ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE

BlackRock Funds

Equity Portfolios

Investor Shares

Prospectus

January 31, 2005, as supplemented June 28, 2005

BlackRock Funds^SM is a mutual fund family with 50 investment portfolios, 4 of which are described in this prospectus. BlackRock Funds are sold principally through licensed investment professionals.

NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

Table of

Contents

How to Find the Information You Need	1
THE BLACKROCK EQUITY PORTFOLIOS
Mid-Cap Value	2
Global Resources	13
Health Sciences	26
Asset Allocation	38
About Your Investment How to Buy/Sell Shares	51
Dividends/Distributions/Taxes	70
Services for Shareholders	73

How to Find the

Information You Need

About BlackRock Funds

This is the BlackRock Equity Portfolios Prospectus. It has been written to provide you with the information you need to make an informed decision about whether to invest in BlackRock Funds (the Company).

This Prospectus contains information on 4 of the BlackRock Equity funds. The Prospectus is organized so that each fund has its own short section. Simply turn to the section for any particular fund to read about important fund facts. Also included are sections that tell you about buying and selling shares, certain fees and expenses, shareholder features of the funds and your rights as a shareholder. These sections apply to all the funds.

If you have questions after reading the Prospectus, ask your registered representative for assistance. Your investment professional has been trained to help you decide which investments are right for you.

BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BlackRock), the funds’ investment adviser, recently acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company, the investment adviser to the former State Street Research mutual funds. In connection with the transaction, the State Street Research mutual funds were combined with certain BlackRock funds, including the Mid-Cap Value Equity, Global Resources, Health Sciences and Asset Allocation (formerly Balanced) Portfolios.

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BlackRock

Mid-Cap Value Equity Portfolio

IMPORTANT DEFINITIONS

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholder, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamental Analysis: A method of stock market analysis that concentrates on “fundamental” information about the company (such as its income statement, balance sheet, earnings and sales history, products and management) to attempt to forecast future stock value.

Investment Style: Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is mid-cap value, referring to the type of securities the managers will choose for this fund.

Mid-Capitalization Companies: Prior to September 1, 2005, the fund defines these companies as those with market capitalizations between $1 billion and $10 billion. As of September 1, 2005, the fund defines these companies as those with market capitalizations comparable in size to the companies in the Russell Midcap Value Index (between approximately $500 million and $15 billion as of September 30, 2004). Capitalization refers to the market value of the company and is calculated by multiplying the number of shares outstanding by the current price per share.

Value Companies: All stocks are generally divided into the categories of “growth” or “value,” although there are times when a growth fund and value fund may own the same stock. Value stocks are companies that appear to the manager to be undervalued by the market as measured by certain financial formulas. Growth stocks are companies whose earnings growth potential appears to the manager to be greater than the market in general and whose growth in revenue is expected to continue for an extended period.

Investment Goal

The fund’s investment goal is to seek long-term capital appreciation.

Primary Investment Strategies

In pursuit of this goal, the fund normally invests at least 80% of its net assets in equity securities issued by U.S. mid-capitalization value companies. Prior to September 1, 2005, the fund defines these companies as those with market capitalizations between $1 billion and $10 billion. As of September 1, 2005, mid-capitalization value companies include companies that are comparable in size to the companies in the Russell Midcap Value Index (between approximately $500 million and $15 billion as of September 30, 2004). The fund primarily buys common stock but also can invest in preferred stock and securities convertible into common and preferred stock. From time to time the fund may invest in shares of companies through initial public offerings (IPOs).

The fund manager is seeking mid-capitalization stocks which he believes are worth more than is indicated by current market price. The manager initially screens for “value” stocks from the universe of U.S. mid-capitalization companies. The manager uses fundamental analysis to examine each company for financial strength before deciding to purchase the stock.

The fund generally will sell a stock when it reaches a target price, which is when the manager believes it is fully valued or when, in the manager’s opinion, conditions change such that the risk of continuing to hold the stock is unacceptable when compared to its growth potential.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

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The fund manager may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities (commonly known as derivatives). An option is the right to buy or sell a security or an index of securities at a specific price on or before a specific date. A future is an agreement to buy or sell a security or an index of securities at a specified price on a specified date. The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The fund manager also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles. For example, in some markets a fund holding mid-cap growth stocks may outperform this fund.

There is more business risk in investing in mid-capitalization companies than in larger, better capitalized companies. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies.

IPOs and companies that have recently gone public have the potential to produce substantial gains for the fund. However, there is no assurance that the fund will have access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future performances. The investment performance of the fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the fund is able to do so. In addition, as the fund increases in size, the impact of IPOs on the fund’s performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In

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addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.

While the fund manager chooses stocks he believes to be undervalued, there is no guarantee that the investments will increase in value or that they won’t decline.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Mid-Cap Value Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had similar investment goals and strategies as

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the fund. The chart and table give you a picture of long-term performance for Investor A Shares (in the chart) and for Investor A, B and C Shares (in the table). The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of the Russell Midcap Value Index, a recognized unmanaged index of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. Sales charges are not reflected in the bar chart. If they were, returns would be less than those shown. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Investor A Shares of the fund is based on the performance of the A Shares of the SSR Fund. The performance of the Investor B Shares of the fund is based on the performance of the B(1) Shares of the SSR Fund. The performance of the Investor C Shares of the fund is based on the performance of the C Shares of the SSR Fund. The performance for the period before B(1) Shares of the SSR Fund were launched on January 1, 1999 is based upon performance for B Shares of the SSR Fund. The actual return of B(1) Shares would have been lower than shown for this period because B Shares of the SSR Fund had lower expenses than B(1) Shares.

As of 12/31

Investor A Shares

ANNUAL TOTAL RETURNS*

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These returns assume payment of applicable sales charges.

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

These returns assume payment of applicable sales charges.

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Mid-Cap Value; Inv A
Return Before Taxes	16.21%	7.76%	13.22%	14.60%	08/25/86
Return After Taxes on Distributions	15.56%	6.87%	11.20%	12.01%
Return After Taxes on Distributions and Sale of Shares	11.04%	6.15%	10.29%	11.33%
Mid-Cap Value; Inv B
Return Before Taxes	17.41%	8.29%	13.52%	14.43%	08/25/86
Mid-Cap Value; Inv C
Return Before Taxes	21.36%	9.15%	13.77%	14.46%	08/25/86
Russell Midcap Value (Reflects no deduction for fees, expenses or taxes)	23.71%	15.56%	13.48%	12.86%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Investor A Shares only, and the after-tax returns for Investor B and C Shares will vary.

Expenses and Fees

The tables below explain your pricing options and describe the fees and expenses that you may pay if you buy and hold Investor A, B and C Shares of the fund. The “Annual Fund Operating Expenses” table is based on expenses for the most recent fiscal year (restated to reflect current fees) and may not reflect expenses of the fund after February 1, 2007.

Shareholder Fees

(Fees paid directly from your investment)

	A Shares		B Shares		C Shares
Maximum Sales Charge (Load) Imposed on Purchases*	5.75	%	0.0	%	0.0	%
(as percentage of offering price)
Maximum Deferred Sales Charge (Load)	0.0	%	4.5	%**	1.00	%***
(as percentage of offering price)
Redemption/Exchange Fee****	2.0	%	2.0	%	2.0	%
(as a percentage of amount redeemed)

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IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Distribution Fees: Fees paid to the fund’s distributor, BlackRock and service organizations for distribution of fund shares and related sales support services.

Other Expenses: Include administration, transfer agency, custody, professional fees and registration fees.

Service Fees: Fees that are paid to service organizations that provide personal services to shareholders.

Service Organizations: Brokers, dealers, financial institutions and industry professionals that provide support services to their customers who own shares of the Company.

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

	A Shares		B Shares		C Shares
Advisory fees	.80	%	.80	%	.80	%
Distribution (12b-1) fees	.10	%	.75	%	.75	%
Other expenses	.73	%	.73	%	.73	%
Service fees	.25%		.25%		.25%
Other	.48%		.48%		.48%
Total annual fund operating expenses	1.63	%	2.28	%	2.28	%
Fee waivers and expense reimbursements1	.38	%	.28	%	.28	%
Net expenses1	1.25	%	2.00	%	2.00	%

  * Reduced front-end sales charges may be available (see the section “Can the Sales Charge Be Reduced or Eliminated?” for more information regarding the reduction of front-end sales charges). A CDSC of 1.00% is assessed on certain redemptions of Investor A Shares that are purchased with no initial sales charge as part of an investment of $1,000,000 or more.

 ** The CDSC is 4.5% if shares are redeemed in less than one year. The CDSC for Investor B Shares decreases for redemptions made in subsequent years. After six years there is no CDSC on B Shares. (See the section “Purchase of Investor B Shares” for complete schedule of CDSCs.)

*** There is no CDSC on C Shares after one year.

**** Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit expenses to 1.25% (for Investor A Shares) and 2.00% (for Investor B and C Shares) of average daily net assets until February 1, 2007. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses, redemption at the end of each time period and, with respect to B Shares and C Shares only, no redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
A Shares*	$	695	$	988	$	1,341	$	2,335
B Shares**
Redemption	$	653	$	1,007	$	1,368	$	2,407	***
B Shares
No Redemption	$	203	$	657	$	1,168	$	2,407	***
C Shares**
Redemption	$	303	$	657	$	1,168	$	2,571
C Shares
No Redemption	$	203	$	657	$	1,168	$	2,571

* Reflects imposition of sales charge.

** Reflects deduction of CDSC.

*** Based on the conversion of Investor B Shares to Investor A Shares after eight years.

As a shareholder you pay certain fees and expenses. Shareholder transaction fees are paid out of your investment and annual fund operating expenses are paid out of fund assets.

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This prospectus offers shareholders three different ways to invest with three separate pricing options. You need to understand your choices so that you can choose the pricing option that is most suitable for you. As shown above, with one option (Investor A Shares) you pay a one-time front-end transaction fee each time you buy shares. The other options (Investor B and Investor C Shares) have no front-end charges but have higher on-going fees, which are paid over the life of the investment, and have a contingent deferred sales charge (CDSC) that you may pay when you redeem your shares. Which option should you choose? It depends on your individual circumstances. You should know that the lowest sales charge won’t necessarily be the least expensive option over time. For example, if you intend to hold your shares long term it may cost less to buy A Shares than B or C Shares.

Fund Management

The fund management team is led by Anthony F. Forcione, CFA, Vice President at BlackRock Advisors, Inc. (BlackRock), and Wayne J. Archambo, CFA, Managing Director at BlackRock.

Mr. Forcione joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining BlackRock, Mr. Forcione was a Vice President and had been a member of the management team of the State Street Research Mid-Cap Value Fund since 2002. Mr. Forcione became an equity analyst at SSRM in 1997 and joined the Large-Cap and Mid-Cap Value Teams in 1999.

Mr. Archambo heads the small and mid-cap value equity team. He has primary responsibility for managing client portfolios within this strategy and client investment guidelines, and he makes purchase and sale decisions for these products and has been a portfolio manager for the Fund since January 2005. He is a member of the Global Equity Operating Committee and the Equity Investment Strategy Group. Prior to joining BlackRock in 2002, Mr. Archambo was a founding partner and Manager of Boston Partners Asset Management, L.P.’s small and mid-cap value equity products since the firm’s inception in 1995. Prior to his departure, he was responsible for the development and management of over $1.3 billion of small cap value assets and $1.5 billion of mid-cap value assets for 50 institutional clients.

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Financial Highlights

The financial information in the tables on the following pages shows financial performance for the periods indicated. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through June 30, 2002) and Deloitte & Touche LLP (for periods after June 30, 2002). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

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FINANCIAL HIGHLIGHTS

(For an Investor A Share Outstanding Throughout Each Period)

Mid-Cap Value Equity Portfolio

	INVESTOR A SHARES
	Period 3/1/05 through 3/31/057			Period 7/1/04 through 2/28/056			Year Ended 6/30/044,6,8			Year Ended 6/30/036,8			Year Ended 6/30/025,6,8			Year Ended 6/30/015,6,8			Year Ended 6/30/005,6,8
Net asset value at beginning of period	$	12.53		$	11.92		$	8.91		$	10.53		$	11.73		$	8.66		$	10.00
Income from investment operations
Net investment income		– –			0.07			0.05			0.06			0.02			0.06			0.15
Net gain (loss) on investments (both realized and unrealized)		(0.12	)		1.45			3.02			(1.22	)		0.29			3.56			(1.14	)
Total from investment operations		(0.12	)		1.52			3.07			(1.16	)		0.31			3.62			(0.99	)
Less distributions
Distributions from net investment income		– –			(0.11	)		(0.06	)		– –			– –			(0.13	)		(0.21	)
Distribution from net realized gains		– –			(0.80	)		– –			(0.46	)		(1.51	)		(0.42	)		(0.14	)
Total distributions		– –			(0.91	)		(0.06	)		(0.46	)		(1.51	)		(0.55	)		(0.35	)
Net asset value at end of period	$	12.41		$	12.53		$	11.92		$	8.91		$	10.53		$	11.73		$	8.66
Total Return1		(0.96	)%2		12.98	%2		34.51	%		(10.61	)%		2.96	%		43.49	%		(9.89	)%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	440,530		$	448,237		$	363,188		$	194,034		$	242,113		$	107,448		$	68,019
Ratios of expenses to average net assets
Net expenses		1.25	%3		1.24	%3		1.28	%		1.29	%		1.25	%		1.25	%		1.26	%
Total expenses		1.63	%3		1.38	%3		1.33	%		1.48	%		1.41	%		1.55	%		1.50	%
Ratios of net investment income (loss) to average net assets
After advisory/administration and other fee waivers		0.33	%3		0.92	%3		0.47	%		0.65	%		0.16	%		0.59	%		1.62	%
Before advisory/administration and other fee waivers		(0.05	)%3		0.78	%3		0.42	%		0.47	%		0.01	%		0.31	%		1.39	%
Portfolio Turnover Rate		9	%		53	%		86	%		66	%		69	%		116	%		31	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with the NASD. These payments had no effect on net realized and unrealized gain per share and increased the total return 0.03%.

 ⁵ Audited by other auditors.

 ⁶ The performance prior to January 31, 2005 set forth in this table is the financial data of the State Street Research Mid-Cap Value Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Mid-Cap Value Equity Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratio of 1.57950264 for Class A shares.

 ⁷ Unaudited.

 ⁸ Per-share figures have been calculated using the average shares method.

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Continued

FINANCIAL HIGHLIGHTS

(For an Investor B Share Outstanding Throughout Each Period)

Mid-Cap Value Equity Portfolio

	INVESTOR B SHARES
	Period 3/1/05 through 3/31/057			Period 7/1/04 through 2/28/056			Year Ended 6/30/044,6,8			Year Ended 6/30/036,8			Year Ended 6/30/025,6,8			Year Ended 6/30/015,6,8			Year Ended 6/30/005,6,8
Net asset value at beginning of period	$	11.87		$	11.28		$	8.45		$	10.05		$	11.30		$	8.36		$	9.67
Income from investment operations
Net investment income (loss)		– –			(0.03	)		(0.02	)		(0.01	)		(0.06	)		(0.02	)		0.08
Net gain (loss) on investments (both realized and unrealized)		(0.12	)		1.41			2.85			(1.15	)		0.28			3.45			(1.11	)
Total from investment operations		(0.12	)		1.38			2.83			(1.16	)		0.22			3.43			(1.03	)
Less distributions
Distributions from net investment income		– –			(0.01	)		– –			– –			– –			(0.08	)		(0.14	)
Distribution from net realized gains		– –			(0.78	)		– –			(0.44	)		(1.47	)		(0.41	)		(0.14	)
Total distributions		– –			(0.79	)		– –			(0.44	)		(1.47	)		(0.49	)		(0.28	)
Net asset value at end of period	$	11.75		$	11.87		$	11.28		$	8.45		$	10.05		$	11.30		$	8.36
Total Return1		(1.01	)%2		12.39	%2		33.53	%		(11.13	)%		2.20	%		42.51	%		(10.59	)%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	126,160		$	128,568		$	109,815		$	79,536		$	91,416		$	25,957		$	10,043
Ratios of expenses to average net assets
Net expenses		2.00	%3		1.99	%3		1.98	%		1.99	%		1.95	%		1.95	%		2.00	%
Total expenses		2.28	%3		2.09	%3		2.03	%		2.18	%		2.10	%		2.25	%		2.24	%
Ratios of net investment income (loss) to average net assets
After advisory/administration and other fee waivers		(0.42	)%3		0.20	%3		(0.24	)%		(0.05	)%		(0.52	)%		(0.18	)%		0.92	%
Before advisory/administration and other fee waivers		(0.70	)%3		0.10	%3		(0.29	)%		(0.23	)%		(0.66	)%		(0.46	)%		0.69	%
Portfolio Turnover Rate		9	%		53	%		86	%		66	%		69	%		116	%		31	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with the NASD. These payments had no effect on net realized and unrealized gain per share and increased the total return 0.03%.

 ⁵ Audited by other auditors.

 ⁶ The performance prior to January 31, 2005 set forth in this table is the financial data of the State Street Research Mid-Cap Value Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Mid-Cap Value Equity Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratio of 1.62345461 for Class B shares.

 ⁷ Unaudited.

 ⁸ Per-share figures have been calculated using the average shares method.

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Continued

FINANCIAL HIGHLIGHTS

(For an Investor C Share Outstanding Throughout Each Period)

Mid-Cap Value Equity Portfolio

	INVESTOR C SHARES
	Period 3/1/05 through 3/31/057			Period 07/01/04 through 02/28/056			Year Ended 6/30/044,6,8			Year Ended 6/30/036,8			Year Ended 6/30/025,6,8			Year Ended 6/30/015,6,8			Year Ended 6/30/005,6,8
Net asset value at beginning of period	$	11.87		$	11.28		$	8.45		$	10.04		$	11.28		$	8.35		$	9.63
Income from investment operations
Net investment income (loss)		– –			(0.03	)		(0.02	)		(0.01	)		(0.05	)		(0.01	)		0.07
Net gain (loss) on investments (both realized and unrealized)		(0.12	)		1.40			2.85			(1.14	)		0.28			3.42			(1.09	)
Total from investment operations		(0.12	)		1.37			2.83			(1.15	)		0.23			3.41			(1.02	)
Less distributions
Distributions from net investment income		– –			(0.01	)		– –			– –			– –			(0.07	)		(0.13	)
Distribution from net realized gains		– –			(0.77	)		– –			(0.44	)		(1.47	)		(0.41	)		(0.13	)
Total distributions		– –			(0.78	)		– –			(0.44	)		(1.47	)		(0.48	)		(0.26	)
Net asset value at end of period	$	11.75		$	11.87		$	11.28		$	8.45		$	10.04		$	11.28		$	8.35
Total Return1		(1.01	)%2		12.40	%2		33.53	%		(11.09	)%		2.25	%		42.48	%		(10.57	)%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	89,817		$	91,657		$	82,758		$	58,499		$	62,505		$	14,062		$	10,661
Ratios of expenses to average net assets
Net expenses		2.00	%3		1.99	%3		1.98	%		1.99	%		1.95	%		1.95	%		2.00	%
Total expenses		2.28	%3		2.09	%3		2.03	%		2.19	%		2.09	%		2.25	%		2.24	%
Ratios of net investment income (loss) to average net assets
After advisory/administration and other fee waivers		(0.42	)%3		0.19	%3		(0.24	)%		(0.04	)%		(0.51	)%		(0.09	)%		0.86	%
Before advisory/administration and other fee waivers		(0.70	)%3		0.09	%3		(0.29	)%		(0.23	)%		(0.64	)%		(0.37	)%		0.63	%
Portfolio Turnover Rate		9	%		53	%		86	%		66	%		69	%		116	%		31	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with the NASD. These payments had no effect on net realized and unrealized gain per share and increased the total return 0.03%.

 ⁵ Audited by other auditors.

 ⁶ The performance prior to January 31, 2005 set forth in this table is the financial data of the State Street Research Mid-Cap Value Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Mid-Cap Value Equity Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratio of 1.63087248 for Class C shares.

 ⁷ Unaudited.

 ⁸ Per-share figures have been calculated using the average shares method.

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BlackRock

Global Resources Portfolio

IMPORTANT DEFINITIONS

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamentals: “Fundamental” information about a company (such as its income statement, balance sheet, earnings and sales history, products and management).

Investment Style: Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is global resources, referring to the type of securities the managers will choose for this fund.

The fund is closed to new investors. Existing shareholders may make additional investments in current accounts. In addition, new accounts may be opened by (i) any investor if the taxpayer identification number for the new account will be the same as that for a current account and (ii) 401(k), 403(b), 457 and other similar group retirement plan programs that have current accounts.

Investment Goal

The fund seeks to provide long-term growth of capital.

Primary Investment Strategies

Under normal conditions, the fund invests at least 80% of its total assets in securities of global energy and natural resources companies and companies in associated businesses, as well as utilities (such as gas, water, cable, electrical and telecommunications utilities). These typically include companies involved in the exploration, production, refining, marketing or distribution of energy or natural resources, such as gas, oil, metal and minerals, as well as related transportation companies and equipment manufacturers. The fund will consider a company to be an energy or natural resources company if 50% or more of its revenues are derived from, or 50% or more of its assets are related to, activities described above. The fund will invest more than 25% of its assets in energy or natural resources industries. The fund may invest without limit in companies located anywhere in the world and will generally invest in at least three countries and in companies tied economically to a number of countries. It expects to invest primarily in developed markets, but may also invest in emerging markets.

In selecting investments, the fund looks for companies and industries that appear to have the potential for above-average long-term performance based on projections of supply and demand of a resource and the state of the market. These may include companies that are expected to show above-average growth over the long term as well as those that appear to be trading below their true worth. While the fund tends to emphasize smaller companies, from time to time it may emphasize companies of other sizes. The fund’s investments may include common and preferred stock, securities convertible into common and preferred stock, warrants and depositary receipts.

The fund reserves the right to invest up to 20% of total assets in other U.S. and foreign investments. These may include stocks of

13

companies not associated with energy or natural resources. These may also include debt securities, although the fund may not invest more than 10% of total assets in junk bonds (bonds that are below Standard & Poor’s BBB or Moody’s Baa rating categories, or their unrated equivalents).

The fund generally will sell a stock when, in the management team’s opinion, the stock reaches its price target, there is a deterioration in the company’s fundamentals, a change in macroeconomic outlook, technical deterioration, valuation issues, a need to rebalance the portfolio or a better opportunity elsewhere.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operation, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities and may buy options on a currency or a basket of currencies (collectively, commonly known as derivatives). An option is the right to buy or sell an instrument at a specific price on or before a specific date. A future is an agreement to buy or sell an instrument at a specific price on a specific date. The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The management team also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns. The fund may also buy and sell currencies and use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movements in the value of non-U.S. currencies or to enhance returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will

14

be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The fund’s strategy of concentrating in energy and natural resources companies means that its performance will be closely tied to the performance of a particular market segment. Because the fund is concentrated in these companies, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy. A downturn in these companies would have a larger impact on the fund than on a mutual fund that does not concentrate in such companies. At times, the performance of these companies will lag the performance of other industries or the broader market as a whole.

Stocks of energy and natural resources companies are especially affected by variations in the commodities markets (that may be due to market events, regulatory developments or other factors that the fund cannot control) and these companies may lack the resources and the broad business lines to weather hard times. Energy companies can be significantly affected by the supply of and demand for specific products and services, the supply of and demand for oil and gas, the price of oil and gas, exploration and production spending, government regulation, world events and economic conditions. Natural resources companies can be significantly affected by events relating to international political developments, energy conservation, the success of exploration projects, commodity prices, and tax and government regulations.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Any securities that are thinly traded or whose resale is restricted can be difficult to sell at the desired time and price. Some of these

15

securities are new and complex, and trade only among institutions; the markets for these securities are still developing, and may not function as efficiently as established markets. Owning a large percentage of restricted or illiquid securities could hamper the fund’s ability to raise cash to meet redemptions. Also, because there may not be an established market price for these securities, the fund may have to estimate their value, which means that their valuation (and, to a much smaller extent, the valuation of the fund) may have a subjective element. Transactions in restricted or illiquid securities may entail registration expense and other transaction costs that are higher than those for transactions in unrestricted or liquid securities. Where registration is required for restricted or illiquid securities, a considerable time period may elapse between the time the fund decides to sell the security and the time it is actually permitted to sell the security under an effective registration statement. If during such period, adverse market conditions were to develop, the fund might obtain less favorable pricing terms than when it decided to sell the security.

Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of dividends or interest paid by non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subject to wider price movements than comparable investments in U.S. companies. There is also less government regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging markets countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past and may do so again in the future, as a result of economic and political turmoil in many of these countries.

In addition, many U.S. companies in which the fund may invest generate significant revenues and earnings from abroad. As a result, these companies and the prices of their securities may be affected by weaknesses in global and regional economies and the relative value of foreign currencies to the U.S. dollar. These factors, taken as a whole, could adversely affect the price of fund shares.

16

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The value of any bonds held by the fund is likely to decline when interest rates rise; this risk is greater for bonds with longer maturities. It is also possible that a bond issuer could default on principal or interest payments, causing a loss for the fund. The fund may invest in non-investment grade or “high yield” securities commonly known to investors as “junk bonds.” Non-investment grade securities carry greater risks than investment grade securities, which have higher credit ratings, including a high risk of default. The yields of non-investment grade securities will move up and down over time.

The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market values may change from time to time, positively or negatively, to reflect new developments regarding the issuer. Companies that issue high yield securities are often young and growing and have a lot of debt. High yield securities are considered speculative, meaning there is a significant risk that companies issuing these securities may not be able to repay principal and pay interest or dividends on time. In addition, other creditors of a high yield issuer may have the right to be paid before the high yield bondholder. During an economic downturn, a period of rising interest rates or a recession, issuers of high yield securities who have a lot of debt may experience financial problems. They may not have enough cash to make their principal and interest payments. An economic downturn could also hurt the market for lower-rated securities and the fund. Also, the market for high yield securities is not as liquid as the market for higher rated securities. This means that it may be harder to buy and sell high yield securities, especially on short notice. The market could also be hurt by legal or tax changes.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the

17

transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

The expenses of the fund can be expected to be higher than those of other funds investing primarily in domestic securities because the costs attributable to investing abroad are usually higher.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

The fund is a non-diversified portfolio under the Investment Company Act, which means that fund performance is more dependent on the performance of a smaller number of securities and issuers than in a diversified portfolio. The change in value of any one security may affect the overall value of the fund more than it would a diversified fund’s.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Global Resources Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005,

18

the chart and table below show performance information for the SSR Fund, which had similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Investor A Shares (in the chart) and for Investor A, B and C Shares (in the table). The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of the Lipper Natural Resources Funds Index and the S&P 500^® Index, recognized unmanaged indices of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. Sales charges are not reflected in the bar chart. If they were, returns would be less than those shown. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Investor A Shares of the fund is based on the performance of the A Shares of the SSR Fund. The performance of the Investor B Shares of the fund is based on the performance of the B(1) Shares of the SSR Fund. The performance of the Investor C Shares of the fund is based on the performance of the C Shares of the SSR Fund. The performance for the period before B(1) Shares of the SSR Fund were launched on January 1, 1999 is based upon performance for B Shares of the SSR Fund. The actual return of B(1) Shares of the SSR Fund would have been lower than shown for this period because B Shares of the SSR Fund had lower expenses than B(1) Shares.

As of 12/31

Investor A Shares

ANNUAL TOTAL RETURNS*

19

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

These returns assume payment of applicable sales charges.

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Global Resources; Inv A
Return Before Taxes	39.13%	32.70%	33.11%	18.54%	03/02/90
Return After Taxes on Distributions	38.14%	32.12%	32.76%	17.68%
Return After Taxes on Distributions and Sale of Shares	26.30%	28.53%	29.76%	16.35%
Global Resources; Inv B
Return Before Taxes	41.67%	33.93%	33.69%	18.39%	03/02/90
Global Resources; Inv C
Return Before Taxes	45.63%	34.53%	33.82%	18.40%	03/02/90
Lipper Natural Resources (Reflects no deduction for fees, expenses or taxes)	35.25%	16.57%	12.34%	12.91%	N/A
S&P 500® (Reflects no deduction for fees, expenses or taxes)	10.88%	3.59%	-2.30	12.07%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Investor A Shares only, and the after-tax returns for Investor B and C Shares will vary.

Expenses and Fees

The tables below explain your pricing options and describe the fees and expenses that you may pay if you buy and hold Investor A, B and C Shares of the fund. The “Annual Fund Operating Expenses” table may not reflect expenses of the fund after February 1, 2007.

Shareholder Fees

(Fees paid directly from your investment)

	A Shares		B Shares		C Shares
Maximum Sales Charge (Load) Imposed on Purchases*	5.75	%	0.0	%	0.0	%
(as percentage of offering price)
Maximum Deferred Sales Charge (Load)	0.0	%	4.5	%**	1.0	%***
(as percentage of offering price)
Redemption/Exchange Fee****	2.0	%	2.0	%	2.0	%
(as a percentage of amount redeemed)

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IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Distribution Fees: Fees paid to the fund’s distributor, BlackRock and service organizations for distribution of fund shares and related sales support services.

Other Expenses: Include administration, transfer agency, custody, professional fees and registration fees.

Service Fees: Fees that are paid to service organizations that provide for personal services to shareholders.

Service Organizations: Brokers, dealers, financial institutions and industry professionals that provide support services to their customers who own shares of the Company.

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

	A Shares		B Shares		C Shares
Advisory fees	.75	%	.75	%	.75	%
Distribution (12b-1) fees	.10	%	.75	%	.75	%
Other expenses	.69	%	.69	%	.69	%
Service fees	.25%		.25%		.25%
Other	.44%		.44%		.44%
Total annual fund operating expenses	1.54	%	2.19	%	2.19	%
Fee waivers and expense reimbursements1	.20	%	.15	%	.15	%
Net expenses1	1.34	%	2.04	%	2.04	%

* Reduced front-end sales charges may be available (See the section “Can the Sales Charge be Reduced or Eliminated?” for more information regarding the reduction of front-end sales charges). A CDSC of 1.00% is assessed on certain redemptions of Investor A Shares that are purchased with no initial sales charge as part of an investment of $1,000,000 or more.

** The CDSC is 4.5% if shares are redeemed in less than one year. The CDSC for Investor B Shares decreases for redemptions made in subsequent years. After six years there is no CDSC on B Shares. (See the section “Purchase of Investor B Shares” for complete schedule of CDSCs.)

*** There is no CDSC on C Shares after one year.

**** Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit expenses to 1.34% (for Investor A Shares) and 2.04% (for Investor B and C Shares) of average daily net assets until February 1, 2007. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses, redemption at the end of each time period and, with respect to B and C Shares only, no redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
A Shares*	$	704	$	996	$	1,330	$	2,271
B Shares**
Redemption	$	657	$	1,006	$	1,346	$	2,335	***
B Shares
No Redemption	$	207	$	656	$	1,146	$	2,335	***
C Shares**
Redemption	$	307	$	656	$	1,146	$	2,500
C Shares
No Redemption	$	207	$	656	$	1,146	$	2,500

* Reflects imposition of sales charge.

** Reflects deduction of CDSC.

*** Based on the conversion of Investor B Shares to Investor A Shares after eight years.

As a shareholder you pay certain fees and expenses. Shareholder transaction fees are paid out of your investment and annual fund operating expenses are paid out of fund assets.

This prospectus offers shareholders different ways to invest with separate pricing options. You need to understand your choices so

21

that you can choose the pricing option that is most suitable for you. As shown above, with one option (Investor A Shares) you pay a one-time front-end transaction fee each time you buy shares. Investor B and Investor C Shares have no front-end charges but have higher on-going fees, which are paid over the life of the investment, and have a contingent deferred sales charge (CDSC) that you may pay when you redeem your shares. Which option schedule should you choose? It depends on your individual circumstances. You should know that the lowest sales charge won’t necessarily be the least expensive option over time. For example, if you intend to hold your shares long term it may cost less to buy A Shares than B or C Shares.

Fund Management

The fund management team is led by Daniel J. Rice III, Managing Director at BlackRock Advisors, Inc. (BlackRock), and Denis J. Walsh III, CFA, Managing Director at BlackRock.

Mr. Rice and Mr. Walsh joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining BlackRock, Mr. Rice had been a Senior Vice President and a portfolio manager of the State Street Research Global Resources Fund since its inception in March 1990. He was employed by SSRM beginning in 1984.

Prior to joining BlackRock, Mr. Walsh was a Managing Director and was an energy analyst for the State Street Research Global Resources Fund beginning in 1999. He was also a member of the portfolio management team for the Large Cap Analyst Fund and has worked as an investment professional in equity research since 1979.

Financial Highlights

The financial information in the tables on the following pages shows financial performance for the periods indicated. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through June 30, 2002) and Deloitte & Touche LLP (for periods after June 30, 2002). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

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FINANCIAL HIGHLIGHTS

(For an Investor A Share Outstanding Throughout Each Period)

Global Resources Portfolio

	INVESTOR A SHARES
	Period 3/1/05 through 3/31/056			Period 7/1/04 through 2/28/05			Year Ended 6/30/044,7			Year Ended 6/30/037			Year Ended 6/30/025,7			Year Ended 6/30/015,7			Year Ended 6/30/005,7
Net asset value at beginning of period	$	56.23		$	39.58		$	25.81		$	22.74		$	21.50		$	16.79		$	12.15
Income from investment operations
Net investment income (loss)		(0.01	)		(0.15	)		0.21			(0.10	)		(0.15	)		(0.22	)		(0.17	)
Net gain (loss) on investments (both realized and unrealized)		(1.49	)		18.69			14.15			3.17			1.39			4.93			4.81
Total from investment operations		(1.50	)		18.54			14.36			3.07			1.24			4.71			4.64
Less distributions
Distributions from net investment income		– –			(0.34	)		(0.59	)		– –			– –			– –			– –
Distributions from net realized gains		– –			(1.55	)		– –			– –			– –			– –			– –
Total distributions		– –			(1.89	)		(0.59	)		– –			– –			– –			– –
Net asset value at end of period	$	54.73		$	56.23		$	39.58		$	25.81		$	22.74		$	21.50		$	16.79
Total return1		(2.67	)%2		47.69	%2		56.06	%		13.50	%		5.77	%		28.05	%		38.19	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	658,700		$	676,234		$	406,209		$	103,987		$	89,883		$	81,880		$	70,152
Ratios of expenses to average net assets
Net expenses		1.34	%3		1.36	%3		1.34	%		1.60	%		1.73	%		1.61	%		1.72	%
Total expenses		1.45	%3		1.38	%3		1.34	%		1.61	%		1.74	%		1.63	%		1.74	%
Ratios of net investment income (loss) to average net assets
After advisory/administration and other fee waivers		(0.22	)%3		(0.52	)%3		0.64	%		(0.47	)%		(0.73	)%		(1.11	)%		(1.34	)%
Before advisory/administration and other fee waivers		(0.33	)%3		(0.54	)%3		0.64	%		(0.47	)%		(0.73	)%		(1.11	)%		(1.34	)%
Portfolio Turnover Rate		2	%		22	%		27	%		33	%		38	%		38	%		47	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with NASD. These payments increased net realized and unrealized gain by $0.02 per share, and increased total return by 0.16%.

 ⁵ Audited by other auditors.

 ⁶ Unaudited.

 ⁷ Per-share figures have been calculated using the average shares method.

23

Continued

FINANCIAL HIGHLIGHTS

(For an Investor B Share Outstanding Throughout Each Period)

Global Resources Portfolio

	INVESTOR B SHARES
	Period 3/1/05 through 3/31/056			Period 7/1/04 through 2/28/05			Year Ended 6/30/044,7			Year Ended 6/30/037			Year Ended 6/30/025,7			Year Ended 6/30/015,7			Year Ended 6/30/005,7
Net asset value at beginning of period	$	51.58		$	36.52		$	23.89		$	21.20		$	20.16		$	15.85		$	11.56
Income from investment operations
Net investment loss		(0.04	)		(0.32	)		(0.06	)		(0.23	)		(0.27	)		(0.33	)		(0.26	)
Net gain (loss) on investments (both realized and unrealized)		(1.37	)		17.18			13.14			2.92			1.31			4.64			4.55
Total from investment operations		(1.41	)		16.86			13.08			2.69			1.04			4.31			4.29
Less distributions
Distributions from net investment income		– –			(0.25	)		(0.45	)		– –			– –			– –			– –
Distributions from net realized gains		– –			(1.55	)		– –			– –			– –			– –			– –
Total distributions		– –			(1.80	)		(0.45	)		– –			– –			– –			– –
Net asset value at end of period	$	50.17		$	51.58		$	36.52		$	23.89		$	21.20		$	20.16		$	15.85
Total return1		(2.74	)%2		47.09	%2		55.07	%		12.69	%		5.16	%		27.19	%		37.11	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	90,877		$	94,506		$	66,704		$	29,782		$	25,626		$	19,237		$	8,608
Ratios of expenses to average net assets
Net expenses		2.04	%3		2.01	%3		2.04	%		2.30	%		2.43	%		2.31	%		2.46	%
Total expenses		2.11	%3		2.02	%3		2.04	%		2.31	%		2.44	%		2.33	%		2.48	%
Ratios of net investment loss to average net assets
After advisory/administration fee waivers		(0.92	)%3		(1.17	)%3		(0.20	)%		(1.17	)%		(1.41	)%		(1.78	)%		(2.12	)%
Before advisory/administration fee waivers		(0.99	)%3		(1.18	)%3		(0.20	)%		(1.17	)%		(1.41	)%		(1.78	)%		(2.12	)%
Portfolio Turnover Rate		2	%		22	%		27	%		33	%		38	%		38	%		47	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with NASD. These payments increased net realized and unrealized gain by $0.02 per share, and increased total return by 0.16%.

 ⁵ Audited by other auditors.

 ⁶ Unaudited.

 ⁷ Per-share figures have been calculated using the average shares method.

24

Continued

FINANCIAL HIGHLIGHTS

(For an Investor C Share Outstanding Throughout Each Period)

Global Resources Portfolio

	INVESTOR C SHARES
	Period 3/1/05 through 3/31/056			Period 7/1/04 through 2/28/05			Year Ended 6/30/044,7			Year Ended 6/30/037			Year Ended 6/30/025,7			Year Ended 6/30/015,7			Year Ended 6/30/005,7
Net asset value at beginning of period	$	51.53		$	36.48		$	23.88		$	21.18		$	20.14		$	15.84		$	11.54
Income from investment operations
Net investment loss		(0.04	)		(0.30	)		(0.03	)		(0.23	)		(0.28	)		(0.34	)		(0.25	)
Net gain (loss) on investments (both realized and unrealized)		(1.37	)		17.14			13.10			2.93			1.32			4.64			4.55
Total from investment operations		(1.41	)		16.84			13.07			2.70			1.04			4.30			4.30
Less distributions
Distributions from net investment income		– –			(0.24	)		(0.47	)		– –			– –			– –			– –
Distributions from net realized gains		– –			(1.55	)		– –			– –			– –			– –			– –
Total distributions		– –			(1.79	)		(0.47	)		– –			– –			– –			– –
Net asset value at end of period	$	50.12		$	51.53		$	36.48		$	23.88		$	21.18		$	20.14		$	15.84
Total return1		(2.74	)%2		47.01	%2		55.05	%		12.75	%		5.16	%		27.15	%		37.26	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	163,253		$	169,871		$	122,088		$	37,601		$	31,853		$	30,214		$	23,313
Ratios of expenses to average net assets
Net Expenses		2.04	%3		2.01	%3		2.04	%		2.30	%		2.43	%		2.31	%		2.46	%
Total expenses		2.10	%3		2.02	%3		2.04	%		2.31	%		2.44	%		2.33	%		2.48	%
Ratios of net investment loss to average net assets
After advisory/administration fee waivers		(0.92	)%3		(1.17	)%3		(0.10	)%		(1.18	)%		(1.43	)%		(1.83	)%		(2.06	)%
Before advisory/administration fee waivers		(0.98	)%3		(1.18	)%3		(0.10	)%		(1.18	)%		(1.43	)%		(1.83	)%		(2.06	)%
Portfolio Turnover Rate		2	%		22	%		27	%		33	%		38	%		38	%		47	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with NASD. These payments increased net realized and unrealized gain by $0.02 per share, and increased total return by 0.16%.

 ⁵ Audited by other auditors.

 ⁶ Unaudited.

 ⁷ Per-share figures have been calculated using the average shares method.

25

BlackRock

Health Sciences Portfolio

IMPORTANT DEFINITIONS

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamentals: “Fundamental” information about a company (such as its income statement, balance sheet, earnings and sales history, products and management).

Investment Style: Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is health sciences, referring to the type of securities the managers will choose for this fund.

Investment Goal

The fund seeks to provide long-term growth of capital.

Primary Investment Strategies

Under normal market conditions, the fund invests at least 80% of total assets in securities of companies in health sciences and related industries. These companies include health care providers as well as businesses involved in the development, production, and distribution or delivery of medical and pharmaceutical products and services. Companies engaged in biotechnology and medical research and development are also included, plus companies that may design, manufacture or distribute medical, dental and optical equipment and supplies, including diagnostic equipment. The companies may also provide diagnostic services or operate health facilities and hospitals, or provide related administrative, management and financial support. The fund will consider a company to be in a health sciences or related industry if 50% or more of its revenues are derived from, or 50% or more of its assets are related to, activities described above. The fund will invest more than 25% of its assets in health sciences or related industries, and may invest in companies located in non-U.S. countries.

In selecting investments, the fund looks for companies and industries that appear to have the potential for above-average growth over the long term. The fund expects to invest in health sciences companies comparable in size to those in the health sector of the Russell 3000^® Index or in similar companies, including non-U.S. companies. The fund does not limit its investments to companies of any particular size. The fund’s investments may include common and preferred stock, securities convertible into common and preferred stock, warrants and depository receipts.

The fund reserves the right to invest up to 20% of total assets in other securities. These may include stocks of companies not associated with health sciences. They may also include debt securities and smaller capitalization companies.

From time to time the fund may invest without limit in shares of companies through initial public offerings (IPOs).

The fund generally will sell a stock when, in the management team’s opinion, the stock reaches its price target, there is a deterioration in the company’s fundamentals, a change in macroeconomic outlook, technical deterioration, valuation issues, a need to rebalance the portfolio or a better opportunity elsewhere.

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It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities and may buy options on a currency or a basket of currencies (collectively, commonly known as derivatives). An option is the right to buy or sell an instrument at a specific price on or before a specific date. A future is an agreement to buy or sell an instrument at a specific price on a specific date. The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The management team also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns. The fund may also buy and sell currencies and use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movements in the value of non-U.S. currencies or to enhance returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The fund’s strategy of concentrating in health sciences and related companies means that its performance will be closely tied to the performance of a particular market segment. Because the fund is concentrated in these companies, it may present more risks than if it were broadly diversified over numerous industries and sectors of

27

the economy. A downturn in these companies would have a larger impact on the fund than on a mutual fund that does not concentrate in such companies. At times, the performance of these companies will lag the performance of other industries or the broader market as a whole.

Investments in health sciences companies are subject to a number of risks, including the adverse impact of legislative actions and government regulations. These actions and regulations can affect the approval process for patents, medical devices and drugs, the funding of research and medical care programs, and the operation and licensing of facilities and personnel. The goods and services of health sciences companies are subject to risks of rapid technological change and obsolescence, product liability litigation, and intense price and other competitive pressures.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of dividends or interest paid by non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subject to wider price movements than comparable investments in U.S. companies. There is also less government regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging markets countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less

28

regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past and may do so again in the future, as a result of economic and political turmoil in many of these countries.

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles.

IPOs and companies that have recently gone public have the potential to produce substantial gains for the fund. However, there is no assurance that the fund will have access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future performances. The investment performance of the fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the fund is able to do so. In addition, as the fund increases in size, the impact of IPOs on the fund’s performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The value of any bonds held by the fund is likely to decline when interest rates rise; this risk is greater for bonds with longer maturities. It is also possible that a bond issuer could default on principal or interest payments, causing a loss for the fund.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also

29

suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

The fund is a non-diversified portfolio under the Investment Company Act, which means that fund performance is more dependent on the performance of a smaller number of securities and issuers than in a diversified portfolio. The change in value of any one security may affect the overall value of the fund more than it would a diversified fund’s.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Health Sciences Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table on the next page show performance information for the SSR Fund, which had substantially similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Investor A Shares (in the chart) and for Investor A, B and C Shares (in the table). The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of the Lipper Health/Biotechnology Funds Index and the S&P 500^® Index,

30

recognized unmanaged indices of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. Sales charges are not reflected in the bar chart. If they were, returns would be less than those shown. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Investor A Shares of the fund is based on the performance of the A Shares of the SSR Fund. The performance of the Investor B Shares of the fund is based on the performance of the B(1) Shares of the SSR Fund. The performance of the Investor C Shares of the fund is based on the performance of the C Shares of the SSR Fund.

As of 12/31

Investor A Shares

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

These returns assume payment of applicable sales charges.

	1 Year	3 Years	5 Years	Since Inception	Inception Date1
Health Sciences; Inv A
Return Before Taxes	7.97%	11.50%	17.38%	18.59%	12/21/99
Return After Taxes on Distributions	6.93%	10.70%	16.18%	17.38%
Return After Taxes on Distributions and Sale of Shares	5.97%	9.55%	14.59%	15.69%
Health Sciences; Inv B
Return Before Taxes	8.75%	12.14%	17.94%	19.26%	12/21/99
Health Sciences; Inv C
Return Before Taxes	12.84%	12.91%	18.11%	19.32%	12/21/99
Lipper Health/Biotechnology (Reflects no deduction for fees, expenses or taxes)	11.74%	2.48%	6.72%	8.03%	N/A
S&P 500® (Reflects no deduction for fees, expenses or taxes)	10.88%	3.59%	-2.30%	-1.80%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

31

IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Distribution Fees: Fees paid to the fund’s distributor, BlackRock and service organizations for distribution of fund shares and related sales support services.

Other Expenses: Include administration, transfer agency, custody, professional fees and registration fees.

Service Fees: Fees that are paid to service organizations that provide for personal services to shareholders.

Service Organizations: Brokers, dealers, financial institutions and industry professionals that provide support services to their customers who own shares of the Company.

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Investor A Shares only, and the after-tax returns for Investor B and C Shares will vary.

Expenses and Fees

The tables below explain your pricing options and describe the fees and expenses that you may pay if you buy and hold Investor A, B and C Shares of the fund. The “Annual Fund Operating Expenses” table may not reflect expenses of the fund after February 1, 2007.

Shareholder Fees

(Fees paid directly from your investment)

	A Shares		B Shares		C Shares
Maximum Sales Charge (Load) Imposed on Purchases*	5.75	%	0.0	%	0.0	%
(as percentage of offering price)
Maximum Deferred Sales Charge (Load)	0.0	%	4.5	%**	1.0	%***
(as percentage of offering price)
Redemption/Exchange Fee****	2.0	%	2.0	%	2.0	%
(as a percentage of amount redeemed)

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

	A Shares		B Shares		C Shares
Advisory fees	.75	%	.75	%	.75	%
Distribution (12b-1) fees	.10	%	.75	%	.75	%
Other expenses	.89	%	.89	%	.89	%
Service fees	.25%		.25%		.25%
Other	.64%		.64%		.64%
Total annual fund operating expenses	1.74	%	2.39	%	2.39	%
Fee waivers and expense reimbursements1	.19	%	.14	%	.14	%
Net expenses1	1.55	%	2.25	%	2.25	%

* Reduced front-end sales charges may be available (See the section “Can the Sales Charge be Reduced or Eliminated?” for more information regarding the reduction of front-end sales charges). A CDSC of 1.00% is assessed on certain redemptions of Investor A Shares that are purchased with no initial sales charge as part of an investment of $1,000,000 or more.

** The CDSC is 4.5% if shares are redeemed in less than one year. The CDSC for Investor B Shares decreases for redemptions made in subsequent years. After six years there is no CDSC on B Shares. (See the section “Purchase of Investor B Shares” for complete schedule of CDSCs.)

*** There is no CDSC on C Shares after one year.

**** Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit expenses to 1.55% (for Investor A Shares) and, 2.25% (for Investor B and C Shares) of average daily net assets until February 1, 2007. See the “Management” section for a discussion of these waivers and reimbursements.

32

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses, redemption at the end of each time period and, with respect to B and C Shares only, no redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
A Shares*	$	724	$	1,056	$	1,430	$	2,478
B Shares**
Redemption	$	678	$	1,068	$	1,450	$	2,543
B Shares
No Redemption	$	228	$	718	$	1,250	$	2,543
C Shares**
Redemption	$	328	$	718	$	1,250	$	2,704
C Shares
No Redemption	$	228	$	718	$	1,250	$	2,704

* Reflects imposition of sales charge.

** Reflects deduction of CDSC.

*** Based on the conversion of Investor B Shares to Investor A Shares after eight years.

As a shareholder you pay certain fees and expenses. Shareholder transaction fees are paid out of your investment and annual fund operating expenses are paid out of fund assets.

This prospectus offers shareholders different ways to invest with separate pricing options. You need to understand your choices so that you can choose the pricing option that is most suitable for you. As shown above, with one option (Investor A Shares) you pay a one-time front-end transaction fee each time you buy shares. Investor B and Investor C Shares have no front-end charges but have higher on-going fees, which are paid over the life of the investment, and have a contingent deferred sales charge (CDSC) that you may pay when you redeem your shares. Which option schedule should you choose? It depends on your individual circumstances. You should know that the lowest sales charge won’t necessarily be the least expensive option over time. For example, if you intend to hold your shares long term it may cost less to buy A Shares than B or C Shares.

Fund Management

The fund management team is led by Thomas P. Callan, CFA, Managing Director at BlackRock Advisors, Inc. (BlackRock), and Erin Xie, PhD, a Director at BlackRock.

Mr. Callan, senior portfolio manager, is the head of the BlackRock Global Opportunities Team and is the manager and strategist for all of the team’s portfolios. He has been a manager of the fund since 2005. He is a member of the BlackRock Equity

33

Operating Committee and Equity Investment Strategy Group. Prior to joining BlackRock as a member of the global emerging-cap team in 1998, Mr. Callan was with the PNC Asset Management Group, which he joined in 1992.

Ms. Xie joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining BlackRock, she was a Senior Vice President and a member of the portfolio management team of the State Street Research Health Sciences Fund since 2001 and became a portfolio manager in 2003. Ms. Xie was employed by SSRM beginning in 2001 as an equity analyst covering the healthcare sector. Prior to SSRM, she also served as an associate in pharmaceutical equity research at Sanford Bernstein & Company.

Financial Highlights

The financial information in the tables on the following pages shows financial performance for the periods indicated. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through February 28, 2003) and Deloitte & Touche LLP (for periods after February 28, 2003). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

34

FINANCIAL HIGHLIGHTS

(For an Investor A Share Outstanding Throughout Each Period)

Health Sciences Portfolio

	INVESTOR A SHARES
	Period 3/1/05 through 3/31/055			Year Ended 2/28/05			Year Ended 2/29/046			Year Ended 2/28/034,6			Year Ended 2/28/024,6			Year Ended 2/28/014,6
Net asset value at beginning of period	$	20.24		$	20.96		$	11.57		$	14.43		$	14.14		$	13.33
Income from investment operations
Net investment loss		(0.04	)		(0.17	)		(0.12	)		(0.12	)		(0.13	)		(0.06	)
Net gain (loss) on investments (both realized and unrealized)		(0.16	)		0.52			10.15			(2.70	)		0.47			1.88
Total from investment operations		(0.20	)		0.35			10.03			(2.82	)		0.34			1.82
Less distributions
Distribution from net realized gains		– –			(1.07	)		(0.64	)		(0.04	)		(0.05	)		(1.01	)
Total distributions		– –			(1.07	)		(0.64	)		(0.04	)		(0.05	)		(1.01	)
Net asset value at end of period	$	20.04		$	20.24		$	20.96		$	11.57		$	14.43		$	14.14
Total Return1		(0.99	)%2		1.52	%2		87.13	%		(19.63	)%		2.41	%		14.31	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	74,682		$	76,550		$	54,638		$	9,250		$	13,069		$	6,863
Ratios of expenses to average net assets
Net expenses		1.50	%3		1.58	%		1.55	%		1.55	%		1.55	%		1.54	%
Total expenses		1.60	%3		1.73	%		2.11	%		3.04	%		3.41	%		8.44	%
Ratios of net investment income (loss) to average net assets
After advisory/administration and other fee waivers		0.06	%3		(0.90	)%		(0.71	)%		(0.99	)%		(0.88	)%		(0.48	)%
Before advisory/administration and other fee waivers		(0.04	)%3		(1.05	)%		(1.27	)%		(2.47	)%		(2.71	)%		(7.35	)%
Portfolio Turnover Rate		14	%		173	%		106	%		157	%		75	%		139	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ Audited by other auditors.

 ⁵ Unaudited.

 ⁶ Per-share figures have been calculated using the average shares method.

35

Continued

FINANCIAL HIGHLIGHTS

(For an Investor B Share Outstanding Throughout Each Period)

Health Sciences Portfolio

	INVESTOR B SHARES
	Period 3/1/05 through 3/31/057			Year Ended 2/28/05			Year Ended 2/29/048			Year Ended 2/28/036,8			Year Ended 2/28/026,8			Year Ended 2/28/015,6,8
Net asset value at beginning of period	$	19.65		$	20.52		$	11.41		$	14.34		$	14.14		$	15.50
Income from investment operations
Net investment loss		(0.02	)		(0.28	)		(0.24	)		(0.21	)		(0.23	)		(0.04	)
Net gain (loss) on investments (both realized and unrealized)		(0.18	)		0.48			9.99			(2.68	)		0.48			(0.63	)
Total from investment operations		(0.20	)		0.20			9.75			(2.89	)		0.25			(0.67	)
Less distributions
Distribution from net realized gains		– –			(1.07	)		(0.64	)		(0.04	)		(0.05	)		(0.69	)
Total distributions		– –			(1.07	)		(0.64	)		(0.04	)		(0.05	)		(0.69	)
Net asset value at end of period	$	19.45		$	19.65		$	20.52		$	11.41		$	14.34		$	14.14
Total Return1		(1.02	)%2		0.81	%2		85.89	%		(20.24	)%		1.77	%		(4.47	)%4
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	29,599		$	29,495		$	22,825		$	9,290		$	11,399		$	4,645
Ratios of expenses to average net assets
Net expenses		2.25	%3		2.25	%		2.25	%		2.25	%		2.25	%		2.25	%3
Total expenses		2.25	%3		2.39	%		2.91	%		3.74	%		3.99	%		8.54	%3
Ratios of net investment loss to average net assets
After advisory/administration and other fee waivers		(0.70	)%3		(1.58	)%		(1.44	)%		(1.69	)%		(1.59	)%		(0.81	)%3
Before advisory/administration and other fee waivers		(0.70	)%3		(1.71	)%		(2.10	)%		(3.17	)%		(3.30	)%		(7.07	)%3
Portfolio Turnover Rate		14	%		173	%		106	%		157	%		75	%		139	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ Not annualized.

 ⁵ October 16, 2000 (commencement of share class) to February 28, 2001.

 ⁶ Audited by other auditors.

 ⁷ Unaudited.

 ⁸ Per-share figures have been calculated using the average shares method.

36

Continued

FINANCIAL HIGHLIGHTS

(For an Investor C Share Outstanding Throughout Each Period)

Health Sciences Portfolio

	INVESTOR C SHARES
	Period 3/1/05 through 3/31/057			Year Ended 2/28/05			Year Ended 2/29/048			Year Ended 2/28/036,8			Year Ended 2/28/026,8			Year Ended 2/28/015,6,8
Net asset value at beginning of period	$	19.61		$	20.47		$	11.39		$	14.31		$	14.11		$	15.50
Income from investment operations
Net investment loss		(0.01	)		(0.22	)		(0.23	)		(0.21	)		(0.23	)		(0.04	)
Net gain (loss) on investments (both realized and unrealized)		(0.19	)		0.43			9.95			(2.67	)		0.48			(0.66	)
Total from investment operations		(0.20	)		0.21			9.72			(2.88	)		0.25			(0.70	)
Less distributions
Distribution from net realized gains		– –			(1.07	)		(0.64	)		(0.04	)		(0.05	)		(0.69	)
Total distributions		– –			(1.07	)		(0.64	)		(0.04	)		(0.05	)		(0.69	)
Net asset value at end of period	$	19.41		$	19.61		$	20.47		$	11.39		$	14.31		$	14.11
Total Return1		(1.02	)%2		0.86	%2		85.87	%		(20.21	)%		1.77	%		(4.67	)%4
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	26,062		$	25,248		$	11,017		$	1,291		$	1,314		$	645
Ratios of expenses to average net assets
Net expenses		2.25	%3		2.25	%		2.25	%		2.25	%		2.25	%		2.25	%3
Total expenses		2.25	%3		2.41	%		2.77	%		3.74	%		3.99	%		8.15	%3
Ratios of net investment loss to average net assets
After advisory/administration and other fee waivers		(0.70	)%3		(1.56	)%		(1.38	)%		(1.69	)%		(1.58	)%		(0.83	)%3
Before advisory/administration and other fee waivers		(0.70	)%3		(1.71	)%		(1.90	)%		(3.18	)%		(3.29	)%		(6.70	)%3
Portfolio Turnover Rate		14	%		173	%		106	%		157	%		75	%		139	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ Not annualized.

 ⁵ October 16, 2000 (commencement of share class) to February 28, 2001.

 ⁶ Audited by other auditors.

 ⁷ Unaudited.

 ⁸ Per-share figures have been calculated using the average shares method.

37

BlackRock

Asset Allocation Portfolio

IMPORTANT DEFINITIONS

Asset-Backed Securities:  Bonds that are backed by a pool of assets, usually loans such as installment sale contracts or credit card receivables.

Bonds:  Debt obligations such as bonds and debentures, U.S. Government securities, debt obligations of domestic and foreign corporations, debt obligations of foreign governments and their political subdivisions, asset-backed securities, various mortgage-backed securities (both residential and commercial), other floating or variable rate obligations, municipal obligations and zero coupon debt securities.

Collateralized Mortgage Obligations (CMO):  Bonds that are backed by cash flows from pools of mortgages. CMOs may have multiple classes with different payment rights and protections.

Commercial Mortgage-Backed Securities (CMBS):  Bonds that are backed by a mortgage loan or pools of loans secured by commercial property, not residential mortgages.

Equity Security:  A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

High Yield Bonds:   Sometimes referred to as “junk bonds,” these are debt securities which are rated lower than investment grade (below the fourth highest rating of the major rating agencies). These securities generally pay more interest than higher rated securities. The higher yield is an incentive to investors who otherwise may be hesitant to purchase the debt of such a low rated issuer.

Investment Goal

The Fund’s investment goal is to seek to maximize total return, consistent with income generation and prudent investment management.

Primary Investment Strategies

The fund uses an asset allocation strategy, investing varying percentages of its portfolio in three major categories: stocks, bonds and, to a lesser extent, money market instruments. Drawing on its analysis of financial trends and market conditions, the fund management team monitors and adjusts those allocations from time to time. The fund has wide flexibility in the relative weightings given to each category; however, it intends to remain diversified across categories.

The assets allocated to the stock and bond categories undergo a further allocation process. The fund management team uses a combination of quantitative and fundamental analysis to evaluate the relative attractiveness of various segments in the equity universe, defined by style, capitalization range and geographic location. The fund management team regularly reviews and allocates varying percentages of the fund to equity investment management team members responsible for security selection within these distinctive disciplines, including stocks of large, middle and small capitalization companies, companies that appear to be trading below their true worth, companies with significant growth opportunities, firms in specialized sectors and international companies. Within each discipline, investment decisions are primarily the result of bottom-up security selection that, in turn, drives sector and industry weightings as well as average market capitalization. With respect to its equity investments, the fund primarily buys common stock but also can invest in preferred stock and securities convertible into common and preferred stock. The equity investment management team assesses each stock’s changing characteristics relative to its contribution to portfolio risk. A stock is sold when it no longer offers an appropriate return-to-risk trade-off.

Members of the fixed income investment management team are responsible for managing the fixed income allocation of the fund. The fixed income investment management team evaluates sectors of the bond market and individual securities within these sectors. The fixed income investment management team selects bonds from several sectors including: U.S. Treasuries and agency

38

IMPORTANT DEFINITIONS

Investment Grade:  Securities which are rated in the four highest categories by at least one of the major rating agencies or determined by the fund manager to be of similar quality. Generally, the higher the rating of a bond, the higher the likelihood that interest and principal payments will be made on time.

Investment Style:  Refers to the guiding principle of a mutual fund’s investment choices. The investment style of this fund is balanced, meaning that the managers will choose both equity and fixed income securities for this fund.

Mortgage-Backed Securities: Asset-backed securities based on a particular type of asset, a mortgage. There are a wide variety of mortgage backed securities involving commercial or residential, fixed rate or adjustable rate mortgages and mortgages issued by banks or government agencies.

Sector: All stocks are classified into a category or sector such as utilities, consumer services, basic materials, capital equipment, consumer cyclicals, energy, consumer non-cyclicals, healthcare, technology, transportation, finance and cash.

Total Return: A way of measuring fund performance. Total return is based on a calculation that takes into account income dividends, capital gain distributions and the increase or decrease in share price.

securities, commercial and residential mortgage-backed securities, CMOs, asset-backed securities and corporate bonds. Securities are purchased for the fund when the fixed income management team believes that they have the potential for above-average total return. The fund invests primarily in dollar-denominated investment grade bonds, but may invest up to 20% of its fixed income allocation in any combination of non-investment grade bonds (high yield or junk bonds), non-dollar denominated bonds and bonds of emerging market issuers. The fund’s investment in non-dollar denominated bonds may be on a currency hedged or unhedged basis. Non-investment grade bonds acquired by the fund will generally be in the lower rating categories of the major rating agencies (BB or lower by Standard & Poor’s or Ba or lower by Moody’s) or will be determined by the fixed income investment management team to be of similar quality. Split rated bonds will be considered to have the higher credit rating. A security will be sold if, in the opinion of the fixed income investment management team, the risk of continuing to hold the security is unacceptable when compared to its total return potential.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund also may invest in these securities in order to achieve its investment goal.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities, or enter into interest rate or foreign currency transactions, including swaps (collectively, commonly known as derivatives). An option is the right to buy or sell a security or an index of securities at a specific price on or before a specific date. A future is an agreement to buy or sell a security or an index of securities at a specific price on a specific date. A swap is an agreement whereby one party exchanges its right to receive or its obligation to pay one type of interest or currency with another party for that other party’s obligation to pay or its right to receive another type of interest or currency in the future or for a period of time. The fund typically uses derivatives as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The fund may also use derivatives for leverage, in

39

which case their use would involve leveraging risk. The fund may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as reverse repurchase agreements or dollar rolls). The fund may also use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movement in the value of non-U.S. currencies.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The main risk of any investment in stocks is that values fluctuate in price.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Because market conditions can vary, this fund’s performance may be better or worse than other funds with different investment styles. For example, in some markets a fund holding exclusively equity or fixed income securities may outperform this fund.

While the management team chooses stocks it believes to have rising earnings expectations and good relative valuations, there is no guarantee that the investments will increase in value or that they won’t decline.

Two of the main risks of investing in the fund are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds such as those held by the fund. Market interest rates have in recent years declined significantly below historical average rates. This decline

40

may have increased the risk that these rates will rise in the future. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

Securities rated in the fourth highest category by the rating agencies are considered investment grade but they may also have some speculative characteristics, meaning that they carry more risk than higher rated securities and may have problems making principal and interest payments in difficult economic climates. Investment grade ratings do not guarantee that bonds will not lose value.

The fund makes investments in residential and commercial mortgage-backed securities and other asset-backed securities. The characteristics of these mortgage-backed and asset-backed securities differ from traditional fixed income securities.

A main difference is that the principal on mortgage- or asset-backed securities may normally be prepaid at any time, which will reduce the yield and market value of these securities. Asset-backed securities and CMBS generally experience less prepayment than residential mortgage-backed securities. In periods of falling interest rates, the rate of prepayments tends to increase (as does price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower rates. During such periods, reinvestment of the prepayment proceeds by the management team will generally be at lower rates of return than the return on the assets which were prepaid. Certain commercial mortgage-backed securities are issued in several classes with different levels of yield and credit protection. The fund’s investments in commercial mortgage-backed securities with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate, credit and prepayment risks.

Certain asset-backed securities are based on loans that are unsecured, which means that there is no collateral to seize if the underlying borrower defaults.

Non-investment grade securities carry greater risks than securities which have higher credit ratings, including a high risk of default. The yields of non-investment grade securities will move up and down over time. The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer. These companies are often young and growing and have a lot of debt. High yield securities are considered speculative, meaning there is significant risk that companies issuing these securities may not be able to repay principal and pay interest or dividends on time. In addition, other creditors of a high yield issuer may have the right to be paid before the high yield bond holder.

During an economic downturn, a period of rising interest rates or a recession, issuers of high yield securities who have a lot of debt

41

may experience financial problems. They may not have enough cash to make their principal and interest payments. An economic downturn could also hurt the market for lower-rated securities and the fund.

The market for high yield bonds is not as liquid as the markets for higher rated securities. This means that it may be harder to buy and sell high yield bonds, especially on short notice. The market could also be hurt by legal or tax changes.

The fund may invest in non-dollar denominated bonds of issuers located outside of the United States. Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of interest paid on non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subjected to wider price movements than comparable investments in U.S. companies. There is also less regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging market countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past, and may do so again in the future, as a result of economic and political turmoil in many of these countries.

Treasury obligations may differ in their interest rates, maturities, times of issuance and other characteristics. Obligations of U.S. Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S. Government. No assurance can be given that the U.S. Government will provide financial support to its agencies and authorities if it is not obligated by law to do so.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is

42

that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

Some transactions may give rise to a form of leverage. These transactions may include, among others, derivatives, reverse repurchase agreements and dollar rolls and may expose the fund to greater risk and increase its costs. To mitigate leverage risk, the management team will segregate liquid assets on the books of the fund or otherwise cover the transactions. The use of leverage may cause the fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Increases and decreases in the value of the fund’s portfolio will be magnified when the fund uses leverage. The fund will also have to pay interest on its borrowings, reducing the fund’s return. This interest expense may be greater than the fund’s return on the underlying investment.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Asset Allocation Fund (the SSR Fund). The SSR Fund

43

transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Investor A Shares (in the chart) and for Investor A, B and C Shares (in the table). The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of a customized weighted index comprised of the returns of the S&P 500^® Index (60%) and the Lehman Aggregate Index (40%), recognized unmanaged indices of stock and bond market performance, respectively. As with all such investments, past performance (before and after taxes) is not an indication of future results. Sales charges are not reflected in the bar chart. If they were, returns would be less than those shown. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Investor A Shares of the fund is based on the performance of the A Shares of the SSR Fund. The performance of the Investor B Shares of the fund is based on the performance of the B(1) Shares of the SSR Fund. The performance of the Investor C Shares of the fund is based on the performance of the C Shares of the SSR Fund. The performance for the period before B(1) Shares of the SSR Fund were launched on January 1, 1999 is based upon performance for B Shares of the SSR Fund. The actual return of B(1) Shares would have been lower than shown for this period because B Shares of the SSR Fund had lower expenses than B(1) Shares.

As of 12/31

Investor A Shares

ANNUAL TOTAL RETURNS*

44

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

These returns assume payment of applicable sales charges.

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Asset Allocation; Inv A
Return Before Taxes	4.68%	3.41%	4.57%	10.11%	12/29/88
Return After Taxes on Distributions	3.57%	2.49%	2.65%	7.67%
Return After Taxes on Distributions and Sale of Shares	3.34%	2.38%	2.81%	7.43%
Asset Allocation; Inv B
Return Before Taxes	5.32%	3.81%	4.74%	9.96%	12/29/88
Asset Allocation; Inv C
Return Before Taxes	9.28%	4.73%	5.07%	9.95%	12/29/88
60% S&P 500®/40% Leh. Agg. (Reflects no deduction for fees, expenses or taxes)	8.30%	5.14%	1.97%	10.74%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Investor A Shares only, and the after-tax returns for Investor B and C Shares will vary.

Expenses and Fees

The tables below explain your pricing options and describe the fees and expenses that you may pay if you buy and hold Investor A, B and C Shares of the fund. The “Annual Fund Operating Expenses” table is based on expenses for the most recent fiscal year (restated to reflect current fees) and may not reflect expenses of the fund after February 1, 2006.

Shareholder Fees

(Fees paid directly from your investment)

	A Shares		B Shares		C Shares
Maximum Sales Charge (Load) Imposed on Purchases*	5.75	%	0.0	%	0.0	%
(as percentage of offering price)
Maximum Deferred Sales Charge (Load)	0.0	%	4.5	%**	1.00	%***
(as percentage of offering price)
Redemption/Exchange Fee****	2.0	%	2.0	%	2.0	%
(as a percentage of amount redeemed)

45

IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Distribution Fees: Fees paid to the fund’s distributor, BlackRock and service organizations for distribution of fund shares and related sales support services.

Interest Expense: The cost of borrowing money to buy additional securities, primarily through reverse repurchase agreements (under which the fund sells securities and agrees to buy them back at a particular date and price).

Other Expenses: Include fees paid by the fund for other expenses such as administration, transfer agency, custody, professional fees and registration fees.

Service Fees: Fees that are paid to service organizations that provide personal services to shareholders.

Service Organizations: Brokers, dealers, financial institutions and industry professionals that provide support services to their customers who own shares of the Company.

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

	A Shares	B Shares	C Shares
Advisory fees	.55%	.55%	.55%
Distribution (12b-1) fees	.10%	.75%	.75%
Other expenses	.72%	.72%	.72%
Service fees	.25%	.25%	.25%
Other	.47%	.47%	.47%
Total annual fund operating expenses	1.37%	2.02%	2.02%
Fee waivers and expense reimbursements1	.04%	—	—
Net expenses1	1.33%	2.02%	2.02%

      * Reduced front-end sales charges may be available (see the section “Can the Sales Charge be Reduced or Eliminated?” for more information regarding the reduction of front-end sales charges). A CDSC of .75% is assessed on certain redemptions of Investor A Shares that are purchased with no initial sales charge as part of an investment of $1,000,000 or more.

    ** The CDSC is 4.5% if shares are redeemed in less than one year. The CDSC for Investor B Shares decreases for redemptions made in subsequent years. After six years there is no CDSC on B Shares. (See the section “Purchase of Investor B Shares” for complete schedule of CDSCs.)

  *** There is no CDSC on C Shares after one year.

**** Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit expenses to 1.33% (for Investor A Shares) and 2.08% (for Investor B and C Shares) of average daily net assets until February 1, 2006. In addition, BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit expenses to 1.40% (for Investor A Shares) and 2.15% (for Investor B and C Shares) of average daily net assets until February 1, 2007. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses, redemption at the end of each time period and, with respect to B Shares and C Shares only, no redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
A Shares*	$	703	$	980	$	1,278	$	2,123
B Shares**
Redemption	$	655	$	984	$	1,288	$	2,181	***
B Shares
No Redemption	$	205	$	634	$	1,088	$	2,181	***
C Shares**
Redemption	$	305	$	634	$	1,088	$	2,348
C Shares
No Redemption	$	205	$	634	$	1,088	$	2,348

* Reflects imposition of sales charge.

** Reflects deduction of CDSC.

*** Based on the conversion of Investor B Shares to Investor A shares after eight years.

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As a shareholder you pay certain fees and expenses. Shareholder transaction fees are paid out of your investment and annual fund operating expenses are paid out of fund assets.

This prospectus offers shareholders different ways to invest with three separate pricing options. You need to understand your choices so that you can choose the pricing option that is most suitable for you. As shown above, with one option (Investor A Shares) you pay a one-time front-end transaction fee each time you buy shares. The other options (Investor B and Investor C Shares) have no front-end charges but have higher on-going fees, which are paid over the life of the investment, and have a contingent deferred sales charge (CDSC) that you may pay when you redeem your shares. Which option should you choose? It depends on your individual circumstances. You should know that the lowest sales charge won’t necessarily be the least expensive option over time. For example, if you intend to hold your shares long term it may cost less to buy A Shares than B or C Shares.

Fund Management

The fund management team is led by R. Andrew Damm, Managing Director of BlackRock Advisors, Inc. (BlackRock), and Linda Zhang, Vice President at BlackRock.

Mr. Damm is primarily responsible for the oversight of the risk management of domestic and international equity portfolios and has managed the fund since 2005. He heads a team that utilizes quantitative techniques to model all of BlackRock’s equity portfolios to ensure that they are managed consistently with their mandates. He works with BlackRock’s portfolio managers to communicate portfolio risk forecasts and to analyze historical performance. He is also a member of the Portfolio Risk Management Group, the Asset Allocation Committee and the Equity Investment Strategy Group.

Prior to taking on his current responsibilities, Mr. Damm was the equity product strategist and the lead portfolio manager for BlackRock’s large cap growth and core equity portfolios where he led a team of analysts and portfolio managers that managed institutional and mutual fund portfolios. He joined the PNC Asset Management Group in 1995 as a senior investment strategist, and was previously a portfolio manager within PNC’s Investment Management and Trust Division.

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Ms. Zhang joined BlackRock following the merger with SSRM in 2005. Prior to joining BlackRock, she was a Vice President, a portfolio manager and a key member of the portfolio management team for the State Street Research Asset Allocation Fund. Previously, Ms. Zhang served as a Senior Quantitative Analyst and Vice President and Associate Portfolio Manager for the North American Fixed Income Team at Baring Asset Management from 1997 to 2003.

Financial Highlights

The financial information in the tables on the following pages shows financial performance for the periods indicated. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through March 31, 2003) and Deloitte & Touche LLP (for periods after March 31, 2003). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

48

FINANCIAL HIGHLIGHTS

(For an Investor A or B Share Outstanding Throughout Each Period)

Asset Allocation Portfolio

	INVESTOR A SHARES
	Period 3/1/05 through 03/31/057			Period 4/1/04 through 2/28/056			Year Ended 3/31/046,8			Year Ended 3/31/035,6,8			Year Ended 3/31/024,5,6,8			Year Ended 3/31/015,6,8			Year Ended 3/31/005,6,8
Net asset value at beginning of period	$	14.95		$	14.89		$	11.36		$	14.15		$	14.03		$	16.24		$	14.45
Income from investment operations
Net investment income		0.02			0.18			0.19			0.24			0.28			0.39			0.33
Net gain (loss) on investments (both realized and unrealized)		(0.22	)		0.80			3.55			(2.68	)		0.83			(0.40	)		2.06
Total from investment operations		(0.20	)		0.98			3.74			(2.44	)		1.11			(0.01	)		2.39
Less distributions
Distributions from net investment income		(0.04	)		(0.38	)		(0.21	)		(0.29	)		(0.31	)		(0.31	)		(0.31	)
Distribution from net realized gains		– –			(0.54	)		– –			(0.06	)		(0.68	)		(1.89	)		(0.29	)
Total distributions		(0.04	)		(0.92	)		(0.21	)		(0.35	)		(0.99	)		(2.20	)		(0.60	)
Net asset value at end of period	$	14.71		$	14.95		$	14.89		$	11.36		$	14.15		$	14.03		$	16.24
Total Return1		(1.43	)%2		6.78	%2		32.94	%		(17.37	)%		8.15	%		0.29	%		16.88	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	509,998		$	526,929		$	357,100		$	252,069		$	320,614		$	272,813		$	304,400
Ratios of expenses to average net assets
Net expenses		1.25	%3		1.24	%3		1.45	%		1.42	%		1.40	%		1.44	%		1.29	%
Total expenses		1.40	%3		1.32	%3		1.45	%		1.43	%		1.41	%		1.46	%		1.30	%
Ratios of net investment income to average net assets
After advisory/administration and other fee waivers		2.05	%3		1.55	%3		1.43	%		1.92	%		1.95	%		2.61	%		2.23	%
Before advisory/administration and other fee waivers		1.91	%3		1.47	%3		1.43	%		1.92	%		1.95	%		2.61	%		2.23	%
Portfolio Turnover Rate		19	%		101	%		216	%		181	%		186	%		181	%		123	%
	INVESTOR B SHARES
	Period 3/1/05 through 03/31/057			Period 4/1/04 through 2/28/056			Year Ended 3/31/046,8			Year Ended 3/31/035,6,8			Year Ended 3/31/024,5,6,8			Year Ended 3/31/015,6,8			Year Ended 3/31/005,6,8
Net asset value at beginning of period	$	14.81		$	14.74		$	11.26		$	14.01		$	13.90		$	16.08		$	14.32
Income from investment operations
Net investment income		0.02			0.08			0.10			0.15			0.17			0.26			0.24
Net gain (loss) on investments (both realized and unrealized)		(0.24	)		0.81			3.49			(2.63	)		0.83			(0.37	)		2.00
Total from investment operations		(0.22	)		0.89			3.59			(2.48	)		1.00			(0.11	)		2.24
Less distributions
Distributions from net investment income		(0.01	)		(0.28	)		(0.11	)		(0.21	)		(0.21	)		(0.19	)		(0.19	)
Distribution from net realized gains		– –			(0.54	)		– –			(0.06	)		(0.68	)		(1.88	)		(0.29	)
Total distributions		(0.01	)		(0.82	)		(0.11	)		(0.27	)		(0.89	)		(2.07	)		(0.48	)
Net asset value at end of period	$	14.58		$	14.81		$	14.74		$	11.26		$	14.01		$	13.90		$	16.08
Total Return1		(1.45	)%2		6.20	%2		32.03	%		(17.91	)%		7.30	%		(0.35	)%		15.93	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	183,141		$	187,689		$	133,083		$	75,963		$	81,440		$	56,543		$	36,045
Ratios of expenses to average net assets
Net expenses		2.01	%3		2.04	%3		2.15	%		2.12	%		2.10	%		2.17	%		2.04	%
Total expenses		2.05	%3		2.04	%3		2.15	%		2.13	%		2.11	%		2.19	%		2.05	%
Ratios of net investment income to average net assets
After advisory/administration fee waivers		1.30	%3		0.73	%3		0.72	%		1.22	%		1.25	%		1.86	%		1.48	%
Before advisory/administration fee waivers		1.26	%3		0.73	%3		0.72	%		1.22	%		1.25	%		1.86	%		1.48	%
Portfolio Turnover Rate		19	%		101	%		216	%		181	%		186	%		181	%		123	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ Effective April 1, 2001, the fund has adopted the provisions on the AICPA Audit and Accounting Guide, Audit of Investment Companies and began amortizing premium on all fixed income securities. The effect of this change for the year ended March 31, 2002, was to decrease net investment income per share by $0.01, increase net realized and unrealized gain per share by $0.01, and decrease the ratio of net investment income in average and assets by 0.13%. The statement of changes and financial highlights for the period prior to April 1, 2001, have not been restated for this change in policy.

 ⁵ Audited by other auditors.

 ⁶ The performance prior to January 31, 2005, set forth in this table is the financial data of the State Street Research Asset Allocation Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Asset Allocation Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratios of 0.71991517 and 0.72321182 for Class A and Class B shares, respectively.

 ⁷ Unaudited.

 ⁸ Per-share figures have been calculated using the average shares method.

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Continued

FINANCIAL HIGHLIGHTS

(For an Investor C Share Outstanding Throughout Each Period)

Asset Allocation Portfolio

	INVESTOR C SHARES
	Period 3/1/05 through 03/31/057			Period 4/1/04 through 2/28/056			Year Ended 3/31/046,8			Year Ended 3/31/035,6,8			Year Ended 3/31/024,5,6,8			Year Ended 3/31/015,6,8			Year Ended 3/31/005,6,8
Net asset value at beginning of period	$	14.81		$	14.74		$	11.25		$	14.01		$	13.89		$	16.05		$	14.27
Income from investment operations
Net investment income		0.02			0.08			0.10			0.15			0.18			0.27			0.22
Net gain (loss) on investments (both realized and unrealized)		(0.24	)		0.81			3.50			(2.65	)		0.80			(0.38	)		2.03
Total from investment operations		(0.22	)		0.89			3.60			(2.50	)		0.98			(0.11	)		2.25
Less distributions
Distributions from net investment income		(0.02	)		(0.28	)		(0.11	)		(0.21	)		(0.19	)		(0.18	)		(0.18	)
Distribution from net realized gains		– –			(0.54	)		– –			(0.05	)		(0.67	)		(1.87	)		(0.29	)
Total distributions		(0.02	)		(0.82	)		(0.11	)		(0.26	)		(0.86	)		(2.05	)		(0.47	)
Net asset value at end of period	$	14.57		$	14.81		$	14.74		$	11.25		$	14.01		$	13.89		$	16.05
Total Return1		(1.51	)%2		6.20	%2		32.14	%		(17.96	)%		7.31	%		(0.35	)%		15.93	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	63,178		$	65,357		$	42,262		$	19,079		$	13,226		$	12,687		$	17,093
Ratios of expenses to average net assets
Net expenses		2.01	%3		2.04	%3		2.15	%		2.12	%		2.10	%		2.17	%		2.04	%
Total expenses		2.05	%3		2.04	%3		2.15	%		2.13	%		2.11	%		2.19	%		2.05	%
Ratios of net investment income to average net assets
After advisory/administration fee waivers		1.39	%3		0.76	%3		0.72	%		1.21	%		1.26	%		1.89	%		1.47	%
Before advisory/administration fee waivers		1.35	%3		0.76	%3		0.72	%		1.21	%		1.26	%		1.89	%		1.47	%
Portfolio Turnover Rate		19	%		101	%		216	%		181	%		186	%		181	%		123	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ Effective April 1, 2001, the fund has adopted the provisions on the AICPA Audit and Accounting Guide, Audit of Investment Companies and began amortizing premium on all fixed income securities. The effect of this change for the year ended March 31, 2002, was to decrease net investment income per share by $0.01, increase net realized and unrealized gain per share by $0.01, and decrease the ratio of net investment income in average and assets by 0.13%. The statement of changes and financial highlights for the period prior to April 1, 2001, have not been restated for this change in policy.

 ⁵ Audited by other auditors.

 ⁶ The performance prior to January 31, 2005, set forth in this table is the financial data of the State Street Research Asset Allocation Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Asset Allocation Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratio of 0.72727901 for Class C shares.

⁷ Unaudited.

 ⁸ Per-share figures have been calculated using the average shares method.

50

About Your Investment

Buying Shares from a Registered Investment Professional

BlackRock Funds believes that investors can benefit from the advice and ongoing assistance of a registered investment professional. Accordingly, when you buy or sell BlackRock Funds Investor Shares, you may pay a sales charge, which is used to compensate your investment professional for services provided to you. A person who gets compensated for selling shares may receive a different amount for each class.

As a shareholder you pay certain fees and expenses. Shareholder fees are paid directly from your investment and annual fund operating expenses are paid out of fund assets and are reflected in the fund’s net asset value.

Your registered representative can help you to buy shares by telephone. Before you place your order make sure that you have read the Prospectus and have a discussion with your registered representative about the details of your investment.

What Price Per Share Will You Pay?

The price of mutual fund shares generally changes every day the New York Stock Exchange (NYSE) is open (business day). A mutual fund is a pool of investors’ money that is used to purchase a portfolio of securities, which in turn is owned in common by the investors. Investors put money into a mutual fund by buying shares. If a mutual fund has a portfolio worth $50 million and has 5 million shares outstanding, the net asset value (NAV) per share is $10. When you buy Investor Shares you pay the NAV per share plus the applicable front-end sales charge if you are purchasing Investor A Shares.

PFPC Inc. (PFPC), the Company’s transfer agent, will probably receive your order from your registered representative, who takes your order. However, you can also fill out a purchase application and mail it to the transfer agent with your check. Please call (800) 441-7762 for a purchase application. Purchase orders received by the transfer agent before the close of regular trading on the NYSE (currently 4 p.m. (Eastern time)) on each day the NYSE is open will be priced based on the NAV calculated at the close of trading on that day plus any applicable sales charge. NAV is calculated separately for each class of shares of each fund as of the close of business on the NYSE, generally 4 p.m. (Eastern time), each day the NYSE is open. Shares will not be priced on days the NYSE is closed. Purchase orders received after the close of trading will be priced based on the next calculation of NAV. The non-U.S. securities and certain other securities held by a fund may trade on

51

days when the NYSE is closed. In these cases, net asset value of shares may change when fund shares cannot be bought or sold.

Since the NAV changes daily, the price you pay for your shares depends on the time that your order is received by the Company’s transfer agent, whose job it is to keep track of shareholder records.

Each fund’s assets are valued primarily on the basis of market quotations. Certain short-term debt securities are valued on the basis of amortized cost. When a determination is made that market quotations are not readily available, including, but not limited to, when (i) the exchange or market on which a security is traded does not open for trading for an entire trading day and no other market prices are available, (ii) a particular security does not trade regularly or has had its trading halted, (iii) a security does not have a price source due to its lack of liquidity, (iv) BlackRock believes a market quotation from a broker-dealer is unreliable (e.g., where it varies significantly from a recent trade), (v) the security is thinly traded or (vi) there has been a significant subsequent event, each fund values the affected securities at fair value as determined by BlackRock pursuant to procedures adopted by the Company’s Board of Trustees. For example, in valuing a security that trades principally on a foreign market, a fund uses the most recent closing market price from the market on which the security principally trades, unless because of a significant event subsequent to the market close such closing market price, in BlackRock’s judgment, does not represent the current market value of the security. Because significant events could affect the value of a foreign security between the close of the foreign market where the security is principally traded and the time the fund calculates its NAV, such closing price may not be reflective of current market conditions. Therefore, a fund may adjust the closing market price of a foreign security as a result of a significant subsequent event to reflect what it believes to be the fair value of the security as of the time the fund calculates its NAV.

Fair value represents a good faith approximation of the value of a security. A security’s valuation may differ depending on the method used for determining value. Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. The fair value of one or more securities may not, in retrospect, be the prices at

52

which those assets could have been sold during the period in which the particular fair values were used in determining a fund’s NAV. As a result, a fund’s sale or redemption of its shares at NAV, at a time when a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.

When you place a purchase order, you need to specify whether you want Investor A, B or C Shares. If you do not specify a class, you will receive Investor A Shares.

When Must You Pay?

Payment for an order must be made in Federal funds or other immediately available funds by the time specified by your registered representative or other financial intermediary, but in no event later than 4 p.m. (Eastern time) on the third business day following PFPC’s receipt of the order. If payment is not received by this time, the order will be canceled and you and your registered representative or other financial intermediary will be responsible for any loss to a fund. For shares purchased directly from the transfer agent, a check payable to BlackRock Funds and bearing the name of the fund you are purchasing must accompany a completed purchase application. There is a $20 fee for each purchase check that is returned due to insufficient funds. The Company does not accept third-party checks. You may also wire Federal funds to the transfer agent to purchase shares, but you must call BlackRock Funds at (800) 441-7762 before doing so to confirm the wiring instructions.

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions, including the Company, to obtain, verify and record information that identifies each person who opens an account. When opening an account, you will be asked for your name, address, date of birth and other information that will allow the Company to identify you. The Company may also ask to see other identifying documents such as a driver’s license (for individuals) or Articles of Incorporation or other formation documents (for institutions). The Company may use a third party to obtain and verify this information. The Company may not be able to establish an account if you do not provide the necessary information.

53

How Much is the Minimum Investment?

The minimum investment for the initial purchase of Investor Shares is $500. There is a $50 minimum for all later investments. The Company permits a lower initial investment if you are an employee of the Company or one of its service providers or if you participate in the Automatic Investment Plan in which you make regular, periodic investments through a savings or checking account. Your investment professional can advise you on how to begin an Automatic Investment Plan. The Company won’t accept a purchase order of $100,000 or more for Investor B Shares or $1 million or more for Investor C Shares. Your registered representative may set a lower maximum for Investor B Share purchases. The Company may reject any purchase order, modify or waive the minimum investment requirements and suspend and resume the sale of any share class of any fund at any time.

Which Pricing Option Should You Choose?

BlackRock Funds offers different pricing options to investors in the form of different share classes. Your registered representative can help you decide which option works best for you. Through this Prospectus, you can choose from Investor A, B, or C Shares.

A Shares (Front-End Load)

n One time sales charge paid at time of purchase

n Lower ongoing distribution fees

n Free exchange with other A Shares in BlackRock Funds family

n Advantage: Makes sense for investors who are eligible to have the sales charge reduced or eliminated or who have a long-term investment horizon because ongoing distribution fees are less than for other Investor Share classes.

n Disadvantage: You pay a sales charge up-front, and therefore you start off owning fewer shares.

B Shares (Back-End Load)

n No front-end sales charge when you buy shares

n You pay a sales charge when you redeem shares. It is called a contingent deferred sales charge (CDSC) and it declines over 6 years to zero from a high of 4.5%.

n Higher ongoing distribution fees than A Shares

54

n Free exchange with other B Shares in BlackRock Funds family

n Advantage: No up-front sales charge so you start off owning more shares.

n Disadvantage: You pay higher ongoing distribution fees than on A Shares each year you own shares, which means that you can expect lower total performance per share.

C Shares (Level Load)

n No front-end sales charge when you buy shares

n Contingent deferred sales charge (CDSC) of 1.00% if shares are redeemed within 12 months of purchase

n Higher ongoing distribution fees than A Shares

n Free exchange with other C Shares in BlackRock Funds family

n Advantage: No up-front sales charge so you start off owning more shares. These shares may make sense for investors who have a shorter investment horizon relative to A or B Shares.

n Disadvantage: You pay higher ongoing distribution fees than on A shares each year you own shares, which means that you can expect lower total performance per share. Shares do not convert to A Shares, so you will continue paying the higher ongoing distribution fees as long as you hold the C Shares. Over the long term, this can add up to higher total fees than either A Shares or B Shares.

Investor B Shares received through the reinvestment of dividends and distributions convert to A Shares proportionately with the conversion of B Shares that were not received through reinvestment.

You may also view information about a fund’s sales loads free of charge at www.blackrock.com/funds.

How Much is the Sales Charge?

The tables below show the schedules of sales charges that you may pay if you buy and sell Investor A, B and C Shares of a fund.

Purchase of Investor A Shares

The following table shows the front-end sales charges that you may pay if you buy Investor A Shares. The offering price for Investor A Shares includes any front-end sales charge. The front-end sales charge expressed as a percentage of the offering price may be higher or lower than the charge described below due to

55

rounding. Similarly, any contingent deferred sales charge paid upon certain redemptions of Investor A Shares expressed as a percentage of the applicable redemption amount may be higher or lower than the charge described below due to rounding. You may qualify for a reduced front-end sales charge. Purchases of Investor A Shares at certain fixed dollar levels, known as “breakpoints,” cause a reduction in the front-end sales charge. Once you achieve a breakpoint, you pay that sales charge on your entire purchase amount (and not just the portion above the breakpoint). Additionally, the front-end sales charge can be reduced or eliminated through one or a combination of the following: the right of accumulation, a Letter of Intent, the reinstatement privilege, quantity discounts or a waiver of the sales charge (described below).

The following schedules of front-end sales charges and quantity discounts applies to the Mid-Cap Value Equity, Asset Allocation, Health Sciences and Global Resources Portfolios.

AMOUNT OF TRANSACTION AT OFFERING PRICE	SALES CHARGE AS % OF OFFERING PRICE*	SALES CHARGE AS % OF NET ASSET VALUE*
Less than $50,000	5.75%	6.10%
$50,000 but less than $100,000	4.50%	4.71%
$100,000 but less than $250,000	3.50%	3.63%
$250,000 but less than $500,000	2.50%	2.56%
$500,000 but less than $1,000,000	2.00%	2.04%
$1,000,000 or more	0.00%	0.00%

* There is no initial sales charge on purchases of $1,000,000 or more of Investor A Shares; however, you will pay a CDSC of (i) .75% for the Asset Allocation Portfolio and (ii) 1.00% for the Mid-Cap Value Equity, Health Sciences and Global Resources Portfolios, of the offering price or the net asset value of the shares on the redemption date (whichever is less) for shares redeemed within 18 months after purchase. Class A Shares of an SSR Fund purchased prior to its reorganization with a BlackRock fund will pay the CDSC specified above for shares of the SSR Fund redeemed within 12 months after purchase, except with respect to the Asset Allocation Portfolio, in which case Class A shares will pay a CDSC of 1.0% based on the net asset value of the shares at the time of purchase (or of sale, if lower) for shares redeemed within 12 months after purchase.

The Company’s distributor retains up to .75% of the sales charge on all purchases of Investor A Shares of the Mid-Cap Value Equity, Asset Allocation, Health Sciences and Global Resources Portfolios. When an investor purchases Investor A Shares directly from the Company (and not through a broker), the distributor retains the entire front-end sales charge.

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Purchase of Investor B Shares

Investor B Shares are subject to a CDSC at the rates shown in the chart below if they are redeemed within six years of purchase. The CDSC is based on the price of the Investor B Shares when purchased or the net asset value of the Investor B Shares on the redemption date (whichever is less) and is calculated without regard to any redemption/exchange fee. The amount of any CDSC an investor must pay depends on the number of years that elapse between the date of purchase and the date of redemption. The CDSC may be waived under certain circumstances, as described below. Any CDSC paid on redemptions of Investor B Shares expressed as a percentage of the applicable redemption amount may be higher or lower than the charge described below due to rounding.

NUMBER OF YEARS ELAPSED SINCE PURCHASE	CONTINGENT DEFERRED SALES CHARGE (AS % OF DOLLAR AMOUNT SUBJECT TO THE CHARGE)
Up to one year	4.50%
More than one but less than two years	4.00%
More than two but less than three years	3.50%
More than three but less than four years	3.00%
More than four but less than five years	2.00%
More than five but less than six years	1.00%
More than six years	0.00%

Class B(1) shares of an SSR Fund purchased prior to its reorganization with a BlackRock fund remain subject to the CDSC applicable to such Class B(1) shares. All Investor B shares of a BlackRock fund purchased following the reorganizations will be subject to the CDSC of the BlackRock fund. Class B(1) shares of an SSR Fund are subject to a CDSC at the rates shown in the chart below if they are redeemed within six years of purchase.

NUMBER OF YEARS ELAPSED SINCE PURCHASE	CONTINGENT DEFERRED SALES CHARGE AS % OF NET ASSET VALUE AT THE TIME OF PURCHASE (OR REDEMPTION, IF LOWER)
First year	5.00%
Second year	4.00%
Third year	3.00%
Fourth year	3.00%
Fifth year	2.00%
Sixth year	1.00%
Seventh or Eighth year	None

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Purchase of Investor C Shares

Investor C Shares are subject to a CDSC of 1.00% if they are redeemed within 12 months after purchase. The 1.00% is based on the offering price or the net asset value of the Investor C Shares on the redemption date (whichever is less) and is calculated without regard to any redemption/exchange fee. The CDSC may be waived under certain circumstances, as described below. There is no CDSC on redemptions of Investor C Shares after 12 months. Any CDSC paid on redemptions of Investor C Shares expressed as a percentage of the applicable redemption amount may be higher or lower than the charge described below due to rounding.

When an investor redeems Investor B Shares or Investor C Shares, the redemption order is processed so that the lowest CDSC is charged. Investor B Shares and Investor C Shares that are not subject to the CDSC are redeemed first. After that, the Company redeems the Shares that have been held the longest.

Can the Sales Charge be Reduced or Eliminated?

There are several ways in which the sales charge can be reduced or eliminated. Purchases of Investor A Shares at certain fixed dollar levels, known as “breakpoints,” cause a reduction in the front-end sales charge (as described above in the “Purchase of Investor A Shares” section). Additionally, the front-end sales charge can be reduced or eliminated through one or a combination of the following: the right of accumulation, a Letter of Intent, the reinstatement privilege, quantity discounts or a waiver of the sales charge (described below). The CDSC on Investor B Shares can be reduced depending on how long you own the shares (a schedule of these reductions is listed above in the “Purchase of Investor B Shares” section). The CDSC on Investor B and C Shares also may be eliminated through waivers (described below). You may be required to provide PFPC and/or your registered representative with certain records and information in connection with the exercise of these rights, including information or records regarding shares of the funds held (i) in other accounts at your registered representative, (ii) at any other financial intermediary and (iii) at any financial intermediary by your related parties, such as members of your family or household. For more information, see the SAI or contact your investment professional.

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Right of Accumulation (Investor A Shares)

Investors have a “right of accumulation” under which the current value of an investor’s existing Investor A Shares in all BlackRock funds that are subject to a front-end sales charge may be combined with the amount of the current purchase in determining whether an investor qualifies for a breakpoint and a reduced front-end sales charge. In order to use this right, the investor must alert PFPC to the existence of previously purchased shares.

Letter of Intent (Investor A Shares)

An investor may qualify for a reduced front-end sales charge immediately by signing a “Letter of Intent” stating the investor’s intention to buy a specified amount of Investor A Shares in one or more funds subject to a front-end sales charge within the next 13 months that would, if bought all at once, qualify the investor for a reduced sales charge. The Letter of Intent may be signed anytime within 90 days after the first investment to be covered by the letter. The initial investment must meet the minimum initial purchase requirement. The investor must tell PFPC that later purchases are subject to the Letter of Intent. During the term of the Letter of Intent, PFPC will hold Investor A Shares representing up to 5% of the indicated amount in an escrow account for payment of a higher sales load if the full amount indicated in the Letter of Intent is not purchased. Any redemptions made during the term of the Letter of Intent will be subtracted from the amount of the total purchase indicated in the letter. If the full amount indicated is not purchased within the 13-month period, and the investor does not pay the higher sales load within 20 days, PFPC will redeem enough of the Investor A Shares held in escrow to pay the difference.

Reinvestment Privilege (Investor A, Investor B and Investor C Shares)

Upon redemption of Investor Shares, a shareholder may reinvest their redemption proceeds (after paying any applicable CDSC or redemption/exchange fee) in Investor A Shares of the SAME fund without paying a front-end sales charge. This right may be exercised once a year and within 60 days of the redemption, provided that the Investor A Share class of that fund is currently open to new investors or the shareholder has a current account in that closed fund. Shares will be purchased at the NAV calculated at the close of trading on the day the request is received. To exercise this privilege, PFPC must receive written notification from the shareholder of record or the registered representative of record, at the time of purchase. Investors should consult a tax adviser concerning the tax consequences of exercising this reinstatement privilege.

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Quantity Discounts (Investor A Shares)

In addition to quantity discounts for individuals which we discussed above, there are ways for you to qualify for breakpoints and therefore reduce the front-end sales charge by combining your order with the orders of (a) your spouse and any of your children under the age of 21, (b) a trustee or fiduciary of a single trust estate or single fiduciary account or (c) members of any organized group you belong to that has been in existence for more than six months, if it is not organized for the purpose of investing in mutual funds, and if the purchase is made through a central administrator, or through a single dealer, or by other means which result in economy of sales effort or expense. All orders must be placed at one time and certain restrictions apply. Investors must tell PFPC or their broker, at the time of purchase, that they are aggregating their purchases. For more information, please contact BlackRock Funds at (800) 441-7762 or see the SAI.

Waiving the Sales Charge (Investor A Shares)

The following investors may buy Investor A Shares without paying a front-end sales charge: (a) authorized qualified employee benefit plans; (b) persons investing through an authorized payroll deduction plan; (c) persons investing through an authorized investment plan for organizations which operate under Section 501(c)(3) of the Internal Revenue Code; (d) registered investment advisers, trust companies and bank trust departments exercising discretionary investment authority with respect to amounts to be invested in a fund; (e) persons participating in a “wrap account” or similar program under which they pay advisory fees to a broker-dealer or other financial institution; (f) persons participating in an account or program under which they pay fees to a broker-dealer or other financial institution for providing transaction processing and other administrative services, but not investment advisory services; and (g) employees of MetLife. In addition, within 60 days from the date of liquidation of Partners Balanced Trust (PBT), which is expected to occur on or about September 30, 2005, former shareholders of PBT will be able to invest their liquidation proceeds in Investor A Shares of the Company without paying a front-end sales charge. Investors who qualify for any of these exemptions from the sales charge must purchase Investor A Shares. Additionally, some people associated with the Company and its service providers may buy Investor A Shares without paying a sales charge. The front-end sales charge is not applied on Investor A shares acquired through the reinvestment of dividends

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or distributions. For more information on the waivers, please contact BlackRock Funds at (800) 441-7762 or see the SAI.

Waiving the Contingent Deferred Sales Charge (Investor B and Investor C Shares)

The CDSC on Investor B and Investor C Shares is not charged in connection with: (a) redemptions of Investor B and Investor C Shares purchased through authorized qualified employee benefit plans; (b) exchanges described in “Exchange Privilege” below; (c) redemptions made in connection with minimum required distributions due to the shareholder reaching age 70½ from IRA and 403(b)(7) accounts; (d) redemptions made with respect to certain retirement plans sponsored by the Company, BlackRock or its affiliates; (e) redemptions in connection with a shareholder’s death (including in connection with the distribution of account assets to a beneficiary of the decedent) or disability (as defined in the Internal Revenue Code) subsequent to the purchase of Investor B or Investor C Shares; (f) involuntary redemptions of Investor B or Investor C Shares in accounts with low balances; (g) certain redemptions made pursuant to the Systematic Withdrawal Plan (described below); and (h) redemptions when a shareholder can demonstrate hardship, in the absolute discretion of the Company. In addition, no CDSC is charged on Investor B or Investor C Shares acquired through the reinvestment of dividends or distributions. For more information on these waivers, please contact BlackRock Funds at (800) 441-7762 or see the SAI.

Distribution and Service Plan

The Company has adopted a plan (the Plan) that allows the Company to pay distribution fees for the sale of its shares under Rule 12b-1 of the Investment Company Act and shareholder servicing fees for certain services provided to its shareholders.

Under the Plan, Investor Shares pay a fee (distribution fees) to BlackRock Distributors, Inc. (the Distributor) and/or affiliates of PNC Bank (including BlackRock) for distribution and sales support services. The distribution fees may be used to pay the Distributor for distribution services and to pay the Distributor and PNC Bank affiliates (including BlackRock) for sales support services provided in connection with the sale of Investor Shares. The distribution fees may also be used to pay brokers, dealers, financial institutions and industry professionals (including

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BlackRock, PNC Bank and its affiliates) (Service Organizations) for sales support services and related expenses. All Investor A Shares pay a maximum distribution fee of .10% per year of the average daily net asset value of each fund attributable to Investor A Shares. All Investor B and C Shares pay a maximum of .75% per year.

Under the Plan, the Company also pays shareholder servicing fees to Service Organizations whereby the Service Organizations provide support services to their customers who own Investor Shares in return for these fees. The Company may pay a shareholder servicing fee of up to .25% per year of the average daily net asset value of Investor Shares of a fund. All Investor Shares pay this shareholder servicing fee.

In return for the shareholder servicing fee, Service Organizations (including BlackRock) may provide one or more of the following services to their customers who own Investor Shares:

(1) Responding to customer questions on the services performed by the Service Organization and investments in Investor Shares;

(2) Assisting customers in choosing and changing dividend options, account designations and addresses; and

(3) Providing other similar shareholder liaison services.

The shareholder servicing fees payable pursuant to the Plan are fees payable for the administration and servicing of shareholder accounts and not costs which are primarily intended to result in the sale of a fund’s shares.

Because the fees paid by the Company under the Plan are paid out of Company assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.

For more information on the Plan, including a complete list of services provided thereunder, see the SAI.

The Plan permits BlackRock, the Distributor and their affiliates to make payments relating to distribution and sales support activities out of their past profits or other sources available to them (and not as an additional charge to the funds). BlackRock, the Distributor and their affiliates may pay affiliated and unaffiliated Service Organizations compensation for the sale and distribution

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of shares of the funds or for other services to the funds and shareholders. These payments (Additional Payments) would be in addition to the fund payments described in this Prospectus and may be a fixed dollar amount, may be based on the number of customer accounts maintained by the Service Organization, or may be based on a percentage of the value of shares sold to, or held by, customers of the Service Organization. The aggregate amount of Additional Payments may be substantial. The Additional Payments include amounts that are sometimes referred to as “revenue sharing” payments. In some circumstances, these revenue sharing payments may create an incentive for a Service Organization, its employees or associated persons to recommend or sell shares of a fund to you. Please contact your Service Organization for details about Additional Payments it may receive. For more information on Additional Payments, see the SAI.

Selling Shares

You can redeem shares at any time. The Company will redeem your shares at the next NAV calculated after your order is received by the fund’s transfer agent minus any applicable CDSC and/or redemption/exchange fee. Each of the CDSC and redemption/exchange fee is assessed without regard to the other. See “Market Timing and Redemption/Exchange Fees” below. Shares may be redeemed by sending a written redemption request to BlackRock Funds, c/o PFPC Inc., P.O. Box 9819, Providence RI 02940-8018. Shares may also be redeemed by telephone request by calling (800) 441-7762. Shares redeemed by telephone may be made by check in amounts up to $100,000, through the automated clearing house network (ACH) in amounts up to $250,000 or by wire transfers in amounts up to $250,000. For redemption amounts in excess of those stated above must be in writing with a medallion signature guarantee. Shares may also be redeemed by use of the Company’s automated voice response unit service (VRU) or internet. Shares redeemed by VRU or internet may be made for non-retirement accounts in amounts up to $25,000 either through check, ACH or wire. You will be charged a fee of $7.50 for each redemption payment made by wire transfer. If a redemption check is requested via overnight mail, a $15.00 fee will be charged.

You can also make redemption requests through your registered investment professional, who may charge for this service.

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Shareholders should indicate whether they are redeeming Investor A, Investor B or Investor C Shares. If a shareholder owns more than one class of a fund and does not indicate which class he or she is redeeming, the fund will redeem shares so as to minimize the CDSC charged.

Unless another option is requested, payment for redeemed shares is normally made by check mailed within seven days after PFPC receives the redemption request. If the shares to be redeemed have been recently purchased by check, PFPC may delay the payment of redemption proceeds for up to 10 days after the purchase date until the check has cleared.

Market Timing and Redemption/Exchange Fees

The Board of Trustees of the Company has determined that the interests of long-term shareholders and the Company’s ability to manage its investments may be adversely affected when shares are repeatedly bought, sold or exchanged in response to short-term market fluctuations—also known as “market timing.” The funds are not designed for market timing organizations or other entities using programmed or frequent purchases and sales or exchanges. The exchange privilege for Investor Shares is not intended as a vehicle for short-term trading. Excessive purchase and sale or exchange activity may interfere with portfolio management, increase expenses and taxes and may have an adverse effect on the performance of a fund and its shareholders. For example, large flows of cash into and out of a fund may require the management team to allocate a significant amount of assets to cash or other short-term investments or sell securities, rather than maintaining such assets in securities selected to achieve the fund’s investment goal. Frequent trading may cause a fund to sell securities at less favorable prices, and transaction costs, such as brokerage commissions, can reduce a fund’s performance.

A fund that invests in non-U.S. securities is subject to the risk that an investor may seek to take advantage of a delay between the change in value of the fund’s portfolio securities and the determination of the fund’s NAV as a result of different closing times of U.S. and non-U.S. markets by buying or selling fund shares at a price that does not reflect their true value. A similar risk exists for funds that invest in securities of small capitalization companies, securities of issuers located in emerging markets or high yield securities (junk bonds) that are thinly traded and

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therefore may have actual values that differ from their market prices. This short-term arbitrage activity can reduce the return received by long-term shareholders. The Company will seek to eliminate these opportunities by using fair value pricing, as described in “What Price Per Share Will You Pay?” above.

The Company discourages market timing and seeks to prevent frequent purchases and sales or exchanges of fund shares that it determines may be detrimental to a fund or long-term shareholders. The Board of Trustees has approved the policies discussed below to seek to deter market timing activity. The Board has not adopted any specific numerical restrictions on purchases, sales and exchanges of fund shares because legitimate strategies, such as asset allocation, dollar cost averaging or similar activities, may result in frequent trading of fund shares. It is not expected that shareholders would be harmed by such legitimate activities.

If the Company believes, in its sole discretion, that your short-term trading is excessive or that you are engaging in market timing activity, it reserves the right to reject any specific purchase or exchange order. If the Company rejects your purchase or exchange order, you will not be able to execute that transaction, and the Company will not be responsible for any losses you therefore may suffer. In addition, any redemptions or exchanges that you make (as a result of the activity described above or otherwise) will be subject to any and all redemption/exchange fees, as described below. For transactions placed directly with the Company, the Company may consider the trading history of accounts under common ownership or control for the purpose of enforcing these policies. Transactions placed through the same financial intermediary on an omnibus basis may be deemed part of a group for the purpose of this policy and may be rejected in whole or in part by the Company. Certain accounts, such as omnibus accounts and accounts at financial intermediaries, however, include multiple investors and such accounts typically provide the Company with net purchase or redemption and exchange requests on any given day where purchases, redemptions and exchanges of shares are netted against one another and the identity of individual purchasers, redeemers and exchangers whose orders are aggregated are not known by the Company. While the Company monitors for market timing activity, the Company may be unable to identify such activities because the netting effect in omnibus accounts often makes it more difficult to locate and eliminate market timers from the funds. Identification

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of market timers may also be limited by operational systems and technical limitations. In the event that a financial intermediary is determined by the Company to be engaged in market timing or other improper trading activity, the Company’s distributor may terminate such financial intermediary’s agreement with the distributor, suspend such financial intermediary’s trading privileges or take other appropriate actions.

Each of the equity funds will automatically assess and retain a fee of 2% of the current NAV, after excluding the effect of any contingent deferred sales charges, of shares being redeemed or exchanged within 90 days of acquisition (other than those acquired through reinvestment of dividends or other distributions). Each of the High Yield Bond and International Bond Portfolios will automatically assess and retain a fee of 2% of the current NAV, after excluding the effect of any contingent deferred sales charges, of shares being redeemed or exchanged within 30 days of acquisition (other than those acquired through reinvestment of dividends or other distributions). A new 90-day period, or 30-day period, as the case may be, begins with each acquisition of shares through a purchase or exchange. For example, a series of transactions in which shares of Portfolio A are exchanged for shares of Portfolio B 20 days after the purchase of the Portfolio A shares, followed in 20 days by an exchange of the Portfolio B shares for shares of Portfolio C, will be subject to two redemption fees (one on each exchange).

The redemption/exchange fee is for the benefit of the remaining shareholders of a fund and is intended to encourage long-term investment, to compensate for transaction and other expenses caused by early redemptions and exchanges, and to facilitate portfolio management. The “first-in, first-out” method is used to determine the holding period. Under this method, the date of redemption or exchange will be compared with the earliest purchase date of shares held in the account. The Company sells shares to some 401(k) plans, 403(b) plans, bank or trust company accounts, and accounts of certain financial institutions or intermediaries that do not apply the redemption/exchange fee to underlying shareholders, often because of administrative or systems limitations. From time to time, with the approval of the Company, the redemption/exchange fee will not be assessed on redemptions or exchanges by: (i) accounts of asset allocation programs or wrap programs whose trading practices are determined by the Company not to be detrimental to a fund or

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long-term shareholders (e.g., model driven programs with periodic automatic portfolio rebalancing that prohibit participant-directed trading and other programs with similar characteristics); (ii) accounts of shareholders who have died or become disabled; (iii) shareholders redeeming or exchanging shares through the Company’s Systematic Withdrawal Plan, Systematic Exchange Plan or in connection with required distributions from an IRA, 401(k) plan, 403(b) plan or any other Internal Revenue Code Section 401 qualified retirement plan or account; and (iv) certain other accounts in the absolute discretion of the Company when a shareholder can demonstrate hardship. In addition, former State Street Research fund shareholders will not be charged a redemption/exchange fee in connection with a one-time redemption or exchange of Company shares received in a reorganization of a State Street Research fund with one of the Company’s funds. However, additional Company shares purchased by such shareholders after the reorganization and any Company shares acquired through an exchange after the reorganization will be subject to the fee. The Company reserves the right to modify or eliminate these waivers at any time.

Expedited Redemptions

If a shareholder has given authorization for expedited redemption, shares can be redeemed by telephone and the proceeds sent by check to the shareholder or by Federal wire transfer to a single previously designated bank account. Shareholders will pay $15 for redemption proceeds sent by check via overnight mail and $7.50 for redemption proceeds sent by Federal wire transfer. You are responsible for any additional charges imposed by your bank for this service. Once authorization is on file, the Company will honor requests by telephone at (800) 441-7762. The Company is not responsible for the efficiency of the Federal wire system or the shareholder’s firm or bank. The Company may refuse a telephone redemption request if it believes it is advisable to do so and may use reasonable procedures to make sure telephone instructions are genuine. The Company and its service providers will not be liable for any loss that results from acting upon telephone instructions that they reasonably believed to be genuine in accordance with those procedures. The Company may alter the terms of or terminate this expedited redemption privilege at any time.

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IMPORTANT DEFINITIONS

Adviser: The adviser of a mutual fund is responsible for the overall investment management of the fund. The adviser for BlackRock Funds is BlackRock Advisors, Inc.

Sub-Adviser: The sub-adviser of a fund is responsible for its day-to-day management and will generally make all buy and sell decisions. Sub-advisers also provide research and credit analysis. The sub-adviser for the Asset Allocation Portfolio is BlackRock Financial Management, Inc.

The Company's Rights

The Company may:

n Suspend the right of redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company Act,

n Postpone date of payment upon redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company Act or as described in the third paragraph in the section “Selling Shares” above,

n Redeem shares involuntarily in certain cases, such as when the value of a shareholder account falls below a specified level, as described below, and

n Redeem shares for property other than cash if conditions exist which make cash payments undesirable in accordance with its rights under the Investment Company Act.

Accounts with Low Balances

The Company may redeem a shareholder’s account in any fund at any time if the net asset value of the account in such fund falls below the required minimum initial investment (usually $500 for Investor Shares) as the result of a redemption or an exchange request. The shareholder will be notified in writing that the value of the account is less than the required amount and the shareholder will be allowed 30 days to make additional investments before the redemption is processed.

Management

BlackRock Funds’ adviser is BlackRock Advisors, Inc. (BlackRock). BlackRock was organized in 1994 to perform advisory services for investment companies and is located at 100 Bellevue Parkway, Wilmington, DE 19809. BlackRock is a wholly-owned subsidiary of BlackRock, Inc., one of the largest publicly traded investment management firms in the United States with $391.3 billion of assets under management as of March 31, 2005. BlackRock, Inc. is a majority-owned indirect subsidiary of The PNC Financial Services Group, Inc., one of the largest diversified financial services companies in the United States. BlackRock Financial Management, Inc. (BFM), an affiliate of BlackRock located at 40 E. 52nd Street, New York, NY 10022, acts as sub-adviser for the Asset Allocation Portfolio.

For their investment advisory and sub-advisory services, BlackRock and BFM, as applicable, are entitled to fees computed daily on a fund-by-fund basis and payable monthly. For the fiscal

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year ended September 30, 2004, the aggregate advisory fees paid by the funds to BlackRock, as a percentage of average daily net assets were:

Mid-Cap Value Equity	.78	%
Asset Allocation	.47	%

With respect to the SSR Funds listed below that reorganized with BlackRock funds, the aggregate advisory fees paid by the SSR Funds to State Street Research & Management Company, as a percentage of average daily net assets, for such SSR Fund’s most recent fiscal year were:

Asset Allocation Fund	0.75	%
Global Resources Fund	0.75	%
Health Sciences Fund	0.75	%
Mid-Cap Value Fund	0.65	%

A discussion regarding the basis for the Board of Trustees of the Company approving the funds’ investment advisory contracts is available in the Company’s semi-annual report to shareholders for the period ended March 31, 2005.

The total annual advisory fees that can be paid to BlackRock (as a percentage of average daily net assets), are as follows:

Total Annual Advisory Fee for the Asset Allocation Portfolio (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.550	%
$1 billion-$2 billion	.500	%
$2 billion-$3 billion	.475	%
more than $3 billion	.450	%

Total Annual Advisory Fee for the Mid-Cap Value Equity Portfolio (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.800	%
$1 billion-$2 billion	.700	%
$2 billion-$3 billion	.675	%
more than $3 billion	.625	%

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Total Annual Advisory Fee for the Health Sciences and Global Resources Portfolios (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.750	%
$1 billion-$2 billion	.700	%
$2 billion-$3 billion	.675	%
more than $3 billion	.650	%

Information about the portfolio manager for each of the funds is presented in the appropriate fund section.

As discussed above, BlackRock has agreed contractually to cap net expenses (excluding interest expense, taxes, brokerage commissions and extraordinary expenses, if any) of each share class of each fund at the levels shown in each fund’s expense table.

To achieve this cap, BlackRock and the Company have entered into an expense limitation agreement. The agreement sets a limit on certain of the operating expenses of each class of shares and requires BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit.

Dividends and Distributions

BlackRock Funds makes two kinds of distributions to share- holders: net investment income and net realized capital gains.

Distributions of net investment income derived by a fund are paid within 10 days after the end of each quarter. The Company’s Board of Trustees may change the timing of such dividend payments.

Net realized capital gains (including net short-term capital gains), if any, will be distributed by a fund at least annually at a date determined by the Company’s Board of Trustees.

Your distributions will be reinvested at net asset value in new shares of the same class of the fund unless you instruct PFPC in writing to pay them in cash. There are no sales charges on these reinvestments.

If you invest in a fund shortly before it makes a capital gain distribution, some of your investment may be returned to you in the form of a taxable distribution. This is commonly known as “buying a dividend.” Distributions that are declared in December, but paid in January are taxable as if they were paid in December.

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Taxation of Distributions

Distributions paid out of a fund’s “net capital gain” will be taxed to shareholders as long-term capital gain, regardless of how long a shareholder has owned shares. Distributions of net investment income and net short-term capital gains will generally be taxed to shareholders as ordinary income. However, individual shareholders who satisfy certain holding period requirements and other requirements are taxed on such dividends at long-term capital gain rates to the extent the dividends are attributable to “qualified dividend income” received by the fund. “Qualified dividend income” generally consists of dividends received from U.S. corporations (other than dividends from tax exempt organizations and certain dividends from real estate investment trusts and regulated investment companies) and certain foreign corporations.

Your annual tax statement from the Company will present in detail the tax status of your distributions for each year.

If more than half of the total asset value of a fund is invested in non-U.S. stock or securities, the fund may elect to “pass through” to its shareholders the amount of non-U.S. income taxes paid by it. In such case, you would be required to include your proportionate share of such taxes in your income and may be entitled to deduct or credit such taxes in computing your taxable income.

Distributions paid by a fund with respect to certain qualifying dividends received by the fund from domestic corporations may be eligible for the corporate dividends received deduction.

When you sell your shares of a fund, you may realize a capital gain or loss. Use of the exchange privilege also will be treated as a taxable event because it will be deemed a redemption and subsequent purchase of the shares involved. Therefore, use of the exchange privilege may be subject to federal, state and local income tax.

If you do not provide a fund with your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding on any distributions of income, capital gains or proceeds from the sale of your shares. When withholding is required, the amount will be 28% of any distributions or proceeds paid. Backup withholding is not an additional tax. Any amounts withheld may be credited against your U.S. federal income tax liability.

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Non-U.S. investors may be subject to U.S. withholding and/or estate tax, and will be subject to special U.S. tax certification requirements. Because every investor has an individual tax situation, and also because the tax laws are subject to periodic changes, you should always consult your tax professional about federal, state and local tax consequences of owning shares of the Company.

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Services for Shareholders

BlackRock Funds offers shareholders many special features which can enable investors to have greater investment flexibility as well as more access to information about the Company.

Additional information about these features is available by calling BlackRock Funds at (800) 441-7762.

Exchange Privilege

BlackRock Funds offers 50 different funds, enough to meet virtually any investment need. Once you are a shareholder, you have the right to exchange Investor A, B or C Shares from one fund to Investor A, B or C Shares of another to meet your changing financial needs. Please note that you can exchange only into a share class and fund that are open to new investors, unless you have a current account in a fund that is closed to new investors.

You can exchange $500 (or any other applicable minimum) or more from one fund into another. Investor A, Investor B and Investor C Shares of each fund may be exchanged for shares of the same class of other funds which offer that class of shares, based on their respective net asset values. (You can exchange less than $500 if you already have an account in the fund into which you are exchanging.) Because different funds have different sales charges, the exchange of Investor A Shares may be subject to the difference between the sales charge already paid and the higher sales charge (if any) payable on the shares acquired as a result of the exchange. For Federal income tax purposes a share exchange is a taxable event and a capital gain or loss may be realized. Please consult your tax or other financial adviser before making an exchange request.

The exchange of Investor B and Investor C Shares will not be subject to a CDSC, although exchanges may be subject to the 2% redemption/exchange fee. See “Market Timing and Redemption/Exchange Fees” above. The CDSC will continue to be measured from the date of the original purchase and will not be affected by the exchange.

To make an exchange, you must send a written request to BlackRock Funds c/o PFPC Inc. at P.O. Box 9819, Providence, Rhode Island, 02940-8019. You can also make exchanges via telephone automatically, unless you previously indicated that you did not want this option. If so, you may not use telephone

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exchange privileges until completing a Telephone Exchange Authorization Form. To receive a copy of the form contact PFPC. The Company has the right to reject any telephone request.

The Company may suspend or terminate your exchange privilege at any time, including if the Company believes, in its sole discretion, that you are engaging in market timing activities. See “Market Timing and Redemption/Exchange Fees” above.

The Company reserves the right to modify, limit the use of, or terminate the exchange privilege at any time for any reason.

Automatic Investment Plan (AIP)

If you would like to establish a regular, affordable investment program, BlackRock Funds makes it easy to set up. As an investor in any fund, you can arrange for periodic investments in that fund through automatic deductions from a checking or non-passbook savings account by completing the AIP Application Form. You determine the frequency and amount of your investment. The minimum investment amount for an automatic investment plan is $50 per portfolio. AIP Application Forms are available from PFPC.

Retirement Plans

Shares may be purchased in conjunction with individual retirement accounts (IRAs), rollover IRAs and 403(b) plans where PNC Bank or any of its affiliates acts as custodian. For more information about applications or annual fees, please contact BlackRock Funds c/o PFPC Inc., at P.O. Box 9819, Providence, Rhode Island 02940-8019, or call (800) 441-7762. Investors will be charged an annual fee of $15 per IRA and 403(b) account and a 403(b) loan application/processing fee of $25. To determine if you are eligible for an IRA or 403 plan and whether an IRA or 403 plan is appropriate for you, you should consult with a tax adviser.

Statements

Every shareholder automatically receives regular account statements. In addition, for tax purposes, shareholders also receive a yearly statement describing the characteristics of any dividends or other distributions received.

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Systematic Withdrawal Plan (SWP)

This feature can be used by investors who want to receive regular distributions from their accounts. To start a Systematic Withdrawal Plan (SWP) a shareholder must have a current investment of $10,000 or more in a fund. Shareholders can elect to receive cash payments of $50 or more at any interval they choose. Shareholders may sign up by completing the SWP Application Form which may be obtained from PFPC. Shareholders should realize that if withdrawals exceed income the invested principal in their account will be depleted.

To participate in the SWP, shareholders must have their dividends automatically reinvested. Shareholders may change or cancel the SWP at any time, upon written notice to PFPC. If a shareholder purchases additional Investor A Shares of a fund at the same time he or she redeems shares through the SWP, that investor may lose money because of the sales charge involved. No CDSC will be assessed on redemptions of Investor B or Investor C Shares made through the SWP that do not exceed 12% of the account’s net asset value on an annualized basis. For example, monthly, quarterly, and semi-annual SWP redemptions of Investor B or Investor C Shares will not be subject to the CDSC if they do not exceed 1%, 3% and 6%, respectively, of an account’s net asset value on the redemption date. SWP redemptions of Investor B or Investor C Shares in excess of this limit will still pay any applicable CDSC.

Systematic Exchange

This feature can be used by investors to systematically exchange money from one fund to up to four other funds. A minimum of $10,000 in the initial fund is required and investments in any additional funds must meet minimum initial investment requirements. For more information, please contact BlackRock Funds at (800) 441-7762.

EZ Trader

This service allows an investor to purchase or sell Fund shares by telephone or over the Internet through the ACH (Automated Clearing House) system. Prior to establishing an EZ Trader account, please contact your bank to confirm that they are a member of the ACH system. Once confirmed, complete an application, making sure to include the appropriate bank information, and return the application to BlackRock Funds, c/o PFPC. Prior to placing a telephone or internet purchase or sale

75

order, please contact the Company at (800) 441-7762 to confirm that your bank information has been updated on your account. Once this is established, you may place your request to sell shares with PFPC by telephone or Internet. Proceeds will be sent to your pre-designated bank account.

Dividend Allocation Plan

This plan automatically invests your distributions from one fund into another fund of your choice pursuant to your instructions, without any fees or sales charges. Please call the Company at (800) 441-7762 for details.

Important Notice Regarding Delivery of Shareholder Documents

The funds deliver only one copy of shareholder documents, including prospectuses, shareholder reports and proxy statements to shareholders with multiple accounts at the same address. This practice is known as “householding” and is intended to eliminate duplicate mailings and reduce expenses. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact BlackRock Funds at (800) 441-7762.

Internet Transactions

Investors in the funds may view their account balance and activity through the BlackRock website. To use this service, you will need a browser that supports Microsoft Internet Explorer version 5.5 or higher, Netscape 7.1 or higher and AOL 8.0 (for Windows operating systems from Windows 2000 and above) as well as Mac-compatible and other browsers.

The total purchase amount will be debited directly from your bank account via the Automated Clearing House (ACH) system. Purchases made on the Internet using the ACH system will have a trade date that is the day after the purchase is made. Proceeds from Internet redemptions may be sent via check, ACH or wire to the bank account of record. The Company will limit Internet purchases and redemptions in Investor Class shares to $25,000.00 per trade. Applications and forms may be downloaded from www.blackrock.com/funds.

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Please read the On-Line Services Disclosure Statement and User Agreement, the Terms and Conditions page and the Consent to Election Delivery Agreement (if you consent to Electronic Delivery) before attempting to transact online.

The Company employs reasonable procedures to confirm that transactions entered over the Internet are genuine. The procedures include the use of a protected password, Secure Socket Layering (SSL), 128-bit encryption and other precautions designed to protect the integrity, confidentiality and security of shareholder information. By entering into the User Agreement with the Company in order to open an account through the website, the shareholder waives any right to reclaim any losses from the Company or any of its affiliates, incurred through fraudulent activity.

Electronic Access to Annual Reports, Semi-Annual Reports and Prospectuses

Electronic copies of most financial reports and prospectuses are now available on the Company’s website. Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports and prospectuses by visiting BlackRock’s website if they enroll in the Company’s electronic delivery program.

To enroll:

Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:

Please contact your financial adviser. Please note that not all investment advisers, banks or brokerages may offer this service.

Shareholders Who Hold Accounts Directly With BlackRock

1)  Log on to http://www.blackrock.com/funds

2)  Click on the link for Electronic Delivery

3)  Continue to Account Access

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For more information

This prospectus contains important information you should know before you invest. Read it carefully and keep it for future reference. More information about the BlackRock Funds is available at no charge upon request. This information includes:

Annual/Semi-Annual Reports

These reports contain additional information about each of the funds’ investments. The annual report describes the funds’ performance, lists portfolio holdings, and discusses recent market conditions, economic trends and fund investment strategies that significantly affected the funds’ performance for the last fiscal year.

Statement of Additional Information (SAI)

A Statement of Additional Information, dated June 28, 2005, has been filed with the Securities and Exchange Commission (SEC). The SAI, which includes additional information about the BlackRock Funds, may be obtained free of charge, along with the Company’s annual and semi-annual reports, by calling (800) 441-7762. The SAI, as supplemented from time to time, is incorporated by reference into this Prospectus.

BlackRock Investment Services

Representatives are available to discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8:00 a.m. to 6:00 p.m. (Eastern time), Monday-Friday. Call: (800) 441-7762.

An investor in any fund can call the National TTY Relay Number at (800) 688-4889 with his or her TTY machine. A Relay agent will assist the investor with all inquiries made to a Shareholder Account Service Representative.

Purchases and Redemptions

Call your registered representative or (800) 441-7762.

World Wide Web

Access general fund information and specific fund performance. Request mutual fund prospectuses and literature. Forward mutual fund inquiries. www.blackrock.com/funds

Written Correspondence

BlackRock Funds

c/o PFPC Inc.

PO Box 9819

Providence, RI 02940-8019

Overnight Mail

BlackRock Funds

c/o PFPC Inc.

101 Sabin Street

Pawtucket, RI 02860

Internal Wholesalers/Broker Dealer Support

Available to support investment professionals 8:30 a.m. to 6:00 p.m. (Eastern time), Monday - Friday. Call: (800) 882-0052

Portfolio Characteristics and Holdings

A description of the BlackRock Funds’ policies and procedures related to disclosure of portfolio characteristics and holdings is available in the SAI.

For information about portfolio holdings and characteristics, BlackRock fund shareholders and prospective investors may call (800) 882-0052.

Securities and Exchange Commission (SEC)

You may also view and copy public information about the BlackRock Funds, including the SAI, by visiting the EDGAR database on the SEC Web site (http://www.sec.gov) or the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the public reference room can be obtained by calling the SEC directly at (202) 942-8090. Copies of this information can be obtained, for a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

INVESTMENT COMPANY ACT FILE NO. 811-05742

PRO-EQ2-INVA 06/05

ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE

BlackRock Funds

Equity Portfolios

Institutional Shares

Prospectus

January 31, 2005, as supplemented June 28, 2005

BlackRock Funds^SM is a mutual fund family with 50 investment portfolios, 4 of which are described in this prospectus.

NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

Table of

Contents

How to Find the Information You Need	1
THE BLACKROCK EQUITY PORTFOLIOS
Mid-Cap Value	2
Global Resources	9
Health Sciences	18
Asset Allocation	27
About Your Investment How to Buy/Sell Shares	37
Dividends/Distributions/Taxes	47

How to Find the

Information You Need

About BlackRock Funds

This is the BlackRock Equity Portfolios Prospectus. It has been written to provide you with the information you need to make an informed decision about whether to invest in BlackRock Funds (the Company).

This Prospectus contains information on 4 of the BlackRock Equity funds. The prospectus is organized so that each fund has its own short section. Simply turn to the section for any particular fund to read about important fund facts. Also included are sections that tell you about buying and selling shares, certain fees and expenses, shareholder features of the funds and your rights as a shareholder. These sections apply to all the funds.

BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BlackRock), the funds’ investment adviser, recently acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company, the investment adviser to the former State Street Research mutual funds. In connection with the transaction, the State Street Research mutual funds were combined with certain BlackRock funds, including the Mid-Cap Value Equity, Global Resources, Health Sciences and Asset Allocation (formerly Balanced) Portfolios.

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BlackRock

Mid-Cap Value Equity Portfolio

IMPORTANT DEFINITIONS

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholder, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamental Analysis: A method of stock market analysis that concentrates on “fundamental” information about the company (such as its income statement, balance sheet, earnings and sales history, products and management) to attempt to forecast future stock value.

Investment Style: Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is mid-cap value, referring to the type of securities the managers will choose for this fund.

Mid-Capitalization Companies: Prior to September 1, 2005, the fund defines these companies as those with market capitalizations between $1 billion and $10 billion. As of September 1, 2005, the fund defines these companies as those with market capitalizations comparable in size to the companies in the Russell Midcap Value Index (between approximately $500 million and $15 billion as of September 30, 2004). Capitalization refers to the market value of the company and is calculated by multiplying the number of shares outstanding by the current price per share.

Value Companies: All stocks are generally divided into the categories of “growth” or “value,” although there are times when a growth fund and value fund may own the same stock. Value stocks are companies that appear to the manager to be undervalued by the market as measured by certain financial formulas. Growth stocks are companies whose earnings growth potential appears to the manager to be greater than the market in general, and whose growth in revenue is expected to continue for an extended period.

Investment Goal

The fund’s investment goal is to seek long-term capital appreciation.

Primary Investment Strategies

In pursuit of this goal, the fund normally invests at least 80% of its net assets in equity securities issued by U.S. mid-capitalization value companies. Prior to September 1, 2005, the fund defines these companies as those with market capitalizations between $1 billion and $10 billion. As of September 1, 2005, mid-capitalization value companies include companies that are comparable in size to the companies in the Russell Midcap Value Index (between approximately $500 million and $15 billion as of September 30, 2004). The fund primarily buys common stock but also can invest in preferred stock and securities convertible into common and preferred stock. From time to time the fund may invest in shares of companies through initial public offerings (IPOs).

The fund manager is seeking mid-capitalization stocks which he believes are worth more than is indicated by current market price. The manager initially screens for “value” stocks from the universe of U.S. mid-capitalization companies. The manager uses fundamental analysis to examine each company for financial strength before deciding to purchase the stock.

The fund generally will sell a stock when it reaches a target price, which is when the manager believes it is fully valued or when, in the manager’s opinion, conditions change such that the risk of continuing to hold the stock is unacceptable when compared to its growth potential.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

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The fund manager may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities (commonly known as derivatives). An option is the right to buy or sell a security or an index of securities at a specific price on or before a specific date. A future is an agreement to buy or sell a security or an index of securities at a specific price on a specific date. The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The fund manager also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles. For example, in some markets a fund holding mid-cap growth stocks may outperform this fund.

There is more business risk in investing in mid-capitalization companies than in larger, better capitalized companies. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies.

IPOs and companies that have recently gone public have the potential to produce substantial gains for the fund. However, there is no assurance that the fund will have access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future performances. The investment performance of the fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the fund is able to do so. In addition, as the fund increases in size, the impact of IPOs on the fund’s performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information

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addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.

While the fund manager chooses stocks he believes to be undervalued, there is no guarantee that the investments will increase in value or that they won’t decline.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Mid-Cap Value Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to

4

SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Institutional Shares. The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of the Russell Midcap Value Index, a recognized unmanaged index of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Institutional Shares of the fund is based on the performance of the S Shares of the SSR Fund. The actual return of Institutional Shares would have been lower than shown for this period because S Shares of the SSR Fund had lower expenses than Institutional Shares.

As of 12/31

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Mid-Cap Value
Return Before Taxes	23.59%	10.25%	14.91%	15.60%	08/25/86
Return After Taxes on Distributions	22.82%	9.30%	12.79%	12.90%
Return After Taxes on Distributions and Sale of Shares	15.86%	8.28%	11.74%	12.17%
Russell Midcap Value (Reflects no deduction for fees, expenses or taxes)	23.71%	15.56%	13.48%	12.86%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the

5

IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Other Expenses: Include administration, transfer agency, custody, professional fees and registration fees.

impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

Expenses and Fees

As a shareholder you pay certain fees and expenses. Annual fund operating expenses are paid out of fund assets.

The tables below describe the fees and expenses that you may pay if you buy and hold Institutional Shares of the fund. The “Annual Fund Operating Expenses” table is based on expenses for the most recent fiscal year (restated to reflect current fees) and may not reflect expenses of the fund after February 1, 2007.

