N-14/A

<R>As filed with the Securities and Exchange Commission on November 3, 2003

Securities Act File No. 333-109472</R>
Investment Company Act File No. 811-6669

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-14

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

[   ] Pre-Effective Amendment No. [   ] Post-Effective Amendment No.

(Check appropriate box or boxes)

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

(Exact name of Registrant as Specified in Charter)

(609) 282-2800
(Area Code and Telephone Number)

800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices: Number, Street, City, State, Zip Code)

Terry K. Glenn
Merrill Lynch Fundamental Growth Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)

Copies to:

Andrew J. Donohue, Esq
Merrill Lynch Investment Managers, L.P.
P.O. Box 9011
Plainsboro, NJ   08543-9011 Frank P. Bruno, Esq.
Sidley Austin Brown & Wood LLP
787 Seventh Avenue
New York, New York 10019

     Approximate Date of Proposed Public Offering: As soon as practicable after the registration statement becomes effective under the Securities Act of 1933.

     Title of Securities to Be Registered: Shares of common stock, par value $.10 per share.

     No filing fee is required because of reliance on Section 24(f) of the Investment Company Act of 1940.

 

THE ASSET PROGRAM, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on December 9, 2003

To The Stockholders of
     The Asset Program, Inc. holding shares of
     Mercury Growth Opportunity Fund:

     NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the “Meeting”) of Mercury Growth Opportunity Fund (“Growth Opportunity”), a series of The Asset Program, Inc. (“Asset Program”), will be held at the offices of Fund Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey, on Tuesday, December 9, 2003, at 9:00 a.m. Eastern time, for the following purposes:

     (1) To approve or disapprove an Agreement and Plan of Reorganization (the “Agreement and Plan”) providing for the acquisition of the assets and assumption of the liabilities of Growth Opportunity by Merrill Lynch Fundamental Growth Fund, Inc. (“Fundamental Growth”) and the issuance of shares of common stock of Fundamental Growth to Growth Opportunity for distribution to the stockholders of Growth Opportunity; and

     (2) To transact such other business as properly may come before the Meeting or any adjournment thereof.

     Stockholders of Growth Opportunity are not entitled to appraisal rights in connection with the proposal.

     The Board of Directors of Growth Opportunity has fixed the close of business on October 17, 2003 as the record date (the “Record Date”) for the determination of stockholders entitled to notice of, and to vote at, the Meeting and at any adjournment(s) thereof.

     You are cordially invited to attend the Meeting. Stockholders of Growth Opportunity who do not expect to attend the Meeting in person are requested to complete, date and sign the enclosed form of proxy and return it promptly in the envelope provided for that purpose. If you have been provided with the opportunity on your proxy card or voting instruction form to provide voting instructions via telephone or the Internet, please take advantage of these prompt and efficient voting options. The enclosed proxy is being solicited on behalf of the Board of Directors of the Asset Program.

     <R>If you have any questions regarding the enclosed proxy materials or need assistance in voting your shares, please contact our proxy solicitor, Georgeson Shareholder, at 1-866-790-9309.</R>

By Order of the Board of Directors,

Phillip S. Gillespie
Secretary
The Asset Program, Inc.

Plainsboro, New Jersey
<R>Dated: November 3, 2003</R>

 

<R></R>

PROXY STATEMENT OF THE ASSET PROGRAM, INC.
FOR USE AT A SPECIAL MEETING OF STOCKHOLDERS
To Be Held On December 9, 2003

PROSPECTUS OF
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
P.O. Box 9011, Princeton, New Jersey 08543-9011
(609) 282-2800

     This Combined Proxy Statement and Prospectus (“Proxy Statement and Prospectus”) is furnished to you because you are a stockholder of Mercury Growth Opportunity Fund (“Growth Opportunity”), a series of The Asset Program, Inc. (the “Asset Program”), and you are being asked to consider:

    <R> (1) approval of an Agreement and Plan of Reorganization (the “Agreement and Plan”) providing for the acquisition of the assets and assumption of the liabilities of Growth Opportunity by Merrill Lynch Fundamental Growth Fund, Inc., a Maryland corporation (“Fundamental Growth”) and the issuance of shares of common stock of Fundamental Growth to Growth Opportunity for distribution to the stockholders of Growth Opportunity. A vote in favor of this proposal will constitute a vote in favor of the termination of Growth Opportunity as a series of the Asset Program; and</R>

     (2) to transact such other business as properly may come before the meeting or any adjournment thereof.

     This transaction is referred to herein as the “Reorganization.” As part of the Reorganization, Growth Opportunity will be terminated as a series of Asset Program.

     The Special Meeting of Stockholders of Growth Opportunity (the “Meeting”) will be held on Tuesday, December 9, 2003 for the purpose of obtaining stockholder approval of the Reorganization.

     This Proxy Statement and Prospectus sets forth the information about Fundamental Growth that a stockholder of Growth Opportunity should know before considering the transactions proposed herein and should be retained for future reference. Growth Opportunity has authorized the solicitation of proxies in connection with the above described Reorganization solely on the basis of this Proxy Statement and Prospectus and the accompanying documents.

     <R>The Board of Directors of the Asset Program has fixed the close of business on October 17, 2003 as the record date (the “Record Date”) for the determination of stockholders entitled to notice of and to vote at the Meeting and at any adjournment(s) thereof. Stockholders on the Record Date will be entitled to one vote for each share held, with no share having cumulative voting rights. As of the Record Date, Growth Opportunity had outstanding 10,052,576 shares of common stock.</R>

(continued on following page)

The Securities and Exchange Commission has not approved or disapproved these securities
or passed upon the adequacy of this Proxy Statement and Prospectus.
Any representation to the contrary is a criminal offense.

<R>The date of this Proxy Statement and Prospectus is November 3, 2003.</R>

     With this Proxy Statement and Prospectus you will also be receiving the following documents:

• Prospectus of Fundamental Growth, dated January 1, 2003 (the “Fundamental Growth Prospectus”); and

• Annual Report to Stockholders of Fundamental Growth for the fiscal year ended August 31, 2003 (the “Fundamental Growth Annual Report”).

     The Fundamental Growth Prospectus and the Fundamental Growth Annual Report are incorporated by reference into this Proxy Statement and Prospectus, which means that each of these documents is legally considered to be part of this Proxy Statement and Prospectus.

     Certain other documents containing information about Fundamental Growth and Growth Opportunity have been filed with the Securities and Exchange Commission (the “Commission”) and may be obtained, without charge, by writing to Fundamental Growth or Growth Opportunity at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, or by calling 1-800-995-6526. These documents are:

• Statement of Additional Information of Fundamental Growth, dated January 1, 2003 (the “Fundamental Growth Statement”);

• Prospectus and Statement of Additional Information relating to Growth Opportunity, each dated May 28, 2003 (the “Growth Opportunity Prospectus” and “Growth Opportunity Statement,” respectively);

• Annual Report to Stockholders of Growth Opportunity for the fiscal year ended January 31, 2003 (the “Growth Opportunity Annual Report”);

• Semi-Annual Report to Stockholders of Growth Opportunity for the six months ended July 31, 2003 (the “Growth Opportunity Semi-Annual Report”); and

• <R>Statement of Additional Information relating to this Proxy Statement and Prospectus, dated November 3, 2003 (the “Reorganization Statement of Additional Information”).</R>

     The Growth Opportunity Prospectus and the Reorganization Statement of Additional Information also are incorporated by reference into this Proxy Statement and Prospectus. The Commission maintains a web site (http://www.sec.gov) that contains the Reorganization Statement of Additional Information, other material incorporated herein by reference, and other information regarding Fundamental Growth and Growth Opportunity.

     The address of the principal executive offices of Fundamental Growth and Growth Opportunity is 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.

TABLE OF CONTENTS

<R>	Page
INTRODUCTION	1
Certain Defined Terms Used in this Proxy Statement and Prospectus	1
SUMMARY	1
The Reorganization	1
What will Stockholders of Growth Opportunity Receive in the Reorganization?	2
What are the Reasons for the Reorganization?	2
Fee Tables	3
RISK FACTORS AND SPECIAL CONSIDERATIONS	10
COMPARISON OF THE FUNDS	13
Financial Highlights	13
Investment Objectives And Policies	20
Investment Restrictions	20
Management	20
Purchase of Shares	20
Redemption of Shares	21
Exchange of Shares	21
Performance	22
Code of Ethics	22
Stockholder Rights	22
Dividends	23
Automatic Dividend Reinvestment Plan	23
Systematic Withdrawal Plan	23
Tax Information	24
Portfolio Transactions	24
Portfolio Turnover	24
Additional Information	25
THE REORGANIZATION	26
General	26
Procedure	26
Terms of the Agreement and Plan	27
Potential Benefits to Stockholders of Growth Opportunity as a Result of the Reorganization	28
Tax Consequences of the Reorganization	29
Capitalization	30
INFORMATION CONCERNING THE SPECIAL MEETING	30
Date, Time and Place of Meeting	30
Solicitation, Revocation and Use of Proxies	30
Record Date and Outstanding Shares	31
Security Ownership of Certain Beneficial Owners and Management of Fundamental        Growth and Growth Opportunity	31
Voting Rights and Required Vote	31
ADDITIONAL INFORMATION	31
LEGAL PROCEEDINGS	32
LEGAL OPINIONS	32
EXPERTS	32
</R>

 

TABLE OF CONTENTS

		Page
STOCKHOLDERS’ MEETINGS		32
STOCKHOLDER PROPOSALS		33
EXHIBIT I —	AGREEMENT AND PLAN OF REORGANIZATION	I-1
EXHIBIT II —	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL AND REGISTERED OWNERS OF SHARES OF FUNDAMENTAL GROWTH AND GROWTH OPPORTUNITY	II-1

INTRODUCTION

     <R>This Proxy Statement and Prospectus is furnished to the stockholders of Growth Opportunity in connection with the solicitation of proxies on behalf of the Board of Directors of the Asset Program for use at the Meeting to be held at the offices of Fund Asset Management, L.P. (“FAM”), 800 Scudders Mill Road, Plainsboro, New Jersey on Tuesday, December 9, 2003, at 9:00 a.m. Eastern time. The mailing address for Asset Program and Growth Opportunity is P.O. Box 9011, Princeton, New Jersey 08543-9011. The approximate mailing date of this Proxy Statement and Prospectus is November 10, 2003.</R>

     Any person giving a proxy may revoke it at any time prior to its exercise by executing a superseding proxy, by giving written notice of the revocation to the Secretary of Asset Program at the address indicated above or by voting in person at the Meeting. All properly executed proxies received prior to the Meeting will be voted at the Meeting in accordance with the instructions marked thereon or otherwise as provided therein. Unless instructions to the contrary are marked, properly executed proxies of Growth Opportunity will be voted “FOR” approval of the Agreement and Plan.

     Assuming a quorum is present at the Meeting, consummation of the Reorganization requires, among other things, the affirmative vote of the stockholders of Growth Opportunity representing a majority of the outstanding shares of Growth Opportunity entitled to be voted thereon. The Boards of Directors of Asset Program and Fundamental Growth together may amend the Agreement and Plan and change the terms of the Reorganization at any time prior to the approval thereof by the stockholders of Growth Opportunity. See “Information Concerning the Special Meeting.”

     This Proxy Statement and Prospectus is being used to solicit the vote of the stockholders of Growth Opportunity. The Board of Directors of the Asset Program knows of no business other than that described above that will be presented for consideration at the Meeting. If any other matter is properly presented, it is the intention of the persons named in the enclosed proxy to vote in accordance with their best judgment.

     This Proxy Statement and Prospectus serves as a prospectus of Fundamental Growth under the Securities Act of 1933 (the “Securities Act”), in connection with the issuance of shares of common stock of Fundamental Growth pursuant to the terms of the Agreement and Plan.

Certain Defined Terms Used in this Proxy Statement and Prospectus

     <R>Fundamental Growth is organized as a Maryland corporation. Growth Opportunity is a series of Asset Program, which is also organized as a Maryland corporation. Shares of common stock of Fundamental Growth and Growth Opportunity are hereinafter referred to as “shares,” holders of shares are hereinafter referred to as “stockholders,” the Directors and officers of Asset Program are hereinafter sometimes referred to as Directors and officers of Growth Opportunity, the Directors of Fundamental Growth and Growth Opportunity are hereinafter referred to as “Directors,” the Boards of Directors of Fundamental Growth and Growth Opportunity are each hereinafter referred to as a “Board” and collectively as the “Boards,” and the Articles of Incorporation of Fundamental Growth and Asset Program, as amended, restated and supplemented, as applicable, are each hereinafter referred to as a “Charter.” Fundamental Growth and Growth Opportunity are sometimes referred to herein individually as a “Fund” and collectively as the “Funds,” as the context requires. The fund resulting from the Reorganization is sometimes referred to herein as the “Fundamental Growth Pro Forma Combined Fund.”</R>

SUMMARY

     The following is a summary of certain information contained elsewhere in this Proxy Statement and Prospectus (including documents incorporated by reference) and is qualified in its entirety by reference to the more complete information contained in this Proxy Statement and Prospectus and in the Agreement and Plan, attached hereto as Exhibit I.

The Reorganization

     The Boards of Fundamental Growth and Growth Opportunity unanimously approved the Reorganization at Meetings held on August 13-14, 2003.

     Following the Reorganization, the Board of Asset Program will take action to terminate Growth Opportunity as a series of Asset Program under Maryland law.

What will Stockholders of Growth Opportunity Receive in the Reorganization?

     If the Agreement and Plan is approved and the Reorganization is consummated:

• You will become a stockholder of Fundamental Growth; and

• You will receive shares of Fundamental Growth of the same class and that have the same aggregate net asset value as the shares of Growth Opportunity that you held immediately prior to the Reorganization.

     No sales charge or fee of any kind will be charged to stockholders of Growth Opportunity in connection with their receipt of shares of Fundamental Growth common stock in the Reorganization.

     The Reorganization has been structured with the intention that it qualify as a tax-free reorganization for Federal income tax purposes. See “The Reorganization — Tax Consequences of the Reorganization.” You should consult your tax adviser regarding the tax effects of the Reorganization in light of your individual circumstances.

What are the Reasons for the Reorganization?

     The Board of Growth Opportunity, including all of the Directors who are not “interested persons” of Growth Opportunity as defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”), has determined that the Reorganization is in the best interests of Growth Opportunity, and that the interests of the stockholders of Growth Opportunity with respect to net asset value will not be diluted as a result of effecting the Reorganization. However, a stockholder of Growth Opportunity will hold a lower percentage of ownership in the Combined Fund than such stockholder held in Growth Opportunity prior to the Reorganization.

     In reaching its conclusions, the Board of Growth Opportunity considered a number of factors, including the following:

     After the Reorganization, stockholders of Growth Opportunity

• will be invested in an open-end fund with a substantially larger combined asset base and a broader portfolio of assets that is more widely diversified;

• are likely to benefit from a lower management fee rate and reduced operating expenses per share as stockholders of the Combined Fund; and

• are expected to benefit from greater flexibility in portfolio management as stockholders of the larger Combined Fund;

     See “Fee Tables” below and “The Reorganization — Potential Benefits to Stockholders of Growth Opportunity as a Result of the Reorganization.”

     If all of the requisite approvals are obtained with respect to the Reorganization, it is anticipated that the Reorganization will occur as soon as practicable after such approvals, provided that the Funds have obtained an opinion of counsel concerning the tax consequences of the Reorganization as set forth in the Agreement and Plan. Under the Agreement and Plan, the Reorganization may be abandoned at any time (whether before or after approval thereof by the stockholders of Growth Opportunity) prior to the Closing Date (as defined below), or the Closing Date may be postponed, (i) by mutual consent of the Boards of the Funds; (ii) by the Board of Growth Opportunity if any condition of Growth Opportunity’s obligations has not been fulfilled or waived by such Board; or (iii) by the Board of Fundamental Growth if any condition of Fundamental Growth’s obligations has not been fulfilled or waived by such Board. The Boards of Growth Opportunity and Fundamental Growth may together amend the Agreement and Plan to change the terms of the Reorganization at any time prior to the approval thereof by the stockholders of Growth Opportunity.

 

2

Fee Tables

     <R>The fee tables below provide information about the fees and expenses attributable to shares of each class of the Funds, assuming the Reorganization had taken place on August 31, 2003, and the estimated pro forma annualized fees and expenses attributable to each class of shares of the Fundamental Growth Pro Forma Combined Fund. Future fees and expenses may be greater or less than those indicated below.

Fee Table for Class A and Class B Stockholders of Fundamental Growth,
Growth Opportunity and the Fundamental Growth Pro Forma Combined Fund as of
August 31, 2003 (unaudited)

Class A Shares*

Class B Shares

Actual

Actual

Fundamental Growth

Growth Opportunity

Fundamental Growth Pro Forma Combined Fund

Fundamental Growth(b)

Growth Opportunity(b)

Fundamental Growth Pro Forma Combined Fund(b)

Stockholder Fees (fees paid directly from a stockholder’s investment)(a):

Maximum Sales Charge (Load) imposed on      purchases (as a percentage of offering price)

5.25%

(c)

5.25%

(c)

5.25%

(c)

None

None

None

Maximum Deferred Sales Charge (Load) (as a      percentage of original purchase price or      redemption proceeds, whichever is lower)

None

(d)

None

(d)

None

(d)

4.0%

(c)

4.0%

(c)

4.0%

(c)

Maximum Sales Charge (Load) Imposed on      Dividend Reinvestments

None

None

None

None

None

None

Redemption Fee

None

None

None

None

None

None

Exchange Fee

None

None

None

None

None

None

Annual Fund Operating Expenses (expenses that are deducted from Fund assets):

Management Fees(e)

0.61%

0.65%

0.61%

0.61%

0.65%

0.61%

Distribution and/or Service (12b-1) Fees(f)

0.25%

0.25%

0.25%

1.00%

1.00%

1.00%

Other Expenses (including transfer      agency fees)(g)

0.32%

0.93%

0.33%

0.36%

1.05%

0.37%

Total Annual Fund Operating Expenses

1.18%

1.83%

1.19%

1.97%

2.70%

1.98%

</R>

* Prior to April 14, 2003, Class A shares of Fundamental Growth were designated Class D.

(a) Certain securities dealers or other financial intermediaries may charge a fee to process a purchase or sale of shares; for instance, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) may charge clients a processing fee (currently $5.35) when a client buys or redeems shares.

(b) Class B shares automatically convert to Class A shares about eight years after initial purchase and will no longer be subject to distribution fees.

(c) Some investors may qualify for reductions in or waivers of the sales charge (load).

(d) A stockholder may pay a deferred sales charge if such stockholder purchases $1 million or more and redeems within one year.

(e) <R>Fundamental Growth has agreed to pay, and the Fundamental Growth Pro Forma Combined Fund will pay, Merrill Lynch Investment Managers, L.P. (“MLIM”) a monthly fee at the annual rate of 0.65% of average daily net assets for the first $1.0 billion; 0.625% of average daily net assets in excess of $1.0 billion but not exceeding $1.5 billion; 0.60% of average daily net assets in excess of $1.5 billion but not exceeding $5.0 billion; 0.575% of average daily net assets in excess of $5.0 billion but not exceeding $7.5 billion; and 0.55% of average daily net assets in excess of $7.5 billion. MLIM received a fee equal to 0.61% of Fundamental Growth’s average daily net assets for the fiscal year ended August 31, 2003.</R>

(f) Fundamental Growth and Growth Opportunity each call the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the term used in the Prospectuses of the Funds and all other Fund materials. If a stockholder holds Class B shares over time, it may cost that stockholder more in distribution and account maintenance (12b-1) fees than the maximum sales charge that such stockholder would have paid if he or she had bought one of the other classes.

(g) Financial Data Services, Inc., an affiliate of both MLIM and FAM, provides transfer agency services to Fundamental Growth and Growth Opportunity and will provide such services to the Combined Fund. The Funds each pay a fee for these services. Each Fund’s manager or investment adviser, and/or their affiliates, also provides certain accounting services to such Fund and each Fund reimburses its manager or investment adviser, or their affiliates, for such services.

 

3

<R>Fee Table for Class C and Class I Stockholders of Fundamental Growth,
Growth Opportunity and the Fundamental Growth Pro Forma Combined Fund as of August 31, 2003 (unaudited)

	Class C Shares						Class I Shares*
	Actual						Actual
	Fundamental Growth		Growth Opportunity		Fundamental Growth Pro Forma Combined Fund		Fundamental Growth		Growth Opportunity		Fundamental Growth Pro Forma Combined Fund
Stockholder Fees (fees paid directly from a stockholder’s investment)(a):
Maximum Sales Charge (Load)     imposed on purchases (as a     percentage of offering price)	None		None		None		5.25	%(b)	5.25	%(b)	5.25	%(b)
Maximum Deferred Sales Charge (Load)     (as a percentage of original purchase price or     redemption proceeds, whichever is lower)	1.0	%(b)	1.0	%(b)	1.0	%(b)	None	(c)	None	(c)	None	(c)
Maximum Sales Charge (Load)     Imposed on Dividend Reinvestments	None		None		None		None		None		None
Redemption Fee	None		None		None		None		None		None
Exchange Fee	None		None		None		None		None		None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
Management Fees(d)	0.61	%	0.65	%	0.61	%	0.61	%	0.65	%	0.61	%
Distribution and/or Service       (12b-1) Fees(e)	1.00	%	1.00	%	1.00	%	None		None		None
Other Expenses       (including transfer agency fees)(f)	0.37	%	1.08	%	0.38	%	0.32	%	0.93	%	0.33	%
Total Annual Fund Operating Expenses	1.98	%	2.73	%	1.99	%	0.93	%	1.58	%	0.94	%
</R>

* Prior to April 14, 2003, Class I shares of Fundamental Growth were designated Class A.

(a) Certain securities dealers or other financial intermediaries may charge a fee to process a purchase or sale of shares; for instance, Merrill Lynch may charge clients a processing fee (currently $5.35) when a client buys or redeems shares.

(b) Some investors may qualify for reductions in or waivers of the sales charge (load).

(c) A stockholder may pay a deferred sales charge if such stockholder purchases $1 million or more and redeems within one year.<R>

(d) Fundamental Growth has agreed to pay, and the Fundamental Growth Pro Forma Combined Fund will pay, MLIM a monthly fee at the annual rate of 0.65% of average daily net assets for the first $1.0 billion; 0.625% of average daily net assets in excess of $1.0 billion but not exceeding $1.5 billion; 0.60% of average daily net assets in excess of $1.5 billion but not exceeding $5.0 billion; 0.575% of average daily net assets in excess of $5.0 billion but not exceeding $7.5 billion; and 0.55% of average daily net assets in excess of $7.5 billion. MLIM received a fee equal to 0.61% of Fundamental Growth’s average daily net assets for the fiscal year ended August 31, 2003.</R>

(e) Fundamental Growth and Growth Opportunity each call the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the term used in the Prospectuses of the Funds and all other Fund materials. If a stockholder holds Class C shares over time, it may cost that stockholder more in distribution and account maintenance (12b-1) fees than the maximum sales charge that such stockholder would have paid if he or she had bought one of the other classes.

(f) Financial Data Services, Inc., an affiliate of both MLIM and FAM, provides transfer agency services to Fundamental Growth and Growth Opportunity and will provide such services to the Combined Fund. The Funds each pay a fee for these services. Each Fund’s manager or investment adviser, and/or their affiliates, also provides certain accounting services to such Fund and each Fund reimburses its manager or investment adviser, or their affiliates, for such services.

 

4

EXAMPLES:

These examples assume that you invest $10,000 in the relevant Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund’s operating expenses remain the same. These assumptions are not meant to indicate that you will receive a 5% annual rate of return. The annual return may be more or less than the 5% used in these examples. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

EXPENSES IF YOU DID REDEEM YOUR SHARES:

<R>	1 Year	3 Years	5 Years	10 Years
Class A
Fundamental Growth	$639	$   880	$1,140	$1,882
Growth Opportunity	$701	$1,070	$1,463	$2,560
Fundamental Growth Pro Forma Combined Fund*	$640	$   883	$1,145	$1,892
Class B
Fundamental Growth	$600	$   918	$1,262	$2,091	**
Growth Opportunity	$673	$1,138	$1,630	$2,822	**
Fundamental Growth Pro Forma Combined Fund*	$601	$   921	$1,268	$2,102	**
Class C
Fundamental Growth	$301	$   621	$1,068	$2,306
Growth Opportunity	$376	$   847	$1,445	$3,061
Fundamental Growth Pro Forma Combined Fund*	$302	$   624	$1,073	$2,317
Class I
Fundamental Growth	$615	$   806	$1,013	$1,608
Growth Opportunity	$677	$   998	$1,340	$2,305
Fundamental Growth Pro Forma Combined Fund*	$616	$   809	$1,018	$1,619
</R>

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

<R>	1 Year	3 Years	5 Years	10 Years
Class A
Fundamental Growth	$639	$   880	$1,140	$1,882
Growth Opportunity	$701	$1,070	$1,463	$2,560
Fundamental Growth Pro Forma Combined Fund*	$640	$   883	$1,145	$1,892
Class B
Fundamental Growth	$200	$   618	$1,062	$2,091	**
Growth Opportunity	$273	$   838	$1,430	$2,822	**
Fundamental Growth Pro Forma Combined Fund*	$201	$   621	$1,068	$2,102	**
Class C
Fundamental Growth	$201	$   621	$1,068	$2,306
Growth Opportunity	$276	$   847	$1,445	$3,061
Fundamental Growth Pro Forma Combined Fund*	$202	$   624	$1,073	$2,317
Class I
Fundamental Growth	$615	$   806	$1,013	$1,608
Growth Opportunity	$677	$   998	$1,340	$2,305
Fundamental Growth Pro Forma Combined Fund*	$616	$   809	$1,018	$1,619
</R>

  * Assuming the Reorganization had taken place on August 31, 2003. <R>

** Assumes conversion to Class A shares approximately eight years after purchase.</R>

     The foregoing Fee Tables and Examples are intended to assist investors in understanding the costs and expenses that a stockholder of Growth Opportunity or Fundamental Growth bears directly or indirectly as compared to the costs and expenses that would be borne by such investors taking into account the Reorganization. The Examples set forth above assume reinvestment of all dividends and distributions and utilize a 5% annual rate of return as mandated by Commission filing regulations.

 

5

     The Examples should not be considered a representation of past or future expenses or annual rates of return, and actual expenses or annual rates of return may be more or less than those assumed for purposes of the Examples. See “Summary,” “The Reorganization—Potential Benefits to Stockholders of Growth Opportunity as a Result of the Reorganization,” “Comparison of the Funds—Management,” “—Purchase of Shares” and “—Redemption of Shares.”

Fundamental Growth	Fundamental Growth was organized under the laws of the State of Maryland on April 30, 1992. Fundamental Growth is a diversified, open end investment company.
	<R>As of August 31, 2003, Fundamental Growth had net assets of approximately $5.1 billion.</R>
Growth Opportunity	Growth Opportunity is a series of the Asset Program, which was incorporated under the laws of the State of Maryland on May 12, 1994. Growth Opportunity is a non-diversified, open-end investment company.
	<R>As of August 31, 2003, Growth Opportunity had net assets of approximately $112.5 million.</R>
Comparison of the Funds	Investment Objectives. The investment objectives of Fundamental Growth and Growth Opportunity are identical. Each Fund seeks to provide stockholders with long-term growth of capital.
	Investment Strategies. The investment strategies of each Fund are similar. Each Fund seeks to achieve its objective by investing in a portfolio of equity securities. Although the Funds may purchase securities of issuers with any market capitalization, Fundamental Growth emphasizes equity securities of companies with a market capitalization of $2 billion or more while Growth Opportunity emphasizes those with a market capitalization of $500 million or more. Each Fund emphasizes companies that have exhibited above-average growth rates in earnings and each normally invests at least 65% of its total assets in equity securities, including common stock, securities convertible into common stock, preferred stock and rights to subscribe for common stock.
	<R>Growth Opportunity may invest in the securities of small and emerging growth companies when such companies are expected to provide a higher total return than other equity investments. Fundamental Growth may also invest in small and emerging growth securities. Each Fund may also invest in debt securities, and Growth Opportunity may invest in debt securities rated below investment grade. Each Fund may invest a portion of its assets in short-term debt securities, such as commercial paper or U.S. Treasury bills.</R>
	For temporary defensive or emergency purposes, or to meet redemptions, each Fund may invest without limitation in short-term debt securities, such as commercial paper, and in U.S. Government bonds and money market securities.
	Each Fund may invest in equity securities of foreign issuers. Fundamental Growth may invest up to 10% of its total assets in securities of foreign issuers while Growth Opportunity may invest up to 20%. For neither Fund do these restrictions apply to investments in American Depositary Receipts. Each Fund may use derivatives such as futures and options for hedging purposes and may invest in rights and warrants to subscribe for common stock. Each Fund may invest in illiquid securities, restricted securities,

 

6

 

144A securities, when issued securities, delayed delivery securities, forward commitments, repurchase agreements and purchase and sale contracts, and may lend its portfolio securities.

Portfolio Management.  MLIM serves as the manager to Fundamental Growth. FAM serves as the investment adviser to Growth Opportunity. Lawrence R. Fuller has served as portfolio manager for Fundamental Growth since 1992. Mr. Fuller has served as portfolio manager for Growth Opportunity since 1998 and Thomas E. Burke has served as associate portfolio manager for Growth Opportunity since 2001. Mr. Fuller is expected to be the portfolio manager for the Combined Fund following the Reorganization.

Management Fees. Pursuant to a management agreement between MLIM and Fundamental Growth, Fundamental Growth pays MLIM a monthly fee at an annual rate calculated as follows:

Portion of average daily value of net assets:	Management Fee
Not exceeding $1 billion	0.650%
$1 billion to $1.5 billion	0.625%
$1.5 billion to $5 billion	0.600%
$5 billion to $7.5 billion	0.575%
Exceeding $7.5 billion	0.550%

<R>For the fiscal year ended August 31, 2003, MLIM received a fee equal to 0.61% of Fundamental Growth’s average daily net assets.</R>

Pursuant to an investment advisory agreement between FAM and the Asset Program, on behalf of Growth Opportunity, Growth Opportunity pays FAM a monthly fee at the annual rate of 0.65% of the Fund’s average daily net assets.

<R>MLIM has a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited (“MLAM U.K.”), an affiliate, under which MLIM may pay a fee for services it receives on behalf of Fundamental Growth. FAM also has a sub-advisory agreement with MLAM U.K. under which FAM may pay a fee for services it receives on behalf of Growth Opportunity.

After the Reorganization, the effective management fee rate applicable to the Fundamental Growth Pro Forma Combined Fund, at current asset levels, would be lower than Growth Opportunity’s current management fee rate.</R>

See “Summary — Fee Tables” and “Comparison of the Funds-Management.”

Class Structure.  Fundamental Growth offers five classes of shares: Class A, Class B, Class C, Class I and Class R. Growth Opportunity offers four classes of shares: Class A, Class B, Class C and Class I. Fundamental Growth’s Class A, Class B, Class C and Class I shares are substantially the same as Growth Opportunity’s Class A, Class B, Class C and Class I shares, respectively, except that they represent ownership interests in a different investment portfolio. See “Comparison of the Funds — Purchase of Shares,” “— Redemption of Shares,” and “Additional Information Stockholder Services.”

<R>Overall Annual Expense Ratio.  The tables below show the total operating expense ratio for each class of shares of Growth Opportunity and of Fundamental Growth (other than Class R) as of </R>

 

7

 

<R>August 31, 2003 and, assuming the Reorganization had taken place on August 31, 2003, the estimated pro forma operating expense ratio for each class of shares of the Fundamental Growth Pro Forma Combined Fund (in each case, including class specific distribution and account maintenance fees with respect to the Funds).

Total Operating Expense Ratios
Fund	Class A*	Class B	Class C	Class I*
Fundamental Growth	1.18%	1.97%	1.98%	0.93%
Growth Opportunity	1.83%	2.70%	2.73%	1.58%
Combined Fund Pro Forma Total Operating Expense Ratios**
	Class A	Class B	Class C	Class I
Fundamental Growth Pro Forma Combined Fund	1.19%	1.98%	1.99%	0.94%

</R>
*	Prior to April 14, 2003, Class A shares of Fundamental Growth were designated Class D and Class I shares of Fundamental Growth were designated Class A.
**	Assumes the Reorganization had taken place on August 31, 2003.

Redemption of Shares.  The redemption procedures for shares of Fundamental Growth are the same as the redemption procedures for shares of Growth Opportunity. For purposes of computing any contingent deferred sales charge (“CDSC”) that may be payable upon disposition of shares of Fundamental Growth distributed to Growth Opportunity stockholders in the Reorganization, the holding period of Growth Opportunity shares outstanding on the date the Reorganization takes place will be “tacked” onto the holding period of the shares of Fundamental Growth distributed in the Reorganization. See “Comparison of the Funds — Redemption of Shares.”

Exchange of Shares.  The exchange privilege for the Class A, Class B, Class C and Class I shares of Fundamental Growth is identical to the exchange privilege for the Class A, Class B, Class C and Class I shares of Growth Opportunity. Shareholders of each Fund may exchange their shares for shares of the same class of certain other funds advised by MLIM, FAM or their affiliates (“MLIM/FAM-advised funds”).

Dividends.  Each Fund distributes its net investment income, if any, and net realized capital gains, if any, at least annually. See “Comparison of the Funds — Dividends and Distributions.”

Net Asset Value.  Growth Opportunity and Fundamental Growth each determines the net asset value of each class of its shares once daily, Monday through Friday, as of the close of business on the New York Stock Exchange (“NYSE”), generally 4:00 p.m. Eastern time, on each day the NYSE is open for trading (a “Business Day”) based on prices at the time of closing. The Funds compute net asset value per share in the same manner. See “Comparison of the Funds — Additional Information — Net Asset Value.”

Voting Rights.  The corresponding voting rights of the stockholders of the Funds are substantially similar. See “Comparison of the Funds — Additional Information — Capital Stock.”

Other Significant Considerations.  Stockholder services, including exchange privileges, available to Growth Opportunity and Fundamental Growth stockholders are similar.

See “Comparison of the Funds — Additional Information — Stockholder Services.” An automatic dividend reinvestment plan is available to stockholders of each Fund. The plans are similar. See

 

8

 

“Comparison of the Funds — Automatic Dividend Reinvestment Plan.” Other stockholder services, including the provision of annual and semi-annual reports, are the same for both Funds. See “Comparison of the Funds — Stockholder Services.”

Tax Considerations

The Funds will receive an opinion of counsel with respect to the Reorganization to the effect that, among other things, neither Fundamental Growth nor Growth Opportunity will recognize any gain or loss on the transaction, and no stockholder of Growth Opportunity will recognize any gain or loss upon receipt of shares of Fundamental Growth. Consummation of the Reorganization is subject to the receipt of such opinion of counsel. See “The Reorganization — Tax Consequences of the Reorganization.” The Reorganization will not affect the status of Fundamental Growth as a regulated investment company.

 

9

RISK FACTORS AND SPECIAL CONSIDERATIONS

     Many of the investment risks associated with an investment in Fundamental Growth are substantially similar to those associated with an investment in Growth Opportunity. Such risks include market and selection risk, growth investing style risk, foreign market and foreign economy risk, currency risk, and borrowing and leverage risk, as well as the risks associated with investing in futures, forwards, options, warrants, indexed and inverse securities, repurchase agreements, depositary receipts, when issued securities, delayed delivery securities and forward commitments, small cap and emerging growth securities, convertible securities, restricted securities, illiquid and Rule 144A securities and securities lending. The risk factors associated with an investment in Fundamental Growth are set forth below and in the Fundamental Growth Prospectus, which accompanies this Proxy Statement and Prospectus, under the caption “Details about the Fund — Investment Risks.”

     The principal difference in risk between Fundamental Growth and Growth Opportunity is that Fundamental Growth is classified as a diversified investment company under the Investment Company Act and Growth Opportunity is classified as non-diversified under the Investment Company Act. Because a non-diversified fund may invest in a smaller number of issuers, Growth Opportunity is more exposed to developments affecting and the risks associated with individual issuers, which may have a greater impact on Growth Opportunity’s performance. To the extent that Growth Opportunity may concentrate its investments among fewer issuers than Fundamental Growth, Growth Opportunity’s exposure to selection, credit and market risks associated with such issuers may be greater than that of a diversified fund such as Fundamental Growth.

     Unless otherwise noted, each Fund is subject to the following main investment risks:

     Market and Selection Risk — Market risk is the risk that the stock market in one or more countries in which the Fund invests will go down in value, including the possibility that one or more markets will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform the stock markets, the relevant indices or other funds with similar investment objectives and investment strategies.

     Growth Investing Style Risk — Each Fund follows an investment style that favors growth investments. Historically, growth investments have performed best during the later stages of economic expansion. Therefore, the growth investing style may over time go in and out of favor. At times when the growth investing style is out of favor, a Fund may underperform other equity funds that use different investment styles.

     Non-Diversification Risk — Growth Opportunity is a non-diversified portfolio. As noted above, because it may invest in a smaller number of issues, Growth Opportunity is more exposed to developments affecting and the risks associated with individual issues, which may have a greater impact on Growth Opportunity’s performance.

<R></R>

     Foreign Market Risks — Each Fund may invest in securities of companies located in countries other than the United States. This may expose the Funds to risks associated with foreign investments.

• The value of holdings traded outside the United States (and any hedging transactions in foreign currencies) will be affected by changes in currency exchange rates.

• The costs of non-U.S. securities transactions tend to be higher than those of U.S. transactions.

• Foreign holdings may be adversely affected by foreign government action.

• International trade barriers or economic sanctions against certain non-U.S. countries may adversely affect these holdings.

     <R>Unless otherwise noted, each Fund also may be subject to certain other risks associated with its investments and investment strategies, including:</R>

     Currency Risk — Each Fund may be subject to currency risk. Securities in which Growth Opportunity invests may be denominated or quoted in currencies other than the U.S. dollar. Changes in foreign currency exchange rates affect the value of the Fund’s portfolio. Generally, when the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. dollars. The risk, generally known as “currency risk,” means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.

 

10

     Depositary Receipts — Each Fund may be subject to Depositary Receipt risk. The Fund may invest in securities of foreign issuers in the form of Depositary Receipts. American Depositary Receipts are receipts typically issued by an American bank or trust company that show evidence of underlying securities issued by a foreign corporation. European Depositary Receipts evidence a similar ownership arrangement. The Funds may also invest in unsponsored Depositary Receipts. The issuers of such unsponsored Depositary Receipts are not obligated to disclose material information in the United States. Therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts.

     Borrowing and Leverage Risk — Each Fund may borrow for temporary emergency purposes including to meet redemptions. Borrowing may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund’s portfolio. Borrowing will cost each Fund interest expense and other fees. The cost of borrowing may reduce a Fund’s return. Certain securities that each Fund buys may create leverage including, for example, options.

     <R>Securities Lending — Each Fund may lend securities with a value up to 33¹/3% of its assets to financial institutions that provide cash or securities issued or guaranteed by the U.S. Government as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, a Fund may lose money and there may be a delay in recovering the loaned securities. A Fund could also lose money if it does not recover the securities and/or the value of the collateral falls, including the value of investments made with cash collateral. These events could trigger adverse tax consequences to each Fund.</R>

     Convertibles — Each Fund may invest in convertibles. Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible’s value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risks as the underlying stock.

     Derivatives — Each Fund may use derivative instruments, including futures, forwards, options, indexed securities and inverse securities. Derivatives allow a Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

• Credit risk — the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to a Fund.

• Currency risk — the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment.

• Leverage risk — the risk, associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments), that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.

• Liquidity risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth.

     Each Fund may use derivatives for hedging purposes, including anticipatory hedges. Hedging is a strategy in which a Fund uses a derivative to offset the risks associated with other Fund holdings. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by a Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by a Fund, in which case any losses on the holdings being hedged may not be reduced and may be increased. There can be no assurance that a Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Funds are not required to use hedging and may choose not to do so.

     Indexed and Inverse Securities — Each Fund may invest in securities whose potential returns are directly related to changes in an underlying index, known as indexed securities. The return on indexed securities will rise when the underlying index rises and fall when the index falls. The Funds may also invest in securities whose return

 

11

is inversely related to changes in an index or interest rate (“inverse securities”). In general, the return on inverse securities will decrease when the underlying index or interest rate goes up and increase when that index or interest rate goes down. Certain indexed securities, including inverse securities, may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index or interest rate.

     Initial Public Offering Risk — Each Fund may be subject to initial public offering risk. The volume of initial public offerings and the levels at which the newly issued stocks trade in the secondary market are affected by the performance of the stock market overall. If initial public offerings are brought to the market, availability may be limited and the Fund may not be able to buy any shares at the offering price or if it is able to buy shares, it may not be able to buy as many shares at the offering price as it would like. In addition, the prices of securities involved in initial public offerings are often subject to greater and more unpredictable price changes than more established stocks.

     Warrants — Each Fund may invest in warrants. A warrant gives a Fund the right to buy a quantity of stock. The warrant specifies the amount of underlying stock, the purchase (or “exercise”) price, and the date the warrant expires. The Fund has no obligation to exercise the warrant and buy the stock. A warrant has value only if a Fund can exercise it or sell it before it expires. If the price of the underlying stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and the Fund loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock.

     Illiquid Securities — Each Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily sell within seven days at current value or that have contractual or legal restrictions on resale. If a Fund buys illiquid securities it may be unable to quickly sell them or may be able to sell them only at a price below current value.

     Restricted Securities — Each Fund may invest in restricted securities. Restricted securities have contractual or legal restrictions on their resale. They may include private placement securities that a Fund buys directly from the issuer. Private placement and other restricted securities may not be listed on an exchange and may have no active trading market.

     Restricted securities may be illiquid. The Funds may be unable to sell them on short notice or may be able to sell them only at a price below current value. A Fund may get only limited information about the issuer, so it may be less able to predict a loss. In addition, if a Fund’s management receives material adverse nonpublic information about the issuer, the Fund will not be able to sell the securities.

     Rule 144A Securities — Each Fund may invest in Rule 144A securities. Rule 144A securities are restricted securities that can be resold to qualified institutional buyers, but not to the general public. Rule 144A securities may have an active trading market, but carry the risk that the active trading market may not continue.

     Repurchase Agreements — Each Fund may enter into repurchase agreements. Under a repurchase agreement, the seller agrees to repurchase a security at a mutually agreed upon time and price. If the other party to a repurchase agreement defaults on its obligation under the agreement, a Fund may suffer delays and incur costs or even lose money in exercising its rights under the agreements.

     When Issued Securities, Delayed Delivery Securities and Forward Commitments — Each Fund may invest in when issued securities, delayed delivery securities and forward commitments. When issued and delayed delivery securities and forward commitments involve the risk that the security a Fund buys will lose value prior to its delivery to the Fund. There also is the risk that the security will not be issued or that the other party will not meet its obligation. If this occurs, the Fund both loses the investment opportunity for the assets it has set aside to pay for the security and any gain in the security’s price.

     Small Cap and Emerging Growth Securities — Small cap or emerging growth companies may have limited product lines or markets. They may be less financially secure than larger, more established companies. They may depend on a small number of key personnel. If a product fails, or if management changes, or there are other adverse developments, a Fund’s investment in a small cap or emerging growth company may lose substantial value.

     The securities of small cap or emerging growth companies generally trade in lower volumes and are subject to greater and more unpredictable price changes than larger cap securities or the stock market as a whole. In addition, small cap securities may be particularly sensitive to changes in interest rates, borrowing costs and earnings. Investing in small cap and emerging growth securities requires a longer term view.

 

12

COMPARISON OF THE FUNDS

Financial Highlights

     Fundamental Growth. The Financial Highlights table is intended to help you understand Fundamental Growth’s financial performance for the periods shown. Certain information reflects financial results for a single Fundamental Growth share. The total returns in the table represent the rate an investor would have earned or lost on an investment in shares of Fundamental Growth (assuming reinvestment of all dividends). The information has been audited by Ernst & Young LLP whose report, along with Fundamental Growth’s financial statements, is included in Fundamental Growth’s Annual Report which, accompanies this Proxy Statement and Prospectus.

     The following per share data and ratios have been derived from information provided in the financial statements.<R>

	Class A† For the Year Ended August 31										Class B For the Year Ended August 31
	2003		2002		2001		2000		1999		2003		2002		2001		2000		1999
Increase (Decrease) in   Net Asset Value:
Per Share Operating   Performance:
Net asset value,   beginning of year	$13.63		$17.23		$29.63		$21.77		$16.06		$12.74		$16.24		$28.06		$20.75		$15.39
Investment income   (loss) — net††	(.04	)	(.05	)	.03		(.04	)	.08		(.13	)	(.17	)	(.13	)	(.23	)	(.08	)
Realized and unrealized   gain (loss) on   investments and   foreign currency   transactions — net	1.30		(3.55	)	(10.52	)	9.80		6.31		1.20		(3.33	)	(9.95	)	9.32		6.05
Total from investment   operations	1.26		(3.60	)	(10.49	)	9.76		6.39		1.07		(3.50	)	(10.08	)	9.09		5.97
Less distributions:
Realized gain on     investments — net	—		—		—		(1.90	)	(.68	)	—		—		—		(1.78	)	(.61	)
In excess of     realized gain on     investments — net	—		—		(1.91	)	—		—		—		—		(1.74	)	—		—
Total distributions	—		—		(1.91	)	(1.90	)	(.68	)	—		—		(1.74	)	(1.78	)	(.61	)
Net asset value, end   of year	$14.89		$13.63		$17.23		$29.63		$21.77		$13.81		$12.74		$16.24		$28.06		$20.75
Total Investment   Return:†††
Based on net asset value   per share	9.24	%	(20.89	)%	(36.88	)%	46.67	%	40.67	%	8.40	%	(21.55	)%	(37.36	)%	45.55	%	39.58	%
Ratios to Average   Net Assets:
Expenses	1.18	%	1.18	%	1.04	%	1.01	%	1.05	%	1.97	%	1.96	%	1.81	%	1.77	%	1.83	%
Investment income   (loss) — net	(.29	)%	(.33	)%	.14	%	(.17	)%	.36	%	(1.08	)%	(1.10	)%	(.62	)%	(.92	)%	(.41	)%
Supplemental Data:
Net assets, end of year   (in thousands)	$1,544,751		$1,384,765		$1,296,787		$1,712,701		$795,607		$1,685,904		$1,802,731		$2,299,511		$3,411,474		$2,000,535
Portfolio turnover	108.34	%	92.35	%	149.86	%	98.71	%	52.72	%	108.34	%	92.35	%	149.86	%	98.71	%	52.72	%

† Prior to April 14, 2003, Class A shares were designated Class D. </R>

†† Based on average shares outstanding.

††† Total investment returns exclude the effects of sales charges.

