N-30D 1 dn30d.htm SEMI-ANNUAL REPORT DATED NOVEMBER 30, 2002 Semi-Annual Report dated November 30, 2002
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Mercantile Funds, Inc.
 
Semi-Annual Report
 
NOVEMBER 30, 2002

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Dear Shareholder,
 
It is a pleasure to present the semi-annual report for Mercantile Funds, Inc. for the period ended November 30, 2002. This report includes investment performance, financial information and Fund synopses for the Equity, Bond and Money Market Funds. Also included is a Statement of Net Assets for each of the Funds listing the securities held as of November 30, 2002.
 
The uneven nature of the current recovery leaves the economy operating below its long-term potential. Indeed, during the past year, real GDP has averaged only about two-thirds of the normal first year growth rate of an emerging business cycle. The consumer sector has provided the bulk of the gains, supported by consistent personal income growth and record levels of mortgage refinancings. However, firms have remained cautious about increasing their inventories, capital spending and additions to payroll, which has kept overall economic activity muted.
 
The threat of war, corporate governance issues and lowered earnings guidance have increased investor uncertainty and resulted in reduced risk-taking. Equity markets have responded negatively by plunging to new lows in both July and October. Conversely, U.S. Treasury securities have been the benefactor to a wave of funds searching for safety moving market yields to generational lows. Importantly, impressive productivity gains and cost cutting are quietly working to support a cyclical turn in corporate profits. More recently, investor sentiment has begun to turn as stocks have experienced a move up in price over the past few months.
 
The Funds’ advisor believes the footings of the recovery remain sound and anticipates solid, but not spectacular, economic growth as the business cycle develops. As several of the uncertainties currently dogging the financial markets are resolved, business conditions should improve and provide a boost to profits. In this environment, equity markets should become less volatile and the flight to quality bid in the Treasury market may lessen. Security selection by the Funds’ portfolio managers will remain critical.
 
The pages that follow discuss the investment objectives, performance, structure and strategy of each of the Mercantile Funds. We appreciate your investment in the Mercantile Funds and welcome any suggestions or comments.
 
Best Regards,
LOGO
Leslie B. Disharoon
Chairman
 
Shares of Mercantile Funds, Inc. are not bank deposits or obligations of, or guaranteed, endorsed, or otherwise supported by, Mercantile-Safe Deposit and Trust Company, its parent company or its affiliates, and such shares are not federally insured by the U.S. Government, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board or any other government agency. Investment in the Funds involves risk, including the possible loss of principal.
 
The Money Market Funds are neither insured nor guaranteed by the FDIC or any other government agency. Although the Money Market Funds strive to maintain a net asset value of $1.00 per share, it is possible to lose money by investing in the Funds.
 
Yields will fluctuate as market conditions change. Past performance is not a guarantee of future results.
 
For more complete information on Mercantile Funds, Inc., including expenses and ongoing fees, please call 1-800-551-2145 to receive a prospectus, which should be read carefully before investing. BISYS Fund Services Limited Partnership serves as the Funds’ distributor.

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The Mercantile Growth & Income Fund
 
The equity markets over the past six months have been characterized by indecisiveness about the magnitude of recovery in corporate earnings. The Mercantile Growth & Income Fund’s focus on stock selection of quality companies helped its relative returns over the past six months. Stocks such as Vodafone (1.4%), Microsoft (2.8%), Sysco (1.3%), Merck (4.1%) and United Parcel Service (1.5%) advanced in a market that broadly declined. The Fund also benefited from its under-weighing in the Utilities sector.1
 
During the six months ended November 30, 2002, the advisor initiated new positions in companies such as Cox Communications (0.6%), Campbell Soup (0.9%) and Capital One Financial (1.6%). The advisor has admired these companies for a long time and had a chance to acquire them at reasonable valuations. Investments in Kimberly-Clark, IMS Health and Sungard Data Systems were sold1.
 
The advisor’s endeavor is to invest in companies that should emerge stronger from the current sluggish economic environment. Quality and fundamentals endure long after emotions are forgotten and the advisor believes this strategy, over time, could generate excellent relative returns.
 
The Mercantile Equity Income Fund
 
During the six months ended November 30, 2002, sharp declines in a diverse group of stocks such as General Motors (1.1%), Albertsons (0.9%), J.P. Morgan Chase (1.0%), Intel (Sold), BP (2.8%) and Chubb (1.5%) adversely impacted the Mercantile Equity Income Fund’s relative performance. These losses were mitigated by gains in stocks such as Microsoft (1.2%), IBM (2.3%), Worthington Industries (1.2%), Merck (2.7%) and 3M (1.0%). Overall, Technology, Telecommunications and old economy cyclical stocks did well in the portfolio, while Energy, Property Casualty Insurance and Consumer Cyclical issues fared poorly1.
 
The broad stock decline that began in mid-March reached a climax in one of the weakest Septembers in stock market history. Stocks rallied dramatically in October, and the rally continued through November. Time will tell if this extreme volatility represents “base building” in advance of an inflection point in the trend for stock prices. Clearly recent economic reports have been somewhat more positive, but fourth quarter earnings and the uncertain outlook for the first few months of 2003 could cause continued near-term volatility, particularly with a looming confrontation with Iraq.
 
In this turbulent environment, the Fund’s advisor has focused especially on diversification, dividends, value and financial strength in portfolio holdings.
 
The Mercantile Equity Growth Fund
 
Changes made by the Mercantile Equity Growth Fund’s new management team, such as investing in companies with better quality and consistent growth characteristics, have begun to show results in terms of relative performance. During the past six months, the advisor reduced investments in the Technology sector and increased investments in other sectors. Relative to its benchmark and peer group, the Fund is now overweight in the Consumer Staples sector and underweight in the Technology sector1.
 
The advisor continues to seek investment opportunities with sustainable profitability models. During the six months ended November 30, 2002, the advisor initiated investments in Cox Communications (1.7%), Capital One (1.9%), Dell Computer (1.7%) and Sysco (2.4%). The Cable and Cable modem business of Cox has high barriers to entry and pricing flexibility. Capital One continues to be one of the better-operated and faster growing credit card companies. Dell, the low cost provider in personal computers, has been gaining market share rapidly. Sysco also generates excellent profitability while continuing to grow market share. Investments sold during the period include AT&T Wireless, CVS, Electronic Data Services and Schering Plough1.
 
The advisor believes that the Fund is now a well-diversified portfolio of high-quality companies. The advisor believes that most of these companies will deliver above-average revenue, earnings and dividend growth.

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The Mercantile Capital Opportunities Fund 2
 
The six-month period ended November 30, 2002 was a difficult one for stocks as investors remained concerned over the quality of corporate financial statements, global instability and a tepid economic rebound. The period did end on a positive note, however, with stocks making a strong rebound in October and November.
 
The Mercantile Capital Opportunities Fund was down as well for the period, but its return was better than that of its benchmark by a considerable margin. Strong stock selection, particularly in the Technology and Healthcare sectors, was the main catalyst behind the Fund’s relative outperformance. Inspire Pharmaceuticals (4.2%) was the portfolio’s best performing stock, as it was up more than 180% during the period after announcing positive developments regarding its product for “dry-eye” condition. Coach (2.4%) was also a strong performer as it continued to deliver strong sales and earnings growth1.
 
Many technology-related stocks were down, especially in the early part of the period, as the outlook for capital spending remained murky. Micrel (0.7%) was down over 45% during the period based on the uncertainty as to the timing and extent of a rebound in technology spending. Companies that reported earnings shortfalls or reduced future estimates were also severely punished. Wet Seal (Sold) declined over 50% after it lowered future guidance. The Fund exited from the stock during the period1.
 
The Mercantile International Equity Fund 3
 
Global equity markets remained mired in a period of mixed and uncertain economic signals in the six months ended November 30, 2002. During this time, the Mercantile International Equity Fund continued to perform well on a relative basis. The period did end on a positive note as most major European markets rallied nearly 20% from their September lows, spearheaded by Technology and Telecom stocks. In Asia, Japan climbed 4% in the month of November. The Fund’s relative out-performance in the six-month period was again based on its overweight position in Consumer Staples and good stock selection in the Technology and Telecom industries. This defensive posturing of the Fund’s portfolio meant that the portfolio lagged in strong markets but outperformed in weak markets. Amidst the rally started in October, profits were taken in the high-flying Tech and Telecom sectors. Proceeds were distributed to the high quality, sold-off Consumer Staples and Pharmaceutical sectors, which looked compelling on an absolute and relative basis1.
 
Looking forward, the Fund’s managers believe that the recent rally has run its course on fundamental valuation grounds, particularly in the absence of more convincing evidence of a pick up in economic growth. Anecdotal evidence pointing to weakening housing prices, corporations cutting capital investment and jobs, and the continuing geopolitical risks and threats of terrorist attacks, have global markets on edge. The advisor feels that the Fund is suitably positioned in this environment, but may increase its weighting in higher risk stocks as valuations become more attractive.
 
The Mercantile Diversified Real Estate Fund
 
After peaking for the year at the end of June, REITs began declining along with the broader market in July. The sector rebounded sharply during the last week of July only to fall again during the market weakness in September. REITs again staged a recovery from the second week of October. The Mercantile Diversified Real Estate Fund’s advisor has taken advantage of this volatility by adding to positions and locking in attractive yields when the markets were weak. The advisor continues to monitor dividend risk and has been increasing the Fund’s positions in companies with a combination of solid dividend coverage and above-average dividend growth potential. Despite the media focus on a couple of REITs that have cut their payouts, many more have increased their dividends and will likely continue to do so. In addition, REITs have also strengthened their balance sheets, taking advantage of lower cost debt and reducing leverage through asset sales.
 
The Office, Apartment, and Hotel sectors remain the most difficult near-term due to continued economic weakness, although they seem to have stabilized recently. In general, real estate fundamentals such as rental rates and occupancy have declined over the last two years but the declines seem to be leveling off. Real estate asset prices have remained strong as institutional investors

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have been increasing their investments in real estate due to weak returns in other assets. The advisor expects the industry to recover with the economy, with Apartment, Hotel, and Industrial properties being the first to benefit.
 
The Mercantile Limited Maturity Bond Fund
 
For the six-month period ended November 30, 2002, interest rates were generally lower on higher quality credits. Investors fled the turbulence in the equity markets during the summer and early fall and sought safety in bonds. U.S. Treasury yields declined 0.50% to 1.00%, while yields on U.S. Government Agency and the highest quality corporate issues also dropped during the six months. Lower quality credits, by contrast, suffered through much of the period with their yields rising through October. However, with the better conditions in the equity market in the most recent two months, lower quality credits performed well in November, as the corporate bond market enjoyed its best ever monthly return when compared to the Treasury market.
 
In this environment, income returns were augmented by capital appreciation resulting in returns ranging from 3% to 9% along the intermediate Treasury curve. Factors that hindered performance of the Mercantile Limited Maturity Bond Fund relative to the benchmark in this “flight to quality’ environment were a shorter duration and overweighting of mortgage and corporate bonds.
 
Mortgage-backed bond exposure fell as the refinancing wave and strength in the housing market led to increased prepayments of home mortgages. Corporate bonds were slightly reduced through some swaps to Treasuries and Agencies. Cash reserves were reduced as well. The average life of the Fund was essentially unchanged from fiscal year end at 2.2 years.
 
With better financial conditions emerging in the stock and bond markets, the worry over a second dip in the economy should fade. While economic indicators continue to be a mixture of both positive and negative reports, the preponderance of economic news is improving. With continued monetary and fiscal policy stimulation, the economy appears poised to continue on its modest expansionary track. In such an environment, the Federal Reserve may eventually need to reverse course on its highly-stimulative monetary policy and market rates may move higher in anticipation of such a changeover.
 
The Mercantile Total Return Bond Fund
 
During the six-months ended November 30, 2002, bond yields appeared to move in lock step with stock prices. Initially, corporate governance issues tested the capital markets’ resolve as several well-publicized episodes of corporate malfeasance came to light along with concerns over the quality of the data in financial statements. Additionally, geopolitical tensions have risen as the United States escalated its war on terrorism, including an impending showdown with Iraq. As a result of these uncertainties, stock prices fell precipitously during the spring and summer as investors fled equities and lower quality corporate bonds for the safety of U.S. Treasury debt, driving government yields to generational lows.
 
For the period, the Mercantile Total Return Bond Fund maintained a relative effective duration lower than its unmanaged benchmark, which hindered its relative performance during this period of declining yields. In addition, the Fund’s portfolio remained overweight in so-called “spread products”, which include corporate, high yield and mortgage-backed pass-through securities. As the uncertainties grew, investors preferred the security of government issues.
 
Recently, the financial markets have begun to show signs of stabilization and yields on U.S. Treasuries have begun to rise faster than those on corporate securities. It is anticipated that several of the uncertainties currently weighing on the financial markets should be resolved over the intermediate term. The Fund’s portfolio has been positioned to benefit in such an environment as Treasury yield levels and corporate bond spreads should continue their current trends toward more normal bond market relationships.

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The Mercantile Maryland Tax-Exempt Bond Fund 4
 
Credit downgrades that have affected issuers nationwide have not been seen in the state of Maryland. Although the state is far out of balance in its budget, the rating agencies have not changed the state’s Aaa ratings. Local governments have also escaped the wrath of the agencies, who take a long-term perspective in their analysis of an issuer’s creditworthiness. Only a longer economic downturn or poor fiscal management would put their ratings in jeopardy of a downgrade. Maryland issuers, on the other hand, did not tap the municipal bond market to the extent of others across the country, despite rates that hit 40-year lows in September. Steady retail and institutional demand for bonds combined with the spotty issuance to keep credit spreads relatively tight, particularly when compared to the general widening of spreads in the rest of the municipal bond market. Projecting into 2003, as the economy should gradually improve and lawmakers deal with some tough fiscal problems, credit quality in Maryland should remain favorable. Demand for bonds should remain stable, but nothing like the frenzied buying that took place earlier this year as the equity markets melted down.
 
The effective duration of the Mercantile Maryland Tax-Exempt Bond Fund had been shortened during the summer of 2002, the timing of which, in retrospect, was a bit too soon. The Iraq situation, economic softness and technical factors in the mortgage market all contributed to the decline in yields that ended in late September. Since then, the equity markets have stabilized and the economy seems poised for a modest recovery. With the Iraq situation still unsettled, markets will remain volatile. The Federal Reserve has signaled that their rate cut in November may be the last of the cycle, barring a sharp downturn or shock to the economy. This points to possibly a general increase in interest rates over the next six months. The advisor plans to keep the Fund’s duration short, acting nimbly to add relative value during those periods of volatility.
 
The Mercantile Intermediate Tax-Exempt Bond Fund 4
 
Yields on short and intermediate municipal bond maturities reached 40-year lows during the late summer of 2002. At the end of November, however, yields retraced nearly half or more of their move since the beginning of June. Expectations of worst case scenarios in the economy, world politics, and the financial markets pushed stock prices and bond yields lower. Investors, en masse, moved out of equities and into the safety of Treasuries and municipals. Technical factors related to the mortgage market exacerbated the plunge in yields. By mid-October, the psychology of the capital markets had changed dramatically. Equity indices have rallied 15% or more off their lows while bond yields rose 0.30% to 0.60%. Reasons included economic indicators pointing toward modest recovery in 2003, beginning of a resolution to the accounting analyst fiasco and the UN/Iraq Inspector compromise. The Federal Reserve cut the federal funds rate 0.50%, to 1.25%, in early November, but characterized it as an “insurance policy” against a dip in the recovering economy.
 
Tax-exempt bonds benefited from the asset reallocation that took place in middle and late 2002. Flows into municipal bond funds averaged over $2 billion per month through September, when the low in yields occurred. Retail buying was strong through the summer, but as yields moved into record low territory in late August and September, the perceived lack of relative return caused investors to pause. Issuance will set a record in 2002, as record low rates and shortfalls in expected revenues motivated governments and other tax-exempt entities to add more debt to their balance sheets. Credit ratings continue their slight deterioration, as state and local government deficits balloon higher. Most entities are moving away from accounting gimmicks or one-time measures to plug the budgetary holes, however, and are using a sounder combination of tax increases and spending cuts.
 
The advisor shortened the duration of the Mercantile Intermediate Tax-Exempt Bond Fund during mid summer of 2002. In hindsight, the timing was a little bit early, given the subsequent move lower in yields. The move to higher yields that began in October is believed to be the beginning of a trend, rather than a correction. The only caveat is that a war with Iraq could cause a sharp, albeit temporary, shift lower in yields. The advisor plans to keep the Fund’s duration short, but may move quickly in periods of volatility, utilizing those opportunities to add relative value.

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The Mercantile National Tax-Exempt Bond Fund 4
 
Over the past six months, municipal yields have varied considerably. From June through September 2002, yields declined 0.50% to 0.75%, their lowest levels in 40-years. However, from late September through November 2002, tax-exempt yields increased 35-45 basis points across the yield curve. There were many and varied reasons for the volatility. The economic recovery petered out in the summer and early fall, then appeared as if it was moving again late in the year. Terrorism threats waxed and waned, as did the Iraq situation. Equity markets imploded, then rose from the dead in mid-October. Technical factors in the mortgage market are also attributed to the sharp movements in interest rates.
 
Tax-exempt bond issuance will set an all time record by the time 2002 ends, with close to $350 billion in debt being sold. Demand kept up with supply for most of the year, hitting a wall in the autumn as yields plummeted to levels not seen in a couple generations, then rose quickly, leaving the new bondholders looking at losses. Rising equity prices in October and November acted to temper the asset reallocation as well. Credit quality continued to slide slightly downward, although municipal issuers in general remain on solid ground, despite some budgetary and fiscal problems that remain to be solved.
 
Volatility, which has been historically high in 2002, should remain so through mid-2003. Although the economy appears to be slowly moving ahead towards solid, but not spectacular growth, the lingering clouds over the Iraq situation increases the uncertainty of that assumption. The advisor believes that any action in Iraq would be brief and not be of great detriment to the economic recovery. The duration of the Mercantile National Tax-Exempt Bond Fund was shortened in the summer, a move that was a bit early in its timing. The Fund’s duration may remain short going forward in anticipation of higher rates, with the advisor exploiting those periods of volatility to add value to the portfolio.
 
1
Portfolio composition is subject to change at any time without notice.
 
2
The Mercantile Capital Opportunities Fund could fluctuate in price more than most funds, due to the volatile nature of both the technology sector and stocks of smaller companies. In addition, the Fund participates heavily in the Initial Public Offering (IPO) market, and a portion of the Fund’s returns consequently are attributable to its investment in IPOs, which may have a magnified impact due to the Fund’s small asset base. As the Fund’s assets grow, it is probable that the effect of the Fund’s investments in IPOs on its total returns may not be as significant.
 
3
International investing is subject to certain risks, such as currency exchange rate volatility, possible political, social or economic instability, foreign taxation and/or differences in auditing and other financial standards.
 
4
The Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds’ income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax.

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Mercantile Funds, Inc.
PRIME MONEY MARKET FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 

 
   
Par (000)
  
Value
             
AGENCY OBLIGATIONS — 11.1%
            
Federal Home Loan Bank — 6.2%
            
Notes
            
2.55%, 04/25/03
  
$
5,000
  
$
5,000,000
2.555%, 06/20/03
  
 
10,000
  
 
10,000,000
2.00%, 09/28/03
  
 
10,000
  
 
10,000,000
2.00%, 11/21/03
  
 
10,000
  
 
10,000,000
1.67%, 12/24/03
  
 
10,000
  
 
10,000,000
         
         
 
45,000,000
         
Student Loan Marketing Association — 4.9%
      
Floating Rate Notes**
            
1.258%, 12/03/02
  
 
10,000
  
 
10,000,000
1.278%, 12/03/02
  
 
10,000
  
 
10,000,000
1.277%, 05/15/03
  
 
15,000
  
 
15,000,000
         
         
 
35,000,000
         
TOTAL AGENCY OBLIGATIONS
      
(Cost $80,000,000)
        
 
80,000,000
         
BANK NOTES — 1.4%
            
Bank of America
            
1.79%, 01/15/03
  
 
10,000
  
 
10,000,000
         
CERTIFICATES OF DEPOSIT — 2.8%
      
Candian Imperial Bank of Commerce
            
1.75%, 12/09/02
  
 
10,000
  
 
10,000,000
1.80%, 12/27/02
  
 
10,000
  
 
10,000,000
         
TOTAL CERTIFICATES OF DEPOSIT
      
(Cost $20,000,000)
        
 
20,000,000
         
COMMERCIAL PAPER — 25.0%
            
Banks — 2.8%
            
Westdeutche Landesbank Girozentrale
            
2.20%, 01/08/03
  
 
15,000
  
 
14,965,167
1.64%, 02/04/03
  
 
6,000
  
 
5,982,233
         
         
 
20,947,400
         
Broker/Dealers — 9.7%
            
Dexia Del., LLC
            
1.32%, 02/20/03
  
 
25,000
  
 
24,925,750
UBS Finance
            
1.36%, 12/02/02
  
 
30,000
  
 
29,998,867
   
Par (000)
  
Value
         
COMMERCIAL PAPER — Continued
      
Broker/Dealers — Continued
            
J.P. Morgan & Co.
            
1.34%, 01/23/03
  
$
15,000
  
$
14,970,408
         
         
 
69,895,025
         
Financial Services — 5.5%
            
Goldman Sachs Group, Inc.
            
1.78%, 02/06/03
  
 
15,000
  
 
14,950,308
Morgan Stanley
            
1.76%, 01/09/03
  
 
25,000
  
 
24,952,333
         
         
 
39,902,641
         
Petroleum — 3.5%
            
Chevron Corp.***
            
1.76%, 01/14/03
  
 
10,000
  
 
9,978,489
1.75%, 02/11/03
  
 
15,000
  
 
14,947,500
         
         
 
24,925,989
         
Utilities — Electric — 3.5%
            
General Electric Capital Corp.
            
1.66%, 01/29/03
  
 
15,000
  
 
14,959,192
1.64%, 03/12/03
  
 
10,000
  
 
9,962,967
         
         
 
24,922,159
         
TOTAL COMMERCIAL PAPER
      
(Cost $180,593,214)
        
 
180,593,214
         
CORPORATE BONDS — 0.7%
            
Brokers/Dealers — 0.7%
            
Merrill Lynch
            
6.00%, 02/12/03
  
 
5,000
  
 
5,034,302
         
ASSET BACKED SECURITIES — 26.8%
      
Finance — 26.8%
            
Amsterdam Funding Corp.***
            
1.78%, 12/19/02
  
 
7,000
  
 
6,993,770
1.71%, 01/10/03
  
 
18,000
  
 
17,965,800
CitiCorp
            
1.76%, 12/11/02
  
 
20,000
  
 
19,990,222
Delaware Funding***
            
1.55%, 12/05/02
  
 
15,000
  
 
14,997,417
Edison Asset Securitization***
            
1.32%, 02/10/03
  
 
15,000
  
 
14,960,950

 
See Accompanying Notes to Financial Statements.

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Mercantile Funds, Inc.
PRIME MONEY MARKET FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
Par (000)
  
Value
         
ASSET BACKED SECURITIES — Continued
      
Finance — Continued
            
Fairway Finance FRN
            
1.357%, 12/09/02
  
$
15,600
  
$
15,600,000
1.77%, 01/13/03
  
 
10,670
  
 
10,647,442
Fountain Square***
            
1.75%, 01/02/03
  
 
5,292
  
 
5,283,768
Old Line Funding Corp.***
            
1.33%, 01/06/03
  
 
7,000
  
 
6,990,690
1.32%, 01/07/03
  
 
20,000
  
 
19,972,867
Societe Generale
            
1.62%, 12/16/02
  
 
15,000
  
 
14,989,875
Steamboat Funding***
            
1.37%, 12/03/02
  
 
25,000
  
 
24,998,097
Windmill Funding Corp.***
            
1.34%, 01/14/03
  
 
20,000
  
 
19,967,244
         
TOTAL ASSET-BACKED SECURITIES
      
(Cost $198,358,142)
        
 
193,358,142
         
             
REPURCHASE AGREEMENTS — 27.9%
      
Banc of America Securities, LLC
            
(Agreement dated 11/29/02 to be repurchased at $31,003,229.17 collateralized by $29,770,000 (Value $31,898,719) U.S. Treasury Notes, 4.75%, due 11/15/08)
1.25%, 12/02/02
  
 
31,000
  
 
31,000,000
Goldman Sachs Group, Inc.
            
(Agreement dated 11/29/02 to be repurchased at $30,003,275 collateralized by $29,109,000 (Value $30,983,287) U.S. Treasury Notes, 5.50%, due 8/15/28)
1.31%, 12/02/02
  
 
30,000
  
 
30,000,000
   
Par (000)
  
Value
         
REPURCHASE AGREEMENTS — Continued
J.P. Morgan Securities, Inc.
            
(Agreement dated 11/29/02 to be repurchased at $35,003,792 collateralized by $26,130,000 (Value $36,066,234) U.S. Treasury Notes, 8.125%, due 8/15/19)
1.30%, 12/02/02
  
$
35,000
  
$
35,000,000
Merrill Lynch Government Securities, Inc.
      
(Agreement dated 11/29/02 to be repurchased at $35,003,792 collateralized by $26,130,000 (Value $36,066,234) U.S. Treasury Notes, 8.125%, due 8/15/19)
1.30%, 12/02/02
  
 
35,000
  
 
35,000,000
Morgan Stanley Securities, Inc.
            
(Agreement dated 11/29/02 to be repurchased at $35,003,646 collateralized by $26,555,000 (Value $36,096,965) U.S. Treasury Notes, 8.0%, due 11/15/21)
1.25%, 12/02/02
  
 
35,000
  
 
35,000,000
Wachovia Securities, Inc.
            
(Agreement dated 11/29/02 to be repurchased at $35,003,646 collateralized by $33,839,000 (Value $35,684,973) U.S. Treasury Notes, 3.00%, due 7/15/12)
1.25%, 12/02/02
  
 
35,000
  
 
35,000,000
         
TOTAL REPURCHASE AGREEMENTS
      
(Cost $201,000,000)
        
 
201,000,000
         

 
See Accompanying Notes to Financial Statements.

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Mercantile Funds, Inc.
PRIME MONEY MARKET FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Number of Shares
  
 
Value
         
INVESTMENT COMPANIES — 5.7%
      
Goldman Sachs Financial Square Prime Obligations Fund
  
9,967,995
  
$
9,967,995
Merrill Lynch Premier Institutional Fund
  
26,000,000
  
 
26,000,000
Provident Institutional Funds — TempFund
  
5,376,164
  
 
5,376,164
       
TOTAL INVESTMENT COMPANIES
      
(Cost $41,344,159)
  
 
41,344,159
       
TOTAL INVESTMENTS IN SECURITIES — 101.4%
(Cost $731,329,817*)
  
 
731,329,817
LIABILITIES IN EXCESS OF OTHER ASSETS — (1.4)%
  
 
(10,196,681)
       
NET ASSETS — 100.0%
  
$
721,133,136
       
    
 
Value
      
NET ASSET VALUE PER SHARE
       
Institutional Shares
       
($720,812,482 ÷ 720,876,343 shares outstanding)
   
$
1.00
        
Class A Shares
       
($319,653 ÷ 319,653 shares outstanding)
   
$
1.00
        
Class C Shares
       
($1,001 ÷ 1,001 shares outstanding)
   
$
1.00
        
*
 
Aggregate cost for Federal income tax purposes.
**
 
The rate shown is as of November 30, 2002.
***
 
Security was purchased pursuant to Section 4(2) of the Securities Act of 1933 and may be resold only to qualified buyers.

 
See Accompanying Notes to Financial Statements.

3

Table of Contents

Mercantile Funds, Inc.
GOVERNMENT MONEY MARKET FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 
   
Par (000)
  
Value
             
AGENCY OBLIGATIONS — 72.3%
            
Federal Farm Credit Bureau — 14.5%
      
Discount Notes
            
1.55%, 05/16/03
  
$
5,000
  
$
4,964,264
Notes
            
1.70%, 12/02/02
  
 
10,000
  
 
10,000,000
1.93%, 12/02/02
  
 
5,000
  
 
5,000,000
1.67%, 01/02/03
  
 
10,000
  
 
10,000,000
1.60%, 02/03/03
  
 
15,000
  
 
15,000,000
1.67%, 04/01/03
  
 
5,000
  
 
5,000,000
1.55%, 05/01/03
  
 
10,000
  
 
10,000,000
         
         
 
59,964,264
         
Federal Home Loan Bank — 13.3%
            
Discount Notes
            
1.65%, 12/20/02
  
 
10,000
  
 
9,991,292
1.24%, 01/15/03
  
 
10,000
  
 
9,984,500
1.24%, 02/12/03
  
 
5,000
  
 
4,987,428
Notes
            
2.125%, 01/10/03
  
 
10,000
  
 
9,999,747
2.555%, 06/20/03
  
 
5,000
  
 
5,000,000
2.000%, 09/30/03
  
 
7,500
  
 
7,500,000
1.86%, 11/10/03
  
 
5,000
  
 
5,000,000
2.00%, 11/21/03
  
 
3,000
  
 
3,000,000
         
         
 
55,462,967
         
Federal Home Loan Mortgage Corp. — 14.4%
Discount Notes
            
2.48%, 12/11/02
  
 
15,000
  
 
14,992,958
1.70%, 12/17/02
  
 
15,000
  
 
14,988,667
1.64%, 01/09/03
  
 
10,000
  
 
9,982,233
1.24%, 01/24/03
  
 
10,000
  
 
9,981,400
1.25%, 02/28/03
  
 
10,000
  
 
9,969,097
         
         
 
59,914,355
         
Federal National Mortgage Association — 15.6%
Discount Notes
            
1.70%, 12/20/02
  
 
5,000
  
 
4,995,513
1.69%, 12/24/02
  
 
10,000
  
 
9,989,203
1.92%, 12/27/02
  
 
5,000
  
 
4,993,067
1.77%, 01/08/03
  
 
10,000
  
 
9,981,317
1.25%, 02/05/03
  
 
15,000
  
 
14,965,625
2.26%, 02/07/03
  
 
5,000
  
 
4,978,655
2.75%, 03/07/03
  
 
5,000
  
 
4,963,467
   
Par (000)
  
Value
         
AGENCY OBLIGATIONS — Continued
      
Federal National Mortgage Association — Continued
Discount Notes — Continued
            
1.26%, 04/23/03
  
$
10,000
  
$
9,949,950
         
         
 
64,816,797
         
Student Loan Marketing Association — 14.5%
Floating Rate Notes**
            
1.278%, 12/19/02
  
 
10,000
  
 
10,000,000
1.258%, 01/16/03
  
 
10,000
  
 
10,000,000
1.258%, 02/20/03
  
 
10,000
  
 
10,000,000
1.258%, 03/20/03
  
 
10,000
  
 
10,000,000
1.318%, 04/17/03
  
 
10,000
  
 
10,000,000
1.277%, 05/15/03
  
 
10,000
  
 
10,000,000
         
         
 
60,000,000
         
TOTAL AGENCY OBLIGATIONS
      
(Cost $300,158,383)
        
 
300,158,383
         
REPURCHASE AGREEMENTS — 21.2%
Banc of America Securities, LLC
(Agreement dated 11/29/02 to be repurchased at $15,001,563 collateralized by $14,410,000 (Value $15,440,395) U.S. Treasury Notes, 4.75%, due 11/15/08) 1.25%, 12/02/02
  
 
15,000
  
 
15,000,000
Goldman Sachs Group, Inc.
(Agreement dated 11/29/02 to be repurchased at $13,001,419 collateralized by $12,614,000 (Value $13,426,198) U.S. Treasury Bond, 5.50%, due 8/15/28) 1.31%, 12/02/02
  
 
13,000
  
 
13,000,000
J.P. Morgan Securities, Inc.
(Agreement dated 11//29/02 to be repurchased at $15,001,625 collateralized by $11,199,000 (Value $15,457,549) U.S. Treasury Notes, 8.125%, due 8/15/19) 1.30%, 12/02/02
  
 
15,000
  
 
15,000,000

 
See Accompanying Notes to Financial Statements.

4

Table of Contents

Mercantile Funds, Inc.
GOVERNMENT MONEY MARKET FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Par (000)
  
Value
REPURCHASE AGREEMENTS — Continued
         
Merrill Lynch Government Securities, Inc.
(Agreement dated 11/29/02 to be repurchased at $15,001,625 collateralized by $11,625,000 (Value $15,400,436) U.S. Treasury Bond, 10.375%, due 11/15/12) 1.30%, 12/02/02
  
$
15,000
  
$
15,000,000
Morgan Stanley Securities, Inc.
(Agreement dated 11/29/02 to be repurchased at $15,001,563 collateralized by $11,375,000 (Value $15,462,360) U.S. Treasury Bond, 8.0%, due 11/15/21) 1.25%, 12/02/02
  
 
15,000
  
 
15,000,000
Wachovia Securities, Inc.
            
(Agreement dated 11/29/02 to be repurchased at $15,001,563 collateralized by $14,503,000 (Value $15,294,162) U.S. Treasury Bond, 3.0%, due 7/15/12)
1.25%, 12/02/02
  
 
15,000
  
 
15,000,000
         
TOTAL REPURCHASE AGREEMENTS
      
(Cost $88,000,000)
        
 
88,000,000
         
   
Number of Shares
  
 
Value
         
INVESTMENT COMPANIES — 6.5%
      
Goldman Sachs Financial
          
Square Government Fund
  
5,000,000
  
$
5,000,000
Merrill Lynch Government
          
Money Market Fund
  
15,280,371
  
 
15,280,371
Provident Institutional Funds —
          
FedFund
  
6,422,724
  
 
6,422,724
       
TOTAL INVESTMENT COMPANIES
      
(Cost $26,703,095)
      
 
26,703,095
       
TOTAL INVESTMENTS IN SECURITIES — 100.0%
(Cost $414,861,478*)
  
 
414,861,478
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.0%
  
 
65,254
       
NET ASSETS — 100.0%
  
$
414,926,732
       
NET ASSET VALUE PER SHARE
      
Institutional Shares
($414,924,729 ÷ 415,053,226 shares outstanding)
  
 
$1.00
       
Class A Shares
($1,001 ÷ 1,001 shares outstanding)
  
 
$1.00
       
Class C Shares
($1,001 ÷ 1,001 shares outstanding)
  
 
$1.00
       
*
 
Aggregate cost for Federal income tax purposes.
**
 
The rate shown is as of November 30, 2002.

 
See Accompanying Notes to Financial Statements.

5

Table of Contents

Mercantile Funds, Inc.
TAX-EXEMPT MONEY MARKET FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 

 
   
Par
(000)
  
Value
             
             
ALASKA — 2.0%
      
Alaska Marine, VRDN, Exxon Mobil Corp., Valdez Project**
            
1.25%, 12/01/02
  
$
1,000
  
$
1,000,000
1.20%, 12/01/02
  
 
2,000
  
 
2,000,000
1.25%, 12/01/02
  
 
1,100
  
 
1,100,000
1.25%, 12/01/02
  
 
1,000
  
 
1,000,000
         
         
 
5,100,000
         
ARIZONA — 3.5%
      
Phoenix, GO, Refunding Bonds
            
3.00%, 07/01/03
  
 
1,500
  
 
1,513,866
Phoenix, RB, Waste Water System Lease
            
6.125%, 07/01/03
  
 
1,000
  
 
1,045,729
Salt River, Agriculture Improvement & Power Distribution, GO, TECP, LIC: Wells, M&I, Bank One, Morgan Guaranty Trust Co. NY, Bank of America, Bank of New York
            
1.45%, 12/02/02
  
 
4,000
  
 
4,000,000
1.40%, 12/05/02
  
 
1,000
  
 
1,000,000
5.50%, 01/01/03
  
 
1,500
  
 
1,505,122
         
         
 
9,064,717
         
CALIFORNIA — 0.8%
      
California State Department of Water and Power Supply, VRDN, RB
            
1.80%, 12/07/02
  
 
2,000
  
 
2,000,000
         
COLORADO — 2.3%
      
Colorado State General Fund, RB, Tax and Revenue Anticipation Notes
            
3.00%, 06/27/03
  
 
6,000
  
 
6,050,509
         
CONNECTICUT — 4.1%
      
Connecticut State, VRDN, GO, SPA: Bayerische LandesBank**
            
1.05%, 12/07/02
  
 
1,100
  
 
1,100,000
Connecticut State Health & Education, VRDN, RB, AMBAC, Yale University**
            
1.30%, 12/01/02
  
 
4,000
  
 
4,000,000
   
Par
(000)
  
Value
             
CONNECTICUT — Continued
      
Connecticut State Health & Education, VRDN, RB, Yale University, Revolving Credit Fac: Credit Local de France, Toronto Dominion Bank & Landesbank Hessen-Thuringen**
            
1.05%, 12/07/02
  
$
3,000
  
$
3,000,000
New Haven, GO, Bond Anticipation Notes
            
2.25%, 01/30/03
  
 
2,500
  
 
2,503,848
         
         
 
10,603,848
         
DISTRICT OF COLUMBIA — 1.9%
      
George Washington University, VRDN, RB, MBIA, SPA: Bank of America**
            
1.15%, 12/07/02
  
 
5,000
  
 
5,000,000
         
FLORIDA — 4.4%
            
Miami-Dade County School District, RB, Tax Anticipation Note
            
2.75%, 06/26/03
  
 
3,000
  
 
3,020,777
University of Florida, VRDN, Athletic Association Inc., Capital Improvements, LOC: SunTrust Bank**
            
1.40%, 12/01/02
  
 
3,525
  
 
3,525,000
Volusia County Health Facilities, VRDN, FGIC, Aces-Pooled Hospital Loan Program, SPA: SunTrust Bank**
            
1.11%, 12/07/02
  
 
5,000
  
 
5,000,000
         
         
 
11,545,777
         
GEORGIA — 0.4%
            
Georgia State, GO
            
4.75%, 07/01/03
  
 
1,000
  
 
1,019,453
         
IDAHO — 1.3%
            
Idaho Health Facility Authority, VRDN, RB, St. Luke’s Medical Center, FSA, SPA: Bayerische LandesBank & Morgan Guaranty Trust Co. NY**
            
1.13%, 12/01/02
  
 
3,500
  
 
3,500,000
         

 
See Accompanying Notes to Financial Statements.

6

Table of Contents

Mercantile Funds, Inc.
TAX-EXEMPT MONEY MARKET FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
Par
(000)
  
Value
             
ILLINOIS — 5.8%
            
Cook County, GO, VRDN, GPI, SPA: Landesbank Hessen-Thuringen**
            
1.32%, 12/07/02
  
$
1,000
  
$
1,000,000
Illinois Educational Facilities, VRDN, Northwestern University, LOC: First National Bank of Chicago/Bank One**
            
1.20%, 12/07/02
  
 
4,000
  
 
4,000,000
Illinois Educational Facilities, VRDN, Northwestern University, SPA: Northern Trust Co.**
            
1.20%, 12/07/02
  
 
1,700
  
 
1,700,000
Illinois Health Facility, VRDN, Rush Presby./St Luke’s Medical Center, LOC: Northern Trust Co.**
            
1.20%, 12/07/02
  
 
1,630
  
 
1,630,000
Illinois Health Facility, VRDN, Rush Presby./St Luke’s Medical Center, LOC: Northern Trust Co.**
            
1.20%, 06/07/02
  
 
2,000
  
 
2,000,000
Illinois Revenue Aniticaption Note, RB
            
3.00%, 04/15/03
  
 
2,000
  
 
2,011,917
Metropolitan Pier and Exposition Authority, RB, Prerefunded
            
6.50%, 06/15/03
  
 
2,735
  
 
2,868,603
         
         
 
15,210,520
         
INDIANA — 2.4%
            
City of Mt. Vernon, TECP, PCRB,
General Electric Co. Project
1.40%, 12/05/02
  
 
4,500
  
 
4,500,000
Indianapolis Bond Bank, RB,
Local Public Improvements
2.375%, 01/09/03
  
 
1,000
  
 
1,000,947
Saint Joseph County, VRDN, Educational Facility, Univ. of Notre Dame, Refunding Bonds, Liq:
Northern Trust & Fifth Third**
1.20%, 12/01/02
  
 
700
  
 
700,000
         
         
 
6,200,947
         
   
Par
(000)
  
Value
             
KANSAS — 1.9%
            
Kansas State Turnpike Authority RB, INS: AMBAC, Refunding Bonds
1.13%, 12/01/02
  
$
5,000
  
$
5,000,000
         
LOUISIANA — 0.6%
            
Saint Charles Parish, VRDN, PCRB,
Shell Oil, Co. Project**
1.20%, 12/01/02
  
 
1,550
  
 
1,550,000
         
MARYLAND — 5.9%
            
City of Baltimore, VRDN, RB, IDA, Capital Acquisition Revenue, LOC:
Bayerische LandesBank**
1.200%, 12/07/02
  
 
2,000
  
 
2,000,000
Maryland State Community Development Administration, RB, Housing & Community Development
1.60%, 12/19/02
  
 
1,000
  
 
1,000,000
Maryland State and Local Facilities, GO 3.00%, 02/01/03
  
 
2,450
  
 
2,456,952
Maryland State Health & Higher Educational Facilities Authority, RB, TECP, Johns Hopkins University
1.60%, 12/11/02
  
 
3,000
  
 
3,000,000
Montgomery County, GO, TECP, Liq: Westdeutsche Landesbank
5.10%, 04/01/03
  
 
1,000
  
 
1,012,626
Montgomery County, GO, TECP, Liq: Westdeutsche Landesbank
1.30%, 01/09/03
  
 
1,200
  
 
1,200,000
Montgomery County, GO, TECP, Liq: Westdeutsche Landesbank
1.40%, 12/05/02
  
 
1,500
  
 
1,500,000
Montgomery County, GO, TECP, Liq: Westdeutsche Landesbank
1.60%, 12/12/02
  
 
1,250
  
 
1,250,000
University of Maryland, VRDN, COP, College Park Business School, LOC: Bank of America**
            
1.23%, 12/07/02
  
 
2,000
  
 
2,000,000
         
         
 
15,419,578
         

 
See Accompanying Notes to Financial Statements.