Shareholder Fees

(Fees paid directly from your investment)

Redemption/Exchange Fee* (as a percentage of amount redeemed) 2.0 %

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

Advisory fees	.80	%
Other expenses	.48	%
Total annual fund operating expenses	1.28	%
Fee waivers and expense reimbursements1	.28	%
Net expenses1	1.00	%

* Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Institutional class expenses to 1.00% of average daily net assets until February 1, 2007. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses and redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year	3 Years	5 Years	10 Years
Institutional Shares	$102	$349	$647	$1,495

Fund Management

The fund management team is led by Anthony F. Forcione, CFA, Vice President at BlackRock Advisors, Inc. (BlackRock), and Wayne J. Archambo, CFA, Managing Director at BlackRock.

Mr. Forcione joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining BlackRock, Mr. Forcione was a Vice President and had been a

6

member of the management team of the State Street Research Mid-Cap Value Fund since 2002. Mr. Forcione became an equity analyst at SSRM in 1997 and joined the Large-Cap and Mid-Cap Value Teams in 1999.

Mr. Archambo heads the small and mid-cap value equity team. He has primary responsibility for managing client portfolios within this strategy and client investment guidelines, and he makes purchase and sale decisions for these products and has been a portfolio manager for the Fund since January 2005. He is a member of the Global Equity Operating Committee and the Equity Investment Strategy Group. Prior to joining BlackRock in 2002, Mr. Archambo was a founding partner and Manager of Boston Partners Asset Management, L.P.’s small and mid-cap value equity products since the firm’s inception in 1995. Prior to his departure, he was responsible for the development and management of over $1.3 billion of small cap value assets and $1.5 billion of mid-cap value assets for 50 institutional clients.

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Financial Highlights

The financial information in the table below shows financial performance for the periods indicated. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through June 30, 2002) and Deloitte & Touche LLP (for periods after June 30, 2002). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

FINANCIAL HIGHLIGHTS

(For an Institutional Share Outstanding Throughout Each Period)

Mid-Cap Value Equity Portfolio

	Period 3/1/05 through 3/31/056			Period 7/1/04 through 2/28/055			Year Ended 6/30/043,5,8			Year Ended 6/30/035,8			Year Ended 6/30/024,5,8			Year Ended 6/30/014,5,8			Year Ended 6/30/004,5,8
Net asset value at beginning of period	$	12.73		$	12.14		$	9.07		$	10.66		$	11.85		$	8.74		$	10.09
Income from investment operations
Net investment income		0.01			0.11			0.08			0.08			0.04			0.10			0.17
Net gain (loss) on investments (both realized and unrealized)		(0.12	)		1.44			3.08			(1.21	)		0.30			3.59			(1.14	)
Total from investment operations		(0.11	)		1.55			3.16			(1.13	)		0.34			3.69			(0.97	)
Less distributions
Distributions from net investment income		– –			(0.15	)		(0.09	)		– –			– –			(0.15	)		(0.24	)
Distribution from net realized gains		– –			(0.81	)		– –			(0.46	)		(1.53	)		(0.43	)		(0.14	)
Total distributions		– –			(0.96	)		(0.09	)		(0.46	)		(1.53	)		(0.58	)		(0.38	)
Net asset value at end of period	$	12.62		$	12.73		$	12.14		$	9.07		$	10.66		$	11.85		$	8.74
Total Return		(0.86	)%1		13.07	%1		34.83	%		(10.21	)%		3.20	%		43.89	%		(9.58	)%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	48,278		$	50,383		$	30,181		$	26,099		$	35,116		$	34,577		$	22,994
Ratios of expenses to average net assets
Net expenses		1.00	%2		0.99	%2		0.98	%		0.99	%		0.95	%		0.95	%		1.00	%
Total expenses		1.28	%2		1.09	%2		1.03	%		1.18	%		1.15	%		1.25	%		1.24	%
Ratios of net investment income to average net assets
After advisory/administration and other fee waivers		0.58	%2		1.18	%2		0.76	%		0.93	%		0.42	%		0.90	%		1.87	%
Before advisory/administration and other fee waivers		0.30	%2		1.08	%2		0.71	%		0.75	%		0.23	%		0.62	%		1.64	%
Portfolio turnover rate		9	%		53	%		86	%		66	%		69	%		116	%		31	%

¹ Redemption fee of 2.00% is reflected in total return calculations.

² Annualized.

³ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with the NASD. These payments had no effect on net realized and unrealized gain per share and increased the total return 0.03%.

⁴ Audited by other auditors.

⁵ The performance prior to January 31, 2005, set forth in this table is the financial data of the State Street Research Mid-Cap Value Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Mid-Cap Value Equity Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratios of 1.56483770 for the Institutional shares.

⁶ Unaudited.

⁸ Per-share figures have been calculated using the average shares method.

8

BlackRock

Global Resources Portfolio

IMPORTANT DEFINITIONS

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamentals: “Fundamental” information about a company (such as its income statement, balance sheet, earnings and sales history, products and management).

Investment Style: Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is global resources, referring to the type of securities the managers will choose for this fund.

The fund is closed to new investors. Existing shareholders may make additional investments in current accounts. In addition, new accounts may be opened by (i) any investor if the taxpayer identification number for the new account will be the same as that for a current account and (ii) 401(k), 403(b), 457 and other similar group retirement plan programs that have current accounts.

Investment Goal

The fund seeks to provide long-term growth of capital.

Primary Investment Strategies

Under normal conditions, the fund invests at least 80% of its total assets in securities of global energy and natural resources companies and companies in associated businesses, as well as utilities (such as gas, water, cable, electrical and telecommunications utilities). These typically include companies involved in the exploration, production, refining, marketing or distribution of energy or natural resources, such as gas, oil, metal and minerals, as well as related transportation companies and equipment manufacturers. The fund will consider a company to be an energy or natural resources company if 50% or more of its revenues are derived from, or 50% or more of its assets are related to, activities described above. The fund will invest more than 25% of its assets in energy or natural resources industries. The fund may invest without limit in companies located anywhere in the world and will generally invest in at least three countries and in companies tied economically to a number of countries. It expects to invest primarily in developed markets, but may also invest in emerging markets.

In selecting investments, the fund looks for companies and industries that appear to have the potential for above-average long-term performance based on projections of supply and demand of a resource and the state of the market. These may include companies that are expected to show above-average growth over the long term as well as those that appear to be trading below their true worth. While the fund tends to emphasize smaller companies, from time to time it may emphasize companies of other sizes. The fund’s investments may include common and preferred stock, securities convertible into common and preferred stock, warrants and depositary receipts.

The fund reserves the right to invest up to 20% of total assets in other U.S. and foreign investments. These may include stocks of companies not associated with energy or natural resources. These

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may also include debt securities, although the fund may not invest more than 10% of total assets in junk bonds (bonds that are below Standard & Poor’s BBB or Moody’s Baa rating categories, or their unrated equivalents).

The fund generally will sell a stock when, in the management team’s opinion, the stock reaches its price target, there is a deterioration in the company’s fundamentals, a change in macroeconomic outlook, technical deterioration, valuation issues, a need to rebalance the portfolio or a better opportunity elsewhere.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities and may buy options on a currency or a basket of currencies (collectively, commonly known as derivatives). An option is the right to buy or sell an instrument at a specific price on or before a specific date. A future is an agreement to buy or sell an instrument at a specific price on a specific date. The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The management team also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns. The fund may also buy and sell currencies and use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movements in the value of non-U.S. currencies or to enhance returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

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Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The fund’s strategy of concentrating in energy and natural resources companies means that its performance will be closely tied to the performance of a particular market segment. Because the fund is concentrated in these companies, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy. A downturn in these companies would have a larger impact on the fund than on a mutual fund that does not concentrate in such companies. At times, the performance of these companies will lag the performance of other industries or the broader market as a whole.

Stocks of energy and natural resources companies are especially affected by variations in the commodities markets (that may be due to market events, regulatory developments or other factors that the fund cannot control) and these companies may lack the resources and the broad business lines to weather hard times. Energy companies can be significantly affected by the supply of and demand for specific products and services, the supply of and demand for oil and gas, the price of oil and gas, exploration and production spending, government regulation, world events and economic conditions. Natural resources companies can be significantly affected by events relating to international political developments, energy conservation, the success of exploration projects, commodity prices, and tax and government regulations.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Any securities that are thinly traded or whose resale is restricted can be difficult to sell at the desired time and price. Some of these securities are new and complex, and trade only among institutions; the markets for these securities are still developing, and may not function as efficiently as established markets. Owning a large percentage of restricted or illiquid securities could hamper the fund’s ability to raise cash to meet redemptions. Also,

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because there may not be an established market price for these securities, the fund may have to estimate their value, which means that their valuation (and, to a much smaller extent, the valuation of the fund) may have a subjective element. Transactions in restricted or illiquid securities may entail registration expense and other transaction costs that are higher than those for transactions in unrestricted or liquid securities. Where registration is required for restricted or illiquid securities, a considerable time period may elapse between the time the fund decides to sell the security and the time it is actually permitted to sell the security under an effective registration statement. If during such period, adverse market conditions were to develop, the fund might obtain less favorable pricing terms than when it decided to sell the security.

Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of dividends or interest paid by non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subject to wider price movements than comparable investments in U.S. companies. There is also less government regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging markets countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past and may do so again in the future, as a result of economic and political turmoil in many of these countries.

In addition, many U.S. companies in which the fund may invest generate significant revenues and earnings from abroad. As a result, these companies and the prices of their securities may be affected by weaknesses in global and regional economies and the relative value of foreign currencies to the U.S. dollar. These factors, taken as a whole, could adversely affect the price of fund shares.

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles.

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The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The value of any bonds held by the fund is likely to decline when interest rates rise; this risk is greater for bonds with longer maturities. It is also possible that a bond issuer could default on principal or interest payments, causing a loss for the fund. The fund may invest in non-investment grade or “high yield” securities commonly known to investors as “junk bonds.” Non-investment grade securities carry greater risks than investment grade securities, which have higher credit ratings, including a high risk of default. The yields of non-investment grade securities will move up and down over time.

The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market values may change from time to time, positively or negatively, to reflect new developments regarding the issuer. Companies that issue high yield securities are often young and growing and have a lot of debt. High yield securities are considered speculative, meaning there is a significant risk that companies issuing these securities may not be able to repay principal and pay interest or dividends on time. In addition, other creditors of a high yield issuer may have the right to be paid before the high yield bondholder. During an economic downturn, a period of rising interest rates or a recession, issuers of high yield securities who have a lot of debt may experience financial problems. They may not have enough cash to make their principal and interest payments. An economic downturn could also hurt the market for lower-rated securities and the fund. Also, the market for high yield securities is not as liquid as the market for higher rated securities. This means that it may be harder to buy and sell high yield securities, especially on short notice. The market could also be hurt by legal or tax changes.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives

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position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

The expenses of the fund can be expected to be higher than those of other funds investing primarily in domestic securities because the costs attributable to investing abroad are usually higher.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

The fund is a non-diversified portfolio under the Investment Company Act, which means that fund performance is more dependent on the performance of a smaller number of securities and issuers than in a diversified portfolio. The change in value of any one security may affect the overall value of the fund more than it would a diversified fund’s.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Global Resources Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had substantially similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Institutional Shares. The information shows you how performance has varied year by year and provides

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some indication of the risks of investing in the fund. The table compares the performance to that of the Lipper Natural Resources Funds Index and the S&P 500^® Index, recognized unmanaged indices of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Institutional Shares of the fund is based on the performance of the S Shares of the SSR Fund.

As of 12/31

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Global Resources
Return Before Taxes	48.03%	35.97%	35.24%	19.64%	03/02/90
Return After Taxes on Distributions	47.02%	35.37%	34.89%	18.77%
Return After Taxes on Distributions and Sale of Shares	32.10%	31.48%	31.76%	17.39%
Lipper Natural Resources (Reflects no deduction for fees, expenses or taxes)	35.25%	16.57%	12.34%	12.91%	N/A
S&P 500® (Reflects no deduction for fees, expenses or taxes)	10.88%	3.59%	-2.30%	12.07%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

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IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Other Expenses: Include administration, transfer agency, custody, professional fees and registration fees.

Expenses and Fees

The tables below explain your pricing options and describe the fees and expenses that you may pay if you buy and hold Institutional Shares of the fund. The “Annual Fund Operating Expenses” table may not reflect expenses of the fund after February 1, 2007.

Shareholder Fees

(Fees paid directly from your investment)

Redemption/Exchange Fee* (as a percentage of amount redeemed) 2.0 %

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

Advisory fees	.75	%
Other expenses	.44	%
Total annual fund operating expenses	1.19	%
Fee waivers and expense reimbursements1	.15	%
Net expenses1	1.04	%

* Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Institutional class expenses to 1.04% of average daily net assets until February 1, 2007. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses and redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
Institutional Shares	$	106	$	347	$	625	$	1,416

Fund Management

The fund management team is led by Daniel J. Rice III, Managing Director at BlackRock Advisors, Inc. (BlackRock), and Denis J. Walsh III, CFA, Managing Director at BlackRock.

Mr. Rice and Mr. Walsh joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining BlackRock, Mr. Rice had been a Senior Vice President and a portfolio manager of the State Street Research Global Resources Fund since its inception in March 1990. He was employed by SSRM beginning in 1984.

Prior to joining BlackRock, Mr. Walsh was a Managing Director and was an energy analyst for the State Street Research Global Resources Fund beginning in 1999. He was also a member of the portfolio management team for the Large Cap Analyst Fund and has worked as an investment professional in equity research since 1979.

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Financial Highlights

The financial information in the table below shows financial performance for the periods indicated. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through June 30, 2002) and Deloitte & Touche LLP (for periods after June 30, 2002). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

FINANCIAL HIGHLIGHTS

(For an Institutional Share Outstanding Throughout Each Period)

Global Resources Portfolio

	Period 3/1/05 through 3/31/055			Period 7/1/04 through 2/28/05			Year Ended 6/30/043,6			Year Ended 6/30/036			Year Ended 6/30/024,6			Year Ended 6/30/014,6			Year Ended 6/30/004,6
Net asset value at beginning of period	$	58.80		$	41.25		$	26.85		$	23.51		$	22.13		$	17.21		$	12.43
Income from investment operations
Net investment income		(0.02	)		(0.08	)		0.27			(0.04	)		(0.09	)		(0.18	)		(0.15	)
Net gain (loss) on investments (both realized and unrealized)		(1.54	)		19.52			14.78			3.38			1.47			5.10			4.93
Total from investment operations		(1.56	)		19.44			15.05			3.34			1.38			4.92			4.78
Less distributions
Distributions from net investment income		– –			(0.34	)		(0.65	)		– –			– –			– –			– –
Distribution from net realized gains		– –			(1.55	)		– –			– –			– –			– –			– –
Total distributions		– –			(1.89	)		(0.65	)		– –			– –			– –			– –
Net asset value at end of period	$	57.24		$	58.80		$	41.25		$	26.85		$	23.51		$	22.13		$	17.21
Total Return		(2.65	)%1		47.95	%1		56.49	%		14.21	%		6.24	%		28.59	%		38.46	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	26,595		$	29,188		$	20,044		$	10,144		$	7,995		$	6,935		$	8,599
Ratios of expenses to average net assets
Net expenses		1.04	%2		1.01	%2		1.04	%		1.30	%		1.43	%		1.31	%		1.46	%
Total expenses		1.10	%2		1.02	%2		1.04	%		1.31	%		1.44	%		1.33	%		1.48	%
Ratios of net investment income (loss) to average net assets
After advisory/administration fee waivers		0.08	%2		(0.16	)%2		0.79	%		(0.20	)%		(0.42	)%		(0.89	)%		(1.11	)%
Before advisory/administration fee waivers		0.02	%2		(0.17	)%2		0.79	%		(0.20	)%		(0.42	)%		(0.89	)%		(1.11	)%
Portfolio turnover rate		2	%		22	%		27	%		33	%		38	%		38	%		47	%

¹ Redemption fee of 2.00% is reflected in total return calculations.

² Annualized.

³ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with NASD. These payments increased net realized and unrealized gain by $0.02 per share, and increased total return by 0.16%.

⁴ Audited by other auditors.

⁵ Unaudited.

⁶ Per-shares figures have been calculated using the average shares method.

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BlackRock

Health Sciences Portfolio

IMPORTANT DEFINITIONS

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamentals: “Fundamental” information about a company (such as its income statement, balance sheet, earnings and sales history, products and management).

Investment Style: Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is health sciences, referring to the type of securities the managers will choose for this fund.

Investment Goal

The fund seeks to provide long-term growth of capital.

Primary Investment Strategies

Under normal market conditions, the fund invests at least 80% of total assets in securities of companies in health sciences and related industries. These companies include health care providers as well as businesses involved in the development, production, and distribution or delivery of medical and pharmaceutical products and services. Companies engaged in biotechnology and medical research and development are also included, plus companies that may design, manufacture or distribute medical, dental and optical equipment and supplies, including diagnostic equipment. The companies may also provide diagnostic services or operate health facilities and hospitals, or provide related administrative, management and financial support. The fund will consider a company to be in a health sciences or related industry if 50% or more of its revenues are derived from, or 50% or more of its assets are related to, activities described above. The fund will invest more than 25% of its assets in health sciences or related industries, and may invest in companies located in non-U.S. countries.

In selecting investments, the fund looks for companies and industries that appear to have the potential for above-average growth over the long term. The fund expects to invest in health sciences companies comparable in size to those in the health sector of the Russell 3000^® Index or in similar companies, including non-U.S. companies. The fund does not limit its investments to companies of any particular size. The fund’s investments may include common and preferred stock, securities convertible into common and preferred stock, warrants and depository receipts.

The fund reserves the right to invest up to 20% of total assets in other securities. These may include stocks of companies not associated with health sciences. They may also include debt securities and smaller capitalization companies.

From time to time the fund may invest without limit in shares of companies through initial public offerings (IPOs).

The fund generally will sell a stock when, in the management team’s opinion, the stock reaches its price target, there is a deterioration in the company’s fundamentals, a change in macroeconomic outlook, technical deterioration, valuation issues, a need to rebalance the portfolio or a better opportunity elsewhere.

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It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities and may buy options on a currency or a basket of currencies (collectively, commonly known as derivatives). An option is the right to buy or sell an instrument at a specific price on or before a specific date. A future is an agreement to buy or sell an instrument at a specific price on a specific date. The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The management team also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns. The fund may also buy and sell currencies and use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movements in the value of non-U.S. currencies or to enhance returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The fund’s strategy of concentrating in health sciences and related companies means that its performance will be closely tied to the performance of a particular market segment. Because the fund is

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concentrated in these companies, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy. A downturn in these companies would have a larger impact on the fund than on a mutual fund that does not concentrate in such companies. At times, the performance of these companies will lag the performance of other industries or the broader market as a whole.

Investments in health sciences companies are subject to a number of risks, including the adverse impact of legislative actions and government regulations. These actions and regulations can affect the approval process for patents, medical devices and drugs, the funding of research and medical care programs, and the operation and licensing of facilities and personnel. The goods and services of health sciences companies are subject to risks of rapid technological change and obsolescence, product liability litigation, and intense price and other competitive pressures.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of dividends or interest paid by non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subject to wider price movements than comparable investments in U.S. companies. There is also less government regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging markets countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more

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developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past and may do so again in the future, as a result of economic and political turmoil in many of these countries.

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles.

IPOs and companies that have recently gone public have the potential to produce substantial gains for the fund. However, there is no assurance that the fund will have access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future performances. The investment performance of the fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the fund is able to do so. In addition, as the fund increases in size, the impact of IPOs on the fund’s performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The value of any bonds held by the fund is likely to decline when interest rates rise; this risk is greater for bonds with longer maturities. It is also possible that a bond issuer could default on principal or interest payments, causing a loss for the fund.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack

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of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

The fund is a non-diversified portfolio under the Investment Company Act, which means that fund performance is more dependent on the performance of a smaller number of securities and issuers than in a diversified portfolio. The change in value of any one security may affect the overall value of the fund more than it would a diversified fund’s.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Health Sciences Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had substantially similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Institutional Shares. The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of the Lipper Health/

22

Biotechnology Funds Index and the S&P 500^® Index, recognized unmanaged indices of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Institutional Shares of the fund is based on the performance of the S Shares of the SSR Fund. The performance for the period before S Shares of the SSR Fund were launched on October 10, 2000, is based upon performance for A Shares of the SSR Fund.

As of 12/31

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

	1 Year	3 Years	5 Years	Since Inception	Inception Date1
Health Sciences Portfolio
Return Before Taxes	14.90%	14.03%	19.05%	20.26%	12/21/99
Return After Taxes on Distributions	13.80%	13.22%	17.83%	19.04%
Return After Taxes on Distributions and Sale of Shares	10.51%	11.76%	16.10%	17.21%
Lipper Health/Biotechnology (Reflects no deduction for fees, expenses or taxes)	11.74%	2.48%	6.72%	8.03%	N/A
S&P 500® (Reflects no deduction for fees, expenses or taxes)	10.88%	3.59%	-2.30%	-1.80%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

23

Expenses and Fees

The tables below explain your pricing options and describe the fees and expenses that you may pay if you buy and hold Institutional Shares of the fund. The “Annual Fund Operating Expenses” table may not reflect expenses of the fund after February 1, 2007.

Shareholder Fees

(Fees paid directly from your investment)

Redemption/Exchange Fee* (as a percentage of amount redeemed) 2.0 %

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

Advisory fees	.75	%
Other expenses	.64	%
Total annual fund operating expenses	1.39	%
Fee waivers and expense reimbursements1	.14	%
Net expenses1	1.25	%

* Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Institutional class expenses to 1.25% of average daily net assets until February 1, 2007. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses and redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
Institutional Shares	$	127	$	412	$	733	$	1,644

Fund Management

The fund management team is led by Thomas P. Callan, CFA, Managing Director at BlackRock Advisors, Inc. (BlackRock), and Erin Xie, PhD, a Director at BlackRock.

Mr. Callan, senior portfolio manager, is the head of the BlackRock Global Opportunities Team and is the manager and strategist for all of the team’s portfolios. He has been a manager of the fund since 2005. He is a member of the BlackRock Equity Operating Committee and Equity Investment Strategy Group. Prior to joining BlackRock as a member of the global emerging-cap team in 1998, Mr. Callan was with the PNC Asset Management Group, which he joined in 1992.

Ms. Xie joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining BlackRock, she was a Senior Vice President and a member of the

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portfolio management team of the State Street Research Health Sciences Fund since 2001 and became a portfolio manager in 2003. Ms. Xie was employed by SSRM beginning in 2001 as an equity analyst covering the healthcare sector. Prior to SSRM, she also served as an associate in pharmaceutical equity research at Sanford Bernstein & Company.

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Financial Highlights

The financial information in the table below shows financial performance for the periods indicated. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through February 28, 2003) and Deloitte & Touche LLP (for periods after February 28, 2003). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

FINANCIAL HIGHLIGHTS

(For an Institutional Share Outstanding Throughout Each Period)

Health Sciences Portfolio

	Period 3/1/05 through 3/31/056			Year Ended 2/28/05			Year Ended 2/29/047			Year Ended 2/28/035,7			Year Ended 2/28/025,7			Year Ended 2/28/014,5,7
Net asset value at beginning of period	$	20.50		$	21.15		$	11.64		$	14.48		$	14.14		$	15.50
Income from investment operations
Net investment income (loss)		0.01			(0.15	)		(0.06	)		(0.09	)		(0.08	)		0.01
Net gain (loss) on investments (both realized and unrealized)		(0.21	)		0.57			10.21			(2.71	)		0.47			(0.68	)
Total from investment operations		(0.20	)		0.42			10.15			(2.80	)		0.39			(0.67	)
Less distributions
Distribution from net realized gains		– –			(1.07	)		(0.64	)		(0.04	)		(0.05	)		(0.69	)
Total distributions		– –			(1.07	)		(0.64	)		(0.04	)		(0.05	)		(0.69	)
Net asset value at end of period	$	20.30		$	20.50		$	21.15		$	11.64		$	14.48		$	14.14
Total Return		(0.98	)%1		1.84	%1		87.73	%		(19.42	)%		2.76	%		(4.48	)%3
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	4,302		$	4,262		$	5,067		$	988		$	1,109		$	946
Ratios of expenses to average net assets
Net expenses		1.25	%2		1.25	%		1.25	%		1.25	%		1.25	%		1.25	%2
Total expenses		1.25	%2		1.37	%		1.84	%		2.75	%		3.25	%		6.86	%2
Ratios of net investment income (loss) to average net assets
After advisory/administration and other fee waivers		0.30	%2		(0.59	)%		(0.38	)%		(0.69	)%		(0.56	)%		0.18	%2
Before advisory/administration and other fee waivers		0.30	%2		(0.71	)%		(0.97	)%		(2.18	)%		(2.53	)%		(5.40	)%2
Portfolio turnover rate		14	%		173	%		106	%		157	%		75	%		139	%

¹ Redemption fee of 2.00% is reflected in total return calculations.

² Annualized.

³ Not annualized.

⁴ October 16, 2000 (commencement of share class) to February 28, 2001.

⁵ Audited by other auditors.

⁶ Unaudited.

⁷ Per-share figures have been calculated using the average shares method.

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BlackRock

Asset Allocation Portfolio

IMPORTANT DEFINITIONS

Asset-Backed Securities: Bonds that are backed by a pool of assets, usually loans such as installment sale contracts or credit card receivables.

Bonds: Debt obligations such as bonds and debentures, U.S. Government securities, debt obligations of domestic and foreign corporations, debt obligations of foreign governments and their political subdivisions, asset-backed securities, various mortgage-backed securities (both residential and commercial), other floating or variable rate obligations, municipal obligations and zero coupon debt securities.

Collateralized Mortgage Obligations (CMO): Bonds that are backed by cash flows from pools of mortgages. CMOs may have multiple classes with different payment rights and protections.

Commercial Mortgage-Backed Securities (CMBS): Bonds that are backed by a mortgage loan or pools of loans secured by commercial property, not residential mortgages.

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

High Yield Bonds: Sometimes referred to as “junk bonds,” these are debt securities which are rated lower than investment grade (below the fourth highest rating of the major rating agencies). These securities generally pay more interest than higher rated securities. The higher yield is an incentive to investors who otherwise may be hesitant to purchase the debt of such a low rated issuer.

Investment Goal

The Fund’s investment goal is to seek to maximize total return, consistent with income generation and prudent investment management.

Primary Investment Strategies

The fund uses an asset allocation strategy, investing varying percentages of its portfolio in three major categories: stocks, bonds and, to a lesser extent, money market instruments. Drawing on its analysis of financial trends and market conditions, the fund management team monitors and adjusts those allocations from time to time. The fund has wide flexibility in the relative weightings given to each category; however, it intends to remain diversified across categories.

The assets allocated to the stock and bond categories undergo a further allocation process. The fund management team uses a combination of quantitative and fundamental analysis to evaluate the relative attractiveness of various segments in the equity universe, defined by style, capitalization range and geographic location. The fund management team regularly reviews and allocates varying percentages of the fund to equity investment management team members responsible for security selection within these distinctive disciplines, including stocks of large, middle and small capitalization companies, companies that appear to be trading below their true worth, companies with significant growth opportunities, firms in specialized sectors and international companies. Within each discipline, investment decisions are primarily the result of bottom-up security selection that, in turn, drives sector and industry weightings as well as average market capitalization. With respect to its equity investments, the fund primarily buys common stock but also can invest in preferred stock and securities convertible into common and preferred stock. The equity investment management team assesses each stock’s changing characteristics relative to its contribution to portfolio risk. A stock is sold when it no longer offers an appropriate return-to-risk trade-off.

Members of the fixed income investment management team are responsible for managing the fixed income allocation of the fund. The fixed income investment management team evaluates sectors of the bond market and individual securities within these sectors. The fixed income investment management team selects bonds from several sectors including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities,

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IMPORTANT DEFINITIONS

Investment Grade: Securities which are rated in the four highest categories by at least one of the major rating agencies or determined by the fund manager to be of similar quality. Generally, the higher the rating of a bond, the higher the likelihood that interest and principal payments will be made on time.

Investment Style: Refers to the guiding principle of a mutual fund’s investment choices. The investment style of this fund is balanced, meaning that the managers will choose both equity and fixed income securities for this fund.

Mortgage-Backed Securities: Asset-backed securities based on a particular type of asset, a mortgage. There are a wide variety of mortgage backed securities involving commercial or residential, fixed rate or adjustable rate mortgages and mortgages issued by banks or government agencies.

S&P 500^® Index: The Standard & Poor’s Composite Stock Price Index, an unmanaged index of 500 stocks, most of which are listed on the New York Stock Exchange. The index focuses on the large-cap segment of the market, with 80% coverage of U.S. equities.

Sector: All stocks are classified into a category or sector such as utilities, consumer services, basic materials, capital equipment, consumer cyclicals, energy, consumer non-cyclicals, healthcare, technology, transportation, finance and cash.

Total Return: A way of measuring fund performance. Total return is based on a calculation that takes into account income dividends, capital gain distributions and the increase or decrease in share price.

CMOs, asset-backed securities and corporate bonds. Securities are purchased for the fund when the fixed income management team believes that they have the potential for above-average total return. The fund invests primarily in dollar-denominated investment grade bonds, but may invest up to 20% of its fixed income allocation in any combination of non-investment grade bonds (high yield or junk bonds), non-dollar denominated bonds and bonds of emerging market issuers. The fund’s investment in non-dollar denominated bonds may be on a currency hedged or unhedged basis. Non-investment grade bonds acquired by the fund will generally be in the lower rating categories of the major rating agencies (BB or lower by Standard & Poor’s or Ba or lower by Moody’s) or will be determined by the fixed income investment management team to be of similar quality. Split rated bonds will be considered to have the higher credit rating. A security will be sold if, in the opinion of the fixed income investment management team, the risk of continuing to hold the security is unacceptable when compared to its total return potential.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund also may invest in these securities in order to achieve its investment goal.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities, or enter into interest rate or foreign currency transactions, including swaps (collectively, commonly known as derivatives). An option is the right to buy or sell a security or an index of securities at a specific price on or before a specific date. A future is an agreement to buy or sell a security or an index of securities at a specific price on a specific date. A swap is an agreement whereby one party exchanges its right to receive or its obligation to pay one type of interest or currency with another party for that other party’s obligation to pay or its right to receive another type of interest or currency in the future or for a period of time. The fund typically uses derivatives as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The fund may also use derivatives for leverage, in which case their use would involve leveraging risk. The fund may

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seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as reverse repurchase agreements or dollar rolls). The fund may also use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movement in the value of non-U.S. currencies.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The main risk of any investment in stocks is that values fluctuate in price.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Because market conditions can vary, this fund’s performance may be better or worse than other funds with different investment styles. For example, in some markets a fund holding exclusively equity or fixed income securities may outperform this fund.

While the management team chooses stocks it believes to have rising earnings expectations and good relative valuations, there is no guarantee that the investments will increase in value or that they won’t decline.

Two of the main risks of investing in the fund are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds such as those held by the fund. Market interest rates have in recent years

29

declined significantly below historical average rates. This decline may have increased the risk that these rates will rise in the future. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

Securities rated in the fourth highest category by the rating agencies are considered investment grade but they may also have some speculative characteristics, meaning that they carry more risk than higher rated securities and may have problems making principal and interest payments in difficult economic climates. Investment grade ratings do not guarantee that bonds will not lose value.

The fund makes investments in residential and commercial mortgage-backed securities and other asset-backed securities. The characteristics of these mortgage-backed and asset-backed securities differ from traditional fixed income securities.

A main difference is that the principal on mortgage- or asset-backed securities may normally be prepaid at any time, which will reduce the yield and market value of these securities. Asset-backed securities and CMBS generally experience less prepayment than residential mortgage-backed securities. In periods of falling interest rates, the rate of prepayments tends to increase (as does price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower rates. During such periods, reinvestment of the prepayment proceeds by the management team will generally be at lower rates of return than the return on the assets which were prepaid. Certain commercial mortgage-backed securities are issued in several classes with different levels of yield and credit protection. The fund’s investments in commercial mortgage-backed securities with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate, credit and prepayment risks.

Certain asset-backed securities are based on loans that are unsecured, which means that there is no collateral to seize if the underlying borrower defaults.

Non-investment grade securities carry greater risks than securities which have higher credit ratings, including a high risk of default. The yields of non-investment grade securities will move up and down over time. The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer. These companies are often young and growing and have a lot of debt. High yield securities are considered speculative, meaning there is significant risk that companies issuing these securities may not be able to repay principal and pay interest or dividends on time. In addition, other creditors of a high yield issuer may have the right to be paid before the high yield bond holder.

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During an economic downturn, a period of rising interest rates or a recession, issuers of high yield securities who have a lot of debt may experience financial problems. They may not have enough cash to make their principal and interest payments. An economic downturn could also hurt the market for lower-rated securities and the fund.

The market for high yield bonds is not as liquid as the markets for higher rated securities. This means that it may be harder to buy and sell high yield bonds, especially on short notice. The market could also be hurt by legal or tax changes.

The fund may invest in non-dollar denominated bonds of issuers located outside of the United States. Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of interest paid on non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subjected to wider price movements than comparable investments in U.S. companies. There is also less regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging market countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past, and may do so again in the future, as a result of economic and political turmoil in many of these countries.

Treasury obligations may differ in their interest rates, maturities, times of issuance and other characteristics. Obligations of U.S Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S. Government. No assurance can be given that the U.S. Government will provide financial support to its agencies and authorities if it is not obligated by law to do so.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

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The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

Some transactions may give rise to a form of leverage. These transactions may include, among others, derivatives, reverse repurchase agreements and dollar rolls and may expose the fund to greater risk and increase its costs. To mitigate leverage risk, the management team will segregate liquid assets on the books of the fund or otherwise cover the transactions. The use of leverage may cause the fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Increases and decreases in the value of the fund’s portfolio will be magnified when the fund uses leverage. The fund will also have to pay interest on its borrowings, reducing the fund’s return. This interest expense may be greater than the fund’s return on the underlying investment.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

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When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

Risk/Return Information

On January 31, 2005, the fund reorganized with the State Street Research Asset Allocation Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Institutional Shares. The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of a customized weighted index comprised of the returns of the S&P 500^® Index (60%) and the Lehman Aggregate Index (40%), recognized unmanaged indices of stock and bond market performance, respectively. As with all such investments, past performance (before and after taxes) is not an indication of future results. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Institutional Shares of the fund is based on the performance of the S Shares of the SSR Fund. The actual return of Institutional Shares would have been lower than shown for this period because S Shares of the SSR Fund had lower expenses than Institutional Shares.

As of 12/31

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Asset Allocation
Return Before Taxes	11.50%	5.78%	6.14%	11.06%	12/29/88
Return After Taxes on Distributions	10.20%	4.73%	4.17%	8.53%
Return After Taxes on Distributions and Sale of Shares	7.78%	4.33%	4.16%	8.25%
60% S&P 500®/ 40% Leh. Agg. (Reflects no deduction for fees, expenses or taxes)	8.30%	5.14%	1.97%	10.74%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

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IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Interest Expense: The cost of borrowing money to buy additional securities, primarily through reverse repurchase agreements (under which the fund sells securities and agrees to buy them back at a particular date and price).

Other Expenses: Include administration, transfer agency, custody, professional fees and registration fees.

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

Expenses and Fees

As a shareholder you pay certain fees and expenses. Annual fund operating expenses are paid out of fund assets.

The tables below describe the fees and expenses that you may pay if you buy and hold Institutional Shares of the fund. The “Annual Fund Operating Expenses” table is based on expenses for the most recent fiscal year (restated to reflect current fees) and may not reflect expenses of the fund after February 1, 2006.

Shareholder Fees

(Fees paid directly from your investment)

Redemption/Exchange Fee* (as a percentage of amount redeemed) 2.0 %

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

Advisory fees	.55	%
Other expenses	.47	%
Total annual fund operating expenses	1.02	%
Fee waivers and expense reimbursements1	.16	%
Net expenses1	.86	%

* Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Institutional class expenses to .86% of average daily net assets until February 1, 2006. In addition, BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Institutional class expenses to 1.15% of average daily net assets until February 1, 2007. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses and redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
Institutional Shares	$	88	$	309	$	548	$	1,233

Fund Management

The fund management team is led by R. Andrew Damm, Managing Director of BlackRock Advisors, Inc. (BlackRock), and Linda Zhang, Vice President at BlackRock.

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Mr. Damm is primarily responsible for the oversight of the risk management of domestic and international equity portfolios and has managed the fund since 2005. He heads a team that utilizes quantitative techniques to model all of BlackRock’s equity portfolios to ensure that they are managed consistently with their mandates. He works with BlackRock’s portfolio managers to communicate portfolio risk forecasts and to analyze historical performance. He is also a member of the Portfolio Risk Management Group, the Asset Allocation Committee and the Equity Investment Strategy Group.

Prior to taking on his current responsibilities, Mr. Damm was the equity product strategist and the lead portfolio manager for BlackRock’s large cap growth and core equity portfolios where he led a team of analysts and portfolio managers that managed institutional and mutual fund portfolios. He joined the PNC Asset Management Group in 1995 as a senior investment strategist, and was previously a portfolio manager within PNC’s Investment Management and Trust Division.

Ms. Zhang joined BlackRock following the merger with SSRM in 2005. Prior to joining BlackRock, she was a Vice President, a portfolio manager and a key member of the portfolio management team for the State Street Research Asset Allocation Fund. Previously, Ms. Zhang served as a Senior Quantitative Analyst and Vice President and Associate Portfolio Manager for the North American Fixed Income Team at Baring Asset Management from 1997 to 2003.

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Financial Highlights

The financial information in the table below shows financial performance for the periods indicated. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through March 31, 2003) and Deloitte & Touche LLP (for periods after March 31, 2003). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

FINANCIAL HIGHLIGHTS

(For an Institutional Share Outstanding Throughout Each Period)

Asset Allocation Portfolio

	Period 3/1/05 through 3/31/056			Period 4/1/04 through 2/28/055			Year Ended 3/31/045,7			Year Ended 3/31/034,5,7			Year Ended 3/31/023,4,5,7			Year Ended 3/31/014,5,7			Year Ended 3/31/004,5,7
Net asset value at beginning of period	$	14.99		$	14.91		$	11.38		$	14.17		$	14.05		$	16.26		$	14.47
Income from investment operations
Net investment income		0.03			0.20			0.24			0.28			0.32			0.42			0.40
Net gain (loss) on investments (both realized and unrealized)		(0.24	)		0.82			3.54			(2.68	)		0.83			(0.41	)		2.03
Total from investment operations		(0.21	)		1.02			3.78			(2.40	)		1.15			0.01			2.43
Less distributions
Distributions from net investment income		(0.05	)		(0.40	)		(0.25	)		(0.33	)		(0.35	)		(0.33	)		(0.35	)
Distribution from net realized gains		– –			(0.54	)		– –			(0.06	)		(0.68	)		(1.89	)		(0.29	)
Total distributions		(0.05	)		(0.94	)		(0.25	)		(0.39	)		(1.03	)		(2.22	)		(0.64	)
Net asset value at end of period	$	14.73		$	14.99		$	14.91		$	11.38		$	14.17		$	14.05		$	16.26
Total Return		(1.41	)%1		7.17	%1		33.46	%		(17.12	)%		8.47	%		0.56	%		17.17	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	30,598		$	31,328		$	21,989		$	17,992		$	26,821		$	26,917		$	23,316
Ratios of expenses to average net assets
Net expenses		0.86	%2		1.03	%2		1.15	%		1.12	%		1.10	%		1.17	%		1.04	%
Total expenses		1.05	%2		1.05	%2		1.15	%		1.13	%		1.11	%		1.19	%		1.05	%
Ratios of net investment income to average net assets
After advisory/administration fee waivers		2.45	%2		1.71	%2		1.74	%		2.21	%		2.27	%		2.85	%		2.62	%
Before advisory/administration fee waivers		2.26	%2		1.70	%2		1.74	%		2.21	%		2.27	%		2.85	%		2.62	%
Portfolio turnover rate		19	%		101	%		216	%		181	%		186	%		181	%		123	%

¹ Redemption fee of 2.00% is reflected in total return calculations.

² Annualized.

³ Effective April 1, 2001, the fund has adopted the provisions on the AICPA Audit and Accounting Guide, Audit of Investment Companies and began amortizing premium on all fixed income securities. The effect of this change for the year ended March 31, 2002, was to decrease net investment income per share by $0.01, increase net realized and unrealized gain per share by $0.01, and decrease the ratio of net investment income in average and assets by 0.13%. The statement of changes and financial highlights for the period prior to April 1, 2001, have not been restated for this change in policy.

⁴ Audited by other auditors.

⁵ The performance prior to January 31, 2005, set forth in this table is the financial data of the State Street Research Asset Allocation Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Asset Allocation Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratios of 0.71889936 for the Institutional shares.

⁶ Unaudited.

⁷ Per-share figures have been calculated using the average shares method.

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About Your Investment

Buying Shares

Institutional Shares are offered without a sales charge to:

n Institutional investors and individuals with a minimum investment of $2 million

n Trust departments of PNC Bank and its affiliates on behalf of clients for whom the bank:

n acts in a fiduciary capacity (excluding participant-directed employee benefit plans)

n otherwise has investment discretion or

n acts as custodian for at least $2 million in assets

n Registered investment advisers with a minimum investment of $250,000

Purchase orders may be placed by calling (800) 441-7762.

BlackRock, the Company’s distributor and their affiliates are permitted to make payments relating to distribution and sales support activities out of their past profits or other sources available to them (and not as an additional charge to the funds). BlackRock, the distributor and their affiliates may pay affiliated and unaffiliated brokers, dealers, financial institutions and industry professionals (Service Organizations) compensation for the sale and distribution of shares of the funds or for other services to the funds and shareholders. These payments (Additional Payments) would be in addition to the fund payments described in this Prospectus and may be a fixed dollar amount, may be based on the number of customer accounts maintained by the Service Organization, or may be based on a percentage of the value of shares sold to, or held by, customers of the Service Organization. The aggregate amount of Additional Payments may be substantial. The Additional Payments include amounts that are sometimes referred to as “revenue sharing” payments. In some circumstances, these revenue sharing payments may create an incentive for a Service Organization, its employees or associated persons to recommend or sell shares of a fund to you. Please contact your Service Organization for details about Additional Payments it may receive. For more information on Additional Payments, see the SAI.

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What Price Per Share Will You Pay?

The price of mutual fund shares generally changes every day the New York Stock Exchange (NYSE) is open (business day). A mutual fund is a pool of investors’ money that is used to purchase a portfolio of securities, which in turn is owned in common by the investors. Investors put money into a mutual fund by buying shares. If a mutual fund has a portfolio worth $50 million and has 5 million shares outstanding, the net asset value (NAV) per share is $10.

Purchase orders received before the close of regular trading on the NYSE (currently 4 p.m. (Eastern time)) on each day the NYSE is open will be priced based on the NAV calculated at the close of trading on that day. NAV is calculated separately for each class of shares of each fund as of the close of business on the NYSE, generally 4 p.m. (Eastern time), each day the NYSE is open.

Shares will not be priced on days the NYSE is closed. Purchase orders received after the close of trading will be priced based on the next calculation of NAV. Non-U.S. securities and certain other securities held by a fund may trade on days when the NYSE is closed. In these cases, net asset value of shares may change when fund shares cannot be bought or sold.

Since the NAV changes daily, the price of your shares depends on the time that your order is received.

Each fund’s assets are valued primarily on the basis of market quotations. Certain short-term debt securities are valued on the basis of amortized cost. When a determination is made that market quotations are not readily available, including when a particular security does not trade regularly or has had its trading halted or there has been a significant subsequent event, each fund values the affected securities at fair value as determined by BlackRock pursuant to procedures adopted by the Company’s Board of Trustees. For example, in valuing a security that trades principally on a foreign market, a fund uses the most recent closing market price from the market on which the security principally trades, unless because of a significant event subsequent to the market close such closing market price, in BlackRock’s judgment, does not represent the current market value of the security. Because significant events could affect the value of a foreign security between the close of the foreign market where the security is principally traded and the time the fund calculates its NAV, such closing price may not be reflective of current market conditions. Therefore, a fund may adjust the closing market price

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of a foreign security as a result of a significant subsequent event to reflect what it believes to be the fair value of the security as of the time the fund calculates its NAV.

Fair value represents a good faith approximation of the value of a security. A security’s valuation may differ depending on the method used for determining value. Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. The fair value of one or more securities may not, in retrospect, be the prices at which those assets could have been sold during the period in which the particular fair values were used in determining a fund’s NAV. As a result, a fund’s sale or redemption of its shares at NAV, at a time when a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.

Certain financial institutions may buy and sell Institutional Shares on behalf of their customers. The institutions may charge a fee for this service and may impose additional conditions on owning fund shares. Shareholders should contact their institutions for more information.

Paying for Shares

Payment for Institutional Shares must normally be made in Federal funds or other funds immediately available by 4 p.m. (Eastern time) on the first business day following receipt of the order. Payment may also, at the discretion of the Company, be made in the form of securities that are permissible investments for the respective fund.

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions, including the Company, to obtain, verify and record information that identifies each person who opens an account. When opening an account, you will be asked for your name, address, date of birth and other information that will allow the Company to identify you. The Company may also ask to see other identifying documents such as a driver’s license (for individuals) or Articles of Incorporation or other formation documents (for institutions). The Company may use a third party to obtain and verify this information. The Company may not be able to establish an account if you do not provide the necessary information.

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How Much is the Minimum Investment?

The minimum investment for the initial purchase of Institutional Shares is:

n $2 million for institutions and individuals

n $250,000 for registered investment advisers

There is no minimum requirement for later investments. The Company does not accept third party checks as payment for shares.

The Company may permit a lower initial investment for certain investors if their purchase, combined with purchases by other investors received together by the Company, meets the minimum investment requirement. The Company may reject any purchase order, modify or waive the minimum initial or subsequent investment requirements and suspend and resume the sale of any share class of any fund at any time.

Selling Shares

Shareholders may place redemption orders by telephoning (800) 441-7762. Shares are redeemed at the NAV per share next determined after receipt of the redemption order, minus any applicable redemption/exchange fee. See “Market Timing and Redemption/Exchange Fees” below. The Company, its administrators and the distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Company and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures.

Payment for redeemed shares for which a redemption order is received before 4 p.m. (Eastern time) on a business day is normally made in Federal funds wired to the redeeming shareholder on the next business day, provided that the funds’ custodian is also open for business. Payment for redemption orders received after 4 p.m. (Eastern time) or on a day when the funds’ custodian is closed is normally wired in Federal funds on the next business day following redemption on which the funds’ custodian is open for business. The Company reserves the right to wire redemption proceeds within seven days after receiving a redemption order if, in the judgment of the Company, an earlier payment could adversely affect a fund. No charge for wiring redemption payments is imposed by the Company.

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During periods of substantial economic market change telephone redemptions may be difficult to complete. Redemption requests may also be mailed to BlackRock Funds, c/o PFPC, Inc., P.O. Box 9819, Providence, RI 02940.

The Company is not responsible for the efficiency of the Federal wire system or the shareholder’s firm or bank. The fund does not currently charge for wire transfers. The shareholder is responsible for any charges imposed by the shareholder’s bank. To change the name of the single, designated bank account to receive wire redemption proceeds, it is necessary to send a written request to BlackRock Funds, c/o PFPC, Inc., P.O. Box 9819, Providence, RI 02940.

The Company may refuse a telephone redemption request if it believes it is advisable to do so.

Market Timing and Redemption/Exchange Fees

The Board of Trustees of the Company has determined that the interests of long-term shareholders and the Company’s ability to manage its investments may be adversely affected when shares are repeatedly bought, sold or exchanged in response to short-term market fluctuations—also known as “market timing.” The funds are not designed for market timing organizations or other entities using programmed or frequent purchases and sales or exchanges. The exchange privilege for Investor Shares is not intended as a vehicle for short-term trading. Excessive purchase and sale or exchange activity may interfere with portfolio management, increase expenses and taxes and may have an adverse effect on the performance of a fund and its shareholders. For example, large flows of cash into and out of a fund may require the management team to allocate a significant amount of assets to cash or other short-term investments or sell securities, rather than maintaining such assets in securities selected to achieve the fund’s investment goal. Frequent trading may cause a fund to sell securities at less favorable prices, and transaction costs, such as brokerage commissions, can reduce a fund’s performance.

A fund that invests in non-U.S. securities is subject to the risk that an investor may seek to take advantage of a delay between the change in value of the fund’s portfolio securities and the determination of the fund’s NAV as a result of different closing times of U.S. and non-U.S. markets by buying or selling fund

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shares at a price that does not reflect their true value. A similar risk exists for funds that invest in securities of small capitalization companies, securities of issuers located in emerging markets or high yield securities (junk bonds) that are thinly traded and therefore may have actual values that differ from their market prices. This short-term arbitrage activity can reduce the return received by long-term shareholders. The Company will seek to eliminate these opportunities by using fair value pricing, as described in “What Price Per Share Will You Pay?” above.

The Company discourages market timing and seeks to prevent frequent purchases and sales or exchanges of fund shares that it determines may be detrimental to a fund or long-term shareholders. The Board of Trustees has approved the policies discussed below to seek to deter market timing activity. The Board has not adopted any specific numerical restrictions on purchases, sales and exchanges of fund shares because legitimate strategies, such as asset allocation, dollar cost averaging or similar activities, may result in frequent trading of fund shares. It is not expected that shareholders would be harmed by such legitimate activities.

If the Company believes, in its sole discretion, that your short-term trading is excessive or that you are engaging in market timing activity, it reserves the right to reject any specific purchase or exchange order. If the Company rejects your purchase or exchange order, you will not be able to execute that transaction, and the Company will not be responsible for any losses you therefore may suffer. In addition, any redemptions or exchanges that you make (as a result of the activity described above or otherwise) will be subject to any and all redemption/exchange fees, as described below. For transactions placed directly with the Company, the Company may consider the trading history of accounts under common ownership or control for the purpose of enforcing these policies. Transactions placed through the same financial intermediary on an omnibus basis may be deemed part of a group for the purpose of this policy and may be rejected in whole or in part by the Company. Certain accounts, such as omnibus accounts and accounts at financial intermediaries, however, include multiple investors and such accounts typically provide the Company with net purchase or redemption and exchange requests on any given day where purchases, redemptions and exchanges of shares are netted against one another and the identity of individual purchasers, redeemers and exchangers whose orders are aggregated are not known by the Company.

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While the Company monitors for market timing activity, the Company may be unable to identify such activities because the netting effect in omnibus accounts often makes it more difficult to locate and eliminate market timers from the funds. Identification of market timers may also be limited by operational systems and technical limitations. In the event that a financial intermediary is determined by the Company to be engaged in market timing or other improper trading activity, the Company’s distributor may terminate such financial intermediary’s agreement with the distributor, suspend such financial intermediary’s trading privileges or take other appropriate actions.

Each of the equity funds will automatically assess and retain a fee of 2% of the current NAV, after excluding the effect of any contingent deferred sales charges, of shares being redeemed or exchanged within 90 days of acquisition (other than those acquired through reinvestment of dividends or other distributions). Each of the High Yield Bond and International Bond Portfolios will automatically assess and retain a fee of 2% of the current NAV, after excluding the effect of any contingent deferred sales charges, of shares being redeemed or exchanged within 30 days of acquisition (other than those acquired through reinvestment of dividends or other distributions). A new 90-day period, or 30-day period, as the case may be, begins with each acquisition of shares through a purchase or exchange. For example, a series of transactions in which shares of Portfolio A are exchanged for shares of Portfolio B 20 days after the purchase of the Portfolio A shares, followed in 20 days by an exchange of the Portfolio B shares for shares of Portfolio C, will be subject to two redemption fees (one on each exchange).

The redemption/exchange fee is for the benefit of the remaining shareholders of a fund and is intended to encourage long-term investment, to compensate for transaction and other expenses caused by early redemptions and exchanges, and to facilitate portfolio management. The “first-in, first-out” method is used to determine the holding period. Under this method, the date of redemption or exchange will be compared with the earliest purchase date of shares held in the account. The Company sells shares to some 401(k) plans, 403(b) plans, bank or trust company accounts, and accounts of certain financial institutions or intermediaries that do not apply the redemption/exchange fee to underlying shareholders, often because of administrative or systems limitations. From time to time, with the approval of the

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Company, the redemption/exchange fee will not be assessed on redemptions or exchanges by: (i) accounts of asset allocation programs or wrap programs whose trading practices are determined by the Company not to be detrimental to a fund or long-term shareholders (e.g., model driven programs with periodic automatic portfolio rebalancing that prohibit participant-directed trading and other programs with similar characteristics); (ii) accounts of shareholders who have died or become disabled; (iii) shareholders redeeming or exchanging shares through the Company’s Systematic Withdrawal Plan, Systematic Exchange Plan or in connection with required distributions from an IRA, 401(k) plan, 403(b) plan or any other Internal Revenue Code Section 401 qualified retirement plan or account; and (iv) certain other accounts in the absolute discretion of the Company when a shareholder can demonstrate hardship. In addition, former State Street Research fund shareholders will not be charged a redemption/exchange fee in connection with a one-time redemption or exchange of Company shares received in a reorganization of a State Street Research fund with one of the Company’s funds. However, additional Company shares purchased by such shareholders after the reorganization and any Company shares acquired through an exchange after the reorganization will be subject to the fee. The Company reserves the right to modify or eliminate these waivers at any time.

The Company's Rights

The Company may:

n Suspend the right of redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company Act,

n Postpone date of payment upon redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company Act or as described in the second paragraph in the section “Selling Shares” above,

n Redeem shares involuntarily in certain cases, such as when the value of a shareholder account falls below a specified level, as described below, and

n Redeem shares for property other than cash if conditions exist which make cash payments undesirable in accordance with its rights under the Investment Company Act.

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IMPORTANT DEFINITIONS

Adviser: The adviser of a mutual fund is responsible for the overall investment management of the fund. The adviser for BlackRock Funds is BlackRock Advisors, Inc.

Sub-Adviser: The sub-adviser of a fund is responsible for its day-to-day management and will generally make all buy and sell decisions. Sub-advisers also provide research and credit analysis. The sub-adviser for the Asset Allocation Portfolio is BlackRock Financial Management, Inc.

Accounts with Low Balances

The Company may redeem a shareholder’s account in any fund at any time if the net asset value of the account in such fund falls below the required minimum investment as the result of a redemption. The shareholder will be notified in writing that the value of the account is less than the required amount and the shareholder will be allowed 30 days to make additional investments before the redemption is processed.

Statements

Every shareholder automatically receives regular account statements. In addition, for tax purposes, shareholders also receive a yearly statement describing the characteristics of any dividends or other distributions received.

Management

BlackRock Funds’ adviser is BlackRock Advisors, Inc. (BlackRock). BlackRock was organized in 1994 to perform advisory services for investment companies and is located at 100 Bellevue Parkway, Wilmington, DE 19809. BlackRock is a wholly-owned subsidiary of BlackRock, Inc., one of the largest publicly traded investment management firms in the United States with $391.3 billion of assets under management as of March 31, 2005. BlackRock, Inc. is a majority-owned indirect subsidiary of The PNC Financial Services Group, Inc., one of the largest diversified financial services companies in the United States. BlackRock Financial Management, Inc. (BFM), an affiliate of BlackRock, located at 40 E. 52nd Street, New York, NY 10022, acts as sub-adviser for the Asset Allocation Portfolio.

For their investment advisory and sub-advisory services, BlackRock and BFM, as applicable, are entitled to fees computed daily on a fund-by-fund basis and payable monthly. For the fiscal year ended September 30, 2004, the aggregate advisory fees paid by the funds to BlackRock, as a percentage of average daily net assets were:

Mid-Cap Value Equity	.78%
Asset Allocation	.47%

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With respect to the SSR Funds listed below that reorganized with BlackRock funds, the aggregate advisory fees paid by the SSR Funds to State Street Research & Management Company, as a percentage of average daily net assets, for such SSR Fund’s most recent fiscal year were:

Asset Allocation Fund	0.75	%
Global Resources Fund	0.75	%
Health Sciences Fund	0.75	%
Mid-Cap Value Fund	0.65	%

A discussion regarding the basis for the Board of Trustees of the Company approving the funds’ investment advisory contracts is available in the Company’s semi-annual report to shareholders for the period ended March 31, 2005.

The total annual advisory fees that can be paid to BlackRock (as a percentage of average daily net assets) are as follows:

Total Annual Advisory Fee for Asset Allocation Portfolio (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.550%
$1 billion-$2 billion	.500%
$2 billion-$3 billion	.475%
more than $3 billion	.450%

Total Annual Advisory Fee for the Mid-Cap Value Equity Portfolio (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.800%
$1 billion-$2 billion	.700%
$2 billion-$3 billion	.675%
more than $3 billion	.625%

Total Annual Advisory Fee for the Health Sciences and Global Resources Portfolios (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.750%
$1 billion-$2 billion	.700%
$2 billion-$3 billion	.675%
more than $3 billion	.650%

Information about the portfolio manager for each of the funds is presented in the appropriate fund section.

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As discussed above, BlackRock has agreed contractually to cap net expenses (excluding interest expense, taxes, brokerage commissions and extraordinary expenses, if any) of each share class of each fund at the levels shown in each fund’s expense table.

To achieve this cap, BlackRock and the Company have entered into an expense limitation agreement. The agreement sets a limit on certain of the operating expenses of each class of shares and requires BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit.

Dividends and Distributions

BlackRock Funds makes two kinds of distributions to shareholders: net investment income and net realized capital gains.

Distributions of net investment income derived by a fund are paid within ten days after the end of each quarter. The Company’s Board of Trustees may change the timing of such dividend payments.

Net realized capital gains (including net short-term capital gains), if any, will be distributed by a fund at least annually at a date determined by the Company’s Board of Trustees.

Your distributions will be reinvested at net asset value in new shares of the same class of the fund unless you instruct PFPC Inc. in writing to pay them in cash. There are no sales charges on these reinvestments.

If you invest in a fund shortly before it makes a capital gain distribution, some of your investment may be returned to you in the form of a taxable distribution. This is commonly known as “buying a dividend.” Distributions that are declared in December, but paid in January are taxable as if they were paid in December.

Taxation of Distributions

Distributions paid out of a fund’s “net capital gain” will be taxed to shareholders as long-term capital gain, regardless of how long a shareholder has owned shares. Distributions of net investment income, other than exempt-interest dividends, and net short-term capital gains will generally be taxed to shareholders as ordinary income. However, individual shareholders who satisfy certain holding period requirements and other requirements are taxed on such dividends at long-term capital gain rates to the extent the dividends are attributable to “qualified dividend

47

income” received by the fund. “Qualified dividend income” generally consists of dividends received from U.S. corporations (other than dividends from tax exempt organizations and certain dividends from real estate investment trusts and regulated investment companies) and certain foreign corporations.

Your annual tax statement from the Company will present in detail the tax status of your distributions for each year.

If more than half of the total asset value of a fund is invested in non-U.S. stock or securities, the fund may elect to “pass through” to its shareholders the amount of non-U.S. income taxes paid by it. In such case, you would be required to include your proportionate share of such taxes in your income and may be entitled to deduct or credit such taxes in computing your taxable income.

Distributions paid by a fund with respect to certain qualifying dividends received by the fund from domestic corporations may be eligible for the corporate dividends received deduction.

If you do not provide a fund with your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding on any distributions of income, capital gains or proceeds from the sale of your shares. When withholding is required, the amount will be 28% of any distributions or proceeds paid. Backup withholding is not an additional tax. Any amounts withheld may be credited against your U.S. federal income tax liability.

Non-U.S. investors may be subject to U.S. withholding and/or estate tax, and will be subject to special U.S. tax certification requirements. Because every investor has an individual tax situation, and also because the tax laws are subject to periodic changes, you should always consult your tax professional about federal, state and local tax consequences of owning shares of the Company.

Important Notice Regarding Delivery of Shareholder Documents

The funds deliver only one copy of shareholder documents, including prospectuses, shareholder reports and proxy statements to shareholders with multiple accounts at the same address. This practice is known as “householding” and is intended to eliminate duplicate mailings and reduce expenses. Mailings of your shareholder documents may be householded indefinitely unless

48

you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact BlackRock Funds at (800) 441-7762.

Electronic Access to Annual Reports, Semi-Annual Reports and Prospectuses

Electronic copies of most financial reports and prospectuses are now available on the Company’s website. Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports and prospectuses by visiting BlackRock’s website if they enroll in the Company’s electronic delivery program.

To enroll:

Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:

Please contact your financial adviser. Please note that not all investment advisers, banks or brokerages may offer this service.

Shareholders Who Hold Accounts Directly With BlackRock

1)  Log on to http://www.blackrock.com/funds

2)  Click on the link for Electronic Delivery

3)  Continue to Account Access

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For more information:

This Prospectus contains important information you should know before you invest. Read it carefully and keep it for future reference. More information about the BlackRock Funds is available at no charge upon request. This information includes:

Annual/Semi-Annual Reports

These reports contain additional information about each of the funds’ investments. The annual report describes the funds’ performance, lists portfolio holdings, and discusses recent market conditions, economic trends and fund investment strategies that significantly affected the funds’ performance for the last fiscal year.

Statement of Additional Information (SAI)

A Statement of Additional Information, dated June 28, 2005, has been filed with the Securities and Exchange Commission (SEC). The SAI, which includes additional information about the BlackRock Funds, may be obtained free of charge, along with the Company’s annual and semi-annual reports, by calling (800) 441-7762. The SAI, as supplemented from time to time is incorporated by reference into this Prospectus.

BlackRock Investment Services

Representatives are available to discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8:00 a.m. to 6:00 p.m. (Eastern time), Monday-Friday. Call: (800) 441-7762.

Purchases and Redemptions

Call your registered representative or (800) 441-7762.

World Wide Web

Access general fund information and specific fund performance. Request mutual fund prospectuses and literature. Forward mutual fund inquiries. www.blackrock.com/funds

Written Correspondence

BlackRock Funds

c/o PFPC Inc.

PO Box 9819

Providence, RI 02940-8019

Overnight Mail

BlackRock Funds

c/o PFPC Inc.

101 Sabin Street

Pawtucket, RI 02860

Internal Wholesalers/Broker Dealer Support

Available to support investment professionals

8:30 a.m. to 6:00 p.m. (Eastern time), Monday-Friday.

Call: (800) 882-0052

Portfolio Characteristics and Holdings

A description of the BlackRock Funds’ policies and procedures related to disclosure of portfolio characteristics and holdings is available in the SAI.

For information about portfolio holdings and characteristics, BlackRock fund shareholders and prospective investors may call (800) 882-0052.

Securities and Exchange Commission (SEC)

You may also view and copy public information about the BlackRock Funds, including the SAI, by visiting the EDGAR database on the SEC Web site (http://www.sec.gov) or the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the public reference room can be obtained by calling the SEC directly at (202) 942-8090. Copies of this information can be obtained, for a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

INVESTMENT COMPANY ACT FILE NO. 811-05742

PRO-EQ2-INST 06/05

ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE

BlackRock Funds

Equity Portfolios

Service Shares

Prospectus

January 31, 2005, as supplemented June 28, 2005

BlackRock Funds^SM is a mutual fund family with 50 investment portfolios, 4 of which are described in this prospectus.

NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

Table of

Contents

How to Find the Information You Need	1
THE BLACKROCK EQUITY PORTFOLIOS
Mid-Cap Value	2
Global Resources	9
Health Sciences	18
Asset Allocation	27
About Your Investment How to Buy/Sell Shares	37
Dividends/Distributions/Taxes	49

How to Find the

Information You Need

About BlackRock Funds

This is the BlackRock Equity Portfolios Prospectus. It has been written to provide you with the information you need to make an informed decision about whether to invest in BlackRock Funds (the Company).

This Prospectus contains information on 4 of the BlackRock Equity funds. The Prospectus is organized so that each fund has its own short section. Simply turn to the section for any particular fund to read about important fund facts. Also included are sections that tell you about buying and selling shares, certain fees and expenses, shareholder features of the funds and your rights as a shareholder. These sections apply to all the funds.

BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BlackRock), the funds’ investment adviser, recently acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company, the investment adviser to the former State Street Research mutual funds. In connection with the transaction, the State Street Research mutual funds were combined with certain BlackRock funds, including the Mid-Cap Value Equity, Global Resources, Health Sciences and Asset Allocation (formerly Balanced) Portfolios.

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BlackRock

Mid-Cap Value Equity Portfolio

IMPORTANT DEFINITIONS

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholder, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamental Analysis: A method of stock market analysis that concentrates on “fundamental” information about the company (such as its income statement, balance sheet, earnings and sales history, products and management) to attempt to forecast future stock value.

Investment Style: Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is mid-cap value, referring to the type of securities the managers will choose for this fund.

Mid-Capitalization Companies: Prior to September 1, 2005, the fund defines these companies as those with market capitalizations between $1 billion and $10 billion. As of September 1, 2005, the fund defines these companies as those with market capitalizations comparable in size to the companies in the Russell Midcap Value Index (between approximately $500 million and $15 billion as of September 30, 2004). Capitalization refers to the market value of the company and is calculated by multiplying the number of shares outstanding by the current price per share.

Value Companies: All stocks are generally divided into the categories of “growth” or “value,” although there are times when a growth fund and value fund may own the same stock. Value stocks are companies that appear to the manager to be undervalued by the market as measured by certain financial formulas. Growth stocks are companies whose earnings growth potential appears to the manager to be greater than the market in general, and whose growth in revenue is expected to continue for an extended period.

Investment Goal

The fund’s investment goal is to seek long-term capital appreciation.

Primary Investment Strategies

In pursuit of this goal, the fund normally invests at least 80% of its net assets in equity securities issued by U.S. mid-capitalization value companies. Prior to September 1, 2005, the fund defines these companies as those with market capitalizations between $1 billion and $10 billion. As of September 1, 2005, mid-capitalization value companies include companies that are comparable in size to the companies in the Russell Midcap Value Index (between approximately $500 million and $15 billion as of September 30, 2004). The fund primarily buys common stock but also can invest in preferred stock and securities convertible into common and preferred stock. From time to time the fund may invest in shares of companies through initial public offerings (IPOs).

The fund manager is seeking mid-capitalization stocks which he believes are worth more than is indicated by current market price. The manager initially screens for “value” stocks from the universe of U.S. mid-capitalization companies. The manager uses fundamental analysis to examine each company for financial strength before deciding to purchase the stock.

The fund generally will sell a stock when it reaches a target price, which is when the manager believes it is fully valued or when, in the manager’s opinion, conditions change such that the risk of continuing to hold the stock is unacceptable when compared to its growth potential.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

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The fund manager may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities (commonly known as derivatives). An option is the right to buy or sell a security or an index of securities at a specific price on or before a specific date. A future is an agreement to buy or sell a security or an index of securities at a specific price on a specific date.

The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The fund manager also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made.

Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles. For example, in some markets a fund holding mid-cap growth stocks may outperform this fund.

There is more business risk in investing in mid-capitalization companies than in larger, better capitalized companies. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies.

IPOs and companies that have recently gone public have the potential to produce substantial gains for the fund. However, there is no assurance that the fund will have access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future performances. The investment performance of the fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the fund is able to do so. In addition, as the fund increases in size, the impact of IPOs on the fund’s performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information

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about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.

While the fund manager chooses stocks he believes to be undervalued, there is no guarantee that the investments will increase in value or that they won’t decline.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long- term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Mid-Cap Value Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund

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in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had substantially similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Service Shares. The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of the Russell Midcap Value Index, a recognized unmanaged index of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Service Shares of the fund is based on the performance of the A Shares of the SSR Fund.

As of 12/31

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

These returns assume payment of applicable sales charges for A Shares. Sales charges do not apply to Service Shares.

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Mid-Cap Value
Return Before Taxes	16.21%	7.76%	13.22%	14.60%	08/25/86
Return After Taxes on Distributions	15.56%	6.87%	11.20%	12.01%	—
Return After Taxes on Distributions and Sale of Shares	11.04%	6.15%	10.29%	11.33%	—
Russell Midcap Value (Reflects no deduction for fees, expenses or taxes)	23.71%	15.56%	13.48%	12.86%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on

5

IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Other Expenses: Include administration, transfer agency, custody, professional fees and registration fees.

Service Fees: Fees that are paid to service organizations that provide personal services to shareholders.

Service Organizations: Brokers, dealers, financial institutions and industry professionals that provide support services to their customers who own shares of the Company.

the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

Expenses and Fees

As a shareholder you pay certain fees and expenses. Annual fund operating expenses are paid out of fund assets.

The tables below describe the fees and expenses that you may pay if you buy and hold Service Shares of the fund. The “Annual Fund Operating Expenses” table is based on expenses for the most recent fiscal year (restated to reflect current fees) and may not reflect expenses of the fund after February 1, 2006.

Shareholder Fees

(Fees paid directly from your investment)

Redemption/Exchange Fee*	2.0	%
(as a percentage of amount redeemed)

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

Advisory fees		.80%
Other expenses		.73%
Service fees	.25%
Other	.48%
Total annual fund operating expenses		1.53%
Fee waivers and expense reimbursements1		.28%
Net expenses1		1.25%

* Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Service class expenses to 1.25% of average daily net assets until February 1, 2006. The fund may have to repay some of these waivers and reimbursements to BlackRock in the following two years. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses and redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
Service Shares	$	127	$	456	$	808	$	1,800

Fund Management

The fund management team is led by Anthony F. Forcione, CFA, Vice President at BlackRock Advisors, Inc. (BlackRock), and Wayne J. Archambo, CFA, Managing Director at BlackRock.

Mr. Forcione joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining

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BlackRock, Mr. Forcione was a Vice President and had been a member of the management team of the State Street Research Mid-Cap Value Fund since 2002. Mr. Forcione became an equity analyst at SSRM in 1997 and joined the Large-Cap and Mid-Cap Value Teams in 1999.

Mr. Archambo heads the small and mid-cap value equity team. He has primary responsibility for managing client portfolios within this strategy and client investment guidelines, and he makes purchase and sale decisions for these products and has been a portfolio manager for the Fund since January 2005. He is a member of the Global Equity Operating Committee and the Equity Investment Strategy Group. Prior to joining BlackRock in 2002, Mr. Archambo was a founding partner and Manager of Boston Partners Asset Management, L.P.’s small and mid-cap value equity products since the firm’s inception in 1995. Prior to his departure, he was responsible for the development and management of over $1.3 billion of small cap value assets and $1.5 billion of mid-cap value assets for 50 institutional clients.

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Financial Highlights

The financial information in the table below shows financial performance for the periods indicated. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by Deloitte & Touche LLP. The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

FINANCIAL HIGHLIGHTS

(For a Service Share Outstanding Throughout Each Period)

Mid-Cap Value Equity Portfolio

	Period 3/1/05 through 3/31/054			Period 1/28/051 through 2/28/05
Net asset value at beginning of period	$	12.63		$	12.04
Income from investment operations
Net investment income (loss)		– –			(0.01	)
Net gain (loss) on investments (both realized and unrealized)		(0.12	)		0.60
Total from investment operations		(0.12	)		0.59
Net asset value at end of period	$	12.51		$	12.63
Total return		(0.95	)%2		4.89	%2
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	1,346		$	1,374
Ratios of expenses to average net assets
Net expenses		1.25	%3		1.25	%3
Total expenses		1.53	%3		1.49	%3
Ratios of net investment income to average net assets
After advisory/administration fee waivers		0.33	%3		0.39	%3
Before advisory/administration fee waivers		0.05	%3		0.14	%3
Portfolio turnover rate		9	%		53	%

¹ Commencement of operations of share class.

² Redemption fee of 2.00% is reflected in total return calculations.

³ Annualized.

⁴ Unaudited.

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BlackRock

Global Resources Portfolio

IMPORTANT DEFINITIONS

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamentals: “Fundamental” information about a company (such as its income statement, balance sheet, earnings and sales history, products and management).

Investment Style: Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is global resources, referring to the type of securities the managers will choose for this fund.

The fund is closed to new investors. Existing shareholders may make additional investments in current accounts. In addition, new accounts may be opened by (i) any investor if the taxpayer identification number for the new account will be the same as that for a current account and (ii) 401(k), 403(b), 457 and other similar group retirement plan programs that have current accounts.

Investment Goal

The fund seeks to provide long-term growth of capital.

Primary Investment Strategies

Under normal conditions, the fund invests at least 80% of its total assets in securities of global energy and natural resources companies and companies in associated businesses, as well as utilities (such as gas, water, cable, electrical and telecommunications utilities). These typically include companies involved in the exploration, production, refining, marketing or distribution of energy or natural resources, such as gas, oil, metal and minerals, as well as related transportation companies and equipment manufacturers. The fund will consider a company to be an energy or natural resources company if 50% or more of its revenues are derived from, or 50% or more of its assets are related to, activities described above. The fund will invest more than 25% of its assets in energy or natural resources industries. The fund may invest without limit in companies located anywhere in the world and will generally invest in at least three countries and in companies tied economically to a number of countries. It expects to invest primarily in developed markets, but may also invest in emerging markets.

In selecting investments, the fund looks for companies and industries that appear to have the potential for above-average long-term performance based on projections of supply and demand of a resource and the state of the market. These may include companies that are expected to show above-average growth over the long term as well as those that appear to be trading below their true worth. While the fund tends to emphasize smaller companies, from time to time it may emphasize companies of other sizes. The fund’s investments may include common and preferred stock, securities convertible into common and preferred stock, warrants and depositary receipts.

The fund reserves the right to invest up to 20% of total assets in other U.S. and foreign investments. These may include stocks of companies not associated with energy or natural resources. These

9

may also include debt securities, although the fund may not invest more than 10% of total assets in junk bonds (bonds that are below Standard & Poor’s BBB or Moody’s Baa rating categories, or their unrated equivalents).

The fund generally will sell a stock when, in the management team’s opinion, the stock reaches its price target, there is a deterioration in the company’s fundamentals, a change in macroeconomic outlook, technical deterioration, valuation issues, a need to rebalance the portfolio or a better opportunity elsewhere.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities and may buy options on a currency or a basket of currencies (collectively, commonly known as derivatives). An option is the right to buy or sell an instrument at a specific price on or before a specific date. A future is an agreement to buy or sell an instrument at a specific price on a specific date. The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The management team also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns. The fund may also buy and sell currencies and use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movements in the value of non-U.S. currencies or to enhance returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

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Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The fund’s strategy of concentrating in energy and natural resources companies means that its performance will be closely tied to the performance of a particular market segment. Because the fund is concentrated in these companies, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy. A downturn in these companies would have a larger impact on the fund than on a mutual fund that does not concentrate in such companies. At times, the performance of these companies will lag the performance of other industries or the broader market as a whole.

Stocks of energy and natural resources companies are especially affected by variations in the commodities markets (that may be due to market events, regulatory developments or other factors that the fund cannot control) and these companies may lack the resources and the broad business lines to weather hard times. Energy companies can be significantly affected by the supply of and demand for specific products and services, the supply of and demand for oil and gas, the price of oil and gas, exploration and production spending, government regulation, world events and economic conditions. Natural resources companies can be significantly affected by events relating to international political developments, energy conservation, the success of exploration projects, commodity prices, and tax and government regulations.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Any securities that are thinly traded or whose resale is restricted can be difficult to sell at the desired time and price. Some of these securities are new and complex, and trade only among institutions; the markets for these securities are still developing, and may not function as efficiently as established markets. Owning a large percentage of restricted or illiquid securities could

11

hamper the fund’s ability to raise cash to meet redemptions. Also, because there may not be an established market price for these securities, the fund may have to estimate their value, which means that their valuation (and, to a much smaller extent, the valuation of the fund) may have a subjective element. Transactions in restricted or illiquid securities may entail registration expense and other transaction costs that are higher than those for transactions in unrestricted or liquid securities. Where registration is required for restricted or illiquid securities, a considerable time period may elapse between the time the fund decides to sell the security and the time it is actually permitted to sell the security under an effective registration statement. If during such period, adverse market conditions were to develop, the fund might obtain less favorable pricing terms than when it decided to sell the security.

Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of dividends or interest paid by non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subject to wider price movements than comparable investments in U.S. companies. There is also less government regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging markets countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past and may do so again in the future, as a result of economic and political turmoil in many of these countries.

In addition, many U.S. companies in which the fund may invest generate significant revenues and earnings from abroad. As a result, these companies and the prices of their securities may be affected by weaknesses in global and regional economies and the relative value of foreign currencies to the U.S. dollar. These factors, taken as a whole, could adversely affect the price of fund shares.

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles.

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The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The value of any bonds held by the fund is likely to decline when interest rates rise; this risk is greater for bonds with longer maturities. It is also possible that a bond issuer could default on principal or interest payments, causing a loss for the fund. The fund may invest in non-investment grade or “high yield” securities commonly known to investors as “junk bonds.” Non-investment grade securities carry greater risks than investment grade securities, which have higher credit ratings, including a high risk of default. The yields of non-investment grade securities will move up and down over time.

The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market values may change from time to time, positively or negatively, to reflect new developments regarding the issuer. Companies that issue high yield securities are often young and growing and have a lot of debt. High yield securities are considered speculative, meaning there is a significant risk that companies issuing these securities may not be able to repay principal and pay interest or dividends on time. In addition, other creditors of a high yield issuer may have the right to be paid before the high yield bondholder. During an economic downturn, a period of rising interest rates or a recession, issuers of high yield securities who have a lot of debt may experience financial problems. They may not have enough cash to make their principal and interest payments. An economic downturn could also hurt the market for lower-rated securities and the fund. Also, the market for high yield securities is not as liquid as the market for higher rated securities. This means that it may be harder to buy and sell high yield securities, especially on short notice. The market could also be hurt by legal or tax changes.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives

13

position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

The expenses of the fund can be expected to be higher than those of other funds investing primarily in domestic securities because the costs attributable to investing abroad are usually higher.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

The fund is a non-diversified portfolio under the Investment Company Act, which means that fund performance is more dependent on the performance of a smaller number of securities and issuers than in a diversified portfolio. The change in value of any one security may affect the overall value of the fund more than it would a diversified fund’s.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Global Resources Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had substantially similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Service Shares. The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of the Lipper Natural Resources Funds Index and the S&P 500^® Index, recognized unmanaged indices

14

of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Service Shares of the fund is based on the performance of the A Shares of the SSR Fund.

As of 12/31

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Global Resources
Return Before Taxes	39.13%	32.70%	33.11%	18.54%	03/02/90
Return After Taxes on Distributions	38.14%	32.12%	32.76%	17.68%	—
Return After Taxes on Distributions and Sale of Shares	26.30%	28.53%	29.76%	16.35%	—
Lipper Natural Resources (Reflects no deduction for fees, expenses or taxes)	35.25%	16.57%	12.34%	12.91%	N/A
S&P 500® (Reflects no deduction for fees, expenses or taxes)	10.88%	3.59%	-2.30%	12.07%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

Expenses and Fees

As a shareholder you pay certain fees and expenses. Annual fund operating expenses are paid out of fund assets.

These returns assume payment of applicable sales charges for Investor A Shares. Sales charges do not apply to Service Shares.

15

IMPORTANT DEFINITIONS

Advisory Fees: Fees paid to the investment adviser for portfolio management services.

Other Expenses: Include administration, transfer agency, custody, professional fees and registration fees.

Service Fees: Fees that are paid to service organizations that provide personal services to shareholders.

Service Organizations: Brokers, dealers, financial institutions and industry professionals that provide support services to their customers who own shares of the Company.

The tables below describe the fees and expenses that you may pay if you buy and hold Service Shares of the fund. The “Annual Fund Operating Expenses” table may not reflect expenses of the fund after February 1, 2006.

Shareholder Fees

(Fees paid directly from your investment)

Redemption/Exchange Fee*	2.0	%
(as a percentage of amount redeemed)

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

Advisory fees		.75	%
Other expenses		.69	%
Service fees	.25%
Other	.44%
Total annual fund operating expenses		1.44	%
Fee waivers and expense reimbursements1		.10	%
Net expenses1		1.34	%

* Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Service class expenses to 1.34% of average daily net assets until February 1, 2006. The fund may have to repay some of these waivers and reimbursements to BlackRock in the following two years. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses and redemption at the end of each time period. Although your actual cost may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
Service Shares	$	136	$	435	$	767	$	1,706

Fund Management

The fund management team is led by Daniel J. Rice III, Managing Director at BlackRock Advisors, Inc. (BlackRock), and Denis J. Walsh III, CFA, Managing Director at BlackRock.

Mr. Rice and Mr. Walsh joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining BlackRock, Mr. Rice had been a Senior Vice President and a portfolio manager of the State Street Research Global Resources Fund since its inception in March 1990. He was employed by SSRM beginning in 1984.

Prior to joining BlackRock, Mr. Walsh was a Managing Director and was an energy analyst for the State Street Research Global Resources Fund beginning in 1999. He was also a member of the portfolio management team for the Large Cap Analyst Fund and has worked as an investment professional in equity research since 1979.

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Financial Highlights

The financial information in the table below shows financial performance for the periods indicated. The table below shows performance information for Investor A Shares of the fund. For periods prior to January 31, 2005, the table shows performance information for the SSR Fund, which reorganized with the fund on that date. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by PricewaterhouseCoopers LLP (for periods through June 30, 2002) and Deloitte & Touche LLP (for periods after June 30, 2002). The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

FINANCIAL HIGHLIGHTS

(For an Investor A Share Outstanding Throughout Each Period):

Global Resources Portfolio

	INVESTOR A SHARES
	Period 3/1/05 through 3/31/056			Period 7/1/04 through 2/28/05			Year Ended 6/30/044,7			Year Ended 6/30/037			Year Ended 6/30/025,7			Year Ended 6/30/015,7			Year Ended 6/30/005,7
Net asset value at beginning of period	$	56.23		$	39.58		$	25.81		$	22.74		$	21.50		$	16.79		$	12.15
Income from investment operations
Net investment income (loss)		(0.01	)		(0.15	)		0.21			(0.10	)		(0.15	)		(0.22	)		(0.17	)
Net gain (loss) on investments (both realized and unrealized)		(1.49	)		18.69			14.15			3.17			1.39			4.93			4.81
Total from investment operations		(1.50	)		18.54			14.36			3.07			1.24			4.71			4.64
Less distributions
Distributions from net investment income		– –			(0.34	)		(0.59	)		– –			– –			– –			– –
Distributions from net realized gains		– –			(1.55	)		– –			– –			– –			– –			– –
Total distributions		– –			(1.89	)		(0.59	)		– –			– –			– –			– –
Net asset value at end of period	$	54.73		$	56.23		$	39.58		$	25.81		$	22.74		$	21.50		$	16.79
Total return1		(2.67	)%2		47.69	%2		56.06	%		13.50	%		5.77	%		28.05	%		38.19	%
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	658,700		$	676,234		$	406,209		$	103,987		$	89,883		$	81,880		$	70,152
Ratios of expenses to average net assets
Net expenses		1.34	%3		1.36	%3		1.34	%		1.60	%		1.73	%		1.61	%		1.72	%
Total expenses		1.45	%3		1.38	%3		1.34	%		1.61	%		1.74	%		1.63	%		1.74	%
Ratios of net investment income (loss) to average net assets
After advisory/administration and other fee waivers		(0.22	)%3		(0.52	)%3		0.64	%		(0.47	)%		(0.73	)%		(1.11	)%		(1.34	)%
Before advisory/administration and other fee waivers		(0.33	)%3		(0.54	)%3		0.64	%		(0.47	)%		(0.73	)%		(1.11	)%		(1.34	)%
Portfolio turnover rate		2	%		22	%		27	%		33	%		38	%		38	%		47	%

 ¹ Neither front-end sales load nor contingent deferred sales load is reflected in total returns.

 ² Redemption fee of 2.00% is reflected in total return calculations.

 ³ Annualized.

 ⁴ During the year ended June 30, 2004, the SSR Fund’s distributor made restitution payments to the fund as part of a settlement with NASD. These payments increased net realized and unrealized gain by $0.02 per share, and increased total return by 0.16%.

 ⁵ Audited by other auditors.

 ⁶ Unaudited.

 ⁷ Per-share figures have been calculated using the average shares method.

17

BlackRock

Health Sciences Portfolio

IMPORTANT DEFINITIONS

Equity Security:A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

Fundamentals:“Fundamental” information about a company (such as its income statement, balance sheet, earnings and sales history, products and management).

Investment Style:Refers to the guiding principles of a mutual fund’s investment choices. The investment style of this fund is health sciences, referring to the type of securities the managers will choose for this fund.

Investment Goal

The fund seeks to provide long-term growth of capital.

Primary Investment Strategies

Under normal market conditions, the fund invests at least 80% of total assets in securities of companies in health sciences and related industries. These companies include health care providers as well as businesses involved in the development, production, and distribution or delivery of medical and pharmaceutical products and services. Companies engaged in biotechnology and medical research and development are also included, plus companies that may design, manufacture or distribute medical, dental and optical equipment and supplies, including diagnostic equipment. The companies may also provide diagnostic services or operate health facilities and hospitals, or provide related administrative, management and financial support. The fund will consider a company to be in a health sciences or related industry if 50% or more of its revenues are derived from, or 50% or more of its assets are related to, activities described above. The fund will invest more than 25% of its assets in health sciences or related industries, and may invest in companies located in non-U.S. countries.

In selecting investments, the fund looks for companies and industries that appear to have the potential for above-average growth over the long term. The fund expects to invest in health sciences companies comparable in size to those in the health sector of the Russell 3000^® Index or in similar companies, including non-U.S. companies. The fund does not limit its investments to companies of any particular size. The fund’s investments may include common and preferred stock, securities convertible into common and preferred stock, warrants and depository receipts.

The fund reserves the right to invest up to 20% of total assets in other securities. These may include stocks of companies not associated with health sciences. They may also include debt securities and smaller capitalization companies.

From time to time the fund may invest without limit in shares of companies through initial public offerings (IPOs).

The fund generally will sell a stock when, in the management team’s opinion, the stock reaches its price target, there is a deterioration in the company’s fundamentals, a change in macroeconomic outlook, technical deterioration, valuation issues, a need to rebalance the portfolio or a better opportunity elsewhere.

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It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund will not deviate from its normal strategies if it holds these securities pending investments.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities and may buy options on a currency or a basket of currencies (collectively, commonly known as derivatives). An option is the right to buy or sell an instrument at a specific price on or before a specific date. A future is an agreement to buy or sell an instrument at a specific price on a specific date. The primary purpose of using derivatives is to attempt to reduce risk to the fund as a whole (hedge) but they may also be used to maintain liquidity and commit cash pending investment. The management team also may, but under normal market conditions generally does not intend to, use derivatives for speculation to increase returns. The fund may also buy and sell currencies and use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movements in the value of non-U.S. currencies or to enhance returns.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The main risk of any investment in stocks is that values fluctuate in price. The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The fund’s strategy of concentrating in health sciences and related companies means that its performance will be closely tied to the performance of a particular market segment. Because the fund is

19

concentrated in these companies, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy. A downturn in these companies would have a larger impact on the fund than on a mutual fund that does not concentrate in such companies. At times, the performance of these companies will lag the performance of other industries or the broader market as a whole.

Investments in health sciences companies are subject to a number of risks, including the adverse impact of legislative actions and government regulations. These actions and regulations can affect the approval process for patents, medical devices and drugs, the funding of research and medical care programs, and the operation and licensing of facilities and personnel. The goods and services of health sciences companies are subject to risks of rapid technological change and obsolescence, product liability litigation, and intense price and other competitive pressures.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of dividends or interest paid by non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subject to wider price movements than comparable investments in U.S. companies. There is also less government regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging markets countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more

20

developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past and may do so again in the future, as a result of economic and political turmoil in many of these countries.

Because different kinds of stocks go in and out of favor depending on market conditions, this fund’s performance may be better or worse than other funds with different investment styles.

IPOs and companies that have recently gone public have the potential to produce substantial gains for the fund. However, there is no assurance that the fund will have access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future performances. The investment performance of the fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the fund is able to do so. In addition, as the fund increases in size, the impact of IPOs on the fund’s performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The value of any bonds held by the fund is likely to decline when interest rates rise; this risk is greater for bonds with longer maturities. It is also possible that a bond issuer could default on principal or interest payments, causing a loss for the fund.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack

21

of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

The fund is a non-diversified portfolio under the Investment Company Act, which means that fund performance is more dependent on the performance of a smaller number of securities and issuers than in a diversified portfolio. The change in value of any one security may affect the overall value of the fund more than it would a diversified fund’s.

Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Health Sciences Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had substantially similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Service Shares. The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of the Lipper Health/Biotechnology Funds

22

Index and the S&P 500^® Index, recognized unmanaged indices of stock market performance. As with all such investments, past performance (before and after taxes) is not an indication of future results. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Service Shares of the fund is based on the performance of the A Shares of the SSR Fund.

As of 12/31

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

These returns assume payment of applicable sales charges for Investor A Shares. Sales charges do not apply to Service Shares.

	1 Year	3 Years	5 Years	Since Inception	Inception Date1
Health Sciences
Return Before Taxes	7.97%	11.50%	17.38%	18.59%	12/21/99
Return After Taxes on Distributions	6.93%	10.70%	16.18%	17.38%
Return After Taxes on Distributions and Sale of Shares	5.97%	9.55%	14.59%	15.69%
Lipper Health/Biotechnology (Reflects no deduction for fees, expenses or taxes)	11.74%	2.48%	6.72%	8.03%	N/A
S&P 500® (Reflects no deduction for fees, expenses or taxes)	10.88%	3.59%	-2.30%	-1.80%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

23

IMPORTANT DEFINITIONS

Advisory Fees:Fees paid to the investment adviser for portfolio management services.

Other Expenses:Include administration, transfer agency, custody, professional fees and registration fees.

Service Fees:Fees that are paid to service organizations that provide personal services to shareholders.

Service Organizations:Brokers, dealers, financial institutions and industry professionals that provide support services to their customers who own shares of the Company.

Expenses and Fees

As a shareholder you pay certain fees and expenses. Annual fund operating expenses are paid out of fund assets.

The tables below describe the fees and expenses that you may pay if you buy and hold Service Shares of the fund. The “Annual Fund Operating Expenses” table may not reflect expenses of the fund after February 1, 2006.

Shareholder Fees

(Fees paid directly from your investment)

Redemption/Exchange Fee*	2.0	%
(as a percentage of amount redeemed)

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

Advisory fees		.75	%
Other expenses		.89	%
Service fees	.25%
Other	.64%
Total annual fund operating expenses		1.64	%
Fee waivers and expense reimbursements1		.09	%
Net expenses1		1.55	%

* Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Service class expenses to 1.55% of average daily net assets until February 1, 2006. The fund may have to repay some of these waivers and reimbursements to BlackRock in the following two years. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses and redemption at the end of each time period. Although your actual cost may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
Service Shares	$	158	$	499	$	874	$	1,928

Fund Management

The fund management team is led by Thomas P. Callan, CFA, Managing Director at BlackRock Advisors, Inc. (BlackRock), and Erin Xie, PhD, a Director at BlackRock.

Mr. Callan, senior portfolio manager, is the head of the BlackRock Global Opportunities Team and is the manager and strategist for all of the team’s portfolios. He has been a manager of the fund since 2005. He is a member of the BlackRock Equity Operating Committee and Equity Investment Strategy Group. Prior to joining BlackRock as a member of the global emerging-cap team in 1998, Mr. Callan was with the PNC Asset Management Group, which he joined in 1992.

24

Ms. Xie joined BlackRock following the merger with State Street Research & Management (SSRM) in 2005. Prior to joining BlackRock, she was a Senior Vice President and a member of the portfolio management team of the State Street Research Health Sciences Fund since 2001 and became a portfolio manager in 2003. Ms. Xie was employed by SSRM beginning in 2001 as an equity analyst covering the healthcare sector. Prior to SSRM, she also served as an associate in pharmaceutical equity research at Sanford Bernstein & Company.

25

Financial Highlights

The financial information in the table below shows financial performance for the periods indicated. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by Deloitte & Touche LLP. The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

FINANCIAL HIGHLIGHTS

(For a Service Share Outstanding Throughout Each Period)

Health Sciences Portfolio

	Period 3/1/05 through 3/31/054			Period 1/28/051 through 2/28/05
Net asset value at beginning of period	$	20.24		$	20.30
Income from investment operations
Net investment income (loss)		0.01			(0.01	)
Net loss on investments (both realized and unrealized)		(0.19	)		(0.05	)
Total from investment operations		(0.18	)		(0.06	)
Net asset value at end of period	$	20.06		$	20.24
Total return		(0.89	)%2		(0.30	)%2
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	– –		$	– –
Ratios of expenses to average net assets
Net expenses		1.50	%3		0.82	%3
Total expenses		1.50	%3		0.82	%3
Ratios of net investment income (loss) to average net assets
After advisory/administration fee waivers		0.05	%3		(0.70	)%3
Before advisory/administration fee waivers		0.05	%3		(0.70	)%3
Portfolio turnover rate		14	%		173	%

¹ Commencement of operations of share class.

² Redemption fee of 2.00% is reflected in total return calculations.

³ Annualized.

⁴ Unaudited.

26

BlackRock

Asset Allocation Portfolio

IMPORTANT DEFINITIONS

Asset-Backed Securities: Bonds that are backed by a pool of assets, usually loans such as installment sale contracts or credit card receivables.

Bonds: Debt obligations such as bonds and debentures, U.S. Government securities, debt obligations of domestic and foreign corporations, debt obligations of foreign governments and their political subdivisions, asset-backed securities, various mortgage-backed securities (both residential and commercial), other floating or variable rate obligations, municipal obligations and zero coupon debt securities.

Collateralized Mortgage Obligations (CMO): Bonds that are backed by cash flows from pools of mortgages. CMOs may have multiple classes with different payment rights and protections.

Commercial Mortgage-Backed Securities (CMBS): Bonds that are backed by a mortgage loan or pools of loans secured by commercial property, not residential mortgages.

Equity Security: A security, such as stock, representing ownership of a company. Bonds, in comparison, are referred to as fixed income or debt securities because they represent indebtedness to the bondholders, not ownership (although convertible bonds are fixed income securities that are convertible to equity according to their terms).

High Yield Bonds: Sometimes referred to as “junk bonds,” these are debt securities which are rated lower than investment grade (below the fourth highest rating of the major rating agencies). These securities generally pay more interest than higher rated securities. The higher yield is an incentive to investors who otherwise may be hesitant to purchase the debt of such a low rated issuer.

Investment Goal

The Fund’s investment goal is to seek to maximize total return, consistent with income generation and prudent investment management.

Primary Investment Strategies

The fund uses an asset allocation strategy, investing varying percentages of its portfolio in three major categories: stocks, bonds and, to a lesser extent, money market instruments. Drawing on its analysis of financial trends and market conditions, the fund management team monitors and adjusts those allocations from time to time. The fund has wide flexibility in the relative weightings given to each category; however, it intends to remain diversified across categories.

The assets allocated to the stock and bond categories undergo a further allocation process. The fund management team uses a combination of quantitative and fundamental analysis to evaluate the relative attractiveness of various segments in the equity universe, defined by style, capitalization range and geographic location. The fund management team regularly reviews and allocates varying percentages of the fund to equity investment management team members responsible for security selection within these distinctive disciplines, including stocks of large, middle and small capitalization companies, companies that appear to be trading below their true worth, companies with significant growth opportunities, firms in specialized sectors and international companies. Within each discipline, investment decisions are primarily the result of bottom-up security selection that, in turn, drives sector and industry weightings as well as average market capitalization. With respect to its equity investments, the fund primarily buys common stock but also can invest in preferred stock and securities convertible into common and preferred stock. The equity investment management team assesses each stock’s changing characteristics relative to its contribution to portfolio risk. A stock is sold when it no longer offers an appropriate return-to-risk trade-off.

Members of the fixed income investment management team are responsible for managing the fixed income allocation of the fund. The fixed income investment management team evaluates sectors of the bond market and individual securities within these sectors. The fixed income investment management team selects bonds from several sectors including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities,

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IMPORTANT DEFINITIONS

Investment Grade: Securities which are rated in the four highest categories by at least one of the major rating agencies or determined by the fund manager to be of similar quality. Generally, the higher the rating of a bond, the higher the likelihood that interest and principal payments will be made on time.

Investment Style: Refers to the guiding principle of a mutual fund’s investment choices. The investment style of this fund is balanced, meaning that the managers will choose both equity and fixed income securities for this fund.

Mortgage-Backed Securities: Asset-backed securities based on a particular type of asset, a mortgage. There are a wide variety of mortgage backed securities involving commercial or residential, fixed rate or adjustable rate mortgages and mortgages issued by banks or government agencies.

S&P 500^® Index: The Standard & Poor’s Composite Stock Price Index, an unmanaged index of 500 stocks, most of which are listed on the New York Stock Exchange. The index focuses on the large-cap segment of the market, with 80% coverage of U.S. equities.

Sector: All stocks are classified into a category or sector such as utilities, consumer services, basic materials, capital equipment, consumer cyclicals, energy, consumer non-cyclicals, healthcare, technology, transportation, finance and cash.

Total Return: A way of measuring fund performance. Total return is based on a calculation that takes into account income dividends, capital gain distributions and the increase or decrease in share price.

CMOs, asset-backed securities and corporate bonds. Securities are purchased for the fund when the fixed income management team believes that they have the potential for above-average total return. The fund invests primarily in dollar-denominated investment grade bonds, but may invest up to 20% of its fixed income allocation in any combination of non-investment grade bonds (high yield or junk bonds), non-dollar denominated bonds and bonds of emerging market issuers. The fund’s investment in non-dollar denominated bonds may be on a currency hedged or unhedged basis. Non-investment grade bonds acquired by the fund will generally be in the lower rating categories of the major rating agencies (BB or lower by Standard & Poor’s or Ba or lower by Moody’s) or will be determined by the fixed income investment management team to be of similar quality. Split rated bonds will be considered to have the higher credit rating. A security will be sold if, in the opinion of the fixed income investment management team, the risk of continuing to hold the security is unacceptable when compared to its total return potential.

As part of its normal operations, the fund may hold high quality money market securities pending investments or when it expects to need cash to pay redeeming shareholders. The fund also may invest in these securities in order to achieve its investment goal.

It is possible that in extreme market conditions the fund temporarily may invest some or all of its assets in high quality money market securities. Such a temporary defensive strategy would be inconsistent with the fund’s primary investment strategies. The reason for acquiring money market securities would be to avoid market losses. However, if market conditions improve, this strategy could result in reducing the potential gain from the market upswing, thus reducing the fund’s opportunity to achieve its investment goal.

The management team may, when consistent with the fund’s investment goal, buy or sell options or futures on a security or an index of securities, or enter into interest rate or foreign currency transactions, including swaps (collectively, commonly known as derivatives). An option is the right to buy or sell a security or an index of securities at a specific price on or before a specific date. A future is an agreement to buy or sell a security or an index of securities at a specific price on a specific date. A swap is an agreement whereby one party exchanges its right to receive or its obligation to pay one type of interest or currency with another party for that other party’s obligation to pay or its right to receive another type of interest or currency in the future or for a period of time. The fund typically uses derivatives as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The fund may also use derivatives for leverage, in which case their use would involve leveraging risk. The fund may

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seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as reverse repurchase agreements or dollar rolls). The fund may also use forward foreign currency exchange contracts (obligations to buy or sell a currency at a set rate in the future) to hedge against movement in the value of non-U.S. currencies.

The fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.

Should the Company’s Board of Trustees determine that the investment goal of the fund should be changed, shareholders will be given at least 30 days notice before any such change is made. However, such change can be effected without shareholder approval.

Key Risks

The value of your investment can go up or down depending upon market conditions, which means you could lose money.

The main risk of any investment in stocks is that values fluctuate in price.

The fund may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell the fund’s investment than if the fund held the securities of larger, more established companies.

Because market conditions can vary, this fund’s performance may be better or worse than other funds with different investment styles. For example, in some markets a fund holding exclusively equity or fixed income securities may outperform this fund.

While the management team chooses stocks it believes to have rising earnings expectations and good relative valuations, there is no guarantee that the investments will increase in value or that they won’t decline.

Two of the main risks of investing in the fund are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds such as those held by the fund. Market interest rates have in recent years declined significantly below historical average rates. This decline may

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have increased the risk that these rates will rise in the future. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

Securities rated in the fourth highest category by the rating agencies are considered investment grade but they may also have some speculative characteristics, meaning that they carry more risk than higher rated securities and may have problems making principal and interest payments in difficult economic climates. Investment grade ratings do not guarantee that bonds will not lose value.

The fund makes investments in residential and commercial mortgage-backed securities and other asset-backed securities. The characteristics of these mortgage-backed and asset-backed securities differ from traditional fixed income securities.

A main difference is that the principal on mortgage- or asset-backed securities may normally be prepaid at any time, which will reduce the yield and market value of these securities. Asset-backed securities and CMBS generally experience less prepayment than residential mortgage-backed securities. In periods of falling interest rates, the rate of prepayments tends to increase (as does price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower rates. During such periods, reinvestment of the prepayment proceeds by the management team will generally be at lower rates of return than the return on the assets which were prepaid. Certain commercial mortgage-backed securities are issued in several classes with different levels of yield and credit protection. The fund’s investments in commercial mortgage-backed securities with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate, credit and prepayment risks.

Certain asset-backed securities are based on loans that are unsecured, which means that there is no collateral to seize if the underlying borrower defaults.

Non-investment grade securities carry greater risks than securities which have higher credit ratings, including a high risk of default. The yields of non-investment grade securities will move up and down over time. The credit rating of a high yield security does not necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer. These companies are often young and growing and have a lot of debt. High yield securities are considered speculative, meaning there is significant risk that companies issuing these securities may not be able to repay principal and pay interest or dividends on time. In addition, other creditors of a high yield issuer may have the right to be paid before the high yield bond holder.

During an economic downturn, a period of rising interest rates or a recession, issuers of high yield securities who have a lot of debt may

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experience financial problems. They may not have enough cash to make their principal and interest payments. An economic downturn could also hurt the market for lower-rated securities and the fund.

The market for high yield bonds is not as liquid as the markets for higher rated securities. This means that it may be harder to buy and sell high yield bonds, especially on short notice. The market could also be hurt by legal or tax changes.

The fund may invest in non-dollar denominated bonds of issuers located outside of the United States. Non-dollar and non-U.S. securities involve risks not typically associated with investing in U.S. securities. These risks include but are not limited to: currency risks (the risk that the value of interest paid on non-U.S. securities, or the value of the securities themselves, may fall if currency exchange rates change), the risk that a security’s value will be hurt by changes in non-U.S. political or social conditions, including changes in policies restricting investment, the possibility of heavy taxation, nationalization or expropriation of assets and more difficulty obtaining information on non-U.S. securities or companies. In addition, a portfolio of non-U.S. securities may be harder to sell and may be subjected to wider price movements than comparable investments in U.S. companies. There is also less regulation of non-U.S. securities markets.

In addition, political and economic structures in emerging market countries may be undergoing rapid change and these countries may lack the social, political and economic stability of more developed countries. As a result, some of the risks described above, including the risks of nationalization or expropriation of assets and the existence of smaller, more volatile and less regulated markets, may be increased. The value of many investments in emerging market countries has declined significantly in the past, and may do so again in the future, as a result of economic and political turmoil in many of these countries.

Treasury obligations may differ in their interest rates, maturities, times of issuance and other characteristics. Obligations of U.S Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S. Government. No assurance can be given that the U.S. Government will provide financial support to its agencies and authorities if it is not obligated by law to do so.

The fund may invest in securities prior to their date of issue. These securities could fall in value by the time they are actually issued, which may be any time from a few days to over a year.

The fund’s use of derivatives may reduce the fund’s returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price

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within a short time period. A risk of the fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the fund to sell or otherwise close a derivatives position could expose the fund to losses. The fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally, BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the fund’s derivatives positions to lose value.

Forward foreign currency exchange contracts do not eliminate movements in the value of non-U.S. currencies and securities but rather allow the fund to establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.

Some transactions may give rise to a form of leverage. These transactions may include, among others, derivatives, reverse repurchase agreements and dollar rolls and may expose the fund to greater risk and increase its costs. To mitigate leverage risk, the management team will segregate liquid assets on the books of the fund or otherwise cover the transactions. The use of leverage may cause the fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Increases and decreases in the value of the fund’s portfolio will be magnified when the fund uses leverage. The fund will also have to pay interest on its borrowings, reducing the fund’s return. This interest expense may be greater than the fund’s return on the underlying investment.

High portfolio turnover (more than 100%) may result in increased transaction costs to the fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of fund securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect fund performance.

When you invest in this fund you are not making a bank deposit. Your investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency.

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Risk / Return Information

On January 31, 2005, the fund reorganized with the State Street Research Asset Allocation Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the fund in exchange for shares of the fund, which were then distributed to SSR Fund shareholders. For periods prior to January 31, 2005, the chart and table below show performance information for the SSR Fund, which had substantially similar investment goals and strategies as the fund. The chart and table give you a picture of long-term performance for Service Shares. The information shows you how performance has varied year by year and provides some indication of the risks of investing in the fund. The table compares the performance to that of a customized weighted index comprised of the returns of the S&P 500^® Index (60%) and the Lehman Aggregate Index (40%), recognized unmanaged indices of stock and bond market performance, respectively. As with all such investments, past performance (before and after taxes) is not an indication of future results. If certain SSR Fund expenses had not been waived or reimbursed during these periods, returns would have been lower.

The performance of the Service Shares of the fund is based on the performance of the A Shares of the SSR Fund.

As of 12/31

ANNUAL TOTAL RETURNS*

As of 12/31/04

AVERAGE ANNUAL TOTAL RETURNS*

These returns assume payment of applicable sales charges for Investor A Shares. Sales charges do not apply to Service Shares.

	1 Year	3 Years	5 Years	10 Years	Inception Date1
Asset Allocation
Return Before Taxes	4.68%	3.41%	4.57%	10.11%	12/29/88
Return After Taxes on Distributions	3.57%	2.49%	2.65%	7.67%
Return After Taxes on Distributions and Sale of Shares	3.34%	2.38%	2.81%	7.43%
60% S&P 500®/40% Leh. Agg. (Reflects no deduction for fees, expenses or taxes)	8.30%	5.14%	1.97%	10.74%	N/A

* The chart and the table both assume reinvestment of dividends and distributions. Source: BlackRock Advisors, Inc.

¹ Inception date of the SSR Fund’s oldest class(es).

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IMPORTANT DEFINITIONS

Advisory Fees:Fees paid to the investment adviser for portfolio management services.

Interest Expense:The cost of borrowing money to buy additional securities, primarily through reverse repurchase agreements (under which the fund sells securities and agrees to buy them back at a particular date and price).

Other Expenses:Include administration, transfer agency, custody, professional fees and registration fees.

Service Fees:Fees that are paid to service organizations that provide personal services to shareholders.

Service Organizations:Brokers, dealers, financial institutions and industry professionals that provide support services to their customers who own shares of the Company.

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor’s tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts.

Expenses and Fees

As a shareholder you pay certain fees and expenses. Annual fund operating expenses are paid out of fund assets.

The tables below describe the fees and expenses that you may pay if you buy and hold Service Shares of the fund. The “Annual Fund Operating Expenses” table is based on expenses for the most recent fiscal year (restated to reflect current fees) and may not reflect expenses of the fund after February 1, 2006.

Shareholder Fees

(Fees paid directly from your investment)

Redemption/Exchange Fee* (as a percentage of amount redeemed) 2.0 %

Annual Fund Operating Expenses

(Expenses that are deducted from fund assets)

Advisory fees		.55	%
Other expenses		.72	%
Service fees	.25%
Other	.47%
Total annual fund operating expenses		1.27	%
Fee waivers and expense reimbursements1		.11	%
Net expenses1		1.16	%

* Fee applies only to shares that are redeemed or exchanged within 90 days of purchase.

¹ BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit Service class expenses to 1.16% (excluding interest expense) of average daily net assets until February 1, 2006. The fund may have to repay some of these waivers and reimbursements to BlackRock in the following two years. See the “Management” section for a discussion of these waivers and reimbursements.

Example:

This example is intended to help you compare the cost of investing in the fund with the cost of investing in other mutual funds. We are assuming an initial investment of $10,000, 5% total return each year with no changes in operating expenses and redemption at the end of each time period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

	1 Year		3 Years		5 Years		10 Years
Service Shares	$	118	$	392	$	686	$	1,524

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Fund Management

The fund management team is led by R. Andrew Damm, Managing Director of BlackRock Advisors, Inc. (BlackRock), and Linda Zhang, Vice President at BlackRock.

Mr. Damm is primarily responsible for the oversight of the risk management of domestic and international equity portfolios and has managed the fund since 2005. He heads a team that utilizes quantitative techniques to model all of BlackRock’s equity portfolios to ensure that they are managed consistently with their mandates. He works with BlackRock’s portfolio managers to communicate portfolio risk forecasts and to analyze historical performance. He is also a member of the Portfolio Risk Management Group, the Asset Allocation Committee and the Equity Investment Strategy Group.

Prior to taking on his current responsibilities, Mr. Damm was the equity product strategist and the lead portfolio manager for BlackRock’s large cap growth and core equity portfolios where he led a team of analysts and portfolio managers that managed institutional and mutual fund portfolios. He joined the PNC Asset Management Group in 1995 as a senior investment strategist, and was previously a portfolio manager within PNC’s Investment Management and Trust Division.

Ms. Zhang joined BlackRock following the merger with SSRM in 2005. Prior to joining BlackRock, she was a Vice President, a portfolio manager and a key member of the portfolio management team for the State Street Research Asset Allocation Fund. Previously, Ms. Zhang served as a Senior Quantitative Analyst and Vice President and Associate Portfolio Manager for the North American Fixed Income Team at Baring Asset Management from 1997 to 2003.

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Financial Highlights

The financial information in the table below shows financial performance for the periods indicated. Certain information reflects results for a single fund share. The term “Total Return” indicates how much your investment would have increased or decreased during this period of time and assumes that you have reinvested all dividends and distributions. These figures have been audited by Deloitte & Touche LLP. The independent registered public accountant’s report, along with the fund’s financial statements, are included in the Company’s SAI and annual report, which are available upon request (see back cover for ordering instructions). Deloitte & Touche LLP has been appointed as the Company’s independent registered public accountant for the current fiscal year.

FINANCIAL HIGHLIGHTS

(For a Service Share Outstanding Throughout Each Period)

Asset Allocation Portfolio

	Period 3/1/05 through 3/31/054			Period 1/28/051 through 2/28/05
Net asset value at beginning of period	$	14.97		$	14.63
Income from investment operations
Net investment income (loss)		(0.05	)		0.01
Net gain (loss) on investments (both realized and unrealized)		(0.16	)		0.33
Total from investment operations		(0.21	)		0.34
Less distributions
Distributions from net investment income		(0.04	)		– –
Total distributions		(0.04	)		– –
Net asset value at end of period	$	14.72		$	14.97
Total Return		(1.41	)%2		2.32	%2
Ratios/Supplemental data
Net assets at end of period (in thousands)	$	2,147		$	2,171
Ratios of expenses to average net assets
Net expenses		1.16	%3		1.16	%3
Total expenses		1.30	%3		1.26	%3
Ratios of net investment income (loss) to average net assets
After advisory/administration fee waivers		2.16	%3		(0.17	)%3
Before advisory/administration fee waivers		2.02	%3		(0.27	)%3
Portfolio turnover rate		19	%		101	%

¹ Commencement of operations of share class.

² Redemption fee of 2.00% is reflected in total return calculations.

³ Annualized.

⁴ Unaudited.

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About Your Investment

Buying Shares

Service Shares are offered without a sales charge to financial institutions (such as banks and brokerage firms) acting on behalf of their customers, certain persons who were shareholders of the Compass Capital Group of Funds at the time of its combination with The PNC^® Fund in 1996 and investors that participate in the Capital Directions^SM asset allocation program. Service Shares will normally be held by institutions or in the name of nominees of institutions on behalf of their customers. Service Shares are normally purchased through a customer’s account at an institution through procedures established by the institution. In these cases, confirmation of share purchases and redemptions will be sent to the institutions. A customer’s ownership of shares will be recorded by the institution and reflected in the account statements provided by the institutions to their customers. Investors wishing to purchase Service Shares should contact their institutions.

Purchase orders may be placed by calling (800) 441-7762.

What Price Per Share Will You Pay?

The price of mutual fund shares generally changes every day the New York Stock Exchange (NYSE) is open (business day). A mutual fund is a pool of investors’ money that is used to purchase a portfolio of securities, which in turn is owned in common by the investors. Investors put money into a mutual fund by buying shares. If a mutual fund has a portfolio worth $50 million and has 5 million shares outstanding, the net asset value (NAV) per share is $10.

Purchase orders received by the close of regular trading on the NYSE (currently 4 p.m. (Eastern time)) on each day the NYSE is open will be priced based on the NAV calculated at the close of trading on that day. NAV is calculated separately for each class of shares of each fund as of the close of business on the NYSE, generally 4 p.m. (Eastern time), each day the NYSE is open.

Shares will not be priced on days the NYSE is closed. Purchase orders received after the close of trading will be priced based on the next calculation of NAV. Non-U.S. securities and certain other securities held by a fund may trade on days when the NYSE is closed. In these cases, net asset value of shares may change when fund shares cannot be bought or sold.

Since the NAV changes daily, the price you pay for your shares depends on the time that your order is received.

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Each fund’s assets are valued primarily on the basis of market quotations. Certain short-term debt securities are valued on the basis of amortized cost. When a determination is made that market quotations are not readily available, including, but not limited to, when (i) the exchange or market on which a security is traded does not open for trading for an entire trading day and no other market prices are available, (ii) a particular security does not trade regularly or has had its trading halted, (iii) a security does not have a price source due to its lack of liquidity, (iv) BlackRock believes a market quotation from a broker-dealer is unreliable (e.g., where it varies significantly from a recent trade), (v) the security is thinly traded or (vi) there has been a significant subsequent event, each fund values the affected securities at fair value as determined by BlackRock pursuant to procedures adopted by the Company’s Board of Trustees. For example, in valuing a security that trades principally on a foreign market, a fund uses the most recent closing market price from the market on which the security principally trades, unless because of a significant event subsequent to the market close such closing market price, in BlackRock’s judgment, does not represent the current market value of the security. Because significant events could affect the value of a foreign security between the close of the foreign market where the security is principally traded and the time the fund calculates its NAV, such closing price may not be reflective of current market conditions. Therefore, a fund may adjust the closing market price of a foreign security as a result of a significant subsequent event to reflect what it believes to be the fair value of the security as of the time the fund calculates its NAV.

Fair value represents a good faith approximation of the value of a security. A security’s valuation may differ depending on the method used for determining value. Valuing securities at fair value involves greater reliance on judgment than valuation of securities based on readily available market quotations. The fair value of one or more securities may not, in retrospect, be the prices at which those assets could have been sold during the period in which the particular fair values were used in determining a fund’s NAV. As a result, a fund’s sale or redemption of its shares at NAV, at a time when a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.

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Paying for Shares

Payment for Service Shares must normally be made in Federal funds or other funds immediately available by 4 p.m. (Eastern time) on the first business day following receipt of the order. Payment may also, at the discretion of the Company, be made in the form of securities that are permissible investments for the respective fund.

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions, including the Company, to obtain, verify and record information that identifies each person who opens an account. When opening an account, you will be asked for your name, address, date of birth and other information that will allow the Company to identify you. The Company may also ask to see other identifying documents such as a driver’s license (for individuals) or Articles of Incorporation or other formation documents (for institutions). The Company may use a third party to obtain and verify this information. The Company may not be able to establish an account if you do not provide the necessary information.

How Much is the Minimum Investment?

The minimum investment for the initial purchase of Service Shares is $5,000; however, institutions may set a higher minimum for their customers. There is no minimum requirement for later investments. The Company does not accept third party checks as payment for shares.

The Company may reject any purchase order, modify or waive the minimum initial or subsequent investment requirements and suspend and resume the sale of any share class of any fund at any time.

Distribution and Service Plan

The Company has adopted a plan (the Plan) that allows the Company to pay distribution fees for the sale of its shares under Rule 12b-1 of the Investment Company Act and shareholder servicing fees for certain services provided to its shareholders. The Company does not make distribution payments under the Plan with respect to Service Shares.

Under the Plan, the Company pays shareholder servicing fees to brokers, dealers, financial institutions and industry professionals (including BlackRock, PNC Bank and its affiliates) (Service Organizations) whereby the Service Organizations provide

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support services to their customers who own Service Shares in return for these fees. The Company may pay a shareholder servicing fee of up to .25% per year of the average daily net asset value of Service Shares of a fund. All Service Shares pay this shareholder servicing fee.

In return for the shareholder servicing fee, Service Organizations (including BlackRock) may provide one or more of the following services to their customers who own Service Shares:

(1) Responding to customer questions on the services performed by the Service Organization and investments in Service Shares;

(2) Assisting customers in choosing and changing dividend options, account designations and addresses; and

(3) Providing other similar shareholder liaison services.

The shareholder servicing fees payable pursuant to the Plan are fees payable for the administration and servicing of shareholder accounts and not costs which are primarily intended to result in the sale of a fund’s shares.

Because the fees paid by the Company under the Plan are paid out of Company assets on an on-going basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.

The Plan permits BlackRock, the Company’s distributor and their affiliates to make payments relating to distribution and sales support activities out of their past profits or other sources available to them (and not as an additional charge to the funds). BlackRock, the distributor and their affiliates may pay affiliated and unaffiliated Service Organizations compensation for the sale and distribution of shares of the funds or for other services to the funds and shareholders. These payments (Additional Payments) would be in addition to the fund payments described in this Prospectus and may be a fixed dollar amount, may be based on the number of customer accounts maintained by the Service Organization, or may be based on a percentage of the value of shares sold to, or held by, customers of the Service Organization. The aggregate amount of Additional Payments may be substantial. The Additional Payments include amounts that are sometimes referred to as “revenue sharing” payments. In some circumstances, these revenue sharing payments may create an

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incentive for a Service Organization, its employees or associated persons to recommend or sell shares of a fund to you. Please contact your Service Organization for details about Additional Payments it may receive. For more information on Additional Payments, see the SAI.

For more information on the Plan, including a complete list of services provided thereunder, see the SAI.

Selling Shares

Customers of institutions may redeem Service Shares in accordance with the procedures applicable to their accounts with the institutions. These procedures will vary according to the type of account and the institution involved and customers should consult their account managers in this regard. Institutions are responsible for transmitting redemption orders to PFPC and crediting their customers’ accounts with redemption proceeds on a timely basis.

Institutions may place redemption orders by telephoning (800) 441-7762. Shares are redeemed at the NAV per share next determined after receipt of the redemption order minus any applicable redemption/exchange fee. See “Market Timing and Redemption/Exchange Fees” below. The Company, its administrators and the distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Company and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures.

Payment for redeemed shares for which a redemption order is received before 4 p.m. (Eastern time) on a business day is normally made in Federal funds wired to the redeeming institution on the next business day, provided that the funds’ custodian is also open for business. Payment for redemption orders received after 4 p.m. (Eastern time) or on a day when the funds’ custodian is closed is normally wired in Federal funds on the next business day following redemption on which the funds’ custodian is open for business. The Company reserves the right to wire redemption proceeds within seven days after receiving a redemption order if, in the judgement of the Company, an earlier payment could adversely affect a fund. No charge for wiring redemption payments is imposed by the Company, although institutions may

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charge their customer accounts for redemption services. Information relating to such redemption services and charges, if any, should be obtained by customers from their institutions.

Persons who were shareholders of the Compass Capital Group of Funds at the time of its combination with the PNC^® Fund may redeem for cash some or all of their shares of a fund at any time by sending a written redemption request in proper form to BlackRock Funds, c/o PFPC, Inc., P.O. Box 9819, Providence, RI 02940. They may also redeem shares by telephone if they have signed up for the expedited redemption privilege.

During periods of substantial economic market change telephone redemptions may be difficult to complete. Redemption requests may also be mailed to BlackRock Funds, c/o PFPC, Inc., P.O. Box 9819, Providence, RI 02940.

The Company is not responsible for the efficiency of the Federal wire system or the shareholder’s firm or bank. The fund does not currently charge for wire transfers. The shareholder is responsible for any charges imposed by the shareholder’s bank. To change the name of the single, designated bank account to receive wire redemption proceeds, it is necessary to send a written request to BlackRock Funds, c/o PFPC, Inc., P.O. Box 9819, Providence, RI 02940.

The Company may refuse a telephone redemption request if it believes it is advisable to do so.

Persons who were shareholders of an investment portfolio of the Compass Capital Group of Funds at the time of the portfolio combination with The PNC^® Fund may also purchase and redeem Service Shares of the same fund and for the same account in which they held shares on that date through the procedures described in this section.

Market Timing and Redemption/Exchange Fees

The Board of Trustees of the Company has determined that the interests of long-term shareholders and the Company’s ability to manage its investments may be adversely affected when shares are repeatedly bought, sold or exchanged in response to short-term market fluctuations—also known as “market timing.” The funds are not designed for market timing organizations or other entities

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using programmed or frequent purchases and sales or exchanges. The exchange privilege for Investor Shares is not intended as a vehicle for short-term trading. Excessive purchase and sale or exchange activity may interfere with portfolio management, increase expenses and taxes and may have an adverse effect on the performance of a fund and its shareholders. For example, large flows of cash into and out of a fund may require the management team to allocate a significant amount of assets to cash or other short-term investments or sell securities, rather than maintaining such assets in securities selected to achieve the fund’s investment goal. Frequent trading may cause a fund to sell securities at less favorable prices, and transaction costs, such as brokerage commissions, can reduce a fund’s performance.

A fund that invests in non-U.S. securities is subject to the risk that an investor may seek to take advantage of a delay between the change in value of the fund’s portfolio securities and the determination of the fund’s NAV as a result of different closing times of U.S. and non-U.S. markets by buying or selling fund shares at a price that does not reflect their true value. A similar risk exists for funds that invest in securities of small capitalization companies, securities of issuers located in emerging markets or high yield securities (junk bonds) that are thinly traded and therefore may have actual values that differ from their market prices. This short-term arbitrage activity can reduce the return received by long-term shareholders. The Company will seek to eliminate these opportunities by using fair value pricing, as described in “What Price Per Share Will You Pay?” above.

The Company discourages market timing and seeks to prevent frequent purchases and sales or exchanges of fund shares that it determines may be detrimental to a fund or long-term shareholders. The Board of Trustees has approved the policies discussed below to seek to deter market timing activity. The Board has not adopted any specific numerical restrictions on purchases, sales and exchanges of fund shares because legitimate strategies, such as asset allocation, dollar cost averaging or similar activities, may result in frequent trading of fund shares. It is not expected that shareholders would be harmed by such legitimate activities.

If the Company believes, in its sole discretion, that your short-term trading is excessive or that you are engaging in market timing activity, it reserves the right to reject any specific purchase or exchange order. If the Company rejects your purchase or exchange order, you will not be able to execute that transaction,

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and the Company will not be responsible for any losses you therefore may suffer. In addition, any redemptions or exchanges that you make (as a result of the activity described above or otherwise) will be subject to any and all redemption/exchange fees, as described below. For transactions placed directly with the Company, the Company may consider the trading history of accounts under common ownership or control for the purpose of enforcing these policies. Transactions placed through the same financial intermediary on an omnibus basis may be deemed part of a group for the purpose of this policy and may be rejected in whole or in part by the Company. Certain accounts, such as omnibus accounts and accounts at financial intermediaries, however, include multiple investors and such accounts typically provide the Company with net purchase or redemption and exchange requests on any given day where purchases, redemptions and exchanges of shares are netted against one another and the identity of individual purchasers, redeemers and exchangers whose orders are aggregated are not known by the Company. While the Company monitors for market timing activity, the Company may be unable to identify such activities because the netting effect in omnibus accounts often makes it more difficult to locate and eliminate market timers from the funds. Identification of market timers may also be limited by operational systems and technical limitations. In the event that a financial intermediary is determined by the Company to be engaged in market timing or other improper trading activity, the Company’s distributor may terminate such financial intermediary’s agreement with the distributor, suspend such financial intermediary’s trading privileges or take other appropriate actions.

Each of the equity funds will automatically assess and retain a fee of 2% of the current NAV, after excluding the effect of any contingent deferred sales charges, of shares being redeemed or exchanged within 90 days of acquisition (other than those acquired through reinvestment of dividends or other distributions). Each of the High Yield Bond and International Bond Portfolios will automatically assess and retain a fee of 2% of the current NAV, after excluding the effect of any contingent deferred sales charges, of shares being redeemed or exchanged within 30 days of acquisition (other than those acquired through reinvestment of dividends or other distributions). A new 90-day period, or 30-day period, as the case may be, begins with each acquisition of shares through a purchase or exchange. For

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example, a series of transactions in which shares of Portfolio A are exchanged for shares of Portfolio B 20 days after the purchase of the Portfolio A shares, followed in 20 days by an exchange of the Portfolio B shares for shares of Portfolio C, will be subject to two redemption fees (one on each exchange).

The redemption/exchange fee is for the benefit of the remaining shareholders of a fund and is intended to encourage long-term investment, to compensate for transaction and other expenses caused by early redemptions and exchanges, and to facilitate portfolio management. The “first-in, first-out” method is used to determine the holding period. Under this method, the date of redemption or exchange will be compared with the earliest purchase date of shares held in the account. The Company sells shares to some 401(k) plans, 403(b) plans, bank or trust company accounts, and accounts of certain financial institutions or intermediaries that do not apply the redemption/exchange fee to underlying shareholders, often because of administrative or systems limitations. From time to time, with the approval of the Company, the redemption/exchange fee will not be assessed on redemptions or exchanges by: (i) accounts of asset allocation programs or wrap programs whose trading practices are determined by the Company not to be detrimental to a fund or long-term shareholders (e.g., model driven programs with periodic automatic portfolio rebalancing that prohibit participant-directed trading and other programs with similar characteristics); (ii) accounts of shareholders who have died or become disabled; (iii) shareholders redeeming or exchanging shares through the Company’s Systematic Withdrawal Plan, Systematic Exchange Plan or in connection with required distributions from an IRA, 401(k) plan, 403(b) plan or any other Internal Revenue Code Section 401 qualified retirement plan or account; and (iv) certain other accounts in the absolute discretion of the Company when a shareholder can demonstrate hardship. In addition, former State Street Research fund shareholders will not be charged a redemption/exchange fee in connection with a one-time redemption or exchange of Company shares received in a reorganization of a State Street Research fund with one of the Company’s funds. However, additional Company shares purchased by such shareholders after the reorganization and any Company shares acquired through an exchange after the reorganization will be subject to the fee. The Company reserves the right to modify or eliminate these waivers at any time.

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The Company's Rights

The Company may:

n Suspend the right of redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company Act,

n Postpone date of payment upon redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company Act or as described in the third paragraph in the section “Selling Shares” above,

n Redeem shares involuntarily in certain cases, such as when the value of a shareholder account falls below a specified level, as described below, and

n Redeem shares for property other than cash if conditions exist which make cash payments undesirable in accordance with its rights under the Investment Company Act.

Accounts with Low Balances

The Company may redeem a shareholder’s account in any fund at any time if the net asset value of the account in such fund falls below $5,000 as the result of a redemption. The shareholder will be notified in writing that the value of the account is less than the required amount and the shareholder will be allowed 30 days to make additional investments before the redemption is processed. If a customer has agreed with an institution to maintain a minimum balance in his or her account, and the balance in the account falls below the minimum, the customer may be obligated to redeem all or part of his or her shares in the fund to the extent necessary to maintain the minimum balance required.

Statements

Every shareholder automatically receives regular account statements. In addition, for tax purposes, shareholders also receive a yearly statement describing the characteristics of any dividends or other distributions received.

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IMPORTANT DEFINITIONS

Adviser: The adviser of a mutual fund is responsible for the overall investment management of the fund. The adviser for BlackRock Funds is BlackRock Advisors, Inc.

Sub-Adviser: The sub-adviser of a fund is responsible for its day-to-day management and will generally make all buy and sell decisions. Sub-advisers also provide research and credit analysis. The sub-adviser for the Asset Allocation Portfolio is BlackRock Financial Management, Inc.

Management

BlackRock Funds’ adviser is BlackRock Advisors, Inc. (BlackRock). BlackRock was organized in 1994 to perform advisory services for investment companies and is located at 100 Bellevue Parkway, Wilmington, DE 19809. BlackRock is a wholly-owned subsidiary of BlackRock, Inc., one of the largest publicly traded investment management firms in the United States with 391.3 billion of assets under management as of March 31, 2005. BlackRock, Inc. is a majority-owned subsidiary of the PNC Financial Services Group, Inc., one of the largest diversified financial services companies in the United States. BlackRock Financial Management, Inc. (BFM), an affiliate of BlackRock located at 40 E. 52nd Street, New York, NY 10022, acts as sub-adviser for the Asset Allocation Portfolio.

For their investment advisory and sub-advisory services, BlackRock and BFM, as applicable, are entitled to fees computed daily on a fund-by-fund basis and payable monthly. For the fiscal year ended September 30, 2004, the aggregate advisory fees paid by the funds to BlackRock as a percentage of average daily net assets were:

Mid-Cap Value Equity	.78	%
Asset Allocation	.47	%

With respect to the SSR Funds listed below that reorganized with BlackRock funds, the aggregate advisory fees paid by the SSR Funds to State Street Research & Management Company, as a percentage of average daily net assets, for such SSR Fund’s most recent fiscal year were:

Asset Allocation Fund	0.75	%
Global Resources Fund	0.75	%
Health Sciences Fund	0.75	%
Mid-Cap Value Fund	0.65	%

A discussion regarding the basis for the Board of Trustees of the Company approving the funds’ investment advisory contracts is available in the Company’s semi-annual report to shareholders for the period ended March 31, 2005.

The total annual advisory fees that can be paid to BlackRock (as a percentage of average daily net assets) are as follows:

Total Annual Advisory Fee for the Asset Allocation Portfolio (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.550%
$1 billion-$2 billion	.500%
$2 billion-$3 billion	.475%
more than $3 billion	.450%

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Total Annual Advisory Rate for the Mid-Cap Value Equity Portfolio (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.800%
$1 billion-$2 billion	.700%
$2 billion-$3 billion	.675%
more than $3 billion	.625%

Total Annual Advisory Fee for the Health Sciences and Global Resources Portfolios (Before Waivers)

AVERAGE DAILY NET ASSETS	INVESTMENT ADVISORY FEE
First $1 billion	.750%
$1 billion-$2 billion	.700%
$2 billion-$3 billion	.675%
more than $3 billion	.650%

Information about the portfolio manager for each of the funds is presented in the appropriate fund section.

As discussed above, BlackRock has agreed contractually to cap net expenses (excluding interest expense, taxes, brokerage commissions and extraordinary expenses, if any) of each share class of each fund at the levels shown in each fund’s expense table.

To achieve this cap, BlackRock and the Company have entered into an expense limitation agreement. The agreement sets a limit on certain of the operating expenses of each class of shares and require BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit.

If within two years following a waiver or reimbursement the operating expenses of a share class that previously received a waiver or reimbursement from BlackRock are less than the expense limit for that share class, the share class is required to repay BlackRock up to the amount of fees waived or expenses reimbursed under the agreement if: (1) the fund of which the share class is a part has more than $50 million in assets, (2) BlackRock or an affiliate serves as the fund’s investment adviser or administrator and (3) the Board of Trustees of the Company has approved in advance the payments to BlackRock at the previous quarterly meeting of the Board.

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Dividends and Distributions

BlackRock Funds makes two kinds of distributions to shareholders: net investment income and net realized capital gains.

Distributions of net investment income derived by a fund are paid within 10 days after the end of each quarter. The Company’s Board of Trustees may change the timing of such dividend payments.

Net realized capital gains (including net short-term capital gains), if any, will be distributed by a fund at least annually at a date determined by the Company’s Board of Trustees.

Your distributions will be reinvested at net asset value in new shares of the same class of the fund unless you instruct PFPC Inc. in writing to pay them in cash. There are no sales charges on these reinvestments.

If you invest in a fund shortly before it makes a capital gain distribution, some of your investment may be returned to you in the form of a taxable distribution. This is commonly known as “buying a dividend.” Distributions that are declared in December, but paid in January are taxable as if they were paid in December.

Taxation of Distributions

Distributions paid out of a fund’s “net capital gain” will be taxed to shareholders as long-term capital gain, regardless of how long a shareholder has owned shares. Distribution of net investment income and net short-term capital gains will generally be taxed to shareholders as ordinary income. However, individual shareholders who satisfy certain holding period requirements and other requirements are taxed on such dividends at long-term capital gain rates to the extent the dividends are attributable to “qualified dividend income” received by the fund. “Qualified dividend income” generally consists of dividends received from U.S. corporations (other than dividends from tax exempt organizations and certain dividends from real estate investment trusts and regulated investment companies) and certain foreign corporations.

Your annual tax statement from the Company will present in detail the tax status of your distributions for each year.

If more than half of the total asset value of a fund is invested in non-U.S. stock or securities, the fund may elect to “pass through” to its shareholders the amount of non-U.S. income taxes paid by

49

it. In such case, you would be required to include your proportionate share of such taxes in your income and may be entitled to deduct or credit such taxes when computing your taxable income.

Distributions paid by a fund with respect to certain qualifying dividends received by the fund from domestic corporations may be eligible for the corporate dividends received deduction.

If you do not provide a fund with your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding on any distributions of income, capital gains or proceeds from the sale of your shares. When withholding is required, the amount will be 28% of any distributions or proceeds paid. Backup withholding is not an additional tax. Any amounts withheld may be credited against your U.S. federal income tax liability.

Non-U.S. investors may be subject to U.S. withholding and/or estate tax, and will be subject to special U.S. tax certification requirements. Because every investor has an individual tax situation, and also because the tax laws are subject to periodic changes, you should always consult your tax professional about federal, state and local tax consequences of owning shares of the Company.

Important Notice Regarding Delivery of Shareholder Documents

The funds deliver only one copy of shareholder documents, including prospectuses, shareholder reports and proxy statements to shareholders with multiple accounts at the same address. This practice is known as “householding” and is intended to eliminate duplicate mailings and reduce expenses. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact BlackRock Funds at (800) 441-7762.

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Electronic Access to Annual Reports, Semi-Annual Reports and Prospectuses

Electronic copies of most financial reports and prospectuses are now available on the Company’s website. Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports and prospectuses by visiting BlackRock’s website if they enroll in the Company’s electronic delivery program.

To enroll:

Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:

Please contact your financial adviser. Please note that not all investment advisers, banks or brokerages may offer this service.