 

13

<R>Fundamental Growth — Financial Highlights (continued)

	Class C For the Year Ended August 31										Class I† For the Year Ended August 31
	2003		2002		2001		2000		1999		2003		2002		2001		2000		1999
Increase (Decrease) in   Net Asset Value:
Per Share Operating   Performance:
Net asset value, beginning   of year	$12.82		$16.34		$28.26		$20.88		$15.45		$13.84		$17.46		$29.98		$21.99		$16.19
Investment income (loss)   —net††	(.14	)	(.17	)	(.13	)	(.24	)	(.09	)	(.01	)	(.02	)	.08		.02		.13
Realized and unrealized   gain (loss) on   investments   and foreign currency      transactions — net	1.21		(3.35	)	(10.01	)	9.39		6.10		1.33		(3.60	)	(10.64	)	9.91		6.37
Total from investment   operations	1.07		(3.52	)	(10.14	)	9.15		6.01		1.32		(3.62	)	(10.56	)	9.93		6.50
Less distributions:
Realized gain on     investments — net	—		—		—		(1.77	)	(.58	)	—		—		—		(1.94	)	(.70	)
In excess of realized gain     on investments — net	—		—		(1.78	)	—		—		—		—		(1.96	)	—		—
Total distributions	—		—		(1.78	)	(1.77	)	(.58	)	—		—		(1.96	)	(1.94	)	(.70	)
Net asset value, end   of year	$13.89		$12.82		$16.34		$28.26		$20.88		$15.16		$13.84		$17.46		$29.98		$21.99
Total Investment   Return:†††
Based on net asset value   per share	8.35	%	(21.54	)%	(37.35	)%	45.53	%	39.65	%	9.54	%	(20.73	)%	(36.71	)%	47.01	%	41.08	%
Ratios to Average   Net Assets:
Expenses	1.98	%	1.97	%	1.83	%	1.78	%	1.83	%	.93	%	.94	%	.80	%	.76	%	.81	%
Investment income   (loss) — net	(1.09	)%	(1.11	)%	(.66	)%	(.93	)%	(.43	)%	(.04	)%	(.09	)%	.35	%	.09	%	.60	%
Supplemental Data:
Net assets, end of year   (in thousands)	$608,176		$596,871		$616,400		$627,021		$307,988		$1,284,423		$1,170,884		$950,922		$882,072		$472,464
Portfolio turnover	108.34	%	92.35	%	149.86	%	98.71	%	52.72	%	108.34	%	92.35	%	149.86	%	98.71	%	52.72	%
</R>

† Prior to April 14, 2003, Class I shares were designated Class A.

†† Based on average shares outstanding.

††† Total investment returns exclude the effects of sales charges.

14

 

<R>Fundamental Growth — Financial Highlights (concluded)

	Class R
	For the period January 3, 2003† to August 31, 2003
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period	$12.13
Investment loss — net††	(.02	)
Realized and unrealized gain   on investments and foreign   currency transactions — net	1.84
Total from investment operations	1.82
Net asset value, end of period	$13.95
Total Investment Return:**
Based on net asset value per share	15.00	%‡
Ratios To Average Net Assets:
Expenses	1.42	%*
Investment loss — net	(.53	)%*
Supplemental Data:
Net assets, end of period (in thousands)	$14
Portfolio turnover	108.34	%

*	Annualized.
**	Total investment returns exclude the effects of sales charges.
†	Commencement of operations.
††	Based on average shares outstanding.
‡	Aggregate total investment return.</R>

 

15

Growth Opportunity — Financial Highlights

     <R>Growth Opportunity. The Financial Highlights table is intended to help you understand Growth Opportunity’s financial performance for the periods shown. Certain information reflects financial results for a single Growth Opportunity share. The total returns in the table represent the rate an investor would have earned or lost on an investment in shares of Growth Opportunity (assuming reinvestment of all dividends). The information for each of Growth Opportunity’s last five fiscal years has been audited by Deloitte & Touche LLP, whose report, along with Growth Opportunity’s financial statements, is included in Growth Opportunity’s Annual Report, which is available upon request. The information for the six months ended July 31, 2003 is unaudited.</R>

     The following per share data and ratios have been derived from information provided in the financial statements.

<R>
	Class A†
			For the Year ended January 31,
	For the Six Months Ended July 31, 2003 (unaudited)		2003		2002		2001		2000		1999
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period	$9.49		$13.61		$17.45		$21.93		$18.51		$13.42
Investment loss — net††	(.04	)	(.11	)	(.08	)	(.12	)	(.07	)	(.10	)
Realized and unrealized gain (loss)      on investments and foreign      currency transactions — net	1.50		(4.01	)	(3.33	)	(1.61	)	4.58		5.62
Total from investment operations	1.46		(4.12	)	(3.41	)	(1.73	)	4.51		5.52
Less distributions from realized      gain on investments — net	—		—		(.43	)	(2.75	)	(1.09	)	(.43	)
Net asset value, end of period	$10.95		$9.49		$13.61		$17.45		$21.93		$18.51
Total Investment Return:†††
Based on net asset value per share	15.38	%**	(30.27	)%	(19.55	)%	(8.57	)%	24.80	%	41.59	%
Ratios To Average Net Assets:
Expenses	1.79	%*	1.82	%	1.56	%	1.55	%	1.62	%	1.80	%
Investment loss — net	(.88	)%*	(1.03	)%	(.58	)%	(.55	)%	(.34	)%	(.64)	%
Supplemental Data:
Net assets, end of period (in thousands)	$17,150		$13,770		$11,847		$10,515		$7,659		$3,700
Portfolio turnover	63.97	%	89.63	%	131.76	%	100.88	%	81.27	%	40.59	%
</R>

† Prior to April 3, 2000, Class A shares were designated Class D.

†† Based on average shares outstanding.

††† Total investment returns exclude the effects of sales charges.

* Annualized.

** Aggregate total investment return.

 

16

<R>Growth Opportunity — Financial Highlights (continued)

	Class B
			For the Year ended January 31,
	For the Six Months Ended July 31, 2003 (unaudited)		2003		2002		2001		2000		1999
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period	$9.16		$13.25		$17.13		$21.44		$18.26		$13.27
Investment loss — net†	(.08	)	(.21	)	(.20	)	(.30	)	(.22	)	(.23	)
Realized and unrealized gain (loss) on      investments and foreign      currency transactions — net	1.43		(3.88	)	(3.25	)	(1.56	)	4.48		5.54
Total from investment operations	1.35		(4.09	)	(3.45	)	(1.86	)	4.26		5.31
Less distributions from realized gain      on investments — net	—		—		(.43	)	(2.45	)	(1.08	)	(.32	)
Net asset value, end of period	$10.51		$9.16		$13.25		$17.13		$21.44		$18.26
Total Investment Return:††
Based on net asset value per share	14.74	%**	(30.87)	%	(20.16)	%	(9.31)	%	23.76	%	40.41%
Ratios To Average Net Assets:
Expenses	2.66	%*	2.65	%	2.39	%	2.36	%	2.45	%	2.66%
Investment loss — net	(1.74	)%*	(1.87)	%	(1.42)	%	(1.38	)%	(1.16	)%	(1.50)%
Supplemental Data:
Net assets, end of period (in thousands)	$53,684		$50,933		$85,072		$109,589		$115,216		$69,601
Portfolio turnover	63.97	%	89.63	%	131.76	%	100.88	%	81.27	%	40.59	%

</R>

† Based on average shares outstanding.

†† Total investment returns exclude the effects of sales charges.

* Annualized.

** Aggregate total investment return.

17

 

<R>Growth Opportunity — Financial Highlights (continued)

	Class C
			For the Year ended January 31,
	For the Six Months Ended July 31, 2003 (unaudited)		2003		2002		2001		2000		1999
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period	$9.13		$13.21		$17.09		$21.40		$18.24		$13.26
Investment loss — net†	(.08	)	(.21	)	(.20	)	(.30	)	(.23	)	(.24	)
Realized and unrealized gain (loss) on      investments and foreign      currency transactions — net	1.43		(3.87	)	(3.25	)	(1.56	)	4.47		5.55
Total from investment operations	1.35		(4.08	)	(3.45	)	(1.86	)	4.24		5.31
Less distributions from realized gain      on investments — net	—		—		(.43	)	(2.45	)	(1.08	)	(.33	)
Net asset value, end of period	$10.48		$9.13		$13.21		$17.09		$21.40		$18.24
Total Investment Return:††
Based on net asset value per share	14.79	%**	(30.89	)%	(20.20	)%	(9.34	)%	23.68	%	40.39%
Ratios To Average Net Assets:
Expenses	2.69	%*	2.68	%	2.42	%	2.38	%	2.48	%	2.71%
Investment loss — net	(1.77	)%*	(1.90	)%	(1.44	)%	(1.41	)%	(1.20	)%	(1.55)%
Supplemental Data:
Net assets, end of period (in thousands)	$35,898		$33,258		$55,039		$69,476		$72,650		$40,710
Portfolio turnover	63.97	%	89.63	%	131.76	%	100.88	%	81.27	%	40.59	%

</R>

† Based on average shares outstanding.

†† Total investment returns exclude the effects of sales charges.

* Annualized.

** Aggregate total investment return.

 

18

<R>Growth Opportunity — Financial Highlights (concluded)

	Class I†
			For the Year ended January 31,
	For the Six Months Ended July 31, 2003 (unaudited)		2003		2002		2001		2000		1999
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period	$9.57		$13.69		$17.49		$22.01		$18.53		$13.42
Investment loss — net††	(.03	)	(.09	)	(.05	)	(.05	)	(.01	)	(.06	)
Realized and unrealized gain (loss) on      investments and foreign      currency transactions — net	1.51		(4.03	)	(3.32	)	(1.64	)	4.58		5.63
Total from investment operations	1.48		(4.12	)	(3.37	)	(1.69	)	4.57		5.57
Less distributions from realized gain      on investments — net	—		—		(.43	)	(2.83	)	(1.09	)	(.46	)
Net asset value, end of period	$11.05		$9.57		$13.69		$17.49		$22.01		$18.53
Total Investment Return:†††
Based on net asset value per share	15.46	%**	(30.09)	%	(19.27)	%	(8.37)	%	25.11	%	42.02%
Ratios To Average Net Assets:
Expenses	1.54	%*	1.56	%	1.30	%	1.31	%	1.36	%	1.56%
Investment loss — net	(.63	)%*	(.77	)%	(.33	)%	(.25	)%	(.07	)%	(.39	)%
Supplemental Data:
Net assets, end of period (in thousands)	$2,673		$2,146		$2,550		$2,142		$939		$582
Portfolio turnover	63.97	%	89.63	%	131.76	%	100.88	%	81.27	%	40.59	%

</R>

† Prior to April 3, 2000, Class I shares were designated Class A.

†† Based on average shares outstanding.

††† Total investment returns exclude the effects of sales charges.

* Annualized.

** Aggregate total investment return.

 

19

Investment Objectives and Policies

     The investment objectives of Fundamental Growth and Growth Opportunity are identical. Each Fund seeks to provide stockholders with long-term growth of capital. Each Fund also uses similar, although not identical, investment strategies in seeking to achieve its objective. See “How the Fund Invests” in the Fundamental Growth Prospectus and the Growth Opportunity Prospectus.

Investment Restrictions

     Growth Opportunity and Fundamental Growth have identical investment restrictions except as follows: (i) as a non-diversified fund, Growth Opportunity does not have a fundamental diversification restriction and (ii) Growth Opportunity has a non-fundamental borrowing limit of 10% of its total assets while Fundamental Growth’s non-fundamental borrowing limit equals 20% of its total assets. See “Investment Objective and Policies — Investment Restrictions” in the Growth Opportunity and Fundamental Growth Statements.

Management

     <R>Management and Advisory Arrangements. MLIM serves as the manager to Fundamental Growth. FAM, serves as the investment adviser to Growth Opportunity. MLIM has a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an affiliate, under which MLIM may pay a fee for services it receives on behalf of Fundamental Growth. FAM also has a sub-advisory agreement with MLAM U.K., under which FAM may pay a fee for services it receives on behalf of Growth Opportunity. MLIM will act as manager and MLAM U.K. as sub-adviser to the combined fund.</R>

     Pursuant to a management agreement between MLIM and Fundamental Growth, Fundamental Growth pays MLIM a monthly management fee at an annual rate calculated as follows:

Portion of average daily value of net assets:	Management Fee
Not exceeding $1 billion	0.650%
$1 billion to $1.5 billion	0.625%
$1.5 billion to $5 billion	0.600%
$5 billion to $7.5 billion	0.575%
Exceeding $7.5 billion	0.550%

     <R>Pursuant to an investment advisory agreement between FAM and the Asset Program, Growth Opportunity pays FAM a monthly management fee at the annual rate of 0.65% of the Fund’s average daily net assets.</R>

Purchase of Shares

     <R>The class structure and purchase and distribution procedures for shares of Growth Opportunity are substantially similar to those of Fundamental Growth. Currently, Fundamental Growth offers five classes of shares, designated Class A, Class B, Class C, Class I and Class R. Growth Opportunity offers four classes of shares, designated Class A, Class B, Class C and Class I. Fundamental Growth’s Class A, Class B, Class C and Class I shares are substantially the same as Growth Opportunity’s Class A, Class B, Class C and Class I shares, respectively, except that each Fund’s share classes represent ownership interests in a different investment portfolio. Fundamental Growth also offers Class R shares, which are available only to certain retirement plans. For a complete discussion of the classes of shares and the purchase and distribution procedures related thereto for Fundamental Growth and Growth Opportunity, see “Your Account — Merrill Lynch Select Pricing^SM System” and “— How to Buy, Sell, Transfer and Exchange Shares” in the Fundamental Growth Prospectus and “Pricing of Shares” and “How to Buy, Sell, Transfer and Exchange Shares” in the Growth Opportunity Prospectus.</R>   

     Sales Charges; 12b-1 Fees. Class A and Class I shares of Fundamental Growth and Growth Opportunity are sold subject to a front-end sales charge, and Class B and Class C shares of Fundamental Growth and Growth Opportunity are subject to a contingent deferred sales charge. Under separate class-specific plans adopted pursuant to Rule 12b-1 under the Investment Company Act, Fundamental Growth pays fees in connection with account maintenance for Class A, Class B, Class C and Class R shares and in connection with distribution for Class B, Class C and Class R shares (“12b-1 fees”), and Growth Opportunity pays 12b-1 fees in connection with account maintenance for Class A, Class B and Class C shares and in connection with distribution for Class B and Class C shares. Set forth below is a comparison of the 12b-1 fees as well as the maximum applicable sales charges for Fundamental Growth and Growth Opportunity:   

 

20

12b-1 Annual Fee Rates and Sales Charges
(as a percentage of average daily net assets of the applicable share class)

	Account Maintenance Fee		Distribution Fee		Maximum Front-End1 or Contingent Deferred Sales Charge2
Share Class	Fundamental Growth	Growth Opportunity	Fundamental Growth	Growth Opportunity	Fundamental Growth	Growth Opportunity
Class A Shares	0.25%	0.25%	None	None	5.25%	5.25%
Class B Shares	0.25%	0.25%	0.75%	0.75%	4.00%	4.00%
Class C Shares	0.25%	0.25%	0.75%	0.75%	1.00%	1.00%
Class I Shares	None	None	None	None	5.25%	5.25%
Class R Shares	0.25%	N/A	0.25%	N/A	None	N/A

1 Class A shares and Class I shares of Fundamental Growth and Growth Opportunity are subject to a front-end sales charge. See “Purchase of Shares — Initial Sales Charge Alternatives — Class A and Class D Shares” in the Fundamental Growth Statement and “Purchase of Shares — Initial Sales Charge Alternatives — Class I and Class A Shares” in the Growth Opportunity Statement.

2 Class B shares and Class C shares of Fundamental Growth and Growth Opportunity are subject to a contingent deferred sales charge. See “Purchase of Shares — Deferred Sales Charge Alternatives — Class B and Class C Shares” in the Fundamental Growth Statement and the Growth Opportunity Statement.

Redemption of Shares

     The redemption procedures for shares of Fundamental Growth are the same as the redemption procedures for shares of Growth Opportunity. For purposes of computing any CDSC that may be payable upon disposition of shares of Fundamental Growth distributed to Growth Opportunity stockholders in the Reorganization, the holding period of Growth Opportunity shares outstanding on the date the Reorganization takes place will be tacked to the holding period of the shares of Fundamental Growth distributed in the Reorganization. See “Your Account — Merrill Lynch Select Pricing^SM System,” “— How to Buy, Sell, Transfer and Exchange Shares” and “— Participation in Fee-Based Programs” in the Fundamental Growth Prospectus and “Pricing of Shares,” “How to Buy, Sell, Transfer and Exchange Shares” and “Participation in Fee-Based Programs” in the Growth Opportunity Prospectus.

Exchange of Shares

     <R>The exchange privilege for the Class A, Class B, Class C and Class I shares of Fundamental Growth is identical to the exchange privilege for the Class A, Class B, Class C and Class I shares of Growth Opportunity. U.S. stockholders of Class A, Class B, Class C and Class I shares of each Fund have an exchange privilege with certain other MLIM/FAM-advised funds, including Summit Cash Reserves Fund (“Summit”), a series of Financial Institutional Series Trust, which is a Merrill Lynch-sponsored money market fund specifically designated for exchange by holders of Class A, Class B, Class C, and Class I shares of MLIM/FAM-advised funds. Class I stockholders of each Fund may exchange their Class I shares for Class I shares of a second MLIM/FAM-advised fund if the stockholder holds any Class I shares of the second fund in his or her account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class I shares of the second fund. If the Class I stockholder wants to exchange Class I shares for shares of a second MLIM/FAM-advised fund, and the stockholder does not hold Class I shares of the second fund in his or her account at the time of the exchange and is not otherwise eligible to acquire Class I shares of the second fund, the stockholder will receive Class A shares of the second fund as a result of the exchange. Class A shares also may be exchanged for Class I shares of a second MLIM/FAM-advised fund at any time as long as, at the time of the exchange, the stockholder holds Class I shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class I shares of the second fund. Class A, Class B and Class C shares will be exchangeable with shares of the same class of other MLIM/FAM-advised funds. For purposes of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of a Fund is “tacked” to the holding period of the newly acquired shares of the other fund. Class A, Class B, Class C and Class I shares also will be exchangeable for shares of certain MLIM/FAM-advised funds specifically designated as available for exchange by holders of Class A, Class B, Class C or Class I shares. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege, and any shares used in an exchange must have been held by the stockholder for at least 15 days.</R>

 

21

Performance

     The following tables provide performance information for each class of shares of each Fund, including and excluding maximum applicable sales charges, for the periods indicated. Past performance is not indicative of future performance. For more information concerning the performance of Fundamental Growth, please refer to the Fundamental Growth Prospectus, the Fundamental Growth Statement and the Fundamental Growth Annual Report. For more information concerning the performance of Growth Opportunity, please refer to the Growth Opportunity Prospectus, the Growth Opportunity Statement, the Growth Opportunity Annual Report and the Growth Opportunity Semi-Annual Report.

Fundamental Growth
Average Annual Total Return

<R>
	Class A*		Class B		Class C		Class I*		Class R
Period	With Sales Charge†	Without Sales Charge	With Sales Charge†	Without Sale s Charge	With Sales Charge†	Without Sales Charge	With Sales Charge†	Without Sales Charge	Without Sales Charge
One Year Ended 8/31/03	3.51%	9.24%	4.40%	8.40%	7.35%	8.35%	3.79%	9.54%	—
Five Years Ended 8/31/03	1.29%	2.39%	1.25%	1.59%	1.59%	1.59%	1.55%	2.65%	—
Ten Years Ended 8/31/03	8.51%	9.09%	—	—	8.24%	8.24%	—	—	—
Inception (10/21/94) to 8/31/03	—	—	9.36%	9.36%	—	—	9.83%	10.50%	—
Inception (1/3/03) through 8/31/03	—	—	—	—	—	—	—	—	15.00%

</R>

* Prior to April 14, 2003, Class A shares were designated Class D and Class I shares were designated Class A. —-

† Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class I shares is 5.25%. The maximum CDSC on Class B shares is 4.0% and is reduced to 0% after six years. Class C shares are subject to a 1.0% CDSC for one year.

Growth Opportunity
Average Annual Total Return

<R>
	Class A*		Class B		Class C		Class I*
Period	With Sales Charge†	Without Sales Charge	With Sales Charge†	Without Sales Charge	With Sales Charge†	Without Sales Charge	With Sales Charge†	Without Sales Charge
One Year Ended 8/31/03	2.68%	8.37%	3.47%	7.47%	6.39%	7.39%	2.99%	8.70%
Five Years Ended 8/31/03	0.60%	1.69%	0.53%	0.85%	0.82%	0.82%	0.86%	1.96%
Inception (2/2/96) through 8/31/03	5.47%	6.22%	5.33%	5.33%	5.29%	5.29%	5.71%	6.47%

</R>

* Prior to April 3, 2000, Class I shares were designated Class A and Class A shares were designated Class D.

† Assumes the maximum applicable sales charge. The maximum initial sales charge on Class A and Class I shares is 5.25%. The maximum CDSC on Class B shares is 4.0% and is reduced to 0% after six years. Class C shares are subject to a 1.0% CDSC for one year.

Code of Ethics

     <R>Each Board has approved the same Code of Ethics under Rule 17j-1 of the Investment Company Act, which covers each Fund, the Fund’s investment adviser, the Fund’s sub-adviser and FAM Distributors, Inc., the Fund’s Distributor. The Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased or held by the respective Fund.</R>

Stockholder Rights

     Stockholders of Fundamental Growth are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a stockholder vote. Fundamental Growth does not intend to hold annual meetings of stockholders. Voting rights for Directors are not cumulative.

     Shares of Fundamental Growth to be issued to stockholders of Growth Opportunity in the Reorganization will be fully paid and, non-assessable, will have no preemptive rights, and will have the conversion rights described in this Proxy Statement and Prospectus and in the Fundamental Growth Prospectus. Each share of Fundamental Growth is entitled to participate equally in dividends declared by the Fund and in the net assets of the Fund on liquidation or dissolution after satisfaction of outstanding liabilities, except that Class A, Class B and Class C shares bear certain additional expenses. See “Stockholders’ Meetings” below for additional information. Rights attributable to shares of Growth Opportunity are similar to those described above.

 

22

Dividends

     It is the intention of each Fund to distribute substantially all of its net investment income. Each Fund distributes dividends from net investment income, if any, at least annually. All net realized capital gains, if any, will be distributed to each Fund’s stockholders at least annually. From time to time, each Fund may declare a special distribution at or about the end of the calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year.

Automatic Dividend Reinvestment Plan

     Fundamental Growth and Growth Opportunity each offers its stockholders an Automatic Dividend Reinvestment Plan (each, a “Plan” and collectively, the “Plans”) with the same terms. Pursuant to the Plans, dividends will be automatically reinvested, without sales charge, in additional full and fractional shares of the relevant Fund unless a stockholder has elected to receive such dividends in cash. For further information about the Plans, see “Your Account — How to Buy, Sell, Transfer and Exchange Shares” in the Fundamental Growth Prospectus and “Account Choices — How to Buy, Sell, Transfer and Exchange Shares” in the Growth Opportunity Prospectus.

     After the Reorganization, former stockholders of Growth Opportunity who elected to receive dividends in cash will continue to receive dividends in cash from the Combined Fund. Otherwise, dividends paid to all former Growth Opportunity stockholders will be automatically reinvested in shares of the Combined Fund. If a stockholder currently owns shares of Fundamental Growth and shares of Growth Opportunity, after the Reorganization that stockholder’s election with respect to the dividends of Fundamental Growth will control unless the stockholder specifically elects a different option.

Automatic Investment Plans

     <R>A stockholder of each Fund may make additions to an Investment Account at any time by purchasing Class I shares (if he or she is an eligible Class I investor) or Class A, Class B or Class C shares at the applicable public offering price. These purchases may be made either through the stockholder’s securities dealer, or by mail directly to the Transfer Agent, acting as agent for such securities dealer. Voluntary accumulation also can be made through a service known as the Fund’s Automatic Investment Plan. Under the Automatic Investment Plan, the Fund would be authorized, on a regular basis, to provide systematic additions to the Investment Account of such shareholder through charges of $50 or more to the regular bank account of the stockholder by either pre-authorized checks or automated clearing house debits. For investors who buy shares of the Fund through Blueprint, no minimum charge to the investor’s bank account is required. Alternatively, an investor that maintains a CMA^® Account may arrange to have periodic investments made in the Fund in amounts of $100 ($1 or more for retirement accounts) or more through the CMA^® Automated Investment Program. </R>

Systematic Withdrawal Plan

     <R>A stockholder may elect to receive systematic withdrawals from his or her Investment Account by check or through automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for stockholders that have acquired shares of the Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for stockholders with shares having a value of $10,000 or more.

     At the time of each withdrawal payment, sufficient shares are redeemed from those on deposit in the stockholder’s account to provide the withdrawal payment specified by the stockholder. The stockholder may specify the dollar amount and the class of shares to be redeemed. Redemptions will be made at net asset value as determined as of the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable.

     If the NYSE is not open for business on such date, the shares will be redeemed at the net asset value determined as of the close of business on the NYSE on the following business day. The check for the withdrawal payment will be mailed, or the direct deposit will be made, on the next business day following redemption. When a stockholder is making systematic withdrawals, dividends and distributions on all shares in the Investment Account are reinvested automatically in Fund shares. A stockholder’s systematic withdrawal plan may be terminated at any time, without charge or penalty, by the stockholder, the Fund, the Transfer Agent or the Distributor.</R>

 

23

     <R>With respect to redemptions of Class B or Class C shares pursuant to a systematic withdrawal plan, the maximum number of Class B or Class C shares that can be redeemed from an account annually shall not exceed 10% of the value of shares of such class in that account at the time the election to join the systematic withdrawal plan was made. Any CDSC that otherwise might be due on such redemption of Class B or Class C shares will be waived. Shares redeemed pursuant to a systematic withdrawal plan will be redeemed in the same order as Class B or Class C shares are otherwise redeemed. See “Purchase of Shares — Deferred Sales Charge Alternatives — Contingent Deferred Sales Charges — Class B and Class C Shares.” Where the systematic withdrawal plan is applied to Class B shares, upon conversion of the last Class B shares in an account to Class A shares, the systematic withdrawal plan will be applied thereafter to Class A shares if the stockholder so elects. See “Purchase of Shares — Deferred Sales Charge Alternatives — Conversion of Class B Shares to Class A Shares.” If an investor wishes to change the amount being withdrawn in a systematic withdrawal plan the investor should contact his or her Merrill Lynch Financial Advisor.

     Withdrawal payments generally should not be considered as dividends. Withdrawals generally are treated as sales of shares and may result in taxable gain or loss. If periodic withdrawals continuously exceed reinvested dividends, the stockholder’s original investment may be reduced correspondingly. Purchases of additional shares concurrent with withdrawals are ordinarily disadvantageous to the stockholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for shares of the Fund from investors that maintain a systematic withdrawal plan unless such purchase is equal to at least one year’s scheduled withdrawals or $1,200, whichever is greater. Automatic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals.

     Alternatively, a stockholder whose shares are held within a CMA^® or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA^® Systematic Redemption Program or the redemption program of the Retirement Account. The minimum fixed dollar amount redeemable is $50. The proceeds of systematic redemptions will be posted to the stockholder’s account three business days after the date the shares are redeemed. All redemptions are made at net asset value. A stockholder may elect to have his or her shares redeemed on the first, second, third or fourth Monday of each month, in the case of monthly redemptions, or of every other month, in the case of bimonthly redemptions. For quarterly, semiannual or annual redemptions, the stockholder may select the month in which the shares are to be redeemed and may designate whether the redemption is to be made on the first, second, third or fourth Monday of the month. If the Monday selected is not a business day, the redemption will be processed at net asset value on the next business day. The CMA^® Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automated Investment Program. For more information on the CMA^® Systematic Redemption Program, eligible stockholders should contact their Merrill Lynch Financial Advisor.</R>

Tax Information

     The tax consequences associated with investment in shares of Growth Opportunity are substantially identical to the tax consequences associated with investment in shares of Fundamental Growth. See “Your Account — Dividends and Taxes” in the Fundamental Growth Prospectus.

Portfolio Transactions

     The procedures for engaging in portfolio transactions are generally the same for Fundamental Growth and Growth Opportunity. After the Reorganization, the Combined Fund will use the portfolio transaction procedures of Fundamental Growth. For a discussion of Fundamental Growth’s procedures, see “Portfolio Transactions and Brokerage” in the Fundamental Growth Statement.

Portfolio Turnover

     <R>While neither Fund generally expects to engage in trading for short term gains, each Fund will effect portfolio transactions without regard to holding period if, in Fund management’s judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. The portfolio turnover rate is calculated by dividing the lesser of a Fund’s annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. government securities and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover may result in certain tax consequences, such as increased capital gain dividends and/or ordinary income dividends and in </R>

 

24

correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by a Fund. The following table illustrates the portfolio turnover rates for each Fund for the last two fiscal years:<R>

Fund	Portfolio Turnover Rate for Fiscal Year Ended August 31, 2003/January 31, 2003*	Portfolio Turnover Rate for Fiscal Year Ended August 31, 2002/January 31, 2002*
Fundamental Growth	108.34%	92.35%
Growth Opportunity	89.63%**	131.76%
</R>

* The fiscal year end of Fundamental Growth is August 31 and the fiscal year end of Growth Opportunity is January 31.

** The difference in portfolio turnover rate for Growth Opportunity for the fiscal years ended January 31, 2003 and 2002 resulted from a decrease in market volatility in fiscal 2003.

Additional Information

     Net Asset Value. Growth Opportunity and Fundamental Growth each determines the net asset value of each class of its shares once daily as of the close of business on the NYSE on each day during which the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m. Eastern time. Net asset value is computed by dividing the market value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time.

     Stockholder Services. Each Fund offers a number of stockholder services and investment plans designed to facilitate investment in shares of the Fund. In addition, U.S. stockholders of Class A, Class B, Class C and Class I shares of each Fund have an exchange privilege with certain other MLIM/FAM-advised funds. For a description of these services, see “Shareholder Services” in the Fundamental Growth Statement.

     Custodian. JPMorgan Chase Bank (“JPMorgan Chase”) acts as custodian for the cash and securities of Fundamental Growth. JPMorgan Chase’s principal business address is 4 Chase Metro Tech Center, 18th Floor, Brooklyn, New York 11245. The Bank of New York (“BONY”) acts as custodian of the cash and securities of Growth Opportunity. BONY’s principal business address is 90 Washington Street, 12th Floor, New York, New York 11286. It is anticipated that JPMorgan Chase will serve as the custodian of the Combined Fund.

     <R>Accounting Services. Each of Fundamental Growth and Growth Opportunity has entered into an agreement with State Street Bank and Trust Company (“State Street”), pursuant to which State Street provides certain accounting services to Fundamental Growth and Growth Opportunity. Fundamental Growth and Growth Opportunity each pay a fee for these services. Prior to January 1, 2001, MLIM provided accounting services to Fundamental Growth and FAM provided accounting services to Growth Opportunity and each was reimbursed by the respective Fund at its cost in connection with such services. MLIM and FAM continue to provide certain accounting services to Fundamental Growth and Growth Opportunity and the Funds reimburse MLIM and FAM for these services.</R>

     The tables below show the amounts paid by Fundamental Growth and Growth Opportunity to State Street and to MLIM or FAM, as applicable, for accounting services for the periods indicated.

<R>
	Fundamental Growth		Growth Opportunity
Fiscal Year*	Paid to State Street	Paid to MLIM	Paid to State Street	Paid to FAM
2003	$653,377	$102,353	$67,030	$    4,704
2002	$759,640	$138,674	$72,932	$  12,655
2001	$549,202**	$388,701	$  8,898**	$233,435
</R>

* The fiscal year end of Fundamental Growth is August 31 and the fiscal year end of Growth Opportunity is January 31.

** Represents payments pursuant to the agreement with State Street commencing on January 1, 2001.

     Transfer Agent, Dividend Disbursing Agent and Registrar. Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, serves as the transfer agent, dividend disbursing agent and registrar with respect to Fundamental Growth and Growth Opportunity (the “Transfer Agent”), pursuant to separate registrar, transfer agency and service agreements with each of the Funds. Each Fund pays between $16.00 and $20.00 for each Class A or Class I stockholder account and between $19.00 and $23.00 for each Class B or Class C stockholder account, depending on the level of service required. Fundamental Growth also pays $16.00 for each Class R stockholder account. Each Fund reimburses FDS for certain transaction charges and out-of-

 

25

 

<R>pocket expenses incurred by FDS under the transfer agency agreement. The following table sets forth the transfer agent fees paid by Fundamental Growth and Growth Opportunity for the last three fiscal years:

	Fiscal Year*
Fund	2003	2002	2001
Fundamental Growth	$13,391,502	$17,122,973	$8,940,944
Growth Opportunity	$     876,571	$     806,873	$   848,773
</R>

* The fiscal year end of Fundamental Growth is August 31 and the fiscal year end of Growth Opportunity is January 31.

     Capital Stock. Fundamental Growth is authorized to issue 1,750,000,000 shares of common stock, par value $.10 per share, which are divided into five classes, designated Class A, Class B, Class C, Class I and Class R shares. Class I Common Stock consists of 150,000,000 shares; Class B and Class R Common Stock each consists of 500,000,000 shares; and Class A and Class C Common Stock each consists of 300,000,000 shares. The Asset Program on behalf of Growth Opportunity is authorized to issue 57,500,000 shares of common stock, par value $0.10 per share, which are divided into five classes as follows: 6,250,000 Class A shares, 15,000,000 Class B shares, 15,000,000 Class C shares, 6,250,000 Class I shares and 15,000,000 Class R shares. Growth Opportunity does not currently offer Class R shares.

     The types of expenses attributable to Class A, Class B, Class C and Class I shares of Fundamental Growth and Class A, Class B, Class C and Class I shares of Growth Opportunity are identical in all respects.

     Stockholder Inquiries. Stockholder inquiries with respect to Fundamental Growth and Growth Opportunity may be addressed to the respective Fund by telephone at (609) 282-2800 or at the address set forth on the cover page of this Proxy Statement and Prospectus.

THE REORGANIZATION

General

     Under the Agreement and Plan (attached hereto as Exhibit I), Fundamental Growth will acquire substantially all of the assets, and assume substantially all of the liabilities, of Growth Opportunity, a series of the Asset Program, in exchange solely for an equal aggregate value of newly issued shares of common stock, with a par value of $.10 per share, of Fundamental Growth. Such shares of Fundamental Growth received by Growth Opportunity will then be distributed on a proportionate basis to the stockholders of Growth Opportunity in exchange for their shares of common stock of Growth Opportunity, with a par value of $.10 per share.

     Generally, the assets transferred by Growth Opportunity to Fundamental Growth will equal all investments of Growth Opportunity held in its portfolio after the close of business on the NYSE on the business day prior to the date the Reorganization takes place (“Valuation Time”) and all other assets of Growth Opportunity as of such time.

     Shares of Fundamental Growth will be distributed to stockholders of Growth Opportunity as follows: holders of Class A, Class B, Class C and Class I shares of Growth Opportunity as of the Valuation Time will be entitled to receive Class A, Class B, Class C and Class I shares, respectively, of Fundamental Growth (the “Corresponding Shares”). The aggregate net asset value of the Corresponding Shares of Fundamental Growth to be received by each stockholder of Growth Opportunity will equal the aggregate net asset value of the shares of Growth Opportunity owned by such stockholder as of the Valuation Time. See “Terms of the Agreement and Plan — Valuation of Assets and Liabilities” for information concerning the calculation of net asset value.

     <R>Since the Corresponding Shares will be issued at net asset value and the shares of Growth Opportunity will be valued at net asset value, the interests of holders of shares of Growth Opportunity and Fundamental Growth will not be diluted as a result of the Reorganization. Because the Combined Fund will have a larger asset base than either Growth Opportunity or Fundamental Growth as a result of the Reorganization, a stockholder likely will hold a lower percentage of ownership in the Combined Fund than he or she owned in either fund immediately prior to the Reorganization.</R>

Procedure

     The Board of Asset Program, including all of the Directors who are not “interested persons” of Growth Opportunity as defined in the Investment Company Act (the “non-interested Directors”), after determining that the Reorganization is in the best interests of Growth Opportunity, and that the interests of the stockholders of Growth Opportunity with respect to net asset value will not be diluted as a result of effecting the Reorganization,

 

26

unanimously approved the Agreement and Plan and the submission of such Agreement and Plan to the stockholders of Growth Opportunity for approval. The Board of Fundamental Growth, including all of the non-interested Directors, after determining that the Reorganization is in the best interests of Fundamental Growth and that the interests of the stockholders of Fundamental Growth with respect to net asset value will not be diluted as a result of effecting the Reorganization, unanimously approved the Agreement and Plan. No vote of the stockholders of Fundamental Growth is required.

     If the stockholders of Growth Opportunity approve the Agreement and Plan at the Meeting, and all required regulatory approvals are obtained and certain conditions are either met or waived, it is presently anticipated that the Reorganization will take place as soon as practicable after such approval.

     The Board of the Asset Program recommends that stockholders of Growth Opportunity approve the Agreement and Plan.

Terms of the Agreement and Plan

     The following is a summary of the significant terms of the Agreement and Plan. This summary is qualified in its entirety by reference to the Agreement and Plan, a copy of which is attached hereto as Exhibit I.

     Valuation of Assets and Liabilities. Full shares of Fundamental Growth, and to the extent necessary, fractional shares of Fundamental Growth, of an aggregate net asset value equal to the aggregate net asset value of the assets of Growth Opportunity, determined as hereinafter provided, shall be issued by Fundamental Growth, in return for such assets of Growth Opportunity. The respective assets of the Funds will be valued as of the Valuation Time. The assets of each Fund will be valued according to the procedures set forth under “Your Account—How Shares Are Priced” in the Fundamental Growth Prospectus. Such valuation and determination shall be made by Fundamental Growth in cooperation with Growth Opportunity. Purchase orders for Growth Opportunity shares that have not been confirmed as of the Valuation Time will be treated as assets of Growth Opportunity for purposes of the Reorganization. Redemption requests that have not settled as of the Valuation Time will be treated as liabilities for purposes of the Reorganization.

     Distribution of Corresponding Shares. As soon as practicable after the Closing Date (the next full business day following the Valuation Time), Growth Opportunity will liquidate and distribute the Corresponding Shares of Fundamental Growth received by it pro rata to its stockholders in exchange for such stockholders’ proportional interests in Growth Opportunity. The Corresponding Shares of Fundamental Growth received by the stockholders will have the same aggregate net asset value as each such stockholders’ interest in Growth Opportunity held on the Closing Date. Generally, the liquidation and distributions will be accomplished by opening new accounts on the books of Fundamental Growth in the names of the stockholders of Growth Opportunity and transferring to those stockholders’ accounts the shares of Fundamental Growth representing such stockholders’ interests in Growth Opportunity.

     No sales charge or fee of any kind will be charged to stockholders of Growth Opportunity in connection with their receipt of Corresponding Shares of Fundamental Growth in the Reorganization.

     <R>Expenses. The expenses of the Reorganization that are directly attributable to Growth Opportunity are expected to include the expenses incurred in preparing, printing and mailing the proxy materials to be used in connection with the meeting of stockholders of the Fund to consider the Reorganization and the expenses related to the solicitation of proxies to be voted at that meeting. The expenses of the Reorganization that are directly attributable to Growth Opportunity will be borne by Growth Opportunity. The expenses directly attributable to Fundamental Growth are expected to include the expenses incurred in printing sufficient copies of Fundamental Growth’s Prospectus and Annual Report that will accompany the mailing of the Proxy Statement and Prospectus. The expenses of the Reorganization that are directly attributable to Fundamental Growth will be borne by MLIM. Certain other expenses of the Reorganization, including expenses in connection with obtaining the opinion of counsel with respect to certain tax matters, the preparation of the Agreement and Plan, legal, transfer agent and audit fees, will be borne equally by Growth Opportunity and MLIM, which has agreed to bear Fundamental Growth’s Reorganization expenses. The expenses of the Reorganization attributable to Fundamental Growth (borne by MLIM) and Growth Opportunity are currently estimated to be approximately $110,500 and $257,800, respectively.</R>

     Required Approvals. Consummation of the Reorganization is conditioned upon the approval by the Board of Fundamental Growth and the Board of the Asset Program, as well as the receipt of certain regulatory approvals. Approval of the Agreement and Plan by Growth Opportunity also requires the affirmative vote of the stockholders of Growth Opportunity representing a majority of the outstanding shares of Growth Opportunity entitled to be

 

27

voted thereon. All classes of shares of Growth Opportunity will vote together as a single class in approving the Agreement and Plan. A vote of the stockholders of Fundamental Growth is not required.

     Termination of Growth Opportunity. Following the transfer of the assets and liabilities of Growth Opportunity to Fundamental Growth and distribution of the Corresponding Shares of Fundamental Growth to Growth Opportunity’s stockholders, the Asset Program will take action to terminate Growth Opportunity as a series of the Asset Program under Maryland law.

     <R>Amendments and Conditions. Prior to stockholder approval of the Reorganization, the Agreement and Plan may be amended, modified, superseded, canceled, renewed or extended, and the terms of the covenants may be waived, by a written instrument executed by the Funds or, in the case of a waiver, by the Fund waiving compliance. At any time prior to the Closing Date, any of the terms or conditions of the Agreement and Plan may be waived by the Board of either Fund (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action will not have a material adverse effect on the benefits intended under the Agreement and Plan to the stockholders of the applicable Fund, on behalf of which such action is taken. In addition, the Board of Directors of each Fund has delegated to its investment adviser, FAM or MLIM, as applicable, the ability to make non-material changes to the terms of the Reorganization if FAM or MLIM, as applicable, deems it to be in the best interests of the Fund to do so. The obligations of Growth Opportunity and Fundamental Growth pursuant to the Agreement and Plan are subject to various conditions, including a registration statement on Form N-14 becoming effective, approval of the Reorganization by Growth Opportunity’s stockholders, an opinion of counsel being received as to certain tax matters and the continuing accuracy of various representations and warranties being confirmed by the respective parties. The Boards may amend the Agreement and Plan to change the terms of the Reorganization at any time prior to the approval thereof by the stockholders of Growth Opportunity.

     Termination, Postponement and Waivers. The Agreement and Plan may be terminated, and the Reorganization abandoned at any time, whether before or after adoption thereof by the stockholders of Growth Opportunity, prior to the Closing Date, or the Closing Date may be postponed with respect to the Reorganization: (i) by mutual consent of the Boards of Fundamental Growth and Growth Opportunity; (ii) by the Board of Growth Opportunity if any condition of Growth Opportunity’s obligations with respect to the Reorganization has not been fulfilled or waived by such Board; or (iii) by the Board of Fundamental Growth if any condition of Fundamental Growth’s obligations with respect to the Reorganization has not been fulfilled or waived by such Board.</R>

Potential Benefits to Stockholders of Growth Opportunity as a Result of the Reorganization

     <R>FAM and the Board of Growth Opportunity have determined, after considering numerous factors including the estimated costs associated with the Reorganization, that the Reorganization is in the best interests of Growth Opportunnity and its stockholders. Following the Reorganization, Growth Opportunity stockholders will be invested in a diversified open-end fund that has substantially the same investment objective as Growth Opportunity and substantially the same sales charges and account maintenance and distribution fees. In addition, stockholders of Growth Opportunity are likely to experience certain benefits, including potential future economies of scale and the potential for greater flexibility in portfolio management due to increased asset size. Also, at current asset levels, the effective advisory fee rate for the Combined Fund would be lower than the current contractual advisory fee rate for Growth Opportunity.

     FAM and the Board of Growth Opportunity believe that the Reorganization will also benefit the stockholders of Growth Opportunity because after the Reorganization, certain fixed costs, such as printing stockholder reports and proxy statements, legal expenses, audit fees, registration fees, mailing costs and other expenses would be spread across a larger asset base, thereby potentially lowering the expense ratio borne by stockholders of Growth Opportunity.

     To illustrate the potential economies of scale for Growth Opportunity stockholders, the following table sets forth the total operating expense ratio for each class of shares as of August 31, 2003.

	Class A Shares	Class B Shares*	Class C Shares	Class I Shares
Fundamental Growth	1.18%	1.97%	1.98%	0.93%
Growth Opportunity	1.83%	2.70%	2.73%	1.58%
Fundamental Growth Pro Forma    Combined Fund**	1.19%	1.98%	1.99%	0.94%
</R>

* Class B shares automatically convert to Class A shares about eight years after initial purchase and will no longer be subject to distribution fees.

** Assuming the Reorganization had taken place on August 31, 2003.

 

28

     The following tables set forth the net assets of the Funds for each of their last three fiscal year ends and as of August 31, 2003.<R>

Fundamental Growth		Growth Opportunity
As of 8/31/01	$5,163,619,913	As of 1/31/01	$191,721,691
As of 8/31/02	$4,955,250,576	As of 1/31/02	$154,508,130
As of 8/31/03	$5,123,268,019	As of 1/31/03	$100,107,388
		As of 8/31/03	$112,497,210

     FAM and the Board of Growth Opportunity do not believe that Growth Opportunity is likely to attract significant assets and believe that it is likely to experience net redemptions resulting over time in a higher operating expense ratio. As discussed above, in the Reorganization, stockholders of Growth Opportunity should benefit by becoming invested in an open-end fund with a similar investment objective, a lower effective advisory fee and a larger asset base that has a broader, more widely diversified portfolio of assets.</R>

     In approving the Reorganization, the Board of Growth Opportunity also determined that the interests of existing stockholders of Growth Opportunity would not be diluted as a result of the Reorganization.

Tax Consequences of the Reorganization

     Summary. The Asset Program, on behalf of Growth Opportunity, and Fundamental Growth will receive an opinion of counsel with respect to the Reorganization to the effect that, among other things, neither Fund will recognize any gain or loss on the transaction, and no stockholder of Growth Opportunity will recognize any gain or loss upon receipt of shares of Fundamental Growth in the Reorganization.