7

Table of Contents

Mercantile Funds, Inc.
TAX-EXEMPT MONEY MARKET FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
Par
(000)
  
Value
             
MASSACHUSETTS — 3.7%
            
Boston, GO, BAN, School Improvements
            
4.00%, 02/01/03
  
$
2,500
  
$
2,509,618
Massachusetts State Bond Anticipation Note, GO
            
4.00%, 09/01/03
  
 
2,000
  
 
2,038,577
Massachusetts State Health & Educational Facilities Authority, VRDN, RB, Capital Asset Program, LOC: First National Bank of Chicago/Bank One, SPA: First National Bank of Chicago/Bank One**
            
1.30%, 12/01/02
  
 
3,000
  
 
3,000,000
Massachusetts State, VRDN, GO, SPA: State Street B&T Co., Refunding Bonds**
            
1.20%, 12/07/02
  
 
2,000
  
 
2,000,000
         
         
 
9,548,195
         
MICHIGAN — 1.5%
            
University of Michigan, VRDN, RB, Hospital Revenue**
            
1.30%, 12/01/02
  
 
2,000
  
 
2,000,000
University of Michigan, VRDN, RB, Medical Services**
            
1.30%, 12/02/02
  
 
2,000
  
 
2,000,000
         
         
 
4,000,000
         
MINNESOTA — 4.4%
            
City of Rochester Health, RB, TECP, Health-Mayo Foundation
            
1.40%, 01/08/03
  
 
5,400
  
 
5,400,000
Minneapolis, GO, Special School District, University Gateway Project, SPA: Wells Fargo
1.10%, 12/07/02
  
 
6,000
  
 
6,000,000
   
         
         
 
11,400,000
         
MISSISSIPPI — 2.5%
            
Harrison County, VRDN, PCRB, E.I. duPont deNemours & Co.**
            
1.30%, 12/01/02
  
 
1,100
  
 
1,100,000
   
Par
(000)
  
Value
             
MISSISSIPPI — Continued
            
Mississippi State, GO, GPI
            
4.00%, 05/01/03
  
$
5,280
  
$
5,336,944
         
         
 
6,436,944
         
MISSOURI — 0.9%
            
Missouri State Health & Educational Facilities, VRDN, RB, SPA: Morgan Guaranty Trust Co. NY, Washington University Project**
            
1.15%, 12/07/02
  
 
1,050
  
 
1,050,000
Missouri State Health & Educational Facilities, VRDN, RB, SPA: Morgan Guaranty Trust Co. NY, Washington University Project**
            
1.15%, 12/07/02
  
 
1,240
  
 
1,240,000
         
         
 
2,290,000
         
NEBRASKA — 0.8%
            
Nebraska Public Power Distribution, RB, Refunding Bonds, Prerefunded
            
1/1/03 @ 102
            
5.25%, 01/01/03
  
 
2,000
  
 
2,046,212
         
NEVADA — 1.9%
            
Clark County Improvements District, VRDN, Local Improvements, Special Assessment, LOC: Bayerische Hypo Under Vereinsbank**
            
1.13%, 12/01/02
  
 
5,000
  
 
5,000,000
         
NEW JERSEY — 2.3%
            
New Jersey State Utilities Authority, GO, Bergen County
            
5.70%, 12/15/02
  
 
1,000
  
 
1,001,643
New Jersey State Educational Facilities, VRDN, RB, Princeton University
            
0.95%, 12/01/02
  
 
5,000
  
 
5,000,000
         
         
 
6,001,643
         
NEW YORK — 6.4%
            
City of New York, New York Water Financial Authority, VRDN, INS: FGIC**
            
1.25%, 12/03/02
  
 
2,000
  
 
2,000,000

 
See Accompanying Notes to Financial Statements.

8

Table of Contents

Mercantile Funds, Inc.
TAX-EXEMPT MONEY MARKET FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
Par
(000)
  
Value
             
NEW YORK — Continued
            
Long Island Power Authority, VRDN, RB, New York Electric Systems, MBIA, SPA: Credit Suisse First Boston**
            
1.13%, 12/07/02
  
$
4,000
  
$
4,000,000
New York City, VRDN, GO, 1993 Service Project
            
1.30%, 12/03/02
  
 
4,285
  
 
4,285,000
New York State Environmental Facilities Corp., TECP, RB, Clean Water & Drinking Revolving Fund
            
1.70%, 12/02/02
  
 
2,500
  
 
2,500,000
New York Transitional Financial Authority, GPI, RAN, New York City Recovery
            
1.45%, 01/07/03
  
 
4,000
  
 
4,000,000
         
         
 
16,785,000
         
NORTH CAROLINA — 4.7%
            
City of Durham, VRDN, COP, SPA: Wachovia Bank N.A.**
            
1.30%, 12/07/02
  
 
1,300
  
 
1,300,000
City of Winston-Salem, VRDN, COP, CPI, SPA: Wachovia Bank N.A.**
            
1.30%, 12/07/02
  
 
2,400
  
 
2,400,000
North Carolina Medical Care Community, VRDN, RB, Duke University Hospital, SPA: Wachovia Bank N.A.**
            
1.25%, 12/07/02
  
 
2,000
  
 
2,000,000
North Carolina State Highway Administration, GO
            
4.50%, 05/01/03
  
 
2,000
  
 
2,025,892
University of North Carolina, VRDN, RB, Housing Systems Revenue
            
1.10%, 12/07/02
  
 
4,400
  
 
4,400,000
         
         
 
12,125,892
         
OHIO — 5.5%
            
Cuyahoga County, VRDN, Hospital Revenue, Cleveland Clinic, SPA: Morgan Guaranty Trust Co. NY**
            
1.25%, 12/07/02
  
 
2,800
  
 
2,800,000
   
Par
(000)
  
Value
             
OHIO — Continued
            
Ohio State Highway Capital Improvements, GO
            
5.00%, 05/01/03
  
$
2,000
  
$
2,030,422
Ohio State Public Facilities, RB, Higher Education Capital Facilities
            
4.375%, 11/01/03
  
 
2,000
  
 
2,053,893
Ohio State University, VRDN, RB**
            
1.10%, 12/01/02
  
 
2,500
  
 
2,500,000
Warren County, Health Care, VRDN, Otterbein Homes, LOC: Fifth Third Bank**
            
1.30%, 12/07/02
  
 
5,050
  
 
5,050,000
         
         
 
14,434,315
         
OREGON — 1.0%
            
State of Oregon, GO, VRDN, RB, Veterans Welfare Board, SPA: Morgan Guaranty Trust Co. NY**
            
1.10%, 12/07/02
  
 
2,600
  
 
2,600,000
         
PENNSYLVANIA — 7.7%
            
Delaware County, IDA, VRDN, General Electric Capital Corp.**
            
1.10%, 12/07/02
  
 
2,200
  
 
2,200,000
Delaware County, IDA, VRDN, GTD, United Parcels Project**
            
0.99%, 12/01/02
  
 
2,600
  
 
2,600,000
Pennsylvania State Turnpike Commission, RB, VRDN, SPA: Mellon Bank
            
1.20%, 12/07/02
  
 
5,300
  
 
5,300,000
Pennsylvania State University, RB, VRDN, SPA: Toronto Dominion Bank**
            
1.17%, 12/07/02
  
 
2,500
  
 
2,500,000
State of Pennsylvania, GO, CPI, INS: AMBAC
            
5.125%, 09/15/03
  
 
2,300
  
 
2,367,259
University of Pittsburgh, VRDN, RB, Capital Project
            
1.25%, 12/07/02
  
 
5,000
  
 
5,000,000
         
         
 
19,967,259
         

 
See Accompanying Notes to Financial Statements.

9

Table of Contents

Mercantile Funds, Inc.
TAX-EXEMPT MONEY MARKET FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Par
(000)
  
Value
             
SOUTH CAROLINA — 2.3%
            
Berkeley County, VRDN, PCR, BP Amoco Chemical Co. Project
1.25%, 12/01/02
  
$
2,200
  
$
2,200,000
         
Charleston County School District, GO 4.00%, 02/01/03
  
 
2,055
  
 
2,062,906
Charleston County School District, GO 2.50%, 04/15/03
  
 
1,600
  
 
1,606,860
         
         
 
5,869,766
         
TENNESSEE — 2.3%
            
Memphis, GO, TECP, LIQ: Westdeutsche Landesbank
1.40%, 12/09/02
  
 
2,000
  
 
2,000,000
Shelby County, GO
            
6.75%, 04/01/03
  
 
2,140
  
 
2,176,152
4.50%, 05/01/03
  
 
1,750
  
 
1,772,650
         
         
 
5,948,802
         
TEXAS — 5.5%
            
Gulf Coast Waste Disposal Authority, VRDN, PCRB, Amoco Oil Co. Project, Refunding Bonds**
1.25%, 12/01/02
  
 
3,000
  
 
3,000,000
North Central Texas Health Facilities Development, VRDN, RB, Presbyterian Medical Center, INS: MBIA: Chase Manhattan Bank** 1.16%, 06/01/02
  
 
2,600
  
 
2,600,000
Richardson Texas Independent School District, GO
4.50%, 02/15/03
  
 
3,000
  
 
3,018,438
Red River Education Finance Corporation, VRDN, RB, Texas Christian University Project
1.25%, 12/07/02
  
 
2,000
  
 
2,000,000
Texas State, TRAN
2.75%, 08/29/03
  
 
4,000
  
 
4,039,826
         
         
 
14,658,264
         
UTAH — 0.5%
            
Salt Lake County, VRDN, PCRB, Service Station Holdings, INS: British Petroleum PLC
1.25%, 12/01/02
  
 
1,500
  
 
1,500,000
         
VIRGINIA — 0.7%
            
Fairfax County, GO, GPI, INS: SAW 4.50%, 12/01/02
  
 
2,000
  
 
2,000,000
         
   
Par
(000)
  
Value
             
WISCONSIN — 0.8%
            
State of Wisconsin, TECP, SPA: Bank of Nova Scotia
1.35%, 01/09/03
  
$
2,213
  
$
2,213,000
         
             
WYOMING — 1.3%
            
Lincoln County, VRDN, PCRB, Exxon Project**
1.20%, 12/01/02
  
 
2,000
  
 
2,000,000
Sublette County, VRDN, PCRB, Exxon Mobil Corp. Project** 1.20%, 12/01/02
  
 
1,300
  
 
1,300,000
         
         
 
3,300,000
         
TOTAL MUNICIPAL BONDS
      
(Cost $245,390,641)
        
 
245,390,641
         
   
 
 
Number of
Shares
  
 
Value
INVESTMENT COMPANIES — 5.5%
      
Goldman Sachs Financial Square Tax-Free Money Market Fund
  
 
9,424,015
  
 
9,424,015
Provident Institutional Funds —MuniFund
  
 
4,814,062
  
 
4,814,062
         
TOTAL INVESTMENT COMPANIES
      
(Cost $14,238,077)
        
 
14,238,077
         
TOTAL INVESTMENTS IN SECURITIES — 99.5%
(Cost $259,628,718*)
  
 
259,628,718
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.5%
  
 
696,544
         
NET ASSETS — 100.0%
  
$
260,325,262
         
NET ASSET VALUE PER SHARE
Institutional Shares
            
($260,310,921 ÷ 260,326,869 shares outstanding)
  
 
$1.00
         
Class A Shares
            
($13,341 ÷ 13,341 shares outstanding)
  
 
$1.00
         
Class C Shares
            
($1,001 ÷ 1,001 shares outstanding)
  
 
$1.00
         
*
 
Aggregate cost for Federal income tax purposes.
**
 
The rate shown is as of November 30, 2002 and the maturity date shown is the shorter of (i) the next interest readjustment date or (ii) the date on which the principal amount can be recovered through demand.

 
See Accompanying Notes to Financial Statements.

10

Table of Contents

Mercantile Funds, Inc.
GROWTH & INCOME FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 

 
   
Number of Shares
  
 
Value
           
COMMON STOCK — 93.9%
          
Consumer Discretionary — 10.3%
          
Costco Wholesale Corp.*
  
282,380
  
$
9,120,874
Cox Communications*
  
68,270
  
 
2,067,216
Dana Corp.
  
149,380
  
 
2,016,630
General Motors—Class H*
  
245,910
  
 
2,872,229
Johnson Controls, Inc.
  
48,980
  
 
4,059,952
Sony Corp. ADR
  
131,585
  
 
5,835,795
Tiffany & Co.
  
141,530
  
 
4,016,621
Wal-Mart Stores, Inc.
  
128,240
  
 
6,945,478
       
       
 
36,934,795
       
Consumer Staples — 11.7%
          
Campbell Soup Co.
  
137,880
  
 
3,329,802
Clorox Company
  
202,140
  
 
8,861,818
General Mills Inc.**
  
198,860
  
 
8,873,133
Nestle ADR
  
161,410
  
 
8,160,696
Pepsico, Inc.
  
114,080
  
 
4,846,118
Philip Morris, Inc.
  
87,500
  
 
3,300,500
Sysco Corp.
  
161,870
  
 
4,762,215
       
       
 
42,134,282
       
Energy — 6.5%
          
BP PLC ADR
  
247,260
  
 
9,695,065
Chevron-Texaco Corp.
  
100,254
  
 
6,720,026
Exxon Mobil Corp.
  
207,962
  
 
7,237,078
       
       
 
23,652,169
       
Financials — 16.7%
          
Berkshire Hathaway B, Inc.*
  
1,477
  
 
3,561,047
Capital One Financial**
  
168,030
  
 
5,679,414
Chubb Corp.
  
47,615
  
 
2,790,239
Citigroup, Inc.
  
101,550
  
 
3,948,264
Freddie Mac
  
54,810
  
 
3,159,248
Jefferson Pilot Corp.
  
164,115
  
 
6,260,987
Moody’s Corp.
  
63,350
  
 
2,788,667
Northern Trust Corp.
  
162,560
  
 
6,291,072
State Street Corp.
  
232,370
  
 
10,456,650
UNUMProvident Corp.
  
397,600
  
 
6,779,080
Wells Fargo Company
  
176,010
  
 
8,133,422
       
       
 
59,848,090
       
Financials — REIT — 0.7%
          
Archstone-Smith Trust
  
101,140
  
 
2,336,334
       
   
Number of Shares
  
 
Value
           
COMMON STOCK — Continued
          
Health Care — 16.3%
          
Bristol Myers Squibb Co.
  
343,880
  
$
9,112,820
Johnson & Johnson
  
189,800
  
 
10,822,396
Lilly (Eli), and Co.
  
170,790
  
 
11,664,957
Merck & Co., Inc.
  
245,480
  
 
14,583,967
Pfizer, Inc.
  
118,040
  
 
3,722,982
Zimmer Holdings Inc.*
  
226,516
  
 
8,526,062
       
       
 
58,433,184
       
Industrials — 15.0%
          
Automatic Data Processing
  
138,050
  
 
6,001,034
Emerson Electric Co.
  
153,670
  
 
8,013,891
General Electric Co.
  
162,010
  
 
4,390,471
Honeywell International
  
227,670
  
 
5,889,823
Norfolk Southern Corp.
  
454,350
  
 
8,964,326
Northrop Grumman Corp.**
  
36,520
  
 
3,539,153
Southwest Airlines Co.
  
331,455
  
 
5,502,153
United Parcel Service
  
82,260
  
 
5,211,994
United Technologies
  
98,530
  
 
6,155,169
       
       
 
53,668,014
       
Information Technology — 11.6%
          
Dell Computer Corp.*
  
233,190
  
 
6,662,238
IBM
  
83,860
  
 
7,304,206
Intel Corp.
  
186,190
  
 
3,887,647
Kyocera ADR
  
73,920
  
 
4,817,366
Microsoft*
  
170,710
  
 
9,870,452
Nokia Corp. ADR*
  
85,320
  
 
1,638,997
Qualcomm, Inc.*
  
74,800
  
 
3,083,256
Texas Instruments, Inc.
  
214,770
  
 
4,319,025
       
       
 
41,583,187
       
Telecommunication — 3.7%
          
Verizon Communications
  
196,330
  
 
8,222,300
Vodafone ADR
  
271,220
  
 
5,085,375
       
       
 
13,307,675
       
Utilities — 1.4%
          
FPL Group, Inc.
  
57,010
  
 
3,352,188
Xcel Energy, Inc.**
  
170,930
  
 
1,835,788
       
       
 
5,187,976
       
TOTAL COMMON STOCK
          
(Cost $328,767,368)
      
 
337,085,706
       

 
See Accompanying Notes to Financial Statements.

11

Table of Contents

Mercantile Funds, Inc.
GROWTH & INCOME FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Par
(000)
  
Value
             
REPURCHASE AGREEMENTS — 6.0%
      
Goldman Sachs Group, Inc.
      
(Agreement dated 11/29/02 to be repurchased at $10,001,092 collateralized by $9,087,000 (Value $10,333,254) U.S. Treasury Notes, 6.125%, due 11/15/27) 1.31% 12/02/02
  
$
10,000
  
$
10,000,000
Merrill Lynch
      
(Agreement dated 11/29/02 to be repurchased at $11,330,227 collateralized by $8,780,000 (Value $11,631,469) U.S. Treasury Notes, 10.375%, due 11/15/12) 1.30% 12/02/02
  
 
11,329
  
 
11,329,000
         
TOTAL REPURCHASE AGREEMENTS
      
(Cost $21,329,000)
        
 
21,329,000
         
   
Value
TOTAL INVESTMENTS IN SECURITIES — 99.9%
(Cost $350,096,368***)
  
$
358,414,706
       
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.1%
  
 
525,530
   
NET ASSETS — 100.0%
  
$
358,940,236
   
       
NET ASSET VALUE PER SHARE
      
Institutional Shares
      
($358,776,347 ÷ 23,635,806 shares outstanding)
  
 
$15.18
   
Class A Shares
      
($161,785 ÷ 10,657 shares outstanding)
  
 
$15.18
   
Class C Shares
      
($2,104 ÷ 139 shares outstanding)
  
 
$15.17
   
*
 
Non-income producing securities.
**
 
Certain share amounts are temporarily on loan to an unaffiliated broker/dealer.
***
 
Cost for Federal income tax purposes is $338,838,527. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
49,231,561
 
Excess of tax cost over value
   
$
(40,984,382
)

 
See Accompanying Notes to Financial Statements.

12

Table of Contents

Mercantile Funds, Inc.
EQUITY INCOME FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 

 
    
Number of Shares
  
Value
            
COMMON STOCK — 95.9%
           
Consumer Discretionary — 9.7%
           
Carnival Cruise
   
75,550
  
$
2,119,178
Gannett Co., Inc.
   
32,250
  
 
2,297,813
General Motors Corp.
   
25,650
  
 
1,018,305
May Department Stores Co.
   
54,200
  
 
1,325,732
Starwood Hotels & Resorts Corp.
   
20,075
  
 
508,500
Wal-Mart Stores, Inc.
   
32,500
  
 
1,760,200
        
        
 
9,029,728
        
Consumer Staples — 12.0%
           
Albertson’s, Inc.
   
37,925
  
 
885,169
Campbell Soup Co.
   
39,300
  
 
949,095
Conagra
   
57,000
  
 
1,389,090
CVS Corp.
   
29,225
  
 
785,568
General Mills, Inc.
   
51,725
  
 
2,307,970
Kimberly-Clark Corp.
   
28,650
  
 
1,441,668
Pepsico, Inc.
   
38,975
  
 
1,655,658
Procter & Gamble Co.
   
19,975
  
 
1,677,900
        
        
 
11,092,118
        
Energy — 7.9%
           
BP PLC ADR
   
68,425
  
 
2,682,944
Chevron-Texaco Corp.
   
20,210
  
 
1,354,676
Exxon Mobil Corp.
   
46,720
  
 
1,625,856
Schulmberger Ltd.
   
36,875
  
 
1,631,719
        
        
 
7,295,195
        
Financials — 20.9%
           
American International Group
   
15,375
  
 
1,001,681
Bank of New York
   
47,000
  
 
1,426,450
Chubb Corp.
   
24,700
  
 
1,447,420
Citigroup, Inc.
   
50,500
  
 
1,963,440
Comerica, Inc.
   
32,625
  
 
1,544,141
Freddie Mac
   
30,300
  
 
1,746,492
J.P. Morgan Chase & Co.
   
38,800
  
 
976,596
Lincoln National Corp.
   
58,000
  
 
2,038,120
St. Paul Co.
   
27,915
  
 
1,039,555
T. Rowe Price Group, Inc.
   
23,425
  
 
711,886
Wachovia Corp.
   
62,350
  
 
2,191,602
Wells Fargo Company
   
46,250
  
 
2,137,212
Zions Bancorp.
   
28,450
  
 
1,170,717
        
        
 
19,395,312
        
    
Number of Shares
  
Value
COMMON STOCK — Continued
           
            
Financials — REIT — 4.0%
           
Archstone-Smith Trust
   
79,965
  
$
  1,847,192
Equity Office Properties
   
72,345
  
 
1,859,990
        
        
 
3,707,182
        
Health Care — 9.7%
           
Bristol Myers Squibb Co.
   
35,800
  
 
948,700
Johnson & Johnson
   
33,400
  
 
1,904,468
Merck & Co., Inc.
   
43,575
  
 
2,588,791
Lilly (Eli), and Co.
   
23,625
  
 
1,613,587
Wyeth Co.
   
51,000
  
 
1,959,930
        
        
 
9,015,476
        
Industrials — 13.0%
           
Caterpillar, Inc.
   
45,300
  
 
2,260,470
Emerson Electric Co.
   
30,300
  
 
1,580,145
General Electric Co.
   
53,450
  
 
1,448,495
Honeywell International
   
75,865
  
 
1,962,627
Ingersoll-Rand
   
33,950
  
 
1,568,490
Minnesota Mining &
Manufacturing Co.
   
7,050
  
 
915,443
Southwest Airlines Co.
   
114,575
  
 
1,901,945
Tyco International
   
23,150
  
 
412,996
        
        
 
12,050,611
        
Information Technology — 8.1%
           
Autodesk
   
84,375
  
 
1,306,969
Avnet, Inc.
   
43,750
  
 
619,063
IBM
   
24,750
  
 
2,155,725
Intel Corp.
   
63,915
  
 
1,334,545
Microsoft*
   
19,750
  
 
1,141,945
Teradyne, Inc.***
   
59,200
  
 
970,288
        
        
 
7,528,535
        
Materials — 6.3%
           
Air Products & Chemicals
   
34,150
  
 
1,510,113
Dow Chemical Co.
   
55,875
  
 
1,782,412
Weyerhaeuser Co.
   
26,425
  
 
1,389,955
Worthington Industries, Inc.
   
64,285
  
 
1,132,702
        
        
 
5,815,182
        

 
See Accompanying Notes to Financial Statements.

13

Table of Contents

Mercantile Funds, Inc.
EQUITY INCOME FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Number of Shares
  
Value
             
COMMON STOCK — Continued
            
Telecommunication — 4.3%
            
SBC Communications, Inc.
  
 
53,825
  
$
1,534,012
Verizon Communications
  
 
58,700
  
 
2,458,356
         
         
 
3,992,368
         
TOTAL COMMON STOCK
            
(Cost $82,411,763)
        
 
88,921,707
         
   
 
 
Par
(000)
  
REPURCHASE AGREEMENT — 7.3%
      
Banc of America Securities, LLC
            
(Agreement dated 11/29/02 to be repurchased at $3,770,393 collateralized by $3,630,000 (Value $3,889,565) U.S. Treasury Notes, 4.75%, due 11/15/08) 1.25%, 12/02/02
  
$
3,770
  
 
3,770,000
Merrill Lynch
            
(Agreement dated 11/29/02 to be repurchased at $3,000,325 collateralized by $2,325,000 (Value $3,080,087) U.S. Treasury Notes, 10.375%, due 11/15/12) 1.30%, 12/02/02
  
 
3,000
  
 
3,000,000
         
TOTAL REPURCHASE AGREEMENTS
      
(Cost $6,770,000)
        
 
6,770,000
         
       
Value
           
TOTAL INVESTMENTS IN SECURITIES — 103.2%
(Cost $89,181,763***)
  
$
95,691,707
       
LIABILITIES IN EXCESS OF OTHER ASSETS — (3.2)%
  
 
(2,950,086)
       
NET ASSETS — 100.0%
  
$
92,741,621
       
NET ASSET VALUE PER SHARE
      
Institutional Shares
          
($92,739,401 ÷ 24,415,365 shares outstanding)
  
 
$3.80
       
Class A Shares
          
($1,111 ÷ 292 shares outstanding)
  
 
$3.80
       
Class C Shares
          
($1,110 ÷ 292 shares outstanding)
  
 
$3.80
       
*
 
Non-income producing securities.
**
 
Certain share amounts are temporarily on loan to an unaffiliated broker/dealer.
***
 
Cost for Federal income tax purposes is $89,287,764. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
15,605,500
 
Excess of tax cost over value
   
$
(9,198,557
)

 
See Accompanying Notes to Financial Statements.

14

Table of Contents

Mercantile Funds, Inc.
EQUITY GROWTH FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 

   
Number of Shares
  
 
Value
           
COMMON STOCK — 96.6%
          
Consumer Discretionary — 16.0%
          
Costco Wholesale Corp.*
  
27,680
  
$
894,064
Cox Communications*
  
16,650
  
 
504,162
General Motors — Class H*
  
44,200
  
 
516,256
Home Depot, Inc.
  
11,860
  
 
313,341
Johnson Controls, Inc.
  
7,300
  
 
605,097
Sony Corp. ADR
  
13,720
  
 
608,482
Tiffany & Co.
  
26,560
  
 
753,773
Wal-Mart Stores, Inc.
  
11,570
  
 
626,631
       
       
 
4,821,806
       
Consumer Staples — 10.3%
          
Colgate-Palmolive Co.
  
2,240
  
 
115,114
General Mills, Inc.
  
20,265
  
 
904,224
Nestle ADR
  
19,410
  
 
981,346
Pepsico, Inc.
  
9,010
  
 
382,745
Sysco Corp.
  
24,520
  
 
721,378
       
       
 
3,104,807
       
Financials — 11.7%
          
Capital One Financial
  
17,290
  
 
584,402
Citigroup, Inc.
  
7,410
  
 
288,101
Freddie Mac
  
2,630
  
 
151,593
Moody’s Corp.
  
18,190
  
 
800,724
Northern Trust Corp.
  
19,625
  
 
759,488
State Street Corp.
  
20,520
  
 
923,400
       
       
 
3,507,708
       
Health Care — 21.1%
          
Bristol Myers Squibb Co.
  
29,145
  
 
772,343
Guidant Corp.*
  
4,930
  
 
147,555
Johnson & Johnson
  
14,310
  
 
815,956
Lilly (Eli), & Co.
  
20,945
  
 
1,430,544
Merck & Co., Inc.
  
20,805
  
 
1,236,025
Pfizer, Inc.
  
38,725
  
 
1,221,387
Zimmer Holdings, Inc.*
  
19,145
  
 
720,618
       
       
 
6,344,428
       
Industrials — 13.8%
          
Automatic Data Processing
  
25,100
  
 
1,091,097
General Electric Co.
  
23,240
  
 
629,804
Honeywell International
  
19,410
  
 
502,137
Northrop Grumman Corp.**
  
5,730
  
 
555,294
    
Number of Shares
  
Value
COMMON STOCK — Continued
             
Industrials — Continued
      
              
Southwest Airlines Co.
   
 
51,920
  
$
861,872
United Technologies
   
 
8,060
  
 
503,508
          
          
 
4,143,712
          
Information Technology — 20.4%
             
Applied Materials, Inc.*
   
 
35,030
  
 
597,261
Dell Computer Corp.*
   
 
18,040
  
 
515,403
IBM
   
 
9,500
  
 
827,450
Intel Corp.
   
 
43,680
  
 
912,038
Microsoft*
   
 
25,280
  
 
1,461,690
Nokia Corp. ADR*
   
 
24,580
  
 
472,182
Qualcomm, Inc.*
   
 
18,805
  
 
775,142
Texas Instruments, Inc.
   
 
29,140
  
 
586,005
          
          
 
6,147,171
          
Telecommunication — 3.3%
             
Verizon Communications
   
 
10,430
  
 
436,808
Vodafone ADR
   
 
29,760
  
 
558,000
          
          
 
994,808
          
TOTAL COMMON STOCK
             
(Cost $28,957,221)
         
 
29,064,440
          
    
 
 
Par
(000)
  
REPURCHASE AGREEMENTS — 3.3%
      
Banc of America Securities, LLC
             
(Agreement dated 11/29/02 to be repurchased at $994,104 collateralized by $965,000
(Value $1,034,003) U.S. Treasury Notes, 4.75%, due 11/15/08) 1.25%, 12/02/02
   
$
994
  
 
994,000
          
TOTAL REPURCHASE AGREEMENT
      
(Cost $994,000)
         
 
994,000
          
TOTAL INVESTMENTS IN SECURITIES — 99.9%
(Cost $29,951,221***)
  
 
30,058,440
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.1%
  
 
18,889
          
NET ASSETS — 100.0%
  
$
30,077,329
          

 
See Accompanying Notes to Financial Statements.

15

Table of Contents

Mercantile Funds, Inc.
EQUITY GROWTH FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
       
Value
NET ASSET VALUE PER SHARE
    
Institutional Shares
($30,071,659 ÷ 5,302,535 shares outstanding)
  
$5.67
       
Class A Shares
($4,532 ÷ 800 shares outstanding)
  
$5.66
       
Class C Shares
($1,138 ÷ 201 shares outstanding)
  
$5.66
       
*
 
Non-income producing securities.
**
 
Certain share amounts are temporarily on loan to an unaffiliated broker/dealer.
***
 
Cost for Federal income tax purposes is $30,008,741. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
3,151,034
 
Excess of tax cost over value
   
$
(3,101,335
)
 

 
See Accompanying Notes to Financial Statements.

16

Table of Contents

Mercantile Funds, Inc.
CAPITAL OPPORTUNITIES FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 

    
Number of Shares
  
Value
            
COMMON STOCK — 89.7%
      
Basic Industry — 2.5%
      
Gray Television
   
38,100
  
$
385,572
Varian, Inc.*
   
19,500
  
 
612,690
        
        
 
998,262
        
Business Services — 1.2%
      
Brown & Brown, Inc.
   
8,000
  
 
275,360
Watson Wyatt & Co.*
   
9,900
  
 
209,880
        
        
 
485,240
        
Consumer Durables — 2.0%
      
Gentex Corp.*
   
22,300
  
 
669,223
WCI Communities, Inc.*
   
10,000
  
 
113,300
        
        
 
782,523
        
Consumer Non-Durables — 11.7%
      
American Italian Pasta Co.*
   
8,500
  
 
308,550
Coach, Inc.*
   
28,200
  
 
959,364
Constellation Brands, Inc.*
   
20,400
  
 
479,808
Cost Plus, Inc.*
   
26,000
  
 
850,200
Dick’s Sporting Goods*
   
6,800
  
 
142,868
Hibbett Sporting Goods*
   
23,200
  
 
579,536
Krispy Kreme Doughnuts*
   
14,400
  
 
540,000
Urban Oufitters Inc.*
   
29,600
  
 
781,736
        
        
 
4,642,062
        
Consumer Services — 15.3%
      
California Pizza Kitchen*
   
15,800
  
 
387,574
Cumulus Media, Inc.*
   
59,300
  
 
984,380
Extended Stay America*
   
32,900
  
 
460,271
Fidelity National Info Solutions*
   
9,900
  
 
197,604
Getty Images, Inc.*
   
17,800
  
 
531,686
Landry’s Seafood
   
22,900
  
 
491,892
Lendingtree, Inc.*
   
21,000
  
 
280,560
Lin TV Corp.*
   
31,000
  
 
756,400
Mediacom Corp.*
   
62,500
  
 
589,375
Sonic Corp.*
   
27,475
  
 
590,163
The Cheesecake Factory*
   
21,700
  
 
773,822
        
        
 
6,043,727
        
Energy — 5.4%
      
Cal Dive International, Inc.*
   
18,000
  
 
415,980
Denbury Resources, Inc.*
   
42,000
  
 
433,860
          
    
Number of Shares
  
Value
            
COMMON STOCK — Continued
      
Energy — Continued
      
          
Pride International Inc.*
   
72,200
  
$
1,009,356
W-H Energy Services*
   
19,400
  
 
288,866
        
        
 
2,148,062
        
Financial — 9.0%
      
Allegiant Bancorp
   
7,000
  
 
122,150
American Home Mortgage
   
18,600
  
 
202,182
Bankatlantic Bancorp
   
23,000
  
 
215,510
Brookline Bancorp
   
15,300
  
 
173,655
Doral Financial Corp.
   
18,850
  
 
508,008
Harleysville Group
   
9,000
  
 
236,070
Hub International Ltd.
   
7,300
  
 
92,272
PMA Capital Corp.
   
11,700
  
 
175,032
R & G Financial
   
15,900
  
 
363,315
Redwood Trust
   
27,300
  
 
742,014
Stewart Information*
   
19,100
  
 
395,370
Wintrust Financial
   
10,400
  
 
313,986
        
        
 
3,539,564
        
Health Care — 22.0%
      
Cima Labs*
   
26,400
  
 
700,128
Conceptus, Inc.*
   
52,000
  
 
721,240
Cross Country Inc.*
   
7,600
  
 
127,680
CV Therapeutics*
   
8,300
  
 
192,643
First Horizon Pharmaceutical*
   
28,800
  
 
175,392
Fischer Imaging Stock
   
43,500
  
 
210,975
Inhale Therapeutic*
   
69,900
  
 
638,187
Inspire Pharmaceuticals*
   
197,900
  
 
1,642,570
Intrabiotics Pharmaceuticals*
   
310,500
  
 
96,255
Medicines Co.*
   
22,300
  
 
374,194
Medicis Pharmaceuticals*
   
15,900
  
 
735,375
Neurocrine Biosciences*
   
23,000
  
 
1,059,840
Pain Therapeutics*
   
58,000
  
 
211,120
Tanox, Inc.*
   
52,300
  
 
577,915
Trimeris, Inc.*
   
12,600
  
 
605,430
Xoma*
   
112,200
  
 
624,954
        
        
 
8,693,898
        
Technology — 17.6%
      
Advanced Fibre Communications*
   
41,600
  
 
756,288
Agile Software Corp.*
   
104,500
  
 
936,320

 
See Accompanying Notes to Financial Statements.

17

Table of Contents

Mercantile Funds, Inc.
CAPITAL OPPORTUNITIES FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
    
Number of Shares
  
Value
            
COMMON STOCK — Continued
      
Technology — Continued
      
Ciena Corp.*
   
40,320
  
$
268,128
Coorstek Inc.*
   
10,700
  
 
244,495
Cymer Inc.*
   
8,300
  
 
301,547
Integral Systems*
   
38,100
  
 
777,240
Jack Henry & Associates
   
48,800
  
 
633,424
Micrel, Inc.*
   
24,700
  
 
280,864
O2Micro International Ltd.*
   
79,300
  
 
1,046,760
Skyworks Solutions, Inc.*
   
46,700
  
 
562,735
Tekelec*
   
41,400
  
 
421,866
Veridian Corp.*
   
19,800
  
 
415,800
Webex Communications Inc.*
   
15,600
  
 
303,576
        
        
 
6,949,043
        
Transportation — 3.0%
      
Heartland Express Inc.*
   
32,833
  
 
715,759
Knight Transportation*
   
23,000
  
 
454,963
        
        
 
1,170,722
        
TOTAL COMMON STOCK
           
(Cost $33,433,786)
       
 
35,453,103
        
AGENCY OBLIGATIONS — 10.4%
   
Par
(000)
      
Federal Farm Credit Bureau — 1.4%
         
Discount Note
           
1.22%, 12/02/02
   
185
  
 
184,987
1.22%, 12/19/02
   
370
  
 
369,762
        
        
 
554,749
        
Federal Home Loan Bank — 0.6%
      
Discount Note
           
1.65%, 12/20/02
   
250
  
 
249,828
        
Federal Home Loan Mortgage Corp. — 8.4%
      
Note
           
1.20%, 12/04/02
   
1,860
  
 
1,859,752
   
Par (000)
  
Value
           
AGENCY OBLIGATIONS — Continued
      
Federal Home Loan Mortgage Corp. — Continued
Discount Note
          
1.26%, 12/05/02
  
255
  
$
254,963
1.68%, 12/10/02
  
100
  
 
99,953
1.70%, 12/17/02
  
1,085
  
 
1,084,375
       
       
 
3,299,043
       
TOTAL AGENCY OBLIGATIONS
      
(Cost $4,103,752)
  
 
4,103,620
       
TOTAL INVESTMENTS IN SECURITIES — 100.1%
(Cost $37,537,538**)
  
 
39,556,723
LIABILITIES IN EXCESS OF OTHER ASSETS — (0.1)%
  
 
(35,726)
       
NET ASSETS — 100.0%
  
$
39,520,997
       
NET ASSET VALUE PER SHARE
      
Institutional Shares
      
($39,500,166 ÷ 5,971,539 shares outstanding)
  
 
$6.61
       
Class A Shares
      
($19,688 ÷ 2,982 shares outstanding)
  
 
$6.60
       
Class C Shares
      
($1,144 ÷ 173 shares outstanding)
  
 
$6.61
       
*
 
Non-income producing securities.
**
 
Aggregate cost for Federal income tax purposes is $38,773,063. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
5,397,772
 
Excess of tax cost over value
   
$
(4,614,112
)

 
See Accompanying Notes to Financial Statements.

18

Table of Contents

Mercantile Funds, Inc.
INTERNATIONAL EQUITY FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 
   
Number of
Shares
  
Value
           
COMMON & PREFERRED STOCK — 92.0%
Australia — 1.3%
Broken Hill Properties
  
39,452
  
$
224,141
Telstra Corp
  
260,900
  
 
669,365
WMC Limited
  
50,240
  
 
234,664
       
       
 
1,128,170
       
Austria — 0.6%
Erste Bank Der Oester
  
7,420
  
 
402,287
OMV AG
  
1,727
  
 
155,825
       
       
 
558,112
       
Brazil — 0.1%
Companhia De Bebidas ADR
  
3,261
  
 
48,915
       
Canada — 0.9%
Canadian Natural Resources*
  
4,166
  
 
109,030
Encana Corp.
  