Shareholders Who Hold Accounts Directly With BlackRock

1)  Log on to http://www.blackrock.com/funds

2)  Click on the link for Electronic Delivery

3)  Continue to Account Access

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For more information:

This Prospectus contains important information you should know before you invest. Read it carefully and keep it for future reference. More information about the BlackRock Funds is available at no charge upon request. This information includes:

Annual/Semi-Annual Reports

These reports contain additional information about each of the funds’ investments. The annual report describes the funds’ performance, lists portfolio holdings, and discusses recent market conditions, economic trends and fund investment strategies that significantly affected the funds’ performance for the last fiscal year.

Statement of Additional Information (SAI)

A Statement of Additional Information, dated June 28, 2005, has been filed with the Securities and Exchange Commission (SEC). The SAI, which includes additional information about the BlackRock Funds, may be obtained free of charge, along with the Company’s annual and semi-annual reports, by calling (800) 441-7762. The SAI, as supplemented from time to time, is incorporated by reference into this Prospectus.

BlackRock Investment Services

Representatives are available to discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8:00 a.m. to 6:00 p.m. (Eastern time), Monday-Friday. Call: (800) 441-7762.

Purchases and Redemptions

Call your registered representative or (800) 441-7762.

World Wide Web

Access general fund information and specific fund

performance. Request mutual fund prospectuses and literature. Forward mutual fund inquiries. www.blackrock.com/funds

Written Correspondence

BlackRock Funds

c/o PFPC Inc.

PO Box 9819

Providence, RI 02940-8019

Overnight Mail

BlackRock Funds

c/o PFPC Inc.

101 Sabin Street

Pawtucket, RI 02860

Internal Wholesalers/Broker Dealer Support

Available to support investment professionals

8:30 a.m. to 6 p.m. (Eastern time), Monday-Friday.

Call: (800) 882-0052

Portfolio Characteristics and Holdings

A description of the BlackRock Funds’ policies and procedures related to disclosure of portfolio characteristics and holdings is available in the SAI.

For information about portfolio holdings and characteristics, BlackRock fund shareholders and prospective investors may call (800) 882-0052.

Securities and Exchange Commission (SEC)

You may also view and copy public information about the BlackRock Funds, including the SAI, by visiting the EDGAR database on the SEC Web site (http://www.sec.gov) or the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the public reference room can be obtained by calling the SEC directly at (202) 942-8090. Copies of this information can be obtained, for a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

INVESTMENT COMPANY ACT FILE NO. 811-05742

PRO-EQ2-SVC 06/05

BLACKROCK FUNDS^SM

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information provides supplementary information pertaining to shares representing interests in the Money Market, U.S. Treasury Money Market, Municipal Money Market, New Jersey Municipal Money Market, North Carolina Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, Virginia Municipal Money Market, Large Cap Value Equity, Large Cap Growth Equity, Mid-Cap Value Equity, Mid-Cap Growth Equity, Small Cap Value Equity, Small Cap Core Equity, Small Cap Growth Equity, Global Science & Technology Opportunities, International Opportunities, Investment Trust (formerly, Select Equity), Index Equity, Asset Allocation (formerly, Balanced), U.S. Opportunities, Dividend Achievers^TM, Exchange, Small/Mid-Cap Growth, Aurora, Legacy, Health Sciences, Global Resources, All-Cap Global Resources, Low Duration Bond, Intermediate Government Bond, Intermediate Bond, Core Bond Total Return, Core PLUS Total Return, Government Income, GNMA, Managed Income, International Bond, High Yield Bond, Intermediate PLUS Bond, Inflation Protected Bond, Tax-Free Income, Delaware Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free Income, New Jersey Tax-Free Income, Pennsylvania Tax-Free Income, Enhanced Income and UltraShort Municipal Portfolios (collectively, the “Portfolios”) of BlackRock Funds^SM (the “Fund”). The Money Market, U.S. Treasury Money Market, Municipal Money Market, New Jersey Municipal Money Market, North Carolina Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market and Virginia Municipal Money Market Portfolios are called “Money Market Portfolios,” the Municipal Money Market, New Jersey Municipal Money Market, North Carolina Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market and Virginia Municipal Money Market Portfolios are called “Municipal Money Market Portfolios,” the New Jersey Municipal Money Market, North Carolina Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market and Virginia Municipal Money Market Portfolios are called the “State-Specific Municipal Portfolios”, the Large Cap Value Equity, Large Cap Growth Equity, Mid-Cap Value Equity, Mid-Cap Growth Equity, Small Cap Value Equity, Small Cap Core Equity, Small Cap Growth Equity, Global Science & Technology Opportunities, International Opportunities, Investment Trust, Index Equity, Asset Allocation, U.S. Opportunities, Dividend Achievers^TM, Exchange, Small/Mid-Cap Growth, Aurora, Legacy, Health Sciences, Global Resources and All-Cap Global Resources Portfolios are called “Equity Portfolios” and the Low Duration Bond, Intermediate Government Bond, Intermediate Bond, Core Bond Total Return, Core PLUS Total Return, Government Income, GNMA, Managed Income, International Bond, High Yield Bond, Intermediate PLUS Bond, Inflation Protected Bond, Tax-Free Income, Delaware Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free Income, New Jersey Tax-Free Income, Pennsylvania Tax-Free Income, Enhanced Income and UltraShort Municipal Portfolios are called “Bond Portfolios.” The Equity Portfolios and the Bond Portfolios are also called “Non-Money Market Portfolios.” The Tax-Free Income, Delaware Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free Income, New Jersey Tax-Free Income and Pennsylvania Tax-Free Income Portfolios are called “Tax-Free Portfolios.” The Delaware Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free Income, New Jersey Tax-Free Income and Pennsylvania Tax-Free Income Portfolios are called “State-Specific Tax-Free Portfolios.”

This Statement of Additional Information is not a prospectus, and should be read only in conjunction with the Prospectuses of the Fund dated January 31, 2005, each as amended or supplemented from time to time (the “Prospectuses”). Certain information contained in the Fund’s and The U.S. Large Company Series of The DFA Investment Trust Company’s annual and semi-annual reports to shareholders is incorporated by reference herein. Prospectuses and current shareholder reports of the Fund may be obtained at no charge by calling toll-free (800) 441-7762.

This Statement of Additional Information is dated June 28, 2005.

TABLE OF CONTENTS

	Page
INVESTMENT POLICIES	1
SPECIAL CONSIDERATIONS FOR STATE-SPECIFIC PORTFOLIOS	35
ADDITIONAL INVESTMENT LIMITATIONS	76
TRUSTEES AND OFFICERS	82
THE FUND	82
THE TRUST	90
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND	98
INVESTMENT ADVISORY, ADMINISTRATION, DISTRIBUTION AND SERVICING ARRANGEMENTS	98
EXPENSES	125
PORTFOLIO TRANSACTIONS	125
PURCHASE AND REDEMPTION INFORMATION	134
VALUATION OF PORTFOLIO SECURITIES	152
TAXES	155
ADDITIONAL INFORMATION CONCERNING SHARES	164
MISCELLANEOUS	165
FINANCIAL STATEMENTS	179
APPENDIX A	A-1
APPENDIX B	B-1
APPENDIX C	C-1
APPENDIX D	D-1

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INVESTMENT POLICIES

The following supplements information contained in the Prospectuses concerning the Portfolios’ investment policies. To the extent that an investment strategy is discussed in this Statement of Additional Information but not in the Prospectuses, such strategy is not a principal strategy of the Portfolios. Except as indicated, the information below relates only to those Portfolios that are authorized to invest in the instruments or securities described below.

The Index Equity Portfolio invests all of its investable assets in The U.S. Large Company Series (the “Index Master Portfolio”) of The DFA Investment Trust Company (the “Trust”). Accordingly, the following discussion relates to: (i) the investment policies of all the Portfolios including the Index Equity Portfolio; and (ii) where indicated, the investment policies of the Index Master Portfolio.

The Portfolios (other than the Tax-Free Portfolios, the UltraShort Municipal Portfolio and the Municipal Money Market Portfolios) that are subject to Rule 35d-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), will not change their investment policies required by that Rule without giving shareholders 60 days prior written notice.

Additional Information on Investment Strategies

Equity Portfolios. Equity securities include common stock and preferred stock (including convertible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts; general and limited partnerships and limited liability companies; and depositary receipts.

The Global Science & Technology Opportunities Portfolio may invest more than 25% of its total assets in any one industry or industries included in the science and/or technology sectors (as defined in its Prospectuses). This would expose the Global Science & Technology Opportunities Portfolio to the risks of that industry or industries to a greater extent than a mutual fund that did not so concentrate its investments.

From time to time each of the Equity Portfolios may invest in shares of companies through initial public offerings (“IPOs”). IPOs have the potential to produce, and have in fact produced, substantial gains for certain Portfolios. There is no assurance that any Portfolio will have continued access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future performance. The investment performance of a Portfolio during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when it is able to do so. In addition, as a Portfolio increases in size, the impact of IPOs on its performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public offering.

The Equity Portfolios may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell a Portfolio’s investment than if the Portfolio held the securities of larger, more established companies.

Index Equity and Index Master Portfolios. During normal market conditions, the Index Master Portfolio (in which all of the assets of the Index Equity Portfolio are invested) invests at least 95% of the value of its total assets in securities included in the Standard & Poor’s 500^® Composite Stock Price Index (the “S&P 500^® Index”)¹.

¹ “Standard & Poor’s”, “S&P”, “S&P500^®”, “Standard & Poor’s 500^®” and “500” are trademarks of The McGraw Hill Companies, Inc. and have been licensed for use by the Fund and The DFA Investment Trust Company.

The Index Master Portfolio intends to invest in all of the stocks that comprise the S&P 500^® Index in approximately the same proportions as they are represented in the Index. The Index Master Portfolio operates as an index portfolio and, therefore, is not actively managed (through the use of economic, financial or market analysis). Adverse performance will ordinarily not result in the elimination of a stock from the Index Master Portfolio. The Index Master Portfolio will remain fully invested in common stocks even when stock prices are generally falling. Ordinarily, portfolio securities will not be sold except to reflect additions or deletions of the stocks that comprise the S&P 500^® Index, including mergers, reorganizations and similar transactions and, to the extent necessary, to provide cash to pay redemptions of the Index Master Portfolio’s shares. Given the impact on prices of securities affected by the reconstitution of the S&P 500^® Index around the time of a reconstitution date, the Index Master Portfolio may purchase or sell securities that may be impacted by the reconstitution before or after the reconstitution date of the S&P 500^® Index. The investment performance of the Index Master Portfolio and the Index Equity Portfolio is each expected to approximate the investment performance of the S&P 500^® Index, which tends to be cyclical in nature, reflecting periods when stock prices generally rise or fall. As a non-fundamental policy, under normal circumstances, the Index Master Portfolio will invest at least 80% of its net assets in securities of large U.S. companies. If the Index Master Portfolio changes this investment policy, the Index Master Portfolio will notify its shareholders at least 60 days in advance of the change and will change its name. The Index Master Portfolio also may use derivatives, such as futures contracts and options on futures contracts, to gain market exposure on the Index Master Portfolio’s uninvested cash pending investment in securities or to maintain liquidity to pay redemptions. The Index Master Portfolio may enter into futures contracts and options on futures contracts for U.S. equity securities and indices.

Neither the Index Equity Portfolio nor the Index Master Portfolio are sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the owners of the Index Equity Portfolio or the Index Master Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Index Equity Portfolio or the Index Master Portfolio particularly or the ability of the S&P 500^® Index to track general stock market performance. S&P’s only relationship to the Index Equity Portfolio and the Index Master Portfolio is the licensing of certain trademarks and trade names of S&P and of the S&P 500^® Index which is determined, composed and calculated by S&P without regard to the Index Equity Portfolio or the Index Master Portfolio. S&P has no obligation to take the needs of the Index Equity Portfolio or the Index Master Portfolio or their respective owners into consideration in determining, composing or calculating the S&P 500^® Index. S&P is not responsible for and has not participated in the determination of the prices and amount of the Index Equity Portfolio or the Index Master Portfolio or the timing of the issuance or sale of the Index Equity Portfolio or the Index Master Portfolio or in the determination or calculation of the equation by which the Index Equity Portfolio or the Index Master Portfolio is to be converted into cash. S&P has no obligation or liability in connection with the administration, marketing or trading of the Index Equity Portfolio or Index Master Portfolio.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500^® INDEX OR ANY DATA INCLUDED THEREIN, AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEES, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500^® INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500^® INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

Science and Technology Companies. Companies in the rapidly changing fields of technology and science face special risks. For example, their products or services may not prove commercially successful or may become obsolete quickly. The value of the Global Science & Technology Opportunities Portfolio’s shares may be susceptible to factors affecting the technology and science areas and to greater risk and market fluctuation than an investment in a fund that invests in a broader range of portfolio securities not concentrated in any particular sector. As such, the Portfolio is not an appropriate investment for individuals who are not long-term investors and who, as their primary objective, require safety of principal or stable income from their investments. The technology and science areas may be subject to greater governmental regulation than many other areas and changes in governmental

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policies and the need for regulatory approvals may have a material adverse effect on these areas. Additionally, companies in these areas may be subject to risks of developing technologies, competitive pressures and other factors and are dependent upon consumer and business acceptance as new technologies evolve.

Certain of the companies in which the Portfolio invests may allocate greater than usual amounts to research and product development. The securities of such companies may experience above-average price movements associated with the perceived prospects of success of the research and development programs. In addition, companies in which the Portfolio invests could be adversely affected by lack of commercial acceptance of a new product or products or by technological change and obsolescence.

The Global Science & Technology Opportunities Portfolio’s concentration in the securities of science and technology related companies exposes it to the price movements of companies in those sectors more than a mutual fund that invests in many sectors. Because the Portfolio invests primarily in the science and technology sectors, there is the risk that the Portfolio will perform poorly during a downturn in one or both of those sectors. Funds that concentrate investments in a small number of sectors may be subject to rapidly changing asset inflows and outflows. The volatile nature of the technology and science areas could cause price appreciation in a particular security or securities that results in that investment increasing its concentration in the Portfolio, in some cases, well above the level at which it was originally purchased.

Asset Allocation Portfolio. Fixed income securities purchased by the Asset Allocation Portfolio may include domestic, dollar-denominated non-U.S. and non-dollar denominated non-U.S. debt securities, including bonds, debentures, notes, equipment lease and trust certificates, mortgage-related and asset-backed securities, guaranteed investment contracts (“GICs”), obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and state and local municipal obligations. These securities may be rated “Ba” or lower at the time of purchase by Moody’s Investors Service, Inc. (“Moody’s”), “BB” or lower by Standard & Poor’s Ratings Group (“S&P”) or another nationally recognized statistical rating organization. If unrated, the securities will be determined at the time of purchase to be of comparable quality by the Portfolio’s sub-adviser.

The Asset Allocation Portfolio may also purchase zero-coupon bonds (i.e., discount debt obligations that do not make periodic interest payments) and state and local government obligations. Zero-coupon bonds are subject to greater market fluctuations from changing interest rates than debt obligations of comparable maturities which make current distributions of interest. Dividends paid by the Asset Allocation Portfolio that are derived from interest on municipal obligations will be taxable to shareholders.

Dividend Achievers^™ Portfolio. The Portfolio seeks to achieve its investment goal by investing at least 80% of its assets in common stocks included in the universe of common stocks which Mergent^®, a recognized provider of financial information, has identified as Dividend Achievers^™. Since 1979, Mergent^® has tracked companies that have consistent records of dividend increases. To qualify for the Dividend Achievers^™ universe, an issuer must have raised its annual regular cash dividend on a pre-tax basis for at least each the last ten consecutive years. These issuers are also subject to additional screening criteria applied by Mergent^® such as liquidity, asset size and number of shareholders. For more information, see Appendix C.

The Portfolio will be constructed from a broad universe of stocks that BlackRock Advisors, Inc. (“BlackRock”) believes to be value stocks and all stocks in the Dividend Achiever^™ universe. BlackRock screens these issuers utilizing BlackRock’s proprietary Quantitative Equity Model, which uses earnings momentum and valuation factors to rank stocks within a sector and industry based upon their expected return, to continuously evaluate Portfolio holdings. The earnings momentum factors attempt to capture the breadth and magnitude of changes to forecasted earnings expectations. The valuation factors attempt to measure each stock’s relative attractiveness to its sector peers based on fundamental measures of valuation.

BlackRock will consider the relative yield of a stock at the time of purchase. The Portfolio will seek to generate a gross yield in excess of the Russell 1000 Value Index. Achieving this objective will result in a portfolio that is overweight in certain market sectors relative to the Russell 1000 Value Index.

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Overall, the Portfolio will be constructed with consideration of the characteristics of the Russell 1000 Value Index, such as style, sector, industry, capitalization and volatility. The Portfolio may invest up to 20% of its assets in common stocks of issuers that are not included in the Dividend Achievers^™ universe, and in fixed income securities when, in the opinion of the Portfolio management team, it is advantageous for the Portfolio to do so.

Seeking to achieve optimal risk/return tradeoff, the management team rebalances the Portfolio regularly. The team assesses each stock’s changing characteristics relative to its contribution to risk and yield. An issuer may be removed from the Portfolio if the management team believes that (1) the issuer has experienced or is expected to experience a fundamental change (e.g. bankruptcy, insolvency, or change in management) that renders it unsuitable for the Portfolio, or (2) an issuer’s rank, as determined by the investment model, has declined and the issuer is no longer considered to be an attractive investment relative to its peers, or (3) such removal presents the opportunity to manage the distribution of income or tax liability of the Portfolio. Changes in market price in a security may be a factor in removing a name from the Portfolio, but will not be the sole deciding factor.

While the Portfolio’s management team evaluates the Portfolio’s investments on a continuous basis, there will be at least two events that may initiate portfolio repositioning. Mergent^® annually (typically on or about January 31^st) reconstitutes the Dividend Achievers^™ universe and may add or delete certain issuers. Similarly, Russell annually (typically on or about June 30^th) reconstitutes the Russell 1000 Value Index and may add or delete issuers and change the sector weightings. Based upon these adjustments, the management team may choose to make changes to the portfolio composition. However, if the management team determines that it is inefficient or disadvantageous for the Portfolio to sell stock for tax or other reasons, the Portfolio will retain the stock subject to the Portfolio’s non-fundamental policy of investing 80% of its assets in stocks included in the Dividend Achievers^™ universe.

Equity securities include common stock and preferred stock (including convertible preferred stock); bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts; general and limited partnerships and limited liability companies; and depositary receipts. The Portfolio intends to invest primarily in common stocks. Common stock generally represents an equity ownership interest in an issuer. Although common stocks have historically generated higher average total returns than fixed-income securities over the long term, common stocks also have experienced significantly more volatility in those returns and have significantly under performed relative to fixed-income securities during certain periods. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Portfolio. Also, prices of common stocks are sensitive to general movements in the stock market and a drop in the stock market may depress the price of common stocks to which the Portfolio has exposure. Common stock prices fluctuate for several reasons including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or when political or economic events affecting the issuers occur. In addition, common stock prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase.

An investment in the Portfolio’s shares is subject to investment risk, including the possible loss of the entire amount that you invest. Your investment in shares represents an indirect investment in the securities owned by the Portfolio, substantially all of which are traded on a national securities exchange or in the over-the-counter markets. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. Although the Portfolio can sell stocks of an issuer included in the Dividend Achievers^™ universe upon the occurrence of certain events or for tax planning as described herein, the Portfolio generally will not sell stocks of issuers solely due to changes in market price. Your shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Portfolio dividends and distributions.

The Portfolio may, from time to time, invest a substantial portion of its assets in the securities of issuers in any single industry or sector of the economy if the companies selected through application of the Portfolio’s investment strategy result in such a focus. The Portfolio cannot predict the industries or sectors in which its investment strategy may cause it to focus. If the Portfolio invests heavily in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy. A downturn in an industry or sector in which the Portfolio is invested would have a larger impact on the Portfolio than on an investment company that does not focus on such industry or sector.

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The Portfolio may invest a significant portion of its assets in the financial services sector, which investments include the following risks:

(i) regulatory actions - financial services companies may suffer a setback if regulators change the rules under which they operate;

(ii) changes in interest rates - unstable interest rates can have a disproportionate effect on the financial services sector;

(iii) concentration of loans - financial services companies whose securities the Portfolio may purchase may themselves have concentrated portfolios, such as a high level of loans to real estate developers, which makes them vulnerable to economic conditions that affect that sector; and

(iv) competition - financial services companies have been affected by increased competition, which could adversely affect the profitability or viability of such companies.

The Portfolio has been granted a revocable license by Mergent^® to use the Dividend Achievers^™ universe of common stocks. If Mergent^® revokes the Portfolio’s license to use the Dividend Achievers^™ universe, the board of trustees of the Portfolio may need to adopt a new investment goal and/or new investment strategies for the Portfolio. There is no assurance that the Portfolio would pursue or achieve its investment goal during the period in which it implements these replacement strategies. In addition, the Portfolio is not an index fund, so the performance of the Portfolio will differ from the composite performance of the Dividend Achievers^™ universe of stocks as a whole for various reasons, including the fact that: (i) the Portfolio will invest in a limited number of stocks included in the Dividend Achievers^™ universe of common stocks; (ii) the weightings of the common stocks in the Portfolio will be different than the weightings of the common stocks in the Dividend Achievers^™ universe; (iii) BlackRock may invest up to 20% of the Portfolio’s assets in common stocks that are not included in the Dividend Achievers^™ universe; (iv) there may be delays between the time changes to the composition of the Dividend Achievers^™ universe are announced by Mergent^® and the time the Portfolio is able to make such changes in its portfolio; and (v) unlike the Dividend Achievers^™ universe of stocks, shares of the Portfolio may have a sales charge and will have ongoing operating expenses and transaction costs. At times, the segment of the equity markets represented by the Dividend Achievers^™ universe (i.e., high dividend paying stocks) may be out of favor and underperform other segments (e.g., growth stocks).

Dividends on common stocks are not fixed but are declared at the discretion of an issuer’s board of directors. There is no guarantee that the issuers of the common stocks in which the Portfolio invests will declare dividends in the future or that if declared they will remain at current levels or increase over time. As described further in “Taxes,” “qualified dividend income” received by the Portfolio will generally be eligible for the reduced tax rate applicable to such dividends under the recently enacted the “Jobs and Growth Tax Relief Reconciliation Act of 2003” (the “Tax Act”). Unless subsequent legislation is enacted, the reduction to tax rates as set forth in the Tax Act will expire for taxable years beginning on or after January 1, 2009. Dividends received by the Portfolio from Real Estate Investment Trust (“REIT”) shares and certain foreign securities, if any, generally will not constitute “qualified dividend income” eligible for the reduced tax rate applicable to “qualified dividend income” and therefore it is possible that, depending upon the composition of the stocks in the Portfolio, a portion of the Portfolio ‘s distributions will not constitute qualifying dividends eligible for the reduced tax rate. A portion of the Portfolio’s dividends may be a return of capital which may, under certain circumstances, have certain adverse consequences to the Portfolio and its shareholders.

Health Sciences Portfolio. A variety of important factors are influencing the health sciences and related industries in significant ways. The aging of the overall population, and a focus on good health and prevention of illness, as well as increased attention to the diagnosis of diseases and deficiencies, have generated growth in the health science field.

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Technological advances in the development of drugs, medical devices and procedures, and genetic engineering, have similarly fostered growth in the health care area. The focus of consumers and regulators on health care costs, managed health care programs, health maintenance organizations, and other service delivery arrangements have driven the industries further.

At the same time, these forces have heightened the difficulty of investing in health sciences companies. Shifts in consumer attitudes or regulatory policy, or new medical or technological developments, can have a substantial positive or negative effect on a company’s business. Changes in the financial infrastructure for health sciences may also affect the companies. For example, changes in Medicare/Medicaid and private insurance coverage, as well as the consolidation or break-up of individual companies themselves, influence the overall business prospects of the health sciences sector.

Global Resources and All-Cap Global Resources Portfolios. Each Portfolio’s investments will be concentrated in energy and natural resources companies. Because each Portfolio is concentrated in these companies, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy. A downturn in the energy and natural resources industry would have a larger impact on the Portfolio than on an investment company that does not concentrate in such companies. Energy companies can be significantly affected by the supply of and demand for specific products and services, the supply and demand for oil and gas, the price of oil and gas, exploration and production spending, government regulation, world events and economic conditions. Natural resource companies can be significantly affecting by events relating to international political developments, energy conservation, the success of exploration projects, commodity prices, and tax and government regulations. At times, the performance of securities of energy and natural resources companies will lag the performance of other industries or the broader market as a whole.

Other risks inherent in investing in energy and natural resources companies include:

Supply and Demand Risk. A decrease in the production of natural gas, natural gas liquids (“NGLs”), crude oil, coal or other energy commodities or a decrease in the volume of such commodities available for transportation, mining, processing, storage or distribution may adversely impact the financial performance of energy and natural resources companies. Production declines and volume decreases could be caused by various factors, including catastrophic events affecting production, depletion of resources, labor difficulties, environmental proceedings, increased regulations, equipment failures and unexpected maintenance problems, import supply disruption, increased competition from alternative energy sources or commodity prices. Alternatively, a sustained decline in demand for such commodities could also adversely affect the financial performance of energy and natural resources companies. Factors which could lead to a decline in demand include economic recession or other adverse economic conditions, higher fuel taxes or governmental regulations, increases in fuel economy, consumer shifts to the use of alternative fuel sources, changes in commodity prices, or weather.

Depletion and Exploration Risk. Many energy and natural resources companies are either engaged in the production of natural gas, NGLs, crude oil, refined petroleum products or coal, or are engaged in transporting, storing, distributing and processing these items on behalf of shippers. To maintain or grow their revenues, these companies or their customers need to maintain or expand their reserves through exploration of new sources of supply, through the development of existing sources, through acquisitions, or through long-term contracts to acquire reserves. The financial performance of energy and natural resources companies may be adversely affected if they, or the companies to whom they provide the service, are unable to cost-effectively acquire additional reserves sufficient to replace the natural decline.

Regulatory Risk. Energy and natural resources companies are subject to significant federal, state and local government regulation in virtually every aspect of their operations, including how facilities are constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the products and services they provide. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. Stricter laws, regulations or enforcement policies could be enacted in the future which would likely increase compliance costs and may adversely affect the financial performance of energy and natural resources companies.

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Commodity Pricing Risk. The operations and financial performance of energy and natural resources companies may be directly affected by energy commodity prices, especially those energy and natural resources companies which own the underlying energy commodity. Commodity prices fluctuate for several reasons, including changes in market and economic conditions, the impact of weather on demand, levels of domestic production and imported commodities, energy conservation, domestic and foreign governmental regulation and taxation and the availability of local, intrastate and interstate transportation systems. Volatility of commodity prices, which may lead to a reduction in production or supply, may also negatively impact the performance of energy and natural resources companies which are solely involved in the transportation, processing, storing, distribution or marketing of commodities. Volatility of commodity prices may also make it more difficult for energy and natural resources companies to raise capital to the extent the market perceives that their performance may be directly or indirectly tied to commodity prices.

Bond Portfolios. Each Bond Portfolio will normally invest at least 80% of the value of its total assets in debt securities. The Tax-Free Portfolios will invest, during normal market conditions, at least 80% of their total assets in obligations issued by or on behalf of states, territories and possessions of the United States, the District of Columbia and their political sub-divisions, agencies, instrumentalities and authorities and related tax-exempt derivative securities the interest on which is exempt from regular Federal income tax (“Municipal Obligations”) and is not an item of tax preference for purposes of the Federal alternative minimum tax. The UltraShort Municipal Portfolio will invest, during normal market conditions, at least 80% of its total assets in Municipal Obligations, except that the interest on the Municipal Obligations in which the UltraShort Municipal Portfolio will invest may be an item of tax preference for purposes of the Federal alternative minimum tax. Each State-Specific Tax-Free Portfolio also intends to invest at least 80% of its total assets in Municipal Obligations the interest on which is exempt from the applicable state income tax (“State-Specific Obligations”). In addition, the New Jersey Tax-Free Income Portfolio intends to invest at least 80% of its total assets in New Jersey State-Specific Obligations and in obligations issued by the U.S. Government, its agencies and instrumentalities, which are statutorily free from New Jersey or local taxation under the laws of the United States (“U.S. Government Obligations”).

Inflation Protected Bond Portfolio. The Inflation Protected Bond Portfolio will, and other Bond and Asset Allocation Portfolios may, invest in inflation-indexed bonds, which are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the CPI accruals as part of a semiannual coupon.

Inflation-indexed securities issued by the U.S. Treasury have maturities of five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months were 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole years’ inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).

If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Inflation Protected Bond Portfolio may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.

The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation.

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Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds.

While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.

The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers (“CPI-U”), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.

Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.

Municipal Investments. The two principal classifications of Municipal Obligations are “general obligation” securities and “revenue” securities. General obligation securities are secured by the issuer’s pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as the user of the facility being financed. Revenue securities include private activity bonds which are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved. Municipal Obligations may also include “moral obligation” bonds, which are normally issued by special purpose public authorities. If the issuer of moral obligation bonds is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.

Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal bonds generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.

Also included within the general category of Municipal Obligations are participation certificates in a lease, an installment purchase contract, or a conditional sales contract (“lease obligations”) entered into by a state or political subdivision to finance the acquisition or construction of equipment, land, or facilities. Although lease obligations are not general obligations of the issuer for which the state or other governmental body’s unlimited taxing power is pledged, certain lease obligations are backed by a covenant to appropriate money to make the lease obligation payments. However, under certain lease obligations, the state or governmental body has no obligation to make these payments in future years unless money is appropriated on a yearly basis. Although “non appropriation” lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult.

The amount of information regarding the financial condition of issuers of Municipal Obligations may be less extensive than the information for public corporations, and the secondary market for Municipal Obligations may be less liquid than that for taxable obligations. Accordingly, the ability of a Portfolio to buy and sell Municipal Obligations may, at any particular time and with respect to any particular securities, be limited. In addition, Municipal Obligations purchased by the Portfolios include obligations backed by letters of credit and other forms of

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credit enhancement issued by domestic and non-U.S. banks, as well as other financial institutions. Changes in the credit quality of these institutions could cause loss to a Tax-Free Portfolio and the UltraShort Municipal Portfolio and affect their share prices.

Opinions relating to the validity of Municipal Obligations and to the exemption of interest thereon from Federal and state income tax are rendered by counsel to the respective issuers and sponsors of the obligations at the time of issuance. The Fund and its service providers will rely on such opinions and will not review independently the underlying proceedings relating to the issuance of Municipal Obligations, the creation of any tax-exempt derivative securities, or the bases for such opinions.

Money Market Portfolios and Enhanced Income Portfolio.

The Money Market Portfolio and the Enhanced Income Portfolio may invest in a broad range of short-term, high quality, U.S. dollar-denominated instruments, such as government, bank, commercial and other obligations that are available in the money markets. In particular, the Portfolios may invest in:

(a) U.S. dollar-denominated obligations issued or supported by the credit of U.S. or non-U.S. banks or savings institutions with total assets in excess of $1 billion (including obligations of non-U.S. branches of such banks);

(b) high quality commercial paper and other obligations issued or guaranteed by U.S. and non-U.S. corporations and other issuers rated (at the time of purchase) A-2 or higher by S&P, Prime-2 or higher by Moody’s or F-2 or higher by Fitch Investors Service, Inc. (“Fitch”), as well as high quality corporate bonds rated (at the time of purchase) A or higher by those rating agencies;

(c) unrated notes, paper and other instruments that are of comparable quality to the instruments described in (b) above as determined by the Portfolio’s sub-adviser;

(d) asset-backed securities (including interests in pools of assets such as mortgages, installment purchase obligations and credit card receivables);

(e) securities issued or guaranteed as to principal and interest by the U.S. Government or by its agencies or authorities and related custodial receipts;

(f) dollar-denominated securities issued or guaranteed by non-U.S. governments or their political subdivisions, agencies or authorities;

(g) funding agreements issued by highly-rated U.S. insurance companies;

(h) securities issued or guaranteed by state or local governmental bodies;

(i) repurchase agreements relating to the above instruments; and

(j) municipal bonds and notes whose principal and interest payments are guaranteed by the U.S. Government or one of its agencies or authorities or which otherwise depend on the credit of the United States.

The U.S. Treasury Money Market Portfolio pursues its objective by investing exclusively in short-term bills, notes and other obligations issued or guaranteed by the U.S. Treasury and repurchase agreements relating to such obligations.

The Municipal Money Market Portfolio pursues its objective by investing primarily in short-term Municipal Obligations.

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The Municipal Money Market Portfolios seek to achieve their investment objectives by primarily investing in:

(a) fixed and variable rate notes and similar debt instruments rated MIG-2, VMIG-2 or Prime-2 or higher by Moody’s, SP-2 or A-2 or higher by S&P, or F-2 or higher by Fitch;

(b) tax-exempt commercial paper and similar debt instruments rated Prime-2 or higher by Moody’s, A-2 or higher by S&P, or F-2 or higher by Fitch;

(c) municipal bonds rated A or higher by Moody’s, S&P or Fitch;

(d) unrated notes, paper or other instruments that are of comparable quality to the instruments described above, as determined by the Portfolios’ sub-adviser under guidelines established by the Fund’s Board of Trustees; and

(e) municipal bonds and notes which are guaranteed as to principal and interest by the U.S. Government or an agency or instrumentality thereof or which otherwise depend directly or indirectly on the credit of the United States.

All securities acquired by the Money Market Portfolios will be determined at the time of purchase by the Portfolios’ sub-adviser, under guidelines established by the Fund’s Board of Trustees, to present minimal credit risks and will be “Eligible Securities” as defined by the SEC. Eligible Securities are (a) securities that either (i) have short-term debt ratings at the time of purchase in the two highest rating categories by at least two unaffiliated nationally recognized statistical rating organizations (“NRSROs”) (or one NRSRO if the security is rated by only one NRSRO), or (ii) are comparable in priority and security with an instrument issued by an issuer which has such ratings, and (b) securities that are unrated (including securities of issuers that have long-term but not short-term ratings) but are of comparable quality as determined in accordance with guidelines approved by the Board of Trustees.

Reverse Repurchase Agreements and Other Borrowings. Each Equity and Bond Portfolio (including the Index Master Portfolio) is authorized to borrow money. If the securities held by a Portfolio should decline in value while borrowings are outstanding, the net asset value of the Portfolio’s outstanding shares will decline in value by proportionately more than the decline in value suffered by the Portfolio’s securities. Borrowings may be made by each Portfolio through reverse repurchase agreements under which the Portfolio sells portfolio securities to financial institutions such as banks and broker-dealers and agrees to repurchase them at a particular date and price. Such Agreements are considered to be borrowings under the 1940 Act. Certain Portfolios may use the proceeds of reverse repurchase agreements to purchase additional securities that meet the Portfolios’ investment guidelines. The Index Master Portfolio does not intend to invest in reverse repurchase agreements. The Bond Portfolios (except the Tax-Free Portfolios) and the Asset Allocation Portfolio may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. This use of reverse repurchase agreements may be regarded as leveraging and, therefore, speculative. Reverse repurchase agreements involve the risks that the interest income earned in the investment of the proceeds will be less than the interest expense, that the market value of the securities sold by a Portfolio may decline below the price of the securities the Portfolio is obligated to repurchase and that the securities may not be returned to the Portfolio. During the time a reverse repurchase agreement is outstanding, the adviser or sub-adviser will designate liquid assets on its books and records in an amount equal to the amount of the Portfolio’s commitments to the extent required by SEC guidelines. A Portfolio’s reverse repurchase agreements, together with any other borrowings, will not exceed, in the aggregate, 33 1/3% of the value of its total assets (33% in the case of the Index Master Portfolio). In addition, each Bond Portfolio (except the Tax-Free Portfolios) and the Asset Allocation Portfolio may borrow up to an additional 5% of its total assets for temporary purposes. Whenever borrowings exceed 5% of a Portfolio’s total assets, the Equity Portfolios (other than the Index Master Portfolio and the Asset Allocation Portfolio) will not make any investments.

The Money Market and U.S. Treasury Money Market Portfolios may enter into reverse repurchase agreements for temporary purposes (such as to obtain cash to meet redemption requests when the liquidation of portfolio securities is deemed disadvantageous or inconvenient).

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To take advantage of attractive opportunities in the mortgage market and to enhance current income, the Asset Allocation Portfolio and each Bond Portfolio (except the Tax-Free Portfolios) may enter into dollar roll transactions. A dollar roll transaction involves a sale by the Portfolio of a mortgage-backed or other security concurrently with an agreement by the Portfolio to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and a similar maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold. During the period between the sale and repurchase, a Portfolio will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in additional instruments for the Portfolio, and the income from these investments will generate income for the Portfolio. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of a Portfolio compared with what the performance would have been without the use of dollar rolls. At the time a Portfolio enters into a dollar roll transaction, the adviser or sub-adviser will designate assets on its books and records in an amount equal to the amount of the Portfolio’s commitments and will subsequently monitor the account to ensure that its value is maintained. A Portfolio’s dollar rolls, together with its reverse repurchase agreements and other borrowings, will not exceed, in the aggregate, 33 ¹/3% of the value of its total assets.

Dollar roll transactions involve the risk that the market value of the securities a Portfolio is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom a Portfolio sells securities becomes insolvent, the Portfolio’s right to purchase or repurchase securities may be restricted. Successful use of mortgage dollar rolls may depend upon the sub-adviser’s ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.

Variable and Floating Rate Instruments. The Asset Allocation and Bond Portfolios may purchase rated and unrated variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The Portfolios may invest up to 10% of their total assets in leveraged inverse floating rate debt instruments (“inverse floaters”), including tender option bonds. The interest rate of an inverse floater resets in the opposite direction from the market rate of interest on a security or index to which it is related. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values.

Each Money Market Portfolio may purchase variable and floating rate instruments. Variable and floating rate instruments are subject to the credit quality standards described in the Prospectuses. The Money Market Portfolios invest in variable or floating rate notes only when the adviser or sub-adviser deems the investment to involve minimal credit risk. In some cases, the Money Market Portfolios may require that the obligation to pay the principal of the instrument be backed by a letter of credit or guarantee. Such instruments may carry stated maturities in excess of 13 months provided that the maturity-shortening provisions stated in Rule 2a-7 are satisfied. Although a particular variable or floating rate demand instrument may not be actively traded in a secondary market, in some cases, a Money Market Portfolio may be entitled to principal on demand and may be able to resell such notes in the dealer market.

Variable and floating rate demand instruments held by a Money Market Portfolio may have maturities of more than 13 months provided: (i) the Portfolio is entitled to the payment of principal and interest at any time, or during specified intervals not exceeding 13 months, upon giving the prescribed notice (which may not exceed 30 days), and (ii) the rate of interest on such instruments is adjusted at periodic intervals which may extend up to 13 months. Variable and floating rate notes that do not provide for payment within seven days may be deemed illiquid and subject to a 10% limitation on illiquid investments.

In determining a Portfolio’s average weighted portfolio maturity and whether a long-term variable rate demand instrument has a remaining maturity of 13 months or less, the instrument will be deemed by a Portfolio to have a maturity equal to the longer of the period remaining until its next interest rate adjustment or the period remaining until the principal amount can be recovered through demand. In determining a Portfolio’s average weighted portfolio maturity and whether a long-term floating rate demand instrument has a remaining maturity of 13 months or less, the instrument will be deemed by a Portfolio to have a maturity equal to the period remaining until the principal amount can be recovered through demand. Variable and floating notes are not typically rated by credit rating agencies, but their issuers must satisfy the Portfolio’s quality and maturity requirements.

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With respect to purchasable variable and floating rate instruments, the adviser or sub-adviser will consider the earning power, cash flows and liquidity ratios of the issuers and guarantors of such instruments and, if the instruments are subject to a demand feature, will monitor their financial status to meet payment on demand. Such instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. The absence of an active secondary market with respect to particular variable and floating rate instruments could make it difficult for a Portfolio to dispose of a variable or floating rate note if the issuer defaulted on its payment obligation or during periods that the Portfolio is not entitled to exercise its demand rights, and the Portfolio could, for these or other reasons, suffer a loss with respect to such instruments.

Bank Loans. Bank loans are generally non-investment grade floating rate instruments. Usually, they are freely callable at the issuer’s option. Each Bond Portfolio and the Asset Allocation Portfolio may invest in fixed and floating rate loans (“Loans”) arranged through private negotiations between a corporate borrower or a non-U.S. sovereign entity and one or more financial institutions (“Lenders”). A Portfolio may invest in such Loans in the form of participations in Loans (“Participations”) and assignments of all or a portion of Loans from third parties (“Assignments”). A Portfolio considers these investments to be investments in debt securities for purposes of its investment policies. Participations typically will result in the Portfolio having a contractual relationship only with the Lender, not with the borrower. The Portfolio will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, the Portfolio generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loans, nor any rights of set-off against the borrower, and the Portfolio may not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Portfolio will assume the credit risk of both the borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling the Participation, the Portfolio may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. The Portfolio will acquire Participations only if the Lender interpositioned between the Portfolio and the borrower is determined by the Portfolio’s sub-adviser to be creditworthy. When the Portfolio purchases Assignments from Lenders, the Portfolio will acquire direct rights against the borrower on the Loan, and will not have exposure to a counterparty’s credit risk. The Portfolios may enter into Participations and Assignments on a forward commitment or “when-issued” basis, whereby a Portfolio would agree to purchase a Participation or Assignment at set terms in the future. For more information on forward commitments and when-issued securities, see “When-Issued Purchases and Forward Commitments” below.

A Portfolio may have difficulty disposing of Assignments and Participations. In certain cases, the market for such instruments is not highly liquid, and therefore the Portfolio anticipates that in such cases such instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary market may have an adverse impact on the value of such instruments and on the Portfolio’s ability to dispose of particular Assignments or Participations in response to a specific economic event, such as deterioration in the creditworthiness of the borrower. Assignments and Participations will not be considered illiquid so long as it is determined by the Portfolios’ adviser or sub-adviser that an adequate trading market exists for these securities. To the extent that liquid Assignments and Participations that a Portfolio holds become illiquid, due to the lack of sufficient buyers or market or other conditions, the percentage of the Portfolio’s assets invested in illiquid assets would increase.

Preferred Stock. In addition to the Equity Portfolios, the Bond Portfolios each may invest in preferred stocks. Preferred stock has a preference over common stock in liquidation (and generally dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics. Unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.

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Convertible Securities. In addition to the Equity Portfolios, the Bond Portfolios each may invest in convertible securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible income securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible securities. The value of a convertible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value. Convertible securities rank senior to common stock in a corporation’s capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument. The High Yield Bond Portfolio will treat investments in convertible debt securities as debt securities for purposes of its investment policies.

Pay-in-kind Bonds. The Bond and Equity Portfolios may invest in Pay-in-kind, or PIK, bonds. PIK bonds are bonds which pay interest through the issuance of additional debt or equity securities. Similar to zero coupon obligations, pay-in-kind bonds also carry additional risk as holders of these types of securities realize no cash until the cash payment date unless a portion of such securities is sold and, if the issuer defaults, a Portfolio may obtain no return at all on its investment. The market price of pay-in-kind bonds is affected by interest rate changes to a greater extent, and therefore tends to be more volatile, than that of securities which pay interest in cash. Additionally, current federal tax law requires the holder of certain pay-in-kind bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income and excise taxes, each Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.

Money Market Obligations of Domestic Banks, Non-U.S. Banks and Non-U.S. Branches of U.S. Banks. Each Portfolio may purchase bank obligations, such as certificates of deposit, notes, bankers’ acceptances and time deposits, including instruments issued or supported by the credit of U.S. or non-U.S. banks or savings institutions having total assets at the time of purchase in excess of $1 billion. These obligations may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific obligation or by government regulation. The assets of a bank or savings institution will be deemed to include the assets of its domestic and non-U.S. branches for purposes of each Portfolio’s investment policies. Investments in short-term bank obligations may include obligations of non-U.S. banks and domestic branches of non-U.S. banks, and also non-U.S. branches of domestic banks.

The Index Master Portfolio may purchase obligations of U.S. banks and savings and loan associations and dollar-denominated obligations of U.S. subsidiaries and branches of non-U.S. banks, such as certificates of deposit (including marketable variable rate certificates of deposit) and bankers’ acceptances. Bank certificates of deposit will only be acquired by the Index Master Portfolio if the bank has assets in excess of $1 billion.

To the extent consistent with their investment objectives, the Portfolios (except the Tax-Free Portfolios) may invest in debt obligations of domestic or non-U.S. corporations and banks, and may acquire commercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a non-U.S. issuer. The Bond Portfolios and the Money Market Portfolio may also make interest-bearing savings deposits in commercial and savings banks in amounts not in excess of 5% of their respective total assets.

Mortgage Related and Asset-Backed Securities. The Asset Allocation and Bond Portfolios (except the Tax-Free Portfolios) may make significant investments, and the other Equity Portfolios may from time to time invest, in residential and commercial mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, installment sale contracts, credit card receivables or other assets) issued by governmental entities and private issuers. The Money Market Portfolios, to the extent consistent with their investment objectives, may invest in these instruments to a lesser extent.

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Asset-backed securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in an underlying pool of assets, or as debt instruments, which are also known as collateralized obligations, and are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties.

The yield characteristics of certain mortgage-related and asset-backed securities may differ from traditional debt securities. One such major difference is that all or a principal part of the obligations may be prepaid at any time because the underlying assets (i.e., loans) may be prepaid at any time. As a result, a decrease in interest rates in the market may result in increases in the level of prepayments as borrowers, particularly mortgagors, refinance and repay their loans. An increased prepayment rate with respect to a mortgage-related or asset-backed security subject to such a prepayment feature will have the effect of shortening the maturity of the security. If a Portfolio has purchased such a mortgage-related or asset-backed security at a premium, a faster than anticipated prepayment rate could result in a loss of principal to the extent of the premium paid. Conversely, an increase in interest rates may result in lengthening the anticipated maturity of such a security because expected prepayments are reduced. A prepayment rate that is faster than expected will reduce the yield to maturity of such a security, while a prepayment rate that is slower than expected may have the opposite effect of increasing yield to maturity.

In general, the assets supporting non-mortgage asset-backed securities are of shorter maturity than the assets supporting mortgage-related securities. Like other fixed-income securities, when interest rates rise the value of an asset-backed security generally will decline; however, when interest rates decline, the value of an asset-backed security with prepayment features may not increase as much as that of other fixed-income securities, and, as noted above, changes in market rates of interest may accelerate or retard prepayments and thus affect maturities.

These characteristics may result in a higher level of price volatility for asset-backed securities with prepayment features under certain market conditions. In addition, while the trading market for short-term mortgages and asset-backed securities is ordinarily quite liquid, in times of financial stress the trading market for these securities sometimes becomes restricted.

The relationship between prepayments and interest rates may give some high-yielding mortgage- related and asset-backed securities less potential for growth in value than conventional bonds with comparable maturities. During periods of falling interest rates, the reinvestment of prepayment proceeds by a Portfolio will generally be at lower rates than the rates that were carried by the obligations that have been prepaid. Because of these and other reasons, mortgage-related and other asset-backed security’s total return and maturity may be difficult to predict precisely.

A Portfolio from time to time may purchase in the secondary market (i) certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (“PNC Mortgage”) (or Sears Mortgage if PNC Mortgage succeeded to the rights and duties of Sears Mortgage) or Midland Loan Services, Inc. (“Midland”), or (ii) mortgage-related securities containing loans or mortgages originated by PNC Bank, National Association (“PNC Bank”) or its affiliates. It is possible that under some circumstances, PNC Mortgage, Midland or other affiliates could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage, Midland or their affiliates. For example, if PNC Mortgage, Midland or their affiliates engaged in negligence or willful misconduct in carrying out its duties as a master servicer, then any holder of the mortgage-backed security could seek recourse against PNC Mortgage, Midland or their affiliates, as applicable. Also, as a master servicer, PNC Mortgage, Midland or their affiliates may make certain representations and warranties regarding the quality of the mortgages and properties underlying a mortgage-backed security. If one or more of those representations or warranties is false, then the holders of the mortgage-backed securities could trigger an obligation of PNC Mortgage, Midland or their affiliates, as applicable, to repurchase the mortgages from the issuing trust. Finally, PNC Mortgage, Midland or their affiliates may own securities that are subordinate to the senior mortgage-backed securities owned by a Portfolio.

The GNMA Portfolio will invest primarily in GNMA Mortgage Pass-Through Certificates (also known as “Ginnie Maes”), and may make significant investments in other residential and commercial mortgage-related and other asset-backed securities (i.e., securities backed by home equity loans, installment sale contracts, credit card receivables or other assets) issued by governmental entities and private issuers.

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The GNMA Portfolio may acquire several types of mortgage-related securities. Ginnie Maes are typically mortgage pass-through certificates, which provide the holder with a pro rata interest in the underlying mortgages.

To maintain greater flexibility, the GNMA Portfolio may invest in instruments which have the characteristics of futures contracts. These instruments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the value of a commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures, including volatility and illiquidity.

Each Money Market Portfolio may invest in mortgage-related securities issued by the U.S. Government or its agencies or instrumentalities or issued by private companies.

There are a number of important differences among the agencies and instrumentalities of the U.S. Government that issue mortgage-related securities and among the securities that they issue. Mortgage-related securities guaranteed by the Government National Mortgage Association (“GNMA”) include Ginnie Maes, which are guaranteed as to the timely payment of principal and interest by GNMA and such guarantee is backed by the full faith and credit of the United States. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. Mortgage-related securities issued by the Federal National Mortgage Association (“FNMA”) include FNMA guaranteed Mortgage Pass-Through Certificates (also known as “Fannie Maes”) which are solely the obligations of the FNMA, are not backed by or entitled to the full faith and credit of the United States and are supported by the right of the issuer to borrow from the Treasury. FNMA is a government-sponsored organization owned entirely by private stockholders. Fannie Maes are guaranteed as to timely payment of principal and interest by FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation (“FHLMC”) include FHLMC Mortgage Participation Certificates (also known as “Freddie Macs” or “PCs”). FHLMC is a corporate instrumentality of the United States, created pursuant to an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs, which are not guaranteed by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank, are supported by the right of the issuer to borrow from the Treasury. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When FHLMC generally does not guarantee timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. FHLMC “Gold” PCs are guaranteed as to timely payment of interest and principal by FHLMC and represent 100% of the current fixed-rate production of the majority of FHLMC fixed-rate securities outstanding.

The Portfolios may invest in multiple class pass-through securities, including collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduit (“REMIC”) pass-through or participation certificates (“REMIC Certificates”). These multiple class securities may be issued by GNMA, U.S. Government agencies or instrumentalities, including FNMA and FHLMC, or by trusts formed by private originators of, or investors in, mortgage loans. In general, CMOs and REMICs are debt obligations of a legal entity that are collateralized by, and multiple class pass-through securities represent direct ownership interests in, a pool of residential or commercial mortgage loans or mortgage pass-through securities (the “Mortgage Assets”), the payments on which are used to make payments on the CMOs or multiple pass-through securities. Investors may purchase beneficial interests in CMOs and REMICs, which are known as “regular” interests or “residual” interests. The residual in a CMO or REMIC structure generally represents the interest in any excess cash flow or tax liability remaining after making required payments of principal of and interest on the CMOs or REMICs, as well as the related administrative expenses of the issuer. Residual interests generally are junior to, and may be significantly more volatile than, “regular” CMO and REMIC interests. The Portfolios do not currently intend to purchase residual interests. The markets for CMOs and REMICs may be more illiquid than those of other securities.

Each class of CMOs or REMIC Certificates, often referred to as a “tranche,” is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution date. Principal prepayments on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or REMIC Certificates to be retired substantially earlier than their final distribution dates. Generally, interest is paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.

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The principal of and interest on the Mortgage Assets may be allocated among the several classes of CMOs or REMIC Certificates in various ways. In certain structures (known as “sequential pay” CMOs or REMIC Certificates), payments of principal, including any principal prepayments, on the Mortgage Assets generally are applied to the classes of CMOs or REMIC Certificates in the order of their respective final distribution dates. Thus, no payment of principal will be made on any class of sequential pay CMOs or REMIC Certificates until all other classes having an earlier final distribution date have been paid in full.

Additional structures of CMOs or REMIC Certificates include, among others, “parallel pay” CMOs and REMIC Certificates. Parallel pay CMOs or REMIC Certificates are those which are structured to apply principal payments and prepayments of the Mortgage Assets to two or more classes concurrently on a proportionate or disproportionate basis. These simultaneous payments are taken into account in calculating the final distribution date of each class. A wide variety of REMIC Certificates may be issued in the parallel pay or sequential pay structures. These securities include accrual certificates (also known as “Z-Bonds”), which only accrue interest at a specified rate until all other certificates having an earlier final distribution date have been retired and are converted thereafter to an interest-paying security.

Classes of CMOs include interest only (“IOs”), principal only (“POs”), planned amortization classes (“PACs”) and targeted amortization classes (“TACs”). IOs and POs are stripped mortgage-backed securities representing interests in a pool of mortgages the cash flow from which has been separated into interest and principal components. IOs (interest only securities) receive the interest portion of the cash flow while POs (principal only securities) receive the principal portion. IOs and POs can be extremely volatile in response to changes in interest rates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. POs perform best when prepayments on the underlying mortgages rise since this increases the rate at which the investment is returned and the yield to maturity on the PO. When payments on mortgages underlying a PO are slow, the life of the PO is lengthened and the yield to maturity is reduced.

The scheduled principal payments for PAC Certificates generally have the highest priority on each payment date after interest due has been paid to all classes entitled to receive interest currently. Shortfalls, if any, are added to the amount payable on the next payment date. The PAC Certificate payment schedule is taken into account in calculating the final distribution date of each class of PAC. In order to create PAC tranches, one or more tranches generally must be created that absorb most of the volatility in the underlying mortgage assets. These tranches (often called “supports” or “companion” tranches) tend to have market prices and yields that are more volatile than the PAC classes.

TACs are similar to PACs in that they require that specified amounts of principal be applied on each payment date to one or more classes of REMIC Certificates. A PAC’s payment schedule, however, remains in effect as long as prepayment rates on the underlying mortgages do not exceed certain ranges. In contrast, a TAC provides investors with protection, to a certain level, against either faster than expected or slower than expected prepayment rates, but not both. TACs thus provide more cash flow stability than a regular sequential paying class, but less than a PAC. TACs also tend to have market prices and yields that are more volatile than PACs.

FNMA REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by FNMA. In addition, FNMA will be obligated to distribute on a timely basis to holders of FNMA REMIC Certificates required installments of principal and interest and to distribute the principal balance of each class of REMIC Certificates in full, whether or not sufficient funds are otherwise available.

For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of interest, and also guarantees the ultimate payment of principal as payments are required to be made on the underlying mortgage participation certificates (“PCs”). PCs represent undivided interests in specified level payment, residential mortgages or participations therein purchased by FHLMC and placed in a PC pool. With respect to principal payments on PCs, FHLMC generally guarantees ultimate collection of all principal of the related mortgage loans without offset or deduction. FHLMC also guarantees timely payment of principal on certain PCs, referred to as “Gold PCs.”

U.S. Government Obligations. The Asset Allocation and Bond Portfolios (and, to the extent consistent with their investment objectives, the Equity and Money Market Portfolios) may purchase obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and instrumentalities. Obligations of certain

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agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury. Others are supported by the right of the issuer to borrow from the U.S. Treasury; and still others are supported only by the credit of the agency or instrumentality issuing the obligation. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Certain U.S. Treasury and agency securities may be held by trusts that issue participation certificates (such as Treasury income growth receipts (“TIGRs”) and certificates of accrual on Treasury certificates (“CATs”)). These certificates, as well as Treasury receipts and other stripped securities, represent beneficial ownership interests in either future interest payments or the future principal payments on U.S. Government obligations. These instruments are issued at a discount to their “face value” and may (particularly in the case of stripped mortgage-backed securities) exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors.

Examples of the types of U.S. Government obligations that may be held by the Portfolios include U.S. Treasury Bills, Treasury Notes, and Treasury Bonds and the obligations of the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association, Federal National Mortgage Association, Federal Financing Bank, General Services Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Farm Credit Banks System, Maritime Administration, Tennessee Valley Authority, and Washington D.C. Armory Board. The Portfolios may also invest in mortgage-related securities issued or guaranteed by U.S. Government agencies and instrumentalities, including such instruments as obligations of the GNMA, FNMA and FHLMC.

The Index Master Portfolio may purchase (i) debt securities issued by the U.S. Treasury which are direct obligations of the U.S. Government, including bills, notes and bonds, and (ii) obligations issued or guaranteed by U.S. Government-sponsored instrumentalities and federal agencies, including FNMA, Federal Home Loan Bank and the Federal Housing Administration.

Supranational Organization Obligations. The Portfolios may purchase debt securities of supranational organizations such as the World Bank, which are chartered to promote economic development.

Lease Obligations. The Portfolios (other than the Index Master Portfolio) may hold participation certificates in a lease, an installment purchase contract, or a conditional sales contract (“lease obligations”).

The adviser or sub-adviser will monitor the credit standing of each borrower and each entity providing credit support and/or a put option relating to lease obligations. In determining whether a lease obligation is liquid, the adviser or sub-adviser will consider, among other factors, the following: (i) whether the lease can be cancelled; (ii) the degree of assurance that assets represented by the lease could be sold; (iii) the strength of the lessee’s general credit (e.g., its debt, administrative, economic, and financial characteristics); (iv) in the case of a municipal lease, the likelihood that the municipality would discontinue appropriating funding for the leased property because the property is no longer deemed essential to the operations of the municipality (e.g., the potential for an “event of nonappropriation”); (v) legal recourse in the event of failure to appropriate; (vi) whether the security is backed by a credit enhancement such as insurance; and (vii) any limitations which are imposed on the lease obligor’s ability to utilize substitute property or services other than those covered by the lease obligation.

The Municipal Money Market Portfolios will only invest in lease obligations with puts that (i) may be exercised at par on not more than seven days notice, and (ii) are issued by institutions deemed by the sub-adviser to present minimal credit risks. Such obligations will be considered liquid. However, a number of puts are not exercisable at the time the put would otherwise be exercised if the municipal borrower is not contractually obligated to make payments (e.g., an event of nonappropriation with a “nonappropriation” lease obligation). Under such circumstances, the lease obligation while previously considered liquid would become illiquid, and a Portfolio might lose its entire investment in such obligation.

Municipal leases, like other municipal debt obligations, are subject to the risk of non-payment. The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local

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governmental units. Such non-payment would result in a reduction of income to a Portfolio, and could result in a reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the net asset value of a Portfolio. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, a Portfolio could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and a Portfolio may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Fund might take possession of and manage the assets securing the issuer’s obligations on such securities, which may increase a Portfolio’s operating expenses and adversely affect the net asset value of a Portfolio. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and a Portfolio would not have the right to take possession of the assets. Any income derived from a Portfolio’s ownership or operation of such assets may not be tax-exempt. In addition, a Portfolio’s intention to qualify as a “regulated investment company” under the Internal Revenue Code of 1986, as amended, may limit the extent to which a Portfolio may exercise its rights by taking possession of such assets, because as a regulated investment company a Portfolio is subject to certain limitations on its investments and on the nature of its income.

Commercial Paper. The Money Market Portfolios may purchase commercial paper rated in one of the two highest rating categories of an NRSRO. The Non-Money Market Portfolios, except the High Yield Bond Portfolio and the Index Master Portfolio, may purchase commercial paper rated (at the time of purchase) “A-1” by S&P or “Prime-1” by Moody’s or, when deemed advisable by a Portfolio’s adviser or sub-adviser, “high quality” issues rated “A-2”, “Prime-2” or “F-2” by S&P, Moody’s or Fitch, respectively. The High Yield Bond Portfolio may purchase commercial paper of any rating. The Index Master Portfolio may purchase commercial paper rated (at the time of purchase) “A-1” or better by S&P or “Prime-1” by Moody’s, or, if not rated, issued by a corporation having an outstanding unsecured debt issue rated “Aaa” by Moody’s or “AAA” by S&P, and having a maximum maturity of nine months. These ratings symbols are described in Appendix A.

Commercial paper purchasable by each Portfolio includes “Section 4(2) paper,” a term that includes debt obligations issued in reliance on the “private placement” exemption from registration afforded by Section 4(2) of the Securities Act of 1933. Section 4(2) paper is restricted as to disposition under the Federal securities laws, and is frequently sold (and resold) to institutional investors such as the Fund through or with the assistance of investment dealers who make a market in the Section 4(2) paper, thereby providing liquidity. Certain transactions in Section 4(2) paper may qualify for the registration exemption provided in Rule 144A under the Securities Act of 1933.

Repurchase Agreements. Each Equity and Bond Portfolio may agree to purchase securities from financial institutions subject to the seller’s agreement to repurchase them at an agreed upon time and price (“repurchase agreements”). Repurchase agreements are, in substance, loans. Default by or bankruptcy of a seller would expose a Portfolio to possible loss because of adverse market action, expenses and/or delays in connection with the disposition of the underlying obligations.

Each Money Market Portfolio may enter into repurchase agreements. The securities held subject to a repurchase agreement by a Money Market Portfolio may have stated maturities exceeding 13 months, so long as the repurchase agreement itself matures in less than 13 months.

The repurchase price under the repurchase agreements generally equals the price paid by a Portfolio involved plus interest negotiated on the basis of current short-term rates (which may be more or less than the rate on securities underlying the repurchase agreement). The financial institutions with which a Portfolio may enter into repurchase agreements will be banks and non-bank dealers, if such banks and non-bank dealers are deemed creditworthy by the Portfolio’s adviser or sub-adviser. A Portfolio’s adviser or sub-adviser will continue to monitor creditworthiness of the seller under a repurchase agreement, and will require the seller to maintain during the term of the agreement the value of the securities subject to the agreement to equal at least the repurchase price (including accrued interest and any accrued premium). The accrued premium is the amount specified in the repurchase agreement or the daily amortization of the difference between the purchase price and the repurchase price specified in the repurchase agreement. The Portfolio’s adviser or sub-adviser will mark-to-market daily the value of the securities. Securities subject to repurchase agreements will be held by the Fund’s custodian (or sub-custodian) in the Federal Reserve/Treasury book-entry system or by another authorized securities depository. Repurchase agreements are considered to be loans by the Portfolios under the 1940 Act.

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The use of repurchase agreements involves certain risks. For example, if the seller of securities under a repurchase agreement defaults on its obligation to repurchase the underlying securities, as a result of its bankruptcy or otherwise, a Portfolio will seek to dispose of such securities, which action could involve costs or delays. If the seller becomes insolvent and subject to liquidation or reorganization under applicable bankruptcy or other laws, a Portfolio’s ability to dispose of the underlying securities may be restricted. Finally, it is possible that a Portfolio may not be able to substantiate its interest in the underlying securities. To minimize this risk, the securities underlying the repurchase agreement will be held by the custodian at all times in an amount at least equal to the repurchase price, including accrued interest. If the seller fails to repurchase the securities, a Portfolio may suffer a loss to the extent proceeds from the sale of the underlying securities are less than the repurchase price.

Certain of the Money Market Portfolios may enter into repurchase agreements in which the collateral may include IO or PO securities related to CMOs issued by U.S. Government agencies and instrumentalities. IOs and POs are subject to the risks described in “Stripped and Zero Coupon Obligations” below and CMOs are subject to the risks described in “Mortgage Related and Asset-Backed Securities” above.

The Index Master Portfolio may enter into repurchase agreements, but will not enter into a repurchase agreement with a duration of more than seven days if, as a result, more than 10% of the value of its total assets would be so invested. The Index Master Portfolio will also only invest in repurchase agreements with a bank if the bank has at least $1 billion in assets and is approved by the Investment Committee of Dimensional Fund Advisors Inc. (“DFA”). DFA will monitor the market value of transferred securities plus any accrued interest thereon so that the value of such securities will at least equal the repurchase price. The securities underlying the repurchase agreements will be limited to U.S. Government and agency obligations described under “U.S. Government Obligations” above.

Investment Grade Debt Obligations. Each of the Money Market Portfolios and Enhanced Income Portfolio may invest in investment grade securities in the rating categories specified in the Prospectuses and above in “Money Market Portfolios.” The Non-Money Market Portfolios, except the Index Master Portfolio and the Intermediate Government Bond, Government Income and GNMA Portfolios, may invest in “investment grade securities,” which are securities rated in the four highest rating categories of an NRSRO or deemed to be of equivalent quality by a Portfolio’s adviser or sub-adviser. The Intermediate Government Bond, Government Income and GNMA Portfolios may invest in debt securities rated Aaa by Moody’s or AAA by S&P. It should be noted that debt obligations rated in the lowest of the top four ratings (i.e., “Baa” by Moody’s or “BBB” by S&P) are considered to have some speculative characteristics and are more sensitive to economic change than higher rated securities. If an investment grade security of a Portfolio is subsequently downgraded below investment grade, the Portfolio’s adviser or sub-adviser will consider such an event in determining whether the Portfolio should continue to hold the security. Subject to its investment strategies, there is no limit on the amount of such downgraded securities a Portfolio may hold, although under normal market conditions the adviser and sub-adviser do not expect to hold these securities to a material extent.

The Index Master Portfolio may invest in non-convertible corporate debt securities which are issued by companies whose commercial paper is rated “Prime-1” by Moody’s or “A-1” by S&P and dollar-denominated obligations of non-U.S. issuers issued in the U.S. If the issuer’s commercial paper is unrated, then the debt security would have to be rated at least “AA” by S&P or “Aa2” by Moody’s. If there is neither a commercial paper rating nor a rating of the debt security, then the Index Master Portfolio’s investment adviser must determine that the debt security is of comparable quality to equivalent issues of the same issuer rated at least “AA” or “Aa2.”

See Appendix A to this Statement of Additional Information for a description of applicable securities ratings.

Non-Investment Grade Securities. Each of the Asset Allocation, Aurora, Global Resources, All-Cap Global Resources, High Yield Bond, Low Duration Bond, Core PLUS Total Return, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may invest in non-investment grade or “high yield” fixed income or convertible securities commonly known to investors as “junk bonds.”

High yield securities are bonds that are issued by a company whose credit rating (based on rating agencies’ evaluation of the likelihood of repayment) necessitates offering a higher coupon and yield on its issues when selling

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them to investors who may otherwise be hesitant in purchasing the debt of such a company. While generally providing greater income and opportunity for gain, non-investment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated “Ba” or lower by Moody’s or “BB” or lower by S&P) or will be non-rated. The credit rating of a high yield security does not necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the issuer’s financial condition. High yield securities are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.

While the market values of high yield securities tend to react less to fluctuations in interest rates than do those of higher rated securities, the values of high yield securities often reflect individual corporate developments and have a high sensitivity to economic changes to a greater extent than do higher rated securities. Issuers of high yield securities are often in the growth stage of their development and/or involved in a reorganization or takeover. The companies are often highly leveraged (have a significant amount of debt relative to shareholders’ equity) and may not have available to them more traditional financing methods, thereby increasing the risk associated with acquiring these types of securities. In some cases, obligations with respect to high yield securities are subordinated to the prior repayment of senior indebtedness, which will potentially limit a Portfolio’s ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in high yield securities have a lower degree of protection with respect to principal and interest payments then do investors in higher rated securities.

During an economic downturn, a substantial period of rising interest rates or a recession, highly leveraged issuers of high yield securities may experience financial distress possibly resulting in insufficient revenues to meet their principal and interest payment obligations, to meet projected business goals and to obtain additional financing. An economic downturn could also disrupt the market for lower-rated securities and adversely affect the value of outstanding securities, the Portfolio’s net asset value and the ability of the issuers to repay principal and interest. If the issuer of a security held by a Portfolio defaulted, the Portfolio may not receive full interest and principal payments due to it and could incur additional expenses if it chose to seek recovery of its investment.

The secondary markets for high yield securities are not as liquid as the secondary markets for higher rated securities. The secondary markets for high yield securities are concentrated in relatively few market makers and participants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. Under certain economic and/or market conditions, a Portfolio may have difficulty disposing of certain high yield securities due to the limited number of investors in that sector of the market. An illiquid secondary market may adversely affect the market price of the high yield security, which may result in increased difficulty selling the particular issue and obtaining accurate market quotations on the issue when valuing a Portfolio’s assets. Market quotations on high yield securities are available only from a limited number of dealers, and such quotations may not be the actual prices available for a purchase or sale.

The high yield markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory developments. These developments could adversely affect a Portfolio’s net asset value and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value and liquidity of outstanding high yield securities, especially in a thinly traded market. For example, federal legislation requiring the divestiture by federally insured savings and loan associations of their investments in high yield bonds and limiting the deductibility of interest by certain corporate issuers of high yield bonds adversely affected the market in the past.

When the secondary market for high yield securities becomes more illiquid, or in the absence of readily available market quotations for such securities, the relative lack of reliable objective data makes it more difficult to value a Portfolio’s securities, and judgment plays a more important role in determining such valuations. Increased illiquidity in the junk bond market, in combination with the relative youth and growth of the market for such

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securities, also may affect the ability of a Portfolio to dispose of such securities at a desirable price. Additionally, if the secondary markets for high yield securities contract due to adverse economic conditions or for other reasons, certain of a Portfolio’s liquid securities may become illiquid and the proportion of the Portfolio’s assets invested in illiquid securities may significantly increase.

The rating assigned by a rating agency evaluates the safety of a non-investment grade security’s principal and interest payments, but does not address market value risk. Because such ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the sub-adviser performs its own analysis of the issuers whose non-investment grade securities a Portfolio holds. Because of this, the Portfolio’s performance may depend more on the sub-adviser’s own credit analysis than in the case of mutual funds investing in higher-rated securities. For a description of these ratings, see Appendix A.

In selecting non-investment grade securities, the adviser or sub-adviser considers factors such as those relating to the creditworthiness of issuers, the ratings and performance of the securities, the protections afforded the securities and the diversity of the Portfolio. The sub-adviser continuously monitors the issuers of non-investment grade securities held by the Portfolio for their ability to make required principal and interest payments, as well as in an effort to control the liquidity of the Portfolio so that it can meet redemption requests. If a security’s rating is reduced below the minimum credit rating that is permitted for a Portfolio, the Portfolio’s sub-adviser will consider whether the Portfolio should continue to hold the security.

In the event that a Portfolio investing in high yield securities experiences an unexpected level of net redemptions, the Portfolio could be forced to sell its holdings without regard to the investment merits, thereby decreasing the assets upon which the Portfolio’s rate of return is based.

The costs attributable to investing in the high yield markets are usually higher for several reasons, such as higher investment research costs and higher commission costs.

The Asset Allocation, Core PLUS Total Return, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may invest in securities rated in the category “C” and above or determined by the sub-adviser to be of comparable quality. Securities rated “C” are considered highly speculative and may be used to cover a situation where the issuer has filed a bankruptcy petition but debt service payments are continued. While such debt will likely have some quality and protective characteristics, those are outweighed by large uncertainties or major risk exposure to adverse conditions.

The High Yield Bond Portfolio may invest in securities of any rating and may invest up to 10% of its assets (measured at the time of investment) in distressed securities that are in default or the issuers of which are in bankruptcy. Investments in distressed securities are speculative and involve significant risk. Distressed securities frequently do not produce income while they are outstanding and may require the Portfolio to bear certain extraordinary expenses in order to protect and recover its investment. Therefore, to the extent the Portfolio seeks capital appreciation through investment in distressed securities, the Portfolio’s ability to achieve current income for its shareholders may be diminished. The Portfolio also will be subject to significant uncertainty as to when and in what manner and for what value the obligations evidenced by the distressed securities will eventually be satisfied (e.g., through a liquidation of the obligor’s assets, an exchange offer or plan of reorganization involving the distressed securities or a payment of some amount in satisfaction of the obligation). In addition, even if an exchange offer is made or a plan of reorganization is adopted with respect to distressed securities held by the Portfolio, there can be no assurance that the securities or other assets received by the Portfolio in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made. Moreover, any securities received by the Portfolio upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of the Portfolio’s participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed securities, the Portfolio may be restricted from disposing of such securities.

Mezzanine Investments. Each of the Asset Allocation, Aurora, Global Resources, All-Cap Global Resources, Intermediate PLUS Bond, Inflation Protected Bond, Low Duration, Core PLUS Total Return and High Yield Bond Portfolios, consistent with its restrictions on investing in securities of a specific credit quality, may invest in certain high yield securities known as mezzanine investments, which are subordinated debt securities

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which are generally issued in private placements in connection with an equity security (e.g., with attached warrants). Such mezzanine investments may be issued with or without registration rights. Similar to other high yield securities, maturities of mezzanine investments are typically seven to ten years, but the expected average life is significantly shorter at three to five years. Mezzanine investments are usually unsecured and subordinate to other obligations of the issuer.

Collateralized Bond Obligations. The High Yield Bond Portfolio may invest in collateralized bond obligations (“CBOs”), which are structured products backed by a diversified pool of high yield public or private fixed income securities. In addition, each Bond and Equity Portfolio may invest in CBOs to the extent that the securities underlying the CBO meet the credit quality requirements of the Portfolio. The pool of securities is typically separated into tranches representing different degrees of credit quality. The top tranche of CBOs, which represents the highest credit quality in the pool, has the greatest collateralization and pays the lowest interest rate. Lower CBO tranches represent lower degrees of credit quality and pay higher interest rates to compensate for the attendant risks. The bottom tranche specifically receives the residual interest payments (i.e., money that is left over after the higher tiers have been paid) rather than a fixed interest rate. The return on the bottom tranche of CBOs is especially sensitive to the rate of defaults in the collateral pool.

When-Issued Purchases and Forward Commitments. Each Portfolio (other than the Index Master Portfolio) may purchase securities on a “when-issued” basis and may purchase or sell securities on a “forward commitment,” including “TBA” (to be announced) basis. These transactions involve a commitment by a Portfolio to purchase or sell particular securities with payment and delivery taking place at a future date (perhaps one or two months later), and permit a Portfolio to lock in a price or yield on a security it owns or intends to purchase, regardless of future changes in interest rates or market action. When-issued and forward commitment transactions involve the risk, however, that the price or yield obtained in a transaction may be less favorable than the price or yield available in the market when the securities delivery takes place.

When a Portfolio agrees to purchase securities on this basis, the adviser or sub-adviser will designate liquid assets on its books and records in an amount equal to the amount of the Portfolio’s commitments to the extent required by SEC guidelines. It may be expected that the market value of a Portfolio’s net assets will fluctuate to a greater degree when it sets aside portfolio securities to cover such purchase commitments than when it sets aside cash.

If deemed advisable as a matter of investment strategy, a Portfolio may dispose of or renegotiate a commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to the Portfolio on the settlement date. In these cases the Portfolio may realize a taxable capital gain or loss.

When a Portfolio engages in when-issued, TBA or forward commitment transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in the Portfolio’s incurring a loss or missing an opportunity to obtain a price considered to be advantageous.

The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value, is taken into account when determining the market value of a Portfolio starting on the day the Portfolio agrees to purchase the securities. The Portfolio does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date.

Rights Offerings and Warrants to Purchase. Each Equity and Bond Portfolio (except the Index Master Portfolio, which may only acquire warrants as a result of corporate actions involving its holdings of other equity securities) may participate in rights offerings and may purchase warrants, which are privileges issued by corporations enabling the owners to subscribe to and purchase a specified number of shares of the corporation at a specified price during a specified period of time. Subscription rights normally have a short life span to expiration. The purchase of rights or warrants involves the risk that a Portfolio could lose the purchase value of a right or warrant if the right to subscribe to additional shares is not exercised prior to the rights’ and warrants’ expiration. Also, the purchase of rights and/or warrants involves the risk that the effective price paid for the right and/or warrant added to the subscription price of the related security may exceed the value of the subscribed security’s market price such as when there is no movement in the level of the underlying security. A Portfolio will not invest more than 5%

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of its net assets, taken at market value, in warrants, or more than 2% of its net assets, taken at market value, in warrants not listed on the New York or American Stock Exchanges. Warrants acquired by a Portfolio in units or attached to other securities are not subject to this restriction.

Non-U.S. Investments. The Money Market Portfolio and the Non-Money Market Portfolios may invest in non-U.S. securities. Investing in non-U.S. securities involves risks not typically associated with investing in securities of companies organized and operated in the United States. Because non-U.S. securities generally are denominated and pay dividends or interest in non-U.S. currencies, the value of a Portfolio that invests in non-U.S. securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates.

A Portfolio’s investments in non-U.S. securities may also be adversely affected by changes in non-U.S. political or social conditions, diplomatic relations, confiscatory taxation, expropriation, limitation on the removal of funds or assets, or imposition of (or change in) exchange control regulations. In addition, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in appreciation or depreciation of portfolio securities and could favorably or adversely affect a Portfolio’s operations.

In general, less information is publicly available with respect to non-U.S. issuers than is available with respect to U.S. companies. Most non-U.S. companies are also not subject to the uniform accounting and financial reporting requirements applicable to issuers in the United States. While the volume of transactions effected on non-U.S. stock exchanges has increased in recent years, it remains appreciably below that of the New York Stock Exchange. Accordingly, a Portfolio’s non-U.S. investments may be less liquid and their prices may be more volatile than comparable investments in securities in U.S. companies. In addition, there is generally less government supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.

Investments in non-dollar denominated securities may be on either a currency hedged or unhedged basis, and the Portfolios may hold from time to time various non-U.S. currencies pending investment or conversion into U.S. dollars. Some of these instruments may have the characteristics of futures contracts. In addition, certain Portfolios may engage in non-U.S. currency exchange transactions to seek to protect against changes in the level of future exchange rates which would adversely affect the Portfolio’s performance. These investments and transactions involving non-U.S. securities, currencies, options (including options that relate to non-U.S. currencies), futures, hedging and cross-hedging are described below and under “Interest Rate Transactions and Currency Swaps,” “Non-U.S. Currency Transactions” and “Options and Futures Contracts.”

To maintain greater flexibility, a Portfolio may invest in instruments which have the characteristics of futures contracts. These instruments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the value of a currency or commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures, currencies and securities, including volatility and illiquidity.

Non-U.S. investments of the Asset Allocation and Bond Portfolios (and, to the extent stated in its Prospectuses, the Money Market Portfolio) may include: (a) debt obligations issued or guaranteed by non-U.S. sovereign governments or their agencies, authorities, instrumentalities or political subdivisions, including a non-U.S. state, province or municipality; (b) debt obligations of supranational organizations such as the World Bank, Asian Development Bank, European Investment Bank, and European Economic Community; (c) debt obligations of non-U.S. banks and bank holding companies; (d) debt obligations of domestic banks and corporations issued in non-U.S. currencies; (e) debt obligations denominated in the Euro; and (f) non-U.S. corporate debt securities and commercial paper. Such securities may include loan participations and assignments, convertible securities and zero-coupon securities.

Political and economic structures in emerging market countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability characteristic of more developed countries. Some of these countries may have in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of private companies. As a result the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the value of investments in these countries and the availability to a Portfolio of additional investments in emerging market countries. The small size and inexperience of the securities

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markets in certain of these countries and the limited volume of trading in securities in these countries may make investments in the countries illiquid and more volatile than investments in Japan or most Western European countries. There may be little financial or accounting information available with respect to issuers located in certain emerging market countries, and it may be difficult to assess the value or prospects of an investment in such issuers.

The expense ratios of the Portfolios investing significantly in non-U.S. securities can be expected to be higher than those of Portfolios investing primarily in domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as the higher cost of custody of non-U.S. securities, higher commissions paid on comparable transactions on non-U.S. markets and additional costs arising from delays in settlements of transactions involving non-U.S. securities.

Brady Bonds. A Portfolio’s emerging market debt securities may include emerging market governmental debt obligations commonly referred to as Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the “Brady Plan”). Brady Plan debt restructurings have been implemented in a number of countries, including: Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger, Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, and Venezuela.

Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market. Brady Bonds are not considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year’s interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to “value recovery payments” in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (the uncollateralized amounts constitute the “residual risk”).

Most Mexican Brady Bonds issued to date have principal repayments at final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and interest coupon payments collateralized on an 18-month rolling-forward basis by funds held in escrow by an agent for the bondholders. A significant portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and/or interest coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis by securities held by the Federal Reserve Bank of New York as collateral agent.

Brady Bonds involve various risk factors described above associated with investing in non-U.S. securities, including the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. There can be no assurance that Brady Bonds in which the Portfolios may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Portfolios to suffer a loss of interest or principal on any of its holdings.

ADRs, EDRs and GDRs. Each Equity and Bond Portfolio (other than the Index Master Portfolio) may invest in both sponsored and unsponsored American Depository Receipts (“ADRs”), European Depository Receipts (“EDRs”), Global Depository Receipts (“GDRs”) and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence ownership of underlying securities issued by a non-U.S. corporation. EDRs, which are sometimes referred to as Continental Depository Receipts, are receipts issued in Europe, typically by non-U.S. banks and trust companies, that evidence ownership of either non-U.S. or domestic underlying securities. GDRs are depository receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs are organized independently and without the

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cooperation of the issuer of the underlying securities. As a result, available information concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Investments in ADRs, EDRs and GDRs present additional investment considerations as described under “Non-U.S. Investments.”

Options and Futures Contracts. To the extent consistent with its investment objective, each Equity and Bond Portfolio (other than the Index Master Portfolio) may write (i.e., sell) covered call options, buy call options, write secured put options and buy put options for the purpose of hedging or earning additional income, which may be deemed speculative or, with respect to the Low Duration Bond, Core Bond Total Return, Core PLUS Total Return, Managed Income, International Bond, High Yield Bond, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond, Inflation Protected Bond, Health Sciences, Global Resources, All-Cap Global Resources, Global Science & Technology Opportunities, Asset Allocation and International Opportunities Portfolios, cross-hedging. Each of the Low Duration Bond, Core Bond Total Return, Core PLUS Total Return, Managed Income, International Bond, High Yield Bond, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond, Inflation Protected Bond, Health Sciences, Global Resources, All-Cap Global Resources, Global Science & Technology Opportunities, Asset Allocation and International Opportunities Portfolios may also purchase exchange-listed and over-the-counter put and call options on non-U.S. currencies, and the Health Sciences, Global Resources, All-Cap Global Resources, Core PLUS Total Return and International Bond Portfolios may write covered call options on up to 100% of the currencies in its portfolio. For the payment of a premium, the purchaser of an option obtains the right to buy (in the case of a call option) or to sell (in the case of a put option) the item which is the subject of the option at a stated exercise price for a specific period of time. These options may relate to particular securities, securities indices, or the yield differential between two securities, or, in the case of the Low Duration Bond, Core Bond Total Return, Core PLUS Total Return, Managed Income, International Bond, High Yield Bond, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond, Inflation Protected Bond, Health Sciences, Global Resources, All-Cap Global Resources, Global Science & Technology Opportunities, Asset Allocation and International Opportunities Portfolios, non-U.S. currencies, and may or may not be listed on a securities exchange and may or may not be issued by the Options Clearing Corporation. A Portfolio will not purchase put and call options when the aggregate premiums on outstanding options exceed 5% of its total assets at the time of purchase, and will not write options on more than 25% of the value of its total assets (measured at the time an option is written). There is no limit on the amount of a Portfolio’s assets that can be put at risk through the use of options. In addition, unlisted options are not subject to the protections afforded purchasers of listed options issued by the Options Clearing Corporation, which performs the obligations of its members if they default.

Options on particular securities may be more volatile than the underlying securities, and therefore, on a percentage basis, an investment in the underlying securities themselves. A Portfolio will write call options only if they are “covered.” In the case of a call option on a security, the option is “covered” if a Portfolio owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, liquid assets in such amount are designated on the adviser’s or sub-adviser’s books and records in an amount equal to the amount of the Portfolio’s commitments to the extent required by SEC guidelines) upon conversion or exchange of other securities held by it. For a call option on an index, the option is covered if a Portfolio maintains with its custodian liquid assets equal to the contract value. A call option is also covered if a Portfolio holds a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written provided the difference is maintained by the Portfolio in liquid assets designated on the adviser’s or sub-adviser’s books and records to the extent required by SEC guidelines.

When a Portfolio purchases an option, the premium paid by it is recorded as an asset of the Portfolio. When a Portfolio writes a put option, in return for receipt of the premium, it assumes the obligation to pay the strike price for the instrument underlying the option if the other party to the option chooses to exercise it. When a Portfolio writes an option, an amount equal to the net premium (the premium less the commission) received by the Portfolio is included in the liability section of the Portfolio’s statement of assets and liabilities as a deferred credit. The amount of this asset or deferred credit will be subsequently marked-to-market to reflect the current value of the option purchased or written. The current value of the traded option is the last sale price or, in the absence of a sale, the mean between the last bid and asked prices. If an option purchased by a Portfolio expires unexercised the Portfolio realizes a loss equal to the premium paid. If the Portfolio enters into a closing sale transaction on an option purchased by it, the Portfolio will realize a gain if the premium received by the Portfolio on the closing transaction is

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more than the premium paid to purchase the option, or a loss if it is less. If an option written by a Portfolio expires on the stipulated expiration date or if the Portfolio enters into a closing purchase transaction, it will realize a gain (or loss if the cost of a closing purchase transaction exceeds the net premium received when the option is sold) and the deferred credit related to such option will be eliminated. If an option written by a Portfolio is exercised, the proceeds of the sale will be increased by the net premium originally received and the Portfolio will realize a gain or loss.

There are several risks associated with transactions in options on securities and indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. In addition, a liquid secondary market for particular options, whether traded over-the-counter or on a national securities exchange (“Exchange”) may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the Options Clearing Corporation as a result of trades on that Exchange would continue to be exercisable in accordance with their terms.

To the extent consistent with its investment objective, each Equity and Bond Portfolio may also invest in futures contracts and options on futures contracts (interest rate futures contracts, index futures contracts, or non-U.S. exchange futures contracts as applicable). These instruments are described in Appendix B to this Statement of Additional Information. There is no limit on the amount of a Portfolio’s assets that can be put at risk through the use of futures contracts and the value of a Portfolio’s futures contracts and options on futures contracts may equal or exceed 100% of its total assets.

To maintain greater flexibility, each of the Bond Portfolios may invest in instruments which have characteristics similar to futures contracts. These instruments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the value of a commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures and securities, including volatility and illiquidity.

Futures contracts obligate a Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a non-U.S. currency. A Portfolio may sell a futures contract in order to offset an expected decrease in the value of its portfolio positions that might otherwise result from a market decline or currency exchange fluctuation. A Portfolio may do so either to hedge the value of its securities portfolio as a whole, or to protect against declines occurring prior to sales of securities in the value of the securities to be sold. In addition, a Portfolio may utilize futures contracts in anticipation of changes in the composition of its holdings or in currency exchange rates.

A Portfolio may purchase and sell put and call options on futures contracts traded on an exchange or board of trade. When a Portfolio purchases an option on a futures contract, it has the right to assume a position as a purchaser or a seller of a futures contract at a specified exercise price during the option period. When a Portfolio sells an option on a futures contract, it becomes obligated to sell or buy a futures contract if the option is exercised. In connection with a Portfolio’s position in a futures contract or related option, the adviser or sub-adviser will designate liquid assets on its books and records in an amount equal to the amount of the Portfolio’s commitments or will otherwise cover its position in accordance with applicable SEC requirements.

The primary risks associated with the use of futures contracts and options are (a) the imperfect correlation between the change in market value of the instruments held by a Portfolio and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the adviser’s or sub-adviser’s inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.

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The Fund and the Portfolios have claimed exclusions from the definition of the term “commodity pool operator” under the Commodity Exchange Act and, therefore, are not subject to registration or regulation as commodity pool operators under the Act.

Interest Rate Transactions, Currency Swaps and Swaptions. In addition to the Equity Portfolios, the Asset Allocation and Bond Portfolios may enter into interest rate swaps, may purchase or sell interest rate caps and floors and may enter into options on swap agreements (“swaptions”). The Portfolios may enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their holdings, as a duration management technique or to protect against an increase in the price of securities a Portfolio anticipates purchasing at a later date. They may also be used for speculation to increase returns.

In order to protect against currency fluctuations, the Health Sciences, Global Resources, All-Cap Global Resources, Global Science & Technology Opportunities, International Opportunities, Asset Allocation, Low Duration Bond, Core Bond Total Return, Core PLUS Total Return, Managed Income, International Bond, High Yield Bond, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may enter into currency swaps. Currency swaps involve the exchange of the rights of the Portfolios and another party to make or receive payments in specified currencies.

The Bond and Asset Allocation Portfolios may enter into interest rate swaps, caps, floors and swaptions on either an asset-based or liability-based basis, depending on whether a Portfolio is hedging its assets or its liabilities. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the parties are generally calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a “basket” of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”; and interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”.

A Portfolio will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Portfolio receiving or paying, as the case may be, only the net amount of the two payments. In contrast, currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency.

A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Portfolios may write (sell) and purchase put and call swaptions.

Whether the Portfolios’ use of swap agreements or swaptions will be successful in furthering their investment objectives will depend on the adviser’s or sub-adviser’s ability to predict correctly whether certain types of investments are likely to product greater returns than other investments. Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, a Portfolio bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. A Portfolio will enter into swap agreements only with counterparties that meet certain standards of creditworthiness. If there is a default by the other party to such a transaction, a Portfolio will have contractual remedies pursuant to the agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid. Caps and floors are less liquid than swaps.

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The swaps market is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a Portfolio’s ability to terminate existing swap agreements or to realize amounts to be received under such agreements.

Depending on the terms of the particular option agreement, a Portfolio will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a Portfolio purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when a Portfolio writes a swaption, upon exercise of the option the Portfolio will become obligated according to the terms of the underlying agreement.

A Portfolio will accrue the net amount of the excess, if any, of its obligations over its entitlements with respect to each interest rate or currency swap or swaption on a daily basis and its adviser or sub-adviser will designate liquid assets on its books and records in an amount having an aggregate net asset value at least equal to the accrued excess to the extent required by SEC guidelines. If the other party to an interest rate swap defaults, a Portfolio’s risk of loss consists of the net amount of interest payments that the Portfolio is contractually entitled to receive. Because currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations.

Credit Default Swaps. To the extent consistent with their investment strategies, the Bond and Asset Allocation Portfolios may, for hedging or leveraging purposes, make use of credit default swaps, which are contracts whereby one party makes periodic payments to a counterparty in exchange for the right to receive from the counterparty a payment equal to the par (or other agreed-upon) value of a referenced debt obligation in the event of a default by the issuer of the debt obligation. The use of credit default swaps may be limited by the Portfolios’ limitations on illiquid investments. When used for hedging purposes, the Portfolio would be the buyer of a credit default swap contract. In that case, the Portfolio would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract in the event of a default by a third party, such as a U.S. or non-U.S. issuer, on the debt obligation. In return, the Portfolio would pay to the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Portfolio would have spent the stream of payments and received no benefit from the contract. Credit default swaps involve the risk that the investment may expire worthless and would generate income only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial instability). It would also involve credit risk—that the seller may fail to satisfy its payment obligations to the Portfolio in the event of a default.

When the Portfolio is the seller of a credit default swap contract, it receives the stream of payments but is obligated to pay upon default of the referenced debt obligation. As the seller, the Portfolio would effectively add leverage to its portfolio because, in addition to its total assets, the Portfolio would be subject to investment exposure on the notional amount of the swap.

In addition to the risks applicable to derivatives generally, credit default swaps involve special risks because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).

Non-U.S. Currency Transactions. Each of the Health Sciences, Global Resources, All-Cap Global Resources, Global Science & Technology Opportunities, Asset Allocation, International Opportunities, Low Duration Bond, Core Bond Total Return, Core PLUS Total Return, Managed Income, International Bond, High Yield Bond, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may engage in non-U.S. currency exchange transactions to protect against uncertainty in the level of future exchange rates. Those Portfolios may engage in non-U.S. currency exchange transactions in connection with the purchase and sale of portfolio securities (transaction hedging) and to protect the value of specific portfolio positions (position hedging). The Portfolios may purchase or sell a non-U.S. currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that non-U.S. currency, and may also enter into contracts to purchase or sell non-U.S. currencies at a future date (“forward contracts”).

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Forward non-U.S. currency exchange contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time of the contract. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather allow a Portfolio to establish a rate of exchange for a future point in time. A Portfolio may use forward non-U.S. currency exchange contracts to hedge against movements in the value of non-U.S. currencies relative to the U.S. dollar in connection with specific portfolio transactions or with respect to portfolio positions. A Portfolio generally may enter into forward non-U.S. currency exchange contracts when deemed advisable by its adviser or sub-adviser under two circumstances. First, when entering into a contract for the purchase or sale of a security, a Portfolio may enter into a forward non-U.S. currency exchange contract for the amount of the purchase or sale price to protect against variations, between the date the security is purchased or sold and the date on which payment is made or received, in the value of the non-U.S. currency relative to the U.S. dollar or other non-U.S. currency.

Second, when a Portfolio’s adviser or sub-adviser anticipates that a particular non-U.S. currency may decline relative to the U.S. dollar or other leading currencies, in order to reduce risk, the Portfolio may enter into a forward contract to sell, for a fixed amount, the amount of non-U.S. currency approximating the value of some or all of the Portfolio’s securities denominated in such non-U.S. currency. With respect to any forward non-U.S. currency contract, it will not generally be possible to match precisely the amount covered by that contract and the value of the securities involved due to the changes in the values of such securities resulting from market movements between the date the forward contract is entered into and the date it matures. In addition, while forward contracts may offer protection from losses resulting from declines in the value of a particular non-U.S. currency, they also limit potential gains which might result from increases in the value of such currency. A Portfolio will also incur costs in connection with forward non-U.S. currency exchange contracts and conversions of non-U.S. currencies and U.S. dollars.

A Portfolio may also engage in proxy hedging transactions to reduce the effect of currency fluctuations on the value of existing or anticipated holdings of portfolio securities. Proxy hedging is often used when the currency to which the Portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Portfolio’s securities are, or are expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Portfolio if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. In addition, there is the risk that the perceived linkage between various currencies may not be present or may not be present during the particular time that a Portfolio is engaging in proxy hedging. A Portfolio may also cross-hedge currencies by entering into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies to which the Portfolio has or in which the Portfolio expects to have portfolio exposure. For example, a Portfolio may hold both Canadian government bonds and Japanese government bonds, and the adviser or sub-adviser may believe that Canadian dollars will deteriorate against Japanese yen. The Portfolio would sell Canadian dollars to reduce its exposure to that currency and buy Japanese yen. This strategy would be a hedge against a decline in the value of Canadian dollars, although it would expose the Portfolio to declines in the value of the Japanese yen relative to the U.S. dollar.

In general, currency transactions are subject to risks different from those of other portfolio transactions, and can result in greater losses to a Portfolio than would otherwise be incurred, even when the currency transactions are used for hedging purposes.

Liquid assets equal to the amount of the Portfolio’s assets that could be required to consummate forward contracts will be segregated on the books and records of the adviser or sub-adviser to the extent required by SEC guidelines. For the purpose of determining the adequacy of the securities so segregated, the securities will be valued at market or fair value. If the market or fair value of such securities declines, additional cash or securities will be added.

Stand-by Commitments. Under a stand-by commitment for a Municipal Obligation, a dealer agrees to purchase at the Portfolio’s option a specified Municipal Obligation at a specified price. Stand-by commitments for Municipal Obligations may be exercisable by a Portfolio at any time before the maturity of the underlying Municipal Obligations and may be sold, transferred or assigned only with the instruments involved. It is expected that such stand-by commitments will generally be available without the payment of any direct or indirect consideration.

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However, if necessary or advisable, a Portfolio may pay for such a stand-by commitment either separately in cash or by paying a higher price for Municipal Obligations which are acquired subject to the commitment for Municipal Obligations (thus reducing the yield to maturity otherwise available for the same securities). The total amount paid in either manner for outstanding stand-by commitments for Municipal Obligations held by a Portfolio will not exceed ½ of 1% of the value of such Portfolio’s total assets calculated immediately after each stand-by commitment is acquired.

Stand-by commitments will only be entered into with dealers, banks and broker-dealers which, in an adviser’s or sub-adviser’s opinion, present minimal credit risks. A Portfolio will acquire stand-by commitments solely to facilitate portfolio liquidity and not to exercise its rights thereunder for trading purposes. Stand-by commitments will be valued at zero in determining net asset value. Accordingly, where a Portfolio pays directly or indirectly for a stand-by commitment, its cost will be reflected as an unrealized loss for the period during which the commitment is held by such Portfolio and will be reflected as a realized gain or loss when the commitment is exercised or expires.

Each Tax-Free and Municipal Money Market Portfolio and the Core PLUS Total Return, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may acquire stand-by commitments with respect to Municipal Obligations held by it. The acquisition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligations to which the commitment relates.

Tax-Exempt Derivatives. The Municipal Money Market Portfolios and the Tax-Free Portfolios (collectively, the “Money and Non-Money Market Municipal Portfolios”) and the Asset Allocation, Core PLUS Total Return, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may hold tax-exempt derivatives which may be in the form of tender option bonds, participations, beneficial interests in a trust, partnership interests or other forms. It is intended that any such tax-exempt derivatives held by the New Jersey Municipal Money Market Portfolio and the New Jersey Tax-Free Income Portfolio shall comply with the requirements of N.J.S.A. 54A:6-14.1. A number of different structures have been used. For example, interests in long-term fixed-rate municipal debt obligations, held by a bank as trustee or custodian, are coupled with tender option, demand and other features when the tax-exempt derivatives are created. Together, these features entitle the holder of the interest to tender (or put) the underlying municipal debt obligation to a third party at periodic intervals and to receive the principal amount thereof. In some cases, municipal debt obligations are represented by custodial receipts evidencing rights to receive specific future interest payments, principal payments, or both, on the underlying securities held by the custodian. Under such arrangements, the holder of the custodial receipt has the option to tender the underlying securities at their face value to the sponsor (usually a bank or broker dealer or other financial institution), which is paid periodic fees equal to the difference between the securities’ fixed coupon rate and the rate that would cause the securities, coupled with the tender option, to trade at par on the date of a rate adjustment. A participation interest gives the Fund an undivided interest in a Municipal Obligation in the proportion the Fund’s participation bears to the total principal amount of the Municipal Obligation, and typically provides for a repurchase feature for all or any part of the full principal amount of the participation interest, plus accrued interest. Trusts and partnerships are typically used to convert long-term fixed rate high quality bonds of a single state or municipal issuer into variable or floating rate demand instruments. The Money and Non-Money Market Municipal Portfolios and the UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may hold tax-exempt derivatives, such as participation interests and custodial receipts, for municipal debt obligations which give the holder the right to receive payment of principal subject to the conditions described above. It is intended that any such tax-exempt derivatives held by the New Jersey Municipal Money Market Portfolio and the New Jersey Tax-Free Income Portfolio shall comply with the requirements of N.J.S.A. 54A:6-14.1. The Internal Revenue Service has not ruled on whether the interest received on tax-exempt derivatives in the form of participation interests or custodial receipts is tax-exempt, and accordingly, purchases of any such interests or receipts are based on the opinions of counsel to the sponsors of such derivative securities. Neither the Fund nor its investment adviser or sub-advisers will review the proceedings related to the creation of any tax-exempt derivatives or the basis for such opinions.

Tax-Exempt Preferred Shares. The Tax-Free Portfolios and the Asset Allocation, Core PLUS Total Return, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may invest in preferred interests of other investment funds that pay dividends that are exempt from regular Federal income tax. Such funds in turn invest in municipal bonds and other assets that pay interest or make distributions that are exempt

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from regular Federal income tax, such as revenue bonds issued by state or local agencies to fund the development of low-income, multi-family housing. Investment in such tax-exempt preferred shares involves many of the same issues as investing in other open- or closed-end investment companies as discussed below. These investments also have additional risks, including liquidity risk, the absence of regulation governing investment practices, capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers or industries. The Tax-Free Portfolios and the UltraShort Municipal Portfolio will treat investments in tax-exempt preferred shares as investments in municipal bonds.

Securities Lending. A Portfolio may seek additional income by lending securities on a short-term basis. Voting rights may pass with the lending of securities. The trustees of the Fund will call loans of securities to vote proxies or otherwise obtain rights to vote or consent if a material event affecting the investment occurs. The securities lending agreements will require that the loans be secured by collateral in cash, U.S. Government securities or (except for the Index Master Portfolio) irrevocable bank letters of credit maintained on a current basis equal in value to at least the market value of the loaned securities. A Portfolio may not make such loans in excess of 33 1/3% of the value of its total assets. Securities loans involve risks of delay in receiving additional collateral or in recovering the loaned securities, or possibly loss of rights in the collateral if the borrower of the securities becomes insolvent.

A Portfolio would continue to accrue interest on loaned securities and would also earn income on investment collateral for such loans. Any cash collateral received by a Portfolio in connection with such loans may be invested in a broad range of high quality, U.S. dollar-denominated money market instruments that meet Rule 2a-7 restrictions for money market funds. Specifically, cash collateral may be invested in any of the following instruments: (a) securities issued or guaranteed as to principal and interest by the U.S. Government or by its agencies or instrumentalities and related custodial receipts; (b) “first tier” quality commercial paper and other obligations issued or guaranteed by U.S. and non-U.S. corporations and other issuers rated (at the time of purchase) in the highest rating category by at least two NRSRO’s, or one if only rated by one NRSRO; (c) U.S. dollar-denominated obligations issued or supported by the credit of U.S. or non-U.S. banks or savings institutions with total assets in excess of $1 billion (including obligations of non-U.S. branches of such banks) (i.e., CD’s, BA’s and time deposits); (d) repurchase agreements relating to the above instruments, as well as corporate debt; and (e) unaffiliated and, to the extent permitted by SEC guidelines, affiliated money market funds. Any such investments must be rated “first tier” and must have a maturity of 397 days or less from the date of purchase.

PFPC Trust Company acts as the lending agent for the Portfolios and is paid a fee for the provision of these services. The lending agent has hired BlackRock Capital Management, Inc. (“BCM”), a wholly-owned subsidiary of BlackRock, Inc., and pays BCM to provide advisory services with respect to the collateral of all of the clients of its securities lending program. The lending agent may invest such collateral in short-term investments, including the Institutional Money Market Trust (the “Trust”), a portfolio of money market securities, or high-quality, short-term instruments with a maturity date not to exceed 397 days. BCM serves as investment adviser to the Trust, but receives no fees from the Trust for these services. Administrative and accounting services are provided by PFPC Inc., an indirect wholly-owned subsidiary of The PNC Financial Services Group, Inc. PFPC, Inc. is paid a fee from the Trust at an annual rate not to exceed 0.10% of the Trust’s average daily net assets.

While the Index Master Portfolio may earn additional income from lending securities, such activity is incidental to the investment objective of the Index Master Portfolio. The value of securities loaned may not exceed 33 1/3% of the value of the Index Master Portfolio’s total assets. In connection with such loans, the Index Master Portfolio will receive collateral consisting of cash or U.S. Government securities which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. In addition, the Index Master Portfolio will be able to terminate the loan at any time and will receive reasonable interest on the loan, as well as amounts equal to any dividends, interest or other distributions on the loaned securities. In the event of the bankruptcy of the borrower, the Trust could experience a delay in recovering the loaned securities. Management of the Trust believes that this risk can be controlled through careful monitoring procedures.

Yields and Ratings. The yields on certain obligations are dependent on a variety of factors, including general market conditions, conditions in the particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the ratings of the issue. The ratings of Moody’s, Fitch and S&P represent their respective opinions as to the quality of the obligations they undertake to rate. Ratings, however,

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are general and are not absolute standards of quality. Consequently, obligations with the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by a Portfolio, a rated security may cease to be rated. A Portfolio’s adviser or sub-adviser will consider such an event in determining whether the Portfolio should continue to hold the security. Subject to its other investment strategies, there is no limit on the amount of unrated securities a Portfolio may hold, although under normal market conditions the adviser and sub-adviser do not expect to hold these securities to a material extent.

Investment Companies. In connection with the management of their daily cash positions, the Equity Portfolios (other than the Index Master Portfolio) and the Core PLUS Total Return, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may invest in securities issued by other investment companies which invest in short-term debt securities and which seek to maintain a $1.00 net asset value per share. Such Portfolios may also invest in securities issued by other investment companies with similar investment objectives. The Bond Portfolios may invest in securities issued by other investment companies within the limits prescribed by the 1940 Act and set forth below. The Health Sciences, Global Resources, All-Cap Global Resources, International Opportunities, Asset Allocation and Core PLUS Total Return Portfolios may purchase shares of investment companies investing primarily in non-U.S. securities, including so-called “country funds.” Country funds have portfolios consisting exclusively of securities of issuers located in one foreign country. The Index Master Portfolio may also invest in Standard & Poor’s Depository Receipts (“SPARS”) and shares of other investment companies that are structured to seek a similar correlation to the performance of the S&P 500^® Index. Securities of other investment companies will be acquired within limits prescribed by the 1940 Act. As a shareholder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company’s expenses, including advisory fees. These expenses would be in addition to the advisory fees and other expenses the Portfolio bears directly in connection with its own operations.

The Money Market Portfolios may invest in securities issued by other investment companies which invest in short-term, high quality debt securities and which determine their net asset value per share based on the amortized cost or penny-rounding method of valuation. Securities of other investment companies will be acquired by a Portfolio within the limits prescribed by the 1940 Act. As a shareholder of another investment company, a Portfolio would bear, along with other shareholders, its pro rata portion of the other investment company’s expenses, including advisory fees. These expenses would be in addition to the advisory fees and other expenses the Portfolio bears directly in connection with its own operations.

Each Portfolio, other than the Index Equity Portfolio, currently intends to limit its investments so that, as determined immediately after a securities purchase is made: (i) not more than 5% of the value of its total assets will be invested in the securities of any one investment company; (ii) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group; and (iii) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Portfolio or by the Fund as a whole.

Stripped and Zero Coupon Obligations. To the extent consistent with their investment objectives, the Bond and Equity Portfolios may purchase Treasury receipts and other “stripped” securities that evidence ownership in either the future interest payments or the future principal payments on U.S. Government and other obligations. These participations, which may be issued by the U.S. Government (or a U.S. Government agency or instrumentality) or by private issuers such as banks and other institutions, are issued at a discount to their “face value,” and may include stripped mortgage-backed securities (“SMBS”). Stripped securities, particularly SMBS, may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors, and they are often illiquid. The International Bond Portfolio also may purchase “stripped” securities that evidence ownership in the future interest payments or principal payments on obligations of non-U.S. governments.

SMBS are usually structured with two or more classes that receive different proportions of the interest and principal distributions from a pool of mortgage-backed obligations. A common type of SMBS will have one class receiving all of the interest (“IO” or interest-only), while the other class receives all of the principal (“PO” or principal-only). However, in some cases, one class will receive some of the interest and most of the principal while the other class will receive most of the interest and the remainder of the principal. If the underlying obligations experience greater than anticipated prepayments of principal, a Portfolio may fail to fully recoup its initial investment in these securities even if the securities have received the highest rating by a nationally recognized

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statistical rating organization. The market value of SMBS can be extremely volatile in response to changes in interest rates. The yields on a class of SMBS that receives all or most of the interest are generally higher than prevailing market yields on other mortgage-related obligations because their cash flow patterns are also volatile and there is a greater risk that the initial investment will not be fully recouped.

Each Bond and Equity Portfolio may invest in zero-coupon bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may experience greater volatility in market value than similar maturity debt obligations which provide for regular interest payments. Additionally, current federal tax law requires the holder of certain zero-coupon bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income and excise taxes, a Portfolio may be required to distribute income accrued with respect to these securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements. See “Taxes.”

Funding Agreements. The Bond and Equity Portfolios and the Money Market Portfolio may invest in guaranteed investment contracts (“GICs”) and similar funding agreements. In connection with these investments, a Portfolio makes cash contributions to a deposit fund of an insurance company’s general account. The insurance company then credits to the Portfolio on a monthly basis guaranteed interest, which is based on an index (such as LIBOR). The funding agreements provide that this guaranteed interest will not be less than a certain minimum rate. The purchase price paid for a funding agreement becomes part of the general assets of the insurance company, and the contract is paid from the general assets of the insurance company. Generally, funding agreements are not assignable or transferable without the permission of the issuing insurance companies, and an active secondary market in some funding agreements does not currently exist.

Short Sales. The Portfolios may only make short sales of securities “against-the-box.” A short sale is a transaction in which a Portfolio sells a security it does not own in anticipation that the market price of that security will decline. The Portfolios may make short sales both as a form of hedging to offset potential declines in long positions in similar securities and in order to maintain portfolio flexibility. In a short sale “against-the-box,” at the time of sale, the Portfolio owns or has the immediate and unconditional right to acquire the identical or similar security at no additional cost. When selling short “against-the-box,” a Portfolio forgoes an opportunity for capital appreciation in the security.

Interest Rate and Extension Risk. The value of fixed income securities in the Portfolios can be expected to vary inversely with changes in prevailing interest rates. Fixed income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The Portfolios are not restricted to any maximum or minimum time to maturity in purchasing individual portfolio securities, and the average maturity of a Portfolio’s assets will vary. Although the Bond Portfolios’ sub-adviser will normally attempt to structure each Portfolio to have a comparable duration to its benchmark as stated in the Prospectuses, there can be no assurance that it will be able to do so at all times.

Liquidity Management. Each Money Market Portfolio and the Enhanced Income and UltraShort Municipal Portfolios may hold uninvested cash reserves pending investment during temporary defensive periods or if, in the opinion of the Portfolios’ sub-adviser, suitable obligations are unavailable. During normal market periods, no more than 20% of a Portfolio’s assets will be held uninvested. Uninvested cash reserves may not earn income.

As a temporary defensive measure if its adviser or sub-adviser determines that market conditions warrant, each Equity Portfolio (other than the Index Master Portfolio) may invest without limitation in high quality money market instruments. The Equity Portfolios may also invest in high quality money market instruments pending investment or to meet anticipated redemption requests. The Asset Allocation Portfolio may also invest in these securities in furtherance of its investment objective. The Index Master Portfolio may invest a portion of its assets, normally not more than 5% of its net assets, in certain short-term fixed income obligations in order to maintain liquidity or to invest temporarily uncommitted cash balances. High quality money market instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of non-U.S. issuers, bank obligations, including U.S. subsidiaries and branches of non-U.S. banks, corporate obligations, commercial paper, repurchase agreements and obligations of supranational organizations. Generally, such obligations will mature within one year from the date of settlement, but may mature within two years from the date of settlement.

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Illiquid Securities. No Equity or Bond Portfolio will invest more than 15% (10% with respect to the Index Master Portfolio) and no Money Market Portfolio will invest more than 10% of the value of its net assets in securities that are illiquid. GICs, variable and floating rate instruments that cannot be disposed of within seven days, and repurchase agreements and time deposits that do not provide for payment within seven days after notice, without taking a reduced price, are subject to these limits. Each Equity, Bond and Money Market Portfolio may purchase securities which are not registered under the Securities Act of 1933 (the “1933 Act”) but which can be sold to “qualified institutional buyers” in accordance with Rule 144A under the 1933 Act. These securities will not be considered illiquid so long as it is determined by the adviser or sub-adviser that an adequate trading market exists for the securities. This investment practice could have the effect of increasing the level of illiquidity in a Portfolio during any period that qualified institutional buyers become uninterested in purchasing these restricted securities.

Any securities that are thinly traded or whose resale is restricted can be difficult to sell at the desired time and price. Some of these securities are new and complex, and trade only among institutions; the markets for these securities are still developing, and may not function as efficiently as established markets. Owning a large percentage of restricted or illiquid securities could hamper the fund’s ability to raise cash to meet redemptions. Also, because there may not be an established market price for these securities, the fund may have to estimate their value, which means that their valuation (and, to a much smaller extent, the valuation of the fund) may have a subjective element. Transactions in restricted or illiquid securities may entail registration expense and other transaction costs that are higher than those for transactions in unrestricted or liquid securities. Where registration is required for restricted or illiquid securities a considerable time period may elapse between the time the fund decides to sell the security and the time it is actually permitted to sell the security under an effective registration statement. If during such period, adverse market conditions were to develop, the fund might obtain less favorable pricing terms that when it decided to sell the security.

Guarantees. A Portfolio may purchase securities which contain guarantees issued by an entity separate from the issuer of the security. Generally, the guarantor of a security (often an affiliate of the issuer) will fulfill an issuer’s payment obligations under a security if the issuer is unable to do so.

REITs. In pursuing its investment strategy, an Equity Portfolio may invest in shares of REITs. REITs possess certain risks which differ from an investment in common stocks. REITs are financial vehicles that pool investor’s capital to purchase or finance real estate. REITs may concentrate their investments in specific geographic areas or in specific property types, i.e., hotels, shopping malls, residential complexes and office buildings. The market value of REIT shares and the ability of the REITs to distribute income may be adversely affected by several factors, including rising interest rates, changes in the national, state and local economic climate and real estate conditions, perceptions of prospective tenants of the safety, convenience and attractiveness of the properties, the ability of the owners to provide adequate management, maintenance and insurance, the cost of complying with the Americans with Disabilities Act, increased competition from new properties, the impact of present or future environmental legislation and compliance with environmental laws, changes in real estate taxes and other operating expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws and other factors beyond the control of the issuers of the REITs. In addition, distributions received by a Portfolio from REITs may consist of dividends, capital gains and/or return of capital. As REITs generally pay a higher rate of dividends (on a pre-tax basis) than operating companies, to the extent application of the Portfolio’s investment strategy results in the Portfolio investing in REIT shares, the percentage of the Portfolio’s dividend income received from REIT shares will likely exceed the percentage of the Portfolio’s portfolio which is comprised of REIT shares. Generally, dividends received by a Portfolio from REIT shares and distributed to the Portfolio’s shareholders will not constitute “qualified dividend income” eligible for the reduced tax rate applicable to qualified dividend income; therefore, the tax rate applicable to that portion of the dividend income attributable to REIT shares held by the Portfolio that shareholders of the Portfolio receive will be taxed at a higher rate than dividends eligible for the reduced tax rate applicable to qualified dividend income.

Portfolio Turnover Rates. A Portfolio’s annual portfolio turnover rate will not be a factor preventing a sale or purchase when the adviser or sub-adviser believes investment considerations warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular year. High portfolio turnover (i.e., 100% or more) may result in increased transaction costs to a Portfolio, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and reinvestment in other securities. The sale of a Portfolio’s securities may result in the recognition of capital gain or loss. Given the frequency of sales,

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such gain or loss will likely be short-term capital gain or loss. Unlike long-term capital gain, short-term capital gain of individuals is taxable at the same rates as ordinary income. These effects of higher than normal portfolio turnover may adversely affect a Portfolio’s performance.

SPECIAL CONSIDERATIONS FOR STATE-SPECIFIC PORTFOLIOS

This information regarding the State-Specific Portfolios is derived from official statements of certain issuers published in connection with their issuance of securities and from other publicly available information, and is believed to be accurate. No independent verification has been made of any of the following information.

Special Considerations Regarding Investments in Ohio State-Specific Obligations. The Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios (the “Ohio Portfolios”) will each invest most of its net assets in securities issued by or on behalf of (or in certificates of participation in lease-purchase obligations of) the State of Ohio, political subdivisions of the State, or agencies or instrumentalities of the State or its political subdivisions (“Ohio Obligations”). Each of the Ohio Portfolios is therefore susceptible to general or particular economic, political or regulatory factors that may affect issuers of Ohio Obligations. The following information constitutes only a brief summary of some of the many complex factors that may have an effect. The information does not apply to “conduit” obligations on which the public issuer itself has no financial responsibility. This information is derived from official statements of certain Ohio issuers published in connection with their issuance of securities and from other publicly available information, and is believed to be accurate. No independent verification has been made of any of the following information.

Generally, the creditworthiness of Ohio Obligations of local issuers is unrelated to that of obligations of the State itself, and the State has no responsibility to make payments on those local obligations.

There may be specific factors that at particular times apply in connection with investment in particular Ohio Obligations or in those obligations of particular Ohio issuers. It is possible that the investment may be in particular Ohio Obligations, or in those of particular issuers, as to which those factors apply. However, the information below is intended only as a general summary, and is not intended as a discussion of any specific factors that may affect any particular obligation or issuer.

Much of this information is as of June 9, 2005, particularly debt figures and other statistics.

Ohio is the seventh most populous state. The Census count for 2000 was 11,353,140, up from 10,847,100 in 1990.

While diversifying more into the service and other non-manufacturing areas, the Ohio economy continues to rely in part on durable goods manufacturing largely concentrated in motor vehicles and machinery, including electrical machinery. As a result, general economic activity, as in many other industrially-developed states, tends to be more cyclical than in some other states and in the nation as a whole. Agriculture is an important segment of the economy, with over half the State’s area devoted to farming and a significant portion of total employment in agribusiness.

In earlier years, the State’s overall unemployment rate was commonly somewhat higher than the national figure. For example, the reported 1990 average monthly State rate was 5.7%, compared to the 5.5% national figure. However, then through 1998 the annual State rates were below the national rates (4.3% vs. 4.5% in 1998), but were again slightly higher in 1999 (4.3% vs. 4.2%) and 2000 (4.0% vs. 4.0%), lower in 2001 (4.2% vs. 4.7%) and in 2002 (5.7% vs. 5.8%) and higher in 2003 (6.1% vs. 6.0%) and in 2004 (6.0% vs. 5.5%). In April 2005, the State unemployment rate was higher than the national rate (6.1% vs. 5.2%). The unemployment rate and its effects vary among geographic areas of the State.

There can be no assurance that future national, regional or state-wide economic difficulties, and the resulting impact on State or local government finances generally, will not adversely affect the market value of Ohio Obligations held in an Ohio Portfolio or the ability of particular obligors to make timely payments of debt service on (or lease payments relating to) those Obligations.

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The State operates on the basis of a fiscal biennium for its appropriations and expenditures, and is effectively precluded by law from ending its July 1 to June 30 fiscal year or fiscal biennium in a deficit position. Most State operations are financed through the General Revenue Fund (“GRF”), for which the personal income and sales-use taxes are the major sources. Growth and depletion of GRF ending fund balances show a consistent pattern related to national economic conditions, with the ending fiscal year balance reduced during less favorable and increased during more favorable economic periods. The State has well-established procedures for, and has timely taken, necessary actions to ensure resource/expenditure balances during less favorable economic periods such as the current fiscal biennium. Those procedures include general and selected reductions in appropriations spending.

Recent biennium ending GRF balances were:

Biennium	Fund Balance		Cash Balance
1992-93	$	111,013,000	$	393,634,000
1994-95		928,019,000		1,312,234,000
1996-97		834,933,000		1,367,750,000
1998-99		976,778,000		1,512,528,000
2000-01		219,414,000		817,069,000
2002-03		52,338,000		396,539,000

Actions have been and may be taken by the State during less favorable economic periods to ensure resource/expenditure balances (particularly in the GRF), some of which are described below. None of those actions were or are being applied to appropriations or expenditures needed for debt service or lease payments relating to any State obligations.

The appropriations acts for the 2004-05 biennium include all necessary appropriations for debt service on State obligations and for lease payments relating to lease obligations issued by the Ohio Building Authority and the Treasurer of State, and previously by the Ohio Public Facilities Commission.

The following is a selective general discussion of State finances, particularly GRF receipts and expenditures, for the recent and the current bienniums.

1992-93. State and national fiscal uncertainties necessitated several actions to achieve positive GRF ending balances. An interim appropriations act was enacted effective July 1, 1991, that included appropriations for both years of the biennium for debt service and lease rental payments on State obligations payable from the GRF, even though most other GRF appropriations were made for only one month. The general appropriations act for the entire biennium was then passed on July 11, 1991. Included in the GRF resources appropriated was a transfer of $200,000,000 from the Budget Stabilization fund (“BSF”) to the GRF.

To address a projected fiscal year 1992 imbalance, the Governor ordered most State agencies to reduce GRF spending in the final six months of that fiscal year by a total of $184,000,000, the entire $100,400,000 BSF balance and additional amounts from certain other funds were transferred to the GRF, and other revenue and spending actions were taken.

Steps to ensure positive biennium-ending GRF balances for fiscal year 1993 included the Governor ordering selected GRF spending reductions totaling $350,000,000 and tax revisions that produced additional revenue of $194,500,000. As a first step toward BSF replenishment, $21,000,000 from the GRF ending balance was deposited in the BSF.

1994-95. Expenditures were below those authorized, primarily as the result of lower than expected Medicaid spending, and tax receipts (primarily auto sales/use) were significantly above estimates. Transfers from the biennium-ending GRF fund balance included $535,200,000 to the BSF and $322,800,000 to other funds, including a family services stabilization fund in anticipation of possible federal programs changes.

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1996-97. From a higher than forecasted mid-biennium GRF fund balance, $100,000,000 was transferred for elementary and secondary school computer network purposes and $30,000,000 to a new State transportation infrastructure fund. Approximately $400,800,000 served as a basis for temporary 1996 personal income tax reductions aggregating that amount. Of the GRF biennium-ending fund balance, $250,000,000 was directed to school buildings, $94,400,000 to the school computer network, $44,200,000 to school textbooks and instructional materials and a distance learning program, $34,400,000 to the BSF, and $262,900,000 to the State Income Tax Reduction Fund (“ITRF”).

1998-99. GRF appropriations of approximately $36 billion provided for significant increases in funding for primary and secondary education. Of the first fiscal year (ended on June 30, 1998) ending fund balance of over $1.08 billion, approximately $701,400,000 was transferred to the ITRF, $200,000,000 into public school assistance programs, and $44,184,200 into the BSF. Of the GRF biennium-ending fund balance, $325,700,000 was transferred to school building assistance, $293,185,000 to the ITRF, $85,400,000 to SchoolNet (a program to supply computers for classrooms), $4,600,000 to interactive video distance learning, and $46,374,000 to the BSF.

2000-01. The State’s financial situation varied substantially in the 2000-01 biennium. The first fiscal year of the biennium ended with a GRF cash balance of $1,506,211,000 and a fund balance of $855,845,000. A transfer of $49,200,000 from that balance increased the BSF to $1,002,491,000 (or 5% of GRF revenue for the preceding fiscal year). An additional $610,400,000 was transferred to the State Income Tax Reduction Fund.

In the middle of the second year of the biennium, the State enacted supplemental appropriations of $645,300,000 to address shortfalls in its Medicaid and disability assistance programs. The State’s share of this additional funding was $247,600,000, with $125,000,000 coming from fiscal year 2001 GRF spending reductions and the remainder from available GRF moneys. The reductions were implemented by OBM prior to March 1, 2001, by a 1 to 2% cut applying to most State departments and agencies. Expressly excluded from the reductions, in addition to debt service and lease rental payments relating to State obligations, were elementary and secondary education.

In March 2001, new lowered revenue estimates for fiscal year 2001 and for fiscal years 2002 and 2003 were announced. Based on indications that the Ohio economy continued to be affected by the national economic downturn, GRF revenue estimates for fiscal year 2001 were reduced by $288,000,000. In addition, OBM projected higher than previously anticipated Medicaid expenditures. Among the more significant steps taken to ensure the positive GRF ending fund balance at June 30, 2001, were further spending reductions (with the same exceptions mentioned above for debt service and education) and authorization to transfer from the BSF to the GRF amounts necessary to ensure an ending GRF fund balance of $188,200,000. The State ended fiscal year 2001 with a GRF fund balance of $219,414,000, making that transfer unnecessary.

2002-03. Ongoing and rigorous consideration was given by the Governor and the General Assembly to revenues and expenditures throughout fiscal years 2002-03, primarily as a result of continuing economic conditions. Budgetary pressures during this period were primarily due to continuing lower than previously anticipated levels of receipts from certain major revenue sources.

Consideration came in four general time frames – the June 2001 biennial appropriation act, late fall and early winter 2001, late spring and summer 2002 and late winter/spring 2003. Significant remedial steps included authorization to draw down and use the entire BSF balance, increased cigarette taxes and use of tobacco settlement moneys previously earmarked for other purposes.

The biennial GRF appropriations act passed in June 2001 provided for biennial GRF expenditures of approximately $45.1 billion without increases in any major State taxes. Some of the major program funding increases over the original appropriations for the preceding 2000-01 biennium were: Medicaid, 29%; primary and secondary education, 17%; adult and juvenile corrections, 6.2%; mental health and mental retardation, 2.8%; and higher education, 2.4%.

That original appropriations act provided for the following uses of certain reserves, aimed at achieving fiscal year and biennium ending positive GRF fund balances, based on then current estimates and projections:

• Transfer of up to $150,000,000 from the BSF to the GRF for increased Medicaid costs.

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• An additional $10,000,000 transfer from the BSF to an emergency purposes fund.

• Transfer to the GRF in fiscal year 2002 of the entire $100,000,000 balance in the Family Services Stabilization Fund.

Necessary GRF debt service and lease rental appropriations for the biennium were requested in the Governor’s proposed budget, incorporated in the related appropriations bills as introduced, and included in the versions as passed by the House and the Senate and in the act as passed and signed. The same was true for separate appropriations acts that included lease-rental appropriations for certain OBA-financed projects for the departments of Transportation and Public Safety, and Bureau of Workers’ Compensation.

The Ohio economy continued to be negatively affected by the national economic downturn and by national and international events, and in October 2001 OBM lowered its GRF revenue estimates. Based on reduced revenue collections in certain categories (particularly personal income taxes and, at that time, sales taxes), OBM then projected GRF revenue shortfalls of $709,000,000 for fiscal year 2002 and $763,000,000 for fiscal year 2003. Executive and legislative actions were taken based on those new estimates, including:

• The Governor promptly ordered reduced appropriations spending by most State agencies (expressly excepted were appropriations for or relating to debt service on State obligations), and limits on hiring and major purchases. Reductions were at the annual rate of 6% for most State agencies (including higher education institutions), with lesser reductions for correctional and other institutional agencies, and with exemptions for primary and secondary education and the adjutant general.

• December 2001 legislation, the more significant aspects of which included:

• Authorizing transfer of up to $248,000,000 from the BSF to the GRF during the current biennium. This was in addition to the $160,000,000 in transfers from the BSF provided for in the original appropriations act (and would reduce the BSF balance to approximately $607,000,000).

• Reallocating to the GRF a $260,000,000 portion of tobacco settlement receipts in fiscal years 2002 and 2003, intended to be replenished from settlement receipts in fiscal years 2013 and 2014.

• Reducing appropriation spending authorizations for the legislative and judicial branches.

• Making certain tax-related changes (including accelerating the time for certain payments).

• Authorizing Ohio’s participation in a multi-state lottery game, estimated to generate $40,000,000 annually beginning in fiscal year 2003.

Continuing economic conditions, among other factors, then led OBM in the spring of 2002 to project a higher than previously estimated GRF revenue shortfall. Among areas of continuing concern were lower than anticipated levels of receipts from personal income and corporate franchise taxes. These updated GRF shortfall estimates were approximately $763,000,000 in fiscal year 2002 and $1.15 billion in fiscal year 2003. Further executive and legislative actions were taken for fiscal year 2002 to ensure a positive GRF fund balance for fiscal year 2002 and the biennium. In addition to further administrative and management steps, such as additional restraints on spending, those actions included legislation providing for among other things:

• Authorization of additional transfers to the GRF of the then-remaining BSF balance ($607,000,000) as needed in fiscal years 2002 and 2003, and of $50,800,000 of unclaimed funds to the GRF.

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• $50,000,000 reduction in the fiscal year 2002 ending GRF balance (to $100,000,000 from its previously budgeted level of $150,000,000).

• Increased cigarette tax by 31¢ per pack (to a total 55¢ a pack), estimated by OBM to produce approximately $283,000,000 in fiscal year 2003.

• Transfers to the GRF of $345,000,000 from tobacco settlement money received in fiscal years 2002 and 2003. That amount had previously been earmarked and appropriated for elementary and secondary school facilities construction; moneys for that purpose were instead provided by way of $345,000,000 in additionally authorized general obligation bonds.

• Extension of the State income tax to Ohio-based trusts (a “sunset” provision ends this tax December 31, 2004), and exemption of certain Ohio business taxes from recent federal tax law “economic stimulus changes” by modifying existing State law tie-ins to the federal tax base. The combination produced approximately $283,000,000 in fiscal year 2003.

• Selective additional appropriation cuts for certain departments.

Certain other provisions of the legislation were aimed at the future, rather than the 2002-03 biennium, including the indexing of State income tax brackets to the Gross Domestic Product beginning in July 2005.

Several categories of fiscal year 2002 GRF tax receipts were below those in the prior fiscal year. Overall, total GRF tax receipts were 1.1% below those in fiscal year 2001. Fiscal year 2002 nevertheless did end with positive GRF balances of $108,306,000 (fund) and $619,217,000 (cash). This was accomplished by the remedial steps described above, including significant transfers from the BSF ($534,300,000) and from tobacco settlement moneys ($289,600,000). The fiscal year ending BSF balance was $427,904,000, with that entire balance appropriated for GRF use if needed in fiscal year 2003.

On July 1, 2002, the first day of fiscal year 2003, the Governor issued an executive order directing a total of approximately $375,000,000 in GRF spending cutbacks for fiscal year 2003 (based on prior appropriations) by agencies and departments in his administration, as well as limitations on hiring, travel and major purchases. This cutback order reflected and was consistent with prior budget balancing discussions between the Governor and General Assembly. Annual cutbacks ranged generally from 7.5% to 15%, with allocation of amounts and manners determined by the OBM Director in consultation with the affected agencies and departments. Excluded from those cutbacks were elementary and secondary education, higher education, alcohol and drug addiction services, and the adjutant general. Also expressly excluded were appropriations for debt service including lease rental contracts and all State office building rent, and ad valorem property tax relief payments (made to local taxing entities).

Based on continuing reduced revenue collections (particularly, personal income taxes and sales tax receipts for the holidays) and projected additional Medicaid spending of $40,000,000, OBM in late January 2003 announced an additional GRF shortfall of $720,000,000 for fiscal year 2003. The Governor ordered immediate additional reductions in appropriations spending intended to generate an estimated $121,600,000 of GRF savings through the end of the fiscal year (expressly excepted were appropriations for or relating to debt service on State obligations). The Governor also proposed for the General Assembly’s prompt consideration the following additional revenue enhancements, transfers and expenditure reductions for fiscal year 2003 requiring legislative authorization to achieve the indicated financial effects as estimated by OBM:

• A 2.5% reduction in local government fund distributions to most subdivisions and local libraries, producing an estimated $30,000,000 savings. This reduction is in addition to the prior local government fund distribution adjustments noted below.

• Transfers to the GRF from unclaimed funds ($35,000,000) and various rotary funds ($21,400,000).

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• A one-month acceleration in sales tax collections by vendors filing electronically, to produce $286,000,000.

• An additional increase in the cigarette tax of 45 cents per pack (to a total of $1.00 a pack), to produce approximately $140,000,000.

• A doubling of the current taxes on spirituous liquor and beer and wine, to net an additional $18,700,000.

The Governor proposed enactment of these legislative authorizations by March 1, 2003 in order to produce the indicated financial effects by the June 30 end of the fiscal year and biennium. The General Assembly gave its final approval on February 25, 2003, to legislation authorizing the first three elements (see above) of the Governor’s proposal, but that legislation did not include the proposed additional taxes on cigarettes and spirituous liquor and beer and wine.

OBM projected at the time that the Governor’s proposal to the General Assembly and the additional expenditure reductions ordered by the Governor in January 2003, coupled with the previously authorized transfer to the GRF of the then available and unused balance in the BSF, would result in a positive GRF fund balance at June 30, 2003. To offset the General Assembly’s enactment of legislation that did not include the proposed additional taxes on cigarettes and liquor, beer and wine, the Governor on March 25 ordered additional reductions in GRF appropriations spending aggregating $142.5 million for the balance of fiscal year 2003. Included were reductions (generally at an annualized rate of 2.5%) of $90.6 million in State foundation and parity aid to school districts and an additional $9.3 million in Department of Education administration spending, $39.2 million in instructional support to higher education institutions, and other selected reductions totaling $3.4 million. The Governor also identified approximately $20 million in excess food stamp administration funds available to offset the need for further expenditure reductions. Expressly excepted from those reductions were appropriations for or relating to debt service on State obligations.

Based on the Administration’s continuing monitoring of revenues, and as an anticipated step in the then ongoing 2004-05 biennial budget and appropriations process, OBM reported revised revenue estimates to the General Assembly on June 11, 2003. Those estimates revised fiscal year 2003 revenues downward by an additional $200,000,000 from OBM’s January 2003 adjusted baseline, based primarily on updated income and sales tax receipts through May 31. The Governor and OBM addressed this additional fiscal year 2003 revenue shortfall through additional expenditure controls and by drawing upon $193,000,000 of federal block grant aid made available to the State prior to June 30 under a federal law effective on May 28, 2003.

The State ended the 2002-03 biennium with a GRF fund and cash balances of $52,338,000 and $396,539,000, respectively, and a balance in the BSF of $180,705,000.

Additional appropriations actions during the 2002-03 biennium, affecting most subdivisions and local libraries in the State, relate to the various local government assistance funds. The original appropriations act capped the amount to be distributed in fiscal years 2002 and 2003 to essentially the equivalent monthly payment amounts in fiscal years 2000 and 2001. Subsequent legislation amended the level to the lesser of those prior fiscal year amounts or the amount that would have been distributed under the standard formula.

Current Biennium. The GRF appropriations bill for the 2004-05 biennium (beginning July 1, 2003) was passed by the General Assembly on June 19, 2003 and promptly signed (with selective vetoes) by the Governor June 26. All necessary GRF debt service and lease-rental appropriations for the entire biennium were requested in the Governor’s proposed budget, incorporated in the related appropriations bill as introduced and in the bill’s versions as passed by the House and the Senate, and in the Act as passed and signed. (The same is true for the separate transportation and public safety and Bureau of Workers’ Compensation appropriations acts containing lease-rental appropriations for certain OBA-financed ODOT, DPS and BWC projects.)

The Act provides for total GRF biennial expenditures of approximately $48.8 billion. Those authorized GRF expenditures for fiscal year 2004 are approximately 5.8% higher than the actual fiscal year 2003 expenditures

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(taking into account fiscal year 2003 expenditure reductions), and for fiscal year 2005 are approximately 3.5% higher than for fiscal year 2004. The following are examples of increases in authorized GRF biennial expenditures compared with actual 2002-03 expenditures in major program categories: primary and secondary education, 5.1%; higher education, 4.4%; mental health and mental retardation, 4.1%; Medicaid, 19.9%; and adult and juvenile corrections, 5.7%.

The above expenditure levels reflect among other expenditure controls in the Act: Medicaid cost containment measures including pharmacy cost management initiatives, limited expenditure growth for institutional services and implementation of managed care for higher-cost populations; continued phase-out of certain tangible personal property tax relief payments to local governments; the closing by consolidation of three institutional facilities during the biennium; adjustments in eligibility guidelines for subsidized child care from 185% to 150% of the federal poverty level and freezing certain reimbursement rates; no compensation increases for most State employees in fiscal year 2004 and limited one-time increases in fiscal year 2005; and continued limitation on local government assistance fund distributions to most subdivisions and local libraries to the lesser of the equivalent monthly payments in fiscal years 2000 and 2001 or the amount that would have been distributed under the standard formula.