     <R>General. The Reorganization has been structured with the intention that it qualify for Federal income tax purposes as a tax-free reorganization under Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the “Code”). Fundamental Growth and Growth Opportunity have elected and qualified for the special tax treatment afforded “regulated investment companies” under the Code, and Fundamental Growth intends to continue to so qualify after the Reorganization. The Funds have requested an opinion of counsel to the effect that for Federal income tax purposes: (i) the transfer by Growth Opportunity of substantially all of its assets to Fundamental Growth in exchange solely for Corresponding Shares of Fundamental Growth as provided in the Agreement and Plan will constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code, and each Fund will be deemed to be a “party” to a reorganization within the meaning of Section 368(b); (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized by Growth Opportunity as a result of the transfer of its assets solely in exchange for Fundamental Growth shares or on the distribution of the Corresponding Shares of Fundamental Growth to its stockholders under Section 361(c)(1); (iii) under Section 1032 of the Code, no gain or loss will be recognized by Fundamental Growth on the receipt of assets of Growth Opportunity in exchange for Fundamental Growth shares; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized by the stockholders of Growth Opportunity on the receipt of Corresponding Shares of Fundamental Growth in exchange for their shares of Growth Opportunity; (v) in accordance with Section 362(b) of the Code, the tax basis of Growth Opportunity’s assets in the hands of Fundamental Growth will be the same as the tax basis of such assets in the hands of Growth Opportunity immediately prior to the consummation of the Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the Reorganization, the tax basis of the Corresponding Shares of Fundamental Growth received by the stockholders of Growth Opportunity in the Reorganization (including fractional shares to which they may be entitled) will be equal to the tax basis of the shares of Growth Opportunity surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a stockholder’s holding period for the Corresponding Shares of Fundamental Growth (including fractional shares to which he/she may be entitled) will be determined by including the period for which such stockholder held Growth Opportunity shares exchanged therefor, provided that such Growth Opportunity shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, Fundamental Growth’s holding period with respect to Growth Opportunity’s assets transferred will include the period for which such assets were held by Growth Opportunity; and (ix) pursuant to Section 381(a) of the Code and regulations thereunder, Fundamental Growth will succeed to and take into account certain tax attributes of Growth Opportunity, such as earnings and profits, capital loss carryovers and method of accounting.</R>

     Under Section 381(a) of the Code, Fundamental Growth will succeed to and take into account certain tax attributes of Growth Opportunity, including, but not limited to, earnings and profits, any capital loss carryovers and method of accounting. The Code, however, contains special limitations with regard to the use of capital losses and other similar items in the context of certain reorganizations, including tax-free reorganizations pursuant to

 

29

 

Section 368(a)(1)(C) of the Code, which could reduce the benefit of these attributes to Fundamental Growth. [ As of August 31, 2003, Growth Opportunity had net realized losses and unrealized appreciation. Fundamental Growth had significant net realized capital losses and net unrealized appreciation as of the same date.] After the Reorganization, stockholders will benefit from the ability of the Combined Fund to use realized capital losses to offset any realized capital gains and will also share in any unrealized appreciation (and the tax consequences on realization) of the Combined Fund.

     Stockholders should consult their tax advisers regarding the effect of the Reorganization in light of their individual circumstances. As the foregoing relates only to Federal income tax consequences, stockholders also should consult their tax advisers as to the foreign, state and local tax consequences of the Reorganization.

     Status as a Regulated Investment Company. Fundamental Growth and Growth Opportunity have elected and qualified to be taxed as regulated investment companies under Sections 851-855 of the Code and, after the Reorganization, Fundamental Growth intends to continue to so qualify.

Capitalization

     <R>The following tables set forth as of October 24, 2003: (i) the capitalization of Fundamental Growth, (ii) the capitalization of Growth Opportunity, and (iii) the pro forma capitalization of the Fundamental Growth Pro Forma Combined Fund as adjusted to give effect to the Reorganization assuming the Reorganization was consummated as of that date.

Capitalization of Fundamental Growth, Growth Opportunity and
Fundamental Growth Pro Forma Combined Fund as of October 24, 2003

Fundamental Growth

<R>	Class A	Class B	Class C	Class I	Class R
Total Net Assets:	$1,593,680,010	$1,685,731,236	$623,672,884	$1,317,001,320	$643,127
Shares Outstanding:	104,271,728	119,009,764	43,782,002	84,592,638	44,929
Net Asset Value Per Share:	$15.28	$14.16	$14.24	$15.57	$14.31
</R>

Growth Opportunity

<R>	Class A	Class B	Class C	Class I	Class R
Total Net Assets:	$18,245,474	$55,088,532	$36,944,968	$2,568,937	$   —
Shares Outstanding:	1,560,979	4,916,213	3,307,295	217,649	—
Net Asset Value Per Share:	$11.69	$11.21	$11.17	$11.80	$   —
</R>

Fundamental Growth Pro Forma Combined Fund*

<R>	Class A	Class B	Class C	Class I	Class R
Total Net Assets:	$1,611,925,484	$1,740,819,768	$660,617,852	$1,319,570,257	$643,127
Shares Outstanding:	105,465,498	122,898,921	46,375,549	84,757,644	44,929
Net Asset Value Per Share:	$15.28	$14.16	$14.24	$15.57	$14.31

* Total Net Assets and Net Asset Value Per Share include the aggregate value of Growth Opportunity’s net assets that would have been transferred to Fundamental Growth had the Reorganization been consummated on October 24, 2003. The data does not take into account expenses incurred in connection with the Reorganization or the actual number of shares that would have been issued. No assurance can be given as to how many shares of Fundamental Growth the stockholders of Growth Opportunity will receive on the date the Reorganization takes place, and the foregoing should not be relied upon to reflect the number of shares of Fundamental Growth that actually will be received on or after such date.</R>

INFORMATION CONCERNING THE SPECIAL MEETING

Date, Time and Place of Meeting

     The Meeting will be held on Tuesday, December 9, 2003, at the offices of Fund Asset Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey at 9: 00 a.m. Eastern time.

Solicitation, Revocation and Use of Proxies

     A stockholder executing and returning a proxy has the power to revoke it at any time prior to its exercise by executing a superseding proxy or by submitting a notice of revocation to the Secretary of Growth Opportunity. Although mere attendance at the Meeting will not revoke a proxy, a stockholder present at the Meeting may withdraw his or her proxy and vote in person.

30

     All shares represented by properly executed proxies, unless such proxies previously have been revoked, will be voted at the Meeting in accordance with the directions on the proxies; if no direction is indicated on a properly executed proxy, such shares will be voted “FOR” approval of the Agreement and Plan.

     It is not anticipated that any other matters will be brought before the Meeting. If, however, any other business properly is brought before the Meeting, proxies will be voted in accordance with the judgment of the persons designated on such proxies.

Record Date and Outstanding Shares

     <R>Only holders of record of shares of Growth Opportunity at the close of business on the Record Date are entitled to vote at the Meeting or any adjournment thereof. At the close of business on the Record Date, the number of shares of Growth Opportunity issued, outstanding and entitled to vote was 10,052,576.</R>

Security Ownership of Certain Beneficial Owners and Management of Fundamental Growth and Growth Opportunity

     <R>At the Record Date, the Directors and officers of Fundamental Growth as a group owned in the aggregate less than 1% of the outstanding shares of Fundamental Growth and owned in the aggregate less than 1% of the outstanding shares of common stock of Merrill Lynch & Co., Inc.</R>

     To the knowledge of Fundamental Growth, as of the Record Date, except as set forth in Exhibit II to this Proxy Statement and Prospectus, no person or entity owned of record or beneficially 5% or more of any class of the outstanding shares of Fundamental Growth.

     <R>At the Record Date, the Directors and officers of the Asset Program as a group owned in the aggregate less than 1% of the outstanding shares of Growth Opportunity and owned in the aggregate less than 1% of the outstanding shares of common stock of Merrill Lynch & Co., Inc.</R>

     To the knowledge of Growth Opportunity, as of the Record Date, except as set forth in Exhibit II to this Proxy Statement and Prospectus, no person or entity owned of record or beneficially 5% or more of any class of the outstanding shares of Growth Opportunity.

Voting Rights and Required Vote

     For purposes of this Proxy Statement and Prospectus, each share of each class of Growth Opportunity is entitled to one vote. Approval of the Agreement and Plan by Growth Opportunity requires the affirmative vote of the stockholders of Growth Opportunity representing a majority of the outstanding shares of Growth Opportunity entitled to be voted thereon. All classes of shares of Growth Opportunity will vote together as a single class in approving the Agreement and Plan. A vote of the stockholders of Fundamental Growth is not required.

     Stockholders of Growth Opportunity are not entitled to demand the fair value of their shares upon a transfer of assets and will be bound by the terms of the Reorganization if approved at the Meeting. However, any stockholder of Growth Opportunity may redeem his or her respective shares prior to the Reorganization.

     A quorum for purposes of the Meeting consists of a majority of the shares of Growth Opportunity entitled to vote at the Meeting, present in person or by proxy. If, by the time scheduled for the Meeting, a quorum of the stockholders of Growth Opportunity is not present or if a quorum is present but sufficient votes in favor of the Agreement and Plan are not received from the stockholders of Growth Opportunity, the persons named as proxies may propose one or more adjournments of the Meeting to permit further solicitation of proxies from stockholders. Any such adjournment will require the affirmative vote of a majority of the shares of Growth Opportunity present in person or by proxy and entitled to vote at the session of the Meeting to be adjourned. The persons named as proxies will vote in favor of any such adjournment if they determine that adjournment and additional solicitation are reasonable and in the interests of Growth Opportunity’s stockholders.

ADDITIONAL INFORMATION

     The expenses of preparation, printing and mailing of the enclosed form of proxy, the accompanying Notice and this Proxy Statement and Prospectus will be borne by Growth Opportunity. Growth Opportunity will reimburse banks, brokers and others for their reasonable expenses in forwarding proxy solicitation materials to the beneficial owners of shares of Growth Opportunity and will reimburse certain persons that the Fund may employ for their reasonable expenses in assisting in the solicitation of proxies from such beneficial owners of shares of the Fund. See “The Reorganization — Terms of the Agreement and Plan of Reorganization — Expenses.”

 

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     <R>In order to obtain the necessary quorum at the Meeting, supplementary solicitation may be made by mail, telephone, telegraph or personal interview by officers of Growth Opportunity. Growth Opportunity has retained Georgeson Shareholder Communications, Inc., with offices at 17 State Street, New York, New York 10004, to aid in the solicitation of proxies at a cost of approximately $10,000, plus out-of-pocket expenses, which are estimated to be $48,614.</R>

     Broker-dealer firms, including Merrill Lynch, holding shares of Growth Opportunity in “street name” for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares before the Meeting. Broker-dealer firms, including Merrill Lynch, will not be permitted to vote without instructions with respect to the approval of the Agreement and Plan. Properly executed proxies that are returned but that are marked “abstain” or with respect to which a broker-dealer has received no instructions and therefore has declined to vote on the proposal (“broker non-votes”) will be counted as present for the purposes of determining a quorum. Such abstentions and broker non-votes will have the same effect as a vote against approval of the Agreement and Plan.

     This Proxy Statement and Prospectus does not contain all of the information set forth in the registration statements and the exhibits relating thereto that the Funds have filed with the Commission under the Securities Act and the Investment Company Act, to which reference is hereby made.

     Each Fund files reports and other information with the Commission. Reports, proxy statements, registration statements and other information filed by each Fund can be inspected and copied at the public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such materials also can be obtained from the public reference section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants, including the Funds, that file electronically with the Commission.

LEGAL PROCEEDINGS

     There are no material legal proceedings to which either Fund is a party.

LEGAL OPINIONS

     Certain legal matters in connection with the Reorganization will be passed upon for Fundamental Growth and Growth Opportunity by Sidley Austin Brown & Wood LLP, 787 Seventh Avenue, New York, New York 10019.

EXPERTS

     <R>The financial highlights of the Funds, other than the unaudited information, included in this Proxy Statement and Prospectus have been so included with respect to Fundamental Growth in reliance on the report of Ernst & Young LLP (“E&Y”) and with respect to Growth Opportunity in reliance on the report of Deloitte & Touche, LLP (“D&T”), independent auditors, given on their authority as experts in auditing and accounting. The principal business address of E&Y is 99 Wood Avenue South, P.O. Box 751, Iselin, New Jersey 08830 and the principal business address of D&T is 750 College Road East, Princeton, New Jersey 08540. E&Y will serve as the independent auditors for the Fundamental Growth Pro Forma Combined Fund after the Reorganization.</R>

STOCKHOLDERS’ MEETINGS

     Stockholders of each Fund are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on any matter submitted to a stockholder vote. As Maryland corporations, neither Fund intends to hold meetings of stockholders in any year in which the Investment Company Act does not require stockholders to act upon any of the following matters: (i) election of Directors; (ii) approval of a management agreement; or (iii) approval of distribution arrangements. The Charter of each Fund does not require it to hold an annual meeting of stockholders. Each Fund will be required, however, to call special meetings of its stockholders in accordance with the requirements of the Investment Company Act to seek approval of new management and advisory arrangements or of a change in the fundamental policies, objectives or restrictions. Each Fund also would be required to hold a stockholders’ meeting to elect new Directors at such time as less than a majority of the Directors holding office have been elected by stockholders. The by-laws of each Fund provide that a stockholders’ meeting may be called with respect to such Fund at any time by a majority of the Directors, the President, or on the written request of the holders of at least 10% of the outstanding capital stock of such Fund entitled to vote at such meeting.

 

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STOCKHOLDER PROPOSALS

     A stockholder proposal intended to be presented at any subsequent meetings of stockholders of Growth Opportunity must be received by Growth Opportunity within a reasonable time before the solicitation relating to such meeting is to be made by the Board of Growth Opportunity in order to be considered in Growth Opportunity’s proxy statement and form of proxy relating to the meeting. The persons named as proxies in any future proxy materials of Growth Opportunity may exercise discretionary authority with respect to any stockholder proposal presented at any subsequent meeting of the stockholders of Growth Opportunity if written notice of such proposal has not been received by Growth Opportunity within a reasonable time before Growth Opportunity begins to print and mail the proxy solicitation materials to be used in connection with such meeting. Written proposals with regard to Growth Opportunity should be sent to the Secretary of the Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 08536. If the Reorganization is approved, the Meeting will be the last meeting for Growth Opportunity’s stockholders.

By Order of the Board of Directors,

Phillip S. Gillespie
Secretary
The Asset Program, Inc., on behalf of
Mercury Growth Opportunity Fund

 

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EXHIBIT 1

AGREEMENT AND PLAN OF REORGANIZATION

     <R>THIS AGREEMENT AND PLAN OF REORGANIZATION (“Agreement”) is made as of the 3rd day of November, 2003, by and between Merrill Lynch Fundamental Growth Fund, Inc., a Maryland corporation (“Fundamental Growth Fund”), and The Asset Program, Inc., a Maryland corporation (“Asset Program”).</R>

PLAN OF REORGANIZATION

     The reorganization will comprise (1) the acquisition by Fundamental Growth Fund of substantially all of the assets, and the assumption by Fundamental Growth Fund of substantially all of the liabilities, of Mercury Growth Opportunity Fund (“Mercury Fund” and together with Fundamental Growth Fund, the “Funds”), a series of Asset Program, in exchange solely for an equal aggregate value of newly issued shares of common stock, with a par value of $.10 per share, of Fundamental Growth Fund and (2) the subsequent distribution of Corresponding Shares (defined in the following paragraph) of Fundamental Growth Fund to Mercury Fund stockholders in exchange for their shares of common stock, with a par value of $.10 per share, of Mercury Fund. The transactions described in this paragraph are collectively referred to as the “Reorganization.” The Boards of Directors of Asset Program and Fundamental Growth Fund are referred to collectively herein as the “Boards” or singularly as the “Board” where applicable. Asset Program and Mercury Fund are sometimes referred to herein as “Mercury Fund.”

     In the course of the Reorganization, shares of Fundamental Growth Fund will be distributed to stockholders of Mercury Fund as follows: (a) holders of Class A, B, C and I shares of Mercury Fund as of the Valuation Time (as defined in Section 3(c) of this Agreement) will be entitled to receive Class A, B, C and I shares, respectively, of Fundamental Growth Fund (“Corresponding Shares”). The same distribution fees, account maintenance fees and sales charges (including contingent deferred sales charges), if any, shall apply to the Corresponding Shares as applied to shares of Mercury Fund as of the Valuation Time. The aggregate net asset value of the Corresponding Shares of Fundamental Growth Fund to be received by each stockholder of Mercury Fund will equal the aggregate net asset value of the shares of Mercury Fund owned by such stockholder as of the Valuation Time. In consideration therefor, on the Closing Date (as defined in Section 7 of this Agreement), Fundamental Growth Fund shall acquire substantially all of the assets of Mercury Fund and assume substantially all of Mercury Fund’s liabilities then existing, whether absolute, accrued, contingent or otherwise. It is intended that the Reorganization described in this Agreement shall be a reorganization within the meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the “Code”), and any successor provision.

     As promptly as practicable after the consummation of the Reorganization, the Board of Asset Program shall take such action as may be necessary to terminate Mercury Fund as a series of Asset Program in accordance with the laws of the State of Maryland.

AGREEMENT

     In order to consummate the Reorganization and in consideration of the premises and the covenants and agreements hereinafter set forth, and intending to be legally bound, Fundamental Growth Fund, Asset Program and Mercury Fund hereby agree as follows:

     1. Representations and Warranties of Asset Program.

     Asset Program represents and warrants to, and agrees with Fundamental Growth Fund that:

     (a) Asset Program is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland, and has the power to own all of its assets, to transfer the assets and liabilities of Mercury Fund to Fundamental Growth Fund and to carry out this Agreement. Asset Program has all necessary Federal, state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement. Mercury Fund has been duly established in accordance with the terms of Asset Program’s Articles of Incorporation as a separate series of Asset Program.

     (b) Asset Program is duly registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company (File No. 811-7177), and such registration has not been revoked or rescinded and is in full force and effect. Asset Program has elected and qualified Mercury Fund at all times since its inception for the special tax treatment afforded regulated investment

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companies (“RICs”) under Sections 851-855 of the Code and intends to continue to so qualify Mercury Fund through its taxable year ending on the Closing Date.

     (c) As used in this Agreement, the term “Mercury Fund Investments” shall mean (i) the investments of Mercury Fund shown on the schedule of its investments as of the Valuation Time (as defined in Section 3(c) of this Agreement) furnished to Fundamental Growth Fund pursuant to Section 9(b); and (ii) all other assets owned by Mercury Fund or liabilities incurred by Mercury Fund existing as of the Valuation Time.

     (d) Asset Program has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of its Board, and this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors’ rights generally and court decisions with respect thereto.

     <R>(e) Fundamental Growth Fund has been furnished with a statement of assets and liabilities and a schedule of investments of Mercury Fund, each as of January 31, 2003, said financial statements having been examined by Deloitte & Touche LLP, independent public accountants. Fundamental Growth Fund has also been furnished with an unaudited statement of assets and liabilities and an unaudited schedule of investments of Mercury Fund, each as of August 31, 2003. An unaudited statement of assets and liabilities of Mercury Fund and an unaudited schedule of investments of Mercury Fund, each as of the Valuation Time, will be furnished to Fundamental Growth Fund at or prior to the Closing Date for the purpose of determining the number of shares of Fundamental Growth Fund to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial position of Mercury Fund as of the Valuation Time in conformity with accounting principles generally accepted in the United States of America.</R>

     (f) Fundamental Growth Fund has been furnished with Mercury Fund’s Annual Report to Stockholders for the year ended January 31, 2003, and Mercury Fund’s Semi-Annual Report to Stockholders for the period ended July 31, 2003, and the financial statements appearing in such reports fairly present the financial position of Asset Program and Mercury Fund as of the respective dates indicated, in conformity with accounting principles generally accepted in the United States of America.

     (g) Fundamental Growth Fund has been furnished with the prospectus and statement of additional information of Asset Program with respect to Mercury Fund, each dated May 28, 2003, and said prospectus and statement of additional information do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

     (h) There are no material legal, administrative or other proceedings pending or, to the knowledge of Asset Program, threatened against it or Mercury Fund which assert liability on the part of Asset Program or Mercury Fund, which materially affect its financial condition or its ability to consummate the Reorganization. Neither Asset Program nor Mercury Fund is charged with nor, to the best of the knowledge of Asset Program, threatened with any violation or investigation of any possible violation of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business.

     (i) There are no material contracts outstanding relating to Mercury Fund to which Asset Program is a party that have not been disclosed in the N-14 Registration Statement (as defined in subsection (o) below) or will not otherwise be disclosed to Fundamental Growth Fund prior to the Valuation Time.

     (j) Asset Program is not a party to or obligated under any provision of its Articles of Incorporation, as amended, restated and supplemented, or its by-laws, as amended or any contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or performance under this Agreement.

     (k) Mercury Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown on its statements of assets and liabilities referred to above, those incurred in the ordinary course of its business as an investment company since the date of its most recent Annual or Semi-Annual Report, and those incurred in connection with the Reorganization. As of the Valuation Time, Asset Program will advise Fundamental Growth Fund in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time with respect to Mercury Fund.

 

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     (l) Asset Program has filed, or has obtained extensions to file, all Federal, state and local tax returns that are required to be filed by it, and has paid or has obtained extensions to pay, all Federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in which the Closing Date occurs. All tax liabilities of Asset Program have been adequately provided for on its books, and no tax deficiency or liability of Asset Program has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.

     (m) At both the Valuation Time and the Closing Date, Asset Program will have full right, power and authority to sell, assign, transfer and deliver the Mercury Fund Investments. At the Closing Date, subject only to the delivery of the Mercury Fund Investments as contemplated by this Agreement, Asset Program will have good and marketable title to all of the Mercury Fund Investments, and Fundamental Growth Fund will acquire all of the Mercury Fund Investments free and clear of any encumbrances, liens or security interests and without any restrictions upon the transfer thereof (except those imposed by the Federal or state securities laws and those imperfections of title or encumbrances as do not materially detract from the value or use of the Mercury Fund Investments or materially affect title thereto).

     (n) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by Asset Program of the Reorganization, except such as may be required under the Securities Act of 1933, as amended (the “1933 Act”), the Securities Exchange Act of 1934, as amended (the “1934 Act”), and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico).

     (o) The registration statement filed by Fundamental Growth Fund on Form N-14 relating to the shares of Fundamental Growth Fund to be issued pursuant to this Agreement, which includes the proxy statement of Mercury Fund and the prospectus and statement of additional information of Fundamental Growth Fund (together, the “Proxy Statement and Prospectus”) with respect to the transactions contemplated herein, and any supplement or amendment thereto or to the documents therein (as amended, collectively the “N-14 Registration Statement”), on its effective date, at the time of the stockholders meeting referred to in Section 6(a) of this Agreement and on the Closing Date, insofar as it relates to Mercury Fund (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder, and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and the Proxy Statement and Prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by Mercury Fund for use in the N-14 Registration Statement as provided in Section 6(d) of this Agreement.

     (p) Asset Program is authorized to issue 222,500,000 shares of common stock, par value $0.10 per share, of which 57,500,000 have been designated to Mercury Fund as follows: 6,250,000 Class A shares, 15,000,000 Class B shares,15,000,000 Class C shares, 6,250,000 Class I shares and 15,000,000 Class R shares. Each outstanding Class A, Class B, Class C and Class I share of which is fully paid and nonassessable and has full voting rights. The Mercury Fund has no Class R shares outstanding.

     (q) The books and records of Asset Program with respect to Mercury Fund made available to Fundamental Growth Fund and/or its counsel are substantially true and correct and contain no material misstatements or omissions with respect to the operations of Mercury Fund.

     (r) Mercury Fund will not sell or otherwise dispose of any of the Corresponding Shares of Fundamental Growth Fund to be received in the Reorganization, except in distribution to its stockholders as provided herein.

     (s) Mercury Fund has no plan or intention to sell or otherwise dispose of its assets to be acquired in the Reorganization, except for dispositions made in the ordinary course of business.

     (t) At or prior to the Closing Date, Asset Program will have obtained any and all regulatory, Board, stockholder and other approvals necessary to effect the Reorganization as set forth herein.

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     2. Representations and Warranties of Fundamental Growth Fund.

     Fundamental Growth Fund represents and warrants to, and agrees with, Asset Program that:

     (a) Fundamental Growth Fund is a corporation duly organized, validly existing and in good standing in conformity with the laws of the State of Maryland, and has the power to own all of its assets and to carry out this Agreement. Fundamental Growth Fund has all necessary Federal, state and local authorizations to carry on its business as it is now being conducted and to carry out this Agreement.

     (b) Fundamental Growth Fund is duly registered under the 1940 Act as an open-end management investment company (File No. 811-6669), and such registration has not been revoked or rescinded and is in full force and effect. Fundamental Growth Fund has elected and qualified for the special tax treatment afforded RICs under Sections 851-855 of the Code at all times since its inception and intends to continue to so qualify both until consummation of the Reorganization and thereafter.

     <R>(c) Mercury Fund has been furnished with a statement of assets and liabilities and a schedule of investments of Fundamental Growth Fund, each as of August 31, 2003, said financial statements having been audited by Ernst & Young LLP, independent public accountants. An unaudited statement of assets and liabilities of Fundamental Growth Fund and an unaudited schedule of investments of Fundamental Growth Fund, each as of the Valuation Time, will be furnished to Mercury Fund at or prior to the Closing Date for the purpose of determining the number of shares of Fundamental Growth Fund to be issued pursuant to Section 4 of this Agreement; and each will fairly present the financial position of Fundamental Growth Fund as of the Valuation Time in conformity with generally accepted accounting principles applied on a consistent basis.</R>

     (d) Mercury Fund has been furnished with Fundamental Growth Fund’s Annual Report to Stockholders for the year ended August 31, 2003, and the audited financial statements appearing therein fairly present the financial position of Fundamental Growth Fund as of the dates indicated, in conformity with accounting principles generally accepted in the United States of America.

     (e) Mercury Fund has been furnished with the prospectus and statement of additional information of Fundamental Growth Fund, each dated January 1, 2003, and said prospectus and statement of additional information do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

     (f) Fundamental Growth Fund has full power and authority to enter into and perform its obligations under this Agreement. Stockholders of Fundamental Growth Fund are not required to approve the Reorganization. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of its Board and this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors’ rights generally and court decisions with respect thereto.

     (g) There are no material legal, administrative or other proceedings pending or, to the knowledge of Fundamental Growth Fund, threatened against it which assert liability on the part of Fundamental Growth Fund or which materially affect its financial condition or its ability to consummate the Reorganization. Fundamental Growth Fund is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any Federal, state or local law or regulation or administrative ruling relating to any aspect of its business.

     (h) There are no material contracts outstanding to which Fundamental Growth Fund is a party that have not been disclosed in the N-14 Registration Statement or will not otherwise be disclosed to Mercury Fund prior to the Valuation Time.

     (i) Fundamental Growth Fund is not a party to or obligated under any provision of its Articles of Incorporation, as amended, restated and supplemented, or its by-laws, as amended, or any contract or other commitment or obligation, and is not subject to any order or decree which would be violated by its execution of or performance under this Agreement.

     (j) Fundamental Growth Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown on its statements of assets and liabilities referred to above, those incurred in the

 

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ordinary course of its business as an investment company since the date of its most recent Annual or Semi-Annual Report and those incurred in connection with the Reorganization. As of the Valuation Time, Fundamental Growth Fund will advise Mercury Fund in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time.

     (k) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by Fundamental Growth Fund of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act or state securities laws.

     (l) The N-14 Registration Statement, on its effective date, at the time of the stockholders meeting referred to in Section 6(a) of this Agreement and on the Closing Date, insofar as it relates to Fundamental Growth Fund (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the N-14 Registration Statement made in reliance upon and in conformity with information furnished by Fundamental Growth Fund for use in the N-14 Registration Statement as provided in Section 6(d) of this Agreement.

     (m) Fundamental Growth Fund is authorized to issue 1,750,000,000 shares of common stock, par value $.10 per share, which are divided into five classes designated as follows: 300,000,000 Class A shares, 500,000,000 Class B shares, 300,000,000 Class C shares, 150,000,000 Class I shares and 500,000,000 Class R shares, each outstanding share of which is fully paid and nonassessable and has full voting rights.

     (n) The Fundamental Growth Fund shares to be issued to Mercury Fund and distributed to stockholders of Mercury Fund pursuant to this Agreement will have been duly authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, and no stockholder of Fundamental Growth Fund will have any preemptive right of subscription or purchase in respect thereof.

     (o) At or prior to the Closing Date, the Fundamental Growth Fund shares to be issued to Mercury Fund and distributed to stockholders of Mercury Fund on the Closing Date will be duly qualified for offer and sale to the public in all states of the United States in which the sale of shares of Mercury Fund presently are qualified, and there shall be a sufficient number of such shares registered under the 1933 Act and, as may be necessary, with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated.

     (p) At or prior to the Closing Date, Fundamental Growth Fund will have obtained any and all regulatory, Board and other approvals, necessary to issue the Corresponding Shares of Fundamental Growth Fund to Mercury Fund for distribution to the stockholders of Mercury Fund.

     3. The Reorganization.

     (a) Subject to receiving the requisite approval of the stockholders of Mercury Fund, and to the other terms and conditions contained herein, Mercury Fund agrees to convey, transfer and deliver to Fundamental Growth Fund, and Fundamental Growth Fund agrees to acquire from Mercury Fund, on the Closing Date all of the Mercury Fund Investments (including interest accrued as of the relevant Valuation Time on debt instruments), and assume substantially all of the liabilities of Mercury Fund, in exchange solely for that number of shares of Fundamental Growth Fund calculated in accordance with Section 4 of this Agreement. Pursuant to this Agreement, on the Closing Date or as soon as practicable thereafter, Mercury Fund will distribute all Corresponding Shares of Fundamental Growth Fund received by it to its stockholders in exchange for their corresponding shares of Mercury Fund. Such distribution shall be accomplished by the opening of stockholder accounts on the stock ledger records of Fundamental Growth Fund in the amounts due the stockholders of Mercury Fund based on their respective holdings in Mercury Fund as of the Valuation Time.

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     (b) Mercury Fund will pay or cause to be paid to Fundamental Growth Fund any interest or dividends it receives on or after the Closing Date with respect to the Mercury Fund Investments transferred to Fundamental Growth Fund hereunder.

     <R>(c) The Valuation Time shall be 4:00 p.m. New York time, on January 16, 2004, or such earlier or later day and time as may be mutually agreed upon in writing (the “Valuation Time”).

     (d) Fundamental Growth Fund will acquire substantially all of the assets of, and will assume substantially all of the liabilities of, Mercury Fund. The known liabilities of Mercury Fund as of the Valuation Time shall be confirmed in writing to Fundamental Growth Fund by Mercury Fund pursuant to Section 1(k) of this Agreement.</R>

     (e) Fundamental Growth Fund and Asset Program, on behalf of Mercury Fund, will jointly file any and all such other instruments, including Articles of Transfer, as may be required by the State Department of Assessments and Taxation of Maryland to effect of the transfer of the Mercury Fund Investments to Fundamental Growth Fund.

     (f) Following the distribution referred to in subparagraph 3(a) above, Mercury Fund shall be terminated by Asset Program as a series of Asset Program by such action as may be necessary in accordance with the laws of the State of Maryland.

     4. Issuance and Valuation of Fundamental Growth Fund Shares in the Reorganization.

     Full shares of Fundamental Growth Fund, and to the extent necessary, any fractional shares of Fundamental Growth Fund, of an aggregate net asset value equal to the value of the assets of Mercury Fund acquired, determined as hereinafter provided, reduced by the amount of liabilities of Mercury Fund assumed by Fundamental Growth Fund, shall be issued by Fundamental Growth Fund in exchange for such assets of Mercury Fund. The net asset value of Mercury Fund and Fundamental Growth Fund shall be determined as of the Valuation Time in accordance with the procedures described in the prospectus of Fundamental Growth Fund dated January 1, 2003. Such valuation and determination shall be made by Fundamental Growth Fund in cooperation with Mercury Fund. Fundamental Growth Fund shall issue its Class A, Class B, Class C and Class I shares to Mercury Fund by the opening of a stockholder account (one in respect of each Class) on the stock ledger records of Fundamental Growth Fund registered in the name of Mercury Fund. Mercury Fund shall distribute Corresponding Shares of Fundamental Growth Fund to its stockholders by indicating the registration of such shares in the name of Mercury Fund’s stockholders in the amounts due such stockholders based on their respective holdings in Mercury Fund as of the Valuation Time.

     5. Payment of Expenses.

     <R>(a) The expenses of the Reorganization that are directly attributable to Mercury Fund will be deducted from the assets of Mercury Fund as of the Valuation Time. These expenses are expected to include the expenses incurred in preparing, printing and mailing the proxy materials to be used in connection with the meeting of stockholders of Mercury Fund to consider the Reorganization and the expenses related to the solicitation of proxies to be voted at that meeting. The expenses of the Reorganization that are directly attributable to Mercury Fund will be borne by Mercury Fund. The expenses directly attributable to Fundamental Growth Fund are expected to include the expenses incurred in printing sufficient copies of Fundamental Growth Fund’s prospectus and Annual Report that will accompany the mailing of the Proxy Statement and Prospectus. The expenses of the Reorganization that are directly attributable to Fundamental Growth Fund will be borne by Merrill Lynch Investment Managers, L.P. (“MLIM”). Certain other expenses of the Reorganization, including expenses in connection with obtaining the opinion of counsel with respect to certain tax matters, the preparation of this Agreement, legal, transfer agent and audit fees, will be borne equally by Mercury Fund and MLIM (since MLIM has agreed to bear all Reorganization expenses attributable to Fundamental Growth Fund).</R>

     (b) If for any reason the Reorganization is not consummated, no party shall be liable to any other party for any damages resulting therefrom, including, without limitation, consequential damages.

     6. Covenants of the Funds.

     (a) Mercury Fund agrees to call a special meeting of its stockholders to be held as soon as is practicable after the effective date of the N-14 Registration Statement for the purpose of considering the approval of this

 

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Agreement, and it shall be a condition to the obligations of Fundamental Growth Fund and Mercury Fund that the holders of a majority of the shares of Mercury Fund issued and outstanding and entitled to vote thereon, shall have approved this Agreement at such special meeting at or prior to the Valuation Time.

     (b) Each Fund covenants to operate its respective business as presently conducted between the date hereof and the Closing Date.

     (c) (i) Asset Program agrees that following the Closing Date it will take such action as may be necessary to terminate Mercury Fund as a series of Asset Program in accordance with the laws of the State of Maryland, and (ii) Mercury Fund will not make any distributions of any Corresponding Shares of Fundamental Growth Fund other than to its stockholders and without first paying or adequately providing for the payment of all of its liabilities not assumed by Fundamental Growth Fund, if any, and on and after the Closing Date shall not conduct any business except in connection with its termination.

     (d) Fundamental Growth Fund will file the N-14 Registration Statement with the Securities and Exchange Commission (the “Commission”) and will use its best efforts to provide that the N-14 Registration Statement becomes effective as promptly as practicable. Mercury Fund and Fundamental Growth Fund agree to cooperate fully with each other, and each will furnish to the other the information relating to itself to be set forth in the N-14 Registration Statement as required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and regulations thereunder and the state securities laws.

     (e) Mercury Fund and Fundamental Growth Fund each agree that by the Closing Date all of their Federal and other tax returns and reports required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes. In connection with this covenant, Fundamental Growth Fund and Mercury Fund agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. Fundamental Growth Fund agrees to retain for a period of ten (10) years following the Closing Date all returns, schedules and work papers and all material records or other documents relating to tax matters of Mercury Fund for its taxable period first ending after the Closing Date and for all prior taxable periods. Any information obtained under this subsection shall be kept confidential except as otherwise may be necessary in connection with the filing of returns or claims for refund or in conducting an audit or other proceeding. After the Closing Date, Mercury Fund shall prepare, or cause its agents to prepare, any Federal, state or local tax returns, including any Forms 1099, required to be filed by or with respect to it with respect to its final taxable year ending with its complete liquidation and for any prior periods or taxable years and further shall cause such tax returns and Forms 1099 to be duly filed with the appropriate taxing authorities. Notwithstanding the aforementioned provisions of this subsection, Mercury Fund shall bear any expenses incurred by it (other than for payment of taxes) in connection with the preparation and filing of said tax returns and Forms 1099 after the Closing Date to the extent that Mercury Fund accrued such expenses in the ordinary course without regard to the Reorganization; any excess expenses shall be borne by MLIM at the time such tax returns and Forms 1099 are prepared.

     (f) Mercury Fund agrees to mail to its stockholders of record entitled to vote at the special meeting of stockholders at which action is to be considered regarding this Agreement, in sufficient time to comply with applicable notice requirements, a combined Proxy Statement and Prospectus which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder.

     (g) Following the consummation of the Reorganization, Fundamental Growth Fund expects to stay in existence and continue its business as an open-end management investment company registered under the 1940 Act.

     (h) Fundamental Growth Fund agrees to comply with the record keeping requirements of Rule 17a-8(a)(5) under the 1940 Act after the Reorganization.

     7. Closing Date.

     (a) Delivery of the assets of Mercury Fund to be transferred, together with any other Mercury Fund Investments, and the Corresponding Shares of Fundamental Growth Fund to be issued to Mercury Fund, shall be made at the offices of Sidley Austin Brown & Wood LLP, 787 Seventh Avenue, New York, New York

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10019, at 10:00 A.M. on the next full business day following the Valuation Time, or at such other place, time and date agreed to by Mercury Fund and Fundamental Growth Fund, the date and time upon which such delivery is to take place being referred to herein as the “Closing Date.” To the extent that any Mercury Fund Investments, for any reason, are not transferable on the Closing Date, Mercury Fund shall cause such Mercury Fund Investments to be transferred to Fundamental Growth Fund’s account with JPMorgan Chase Bank at the earliest practicable date thereafter.

     (b) Mercury Fund will deliver to Fundamental Growth Fund on the Closing Date confirmations or other adequate evidence as to the tax basis of each of the Mercury Fund Investments delivered to Fundamental Growth Fund hereunder.

     (c) As soon as practicable after the close of business on the Closing Date, Mercury Fund shall deliver to Fundamental Growth Fund a list of the names and addresses of all of the stockholders of record of Mercury Fund on the Closing Date and the number of shares of common stock of Mercury Fund owned by each such stockholder, certified to the best of its knowledge and belief by the transfer agent for Mercury Fund or by its President.

     8. Conditions of Mercury Fund.

     The obligations of Mercury Fund hereunder shall be subject to the following conditions:

     (a) That this Agreement shall have been adopted, and the Reorganization shall have been approved, by (i) the affirmative vote of the holders of a majority of the shares of common stock of Mercury Fund issued and outstanding and entitled to vote thereon, voting together as a single class and (ii) the Boards of Directors of Fundamental Growth Fund and Asset Program, including in each case a majority of the independent Directors; and that Fundamental Growth Fund shall have delivered to Mercury Fund a copy of the resolution approving this Agreement adopted by Fundamental Growth Fund’s Board, certified by the Secretary of Fundamental Growth Fund.

     (b) That Fundamental Growth Fund shall have furnished to Mercury Fund a statement of Fundamental Growth Fund’s assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a schedule of its investments, all as of the Valuation Time, certified on Fundamental Growth Fund’s behalf by its President (or any Vice President) and its Treasurer, and a certificate signed by Fundamental Growth Fund’s President (or any Vice President) and its Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of Fundamental Growth Fund since the date of Fundamental Growth Fund’s most recent Annual or Semi-Annual Report as applicable, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities.

     (c) That Fundamental Growth Fund shall have furnished to Mercury Fund a certificate signed by Fundamental Growth Fund’s President (or any Vice President) and its Treasurer, dated as of the Closing Date, certifying that, as of the Valuation Time and as of the Closing Date all representations and warranties of Fundamental Growth Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates, and that Fundamental Growth Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to each of such dates.

     (d) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.

     (e) That Mercury Fund shall have received an opinion of Sidley Austin Brown & Wood LLP, as counsel to Fundamental Growth Fund, in form and substance satisfactory to Mercury Fund and dated the Closing Date, to the effect that (i) Fundamental Growth Fund is a corporation duly incorporated, validly existing and in good standing in conformity with the laws of the State of Maryland; (ii) the Corresponding Shares of Fundamental Growth Fund to be issued pursuant to this Agreement are duly authorized and, upon delivery, will be validly issued and fully paid and nonassessable by Fundamental Growth Fund, and no stockholder of Fundamental Growth Fund has any preemptive right to subscription or purchase in respect thereof (pursuant to the Articles of Incorporation, as amended and supplemented of Fundamental Growth Fund, or the by-laws, as amended, of Fundamental Growth Fund or, to the best of such counsel’s knowledge, otherwise); (iii) this Agreement has been duly authorized, executed and delivered by Fundamental Growth Fund, and represents a valid and binding contract, enforceable in accordance with its terms, except as

 

I-8

enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors’ rights generally and court decisions with respect thereto; provided, such counsel shall express no opinion with respect to the application of equitable principles in any proceeding, whether at law or in equity; (iv) the execution and delivery of this Agreement does not, and the consummation of the Reorganization will not, violate any material provisions of Maryland law or the Articles of Incorporation, as amended and supplemented, of Fundamental Growth Fund, the by-laws, as amended, of Fundamental Growth Fund, or any agreement (known to such counsel) to which either Fundamental Growth Fund or Mercury Fund is a party or by which either Fundamental Growth Fund or Mercury Fund is bound, except insofar as the parties have agreed to amend such provision as a condition precedent to the Reorganization; (v) Mercury Fund has the power to sell, assign, transfer and deliver the assets transferred by it hereunder and, upon consummation of the Reorganization in accordance with the terms of this Agreement, Mercury Fund will have duly transferred such assets and liabilities in accordance with this Agreement; (vi) to the best of such counsel’s knowledge, no consent, approval, authorization or order of any United States federal court, Maryland state court or governmental authority is required for the consummation by Fundamental Growth Fund of the Reorganization, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and the published rules and regulations of the Commission thereunder and under Maryland law and such as may be required under state securities laws; (vii) the N-14 Registration Statement has been declared effective under the 1933 Act, no stop order suspending the effectiveness of the N-14 Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act, and the N-14 Registration Statement, as of its effective date, appears on its face to be appropriately responsive in all material respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act and the published rules and regulations of the Commission thereunder; (viii) the descriptions in the N-14 Registration Statement of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; (ix) such counsel does not know of any statutes, legal or governmental proceedings or contracts or other documents related to the Reorganization of a character required to be described in the N-14 Registration Statement which are not described therein or, if required to be filed, filed as required; (x) Fundamental Growth Fund, to the knowledge of such counsel, is not required to qualify to do business as a foreign corporation in any jurisdiction except as may be required by state securities laws, and except where it has so qualified or the failure so to qualify would not have a material adverse effect on Fundamental Growth Fund or its stockholders; (xi) such counsel does not have actual knowledge of any material suit, action or legal or administrative proceeding pending or threatened against Fundamental Growth Fund, the unfavorable outcome of which would materially and adversely affect Fundamental Growth Fund or Mercury Fund; (xii) all corporate actions required to be taken by Fundamental Growth Fund to authorize this Agreement and to effect the Reorganization have been duly authorized by all necessary corporate actions on the part of Fundamental Growth Fund; and (xiii) such opinion is solely for the benefit of Mercury Fund and its Directors and officers. In giving the opinion set forth above, Sidley Austin Brown & Wood LLP may state that they are relying on certificates of officers of Fundamental Growth Fund with regard to matters of fact and certain certificates and written statements of governmental officials with respect to the due incorporation, valid existence and good standing of Fundamental Growth Fund.

     (f) That Mercury Fund shall have received a letter from Sidley Austin Brown & Wood LLP, as counsel to Fundamental Growth Fund, in form and substance satisfactory to Mercury Fund and dated the Closing Date, to the effect that (i) while such counsel cannot make any representation as to the accuracy or completeness of statements of fact in the N-14 Registration Statement or any amendment or supplement thereto, nothing has come to their attention that caused them to believe that, on the effective date of the N-14 Registration Statement, (1) the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact relating to Fundamental Growth Fund required to be stated therein or necessary to make the statements therein not misleading; and (2) the prospectus included in the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact relating to Fundamental Growth Fund necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) such counsel does not express any opinion or belief as to the financial statements or other financial or statistical data relating to Fundamental Growth Fund contained or incorporated by reference in the N-14 Registration Statement; and (iii) such letter is solely for the benefit of Mercury Fund and its Directors and officers. In giving the letter set forth above, Sidley Austin Brown & Wood LLP may state that they are relying on certificates of officers of Fundamental Growth Fund with regard to matters of fact.

I-9

     <R>(g) That Mercury Fund shall have received an opinion of Sidley Austin Brown & Wood LLP to the effect that for Federal income tax purposes (i) the transfer by Mercury Fund of substantially all of the Mercury Fund Investments to Fundamental Growth Fund in exchange solely for shares of Fundamental Growth Fund as provided in this Agreement will constitute a reorganization within the meaning of Section 368(a)(1)(C) of the Code and each of Mercury Fund and Fundamental Growth Fund will be deemed to be a “party” to a reorganization within the meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a) of the Code, no gain or loss will be recognized by Mercury Fund as a result of the transfer of its assets solely in exchange for shares of Fundamental Growth Fund or on the distribution of these shares to its stockholders under Section 361(c)(1) of the Code; (iii) under Section 1032 of the Code, no gain or loss will be recognized by Fundamental Growth Fund on the receipt of the assets of Mercury Fund in exchange for Fundamental Growth Fund shares; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized by the stockholders of Mercury Fund on the receipt of Corresponding Shares of Fundamental Growth Fund in exchange for their shares of Mercury Fund; (v) in accordance with Section 362(b) of the Code, the tax basis of Mercury Fund’s assets in the hands of Fundamental Growth Fund will be the same as the tax basis of such assets in the hands of Mercury Fund immediately prior to the consummation of the Reorganization; (vi) in accordance with Section 358 of the Code, immediately after the Reorganization, the tax basis of the Corresponding Shares of Fundamental Growth Fund received by the stockholders of Mercury Fund in the Reorganization (including fractional shares to which they may be entitled) will be equal to the tax basis of the shares of Mercury Fund surrendered in exchange; (vii) in accordance with Section 1223 of the Code, a stockholder’s holding period for the Corresponding Shares of Fundamental Growth Fund (including fractional shares to which he/she may be entitled) will be determined by including the period for which such stockholder held the shares of Mercury Fund exchanged therefor, provided, that such Mercury Fund shares were held as a capital asset; (viii) in accordance with Section 1223 of the Code, Fundamental Growth Fund’s holding period with respect to Mercury Fund’s assets transferred will include the period for which such assets were held by Mercury Fund; (ix) the taxable year of Mercury Fund will end on the Closing Date and pursuant to Section 381(a) of the Code and regulations thereunder, Fundamental Growth Fund will succeed to and take into account certain tax attributes of Mercury Fund, such as earnings and profits, capital loss carryovers and method of accounting.</R>

     (h) That all proceedings taken by Fundamental Growth Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to Mercury Fund and its counsel.

     (i) That the N-14 Registration Statement shall have been declared effective under the 1933 Act, and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of Fundamental Growth Fund or Asset Program, be contemplated by the Commission.

     <R>(j) That Mercury Fund shall have received from Ernst & Young LLP a letter dated as of or within three days prior to the effective date of the N-14 Registration Statement and a similar letter dated as of or within five days prior to the Closing Date, in form and substance satisfactory to Mercury Fund, to the effect that (i) they are independent auditors with respect to Fundamental Growth Fund within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of Fundamental Growth Fund included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; and (iii) on the basis of limited procedures agreed upon by Mercury Fund and described in such letter (but not an examination in accordance with auditing standards generally accepted in the United States of America) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of Fundamental Growth Fund included in the N-14 Registration Statement, and inquiries of certain officials of Fundamental Growth Fund responsible for financial and accounting matters, nothing came to their attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with accounting principles generally accepted in the United States of America, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of </R>

 

I-10

limited procedures agreed upon by Mercury Fund and described in such letter (but not an examination in accordance with auditing standards generally accepted in the United States of America), the information relating to Fundamental Growth Fund appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), has been obtained from the accounting records of Fundamental Growth Fund or from schedules prepared by officials of Fundamental Growth Fund having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom.