12,672
  
 
344,990
Petro Canada
  
4,921
  
 
145,123
Royal Bank of Canada
  
2,210
  
 
82,596
Suncor Energy
  
7,300
  
 
107,641
       
       
 
789,380
       
Czech Republic — 1.1%
Komercni Banka
  
14,225
  
 
974,743
       
Denmark — 0.6%
Danisco
  
12,700
  
 
421,059
Danske Bank
  
7,090
  
 
118,719
       
       
 
539,778
       
Finland — 1.9%
Fortum Oyj
  
19,985
  
 
114,913
M-Real
  
7,072
  
 
57,337
Nokia ‘A Shares’*
  
54,830
  
 
1,058,171
Stora Enso
  
10,195
  
 
124,746
UPM-Kymmene
  
8,962
  
 
324,610
       
       
 
1,679,777
       
France — 8.9%
Accor SA
  
5,601
  
 
196,297
Alstom
  
14,776
  
 
84,520
Autoroutes Du Sud de La*
  
5,716
  
 
141,873
Aventis
  
26,015
  
 
1,447,970
Banque National de Paris
  
14,120
  
 
575,910
Bouygues
  
7,600
  
 
224,924
   
Number of
Shares
  
Value
           
COMMON & PREFERRED STOCK — Continued
France — Continued
Carrefour
  
2,525
  
$
110,924
Danone
  
11,485
  
 
1,504,710
Lafarge Coppee
  
2,265
  
 
184,314
Lvmh Moet Hennessy
  
3,029
  
 
142,828
PSA Peugeot Citroen
  
2,319
  
 
104,620
Remy Cointreau
  
2,797
  
 
82,917
Renault SA
  
1,200
  
 
59,258
Societe Generale
  
11,700
  
 
658,777
St. Gobain
  
5,989
  
 
180,940
Total Fina Elf S.A.
  
11,071
  
 
1,487,914
Valeo
  
4,400
  
 
144,007
Vinci
  
5,252
  
 
301,726
Vivendi Universal SA
  
4,515
  
 
73,143
       
       
 
7,707,572
       
Germany — 4.0%
Allianze AG
  
568
  
 
63,907
Bayer AG
  
2,755
  
 
63,310
Bayerische Motor Wrke
  
6,585
  
 
224,036
Continental AG
  
5,445
  
 
88,292
Depfa Bank AG
  
1,125
  
 
46,221
Deutsche Bank AG
  
2,600
  
 
130,876
Deutsche Telekom
  
47,535
  
 
580,694
E. On AG
  
7,000
  
 
302,220
Fraport AG
  
5,136
  
 
105,762
Heidelberger
  
2,200
  
 
56,793
Henkel Kgaa-Vorzug
  
1,776
  
 
108,833
Kali & Salz AG
  
2,756
  
 
48,802
Linde AG
  
1,529
  
 
57,648
Muenchener Reuckversicherungs
  
3,582
  
 
499,585
Porsche AG Preferred
  
146
  
 
67,827
RWE AG
  
10,120
  
 
287,424
Strada Arzneimittel AG
  
3,315
  
 
126,634
Volkswagen AG
  
10,455
  
 
425,386
Volkswagen AG, Preferred
  
1,850
  
 
54,843
Wella AG
  
1,671
  
 
93,089
Wella AG, Preferred
  
1,005
  
 
56,987
       
       
 
3,489,169
       
Hong Kong — 0.4%
Bank of East Asia
  
54,565
  
 
95,155

 
See Accompanying Notes to Financial Statements.

19

Table of Contents

Mercantile Funds, Inc.
INTERNATIONAL EQUITY FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
Number of
Shares
  
Value
           
COMMON & PREFERRED STOCK — Continued
Hong Kong — Continued
Hong Kong Land Holdings Ltd.
  
166,000
  
$
222,440
       
       
 
317,595
       
Hungary — 1.1%
EGIS RT
  
4,965
  
 
297,406
OTP Bank
  
72,890
  
 
686,260
       
       
 
983,666
       
Indonesia — 0.0%
PT Indofood Sukses Makmur
  
610,015
  
 
39,071
       
Ireland — 0.1%
Allied Irish Banks
  
5,315
  
 
74,446
Bank of Ireland
  
4,074
  
 
44,216
       
       
 
118,662
       
Italy — 3.2%
Banca Popolare Di Verona
  
10,325
  
 
114,525
Cassa Di Risparmio
  
100,831
  
 
126,988
Credito Italiano
  
49,042
  
 
195,636
Ente Nazionale Idrocarburi*
  
91,278
  
 
1,327,546
Parmalat Finanziaria
  
19,768
  
 
47,393
Snam Rete Gas
  
39,435
  
 
122,005
Telecom Italia
  
169,300
  
 
912,834
       
       
 
2,846,927
       
Japan — 17.0%
Asahi Kasei Corp.*
  
51,000
  
 
119,887
Asatsu-DK, Inc.
  
8,200
  
 
152,602
Canon Inc.
  
17,000
  
 
648,002
Central Japan Railway Co.
  
61
  
 
381,390
Dai Nippon Printing*
  
62,000
  
 
735,812
Daiwa Securities
  
74,000
  
 
338,848
Fuji Photo Film
  
13,000
  
 
422,316
Fuji Television Network
  
178
  
 
735,159
Fujitsu Ltd.
  
246,000
  
 
879,468
Honda Motor
  
4,142
  
 
156,193
Ito Yokado Co.
  
3,470
  
 
119,240
Japan Tobacco Inc.
  
89
  
 
552,096
Kao Corp.
  
10,406
  
 
223,383
Lawson Inc.
  
10,300
  
 
278,276
Matsushita Electric Inds.
  
33,000
  
 
338,579
Millea Holdings Inc.*
  
78
  
 
600,367
   
Number of
Shares
  
Value
           
COMMON & PREFERRED STOCK — Continued
Japan — Continued
Mitsubishi Estate Co. Ltd.
  
44,000
  
$
328,613
Mitsui Sumitomo*
  
63,000
  
 
274,081
Nippon Telegraph & Telephone
  
207
  
 
814,382
Nissan Motor Corp.
  
22,652
  
 
180,639
Nomura Securities
  
29,070
  
 
349,746
Rohm Co.
  
3,100
  
 
433,694
Sankyo Co. Ltd.
  
50,000
  
 
564,829
Sekisui House Ltd.
  
65,000
  
 
471,126
Shionogi & Co.
  
8,000
  
 
109,766
Shisedo Let Ord
  
10,483
  
 
124,583
Sumitomo Electric Inds.*
  
87,000
  
 
553,181
Takeda Chemical Industries
  
2,061
  
 
86,636
Tokyo Broadcast
  
18,800
  
 
270,073
Tokyo Electric Power Co.*
  
7,200
  
 
122,238
Tokyo Gas Co. Ltd.
  
128,000
  
 
381,341
Tokyo Price Index
  
89,294
  
 
655,957
Toppan Printing
  
39,000
  
 
287,451
Toyo Seikan Kaisha
  
30,000
  
 
327,633
Toyota Motor Corp.*
  
25,400
  
 
667,575
Yamanouchi Pharmaceutical
  
46,600
  
 
1,270,408
       
       
 
14,955,570
       
Netherlands — 8.9%
ABN Amro Holding NV
  
24,625
  
 
422,817
Akzo Nobel
  
23,868
  
 
747,695
CSM
  
17,300
  
 
342,996
Fortis NL*
  
23,370
  
 
414,288
Grolsch
  
2,947
  
 
58,633
Gucci Group
  
400
  
 
36,052
Heijmans
  
4,399
  
 
76,145
ING Groep
  
25,018
  
 
476,604
Koninklijke KPN*
  
45,220
  
 
300,499
Kon Philips Electronics
  
44,300
  
 
972,176
Libertel
  
9,584
  
 
94,388
NLG Heineken
  
10,000
  
 
377,726
Rodamco Europe
  
1,620
  
 
69,233
Royal Dutch Petroleum
  
44,831
  
 
1,964,091
Royal Volker Wessels
  
5,234
  
 
97,054
TNT Post Group
  
2,965
  
 
54,243
Unilever*
  
22,610
  
 
1,318,056
       
       
 
7,822,696
       

 
See Accompanying Notes to Financial Statements.

20

Table of Contents

Mercantile Funds, Inc.
INTERNATIONAL EQUITY FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
Number of
Shares
  
Value
           
COMMON & PREFERRED STOCK — Continued
New Zealand — 0.4%
Telecom Corp of New Zealand
  
129,960
  
$
313,163
       
Norway — 1.3%
DNB Holding ASA
  
22,855
  
 
112,036
Gjensidige Nor ASA
  
6,255
  
 
196,443
Nordlandsbanken ASA
  
7,565
  
 
28,820
Norsk Hydro
  
3,838
  
 
153,027
Orkla ASA
  
13,672
  
 
236,159
Sparebanken Midt
  
4,428
  
 
97,950
Sparebanken Rogaland
  
7,261
  
 
194,327
Statoil ASA
  
7,169
  
 
52,371
Telenor ASA
  
15,312
  
 
62,306
       
       
 
1,133,439
       
Poland — 1.3%
Agora SA*
  
4,250
  
 
57,577
Bank Pekao*
  
27,440
  
 
664,360
Bank Zachodni WBK SA
  
11,823
  
 
222,183
Budimex*
  
20,300
  
 
153,906
Telekomunikacja Polsk
  
20,150
  
 
70,124
       
       
 
1,168,150
       
Portugal — 0.3%
Electricidade De Portugal
  
176,805
  
 
297,247
       
Romania — 0.1%
Romanian Development Bank
  
121,000
  
 
86,512
       
Russian Federation — 0.3%
Sun Interbrew LTD GDR*
  
21,400
  
 
103,790
Surgutneftegaz
  
3,200
  
 
53,600
Wimm Bill Dann Foods ADR*
  
4,540
  
 
83,763
       
       
 
241,153
       
South Korea — 1.1%
Samsung Electronics GDR
  
5,965
  
 
957,383
       
Spain — 1.4%
Acerinox SA
  
1,700
  
 
65,938
Aurea Conces
  
3,889
  
 
82,985
Endesa SA
  
21,382
  
 
253,336
Grupo Dragados SA
  
3,600
  
 
56,942
Groupo Empresarial Ence
  
3,990
  
 
56,324
Groupo Ferrovial
  
2,924
  
 
70,277
Telefonica SA*
  
52,712
  
 
536,964
   
Number of
Shares
  
Value
           
COMMON & PREFERRED STOCK — Continued
Spain — Continued
Vallehermoso SA
  
6,690
  
$
62,559
       
       
 
1,185,325
       
Sweden — 1.3%
Foereningssparbanken
  
30,900
  
 
381,759
Nordea AB
  
134,070
  
 
655,161
Svenska Cell
  
3,297
  
 
114,199
       
       
 
1,151,119
       
Switzerland — 7.7%
Cie Financiere Richemont
  
12,851
  
 
242,570
Credit Suisse Group
  
15,631
  
 
367,751
Givaudan
  
185
  
 
76,948
Holcim Ltd
  
2,046
  
 
407,573
Nestle
  
8,710
  
 
1,761,493
Novartis AG
  
33,425
  
 
1,243,805
Roche Holdings
  
11,037
  
 
784,955
Schindler Holding
  
2,400
  
 
402,858
Swatch Group
  
2,943
  
 
264,858
Syngenta AG
  
1,050
  
 
59,458
UBS AG*
  
18,070
  
 
910,565
Zurich Financial Services Group
  
2,380
  
 
256,306
       
       
 
6,779,140
       
United Kingdom — 26.7%
Acambis*
  
11,622
  
 
45,119
Allied Domecq
  
84,943
  
 
503,242
Arm Holdings*
  
27,519
  
 
28,903
Associated British Foods
  
7,715
  
 
66,505
Aviva PLC
  
54,375
  
 
464,072
BAA
  
37,300
  
 
304,123
BAE Systems PLC
  
268,970
  
 
708,341
Barclays*
  
119,000
  
 
861,013
BHP Billiton PLC
  
77,059
  
 
408,872
BOC Group
  
38,900
  
 
541,729
BP Amoco
  
278,625
  
 
1,814,367
British American Tobacco
  
88,600
  
 
799,597
Bunzl
  
46,600
  
 
309,616
Cadbury Schweppes
  
219,600
  
 
1,424,879
Diageo
  
13,207
  
 
137,583
Gallagher Group
  
7,395
  
 
65,127
GlaxoSmithKline
  
115,800
  
 
2,167,623

 
See Accompanying Notes to Financial Statements.

21

Table of Contents

Mercantile Funds, Inc.
INTERNATIONAL EQUITY FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Number of
Shares
  
Value
           
COMMON & PREFERRED STOCK — Continued
United Kingdom — Continued
Great Universal Stores
  
79,300
  
$
726,772
Hays PLC
  
407,700
  
 
626,451
Hilton Group
  
83,634
  
 
239,773
HSBC Holdings
  
79,300
  
 
940,855
Imperial Tobacco*
  
53,500
  
 
760,036
Lloyds TSB
  
34,350
  
 
289,959
National Grid Transco
  
101,687
  
 
682,349
Pearson PLC
  
31,891
  
 
366,958
Prudential Corp.
  
41,127
  
 
342,686
Reckitt Benckiser
  
21,377
  
 
371,543
Reed Elsevier
  
137,200
  
 
1,206,180
Regent Inns
  
27,710
  
 
33,890
Rentokil Initial
  
243,400
  
 
797,227
RMC Group PLC
  
13,700
  
 
89,745
Rolls-Royce
  
125,040
  
 
252,931
Sainsbury
  
142,900
  
 
657,051
Scottish & Newcastle
  
1
  
 
7
Scottish & Southern Energy
  
11,575
  
 
111,576
Six Continents
  
21,405
  
 
188,180
South African Brewers
  
7,895
  
 
54,789
Standard Charter PLC
  
11,662
  
 
140,632
Tesco
  
41,560
  
 
131,275
UK Royal Bank of Scotland
  
4,427
  
 
113,521
Unilever PLC
  
26,315
  
 
234,417
Vodafone Group*
  
1,098,040
  
 
2,084,432
Wolseley
  
37,400
  
 
317,741
WPP Group
  
116,000
  
 
982,801
       
       
 
23,394,488
       
Venezuela — 0.0%
Cia Anonima ADR
  
2,219
  
 
29,025
       
TOTAL COMMON STOCK & PREFERRED STOCK
(Cost $82,036,116)
  
 
80,735,947
       
EXCHANGE TRADED FUNDS — 2.0%
Ireland — 1.4%
Fresco Dow Jones Euro STOXX 50 Fund
  
46,646
  
 
1,225,051
   
Number of
Shares
  
Value
           
EXCHANGE TRADED FUNDS — Continued
USA — 0.6%
ishares S&P Europe 350 Index Fund
  
11,004
  
$
554,051
       
TOTAL EXCHANGE TRADED FUNDS
      
(Cost $1,696,441)
  
 
1,779,102
       
   
 
 
Par
(000)
  
SHORT-TERM INVESTMENTS — 3.0%
Eurodollar Time Deposit
      
Morgan Stanley Dean Witter
     
(Cost $2,653,000)
  
$
2,653
  
 
2,653,000
         
TOTAL INVESTMENTS IN SECURITIES — 97.0%
(Cost $86,385,557**)
  
 
85,168,049
OTHER ASSETS IN EXCESS OF LIABILITIES — 3.0%
  
 
2,614,092
         
NET ASSETS — 100.0%
  
$
87,782,141
         
NET ASSET VALUE PER SHARE
      
Institutional Shares
            
($87,762,423 ÷ 9,146,493 shares outstanding)
  
 
$9.60
         
Class A Shares
            
($18,646 ÷ 1,944 shares outstanding)
  
 
$9.59
         
Class C Shares
            
($1,072 ÷ 112 shares outstanding)
  
 
$9.58
         
*
 
Non-income producing securities.
**
 
Cost for Federal income tax purposes is $82,605,417. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
5,647,888
 
Excess of tax cost over value
   
$
(7,930,261
)

 
See Accompanying Notes to Financial Statements.

22

Table of Contents

Mercantile Funds, Inc.
DIVERSIFIED REAL ESTATE FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 

   
Number of Shares
  
Value
           
REAL ESTATE INVESTMENT TRUSTS — 93.2%
Apartments — 22.2%
AMLI Residential Properties Trust
  
22,200
  
$
477,966
Apartment Investment & Management Co.
  
36,000
  
 
1,345,320
Archstone-Smith Trust
  
57,657
  
 
1,331,877
Avalonbay Communities
  
32,634
  
 
1,292,306
BRE Properties, Inc.
  
40,000
  
 
1,230,400
Equity Residential Properties Trust
  
47,900
  
 
1,251,148
Essex Property Trust
  
23,000
  
 
1,173,000
Gables Residential Trust
  
28,200
  
 
696,258
Home Properties
  
39,000
  
 
1,277,250
Summit Properties, Inc.
  
40,000
  
 
766,000
United Dominion Realty Trust, Inc.
  
71,500
  
 
1,109,680
       
       
 
11,951,205
       
Diversified — 9.1%
Colonial Properties Trust
  
12,400
  
 
408,208
Duke-Weeks Realty Corp.
  
40,678
  
 
1,016,950
Eastgroup Properties
  
20,900
  
 
518,947
Liberty Property Trust
  
28,800
  
 
905,760
Vornado Realty Trust
  
40,000
  
 
1,494,400
Washington REIT
  
20,000
  
 
505,200
       
       
 
4,849,465
       
Health Care — 6.9%
Health Care Property Investors
  
26,000
  
 
1,133,340
Health Care Realty Trust
  
29,000
  
 
890,590
Health Care REIT
  
22,000
  
 
612,700
Nationwide Health Properties, Inc.
  
30,100
  
 
480,697
Senior Housing
  
50,000
  
 
560,000
       
       
 
3,677,327
       
Hotel — 5.9%
Hilton Hotels Corp.
  
35,000
  
 
479,150
Hospitality Properties
  
42,000
  
 
1,432,200
Host Marrioitt Corp.**
  
40,000
  
 
366,000
Starwood Hotels & Resorts
  
35,000
  
 
886,550
       
       
 
3,163,900
       
Office Properties — 16.6%
Arden Realty Group, Inc.
  
32,500
  
 
724,100
   
Number of Shares
  
Value
           
REAL ESTATE INVESTMENT TRUSTS — Continued
Office Properties — Continued
Boston Properties, Inc.
  
29,300
  
$
1,086,151
Carramerica Realty Corp.
  
35,400
  
 
896,328
Corporate Office Properties Trust
  
67,000
  
 
913,210
Cousins Properties, Inc.
  
33,600
  
 
808,080
Crescent Real Estate Equities, Inc.
  
44,500
  
 
740,925
Highwood Properties, Inc.
  
24,000
  
 
489,600
Mack Cali Realty Corp.
  
27,800
  
 
834,000
Prentiss Properties Trust
  
35,000
  
 
962,150
SL Green Realty Corp.
  
45,000
  
 
1,427,400
       
       
 
8,881,944
       
Other — 3.0%
Capital Auto
  
39,000
  
 
964,470
Plum Creek Timber Co.
  
26,000
  
 
633,100
       
       
 
1,597,570
       
Retail — 17.0%
CBL & Associates Properties, Inc.
  
18,900
  
 
742,770
Equity One, Inc.
  
41,000
  
 
549,400
General Growth Properties, Inc.**
  
26,000
  
 
1,284,400
Glimcher Realty Trust
  
25,000
  
 
412,500
IRT Property Company
  
29,800
  
 
354,024
Kimco Realty Corp.
  
26,750
  
 
838,613
New Plan Excel Realty
  
33,000
  
 
624,360
Pan Pacific Retail Properties
  
26,650
  
 
951,405
Regency Centers Corp.
  
23,000
  
 
710,700
Simon Property Group, Inc.
  
33,500
  
 
1,129,620
Sizeler Property Investments
  
60,000
  
 
570,000
Taubman Centers, Inc.
  
39,800
  
 
647,944
Urstadt Biddle
  
27,000
  
 
309,960
       
       
 
9,125,696
       
Storage — 3.9%
Public Storage, Inc.
  
33,600
  
 
1,045,295
Shurgard Storage
  
17,000
  
 
525,300
Sovran Self Storage, Inc.
  
19,400
  
 
543,200
       
       
 
2,113,795
       
Warehouse/Industrial — 8.6%
AMB Property Corp.
  
35,000
  
 
967,750
Centerpoint Properties Trust
  
16,000
  
 
914,880

 
See Accompanying Notes to Financial Statements.

23

Table of Contents

Mercantile Funds, Inc.
DIVERSIFIED REAL ESTATE FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Number of Shares
  
Value
           
REAL ESTATE INVESTMENT TRUSTS — Continued
Warehouse/Industrial — Continued
First Industrial Realty Trust, Inc.
  
30,100
  
$
813,001
Keystone Property Trust
  
37,000
  
 
621,600
Prologis Trust
  
51,620
  
 
1,268,820
       
       
 
4,586,051
       
TOTAL REAL ESTATE INVESTMENT TRUSTS
(Cost $47,247,812)
  
 
49,946,953
       
INVESTMENT COMPANIES — 6.7%
Goldman Sachs Financial Square Prime Obligations Fund
  
1,913,361
  
 
1,913,361
Provident Institutional Funds — TempFund
  
1,659,731
  
 
1,659,731
       
TOTAL INVESTMENT COMPANIES
      
(Cost $3,573,092)
  
 
3,573,092
       
       
Value
TOTAL INVESTMENTS IN SECURITIES — 99.9%
(Cost $50,820,904***)
  
$53,520,045
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.1%
  
57,040
       
NET ASSETS — 100.0%
  
$53,577,085
       
NET ASSET VALUE PER SHARE
    
Institutional Shares
    
($53,513,594 ÷ 5,039,496 shares
outstanding)
  
$10.62
Class A Shares
($28,724 ÷ 2,709 shares outstanding)
  
$10.60
Class C Shares
($34,766 ÷ 3,279 shares outstanding)
  
$10.60
*
 
Non-income producing securities.
**
 
Certain share amounts are temporarily on loan to an unaffiliated broker/dealer.
***
 
Aggregate cost for Federal income tax purposes is $49,644,404. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
4,052,034
 
Excess of tax cost over value
   
$
(1,428,943
)

 
See Accompanying Notes to Financial Statements.

24

Table of Contents

Mercantile Funds, Inc.
LIMITED MATURITY BOND FUND
Statement of Net Assets 
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
AGENCY OBLIGATIONS — 32.4%
Federal Farm Credit Bank — 2.6%
Notes
            
1.67%, 01/02/03
  
$
2,000
  
$
2,000,000
2.50%, 11/15/05
  
 
2,325
  
 
2,307,563
         
         
 
4,307,563
         
Federal Home Loan Bank — 3.0%
Discount Notes
            
1.65%, 12/20/02
  
 
3,000
  
 
2,997,933
1.24%, 01/17/03
  
 
2,000
  
 
1,996,693
         
         
 
4,994,626
         
Federal Home Loan Mortgage Corp. — 7.6%
Note
            
3.00%, 07/15/04
  
 
2,720
  
 
2,760,800
Mortgage Backed Securities
            
6.00%, 04/01/14
(Pool #E76190)
  
 
6,231
  
 
6,497,307
5.50%, 10/15/16
(Pool #E01042)
  
 
2,993
  
 
3,072,310
         
         
 
12,330,417
         
Federal National Mortgage Association — 13.4%
Collateralized Mortgage Obligation
      
5.50%, 07/25/27
  
 
2,500
  
 
2,551,422
Discount Note
            
1.69%, 12/24/02
  
 
5,000
  
 
4,995,082
Mortgage Backed Securities
            
6.50%, 11/01/13
(Pool #252098)
  
 
2,495
  
 
2,626,173
6.50%, 04/01/14
(Pool #323654)
  
 
4,402
  
 
4,632,347
6.00%, 04/01/14
(Pool #484807)
  
 
1,108
  
 
1,155,916
6.00%, 01/01/17
(Pool #624250)
  
 
4,568
  
 
4,748,177
Note
            
3.13%, 08/15/05
  
 
1,345
  
 
1,355,088
         
         
 
22,064,205
         
Government National Mortgage Association — 5.0%
Mortgage Backed Securities
            
6.00%, 06/15/13
(Pool #456934)
  
 
1,293
  
 
1,361,091
   
 
 
Par
(000)
  
 
Value
             
AGENCY OBLIGATIONS — Continued
Government National Mortgage Association — Continued
Mortgage Backed Securities — Continued
      
6.00%, 07/15/13
(Pool #433894)
  
$
1,812
  
$
1,907,150
6.50%, 06/15/14
(Pool #510976)
  
 
447
  
 
472,166
6.50%, 11/15/15
(Pool #479694)
  
 
715
  
 
754,418
5.50%, 09/15/16
(Pool #564803)
  
 
1,567
  
 
1,619,364
5.50%, 10/15/16
(Pool #570640)
  
 
136
  
 
140,771
6.00%, 04/15/17
(Pool #552489)
  
 
1,871
  
 
1,959,020
         
         
 
8,213,980
         
Small Business Administration — 0.8%
Note
            
5.20%, 08/01/12
  
 
1,300
  
 
1,303,250
         
TOTAL AGENCY OBLIGATIONS
      
(Cost $51,745,351)
        
 
53,214,041
         
DOMESTIC CORPORATE BONDS — 34.7%
Automotive — 2.9%
Ford Motor Credit Corp.
            
6.00%, 01/14/03
  
 
2,800
  
 
2,802,582
General Motors Acceptance Corp.
            
6.13%, 09/15/06
  
 
2,000
  
 
1,995,000
         
         
 
4,797,582
         
Banking — 1.6%
Wachovia Corp.
            
6.70%, 06/21/04
  
 
2,500
  
 
2,667,595
         
Beverages — 1.8%
Pepsico Inc. Medium Term Note
            
5.75%, 01/02/03
  
 
3,000
  
 
3,008,115
         
Chemicals — 1.7%
Dow Chemical*
            
6.00%, 10/01/12
  
 
800
  
 
797,000
E.I. duPont deNemours & Co. Medium Term Note
            
6.00%, 03/06/03
  
 
2,000
  
 
2,023,004
         
         
 
2,820,004
         

 
See Accompanying Notes to Financial Statements.

25

Table of Contents

Mercantile Funds, Inc.
LIMITED MATURITY BOND FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
DOMESTIC CORPORATE BONDS — Continued
Computers — 1.0%
Hewlett Packard Company
            
7.15%, 06/15/05
  
$
1,350
  
$
1,444,500
         
Consumer Staples — 1.9%
Proctor & Gamble Co.
            
4.75%, 06/15/03
  
 
800
  
 
840,053
Unilever Capital Corp.
            
6.75%, 11/01/03
  
 
2,165
  
 
2,262,425
         
         
 
3,102,478
         
Drugs — 0.5%
Wyeth
            
6.700%, 03/15/11
  
 
800
  
 
863,000
         
Entertainment — 1.5%
AOL Time Warner
            
6.125%, 04/15/06
  
 
1,500
  
 
1,510,938
Viacom*
            
5.63%, 08/15/12
  
 
800
  
 
831,000
         
         
 
2,341,938
         
Finance — 7.0%
CIT Group
            
7.50%, 11/14/03
  
 
2,000
  
 
2,075,000
Citigroup, Inc.
            
1.95%, 07/17/03
  
 
1,750
  
 
1,752,188
Duke Capital
            
2.03%, 02/28/03
  
 
2,800
  
 
2,779,000
Household Finance
            
6.75%, 05/15/11
  
 
790
  
 
801,860
John Deere Capital
            
4.13%, 07/15/05
  
 
2,100
  
 
2,149,875
Merrill Lynch
            
2.14%, 06/11/04
  
 
2,000
  
 
1,995,296
         
         
 
11,553,219
         
Food & Beverage — 2.0%
Kellogg Co.
            
5.50%, 04/01/03
  
 
2,250
  
 
2,275,313
6.00%, 04/01/06
  
 
1,000
  
 
1,077,186
         
         
 
3,352,499
         
   
 
 
Par
(000)
  
 
Value
             
DOMESTIC CORPORATE BONDS — Continued
Home Furnishings — 1.5%
Leggett & Platt, Inc.
            
7.65%, 02/15/05
  
$
2,250
  
$
2,439,022
         
Manufacturing — 1.2%
Honeywell, Inc.
            
6.125%, 11/01/11
  
 
800
  
 
842,000
Minnesota Mining & Manufacturing Co.
5.62%, 07/15/09
  
 
1,056
  
 
1,119,791
         
         
 
1,961,791
         
Oil & Exploration — 1.6%
BP Canada
            
3.38%, 10/31/07
  
 
800
  
 
786,000
ChevronTexaco
            
3.50%, 09/17/07
  
 
800
  
 
795,000
Occidental
            
4.000%, 11/30/07
  
 
1,000
  
 
991,245
         
         
 
2,572,245
         
Pharmaceuticals — 0.9%
Merck & Co.
            
4.125%, 01/18/05
  
 
1,500
  
 
1,550,625
         
Telecommunications — 2.3%
Motorola, Inc.
            
6.75%, 02/01/06
  
 
2,000
  
 
2,042,500
SBC
            
5.88%, 02/01/12
  
 
820
  
 
858,950
Verizon
            
6.000%, 04/15/08
  
 
800
  
 
827,000
         
         
 
3,728,450
         
Utilities — Electrical & Electronic — 0.5%
Boston Edison
            
4.875%, 10/15/12
  
 
800
  
 
781,000
         
Utilities — Gas/Gas & Electric — 4.4%
Baltimore Gas & Electric
            
6.50%, 02/15/03
  
 
2,500
  
 
2,519,643
Constellation Energy
            
6.35%, 04/01/07
  
 
300
  
 
310,125
6.125%, 09/01/09
  
 
500
  
 
500,000

 
See Accompanying Notes to Financial Statements.

26

Table of Contents

Mercantile Funds, Inc.
LIMITED MATURITY BOND FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
DOMESTIC CORPORATE BONDS — Continued
Utilities — Gas/Gas & Electric — Continued
Consolidated Natural Gas Co.
            
5.75%, 08/01/03
  
$
475
  
$
484,500
Keyspan
            
7.625%, 11/15/10
  
 
820
  
 
937,875
Progress Energy
            
6.85%, 04/15/12
  
 
400
  
 
429,000
Wisconsin Electric Power
            
6.625%, 12/01/02
  
 
2,000
  
 
2,000,205
         
         
 
7,181,348
         
Utilities — Water — 0.4%
Natural Rural Utilities Cooperative
      
5.750%, 12/01/08
  
 
700
  
 
717,500
         
TOTAL DOMESTIC CORPORATE BONDS
(Cost $55,707,004)
  
 
56,882,911
         
FOREIGN BONDS — 3.6%
Sovereign Agency — 1.7%
Japan Bank for International Cooperation
      
7.125%, 06/20/05
  
 
2,500
  
 
2,748,255
         
International Finance — 1.9%
KFW International
            
4.75%, 01/24/07
  
 
1,500
  
 
1,574,577
Oesterreich Kontrollbank
            
5.125%, 03/20/07
  
 
1,500
  
 
1,599,375
         
         
 
3,173,952
         
TOTAL FOREIGN BONDS
      
(Cost $5,490,771)
  
 
5,922,207
         
U.S. TREASURY OBLIGATIONS — 15.1%
U.S. Treasury Bills — 6.7%
1.88%, 12/05/02
  
 
5,000
  
 
4,998,965
1.21%, 02/20/03
  
 
6,000
  
 
5,984,520
         
         
 
10,983,485
         
U.S. Treasury Notes — 8.4%
3.25%, 05/31/04
  
 
2,500
  
 
2,554,005
2.25%, 07/31/04
  
 
2,500
  
 
2,515,025
2.125%, 08/31/04*
  
 
2,500
  
 
2,508,000
2.00%, 11/30/04
  
 
2,500
  
 
2,494,775
   
 
 
Par
(000)
  
 
Value
             
U.S. TREASURY OBLIGATIONS — Continued
U.S. Treasury Notes — Continued
3.00%, 07/15/12*
  
$
2,250
  
$
2,336,485
4.00%, 11/15/12
  
 
1,500
  
 
1,474,335
         
         
 
13,882,625
         
TOTAL U.S. TREASURY OBLIGATIONS
      
(Cost $24,767,951)
  
 
24,866,110
         
REPURCHASE AGREEMENTS — 11.0%
Bank of America Securities, LLC
      
(Agreement dated 11/29/02 to be repurchased at $6,015,627 collateralized by $5,780,000
(Value $6,193,302) U.S. Treasury Notes, 4.75%, due 11/15/08)
1.25%, 12/02/02
  
 
6,015
  
 
6,015,000
Goldman Sachs Group, Inc.
      
(Agreement dated 11/29/02 to be repurchased at $6,000,655 collateralized by $5,822,000
(Value $6,196,870) U.S. Treasury Notes, 5.5%, due 8/15/28)
1.31%, 12/02/02
  
 
6,000
  
 
6,000,000
Morgan Stanley Securities, Inc.
      
(Agreement dated 11/29/02 to be repurchased at $6,000,625 collateralized by $4,550,000
(Value $6,184,944) U.S. Treasury Notes, 8.0%, due 11/15/21)
1.25%, 12/02/02
  
 
6,000
  
 
6,000,000
         
TOTAL REPURCHASE AGREEMENTS
(Cost $18,015,000)
  
 
18,015,000
         

 
See Accompanying Notes to Financial Statements.

27

Table of Contents

Mercantile Funds, Inc.
LIMITED MATURITY BOND FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Number of Shares
  
 
Value
           
INVESTMENT COMPANIES — 4.3%
Goldman Sachs Financial Square Prime Obligations Fund
  
3,500,000
  
 
3,500,000
Provident Institutional Funds — TempFund
  
3,500,000
  
 
3,500,000
       
TOTAL INVESTMENT COMPANIES
      
(Cost $7,000,000)
  
 
7,000,000
       
TOTAL INVESTMENTS IN SECURITIES — 101.1%
(Cost $162,726,077**)
  
 
165,900,269
LIABILITIES IN EXCESS OF OTHER ASSETS — (1.1)%
  
 
(1,756,615)
       
NET ASSETS — 100.0%
  
$
164,143,654
       
NET ASSET VALUE PER SHARE
      
Institutional Shares
($164,067,698 ÷ 15,736,988 shares outstanding)
  
 
$10.43
       
Class A Shares
($74,958 ÷ 7,192 shares outstanding)
  
 
$10.42
       
Class C Shares
($999 ÷ 96 shares outstanding)
  
 
$10.42
       
*
 
Certain principal amounts are temporarily on loan to an unaffiliated broker/dealer.
**
 
Cost for Federal income tax purposes is $162,760,874. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
3,243,449
 
Excess of tax cost over value
   
$
(205,004
)

 
See Accompanying Notes to Financial Statements.

28

Table of Contents

Mercantile Funds, Inc.
TOTAL RETURN BOND FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
AGENCY OBLIGATIONS — 55.1%
Federal Farm Credit Bank — 1.4%
1.67%, 04/01/03
  
$
1,950
  
$
1,952,438
         
Federal Home Loan Mortgage Corp. — 18.6%
Notes
            
3.00%, 07/15/04
  
 
6,850
  
 
6,952,750
4.50%, 12/15/05
  
 
1,452
  
 
1,486,089
4.50%, 11/15/09
  
 
2,415
  
 
2,454,364
6.50%, 11/01/17
  
 
5,700
  
 
5,977,875
Collateralized Mortgage Obligation
      
8.00%, 10/01/29 (Pool #C00879)
  
 
63
  
 
67,806
8.00%, 06/01/30 (Pool #C39741)
  
 
74
  
 
79,283
8.00%, 09/01/30 (Pool #C41949)
  
 
7
  
 
7,768
8.00%, 12/01/30 (Pool #C45813)
  
 
4
  
 
4,639
8.00%, 05/01/31 (Pool #C01198)
  
 
42
  
 
44,799
6.00%, 09/01/32 (Pool #C014603)
  
 
2,655
  
 
2,719,491
Mortgage Backed Securities
            
6.00%, 02/01/14 (Pool #E74547)
  
 
542
  
 
566,238
6.50%, 09/01/24 (Pool #G00320)
  
 
1,209
  
 
1,257,832
7.50%, 07/01/26 (Pool #D72963)
  
 
63
  
 
66,999
6.50%, 10/01/27 (Pool #C00561)
  
 
13
  
 
13,740
7.50%, 10/01/27 (Pool #D82914)
  
 
95
  
 
100,567
6.50%, 10/01/27 (Pool #D83095)
  
 
10
  
 
10,742
6.50%, 10/01/27 (Pool #D83337)
  
 
281
  
 
291,678
7.00%, 11/01/27 (Pool #D83947)
  
 
619
  
 
648,051
6.50%, 06/01/29 (Pool #C27091)
  
 
222
  
 
229,301
7.50%, 09/01/30 (Pool #G01131)
  
 
81
  
 
85,235
5.50%, 08/01/32 (Pool #C69707)
  
 
2,597
  
 
2,607,743
         
         
 
25,672,990
         
Federal National Mortgage Association — 28.4%
Collateralized Mortgage Obligation
      
6.00%, 03/25/23
  
 
1,039
  
 
1,089,909
Medium Term Notes
            
7.00%, 08/27/12
  
 
1,000
  
 
1,061,740
Notes
            
4.20%, 02/11/05
  
 
3,300
  
 
3,320,625
3.13%, 08/15/05
  
 
2,325
  
 
2,342,437
6.50%, 07/01/17
  
 
5,700
  
 
5,985,000
4.00%, 07/25/10
  
 
1,000
  
 
1,016,690
4.00%, 12/25/17
  
 
1,000
  
 
1,012,510
Mortgage Backed Securities
            
7.00%, 04/01/04 (Pool #377898)
  
 
27
  
 
27,557
   
 
 
Par
(000)
  
 
Value
             
AGENCY OBLIGATIONS — Continued
Federal National Mortgage Association — Continued
Mortgage Backed Securities — Continued
7.50%, 10/01/07 (Pool #177233)
  
$
45
  
$
48,015
6.00%, 01/01/09 (Pool #265989)
  
 
563
  
 
591,529
7.00%, 04/01/11 (Pool #338884)
  
 
125
  
 
133,159
6.00%, 12/01/16 (Pool #614235)
  
 
710
  
 
737,473
6.50%, 03/01/17 (Pool #636496)
  
 
1,149
  
 
1,205,841
6.00%, 06/01/17 (Pool #641209)
  
 
2,529
  
 
2,628,176
5.50%, 09/01/17 (Pool #664005)
  
 
670
  
 
687,118
7.50%, 08/01/26 (Pool #349416)
  
 
54
  
 
57,831
8.00%, 09/01/26 (Pool #250675)
  
 
89
  
 
95,811
7.00%, 04/01/27 (Pool #313458)
  
 
165
  
 
173,497
8.00%, 08/01/27 (Pool #392496)
  
 
212
  
 
227,342
8.00%, 09/01/27 (Pool #398392)
  
 
8
  
 
8,652
8.00%, 10/01/27 (Pool # 331320)
  
 
29
  
 
30,932
7.50%, 10/01/27 (Pool #395593)
  
 
212
  
 
225,232
8.00%, 10/01/27 (Pool #395770)
  
 
3
  
 
2,842
7.50%, 10/01/27 (Pool #396031)
  
 
294
  
 
312,107
7.00%, 10/01/27 (Pool #398928)
  
 
92
  
 
96,649
6.50%, 10/01/27 (Pool #399065)
  
 
134
  
 
138,327
8.00%, 10/01/27 (Pool #402178)
  
 
76
  
 
82,069
7.00%, 11/01/27 (Pool #251286)
  
 
267
  
 
279,874
6.50%, 11/01/27 (Pool #402786)
  
 
67
  
 
69,485
6.50%, 12/01/27 (Pool #354802)
  
 
206
  
 
213,848
6.50%, 01/01/28 (Pool #406700)
  
 
866
  
 
895,774
7.00%, 03/01/29 (Pool #491183)
  
 
1,108
  
 
1,157,426
6.50%, 06/01/29 (Pool #490861)
  
 
1,756
  
 
1,815,074
7.50%, 10/01/29 (Pool #252806)
  
 
515
  
 
544,810
7.50%, 04/01/30 (Pool #534171)
  
 
25
  
 
25,966
7.50%, 08/01/30 (Pool #539623)
  
 
334
  
 
352,681
7.50%, 01/01/31 (Pool #562502)
  
 
34
  
 
35,618
7.50%, 04/01/31 (Pool #576245)
  
 
67
  
 
70,597
7.50%, 04/01/31 (Pool #577475)
  
 
7
  
 
7,605
7.00%, 07/01/31 (Pool #253907)
  
 
2,619
  
 
2,735,202
7.50%, 07/01/31 (Pool #592239)
  
 
411
  
 
434,167
7.50%, 08/01/31 (Pool #545137)
  
 
265
  
 
280,195
6.50%, 02/01/32 (Pool #254199)
  
 
5,961
  
 
6,162,546
6.00%, 07/01/32 (Pool #254377)
  
 
964
  
 
986,881
         
         
 
39,406,819
         
Government National Mortgage Association — 6.7%
Mortgage Backed Securities
            
7.00%, 02/15/12 (Pool #393360)
  
 
133
  
 
141,874

 
See Accompanying Notes to Financial Statements.