The GRF expenditure authorizations for the 2004-05 biennium also reflect and are supported by revenue enhancement actions contained in the Act including:

• A one-cent increase in the State sales tax (to 6%) for the biennium (expiring June 30, 2005), projected to generate approximately $1.25 billion in each fiscal year to which it applies.

• Expansion of the sales tax base to include dry-cleaning/laundry services, towing, personal care and other services, and satellite television, projected in the aggregate to produce approximately $69,000,000 annually. (The inclusion of satellite television in the sales tax base, projected to produce approximately $21,000,000 annually, is subject to a legal challenge.)

• Moving local telephone companies from the public utility tax base to the corporate franchise and sales tax, projected to produce approximately $29,000,000 annually.

• Elimination of the sales tax exemption for WATS and 800 telecom services coupled with the enactment of a more limited exemption for call centers, projected to produce approximately $64,000,000 annually.

• Adjustments in the corporate franchise tax through the adoption of the Uniform Division of Income for Tax Purposes Act (UDITPA) for apportionment of business income among states, and an increase in the corporate alternative minimum tax, projected in the aggregate to produce approximately $35,000,000 annually.

The Act also authorized and OMB on or before June 30, 2004, transferred $242,800,000 of proceeds received from the national tobacco settlement into the GRF. In addition, the Act reflects the draw down during the biennium of an additional $582,000,000 of federal block grant and Medicaid assistance aid made available to the State under a federal law effective May 28, 2003.

Based on regular monthly monitoring of revenues and expenditures, OBM on March 8, 2004, announced revised GRF revenue projections for fiscal years 2004 and 2005 based primarily on reduced revenue collections from personal income taxes. In response to OBM reducing its GRF revenue projection by $247,100,000 (1.02%) for fiscal year 2004 and by $372,700,000 (1.48%) for fiscal year 2005, the Governor on March 8 ordered fiscal year 2004 expenditure reductions of approximately $100,000,000. On July 1, the Governor ordered fiscal year 2005 expenditure cuts of approximately $118 million in addition to a reduction of $50,000,000 in State spending on Medicaid reflecting an increased Federal share of certain Medicaid services. Those annualized reductions are 1% for corrections, youth services, mental health, and mental retardation and developmental disabilities; and 4% in fiscal year 2004 and 6% in fiscal year 2005 for other departments and agencies. Expressly excluded from those reductions are debt service and lease rental payments relating to State obligations, State basic aid to elementary and

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secondary education, instructional subsidies and scholarships for public higher education, in-home care for seniors and certain job creation programs. The balance of those revenue reductions have been and will be offset by GRF expenditure lapses and, for fiscal year 2005, elimination of an anticipated $100,000,000 year-end transfer to the BSF while maintaining a 0.5% year-end GRF fund balance. The State ended fiscal year 2004 with a GRF fund balance of $157,509,000 and a GRF cash balance of $533,132,000.

Litigation pending in the Ohio Court of Claims contests the Ohio Department of Human Services (“ODHS”, now Ohio Department of Job and Family Services (“ODJFS”)) former Medicaid financial eligibility rules for married couples when one spouse is living in a nursing facility and the other resides in the community. ODHS promulgated new eligibility rules effective January 1, 1996. ODHS appealed an order of the federal court directing it to provide notice to persons potentially affected by the former rules from 1990 through 1995, and the Court of Appeals ruled in favor of ODHS; plaintiff’s petition for certiorari was not granted by the U.S. Supreme Court. As to the Court of Claims case, it is not possible to state the period (beyond the current fiscal year) during which necessary additional Medicaid expenditures would have to be made. Plaintiffs have estimated total additional Medicaid expenditures at $600,000,000 for the retroactive period and, based on current law, it is estimated that the State’s share of those additional expenditures would be approximately $240,000,000. The Court of Appeals has certified the class action and notice has been sent to the members of the class. Trial for liability only was completed in the Court of Claims in January 2003 and all post-trial briefs have been filed with that Court. In March 2004, the trial court issued a decision finding no liability with respect to ODJFS. The plaintiff class has filed an appeal from that decision to the Franklin County Court of Appeals. That appeal is currently pending.

Litigation is also currently pending in the Cuyahoga County Court of Appeals relating to the transfer to the GRF and use in fiscal year 2002 for general State purpose of $60,000,000 in earned federal reimbursement on Title XX (Social Services Block Grant) expenditures. Plaintiff Cuyahoga County filed an action contesting the transfer and use of those monies for general State purposes, and the trial court ordered the State to return the monies to its Department of Job and Family Services. The State has appealed the trial court’s decision and order.

The incurrence or assumption of debt by the State without a popular vote is, with limited exceptions, prohibited by the State Constitution. The State may incur debt to cover casual deficits or to address failures in revenues or to meet expenses not otherwise provided for, but limited in amount to $750,000. The Constitution expressly precludes the State from assuming the debts of any county, city, town or township, or of any corporation. (An exception in both cases is for debts incurred to repel invasion, suppress insurrection, or defend the State in war.) The Constitution provides that “Except the debts above specified . . . no debt whatever shall hereafter be created by, or on behalf of the state.”

By 17 constitutional amendments approved from 1921 to present, Ohio voters have authorized the incurrence of State general obligation (“GO”) debt and the pledge of taxes or excises to its payment. All related to the financing of capital facilities, except for three that funded bonuses for veterans and one that funded coal technology research and development. Currently, tax supported general obligation debt of the State is authorized to be incurred for the following purposes: highways, local infrastructure, coal development, natural resources, higher education, common schools, and conservation. Although supported by the general obligation pledge, highway debt is backed by a pledge of and has always been paid from the State’s motor fuel taxes and other highway user receipts that are constitutionally restricted in use to highway related purposes.

A 1999 constitutional amendment provides an annual debt service “cap” applicable to future issuances of State general obligations and other State direct obligations payable from the GRF or net State lottery proceeds. Generally, new bonds may not be issued if future fiscal year debt service on those new and the then outstanding bonds of those categories would exceed 5% of the total estimated GRF revenues plus net State lottery proceeds during the fiscal year of issuance. Those direct obligations of the State include, for example, special obligation bonds that are paid from GRF appropriations, but exclude bonds such as highway bonds that are paid from highway user receipts. Pursuant to the amendment and implementing legislation, the Governor has designated the OBM Director as the State official to make the 5% determinations and certifications. Application of the cap may be waived in a particular instance by a three-fifths vote of each house of the General Assembly and may be changed by future constitutional amendments.

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In addition to its issuance of highway bonds, the State has financed selected highway infrastructure projects by entering into agreements that call for payments to be made from federal transportation funds allocated to the State, subject to biennial appropriations by the General Assembly. Annual State payments under those agreements reach a maximum of $79,602,448 in fiscal year 2005. In the event of any insufficiency in those anticipated federal allocations to make payments on State bonds, the payments are to be made from any lawfully available federal moneys appropriated to ODOT for the purpose, and in the case of continued insufficiency the ODOT Director is to request a General Assembly appropriation for the purpose.

State agencies also have participated in office building and non-highway transportation projects that have local as well as State use and benefit, in connection with which the State has entered into lease-purchase agreements with terms ranging from 7 to 20 years. Certificates of Participation (“COPs”) have been issued that represent fractionalized interests in or are payable from the State’s anticipated payments. The number and amount of COPs issued in connection with those agreements have varied and will continue to vary. Including the Lease Payments under the Series 2005A Certificates, the maximum annual payment under those agreements, primarily made from GRF appropriations, is 11,718,700 in fiscal year 2017. Payments by the State are subject to biennial appropriations by the General Assembly with the lease terms subject to renewal if appropriations are made. Generally, the OBM Director’s approval of such agreements is required, particularly if COPs are to be publicly-offered in connection with those agreements.

A statewide economic development program assists the financing of facilities and equipment for industry, commerce, research and distribution, including technology innovation, by providing loans and loan guarantees. The law authorizes the issuance of State bonds and notes secured by a pledge of portions of the State profits from liquor sales. The General Assembly has authorized the issuance of these obligations with a general maximum of $500,000,000 to be outstanding at any one time (excluding bonds issued to meet guarantees, if any). The aggregate amount from the liquor profits to be used in any fiscal year in connection with these bonds (excluding bonds issued to meet guarantees, if any) may not exceed $45,000,000. The total of unpaid guaranteed loan amounts and unpaid principal of direct loans may not exceed $800,000,000. A 1996 issue of $168,740,000 of taxable bonds refunded outstanding bonds and provided additional loan moneys for facilities and equipment (i.e., the State’s direct loan program), $101,980,000 of taxable forward purchase bonds were issued in 1998 to refund, as of 2006, term bonds of the 1996 issue stated to mature in 2016 and 2021. In 2003, the State issued $50,000,000 in bonds for innovation Ohio projects and $50,000,000 for research and development projects, followed by a 2004 issuance of $50,000,000 for its direct loan program. Pursuant to a 2000 constitutional amendment, the State has issued a first series of $50,000,000 of bonds for revitalization purposes that are also payable from State liquor profits. The maximum annual debt service on all state bonds payable from State liquor profits is $30,740,289 in fiscal year 2006.

Certain State agencies issue revenue bonds that are payable from revenues from or relating to revenue producing facilities, such as those issued by the Ohio Turnpike Commission. By judicial interpretation, such revenue bonds do not constitute “debt” under the constitutional provisions described above. The Constitution authorizes State bonds for certain housing purposes (issued by the Ohio Housing Finance Agency) to which tax moneys may not be obligated or pledged.

Litigation was commenced in the Ohio courts in 1991 questioning the constitutionality of Ohio’s system of school funding and compliance with the constitutional requirement that the State provide a “thorough and efficient system of common schools.” On December 11, 2002, the Ohio Supreme Court, in a 4-3 decision on a motion to reconsider its own decision rendered in September 2001, concluded (as it had in its 1997 and 2000 opinions in that litigation) that the State did not comply with that requirement, even after again noting and crediting significant State steps in recent years.

In its prior decisions, the Ohio Supreme Court stated as general base threshold requirements that every school district have enough funds to operate, an ample number of teachers, sound and safe buildings, and equipment sufficient for all students to be afforded an educational opportunity.

With particular respect to funding sources, the Court concluded in 1997 and 2000 decisions that property taxes no longer may be the primary means of school funding in Ohio.

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On March 4, 2003, the plaintiffs filed with the original trial court a motion to schedule and conduct a conference to address compliance with the orders of the court in that case, the State petitioned the Ohio Supreme Court to issue a writ prohibiting that conference on compliance, and the trial court subsequently petitioned the Ohio Supreme Court for guidance as to the proper course to follow. On May 16, 2003, the Supreme Court granted that writ and ordered the dismissal of the motion before the trial court. And on October 20, 2003, the United States Supreme Court declined to accept the plaintiff’s subsequent petition requesting further review of the case.

The General Assembly has taken several steps, including significantly increasing State funding for public schools, as discussed below. In addition, at the November 1999 election electors approved a constitutional amendment authorizing the issuance of State general obligation debt for school buildings and for higher education facilities. December 2000 legislation addressed certain mandated programs and reserves, characterized by the plaintiffs and the Court as “unfunded mandates.”

Under the current financial structure, Ohio’s 612 public school districts and 49 joint vocational school districts receive a major portion (but less than 50%) of their operating moneys from State subsidy appropriations (the primary portion of which is known as the Foundation Program) distributed in accordance with statutory formulas that take into account both local needs and local taxing capacity. The Foundation Program amounts have steadily increased in recent years, including small aggregate increases even in those fiscal years in which appropriations cutbacks were imposed.

School districts also rely upon receipts from locally voted taxes. In part because of provisions of some State laws, such as that partially limiting the increase (without further vote of the local electorate) in voted property tax collections that would otherwise result from increased assessed valuations, some school districts have expressed varying degrees of difficulty in meeting mandated and discretionary increased costs. Local electorates have largely determined the total moneys available for their schools. Locally elected boards of education and their school administrators are responsible for managing school programs and budgets within statutory requirements.

The State’s present school subsidy formulas are structured to encourage both program quality and local taxing effort. Until the late 1970’s, although there were some temporary school closings, most local financial difficulties that arose were successfully resolved by the local districts themselves by some combination of voter approval of additional property tax levies, adjustments in program offerings, or other measures. For more than 20 years, requirements of law and levels of State funding have sufficed to prevent school closings for financial reasons, which in any case are prohibited by current law.

To broaden the potential local tax revenue base, local school districts also may submit for voter approval income taxes on the district income of individuals and estates. Many districts have submitted the question, and income taxes are currently approved in 145 districts.

Original State basic aid appropriations for the 1992-93 biennium of $9.5 billion provided for 1.5% and 4.8% increases in the two fiscal years of the biennium over appropriations in the preceding biennium. The reduction in appropriations spending for fiscal year 1992 included a 2.5% overall reduction in annual Foundation Program appropriations, and a 6% reduction in other primary and secondary education programs. The reductions were in varying amounts, and had varying effects, with respect to individual districts; there were no reductions for the 172 districts with the lowest per pupil tax valuations. Foundation payments were excluded from the Governor’s fiscal year 1993 cutback order.

Subsequent biennial school funding State appropriations from the GRF and Lottery Profits Education Fund (but excluding federal and other special revenue funds) were:

• 1994-95 – $8.9 billion provided for 2.4% and 4.6% increases, respectively, in State aid in the biennium’s two fiscal years.

• 1996-97 – $10.1 billion representing a 13.6% increase over the preceding biennium total.

• 1998-99 – $11.6 billion (18.3% over the previous biennium).

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• 2000-01 – $13.3 billion (15% over the previous biennium).

• 2002-03 - $15.2 billion (17% over the previous biennium before the expenditure reductions).

State appropriations for the purpose made for the 2004-05 biennium were $15.7 billion (3.3% over the previous biennium), and represented an increase of 0.01% in fiscal year 2004 over 2003 and 2.2% in fiscal year 2005 over 2004 when compared to original State appropriations.

Those total State 2004-05 biennial appropriations excluded non-GRF and federal appropriations, but include appropriations from the GRF and the lottery profits education fund (LPEF). The amount of lottery profits transferred to the LPEF totaled, $655,036,000 in fiscal year 2001, $635,150,000 in fiscal year 2002, $671,352,000 in fiscal year 2003 and $648,106,000 in fiscal year 2004. Ohio participation in the multi-state lottery commenced in May 2002. A constitutional provision requires that net lottery profits be paid into LPEF to be used solely for the support of elementary, secondary, vocational and special education purposes, including application to debt service on general obligation bonds to finance common school facilities.

In response to the 1997 Ohio Supreme Court decision holding certain provisions for local school district borrowing unconstitutional, the General Assembly created the school district solvency assistance program. Beginning in fiscal year 1999, local school districts in fiscal emergency status as certified by the Auditor of State could apply for an advancement of future year Foundation Program distributions. The amount advanced was then deducted, interest free, from the district’s foundation payments over the following two-year period. Six school districts received a total of approximately $12,100,000 in solvency assistance advancements during fiscal year 1999, with another six districts receiving a total of approximately $8,657,000 in fiscal year 2000. This solvency assistance program was held to be not in compliance with the Constitution by the Supreme Court. In fiscal year 2001 four districts received approximately $3,800,000 under a restructured solvency assistance program. The program was further modified in December 2000 to allow districts that experience an unforeseen catastrophic event to apply for a grant. In fiscal year 2002, three districts received catastrophic grants totaling $2,569,970 and one district received a solvency advance in the amount of $421,000. In fiscal year 2003, three districts received solvency advances in the amount of $8,742,000 and no districts received catastrophic grants.

Legislation was enacted in 1996 to address school districts in financial straits. It is similar to that for municipal “fiscal emergencies” and “fiscal watch”, but is particularly tailored to certain school districts and their then existing or potential fiscal problems. There are currently ten school districts in fiscal emergency status and twelve in fiscal watch status. New legislation has created a third, more preliminary, category of “fiscal caution.” A current listing of school districts in each status is on the Internet at http://www.auditor.state.oh.us.

Ohio’s 943 incorporated cities and villages rely primarily on property and municipal income taxes to finance their operations. With other subdivisions, they also receive local government support and property tax relief moneys from State resources.

For those few municipalities and school districts that on occasion have faced significant financial problems, there are statutory procedures for a commission composed of State and local officials, and private sector members experienced in business and finance appointed by the Governor to monitor the fiscal affairs and for development of a financial plan to eliminate deficits and cure any defaults. (Similar procedures have recently been extended to counties and townships.) Fifteen municipalities and one township are in “fiscal emergency” status and six municipalities in preliminary “fiscal watch” status.

At present the State itself does not levy ad valorem taxes on real or tangible personal property. Those taxes are levied by political subdivisions and local taxing districts. The Constitution has since 1934 limited the amount of the aggregate levy of ad valorem property taxes on particular property, without a vote of the electors or municipal charter provision, to 1% of true value in money, and statutes limit the amount of that aggregate levy without a vote or charter provision to 10 mills per $1 of assessed valuation—commonly referred to in the context of Ohio local government finance as the “ten-mill limitation.”

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Special Considerations Regarding Investment in Pennsylvania State-Specific Obligations. The concentration of investments in Pennsylvania State-Specific Obligations by the Pennsylvania Municipal Money Market and Pennsylvania Tax-Free Income Portfolios raises special investment considerations. In particular, changes in the economic condition and governmental policies of the Commonwealth of Pennsylvania and its municipalities could adversely affect the value of those Portfolios and their portfolio securities. This section briefly describes current economic trends in Pennsylvania, as described in the Preliminary Official Statement, dated as of May 13, 2005, relating to the Commonwealth of Pennsylvania General Obligation Bonds, First Series of 2005.

A rebounding national economy that exceeded preliminary estimates for growth resulted in actual fiscal year 2004 Commonwealth General Fund revenues exceeding the budget estimate by 2.9%, or $636.7 million. Total fiscal year 2004 revenues net of reserves for tax refunds and including intergovernmental transfers and additional resources totaled $23,159.7 million. Total expenditures net of appropriation lapses and including intergovernmental transfers and expenditures from additional resources was $23,089.2 million. As result of Commonwealth financial operations during the fiscal year the preliminary unappropriated surplus balance, prior to the statutorily required 25% transfer to the Budget Stabilization Reserve Fund, was scheduled to increase $57.5 million to $266.8 million from the fiscal year 2003 ending balance. Following the statutorily required 25% transfer to the Budget Stabilization Reserve Fund ($66.7 million), a supplemental transfer of $123.3 million was also made to the Budget Stabilization Reserve Fund. As result, the fiscal year 2004 final unappropriated surplus balance was $76.7 million as of June 30, 2004.

Revenues available to the Commonwealth, including intergovernmental transfers and additional resources, increased 6.2% from fiscal year 2003 levels. Fiscal year 2004 revenues totaled $23,159.7 million, an increase of $1,351.2 million over fiscal year 2003 revenues. Commonwealth taxes and revenues, prior to reserves for refunds, increased by $1,513.6 million to $22,828.1 million in fiscal year 2004, a 7.1% increase from fiscal year 2003 actual receipts. This increase in tax revenues was primarily due to increases for certain Commonwealth taxes enacted with the fiscal year 2004 budget. Tax revenues to the Commonwealth for fiscal year 2004 exceeded the budget estimate, as re-certified in December 2003, by $636.7 million or 2.9%. Nearly all Commonwealth major tax and revenue categories experienced revenue collections above the budget estimate.

Reserves for tax refunds in fiscal year 2004 were $1,014.7 million, an increase of 9.2% over fiscal year 2003 reserves. Recent tax rate and tax base changes have contributed to the growth rate in refunds in fiscal year 2004. Actual tax refunds have stabilized after several recent years of increases. At the end of fiscal year 2004, approximately $91.7 million of reserves were available for making tax refunds in the following fiscal year.

Expenditures for fiscal year 2004 including supplemental appropriations, intergovernmental transfers and additional resources, and net of appropriation lapses, totaled $23,089.2 million, representing an increase of $1,417.3 million or 6.5% from the fiscal year 2003 level. A total of $182.9 million in appropriations were lapsed in fiscal year 2004. The fiscal year 2004 budget continued to utilize an enhanced level of intergovernmental transfers for a portion of medical assistance costs, albeit at a reduced rate from fiscal year 2003. Intergovernmental transfers replaced $738.7 million of General Fund medical assistance costs in fiscal year 2004, compared to $844.6 million in fiscal year 2003. Expenditures normally funded from Commonwealth revenues that were instead funded from additional resources in fiscal year 2004 totaled $607.6 million. These expenditures included $457.6 million in available federal fiscal relief funds, which were used to offset certain medical assistance and other health care costs as well as $150 million in available capital debt fund reserves, which were used to offset General Fund debt service costs in fiscal year 2004. General obligation debt of the Commonwealth outstanding as of June 30, 2004 totaled approximately $6.9 billion.

Pennsylvania has historically been dependent on heavy industry, although the past thirty years have witnessed declines in the coal, steel and railroad industries. Recent sources of economic growth in Pennsylvania have led to diversification of the Commonwealth’s economy. Relative growth has been experienced in the service sector, including trade, medical and health services, education and financial institutions. Agriculture continues to be an important component of the Commonwealth’s economic structure, with nearly one-third of the Commonwealth’s total land area devoted to cropland, pasture and farm woodlands.

The population of Pennsylvania experienced a slight increase in the period 1994 through 2004. Persons 65 or older comprise 15.3% of Pennsylvania’s population, compared with 12.3% of the United States population. The

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Commonwealth is highly urbanized, with almost 79% of the Commonwealth’s 2004 mid-year population estimate residing in metropolitan statistical areas. The two largest metropolitan statistical areas, those containing the Cities of Philadelphia and Pittsburgh, together comprise almost 44% of the Commonwealth’s total population.

The Commonwealth utilizes the fund method of accounting, and over 150 funds have been established for purposes of recording receipts and disbursements of the Commonwealth, of which the General Fund is the largest. Most of the Commonwealth’s operating and administrative expenses are payable from the General Fund. The major tax sources for the General Fund are the sales tax, the personal income tax, the corporate net income tax and the capital stock and franchise tax. Major expenditures of the Commonwealth include funding for education, public health and welfare and transportation.

The constitution of the Commonwealth provides that operating budget appropriations of the Commonwealth may not exceed the actual and estimated revenues and available surplus in the fiscal year for which funds are appropriated. Annual budgets are enacted for the General Fund (the principal operating fund of the Commonwealth) and for certain special revenue funds which together represent the majority of expenditures of the Commonwealth.

The Commonwealth maintains two contributory benefit pension plans. The State Employees’ Retirement System (“SERS”) covers all state employees and employees of certain state-related organizations. The Public School Employees’ Retirement System (“PSERS”) covers all public school employees. Membership in the applicable retirement system is generally mandatory for the covered employees. Employers and employees contribute jointly to these retirement programs. Annual actuarial valuations are required by state law. The employer’s contribution rate is computed to fully amortize the unfunded actuarial accrued liability of the respective plan as determined by its actuary. The unfunded actuarial accrued liability measures the present value of benefits estimated to be due in the future for current employees based on assumptions relating to mortality, pay levels, retirement experience and employee turnover, less the present value of assets available to pay those benefits based on assumptions of normal cost, supplemental annuity amortization, and employer and member contributions. At the close of fiscal year 2001, the unfunded actuarial accrued liability was ($3,846) million for SERS and ($6,913) for PSERS. At the close of fiscal year 2003, the unfunded actuarial accrued liability for SERS was ($1,286) and for PERS was ($1,543) million.

Certain litigation is pending against the Commonwealth that could adversely affect the ability of the Commonwealth to pay debt service on its obligations including suits relating to the following matters: (a) in 1987, the Supreme Court of Pennsylvania held the statutory scheme for county funding of the judicial system to be in conflict with the constitution of the Commonwealth, but stayed judgment pending enactment by the legislature of funding consistent with the opinion; (b) two corporations have challenged different aspects of the Pennsylvania capital stock/franchise tax; (c) the School District of Philadelphia and others have brought suit in Federal court to declare the Commonwealth’s system of funding public schools to be racially discriminatory and therefore illegal; by agreement of the parties that suit is in civil suspense; and (d) dozens of cases have been brought challenging the Department of Revenue’s assessment of insurance companies to provide funds due to Pennsylvania residents insured from other, insolvent, insurance companies or companies in default, some of which are being held pending litigation at the administrative boards.

The City of Philadelphia (“Philadelphia”) experienced severe financial difficulties during the early 1990’s which impaired its access to public credit markets. Philadelphia experienced a series of general fund deficits for fiscal years 1988 through 1992. Legislation was enacted in 1991 to create an Intergovernmental Cooperation Authority (the “Authority”) to provide deficit reduction financing and fiscal oversight for Philadelphia. In order for the Authority to issue bonds on behalf of Philadelphia, Philadelphia and the Authority entered into an intergovernmental cooperation agreement providing the Authority with certain oversight powers with respect to the fiscal affairs of Philadelphia. Philadelphia currently is operating under a five year plan approved by the Authority on December 21, 2004. The unaudited fund balance deficit of Philadelphia’s General Fund as of June 30, 2004, was approximately $46.8 million.

The Authority’s power to issue further bonds to finance capital projects or deficit expired on December 31, 1994, and its power to issue debt to finance a cash flow deficit expired December 31, 1995. Its ability to refund outstanding bonds is unrestricted. The Authority had $770.7 million in special tax revenue bonds outstanding as of June 30, 2004.

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As of May 24, 2005, Moody’s rated the long-term general obligation bonds of the Commonwealth “Aa2,” Standard & Poor’s rated such bonds “AA” and Fitch rated such bonds “AA.” There can be no assurance that the economic conditions on which these ratings are based will continue or that particular bond issues may not be adversely affected by changes in economic or political conditions.

Special Considerations Regarding Investment in North Carolina State-Specific Obligations. The concentration of investments in North Carolina State-Specific Obligations by the North Carolina Municipal Money Market Portfolio (the “Fund”) raises special investment considerations. In particular, changes in the economic condition and governmental policies of North Carolina (the “State”) and its political subdivisions, agencies, instrumentalities, and authorities could adversely affect the value of the Fund and its portfolio securities. This section briefly describes current economic trends in the State, and constitutes only a brief summary of some of the many complex factors that may have an effect. The information set forth below is derived from official statements prepared in connection with the debt offerings of State issuers and other sources that are generally available to investors. No independent verification has been made of the following information.

The State has three major operating funds: the General Fund, the Highway Fund, and the Highway Trust Fund. The State derives most of its revenue from taxes, including individual income taxes, corporation income taxes, sales and use taxes, highway use taxes on motor vehicle rentals, corporation franchise taxes, piped natural gas excise taxes, alcoholic beverage taxes, insurance taxes, estate taxes, tobacco products taxes, and other taxes, e.g., gift taxes, freight car taxes, and various privilege taxes. A streamlined sales tax collection system has been adopted to improve collection efforts, particularly as to out-of-state catalog and internet sales. The State receives other non-tax revenues which are also deposited in the General Fund. The most important are federal funds collected by State agencies, university fees and tuition, interest earned by the State Treasurer on investments of General Fund moneys, and revenues from the judicial branch. The proceeds from the motor fuel tax, highway use tax, and motor vehicle license tax are deposited in the Highway Fund and the Highway Trust Fund.

Extraordinary events occurred during fiscal year 1999-2000 that caused significant stress on the budget for the fiscal year. In the fall of 1999, the State was the victim of two major hurricanes, Dennis and Floyd, in a period of a few weeks. In response to the devastation caused by these storms, a special session of the General Assembly was convened in December 1999 to create relief programs to address the damages, culminating in the enactment of legislation appropriating $836.6 million for disaster relief programs. The General Assembly funded the $836.6 million for Hurricane Floyd relief programs from $228.7 million of reallocated appropriations from department operating budgets and $607.9 million from unspent capital improvement appropriations and reserves, including $286 million from the Budget Stabilization Reserve, and the unappropriated fund balance. In addition, during 1998 and 1999, the State settled two major lawsuits involving taxes held to be illegally collected. The total amount paid for these settlements was $1.24 billion, $400 million of which was paid in fiscal year 1998-99 and another $600 million of which was paid in fiscal year 1999-2000. Additionally, actual revenues received during fiscal year 1999-2000 were below budget due in part to the hurricanes and a major winter storm in early 2000 that paralyzed much of the State for over a week.

On account of the stress caused by these events on the budget for fiscal year 1999-2000, certain adjustments were made to assure that the budget for the fiscal year would remain balanced and to assure that the budget for fiscal year 2000-01 would be balanced. In addition, approximately $98.7 million of tax refunds not paid before June 30, 2000 resulted in overstated revenues for fiscal year 1999-2000 by that amount. Due to the presence of these revenues, additional adjustments to balance the budget for fiscal year 1999-2000 were not required. The payment of these refunds after June 30, 2000, resulted in a decrease in revenues for fiscal year 2000-01 by a like amount. In the past, payments for teacher salaries for services rendered in a fiscal year have been funded as an expenditure in that fiscal year’s budget, even though payments would be made after June 30. The State deferred funding of $271 million required for the payment of teacher salaries to be paid after fiscal year 1999-2000 to fund a reserve to pay the final $240 million settlement payment on one of the lawsuits referred to above. This final payment settling these cases was made by the State on July 10, 2000. In the budget for fiscal year 2000-01, the State reduced by $252 million the budgeted contributions to the State plans for employee’s retirement ($191.3 million), retiree health benefits ($50 million), and death benefits ($10.9 million). This reduction was provided from the realization of a portion of the gains from the investment of amounts previously contributed to the plans and excess available reserves set aside for this purpose.

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Fiscal year 1999-2000 ended with a positive General Fund balance of $447.5 million. Along with additional reserves, $37.5 million was reserved in the Savings Reserve Account, $117.7 million was reserved in the Retirees’ Health Premiums Reserve, $7.1 million was reserved in the Repairs and Renovations Reserve Account, and $1.1 million was reserved in the Clean Water Management Trust Fund. Additionally, $240.0 million was reserved in the Intangibles Tax Refunds Reserve. After additional reserves, there was no balance remaining in the unreserved General Fund at the end of fiscal year 1999-2000. The ending General Fund balance did not include $541.9 million of unexpended funds designated to relief of Hurricane Floyd victims, which funds were to be expended during subsequent fiscal years.

On June 30, 2000, the General Assembly adopted a $14.1 billion budget for fiscal year 2000-01, an increase of 4.1% from the previous year, with no new taxes or tax relief, although a streamlined sales tax collection system was implemented to improve collections, particularly as to out-of-state catalog and internet sales. Continuing to focus on education, the General Assembly approved a $3.1 billion bond referendum for construction and renovation at the State’s 16 university campuses and 59 community colleges. North Carolina’s citizens approved the $3.1 billion bond package – the largest in State history – on November 7, 2000. The bonds will be issued over five years and paid back over 20 years. The General Assembly also authorized 6.5% raises for teachers in the public schools, bringing the State’s teachers’ salaries up to the national average. State employees received 4.2% raises and $500 bonuses disbursed in October 2000. The General Assembly placed $170 million over the next two years in reserve to help cover expected cost increases in the state employee’s health insurance plan, and an additional $120 million was set aside to replenish the depleted State Emergency Reserves. The General Assembly also placed in reserve $100 million for the Repairs and Renovations Reserve Account, $14.9 million in the Reserve for Capital Improvements, $120 million in the Savings Reserve Account, and $30 million in the Clean Water Management Trust Fund.

On August 24, 2000, the State Supreme Court issued an order in the Chrysler Credit case denying the State’s request for discretionary review of a decision of the State Court of Appeals. As a result, the State was required to refund $20.5 million of taxes previously paid by Chrysler. On November 1, 2000, the State Court of Appeals issued an order accepting the State’s motion to dismiss an appeal previously filed by the State in the Ford Motor Credit case. As a result, the State was required to refund $38.2 of taxes previously paid by Ford.

On May 1, 2001, the State Office of State Budget, Planning and Management and the Fiscal Research Division of the State General Assembly estimated there would be a General Fund revenue shortfall of $697.1 million from the authorized 2000-01 fiscal year budget, and a total budget shortfall for fiscal year 2000-01 of approximately $850 million. The shortfall was attributed to four major factors: (1) the State was required to refund approximately $123 million of income tax refunds in the 2000-01 budget year that should have been refunded in the prior year, creating a corresponding decrease in revenues; (2) the State was required to refund approximately $63.3 million in taxes and fees arising from lawsuits involving privilege fees charged to major automobile finance companies and involving the intangibles tax previously levied by the State, creating an $18.3 million reduction in individual income taxes and a $45 million reduction in privilege taxes; (3) the State’s share of the federal Medicaid program generated expenses approximately $108 million greater than the budgeted appropriation for this purpose; and (4) decreased revenues attributable to a general slow down of the national economy resulted in a forecasted general revenue shortfall of $300 to $450 million, particularly affecting revenues from taxes associated with the State’s manufacturing sector. Also, the general economic slow down and its effects on capital markets lead to decreases in taxes attributable to capital gains income. The slow down resulted in decreased forecasted revenues in several categories, including individual income taxes, corporate income taxes, and sales taxes.

In response to the budget shortfall, the Governor, as Director of the Budget, issued Executive Order No. 3 directing a number of actions to be taken to insure the State met its constitutional requirement of a balanced budget. Specifically, the Governor identified budgetary resources that would cover a budget shortfall of up to approximately $1 billion. These resources consisted of a combination of reversions of unexpended appropriations, the diversion of other resources from their otherwise appropriated use, and the identification and use of available reserves.

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At the end of fiscal year 2000-01, General Fund revenues, including tax, non-tax, diverted funds, and delayed reimbursements, fell short of estimated revenue by $598.4 million. Individual income tax fell short of estimates by $259.4 million, sales and use tax payments fell short of estimates by $177.7 million, and corporate income and franchise tax payments fell short of estimates by $149.3 million. With lowered available investment balances in the General Fund, investment earnings fell short of estimates by $43.1 million. Nevertheless, as a result of the actions taken pursuant to Executive Order No. 3, fiscal year 2000-01 ended June 30, 2001, with a positive General Fund balance of $871.3 million. Along with additional reserves, $157.5 million was reserved in the Savings Reserve Account, and $53.9 million was reserved in the Retirees’ Health Premiums Reserve. After additional reserves, there was no balance remaining in the unreserved General Fund at the end of fiscal year 2000-01. The ending General Fund balance included $448.6 million of unexpended funds designated to relief of Hurricane Floyd victims, which funds were to be expended during subsequent fiscal years, and $178.5 million of unexpended budgetary shortfall funds reserved pursuant to Executive Order No. 3 restricting State expenditures.

On September 21, 2001, the General Assembly adopted a $14.5 billion budget for fiscal year 2001-02. Due to the need to increase revenues, the budget contained several new and increased taxes, including the following: a two-year half-cent increase in the statewide sales tax; a two-year increase to 8.25% of the income tax rate for taxable incomes of single and married individuals over $120,000 and $200,000, respectively; a 6% telecommunications tax on out-of-state long distance calls, with the tax on in-state long distance calls dropping from 6.5% to 6%; a 5% tax on satellite television; a 1% gross premiums tax for HMOs and Blue Cross/Blue Shield; and a 3% increase on liquor taxes. Additionally, tuition for students attending the University of North Carolina was raised 9%. The budget increased spending on education and human services while trimming 400 positions from the State’s payrolls. The General Assembly included in the budget $25 million to reduce class size, $93 million for teacher bonuses, and another $44 million to help struggling students meet testing standards. Teachers and school administrators received salary increases averaging close to 3%, while community college instructors and professional staff received a 1.25% salary increase. Each state employee got a $625 raise. The General Assembly provided $15 million for the One North Carolina Fund for the Governor to use to provide incentives in the recruitment of industries to the State. The budget established a mental health trust fund and provided $47.5 million in funding to be used to renovate existing mental health and substance abuse facilities and to help patients move from institutional to community treatment. The General Assembly set aside $181 million to replenish the depleted State Emergency Reserves and placed in reserve $125 million for the Repairs and Renovations Reserve Account and $40 million for the Clean Water Management Trust Fund.

Due to many factors, an overall budget shortfall in the General Fund for fiscal year 2001-02 of $1.6 billion was projected. The shortfall was primarily a result of an under-realization of budgeted revenues and an increase in Medicaid expenditures exceeding budgeted appropriations. In particular, State personal income tax collections in April 2002 were $595 million, which was over $250 million less than in 2001 and over $350 million less than projected for the fiscal year 2001-02 budget. Overall, tax collections declined 6% from the previous fiscal year while the fiscal year 2001-02 budget had projected a 4% revenue increase, a difference of 10 percentage points. Medicaid expenditures were expected to exceed well $100 million of budgeted appropriations. Both the under-realization of revenues and the increased Medicaid expenditures were attributed to the on-going national and regional economic recession, the severity of which was deepened by the impact of the September 11, 2001, terrorist attacks.

In response to the projected budgetary shortfall, the Governor invoked his constitutional authority to insure that the State would meet its constitutional requirement of a balanced budget by issuing Executive Order No. 19, which rescinded previous Executive Order No. 3 and identified over $1.3 billion of resources available if needed to balance the budget. Executive Order No. 19 reduced expenditures for use by State agencies and for capital improvement projects and transferred funds from General Fund reserves and non-General Fund receipts and reserves. Following the issuance of Executive Order No. 19, the Governor ordered the transfer of an additional $200 million from the Hurricane Floyd relief fund and the Tobacco Trust Fund to cover any remaining budgetary shortfall for fiscal year 2001-02.

As of the close of the 2001-02 fiscal year, the General Fund reported a total fund balance of $393.9 million, with reserves of over $390 million and an unreserved fund balance of $3.8 million. For fiscal year 2001-02, the State experienced a shortfall in tax and non-tax receipts of $1.55 billion. As with other state governments, the slowing national and state economy resulted in a general decline in tax collections. Individual income taxes fell

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short by over $1 billion, corporate income taxes by $177 million, sales and use taxes by $90.5 million, and franchise taxes by $192.7 million. Inheritance and capital gains taxes were similarly lower than budget expectations. In an effort to meet the State constitutional mandate of balancing the General Fund budget, reductions of $789.2 million were implemented, with the remainder of the budget funded by $437.7 million of non-General Fund dollars, and $239.3 million transferred from the Savings Reserve account.

On September 20, 2002, the General Assembly adopted a $14.3 billion budget for fiscal year 2002-03, a more than 2% reduction in the budget from the previous year but an increase of 4% over actual spending of $13.7 billion during last year’s fiscal crises. The budget used $800 million in non-recurring revenue to fund ongoing expenses, including $333 million in reimbursements withheld from local governments. To replace that revenue, the General Assembly granted counties the authority to approve an additional half-cent local-option sales tax. This budget included revenue growth of only 1.8% over last year, which was a far more conservative growth projection than had been used in past years. The budget contained over $100 million in unidentified future cuts to be made by various State departments and agencies, and the heads of those departments and agencies were given additional management flexibility to cut programs. The budget provided no raises for state employees but did grant 10 bonus vacation days. Teachers and principals received career step raises. The State Board of Education was required to cut $42 million from its budget, and appropriations for local partnerships with the Smart Start program were reduced by $20 million. Nevertheless, the budget provided $26.8 million to reduce the student-teacher ratio in both kindergarten and first grade classrooms and $28 million to expand a voluntary pre-kindergarten program to prepare at-risk 4-year olds. The budget for the children’s health insurance program, Health Choice, was increased by $7.7 million, while spending for area mental health programs was reduced by $3 million. Three prison facilities were closed, and many positions with the Department of Correction were eliminated, including 23 chaplain positions. The State’s public universities received full funding for enrollment growth, at $66.8 million, and $4.5 million in additional financial aid for students. Individual campuses, however, shared the burden of a $50.2 million spending reduction statewide, amounting to 2.9% for each institution. University tuition increased 8% for in-state students and 12% for out-of-state students. The State’s community colleges received $9 million less than the year before, with more than half of the cuts to be determined by the system’s board. Nevertheless, the 59-campus system also got a $52 million increase for enrollment growth. Community college students also saw a tuition increase.

The conservative revenue growth projections used for the fiscal year 2002-03 budget were more in line with actual revenues, which spared the State from a mid-year fiscal emergency for the first time in three years. As of the close of the 2002-03 fiscal year, the General Fund reported a total fund balance of $603.9 million, with reserves of over $353 million and an unreserved fund balance of $250.5 million. Key factors improving the fiscal year-end General Fund balance were higher corporate income and sales tax collections, the accelerated repeal of local government reimbursements, increased transfers from other funds, and significant spending reductions by State agencies. Additionally, the State received $136.9 million in federal fiscal relief in June 2003, which is the first of two equal flexible grant payments. The second flexible grant payment of $136.9 million was received in October 2003.

On June 30, 2003, the General Assembly adopted a $14.8 billion budget for fiscal year 2003-04. Due to the current budget difficulties, the General Assembly made permanent a .5% State sales tax increase which was due to expire at the end of fiscal year 2002-03. Additionally, the fiscal year 2003-04 budget reduced spending for positions, programs, and general administration at most levels of State government, including at the Departments of Agriculture, Labor, Environment and Natural Resources, Justice, Corrections, Cultural Resources, Insurance, Revenue, and the Administrative Office of the Courts. Teachers received a pay increase averaging 1.81%, while other State employees received a one-time bonus of $550. An initiative to reduce second grade class sizes received $25.3 million, and $96 million in projected bonuses under the State’s ABC’s plan was funded. State and local boards of education found funding reduced for administrative positions and transportation costs, although an increase of $5 million was earmarked for funding low-wealth schools. University tuition increased 5% for both in-state and out-of-state students, while community college tuition increased 3.2% for in-state students and 8.2% for out-of-state students. The State university system received $46.6 million to fund the additional 518 positions needed to meet a projected 4.5% enrollment increase, while need-based financial aid increased by $5.1 million. An additional $2.8 million was provided to increase aid for in-state students attending private colleges. The community colleges also received $32 million in increased funding for staff and supplies to meet enrollment growth. Funding was reduced for many services provided by the State Department of Health and Human Services, including reduced funding of inflationary increases for Medicaid providers and public agencies and cuts to the Smart Start child care

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program. The fiscal year 2003-04 budget increased funding to the Health Choice insurance program by $12.2 million. Various licensing fees were also implemented for health and child care facilities. The General Assembly set aside $150 million for the State Emergency Reserves and placed in reserve $50 million for the Repairs and Renovations Reserve Account and $12.5 million for the Mental Health Trust Fund; however, $38 million was cut from the Clean Water Management Trust Fund.

In December 2003, the Governor called a Special Session of the General Assembly at which the General Assembly appropriated $24 million for economic development. The General Assembly also appropriated $20 million for the One North Carolina Fund, $4.1 million to the community college system for new and expanding industry training, and $20 million to the North Carolina Rural Economic Development Center.

The State ended fiscal year 2003-04 with an over-collection of revenues of $242.4 million, which was 1.7% of the budgeted revenue forecast. The major tax categories that exceeded the budgeted forecast were individual income, corporate income, and sales and use tax. In addition, unexpended appropriation or reversions of $159 million were realized, and the State received $136.9 million in federal fiscal relief in October 2003. Therefore, the State closed fiscal year 2003-04 with a $289.4 million unreserved fund balance after transferring $116.7 million to the Rainy Day Fund and $76.8 million to the Repair and Renovation Reserve.

On July 18, 2004, the General Assembly adopted a $15.9 billion budget for fiscal year 2004-05. State workers will receive their first pay raises in three years – the greater of $1,000 or 2.5% of their current salaries. Teachers will get an average raise of 2.5%. State university faculty will also receive an average 2.5% raise, while community college faculty will get a 4.5% raise. Retired State employees will get a 1.7% cost of living adjustment. The budget provides public schools with over $50 million to hire up to 1,100 new teachers to reduce third-grade class sizes, $7.5 million to improve test scores in the State’s poorest school districts, and $9.1 million to add 2,000 students to the State’s More at Four pre-kindergarten program. Another $4 million is provided to hire 80 school nurses. $6.6 million is budgeted to provide health insurance for children of the working poor, $4 million is provided to hire 75 to 100 additional child abuse care workers, and $3 million will be used to increase the foster care and adoption assistance reimbursements by $25 per child per month. Twenty-four independent, nonprofit community healthcare centers serving poor patients will receive $5 million, while $2 million will be distributed among 100 shelters for domestic violence victims. $2.7 million will be used to add over 1,400 prison beds at correctional facilities throughout the State. Another $8.6 million will be used for economic development to fund the State Biotechnology Center in the Research Triangle Park, the Global TransPark in Kinston, and a Motorsports Testing and Research Center Complex near Charlotte. Another $30 million is allocated to a fund for underground storage tank cleanup.

The General Assembly also approved the issuance of $468 million in special indebtedness over two years to fund a cancer hospital, a cardiovascular center, a health promotion center, a genetics data center, and a pharmacy school at several State universities. The funds will also be used to pay for several other projects at State universities and to preserve land for State parks and to protect land near military bases from encroachment. The funds will also be used to build new juvenile detention facilities. No more than $310 million of this special indebtedness may be issued during the 2004-05 fiscal year. The fiscal impact of the $468 million of special indebtedness on the General Fund is expected to be zero because of the annual transfer of revenue from other sources to the General Fund in an amount to cover the estimated debt service. The debt service for the State universities projects and the juvenile detention facilities will be reimbursed from the special revenue funds known as the Health and Wellness Trust Fund and the Tobacco Trust Fund. The debt service for the State parks projects is fully funded by the streams of revenue available to the special revenue funds known as the Parks and Recreation Trust Fund, the Natural Heritage Trust Fund, and the Clean Water Management Trust Fund. The special indebtedness is non-voted debt that is generally secured only by an interest in State property being acquired or improved (e.g., certificates of participation and lease-purchase revenue bonds). With this type of debt, there is no pledge of the State’s faith, credit, or taxing power to secure the debt, which is why voter approval is not required. If the State defaulted on its repayments, no deficiency judgment could be rendered against the State, but the State property that serves as security could be disposed of to generate funds to satisfy the debt. Failure to repay the debt would have negative consequences for the State’s credit rating. Article 9 of Chapter 142 of the State’s General Statutes prohibits the issuance of special indebtedness except for projects specifically authorized by the General Assembly. The use of alternative financing methods provides financing flexibility to the State and permits the State to take advantage of changing financial and economic environments.

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In November 2004, the Governor announced that Dell, Inc. will build a computer manufacturing facility in the State. Dell, a leading manufacturer and distributor of personal computers and related products, plans to build and equip a state-of-the-art, 400,000 square-foot manufacturing and distribution facility in the Piedmont Triad region. Dell currently has two U.S. factories in Nashville, Tennessee, and Austin, Texas. The North Carolina General Assembly convened a one-day special session on November 4, 2004, and approved an economic incentive for computer manufacturing companies that, in the case of Dell, will provide up to $225 million in tax credits over the next fifteen years. For each year in which Dell meets the required performance targets, the State will provide a grant equal to 75% of the State personal income withholding taxes derived from the creation of new jobs.

As of April 30, 2005, the State’s revenue collections were above the 2004-2005 fiscal year forecast of $14,740.4 million primarily due to more than $250 million in one-time collection from a Voluntary Compliance Program undertaken by the State Department of Revenue and higher than expected personal income tax collection. A budget surplus of $527 million is projected for the end of fiscal year 2004-2005.

On May 4, 2005, the State Senate passed a $17 billion budget, which includes $500 million in budget cuts and approximately $800 million in new revenues to cover a projected $1.3 billion budget gap caused by the use of one-time revenues to pay for recurring expenses for the past few years. Tax breaks include a half-percentage point reduction in the corporate income tax rate and a quarter-percentage point reduction in the income tax rate for high earners. A temporary half-cent sales tax would be made permanent and would apply to formerly excluded products. The State’s cigarette tax would rise from 5¢ a pack to 40¢, while other tobacco products would be taxed at 4% of the purchase price, up from 2%. State employees would receive the greater of a 2% raise or $500, while State retirees would receive a 2% cost-of-living increase. The Senate budget would increase funds for public education by creating a State lottery for the first time in North Carolina.

As of June 9, 2005, the State House had not passed a budget, although a $562 million tax package had been passed. This tax package differs significantly from the revenue items in the Senate budget. The House will need to pass a State spending package before House and Senate negotiators can settle on a single budget in conference for approval by both houses of the General Assembly and the Governor.

The foregoing results are presented on a budgetary basis. Accounting principles applied to develop data on a budgetary basis differ significantly from those principles used to present financial statements in conformity with generally accepted accounting principles. For example, based on a modified accrual basis, the General Fund balance as of June 30, 2000, was positive $265.7 million, as of June 30, 2001, it was negative $32.4 million, as of June 30, 2002, it was negative $349 million, as of June 30, 2003, it was negative $167 million and as of June 30, 2004, it was negative $196 million.

Under the State’s constitutional and statutory scheme, the Governor is required to prepare and propose a biennial budget to the General Assembly. The General Assembly is responsible for considering the budget proposed by the Governor and enacting the final budget, which must be balanced. In enacting the final budget, the General Assembly may modify the budget proposed by the Governor as it deems necessary. The Governor is responsible for administering the budget enacted by the General Assembly.

The State budget is based upon a number of existing and assumed State and non-State factors, including State and national economic conditions, international activity, federal government policies and legislation, and the activities of the State’s General Assembly. Such factors are subject to change which may be material and affect the budget. The Congress of the United States is considering a number of matters affecting the federal government’s relationship with the state governments that, if enacted into law, could affect fiscal and economic policies of the states, including North Carolina.

In 1998, the State, along with forty-five other states, signed the Master Settlement Agreement (“MSA”) with the nation’s largest tobacco companies to settle existing and potential claims of the states for damages arising from the use of the companies’ tobacco products. Under the MSA, the tobacco companies are required to adhere to a variety of marketing, advertising, lobbying, and youth access restrictions, support smoking cessation and prevention programs, and provide payments to the states in perpetuity. The amount that the State will actually receive from this settlement remains uncertain, but projections are that the state will receive approximately $4.6 billion through the year 2025. In the early years of the MSA, participating states received initial payments that were

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distinct from annual payments. The initial payments were made for five years: 1998 and 2000 through 2003. The annual payments began in 2000 and will continue indefinitely. However, these payments are subject to a number of adjustments including an inflation adjustment and a volume adjustment. Some adjustments (e.g., inflation) should result in an increase in the payments while others (e.g., domestic cigarette sales volume) may decrease the payments. Also, future payments may be impacted by continuing and potential litigation against the tobacco industry and changes in the financial condition of the tobacco companies. In 1999, the General Assembly approved legislation implementing the terms of the MSA in the State. The Golden LEAF, Inc., a nonprofit foundation, was created to distribute half of the settlement funds received by the State. The legislation directed that these funds be used for the purposes of providing economic impact assistance to economically affected or tobacco-dependent regions of the State. However, the foundation’s share of the payments may be diverted by the General Assembly prior to the funds being received by the State Specific Account. The foundation is reported as a discretely presented component unit. In 2000, the State enacted legislation establishing the Health and Wellness Trust Fund and the Tobacco Trust Fund and created commissions charged with managing these funds. Each fund will receive a quarter of the tobacco settlement payments. The purpose of the Health and Wellness Trust Fund is to finance programs and initiatives to improve the health and wellness of the people of North Carolina. An eighteen-member Health and Wellness Trust Fund Commission will administer this fund. The primary purpose of the Tobacco Trust Fund is to compensate the tobacco-related segment of the State’s economy for the economic hardship it is expected to experience as a result of the MSA. An eighteen-member Tobacco Trust Fund Commission will administer this fund.

The economic profile of the State consists of a combination of services, trade, agriculture, manufacturing, and tourism. Non-agricultural wage and salary employment accounted for approximately 3,870,500 jobs as of April 2005. The largest segment of jobs was approximately 1,249,400 in various service categories, followed by 727,200 in trade, transportation and utilities and 574,700 in manufacturing. Based on April 2005 data from the United States Bureau of Labor Statistics, the State ranked eleventh among the states in non-agricultural employment, thirteenth in services employment, eleventh in trade employment, and ninth in manufacturing employment. According to the U.S. Department of Commerce, Bureau of Economic Analysis, per capita income in the State during the period from 1990 to 2004 grew from $17,295 to $29,246, an increase of over 69%. Over a similar period, according to the North Carolina Employment Security Commission, the seasonally-adjusted labor force grew from 3,441,436 to 4,302,043, an increase of 25%, and it has undergone significant changes during this period, as the State has moved from an agricultural economy to a service and goods-producing economy. As reported by the North Carolina Employment Security Commission, the seasonally-adjusted unemployment rate in April 2005 was 5.3% of the labor force, as compared to the nationwide unemployment rate for the same period of 5.2%.

Agriculture is another basic element of the State’s economy. In calendar year 2003, the State’s agricultural industry contributed over $62 billion to the State’s economy, and accounted for 22% of the State’s income. Gross agricultural income was in excess of $6.9 billion in 2003, placing the State eighth in the nation in gross agricultural income and tenth in the nation in net farm income. The poultry industry is the leading source of agricultural income in the State, accounting for approximately 32% of gross agricultural income in 2003, followed by the pork industry at approximately 22%, nursery and greenhouse products at approximately 12% and the tobacco industry at approximately 9%. According to the State Commissioner of Agriculture, the State ranks first in the nation in the production of all tobacco, flue-cured tobacco and sweet potatoes, second in hog production, cucumbers for pickles, turkeys and Christmas tree production and third in poultry and egg products and trout.

A significant military presence in the State contributes further to the diversity of the State’s economic base. 6% of the State’s 2004 Gross State Product (total goods and services), or $18.1 billion, is attributed to the military sector in the State. The major military installations in the State are Camp Lejuene Marine Corps Base, New River Air Station, Fort Bragg Army Base, Pope Air Force Base, Cherry Point Marine Corps Air Station and Seymour Johnson Air Force Base. The State has created a task force, headed by the Lieutenant Governor, to assist the federal Base Realignment and Closure Commission (the “BRAC Commission”) in reviewing proposed realignments and closures of federal military bases. On May 13, 2005, the Department of Defense recommended to the BRAC Commission that none of the State military bases be closed and that due to realignments elsewhere, the State’s military bases should see an increase personnel and operations.

The following are cases pending in which the State faces the risk of either a loss of revenue or an unanticipated expenditure. In the opinion of the Department of State Treasurer after consultation with the State Attorney General, an adverse decision in any of these cases would not materially adversely affect the State’s ability to meet its financial obligations.

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1. Hoke County, et al. v. State of North Carolina, et al. (formerly Leandro, et al. v. State of North Carolina and State Board of Education) – Funding of Public Education. In 1994, students and boards of education in five counties in the State filed suit requesting a declaration that the public education system of North Carolina, including its system of funding, violates the State constitution by failing to provide adequate or substantially equal educational opportunities, by denying due process of law, and by violating various statutes relating to public education. Five other school boards and students intervened and alleged claims for relief on the basis of the high proportion of at-risk and high-cost students in their counties’ systems. The suit is similar to a number of suits in other states, some of which resulted in holdings that the respective systems of public education funding were unconstitutional under the applicable state law.

The State filed a motion to dismiss, which was denied. On appeal the State Supreme Court upheld the present funding system against the claim that it unlawfully discriminated against low wealth counties but remanded the case for trial on the claim for relief based on the Court’s conclusion that the constitution guarantees every child the opportunity to obtain a sound basic education. The trial on the claim of one plaintiff’s county was held in the fall of 1999. In rulings issued in the fall of 2000 and spring of 2001, the trial court concluded that at-risk children in the State are constitutionally entitled to such pre-kindergarten educational programs as may be necessary to prepare them for higher levels of education, and ordered an investigation into why certain school systems succeed without additional funding. Following the State’s filing of an appeal of these rulings, the trial court re-opened the trial and called additional witnesses in the fall of 2001.

On April 4, 2002, the trial court issued its final order in the case, reaffirming its prior rulings and finding that the State must take all necessary actions to provide each child with the “sound basic education” guaranteed by the State Constitution. The trial court’s order directed the State to provide written reports every 90 days on the steps it has taken to comply with the order. On July 30, 2004, the State Supreme Court affirmed the majority of the trial court’s orders, thereby directing the executive and legislative branches to take corrective action necessary to ensure that every child has the opportunity to obtain a sound, basic education. The Supreme Court did agree with the State that the trial court exceeded its authority in ordering pre-kindergarten programs for at-risk children. The State is now undertaking measures to respond to the trial court’s directives. The magnitude of State resources which may ultimately be required cannot be determined at this time; however, the total cost could exceed $100 million.

2. N.C. School Boards Association, et al. v. Richard H. Moore, State Treasurer, et al. – Use of Administration Payments. On December 14, 1998, plaintiffs, including the county school boards of Wake, Durham, Johnston, Buncombe, Edgecombe, and Lenoir Counties, filed suit requesting a declaration that certain payments to State administrative agencies must be distributed to the public schools on the theory that such amounts are fines which under the North Carolina Constitution must be paid to the schools. The trial court ruled in favor of plaintiffs on December 14, 2001.

In its order, the trial court concluded that specifically identified monetary payments assessed and collected by state agencies are civil fines or penalties whose disposition is controlled by Article IX, Section 7 of the State Constitution. The trial court also concluded the statutes under which these funds are distributed are “unconstitutional and void” to the extent they provide that the money is to “go to agencies or for purposes other than the public schools.” Based upon these conclusions of law, the trial court directed the “clear proceeds” of the affected civil fines and penalties be remitted to the public schools.

The trial court also declared “unconstitutional and void” the portions of the State Civil Penalty and Forfeiture Fund and the State School Technology Fund which operate to collect in a central fund and equitably distribute civil fines and penalties to the State’s school system for the purpose of supporting local school technology plans. The order required state agencies to remit civil fines and penalties directly to the local board(s) of education in the county in which the violation leading to the payment occurred for use in the board(s) discretion.

Finally, the trial court determined a three-year statute of limitations applies, allowing the order to be enforced retroactively from the date the civil action was filed to include all affected civil fines and penalties collected by State agencies since December 1995. However, the court stayed the operation and enforcement of the

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order pending appeal. On appeal, the State Court of Appeals rendered a decision in September 2003 mostly favorable to the State. Discretionary review of this appeal was granted by the State Supreme Court on February 5, 2004, and oral arguments were heard in May 2004.

For the last fiscal year for which information was available to them, plaintiffs alleged liability of approximately $84 million. Until this matter is resolved, any refunds and interest will continue to accrue. The State Attorney General’s Office believes that sound legal arguments support the State’s position on this matter.

3. Southeast Compact Commission – Disposal of Low-Level Radioactive Waste. North Carolina and seven other southeastern states created the Southeast Interstate Low-Level Radioactive Waste Management Compact to plan and develop a site for the disposal of low-level radioactive waste generated in the member states. North Carolina was assigned responsibility for development of the first disposal site, with costs to be distributed equitably among the Compact members. In 1997, the Compact Commission discontinued funding of the development of the North Carolina site, alleging that the State was not actively pursuing the permitting and development of the proposed site. North Carolina withdrew from the Compact in 1999. The Compact subsequently petitioned the United States Supreme Court to allow the filing of its complaint against the State demanding repayment of $80 million of Compact payments expended on the permitting of the site, plus $10 million of future lost income, interest, and attorneys’ fees. The United States Supreme Court denied the Compact’s petition in August 2001. On August 5, 2002, the Compact, with the addition of four member states as plaintiffs, filed a new motion requesting the United States Supreme Court to accept the claim under its original jurisdiction. On June 16, 2003, the United States Supreme Court accepted jurisdiction of the case, and the State filed an answer and motion to dismiss. On November 17, 2003, the motion to dismiss was denied, and the United States Supreme Court appointed a special master with authority to determine when additional pleadings will be filed in the case. The Special Master heard oral arguments on dispositive motions filed by both sides on September 3, 2004. The State Attorney General’s office believes that sound legal arguments support the State’s position on this matter.

4. Philip Morris USA Inc. v. Tolson – Refund of Corporate Income Tax. On June 13, 2000, Philip Morris filed an action for a refund of approximately $30 million in corporate income taxes paid for 1989 through 1991. An order of the Augmented Tax Review Board in the 1970’s allowed it to apportion its income under a modified formula, which included a more favorable property factor. When the law changed in 1989 to move to double weighting of the sales factor, Philip Morris incorporated this change into its formula. The Board’s order did not permit double weighting. Philip Morris argued that the principle of in pari materia required incorporation of the amendment, and that failure to allow double weighting violated the equal protection and separation of powers clauses. The Wake County Superior Court recently ruled that Philip Morris was required to use the formula approved by the Board without double weighting the sales factor unless the statutory formula (without the modified property factor) produced a more favorable result. Philip Morris appealed this ruling, and the record on appeal was filed in March 2005.

5. State Employees Association of North Carolina v. State of North Carolina; Stone v. State of North Carolina – Diversion of Employer’s Retirement System Contribution. On May 22, 2001, SEANC filed an action demanding repayment of approximately $129 million in employer retirement contributions to the State retirement system. The Governor withheld, and subsequently used, the withheld funds under his constitutional authority to balance the State budget. The trial court dismissed the action on May 23, 2001, for lack of standing, among other things. Plaintiffs appealed to the State Court of Appeals, and on December 3, 2002, the Court of Appeals affirmed the trial court’s dismissal of the action for lack of standing. On June 13, 2003, the State Supreme Court reversed the lower courts on the issue of standing and remanded the case back to the Court of Appeals for further consideration. In June 2002, the Stone case was filed on behalf of individual State employees and retirees seeking repayment of the withheld employer contribution and a prohibition against future diversions. A class comprised of all members of the retirement system has been certified, and the case is proceeding through class notification and toward trial. The State Attorney General’s office believes that sound legal arguments support the State’s defense of these cases.

6. Cabarrus County v. Tolson – Diversion of Local Government Tax Reimbursements and Shared Revenue. On September 17, 2002, six counties and three municipalities filed suit against the State Secretary of Revenue demanding that the State release payments of local tax reimbursements and shared revenues in excess of $200 million and a prohibition against future diversions. The Governor, in the exercise of his

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constitutional responsibility to balance the State budget, withheld tax revenues designated by statute for payment to local governments. Summary judgment was granted in favor of the State on all issues, and Plaintiffs appealed. On April 5, 2005, the State Court of Appeals ruled in favor of the State. Plaintiffs are expected to seek review by the State Supreme Court. The State Attorney General’s office believes that sound legal arguments support the State’s defense of this action.

7. Goldston, et al. v. State of North Carolina – Diversion of Highway Trust Funds. On November 14, 2002, a former Secretary of the Department of Transportation and a retired State Senator sued the Governor and the State for using Highway Trust Fund money in the State’s General Fund. The Governor’s Executive Order No. 19 transferred $80 million from the Highway Trust Fund to the General Fund for purposes of balancing the State budget. Also, the General Assembly in its 2002 Special Session authorized this transfer and the transfer of an additional $125 million during fiscal year 2003 in the form of a loan to be repaid with interest through 2009. The suit alleges that these actions are unlawful and unconstitutional and requests a declaration that taxes collected for purposes of Highway Trust Fund expenditures cannot be used for other purposes. Summary judgment was granted in favor of the State on all issues, and Plaintiffs appealed. Briefs were filed with the State Court of Appeals in February and March 2005. The State Attorney General’s office believes that sound legal arguments support the State’s defense of this action.

8. Diana Coley, et al. v. State of North Carolina, et al. (formerly Edward N. Rodman, et al. v. State of North Carolina, et al.) – Retroactive Income Tax Rates. On April 25, 2003, Plaintiffs filed suit against the State and the Secretary of Revenue challenging the constitutionality of retroactively applying the 2001 increase in the highest rate of North Carolina’s state income tax to the entire 2001 tax year. Plaintiffs seek refunds, for themselves and a proposed class of similarly situated taxpayers, of all taxes paid for the year 2001 in excess of the prior 7.75% maximum rate, on the theory that a retroactive mid-year tax increase violates the State and federal constitutions. Plaintiffs claim the total amount of taxes involved exceeds $76 million, plus interest. On June 30, 2004, the trial court granted summary judgment in favor of the State on all issues. Plaintiffs appealed to the State Court of Appeals, and oral arguments were held in April 2005. The State Attorney General’s office has filed a motion to dismiss and believes sound legal arguments support dismissal of the case.

9. Medical Mutual Insurance Corporation of North Carolina v. The Board of Governors of the University of North Carolina and its Constituent Institution, East Carolina University, the East Carolina School of Medicine, et al. – Insurance Policy Termination Premium. On March 18, 2003, Medical Mutual Insurance Corporation of North Carolina (“MMI”) filed this action in Wake County Superior Court against the Board of Governors of the University of North Carolina, East Carolina University Brody School of Medicine (“ECM”), and various doctors. In 2002, in order to raise additional capital, MMI demanded that all policy holders, including ECM, purchase guaranteed capital shares under threat of termination or nonrenewal of policies. In the face of MMI’s demand, ECM decided to purchase insurance for almost all of its healthcare professionals from another insurance company. In this lawsuit, MMI claims that ECM’s decision not to purchase insurance for all its healthcare professionals from MMI triggered an obligation to pay a termination fee to MMI of approximately $26.7 million. ECM believes that MMI is not entitled to any further payments. The State Attorney General’s Office believes that no fee may be owed because of MMI’s termination of the contract; however, in the event that a fee is owed, the State Attorney General’s Office believes that it would be substantially less than $26.7 million. The suit is pending in Superior Court and related administrative proceedings before the State Department of Insurance are ongoing. In August 2004, the trial court entered an order referring the case to arbitration. The State has appealed the arbitration order, and the State Court of Appeals has agreed to hear the case. The State has also filed an administrative proceeding with the State Department of Insurance seeking determination that MMI is violating various aspects of State insurance practice in its attempt to impose this penalty.

10. DirecTV, Inc. and EchoStar Satellite Corp. v. State of North Carolina, et al. – Refund of Sales Tax. On September 30, 2003, DirecTV and Echostar filed an action for a $32 million refund of State sales tax paid. The State General Assembly recently enacted a provision to impose the sales tax on satellite TV service providers. Plaintiffs claim this tax, which is not imposed on cable television providers, is unconstitutional in that it violates the Commerce Clause (because it is discriminatory and not fairly related to benefits provided by the State), the equal protection clause and North Carolina’s uniformity of taxation constitutional requirement. It is the State’s position that although cable providers are not subject to this tax, they are subject to city and county franchise taxes. The tax on satellite companies was enacted to equalize the tax burden on these various forms of entertainment. The case has been designated as exceptional under the State’s Rules of Civil Procedure. The parties’ cross-motions for summary judgment were argued in May 2005, and the trial court granted summary judgment in favor of the State.

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11. Lessie J. Dunn, et al. v. State of North Carolina, et al. – Tax on Non-State Municipal Bonds. On February 9, 2004, Plaintiffs, on behalf of a class of all others similarly situated, filed suit alleging that the State’s imposition and collection of State income tax on interest received by certain taxpayers on municipal bonds issued by non-North Carolina State and local governments constitutes a violation of the Commerce Clause of the United States Constitution. A similar case recently filed in Ohio was ultimately unsuccessful. The State Attorney General’s Office has filed an answer in the case, and plaintiffs are currently seeking class certification. The State Attorney General’s Office believes that sound legal arguments support the defense of this case.

12. Sanders, et al v. State Personnel Commission, et al. – Temporary Employees. On April 1, 2005, this action was filed on behalf of two former temporary employees of the State government seeking class action certification, injunctive relief and declaratory relief alleging that the State has engaged in unlawful and unconstitutional practices designed to deprive temporary employees who have worked 12 consecutive months or more of compensation rights benefits and permanent employee status. The complaint references a rule promulgated by the Office of State Personnel stating that temporary employees shall not work longer than 12 consecutive months, asserts the creation of implied contracts and relies in addition on various provisions of the State Constitution. The complaint has been amended once to add two additional plaintiffs and a motion is pending to allow a second amendment adding a State “whistleblower” allegation because several agencies began strictly applying the rule after the complaint was filed. Significant defenses exist as to each claim alleged in the lawsuit. On June 1, 2005, a Superior Court judge entered a limited temporary restraining order prohibiting the State from terminating temporary employees either on the basis of the rule in question or because of the lawsuit. A motions hearing on the preliminary injunction and other pending motions, including a request for “provisional” class certification, is scheduled for June 2005. If the State were to ultimately be required to provide to a class of several thousand former and current temporary employees retroactive benefits in the form of leave compensation, retirement and health insurance benefits, the liability would be substantial.

The State is also involved in numerous other claims and legal proceedings, many of which normally occur in governmental operations. A review of the status of outstanding lawsuits involving the State by the State Attorney General did not disclose any other proceedings that are expected to have a material adverse effect on the financial position of the State.

In its 1996 Short Session, the North Carolina General Assembly approved State general obligation bonds in the amount of $950 million for highways and $1.8 billion for schools. These bonds were approved by the voters of the State in November 1996. In March 1997, the State issued $450 million of the authorized school bonds. In November 1997, the State issued $250 million of the authorized highway bonds. In April 1998, the State issued an additional $450 million of the authorized school bonds. In April 1999, the State again issued an additional $450 million of the authorized school bonds. In September 2000, the State issued an additional $295 million of the authorized school bonds, and another $100 million of the authorized school bonds were issued in March 2001. In May 2002, the State issued the final $55 million of the authorized school bonds. In November 2003, the State issued an additional $400 million of the authorized highway bonds. The remaining $300 million of the authorized highway bonds were issued by the State in September 2004.

On November 3, 1998, North Carolina voters approved the issuance of $800 million in clean water bonds and $200 million in natural gas facilities bonds. The clean water bonds provide grants and loans for needed water and sewer improvement projects for the State’s municipalities, and fund programs to reduce pollution in the State’s waterways. The natural gas bonds provide grants, loans and other financing for local distribution companies or state or local government agencies to build natural gas facilities, in part to help attract industry to the State’s rural regions. In September 1999, the State issued a total of $197.4 million of authorized clean water bonds and natural gas facilities bonds, $177.4 million of which were a combination of clean water bonds ($172.4 million) and natural gas facilities bonds ($5 million) and $20 million of which were solely natural gas facilities bonds. In October 1999, the State issued an additional $2.6 million of the authorized clean water bonds. In September 2000, the State issued an additional $5 million of the authorized natural gas facilities bonds. In March 2001, the State issued an additional

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$30 million of the authorized clean water bonds. In March 2002, the State issued an additional $204.4 million of the authorized clean water bonds and an additional $35 million of the authorized natural gas facilities bonds. In April 2002, the State issued an additional $10.6 million of the authorized clean water bonds. In December 2002, the State issued an additional $18.8 million of the authorized clean water bonds and an additional $50 million of the authorized natural gas facilities bonds. In January 2003, the State issued an additional $2.9 million of the authorized clean water bonds. In April 2003, the State issued an additional $33 million of the authorized natural gas facilities bonds. In May 2003, the State issued an additional $3.65 million of the authorized clean water bonds. In March 2004, the State issued an additional $36 million of the authorized natural gas facilities bonds. The remaining total of $16 million of the authorized natural gas facilities bonds were issued by the State in January 2005.

On November 7, 2000, North Carolina voters approved the issuance of $3.1 billion in general obligation higher education bonds to finance improvements to the facilities of the 16 public universities and 59 community colleges in the State. In March 2001, the State issued $250 million of the authorized higher education bonds. In May 2002, the State issued an additional $300 million of the authorized higher education bonds.

In March 2003, the State issued bonds representing a consolidation of the clean water bonds and the higher education bonds in the approximate amount of $320 million. In April 2003, the State issued approximately $283.3 million of additional consolidated public improvement bonds. These two issuances consisted of a total of $38.4 million of the clean water bonds and 564.9 million of the higher education bonds. In March 2004, the State issued approximately $707.9 million of additional consolidated public improvement bonds. This issuance consisted of a total of $90.8 million of the clean water bonds and $617.1 million of the higher education bonds. An additional $15.255 million of the clean water bonds was issued separately by the State in March 2004. In January 2005, the State issued $705.5 million of additional consolidated public improvement bonds, consisting of a total of $41 million of the clean water bonds and $664.5 million of the higher education bonds. A total of approximately $169 million of the authorized clean water bonds remains unissued, and a total of approximately $703.5 million of the authorized higher education bonds remains unissued.

In addition, the State refinanced over $1,372 million of its existing debt in the years 2002 through January 2005 to improve cash flow and to take advantage of lower interest rates by reducing its future debt service payments.

It is anticipated that in July 2005 the State will issue $609.61 million in additional refunding bonds.

Hurricane Floyd struck North Carolina on September 16, 1999, causing significant flood and wind damage and some loss of life. The effects of the storm and its aftermath have been, and continue to be, felt in the eastern part of the State. The final estimate of property damage caused by the storm and its aftermath is $6 billion. In the opinion of the Offices of the Governor and the State Treasurer, notwithstanding the devastation caused by Hurricane Floyd, the storm and its consequences should not have a material adverse impact upon the ability of the State to meet its financial obligations, including timely payment of principal and interest on the State’s general obligation bonds.

Hurricane Isabel came ashore near Ocracoke on the Outer Banks of the State on September 18, 2003. The storm hammered the fragile Outer Banks and raked across the northeastern portion of the State, causing widespread destruction to homes, business, and farms. 47 of the State’s 100 counties were declared disaster areas. The State Department of Agriculture reports that damage to crops, livestock, and farm structures in the State exceeds $152 million. Damage to timber in the State is estimated at $565 million, with more than 833,000 acres sustaining some level of damage. By the end of December 2003, more than $155 million in federal and State disaster assistance to individuals, households, local governments, and private nonprofits has been approved. The federal government covers 75% of the costs; the State pays the other 25%.

The State suffered the effects of six tropical weather systems in 2004. In August, Hurricanes Alex, Bonnie and Charley caused flooding and widespread power outages in eastern North Carolina. In September, Hurricanes Frances, Ivan, and Jeanne devastated central and western North Carolina with torrential rainfall that spawned flash flooding and numerous debris flows, including mudslides and rock falls. Only Hurricanes Frances and Ivan have met the criteria necessary to achieve a Federal Disaster Declaration, while Hurricanes Alex, Bonnie, Charley and Jeanne met the criteria necessary for a State Disaster Declaration. Preliminary estimates indicate that these storms

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caused over $230 million in damages that are eligible for state and federal governmental assistance. The State’s share is estimated to be approximately $90 million. In order to match federal funds available to the State for federal disaster recovery services, the Governor ordered State agencies to revert 0.75% of their 2004-05 budgets to provide an estimated $120 million for storm relief.

Currently, Standard & Poor’s and Fitch both rate the State’s general obligation bonds as AAA. On August 19, 2002, Moody’s downgraded the State’s general obligation bonds from Aaa, its highest rating, to Aa1 with stable outlook, one step below Aaa. Moody’s cited the State’s “continued budget pressure, its reliance on non-recurring revenues, and its weakened balance sheet” as reasons for this downgrade. This represents the first time since 1960 that the State has had less than a AAA rating on its general obligation bonds. In September 2004, Moody’s revised the State’s outlook from stable to positive and noted the following:

“This rating reflects the State’s slowly stabilizing economy, its improving tax revenues, its conservative debt policy, and its effective financial management. While general fund balances remain negative, flexible cash reserves outside the general fund are ample, and pension funding is exceptionally strong. Moody’s expects that the state will continue to take actions to restore structural balance and rebuild reserves.”

Special Considerations Regarding Investment in Virginia State-Specific Obligations. The Virginia State-Specific Money Market Portfolio will invest primarily in Virginia State-Specific Obligations. For this reason, the Portfolio is affected by political, economic, regulatory or other developments that constrain the taxing, revenue-collecting and spending authority of Virginia issuers or otherwise affect the ability of Virginia issuers to pay interest, principal or any premium. The following information constitutes only a brief summary of certain of these developments and does not purport to be a complete description of them. The information has been obtained from recent official statements prepared by the Commonwealth of Virginia relating to its securities, and no independent investigation has been undertaken to verify its accuracy. Moreover, the information relates only to the state itself and not to the numerous special purpose or local government units whose issues may also be held by the Portfolio. The credits represented by such issues may be affected by a wide variety of local factors or structuring concerns, and no disclosure is made here relating to such matters.

The rate of economic growth in the Commonwealth of Virginia has increased steadily over the past decade. Per capita income in Virginia has been consistently above national levels during that time. The services sector in Virginia generates the largest number of jobs, followed by wholesale and retail trade, state and local government and manufacturing. Because of Northern Virginia, with its proximity to Washington, D.C., and Hampton Roads, which has the nation’s largest concentration of military installations, the Federal government has a greater economic impact on Virginia relative to its size than any state other than Alaska and Hawaii.

According to statistics published by the U.S. Department of Labor, Virginia typically has one of the lowest unemployment rates in the nation. This is generally attributed to the balance among the various sectors represented in the economy. Virginia is one of twenty-one states with a right-to-work law and is generally regarded as having a favorable business climate marked by few strikes or other work stoppages. Virginia is also one of the least unionized among the industrialized states. While overall employment has shown growth over the last five years, years 2001-03 saw little or no job growth, at 0.0%, -0.6% and 0.2% respectively. However, in June 2004, Virginia’s nonagricultural employment level was 3,617,600, a 2.3% increase over June 2003 and more than two times the 1.1% June 2004 national annual rate of job creation. This renewed job growth was aided by strong growth in the sectors of technology, business and professional services, defense contracting, construction and tourism.

Virginia’s state government operates on a two-year budget. The Constitution vests the ultimate responsibility and authority for levying taxes and appropriating revenue in the General Assembly, but the Governor has broad authority to manage the budgetary process. Once an appropriation act becomes law, revenue collections and expenditures are constantly monitored by the Governor, assisted by the Secretary of Finance and the Department of Planning and Budget, to ensure that a balanced budget is maintained. If projected revenue collections fall below amounts appropriated at any time, the Governor must reduce expenditures and withhold allotments of appropriations (other than for debt service and other specified purposes) to restore balance. Virginia law provides that up to 15% of a general fund appropriation to an agency may be withheld if required. An amendment to the Constitution, effective January 1, 1993, established a Revenue Stabilization Fund. This Fund is used to offset a portion of anticipated

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shortfalls in revenues in years when appropriations based on previous forecasts exceed expected revenues in subsequent forecasts. The Revenue Stabilization Fund consists of an amount not to exceed 10% of Virginia’s average annual tax revenues derived from taxes on income and retail sales for the three preceding fiscal years.

General Fund revenues are principally comprised of direct taxes. In recent fiscal years, most of the total tax revenues have been derived from five major taxes imposed by Virginia on individual and fiduciary income, state sales and use, corporate income, deeds, contracts, wills and suits and premiums of insurance companies. Historically, balances in the General Fund have decreased in some years, for example in fiscal years 1995, 2001, 2002 and 2003, and have increased at varying rates in other years, such as fiscal years 1996, 1997, 1998, 1999, 2000 and 2004. In fiscal year 2004, the General Fund revenues and other sources exceeded expenditures and other uses by $554.8 million, resulting in a 100% increase in the General Fund balance over fiscal year 2003. Overall revenue increased by 9.6%, while non-tax revenues decreased by 8.7%. Overall expenditures rose by a rate of 2.9% in fiscal year 2004, compared to a 0.6% decrease in fiscal year 2003. The fiscal year 2003 amounts are unaudited.

In September 1991, the Debt Capacity Advisory Committee was created by the Governor through an executive order. The committee is charged with annually estimating the amount of tax-supported debt that may prudently be authorized, consistent with the financial goals, capital needs and policies of Virginia. The committee annually reviews the outstanding debt of all agencies, institutions, boards and authorities of Virginia for which Virginia has either a direct or indirect pledge of tax revenues or moral obligation. The Committee provides its recommendations on the prudent use of such obligations to the Governor and the General Assembly.

The Constitution of Virginia prohibits the creation of debt by or on behalf of Virginia that is backed by Virginia’s full faith and credit, except as provided in Section 9 of Article X. Section 9 of Article X contains several different provisions for the issuance of general obligation and other debt, and Virginia is well within its limit for each:

Section 9(a) provides that the General Assembly may incur general obligation debt to meet certain types of emergencies; subject to limitations on amount and duration, to meet casual deficits in the revenue or in anticipation of the collection of revenues of Virginia; and to redeem a previous debt obligation of Virginia. Total indebtedness issued pursuant to Section 9(a)(2) may not exceed 30% of an amount equal to 1.15 times the annual tax revenues derived from taxes on income and retail sales, as certified by the Auditor of Public Accounts for the preceding fiscal year and such debt shall mature within 12 months from the date such debt is incurred.

Section 9(b) provides that the General Assembly may authorize the creation of general obligation debt for capital projects. Such debt is required to be authorized by an affirmative vote of a majority of each house of the General Assembly and approved in a statewide election. The outstanding amount of such debt is limited to an amount equal to 1.15 times the average annual tax revenues derived from taxes on income and retail sales, as certified by the Auditor of Public Accounts for the three preceding fiscal years less the total amount of bonds outstanding. The amount of 9(b) debt that may be authorized in any single fiscal year is limited to 25% of the limit on all 9(b) debt less the amount of 9(b) debt authorized in the current and prior three fiscal years.

Section 9(c) provides that the General Assembly may authorize the creation of general obligation debt for revenue-producing capital projects (so-called “double-barrel” debt). Such debt is required to be authorized by an affirmative vote of two-thirds of each house of the General Assembly and approved by the Governor. The Governor must certify before the enactment of the authorizing legislation and again before the issuance of the debt that the net revenues pledged are expected to be sufficient to pay principal of and interest on the debt. The outstanding amount of 9(c) debt is limited to an amount equal to 1.15 times the average annual tax revenues derived from taxes on income and retail sales, as certified by the Auditor of Public Accounts for the three preceding fiscal years. While the debt limits under Sections 9(b) and 9(c) are each calculated as the same percentage of the same average tax revenues, these debt limits are separately computed and apply separately to each type of debt.

Section 9(d) provides that the restrictions of Section 9 are not applicable to any obligation incurred by Virginia or any of its institutions, agencies or authorities if the full faith and credit of Virginia is not pledged or committed to the payment of such obligation. There are currently outstanding various types of such 9(d) revenue bonds. Certain of these bonds, however, are paid in part or in whole from revenues received as appropriations by the General Assembly from general tax revenues, while others are paid solely from revenues of the applicable

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project. The repayment of debt issued by the Virginia Public Building Authority, the Virginia College Building Authority 21^st Century College and Equipment Program, the Innovative Technology Authority and the Virginia Biotechnology Research Park Authority is supported in large part by General Fund appropriations.

The Commonwealth Transportation Board is a substantial issuer of bonds for highway projects. These bonds are secured by and are payable from funds appropriated by the General Assembly from the Transportation Trust Fund for such purpose. The Transportation Trust Fund was established by the General Assembly in 1986 as a special non-reverting fund administered and allocated by the Transportation Board to provide increased funding for construction, capital and other needs of state highways, airports, mass transportation and ports. The Virginia Port Authority has also issued bonds that are secured by a portion of the Transportation Trust Fund.

Virginia is involved in numerous leases that are subject to appropriation of funding by the General Assembly. Virginia also finances the acquisition of certain personal property and equipment through installment purchase agreements.

Bonds issued by the Virginia Housing Development Authority, the Virginia Resources Authority and the Virginia Public School Authority are designed to be self-supporting from their individual loan programs. A portion of the Virginia Housing Development Authority bonds, Virginia Public School Authority bonds and the Virginia Resources Authority bonds are secured in part by a moral obligation pledge of Virginia. Should the need arise, Virginia may consider funding deficiencies in the respective debt service reserves for such moral obligation debt but the General Assembly is not legally required to make any appropriation for such purpose. To date, none of these authorities has advised Virginia that any such deficiencies exist.

As of June 30, 2004, local government in Virginia was comprised of 95 counties, 39 incorporated cities, and 190 incorporated towns. Virginia is unique among the several states in that cities and counties are independent, and their land areas do not overlap. The largest expenditures by local governments in Virginia are for education, but local governments also provide other services such as water and sewer, police and fire protection and recreational facilities. The Virginia Constitution imposes numerous restrictions on local indebtedness, affecting both its incurrence and amount.

On December 17, 2003, Governor Warner presented the 2004 Budget Bill for the 2004-06 biennium. The 2004 Budget Bill included a number of actions to balance a projected shortfall of $1.9 billion over the biennium between projected revenues and spending requirements. The general fund revenues for 2005 and 2006 at that time were projected to be $27.2 billion, consisting of $13.4 billion in fiscal year 2005 and $13.8 billion in fiscal year 2006.

On May 7, 2004, the General Assembly passed a comprised budget for the 2004-06 biennium that included tax reforms that were projected to generate additional revenue of $616.3 million in fiscal year 2005 and $775.6 million in fiscal year 2006.

On June 6, 2004, Governor Warner returned the enrolled Budget Bill to the General Assembly with 43 recommended amendments. On June 16, 2004, the General Assembly adopted 27 of the 43 recommended amendments, and on June 25, 2004, Governor Warner signed House Bill 5001, as amended, and vetoed 8 items.

On December 17, 2004, Governor Warner presented his proposed amendments to the 2004 Appropriation Act (later filed as House Bill 1500/Senate Bill 700) which impacts spending in the current biennium and the one for the period July 1, 2005 to June 20, 2006.

The General Assembly made a series of amendments to the 2004 Appropriation Act which were signed by the Governor on May 10 and will be effective July 1, 2005. The amendments included actions to further enhance budget and fiscal stability; expand tax relief; and provide funding for basic budget commitments, primarily in the areas of transportation, health care and education.

Because of actions to increase revenues during the 2004 General Assembly and the overall strong economy in the Commonwealth, the adopted budget included approximately $1.3 billion in net additional general fund

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resources through June 30, 2006. This amount was comprised largely of a revision to the general fund revenue forecast of an additional $1,213.6 million for the biennium and surplus balances carried over from the previous fiscal year.

During the 2005 General Assembly, a number of tax policy changes were adopted affecting revenues in the general fund, including: the elimination of the accelerated sales tax payment by most merchants in June, 2006, thus reducing revenues by $200.1 million; a reduction in forecast revenues in the amount of $99.1 million to reflect acceleration of the phase-out of the state sales tax on food by two years to be effective July 1, 2005; a transfer of $23.2 million generated annually by the state’s rental car tax to support a fund to encourage the development of rail projects; and a reduction of $6.7 million to reflect conformity to recent federal tax law changes.

Among the commitments made in the amended budget were (1) $229.4 million to the Revenue Stabilization Fund to meet the constitutionally required deposit and provide for a supplemental deposit in FY 2005 to further strengthen the Fund in the event of a future downturn in state revenues; (2) $212.2 million to meet the increase in projected costs of Medicaid services for mandated clients; (3) $163.9 million for capital project cost overruns, maintenance and repair of state owned facilities and equipment for previously approved projects; (4) $347.6 million for a variety of new transportation initiatives; (5) $131.7 million for a salary increase for state employees, college faculty, teachers and state-supported local employees; (6) $31.2 million representing the employer’s share of the state employee health insurance premium increase; and (7) $86.4 million for water quality improvement.

Most recently, Moody’s has reaffirmed Virginia’s AAA bond rating for long-term general obligation bonds. Moody’s reaffirmation reverses an earlier decision to place Virginia on its Watchlist for a possible rating downgrade. Virginia’s outlook has also been upgraded from negative to stable.

Special Considerations Regarding Investment in New Jersey State-Specific Obligations. The following information provides only a brief summary of the complex factors affecting the financial situation in New Jersey, does not purport to be a complete description and is largely based on information drawn from official statements relating to securities offerings of New Jersey municipal obligations available as of the date of this Statement of Additional Information. The accuracy and completeness of the information contained in such offering statements has not been independently verified.

New Jersey Economic Information and Trends. New Jersey’s economic base is diversified, consisting of a variety of manufacturing, construction and service industries, supplemented by rural areas with selective commercial agriculture

New Jersey’s economy continued to recover steadily in 2004. New Jersey’s payroll employment in January 2005 grew at a 1.3% average annual rate from over a year ago, continuing the positive year-to-year growth trend for the twelfth consecutive month since February 2004. The generally improving labor market conditions have kept New Jersey’s jobless rate below 5.0% for the ninth straight month since May 2004. New Jersey and the nation are expected to have economic momentum into 2005. New Jersey’s economy is expected to follow the national trend in 2005. New Jersey and the Nation may experience further near-term slow growth, and the expected pace of economic expansion may stall if consumers, investors, and businesses become more cautious than currently assumed. However, the fundamentals of New Jersey’s economic health remain stable and the long-term prospects for economic growth of New Jersey in 2005 and beyond are favorable.

New Jersey’s Budget and Appropriation System - Current Operating Expenses.

The General Fund. New Jersey operates on a fiscal year ending on June 30. The General Fund is the fund into which all New Jersey revenues, not otherwise restricted by statute, are deposited and from which appropriations are made. The largest part of the total financial operations of New Jersey is accounted for in the General Fund. The Appropriations Act enacted by the New Jersey Legislature and approved by the Governor provides the basic framework for the operation of the General Fund. The undesignated General Fund balance at year end for fiscal year 2002 was 292.3 million, for fiscal year 2003 was 373.0 million and for fiscal year 2004 was $376.5 million. For fiscal years 2005 and 2006, the balance in the undesignated General Fund is estimated to be $111.6 million and $111.6 million, respectively. The fund balances are available for appropriation in succeeding fiscal years.

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Tax and Revenue Anticipation Notes. In fiscal year 1992, New Jersey initiated a program under which it issued tax and revenue anticipation notes to aid in providing effective cash flow management to fund imbalances which occur in the collection and disbursement of General Fund revenues and Property Tax Relief Fund revenues. New Jersey authorized the issuance of up to $3,100,000,000 of such notes for fiscal year 2005 and has issued notes in the amount of $1,500,000,000 on August 12, 2004, which notes are payable on June 24, 2005 Such tax and revenue anticipation notes do not constitute a general obligation of New Jersey or a debt or liability within the meaning of the New Jersey Constitution. Such notes constitute special obligations of New Jersey payable solely from monies on deposit in the General Fund and Property Tax Relief Fund that are legally available for such payment.

New Jersey Capital Project Financings.

General Obligation Bonds. New Jersey finances certain capital projects through the sale of its general obligation bonds. These bonds are backed by the full faith and credit of New Jersey. Certain state tax revenues and certain other fees are pledged to meet the principal payments, interest payments and redemption premium payments, if any, required to fully pay the bonds. The aggregate outstanding general obligation bonded indebtedness of New Jersey as of June 30, 2004 was $3,236,099,741. The recommended appropriation for the debt service obligation on outstanding projected indebtedness is $185.4 million for fiscal year 2006.

Pay-As-You-Go. In addition to payment from bond proceeds, capital projects can also be funded by appropriation of current revenues on a pay-as-you-go basis. In fiscal year 2006, the amount recommended for this purpose is $1,089.4 million.

Other Long Term Debt Obligations of New Jersey.

Bonds Guaranteed by New Jersey. The New Jersey Sports and Exposition Authority (“NJSEA”) has issued State-guaranteed bonds of which $20,050,000 were outstanding as of June 30, 2004. To date, the NJSEA has not had a revenue deficiency requiring New Jersey to make debt service payments pursuant to its guarantee. It is anticipated that the NJSEA’s revenues will continue to be sufficient to pay debt service on these bonds without recourse to New Jersey’s guarantee.

“Moral Obligation” Bonds. The authorizing legislation for certain New Jersey entities provides for specific budgetary procedures with respect to certain of the obligations issued by such entities. Pursuant to such legislation, a designated official is required to certify any deficiency in a debt service reserve fund maintained to meet payments of principal of and interest on the obligations and a New Jersey appropriation in the amount of the deficiency is to be made. However, the New Jersey Legislature is not legally bound to make such an appropriation. Bonds issued pursuant to authorizing legislation of this type are sometimes referred to as “moral obligation” bonds. There is no statutory limitation on the amount of “moral obligation” bonds which may be issued by eligible New Jersey entities. Below is a discussion of those New Jersey authorities and instrumentalities that issue bonds that constitute a “moral obligation” of New Jersey.

New Jersey Housing and Mortgage Finance Agency. Neither the New Jersey Housing and Mortgage Finance Agency nor its predecessor agencies (the New Jersey Housing Finance Agency and the New Jersey Mortgage Finance Agency) have had a deficiency in a debt service reserve fund which required New Jersey to appropriate funds to meet its “moral obligation.” It is anticipated that this agency’s revenues will continue to be sufficient to pay debt service on its bonds.

South Jersey Port Corporation. New Jersey has periodically provided the South Jersey Port Corporation (the “SJPC”) with funds to cover debt service and property tax requirements, when earned revenues are anticipated to be insufficient to cover these obligations. For calendar years 2000 through 2004, New Jersey has made appropriations totaling $20,371,846 which covered deficiencies in revenues of the SJPC for debt service.

New Jersey Higher Education Student Assistance Authority. The New Jersey Higher Education Student Assistance Authority (“NJHESAA”) (successor to the Higher Education Assistance Authority) has not had a revenue deficiency that required New Jersey to appropriate funds to meet its “moral obligation”. It currently is anticipated that the NJHESAA’s revenues will continue to be sufficient to cover debt service on its bonds.

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There is no statutory limitation on the amount of “moral obligation” bonds which may be issued by eligible New Jersey entities. As of June 30, 2004, outstanding “moral obligation” bonded indebtedness issued by New Jersey entities totaled $1,167,907,668 and fiscal year 2005 debt service subject to “moral obligation” is $53,999,749.

Obligations Supported by New Jersey Revenue Subject to Annual Appropriation. New Jersey has entered into a number of leases and contracts described below (collectively, the “Agreements” and each an “Agreement”) with several governmental authorities to secure the financing of various New Jersey projects. Under the terms of the Agreements, New Jersey has agreed to make payments equal to the debt service on, and other costs related to, the obligations sold to finance the projects, including payments on swap agreements defined below. New Jersey’s obligations to make payments with respect to certain financings includes payments related to interest rate exchange agreements described below (“swap agreements”) entered into with respect to such financings. Under such swap agreements, the issuer is required to pay a fixed rate to the swap counter party and any swap termination payment. If the payments to an issuer under a swap agreement are not sufficient to pay the interest on the issuer’s related obligation, the issuer must pay such deficiency. New Jersey’s obligation to make payments under the Agreements is subject to and dependent upon annual appropriations being made by the New Jersey Legislature for such purposes. The New Jersey Legislature has no legal obligation to enact such appropriations, but has done so to date for all such obligations. Below is a discussion of those financings pursuant to which State authorities and instrumentalities have entered into Agreements with New Jersey to secure the financing of various State projects.

New Jersey Economic Development Authority. The New Jersey Economic Development Authority (“NJEDA”) issues bonds secured by Agreements pursuant to the following legislative programs: (i) Economic Recovery Bonds issued to finance various economic development purposes (with payments made by New Jersey pursuant to an Agreement being equivalent to payments due to New Jersey under an agreement with the Port Authority of New York and New Jersey); (ii) Pension Bonds issued for the purpose of financing the unfunded accrued pension liability for New Jersey’s retirement system; (iii) Market Transition Facility Bonds issued to pay current and anticipated liabilities and expenses of the Market Transition Facility, which issued private passenger automobile insurance policies for drivers who could not be insured by private insurance companies on a voluntary basis; (iv) the School Facility Construction Bonds (the principal amount of bonds authorized to be issued is $6 billion for the “Abbott” districts, $2.5 billion for all other districts and $100 million for county vocational school district projects), pursuant to which the NJEDA issues bonds to finance New Jersey’s share of costs for school facility construction projects and debt service on the bonds is paid pursuant to a contract between the NJEDA and the New Jersey Treasurer; (v) pursuant to the Motor Vehicle Security and Customer Service Act, the NJEDA is authorized to issue bonds to pay the costs of capital improvements for the New Jersey Motor Vehicle Commission facilities (authorized in an amount not exceeding $160 million); (vi) the lease financing program through which certain real property, office buildings and equipment are financed with NJEDA bonds (secured by Agreements between the New Jersey Treasurer and NJEDA) and (vii) pursuant to the Cigarette Tax Securitization Act of 2004, the NJEDA is authorized to issue bonds payable, and secured by, a portion, $0.0325 per cigarette, of the cigarette tax imposed pursuant to N.J.S.A. 54:40A-1 et seq.

The NJEDA has entered into a number of swap agreements with certain bond issues. In connection with the $375,000,000 State Pension Variable Rate Refunding Bonds, Series 2003, the NJEDA has entered into swap agreements for the purpose of converting the NJEDA’s variable rate exposure to a fixed rate. The outstanding aggregate principal amount of the bonds is equal to the aggregate notional amount of the swap agreements related thereto. In connection with School Facilities Construction Bonds, the NJEDA has entered into for six separate tranches of swap agreements in an aggregate notional amount of $3 billion in 2003 and three separate swap agreements with a notional amount of $750 million in 2004. These forward-starting swap agreements effectively hedge against rising interest rates a portion of the NJEDA’s future borrowings expense associated with bonds anticipated to be issued under the Educational Facilities Construction and Financing Act, enacted July 18, 2000, P.L. 2000, c.72. The NJEDA has entered into three separate swap agreements with an aggregate notional amount of $214,795,000 in connection with its Business Employment Incentive Program Bonds and are effectively a hedge against rising interest rates for a portion of NJEDA’s future borrowing expense associated with bonds anticipated to be issued under the Business Employment Incentives Program in fiscal year 2005.

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New Jersey Educational Facilities Authority. The New Jersey Educational Facilities Authority issues bonds secured by Agreements pursuant to seven separate legislative programs to finance (i) the purchase of equipment to be leased to institutions of higher learning; (ii) grants to New Jersey’s public and private institutions of higher education for the development, construction and improvement of instructional, laboratory, communication and research facilities; (iii) grants to public and private institutions of higher education to develop a technology infrastructure within and among New Jersey’s institutions of higher education; (iv) capital projects at county colleges; (v) grants to public and private institutions of higher education to finance and refinance eligible educational facilities; (vi) grants to public libraries to finance the acquisition, expansion and rehabilitation of buildings to be used as public library facilities; and (vii) loans to public and private institutions of higher education and public and private secondary schools, military schools and boarding schools located within New Jersey to install automatic fire suppression systems.

New Jersey Transportation Trust Fund Authority. In July 1984, New Jersey created the New Jersey Transportation Trust Fund Authority (the “NJTTFA”) for the purpose of funding a portion of New Jersey’s share of the cost of improvements to its transportation system. The principal amount of the NJTTFA’s bonds, notes or other obligations which may be issued in any fiscal year generally may not exceed $650 million plus amounts carried over from prior fiscal years. The obligations issued by the NJTTFA are special obligations of the NJTTFA payable from a contract among the NJTTFA, the New Jersey Treasurer and the Commissioner of Transportation.

The NJTTFA has entered into a number of swap agreements in connection with its $345,000,000 Transportation System Bonds, 2003 Series B for the purpose of converting the NJTTFA’s variable rate exposure to a fixed rate. The outstanding aggregate principal amount of the bonds is equal to the aggregate notional amount of the swap agreements related thereto.

New Jersey Building Authority. The New Jersey Building Authority (“NJBA”) issues bonds for the acquisition, construction, renovation and rehabilitation of various New Jersey office buildings, historic buildings, and correctional facilities. Pursuant to a lease agreement, New Jersey makes rental payments to NJBA in amounts sufficient to pay debt service on the NJBA bonds.

The NJBA has entered into a number of swap agreements in connection with its $189,950,000 State Building Revenue Bonds, 2003 Series A for the purpose of converting the NJBA’s variable rate exposure to a fixed rate. The outstanding aggregate principal amount of the bonds is equal to the aggregate notional amount of the swap agreements related thereto.

New Jersey Sports and Exposition Authority. Legislation enacted in 1992 authorizes the New Jersey Sports and Exposition Authority (the “NJSEA”) to issue bonds for various purposes payable from a contract between the NJSEA and the New Jersey Treasurer. Pursuant to such contract, the NJSEA undertakes certain projects and the New Jersey Treasurer credits to the NJSEA amounts from the General Fund sufficient to pay debt service and other costs related to the bonds.

The NJSEA has entered into swap agreements in connection with its $36,825,000 State Contract Bonds, 2002 Series B-1, B-2 and C and 209,990,000 State Contract Bonds, 1992 Series C for the purpose of converting the NJSEA’s variable rate exposure to a fixed rate.

Garden State Preservation Trust. In July 1999, New Jersey established the Garden State Preservation Trust (“GSPT”) for the purpose of preserving, as open space, farmland and historic properties. Pursuant to the enabling act of the GSPT, the principal amount of bonds, notes or other obligations which may be issued prior to July 1, 2009, other than refunding bonds, cannot exceed $1.15 billion. After July 1, 2009, only refunding bonds can be issued. The obligations to be issued by the GSPT will be special obligations of the GSPT payable from amounts paid to it under a contract between GSPT and the New Jersey Treasurer.

New Jersey Health Care Facilities Financing Authority. Pursuant to Legislation, the New Jersey Health Care Facilities Financing Authority is authorized to acquire, construct and lease a project to the New Jersey Department of Human Services (“DHS”) and to issue bonds to finance each project, the debt service on which shall be paid by DHS, subject to appropriations by the New Jersey Legislature.

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New Jersey Certificates of Participation. Beginning in April 1984, New Jersey, acting through the Director of the Division of Purchase and Property, has entered into a series of lease purchase agreements which provide for the acquisition of equipment, services and real property to be used by various departments and agencies of New Jersey. Certificates of Participation in such lease purchase agreements have been issued. A Certificate of Participation represents a proportionate interest of the owner thereof in the lease payments to be made by New Jersey under the terms of the lease purchase agreement.

New Jersey Supported School and County College Bonds. Legislation provides for future appropriations for New Jersey aid to local school districts equal to a portion of the debt service on bonds issued by such local school districts for construction and renovation of school facilities (P.L. 1968, c. 177; P.L. 1971, c. 10; and P.L. 1978, c. 74) and for New Jersey aid to counties equal to a portion of the debt service on bonds issued by or on behalf of counties for construction of county college facilities (P.L. 1971, c. 12, as amended). The New Jersey Legislature has no legal obligation to make such appropriations, but has done so to date for all obligations issued under these laws.

Department of Human Services Programs. The NJEDA issues revenue bonds from time to time on behalf of non-profit community services providers. The payment of debt service on these bonds as was as the payment of certain other provider expenses is made by New Jersey pursuant to service contracts between DHS and these providers.

Conduit Indebtedness of New Jersey Authorities and Instrumentalities. Certain State authorities and instrumentalities are authorized to issue debt on behalf of various private and governmental entities on a conduit basis. Under such circumstances, neither the New Jersey authority or instrumentality acting as a conduit issuer nor the State of New Jersey is responsible for the repayment of such debt. The payment obligations with respect to such debt are solely that of the entity on whose behalf the debt was issued. Those State authorities and instrumentalities that issue debt on behalf of private and governmental entities on a conduit basis include: (i) the New Jersey Economic Development Authority; (ii) the New Jersey Health Care Facilities Financing Authority; (iii) the New Jersey Education Facilities Authority; (iv) the New Jersey Housing and Mortgage Finance Agency; (v) the New Jersey Environmental Infrastructure Trust; and (vi) the New Jersey Redevelopment Agency.

Counties and Municipalities.

Regulation of County and Municipal Finance. New Jersey’s county and municipal finance system is regulated by various statutes designed to assure that all county and municipal governments and their issuing authorities remain on a sound financial basis. Regulatory and remedial statutes are enforced by the Division of Local Government Services (the “Division”) in the New Jersey Department of Community Affairs.

The Local Budget Law (N.J.S.A. 40A:4-1 et seq.) (the “Local Budget Law”) imposes specific budgetary procedures upon counties and municipalities (“local units”). Every local unit must adopt an operating budget which is balanced on a cash basis, and items of revenue and appropriation must be examined by the Director of the Division (the “Director”). The accounts of each local unit must be independently audited by a registered municipal accountant. New Jersey law provides that budgets must be submitted in a form promulgated by the Division. The Division reviews all local unit annual budgets prior to adoption for compliance with the Local Budget Law. The Director is empowered (i) to require changes for compliance with law as a condition of approval; (ii) to disapprove budgets not in accordance with law; and (iii) to prepare the budget of a local unit, within the limits of the adopted budget of the previous year with suitable adjustments for legal compliance, if the local unit fails to adopt a budget in accordance with law. This process insures that every local unit annually adopts a budget balanced on a cash basis, within limitations on appropriations or tax levies, respectively, and making adequate provision for (i) principal of and interest on indebtedness falling due in the fiscal year, (ii) deferred charges, and (iii) other statutory expenditure requirements. The Director also oversees changes to local budgets after adoption as permitted by law, and enforces regulations pertaining to execution of adopted budgets and financial administration. In addition to the exercise of regulatory and oversight functions, the Division offers expert technical assistance to local units in all aspects of financial administration, including revenue collection and cash management procedures, contracting procedures, debt management and administrative analysis.

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The Local Government Cap Law (N.J.S.A. 40A:4-45.1 et seq.) (the “Cap Law”) limits the year-to-year increase of the total appropriations of any local unit to either 5% or an index rate determined annually by the Director, whichever is less. However, where the index percentage rate exceeds 5%, the Cap Law permits the governing body of any local unit to approve the use of a higher percentage rate up to the index rate. Further, where the index percentage rate is less than 5%, the Cap Law also permits the governing body of any local unit to approve the use of a higher percentage rate up to 5%. Regardless of the rate utilized, certain exceptions exist to the Cap Law’s limitation on increases in appropriations. The principal exceptions to these limitations are: (i) municipal and county appropriations to pay debt service requirements; (ii) requirements to comply with certain other New Jersey or federal mandates; (iii) appropriations of private and public dedicated funds; (iv) amounts approved by referendum; and (v) in the case of municipalities only, to fund the preceding year’s cash deficit or to reserve for shortfalls in tax collections, and amounts required pursuant to contractual obligations for specified services. The Cap Law was re-enacted in 1990 with amendments and made a permanent part of the municipal finance system.

Regulation of the Issuance of Bonds by Counties and Municipalities. New Jersey law also regulates the issuance of debt by local units. The Local Budget Law limits the amount of tax anticipation notes that may be issued by local units and requires the repayment of such notes within 120 days of the end of the fiscal year (six months in the case of the counties) in which issued. The Local Bond Law (N.J.S.A. 40A:2-1 et seq.) governs the issuance of bonds and notes by the local units. No local unit is permitted to issue bonds for the payment of current expenses (other than fiscal year adjustment bonds). Local units may not issue bonds to pay outstanding bonds, except for refunding purposes, and then only with the approval of the Local Finance Board. Local units may issue bond anticipation notes for temporary periods not exceeding in the aggregate approximately ten years from the date of issue. The debt that any local unit may authorize is limited to a percentage of its equalized valuation basis. In the calculation of debt capacity, the Local Bond Law and certain other statutes permit the deduction of certain classes of debt (“statutory deduction”) from all authorized debt of the local unit in computing whether a local unit has exceeded its statutory debt limit. The Local Bond Law permits the issuance of certain obligations, including obligations issued for certain emergency or self liquidating purposes, notwithstanding the statutory debt limitation described above, but, with certain exceptions, it is then necessary to obtain the approval of the Local Finance Board.

School Districts.

Regulation of School District Finance. All New Jersey school districts are coterminous with the boundaries of one or more municipalities. They are characterized by the manner in which the board of education, the governing body of the school districts, takes office. Type I school districts, most commonly found in cities, have a board of education, appointed by the mayor or the chief executive officer of the municipality, constituting the school district. In a Type II school district, the board of education is elected by the voters of the district. Nearly all regional and consolidated school districts are Type II school districts. The New Jersey Department of Education has been empowered with authority to abolish an existing school board and create a State-operated school district where the existing school board has failed or is unable to take the corrective actions necessary to provide a thorough and efficient system of education in that school district pursuant to N.J.S.A. 18A:7A-15 et seq. (the “School Intervention Act”). The State-operated school district, under the direction of a New Jersey appointed superintendent, has all of the powers and authority of the local board of education and of the local district superintendent.

New Jersey’s school districts operate under the same comprehensive review and regulation as do its counties and municipalities. Certain exceptions and differences are provided, but New Jersey’s supervision of school finance closely parallels that of local governments.

Regulation of the Issuance of Bonds by School Districts. School district bonds and temporary notes are issued in conformity with N.J.S.A. 18A:24-1 et seq. (the “School Bond Law”), which closely parallels the Local Bond Law (for further information relating to the Local Bond Law, see “Counties and Municipalities - Regulation of the Issuance of Bonds by Counties and Municipalities” herein). Although school districts are exempted from the 5% down payment provision generally applied to bonds issued by local units, they are subject to debt limits (which vary depending on the type of school system) and to New Jersey regulation of their borrowing.

School bonds are authorized by (i) an ordinance adopted by the governing body of a municipality within a Type I school district; (ii) adoption of a proposal by resolution by the board of education of a Type II school district having a board of school estimate; (iii) adoption of a proposal by resolution by the board of education and approval of the proposal by the legal voters of any other Type II school district; or (iv) adoption of a proposal by resolution by a capital project control board for projects in a State-operated school district.

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If school bonds of a Type II school district will exceed the school district borrowing capacity, a school district (other than a regional school district) may use the balance of the municipal borrowing capacity. If the total amount of debt exceeds the school district’s borrowing capacity, the Commissioner and the Local Finance Board must approve the proposed authorization before it is submitted to the voters. All authorizations of debt in a Type II school district without a board of school estimate require an approving referendum, except where, after hearing, the Commissioner and the New Jersey Department of Education determine that the issuance of such debt is necessary to meet the constitutional obligation to provide a thorough and efficient system of public schools. When such obligations are issued, they are issued by, and in the name of, the school district.

In Type I and II school districts with a board of school estimate, that board examines the capital proposal of the board of education and certifies the amount of bonds to be authorized. When it is necessary to exceed the borrowing capacity of the municipality, the approval of a majority of the legally qualified voters of the municipality is required, together with the approval of the Commissioner and the Local Finance Board. When such bonds are issued by a Type I school district, they are issued by the municipality and identified as school bonds. When bonds are issued by a Type II school district having a board of school estimate, they are issued by, and in the name of, the school district.

School District Lease Purchase Financings. School districts are permitted to enter into lease purchase agreements for the acquisition of equipment or for the acquisition of land and school buildings in order to undertake the construction or the improvement of the school buildings. Lease purchase agreements for equipment cannot exceed five years. Lease purchase agreements for school facilities must be approved by the Commissioner, the voters or the board of school estimate, as applicable. The payment of rent on an equipment lease and on a five year and under facilities lease purchase agreement is treated as a current expense and is within the cap on the school district’s budget. Under the Comprehensive Education Improvement and Financing Act, lease purchase payments on leases in excess of five years will be treated as debt service payments and therefore receive debt service aid if the school district is entitled and will be outside the school district’s spending limitation of the General Fund.

New Jersey School Bond Reserve Act. The New Jersey School Bond Reserve Act (N.J.S.A. 18A:56-17 et seq.) establishes a school bond reserve within the constitutionally dedicated Fund for the support of free public schools. Under this law, the reserve is maintained at an amount equal to 1.5% of the aggregate outstanding bonded indebtedness of counties, municipalities or school districts for school purposes (exclusive of bonds whose debt service is provided by New Jersey appropriations), but not in excess of monies available in such Fund. If a municipality, county or school district is unable to meet payment of the principal of or interest on any of its school bonds, the trustee of the school bond reserve will purchase such bonds at the face amount thereof or pay the holders thereof the interest due or to become due. There has never been an occasion to call upon this Fund.

Local Financing Authorities.

Regulation of Local Financing Authorities. The Local Authorities Fiscal Control Law (N.J.S.A. 40A:5A-1 et seq.) provides for State supervision of the fiscal operations and debt issuance practices of independent local authorities and special taxing districts by the New Jersey Department of Community Affairs. The Local Authorities Fiscal Control Law applies to all autonomous public bodies, created by local units, which are empowered (i) to issue bonds, (ii) to impose facility or service charges, or (iii) to levy taxes in their districts. This encompasses most autonomous local authorities (sewerage, municipal utilities, parking, pollution control, improvement, etc.) and special taxing districts (fire, water, etc.). Authorities which are subject to differing New Jersey or federal financial restrictions are exempted, but only to the extent of that difference.

Financial control responsibilities over local authorities and special districts are assigned to the Local Finance Board and the Director. The Local Finance Board exercises approval over creation of new authorities and special districts as well as their dissolution. The Local Finance Board prescribes minimum audit requirements to be followed by authorities and special districts in the conduct of their annual audits. The Director reviews and approves annual budgets of authorities and special districts.

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Regulation of the Issuance of Bonds by Local Financing Authorities. Certain local authorities are authorized to issue debt on behalf of various entities on a conduit basis. Under such circumstances, neither the local authority acting as a conduit issuer, the local unit creating such local authority nor the State of New Jersey is responsible for the repayment of such debt. The payment obligations with respect to such debt is solely that of the entity on whose behalf the debt was issued. The Local Finance Board reviews, conducts public hearings, and issues findings and recommendations on any proposed project financing of an authority or district, and on any proposed financing agreement between a local unit and an authority or special district.

Pollution Control Bonds. In the 1970’s, the New Jersey Legislature initiated a comprehensive statutory mechanism for the management of solid waste disposal within New Jersey that required each county to develop a plan for county-wide controlled flow of solid waste to a franchised location. The controlled flow of solid waste to a franchised location enabled the imposition of above-market-rate disposal fees. Most counties created independent local authorities or utilized existing local authorities in order to finance, with the proceeds of bonds, the technically complex and expensive infrastructure required to implement this statutory mechanism. Typically, the primary security for the amortization of the bonds was the above-market-rate disposal fees, although some bonds were further secured by a guaranty of the respective county. On May 1, 1997, in Atlantic Coast Demolition & Recycling, Inc. v. Board of Chosen Freeholders of Atlantic County, 112 F.3d 652 (3d Cir. 1997), the United States Court of Appeals for the Third Circuit held that New Jersey’s system of controlled flow of solid waste to franchised locations unconstitutionally discriminated against out-of-State operators of waste disposal facilities and, therefore, violated the Commerce Clause of the United States Constitution. Subsequently, the United States Supreme Court denied a petition for writ of certiorari. This decision has terminated controlled flow of solid waste to franchised locations within New Jersey. In the absence of controlled flow, franchisees facing competition from other operators of waste disposal facilities are unable to charge above-market-rate disposal fees. The reduction of such fees to competitive levels has reduced correspondingly the primary source of security for the outstanding bonds of the local authorities. The facts relevant to each local authority within New Jersey remain unique. Some local authorities have successfully implemented refunding and work-out financings. Other local authorities have eliminated revenue shortfalls through the imposition of special waste disposal taxes. In other cases, revenue shortfalls continue, but bond payment defaults by such local authorities have been avoided as a result of a New Jersey program by which New Jersey to date has voluntarily provided financial assistance to qualifying local authorities to satisfy bond payment obligations on a given bond payment date. However, no assurance can be given that such New Jersey subsidies will be made available to such local authorities in the future (or that sufficient funds will be made available to New Jersey for such purpose), particularly given recent New Jersey budget reductions.

Qualified Bonds. In 1976, legislation was enacted (P.L. 1976, c. 38 and c. 39) which provides for the issuance by municipalities and school districts of “qualified bonds.” Whenever a local board of education or the governing body of a municipality determines to issue bonds, it may file an application with the Local Finance Board, and, in the case of a local board of education, the Commissioner, to qualify bonds pursuant to P.L. 1976 c. 38 or c. 39. Upon approval of such an application, the New Jersey Treasurer shall withhold from certain New Jersey revenues or other New Jersey aid payable to the municipalities, or from New Jersey school aid payable to the school district, as appropriate, an amount sufficient to pay debt service on such bonds. These “qualified bonds” are not direct, guaranteed or moral obligations of New Jersey, and debt service on such bonds will be provided by New Jersey only if the above mentioned appropriations are made by New Jersey. As of June 30, 2004, the aggregate amounts of school district and municipal qualified bonds outstanding are $251,901,700 and $1,104,790,953, respectively.

Litigation of the State of New Jersey.

General. At any given time, there are various numbers of claims and cases pending against the State of New Jersey, State agencies and State employees, seeking recovery of monetary damages that are primarily paid out of the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1 et seq.). New Jersey does not formally estimate its reserve representing potential exposure for these claims and cases. New Jersey is unable to estimate its exposure for these claims and cases.

New Jersey routinely receives notices of claim seeking substantial sums of money. The majority of these claims has historically proven to be of substantially less value than the amount originally claimed. Under the New Jersey Tort Claims Act, any tort litigation against New Jersey must be preceded by a notice of claim, which affords

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New Jersey the opportunity for a six-month investigation prior to the filing of any suit against it. In addition, at any given time, there are various numbers of contract and other claims against New Jersey and New Jersey agencies, including environmental claims asserted against New Jersey, among other parties, arising from the alleged disposal of hazardous waste. Claimants in such matters seek recovery of monetary damages or other relief that, if granted, would require the expenditure of funds. New Jersey is unable to estimate its exposure for these claims. At any given time, there are various numbers of claims and cases pending against the University of Medicine and Dentistry of New Jersey and its employees, seeking recovery of monetary damages that are primarily paid out of the Self Insurance Reserve Fund created pursuant to the New Jersey Tort Claims Act.

An independent study estimated an aggregate potential exposure of $95,902,262 for tort and medical malpractice claims pending as of December 31, 2004. In addition, at any given time, there are various numbers of contract and other claims against the University of Medicine and Dentistry of New Jersey, seeking recovery of monetary damages or other relief that, if granted, would require the expenditure of funds. New Jersey is unable to estimate its exposure for these claims.

Lawsuits currently pending or threatened in which New Jersey has the potential for either a significant loss of revenue or a significant unanticipated expenditure are described in official statements relating to securities offerings of New Jersey municipal obligations available as of the date of this Statement of Additional Information.

Special Considerations Regarding Investment in Delaware State-Specific Obligations. The concentration of investments in Delaware State-Specific Obligations by the Delaware Tax-Free Income Portfolio raises special investment considerations. In particular, changes in the economic condition and governmental policies of the State of Delaware (“Delaware” or the “State”) and its political subdivisions, agencies, instrumentalities and authorities could adversely affect the value of the Delaware Tax-Free Income Portfolio. This section briefly describes recent economic trends in Delaware. The information set forth in this section relates only to the State itself and not to the special purpose or local government units whose issues may also be held by the Delaware Tax-Free Income Portfolio. The credits represented by such issuers may be affected by a wide variety of local factors or structuring concerns, and no disclosure is made herein relating to such matters.

Delaware enjoyed expansion throughout most sectors of its economy during the past decade. Much of Delaware’s success in maintaining a healthy economy over this period can be attributed to its increasingly diverse economic base. Once heavily reliant on the manufacturing base, Delaware has experienced gains in several of the service industries. Since 1993, construction, retail trade, information, education, health, leisure and hospitality have had an increase in the percent of Delaware jobs. Over the past ten years, professional and business services accounted for 17% of Delaware jobs, compared to 12% for the nation. Delaware also is pursuing high technology industry, including life sciences research and development, pharmaceuticals, agricultural biotechnology, human biotechnology and information technology.

Delaware experienced above-average population growth through the 1990s. Between 2002 and 2003, Delaware’s population increased 1.4% to 817,491 inhabitants, compared to 0.5% growth for the region and 1.0% growth for the nation. Net in-migration accounts for a significant share of the growth. Delaware’s total personal income grew 4.0% from 2002 to 2003 compared with 2.7% for the mid-Atlantic region and 3.2% for the nation. Delaware’s non-agricultural employment accounts for approximately 98% of the workforce. Delaware experienced a 1.6% rise in non-agricultural employment in the first ten months of 2004. The State’s unemployment rate for 2003 was 4.0%, lower than both the regional rate of 5.2% and the national rate of 6.0%. For the first ten months of 2004, the State’s unemployment rate was 3.7%, compared to the Mid-Atlantic rate of 4.8% and the national rate of 6.0%.

The State’s general obligation debt outstanding was $1,012.5 million on June 30, 2004, with approximately 80% scheduled to mature within ten years and approximately 93% scheduled to mature within fifteen years. Delaware’s debt burden reflects the centralized role of the State government in undertaking capital projects typically funded at local government levels elsewhere, such as correctional facilities and schools. There is no state constitutional debt limit applicable to Delaware. However, Delaware has instituted several measures designed to manage and reduce its indebtedness. In 1991, the State instituted new debt limits. New debt authorizations are limited to 5% of budgetary general fund revenue as projected on June 30 for the next fiscal year (the “5% rule”). Should revenue collections increase during the fiscal year, no additional authorizations are made. The debt limit also effectively eliminates the use of any “off balance sheet” financing instruments, such as certificates of

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participation. The June 2003 budgetary General Fund revenue estimate for fiscal 2005 was $2,765.1 million; thus a total of $138.3 million of new general obligation debt was available to be authorized under the 5% rule for fiscal 2005.

In April 2004, legislation was enacted that gives Delaware additional flexibility to use original issue premium earned on the sale of its bonds or notes. In addition to using proceeds attributable to such premium to satisfy future debt service, Delaware can apply the premium to refund or redeem existing bonds or notes, or can apply the premium to any of the purposes for which such bonds or notes were issued.

Delaware voluntarily retires its general obligation debt. Over the years, whenever revenues have permitted, the State has appropriated surplus cash for “pay-as-you-go” financing. Extraordinary revenue surpluses in the period from fiscal 1993-2001 allowed the State to appropriate cash on average at a rate of 52.6% of capital expenditures. With more modest revenue growth, the fiscal 2002 and 2003 pay-as-you-go financing levels were $11.0 million and $19.2 million, respectively. For fiscal 2004 and 2005 the pay-as-you-go financing levels are $142.0 million and $235.5 million, respectively. In the period 1995-2001, the State implemented a substantial debt reduction plan as surplus permitted. Tighter revenues in fiscal 2002, 2003 and 2004 precluded additional debt reduction efforts. Delaware has also undertaken a series of bond refundings to lower the overall debt service on its obligations. In fiscal 2004, savings of $2.9 million were realized after the State refunded $74.6 million of its general obligation bonds.

Delaware budgets and controls its financial activities on the cash basis of accounting for its fiscal year (July 1 to June 30). State law requires Delaware to record its financial transactions in either of two major categories — the budgetary General Fund or the budgetary Special Funds. The General Fund provides for the cost of the State’s general operations and is credited with all tax and other revenue of Delaware not dedicated to Special Funds. All disbursements from the General Fund must be authorized by appropriations of the Delaware General Assembly. The Special Funds are designated for specific purposes, and the appropriate fund is credited with the tax or other revenue allocated to such fund and is charged with the related disbursements.

The Delaware Constitution limits annual appropriations by majority vote of both houses of the Delaware General Assembly to 98% of estimated budgetary General Fund revenue plus the unencumbered budgetary General Fund balance, if any, from the previous year. The State Constitution also provides for the deposit of the excess of any unencumbered budgetary General Funds at the end of the fiscal year into a reserve account (the “Budget Reserve Account”), provided that the amount of the Budget Reserve Account does not exceed 5% of the estimated budgetary general fund revenue used to determine the appropriation limit for that fiscal year. Transfers of $148.2 million were made to fund the Budget Reserve Account for fiscal 2005. Money from the account can be accessed only with the approval of a three-fifths vote of each house of the General Assembly and only to fund an unanticipated budgetary General Fund deficit or to provide funds required as a result of the enactment of legislation causing a reduction in revenue.

A coalition of state Attorneys General negotiated an agreement settling various states’ lawsuits against tobacco manufacturers, seeking to recover state funds expended on health care for smokers and for consumer fraud and other claims. The master settlement agreement could result in significant payments to the State through the year 2025. The size of payments to Delaware are subject to a number of possible offsets and adjustments as outlined in the settlement agreement. The State created a special fund called the “Delaware Health Fund” into which it deposits proceeds received as a result of the settlement agreement. As of October 1, 2004, approximately $140 million has been received by the State from participating manufacturers. The State has elected not to securitize future tobacco settlement payments.

Based upon June 2004 revenue forecasts, net budgetary general fund revenue for fiscal 2005 is projected to total $2,755.6 million, a 0.7% increase over fiscal 2004 when adjusted for tax law changes and other one-time events. The unadjusted growth rate is 12.3%.

The fiscal 2005 operation budget for the State totals $2,600.4 million, a 6.4% increase over fiscal 2004. Grants-in-aid appropriations of $40.0 million and the budgetary General Fund contribution to the capital budget of $235.0 million bring total appropriations to $2,875.4 million. This appropriations package is within the constitutionally-prescribed limit of 98% of revenues. The State’s fiscal 2005 capital budget totals $772.5 million,

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consisting of $138.3 million allocated for general obligation capital projects, $393.6 million allocated for the capital program of the Department of Transportation funded through the Transportation Trust Fund and $235.0 million allocated for “pay-as-you-go” capital projects.

The largest source of Delaware revenue is personal income tax. Other significant sources of revenue include franchise taxes and corporate fees, business and occupational gross receipt taxes, corporate income taxes, bank franchise taxes, lottery revenue and abandoned property revenue. Delaware does not levy ad valorem taxes on real or person property and does not impose a general sales or use tax. In May 1980, the Delaware Constitution was amended to limit tax and license fee increases and the imposition of new taxes or fees. Any tax or license fee increase or new tax or license fee must be passed by a three-fifths vote, of all members of each house of the General Assembly, rather than by a simple majority vote.

Delaware is a defendant in various suits involving contract/construction claims, tax refund claims, allegations of wrongful discharge and/or other employment-related claims, use of excessive force, civil rights violations, and automobile accident claims. Although Delaware believes it has valid defenses to these actions, Delaware has a potential aggregate exposure which could exceed $40.8 million.

Delaware is exposed to risks and losses related to employee health and accident, worker’s compensation, environmental and a portion of property and casualty claims. It is the policy of Delaware to self-insure its exposure when cost effective and to commercially insure on the exposures that are specialized.

Special Considerations Regarding Investments in Kentucky State-Specific Obligations. Kentucky (“Kentucky or the “Commonwealth”) is a leader among the states in the production of tobacco. The tobacco industry has been under significant attack in recent years. In late 1998, the states, including Kentucky, certain commonwealths and territories, and the District of Columbia reached a Master Settlement Agreement with the major tobacco companies that will require payments from them worth approximately $250 billion over the next 25 years. Recently enacted legislation removes the government subsidy to the tobacco growers and replaces it with a payment by the cigarette manufacturers to the federal government over a ten-year period. Potential federal regulation of the tobacco industry, the Master Settlement Agreements with the states, and future litigation may adversely impact the tobacco industry, but the degree of the impact cannot be predicted with any certainty.

Kentucky is also a leader among the states in the production of coal. The coal severance tax is a significant revenue producer for the Commonwealth and its political subdivisions, and any substantial decrease in the production of coal or other minerals could result in revenue shortfalls.

The Commonwealth’s economy, once dominated by coal, horses, bourbon and tobacco, has become more diversified and now include manufacturing of industrial machinery, automobiles and automobile parts, consumer appliances and non-durable goods such as apparel. Kentucky’s non-manufacturing industries have grown considerably in recent years, with strong gains in air transportation, health and business services and retail trade. No single segment of the Commonwealth’s economy consists of as much as one-fourth of the overall state domestic product. The Kentucky economy is diversified to the extent that an economic decline in a single segment would not necessarily lead to the non-payment of debt service on Kentucky State-Specific Obligations. The Commonwealth’s parks, horse breeding and racing industry, symbolized by the Kentucky Derby, play an important role in expanding tourism in the Commonwealth.

During the past decade, manufacturing employment has declined in the entire U.S. but has grown in Kentucky. At the close of Kentucky’s fiscal year ended June 30, 2004, 14.8% of the state’s total non-agricultural employment was in the manufacturing sector compared to 9.8% nationally.

Both the nation and the Commonwealth experienced economic recovery during Kentucky’s fiscal year 2004. Kentucky experienced growth in total non-agricultural employment of 1.1% during fiscal year 2004, compared to an increase of 1.0% nationally. Personal income, the broadest measure of economic performance, grew 4.8% in Kentucky during fiscal year 2004 compared to 4.7% nationally. Kentucky’s state general fund receipts in fiscal year 2004 increased 2.9% over fiscal year 2003.

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The Commonwealth relies heavily upon sales and use taxes, individual and corporate income taxes, property taxes, insurance premium taxes, alcoholic beverage taxes, corporate license taxes, cigarette taxes, mineral severance taxes, motor fuel taxes, motor vehicle usage taxes and horse racing taxes for its revenue. The cities, counties and other local governments are generally limited to property taxes, occupational license taxes, utility taxes, transit and restaurant meals taxes and various license fees for their revenue. Sales and use taxes and individual and corporate income taxes together account for approximately three-fourths of the General Fund revenue.

The Kentucky General Assembly is required by the Kentucky Constitution to adopt measures providing for the state’s revenues and appropriations for each fiscal year. The Governor is required by law to submit a biennial state budget to the General Assembly during the legislative session held in each even-numbered year. State budgets have generally been adopted by the General Assembly during those legislative sessions to be effective for a two-year period, commencing on the following July 1.

The Kentucky General Assembly has failed to enact a budget for the executive branch of state government for fiscal year 2004. In the absence of a legislatively enacted budget, the Governor adopted by executive order a plan to provide for the continued operation of state government, based generally on the expenditure levels in the legislative budget enacted for the prior fiscal year and authorizing the payment of all debt service due during the fiscal year ending June 30, 2005, on outstanding debt obligations of the state. The Kentucky Attorney General commenced litigation in state circuit court to determine the Governor’s power to expend state funds in the absence of legislatively enacted appropriations. The court issued interlocutory orders ruling that no state funds could be expended on new programs not previously authorized by the General Assembly, and that no state funds could be expended or state debt obligations issued for capital projects not previously authorized by the General Assembly. The court recently issued a final decision confirming the exclusive power of the General Assembly to appropriate the expenditure of state funds and ordering that, upon the expiration of the current executive spending plan on June 30, 2005, except for essential services no state funds may be expended in the absence of legislative appropriation. The court’s opinion does not define the scope of the term essential services and whether such term includes the payment of debt service on outstanding state debt obligations. No assurance can be given that there will not be a disruption in the payment of debt service on outstanding debt obligations of the Commonwealth in the event the General Assembly fails to enact a state budget for the fiscal year beginning July 1, 2005.

S&P currently assigns to Kentucky an issuer credit rating of AA- with a stable outlook. Moody’s currently assigns to Kentucky an issuer credit rating of Aa2 and a lease appropriation-backed debt rating of Aa3. Fitch currently assigns to Kentucky an issuer credit rating of AA-. A continuing failure of the General Assembly to enact a state budget is likely to adversely affect these ratings.

The Kentucky Tax-Free Income Portfolio will invest primarily in Kentucky State-Specific Obligations. Such obligations generally include tax-exempt securities issued by the Commonwealth, its counties and various other local authorities to finance long-term public purpose projects, such as schools, universities, government facilities, housing, transportation, utilities, hospitals and water and sewer facilities.

There are several general types of Kentucky State-Specific Obligations. General obligation securities are secured by the issuer’s pledge of its full faith, credit and/or taxing power for the payment of principal and interest. General obligations securities of the Commonwealth must be authorized by a two-thirds vote of the electorate of the issuer, and there are none outstanding at present.

Because of the limitations on incurring general obligation debt, the Commonwealth generally does not enter into a financial obligation of more than two year’s duration. Prior to 1996, no municipal issuer within the Commonwealth could enter into a financial obligation of more than one year’s duration. In 1996, the Kentucky Constitution was amended to permit local governments to issue general obligation indebtedness without voter approval, subject to prescribed limitations on the maximum amount of indebtedness based on the assessed value of taxable property within the jurisdiction and other eliminations and conditions. Local governments (exclusive of school districts) are now active issuers of general obligation indebtedness.

Revenue obligations are payable from and secured by a particular revenue stream, such as lease rentals, utility usage and connection charges, student registration or housing fees, bridge or highway tolls, parking fees and

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sports event gate receipts. Although revenue obligations of the Commonwealth or its political subdivisions may be payable from a specific project, there can be no assurances that economic difficulties and the resulting impact on state and local government finances will not adversely affect the market value of Kentucky State-Specific Obligations or the ability of the respective entities to pay debt service.

Industrial building revenue obligations are issued by local governments, but are secured by revenue derived from some form of contractual arrangement with a non-government user. Some revenue obligations, including industrial building revenue obligations, are secured by a mortgage on the real property. Improvement assessment obligations are obligations secured by a special assessment (e.g., a sewer charge) that the governmental issuer imposes on each owner of property benefited by the improvement (e.g., a sanitary sewer project). The assessments are similar to taxes and have a priority that is similar to a tax lien. Refunded or defeased bonds are secured by an escrow fund, which usually is invested in U.S. government securities and occasionally in bank certificates of deposit or similar instruments. Housing obligations, including bonds issued by the Kentucky Housing Corporation, are usually secured by mortgages pledged for the payment of the obligations. Local housing authorities sometimes issue obligations that are secured by mortgages and rentals from the operation of a housing project. Housing obligations may also have additional security in the form of federal guarantees of the mortgages or rentals constituting the primary security.

There are variations in the security of Kentucky State-Specific Obligations, both within a particular classification and between classifications, depending on numerous factors. For example, most local school construction is financed with obligations nominally issued by a larger city or county government, that holds legal title to the school facility, subject to a year-to-year renewable lease arrangement with the local school district. There is no reported instance in which a Kentucky school bond has gone into default.

Similar arrangements are used to finance many city and county construction projects, but in these cases, the obligations are nominally issued in the name of a public corporation, that holds title to the project and leases the project back to the city or county on a year-to-year basis. In such situations, the rent that the nominal issuer receives from the actual user of the property financed by the obligations is the only source of any security for the payment of the obligations.

Overview of the Commonwealth’s Debt Authorities. The Commonwealth’s indebtedness is classified as either appropriation supported debt or non-appropriation supported debt.

Appropriation supported debt carries the name of the Commonwealth and is either (i) a general obligation of the Commonwealth or (ii) a project revenue obligation of one of its debt-issuing agencies or entities created by the Kentucky General Assembly to finance various projects that are subject to state appropriation for all or a portion of the debt service on the bonds.

General obligation bonds pledge the full faith, credit and taxing power of the Commonwealth for the repayment of the debt. The Kentucky Constitution requires voter approval by general referendum prior to the issuance of general obligation bonds in amounts exceeding $500,000. Kentucky has not issued general obligation bonds since 1966, and the Commonwealth has no general obligation bonds outstanding.

Project revenue notes and bonds are issued by various debt issuing authorities of the Commonwealth. The revenues produced by the projects funded by the debt are pledged as security for repayment of the debt. Project revenues are not a direct obligation of the Commonwealth. Project revenues are, in some cases, derived partially or solely from biennial appropriations of the Kentucky General Assembly. In other cases, the direct revenues generated from the project funded constitute the entire source of payment.