     (k) That the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization with respect to Mercury Fund under Section 25(c) of the 1940 Act, and no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of Fundamental Growth Fund or would prohibit the Reorganization.

     (l) That Mercury Fund shall have received from the Commission such orders or interpretations as Sidley Austin Brown & Wood LLP, as counsel to Mercury Fund, deems reasonably necessary or desirable under the 1933 Act and the 1940 Act in connection with the Reorganization, provided that such counsel shall have requested such orders as promptly as practicable, and all such orders shall be in full force and effect.

     9. Fundamental Growth Fund Conditions.

     The obligations of Fundamental Growth Fund hereunder shall be subject to the following conditions:

     (a) That this Agreement shall have been adopted, and the Reorganization shall have been approved, by (i) the Boards of Directors of Fundamental Growth Fund and Asset Program, in each case including a majority of the independent Directors and (ii) by the affirmative vote of the holders of a majority of the shares of common stock of Mercury Fund issued and outstanding and entitled to vote thereon, voting together as a single class; and that Mercury Fund shall have delivered to Fundamental Growth Fund a copy of the resolution approving this Agreement adopted by Mercury Fund’s Board, and a certificate setting forth the vote that Mercury Fund’s stockholders obtained, each certified by the Secretary of Mercury Fund.

     (b) That Mercury Fund shall have furnished to Fundamental Growth Fund a statement of its assets and liabilities, with values determined as provided in Section 4 of this Agreement, together with a schedule of investments with their respective dates of acquisition and tax costs, all as of the Valuation Time, certified on Mercury Fund’s behalf by Asset Program’s President (or any Vice President) and its Treasurer, and a certificate signed by Asset Program’s President (or any Vice President) and its Treasurer, dated the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of Mercury Fund since the date of Mercury Fund’s most recent annual or semi-annual report to stockholders, as applicable, other than changes in the Mercury Fund Investments since the date of such report or changes in the market value of the Mercury Fund Investments.

     (c) That Mercury Fund shall have furnished to Fundamental Growth Fund a certificate signed by Mercury Fund’s President (or any Vice President) and its Treasurer, dated the Closing Date, certifying that as of the Valuation Time and as of the Closing Date all representations and warranties of Mercury Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates and Mercury Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates.

     (d) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.

     (e) That Fundamental Growth Fund shall have received an opinion of Sidley Austin Brown & Wood LLP, as counsel to Mercury Fund, in form and substance satisfactory to Fundamental Growth and dated the Closing Date, with respect to the matters specified in Section 8(e) of this Agreement and such other matters as Fundamental Growth Fund reasonably may deem necessary or desirable.

     (f) That Fundamental Growth Fund shall have received a letter from Sidley Austin Brown & Wood LLP, as counsel to Mercury Fund, in form and substance satisfactory to Fundamental Growth Fund and dated the Closing Date, with respect to the matters specified in Section 8(f) of this Agreement and such other matters as Fundamental Growth Fund reasonably may deem necessary or desirable.

I-11

     (g) That Fundamental Growth Fund shall have received an opinion of Sidley Austin Brown & Wood LLP with respect to the matters specified in Section 8(g) of this Agreement.

     <R>(h) That Fundamental Growth Fund shall have received from Deloitte & Touche LLP a letter dated as of or within three days prior to the effective date of the N-14 Registration Statement and a similar letter dated as of or within five days prior to the Closing Date, in form and substance satisfactory to Fundamental Growth Fund, to the effect that (i) they are independent public accountants with respect to Mercury Fund within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; (ii) in their opinion, the financial statements and supplementary information of Mercury Fund included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; (iii) on the basis of limited procedures agreed upon by Fundamental Growth Fund and described in such letter (but not an examination in accordance with auditing standards generally accepted in the United States of America) consisting of a reading of any unaudited interim financial statements and unaudited supplementary information of Mercury Fund included in the N-14 Registration Statement, and inquiries of certain officials of Mercury Fund responsible for financial and accounting matters, nothing came to their attention that caused them to believe that (a) such unaudited financial statements and related unaudited supplementary information do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder, (b) such unaudited financial statements are not fairly presented in conformity with accounting principles generally accepted in the United States of America, applied on a basis substantially consistent with that of the audited financial statements, or (c) such unaudited supplementary information is not fairly stated in all material respects in relation to the unaudited financial statements taken as a whole; and (iv) on the basis of limited procedures agreed upon by Fundamental Growth Fund and Mercury Fund and described in such letter (but not an examination in accordance with generally accepted auditing standards), the information relating to Mercury Fund appearing in the N-14 Registration Statement, which information is expressed in dollars (or percentages derived from such dollars) (with the exception of performance comparisons, if any), has been obtained from the accounting records of Mercury Fund or from schedules prepared by officials of Mercury Fund having responsibility for financial and reporting matters and such information is in agreement with such records, schedules or computations made therefrom.</R>

     (i) That the assets to be transferred to Fundamental Growth Fund shall not include any assets or liabilities which Fundamental Growth Fund by reason of charter limitations, investment policies or otherwise may not properly acquire or assume.

     (j) That the N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of Mercury Fund or Fundamental Growth Fund, be contemplated by the Commission.

     (k) That the Commission shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Reorganization with respect to Mercury Fund under Section 25(c) of the 1940 Act, and no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of Mercury Fund or would prohibit the Reorganization with respect to Mercury Fund.

     (l) That Fundamental Growth Fund shall have received from the Commission such orders or interpretations as Sidley Austin Brown & Wood LLP, as counsel to Fundamental Growth Fund, deems reasonably necessary or desirable under the 1933 Act and the 1940 Act in connection with the Reorganization with respect to Mercury Fund, provided, that such counsel shall have requested such orders as promptly as practicable, and all such orders shall be in full force and effect.

     (m) That all proceedings taken by Mercury Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to Fundamental Growth Fund.

     (n) That prior to the Closing Date, Mercury Fund shall have declared a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to its stockholders all of its investment company taxable income for the period to and including the Closing Date, if any (computed without regard to any deduction for dividends paid), and all of its net capital gain, if any, realized to and including the Closing Date.

 

I-12

     <R>10. Termination, Postponement, Amendment and Waivers.</R>

     (a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the Reorganization abandoned at any time (whether before or after adoption thereof by the stockholders of Mercury Fund) prior to the Closing Date, or the Closing Date may be postponed, (i) by mutual consent of the Boards of Fundamental Growth Fund and Mercury Fund; (ii) by the Board of Mercury Fund if any condition of Mercury Fund’s obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by such Board; or (iii) by the Board of Fundamental Growth Fund if any condition of Fundamental Growth Fund’s obligations set forth in Section 9 of this Agreement has not been fulfilled or waived by such Board.

     (b) If the transactions contemplated by this Agreement have not been consummated by March 31, 2004, this Agreement automatically shall terminate on that date, unless a later date is mutually agreed to by the Boards of Fundamental Growth Fund and Mercury Fund.

     (c) In the event of termination of this Agreement pursuant to the provisions hereof, this Agreement shall become void and have no further effect, and there shall not be any liability on the part of either Fundamental Growth Fund and Mercury Fund or persons who are their directors, trustees, officers, agents or stockholders in respect of this Agreement.

<R>     (d) At any time prior to the Closing Date, any of the terms or conditions of this Agreement may be waived by the Board of either Fund (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action or waiver will not have a material adverse effect on the benefits intended under this Agreement to the stockholders of the applicable Fund, on behalf of which such action is taken. In addition, the Board of Directors of each Fund has delegated to MLIM or FAM, as applicable, the ability to make non-material changes to the transaction contemplated hereby if MLIM or FAM, as applicable, deems it to be in the best interests of the Funds to do so.</R>

     (e) The respective representations and warranties contained in Sections 1 and 2 of this Agreement relating to Fundamental Growth Fund and Mercury Fund shall expire and terminate on the Closing Date and neither Fundamental Growth Fund, Mercury Fund nor any of their officers, directors or trustees, agents or stockholders shall have any liability with respect to such representations or warranties after the Closing Date. This provision shall not protect any officer, director or trustee, agent or stockholder of either Fund against any liability to the entity for which that officer, director or trustee, agent or stockholder so acts or to its stockholders, to which that officer, director or trustee, agent or stockholder otherwise would be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties in the conduct of such office.

     (f) If any order or orders of the Commission with respect to this Agreement shall be issued prior to the Closing Date and shall impose any terms or conditions which are determined by action of the Boards of Fundamental Growth Fund and Mercury Fund to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval of the stockholders of Mercury Fund unless such terms and conditions shall result in a change in the method of computing the number of shares of Fundamental Growth Fund to be issued to Mercury Fund in which event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the stockholders of Mercury Fund prior to the meeting at which the Reorganization shall have been approved, this Agreement shall not be consummated and shall terminate unless Mercury Fund promptly shall call a special meeting of stockholders at which such conditions so imposed shall be submitted for approval.

     <R>(g) Prior to stockholder approval of the Reorganization, this Agreement may be amended, modified, superseded, canceled, renewed or extended, and the terms or covenants hereof may be waived, by a written instrument executed by the Funds or, in the case of a waiver, by the Fund waiving compliance. After stockholder approval of the Reorganization, this Agreement may be modified and any terms or conditions waived only as provided in (d) above.</R>

     11. Other Matters.

     (a) Pursuant to Rule 145 under the 1933 Act, and in connection with the issuance of any shares to any person who at the time of the Reorganization is, to its knowledge, an affiliate of a party to the Reorganization pursuant to Rule 145(c), Fundamental Growth Fund will cause to be affixed upon the certificate(s) issued to such person (if any) a legend as follows:

I-13

 

THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. (OR ITS STATUTORY SUCCESSOR) (THE “FUND”) OR ITS PRINCIPAL UNDERWRITER UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (2) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED.

and, further, that stop transfer instructions will be issued to Fundamental Growth Fund’s transfer agent with respect to such shares. Mercury Fund will provide Fundamental Growth Fund on the Closing Date with the name of any stockholder who is, to the knowledge of Mercury Fund, an affiliate of Mercury Fund on such date.

     (b) All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf.

     (c) Any notice, report or demand required or permitted by any provision of this Agreement shall be in writing and shall be made by hand delivery, prepaid certified mail or overnight service, addressed to either Fund, in each case at 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Terry K. Glenn, President.

     <R>(d) This Agreement supersedes all previous correspondence and oral communications between the parties regarding the Reorganization, constitutes the only understanding with respect to the Reorganization, may not be changed except by a letter of agreement signed by each party and shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in said state.</R>

     (e) Copies of the Articles of Incorporation, as amended, restated and supplemented, as applicable, of each of Fundamental Growth Fund and Mercury Fund are on file with the State Department of Assessments and Taxation of the State of Maryland and notice is hereby given that this instrument is executed on behalf of the members of the Board of each of Fundamental Growth Fund and Mercury Fund.

 

I-14

     This Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original but all such counterparts together shall constitute but one instrument.

<R>	MERRILL LYNCH FUNDAMENTAL GROWTH        FUND, INC.
	By:	/s/ DONALD C. BURKE
		DONALD C. BURKE VICE PRESIDENT AND TREASURER

ATTEST:

/s/ PHILLIP S. GILLESPIE

SECRETARY

THE ASSET PROGRAM, INC.
By:	/s/ DONALD C. BURKE
	DONALD C. BURKE VICE PRESIDENT AND TREASURER

ATTEST:
/s/ PHILLIP S. GILLESPIE
SECRETARY	</R>

 

I-15

 

EXHIBIT II

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL AND
RECORD OWNERS OF SHARES OF FUNDAMENTAL GROWTH AND GROWTH OPPORTUNITY

<R>The following tables provide information about the persons or entities who, to the knowledge of the relevant Fund, owned beneficially or of record 5% or more of any class of that Fund’s outstanding shares as of October 17, 2003:</R>

Fundamental Growth

<R>

Name	Address	Percentage and Class	Percentage of Fund
Merrill Lynch Trust Co., FSB* TTEE FBO Merrill Lynch	800 Scudders Mill Road Plainsboro, NJ 08536	12.68% of Class I	3.05%
Merrill Lynch Trust Co., FSB* TTEE FBO The Kroger Co. Savings plan	800 Scudders Mill Road Plainsboro, NJ 08536	10.83% of Class I	2.60%
Delaware Management Trust Co. Dayton, Inc	800 Scudders Mill Road Plainsboro, NJ 08536	77.36% of Class R	0.00%**
Delaware Mgmt Trust Co TTEE FBO The Diocese Of Belleville Lay Employees 403(B) Plan	800 Scudders Mill Road Plainsboro, NJ 08536	8.20% of Class R	0.00%**
Delaware Management Trust Co. FBO Fowler Production Co.	800 Scudders Mill Road Plainsboro, NJ 08536	7.19% of Class R	0.00%**
Delaware Mgmnt Trust Co TTEE FBO Freeman Gas & Electric 401K Plan	800 Scudders Mill Road Plainsboro, NJ 08536	6.34% of Class R	0.00%**

Growth Opportunity

Name	Address	Percentage and Class	Percentage of Fund
Merrill Lynch Trust Company, FSB* TTEE FBO Merrill Lynch Trust Company	800 Scudders Mill Road Plainsboro, NJ 08536	41.92% of Class I	0.94%
Merrill Lynch Trust Company, FSB* TTEE FBO Merrill Lynch Trust Company	800 Scudders Mill Road Plainsboro, NJ 08536	11.29% of Class I	0.25%
Mr. Christopher Hagy FBO FBO C Christopher Hagy	800 Scudders Mill Road Plainsboro, NJ 08536	7.53% of Class I	0.17%
Gift Growth Portfolio Gift College Investing Plan Ark Teacher Retirement System	800 Scudders Mill Road Plainsboro, NJ 08536	12.78% of Class A	1.98%
Gift Growth & Income Portfolio Gift College Investing Plan Ark Teacher Retirement System	800 Scudders Mill Road Plainsboro, NJ 08536	7.94% of Class A	1.23%

* Merrill Lynch Trust Company is the record holder on behalf of certain employee retirement, personal trust or savings plan accounts for which it acts as trustee.

** Represents less than 0.01% of the Fund.</R>

 

II-1

STATEMENT OF ADDITIONAL INFORMATION
MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(609) 282-2800

     <R>This Statement of Additional Information is not a prospectus and should be read in conjunction with the Combined Proxy Statement and Prospectus of Mercury Growth Opportunity Fund (“Growth Opportunity”), a series of The Asset Program, Inc. (“Asset Program”), and Merrill Lynch Fundamental Growth Fund, Inc. (“Fundamental Growth”), dated November 3, 2003 (the “Proxy Statement and Prospectus”), which has been filed with the Securities and Exchange Commission and can be obtained, without charge, by calling Fundamental Growth at 1-800-995-6526, or by writing to Fundamental Growth at the above address. This Statement of Additional Information has been incorporated by reference into the Proxy Statement and Prospectus.</R>

     Further information about Fundamental Growth is contained in the Statement of Additional Information of Fundamental Growth, dated January 1, 2003 (the “Fundamental Growth Statement”), which is incorporated by reference into and accompanies this Statement of Additional Information.

     The Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains the prospectus relating to Fundamental Growth, the Fundamental Growth Statement, the prospectus of Growth Opportunity, the statement of additional information relating to Growth Opportunity, other material incorporated by reference and other information regarding Fundamental Growth and Growth Opportunity.

<R>The date of this Statement of Additional Information is November 3, 2003</R>

TABLE OF CONTENTS

<R>
General Information	SAI-3
Financial Statements	SAI-3
</R>

 

SAI-2

GENERAL INFORMATION

     Stockholders of Growth Opportunity are being asked to approve Fundamental Growth’s acquisition of substantially all of the assets, and the assumption of substantially all of the liabilities, of Growth Opportunity in exchange solely for an equal aggregate value of newly issued shares of common stock, with a par value of $.10 per share, of Fundamental Growth and the subsequent distribution of Corresponding Shares (defined below) of Fundamental Growth to Growth Opportunity stockholders in proportion to such stockholders’ interest in Growth Opportunity. Thereafter, the Asset Program will terminate Growth Opportunity as a series of the Asset Program under Maryland law. The transaction described in this paragraph is referred to herein as the “Reorganization.”

     Generally, the assets transferred by Growth Opportunity to Fundamental Growth will equal all investments of Growth Opportunity held in its portfolio after the close of business on the New York Stock Exchange on the business day prior to the date the Reorganization takes place (“Valuation Time”) and all other assets of Growth Opportunity as of such time.

     Shares of Fundamental Growth will be distributed to stockholders of Growth Opportunity as follows: (a) holders of Class A, Class B, Class C and Class I shares of Growth Opportunity who own such shares as of the Valuation Time will be entitled to receive Class A, Class B, Class C and Class I shares, respectively, of Fundamental Growth (“Corresponding Shares”). The aggregate net asset value of the Corresponding Shares of Fundamental Growth to be received by each stockholder of Growth Opportunity will equal the aggregate net asset value of the shares of Growth Opportunity owned by such stockholder as of the Valuation Time.

     A special meeting of the stockholders of Growth Opportunity will be held at the offices of Fund Asset Management, L.P. (“FAM”), 800 Scudders Mill Road, Plainsboro, New Jersey on Tuesday, December 9, 2003 at 9:00 a.m. Eastern time to consider the Reorganization.

     For detailed information about the Reorganization, stockholders of Growth Opportunity should refer to the Proxy Statement and Prospectus. For further information about Fundamental Growth, stockholders should refer to the Fundamental Growth Statement, which accompanies this Statement of Additional Information and is incorporated by reference herein.

FINANCIAL STATEMENTS

     <R>Pro forma financial statements reflecting consummation of the Reorganization have not been prepared since, as of October 24, 2003, the net asset value of Growth Opportunity did not exceed 10% of the net asset value of Fundamental Growth.</R>

Fundamental Growth

     <R>Audited financial statements and accompanying notes for the fiscal year ended August 31, 2003 and the report of independent auditors thereon, dated October 22, 2003, of Fundamental Growth are incorporated herein by reference from Fundamental Growth’s Annual Report, which accompanies this Statement of Additional Information.</R>

Growth Opportunity

     <R>Audited financial statements and accompanying notes for the fiscal year ended January 31, 2003 and the independent auditors’ report thereon, dated March 12, 2003, of Growth Opportunity are incorporated herein by reference to Growth Opportunity’s Annual Report, which accompanies this Statement of Additional Information. Unaudited Financial Statements and accompanying notes for the six month period ended July 31, 2003 of Growth Opportunity are incorporated herein by reference to Growth Opportunity’s Semi-Annual Report, which accompanies this Statement of Additional Information.</R>

 

SAI-3

PART C

OTHER INFORMATION

Item 15. Exhibits.

<R>
1	(a)	—	Articles of Incorporation of the Registrant, dated April 29, 1992.(a)
	(b)	—	Articles of Amendment, dated July 7, 1992, to the Articles of Incorporation of the Registrant.(a)
	(c)	—	Articles of Amendment, dated October 17, 1994, to the Articles of Incorporation of the Registrant.(a)
	(d)	—	Articles of Amendment, dated May 3, 2002, to the Articles of Incorporation of the Registrant.(i)
	(e)	—	Articles Supplementary, dated October 17, 1994, to the Articles of Incorporation of the Registrant.(a)
	(f)	—	Articles Supplementary, dated October 17, 1994, to the Articles of Incorporation of the Registrant.(a)
	(g)	—	Articles Supplementary, dated November 17, 1999, to the Articles of Incorporation of the Registrant.(j)
	(h)	—	Articles Supplementary, dated October 20, 2000, to the Articles of Incorporation of the Registrant.(l)
	(i)	—	Articles Supplementary, dated December 11, 2001, to the Articles of Incorporation of the Registrant.(d)
	(j)	—	Articles Supplementary, dated December 9, 2002, to the Articles of Incorporation of the Registrant.(i)
2		—	By-Laws of the Registrant.(a)
3		—	Not applicable.
4		—	Form of Agreement and Plan between the Registrant and Mercury Growth Opportunity Fund (“Growth Opportunity”), a series of The Asset Program.(f)
5		—	Portions of the Articles of Incorporation, as amended and supplemented, and By-Laws of the Registrant defining the rights of holders of shares of common stock of the Registrant.(b)
6	(a)	—	Management Agreement, as amended, between the Registrant and Merrill Lynch Investment Managers, L.P. (the “Manager”).(d)
	(b)	—	Form of Sub-Advisory Agreement between the Manager and Merrill Lynch Asset Management U.K. Limited.(n)
7		—	Form of Distribution Agreement between the Registrant and FAM Distributors, Inc. (the “Distributor”).(g)
8		—	None.
9		—	Form of Custody Agreement between the Registrant and JP Morgan Chase.(o)
10	(a)	—	Form of Amended and Restated Class A Distribution Plan of the Registrant.(c)
	(b)	—	Form of Amended and Restated Class B Distribution Plan of the Registrant.(h)
	(c)	—	Form of Amended and Restated Class C Distribution Plan of the Registrant.(h)
	(d)	—	Form of Class R Distribution Plan of the Registrant.(q)
	(e)	—	Revised Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-3.(c)
11		—	Opinion of Sidley Austin Brown & Wood LLP, counsel to the Registrant.
12		—	Tax Opinion of Sidley Austin Brown & Wood LLP, counsel to the Registrant and Growth Opportunity.*
13	(a)(1)	—	Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement between the Registrant and Financial Data Services, Inc.(a)
	(a)(2)	—	Amendment to the Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement dated July 11, 2001.(i)
	(a)(3)	—	Amendment to the Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement dated December 1, 2001.(i)
</R>

C-1

 

<R>
	(a)(4)	—	Form of Amendment to the Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement.(r)
	(b)	—	Agreement between Merrill Lynch & Co., Inc. and Registrant relating to Registrant’s use of Merrill Lynch name.(a)
	(c)(1)	—	Amended and Restated Credit Agreement between the Registrant and a syndicate of banks.(e)
	(c)(2)	—	Form of Second Amended and Restated Credit Agreement among the Registrant, a syndicate of banks and certain other parties.(m)
	(c)(3)	—	Form of Third Amended and Restated Credit Agreement among the Registrant, a syndicate of banks and certain other parties.(s)
	(d)	—	Form of Administrative Services Agreement between the Registrant and State Street Bank and Trust Company.(k)
	(e)	—	Form of Securities Lending Agency Agreement.(p)
14	(a)	—	Consent of Ernst & Young LLP, independent auditors for the Registrant.
	(b)	—	Consent of Deloitte & Touche LLP, independent auditors for Growth Opportunity.
15		—	Not Applicable.
16		—	Power of Attorney.(t)
17	(a)	—	Prospectus dated January 1, 2003, and Statement of Additional Information dated January 1, 2003, of the Registrant.
	(b)	—	Annual Report to Stockholders of the Registrant for the fiscal year ended August 31, 2003.
	(c)	—	Prospectus dated May 28, 2003, and Statement of Additional Information dated May 28, 2003, of Growth Opportunity.
	(d)	—	Annual Report to Stockholders of Growth Opportunity for the fiscal year ended January 31, 2003.
	(e)	—	Semi-Annual Report to Stockholders of Growth Opportunity for the six months ended July 31, 2003.
	(f)	—	Form of Proxy.(t)
</R>

(a) Re-Filed on December 21, 1995, as an exhibit to Post-Effective Amendment No. 4 to the Registrant’s Registration Statement on Form N-1A (the “Registration Statement”) pursuant to the Electronic Data Gathering Analysis and Retrieval (“EDGAR”) requirements.

(b) Reference is made to Article II, Article IV, Article V (sections 2, 3, 4 and 6), Article VI, Article VII and Article IX of the Registrant’s Articles of Incorporation, previously filed as Exhibit (1), to the Registration Statement, and to Article II, Article III (sections 1, 3, 5, 6 and 17), Article VI, Article VII, Article XII, Article XIII and Article XIV of the Registrant’s By-Laws previously filed as Exhibit (2) to the Registration Statement.

(c) Incorporated by reference to Exhibits 13(a) and 14 to Post-Effective Amendment No. 36 to the Registration Statement on Form N-1A of Merrill Lynch Pacific Fund, Inc. filed on April 17, 2003 (File No. 2-56978).

(d) Filed on December 11, 2001 as an exhibit to Post-Effective Amendment No. 11 to the Registrant’s Registration Statement.

(e) Incorporated by reference to Exhibit 8(b) to the Issuer Tender Offer Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc. (File No. 333-15973) filed on December 14, 2000.

(f) Included as Exhibit I to the Proxy Statement and Prospectus contained the Registration Statement.

(g) Incorporated by reference to Exhibit 5 to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A of Merrill Lynch Adjustable Rate Securities Fund, Inc. (File No. 33-40332), filed on July 5, 2000.

(h) Incorporated by reference to Exhibit 13 to Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A of Merrill Lynch Adjustable Rate Securities Fund, Inc. (File No. 33-40332), filed on September 28, 2000.

(i) Filed on December 30, 2002 as an exhibit to Post-Effective Amendment No. 12 to the Registrant’s Registration Statement.

C-2

 

(j) Filed on December 1, 1999 as an exhibit to Post-Effective Amendment No. 9 to the Registrant’s Registration Statement.

(k) Incorporated by reference to Exhibit 8(d) to Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A of Merrill Lynch Focus Twenty Fund, Inc. (File No. 333-89775) filed on March 20, 2001.

(l) Filed on November 30, 2000 as an exhibit to Post-Effective Amendment No. 10 to the Registrant’s Registration Statement.

(m) Incorporated by reference to Exhibit (b)(2) to the Issuer Tender Offer Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc. (File No. 333-39837), filed on December 14, 2001.

(n) Filed on December 23, 1996 as an exhibit to Post-Effective Amendment No. 5 to the Registrant’s Registration Statement.

(o) Incorporated by reference to Exhibit 7 to Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A of Mercury Global Holdings, Inc. (File No. 2-9834), filed on March 28, 2002.

(p) Incorporated by reference to Exhibit 8(f) to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A of Merrill Lynch Global Technology Fund, Inc. (File No. 333-48929), filed on July 24, 2002.

(q) Incorporated by reference to Exhibit 13(d) to Post-Effective Amendment No. 32 to the Registration Statement on Form N-1A of Merrill Lynch Basic Value Fund, Inc. (File No. 2-58521), filed on December 20, 2002

(r) Incorporated by reference to Exhibit 8(a)(3) to Post-Effective Amendment No. 32 to the Registration Statement on Form N-1A of Merrill Lynch Basic Value Fund, Inc. (File No. 2-58521), filed on December 20, 2002.

(s) Incorporated by reference to Exhibit (b)(3) of the Issuer Tender Offer Statement on Schedule TO of Merrill Lynch Senior Floating Rate Fund, Inc. (333-39837), filed on December 13, 2002.<R>

(t)	Filed as an Exhibit to the Registrant’s Registration Statement on Form N-14 (File No. 333-109472), filed on October 3, 2003.
*	To be filed by post-effective amendment.</R>

Item 16. Indemnification.

Reference is made to Article VI of the Registrant’s Articles of Incorporation, Article VI of the Registrant’s By-Laws, Section 2-418 of the Maryland General Corporation Law and Section 9 of the Distribution Agreement.

Insofar as the conditional advancing of indemnification moneys for actions based on the Investment Company Act of 1940, as amended (the “1940 Act”) may be concerned, Article VI of the Registrant’s By-Laws provides that such payments will be made only on the following conditions: (i) advances may be made only on receipt of a written affirmation of such person’s good faith belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any such advance if it is ultimately determined that the standard of conduct has not been met; and (ii) (a) such promise must be secured by a security for the undertaking in form and amount acceptable to the Registrant, (b) the Registrant is insured against losses arising by receipt by the advance, or (c) a majority of a quorum of the Registrant’s disinterested non-party Directors, or an independent legal counsel in a written opinion, shall determine, based upon a review of readily available facts, that at the time the advance is proposed to be made, there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification.

In Section 9 of the Distribution Agreement relating to the securities being offered hereby, the Registrant agrees to indemnify the Distributor and each person, if any, who controls the Distributor within the meaning of the Securities Act of 1933, as amended (the “1933 Act”), against certain types of civil liabilities arising in connection with the Registration Statement or Prospectus and Statement of Additional Information.

C-3

 

Insofar as indemnification for liabilities arising under the 1933 Act may be permitted to Directors, officers and controlling persons of the Registrant and the principal underwriter pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a Director, officer, or controlling person of the Registrant and the principal underwriter in connection with the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person or the principal underwriter in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.

Item 17. Undertakings.

     (1) The undersigned Registrant agrees that prior to any public reoffering of the securities registered through use of a prospectus which is part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933, as amended, the reoffering prospectus will contain information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by other items of the applicable form.

     (2) The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the Securities Act of 1933, as amended, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of securities at that time shall be deemed to be the initial bona fide offering of them.

     (3) The Registrant undertakes to file, by post-effective amendment, an opinion of counsel as to certain tax matters, within a reasonable time after receipt of such opinion.

 

C-4

SIGNATURES

     <R>As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the Registrant, in the Township of Plainsboro and State of New Jersey, on the 3rd of November, 2003.<R>

	MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.
	(Registrant)
By:	/s/ Donald C. Burke
	(Donald C. Burke, Vice President and Treasurer)

     As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
*	President (Principal Executive   Officer) and Director
(Terry K. Glenn)
*	Vice President and Treasurer    (Principal Financial    And Accounting Officer)
(Donald C. Burke)
*	Director
(James H. Bodurtha)
*	Director
(Joe Grills)
*	Director
(Herbert I. London)
*	Director
(Andre F. Perold)
*	Director
(Roberta Cooper Ramo)
*	Director
(Robert S. Salomon, Jr.)
*	Director
(Stephen B. Swensrud)

 *   This Registration Statement has been signed by each of the persons so indicated by the undersigned as Attorney-in-Fact.<R>

* By:	/s/ Donald C. Burke	November 3, 2003
	(Donald C. Burke, Attorney-in-Fact)
</R>

 

C-5

EXHIBIT INDEX

<R>
(11)		—	Opinion of Sidley Austin Brown & Wood LLP
(14)	(a)	—	Consent of Ernst & Young LLP, independent auditors for the Registrant
(14)	(b)	—	Consent of Deloitte & Touche LLP, independent auditors for Growth Opportunity
(17)	(a)	—	Prospectus dated January 1, 2003, and Statement of Additional Information dated January 1, 2003, of the Registrant
(17)	(b)	—	Annual Report to Stockholders of the Registrant
(17)	(c)	—	Prospectus dated May 28, 2003, and Statement of Additional Information dated May 28, 2003, of Growth Opportunity
(17)	(d)	—	Annual Report to Stockholders of Growth Opportunity
(17)	(e)	—	Semi-Annual Report to Stockholders of Growth Opportunity
</R>

EX-11 3 e15840ex_11.htm OPINION OF SIDLEY AUSTIN BROWN & WOOD LLP

Exhibit 11

SIDLEY AUSTIN BROWN & WOOD LLP

BEIJING	787 SEVENTH AVENUE NEW YORK, NEW YORK 10019 TELEPHONE 212 839 5300 FACSIMILE 212 839 5599 www.sidley.com FOUNDED 1866	LOS ANGELES
BRUSSELS		NEW YORK
CHICAGO		SAN FRANCISCO
DALLAS		SHANGHAI
GENEVA		SINGAPORE
HONG KONG		TOKYO
LONDON		WASHINGTON, D.C.

                                                                               October 31, 2003

Merrill Lynch Fundamental Growth Fund, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Ladies and Gentlemen:

     We have acted as counsel for Merrill Lynch Fundamental Growth Fund, Inc. (the “Fund”) in connection with the proposed acquisition by the Fund of substantially all of the assets, and the proposed assumption by the Fund of substantially all of the liabilities, of Mercury Growth Opportunity Fund (“Growth Opportunity”), a series of The Asset Program, Inc., and the simultaneous distribution to Growth Opportunity of newly-issued shares of common stock of the Fund having an aggregate net asset value equal to the net assets of Growth Opportunity acquired by the Fund reduced by the amount of liabilities of Growth Opportunity assumed by the Fund (collectively, the “Reorganization”). This opinion is furnished in connection with the Fund’s Registration Statement on Form N-14 under the Securities Act of 1933, as amended (the “Registration Statement”), relating to shares of common stock, par value $0.10 per share, of the Fund (the “Shares”), to be issued in the Reorganization.

     As counsel for the Fund, we are familiar with the proceedings taken by the Fund and to be taken by the Fund in connection with the authorization and issuance of the Shares. In addition, we have examined and are familiar with the Articles of Incorporation of the Fund, as amended and supplemented, the By-laws of the Fund, as amended, and such other documents as we have deemed relevant to the matters referred to in this opinion.

     Based upon the foregoing, we are of the opinion that subsequent to the approval of the Agreement and Plan of Reorganization between the Fund and Growth Opportunity, as set forth in the proxy statement and prospectus constituting a part of the Registration Statement (the “Proxy Statement and Prospectus”), the Shares, upon issuance in the manner referred to in the Registration Statement, for consideration as described in the Agreement and Plan of Reorganization, will be legally issued, fully paid and non-assessable shares of common stock of the Fund.

     We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Proxy Statement and Prospectus constituting a part thereof.

Very truly yours,

/S/ SIDLEY AUSTIN BROWN & WOOD LLP

  EX-14.(A) 4 e15840ex_14a.htm CONSENT OF INDEPENDENT AUDITORS

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions “Comparison of the Funds -Financial Highlights”, “Experts”, “Exhibit 1, Agreement and Plan of Reorganization, Representations and Warranties of Fundamental Growth Fund” and “Exhibit 1, Agreement and Plan of Reorganization, Conditions of Mercury Fund”, and to the incorporation by reference of our report dated October 22, 2003 for Merrill Lynch Fundamental Growth Fund, Inc. in the Registration Statement (Form N-14 Investment Company Act File No. 333-109472 and Investment Company Act File No. 811-6669) and related Combined Proxy Statement and Prospectus of Merrill Lynch Fundamental Growth Fund, Inc. and Mercury Growth Opportunity Fund, filed with the Securities and Exchange Commission.

/s/ Ernst & Young

MetroPark, New Jersey
October 31, 2003

  EX-14.(B) 5 e15840ex_14b.htm INDEPENDENT AUDITORS' CONSENT

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in this Registration Statement of Merrill Lynch Fundamental Growth Fund, Inc. on Form N-14 of our report dated March 12, 2003 on the financial statements and financial highlights of Mercury Growth Opportunity Fund appearing in the January 31, 2003 Annual Report of Mercury Growth Opportunity Fund, in the Statement of Additional Information which is part of this Registration Statement. We also consent to the reference to us under the caption “EXPERTS” appearing in the Joint Proxy Statement and Prospectus, which is also part of this Registration Statement, and to the reference to us under the caption “Financial Statements - Growth Opportunity” appearing in such Statement of Additional Information.

/s/ Deloitte & Touche LLP

Princeton, New Jersey
October 30, 2003

  EX-17.(A) 6 e15840ex17a.htm PROSPECTUS

[LOGO]   Merrill Lynch   Investment Managers www.mlim.ml.com

Prospectus

<R>January 1, 2003</R>

Merrill Lynch Fundamental Growth Fund, Inc.

This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference.

The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

Table of Contents

<R>		PAGE
[ICON]	KEY FACTS
	Merrill Lynch Fundamental Growth Fund at a Glance	3
	Risk/Return Bar Chart	4
	Fees and Expenses	6
[ICON]	DETAILS ABOUT THE FUND
	How the Fund Invests	8
	Investment Risks	9
[ICON]	YOUR ACCOUNT
	Merrill Lynch Select PricingSM System	14
	How to Buy, Sell, Transfer and Exchange Shares	20
	Participation in Fee-Based Programs	24
[ICON]	MANAGEMENT OF THE FUND
	Merrill Lynch Investment Managers	27
	Financial Highlights	28
[ICON]	FOR MORE INFORMATION
	Shareholder Reports	Back Cover
	Statement of Additional Information	Back Cover
</R>

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

Key Facts [ICON]  

In an effort to help you better understand the many concepts involved in making an investment decision, we have defined the highlighted terms in this prospectus in the sidebar.

Common Stock — shares of ownership of a corporation.

MERRILL LYNCH FUNDAMENTAL GROWTH FUND AT A GLANCE

What is the Fund’s investment objective?

The investment objective of the Fund is to seek long-term growth of capital.

What are the Fund’s main investment strategies?

<R>The Fund tries to achieve its objective by investing primarily in a portfolio of common stock of U.S. companies that Fund management believes have shown above-average growth rates in earnings over the long-term. In other words, Fund management tries to choose investments that will increase in value over the long-term. To a lesser extent the Fund may also invest in securities convertible into common stock and rights to subscribe to common stock of these companies. The Fund may invest up to 10% of its total assets in securities issued by foreign companies. (This limit does not apply to American Depositary Receipts (“ADRs”).)The Fund may also invest in certain types of “derivative” securities. We cannot guarantee that the Fund will achieve its objective.</R>

What are the main risks of investing in the Fund?

<R>As with any mutual fund, the value of the Fund’s investments — and therefore the value of Fund shares — may fluctuate. These changes may occur because a particular stock market is rising or falling. At other times, there are specific factors that may affect the value of a particular investment. Since foreign markets may differ significantly from U.S. markets in terms of both economic conditions and government regulation, investments in foreign securities involve special risks. Derivatives may be volatile and subject to liquidity, leverage and credit risks. If the value of the Fund’s investments goes down, you may lose money.</R>

Who should invest?

<R>Investors should consider their own investment goals, time horizon, total investment portfolio diversification and risk tolerance before investing in the Fund. An investment in the Fund may not be appropriate for all investors and is not intended to be a complete investment program.</R>

The Fund may be an appropriate investment for you if you:<R>

• Are investing with long term goals

• Are looking for a professionally managed and diversified portfolio of growth stocks as part of your total investment portfolio

• Are willing to accept the risk that the value of your investment may decline in order to seek long term growth of capital

• Are not looking for a significant amount of current income</R>

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 3 

[ICON]  Key Facts

RISK/RETURN BAR CHART

<R>The bar chart and table below provide an indication of the risks of investing in the Fund. The bar chart shows changes in the Fund’s performance for Class D shares for each complete calendar year since the Fund’s inception. Sales charges are not reflected in the bar chart. If these amounts were reflected, returns would be less than those shown. The table compares the Fund’s average annual total return with the S&P 500, a broad measure of market performance. How the Fund performed in the past (before and after taxes) is not necessarily an indication of how the Fund will perform in the future.</R>

<R>During the period shown in the bar chart, the highest return for a quarter was 27.31% (quarter ended December 31, 1998) and the lowest return for a quarter was -14.94% (quarter ended March 31, 2001). The Fund’s year-to-date return as of September 30, 2002 was -31.39%</R>.

 

 4 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

<R>The table below compares the average annual total returns of the Fund’s shares with those of the S&P 500 Index and the S&P 500/Barra Growth Index. After-tax returns are shown only for Class D shares and will vary for other classes. The after-tax returns are calculated using the historical highest marginal Federal individual income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts or through tax advantaged education savings accounts.

Average Annual Total Returns (for the periods ended December 31, 2001)*	One Year		Five Years		Life of Fund
Merrill Lynch Fundamental Growth Fund Class A:
Return Before Taxes**	-23.64	%	11.60	%	15.04	%†
Merrill Lynch Fundamental Growth Fund Class B:
Return Before Taxes**	-23.43	%	11.40	%	14.72	%†
Merrill Lynch Fundamental Growth Fund Class C:
Return Before Taxes**	-21.05	%	11.65	%	11.39	%††
Merrill Lynch Fundamental Growth Fund Class D:
Return Before Taxes**	-23.84	%	11.31	%	11.59	%††
Return After Taxes on Distributions**	-23.84	%	9.15	%	9.83	%††
Return After Taxes on Distributions    and Sale of Fund Shares**	-14.52	%	8.60	%	9.10	%†
S&P 500 Index‡	-11.90	%	10.70	%	15.16	%#
					13.54	%##
S&P 500/Barra Growth Index‡‡	-12.73	%	11.10	%	15.75	%#
					13.15	%##

* The inception date for Class R shares was January 1, 2003; therefore, information with respect to Class R shares is not included.

** Includes all applicable fees and sales charges.

‡ The S&P 500^® is the Standard & Poor’s 500 Index, a widely recognized, unmanaged index of common stock prices. Performance of the index does not reflect the deduction of fees, expenses or taxes. Past performance is not predictive of future performance.

‡‡ The S&P 500/Barra Growth Index is an unmanaged and non-diversified index of common stock prices. Performance of the index does not reflect the deduction of fees, expenses or taxes. Past performance is not predictive of future performance.

† Class inception date is October 21, 1994.

# Since October 31, 1994.

## Since December 31, 1992.

†† As a result of the implementation of the Merrill Lynch Select Pricing^SM System, Class A and Class B shares outstanding prior to October 21, 1994 were redesignated as Class D and Class C shares, respectively. Historical performance information pertaining to these shares is included here.</R>

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 5 

[ICON]  Key Facts

UNDERSTANDING
EXPENSES

<R>Fund investors pay various fees and expenses, either directly or indirectly. Listed below are some of the main types of expenses that the Fund may charge:</R>

Expenses paid directly by the shareholder:

<R>Shareholder Fees — These include sales charges that you may pay when you buy or sell shares of the Fund.</R>

Expenses paid indirectly by the shareholder:

Annual Fund Operating Expenses — expenses that cover the costs of operating the Fund.

Management Fee — a fee paid to the Manager for managing the Fund.

<R>Distribution Fees — fees used to support the Fund’s marketing and distribution efforts, such as compensating financial advisers and other financial intermediaries, advertising and promotion.</R>

Service (Account Maintenance) Fees — fees used to compensate securities dealers and other financial intermediaries for account maintenance activities.

FEES AND EXPENSES

<R>The Fund offers five different classes of shares. Although your money will be invested the same way no matter which class of shares you buy, there are differences among the fees and expenses associated with each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your Merrill Lynch Financial Advisor can help you with this decision.

This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or less than those indicated below.

Shareholder Fees (fees paid directly   from your investment)(a):	Class A		Class B(b)		Class C		Class D		Class R
Maximum Sales Charge (Load)    imposed on purchases (as a percentage    of offering price)	5.25%	(c)	None		None		5.25%	(c)	None
Maximum Deferred Sales Charge (Load)    (as a percentage of original purchase    price or redemption proceeds,    whichever is lower)	None	(d)	4.0%	(c)	1.0%	(c)	None	(d)	None
Maximum Sales Charge (Load)    imposed on Dividend Reinvestments	None		None		None		None		None
Redemption Fee	None		None		None		None		None
Exchange Fee	None		None		None		None		None
Annual Fund Operating Expenses   (expenses that are deducted from   Fund assets):
Management Fee	0.61%		0.61%		0.61%		0.61%		0.61%
Distribution and/or Service (12b-1)     Fees(e)	None		1.00%		1.00%		0.25%		0.50%
Other Expenses (including transfer     agency fees)(f)	0.33%		0.35%		0.36%		0.32%		0.33%
Total Annual Fund Operating Expenses	0.94%		1.96%		1.97%		1.18%		1.44%
</R>

(a) In addition, Merrill Lynch may charge clients a processing fee (currently $5.35) when a client buys or sells shares. See “Your Account — How to Buy, Sell, Transfer and Exchange Shares.”

(b) Class B shares automatically convert to Class D shares about eight years after you buy them and will no longer be subject to distribution fees.<R>

(c) Some investors may qualify for reductions in or waivers of the sales charge (load).

(d) You may pay a deferred sales charge if you purchase $1 million or more and you redeem within one year.

(e) The Fund calls the Service Fee an “Account Maintenance Fee.” Account Maintenance Fee is the term used elsewhere in this Prospectus and in all other Fund materials. If you hold Class B, Class C or Class R shares over time, it may cost you more in account maintenance and distribution (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of the other classes.

(f) Financial Data Services, Inc., an affiliate of the Manager, provides transfer agency services to the Fund. The Fund pays a fee for these services. The Manager or its affiliates also provide certain accounting services to the Fund. The Fund reimburses the Manager or its affiliates for such services.</R>

 

 6 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

Examples:

These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund’s operating expenses remain the same. This assumption is not meant to indicate you will receive a 5% annual rate of return. Your annual return may be more or less than the 5% used in this example. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

EXPENSES IF YOU DID REDEEM YOUR SHARES:

<R>	1 Year	3 Years	5 Years	10 Years
Class A	$616	$809	$1,018	$1,619
Class B	$599	$915	$1,257	$2,091	*
Class C	$300	$618	$1,062	$2,296
Class D	$639	$880	$1,140	$1,882
Class R	$147	$456	$  787	$1,724
</R>

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

<R>	1 Year	3 Years	5 Years	10 Years
Class A	$616	$809	$1,018	$1,619
Class B	$199	$615	$1,057	$2,091	*
Class C	$200	$618	$1,062	$2,296
Class D	$639	$880	$1,140	$1,882
Class R	$147	$456	$  787	$1,724
</R>

* Assumes conversion to Class D shares approximately eight years after purchase. See note (b) to the Fees and Expenses table above.

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 7 

Details About the Fund [ICON]

ABOUT THE
PORTFOLIO MANAGER

<R>Lawrence R. Fuller has been portfolio manager of the Fund since 1992 and Senior Vice President of the Fund since 1997. Mr. Fuller is primarily responsible for the day-to-day management of the Fund. Mr. Fuller has been a First Vice President of Merrill Lynch Investment Managers since 1997 and was Vice President from 1992 to 1997.

Thomas E. Burke has been an associate portfolio manager of the Fund since 1997. Mr. Burke has been a Director of Merrill Lynch Investment Managers since 1998.</R>

ABOUT THE MANAGER

<R>Merrill Lynch Investment Managers is the Manager and Merrill Lynch Asset Management, U.K. Limited is the sub-adviser.</R>

HOW THE FUND INVESTS

<R>The Fund’s main objective is long-term growth of capital. The Fund tries to achieve its goals by investing in a diversified portfolio consisting primarily of common stock.</R>

Outlined below are the main strategies the Fund uses in seeking to achieve its investment objective:

The Fund will generally invest at least 65% of its total assets in the following equity securities:

• Common stock

• Convertible preferred stock

• Securities convertible into common stock

• Rights to subscribe to common stock

Of these securities the Fund will generally invest in common stock.

<R>In selecting securities, Fund management emphasizes common stock of companies that have above-average rates of earnings growth. Fund management believes that the common stocks of companies with above-average rates of earnings growth frequently have the prospect of having above-average increases in price. On the other hand, such companies tend to have higher stock market valuations. As a result, their shares may be more vulnerable to price declines from unexpected adverse developments. The common stocks of these companies also tend to have higher prices relative to stocks of companies that do not have above average rates of earnings growth.</R>

Some, but not all, of the factors that may cause a company to have an above-average rate of earnings growth include:

• Above average growth rate in sales

• Improvement in its profit margin

• Providing proprietary or niche products or services

• Strong industry growth <R>

• A lead in market share

The Fund may invest in companies of any size but emphasizes common stocks of companies having a medium to large stock market capitalization (currently approximately $2 billion or more). </R>

 

 8 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

<R>Other Strategies. In addition to the main strategies discussed above, the Fund may use certain other investment strategies:

The Fund may also invest up to 10% of its total assets in the securities of foreign companies. Securities of foreign companies may be in the form of ADRs, European Depository Receipts (“EDRs”) or other securities convertible into securities of foreign companies.</R>

The Fund’s restriction limiting investments in foreign securities to 10% of total assets does not include ADRs.