29

Table of Contents

Mercantile Funds, Inc.
TOTAL RETURN BOND FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
AGENCY OBLIGATIONS — Continued
Government National Mortgage Association — Continued
Mortgage Backed Securities — Continued
      
9.00%, 05/15/16 (Pool #163606)
  
$
3
  
$
3,525
9.00%, 11/15/16 (Pool #181127)
  
 
61
  
 
68,170
9.00%, 11/15/16 (Pool #183984)
  
 
4
  
 
4,547
7.00%, 02/15/17 (Pool #555869)
  
 
838
  
 
894,688
8.00%, 05/15/17 (Pool #180719)
  
 
14
  
 
15,428
8.00%, 05/15/17 (Pool #217626)
  
 
23
  
 
24,668
9.00%, 04/15/18 (Pool #236277)
  
 
5
  
 
5,155
10.00%, 05/15/19 (Pool #274305)
  
 
13
  
 
14,858
9.00%, 11/15/19 (Pool #247019)
  
 
29
  
 
32,236
9.00%, 06/15/21 (Pool #305720)
  
 
57
  
 
63,290
9.00%, 06/15/21 (Pool #309078)
  
 
87
  
 
96,963
9.00%, 07/15/21 (Pool #309027)
  
 
13
  
 
13,896
9.00%, 07/15/21 (Pool #309084)
  
 
26
  
 
29,354
9.00%, 08/15/21 (Pool #306259)
  
 
56
  
 
62,267
9.00%, 09/15/21 (Pool #272061)
  
 
20
  
 
21,767
9.00%, 09/15/21 (Pool #305911)
  
 
16
  
 
17,272
9.00%, 09/15/21 (Pool #308283)
  
 
31
  
 
34,043
9.00%, 09/15/21 (Pool #308920)
  
 
83
  
 
92,019
9.00%, 09/15/21 (Pool #313023)
  
 
4
  
 
4,293
9.00%, 09/15/21 (Pool #314939)
  
 
5
  
 
5,004
8.00%, 02/15/23 (Pool #332531)
  
 
467
  
 
506,326
7.00%, 05/20/24 (Pool #1716)
  
 
61
  
 
64,011
7.00%, 10/15/25 (Pool #409958)
  
 
168
  
 
177,533
7.00%, 01/15/26 (Pool #382719)
  
 
131
  
 
138,319
7.00%, 01/15/26 (Pool #422404)
  
 
82
  
 
86,558
6.50%, 02/15/26 (Pool #405214)
  
 
95
  
 
99,035
7.00%, 02/15/26 (Pool #421686)
  
 
405
  
 
427,661
6.50%, 02/15/26 (Pool #425085)
  
 
52
  
 
53,774
6.50%, 03/15/26 (Pool #395468)
  
 
90
  
 
93,760
7.00%, 01/15/27 (Pool #436748)
  
 
166
  
 
175,009
7.00%, 02/15/27 (Pool #428935)
  
 
151
  
 
159,245
7.00%, 08/15/27 (Pool #443508)
  
 
84
  
 
88,754
8.50%, 08/15/27 (Pool #453213)
  
 
118
  
 
128,511
8.00%, 09/15/27 (Pool #453740)
  
 
41
  
 
43,782
7.00%, 09/15/27 (Pool #453980)
  
 
144
  
 
152,204
7.00%, 09/15/27 (Pool #454825)
  
 
10
  
 
11,001
7.00%, 10/15/27 (Pool #445227)
  
 
100
  
 
105,273
7.00%, 10/15/27 (Pool #453576)
  
 
38
  
 
40,169
7.00%, 10/15/27 (Pool #455319)
  
 
113
  
 
119,070
7.00%, 11/15/27 (Pool #452737)
  
 
235
  
 
248,462
7.00%, 12/15/27 (Pool #443780)
  
 
98
  
 
102,901
   
 
 
Par
(000)
  
 
Value
             
AGENCY OBLIGATIONS — Continued
Government National Mortgage Association — Continued
Mortgage Backed Securities — Continued
      
7.00%, 04/15/28 (Pool #471672)
  
$
20
  
$
20,981
6.50%, 07/15/28 (Pool #468090)
  
 
558
  
 
581,331
6.50%, 12/15/28 (Pool #471541)
  
 
786
  
 
818,528
6.50%, 01/15/29 (Pool #490890)
  
 
505
  
 
525,576
7.50%, 10/15/29 (Pool #521954)
  
 
241
  
 
256,702
6.50%, 04/15/32 (Pool #587032)
  
 
2,320
  
 
2,415,000
         
         
 
9,284,793
         
TOTAL AGENCY OBLIGATIONS
      
(Cost $74,803,747)
  
 
76,317,040
         
DOMESTIC CORPORATE BONDS — 28.4%
Automotive — 2.9%
Ford Motor Co.
            
6.375%, 02/01/29
  
 
1,000
  
 
745,000
GMAC
            
5.48%, 12/16/02
  
 
2,000
  
 
2,000,656
8.00%, 11/01/31
  
 
1,250
  
 
1,223,438
         
         
 
3,969,094
         
Banking and Financial Services — 7.9%
American Express Credit Corp.
            
7.45%, 08/10/05
  
 
1,000
  
 
1,108,130
Bank One FRN
            
1.62%, 02/14/03
  
 
625
  
 
625,781
CIT Group, Inc.
            
5.625%, 10/15/03
  
 
1,000
  
 
1,016,250
Citigroup, Inc.*
            
4.125%, 06/30/05
  
 
1,650
  
 
1,697,438
GE Capital Corp.
            
6.75%, 03/15/32
  
 
1,350
  
 
1,439,438
GE Capital Corp. FRN*
            
1.95%, 09/15/04
  
 
1,410
  
 
1,410,000
Household Financial
            
6.75%, 05/15/11
  
 
675
  
 
685,134
John Deere Capital
            
4.125%, 07/15/05
  
 
1,600
  
 
1,638,000
Morgan Stanley
            
1.00%, 04/01/12
  
 
1,250
  
 
1,351,563
         
         
 
10,971,734
         

 
See Accompanying Notes to Financial Statements.

30

Table of Contents

Mercantile Funds, Inc.
TOTAL RETURN BOND FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
DOMESTIC CORPORATE BONDS — Continued
Chemicals — 1.0%
Dow Chemical*
            
6.00%, 10/01/12
  
$
1,385
  
$
1,379,806
         
Consumer Goods & Services — 1.5%
Unilever
            
6.75%, 11/01/03
  
 
1,350
  
 
1,410,750
7.125%, 11/01/10
  
 
700
  
 
812,000
         
         
 
2,222,750
         
Defense — 1.1%
United Technology
            
7.50%, 09/15/29
  
 
1,250
  
 
1,509,375
         
Drugs — 0.5%
Wyeth
            
6.70%, 03/15/11
  
 
700
  
 
755,125
         
Electrical & Electronic — 1.0%
Motorola, Inc.
            
6.50%, 11/15/28
  
 
1,750
  
 
1,435,000
         
Energy — 3.0%
DTE
            
5.20%, 10/15/12
  
 
400
  
 
400,500
Progress Energy
            
6.85%, 04/15/12
  
 
590
  
 
632,775
6.55%, 03/01/04
  
 
1,700
  
 
1,751,000
Southern Power
            
6.25%, 07/15/12
  
 
1,300
  
 
1,339,000
         
         
 
4,123,275
         
Entertainment — 0.6%
Viacom
            
5.625%, 08/15/12
  
 
745
  
 
773,869
         
Environmental Services — 0.5%
Honeywell
            
6.125%, 11/01/11
  
 
700
  
 
736,750
         
Food & Beverages — 1.6%
Kellogg Co.
            
5.50%, 04/01/03
  
 
2,125
  
 
2,148,906
         
Oil & Exploration — 0.7%
Occidental
            
4.00%, 11/30/07
  
 
950
  
 
941,683
         
   
 
 
Par
(000)
  
 
Value
             
DOMESTIC CORPORATE BONDS — Continued
Oil & Gas Equipment — 0.5%
MRO
            
6.80%, 03/15/32
  
$
700
  
$
704,375
         
Paper Products — 0.2%
Meadwest
            
6.80%, 11/15/32
  
 
250
  
 
246,875
         
Railroads — 0.6%
Norfolk
            
7.25%, 02/15/31
  
 
700
  
 
772,625
         
Telecommunications — 2.6%
AOL Time Warner
            
6.625%, 05/15/29
  
 
1,330
  
 
1,158,969
SBC
            
5.875%, 02/01/12
  
 
1,070
  
 
1,120,825
Verizon
            
7.375%, 04/01/32
  
 
1,250
  
 
1,381,250
         
         
 
3,661,044
         
Utilities — Gas/Gas & Electric — 1.7%
Conoco Funding
            
7.25%, 10/15/31
  
 
1,350
  
 
1,414,125
Keyspan
            
7.625%, 11/15/10
  
 
770
  
 
880,688
         
         
 
2,294,813
         
Utilities — Water — 0.5%
National Rural Utility Cooperative
            
5.75%, 12/01/08
  
 
650
  
 
666,250
         
TOTAL DOMESTIC CORPORATE BONDS
(Cost $38,710,799)
  
 
39,313,349
         
U.S. TREASURY OBLIGATIONS — 6.3%
U.S. Treasury Notes
            
2.25%, 07/31/04
  
 
650
  
 
653,906
3.25%, 08/15/07*
  
 
675
  
 
676,081
4.375%, 08/15/12*
  
 
700
  
 
708,914
Treasury Inflation Protected Security (TIPS)
            
3.00%, 07/15/12*
  
 
1,975
  
 
2,050,915
         
         
 
4,089,816
         

 
See Accompanying Notes to Financial Statements.

31

Table of Contents

Mercantile Funds, Inc.
TOTAL RETURN BOND FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
U.S. TREASURY OBLIGATIONS — Continued
U.S. Treasury Bonds
            
6.00%, 02/15/26
  
$
2,775
  
$
3,062,040
6.125%, 11/15/27
  
 
6,000
  
 
1,527,024
         
         
 
4,589,064
         
TOTAL U.S. TREASURY
      
(Cost $8,131,228)
        
 
8,678,880
         
REPURCHASE AGREEMENTS — 2.0%
Banc of America Securities LLC
      
(Agreement dated 11/29/02 to be repurchased at $1,867,194 collateralized by $1,810,000 (Value $1,939,425) U.S. Treasury Notes, 4.75%, due 11/15/08)
            
1.25%, 12/02/02
  
 
1,876
  
 
1,867,000
Goldman Sachs Group, Inc.
            
(Agreement dated 11/29/02 to be repurchased at $1,000,109 collateralized by $971,000 (Value $1.033,521) U.S. Treasury Notes, 5.5%, due 8/15/28)
            
1.31%, 12/02/02
  
 
1,000
  
 
1,000,000
         
TOTAL REPURCHASE AGREEMENTS
      
(Cost $2,867,000)
        
 
2,867,000
         
   
Number of Shares
  
 
Value
           
INVESTMENT COMPANIES — 7.8%
BlackRock High Yield Bond
  
761,799
  
$
5,241,175
BlackRock Strategic Bond Trust,
  
107,667
  
 
1,419,051
Evergreen Offit High Yield Bond Fund
  
452,395
  
 
2,954,137
Goldman Sachs Financial Square Prime Obligations Fund
  
1,304,348
  
 
1,304,348
       
TOTAL INVESTMENT COMPANIES
      
(Cost $11,318,147)
  
 
10,918,711
       
TOTAL INVESTMENTS IN SECURITIES — 99.6%
(Cost $135,830,921**)
  
 
138,094,980
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.4%
  
 
494,068
       
NET ASSETS — 100.0 %
  
$
138,589,048
       
NET ASSET VALUE PER SHARE
      
Institutional Shares
      
($138,584,171 ÷ 13,985,950 shares outstanding)
  
 
$9.91
       
Class A Shares
      
($3,878 ÷ 391 shares outstanding)
  
 
$9.91
       
Class C Shares
      
($999 ÷ 101 shares outstanding)
  
 
$9.91
       
*
 
Certain principal amounts are temporarily on loan to an unaffiliated broker/dealer.
**
 
Cost for Federal income tax purposes is $133,972,349. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
2,954,816
 
Excess of tax cost over value
   
$
(784,623
)

 
See Accompanying Notes to Financial Statements.

32

Table of Contents

Mercantile Funds, Inc.
MARYLAND TAX-EXEMPT BOND FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
DISTRICT OF COLUMBIA — 1.2%
Washington D.C., Metropolitan Transit Authority, RB, INS: FGIC
            
6.00%, 07/01/09
  
$
600
  
$
690,822
         
MARYLAND — 92.5%
Annapolis, GO, CPI
            
5.00%, 11/01/16
  
 
440
  
 
462,783
Anne Arundel County, GO
            
6.50%, 05/15/05
  
 
500
  
 
553,470
Baltimore City, GO, CPI, INS: FGIC
            
5.00%, 10/15/16
  
 
500
  
 
519,830
Baltimore City, RB, Refunding —Auto Parking Revenue, INS: FGIC
            
5.90%, 07/01/13
  
 
1,000
  
 
1,155,020
Baltimore City, RB, Waste Water Project, INS: FGIC
            
5.00%, 07/01/22
  
 
1,000
  
 
1,021,330
5.50%, 07/01/26
  
 
300
  
 
337,206
Baltimore County, COP, Equipment Acquisition Program
            
5.00%, 08/01/07
  
 
250
  
 
273,970
Baltimore City, GO, INS: MBIA
            
7.00%, 10/15/10
  
 
450
  
 
552,911
Baltimore, COP, Board of Education Administration, INS: MBIA
            
5.25%, 04/01/07
  
 
500
  
 
548,270
Baltimore, RB, School Systems
            
4.85%, 11/01/11
  
 
450
  
 
481,680
5.125%, 11/01/14
  
 
455
  
 
484,630
Cecil County, GO, CPI
            
5.00%, 08/01/09
  
 
655
  
 
721,456
Frederick County, GO
            
5.80%, 12/01/02
  
 
500
  
 
500,049
5.00%, 12/01/08
  
 
400
  
 
443,112
5.00%, 08/01/09
  
 
500
  
 
519,215
5.25%, 07/01/12
  
 
250
  
 
274,805
Frederick City, GO
            
5.00%, 12/01/08
  
 
500
  
 
553,890
Harford County, GO, CPI, UT
            
5.50%, 12/01/07
  
 
920
  
 
1,040,916
5.00%, 12/01/14
  
 
125
  
 
133,344
   
 
 
Par
(000)
  
 
Value
             
MARYLAND — Continued
Harford County, GO, CPI, UT, Prerefunded 12/1/07 @ 102
            
5.00%, 12/01/14
  
$
125
  
$
140,029
Howard County, GO, CPI
            
5.00%, 02/15/06
  
 
650
  
 
703,151
Howard County, GO, Prerefunded 8/15/03 @ 102
            
5.25%, 08/15/12
  
 
250
  
 
261,693
Maryland Environmental Services — Cecil County, RB, Landfill Project
            
5.125%, 09/01/10
  
 
180
  
 
193,480
5.30%, 09/01/12
  
 
250
  
 
267,585
Maryland National Capital Park & Planning Commission — Prince George’s County, GO, GPI, Prerefunded 7/01/03 @ 102
            
5.15%, 07/01/11
  
 
10
  
 
10,412
Maryland National Capital Park & Planning Commission — Prince George’s County, GO, Unrefunded Balance
            
6.25%, 01/15/05
  
 
200
  
 
216,938
5.15%, 07/01/11
  
 
290
  
 
300,089
5.375%, 01/15/14
  
 
450
  
 
477,410
Maryland State & Local Facilities, GO, GPI
            
5.00%, 07/15/03
  
 
1,055
  
 
1,072,671
5.00%, 07/15/04
  
 
500
  
 
526,395
5.00%, 10/15/04
  
 
1,000
  
 
1,060,840
5.25%, 03/01/05
  
 
750
  
 
802,470
5.25%, 06/15/06
  
 
500
  
 
547,960
5.25%, 02/01/08
  
 
680
  
 
752,243
Maryland State Community Development, RB, Administration Department of Housing & Community Development, Infrastructure, INS: MBIA
            
5.125%, 06/01/17
  
 
325
  
 
331,991
5.15%, 06/01/22
  
 
390
  
 
396,540

 
See Accompanying Notes to Financial Statements.

33

Table of Contents

Mercantile Funds, Inc.
MARYLAND TAX-EXEMPT BOND FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
MARYLAND — Continued
Maryland State Community Development, RB, Administration Department of Housing & Community Development, Multi-family
            
5.05%, 05/15/18
  
$
185
  
$
186,595
Maryland State Community Development, RB, Administration Department of Housing & Community Development, Single Family
            
5.30%, 09/01/10
  
 
250
  
 
261,058
4.45%, 04/01/12
  
 
1,000
  
 
1,007,560
5.80%, 04/01/17
  
 
210
  
 
216,535
Maryland State Department of Transportation, RB
            
5.00%, 02/01/06
  
 
500
  
 
538,035
Maryland State Economic Development, RB, Corporate Lease, Maryland Department of Transportation Headquarters
            
5.00%, 06/01/15
  
 
450
  
 
474,759
Maryland State Economic Development, RB, Infrastructure, University of Maryland-College Park Project, INS: AMBAC
            
5.00%, 07/01/04
  
 
500
  
 
525,050
5.375%, 07/01/14
  
 
500
  
 
542,670
5.00%, 07/01/19
  
 
220
  
 
224,607
Maryland State Health & Higher Educational Facilities Authority, College of Notre Dame, INS: MBIA
            
4.45%, 10/01/12
  
 
290
  
 
298,236
5.30%, 10/01/18
  
 
460
  
 
481,942
Maryland State Health & Higher Educational Facilities Authority, RB, Johns Hopkins University
            
5.125%, 07/01/11
  
 
600
  
 
652,482
Maryland State Health & Higher Educational Facilities Authority, RB, Board of Child Care
            
5.50%, 07/01/13
  
 
800
  
 
864,232
5.375%, 07/01/32
  
 
500
  
 
500,905
   
 
 
Par
(000)
  
 
Value
             
MARYLAND — Continued
Maryland State Health & Higher Educational Facilities Authority, RB, Charlestown Community Inc.
            
1.20%, 01/01/28
  
$
1,000
  
$
1,000,000
Maryland State Health & Higher Educational Facilities Authority, RB, Helix Health Inc., INS: AMBAC, ETM
            
5.125%, 07/01/11
  
 
600
  
 
657,696
5.125%, 07/01/12
  
 
555
  
 
608,874
Maryland State Health & Higher Educational Facilities Authority, RB, Johns Hopkins Hospital
            
5.50%, 07/01/07
  
 
1,000
  
 
1,041,440
Maryland State Health & Higher Educational Facilities Authority, RB, Refunding, Johns Hopkins University
            
5.00%, 07/01/11
  
 
500
  
 
543,925
5.25%, 07/01/16
  
 
750
  
 
793,635
5.25%, 07/01/17
  
 
500
  
 
525,465
5.125%, 07/01/20
  
 
500
  
 
510,835
Maryland State Industrial Development, RB, IDA, American Center for Physics, SPA: American Institute of Physics
            
5.25%, 12/15/14
  
 
500
  
 
539,110
Maryland State Industrial Development, RB, National Aquarium Baltimore
            
5.50%, 11/01/17
  
 
750
  
 
789,765
Maryland State Transportation Authority, RB
            
5.80%, 07/01/06
  
 
775
  
 
860,241
5.75%, 07/01/15
  
 
150
  
 
150,284
Maryland Water Quality Financing Administration, RB, Revolving Loan Fund, Prerefunded
9/01/03 @ 100
            
5.40%, 09/01/12
  
 
300
  
 
308,931
Montgomery County, COP, GPI, Equipment Acquisition Program
            
4.50%, 06/01/06
  
 
500
  
 
532,375

 
See Accompanying Notes to Financial Statements.

34

Table of Contents

Mercantile Funds, Inc.
MARYLAND TAX-EXEMPT BOND FUND
Statement of Net Assets  — Continued
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
MARYLAND — Continued
Montgomery County, GO, CP
            
1.25%, 12/11/02
  
$
1,000
  
$
1,000,000
Montgomery County, GO, CPI
            
5.75%, 07/01/06
  
 
400
  
 
446,655
Montgomery County, RB, Economic Development Revenue, Trinity Health Care Group
            
5.50%, 12/01/16
  
 
930
  
 
993,891
Montgomery County, RB, Housing Opportunity Community Housing Multi-Family, Avalon Knoll, FNMA COLL
            
5.70%, 07/01/10
  
 
150
  
 
160,288
Montgomery County Revenue Authority, RB, Olney Indoor Swim Project
            
5.25%, 10/01/12
  
 
250
  
 
261,440
Northeast Waste Disposal Authority, RB, Southwest Resource Recovery Facility,
INS: MBIA
            
5.00%, 01/01/05
  
 
1,000
  
 
1,073,130
Ocean City, GO, INS: FGIC
            
5.00%, 03/01/09
  
 
450
  
 
491,486
Prince George’s County, GO, CPI, INS: FSA
            
5.00%, 05/15/07
  
 
525
  
 
573,662
5.20%, 03/15/08
  
 
500
  
 
537,170
5.25%, 03/15/15
  
 
400
  
 
420,424
Prince George’s County, GO,
INS: AMBAC
            
5.25%, 03/15/03
  
 
500
  
 
505,670
Prince George’s County, RB, IDA
            
6.00%, 07/01/09
  
 
675
  
 
725,983
5.00%, 10/01/12
  
 
500
  
 
535,870
Prince George’s County Solid Waste Management System, RB, INS: FSA-CR
            
5.25%, 06/15/13
  
 
2,380
  
 
2,461,872
Queen Anne’s County, GO, INS: FGIC
            
5.00%, 11/15/10
  
 
400
  
 
439,848
   
 
 
Par
(000)
  
 
Value
             
MARYLAND — Continued
Saint Mary’s College, GO, INS: AMBAC
            
5.55%, 09/01/30
  
$
500
  
$
520,060
Saint Mary’s County, GO, Prerefunded 10/1/09 @ 101
            
5.50%, 10/01/14
  
 
1,000
  
 
1,136,160
Saint Mary’s County, GO, CPI, Refunding
            
5.00%, 10/01/09
  
 
145
  
 
160,226
Saint Mary’s County, GO, Refunding, St. Mary’s Hospital
            
5.00%, 10/01/09
  
 
880
  
 
972,409
Talbot County, GO
            
5.00%, 03/15/12
  
 
480
  
 
525,451
University of Maryland, RB, Refunding, Auxiliary Facilities & Tuition
            
5.000%, 04/01/08
  
 
500
  
 
545,255
5.125%, 04/01/13
  
 
400
  
 
422,528
5.00%, 04/01/15
  
 
500
  
 
518,640
Washington County, GO, INS: FGIC
            
5.25%, 01/01/06
  
 
200
  
 
204,490
5.00%, 01/01/16
  
 
675
  
 
702,277
5.50%, 01/01/20
  
 
300
  
 
317,379
Washington Suburban Sanitary District, GO, General Construction
            
5.25%, 06/01/24
  
 
440
  
 
452,530
5.00%, 06/01/09
  
 
500
  
 
544,285
Wicomico County, GO, INS: FGIC
            
5.00%, 02/01/15
  
 
755
  
 
789,519
Worcester County, GO
            
5.20%, 08/01/08
  
 
1,310
  
 
1,420,839
         
         
 
54,136,463
         
PUERTO RICO — 1.5%
Children’s Trust Fund, RB, Puerto Rico Tobacco, Prerefunded 7/1/10 @ 100
            
6.00%, 07/01/26
  
 
750
  
 
874,335
         
TOTAL MUNICIPAL BONDS
      
(Cost $53,526,132)
        
 
55,701,620
         

 
See Accompanying Notes to Financial Statements.

35

Table of Contents

Mercantile Funds, Inc.
MARYLAND TAX-EXEMPT BOND FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Number of Shares
  
 
Value
           
INVESTMENT COMPANIES — 4.3%
Goldman Sachs Financial Square Tax-Free Money Market Fund
  
1,533,008
  
$
1,533,008
Provident Institutional Funds —MuniFund
  
929,065
  
 
929,065
       
TOTAL INVESTMENT COMPANIES
      
(Cost $2,462,073)
  
 
2,462,073
       
TOTAL INVESTMENTS IN SECURITIES — 99.5%
(Cost $55,988,205*)
  
 
58,163,693
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.5%
  
 
331,335
       
NET ASSETS — 100.0%
  
$
58,495,028
       
   
Number of Shares
  
Value
         
NET ASSET VALUE PER SHARE
    
Institutional Shares
    
($58,254,550 ÷ 5,239,444 shares outstanding)
  
$11.12
       
Class A Shares
    
($239,494 ÷ 21,547 shares outstanding)
  
$11.11
       
Class C Shares
    
($985 ÷ 89 shares outstanding)
  
$11.12
       
*
 
Aggregate cost for Federal income tax purposes. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
2,205,122
 
Excess of tax cost over value
   
$
(29,634
)

See Accompanying Notes to Financial Statements.

36

Table of Contents

Mercantile Funds, Inc.
INTERMEDIATE TAX-EXEMPT BOND FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 

   
Par
(000)
  
Value
             
ARIZONA — 2.4%
Arizona Water Infrastructure Financial Authority, RB
            
5.375%, 10/01/11
  
$
2,000
  
$
2,242,160
         
COLORADO — 3.8%
Arapahoe County School District No. 5, GO, SAW, Cherry Creek
            
5.25%, 12/15/07
  
 
1,000
  
 
1,115,200
Jefferson County School District, GO, INS: MBIA
            
5.25%, 12/15/05
  
 
1,230
  
 
1,341,659
Regional Transportation District, RB, Sales Tax Revenue, INS: AMBAC
            
5.25%, 11/01/11
  
 
1,000
  
 
1,106,290
         
         
 
3,563,149
         
CONNECTICUT — 0.8%
Stamford, GO, Refunding Bonds
            
4.30%, 07/15/11
  
 
750
  
 
781,785
         
FLORIDA — 5.9%
Broward County, RB, Resource Recovery, Wheelabrator
            
5.00%, 12/01/02
  
 
1,000
  
 
1,000,076
Florida State, RB, Dept. of Environmental Protection
            
5.50%, 07/01/06
  
 
2,000
  
 
2,204,660
5.75%, 07/01/07
  
 
1,000
  
 
1,126,280
St. Lucie County, RB, INS: MBIA
            
5.50%, 04/01/10
  
 
1,000
  
 
1,117,240
         
         
 
5,448,256
         
GEORGIA — 6.4%
Chatham County School District, GO, INS: MBIA, Prerefunded 8/1/03 @ 102
            
6.75%, 08/01/18
  
 
1,000
  
 
1,055,070
Fulton County, GO, Prerefunded 1/01/04 @ 102
            
5.40%, 01/01/08
  
 
1,000
  
 
1,059,320
Georgia State, GO
            
6.50%, 12/01/03
  
 
1,500
  
 
1,575,840
5.50%, 08/01/06
  
 
2,000
  
 
2,209,920
         
         
 
5,900,150
         
   
Par
(000)
  
Value
             
ILLINOIS — 3.5%
Illinois State, RB, Highway Toll Authority, Prerefunded
01/01/03 @ 102
            
6.375%, 01/01/15
  
$
1,500
  
$
1,535,580
Univ. of Illinois, COP, MBIA, Utility Infrastructure Projects
            
5.75%, 08/15/08
  
 
1,605
  
 
1,814,741
         
         
 
3,350,321
         
INDIANA — 2.7%
Indiana University, CP
            
1.40%, 12/04/02
  
 
2,500
  
 
2,500,000
         
IOWA — 1.7%
Cedar Falls, BAN, RB, Community School, Infrastructure
5.00%, 06/01/03
  
 
1,500
  
 
1,527,255
         
KANSAS — 2.0%
Kansas State Juvenile Justice Authority, RB, INS: MBIA
5.00%, 05/01/05
  
 
1,710
  
 
1,822,091
         
KENTUCKY — 2.9%
Kentucky State Property and Buildings Community, RB, Project No. 69, INS: MBIA
            
5.00%, 08/01/05
  
 
1,430
  
 
1,536,635
Kentucky State Turnpike Authority, RB, Revitalization
            
5.50%, 07/01/10
  
 
1,000
  
 
1,121,440
         
         
 
2,658,075
         
LOUISIANA — 1.4%
Louisiana Public Facilities Authority, RB, INS: FSA
            
5.00%, 08/01/04
  
 
1,270
  
 
1,334,795
         
MARYLAND — 6.6%
Baltimore County, COP, Equipment Acquisition Program
            
5.00%, 08/01/07
  
 
1,265
  
 
1,386,288
Maryland State Health & Higher Education, RB, Johns Hopkins Hospital
            
5.50%, 07/01/07
  
 
1,550
  
 
1,614,232
5.00%, 05/15/10
  
 
500
  
 
537,245

 
See Accompanying Notes to Financial Statements.

37

Table of Contents

Mercantile Funds, Inc.
INTERMEDIATE TAX-EXEMPT BOND FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
Par
(000)
  
Value
             
MARYLAND — Continued
Maryland State, RB, Dept. of Transportation
            
5.00%, 09/01/04
  
$
1,400
  
$
1,477,434
Prince Georges County, GO, CPI, INS: FSA
            
5.50%, 05/15/09
  
 
1,000
  
 
1,123,720
         
         
 
6,138,919
         
MASSACHUSETTS — 1.8%
Harvard University, CP
            
1.25%, 12/11/02
  
 
1,700
  
 
1,700,000
         
MICHIGAN — 1.4%
Michigan Muni Bond Authority, RB, Drinking Water
            
5.25%, 10/01/08
  
 
1,145
  
 
1,274,580
         
NEBRASKA — 1.9%
Nebraska Public Power District, RB, INS: MBIA
            
5.00%, 01/01/03
  
 
1,760
  
 
1,764,690
         
NEW JERSEY — 4.9%
New Jersey Economic Development, RB, INS: AMBAC
            
5.00%, 09/15/11
  
 
1,120
  
 
1,215,995
New Jersey State Educational Facility Authority, RB, Princeton University
            
4.75%, 07/01/07
  
 
1,410
  
 
1,532,952
New Jersey State Transportation, RB, ETM, INS: MBIA
            
6.50%, 06/15/10
  
 
1,500
  
 
1,785,765
         
         
 
4,534,712
         
NORTH CAROLINA — 1.1%
Guilford County, GO, Recreational and School Improvements
            
5.00%, 10/01/04
  
 
1,000
  
 
1,058,470
         
OHIO — 6.6%
Cleveland Municipal School District, GO, INS: FGIC
            
5.00%, 12/01/05
  
 
1,250
  
 
1,349,663
Columbus, GO, Public Improvements
            
6.00%, 06/15/07
  
 
2,000
  
 
2,276,000
   
Par
(000)
  
Value
             
OHIO — Continued
Ohio State Building Authority, Lausche Office Building, RB
            
6.00%, 10/01/03
  
$
2,385
  
$
2,476,035
         
         
 
6,101,698
         
OKLAHOMA — 3.1%
Oklahoma City, GO
            
6.00%, 03/01/03
  
 
1,750
  
 
1,770,160
Oklahoma Housing Development Authority, RB
            
5.10%, 11/01/05
  
 
1,000
  
 
1,056,330
         
         
 
2,826,490
         
PENNSYLVANIA — 11.6%
Allegheny County Sanitation Authority, RB, INS: MBIA
            
5.50%, 12/01/02
  
 
1,595
  
 
1,595,167
Harrisburg Authority School Revenue, GO, INS: FGIC
            
5.00%, 04/01/10
  
 
1,250
  
 
1,355,875
Pennsylvania State, GO
            
5.00%, 10/01/05
  
 
1,250
  
 
1,345,675
Pennsylvania State Higher Education, RB, VRDB, Association of Independent Colleges, Muhlenberg College, SPA: PNC Bank N.A.
            
1.20%, 11/01/31
  
 
2,500
  
 
2,500,000
Pennsylvania State, IDA, RB, AMBAC, Economic Development
            
5.50%, 07/01/05
  
 
2,500
  
 
2,706,700
Pennsylvania State University, RB, VRDB, SPA: Toronto-Dominion Bank
            
1.17%, 03/01/32
  
 
1,200
  
 
1,200,000
         
         
 
10,703,417
         
PUERTO RICO — 2.2%
Puerto Rico Commonwealth, TRAN
            
2.50%, 07/30/03
  
 
2,000
  
 
2,016,940
         
SOUTH CAROLINA — 5.4%
Columbia Tax Increment Revenues, RB, INS: FSA
            
5.00%, 12/01/06
  
 
1,790
  
 
1,962,574

 
See Accompanying Notes to Financial Statements.

38

Table of Contents

Mercantile Funds, Inc.
INTERMEDIATE TAX-EXEMPT BOND FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
Par
(000)
  
Value
             
SOUTH CAROLINA — Continued
South Carolina State Public Service Authority, RB
            
5.00%, 01/01/03
  
$
1,000
  
$
1,002,654
South Carolina State Public Service Authority, CP
            
1.30%, 12/11/02
  
 
2,000
  
 
2,000,000
         
         
 
4,965,228
         
TENNESSEE — 2.4%
Shelby County, GO
            
5.50%, 08/01/08
  
 
1,000
  
 
1,118,680
5.00%, 04/01/09
  
 
1,000
  
 
1,087,950
         
         
 
2,206,630
         
TEXAS — 4.9%
Fort Worth, GO, CP
            
1.35%, 12/11/02
  
 
1,000
  
 
1,000,000
San Antonio Electric & Gas, RB, Unrefunded Balance
            
5.80%, 02/01/06
  
 
1,775
  
 
1,930,845
University of Texas, RB
            
5.00%, 07/01/05
  
 
1,500
  
 
1,605,345
         
         
 
4,536,190
         
VIRGINIA — 1.1%
Virginia State Public School Authority, RB
            
5.00%, 04/01/03
  
 
1,000
  
 
1,012,230
         
WISCONSIN — 4.8%
North Central Technical College, GO
            
5.40%, 09/01/04
  
 
1,075
  
 
1,139,694
State of Wisconsin, CP
            
1.350%, 12/13/02
  
 
1,000
  
 
1,000,000
Wisconsin State, GO
            
6.125%, 11/01/06
  
 
2,000
  
 
2,265,900
         
         
 
4,405,594
         
TOTAL MUNICIPAL BONDS
      
(Cost $84,091,790)
  
 
86,373,825
         
   
Number of Shares
  
 
Value
           
INVESTMENT COMPANIES — 6.2%
Goldman Sachs Financial Square Tax-Free Money Market Fund
  
3,177,719
  
$
3,177,719
Provident Institutional Funds —MuniFund
  
2,517,861
  
 
2,517,861
       
TOTAL INVESTMENT COMPANIES
      
(Cost $5,695,580)
  
 
5,695,580
       
TOTAL INVESTMENTS IN SECURITIES — 99.5%
(Cost $89,787,370*)
  
 
92,069,405
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.5%
  
 
465,850
       
NET ASSETS — 100.0%
  
$
92,535,255
       
NET ASSET VALUE PER SHARE
      
Institutional Shares
      
($92,461,059 ÷ 9,106,464 shares outstanding)
  
 
$10.15
       
Class A Shares
      
($73,204 ÷ 7,209 shares outstanding)
  
 
$10.15
       
Class C Shares
      
($992 ÷ 98 shares outstanding)
  
 
$10.15
       
*
 
Aggregate cost for Federal income tax purposes. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
2,348,825
 
Excess of tax cost over value
   
$
(66,790
)

 
See Accompanying Notes to Financial Statements.

39

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40

Table of Contents

Mercantile Funds, Inc.
NATIONAL TAX-EXEMPT BOND FUND
Statement of Net Assets
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
ALABAMA — 1.5%
Auburn University, RB, General Fee Revenue, INS: MBIA
            
5.50%, 06/01/13
  
$
2,345
  
$
2,583,721
         
ARIZONA — 0.8%
Maricopa County School District No. 38 Madison Elementary, GO, INS: MBIA, Prerefunded 07/01/06 @ 101
            
5.80%, 07/01/15
  
 
1,230
  
 
1,384,168
         
ARKANSAS — 0.9%
Arkansas State, GO
            
5.25%, 08/01/05
  
 
1,425
  
 
1,540,810
         
CALIFORNIA — 2.5%
California State Department of Water Supply, RB, LOC: Dexia Credit Local
            
1.80%, 04/29/22
  
 
2,000
  
 
2,001,840
Los Angeles Unified School District, GO, INS: MBIA
            
5.75%, 07/01/13
  
 
2,000
  
 
2,308,680
         
         
 
4,310,520
         
COLORADO — 8.7%
Arapahoe County District No. 5 Cherry Creek, GO, INS: SAW
            
5.50%, 12/15/12
  
 
1,750
  
 
1,932,018
6.00%, 12/15/13
  
 
1,000
  
 
1,130,000
Broomfield Open Space Parks and Recreation, COP, INS: AMBAC
            
5.00%, 12/01/03
  
 
2,425
  
 
2,511,888
Colorado Department of Transportation, RB, TRAN, INS: AMBAC, Prerefunded 6/15/10 @ 100.5
            
6.00%, 06/15/15
  
 
2,000
  
 
2,323,200
Colorado Springs, RB, Utility Revenue, ETM
            
5.875%, 11/15/17
  
 
1,500
  
 
1,720,470
Colorado Water Resource & Power, RB
            
5.00%, 09/01/10
  
 
2,120
  
 
2,312,877
   
 
 
Par
(000)
  
 
Value
             
COLORADO — Continued
Denver City and County, COP, INS: AMBAC
            
5.75%, 12/01/18
  
$
1,750
  
$
1,923,810
Denver City and County, GO
            
6.00%, 10/01/10
  
 
1,000
  
 
1,159,390
         
         
 
15,013,653
         
CONNECTICUT — 2.2%
Connecticut, GO
            
5.00%, 11/15/08
  
 
1,000
  
 
1,101,880
5.00%, 11/15/09
  
 
1,500
  
 
1,651,260
Connecticut Special Tax Obligation, INS: FSA
            
5.00%, 10/01/06
  
 
1,000
  
 
1,091,000
         
         
 
3,844,140
         
FLORIDA — 5.8%
Broward County, RB, Florida Resource Recovery
            
5.00%, 12/01/04
  
 
2,000
  
 
2,090,200
Florida State, RB, Department of Environmental Protection
            
5.00%, 07/01/05
  
 
2,000
  
 
2,143,580
Florida State, RB, Department of Environmental Protection, INS: AMBAC
            
6.00%, 07/01/12
  
 
1,000
  
 
1,163,820
Hillsborough County Capital Improvements Program, RB, INS: FGIC
            
6.00%, 08/01/05
  
 
1,210
  
 
1,330,685
Hillsborough County Solid Waste, RB, INS: MBIA
            
5.40%, 10/01/04
  
 
2,000
  
 
2,127,900
Reedy Creek Improvements District, GO, Prerefunded 06/01/05 @ 100, INS: MBIA
            
5.75%, 06/01/19
  
 
1,000
  
 
1,090,190
         
         
 
9,946,375
         
GEORGIA — 7.3%
Georgia State, GO
            
6.50%, 12/01/05
  
 
1,700
  
 
1,912,109
6.00%, 07/01/12
  
 
2,000
  
 
2,284,380

 
See Accompanying Notes to Financial Statements.