Non-appropriation or moral obligation debt carries the name of the Commonwealth for the benefit and convenience of other entities or agencies within the Commonwealth. The bonds are special obligations of the issuer, are secured by and payable solely from the sources pledged for the payment thereof and do not constitute a debt, liability, obligation or a pledge of the faith and credit of the Commonwealth. The General Assembly does not intend to appropriate any funds to fulfill the financial obligations represented by these types of bonds. In the event of a shortfall, however, the issuer generally covenants to request from the Governor and the General Assembly sufficient amounts to pay debt service.

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Default Record. Neither the Commonwealth nor any of its agencies have ever defaulted in the payment of principal or interest on general obligation indebtedness or project revenue obligations.

Debt Issuing Entities of the Commonwealth. The following entities are active issuers of debt in the Commonwealth: State Property and Buildings Commission, Kentucky Asset/Liability Commission, Turnpike Authority of Kentucky, Kentucky Housing Corporation, Kentucky Infrastructure Authority, Kentucky Higher Education Student Loan Corporation, School Facilities Construction Commission, Kentucky Economic Development Finance Authority, Kentucky Local Correctional Facilities Construction Authority and the State Universities (consisting of nine universities). The ratings on each issuer vary.

The Kentucky Housing Corporation and the Kentucky Higher Education Student Loan Corporation issue obligations to finance projects that are not repaid by governmental appropriations. The General Assembly has placed specific debt limitations on the principal debt outstanding of the Kentucky Housing Corporation ($2.5 billion), and the Kentucky Higher Education Student Loan Corporation ($1.95 billion). The following issuers cannot incur debt without prior approval of the projects and appropriation of debt service by the General Assembly: State Property and Buildings Commission, Turnpike Authority of Kentucky and the nine state universities. The Kentucky Asset/Liability Commission may not incur debt without prior approval of the projects and appropriation of the debt service by the General Assembly, exclusive of cash flow borrowing within a fiscal year. The School Facilities Construction Commission cannot incur debt without appropriation of debt service by the General Assembly. The Kentucky Infrastructure Authority, in its revolving fund programs, cannot incur debt without appropriation of debt service. Without legislative approval, other programs of the Kentucky Infrastructure Authority are limited to $500,000,000 of debt outstanding. The debt of the Kentucky Local Correctional Facilities Construction Authority is limited to the level of debt service supported by court fees pledged to the payment of the debt service. No debt limitation is currently in effect for the Kentucky Economic Development Finance Authority, which acts as a conduit issuer of revenue bonds for the benefit of private businesses and nonprofit entities and for which the Commonwealth has no liability for the payment of the debt service.

ADDITIONAL INVESTMENT LIMITATIONS

Each Portfolio is subject to the investment limitations enumerated in this subsection which may be changed with respect to a particular Portfolio only by a vote of the holders of a majority of such Portfolio’s outstanding shares (as defined below under “Miscellaneous”). The Index Master Portfolio’s fundamental investment limitations are described separately.

Money Market Portfolios:

1. Each of the Money Market, Municipal Money Market and U.S. Treasury Money Market Portfolios may not purchase securities of any one issuer (other than securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or certificates of deposit for any such securities) if more than 5% of the value of the Portfolio’s total assets (taken at current value) would be invested in the securities of such issuer, or more than 10% of the issuer’s outstanding voting securities would be owned by the Portfolio or the Fund, except that up to 25% of the value of the Portfolio’s total assets (taken at current value) may be invested without regard to these limitations. For purposes of this limitation, a security is considered to be issued by the entity (or entities) whose assets and revenues back the security. A guarantee of a security is not deemed to be a security issued by the guarantor when the value of all securities issued and guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of the value of the Portfolio’s total assets.

2. No Portfolio may borrow money or issue senior securities, except that each Portfolio may borrow from banks and (other than a Municipal Money Market Portfolio) enter into reverse repurchase agreements for temporary purposes in amounts up to one-third of the value of its total assets at the time of such borrowing; or mortgage, pledge or hypothecate any assets, except in connection with any such borrowing and then in amounts not in excess of one-third of the value of the Portfolio’s total assets at the time of such borrowing. No Portfolio will purchase securities while its aggregate borrowings (including reverse repurchase agreements and borrowings from banks) in excess of 5% of its total assets are outstanding. Securities held in escrow or separate accounts in connection with a Portfolio’s investment practices are not deemed to be pledged for purposes of this limitation.

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3. Each of the Municipal Money Market, U.S. Treasury Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios may not purchase securities which would cause 25% or more of the value of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry. The Money Market Portfolio, on the other hand, may not purchase any securities which would cause, at the time of purchase, less than 25% of the value of its total assets to be invested in the obligations of issuers in the financial services industry, or in obligations, such as repurchase agreements, secured by such obligations (unless the Portfolio is in a temporary defensive position) or which would cause, at the time of purchase, more than 25% of the value of its total assets to be invested in the obligations of issuers in any other industry. In applying the investment limitations stated in this paragraph, (i) there is no limitation with respect to the purchase of (a) instruments issued (as defined in Investment Limitation number 1 above) or guaranteed by the United States, any state, territory or possession of the United States, the District of Columbia or any of their authorities, agencies, instrumentalities or political subdivisions, (b) instruments issued by domestic banks (which may include U.S. branches of non-U.S. banks) and (c) repurchase agreements secured by the instruments described in clauses (a) and (b); (ii) wholly-owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of the parents; and (iii) utilities will be divided according to their services, for example, gas, gas transmission, electric and gas, electric and telephone will be each considered a separate industry.

4. Each of the Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios will invest at least 80% of its net assets in AMT Paper and instruments the interest on which is exempt from regular Federal income tax, except during defensive periods or during periods of unusual market conditions.

5. The Municipal Money Market Portfolio will invest at least 80% of its net assets in instruments the interest on which is exempt from regular Federal income tax and is not an item of tax preference for purposes of Federal alternative minimum tax, except during defensive periods or during periods of unusual market conditions.

AMT Paper is defined as Municipal Obligations the interest on which is an item of tax preference for purposes of the Federal alternative minimum tax.

Non-Money Market Portfolios:

Each of the Non-Money Market Portfolios (other than the Health Sciences, Global Resources, All-Cap Global Resources, Inflation Protected Bond, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Delaware Tax Free Income and Kentucky Tax-Free Income Portfolios) may not:

1. Purchase securities of any one issuer (other than securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or certificates of deposit for any such securities) if more than 5% of the value of the Portfolio’s total assets would (taken at current value) be invested in the securities of such issuer, or more than 10% of the issuer’s outstanding voting securities would be owned by the Portfolio or the Fund, except that up to 25% of the value of the Portfolio’s total assets may (taken at current value) be invested without regard to these limitations. For purposes of this limitation, a security is considered to be issued by the entity (or entities) whose assets and revenues back the security. A guarantee of a security shall not be deemed to be a security issued by the guarantors when the value of all securities issued and guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of the value of the Portfolio’s total assets.

Each of the Non-Money Market Portfolios may not:

2. Purchase any securities which would cause 25% or more of the value of the Portfolio’s total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in the same industry, provided that (a) the Global Science & Technology Opportunities Portfolio may cause 25% or more of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in a single industry in the science and technology sectors as defined in its Prospectuses; (b) the Health Sciences Portfolio will cause 25% or more of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in health sciences

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or related industries as described in the Prospectuses; (c) the Global Resources and All-Cap Global Resources Portfolios will each cause 25% or more of its total assets at the time of purchase to be invested in the securities of one or more issuers conducting their principal business activities in energy or natural resources industries as described in the Prospectuses; (d) there is no limitation with respect to (i) instruments issued or guaranteed by the United States, any state, territory or possession of the United States, the District of Columbia or any of their authorities, agencies, instrumentalities or political subdivisions, and (ii) repurchase agreements secured by the instruments described in clause (i); (e) wholly-owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of the parents; and (f) utilities will be divided according to their services; for example, gas, gas transmission, electric and gas, electric and telephone will each be considered a separate industry.

Each Non-Money Market Portfolio (other than the Managed Income, Intermediate Government Bond, Low Duration Bond, Intermediate Bond, Government Income, International Bond, Core Bond Total Return, Core PLUS Total Return, High Yield Bond, Asset Allocation, GNMA, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios) may not:

3. Borrow money or issue senior securities, except that each Portfolio may borrow from banks and enter into reverse repurchase agreements for temporary purposes in amounts up to one-third of the value of its total assets at the time of such borrowing; or mortgage, pledge or hypothecate any assets, except in connection with any such borrowing and then in amounts not in excess of one-third of the value of the Portfolio’s total assets at the time of such borrowing. No Portfolio will purchase securities while its aggregate borrowings (including reverse repurchase agreements and borrowings from banks) in excess of 5% of its total assets are outstanding. Securities held in escrow or separate accounts in connection with a Portfolio’s investment practices are not deemed to be pledged for purposes of this limitation.

None of the Managed Income, Intermediate Government Bond, Low Duration Bond, Intermediate Bond, Government Income, Core Bond Total Return, Core PLUS Total Return, International Bond, High Yield Bond, Asset Allocation, GNMA, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios may:

4. Issue senior securities, borrow money or pledge its assets, except that a Portfolio may borrow from banks or enter into reverse repurchase agreements or dollar rolls in amounts aggregating not more than 33 ¹/3% of the value of its total assets (calculated when the loan is made) to take advantage of investment opportunities and may pledge up to 33 ¹/3% of the value of its total assets to secure such borrowings. Each Portfolio is also authorized to borrow an additional 5% of its total assets without regard to the foregoing limitations for temporary purposes such as clearance of portfolio transactions and share redemptions. For purposes of these restrictions, the purchase or sale of securities on a “when-issued,” delayed delivery or forward commitment basis, the purchase and sale of options and futures contracts and collateral arrangements with respect thereto are not deemed to be the issuance of a senior security, a borrowing or a pledge of assets.

All Portfolios:

No Portfolio may:

1. Purchase or sell real estate, except that each Portfolio may purchase securities of issuers which deal in real estate and may purchase securities which are secured by interests in real estate.

2. Acquire any other investment company or investment company security except in connection with a merger, consolidation, reorganization or acquisition of assets or where otherwise permitted by the 1940 Act.

3. Act as an underwriter of securities within the meaning of the Securities Act of 1933 except to the extent that the purchase of obligations directly from the issuer thereof, or the disposition of securities, in accordance with the Portfolio’s investment objective, policies and limitations may be deemed to be underwriting.

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4. Write or sell put options, call options, straddles, spreads, or any combination thereof, except for transactions in options on securities and securities indices, futures contracts and options on futures contracts and, in the case of the Exchange, Small/Mid-Cap Growth, Aurora, Legacy, Health Sciences, Global Resources, All-Cap Global Resources, International Bond, Core PLUS Total Return, Intermediate PLUS Bond and Inflation Protected Bond Portfolios, currencies.

5. Purchase securities of companies for the purpose of exercising control.

6. Purchase securities on margin, make short sales of securities or maintain a short position, except that (a) this investment limitation shall not apply to a Portfolio’s transactions in futures contracts and related options or a Portfolio’s sale of securities short against the box, and (b) a Portfolio may obtain short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities.

7. Purchase or sell commodity contracts, or invest in oil, gas or mineral exploration or development programs, except that each Portfolio may, to the extent appropriate to its investment policies, purchase securities (publicly traded securities in the case of each Money Market Portfolio) of companies engaging in whole or in part in such activities and may enter into futures contracts and related options.

8. Make loans, except that each Portfolio may purchase and hold debt instruments and enter into repurchase agreements in accordance with its investment objective and policies and may lend portfolio securities.

9. Purchase or sell commodities except that each Portfolio may, to the extent appropriate to its investment policies, purchase securities of companies engaging in whole or in part in such activities, may engage in currency transactions and may enter into futures contracts and related options.

10. Notwithstanding the investment limitations of the Index Equity Portfolio, the Index Equity Portfolio may invest all of its assets in shares of an open-end management investment company with substantially the same investment objective, policies and limitations as the Portfolio.

In addition, in compliance with Rule 35d-1 under the 1940 Act, each Municipal Money Market and Tax-Free Portfolio’s, and the UltraShort Municipal Portfolio’s, requirement that it invest at least 80% of its assets in certain Municipal Obligations, as described in each Portfolio’s Prospectuses, is a fundamental policy that may be changed with respect to a particular Portfolio only by a vote of the holders of a majority of such Portfolio’s outstanding shares (as defined below under “Miscellaneous”).

Although the foregoing investment limitations would permit the Money Market Portfolios to invest in options, futures contracts and options on futures contracts, and to sell securities short against the box, those Portfolios do not currently intend to trade in such instruments or engage in such transactions during the next twelve months (except to the extent a portfolio security may be subject to a “demand feature” or “put” as permitted under SEC regulations for money market funds). Prior to making any such investments, a Money Market Portfolio would notify its shareholders and add appropriate descriptions concerning the instruments and transactions to its Prospectus.

Unless otherwise indicated, all limitations apply only at the time that a transaction is undertaken. Any change in the percentage of a Portfolio’s assets invested in certain securities or other instruments resulting from market fluctuations or other changes in the Portfolio’s total assets will not require the Portfolio to dispose of an investment until the adviser or sub-adviser determines that it is practicable to sell or close out the investment without undue market or tax consequences.

Index Master Portfolio:

The investment limitations of the Index Master Portfolio, the Portfolio in which the Index Equity Portfolio invests all of its investable assets, are separate from those of the Index Equity Portfolio. The Index Master Portfolio may not:

1. Invest in commodities or real estate, including limited partnership interests therein, although it may purchase and sell securities of companies which deal in real estate and securities which are secured by interests in real estate, and may purchase or sell financial futures contracts and options thereon;

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2. Make loans of cash, except through the acquisition of repurchase agreements and obligations customarily purchased by institutional investors;

3. As to 75% of the total assets of the Index Master Portfolio, invest in the securities of any issuer (except obligations of the U.S. Government and its instrumentalities) if, as a result, more than 5% of the Index Master Portfolio’s total assets, at market, would be invested in the securities of such issuer;

4. Purchase or retain securities of an issuer if those officers and trustees of the Trust or officers and directors of the Trust’s investment adviser owning more than ½ of 1% of such securities together own more than 5% of such securities;

5. Borrow, except from banks and as a temporary measure for extraordinary or emergency purposes and then, in no event, in excess of 5% of the Index Master Portfolio’s gross assets valued at the lower of market or cost; provided that it may borrow amounts not exceeding 33% of its net assets from banks and pledge not more than 33% of such assets to secure such loans;

6. Pledge, mortgage, or hypothecate any of its assets to an extent greater than 10% of its total assets at fair market value, except as described in (5) above;

7. Invest more than 10% of the value of its total assets in illiquid securities, which include certain restricted securities, repurchase agreements with maturities of greater than seven days, and other illiquid investments;

8. Engage in the business of underwriting securities issued by others;

9. Invest for the purpose of exercising control over management of any company;

10. Invest its assets in securities of any investment company, except in connection with a merger, acquisition of assets, consolidation or reorganization;

11. Invest more than 5% of its total assets in securities of companies which have (with predecessors) a record of less than three years’ continuous operation;

12. Acquire any securities of companies within one industry if, as a result of such acquisition, more than 25% of the value of its total assets would be invested in securities of companies within such industry;

13. Write or acquire options (except as described in (1) above) or interests in oil, gas or other mineral exploration, leases or development programs;

14. Purchase warrants; however, it may acquire warrants as a result of corporate actions involving its holdings of other equity securities;

15. Purchase securities on margin or sell short;

16. Acquire more than 10% of the voting securities of any issuer; or

17. Issue senior securities (as such term is defined in Section 18(f) of the 1940 Act), except as permitted under the 1940 Act.

The investment limitations described in (1) and (15) above do not prohibit the Index Master Portfolio from making margin deposits to the extent permitted under applicable regulations. Although (2) above prohibits cash

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loans, the Index Master Portfolio is authorized to lend portfolio securities. With respect to (7) above, pursuant to Rule 144A under the 1933 Act, the Index Master Portfolio may purchase certain unregistered (i.e., restricted) securities upon a determination that a liquid institutional market exists for the securities. If it is decided that a liquid market does exist, the securities will not be subject to the 10% limitation on holdings of illiquid securities stated in (7) above. While maintaining oversight, the Board of Trustees of the Trust has delegated the day-to-day function of making liquidity determinations to DFA, the Index Master Portfolio’s investment adviser. For Rule 144A securities to be considered liquid, there must be at least two dealers making a market in such securities. After purchase, the Board of Trustees of the Trust and DFA will continue to monitor the liquidity of Rule 144A securities.

Subject to future regulatory guidance, for purposes of those investment limitations identified above that are based on total assets, “total assets” refers to the assets that the Index Master Portfolio owns, and does not include assets which the Index Master Portfolio does not own but over which it has effective control. For example, when applying a percentage investment limitation that is based on total assets, the Index Master Portfolio will exclude from its total assets those assets which represent collateral received by the Index Master Portfolio for its securities lending transactions.

Unless otherwise indicated, all limitations applicable to the Index Master Portfolio’s investments apply only at the time that a transaction is undertaken. Any subsequent change in a rating assigned by any rating service to a security or change in the percentage of the Index Master Portfolio’s assets invested in certain securities or other instruments resulting from market fluctuations or other changes in the Index Master Portfolio’s total assets will not require the Index Master Portfolio to dispose of an investment until DFA determines that it is practicable to sell or close out the investment without undue market or tax consequences. In the event that ratings services assign different ratings to the same security, DFA will determine which rating it believes best reflects the security’s quality and risk at that time, which may be the higher of the several assigned ratings.

Because the structure of the Index Master Portfolio is based on the relative market capitalizations of eligible holdings, it is possible that the Index Master Portfolio might include at least 5% of the outstanding voting securities of one or more issuers. In such circumstances, the Trust and the issuer would be deemed “affiliated persons” under the 1940 Act, and certain requirements of the 1940 Act regulating dealings between affiliates might become applicable.

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TRUSTEES AND OFFICERS

THE FUND

The business and affairs of the Fund are managed under the direction of its Board of Trustees. The trustees and executive officers of the Fund, and their business addresses and principal occupations during the past five years, are:

Interested Trustees:

Name, Address and Age	Position(s) Held with Fund	Term of Office1 and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex2 Overseen by Trustee	Other Directorships Held by Trustee
Richard S. Davis3 BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 59	Trustee	Since 2005	Managing Director, BlackRock, Inc. (since 2005); Chief Executive Officer, State Street Research & Management Company (2000–2005); Chairman of the Board of Trustees, State Street Research mutual funds (“SSR Funds”) (2000–2005); Senior Vice President, Metropolitan Life Insurance Company (1999–2000); Chairman, SSR Realty (2000–2004).	55 (includes 50 Portfolios of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares)	None
Laurence D. Fink4 BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 51	Trustee	Since 2000	Director, Chairman and Chief Executive Officer of BlackRock, Inc. since its formation in 1998 and of BlackRock, Inc.’s predecessor entities since 1988; Chairman of the Management Committee; formerly, Managing Director of the First Boston Corporation, Member of its Management Committee, Co-head of its Taxable Fixed Income Division and Head of its Mortgage and Real Estate Products Group; Chairman of the Board of Nomura BlackRock Asset Management and several of BlackRock’s alternative investment vehicles; Director of several of BlackRock’s offshore funds; Co-Chairman of the Board of Trustees of Mount Sinai-NYU; Co-Chairman of the Board of Trustees of NYU Hospitals Center; member of the Board of Trustees of NYU; member of the Board of Executives of the New York Stock Exchange; and Trustee of the American Folk Art Museum.	55 (includes 50 Portfolios of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares)	Director, BlackRock, Inc.

¹ Each Trustee holds office for an indefinite term until the earlier of (1) the next meeting of shareholders at which Trustees are elected and until his or her successor is elected and qualified and (2) such time as such Trustee resigns or his or her term as a Trustee is terminated in accordance with the Fund’s code of regulations and Declaration of Trust.

² A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, that have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies.

³ Mr. Davis is an interested person of the Fund due to his position at BlackRock, Inc.

⁴ Mr. Fink is an interested person of the Fund due to his position at BlackRock, Inc.

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Disinterested Trustees:

Name, Address and Age	Position(s) Held with Fund	Term of Office1 and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex2 Overseen by Trustee	Other Directorships Held by Trustee
Bruce R. Bond c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 58	Trustee	Since 2005	Retired; Trustee and member of the Governance Committee, SSR Funds (1997–2005).	55 (includes 50 Portfolios of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares)	Director, Avaya, Inc. (information technology).
Peter S. Drotch c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 63	Trustee	Since 2005	Retired; Trustee and member of the Audit Committee, SSR Funds (2003–2005); Partner, PricewaterhouseCoopers LLP (accounting firm) (1964–2000).	55 (includes 50 Portfolios of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares)	Director, First Marblehead Corp. (student loan processing and securitization); Trustee, University of Connecticut; Trustee, Huntington Theatre; Trustee, New England College of Finance.
Honorable Stuart E. Eizenstat Covington & Burling 1201 Pennsylvania Avenue, NW Washington, DC 20004 Age: 61	Trustee and Chairman of the Nominating Committee	Since 2001	Partner, Covington & Burling (law firm) (2001–Present); Deputy Secretary of the Treasury (1999–2001); Under Secretary of State for Economic, Business and Agricultural Affairs (1997–1999); Under Secretary of Commerce for International Trade (1996–1997); U.S. Ambassador to the European Union (1993–1996); Chairman, International Board of Governors, Weizmann Institute of Science.	55 (includes 50 Portfolios of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares)	Director, Mirant Corporation; Advisory Board member, The Coca-Cola Company; Advisory Board member, Group Menatep; Advisory Board member, BT Americas.
Robert M. Hernandez c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 60	Trustee, Vice Chairman of the Board and Chairman of the Audit Committee	Since 1996	Retired; Director (1991–2001), Vice Chairman and Chief Financial Officer (1994–2001), Executive Vice President-Accounting and Finance and Chief Financial Officer (1991–1994), USX Corporation (a diversified company principally engaged in energy and steel businesses).	55 (includes 50 Portfolios of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares)	Lead Director, ACE Limited (insurance company); Director and Chairman of the Board, RTI International Metals, Inc.; Director, Eastman Chemical Company.

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Name, Address and Age	Position(s) Held with Fund	Term of Office1 and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of Portfolios in Fund Complex2 Overseen by Trustee	Other Directorships Held by Trustee
Dr. Matina Horner c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 65	Trustee and Chairperson of the Governance Committee	Since 2004	Retired; Executive Vice President of Teachers Insurance and Annuity Association and College Retirement Equities Fund (TIAA-CREF) (1989–2003).	55 (includes 50 Portfolios of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares)	Chair of the Board of the Massachusetts General Hospital Institute of Health Professions; Chair of the Board of the Greenwall Foundation; Trustee, Century Foundation (formerly The Twentieth Century Fund); Director, N STAR (formerly called Boston Edison); Director, The Neiman Marcus Group; Honorary Trustee, Massachusetts General Hospital Corporation.
Toby Rosenblatt c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 66	Trustee	Since 2005	President, Founders Investments Ltd. (private investments) (since 1999); Trustee, SSR Funds (1993–2005).	55 (includes 50 Portfolios of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares)	Director, A.P. Pharma, Inc.; Director, Metropolitan Series Fund, Inc.; Director, Metropolitan Series Fund II.
David R. Wilmerding, Jr. c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 69	Trustee and Chairman of the Board	Since 1996	Chairman, Wilmerding & Associates, Inc. (investment advisers) (since 1989); Chairman, Coho Partners, Ltd. (investment advisers) (since 2003); Director, Beaver Management Corporation (land management corporation); Managing General Partner, Chestnut Street Exchange Fund.	56 (includes 50 Portfolios of the Fund, 5 Portfolios of BlackRock Bond Allocation Target Shares and 1 Portfolio of Chestnut Street Exchange Fund, which is managed by BlackRock Financial Management Inc. and BlackRock Institutional Management Corporation.)	None

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Executive Officers:

Name, Address and Age	Position(s) Held with Fund	Term of Office5 and Length of Time Served	Principal Occupation(s) During Past Five Years
Anne Ackerley BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 42	Vice President	Since 2003 (previously served as Assistant Secretary since 2000)	Managing Director, BlackRock, Inc. (since May 2000); First Vice President and Operating Officer, Mergers and Acquisitions Group (1997–2000), First Vice President and Operating Officer, Public Finance Group (1995–1997), and First Vice President, Emerging Markets Fixed Income Research (1994–1995), Merrill Lynch & Co.
Edward Baer BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 36	Assistant Secretary	Since 2005	Director and Senior Counsel of BlackRock, Inc. (since 2004); Associate, Willkie Farr & Gallagher LLP (2000–2004); Associate, Morgan Lewis & Bockius LLP (1995–2000).
Bart Battista BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 45	Chief Compliance Officer and Anti-Money Laundering Compliance Officer	Since 2004	Chief Compliance Officer and Anti-Money Laundering Compliance Officer of BlackRock, Inc. (since 2004); Managing Director (since 2003), and Director (1998–2002) of BlackRock, Inc.; Compliance Officer at Moore Capital Management (1995–1998).
Ellen L. Corson PFPC Inc. 103 Bellevue Parkway Wilmington, DE 19809 Age: 40	Assistant Treasurer	Since 1998	Senior Director and Vice President of Fund Accounting and Administration, PFPC Inc. (since 2003); Vice President and Director of Mutual Fund Accounting and Administration, PFPC Inc. (since November 1997); Assistant Vice President, PFPC Inc. (March 1997–November 1997); Senior Accounting Officer, PFPC Inc. (March 1993–March 1997).
Henry Gabbay BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 57	President	Since 2005	Managing Director, BlackRock, Inc. (since 1989).
Brian P. Kindelan BlackRock Advisors, Inc. 100 Bellevue Parkway Wilmington, DE 19809 Age: 45	Secretary	Since 1997	Managing Director and Senior Counsel (since January 2005), Director and Senior Counsel (2001–2004) and Vice President and Senior Counsel (1998–2000), BlackRock Advisors, Inc.; Senior Counsel, PNC Bank Corp. (May 1995–April 1998).
William McGinley BlackRock, Inc. 100 Bellevue Parkway Wilmington, DE 19809 Age: 38	Treasurer	Since 2005	Managing Director of BlackRock, Inc. (since 2004); Partner, PricewaterhouseCoopers LLC (1990–2004).

⁵ Each officer holds office for an indefinite term until the earlier of (1) the next meeting of trustees at which his or her successor is appointed and (2) such time as such officer resigns or his or her term as an officer is terminated in accordance with the Fund’s code of regulations and Declaration of Trust.

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Name, Address and Age	Position(s) Held with Fund	Term of Office5 and Length of Time Served	Principal Occupation(s) During Past Five Years
Vincent Tritto BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 43	Assistant Secretary	Since 2003	Managing Director and Assistant Secretary (since January 2005) and Director and Senior Counsel (2002–2004) of BlackRock, Inc. Executive Director (2000–2002) and Vice President (1998–2000), Morgan Stanley & Co. Incorporated and Morgan Stanley Asset Management Inc. and officer of various Morgan Stanley-sponsored investment vehicles; Counsel (1998); Associate (1988–1997), Rogers & Wells LLP, New York, NY.

The standing committees of the Board are the Audit Committee, the Nominating Committee and the Governance Committee.

The members of the Audit Committee are Dr. Horner and Messrs. Bond, Drotch, Eizenstat, Hernandez, Rosenblatt and Wilmerding. Mr. Hernandez serves as Chairman. The Audit Committee is responsible for, among other things: (i) considering management’s recommendations of independent accountants for the Fund and evaluating such accountants’ performance, costs and financial stability; (ii) reviewing and coordinating audit plans prepared by the Fund’s independent accountants and management’s internal audit staff; and (iii) reviewing financial statements contained in periodic reports to shareholders with the Fund’s independent accountants and management. The Audit Committee met 4 times in the last fiscal year.

The members of the Nominating Committee are Dr. Horner and Messrs. Eizenstat, Hernandez and Wilmerding. Mr. Eizenstat serves as Chairman. The Nominating Committee is responsible for selecting and nominating “disinterested” trustees of the Fund. The Committee will consider nominees recommended by shareholders when a vacancy becomes available. Shareholders who wish to recommend a nominee should send nominations which include biographical information and sets forth the qualifications of the proposed nominee to the Fund’s Secretary. The Nominating Committee met 4 times in the last fiscal year.

The members of the Governance Committee are Dr. Horner and Messrs. Bond, Drotch, Eizenstat, Hernandez, Rosenblatt and Wilmerding. Dr. Horner serves as Chairwoman. The Governance Committee is responsible for, among other things, the scheduling and organization of board meetings, evaluating the structure and composition of the board and determining compensation of the Fund’s disinterested trustees. The Governance Committee met once in the last fiscal year.

The following table shows the dollar range of equity securities owned by the Trustees in the Fund and in other investment companies overseen by the Trustees within the same family of investment companies as of February 1, 2005 (as of March 15, 2005, for Mr. Eizenstat). Investment companies are considered to be in the same family if they share the same investment adviser or principal underwriter and hold themselves out to investors as related companies for purposes of investment and investor services.

Name of Trustee	Dollar Range of Equity Securities in the Fund	Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by the Trustee in the Family of Investment Companies
Interested Trustees
Richard S. Davis	High Yield Bond—over $100,000, Investment Trust—over $100,000, Small/Mid-Cap Growth—$1–$10,000, Global Resources—over $100,000, Asset Allocation—over $100,000, Legacy—over $100,000, Health Sciences—over $100,000	Over $100,000

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Name of Trustee	Dollar Range of Equity Securities in the Fund	Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by the Trustee in the Family of Investment Companies
Laurence D. Fink	International Opportunities—over $100,000, Global Science & Technology Opportunities—$50,001-$100,000	Over $100,000
Disinterested Trustees
Toby Rosenblatt	Investment Trust—over $100,000	Over $100,000
Stuart E. Eizenstat	Investment Trust—$1-$10,000, Low Duration Bond—$1-$10,000	$1-$10,000
Robert M. Hernandez	Pennsylvania Municipal Money Market—over $100,000	Over $100,000
Dr. Matina Horner	None	None
Bruce R. Bond	None	None
Peter S. Drotch	Money Market Portfolio—over $100,000	Over $100,000
David R. Wilmerding, Jr.	None	None

Compensation

Trustees who are not affiliated with BlackRock or BlackRock Distributors, Inc. (“BDI” or the “Distributor”) receive from the BlackRock open-end funds (BlackRock Funds and BlackRock Bond Allocation Target Shares) the following: $20,000 annually, $2,500 for each meeting that they attend, whether by phone or in person, and $350 per Portfolio for each full in-person meeting of the Board that they attend; in addition, the Chairman and Vice Chairman of the open-end Boards receive an additional $10,000 and $5,000 per year, respectively, for their service in such capacities and trustees who are not affiliated with BlackRock or BDI receive from the BlackRock open-end funds (BlackRock Funds and BlackRock Bond Allocation Target Shares) the following: $1,500 for each committee meeting that they attend, whether by phone or in person, and the Audit Committee Chairman receives an additional $10,000 and each other committee chairperson an additional $5,000 per year, for their service in such capacities. Trustees who are not affiliated with BlackRock or the Distributor are reimbursed for any expenses incurred in attending meetings of the Board of Trustees or any committee thereof. The term of office of each trustee will automatically terminate when such trustee reaches 72 years of age. No officer, director or employee of BlackRock, PFPC Inc. (“PFPC”) (with BlackRock, the “Administrators”), BDI, PNC Bank, National Association (“PNC Bank”) or BlackRock, Inc. currently receives any compensation from the Fund. As of the date of this Statement of Additional Information, the trustees and officers of the Fund, as a group, owned less than 1% of the outstanding shares of each class of the Fund.

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The table below sets forth the compensation actually received from the Fund and the Fund Complex of which the Fund is a part by the disinterested trustees and the Fund’s Chief Compliance Officer for the fiscal year ended September 30, 2004. Dr. Matina Horner became a trustee of the Fund on September 10, 2004. Bruce R. Bond, Peter S. Drotch and Toby Rosenblatt became trustees of the Fund on April 29, 2005.

	Aggregate Compensation from Registrant		Pension or Retirement Benefits Accrued as Part of Fund Expenses	Estimated Annual Benefits upon Retirement	Total Compensation from Registrant and Fund Complex Paid to Trustees
David R. Wilmerding, Jr., Trustee and Chairman of the Board	$	117,300	N/A	N/A	(3)1 127,300
Honorable Stuart E. Eizenstat, Trustee and Chairman of the Nominating Committee	$	112,300	N/A	N/A	(2)1 112,300
Robert M. Hernandez, Vice Chairman of the Board and Chairman of the Audit Committee	$	122,300	N/A	N/A	(2)1 122,300
Dr. Matina Horner, Trustee and Chairperson of the Governance Committee	$	0	N/A	N/A	(2)1 0
Bruce R. Bond, Trustee		N/A	N/A	N/A	(2)1 N/A
Peter S. Drotch, Trustee		N/A	N/A	N/A	(2)1 N/A
Toby Rosenblatt, Trustee		N/A	N/A	N/A	(2)1 N/A
Bart Battista, Chief Compliance Officer and Anti-Money Laundering Officer2	$	97,950	N/A	N/A	N/A

1. Total number of investment company boards trustees served on within the Fund Complex.

2. The Fund’s Chief Compliance Officer is paid jointly by the Fund and BlackRock. The Fund’s Board determines annually the appropriate compensation for the Chief Compliance Officer, including the appropriate portion of such compensation to be paid by the Fund. The table reflects the compensation paid to the Chief Compliance Officer by the Fund for the year ended September 30, 2004.

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THE TRUST

Trustees

The Board of Trustees of the Trust is responsible for establishing the Trust’s policies and for overseeing the management of the Trust.

The Board of Trustees of the Trust has two standing committees, the Audit Committee and the Portfolio Performance and Service Review Committee (the “Performance Committee”). The Audit Committee is comprised of George M. Constantinides, Roger G. Ibbotson and Abbie J. Smith. Each member of the Trust’s Audit Committee is a disinterested Trustee. The Audit Committee oversees the Trust’s accounting and financial reporting policies and practices, the Trust’s internal controls, the Trust’s financial statements and the independent audits thereof and performs other oversight functions as requested by the Board of Trustees. The Audit Committee recommends the appointment of the Trust’s independent registered certified public accounting firm and also acts as a liaison between the Trust’s independent certified public accounting firm and the full Board. There were three Audit Committee meetings held during the fiscal year ended November 30, 2004.

The Performance Committee is comprised of Messrs. Constantinides and Ibbotson, Ms. Smith, John P. Gould, Robert C. Merton and Myron S. Scholes. Each member of the Trust’s Performance Committee is a disinterested Trustee. The Performance Committee regularly reviews and monitors the investment performance of the Trust’s series, including the Index Master Portfolio, and reviews the performance of the Trust’s service providers. There were three Performance Committee meetings held during the fiscal year ended November 30, 2004.

Certain biographical information for each disinterested Trustee and each interested Trustee of the Trust is set forth in the tables below, including a description of each Trustee’s experience as a Trustee of the Trust and as a director or trustee of other funds, as well as other recent professional experience.

Disinterested Trustees

Name, Address and Age	Position Held with the Trust	Term of Office1 and Length of Service	Principal Occupation(s) During Past 5 Years	Portfolios within the DFA Fund Complex2 Overseen	Other Directorships of Public Companies Held
George M. Constantinides Graduate School of Business University of Chicago 1101 E. 58th Street Chicago, IL 60637 Date of Birth: 9/22/47	Trustee	Since inception	Leo Melamed Professor of Finance, Graduate School of Business, University of Chicago.	75 portfolios in 4 investment companies
John P. Gould Graduate School of Business University of Chicago 1101 E. 58th Street Chicago, IL 60637 Date of Birth: 1/19/39	Trustee	Since inception	Steven G. Rothmeier Distinguished Service Professor of Economics, Graduate School of Business, University of Chicago. Member of the Boards of Milwaukee Mutual Insurance Company and UNext.com. Formerly, Senior Vice President, Lexecon Inc. (economics, law, strategy and finance consulting). Formerly, President, Cardean University (division of UNext.com). Formerly, Trustee, First Prairie Funds (registered investment company).	75 portfolios in 4 investment companies	Trustee, Harbor Fund (registered investment company) (13 portfolios).

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Name, Address and Age	Position Held with the Trust	Term of Office1 and Length of Service	Principal Occupation(s) During Past 5 Years	Portfolios within the DFA Fund Complex2 Overseen	Other Directorships of Public Companies Held
Roger G. Ibbotson Yale School of Management P.O. Box 208200 New Haven, CT 06520-8200 Date of Birth: 5/27/43	Trustee	Since inception	Professor in Practice of Finance, Yale School of Management. Director, BIRR Portfolio Analysis, Inc. (software products). Chairman, Ibbotson Associates, Inc., Chicago, IL (software, data, publishing and consulting). Partner, Zebra Capital Management, LLC (hedge fund manager). Formerly, Director, Hospital Fund, Inc. (investment management services).	75 portfolios in 4 investment companies
Robert C. Merton Harvard Business School 397 Morgan Hall Soldiers Field Boston, MA 02163 Date of Birth: 7/31/44	Trustee	Since 2003	John and Natty McArthur University Professor, Graduate School of Business Administration, Harvard University (since 1998). Co-founder, Chief Science Officer, Integrated Finance Limited (since 2002). Director, MFRisk, Inc. (risk management software) (since 2001). Director, Peninsula Banking Group (bank) (since 2003). Director, Community First Financial Group (bank holding company) (since 2003).	75 portfolios in 4 investment companies	Director, Vical Incorporated (biopharmaceutical product development).
Myron S. Scholes Oak Hill Capital Management, Inc. 2775 Sand Hill Rd. Suite 220 Menlo Park, CA 94025 Date of Birth: 7/1/41	Trustee	Since inception	Frank E. Buck Professor Emeritus of Finance, Stanford University. Managing Partner, Oak Hill Capital Management (hedge fund) (private equity firm). Chairman, Oak Hill Platinum Partners (hedge fund). Director, Financial Engines. Director, Chicago Mercantile Exchange. Consultant, Arbor Investors. Formerly, Director, Smith Breeden Family of Funds.	75 portfolios in 4 investment companies	Director, American Century Fund Complex (registered investment companies) (38 portfolios) and Director, Chicago Mercantile Exchange Holdings Inc.
Abbie J. Smith 1101 E. 58th Street Chicago, IL 60637 Date of Birth: 4/30/53	Trustee	Since 2000	Boris and Irene Stern Professor of Accounting, Graduate School of Business, University of Chicago. Formerly, Marvin Bower Fellow, Harvard Business School.	75 portfolios in 4 investment companies	Director, HON Industries Inc. (office furniture) and Director, Ryder System, Inc. (transportation).

Interested Trustees

The following Interested Trustees are described as such because they are deemed to be “interested persons,” as that term is defined under the 1940 Act, due to their positions with DFA.

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Name, Address and Age	Position Held with the Trust	Term of Office1 and Length of Service	Principal Occupation(s) During Past 5 Years	Portfolios within the DFA Fund Complex2 Overseen	Other Directorships of Public Companies Held
David G. Booth 1299 Ocean Avenue Santa Monica, CA 90401 Date of Birth: 12/2/46	Trustee, President, Chairman, Chief Executive Officer and Chief Investment Officer	Since inception	President, Chairman, Chief Executive Officer and Chief Investment Officer (beginning in 2003) and Director/Trustee of the following companies: the Trust, DFA, DFA Securities Inc., DFA Australia Limited, Dimensional Fund Advisors Canada Inc., DFA Investment Dimensions Group Inc., Dimensional Investment Group Inc. and Dimensional Emerging Markets Value Fund Inc. Director of Dimensional Fund Advisors Ltd. and formerly, Chief Investment Officer. Director, President and Chief Investment Officer (beginning in 2003) of DFA Australia Limited. Formerly, Director of Dimensional Funds PLC. Limited Partner, Oak Hill Partners. Director, University of Chicago Business School. Formerly, Director, SA Funds (registered investment company), and formerly, Director, Assante Corporation (investment management).	75 portfolios in 4 investment companies
Rex A. Sinquefield* 1299 Ocean Avenue Santa Monica, CA 90401 Date of Birth: 9/7/44	Trustee and Chairman	Since inception	Chairman and Director (and prior to 2003, Chief Investment Officer), DFA, DFA Securities Inc., DFA Investment Dimensions Group Inc., Dimensional Investment Group Inc. and Dimensional Emerging Markets Value Fund Inc. Trustee and Chairman of the Trust. Director and formerly President, Dimensional Fund Advisors Ltd. Director (and prior to 2003, Chief Investment Officer), DFA Australia Limited. Director, Dimensional Fund Advisors Canada Inc. Director, Dimensional Funds PLC. Trustee, St. Louis University. Life Trustee and Member of Investment Committee, DePaul University. Director, The German St. Vincent Orphan Home. Member of Investment Committee, Archdiocese of St. Louis.	75 portfolios in 4 investment companies

¹ Each Trustee holds office for an indefinite term until his or her successor is elected and qualified.

² Each Trustee is a director or trustee of each of the four registered investment companies within the DFA Fund Complex, which are: the Trust, Dimensional Emerging Markets Value Fund Inc., DFA Investment Dimensions Group Inc. and Dimensional Investment Group Inc. (together, the “DFA Funds”).

* Rex A. Sinquefield and Jeanne C. Sinquefield are husband and wife.

Information relating to each Trustee’s ownership (including the ownership of his or her immediate family) in the series of the Trust and in all registered investment companies in the DFA Fund Complex as of December 31, 2004 is set forth in the chart below:

Name	Dollar Range of Fund Shares Owned		Aggregate Dollar Range of Shares Owned in All Funds Overseen by Trustee in Family of Investment Companies
Disinterested Trustees:
George M. Constantinides	$	0	$	0
John P. Gould	$	0	$	0
Roger G. Ibbotson	$	0	$	0
Robert C. Merton	$	0	$	0
Myron S. Scholes	$	0	$	50,001 – 100,000

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Name	Dollar Range of Fund Shares Owned		Aggregate Dollar Range of Shares Owned in All Funds Overseen by Trustee in Family of Investment Companies
Abbie J. Smith	$	0	$	0
Interested Trustees:
David G. Booth	$	0	over $	100,0000
Rex A. Sinquefield	$	0	over $	100,0000

Set forth below is a table listing, for each Trustee entitled to receive compensation, the compensation received from the Trust during the fiscal year ended November 30, 2004 and the total compensation received from the four DFA Funds for which DFA served as investment adviser during that same fiscal year:

Trustee	Aggregate Compensation from the Trust*		Pension or Retirement Benefits as Part of Trust Expenses	Estimated Annual Benefits upon Retirement	Total Compensation from the Trust and DFA Fund Complex†
George M. Constantinides	$	32,636	N/A	N/A	$	75,000
John P. Gould	$	32,636	N/A	N/A	$	75,000
Roger G. Ibbotson	$	32,636	N/A	N/A	$	75,000
Robert C. Merton	$	32,636	N/A	N/A	$	75,000
Myron S. Scholes	$	32,636	N/A	N/A	$	75,000
Abbie J. Smith	$	32,636	N/A	N/A	$	75,000

* Under a deferred compensation plan (the “Plan”) adopted effective January 1, 2002, the disinterested Trustees of the Trust may defer receipt of all or a portion of the compensation for serving as members of the four Boards of Directors/Trustees of the DFA Funds. Amounts deferred under the Plan are treated as though equivalent dollar amounts had been invested in shares of a cross-section of the DFA Funds (the “Reference Funds”). The amounts ultimately received by the disinterested Trustees under the Plan will be directly linked to the investment performance of the Reference Funds. Deferral of fees in accordance with the Plan will have a negligible effect on a fund’s assets, liabilities, and net income per share, and will not obligate a fund to retain the services of any disinterested Trustee or to pay any particular level of compensation to the disinterested Trustee. The total amount of deferred compensation accrued by the disinterested Trustees from the DFA Fund Complex who participated in the Plan during the fiscal year ended November 30, 2004, is as follows: $75,000 (Mr. Gould), $75,000 (Mr. Ibbotson), $75,000 (Mr. Morton) and $75,000 (Ms. Smith). A disinterested Trustee’s deferred compensation will be distributed at the earlier of: (a) January in the year after the disinterested Trustee’s resignation from the Boards of Directors/Trustees, or death or disability; or (b) five years following the first deferral, in such amounts as the disinterested Trustee has specified. The obligations of the DFA Funds to make payments under the Plan will be unsecured general obligations of the DFA Funds, payable out of the general assets and property of the DFA Funds.

† The term DFA Fund Complex refers to all registered investment companies for which DFA performs advisory or administrative services and for which the individuals listed above serve as directors or trustees on the boards of such companies.

Officers

Below is the name, address, age, information regarding positions with the Trust and the principal occupation for each officer of the Trust. Each of the officers listed below holds the same office (except as otherwise noted) in the following entities: DFA, DFA Securities Inc., DFA Investment Dimensions Group Inc., Dimensional Investment Group Inc., the Trust and Dimensional Emerging Markets Value Fund Inc. (collectively, the “DFA Entities”).

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Name, Address and Age	Position Held with the Trust	Term of Office1 and Length of Service	Principal Occupation(s) During Past 5 Years
M. Akbar Ali Santa Monica, CA Date of Birth: 7/1/71	Vice President	Since 2005	Vice President of all the DFA Entities. Portfolio Manager of Dimensional Fund Advisors Inc. (since August 2002). Formerly, Graduate Student at the University of California, Los Angeles (August 2000 to June 2002); Senior Technology Office at JPMorgan Chase & Co. (February 1997 to June 2000).
Darryl Avery Santa Monica, CA Date of Birth: 10/4/66	Vice President	Since 2005	Vice President of all the DFA Entities. From June 2002 to January 2005, institutional client service representative of Dimensional Fund Advisors Inc. Formerly, institutional client service and marketing representative for Metropolitan West Asset Management (February 2001 to February 2002); institutional client service and marketing representative for Payden & Rygel (June 1990 to January 2001).
Arthur H. Barlow Santa Monica, CA Date of Birth: 11/7/55	Vice President	Since 1993	Vice President of all the DFA Entities.
Valerie A. Brown Santa Monica, CA Date of Birth: 1/24/67	Vice President and Assistant Secretary	Since 2001	Vice President and Assistant Secretary of all the DFA Entities. Prior to April 2001, legal counsel for DFA (since March 2000). Associate, Jones, Day, Reavis & Pogue from October 1991 to February 2000.
Stephen A. Clark Santa Monica, CA Date of Birth: 8/20/72	Vice President	Since 2004	Vice President of all the DFA Entities. April 2001 to April 2004, Portfolio Manager of Dimensional Fund Advisors Inc. Formerly, Graduate Student at the University of Chicago (September 2000 to March 2001); Associate of US Bancorp Piper Jaffrey (September 1999 to September 2000), and an Analyst and later an Associate of John Nuveen & Co. (August to September 1999).
Truman A. Clark Santa Monica, CA Date of Birth: 4/8/41	Vice President	Since 1996	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd.
Christopher S. Crossan Santa Monica, CA Date of Birth: 12/21/65	Vice President and Chief Compliance Officer	Since 2004	Vice President of all the DFA Entities. Formerly, Senior Compliance Officer, INVESCO Institutional, Inc. and its affiliates (August 2000 to January 2004); Branch Chief, Investment Company and Investment Advisor Inspections, Securities and Exchange Commission (April 1994 to August 2000).
James L. Davis Santa Monica, CA Date of Birth: 11/29/56	Vice President	Since 1999	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd. Formerly at Kansas State University, Arthur Andersen & Co. and Phillips Petroleum Co.
Robert T. Deere Santa Monica, CA Date of Birth: 10/8/57	Vice President	Since 1994	Vice President of all the DFA Entities.
Robert W. Dintzner Santa Monica, CA Date of Birth: 3/18/70	Vice President	Since 2001	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd. Prior to April 2001, marketing supervisor and marketing coordinator for DFA.
Richard A. Eustice Santa Monica, CA Date of Birth: 8/5/65	Vice President and Assistant Secretary	Since 1998	Vice President and Assistant Secretary of all the DFA Entities, except Dimensional Fund Advisors Ltd.

93

Name, Address and Age	Position Held with the Trust	Term of Office1 and Length of Service	Principal Occupation(s) During Past 5 Years
Eugene F. Fama, Jr. Santa Monica, CA Date of Birth: 1/21/61	Vice President	Since 1993	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd.
Damon S. Fisher Santa Monica, CA Date of Birth: 8/2/68	Vice President	Since 2004	Vice President of all the DFA Entities. Prior to April 2004, institutional client service representative of Dimensional Fund Advisors Inc.
Gretchen A. Flicker Santa Monica, CA Date of Birth: 6/9/71	Vice President	Since 2004	Vice President of all the DFA Entities. Prior to April 2004, institutional client service representative of Dimensional Fund Advisors Inc.
Glenn S. Freed Santa Monica, CA Date of Birth: 11/24/61	Vice President	Since 2001	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd. and DFA Australia Limited. Formerly, Professor and Associate Dean of the Leventhal School of Accounting (September 1998 to August 2001) and Academic Director Master of Business Taxation Program (June 1996 to August 2001) at the University of Southern California Marshall School of Business.
Henry F. Gray Santa Monica, CA Date of Birth: 9/22/67	Vice President	Since 2000	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd. Prior to July 2000, portfolio manager.
Kamyab Hashemi-Nejad Santa Monica, CA Date of Birth: 1/22/61	Vice President, Controller and Assistant Treasurer	Since 1997	Vice President, Controller and Assistant Treasurer, of all the DFA Entities.
Christine W. Ho Santa Monica, CA Date of Birth: 11/29/67	Vice President	Since 2004	Vice President of all the DFA Entities. Prior to April 2004, Assistant Controller of Dimensional Fund Advisors Inc.
Jeff J. Jeon Santa Monica, CA Date of Birth: 11/11/73	Vice President	Since 2004	Vice President of all the DFA Entities. Prior to April 2004, counsel of Dimensional Fund Advisors Inc. Formerly, an Associate at Gibson, Dunn & Crutcher LLP (September 1997 to August 2001).
Patrick Keating Date of Birth: 12/21/54	Vice President	Since 2003	Vice President of all the DFA Entities. Formerly, Director, President and Chief Executive Officer, Assante Asset Management Inc. (October 2000 to December 2002); Director, Assante Capital Management (October 2000 to December 2002); President and Chief Executive Officer, Assante Capital Management (October 2000 to April 2001); Executive Vice President, Assante Corporation (May 2001 to December 2002); Director, Assante Asset Management Ltd. (September 1997 to December 2002); President and Chief Executive Officer, Assante Asset Management Ltd. (September 1998 to May 2001); Executive Vice President, Loring Ward (financial services company) (January 1996 to September 1998).
Joseph F. Kolerich Santa Monica, CA Date of Birth: 11/7/71	Vice President	Since 2004	Vice President of all the DFA Entities. From April 2001 to April 2004, Portfolio Manager for Dimensional Fund Advisors Inc. Formerly, a trader at Lincoln Capital Fixed Income Management (formerly Lincoln Capital Management Company).

94

Name, Address and Age	Position Held with the Trust	Term of Office1 and Length of Service	Principal Occupation(s) During Past 5 Years
Michael F. Lane Santa Monica, CA Date of Birth: 7/11/67	Vice President	Since 2004	Vice President of all the DFA Entities. Formerly, Vice President of Advisor Services at TIAA-CREF (July 2001 to September 2004); AEGON, President, Advisor Resources (September 1994 to June 2001).
Heather H. Mathews Santa Monica, CA Date of Birth: 12/12/69	Vice President	Since 2004	Vice President of all the DFA Entities and Dimensional Fund Advisors Ltd. Prior to April 2004, Portfolio Manager for Dimensional Fund Advisors Inc. Formerly, Graduate Student at Harvard University (August 1998 to June 2000).
David M. New Date of Birth: 2/9/60	Vice President	Since 2003	Vice President of all the DFA Entities and Client Service Manager prior to becoming a Vice President; Director of Research, Wurts and Associates (investment consulting firm) from December 2000 to June 2002; and President, Kobe Investment Research from August 1999 to November 2000.
Catherine L. Newell Santa Monica, CA Date of Birth: 5/7/64	Vice President, Secretary, General Counsel and Chief Legal Officer	Since 2000	Vice President and Secretary of all the DFA Entities, except DFA Australia Limited for which she is Vice President and Assistant Secretary. Director, Dimensional Funds PLC. Vice President and Assistant Secretary of all the DFA Entities (1997–2000).
Sonya Park Date of Birth: 6/28/72	Vice President	Since 2005	Vice President of all the DFA Entities. From February 2002 to January 2005, institutional client service representative of Dimensional Fund Advisors Inc. Formerly, Associate Director at Watson Pharmaceuticals Inc. (January 2001 to February 2002); Graduate student at New York University (February 2000 to December 2000).
David A. Plecha Santa Monica, CA Date of Birth: 10/26/61	Vice President	Since 1993	Vice President of all the DFA Entities.
Eduardo A. Repetto Santa Monica, CA Date of Birth: 1/28/67	Vice President	Since 2002	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd. and DFA Australia Limited. Research Associate for DFA (June 2000 to April 2002). Research scientist (August 1998 to June 2000) and Faculty–Postdoctural Fellow (August 1997 to August 1998), California Institute of Technology.
Michael T. Scardina Santa Monica, CA Date of Birth: 10/12/55	Vice President, Chief Financial Officer and Treasurer	Since 1993	Vice President, Chief Financial Officer and Treasurer of all the DFA Entities. Director, Dimensional Funds, PLC.
David E. Schneider Santa Monica, CA Date of Birth: 1/26/46	Vice President	Since 2001	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd. and DFA Australia Limited. Prior to 2001 and currently, Regional Director of DFA.
John C. Siciliano Santa Monica, CA Date of Birth: 8/24/54	Vice President	Since 2001	Vice President of all the DFA Entities. Director, Dimensional Funds PLC. Managing Principal, Payden & Rygel Investment Counsel from April 1998 through December 2000, and Co-Head, North American Corporate Finance for Dresdner Kleinwort Benson N.A., from October 1995 to April 1998.

95

Name, Address and Age	Position Held with the Trust	Term of Office1 and Length of Service	Principal Occupation(s) During Past 5 Years
Jeanne C. Sinquefield, Ph.D.* Santa Monica, CA Date of Birth: 12/2/46	Executive Vice President	Since 1988	Executive Vice President of all the DFA Entities.
Grady M. Smith Santa Monica, CA Date of Birth: 5/26/56	Vice President	Since 2004	Vice President of all the DFA Entities. From August 2001 to April 2004, Portfolio Manager of Dimensional Fund Advisors Inc. Formerly, Principal of William M. Mercer, Incorporated (July 1995 to June 2001).
Carl G. Snyder Santa Monica, CA Date of Birth: 6/8/63	Vice President	Since 2000	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd. Prior to July 2000, portfolio manager.
Lawrence R. Spieth Santa Monica, CA Date of Birth: 11/10/47	Vice President	Since 2004	Vice President of all the DFA Entities. Prior to April 2004, institutional client service representative of Dimensional Fund Advisors Inc.
Bradley G. Steiman Santa Monica, CA Date of Birth: 3/25/73	Vice President	Since 2004	Vice President of all the DFA Entities and Dimensional Funds Canada Inc. (since June 2003). Prior to April 2002, Regional Director of Dimensional Fund Advisors Inc. Formerly, Vice President and General Manager of Assante Global Advisors (July 2000 to April 2002); Vice President of Assante Asset Management Inc. (March 2000 to July 2000); and Private Client Manager at Loring Ward Investment Counsel Ltd. (June 1997 to February 2002).
Karen Umland Date of Birth: 3/10/66	Vice President	Since 1997	Vice President of all the DFA Entities, DFA Australia Limited and Dimensional Fund Advisors Ltd.
Carol W. Wardlaw Santa Monica, CA Date of Birth: 8/7/58	Vice President	Since 2004	Vice President of all the DFA Entities. Prior to April 2004, institutional client service representative of Dimensional Fund Advisors Inc.
Weston J. Wellington Santa Monica, CA Date of Birth: 3/1/51	Vice President	Since 1997	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd.
Daniel M. Wheeler Santa Monica, CA Date of Birth: 3/3/45	Vice President	Since 2001	Vice President of all the DFA Entities, except Dimensional Fund Advisors Ltd. and DFA Australia Limited. Prior to 2001 and currently, Director of Financial Advisors Services of DFA.

¹ Each officer holds office for an indefinite term at the pleasure of the Board of Trustees and until his or her successor is elected and qualified.

* Rex A. Sinquefield and Jeanne C. Sinquefield are husband and wife.

As of December 31, 2004, the Trustees and officers as a group own less than 1% of the Trust’s outstanding stock.

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SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND

Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for the obligations of the trust. However, the Fund’s Declaration of Trust provides that shareholders shall not be subject to any personal liability in connection with the assets of the Fund for the acts or obligations of the Fund, and that every note, bond, contract, order or other undertaking made by the Fund shall contain a provision to the effect that the shareholders are not personally liable thereunder. The Declaration of Trust provides for indemnification out of the trust property of any shareholder held personally liable solely by reason of his being or having been a shareholder and not because of his acts or omissions or some other reason. The Declaration of Trust also provides that the Fund shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Fund, and shall satisfy any judgment thereon.

The Declaration of Trust further provides that all persons having any claim against the trustees or Fund shall look solely to the trust property for payment; that no trustee of the Fund shall be personally liable for or on account of any contract, debt, tort, claim, damage, judgment or decree arising out of or connected with the administration or preservation of the trust property or the conduct of any business of the Fund; and that no trustee shall be personally liable to any person for any action or failure to act except by reason of his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties as a trustee. With the exception stated, the Declaration of Trust provides that a trustee is entitled to be indemnified against all liabilities and expenses reasonably incurred by him in connection with the defense or disposition of any proceeding in which he may be involved or with which he may be threatened by reason of his being or having been a trustee, and that the Fund will indemnify officers, representatives and employees of the Fund to the same extent that trustees are entitled to indemnification.

INVESTMENT ADVISORY, ADMINISTRATION,

DISTRIBUTION AND SERVICING ARRANGEMENTS

Advisory and Sub-Advisory Agreements. The advisory and sub-advisory services provided by BlackRock, BIMC, BFM, BIL and, with respect to the Index Master Portfolio, Dimensional Fund Advisors Inc. (“DFA”), and the fees received by BlackRock and DFA for such services, are described in the Prospectuses.

For their advisory and subadvisory services, BlackRock, BIMC, BFM, BIL and DFA, as applicable, are entitled to fees, computed daily on a portfolio-by-portfolio basis and payable monthly, at the maximum annual rates set forth below.

MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE LARGE CAP VALUE EQUITY, LARGE CAP GROWTH

EQUITY, SMALL CAP VALUE EQUITY, SMALL CAP GROWTH EQUITY AND DIVIDEND ACHIEVERS^TM

PORTFOLIOS AND THE INVESTMENT TRUST (BEFORE WAIVERS)

Average Daily Net Assets	Investment Advisory Fee
first $1 billion	.550	%
$1 billion — $2 billion	.500
$2 billion — $3 billion	.475
Greater than $3 billion	.450

97

MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE LEGACY PORTFOLIO (BEFORE WAIVERS)

Average Daily Net Assets	Investment Advisory Fee
first $1 billion	.650	%
$1 billion — $2 billion	.600
$2 billion — $3 billion	.575
Greater than $3 billion	.550
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE AURORA PORTFOLIO (BEFORE WAIVERS)
Average Daily Net Assets	Investment Advisory Fee
first $1 billion	.850	%
$1 billion — $2 billion	.800
$2 billion — $3 billion	.750
Greater than $3 billion	.700
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE SMALL/MID-CAP GROWTH, HEALTH SCIENCES, GLOBAL RESOURCES AND ALL-CAP GLOBAL RESOURCES PORTFOLIOS (BEFORE WAIVERS)
Average Daily Net Assets	Investment Advisory Fee
first $1 billion	.750	%
$1 billion — $2 billion	.700
$2 billion — $3 billion	.675
Greater than $3 billion	.650
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE MID-CAP VALUE EQUITY AND MID-CAP GROWTH EQUITY PORTFOLIOS (BEFORE WAIVERS)
Average Daily Net Assets	Investment Advisory Fee
first $1 billion	.800	%
$1 billion — $2 billion	.700
$2 billion — $3 billion	.675
greater than $3 billion	.625

98

MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE ASSET ALLOCATION PORTFOLIO (BEFORE WAIVERS)
Average Daily Net Assets	Investment Advisory Fee		Sub-Advisory Fee to BFM
first $1 billion	.550	%	.400	%
$1 billion — $2 billion	.500		.350
$2 billion — $3 billion	.475		.325
greater than $3 billion	.450		.300
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE INTERNATIONAL OPPORTUNITIES PORTFOLIO (BEFORE WAIVERS)
Average Daily Net Assets	Investment Advisory Fee		Sub-Advisory Fee to BIL
first $1 billion	1.00	%	.85	%
$1 billion — $2 billion	.95		.80
$2 billion — $3 billion	.90		.75
greater than $3 billion	.85		.70

MAXIMUM ANNUAL CONTRACTUAL FEE RATE

FOR THE U.S. OPPORTUNITIES PORTFOLIO (BEFORE WAIVERS)

Average Daily Net Assets	Investment Advisory Fee
first $1 billion	1.100	%
$1 billion — $2 billion	1.050
$2 billion — $3 billion	1.025
greater than $3 billion	1.000
MAXIMUM ANNUAL CONTRACTUAL FEE RATE FOR THE GLOBAL SCIENCE & TECHNOLOGY OPPORTUNITIES PORTFOLIO (BEFORE WAIVERS)
Average Daily Net Assets	Investment Advisory Fee
first $1 billion	.90	%
$1 billion—$2 billion	.85
$2 billion—$3 billion	.80
greater than $3 billion	.75

99

MAXIMUM ANNUAL CONTRACTUAL FEE RATE

FOR THE BOND PORTFOLIOS (BEFORE WAIVERS)

	Each Bond Portfolio Except the Enhanced Income, International Bond, GNMA, UltraShort Municipal, Inflation Protected Bond, DE Tax-Free Income and KY Tax-Free Income Portfolios				International Bond, GNMA, DE Tax-Free Income and KY Tax-Free Income Portfolios
Average Daily Net Assets	Investment Advisory Fee		Sub-Advisory Fees to BFM		Investment Advisory Fee		Sub-Advisory Fees to BFM
first $1 billion	.500	%	.350	%	.550	%	.400	%
$1 billion—$2 billion	.450		.300		.500		.350
$2 billion—$3 billion	.425		.275		.475		.325
greater than $3 billion	.400		.250		.450		.300

MAXIMUM ANNUAL CONTRACTUAL FEE RATE

FOR THE INFLATION PROTECTED BOND PORTFOLIO (BEFORE WAIVERS)

Average Daily Net Assets	Investment Advisory Fee		Sub-Advisory Fee to BFM
first $1 billion	.400	%	.250	%
$1 billion — $2 billion	.375		.225
$2 billion — $3 billion	.350		.200
greater than $3 billion	.325		.175

MAXIMUM ANNUAL CONTRACTUAL FEE RATE

FOR THE MONEY MARKET PORTFOLIOS (BEFORE WAIVERS)

Average Daily Net Assets	Investment Advisory Fee		Sub-Advisory Fee to BIMC
first $1 billion	.450	%	.400	%
$1 billion — $2 billion	.400		.350
$2 billion — $3 billion	.375		.325
greater than $3 billion	.350		.300

The investment advisory fee for the Enhanced Income Portfolio is .40%, .45% for the UltraShort Municipal Portfolio, 1.00% for the Small Cap Core Equity Portfolio and .50% for the Exchange Portfolio. The subadvisory fees for the Enhanced Income Portfolio and for the UltraShort Municipal Portfolio are .15% and .28%, respectively.

BlackRock, a majority-owned indirect subsidiary of The PNC Financial Services Group, Inc., renders advisory services to each of the Portfolios, except the Index Equity Portfolio, pursuant to an Investment Advisory Agreement. From the commencement of operations of each Portfolio that existed prior to that time (other than the New Jersey Municipal Money Market, New Jersey Tax-Free Income, Core Bond Total Return, Low Duration Bond and International Bond Portfolios) until January 4, 1996 (June 1, 1996, in the case of the Index Equity Portfolio), BIMC served as adviser.

100

From July 1, 1991 to December 31, 1995, Midlantic Bank, N.A. (“Midlantic Bank”) served as investment adviser to the predecessor portfolios of the International Bond, New Jersey Tax-Free Income and New Jersey Municipal Money Market Portfolios. From January 1, 1996, through January 12, 1996 (February 12, 1996, with respect to the predecessor portfolio of the International Bond Portfolio): (i) BlackRock and Morgan Grenfell Investment Services Limited (“Morgan Grenfell”) served as investment adviser and sub-adviser, respectively, to the predecessor portfolio to the International Bond Portfolio; (ii) BIMC served as investment adviser to the predecessor portfolio to the New Jersey Municipal Money Market Portfolio; and (iii) BFM served as investment adviser to the predecessor portfolio to the New Jersey Tax-Free Income Portfolio pursuant to interim advisory and sub-advisory agreements approved by the shareholders of the Compass Capital Group of Funds. From December 9, 1992, to January 13, 1996, BFM served as investment adviser to the predecessor portfolio of the Core Bond Total Return Portfolio. From July 17, 1992, to January 13, 1996, BFM served as investment adviser to the predecessor portfolio of the Low Duration Bond Portfolio.

BFM renders sub-advisory services to the Asset Allocation, Managed Income, Intermediate Government Bond, Tax-Free Income, Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Low Duration Bond, Intermediate Bond, New Jersey Tax-Free Income, Delaware Tax-Free Income, Kentucky Tax-Free Income, Core Bond Total Return, Core PLUS Total Return, Government Income, International Bond, High Yield Bond, GNMA, Enhanced Income, UltraShort Municipal, Intermediate PLUS Bond and Inflation Protected Bond Portfolios pursuant to Sub-Advisory Agreements. Until January 26, 2001, BFM rendered sub-advisory services to the Large Cap Value Equity, Mid-Cap Value Equity, Small Cap Value Equity, Investment Trust, Large Cap Growth Equity, Mid-Cap Growth Equity, Small Cap Growth Equity, U.S. Opportunities, and International Opportunities Portfolios. From May 15, 2000, to January 26, 2001, BFM rendered sub-advisory services to the Global Science & Technology Opportunities Portfolio. BIL renders sub-advisory services to the International Opportunities Portfolio pursuant to a sub-advisory agreement. BIMC renders sub-advisory services to the Money Market, U.S. Treasury Money Market, Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North Carolina Municipal Money Market, Virginia Municipal Money Market and New Jersey Municipal Money Market Portfolios pursuant to Sub-Advisory Agreements. DFA renders advisory services to the Index Master Portfolio, the registered investment company in which the Index Equity Portfolio invests all of its assets, pursuant to an Investment Management Agreement. The Investment Advisory Agreement with BlackRock, the Investment Advisory Agreement with BIL and the above-referenced Sub-Advisory Agreements are collectively referred to as the “Advisory Contracts.”

The Advisory Contracts were most recently approved by the Fund’s Board of Trustees at an in-person meeting of the Board held on March 1, 2005, including a majority of the Trustees who are not parties to the agreements or interested persons of any such party (as such term is defined in the 1940 Act). For a discussion of the factors considered by the Fund’s Board of Trustees in connection with the renewal of the Advisory Contracts, see the Fund’s most recent semi-annual report to shareholders dated March 31, 2005.

PNC Bank served as sub-adviser for the Money Market Portfolio from October 4, 1989 (commencement of operations), to January 4, 1996; for the Municipal Money Market Portfolio from September 10, 1993 to January 4, 1996; for the U.S. Treasury Money Market Portfolio from November 1, 1989 (commencement of operations), to January 4, 1996; for the Ohio Municipal Money Market Portfolio from June 1, 1993 (commencement of operations), to January 4, 1996; for the Pennsylvania Municipal Money Market Portfolio from June 1, 1993 (commencement of operations), to January 4, 1996; for the North Carolina Municipal Money Market Portfolio from May 4, 1993 (commencement of operations), to January 4, 1996; for the Virginia Municipal Money Market Portfolio from July 25, 1994 (commencement of operations), to January 4, 1996; and for the New Jersey Municipal Money Market Portfolio from January 13, 1996, to June 6, 1996. From April 4, 1990 (commencement of operations), to January 4, 1996, PNC Bank served as sub-adviser to the Asset Allocation Portfolio. From March 1, 1993, to January 4, 1996, PNC Equity Advisors Company (a predecessor entity of BlackRock) (“PEAC”) served as sub-adviser to the Investment Trust Portfolio. From March 29, 1995, to June 1, 1996, PEAC served as sub-adviser to the Index Equity Portfolio. From July 1, 1996, through December 31, 1996, Morgan Grenfell served as sub-adviser to the International Bond Portfolio.

101

Under the relevant Advisory Contracts, BlackRock, BIMC, BFM and BIL are not liable for any error of judgment or mistake of law or for any loss suffered by the Fund or a Portfolio in connection with the performance of the Advisory Contracts. Under the Advisory Contracts, BlackRock, BIMC, BFM, BIL and DFA are liable for a loss resulting from willful misfeasance, bad faith or gross negligence in the performance of their respective duties or from reckless disregard of their respective duties and obligations thereunder. Each of the Advisory Contracts (except the Advisory Contract relating to the Index Master Portfolio) is terminable as to a Portfolio by vote of the Fund’s Board of Trustees or by the holders of a majority of the outstanding voting securities of the relevant Portfolio, at any time without penalty, on 60 days’ written notice to BlackRock, BIMC, BFM or BIL, as the case may be. BlackRock, BIMC, BFM and BIL may also terminate their advisory relationship with respect to a Portfolio on 60 days’ written notice to the Fund. The Advisory Contract relating to the Index Master Portfolio is terminable by vote of the Trust’s Board of Trustees or by the holders of a majority of the outstanding voting securities of the Index Master Portfolio at any time without penalty on 60 days’ written notice to DFA. DFA may also terminate its advisory relationship with respect to the Index Master Portfolio on 90 days’ written notice to the Trust. Each of the Advisory Contracts terminates automatically in the event of its assignment.

For the period from October 1, 2003, through September 30, 2004 (for the period March 4, 2004, through September 30, 2004, for the Enhanced Income Portfolio, and for the period August 18, 2004, through September 30, 2004, for the Intermediate PLUS Bond Portfolio, and for the period June 28, 2004, through September 30, 2004, for the Inflation Protected Bond Portfolio, and for the period March 3, 2004, through September 30, 2004, for the UltraShort Municipal Portfolio and for the period September 8, 2004, through September 30, 2004, for the Dividend Achievers^™ Portfolio), the Fund paid BlackRock advisory fees (after waivers), and BlackRock waived advisory fees and reimbursed expenses, as follows:

Portfolios	Fees Paid (After Waivers)		Waivers		Reimbursements
Money Market	$	5,135,508	$	5,142,094	$	0
U. S. Treasury Money Market		1,005,473		1,493,392		0
Municipal Money Market		1,004,436		1,513,210		0
New Jersey Municipal Money Market		232,248		475,556		0
North Carolina Municipal Money Market		39,272		328,500		0
Ohio Municipal Money Market		210,979		424,920		0
Pennsylvania Municipal Money Market		975,970		1,270,585		0
Virginia Municipal Money Market		0		75,421		7,977
Enhanced Income		0		73,891		83,398
Low Duration Bond		4,690,729		4,289,773		0
Intermediate Government Bond		1,097,362		458,981		0
Intermediate Bond		2,758,239		1,928,329		0
Intermediate PLUS Bond		0		15,174		72,318
Core Bond Total Return		6,538,392		5,211,255		0
Core PLUS Total Return		608,870		793,297		0
Government Income		388,906		568,430		0
Inflation Protected Bond		0		21,113		94,627
Managed Income		3,763,953		608,395		0
GNMA		684,512		881,135		0
International Bond		1,767,793		94,170		0
High Yield Bond		2,191,024		865,521		0
UltraShort Municipal		0		93,894		79,619
Tax-Free Income		1,215,962		903,123		0
Pennsylvania Tax-Free Income		2,981,721		790,267		0
New Jersey Tax-Free Income		662,583		231,134		0
Ohio Tax-Free Income		422,969		170,509		0
Delaware Tax-Free Income		406,572		87,068		0
Kentucky Tax-Free Income		501,110		106,334		0
Large Cap Value Equity		1,422,000		115,217		0
Large Cap Growth Equity		502,721		114,659		0

102

Portfolios	Fees Paid (After Waivers)		Waivers		Reimbursements
Dividend Achievers		0		661		62,817
Mid-Cap Value Equity		305,741		6,178		0
Mid-Cap Growth Equity		1,095,761		0		0
Small Cap Value Equity		721,863		34,574		0
Small Cap Core Equity		2,598		47,609		32,212
Small Cap Growth Equity		2,397,602		0		0
U.S. Opportunities		1,167,054		0		0
Global Science & Technology Opportunities		261,799		41,767		0
International Opportunities		2,425,980		118,546		0
Investment Trust		479,146		91,554		19,203
Asset Allocation		650,694		111,760		0
For the period from October 1, 2002, through September 30, 2003, the Fund paid BlackRock advisory fees (after waivers), and BlackRock waived advisory fees and reimbursed expenses, as follows:
Portfolios	Fees Paid (After Waivers)		Waivers		Reimbursements
Money Market	$	6,911,967	$	6,912,046	$	0
U.S. Treasury Money Market		1,282,148		2,318,008		0
Municipal Money Market		1,137,931		2,014,341		0
New Jersey Municipal Money Market		201,914		584,075		0
North Carolina Municipal Money Market		21,885		707,104		0
Ohio Municipal Money Market		179,515		521,228		0
Pennsylvania Municipal Money Market		865,446		1,583,467		0
Virginia Municipal Money Market		1,659		325,965		0
Low Duration Bond		3,025,091		3,190,661		0
Intermediate Government Bond		865,501		851,507		0
Intermediate Bond		2,268,823		1,809,243		0
Core Bond Total Return		5,253,514		4,809,012		0
Core PLUS Total Return		236,405		448,362		0
Government Income		551,823		645,703		0
Managed Income		3,397,073		1,661,407		0
GNMA		769,788		1,007,985		0
International Bond		903,367		0		0
High Yield Bond		1,621,779		620,504		0
Tax-Free Income		1,003,134		858,459		0
Pennsylvania Tax-Free Income		2,659,113		1,805,515		0
New Jersey Tax-Free Income		438,114		366,040		0
Ohio Tax-Free Income		350,868		303,294		0
Delaware Tax-Free Income		291,123		152,995		0
Kentucky Tax-Free Income		481,147		241,241		0
Large Cap Value Equity		1,818,065		488,538		0
Large Cap Growth Equity		801,286		189,689		0
Mid-Cap Value Equity		432,067		23,503		0
Mid-Cap Growth Equity		1,122,299		35,068		0
Small Cap Value Equity		728,977		42,733		0
Small Cap Core Equity		0		9,700		4,163
Small Cap Growth Equity		1,566,909		94,355		0
U.S. Opportunities		1,013,727		62,879		0
Global Science & Technology Opportunities		182,268		80,037		0
International Opportunities		1,171,610		121,595		0
Investment Trust		565,388		202,909		0
Asset Allocation		722,052		164,894		0

103

For the period from October 1, 2001, through September 30, 2002 (from December 7, 2001, through September 30, 2002, in the case of Core PLUS Total Return Portfolio, and January 2, 2002, through September 30, 2002, in the case of Small Cap Core Equity Portfolio), the Fund paid BlackRock advisory fees (after waivers), and BlackRock waived advisory fees and reimbursed expenses, as follows:

Portfolios	Fees Paid (After Waivers)		Waivers		Reimbursements
Money Market	$	8,274,785	$	7,729,225	$	0
U.S. Treasury Money Market		1,723,625		2,777,685		0
Municipal Money Market		1,238,713		2,099,051		0
New Jersey Municipal Money Market		220,592		562,667		0
North Carolina Municipal Money Market		36,606		578,231		0
Ohio Municipal Money Market		180,071		470,470		0
Pennsylvania Municipal Money Market		1,117,182		1,857,728		0
Virginia Municipal Money Market		0		265,282		0
Low Duration Bond		1,392,862		1,470,012		0
Intermediate Government Bond		962,763		779,737		0
Intermediate Bond		2,735,742		1,935,147		0
Core Bond Total Return		5,034,144		4,180,505		0
Core PLUS Total Return		79,409		213,576		0
Government Income		128,799		188,393		0
Managed Income		4,498,725		1,435,130		0
GNMA		507,127		574,069		0
International Bond		772,312		0		0
High Yield Bond		942,546		376,620		0
Tax-Free Income		1,054,968		783,020		0
Pennsylvania Tax-Free Income		2,963,667		1,816,462		0
New Jersey Tax-Free Income		445,615		337,400		0
Ohio Tax-Free Income		319,067		238,432		0
Delaware Tax-Free Income		300,674		153,209		0
Kentucky Tax-Free Income		546,410		251,834		0
Large Cap Value Equity		6,129,797		575,502		0
Large Cap Growth Equity		2,952,107		262,175		0
Mid-Cap Value Equity		1,550,453		0		0
Mid-Cap Growth Equity		2,907,698		0		0
Small Cap Value Equity		1,879,168		43,425		0
Small Cap Core Equity		0		7,207		51,940
Small Cap Growth Equity		3,974,192		148,693		0
U.S. Opportunities		1,957,395		87,139		0
Global Science & Technology Opportunities		383,877		56,646		0
International Opportunities		1,257,367		133,079		0
Investment Trust		3,236,334		370,981		0
Asset Allocation		1,848,939		92,462		0

104

With respect to the SSR Funds listed below that reorganized with BlackRock funds, for such SSR Fund’s three most recent fiscal years, such SSR Fund paid State Street Research & Management Company advisory fees:

	Fees Paid For Fiscal Year Ended Payments
Fund	2004		2003		2002
Asset Allocation Fund	$	4,250,653	$	4,180,605	$	4,846,212
Aurora Fund		29,179,140		21,291,705		26,372,557
Emerging Growth Fund		2,550,085		857,754		817,708
Exchange Fund		1,515,452		1,419,580		1,568,988
Global Resources Fund		2,882,773		1,276,075		1,254,667
Health Sciences Fund		361,824		197,394		175,996
Legacy Fund		2,172,192		1,872,758		2,020,997
Mid-Cap Value Fund		3,273,789		2,645,618		2,435,130

For the period from October 1, 2003, through September 30, 2004, BlackRock paid sub-advisory fees to the specified Portfolios’ sub-advisers, after waivers, and such sub-advisers waived sub-advisory fees, as follows:

Portfolios	Fees Paid (After Waivers)		Waivers
Low Duration Bond	$	1,773,897	$	0
Intermediate Bond		1,043,982		0
Intermediate Government Bond		377,481		0
Intermediate PLUS Bond		—		—
Core Bond Total Return		2,479,532		0
Core PLUS Total Return		229,889		0
Inflation Protected Bond		—		—
Managed Income		1,324,205		0
Government Income		146,760		0
GNMA		259,192		0
International Bond		671,133		0
High Yield Bond		2,184,019		0
UltraShort Municipal		—		—
Tax-Free Income		460,217		0
Pennsylvania Tax-Free Income		1,041,467		0
New Jersey Tax-Free Income		227,378		0
Ohio Tax-Free Income		145,241		0
Delaware Tax-Free Income		142,947		0
Kentucky Tax-Free Income		176,100		0

For the period from October 1, 2002, through September 30, 2003, BlackRock paid sub-advisory fees to the specified Portfolios’ sub-advisers, after waivers, and such sub-advisers waived sub-advisory fees, as follows:

Portfolios	Fees Paid (After Waivers)		Waivers
Low Duration Bond	$	1,078,862	$	0
Intermediate Bond		832,596		0
Intermediate Government Bond		330,287		0
Core Bond Total Return		1,934,053		0
Core PLUS Total Return		112,372		0
Managed Income		1,288,076		0
Government Income		198,386		0
GNMA		288,944		0
International Bond		335,028		0
High Yield Bond		1,509,797		0
Tax-Free Income		378,167		0
Pennsylvania Tax-Free Income		1,011,468		0
New Jersey Tax-Free Income		165,610		0
Ohio Tax-Free Income		131,240		0
Delaware Tax-Free Income		108,220		0
Kentucky Tax-Free Income		181,141		0

105

For the period from October 1, 2001, through September 30, 2002 (from December 7, 2001, through September 30, 2002, in the case of Core PLUS Total Return Portfolio), BlackRock paid sub-advisory fees to the specified Portfolios’ sub-advisers, after waivers, and such sub-advisers waived sub-advisory fees, as follows:

Portfolios	Fees Paid (After Waivers)		Waivers
Low Duration Bond	$	524,558	$	0
Intermediate Bond		1,053,854		0
Intermediate Government Bond		365,353		0
Core Bond Total Return		1,930,748		0
Core PLUS Total Return		13,197		0
Managed Income		1,769,623		0
Government Income		48,275		0
GNMA		191,668		0
International Bond		293,661		0
High Yield Bond		938,221		0
Tax-Free Income		400,292		0
Pennsylvania Tax-Free Income		1,162,899		0
New Jersey Tax-Free Income		168,986		0
Ohio Tax-Free Income		121,222		0
Delaware Tax-Free Income		112,900		0
Kentucky Tax-Free Income		203,948		0

For the services it provides as investment adviser to the Index Master Portfolio, DFA is paid a monthly fee calculated at the annual rate of .025% of the Index Master Portfolio’s average daily net assets. For the fiscal years ending November 30, 2002, 2003 and 2004, the Index Master Portfolio paid advisory fees to DFA totaling $692,785, $652,087 and $823,267, respectively.

Administration Agreement. BlackRock and PFPC serve as the Fund’s co-administrators pursuant to an administration agreement (the “Administration Agreement”). PFPC has agreed to maintain office facilities for the Fund; furnish the Fund with statistical and research data, clerical, accounting, and bookkeeping services; provide and supervise the operation of an automated data processing system to process purchase and redemption orders; prepare and file certain reports required by regulatory authorities; prepare and file federal and state tax returns; prepare and file material requested by state securities regulators; calculate various contractual expenses; compute each Portfolio’s net asset value, net income and net capital gain or loss; and serve as a liaison with the Fund’s independent public accountants. The Administrators may from time to time voluntarily waive administration fees with respect to a Portfolio and may voluntarily reimburse the Portfolios for expenses.

Under the Administration Agreement, the Fund pays to BAI and PFPC on behalf of each Portfolio a fee, computed daily and payable monthly, at an aggregate annual rate of (i) .085% of the first $500 million of each Portfolio’s average daily net assets, .075% of the next $500 million of each Portfolio’s average daily net assets and .065% of the average daily net assets of each Portfolio in excess of $1 billion and (ii) .145% of the first $500 million of average daily net assets allocated to each class of shares of each Portfolio (.095% with respect to the Money Market Portfolios and .035% with respect to BlackRock Shares), .135% of the next $500 million of such average daily net assets (.085% with respect to the Money Market Portfolios and .025% with respect to BlackRock Shares) and .125% of the average daily net assets allocated to each class of shares of each Portfolio in excess of $1 billion (.075% with respect to the Money Market Portfolios and .015% with respect to BlackRock Shares).

Under the Administration Agreement, BlackRock is responsible for: (i) the supervision and coordination of the performance of the Fund’s service providers; (ii) the negotiation of service contracts and arrangements between the Fund and its service providers; (iii) acting as liaison between the trustees of the Fund and the Fund’s service providers; and (iv) providing ongoing business management and support services in connection with the Fund’s operations.

106

The Administration Agreement provides that BlackRock and PFPC will not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund or a Portfolio in connection with the performance of the Administration Agreement, except a loss resulting from willful misfeasance, bad faith or gross negligence in the performance of their respective duties or from reckless disregard of their respective duties and obligations thereunder. In addition, the Fund will indemnify each of BAI and PFPC and their affiliates against any loss arising in connection with their provision of services under the Administration Agreement, except that neither BAI nor PFPC nor their affiliates shall be indemnified against any loss arising out of willful misfeasance, bad faith, gross negligence or reckless disregard of their respective duties under the Administration Agreement.

PFPC serves as the administrative services agent for the Index Master Portfolio pursuant to an Administration and Accounting Services Agreement. The services provided by PFPC are subject to supervision by the executive officers and the Board of Trustees of the Trust, and include day-to-day keeping and maintenance of certain records, calculation of the offering price of the shares, preparation of reports and acting as liaison with the Trust’s custodians and dividend and disbursing agent. For these services, PFPC is entitled to compensation from the Index Master Portfolio at the annual rate of .015% of the Index Master Portfolio’s average daily net assets. The Index Equity Portfolio bears its pro rata portion of the Index Master Portfolio’s administrative services expenses.

For the period from October 1, 2003, through September 30, 2004 (for the period March 4, 2004, through September 30, 2004, for the Enhanced Income Portfolio, and for the period August 18, 2004, through September 30, 2004, for the Intermediate PLUS Bond Portfolio, and for the period June 28, 2004, through September 30, 2004, for the Inflation Protected Bond Portfolio, and for the period March 3, 2004, through September 30, 2004, for the UltraShort Municipal Portfolio and for the period September 8, 2004, through September 30, 2004, for the Dividend Achievers^™ Portfolio), the Fund paid the Administrators combined administration fees (after waivers), and the Administrators waived combined administration fees and reimbursed expenses, as follows:

Portfolios	Fees Paid (After Waivers)		Waivers	Reimbursements
Money Market	$	3,798,896	156,608	$	0
U. S. Treasury Money Market		884,509	106,717		0
Municipal Money Market		937,939	58,026		0
New Jersey Municipal Money Market		246,425	36,696		0
North Carolina Municipal Money Market		115,317	31,792		0
Ohio Municipal Money Market		216,406	37,957		0
Pennsylvania Municipal Money Market		753,916	144,247		0
Virginia Municipal Money Market		7,329	22,839		0
Enhanced Income		5,392	25,264		0
Low Duration Bond		2,841,445	393,389		0
Intermediate Government Bond		467,703	248,188		0
Intermediate Bond		1,447,876	186,262		0
Intermediate PLUS Bond		0	3,642		0
Core Bond Total Return		3,491,016	462,796		0
Core PLUS Total Return		248,786	87,802		0
Government Income		431,800	2,095		0
Inflation Protected Bond		17	6,330		0
Managed Income		1,180,693	769,713		0
GNMA		614,237	15,654		0
International Bond		763,589	3,410		0
High Yield Bond		1,253,961	41,266		0
Ultra Short Municipal		3,195	27,415		0
Tax-Free Income		847,415	42,835		0
Pennsylvania Tax-Free Income		1,030,435	660,347		0
New Jersey Tax-Free Income		246,886	163,901		0
Ohio Tax-Free Income		172,969	100,064		0
Delaware Tax-Free Income		142,436	64,002		0

107

Portfolios	Fees Paid (After Waivers)	Waivers	Reimbursements
Kentucky Tax-Free Income	159,811	94,272	0
Large Cap Value Equity	467,222	175,780	0
Large Cap Growth Equity	187,602	706,444	0
Dividend Achievers	0	276	0
Mid-Cap Value Equity	67,151	22,549	0
Mid-Cap Growth Equity	281,127	34,006	0
Small Cap Value Equity	307,855	8,059	0
Small Cap Core Equity	5,308	6,203	0
Small Cap Growth Equity	994,653	6,742	0
U.S. Opportunities	230,141	14,002	0
Global Science & Technology Opportunities	64,392	13,229	0
International Opportunities	469,215	115,595	0
Investment Trust	172,428	66,294	0
Index Equity	1,532,332	1,846,799	0
Asset Allocation	268,815	50,182	0

For the period from October 1, 2002, through September 30, 2003, the Fund paid the Administrators combined administration fees (after waivers), and the Administrators waived combined administration fees and reimbursed expenses, as follows:

Portfolios	Fees Paid (After Waivers)		Waivers	Reimbursements
Money Market	$	5,154,702	212,941	$	0
U.S. Treasury Money Market		1,378,577	29,100		0
Municipal Money Market		1,240,761	0		0
New Jersey Municipal Money Market		314,397	0		0
North Carolina Municipal Money Market		291,596	0		0
Ohio Municipal Money Market		280,296	0		0
Pennsylvania Municipal Money Market		974,804	0		0
Virginia Municipal Money Market		127,681	3,369		0
Low Duration Bond		2,194,434	240,894		0
Intermediate Government Bond		789,827	0		0
Intermediate Bond		1,361,234	95,379		0
Core Bond Total Return		3,299,634	300,859		0
Core PLUS Total Return		136,977	27,405		0
Government Income		469,726	12,483		0
Managed Income		2,188,766	53,824		0
GNMA		714,937	4,382		0
International Bond		377,590	0		0
High Yield Bond		937,942	13,845		0
Tax-Free Income		856,432	0		0
Pennsylvania Tax-Free Income		1,978,575	3,793		0
New Jersey Tax-Free Income		369,930	0		0
Ohio Tax-Free Income		300,886	0		0
Delaware Tax-Free Income		185,734	0		0
Kentucky Tax-Free Income		302,122	0		0
Large Cap Value Equity		962,857	0		0
Large Cap Growth Equity		414,530	0		0
Mid-Cap Value Equity		131,006	0		0
Mid-Cap Growth Equity		332,812	0		0
Small Cap Value Equity		322,848	0		0
Small Cap Core Equity		0	2,230		0
Small Cap Growth Equity		694,810	0		0
U.S. Opportunities		225,108	0		0

108

Portfolios	Fees Paid (After Waivers)		Waivers		Reimbursements
Global Science & Technology Opportunities		67,032		0		0
International Opportunities		297,578		0		0
Investment Trust		321,327		0		0
Index Equity		1,539,175		1,668,278		0
Asset Allocation		370,908		0		0
For the period from October 1, 2001, through September 30, 2002 (from December 7, 2001, through September 30, 2002 in the case of Core PLUS Total Return Portfolio, and January 2, 2002, through September 30, 2002, in the case of Small Cap Core Equity Portfolio), the Fund paid the Administrators combined administration fees (after waivers), and the Administrators waived combined administration fees and reimbursed expenses, as follows:
Portfolios	Fees Paid (After Waivers)		Waivers		Reimbursements
Money Market	$	6,001,604	$	0	$	0
U.S. Treasury Money Market		1,698,457		0		0
Municipal Money Market		1,286,761		0		0
New Jersey Municipal Money Market		313,303		0		0
North Carolina Municipal Money Market		245,935		0		0
Ohio Municipal Money Market		260,216		0		0
Pennsylvania Municipal Money Market		1,157,746		0		0
Virginia Municipal Money Market		106,113		2,865		0
Low Duration Bond		1,103,009		35,836		0
Intermediate Government Bond		801,550		0		0
Intermediate Bond		1,625,798		87,216		0
Core Bond Total Return		3,380,935		164,506		0
Core PLUS Total Return		71,612		11,461		0
Government Income		145,908		0		0
Managed Income		2,685,173		0		0
GNMA		452,137		0		0
International Bond		332,967		0		0
High Yield Bond		569,625		6,440		0
Tax-Free Income		845,474		0		0
Pennsylvania Tax-Free Income		2,107,654		0		0
New Jersey Tax-Free Income		360,188		0		0
Ohio Tax-Free Income		256,449		0		0
Delaware Tax-Free Income		189,806		0		0
Kentucky Tax-Free Income		333,811		0		0
Large Cap Value Equity		2,657,222		0		0
Large Cap Growth Equity		1,317,009		0		0
Mid-Cap Value Equity		445,755		0		0
Mid-Cap Growth Equity		835,963		0		0
Small Cap Value Equity		803,994		0		0
Small Cap Core Equity		1,658		1,658		0
Small Cap Growth Equity		1,668,197		0		0
U.S. Opportunities		427,493		0		0
Global Science & Technology Opportunities		112,581		0		0
International Opportunities		319,803		0		0
Investment Trust		1,462,630		0		0
Index Equity		3,655,489		0		0
Asset Allocation		810,286		0		0

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The Fund and its service providers may engage third party plan administrators who provide trustee, administrative and recordkeeping services for certain employee benefit, profit-sharing and retirement plans as agent for the Fund with respect to such plans, for the purpose of accepting orders for the purchase and redemption of shares of the Fund.

In addition, pursuant to a Shareholders’ Administrative Services Agreement, BlackRock provides certain shareholder liaison services in connection with the Fund’s investor service center. The Fund reimburses BlackRock for its costs in maintaining the service center, which costs include, among other things, employee salaries, leasehold expenses, and other out-of-pocket expenses.

Custodian and Transfer Agency Agreements. Pursuant to the terms of a custodian agreement (the “Custodian Agreement”) between the Fund and PFPC Trust Company (“PTC”), an affiliate of BlackRock, PTC or a sub-custodian (i) maintains a separate account or accounts in the name of each Portfolio, (ii) holds and transfers portfolio securities on account of each Portfolio, (iii) accepts receipts and makes disbursements of money on behalf of each Portfolio, (iv) collects and receives all income and other payments and distributions on account of each Portfolio’s securities and (v) makes periodic reports to the Board of Trustees concerning each Portfolio’s operations. PTC is authorized to select one or more banks or trust companies to serve as sub-custodian on behalf of the Fund, provided that, with respect to sub-custodians other than sub-custodians for non-U.S. securities, PTC remains responsible for the performance of all its duties under the Custodian Agreement and holds the Fund harmless from the acts and omissions of any sub-custodian. Citibank, N.A. serves as the international sub-custodian for various Portfolios of the Fund and has been appointed by the Board of Trustees as the Fund’s “foreign custody manager” under Rule 17f-5 of the 1940 Act. As foreign custody manager, Citibank, N.A. selects and monitors foreign sub-custodian banks and furnishes information relevant to the selection of foreign depositories.

For its services to the Fund under the Custodian Agreement, PTC receives a fee which is calculated based upon each investment portfolio’s average gross assets as follows: .01% of the first $250 million of each Portfolio’s average gross assets, .009% of the next $250 million of each Portfolio’s average gross assets, .0075% of the next $250 million of each Portfolio’s average gross assets, .007% of the next $250 million of each Portfolio’s average gross assets, .006% of the next $250 million of each Portfolio’s average gross assets and .005% of each Portfolio’s average gross assets in excess of $1.25 billion. PTC is also entitled to out-of-pocket expenses and certain transaction charges. PTC has undertaken to waive its custody fees with respect to the Index Equity Portfolio, which invests substantially all of its assets in the Index Master Portfolio.

PFPC, which has its principal offices at 301 Bellevue Parkway, Wilmington, DE 19809 and is an affiliate of BlackRock, serves as the transfer and dividend disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the “Transfer Agency Agreement”), under which PFPC (i) issues and redeems HL, Service, Investor, Institutional and BlackRock classes of shares in each Portfolio, (ii) addresses and mails all communications by each Portfolio to record owners of its shares, including reports to shareholders, dividend and distribution notices and proxy materials for its meetings of shareholders, (iii) maintains shareholder accounts and, if requested, sub-accounts and (iv) makes periodic reports to the Board of Trustees concerning the operations of each Portfolio. PFPC may, on 30 days’ notice to the Fund, assign its duties as transfer and dividend disbursing agent to any other affiliate of PNC Bank Corp. For its services with respect to the Fund’s Investor, HL, Institutional and Service Shares under the Transfer Agency Agreement, PFPC receives fees at the annual rate of .018% of the average net asset value of outstanding shares in each class in each Portfolio, plus per account fees and disbursements. For its services with respect to the Fund’s BlackRock Shares under the Transfer Agency Agreement, PFPC receives fees at the annual rate of .005% of the average net asset value of outstanding BlackRock Shares in each Portfolio, plus per account fees and disbursements.

PTC serves as the Trust’s custodian and PFPC serves as the Trust’s transfer and dividend disbursing agent. The Index Equity Portfolio bears its pro rata portion of the Index Master Portfolio’s custody and transfer and dividend disbursing fees and expenses.

Distributor and Distribution and Service Plan. The Fund has entered into a distribution agreement with the Distributor under which the Distributor, as agent, offers shares of each Portfolio on a continuous basis. The Distributor has agreed to use appropriate efforts to effect sales of the shares, but it is not obligated to sell any particular amount of shares. The Distributor’s principal business address is 760 Moore Road, King of Prussia, PA 19406. The Distributor is an affiliate of BlackRock.

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Pursuant to the Fund’s Amended and Restated Distribution and Service Plan (the “Plan”), the Fund may pay the Distributor and/or BlackRock or any other affiliate of PNC Bank fees for distribution and sales support services. Currently, as described further below, only HL Shares, Investor A Shares, Investor B Shares and Investor C Shares bear the expense of distribution fees under the Plan. In addition, the Fund may pay to brokers, dealers, financial institutions and industry professionals (including BlackRock, Hilliard Lyons and their affiliates) (collectively, “Service Organizations”) fees for the provision of personal services to shareholders. Effective July 1, 2004, the Fund eliminated its shareholder processing fee. In the past, BlackRock has retained a portion of the shareholder servicing fees and a significant portion of the shareholder processing fees paid by the Fund. The Plan provides, among other things, that: (i) the Board of Trustees shall receive quarterly reports regarding the amounts expended under the Plan and the purposes for which such expenditures were made; (ii) the Plan will continue in effect for so long as its continuance is approved at least annually by the Board of Trustees in accordance with Rule 12b-1 under the 1940 Act; (iii) any material amendment thereto must be approved by the Board of Trustees, including the trustees who are not “interested persons” of the Fund (as defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of the Plan or any agreement entered into in connection with the Plan (the “12b 1 Trustees”), acting in person at a meeting called for said purpose; (iv) any amendment to increase materially the costs which any class of shares may bear for distribution services pursuant to the Plan shall be effective only upon approval by a vote of a majority of the outstanding shares of such class and by a majority of the 12b-1 Trustees; and (v) while the Plan remains in effect, the selection and nomination of the Fund’s trustees who are not “interested persons” of the Fund shall be committed to the discretion of the Fund’s non-interested trustees.

The Plan is terminable as to any class of shares without penalty at any time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of a majority of the shares of such class.

With respect to HL Shares and Investor A Shares, the front-end sales charge and the distribution fee payable under the Plan (at a maximum annual rate of .10% of the average daily net asset value of each Portfolio’s outstanding HL Shares or Investor A Shares, as applicable) are used to pay commissions and other fees payable to Service Organizations and other broker/dealers who sell HL Shares and/or Investor A Shares.

With respect to Investor B Shares, Service Organizations and other broker/dealers receive commissions from the Distributor for selling Investor B Shares, which are paid at the time of the sale. The distribution fees payable under the Plan (at a maximum annual rate of .75% of the average daily net asset value of each Portfolio’s outstanding Investor B Shares) are intended to cover the expense to the Distributor of paying such up-front commissions, as well as to cover ongoing commission payments to broker/dealers. The contingent deferred sales charge is calculated to charge the investor with any shortfall that would occur if Investor B Shares are redeemed prior to the expiration of the conversion period, after which Investor B Shares automatically convert to Investor A Shares.

With respect to Investor C Shares, Service Organizations and other broker/dealers receive commissions from the Distributor for selling Investor C Shares, which are paid at the time of the sale. The distribution fees payable under the Plan (at a maximum annual rate of .75% of the average daily net asset value of each Portfolio’s outstanding Investor C Shares) are intended to cover the expense to the Distributor of paying such up-front commissions, as well as to cover ongoing commission payments to the broker/dealers. The contingent deferred sales charge is calculated to charge the investor with any shortfall that would occur if Investor C Shares are redeemed within 12 months of purchase.

The Fund is not required or permitted under the Plan to make distribution payments with respect to Service, Institutional or BlackRock Shares. However, the Plan permits BDI, BlackRock, PFPC, their affiliates and other companies that receive fees from the Fund to make payments relating to distribution and sales support activities out of their past profits or other sources available to them (and not as an additional charge to the Portfolios). BDI, BlackRock and their affiliates may pay affiliated and unaffiliated financial institutions, broker/dealers and/or their salespersons certain compensation for the sale and distribution of shares of the Fund or for services to the Fund and its shareholders. These payments (“Additional Payments”) would be in addition to the payments by the Fund described in this Statement of Additional Information for distribution and shareholder servicing. These Additional

111

Payments may take the form of, among other things, “due diligence” payments for a dealer’s examination of the Portfolios and payments for providing extra employee training and information relating to Portfolios; “listing” fees for the placement of the Portfolios on a dealer’s list of mutual funds available for purchase by its customers; “finders” or “referral” fees for directing investors to the Fund; “marketing support” fees for providing assistance in promoting the sale of the Funds’ shares; payments for the sale of shares and/or the maintenance of share balances; CUSIP fees; maintenance fees; and set-up fees regarding the establishment of new accounts. In addition, BDI, BlackRock and their affiliates may make Additional Payments to affiliated and unaffiliated entities for subaccounting, administrative and/or shareholder processing services that are in addition to the shareholder servicing fees paid by the Fund. The Additional Payments made by BDI, BlackRock and their affiliates may be a fixed dollar amount, may be based on the number of customer accounts maintained by a financial institution or broker/dealer, or may be based on a percentage of the value of shares sold to, or held by, customers of the affiliated and unaffiliated financial institutions or dealers involved, and may be different for different institutions and dealers. The Additional Payments described above are made from BDI’s, BlackRock’s, PFPC’s or their affiliates’ own assets pursuant to agreements with brokers and do not change the price paid by investors for the purchase of the Fund’s shares or the amount the Fund will receive as proceeds from such sales.

Additional Payments may be made, at the discretion of BDI, BlackRock, PFPC or their affiliates to Service Organizations in connection with the sale and distribution of Fund shares. Pursuant to applicable NASD regulations, the details of certain of these Additional Payments, including the Service Organizations receiving such Additional Payments, are required to be disclosed. As of the date of this Statement of Additional Information, as amended or supplemented from time to time, the following Service Organizations are receiving such Additional Payments: Citigroup, Fidelity, Merrill Lynch, MetLife, UBS, Morgan Stanley and Linsco/Private Ledger Corp. The level of Additional Payments made to Citigroup, Fidelity, Merrill Lynch, UBS, Morgan Stanley and Linsco/Private Ledger Corp. in any year will vary and normally will not exceed the sum of (a) 0.25% of such year’s Fund sales by that Service Organization and (b) 0.12% of the assets attributable to that Service Organization invested in equity portfolios of the Fund and 0.10% of the assets attributable to that Service Organization invested in fixed-income portfolios of the Fund.

The level of Additional Payments made to MetLife in any year will vary and will be calculated based on the following tables with respect to the purchase of Investor A Shares of all Non-Money Market Portfolios (except the Index Equity Portfolio) by MetLife 401(k) customers. For the tables below, the payments indicated will apply up to the indicated breakpoint (so that, for example, a purchase of $3,500,000 worth of Investor A Shares in the Low Duration Bond Portfolio will result in a payment of 1.00% on the first $500,000, 0.75% on the next $500,000, 0.50% on the next $2,000,000 and 0.25% on the final $500,000).

Low Duration Bond Portfolio:

Amount of Transaction at Offering Price	Additional Payment to MetLife (as % of Offering Price)
Less than $500,000	1.00	%
$500,000 but less than $1,000,000	0.75
$1 million but less than $3 million	0.50
$3 million but less than $15 million	0.25
$15 million and above	0.15

Inflation Protected Bond, Enhanced Income and UltraShort Municipal Portfolios:

Amount of Transaction at Offering Price	Additional Payment to MetLife (as % of Offering Price)
Less than $500,000	1.00	%
$500,000 but less than $1,000,000	0.75
$1 million but less than $3 million	0.15
$3 million but less than $15 million	0.10
$15 million and above	0.05

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Intermediate Government Bond, Intermediate Bond, Government Income, Managed Income, Core Bond Total Return, Core PLUS Total Return, GNMA, Intermediate PLUS Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Delaware Tax-Free Income and Kentucky Tax-Free Income Portfolios:

Amount of Transaction at Offering Price	Additional Payment to MetLife (as % of Offering Price)
Less than $1,000,000	1.00	%
$1 million but less than $3 million	0.50
$3 million but less than $15 million	0.25
$15 million and above	0.15

Large Cap Value Equity, Large Cap Growth Equity, Legacy, Asset Allocation, International Bond and High Yield Bond Portfolios and Investment Trust:

Amount of Transaction at Offering Price	Additional Payment to MetLife (as % of Offering Price)
Less than $1,000,000	1.00	%
$1 million but less than $3 million	0.75
$3 million but less than $15 million	0.50
$15 million and above	0.25

Mid-Cap Value Equity, Mid-Cap Growth Equity, Small Cap Value Equity, Small Cap Core Equity, Small Cap Growth Equity, International Opportunities, Global Science & Technology Opportunities, U.S. Opportunities, Dividend Achievers^TM, Small/Mid-Cap Growth, Aurora, Health Sciences, Global Resources and All-Cap Global Resources Portfolios:

Amount of Transaction at Offering Price	Additional Payment to MetLife (as % of Offering Price)
Less than $3,000,000	1.00	%
$3 million but less than $15 million	0.50
$15 million and above	0.25

In lieu of payments pursuant to the foregoing, BDI, BlackRock, PFPC or their affiliates may make payments to the above-named Service Organizations of an agreed-upon amount which will not exceed the amount that would have been payable pursuant to the formula or tables, respectively, and may also make similar payments to other Service Organizations.

If investment advisers, distributors or affiliates of mutual funds pay bonuses and incentives in differing amounts, financial firms and their financial consultants may have financial incentives for recommending a particular mutual fund over other mutual funds. In addition, depending on the arrangements in place at any particular time, a financial firm and its financial consultants may also have a financial incentive for recommending a particular share class over other share classes. You should consult your financial advisor and review carefully any disclosure by the financial firm as to compensation received by your financial advisor for more information about Additional Payments.

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Furthermore, the Distributor, BlackRock and their affiliates may contribute to various non-cash and cash incentive arrangements to promote the sale of shares, and may sponsor various contests and promotions subject to applicable NASD regulations in which participants may receive prizes such as travel awards, merchandise and cash. Subject to applicable NASD regulations, the Distributor, BlackRock and their affiliates may also (i) pay for the travel expenses, meals, lodging and entertainment of broker/dealers, financial institutions and their salespersons in connection with educational and sales promotional programs, (ii) sponsor speakers, educational seminars and charitable events and (iii) provide other sales and marketing conferences and other resources to broker/dealers, financial institutions and their salespersons.

BlackRock, Inc., the parent company of BAI, has agreed to pay PNC Bank, National Association and PNC Bank, Delaware (including Hilliard Lyons Asset Management, Wealth Management, Hawthorn and Institutional Investment Group) fees for administration and servicing with respect to assets of the Fund attributable to shares held by customers of such entities. These assets are predominantly in the Institutional Share Class of the Funds, with respect to which the Fund does not pay shareholder servicing and shareholder providing fees under the Plan. The fees are paid according to the following schedule: Money Market Portfolios - .15% of net assets; Bond Portfolios - .20% of net assets (except that with respect to the Enhanced Income, UltraShort Municipal and Inflation Protected Bond Portfolios, the fee is .05% of net assets); and Equity Portfolios - .25% of net assets (except that with respect to the Index Equity Portfolio, the fee is .04% of net assets).

Service Organizations may charge their clients additional fees for account-related services. Service Organizations may charge their customers a processing or service fee in connection with the purchase or redemption of Fund shares. The amount and applicability of such a fee is determined and disclosed to its customers by each individual Service Organization. Processing or service fees typically are fixed, nominal dollar amounts and are in addition to the sales and other charges described in the Prospectuses and this Statement of Additional Information. Your Service Organization will provide you with specific information about any processing or service fees you will be charged.

Pursuant to the Plan, the Fund enters into service arrangements with Service Organizations pursuant to which Service Organizations will render certain support services to their customers (“Customers”) who are the beneficial owners of BlackRock Shares of the Small Cap Value Equity Portfolio, and HL Shares, Service, Investor A, Investor B and Investor C Shares of all Portfolios. Such services will be provided to Customers who are the beneficial owners of Shares of such classes and are intended to supplement the services provided by the Fund’s Administrators and transfer agent to the Fund’s shareholders of record. In consideration for payment of a service fee of up to .25% (on an annualized basis) of the average daily net asset value of the BlackRock Shares of the Small Cap Value Equity Portfolio, and HL Shares, Service Shares, Investor A, Investor B and Investor C Shares of all Portfolios owned beneficially by their Customers, Service Organizations may provide general shareholder liaison services, including, but not limited to (i) answering customer inquiries regarding account status and history, the manner in which purchases, exchanges and redemptions of shares may be effected and certain other matters pertaining to the Customers’ investments; and (ii) assisting Customers in designating and changing dividend options, account designations and addresses. On or about July 1, 2005, the annual service fee payable by Investor A, B, C and Service Shares of the Index Equity Portfolio will be reduced from .25% of average daily net assets to .15% of average daily net assets.

To the extent a shareholder is not associated with a Service Organization, the shareholder servicing fees will be paid to BlackRock, and BlackRock will provide services. For the fiscal year ended September 30, 2004, BlackRock retained an aggregate of $74,410.62, $241,771.32 and $1,777,261.96 in distribution, shareholder servicing and shareholder processing fees, respectively.

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For the twelve months ended September 30, 2004, the Portfolios’ share classes bore the following distribution, shareholder servicing and shareholder processing fees under the Plan:

Portfolios - BlackRock Shares	Net Distribution Fees	Distribution Waivers	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
Small Cap Value Equity	N/A	N/A	1,043	—	N/A	—
Portfolios – Hilliard Lyons Shares	Net Distribution Fees	Distribution Waivers	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
Money Market	—	131,406	328,910	—	153,788	—
Municipal Money Market	—	141,353	—	353,384	162,056	478
Portfolios – Investor A Shares	Net Distribution Fees	Distribution Waivers	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
Money Market	—	406,854	1,016,216	—	453,890	—
U. S. Treasury Money Market	—	46,352	115,793	—	52,463	—
Municipal Money Market	—	6,591	16,476	—	231	7,222
New Jersey Municipal Money Market	—	14,454	36,192	—	478	16,403
North Carolina Municipal Money Market	—	331	828	—	—	376
Ohio Municipal Money Market	—	26,269	65,570	—	28,454	—
Pennsylvania Municipal Money Market	—	35,557	88,393	—	—	40,726
Virginia Municipal Money Market	N/A	N/A	N/A	N/A	N/A	N/A
Low Duration Bond	1,185	98,861	251,106	—	117,305	—
Intermediate Government Bond	605	51,702	131,843	—	60,282	—
Intermediate Bond	440	39,636	100,200	—	45,773	—
Core Bond Total Return	1,315	126,698	322,408	—	142,673	—
Core PLUS Total Return	—	8	21	—	10	—
Government Income	949	107,471	273,130	—	117,943	—
Managed Income	546	42,597	107,803	—	50,085	—
GNMA	223	19,082	48,501	—	22,209	—
International Bond	945	104,722	264,390	—	112,626	—
High Yield Bond	903	71,127	180,692	—	82,911	—
Enhanced Income	—	—	—	—	—	—
Inflation Protected Bond	—	8	20	—	—	—
Intermediate Plus	—	—	—	—	—	—
Tax-Free Income PLUS Bond	30	7,873	20,356	—	9,275	—
Pennsylvania Tax-Free Income	407	34,454	88,767	—	40,459	—
New Jersey Tax-Free Income	64	5,868	14,853	—	6,627	—
Ohio Tax-Free Income	74	5,358	14,037	—	6,573	—
Delaware Tax-Free Income	106	15,079	27,676	—	11,893	—
Kentucky Tax-Free Income	55	5,315	13,393	—	5,936	—
UltraShort Municipal	—	—	—	—	—	—
Large Cap Value Equity	757	63,888	148,182	—	66,242	—
Large Cap Growth Equity	328	24,550	62,863	—	30,000	—
Mid-Cap Value Equity	46	4,235	10,408	—	4,917	—
Mid-Cap Growth Equity	296	28,475	74,536	—	33,553	—

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Portfolios – Investor A Shares	Net Distribution Fees	Distribution Waivers	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
Small Cap Value Equity	465	39,380	100,964	—	46,663	—
Small Cap Growth Equity	1,320	129,014	328,202	—	144,899	—
Small Cap Core Equity	4	1,690	4,221	—	1,504	—
U.S. Opportunities Equity	342	31,959	82,961	—	38,102	—
Global Science and Technology Opp. Equity	140	11,755	30,762	—	14,741	—
International Opportunities Equity	493	72,522	183,191	—	73,839	—
Investment Trust	206	19,203	48,205	—	22,115	—
Index Equity	4,269	307,441	767,303	—	385,063	—
Asset Allocation	911	76,367	194,898	—	91,891	—
Portfolios – Investor B Shares	Net Distribution Fees	Distribution Waivers	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
Money Market	72,634	—	219	24,191	5	11,375
U. S. Treasury Money Market	—	—	—	—	—	—
Municipal Money Market	—	—	—	—	—	—
New Jersey Municipal Money Market	—	—	—	—	—	—
North Carolina Municipal Money Market	—	—	—	—	—	—
Ohio Municipal Money Market	—	—	—	—	—	—
Pennsylvania Municipal Money Market	—	—	—	—	—	—
Virginia Municipal Money Market	—	—	—	—	—	—
Low Duration Bond	560,018	—	186,652	—	86,009	—
Intermediate Government Bond	92,777	—	31,022	—	14,118	—
Intermediate Bond	103,887	—	34,618	—	15,551	—
Core Bond Total Return	472,887	—	157,548	—	72,801	—
Core PLUS Total Return	603	—	201	—	86	—
Government Income	370,353	—	123,699	—	57,169	—
Managed Income	73,645	—	24,557	—	11,237	—
GNMA	226,242	—	75,424	—	35,079	—
International Bond	115,131	—	38,422	—	16,885	—
High Yield Bond	785,156	—	261,535	—	122,195	—
Enhanced Income	—	—	—	—	—	—
Inflation Protected Bond	26	—	9	—	—	—
Intermediate PLUS Bond	—	—	—	—	—	—
Tax-Free Income	49,450	—	16,384	—	7,616	—
Pennsylvania Tax-Free Income	164,923	—	50,650	—	20,638	—
New Jersey Tax-Free Income	91,422	—	30,338	—	13,833	—
Ohio Tax-Free Income	78,735	—	26,293	—	11,832	—
Delaware Tax-Free Income	64,121	—	21,363	—	9,580	—
Kentucky Tax-Free Income	29,678	—	9,916	—	4,436	—
UltraShort Municipal	—	—	—	—	—	—
Large Cap Value Equity	150,098	—	47,551	—	21,590	—
Large Cap Growth Equity	109,883	—	36,695	—	17,044	—
Mid-Cap Value Equity	57,922	—	19,194	—	8,755	—
Mid-Cap Growth Equity	275,322	—	92,479	—	42,748	—
Small Cap Value Equity	121,243	—	41,953	—	19,145	—
Small Cap Growth Equity	206,974	—	69,152	—	32,408	—
Small Cap Core Equity	8,106	—	1,442	—	492	—

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Portfolios – Investor B Shares	Net Distribution Fees	Distribution Waivers	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
U.S. Opportunities Equity	332,450	—	112,488	—	52,112	—
Global Science and Technology Opp. Equity	119,879	—	40,018	—	19,358	—
International Opportunities Equity	319,564	—	106,719	—	47,498	—
Investment Trust	165,625	—	55,405	—	25,349	—
Index Equity	1,494,836	—	496,879	—	228,918	—
Asset Allocation	318,481	—	105,790	—	47,894	—
Portfolios – Investor C Shares	Net Distribution Fees	Distribution Waivers	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
Money Market	8,459	—	—	24,191	—	1,356
U. S. Treasury Money Market	—	—	—	—	—	—
Municipal Money Market	—	—	—	—	—	—
New Jersey Municipal Money Market	—	—	—	—	—	—
North Carolina Municipal Money Market	—	—	—	—	—	—
Ohio Municipal Money Market	—	—	—	—	—	—
Pennsylvania Municipal Money Market	—	—	—	—	—	—
Virginia Municipal Money Market	—	—	—	—	—	—
Low Duration Bond	1,166,910	—	388,974	—	183,636	—
Intermediate Government Bond	122,758	—	40,917	—	19,107	—
Intermediate Bond	110,698	—	36,899	—	16,726	—
Core Bond Total Return	659,113	—	219,700	—	99,262	—
Core PLUS Total Return						—
Government Income	206,303	—	68,375	—	31,324	—
Managed Income	6,168	—	2,056	—	912	—
GNMA	353,908	—	117,968	—	54,776	—
International Bond	212,671	—	70,898	—	29,380	—
High Yield Bond	550,918	—	181,759	—	84,946	—
Enhanced Income	—	—	—	—	—	—
Inflation Protected Bond	1	—	—	—	—	—
Intermediate PLUS Bond	—	—	—	—	—	—
Tax-Free Income	25,544	—	8,590	—	3,700	—
Pennsylvania Tax-Free Income	15,309	—	5,103	—	2,373	—
New Jersey Tax-Free Income	19,620	—	6,536	—	2,729	—
Ohio Tax-Free Income	41,270	—	13,757	—	6,204	—
Delaware Tax-Free Income	112,703	—	37,567	—	16,962	—
Kentucky Tax-Free Income	9,808	—	3,269	—	1,448	—
UltraShort Municipal						—
Large Cap Value Equity	45,964	—	15,446	—	6,866	—
Large Cap Growth Equity	21,030	—	7,008	—	3,162	—
Mid-Cap Value Equity	18,106	—	6,009	—	2,679	—
Mid-Cap Growth Equity	100,159	—	33,351	—	15,604	—
Small Cap Value Equity	50,262	—	16,751	—	7,543	—
Small Cap Growth Equity	112,829	—	37,607	—	17,228	—
Small Cap Core Equity	4,328	—	2,702	—	634	—
U.S. Opportunities Equity	169,265	—	56,312	—	26,167	—
Global Science and Technology Opp. Equity	30,661	—	10,205	—	4,338	—

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Portfolios – Investor C Shares	Net Distribution Fees	Distribution Waivers	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
International Opportunities Equity	340,641	—	113,485	—	48,187	—
Investment Trust	16,009	—	5,329	—	2,279	—
Index Equity	2,327,323	—	778,546	—	354,937	—
Asset Allocation	38,200	—	12,753	—	5,732	—

Portfolios – Service Shares	Net Distribution Fees	Net Shareholder Servicing Fees	Shareholder Servicing Waivers	Net Shareholder Processing Fees	Shareholder Processing Waivers
New Jersey Municipal Money Market	N/A	109,381	—	70,676	—
North Carolina Municipal Money Market	N/A	351	—	217	—
Ohio Municipal Money Market	N/A	28,696	—	19,086	—
Pennsylvania Municipal Money Market	N/A	65,075	—	43,968	—
Virginia Municipal Money Market	N/A	—	968	645	323
Low Duration Bond	N/A	534,735	—	321,798	—
Intermediate Government Bond	N/A	1,924	—	1,189	—
Intermediate Bond	N/A	126,676	—	75,585	—
Core Bond Total Return	N/A	252,245	—	157,890	—
Core PLUS Total Return	N/A	18	—	—	—
Government Income	N/A	—	—	—	—
Managed Income	N/A	150,427	—	99,372	—
GNMA	N/A	3,410	—	2,053	—
International Bond	N/A	125,492	—	76,667	—
High Yield Bond	N/A	180,971	—	114,189	—
Enhanced Income	N/A	—	—	—	—
Inflation Protected Bond	N/A	—	—	—	—
Intermediate PLUS Bond	N/A	—	—	—	—
Tax - Free Income	N/A	4,577	—	2,864	—
Pennsylvania Tax-Free Income	N/A	10,681	—	6,679	—
New Jersey Tax-Free Income	N/A	27,325	—	17,286	—
Ohio Tax-Free Income	N/A	667	—	259	—
Delaware Tax-Free Income	N/A	—	—	—	—
Kentucky Tax-Free Income	N/A	333	—	176	—
UltraShort Municipal	N/A	—	—	—	—
Large Cap Value Equity	N/A	100,042	—	71,674	—
Large Cap Growth Equity	N/A	61,766	—	42,321	—
Mid-Cap Value Equity	N/A	7,840	—	5,491	—
Mid-Cap Growth Equity	N/A	22,537	—	15,472	—
Small Cap Value Equity	N/A	7,049	—	4,906	—
Small Cap Growth Equity	N/A	52,504	—	33,632	—
Small Cap Core Equity	N/A	—	—	—	—
U.S. Opportunities Equity	N/A	3,406	—	392	—
Global Science and Technology Opp. Equity	N/A	182	—	124	—
International Equity	N/A	13,178	—	10,288	—
International Opportunities Equity	N/A	18,751	—	8,383	—
Investment Trust	N/A	2,776	—	1,715	—
Index Equity	N/A	152,414	—	102,345	—
Asset Allocation	N/A	3,835	—	2,433	—

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Code of Ethics. The Fund, the Trust, BlackRock, BFM, BIL, BIMC, DFA and the Distributor have adopted codes of ethics under Rule 17j-1 under the 1940 Act. These codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Fund.

Proxy Voting Policies. The Fund has delegated proxy voting responsibilities to BlackRock and its affiliates, subject to the general oversight of the Fund’s Board of Trustees. The Fund expects BlackRock and its affiliates to vote proxies related to the Fund’s portfolio securities for which the Fund has voting authority consistent with the Fund’s best interests. BlackRock has adopted its own proxy voting policies (the “Proxy Voting Policy”) to be used in voting the Fund’s proxies, which are summarized below.

BlackRock recognizes that implicit in the initial decision to retain or invest in the security of a corporation is approval of its existing corporate ownership structure, its management, and its operations. Accordingly, proxy proposals that would change the existing status of a corporation are reviewed carefully and supported only when it seems clear that the proposed changes are likely to benefit the corporation and its shareholders. Notwithstanding this favorable predisposition, BlackRock assesses management on an ongoing basis both in terms of its business capability and its dedication to the shareholders to ensure that BlackRock’s continued confidence remains warranted. If BlackRock determines that management is acting on its own behalf instead of for the well being of the corporation, it will vote to support the shareholder.

BlackRock’s proxy voting policy and its attendant recommendations attempt to generalize a complex subject. Specific fact situations, including differing voting practices in jurisdictions outside the United States, might warrant departure from these guidelines. With respect to voting proxies of non-U.S. companies, a number of logistical problems may arise that may have a detrimental effect on BlackRock’s ability to vote such proxies in the best interests of the Fund. Accordingly, BlackRock may determine not to vote proxies if it believes that the restrictions or other detriments associated with such vote outweigh the benefits that will be derived by voting on the company’s proposal.

Additionally, situations may arise that involve an actual or perceived conflict of interest. For example, BlackRock may manage assets of a pension plan of a company whose management is soliciting proxies, or a BlackRock employee may have a close relative who serves as a director or executive of a company that is soliciting proxies. BlackRock’s policy in all cases is to vote proxies based on its clients’ best interests and not the product of the conflict.

BlackRock has engaged Institutional Shareholder Services (“ISS”) to assist it in the voting of proxies. ISS analyzes all proxy solicitations BlackRock receives for its clients and advises BlackRock how, based upon BlackRock’s guidelines, the relevant votes should be cast.

Below is a summary of some of the procedures described in the Proxy Voting Policy.

Routine Matters. BlackRock will generally support routine proxy proposals, amendments, or resolutions if they do not measurably change the structure, management control, or operation of the issuer and they are consistent with industry standards as well as the corporate laws of the state of incorporation of the issuer.

Social Issues. If BlackRock has determined that management is generally socially responsible, it will generally vote against social issue proposals, which are generally proposed by shareholders who believe that the corporation’s internally adopted policies are ill-advised or misguided.

Financial/Corporate Issues. BlackRock will generally vote in favor of proposals that seek to change a corporation’s legal, business or financial structure provided the position of current shareholders is preserved or enhanced.

Shareholder Rights. Proposals in this category are made regularly both by management and shareholders. They can be generalized as involving issues that transfer or realign board or shareholder voting power. BlackRock will generally oppose any proposal aimed solely at thwarting potential takeover offers by requiring, for example, super-majority approval. At the same time it believes stability and continuity promote profitability. Individual proposals may have to be carefully assessed in the context of their particular circumstances.

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Copies of the proxy voting record of the Portfolios are available without charge, upon request, by calling 1-800-699-1236 and are posted on the Commission’s website at http://www.sec.gov and reflect the twelve-month period beginning July 1 and ending June 30.

In the case of the Trust, the Board of Trustees has delegated the authority to vote proxies for the portfolio securities held by the Index Master Portfolio to DFA in accordance with the Proxy Voting Policies and Procedures (the “Voting Policies”) and Proxy Voting Guidelines (“Voting Guidelines”) adopted by DFA.

The Investment Committee at DFA is generally responsible for overseeing DFA’s proxy voting process. The Investment Committee may designate one or more of its members to oversee specific, on going compliance with respect to the Voting Policies and may designate other personnel of DFA to vote proxies on behalf of the Index Master Portfolio, including all authorized traders of DFA.

DFA votes proxies in a manner consistent with the best interests of the Index Master Portfolio. Generally, DFA analyzes proxy statements on behalf of the Index Master Portfolio in accordance with the Voting Policies and the Voting Guidelines. Most proxies that DFA receives will be voted in accordance with the predetermined Voting Guidelines. Since nearly all proxies are voted in accordance with the Voting Guidelines, it normally will not be necessary for DFA to make an actual determination of how to vote a particular proxy, thereby largely eliminating conflicts of interest for DFA during the proxy voting process. However, the Proxy Policies do address the procedures to be followed if a conflict of interest arises between the interests of the Index Master Portfolio and the interests of DFA or its affiliates. If an Investment Committee member has actual knowledge of a conflict of interest and recommends a vote contrary to the Voting Guidelines, DFA, prior to voting, will fully disclose the conflict to a disinterested Trustee of the Trust and vote the proxy in accordance with the direction of such disinterested Trustee.

The Voting Guidelines summarize DFA’s positions on various issues and give a general indication as to how DFA will vote proxies on each issue. DFA will usually vote proxies in accordance with the Voting Guidelines. However, DFA reserves the right to vote certain issues counter to the Voting Guidelines if, after a review of the matter (which analysis will be documented in writing), DFA believes that the Index Master Portfolio’s best interests would be served by such vote. To the extent that the Voting Guidelines do not address a potential voting issue DFA will vote on such issue in a manner that is consistent with the spirit of the Voting Guidelines and that DFA believes would be in the best interest in the Index Master Portfolio. Pursuant to the Voting Guidelines DFA generally votes FOR matters such as: (i) routine business decisions (such as stock splits, name changes and setting the number of directors); (ii) reverse anti-takeover amendments; (iii) auditors; (iv) directors; (v) proposals establishing or increasing indemnification of directors; (vi) proposals eliminating or reducing director’s liability; (vii) equal access to the proxy; (viii) the right to act by written consent of shareholders and to hold special meetings of shareholders; (ix) the separation of audit and consulting responsibilities; and (x) confidential voting. As provided in the Voting Guidelines, DFA generally votes AGAINST matters such as: (i) anti-takeover measures (such as reincorporation to facilitate a takeover defense, adoption of fair price amendments, institution of classified boards of directors, elimination of cumulative voting and creation of a super majority provisions); (ii) the issuance of a new class of stock with unequal voting rights; (iii) blank check preferred stock proposals; (iv) other employee compensation plans; and (v) various shareholder amendments. The Voting Guidelines also provide that DFA will generally consider on an individual basis such proposals as: (i) increasing authorized common stock; (ii) establishing or increasing a stock option plan or other employee compensation plan; (iii) approving a reorganization or merger; (iv) approving a proposal by a dissident shareholder in a proxy battle and (v) issues related to independent directors.

Under certain circumstances, DFA may not be able to vote proxies or DFA may find that the expected economic costs from voting outweigh the benefits associated with voting. Generally DFA may not vote proxies on non-U.S. securities due to local restrictions, customs or anticipated expenses.

Copies of the proxy voting record of the Index Master Portfolio are available without charge, upon request, by calling collect: (310) 395-8005 and are posted on the Commission’s website at http://www.sec.gov and reflect the twelve-month period beginning July 1, 2003 and ending June 30, 2004.

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Disclosure of Portfolio Holdings. The Board of Trustees and BlackRock have each approved Portfolio Information Distribution Guidelines (the “Guidelines”) regarding the disclosure of the Fund’s portfolio securities and other portfolio information. The purpose of the Guidelines is to ensure that (i) shareholders and prospective shareholders of the Fund have equal access to portfolio holdings and characteristics and (ii) third parties (such as consultants, intermediaries and third party data providers) receive such information no more frequently than shareholders and prospective shareholders.

Asset and Return Information. Data on NAV’s, asset levels (by total Portfolio and share class), accruals, yields, capital gains, dividends and Portfolio returns (net of fees by share class) are available to shareholders, prospective shareholders, consultants, intermediaries and third party data providers upon request, as soon as such data is available. Data on number of shareholders (total and by share class) and benchmark returns (including performance measures such as standard deviation, information ratio, Sharpe ratio, alpha, and beta) are available to shareholders, prospective shareholders, consultants, intermediaries and third party data providers as soon as such data is released after month-end.

Portfolio Characteristics. Examples of portfolio characteristics include sector allocation, credit quality breakdown, maturity distribution, duration and convexity measures, average credit quality, average maturity, average coupon, top 10 holdings with percent of the Portfolio held, average market capitalization, capitalization range, ROE, P/E, P/B, P/CF, P/S and EPS.

1. Month-end portfolio characteristics are available to shareholders, prospective shareholders, intermediaries and consultants on the fifth calendar day after month-end.⁷

2. Fund Fact Sheets, which contain certain portfolio characteristics, are available to shareholders, prospective shareholders, intermediaries and consultants on a quarterly basis and will be posted to the Fund’s website immediately upon becoming available.

Portfolio Holdings. In addition to position description, portfolio holdings may also include ticker if equity, face amount or quantity, CUSIP or SEDOL, market value, market price, yield, weighted average life, duration and convexity of each security in a Portfolio as of a specific date.

1. Month-end portfolio holdings are available to shareholders, prospective shareholders, intermediaries and consultants on the 20^th calendar day after month-end.⁷

2. Quarter-end portfolio holdings are available to third party data providers (e.g., Lipper, Morningstar, Bloomberg, Thomson and S&P) on the 20^th calendar day after quarter-end.⁷

Other Information. To the extent other Fund information such as attribution analyses or security-specific information (e.g., information about Portfolio holdings where an issuer has been downgraded, been acquired or declared bankruptcy) is provided on an individual basis, such information shall also be made available to existing and prospective shareholders through the Fund’s website. The executive officers of the Fund may authorize disclosure of the Fund’s portfolio securities and other portfolio information.

Implementation. All Fund and BlackRock employees must adhere to the Guidelines when responding to inquiries from shareholders, prospective shareholders, consultants, intermediaries and third party data providers. With respect to requests for portfolio information, BlackRock maintains a request log that is reviewed regularly. The Fund’s Chief Compliance Officer (“CCO”) is responsible for oversight of compliance with the Guidelines and will recommend to the Board of Trustees any changes to the Guidelines that he deems necessary or appropriate to ensure the Fund’s and BlackRock’s compliance.

⁷ The precise number of days specified above may vary slightly from period to period depending on whether the fifth or the 20^th calendar day falls on a weekend or holiday.

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Ongoing Arrangements. As of January 31, 2005, the Fund has ongoing arrangements with the following entities to make available portfolio holdings information:

1. PFPC Trust Company pursuant to the Fund’s Amended and Restated Custodian Agreement under which the Fund’s portfolio holdings information is provided daily on a real-time basis.

2. PFPC Inc. pursuant to the Fund’s Amended and Restated Administration Agreement under which the Fund’s portfolio holdings information is provided daily on a real-time basis.

3. Deloitte & Touche LLP, the Fund’s independent registered public accountant, whereby the Fund’s portfolio holdings information is provided in connection with the preparation of the Fund’s annual financial statements.

With respect to each such arrangement, the Fund has a legitimate business purpose for the release of information. The release of the information is subject to confidential treatment to prohibit the entity from sharing with an unauthorized source or trading upon the information provided. The Fund, BlackRock and their affiliates do not receive any compensation or other consideration in connection with such arrangements.

Disclosure by the Index Master Portfolio. DFA and the Board of Trustees of the Trust Company (the “Trust’s Board”) have adopted a policy (the “Policy”) to govern disclosure of the portfolio holdings of the Index Master Portfolio (“Holdings Information”), and to prevent the misuse of material non-public Holdings Information. DFA has determined that the Policy and its procedures (1) are reasonably designed to ensure that disclosure of Holdings Information is in the best interests of the shareholders of the Index Master Portfolio, and (2) appropriately address the potential for material conflicts of interest.

Disclosure of Holdings Information as Required by Applicable Law. Holdings Information (whether a partial listing of portfolio holdings or a complete listing of portfolio holdings) shall be disclosed to any person as required by applicable law, rules and regulations.

Online Disclosure of Portfolio Holdings Information. The Index Master Portfolio generally discloses its ten largest portfolio holdings and the percentages that each of these ten largest portfolio holdings represent of the Index Master Portfolio’s total assets (collectively, “ten largest holdings”), as of the most recent calendar quarter-end, online at DFA’s public website, www.dfaus.com, 30 calendar days after the end of each calendar quarter. This online disclosure may also include information regarding the Index Master Portfolio’s industry allocations.

The Index Master Portfolio generally discloses its complete Holdings Information (other than cash and cash equivalents), as of month-end, online at DFA’s public website, www.dfaus.com, three months following the month-end.

Disclosure of Holdings Information to Recipients. Each of DFA’s Chairmen, Director of Global Institutional Services, Executive Vice President and General Counsel (together, the “Designated Persons”) may authorize disclosing non-public Holdings Information more frequently or at different periods than as described above solely to those financial advisors, registered accountholders, authorized consultants, authorized custodians, or third-party data service providers (each a “Recipient”) who: (1) specifically request the more current non-public Holdings Information, and (2) execute a Use and Nondisclosure Agreement (each a “Nondisclosure Agreement). Each Nondisclosure Agreement subjects the Recipient to a duty of confidentiality with respect to the non-public Holdings Information, and prohibits the Recipient from trading based on the non-public Holdings Information. Any non-public Holdings Information that is disclosed shall not include any material information about the Index Master Portfolio’s trading strategies or pending portfolio transactions.

As of March 31, 2005, DFA and the Trust had ongoing arrangements with the following Recipients to make available non-public Holdings Information relating to the Index Master Portfolio. The non-public Holdings Information provided to Recipients under the Nondisclosure Agreements is not subject to a time delay before dissemination.