<R>The Fund may use derivatives to hedge its investment portfolio against market and currency risks. Derivatives are financial instruments whose value is derived from another security, a commodity (such as oil or gold), a currency or an index such as the Standard & Poor’s 500 Index. The derivatives that the Fund may use include futures, forwards, options, indexed securities and inverse securities.</R>

The Fund may also lend its portfolio securities.

<R>The Fund will normally invest a portion of its assets in short-term debt securities, such as commercial paper. These securities can be sold easily and have limited risk of loss but earn only limited returns. The Fund may also invest without limitation in short-term debt securities (including repurchase agreements), non-convertible preferred stocks and bonds or government and money market securities when Fund management is unable to find enough attractive equity investments and to reduce exposure to equities when Fund management believes it is advisable to do so on a temporary basis. Investment in these securities may also be used to meet redemptions. Short-term investments and temporary defensive positions may limit the potential for the Fund to achieve its objective of long-term growth of capital. The Fund may also invest uninvested cash balances in affiliated money market funds.</R>

INVESTMENT RISKS

<R>This section contains a summary discussion of the general risks of investing in the Fund. As with any mutual fund, there can be no guarantee that the Fund will meet its objective or that the Fund’s performance will be positive for any period of time. </R>

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 9 

[ICON]  Details About the Fund<R>

<R>Set forth below are the main risks of investing in the Fund.

Market Risk and Selection Risk — Market risk is the risk that the stock market in one or more countries in which the Fund invests will go down in value, including the possibility that a market will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform the stock markets, the relevant indices or other funds with similar investment objectives and investment strategies. The Fund’s investment style may over time go in and out of favor. At times when the growth investing style is out of favor, the Fund may underperform other equity funds that use different investment styles.

Foreign Market Risks — The Fund may invest in companies located in countries other than the United States. This may expose the Fund to risks associated with foreign investments.

• The value of holdings traded outside the United States (and any hedging transactions in foreign currencies) will be affected by changes in currency exchange rates

• The costs of non-U.S. securities transactions tend to be higher than those of U.S. transactions

• Foreign holdings may be adversely affected by foreign government action

• International trade barriers or economic sanctions against certain non-U.S. countries may adversely affect these holdings

The Fund may also be subject to other risks associated with its investments and investment strategies, including:

Borrowing and Leverage Risk — The Fund may borrow for temporary emergency purposes including to meet redemptions. Borrowing may exaggerate changes in the net asset value of Fund shares and in the return on the Fund’s portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of borrowing may reduce the Fund’s return. Certain securities that the Fund buys may create leverage including, for example, options.

Securities Lending — The Fund may lend securities with a value up to 33¹/3% of its assets to financial institutions that provide cash or securities issued or guaranteed by the U.S. Government as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may lose money and there may </R>

 

 10 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

<R>be a delay in recovering the loaned securities. The Fund could also lose money if it does not recover the securities and/or the value of the collateral falls, including the value of investments made with cash collateral. These events could trigger adverse tax consequences to the Fund.

Convertibles — Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible’s value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risks as the underlying common stock.

Derivatives — The Fund may use derivative instruments, including futures, forwards, options, indexed securities and inverse securities. Derivatives allow the Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments.</R>

Derivatives are volatile and involve significant risks, including:

Credit risk — the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to the Fund.

Currency risk — the risk that changes in the exchange rate between currencies will adversely affect the value (in U.S. dollar terms) of an investment.

Leverage risk — the risk, associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments), that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.

Liquidity risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth.

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 11 

[ICON]  Details About the Fund

<R>The Fund may use derivatives for hedging purposes, including anticipatory hedges. Hedging is a strategy in which the Fund uses a derivative to offset the risks associated with other Fund holdings. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced.</R>

There can be no assurance that the Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so.

<R>Indexed and Inverse Securities — The Fund may invest in securities whose potential returns are directly related to changes in an underlying index, known as indexed securities. The return on indexed securities will rise when the underlying index rises and fall when the index falls. The Fund may also invest in securities whose return is inversely related to changes in an index (“inverse securities”). In general, the return on inverse securities will decrease when the underlying index goes up and increase when that index goes down. Certain indexed securities, including inverse securities (which move in an opposite direction to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.

Initial Public Offering Risk — The volume of initial public offerings and the levels at which the newly issued stocks trade in the secondary market are affected by the performance of the stock market overall. If initial public offerings are brought to the market, availability may be limited and the Fund may not be able to buy any shares at the offering price or if it is able to buy shares, it may not be able to buy as many shares at the offering price as it would like. In addition, the prices of securities involved in initial public offerings are often subject to greater and more unpredictable price changes than more established stocks.</R>

Warrants — A warrant gives the Fund the right to buy a quantity of stock. The warrant specifies the amount of underlying stock, the purchase (or “exercise”) price, and the date the warrant expires. The Fund has no obligation to exercise the warrant and buy the stock. A warrant has value only if the Fund can exercise it or sell it before it expires. If the price of the underlying stock does not rise above the exercise price before the warrant

 

 12 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

expires, the warrant generally expires without any value and the Fund loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock.

Illiquid Securities — The Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily sell within seven days at current value or that have contractual or legal restrictions on resale. If the Fund buys illiquid securities it may be unable to quickly sell them or may be able to sell them only at a price below current value.

Restricted Securities — Restricted securities have contractual or legal restrictions on their resale. They may include private placement securities that the Fund buys directly from the issuer. Private placement and other restricted securities may not be listed on an exchange and may have no active trading market.

Restricted securities may be illiquid. The Fund may be unable to sell them on short notice or may be able to sell them only at a price below current value. The Fund may get only limited information about the issuer, so it may be less able to predict a loss. In addition, if Fund management receives material adverse nonpublic information about the issuer, the Fund will not be able to sell the securities.

Rule 144A Securities — Rule 144A securities are restricted securities that can be resold to qualified institutional buyers but not to the general public. Rule 144A securities may have an active trading market, but carry the risk that the active trading market may not continue.

<R>STATEMENT OF ADDITIONAL INFORMATION</R>

If you would like further information about the Fund, including how it invests, please see the Statement of Additional Information.

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 13 

Your Account [ICON]

MERRILL LYNCH SELECT PRICING^SM SYSTEM

<R>The Fund offers five share classes, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose your class of shares you should consider the size of your investment and how long you plan to hold your shares. Your Merrill Lynch Financial Advisor or other financial intermediary can help you determine which share class is best suited to your personal financial goals.</R>

For example, if you select Class A or Class D shares, you generally pay a sales charge at the time of purchase. If you buy Class D shares, you also pay an ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge reduction or waiver.

Certain financial intermediaries may charge additional fees in connection with transactions in Fund shares. The Manager, the Distributor or their affiliates may make payments out of their own resources to selected securities dealers and other financial intermediaries for providing services intended to result in the sale of Fund shares or for shareholder servicing activities.

<R>If you select Class B, Class C or Class R shares, you will invest the full amount of your purchase price. However, you will be subject to a distribution fee of 0.75% for Class B or Class C shares and 0.25% for Class R shares and an account maintenance fee of 0.25% for all three classes of shares. Because fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. In addition, you may be subject to a deferred sales charge when you sell Class B or Class C shares.</R>

The Fund’s shares are distributed by FAM Distributors, Inc., an affiliate of Merrill Lynch.

 

 14 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

The table below summarizes key features of the Merrill Lynch Select Pricing^SM System.

<R>	Class A	Class B	Class C	Class D	Class R
Availability	Limited to certain investors including:   •  Current Class A       shareholders   •  Certain       Retirement Plans   •  Participants in       certain Merrill       Lynch sponsored       programs   •  Certain affiliates       of Merrill Lynch,       selected securities       dealers and other       financial       intermediaries.	Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries.	Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries.	Generally available through Merrill Lynch. Limited availability through selected securities dealers and other financial intermediaries.	Available only to certain retirement plans.
Initial Sales Charge?	Yes. Payable at time of purchase. Lower sales charges available for larger investments.	No. Entire purchase price is invested in shares of the Fund.	No. Entire purchase price is invested in shares of the Fund.	Yes. Payable at time of purchase. Lower sales charges available for larger investments.	No. Entire purchase price is invested in shares of the Fund.
Deferred Sales Charge?	No. (May be charged for purchases over   $1 million that are redeemed within   one year.)	Yes. Payable if you redeem within six years of purchase.	Yes. Payable if you redeem within one year of purchase.	No. (May be charged for purchases over $1 million that are redeemed within one year.)	No.
Account Maintenance and Distribution Fees?	No.	0.25% Account Maintenance Fee. 0.75% Distribution Fee.	0.25% Account Maintenance Fee. 0.75% Distribution Fee.	0.25% Account Maintenance Fee. No Distribution Fee.	0.25% Account Maintenance Fee. 0.25% Distribution Fee.
Conversion to Class D shares?	No.	Yes, automatically after approximately eight years.	No.	N/A	No.
</R>

 15 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

[ICON]  Your Account

Right of Accumulation — permits you to pay the sales charge that would apply to the cost or value (whichever is higher) of all shares you own in the Merrill Lynch mutual funds that offer Select Pricing^SM options.

Letter of Intent — permits you to pay the sales charge that would be applicable if you add up all shares of Merrill Lynch Select Pricing^SM System funds that you agree to buy within a 13 month period. Certain restrictions apply.

Class A and Class D Shares — Initial Sales Charge Options

<R>If you select Class A or Class D shares, you will pay a sales charge at the time of purchase as shown in the following table.</R>

Your Investment	As a % of Offering Price	As a % of Your Investment*	Dealer Compensation as a % of Offering Price
Less than $25,000	5.25%	5.54%	5.00%
$25,000 but less   than $50,000	4.75%	4.99%	4.50%
$50,000 but less   than $100,000	4.00%	4.17%	3.75%
$100,000 but less   than $250,000	3.00%	3.09%	2.75%
$250,000 but less   than $1,000,000	2.00%	2.04%	1.80%
$1,000,000 and over**	0.00%	0.00%	0.00%

* Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class A or Class D shares, you may not pay an initial sales charge. In that case, the Manager compensates the selling dealer or other financial intermediary from its own funds. However, if you redeem your shares within one year after purchase, you may be charged a deferred sales charge. This charge is 1.00% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. A sales charge of 0.75% will be charged on purchases of $1,000,000 or more of Class A or Class D shares by certain employer sponsored retirement or savings plans.

No initial sales charge applies to Class A or Class D shares that you buy through reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class A or Class D shares may apply for:

• Purchases under a Right of Accumulation or Letter of Intent

• Merrill Lynch Blueprint^SM Program participants

• TMA^SM Managed Trusts

• Certain Merrill Lynch investment or central asset accounts

• Certain employer-sponsored retirement or savings plans

 

 16 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

 

• Purchases using proceeds from the sale of certain Merrill Lynch closed-end funds under certain circumstances

• Certain investors, including directors or trustees of Merrill Lynch mutual funds and Merrill Lynch employees

• Certain fee-based programs of Merrill Lynch and other financial intermediaries that have agreements with the Distributor or its affiliates

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch Financial Advisor can help you determine whether you are eligible to buy Class A shares or to participate in any of these programs.

If you decide to buy shares under the initial sales charge alternative and you are eligible to buy both Class A and Class D shares, you should buy Class A since Class D shares are subject to a 0.25% account maintenance fee, while Class A shares are not.

If you redeem Class A or Class D shares and within 30 days buy new shares of the same class, you will not pay a sales charge on the new purchase amount. The amount eligible for this “Reinstatement Privilege” may not exceed the amount of your redemption proceeds. To exercise the privilege, contact your Merrill Lynch Financial Advisor, selected securities dealer or other financial intermediary or contact the Fund’s Transfer Agent at 1-800-MER-FUND.

<R>As a result of the implementation of the Merrill Lynch Select Pricing^SM System, Class A shares outstanding prior to October 21, 1994 were redesignated as Class D shares. The Class A shares currently being offered differ from the Class A shares offered prior to October 21, 1994 in many respects, including eligible investors, sales charges and exchange privileges.</R>

Class B and Class C Shares — Deferred Sales Charge Options

If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within six years after purchase, or your Class C shares within one year after purchase, you may be required to pay a deferred sales charge. You will also pay distribution fees of 0.75% and account maintenance fees of 0.25% each year under distribution plans that the Fund has adopted under Rule 12b-1. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. The Distributor uses the money that

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 17 

[ICON]  Your Account

it receives from the deferred sales charges and the distribution fees to cover the costs of marketing, advertising and compensating the Merrill Lynch Financial Advisor, selected securities dealer or other financial intermediary who assists you in purchasing Fund shares.

Class B Shares

If you redeem Class B shares within six years after purchase, you may be charged a deferred sales charge. The amount of the charge gradually decreases as you hold your shares over time, according to the following schedule:

Years Since Purchase	Sales Charge*
0 – 1	4.00%
1 – 2	4.00%
2 – 3	3.00%
3 – 4	3.00%
4 – 5	2.00%
5 – 6	1.00%
6 and thereafter	0.00%

* The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through reinvestment of dividends are not subject to a deferred sales charge. For shares acquired before June 1, 2001, the four-year deferred sales charge schedule in effect at that time will apply. Not all Merrill Lynch funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the higher charge will apply.

The deferred sales charge relating to Class B shares may be reduced or waived in certain circumstances, such as:

• Certain post-retirement withdrawals from an IRA or other retirement plan if you are over 59¹/2 years old

• Redemption by certain eligible 401(a) and 401(k) plans, certain related accounts, group plans participating in the Merrill Lynch Blueprint^SM Program and certain retirement plan rollovers<R>

• Redemption in connection with participation in certain fee-based programs of Merrill Lynch or other financial intermediaries that have agreements with the Distributor or its affiliates or in connection with involuntary termination of an account in which Fund shares are held</R>

 

 18 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

 

• Withdrawals resulting from shareholder death or disability as long as the waiver request is made within one year of death or disability or, if later, reasonably promptly following completion of probate

• Withdrawal through the Merrill Lynch Systematic Withdrawal Plan of up to 10% per year of your Class B account value at the time the plan is established

Your Class B shares convert automatically into Class D shares approximately eight years after purchase. Any Class B shares received through reinvestment of dividends paid on converting shares will also convert at that time. Class D shares are subject to lower annual expenses than Class B shares. The conversion of Class B to Class D shares is not a taxable event for Federal income tax purposes.

Different conversion schedules apply to Class B shares of different Merrill Lynch mutual funds. For example, Class B shares of a fixed-income fund typically convert approximately ten years after purchase compared to approximately eight years for equity funds. If you acquire your Class B shares in an exchange from another fund with a shorter conversion schedule, the Fund’s eight year conversion schedule will apply. If you exchange your Class B shares in the Fund for Class B shares of a fund with a longer conversion schedule, the other fund’s conversion schedule will apply. The length of time that you hold both the original and exchanged Class B shares in both funds will count toward the conversion schedule. The conversion schedule may be modified in certain other cases as well.

<R>As a result of the implementation of the Merrill Lynch Select Pricing^SM System, Class B shares outstanding prior to October 21, 1994 were redesignated as Class C shares. The Class B shares currently being offered differ from the Class B shares offered prior to October 21, 1994 in certain respects, including sales charges and conversion privileges.</R>

Class C Shares

<R>If you redeem Class C shares within one year after purchase, you may be charged a deferred sales charge of 1.00%. The charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. You will not be charged a deferred sales charge when you redeem shares that you acquire through reinvestment of Fund dividends. The deferred sales charge relating to Class C shares may be reduced or waived in connection with involuntary termination of an account in which</R>

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 19 

[ICON]  Your Account

<R>Fund shares are held, withdrawals through the Merrill Lynch Systematic Withdrawal Plan and redemption of Class C shares by certain retirement plans.</R>

Class C shares do not offer a conversion privilege.

<R>Class R Shares

Class R Shares are available only to certain retirement plans. If you buy Class R shares, you will not pay either an initial sales charge or a contingent deferred sales charge. However, Class R shares are subject to a distribution fee of 0.25% and an account maintenance fee of 0.25%. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. Class R shares do not offer a conversion privilege.</R>

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES

The chart on the following pages summarizes how to buy, sell, transfer and exchange shares through Merrill Lynch, a selected securities dealer, broker, investment adviser, service provider or other financial intermediary. You may also buy shares through the Transfer Agent. To learn more about buying shares through the Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund involves many considerations, your Merrill Lynch Financial Advisor may help you with this decision.

Because of the high costs of maintaining smaller shareholder accounts, the Fund may redeem the shares in your account (without charging any deferred sales charge) if the net asset value of your account falls below $500 due to redemptions you have made. You will be notified that the value of your account is less than $500 before the Fund makes an involuntary redemption. You will then have 60 days to make an additional investment to bring the value of your account to at least $500 before the Fund takes any action. This involuntary redemption does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act accounts.

 

 20 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

 

If You Want to	Your Choices	Information Important for You to Know
Buy Shares	<R>First, select the share class appropriate for you	Refer to the Merrill Lynch Select Pricing table on page 15. Be sure to read this prospectus carefully. </R>
	Next, determine the amount of your investment	The minimum initial investment for the Fund is $1,000 for all accounts except:   •  $250 for certain Merrill Lynch fee-based programs   •  $100 for retirement plans (The minimums for initial investments may be waived under certain circumstances.)
	Have your Merrill Lynch Financial Advisor, selected securities dealer or other financial intermediary submit your purchase order	The price of your shares is based on the next calculation of net asset value after your order is placed. Any purchase orders placed prior to the close of business on the New York Stock Exchange (generally 4:00 p.m. Eastern time) will be priced at the net asset value determined that day. Certain financial intermediaries, however, may require submission of orders prior to that time. Purchase orders placed after that time will be priced at the net asset value determined on the next business day. The Fund may reject any order to buy shares and may suspend the sale of shares at any time. Selected securities dealers or other financial intermediaries, including Merrill Lynch, may charge a processing fee to confirm a purchase. Merrill Lynch currently charges a fee of $5.35.
	Or contact the Transfer Agent	To purchase shares directly, call the Transfer Agent at 1–800–MER–FUND and request a purchase order. Mail the completed purchase order to the Transfer Agent at the address on the inside back cover of this Prospectus.
Add to Your Investment	Purchase additional shares	<R>The minimum investment for additional purchases is generally $50 except that retirement plans have a minimum additional purchase of $1 and certain programs, such as automatic investment plans, may have higher minimums.</R> (The minimums for additional purchases may be waived under certain circumstances.)
	Acquire additional shares through the automatic dividend reinvestment plan	All dividends are automatically reinvested without a sales charge.
	Participate in the automatic investment plan	You may invest a specific amount on a periodic basis through certain Merrill Lynch investment or central asset accounts.
Transfer Shares to Another Securities Dealer or Other Financial Intermediary	Transfer to a participating securities dealer or other financial intermediary	You may transfer your Fund shares only to another securities dealer that has entered into an agreement with the Distributor. Certain shareholder services may not be available for the transferred shares. You may only purchase additional shares of funds previously owned before the transfer. All future trading of these assets must be coordinated by the receiving firm.

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 21 

 

[ICON]  Your Account

If You Want to	Your Choices	Information Important for You to Know
Transfer Shares to Another Securities Dealer or Other Financial Intermediary (continued)	<R>Transfer to a non-participating securities dealer or other financial intermediary</R>	You must either:   •  Transfer your shares to an account with the Transfer Agent; or   •  Sell your shares, paying any applicable deferred sales charge.
Sell Your Shares	Have your Merrill Lynch Financial Advisor, selected securities dealer or other financial intermediary submit your sales order	The price of your shares is based on the next calculation of net asset value after your order is placed. For your redemption request to be priced at the net asset value on the day of your request, you must submit your order to your dealer or other financial intermediary prior to that day’s close of business on the New York Stock Exchange (generally 4:00 p.m. Eastern time). Certain financial intermediaries, however, may require submission of orders prior to that time. Any redemption request placed after that time will be priced at the net asset value at the close of business on the next business day. Securities dealers or other financial intermediaries, including Merrill Lynch, may charge a fee to process a redemption of shares. Merrill Lynch currently charges a fee of $5.35. No processing fee is charged if you redeem shares directly through the Transfer Agent. The Fund may reject an order to sell shares under certain circumstances.
	Sell through the Transfer Agent	You may sell shares held at the Transfer Agent by writing to the Transfer Agent at the address on the inside back cover of this prospectus. All shareholders on the account must sign the letter. A signature guarantee will generally be required but may be waived in certain limited circumstances. You can obtain a signature guarantee from a bank, securities dealer, securities broker, credit union, savings association, national securities exchange and registered securities association. A notary public seal will not be acceptable. If you hold stock certificates, return the certificates with the letter. The Transfer Agent will normally mail redemption proceeds within seven days following receipt of a properly completed request. If you make a redemption request before the Fund has collected payment for the purchase of shares, the Fund or the Transfer Agent may delay mailing your proceeds. This delay will usually not exceed ten days. You may also sell shares held at the Transfer Agent by telephone request if the amount being sold is less than $50,000 and if certain other conditions are met. Contact the Transfer Agent at 1-800-MER-FUND for details.

 

 22 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

 

If You Want to	Your Choices	Information Important for You to Know
Sell Shares Systematically	Participate in the Fund’s Systematic Withdrawal Plan	<R>You can choose to receive systematic payments from your Fund account either by check or through direct deposit to your bank account on a monthly or quarterly basis. If you hold your Fund shares in a Merrill Lynch CMA® or Retirement Account you can arrange for systematic redemptions of a fixed dollar amount on a monthly, bi-monthly, quarterly, semi-annual or annual basis, subject to certain conditions. Under either method you must have dividends automatically reinvested. For Class B and Class C shares your total annual withdrawals cannot be more than 10% per year of the value of your shares at the time your plan is established. The deferred sales charge is waived for systematic redemptions. Ask your Merrill Lynch Financial Advisor for details.</R>
Exchange Your Shares	Select the fund into which you want to exchange. Be sure to read that fund’s prospectus	<R>You can exchange your Class A, Class B, Class C or Class D shares of the Fund for shares of many other Merrill Lynch mutual funds. You must have held the shares used in the exchange for at least 15 calendar days before you can exchange to another fund. Class A, Class B, Class C and Class D shares of the Fund are generally exchangeable for shares of the same class of another fund. If you own Class A shares and wish to exchange into a fund in which you have no Class A shares (and are not eligible to buy Class A shares), you will exchange into Class D shares. Some of the Merrill Lynch mutual funds impose a different initial or deferred sales charge schedule. If you exchange Class A or Class D shares for shares of a fund with a higher initial sales charge than you originally paid, you will be charged the difference at the time of exchange. If you exchange Class B shares for shares of a fund with a different deferred sales charge schedule, the higher schedule will generally apply. The time you hold Class B or Class C shares in both funds will count when determining your holding period for calculating a deferred sales charge at redemption. If you exchange Class A or Class D shares for money market fund shares, you will receive Class A shares of Summit Cash Reserves Fund. Class B or Class C shares of the Fund will be exchanged for Class B shares of Summit Cash Reserves Fund.</R> To exercise the exchange privilege contact your Merrill Lynch Financial Advisor or other financial intermediary or call the Transfer Agent at 1-800-MER-FUND. Although there is currently no limit on the number of exchanges that you can make, the exchange privilege may be modified or terminated at any time in the future.

Short term or excessive trading into and out of the Fund may harm performance by disrupting portfolio management strategies and by increasing expenses. Accordingly, the Fund may reject any purchase orders, including exchanges, particularly from market timers or investors who, in Fund management’s opinion, have a pattern of short term or excessive trading or whose trading has been or may be disruptive to the Fund. For these purposes, Fund management may consider an investor’s trading history in the Fund or other Merrill Lynch funds, and accounts under common ownership or control.

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 23 

[ICON]  Your Account

Net asset value — the market value of the Fund’s total assets after deducting liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED

<R>When you buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates its net asset value (generally by using market quotations) each day the New York Stock Exchange is open as of the close of business on the Exchange based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. If events that are expected to materially affect the value of securities traded in other markets occur between the close of those markets and the close of business on the New York Stock Exchange, those securities may be valued at their fair value. The net asset value used in determining your share price is the next one calculated after your purchase or redemption order is placed. Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a result, the Fund’s net asset value may change on days when you will not be able to purchase or redeem the Fund’s shares.</R>

The Fund may accept orders from certain authorized financial intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the financial intermediary or designee and the order will receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later time, the order will be canceled and the financial intermediary could be held liable for any losses.

<R>Generally, Class A shares will have the highest net asset value because that class has the lowest expenses, Class D shares will have a higher net asset value than Class B, Class C or Class R shares and Class R shares will have a higher net asset value than Class B or Class C shares. Also, dividends paid on Class A, Class D and Class R shares generally will be higher than dividends paid on Class B and Class C shares because Class A, Class D and Class R shares have lower expenses.</R>

PARTICIPATION IN FEE-BASED PROGRAMS

If you participate in certain fee-based programs offered by Merrill Lynch or other financial intermediaries, you may be able to buy Class A shares at net asset value, including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances.

 

 24 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

Dividends — ordinary income and capital gains paid to shareholders. Dividends may be reinvested in additional Fund shares as they are paid.

You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to distribution and account maintenance fees. This may be a taxable event and you will pay any applicable sales charges.

If you leave one of these programs, your shares may be redeemed or automatically exchanged into another class of Fund shares or into a money market fund. The class you receive may be the class you originally owned when you entered the program, or in certain cases, a different class. If the exchange is into Class B shares, the period before conversion to Class D shares may be modified. Any redemption or exchange will be at net asset value. However, if you participate in the program for less than a specified period, you may be charged a fee in accordance with the terms of the program.

Details about these features and the relevant charges are included in the client agreement for each fee-based program and are available from your Merrill Lynch Financial Advisor, selected securities dealer or other financial intermediary.

DIVIDENDS AND TAXES

<R>The Fund will distribute net investment income and net realized capital gains at least annually. The Fund may also pay a special distribution at the end of the calendar year to comply with Federal tax requirements. If you would like to receive dividends in cash, contact your Merrill Lynch Financial Advisor, selected securities dealer, other financial intermediary or the Transfer Agent. Although this cannot be predicted with any certainty, the Fund anticipates that the majority of its dividends, if any, will consist of capital gains. Capital gains paid by the Fund, if any, may be taxable to you at different rates, depending, in part, on how long the Fund held the assets sold.</R>

You will pay tax on dividends from the Fund whether you receive them in cash or additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares and any gain on the transaction may be subject to tax. Capital gain dividends are generally taxed at different rates than ordinary income dividends.

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 25 

[ICON]  Your Account

<R>“BUYING A DIVIDEND”

Unless your investment is in a tax deferred account, you may want to avoid buying shares shortly before the Fund pays a dividend. The reason? If you buy shares when a fund has realized but not yet distributed ordinary income or capital gains, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable dividend. Before investing you may want to consult your tax adviser.

If you are neither a lawful permanent resident nor a citizen of the U.S. or if you are a foreign entity, the Fund’s ordinary income dividends (which include distributions of the excess of net short term capital gains over net long term capital losses) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.

Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.</R>

By law, your dividends and redemption proceeds will be subject to a withholding tax if you have not provided a taxpayer identification number or social security number or if the number you have provided is incorrect.

This section summarizes some of the consequences under current Federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in the Fund under all applicable tax laws.

<R>ELECTRONIC DELIVERY

Merrill Lynch Investment Managers is now offering electronic delivery of communications to its shareholders. In order to receive this service, you must register your account and provide us with email information. To sign up for this service, simply access the website http://www.icsdelivery.com/live/ and follow the instructions. You will obtain a personal identification number (PIN) should you need to update your email address and/or choose to discontinue this service. This service is not available for certain retirement accounts at this time.</R>

 

 26 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

Management of the Fund   [ICON]

MERRILL LYNCH INVESTMENT MANAGERS

<R>Merrill Lynch Investment Managers, the Fund’s Manager, manages the Fund’s investments and its business operations under the overall supervision of the Fund’s Board of Directors. The Manager has the responsibility for making all investment decisions for the Fund. The Manager has a sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an affiliate, under which the Manager may pay a fee for services it receives. The Fund pays the Manager a management fee at the annual rate of 0.65% of the average daily net assets of the Fund for the first $1 billion, 0.625% of the average daily net assets above $1 billion to $1.5 billion, 0.60% of the average daily net assets above $1.5 billion to $5 billion, 0.575% of the average daily net assets above $5 billion to $7.5 billion and 0.55% of the average daily net assets above $7.5 billion. For the fiscal year ended August 31, 2002, the Manager received a fee equal to 0.61% of the Fund’s average daily net assets.

Merrill Lynch Investment Managers was organized as an investment adviser in 1976 and offers investment advisory services to more than 50 registered investment companies. Merrill Lynch Asset Management U.K. Limited was organized as an investment adviser in 1986 and acts as sub-adviser to more than 50 registered investment companies. Merrill Lynch Investment Managers and its affiliates, including Fund Asset Management, had approximately $448 billion in investment company and other portfolio assets under management as of October 2002.</R>

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 27 

[ICON]  Management of the Fund

<R>FINANCIAL HIGHLIGHTS

The Financial Highlights table is intended to help you understand the Fund’s financial performance for the past five years. Certain information reflects the financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends). This information has been audited by Ernst & Young LLP, whose report, along with the Fund’s financial statements, is included in the Fund’s Annual Report, which is available upon request.

	Class A										Class B
	For the Year Ended August 31,										For the Year Ended August 31,
Increase (Decrease) in   Net Asset Value:*	2002		2001		2000		1999		1998		2002		2001		2000		1999		1998
Per Share Operating   Performance:
Net asset value,  beginning of year	$17.46		$29.98		$21.99		$16.19		$17.37		$16.24		$28.06		$20.75		$15.39		$16.69
Investment income   (loss) — net†	(.02	)	.08		.02		.13		.07		(.17	)	(.13	)	(.23	)	(.08	)	(.11	)
Realized and unrealized   gain (loss) on   investments   and foreign currency   transactions — net	(3.60	)	(10.64	)	9.91		6.37		1.09		(3.33	)	(9.95	)	9.32		6.05		1.05
Total from investment   operations	(3.62	)	(10.56	)	9.93		6.50		1.16		(3.50	)	(10.08	)	9.09		5.97		.94
Less distributions from:
Realized gain on     investments — net	—		—		(1.94	)	(.70	)	(2.34	)	—		—		(1.78	)	(.61	)	(2.24	)
In excess of     realized gain on     investments — net	—		(1.96	)	—		—		—		—		(1.74	)	—		—		—
Total distributions	—		(1.96	)	(1.94	)	(.70	)	(2.34	)	—		(1.74	)	(1.78	)	(.61	)	(2.24	)
Net asset value, end   of year	$13.84		$17.46		$29.98		$21.99		$16.19		$12.74		$16.24		$28.06		$20.75		$15.39
Total Investment   Return:**
Based on net asset value   per share	(20.73	)%	(36.71	)%	47.01	%	41.08	%	6.37	%	(21.55	)%	(37.36	)%	45.55	%	39.58	%	5.21	%
Ratios to Average   Net Assets:
Expenses	.94	%	.80	%	.76	%	.81	%	.87	%	1.96	%	1.81	%	1.77	%	1.83	%	1.88	%
Investment income   (loss) — net	(.09	)%	.35	%	.09	%	.60	%	.37	%	(1.10	)%	(.62	)%	(.92	)%	(.41	)%	(.64	)%
Supplemental Data:
Net assets, end of year   (in thousands)	$1,170,884		$950,922		$882,072		$472,464		$167,133		$1,802,731		$2,299,511		$3,411,474		$2,000,535		$641,688
Portfolio turnover	92.35	%	149.86	%	98.71	%	52.72	%	40.27	%	92.35	%	149.86	%	98.71	%	52.72	%	40.27	%

* Since the inception date for Class R shares was January 1, 2003, information with respect to Class R shares is not included.

** Total investment returns exclude the effects of sales charges.</R>

† Based on average shares outstanding.

 

 28 MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

FINANCIAL HIGHLIGHTS (concluded)

<R>	Class C										Class D
	For the Year Ended August 31,										For the Year Ended August 31,
Increase (Decrease) in   Net Asset Value:*	2002		2001		2000		1999		1998		2002		2001		2000		1999		1998
Per Share Operating   Performance:
Net asset value, beginning   of year	$16.34		$28.26		$20.88		$15.45		$16.72		$17.23		$29.63		$21.77		$16.06		$17.27
Investment income (loss)   —net†	(.17	)	(.13	)	(.24	)	(.09	)	(.11	)	(.05	)	.03		(.04	)	.08		.02
Realized and unrealized   gain (loss) on investments   and foreign currency   transactions — net	(3.35	)	(10.01	)	9.39		6.10		1.05		(3.55	)	(10.52	)	9.80		6.31		1.09
Total from investment   operations	(3.52	)	(10.14	)	9.15		6.01		.94		(3.60	)	(10.49	)	9.76		6.39		1.11
Less distributions from:
Realized gain on     investments — net	—		—		(1.77	)	(.58	)	(2.21	)	—		—		(1.90	)	(.68	)	(2.32	)
In excess of realized gain     on investments — net	—		(1.78	)	—		—		—		—		(1.91	)	—		—		—
Total distributions	—		(1.78	)	(1.77	)	(.58	)	(2.21	)	—		(1.91	)	(1.90	)	(.68	)	(2.32	)
Net asset value, end   of year	$12.82		$16.34		$28.26		$20.88		$15.45		$13.63		$17.23		$29.63		$21.77		$16.06
Total Investment   Return:**
Based on net asset value   per share	(21.54	)%	(37.35	)%	45.53	%	39.65	%	5.19	%	(20.89	)%	(36.88	)%	46.67	%	40.67	%	6.08	%
Ratios to Average   Net Assets:
Expenses	1.97	%	1.83	%	1.78	%	1.83	%	1.89	%	1.18	%	1.04	%	1.01	%	1.05	%	1.11	%
Investment income (loss)   — net	(1.11	)%	(.66	)%	(.93	)%	(.43	)%	(.63	)%	(.33	)%	.14	%	(.17	)%	.36	%	.12	%
Supplemental Data:
Net assets, end of year   (in thousands)	$596,871		$616,400		$627,021		$307,988		$130,652		$1,384,765		$1,296,787		$1,712,701		$795,607		$157,899
Portfolio turnover	92.35	%	149.86	%	98.71	%	52.72	%	40.27	%	92.35	%	149.86	%	98.71	%	52.72	%	40.27	%

* Since the inception date for Class R shares was January 1, 2003, information with respect to Class R shares is not included.

** Total investment returns exclude the effects of sales charges.</R>

† Based on average shares outstanding.

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC. 29 

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MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

 

[1]	POTENTIAL INVESTORS Open an account (two options).	[2]
MERRILL LYNCH FINANCIAL ADVISOR OR SECURITIES DEALER Advises shareholders on their Fund investments.		TRANSFER AGENT Financial Data Services, Inc. ADMINISTRATIVE OFFICES 4800 Deer Lake Drive East Jacksonville, Florida 32246-6484 MAILING ADDRESS P.O. Box 45289 Jacksonville, Florida 32232-5289 Performs recordkeeping and reporting services.
	DISTRIBUTOR FAM Distributors, Inc. P.O. Box 9081 Princeton, New Jersey 08543-9081 Arranges for the sale of Fund shares.
COUNSEL Sidley Austin Brown & Wood LLP <R>787 Seventh Avenue New York, New York 10019-6018</R> Provides legal advice to the Fund.	THE FUND The Board of Directors oversees the Fund.	CUSTODIAN <R>JPMorgan Chase Bank 4 Chase MetroTechCenter,</R> 18th Floor Brooklyn, New York 11245 Holds the Fund’s assets for safekeeping.
INDEPENDENT AUDITORS Ernst & Young LLP 99 Wood Avenue South Iselin, New Jersey 08830-0471 <R>Audits the financial statements of the Fund on behalf of the shareholders.</R>	ACCOUNTING SERVICES PROVIDER State Street Bank and Trust Company 500 College Road East Princeton, New Jersey 08540 Provides certain accounting services to the Fund.	MANAGER Merrill Lynch Investment Managers, L.P. ADMINISTRATIVE OFFICES 800 Scudders Mill Road Plainsboro, New Jersey 08536 MAILING ADDRESS P.O. Box 9011 Princeton, New Jersey 08543-9011 TELEPHONE NUMBER 1-800-MER-FUND <R>Manages the Fund’s day-to-day activities.</R> Merrill Lynch Asset Management U.K. Limited 33 King William Street <R>London, EC4R 9AS England Sub-Adviser to the Fund.</R>

 

MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.

For More Information   [ICON]

Shareholder Reports

Additional information about the Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders. In the Fund’s annual report you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. You may obtain these reports at no cost by calling 1-800-MER-FUND.

<R>The Fund will send you one copy of each shareholder report and certain other mailings, regardless of the number of Fund accounts you have. To receive separate shareholder reports for each account, call your Merrill Lynch Financial Advisor, or other financial intermediary or write to the Transfer Agent at its mailing address. Include your name, address, tax identification number and Merrill Lynch brokerage or mutual fund account number. If you have any questions, please call your Merrill Lynch Financial Advisor or other financial intermediary, or call the Transfer Agent at 1-800-MER-FUND.</R>

Statement of Additional Information

The Fund’s Statement of Additional Information contains further information about the Fund and is incorporated by reference (legally considered to be part of this Prospectus). You may request a free copy by writing the Fund at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or by calling 1-800-MER-FUND.

<R>Contact your Merrill Lynch Financial Advisor or other financial intermediary, or contact the Fund, at the telephone number or address indicated above, if you have any questions.</R>

Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the operation of the public reference room. This information is also available on the SEC’s Internet site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

You should rely only on the information contained in this Prospectus. No one is authorized to provide you with information that is different from the information contained in this Prospectus.

Investment Company Act file #811-6669
<R>Code #16463-01-03</R>
^©Merrill Lynch Investment Managers, L.P.

[LOGO]   Merrill Lynch   Investment Managers

Prospectus

<R>January 1, 2003</R>

Merrill Lynch Fundamental
Growth Fund, Inc.

This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference.

The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

www.mlim.ml.com

STATEMENT OF ADDITIONAL INFORMATION

Merrill Lynch Fundamental Growth Fund, Inc.

P.O. Box 9011, Princeton, New Jersey 08543-9011 • Phone No. (609) 282-2800

     Merrill Lynch Fundamental Growth Fund, Inc. (the “Fund”) is a mutual fund that seeks to provide shareholders with long-term growth of capital. The Fund will seek to achieve its investment objective by investing in a diversified portfolio of equity securities placing particular emphasis on companies that have exhibited above-average growth rates in earnings. There can be no assurance that the investment objective of the Fund will be realized. For more information on the Fund’s investment objectives and policies, see “Investment Objective and Policies.”

     <R>Pursuant to the Merrill Lynch Select Pricing^SM System, the Fund offers five classes of shares, each with a different combination of sales charges, ongoing fees and other features. The Merrill Lynch Select Pricing^SM System permits an investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances. See “Purchase of Shares.”

     This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the Prospectus of the Fund, dated January 1, 2003 (the “Prospectus”), which has been filed with the Securities and Exchange Commission (the “Commission”) and can be obtained, without charge, by calling 1-800-MER-FUND or by writing to the Fund at the above address. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus. The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference to its 2002 Annual Report. You may request a copy of the annual report at no charge by calling 1-800-637-3863 between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.

Merrill Lynch Investment Managers — Manager
FAM Distributors, Inc. — Distributor

The date of this Statement of Additional Information is January 1, 2003.</R>

TABLE OF CONTENTS

<R>	Page
INVESTMENT OBJECTIVE AND POLICIES	2
Convertible Securities	3
Warrants	5
Derivatives>	5
Other Investment Policies and Practices	10
Suitability	11
Investment Restrictions	11
Portfolio Turnover	13
MANAGEMENT OF THE FUND	14
Directors and Officers	14
>Compensation of Directors	19
Management and Advisory Arrangements	19
ode of Ethics	22
PURCHASE OF SHARES	22
Initial Sales Charge Alternatives — Class A and Class D Shares	23
Reduced Initial Sales Charges	24
Deferred Sales Charge Alternatives — Class B and Class C Shares	26
>Class R Shares	29
Closed-End Fund Reinvestment Option	29
Distribution Plans	30
Limitations on the Payment of Deferred Sales Charges	31
REDEMPTION OF SHARES	32
Redemption	33
Repurchase	34
Reinstatement Privilege — Class A and Class D Shares	34
PRICING OF SHARES	34
Determination of Net Asset Value	34
Computation of Offering Price Per Share	36
>PORTFOLIO TRANSACTIONS AND BROKERAGE	36
SHAREHOLDER SERVICES	38
Investment Account	38
Exchange Privilege>	39
Fee-Based Programs	41
Retirement and Education Savings Plans	42
Automatic Investment Plans	42
Automatic Dividend Reinvestment Plan	42
Systematic Withdrawal Plan	42
DIVIDENDS AND TAXES	43
Dividends	43
Taxes	44
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions	45
Special Rules for Certain Foreign Currency Transactions	45
PERFORMANCE DATA	46
GENERAL INFORMATION	49
Description of Shares	49
Independent Auditors	49
Accounting Services Provider	49
Custodian	49
Transfer Agent	50
Legal Counsel	50
Reports to Shareholders	50
Shareholder Inquiries	50
Additional Information	50
FINANCIAL STATEMENTS	50
LEGAL PROCEEDINGS	51
</R>

INVESTMENT OBJECTIVE AND POLICIES

     <R>The investment objective of the Fund is to seek long term growth of capital. The Fund will seek to achieve its investment objective by investing in a diversified portfolio of equity securities placing particular emphasis on companies that have exhibited above-average growth rates in earnings. There can be no assurance that the investment objective of the Fund will be realized. The investment objective of the Fund set forth in the first sentence of this paragraph is a fundamental policy of the Fund and may not be changed without the approval of a majority of the Fund’s outstanding voting securities as defined in the Investment Company Act of 1940, as amended (the “Investment Company Act”). Please see “How the Fund Invests” and “Investment Risks” in the Prospectus for information with respect to the Fund’s investment objective and policies.</R> 

     The Fund will give particular emphasis to companies that have exhibited above-average growth rates in earnings, resulting from a variety of factors including — but not limited to — above-average growth rates in sales, profit margin improvement, proprietary or niche products or services, leading market shares, and underlying strong industry growth. Merrill Lynch Investment Managers, L.P., the Fund’s investment manager (“MLIM” or the “Manager”) believes that companies which possess above-average earnings growth frequently provide the prospect of above-average stock market returns, although such companies tend to have higher relative stock market valuations. Emphasis also will be given to companies having medium to large stock market capitalizations ($500 million or more). Investment in companies with lower market capitalizations, especially those under $1 billion, may involve special risks including limited product lines, market or financial resources or a limited management group. In addition, many smaller company stocks trade less frequently and in smaller volume, and may be subject to more abrupt or erratic price movements or more sensitive to market fluctuations, than stocks of larger companies.

     <R>Investment emphasis is on equities, primarily common stock and, to a lesser extent, securities convertible into common stock and rights to subscribe for common stock. The Fund will maintain at least 65% of its total assets invested in equity securities except during defensive periods. The Fund reserves the right as a defensive measure and to provide for redemptions to hold other types of securities, including non-convertible preferred stocks and debt securities rated investment grade by a nationally recognized statistical ratings organization, Government and money market securities, including repurchase agreements, or cash, in such proportions as, in the opinion of management, prevailing market or economic conditions warrant. It may also invest cash balances in affiliated money market funds.</R>

     The Fund may invest up to 10% of its total assets in equity securities of foreign issuers with the foregoing characteristics. (Purchases of American Depositary Receipts (“ADRs”), however, are not subject to this restriction.) Investments in securities of foreign entities and securities denominated in foreign currencies involve risks not typically involved in domestic investment, including fluctuations in foreign exchange rates, future foreign political and economic developments, and the possible imposition of exchange controls or other foreign or United States governmental laws or restrictions applicable to such investments. Since the Fund may invest in securities denominated or quoted in currencies other than the United States dollar, changes in foreign currency exchange rates may affect the value of investments in the portfolio and the unrealized appreciation or depreciation of investments insofar as the United States investors are concerned. Changes in foreign currency exchange rates relative to the U.S. dollar will affect the U.S. dollar value of the Fund’s assets denominated in that currency and the Fund’s yield on such assets. Foreign currency exchange rates are determined by forces of supply and demand on the foreign exchange markets. These forces are, in turn, affected by the international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. Moreover, individual foreign economies may differ favorably or unfavorably from the United States economy in such respects as growth of gross national product, rate of inflation, capital reinvestment, resources, self-sufficiency and balance of payments position.

     <R>With respect to certain foreign countries, there is the possibility of expropriation of assets, confiscatory taxation, political or social instability or diplomatic developments that could affect investment in those countries. There may be less publicly available information about a foreign financial instrument than about a United States instrument, and foreign entities may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those of United States entities. In addition, certain foreign investments may be subject to foreign withholding taxes. Foreign financial markets, while growing in volume, have, for the most part, substantially less volume than United States markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable domestic companies. The foreign markets also have</R>

 

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<R>different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. Costs associated with transactions in foreign securities are generally higher than with transactions in United States securities. There is generally less government supervision and regulation of exchanges, financial institutions and issuers in foreign countries than there is in the United States.</R>

     The Fund may invest in the securities of foreign issuers in the form of ADRs, European Depositary Receipts (“EDRs”) or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically issued by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designed for use in the United States securities markets, and EDRs, which are issued in bearer form, are designed for use in European securities markets. The Fund may invest in unsponsored ADRs. The issuers of unsponsored ADRs are not obligated to disclose material information in the United States and, therefore, there may not be a correlation between such information and the market value of such ADRs.

<R>Convertible Securities

     Convertible securities entitle the holder to receive interest payments on corporate debt securities or the dividend preference on a preferred stock until such time as the convertible security matures or is redeemed or until the holder elects to exercise the conversion privilege. Synthetic convertible securities may be either (i) a debt security or preferred stock that may be convertible only under certain contingent circumstances or that may pay the holder a cash amount based on the value of shares of underlying common stock partly or wholly in lieu of a conversion right (a “Cash-Settled Convertible”) or (ii) a combination of separate securities chosen by the Manager in order to create the economic characteristics of a convertible security, i.e., a fixed income security paired with a security with equity conversion features, such as an option or warrant (a “Manufactured Convertible”).<R>

     The characteristics of convertible securities make them appropriate investments for an investment company seeking a high total return from capital appreciation and investment income. These characteristics include the potential for capital appreciation as the value of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks of decline in value relative to the underlying common stock due to their fixed-income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is generally less than would be the case if the securities were issued in nonconvertible form.