41

Table of Contents

Mercantile Funds, Inc.
NATIONAL TAX-EXEMPT BOND FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
GEORGIA — Continued
Private Colleges & Universities, RB, Emory University
            
5.75%, 11/01/15
  
$
2,320
  
$
2,598,075
5.75%, 11/01/16
  
 
2,000
  
 
2,211,120
Union City Housing Authority, RB, Hidden Lake Apartments, INS: FHA 221(D) (4)
            
7.125%, 12/01/25
  
 
3,190
  
 
3,500,259
         
         
 
12,505,943
         
ILLINOIS — 1.0%
Chicago Wastewater Transmission, RB, INS: MBIA, Prerefunded 1/1/10 @101
            
6.00%, 01/01/13
  
 
1,545
  
 
1,790,933
         
KANSAS — 2.3%
Kansas State Development Financial Authority, RB, PCR, Prerefunded 11/1/10 @ 100
            
6.00%, 11/01/14
  
 
2,000
  
 
2,329,220
Kansas State, RB, TPK Authority, INS: AMBAC
            
5.50%, 09/01/06
  
 
1,500
  
 
1,656,900
         
         
 
3,986,120
         
LOUISIANA — 1.5%
Louisiana Public Facilities, RB, INS: FSA
            
5.50%, 08/01/17
  
 
2,365
  
 
2,546,963
         
MARYLAND — 3.9%
Dorchester County, GO
            
6.10%, 02/01/15
  
 
2,000
  
 
2,133,380
Maryland State & Local Facilities, GO, GPI
            
5.50%, 03/01/08
  
 
1,000
  
 
1,119,860
Maryland State Community Development, RB, Administration Department of Housing & Community Development, Single Family
            
4.60%, 04/01/13
  
 
1,310
  
 
1,326,205
   
 
 
Par
(000)
  
 
Value
             
MARYLAND — Continued
Northeast Waste Disposal Authority, RB, Southwest Recovery Facility, INS: MBIA
            
7.20%, 12/31/04
  
$
2,000
  
$
2,146,260
         
         
 
6,725,705
         
MASSACHUSETTS — 5.0%
Massachusetts Bay Transportation Authority, Special Assessment
            
5.75%, 07/01/15
  
 
1,000
  
 
1,108,540
Massachusetts State, GO, Transit Improvements
            
6.00%, 02/01/14
  
 
2,000
  
 
2,321,400
Massachusetts State, GO
            
5.50%, 03/01/19
  
 
3,500
  
 
3,930,815
Pembroke, GO, INS: FGIC
            
5.50%, 11/15/20
  
 
1,230
  
 
1,308,350
         
         
 
8,669,105
         
MICHIGAN — 3.2%
Michigan State Building Authority, RB, Facilities Program
            
5.00%, 10/15/04
  
 
2,535
  
 
2,684,413
5.50%, 10/13/06
  
 
2,500
  
 
2,776,475
         
         
 
5,460,888
         
MINNESOTA — 0.6%
Minnesota State, GO, Prerefunded 10/01/04 @ 100
            
6.00%, 10/01/14
  
 
1,000
  
 
1,075,790
         
MISSOURI — 1.7%
Farmington School District No. R 7, GO, INS: SADD
            
5.70%, 03/01/15
  
 
1,065
  
 
1,168,666
Missouri State Board of Public Buildings, RB, Special Obligation
            
5.75%, 05/01/09
  
 
1,500
  
 
1,704,165
         
         
 
2,872,831
         
NEBRASKA — 1.4%
Omaha, GO
            
5.00%, 12/01/08
  
 
2,170
  
 
2,395,116
         

 
See Accompanying Notes to Financial Statements.

42

Table of Contents

Mercantile Funds, Inc.
NATIONAL TAX-EXEMPT BOND FUND
Statement of Net Assets — Continued
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
NEW JERSEY — 4.7%
New Jersey State, GO, Refunding
            
5.75%, 02/15/06
  
$
1,000
  
$
1,101,500
New Jersey State Transportation Authority, RB
            
5.50%, 06/13/08
  
 
1,800
  
 
2,004,444
New Jersey State Transportation Authority, RB, INS: MBIA
            
6.00%, 12/15/15
  
 
2,000
  
 
2,273,040
New Jersey Transportation Corp., RB, BAN, INS: AMBAC
            
5.50%, 02/01/08
  
 
2,500
  
 
2,778,850
         
         
 
8,157,834
         
NEW YORK — 1.3%
New York State Environmental Facility, RB
            
6.00%, 06/15/18
  
 
2,000
  
 
2,201,320
         
OHIO — 6.8%
Cleveland Public Water System, RB, INS: MBIA, Prerefunded 11/15/04 @ 102
            
7.00%, 11/15/24
  
 
2,000
  
 
2,238,380
Eaton School District, GO, INS: FGIC
            
5.75%, 12/01/20
  
 
1,000
  
 
1,095,950
Ohio Public Facilities Commission, Mental Health, RB
            
5.125%, 06/01/04
  
 
1,000
  
 
1,051,300
Ohio State Water Development Authority, Drinking Water Fund, RB
            
5.50%, 12/01/17
  
 
2,500
  
 
2,709,875
Ohio State, GO
            
6.65%, 09/01/09
  
 
2,000
  
 
2,307,940
Ohio State Higher Education, RB, Capital Facilities
            
5.50%, 12/01/07
  
 
2,000
  
 
2,248,940
         
         
 
11,652,385
         
OREGON — 4.0%
Jackson County School District No. 6 Central Point, GO, INS: FGIC
            
5.75%, 06/15/15
  
 
2,060
  
 
2,282,501
Portland Sewer System, RB, INS: FGIC
            
5.75%, 08/01/18
  
 
2,000
  
 
2,177,880
   
 
 
Par
(000)
  
 
Value
             
OREGON — Continued
Portland Urban Renewal, Tax Allocation, Oregon Conventional Center, INS: AMBAC
            
6.00%, 06/15/13
  
$
2,000
  
$
2,269,900
         
         
 
6,730,281
         
PENNSYLVANIA — 11.2%
Allegheny County Higher Education Building Authority, RB, VRDB, Carnegie Mellon University, SPA: Landesbank Hessen
            
1.20%, 12/01/33
  
 
5,000
  
 
5,000,000
Allegheny County Sanitation Authority, RB, INS: MBIA
            
5.75%, 12/01/13
  
 
1,150
  
 
1,289,012
Chester County, GO
            
5.50%, 11/15/15
  
 
4,300
  
 
4,679,776
Northampton County, GPI, RB, INS: FSA
            
5.75%, 10/01/14
  
 
2,000
  
 
2,243,900
Pennsylvania Intergovernmental Coop Authority, RB, Special Tax, Philadelphia Funding Program
            
5.00%, 06/15/04
  
 
1,000
  
 
1,050,730
Pennsylvania State, GO
            
5.75%, 01/15/09
  
 
1,315
  
 
1,485,792
Pennsylvania State Higher Educational Facilities, RB, Carnegie Mellon University
            
6.00%, 11/01/04
  
 
1,270
  
 
1,368,108
Philadelphia School District, GO, SAW, INS: FSA
            
5.50%, 02/01/31
  
 
1,000
  
 
1,036,310
Pennsylvania State University, RB, Refunding
            
5.25%, 08/15/14
  
 
1,000
  
 
1,097,160
         
         
 
19,250,788
         
PUERTO RICO — 2.7%
Puerto Rico Commonwealth Highway & Transportation Authority, RB, INS: MBIA
            
6.25%, 07/01/05
  
 
1,345
  
 
1,487,395

 
See Accompanying Notes to Financial Statements.

43

Table of Contents

Mercantile Funds, Inc.
NATIONAL TAX-EXEMPT BOND FUND
Statement of Net Assets — Concluded
November 30, 2002
(Unaudited)
 
   
 
 
Par
(000)
  
 
Value
             
PUERTO RICO — Continued
5.50%, 07/01/13
  
$
2,780
  
$
3,149,462
         
         
 
4,636,857
         
RHODE ISLAND — 1.6%
Rhode Island State, GO, INS: FGIC
            
6.00%, 07/15/14
  
 
2,415
  
 
2,743,682
         
SOUTH CAROLINA — 1.7%
South Carolina Transportation Infrastructure, RB, GPI
            
5.50%, 10/01/06
  
 
2,705
  
 
3,004,389
         
TENNESSEE — 2.5%
Nashville & Davidson County, RB, Prerefunded 05/15/06 @ 102
            
5.625%, 05/15/14
  
 
2,750
  
 
3,093,338
Shelby County, GO
            
5.00%, 08/01/05
  
 
1,000
  
 
1,073,760
         
         
 
4,167,098
         
TEXAS — 3.9%
Austin Utility Systems, RB, Unrefunded Balance, INS: FSA
            
5.75%, 11/15/03
  
 
2,000
  
 
2,080,600
Bexar County, RB, Venue Project, INS: MBIA
            
5.25%, 08/15/04
  
 
1,035
  
 
1,093,685
San Antonio Electric & Gas, RB, Unrefunded Balance
            
5.80%, 02/01/06
  
 
3,300
  
 
3,589,740
         
         
 
6,764,025
         
UTAH — 1.0%
Salt Lake City, GO
            
6.00%, 12/15/03
  
 
1,500
  
 
1,571,130
         
VIRGINIA — 2.6%
Hampton, GO, GPI
            
5.75%, 02/01/15
  
 
1,490
  
 
1,666,342
Montgomery County, RB, INS: AMBAC
            
6.00%, 01/15/17
  
 
1,000
  
 
1,120,970
Virginia State Public Schools, RB
            
5.50%, 08/01/08
  
 
1,500
  
 
1,682,145
         
         
 
4,469,457
         
   
 
 
Par
(000)
  
 
Value
             
WISCONSIN — 1.4%
Sun Prairie Area School District, GO, INS: FSA
            
6.00%, 03/01/14
  
$
1,180
  
$
1,325,447
Wisconsin State, GO
            
6.20%, 05/01/06
  
 
1,000
  
 
1,119,100
         
         
 
2,444,547
         
TOTAL MUNICIPAL BONDS
      
(Cost $158,435,260)
  
 
164,446,574
         
   
 
 
Number of
Shares
  
INVESTMENT COMPANIES — 5.1%
Goldman Sachs Financial Square Tax-Free Money Market Fund
  
 
4,090,126
  
 
4,090,126
Provident Institutional Funds —  MuniFund
  
 
4,599,197
  
 
4,599,197
         
TOTAL INVESTMENT COMPANIES
      
(Cost $8,689,323)
  
 
8,689,323
         
TOTAL INVESTMENTS IN SECURITIES — 100.8%
(Cost $167,124,583)
  
 
173,135,897
         
LIABILITIES IN EXCESS OF OTHER ASSETS — (0.8)%
  
 
(1,372,188)
         
NET ASSETS — 100.0%
  
$
171,763,709
         
NET ASSET VALUE PER SHARE
      
Institutional Shares
($171,761,751 ÷ 17,342,830 shares outstanding)
  
 
$9.90
         
Class A Shares
($979 ÷ 99 shares outstanding)
  
 
$9.90
         
Class C Shares
($979 ÷ 99 shares outstanding)
  
 
$9.90
         
*
 
Aggregate cost for Federal income tax purposes. The aggregate gross unrealized appreciation (depreciation) for all securities is as follows:
 
Excess of value over tax cost
   
$
6,195,460
 
Excess of tax cost over value
   
$
(184,146
)

 
See Accompanying Notes to Financial Statements.

44

Table of Contents
Mercantile Funds, Inc.
INVESTMENT ABBREVIATIONS
 
ADR
   
American Depositary Receipt
AMBAC
   
American Municipal Bond Assurance Corp.
ARM
   
Adjustable Rate Mortgage
BAN
   
Bond Anticipation Notes
CGI
   
Consolidated General Improvement
COP
   
Certificates of Participation
CPI
   
Consolidated Public Improvement
ETM
   
Escrowed to Maturity in U.S. Government Obligations
FGIC
   
Financial Guaranty Insurance Co.
FRN
   
Floating Rate Notes
FSA
   
Financial Surety Assurance
GDR
   
Global Depositary Receipt
GO
   
General Obligation
GPI
   
General Public Improvement
GTD
   
Guaranteed
IDA
   
Industrial Development Authority
INS
   
Insured
LIC
   
Line of Credit
LIQ
   
Liquidity
LOC
   
Letter of Credit
MBIA
   
Municipal Bond Investor Association
MPB
   
Municipal Put Bonds
PCR
   
Pollution Control Revenue
PCRB
   
Pollution Control Revenue Bonds
PSFG
   
Permanent School Fund Guaranty
RAN
   
Revenue Anticipation Notes
RB
   
Revenue Bonds
SADD
   
State Aid Direct Deposit
SAW
   
State Aid Withholding
SPA
   
Standby Purchase Agreement
TAN
   
Tax Anticipation Notes
TECP
   
Tax-Exempt Commercial Paper
TIPS
   
Treasury Inflation Protected Securities
TRAN
   
Tax and Revenue Anticipation Notes
UT
   
Unlimited Tax
VRDN
   
Variable Rate Demand Notes

45

Table of Contents

Mercantile Funds, Inc.
Statements of Operations  For the Six Months Ended November 30, 2002  (Unaudited)
 
      
Prime Money Market Fund
       
Government Money Market Fund
       
Tax-Exempt Money Market Fund
  
INVESTMENT INCOME:
                                 
Interest
     
$
6,100,358
 
     
$
3,721,060
 
     
$
1,900,540
 
      
    
    
EXPENSES:
                                 
Investment advisory fees
     
 
838,688
 
     
 
522,160
 
     
 
328,732
 
Administration fees
     
 
419,345
 
     
 
261,080
 
     
 
164,366
 
Accounting agent fees
     
 
73,885
 
     
 
46,012
 
     
 
38,549
 
Distribution and service fees
                                 
Class A Shares
     
 
51
 
     
 
1
 
     
 
3
 
Class C Shares
     
 
1
 
     
 
2
 
     
 
2
 
Custodian fees
     
 
32,745
 
     
 
20,297
 
     
 
13,392
 
Directors’ fees
     
 
17,571
 
     
 
11,083
 
     
 
7,188
 
Transfer agent fees
     
 
14,274
 
     
 
10,027
 
     
 
8,607
 
Professional services
     
 
78,713
 
     
 
51,147
 
     
 
28,496
 
Other
     
 
31,493
 
     
 
18,633
 
     
 
20,288
 
      
    
    
      
 
1,506,766
 
     
 
940,442
 
     
 
609,623
 
Fees waived by Investment
                                 
Advisor
     
 
(164,813
)
     
 
(104,983
)
     
 
(83,630
)
Fees waived by
                                 
Administrator
     
 
(83,868
)
     
 
(52,216
)
     
 
(32,873
)
Distribution and services fee waived
                                 
Class A Shares
     
 
(51
)
     
 
(1
)
     
 
(3
)
Class C Shares
     
 
(1
)
     
 
(2
)
     
 
(2
)
      
    
    
TOTAL EXPENSES
     
 
1,258,033
 
     
 
783,240
 
     
 
493,115
 
      
    
    
NET INVESTMENT INCOME
     
 
4,842,325
 
     
 
2,937,820
 
     
 
1,407,425
 
      
    
    
REALIZED GAIN (LOSS) ON INVESTMENTS:
                                 
Net realized gain (loss) on investments sold
     
 
—
 
     
 
—
 
     
 
—
 
      
    
    
Net gain (loss) on investments
     
 
—
 
     
 
—
 
     
 
—
 
      
    
    
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
     
$
4,842,325
 
     
$
2,937,820
 
     
$
1,407,425
 
      
    
    

 
See Accompanying Notes to Financial Statements.

46

Table of Contents

Mercantile Funds, Inc.
Statement of Operations
For the Six Months Ended November 30, 2002
(Unaudited)

 
   
Growth & Income Fund
    
Equity Income
Fund
    
Equity Growth Fund
     
Capital Opportunities Fund
     
International Equity
Fund
    
Diversified Real Estate Fund
  
INVESTMENT INCOME:
                                                  
Interest
  
$
95,246
 
  
$
45,169
 
  
$
7,461
 
   
$
16,866
 
   
$
6,016
 
  
$
22,318
 
Income from securities loaned
  
 
2,131
 
  
 
509
 
  
 
106
 
   
 
1,113
 
   
 
—
 
  
 
1,254
 
Dividends
  
 
2,963,658
 
  
 
1,136,148
 
  
 
180,540
 
   
 
39,374
 
   
 
670,573
1
  
 
1,614,433
 
   
 
 
  
  
 
TOTAL INVESTMENT INCOME
  
 
3,061,035
 
  
 
1,181,826
 
  
 
188,107
 
   
 
57,353
 
   
 
676,589
 
  
 
1,638,005
 
   
 
 
  
  
 
EXPENSES:
                                                  
Investment advisory fees
  
 
1,034,260
 
  
 
272,896
 
  
 
98,082
 
   
 
217,349
 
   
 
502,962
 
  
 
192,476
 
Administration fees
  
 
215,471
 
  
 
56,853
 
  
 
20,434
 
   
 
20,888
 
   
 
51,533
 
  
 
30,074
 
Accounting agent fees
  
 
50,263
 
  
 
12,062
 
  
 
4,778
 
   
 
4,871
 
   
 
17,549
 
  
 
7,008
 
Distribution and service fees
                                                  
Class A Shares
  
 
26
 
  
 
1
 
  
 
3
 
   
 
4
 
   
 
4
 
  
 
9
 
Class C Shares
  
 
2
 
  
 
2
 
  
 
2
 
   
 
2
 
   
 
2
 
  
 
5
 
Custodian fees
  
 
16,525
 
  
 
4,274
 
  
 
1,477
 
   
 
1,632
 
   
 
82,797
 
  
 
2,314
 
Directors’ fees
  
 
11,936
 
  
 
3,426
 
  
 
1,904
 
   
 
1,802
 
   
 
3,126
 
  
 
2,092
 
Transfer agent fees
  
 
24,046
 
  
 
9,742
 
  
 
12,472
 
   
 
8,624
 
   
 
11,908
 
  
 
10,779
 
Professional services
  
 
34,339
 
  
 
10,458
 
  
 
6,954
 
   
 
6,522
 
   
 
14,037
 
  
 
5,288
 
Registration fees
  
 
12,000
 
  
 
6,737
 
  
 
1,887
 
   
 
3,483
 
   
 
4,239
 
  
 
2,817
 
Printing costs
  
 
5,281
 
  
 
1,411
 
  
 
1,001
 
   
 
1,567
 
   
 
1,405
 
  
 
874
 
Other
  
 
5,048
 
  
 
3,050
 
  
 
3,269
 
   
 
2,705
 
   
 
8,488
 
  
 
2,389
 
   
 
 
  
  
 
   
 
1,409,197
 
  
 
380,912
 
  
 
152,263
 
   
 
269,449
 
   
 
698,050
 
  
 
256,125
 
Fees waived by Investment Advisors
  
 
(103,172
)
  
 
(36,203
)
  
 
(29,304
)
   
 
(56,027
)
   
 
(172,407
)
  
 
(2,523
)
Fees waived by Administrator
  
 
(43,094
)
  
 
(11,371
)
  
 
(3,058
)
   
 
(4,178
)
   
 
(10,307
)
  
 
(4,710
)
   
 
 
  
  
 
TOTAL EXPENSES
  
 
1,262,931
 
  
 
333,338
 
  
 
119,901
 
   
 
209,244
 
   
 
515,336
 
  
 
248,892
 
   
 
 
  
  
 
NET INVESTMENT INCOME (LOSS)
  
 
1,798,104
 
  
 
848,488
 
  
 
68,206
 
   
 
(151,891
)
   
 
161,253
 
  
 
1,389,113
 
   
 
 
  
  
 
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
                                                  
Net realized gain (loss) from:
                                                  
Investments
  
 
(4,053,481
)
  
 
(5,876,987
)
  
 
(4,327,584
)
   
 
(3,741,013
)
   
 
(1,289,636
)
  
 
(214,992
)
Foreign currency transactions
  
 
—
 
  
 
—
 
  
 
—
 
   
 
—
 
   
 
379,755
 
  
 
—
 
   
 
 
  
  
 
   
 
(4,053,481
)
  
 
(5,876,987
)
  
 
(4,327,584
)
   
 
(3,741,013
)
   
 
(909,881
)
  
 
(214,992
)
   
 
 
  
  
 
Change in net unrealized appreciation (depreciation):
                                                  
Investments
  
 
(34,376,666
)
  
 
(8,789,319
)
  
 
(1,304,723
)
   
 
611,894
 
   
 
(9,008,472
)
  
 
(3,210,176
)
Translation of assets and liabilities in foreign currencies
  
 
—
 
  
 
—
 
  
 
—
 
   
 
—
 
   
 
(162,117
)
  
 
—
 
   
 
 
  
  
 
   
 
(34,376,666
)
  
 
(8,789,319
)
  
 
(1,304,723
)
   
 
611,894
 
   
 
(9,170,589
)
  
 
(3,210,176
)
   
 
 
  
  
 
Net gain (loss) on investments and foreign currency transactions
  
 
(38,430,147
)
  
 
(14,666,306
)
  
 
(5,632,307
)
   
 
(3,129,119
)
   
 
(10,080,470
)
  
 
(3,425,168
)
   
 
 
  
  
 
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
  
 
(36,632,043
)
  
 
(13,817,818
)
  
 
(5,564,101
)
   
 
(3,281,010
)
   
 
(9,919,217
)
  
 
(2,036,055
)
   
 
 
  
  
 
1
Net of withholding taxes of $97,583

See Accompanying Notes to Financial Statements.

47

Table of Contents

Mercantile Funds, Inc.
Statements of Operations  For the Six Months Ended November 30, 2002
(Unaudited)
 

 
    
Limited Maturity Bond Fund
     
Total Return Bond Fund
     
Maryland Tax-Exempt Bond Fund
     
Intermediate Tax-Exempt Bond Fund
     
National Tax-Exempt Bond Fund
  
INVESTMENT INCOME:
                                             
Interest
   
$
3,374,338
 
   
$
3,620,274
 
   
$
1,160,957
 
   
$
1,557,169
 
   
$
3,484,718
 
    
  
  
  
  
EXPENSES:
                                             
Investment advisory fees
   
 
275,042
 
   
 
237,416
 
   
 
142,927
 
   
 
207,417
 
   
 
437,841
 
Administration fees
   
 
98,230
 
   
 
84,792
 
   
 
35,732
 
   
 
51,854
 
   
 
109,460
 
Accounting agent fees
   
 
22,876
 
   
 
19,751
 
   
 
10,188
 
   
 
14,763
 
   
 
31,536
 
Distribution and service fees
                                             
Class A Shares
   
 
13
 
   
 
9
 
   
 
126
 
   
 
42
 
   
 
1
 
Class C Shares
   
 
2
 
   
 
2
 
   
 
2
 
   
 
2
 
   
 
2
 
Custodian fees
   
 
7,595
 
   
 
6,633
 
   
 
2,725
 
   
 
3,960
 
   
 
8,639
 
Directors’ fees
   
 
4,736
 
   
 
4,214
 
   
 
2,245
 
   
 
2,942
 
   
 
5,336
 
Transfer agent fees
   
 
14,139
 
   
 
10,341
 
   
 
10,391
 
   
 
8,328
 
   
 
8,363
 
Professional services
   
 
18,554
 
   
 
16,768
 
   
 
7,949
 
   
 
13,695
 
   
 
20,567
 
Registration fees
   
 
9,182
 
   
 
4,382
 
   
 
3,040
 
   
 
2,183
 
   
 
8,775
 
Pricing service fees
   
 
4,695
 
   
 
13,031
 
   
 
7,162
 
   
 
4,242
 
   
 
6,881
 
Other
   
 
3,584
 
   
 
3,204
 
   
 
1,558
 
   
 
2,234
 
   
 
4,181
 
    
  
  
  
  
    
 
458,648
 
   
 
400,543
 
   
 
224,045
 
   
 
311,662
 
   
 
641,582
 
Fees waived by Investment Advisor
   
 
(58,686
)
   
 
(55,372
)
   
 
(78,337
)
   
 
(100,435
)
   
 
(192,571
)
Fees waived by Administrator
   
 
(19,646
)
   
 
(16,958
)
   
 
(7,146
)
   
 
(10,371
)
   
 
(21,892
)
    
  
  
  
  
TOTAL EXPENSES
   
 
380,316
 
   
 
328,213
 
   
 
138,562
 
   
 
200,856
 
   
 
427,119
 
    
  
  
  
  
NET INVESTMENT INCOME
   
 
2,994,022
 
   
 
3,292,061
 
   
 
1,022,395
 
   
 
1,356,313
 
   
 
3,057,599
 
    
  
  
  
  
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
                                             
Net realized gain (loss)
   
 
452,442
 
   
 
305,704
 
   
 
191,765
 
   
 
702,263
 
   
 
316,134
 
Change in net unrealized appreciation (depreciation)
   
 
777,329
 
   
 
713,122
 
   
 
187,096
 
   
 
(297,295
)
   
 
454,354
 
    
  
  
  
  
Net gain (loss) on investments
   
 
1,229,771
 
   
 
1,018,826
 
   
 
378,861
 
   
 
404,968
 
   
 
770,488
 
    
  
  
  
  
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
   
$
4,223,793
 
   
$
4,310,887
 
   
$
1,401,256
 
   
$
1,761,281
 
   
$
3,828,087
 
    
  
  
  
  

 
See Accompanying Notes to Financial Statements.

48

Table of Contents

Mercantile Funds, Inc.
Statement of Changes in Net Assets
 

 
      
Prime Money Market Fund
For the
Six Months Ended November 30, 2002
     
Prime Money Market Fund For the
Year Ended
May 31, 2002
       
Government Money Market Fund For the Six Months Ended
November 30, 2002
     
Government Money Market
Fund For the Year Ended
May 31, 2002
  
      
(Unaudited)
              
(Unaudited)
         
INCREASE (DECREASE) IN NET ASSETS:
                                        
Operations:
                                        
Net investment income
     
$
4,842,325
 
   
$
16,148,533
 
     
$
2,937,820
 
   
$
10,236,919
 
Net gain (loss) on investments
     
 
—
 
   
 
19,288
 
     
 
—
 
   
 
(2,291
)
      
  
    
  
Net increase (decrease) in net assets resulting from operations
     
 
4,842,325
 
   
 
16,167,821
 
     
 
2,937,820
 
   
 
10,234,628
 
      
  
    
  
Distributions to shareholders from Net investment income
                                        
Institutional Class
     
 
(4,842,200
)
   
 
(16,148,533
)
     
 
(2,937,816
)
   
 
(10,236,919
)
Class A Shares
     
 
(123
)
   
 
—
 
     
 
(2
)
   
 
—
 
Class C Shares
     
 
(2
)
   
 
—
 
     
 
(2
)
   
 
—
 
      
  
    
  
Total distributions to shareholders
     
 
(4,842,325
)
   
 
(16,148,533
)
     
 
(2,937,820
)
   
 
(10,236,919
)
      
  
    
  
Increase (decrease) in net assets derived from capital share transactions
     
 
74,072,421
 
   
 
(14,857,301
)
     
 
12,018,554
 
   
 
(27,945,745
)
      
  
    
  
TOTAL INCREASE (DECREASE) IN NET ASSETS
     
 
74,072,421
 
   
 
(14,838,013
)
     
 
12,018,554
 
   
 
(27,948,036
)
NET ASSETS:
                                        
Beginning of period
     
 
647,060,715
 
   
 
661,898,728
 
     
 
402,908,178
 
   
 
430,856,214
 
      
  
    
  
End of period
     
$
721,133,136
 
   
$
647,060,715
 
     
$
414,926,732
 
   
$
402,908,178
 
      
  
    
  
 
      
Tax-Exempt Money Market Fund For the Six Months Ended November 30, 2002
     
Tax-Exempt Money Market Fund For the Year Ended
May 31, 2002
  
      
(Unaudited)
         
INCREASE (DECREASE) IN NET ASSETS:
                    
Operations:
                    
Net investment income
     
$
1,407,425
 
   
$
3,696,451
 
Net gain (loss) on investments
     
 
—
 
   
 
—
 
      
  
Net increase (decrease) in net assets resulting from operations
     
 
1,407,425
 
   
 
3,696,451
 
      
  
Distributions to shareholders from Net investment income
                    
Institutional Class
     
 
(1,407,418
)
   
 
(3,696,451
)
Class A Shares
     
 
(5
)
   
 
—
 
Class C Shares
     
 
(2
)
   
 
  —
 
      
  
Total distributions to shareholders
     
 
(1,407,425
)
   
 
(3,696,451
)
      
  
Increase (decrease) in net assets derived from capital share transactions
     
 
7,818,707
 
   
 
57,231,904
 
      
  
TOTAL INCREASE (DECREASE) IN NET ASSETS
     
 
7,818,707
 
   
 
57,231,904
 
NET ASSETS:
                    
Beginning of period
     
 
252,506,555
 
   
 
195,274,651
 
      
  
End of period
     
$
260,325,262
 
   
$
252,506,555
 
      
  

 
See Accompanying Notes to Financial Statements.

49

Table of Contents

Mercantile Funds, Inc.
Statements of Changes in Net Assets
 
    
Growth &
Income Fund
For the
Six Months Ended
November 30, 2002
     
Growth &
Income Fund For the Year Ended
May 31, 2002
     
Equity
Income Fund
For the
Six Months Ended November 30, 2002
     
Equity
Income Fund For the Year Ended
May 31, 2002
  
    
(Unaudited)
            
(Unaudited)
         
INCREASE (DECREASE) IN NET ASSETS:
                                    
Operations:
                                    
Net investment income
   
$
1,798,104
 
   
$
3,622,916
 
   
$
848,488
 
   
$
1,502,653
 
Net realized gain (loss) on investments
   
 
(4,053,481
)
   
 
(9,370,803
)
   
 
(5,876,987
)
   
 
(3,093,323
)
Net increase (decrease) in unrealized appreciation (depreciation) on investments
   
 
(34,376,666
)
   
 
(40,049,508
)
   
 
(8,789,319
)
   
 
(6,185,464
)
    
  
  
  
Net increase (decrease) in net assets resulting from operations
   
 
(36,632,043
)
   
 
(45,797,395
)
   
 
(13,817,818
)
   
 
(7,776,134
)
    
  
  
  
Distributions to shareholders from
                                    
Net investment income
                                    
Institutional Class
   
 
(1,842,487
)
   
 
(3,610,834
)
   
 
(860,711
)
   
 
(1,538,967
)
Class A Shares
   
 
(1
)
   
 
—
 
   
 
(2
)
   
 
—
 
Class C Shares
   
 
(1
)
   
 
—
 
   
 
(2
)
   
 
—
 
Net realized capital gains
                                    
Institutional Class
   
 
—
 
   
 
(43,101,978
)
   
 
—
 
   
 
(5,325,872
)
    
  
  
  
Total distributions to shareholders
   
 
(1,842,489
)
   
 
(46,712,812
)
   
 
(860,715
)
   
 
(6,864,839
)
    
  
  
  
Capital Share Transactions:
                                    
Proceeds of shares sold
                                    
Institutional Class
   
 
30,170,213
 
   
 
85,541,257
 
   
 
14,055,452
 
   
 
19,724,313
 
Class A Shares
   
 
159,586
 
   
 
—
 
   
 
1,000
 
   
 
—
 
Class C Shares
   
 
3,000
 
   
 
—
 
   
 
1,000
 
   
 
—
 
Cost of shares redeemed
                                    
Institutional Class
   
 
(23,637,343
)
   
 
(88,379,540
)
   
 
(10,261,661
)
   
 
(9,866,078
)
Class C Shares
   
 
(1,000
)
   
 
—
 
   
 
—
 
   
 
—
 
Value of shares issued in reinvestment of dividends
                                    
Institutional Class
   
 
529,729
 
   
 
15,958,881
 
   
 
23,628
 
   
 
259,542
 
Class A Shares
   
 
1
 
   
 
—
 
   
 
2
 
   
 
—
 
Class C Shares
   
 
1
 
   
 
—
 
   
 
2
 
   
 
—
 
    
  
  
  
Increase (decrease) in net assets derived from capital share transactions
   
 
7,224,187
 
   
 
13,120,598
 
   
 
3,819,423
 
   
 
10,117,777
 
    
  
  
  
TOTAL INCREASE (DECREASE) IN NET ASSETS
   
 
(31,250,345
)
   
 
(79,389,609
)
   
 
(10,859,110
)
   
 
(4,523,196
)
NET ASSETS:
                                    
Beginning of period
   
 
390,190,581
 
   
 
469,580,190
 
   
 
103,600,731
 
   
 
108,123,927
 
    
  
  
  
End of period
   
$
358,940,236
 
   
$
390,190,581
 
   
$
92,741,621
 
   
$
103,600,731
 
    
  
  
  
CAPITAL SHARE TRANSACTIONS (IN SHARES)
                                    
Shares sold
                                    
Institutional Class
   
 
2,161,115
 
   
 
4,853,529
 
   
 
3,739,560
 
   
 
4,292,881
 
Class A Shares
   
 
10,657
 
   
 
—
 
   
 
291
 
   
 
—
 
Class C Shares
   
 
205
 
   
 
—
 
   
 
291
 
   
 
—
 
Shares redeemed
                                    
Institutional Class
   
 
(1,730,611
)
   
 
(4,984,996
)
   
 
(2,749,670
)
   
 
(2,173,177
)
Class A Shares
   
 
—
 
   
 
—
 
   
 
—  
 
   
 
—
 
Class C Shares
   
 
(66
)
   
 
—
 
   
 
—  
 
   
 
—
 
Shares issued in reinvestment of dividends
                                    
Institutional Class
   
 
38,886
 
   
 
892,335
 
   
 
6,173
 
   
 
54,570
 
Class A Shares
   
 
—
 
   
 
—
 
   
 
1
 
   
 
—
 
Class C Shares
   
 
—
 
   
 
—
 
   
 
1
 
   
 
—
 
    
  
  
  
Net Increase (Decrease) in Shares
                                    
Institutional Class
   
 
469,390
 
   
 
760,868
 
   
 
996,063
 
   
 
2,174,274
 
Class A Shares
   
 
10,657
 
   
 
—
 
   
 
292
 
   
 
—
 
Class C Shares
   
 
139
 
   
 
—
 
   
 
292
 
   
 
—
 
    
  
  
  
    
 
480,186
 
   
 
760,868
 
   
 
996,647
 
   
 
2,174,274
 

See Accompanying Notes to Financial Statements.

50

Table of Contents

Mercantile Funds, Inc.
Statements of Changes in Net Assets
 
    
Equity
Growth Fund
For the
Six Months Ended November 30, 2002
     
Equity
Growth Fund
For the Year Ended May 31, 2002
     
Capital Opportunities Fund For the
Six Months Ended November 30, 2002
     
Capital Opportunities Fund For the Period
For the Year Ended May 31, 2002
  
    
(Unaudited)
            
(Unaudited)
         
INCREASE (DECREASE) IN NET ASSETS:
                                    
Operations:
                                    
Net investment income (loss)
   
$
68,206
 
   
$
82,264
 
   
$
(151,891
)
   
$
(223,397
)
Net realized gain (loss) on investments
   
 
(4,327,584
)
   
 
(24,774,162
)
   
 
(3,741,013
)
   
 
(2,376,201
)
Net increase (decrease) in unrealized appreciation (depreciation) on investments
   
 
(1,304,723
)
   
 
4,888,589
 
   
 
611,894
 
   
 
(1,427,854
)
    
  
  
  
Net increase (decrease) in net assets resulting from operations
   
 
(5,564,101
)
   
 
(19,803,309
)
   
 
(3,281,010
)
   
 
(4,027,452
)
    
  
  
  
Distributions to shareholders from:
                                    
Net investment income
                                    
Institutional Class
   
 
(30,514
)
   
 
(147,900
)
   
 
—
 
   
 
—
 
Net realized capital gains
                                    
Institutional Class
   
 
—
 
   
 
(886,171
)
   
 
—
 
   
 
—
 
    
  
  
  
Total distributions to shareholders
   
 
(30,514
)
   
 
(1,034,071
)
   
 
—
 
   
 
—
 
    
  
  
  
Capital Share Transactions:
                                    
Proceeds of shares sold
                                    
Institutional Class
   
 
1,949,477
 
   
 
20,291,042
 
   
 
11,448,766
 
   
 
14,277,744
 
Class A Shares
   
 
3,856
 
   
 
—
 
   
 
18,682
 
   
 
—
 
Class C Shares
   
 
1,000
 
   
 
—
 
   
 
1,000
 
   
 
—
 
Cost of shares redeemed
                                    
Institutional Class
   
 
(8,925,911
)
   
 
(30,528,948
)
   
 
(4,731,202
)
   
 
(1,340,034
)
Value of shares issued in reinvestment of dividends
                                    
Institutional Class
   
 
5,294
 
   
 
131,065
 
   
 
—
 
   
 
—
 
    
  
  
  
Increase (decrease) in net assets derived from capital share transactions
   
 
(6,966,284
)
   
 
(10,106,841
)
   
 
6,737,246
 
   
 
12,937,710
 
    
  
  
  
TOTAL INCREASE (DECREASE) IN NET ASSETS
   
 
(12,560,899
)
   
 
(30,944,221
)
   
 
3,456,236
 
   
 
8,910,258
 
NET ASSETS:
                                    
Beginning of period
   
 
42,638,228
 
   
 
73,582,449
 
   
 
36,064,761
 
   
 
27,154,503
 
    
  
  
  
End of period
   
$
30,077,329
 
   
$
42,638,228
 
   
$
39,520,997
 
   
$
36,064,761
 
    
  
  
  
CAPITAL SHARE TRANSACTIONS (IN SHARES)
                                    
Shares sold
                                    
Institutional Class
   
 
360,279
 
   
 
2,452,349
 
   
 
1,816,188
 
   
 
1,858,192
 
Class A Shares
   
 
800
 
   
 
—
 
   
 
2,982
 
   
 
—
 
Class C Shares
   
 
201
 
   
 
—
 
   
 
173
 
   
 
—
 
Shares redeemed
                                    
Institutional Class
   
 
(1,621,798
)
   
 
(3,802,131
)
   
 
(760,336
)
   
 
(179,395
)
Class A Shares
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
Class C Shares
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
Shares issued in reinvestment of dividends
Institutional Class
   
 
930
 
   
 
15,761
 
   
 
—
 
   
 
—
 
Class A Shares
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
Class C Shares
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
    
  
  
  
Net Increase (Decrease) in Shares
                                    
Institutional Class
   
 
(1,260,589
)
   
 
(1,334,021
)
   
 
1,055,852
 
   
 
1,678,797
 
Class A Shares
   
 
800
 
   
 
—
 
   
 
2,982
 
   
 
—
 
Class C Shares
   
 
201
 
   
 
—
 
   
 
173
 
   
 
—
 
    
  
  
  
    
 
(1,259,588
)
   
 
(1,334,021
)
   
 
1,059,007
 
   
 
1,678,797
 

 
See Accompanying Notes to Financial Statements.