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Recipient	Business Purpose	Frequency
PFPC Trust Company	Index Master Portfolio Custodian	Daily
PFPC Inc.	Index Master Portfolio Transfer Agent	Daily
BlackRock Advisors, Inc.	Administering the Index Equity Portfolio	Quarterly
Fincom Technologies, LLC	Monitoring investor exposure and investment strategy	Quarterly
Northern Trust Company	Monitoring investor exposure and investment strategy	Upon request
Bank of New York	Monitoring investor exposure and investment strategy	Upon request
Wilshire Associates	Monitoring investor exposure and investment strategy	Quarterly

In addition, certain employees of DFA and its subsidiaries receive Holdings Information on a quarterly, monthly or daily basis, or upon request, in order to perform their business functions. None of the Index Master Portfolio, DFA or any other party receives any compensation in connection with these arrangements.

The Policy includes the following procedures to ensure that disclosure of Holdings Information is in the best interests of shareholders, and to address any conflicts between the interests of shareholders, on the one hand, and the interests of DFA, DFAS or any affiliated person of the Trust, DFA or DFAS, on the other. In order to protect the interests of shareholders of the Index Master Portfolio, and to ensure no adverse effect on shareholders, in the limited circumstances where a Designated Person is considering making non-public Holdings Information available to a Recipient, DFA’s Director of Global Institutional Services and the Chief Compliance Officer of the Trust will consider any conflicts of interest. If the Chief Compliance Officer, following appropriate due diligence, determines that (1) the Index Master Portfolio has a legitimate business purpose for providing the non-public Holdings Information to a Recipient, and (2) disclosure of non-public Holdings Information to the Recipient would be in the best interests of shareholders and will not adversely affect the shareholders, then the Chief Compliance Officer may approve the proposed disclosure.

The Chief Compliance Officer documents all disclosures of non-public Holdings Information (including the legitimate business purpose for the disclosure), and periodically reports to the Trust’s Board on such arrangements. The Chief Compliance Officer is also responsible for ongoing monitoring of the distribution and use of non-public Holdings Information. Such arrangements are reviewed by the Chief Compliance Officer on an annual basis. Specifically, the Chief Compliance Officer requests an annual certification from each Recipient that the Recipient has complied with all terms contained in the Nondisclosure Agreement. Recipients who fail to provide the requested certifications are prohibited from receiving non-public Holdings Information.

The Trust’s Board exercises continuing oversight of the disclosure of Holdings Information by: (1) overseeing the implementation and enforcement of the Policy by the Chief Compliance Officer of DFA and of the Trust; (2) considering reports and recommendations by the Chief Compliance Officer concerning the implementation of the Policy and any material compliance matters that may arise in connection with the Policy; and (3) considering whether to approve or ratify any amendments to the Policy. DFA and the Trust’s Board reserve the right to amend the Policy at any time, and from time to time without prior notice, in their sole discretion.

Prohibitions on Disclosure of Portfolio Holdings and Receipt of Compensation. No person is authorized to disclose Holdings Information or other investment positions (whether online at www.dfaus.com, in writing, by fax, by e-mail, orally or by other means) except in accordance with the Policy. In addition, no person is authorized to make disclosure pursuant to the Policy if such disclosure is otherwise in violation of the antifraud provisions of the federal securities laws.

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The Policy prohibits the Index Master Portfolio, DFA or an affiliate thereof from receiving any compensation or other consideration of any type for the purpose of obtaining disclosure of non-public Holdings Information or other investment positions. “Consideration” includes any agreement to maintain assets in the Index Master Portfolio or in other investment companies or accounts managed by DFA or by any affiliated person of DFA.

The Policy and its procedures are intended to provide useful information concerning the Index Master Portfolio to existing and prospective shareholders, while at the same time preventing the improper use of Holdings Information. However, there can be no assurance that the furnishing of any Holdings Information is not susceptible to inappropriate uses, particularly in the hands of sophisticated investors, or that the Holdings Information will not in fact be misused in other ways, beyond the control of DFA.

EXPENSES

Expenses are deducted from the total income of each Portfolio before dividends and distributions are paid. These expenses include, but are not limited to, fees paid to BlackRock, PFPC, transfer agency fees, fees and expenses of officers and trustees who are not affiliated with BlackRock, the Distributor or any of their affiliates, taxes, interest, legal fees, custodian fees, auditing fees, distribution fees, shareholder servicing fees, fees and expenses in registering and qualifying the Portfolios and their shares for distribution under federal and state securities laws, expenses of preparing prospectuses and statements of additional information and of printing and distributing prospectuses and statements of additional information to existing shareholders, expenses relating to shareholder reports, shareholder meetings and proxy solicitations, fidelity bond and trustees and officers liability insurance premiums, the expense of independent pricing services and other expenses which are not expressly assumed by BlackRock or the Fund’s service providers under their agreements with the Fund. Any general expenses of the Fund that do not belong to a particular investment portfolio will be allocated among all investment portfolios by or under the direction of the Board of Trustees in a manner the Board determines to be fair and equitable.

PORTFOLIO TRANSACTIONS

In executing portfolio transactions, the adviser and sub-advisers seek to obtain the best price and most favorable execution for a Portfolio, taking into account such factors as the price (including the applicable brokerage commission or dealer spread), size of the order, difficulty of execution and operational facilities of the firm involved. While the adviser and sub-advisers generally seek reasonably competitive commission rates, payment of the lowest commission or spread is not necessarily consistent with obtaining the best price and execution in particular transactions. Payments of commissions to brokers who are affiliated persons of the Fund, or the Trust with respect to the Index Master Portfolio (or affiliated persons of such persons), will be made in accordance with Rule 17e-1 under the 1940 Act. With respect to the Index Master Portfolio, commissions paid on such transactions would be commensurate with the rate of commissions paid on similar transactions to brokers that are not so affiliated.

No Portfolio has any obligation to deal with any broker or group of brokers in the execution of Portfolio transactions. The adviser and sub-advisers may, consistent with the interests of a Portfolio, select brokers on the basis of the research, statistical and pricing services they provide to a Portfolio and the adviser’s or sub-adviser’s other clients. Information and research received from such brokers will be in addition to, and not in lieu of, the services required to be performed by the adviser and sub-advisers under their respective contracts. A commission paid to such brokers may be higher than that which another qualified broker would have charged for effecting the same transaction, provided that the adviser or sub-adviser determines in good faith that such commission is reasonable in terms either of the transaction or the overall responsibility of the adviser or sub-adviser to a Portfolio and its other clients and that the total commissions paid by a Portfolio will be reasonable in relation to the benefits to a Portfolio over the long-term. The advisory fees that the Portfolios pay to the adviser will not be reduced as a consequence of the adviser’s or sub-advisers’ receipt of brokerage and research services. To the extent the Portfolios’ portfolio transactions are used to obtain such services, the brokerage commissions paid by the Portfolios will exceed those that might otherwise be paid by an amount which cannot be presently determined. Such services generally would be useful and of value to the adviser or sub-advisers in serving one or more of their other clients and, conversely, such services obtained by the placement of brokerage business of other clients generally would be useful to the adviser and sub-advisers in carrying out their obligations to the Portfolios. While such services are not

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expected to reduce the expenses of the adviser or sub-advisers, the advisers would, through use of the services, avoid the additional expenses which would be incurred if they should attempt to develop comparable information through their own staffs.

With respect to the Index Master Portfolio, DFA will seek to acquire and dispose of securities in a manner which would cause as little fluctuation in the market prices of stocks being purchased or sold as possible in light of the size of the transactions being effected, and brokers will be selected with this goal in view. DFA monitors the performance of brokers which effect transactions for the Index Master Portfolio to determine the effect that the Index Master Portfolio’s trading has on the market prices of the securities in which the Index Master Portfolio invests. DFA also checks the rate of commission being paid by the Index Master Portfolio to its brokers to ascertain that they are competitive with those charged by other brokers for similar services. Transactions also may be placed with brokers who provide DFA with investment research, such as reports concerning individual issuers, industries and general economic and financial trends and other research services. The Investment Management Agreement permits DFA knowingly to pay commissions on such transactions which are greater than another broker might charge if DFA, in good faith, determines that the commissions paid are reasonable in relation to the research or brokerage services provided by the broker or dealer when viewed in terms of either a particular transaction or DFA’s overall responsibilities to the Trust.

Commission rates for brokerage transactions on non-U.S. stock exchanges are generally fixed.

During the 12 months ended September 30, 2004, the following Portfolios paid brokerage commissions as follows:

Portfolios	Brokerage Commissions
Large Cap Value Equity	$	502,196
Large Cap Growth Equity		207,664
Dividend Achievers		1,046
Mid-Cap Value Equity		312,503
Mid-Cap Growth Equity		177,227
Small Cap Value Equity		890,786
Small Cap Core Equity		29,200
Small Cap Growth Equity		2,365,277
U.S. Opportunities Equity		553,365
Global Science & Technology Opportunities		250,428
International Opportunities Equity		1,902,919
Investment Trust		173,045
Asset Allocation		177,084
Enhanced Income		356
Low Duration Bond		63,884
Intermediate Government Bond		7,716
Intermediate Bond		25,976
Intermediate PLUS Bond		213
Core Bond Total Return		122,185
Core PLUS Total Return		11,979
Government Income		38,570
Inflation Protected Bond		49
GNMA		45,358
Managed Income		54,503
High Yield Bond		4,507
International Bond		10,803
Tax-Free Income		11,231
Pennsylvania Tax-Free Income		15,541
New Jersey Tax-Free Income		3,942
Ohio Tax-Free Income		2,301
Delaware Tax-Free Income		1,715
Kentucky Tax-Free Income		2,334

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During the 12 months ended September 30, 2003, the following Portfolios paid brokerage commissions as follows:

Portfolios	Brokerage Commissions
Large Cap Value Equity	$	2,941,041
Large Cap Growth Equity		801,914
Mid-Cap Value Equity		731,020
Mid-Cap Growth Equity		1,072,457
Small Cap Value Equity		1,900,206
Small Cap Core Equity		8,867
Small Cap Growth Equity		3,461,067
U.S. Opportunities		1,107,585
Global Science & Technology Opportunities		428,479
International Opportunities		525,050
Investment Trust		577,817
Asset Allocation		436,437
Low Duration Bond		22,425
Intermediate Government Bond		9,158
Intermediate Bond		22,998
Core Bond Total Return		91,691
Core PLUS Total Return		14,772
Government Income		28,355
Managed Income		55,736
GNMA		15,999
High Yield Bond		0
International Bond		5,664
Tax-Free Income		4,726
Pennsylvania Tax-Free Income		11,131
New Jersey Tax-Free Income		2,099
Ohio Tax-Free Income		1,754
Delaware Tax-Free Income		1,133
Kentucky Tax-Free Income		1,670

During the 12 months ended September 30, 2002, the following Portfolios paid brokerage commissions as follows:

Portfolios	Brokerage Commissions
Large Cap Value Equity	$	5,839,477
Large Cap Growth Equity		2,177,186
Mid-Cap Value Equity		2,432,276
Mid-Cap Growth Equity		2,505,079
Small Cap Value Equity		4,517,019
Small Cap Core Equity		10,838
Small Cap Growth Equity		5,518,530
U.S. Opportunities		2,948,552
Global Science & Technology Opportunities		678,982
International Opportunities		876,493
Investment Trust		2,882,447

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Portfolios	Brokerage Commissions
Asset Allocation	924,407
Low Duration Bond	14,330
Intermediate Government Bond	5,763
Intermediate Bond	21,247
Core Bond Total Return	81,565
Core PLUS Total Return	2,185
Government Income	10,488
Managed Income	54,557
GNMA	16,121
High Yield Bond	840
International Bond	4,102
Tax-Free Income	10,348
Pennsylvania Tax-Free Income	26,511
New Jersey Tax-Free Income	6,132
Ohio Tax-Free Income	3,606
Delaware Tax-Free Income	6,855
Kentucky Tax-Free Income	5,944

For the Index Master Portfolio’s fiscal years ended November 30, 2002, 2003 and 2004, the Index Master Portfolio paid brokerage commissions totaling $94,734, $80,760 and $44,310, respectively.

The following table shows the dollar amount of brokerage commissions paid to brokers for providing research services and the approximate dollar amount of the transactions involved for the fiscal year ended September 30, 2004. The provision of research services was not necessarily a factor in the placement of all brokerage business with such brokers.

Portfolio	$ Amount of Commissions Paid to Brokers for Providing Research Services 10/01/03-09/30/04		$ Amount of Brokerage Transactions Involved 10/01/03-09/30/04
BlackRock Balanced Portfolio	$	135,806.52	$	122,925,810.05
BlackRock Investment Trust	$	135,944.57	$	122,563,103.45
BlackRock Large Cap Growth Equity	$	159,013.65	$	126,155,178.73
BlackRock Global Science & Technology Opportunities	$	62,702.71	$	27,600,415.05
BlackRock International Opportunities	$	4,535.00	$	3,142,669.38
BlackRock Mid-Cap Growth Equity	$	100,007.20	$	61,462,378.40
BlackRock Mid-Cap Value Equity	$	162,574.85	$	99,283,708.97
BlackRock Small Cap Growth Equity	$	1,045,637.73	$	389,662,237.43
BlackRock Small Cap Core Equity	$	12,715.45	$	5,155,481.32
BlackRock Small Cap Value Equity	$	314,023.66	$	143,608,693.04
BlackRock U.S. Opportunities	$	118,614.59	$	46,985,776.84
BlackRock Large Cap Value Equity	$	373,018.34	$	345,076,188.46

Over-the-counter issues, including corporate debt and U.S. Government securities, are normally traded on a “net” basis without a stated commission, through dealers acting for their own account and not as brokers. The Portfolios will primarily engage in transactions with these dealers or deal directly with the issuer unless a better price or execution could be obtained by using a broker. Prices paid to a dealer with respect to both non-U.S. and domestic securities will generally include a “spread,” which is the difference between the prices at which the dealer is willing to purchase and sell the specific security at the time, and includes the dealer’s normal profit.

Purchases of money market instruments by a Portfolio are made from dealers, underwriters and issuers. The Portfolios do not currently expect to incur any brokerage commission expense on such transactions because

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money market instruments are generally traded on a “net” basis with dealers acting as principal for their own accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer. Each Money Market Portfolio intends to purchase only securities with remaining maturities of 13 months or less as determined in accordance with the rules of the SEC. As a result, the portfolio turnover rates of a Money Market Portfolio will be relatively high. However, because brokerage commissions will not normally be paid with respect to investments made by a Money Market Portfolio, the turnover rates should not adversely affect the Portfolio’s net asset values or net income.

Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.

The adviser or sub-advisers may seek to obtain an undertaking from issuers of commercial paper or dealers selling commercial paper to consider the repurchase of such securities from a Portfolio prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if it believes that a Portfolio’s anticipated need for liquidity makes such action desirable. Any such repurchase prior to maturity reduces the possibility that a Portfolio would incur a capital loss in liquidating commercial paper, especially if interest rates have risen since acquisition of such commercial paper.

Investment decisions for each Portfolio and for other investment accounts managed by the adviser or sub-advisers are made independently of each other in light of differing conditions. BlackRock allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in making such allocations. These factors include: (i) investment objectives or strategies for particular accounts, (ii) tax considerations of an account, (iii) risk or investment concentration parameters for an account, (iv) supply or demand for a security at a given price level, (v) size of available investment, (vi) cash availability and liquidity requirements for accounts, (vii) regulatory restrictions, (viii) minimum investment size of an account, (ix) relative size of account, and (x) such other factors as may be approved by BlackRock’s general counsel. Moreover, investments may not be allocated to one client account over another based on any of the following considerations: (i) to favor one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce greater performance compensation to BlackRock, (iii) to develop or enhance a relationship with a client or prospective client, (iv) to compensate a client for past services or benefits rendered to BlackRock or to induce future services or benefits to be rendered to BlackRock, or (v) to manage or equalize investment performance among different client accounts.

Equity securities will generally be allocated among client accounts within the same investment mandate on a pro rata basis. This pro-rata allocation may result in a Portfolio receiving less of a particular security than if pro-ration had not occurred. All allocations of equity securities will be subject, where relevant, to share minimums established for accounts and compliance constraints.

Initial public offerings of securities may be over-subscribed and subsequently trade at a premium in the secondary market. When BlackRock is given an opportunity to invest in such an initial offering or “hot issue,” the supply of securities available for client accounts is often less than the amount of securities the accounts would otherwise take. In order to allocate these investments fairly and equitably among client accounts over time, each portfolio manager or a member of his or her respective investment team will indicate to BlackRock’s trading desk their level of interest in a particular offering with respect to eligible clients accounts for which that team is responsible. Initial public offerings of U.S. equity securities will be identified as eligible for particular client accounts that are managed by portfolio teams who have indicated interest in the offering based on market capitalization of the issuer of the security and the investment mandate of the client account and in the case of international equity securities, the country where the offering is taken place and the investment mandate of the client account. Generally, shares received during the initial public offering will be allocated among participating client accounts within each investment mandate on a pro rata basis. In situations where supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate such investment opportunities among one or more accounts so long as the rotation system provides for fair access for all client accounts over time.

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Because different accounts may have differing investment objectives and policies, BlackRock may buy and sell the same securities at the same time for different clients based on the particular investment objective, guidelines and strategies of those accounts. For example, BlackRock may decide that it may be entirely appropriate for a growth fund to sell a security at the same time a value fund is buying that security. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients. For example, sales of a security by BlackRock on behalf of one or more of its clients may decrease the market price of such security, adversely impacting other BlackRock clients that still hold the security.

In certain instances, BlackRock may find it efficient for purposes of achieving best execution, to aggregate certain contemporaneous purchases or sale orders of its advisory accounts (a/k/a “bunching”). In general, all contemporaneous trades for client accounts under management by the same portfolio manager or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client with an opportunity to achieve a more favorable execution at a potentially lower execution cost. The costs associated with a bunched order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager or management team is filled at several different prices through multiple trades, all accounts participating in the order will receive the average price except in the case of certain international markets where average pricing is not permitted. While in some cases this practice could have a detrimental effect upon the price or value of the security as far as a Portfolio is concerned, in other cases it could be beneficial to the Portfolio. Transactions effected by BlackRock on behalf of more than one of its clients during the same period may increase the demand for securities being purchased or the supply of securities being sold, causing an adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able to provide the best execution of the order. Orders for purchase or sale of securities will be placed within a reasonable amount of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.

A Portfolio will not purchase securities during the existence of any underwriting or selling group relating to such securities of which BlackRock, BIMC, BFM, PNC Bank, PTC, BIL, the Administrators, the Distributor or any affiliated person (as defined in the 1940 Act) thereof is a member except pursuant to procedures adopted by the Board of Trustees in accordance with Rule 10f-3 under the 1940 Act. In no instance will portfolio securities be purchased from or sold to BlackRock Advisors, Inc., BIMC, BFM, PNC Bank, PTC, BIL, PFPC, the Distributor or any affiliated person of the foregoing entities except as permitted by SEC exemptive order or by applicable law.

The portfolio turnover rate of a Portfolio is calculated by dividing the lesser of a Portfolio’s annual sales or purchases of portfolio securities (exclusive of purchases or sales of securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities held by the Portfolio during the year. The Index Master Portfolio ordinarily will not sell portfolio securities except to reflect additions or deletions of stocks that comprise the S&P 500^® Index, including mergers, reorganizations and similar transactions and, to the extent necessary, to provide cash to pay redemptions of the Index Master Portfolio’s shares.

The Fund is required to identify any securities of its regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by the Fund as of the end of its most recent fiscal year. As of September 30, 2004, the following Portfolios held the following securities:

Portfolio	Security	Value
Money Market
Morgan Stanley & Co.	Commercial Paper	$	9,987,144
Merrill Lynch & Co., Inc.	Master Notes		24,320,000
Morgan Stanley & Co., Inc.	Master Notes		50,000,000
Merrill Lynch & Co., Inc.	Municipal Bonds		50,000,000
Morgan Stanley & Co.	Repurchase Agreement		260,700,000
U.S. Treasury Money Market
Deutsche Bank Securities, Inc.	Repurchase Agreement		90,000,000
J.P. Morgan Chase & Co.	Repurchase Agreement		90,000,000
Morgan Stanley & Co., Inc.	Repurchase Agreement		92,008,000
UBS Securities LLC	Repurchase Agreement		90,000,000

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Portfolio	Security	Value
Enhanced Income
The Bear Stearns Co., Inc.	Commercial Mortgage Backed Security	366,310
Credit Suisse First Boston Corp.	Commercial Mortgage Backed Security	155,082
Goldman Sachs Group, Inc.	Commercial Mortgage Backed Security	194,369
Merrill Lynch & Co., Inc.	Commercial Mortgage Backed Security	640,904
Bank of America Securities LLC	Corporate Bonds	19,739
Low Duration Bond
J.P. Morgan Chase & Co.	Corporate Bonds	3,440,913
The Bear Stearns Co., Inc.	Commercial Mortgage Backed Security	20,624,792
Goldman Sachs Group, Inc.	Commercial Mortgage Backed Security	42,929,160
Bank of America Securities LLC	Corporate Bonds	2,146,597
Citigroup Global Markets, Inc.	Corporate Bonds	5,217,108
Lehman Brothers Holdings, Inc.	Commercial Mortgage Backed Security	8,107,496
Intermediate Government Bond
Credit Suisse First Boston Corp.	Commercial Mortgage Backed Security	3,652,241
J.P. Morgan Chase & Co.	Commercial Mortgage Backed Security	1,824,966
Goldman Sachs Group, Inc.	Commercial Mortgage Backed Security	6,841,356
Lehman Brothers Holdings, Inc.	Commercial Mortgage Backed Security	2,640,045
Intermediate Bond
Bank of America Corp.	Corporate Bond	9,094,729
The Bear Stearns Co., Inc.	Commercial Mortgage Backed Security	10,134,613
Barclays Investments, Inc.	Corporate Bond	1,965,892
Citigroup, Inc.	Corporate Bond	17,317,581
Credit Suisse First Boston Corp.		11,355,010
Goldman Sachs Group, Inc.	Corporate Bond	1,077,689
J.P. Morgan Chase & Co.	Corporate Bonds	12,018,945
Lehman Brothers Holdings, Inc.	Corporate Bond	656,844
Lehman Brothers Holdings, Inc.	Commercial Mortgage Backed Security	14,989,449
UBS AG	Corporate Bond	573,465
Intermediate PLUS Bond
The Bear Stearns Co., Inc.	Commercial Mortgage Backed Security	125,884
Credit Suisse First Boston Corp.	Commercial Mortgage Backed Security	145,595
Morgan Stanley	Commercial Mortgage Backed Security	97,328
Bank of America Corp.	Corporate Bond	376,661
Barclays Investments, Inc.	Corporate Bond	36,746
J.P. Morgan Chase & Co.	Corporate Bond	463,713
Citigroup, Inc.	Corporate Bond	424,620
Goldman Sachs Group, Inc.	Corporate Bond	67,708
UBS Securities LLC	Corporate Bond	12,073
Lehman Brothers Holdings, Inc.	Commercial Mortgage Backed Security	111,592
Goldman Sachs Group, Inc.	Commercial Mortgage Backed Security	222,327
UBS Paine Webber	Corporate Bond	12,073
Core Bond Total Return
Bank of America Corp.	Commercial Mortgage Backed Security	9,530,345
Bank of America Corp.	Corporate Bond	14,784,839
Barclays PLC	Corporate Bond	7,434,864
Citigroup, Inc.	Commercial Mortgage Backed Security	7,526,910
Citigroup, Inc.	Corporate Bond	39,630,158

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Portfolio	Security	Value
Credit Suisse First Boston Corp.	Commercial Mortgage Backed Security	2,464,428
Goldman Sachs Group, Inc.	Commercial Mortgage Backed Security	18,294,028
Greenwich Capital Markets, Inc.	Asset Backed Security	13,781,463
HSBC Securities	Corporate Bond	9,173,343
J.P. Morgan Chase & Co.	Corporate Bond	24,435,787
Lehman Brothers Holdings, Inc.	Commercial Mortgage Backed Security	13,084,777
Lehman Brothers Holdings, Inc.	Corporate Bond	193,126
Merrill Lynch & Co., Inc.	Commercial Mortgage Backed Security	7,363,642
Morgan Stanley	Commercial Mortgage Backed Security	11,445,397
Royal Bank of Scotland Group PLC	Corporate Bond	4,433,287
UBS Securities LLC	Corporate Bond	1,678,139
UBS Securities LLC	Commercial Mortgage Backed Security	89,388
Core PLUS Total Return
Bank of America Corp.	Corporate Bond	2,560,173
Bank of America Corp.	Commercial Mortgage Backed Security	1,102,282
Barclays Investments, Inc.	Corporate Bond	753,285
Citigroup, Inc.	Corporate Bond	5,011,181
Credit Suisse First Boston Corp., Commercial Mortgage Backed Division	Commercial Mortgage Backed Security	362,227
Goldman Sachs Group, Inc.	Commercial Mortgage Backed Security	2,521,331
HSBC Securities	Corporate Bond	1,098,163
J.P. Morgan Chase & Co.	Commercial Mortgage Backed Security	2,182,118
J.P. Morgan Chase & Co.	Corporate Bond	3,147,701
Lehman Brothers Holdings, Inc.	Corporate Bond	894,358
Lehman Brothers Holdings, Inc.	Commercial Mortgage Backed Security	2,932,058
Morgan Stanley	Commercial Mortgage Backed Security	947,505
Royal Bank of Scotland Group PLC	Corporate Bond	193,445
UBS Paine Webber	Corporate Bond	48,292
Government Income Bond
Goldman Sachs Group, Inc.	Commercial Mortgage Backed Security	2,106,083
Managed Income Bond
Bank of America Corp.	Corporate Bond	4,084,841
Barclays PLC	Corporate Bond	912,516
The Bear Stearns Co., Inc.	Commercial Mortgage Backed Security	5,252,800
The Bear Stearns Co., Inc.	Corporate Bond	969,144
Citigroup, Inc.	Corporate Bond	11,383,881
HSBC Securities	Corporate Bond	1,996,660
J.P. Morgan Chase & Co.	Corporate Bond	7,211,512
Lehman Brothers Holdings, Inc.	Corporate Bond	380,734
Lehman Brothers Holdings, Inc.	Commercial Mortgage Backed Security	9,066,182
Morgan Stanley	Commercial Mortgage Backed Security	8,052,986
Royal Bank of Scotland Group PLC	Corporate Bond	1,608,339
International Bond
Morgan Stanley	Commercial Mortgage Backed Security	752,771
Lehman Brothers Holdings, Inc.	Commercial Mortgage Backed Security	2,081,861
Citigroup, Inc.	Corporate Bond	1,762,628
Greenwich Capital Markets, Inc.	Asset Backed Security	1,990,770

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Portfolio	Security	Value
Large Cap Value Equity
Bank of America Corp.	Common Stock	10,581,186
The Bear Stearns Co., Inc.	Short Term Investments	2,313,226
Citigroup, Inc.	Common Stock	11,316,780
Goldman Sachs Group, Inc.	Common Stock	2,004,660
Goldman Sachs Group, Inc.	Short Term Investments	1,004,677
J.P. Morgan Chase & Co.	Common Stock	6,359,502
Lehman Brothers Holdings, Inc.	Common Stock	1,586,428
Merrill Lynch & Co., Inc.	Common Stock	2,386,560
Merrill Lynch & Co., Inc.	Short Term Investments	76,913
Morgan Stanley	Short Term Investments	2,936,091
Large Cap Growth Equity
The Bear Stearns Co., Inc.	Short Term Investments	819,378
Citigroup, Inc.	Common Stock	683,860
Morgan Stanley	Short Term Investments	1,698,268
Merrill Lynch & Co., Inc.	Short Term Investments	1,606,509
Dividend Achievers
Bank of America Corp.	Common Stock	73,661
J.P. Morgan Chase & Co.	Common Stock	18,872
Citigroup, Inc.	Common Stock	80,518
Goldman Sachs Group, Inc.	Common Stock	9,324
Mid Cap Value Equity
The Bear Stearns Co., Inc.	Common Stock	567,403
The Bear Stearns Co., Inc.	Short Term Investments	395,555
Goldman Sachs Group, Inc.	Short Term Investments	435,895
Merrill Lynch & Co., Inc.	Short Term Investments	53,772
Morgan Stanley	Short Term Investments	1,018,026
UBS AG	Short Term Investments	187,132
Mid Cap Growth Equity
Merrill Lynch & Co., Inc.	Short Term Investments	4,232,993
UBS AG	Short Term Investments	704,255
Small Cap Value Equity
Goldman Sachs Group, Inc.	Short Term Investments	635,480
Merrill Lynch & Co., Inc.	Short Term Investments	1,683,360
Morgan Stanley	Short Term Investments	314,942
UBS AG	Short Term Investments	276,734
Small Cap Growth Equity
Merrill Lynch & Co., Inc.	Short Term Investments	3,173,889
UBS AG	Short Term Investments	1,131,494
Investment Trust
Bank of America Corp.	Common Stock	2,019,178
The Bear Stearns Co., Inc.	Common Stock	519,318
The Bear Stearns Co., Inc.	Short Term Investments	565,972
Citigroup, Inc.	Common Stock	2,638,376
Goldman Sachs Group, Inc.	Common Stock	745,920
J.P. Morgan Chase & Co.	Common Stock	1,702,511
Morgan Stanley	Short Term Investments	1,587,850

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Portfolio	Security	Value
Merrill Lynch & Co., Inc.	Short Term Investments	852,759
UBS AG	Short Term Investments	1,044,449
Asset Allocation
Bank of America Corp.	Common Stock	1,863,190
Bank of America Corp.	Commercial Mortgage-Backed Security	98,251
Bank of America Corp.	Corporate Bond	285,029
Barclays Investments, Inc.	Corporate Bond	97,988
The Bear Stearns Co., Inc.	Common Stock	519,318
The Bear Stearns Co., Inc.	Short Term Investments	17,528
Citigroup, Inc.	Common Stock	2,444,248
Citigroup, Inc.	Corporate Bond	589,748
Credit Suisse First Boston Corp.	Repurchase Agreement	65,175
Goldman Sachs Group, Inc.	Common Stock	717,948
HSBC Holdings.	Corporate Bond	347,600
J.P. Morgan Chase & Co.	Common Stock	1,572,831
J.P. Morgan Chase & Co.	Corporate Bond	404,119
Lehman Brothers, Inc.	Repurchase Agreement	908,425
Morgan Stanley	Corporate Bond	1,689,321
Merrill Lynch & Co., Inc.	Short Term Investments	1,156,046
UBS AG	Corporate Bond	42,255
UBS AG	Short Term Investments	291,625

PURCHASE AND REDEMPTION INFORMATION

The Fund has authorized one or more brokers and/or financial institutions (“Authorized Persons”) to receive on its behalf purchase and redemption orders that are in “good form” in accordance with the policies of those Authorized Persons. Such Authorized Persons are authorized to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf, and the Fund will be deemed to have received a purchase or redemption order when an Authorized Persons or, if applicable, such Authorized Person’s authorized designee, receives the order. Such customer orders will be priced at a Portfolio’s net asset value next computed after they are received by an Authorized Person or such Authorized Person’s authorized designee. Financial institutions may include retirement plan service providers who aggregate purchase and redemption instructions received from numerous retirement plans or plan participants.

Investor Shares

Purchase of Shares. The minimum investment for the initial purchase of shares is $500; there is a $50 minimum for subsequent investments. Purchases through the Automatic Investment Plan are subject to a lower initial purchase minimum. In addition, the minimum initial investment for employees of the Fund, the Fund’s investment adviser, sub-advisers, Distributor or transfer agent or employees of their affiliates is $100, unless payment is made through a payroll deduction program in which case the minimum investment is $25.

Purchases Through Brokers. It is the responsibility of brokers to transmit purchase orders and payment on a timely basis. Generally, if payment is not received within the period described in the prospectuses, the order will be canceled, notice thereof will be given, and the broker and its customers will be responsible for any loss to the Fund or its shareholders. Orders of less than $500 may be mailed by a broker to the transfer agent.

Other Purchase Information. Shares of each Portfolio of the Fund are sold on a continuous basis by BDI as the Distributor. BDI maintains its principal offices at 760 Moore Road, King of Prussia, PA 19406. Purchases may be effected on weekdays on which the New York Stock Exchange is open for business (a “Business Day”). Payment for orders which are not received or accepted will be returned after prompt inquiry. The issuance of shares is recorded on the books of the Fund. No certificates will be issued for shares. Payments for shares of a Portfolio

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may, in the discretion of the Fund’s investment adviser, be made in the form of securities that are permissible investments for that Portfolio. The Fund reserves the right to reject any purchase order, to modify or waive the minimum initial or subsequent investment requirement and to suspend and resume the sale of any share class of any Portfolio at any time.

Unless a sales charge waiver applies, Investor B shareholders of a Bond or Equity Portfolio pay a contingent deferred sales charge if they redeem during the first six years after purchase, and Investor C shareholders pay a contingent deferred sales charge if they redeem during the first twelve months after purchase. Investors expecting to redeem during these periods should consider the cost of the applicable contingent deferred sales charge in addition to the aggregate annual Investor B or Investor C distribution fees, as compared with the cost of the initial sales charges applicable to the Investor A Shares.

Dealer Reallowances. The following are the front-end sales loads reallowed to dealers as a percentage of the offering price of certain of the Funds’ Non-Money Market Investor A Shares. In case where the Distributor acts as dealer, it will not receive a placement fee on purchases of over $1 million of Investor A Shares. For the tables below, the reallowance or placement fees indicated will apply up to the indicated breakpoint (so that, for example, a sale of $4 million worth of Investor A Shares in the Low Duration Bond Portfolio will result in a placement fee of .50% on the first $3 million and .25% on the final $1 million).

LOW DURATION BOND PORTFOLIO:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	2.50	%
$50,000 but less than $100,000	2.25
$100,000 but less than $250,000	2.00
$250,000 but less than $500,000	1.25
$500,000 but less than $1,000,000	0.75
$1 million but less than $3 million	0.50
$3 million but less than $15 million	0.25
$15 million and above	0.15

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

INFLATION PROTECTED BOND PORTFOLIO:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	2.50	%
$50,000 but less than $100,000	2.25
$100,000 but less than $250,000	2.00
$250,000 but less than $500,000	1.25
$500,000 but less than $1,000,000	0.75
$1 million but less than $3 million	0.15
$3 million but less than $15 million	0.10
$15 million and above	0.05

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

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INTERMEDIATE GOVERNMENT BOND, INTERMEDIATE BOND, CORE BOND TOTAL RETURN, CORE PLUS TOTAL RETURN, GNMA, INTERMEDIATE PLUS BOND, TAX-FREE INCOME, PENNSYLVANIA TAX -FREE INCOME, NEW JERSEY TAX-FREE INCOME, OHIO TAX-FREE INCOME, DELAWARE TAX-FREE INCOME AND KENTUCKY TAX-FREE INCOME PORTFOLIOS:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	3.50	%
$50,000 but less than $100,000	3.25
$100,000 but less than $250,000	3.00
$250,000 but less than $500,000	2.00
$500,000 but less than $1,000,000	1.00
$1 million but less than $3 million	0.50
$3 million but less than $15 million	0.25
$15 million and above	0.15

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

LARGE CAP VALUE EQUITY, LARGE CAP GROWTH EQUITY, LEGACY AND ASSET ALLOCATION PORTFOLIOS AND INVESTMENT TRUST:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	5.00	%
$50,000 but less than $100,000	4.00
$100,000 but less than $250,000	3.00
$250,000 but less than $500,000	2.00
$500,000 but less than $1,000,000	1.75
$1 million but less than $3 million	0.75
$3 million but less than $15 million	0.50
$15 million and above	0.25

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

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GOVERNMENT INCOME AND MANAGED INCOME PORTFOLIOS:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	4.00	%
$50,000 but less than $100,000	3.75
$100,000 but less than $250,000	3.50
$250,000 but less than $500,000	2.50
$500,000 but less than $1,000,000	1.50
$1 million but less than $3 million	0.50
$3 million but less than $15 million	0.25
$15 million and above	0.15

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

INTERNATIONAL OPPORTUNITIES PORTFOLIO:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	4.50	%
$50,000 but less than $100,000	4.25
$100,000 but less than $250,000	4.00
$250,000 but less than $500,000	3.00
$500,000 but less than $1,000,000	2.00
$1 million but less than $3 million	1.00
$3 million but less than $15 million	0.50
$15 million and above	0.25

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

INTERNATIONAL BOND AND HIGH YIELD BOND PORTFOLIOS:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	4.50	%
$50,000 but less than $100,000	4.25
$100,000 but less than $250,000	4.00
$250,000 but less than $500,000	3.00
$500,000 but less than $1,000,000	2.00
$1 million but less than $3 million	0.75
$3 million but less than $15 million	0.50
$15 million and above	0.25

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

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MID-CAP VALUE EQUITY, MID-CAP GROWTH EQUITY, SMALL CAP VALUE EQUITY, SMALL CAP CORE EQUITY, SMALL CAP GROWTH EQUITY, GLOBAL SCIENCE & TECHNOLOGY OPPORTUNITIES, U.S. OPPORTUNITIES, DIVIDEND ACHIEVERS^™, SMALL/MID-CAP GROWTH, AURORA, HEALTH SCIENCES, GLOBAL RESOURCES AND ALL-CAP GLOBAL RESOURCES PORTFOLIOS:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	5.00	%
$50,000 but less than $100,000	4.00
$100,000 but less than $250,000	3.00
$250,000 but less than $500,000	2.00
$500,000 but less than $1,000,000	1.75
$1 million but less than $3 million	1.00
$3 million but less than $15 million	0.50
$15 million and above	0.25

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

ENHANCED INCOME AND ULTRASHORT MUNICIPAL PORTFOLIOS:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)*
Less than $50,000	2.50	%
$50,000 but less than $100,000	2.25
$100,000 but less than $250,000	2.00
$250,000 but less than $500,000	1.25
$500,000 but less than $1,000,000	0.75
$1 million but less than $3 million	0.15
$3 million but less than $15 million	0.10
$15 million and above	0.05

* BlackRock may pay placement fees to dealers as shown on purchases of Investor A Shares of $1,000,000 or more.

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INDEX EQUITY PORTFOLIO:

Amount of Transaction at Offering Price	Reallowance or Placement Fees to Dealers (as % of Offering Price)
Less than $50,000	2.50	%
$50,000 but less than $100,000	2.25
$100,000 but less than $250,000	2.00
$250,000 but less than $500,000	1.25
$500,000 but less than $1,000,000	0.75
$1 million but less than $3 million	0.00
$3 million but less than $15 million	0.00
$15 million and above	0.00

No placement fee is paid to dealers for purchases of Investor A Shares of the Index Equity Portfolio in excess of $1,000,000.

During special promotions, the entire sales charge may be reallowed to dealers. Dealers who receive 90% or more of the sales charge may be deemed to be “underwriters” under the 1933 Act. The amount of the sales charge not reallowed to dealers may be paid to broker-dealer affiliates of PNC Bank Corp. who provide sales support services. Furthermore, the Distributor, BlackRock and their affiliates may, out of their assets and not as an additional charge to the Portfolios, contribute to various non-cash and cash incentive arrangements to promote the sale of shares, and may sponsor various contests and promotions subject to applicable NASD regulations in which participants may receive prizes such as travel awards, merchandise and cash. The Distributor, BlackRock and their affiliates may also pay for the travel expenses, meals, lodging and entertainment of broker/dealers, financial institutions and their salespersons in connection with educational and sales promotional programs subject to applicable NASD regulations. The compensation arrangements described above generally are made available to all qualified financial institutions, broker/dealers and salespersons when such arrangements are in effect, subject to applicable NASD regulations.

The following special purchase plans result in the waiver or reduction of sales charges for Investor A, B or C shares of each of the Equity and Bond Portfolios.

Sales Charge Waivers For Each of the Equity and Bond Portfolios—Investor A Shares

Qualified Plans. In general, no sales charge will apply to purchases by authorized qualified employee benefit plans (“Qualified Plans”) of Investor A Shares. BlackRock may pay placement fees to dealers, up to the following amounts, on purchases of Investor A Shares of all Non-Money Market Portfolios (except the Index Equity Portfolio) by Qualified Plans:

Less than $3,000,000	1.00	%
$3 million but less than $15 million	0.50	%
$15 million and above	0.25	%

For the table above, the placement fees indicated will apply up to the indicated breakpoint (so that, for example, a sale of $4 million worth of Investor A Shares will result in a placement fee of up to 1.00% on the first $3 million and .50% on the final $1 million).

Other. The following persons associated with the Fund, the Distributor, the Fund’s investment adviser, sub-advisers or transfer agent and their affiliates may buy Investor A Shares of each of the Bond and Equity Portfolios without paying a sales charge to the extent permitted by these firms: (a) officers, directors and partners

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(and their spouses and minor children); (b) employees and retirees (and their spouses and minor children); (c) registered representatives of brokers who have entered into selling agreements with the Distributor; (d) spouses or children of such persons; and (e) any trust, pension, profit-sharing or other benefit plan for any of the persons set forth in (a) through (c). The following persons may also buy Investor A Shares without paying a sales charge: (a) persons investing through an authorized payroll deduction plan; (b) persons investing through an authorized investment plan for organizations which operate under Section 501(c)(3) of the Internal Revenue Code; (c) registered investment advisers, trust companies and bank trust departments exercising discretionary investment authority with respect to amounts to be invested in a Portfolio; (d) persons participating in a “wrap account” or similar program under which they pay advisory fees to a broker-dealer or other financial institution; (e) persons participating in an account or program under which they pay fees to a broker-dealer or other financial institution for providing transaction processing and other administrative services, but not investment advisory services; and (f) MetLife employees. In addition, within 60 days from the date of liquidation of Partners Balanced Trust (“PBT”), which is expected to occur on or about September 30, 2005, former shareholders of PBT will be able to invest their liquidation proceeds in Investor A Shares of the Fund without paying a front-end sales charge. Investors who qualify for any of these exemptions from the sales charge must purchase Investor A Shares.

The CDSC related to purchases of $1,000,000 or more of Investor A Shares is not charged if the dealer receives a placement fee over time during the 18 months after purchase.

Reduced Sales Charges For Each of the Equity and Bond Portfolios—Investor A Shares

Because of reductions in the front-end sales charge for purchases of Investor A Shares aggregating $50,000 or more, it may be advantageous for investors purchasing large quantities of Investor Shares to purchase Investor A Shares. In any event, the Fund will not accept a purchase order of $100,000 or more for Investor B Shares or $1 million or more for Investor C Shares.

Quantity Discounts. Larger purchases may reduce the sales charge price. Upon notice to the investor’s broker or the transfer agent, purchases of Investor A Shares made at any one time by the following persons may be considered when calculating the sales charge: (a) an individual, his or her spouse and their children under the age of 21; (b) a trustee or fiduciary of a single trust estate or single fiduciary account; or (c) any organized group which has been in existence for more than six months, if it is not organized for the purpose of buying redeemable securities of a registered investment company, and if the purchase is made through a central administrator, or through a single dealer, or by other means which result in economy of sales effort or expense. An organized group does not include a group of individuals whose sole organizational connection is participation as credit card holders of a company, policyholders of an insurance company, customers of either a bank or broker/dealer or clients of an investment adviser. Purchases made by an organized group may include, for example, a trustee or other fiduciary purchasing for a single fiduciary account or other employee benefit plan purchases made through a payroll deduction plan.

Right of Accumulation. Under the Right of Accumulation, the current value of an investor’s existing Investor A Shares in any of the Non-Money Market Portfolios that are subject to a front-end sales charge may be combined with the amount of the investor’s current purchase in determining the applicable sales charge. In order to receive the cumulative quantity reduction, previous purchases of Investor A Shares must be called to the attention of PFPC by the investor at the time of the current purchase.

Reinstatement Privilege. Upon redemption of Investor Shares, a shareholder may reinvest the redemption proceeds (after paying any applicable CDSC or redemption/exchange fee) in Investor A Shares of the SAME Portfolio without paying a front-end sales charge. This right may be exercised once a year and within 60 days of the redemption, provided the Investor A Share class of that Portfolio is currently open to new investors or the shareholder has a current account in that closed Portfolio. To exercise this privilege, PFPC must be notified of the reinvestment in writing by the purchaser, or by his or her broker, at the time purchase is made. An investor should consult a tax adviser concerning the tax consequences of use of the reinstatement privilege.

Letter of Intent. An investor may qualify for a reduced sales charge immediately by signing a Letter of Intent stating the investor’s intention to invest during the next 13 months a specified amount in Investor A Shares of a Non-Money Market Portfolio which, if made at one time, would qualify for a reduced sales charge. The Letter of Intent may be signed at any time within 90 days after the first investment to be included in the Letter of Intent. The

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investor must instruct PFPC upon making subsequent purchases that such purchases are subject to a Letter of Intent. All dividends and capital gains of a Portfolio that are invested in additional Investor A Shares of the same Portfolio are applied to the Letter of Intent.

During the term of a Letter of Intent, the Fund’s transfer agent will hold Investor A Shares representing up to 5% of the indicated amount in escrow for payment of a higher sales load if the full amount indicated in the Letter of Intent is not purchased. The escrowed Investor A Shares will be released when the full amount indicated has been purchased. Any redemptions made during the 13-month period will be subtracted from the amount of purchases in determining whether the Letter of Intent has been completed.

If the full amount indicated is not purchased within the 13-month period, the investor will be required to pay an amount equal to the difference between the sales charge actually paid and the sales charge the investor would have had to pay on his or her aggregate purchases if the total of such purchases had been made at a single time. If remittance is not received within 20 days of the expiration of the 13-month period, PFPC, as attorney-in-fact, pursuant to the terms of the Letter of Intent, will redeem an appropriate number of Investor A Shares held in escrow to realize the difference.

Investor B Shares

Investor B Shares of the Non-Money Market Portfolios are subject to a deferred sales charge if they are redeemed within six years of purchase. Dealers will generally receive commissions equal to 4.00% of Investor B Shares sold by them plus ongoing fees under the Fund’s Amended and Restated Distribution and Service Plan. Dealers may not receive a commission in connection with sales of Investor B Shares to certain retirement plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees under the Amended and Restated Distribution and Service Plan. These commissions and payments may be different than the reallowances, placement fees and commissions paid to dealers in connection with sales of Investor A Shares and Investor C Shares.

Investor C Shares

Investor C Shares of the Non-Money Market Portfolios are subject to a deferred sales charge of 1% based on the lesser of the original cost or the net asset value of the Investor C Shares on the redemption date if redeemed within twelve months after purchase. Dealers will generally immediately receive commissions equal to 1% of the Investor C Shares sold by them plus ongoing fees under the Fund’s Amended and Restated Distribution and Service Plan. Dealers may not receive a commission in connection with sales of Investor C Shares to certain retirement plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees under the Amended and Restated Distribution and Service Plan. These commissions and payments may be different than the reallowances, placement fees and commissions paid to dealers in connection with sales of Investor A Shares and Investor B Shares.

Exemptions from and Reductions of the Contingent Deferred Sales Charge

Investor B and Investor C Shares. The contingent deferred sales charge on Investor B Shares and Investor C Shares of the Non-Money Market Portfolios is not charged in connection with: (1) redemptions of Investor B and Investor C Shares purchased through certain authorized Qualified Plans; (2) exchanges described in “Exchange Privilege” below; (3) redemptions made in connection with minimum required distributions due to the shareholder reaching age 70½ from IRA and 403(b)(7) accounts; (4) redemptions made with respect to certain retirement plans sponsored by the Fund, BlackRock or its affiliates; (5) redemptions in connection with a shareholder’s death (including in connection with the distribution of account assets to a beneficiary of the decedent) or disability (as defined in the Internal Revenue Code) subsequent to the purchase of Investor B Shares or Investor C Shares; (6) involuntary redemptions of Investor B Shares or Investor C Shares in accounts with low balances as described in “Redemption of Shares” below; (7) redemptions made pursuant to the Systematic Withdrawal Plan, subject to the limitations set forth under “Systematic Withdrawal Plan” below; and (8) redemptions when a shareholder can demonstrate hardship, in the absolute discretion of the Fund. In addition, no contingent deferred sales charge is charged on Investor B Shares or Investor C Shares acquired through the reinvestment of dividends or distributions.

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Investor B Shares of the Intermediate Government Bond and Managed Income Portfolios purchased from December 1, 1999, to December 31, 1999, are subject to a CDSC at the rates shown in the chart below:

Number of Years Elapsed Since Purchase	Contingent Deferred Sales Charge (as % of Dollar Amount Subject to the Charge)
Up to one year	3.50	%
More than one but less than two years	3.00
More than two but less than three years	2.00
More than three but less than four years	1.00
More than four years	0.00

When an investor redeems Investor B Shares or Investor C Shares, the redemption order is processed to minimize the amount of the contingent deferred sales charge that will be charged. Investor B Shares and Investor C Shares are redeemed first from those shares that are not subject to the deferred sales load (i.e., shares that were acquired through reinvestment of dividends or distributions) and after that from the shares that have been held the longest.

Shareholder Features

Exchange Privilege. Exchanges of Investor A Shares may be subject to the difference between the sales charge previously paid on the exchanged shares and the higher sales charge (if any) payable with respect to the shares acquired in the exchange. The exchange of Investor B and Investor C Shares will not be subject to a CDSC, which will continue to be measured from the date of the original purchase and will not be affected by exchanges.

Unless an exemption applies, a front-end sales charge will be charged in connection with exchanges of Investor A Shares of a Money Market Portfolio for Investor A Shares of the Fund’s Non-Money Market Portfolios. Exchanges of Investor B or Investor C Shares of a Money Market Portfolio for Investor B or Investor C Shares of a Non-Money Market Portfolio of the Fund will be exercised at NAV. However, a CDSC will be charged in connection with the redemption of the Investor B or Investor C Shares of the Non-Money Market Portfolio received in the exchange. In determining the holding period for calculating the contingent deferred sales charge payable on redemption of Investor B and Investor C Shares of the Non-Money Market Portfolios, the holding period of the Investor B or Investor C Shares originally held will be added to the holding period of the Investor B or Investor C Shares acquired through exchange.

Investor A Shares of Money Market Portfolios of the Fund that were (1) acquired through the use of the exchange privilege and (2) can be traced back to a purchase of shares in one or more investment portfolios of the Fund for which a sales charge was paid, can be exchanged for Investor A Shares of a portfolio subject to differential sales charges as applicable.

A shareholder wishing to make an exchange may do so by sending a written request to the Fund c/o PFPC at the following address: PFPC Inc., P.O. Box 9819, Providence, RI 02940-8019. Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the Application that they do not wish to use this privilege. To add this feature to an existing account that previously did not provide this option, a Telephone Exchange Authorization Form must be filed with PFPC. This form is available from PFPC. Once this election has been made, the shareholder may simply contact the Fund by telephone at (800) 441-7762 to request the exchange. During periods of substantial economic or market change, telephone exchanges may be difficult to complete and shareholders may have to submit exchange requests to PFPC in writing.

If the exchanging shareholder does not currently own shares of the investment portfolio whose shares are being acquired, a new account will be established with the same registration, dividend and capital gain options and broker of record as the account from which shares are exchanged, unless otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as defined below. In order to participate in the Automatic Investment Program or establish a Systematic Withdrawal Plan for the new account, however, an exchanging shareholder must file a specific written request.

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Any share exchange must satisfy the requirements relating to the minimum initial investment requirement, and must be legally available for sale in the state of the investor’s residence. For Federal income tax purposes, a share exchange is a taxable event and, accordingly, a capital gain or loss may be realized. Before making an exchange request, shareholders should consult a tax or other financial adviser and should consider the investment objective, policies and restrictions of the investment portfolio into which the shareholder is making an exchange. Brokers may charge a fee for handling exchanges.

The Fund reserves the right to suspend, modify or terminate the exchange privilege at any time. Notice will be given to shareholders of any material modification or termination except where notice is not required. The Fund reserves the right to reject any telephone exchange request. Telephone exchanges may be subject to limitations as to amount or frequency, and to other restrictions that may be established from time to time to ensure that exchanges do not operate to the disadvantage of any portfolio or its shareholders. The Fund, the Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Fund, the Administrators and the Distributor will not be liable for any loss, liability, cost or expense for acting upon telephone instructions reasonably believed to be genuine in accordance with such procedures. Exchange orders may also be sent by mail to the shareholder’s broker or to PFPC at P.O. Box 9819, Providence, RI 02940-8019.

By use of the exchange privilege, the investor authorizes the Fund’s transfer agent to act on telephonic or written exchange instructions from any person representing himself to be the investor and believed by the Fund’s transfer agent to be genuine. The records of the Fund’s transfer agent pertaining to such instructions are binding. The exchange privilege may be modified or terminated at any time upon 60 days’ notice to affected shareholders. The exchange privilege is only available in states where the exchange may legally be made.

The redemption of shares of one Portfolio and the subsequent investment in another Portfolio generally will be treated as two separate transactions. Therefore, a front-end sales charge will be imposed (unless an exemption applies) on the purchase of Investor A Shares of a Non-Money Market Portfolio with the proceeds of a redemption of Investor Shares of a Money Market Portfolio. In addition, when Investor Shares of a Money Market Portfolio are redeemed and the proceeds are used to purchase Investor B Shares or Investor C Shares of a Non-Money Market Portfolio, a contingent deferred sales charge will be imposed (unless an exemption applies) when the Investor B Shares or Investor C Shares of the Non-Money Market Portfolio are redeemed.

Automatic Investment Plan (“AIP”). Investor Share shareholders and certain Service Share shareholders who were shareholders or the Compass Capital Group of Funds at the time of its combination with The PNC^® Fund in 1996 may arrange for periodic investments in that Portfolio through automatic deductions from a checking or savings account by completing the AIP Application Form which may be obtained from PFPC. The minimum pre-authorized investment amount is $50.

Systematic Withdrawal Plan (“SWP”). The Fund offers a Systematic Withdrawal Plan to shareholders who wish to receive regular distributions from their accounts. Upon commencement of the SWP, the account must have a current value of $10,000 or more in a Portfolio. Shareholders may elect to receive automatic cash payments of $50 or more either monthly, quarterly, semi-annually or annually. You may choose any day for the withdrawal. If no day is specified, the withdrawals will be processed on the 25^th day of the month or, if such day in not a Business Day, on the prior Business Day and are paid promptly thereafter. An investor may utilize the SWP by completing the Systematic Withdrawal Plan Application Form which may be obtained by visiting our website at www.blackrock.com/funds.

Shareholders should realize that if withdrawals exceed income dividends their invested principal in the account will be depleted. To participate in the SWP, shareholders must have their dividends automatically reinvested. Shareholders may change or cancel the SWP at any time, upon written notice to the Fund, or by calling the Fund at (800) 441-7762. Purchases of additional Investor A Shares of the Fund concurrently with withdrawals may be disadvantageous to investors because of the sales charges involved and, therefore, are discouraged. No contingent deferred sales charge will be assessed on redemptions of Investor B or Investor C Shares made through

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the SWP that do not exceed 12% of the original investment on an annualized basis. For example, monthly, quarterly and semi-annual SWP redemptions of Investor B or Investor C Shares will not be subject to the CDSC if they do not exceed 1%, 3% and 6%, respectively, of an account’s net asset value on the redemption date. SWP redemptions of Investor B or Investor C Shares in excess of this limit are still subject to the applicable CDSC.

For this reason, a shareholder may not participate in the Automatic Investment Plan (see “Services for Shareholders—Automatic Investment Plan” in the Fund’s Prospectus) and the Systematic Withdrawal Plan at the same time.

Dividend Allocation Plan. The Dividend Allocation Plan allows shareholders to elect to have all their dividends and any other distributions from the Fund or any Eligible Fund (which includes the Fund and other funds as designated by the Distributor from time to time) automatically invested at net asset value in one other such Eligible Fund designated by the shareholder, provided the account into which the dividends and distributions are directed is initially funded with the requisite minimum amount.

Redemption of Shares. Except as noted below, a request for redemption must be signed by all persons in whose names the shares are registered. Signatures must conform exactly to the account registration. If the proceeds of the redemption would exceed $25,000, or if the proceeds are not to be paid to the record owner at the record address, or if the shareholder is a corporation, partnership, trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor institution.

A signature guarantee is designed to protect the shareholders and the Portfolio against fraudulent transactions by unauthorized persons. A signature guarantee may be obtained from a domestic bank or trust company, recognized broker, dealer, clearing agency, savings association who are participants in a medallion program by the Securities Transfer Association, credit unions, national securities exchanges and registered securities associations. The three recognized medallion programs are Securities Transfer Agent Medallion Program (“STAMP”), Stock Exchanges Medallion Program (“SEMP”) and New York Stock Exchange, Inc. Medallion Signature Program (“MSP”). Signature Guarantees which are not a part of these programs will not be accepted. Please note that a notary public stamp or seal is not acceptable.

Generally, a properly signed written request with any required signature guarantee is all that is required for a redemption. In some cases, however, other documents may be necessary. Additional documentary evidence of authority is required by PFPC in the event redemption is requested by a corporation, partnership, trust, fiduciary, executor or administrator.

Investor A shareholders of the Money Market Portfolios may redeem their shares through the checkwriting privilege. Upon receipt of the checkwriting application and signature card by PFPC, checks will be forwarded to the investor. The minimum amount of a check is $100. If more than one shareholder owns the account, each shareholder must sign each check, unless an election has been made to permit check writing by a limited number of signatures and such election is on file with PFPC. Investor A Shares represented by a check redemption will continue to earn daily income until the check is presented for payment. PNC bank, as the investor’s agent, will cause the Fund to redeem a sufficient number of Investor A Shares owned to cover the check. When redeeming Investor A Shares by check, an investor should make certain that there is an adequate number of Investor A Shares in the account to cover the amount of the check. If an insufficient number of Investor A Shares is held or if checks are not properly endorsed, they may not be honored and a $15 service charge will be incurred. Checks may not be presented for cash payments at the offices of PNC Bank. This limitation does not affect checks used for the payment of bills or cash at other banks. However, a shareholder cannot close an account by writing a checkwriting check.

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Computation of Public Offering Prices for Investor A Shares of the Non-Money Market Portfolios. An illustration of the computation of the public offering price per Investor A Share of the respective Non-Money Market Portfolios, based on the value of such Portfolios’ net assets as of March 31, 2005, follows:

	Enhanced Income Portfolio		Low Duration Bond Portfolio		Intermediate Government Bond Portfolio		Intermediate Bond Portfolio		Intermediate PLUS Bond Portfolio		Core Bond Total Return Portfolio		Core PLUS Total Return Portfolio		Government Income Portfolio
Net Assets	$	100	$	81,716,412	$	387,307,871	$	29,514,418	$	19,347	$	138,519,058	$	26,220	$	177,620,406
Outstanding Shares		10		8,180,107		37,802,483		3,167,588		1,940		14,373,660		2,555		16,283,098
Net Asset Value Per Share	$	9.88	$	9.99	$	10.25	$	9.32	$	9.97	$	9.64	$	10.26	$	10.91
Maximum Sales Charge, 4.00% of offering price (3.00% for Enhanced Income Portfolio and Low Duration Bond and 4.50% for Government Income)*		0.31		0.31		0.43		0.39		0.42		0.40		0.43		0.51
Offering to Public	$	10.19	$	10.30	$	10.68	$	9.71	$	10.39	$	10.04	$	10.69	$	11.42

* The maximum sales charge as a percentage of the net asset value per share for each portfolio at March 31, 2005, was as follows: Enhanced Income Portfolio 3.14%; Low Duration Bond Portfolio 3.10%; Intermediate Government Bond Portfolio 4.20%; Intermediate Bond Portfolio 4.18%; Intermediate PLUS Bond Portfolio 4.21%; Core Bond Total Return Portfolio 4.15%; Core PLUS Total Return Portfolio 4.19%; and Government Income Portfolio 4.67%.

	Inflation Protected Bond Portfolio		GNMA Portfolio		Managed Income Portfolio		International Bond Portfolio		High Yield Bond Portfolio		UltraShort Municipal Portfolio		Tax-Free Income Portfolio
Net Assets	$	3,994,060	$	16,060,302	$	32,986,382	$	189,760,386	$	287,962,396	$	100	$	8,738,768
Outstanding Shares		383,670		1,639,677		3,223,479		16,012,506		35,770,864		10		788,441
Net Asset Value Per Share	$	10.41	$	9.79	$	10.23	$	11.85	$	8.05	$	10.00	$	11.08
Maximum Sales Charge, 4.00% of offering price (3.00% for Inflation Protected Bond and UltraShort Municipal and 4.50% for Managed Income and 5.00% for International Bond and High Yield Bond)*		0.32		0.41		0.48		0.62		0.42		0.31		0.46
Offering to Public	$	10.73	$	10.20	$	10.71	$	12.47	$	8.47	$	10.31	$	11.54

* The maximum sales charge as a percentage of the net asset value per share for each portfolio at March 31, 2005, was as follows: Inflation Protected Bond Portfolio 3.07%; GNMA Portfolio 4.19%; Managed Income Portfolio 4.69%; International Bond Portfolio 5.23%; High Yield Bond Portfolio 5.22%; UltraShort Municipal Portfolio 3.10%; and Tax-Free Income Portfolio 4.15%.

	Pennsylvania Tax-Free Income Portfolio		New Jersey Tax- Free Income Portfolio		Ohio Tax-Free Income Portfolio		Delaware Tax- Free Income Portfolio		Kentucky Tax- Free Income Portfolio
Net Assets	$	32,204,238	$	6,035,491	$	6,850,741	$	14,367,375	$	5,545,333
Outstanding Shares		3,057,815		521,056		637,510		1,440,210		570,097
Net Asset Value Per Share	$	10.53	$	11.58	$	10.75	$	9.98	$	9.73
Maximum Sales Charge, 4.00% of offering price*		0.44		0.48		0.45		0.42		0.41
Offering to Public	$	10.97	$	12.06	$	11.20	$	10.40	$	10.14

* The maximum sales charge as a percentage of the net asset value per share for each portfolio at March 31, 2005, was as follows: Pennsylvania Tax-Free Income Portfolio 4.18%; New Jersey Tax-Free Income Portfolio 4.15%; Ohio Tax-Free Income Portfolio 4.19%; Delaware Tax-Free Income Portfolio 4.21%; and Kentucky Tax-Free Income Portfolio 4.21%.

	Large Cap Value Equity Portfolio		Large Cap Growth Equity Portfolio		Dividend Achievers Portfolio		Mid-Cap Value Equity Portfolio		Mid-Cap Growth Equity Portfolio		Small Cap Value Equity Portfolio
Net Assets	$	152,433,790	$	16,937,174	$	11,028,678	$	440,529,737	$	301,541,107	$	32,975,703
Outstanding Shares		10,966,819		1,857,182		1,053,088		35,499,398		33,420,533		2,346,622
Net Asset Value Per Share	$	13.90	$	9.12	$	10.47	$	12.41	$	9.02	$	14.05
Maximum Sales Charge, 5.75% of offering price*		0.85		0.56		0.64		0.76		0.55		0.86
Offering to Public	$	14.75	$	9.68	$	11.11	$	13.17	$	9.57	$	14.91

* The maximum sales charge as a percentage of the net asset value per share for each portfolio at March 31, 2005, was as follows: Large Cap Value Equity Portfolio 6.12%; Large Cap Growth Equity Portfolio 6.14%; Dividend Achievers Portfolio 6.11%; Mid-Cap Value Equity Portfolio 6.12%; Mid-Cap Growth Equity Portfolio 6.10%; and Small Cap Value Equity Portfolio 6.11%.

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	Small Cap Core Equity Portfolio		Small Cap Growth Equity Portfolio		U.S. Opportunities Portfolio		Global Science & Technology Opportunities Portfolio		Legacy Portfolio		Aurora Portfolio
Net Assets	$	6,691,127	$	145,394,809	$	29,975,372	$	9,048,365	$	123,836,967	$	2,019,006,839
Outstanding Shares		416,431		9,790,116		1,375,932		1,636,930		9,627,581	$	51,588,516
Net Asset Value Per Share	$	16.07	$	14.85	$	21.79	$	5.53	$	12.86	$	39.14
Maximum Sales Charge, 5.75% of offering price*		0.98		0.91		1.33		0.34		0.78		2.39
Offering to Public	$	17.05	$	15.76	$	23.12	$	5.87	$	13.64	$	41.53

* The maximum sales charge as a percentage of the net asset value per share for each portfolio at March 31, 2005, was as follows: Small Cap Core Equity Portfolio 6.10%; Small Cap Growth Equity Portfolio 6.13%; U.S. Opportunities Portfolio 6.10%; Global Science & Technology Opportunities Portfolio 6.15%; Legacy Portfolio 6.07%; and Aurora Portfolio 6.11%.

	International Opportunities Equity Portfolio		Investment Trust Portfolio		Index Equity Portfolio		Small/MidCap Growth Portfolio		Global Resources Portfolio		All-Cap Global Resources Portfolio
Net Assets	$	172,559,137	$	602,950,144	$	304,373,181	$	231,376,775	$	658,699,655	$	7,944,718
Outstanding Shares		6,025,349		47,761,883		13,511,057		17,709,966		12,036,430		790,402
Net Asset Value Per Share	$	28.64	$	12.62	$	22.53	$	13.06	$	54.73	$	10.05
Maximum Sales Charge, 5.75% of offering price (5.00% for International Opportunities and 3.00% for Index Equity)*		1.51		0.77		0.70	$	0.80	$	3.34	$	0.61
Offering to Public	$	30.15	$	13.39	$	23.23	$	13.86	$	58.07	$	10.66

* The maximum sales charge as a percentage of the net asset value per share for each portfolio at March 31, 2005, was as follows: International Opportunities Portfolio 5.27%; Investment Trust Portfolio 6.10%; and Index Equity Portfolio 3.11%; Small/MidCap Growth Portfolio 6.13%; Global Resources 6.10%; All-Cap Global Resources Portfolio 6.07%.

	Asset Allocation Portfolio		Health Sciences Portfolio
Net Assets	$	509,997,906	$	74,681,630
Outstanding Shares		34,677,749		3,726,544
Net Asset Value Per Share	$	14.71	$	20.04
Maximum Sales Charge, 5.75% of offering price*		0.90		1.22
Offering to Public	$	15.61	$	21.26

* The maximum sales charge as a percentage of the net asset value per share for each Portfolio at March 31, 2005 as follows: Asset Allocation Portfolio was 6.12%; Health Sciences Portfolio 6.09%.

Total front-end sales charges paid by shareholders of Investor A Shares of the Portfolios for the year ended September 30, 2004, were as follows:

Portfolios	Front-End Sales Charges
Low Duration Bond	108,616.65
Intermediate Government Bond	21,396.69
Intermediate Bond	107,134.96
Intermediate PLUS Bond	—
Core Bond Total Return	89,103.32
Core PLUS Total Return	100.23

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Portfolios	Front-End Sales Charges
Government Income	227,039.11
Managed Income	11,150.71
Inflation Protected Bond	1,848.01
GNMA	86,224.99
UltraShort Municipal	—
High Yield Bond	352,245.14
International Bond	444,266.00
Tax-Free Income	9,519.73
Pennsylvania Tax-Free Income	49,390.60
New Jersey Tax-Free Income	40,695.68
Ohio Tax-Free Income	14,021.14
Delaware Tax-Free Income	114,862.71
Kentucky Tax-Free Income	35,806.02
Large Cap Value Equity	19,975.23
Large Cap Growth Equity	12,924.35
Dividend Achievers	—
Mid-Cap Value Equity	8,342.35
Mid-Cap Growth Equity	16,615.05
Small Cap Value Equity	41,156.02
Small Cap Core Equity	87,871.58
Small Cap Growth Equity	119,664.88
U.S. Opportunities	51,146.18
Global Science & Technology Opportunities	69,453.09
International Opportunities	470,605.08
Investment Trust	19,119.79
Index Equity	102,341.29
Asset Allocation	24,094.27
Enhanced Income	—

Total front-end sales charges paid by shareholders of Investor A Shares of the Portfolios for the year ended September 30, 2003, were as follows:

Portfolios	Front-End Sales Charges
Low Duration Bond	$	354,828.31
Intermediate Government Bond		101,741.16
Intermediate Bond		99,285.03
Core Bond Total Return		239,377.16
Core PLUS Total Return		0.00
Government Income		473,984.31
Managed Income		26,986.76
GNMA		235,816.79
High Yield Bond		1,030,307.43
International Bond		345,921.29
Tax-Free Income		32,281.22
Pennsylvania Tax-Free Income		43,305.42
New Jersey Tax-Free Income		76,206.43
Ohio Tax-Free Income		22,753.54
Delaware Tax-Free Income		89,771.01
Kentucky Tax-Free Income		34,329.23
Large Cap Value Equity		13,893.11

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Portfolios	Front-End Sales Charges
Large Cap Growth Equity	15,994.82
Mid-Cap Value Equity	2,910.17
Mid-Cap Growth Equity	17,062.28
Small Cap Value Equity	16,257.48
Small Cap Growth Equity	30,521.35
Small Cap Core Equity	0.00
U.S. Opportunities	56,350.49
Global Science & Technology Opportunities	15,595.13
International Opportunities	81,969.77
Investment Trust	11,769.60
Index Equity	103,850.05
Asset Allocation	18,861.93

Total front-end sales charges paid by shareholders of Investor A Shares of the Portfolios for the year ended September 30, 2002, were as follows:

Portfolios	Front-End Sales Charges
Low Duration Bond	$	201,555.52
Intermediate Government Bond		46,761.39
Intermediate Bond		49,118.75
Core Bond Total Return		137,122.14
Core PLUS Total Return		0.00
Government Income		235,283.20
Managed Income		25,242.17
GNMA		134,106.96
High Yield Bond		294,129.93
International Bond		131,970.69
Tax-Free Income		16,109.14
Pennsylvania Tax-Free Income		40,314.91
New Jersey Tax-Free Income		64,329.38
Ohio Tax-Free Income		44,533.13
Delaware Tax-Free Income		26,514.27
Kentucky Tax-Free Income		8,321.12
Large Cap Value Equity		18,301.20
Large Cap Growth Equity		24,493.59
Mid-Cap Value Equity		15,228.31
Mid-Cap Growth Equity		38,601.68
Small Cap Value Equity		18,401.20
Small Cap Growth Equity		27,778.41
Small Cap Core Equity		0.00
U.S. Opportunities		17,998.65
Global Science & Technology Opportunities		23,852.88
International Opportunities		81,358.90
Investment Trust		20,153.79
Index Equity		121,268.19
Asset Allocation		31,442.49

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Institutional and BlackRock Shares

Purchase of Shares. Employees of BlackRock and Trustees of the Fund may buy BlackRock or Institutional Shares of the fund without regard to any existing minimum investment requirements. The Fund may in its discretion waive or modify the minimum investment amount, may reject any order for Institutional and BlackRock Shares and may suspend and resume the sale of shares of any Portfolio at any time.

Institutional Shares of the Portfolios may be purchased by customers of broker-dealers and agents which have established a servicing relationship with the Fund on behalf of their customers. These broker-dealers and agents may impose additional or different conditions on the purchase or redemption of Portfolio shares by their customers and may charge their customers transaction, account or other fees on the purchase and redemption of Portfolio shares. Each broker-dealer or agent is responsible for transmitting to its customers a schedule of any such fees and information regarding any additional or different conditions regarding purchases and redemptions. Shareholders who are customers of such broker-dealers or agents should consult them for information regarding these fees and conditions.

Service Shares

Redemption of Shares. The Fund may redeem Service Shares in any Portfolio account if the account balance drops below $5,000 as the result of redemption requests and the shareholder does not increase the balance to at least $5,000 upon thirty days’ written notice. If a customer has agreed with an Institution to maintain a minimum balance in his or her account with the Institution, and the balance in the account falls below that minimum, the customer may be obligated to redeem all or part of his or her shares in the Portfolio to the extent necessary to maintain the minimum balance required.

The following is applicable only to persons who were shareholders of an investment portfolio of Compass Capital Group of Funds at the time of the portfolio’s combination with The PNC Fund:

Except as noted below, a request for redemption must be signed by all persons in whose names the shares are registered. Signatures must conform exactly to the account registration. If the proceeds of the redemption would exceed $25,000, or if the proceeds are not to be paid to the record owner at the record address, or if the shareholder is a corporation, partnership, trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor institution. A signature guarantee is designed to protect the shareholders and the Portfolio against fraudulent transactions by unauthorized persons. A signature guarantee may be obtained from a domestic bank or trust company, recognized broker, dealer, clearing agency, savings association who are participants in a medallion program by the Securities Transfer Association, credit unions, national securities exchanges and registered securities associations. The three recognized medallion programs are Securities Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP). Signature Guarantees which are not a part of these programs will not be accepted. Please note that a notary public stamp or seal is not acceptable.

Generally, a properly signed written request with any required signature guarantee is all that is required for a redemption. In some cases, however, other documents may be necessary. Additional documentary evidence of authority is required by PFPC in the event redemption is requested by a corporation, partnership, trust, fiduciary, executor or administer.

If shareholder has given authorization for expedited redemption, shares can be redeemed by telephone and the proceeds sent by check to the shareholder or by Federal wire transfer to a single previously designated bank account. Once authorization is on file, the Fund will honor requests by any person by telephone at (800) 441-7762 or other means. The Fund reserves the right to terminate these redemptions privileges. If the proceeds of a redemption would exceed $25,000, the redemption request must be in writing and will be subject to the signature guarantee requirement described above.

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Persons who were shareholders of an investment portfolio of Compass Capital Group of Funds at the time of the portfolio’s combination with The PNC Fund may also purchase and redeem Service Shares of the same Portfolio and for the same account in which they held shares on that date through the procedures described in this section.

DCC&S. Qualified Plans may be able to invest in shares of the Portfolios through the Defined Contribution Clearance and Settlement system (“DCC&S”) of the National Securities Clearing Corporation. Institutions qualifying to trade on DCC&S include broker/dealers, trust companies and third party administrators. Please contact the Fund for information on agreements, procedures, sales charges and fees related to DCC&S transactions.

Hilliard Lyons Shares (“HL Shares”)

Purchase of Shares. The minimum investment for the initial purchase of HL Shares is $1,000; there is a $100 minimum for subsequent investments. Purchases through the Automatic Investment Plan are subject to a lower initial purchase minimum. In addition, the minimum initial investment for employees of a Portfolio, a Portfolio’s investment adviser, sub-advisers, Distributor or transfer agent or employees of their affiliates is $100, unless payment is made through a payroll deduction program in which case the minimum investment is $25.

Other Purchase Information. HL Shares of the Portfolios of the Fund are sold on a continuous basis by BDI as the Distributor. BDI maintains its principal offices at 760 Moore Road, King of Prussia, PA 19406. Purchases may be effected on weekdays on which the New York Stock Exchange is open for business (a “Business Day”). Payment for orders which are not received or accepted will be returned after prompt inquiry. The issuance of shares is recorded on the books of the Fund. No certificates will be issued for shares. Payments for shares of a Portfolio may, in the discretion of the Fund’s investment adviser, be made in the form of securities that are permissible investments for that Portfolio. The Fund reserves the right to reject any purchase order, to modify or waive the minimum initial or subsequent investment requirement and to suspend and resume the sale of any share class of any Portfolio at any time.

Redemption of Shares. Except as noted below, a request for redemption must be signed by all persons in whose names the shares are registered. Signatures must conform exactly to the account registration. If the proceeds of the redemption would exceed $25,000, or if the proceeds are not to be paid to the record owner at the record address, or if the shareholder is a corporation, partnership, trust or fiduciary, signature(s) must be guaranteed by any eligible guarantor institution.

A signature guarantee is designed to protect the shareholders and the Portfolio against fraudulent transactions by unauthorized persons. A signature guarantee may be obtained from a domestic bank or trust company, recognized broker, dealer, clearing agency, savings association who are participants in a medallion program by the Securities Transfer Association, credit unions, national securities exchanges and registered securities associations. The three recognized medallion programs are Securities Transfer Agent Medallion Program (STAMP), Stock Exchanges Medallion Program (SEMP) and New York Stock Exchange, Inc. Medallion Signature Program (MSP). Signature Guarantees which are not a part of these programs will not be accepted. Please note that a notary public stamp or seal is not acceptable.

Generally, a properly signed written request with any required signature guarantee is all that is required for a redemption. In some cases, however, other documents may be necessary. Additional documentary evidence of authority is required by PFPC in the event redemption is requested by a corporation, partnership, trust, fiduciary, executor or administrator.

Payment of Redemption Proceeds

The Fund may suspend the right of redemption or postpone the date of payment upon redemption for such periods as are permitted under the 1940 Act, and may redeem shares involuntarily or make payment for redemption in securities or other property when determined appropriate in light of the Fund’s responsibilities under the 1940 Act.

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The Fund reserves the right, if conditions exist which make cash payments undesirable, to honor any request for redemption or repurchase of a Portfolio’s shares by making payment in whole or in part in securities chosen by the Fund and valued in the same way as they would be valued for purposes of computing a Portfolio’s net asset value. If payment is made in securities, a shareholder may incur transaction costs in converting these securities into cash. The Fund has elected, however, to be governed by Rule 18f-1 under the 1940 Act so that a Portfolio is obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day period for any one shareholder of a Portfolio.

With respect to the Index Master Portfolio, when the Trustees of the Trust determine that it would be in the best interests of the Index Master Portfolio, the Index Master Portfolio may pay the redemption price in whole or in part by a distribution of portfolio securities from the Index Master Portfolio of the shares being redeemed in lieu of cash in accordance with Rule 18f-1 under the 1940 Act. Investors, such as the Index Equity Portfolio, may incur brokerage charges and other transaction costs selling securities that were received in payment of redemptions.

Under the 1940 Act, a Portfolio may suspend the right to redemption or postpone the date of payment upon redemption for any period during which the New York Stock Exchange (the “NYSE”) is closed (other than customary weekend and holiday closings), or during which trading on the NYSE is restricted, or during which (as determined by the SEC by rule or regulation) an emergency exists as a result of which disposal or valuation or portfolio securities is not reasonably practicable, or for such other periods as the SEC may permit. (A Portfolio may also suspend or postpone the recordation of the transfer of its shares upon the occurrence of any of the foregoing conditions.)

The Fund may redeem shares involuntarily to reimburse a Portfolio for any loss sustained by reason of the failure of a shareholder to make full-payment for shares purchased by the shareholder or to collect any charge relating to a transaction effected for the benefit of a shareholder. The Fund reserves the express right to redeem shares of each Portfolio involuntarily at any time if the Fund’s Board of Trustees determines, in its sole discretion, that failure to do so may have adverse consequences to the holders of shares in the Portfolio. Upon such redemption the holders of shares so redeemed shall have no further right with respect thereto other than to receive payment of the redemption price.

Dividends and Distributions

Equity Portfolios. Each of the Equity Portfolios of the Fund will distribute substantially all of its net investment income and (except with respect to the Exchange Portfolio) net realized capital gains, if any, to shareholders. The net investment income of each of the Equity Portfolios is declared quarterly as a dividend to investors who are shareholders of the Portfolio at the close of business on the record day. All dividends are paid not later than ten days after the end of each quarter. Any net realized capital gains (including net short-term capital gains) will be distributed by each Portfolio of the Fund at least annually. The period for which dividends are payable and the time for payment are subject to change by the Fund’s Board of Trustees.

Distributions are reinvested at net asset value in additional full and fractional shares of the same class on which the distributions are paid, unless a shareholder elects to receive distributions in cash. This election, or any revocation thereof, must be made in writing to PFPC, and will become effective with respect to distributions paid after its receipt by PFPC.

The Index Equity Portfolio seeks its investment objective by investing all of its assets in the Index Master Portfolio (which is taxable as a partnership for federal income tax purposes). The Index Equity Portfolio is allocated its distributive share of the income, gains (including capital gains), losses, deductions and credits of the Index Master Portfolio. The Index Equity Portfolio’s distributive share of such items, plus gain, if any, on the redemption of shares of the Index Master Portfolio, less the Index Equity Portfolio’s expenses incurred in operations, will constitute the Index Equity Portfolio’s net income from which dividends are distributed as described above.

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Bond Portfolios. Each of the Bond Portfolios will distribute substantially all of its net investment income and net realized capital gains, if any, to shareholders. All distributions are reinvested at net asset value in the form of additional full and fractional shares of the same class of shares of the relevant Portfolio unless a shareholder elects otherwise. Dividends may only be directed to one other Portfolio. Such election, or any revocation thereof, must be made in writing to PFPC, and will become effective with respect to dividends paid after its receipt by PFPC. Each Portfolio declares a dividend each day on “settled” shares (i.e., shares for which the particular Portfolio has received payment in Federal funds) on the first Business Day after a purchase order is placed with the Fund. Payments by check are normally converted to Federal funds within two Business Days of receipt. Over the course of a year, substantially all of the Portfolio’s net investment income will be declared as dividends. The amount of the daily dividend for each Portfolio will be based on periodic projections of its net investment income. All dividends are paid within ten days after the end of each month. Net realized capital gains (including net short-term capital gains), if any, will be distributed by each Portfolio at least annually.

Money Market Portfolios. Shareholders are entitled to dividends and distributions arising from the net income and capital gains, if any, earned on investments held by the Money Market Portfolio in which they invest. Each Money Market Portfolio’s net income is declared daily as a dividend. Shareholders whose purchase orders are executed at 12:30 p.m. (Eastern Time) receive dividends for that day. On the other hand, shareholders whose redemption orders have been received by 12:30 p.m. (Eastern Time) do not receive dividends for that day, while shareholders of each Portfolio whose redemption orders are received after 12:30 p.m. (Eastern Time) do receive dividends for that day.

Dividends are paid monthly by check, or by wire transfer if requested in writing by the shareholder, within ten business days after the end of the month. Net short-term capital gains, if any, will be distributed at least annually. The period for which dividends are payable and the time for payment are subject to change by the Fund’s Board of Trustees. The Portfolios do not expect to realize net long-term capital gains.

Dividends are reinvested in additional full and fractional Investor Shares of the same class on which the dividends are paid, unless a shareholder elects to receive dividends in cash. Such election, or any revocation thereof, must be made in writing to PFPC, and will become effective with respect to dividends paid after receipt by PFPC.

VALUATION OF PORTFOLIO SECURITIES

In determining the market value of portfolio investments, the Fund may employ outside organizations, which may use, without limitation, a matrix or formula method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the securities being valued at a price different from the price that would have been determined had the matrix or formula method not been used. All cash, receivables and current payables are carried on the Fund’s books at their face value. Other assets, if any, are valued at fair value as determined in good faith under the supervision of the Board of Trustees.

Money Market Portfolios. The Fund seeks to maintain for each of the Money Market Portfolios a net asset value of $1.00 per share for purposes of purchase and redemptions and values their portfolio securities on the basis of the amortized cost method of valuation.

Under this method the market value of an instrument is approximated by amortizing the difference between the acquisition cost and value at maturity of the instrument on a straight-line basis over the remaining life of the instrument. The effect of changes in the market value of a security as a result of fluctuating interest rates is not taken into account. The market value of debt securities usually reflects yields generally available on securities of similar quality. When such yields decline, market values can be expected to increase, and when yields increase, market values can be expected to decline.

As indicated, the amortized cost method of valuation may result in the value of a security being higher or lower than its market price, the price a Money Market Portfolio would receive if the security were sold prior to maturity. The Fund’s Board of Trustees has established procedures for the purpose of maintaining a constant net asset value of $1.00 per share for each Money Market Portfolio, which include a review of the extent of any deviation of net asset value per share, based on available market quotations, from the $1.00 amortized cost per share.

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Should that deviation exceed ½ of 1% for a Money Market Portfolio, the Fund’s Board of Trustees will promptly consider whether any action should be initiated to eliminate or reduce material dilution or other unfair results to shareholders. Such action may include redeeming shares in kind, selling portfolio securities prior to maturity, reducing or withholding dividends, shortening the average portfolio maturity, reducing the number of outstanding shares without monetary consideration, and utilizing a net asset value per share as determined by using available market quotations.

Each Money Market Portfolio will maintain a dollar-weighted average portfolio maturity of 90 days or less, will not purchase any instrument with a deemed maturity under Rule 2a-7 of the 1940 Act greater than 13 months, and will limit portfolio investments, including repurchase agreements, to those instruments that the adviser or sub-adviser determines present minimal credit risks pursuant to guidelines adopted by the Fund’s Board of Trustees. There can be no assurance that a constant net asset value will be maintained for any Money Market Portfolio.

Equity Portfolios. Net asset value is calculated separately for each class of shares of each Equity Portfolio as of the close of regular trading hours on the NYSE (currently 4:00 p.m. Eastern Time) on each Business Day by dividing the value of all securities, cash and other assets owned by a Portfolio that are allocated to a particular class of shares, less the liabilities charged to that class, by the total number of outstanding shares of the class.

Valuation of securities held by each Equity Portfolio is as follows: securities traded on a national securities exchange or on the NASDAQ National Market System are valued at the last reported sale price that day or the NASDAQ official closing price (“NOCP”), if applicable; securities traded on a national securities exchange for which there were no sales on that day and securities traded on other over-the-counter markets for which market quotations are readily available are valued at the mean of the bid and asked prices; an option or futures contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal exchange or board of trade on which such option or contract is traded, or in the absence of a sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern Time); and securities for which market quotations are not readily available are valued at fair market value as determined in good faith by or under the direction of the Fund’s Board of Trustees. The amortized cost method of valuation may also be used with respect to debt obligations with sixty days or less remaining to maturity unless the investment adviser and/or sub-adviser under the supervision of the Board of Trustees determines such method does not represent fair value.

Valuation of securities of non-U.S. issuers is as follows: to the extent sale prices are available, securities which are traded on a recognized stock exchange, whether U.S. or non-U.S., are valued at the latest sale price on that exchange prior to the time when assets are valued or prior to the close of regular trading hours on the NYSE. In the event that there are no sales, the mean between the last available bid and asked prices will be used. If a security is traded on more than one exchange, the latest sale price on the exchange where the stock is primarily traded is used. An option or futures contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal exchange or board of trade on which such option or contract is traded, or in the absence of a sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern Time). In the event that application of these methods of valuation results in a price for a security which is deemed not to be representative of the market value of such security, the security will be valued by, under the direction of or in accordance with a method specified by the Board of Trustees as reflecting fair value. The amortized cost method of valuation will be used with respect to debt obligations with sixty days or less remaining to maturity unless the investment adviser and/or sub-adviser under the supervision of the Board of Trustees determines such method does not represent fair value. All other assets and securities held by the Portfolios (including restricted securities) are valued at fair value as determined in good faith by the Board of Trustees or by someone under its direction. Any assets which are denominated in a non-U.S. currency are translated into U.S. dollars at the prevailing market rates.

Certain of the securities acquired by the Portfolios may be traded on non-U.S. exchanges or over-the-counter markets on days on which a Portfolio’s net asset value is not calculated. In such cases, the net asset value of the Portfolio’s shares may be significantly affected on days when investors can neither purchase nor redeem shares of the Portfolio.

A Portfolio may use a pricing service, bank or broker/dealer experienced in such matters to value the Portfolio’s securities.

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The valuation of securities held by the Index Master Portfolio is discussed in its Registration Statement.

Bond Portfolios. Net asset value is calculated separately for each class of shares of each Bond Portfolio as of the close of regular trading hours on the NYSE on each Business Day by dividing the value of all securities, cash and other assets owned by a Portfolio that are allocated to a particular class of shares, less the liabilities charged to that class, by the total number of outstanding shares of the class.

Valuation of securities held by each Bond Portfolio is as follows: fixed income securities are valued by using market quotations or prices provided by market makers; a portion of the fixed income securities are valued utilizing one or more pricing services approved by the Board of Trustees; an option or futures contract is valued at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal exchange or board of trade on which such option or futures contract is traded, or in the absence of a sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern Time); the amortized cost method of valuation will be used with respect to debt obligations with sixty days or less remaining to maturity unless the investment adviser and/or sub-adviser under the supervision of the Board of Trustees determines that such method does not represent fair value. In the event that application of these methods of valuation results in a price for a security which is deemed not to be representative of the market value of such security, the security will be valued by, under the direction of or in accordance with a method specified by the Board of Trustees as reflecting fair value. All other assets and securities (including securities for which market quotations are not readily available) held by the Portfolios (including restricted securities) are valued at fair value as determined in good faith by the Board of Trustees or by someone under its direction. Any securities that are denominated in a non-U.S. currency are translated into U.S. dollars at the prevailing market rates. Certain of the securities acquired by the Portfolios may be traded on non-U.S. exchanges or over-the-counter markets on days on which the Portfolio’s net asset value is not calculated. In such cases, the net asset value of the Portfolio’s shares may be significantly affected on days when investors can neither purchase nor redeem shares of the Portfolio.

Fair Value. When the exchange or market on which a security or other asset is traded does not open for trading for an entire trading day, and no other market prices are available, market quotations are not readily available. Market quotations may not be reliable when there is a substantial time differential between the close of trading for the asset and the time as of which the Fund values its assets and when significant events have occurred in the markets or in related instruments such as ADRs. When market quotations are not readily available or are believed by BlackRock to be unreliable, the Fund’s investments are valued at fair value (“Fair Value Assets”).

Fair Value Assets generally are valued by BlackRock in accordance with procedures approved by the Board of Trustees. BlackRock may conclude that a market quotation is not readily available or is unreliable if a security or other asset does not have a price source due to its lack of liquidity, if BlackRock believes a market quotation from a broker-dealer is unreliable (e.g., where it varies significantly from a recent trade), where the security or other asset is thinly traded or where there is a significant event subsequent to the most recent market quotation. For these purpose, a “significant event” is deemed to occur if the BlackRock Portfolio Management Group and/or the Pricing Group determines, in its business judgment prior to or at the time of pricing the Fund’s assets, that it is highly likely that the event will cause a material change to the last closing market price of one or more assets held by the Fund.

BlackRock’s Pricing Group will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to BlackRock’s Valuation Committee. The Valuation Committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to and ratified by the Board.

When determining the price for a Fair Value Asset, the Valuation Committee (or the Pricing Group) shall seek to determine the price that the Fund might reasonably expect to receive from the current sale of that asset in an arm’s-length transaction. The price generally may not be determined based on what the Fund might reasonably expect to receive for selling an asset at a later time or if it holds the asset to maturity. Fair value determinations shall be based upon all available factors that the Valuation Committee (or Pricing Group) deems relevant.

Fair value represents a good faith approximation of the value of a security. The fair value of one or more securities may not, in retrospect, be the prices at which those assets could have been sold during the period in which

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the particular fair values were used in determining a Portfolio’s net asset value. As a result, a Portfolio’s sale or redemption of its shares at net asset value, at a time when a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.

TAXES

The following is only a summary of certain additional tax considerations generally affecting the Portfolios and their shareholders that are not described in the Prospectuses. No attempt is made to present a detailed explanation of the tax treatment of the Portfolios or their shareholders, and the discussion here and in the Prospectuses is not intended as a substitute for careful tax planning. Investors are urged to consult their tax advisers with specific reference to their own tax situation.

Please note that for purposes of satisfying certain of the requirements for taxation as a regulated investment company described below, the Index Equity Portfolio is deemed to own a proportionate share of the assets and gross income of the Index Master Portfolio in which the Index Equity Portfolio invests all of its assets. Also, with respect to the Index Equity Portfolio, the discussion below that relates to the taxation of futures contracts and other rules pertaining to the timing and character of income applies to the Index Master Portfolio.

Each Portfolio of the Fund has elected and intends to qualify each year for taxation as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a regulated investment company, each Portfolio generally is exempt from federal income tax on its investment company taxable income, as that term is defined in the Code without regard to the deduction for dividends paid, and net capital gain (i.e., the excess of its net long-term capital gain over its net short-term capital loss) that it distributes to shareholders, provided that it distributes an amount equal to at least the sum of (a) 90% of its investment company taxable income and (b) 90% of its net tax-exempt interest income, if any, for the year (the “Distribution Requirement”) and satisfies certain other requirements of the Code that are described below. Distributions of investment company taxable income and net tax-exempt interest income made during the taxable year or, under specified circumstances, within twelve months after the close of the taxable year will satisfy the Distribution Requirement.

In addition to satisfaction of the Distribution Requirement, each Portfolio must derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans and gains from the sale or other disposition of stock or securities or non-U.S. currencies (including, but not limited to, gains from forward non-U.S. currency exchange contracts), or from other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies (the “Income Requirement”).

In addition to the foregoing requirements, at the close of each quarter of its taxable year, at least 50% of the value of each Portfolio’s assets must consist of cash and cash items, U.S. government securities, securities of other regulated investment companies, and securities of other issuers (as to which a Portfolio generally has not invested more than 5% of the value of its total assets in securities of such issuer and as to which a Portfolio does not hold more than 10% of the outstanding voting securities of such issuer), and no more than 25% of the value of each Portfolio’s total assets may be invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated investment companies), or in two or more issuers which such Portfolio controls and which are engaged in the same or similar trades or businesses.

The American Jobs Creation Act of 2004 (the “2004 Act”), which the President recently signed into law, provides that for taxable years of a regulated investment company beginning after October 22, 2004, net income derived from an interest in a “qualified publicly traded partnership,” as defined in the Code, will be treated as qualifying income for purposes of the Income Requirement described above. In addition, for the purposes of the diversification requirements described above, the outstanding voting securities of any issuer includes the equity securities of a qualified publicly traded partnership, and no more than 25% of the value of a regulated investment company’s total assets may be invested in the securities of one or more qualified publicly traded partnerships. The 2004 Act also provides that the separate treatment for publicly traded partnerships under the passive activity rules of the Code applies to a regulated investment company holding an interest in a qualified publicly traded partnership, with respect to items attributable to such interest.

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Each of the Money and Non-Money Market Municipal Portfolios and the UltraShort Municipal Portfolio is designed to provide investors with tax-exempt interest income. Shares of the Money Market Municipal Portfolios would not be suitable for tax-exempt institutions and may not be suitable for retirement plans qualified under Section 401 of the Code, H.R. 10 plans and individual retirement accounts because such plans and accounts are generally tax-exempt and, therefore, not only would not gain any additional benefit from the Portfolio’s dividends being tax-exempt but also such dividends would be taxable when distributed to the beneficiary. In addition, the Money and Non-Money Market Municipal Portfolios and the UltraShort Municipal Portfolio may not be an appropriate investment for entities which are “substantial users” of facilities financed by private activity bonds or “related persons” thereof. “Substantial user” is defined under U.S. Treasury Regulations to include a non-exempt person who regularly uses a part of such facilities in his trade or business and (a) whose gross revenues derived with respect to the facilities financed by the issuance of bonds are more than 5% of the total revenues derived by all users of such facilities, (b) who occupies more than 5% of the entire usable area of such facilities, or (c) for whom such facilities or a part thereof were specifically constructed, reconstructed or acquired. “Related persons” include certain related natural persons, affiliated corporations, a partnership and its partners and an S corporation and its shareholders.

In order for the Money and Non-Money Market Municipal Portfolios and the UltraShort Municipal Portfolio to pay exempt-interest dividends for any taxable year, at the close of each quarter of the taxable year at least 50% of the value of each such Portfolio must consist of exempt-interest obligations. Exempt-interest dividends distributed to shareholders are not included in the shareholder’s gross income for regular federal income tax purposes. However, gain realized by such Portfolios from the disposition of a tax-exempt bond that was acquired after April 30, 1993, for a price less than the principal amount of the bond is treated as ordinary income to the extent of accrued market discount. Also, all shareholders required to file a federal income tax return are required to report the receipt of exempt-interest dividends and other exempt interest on their returns. Partnerships, in which all or substantially all of the partnership’s income is derived from the holding or disposition of tax-exempt obligations or shares in a regulated investment company that pays exempt-interest dividends and where the partnership meets certain procedural requirements, do not have to file Form 1065 or issue Schedule K-1s for the taxable year. Moreover, while such dividends and interest are exempt from regular federal income tax, they may be subject to alternative minimum tax (currently imposed at the rate of 26% (28% on the taxable excess over $175,000) in the case of non-corporate taxpayers and at the rate of 20% in the case of corporate taxpayers) in two circumstances. First, exempt-interest dividends derived from certain private activity bonds issued after August 7, 1986, generally will constitute an item of tax preference for both corporate and non-corporate taxpayers. Second, exempt-interest dividends derived from all bonds, regardless of the date of issue, must be taken into account by corporate taxpayers in determining certain adjustments for alternative minimum tax purposes. Receipt of exempt-interest dividends may result in collateral federal income tax consequences to certain other taxpayers, including financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, and non-U.S. corporations engaged in a trade or business in the United States. Prospective investors should consult their own tax advisors as to such consequences.

If a Money or Non-Money Market Municipal Portfolio distributes exempt-interest dividends during the shareholder’s taxable year, no deduction generally will be allowed for any interest expense on indebtedness incurred to purchase or carry shares of such Portfolio.

Distributions of investment company taxable income from a Portfolio will generally be taxable (other than qualified dividend income and the possible allowance of the dividends received deduction described below) to shareholders as ordinary income to the extent of that Portfolio’s earnings and profits, regardless of whether such distributions are paid in cash or are reinvested in shares. However, for taxable years beginning on or before December 31, 2008, distributions of investment company taxable income that are designated by a Portfolio as derived from qualified dividend income are taxed to individuals at the rates applicable to long-term capital gains. A Portfolio will notify shareholders of the amount of any distribution that may constitute qualified dividend income not later than 60 days after the close of its taxable year. If a Portfolio receives 95% or more of its gross income (as defined for that purpose) from qualified dividend income, all the Portfolio’s distributions may be classified as qualified dividend income, provided holding period and other requirements are met by both the shareholders and the

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Portfolio. Otherwise, only a portion of a Portfolio’s distributions may be eligible for classification as qualified dividend income. A Portfolio may designate such distributions as qualified dividend income only to the extent the Portfolio has qualified dividend income for the taxable year in which such distributions are made. Qualified dividend income is generally dividend income from taxable domestic corporations and certain non-U.S. corporations. Shareholders receiving any distribution from a Portfolio in the form of additional shares will be treated as receiving a taxable distribution in an amount equal to the fair market value of the shares received, determined as of the reinvestment date. The Money and Non-Money Market Municipal Portfolios and the UltraShort Municipal Portfolio may each purchase securities that do not bear tax-exempt interest. Any income on such securities recognized by the Portfolio will be distributed and will be taxable to its shareholders.

Except for the Exchange Portfolio, each Portfolio intends to distribute to shareholders any of its net capital gain for each taxable year. Such gain is distributed as a capital gain dividend and is taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has held his shares, whether such gain was recognized by the Portfolio prior to the date on which a shareholder acquired shares of the Portfolio and whether the distribution was paid in cash or reinvested in shares. If a Portfolio retains any net capital gain, it may designate the retained amount as undistributed capital gain in a notice to its shareholders, and each shareholder will (i) be required to include in income for U.S. federal income tax purposes as long-term capital gain its share of such undistributed amounts, (ii) be entitled to credit its proportionate share of tax paid by the Portfolio against its U.S. federal income tax liability and to claim refunds to the extent that the credit exceeds such liability and (iii) increase its basis in its shares of the Portfolio by an amount equal to the difference between its proportionate share of such gains and the amount of tax paid on such shareholder’s behalf by the Portfolio.

Distributions by a Portfolio that do not constitute ordinary income dividends, qualified dividend income, exempt-interest dividends, interest-related dividends, short-term capital gain dividends or capital gain dividends will be treated as a return of capital to the extent of (and in reduction of) a shareholder’s tax basis in his shares; any excess will be treated as gain from the sale of his shares, as discussed below.

Under current law, ordinary income of individuals will be taxable at a maximum marginal rate of 35%, but because of limitations on itemized deductions otherwise allowable and the phase-out of personal exemptions, the maximum effective marginal rate of tax for some taxpayers may be higher. Long-term capital gains for individuals have been temporarily reduced to 15% (with lower rates for individuals in the 10% to 15% rate brackets) for taxable years beginning on or before December 31, 2008. Capital gains and ordinary income of corporate taxpayers are both taxed at a maximum marginal rate of 35%.

A shareholder will recognize gain or loss on the sale, exchange or redemption of a Portfolio’s shares in an amount equal to the difference between the proceeds of the sale, exchange or redemption and the shareholder’s adjusted tax basis in the shares. All or a portion of any loss so recognized may be disallowed if the shareholder purchases other shares of such Portfolio within 30 days before or after the sale, exchange or redemption. Any gain or loss arising from the sale, exchange or redemption of shares of a Portfolio held as a capital asset (generally, property held for investment) will be considered capital gain or loss and will be long-term capital gain or loss if the shares were held for longer than one year. Any loss incurred on the sale or exchange of a Portfolio’s shares, held six months or less, will be disallowed to the extent of exempt-interest dividends received with respect to such shares, and any loss not so disallowed will be treated as a long-term capital loss to the extent of capital gain dividends received with respect to such shares.

Under recently promulgated Treasury regulations, if a shareholder recognizes a loss with respect to shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on IRS Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all regulated investment companies. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their individual circumstances.

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Each Non-Money Market Portfolio (other than the Index Master Portfolio) may engage in hedging or derivatives transactions involving non-U.S. currencies, forward contracts, options and futures contracts (including options, futures and forward contracts on non-U.S. currencies) and short sales. Such transactions will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Portfolio (that is, may affect whether gains or losses are ordinary or capital), accelerate recognition of income of the Portfolio and defer recognition of certain of the Portfolio’s losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. In addition, these provisions (1) will require a Portfolio to “mark-to-market” certain types of positions in its portfolio (that is, treat them as if they were closed out) and (2) may cause a Portfolio to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the Distribution Requirement and avoid the 4% excise tax (described below). Each Portfolio intends to monitor its transactions, will make the appropriate tax elections and will make the appropriate entries in its books and records when it acquires any option, futures contract, forward contract or hedged investment in order to mitigate the effect of these rules.

Each Bond Portfolio and the Asset Allocation Portfolio may make investments in zero coupon bonds having original issue discount (i.e., an amount equal to the excess of the stated redemption price of the bond at maturity over its issue price). Zero coupon bonds do not provide for periodic interest payments and therefore produce income that is not matched by a corresponding cash distribution. Any such income would be treated as income earned by a Portfolio and would be subject to the Distribution Requirement and taken into account for purposes of the 4% excise tax (discussed below). As a result, such Portfolio may be required to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to be able to make distributions to its investors.

Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time a Portfolio accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time a Portfolio actually collects such income or receivables or pays such liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt securities denominated in a foreign currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.

If a Portfolio purchases shares in a “passive foreign investment company” (a “PFIC”), such Portfolio may be subject to U.S. federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Portfolio to its shareholders. Additional charges in the nature of interest may be imposed on a Portfolio in respect of deferred taxes arising from such distributions or gains. If a Portfolio were to invest in a PFIC and elected to treat the PFIC as a “qualified electing fund” under the Code (a “QEF”), in lieu of the foregoing requirements, the Portfolio would be required to include in income each year a portion of the ordinary earnings and net capital gain of the qualified electing fund, even if not distributed to the Portfolio. Alternatively, a Portfolio can elect to mark-to-market at the end of each taxable year its shares in a PFIC; in this case, the Portfolio would recognize as ordinary income any increase in the value of such shares, and as ordinary loss any decrease in such value to the extent it did not exceed prior increases included in income. Under either election, a Portfolio might be required to recognize in a year income in excess of its distributions from PFICs and its proceeds from dispositions of PFIC stock during that year, and such income would nevertheless be subject to the Distribution Requirement and would be taken into account for purposes of the 4% excise tax (described below).

Investment income that may be received by certain of the Portfolios from sources within foreign countries may be subject to foreign taxes withheld at the source. The United States has entered into tax treaties with many foreign countries which entitle any such Portfolio to a reduced rate of, or exemption from, taxes on such income. If more than 50% of the value of the total assets at the close of the taxable year of the International Opportunities or International Bond Portfolios consists of stock or securities of non-U.S. corporations, such Portfolio may elect to “pass through” to the Portfolio’s shareholders the amount of foreign taxes paid by such Portfolio. If a Portfolio so elects, each shareholder would be required to include in gross income, even though not actually received, his pro rata share of the foreign taxes paid by the Portfolio, but would be treated as having paid his pro rata share of such foreign taxes and would therefore be allowed to either deduct such amount in computing taxable income or use such amount (subject to various Code limitations) as a foreign tax credit against federal income tax (but not both). For purposes of the foreign tax credit limitation rules of the Code, each shareholder would treat as non-U.S. source

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income his pro rata share of such foreign taxes plus the portion of dividends received from the Portfolio representing income derived from non-U.S. sources. No deduction for foreign taxes could be claimed by an individual shareholder who does not itemize deductions. In certain circumstances, a shareholder that (i) has held shares of the Portfolio for less than a specified minimum period during which it is not protected from risk of loss or (ii) is obligated to make payments related to the dividends will not be allowed a foreign tax credit for foreign taxes deemed imposed on dividends paid on such shares. Additionally, such Portfolio must also meet this holding period requirement with respect to its non-U.S. stocks and securities in order for “creditable” taxes to flow-through. Each shareholder should consult his own tax adviser regarding the potential application of foreign tax credits.

Ordinary income dividends paid by a Portfolio will qualify for the 70% dividends-received deduction generally available to corporations to the extent of the amount of “qualifying dividends” received by the Portfolio from domestic corporations for the taxable year. A dividend received by a Portfolio will not be treated as a qualifying dividend (i) if it has been received with respect to any share of stock that the Portfolio has held for less than 46 days (91 days in the case of certain preferred stock) during the 91 day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend (during the 181 day period beginning 90 days before such date in the case of certain preferred stock), (ii) to the extent that the Portfolio is under an obligation to make related payments with respect to positions in substantially similar or related property or (iii) to the extent the stock on which the dividend is paid is treated as debt-financed. Moreover, the dividends-received deduction for a corporate shareholder may be disallowed if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of a Portfolio.

If for any taxable year any Portfolio does not qualify as a regulated investment company, all of its taxable income will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and all distributions (including amounts derived from interest on Municipal Obligations) will be taxable as ordinary dividends to the extent of such Portfolio’s current and accumulated earnings and profits. Such distributions will generally be eligible (i) for treatment as qualified dividend income in the case of individual shareholders and (ii) for the dividends-received deduction in the case of corporate shareholders.

A 4% non-deductible excise tax is imposed on regulated investment companies that fail to currently distribute specified percentages of their ordinary taxable income and capital gain net income (excess of capital gains over capital losses). Each Portfolio intends to make sufficient distributions or deemed distributions of its ordinary taxable income and any capital gain net income prior to the end of each calendar year to avoid liability for this excise tax.

Ordinarily, shareholders are required to take distributions by a Portfolio into account in the year in which the distributions are made. However, dividends declared in October, November or December of any year and payable to shareholders of record on a specified date in such a month will be deemed to have been received by the shareholders (and made by the Portfolio) on December 31 of such calendar year if such dividends are actually paid in January of the following year.

The Fund will be required in certain cases to withhold and remit to the United States Treasury a portion of dividends and gross sale proceeds paid to any shareholder (i) who has provided either an incorrect tax identification number or no number at all, (ii) who is subject to backup withholding by the Internal Revenue Service for failure to report the receipt of interest or dividend income properly, or (iii) who has failed to certify to the Fund when required to do so that he is not subject to backup withholding or that he is an “exempt recipient.”

Taxation of a shareholder who, as to the United States, is a nonresident alien individual, non-U.S. trust or estate, non-U.S. corporation, or non-U.S. partnership (“non-U.S. shareholder”), depends on whether the income from a Portfolio is “effectively connected” with a U.S. trade or business carried on by such shareholder. If the income from a Portfolio is not effectively connected with a U.S. trade or business carried on by a non-U.S. shareholder, dividends paid to such non-U.S. shareholder from investment company taxable income will be subject to a U.S. withholding tax at the rate of 30% (or lower treaty rate) upon the gross amount of the dividend. Such a non-U.S. shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale of shares of a Portfolio, exempt-interest dividends and capital gain dividends. In addition, under the 2004 Act, a new exemption is created under which U.S. source withholding taxes are no longer imposed on dividends paid by regulated investment companies to the extent the dividends are designated as “interest-related dividends” or “short-term

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capital gain dividends.” Under this exemption, interest-related dividends and short-term capital gain dividends generally represent distributions of interest or short-term capital gains that would not have been subject to U.S. withholding tax at the source if they had been received directly by a foreign person, and that satisfy certain other requirements. The exemption applies to dividends with respect to taxable years of regulated investment companies beginning after December 31, 2004, and before January 1, 2008. If the income from a Portfolio is effectively connected with a U.S. trade or business carried on by a non-U.S. shareholder, then ordinary income dividends, qualified dividend income, interest-related dividends, short-term capital gain dividends, capital gain dividends, and any gains realized upon the sale of shares of a Portfolio will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations. In the case of non-U.S. non-corporate shareholders, the Fund may be required to withhold U.S. federal income tax on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless such shareholders furnish the Fund with proper notification of their non-U.S. status. Non-U.S. shareholders are urged to consult their own tax advisers with respect to the particular tax consequences to them of an investment in a Portfolio, including the applicability of foreign taxes.

Shareholders will be advised annually as to the Federal income tax consequences of distributions made by the Portfolios each year.

The foregoing general discussion of federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this Statement of Additional Information. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein.

Although each Portfolio expects to qualify as a “regulated investment company” and to be relieved of all or substantially all federal income taxes, depending upon the extent of its activities in states and localities in which its offices are maintained, in which its agents or independent contractors are located or in which it is otherwise deemed to be conducting business, each Portfolio may be subject to the tax laws of such states or localities. Shareholders should consult their tax advisors about state and local tax consequences, which may differ from the federal income tax consequences described above.

Ohio Tax Considerations. Under current Ohio law, individuals and estates that are subject to Ohio personal income tax or municipal or school district income taxes in Ohio will not be subject to such taxes on distributions with respect to shares of the Ohio Tax-Free Income Portfolio or the Ohio Municipal Money Market Portfolio (“Distributions”) to the extent that such Distributions are properly attributable to interest on obligations of the State of Ohio, political subdivisions thereof or agencies or instrumentalities of Ohio or its political subdivisions (“Ohio State-Specific Obligations”), Corporations that are subject to the Ohio corporation franchise tax will not have to include Distributions in their tax base for purposes of calculating the Ohio corporation franchise on the net income basis to the extent that such Distributions either constitute exempt-interest dividends for federal income tax purposes or are properly attributable to interest on Ohio State-Specific Obligations. However, Shares of the Ohio Tax Free Income Portfolio and the Ohio Municipal Money Market Portfolio will be included in a corporation’s tax base for purposes of calculating the Ohio corporation franchise tax on the net worth basis.

Distributions that consist of interest on obligations of the United States or its territories or possessions or of any authority, commission, or instrumentality of the United States (“Territorial Obligations”) the interest on which is exempt from state income taxes under the laws of the United States are exempt from the Ohio personal income tax, and municipal and school district income taxes in Ohio, and, provided, in the case of Territorial Obligations, such interest is excluded from gross income for federal income tax purposes, are excluded from the net income base of the Ohio corporation franchise tax.

Distributions properly attributable to profit on the sale, exchange or other disposition of Ohio State-Specific Obligations will not be subject to the Ohio personal income tax, or municipal or school district income taxes in Ohio and will not be included in the net income base of the Ohio corporation franchise tax. Distributions attributable to other sources generally will not be exempt from the Ohio personal income tax, municipal or school district income taxes in Ohio or the net income base of the Ohio corporation franchise tax.

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The Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios are not subject to the Ohio personal income tax or school district or municipal income taxes in Ohio. The Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios are not subject to the Ohio corporation franchise tax or the Ohio dealers in intangibles tax, provided that, if there is a sufficient nexus between the State of Ohio and such entity that would enable the State to tax such entity, the Fund timely files the annual report required by Section 5733.09 of the Ohio Revised Code. The Ohio Tax Commissioner has waived this annual filing requirement for each tax year since 1990, the first tax year to which such requirement applied. Distributions with respect to shares of the Ohio Municipal Money Market and Ohio Tax-Free Income Portfolios properly attributable to proceeds of insurance paid to those Portfolios that represent maturing or matured interest on defaulted Obligations held by those Portfolios and that are excluded from gross income for Federal income tax purposes will not be subject to Ohio personal income tax or municipal or school district income taxes in Ohio, nor included in the net income base of the Ohio corporation franchise tax.

This discussion of Ohio taxes assumes that the Ohio Tax-Free Income Portfolio and the Ohio Municipal Money Market Portfolio will each continue to qualify as a regulated investment company under the Internal Revenue Code and that at all times at least 50% of the value of the total assets of each of the Portfolios consists of Ohio State-Specific Obligations or similar obligations of other states or their subdivisions.

North Carolina Tax Considerations. Interest received in the form of dividends from the North Carolina Municipal Money Market Portfolio is exempt from North Carolina state income tax to the extent the distributions represent interest on direct obligations of the U.S. Government or North Carolina State-Specific Obligations. Distributions derived from interest earned on obligations of political subdivisions of Puerto Rico, Guam and the U.S. Virgin Islands, including the governments thereof and their agencies, instrumentalities and authorities, are also exempt from North Carolina state income tax. Distributions paid out of interest earned on obligations that are merely backed or guaranteed by the U.S. Government (e.g., GNMAs, FNMAs), on repurchase agreements collateralized by U.S. Government securities or on obligations of other states (which the Portfolio may acquire and hold for temporary or defensive purposes) are not exempt from North Carolina state income tax.

Any distributions of net realized gain earned by the North Carolina Municipal Money Market Portfolio on the sale or exchange of certain obligations of the State of North Carolina or its subdivisions that were issued before July 1, 1995, will also be exempt from North Carolina income tax to the Portfolio’s shareholders. Distributions of gains earned by the North Carolina Municipal Money Market Portfolio on the sale or exchange of all other obligations will be subject to North Carolina income tax.

Distributions of exempt-interest dividends, to the extent attributable to interest on North Carolina State-Specific Obligations and to interest on direct obligations of the United States (including territories thereof), are not subject to North Carolina individual or corporate income tax. Distributions of gains attributable to certain obligations of the State of North Carolina and its political subdivisions issued prior to July 1, 1995, are not subject to North Carolina individual or corporate income tax; however, distributions of gains attributable to such types of obligations that were issued after June 30, 1995, will be subject to North Carolina individual or corporate income tax. An investment in a Portfolio (including the North Carolina Municipal Money Market Portfolio) by a corporation subject to the North Carolina franchise tax will be included in the capital stock, surplus and undivided profits base in computing the North Carolina franchise tax. Investors in a Portfolio including, in particular, corporate investors which may be subject to the North Carolina franchise tax, should consult their tax advisors with respect to the effects on such tax of an investment in a Portfolio and with respect to their tax situation in general.

Virginia Tax Considerations. Dividends paid by the Virginia Municipal Money Market Portfolio and derived from interest on obligations of the Commonwealth of Virginia or of any political subdivision or instrumentality of the Commonwealth or derived from interest or dividends on obligations of the United States excludable from Virginia taxable income under the laws of the United States, which obligations are issued in the exercise of the borrowing power of the Commonwealth or the United States and are backed by the full faith and credit of the Commonwealth or the United States, will generally be exempt from the Virginia income tax. Dividends derived from interest on debt obligations of certain territories and

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possessions of the United States backed by the full faith and credit of the borrowing government (those issued by Puerto Rico, the Virgin Islands and Guam) will also be exempt from the Virginia income tax. Dividends derived from interest on debt obligations other than those described above will be subject to the Virginia income tax even though it may be excludable from gross income for Federal income tax purposes.

Generally, dividends distributed to shareholders by the Portfolio and derived from capital gains will be taxable to the shareholders. Capital gains distributed to shareholders derived from Virginia obligations issued pursuant to special Virginia enabling legislation which provides a specific exemption for such gains will be exempt from Virginia income tax.

When taxable income of a regulated investment company is commingled with exempt income, all distributions of the income are presumed taxable to the shareholders unless the portion of income that is exempt from Virginia income tax can be determined with reasonable certainty and substantiated. Generally, this determination must be made for each distribution to each shareholder. The Virginia Department of Taxation has adopted a policy of allowing shareholders to exclude from their Virginia taxable income the exempt portion of distributions from a regulated investment company even though the shareholders receive distributions monthly but receive reports substantiating the exempt portion of such distributions at less frequent intervals. Accordingly, if the Portfolio receives taxable income, the Portfolio must determine the portion of income that is exempt from Virginia income tax and provide such information to the shareholders in accordance with the foregoing so that the shareholders may exclude from Virginia taxable income the exempt portion of the distribution from the Portfolio.

As a regulated investment company, the Virginia Municipal Money Market Portfolio may distribute dividends that are exempt from the Virginia income tax to its shareholders if the Portfolio satisfies all requirements for conduit treatment under Federal law and, at the close of each quarter of its taxable year, at least 50% of the value of its total assets consists of obligations the interest on which is exempt from taxation under Federal law. If the Portfolio fails to qualify, no part of its dividends will be exempt from the Virginia income tax. To the extent any portion of the dividends are derived from taxable interest for Virginia purposes or from net short-term capital gains, such portion will be taxable to the shareholders as ordinary income. The character of long-term capital gains realized and distributed by the Portfolio will follow through to its shareholders regardless of how long the shareholders have held their shares. Generally, interest on indebtedness incurred by shareholders to purchase or carry shares of the Portfolio will not be deductible for Virginia income tax purposes.

New Jersey Tax Considerations. It is anticipated that the New Jersey Tax-Free Income Portfolio and the New Jersey Municipal Money Market Portfolio will qualify as a “Qualified Investment Fund” and as a result, the main portion of each distribution paid by the New Jersey Tax-Free Income Portfolio and the New Jersey Municipal Money Market Portfolio will not be subject to the New Jersey gross income tax. Only that portion of each distribution will be subject to New Jersey taxation that represents income or gains attributable to obligations that are not exempt from State or local tax under New Jersey or federal law. Net gains from the redemption of shares of the New Jersey Tax-Free Income Portfolio and the New Jersey Municipal Money Market Portfolio will also be exempt from the New Jersey gross income tax as long as they continue to qualify as Qualified Investment Funds.

As defined in N.J.S.A. 54A:6-14.1, a “Qualified Investment Fund” is an investment company or trust registered with the Securities and Exchange Commission, or any series of such investment company or trust, which for the calendar year in which the distribution is paid: (a) has no investments other than interest-bearing obligations, obligations issued at a discount, and cash and cash items, including receivables and Qualified Financial Instruments; and (b) has at the close of each quarter of the taxable year at least 80% of the aggregate principal amount of all of its investments, excluding Qualified Financial Instruments and cash and cash items (including receivables), in New Jersey State-Specific Obligations, U.S. Government Obligations, and other obligations that are exempt from State or local taxation under New Jersey or federal law. “New Jersey State-Specific Obligations” are obligations issued by or on behalf of New Jersey or any county, municipality, school or other district, agency, authority, commission, instrumentality, public corporation (including one created or existing pursuant to agreement or compact between New Jersey and another state), body corporate and politic or political subdivision of New Jersey. “U.S. Government

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Obligations” are obligations issued by the U.S. Government, its agencies and instrumentalities, which are statutorily free from New Jersey or local taxation under the laws of the United States. “Qualified Financial Instruments” are financial options, futures, forward contracts, or other similar financial instruments related to interest-bearing obligations, obligations issued at a discount or bond indexes related thereto, to the extent such instruments are authorized by the regulated investment company rules of the Internal Revenue Code.

In accordance with New Jersey law as currently in effect, distributions paid by a qualified investment fund are excluded from New Jersey gross income tax to the extent that the distributions are attributable to interest or gains from New Jersey State-Specific Obligations, U.S. Government Obligations, and other obligations that are exempt from State or local taxation under New Jersey or federal law. To the extent attributable to other sources, distributions will be subject to the New Jersey gross income tax. The New Jersey Tax-Free Income Portfolio and the New Jersey Municipal Money Market Portfolio will notify shareholders by February 15 of each calendar year as to the amounts of all distributions for the prior year which are exempt from New Jersey gross income tax and the amounts, if any, which are subject to New Jersey gross income tax. It is intended that the New Jersey Tax-Free Income Portfolio and the New Jersey Municipal Money Market Portfolio will qualify as a Qualified Investment Fund each year; however, in extreme or unusual market circumstances the Fund might not seek, or might not be able, to qualify as a Qualified Investment Fund by holding 80% of the aggregate principal of its investments at the end of each quarter of the taxable year in obligations that are exempt from State or local taxation under New Jersey or federal law.

The New Jersey gross income tax is not applicable to corporations. For all corporations subject to the New Jersey Corporation Business Tax, dividends and distributions from a qualified investment fund are included in the tax base for purposes of computing the net income tax portion of the Corporation Business Tax and may be included in the gross receipts base for purposes of computing alternative minimum assessment portion of the Corporation Business Tax. Furthermore, any gain upon the redemption or sale of shares by a corporate shareholder is also included in the net income tax base and may be added to the gross receipts base for purposes of computing the Corporation Business Tax. Shares of the New Jersey Tax-Free Income Portfolio and the New Jersey Municipal Money Market Portfolio are not subject to property taxation by New Jersey.

Prospective Investors should be aware that investments in the New Jersey Money Market Portfolio and the New Jersey Tax-Free Income Portfolio may not be suitable for persons who do not receive income subject to the New Jersey gross income tax.

Delaware Tax Considerations. So long as the Delaware Tax-Free Income Portfolio qualifies as a regulated investment company under the Code, individuals, estates or trusts that are subject to Delaware personal income tax will not be subject to such tax with respect to (i) “exempt interest dividends” (as defined in the Code) attributable to interest on Delaware State-Specific Obligations and (ii) dividends attributable to interest paid on certain U.S. government obligations, provided that the Delaware Tax-Free Income Portfolio sends shareholders a written statement of the dollar amount or percentage of total distributions by the Delaware Tax-Free Income Portfolio that are described in (i) and (ii). Other distributions made by the Portfolio to its shareholders who are individuals, estates or trusts subject to Delaware personal income tax will be includible in the gross income of such shareholders for Delaware personal income tax purposes to the same extent as such distributions are includible in the gross income of such shareholders for Federal income tax purposes. Distributions made by the Delaware Tax-Free Income Portfolio to its shareholders who are corporations or other entities subject to Delaware corporate income tax will be excluded from the Delaware taxable income of such shareholders to the same extent as such distributions are excluded from the Federal taxable income of such shareholders.

Kentucky Tax Considerations. Exempt interest dividends paid by the Kentucky Tax-Free Income Portfolio that are attributable to Kentucky State-Specific Obligations will be excludable from a shareholder’s gross income for Kentucky income tax purposes. Further, distributions attributable to interest on certain U.S. government obligations will similarly be excluded from gross income for Kentucky income tax purposes. All other distributions by the Kentucky Tax-Free Income Portfolio will be included in a shareholder’s gross income for Kentucky income tax purposes. Kentucky taxes distributions of net capital gain at the same rates as ordinary income. According to the Kentucky Revenue Cabinet, shares in mutual funds and money market funds are exempt from Kentucky intangible taxes.

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Pennsylvania Tax Considerations. Income received by a shareholder attributable to interest realized by the Pennsylvania Tax-Free Income Portfolio or the Pennsylvania Municipal Money Market Portfolio from Pennsylvania State-Specific Obligations is not taxable to individuals, estates or trusts under the Personal Income Tax; to corporations under the Corporate Net Income Tax; nor to individuals under the Philadelphia School District Net Investment Income Tax (“School District Tax”).

Income received by a shareholder attributable to gain on the sale or other disposition by the Pennsylvania Tax-Free Income Portfolio or the Pennsylvania Municipal Money Market Portfolio of Pennsylvania State-Specific Obligations is generally taxable under the Personal Income Tax and the Corporate Net Income Tax, but such income is not taxable under the School District Tax.

To the extent that gain on the disposition of a share represents gain realized on Pennsylvania State-Specific Obligations held by the Pennsylvania Tax-Free Income Portfolio, such gain may be subject to the Personal Income Tax and Corporate Net Income Tax. Such gain may also be subject to the School District Tax, except that gain realized with respect to a share held for more than six months is not subject to the School District Tax.

This discussion does not address the extent, if any, to which shares of the Pennsylvania Tax-Free Income Portfolio or the Pennsylvania Municipal Money Market Portfolio, or interest and gain thereon, is subject to, or included in the measure of, the special taxes imposed by the Commonwealth of Pennsylvania on banks and other financial institutions or with respect to any privilege, excise, franchise or other tax imposed on business entities not discussed above (including the Corporate Capital Stock/Franchise Tax).

ADDITIONAL INFORMATION CONCERNING SHARES

Shares of each class of each Portfolio of the Fund bear their pro rata portion of all operating expenses paid by a Portfolio, except transfer agency fees, certain administrative/servicing fees and amounts payable under the Fund’s Amended and Restated Distribution and Service Plan. Each share of a Portfolio of the Fund has a par value of $.001, represents an interest in that Portfolio and is entitled to the dividends and distributions earned on that Portfolio’s assets that are declared in the discretion of the Board of Trustees. The Fund’s shareholders are entitled to one vote for each full share held and proportionate fractional votes for fractional shares held, and will vote in the aggregate and not by class, except where otherwise required by law or as determined by the Board of Trustees.

Shares of the Fund have noncumulative voting rights and, accordingly, the holders of more than 50% of the Fund’s outstanding shares (irrespective of class) may elect all of the trustees. Shares have no preemptive rights and only such conversion and exchange rights as the Board may grant in its discretion. When issued for payment, shares will be fully paid and non-assessable by the Fund.

There will normally be no meetings of shareholders for the purpose of electing trustees unless and until such time as required by law. At that time, the trustees then in office will call a shareholders meeting to elect trustees. Except as set forth above, the trustees shall continue to hold office and may appoint successor trustees. The Fund’s Declaration of Trust provides that meetings of the shareholders of the Fund shall be called by the trustees upon the written request of shareholders owning at least 10% of the outstanding shares entitled to vote.

Rule 18f-2 under the 1940 Act provides that any matter required by the provisions of the 1940 Act or applicable state law, or otherwise, to be submitted to the holders of the outstanding voting securities of an investment company such as the Fund shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each investment portfolio affected by such matter. Rule 18f-2 further provides that an investment portfolio shall be deemed to be affected by a matter unless the interests of each investment portfolio in the matter are substantially identical or the matter does not affect any interest of the investment portfolio. Under the Rule, the approval of an investment advisory agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act or any change in a fundamental investment policy would be effectively acted upon

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with respect to an investment portfolio only if approved by a majority of the outstanding shares of such investment portfolio. However, the Rule also provides that the ratification of the appointment of independent accountants, the approval of principal underwriting contracts and the election of Trustees may be effectively acted upon by shareholders of the Fund voting together in the aggregate without regard to a particular investment portfolio.

The proceeds received by each Portfolio for each issue or sale of its shares, and all net investment income, realized and unrealized gain and proceeds thereof, subject only to the rights of creditors, will be specifically allocated to and constitute the underlying assets of that Portfolio. The underlying assets of each Portfolio will be segregated on the books of account, and will be charged with the liabilities in respect to that Portfolio and with a share of the general liabilities of the Fund. As stated herein, certain expenses of a Portfolio may be charged to a specific class of shares representing interests in that Portfolio.

The Funds’ Declaration of Trust authorizes the Board of Trustees, without shareholder approval (unless otherwise required by applicable law), to: (i) sell and convey the assets belonging to a class of shares to another management investment company for consideration which may include securities issued by the purchaser and, in connection therewith, to cause all outstanding shares of such class to be redeemed at a price which is equal to their net asset value and which may be paid in cash or by distribution of the securities or other consideration received from the sale and conveyance; (ii) sell and convert the assets belonging to one or more classes of shares into money and, in connection therewith, to cause all outstanding shares of such class to be redeemed at their net asset value; or (iii) combine the assets belonging to a class of shares with the assets belonging to one or more other classes of shares if the Board of Trustees reasonably determines that such combination will not have a material adverse effect on the shareholders of any class participating in such combination and, in connection therewith, to cause all outstanding shares of any such class to be redeemed or converted into shares of another class of shares at their net asset value. The Board of Trustees may authorize the liquidation and termination of any Portfolio or class of shares. Upon any liquidation of a Portfolio, Shareholders of each class of the Portfolio are entitled to share pro rata in the net assets belonging to that class available for distribution.

MISCELLANEOUS

The Fund. The Fund was organized as a Massachusetts business trust on December 22, 1988, and is registered under the 1940 Act as an open end, management investment company. Each of the Portfolios except the Health Sciences, Global Resources, All-Cap Global Resources, Inflation Protected Bond, New Jersey Municipal Money Market, North Carolina Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, Virginia Municipal Money Market, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Delaware Tax-Free Income and Kentucky Tax-Free Income Portfolios is diversified. Effective January 31, 1998, the Fund changed its name from Compass Capital Funds^SM to BlackRock Funds^SM.

Master-Feeder Structure. The Index Equity Portfolio, unlike many other investment companies which directly acquire and manage their own portfolio of securities, seeks to achieve its investment objective by investing all of its investable assets in the Index Master Portfolio. The Index Equity Portfolio purchases shares of the Index Master Portfolio at net asset value. The net asset value of the Index Equity Portfolio shares responds to increases and decreases in the value of the Index Master Portfolio’s securities and to the expenses of the Index Master Portfolio allocable to the Index Equity Portfolio (as well as its own expenses). The Index Equity Portfolio may withdraw its investment in the Index Master Portfolio at any time upon 30 days notice to the Index Master Portfolio if the Board of Trustees of the Fund determines that it is in the best interests of the Index Equity Portfolio to do so. Upon withdrawal, the Board of Trustees would consider what action might be taken, including the investment of all of the assets of the Index Equity Portfolio in another pooled investment entity having the same investment objective as the Index Equity Portfolio or the hiring of an investment adviser to manage the Index Equity Portfolio’s assets in accordance with the investment policies described above with respect to the Index Equity Portfolio.

The Index Master Portfolio is a separate series of the Trust, which is a statutory trust created under the laws of the State of Delaware. The Index Equity Portfolio and other institutional investors that may invest in the Index Master Portfolio from time to time (e.g., other investment companies) will each bear a share of all liabilities of the Index Master Portfolio. Under the Delaware Statutory Trust Act, shareholders of the Index Master Portfolio have the same limitation of personal liability as shareholders of a Delaware corporation. Accordingly, Fund management believes that neither the Index Equity Portfolio nor its shareholders will be adversely affected by reason of the Index Equity Portfolio’s investing in the Index Master Portfolio.

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The shares of the Index Master Portfolio are offered to institutional investors in private placements for the purpose of increasing the funds available for investment and achieving economies of scale that might be available at higher asset levels. The expenses of such other institutional investors and their returns may differ from those of the Index Equity Portfolio. While investment in the Index Master Portfolio by other institutional investors offers potential benefits to the Index Master Portfolio (and, indirectly, to the Index Equity Portfolio), economies of scale and related expense reductions might not be achieved. Also, if an institutional investor were to redeem its interest in the Index Master Portfolio, the remaining investors in the Index Master Portfolio could experience higher pro rata operating expenses and correspondingly lower returns. In addition, institutional investors that have a greater pro rata ownership interest in the Index Master Portfolio than the Index Equity Portfolio could have effective voting control over the operation of the Index Master Portfolio.

Shares in the Index Master Portfolio have equal, non-cumulative voting rights, except as set forth below, with no preferences as to conversion, exchange, dividends, redemption or any other feature. Shareholders of the Trust have the right to vote only (i) for removal of the Trust’s trustees, (ii) with respect to such additional matters relating to the Trust as may be required by the applicable provisions of the 1940 Act, and (iii) on such other matters as the trustees of the Trust may consider necessary or desirable. In addition, approval of the shareholders of the Trust is required to adopt any amendments to the Agreement and Declaration of Trust of the Trust which would adversely affect to a material degree the rights and preferences of the shares of the Index Master Portfolio or to increase or decrease their par value. The Index Master Portfolio’s shareholders will also be asked to vote on any proposal to change a fundamental investment policy (i.e., a policy that may be changed only with the approval of shareholders) of the Index Master Portfolio. If a shareholder of the Index Master Portfolio becomes bankrupt, a majority in interest of the remaining shareholders in the Portfolio must vote within 120 days to approve the continuing existence of the Index Master Portfolio or the Portfolio will be liquidated.

When the Index Equity Portfolio, as a shareholder of the Index Master Portfolio, votes on matters pertaining to the Index Master Portfolio, the Index Equity Portfolio would hold a meeting of its shareholders and would cast its votes proportionately as instructed by Index Equity Portfolio shareholders.

The investment objective of the Index Master Portfolio may not be changed without approval of its shareholders. Shareholders of the Index Equity Portfolio will receive written notice thirty days prior to the effective date of any change in the investment objective of the Index Master Portfolio. If the Index Master Portfolio changes its investment objective in a manner that is inconsistent with the investment objective of the Index Equity Portfolio and the Fund’s Board of Trustees fails to approve a similar change in the investment objective of the Index Equity Portfolio, the Index Equity Portfolio would be forced to withdraw its investment in the Index Master Portfolio and either seek to invest its assets in another registered investment company with the same investment objective as the Index Equity Portfolio, which might not be possible, or retain an investment adviser to manage the Index Equity Portfolio’s assets in accordance with its own investment objective, possibly at increased cost. A withdrawal by the Index Equity Portfolio of its investment in the Index Master Portfolio could result in a distribution in kind of portfolio securities (as opposed to a cash distribution) to the Index Equity Portfolio. Should such a distribution occur, the Index Equity Portfolio could incur brokerage fees or other transaction costs in converting such securities to cash in order to pay redemptions. In addition, a distribution in kind to the Index Equity Portfolio could result in a less diversified portfolio of investments and could adversely affect the liquidity of the Portfolio. A distribution to the Index Equity Portfolio will generally only result in a taxable gain for federal income tax purposes to the extent that any cash distributed exceeds the Index Equity Portfolio’s tax basis in its shares of the Index Master Portfolio.

The conversion of the Index Equity Portfolio into a feeder fund of the Index Master Portfolio was approved by shareholders of the Index Equity Portfolio at a meeting held on November 30, 1995. The policy of the Index Equity Portfolio, and other similar investment companies, to invest their investable assets in funds such as the Index Master Portfolio is a relatively recent development in the mutual fund industry and, consequently, there is a lack of substantial experience with the operation of this policy. There may also be other investment companies or entities through which you can invest in the Index Master Portfolio which may have different sales charges, fees and other expenses which may affect performance. As of the date of this Statement of Additional Information, two other feeder funds invest all of their investable assets in the Index Master Portfolio. For information about other funds that may invest in the Index Master Portfolio, please contact DFA at (310) 395-8005.

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Counsel. The law firm of Simpson Thacher & Bartlett LLP, 425 Lexington Avenue, New York, New York 10017, serves as the Fund’s counsel. The law firm of Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square, Philadelphia, Pennsylvania 19103, serves as the Trust’s counsel.

Independent Registered Public Accountant. PricewaterhouseCoopers LLP, with offices located at Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, Pennsylvania, served as the Fund’s independent registered public accountant for the periods prior to and including September 30, 2003. Deloitte & Touche LLP, with offices at 1700 Market Street, Philadelphia, Pennsylvania, served as the Funds’ independent registered public accountant for the periods after September 30, 2003. PricewaterhouseCoopers LLP, with offices located at Suite 1700, 200 East Las Olas Boulevard, Fort Lauderdale, Florida, serves at the Trust’s independent registered public accountant.