     In analyzing convertible securities, the Manager will consider both the yield on the convertible security and the potential capital appreciation that is offered by the underlying common stock, among other things.

     Convertible securities are issued and traded in a number of securities markets. Even in cases where a substantial portion of the convertible securities held by the Fund are denominated in U.S. dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. With respect to convertible securities denominated in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate established at the time the security is issued. As a result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which the share price is quoted will affect the value of the convertible security. As described below, the Fund is authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of such fluctuations.

     Apart from currency considerations, the value of convertible securities is influenced by both the yield of nonconvertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield) is

 

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sometimes referred to as its “investment value.” To the extent interest rates change, the investment value of the convertible security typically will fluctuate. However, at the same time, the value of the convertible security will be influenced by its “conversion value,“which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the underlying common stock. If, because of a low price of the common stock the conversion value is substantially below the investment value of the convertible security, the price of the convertible security is governed principally by its investment value.

     To the extent the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the price of the convertible security will be influenced principally by its conversion value. A convertible security will sell at a premium over the conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed-income security. The yield and conversion premium of convertible securities issued in Japan and the Euromarket are frequently determined at levels that cause the conversion value to affect their market value more than the securities’ investment value.

     Holders of convertible securities generally have a claim on the assets of the issuer prior to the common stockholders but may be subordinated to other debt securities of the same issuer. A convertible security may be subject to redemption at the option of the issuer at a price established in the charter provision, indenture or other governing instrument pursuant to which the convertible security was issued. If a convertible security held by the Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock or sell it to a third party. Certain convertible debt securities may provide a put option to the holder which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain circumstances.

     <R>As indicated above, synthetic convertible securities may include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled Convertibles are instruments that are created by the issuer and have the economic characteristics of traditional convertible securities but may not actually permit conversion into the underlying equity securities in all circumstances. As an example, a private company may issue a Cash-Settled Convertible that is convertible into common stock only if the company successfully completes a public offering of its common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation. Manufactured Convertibles are created by the Manager by combining separate securities that possess one of the two principal characteristics of a convertible security, i.e., fixed income (“fixed income component”) or a right to acquire equity securities (“convertible component”). The fixed income component is achieved by investing in nonconvertible fixed income securities, such as nonconvertible bonds, preferred stocks and money market instruments. The convertibility component is achieved by investing in call options, warrants, Long Term Equity Appreciation Participation Securities (“LEAPS”), or other securities with equity conversion features (“equity features”) granting the holder the right to purchase a specified quantity of the underlying stocks within a specified period of time at a specified price or, in the case of a stock index option, the right to receive a cash payment based on the value of the underlying stock index.</R>

     A Manufactured Convertible differs from traditional convertible securities in several respects. Unlike a traditional convertible security, which is a single security having a unitary market value, a Manufactured Convertible is comprised of two or more separate securities, each with its own market value. Therefore, the total “market value” of such a Manufactured Convertible is the sum of the values of its fixed-income component and its convertibility component.

     More flexibility is possible in the creation of a Manufactured Convertible than in the purchase of a traditional convertible security. Because many corporations have not issued convertible securities, the Manager may combine a fixed income instrument and an equity feature with respect to the stock of the issuer of the fixed income instrument to create a synthetic convertible security otherwise unavailable in the market. The Manager may also combine a fixed income instrument of an issuer with an equity feature with respect to the stock of a different issuer when the Manager believes such a Manufactured Convertible would better promote the Fund’s objective than alternative investments. For example, the Manager may combine an equity feature with respect to an issuer’s stock with a fixed income security of a different issuer in the same industry to diversify the Fund’s credit exposure, or with a U.S. Treasury instrument to create a Manufactured Convertible with a higher credit profile than a traditional convertible security issued by that issuer. A Manufactured Convertible also is a more flexible investment in that its two components may be purchased separately and, upon purchasing the separate securities, “combined” to create

 

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a Manufactured Convertible. For example, the Fund may purchase a warrant for eventual inclusion in a Manufactured Convertible while postponing the purchase of a suitable bond to pair with the warrant pending development of more favorable market conditions.

     <R>The value of a Manufactured Convertible may respond differently to certain market fluctuations than would a traditional convertible security with similar characteristics. For example, in the event the Fund created a Manufactured Convertible by combining a short-term U.S. Treasury instrument and a call option on a stock, the Manufactured Convertible would likely outperform a traditional convertible of similar maturity and which is convertible into that stock during periods when Treasury instruments outperform corporate fixed income securities and underperform during periods when corporate fixed income securities outperform Treasury instruments.</R>

Warrants

     The Fund may invest in warrants, which are securities permitting, but not obligating, the warrant holder to subscribe for other securities. Buying a warrant does not make the Fund a shareholder of the underlying stock. The warrant holder has no right to dividends or votes on the underlying stock. A warrant does not carry any right to assets of the issuer, and for this reason investment in warrants may be more speculative than other equity-based investments.

Derivatives

     The Fund may use instruments referred to as Derivatives. Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold or oil), a currency or an index (a measure of value or rates, such as the Standard & Poor’s 500 Index or the prime lending rate). Derivatives allow the Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments.

     <R>Hedging. The Fund may use Derivatives for hedging purposes, including anticipatory hedges. Hedging is a strategy in which a Derivative is used to offset the risks associated with other Fund holdings. Losses on the other investment may be substantially reduced by gains on a Derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the Fund or if the cost of the Derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the Derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced. The Fund is not required to engage in hedging transactions and may choose not to do so. While the use of hedging strategies, if any, is intended to reduce volatility of the net value of its shares, the net asset value of the Fund’s shares will fluctuate. Furthermore, the Fund may only engage in hedging activities from time to time and may not necessarily be engaging in hedging activities when movements in interest rates or in equity, debt and currency markets occur. There can be no assurance that hedging transactions by the Fund, if any, will be effective.</R>

     The Fund may use Derivative instruments and trading strategies including the following:

Indexed and Inverse Securities

     The Fund may invest in securities the potential return of which is based on an index. As an illustration, the Fund may invest in a debt security that pays interest based on the current value of an interest rate index, such as the prime rate. The Fund may also invest in a debt security which returns principal at maturity based on the level of a securities index or a basket of securities, or based on the relative changes of two indices. In addition, the Fund may invest in securities the potential return of which is based inversely on the change in an index (that is, a security the value of which will move in the opposite direction of changes to an index). For example, the Fund may invest in securities that pay a higher rate of interest when a particular index decreases and pay a lower rate of interest (or do not fully return principal) when the value of the index increases. If the Fund invests in such securities, it may be subject to reduced or eliminated interest payments or loss of principal in the event of an adverse movement in the relevant index or indices. Indexed and inverse securities involve credit risk, and certain indexed and inverse securities may involve currency risk, leverage risk and liquidity risk. The Fund may invest in indexed and inverse securities for hedging purposes only, including anticipatory hedging. When used for hedging purposes, indexed and inverse securities involve correlation risk.

 

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Options on Securities and Securities Indices

     <R>Purchasing Put Options. The Fund may purchase put options on securities held in its portfolio or on securities or interest rate indices that are correlated with securities held in its portfolio. When the Fund purchases a put option, in consideration for an up front payment (the “option premium”) the Fund acquires a right to sell to another party specified securities owned by the Fund at a specified price (the “exercise price”) on or before a specified date (the “expiration date”), in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index declines below a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a put option limits the Fund’s risk of loss in the event of a decline in the market value of the portfolio holdings underlying the put option prior to the option’s expiration date. If the market value of the portfolio holdings associated with the put option increases rather than decreases, however, the Fund will lose the option premium and will consequently realize a lower return on the portfolio holdings than would have been realized without the purchase of the put. Purchasing a put option may involve correlation risk, and may also involve liquidity and credit risk.

     Purchasing Call Options. The Fund may also purchase call options on securities it intends to purchase or on securities indices or interest rate indices that are correlated with the types of securities it intends to purchase. When the Fund purchases a call option, in consideration for the option premium the Fund acquires a right to purchase from another party specified securities at the exercise price on or before the expiration date, in the case of an option on securities, or to receive from another party a payment based on the amount a specified securities index increases beyond a specified level on or before the expiration date, in the case of an option on a securities index. The purchase of a call option may protect the Fund from having to pay more for a security as a consequence of increases in the market value for the security during a period when the Fund is contemplating its purchase, in the case of an option on a security, or attempting to identify specific securities in which to invest in a market the Fund believes to be attractive, in the case of an option on an index (an “anticipatory hedge”). In the event the Fund determines not to purchase a security underlying a call option, however, the Fund may lose the entire option premium. Purchasing a call option involves correlation risk, and may also involve liquidity and credit risk.</R>

     The Fund is also authorized to purchase put or call options in connection with closing out put or call options it has previously sold. However, the Fund will not purchase options on securities if, as a result of such purchase, the aggregate cost (option plus premiums paid) of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund’s total assets.

     Writing Call Options. The Fund may write (i.e., sell) call options on securities held in its portfolio or securities indices the performance of which correlates with securities held in its portfolio. When the Fund writes a call option, in return for an option premium, the Fund gives another party the right to buy specified securities owned by the Fund at the exercise price on or before the expiration date, in the case of an option on securities, or agrees to pay to another party an amount based on any gain in a specified securities index beyond a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write call options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is less than the exercise price, the Fund will partially offset any decline in the value of the underlying securities through the receipt of the option premium. By writing a call option, however, the Fund limits its ability to sell the underlying securities, and gives up the opportunity to profit from any increase in the value of the underlying securities beyond the exercise price, while the option remains outstanding. Writing a call option may involve correlation risk.

     Writing Put Options. The Fund may also write put options on securities or securities indices. When the Fund writes a put option, in return for an option premium the Fund gives another party the right to sell to the Fund a specified security at the exercise price on or before the expiration date, in the case of an option on a security, or agrees to pay to another party an amount based on any decline in a specified securities index below a specified level on or before the expiration date, in the case of an option on a securities index. The Fund may write put options to earn income, through the receipt of option premiums. In the event the party to which the Fund has written an option fails to exercise its rights under the option because the value of the underlying securities is greater than the exercise price, the Fund will profit by the amount of the option premium. By writing a put option, however, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of the security at the time of exercise as long as the put option is outstanding, in the case of an option on a security, or make a cash payment reflecting any decline in the index, in the case of an option on an index. Accordingly, when the Fund writes a put option it is exposed to a risk of loss in the event the value of the underlying securities falls below the exercise

 

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price, which loss potentially may substantially exceed the amount of option premium received by the Fund for writing the put option. The Fund will write a put option on a security or a securities index only if the Fund would be willing to purchase the security at the exercise price for investment purposes (in the case of an option on a security) or is writing the put in connection with trading strategies involving combinations of options — for example, the sale and purchase of options with identical expiration dates on the same security or index but different exercise prices (a technique called a “spread”). Writing a put option may involve substantial leverage risk. The Fund may not write covered put options on underlying securities exceeding 50% of its total assets, taken at market value.

     The Fund is also authorized to sell call or put options in connection with closing out call or put options it has previously purchased.

     Other than with respect to closing transactions, the Fund will only write call or put options that are “covered.” A call or put option will be considered covered if the Fund has segregated assets with respect to such option in the manner described in “Risk Factors in Derivatives” below. A call option will also be considered covered if the Fund owns the securities it would be required to deliver upon exercise of the option (or, in the case of an option on a securities index, securities which substantially correlate with the performance of such index) or owns a call option, warrant or convertible instrument which is immediately exercisable for, or convertible into, such security.

     Types of Options. The Fund may engage in transactions in options on securities or securities indices on exchanges and in the over-the-counter (“OTC”) markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties’ obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but generally do not require the parties to post margin and are subject to greater credit risk. OTC options also involve greater liquidity risk. See “Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives” below.

Futures

     The Fund may engage in transactions in futures and options thereon. Futures are standardized, exchange-traded contracts which obligate a purchaser to take delivery, and a seller to make delivery, of a specific amount of an asset at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract the Fund is required to deposit collateral (“margin”) equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. Futures involve substantial leverage risk.

     The sale of a futures contract limits the Fund’s risk of loss through a decline in the market value of portfolio holdings correlated with the futures contract prior to the futures contract’s expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, the Fund will realize a loss on the futures position and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract.

     The purchase of a futures contract may protect the Fund from having to pay more for securities as a consequence of increases in the market value for such securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or the Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position.

     The Fund will limit transactions in futures and options on futures to financial futures contracts (i.e., contracts for which the underlying asset is a currency or securities or interest rate index) purchased or sold for hedging purposes (including anticipatory hedges). The Fund will further limit transactions in futures and options on futures to the extent necessary to prevent the Fund from being deemed a “commodity pool” under regulations of the Commodity Futures Trading Commission.

 

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Foreign Exchange Transactions

     The Fund may engage in spot and forward foreign exchange transactions and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, “Currency Instruments”) for purposes of hedging against the decline in the value of currencies in which its portfolio holdings are denominated against the U.S. dollar.

     Forward Foreign Exchange Transactions. Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. The Fund will enter into foreign exchange transactions only for purposes of hedging either a specific transaction or a portfolio position. The Fund may enter into a forward foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. The Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near future. The Fund may also hedge portfolio positions through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. Forward foreign exchange transactions involve substantial currency risk, and also involve credit and liquidity risk.

     Currency Futures. The Fund may also hedge against the decline in the value of a currency against the U.S. dollar through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts. See “Futures“above. Currency futures involve substantial currency risk, and also involve leverage risk.

     Currency Options. The Fund may also hedge against the decline in the value of a currency against the U.S. dollar through the use of currency options. Currency options are similar to options on securities, but in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. The Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See “Types of Options” above and “Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives” below. Currency options involve substantial currency risk, and may also involve credit, leverage or liquidity risk.

     Limitations on Currency Hedging. The Fund will not speculate in Currency Instruments. Accordingly, the Fund will not hedge a currency in excess of the aggregate market value of the securities which it owns (including receivables for unsettled securities sales), or has committed to or anticipates purchasing, which are denominated in such currency. The Fund may, however, hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a “cross-hedge”). The Fund will only enter into a cross-hedge if the Manager believes that (i) there is a demonstrable high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged.

     Risk Factors in Hedging Foreign Currency Risks. Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. While the Fund’s use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the net asset value of the Fund’s shares, the net asset value of the Fund’s shares will fluctuate. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Fund’s hedging strategies will be ineffective. To the extent that the Fund hedges against anticipated currency movements which do not occur, the Fund may realize losses and decrease its total return as the result of its hedging transactions. Furthermore, the Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates occur.

     It may not be possible for the Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is

 

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not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available (such as certain developing markets) and it is not possible to engage in effective foreign currency hedging.

Risk Factors in Derivatives

     Derivatives are volatile and involve significant risks, including:

     Credit risk — the risk that the counterparty on a Derivative transaction will be unable to honor its financial obligation to the Fund.

     Currency risk — the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.

     Leverage risk — the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.

     Liquidity risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth.

     Use of Derivatives for hedging purposes involves correlation risk. If the value of the Derivative moves more or less than the value of the hedged instruments the Fund will experience a gain or loss which will not be completely offset by movements in the value of the hedged instruments.

     The Fund intends to enter into transactions involving Derivatives only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under “Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives.” However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a Derivative or the Fund will otherwise be able to sell such instrument at an acceptable price. It may therefore not be possible to close a position in a Derivative without incurring substantial losses, if at all.

     <R>Certain transactions in Derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose the Fund to potential losses which exceed the amount originally invested by the Fund. When the Fund engages in such a transaction, the Fund will deposit in a segregated account at its custodian liquid securities with a value at least equal to the Fund’s exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Fund’s exposure to loss.</R>

Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives

     Certain Derivatives traded in OTC markets, including indexed securities, swaps and OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible for the Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for the Fund to ascertain a market value for such instruments. The Fund will therefore acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Manager anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer’s quotation may be used.

     Because Derivatives traded in OTC markets are not guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterparty the Fund is at risk that its counterparty will become bankrupt or otherwise fail to honor its obligations. The Fund will attempt to minimize the risk that a counterparty will become bankrupt or otherwise fail to honor its obligations by engaging in transactions in Derivatives traded in OTC markets only with financial institutions which have substantial capital or which have provided the Fund with a third-party guaranty or other credit enhancement.

 

9

<R>Additional Limitations on the Use of Derivatives

     The Fund may not use any Derivative to gain exposure to an asset or class of assets that it would be prohibited by its investment restrictions from purchasing directly.</R>

Other Investment Policies and Practices

     Repurchase Agreements. The Fund may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a primary dealer in U.S. Government securities or an affiliate thereof. Under such agreements, the bank or primary dealer or an affiliate thereof agrees, on entering into the contract, to repurchase the security at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period. Such agreements usually cover short periods, such as under a week. The Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement. In the event of a default by the seller, the Fund ordinarily will retain ownership of the securities underlying the repurchase agreement, and instead of a contractually fixed rate of return, the rate of return to the Fund shall be dependent upon intervening fluctuations of the market value of such securities and the accrued interest on the securities. In such event, the Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform. The Fund may suffer time delays and incur costs or possible losses in connection with the disposition of the securities underlying a repurchase agreement in the event of the counterparty’s default. From time to time the Fund also may invest in securities pursuant to purchase and sale contracts. While purchase and sale contracts are similar to repurchase agreements, purchase and sale contracts are structured so as to be in substance more like a purchase and sale of the underlying security than is the case with repurchase agreements.

     When Issued Securities and Delayed Delivery Transactions. The Fund may purchase or sell securities on a delayed delivery basis or a when issued basis at fixed purchase terms. These transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future. The purchase will be recorded on the date the Fund enters into the commitment and the value of the obligation will thereafter be reflected in the calculation of the Fund’s net asset value. The value of the obligation on the delivery date may be more or less than its purchase price. A separate account of the Fund will be established with its custodian consisting of cash, cash equivalents or high grade, liquid debt securities having a market value at all times at least equal to the amount of the forward commitment.

     Illiquid or Restricted Securities. The Fund may invest up to 15% of its net assets in securities that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of the Fund’s assets in illiquid securities may restrict the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute where the Fund’s operations require cash, such as when the Fund redeems shares or pays dividends, and could result in the Fund borrowing to meet short-term cash requirements or incurring capital losses on the sale of illiquid investments.

     The Fund may invest in securities that are not registered under the Securities Act of 1933, as amended (the “Securities Act”) or otherwise have contractual or legal restrictions on their resale (“restricted securities”). These include “private placement“securities that the Fund may buy directly from the issuer. Restricted securities may be sold in private placement transactions between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the Fund or less than their fair market value. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Certain of the Fund’s investments in private placements may consist of direct investments and may

 

10

include investments in smaller, less-seasoned issuers, which may involve greater risks. These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. In making investments in such securities, the Fund may obtain access to material non-public information which may restrict the Fund’s ability to conduct portfolio transactions in such securities.

     <R>Initial Public Offering Risk. The volume of initial public offerings and the levels at which the newly issued stocks trade in the secondary market are affected by the performance of the stock market overall. If initial public offerings are brought to the market, availability may be limited and the Fund may not be able to buy any shares at the offering price, or if it is able to buy shares, it may not be able to buy as many shares at the offering price as it would like. In addition, the prices of securities involved in initial public offerings are often subject to greater and more unpredictable price changes than more established stocks.

     144A Securities. The Fund may purchase restricted securities that can be offered and sold to “qualified institutional buyers” under Rule 144A under the Securities Act. The Board of Directors has determined to treat as liquid Rule 144A securities that are either freely tradable in their primary markets offshore or have been determined to be liquid in accordance with the policies and procedures adopted by the Fund’s Board. The Board has adopted guidelines and delegated to the Manager the daily function of determining and monitoring liquidity of restricted securities. The Board, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how this market for restricted securities sold and offered under Rule 144A will continue to develop, the Board will carefully monitor the Fund’s investments in these securities. This investment practice could have the effect of increasing the level of illiquidity in the Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these securities.

     Securities Lending. The Fund may lend securities with a value not exceeding 33¹/3% of its total assets or the limit prescribed by applicable law to banks, brokers and other financial institutions. In return, the Fund receives collateral in cash or securities issued or guaranteed by the U.S. Government, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Fund maintains the ability to obtain the right to vote or consent on proxy proposals involving material events affecting securities loaned. The Fund receives the income on the loaned securities. Where the Fund receives securities as collateral, the Fund receives a fee for its loan from the borrower and does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned, net of any amount rebated to the borrower. As a result, the Fund’s yield may increase. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard time period for settlement of securities transactions. The Fund is obligated to return the collateral to the borrower at the termination of the loan. The Fund could suffer a loss in the event the Fund must return the cash collateral and there are losses on investments made with the cash collateral. In the event the borrower defaults on any of its obligations with respect to a securities loan, the Fund could suffer a loss where there are losses on investments made with the cash collateral or where the value of the securities collateral falls below the market value of the borrowed securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund may pay reasonable finder’s, lending agent, administrative and custodial fees in connection with its loans. The Fund has received an exemptive order from the Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) or its affiliates and to retain an affiliate of the Fund as lending agent. See “Portfolio Transactions and Brokerage.”</R>

Suitability

     The economic benefit of an investment in the Fund depends upon many factors beyond the control of the Fund, the Manager and its affiliates. Because of its emphasis on equity securities, the Fund should be considered a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in the Fund will depend upon, among other things, such investor’s investment objectives and such investor’s ability to accept the risks associated with investing in equity securities, including the risk of loss of principal.

Investment Restrictions

     <R>The Fund has adopted a number of fundamental and non-fundamental investment policies and restrictions. The fundamental policies and restrictions set forth below may not be changed without the approval of the holders of a majority of the Fund’s outstanding voting securities (which for this purpose and under the Investment</R>

 

11

<R>Company Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). Unless otherwise provided, all references to the assets of the Fund below are in terms of current market value.

     Under the fundamental investment restrictions, the Fund may not:</R>

     1. Make any investment inconsistent with the Fund’s classification as a diversified company under the Investment Company Act.

     2. Invest more than 25% of its assets, taken at market value, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities).

     3. Make investments for the purpose of exercising control or management.

     4. Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies which invest in real estate or interests therein.

     5. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers acceptances, repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Fund’s Prospectus and Statement of Additional Information, as they may be amended from time to time.

     6. Issue senior securities to the extent such issuance would violate applicable law.

     7. Borrow money, except that (i) the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33¹/3% of its total assets (including the amount borrowed), (ii) the Fund may borrow up to an additional 5% of its total assets for temporary purposes, (iii) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund’s investment policies as set forth in its Prospectus and Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies.

     8. Underwrite securities of other issuers except insofar as the Fund technically may be deemed an underwriter under the Securities Act in selling portfolio securities.

     9. Purchase or sell commodities or contracts on commodities, except to the extent that the Fund may do so in accordance with applicable law and the Fund’s Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act.

     Notwithstanding fundamental investment restriction (7) above, the Fund currently does not intend to borrow amounts in excess of 33¹/3% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares. In addition, the Fund will not purchase securities while borrowings are outstanding.

     <R>The Fund has also adopted non-fundamental investment restrictions, which may be changed by the Board of Directors without shareholder approval. Under the non-fundamental restrictions, the Fund may not:</R>

     a. Purchase securities of other investment companies, except to the extent permitted by applicable law. As a matter of policy, however, the Fund will not purchase shares of any registered open-end investment company or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G) (the “fund of funds“provisions) of the Investment Company Act, at any time its shares are owned by another investment company that is part of the same group of investment companies as the Fund.

     b. Make short sales of securities or maintain a short position, except to the extent permitted by applicable law. The Fund currently does not intend to engage in short sales, except short sales “against the box.”

 

12

     c. Invest in securities which cannot be readily resold because of legal or contractual restrictions or which cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its total assets would be invested in such securities. This restriction shall not apply to securities which mature within seven days or securities which the Board of Directors of the Fund have otherwise determined to be liquid pursuant to applicable law.

     d. Notwithstanding fundamental investment restriction (7) above, borrow amounts in excess of 20% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as the redemption of Fund shares.

     <R>The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of such transactions, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and margin deposits on the Fund’s existing OTC options on futures contracts exceed 15% of the net assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are not otherwise readily marketable. However, if an OTC option is sold by the Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is “in-the-money” (i.e., current market value of the underlying securities minus the option’s strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is “in-the-money.” This policy as to OTC options is not a fundamental policy of the Fund and may be amended by the Board of Directors of the Fund without the approval of the Fund’s shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the Commission staff of its position.

     The Fund’s investments will be limited in order to allow the Fund to qualify as a “regulated investment company” for purposes of the Internal Revenue Code of 1986, as amended (the “Code”). See “Dividends and Taxes — Taxes.” To qualify, among other requirements, the Fund will limit its investments so that, at the close of each quarter of the taxable year, (i) not more than 25% of the market value of the Fund’s total assets will be invested in the securities of a single issuer, and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer and the Fund will not own more than 10% of the outstanding voting securities of a single issuer. Foreign government securities (unlike U.S. government securities) are not exempt from the diversification requirements of the Code and the securities of each foreign government issuer are considered to be obligations of a single issuer. These tax-related limitations may be changed by the Directors of the Fund to the extent necessary to comply with changes to the Federal tax requirements. The Fund is “diversified” under the Investment Company Act and must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets.</R>

Portfolio Turnover

     <R>The Manager will effect portfolio transactions without regard to the time the securities have been held, if, in its judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, financial or economic conditions. As a result of its investment policies, the Fund may engage in a substantial number of portfolio transactions and the Fund’s portfolio turnover rate may vary greatly from year to year or during periods within a year. The portfolio turnover rate is calculated by dividing the lesser of the Fund’s annual sales or purchases of portfolio securities (exclusive of purchases or sales of securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high portfolio turnover may result in negative tax consequences, such as an increase in capital gain dividends and/or ordinary income dividends. See “Dividends and Taxes — Taxes.” High portfolio turnover may also involve correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Fund. The Fund’s portfolio turnover increased to 149.86% in the fiscal year ended August 31, 2001 from 98.71% in the fiscal year ended August 31, 2000 largely as a result of the almost complete liquidation of major investment exposure to the energy and technology sectors. The Fund’s portfolio turnover decreased to 92.35% for the fiscal year ended August 31, 2002.</R>

 

13

MANAGEMENT OF THE FUND

<R>Directors and Officers

     The Directors of the Fund consist of eight individuals, seven of whom are not “interested persons” of the Fund as defined in the Investment Company Act (the “non-interested Directors”). The Directors are responsible for the overall supervision of the operations of the Fund and perform the various duties imposed on the directors of investment companies by the Investment Company Act.

     Each non-interested Director is a member of the Fund’s Audit Committee (the “Committee”). The principal responsibilities of the Committee are the appointment, compensation and oversight of the Fund’s independent accountants, including the resolution of disagreements regarding financial reporting between Fund management and such independent accountants. The Committee’s responsibilities include, without limitation, to (i) review with the independent accountants the arrangements for and scope of annual and special audits and any other services provided by the independent accountants to the Fund; (ii) discuss with the independent accountants certain matters relating to the Fund’s financial statements, including any adjustment to such financial statements recommended by such independent accountants or any other results of any audit; (iii) ensure that the independent accountants submit on a periodic basis a formal written statement with respect to their independence, discuss with the independent accountants any relationships or services disclosed in the statement that may impact the objectivity and independence of the Fund’s independent accountants and recommend that the Board take appropriate action in response thereto to satisfy itself of the independent accountant’s independence; and (iv) consider the comments of the independent accountants and management’s responses thereto with respect to the quality and adequacy of the Fund’s accounting and financial reporting policies and practices and internal controls and Fund management’s responses thereto. The Board of the Fund has adopted a written charter for the Committee which will review and reassess the adequacy of the charter on an annual basis and recommend any changes to the Board. The Committee also reviews and nominates candidates to serve as non-interested Directors. The Committee generally will not consider nominees recommended by shareholders. The Committee has retained independent legal counsel to assist them in connection with these duties. The Committee met four times during the fiscal year ended August 31, 2002.

     Biographical Information. Certain biographical and other information relating to the non-interested Directors of the Fund is set forth below, including their ages, their principal occupations for at least the last five years, the length of time served, the total number of investment companies and portfolios overseen in the complex of funds advised by the Manager and its affiliate, Fund Asset Management, L.P. (“FAM”) (“MLIM/FAM-advised Funds”) and other public directorships:

Name, Address* and Age of Director	Position(s) Held with the Fund	Term of Office** and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of MLIM/FAM- Advised Funds and Portfolios Overseen	Public Directorships
James H. Bodurtha (58)	Director	Director since 2002	Director and Executive Vice President, The China Business Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise Management Corporation from 1993 to 1996; Director and Chairman, Berkshire Holding Corporation since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.	42 registered investment companies consisting of 61 portfolios	None
</R>

14

 

<R>
Name, Address* and Age of Director	Position(s) Held with the Fund	Term of Office** and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of MLIM/FAM- Advised Funds and Portfolios Overseen	Public Directorships
Joe Grills (67)	Director	Director since 1994	Member of the Committee of Investment of Employee Benefit Assets of the Association of Financial Professionals (“CIEBA”) since 1986; Member of CIEBA’s Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Corporation (“IBM”) and Chief Investment Officer of IBM Retirement Funds from 1986 to 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund since 1989; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from 1997 to 2000; Director, Duke Management Company since 1992 and Vice Chairman thereof since 1998; Director, LaSalle Street Fund from 1995 to 2001; Director, Kimco Realty Corporation since 1997; Member of the Investment Advisory Committee of the Virginia Retirement System since 1998 and Vice Chairman thereof since 2002; Director, Montpelier Foundation since 1998 and its Vice Chairman since 2000; Member of the Investment Committee of the Woodberry Forest School since 2000; Member of the Investment Committee of the National Trust for Historic Preservation since 2000.	42 registered investment companies consisting of 61 portfolios	Kimco Realty Corporation
Herbert I. London (63)	Director	Director since 2002	John M. Olin Professor of Humanities, New York University since 1993 and Professor thereof since 1980; President, Hudson Institute since 1997 and Trustee thereof since 1980; Dean, Gallatin Division of New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Director, Damon Corp. from 1991 to 1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP since 1996.	42 registered investment companies consisting of 61 portfolios	None
</R>

 

15

 

<R>
Name, Address* and Age of Director	Position(s) Held with the Fund	Term of Office** and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of MLIM/FAM- Advised Funds and Portfolios Overseen	Public Directorships
André F. Perold (50)	Director	Director since 2002	Harvard Business School: George Gund Professor of Finance and Banking since 2000; Senior Associate Dean, Director of Faculty Recruiting since 2001; Finance Area Chair from 1996 to 2001; Sylvan C. Coleman Professor of Financial Management from 1993 to 2000; Trustee, Commonfund from 1989 to 2001; Director, Genbel Securities Limited and Gensec Bank since 1999; Director, Stockback.com since 2001; Director, Sanlam Limited since 2001; Director, Sanlam Investment Management from 1999 to 2001; Director, Bulldogresearch.com from 2000 to 2001; Director, Quantec Limited from 1991 to 1999.	42 registered investment companies consisting of 61 portfolios	None
Roberta Cooper Ramo (60)	Director	Director since 2002	Shareholder, Modrall, Sperling, Roehl, Harris & Sisk, P.A. since 1993; President, American Bar Association from 1995 to 1996 and Member of the Board of Governors thereof from 1994 to 1997; Partner, Poole, Kelly & Ramo, Attorneys at Law, P.C. from 1977 to 1993; Director of Coopers, Inc. since 1999; Director of ECMC Group (service provider to students, schools and lenders) since 2001; Director, United New Mexico Bank (now Wells Fargo) from 1983 to 1988; Director, First National Bank of New Mexico (now First Security) from 1975 to 1976.	42 registered investment companies consisting of 61 portfolios	None
Robert S. Salomon, Jr. (65)	Director	Director since 1996	Principal of STI Management (investment adviser) since 1994; Chairman and CEO of Salomon Brothers Asset Management Inc. from 1992 to 1995; Chairman of Salomon Brothers Equity Mutual Funds from 1992 to 1995; regular columnist with Forbes Magazine since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon Brothers Inc. from 1975 to 1991; Trustee, Commonfund from 1980 to 2001.	42 registered investment companies consisting of 61 portfolios	None
</R>

 

16

 

<R>
Name, Address* and Age of Director	Position(s) Held with the Fund	Term of Office** and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of MLIM/FAM- Advised Funds and Portfolios Overseen	Public Directorships
Stephen R. Swensrud (69)	Director	Director since 1992	Chairman of Fernwood Advisors (investment adviser) since 1996; Principal of Fernwood Associates (financial consultant) since 1975; Chairman of RPP Corporation (manufacturing) since 1978; Director, International Mobile Communications, Inc. (telecommunications) since 1998.	42 registered investment companies consisting of 61 portfolios	None

* The address of each non-interested Director is P.O. Box 9011, Princeton, New Jersey 08543-9011.

** Each Director serves until his or her successor is elected and qualified, until December 31 of the year in which he or she turns 72, or until the earlier of his or her death, resignation or removal as provided in the Fund’s by-laws or charter or by statute.

     Certain biographical and other information about the Director who is an officer and an “interested person” of the Fund as defined in the Investment Company Act (the “interested Director”) and the other officers of the Fund is set forth below, including their ages, their principal occupations for at least the last five years, the length of time served, the total number of portfolios overseen in MLIM/FAM-advised Funds and other public directorships held.

Name, Address† and Age	Position(s) Held with the Fund	Term of Office* and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of MLIM/FAM- Advised Funds and Portfolios Overseen	Public Directorships
Terry K. Glenn (62)††	Director and President	President and Director** since 1999	Chairman (Americas Region) of the Manager since 2000; Executive Vice President of the Manager and FAM (which terms as used herein include their corporate predecessors) since 1983; President of Merrill Lynch Mutual Funds since 1999; President of FAM Distributors, Inc. (“FAMD”) since 1986 and Director thereof since 1991; Executive Vice President and Director of Princeton Services, Inc. (“Princeton Services”) since 1993; President of Princeton Administrators, L.P. (“Princeton Administrators”) since 1988; Director of Financial Data Services, Inc. since 1985.	117 registered investment co7panies consisting of 162 portfolios	None
Robert C. Doll, Jr. (48)	Senior Vice President	Senior Vice President since 1999	President of the Manager and FAM since 2001; Co-Head (Americas Region) of the Manager from 2000 to 2001 and Senior Vice President thereof from 1999 to 2001; Director of Princeton Services since 2001; Chief Investment Officer of OppenheimerFunds, Inc. in 1999 and Executive Vice President thereof from 1991 to 1999.	51 registered investment companies consisting of 71 portfolios	None
</R>

17

 

<R>
Name, Address† and Age	Position(s) Held with the Fund	Term of Office* and Length of Time Served	Principal Occupation(s) During Past Five Years	Number of MLIM/FAM- Advised Funds and Portfolios Overseen	Public Directorships
Lawrence R. Fuller (61)	Senior Vice President and Portfolio Manager	Senior Vice President and Portfolio Manager since 1992	First Vice President of the Manager since 1997 and Vice President of the Manager from 1992 to 1997.	6 registered investment companies consisting of 7 portfolios	None
Thomas J. Verage (61)	Senior Vice President	Senior Vice President since 2000	First Vice President of the Manager since 1997 and Assistant Equity Funds Investment Officer thereof since 1994.	5 registered investment companies consisting of 6 portfolios	None
Donald C. Burke (42)	Vice President and Treasurer	Vice President since 1993 and Treasurer since 1999	First Vice President of the Manager and FAM since 1997 and Treasurer thereof since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of FAMD since 1999; Vice President of the Manager and FAM from 1990 to 1997; Director of Taxation of the Manager since 1990.	117 registered investment companies consisting of 162 portfolios	None
Susan B. Baker (45)	Secretary	Secretary since 2002	Director (Legal Advisory) of the Manager since 1999; Vice President of the Manager from 1993 to 1999; attorney associated with the Manager since 1987.	38 registered investment companies consisting of 44 portfolios	None

† The address for each officer listed is P.O. Box 9011, Princeton, New Jersey 08543-9011.

†† Mr. Glenn is an “interested person,” as defined in the Investment Company Act, of the Fund based on his position with MLIM, FAM, FAMD, Princeton Services and Princeton Administrators.

* Each officer is elected by and serves at the pleasure of the Board of Directors of the Fund.

** As a Director, Mr. Glenn serves until his successor is elected and qualified, until December 31 of the year in which he turns 72, or until the earlier of his death, resignation or removal as provided in the Fund’s by-laws or charter or by statute.

     Share Ownership. Information relating to each Director’s share ownership in the Fund and in all registered funds in the Merrill Lynch family of funds that are overseen by the respective Director (“Supervised Merrill Lynch Funds”) as of December 31, 2001 is set forth in the chart below:

Name	Aggregate Dollar Range of Equity in the Fund		Aggregate Dollar Range of Securities in Supervised Merrill Lynch Funds
Interested Director:
Terry K. Glenn		Over $100,000		Over $100,000
Non-Interested Directors:
James H. Bodurtha		$1 - $10,000		$50,001 - $100,000
Joe Grills		None		Over $100,000
Herbert I. London		$10,001 - $50,000		$50,001 - $100,000
André F. Perold		None		Over $100,000
Roberta Cooper Ramo		None		None
Robert S. Salomon, Jr.		None		None
Stephen R. Swensrud		None		None
</R>

18

     <R>As of December 13, 2002, the Directors and officers of the Fund as a group owned an aggregate of less than 1% of the outstanding shares of the Fund. As of December 31, 2001, none of the non-interested Directors of the Fund or their immediate family members owned beneficially or of record any securities of Merrill Lynch & Co., Inc. (“ML & Co.”).

Compensation of Directors

     For the fiscal year ended August 31, 2002, the Fund paid each non-interested Director a combined fee for service on the Board and the Committee of $10,400 per year plus a fee of $650 per in-person Board meeting attended and $650 per in-person Committee meeting attended. The Fund reimburses each non-interested Director for his or her out-of-pocket expenses relating to attendance at Board and Committee meetings.

     The following table sets forth the compensation earned by the non-interested Directors for the fiscal year ended August 31, 2002, and the aggregate compensation paid to them by all MLIM/FAM-advised Funds for the calendar year ended December 31, 2001.

Name	Position with the Fund	Compensation from the Fund	Pension or Retirement Benefits Accrued as Part of Fund Expense	Aggregate Compensation from the Fund and Other MLIM/FAM- Advised Funds
James H. Bodurtha*†	Director	$  4,767	None	$160,000
Joe Grills†	Director	$20,734	None	$259,500
Herbert I. London*	Director	$  4,767	None	$160,000
André F. Perold*	Director	$  4,767	None	$160,000
Roberta Cooper Ramo*	Director	$  4,767	None	$160,000
Robert S. Salomon, Jr.	Director	$20,734	None	$222,000
Melvin R. Seiden**	Director	$20,734	None	$222,000
Stephen B. Swensrud	Director	$20,734	None	$406,083

* Elected to the Board on April 15, 2002.

** Mr. Seiden retired as a Director on December 31, 2002.

† Co-Chairman of the Committee.

     Directors of the Fund may purchase Class A shares of the Fund at net asset value. See “Purchase of Shares — Reduced Initial Sales Charges — Purchase Privilege of Certain Persons.”

Management and Advisory Arrangements

     Management Services. The Manager provides the Fund with investment advisory and management services. Subject to the supervision of the Directors, the Manager provides the Fund with such investment research, advice and supervision necessary for the proper management of the Fund’s portfolio and reviews the Fund’s holdings in light of its own research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Manager. The Manager performs certain of the other administrative services and provides all the office space, facilities, equipment and necessary personnel for management of the Fund.

     Management Fee. The Fund has entered into a management agreement with the Manager (the “Management Agreement”), pursuant to which the Manager receives for its services to the Fund monthly compensation at the annual rate of 0.65% of the average daily net assets of the Fund not exceeding $1 billion, 0.625% of the average daily net assets in excess of $1 billion but not exceeding $1.5 billion, 0.60% of the average daily net assets in excess of $1.5 billion but not exceeding $5 billion, 0.575% of the average daily net assets in excess of $5 billion but not exceeding $7.5 billion and 0.55% of the average daily net assets in excess of $7.5 billion. For the fiscal year ended August 31, 2002, the Manager received a fee equal to 0.61% of the Fund’s average daily net assets. The table below sets forth information about the total investment advisory fees paid by the Fund to the Manager for the periods indicated.

Fiscal Year Ended August 31,	Investment Advisory Fee
2002	$34,900,247
2001	$35,225,639
2000	$31,124,064	</R>

 

19

     <R>The Manager has entered into a sub-advisory agreement (the “Sub-Advisory Agreement”) with Merrill Lynch Asset Management U.K. Limited (“MLAM U.K.”) pursuant to which MLAM U.K. provides investment advisory services to the Manager with respect to the Fund. For the fiscal years ended August 31, 2002, 2001 and 2000, the Manager paid no fees to MLAM U.K. pursuant to this agreement.

     Payment of Fund Expenses. The Management Agreement obligates the Manager to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as the fees of all Directors of the Fund who are affiliated persons of the Manager. The Fund pays all other expenses incurred in the operation of the Fund including, among other things: taxes; expenses for legal and auditing services; costs of preparing, printing and mailing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information, except to the extent paid by the Distributor; Commission fees; expenses of registering the shares under Federal, State or foreign laws; fees and expenses of non-interested Directors; accounting and pricing costs (including the daily calculation of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Certain accounting services are provided to the Fund by State Street Bank and Trust Company (“State Street”) pursuant to an agreement between State Street and the Fund. The Fund pays a fee for these services. In addition, the Fund reimburses the Manager for certain other accounting services. The Distributor pays certain promotional expenses of the Fund incurred in connection with the offering of shares of the Fund. Certain expenses are financed by the Fund pursuant to distribution plans in compliance with Rule 12b-1 under the Investment Company Act. See “Purchase of Shares — Distribution Plans.”

     Organization of the Manager. The Manager is a limited partnership, the partners of which are ML & Co., a financial services holding company and the parent of Merrill Lynch, and Princeton Services. ML & Co. and Princeton Services are “controlling persons” of the Manager as defined under the Investment Company Act because of their ownership of its voting securities and their power to exercise a controlling influence over its management or policies.

     The following entities may be considered “controlling persons” of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.’s parent), a subsidiary of Merrill Lynch International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.

     Duration and Termination. Unless earlier terminated as described herein, the Management Agreement and Sub-Advisory Agreement will each remain in effect from year to year if approved annually (a) by the Board of Directors of the Fund or by a majority of the outstanding shares of the Fund and (b) by a majority of the Directors of the Fund who are not parties to such contracts or interested persons (as defined in the Investment Company Act) of any such party. Such contracts are not assignable and may be terminated without penalty on 60 days’ written notice at the option of either party or by vote of the shareholders of the Fund.

     In connection with its consideration of the Management Agreement, the Board reviewed information derived from a number of sources and covering a range of issues. The Board considered the services provided to the Fund by the Manager under the Management Agreement, as well as other services provided by the Manager and its affiliates under other agreements, and the personnel who provide these services. In addition to investment advisory services, the Manager and its affiliates provide administrative services, shareholder services, oversight of fund accounting, marketing services, assistance in meeting legal and regulatory requirements, and other services necessary for the operation of the Fund. The Board also considered the Manager’s costs of providing services, and the direct and indirect benefits to the Manager from its relationship with the Fund. The benefits considered by the Board included not only the Manager’s compensation for investment advisory services and the Fund’s profitability to the Manager under the Management Agreement, but also compensation paid to the Manager or its affiliates for other, non-advisory, services provided to the Fund. The Directors also considered the Manager’s access to research services from brokers to which the Manager may have allocated Fund brokerage in a “soft dollar” arrangement. In connection with its consideration of the Management Agreement, the Board also compared the Fund’s advisory fee rate, expense ratios and historical performance to those of comparable funds. The Board considered whether there should be changes in the advisory fee rate or structure in order to enable the Fund to participate in any economies of scale that the Manager may experience as a result of growth in the Fund’s assets. </R>

 

20

     <R>Based on the information reviewed and the discussions, the Board, including a majority of the non-interested Directors, concluded that the management fee rate was reasonable in relation to the services provided. The non-interested Directors were represented by independent counsel who assisted them in their deliberations.

     Transfer Agency Services. Financial Data Services, Inc. (the “Transfer Agent”), a subsidiary of ML & Co., acts as the Fund’s Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the “Transfer Agency Agreement”). Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. The Fund currently pays between $16.00 and $20.00 for each Class A or Class D shareholder account, between $19.00 and $23.00 for each Class B or Class C shareholder account, depending on the level of service required, and $16.00 for each Class R shareholder account. The Fund also reimburses the Transfer Agent’s reasonable out-of-pocket expenses and pays a fee of 0.10% of account assets for certain accounts that participate in the Merrill Lynch Mutual Fund Advisor (Merrill Lynch MFA^SM) Program (the “MFA Program”). For purposes of the Transfer Agency Agreement, the term “account” includes a shareholder account maintained directly by the Transfer Agent and any other account representing the beneficial interest of a person in the relevant share class on a recordkeeping system, provided the recordkeeping system is maintained by a subsidiary of ML & Co.

     The table below sets forth information about the total amounts paid by the Fund to the Transfer Agent for the periods indicated.

Fiscal year ended August 31,	Transfer Agent Fee
2002	$17,122,973
2001	$  8,940,944	*
2000	$  6,266,647	*

* During the fiscal year ended August 31, 2000 and the period September 1, 2000 through June 30, 2001, the Fund paid fees to the Transfer Agent at lower rates than the ones currently in effect. If the current rates had been in effect for those periods, the fees paid may have been higher. The current rates became effective on July 1, 2001.

     Accounting Services. The Fund has entered into an agreement with State Street pursuant to which State Street provides certain accounting services to the Fund. The Fund pays a fee for these services. Prior to January 1, 2001, the Manager provided accounting services to the Fund and was reimbursed by the Fund at its cost in connection with such services. The Manager continues to provide certain accounting services to the Fund and the Fund reimburses the Manager for these services.

     The table below shows the amounts paid by the Fund to State Street and to the Manager for accounting services for the periods indicated.

Fiscal year ended August 31,	Paid to State Street		Paid to the Manager
2002	$759,640		$138,674
2001	$549,202	†	$388,701
2000	N/A		$372,148
</R>

† Represents payments pursuant to the agreement with State Street commencing January 1, 2001.

     Distribution Expenses. The Fund has entered into a distribution agreement with the Distributor in connection with the continuous offering of each class of shares of the Fund (the “Distribution Agreement”). The Distribution Agreement obligates the Distributor to pay certain expenses in connection with the offering of each class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to dealers and investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreement is subject to the same renewal requirements and termination provisions as the Management Agreement described above.

 

21

Code of Ethics

     The Board of Directors of the Fund has approved a Code of Ethics under Rule 17j-1 of the Investment Company Act that covers the Fund, the Manager, MLAM U.K. and the Distributor. The Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased or held by the Fund.

PURCHASE OF SHARES

     <R>Reference is made to “Your Account — How to Buy, Sell, Transfer and Exchange Shares” in the Prospectus.