51

Table of Contents

Mercantile Funds, Inc.
Statements of Changes in Net Assets
 

 
    
International Equity Fund
For the
Six Months Ended
November 30, 2002
    
International Equity Fund
For the
Year Ended
May 31, 2002
     
Diversified Real Estate Fund
For the
Six Months Ended
November 30, 2002
    
Diversified Real Estate Fund
For the
Year Ended
May 31, 2002
  
    
(Unaudited)
           
(Unaudited)
        
INCREASE (DECREASE) IN NET ASSETS:
                                  
Operations:
                                  
Net investment income
   
$
161,253
 
  
$
615,893
 
   
$
1,389,113
 
  
$
1,498,060
 
Net realized gain (loss) on investments and foreign currency
   
 
(909,881
)
  
 
(8,000,208
)
   
 
(214,992
)
  
 
71,341
 
Net increase (decrease) in unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currency
   
 
(9,170,589
)
  
 
10,546,476
 
   
 
(3,210,176
)
  
 
4,250,153
 
    
 
  
 
Net increase (decrease) in net assets resulting from operations
   
 
(9,919,217
)
  
 
3,162,161
 
   
 
(2,036,055
)
  
 
5,819,554
 
    
 
  
 
Distributions to shareholders from:
                                  
Net investment income
                                  
Institutional Class
   
 
(696,002
)
  
 
(128,062
)
   
 
(1,258,468
)
  
 
(1,516,369
)
Class A Shares
   
 
—
 
  
 
—
 
   
 
(13
)
  
 
—
 
Class C Shares
   
 
—
 
  
 
—
 
   
 
(13
)
  
 
—
 
Net realized capital gains
                                  
Institutional Class
   
 
—
 
  
 
—
 
   
 
—
 
  
 
(126,551
)
Return of Capital distributions
                                  
Institutional Class
   
 
—
 
  
 
—
 
   
 
—
 
  
 
(90,289
)
    
 
  
 
Total distributions to shareholders
   
 
(696,002
)
  
 
(128,062
)
   
 
(1,258,494
)
  
 
(1,733,209
)
    
 
  
 
Capital Share Transactions:
                                  
Proceeds of shares sold
                                  
Institutional Class
   
 
11,654,985
 
  
 
64,373,473
 
   
 
14,591,304
 
  
 
15,988,856
 
Class A Shares
   
 
18,347
 
  
 
—
 
   
 
27,841
 
  
 
—
 
Class C Shares
   
 
0
 
  
 
—
 
   
 
34,500
 
  
 
—
 
Cost of shares redeemed
                                  
Institutional Class
   
 
(2,985,350
)
  
 
(75,073,251
)
   
 
(2,755,851
)
  
 
(1,503,102
)
Value of shares issued in reinvestment of dividends
                                  
Institutional Class
   
 
94,945
 
  
 
16,592
 
   
 
165,290
 
  
 
148,864
 
Class A Shares
   
 
—
 
  
 
—
 
   
 
13
 
  
 
—
 
Class C Shares
   
 
—
 
  
 
—
 
   
 
13
 
  
 
—
 
    
 
  
 
Increase (decrease) in net assets derived from capital share transactions
   
 
8,782,927
 
  
 
(10,683,186
)
   
 
12,063,110
 
  
 
14,634,618
 
    
 
  
 
TOTAL INCREASE (DECREASE) IN NET ASSETS
   
 
(1,832,292
)
  
 
(7,649,087
)
   
 
8,768,561
 
  
 
18,720,963
 
NET ASSETS:
                                  
Beginning of period
   
 
89,614,433
 
  
 
97,263,520
 
   
 
44,808,524
 
  
 
26,087,561
 
    
 
  
 
End of period
   
$
87,782,141
 
  
$
89,614,433
 
   
$
53,577,085
 
  
$
44,808,524
 
    
 
  
 
CAPITAL SHARE TRANSACTIONS (IN SHARES)
                                  
Shares sold
                                  
Institutional Class
   
 
1,207,962
 
  
 
6,539,126
 
   
 
1,364,937
 
  
 
1,463,177
 
Class A Shares
   
 
1,944
 
  
 
—
 
   
 
2,708
 
  
 
—
 
Class C Shares
   
 
112
 
  
 
—
 
   
 
3,278
 
  
 
—
 
Shares redeemed
                                  
Institutional Class
   
 
(306,165
)
  
 
(7,544,476
)
   
 
(263,863
)
  
 
(139,973
)
Class A Shares
   
 
—
 
  
 
—
 
   
 
—
 
  
 
—
 
Class C Shares
   
 
—
 
  
 
—
 
   
 
—
 
  
 
—
 
Shares issued in reinvestment of dividends
                                  
Institutional Class
   
 
9,000
 
  
 
1,609
 
   
 
15,023
 
  
 
13,917
 
Class A Shares
   
 
—
 
  
 
—
 
   
 
1
 
  
 
—
 
Class C Shares
   
 
—
 
  
 
—
 
   
 
1
 
  
 
—
 
    
 
  
 
Net Increase (Decrease) in Shares
                                  
Institutional Class
   
 
910,797
 
  
 
(1,003,741
)
   
 
1,116,097
 
  
 
1,337,121
 
Class A Shares
   
 
1,944
 
  
 
—
 
   
 
2,709
 
  
 
—
 
Class C Shares
   
 
112
 
  
 
—
 
   
 
3,279
 
  
 
—
 
    
 
  
 
    
 
912,853
 
  
 
(1,003,741
)
   
 
1,122,085
 
  
 
1,337,121
 

See Accompanying Notes to Financial Statements.

52

Table of Contents

Mercantile Funds, Inc.
Statements of Changes in Net Assets
 
    
Limited Maturity
Bond Fund
For the
Six Months Ended
November 30, 2002
     
Limited Maturity Bond Fund
For the Year Ended May 31, 2002
     
Total Return
Bond Fund
For the
Six Months Ended November 30, 2002
     
Total Return
Bond Fund
For the Year Ended May 31, 2002
  
    
(Unaudited)
            
(Unaudited)
         
INCREASE (DECREASE) IN NET ASSETS:
                                    
Operations:
                                    
Net investment income
   
$
2,994,022
 
   
$
6,951,597
 
   
$
3,292,061
 
   
$
6,785,156
 
Net realized gain (loss) on investments
   
 
452,442
 
   
 
(1,456,865
)
   
 
305,704
 
   
 
472,097
 
Net increase (decrease) in unrealized appreciation (depreciation) on investments
   
 
777,329
 
   
 
1,153,019
 
   
 
713,122
 
   
 
484,089
 
    
  
  
  
Net increase (decrease) in net assets resulting from operations
   
 
4,223,793
 
   
 
6,647,751
 
   
 
4,310,887
 
   
 
7,741,342
 
    
  
  
  
Distributions to shareholders from:
                                    
Net investment income
                                    
Institutional Class
   
 
(2,983,026
)
   
 
(6,971,768
)
   
 
(3,363,852
)
   
 
(6,949,968
)
Class A Shares
   
 
(87
)
   
 
—
 
   
 
(81
)
   
 
—
 
Class C Shares
   
 
(4
)
   
 
—
 
   
 
(7
)
   
 
—
 
Net realized capital gains
                                    
Institutional Class
   
 
—
 
   
 
(1,192,565
)
   
 
—
 
   
 
(380,505
)
    
  
  
  
Total distributions to shareholders
   
 
(2,983,117
)
   
 
(8,164,333
)
   
 
(3,363,940
)
   
 
(7,330,473
)
    
  
  
  
Capital Share Transactions:
                                    
Proceeds of shares sold
                                    
Institutional Class
   
 
27,777,426
 
   
 
22,882,768
 
   
 
15,955,232
 
   
 
21,018,096
 
Class A Shares
   
 
75,085
 
   
 
—
 
   
 
3,458
 
   
 
—
 
Class C Shares
   
 
1,000
 
   
 
—
 
   
 
1,000
 
   
 
—
 
Cost of shares redeemed
                                    
Institutional Class
   
 
(9,849,841
)
   
 
(41,084,763
)
   
 
(7,148,662
)
   
 
(17,285,335
)
Value of shares issued in reinvestment of dividends
                                    
Institutional Class
   
 
473,376
 
   
 
1,709,516
 
   
 
113,741
 
   
 
231,520
 
Class A Shares
   
 
3
 
   
 
—
 
   
 
10
 
   
 
—
 
Class C Shares
   
 
2
 
   
 
—
 
   
 
3
 
   
 
—
 
    
  
  
  
Increase (decrease) in net assets derived from capital
share transactions
   
 
18,477,051
 
   
 
(16,492,479
)
   
 
8,924,782
 
   
 
3,964,281
 
    
  
  
  
TOTAL INCREASE (DECREASE) IN NET ASSETS
   
 
19,717,727
 
   
 
(18,009,061
)
   
 
9,871,729
 
   
 
4,375,150
 
NET ASSETS:
                                    
Beginning of period
   
 
144,425,927
 
   
 
162,434,988
 
   
 
128,717,319
 
   
 
124,342,169
 
    
  
  
  
End of period
   
$
164,143,654
 
   
$
144,425,927
 
   
$
138,589,048
 
   
$
128,717,319
 
    
  
  
  
CAPITAL SHARE TRANSACTIONS (IN SHARES)
                                    
Shares sold
                                    
Institutional Class
   
 
2,754,523
 
   
 
2,198,787
 
   
 
1,620,113
 
   
 
2,135,178
 
Class A Shares
   
 
7,192
 
   
 
—
 
   
 
390
 
   
 
—
 
Class C Shares
   
 
96
 
   
 
—
 
   
 
101
 
   
 
—
 
Shares redeemed
                                    
Institutional Class
   
 
(1,032,006
)
   
 
(3,937,507
)
   
 
(724,593
)
   
 
(1,754,087
)
Class A Shares
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
Class C Shares
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
Shares issued in reinvestment of dividends
                                    
Institutional Class
   
 
49,522
 
   
 
163,761
 
   
 
11,539
 
   
 
23,444
 
Class A Shares
   
 
—
 
   
 
—
 
   
 
1
 
   
 
—
 
Class C Shares
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
    
  
  
  
Net Increase (Decrease) in Shares
                                    
Institutional Class
   
 
1,772,039
 
   
 
(1,574,959
)
   
 
907,059
 
   
 
404,535
 
Class A Shares
   
 
7,192
 
   
 
—
 
   
 
391
 
   
 
—
 
Class C Shares
   
 
96
 
   
 
—
 
   
 
101
 
   
 
—
 
    
  
  
  
    
 
1,779,327
 
   
 
(1,574,959
)
   
 
907,551
 
   
 
404,535
 

See Accompanying Notes to Financial Statements.

53

Table of Contents

Mercantile Funds, Inc.
Statements of Changes in Net Assets
 

   
Maryland Tax-Exempt
Bond Fund
For the
Six Months Ended November 30,
2002
    
Maryland
Tax-Exempt
Bond Fund For the Year Ended
May 31, 2002
    
Intermediate
Tax-Exempt
Bond Fund
For the
Six Months Ended
November 30, 2002
    
Intermediate Tax-Exempt Bond Fund For the
Year Ended May 31,
2002
  
   
(Unaudited)
          
(Unaudited)
        
INCREASE (DECREASE) IN NET ASSETS:
                                
Operations:
                                
Net investment income
  
$
1,022,395
 
  
$
1,898,159
 
  
$
1,356,313
 
  
$
3,001,820
 
Net realized gain (loss) on investments
  
 
191,765
 
  
 
189,937
 
  
 
702,263
 
  
 
806,905
 
Net increase (decrease) in unrealized appreciation (depreciation) on investments
  
 
187,096
 
  
 
466,437
 
  
 
(297,295
)
  
 
(7,183
)
   
 
 
 
Net increase (decrease) in net assets resulting from operations
  
 
1,401,256
 
  
 
2,554,533
 
  
 
1,761,281
 
  
 
3,801,542
 
   
 
 
 
Distributions to shareholders from:
                                
Net investment income
                                
Institutional Class
  
 
(1,021,625
)
  
 
(1,898,159
)
  
 
(1,356,101
)
  
 
(3,001,820
)
Class A Shares
  
 
(767
)
  
 
—
 
  
 
(209
)
  
 
—
 
Class C Shares
  
 
(4
)
  
 
—
 
  
 
(3
)
  
 
—
 
Net realized capital gains
                                
Institutional Class
  
 
—
 
  
 
—
 
  
 
—
 
  
 
—
 
   
 
 
 
Total Distributions to Shareholders
  
 
(1,022,396
)
  
 
(1,898,159
)
  
 
(1,356,313
)
  
 
(3,001,820
)
   
 
 
 
Capital Share Transactions:
                                
Proceeds of shares sold
                                
Institutional Class
  
 
10,627,269
 
  
 
14,331,657
 
  
 
20,366,438
 
  
 
4,958,118
 
Class A Shares
  
 
240,596
 
  
 
—
 
  
 
73,390
 
  
 
—
 
Class C Shares
  
 
1,000
 
  
 
—
 
  
 
1,000
 
  
 
—
 
Cost of shares redeemed
                                
Institutional Class
  
 
(3,593,544
)
  
 
(5,625,317
)
  
 
(7,556,756
)
  
 
(6,577,089
)
Value of shares issued in reinvestment of dividends
                                
Institutional Class
  
 
120,718
 
  
 
226,638
 
  
 
7,983
 
  
 
10,030
 
Class A Shares
  
 
236
 
  
 
—
 
  
 
74
 
  
 
—
 
Class C Shares
  
 
2
 
  
 
—
 
  
 
2
 
  
 
—
 
   
 
 
 
Increase (decrease) in net assets derived from capital share transactions
  
 
7,396,277
 
  
 
8,932,978
 
  
 
12,892,131
 
  
 
(1,608,941
)
   
 
 
 
TOTAL INCREASE (DECREASE) IN NET ASSETS
  
 
7,775,137
 
  
 
9,589,352
 
  
 
13,297,099
 
  
 
(809,219
)
NET ASSETS:
                                
Beginning of period
  
 
50,719,891
 
  
 
41,130,539
 
  
 
79,238,156
 
  
 
80,047,375
 
   
 
 
 
End of period
  
$
58,495,028
 
  
$
50,719,891
 
  
$
92,535,255
 
  
$
79,238,156
 
   
 
 
 
CAPITAL SHARE TRANSACTIONS (IN SHARES)
                                
Shares sold
                                
Institutional Class
  
 
952,140
 
  
 
1,306,797
 
  
 
2,000,051
 
  
 
492,389
 
Class A Shares
  
 
21,526
 
  
 
—
 
  
 
7,202
 
  
 
—
 
Class C Shares
  
 
88
 
  
 
—
 
  
 
98
 
  
 
—
 
Shares redeemed
                                
Institutional Class
  
 
(321,280
)
  
 
(511,486
)
  
 
(741,468
)
  
 
(653,853
)
Class A Shares
  
 
—
 
  
 
—
 
  
 
—
 
  
 
—
 
Class C Shares
  
 
—
 
  
 
—
 
  
 
—
 
  
 
—
 
Shares issued in reinvestment of dividends
                                
Institutional Class
  
 
10,806
 
  
 
20,628
 
  
 
785
 
  
 
996
 
Class A Shares
  
 
21
 
  
 
—
 
  
 
7
 
  
 
—
 
Class C Shares
  
 
1
 
  
 
—
 
  
 
—
 
  
 
—
 
   
 
 
 
Net Increase (Decrease) in Shares
                                
Institutional Class
  
 
641,666
 
  
 
815,939
 
  
 
1,259,368
 
  
 
(160,468
)
Class A Shares
  
 
21,547
 
  
 
—
 
  
 
7,209
 
  
 
—
 
Class C Shares
  
 
89
 
  
 
—
 
  
 
98
 
  
 
—
 
   
 
 
 
   
 
663,302
 
  
 
815,939
 
  
 
1,266,675
 
  
 
(160,468
)

 
See Accompanying Notes to Financial Statements.

54

Table of Contents

Mercantile Funds, Inc.
Statements of Changes in Net Assets
 

 
      
National Tax-Exempt
Bond Fund
For the
Six Months Ended
November 30, 2002
       
National Tax-Exempt
Bond Fund
For the Year Ended
May 31, 2002
  
      
(Unaudited)
           
INCREASE (DECREASE) IN NET ASSETS:
                      
Operations:
                      
Net investment income
     
$
3,057,599
 
     
$
7,158,506
 
Net realized gain (loss) on investments
     
 
316,134
 
     
 
2,336,400
 
Net increase (decrease) in unrealized appreciation (depreciation) on investments
     
 
454,354
 
     
 
654,260
 
      
    
Net increase (decrease) in net assets resulting from operations
     
 
3,828,087
 
     
 
10,149,166
 
      
    
Distributions to shareholders from:
                      
Net investment income
                      
Institutional Class
     
 
(3,057,591
)
     
 
(7,158,506
)
Class A Shares
     
 
(5
)
     
 
—
 
Class C Shares
     
 
(4
)
     
 
—
 
Net realized capital gains
                      
Institutional Class
     
 
—
 
     
 
(3,886,364
)
      
    
Total Distributions to Shareholders
     
 
(3,057,600
)
     
 
(11,044,870
)
      
    
Capital Share Transactions:
                      
Proceeds of shares sold
                      
Institutional Class
     
 
5,057,040
 
     
 
5,289,454
 
Class A Shares
     
 
1,000
 
     
 
—
 
Class C Shares
     
 
1,000
 
     
 
—
 
Cost of shares redeemed
                      
Institutional Class
     
 
(8,374,247
)
     
 
(11,416,173
)
Value of shares issued in reinvestment of dividends
                      
Institutional Class
     
 
9,089
 
     
 
25,052
 
Class A Shares
     
 
2
 
     
 
—
 
Class C Shares
     
 
2
 
     
 
—
 
      
    
Increase (decrease) in net assets derived from capital share transactions
     
 
(3,306,114
)
     
 
(6,101,667
)
      
    
TOTAL INCREASE (DECREASE) IN NET ASSETS
     
 
(2,535,627
)
     
 
(6,997,371
)
NET ASSETS:
                      
Beginning of period
     
 
174,299,336
 
     
 
181,296,707
 
      
    
End of period
     
$
171,763,709
 
     
$
174,299,336
 
      
    
CAPITAL SHARE TRANSACTIONS (IN SHARES)
                      
Shares sold
                      
Institutional Class
     
 
505,800
 
     
 
536,319
 
Class A Shares
     
 
99
 
     
 
—
 
Class C Shares
     
 
99
 
     
 
—
 
Shares redeemed
                      
Institutional Class
     
 
(838,433
)
     
 
(1,158,591
)
Class A Shares
     
 
—
 
     
 
—
 
Class C Shares
     
 
—
 
     
 
—
 
Shares issued in reinvestment of dividends
                      
Institutional Class
     
 
911
 
     
 
2,547
 
Class A Shares
     
 
—
 
     
 
—
 
Class C Shares
     
 
—
 
     
 
—
 
      
    
Net Increase (Decrease) in Shares
                      
Institutional Class
     
 
(331,722
)
     
 
(619,725
)
Class A Shares
     
 
99
 
     
 
—
 
Class C Shares
     
 
99
 
     
 
—
 
      
    
      
 
(331,524
)
     
 
(619,725
)

 
See Accompanying Notes to Financial Statements.

55

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

 
      
Prime Money Market Fund
  
      
For the Six Months Ended November 30, 2002
     
For the Years Ended
  
         
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
May 31, 1998
  
      
(Unaudited)
                                     
Net Asset Value, Beginning of Period
     
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
      
  
  
  
  
  
Income From Investment Operations:
                                                        
Net Investment Income
     
 
0.0072
 
   
 
0.0239
 
   
 
0.0575
 
   
 
0.0522
 
   
 
0.0486
 
   
 
0.0521
 
      
  
  
  
  
  
Total From Investment Operations
     
 
0.0072
 
   
 
0.0239
 
   
 
0.0575
 
   
 
0.0522
 
   
 
0.0486
 
   
 
0.0521
 
      
  
  
  
  
  
Less Distributions to Shareholders from:
                                                        
Net Investment Income
     
 
(0.0072
)
   
 
(0.0239
)
   
 
(0.0575
)
   
 
(0.0522
)
   
 
(0.0486
)
   
 
(0.0521
)
      
  
  
  
  
  
Total Distributions
     
 
(0.0072
)
   
 
(0.0239
)
   
 
(0.0575
)
   
 
(0.0522
)
   
 
(0.0486
)
   
 
(0.0521
)
      
  
  
  
  
  
Net Asset Value, End of Period
     
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
      
  
  
  
  
  
Total Return
     
 
0.73
%
   
 
2.41
%
   
 
5.91
%
   
 
5.34
%
   
 
4.97
%
   
 
5.33
%
Ratios/Supplemental Data
                                                        
Net Assets, End of Period (000)
     
$
720,812
 
   
$
647,061
 
   
$
661,899
 
   
$
514,728
 
   
$
530,835
 
   
$
448,751
 
Ratio of Expenses to Average Net Assets
                                                        
After Expense Waiver
     
 
0.38
%1
   
 
0.38
%
   
 
0.38
%
   
 
0.38
%
   
 
0.38
%
   
 
0.42
%
Before Expense Waiver
     
 
0.42
%1
   
 
0.44
%
   
 
0.44
%
   
 
0.44
%
   
 
0.45
%
   
 
0.47
%
Ratio of Net Investment Income to Average Net Assets
     
 
1.40
%1
   
 
2.41
%
   
 
5.69
%
   
 
5.22
%
   
 
4.84
%
   
 
5.21
%
 
      
Government Money Market Fund
  
      
For the Six Months Ended November 30, 2002
     
For the Years Ended
  
         
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
May 31, 1998
  
      
(Unaudited)
                                     
Net Asset Value, Beginning of Period
     
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
      
  
  
  
  
  
Income From Investment Operations:
                                                        
Net Investment Income
     
 
0.0071
 
   
 
0.0232
 
   
 
0.0566
 
   
 
0.0514
 
   
 
0.0478
 
   
 
0.0515
 
      
  
  
  
  
  
Total From Investment Operations
     
 
0.0071
 
   
 
0.0232
 
   
 
0.0566
 
   
 
0.0514
 
   
 
0.0478
 
   
 
0.0515
 
      
  
  
  
  
  
Less Distributions to Shareholders from:
                                                        
Net Investment Income
     
 
(0.0071
)
   
 
(0.0232
)
   
 
(0.0566
)
   
 
(0.0514
)
   
 
(0.0478
)
   
 
(0.0515
)
      
  
  
  
  
  
Total Distributions
     
 
(0.0071
)
   
 
(0.0232
)
   
 
(0.0566
)
   
 
(0.0514
)
   
 
(0.0478
)
   
 
(0.0515
)
      
  
  
  
  
  
Net Asset Value, End of Period
     
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
      
  
  
  
  
  
Total Return
     
 
0.71
%
   
 
2.35
%
   
 
5.81
%
   
 
5.27
%
   
 
4.89
%
   
 
5.27
%
Ratios/Supplemental Data
                                                        
Net Assets, End of Period (000)
     
$
414,925
 
   
$
402,908
 
   
$
430,856
 
   
$
476,890
 
   
$
445,522
 
   
$
391,133
 
Ratio of Expenses to Average Net Assets
                                                        
After Expense Waiver
     
 
0.38
%1
   
 
0.38
%
   
 
0.38
%
   
 
0.38
%
   
 
0.38
%
   
 
0.42
%
Before Expense Waiver
     
 
0.49
%1
   
 
0.45
%
   
 
0.44
%
   
 
0.44
%
   
 
0.45
%
   
 
0.46
%
Ratio of Net Investment Income to Average Net Assets
     
 
1.41
%1
   
 
2.32
%
   
 
5.65
%
   
 
5.15
%
   
 
4.76
%
   
 
5.15
%
1
Annualized

 
See Accompanying Notes to Financial Statements.

56

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

 
      
Tax-Exempt Money Market Fund
  
      
For the Six Months Ended November 30, 2002
     
For the Years Ended
  
         
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
May 31, 1998
  
      
(Unaudited)
                                     
Net Asset Value, Beginning of Period
     
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
      
  
  
  
  
  
Income From Investment Operations:
                                                        
Net Investment Income
     
 
0.0054
 
   
 
0.0161
 
   
 
0.0348
 
   
 
0.0317
 
   
 
0.0285
 
   
 
0.0318
 
      
  
  
  
  
  
Total From Investment Operations
     
 
0.0054
 
   
 
0.0161
 
   
 
0.0348
 
   
 
0.0317
 
   
 
0.0285
 
   
 
0.0318
 
      
  
  
  
  
  
Less Distributions to Shareholders from:
                                                        
Net Investment Income
     
 
(0.0054
)
   
 
(0.0161
)
   
 
(0.0348
)
   
 
(0.0317
)
   
 
(0.0285
)
   
 
(0.0318
)
      
  
  
  
  
  
Total Distributions
     
 
(0.0054
)
   
 
(0.0161
)
   
 
(0.0348
)
   
 
(0.0317
)
   
 
(0.0285
)
   
 
(0.0318
)
      
  
  
  
  
  
Net Asset Value, End of Period
     
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
      
  
  
  
  
  
Total Return
     
 
0.54
%
   
 
1.63
%
   
 
3.54
%
   
 
3.21
%
   
 
2.89
%
   
 
3.22
%
Ratios/Supplemental Data
                                                        
Net Assets, End of Period (000)
     
$
260,311
 
   
$
252,507
 
   
$
195,275
 
   
$
148,029
 
   
$
143,221
 
   
$
89,965
 
Ratio of Expenses to Average Net Assets
                                                        
After Expense Waiver
     
 
0.38
%1
   
 
0.38
%
   
 
0.38
%
   
 
0.38
%
   
 
0.38
%
   
 
0.43
%
Before Expense Waiver
     
 
0.46
%1
   
 
0.46
%
   
 
0.46
%
   
 
0.46
%
   
 
0.49
%
   
 
0.50
%
Ratio of Net Investment Income to Average Net Assets
     
 
1.07
%1
   
 
1.58
%
   
 
3.46
%
   
 
3.16
%
   
 
2.80
%
   
 
3.17
%
 
    
Growth & Income Fund
  
    
For the Six Months Ended November 30, 2002
    
For the Years Ended
  
      
May 31, 2002
    
May 31, 2001
    
May 31, 2000
    
May 31, 1999
    
May 31, 1998
  
    
(Unaudited)
                                
Net Asset Value, Beginning of Period
   
$
16.84
 
  
$
20.96
 
  
$
25.50
 
  
$
24.43
 
  
$
21.37
 
  
$
18.25
 
    
 
 
 
 
 
Income From Investment Operations:
                                                 
Net Investment Income
   
 
0.05
 
  
 
0.15
 
  
 
0.17
 
  
 
0.13
 
  
 
0.18
 
  
 
0.20
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
(1.63
)
  
 
(2.16
)
  
 
(1.77
)
  
 
2.75
 
  
 
3.62
 
  
 
5.01
 
    
 
 
 
 
 
Total From Investment Operations
   
 
(1.58
)
  
 
(2.01
)
  
 
(1.60
)
  
 
2.88
 
  
 
3.80
 
  
 
5.21
 
    
 
 
 
 
 
Less Distributions to Shareholders from:
                                                 
Net Investment Income
   
 
(0.08
)
  
 
(0.15
)
  
 
(0.17
)
  
 
(0.16
)
  
 
(0.14
)
  
 
(0.23
)
Net Capital Gains
   
 
—
 
  
 
(1.96
)
  
 
(2.77
)
  
 
(1.65
)
  
 
(0.60
)
  
 
(1.86
)
    
 
 
 
 
 
Total Distributions
   
 
(0.08
)
  
 
(2.11
)
  
 
(2.94
)
  
 
(1.81
)
  
 
(0.74
)
  
 
(2.09
)
    
 
 
 
 
 
Net Asset Value, End of Period
   
$
15.18
 
  
$
16.84
 
  
$
20.96
 
  
$
25.50
 
  
$
24.43
 
  
$
21.37
 
    
 
 
 
 
 
Total Return
   
 
(9.38
)%
  
 
(10.08
)%
  
 
(7.42
)%
  
 
12.11
%
  
 
18.20
%
  
 
29.40
%
Ratios/Supplemental Data
                                                 
Net Assets, End of Period (000)
   
$
358,776
 
  
$
390,191
 
  
$
469,580
 
  
$
484,438
 
  
$
427,038
 
  
$
373,864
 
Ratio of Expenses to Average Net Assets
                                                 
After Expense Waiver
   
 
0.75
%1
  
 
0.70
%
  
 
0.70
%
  
 
0.70
%
  
 
0.70
%
  
 
0.71
%
Before Expense Waiver
   
 
0.82
%1
  
 
0.81
%
  
 
0.80
%
  
 
0.80
%
  
 
0.81
%
  
 
0.88
%
Ratio of Net Investment Income to Average
                                                 
Net Assets
   
 
1.05
%1
  
 
0.87
%
  
 
0.76
%
  
 
0.53
%
  
 
0.80
%
  
 
0.99
%
Portfolio turnover rate
   
 
12.23
%
  
 
41.17
%
  
 
44.48
%
  
 
28.46
%
  
 
26.48
%
  
 
24.09
%
1
Annualized.

 
See Accompanying Notes to Financial Statements.

57

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

    
Equity Income Fund
  
    
For the
Six Months Ended November 30, 2002
    
For the Year Ended
    
For the Period March 1, 19981
to May 31, 1998
  
      
May 31, 2002
    
May 31, 2001
    
May 31, 2000
    
May 31, 1999
    
    
(Unaudited)
                                
Net Asset Value, Beginning of Period
   
$
4.42
 
  
$
5.09
 
  
$
7.07
 
  
$
10.25
 
  
$
10.21
 
  
$
10.00
 
    
 
 
 
 
 
Income From Investment Operations:
                                                 
Net Investment Income
   
 
0.03
 
  
 
0.07
 
  
 
0.08
 
  
 
0.18
 
  
 
0.17
 
  
 
0.04
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
(0.61
)
  
 
(0.42
)
  
 
(0.00
)3
  
 
(1.22
)
  
 
1.23
 
  
 
0.19
 
    
 
 
 
 
 
Total From Investment Operations
   
 
(0.58
)
  
 
(0.35
)
  
 
0.08
 
  
 
(1.04
)
  
 
1.40
 
  
 
0.23
 
    
 
 
 
 
 
Less Distributions to Shareholders from:
                                                 
Net Investment Income
   
 
(0.04
)
  
 
(0.07
)
  
 
(0.08
)
  
 
(0.19
)
  
 
(0.17
)
  
 
(0.02
)
Net Capital Gains
   
 
0.00
 
  
 
(0.25
)
  
 
(1.98
)
  
 
(1.95
)
  
 
(1.19
)
  
 
—
 
    
 
 
 
 
 
Total Distributions
   
 
(0.04
)
  
 
(0.32
)
  
 
(2.06
)
  
 
(2.14
)
  
 
(1.36
)
  
 
(0.02
)
    
 
 
 
 
 
Net Asset Value, End of Period
   
$
3.80
 
  
$
4.42
 
  
$
5.09
 
  
$
7.07
 
  
$
10.25
 
  
$
10.21
 
    
 
 
 
 
 
Total Return
   
 
(13.22
)%
  
 
(7.26
)%
  
 
1.66
%
  
 
(10.98
)%
  
 
15.30
%
  
 
2.28
%
Ratios/Supplemental Data
                                                 
Net Assets, End of Period (000)
   
$
92,739
 
  
$
103,601
 
  
$
108,124
 
  
$
194,948
 
  
$
314,306
 
  
$
319,971
 
Ratio of Expenses to Average Net Assets
                                                 
After Expense Waiver
   
 
0.75
%2
  
 
0.70
%
  
 
0.70
%
  
 
0.70
%
  
 
0.70
%
  
 
0.70
%2
Before Expense Waiver
   
 
0.84
%2
  
 
0.83
%
  
 
0.81
%
  
 
0.80
%
  
 
0.82
%
  
 
0.93
%2
Ratio of Net Investment Income to Average
Net Assets
   
 
1.87
%2
  
 
1.47
%
  
 
1.44
%
  
 
2.09
%
  
 
1.77
%
  
 
1.45
%2
Portfolio turnover rate
   
 
18.12
%
  
 
28.86
%
  
 
32.09
%
  
 
58.67
%
  
 
24.47
%
  
 
2.00
%
1
Commencement of Operations
2
Annualized
3
Amount rounds to less than $.01.

 
See Accompanying Notes to Financial Statements.

58

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 
      
Equity Growth Fund
  
      
For the Six Months Ended November 30, 2002
     
For the Year Ended
     
For the Period March 1, 19981 to May 31, 1998
  
         
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
      
(Unaudited)
                                     
Net Asset Value, Beginning of Period
     
$
6.50
 
   
$
9.32
 
   
$
12.67
 
   
$
11.48
 
   
$
10.28
 
   
$
10.00
 
      
  
  
  
  
  
Income From Investment Operations:
                                                        
Net Investment Income
     
 
0.01
 
   
 
0.01
 
   
 
0.04
 
   
 
0.04
 
   
 
0.04
 
   
 
0.02
 
Net Realized and Unrealized Gain (Loss) on Investments
     
 
(0.83
)
   
 
(2.70
)
   
 
(2.58
)
   
 
2.01
 
   
 
2.23
 
   
 
0.27
 
      
  
  
  
  
  
Total From Investment Operations
     
 
(0.82
)
   
 
(2.69
)
   
 
(2.54
)
   
 
2.05
 
   
 
2.27
 
   
 
0.29
 
      
  
  
  
  
  
Less Distributions to Shareholders from:
                                                        
Net Investment Income
     
 
(0.01
)
   
 
(0.02
)
   
 
(0.03
)
   
 
(0.04
)
   
 
(0.05
)
   
 
(0.01
)
Net Capital Gains
     
 
0.00
 
   
 
(0.11
)
   
 
(0.78
)
   
 
(0.82
)
   
 
(1.02
)
   
 
—
 
      
  
  
  
  
  
Total Distributions
     
 
(0.01
)
   
 
(0.13
)
   
 
(0.81
)
   
 
(0.86
)
   
 
(1.07
)
   
 
(0.01
)
      
  
  
  
  
  
Net Asset Value, End of Period
     
$
5.67
 
   
$
6.50
 
   
$
9.32
 
   
$
12.67
 
   
$
11.48
 
   
$
10.28
 
      
  
  
  
  
  
Total Return
     
 
(12.69
)%
   
 
(29.18
)%
   
 
(20.97
)%
   
 
17.94
%
   
 
23.13
%
   
 
2.89
%
Ratios/Supplemental Data
                                                        
Net Assets, End of Period (000)
     
$
30,072
 
   
$
42,638
 
   
$
73,582
 
   
$
76,637
 
   
$
47,521
 
   
$
34,876
 
Ratio of Expenses to Average Net Assets
                                                        
After Expense Waiver
     
 
0.75
%2
   
 
0.70
%
   
 
0.70
%
   
 
0.70
%
   
 
0.70
%
   
 
0.70
%2
Before Expense Waiver
     
 
0.92
%2
   
 
0.86
%
   
 
0.84
%
   
 
0.85
%
   
 
0.91
%
   
 
1.02
%2
Ratio of Net Investment Income to Average Net Assets
     
 
0.42
%2
   
 
0.14
%
   
 
0.35
%
   
 
0.31
%
   
 
0.38
%
   
 
0.68
%2
Portfolio turnover rate
     
 
20.31
%
   
 
57.89
%
   
 
28.45
%
   
 
13.66
%
   
 
62.49
%
   
 
7.99
%
1
Commencement of operations
2
Annualized

 
See Accompanying Notes to Financial Statements.

59

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

      
Capital Opportunities Fund
  
      
For the Six Months Ended November 30, 2002
     
For the Year Ended May 31, 2002
     
For the Period July 5, 20001 to May 31, 2001
  
      
(Unaudited)
                
Net Asset Value, Beginning of Period
     
$
7.34
 
   
$
8.39
 
   
$
10.00
 
      
  
  
Income From Investment Operations:
                             
Net Investment Income
     
 
(0.03
)
   
 
(0.05
)
   
 
(0.00
)3
Net Realized and Unrealized Gain (Loss) on Investments
     
 
(0.70
)
   
 
(1.00
)
   
 
(1.60
)
      
  
  
Total From Investment Operations
     
 
(0.73
)
   
 
(1.05
)
   
 
(1.60
)
      
  
  
Less Distributions to Shareholders from:
                             
Net Investment Income
     
 
—
 
   
 
—
 
   
 
(0.00
)3
Distribution in Excess of Net Investment Income
     
 
—
 
   
 
—
 
   
 
(0.01
)
Net Capital Gains
     
 
—
 
   
 
—
 
   
 
—
 
      
  
  
Total Distributions
     
 
0.00
 
   
 
0.00
 
   
 
(0.01
)
      
  
  
Net Asset Value, End of Period
     
$
6.61
 
   
$
7.34
 
   
$
8.39
 
      
  
  
Total Return
     
 
(9.95
)%
   
 
(12.51
)%
   
 
(15.96
)%
Ratios/Supplemental Data
                             
Net Assets, End of Period (000)
     
$
39,500
 
   
$
36,065
 
   
$
27,155
 
Ratio of Expenses to Average Net Assets
                             
After Expense Waiver
     
 
1.25
%2
   
 
1.25
%
   
 
1.25
%2
Before Expense Waiver
     
 
1.61
%2
   
 
1.57
%
   
 
1.90
%2
Ratio of Net Investment Income to Average Net Assets
     
 
(0.46
)%2
   
 
(0.74
)%
   
 
(0.14
)%2
Portfolio turnover rate
     
 
31.44
%
   
 
123.84
%
   
 
94.47
%
1
Commencement of operations.
2
Annualized.
3
Amount rounds to less than $.01.

 
See Accompanying Notes to Financial Statements.

60

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

 
      
International Equity Fund
  
      
For the Six Months Ended November 30, 2002
     
For the Years Ended
  
         
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
May 31, 1998
  
      
(Unaudited)
                                     
Net Asset Value, Beginning of Period
     
$
10.88
 
   
$
10.53
 
   
$
14.90
 
   
$
13.35
 
   
$
13.90
 
   
$
13.18
 
      
  
  
  
  
  
Income From Investment Operations:
                                                        
Net Investment Income
     
 
—
 
   
 
0.07
 
   
 
0.08
 
   
 
0.07
 
   
 
0.11
 
   
 
0.12
 
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currency
     
 
(1.20
)
   
 
0.29
 
   
 
(1.94
)
   
 
2.89
 
   
 
(0.27
)
   
 
1.42
 
      
  
  
  
  
  
Total From Investment Operations
     
 
(1.20
)
   
 
0.36
 
   
 
(1.86
)
   
 
2.96
 
   
 
(0.16
)
   
 
1.54
 
      
  
  
  
  
  
Less Distributions to Shareholders from:
                                                        
Net Investment Income
     
 
(0.08
)
   
 
(0.01
)
   
 
(0.01
)
   
 
(0.07
)
   
 
(0.08
)
   
 
(0.15
)
Net Capital Gains
     
 
—
 
   
 
—
 
   
 
(2.50
)
   
 
(1.34
)
   
 
(0.31
)
   
 
(0.67
)
      
  
  
  
  
  
Total Distributions
     
 
(0.08
)
   
 
(0.01
)
   
 
(2.51
)
   
 
(1.41
)
   
 
(0.39
)
   
 
(0.82
)
      
  
  
  
  
  
Net Asset Value, End of Period
     
$
9.60
 
   
$
10.88
 
   
$
10.53
 
   
$
14.90
 
   
$
13.35
 
   
$
13.90
 
      
  
  
  
  
  
Total Return
     
 
(11.06
)%
   
 
3.46
%
   
 
(15.50
)%
   
 
21.73
%
   
 
(1.02
)%
   
 
12.77
%
Ratios/Supplemental Data
                                                        
Net Assets, End of Period (000)
     
$
87,762
 
   
$
89,614
 
   
$
97,264
 
   
$
118,382
 
   
$
81,301
 
   
$
85,402
 
Ratio of Expenses to Average Net Assets
                                                        
After Expense Waiver
     
 
1.25
%
   
 
1.25
%
   
 
1.02
%
   
 
1.00
%
   
 
1.00
%
   
 
1.03
%
Before Expense Waiver
     
 
1.69
%
   
 
1.56
%
   
 
1.17
%
   
 
1.12
%
   
 
1.14
%
   
 
1.14
%
Ratio of Net Investment Income to Average Net Assets
     
 
1.32
%
   
 
0.71
%
   
 
0.78
%
   
 
0.50
%
   
 
0.82
%
   
 
92.00
%
Portfolio turnover rate
     
 
28.15
%
   
 
76.95
%
   
 
204.16
%
   
 
155.72
%
   
 
67.33
%
   
 
55.55
%

 
See Accompanying Notes to Financial Statements.