Shareholder Ownership. The name, address and percentage ownership of each person that on May 31, 2005, owned of record or beneficially 5% or more of the outstanding shares of a Portfolio which had commenced operations as of that date was as follows:

Investment Trust: Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 30.221%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 7.341%; Service Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 89.446%.

Large Cap Value Equity Portfolio: Investor A Shares – Lincoln National Life Insurance Co., 1300 S. Clinton St., Fort Wayne, IN 46802-3506, 12.362%; Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 12.324%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 6.409%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 11.873%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 44.963%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 68.183%; MetLife Retirement Plans, JP Morgan Chase Trust F.B.O. DCG-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 12.904%, Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 6.749%; Service Shares – PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 22.489%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 5.769%.

Large Cap Growth Equity Portfolio: Investor A Shares – Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 14.239%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 10.302%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 47.823%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 86.951%; Service Shares – PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 76.154%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 5.967%.

Dividend Achievers Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 11.692%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 13.184%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 37.964%; Institutional Shares – BlackRock Funding Inc., Attn.: Joseph Feliciani, 4th Floor, 40 E. 52nd St., New York, NY 10022, 18.492%; Service Shares – J.J.B. Hilliard, W.L. Lyons, Inc., John Cuppoletti, 501 S. 4th St., Louisville, KY 40202, 28.263%; J.J.B. Hilliard, W.L. Lyons, Inc., Steven T. Sullivan, 501 S. 4th St., Louisville, KY 40202, 20.588%; J.J.B. Hilliard, W.L. Lyons, Inc., Iris B. Heiss IRA, 501 S. 4th St., Louisville, KY 40202, 14.214%; J.J.B. Hilliard, W.L. Lyons, Inc., Joe G. Metzler IRA, 501 S. 4th St., Louisville, KY 40202, 9.704%; J.J.B. Hilliard, W.L. Lyons, Inc., Carlos E. Sosa, 501 S. 4th St., Louisville, KY 40202, 7.411%.

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Legacy Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 9.681%; SSB/NYLIM Supplemental Income Plan, Boston Financial Data Services, DSC/NSCC, 4th Floor, 66 Brooks Dr., Braintree, MA 02184, 8.592%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 13.704%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 37.977%; Institutional Shares – Craig Iverson, Trustee, Laurie M. Cummins Rev. Living Trust U/A/D 2-6-94, 1001 SW. 5th Ave., Suite 1415, Portland, OR 97204-1130, 6.955%; Milton N. Weinstein Trust U/W Item VII dated 9/17/99, 3475 Lenox Rd. NE., Suite 950, Atlanta, GA 30326-3220, 6.416%; Service Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%.

Mid Cap Growth Equity Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 5.547%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 12.164%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 39.998%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 47.433%; MetLife Retirement Plans, JP Morgan Chase Trust F.B.O. DCG-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 24.288%; Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 6.272%; Service Shares – PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 68.441%; Fidelity Investments, Instl. Op. Co. Inc. (FI IOC as Agt. for Certain Employee Ben. Plan), 100 Magellan Way (KW1C), Covington, KY 41015, 15.364%.

Aurora Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 22.919%; Charles Schwab & Co. Inc. Special Custody Account for the Exclusive Benefit of Customers, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 5.015%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 18.615%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 38.574%; Institutional Shares – NFSC F.E.B.O. FIIOC as Agent for Qualified Employee Benefit Plans (401K) FINOPS-IC Funds, 100 Magellan Way KW1C, Covington, KY 41015, 45.796%; MetLife Retirement Plans, JP Morgan Chase Trust F.B.O. DCG-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 8.109%; MetLife Retirement Plans, Reliance Trust F.B.O. Separate Account DC-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 7.698%; Muggs & Co. c/o US Bank, P.O. Box 1787, Milwaukee WI 53201-1787, 7.014%; NFS LLC F.E.B.O. US Bank National Association, Trustee, UW Medical Foundation Retireme., 4000 W. Broadway Ave., BC-MN-H24B, Robbinsdale, MN 55422-2212, 5.950%; Service Shares – First Clearing, LLC, Michael Vancleve Roth IRA, FCC as Custodian, 1374 Sheldon St., Saint Paul, MN 55108-2411, 59.726%; PFPC Distributors Inc. c/o PFPC Finance/General Ledger, 301 Bellevue Parkway, Mail Stop W5 F301-036, Wilmington, DE 19809-3705, 40.273%.

Small/Mid-Cap Growth Equity Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 17.116%; MetLife Retirement Plans, Reliance Trust F.B.O. NAV Product-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 9.357%; Lincoln National Life Insurance Co., 1300 S. Clinton St., Fort Wayne, IN 46802-3506, 5.113%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 16.791%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 33.235%; Institutional Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 36.714%; The Barker Welfare Fdtn., P.O. Box 2, Glen Head, NY 11545-0002, 13.344%; MetLife Retirement Plans, JP Morgan Chase Trust F.B.O. DCG-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 12.855%; Wells Fargo Bank Minnesota NA F.B.O. Regis P/S Plan, P.O. Box 1533, Minneapolis, MN 55480-1533, 11.177%; US Bank NA, Trustees, Lindquist & Vennum PSP Trust, US Bancorp-Mutual Funds Department, P.O. Box 1787, Milwaukee, WI 53201-1787, 5.607%; NFSC F.E.B.O. FIIOC as Agent for Qualified Benefit Plans (401K) FINOPS-IC Funds, 100 Magellan Way KW1C, Covington, KY 41015, 5.453%; Service Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%.

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Small Cap Value Equity Portfolio: Investor A Shares – Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 27.955%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 7.316%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 29.599%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 49.599%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 7.506%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 80.191%; Enterprise Trust & Investment Co., 15425 Los Gatos Blvd., Suite 150, Los Gatos, CA 95032, 6.185%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 5.211%; BlackRock Shares – Northern Trust Co., Custodian F.B.O. JMH Limited Partnership, P.O. Box 92956, Chicago, IL 60675, 29.640%; Northern Trust Co., Custodian F.B.O. Joyce Article 9 Trust-Harold T. Martin, P.O. Box 92956, Chicago, IL 60675, 26.673%; HSBC Bank USA, Trustee F.B.O. HSBC Bank USA Retirement Plan, P.O. Box 1329, Buffalo, NY 14240-1329, 24.556%; Northern Trust Co., Custodian F.B.O. Article 9 Trust, P.O. Box 92956, Chicago, IL 60675, 17.212%; Service Shares – Prudential Investment Mgts. Service F.B.O. Mutual Fund Clients, Attn.: Pruchoice Unit, Mail Stop 194-201, 194 Wood Ave. S., Iselin, NJ 08830-2710, 38.706%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 36.861%; PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 11.427%.

Small Cap Core Equity Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 5.265%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 19.341%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 62.045%; Institutional Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 56.990%; Service Shares – Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 36.205%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 35.284%; FISERV Securities, Inc., Attn.: Mutual Funds, One Commerce Square, 2005 Market St., Suite 1200, Philadelphia, PA 19103, 16.852%; FISERV Securities, Inc., Attn.: Mutual Funds, One Commerce Square, 2005 Market St., Suite 1200, Philadelphia, PA 19103, 11.271%.

Small Cap Growth Equity: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 19.325%; Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 18.606%; RBC Dain Rauscher, Fairview Hospital and Healthcare Services, Attn.: Corp. Acct. Dept., 400 Stinson Blvd., Minneapolis, MN 55413, 14.897%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 29.171%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 34.501%; Institutional Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 31.779%; PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 27.990%; KPMG Peat Marwick, Retirement Plans Master Trust c/o Bank of New York, Trustee, Attn.: Shabat Zaidi, One Wall St., New York, NY 10286, 10.279%; Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Accounts, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 5.016%; Service Shares – The Vanguard Group, Attn.: Outside Funds K 14, 100 Vanguard Blvd., Malvern, PA 19355, 58.066%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 34.824%.

Global Science & Technology Opportunities Portfolio: Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 17.660%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 30.370%; PFPC Trust Co. Cust. F.B.O. Alan Joseph Bendarz IRA, 729 Woodridge Ln., Glencoe, IL 60022-1040, 6.035%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 5.338%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 28.352%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 28.104%; Service Shares – J.J.B. Hilliard,

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W.L. Lyons, Inc., Danny Poore, 501 S. 4th St., Louisville, KY 40202, 32.029%; NFSC F.E.B.O. Paul E. & Marian E. Rohrbaugh Char., Paul E. & Marian E. Rohrbaugh, Trustee, 28635 Westlake Village Dr., Cottage #11, Westlake, OH 44145, 19.268%; LPL Financial Services, 9785 Towne Centre Dr., San Diego, CA 92121-1968, 12.161%; E Trade Clearing LLC, P.O. Box 989030, West Sacramento, CA 95798-9030, 7.259%; NFSC F.E.B.O. David J. Belanger, Trustee, David J. Belanger Trust U/A 10/28/00, 32800 Kimberly Court, Eastlake, OH 44095, 6.432%; J. R. Douglas & Brenda D. Crocker & Gloria D. Blackwell, Jt. Ten., 144 S. Congress St., Winnsboro, SC 29180-1104, 6.091%; Service Shares – E Trade Clearing LLC, IRA Custodian, P.O. Box 989030, West Sacramento, CA 95798-9030, 5.980%.

All-Cap Global Resources Portfolio: Investor A Shares – First Clearing, LLC, The 2003 Frank Luo Grat. Trust, Asset Advisor, 8106 Firenze Blvd., Orlando, FL 32836-8750, 16.783%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 6.785%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 18.799%; Institutional Shares – Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Account, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 31.235%; BlackRock Funding Inc., Attn.: Joseph Feliciani, 4th Floor, 40 E. 52nd St., New York, NY 10022, 29.848%; Mac & Co., Mutual Funds Operations, 525 William Penn Pl., P.O. Box 3198, Pittsburgh, PA 15230-3198, 20.530%; Mac & Co., Mutual Funds Operations, P.O. Box 3198, 525 William Penn Pl., Pittsburgh, PA 15230-3198, 11.370%; Service Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%.

U.S. Opportunities Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 12.010%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 19.283%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 8.760%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 31.374%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 7.489%; Institutional Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 51.298%; PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 37.946%; Service Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 18.807%; LPL Financial Services, 9785 Towne Centre Dr., San Diego, CA 92121-1968, 12.243%; LPL Financial Services, 9785 Towne Centre Dr., San Diego, CA 92121-1968, 9.265%; Pershing LLC, P.O. Box 2052, Jersey City, NJ 07303-9998, 6.904%; LPL Financial Services, 9785 Towne Centre Dr., San Diego, CA 92121-1968, 6.087%; LPL Financial Services, 9785 Towne Centre Dr., San Diego, CA 92121-1968, 5.437%.

International Opportunities Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 17.492%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 5.960%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 22.953%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 7.882%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 38.244%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 5.992%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 27.169%; KPMG Peat Marwick, Retirement Plans Master Trust c/o Bank of New York, Trustee, Attn.: Shabat Zaidi, One Wall St., New York, NY 10286, 14.645%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 12.331%; M&I Trust Co. NA F.B.O. MCW BlackRock International Opportunities Institutional Fund c/o Marshall & Ilsley Trust Co. NA, 1000 N. Water St. – TR14, Milwaukee, WI 53202, 6.858%; Service Shares – Prudential Investment Mgts. Service F.B.O. Mutual Fund Clients, Attn.: Pruchoice Unit, Mail Stop 194-201, 194 Wood Ave. S., Iselin, NJ 08830-2710, 41.463%; Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Account, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 26.471%; Patterson & Co., Omnibus C/C/C, 1525 West W.T. Harris Blvd., Charlotte, NC 28288-1151, 5.604%.

Index Equity Portfolio: Investor A Shares – Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA, 19182, 40.559%; MetLife Retirement Plans, Reliance Trust F.B.O. NAV Product-Conversion Assets, 2 Montgomery St.,

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Jersey City, NJ 07302, 27.277%; MetLife Retirement Plans Reliance Trust Co. Trust F.B.O. A-Share Product-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 5.117%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 34.407%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 7.633%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 57.486%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 81.759%; Pershing LLC, P.O. Box 2052, Jersey City, NJ 07303-9998, 7.656%; Service Shares – Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 69.818%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 21.484%.

Mid-Cap Value Equity Portfolio: Investor A Shares – Lincoln National Life Insurance Co., 1300 S. Clinton St., Fort Wayne, IN 46802-3506, 10.311%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 7.051%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 11.410%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 5.448%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 39.056%; Institutional Shares – MetLife Retirement Plans, JP Morgan Chase Trust F.B.O. DCG-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 39.523%; PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 27.664%; MetLife Retirement Plans, Reliance Trust F.B.O. Separate Account DC Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 12.650%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 6.727%; Service Shares – PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 75.017%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 14.013%.

Global Resources Portfolio: Investor A Shares – Lincoln National Life Insurance Co., 1300 S. Clinton St., Fort Wayne, IN 46802-3506, 23.370%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 9.892%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 19.503%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 6.369%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 30.919%; Institutional Shares – MetLife Retirement Plans, JP Morgan Chase Trust F.B.O. DCG-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 47.494%; John J. Sie, Trustee, The Anna M. Sie Grat. Trust 2004-6 UA, Attn.: Jeffrey Raiss or Brent Kirk, 3300 E. 1st Ave., Suite 390, Denver, CO 80206-5806, 5.757%.

Health Sciences Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 8.566%; SSB/NYLIM Supplemental Income Plan, Boston Financial Data Services, DSC/NSCC 4th Floor-Test Account, 66 Brooks Dr., Braintree, MA 02184, 7.100%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 9.010%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 41.524%; Institutional Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 25.765%; MetLife Retirement Plans, JP Morgan Chase Trust F.B.O. DCG-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 11.959%; John T. Wilson, Jennifer N.S. Wilson, JTWROS, 3 Euclid Ave., Winchester, MA 01890-1418, 7.892%; Service Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%.

Asset Allocation Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 42.434%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 9.287%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 46.468%; Institutional Shares – MetLife Retirement Plans, JP Morgan Chase Trust F.B.O. DCG-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 36.918%; PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 26.413%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 14.115%; Service Shares –

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PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 79.670%; Post & Co. c/o The Bank of New York, Mutual Fund Reorg. Dept., P.O. Box 1066, Wall Street Station, New York, NY 10286, 5.673%.

Exchange Portfolio: Investor A Shares – National City Bank T/U/A Ruth Lilly Special Trust dated 1/14/02, Attn.: Mutual Funds, P.O. Box 94984, Cleveland, OH 44101-4984, 6.854%; National City Bank Tr. o/ The G. Garretson Wade Charitable Trust 2, Attn.: Trust Mutual Funds, P.O. Box 94984, Cleveland, OH 44101-4984, 6.591%.

Enhanced Income Portfolio: Investor A Shares – PFPC Trust Co. Cust. F.B.O. Roth Contribution IRA 1998 F.B.O. Meiling Liu, 12012 Riviera Ct. #20A, College Point, NY 11356-1100, 95.076%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 99.520%; BlackRock Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 63.944%; Bank of New York, Wendel & Co., Mutual Fund/Reorg. Dept., Atlantic Terminal, 2 Hanson Place, 6th Floor, Brooklyn, NY 11217, 14.282%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 14.220%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 5.183%; Service Shares – FISERV Securities, Inc., Attn.: Mutual Funds, One Commerce Square, 2005 Market St., Suite 1200, Philadelphia, PA 19103, 99.791%.

Low Duration Bond Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 10.729%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 7.988%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 34.677%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 16.655%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 55.067%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 9.545%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 77.707%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 7.733%; BlackRock Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 11.106%; Mac & Co., Attn.: Mutual Funds Operations, P.O. Box 3198, Pittsburgh, PA 15230-3198, 8.642%; The Metropolitan Museum of Art, 1000 5th Ave., New York, NY 10028, 7.186%; The Northern Trust Co., P.O. Box 92956, Chicago, IL 60675-2956, 6.030%; Service Shares – Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 88.411%.

Intermediate Government Bond Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 24.810%; Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 5.893%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 7.819%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 39.425%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 77.796%; Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Account, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 5.817%; NFSC F.E.B.O Premier Trust FMT/BlackRock Go., First Mercantile Trust Co., Trustee, U/A 12/23/1997, 57 Germantown Ct., 4th Floor, Cordova, TN 38018, 5.432%; Service Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 44.851%; Fifth Third Bank F.B.O. Fine Arts Fund c/o Mutual Fund Trading, 38 Fountain Square Plaza, Cincinnati, OH 45263, 23.393%; J.J.B. Hilliard, W.L. Lyons, Inc., Junior League of the Oranges, 501 S. 4th St., Louisville, KY 40202, 7.807%; AST Trust Co. as Custodian F.B.O. Benewah Community Hospital, 2390 E. Camelback Rd., Suite 240, Phoenix, AZ 85016-3474, 6.071%.

Intermediate Bond Portfolio: Investor A Shares – Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 36.678%; State Street Bank & Trust Co. F.B.O. ADP/MSDW Alliance, 105 Rosemont Ave., Westwood, MA 02090, 8.982%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 6.614%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 5.670%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 43.956%; Dean Witter Reynolds, Attn.: Mutual Fund

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Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 9.755%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 52.640%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 8.249%; Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 5.751%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 87.346%; BlackRock Shares – KPMG Retirement Plan Master Trust c/o Bank of New York, Trustee, One Wall St., New York, NY 10086, 25.241%; PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 15.434%; The Bank of New York F.B.O. University of Arkansas Foundation, Attn.: Mr. Warren Suco, One Wall St., New York, NY 10286, 10.600%; Citibank NA, Trustee, NYU Hospital Center Retirement Plan, Attn.: Mario Morin, 111 Wall St., 14th Floor, New York, NY 10005, 7.342%; Service Shares – Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 94.705%.

Intermediate PLUS Bond Portfolio: Investor A Shares – Jay Eun, Trustee, Golden Stella PSP dated 01/01/97 c/o National Retirement Serv. Inc., 2838-F I-85 S. Service Rd., Charlotte, NC 28208, 99.483%; Investor B Shares – Athena International Inc. Pension Plan Trust dated 01/01/2004, 1909 S. Vineyard Ave., Ontario, CA 91761-7747, 90.863%; PFPC Distributors Inc. c/o PFPC Finance/General Ledger, 301 Bellevue Parkway, Mailstop W5 F301-036, Wilmington, DE 19809-3705, 9.136%; Investor C Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%; Institutional Shares- PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%; BlackRock Shares – Wells Fargo Bank NA F.B.O. McCune Fdn.-BlackRock, P.O. Box 1533, Minneapolis, MN 55480, 71.492%; Wells Fargo Bank NA F.B.O. Regis P/S Plan, P.O. Box 1533, Minneapolis, MN 55840, 13.508%; BlackRock Funding Inc., Attn.: Natasha Lora, 40 E. 52nd St., 4th Floor, New York, NY 10154, 11.713%; Service Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%.

Core Bond Total Return Portfolio: Investor A Shares – MetLife Retirement Plans, Reliance Trust F.B.O. NAV Product-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 17.703%; Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 16.871%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 6.082%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 46.474%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 5.549%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 81.736%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 75.346%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 11.885%; BlackRock Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 15.837%; Genuine Parts PEN/Safekeeping, P.O. Box 105870, Mail Code 3144, Atlanta, GA 30348, 5.544%; Northern Trust Co. as Trustee F.B.O. USAA Savings & Investment Plan-DV, P.O. Box 92994, Chicago, IL 60675, 5.454%; Service Shares – Fidelity Investments, Instl. Op. Co. Inc. (FIIOC. as Agt. for Certain Employee Ben. Plan), 100 Magellan Way (KW1C), Covington, KY 41015, 26.939%; Massachusetts Mutual Life Insurance Co., 1295 State St. N255, Springfield, MA 01111, 26.118%; First Charter National Bank, Attn.: Trust Operations, P.O. Box 37949, Charlotte, NC 28237-7949, 16.467%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 14.703%.

Core PLUS Total Return Portfolio: Investor A Shares – J.J.B. Hilliard, W.L. Lyons, Inc., Barbara J. Matter IRA, 501 S. 4th St., Louisville, KY 40202, 43.084%; Joanne Lazarus, Burton Lazarus, Jt. Ten., 11330 E. Covina St., Mesa, AZ 85207-1713, 32.841%; J.J.B. Hilliard, W.L. Lyons, Inc., William F. Laughery, Tran Q. Laughery, JTWROS, 501 S. 4th St., Louisville, KY 40202-2520, 8.156%; J.J.B. Hilliard, W.L. Lyons, Inc., Mary L. Johnson IRA, 501 S. 4th St., Louisville, KY 40202, 5.961%; Investor B Shares– J.J.B. Hilliard, W.L. Lyons, Inc., Harvey E. Garrecht, 501 S. 4th St., Louisville, KY 40202, 28.816%; J.J.B. Hilliard, W.L. Lyons, Inc., Jacob Brombrach IRA, 501 S. 4th St., Louisville, KY 40202, 15.413%; PFPC Cust. Rollover IRA F.B.O. Donald E. Rediske, 6832 S. L St., Tacoma, WA 98408-3124, 13.520%; J.J.B. Hilliard, W.L. Lyons, Inc., Joseph F. Cavalieri IRA, 501 S. 4th St., Louisville, KY 40202, 8.751%; NFSC F.E.B.O. NFS/FMTC Rollover IRA F.B.O. David M. Johnson, 21 Lexington Blvd., Carmel, IN 46032, 8.646%; J.J.B. Hilliard, W.L. Lyons, Inc., Carolyn B. Myatt IRA, 501 S. 4th St., Louisville, KY 40202-2520, 6.513%; Janney Montgomery Scott LLC, Alison Hudak (Roth IRA), 1801 Market St.,

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Philadelphia, PA 19103-1675; Investor C Shares – A.G. Edwards & Sons Inc. c/f Veronica M. Zavesky IRA Account, 9091 Woodcrest Dr., Brecksville, OH 44141-2476, 74.353%; A.G. Edwards & Sons Inc. c/f Brian Haskell Rollover IRA Account, 211 E. North St., Medina, OH 44256-1947, 25.207%; Institutional Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%; BlackRock Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 13.826%; Northern Trust Co., Trustee F.B.O. Arch Chemical, P.O. Box 92956, Chicago, IL 60675, 13.728%; Sheldon and Co. c/o National City, Attn.: Mutual Funds, P.O. Box 94984, Cleveland, OH 44101-4984, 13.124%; Mac and Co., Mutual Fund Operations, P.O. Box 3198, 525 William Penn Place, Pittsburgh, PA 15230-3198, 7.780%; AAUW Ed. Fn. Fellowships Fund, 1111 16th St. NW, Washington, DC 20036, 7.753%; Westfield Contributory Retirement System, 59 Court St., P.O. Box 106, Westfield, MA 01086-0106, 6.194%; Service Shares – Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 99.602%.

Government Income Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 31.416%; MetLife Retirement Plans, Reliance Trust F.B.O. NAV Product-Conversion Assets, 2 Montgomery St., Jersey City, NJ 07302, 17.489%; Nationwide Trust Co. FSB c/o LPO Portfolio Accounting, P.O. Box 182029, Columbus, OH 43218-2029, 6.162%; Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Account, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 5.576%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 28.491%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 6.175%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 30.401%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 5.835%; BlackRock Shares – Louis V. Gerstner Jr. Foundation Inc., IBM Corporation, Louis V. Gerstner Jr., Chairman, New Orchard Rd., Armonk, NY 10504, 99.983%; Service Shares – Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 26.683%; Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 20.655%; Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 12.067%; Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 12.009%; Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 11.875%; Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 8.579%; Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 8.061%.

Inflation Protected Bond Portfolio: Investor A Shares – Lyons Township School, Treasurer’s Office, Robert A, Healy, Treasurer, 930 Barnside, LaGrange, IL 60526, 42.283%; NFSC F.E.B.O. Kitellen Milo, 247 Pelehamdale Ave., Pelham, NY 10803, 6.453%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 15.523%; J.J.B. Hilliard, W.L. Lyons, Inc., Doris Palumbo IRA, 501 S. 4th St., Louisville, KY 40202-2520, 9.626%; J.J.B. Hilliard, W.L. Lyons, Inc., James J. Wells IRA-Rollover, 501 S. 4th St., Louisville, KY 40202, 7.910%; J.J.B. Hilliard, W.L. Lyons, Inc., John Claus Ulm Trust, 501 S. 4th St., Louisville, KY 40202, 6.860%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 24.251%; LPL Financial Services, 9785 Towne Centre Dr., San Diego, CA 92121-1968, 12.044%; J.J.B. Hilliard, W.L. Lyons, Inc., James H. Rainey IRA, 501 S. 4th St., Louisville, KY 40202, 5.890%; First Clearing, LLC, Irvine Public Schools Found., 18552 MacArthur Blvd., Suite 200, Irvine, CA 92612-1210, 5.512%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 57.101%; J.J.B. Hilliard, W.L. Lyons, Inc., City of Ft. Mitchell, 501 S. 4th St., Louisville, KY 40202, 14.404%; BlackRock Shares – BlackRock Funding Inc., Attn.: Natasha Lora, 40 E. 52nd St., 4th Floor, New York, NY 10154, 83.216%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 16.772%; Service Shares – Jan Speth, 308 Mott St., New York, NY 10012, 84.885%; PFPC Distributors Inc. c/o PFPC Finance/General Ledger, 301 Bellevue Parkway, Mailstop W5 F301-036, Wilmington, DE 19809-3705, 15.114%.

GNMA Portfolio: Investor A Shares – Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA, 19182, 15.212%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 8.511%; Nationwide Trust Co. FSB c/o LPO Portfolio Accounting, P.O. Box 182029, Columbus, OH 43218-2029, 7.063%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 5.890%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 24.330%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3

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Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 6.032%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 64.522%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 6.639%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 95.733%; BlackRock Shares – Northern Trust Co. Cust. F.B.O. WMATA Local 922, P.O. Box 92956, Chicago, IL 60675, 99.827%; Service Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 73.894%; Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Account, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 18.760%.

Managed Income Portfolio: Investor A Shares – Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 55.579%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 40.509%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 72.147%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 13.197%; Citigroup Global Markets Inc., 333 W. 34th St., 3rd Floor, New York, NY 10001, 8.774%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 96.302%; Service Shares – PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 51.352%; Maril & Co. F.B.O. 6K c/o M&I Trust Co., NA, 1000 N. Water St. TR 14, Milwaukee, WI 53202, 27.674%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 19.531%.

International Bond Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 8.591%; Dean Witter Reynolds. Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 5.298%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 13.705%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 10.955%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 24.586%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 6.478%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 55.901%; Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Account, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 7.114%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 5.809%; BlackRock Shares – State Street Bank & Trust Co., Trustee for Northrop Grumman DC Plans Master Trust, 105 Rosemont Rd., Westwood, MA 02090, 47.525%; Service Shares – Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Account, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 44.761%; Prudential Investment Mgts. Service F.B.O. Mutual Fund Clients, Attn.: Pruchoice Unit, Mail Stop 194-201, 194 Wood Ave. S., Iselin, NJ 08830-2710, 31.906%.

High Yield Bond Portfolio: Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 15.376%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 13.069%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 33.779%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 11.714%, Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 71.628%; BlackRock Shares – KPMG Retirement Plan Master Trust c/o Bank of New York, Trustee, One Wall St., New York, NY 10086, 22.615%; Bank of New York, Wendel & Co., Mutual Fund/Reorg. Dept., Atlantic Terminal, 2 Hanson Place 6th Floor, Brooklyn, NY 11217, 19.853%; UNUM Provident Corporation, Pension Equity Plan, Attn.: Julie Johnson, 1 Fountain Square 6N, Chattanooga, TN 37402, 18.378%; William T. Grant Foundation, 570 Lexington Ave., 18th Floor, New York, NY 10022-6837, 9.882%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 5.731%; Mac & Co., Mutual Funds Ops., P.O. Box 3198, Pittsburgh, PA 15230-3198, 5.170%; Service Shares – Mercantile Safe Deposit & Trust Co., Nap & Co. (Cash/Reinvest.), 7650 Magna Dr., Belleville, IL 62223, 54.947%; Mercantile Safe Deposit & Trust Co., Nap & Co. (Reinvest./Reinvest.), 7650 Magna Dr., Belleville, IL 62223, 12.538%; NFSC F.E.B.O. CMG High Yield Master Fund, A SE CMG High Yield Master Fund A, 150 N. Radnor Chester Road, Suite A150, Radnor, PA 19807, 7.537%; Charles Schwab & Co. Inc. for Exclusive Benefit of Customers, Special Custody Account, Attn.: Mutual Funds, 101 Montgomery St., San Francisco, CA 94104-4122, 5.811%.

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UltraShort Municipal Portfolio: Investor A Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 89.192%; Donald G. Drapkin, MacAndrew & Forbes Holdings, 35 E. 62nd St., New York, NY 10021, 10.595%; BlackRock Shares – Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 36.936%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 18.194%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 12.843%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 9.596%; Mac & Co., Mutual Fund Operations, P.O. Box 3198, 525 William Penn Pl., Pittsburgh, PA 15230-3198, 9.121%; Service Shares – PFPC Distributors c/o PFPC Finance, 301 Bellevue Pkwy., Mailstop W5 F301-036, Wilmington, DE 19809-3705, 100%.

Tax-Free Income Portfolio: Investor A Shares – Lyons Township School, Treasurer’s Office, Robert A. Healy, Treasurer, 930 Barnside, Lagrange, IL 60526, 27.880%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor; Jersey City, NJ 07311, 6.108%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 32.354%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 6.651%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 36.830%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 14.448%; Raymond James & Assoc. Inc. F.B.O. Keliinoi Family, 880 Carillon Pkwy., St. Petersburg, FL 33716, 8.481%; J.J.B. Hilliard, W.L. Lyons, Inc., Gian Paolo Caccini, 501 S. 4th St., Louisville, KY 40202-2520, 7.522%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, 8800 Tinicum Blvd., Philadelphia, PA 19153, 97.728%; BlackRock Shares – Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 22.448%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 13.178%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 11.741%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 6.993%; Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, NY 11201-3859, 5.397%; Service Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 21.368%; PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 20.880%; The Capital Trust Co. of Delaware, Attn.: Deborah Harris, 2711 Centerville Rd., Suite 210, Wilmington, DE 19808, 13.847%; William N. Barlow and Dixie A. Barlow, Jt. Ten., 396 Anderson Ave., Phoenixville, PA 19460-4439, 5.877%.

Delaware Tax-Free Income Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 12.166%; First Clearing, LLC, WBNA Collateral Acct. F.B.O. Cynthia Y. Jones, 20448 Cedar Beach Rd., Milford, DE 19963-4260, 5.777%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 55.552%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 12.389%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 68.114%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 90.986%.

Ohio Tax-Free Income Portfolio: Investor A Shares – Citigroup Global Markets Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 16.627%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 9.002%; Dean Witter Reynolds, Attn.: Mutual Fund Operations, 3 Harborside Plaza, 6th Floor, Jersey City, NJ 07311, 7.000%; Pershing LLC, P.O. Box 2052, Jersey City, NJ 07303-2052, 5.718%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 57.823%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 79.671%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 92.959%; Service Shares – PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 84.477%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 15.522%.

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Kentucky Tax-Free Income Portfolio: Investor A Shares – Lewis, Ruth B. RVOC TR UA, National City Bank, Trustee, Trust Mutual Funds, P.O. Box 94984, Cleveland, OH 44101-4984, 15.263%; Robert W. Baird & Co. Inc., 777 E. Wisconsin Ave., Milwaukee, WI 53202-5391, 11.951%; UBS Financial Services Inc. F.B.O. Frances R. Beck Trust, Frances R. Beck, Trustee, 5312 Heppstead Rd., Louisville, KY 40207-1247, 6.536%; J.J.B. Hilliard W.L. Lyons Inc., Anne L. Walsh, 501 S. 4th St., Louisville, KY 40202-2520, 6.138%; Ameritrade Inc., P.O. Box 2226, Omaha, NE 68103-2226, 5.772%; Investor C Shares – A.G. Edwards & Sons, Inc. F.B.O. Richard C. Miller, Jr., One North Jefferson, St. Louis, MO 63103-2287, 22.569%; Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 21.084%; LPL Financial Services, 9785 Towne Centre Drive, San Diego, CA 92121-1968, 11.864%; LPL Financial Services, 9785 Towne Centre Drive, San Diego, CA 92121-1968, 11.759%; A.G. Edwards & Sons, Inc. F.B.O. Linda D. Miller, One North Jefferson, St. Louis, MO 63103-2287, 5.160%; J.J.B. Hilliard, W.L. Lyons Inc., Susan L. Draper, 501 S. 4th St., Louisville, KY 40202, 5.152%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 93.980%; Service Shares – PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 63.272%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 36.721%.

New Jersey Tax-Free Income Portfolio: Investor A Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 5.859%; Investor B Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 13.166%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 26.256%; Citigroup Global Markets, Inc., 333 West 34th St., 3rd Floor, New York, NY 10001, 11.156%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 97.581%; Service Shares – PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 21.968%.

Pennsylvania Tax-Free Income Portfolio: Investor A Shares – J.J.B. Hilliard, W.L. Lyons, Inc., Charles T. Vogelsong, 501 S. 4th St., Louisville, KY 40202, 8.065%; Investor C Shares – Merrill Lynch Pierce Fenner, Attn.: Stock Powers, 4800 E. Deerlake Dr., 3rd Floor, Jacksonville, FL 32246-6484, 26.963%; A.G. Edwards & Sons, Inc. F.B.O. Diane S. Kedash, One North Jefferson, St. Louis, MO 63103-2287, 14.679%; J.J.B. Hilliard, W.L. Lyons, Inc., Jeffrey McCarron & Kathryn G. McCarron JTWROS, 501 S. 4th St., Louisville, KY 40202, 10.448%; J.J.B. Hilliard, W.L. Lyons, Inc., Don Rose Jr. Rev. Trust, 501 S. 4th St., Louisville, KY 40202, 8.477%; J.J.B. Hilliard, W.L. Lyons, Inc., Joseph V. Spinelli, 501 S. 4th St., Louisville, KY 40202, 6.582%; J.J.B. Hilliard, W.L. Lyons, Inc., Lee E. Belfer, 501 S. 4th St., Louisville, KY 40202, 5.778%; Institutional Shares – PNC Bank, Saxon & Co. (PNC Inst.), Attn.: Lawrence Lockwood, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 94.166%; Service Shares – PFPC F.B.O. Hilliard Lyons/Capital Directions, 760 Moore Rd., King of Prussia, PA 19406, 43.292%; PNC Bank, Saxon & Co. (PNC Service), ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 41.631%.

Money Market Portfolio: Investor A Shares – Special Custody Acct. for Exclusive Benefit of Customers of Hilliard Lyons, Attn.: Barbara O’Neal, P.O. Box 32760, Louisville, KY 40202, 49.512%; Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 15.118%; Investor C Shares – NFSC F.E.B.O. Perry L. Kocher DDS, Zivia Kocher, Bank of America Collateral Ln., 18 Beaver Lake Ct., Elgin, SC 29045-8663, 18.714%; Institutional Shares – PNC Bank, 35 Institutional, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 95.318%; Service Shares – PNC Bank, 35 Service, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 80.835%; Hilliard Lyons Special Custody Account for the Exclusive Benefit of Customers, Attn.: Barbara O’Neal, 501 Hilliard Lyons Ctr., Louisville, KY 40202, 9.885%; Hilliard Lyons Shares – Hilliard Lyons Cash Balance Sweep, Attn.: Barbara O’Neal, 501 Hilliard Lyons Ctr., Louisville, KY 40202, 100%.

U.S. Treasury Money Market Portfolio: Investor A Shares – Special Custody Acct. for the Exclusive Benefit of Customers of Hilliard Lyons, Attn.: Barbara O’Neal, P.O. Box 32760, Louisville, KY 40232-2760, 64.954%; Saxon & Co., P.O. Box 7780-1888, Philadelphia, PA 19182, 29.721%; Institutional Shares – PNC Bank, 35 Institutional, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 98.952%; Service Shares – PNC Bank, 35 Service, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 52.885%; Chase Manhattan Bank F.B.O. Various Trust Capital Markets FID SVCS, 2001 Bryan Tower, 11th Floor, Dallas, TX 75201, 28.841%; PNC Bank, Next Day Sweep, Attn.: Scott Horan, Treas. Mgmt., Inv. Services, Two PNC Plaza, 620 Liberty Ave., Pittsburgh, PA 15265, 14.514%.

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Municipal Money Market Portfolio: Investor A Shares – Special Custody Acct. for Exclusive Benefit of Customers of Hilliard Lyons, Attn.: Barbara O’Neal, P.O. Box 32760, Louisville, KY 40232-2760, 99.122%; Institutional Shares – PNC Bank, 35 Institutional, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 97.088%; Service Shares – PNC Bank, 35 Service, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 64.438%; PNC Bank, Next Day Sweep, Attn.: Scott Horan, Treas. Mgmt., Inv. Services, Two PNC Plaza, 620 Liberty Ave., Pittsburgh, PA, 15265, 20.660%; Hilliard Lyons Special Custody Account for the Exclusive Benefit of Customers, Attn.: Barbara O’Neal, 501 Hilliard Lyons Ctr., Louisville, KY 40202, 10.326%; Hilliard Lyons Shares – Hilliard Lyons Cash Balance Sweep, Attn.: Barbara O’Neal, 501 Hilliard Lyons Ctr., Louisville, KY 40202, 100%.

New Jersey Municipal Money Market Portfolio: Investor A Shares – Special Custody Acct. for Exclusive Benefit of Customers of Hilliard Lyons, Attn.: Barbara O’Neal, P.O. Box 32760, Louisville, KY 40232-2760, 99.175%; Institutional Shares – PNC Bank, 35 Institutional, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 69.216%; Boh & Co., Beacon Trust Co., Attn.: Beth Patino, 333 Main St., Madison, NJ 07940, 20.928%; Service Shares – PNC Bank, 35 Service, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 94.172%.

North Carolina Municipal Money Market Portfolio: Investor A Shares – Joanne Floch, 4478 Moratock Ln., Clemmons, NC 27012-7712, 63.687%; Henry L. Fisher Jr., P.O. Box 36, Mount Pleasant, NC 28124-0036, 22.945%; Joanne Floch, 4478 Moratock Ln., Clemmons, NC 27012-7712, 12.765%; Institutional Shares – Goldman Sachs Global Cash Services Omnibus Account F.B.O. Goldman Sachs & Co. Customers, 4900 Sears Tower, Chicago, IL 60606, 56.709%; U.S. Trust Co. of New York, Technology and Support Svcs. Inc., Attn.: Trading Operations, 7th Floor, 499 Washington Blvd., Jersey City, NJ 07310-1997, 24.798%; PNC Bank, 35 Institutional, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 7.436%; High Point Bank & Trust, Mutual Partners Program, Pratt & Co. (Cash), 300 N. Main St., High Point, NC 27261, 5.459%; Service Shares – PNC Bank, 35 Service, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 88.693%; Trust Company of the South, P.O. Box 1898, Burlington, NC 27216-1898, 11.306%.

Ohio Municipal Money Market Portfolio: Investor A Shares – Special Custody Acct. for Exclusive Benefit of Customers of Hilliard Lyons, Attn.: Barbara O’Neal, P.O. Box 32760, Louisville, KY 40232-2760, 99.999%; Institutional Shares – PNC Bank, 35 Institutional, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 72.671%; American Greetings Corp., One American Rd., Cleveland, OH 44144, 9.945%; CBC Companies Inc., 250 E. Town St., Columbus, OH 43215, 5.324%; Service Shares – PNC Bank, 35 Service, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 66.206%; Hilliard Lyons Special Custody Account for the Exclusive Benefit of Customers, Attn.: Barbara O’Neal, 501 Hilliard Lyons Ctr., Louisville, KY 40202, 17.557%; PNC Bank, Next Day Sweep, Attn.: Scott Horan, Treasury Mgmt., Inv. Services, Two PNC Plaza, 620 Liberty Ave., Pittsburgh, PA 15265, 16.236%.

Pennsylvania Municipal Money Market Portfolio: Investor A Shares – Special Custody Acct. for Exclusive Benefit of Customers of Hilliard Lyons, Attn.: Barbara O’Neal, P.O. Box 32760, Louisville, KY 40232-2760, 99.466%; Institutional Shares – PNC Bank, 35 Institutional, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 91.665%; Service Shares – PNC Bank, 35 Service, ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 71.482%; Hilliard Lyons Special Custody Account for the Exclusive Benefit of Customers, Attn.: Barbara O’Neal, 501 Hilliard Lyons Ctr., Louisville, KY 40202, 27.444%.

Virginia Municipal Money Market Portfolio: Institutional Shares – PNC Bank, Saxon & Co., ACI Dept./Reorg., 8800 Tinicum Blvd., Philadelphia, PA 19153, 42.354%; Virginia Commonwealth Trust Co., Tunat & Co., P.O. Box 1268, Staunton, VA 24402, 32.563%; Band & Co. c/o US Bank, P.O. Box 1787, Milwaukee, WI 53201, 11.047%; Goldman Sachs Global Cash Services Omnibus Account F.B.O. Goldman Sachs & Co. Customers, 4900 Sears Tower, Chicago, IL 60606, 8.700%.

On May 31, 2005, PNC Bank, which has its principal offices at 1600 Market Street, Philadelphia, Pennsylvania 19103, held of record approximately 47.908% of the Fund’s outstanding shares, and may be deemed a controlling person of the Fund under the 1940 Act. PNC Bank is a national bank organized under the laws of the United States. All of the capital stock of PNC Bank is owned by PNC Bancorp, Inc. All of the capital stock of PNC Bancorp, Inc. is owned by The PNC Financial Services Group, Inc., a publicly-held bank holding company.

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Shareholder Approvals. As used in this Statement of Additional Information and in the Prospectuses, a “majority of the outstanding shares” of a class, series or Portfolio means, with respect to the approval of an investment advisory agreement, a distribution plan or a change in a fundamental investment policy, the lesser of (1) 67% of the shares of the particular class, series or Portfolio represented at a meeting at which the holders of more than 50% of the outstanding shares of such class, series or Portfolio are present in person or by proxy, or (2) more than 50% of the outstanding shares of such class, series or Portfolio.

FINANCIAL STATEMENTS

BlackRock Funds. The audited financial statements and notes thereto in the Fund’s Annual Reports to Shareholders for the fiscal year ended September 30, 2004 (the “2004 Annual Report”), and the unaudited financial statements and notes thereto in the Fund’s Semi-Annual Reports to Shareholders for the period ended March 31, 2005 (the “2005 Semi-Annual Report”), are incorporated in this Statement of Additional Information by reference. No other parts of the 2004 Annual Report or the 2005 Semi-Annual Report are incorporated by reference herein. The financial statements included in the 2004 Annual Report have been audited by Deloitte & Touche LLP. The reports of Deloitte & Touche LLP are incorporated herein by reference. Such financial statements have been incorporated herein in reliance upon such reports given upon Deloitte & Touche LLP’s authority as experts in accounting and auditing. Additional copies of the 2004 Annual Report and the 2005 Semi-Annual Report may be obtained at no charge by telephoning the Distributor at the telephone number appearing on the front page of this Statement of Additional Information.

SSR Funds. With respect to the SSR Funds, the following items (collectively, the “SSR Fund Reports”) are incorporated in this Statement of Additional Information by reference:

(i) the audited financial statements and notes thereto for the State Street Research Aurora Fund and the State Street Research Emerging Growth Fund for the fiscal year ended September 30, 2004, contained in the State Street Research Capital Trust’s Annual Report to Shareholders;

(ii) the audited financial statements and notes thereto for the State Street Research Exchange Fund for the fiscal year ended December 31, 2004, and notes thereto, contained in the State Street Research Exchange Trust’s Annual Report to Shareholders; and

(iii) the audited financial statements and notes thereto for the State Street Research Legacy Fund for the fiscal year ended October 31, 2004, contained in the State Street Research Securities Trust’s Annual Report to Shareholders.

No other parts of any of the SSR Fund Reports are incorporated by reference herein. The audited financial statements included in the SSR Fund Reports have been audited by Deloitte & Touche LLP, the independent registered public accountant for the State Street Research Capital Trust, State Street Research Equity Trust, State

178

Street Research Exchange Trust, State Street Research Financial Trust, and State Street Research Securities Trust., whose reports thereon are incorporated herein by reference. Such financial statements have been incorporated herein by reference in reliance upon such reports given upon Deloitte & Touche LLP’s authority as experts in accounting and auditing. Additional copies of the SSR Fund Reports may be obtained at no charge by telephoning the Distributor at the telephone number appearing on the front page of this Statement of Additional Information.

The audited financial statements and notes thereto for the Mid-Cap Value Equity, Global Resources, Health Sciences and Asset Allocation Portfolios for the fiscal periods ended February 28, 2005, are attached hereto as Appendix D. The audited financial statements attached hereto as Appendix D have been audited by Deloitte & Touche LLP. Such financial statements have been included herein in reliance upon such reports given upon Deloitte & Touche LLP’s authority as experts in accounting and auditing.

Index Master Portfolio. The audited financial statements and notes thereto for The U.S. Large Company Series of the Trust contained in the Trust’s Annual Report to Shareholders for the fiscal year ended November 30, 2004 (the “2004 Index Master Report”) is incorporated by reference into this Statement of Additional Information. No other parts of the 2004 Index Master Report are incorporated by reference herein. The financial statements included in the 2004 Index Master Report have been audited by the Trust’s independent registered public accountant, PricewaterhouseCoopers LLP, whose reports thereon are incorporated herein by reference. Such financial statements have been incorporated herein by reference in reliance upon such reports given upon PricewaterhouseCoopers LLP’s authority as experts in accounting and auditing. Additional copies of the 2004 Index Master Report may be obtained at no charge by telephoning the Trust at (310) 395-8005.

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APPENDIX A

Commercial Paper Ratings

A Standard & Poor’s commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. The following summarizes the rating categories used by Standard and Poor’s for commercial paper:

“A-1” - Issue’s degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted “A-1+.”

“A-2” - Issue’s capacity for timely payment is satisfactory. However, the relative degree of safety is not as high as for issues designated “A-1.”

“A-3” - Issue has an adequate capacity for timely payment. It is, however, somewhat more vulnerable to the adverse effects of changes in circumstances than an obligation carrying a higher designation.

“B” - Issue has only a speculative capacity for timely payment.

“C” - Issue has a doubtful capacity for payment.

“D” - Issue is in payment default.

Moody’s commercial paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of 9 months. The following summarizes the rating categories used by Moody’s for commercial paper:

“Prime-1” - Issuer or related supporting institutions are considered to have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins in earning coverage of fixed financial charges and high internal cash generation; and well established access to a range of financial markets and assured sources of alternate liquidity.

“Prime-2” - Issuer or related supporting institutions are considered to have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained.

“Prime-3” - Issuer or related supporting institutions have an acceptable capacity for repayment of short-term promissory obligations. The effects of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained.

“Not Prime” - Issuer does not fall within any of the Prime rating categories.

Fitch short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years. The following summarizes the rating categories used by Fitch for short-term obligations:

“F-1+” - Securities possess exceptionally strong credit quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.

“F-1” - Securities possess very strong credit quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated “F-1+.”

A-1

“F-2” - Securities possess good credit quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as the “F-1+” and “F-1” categories.

“F-3” - Securities possess fair credit quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade.

“F-S” - Securities possess weak credit quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions.

“D” - Securities are in actual or imminent payment default.

Fitch may also use the symbol “LOC” with its short-term ratings to indicate that the rating is based upon a letter of credit issued by a commercial bank.

Corporate and Municipal Long-Term Debt Ratings

The following summarizes the ratings used by Standard & Poor’s for corporate and municipal debt:

“AAA” - This designation represents the highest rating assigned by Standard & Poor’s to a debt obligation and indicates an extremely strong capacity to pay interest and repay principal.

“AA” - Debt is considered to have a very strong capacity to pay interest and repay principal and differs from AAA issues only in small degree.

“A” - Debt is considered to have a strong capacity to pay interest and repay principal although such issues are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories.

“BBB” - Debt is regarded as having an adequate capacity to pay interest and repay principal. Whereas such issues normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories.

“BB,” “B,” “CCC,” “CC” and “C” - Debt is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. “BB” indicates the lowest degree of speculation and “C” the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.

“BB” - Debt has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The “BB” rating category is also used for debt subordinated to senior debt that is assigned an actual or implied “BBB-” rating.

“B” - Debt has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The “B” rating category is also used for debt subordinated to senior debt that is assigned an actual or implied “BB” or “BB-” rating.

“CCC” - Debt has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The “CCC” rating category is also used for debt subordinated to senior debt that is assigned an actual or implied “B” or “B-” rating.

A-2

“CC” - This rating is typically applied to debt subordinated to senior debt that is assigned an actual or implied “CCC” rating.

“C” - This rating is typically applied to debt subordinated to senior debt which is assigned an actual or implied “CCC-” debt rating. The “C” rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued.

“CI” - This rating is reserved for income bonds on which no interest is being paid.

“D” - Debt is in payment default. This rating is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S & P believes that such payments will be made during such grace period. “D” rating is also used upon the filing of a bankruptcy petition if debt service payments are jeopardized.

PLUS (+) OR MINUS (-) - The ratings from “AA” through “CCC” may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

“r” - This rating is attached to highlight derivative, hybrid, and certain other obligations that S & P believes may experience high volatility or high variability in expected returns due to non-credit risks. Examples of such obligations are: securities whose principal or interest return is indexed to equities, commodities, or currencies; certain swaps and options; and interest only and principal only mortgage securities. The absence of an “r” symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.

The following summarizes the ratings used by Moody’s for corporate and municipal long-term debt:

“Aaa” - Bonds are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edged.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.

“Aa” - Bonds are judged to be of high quality by all standards. Together with the “Aaa” group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in “Aaa” securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in “Aaa” securities.

“A” - Bonds possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.

“Baa” - Bonds considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.

“Ba,” “B,” “Caa,” “Ca,” and “C” - Bonds that possess one of these ratings provide questionable protection of interest and principal (“Ba” indicates some speculative elements; “B” indicates a general lack of characteristics of desirable investment; “Caa” represents a poor standing; “Ca” represents obligations which are speculative in a high degree; and “C” represents the lowest rated class of bonds). “Caa,” “Ca” and “C” bonds may be in default.

Con. (—) - Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition.

A-3

(P) - When applied to forward delivery bonds, indicates that the rating is provisional pending delivery of the bonds. The rating may be revised prior to delivery if changes occur in the legal documents or the underlying credit quality of the bonds.

Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody’s believes possess the strongest investment attributes are designated by the symbols, Aa1, A1, Ba1 and B1.

The following summarizes the highest four ratings used by Fitch for corporate and municipal bonds:

“AAA” - Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.

“AA” - Bonds considered to be investment grade and of very high credit quality. The obligor’s ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated “AAA.” Because bonds rated in the “AAA” and “AA” categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated “F-1+.”

“A” - Bonds considered to be investment grade and of high credit quality. The obligor’s ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.

“BBB” - Bonds considered to be investment grade and of satisfactory credit quality. The obligor’s ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have an adverse impact on these bonds, and therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.

“BB,” “B,” “CCC,” “CC,” “C,” “DDD,” “DD,” and “D” - Bonds that possess one of these ratings are considered by Fitch to be speculative investments. The ratings “BB” to “C” represent Fitch’s assessment of the likelihood of timely payment of principal and interest in accordance with the terms of obligation for bond issues not in default. For defaulted bonds, the rating “DDD” to “D” is an assessment of the ultimate recovery value through reorganization or liquidation.

To provide more detailed indications of credit quality, the Fitch ratings from and including “AA” to “BBB” may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within these major rating categories.

Municipal Note Ratings

A Standard and Poor’s rating reflects the liquidity concerns and market access risks unique to notes due in three years or less. The following summarizes the ratings used by Standard & Poor’s Ratings Group for municipal notes:

“SP-1” - The issuers of these municipal notes exhibit very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are given a plus (+) designation.

“SP-2” - The issuers of these municipal notes exhibit satisfactory capacity to pay principal and interest.

“SP-3” - The issuers of these municipal notes exhibit speculative capacity to pay principal and interest.

Moody’s ratings for state and municipal notes and other short-term loans are designated Moody’s Investment Grade (“MIG”) and variable rate demand obligations are designated Variable Moody’s Investment Grade (“VMIG”). Such ratings recognize the differences between short-term credit risk and long-term risk. The following summarizes the ratings by Moody’s Investors Service, Inc. for short-term notes:

“MIG-1”/”VMIG-1” - Loans bearing this designation are of the best quality, enjoying strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing.

A-4

“MIG-2”/”VMIG-2” - Loans bearing this designation are of high quality, with margins of protection ample although not so large as in the preceding group.

“MIG-3”/”VMIG-3” - Loans bearing this designation are of favorable quality, with all security elements accounted for but lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established.

“MIG-4”/”VMIG-4” - Loans bearing this designation are of adequate quality, carrying specific risk but having protection commonly regarded as required of an investment security and not distinctly or predominantly speculative.

“SG” - Loans bearing this designation are of speculative quality and lack margins of protection.

Fitch uses the short-term ratings described under Commercial Paper Ratings for municipal notes.

A-5

APPENDIX B

Certain Portfolios of the Fund may enter into futures transactions. These transactions are described in this Appendix.

Futures Contracts

If so provided in the Prospectus relating to a particular Portfolio, the Portfolio may purchase and sell interest rate, currency and index futures contracts that are traded on U.S. and non-U.S. commodity exchanges on such underlying securities as U.S. Treasury bonds, notes, bills, GNMA Certificates and/or on any non-U.S. government fixed-income security, on various currencies and on such indices of U.S. and non-U.S. securities as may exist or come into existence.

A futures contract purchaser generally incurs an obligation to take delivery of a specified amount of the instrument (that is, the security or securities or the non-U.S. currency) underlying the contract at a specified time in the future for a specified price. A seller of a futures contract incurs an obligation to deliver the specified amount of the underlying instrument at a specified time in return for an agreed upon price. The purchase of a futures contract enables a Portfolio, during the term of the contract, to lock in a price at which it may purchase a security or currency and protect against a rise in prices pending purchase of portfolio securities. The sale of a future contract enables a Portfolio to lock in a price at which it may sell a security or currency and protect against declines in the value of portfolio securities.

Although most futures contracts call for actual delivery or acceptance of the underlying instrument, the contracts usually are closed out before the settlement date without the making or taking of delivery. Index futures contracts provide for the delivery of an amount of cash equal to a specified dollar amount times the difference between the index value at the open or close of the last trading day of the contract and the futures contract price. A futures contract sale is closed out by effecting a futures contract purchase for the same aggregate amount of the specific type of the underlying instrument and the same delivery date. If the sale price exceeds the offsetting purchase price, the seller would be paid the difference and would realize a gain. If the offsetting purchase price exceeds the sale price, the seller would pay the difference and would realize a loss. Similarly, a futures contract purchase is closed out by effecting a future contract sale for the same aggregate amount of the specific type of the underlying instrument and the same delivery date. If the offsetting sale price exceeds the purchase price, the purchaser would realize a gain, whereas if the purchase price exceeds the offsetting sale price, the purchaser would realize a loss. There is no assurance that a Portfolio will be able to enter into a closing transaction.

Margin

If a Portfolio enters into a futures contract, it is initially required to deposit an “initial margin” of cash, U.S. government securities or other liquid portfolio securities ranging from approximately 2% to 5% of the contract amount. Initial margin requirements are established by the exchanges on which futures contracts trade and may, from time to time, change. In addition, brokers may establish margin deposit requirements in excess of those required by the exchanges.

Initial margin in futures transactions is different from margin in securities transactions in that initial margin does not involve the borrowing of funds by a broker’s client but is, rather, a good faith deposit on the futures contract which will be returned to a Portfolio upon the proper termination of the futures contract.

The margin deposits made are marked to market daily and a Portfolio may be required to make subsequent deposits of cash, U.S. government securities or other liquid portfolio securities, called “variation margin,” which are reflective of price fluctuations in the futures contract. For example, when a Portfolio has purchased a futures contract and the price of the contract has risen in response to a rise in the underlying instrument, that position will have increased in value and the Portfolio will be entitled to receive from the broker a variation margin payment equal to that increase in value. Conversely, where a Portfolio has purchased a futures contract and the price of the future contract has declined in response to a decrease in the underlying instrument, the position would be less valuable and the Portfolio would be required to make a variation margin payment to the broker. Prior to expiration of the futures contract, the Adviser to a Portfolio may elect to close the position by taking an opposite position, subject to the availability of a secondary market, which will operate to terminate the Portfolio’s position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid by or released to the Portfolio, and the Portfolio realizes a loss or a gain.

B-1

Options on Futures Contracts

A Portfolio may purchase and write call and put options on futures contracts and enter into closing transactions with respect to such options to terminate an existing position. An option on the futures contract gives the purchaser the right (in return for the premium paid), and the writer the obligation, to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option is accompanied by delivery of the accumulated balance in the writer’s futures margin account, which represents the amount by which the market price of the futures contract at the time of exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract.

The writer of an option on a futures contract is required to deposit initial and variation margin pursuant to requirements similar to those applicable to futures contracts. Premiums received from the writing of an option on a futures contract are included in initial margin deposits.

Risks of Transactions in Futures Contracts and Options on Futures Contracts

The prices of securities, currencies and indices subject to futures contracts (and thereby the futures contract prices) may correlate imperfectly with the behavior of the cash price of a Portfolio’s securities (and the currencies in which they are denominated). Also, prices of futures contracts may not move in tandem with the changes in prevailing interest rates, market movements and/or currency exchange rates against which a Portfolio seeks a hedge. A correlation may also be distorted (a) temporarily, by short-term traders seeking to profit from the difference between a contract or security price objective and their cost of borrowed funds; (b) by investors in futures contracts electing to close out their contracts through offsetting transactions rather than meet margin deposit requirements; (c) by investors in futures contracts opting to make or take delivery of underlying securities rather than engage in closing transactions, thereby reducing liquidity of the futures market; and (d) temporarily, by speculators who view the deposit requirements in the futures markets as less onerous than margin requirements in the cash market. Due to the possibility of price distortion in the futures market and because of the possible imperfect correlation between movements in the prices of securities, currencies and indices and movements in the price of futures contracts, a correct forecast of interest rate, currency exchange rate and/or market movement trends by a Portfolio’s adviser may still not result in a successful hedging transaction.

There is no assurance that a liquid secondary market will exist for futures contracts and related options in which a Portfolio may invest. In the event a liquid market does not exist, it may not be possible to close out a future position and, in the event of adverse price movements, the Portfolio would continue to be required to make daily case payments of variation margin. The absence of a liquid market in futures contracts might cause a Portfolio to make or take delivery of the instruments underlying futures contracts at a time when it may be disadvantageous to do so.

Exchanges also limit the amount by which the price of a futures contract may move on any day. If the price moves equal the daily limit on successive days, then it may prove impossible to liquidate a futures position until the daily limit moves have ceased. In the event of adverse price movements, a Portfolio would continue to be required to make daily cash payments of variation margin on open futures positions. In these situations, if a Portfolio has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. In addition, a Portfolio may be required to take or make delivery of the instruments underlying futures contracts it holds at a time when it is disadvantageous to do so. The inability to close out options and futures positions could also have an adverse impact on a Portfolio’s ability to effectively hedge its portfolio.

The risk of loss in trading futures contracts in some strategies can be substantial, due both to the relatively low margin deposits required, and the extremely high degree of leverage involved in futures pricing. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss (as well as gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as

B-2

margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit, before any deduction for the transaction costs, if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the contract.

Futures contracts and options thereon which are purchased or sold on non-U.S. commodities exchanges may have greater price volatility than their U.S. counterparts. Furthermore, non-U.S. commodities exchanges may be less regulated and under less governmental scrutiny than U.S. exchanges. Brokerage commissions, clearing costs and other transaction costs may be higher on non-U.S. exchanges. Greater margin requirements may limit a Portfolio’s ability to enter into certain commodity transactions on non-U.S. exchanges. Moreover, differences in clearance and delivery requirements on non-U.S. exchanges may occasion delays in the settlement of a Portfolio’s transactions effected on non-U.S. exchanges.

In the event of the bankruptcy of a broker through which a Portfolio engages in transactions in futures or options thereon, the Portfolio could experience delays and/or losses in liquidating open positions purchased or sold through the broker and/or incur a loss on all or part of its margin deposits with the broker.

If a Portfolio maintains a short position in a futures contract or has sold a call option on a futures contract, the adviser or sub-adviser will designate liquid assets on its books and records in an amount equal (when added to any initial or variation margin on deposit) to the market value of the instrument underlying the futures contract or the exercise price of the option. Such a position may also be covered by owning the instrument underlying the futures contract (in the case of a stock index futures contract a portfolio of securities substantially replicating the relevant index), or by holding a call option permitting the Portfolio to purchase the same contract at a price no higher than the price at which the short position was established.

In addition, if a Portfolio holds a long position in a futures contract or has sold a put option on a futures contract, it will hold cash, U.S. government securities or other liquid portfolio securities equal to the purchase price of the contract or the exercise price of the put option (less the amount of initial or variation margin on deposit) in a segregated account maintained on the books of the Portfolio. Alternatively, a Portfolio could cover its long position by purchasing a put option on the same futures contract with an exercise price as high or higher than the price of the contract held by a Portfolio.

Accounting Treatment

Any Portfolio trading in futures contracts and options thereon will account for such instruments in accordance with generally accepted accounting principles.

B-3

APPENDIX C

Information Regarding the Mergent^® License Agreement—General Disclaimers and the 2004 Mergent^® Dividend Achievers^™

“Mergent^®“ and “Dividend Achievers^™“ are trademarks of Mergent^® and have been licensed for use by the Portfolio. The Portfolio is not sponsored, endorsed, sold or promoted by Mergent^® and Mergent^® makes no representation regarding the advisability of investing in the Portfolio.

This Portfolio and its shares are not sponsored, endorsed, sold or promoted by Mergent^®. Mergent^® makes no representation or warranty, express or implied, to the shareholders of this Portfolio or any member of the public regarding the advisability of investing in securities generally or in this Portfolio particularly or the ability of any data supplied by Mergent^® to track general stock market performance. Mergent’s^® only relationship to this Portfolio is the licensing of certain trademarks and trade names of Mergent^® and of the data supplied by Mergent^® which is determined, composed and calculated by Mergent^® without regard to this Portfolio or its shares. Mergent^® has no obligation to take the needs of this Portfolio or the shareholders of the Portfolio into consideration in determining, composing or calculating the data supplied by Mergent^®. Mergent^® is not responsible for and has not participated in the determination of the prices of the shares of the Portfolio or the timing of the issuance or sale of such shares. Mergent^® has no obligation or liability in connection with the administration, marketing or trading of this Portfolio or its shares.

Mergent^® does not guarantee the accuracy and/or the completeness of any data supplied by it or any data included therein. Mergent^® makes no warranty, express or implied, as to results to be obtained by the Portfolio, its shareholders or affiliates, or any other person or entity from the use of the data supplied by Mergent^® or any data included therein. Mergent^® makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the data supplied by Mergent^® or any data included therein. Without limiting any of the foregoing, in no event shall Mergent^® have any liability for any special, punitive, indirect, or consequential damages (including lost profits), even if notified of the possibility of such damages.

The 2004 Mergent^® Dividend Achievers^™

The securities comprising the 2004 Mergent^® Dividend Achievers^™ universe are:

1ST SOURCE

3M CO. (MINNESOTA MINING & MFG.)

ABBOTT LABORATORIES

ABM INDUSTRIES

AFLAC, INC.

AIR PRODUCTS AND CHEMICALS

ALBERTO-CULVER CO.

ALFA CORP.

ALLTEL CORP.

AMBAC

AMERICAN INTERNATIONAL GROUP

AMERICAN NATIONAL INSURANCE

AMERICAN STATES WATER CO.

AMSOUTH BANCORPORATION

ANHEUSER-BUSCH CO., INC.

APPLEBEE’S INTERNATIONAL

ARCHER DANIELS MIDLAND CO.

ARROW INTERNATIONAL

ASSOCIATED BANC-CORP

ATMOS ENERGY CORP.

AUTOMATIC DATA PROCESSING

AVERY DENNISON CORP.

AVON PRODUCTS

BADGER METER, INC.

BANCORP SOUTH INC.

BANDAG INC.

C-1

BANK OF AMERICA CORP.

BANK OF HAWAII

BANK OF NEW YORK

BANTA CORP.

BARD (C.R.) INC.

BB&T CORP.

BECKMAN COULTER

BECTON, DICKINSON & CO.

BEMIS CO., INC.

BLACK HILLS CORP.

BOWL AMERICA INC.

BRADY CORP.

BRIGGS & STRATTON

BRISTOL MEYERS SQUIBB CO.

BROWN FORMAN CORP.

CALIFORNIA WATER SERVICE CO.

CARLISLE COMPANIES, INC

CEDAR FAIR, L.P.

CENTURYTEL, INC.

CHARTER ONE FINANCIAL, INC.

CHEMICAL FINANCIAL

CHEVRONTEXACO

CHITTENDEN CORP.

CHUBB CORP.

CINCINNATI FINANCIAL CORP.

CINTAS CORP.

CITIGROUP INC

CITIZENS BANKING CORP

CLARCOR INC

CLECO CORP

CLOROX CORP.

COCA-COLA CO. (THE)

COLGATE-PALMOLIVE CO.

COMERICA INC

COMMERCE BANCORP, INC.

COMMERCE BANCSHARES, INC

COMMERCIAL NET LEASE REALTY

COMMUNITY BANK SYSTEMS, INC.

COMMUNITY FIRST BANKSHARES, INC.

COMMUNITY TRUST BANCORP, INC.

COMPASS BANCSHARES INC.

CONAGRA FOODS, INC.

CONNECTICUT WATER SERVICE

CONSOLIDATED EDISON, INC

CORUS BANCSHARES, INC.

COUSINS PROPERTIES INC.

CVB FINANCIAL CORP.

DIEBOLD, INC.

DONEGAL GROUP INC

DONNELLEY (R.R) & SONS CO.

DORAL FINANCIAL CORP.

DOVER CORP.

EASTGROUP PROPERTIES, INC.

EATON VANCE CORP.

ECOLAB

EL PASO CORP.

EMERSON ELECTRIC CO.

ENERGEN CORP.

ENERGY WEST INC.

ENERGYSOUTH, INC.

EXXON MOBILE CORP

F.N.B. CORP.

FAMILY DOLLAR STORES INC.

FANNIE MAE

FEDERAL REALTY INVEST. TRUST

FEDERAL SIGNAL CORP.

FIDELITY NATIONAL FINANCIAL INC.

FIFTH THIRD BANCORP

FIRST CHARTER CORP.

FIRST COMMONWEALTH FINANCIAL CORP.

FIRST FEDERAL CAPITAL CORP.

FIRST FINANCIAL BANCORP

FIRST FINANCIAL CORP.

FIRST FINANCIAL HOLDINGS

FIRST INDIANA CORP.

C-2

FIRST MIDWEST CORP.

FIRST VIRGINIA BANKS INC.

FIRSTMERIT CORP

FLEETBOSTON FINANCIAL

FLORIDA PUBLIC UTILITIES CORP.

FRANKLIN RESOURCES, INC.

FREDDIE MAC

FRISCH’S RESTAURANTS, INC.

FULLER (H.B.) CO.

FULTON FINANCIAL CORP

GALLAGHER (ARTHUR J) & CO.

GANNETT CO., INC.

GATX CORP.

GENERAL DYNAMICS CORP.

GENERAL ELECTRIC CO.

GENUINE PARTS CORP.

GLACIER BANCORP, INC.

GOLDEN WEST FINANCIAL CORP.

GORMAN-RUPP CO.

GRAINGER (W.W.) INC.

HARLEYSVILLE GROUP, INC.

HARLEYSVILLE NATIONAL CORP.

HAVERTY FURNITURE COS., INC.

HEALTH CARE PROPERTY INVESTORS

HEINZ (H.J.) CO.

HERSHEY FOODS CORP.

HILB, ROGAL & HAMILTON CO.

HILLENBRAND INDUSTRIES, INC.

HOME DEPOT, INC.

HON INDUSTRIES, INC.

HORMEL FOODS CORP.

HOUSEHOLD INTERNATIONAL, INC.

HUDSON UNITED BANCORP

ILLINOIS TOOL WORKS, INC.

IRWIN FINANCIAL CORP.

J.P. MORGAN CHASE & CO.

JACK HENRY & ASSOCIATES, INC.

JEFFERSON PILOT CORP.

JOHNSON & JOHNSON

JOHNSON CONTROLS, INC.

KEYCORP

KIMBERLY-CLARK CORP.

KIMCO REALTY

LANCASTER COLONY CORP

LA-Z-BOY INC.

LEGG MASON, INC.

LEGGETT & PLATT, INC.

LILLY (ELI) & CO.

LINCOLN NATIONAL CORP.

LINEAR TECHNOLOGY

LOWE’S COMPANIES, INC.

M & T BANK CORP.

MARSH & MCLENNAN COMPANIES, INC.

MARSHALL & ILSLEY CORP.

MASCO CORP.

MAY DEPARTMENT STORES, CO.

MBIA, INC.

MBNA CORP.

MCCORMICK & CO., INC.

MCDONALD’S CORP.

MCGRATH RENT

MCGRAW-HILL COS, INC.

MDU RESOURCES GROUP, INC.

MEDTRONIC INC.

MERCANTILE BANKSHARES CORP.

MERCK & CO., INC.

MERCURY GENERAL CORP.

MGE ENERGY INC.

MIDDLESEX WATER CO.

MIDLAND CO. (THE)

MINE SAFETY APPLIANCES CO.

MYERS INDUSTRIES, INC.

NACCO INDUSTRIES, INC.

NATIONAL CITY CORP

NATIONAL COMMERCE FINANCIAL CORP.

C-3

NATIONAL FUEL GAS CO.

NATIONAL PENN BANCSHARES, INC.

NATIONAL SECURITY GROUP, INC.

NICOR INC.

NORDSON CORP.

NORTHERN TRUST CORP.

NORTHWESTERN CORP.

NUCOR CORP.

NUVEEN INVESTMENTS INC

OLD NATIONAL BANCORP

OLD REPUBLIC INTERNATIONAL

OTTER TAIL POWER CO.

PACIFIC CAPITAL BANCORP.

PARK NATIONAL CORP.

PAYCHEX INC.

PENTAIR INC.

PEOPLES ENERGY CORP.

PEPSICO, INC.

PFIZER INC.

PHILADELPHIA SUBURBAN CORP.

ALTRIA

PIEDMONT NATURAL GAS CO., INC.

PIER 1 IMPORTS, INC.

PITNEY BOWES INC.

POPULAR, INC.

PPG INDUSTRIES, INC.

PRAXAIR

PROCTOR AND GAMBLE CO.

PROGRESS ENERGY

PROGRESSIVE CORP.

PROTECTIVE LIFE CORP.

QUAKER CHEMICAL CORP.

QUESTAR CORP.

RAVEN INDUSTRIES, INC.

REGIONS FINANCIAL CORP.

REPUBLIC BANCORP, INC.

RLI CORP.

ROHM & HASS CO.

ROPER INDUSTRIES, INC.

ROUSE CO.

RPM INC

S & T BANCORP, INC.

SARA LEE CORP.

SBC COMMUNICATIONS, INC.

SCHERING-PLOUGH CORP.

SEI INVESTMENTS CO.

SERVICE MASTER CO.

SHERWIN-WILLAIMS CO.

SIGMA-ALDRICH CORP.

SJW CORP.

SLM CORPORATION

SMITH (A.O.) CORPORATION

SONOCO PRODUCTS CO.

SOUTHTRUST CORP

ST. PAUL COS., INC.

STANLEY WORKS

STATE AUTO FINANCIAL CORP.

STATE STREET CORP.

STEPAN CO.

STERLING FINANCIAL CORP.

STRYKER CORP.

SUNTRUST BANKS, INC.

SUPERIOR INDUSTRIES INTL. INC.

SUPERVALU INC.

SUSQUEHANNA BANCSHARES INC.

SYNOVUS FINANCIAL CORP

SYSCO CORP.

T. ROWE PRICE GROUP, INC.

TARGET CORP.

TCF FINANCIAL

TECO ENERGY INC.

TELEFLEX INC.

TELEPHONE & DATA SYSTEMS

TENNANT CO.

TEPPCO PARTNERS L.P.

TOOTSIE ROLL INDUSTRIES INC.

TRANSATLANTIC HOLDINGS INC.

C-4

TRUSTCO BANK

TRUSTMARK CO.

UGI CORP.

UNITED BANKSHARES, INC. (W.V.)

UNITED DOMINION REALTY TRUST

UNITED MOBILE HOMES, INC.

UNITRIN, INC.

UNIVERSAL CORP.

UNIVERSAL HEALTH REALTY INC. TRUST

UNIZAN FINANCIAL CORP.

VALLEY NATIONAL BANCORP

VALSPAR CORP.

VECTREN CORP.

VF CORP.

VIRCO MANUFACTURING CORP.

VULCAN MATERIALS CO.

WALGREEN CO.

WAL-MART STORES

WASHINGTON FEDERAL INC.

WASHINGTON MUTUAL INC.

WASHINGTON R.E.I.T.

WEBSTER FINANCIAL CORP.

WEINGARTEN REALTY INVESTORS

WELLS FARGO CORP.

WESBANCO INC.

WESCO FINANCIAL CORP.

WEST PHARMACEUTICAL SERVICES, INC.

WESTAMERICA BANCORPORATION

WEYCO GROUP INC.

WGL HOLDINGS

WILMINGTON TRUST CORP.

WPS RESOURCES CORP.

WRIGLEY (W.M.) JR. CO

C-5

APPENDIX D

Audited Financial Statements

BlackRock Funds Equity Portfolios

• Mid-Cap Value Equity

• Global Resources

• Health Sciences

• Asset Allocation

February 28, 2005

BLACKROCK FUNDS

EQUITY PORTFOLIOS

*Mid-Cap Value Equity	*Health Sciences
*Global Resources	*Asset Allocation

TABLE OF CONTENTS

Statement of Net Assets	1-26
Portfolio Financial Statements
Statements of Operations	27
Statements of Changes in Net Assets	28-29
Financial Highlights	30-37
Notes to Financial Statements	38-55
Report of Independent Registered Public Accounting Firm	56
Additional Information	57

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

MID-CAP VALUE EQUITY PORTFOLIO

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS — 97.2%
Aerospace — 1.2%
Alliant Techsystems, Inc.(b)	124,200	$	8,598,366
Banks — 4.3%
Comerica, Inc.	170,500		9,732,140
North Fork Bancorporation, Inc.	361,050		10,401,850
Sovereign Bancorp, Inc.	474,400		10,882,736
			31,016,726
Beverages & Bottling — 1.4%
Coca-Cola Enterprises, Inc.	468,300		9,998,205
Broadcasting — 2.4%
Belo Corp.	343,300		8,101,880
Lin TV Corp.(b)(c)	533,820		9,411,248
			17,513,128
Business Services — 1.1%
PHH Corp.(b)	22,950		481,950
W.W. Grainger, Inc.	117,100		7,351,538
			7,833,488
Chemicals — 3.9%
Ashland, Inc.	194,800		12,718,492
FMC Corp.(b)	177,500		8,761,400
Huntsman Corp.(b)	43,500		1,242,360
Lyondell Chemical Co.	154,200		5,219,670
			27,941,922
Computer & Office Equipment — 5.1%
American Power Conversion Corp.	321,200		7,072,824
Avery Dennison Corp.	147,000		8,922,900
HNI Corp.	193,700		8,449,194
NCR Corp.(b)	321,400		12,531,386
			36,976,304
Computer Software & Services — 1.4%
Phase Metrics, Inc.(b)(c)(d)	108,409		2,168
Unisys Corp.(b)	1,354,900		10,405,632
			10,407,800
Conglomerates — 0.8%
Textron, Inc.	76,300		5,901,805
Containers — 4.9%
Owens-Illinois, Inc.(b)	533,000		13,266,370
Pactiv Corp.(b)	449,100		10,154,151
Smurfit-Stone Container Corp.(b)	656,200		10,912,606
			34,333,127
Energy & Utilities — 4.2%
Constellation Energy Group	118,500		6,099,195
PPL Corp.	212,700		11,600,658
Public Service Enterprise Group, Inc.	230,100		12,551,955
			30,251,808
Entertainment & Leisure — 0.4%
Alliance Gaming Corp.(b)(e)	278,800		3,094,680
Finance — 7.1%
Ambac Financial Group, Inc.	154,150		11,989,786
Capital One Financial Corp.	113,500		8,703,180
CIT Group, Inc.	301,700		12,173,595
Freedom Pay, Inc.(c)(d)	473,563		4,736
H&R Block, Inc.	198,800		10,596,040
MoneyGram International, Inc.	366,770		7,548,127
			51,015,464
Food & Agriculture — 2.2%
Dean Foods Co.(b)	301,300	$	10,409,915
Del Monte Foods Co.(b)	542,500		5,745,075
			16,154,990
Insurance — 7.1%
Allmerica Financial Corp.(b)	281,900		10,092,020
Assurant, Inc.	298,600		10,271,840
Axis Capital Holdings Ltd.	321,100		8,987,589
Everest Re Group Ltd.	109,500		9,512,265
Radian Group, Inc.	254,300		12,290,319
			51,154,033
Manufacturing — 14.9%
American Standard Co., Inc.	261,800		11,990,440
Briggs & Stratton Corp.	291,000		11,471,220
Brunswick Corp.	259,300		12,093,752
ITT Industries, Inc.	143,400		12,612,030
Jones Apparel Group, Inc.	312,600		9,931,302
Mattel, Inc.	357,500		7,478,900
Newell Rubbermaid, Inc.	461,300		10,282,377
Sherwin-Williams Co.	210,900		9,342,870
Snap-on, Inc.	296,300		9,807,530
York International Corp.	318,800		12,327,996
			107,338,417
Medical & Medical Services — 3.0%
MedImmune, Inc.(b)	172,500		4,153,800
STERIS Corp.(b)	292,800		7,246,800
Universal Health Services, Inc.	220,900		10,426,480
			21,827,080
Medical Instruments & Supplies — 1.3%
Hillenbrand Industries, Inc.	165,900		9,358,419
Metal & Mining — 1.6%
Alpha Natural Resources, Inc.(b)	22,700		590,200
Consol Energy, Inc.	216,300		9,915,192
			10,505,392
Oil & Gas — 7.1%
Diamond Offshore Drilling, Inc.	76,300		3,776,850
EOG Resources, Inc.	130,000		11,845,600
KeySpan Corp.	174,300		6,893,565
Newfield Exploration Co.(b)	136,300		10,120,275
NiSource, Inc.	378,200		8,562,448
Pioneer Natural Resources Co.(e)	235,100		9,914,167
			51,112,905
Paper & Forest Products — 2.0%
Bowater, Inc.(e)	178,000		6,911,740
MeadWestvaco Corp.	249,064		7,810,647
			14,722,387
Pharmaceuticals — 1.7%
Par Pharmaceutical Cos., Inc.(b)	114,800		4,246,452
Watson Pharmaceuticals, Inc.(b)	252,300		8,008,002
			12,254,454
Publishing & Printing — 2.9%
Dow Jones & Co., Inc.(e)	283,300		10,510,430
R. R. Donnelley & Sons Corp.	308,700		10,251,927
			20,762,357
Railroad & Shipping — 0.7%
CSX Corp.	123,200		5,089,392

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

1  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

MID-CAP VALUE EQUITY PORTFOLIO (CONCLUDED)

AS OF FEBRUARY 28, 2005		NUMBER OF SHARES		VALUE
COMMON STOCKS (Continued)
Real Estate — 2.4%
Boston Properties, Inc.			123,000	$	7,355,400
Cendant Corp.			459,000		10,153,080
					17,508,480
Restaurants — 1.5%
Darden Restaurants, Inc.			216,000		5,788,800
Wendy’s International, Inc.			134,900		5,105,965
					10,894,765
Retail Merchandising — 4.8%
AutoZone, Inc.(b)(e)			67,900		6,579,510
Federated Department Stores, Inc.			186,700		10,539,215
The Kroger Co.(b)			610,800		10,988,292
Limited Brands, Inc.			273,400		6,501,452
					34,608,469
Security Brokers & Dealers — 2.6%
A.G. Edwards, Inc.			217,700		9,385,047
Janus Capital Group, Inc.			667,000		9,358,010
					18,743,057
Semiconductors & Related Devices — 1.7%
Cypress Semiconductor Corp.(b)			578,800		8,149,504
Teradyne, Inc.(b)			251,300		3,875,046
					12,024,550
Telecommunications — 1.4%
Scientific-Atlanta, Inc.			333,500		10,305,150
Transportation — 0.1%
Laidlaw International, Inc.(b)			44,900		1,032,700
TOTAL COMMON STOCKS (Cost $592,879,736)					700,279,820
	MATURITY	PAR/SHARES (000)
SHORT TERM INVESTMENTS — 5.4%
Chase Manhattan Bank, Time Deposit
2.50%(f)	03/01/05	$	193		192,717
Federal Home Loan Bank Discount Notes
2.51%	03/01/05		16,000		16,000,000
Merrill Lynch, Floating Rate Master Notes
2.73%(f)(g)	03/01/05		487		486,921
Morgan Stanley, Floating Rate Notes
2.70%(f)(g)	03/01/05		3,886		3,886,060
Galileo Money Market Fund			9,815		9,815,467
Institutional Money Market Trust(f)			8,642		8,642,025
TOTAL SHORT TERM INVESTMENTS (Cost $39,023,190)					39,023,190
TOTAL INVESTMENTS IN SECURITIES — 102.6% (Cost $631,902,926(a))				$	739,303,010
LIABILITIES IN EXCESS OF OTHER ASSETS — (2.6)% (Including $13,207,722 of payable upon return of securities loaned)					(19,084,396	)
NET ASSETS — 100.0% (Applicable to 3,956,674 Institutional shares, 108,794 Service shares, 35,782,785 Investor A shares, 10,831,421 Investor B shares and 7,721,984 Investor C shares outstanding)				$	720,218,614
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($50,382,659÷3,956,674)				$	12.73
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($1,374,336÷108,794)				$	12.63
NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($448,237,311÷35,782,785)				$	12.53
MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($12.53÷0.9425)				$	13.29
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($128,567,669÷10,831,421)				$	11.87
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($91,656,639÷7,721,984)				$	11.87

(a) Cost for Federal income tax purposes is $634,917,587. The gross unrealized appreciation (depreciation) on a tax basis is as follows:

Gross unrealized appreciation	$	120,217,680
Gross unrealized depreciation		(15,832,257	)
	$	104,385,423

(b) Non-income producing security.

(c) Security is illiquid.

(d) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of March 31, 2005, this security had a total market value of $6,904 which represents less than 0.01% of net assets.

(e) Total or partial securities on loan.

(f) Securities purchased with the cash proceeds from securities loaned.

(g) Rates shown are the rates as of February 28, 2005.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

2  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

GLOBAL RESOURCES PORTFOLIO

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS — 94.6%
Canada — 25.9%
Finance — 0.0%
Quest Capital Corp.(b)	61,000	$	87,838
Manufacturing — 0.2%
Westport Innovations, Inc.(b)	959,500		1,670,460
Metal & Mining — 6.0%
AXMIN, Inc.(b)	2,329,935		1,156,248
Bema Gold Corp.(b)	250,000		742,500
Canico Resource Corp.(b)	450,000		6,315,083
Crystallex International Corp.(b)	2,600,000		8,786,090
Fording Canadian Coal Trust(c)	128,300		11,994,767
Gateway Gold Corp.(b)	335,559		395,835
Gold Reserve, Inc.(b)	1,000,000		4,500,000
Mag Silver Corp.(b)	1,339,337		1,046,017
Mena Resources, Inc.(b)	20,000		9,274
Minefinders Corp. Ltd.(b)	250,000		1,805,000
Nevsun Resources Ltd.(b)	1,554,809		3,668,174
NovaGold Resources, Inc.(b)	691,418		6,492,415
Radius Gold, Inc.(b)	569,700		653,496
Romarco Minerals, Inc.(b)	223,000		45,355
Southwestern Resources Corp.(b)	566,900		4,911,719
St. Jude Resources Ltd.(b)	1,096,400		1,917,719
Stratagold Corp.(b)	1,000,000		349,821
Sunridge Gold Corp.(b)	870,700		538,344
Virginia Gold Mines, Inc.(b)	823,100		2,718,666
X-Cal Resources Ltd.(b)	1,755,500		614,111
			58,660,634
Oil & Gas — 19.5%
Accrete Energy, Inc.(b)	13,690		79,966
Argo Energy Ltd.(b)	435,500		1,247,120
Baytex Energy Trust (c)	1,312,748		15,805,947
Blizzard Energy, Inc.(b)	242,700		544,951
Bow Valley Energy Ltd.(b)	634,600		1,053,192
C1 Energy Ltd.(b)	647,099		1,137,110
Capitol Energy Resources Ltd.(b)	329,502		273,423
Chamaelo Energy, Inc.(b)	260,900		1,305,349
Cinch Energy Corp.(b)	601,320		1,335,506
Compton Petroleum Corp.(b)	1,171,300		11,911,202
Crew Energy, Inc.(b)	894,615		8,675,407
Cyries Energy, Inc.(b)	69,096		576,175
Delphi Energy Corp.(b)	497,600		1,611,168
Drillers Technology Corp.(b)	200,000		268,467
Endev Energy, Inc.(b)	1,538,300		2,089,945
Esprit Energy Trust	733,525		7,954,676
Fairborne Energy Ltd.(b)	317,020		3,700,974
Galleon Energy, Inc.(b)	800,300		7,682,672
KICK Energy Ltd.(b)	219,700		1,045,595
Lightning Energy Ltd.(b)	890,966		3,819,875
Masters Energy, Inc.(b)	27,741		83,503
Meridian Energy Corp.(b)	468,500		1,898,088
Midnight Oil Exploration Ltd.(b)	550,300		1,898,204
Mustang Resources, Inc.(b)	370,600		2,939,595
Niko Resources Ltd.	246,500		12,790,246
Oilexco, Inc.(c)	1,498,900		4,341,103
Pacific Rodera Energy, Inc.(b)	990,200		1,683,630
Paramount Resources Ltd.(b)	408,900		10,145,989
Penn West Petroleum Ltd.	642,800		43,890,501
PetroKazakhstan, Inc.	108,100		4,729,375
Precision Drilling Corp.(b)	156,000		11,905,920
ProEx Energy Ltd.(b)	69,096		603,157
ProspEx Resources Ltd.(b)	1,504,120		4,588,716
Purcell Energy Ltd.(b)	735,620		1,765,440
Real Resources, Inc.(b)(c)	200,000	$	2,365,766
Technicoil Corp.(b)	753,100		2,297,531
Tempest Energy Corp.(b)	357,600		1,835,711
Thunder Energy, Inc.(b)	730,132		6,058,694
True Energy, Inc.(b)	327,400		1,438,301
West Energy Ltd.(b)	2,735		12,571
			189,390,761
Transportation — 0.2%
Railpower Technologies Corp.(b)	360,600		1,469,741
			251,279,434
Netherlands — 0.7%
Transportation — 0.7%
Koninklijke P&O Nedlloyd NV	125,000		7,059,850
Norway — 0.7%
Transportation — 0.7%
Stolt-Nielsen SA(b)	170,000		6,698,966
United Kingdom — 1.2%
Oil & Gas — 1.2%
Expro International Group PLC	563,941		4,561,135
Tullow Oil PLC	1,244,198		4,264,808
Venture Production PLC(b)	514,729		2,672,816
			11,498,759
United States — 66.1%
Conglomerates — 2.7%
Stolt-Nielsen S.A.(b)	676,100		26,090,699
Energy & Utilities — 0.8%
KFX, Inc.(b)	393,400		6,687,800
Longview Energy Co.(d)	85,400		1,281,000
			7,968,800
Finance — 0.1%
NGP Capital Resources Co.(b)	64,500		993,300
Manufacturing — 2.9%
Maverick Tube Corp.(b)	460,100		16,361,156
McDermott International, Inc.(b)	336,600		6,678,144
NS Group, Inc.(b)	150,000		5,131,500
			28,170,800
Metal & Mining — 21.9%
Alpha Natural Resources, Inc.(b)	27,500		715,000
Arch Coal, Inc.(c)	856,300		38,182,417
Coeur d’Alene Mines Corp.(b)	500,000		2,005,000
Consol Energy, Inc.	1,231,600		56,456,544
Massey Energy Co.(c)	1,148,400		50,047,272
Peabody Energy Corp.	641,000		62,241,100
Randgold Resources Ltd.(b)	200,000		2,738,000
			212,385,333
Oil & Gas — 37.7%
Atlas America, Inc.(b)(c)	16,895		694,891
BJ Services Co.	478,600		23,910,856
Brigham Exploration Co.(b)	81,900		773,955
CanArgo Energy, Inc.(b)	5,024,200		8,641,624
Clayton Williams Energy, Inc.(b)	321,130		10,147,708
Comstock Resources, Inc.(b)	120,300		3,308,250
Cross Timbers Royalty Trust	2,490		112,672
Denbury Resources, Inc.(b)(c)	273,800		9,300,986

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

3  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

GLOBAL RESOURCES PORTFOLIO (CONCLUDED)

AS OF FEBRUARY 28, 2005		NUMBER OF SHARES		VALUE
COMMON STOCKS (Continued)
United States (Continued)
Oil & Gas (Continued)
Diamond Offshore Drilling, Inc.(c)			333,400	$	16,503,300
The Exploration Co.(b)			282,200		1,600,074
Global Industries, Inc.(b)			189,496		1,860,851
Grey Wolf, Inc.(b)			471,900		3,062,631
Halliburton Co.			390,000		17,148,300
Hanover Compressor Co.(b)			250,000		3,310,000
Key Energy Services, Inc.(b)			221,500		3,061,130
Matador Resources Co.(d)(g)			97,846		1,320,921
Nabors Industries Ltd.(b)			346,500		19,889,100
Newfield Exploration Co.(b)			521,962		38,755,678
Newpark Resources, Inc.(b)			500,000		3,195,000
Noble Corp.			90,700		5,176,249
Parallel Petroleum Corp.(b)			192,300		1,386,483
Patterson-UTI Energy, Inc.			1,272,408		31,810,200
Penn Virginia Corp.			560,000		27,350,400
Petrohawk Energy Corp.(b)(c)			96,700		982,472
Pioneer Drilling Co.(b)(g)			110,300		1,421,767
Pioneer Natural Resources Co.			379,200		15,990,864
Plains Exploration & Production Co.(b)			1,137,505		38,686,545
Pride International, Inc.(b)(c)			200,000		4,924,000
Rowan Cos., Inc.			266,500		8,442,720
Transocean, Inc.(b)			420,800		20,400,384
Treasure Island Royalty Trust(b)			507,439		483,337
Universal Compression Holdings, Inc.(b)			35,200		1,337,600
Vintage Petroleum, Inc.			346,989		10,302,103
Weatherford International Ltd.(b)			301,100		17,948,571
Western Gas Resources, Inc.			321,300		11,888,100
					365,129,722
Waste Management — 0.0%
Republic Resources, Inc.(b)			28,750		1,942
TOTAL COMMON STOCKS (Cost $518,163,737)					917,277,605
WARRANTS — 0.1%
Cinch Energy Corp. (expiring 07/11/05) (b)			751,650		137,586
Nevsun Resources Ltd. (expiring 07/07/05) (b)(d)			250,000		2,034
Oilexco, Inc. (expiring 07/11/05) (b)			118,775		195,188
Purcell Energy Ltd. (expiring 07/07/05) (b)(d)			735,620		179,536
Westport Innovations, Inc. (expiring 07/11/05) (b)			92,850		40,035
TOTAL WARRANTS (Cost $0)					554,379
	MATURITY	PAR/SHARES (000)
SHORT TERM INVESTMENTS — 8.4%
Federal National Mortgage Discount Notes
2.46%	03/01/05	$	37,000		37,000,000
Merrill Lynch, Floating Rate Master Notes
2.73%(e)(f)	03/01/05		3,152		3,151,591
Galileo Money Market Fund			9,724	$	9,724,135
Institutional Money Market Trust(f)			31,976		31,976,486
TOTAL SHORT TERM INVESTMENTS (Cost $81,852,212)					81,852,212
TOTAL INVESTMENTS IN SECURITIES — 103.1% (Cost $600,015,949(a))					999,684,196
LIABILITIES IN EXCESS OF OTHER ASSETS — (3.1)%
(Including $35,128,077 of payable upon return of securities loaned)					(29,884,995	)
NET ASSETS — 100.0%
(Applicable to 496,422 Institutional shares, 12,025,944 Investor A shares, 1,832,296 Investor B shares and 3,296,852 Investor C shares outstanding)				$	969,799,201
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($29,187,854÷496,422)				$	58.80
NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($676,234,270÷12,025,944)				$	56.23
MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($56.23÷0.9425)				$	59.66
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($94,505,610÷1,832,296)				$	51.58
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($169,871,467÷3,296,852)				$	51.53

(a) Cost for Federal income tax purposes is $600,247,149. The gross unrealized appreciation (depreciation) on a tax basis is as follows:

Gross unrealized appreciation	$	411,143,850
Gross unrealized depreciation		(11,706,802	)
	$	399,437,048

(b) Non-income producing security.

(c) Total or partial securities on loan.

(d) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of February 28, 2005, the securities had a total market value of $2,783,491 which represents 0.3% of net assets.

(e) Rates shown are the rates as of February 28, 2005.

(f) Securities purchased with the cash proceeds from securities loaned.

(g) Security is illiquid.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

4  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

HEALTH SCIENCES PORTFOLIO

AS OF FEBRUARY 28, 2005		NUMBER OF SHARES		VALUE
COMMON STOCKS — 93.6%
Business Services — 1.1%
Covance, Inc.(b)			33,900	$	1,481,769
Stewart Enterprises, Inc. - Class A(b)			40		254
					1,482,023
Insurance — 9.5%
Aetna, Inc.			24,670		3,602,313
UnitedHealth Group, Inc.			49,000		4,466,840
WellPoint, Inc.(b)			40,718		4,970,039
					13,039,192
Medical & Medical Services — 13.7%
Amgen, Inc.(b)			42,720		2,631,979
Applera Corp. - Celera Genomics Group(b)			60,520		672,377
Baxter International, Inc.			51,850		1,848,971
Caremark Rx, Inc.(b)			106,370		4,071,844
Community Health Systems, Inc.(b)			53,430		1,729,529
Isolagen, Inc.(b)			35,400		265,854
Martek Biosciences Corp.(b)			29,830		1,998,610
Medco Health Solutions, Inc.(b)			40,520		1,799,898
STERIS Corp.(b)			96,450		2,387,138
Universal Health Services, Inc.			24,990		1,179,528
					18,585,728
Medical Instruments & Supplies — 21.7%
Aspect Medical Systems, Inc.(b)			84,981		1,833,890
Becton, Dickinson & Co.			47,820		2,862,983
C. R. Bard, Inc.			38,410		2,554,265
Conceptus, Inc.(b)			75,700		595,002
Cytyc Corp.(b)			101,500		2,314,200
DENTSPLY International, Inc.			37,910		2,083,914
Diagnostic Products Corp.			20,540		937,240
DJ Orthopedics, Inc.(b)			35,740		861,691
Guidant Corp.			23,300		1,709,987
Idenix Pharmaceuticals, Inc.(b)			19,500		373,230
INAMED Corp.(b)			27,140		1,850,405
Invitrogen Corp.(b)			19,620		1,372,615
Kinetic Concepts, Inc.(b)(c)			26,440		1,724,681
Medtronic, Inc.			24,960		1,300,915
Merit Medical Systems, Inc.(b)			184,300		2,427,231
St. Jude Medical, Inc.(b)			33,180		1,297,338
Symmetry Medical, Inc.(b)			50,000		1,039,500
Waters Corp.(b)			15,680		765,968
Zimmer Holdings, Inc.(b)			16,900		1,451,710
					29,356,765
Pharmaceuticals — 47.6%
Abbott Laboratories			92,750		4,265,572
Abgenix, Inc.(b)(c)			222,800		1,840,328
Alexion Pharmaceuticals, Inc.(b)			114,780		2,680,113
Alkermes, Inc.(b)			75,050		876,584
Allergan, Inc.			31,430		2,362,907
Arena Pharmaceuticals, Inc.(b)			75,000		401,250
ARIAD Pharmaceuticals, Inc.(b)			106,740		668,192
ArQule, Inc.(b)			35,434		177,170
AstraZeneca PLC - ADR			28,030		1,113,912
BioMarin Pharmaceutical, Inc.(b)			295,470		1,586,674
Bristol-Myers Squibb Co.			67,660		1,693,530
Cardiome Pharma Corp.(b)			105,500		903,080
CV Therapeutics, Inc.(b)			71,840		1,575,451
Dyax Corp.(b)			151,050	$	785,460
Gene Logic, Inc.(b)			391,580		1,237,393
Genentech, Inc.(b)			76,070		3,590,504
Genzyme Corp.(b)			70,220		3,938,640
GlaxoSmithKline PLC - ADR(c)			70,530		3,400,958
Human Genome Sciences, Inc.(b)(c)			69,320		773,611
ICOS Corp.(b)			105,990		2,344,499
InterMune, Inc.(b)			144,600		1,596,384
iShares Dow Jones U.S. Healthcare Sector Index Fund			36,990		2,170,573
iShares Nasdaq Biotechnology Index Fund(b)			15,340		1,050,790
IVAX Corp.(b)			43,527		695,997
Kosan Biosciences, Inc.(b)			8,600		46,010
Merck & Co., Inc.			48,200		1,527,940
Momenta Pharmaceutical, Inc.(b)			209,440		1,604,310
Novartis AG - ADR(c)			122,200		6,106,334
OSI Pharmaceuticals, Inc.(b)			22,650		1,237,371
Pfizer, Inc.			56,759		1,492,194
Protein Design Labs, Inc.(b)			72,300		1,083,054
QLT, Inc.(b)			32,770		457,797
Sanofi-Aventis - ADR			44,640		1,781,582
Shire Pharmaceuticals Group PLC - ADR			66,050		2,222,582
Telik, Inc.(b)			38,000		717,440
Threshold Pharmaceuticals, Inc.(b)			104,000		728,000
Transkaryotic Therapies, Inc.(b)			134,210		3,092,198
Trimeris, Inc.(b)			30		383
Vertex Pharmaceuticals, Inc.(b)			56,490		651,895
					64,478,662
TOTAL COMMON STOCKS (Cost $110,257,847)					126,942,370
	MATURITY	PAR/SHARES (000)
SHORT TERM INVESTMENTS — 14.2%
Merrill Lynch, Floating Rate Master Notes
2.73%(d)(e)	03/01/05	$	1,185		1,184,848
U.S. Treasury Bills
2.15%	03/03/05		2,300		2,299,725
Galileo Money Market Fund			3,961		3,961,417
Institutional Money Market Trust(e)			11,803		11,803,392
TOTAL SHORT TERM INVESTMENTS (Cost $19,249,382)					19,249,382

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

5  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

HEALTH SCIENCES PORTFOLIO (CONCLUDED)

AS OF FEBRUARY 28, 2005	VALUE
TOTAL INVESTMENTS IN SECURITIES — 107.8% (Cost $129,507,229(a))	$	146,191,752
LIABILITIES IN EXCESS OF OTHER ASSETS — (7.8)% (Including $12,988,240 of payable upon return of securities loaned)		(10,636,876	)
NET ASSETS — 100.0% (Applicable to 207,933 Institutional shares, 5 Service shares, 3,782,400 Investor A shares, 1,500,960 Investor B shares and 1,287,560 Investor C shares outstanding)	$	135,554,876
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($4,261,814÷207,933)	$	20.50
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($100÷5)(f)	$	20.24
NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($76,549,548÷3,782,400)	$	20.24
MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($20.24÷0.9425)	$	21.47
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($29,495,327÷1,500,960)	$	19.65
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($25,248,087÷1,287,560)	$	19.61

(a) Cost for Federal income tax purposes is $130,861,802. The gross unrealized appreciation (depreciation) on a tax basis is as follows:

Gross unrealized appreciation	$	18,747,510
Gross unrealized depreciation		(3,417,560	)
	$	15,329,950

(b) Non-income producing security.

(c) Total or partial securities on loan.

(d) Rates shown are the rates as of February 28, 2005.

(e) Securities purchased with the cash proceeds from securities loaned.

(f) Exact net assets and shares outstanding at February 28, 2005 were $99.71 and 4.926, respectively.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

6  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS — 66.7%
Australia — 0.4%
Metal & Mining — 0.1%
BHP Billiton Ltd.	63,015	$	957,471
Pharmaceuticals — 0.1%
CSL Ltd.	35,805		910,985
Retail Merchandising — 0.2%
Woolworths Ltd.	101,795		1,257,407
			3,125,863
Austria — 0.1%
Banks — 0.1%
Bank Austria Creditanstalt	10,316		1,006,432
Belgium — 0.1%
Beverages & Bottling — 0.1%
Inbev NV	28,544		1,093,824
Canada — 1.3%
Manufacturing — 0.0%
Westport Innovations, Inc.(b)	70,500		122,738
Metal & Mining — 0.5%
Bema Gold Corp.(b)	50,000		148,500
Crystallex International Corp.(b)	300,000		1,014,000
Fording Canadian Coal Trust	6,200		579,638
Gateway Gold Corp.(b)	67,014		79,052
Gold Reserve, Inc.(b)	100,000		450,000
Minefinders Corp. Ltd.(b)	40,000		288,800
NovaGold Resources, Inc.(b)	126,700		1,189,713
Southwestern Resources Corp.(b)	47,300		419,051
Stratagold Corp.(b)	200,000		69,963
Sunridge Gold Corp.(b)	76,700		47,423
			4,286,140
Oil & Gas — 0.7%
Accrete Energy, Inc.(b)	4,960		28,972
Argo Energy Ltd.(b)	19,200		54,982
Blizzard Energy, Inc.(b)	12,000		26,944
C1 Energy Ltd.(b)	85,733		150,653
Capitol Energy Resources Ltd.(b)	11,944		9,911
Chamaelo Energy, Inc.(b)	11,700		58,538
Cinch Energy Corp.(b)	26,880		59,699
Compton Petroleum Corp.(b)	46,500		472,870
Crew Energy, Inc.(b)	9,400		91,155
Delphi Energy Corp.(b)	18,000		58,282
Endev Energy, Inc.(b)	231,700		314,789
Esprit Energy Trust	36,375		370,497
Galleon Energy, Inc.(b)	36,800		353,270
KICK Energy Ltd.(b)	9,100		43,310
Lightning Energy Ltd.(b)	31,727		136,024
Meridian Energy Corp.(b)	37,000		149,902
Midnight Oil Exploration Ltd.(b)	19,600		67,608
Mustang Resources, Inc.(b)	28,200		223,682
Niko Resources Ltd.	15,500		794,797
Oilexco, Inc.(b)	62,300		180,433
Pacific Rodera Energy, Inc.(b)	37,300		63,421
Paramount Resources Ltd.(b)	15,600		387,081
Precision Drilling Corp.(b)	6,400		488,448
ProspEx Resources Ltd.(b)	43,140		131,610
Purcell Energy Ltd.(b)(c)	68,773		165,051
Technicoil Corp.(b)	33,500		102,202
Tempest Energy Corp.(b)	14,700		80,723
Thunder Energy, Inc.(b)	29,367		243,690
True Energy, Inc.(b)	13,200		57,989
West Energy Ltd.(b)	143	$	657
			5,367,190
Retail Merchandising — 0.1%
Shoppers Drug Mart Corp.(b)	24,037		797,062
Transportation — 0.0%
Railpower Technologies Corp.(b)	17,600		71,734
			10,644,864
Finland — 0.2%
Energy & Utilities — 0.2%
Fortum Oyj	77,458		1,488,746
France — 1.5%
Banks — 0.2%
Credit Agricole SA	46,521		1,383,811
Construction — 0.3%
Lafarge SA	9,885		1,032,612
Vinci SA	9,407		1,385,990
			2,418,602
Entertainment & Leisure — 0.2%
Vivendi Universal SA(b)	56,444		1,786,116
Insurance — 0.2%
Axa	60,327		1,626,326
Manufacturing — 0.1%
Essilor International SA	5,825		409,787
Motor Vehicles — 0.1%
PSA Peugeot Citroen SA	18,041		1,184,885
Oil & Gas — 0.2%
Technip SA	8,443		1,502,836
Soaps & Cosmetics — 0.1%
L’Oreal SA	14,098		1,106,874
Telecommunications — 0.1%
SES Global SA	32,033		447,726
			11,866,963
Germany — 0.5%
Banks — 0.1%
Deutsche Postbank AG(b)	17,109		814,368
Chemicals — 0.1%
Bayer AG	34,480		1,208,251
Manufacturing — 0.2%
Siemens AG	17,916		1,408,538
Telecommunications — 0.1%
Deutsche Telekom AG(b)	46,128		968,628
			4,399,785
Greece — 0.3%
Retail Merchandising — 0.1%
Folli-Follie SA	27,368		867,488
Telecommunications — 0.2%
Hellenic Telecommunications Organization SA	84,400		1,644,577
			2,512,065

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

7  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS (Continued)
Hong Kong — 0.1%
Business Services — 0.1%
Hutchison Whampoa Ltd.	115,000	$	1,039,536
Italy — 0.2%
Oil & Gas — 0.2%
Eni SPA	51,874		1,356,444
Japan — 1.9%
Banks — 0.2%
Mitsubishi Tokyo Financial Group, Inc.	114		1,042,873
Mizuho Finance Group, Inc.	204		997,651
			2,040,524
Beverages & Bottling — 0.1%
Asahi Breweries Ltd.	63,000		821,595
Business Services — 0.2%
Mitsui & Co. Ltd.	153,000		1,563,964
Chemicals — 0.1%
Daicel Chemical Industries Ltd.	104,000		577,418
Construction — 0.2%
Daiwa House Industry Co. Ltd.	105,000		1,201,179
Obayashi Corp.	95,000		603,970
			1,805,149
Energy & Utilities — 0.3%
Hokkaido Electric Power Co.	60,600		1,229,026
Tokyo Electric Power Co.	45,100		1,107,120
			2,336,146
Finance — 0.0%
Sanyo Shinpan Finance Co., Ltd.	4,200		284,739
Manufacturing — 0.2%
Komatsu Ltd.	105,000		789,375
Sumitomo Metal Industries	371,000		636,803
			1,426,178
Motor Vehicles — 0.3%
Suzuki Motor Corp.	50,000		947,883
Toyota Motor Corp.	30,000		1,170,830
			2,118,713
Oil & Gas — 0.1%
Nippon Oil Corp.	146,000		1,092,007
Real Estate — 0.2%
Mitsui Fudosan Co. Ltd.	63,000		784,744
Tokyo Tatemono Co., Ltd.	138,000		946,157
			1,730,901
			15,797,334
Norway — 0.2%
Banks — 0.2%
DNB NOR ASA	133,326		1,361,897
Transportation — 0.1%
Stolt-Nielsen SA(b)	13,000		512,274
			1,874,171
Singapore — 0.3%
Business Services — 0.2%
Jardine Matheson Holdings Ltd.	50,400		902,160
Keppel Corp. Ltd.	135,000	$	785,344
			1,687,504
Telecommunications — 0.1%
Singapore Telecommunications Ltd.	546,000		880,618
			2,568,122
Spain — 0.2%
Banks — 0.2%
Banco Bilbao Vizcaya Argentaria, SA	79,119		1,372,596
Switzerland — 0.6%
Banks — 0.3%
Credit Suisse Group(b)	49,153		2,149,913
Chemicals — 0.1%
Syngenta AG(b)	9,575		1,075,740
Pharmaceuticals — 0.2%
Roche Holding AG	17,458		1,846,810
			5,072,463
Thailand — 0.2%
Banks — 0.1%
Kasikornbank Public Co.	609,100		1,042,489
Manufacturing — 0.1%
Siam Cement Public Co. Ltd.	122,400		953,103
			1,995,592
United Kingdom — 1.6%
Banks — 0.3%
HSBC Holdings PLC	134,549		2,249,004
Insurance — 0.2%
Prudential Corp. PLC	219,621		2,000,438
Oil & Gas — 0.6%
BG Group PLC	165,238		1,299,051
Centrica PLC	161,958		737,604
Expro International Group PLC	22,880		185,053
Shell Transport & Trading Co. PLC	238,912		2,245,162
Tullow Oil PLC	97,735		335,012
Venture Production PLC(b)	20,752		107,758
			4,909,640
Pharmaceuticals — 0.4%
AstraZeneca PLC	29,180		1,151,938
Glaxosmithkline PLC	72,560		1,736,834
			2,888,772
Real Estate — 0.1%
British Land Co. PLC	45,610		757,107
			12,804,961
United States — 57.0%
Advertising — 0.1%
Getty Images, Inc.(b)	7,900		563,586
Aerospace — 1.3%
Alliant Techsystems, Inc.(b)	25,900		1,793,057
The Boeing Co.	38,000		2,088,860
General Dynamics Corp.	10,000		1,053,500
Honeywell International, Inc.	49,200		1,868,124

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

8  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS (Continued)
United States (Continued)
Aerospace (Continued)
Lockheed Martin Corp.	13,900	$	823,158
Northrop Grumman Corp.	11,800		624,220
Raytheon Co.	46,100		1,762,864
United Technologies Corp.	5,100		509,388
			10,523,171
Air Transportation — 0.2%
Expressjet Holdings, Inc.	6,800		76,160
Ryanair Holings PLC — SP ADR(b)	31,086		1,358,769
			1,434,929
Banks — 2.8%
AmSouth Bancorporation	23,000		574,541
Bank of America Corp.	122,736		5,725,634
Bank of New York Co., Inc.	43,000		1,300,750
Berkshire Hills Bancorp, Inc.	5,300		184,599
Central Pacific Financial Co.	7,700		275,660
City National Corp.	3,700		253,265
Comerica, Inc.	29,400		1,678,152
Gold Banc Corp., Inc.	16,600		235,886
J.P. Morgan Chase & Co., Inc.	97,400		3,559,970
Key Corp.	19,800		653,400
Main Street Banks, Inc.	8,100		259,200
Newalliance Bancshares, Inc.	12,900		184,470
North Fork Bancorporation, Inc.	55,050		1,585,990
Oriental Financial Group, Inc.	8,800		235,224
PNC Financial Services Group, Inc.(d)	17,500		921,200
Sovereign Bancorp, Inc.	60,500		1,387,870
U.S. Bancorp	89,200		2,653,700
Wachovia Corp.	22,600		1,198,026
			22,867,537
Beverages & Bottling — 0.4%
The Coca-Cola Co.	8,400		359,520
Coca-Cola Enterprises, Inc.	59,600		1,272,460
Constellation Brands, Inc.(b)	11,100		594,183
PepsiCo, Inc.	16,200		872,532
			3,098,695
Broadcasting — 1.0%
Alliance Atlantis	7,500		222,225
Belo Corp.	44,200		1,043,120
Comcast Corp.(b)	18,700		608,685
Comcast Corp. - Special Class A Non-Voting(b)	18,200		579,852
Cumulus Media, Inc.	11,900		168,385
DIRECTV Group, Inc.(b)(e)	69,474		1,042,805
Gray Communications Systems, Inc. Class B	9,400		136,676
Liberty Media Corp. - Class A(b)	127,500		1,292,850
Lin TV Corp.(b)	69,900		1,232,337
News Corp. - Class B	91,200		1,569,552
Radio One, Inc. - Class D	8,600		117,562
Spanish Broadcasting Systems, Inc.	29,400		295,470
			8,309,519
Business Services — 1.0%
Alliance Data Systems Corp.(b)	33,100		1,305,795
CDI Corp.	7,600		158,156
ChoicePoint, Inc.(b)	8,300		334,490
The Corporate Executive Board Co.	11,800		738,090
Cubic Corp.	7,500	$	140,550
Diamond Technology Partners, Inc.	9,300		159,309
Education Management Corp.	1,200		35,184
Hewitt Associates, Inc. Class A(b)(e)	16,600		510,284
Hiedrick & Struggles International, Inc.	4,700		160,458
Hudson Highland Group, Inc.	5,800		96,744
Labor Ready, Inc.	15,200		285,456
Laureate Education, Inc.(b)	16,100		698,579
Manpower, Inc.	16,700		729,790
Modis Professional Services, Inc.	11,300		121,362
Navigant Consulting, Inc.	19,600		504,700
PHH Corp.(b)	6,450		135,450
Smartforce PLC - ADR	20,000		81,400
Tetra Tech, Inc.	19,000		315,020
Titan Corp.	20,700		343,620
W.W. Grainger, Inc.	15,200		954,256
			7,808,693
Chemicals — 1.1%
Agrium, Inc.	6,000		108,600
Air Products and Chemicals, Inc.	22,400		1,402,688
Airgas, Inc.	17,300		434,230
Ashland, Inc.	24,800		1,619,192
Cytec Industries	3,700		186,961
The Dow Chemical Co.	18,700		1,031,305
E.I. du Pont de Nemours & Co.	38,800		2,068,040
FMC Corp.(b)	22,400		1,105,664
Lyondell Chemical Co.	19,600		663,460
			8,620,140
Computer & Office Equipment — 1.9%
American Power Conversion Corp.	40,300		887,406
Apple Computer, Inc.(b)	8,600		385,796
Avery Dennison Corp.	18,800		1,141,160
Cisco Systems, Inc.(b)	121,220		2,111,652
Dell, Inc.(b)	56,600		2,269,094
EMC Corp.(b)	115,600		1,463,496
Hewlett-Packard Co.	74,000		1,539,200
HNI Corp.	24,580		1,072,180
International Business Machines Corp.	18,000		1,666,440
Intuit, Inc.(b)	13,900		594,920
Lexmark International, Inc.(b)	5,300		424,689
NCR Corp.(b)	40,800		1,590,792
Phase Metrics, Inc.(b)(c)(f)	50,574		1,011
			15,147,836
Computer Software & Services — 3.2%
Adobe Systems, Inc.(e)	12,600		778,050
Advanced Digital Information Corp.	14,700		122,157
Ascential Software Corp.	24,300		376,893
BMC Software, Inc.(b)	14,500		216,775
Borland Software Corp.	36,200		302,270
Ceridian Corp.(b)	42,900		782,925
Checkfree Corp.(b)	38,700		1,491,498
Cognizant Technology Solutions Corp.(b)	9,400		443,962
Computer Sciences Corp.(b)	12,400		573,252
Digitas, Inc.	54,900		543,510

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

9  

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS (Continued)
United States (Continued)
Computer Software & Services (Continued)
DST Systems, Inc.(b)	10,400	$	493,896
Earthlink, Inc.	7,200		62,856
Ebay, Inc.(b)	13,600		582,624
Electronic Data Systems Corp.(e)	39,300		837,090
Google, Inc.(b)	3,855		724,701
IAC/InterActive Corp.(b)	3		69
Lawson Software	10,600		61,480
McData Corp. - Class A	36,100		141,873
Mercury Interactive Corp.(b)	11,000		504,680
Microsoft Corp.	258,720		6,514,570
Navteq Corp.(b)(e)	14,900		651,130
Oracle Corp.(b)	172,400		2,225,684
Polycom, Inc.(b)	16,400		265,516
Progress Software	14,900		344,935
Siebel Systems, Inc.(b)	38,400		327,552
Sonicwall, Inc.	28,900		178,602
Sun Microsystems, Inc.(b)	222,500		938,950
Symantec Corp.(b)	10,000		220,100
Take-Two Interactive Software, Inc.	1,700		62,339
Tibco Software, Inc	9,300		90,768
Unisys Corp.(b)	171,800		1,319,424
VeriSign, Inc.(b)	68,800		1,886,496
VERITAS Software Corp.(b)	19,000		460,180
Verity, Inc.	4,800		56,880
Yahoo! Inc.(b)	49,700		1,603,819
			26,187,506
Conglomerates — 0.1%
Textron, Inc.	9,800		758,030
Construction — 0.0%
Chicago Bridge & Iron Co. NV	6,500		282,165
Jacobs Engineering Group, Inc.	2,100		117,558
			399,723
Containers — 0.7%
Owens-Illinois, Inc.(b)	85,200		2,120,628
Pactiv Corp.(b)	55,800		1,261,638
Sealed Air Corp.(b)	13,900		726,553
Smurfit-Stone Container Corp.(b)	85,100		1,415,213
Tupperware Corp.	23,000		471,270
			5,995,302
Credit Institutions — 0.0%
CSG Systems, Inc.	1,600		27,360
Global Payments, Inc.	2,200		122,144
			149,504
Electronics — 0.7%
DRS Technology, Inc.	4,200		173,502
Integrated Circuit Systems, Inc.	5,600		113,008
Intel Corp.	162,430		3,895,071
Iomega Corp.	25,700		116,164
L-3 Communications Holdings, Inc.	9,600		692,160
National Semiconductor Corp.	27,300		544,635
TTM Technologies, Inc.	12,800		137,856
			5,672,396
Energy & Utilities — 1.2%
Constellation Energy Group	14,800		761,756
Energen Corp.	2,500		161,250
Exelon Corp.	22,300		1,011,528
KCS Energy, Inc.	20,600		353,702
KFX, Inc.(b)	11,500	$	195,500
Longview Energy Co.(c)(f)	3,200		48,000
Magnum Petroleum, Inc.	14,400		240,912
PPL Corp.	84,500		4,608,630
Public Service Enterprise Group, Inc.	28,900		1,576,495
TETRA Technologies, Inc.	4,000		125,240
TXU Corp.	7,300		556,625
			9,639,638
Entertainment & Leisure — 1.4%
Alliance Gaming Corp.(b)	35,000		388,500
Argosy Gaming Co.	1,900		87,723
Gaylord Entertainment Co. - Class A	7,400		316,720
GTECH Holdings Corp.	14,400		336,240
Harrah’s Entertainment, Inc.	7,500		491,925
Kerzner International Ltd.	5,500		351,670
LaSalle Hotel Properties (REIT)	7,400		223,036
MTR Gaming Group, Inc.	31,600		379,516
Orient Express Hotels Ltd.	11,700		301,158
Playboy Enterprises, Inc. - Class B	9,200		127,880
Scientific Games Corp. - Class A	10,500		270,060
Starwood Hotels & Resorts Worldwide, Inc.	31,000		1,774,440
Time Warner, Inc.(b)	134,200		2,312,266
Vail Resorts, Inc.	6,000		146,040
Viacom, Inc.	20,200		704,980
The Walt Disney Co.	121,400		3,391,916
World Wrestling Entertainment, Inc.	8,100		102,546
			11,706,616
Finance — 3.7%
Affiliated Managers Group, Inc.(b)	1,000		64,761
Ambac Financial Group, Inc.	19,550		1,520,599
American Express Co.	28,240		1,529,196
The Bear Stearns Cos., Inc.	7,700		766,150
Capital One Financial Corp.	23,900		1,832,652
The Charles Schwab Corp.	66,300		696,150
Chicago Mercantile Exchange	1,500		309,930
CIT Group, Inc.	48,200		1,944,870
Citigroup, Inc.	144,020		6,872,634
Countrywide Financial Corp.	18,700		649,825
Fannie Mae	13,600		795,056
Freddie Mac	9,000		558,000
Golden West Financial Corp	7,400		457,986
The Goldman Sachs Group, Inc.	14,900		1,621,120
H&R Block, Inc.(e)	24,800		1,321,840
MBNA Corp.	74,639		1,893,591
Merrill Lynch & Co., Inc.	16,400		960,712
MoneyGram International, Inc.	46,000		946,680
Morgan Stanley	28,000		1,581,160
NGP Capital Resources Co.(b)	2,700		41,580
Providian Financial Corp.(b)	73,900		1,267,385
SLM Corp.	24,200		1,180,960
T. Rowe Price Group, Inc.	7,200		442,008
TCF Financial Corp.	8,900		246,085
Washington Mutual, Inc.	14,000		587,440
Wright Express Corp.(b)	4,200		75,138
			30,163,508
Food & Agriculture — 0.9%
Archer-Daniels-Midland Co.(e)	27,100		653,110
Campbell Soup Co.	16,000		443,200

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

10

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS (Continued)
United States (Continued)
Food & Agriculture (Continued)
Dean Foods Co.(b)	36,300	$	1,254,165
Del Monte Foods Co.(b)	69,000		730,710
General Mills, Inc.(e)	26,800		1,403,516
John B. Sanfilippo & Son, Inc.	4,600		119,577
Kellogg Co.	11,200		492,800
Kraft Foods, Inc. - Class A	23,400		782,730
Monsanto Co.	27,100		1,592,938
			7,472,746
Insurance — 2.9%
ACE Ltd.	9,900		440,154
Aetna, Inc.	12,100		1,766,842
Allmerica Financial Corp.(b)	41,100		1,471,380
Allstate Corp.	15,400		826,672
American International Group, Inc.	61,400		4,101,520
Assurant, Inc.	38,700		1,331,280
Axis Capital Holdings Ltd.	40,540		1,134,715
CHUBB Corp.	6,000		474,660
Everest Re Group, Ltd.	13,700		1,190,119
Genworth Financial, Inc.	23,500		661,760
Hartford Financial Services Group	16,500		1,187,175
Max Re Capital Ltd.	7,600		174,876
MetLife, Inc.(e)	22,800		935,712
Platinum Underwriters Holdings, Ltd.	1,500		46,500
PXRE Corp.	6,700		174,200
Radian Group, Inc.	32,300		1,561,059
UnitedHealth Group, Inc.	33,200		3,026,512
UnumProvident Corp.	35,000		592,200
W.R. Berkley Corp.	12,100		621,456
WellChoice, Inc.(b)	9,800		506,170
WellPoint, Inc.(b)	12,600		1,537,956
			23,762,918
Machinery & Heavy Equipment — 0.1%
Albany International Corp.	6,000		193,500
Bucyrus International, Inc.	2,500		108,575
Deere & Co.	7,400		526,214
			828,289
Manufacturing — 4.5%
Actuant Corp.	1,600		86,480
Agilent Technologies, Inc.(b)	45,600		1,094,400
American Standard Co., Inc.	34,100		1,561,780
Amphenol Corp.	17,400		694,260
Aptargroup, Inc.	4,900		252,938
Arris Group, Inc.	38,800		246,380
Aviall, Inc.	14,600		408,800
Black & Decker Corp.	5,600		464,352
Briggs & Stratton Corp.	34,000		1,340,280
Brunswick Corp.	46,000		2,145,440
The Clorox Co.	17,600		1,056,704
Durco International, Inc.	6,000		149,940
Eaton Corp.(e)	11,300		788,175
Fleetwood Enterprises, Inc.	18,000		174,060
Fortune Brands, Inc.	8,300		672,300
General Electric Co.	193,620		6,815,424
Herley Microwave Systems, Inc.	2,200		39,798
Hexel Corp.	13,000		216,190
Huntsman Corp.	5,400		154,224
ITT Industries, Inc.	17,400		1,530,330
Jones Apparel Group, Inc.	38,800		1,232,676
K2, Inc.	21,700		310,961
Lear Corp.(e)	7,200	$	375,480
Lennox International, Inc.	3,900		84,318
Mattel, Inc.	94,600		1,979,032
McDermott International, Inc.(b)	16,500		327,360
NBTY, Inc.	7,800		197,262
Newell Rubbermaid, Inc.	101,500		2,262,435
Nike, Inc.	19,000		1,652,050
Nucor Corp.	13,500		841,590
Parker Hannifin Corp.	6,000		394,800
Paxar Corp.	10,400		243,672
Pentair, Inc.	19,600		812,224
Reunion Industries, Inc.(b)	595		178
Sherwin-Williams Co.	43,500		1,927,050
Snap-on, Inc.	38,300		1,267,730
The Stanley Works Co.	16,700		772,375
Sybron Dental Specialties, Inc.	5,900		210,748
York International Corp.	40,300		1,558,401
Zebra Technologies Corp. - Class A(b)	5,700		284,259
			36,626,856
Medical & Medical Services — 1.9%
Accredo Health, Inc.	12,900		549,798
Advanced Medical Optics, Inc.(b)(e)	3,400		129,030
Amgen, Inc.(b)	17,040		1,049,834
Baxter International, Inc.	46,400		1,654,624
Caremark Rx, Inc.(b)	43,000		1,646,040
Community Health Systems, Inc.(b)	25,400		822,198
CryoLife, Inc.	16,600		129,480
CTI Molecular Imaging, Inc.	9,700		159,177
Digene Corp.	3,100		74,493
Digirad Corp.	34,000		262,786
Exact Science Corp.	12,500		58,125
HCA, Inc.	31,280		1,476,729
Hologic, Inc.	14,400		532,080
McKesson Corp.	12,800		477,952
Medco Health Solutions, Inc.(b)	15,500		688,510
MedImmune, Inc.(b)	50,100		1,206,408
Noven Pharmaceuticals, Inc.	4,400		72,688
Orchid Biosciences, Inc.	34,700		463,592
PacifiCare Health Systems, Inc.(b)(e)	7,200		457,056
Pediatrix Medical Group, Inc.	4,900		335,797
Quest Diagnostics, Inc.	7,800		775,320
STERIS Corp.(b)	36,300		898,425
TLC Vision Corp.	2,800		26,292
Universal Health Services, Inc.	27,600		1,302,720
VCA Antech, Inc.	3,300		66,264
			15,315,418
Medical Instruments & Supplies — 1.9%
Bausch & Lomb, Inc.	10,400		736,216
Becton, Dickinson & Co.(e)	11,800		706,466
Bruker Daltonics, Inc.	8,200		30,586
C. R. Bard, Inc.	9,300		618,450
Charles River Laboratories International, Inc.(b)	40,200		1,853,220
Cytyc Corp.(b)	30,800		702,240
DJ Orthopedics, Inc.(b)	14,700		354,417
Guidant Corp.	3,600		264,204
Hillenbrand Industries, Inc.(e)	20,600		1,162,046
Intralase Corp.	15,000		277,650
Invitrogen Corp.(b)	6,600		461,736

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

11

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS (Continued)
United States (Continued)
Medical Instruments & Supplies (Continued)
Johnson & Johnson	78,640	$	5,158,784
Kinetic Concepts, Inc.(b)(e)	3,400		221,782
LCA-Vision, Inc.	8,900		257,388
Ligand Pharmaceuticals, Inc. - Class B	16,400		160,720
PerkinElmer, Inc.	23,700		525,666
St. Jude Medical, Inc.(b)	25,000		977,500
Wright Medical Group, Inc.	11,800		300,782
Zimmer Holdings, Inc.(b)	10,500		901,950
			15,671,803
Metal & Mining — 1.7%
Alcoa, Inc.	15,300		491,436
Alpha Natural Resources, Inc.(b)	8,700		226,200
Arch Coal, Inc.	34,700		1,547,273
Coeur d’Alene Mines Corp.(b)	40,000		160,400
Consol Energy, Inc.	130,400		5,977,536
Massey Energy Co.	58,500		2,549,430
MSC Industrial Direct Co., Inc.	25,400		821,690
Peabody Energy Corp.	19,000		1,844,900
Quanex Corp.	3,200		188,320
			13,807,185
Motor Vehicles — 0.1%
Ford Motor Co.	30,500		385,825
General Motors Corp.(e)	19,800		706,266
			1,092,091
Oil & Gas — 5.3%
Amerada Hess Corp.(e)	11,600		1,164,640
Anadarko Petroleum Corp.	9,800		753,228
Baker Hughes, Inc.(e)	19,800		936,144
BP PLC	17,000		1,103,640
CanArgo Energy, Inc.(b)	191,100		328,692
ChevronTexaco Corp.	39,500		2,452,160
Clayton Williams Energy, Inc.(b)	35,000		1,106,000
ConocoPhillips	15,100		1,674,439
Devon Energy Corp.	2		94
Diamond Offshore Drilling, Inc.	18,900		935,550
Energy Partners Ltd.	2,900		74,965
EOG Resources, Inc.(e)	59,700		5,439,864
The Exploration Co.(b)	10,900		61,803
Exxon Mobil Corp.	108,700		6,881,797
Global Industries, Inc.(b)	50,000		491,000
Grey Wolf, Inc.(b)	38,900		252,461
Halliburton Co.	37,300		1,640,081
Key Energy Services, Inc.(b)	15,500		214,210
KeySpan Corp.	22,500		889,875
Matador Resources Co.(c)(f)	895		12,082
National Fuel Gas Co.	16,600		470,112
Newfield Exploration Co.(b)	56,400		4,187,700
NiSource, Inc.	49,000		1,109,360
Noble Corp.	7,600		433,732
Occidental Petroleum Corp.	10,200		716,754
Oceaneering International, Inc.	2,600		103,740
Parallel Petroleum Corp.(b)	7,000		50,470
Petrohawk Energy Corp.(b)(e)	4,300		43,688
Pioneer Drilling Co.(b)	8,600		110,854
Pioneer Natural Resources Co.	30,000		1,265,100
Plains Exploration & Production Co.(b)	44,500		1,513,445
Range Resources Corp.	4,900	$	123,676
Remington Oil & Gas Corp. - Class B	3,000		99,960
Roper Co.	4,400		284,240
Royal Dutch Petroleum Co. - NY Shares	21,000		1,324,890
Schlumberger Ltd.	7,000		528,150
Tidewater, Inc.	4,300		177,461
Transocean, Inc.(b)	37,700		1,827,696
Treasure Island Royalty Trust(b)	300,000		285,750
Valero Energy Corp.	11,500		819,260
Vintage Petroleum, Inc.	12,610		374,391
Weatherford International Ltd. (b)	18,600		1,108,746
			43,371,900
Paper & Forest Products — 0.7%
Bowater, Inc.(e)	23,000		893,090
Georgia-Pacific Corp.	17,200		615,932
International Paper Co.	33,000		1,232,550
MeadWestvaco Corp.	31,200		978,432
Pope & Talbot, Inc.	3,000		48,600
XL Capital Ltd.	21,900		1,642,500
			5,411,104
Personal Services — 0.2%
Corinthian Colleges, Inc.(b)	5,800		100,282
Jarden Corp.	10,900		474,259
Watson Wyatt & Co.	16,400		448,704
The Yankee Candle Co.(b)	19,900		616,104
			1,639,349
Pharmaceuticals — 2.3%
Allergan, Inc.	14,800		1,112,664
Angiotech Pharmaceuticals, Inc.	4,500		75,555
Bristol-Myers Squibb Co.	79,600		1,992,388
Genentech, Inc.(b)	18,900		892,080
Genzyme Corp.(b)	4,300		241,187
Gilead Sciences, Inc.(b)	12,500		431,875
Hospira, Inc.(b)	19,900		589,040
ICOS Corp.(b)	14,000		309,680
Inhale Therape	3,300		57,222
Medicis Pharmaceutical Corp.	21,500		742,610
Merck & Co., Inc.	35,500		1,125,350
Nabi Biopharmaceuticals	14,300		181,610
Novartis AG - ADR(e)	45,430		2,270,137
OSI Pharmaceuticals, Inc.(b)	9,900		540,837
Par Pharmaceutical Cos., Inc.(b)	21,500		795,285
Pfizer, Inc.	137,982		3,627,547
Schering-Plough Corp.	41,100		778,845
Shire Pharmaceuticals Group PLC - ADR	15,900		535,035
Valeant Pharmaceuticals International	7,400		179,450
Watson Pharmaceuticals, Inc.(b)	32,000		1,015,680
Wyeth	38,600		1,575,652
			19,069,729
Publishing & Printing — 0.5%
Banta Corp.	3,400		149,464
Dow Jones & Co., Inc.(e)	35,300		1,309,630
The McGraw-Hill Cos., Inc.	7,800		716,430
R. R. Donnelley & Sons Corp.	40,000		1,328,400

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

12

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	NUMBER OF SHARES	VALUE
COMMON STOCKS (Continued)
United States (Continued)
Publishing & Printing (Continued)
Tribune Co.(e)	16,400	$	667,972
			4,171,896
Railroad & Shipping — 0.5%
Burlington Northern Santa Fe Corp.	19,100		960,157
CSX Corp.	16,000		660,960
Fedex Corp.	8,000		782,240
Union Pacific Corp.	28,000		1,776,600
			4,179,957
Real Estate — 0.8%
Boston Properties, Inc.	15,400		920,920
Cendant Corp.	130,300		2,882,236
Centex Corp.	7,700		489,643
Eagle Hospitality Properties Trust, Inc.	21,600		203,688
Marriott International, Inc.	28,400		1,820,440
			6,316,927
Restaurants — 0.7%
AFC Enterprises, Inc.	2,700		71,280
Darden Restaurants, Inc.	27,400		734,320
McDonald’s Corp.	86,200		2,851,496
RARE Hospitality International, Inc.(b)	700		20,482
Ruby Tuesday, Inc.	7,700		186,186
Starbucks Corp.(b)	12,500		647,625
Texas Roadhouse, Inc. - Class A	6,700		187,600
Triarc Cos. - Class A	7,700		119,966
Wendy’s International, Inc.	17,100		647,235
			5,466,190
Retail Merchandising — 3.7%
99 Cents Only Stores, Inc.	22,100		344,539
Aaron Rents, Inc.	7,700		157,542
AutoZone, Inc.(b)(e)	14,400		1,395,360
Barnes & Noble, Inc.(b)	26,500		905,240
CDW Corp.(e)	13,300		764,351
Chico’s FAS, Inc.(b)(e)	28,600		842,270
Coach, Inc.(b)	20,060		1,113,932
CVS Corp.	36,300		1,808,829
Federated Department Stores, Inc.	48,000		2,709,600
The Gap, Inc.(e)	63,200		1,348,056
The Home Depot, Inc.	63,100		2,525,262
Hot Topic, Inc.	5,800		123,888
J. Jill Group, Inc.	27,700		400,265
Jos. A. Bank Clothiers, Inc.	8,000		217,120
Kohl’s Corp.(b)	18,200		871,234
The Kroger Co.(b)	164,200		2,953,958
Limited Brands, Inc.	35,400		841,812
Lowe’s Cos., Inc.	7,800		458,484
Nordstrom, Inc.	14,400		774,144
Petsmart, Inc.(e)	37,900		1,155,950
Polo Ralph Lauren Corp.	21,200		835,280
Reebok International Ltd.	1,900		83,904
Simon Property Group, Inc.	5,700		353,172
Sports Authority, Inc.	7,300		178,777
Staples, Inc.	46,300		1,459,376
Supervalue, Inc.	14,700		467,019
Target Corp.	37,000		1,880,340
Too, Inc.	8,600		228,416
Toys “R” Us, Inc.(b)	40,000		914,800
Tuesday Morning Corp.	1,100	$	34,485
Wal-Mart Stores, Inc.	23,300		1,202,513
West Marine	5,600		135,408
Williams-Sonoma, Inc.(b)	24,900		863,781
			30,349,107
Security Brokers & Dealers — 2.4%
A.G. Edwards, Inc.	27,600		1,189,836
Bisys Group, Inc.	8,400		124,488
E*TRADE Financial Corp.(b)	40,400		536,108
Franklin Resources, Inc.	5,320		373,411
iShares Russell 1000 Value Index Fund	61,300		11,613,898
iShares Russell 2000 Value Index Fund(e)	50,500		3,399,660
iShares Russell Midcap Growth Index Fund	3,110		262,328
Janus Capital Group, Inc.	84,900		1,191,147
Lehman Brothers Holdings, Inc.	5,700		519,726
Nasdaq-100 Index Tracking Stock	12,900		480,138
WSFS Financial Corp.	3,100		178,529
			19,869,269
Semiconductors & Related Devices — 0.8%
Altera Corp.(b)	35,800		742,492
Cypress Semiconductor Corp.(b)	72,600		1,022,208
Integrated Device Technology, Inc.	15,700		196,407
Lam Research Corp.(b)(e)	37,400		1,175,856
Linear Technology Corp.(e)	33,500		1,308,510
Micron Technology, Inc.(b)	35,600		409,400
Microsemi Corp.(b)	3,900		63,414
O2Micro International Ltd.(b)	32,700		350,871
Rudolph Technologies, Inc.	26,300		482,342
Teradyne, Inc.(b)	31,500		485,730
Texas Instruments, Inc.	19,000		502,930
			6,740,160
Soaps & Cosmetics — 0.7%
Avon Products, Inc.	17,900		765,583
Kimberly-Clark Corp.	18,000		1,187,640
NU Skin Enterprises, Inc.	7,900		176,407
The Procter & Gamble Co.	59,980		3,184,338
			5,313,968
Telecommunications — 2.3%
Adtran, Inc.	5,400		101,034
Amdocs Ltd.(b)	31,000		909,850
American Tower Corp.(b)	28,900		529,737
Avid Technology, Inc.(b)	16,600		1,110,540
Harman International Industries, Inc.	11,600		1,301,172
Lucent Technologies, Inc.	24,196		21,534
Motorola, Inc.	107,600		1,685,016
Nextel Communications, Inc.(b)	16,700		491,481
Nextel Partners, Inc. - Class A(b)(e)	46,900		933,779
NII Holdings, Inc.(b)	8,500		486,370
Qualcomm, Inc.	32,600		1,177,186
SBC Communications, Inc.	82,700		1,988,935
Scientific-Atlanta, Inc.	60,500		1,869,450
Sprint Corp.(e)	110,600		2,619,008
Syniverse Holdings, Inc.(b)	18,700		285,175