     The Fund offers five classes of shares under the Merrill Lynch Select Pricing^SM System. Shares of Class A and Class D are sold to investors choosing the initial sales charge alternative, shares of Class B and Class C are sold to investors choosing the deferred sales charge alternative and Class R shares are sold only to certain retirement plans. Each Class A, Class B, Class C, Class D or Class R share of the Fund represents an identical interest in the investment portfolio of the Fund and has the same rights, except that Class B, Class C, Class D and Class R shares bear the expenses of the ongoing account maintenance fees (also known as service fees) and Class B, Class C and Class R shares bear the expenses of the ongoing distribution fees. Class B and Class C shares also bear the expenses of the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The contingent deferred sales charges (“CDSCs”) that are imposed on Class B and Class C shares, the distribution fees that are imposed on Class B, Class C and Class R shares, and the account maintenance fees that are imposed on Class B, Class C, Class D and Class R shares are imposed directly against those classes and not against all assets of the Fund. Accordingly, such charges do not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Fund for each class of shares are calculated in the same manner at the same time and differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Each class has different exchange privileges. See “Shareholder Services — Exchange Privilege.”

     Investors should understand that the purpose and function of the initial sales charges with respect to the Class A and Class D shares are the same as those of the CDSCs and distribution fees with respect to the Class B and Class C shares and the distribution fees with respect to Class R shares in that the sales charges and distribution fees applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares.

     The Merrill Lynch Select Pricing^SM System is used by more than 50 registered investment companies advised by MLIM or FAM. MLIM/FAM-advised Funds that use the Merrill Lynch Select Pricing^SM System are referred to herein as “Select Pricing Funds.”

     The Fund offers its shares at a public offering price equal to the next determined net asset value per share plus any sales charge applicable to the class of shares selected by the investor. The applicable offering price for purchase orders is based upon the net asset value of the Fund next determined after receipt of the purchase order by the Distributor. As to purchase orders received by securities dealers or other financial intermediaries prior to the close of business on the New York Stock Exchange (the “NYSE”) (generally 4:00 p.m., Eastern time) which includes orders received after the determination of the net asset value on the previous day, the applicable offering price will be based on the net asset value on the day the order is placed with the Distributor, provided that the orders are received by the Distributor prior to 30 minutes after the close of business on the NYSE on that day. If the purchase orders are not received prior to 30 minutes after the close of business on the NYSE on that day, such orders shall be deemed received on the next business day. Dealers or other financial intermediaries have the responsibility of submitting purchase orders to the Fund not later than 30 minutes after the close of business on the NYSE.

     The Fund or the Distributor may suspend the continuous offering of the Fund’s shares of any class at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Any order may be rejected by the Fund or the Distributor. Neither the Distributor, the securities dealers nor other financial intermediaries are permitted to withhold placing orders to benefit themselves by a price change. Certain securities dealers or other financial intermediaries may charge a processing fee to confirm a purchase of</R>

 

22

<R>shares. For example, the fee currently charged by Merrill Lynch is $5.35. Purchases made directly through the Transfer Agent are not subject to the processing fee.</R>

Initial Sales Charge Alternatives — Class A and Class D Shares

     <R>Investors who prefer an initial sales charge alternative may elect to purchase Class D shares or, if an eligible investor, Class A shares. Investors choosing the initial sales charge alternative who are eligible to purchase Class A shares should purchase Class A shares rather than Class D shares because there is an account maintenance fee imposed on Class D shares. Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with purchases of Class B or Class C shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class A or Class D shares, because over time the accumulated ongoing account maintenance and distribution fees on Class B, Class C or Class R shares may exceed the initial sales charge and, in the case of Class D shares, the account maintenance fee. Although some investors who previously purchased Class A shares may no longer be eligible to purchase Class A shares of other Select Pricing Funds, those previously purchased Class A shares, together with Class B, Class C, Class D and Class R share holdings, will count toward a right of accumulation which may qualify the investor for a reduced initial sales charge on new initial sales charge purchases. In addition, the ongoing Class B, Class C and Class R account maintenance and distribution fees will cause Class B, Class C and Class R shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing Class D account maintenance fees will cause Class D shares to have a higher expense ratio, pay lower dividends and have a lower total return than Class A shares.</R>

     The term “purchase,” as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class A and Class D shares of the Fund, refers to a single purchase by an individual or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his, her or their own account and to single purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary is involved. The term “purchase” also includes purchases by any “company,” as that term is defined in the Investment Company Act, but does not include purchases by any such company that has not been in existence for at least six months or which has no purpose other than the purchase of shares of the Fund or shares of other registered investment companies at a discount; provided, however, that it shall not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit cardholders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser.

Eligible Class A Investors

     <R>Class A shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends on outstanding Class A shares. Investors who currently own Class A shares in a shareholder account, including participants in the Merrill Lynch Blueprint^SM Program, are entitled to purchase additional Class A shares of the Fund in that account. Certain employer-sponsored retirement or savings plans, including eligible 401(k) plans, may purchase Class A shares at net asset value provided such plans meet the required minimum number of eligible employees or required amount of assets advised by the Manager or any of its affiliates. Class A shares are available at net asset value to corporate warranty insurance reserve fund programs and U.S. branches of foreign banking institutions provided that the program or bank has $3 million or more initially invested in Select Pricing Funds. Also eligible to purchase Class A shares at net asset value are participants in certain investment programs including TMA^SM Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services, collective investment trusts for which Merrill Lynch Trust Company serves as trustee and certain purchases made in connection with certain fee-based programs. In addition, Class A shares are offered at net asset value to ML & Co. and its subsidiaries and their directors and employees and to members of the Boards of MLIM/FAM-advised investment companies including the Fund. Certain persons who acquired shares of certain MLIM/FAM-advised closed-end funds in their initial offerings who wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in shares of the Fund also may purchase Class A shares of the Fund if certain conditions are met. In addition, Class A shares of the Fund and certain other Select Pricing Funds are offered at net asset value to shareholders of certain MLIM/FAM-advised continuously offered closed-end funds who wish to reinvest the net</R>

 

23

<R>proceeds from a sale of certain of their shares of common stock pursuant to a tender offer conducted by such funds. See “Purchase of Shares —Closed-End Fund Reinvestment Option.”</R>

Class A and Class D Sales Charge Information

<R>
Class A Shares
For the Fiscal Year Ended August 31,	Gross Sales Charges Collected	Sales Charges Retained by Distributor	Sales Charges Paid to Merrill Lynch	CDSCs Received on Redemption of Load-Waived Shares
2002	$25,846	$1,749	$24,096	$     1,398
2001	$22,761	$1,465	$21,296	$         .11
2000	$18,568	$1,264	$17,304	$198,968
Class D Shares
For the Fiscal Year Ended August 31,	Gross Sales Charges Collected	Sales Charges Retained by Distributor	Sales Charges Paid to Merrill Lynch	CDSCs Received on Redemption of Load-Waived Shares
2002	$   776,545	$  47,188	$   729,357	$   4,591
2001	$2,155,370	$131,498	$2,023,872	$   2,592
2000	$1,350,171	$  85,151	$1,265,020	$54,503
</R>

     The Distributor may reallow discounts to selected securities dealers and other financial intermediaries and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers. Since securities dealers and other financial intermediaries selling Class A and Class D shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act.

Reduced Initial Sales Charges

     Reductions in or exemptions from the imposition of a sales charge are due to the nature of the investors and/or the reduced sales efforts that will be needed to obtain such investments.

     Reinvested Dividends. No initial sales charges are imposed upon Class A and Class D shares issued as a result of the automatic reinvestment of dividends.

     Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser’s combined holdings of all classes of shares of the Fund and of any other Select Pricing Funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser’s securities dealer or other financial intermediary, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing or other employee benefit plans may not be combined with other shares to qualify for the right of accumulation.

      Letter of Intent. Reduced sales charges are applicable to purchases aggregating $25,000 or more of the Class A or Class D shares of the Fund or any Select Pricing Funds made within a 13-month period starting with the first purchase pursuant to a Letter of Intent. The Letter of Intent is available only to investors whose accounts are established and maintained at the Fund’s Transfer Agent. The Letter of Intent is not available to employee benefit plans for which Merrill Lynch provides plan participant recordkeeping services. The Letter of Intent is not a binding obligation to purchase any amount of Class A or Class D shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a Letter of Intent may be included under a subsequent Letter of Intent executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class A and Class D shares of the Fund and of other Select Pricing Funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intent, may be included as a credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of

 

24

Intent (minimum of $25,000), the investor will be notified and must pay, within 20 days of the expiration of such Letter, the difference between the sales charge on the Class A or Class D shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class A or Class D shares equal to at least 5.0% of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intent must be at least 5.0% of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent purchases to the further reduced percentage sales charge that would be applicable to a single purchase equal to the total dollar value of the Class A or Class D shares then being purchased under such Letter, but there will be no retroactive reduction of the sales charge on any previous purchase.

     The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intent will be deducted from the total purchases made under such Letter. An exchange from the Summit Cash Reserves Fund (“Summit”), a series of Financial Institutions Series Trust, into the Fund that creates a sales charge will count toward completing a new or existing Letter of Intent from the Fund.

     Merrill Lynch Blueprint^SM Program. Class D shares of the Fund are offered to participants in the Merrill Lynch Blueprint^SM Program (“Blueprint”). In addition, participants in Blueprint who own Class A shares of the Fund may purchase additional Class A shares of the Fund through Blueprint. The Blueprint program is directed to small investors, group IRAs and participants in certain affinity groups such as credit unions, trade associations and benefit plans. Investors placing orders to purchase Class A or Class D shares of the Fund through Blueprint will acquire the Class A or Class D shares at net asset value plus a sales charge calculated in accordance with the Blueprint sales charge schedule (i.e., up to $300 at 4.25%, from $300.01 up to $5,000 at 3.25% plus $3, and $5,000.01 or more at the standard sales charge rates disclosed in the Prospectus). In addition, Class A or Class D shares of the Fund are being offered at net asset value plus a sales charge of 0.50 of 1% for corporate or group IRA programs placing orders to purchase their Class A or Class D shares through Blueprint. Services, including the exchange privilege, available to Class A and Class D investors through Blueprint, however, may differ from those available to other investors in Class A or Class D shares.

     Class A and Class D shares are offered at net asset value to participants in Blueprint through the Merrill Lynch Directed IRA Rollover Program (the “IRA Rollover Program”) available from Merrill Lynch Business Financial Services, a business unit of Merrill Lynch. The IRA Rollover Program is available to custodian rollover assets from employer-sponsored retirement and savings plans (as defined below) whose trustee and/or plan sponsor has entered into a Merrill Lynch Directed IRA Rollover Program Service Agreement.

     Orders for purchases and redemptions of Class A or Class D shares of the Fund may be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There are no minimum initial or subsequent purchase requirements for participants who are part of an automatic investment plan. Additional information concerning purchases through Blueprint, including any annual fees and transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint^SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

     TMA^SM Managed Trusts. Class A shares are offered at net asset value to TMA^SM Managed Trusts to which Merrill Lynch Trust Company provides discretionary trustee services.

     <R>Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements. Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class A or Class D shares at net asset value, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at
1-800-237-7777.

     Purchase Privilege of Certain Persons. Directors of the Fund, members of the Boards of other MLIM/FAM-advised investment companies, ML & Co. and its subsidiaries (the term “subsidiaries,” when used herein with respect to ML & Co., includes MLIM, FAM and certain other entities directly or indirectly wholly owned and controlled by ML & Co.) and their directors and employees, and any trust, pension, profit-sharing or other benefit </R>

 

25

plan for such persons, may purchase Class A shares of the Fund at net asset value. The Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the Fund. Employees and directors or trustees wishing to purchase shares of the Fund must satisfy the Fund’s suitability standards.

     Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor that has a business relationship with a Financial Advisor who joined Merrill Lynch from another investment firm within six months prior to the date of purchase by such investor, if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from a redemption of shares of a mutual fund that was sponsored by the Financial Advisor’s previous firm and was subject to a sales charge either at the time of purchase or on a deferred basis; and, second, the investor must establish that such redemption had been made within 60 days prior to the investment in the Fund and the proceeds from the redemption had been maintained in the interim in cash or a money market fund.

     Class D shares of the Fund are also offered at net asset value, without a sales charge, to an investor that has a business relationship with a Merrill Lynch Financial Advisor and that has invested in a mutual fund sponsored by a non-Merrill Lynch company for which Merrill Lynch has served as a selected dealer and where Merrill Lynch has either received or given notice that such arrangement will be terminated (“notice”) if the following conditions are satisfied: first, the investor must purchase Class D shares of the Fund with proceeds from a redemption of shares of such other mutual fund and the shares of such other fund were subject to a sales charge either at the time of purchase or on a deferred basis; and, second, such purchase of Class D shares must be made within 90 days after such notice.

     Class D shares of the Fund are offered at net asset value, without a sales charge, to an investor that has a business relationship with a Merrill Lynch Financial Advisor and that has invested in a mutual fund for which Merrill Lynch has not served as a selected dealer if the following conditions are satisfied: first, the investor must advise Merrill Lynch that it will purchase Class D shares of the Fund with proceeds from the redemption of shares of such other mutual fund and that such shares have been outstanding for a period of no less than six months; and, second, such purchase of Class D shares must be made within 60 days after the redemption and the proceeds from the redemption must be maintained in the interim in cash or a money market fund.

     Acquisition of Certain Investment Companies. Class D shares may be offered at net asset value in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company.

     Purchases Through Certain Financial Intermediaries. Reduced sales charges may be applicable for purchases of Class A or Class D shares of the Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Manager from time to time.

Deferred Sales Charge Alternatives — Class B and Class C Shares

     Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in Select Pricing Funds.

     Because no initial sales charges are deducted at the time of the purchase, Class B and Class C shares provide the benefit of putting all of the investor’s dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors that do not qualify for the reduction in initial sales charges. Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class D shares of the Fund after a conversion period of approximately eight years, and thereafter investors will be subject to lower ongoing fees.

     The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. See “Pricing of Shares — Determination of Net Asset Value” below.

 

26

Contingent Deferred Sales Charges — Class B Shares

     Class B shares that are redeemed within six years of purchase may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. In determining whether a CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest applicable rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over six years or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the six-year period. A transfer of shares from a shareholder’s account to another account will be assumed to be made in the same order as a redemption.

     The following table sets forth the Class B CDSC:

Year Since Purchase Payment Made	CDSC as a Percentage of Dollar Amount Subject to Charge†
0 – 1	4.0%
1 – 2	4.0%
2 – 3	3.0%
3 – 4	3.0%
4 – 5	2.0%
5 – 6	1.0%
6 and thereafter	None

† For Class B shares of the Fund purchased before June 1, 2001, the four-year CDSC schedule in effect at that time will apply.

     To provide an example, assume an investor purchased 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to a CDSC because they were issued through dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 3.0% (the applicable rate in the third year after purchase).

     <R>Class B shareholders of the Fund exercising the exchange privilege described under “Shareholder Services — Exchange Privilege” will continue to be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange.

     The Class B CDSC may be waived on redemptions of shares in connection with certain post-retirement withdrawals from an Individual Retirement Account (“IRA”) or other retirement plan or following the death or disability (as defined in the Internal Revenue Code of 1986, as amended) of a shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability or, if later, reasonably promptly following completion of probate. The Class B CDSC also may be waived on redemptions of shares by certain eligible 401(a) and eligible 401(k) plans. The CDSC may also be waived for any Class B shares that are purchased by eligible 401(k) or eligible 401(a) plans that are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at the time of redemption. The Class B CDSC may also be waived for any Class B shares that are purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a terminated 401(k) plan managed by MLIM Global Private Client Group and held in such account at the time of redemption. The Class B CDSC may also be waived or its terms may be modified in connection with certain fee-based programs. The Class B CDSC may also be waived in connection with involuntary termination of an account in which Fund shares are held or for withdrawals through the Merrill Lynch Systematic Withdrawal Plan. See “Shareholder Services — Fee-Based Programs” and “ — Systematic Withdrawal Plan.”

     Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements. Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class B shares with a waiver of the CDSC upon redemption, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments and/or the services provided by Merrill Lynch to the plan. Such Class B shares will convert into Class D shares approximately ten years after the</R>

 

27

<R>plan purchases the first share of any Select Pricing Fund. Minimum purchase requirements may be waived or varied for such plans. Additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements is available toll-free from Merrill Lynch Business Financial Services at 1-800-237-7777.

     Merrill Lynch Blueprint^SM Program. Class B shares are offered to certain participants in Blueprint. Blueprint is directed to small investors, group IRAs and participants in certain affinity groups such as trade associations and credit unions. Class B shares of the Fund are offered through Blueprint only to members of certain affinity groups. The CDSC is waived in connection with purchase orders placed through Blueprint. Services, including the exchange privilege, available to Class B investors through Blueprint, however, may differ from those available to other Class B investors. Orders for purchases and redemptions of Class B shares of the Fund will be grouped for execution purposes which, in some circumstances, may involve the execution of such orders two business days following the day such orders are placed. The minimum initial purchase price is $100, with a $50 minimum for subsequent purchases through Blueprint. There is no minimum initial or subsequent purchase requirement for investors who are part of a Blueprint automatic investment plan. Additional information concerning these Blueprint programs, including any annual fees or transaction charges, is available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint^SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

     <R>Conversion of Class B Shares to Class D Shares. After approximately eight years (the “Conversion Period”), Class B shares will be converted automatically into Class D shares of the Fund. Class D shares are subject to an ongoing account maintenance fee of 0.25% of average daily net assets but are not subject to the distribution fee that is borne by Class B shares. Automatic conversion of Class B shares into Class D shares will occur at least once each month (on the “Conversion Date”) on the basis of the relative net asset value of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class D shares will not be deemed a purchase or sale of the shares for Federal income tax purposes.</R>

     In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class D shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. If at the Conversion Date the conversion of Class B shares to Class D shares of the Fund in a single account will result in less than $50 worth of Class B shares being left in the account, all of the Class B shares of the Fund held in the account on the Conversion Date will be converted to Class D shares of the Fund.

     In general, Class B shares of equity Select Pricing Funds will convert approximately eight years after initial purchase and Class B shares of taxable and tax-exempt fixed income Select Pricing Funds will convert approximately ten years after initial purchase. If, during the Conversion Period, a shareholder exchanges Class B shares with an eight-year Conversion Period for Class B shares with a ten-year Conversion Period, or vice versa, the Conversion Period applicable to the Class B shares acquired in the exchange will apply and the holding period for the shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period also may be modified for investors that participate in certain fee-based programs. See “Shareholder Services — Fee-Based Programs.”

     <R>Share certificates for Class B shares of the Fund to be converted must be delivered to the Transfer Agent at least one week prior to the Conversion Date applicable to those shares. In the event such certificates are not received by the Transfer Agent at least one week prior to the Conversion Date, the related Class B shares will convert to Class D shares on the next scheduled Conversion Date after such certificates are delivered.</R>

Contingent Deferred Sales Charges — Class C Shares

     Class C shares that are redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. In determining whether a Class C CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A transfer of shares from a

 

28

<R>shareholder’s account to another account will be assumed to be made in the same order as a redemption. The Class C CDSC may be waived in connection with involuntary termination of an account in which Fund shares are held, withdrawals through the Merrill Lynch Systematic Withdrawal Plan or redemptions of Class C shares by certain retirement plans. See “Shareholder Services — Systematic Withdrawal Plan.”</R>

Class B and Class C Sales Charge Information

<R>	Class B Shares*
	For the Fiscal Year Ended August 31,	CDSCs Received by Distributor	CDSCs Paid to Merrill Lynch
	2002	$3,907,937	$3,907,937
	2001	$3,512,603	$3,512,603
	2000	$4,682,210	$4,682,210
</R>

* Additional Class B CDSCs payable to the Distributor may have been waived or converted to a contingent obligation in connection with a shareholder’s participation in certain fee-based programs.

<R>
	Class C Shares
	For the Fiscal Year Ended August 31,	CDSCs Received by Distributor	CDSCs Paid to Merrill Lynch
	2002	$243,860	$243,860
	2001	$203,697	$203,697
	2000	$132,425	$132,425

     Merrill Lynch compensates its Financial Advisors for selling Class B and Class C shares at the time of purchase from its own funds. Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of securities dealers or other financial intermediaries (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to financial advisers for selling Class B and Class C shares from a dealer’s own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. See “Distribution Plans” below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the National Association of Securities Dealers, Inc. (“NASD”) asset-based sales charge rule. See “Limitations on the Payment of Deferred Sales Charges” below.

Class R Shares

     Class R shares are available only to certain retirement plans. Class R shares are not subject to an initial sales charge or a contingent deferred sales charge but are subject to an ongoing distribution fee of 0.25% and an ongoing account maintenance fee of 0.25%. Distribution fees are used to support the Fund’s marketing and distribution efforts, such as compensating Merrill Lynch Financial Advisors and other financial intermediaries, advertising and promotion. Account maintenance fees are used to compensate securities dealers and other financial intermediaries for account maintenance activities. If Class R shares are held over time, these fees may exceed the maximum sales charge that an investor would have paid as a shareholder of one of the other share classes.</R>

Closed-End Fund Reinvestment Option

     Class A shares of the Fund and certain other Select Pricing Funds (“Eligible Class A Shares”) are offered at net asset value to shareholders of certain closed-end funds advised by FAM or MLIM who purchased such closed-end fund shares prior to October 21, 1994 (the date the Merrill Lynch Select Pricing^SM System commenced operations) and wish to reinvest the net proceeds from a sale of their closed-end fund shares of common stock in Eligible Class A Shares, if the conditions set forth below are satisfied. Alternatively, closed-end fund shareholders who purchased such shares on or after October 21, 1994 and wish to reinvest the net proceeds from a sale of their closed-end fund shares are offered Class A shares (if eligible to buy Class A shares) or Class D shares of the Fund and other Select Pricing Funds (“Eligible Class D Shares”), if the following conditions are met. First, the sale of closed-end fund shares must be made through Merrill Lynch, and the net proceeds therefrom must be immediately reinvested in Eligible Class A or Eligible Class D Shares. Second, the closed-end fund shares must either have been acquired in the initial public offering or be shares representing dividends paid on shares of common stock acquired

 

29

in such offering. Third, the closed-end fund shares must have been continuously maintained in a Merrill Lynch securities account. Fourth, there must be a minimum purchase of $250 to be eligible for the investment option.

     <R>Subject to the conditions set forth below, shareholders of certain MLIM/FAM-advised continuously offered closed-end funds may reinvest at net asset value the net proceeds from a sale of certain shares of common stock of such funds in shares of the Fund. Upon exercise of this investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch Senior Floating Rate Fund II, Inc. will receive Class C shares of the Fund.

     In order to exercise this investment option, a shareholder of one of the above-referenced continuously offered closed-end funds (an “eligible fund”) must sell his or her shares of common stock of the eligible fund (the “eligible shares”) back to the eligible fund in connection with a tender offer conducted by the eligible fund and reinvest the proceeds immediately in the designated class of shares of the Fund. This investment option is available only with respect to eligible shares as to which no Early Withdrawal Charge (as defined in the eligible fund’s prospectus) is applicable. Purchase orders from eligible fund shareholders wishing to exercise this investment option will be accepted only on the day that the related tender offer terminates and will be effected at the net asset value of the designated class of the Fund on such day. The Class C CDSC may be waived upon redemption of Class C shares purchased by an investor pursuant to this closed-end fund investment option. Such waiver is subject to the requirement that the tendered shares have been held by the investor for a minimum of one year and to such other conditions as are set forth in the prospectus for the related closed-end fund.</R>

Distribution Plans

     <R>Reference is made to “Key Facts — Fees and Expenses” in the Prospectus for certain information with respect to the separate distribution plans for Class B, Class C, Class D and Class R shares pursuant to Rule 12b-1 under the Investment Company Act (each a “Distribution Plan”) with respect to the account maintenance and/or distribution fees paid by the Fund to the Distributor with respect to such classes.

     The Distribution Plans for Class B, Class C, Class D and Class R shares each provides that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the Distributor, Merrill Lynch, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) in connection with account maintenance activities with respect to Class B, Class C, Class D and Class R shares. Each of those classes has exclusive voting rights with respect to the Distribution Plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid (except that Class B shareholders may vote upon any material changes to expenses charged under the Class D Distribution Plan).

     The Distribution Plans for Class B, Class C and Class R shares each provides that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.75% for Class B and Class C shares and 0.25% for Class R shares of the average daily net assets of the Fund attributable to the shares of the relevant class in order to compensate the Distributor, Merrill Lynch, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) for providing shareholder and distribution services and bearing certain distribution-related expenses of the Fund, including payments to financial advisers or other financial intermediaries for selling Class B, Class C and Class R shares of the Fund. The Distribution Plans relating to Class B, Class C and Class R shares are designed to permit an investor to purchase Class B, Class C or Class R shares through selected securities dealers or other financial intermediaries without the assessment of an initial sales charge and at the same time permit the dealer to compensate its financial advisers, selected securities dealers or other financial intermediaries in connection with the sale of the Class B, Class C and Class R shares and to compensate securities dealers and other financial intermediaries for account maintenance activities.</R>

     The Fund’s Distribution Plans are subject to the provisions of Rule 12b-1 under the Investment Company Act. In their consideration of each Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of the Distribution Plan to the Fund and each related class of shareholders.

 

30

<R>Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of non-interested Directors shall be committed to the discretion of the non-interested Directors then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is reasonable likelihood that each Distribution Plan will benefit the Fund and its related class of shareholders. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the non-interested Directors or by the vote of the holders of a majority of the outstanding related class of voting securities of the Fund. A Distribution Plan cannot be amended to increase materially the amount to be spent by the Fund without the approval of the related class of shareholders and all material amendments are required to be approved by the vote of Directors, including a majority of the non-interested Directors who have no direct or indirect financial interest in the Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of the Distribution Plan and any report made pursuant to such plan for a period of not less than six years from the date of the Distribution Plan or such report, the first two years in an easily accessible place.

     Among other things, each Distribution Plan provides that the Distributor shall provide and the Directors shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. Payments under the Distribution Plans are based on a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred and, accordingly, distribution-related revenues from the Distribution Plans may be more or less than distribution-related expenses. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their consideration quarterly and, in connection with their deliberations as to the continuance of the Class B, Class C and Class R Distribution Plans, annually. Distribution-related revenues consist of the account maintenance fees, distribution fees and CDSCs. Distribution-related expenses consist of financial adviser compensation, branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and marketing expense and interest expense.

     As of August 31, 2002, direct cash distribution revenues for the period since the commencement of operations of Class B shares exceeded direct cash distribution expenses by $281,303,515 (15.59% of Class B net assets at that date). As of August 31, 2002, direct cash distribution revenues for the period since the commencement of operations of Class C shares exceeded direct cash distribution expenses by $23,218,357 (3.89% of Class C net assets at that date).

     For the fiscal year ended August 31, 2002, the Fund paid the Distributor $22,961,711 pursuant to the Class B Distribution Plan (based on average daily net assets subject to such Class B Distribution Plan of approximately $2.3 billion), all of which was paid to Merrill Lynch for providing account maintenance and distribution-related activities and services in connection with Class B shares. For the fiscal year ended August 31, 2002, the Fund paid the Distributor $6,659,018 pursuant to the Class C Distribution Plan (based on average daily net assets subject to such Class C Distribution Plan of approximately $667.7 million), all of which was paid to Merrill Lynch for providing account maintenance and distribution-related activities and services in connection with Class C shares. For the fiscal year ended August 31, 2002, the Fund paid the Distributor $3,836,409 pursuant to the Class D Distribution Plan (based on average daily net assets subject to such Class D Distribution Plan of approximately $1.5 billion), all of which was paid to Merrill Lynch for providing account maintenance activities in connection with Class D shares.

     Since the inception date for Class R shares was January 1, 2003, no account maintenance fees or distribution fees were paid pursuant to the Class R Distribution Plan for the fiscal year ended August 31, 2002.

Limitations on the Payment of Deferred Sales Charges

     The maximum sales charge rule in the Conduct Rules of the NASD imposes a limitation on certain asset-based sales charges such as the distribution fee borne by the Class B, Class C and Class R shares and the CDSC borne by the Class B and Class C shares but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares, Class C shares and Class R shares, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from </R>

 

31

the payment of the distribution fee and the CDSC). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to the Distributor (referred to as the “voluntary maximum”) in connection with the Class B shares is 6.75% of eligible gross sales. The Distributor retains the right to stop waiving the interest charges at any time. To the extent payments would exceed the voluntary maximum, the Fund will not make further payments of the distribution fee with respect to Class B shares and any CDSCs will be paid to the Fund rather than to the Distributor; however, the Fund will continue to make payments of the account maintenance fee. In certain circumstances the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstances payment in excess of the amount payable under the NASD formula will not be made.

     <R>The following table sets forth comparative information as of August 31, 2002 with respect to the Class B and Class C shares of the Fund indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and, with respect to the Class B shares, the Distributor’s voluntary maximum. Since the inception date for Class R shares was January 1, 2003, no information is provided for Class R shares.

	Data Calculated as of August 31, 2002
	(In thousands)
	Eligible Gross Sales(1)	Allowable Aggregate Sales Charges(2)	Allowable Interest on Unpaid Balance(3)	Maximum Amount Payable	Amounts Previously Paid to Distributor(4)	Aggregate Unpaid Balance	Annual Distribution Fee at Current Net Asset Level(5)
Class B Shares for the period     October 21, 1994     (commencement of    operations)     to August 31, 2002
Under NASD Rule as Adopted	$8,781,507,496	$552,309,071	$293,213,008	$845,522,079	$336,413,982	$509,108,007	$13,545,185
Under Distributor’s Voluntary    Waiver	$8,781,507,496	$552,309,071	$  40,442,685	$592,751,756	$336,413,982	$256,337,774	$13,545,000
Class C Shares for the period    December 24, 1992    (commencement of operations)    to August 31, 2002
Under NASD Rule as Adopted	$1,474,584,886	$  92,859,841	$  22,578,729	$115,438,570	$  26,940,569	$  88,498,001	$ 4,444,507
<R>

(1) Purchase price of all eligible Class B or Class C shares sold during the periods indicated other than shares acquired through dividend reinvestment and the exchange privilege.<R>

(2) Includes amounts attributable to exchanges from Summit that are not reflected in Eligible Gross Sales. Shares of Summit can only be purchased by exchange from another fund (the “redeemed fund”). Upon such an exchange, the maximum allowable sales charge payment to the redeemed fund is reduced in accordance with the amount of the redemption. This amount is then added to the maximum allowable sales charge payment with respect to Summit. Upon an exchange out of Summit, the remaining balance of this amount is deducted from the maximum allowable sales charge payment to Summit and added to the maximum allowable sales charge payment to the fund into which the exchange is made.</R>

(3) Interest is computed on a monthly basis based upon the prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD Rule.

(4) Consists of CDSC payments, distribution fee payments and accruals. Of the distribution fee payments made with respect to Class B shares prior to July 6, 1993 under the distribution plan in effect at that time, at a 1.0% rate, 0.75% of average daily net assets has been treated as a distribution fee and 0.25% of average daily net assets has been deemed to have been a service fee and not subject to the NASD maximum sales charge rule. See “Key Facts — Fees and Expenses“in the Prospectus. This figure may include CDSCs that were deferred when a shareholder redeemed shares prior to the expiration of the applicable CDSC period and invested the proceeds, without the imposition of a sales charge, in Class A shares in conjunction with the shareholder’s participation in the MFA Program. The CDSC is booked as a contingent obligation that may be payable if the shareholder terminates participation in the MFA Program.

(5) Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum (with respect to Class B shares) or the NASD maximum (with respect to Class B and Class C shares).

REDEMPTION OF SHARES

     Reference is made to “Your Account — How to Buy, Sell, Transfer and Exchange Shares” in the Prospectus.

     The Fund is required to redeem for cash all shares of the Fund upon receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC that may be applicable, there will be no charge for redemption if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption.

 

32

     The right to redeem shares or to receive payment with respect to any such redemption may be suspended for more than seven days only for any period during which trading on the New York Stock Exchange (“NYSE”) is restricted as determined by the Commission or the NYSE is closed (other than customary weekend and holiday closings), for any period during which an emergency exists as defined by the Commission as a result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection of shareholders of the Fund.

     The value of shares at the time of redemption may be more or less than the shareholder’s cost, depending in part on the market value of the securities held by the Fund at such time.

     <R>The Fund has entered into a joint committed line of credit with other investment companies advised by the Manager and its affiliates and a syndicate of banks that is intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from Fund shareholders in extraordinary or emergency circumstances.</R>

Redemption

     <R>A shareholder wishing to redeem shares held with the Transfer Agent may do so without charge by tendering the shares directly to the Transfer Agent at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests delivered other than by mail should be delivered to Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Proper notice of redemption in the case of shares for which certificates have been issued may be accomplished by a written letter as noted above accompanied by certificates for the shares to be redeemed. Redemption requests should not be sent to the Fund. The redemption request in either event requires the signature(s) of all persons in whose name(s) the shares are registered, signed exactly as such name(s) appear(s) on the Transfer Agent’s register. The signature(s) on the redemption requests may require a guarantee by an “eligible guarantor institution” as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. In the event a signature guarantee is required, notarized signatures are not sufficient. In general, signature guarantees are waived on redemptions of less than $50,000 as long as the following requirements are met: (i) all requests require the signature(s) of all persons in whose name(s) shares are recorded on the Transfer Agent’s register; (ii) all checks must be mailed to the stencil address of record on the Transfer Agent’s register and (iii) the stencil address must not have changed within 30 days. Certain rules may apply regarding certain account types such as but not limited to UGMA/UTMA accounts, Joint Tenancies With Rights of Survivorship, contra broker transactions, and institutional accounts. In certain instances, the Transfer Agent may require additional documents such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority.</R>

     A shareholder may also redeem shares held with the Transfer Agent by telephone request. To request a redemption from your account, call the Transfer Agent at 1-800-MER-FUND. The request must be made by the shareholder of record and be for an amount less than $50,000. Before telephone requests will be honored, signature approval from all shareholders of record on the account must be obtained. The shares being redeemed must have been held for at least 15 days. Telephone redemption requests will not be honored in the following situations: the accountholder is deceased, the proceeds are to be sent to someone other than the shareholder of record, funds are to be wired to the client’s bank account, a systematic withdrawal plan is in effect, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced, the address on the account has changed within the last 30 days or share certificates have been issued on the account.

     Since this account feature involves a risk of loss from unauthorized or fraudulent transactions, the Transfer Agent will take certain precautions to protect your account from fraud. Telephone redemption may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time.

     For shareholders redeeming directly with the Transfer Agent, payments will generally be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares for

 

33

which it has not yet received good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing of a redemption check until such time as it has assured itself that good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank) has been collected for the purchase of such Fund shares, which will usually not exceed 10 days. In the event that a shareholder account held directly with the Transfer Agent contains a fractional share balance, such fractional share balance will be automatically redeemed by the Fund.

Repurchase

     <R>The Fund also will repurchase Fund shares through a selected securities dealer or other financial intermediary. The Fund normally will accept orders to repurchase Fund shares by wire or telephone from dealers for their customers at the net asset value next computed after the order is placed. Shares will be priced at the net asset value calculated on the day the request is received, provided that the request for repurchase is submitted to the selected securities dealer or other financial intermediary prior to the regular close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the day received, and such request is received by the Fund from such selected securities dealer or other financial intermediary not later than 30 minutes after the close of business on the NYSE on the same day. Dealers have the responsibility of submitting such repurchase requests to the Fund not later than 30 minutes after the close of business on the NYSE, in order to obtain that day’s closing price.</R>

     The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable CDSC). Securities firms that do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Merrill Lynch, selected securities dealers or other financial intermediaries may charge customers a processing fee (Merrill Lynch currently charges $5.35) to confirm a repurchase of shares to such customers. Repurchases made directly through the Transfer Agent on accounts held at the Transfer Agent are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. However, a shareholder whose order for repurchase is rejected by the Fund may redeem Fund shares as set forth above.

Reinstatement Privilege — Class A and Class D Shares

     Shareholders who have redeemed their Class A or Class D shares of the Fund have a privilege to reinstate their accounts by purchasing Class A or Class D shares, as the case may be, of the Fund at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. Alternatively, the reinstatement privilege may be exercised through the investor’s Merrill Lynch Financial Advisor within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds.

PRICING OF SHARES

Determination of Net Asset Value

     Reference is made to “Your Account — How Shares are Priced” in the Prospectus.

     The net asset value of the shares of all classes of the Fund is determined once daily Monday through Friday as of the close of business on the NYSE on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m., Eastern time. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The NYSE is not open for trading on New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

 

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     <R>Net asset value is computed by dividing the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares outstanding at such time, rounded to the nearest cent. Expenses, including the fees payable to the Manager and Distributor, are accrued daily.

     The per share net asset value of Class B, Class C, Class D and Class R shares generally will be lower than the per share net asset value of Class A shares, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable to Class B and Class C shares, the daily expense accruals of the account maintenance fees applicable to Class D shares and the daily expense accruals of the account maintenance and distribution fees applicable to Class R shares. The per share net asset value of Class B, Class C and Class R shares generally will be lower than the per share net asset value of Class D shares, reflecting the daily expense accruals of the distribution fees and higher transfer agency fees applicable to Class B and Class C shares and the daily expense accruals of the distribution fees applicable to Class R shares. Moreover, the per share net asset value of Class B and Class C shares generally will be lower than the per share net asset value of Class R shares due to the daily expense accruals of the higher distribution fees and higher transfer agency fees applicable to Class B and Class C shares. It is expected, however, that the per share net asset value of the five classes will tend to converge (although not necessarily meet) immediately after the payment of dividends or distributions, which will differ by approximately the amount of the expense accrual differentials between the classes.

     Portfolio securities of the Fund that are traded on stock exchanges are valued at the last sale price (regular way) on the exchange on which such securities are traded as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available ask price for short positions. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Directors as the primary market. Long positions in securities traded in the OTC market are valued at the last available bid price or yield equivalent obtained from one or more dealers or pricing services approved by the Board of Directors of the Fund. Short positions in securities traded in the OTC market are valued at the last available ask price. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market. When the Fund writes an option, the amount of the premium received is recorded on the books of the Fund as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based upon the last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last asked price. Options purchased by the Fund are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Other investments, including financial futures contracts and related options, are generally valued at market value. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless the Manager believes that this method no longer produces fair valuations. Repurchase agreements will be valued at cost plus accrued interest. Securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Board of Directors of the Fund. Such valuations and procedures will be reviewed periodically by the Board of Directors of the Fund.

     Generally, trading in non-U.S. securities, as well as U.S. Government securities and money market instruments, is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Fund’s shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that will not be reflected in the computation of the Fund’s net asset value. If events occur during such periods that are expected to materially affect the value of such securities, then these securities may be valued at their fair value as determined in good faith by the Board of Directors of the Fund or by the Manager using a pricing service and/or procedures approved by the Board of Directors.</R>

 

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Computation of Offering Price Per Share

     <R>An illustration of the computation of the offering price for Class A, Class B, Class C and Class D shares of the Fund based on the value of the Fund’s net assets and number of shares outstanding on August 31, 2002 is set forth below. Since the inception date for Class R shares was January 1, 2003, information with respect to Class R shares is not included.

	Class A	Class B	Class C	Class D
Net Assets	$1,170,884,174	$1,802,730,768	$596,870,616	$1,384,765,018
Number of Shares Outstanding	84,592,178	141,451,031	46,563,157	101,615,591
Net Asset Value Per Share (net assets    divided by number of shares    outstanding)	$              13.84	$              12.74	$           12.82	$              13.63
Sales Charge (for Class A and Class D    shares: 5.25% of offering price; 5.54%    of net asset value per share)*	.77	**	**	.76
Offering Price	$              14.61	$              12.74	$           12.82	$              14.39

* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable.

** Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption of shares. See “Purchase of Shares — Deferred Sales Charge Alternatives — Class B and Class C Shares” herein.</R>

PORTFOLIO TRANSACTIONS AND BROKERAGE

     <R>Subject to policies established by the Board of Directors of the Fund, the Manager is primarily responsible for the execution of the Fund’s portfolio transactions and the allocation of brokerage. The Manager does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While the Manager generally seeks reasonably competitive trade execution costs, the Fund does not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, the Manager may select a broker based partly upon brokerage or research services provided to the Manager and its clients, including the Fund. In return for such services the Manager may pay a higher commission than other brokers would charge if the Manager determines in good faith that the commission is reasonable in relation to the services provided.

     Section 28(e) of the Securities Exchange Act of 1934 (“Section 28(e)”) permits an investment advisor, such as the Manager, under certain circumstances, to cause an account to pay a broker or dealer a commission for effecting a transaction in excess of the amount of commission another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services include (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental to securities transactions (such as clearance, settlement, and custody). The Manager believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund.

     To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information that assists in the valuation of investments. Examples of research-oriented services for which the Manager might use Fund commissions include research reports and other information on the economy, industries, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. Except as noted immediately below, research services furnished by brokers may be used in servicing some or all client accounts and not all services may be used in</R>

 

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<R>connection with the account that paid commissions to the broker providing such services. In some cases, research information received from brokers by mutual fund management personnel or personnel principally responsible for the Manager’s individually managed portfolios is not necessarily shared by and between such personnel. Any investment advisory or other fees paid by the Fund to the Manager are not reduced as a result of the Manager’s receipt of research services.</R>

     In some cases the Manager may receive a service from a broker that has both a “research” and a “non-research” use. When this occurs, the Manager makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Manager will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Manager faces a potential conflict of interest, but the Manager believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.

     <R>From time to time, the Fund may purchase new issues of securities in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition to selling securities, provide the Manager with research services. The NASD has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the broker will provide research “credits” in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).

     In addition, consistent with the Conduct Rules of the NASD and policies established by the Board of Directors of the Fund and subject to best execution, the Manager may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund; however, whether or not a particular broker or dealer sells shares of the Fund neither qualifies nor disqualifies such broker or dealer to execute transactions for the Fund.

     The Fund anticipates that its brokerage transactions involving securities of issuers domiciled in countries other than the United States generally will be conducted primarily on the principal stock exchanges of such countries. Brokerage commissions and other transaction costs on foreign stock exchange transactions generally are higher than in the United States, although the Fund will endeavor to achieve the best net results in effecting its portfolio transactions. There generally is less government supervision and regulation of foreign stock exchanges and brokers than in the United States.

     Information about the brokerage commissions paid by the Fund, including commissions paid to Merrill Lynch, is set forth in the following table.

Fiscal Year Ended August 31,	Aggregate Brokerage Commissions Paid	Commissions Paid to Merrill Lynch
2002	$15,724,463	$2,883,373
2001	$19,568,518	$2,666,874
2000	$  7,457,058	$  947,213

     For the fiscal year ended August 31, 2002, the brokerage commissions paid to Merrill Lynch represented 18.34% of the aggregate brokerage commissions paid and involved 19.29% of the Fund’s dollar amount of transactions involving payment of commissions during the year.

     The Fund may invest in certain securities traded in the OTC market and intends to deal directly with the dealers who make a market in securities involved, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with the Fund and persons who are affiliated with such affiliated persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since transactions in the OTC market usually involve transactions with the dealers acting as principal for their own accounts, the Fund will not deal with affiliated persons, including Merrill Lynch and its affiliates, in connection with such transactions. However, an affiliated person of the Fund may serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. In addition, the Fund may not purchase securities during the existence of any underwriting syndicate for such securities of which Merrill Lynch is a member or in a private placement in which Merrill Lynch serves as placement agent except pursuant to procedures approved by the Board of Directors of the Fund that either comply with rules adopted by the Commission or with interpretations of the Commission staff.</R>

 

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     <R>Because of the affiliation of Merrill Lynch with the Manager, the Fund is prohibited from engaging in certain transactions involving Merrill Lynch or its affiliates except for brokerage transactions permitted under the Investment Company Act involving only usual and customary commissions or transactions pursuant to an exemptive order under the Investment Company Act. Without such an exemptive order, the Fund would be prohibited from engaging in portfolio transactions with Merrill Lynch or any of its affiliates acting as principal.

     The Fund has received an exemptive order from the Commission permitting it to lend portfolio securities to Merrill Lynch or its affiliates. Pursuant to that order, the Fund also has retained an affiliated entity of the Manager as the securities lending agent for a fee, including a fee based on a share of the returns on investment of cash collateral. That entity may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by that entity or in registered money market funds advised by the Manager or its affiliates. For the fiscal years ended August 31, 2002 and August 31, 2001, that affiliated entity received $467,325 and $1,224, respectively, in security lending agent fees from the Fund.

     Section 11(a) of the Exchange Act generally prohibits members of the U.S. national securities exchanges from executing exchange transactions for their affiliates and institutional accounts that they manage unless the member (i) has obtained prior express authorization from the account to effect such transactions, (ii) at least annually furnishes the account with a statement setting forth the aggregate compensation received by the member in effecting such transactions, and (iii) complies with any rules the Commission has prescribed with respect to the requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its portfolio transactions executed on any such securities exchange of which it is a member, appropriate consents have been obtained from the Fund and annual statements as to aggregate compensation will be provided to the Fund.

     The Board of Directors of the Fund has considered the possibility of seeking to recapture for the benefit of the Fund brokerage commissions and other expenses of possible portfolio transactions by conducting portfolio transactions through affiliated entities. For example, brokerage commissions received by affiliated brokers could be offset against the advisory fee paid by the Fund to the Manager. After considering all factors deemed relevant, the Board of Directors made a determination not to seek such recapture. The Directors will reconsider this matter from time to time.

     Securities held by the Fund also may be held by, or be appropriate investments for, other funds or clients for which the Manager or FAM acts as an adviser or by investment advisory clients of the Manager. Because of different objectives or other factors, a particular security may be bought for one or more clients when one or more clients are selling the same security. If purchases or sales of securities for the Fund or other advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Manager or an affiliate during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price.</R>

SHAREHOLDER SERVICES

     <R>The Fund offers a number of shareholder services and investment plans described below that are designed to facilitate investment in shares of the Fund. Full details as to each of such services, copies of the various plans and instructions as to how to participate in the various services or plans, or how to change options with respect thereto, can be obtained from the Fund, by calling the telephone number on the cover page hereof, or from the Distributor, your Merrill Lynch Financial Advisor, a selected securities dealer or other financial intermediary. Certain of these services are available only to U.S. investors and certain of these services are not available to investors who place purchase orders for the Fund’s shares through the Merrill Lynch Blueprint^SM Program.</R>

Investment Account

     Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as transaction confirmations for automatic investment purchases and the reinvestment of dividends. The statements will also show any other activity in the account since the preceding statement. Shareholders will also receive separate confirmations for each purchase or sale transaction other than automatic investment purchases and the

 

38

reinvestment of dividends. A shareholder with an account held at the Transfer Agent may make additions to his or her Investment Account at any time by mailing a check directly to the Transfer Agent. A shareholder may also maintain an account through Merrill Lynch, a selected securities dealer or other financial intermediary. Upon the transfer of shares out of a Merrill Lynch brokerage account or account maintained with a selected securities dealer or other financial intermediary, an Investment Account in the transferring shareholder’s name may be opened automatically at the Transfer Agent.