61

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

 
      
Diversified Real Estate Fund
  
      
For the Six Months Ended November 30, 2002
     
For the Years Ended
     
For the Period August 1, 19971
to May 31,
1998
  
         
May 31, 2002
     
May 31, 2002
     
May 31, 2002
     
May 31, 2002
     
      
(Unaudited)
                                     
Net Asset Value, Beginning of Period
     
$
11.42
 
   
$
10.09
 
   
$
8.99
 
   
$
9.37
 
   
$
10.13
 
   
$
10.00
 
      
  
  
  
  
  
Income From Investment Operations:
                                                        
Net Investment Income
     
 
0.18
 
   
 
0.50
 
   
 
0.47
 
   
 
0.50
 
   
 
0.53
 
   
 
0.35
 
Net Realized and Unrealized Gain (Loss) on Investments
     
 
(0.69
)
   
 
1.42
 
   
 
1.18
 
   
 
(0.39
)
   
 
(0.76
)
   
 
0.09
 
      
  
  
  
  
  
Total From Investment Operations
     
 
(0.51
)
   
 
1.92
 
   
 
1.65
 
   
 
0.11
 
   
 
(0.23
)
   
 
0.44
 
      
  
  
  
  
  
Less Distributions to Shareholders from:
                                                        
Net Investment Income
     
 
(0.29
)
   
 
(0.52
)
   
 
(0.46
)
   
 
(0.42
)
   
 
(0.52
)
   
 
(0.28
)
Return of Capital
     
 
—
 
   
 
(0.03
)
   
 
(0.09
)
   
 
(0.07
)
   
 
(0.01
)
   
 
(0.03
)
Net Capital Gains
     
 
—
 
   
 
(0.04
)
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
      
  
  
  
  
  
Total Distributions
     
 
(0.29
)
   
 
(0.59
)
   
 
(0.55
)
   
 
(0.49
)
   
 
(0.53
)
   
 
(0.31
)
      
  
  
  
  
  
Net Asset Value, End of Period
     
$
10.62
 
   
$
11.42
 
   
$
10.09
 
   
$
8.99
 
   
$
9.37
 
   
$
10.13
 
      
  
  
  
  
  
Total Return
     
 
(4.54
)%
   
 
19.55
%
   
 
18.75
%
   
 
1.59
%
   
 
(1.80
)%
   
 
4.31
%
Ratios/Supplemental Data
                                                        
Net Assets, End of Period (000)
     
$
53,514
 
   
$
44,809
 
   
$
26,088
 
   
$
12,419
 
   
$
7,829
 
   
$
6,677
 
Ratio of Expenses to Average Net Assets
                                                        
After Expense Waiver
     
 
1.05
%2
   
 
1.00
%
   
 
1.00
%
   
 
1.00
%
   
 
1.00
%
   
 
1.00
%2
Before Expense Waiver
     
 
1.06
%2
   
 
1.07
%
   
 
1.12
%
   
 
1.34
%
   
 
1.47
%
   
 
2.25
%2
Ratio of Net Investment Income to Average
Net Assets
     
 
5.79
%2
   
 
4.60
%
   
 
5.18
%
   
 
5.62
%
   
 
6.03
%
   
 
4.17
%2
Portfolio turnover rate
     
 
3.79
%
   
 
10.82
%
   
 
8.94
%
   
 
10.36
%
   
 
14.35
%
   
 
0.84
%
1
Commencement of operations.
2
Annualized.

 
See Accompanying Notes to Financial Statements.

62

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 
    
Limited Maturity Bond Fund
  
    
For the Six Months Ended November 30, 2002
                                     
       
For the Years Ended
  
       
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
May 31, 1998
  
    
(Unaudited)
                                     
Net Asset Value, Beginning of Period
   
$
10.34
 
   
$
10.45
 
   
$
10.07
 
   
$
10.32
 
   
$
10.45
 
   
$
10.31
 
    
  
  
  
  
  
Income From Investment Operations:
                                                      
Net Investment Income
   
 
0.20
 
   
 
0.48
 
   
 
0.60
 
   
 
0.58
 
   
 
0.58
 
   
 
0.60
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
0.09
 
   
 
(0.03
)
   
 
0.38
 
   
 
(0.24
)
   
 
(0.10
)
   
 
0.22
 
    
  
  
  
  
  
Total From Investment Operations
   
 
0.29
 
   
 
0.45
 
   
 
0.98
 
   
 
0.34
 
   
 
0.48
 
   
 
0.82
 
    
  
  
  
  
  
Less Distributions to Shareholders from:
                                                      
Net Investment Income
   
 
(0.20
)
   
 
(0.48
)
   
 
(0.60
)
   
 
(0.58
)
   
 
(0.58
)
   
 
(0.60
)
Net Capital Gains
   
 
—
 
   
 
(0.08
)
   
 
—
 
   
 
(0.01
)
   
 
(0.03
)
   
 
(0.08
)
    
  
  
  
  
  
Total Distributions
   
 
(0.20
)
   
 
(0.56
)
   
 
(0.60
)
   
 
(0.59
)
   
 
(0.61
)
   
 
(0.68
)
    
  
  
  
  
  
Net Asset Value, End of Period
   
$
10.43
 
   
$
10.34
 
   
$
10.45
 
   
$
10.07
 
   
$
10.32
 
   
$
10.45
 
    
  
  
  
  
  
Total Return
   
 
2.80
%
   
 
4.43
%
   
 
9.92
%
   
 
3.42
%
   
 
4.63
%
   
 
8.15
%
Ratios/Supplemental Data
                                                      
Net Assets, End of Period (000)
   
$
164,068
 
   
$
144,426
 
   
$
162,435
 
   
$
161,507
 
   
$
166,257
 
   
$
151,922
 
Ratio of Expenses to Average Net Assets
                                                      
After Expense Waiver
   
 
0.50
%1
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%
   
 
0.50
%
Before Expense Waiver
   
 
0.58
%1
   
 
0.58
%
   
 
0.57
%
   
 
0.57
%
   
 
0.58
%
   
 
0.78
%
Ratio of Net Investment Income to Average Net Assets
   
 
3.82
%1
   
 
4.60
%
   
 
5.77
%
   
 
5.67
%
   
 
5.54
%
   
 
5.71
%
Portfolio turnover rate
   
 
30.81
%
   
 
46.71
%
   
 
42.21
%
   
 
30.95
%
   
 
59.73
%
   
 
48.24
%
1
Annualized.

 
See Accompanying Notes to Financial Statements.

63

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

    
Total Return Bond Fund
  
    
For the Six Months Ended November 30, 2002
     
For the Years Ended
     
For the Period March 1, 19981 to May 31, 1998
  
       
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
    
(Unaudited)
                                     
Net Asset Value, Beginning of Period
   
$
9.84
 
   
$
9.81
 
   
$
9.43
 
   
$
9.82
 
   
$
10.02
 
   
$
10.00
 
    
  
  
  
  
  
Income From Investment Operations:
                                                      
Net Investment Income
   
 
0.24
 
   
 
0.53
 
   
 
0.62
 
   
 
0.60
 
   
 
0.59
 
   
 
0.15
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
0.08
 
   
 
0.08
 
   
 
0.38
 
   
 
(0.36
)
   
 
(0.14
)
   
 
0.02
 
    
  
  
  
  
  
Total From Investment Operations
   
 
0.32
 
   
 
0.61
 
   
 
1.00
 
   
 
0.24
 
   
 
0.45
 
   
 
0.17
 
    
  
  
  
  
  
Less Distributions to Shareholders from:
                                                      
Net Investment Income
   
 
(0.25
)
   
 
(0.55
)
   
 
(0.62
)
   
 
(0.60
)
   
 
(0.59
)
   
 
(0.15
)
Net Capital Gains
   
 
—
 
   
 
(0.03
)
   
 
—
 
   
 
(0.03
)
   
 
(0.06
)
   
 
—
 
    
  
  
  
  
  
Total Distributions
   
 
(0.25
)
   
 
(0.58
)
   
 
(0.62
)
   
 
(0.63
)
   
 
(0.65
)
   
 
(0.15
)
    
  
  
  
  
  
Net Asset Value, End of Period
   
$
9.91
 
   
$
9.84
 
   
$
9.81
 
   
$
9.43
 
   
$
9.82
 
   
$
10.02
 
    
  
  
  
  
  
Total Return
   
 
3.24
%
   
 
6.34
%
   
 
10.81
%
   
 
2.55
%
   
 
4.48
%
   
 
1.69
%
Ratios/Supplemental Data
                                                      
Net Assets, End of Period (000)
   
$
138,584
 
   
$
128,717
 
   
$
124,342
 
   
$
125,962
 
   
$
107,149
 
   
$
101,363
 
Ratio of Expenses to Average Net Assets
                                                      
After Expense Waiver
   
 
0.50
%2
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%2
Before Expense Waiver
   
 
0.59
%2
   
 
0.59
%
   
 
0.58
%
   
 
0.59
%
   
 
0.62
%
   
 
0.73
%2
Ratio of Net Investment Income to Average Net Assets
   
 
4.87
%2
   
 
5.42
%
   
 
6.34
%
   
 
6.30
%
   
 
5.82
%
   
 
5.89
%2
Portfolio turnover rate
   
 
57.69
%
   
 
88.14
%
   
 
87.61
%
   
 
38.96
%
   
 
74.94
%
   
 
10.51
%
1
Commencement of Operations
2
Annualized

 
See Accompanying Notes to Financial Statements.

64

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

 
      
Maryland Tax-Exempt Bond Fund
  
      
For the Six Months Ended November 30, 2002
     
For the Years Ended
  
         
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
May 31, 1998
  
      
(Unaudited)
                                     
Net Asset Value, Beginning of Period
     
$
11.03
 
   
$
10.88
 
   
$
10.23
 
   
$
10.78
 
   
$
10.82
 
   
$
10.38
 
      
  
  
  
  
  
Income From Investment Operations:
                                                        
Net Investment Income
     
 
0.20
 
   
 
0.44
 
   
 
0.47
 
   
 
0.45
 
   
 
0.45
 
   
 
0.48
 
Net Realized and Unrealized Gain (Loss) on Investments
     
 
0.09
 
   
 
0.15
 
   
 
0.65
 
   
 
(0.55
)
   
 
(0.04
)
   
 
0.44
 
      
  
  
  
  
  
Total From Investment Operations
     
 
0.29
 
   
 
0.59
 
   
 
1.12
 
   
 
(0.10
)
   
 
0.41
 
   
 
0.92
 
      
  
  
  
  
  
Less Distributions to Shareholders from:
                                                        
Net Investment Income
     
 
(0.20
)
   
 
(0.44
)
   
 
(0.47
)
   
 
(0.45
)
   
 
(0.45
)
   
 
(0.48
)
      
  
  
  
  
  
Total Distributions
     
 
(0.20
)
   
 
(0.44
)
   
 
(0.47
)
   
 
(0.45
)
   
 
(0.45
)
   
 
(0.48
)
      
  
  
  
  
  
Net Asset Value, End of Period
     
$
11.12
 
   
$
11.03
 
   
$
10.88
 
   
$
10.23
 
   
$
10.78
 
   
$
10.82
 
      
  
  
  
  
  
Total Return
     
 
2.64
%
   
 
5.55
%
   
 
11.09
%
   
 
(0.87
)%
   
 
3.81
%
   
 
9.03
%
Ratios/Supplemental Data
                                                        
Net Assets, End of Period (000)
     
$
58,255
 
   
$
50,720
 
   
$
41,131
 
   
$
31,472
 
   
$
26,565
 
   
$
14,980
 
Ratio of Expenses to Average Net Assets
                                                        
After Expense Waiver
     
 
0.50
%1
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%
   
 
0.49
%
Before Expense Waiver
     
 
0.78
%1
   
 
0.78
%
   
 
0.79
%
   
 
0.83
%
   
 
0.87
%
   
 
1.03
%
Ratio of Net Investment Income to Average
Net Assets
     
 
3.59
%1
   
 
4.05
%
   
 
4.37
%
   
 
4.37
%
   
 
4.12
%
   
 
4.49
%
Portfolio turnover rate
     
 
19.30
%
   
 
17.67
%
   
 
32.07
%
   
 
60.16
%
   
 
22.78
%
   
 
55.95
%
(1) Annualized.

 
See Accompanying Notes to Financial Statements.

65

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 

 
    
Intermediate Tax-Exempt Bond Fund
  
    
For the Six Months Ended November 30, 2002
    
For the Years Ended
    
For the Period March 1, 19981 to May 31, 1998
  
    
May 31, 2002
    
May 31, 2001
    
May 31, 2000
    
May 31, 1999
    
    
(Unaudited)
                                
Net Asset Value, Beginning of Period
   
$
10.10
 
  
$
10.00
 
  
$
9.62
 
  
$
10.00
 
  
$
10.01
 
  
$
10.00
 
    
 
 
 
 
 
Income From Investment Operations:
                                                 
Net Investment Income
   
 
0.17
 
  
 
0.38
 
  
 
0.41
 
  
 
0.38
 
  
 
0.38
 
  
 
0.10
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
0.05
 
  
 
0.10
 
  
 
0.38
 
  
 
(0.32
)
  
 
0.07
 
  
 
0.01
 
    
 
 
 
 
 
Total From Investment Operations
   
 
0.22
 
  
 
0.48
 
  
 
0.79
 
  
 
0.06
 
  
 
0.45
 
  
 
0.11
 
    
 
 
 
 
 
Less Distributions to Shareholders from:
                                                 
Net Investment Income
   
 
(0.17
)
  
 
(0.38
)
  
 
(0.41
)
  
 
(0.38
)
  
 
(0.38
)
  
 
(0.10
)
Net Capital Gains
   
 
—
 
  
 
—
 
  
 
—
 
  
 
(0.06
)
  
 
(0.08
)
  
 
—
 
    
 
 
 
 
 
Total Distributions
   
 
(0.17
)
  
 
(0.38
)
  
 
(0.41
)
  
 
(0.44
)
  
 
(0.46
)
  
 
(0.10
)
    
 
 
 
 
 
Net Asset Value, End of Period
   
$
10.15
 
  
$
10.10
 
  
$
10.00
 
  
$
9.62
 
  
$
10.00
 
  
$
10.01
 
    
 
 
 
 
 
Total Return
   
 
2.16
%
  
 
4.89
%
  
 
8.32
%
  
 
0.64
%
  
 
4.58
%
  
 
1.07
%
Ratios/Supplemental Data
                                                 
Net Assets, End of Period (000)
   
$
92,461
 
  
$
79,238
 
  
$
80,047
 
  
$
81,498
 
  
$
90,895
 
  
$
93,992
 
Ratio of Expenses to Average Net Assets
                                                 
After Expense Waiver
   
 
0.50
%2
  
 
0.45
%
  
 
0.45
%
  
 
0.45
%
  
 
0.45
%
  
 
0.45
%2
Before Expense Waiver
   
 
0.75
%2
  
 
0.75
%
  
 
0.73
%
  
 
0.74
%
  
 
0.76
%
  
 
0.88
%2
Ratio of Net Investment Income to Average
Net Assets
   
 
3.28
%2
  
 
3.79
%
  
 
4.13
%
  
 
3.85
%
  
 
3.80
%
  
 
3.84
%2
Portfolio turnover rate
   
 
18.27
%
  
 
47.25
%
  
 
92.07
%
  
 
140.28
%
  
 
149.02
%
  
 
10.13
%
1
Commencement of operations.
2
Annualized.

 
See Accompanying Notes to Financial Statements.

66

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Institutional Share Outstanding Throughout the Period)
 
    
National Tax-Exempt Bond Fund
  
    
For the
Six Months Ended November 30, 2002
     
For the Years Ended
     
For the Period March 1, 19981
to May 31, 1998
  
       
May 31, 2002
     
May 31, 2001
     
May 31, 2000
     
May 31, 1999
     
    
(Unaudited)
                                     
Net Asset Value, Beginning of Period
   
$
9.86
 
   
$
9.91
 
   
$
9.38
 
   
$
9.93
 
   
$
10.05
 
   
$
10.00
 
    
  
  
  
  
  
Income From Investment Operations:
                                                      
Net Investment Income
   
 
0.17
 
   
 
0.39
 
   
 
0.45
 
   
 
0.45
 
   
 
0.44
 
   
 
0.11
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
0.04
 
   
 
0.16
 
   
 
0.53
 
   
 
(0.51
)
            
 
0.05
 
    
  
  
  
  
  
Total From Investment Operations
   
 
0.21
 
   
 
0.55
 
   
 
0.98
 
   
 
(0.06
)
   
 
0.44
 
   
 
0.16
 
    
  
  
  
  
  
Less Distributions to Shareholders from:
                                                      
Net Investment Income
   
 
(0.17
)
   
 
(0.39
)
   
 
(0.45
)
   
 
(0.45
)
   
 
(0.44
)
   
 
(0.11
)
Net Capital Gains
   
 
—
 
   
 
(0.21
)
   
 
—
 
   
 
(0.04
)
   
 
(0.12
)
   
 
—
 
    
  
  
  
  
  
Total Distributions
   
 
(0.17
)
   
 
(0.60
)
   
 
(0.45
)
   
 
(0.49
)
   
 
(0.56
)
   
 
(0.11
)
    
  
  
  
  
  
Net Asset Value, End of Period
   
$
9.90
 
   
$
9.86
 
   
$
9.91
 
   
$
9.38
 
   
$
9.93
 
   
$
10.05
 
    
  
  
  
  
  
Total Return
   
 
2.17
%
   
 
5.81
%
   
 
10.60
%
   
 
(0.55
)%
   
 
4.43
%
   
 
1.64
%
Ratios/Supplemental Data
                                                      
Net Assets, End of Period (000)
   
$
171,762
 
   
$
174,299
 
   
$
181,297
 
   
$
172,920
 
   
$
178,067
 
   
$
178,116
 
Ratio of Expenses to Average Net Assets
                                                      
After Expense Waiver
   
 
0.50
%2
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%
   
 
0.45
%2
Before Expense Waiver
   
 
0.73
%2
   
 
0.73
%
   
 
0.72
%
   
 
0.72
%
   
 
0.74
%
   
 
0.86
%2
Ratio of Net Investment Income to Average Net Assets
   
 
1.54
%2
   
 
3.97
%
   
 
4.58
%
   
 
4.69
%
   
 
4.36
%
   
 
4.49
%2
Portfolio turnover rate
   
 
27.64
%
   
 
108.13
%
   
 
160.45
%
   
 
113.69
%
   
 
123.30
%
   
 
7.37
%
1
Commencement of operations.
2
Annualized.

 
See Accompanying Notes to Financial Statements.

67

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Class A Share Outstanding Throughout the Period)
 
    
Prime
Money Market
Fund
     
Government Money Market
Fund
     
Tax-Exempt Money Market
Fund
  
    
For the
Period September 30, 20021 to November 30, 2002
     
For the
Period September 30, 20021 to November 30, 2002
     
For the
Period September 30, 20021 to November 30, 2002
  
    
(Unaudited)
     
(Unaudited)
     
(Unaudited)
  
Net Asset Value, Beginning of Period
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
    
  
  
Income From Investment Operations:
                           
Net Investment Income
   
 
0.0022
 
   
 
0.0022
 
   
 
0.0018
 
    
  
  
Total From Investment Operations
   
 
0.0022
 
   
 
0.0022
 
   
 
0.0018
 
    
  
  
Less Distributions to Shareholders from:
                           
Net Investment Income
   
 
(0.0022
)
   
 
(0.0022
)
   
 
(0.0018
)
    
  
  
Total Distributions
   
 
(0.0022
)
   
 
(0.0022
)
   
 
(0.0018
)
    
  
  
Net Asset Value, End of Period
   
$
1.00
 
   
$
1.00
 
   
$
1.00
 
    
  
  
Total Return
   
 
0.22
%
   
 
0.22
%
   
 
0.18
%
Ratios/Supplemental Data
                           
Net Assets, End of Period
   
$
319,653
 
   
$
1,001
 
   
$
13,341
 
Ratio of Expenses to Average Net Assets
                           
After Expense Waiver
   
 
0.38
%2
   
 
0.38
%2
   
 
0.38
%2
Before Expense Waiver
   
 
0.92
%2
   
 
0.99
%2
   
 
0.96
%2
Ratio of Net Investment Income to Average
                           
Net Assets
   
 
1.14
%2
   
 
1.20
%2
   
 
0.99
%2
1
Commencement of operations.
2
Annualized.

 
See Accompanying Notes to Financial Statements.

68

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Class A Share Outstanding Throughout the Period)
 

    
Growth & Income
Fund
     
Equity Income
Fund
     
Equity Growth
Fund
     
Capital Opportunities Fund
     
International Equity
Fund
     
Diversified Real Estate Fund
  
    
For the Period September 30, 20021 to November 30, 2002
     
For the Period September 30, 20021 to November 30, 2002
     
For the Period September 30, 20021 to November 30, 2002
     
For the
Period September 30, 20021 to November 30, 2002
     
For the Period September 30, 20021 to November 30, 2002
     
For the Period September 30, 20021 to November 30, 2002
  
    
(Unaudited)
     
(Unaudited)
     
(Unaudited)
     
(Unaudited)
     
(Unaudited)
     
(Unaudited)
  
Net Asset Value, Beginning of Period
   
$
13.79
 
   
$
3.43
 
   
$
4.97
 
   
$
5.77
 
   
$
8.94
 
   
$
10.72
 
    
  
  
  
  
  
Income From Investment Operations:
                                                      
Net Investment Income
   
 
0.01
 
   
 
0.01
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
0.16
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
1.39
 
   
 
0.37
 
   
 
0.69
 
   
 
0.83
 
   
 
0.65
 
   
 
(0.14
)
    
  
  
  
  
  
Total From Investment Operations
   
 
1.40
 
   
 
0.38
 
   
 
0.69
 
   
 
0.83
 
   
 
0.65
 
   
 
0.02
 
    
  
  
  
  
  
Less Distributions to Shareholders from:
                                                      
Net Investment Income
   
 
(0.01
)
   
 
(0.01
)
   
 
—
 
   
 
—
 
   
 
—
 
   
 
(0.14
)
Net Capital Gains
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
    
  
  
  
  
  
Total Distributions
   
 
(0.01
)
   
 
(0.01
)
   
 
—
 
   
 
—
 
   
 
—
 
   
 
(0.14
)
    
  
  
  
  
  
Net Asset Value, End of Period
   
$
15.18
 
   
$
3.80
 
   
$
5.66
 
   
$
6.60
 
   
$
9.59
 
   
$
10.60
 
    
  
  
  
  
  
Total Return
   
 
10.19
%
   
 
11.02
%
   
 
13.88
%
   
 
14.38
%
   
 
7.27
%
   
 
0.19
%
Ratios/Supplemental Data
                                                      
Net Assets, End of Period
   
$
161,785
 
   
$
1,111
 
   
$
4,532
 
   
$
19,688
 
   
$
18,646
 
   
$
28,724
 
Ratio of Expenses to Average Net Assets
                                                      
After Expense Waiver
   
 
1.25
%2
   
 
1.25
%2
   
 
1.25
%2
   
 
1.75
%2
   
 
1.75
%2
   
 
1.55
%2
Before Expense Waiver
   
 
1.32
%2
   
 
1.34
%2
   
 
1.42
%2
   
 
2.11
%2
   
 
2.19
%2
   
 
1.56
%2
Ratio of Net Investment Income to Average Net Assets
   
 
0.42
%2
   
 
1.17
%2
   
 
(0.32
)%2
   
 
(1.60
)%2
   
 
(0.42
)%2
   
 
3.63
%2
Portfolio turnover rate
   
 
12.23
%
   
 
18.12
%
   
 
20.31
%
   
 
31.44
%
   
 
28.15
%
   
 
3.79
%
1
Commencement of operations
2
Annualized.

 
See Accompanying Notes to Financial Statements.

69

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Class A Share Outstanding Throughout the Period)
 

 
      
Limited
Maturity
Bond Fund
       
Total
Return
Bond Fund
       
Maryland
Tax-Exempt
Bond Fund
       
Intermediate
Tax-Exempt
Bond Fund
       
National
Tax-Exempt
Bond Fund
  
      
For the
Period September 30, 20021
to November 30, 2002
       
For the
Period September 30, 20021 to November 30, 2002
       
For the
Period September 30, 20021 to November 30, 2002
       
For the
Period September 30, 20021 to November 30, 2002
       
For the
Period September 30, 20021 to November 30, 2002
  
      
(Unaudited)
       
(Unaudited)
       
(Unaudited)
       
(Unaudited)
       
(Unaudited)
  
Net Asset Value, Beginning of Period
     
$
10.46
 
     
$
9.95
 
     
$
11.31
 
     
$
10.25
 
     
$
10.14
 
      
    
    
    
    
Income From Investment Operations:
                                                       
Net Investment Income
     
 
0.06
 
     
 
0.07
 
     
 
0.06
 
     
 
0.04
 
     
 
0.05
 
Net Realized and Unrealized Gain (Loss) on Investments
     
 
(0.04
)
     
 
(0.04
)
     
 
(0.20
)
     
 
(0.10
)
     
 
(0.24
)
      
    
    
    
    
Total From Investment Operations
     
 
0.02
 
     
 
0.03
 
     
 
(0.14
)
     
 
(0.06
)
     
 
(0.19
)
      
    
    
    
    
Less Distributions to Shareholders from:
                                                       
Net Investment Income
     
 
(0.06
)
     
 
(0.07
)
     
 
(0.06
)
     
 
(0.04
)
     
 
(0.05
)
Net Capital Gains
     
 
—
 
     
 
—
 
     
 
—
 
     
 
—
 
     
 
—
 
      
    
    
    
    
Total Distributions
     
 
(0.06
)
     
 
(0.07
)
     
 
(0.06
)
     
 
(0.04
)
     
 
(0.05
)
      
    
    
    
    
Net Asset Value, End of Period
     
$
10.42
 
     
$
9.91
 
     
$
11.11
 
     
$
10.15
 
     
$
9.90
 
      
    
    
    
    
Total Return
     
 
0.15
%
     
 
0.29
%
     
 
(1.28
)%
     
 
(0.57
)%
     
 
(1.87
)%
Ratios/Supplemental Data
                                                       
Net Assets, End of Period
     
$
74,958
 
     
$
3,878
 
     
$
239,494
 
     
$
73,204
 
     
$
979
 
Ratio of Expenses to Average Net Assets
                                                       
After Expense Waiver
     
 
1.00
%2
     
 
1.00
%2
     
 
1.00
%2
     
 
1.00
%2
     
 
1.00
%2
Before Expense Waiver
     
 
1.08
%2
     
 
1.09
%2
     
 
1.28
%2
     
 
1.25
%2
     
 
1.23
%2
Ratio of Net Investment Income to Average Net Assets
     
 
3.31
%2
     
 
4.29
%2
     
 
2.98
%2
     
 
2.47
%2
     
 
3.09
%2
Portfolio turnover rate
     
 
30.81
%
     
 
57.69
%
     
 
19.30
%
     
 
18.27
%
     
 
27.64
%
1
Commencement of Operations
2
Annualized.

 
See Accompanying Notes to Financial Statements.

70

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Class C Share Outstanding Throughout the Period)
 

 
      
Prime
Money Market Fund
       
Government Money Market Fund
       
Tax-Exempt Money Market Fund
  
      
For the Period September 30, 20021 to November 30, 2002
       
For the Period September 30, 20021 to November 30, 2002
       
For the Period September 30, 20021 to November 30, 2002
  
      
(Unaudited)
       
(Unaudited)
       
(Unaudited)
  
Net Asset Value, Beginning of Period
     
$
1.00
 
     
$
1.00
 
     
$
1.00
 
      
    
    
Income From Investment Operations:
                                 
Net Investment Income
     
 
0.0022
 
     
 
0.0022
 
     
 
0.0017
 
      
    
    
Total From Investment Operations
     
 
0.0022
 
     
 
0.0022
 
     
 
0.0017
 
      
    
    
Less Distributions to Shareholders from:
                                 
Net Investment Income
     
 
(0.0022
)
     
 
(0.0022
)
     
 
(0.0017
)
      
    
    
Total Distributions
     
 
(0.0022
)
     
 
(0.0022
)
     
 
(0.0017
)
      
    
    
Net Asset Value, End of Period
     
$
1.00
 
     
$
1.00
 
     
$
1.00
 
      
    
    
Total Return
     
 
0.22
%
     
 
0.22
%
     
 
0.17
%
Ratios/Supplemental Data
                                 
Net Assets, End of Period
     
$
1,001
 
     
$
1,001
 
     
$
1,001
 
Ratio of Expenses to Average Net Assets
                                 
After Expense Waiver
     
 
0.38
%2
     
 
0.38
%2
     
 
0.38
%2
Before Expense Waiver
     
 
1.42
%2
     
 
1.49
%2
     
 
1.46
%2
Ratio of Net Investment Income to Average Net Assets
     
 
1.20
%2
     
 
1.20
%2
     
 
1.20
%2
1
Commencement of Operations
2
Annualized.

 
See Accompanying Notes to Financial Statements.

71

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Class C Share Outstanding Throughout the Period)
 

 
    
Growth & Income
Fund
     
Equity Income
Fund
     
Equity Growth
Fund
     
Capital Opportunities Fund
     
International Equity
Fund
     
Diversified Real Estate Fund
  
    
For the Period September 30, 20021 to November 30, 2002
     
For the Period September 30, 20021 to November 30, 2002
     
For the Period September 30, 20021 to November 30, 2002
     
For the
Period September 30, 20021 to November 30, 2002
     
For the Period September 30, 20021 to November 30, 2002
     
For the Period September 30, 20021 to November 30, 2002
  
    
(Unaudited)
     
(Unaudited)
     
(Unaudited)
     
(Unaudited)
     
(Unaudited)
     
(Unaudited)
  
Net Asset Value, Beginning of Period
   
$
13.79
 
   
$
3.43
 
   
$
4.97
 
   
$
5.77
 
   
$
8.94
 
   
$
10.72
 
    
  
  
  
  
  
Income From Investment Operations:
                                                      
Net Investment Income
   
 
0.01
 
   
 
0.01
 
   
 
—
 
   
 
(0.02
)
   
 
0.01
 
   
 
0.14
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
1.38
 
   
 
0.37
 
   
 
0.69
 
   
 
0.85
 
   
 
0.63
 
   
 
(0.12
)
    
  
  
  
  
  
Total From Investment Operations
   
 
1.39
 
   
 
0.38
 
   
 
0.69
 
   
 
0.83
 
   
 
0.64
 
   
 
0.02
 
    
  
  
  
  
  
Less Distributions to Shareholders from:
                                                      
Net Investment Income
   
 
(0.01
)
   
 
(0.01
)
   
 
—
 
   
 
—
 
   
 
—
 
   
 
(0.14
)
Net Capital Gains
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
    
  
  
  
  
  
Total Distributions
   
 
(0.01
)
   
 
(0.01
)
   
 
—
 
   
 
—
 
   
 
—
 
   
 
(0.14
)
    
  
  
  
  
  
Net Asset Value, End of Period
   
$
15.17
 
   
$
3.80
 
   
$
5.66
 
   
$
6.60
 
   
$
9.58
 
   
$
10.60
 
    
  
  
  
  
  
Total Return
   
 
10.07
%
   
 
10.99
%
   
 
13.88
%
   
 
14.38
%
   
 
7.16
%
   
 
0.19
%
Ratios/Supplemental Data
                                                      
Net Assets, End of Period
   
$
2,104
 
   
$
1,110
 
   
$
1,138
 
   
$
1,144
 
   
$
1,072
 
   
$
34,766
 
Ratio of Expenses to Average Net Assets
                                                      
After Expense Waiver
   
 
1.75
%2
   
 
1.75
%2
   
 
1.75
%2
   
 
2.25
%2
   
 
2.25
%2
   
 
2.05
%2
Before Expense Waiver
   
 
1.82
%2
   
 
1.84
%2
   
 
1.92
%2
   
 
2.61
%2
   
 
2.69
%2
   
 
2.06
%2
Ratio of Net Investment Income to Average Net Assets
   
 
0.00
%2
   
 
1.17
%2
   
 
(0.57
)%2
   
 
(2.33
)%2
   
 
0.59
%2
   
 
3.22
%2
Portfolio turnover rate
   
 
12.23
%
   
 
18.12
%
   
 
20.31
%
   
 
31.44
%
   
 
28.15
%
   
 
3.79
%
1
Commencement of operations.
2
Annualized.

 
See Accompanying Notes to Financial Statements.

72

Table of Contents

Mercantile Funds, Inc.
Financial Highlights
(For a Class C Share Outstanding Throughout the Period)
 

 
    
Limited Maturity Bond Fund
     
Total
Return
Bond Fund
     
Maryland Tax-Exempt Bond Fund
     
Intermediate Tax-Exempt Bond Fund
     
National
Tax-Exempt Bond Fund
  
    
For the Period September 30,
20021 to November 30, 2002
     
For the Period September 30,
20021 to November 30, 2002
     
For the Period September 30,
20021 to November 30, 2002
     
For the Period September 30,
20021 to November 30, 2002
     
For the Period September 30,
20021 to November 30, 2002
  
    
(Unaudited)
     
(Unaudited)
     
(Unaudited)
     
(Unaudited)
     
(Unaudited)
  
Net Asset Value, Beginning of Period
   
$
10.46
 
   
$
9.95
 
   
$
11.31
 
   
$
10.25
 
   
$
10.14
 
    
  
  
  
  
Income From Investment Operations:
                                             
Net Investment Income
   
 
0.05
 
   
 
0.07
 
   
 
0.04
 
   
 
0.03
 
   
 
0.04
 
Net Realized and Unrealized Gain (Loss) on Investments
   
 
(0.04
)
   
 
(0.04
)
   
 
(0.19
)
   
 
(0.10
)
   
 
(0.24
)
    
  
  
  
  
Total From Investment Operations
   
 
0.01
 
   
 
0.03
 
   
 
(0.15
)
   
 
(0.07
)
   
 
(0.20
)
    
  
  
  
  
Less Distributions to Shareholders from:
                                             
Net Investment Income
   
 
(0.05
)
   
 
(0.07
)
   
 
(0.04
)
   
 
(0.03
)
   
 
(0.04
)
Net Capital Gains
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
   
 
—
 
    
  
  
  
  
Total Distributions
   
 
(0.05
)
   
 
(0.07
)
   
 
(0.04
)
   
 
(0.03
)
   
 
(0.04
)
    
  
  
  
  
Net Asset Value, End of Period
   
$
10.42
 
   
$
9.91
 
   
$
11.12
 
   
$
10.15
 
   
$
9.90
 
    
  
  
  
  
Total Return
   
 
0.07
%
   
 
0.26
%
   
 
(1.29
)%
   
 
(0.65
)%
   
 
(1.95
)%
Ratios/Supplemental Data
                                             
Net Assets, End of Period
   
$
999
 
   
$
999
 
   
$
985
 
   
$
992
 
   
$
979
 
Ratio of Expenses to Average Net Assets
                                             
After Expense Waiver
   
 
1.50
%2
   
 
1.50
%2
   
 
1.50
%2
   
 
1.50
%2
   
 
1.50
%2
Before Expense Waiver
   
 
1.58
%2
   
 
1.59
%2
   
 
1.78
%2
   
 
1.75
%2
   
 
1.73
%2
Ratio of Net Investment Income to Average
Net Assets
   
 
3.06
%2
   
 
4.29
%2
   
 
2.46
%2
   
 
1.84
%2
   
 
2.47
%2
Portfolio turnover rate
   
 
30.81
%
   
 
57.69
%
   
 
19.30
%
   
 
18.27
%
   
 
27.64
%
1
Commencement of operations
2
Annualized.

 
See Accompanying Notes to Financial Statements.

73

Table of Contents

Mercantile Funds, Inc.
Notes to Financial Statements 
(Unaudited)
 

 
1.    SIGNIFICANT ACCOUNTING POLICIES
 
Mercantile Funds, Inc. (the “Company”) is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Company was incorporated in Maryland on March 7, 1989. The Articles of Incorporation of the Company authorize the Board of Directors to issue up to twenty billion shares, having a par value of $.001 per share. The Company is a series fund which currently issues shares of common stock representing interests in fourteen investment portfolios: the Prime Money Market Fund, Government Money Market Fund and Tax-Exempt Money Market Fund (the “Money Market Funds”), the Growth & Income Fund, Equity Income Fund, Equity Growth Fund, Capital Opportunities Fund, International Equity Fund and Diversified Real Estate Fund (the “Equity Funds”), and the Limited Maturity Bond Fund, Total Return Bond Fund, Maryland Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund and National Tax-Exempt Bond Fund (the “Bond Funds”), (the Money Market Funds, Equity Funds and Bond Funds collectively, the “Funds”). The Company was formerly known as M.S.D. & T. Funds, Inc.
 
Each Fund is authorized to issue four classes of shares (Institutional Shares, Class A Shares, Class B Shares and Class C Shares). Shares of all classes of a Fund represent equal pro rata interests in the Fund and bear the same fees and expenses, except that (i) Class A Shares of the Equity Funds and Bond Funds are subject to maximum front-end sales charges of 4.75% and 4.25%, respectively, (ii) Class B Shares of each Fund are subject to a maximum contingent deferred sales charge of 4.50%, (iii) Class C Shares of each Fund are subject to a contingent deferred sales charge of 1.00%, and (iv) Class A Shares, Class B Shares and Class C Shares of each Fund are subject to distribution and servicing fees payable pursuant to separate Distribution and Services Plans adopted for each such class of shares. Eight years after purchase, Class B Shares of each Fund will automatically convert to Class A Shares of the Fund.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements.
 
 
A)
Security Valuation:    Investment securities held by the Money Market Funds are valued under the amortized cost method, which approximates current market value. Under this method, securities are valued at cost when purchased and, thereafter, a constant proportionate amortization of any discount or premium is recorded until maturity of the security. Regular review and monitoring of the valuation is performed pursuant to procedures adopted by the Company’s Board of Directors. Each Money Market Fund seeks to maintain a stable net asset value of $1.00 per share, but there can be no assurance that it will be able to do so.
 
Investments held by the Equity Funds and Bond Funds are valued at market value or, in the absence of a market value with respect to any portfolio securities, at fair value. A security that is primarily traded on a domestic security exchange (including securities traded through the National Market System) is valued at the last sale price on that exchange or, if there were no sales during the day, at the current quoted bid price. Portfolio securities that are primarily traded on foreign exchanges are generally valued at the closing values of such securities on their respective exchanges, provided that if such securities are not traded on the valuation date, they will be valued at the preceding closing values and provided further, that when an occurrence subsequent to the time of valuation is likely to have changed the value, then the fair value of those securities will be determined through consideration of other factors by or under the direction of the Company’s Board of Directors. Over-the-counter securities and securities listed or traded on foreign exchanges with operations similar to the U.S. over-the-counter market are valued at the mean of the most recent available quoted bid and ask prices in the over-the-counter market. Market or fair value may be determined on the basis of valuations provided by one or more recognized pricing services approved by the Board of Directors, which may rely on matrix pricing systems, electronic data processing techniques and/or quoted bid and ask prices provided by investment dealers. Investments in mutual funds are valued at the closing net asset value per share on the day of valuation.

74

Table of Contents

Mercantile Funds, Inc.
Notes to Financial Statements — Continued
(Unaudited)
 

 
1.    SIGNIFICANT ACCOUNTING POLICIES — Continued
 
Short-term investments with maturities of 60 days or less are valued at amortized cost which approximates fair value. The net asset value per share of the Equity Funds and Bond Funds will fluctuate as the values of their respective investment portfolios change.
 
 
B)
Security Transactions and Investment Income:    Security transactions are accounted for on the trade date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. Interest income is recorded on the accrual basis; dividend income is recorded on the ex-dividend date. The Company accounts separately for the assets, liabilities and operations of each Fund. Direct expenses of a Fund are charged to that Fund while general expenses of the Company are allocated among the Funds based on relative net assets. In addition, expenses of a Fund not directly attributable to the operations of a particular class of shares of the Fund are allocated among the separate classes based on the relative net assets of each class. Expenses directly attributable to a particular class of shares of a Fund are charged to the operations of that class. Expenses paid indirectly reflect credits earned on daily uninvested cash balances at the custodian and are used to reduce a Fund’s custody charges.
 
 
C)
Dividends and Distributions to Shareholders:    Dividends from net investment income are determined separately for each class of shares of a Fund and are declared daily and paid monthly to shareholders of the Money Market Funds and Bond Funds; are declared and paid monthly to shareholders of the Growth & Income Fund and Equity Income Fund; are declared and paid quarterly to shareholders of the Diversified Real Estate Fund; are declared and paid semi-annually to shareholders of the International Equity Fund and Equity Growth Fund; and are declared and paid annually to shareholders of the Capital Opportunities Fund. Any net realized capital gains are distributed at least annually with regard to the Money Market Funds and Bond Funds and at least semi-annually with regard to the Equity Funds. The Company intends to distribute substantially all of its investment company taxable income and any net realized capital gains in order to avoid federal income tax.
 
Income distributions and capital gains distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles; accordingly, periodic reclassifications are made within the Funds’ capital accounts to reflect income and gains available for distribution under income tax resolutions.
 
 
D)
Repurchase Agreements:    Each Fund except the Tax-Exempt Money Market Fund may agree to purchase portfolio securities from financial institutions, such as banks and broker-dealers, subject to the seller’s agreement to repurchase them at an agreed upon date and price. In the case of the Prime Money Market Fund and Government Money Market Fund, collateral for repurchase agreements may have longer maturities than the maximum permissible remaining maturity of portfolio investments. The seller will be required on a daily basis to maintain the value of the securities subject to the repurchase agreement at not less than the repurchase price (including accrued interest), plus the transaction costs the Funds could expect to incur if the seller defaults, marked-to-market daily. Repurchase agreements are accounted for as collateralized financings. The policy of the Funds is to obtain possession of collateral with a market value equal to 102% of the repurchase agreement.
 