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

13

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005		NUMBER OF SHARES		VALUE
COMMON STOCKS (Continued)
United States (Continued)
Telecommunications (Continued)
Verizon Communications, Inc.			85,100	$	3,061,047
					18,571,314
Tobacco — 0.3%
Altria Group, Inc.			34,800		2,284,620
Transportation — 0.1%
Laidlaw International, Inc.(b)			1,300		29,900
Landstar System, Inc.			4,100		143,828
Ryder Systems, Inc.			10,100		428,846
SCS Transportation, Inc.			10,900		241,435
Werner Enterprises, Inc.			4,200		89,880
					933,889
Waste Management — 0.3%
Stericycle, Inc.(b)			10,800		496,584
URS Corp.			8,000		230,720
Waste Management, Inc.			47,700		1,394,748
					2,122,052
Yankee — 0.6%
Tyco International Ltd.			135,600		4,539,888
TOTAL COMMON STOCKS (Cost $452,031,189)					543,994,715
PREFERRED STOCKS — 0.7%
Netherlands — 0.7%
ING Groep NV			53,145		1,640,104
Koninklijke Ahold NV(b)			140,113		1,270,238
Reed Elsevier NV			98,835		1,487,681
TNT NV			49,501		1,387,693
					5,785,716
TOTAL PREFERRED STOCKS (Cost $5,494,038)					5,785,716
WARRANTS — 0.0%
Cinch Energy Corp. - Warrants (Expiring 07/11/05)(b)			33,600		6,150
Oilexco, Inc. - (expiring 12/22/05)(b)			9,725		15,111
Purcell Energy Ltd., Warrants(expiring 07/23/08)(b)(c)			68,773		16,785
Westport Innovations, Inc.(b)			3,650		1,574
TOTAL WARRANTS (Cost $0)					39,620
	MATURITY	PAR (000)		VALUE
U.S. GOVERNMENT & AGENCY OBLIGATIONS — 2.5%
Federal Home Loan Mortgage Association, Unsecured Notes
2.40%	03/29/07	$	125	$	121,623
Federal Home Loan Mortgage Corp. Gold, Unsecured Notes
3.88%	11/10/08		535		528,526
4.12%	02/24/11		325		317,223
4.62%	05/28/13		150		145,728
Federal National Mortgage Association, Unsecured Notes
2.35%	04/06-04/07		630		614,631
1.75%	06/16/06		90		87,970
Resolution Funding Corp. Strip Bonds
6.29%(g)	07/15/18	$	150	$	78,095
6.30%(g)	10/15/18		150		76,988
U.S. Treasury Bonds
3.50%	11/15/09		860		842,430
10.38%	11/15/12		295		344,897
6.25%	08/23-05/30		3,475		4,197,809
6.00%	02/15/26		380		439,984
6.12%	11/15/27		605		715,649
5.38%	02/15/31		475		522,277
U.S. Treasury Notes
2.50%	05/31/06		335		331,401
2.38%	08/31/06		95		93,493
3.12%	01/31/07		95		94,213
3.00%	11/15/07		555		544,962
5.62%	05/15/08		4,800		5,064,187
3.62%	01/15/10		205		201,557
5.75%	08/15/10		1,325		1,434,519
4.25%	08/14-11/14		380		376,440
4.00%(h)	02/15/15		750		728,438
7.25%	05/15/16		1,425		1,768,726
8.88%	02/15/19		650		931,633
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $20,419,054)					20,603,399
MORTGAGE PASS-THROUGHS — 4.9%
Federal Home Loan Mortgage Corp. Gold
8.00%	08/08-08/27		50		53,786
8.50%	07/01/09		0		24
4.00%	05/10-05/19		247		243,179
6.00%	04/13-06/16		230		239,590
9.50%	12/01/22		469		515,628
7.50%	09/01/27		1		612
6.50%	01/29-08/32		186		194,258
5.50%	07/33-08/33		1,318		1,330,660
5.00%	05/01/34		281		277,186
Federal National Mortgage Association
8.00%	04/08-02/33		415		445,841
7.00%	08/08-10/32		731		771,838
8.50%	02/01/09		28		29,674
6.50%	01/11-04/35		1,941		2,030,332
6.00%	09/11-03/35		5,028		5,198,230
5.50%	04/17-01/34		10,648		10,866,986
5.00%	03/18-02/35		5,840		5,810,121
4.00%	07/18-01/20		857		829,821
4.50%	10/18-03/35		2,037		1,984,484
7.50%	10/25-01/31		958		1,024,455
Government National Mortgage Association
6.50%	02/09-03/34		733		772,055
7.50%	11/10-12/29		88		93,810
6.00%	10/23-02/34		2,814		2,905,051
7.00%	01/25-05/32		394		417,759
5.50%	04/33-12/34		1,381		1,405,830
5.00%	10/20/33		1,784		1,773,622
3.75%(i)	05/20/34		283		282,062

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

14

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
MORTGAGE PASS-THROUGHS (Continued)
Merrill Lynch Mortgage Investors, Inc., Series 95-C2 (IO)
10.40%(g)	06/15/21	$	2,618	$	45,915
Salomon Brothers Mortgage Securities VI, Series 87-2, Class (IO)
7.00%(g)	03/06/17		56		15,714
Salomon Brothers Mortgage Securities Vl, Series 87-1, Class (IO)
7.00%(g)	02/17/17		65		17,069
Structured Asset Securities Corp., Series 96-CFL, Class Xl (IO)
5.05%(g)	02/25/28		1,059		55,613
TOTAL MORTGAGE PASS-THROUGHS (Cost $39,280,806)					39,631,205
COMMERCIAL MORTGAGE BACKED SECURITIES — 8.8%
Americredit Automobile Receivables Trust, Series 02-D, Class A4
3.40%	04/13/09		350		348,929
Ameriquest Mortgage Securities, Inc.
3.90%(i)	08/25/32		425		427,131
Amortizing Residential Collateral Trust
4.70%(i)	01/25/32		750		751,727
3.63%(i)	06/25/32		575		578,564
3.85%(i)	07/25/32		250		252,961
3.08%(i)	01/25/33		32		32,425
Asset Backed Funding Corp. Trust, Series 04-OPT4, Class N1
4.45%(j)	05/26/34		93		92,717
Banc of America Alternative Loan Trust, Series 04-6, Class 4A1
5.00%	07/25/19		93		91,444
Bank One Issuance Trust
3.76%	08/15/08		300		300,503
Bear Stearns Commercial Mortgage Securities
7.08%	07/15/31		250		274,996
7.32%	10/15/32		475		533,990
5.92%	10/15/36		894		939,314
4.36%	06/11/41		924		924,032
Caterpillar Financial Asset Trust
3.13%	01/26/09		500		495,005
CDC Commercial Mortgage Trust
5.25%	05/15/19		1,736		1,781,849
Centex Home Equity, Series 02-A, Class MF2
6.54%	01/25/32		550		557,248
Centex Home Equity, Series 03-B, Class M3
5.75%(i)	06/25/33		475		495,595
Chase Commercial Mortgage Securities Corp., Series 98-2 Class A2
6.39%	11/18/30		1,475		1,571,640
Chase Funding Mortgage Loan Asset-Backed Certificates
3.99%	08/25/29		275		274,728
Chase Funding Net Interest Margin
3.75%(j)	03/27/35	$	62	$	61,642
Chase Manhattan Auto Owner Trust
4.17%	09/15/08		370		370,881
2.43%	02/16/10		1,496		1,472,841
Citibank Credit Card Issuance Trust
7.45%	09/15/07		300		306,496
6.65%	05/15/08		575		594,032
Commercial Mortgage Acceptance Corp., Series 98-C2, Class C
5.90%(i)	09/15/30		275		292,677
Commercial Mortgage Pass-Through, Series 2000-C1, Class A2
7.42%	08/15/33		180		201,136
Countrywide Alternative Loan Trust
6.00%	12/25/34		241		243,680
Countrywide Asset-Backed Certificates
6.03%(i)	11/25/31		250		256,620
Countrywide Asset-Backed Certificates, Series 02-2, Class M2
3.80%(i)	12/25/31		75		75,418
Countrywide Asset-Backed Certificates, Series 03-2, Class M2
4.32%(i)	03/26/33		1,075		1,100,080
Countrywide Asset-Backed Certificates, Series 03-3, Class M6
5.43%(i)	07/25/32		1,500		1,549,437
Countrywide Asset-Backed Certificates, Series 03-BC1, Class M2
4.65%(i)	09/25/32		300		304,051
Countrywide Home Loans, Series 01-HYB2, Class B2
5.61%(i)	09/19/31		426		423,088
Countrywide Home Loans, Series 02-HYB2, Class B1
4.79%(i)	09/19/32		78		78,097
Countrywide Home Loans, Series 03-27, Class M
4.00%(i)	06/25/33		885		858,437
Countrywide Home Loans, Series 03-58, Class B1
4.57%(i)	02/19/34		247		239,912
Credit-Based Asset Servicing and Securitization
5.77%(i)	05/25/35		275		280,570
Distribution Financial Services Trust
5.67%	01/17/17		54		54,513
DLG Commercial Mortgage Corp., Series 99-CG1, Class A1B
6.46%	03/10/32		150		160,451

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

15

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
COMMERCIAL MORTGAGE BACKED SECURITIES (Continued)
Federal Home Loan Mortgage Corp.
5.50%	01/15/31	$	190	$	194,940
Federal Home Loan Mortgage Corp. Gold
4.00%	03/15/10-01/15/15		1,016		1,016,751
3.75%	03/15/11		676		677,357
5.00%	11/15/17		100		100,397
Federal National Mortgage Association
4.50%	04/25/09-09/25/18		1,264		1,266,904
3.50%	06/25/10		750		749,251
5.00%	03/25/18		50		49,888
Federal National Mortgage Association Grantor Trust, Series 03-T1, Class (IO)
1.00%(g)	11/25/12		6,783		236,958
FFCA Secured Lending Corp.
6.94%	09/18/25		100		102,224
First Union-Lehman Brothers-Bank of America, Series 98-C2, Class A1
6.28%	11/18/35		32		32,431
Ford Credit Auto Owner Trust
4.36%	09/15/06		210		210,164
4.18%	01/15/08		75		75,026
Ford Credit Auto Owner Trust, Series 02-A, Class B
4.79%	11/15/06		525		527,833
Ford Credit Auto Owner Trust, Series 03-A, Class B2
3.00%(i)	08/15/07		325		326,265
General Electric Business Loan Trust, Series 03-2A, Class B
3.59%(i)(j)	11/15/31		1,119		1,157,841
General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2
7.18%	08/15/36		179		197,475
GGP Mall Properties Trust
5.56%	11/15/11		495		507,704
3.89%(i)(j)	02/15/14		53		53,195
Government National Mortgage Association
6.50%	11/15/28		420		441,481
GSR Mortgage Loan Trust
5.17%(i)	10/25/32		118		117,430
HFG Healthco-4 LLC
3.89%(i)(j)	06/05/07		125		124,716
Impac CMB Trust, Series 02-3, Class B
4.85%(i)	06/25/32		134		134,327
Impac CMB Trust, Series 02-4F, Class M1
5.58%(i)	11/25/32		40		40,346
Impac CMB Trust, Series 03-5, Class M1
3.28%(i)	08/25/33		128		129,411
Impac CMB Trust, Series 03-7, Class M
4.30%(i)	08/25/33		77		78,560
Impac CMB Trust, Series 04-1, Class M4
3.85%(i)	03/25/34	$	199	$	199,528
Impac CMB Trust, Series 04-5, Class 1A1
3.01%(i)	10/25/34		422		422,019
Impac CMB Trust, Series 04-7, Class 1A1
3.02%(i)	11/25/34		1,000		1,000,483
Impac CMB Trust, Series 04-7, Class M4
3.85%(i)	11/25/34		480		481,896
J.P. Morgan Chase Commercial Mortgage Securities Corp.
3.79%(i)(j)	02/17/15		88		87,843
J.P. Morgan Chase Commercial Mortgage Securities Corp., Series FL1A, Class F
4.54%(i)	02/17/15		88		88,107
J.P. Morgan Commercial Mortgage Finance Corp.
6.51%	10/15/35		600		640,605
J.P. Morgan Commercial Mortgage Finance Corp., Series 97-C5, Class C
7.24%	09/15/29		1,600		1,746,524
J.P. Morgan Commercial Mortgage Finance Corp., Series 99-C7, Class A1
6.18%	10/15/35		98		101,145
J.P. Morgan Commercial Mortgage Finance Corp., Series 99-PLS1, Class A2
7.30%(i)(j)	02/15/32		1,550		1,682,905
J.P. Morgan Commercial Mortgage Finance Corp., Series 99-PLS1, Class D
7.30%(i)(j)	02/15/32		650		713,317
Lehman Brothers Commercial Conduit Mortgage Trust
3.25%	03/15/29		1,500		1,441,349
7.32%	10/15/32		250		276,887
7.47%	10/15/32		125		138,842
6.21%	10/15/35		460		487,431
Lehman Brothers-UBS Commercial Mortgage Trust
5.64%	12/15/25		2,164		2,246,244
5.93%	12/15/25		825		873,424
4.07%	09/15/26		1,807		1,785,843
2.95%	03/15/29		352		338,020
4.57%	06/15/29		1,325		1,333,349
Lehman Brothers-UBS Commercial Mortgage Trust, Series 01-WM, Class A1
6.16%(j)	07/14/16		829		875,359
Lehman Brothers-UBS Commercial Mortgage Trust, Series 03-C8, Class A1
3.64%	11/15/27		515		508,490
Lehman Brothers-UBS Commercial Mortgage Trust, Series 04-C6, Class A1
3.88%	08/15/29		265		262,048

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

16

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
COMMERCIAL MORTGAGE BACKED SECURITIES (Continued)
Long Beach Mortgage Loan Trust
6.65%(i)	08/25/33	$	200	$	208,506
Long Beach Mortgage Loan Trust, Series 04-1, Class M5
3.75%(i)	02/25/34		475		480,617
Massachusetts RRB Special Purpose Trust Wmeco-1, Series 01-1, Class A
6.53%	06/01/15		1,185		1,272,880
Master Alternative Loans Trust, Series 04-4, Class 1A1
5.50%	05/25/34		175		173,280
MBNA Credit Card Master Note Trust
6.55%	12/15/08		575		594,583
Morgan Stanley Capital I
3.64%(i)(j)	04/15/16		300		301,908
7.22%(j)	07/15/29		464		487,634
5.91%	11/15/31		218		222,644
6.21%	11/15/31		475		503,101
Morgan Stanley Dean Witter Capital I
7.00%	02/15/33		125		138,707
5.38%	01/15/39		696		720,885
Mortgage Capital Funding, Inc., Series 98-MC2, Class B
6.55%	06/18/30		295		313,807
Nationslink Funding Corp.
6.48%	08/20/30		225		239,235
6.32%	01/20/31		2,187		2,312,635
7.44%(i)	06/20/31		175		193,327
Nationslink Funding Corp., Series 98-2, Class B
6.80%	08/20/30		525		564,690
Option One Mortgage Loan Trust
4.35%(i)	11/25/32		575		581,542
2.97%(i)	07/25/33		426		427,053
6.40%(i)	07/25/33		275		280,797
Option One Mortgage Loan Trust, Series 98-MC2, Class B
5.55%(i)	08/25/33		125		129,835
Option One Mortgage Loan Trust, Series 2002-6, Class M1
3.40%(i)	11/25/32		150		150,817
PSE&G Transition Funding LLC
5.74%	03/15/07		25		25,446
5.98%	06/15/08		600		611,885
Residential Asset Mortgage Products, Inc., Series 03-RZ2, Class B
5.50%(i)	04/25/33		425		425,620
Residential Asset Securities Corp.
2.81%(i)	02/25/21		92		92,041
2.90%(i)	07/25/32		129		129,336
4.40%(i)	01/25/33-04/25/33		1,050		1,064,823
4.00%(i)	12/25/33		1,000		1,014,987
4.45%(i)	04/25/34		400		399,998
Residential Funding Mortgage Securities II
2.80%(i)	12/25/18		342		341,592
Salomon Brothers Mortgage Securities VII
6.13%	02/18/34	$	485	$	504,340
Salomon Brothers Mortgage Securities VII, Series 00-C1, Class A2
7.52%	12/18/09		460		506,584
Starwood Asset Receivables Trust, Series 02-1A Class D
3.52%(i)(j)	05/28/20		225		225,598
Structured Asset Investment Loan Trust
4.60%(i)	04/25/33		600		604,399
Structured Asset Securities Corp.
6.43%(i)	01/25/32		62		62,793
5.42%(i)	02/25/33		222		221,110
Wachovia Bank Commercial Mortgage Trust
3.26%(i)(j)	03/15/14		250		250,900
2.99%	06/15/35		1,092		1,027,246
3.40%	07/15/41		1,309		1,286,149
Washington Mutual
4.74%(i)	04/25/33		237		235,153
3.42%(i)	05/25/33		850		834,257
3.70%(i)	06/25/33		850		838,396
4.52%(i)	03/25/34		1,247		1,203,112
Washington Mutual, Series 03-AR1, Class A4
4.13%(i)	03/25/33		64		63,842
Washington Mutual, Series 03-AR11, Class A6
3.98%(i)	10/25/33		1,350		1,327,904
Washington Mutual, Series 03-AR5, Class B2
4.53%(i)	06/25/33		484		481,421
Washington Mutual, Series 03-AR8, Class B1
4.21%(i)	08/25/33		398		391,362
Washington Mutual, Series 04-AR3 Class B1
4.19%(i)	06/25/34		224		219,769
Washington Mutual, Series 03-AR3, Class A5
3.93%(i)	04/25/33		300		296,003
Wells Fargo Mortage Backed Securities, Series 04-K, Class 1A2
4.48%(i)	07/25/34		523		512,163
TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $71,758,049)					71,426,102
ASSET BACKED SECURITIES — 1.5%
Capital Auto Receivables Asset Trust
4.16%	07/16/07		172		171,845
Chase Funding Net Interest Margin, Series 03-6A, Class Note
5.00%(j)	01/27/35		35		34,773
Chase Manhattan Auto Owner Trust
3.80%	05/15/08		70		69,963

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

17

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
ASSET BACKED SECURITIES (Continued)
Citibank Credit Card Issuance Trust Series 04-A1, Class A1	01/20/09	$	450	$	438,531
2.55%
Citibank Credit Card Issuance Trust, Series 03-A6, Class A6
2.90%	05/17/10		250		240,781
Countrywide Asset-Backed Certificates
2.94%(i)	06/25/35		221		221,382
Federal National Mortgage Association
5.50%	01/31/35		130		137,150
First Union-Lehman Brothers-Bank of America
6.56%	11/18/35		180		190,973
Fleet Commercial Loan Master LLC
4.90%(i)(j)	11/16/09		750		755,859
Fleet Commercial Loan Master LLC, Series 02-1A, Class B1
3.70%(i)(j)	11/16/09		475		476,336
General Electric Business Loan Trust, Series 03-1, Class A
3.02%(i)(j)	04/15/31		332		333,742
General Electric Business Loan Trust, Series 03-1, Class B
3.89%(i)(j)	04/15/31		221		226,725
General Electric Business Loan Trust, Series 04-1, Class B
3.29%(i)(j)	05/15/32		266		267,601
Granite Mortgages PLC
3.21%(i)	06/20/44		250		250,000
Green Tree Financial Corp., Series 96-6, Class A6
7.95%	09/15/27		484		515,750
Green Tree Financial Corp., Series 96-7, Class A6
7.65%	10/15/27		460		489,665
Hedged Mutual Fund Fee Trust
5.22%(j)	11/30/10		1,774		1,773,509
HFG Healthco-4 LLC
3.50%(i)(j)	06/05/07		200		199,496
Holmes Financing PLC
3.28%(i)	07/15/40		250		249,945
Impac CMB Trust, Series 02-5, Class A1
3.02%(i)	07/25/32		76		75,679
Impac CMB Trust, Series 02-8, Class A
3.11%(i)	03/25/33		54		54,143
Knollwood CDO Ltd., Series 04-1A, Class C
5.81%(i)(j)	01/10/39		205		203,715
Long Beach Asset Holdings Corp.
4.94%	06/25/34		90		89,609
Lothian Mortgages PLC
2.83%(i)(j)	07/24/19		224		223,981
MBNA Credit Card Master Note Trust, Series 04-A4, Class A4
2.70%	04/16/07		350		341,414
Nissan Auto Receivables Owner Trust, Series 03-C, Class A3
2.23%	03/15/07		1,250		1,243,050
Pacific Coast Asset Backed Securities CDO., Series 1A, Class A
3.13%(i)	10/25/36	$	344	$	334,323
Permanent Financing PLC
2.96%(i)	06/10/42		550		550,173
Salomon Brothers Mortage Securities, Series 87-2, Class (PO)
1.35%(g)	03/06/17		56		50,801
Salomon Brothers Mortgage Securities VI
1.51%	02/17/17		71		66,071
Small Business Administration Participation Certificates, Series 97-20F, Class 1
7.20%	06/01/17		892		950,251
Small Business Administration, Series 97-P10C, Class 1
6.85%	08/01/07		244		254,936
Structured Asset Receivables Trust, Series 03-2
1.55%(i)	01/21/09		230		229,873
Sutter CBO Ltd., Series 01-1A, Class A3L
3.99%(i)(j)	05/15/07		425		422,875
TOTAL ASSET BACKED SECURITIES (Cost $12,052,141)					12,134,920
CORPORATE BONDS — 9.0%
Aerospace — 0.2%
Lockheed Martin Corp., Senior Debentures
8.50%	12/01/29		45		62,010
Northrop Grumman Corp., Debentures
7.88%	03/01/26		75		95,500
Northrop Grumman Corp., Senior Debentures
7.75%	02/15/31		200		258,448
Northrop Grumman Corp., Senior Unsecured Notes
4.08%	11/16/06		55		55,173
Systems 2001 Asset, Equipment Trust
6.66%(j)	09/15/13		726		791,194
					1,262,325
Automotive — 0.0%
Ford Motor Co., Unsecured Notes
7.45%	07/16/31		300		289,259
Banks — 0.5%
Bank of America Corp.
7.40%	01/15/11		325		371,488
Bank of America Corp., Senior Notes
5.88%	02/15/09		45		47,517
Bank of Scotland Treasury Services, Unsecured Notes
3.50%	11/30/07		65		63,901

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

18

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
CORPORATE BONDS (Continued)
Banks (Continued)
BankBoston NA, Subordinated Notes
7.38%	09/15/06	$	125	$	131,683
Crestar Capital Trust I, Capital Securities
8.16%	12/15/26		175		191,119
DEPFA Bank PLC, Notes
3.62%	10/29/08		300		296,250
First Union Capital I, Capital Security
7.94%	01/15/27		325		354,597
Fleetboston Financial Corp., Senior Unsecured Notes
3.85%	02/15/08		60		59,469
HBOS Treasury Services PLC, Senior Unsecured Notes
3.60%(j)	08/15/07		35		34,580
J.P. Morgan Chase & Co. Capital Trust I, Capital Securities
7.54%	01/15/27		175		188,419
J.P. Morgan Chase & Co., Senior Unsecured Notes
5.35%	03/01/07		50		51,304
5.25%	05/30/07		25		25,668
J.P. Morgan Chase & Co., Subordinated Notes
6.75%	02/01/11		550		611,567
M&T Bank Corp., Senior Unsecured Notes
3.85%(f)(i)	04/01/13		225		220,296
Mellon Capital II, Capital Securities
8.00%	01/15/27		250		272,948
Suntrust Banks, Inc., Senior Unsecured Notes
3.62%	10/15/07		170		167,975
Swedish Export Credit Corp., Unsecured Notes
2.88%	01/26/07		75		74,000
U.S. Bancorp
3.95%	08/23/07		15		14,987
U.S. Bancorp Capital I, Capital Securities
8.27%	12/15/26		250		270,260
U.S. Bank NA, Senior Bank Notes
2.59%(i)	10/01/07		250		249,800
UBS Preferred Funding Trust I, Capital Securities
8.62%(i)	10/29/49		35		41,167
Wachovia Corp., Unsecured Notes
3.62%	02/17/09		35		34,230
Wells Fargo & Co., Senior Unsecured Notes
4.00%	08/15/08		195		194,284
2.59%(i)	09/15/09		105		105,029
Wells Fargo Bank NA, Subordinated Bank Notes
7.80%(i)	06/15/10		50		50,606
Wells Fargo Co., Senior Unsecured Notes
4.20%	01/15/10		40		39,693
Wells Fargo Co., Unsecured Notes
3.50%	04/04/08	$	50	$	49,320
					4,212,157
Broadcasting — 0.2%
Charter Communications Holdings LLC, Senior Unsecured Notes
8.00%(j)	04/30/12		300		308,250
Charter Communications Holdings LLC, Unsecured Notes
10.25%	09/15/10		300		316,875
CSC Holdings, Inc., Senior Unsecured Notes
7.62%	04/01/11		600		672,000
					1,297,125
Chemicals — 0.1%
Lyondell Chemical Co., Senior Secured Notes
10.50%	06/01/13		250		295,625
Nalco Co., Senior Subordinated Notes
8.88%	11/15/13		400		440,000
Rhodia SA, Senior Notes
10.25%	06/01/10		400		460,000
					1,195,625
Computer & Office Equipment — 0.1%
Hewlett-Packard Co., Senior Unsecured Notes
3.62%	03/15/08		475		467,147
Construction — 0.2%
Associated Materials, Inc., Senior Subordinated Notes
9.75%	04/15/12		450		496,125
0.00%	03/01/14		525		380,625
MDC Holdings, Inc., Senior Notes
5.38%	12/15/14		425		421,934
RMCC Acquisition Co., Senior Subordinated Notes
9.50%(j)	11/01/12		125		125,000
					1,423,684
Containers — 0.1%
Graham Packaging Co., Senior Subordinated Notes
9.88%(j)	10/15/14		400		431,000
Electronics — 0.0%
Loral Corp., Senior Debentures
7.00%	09/15/23		150		172,611
Energy & Utilities — 0.5%
AES Eastern Energy LP, Pass-Through Certificates
9.00%	01/02/17		520		601,629
Dominion Resources, Inc., Senior Unsecured Notes
7.20%	09/15/14		450		517,935

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

19

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
CORPORATE BONDS (Continued)
Energy & Utilities (Continued)
DTE Energy Co., Senior Unsecured Notes
6.45%	06/01/06	$	350	$	360,636
Energy Gulf States, Inc., First Mortgage Bonds
3.60%	06/01/08		300		293,291
Firstenergy Corp.
7.38%	11/15/31		260		305,014
Florida Power Corp., First Mortgage Bonds
6.65%	07/15/11		100		109,470
Georgia Power Co., Senior Unsecured Notes
4.88%	07/15/07		525		533,482
Indiana Michigan Power, Senior Unsecured Notes
6.12%	12/15/06		325		336,818
Pennsylvania Electric Co.
5.12%	04/01/14		50		49,876
Progress Energy, Inc., Senior Unsecured Notes
7.10%	03/01/11		300		335,095
7.75%	03/01/31		200		246,778
Reliant Energy, Inc., Senior Secured Notes
9.25%	07/15/10		250		278,125
					3,968,149
Entertainment & Leisure — 0.1%
Gaylord Entertainment Co., Senior Unsecured Notes
8.00%	11/15/13		225		242,719
River Rock Entertainment, Senior Unsecured Notes
9.75%	11/01/11		250		277,499
TCI Communications, Inc.
7.88%	08/01/13		2		2,372
Time Warner Cos., Inc., Senior Debenture
7.57%	02/01/24		30		35,673
Time Warner, Inc.
7.70%	05/01/32		350		432,086
					990,349
Federal Home Loan Bank — 0.0%
Dominion Resources, Inc., Senior Unsecured Notes
5.70%	09/17/12		50		52,562
Finance — 2.3%
Aid-Israel, Unsecured Notes
5.50%	04/24-09/33		185		197,729
ASIF Global Financing, Unsecured Notes
3.85%(j)	11/26/07		25		24,749
3.90%(j)	10/22/08		95		93,853
Associates Corp. NA, Subordinated Debentures
6.88%	11/15/08		175		190,325
Bank of America Corp., Capital Securities
8.07%(j)	12/31/26		225		246,160
Bank of America Corp., Senior Notes
4.38%	12/01/10	$	25	$	24,794
Bank of America Corp., Senior Unsecured Notes
5.25%	02/01/07		25		25,620
3.25%	08/15/08		75		72,726
5.38%	06/15/14		25		26,052
Bank One Corp.
6.00%	08/01/08		155		163,031
BCP Crystal Holdings Corp., Senior Subordinated Notes
9.62%(j)	06/15/14		250		288,438
Berkshire Hathaway Financial, Inc., Senior Unsecured Notes
2.66%(i)(j)	01/11/08		60		59,979
3.38%	10/15/08		75		73,069
CIT Group, Inc., Unsecured Notes
4.12%	02/21/06		275		276,406
Citigroup Capital II, Capital Securities
7.75%	12/01/36		225		240,123
Citigroup, Inc., Senior Unsecured Notes
3.50%	02/01/08		90		88,714
2.59%(i)	06/09/09		35		35,059
Citigroup, Inc., Subordinated Notes
5.00%	09/15/14		944		946,571
Citigroup, Inc., Unsecured Notes
3.62%	02/09/09		175		171,108
4.12%	02/22/10		1,425		1,403,867
Countrywide Home Loans, Inc., Senior Unsecured Notes
4.12%	09/15/09		450		441,062
Credit Suisse First Boston USA, Inc., Senior Unsecured Notes
4.12%	01/15/10		350		344,360
Devon Financing Corp., Senior Unsecured Notes
7.88%	09/30/31		40		51,306
Eksportsfinans, Unsecured Notes
3.38%	01/15/08		155		152,194
EOP Operating LP, Senior Notes
6.80%	01/15/09		775		835,085
EOP Operating LP, Senior Unsecured Notes
7.50%	04/19/29		30		35,437
EOP Operating LP, Unsecured Notes
4.75%	03/15/14		20		19,313
ERAC USA Finance Co., Unsecured Notes
8.25%(j)	05/01/05		450		453,656
6.62%(j)	05/15/06		225		230,981
Ford Motor Credit Co., Senior Unsecured Notes
7.38%	10/28/09		950		995,986

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

20

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
CORPORATE BONDS (Continued)
Finance (Continued)
General Electric Capital Corp., Senior Unsecured Notes
4.25%	01/15/08	$	245	$	245,706
6.12%	02/22/11		975		1,052,075
6.75%	03/15/32		50		58,918
General Electric Capital Corp., Unsecured Notes
3.45%(i)	01/15/08		400		398,364
2.81%(i)	07/28/08		150		150,209
3.60%	10/15/08		70		68,453
4.38%	11/21/11		15		14,787
General Motors Acceptance Corp., Senior Unsecured Notes
7.25%	03/02/11		750		760,890
6.88%	09/15/11		10		9,942
8.00%	11/01/31		100		100,559
General Motors Acceptance Corp., Unsecured Notes
5.62%	05/15/09		110		108,035
The Goldman Sachs Group, Inc., Senior Unsecured Notes
6.88%	01/15/11		625		697,111
Household Finance Corp., Notes
6.38%	11/27/12		1,050		1,149,540
Household Finance Corp., Senior Unsecured Notes
6.38%	10/15/11		225		245,468
HSBC Finance Corp., Senior Unsecured Notes
4.75%	05/15/09		50		50,583
International Lease Finance Corp., Senior Unsecured Notes
5.75%	02/15/07		525		541,221
John Hancock Global Funding II, Secured Notes
7.90%(j)	07/02/10		525		604,180
Lehman Brothers Holdings, Senior Unsecured Notes
3.95%	11/10/09		375		366,109
Lehman Brothers Holdings, Unsecured Notes
4.00%	01/22/08		200		198,962
Massmutual Global Funding II, Senior Secured Notes
2.55%(j)	07/15/08		50		47,385
MBNA Corp., Senior Unsecured Notes
5.62%	11/30/07		525		542,696
Merrill Lynch & Co., Inc., Senior Unsecured Notes
3.70%	04/21/08		425		419,593
Morgan Stanley & Co., Inc., Subordinated Notes
4.75%	04/01/14		750		730,184
Nationwide Building Society, Senior Unsecured Notes
3.50%(j)	07/31/07		75		73,847
Riddell Bell Holdings, Senior Subordinated Notes
8.38%(j)	10/01/12		200		207,000
SLM Corp.
5.62%	04/10/07		250		257,488
SLM Corp., Unsecured Notes
4.00%	01/15/10	$	550	$	537,998
Sun Life of Canada Capital Trust, Capital Securities
8.53%(j)	05/29/49		195		216,333
TIAA Global Markets, Senior Unsecured Notes
3.88%(j)	01/22/08		55		54,541
Transdigm, Inc., Senior Subordinated Notes
8.38%	07/15/11		300		318,750
					18,434,680
Food & Agriculture — 0.2%
Cargill, Inc., Unsecured Notes
4.38%(j)	06/01/13		225		217,200
6.12%(j)	04/19/34		300		320,668
General Mills, Inc., Senior Unsecured Notes
5.12%	02/15/07		65		66,410
Kroger Co., Senior Unsecured Notes
7.80%	08/15/07		775		836,444
					1,440,722
Industrial — 0.1%
Ipsco, Inc., Senior Notes
8.75%	06/01/13		750		849,375
Insurance — 0.2%
Allstate Financial Global Funding LLC, Senior Unsecured Notes
6.15%(j)	02/01/06		50		51,145
Allstate Financial Global Funding LLC, Unsecured Notees
2.50%(j)(k)	06/20/08		325		306,948
Berkshire Hathaway, Inc., Senior Unsecured Notes
4.12%(j)	01/15/10		35		34,578
Marsh & McLennan Cos., Inc., Senior Unsecured Notes
5.38%	07/15/14		20		19,661
Massachusetts Mutual Life Insurance Co., Notes
5.62%(j)	05/15/33		425		432,529
Monumental Global Funding II, Senior Secured Notes
4.38%(j)	07/30/09		50		49,454
Protective Life Corp. Secured Trust, Secured Notes
3.70%	11/24/08		60		58,688
WellPoint, Inc., Unsecured Notes
5.95%(j)	12/15/34		300		308,036
					1,261,039
Manufacturing — 0.3%
Dana Corp., Senior Unsecured Notes
5.85%(j)	01/15/15		225		216,425
Dresser-Rand Group, Inc., Senior Subordinated Notes
7.38%(j)	11/01/14		125		130,625

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

21

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
CORPORATE BONDS (Continued)
Manufacturing (Continued)
General Electric Co., Senior Notes
5.00%	02/01/13	$	750	$	762,375
Kennametal, Inc., Senior Unsecured Notes
7.20%	06/15/12		75		84,285
Park-Ohio Industries, Inc., Senior Subordinated Notes
8.38%(j)	11/15/14		400		400,000
TRW Automotive, Inc., Senior Unsecured Notes
9.38%	02/15/13		500		565,000
					2,158,710
Medical & Medical Services — 0.1%
Concentra Operating Corp., Senior Subordinated Notes
9.50%	08/15/10		375		405,938
Iasis Healthcare/Capital Corp., Senior Subordinated Notes
8.75%	06/15/14		425		459,000
UnitedHealth Group, Inc., Senior Unsecured Notes
7.50%	11/15/05		175		179,229
					1,044,167
Medical Instruments & Supplies — 0.0%
Boston Scientific, Senior Unsecured Notes
5.45%	06/15/14		20		20,720
Metal & Mining — 0.2%
Foundation PA Coal Co., Senior Unsecured Notes
7.25%(j)	08/01/14		150		158,250
Newmont USA Ltd., Senior Unsecured Notes
8.62%	05/15/11		250		301,128
Terex Corp., Senior Subordinated Notes
9.25%	07/15/11		425		469,625
Trimas Corp., Senior Subordinated Notes
9.88%	06/15/12		600		627,000
					1,556,003
Motor Vehicles — 0.1%
Arvinmeritor, Inc., Senior Unsecured Notes
8.75%	03/01/12		250		283,749
DaimlerChrysler NA Holdings Corp., Senior Unsecured Notes
8.50%	01/18/31		350		446,018
General Motors Corp., Senior Unsecured Notes
8.38%	07/15/33		10		9,845
General Motors, Senior Unsecured Notes
8.25%	07/15/23		250		246,075
					985,687
Motor Vehicles & Car Bodies — 0.0%
DaimlerChrysler AG, Senior Debentures
7.45%	03/01/27		15		17,019
Oil & Gas — 0.4%
Anadarko Finance Co., Senior Unsecured Notes
7.50%	05/01/31	$	160	$	201,057
Conoco Funding Co., Senior Unsecured Notes
6.35%	10/15/11		40		44,056
Conoco, Inc., Senior Unsecured Notes
6.95%	04/15/29		375		453,408
Consolidated Natural Gas, Senior Debentures
5.00%	03/01/14		20		19,989
El Paso Production Holding Co., Senior Notes
7.75%	06/01/13		250		268,438
Enterprise Products Operating LP, Senior Unsecured Notes
5.60%(j)	10/15/14		150		153,345
Exco Resources, Inc., Senior Secured Notes
7.25%	01/15/11		600		636,000
Hanover Compressor Co., Senior Unsecured Notes
8.62%	12/15/10		200		217,000
Hanover Compressor Co., Subordinated Notes
11.33%	03/31/07		750		673,125
Kern River Funding Corp., Senior Unsecured Notes
4.89%(j)	04/30/18		254		256,404
Kerr-McGee Corp., Senior Unsecured Notes
6.88%	09/15/11		125		138,485
Newfield Exploration Co., Senior Subordinated Notes
6.62%(j)	09/01/14		250		270,625
Pioneer Natural Resource, Senior Unsecured Notes
5.88%	07/15/16		25		26,062
Suncor Energy, Inc., Bonds
5.95%	12/01/34		20		21,073
					3,379,067
Paper & Forest Products — 0.1%
International Paper Co., Senior Unsecured Notes
6.75%	09/01/11		275		305,096
Weyerhaeuser Co., Senior Debentures
7.38%	03/15/32		150		180,924
					486,020
Pharmaceuticals — 0.1%
Bristol-Myers Squibb Co., Senior Debentures
6.88%	08/01/97		25		29,160
Merck & Co., Inc., Senior Unsecured Notes
4.38%	02/15/13		410		398,274
					427,434
Publishing & Printing — 0.1%
Advertising Directory Solutions, Inc., Senior Unsecured Notes
9.25%(j)	11/15/12		50		52,812

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

22

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
CORPORATE BONDS (Continued)
Publishing & Printing (Continued)
Cenveo Corp., Senior Subordinated Notes
7.88%	12/01/13	$	355	$	330,595
Dex Media, Inc., Discount Note
0.00%	11/15/13		300		236,250
News America Holdings, Senior Debentures
7.75%	01/20/24		25		29,979
News America, Inc., Senior Debentures
7.28%	06/30/28		35		40,452
					690,088
Real Estate — 0.3%
Avalonbay Communities, Inc., Senior Unsecured Notes
7.50%	12/15/10		25		28,342
Centex Corp., Unsecured Notes
4.55%	11/01/10		275		269,646
ERP Operating LP, Senior Notes
6.63%	04/13/05		600		602,288
Host Marriott LP, Unsecured Notes
7.12%	11/01/13		450		478,125
Lennar Corp., Senior Unsecured Notes
3.26%(i)	03/19/09		400		401,539
Pulte Homes, Inc., Bonds
6.38%	05/15/33		250		252,154
Reckson Operating Partnership (REIT), Senior Unsecured Notes
5.88%	08/15/14		300		310,672
The Rouse Co., Unsecured Notes
3.62%	03/15/09		50		46,563
Simon Property Group LP, Senior Unsecured Notes
7.38%	01/20/06		400		412,830
					2,802,159
Retail Merchandising — 0.1%
American Achievement Corp., Senior Subordinated Notes
8.25%	04/01/12		300		315,000
Ametek, Inc., Senior Notes
7.20%	07/15/08		150		161,187
CSK Auto, Inc., Senior Subordinated Notes
7.00%	01/15/14		500		487,500
					963,687
Telecommunications — 1.0%
American Tower Corp., Senior Unsecured Notes
7.50%(e)	05/01/12		800		841,999
AT&T Wireless Services, Inc., Senior Unsecured Notes
8.75%	03/01/31		250		340,061
BellSouth Corp., Senior Unsecured Notes
4.20%	09/15/09		610		603,034
Comcast Corp., Senior Unsecured Notes
7.05%	03/15/33	$	815	$	948,071
Crown Castle International Corp., Senior Unsecured Notes
7.50%	12/01/13		600		651,000
Insight Midwest/Insight Capital, Senior Notes
9.75%	10/01/09		325		340,844
MCI, Inc., Senior Unsecured Notes
5.91%	05/01/07		19		19,428
Mediacom Broadband LLC, Senior Unsecured Notes
11.00%	07/15/13		400		442,500
Nextel Communications, Inc., Senior Notes
7.38%	08/01/15		550		602,250
Qwest Communications International, Senior Unsecured Notes
7.25%(j)	02/15/11		300		308,250
Qwest Corp., Senior Unsecured Notes
7.88%(j)	09/01/11		225		245,250
SBA Communications Corp., Senior Unsecured Notes
8.50%(j)	12/01/12		125		135,000
SBC Communications, Inc., Unsecured Notes
4.12%	09/15/09		25		24,574
5.10%	09/15/14		225		224,208
6.45%	06/15/34		15		16,125
Sprint Capital Corp., Senior Unsecured Notes
8.75%	03/15/32		325		436,363
Superior Essex Communications & Essex Group, Senior Notes
9.00%	04/15/12		500		532,500
TCI Communications, Inc., Senior Debentures
7.88%	02/15/26		5		6,165
TCI Communications, Inc., Senior Notes
7.12%	02/15/28		35		40,315
Verizon Global Funding Corp.
7.75%	12/01/30		510		635,082
Verizon Maryland, Inc., Debentures
5.12%	06/15/33		10		8,994
Verizon New Jersey, Inc., Senior Debentures
5.88%	01/17/12		100		105,465
Vodafone Airtouch PLC, Senior Unsecured Notes
7.75%	02/15/10		70		80,076
Western Wireless Corp., Senior Unsecured Notes
9.25%	07/15/13		775		899,969
					8,487,523

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

23

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR (000)		VALUE
CORPORATE BONDS (Continued)
Telephone Communications — 0.0%
Time Warner Cos., Inc., Debentures
6.95%	01/15/28	$	35	$	39,544
Transportation — 0.1%
Gulfmark Offshore, Inc., Senior Notes
7.75%(j)	07/15/14		225		241,312
Omi Corp., Senior Notes
7.62%	12/01/13		750		773,438
United Rentals North America, Inc., Senior Subordinated Notes
7.75%(e)	11/15/13		200		200,500
					1,215,250
Waste Management — 0.0%
Allied Waste North America, Inc., Senior Secured Notes
6.38%	04/15/11		175		170,188
Yankee — 1.3%
Argentina (Republic of)
1.23%	08/03/12		2,100		1,877,400
Banque Centrale de Tunisie (Tunisia), Senior Unsecured Notes
7.38%	04/25/12		425		487,688
British Telecommunication PLC, Senior Unsecured Notes
8.88%	12/15/30		230		314,375
Corp Andina de Fomento (Spain), Senior Unsecured Notes
6.88%	03/15/12		125		138,994
Deutsche Telekom International Finance BV, Senior Unsecured Notes
8.75%	06/15/30		265		357,146
Eircom Funding (Ireland), Senior Subordinated Notes
8.25%	08/15/13		600		670,500
Encana Corp., Bonds (Canada)
6.50%	08/15/34		325		362,001
France Telecom (France), Senior Unsecured Notes
8.50%	03/01/31		225		306,572
Quebec Province, Unsecured Notes
5.00%	07/17/09		25		25,725
Republic of Colombia, Senior Unsecured Notes
10.75%	01/15/13		925		1,079,938
Republic of Panama, Bonds
7.25%	03/15/15		500		510,000
Republic of Turkey, Unsecured Notes
7.25%	03/15/15		700		731,500
Rogers Wireless, Inc. (Canada), Senior Secured Notes
9.62%	05/01/11		550		653,125
Russian Federation
1.00%	03/31/30		500		527,800
Statoil (Norway), Unsecured Notes
5.12%(j)	04/30/14		50		50,757
Telecom Italia Capital (Luxemburg), Senior Unsecured Notes
4.95%(j)	09/30/14	$	475	$	465,447
Thomson Corp., Bonds (Canada), Unsecured Notes
5.75%	02/01/08		250		259,193
Tyco International Group SA (Luxembourg), Senior Unsecured Notes
6.12%	11/01/08		25		26,441
Ukraine Government International Bonds, Unsecured Notes
7.65%(e)(j)	06/11/13		500		549,375
United Mexican States, Bonds
8.12%	12/30/19		180		215,190
United Mexican States, Senior Unsecured Notes
6.62%	03/03/15		675		724,611
8.30%	08/15/31		25		30,138
United Mexican States, Unsecured Notes
4.62%	10/08/08		250		251,375
XL Capital, Ltd. (Bermuda), Senior Unsecured Notes
6.38%	11/15/24		20		21,024
					10,636,315
TOTAL CORPORATE BONDS (Cost $70,122,839)					72,827,390
MUNICIPAL BONDS — 0.0%
California Department of Water Resources Revenue Bond, Series 02, Class E
3.98%	05/01/05		100		100,103
Ohana Military Communities LLC, Military Housing Revenue Bonds (Navy Hawaii Housing Privatization Project) Series 04-A, Class 1
6.19%	04/01/49		25		27,784
TOTAL MUNICIPAL BONDS (Cost $124,999)					127,887
FOREIGN BONDS — 0.1%
Ainsworth Lumber Co., Senior Unsecured Notes
6.30%(i)(j)
(Cost $402,750)	10/01/10		400		412,000
SHORT TERM INVESTMENTS — 11.7%
Merrill Lynch, Floating Rate Master Notes
2.73%(i)(l)	03/01/05		2,995		2,994,914
Chase Manhattan Bank, Time Deposit
2.50%(i)(l)	03/01/05		324		324,467
Federal Home Loan Bank Discount Notes
2.51%	03/01/05		42,800		42,800,000

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

24

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONTINUED)

AS OF FEBRUARY 28, 2005	MATURITY	PAR/SHARES (000)		VALUE
SHORT TERM INVESTMENTS (Continued)
Galileo Money Fund		8,358		$	8,357,575
Institutional Money Market Trust(l)		33,876			33,875,926
Morgan Stanley, Floating Rate Notes(l)		6,543			6,542,733
TOTAL SHORT TERM INVESTMENTS (Cost $94,895,614)					94,895,615
TOTAL INVESTMENTS IN SECURITIES — 105.9% (Cost $766,581,479(a))				$	861,878,569
		NUMBER OF CONTRACTS		VALUE
OPTIONS — (0.0)%
Bank One Chicago, Strike Price 101.718750, Expires 04/06/05		(75	)		(352	)
Citibank, Strike Price 5.67, Expires 01/04/10		(50	)		(19,688	)
Citibank, Strike Price 5.67, Expires 01/04/10		(50	)		(28,524	)
Citigroup, Strike Price 113.00, Expires 03/24/05		2			31
Deutsche Bank AG NY, Strike Price 5.015, Expires 01/29/07		(35	)		(13,688	)
Deutsche Bank AG NY, Strike Price 5.015, Expires 01/29/07		(35	)		(11,466	)
TOTAL OPTIONS (Premiums received $(79,281))					(73,687	)
				VALUE
LIABILITIES IN EXCESS OF OTHER ASSETS — (5.9)% (Including $43,738,041 of payable upon return of securities loaned)				$	(48,330,270	)
NET ASSETS — 100.0% (Applicable to 2,090,025 Institutional shares, 145,084 Service shares, 35,234,441 Investor A shares, 12,673,275 Investor B shares and 4,414,092 Investor C shares outstanding)				$	813,474,612
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($31,328,475÷2,090,025)				$	14.99
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($2,171,383÷145,084)				$	14.97
NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($526,928,613÷35,234,441)				$	14.95
MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($14.95÷0.9425)				$	15.86
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($187,689,311÷12,673,275)				$	14.81
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR C SHARE ($65,356,850÷4,414,092)				$	14.81

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

25

BLACKROCK FUNDS

STATEMENT OF NET ASSETS

ASSET ALLOCATION PORTFOLIO (CONCLUDED)

(a) Cost for Federal income tax purposes is $769,133,956. The gross unrealized appreciation (depreciation) on a tax basis is as follows:

Gross unrealized appreciation	$	102,792,624
Gross unrealized depreciation		(10,048,011	)
	$	92,744,613

(b) Non-income producing security.

(c) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of February 28, 2005, the securities had a total market value of $77,879 which represents 0.01% of net assets.

(d) Represents an investment in an affiliate.

(e) Total or partial securities on loan.

(f) Security is illiquid.

(g) Rates shown are the effective yields as of February 28, 2005.

(h) Securities, or a portion thereof, subject to financing transactions.

(i) Rates shown are the rates as of February 28, 2005.

(j) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of February 28, 2005, the Portfolio held 2.0% of its net assets, with a current market value of $17,600,587, in securities restricted as to resale.

(k) Securities, or a portion thereof, pledged as collateral with a value of $306,948 on 141 Short U.S. Treasury Notes futures contracts, 42 Long U.S. Treasury Bonds futures contracts expiring March 2005, and 1 Short U.S. Treasury Note future contract, 136 Long U.S. Treasury Notes future contracts, and 57 Long Treasury Bonds futures contracts expiring June 2005. The value of such contracts on February 28, 2005 was $54,879,156, with an unrealized loss of $74,763 (including commissions of $854).

(l) Securities purchased with the cash proceeds from securities loaned.

	INVESTMENT ABBREVIATIONS
ADR	American Depository Receipts
CMT	Constant Maturity Treasury
IO	Interest Only
NVDR	Non Voting Depository Receipts
PLC	Public Limited Company
PO	Principal Only

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

26    

BLACKROCK FUNDS

STATEMENTS OF OPERATIONS

FOR THE PERIOD ENDED FEBRUARY 28, 2005	MID -CAP VALUE EQUITY PORTFOLIO(1)			GLOBAL RESOURCES PORTFOLIO(1)			HEALTH SCIENCES PORTFOLIO(2)			ASSET ALLOCATION PORTFOLIO(3)
Investment Income:
Interest	$	187,175		$	183,027		$	141,834		$	11,943,413
Securities lending income		95,612			172,565			46,298			119,283
Dividends		9,546,084			4,139,881			643,884			5,679,996
Foreign taxes witheld		—			(338,237	)		(15,258	)		(34,188	)
Total investment income		9,828,871			4,157,236			816,758			17,708,504
Expenses:
Investment advisory fee		3,038,640			3,718,767			902,820			4,533,788
Administration fee		114,891			116,612			109,056			148,991
Administration fee — class specific		88,510			108,534			17,387			100,077
Custodian fee		106,832			157,280			105,866			305,880
Transfer agent fee		1,108,449			712,293			341,678			1,268,250
Transfer agent fee — class specific		10,987			13,597			2,158			12,455
Shareholder servicing fees — class specific		1,047,061			1,198,486			288,382			1,417,703
Distribution fees — class specific (Note C)		1,174,289			1,420,045			397,127			1,558,927
Legal and audit		52,379			37,648			49,176			14,726
Printing		180,196			135,412			67,679			90,516
Registration fees and expenses		171,370			40,502			53,140			70,094
Trustees’ fees		14,829			21,374			10,235			25,940
Other		32,265			20,267			16,020			49,780
Total expenses		7,140,698			7,700,817			2,360,724			9,597,127
Less investment advisory fees waived		(61,303	)		—			—			(3,438	)
Less administration fees waived — class specific		(87,493	)		(22,859	)		(371	)		(3,735	)
Less distribution fees waived — class specific		(38,049	)		(52,480	)		(6,915	)		(45,002	)
Less expenses reimbursed by distributor (Note D)		(271,500	)		—			(162,313	)		—
Reimbursement of distribution fees (Note D)		(91,069	)		—			—			(294,508	)
		(549,414	)		(75,339	)		(169,599	)		(346,683	)
Net expenses		6,591,284			7,625,478			2,191,125			9,250,444
Net investment income (loss)		3,237,587			(3,468,242	)		(1,374,367	)		8,458,060
Realized and unrealized gain (loss) on investments and foreign currency transactions:
Net increase from payment by affiliate (Note D)		554,230			12,780			—			90,574
Net realized gain (loss) from:
Investment transactions		55,516,938			79,408,370			2,830,919			24,909,337
Futures and options contracts		—			—			—			3,804,994
Foreign currency related transactions		—			21,031			—			3,502,916
		56,071,168			79,442,181			2,830,919			32,307,821
Change in unrealized appreciation (depreciation) from:
Investments		25,454,000			226,280,120			832,983			10,705,967
Futures and options contracts		—			—			—			(1,136,640	)
Foreign currency related transactions		—			2,148			347			(1,406,191	)
		25,454,000			226,282,268			833,330			8,163,136
Net gain on investments and foreign currency transactions		81,525,168			305,724,449			3,664,249			40,470,957
Net increase in net assets resulting from operations	$	84,762,755		$	302,256,207		$	2,289,882		$	48,929,017

⁽¹⁾ For the period July 1, 2004 through February 28, 2005.

⁽²⁾ For the period March 1, 2004 through February 28, 2005.

⁽³⁾ For the period April 1, 2004 through February 28, 2005.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

27

BLACKROCK FUNDS

STATEMENTS OF CHANGES IN NET ASSETS

	MID-CAP VALUE EQUITY PORTFOLIO
	FOR THE PERIOD 7/1/04-2/28/05			FOR THE YEAR ENDED 6/30/04
Increase (decrease) in net assets:
Operations:
Net investment income (loss)	$	3,237,587		$	2,069,311
Net increase from payment by affiliate		554,230			40,116
Net realized gain on investments, futures, options, swap and swaption contracts and foreign currency related transactions		55,516,938			95,045,065
Net unrealized gain on investments, futures, options, swap and swaption contracts and foreign currency related transactions		25,454,000			48,344,054
Net increase in net assets resulting from operations		84,762,755			145,498,546
Distributions to shareholders from:
Net investment income:
Institutional Class		(383,894	)		(242,767	)
Investor A Class		(4,857,110	)		(1,614,937	)
Investor B Class		(80,308	)		—
Investor C Class		(80,956	)		—
Total distributions from net Investment Income		(5,402,268	)		(1,857,704	)
Net realized gains:
Institutional Class		(2,033,124	)		—
Investor A Class		(29,684,283	)		—
Investor B Class		(7,665,103	)		—
Investor C Class		(6,254,749	)		—
Total distributions from net realized gains		(45,637,259	)		—
Total distributions to shareholders		(51,039,527	)		(1,857,704	)
Capital share transactions (Note F)		45,632,219			84,026,827
Redemption fees		610			—
Total increase (decrease) in net assets		79,356,057			227,667,669
Net Assets:
Beginning of period		640,862,557			413,194,888
End of period	$	720,218,614		$	640,862,557
End of period undistributed net investment income (accumulated net investment loss)	$	(163,219	)	$	2,001,462

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

28

BLACKROCK FUNDS

GLOBAL RESOURCES PORTFOLIO						HEALTH SCIENCES PORTFOLIO						ASSET ALLOCATION PORTFOLIO
FOR THE PERIOD 7/1/04-2/28/05			FOR THE YEAR ENDED 6/30/04			FOR THE YEAR ENDED 2/28/05			FOR THE YEAR ENDED 2/29/04			FOR THE PERIOD 4/1/04-2/28/05			FOR THE YEAR ENDED 3/31/04
$	(3,468,242	)	$	1,224,536		$	(1,374,367	)	$	(492,038	)	$	8,458,060		$	8,516,159
	12,780			274,458			—			—			90,574			—
	79,429,401			49,398,915			2,830,919			10,260,728			32,217,247			88,662,078
	226,282,268			113,653,804			833,330			15,869,865			8,163,136			61,187,645
	302,256,207			164,551,713			2,289,882			25,638,555			48,929,017			158,365,882
	(181,199	)		(239,164	)		—			—			(549,136	)		(378,790	)
	(3,733,634	)		(3,857,057	)		—			—			(13,021,288	)		(6,788,195	)
	(448,727	)		(681,846	)		—			—			(2,669,527	)		(865,650	)
	(740,345	)		(992,836	)		—			—			(1,074,297	)		(237,660	)
	(5,103,905	)		(5,770,903	)		—			—			(17,314,248	)		(8,270,295	)
	(820,327	)		—			(271,998	)		(59,350	)		(669,622	)		—
	(17,122,033	)		—			(3,693,722	)		(1,219,588	)		(17,005,778	)		—
	(2,773,442	)		—			(1,432,836	)		(617,283	)		(5,240,921	)		—
	(4,875,287	)		—			(970,853	)		(195,094	)		(2,030,016	)		—
	(25,591,089	)		—			(6,369,409	)		(2,091,315	)		(24,946,337	)		—
	(30,694,994	)		(5,770,903	)		(6,369,409	)		(2,091,315	)		(42,260,585	)		(8,270,295	)
	42,478,605			284,528,279			42,894,626			50,919,824			147,427,659			30,609,858
	323			—			306			—			4,202			—
	314,040,141			443,309,089			38,815,405			74,467,064			154,100,293			180,705,445
	655,759,060			212,449,971			96,938,528			22,471,464			659,374,319			478,668,874
$	969,799,201		$	655,759,060		$	135,753,933		$	96,938,528		$	813,474,612		$	659,374,319
$	(5,178,168	)	$	3,393,979		$	—		$	—		$	(4,173,594	)	$	4,682,594

29

BLACKROCK FUNDS

FINANCIAL HIGHLIGHTS

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

	NET ASSET VALUE BEGINNING OF PERIOD		NET INVESTMENT INCOME (LOSS)			GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCY AND OPTIONS (BOTH REALIZED AND UNREALIZED)			DISTRIBUTIONS FROM NET INVESTMENT INCOME			DISTRIBUTIONS FROM NET REALIZED CAPITAL GAINS			NET ASSET VALUE END OF PERIOD
Mid-Cap Value Equity*
Institutional Class
7/01/04 through 2/28/05	$	12.14	$	0.11		$	1.44		$	(0.15	)	$	(0.81	)	$	12.73
6/30/04		9.07		0.08			3.08			(0.09	)		—			12.14
6/30/03		10.66		0.08			(1.21	)		—			(0.46	)		9.07
6/30/02		11.85		0.04			0.30			—			(1.53	)		10.66
6/30/01		8.74		0.10			3.59			(0.15	)		(0.43	)		11.85
6/30/00		10.09		0.17			(1.14	)		(0.24	)		(0.14	)		8.74
Service Class
1/28/051 through 2/28/05	$	12.04	$	(0.01	)	$	0.60		$	—		$	—		$	12.63
Investor A Class
7/01/04 through 2/28/05	$	11.92	$	0.07		$	1.45		$	(0.11	)	$	(0.80	)	$	12.53
6/30/04		8.91		0.05			3.02			(0.06	)		—			11.92
6/30/03		10.53		0.06			(1.22	)		—			(0.46	)		8.91
6/30/02		11.73		0.02			0.29			—			(1.51	)		10.53
6/30/01		8.66		0.06			3.56			(0.13	)		(0.42	)		11.73
6/30/00		10.00		0.15			(1.14	)		(0.21	)		(0.14	)		8.66
Investor B Class
7/01/04 through 2/28/05	$	11.28	$	(0.03	)	$	1.41		$	(0.01	)	$	(0.78	)	$	11.87
6/30/04		8.45		(0.02	)		2.85			—			—			11.28
6/30/03		10.05		(0.01	)		(1.15	)		—			(0.44	)		8.45
6/30/02		11.30		(0.06	)		0.28			—			(1.47	)		10.05
6/30/01		8.36		(0.02	)		3.45			(0.08	)		(0.41	)		11.30
6/30/00		9.67		0.08			(1.11	)		(0.14	)		(0.14	)		8.36
Investor C Class
7/01/04 through 2/28/05	$	11.28	$	(0.03	)	$	1.40		$	(0.01	)	$	(0.77	)	$	11.87
6/30/04		8.45		(0.02	)		2.85			—			—			11.28
6/30/03		10.04		(0.01	)		(1.14	)		—			(0.44	)		8.45
6/30/02		11.28		(0.05	)		0.28			—			(1.47	)		10.04
6/30/01		8.35		(0.01	)		3.42			(0.07	)		(0.41	)		11.28
6/30/00		9.63		0.07			(1.09	)		(0.13	)		(0.13	)		8.35

* The performance prior to January 31, 2005 set forth in this table is the financial data of the State Street Research Mid-Cap Value Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Mid-Cap Value Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratios of 1.56483770, 1.57950264, 1.62345461 and 1.63087248 for Institutional, Class A, Class B and Class C shares, respectively.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

30

BLACKROCK FUNDS

TOTAL RETURN		NET ASSETS END OF PERIOD (000)		RATIO OF NET EXPENSES TO AVERAGE NET ASSETS (SEE NOTE C)		RATIO OF TOTAL EXPENSES TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND EXPENSE REIMBURSEMENTS) (SEE NOTE C)		RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS		RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND EXPENSE REIMBURSEMENTS)		PORTFOLIO TURNOVER RATE
13.07	%5	$	50,383	0.99	%2	1.09	%2	1.18	%2	1.08	%2	53	%
34.83			30,181	0.98		1.03		0.76		0.71		86
(10.21	)		26,099	0.99		1.18		0.93		0.75		66
3.20			35,116	0.95		1.15		0.42		0.23		69
43.89			34,577	0.95		1.25		0.90		0.62		116
(9.58	)		22,994	1.00		1.24		1.87		1.64		31
4.89%5		$	1,374	1.25	%2	1.49	%2	0.39	%2	0.14	%2	53	%
12.98	%3,5	$	448,237	1.24	%2	1.38	%2	0.92	%2	0.78	%2	53	%
34.51			363,188	1.28		1.33		0.47		0.42		86
(10.61	)		194,034	1.29		1.48		0.65		0.47		66
2.96			242,113	1.25		1.41		0.16		0.01		69
43.49			107,448	1.25		1.55		0.59		0.31		116
(9.89	)		68,019	1.26		1.50		1.62		1.39		31
12.39	%4,5	$	128,568	1.99	%2	2.09	%2	0.20	%2	0.10	%2	53	%
33.53			109,815	1.98		2.03		(0.24	)	(0.29	)	86
(11.13)			79,536	1.99		2.18		(0.05	)	(0.23	)	66
2.20			91,416	1.95		2.10		(0.52	)	(0.66	)	69
42.51			25,957	1.95		2.25		(0.18	)	(0.46	)	116
(10.59)			10,043	2.00		2.24		0.92		0.69		31
12.40	%4,5	$	91,657	1.99	%2	2.09	%2	0.19	%2	0.09	%2	53	%
33.53			82,758	1.98		2.03		(0.24	)	(0.29	)	86
(11.09	)		58,499	1.99		2.19		(0.04	)	(0.23	)	66
2.25			62,505	1.95		2.09		(0.51	)	(0.64	)	69
42.48			14,062	1.95		2.25		(0.09	)	(0.37	)	116
(10.57	)		10,661	2.00		2.24		0.86		0.63		31

31

BLACKROCK FUNDS

FINANCIAL HIGHLIGHTS (CONTINUED)

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

	NET ASSET VALUE BEGINNING OF PERIOD	NET INVESTMENT INCOME (LOSS)	GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCY AND OPTIONS (BOTH REALIZED AND UNREALIZED)	DISTRIBUTIONS FROM NET INVESTMENT INCOME	DISTRIBUTIONS FROM NET REALIZED CAPITAL GAINS	NET ASSET VALUE END OF PERIOD
Global Resources
Institutional Class
7/01/04 through 2/28/05	$ 41.25	$(0.08)	$19.52	$(0.34)	$(1.55)	$58.80
6/30/04	26.85	0.27	14.78	(0.65)	—	41.25
6/30/03	23.51	(0.04)	3.38	—	—	26.85
6/30/02	22.13	(0.09)	1.47	—	—	23.51
6/30/01	17.21	(0.18)	5.10	—	—	22.13
6/30/00	12.43	(0.15)	4.93	—	—	17.21
Investor A Class
7/01/04 through 2/28/05	$39.58	$(0.15)	$18.69	$(0.34)	$(1.55)	$56.23
6/30/04	25.81	0.21	14.15	(0.59)	—	39.58
6/30/03	22.74	(0.10)	3.17	—	—	25.81
6/30/02	21.50	(0.15)	1.39	—	—	22.74
6/30/01	16.79	(0.22)	4.93	—	—	21.50
6/30/00	12.15	(0.17)	4.81	—	—	16.79
Investor B Class
7/01/04 through 2/28/05	$36.52	$(0.32)	$17.18	$(0.25)	$(1.55)	$51.58
6/30/04	23.89	(0.06)	13.14	(0.45)	—	36.52
6/30/03	21.20	(0.23)	2.92	—	—	23.89
6/30/02	20.16	(0.27)	1.31	—	—	21.20
6/30/01	15.85	(0.33)	4.64	—	—	20.16
6/30/00	11.56	(0.26)	4.55	—	—	15.85
Investor C Class
7/01/04 through 2/28/05	$36.48	$(0.30)	$17.14	$(0.24)	$(1.55)	$51.53
6/30/04	23.88	(0.03)	13.10	(0.47)	—	36.48
6/30/03	21.18	(0.23)	2.93	—	—	23.88
6/30/02	20.14	(0.28)	1.32	—	—	21.18
6/30/01	15.84	(0.34)	4.64	—	—	20.14
6/30/00	11.54	(0.25)	4.55	—	—	15.84

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

32

BLACKROCK FUNDS

TOTAL RETURN		NET ASSETS END OF PERIOD (000)		RATIO OF NET EXPENSES TO AVERAGE NET ASSETS		RATIO OF TOTAL EXPENSES TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND EXPENSE REIMBURSEMENTS)		RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS		RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND EXPENSE REIMBURSEMENTS)		PORTFOLIO TURNOVER RATE
47.95	%5	$	29,188	1.01	%2	1.02	%2	(0.16	)%2	(0.17	)%2	22	%
56.49			20,044	1.04		1.04		0.79		0.79		27
14.21			10,144	1.30		1.31		(0.20	)	(0.20	)	33
6.24			7,995	1.43		1.44		(0.42	)	(0.42	)	38
28.59			6,935	1.31		1.33		(0.89	)	(0.89	)	38
38.46			8,599	1.46		1.48		(1.11	)	(1.11	)	47
47.69	%3,5	$	676,234	1.36	%2	1.38	%2	(0.52	)%2	(0.54	)%2	22	%
56.06			406,209	1.34		1.34		0.64		0.64		27
13.50			103,987	1.60		1.61		(0.47	)	(0.47	)	33
5.77			89,883	1.73		1.74		(0.73	)	(0.73	)	38
28.05			81,880	1.61		1.63		(1.11	)	(1.11	)	38
38.19			70,152	1.72		1.74		(1.34	)	(1.34	)	47
47.09	%4,5	$	94,506	2.01	%2	2.02	%2	(1.17	)%2	(1.18	)%2	22	%
55.07			66,704	2.04		2.04		(0.20	)	(0.20	)	27
12.69			29,782	2.30		2.31		(1.17	)	(1.17	)	33
5.16			25,626	2.43		2.44		(1.41	)	(1.41	)	38
27.19			19,237	2.31		2.33		(1.78	)	(1.78	)	38
37.11			8,608	2.46		2.48		(1.78	)	(1.78	)	47
47.01	%4,5	$	169,871	2.01	%2	2.02	%2	(1.17	)%2	(1.18	)%2	22	%
55.05			122,088	2.04		2.04		(0.10	)	(0.10	)	27
12.75			37,601	2.30		2.31		(1.18	)	(1.18	)	33
5.16			31,853	2.43		2.44		(1.43	)	(1.43	)	38
27.15			30,214	2.31		2.33		(1.83	)	(1.83	)	38
37.26			23,313	2.46		2.48		(2.06	)	(2.06	)	47

33

BLACKROCK FUNDS

FINANCIAL HIGHLIGHTS (CONTINUED)

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

	NET ASSET VALUE BEGINNING OF PERIOD		NET INVESTMENT INCOME (LOSS)			GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCY AND OPTIONS (BOTH REALIZED AND UNREALIZED)			DISTRIBUTIONS FROM NET REALIZED CAPITAL GAINS			NET ASSET VALUE END OF PERIOD
Health Sciences
Institutional Class
2/28/05	$	21.15	$	(0.15	)	$	0.57		$	(1.07	)	$	20.50
2/29/04		11.64		(0.06	)		10.21			(0.64	)		21.15
2/28/03		14.48		(0.09	)		(2.71	)		(0.04	)		11.64
2/28/02		14.14		(0.08	)		0.47			(0.05	)		14.48
2/28/01		15.50		0.01			(0.68	)		(0.69	)		14.14
Service Class
1/28/051 through 2/28/05	$	20.30	$	(0.01	)	$	(0.05	)	$	—		$	20.24
Investor A Class
2/28/05	$	20.96	$	(0.17	)	$	0.52		$	(1.07	)	$	20.24
2/29/04		11.57		(0.12	)		10.15			(0.64	)		20.96
2/28/03		14.43		(0.12	)		(2.70	)		(0.04	)		11.57
2/28/02		14.14		(0.13	)		0.47			(0.05	)		14.43
2/28/01		13.33		(0.06	)		1.88			(1.01	)		14.14
Investor B Class
2/28/05	$	20.52	$	(0.28	)	$	0.48		$	(1.07	)	$	19.65
2/29/04		11.41		(0.24	)		9.99			(0.64	)		20.52
2/28/03		14.34		(0.21	)		(2.68	)		(0.04	)		11.41
2/28/02		14.14		(0.23	)		0.48			(0.05	)		14.34
2/28/01		15.50		(0.04	)		(0.63	)		(0.69	)		14.14
Investor C Class
2/28/05	$	20.47	$	(0.22	)	$	0.43		$	(1.07	)	$	19.61
2/29/04		11.39		(0.23	)		9.95			(0.64	)		20.47
2/28/03		14.31		(0.21	)		(2.67	)		(0.04	)		11.39
2/28/02		14.11		(0.23	)		0.48			(0.05	)		14.31
2/28/01		15.50		(0.04	)		(0.66	)		(0.69	)		14.11

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

34

BLACKROCK FUNDS

TOTAL RETURN		NET ASSETS END OF PERIOD (000)		RATIO OF NET EXPENSES TO AVERAGE NET ASSETS		RATIO OF TOTAL EXPENSES TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND EXPENSE REIMBURSEMENTS)		RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS		RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (EXCLUDINGWAIVERS AND EXPENSE REIMBURSEMENTS)		PORTFOLIO TURNOVER RATE
1.84	%5	$	4,262	1.25	%	1.37	%	(0.59	)%	(0.71	)%	173	%
87.73			5,067	1.25		1.84		(0.38	)	(0.97	)	106
(19.42	)		988	1.25		2.75		(0.69	)	(2.18	)	157
2.76			1,109	1.25		3.25		(0.56	)	(2.53	)	75
(4.48	)		946	1.25		6.86		0.18		(5.40	)	139
(0.30	)%5	$	—	0.82	%2	0.82	%2	(0.70	)%2	(0.70	)%2	173	%
1.52	%3,5	$	76,550	1.58	%	1.73	%	(0.90	)%	(1.05	)%	173	%
87.13			54,638	1.55		2.11		(0.71	)	(1.27	)	106
(19.63	)		9,250	1.55		3.04		(0.99	)	(2.47	)	157
2.41			13,069	1.55		3.41		(0.88	)	(2.71	)	75
14.31			6,863	1.54		8.44		(0.48	)	(7.35	)	139
0.81	%4,5	$	29,495	2.25	%	2.39	%	(1.58	)%	(1.71	)%	173	%
85.89			22,825	2.25		2.91		(1.44	)	(2.10	)	106
(20.24	)		9,290	2.25		3.74		(1.69	)	(3.17	)	157
1.77			11,399	2.25		3.99		(1.59	)	(3.30	)	75
(4.47	)		4,645	2.25		8.54		(0.81	)	(7.07	)	139
0.86	%4,5	$	25,248	2.25	%	2.41	%	(1.56	)%	(1.71	)%	173	%
85.87			11,017	2.25		2.77		(1.38	)	(1.90	)	106
(20.21	)		1,291	2.25		3.74		(1.69	)	(3.18	)	157
1.77			1,314	2.25		3.99		(1.58	)	(3.29	)	75
(4.67	)		645	2.25		8.15		(0.83	)	(6.70	)	139

35

BLACKROCK FUNDS

FINANCIAL HIGHLIGHTS (CONTINUED)

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

	NET ASSET VALUE BEGINNING OF PERIOD		NET INVESTMENT INCOME (LOSS)		GAIN (LOSS) ON INVESTMENTS, FOREIGN CURRENCY AND OPTIONS (BOTH REALIZED AND UNREALIZED)			DISTRIBUTIONS FROM NET INVESTMENT INCOME			DISTRIBUTIONS FROM NET REALIZED CAPITAL GAINS			NET ASSET VALUE END OF PERIOD
Asset Allocation*
Institutional Class
4/01/04 through 2/28/05	$	14.91	$	0.20	$	0.82		$	(0.40	)	$	(0.54	)	$	14.99
3/31/04		11.38		0.24		3.54			(0.25	)		—			14.91
3/31/03		14.17		0.28		(2.68	)		(0.33	)		(0.06	)		11.38
3/31/02		14.05		0.32		0.83			(0.35	)		(0.68	)		14.17
3/31/01		16.26		0.42		(0.41	)		(0.33	)		(1.89	)		14.05
3/31/00		14.47		0.40		2.03			(0.35	)		(0.29	)		16.26
Service Class
1/28/051 through 2/28/05	$	14.63	$	0.01	$	0.33		$	—		$	—		$	14.97
Investor A Class
4/01/04 through 2/28/05	$	14.89	$	0.18	$	0.80		$	(0.38	)	$	(0.54	)	$	14.95
3/31/04		11.36		0.19		3.55			(0.21	)		—			14.89
3/31/03		14.15		0.24		(2.68	)		(0.29	)		(0.06	)		11.36
3/31/02		14.03		0.28		0.83			(0.31	)		(0.68	)		14.15
3/31/01		16.24		0.39		(0.40	)		(0.31	)		(1.89	)		14.03
3/31/00		14.45		0.33		2.06			(0.31	)		(0.29	)		16.24
Investor B Class
4/01/04 through 2/28/05	$	14.74	$	0.08	$	0.81		$	(0.28	)	$	(0.54	)	$	14.81
3/31/04		11.26		0.10		3.49			(0.11	)		—			14.74
3/31/03		14.01		0.15		(2.63	)		(0.21	)		(0.06	)		11.26
3/31/02		13.90		0.17		0.83			(0.21	)		(0.68	)		14.01
3/31/01		16.08		0.26		(0.37	)		(0.19	)		(1.88	)		13.90
3/31/00		14.32		0.24		2.00			(0.19	)		(0.29	)		16.08
Investor C Class
4/01/04 through 2/28/05	$	14.74	$	0.08	$	0.81		$	(0.28	)	$	(0.54	)	$	14.81
3/31/04		11.25		0.10		3.50			(0.11	)		—			14.74
3/31/03		14.01		0.15		(2.65	)		(0.21	)		(0.05	)		11.25
3/31/02		13.89		0.18		0.80			(0.19	)		(0.67	)		14.01
3/31/01		16.05		0.27		(0.38	)		(0.18	)		(1.87	)		13.89
3/31/00		14.27		0.22		2.03			(0.18	)		(0.29	)		16.05

* The performance prior to January 31, 2005 set forth in this table is the financial data of the State Street Research Asset Allocation Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Asset Allocation on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratios of 0.71889936, 0.71991517, 0.72321182 and 0.72727901 for Institutional, Class A, Class B and Class C shares, respectively.

¹ Commencement of operations of share class.

² Annualized.

³ Sales load not reflected in total return.

⁴ Contingent deferred sales load not reflected in total return.

⁵ Redemption fee of 2.00% is reflected in total return calculations.

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

36

BLACKROCK FUNDS

TOTAL RETURN		NET ASSETS END OF PERIOD (000)		RATIO OF NET EXPENSES TO AVERAGE NET ASSETS		RATIO OF TOTAL EXPENSES TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND EXPENSE REIMBURSEMENTS)		RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS		RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (EXCLUDING WAIVERS AND EXPENSE REIMBURSEMENTS)		PORTFOLIO TURNOVER RATE
7.17	%5	$	31,328	1.03	%2	1.05	%2	1.71	%2	1.70	%2	101	%
33.46			21,989	1.15		1.15		1.74		1.74		216
(17.12	)		17,992	1.12		1.13		2.21		2.21		181
8.47			26,821	1.10		1.11		2.27		2.27		186
0.56			26,917	1.17		1.19		2.85		2.85		181
17.17			23,316	1.04		1.05		2.62		2.62		123
2.32	%5	$	2,171	1.16	%2	1.26	%2	(0.17	)%2	(0.27	)%2	101	%
6.78	%3,5	$	526,929	1.24	%2	1.32	%2	1.55	%2	1.47	%2	101	%
32.94			357,100	1.45		1.45		1.43		1.43		216
(17.37	)		252,069	1.42		1.43		1.92		1.92		181
8.15			320,614	1.40		1.41		1.95		1.95		186
0.29			272,813	1.44		1.46		2.61		2.61		181
16.88			304,400	1.29		1.30		2.23		2.23		123
6.20	%4,5	$	187,689	2.04	%2	2.04	%2	0.73	%2	0.73	%2	101	%
32.03			133,083	2.15		2.15		0.72		0.72		216
(17.91	)		75,963	2.12		2.13		1.22		1.22		181
7.30			81,440	2.10		2.11		1.25		1.25		186
(0.35	)		56,543	2.17		2.19		1.86		1.86		181
15.93			36,045	2.04		2.05		1.48		1.48		123
6.20	%4,5	$	65,357	2.04	%2	2.04	%2	0.76	%2	0.76	%2	101	%
32.14			42,262	2.15		2.15		0.72		0.72		216
(17.96	)		19,079	2.12		2.13		1.21		1.21		181
7.31			13,226	2.10		2.11		1.26		1.26		186
(0.35	)		12,687	2.17		2.19		1.89		1.89		181
15.93			17,093	2.04		2.05		1.47		1.47		123

37

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS

(A) Organization

BlackRock Funds^SM (the “Fund”) was organized on December 22, 1988, as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund currently has 50 registered portfolios, 4 of which are included in these financial statements (the “Portfolios”). Each Portfolio is authorized to issue an unlimited number of shares with a par value of $0.001. Each Portfolio of the Fund may offer as many as seven classes of shares. Shares of all classes of a Portfolio represent equal pro rata interests in such Portfolio, except that each class bears different expenses, which reflect the difference in the range of services provided to them.

Under the Fund’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund. However, based on experience, the Fund considers the risk of loss from such claims to be remote.

(B) Fund Reorganizations

On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (“BlackRock”), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (“SSRM”), the investment adviser to the former State Street Research mutual funds. In connection with the transaction, the BlackRock Mid-Cap Value Equity Portfolio reorganized with the State Street Research Mid-Cap Value Fund; the BlackRock Global Resources Portfolio reorganized with the State Street Research Global Resources Fund; and the BlackRock Health Sciences Portfolio reorganized with the State Street Research Health Sciences Fund; the BlackRock Balanced Portfolio reorganized with the State Street Research Asset Allocation Fund and was renamed the BlackRock Asset Allocation Portfolio.

On January 31, 2005, the BlackRock Mid-Cap Value Equity Portfolio acquired all of the assets and certain liabilities of the State Street Research Mid-Cap Value Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the State Street Research shareholders on January 25, 2005. In connection with the reorganization, the BlackRock Mid-Cap Value Equity Portfolio inherited the financial statements and performance history of the State Street Research Mid-Cap Value Fund. Under the Agreement and Plan of Reorganization, 20,463,698 Class A shares, 2,373,286 Class B shares and 224,325 Class R shares, respectively, of the State Street Research Mid-Cap Value Fund, were exchanged for 32,322,465, 3,705,092 and 353,288 Investor A Class shares, respectively, of the BlackRock Mid-Cap Value Equity Portfolio; 6,323,921 Class B(1) shares of the State Street Research Mid-Cap Value Fund were exchanged for 10,266,599 Investor B Class shares of BlackRock Mid-Cap Value Equity Portfolio; 304,742,751 Class C shares of the State Street Research Mid-Cap Value Fund were exchanged for 7,734,822 Investor C Class shares of the BlackRock Mid-Cap Value Equity Portfolio and 1,635,552 Class S shares of the State Street Research Mid-Cap Value Fund were exchanged for 2,559,374 Institutional Class shares of the BlackRock Mid-Cap Value Equity Portfolio. The assets of the State Street Research Mid-Cap Value Fund, which consisted of securities and related receivables less liabilities, were converted on a tax-free basis. Upon the reorganization of such funds on January 31, 2005, the value of the BlackRock Mid-Cap Value Equity Portfolio’s net assets (including $31,360,120 in net assets of the BlackRock Mid-Cap Value Equity Portfolio, including $3,524,456 of unrealized appreciation and undistributed net realized gain on investments of $2,059,570, which was classified as paid-in-capital) was $700,767,573 before the open of business.

On January 31, 2005, the BlackRock Global Resources Portfolio acquired all of the assets and certain stated liabilities of the State Street Research Global Resources Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the State Street Research shareholders on January 25, 2005. In connection with the reorganization, the BlackRock Global Resources Portfolio inherited the financial statements and performance history of the State Street Research Global Resources Fund. Under the Agreement and Plan of Reorganization, 10,780,681 Class A shares, 837,566 Class B shares and 50,252 Class R shares, respectively, of the State Street Research Global Resources Fund, respectively, were exchanged for 10,780,681, 771,353 and 50,135 Investor A Class shares, respectively, of the BlackRock Global Resources Portfolio; 1,831,450 Class B(1) shares of the State Street Research Global Resources Fund were exchanged for 1,831,450 Investor B Class shares of the BlackRock Global Resources Portfolio; 3,254,401 Class C shares of the State Street Research Global Resources Fund were exchanged for 3,254,401 Investor C Class shares of the BlackRock Global Resources Portfolio and 496,483 Class S shares of the State Street Research Global Resources Fund were exchanged for 496,483 Institutional Class shares of the BlackRock Global Resources Portfolio. The BlackRock Global Resources Portfolio commenced operations on this date as result of this tax free reorganization.

38

BLACKROCK FUNDS

On January 31, 2005, the BlackRock Health Sciences Portfolio acquired all of the assets and certain liabilities of the State Street Research Health Sciences Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the State Street Research shareholders on January 25, 2005. In connection with the reorganization, the BlackRock Health Sciences Portfolio inherited the financial statements and performance history of the State Street Research Health Sciences Fund. Under the Agreement and Plan of Reorganization, 3,820,487 Class A shares and 131,841 Class B shares of the State Street Research Health Sciences Fund, respectively, were exchanged for 3,820,487 and 127,224 Investor A Class shares, respectively, of the BlackRock Health Sciences Portfolio; 1,472,908 Class B(1) shares of the State Street Research Health Sciences Fund were exchanged for 1,472,908 Investor B Class shares of the BlackRock Health Sciences Portfolio; 1,252,534 Class C shares of the State Street Research Health Sciences Fund were exchanged for 1,252,534 Investor C Class shares of the BlackRock Health Sciences Portfolio and 220,864 Class S shares of the State Street Research Health Sciences Fund were exchanged for 220,864 Institutional Class shares of the BlackRock Health Sciences Portfolio. The BlackRock Health Sciences Portfolio commenced operations on this date as result of this tax free reorganization.

On January 31, 2005, the BlackRock Balanced Portfolio acquired all of the assets and certain stated liabilities of the State Street Research Asset Allocation Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the State Street Research shareholders on January 25, 2005. In connection with the reorganization, the BlackRock Balanced Portfolio was renamed the BlackRock Asset Allocation Portfolio, and such Portfolio inherited the financial statements and performance history of the State Street Research Asset Allocation Fund. Under the Agreement and Plan of Reorganization, 37,438,832 Class A shares and 6,889,251 Class B shares, respectively, of the State Street Research Asset Allocation Fund were exchanged for 26,952,783 and 4,939,881 Investor A Class shares, respectively, of the BlackRock Asset Allocation Portfolio; 14,031,032 Class B(1) shares of the State Street Research Asset Allocation Fund were exchanged for 10,147,408 Investor B Class shares of the BlackRock Asset Allocation Portfolio; 5,724,613 Class C shares of the State Street Research Asset Allocation Fund were exchanged for 4,163,391 Investor C Class shares of the BlackRock Asset Allocation Portfolio; and 1,535,958 Class S shares of the State Street Research Asset Allocation Fund were exchanged for 1,104,199 Institutional Class shares of the BlackRock Asset Allocation Portfolio. The assets of the State Street Research Asset Allocation Fund, which consisted of securities and related receivables less liabilities, were converted on a tax-free basis. Upon the reorganization of such funds on January 31, 2005, the value of the BlackRock Asset Allocation Portfolio’s net assets (including $118,597,457 in net assets of the former BlackRock Balanced Portfolio, including $23,966,819 of unrealized appreciation, undistributed net investment income of $32,627 and undistributed net realized loss on investments of ($40,410,501), which was classified as paid-in-capital) was $808,215,456 before the open of business.

Accordingly, the information presented in the financial statements and related notes reflects operations of the predecessor State Street Research funds prior to January 31, 2005 and represents operations of the reorganized BlackRock funds following the consummation of the reorganization.

(C) Summary of Significant Accounting Policies

The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements.

Investment Valuation — Valuation of investments held by each Portfolio is as follows: investments traded on a national securities exchange or on the NASDAQ National Market System are valued at the last reported sale price that day or the NASDAQ official closing price, if applicable; investments traded on a national securities exchange for which there were no sales on that day and investments traded on other over-the-counter markets for which market quotations are readily available are valued at the mean of the bid and asked prices; and an option or futures contract is valued at the last sales price prior to 4:00 p.m. (Eastern time), as quoted on the principal exchange or board of trade on which such option or contract is traded, or in the absence of a sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern time). Fixed income securities are valued by a pricing service, which utilizes market transactions, quotations from dealers and various relationships among securities in determining value. The amortized cost method of valuation will be used with respect to debt obligations with sixty days or less remaining to maturity unless the investment adviser, under the supervision of the Board of Trustees, determines such method does not represent fair value. Any assets which are denominated in a non-U.S. currency are translated into U.S. dollars at the prevailing market rates. In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the market value of such investment, the investment will be valued by, under the direction of or in accordance with a method approved by the Board of Trustees as reflecting fair value (“Fair Value Assets”). The investment adviser and/or

39

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

sub-adviser will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to a valuation committee. Such valuation committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to and ratified by the Board of Trustees.

When determining the price for a Fair Value Asset, the investment adviser and/or sub-adviser shall seek to determine the price that the Portfolio might reasonably expect to receive from the current sale of that asset in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that BlackRock Advisors deems relevant.

Dividends to Shareholders — Dividends from net investment income, which are recorded on the ex-dividend date, are declared and paid quarterly for the Portfolios. Net realized capital gains, if any, are distributed at least annually.

Foreign Currency Translation — The books and records of the Portfolios are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis:

(I) market value of investment securities, assets and liabilities at the current rate of exchange; and

(II) purchases and sales of investment securities, income and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions.

The Portfolios do not isolate that portion of gains and losses on investment securities which is due to changes in the foreign exchange rates from that which is due to changes in the market prices of such securities. The Portfolios report forward foreign currency related transactions as components of realized gains for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes.

Forward Foreign Currency Contracts — Certain Portfolios may enter into forward foreign currency contracts as a hedge against either specific transactions or portfolio positions. These contracts are adjusted by the daily forward exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settlement date. Such contracts, which protect the value of the Portfolios’ investment securities against a decline in the value of currency, do not eliminate fluctuations in the underlying prices of the securities. They simply establish an exchange rate at a future date. Also, although such contracts tend to minimize the risk of loss due to a decline in the value of a hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of such foreign currency increase. Risks may arise upon entering into these contracts from the potential inability of counterparts to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar.

Swap Agreements — The Portfolios may invest in swap agreements for the purpose of hedging against changes in interest rates or foreign currencies. Swap agreements involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest (i.e., an exchange of floating rate payments for fixed rate payments) with respect to a notional amount of principal. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as an unrealized gain or loss in the Statement of Operations. Net payments of interest are recorded as interest income. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest and/or exchange rates.

40

BLACKROCK FUNDS

At February 28, 2005, the Asset Allocation Portfolio had the following swap agreements outstanding:

Portfolio	Counter-party	Termination Date	Interest Receivable Rate		Interest Payable Rate		Notional Amount (U.S. Dollars)		Unrealized Appreciation (Depreciation)
Asset Allocation	Merrill Lynch	07/31/2005	2.29	%1	2.45	%2	$	700,000	$	(10,963	)
	Morgan Stanley	06/14/2006	3.22		2.48			2,145,000		(10,486	)
	Union Bank of Switzerland	08/14/2006	2.64		2.29	3		1,500,000		(22,723	)
	Morgan Stanley	11/17/2006	2.81		3.22	3		2,100,000		(4,554	)
	Union Bank of Switzerland	01/21/2010	2.68	3	4.10			150,000		(1,644	)
	Morgan Stanley	06/14/2014	2.48	3	5.31			600,000		(29,270	)
	Merrill Lynch	07/22/2014	2.68	3	4.93			600,000		(10,524	)
	Goldman Sachs	10/01/2014	2.56		4.51			600,000		1,724
	Merrill Lynch	07/29/2019	2.74		5.37	3		100,000		(4,625	)
	Merrill Lynch	08/13/2019	5.16	3	2.29			125,000		2,879
	Merrill Lynch	10/27/2019	4.78		2.70			100,000		(646	)
	Deutsche Bank	08/15/2023	2.79		5.23			1,550,000		(32,131	)

¹ Rate shown is based on Lehman CMBS 8.5+ YR INDEX as of the most recent payment date.

² Rate shown is based on the 1 month LIBOR as of the most recent payment date.

³ Rate shown is based on the 3 month LIBOR as of the most recent payment date.

Investment Transactions and Investment Income — Investment transactions are accounted for on the trade date. The cost of investments sold and the related gain or loss thereon is determined by use of the specific identification method for both financial reporting and federal income tax purposes. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are accreted or amortized, respectively, for book and tax purposes using the effective yield-to-maturity method over the term of the instrument. Dividends are recorded on the ex-dividend date. Paydown gains and losses on mortgage and asset-backed securities are presented as an adjustment to interest income.

Repurchase Agreements — Money market instruments may be purchased from banks and non-bank dealers subject to the seller’s agreement to repurchase them at an agreed upon date and price. Collateral for repurchase agreements may have longer maturities than the maximum permissible remaining maturity of portfolio investments. The seller is required on a daily basis to maintain the value of the securities subject to the agreement at not less than the repurchase price. The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system or held in a separate account by the Fund’s custodian or an authorized securities depository.

Reverse Repurchase Agreements — The Portfolios may enter into reverse repurchase agreements with qualified third party brokers-dealers as determined by and under the direction of the Fund’s Board of Trustees. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance and is included within the related liability on the Statement of Assets and Liabilities. At the time the Portfolio enters into a reverse repurchase agreement, it identifies for segregation certain liquid securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement.

Futures Transactions — The Portfolios may invest in financial futures contracts for the purposes of hedging their existing portfolio securities, or securities that the Portfolios intend to purchase, against fluctuations in value caused by changes in prevailing market interest rates. The Portfolios invest in futures contracts and options on futures contracts to commit funds awaiting investments in stocks or to maintain cash liquidity or, except with respect to the Index Equity Portfolio, for other hedging purposes. Certain Portfolios may also invest in these instruments to increase returns. These Portfolios’ futures contracts obligate a Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. Upon entering into a futures contract, the Portfolio is required to deposit cash or pledge securities as initial margin. Subsequent payments, which are dependent on the daily fluctuations in the value of the underlying security or securities, are made or received by the Portfolio each day (daily variation margin) and are recorded as unrealized gains or losses until the contracts are closed. When the contracts are closed, the Portfolio records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Portfolio’s basis in the contracts. Risks of entering into futures contracts include the possibility that there will not be a perfect price correlation between the futures contracts and the underlying securities. Second, it is possible that a lack of liquidity for futures contracts could exist in the market, resulting in an inability to

41

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

liquidate a futures position prior to its maturity date. Third, the purchase of a futures contract involves the risk that a Portfolio could lose more than the original margin deposit required to initiate a futures transaction.

Stripped Mortgage Backed Securities — The Asset Allocation Portfolio may invest in stripped mortgage-backed securities issued by the U.S. Government, its agencies and instrumentalities. Stripped mortgage-backed securities are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. In certain cases, one class will receive all of the interest (the interest-only or “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). The yield to maturity on IO’s is sensitive to the rate of principal repayments (including prepayments) on the related underlying mortgage assets, and principal payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Portfolio may not fully recoup its initial investment in IO’s. Such securities will be considered liquid only if so determined in accordance with guidelines approved by the Trustees. The Portfolio also may invest in stripped mortgage-backed securities that are privately issued. These securities will be considered illiquid for purposes of the Portfolio’s limit on illiquid securities.

Investing in Government Sponsored Enterprises — The Asset Allocation Portfolio invests in securities issued by the Federal Home Loan Mortgage Corp. (“Freddie Mac”) and similar United States Government sponsored entities such as Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Banks (“FHLB’s”). Freddie Mac, Fannie Mae, and FHLB’s, although chartered and sponsored by Congress, are not funded by Congressional appropriations and the debt and mortgage-backed securities issued by Freddie Mac, Fannie Mae and FHLB’s are neither guaranteed nor insured by the United States Government.

Option Writing/Purchasing — The Portfolios may write or purchase financial options contracts for the purpose of hedging or earning additional income, which may be deemed speculative. When the Portfolio writes or purchases an option, an amount equal to the premium received or paid by the Portfolio is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options, which expire, unexercised are treated by the Portfolio on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commissions, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or proceeds from the sale in determining whether the Portfolio has realized a gain or loss on investment transactions. The Portfolio, as writer of an option may have no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option.

Swaptions Writing — The Portfolios may write swaption contracts to manage exposure to fluctuations in interest rates and to enhance portfolio yield. Swaption contracts written by the Portfolios represent an option that gives the purchaser the right, but not the obligation, to enter into a previously agreed upon swap contract on a future date. If a written call swaption is exercised, the writer will enter a swap and is obligated to pay the fixed rate and receive a floating rate in exchange. If a written put swaption is exercised, the writer will enter a swap and is obligated to pay the floating rate and receive a fixed rated in exchange. Swaptions are marked to market daily based upon quotations from market makers.

When a portfolio writes a swaption, the premium received is recorded as a liability and is subsequently adjusted to the current market value of the swaption. Changes in the value of the swaption are reported as unrealized gains or losses in the Statement of Assets and Liabilities or Statement of Net Assets. Gain or loss is recognized when the swap-tion contract expires or is closed. Premiums received from writing swaptions that expire or are exercised are treated by the Portfolio as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss.

Entering into a swaption contract involves, to varying degrees, the elements of credit, market and interest rate risk associated with both option contracts and swap contracts. To reduce credit risk from potential counterparty default, the Portfolios enter into swaption contracts with counterparties whose creditworthiness has been evaluated by BlackRock. The Portfolios bear the market risk arising from any change in index values or interest rates.

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BLACKROCK FUNDS

Written Option and Swaption transactions entered into by the Portfolios during the period ended February 28, 2005, are summarized as follows:

	HEALTHSCIENCES PORTFOLIO					ASSET ALLOCATION PORTFOLIO
	NUMBER OF CONTRACTS		PREMIUM			NUMBER OF CONTRACTS		PREMIUM
Balance at beginning of period*	—		$	—		(414	)	$	551,636
Written	—			—		(2,107	)		2,011,209
Purchased	1,170			223,307		854			(1,086,358	)
Expired	(420	)		(61,677	)	120			(13,320	)
Closed	(750	)		(161,630	)	1,304			(1,383,886	)
Exercised	—			—		—			—
Balance at 02/28/05	—		$	—		(243	)	$	79,281

* Beginning of period was 2/28/04 for Health Sciences Portfolio and 3/31/04 for Asset Allocation Portfolio.

TBA Commitments — The Portfolios may enter into “TBA” (to be announced) purchases or sell securities for a fixed price at a future date. TBA commitments are considered securities in themselves, and involve a risk of loss if the value of the security to be purchased/sold declines/increases prior to settlement date, which is in addition to the risk of decline in the value of the Portfolio’s other assets. Unsettled TBA commitments are valued at the current market value of the underlying securities, according to the procedures described under “Security Valuation.”

Mortgage Dollar Rolls — The Asset Allocation Portfolio may enter into mortgage dollar rolls (principally using TBA’s) in which the Portfolio sells mortgage securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities at an agreed-upon price on a fixed date. The Portfolio accounts for such dollar rolls as purchases and sales and receives compensation, in either “fee” or “drop”, as consideration for entering into the commitment to repurchase. The Portfolio must maintain liquid securities having a value not less than the repurchase price (including accrued interest) for such dollar rolls. The market value of the securities that the Portfolio is required to purchase may decline below the agreed upon repurchase price of those securities.

In a “fee” roll, the compensation received is recorded as deferred income and amortized to income over the roll period. In a “drop” roll, the compensation is paid via a lower price for the security upon its repurchase. The counterparty receives all principal and interest payments, including prepayments, made in respect of a security subject to such a contract while it is the holder. Mortgage dollar rolls may be renewed with a new purchase and repurchase price and a cash settlement made on settlement date without physical delivery of the securities subject to the contract. A Portfolio engages in dollar rolls for the purpose of enhancing its yield, principally by earning a negotiated fee.

Financing Transactions — The Portfolios may enter into financial transactions consisting of the sale by the Portfolio of securities, together with a commitment to repurchase similar securities at a future date. The difference between the selling price and the future purchase price is an adjustment to interest income. If the counterparty to whom the Portfolio sells the security becomes insolvent, the Portfolio’s right to repurchase the security may be restricted. The value of the security may change over the term of the financing transaction.

Inflation-indexed Bonds — Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal.

Securities Lending — Prior to January 31, 2005, State Street Bank and Trust Co. served as the funds’ securities lending agent. The fund received cash or securities as collateral in an amount equal to at least 100% of the market value of any loaned securities plus accrued interest. Cash collateral was invested in State Street Navigator Securities Lending Prime Portfolio. Effective January 31, 2005, through an agreement with PFPC Trust Co., the Portfolios may lend portfolio securities to certain brokers, dealers or other financial institutions that pay the Portfolios a negotiated fee. Prior to the close of each business day, loans of U.S. securities are secured by collateral at least equal to 102% of the market value of the securities on loan. Loans of foreign securities are secured by collateral at least equal to 105% of the market value of securities on loan. However, due to market fluctuations, the value of the securities lent may exceed

43

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

the value of the collateral. On the next business day, the collateral is adjusted based on the prior day’s market fluctuations and the current day’s lending activity. Cash collateral received in connection with the securities lending is invested in short-term investments by the lending agent. The lending agent has hired BlackRock Capital Management, Inc. (“BCM”), a wholly-owned subsidiary of BlackRock, Inc., and pays BCM to provide advisory services with respect to the collateral of all of the clients of its securities lending program. The lending agent may invest such collateral in short-term investments, including the Institutional Money Market Trust (the “Trust”), a portfolio of money market securities, or high-quality, short-term instruments with a maturity date not to exceed 397 days. BCM serves as investment adviser to the Trust, but receives no fees from the Trust for these services. Administrative and accounting services are provided by PFPC Inc. (“PFPC”), an indirect wholly-owned subsidiary of The PNC Financial Services Group, Inc. PFPC, is paid a fee from the Trust at an annual rate not to exceed 0.10% of the Trust’s average daily net assets. At February 28, 2005, the market value of securities on loan, cash collateral invested in the Trust and total value of collateral held in connection with securities lending is summarized as follows:

	MARKET VALUE OF SECURITIES ON LOAN		MARKET VALUE OF CASH COLLATERAL INVESTED IN THE TRUST		TOTAL MARKET VALUE OF COLLATERAL RECEIVED
Mid-Cap Value Equity	$	12,690,994	$	8,642,025	$	13,207,723
Global Resources		35,713,489		31,976,486		35,128,077
Health Sciences		11,458,179		11,803,392		12,988,240
Asset Allocation		41,093,179		33,875,926		43,738,041

In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings.

Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) requires the use of management estimates. Actual results could differ from these estimates.

Other — Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuations in exchange rates.

Some countries in which the Portfolios invest require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if there is a deterioration in a country’s balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad.

The securities exchanges of certain foreign markets are substantially smaller, less liquid and more volatile than the major securities markets in the United States. Consequently, acquisition and disposition of securities by the Portfolios may be inhibited. In addition, a significant proportion of the aggregate market value of equity securities listed on the major securities exchanges in emerging markets are held by a smaller number of investors. This may limit the number of shares available for acquisition or disposition by the Portfolios.

Expenses that are directly related to one of the Portfolios are charged directly to that Portfolio. Other operating expenses are prorated to the Portfolios on the basis of relative net assets. Class-specific expenses are borne by that class. Differences in net expense ratios between classes of a Portfolio are due to class-specific expenses, waivers and accrual adjustments. Income, other expenses and realized and unrealized gains and losses of a Portfolio are allocated to the respective class on the basis of the relative net assets each day.

44

BLACKROCK FUNDS

The following table provides a list of the Portfolios included in this report along with a summary of their respective class-specific fee arrangements as provided under the Fund’s Amended and Restated Distribution and Service Plan (the “Plan”). Fees are expressed as a percentage of average daily net asset values of the respective classes.

The following table provides a list of the Portfolios and a summary of their respective Class-Specific Fee Arrangements as provided under the Fund’s Distribution and Service Plan:

Class Specific Fee Arrangements

		Share Classes
		Institutional		Service				Investor A				Investor B				Investor C
Portfolio	Period	Contractual Fees	Actual Fees (5)	Contractual Fees		Actual Fees (5)		Contractual Fees (1)		Actual Fees (5)		Contractual Fees (4)		Actual Fees (5)		Contractual Fees (3)		Actual Fees (5)
Mid-Cap Value Equity	Pre-January 31, 2005	None	None	N/A		N/A		0.30	%2	0.30	%	1.00	%	1.00	%	1.00	%	1.00	%
	Post-January 31, 2005	None	None	0.25	%	0.25	%	0.35	%3	0.25	%	1.00	%	1.00	%	1.00	%	1.00	%
Global Resources	Pre-January 31, 2005	None	None	N/A		N/A		0.30	%2	0.30	%	1.00	%	1.00	%	1.00	%	1.00	%
	Post-January 31, 2005	None	None	N/A		N/A		0.35	%3	0.25	%	1.00	%	1.00	%	1.00	%	1.00	%
Health Sciences	Pre-January 31, 2005	None	None	N/A		N/A		0.30	%2	0.30	%	1.00	%	1.00	%	1.00	%	1.00	%
	Post-January 31, 2005	None	None	0.25	%	0.25	%	0.35	%3	0.25	%	1.00	%	1.00	%	1.00	%	1.00	%
Asset Allocation	Pre-January 31, 2005	None	None	N/A		N/A		0.30	%2	0.30	%	1.00	%	1.00	%	1.00	%	1.00	%
	Post-January 31, 2005	None	None	0.25	%	0.25	%	0.35	%3	0.25	%	1.00	%	1.00	%	1.00	%	1.00	%

(1) —	The maximum annual contractual fees are comprised of a 0.25% service fee.
(2) —	The maximum annual contractual fees were comprised of a 0.05% distribution fee and a 0.25% service fee prior to January 31, 2005 and are comprised of a 0.10% distribution fee and a 0.25% service fee after January 31, 2005.
(3) —	The maximum annual contractual fees are comprised of a 0.10% distribution fee and a 0.25% service fee.
(4) —	The maximum annual contractual fees are comprised of a 0.75% distribution fee and a 0.25% service fee.
(5) —	The actual fees are as of February 28, 2005 for Post-January 31, 2005 and January 31, 2005 for Pre-January 31, 2005.

Effective January 31, 2005, each of the Institutional, Service, Investor A, Investor B and Investor C share classes bear a Transfer Agent fee at an annual rate not to exceed 0.018% of the average daily net assets of such respective classes plus per account fees and disbursements.

For the periods ended February 28, 2005, the following tables show the various types of class-specific expenses borne directly by each class of each Portfolio and any associated waivers of those expenses.

ADMINISTRATION FEES	SHARE CLASSES
	INSTITUTIONAL			SERVICE			INVESTOR A			INVESTOR B			INVESTOR C			TOTAL
Mid-Cap Value Equity	$	5,915		$	167		$	55,336		$	15,736		$	11,356		$	88,510
Global Resources		3,311			—			75,000			10,842			19,381			108,534
Health Sciences		548			—			10,092			3,640			3,107			17,387
Asset Allocation		3,557			273			65,052			23,086			8,109			100,077
ADMINISTRATION FEES WAIVED	SHARE CLASSES
	INSTITUTIONAL			SERVICE			INVESTOR A			INVESTOR B			INVESTOR C			TOTAL
Mid-Cap Value Equity	$	(5,798	)	$	(164	)	$	(54,626	)	$	(15,549	)	$	(11,356	)	$	(87,493	)
Global Resources		(1,525	)		—			(7,517	)		(5,009	)		(8,808	)		(22,859	)
Health Sciences		(35	)		—			—			(199	)		(137	)		(371	)
Asset Allocation		(3,557	)		(178	)		—			—			—			(3,735	)
TRANSFER AGENT FEES	SHARE CLASSES
	INSTITUTIONAL			SERVICE			INVESTOR A			INVESTOR B			INVESTOR C			TOTAL
Mid-Cap Value Equity	$	734		$	21		$	6,869		$	1,953		$	1,410		$	10,987
Global Resources		411			—			9,434			1,346			2,406			13,597
Health Sciences		68			—			1,252			452			386			2,158
Asset Allocation		442			34			8,106			2,866			1,007			12,455

45

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

SHAREHOLDER SERVICE FEES	SHARE CLASSES
	SERVICE		INVESTOR A		INVESTOR B		INVESTOR C		TOTAL
Mid-Cap Value Equity	$	289	$	707,636	$	189,907	$	149,229	$	1,047,061
Global Resources		—		844,030		127,171		227,285		1,198,486
Health Sciences		—		175,740		66,989		45,653		288,382
Asset Allocation		471		965,075		329,630		122,527		1,417,703

DISTRIBUTION FEES	SHARE CLASSES
	INVESTOR A		INVESTOR B		INVESTOR C		TOTAL
Mid-Cap Value Equity	$	156,880	$	569,722	$	447,687	$	1,174,289
Global Resources		356,662		381,512		681,871		1,420,045
Health Sciences		59,200		200,968		136,959		397,127
Asset Allocation		202,457		988,889		367,581		1,558,927

DISTRIBUTION FEES WAIVED	SHARE CLASS
	INVESTOR A
Mid-Cap Value Equity	$	(38,049	)
Global Resources		(52,480	)
Health Sciences		(6,915	)
Asset Allocation		(45,002	)

The distribution fees for the Investor A share class include accruals for the State Street Research Class B shares for the period prior to the Reorganization on January 31, 2005, for the Health Sciences and Asset Allocation Portfolios; and for State Street Research Class B and R share classes for the Mid-Cap Value and Global Resources Portfolios.

46

BLACKROCK FUNDS

(D) Transactions with Affiliates and Related Parties

Prior to January 31, 2005, State Street Research Mid-Cap Value Fund, Health Sciences Fund, Global Resources Fund and Asset Allocation Fund entered in an agreement with SSRM to provide management advisory, statistical and research facilities and services. Fees were earned monthly at the following annual rates:

State Street Research Mid-Cap Value Fund — 0.65% of net assets

State Street Research Health Sciences Fund — 0.75% of net assets

State Street Research Global Resources Fund — 0.75% of net assets

State Street Research Asset Allocation Fund — 0.75% of the first $500 million of net assets annually, 0.70% of the next $500 million, and 0.65% of any amount over $1 billion.

Effective January 31, 2005, pursuant to an Investment Advisory Agreement, BlackRock, a wholly-owned subsidiary of BlackRock, Inc., serves as investment adviser for each of the Portfolios. BlackRock Financial Management, Inc. (“BFM”), a wholly-owned subsidiary of BlackRock, serves as the sub-adviser for the Asset Allocation Portfolio. BlackRock, Inc. is an indirect majority-owned subsidiary of The PNC Financial Services Group, Inc.

For its advisory services, BlackRock is entitled to receive fees at the following annual rates, computed daily and payable monthly, based on each Portfolio’s average daily net assets:

Asset Allocation Portfolio — 0.55% of the first $1 billion, 0.50% of the next $1 billion, 0.475% of the next $1 billion and 0.45% of net assets in excess of $3 billion.

Mid-Cap Value Equity Portfolio — 0.80% of the first $1 billion, 0.70% of the next $1 billion, 0.675% of the next $1 billion and 0.625% of net assets in excess of $3 billion.

Global Resources and Health Sciences Portfolios — 0.75% of the first $1 billion, 0.70% of the next $1 billion, 0.675% of the next $1 billion and 0.65% of net assets in excess of $3 billion.

For the periods ended February 28, 2005, advisory fees and waivers for each Portfolio were as follows:

	GROSS ADVISORY FEE		WAIVER		NET ADVISORY FEE
Mid-Cap Value Equity	$	3,038,640	$	61,303	$	2,977,337
Global Resources		3,718,767		—		3,718,767
Health Sciences		902,820		—		902,820
Asset Allocation		4,533,788		3,438		4,530,350

These Portfolio advisory fees are paid to BlackRock as of January 31, 2005. Prior to that date the fees were paid to the respective adviser of the predecessor funds. See Note (B) for more information on the Reorganizations.

In the interest of limiting the expenses of the Portfolios, BlackRock and the Fund have entered into annual expense limitation agreements. The agreements set a limit on certain operating expenses of each Portfolio for the next year and require BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit. These expense limits apply to the aggregate expenses incurred on a share class (excluding: interest, taxes, brokerage commissions, other expenditures which are capitalized in accordance with generally accepted accounting principles and other extraordinary expenses).

Effective February 1, 2005, BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit expenses:

PORTFOLIO	SHARE CLASSES
	INSTITUTIONAL		SERVICE		INVESTOR A		INVESTOR B		INVESTOR C
Mid-Cap Value Equity	1.00	%	1.25	%	1.25	%	2.00	%	2.00	%
Global Resources	1.04	%	1.34	%	1.34	%	2.04	%	2.04	%
Health Sciences	1.25	%	1.55	%	1.55	%	2.25	%	2.25	%
Asset Allocation	0.86	%	1.16	%	1.33	%	2.08	%	2.08	%

Prior to January 31, 2005, the State Street Research Health Sciences and Mid-Cap Value Funds limited expenses to 1.25% (plus 12b-1 fees) and 1.00% (plus 12b-1 fees), respectively.

If in the following two years the operating expenses of a share class that previously received a waiver or reimbursement from BlackRock are less than the expense limit for that share class, the share class is required to repay

47

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

BlackRock up to the amount of fees waived or expenses reimbursed under the agreement if: (1) the Portfolio of which the share class is a part has more than $50 million in assets, (2) BlackRock continues to be the Portfolio’s investment adviser and (3) the Board of Trustees of the Fund has approved the payments to BlackRock at the previous quarterly meeting.

At February 28, 2005, the amounts subject to possible future reimbursement under the expense limitation agreement are as follows:

	EXPIRING JANUARY 31, 2008		TOTAL WAIVERS SUBJECT TO REIMBURSEMENT
Mid-Cap Value Equity	$	148,796	$	148,796
Global Resources		22,859		22,859
Health Sciences		371		371
Asset Allocation		7,173		7,173

BlackRock pays BFM fees for its sub-advisory services.

Prior to January 31, 2005, each fund paid SSRM for certain administrative costs incurred in providing other assistance and services to each fund. The fee was based on actual costs allocated equally among the State Street Research funds. Effective January 31, 2005, PFPC and BlackRock act as co-administrators for the Fund. For these services, the co-administrators receive a combined administration fee computed daily and payable monthly, based on a percentage of the average daily net assets of each Portfolio, at the following annual rates: 0.085% of the first $500 million, 0.075% of the next $500 million and 0.065% of assets in excess of $1 billion. In addition, each of the share classes is charged an administration fee based on the following percentage of average daily net assets of each respective class: 0.145% of the first $500 million, 0.135% of the next $500 million and 0.125% of assets in excess of $1 billion.

For the periods ended February 28, 2005, administration fees and waivers for each Portfolio were as follows:

	GROSS ADMINISTRATION FEE		WAIVER		NET ADMINISTRATION FEE
Mid-Cap Value Equity	$	203,401	$	87,493	$	115,908
Global Resources		225,146		22,859		202,287
Health Sciences		126,443		371		126,072
Asset Allocation		249,068		3,735		245,333

These Portfolio administration fees are paid to PFPC and BlackRock beginning January 31, 2005. Prior to that date the fees were paid to the respective administrator of the predecessor funds. See Note B for more information on the Reorganization.

Prior to January 31, 2005, State Street Bank and Trust Co. served as the State Street Research Funds’ custodian and record keeper. Effective January 31, 2005, PFPC Trust Co. serves as custodian for each of the Fund’s Portfolios. Prior to January 31, 2005, Boston Financial Data Services, Inc. served as the State Street Research Funds’ transfer agent. Effective January 31, 2005, PFPC serves as transfer and dividend disbursing agent.

Prior to January 31, 2005, State Street Research Service Center, a division of State Street Research Investment Services, Inc., the State Street Research Funds’ principal underwriter, provided certain shareholder services to the State Street Research Funds, such as responding to inquiries and instructions from investors with respect to the purchase and redemption of shares of the funds. For the period ended January 28, 2005, the State Street Research Funds paid $110,026, $535,310, $290,168 and $493,146 for Health Sciences, Mid-Cap Value Equity, Global Resources and Asset Allocation Funds, respectively. Subsequent to January 31, 2005, BlackRock operated an investor service center on behalf of the Portfolios. Pursuant to the Fund’s Amended and Restated Distribution and Service Plan (the “Plan”), the Fund may pay BlackRock Distributors, Inc. (the “Distributor”) and/or BlackRock or any other affiliate of The PNC Financial Services Group, Inc. fees for distribution and sales support services. Currently, only Investor A Class Shares, Investor B Class Shares and Investor C Class Shares bear the expense of distribution fees under the Plan. In addition, the Fund may pay brokers, dealers, financial institutions and industry professionals (including The

48

BLACKROCK FUNDS

PNC Financial Services Group, Inc. and its affiliates) (“service organizations”) fees for the provision of personal services to shareholders. BlackRock may receive some of the service fees paid by the Fund in return for providing services to shareholders.

As of the periods ended February 28, 2005, affiliated payables were as follows:

	PFPC(1)		BLACKROCK(2)		PNCBANK AFFILIATES(3)
Mid-Cap Value Equity	$	133,940	$	398,963	$	256,110
Global Resources		107,834		609,888		310,381
Health Sciences		27,713		99,119		57,987
Asset Allocation		164,294		434,172		296,646

(1) —	Payables to PFPC and PFPC Trust Co. are for Accounting, Administration, Custody and Transfer Agent services provided as of February 28, 2005.
(2) —	Payables to BlackRock are for Advisory and Administration services provided as of February 28, 2005.
(3) —	Payables to The PNC Financial Services Group, Inc. are for distribution and sales support services as described under the Plan. The total payable on behalf of the Fund, as of February 28, 2005, was $5,098,183, a portion of which is paid to service organizations, including The PNC Financial Services Group, Inc.

The State Street Research Fund’s distributor, State Street Research Investment Service, Inc. from time to time and in varying amounts, voluntarily assumed some portion of fees or expenses relating to the State Street Research Funds. During the period ended January 31, 2005, the amount of such expenses assumed by State Street Research Service Investment Service, Inc. were $271,500 and $162,313 for the Mid-Cap Value Equity and Health Sciences Funds, respectively.

Prior to January 31, 2005, State Street Research Investment Service, Inc. reimbursed a total of $91,069 and $294,508 to the State Street Research Mid-Cap Value and Asset Allocation Funds, respectively, reflecting the estimated excess of payments received over costs incurred under the plan. This amount is shown as “Reimbursement of distribution fees” in the Statement of Operations.

Prior to January 31, 2005, SSRM conducted an internal review regarding the use of fund brokerage commissions in consideration of the distribution of shares. In connection with this review, SSRM determined to reimburse the funds the entire amount of any such identified brokerage commissions, and reviewed this matter with the Board of Trustees of the funds. The amount of reimbursement in the State Street Research Mid-Cap Value Fund, State Street Research Global Resources Fund and State Street Research Asset Allocation Funds amounted to $144,758, $12,780 and $41,520, respectively, and are shown as “Net increase from payment by affiliate” on the Statement of Operations.

Prior to January 31, 2005, SSRM reimbursed the State Street Research Mid-Cap Value Equity and Asset Allocation Funds $409,472 and $49,054, respectively, as a result of a corporate action processing error. This amount is included in the total amount of “Net increase from payment by affiliate” on the Statement of Operations.

(E) Purchases and Sales of Securities

For the periods ended February 28, 2005, purchases and sales of securities, other than short-term investments, dollar rolls and U.S. government securities, were as follows:

	PURCHASES		SALES
Mid-Cap Value Equity	$	357,164,267	$	411,837,145
Global Resources		161,040,180		181,251,780
Health Sciences		231,263,499		192,740,797
Asset Allocation		701,310,078		678,816,076

For the periods ended February 28, 2005, purchases and sales of U.S. government securities were as follows:

	PURCHASES		SALES
Asset Allocation	$	99,264,237	$	116,985,560

49

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(F) Capital Shares

Transactions in capital shares for each period were as follows:

	MID-CAP VALUE EQUITY
	FOR THE PERIOD 7/1/04 THROUGH 2/28/05					FOR THE YEAR ENDED 6/30/2004
	SHARES		VALUE			SHARES		VALUE
Net change in shares from reorganization:(1)
State Street Research Fund:
Institutional Class (Formerly Class S)	923,822		$	—		—		$	—
Investor A Class (Formerly Class A, Class B and Class R)	13,319,536			—		—			—
Investor B Class (Formerly Class B(1))	3,942,678			—		—			—
Investor C Class (Formerly Class C)	2,992,071			—		—			—
BlackRock Fund:
Institutional Class (Formerly Class S)	1,247,151			15,137,406		—			—
Service Class	109,386			1,317,419		—			—
Investor A Class (Formerly Class A, Class B and Class R)	385,111			4,599,212		—			—
Investor B Class (Formerly Class B(1))	665,825			7,539,866		—			—
Investor C Class (Formerly Class C)	244,284			2,766,217		—			—
Shares sold:
Institutional Class (Formerly Class S)	1,344,505			18,173,943		468,759			7,741,584
Service Class	1,813			22,497		—			—
Investor A Class (Formerly Class A, Class B and Class R)	7,009,420			126,713,520		10,977,111			187,930,330
Investor B Class (Formerly Class B(1))	732,609			12,944,207		956,816			15,709,737
Investor C Class (Formerly Class C)	1,411,687			25,304,297		1,323,060			22,013,072
Shares issued in reinvestment of dividends:
Institutional Class (Formerly Class S)	112,046			2,202,945		13,906			234,742
Investor A Class (Formerly Class A, Class B and Class R)	1,419,250			27,659,321		89,918			1,507,074
Investor B Class (Formerly Class B(1))	313,255			5,942,189		—			—
Investor C Class (Formerly Class C)	190,603			3,632,426		—			—
Shares redeemed:
Institutional Class (Formerly Class S)	(1,260,543	)		(17,700,748	)	(732,645	)		(12,486,339	)
Service Class	(2,405	)		(30,059	)	—			—
Investor A Class (Formerly Class A, Class B and Class R)	(8,538,739	)		(149,448,063	)	(6,610,528	)		(108,711,069	)
Investor B Class (Formerly Class B(1))	(816,608	)		(13,838,156	)	(761,699	)		(12,440,660	)
Investor C Class (Formerly Class C)	(1,614,114	)		(27,306,220	)	(1,071,849	)		(17,471,644	)
Net Increase	24,132,643		$	45,632,219		4,652,849		$	84,026,827

⁽¹⁾ See Note (B).

50

BLACKROCK FUNDS

	GLOBAL RESOURCES
	FOR THE PERIOD 7/1/04 THROUGH 2/28/05					FOR THE YEAR ENDED 6/30/04
	SHARES		VALUE			SHARES		VALUE
Net change in shares from reorganization:(1)
State Street Research Fund:
Investor A Class (Formerly Class A, Class B and Class R)	(66,329	)	$	—		—		$	—
Shares sold:
Institutional Class (Formerly Class S)	148,500			6,997,371		271,772			9,113,747
Investor A Class (Formerly Class A, Class B and Class R)	3,470,009			159,385,219		10,307,500			339,803,562
Investor B Class (Formerly Class B(1))	274,083			11,326,726		896,835			26,709,892
Investor C Class (Formerly Class C)	551,493			23,517,245		2,236,902			68,602,549
Shares issued in reinvestment of dividends:
Institutional Class (Formerly Class S)	17,826			888,813		6,925			237,341
Investor A Class (Formerly Class A, Class B and Class R)	367,069			17,395,794		107,280			3,500,772
Investor B Class (Formerly Class B(1))	51,725			2,266,714		19,360			590,047
Investor C Class (Formerly Class C)	78,414			3,432,162		29,496			898,161
Shares redeemed:
Institutional Class (Formerly Class S)	(155,837	)		(7,836,183	)	(170,538	)		(5,251,269	)
Investor A Class (Formerly Class A, Class B and Class R)	(3,112,124	)		(133,160,606	)	(4,367,520	)		(134,940,591	)
Investor B Class (Formerly Class B(1))	(320,242	)		(13,400,554	)	(336,078	)		(10,133,803	)
Investor C Class (Formerly Class C)	(679,776	)		(28,334,096	)	(493,976	)		(14,602,129	)
Net increase	624,811		$	42,478,605		8,507,958		$	284,528,279

⁽¹⁾ See Note (B).

51

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

	HEALTH SCIENCES
	FOR THE YEAR ENDED 2/28/05					FOR THE YEAR ENDED 2/29/04
	SHARES		VALUE			SHARES		VALUE
Net change in shares from reorganization:(1)
State Street Research Fund:
Investor A Class (Formerly Class A, Class B and Class R)	(4,617	)	$	—		—		$	—
Shares sold:
Institutional Class (Formerly Class S)	128,213			2,671,247		183,218			3,639,921
Service Class	5			100		—			—
Investor A Class (Formerly Class A, Class B and Class R)	2,836,559			57,282,345		2,738,554			50,111,142
Investor B Class (Formerly Class B(1))	558,845			10,973,167		397,168			7,191,329
Investor C Class (Formerly Class C)	961,093			18,966,442		494,043			9,163,916
Shares issued in reinvestment of dividends:
Institutional Class (Formerly Class S)	12,094			257,622		3,043			58,784
Investor A Class (Formerly Class A, Class B and Class R)	148,553			3,118,081		57,770			1,103,393
Investor B Class (Formerly Class B(1))	64,065			1,311,510		31,705			594,591
Investor C Class (Formerly Class C)	25,134			512,969		8,373			156,831
Shares redeemed:
Institutional Class (Formerly Class S)	(171,969	)		(3,493,427	)	(31,546	)		(578,844	)
Investor A Class (Formerly Class A, Class B and Class R)	(1,971,584	)		(39,527,347	)	(967,899	)		(17,048,788	)
Investor B Class (Formerly Class B(1))	(234,528	)		(4,562,237	)	(130,198	)		(2,141,232	)
Investor C Class (Formerly Class C)	(236,874	)		(4,615,846	)	(77,584	)		(1,331,219	)
Net increase	2,114,989		$	42,894,626		2,706,647		$	50,919,824

⁽¹⁾ See Note (B).

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BLACKROCK FUNDS

	ASSET ALLOCATION
	FOR THE PERIOD 4/1/04 THROUGH 2/28/05					FOR THE YEAR ENDED 3/31/04
	SHARES		VALUE			SHARES		VALUE
Net change in shares from reorganization:(1)
State Street Research Fund:
Institutional Class (Formerly Class S)	(431,759	)	$	—		—		$	—
Investor A Class (Formerly Class A, Class B and Class R)	(12,435,419	)		—		—			—
Investor B Class (Formerly Class B(1))	(3,883,624	)		—		—			—
Investor C Class (Formerly Class C)	(1,561,222	)		—		—			—
BlackRock Fund:
Institutional Class (Formerly Class S)	756,058			11,073,022		—			—
Service Class	159,024			2,325,985		—			—
Investor A Class (Formerly Class A, Class B and Class R)	4,260,378			62,273,644		—			—
Investor B Class (Formerly Class B(1))	2,633,550			38,144,193		—			—
Investor C Class (Formerly Class C)	330,149			4,780,614		—			—
Shares sold:
Institutional Class (Formerly Class S)	843,355			11,040,921		290,764			2,764,953
Service Class	6,047			90,163		—			—
Investor A Class (Formerly Class A, Class B and Class R)	9,147,740			97,457,497		9,714,452			94,326,907
Investor B Class (Formerly Class B(1))	2,760,767			29,631,133		4,525,455			43,919,902
Investor C Class (Formerly Class C)	2,286,784			24,055,515		1,980,006			19,760,160
Shares issued in reinvestment of dividends:
Institutional Class (Formerly Class S)	115,141			1,215,396		38,395			376,594
Investor A Class (Formerly Class A, Class B and Class R)	2,609,782			27,513,302		665,521			6,521,284
Investor B Class (Formerly Class B(1))	666,138			6,990,057		84,483			817,086
Investor C Class (Formerly Class C)	149,839			1,581,290		23,301			225,953
Shares redeemed:
Institutional Class (Formerly Class S)	(1,243,828	)		(14,502,160	)	(476,957	)		(4,549,408	)
Service Class	(19,987	)		(296,380	)	—			—
Investor A Class (Formerly Class A, Class B and Class R)	(11,410,029	)		(125,727,173	)	(12,055,243	)		(115,596,398	)
Investor B Class (Formerly Class B(1))	(1,985,558	)		(22,062,236	)	(1,463,343	)		(14,138,963	)
Investor C Class (Formerly Class C)	(733,924	)		(8,157,124	)	(392,657	)		(3,818,212	)
Net increase (decrease)	(6,980,598	)	$	147,427,659		2,934,177		$	30,609,858

⁽¹⁾ See Note (B).

There is a 2% redemption fee on shares of the Portfolios redeemed or exchanged which have been held 90 days or less. The redemption fees are collected and retained by the Fund for the benefit of the remaining shareholders. The redemption fees are recorded as a credit to paid in capital.

On February 28, 2005, two shareholders held approximately 11% of the Mid-Cap Value Equity Portfolio, three shareholders held approximately 26% of the Global Resources Portfolio and one shareholder held approximately 8% of the Health Sciences Portfolio. Some of the shareholders are comprised of omnibus accounts, which are held on behalf of several individual shareholders.

53

BLACKROCK FUNDS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(G) At February 28, 2005, the Portfolio’s net assets consisted of:

	MID-CAP VALUE EQUITY			GLOBAL RESOURCES			HEALTH SCIENCES			ASSET ALLOCATION
Capital paid in	$	592,181,539		$	526,206,255		$	120,341,431		$	709,619,726
End of period distributions in excess of net investment income or accumulated net investment loss		(163,219	)		(5,178,168	)		—			(4,173,594	)
Accumulated net realized gain (loss) on investment transactions, futures contracts and foreign currency related transactions		20,800,210			49,100,281			(1,471,427	)		11,844,221
Net unrealized appreciation on investment transactions, futures contracts and foreign currency related transactions		107,400,084			399,670,833			16,684,872			96,184,259
	$	720,218,614		$	969,799,201		$	135,554,876		$	813,474,612

(H) Federal Tax Information

No provision is made for Federal taxes as it is the Fund’s intention to have each Portfolio continue to qualify for and elect the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended, and to make the requisite distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes. Short-term capital gain and foreign currency distributions that are reported in the Statement of Changes in Net Assets are reported as ordinary income for federal tax purposes.

Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain, as appropriate, in the period that the differences arise. The following permanent differences as of February 28, 2005, attributable to certain net operating losses which for tax purposes, are not available to offset future income, were reclassified to the following accounts:

	DECREASE PAID IN-CAPITAL			INCREASE (DECREASE) ACCUMULATED NET REALIZED GAIN (LOSS)		INCREASE (DECREASE) UNDISTRIBUTED NET INVESTMENT INCOME
Health Sciences	$	(1,447,965	)	$	73,598	$	1,374,367
These reclassifications had no effect on net assets or net asset value per share.
The tax character of distributions paid during the last two fiscal years were as follows:
	ORDINARY INCOME			LONG-TERM CAPITAL GAIN		TOTAL DISTRIBUTIONS
Mid-Cap Value Equity
9/30/04	$	194,370		$	—	$	194,370
9/30/03		—			5,447,281		5,447,281
Global Resources
6/30/04		5,770,903			—		5,770,903
6/30/03		—			—		—
Health Sciences
2/28/05		1,253,067			5,042,744		6,295,811
2/28/04		2,091,315			—		2,091,315
Asset Allocation
9/30/04		1,647,304			—		1,647,304
9/30/03		3,516,108			—		3,516,108

54

BLACKROCK FUNDS

The components of distributable earnings (accumulated losses) were as follows:

	UNDISTRIBUTED ORDINARY INCOME		UNDISTRIBUTED LONG-TERM CAPITAL GAIN		CAPITAL LOSS CARRYFORWARDS			POST - OCTOBER LOSSES
Mid-Cap Value Equity (as of 9/30/04)	$	4,766,173	$	1,580,308	$	—		$	—
Global Resources (as of 6/30/04)		5,071,261		—		(4,422,538	)		—
Health Sciences (as of 2/28/05)		—		74,821		—			(191,668	)
Asset Allocation (as of 9/30/04)		129,474		—		(42,797,697	)		—

Post-October losses represent losses realized on investment transactions from November 1 through the end of its fiscal year that, in accordance with Federal income tax regulations, the Portfolios defer and treat as having arisen in the following fiscal year. For Federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains.

The Portfolios had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates:

	EXPIRING JUNE 30
	2010		2011		TOTAL
Global Resources	$	—	$	4,422,538	$	4,422,538
	EXPIRING SEPTEMBER 30
	2010		2011		TOTAL
Asset Allocation	$	17,967,754	$	24,829,943	$	42,797,697

(I) Subsequent Event

In April of 2005, the Advisor determined that the BlackRock Asset Allocation Portfolio held high yield bonds in violation of a non-fundamental investment policy. The Advisor reimbursed the Portfolio for the realized losses incurred from the date of the reorganization see Note (B) through April 18, 2005. The amount of the reimbursement for the realized losses was $92,690.

55

BLACKROCK FUNDS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees of

BlackRock Funds:

We have audited the accompanying statements of net assets of Mid-Cap Value, Global Resources, Health Sciences and Asset Allocation Portfolios [each a “Portfolio” and collectively the “Portfolios”; four of the fifty portfolios constituting BlackRock Funds (the “Fund”)] as of February 28, 2005 and the related statements of operations, statements of changes in net assets and the financial highlights for the periods presented. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Portfolios are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolios’ internal control over financial reporting. Accordingly, we express no such opinion. 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, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of February 28, 2005, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the portfolios constituting the Fund as of February 28, 2005, the results of their operations, the changes in their net assets, and their financial highlights for the respective stated periods, in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania

April 22, 2005

56

BLACKROCK FUNDS

ADDITIONAL INFORMATION

(A) The Fund’s Audit Committee approved engaging Deloitte & Touche LLP as the independent registered public accountant to audit the Fund’s financial statements for fiscal year 2005. A majority of the Fund’s Board of Trustees, including a majority of the independent Trustees, approved the appointment of Deloitte & Touche LLP as the Fund’s independent registered public accountant for the Fund’s 2005 audit on November 12, 2004. The Fund may terminate the appointment of Deloitte & Touche LLP without penalty by a majority vote of the shareholders at any meeting called for such purpose.

(B) As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and various information requests from the Securities and Exchange Commission in connection with ongoing industry-wide investigations of mutual fund matters.

57