 
E)
Foreign Currency Translation:    Foreign currency amounts are translated into U.S. dollars at prevailing exchange rates as follows: assets and liabilities at the rate of exchange prevailing at the end of the respective period, purchases and sales of securities and income and expenses at the rate of exchange prevailing on the dates of such transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
 
 
F)
Forward Foreign Currency Contracts:    The International Equity Fund may enter into forward foreign currency contracts in order to hedge its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings. All commitments are marked-to-market daily at the applicable foreign exchange rate and any resulting unrealized gains or losses are recorded currently. The gain or loss arising from the difference between the original contracts and the closing of such contracts is included in income as a component of realized gain or loss on foreign currency. Such contracts, which protect the value of the Fund’s investment securities against a decline in the value of currency,

75

Table of Contents

Mercantile Funds, Inc.
Notes to Financial Statements — Continued
(Unaudited)
 

1.     SIGNIFICANT ACCOUNTING POLICIES — Continued
 
 
do not eliminate fluctuations in the underlying prices of the securities, but merely 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.
 
 
G)
Forward Interest Rate Swap Contracts:    The Bond Funds may enter into forward interest rate swap contracts in order to hedge its exposure to changes in interest rates on its debt portfolio holdings. All commitments are marked-to-market daily at the applicable interest rate and any resulting unrealized gains or losses are recorded currently. The gain or loss arising from the difference between the original contracts and the closing of such contracts is included as unrealized gain or loss in the Statements of Operations. Such contracts, which protect the value of the Fund’s investment securities against an increase in interest rates, do not eliminate fluctuations in the underlying prices of the securities, but its characteristics are such that the contract’s price tends to move in the opposite direction of the underlying bonds in the portfolio. Also, although such contracts tend to minimize the risk of loss due to an increase in interest rates, at the same time they tend to limit any potential gain that might be realized should interest rates decrease.
 
 
H)
Interest Rate Swap Agreements:    Each of the Bond Funds may invest in interest rate swap agreements for the purpose of hedging against changes in interest rates. Interest rate swap agreements involve the exchange by a Fund with another party of their respective commitments to pay or receive interest (e.g., 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 unrealized gain or loss in the Statements of Operations. Net payments of interest are recorded as interest income. Entering into interest rate swap agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statements of Net Assets. 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 rates.
 
 
I)
Securities Lending:    Pursuant to an agreement with Credit Suisse First Boston, New York Branch, each Fund except the Tax-Exempt Money Market Fund, Maryland Tax-Exempt Bond Fund, Intermediate Tax-Exempt Bond Fund, National Tax-Exempt Bond Fund and International Equity Fund may lend its portfolio securities to certain brokers, dealers or other financial institutions that pay the Fund a negotiated fee. Prior to the close of each business day, loans of securities are secured by collateral at least equal to 102% of the market value of the securities on loan. However, due to market fluctuations, the value of the securities on loan may exceed 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 securities lending is invested in short-term money market instruments by the lending agent. Securities lending presents risks of delay in receiving additional collateral or in recovering the securities loaned or even a loss of rights in the collateral if the borrower of the securities fails financially.
 
 
J)
International investing is subject to certain factors such as currency exchange rate volatility, possible political, social or economic instability, foreign taxation and/or differences in auditing and other financial standards.
 
 
K)
Investing in the securities of companies principally engaged in the real estate business is subject to the same risks as direct ownership of real estate, such as supply and demand for properties, the economic health of the country, different regions and local markets, and the strength of specific industries renting properties.
 
 
L)
The International Equity Fund is subject to foreign income taxes by certain countries in which it invests. Foreign income taxes are accrued by the Fund and withheld from dividend and interest income. Gains realized upon disposition of certain foreign securities held by the International Equity Fund may be subject to capital gains tax in that particular country. The tax on realized gains is paid prior to repatriation of sales proceeds. The International Equity Fund accrues a deferred tax liability for net unrealized gains on securities subject to a capital gains tax.

76

Table of Contents

Mercantile Funds, Inc.
Notes to Financial Statements — Continued
(Unaudited)
 

1.    SIGNIFICANT ACCOUNTING POLICIES — Continued
 
 
M)
The Capital Opportunities Fund could fluctuate in price more than most funds, due to the volatile nature of both the technology sector and stocks of smaller companies. In addition, the Fund may participate in the Initial Public Offering (IPO) market, and a portion of the Fund’s returns consequently may be attributable to its investment in IPOs, which may have a magnified impact due to the Fund’s small asset base. As the Fund’s assets grow, it is probable that the effect of the Fund’s investments in IPOs on its total returns may not be as significant.
 
 
N)
The Maryland Tax-Exempt Bond, Intermediate Tax-Exempt Bond and National Tax-Exempt Bond Funds’ income may be subject to certain state and local taxes and, depending on your tax status, the federal alternative minimum tax.
 
2.    INVESTMENT ADVISOR, ADMINISTRATOR, DISTRIBUTOR AND OTHER RELATED PARTY TRANSACTIONS
 
Effective May 11, 2001, Mercantile Capital Advisors, Inc. (“Mercantile”), a wholly-owned subsidiary of Mercantile-Safe Deposit and Trust Company, provides investment advisory and administration services to each Fund pursuant to an Investment Advisory Agreement and an Administration Agreement. Prior to May 11, 2001, Mercantile-Safe Deposit & Trust Company provided investment advisory and administration services to each Fund. For its services as Advisor, Mercantile receives an advisory fee computed daily and payable monthly at an annual rate of (a) .25% of the first $1 billion of each of the Prime Money Market Fund’s, Government Money Market Fund’s and Tax-Exempt Money Market Fund’s average daily net assets during the preceding month plus .20% of each such Fund’s average daily net assets in excess of $1 billion during the preceding month, (b) .60% of the first $1 billion of each of the Growth & Income Fund’s, Equity Income Fund’s and Equity Growth Fund’s average daily net assets during the preceding month plus .40% of each such Fund’s average daily net assets in excess of $1 billion during the preceding month, (c) .35% of the first $1 billion of each of the Limited Maturity Bond Fund’s and Total Return Bond Fund’s average daily net assets during the preceding month plus .20% of each such Fund’s average daily net assets in excess of $1 billion during the preceding month, (d) .50% of the first $1 billion of each of the Maryland Tax-Exempt Bond Fund’s, National Tax-Exempt Bond Fund’s and Intermediate Tax-Exempt Bond Fund’s average daily net assets during the preceding month plus .25% of each such Fund’s average daily net assets in excess of $1 billion during the preceding month, (e) 1.22% of the first $1 billion of the International Equity Fund’s average daily net assets during the preceding month plus 1.10% of such Fund’s average daily net assets in excess of $1 billion during the preceding month (Mercantile pays sub-advisory fees to Morgan Stanley Investment Management, Limited (formerly Morgan Stanley Dean Witter Investment Management, Limited) on the average net assets of its managed portion of the International Equity Fund at an annual rate of .80% of the first $25 million, plus .60% on the second $25 million, plus .50% on the third $25 million, plus .40% on average net assets in excess of $75 million and to Julius Baer Investment Management, Inc. on the average net assets of its managed portion of the International Equity Fund at an annual rate of .80% of the first $20 million, plus .60% of the second $20 million, plus .50% of the next $60 million, plus .40% on average net assets in excess of $100 million), (f) .80% of the first $1 billion of the Diversified Real Estate Fund’s average daily net assets during the preceding month plus .60% of such Fund’s average daily net assets in excess of $1 billion during the preceding month, and (g) 1.30% of the first $1 billion of the Capital Opportunities Fund’s average daily net assets during the preceding month plus 1.20% of such Fund’s average daily net assets in excess of $1 billion during the preceding month (Mercantile pays a sub-advisory fee to Delaware Management Company at an annual rate of .70% of the average daily net assets of the Capital Opportunities Fund).
 
For its services as Administrator, Mercantile receives an administration fee computed daily and payable monthly at an annual rate of .125% of the average daily net assets of each Fund (Mercantile pays sub-administration fees to BISYS Fund Services Ohio, Inc., an affiliate of the Company’s distributor). Mercantile may, at its discretion, voluntarily waive any portion of its advisory fee or its administration fee for any Fund.
 
Shares in each Fund are sold on a continuous basis without a sales load by the Company’s distributor, BISYS Fund Services Limited Partnership (the “Distributor”). The Distributor receives no fee for these services. BISYS Fund Services Ohio, Inc., an affiliate of the Distributor, receives fees for fund accounting, blue sky and transfer agent services provided to the Funds.
 

77

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Mercantile Funds, Inc.
Notes to Financial Statements — Continued
(Unaudited)
 

2.    INVESTMENT ADVISOR, ADMINISTRATOR, DISTRIBUTOR AND OTHER RELATED PARTY TRANSACTIONS — Continued
 
The Company has adopted separate Distribution and Services Plans with respect to Class A Shares, Class B Shares and Class C Shares of the Funds. Pursuant to the Distribution and Services Plans, the Company may pay (i) the Distributor or another persons for expenses and activities primarily intended to result in the sale of Class A Shares, Class B Shares or Class C Shares, as the case may be, and (ii) service organizations for administrative support services provided to their customers who are the record or beneficial owners of Class A Shares, Class B Shares or Class C Shares, as the case may be. Under the Distribution and Services Plans, payments for distribution services and expenses may not exceed 0.25%, 0.75% and 0.75% of the average daily net assets attributable to each Fund’s outstanding Class A Shares, Class B Shares and Class C Shares, respectively, and payments for administrative support services may not exceed 0.25% of the average daily net assets attributable to each Fund’s outstanding Class A Shares, Class B Shares and Class C Shares owned of record or beneficially by customers of service organizations.
 
Each director of the Company receives from the Company an annual fee of $9,500, and a fee of $2,000 for each in-person Board meeting attended, $1,000 for each in-person Board Committee meeting attended and $1,000 for each telephone Board or Board Committee meeting attended, and is reimbursed for all out-of-pocket expenses relating to attendance at meetings. The Chairman of the Board of Directors receives an additional fee of $7,500 for his services in this capacity. No person who is a director, officer or employee of Mercantile serves as a director, officer or employee of the Company. During the six months ended November 30, 2002, the Funds paid legal fees to a law firm, one partner of which served as Secretary of the Company and another partner of which served as Assistant Secretary of the Company prior to July 26, 2002.
 
3.    NET ASSETS
 
At November 30, 2002, net assets consisted of the following:
 
    
Prime Money Market Fund
     
Government Money Market Fund
     
Tax-Exempt Money Market Fund
  
Capital Paid-In
                           
Institutional Shares
   
$
720,877,074
 
   
$
415,053,226
 
   
$
260,324,723
 
Class A Shares
   
 
319,653
 
   
 
1,001
 
   
 
13,341
 
Class C Shares
   
 
1,001
 
   
 
1,001
 
   
 
1,001
 
Accumulated Realized Gain (Loss) on Investments
   
 
(64,592
)
   
 
(128,496
)
   
 
(13,803
)
    
  
  
Net Assets
   
$
721,133,136
 
   
$
414,926,732
 
   
$
260,325,262
 
    
  
  
    
Growth & Income
Fund
     
Equity Income Fund
     
Equity Growth Fund
  
Capital Paid-In
                           
Institutional Shares
   
$
363,441,814
 
   
$
95,562,196
 
   
$
59,178,185
 
Class A Shares
   
 
159,588
 
   
 
1,002
 
   
 
3,856
 
Class C Shares
   
 
2,001
 
   
 
1,002
 
   
 
1,000
 
Accumulated Realized Gain (Loss) on Investments and Foreign Currency
   
 
(13,489,546
)
   
 
(9,493,861
)
   
 
(29,267,247
)
Net Unrealized Appreciation (Depreciation) on Investments and Foreign Currency
   
 
8,318,338
 
   
 
6,509,944
 
   
 
107,219
 
Undistributed Net Investment Income
(Distribution in Excess of Net Investment Income)
   
 
508,041
 
   
 
161,338
 
   
 
54,316
 
    
  
  
Net Assets
   
$
358,940,236
 
   
$
92,741,621
 
   
$
30,077,329
 
    
  
  

78

Table of Contents

Mercantile Funds, Inc.
Notes to Financial Statements — Continued
(Unaudited)
 

 
3.    NET ASSETS — Continued
 
    
Capital Opportunities Fund
     
International Equity
Fund
     
Diversified Real Estate Fund
  
Capital Paid-In
                           
Institutional Shares
   
$
49,350,994
 
   
$
109,798,997
 
   
$
50,586,813
 
Class A Shares
   
 
18,682
 
   
 
18,347
 
   
 
27,854
 
Class C Shares
   
 
1,000
 
   
 
1,000
 
   
 
34,513
 
Accumulated Realized Gain (Loss) on Investments and Foreign Currency
   
 
(11,716,972
)
   
 
(21,237,706
)
   
 
(258,702
)
Net Unrealized Appreciation (Depreciation) on Investments and Foreign Currency
   
 
2,019,185
 
   
 
(1,248,905
)
   
 
2,699,141
 
Undistributed Net Investment Income
(Distribution in Excess of Net Investment Income)
   
 
(151,892
)
   
 
450,408
 
   
 
487,466
 
    
  
  
Net Assets
   
$
39,520,997
 
   
$
87,782,141
 
   
$
53,577,085
 
    
  
  
 
    
Limited Maturity Bond Fund
     
Total Return Bond Fund
     
Maryland Tax-Exempt Bond Fund
     
Intermediate Tax-Exempt Bond Fund
     
National Tax-Exempt Bond Fund
Capital Paid-In
                                           
Institutional Class
   
$
162,782,423
 
   
$
136,601,970
 
   
$
56,659,864
 
   
$
90,664,448
 
   
$
165,548,631
A Class
   
 
75,087
 
   
 
3,468
 
   
 
240,832
 
   
 
73,464
 
   
 
1,002
C Class
   
 
1,002
 
   
 
1,003
 
   
 
1,002
 
   
 
1,002
 
   
 
1,002
Accumulated Realized Gain (Loss) on Investments
   
 
(1,899,955
)
   
 
(209,572
)
   
 
(195,600
)
   
 
(3,897
)
   
 
1,409,848
Net Unrealized Appreciation (Depreciation) on Investments
   
 
3,174,192
 
   
 
2,264,059
 
   
 
1,788,930
 
   
 
1,800,238
 
   
 
4,803,226
Undistributed Net Investment Income (Distribution in Excess of Net Investment Income)
   
 
10,905
 
   
 
(71,880
)
   
 
—
 
   
 
—
 
   
 
—
    
  
  
  
  
Net Assets
   
$
164,143,654
 
   
$
138,589,048
 
   
$
58,495,028
 
   
$
92,535,255
 
   
$
171,763,709
    
  
  
  
  

79

Table of Contents

Mercantile Funds, Inc.
Notes to Financial Statements — Continued
(Unaudited)
 

 
4.    FORWARD FOREIGN CURRENCY CONTRACTS
 
A summary of forward foreign currency contracts in the International Equity Fund which were outstanding at November 30, 2002 is as follows:
 
Settlement Dates
   
Sell
   
Buy
     
Net Unrealized
Appreciation/
(Depreciation)
  
12/2/02
   
USD 40,954
   
BPS 26,371
     
$
        79
 
2/10/03
   
BPS 1,300,000
   
EUR 2,026,090
     
 
(3,656
)
2/14/03
   
YEN 350,000,000
   
EUR 2,918,552
     
 
26,740
 
12/3/02
   
USD 11,218
   
EUR 11,297
     
 
18
 
12/2/02
   
USD 33,428
   
SFR 49644
     
 
38
 
12/3/02
   
USD 34,834
   
SFR 51,763
     
 
64
 
12/2/02
   
DAK 9,438
   
USD 1,262
     
 
(3
)
12/2/02
   
EUR 158,007
   
USD 156,980
     
 
(205
)
12/3/02
   
BPS 5,346
   
USD 8,297
     
 
(19
)
12/2/02
   
USD 122,992
   
YEN 15,017,365
     
 
(417
)
12/3/02
   
USD 28,054
   
YEN 3,437,976
     
 
12
 
2/6/03
   
USD 384,974
   
CZK 12,400,000
     
 
14,602
 
2/6/03
   
USD 360,163
   
CZK 11,200,000
     
 
744
 
2/6/03
   
USD 409,543
   
HUF 103,000,000
     
 
15,932
 
2/6/03
   
USD 417,004
   
HUF 103,000,000
     
 
8,471
 
2/3/03
   
USD 93,503
   
PLN 390,000
     
 
2,572
 
1/13/03
   
USD 580,164
   
PLN 2,410,000
     
 
15,313
 
1/13/03
   
PLN 4,532,000
   
USD 1,054,689
     
 
(65,103
)
2/3/03
   
PLN 230,000
   
USD 53,241
     
 
(3,419
)
2/6/03
   
CZK 23,600,000
   
USD 766,109
     
 
5,626
 
2/3/03
   
PLN 160,000
   
USD 37,418
     
 
(1,997
)
2/6/03
   
HUF 206,000,000
   
USD 797,244
     
 
(53,705
)
2/26/03
   
CZK 29,218,150
   
USD 944,105
     
 
3,189
 
1/27/03
   
EUR 1,005,000
   
USD 998,468
     
 
1,630
 
1/27/03
   
EUR 498,000
   
USD 491,227
     
 
(2,728
)
                
                
$
(36,222
)
 
Currency Legend
CZK
   
Czech Koruna
  
PLN
   
Polish Zloty
GBP
   
British Pound
  
HUF
   
Hungary Forint
EUR
   
Euro
  
DAK
   
Danish Kroner
YEN
   
Japanese Yen
  
SFR
   
Swiss Franc
USD
   
US Dollar
         

80

Table of Contents

Mercantile Funds, Inc.
Notes to Financial Statements — Continued
(Unaudited)
 

 
5.    FORWARD AGREEMENTS TO ENTER INTO AN INTEREST RATE SWAP
 
The following is a summary of open forward agreements to enter into an interest rates swap contract as of November 30, 2002.
 
    
Notional Amount
   
Description
   
Unrealized Appreciation (Depreciation)
  
Maryland Tax-Exempt Bond Fund
   
$
8,000,000
   
Forward agreement to enter into an interest rate swap contract with JP Morgan terminating July 1, 2022 to pay TBMA-Muni Swap Index quarterly and to receive a fixed rate of 4.774% semi-annually.
   
$
(386,558
)
Intermediate Tax-Exempt Bond Fund
   
$
25,000,000
   
Forward agreement to enter into an interest rate swap contract with JP Morgan terminating July 1, 2012 to pay TBMA-Muni Swap Index quarterly and to receive a fixed rate of 4.21% semi-annually.
   
$
(1,208,089
)
National Tax-Exempt Bond Fund
   
$
12,000,000
   
Forward agreement to enter into an interest rate swap contract with JP Morgan terminating July 1, 2022 to pay TBMA-Muni Swap Index quarterly and to receive a fixed rate of 4.774% semi-annually.
   
$
(481,798
)
 
6.    SECURITIES LENDING
 
At November 30, 2002, the value of securities loaned and cash collateral was as follows:
 
      
Market Value of Securities Loaned
   
Value of Cash Collateral
Growth & Income Fund
     
$
17,511,594
   
$
18,099,600
Equity Income Fund
     
 
932,751
   
 
988,200
Equity Growth Fund
     
 
549,136
   
 
565,600
Diversified Real Estate Fund
     
 
1,420,000
   
 
1,475,000
Limited Maturity Bond Fund
     
 
5,642,094
   
 
5,797,675
Total Return Bond Fund
     
 
6,602,700
   
 
6,808,230

81

Table of Contents

Mercantile Funds, Inc.
Notes to Financial Statements — Concluded
(Unaudited)
 

 
7.    PURCHASES & SALES OF SECURITIES
 
For the six months ended November 30, 2002, total aggregate purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
 
    
Purchases
   
Sales
     
U.S. Government Purchases
     
U.S. Government Sales
Growth & Income Fund
   
$
44,787,144
   
$
41,280,197
     
$
0
     
$
0
Equity Income Fund
   
 
21,350,108
   
 
15,831,274
     
 
0
     
 
0
Equity Growth Fund
   
 
6,570,863
   
 
12,487,490
     
 
0
     
 
0
Capital Opportunities Fund
   
 
14,453,603
   
 
10,160,339
     
 
0
     
 
0
International Equity Fund
   
 
29,158,561
   
 
22,084,173
     
 
0
     
 
0
Diversified Real Estate Fund
   
 
12,795,126
   
 
1,757,570
     
 
0
     
 
0
Limited Maturity Bond Fund
   
 
48,984,291
   
 
34,094,819
     
 
26,190,239
     
 
16,024,913
Total Return Bond Fund
   
 
25,404,045
   
 
30,922,730
     
 
64,859,110
     
 
44,451,416
Maryland Tax-Exempt Bond Fund
   
 
36,200,061
   
 
29,898,728
     
 
0
     
 
0
Intermediate Tax-Exempt Bond Fund
   
 
59,056,325
   
 
40,616,375
     
 
0
     
 
0
National Tax-Exempt Bond Fund
   
 
109,170,370
   
 
70,441,210
     
 
0
     
 
0
 
8.    CAPITAL LOSS CARRYOVERS
 
At May 31, 2002, the following Funds had capital loss carryovers:
 
      
Capital Loss Carryover
   
Expiration Year
Prime Money Market Fund
     
$
64,591
   
2003 through 2006
Government Money Market Fund
     
 
128,496
   
2003 through 2010
Tax-Exempt Money Market Fund
     
 
13,803
   
2003 through 2008
Growth & Income Fund
     
 
9,364,909
   
2010
Equity Income Fund
     
 
2,114,953
   
2010
Equity Growth Fund
     
 
5,204,436
   
2010
Capital Opportunities Fund
     
 
6,946,391
   
2009 through 2010
International Equity Fund
     
 
15,868,033
   
2010
Maryland Tax-Exempt Bond Fund
     
 
387,368
   
2004 through 2009
Intermediate Tax-Exempt Bond Fund
     
 
706,161
   
2008 through 2009
 
The capital loss carryovers are available to offset possible future capital gains, if any, of the respective Funds.
 
9.     LINE OF CREDIT
 
The Company has established a line of credit with Fifth Third Bank with respect to all Funds except the International Equity Fund. The line of credit, which is in an uncommitted aggregate amount of $25 million, may be accessed by the Funds for temporary or emergency purposes only. Each Fund may borrow up to 10% of its respective net assets. If a Fund’s borrowings under the line of credit exceed 5% of its net assets that Fund may not purchase additional securities. Borrowings under the line of credit bear interest at the overnight Federal Funds rate plus .50% per annum. At November 30, 2002, the Funds had no outstanding borrowings under the line of credit. During the six months ended November 30, 2002, the following Funds borrowed amounts and paid interest as noted in the table below.
 
    
Range of Borrowings
     
Interest Paid
     
Weighted Average
Interest Rate
  
Equity Growth Fund
   
$
140,441 - $508,942
     
$
206
     
1.91
%

82

Table of Contents
IMPORTANT TAX INFORMATION
(Unaudited)
 
During the calendar year ended December 31, 2002, the distributions paid by the Funds were derived from the following:
 
      
Net Investment
Income and
Short-Term
Capital Gains
(taxable as
ordinary income)
       
Exempt Interest
Dividends
(excludable from
gross income for
Federal income
tax purposes)
       
Long-Term
Capital Gains
(gains greater
than one-year
and less than
5-years)3
       
Long-Long
Term Capital
Gains (greater
than 5-years)3
  
Prime Money Market
     
100.0
%
     
0.0
%
     
0.0
%
     
0.0
%
Government Money Market
     
100.0
%
     
0.0
%
     
0.0
%
     
0.0
%
Tax-Exempt Money Market
     
0.0
%
     
100.0
%
     
0.0
%
     
0.0
%
Growth & Income1
     
100.0
%
     
0.0
%
     
0.0
%
     
0.0
%
Equity Income1
     
100.0
%
     
0.0
%
     
0.0
%
     
0.0
%
Equity Growth1
     
100.0
%
     
0.0
%
     
0.0
%
     
0.0
%
International Equity2
     
100.0
%
     
0.0
%
     
0.0
%
     
0.0
%
Limited Maturity Bond
     
100.0
%
     
0.0
%
     
0.0
%
     
0.0
%
Total Return Bond
     
100.0
%
     
0.0
%
     
0.0
%
     
0.0
%
Maryland Tax-Exempt Bond
     
0.0
%
     
100.0
%
     
0.0
%
     
0.0
%
Intermediate Tax-Exempt Bond
     
0.0
%
     
100.0
%
     
0.0
%
     
0.0
%
National Tax-Exempt Bond
     
3.8
%
     
81.5
%
     
10.8
%
     
3.9
%
1
100% of distributions derived from net investment income and short-term capital gains qualify for the dividends received deduction available to corporate shareholders.
2
The foreign taxes paid or withheld per share represent taxes incurred by the International Equity Fund on interest and dividends received by the Fund from foreign sources. Foreign taxes paid or withheld should be included in taxable income with an offsetting deduction from gross income or as a credit for taxes paid to foreign governments. See following page. You should consult your tax advisor regarding the appropriate treatment of foreign taxes paid.
3
Beginning with the 2001 tax year, a lower capital gain rate of 8% may apply for taxpayers in the 15% ordinary income bracket or lower. The lower rate applies to property held at least five years and sold after December 31, 2000, and includes assets sold by a mutual fund. Some of the long-term capital gains in this column may qualify for this favorable treatment. This information will be reported in Box 2c on your 1099-DIV that mails in late January. Remember, you should not prepare your taxes until you receive all your official tax forms.
 
CAPITAL GAIN DISTRIBUTIONS
 
During the calendar year ending December 31, 2002, the Mercantile Funds distributed capital gains to shareholders of the National Tax-Exempt Bond Fund on December 11, 2002. The Securities and Exchange Commission requires mutual funds to disclose to shareholders the composition of the capital gain distribution. The figures listed below may differ from those cited elsewhere in the report due to differences in the calculation of income and gains for Securities and Exchange Commission (book) purposes and Internal Revenue Service (tax) purposes. Pursuant to this requirement, these percentages are listed below:
 
      
Short-Term
       
Long-Term
       
Long-Long Term
  
National Tax-Exempt Bond Fund
     
20.54
%
     
58.47
%
     
20.99
%
 
Short-term capital gain distributions are taxable to you as ordinary income. Long-term capital gain distributions are taxable to you as long term capital gains. Long-Long Term capital gain distributions may be taxable at a lower capital gain rate.

83

Table of Contents
 
IMPORTANT TAX INFORMATION — Continued
(Unaudited)
 
Income by Country for the Mercantile International Equity Fund
 
Calendar Year Ended December 31, 2002
 
      
Percentage
of Gross
Income:
       
Percentage
of Taxes
Paid:
  
Australia
     
1.86
%
     
1.10
%
Austria
     
0.73
 
     
0.94
 
Belgium
     
0.32
 
     
0.40
 
Brazil
     
0.05
 
     
0.00
 
Canada
     
0.71
 
     
0.89
 
Czech Republic
     
0.30
 
     
0.35
 
Denmark
     
0.50
 
     
0.64
 
Estonia
     
0.31
 
     
0.00
 
Finland
     
1.37
 
     
1.70
 
France
     
6.38
 
     
7.45
 
Germany
     
3.81
 
     
5.23
 
Hong Kong
     
1.97
 
     
0.00
 
Hungary
     
0.46
 
     
0.78
 
Indonesia
     
0.08
 
     
0.11
 
Ireland
     
0.17
 
     
0.12
 
Italy
     
7.49
 
     
8.75
 
Japan
     
6.48
 
     
8.33
 
Korea
     
0.28
 
     
0.00
 
Netherlands
     
8.41
 
     
9.73
 
New Zealand
     
0.20
 
     
0.25
 
Norway
     
3.87
 
     
4.97
 
Poland
     
1.37
 
     
1.75
 
Portugal
     
0.61
 
     
1.02
 
Singapore
     
0.19
 
     
0.35
 
Spain
     
1.66
 
     
2.09
 
Sweden
     
2.01
 
     
1.32
 
Switzerland
     
4.44
 
     
5.46
 
Turkey
     
-0.03
 
     
0.00
 
United Kingdom
     
41.98
 
     
36.27
 
United States
     
1.59
 
     
0.00
 
Venezuela
     
0.43
 
     
0.00
 
      
    
Total
     
100.00
 
     
100.00
 
 
Foreign taxes withheld as of December 31, 2002 were $225,468, or 11.15% of distributed income.

84

Table of Contents
IMPORTANT TAX INFORMATION — Continued
(Unaudited)
 
Income by State for the Mercantile Funds
 
Calendar Year Ended December 31, 2002
 
      
Tax-Exempt
Money
Market Fund
       
Maryland
Tax-Exempt
Bond Fund
       
Intermediate
Tax-Exempt
Bond Fund
       
National
Tax-Exempt
Bond Fund
  
Percentage of Income:
                                    
Alabama
     
0.00
%
     
0.00
%
     
2.95
%
     
1.60
%
Alaska
     
1.84
%
     
0.00
%
     
0.00
%
     
0.00
%
Arkansas
     
0.00
%
     
0.00
%
     
0.00
%
     
0.93
%
Arizona
     
3.05
%
     
0.00
%
     
7.64
%
     
1.46
%
California
     
0.13
%
     
0.00
%
     
0.02
%
     
1.78
%
Colorado
     
1.19
%
     
0.00
%
     
1.74
%
     
9.22
%
Connecticut
     
3.26
%
     
0.00
%
     
0.72
%
     
3.29
%
Delaware
     
0.00
%
     
0.00
%
     
1.65
%
     
0.00
%
District of Columbia
     
1.87
%
     
1.36
%
     
0.98
%
     
0.00
%
Florida
     
4.01
%
     
0.00
%
     
6.87
%
     
5.53
%
Georgia
     
0.53
%
     
0.00
%
     
9.52
%
     
5.95
%
Idaho
     
1.32
%
     
0.00
%
     
0.00
%
     
0.00
%
Illinois
     
5.87
%
     
0.00
%
     
5.04
%
     
2.11
%
Indiana
     
2.36
%
     
0.00
%
     
0.00
%
     
0.00
%
Iowa
     
0.00
%
     
0.00
%
     
1.87
%
     
0.00
%
Kansas
     
2.06
%
     
0.00
%
     
0.40
%
     
2.30
%
Kentucky
     
0.00
%
     
0.00
%
     
2.09
%
     
1.30
%
Louisiana
     
0.55
%
     
0.00
%
     
1.28
%
     
2.16
%
Maine
     
0.83
%
     
0.00
%
     
0.00
%
     
0.00
%
Maryland
     
5.11
%
     
95.69
%
     
4.61
%
     
3.32
%
Massachusetts
     
4.05
%
     
0.00
%
     
0.15
%
     
5.05
%
Michigan
     
2.61
%
     
0.00
%
     
2.57
%
     
1.20
%
Minnesota
     
5.82
%
     
0.00
%
     
0.00
%
     
0.81
%
Mississippi
     
2.16
%
     
0.00
%
     
0.44
%
     
0.38
%
Missouri
     
1.30
%
     
0.00
%
     
0.00
%
     
1.70
%
Nebraska
     
0.70
%
     
0.00
%
     
2.50
%
     
0.67
%
Nevada
     
3.77
%
     
0.00
%
     
0.00
%
     
0.00
%
New Jersey
     
1.55
%
     
0.00
%
     
5.51
%
     
4.00
%
New Mexico
     
1.48
%
     
0.00
%
     
0.00
%
     
0.16
%
New York
     
5.24
%
     
0.00
%
     
0.03
%
     
2.92
%
North Carolina
     
4.10
%
     
0.00
%
     
2.79
%
     
0.82
%
Ohio
     
5.36
%
     
0.00
%
     
7.61
%
     
6.61
%
Oklahoma
     
0.84
%
     
0.00
%
     
4.55
%
     
0.00
%
Oregon
     
0.95
%
     
0.00
%
     
0.79
%
     
4.49
%
Pennsylvania
     
8.45
%
     
0.00
%
     
8.02
%
     
10.66
%
Puerto Rico
     
0.00
%
     
2.95
%
     
0.20
%
     
3.14
%
Rhode Island
     
0.00
%
     
0.00
%
     
0.00
%
     
1.86
%
South Carolina
     
2.81
%
     
0.00
%
     
4.00
%
     
2.58
%
Tennessee
     
2.14
%
     
0.00
%
     
2.36
%
     
2.28
%
Texas
     
7.61
%
     
0.00
%
     
2.13
%
     
3.30
%
Utah
     
0.56
%
     
0.00
%
     
0.00
%
     
1.09
%
Virginia
     
1.76
%
     
0.00
%
     
3.43
%
     
2.81
%
Washington
     
0.79
%
     
0.00
%
     
0.00
%
     
0.58
%
Wisconsin
     
0.78
%
     
0.00
%
     
5.54
%
     
1.94
%
Wyoming
     
1.19
%
     
0.00
%
     
0.00
%
     
0.00
%
      
    
    
    
Total
     
100.00
%
     
100.00
%
     
100.00
%
     
100.00
%

85

Table of Contents
IMPORTANT TAX INFORMATION—Continued
(Unaudited)
 
Assets Held by State
 
As of Year Ended December 31, 2002
 
      
Tax-Exempt
Money
Market Fund
       
Maryland
Tax-Exempt
Bond Fund
       
Intermediate
Tax-Exempt
Bond Fund
       
National
Tax-Exempt
Bond Fund
  
Alabama
     
0.00
%
     
0.00
%
     
1.63
%
     
1.53
%
Alaska
     
2.04
 
     
0.00
 
     
0.00
 
     
0.00
 
Arizona
     
3.62
 
     
0.00
 
     
2.32
 
     
0.81
 
Arkansas
     
0.00
 
     
0.00
 
     
0.00
 
     
0.90
 
California
     
0.00
 
     
0.00
 
     
1.52
 
     
1.37
 
Colorado
     
2.42
 
     
0.00
 
     
3.67
 
     
8.84
 
Connecticut
     
4.24
 
     
0.00
 
     
0.81
 
     
2.26
 
District Of Columbia
     
2.00
 
     
1.18
 
     
0.00
 
     
0.00
 
Florida
     
4.61
 
     
0.00
 
     
4.58
 
     
5.80
 
Georgia
     
0.41
 
     
0.00
 
     
7.08
 
     
8.56
 
Idaho
     
1.40
 
     
0.00
 
     
0.00
 
     
0.00
 
Illinois
     
6.08
 
     
0.00
 
     
3.41
 
     
1.06
 
Indiana
     
2.48
 
     
0.00
 
     
1.45
 
     
0.00
 
Iowa
     
0.00
 
     
0.00
 
     
1.54
 
     
0.00
 
Kansas
     
2.00
 
     
0.00
 
     
1.87
 
     
2.34
 
Kentucky
     
0.80
 
     
0.00
 
     
2.73
 
     
1.16
 
Louisiana
     
0.62
 
     
0.00
 
     
1.36
 
     
1.50
 
Maryland
     
5.76
 
     
91.10
 
     
6.28
 
     
3.92
 
Massachusetts
     
6.39
 
     
0.00
 
     
0.00
 
     
7.89
 
Michigan
     
1.58
 
     
0.00
 
     
1.31
 
     
3.18
 
Minnesota
     
4.56
 
     
0.00
 
     
0.00
 
     
0.62
 
Mississippi
     
2.57
 
     
0.00
 
     
0.00
 
     
0.00
 
Missouri
     
0.92
 
     
0.00
 
     
0.00
 
     
1.70
 
Nebraska
     
0.82
 
     
0.00
 
     
1.78
 
     
1.41
 
Nevada
     
2.00
 
     
0.00
 
     
0.00
 
     
0.00
 
New Jersey
     
2.00
 
     
0.00
 
     
6.11
 
     
4.82
 
New York
     
6.71
 
     
0.00
 
     
2.06
 
     
1.30
 
North Carolina
     
4.80
 
     
0.00
 
     
1.08
 
     
0.00
 
Ohio
     
5.53
 
     
0.00
 
     
6.23
 
     
5.50
 
Oklahoma
     
0.00
 
     
0.00
 
     
3.89
 
     
0.00
 
Oregon
     
1.04
 
     
0.00
 
     
0.00
 
     
3.98
 
Pennsylvania
     
7.98
 
     
0.00
 
     
10.97
 
     
8.53
 
Puerto Rico
     
0.00
 
     
1.50
 
     
2.04
 
     
2.73
 
Rhode Island
     
0.00
 
     
0.00
 
     
0.00
 
     
1.62
 
South Carolina
     
3.58
 
     
0.00
 
     
6.64
 
     
1.76
 
Tennessee
     
2.37
 
     
0.00
 
     
2.28
 
     
2.44
 
Texas
     
5.81
 
     
0.00
 
     
3.61
 
     
3.92
 
Utah
     
0.60
 
     
0.00
 
     
0.00
 
     
0.91
 
Virginia
     
0.00
 
     
0.00
 
     
1.02
 
     
2.64
 
Washington
     
0.00
 
     
0.00
 
     
1.07
 
     
0.00
 
Wisconsin
     
0.88
 
     
0.00
 
     
3.48
 
     
1.44
 
Wyoming
     
1.32
 
     
0.00
 
     
0.00
 
     
0.00
 
Other Mutual Funds
     
0.06
 
     
6.22
 
     
6.18
 
     
3.56
 
      
    
    
    
Total
     
100.00
 
     
100.00
 
     
100.00
 
     
100.00
 
 

86

Table of Contents
 
IMPORTANT TAX INFORMATION—Concluded
(Unaudited)
 
Mercantile Funds that Hold U.S. Government Obligations
 
    
Prime Money
Market Fund
       
Government Money
Market Fund
     
Capital
Opportunities
Fund
       
Limited Maturity
Bond Fund
     
Total Return
Bond Fund
  
Percentage of Income for the
Calendar Year Ended
                                       
December 31, 2002:
                                       
Treasury Obligations
   
0.00
%
     
0.00
%
   
0.00
%
     
6.02
%
   
6.41
%
Federal Agency Obligations
   
13.59
 
     
44.54
 
   
6.22
 
     
0.70
 
   
0.81
 
Other Agency Obligations
   
2.38
 
     
13.93
 
   
11.20
 
     
22.60
 
   
43.36
 
Federal Home Loan Mortgage Obligations
   
0.49
 
     
13.17
 
   
21.28
 
     
11.98
 
   
9.11
 
Other Obligations
   
83.54
 
     
28.36
 
   
61.30
 
     
58.70
 
   
40.31
 
    
    
  
    
  
Total
   
100.00
 
     
100.00
 
   
100.00
 
     
100.00
 
   
100.00
 
Percentage of Assets held on
December 31, 2002:
                                       
Treasury Obligations
   
0.00
%
     
0.00
%
   
0.00
%
     
15.10
%
   
7.50
%
Federal Agency Obligations
   
8.10
 
     
38.90
 
   
0.00
 
     
6.80
 
   
1.40
 
Other Agency Obligations
   
2.10
 
     
15.50
 
   
0.00
 
     
21.50
 
   
33.80
 
Federal Home Loan Mortgage Obligations
   
0.00
 
     
17.20
 
   
6.60
 
     
1.70
 
   
15.10
 
Other Obligations
   
89.80
 
     
28.40
 
   
93.40
 
     
54.90
 
   
42.20
 
    
    
  
    
  
Total
   
100.00
 
     
100.00
 
   
100.00
 
     
100.00
 
   
100.00
 

87

Table of Contents
Investment Advisor and Administrator:
 
Mercantile Capital Advisors, Inc.
Baltimore, Maryland
 
Custodian (except for the International Equity Fund)
 
The Fifth Third Bank
Cincinnati, Ohio
 
Distributor and Transfer Agent:
 
BISYS Fund Services
Columbus, Ohio
 
Custodian for the International Equity Fund:
 
State Street Bank & Trust Company
Boston, Massachusetts
 
This report is submitted for the general information of the shareholders of Mercantile. Funds, Inc. It is not authorized for distribution to prospective investors unless accompanied or preceded by current Prospectuses for the Funds which contain information concerning the Funds’ investment policies and expenses as well as other pertinent information.
 
Shares of the Funds are not bank deposits or obligations of, or guaranteed, endorsed or otherwise supported by Mercantile-Safe Deposit & Trust Company, its parent company or its affiliates and are not federally insured or guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other governmental agency. Investment in the Funds involves investment risks, including possible loss of principal.
 
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