     Share certificates are issued only for full shares and only upon the specific request of a shareholder who has an Investment Account. Issuance of certificates representing all or only part of the full shares in an Investment Account may be requested by a shareholder directly from the Transfer Agent.

     Shareholders may transfer their Fund shares from Merrill Lynch, a selected securities dealer or other financial intermediary to another securities dealer or other financial intermediary that has entered into an agreement with the Distributor. Certain shareholder services may not be available for the transferred shares. After the transfer, the shareholder may purchase additional shares of funds owned before the transfer and all future trading of these assets must be coordinated by the new firm. If a shareholder wishes to transfer his or her shares to a securities dealer or other financial intermediary that has not entered into an agreement with the Distributor, the shareholder must either (i) redeem his or her shares, paying any applicable CDSC or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. The shareholder may also request the new securities dealer or other financial intermediary to maintain the shares in an account at the Transfer Agent registered in the name of the securities dealer or other financial intermediary for the benefit of the shareholder whether the securities dealer or other financial intermediary has entered into a selected dealer agreement or not.

     Shareholders considering transferring a tax-deferred retirement account, such as an individual retirement account, from Merrill Lynch to another securities dealer or other financial intermediary should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of the Fund, a shareholder must either redeem the shares, paying any applicable CDSC, so that the cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain a retirement account at Merrill Lynch for those shares.

Exchange Privilege

     <R>U.S. shareholders of Class A, Class B, Class C and Class D shares of the Fund have an exchange privilege with other Select Pricing Funds and Summit, which is a Merrill Lynch-sponsored money market fund specifically designated as available for exchange by holders of Class A, Class B, Class C and Class D shares of Select Pricing Funds. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege and any shares utilized in an exchange must have been held by the shareholder for at least 15 days. Before effecting an exchange, shareholders should obtain a currently effective prospectus of the fund into which the exchange is to be made. Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes.</R>

     Exchanges of Class A and Class D Shares. Class A shareholders may exchange Class A shares of the Fund for Class A shares of a second Select Pricing Fund if the shareholder holds any Class A shares of the second fund in the account in which the exchange is made at the time of the exchange or is otherwise eligible to purchase Class A shares of the second fund. If the Class A shareholder wants to exchange Class A shares for shares of a second Select Pricing Fund, but does not hold Class A shares of the second fund in his or her account at the time of the exchange and is not otherwise eligible to acquire Class A shares of the second fund, the shareholder will receive Class D shares of the second fund as a result of the exchange. Class D shares also may be exchanged for Class A shares of a second Select Pricing Fund at any time as long as, at the time of the exchange, the shareholder holds Class A shares of the second fund in the account in which the exchange is made or is otherwise eligible to purchase Class A shares of the second fund. Class D shares are exchangeable with shares of the same class of other Select Pricing Funds.

     Exchanges of Class A or Class D shares outstanding (“outstanding Class A or Class D shares”) for Class A or Class D shares of other Select Pricing Funds or for Class A shares of Summit (“new Class A or Class D shares”) are transacted on the basis of relative net asset value per Class A or Class D share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class A or Class D

 

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shares and the sales charge payable at the time of the exchange on the new Class A or Class D shares. With respect to outstanding Class A or Class D shares as to which previous exchanges have taken place, the “sales charge previously paid” shall include the aggregate of the sales charges paid with respect to such Class A or Class D shares in the initial purchase and any subsequent exchange. Class A or Class D shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class A or Class D shares. For purposes of the exchange privilege, Class A or Class D shares acquired through dividend reinvestment shall be deemed to have been sold with a sales charge equal to the sales charge previously paid on the Class A or Class D shares on which the dividend was paid. Based on this formula, Class A and Class D shares generally may be exchanged into the Class A or Class D shares, respectively, of the other funds with a reduced sales charge or without a sales charge.

     <R>Exchanges of Class B and Class C Shares. Certain Select Pricing Funds with Class B or Class C shares outstanding (“outstanding Class B or Class C shares”) offer to exchange their Class B or Class C shares for Class B or Class C shares, respectively, of certain other Select Pricing Funds or for Class B shares of Summit (“new Class B or Class C shares”) on the basis of relative net asset value per Class B or Class C share, without the payment of any CDSC that might otherwise be due on redemption of the outstanding shares. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares acquired through use of the exchange privilege. In addition, Class B shares of the Fund acquired through use of the exchange privilege will be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund from which the exchange has been made. For purposes of computing the CDSC that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is “tacked” to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B shares of the Fund for those of Merrill Lynch Small Cap Value Fund, Inc. (“Small Cap Value Fund”) after having held the Fund’s Class B shares for two and a half years. The 3% CDSC that generally would apply to a redemption would not apply to the exchange. Four years later the investor may decide to redeem the Class B shares of Small Cap Value Fund and receive cash. There will be no CDSC due on this redemption, since by “tacking” the two and a half year holding period of the Fund’s Class B shares to the four-year holding period for the new Small Cap Value Fund Class B shares, the investor will be deemed to have held the Small Cap Value Fund Class B shares for more than six years. Class B shares of the Fund and certain other Select Pricing Funds purchased prior to June 1, 2001 are subject to the four-year CDSC schedule in effect at that time. This four-year CDSC schedule will also apply to Class B shares received in exchange for such shares.</R>

     Exchanges for Shares of a Money Market Fund. Class A and Class D shares are exchangeable for Class A shares of Summit and Class B and Class C shares are exchangeable for Class B shares of Summit. Class A shares of Summit have an exchange privilege back into Class A or Class D shares of Select Pricing Funds; Class B shares of Summit have an exchange privilege back into Class B or Class C shares of Select Pricing Funds and, in the event of such an exchange, the period of time that Class B shares of Summit are held will count toward satisfaction of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any Conversion Period with respect to Class B shares. Class B shares of Summit will be subject to a distribution fee at an annual rate of 0.75% of average daily net assets of such Class B shares. This exchange privilege does not apply with respect to certain Merrill Lynch fee-based programs for which alternative exchange arrangements may exist. Please see your Merrill Lynch Financial Advisor for further information.

     <R>Prior to October 12, 1998, exchanges from the Fund and other Select Pricing Funds into a money market fund were directed to certain Merrill Lynch-sponsored money market funds other than Summit. Shareholders who exchanged Select Pricing Fund shares for such other money market funds and subsequently wish to exchange those money market fund shares for shares of the Fund will be subject to the CDSC schedule applicable to such Fund shares, if any. The holding period for those money market fund shares will not count toward satisfaction of the holding period requirement for reduction of the CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. However, the holding period for Class B or Class C shares received in exchange for such money market fund shares will be aggregated with the holding period for the original Select Pricing Fund shares for purposes of reducing the CDSC or satisfying the Conversion Period.

     Exchanges by Participants in the MFA Program. The exchange privilege is modified with respect to certain retirement plans that participate in the MFA Program. Such retirement plans may exchange Class B, Class C or Class D shares that have been held for at least one year for Class A shares of the same fund on the basis of relative net asset values in connection with the commencement of participation in the MFA Program, i.e., no CDSC will</R>

 

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<R>apply. The one year holding period does not apply to shares acquired through reinvestment of dividends. Upon termination of participation in the MFA Program, Class A shares will be re-exchanged for the class of shares originally held. For purposes of computing any CDSC that may be payable upon redemption of Class B or Class C shares so reacquired, or the Conversion Period for Class B shares so reacquired, the holding period for the Class A shares will be “tacked“to the holding period for the Class B or Class C shares originally held. The Fund’s exchange privilege is also modified with respect to purchases of Class A and Class D shares by non-retirement plan investors under the MFA Program. First, the initial allocation of assets is made under the MFA Program. Then, any subsequent exchange under the MFA Program of Class A or Class D shares of a Select Pricing Fund for Class A or Class D shares of the Fund will be made solely on the basis of the relative net asset values of the shares being exchanged. Therefore, there will not be a charge for any difference between the sales charge previously paid on the shares of the other Select Pricing Fund and the sales charge payable on the shares of the Fund being acquired in the exchange under the MFA Program.</R>

     Exercise of the Exchange Privilege. To exercise the exchange privilege, a shareholder should contact his or her Merrill Lynch Financial Advisor, who will advise the Fund of the exchange. Shareholders of the Fund, and shareholders of the other Select Pricing Funds with shares for which certificates have not been issued, may exercise the exchange privilege by wire through their securities dealer or other financial intermediary. The Fund reserves the right to require a properly completed Exchange Application.

     Telephone exchange requests are also available in accounts held with the Transfer Agent for amounts up to $50,000. To request an exchange from your account, call the Transfer Agent at 1-800-MER-FUND. The request must be from the shareholder of record. Before telephone requests will be honored, signature approval from all shareholders of record must be obtained. The shares being exchanged must have been held for at least 15 days. Telephone requests for an exchange will not be honored in the following situations: the accountholder is deceased, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced or the address on the account has changed within the last 30 days. Telephone exchanges may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time.

     This exchange privilege may be modified or terminated in accordance with the rules of the Commission. The Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares to the general public at any time and may thereafter resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor.

Fee-Based Programs

     Certain fee-based programs offered by Merrill Lynch and other financial intermediaries, including pricing alternatives for securities transactions (each referred to in this paragraph as a “Program”), may permit the purchase of Class A shares at net asset value. Under specified circumstances, participants in certain Programs may deposit other classes of shares which will be exchanged for Class A shares. Initial or deferred sales charges otherwise due in connection with such exchanges may be waived or modified, as may the Conversion Period applicable to the deposited shares. Termination of participation in a Program may result in the redemption of shares held therein or the automatic exchange thereof to another class at net asset value, which may be shares of a money market fund. In addition, upon termination of participation in a Program, shares that have been held for less than specified periods within such Program may be subject to a fee based upon the current value of such shares. These Programs also generally prohibit such shares from being transferred to another account at Merrill Lynch, to another financial intermediary, broker-dealer or to the Transfer Agent. Except in limited circumstances (which may also involve an exchange as described above), such shares must be redeemed and another class of shares purchased (which may involve the imposition of initial or deferred sales charges and distribution and account maintenance fees) in order for the investment not to be subject to Program fees. Additional information regarding a specific Program (including charges and limitations on transferability applicable to shares that may be held in such Program) is available in such Program’s client agreement and from the Transfer Agent at 1-800-MER-FUND or 1-800-637-3863.

 

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Retirement and Education Savings Plans

     <R>Individual retirement accounts and other retirement and education savings plans are available from Merrill Lynch. Under these plans, investments may be made in the Fund and certain of the other mutual funds sponsored by Merrill Lynch as well as in other securities. There may be fees associated with investing through these plans. Information with respect to these plans is available on request from Merrill Lynch.</R>

     Dividends received in each of the plans referred to above are exempt from Federal taxation until distributed from the plans and, in the case of Roth IRAs and education savings plans, may be exempt from taxation when distributed, as well. Investors considering participation in any retirement or education savings plan should review specific tax laws relating thereto and should consult their attorneys or tax advisors with respect to the establishment and maintenance of any such plan.

Automatic Investment Plans

     <R>A shareholder may make additions to an Investment Account at any time by purchasing Class A shares (if he or she is an eligible Class A investor) or Class B, Class C or Class D shares at the applicable public offering price. These purchases may be made either through the shareholder’s securities dealer, or by mail directly to the Transfer Agent, acting as agent for such securities dealer. Voluntary accumulation also can be made through a service known as the Fund’s Automatic Investment Plan. Under the Automatic Investment Plan, the Fund would be authorized, on a regular basis, to provide systematic additions to the Investment Account of such shareholder through charges of $50 or more to the regular bank account of the shareholder by either pre-authorized checks or automated clearing house debits. For investors who buy shares of the Fund through Blueprint, no minimum charge to the investor’s bank account is required. Alternatively, an investor that maintains a CMA^® Account may arrange to have periodic investments made in the Fund in amounts of $100 ($1 or more for retirement accounts) or more through the CMA^® Automated Investment Program.</R>

Automatic Dividend Reinvestment Plan

     Unless specific instructions are given as to the method of payment, dividends will be automatically reinvested, without sales charge, in additional full and fractional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund determined as of the close of business on the NYSE on the monthly payment date for such dividends. No CDSC will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends.

     <R>Shareholders may, at any time, elect to have subsequent dividends paid in cash, rather than reinvested in shares of the Fund or vice versa (provided that, in the event that a payment on an account maintained at the Transfer Agent would amount to $10.00 or less, a shareholder will not receive such payment in cash and such payment will automatically be reinvested in additional shares). If the shareholder’s account is maintained with the Transfer Agent, he or she may contact the Transfer Agent in writing or by telephone (1-800-MER-FUND). For other accounts, the shareholder should contact his or her Merrill Lynch Financial Advisor, selected securities dealer or other financial intermediary. Commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. The Fund is not responsible for any failure of delivery to the shareholder’s address of record and no interest will accrue on amounts represented by uncashed dividend checks. Cash payments can also be directly deposited to the shareholder’s bank account.</R>

Systematic Withdrawal Plan

     A shareholder may elect to receive systematic withdrawals from his or her Investment Account by check or through automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders that have acquired shares of the Fund having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with shares having a value of $10,000 or more.

     At the time of each withdrawal payment, sufficient shares are redeemed from those on deposit in the shareholder’s account to provide the withdrawal payment specified by the shareholder. The shareholder may specify the dollar amount and the class of shares to be redeemed. Redemptions will be made at net asset value as determined as of the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on the 24th day of

 

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each month or the 24th day of the last month of each quarter, whichever is applicable. If the NYSE is not open for business on such date, the shares will be redeemed at the net asset value determined as of the close of business on the NYSE on the following business day. The check for the withdrawal payment will be mailed, or the direct deposit will be made, on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends and distributions on all shares in the Investment Account are reinvested automatically in Fund shares. A shareholder’s systematic withdrawal plan may be terminated at any time, without charge or penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor.

     With respect to redemptions of Class B or Class C shares pursuant to a systematic withdrawal plan, the maximum number of Class B or Class C shares that can be redeemed from an account annually shall not exceed 10% of the value of shares of such class in that account at the time the election to join the systematic withdrawal plan was made. Any CDSC that otherwise might be due on such redemption of Class B or Class C shares will be waived. Shares redeemed pursuant to a systematic withdrawal plan will be redeemed in the same order as Class B or Class C shares are otherwise redeemed. See “Purchase of Shares — Deferred Sales Charge Alternatives — Contingent Deferred Sales Charges — Class B and Class C Shares.” Where the systematic withdrawal plan is applied to Class B shares, upon conversion of the last Class B shares in an account to Class D shares, the systematic withdrawal plan will be applied thereafter to Class D shares if the shareholder so elects. See “Purchase of Shares — Deferred Sales Charge Alternatives — Conversion of Class B Shares to Class D Shares.” If an investor wishes to change the amount being withdrawn in a systematic withdrawal plan the investor should contact his or her Merrill Lynch Financial Advisor.

     <R>Withdrawal payments generally should not be considered as dividends. Withdrawals generally are treated as sales of shares and may result in taxable gain or loss. If periodic withdrawals continuously exceed reinvested dividends, the shareholder’s original investment may be reduced correspondingly. Purchases of additional shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for shares of the Fund from investors that maintain a systematic withdrawal plan unless such purchase is equal to at least one year’s scheduled withdrawals or $1,200, whichever is greater. Automatic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals.

     Alternatively, a shareholder whose shares are held within a CMA^® or Retirement Account may elect to have shares redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis through the CMA^® Systematic Redemption Program or the redemption program of the Retirement Account. The minimum fixed dollar amount redeemable is $50. The proceeds of systematic redemptions will be posted to the shareholder’s account three business days after the date the shares are redeemed. All redemptions are made at net asset value. A shareholder may elect to have his or her shares redeemed on the first, second, third or fourth Monday of each month, in the case of monthly redemptions, or of every other month, in the case of bimonthly redemptions. For quarterly, semiannual or annual redemptions, the shareholder may select the month in which the shares are to be redeemed and may designate whether the redemption is to be made on the first, second, third or fourth Monday of the month. If the Monday selected is not a business day, the redemption will be processed at net asset value on the next business day. The CMA^® Systematic Redemption Program is not available if Fund shares are being purchased within the account pursuant to the Automated Investment Program. For more information on the CMA^® Systematic Redemption Program, eligible shareholders should contact their Merrill Lynch Financial Advisor.</R>

DIVIDENDS AND TAXES

Dividends

     The Fund intends to distribute substantially all of its net investment income, if any. Dividends from such investment income are paid at least annually. All net realized capital gains, if any, are distributed to the Fund’s shareholders at least annually. Shareholders may elect in writing to receive any such dividends in cash.

     <R>For information concerning the manner in which dividends may be reinvested automatically in shares of the Fund, see “Shareholder Services — Automatic Dividend Reinvestment Plan.” A shareholder may also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders, as described below, whether they are invested in shares of the Fund or received in cash. The per share dividends on Class B, Class C, Class D and Class R shares will be lower than the per share dividends on Class A shares as a result of the account maintenance, distribution and higher transfer agency fees applicable to Class B and Class C shares, the account</R>

 

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<R>maintenance fees applicable to Class D shares and the account maintenance and distribution fees applicable to Class R shares. Similarly, the per share dividends on Class B, Class C and Class R shares will be lower than the per share dividends on Class D shares as a result of the distribution fees and higher transfer agency fees applicable to Class B and Class C shares and the distribution fees applicable to Class R shares, and the per share dividends on Class B and Class C shares will be lower than the per share dividends on Class R shares as a result of the higher distribution fees and higher transfer agency fees applicable to Class B and Class C shares. See “Pricing of Shares — Determination of Net Asset Value.”</R>

Taxes

     <R>The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies (“RICs”) under the Internal Revenue Code of 1986, as amended (the “Code”). As long as the Fund so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains that it distributes to Class A, Class B, Class C, Class D and Class R shareholders (together, the “shareholders”). The Fund intends to distribute substantially all of such income.</R>

     The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98% of its capital gains, determined, in general on an October 31 year end, plus certain undistributed amounts from previous years. While the Fund intends to distribute its income and capital gains in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund’s taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements.

     Dividends paid by the Fund from its ordinary income or from an excess of net short-term capital gains over net long-term capital losses (together referred to hereafter as “ordinary income dividends”) are taxable to shareholders as ordinary income. Distributions made from an excess of net long-term capital gains over net short-term capital losses (including gains or losses from certain transactions in options, futures and warrants) (“capital gain dividends”) are taxable to shareholders as long-term gains, regardless of the length of time the shareholder has owned Fund shares. Any loss upon the sale or exchange of Fund shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder. Distributions in excess of the Fund’s earnings and profits will first reduce the adjusted tax basis of a holder’s shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Certain categories of capital gains are taxable at different rates. Generally not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amounts of any capital gains dividends, as well as any amount of capital gains dividends in the different categories of capital gain referred to above.

     <R>Dividends are taxable to shareholders even though they are reinvested in additional shares of the Fund. A portion of the Fund’s ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. For this purpose, the Fund will allocate dividends eligible for the dividends received deduction among the Class A, Class B, Class C, Class D and Class R shareholders according to a method (which it believes is consistent with the Commission rule permitting the issuance and sale of multiple classes of stock) that is based on the gross income allocable to Class A, Class B, Class C, Class D and Class R shareholders during the taxable year, or such other method as the Internal Revenue Service may prescribe. If the Fund pays a dividend in January that was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared.</R>

     No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class D shares. A shareholder’s basis in the Class D shares acquired will be the same as such shareholder’s basis in the Class B shares converted, and the holding period of the acquired Class D shares will include the holding period of the converted Class B shares.

     If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid to the Fund reduces any sales charge the shareholder would have owed upon the purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares.

 

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     <R>A loss realized on a sale or exchange of shares of the Fund will be disallowed if other Fund shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.

     Ordinary income dividends paid to shareholders who are nonresident aliens or foreign entities will be subject to a 30% U.S. withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning applicability of the U.S. withholding tax.</R>

     Under certain provisions of the Code, some shareholders may be subject to a withholding tax on ordinary income dividends, capital gain dividends and redemption payments (“backup withholding”). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund’s knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding.

     Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.

<R>Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions</R>

     The Fund may write, purchase or sell options, futures and forward foreign exchange contracts. Options and futures that are “Section 1256 contracts” will be “marked to market” for Federal income tax purposes at the end of each taxable year, i.e., each such option or futures contract will be treated as sold for its fair market value on the last day of the taxable year. Unless such contract is a forward foreign exchange contract, or is a non-equity option or a regulated futures contract for a foreign currency for which the Fund elects to have gain or loss treated as ordinary gain or loss under Code Section 988 (as described below), gain or loss from Section 1256 contracts will be 60% long-term and 40% short-term capital gain or loss. Application of these rules to Section 1256 contracts held by the Fund may alter the timing and character of distributions to shareholders. The mark-to-market rules outlined above, however, will not apply to certain transactions entered into by the Fund solely to reduce the risk of changes in price or interest rates with respect to its investments.

     A forward foreign exchange contract that is a Section 1256 contract will be marked to market, as described above. However, the character of gain or loss from such a contract will generally be ordinary under Code Section 988. The Fund may, nonetheless, elect to treat the gain or loss from certain forward foreign exchange contracts as capital. In this case, gain or loss realized in connection with a forward foreign exchange contract that is a Section 1256 contract will be characterized as 60% long-term and 40% short-term capital gain or loss.

     Code Section 1092, which applies to certain “straddles,” may affect the taxation of the Fund’s sales of securities and transactions in options, futures and forward foreign exchange contracts. Under Section 1092, the Fund may be required to postpone recognition for tax purposes of losses incurred in certain sales of securities and closing transactions in options, futures and forward foreign exchange contracts.

Special Rules for Certain Foreign Currency Transactions

     In general, gains from “foreign currencies” and from foreign currency options, foreign currency futures and forward foreign exchange contracts relating to investments in stock, securities or foreign currencies will be qualifying income for purposes of determining whether the Fund qualifies as a RIC. It is currently unclear, however, who will be treated as the issuer of a foreign currency instrument or how foreign currency options, foreign currency futures and forward foreign exchange contracts will be valued for purposes of the RIC diversification requirements applicable to the Fund.

     Under Code Section 988, special rules are provided for certain transactions in a currency other than the taxpayer’s functional currency (i.e., unless certain special rules apply, currencies other than the U.S. dollar). In general, foreign currency gains or losses from certain debt instruments, from certain forward contracts, from futures contracts that are not “regulated futures contracts“and from unlisted options will be treated as ordinary income or loss under Code Section 988. In certain circumstances, the Fund may elect capital gain or loss treatment

 

45

for such transactions. Regulated futures contracts, as described above, will be taxed under Code Section 1256 unless application of Section 988 is elected by the Fund. In general, however, Code Section 988 gains or losses will increase or decrease the amount of the Fund’s investment company taxable income available to be distributed to shareholders as ordinary income. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary income dividend distributions, and all or a portion of distributions made before the losses were realized but in the same taxable year would be recharacterized as a return of capital to shareholders, thereby reducing the basis of each shareholder’s Fund shares and resulting in a capital gain for any shareholder who received a distribution greater than such shareholder’s basis in Fund shares (assuming the shares were held as a capital asset). These rules and the mark-to-market rules described above, however, will not apply to certain transactions entered into by the Fund solely to reduce the risk of currency fluctuations with respect to its investments.

     The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action either prospectively or retroactively.

     Ordinary income and capital gain dividends may also be subject to state and local taxes.

     Certain states exempt from state income taxation dividends paid by RICs which are derived from interest on United States Government obligations. State law varies as to whether dividend income attributable to United States Government obligations is exempt from state income tax.

     <R>Shareholders are urged to consult their tax advisers regarding specific questions as to Federal, foreign, state or local taxes. Foreign investors should consider applicable foreign taxes in their evaluation of investment in the Fund.

PERFORMANCE DATA

     From time to time the Fund may include its average annual total return and other total return data in advertisements or information furnished to present or prospective shareholders. Total return figures are based on the Fund’s historical performance and are not intended to indicate future performance. Average annual total return is determined separately for Class A, Class B, Class C, Class D and Class R shares in accordance with formulas specified by the Commission.

     Quotations of average annual total return before tax for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return before taxes is computed assuming all dividends are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A and Class D shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares but does not take into account taxes payable on dividends or on redemption.

     Quotations of average annual total return after taxes on dividends for the specified periods are computed by finding the average annual compounded rates of return that would equate the initial amount invested to the ending value of such investment at the end of each period assuming payment of taxes on dividends received during such period. Average annual total return after taxes on dividends is computed assuming all dividends, less the taxes due on such dividends, are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A and Class D shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares. The taxes due on dividends are calculated by applying the highest marginal Federal individual income tax rates in effect on the reinvestment date for that dividend. The rates used correspond to the tax character of each dividend. The taxable amount and tax character of each dividend are specified by the Fund on the dividend declaration date, but may be adjusted to reflect subsequent recharacterizations of distributions. The applicable tax rates may vary over the measurement period. The effects of state and local taxes are not reflected. Applicable tax credits, such as foreign credits, are taken into account according to Federal law. The ending value is determined assuming complete redemption at the end of the applicable periods with no tax consequences associated with such redemption.</R>

 

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     <R>Quotations of average annual total return after taxes on both dividends and redemption for the specified periods are computed by finding the average annual compounded rates of return that would equate the initial amount invested to the ending value of such investment at the end of each period assuming payment of taxes on dividends received during such period as well as on complete redemption. Average annual total return after taxes on distributions and redemption is computed assuming all dividends, less the taxes due on such dividends, are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class A and Class D shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares and assuming, for all classes of shares, complete redemption and payment of taxes due on such redemption. The ending value is determined assuming complete redemption at the end of the applicable periods, subtracting capital gains taxes resulting from the redemption and adding the presumed tax benefit from capital losses resulting from redemption. The taxes due on dividends and on the deemed redemption are calculated by applying the highest marginal Federal individual income tax rates in effect on the reinvestment and/or the redemption date. The rates used correspond to the tax character of each component of each dividend and/or the redemption payment. The applicable tax rates may vary over the measurement period. The effects of state and local taxes are not reflected.</R>

     The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical investment of $1,000 or some other amount, for various periods other than those noted below. Such data will be computed as described above, except that (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time.

 

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     <R>Set forth in the tables below is total return information, before and after taxes, for the Class A, Class B, Class C and Class D shares of the Fund for the periods indicated, expressed as a percentage based on a hypothetical $1,000 investment. As a result of the implementation of the Merrill Lynch Select Pricing^SM System, Class A and Class B shares of the Fund outstanding prior to October 21, 1994, were redesignated Class D and Class C shares, respectively. Historical performance data pertaining to such shares is provided below under the caption “Class D Shares” or “Class C Shares,” as pertinent. Since the inception date for Class R shares was January 1, 2003, information with respect to Class R shares is not included.

	Class A Shares		Class B Shares		Class C Shares		Class D Shares
	Average Annual Total Return (including maximum applicable sales charge)
One Year Ended August 31, 2002	-24.89	%	-24.69	%	-22.33	%	-25.05	%
Five Years Ended August 31, 2002	0.95	%	0.69	%	1.00	%	0.70	%
Inception (October 21, 1994) to    August 31, 2002	9.86	%	9.49	%	—		—
Inception (December 24, 1992) to    August 31, 2002	—		—		7.47	%	7.71	%
	Average Annual Total Return (After Taxes on Dividends) (including maximum applicable sales charge)
One Year Ended August 31, 2002	-24.89	%	-24.69	%	-22.33	%	-25.05	%
Five Years Ended August 31, 2002	-1.03	%	-1.22	%	-0.87	%	-1.26	%
Inception (October 21, 1994) to    August 31, 2002	7.85	%	7.57	%	—		—
Inception (December 24, 1992) to    August 31, 2002	—		—		5.96	%	6.12	%
	Average Annual Total Return (After Taxes on Dividends and Redemptions) (including maximum applicable sales charge)
One Year Ended August 31, 2002	-15.29	%	-15.16	%	-13.71	%	-15.38	%
Five Years Ended August 31, 2002	0.33	%	0.21	%	0.47	%	0.15	%
Inception (October 21, 1994) to    August 31, 2002	7.62	%	7.39	%	—		—
Inception (December 24, 1992) to    August 31, 2002	—		—		5.82	%	5.96	%

</R>

     Total return figures are based on the Fund’s historical performance and are not intended to indicate future performance. The Fund’s total return will vary depending on market conditions, the securities comprising the Fund’s portfolio, the Fund’s operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost.

     In order to reflect the reduced sales charges in the case of Class A or Class D shares, or the waiver of the CDSC in the case of Class B or Class C shares applicable to certain investors, as described under “Purchase of Shares,” the total return data quoted by the Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may not take into account the CDSC, and therefore may reflect greater total return since, due to the reduced sales charges or the waiver of CDSCs, a lower amount of expenses may be deducted.

     <R>On occasion, the Fund may compare its performance to various indices, including the Standard & Poor’s 500 Index, the S&P 500/Barra Growth Index and the Dow Jones Industrial Average, or performance data published by Lipper Analytical Services, Inc., Morningstar Publications, Inc. (“Morningstar”), CDA Investment Technology, Inc., Money Magazine, U.S. News & World Report, Business Week, Forbes Magazine and Fortune Magazine or other industry publications. When comparing its performance to a market index, the Fund may refer to various statistical measures derived from the historic performance of the Fund and the index, such as standard deviation and beta. In addition, from time to time the Fund may include its Morningstar risk-adjusted performance ratings in advertisements or supplemental sales literature.</R>

 

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     The Fund may provide information designed to help investors understand how the Fund is seeking to achieve its investment objectives. This may include information about past, current or possible economic, market, political, or other conditions, descriptive information on general principles of investing such as asset allocation, diversification and risk tolerance, discussion of the Fund’s portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Fund’s performance or portfolio composition to that of other funds or types of investments, indices relevant to the comparison being made, or to a hypothetical or model portfolio. The Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to those of other funds or types of investments. As with other performance data, performance comparisons should not be considered indicative of the Fund’s relative performance for any future period.

GENERAL INFORMATION

Description of Shares

     <R>The Fund was incorporated under Maryland law on April 30, 1992. It has an authorized capital of 1,750,000,000 shares of Common Stock, par value $0.10 per share, divided into five classes, designated Class A, Class B, Class C, Class D and Class R Common Stock. Class A Common Stock consists of 150,000,000 shares, Class B Common Stock consists of 500,000,000 shares, Class C Common Stock consists of 300,000,000 shares, Class D Common Stock consists of 300,000,000 shares and Class R Common Stock consists of 500,000,000 shares. Class A, Class B, Class C, Class D and Class R Common Stock represent an interest in the same assets of the Fund and are identical in all respects except that the Class B, Class C, Class D and Class R shares bear certain expenses related to the account maintenance and/or distribution of such shares and have exclusive voting rights with respect to matters relating to such account maintenance and/or distribution expenditures (except that Class B shareholders may vote upon material changes to the expenses charged under the Class D Distribution Plan). The Board of Directors of the Fund may classify and reclassify the shares of the Fund into additional classes of Common Stock at a future date.

     Shareholders are entitled to one vote for each full share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a shareholder vote. The Fund does not intend to hold annual meetings of shareholders in any year in which the Investment Company Act does not require shareholders to elect Directors. Also, the by-laws of the Fund require that a special meeting of shareholders be held upon the written request of at least 10% of the outstanding shares of the Fund entitled to vote at such meeting, if they comply with applicable Maryland law. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive rights. Redemption and conversion rights are discussed elsewhere herein and in the Prospectus. Each share of Class A, Class B, Class C, Class D and Class R Common Stock is entitled to participate equally in dividends and distributions declared by the Fund and in the net assets of the Fund upon liquidation or dissolution after satisfaction of outstanding liabilities, except that expenses related to the distribution of the shares within a class will be borne solely by such class. Stock certificates are issued by the Transfer Agent only on specific request. Certificates for fractional shares are not issued in any case.

Independent Auditors

     Ernst & Young LLP, 99 Wood Avenue, South, Iselin, New Jersey 08830-0471, has been selected as the independent auditors of the Fund. The selection of independent auditors is subject to approval by the non-interested Directors of the Fund. The independent auditors are responsible for auditing the annual financial statements of the Fund.</R>

Accounting Services Provider

     <R>State Street Bank and Trust Company, 500 College Road East, Princeton, New Jersey 08540, provides certain accounting services for the Fund.</R>

Custodian

     <R>JPMorgan Chase Bank (the “Custodian”), Global Securities Services, 4 Chase MetroTech Center, 18th Floor, Brooklyn, New York 11245, acts as the Custodian of the Fund’s assets. Under its contract with the Fund, the Custodian is authorized to establish separate accounts in foreign currencies and to cause foreign securities owned</R>

 

49

<R>by the Fund to be held in its offices outside the United States and with certain foreign banks and securities depositories. The Custodian is responsible for safeguarding and controlling the Fund’s cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Fund’s investments.</R>

Transfer Agent

     <R>Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund’s transfer agent (the “Transfer Agent”). The Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening, maintenance and servicing of shareholder accounts. See “Your Account — How to Buy, Sell, Transfer and Exchange Shares — Through the Transfer Agent” in the Prospectus.</R>

Legal Counsel

     <R>Sidley Austin Brown & Wood LLP, 787 Seventh Avenue, New York, New York 10019-6018, is counsel for the Fund.</R>

Reports to Shareholders

     The fiscal year of the Fund ends on August 31 of each year. The Fund sends to its shareholders at least semi-annually reports showing the Fund’s portfolio and other information. An annual report, containing financial statements audited by independent auditors, is sent to shareholders each year. After the end of each year, shareholders will receive Federal income tax information regarding dividends.

Shareholder Inquiries

     Shareholder inquiries may be addressed to the Fund at the address or telephone number set forth on the cover page of this Statement of Additional Information.

Additional Information

     The Prospectus and this Statement of Additional Information do not contain all the information set forth in the Registration Statement and the exhibits relating thereto, which the Fund has filed with the Securities and Exchange Commission, Washington, D.C., under the Securities Act and the Investment Company Act, to which reference is hereby made.

     Under a separate agreement, ML & Co. has granted the Fund the right to use the “Merrill Lynch” name and has reserved the right to withdraw its consent to the use of such name by the Fund at any time or to grant the use of such name to any other company, and the Fund has granted ML & Co. under certain conditions, the use of any other name it might assume in the future, with respect to any corporation organized by ML & Co.

     <R>To the knowledge of the Fund, the following entities owned beneficially 5% or more of a class of the Fund’s shares as of December 13, 2002:

Name	Address	Percent of Class
Merrill Lynch Trust Co., FSB* TTEE FBO Merrill Lynch	800 Scudders Mill Road Plainsboro, NJ 08536	12.07% of Class A
Merrill Lynch Trust Co., FSB* TTEE FBO Kroger Co. Savings Plan	800 Scudders Mill Road Plainsboro, NJ 08536	10.33% of Class A

* Represents ownership by pension, 401(k) or similar retirement plans. Merrill Lynch Trust Company is the record owner only. The underlying plan participants have the authority to vote and to dispose of the shares. To the knowledge of the Fund, no underlying plan participant is the beneficial owner of 5% or more of any class of shares of the Fund.

FINANCIAL STATEMENTS

     The audited financial statements of the Fund are incorporated in this Statement of Additional Information by reference to its August 31, 2002 Annual Report. You may request a copy of the Annual Report at no charge by calling 1-800-637-3863 between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.</R>

 

50

LEGAL PROCEEDINGS

     <R>In December 2001 the Fund acquired the assets and liabilities of Merrill Lynch Growth Fund (“Growth Fund”). In November 2000, a putative class action lawsuit was filed in Federal Court in the Middle District of Florida on behalf of Florida investors against Growth Fund, MLIM, certain present and former individual board members of Growth Fund and Merrill Lynch seeking damages. The plaintiffs, trustees of and participants in two 401(k) profit sharing plans, purport to assert claims against the defendants on their own behalf and on behalf of the plans, the plans’ participants and all similarly situated shareholders who purchased Growth Fund shares in Florida. The alleged class consists of “all persons and entities who purchased or sold the Growth Fund in Florida through Merrill Lynch, or any related entity . . . at any time from November 1, 1997, up through and including April 30, 1999.” The lawsuit alleges violations of the Florida Securities and Investor Protection Act and the Florida Deceptive and Unfair Trade Practices Act. Plaintiffs allege that the defendants induced Florida investors to purchase shares of Growth Fund through untrue statements and omissions of material fact regarding the “true nature of the Fund and its holdings.” A second, nearly identical action was filed in Florida state court by one of the named plaintiffs in the federal action. Defendants removed this lawsuit to federal court pursuant to the Securities Litigation Uniform Standards Act (“SLUSA”). The federal district court denied plaintiffs’ motion to remand, consolidated the two actions and, on September 27, 2001, granted defendants’ motion to dismiss the consolidated action on the ground that plaintiffs’ claims were preempted by SLUSA. The plaintiffs appealed the district court’s decisions. On June 7, 2002, the United States Court of Appeals for the Eleventh Circuit affirmed the dismissal of the two securities class actions and in October 2002 the Supreme Court of the United States denied plaintiffs’ petition for certiorari.</R>

 

51

<R>Code #16464-01-03</R>

EX-11

Exhibit 11 

EX-17.(A)

485APOS

EX-17.(B)

(BULL LOGO)
Merrill Lynch Investment Managers


Semi-Annual Report
February 28, 2003


Merrill Lynch
Fundamental Growth
Fund, Inc.


www.mlim.ml.com



This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.



Merrill Lynch Fundamental Growth Fund, Inc.
Box 9011
Princeton, NJ
08543-9011



Printed on post-consumer recycled paper




MERRILL LYNCH FUNDAMENTAL GROWTH FUND, INC.


DEAR SHAREHOLDER


For the six-month period ended February 28, 2003, Merrill Lynch
Fundamental Growth Fund, Inc.'s Class A, Class B, Class C and
Class D Shares had total returns of -9.90%, -10.36%, -10.45% and
- -10.05%, respectively. (Fund results shown do not reflect sales
charges and would be lower if sales charges were included. Complete
performance information can be found on pages 3 and 4 of this report
to shareholders.) This compares with a total return of -7.60% for
the Lipper Large Cap Growth Funds Average for the same period. The
Fund underperformed the unmanaged Standard & Poor's (S&P) 500
Index, which had a total return of -7.29% and the unmanaged S&P
Barra Growth Index, which had a total return of -6.67%.

During the six-month period ended February 28, 2003, major global
stock markets continued in a downward trend with overall market
indexes almost touching new lows in early October 2002. News media
reports and investment community commentators almost continuously
focused on the impending military confrontation with Iraq. It
appears that this emphasis imposed a negative discount on overall
equity valuations.

The Fund continued to be overweighted in the consumer discretionary



and consumer staples sectors. Overall, the negative stock investment
returns in both of these sectors underperformed the total investment
return for the S&P 500 Index. Some of the best comparative
investment returns in the Fund during the period were Clear Channel
Communications, Inc. and Fox Entertainment Group, Inc. in the media
and entertainment industry and eBay Inc., Bed Bath & Beyond Inc.,
Lowe's Companies, Inc. and Brinker International, Inc. in retailing
and restaurants. Stocks added to the Fund included Starbucks
Corporation, eBay Inc., Autozone, Inc. and Fox Entertainment Group,
Inc., Archer-Daniels-Midland Company and The Clorox Company. We sold
Brown-Forman Corporation after the company reported an unanticipated
lower earnings level and a decreased outlook for future earnings.

In the biotechnology industry, shares of Amgen Inc., as well as
companies in the health care equipment and supplies industries
including Alcon, Inc., Boston Scientific Corporation, Stryker
Corporation and Zimmer Holdings, Inc., had positive investment
returns. We also added Medtronic, Inc. and Varian Medical Systems,
Inc. to the Fund's investments. The Fund remained underweighted in
the largest ethical drug companies because we anticipated further
deterioration in pricing conditions as Federal and state officials
attempted to reduce the soaring costs of government reimbursements
for health care. Thus, we sold the Fund's holdings in Pfizer Inc.

The Fund became relatively underweighted in the information
technology sector where there was a broad-based and substantial
improvement in stock prices during the six-month period ended
February 28, 2003. Intel Corporation, International Business
Machines Corporation and Cisco Systems, Inc., which were three of
the largest investments in the Fund, had positive investment
returns. We reduced the Fund's overall investment weighting by
liquidating investment holdings in QUALCOMM Incorporated, Sun
Microsystems, Inc., Applied Materials, Inc., KLA-Tencor Corporation,
STMicroelectronics NV, Texas Instruments Incorporated, Oracle
Corporation, SAP AG and Siebel Systems, Inc. After reporting the
most recent quarterly financial results, the managements of
International Business Machines Corporation, Intel Corporation,
Microsoft Corporation and Cisco Systems, Inc. painted an uncertain
and modest growth outlook for corporate and public sector spending
on technology equipment and software. We continue to invest in the
equities of these companies since we believe they are the best-
managed technology companies for the long term. However, a
substantial amount of time may pass before there is a robust
cyclical upturn in capital spending on technology globally. There
has been a cyclical upturn in U.S. capital spending on information
technology equipment and software since the recession ended at the
completion of the third quarter of 2001. In retrospect, there has
been so much capacity to supply equipment and software services on a
global basis that the cyclical upturn in spending has not evolved
into an overall improvement in the growth of profits for information
technology companies.



Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



We sold the Fund's investments in the residential mortgage financing
and consumer credit industries because of our concern about
deteriorating credit quality reports. Fund equity investments in
H & R Block, Inc., American Express Company, Fannie Mae, MBNA
Corporation, Wells Fargo Company and Target Corporation were
subsequently sold. Target Corporation is a multiline retailer that
has derived a substantial percentage of its growth in earnings from
the expansion of a credit card business to customers, but we are
concerned about a potential deterioration in credit quality and
rising loan loss expenses. In the insurance sector, we sold American
International Group, Inc. and Lincoln National Corporation. After
American International announced a surprising increase in loss
reserves, we became aware of the potential for continued
unanticipated increases in loss reserves in several important
commercial insurance lines of business that historically had been
very profitable. With respect to Lincoln National, we sold the
holding after its management announced a substantial increase in
reserves to support guaranteed returns on various life insurance
annuity products. The life insurance industry in Europe, England and
the United States for some time has been experiencing the necessity
to continually reduce earnings estimates by using increased reserves
because of the more than three-year downward trend in stock values
around the world.



In the media industry, we sold the Fund's holdings in The
Interpublic Group of Companies, Inc. after its management announced
that investments in commercial ventures in Europe and Asia were
unprofitable. The advertising industry in the United States and
Europe has experienced a cyclical upturn from the U.S. recession in
2001. However, this historically well-managed company was not
reaping benefits from the turnaround. We sold the Fund's equity
investment in The Walt Disney Company since there appeared to be a
lack of any meaningful progress in corporate restructuring by
management during the prior fiscal year. We sold Univision
Communications Inc. (Class A) and Viacom, Inc. (Class B) because of
our concerns about slower rates of growth in upcoming quarters as
the geopolitical situation in the Middle East and the involvement of
the United States caused corporations to reduce advertising budgets.

Nextel Communications, Inc. (Class A) and Sprint Corporation (PCS
Group) were sold after the unenthusiastic consumer response to new
mobile phone service offerings and lower-than-anticipated per
subscriber monthly service revenues. We added Verizon Communications
to the Fund since we found the valuation very reasonable and believe
that there will be further U.S. court action to deregulate wireline
communication services and improve the corporate rates of return to
previously relatively high levels.


Market Outlook
We anticipate that a resolution to the confrontation between the
United States and Iraq may result in an upward trend in U.S. equity
prices. (Similar developments took place shortly after the start of
the Gulf War in 1991.) Alan Greenspan, Chairman of the Federal
Reserve Board of Governors, stated in a recent public speech that it
was likely that Americans raised $200 billion of liquidity in 2002
from the refinancing of residential mortgage obligations on
appreciated homes. It would seem that consumers did not spend this
increased liquidity during the year-end holiday season. Military
conflict or the prospect for conflict has dampened consumer spending
in the past. Therefore, we believe that a resolution to the
confrontation will provide a boost to the rate of real growth of
consumer spending and economic growth as well as higher corporate
profits. These developments may be beneficial to the value of
stocks, particularly given that the increased focus of an armed
conflict in Iraq by the media and investment community appears to
have been destructive to stock market values.

Consequently, we focused on stock investments that we believe should
benefit from a recovery in household spending. The last quarter of
the period ended February 28, 2003, from a comparative investment
return perspective for the Fund, was one of our recent best compared
to other actively managed large cap growth funds. In our opinion,
the results reflected our change in strategy during the period.



Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



In Conclusion
We thank you for your continued investment in Merrill Lynch
Fundamental Growth Fund, Inc., and we look forward to discussing our
outlook and strategy with you again in our next report to
shareholders.


Sincerely,



(Terry K. Glenn)
Terry K. Glenn
President and Director



(Lawrence R. Fuller)
Lawrence R. Fuller
Vice President and
Portfolio Manager



March 31, 2003



PERFORMANCE DATA


About Fund Performance


Investors are able to purchase shares of the Fund through five
pricing alternatives:

* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors, as detailed in the Fund's prospectus. If you were a Class
A shareholder prior to October 21, 1994, your Class A Shares were
redesignated to Class D Shares on October 21, 1994. However, in the
case of certain eligible investors, the shares were simultaneously
exchanged for Class A Shares.

* Effective June 1, 2001, Class B Shares are subject to a maximum
contingent deferred sales charge of 4% declining to 0% after six
years. All Class B Shares purchased prior to June 1, 2001 will
maintain the four-year schedule. In addition, Class B Shares are
subject to a distribution fee of 0.75% and an account maintenance
fee of 0.25%. These shares automatically convert to Class D Shares
after 8 years. (There is no initial sales charge for automatic share
conversions.) If you were a Class B shareholder prior to October 21,
1994, your Class B Shares were redesignated to Class C Shares on
October 21, 1994.

* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.

* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).

* Class R Shares do not incur a maximum sales charge (front-end
load) or deferred sales charge. These shares are subject to a
distribution fee of 0.25% and an account maintenance fee of 0.25%.
Class R Shares are available only to certain retirement plans.

None of the past results shown should be considered a representation
of future performance. Performance results do not reflect the
deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Figures shown in
each of the following tables assume reinvestment of all dividends
and capital gains distributions at net asset value on the
ex-dividend date. Investment return and principal value of shares
will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.



Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



PERFORMANCE DATA (concluded)


Recent Performance Results


                                                                                      Ten-Year/
                                                      6-Month        12-Month      Since Inception
As of February 28, 2003                             Total Return   Total Return      Total Return
                                                                       
ML Fundamental Growth Fund, Inc. Class A Shares*       - 9.90%        -28.46%           +99.21%
ML Fundamental Growth Fund, Inc. Class B Shares*       -10.36         -29.20            +82.78
ML Fundamental Growth Fund, Inc. Class C Shares*       -10.45         -29.27            +79.87
ML Fundamental Growth Fund, Inc. Class D Shares*       -10.05         -28.64            +94.84
ML Fundamental Growth Fund, Inc. Class R Shares*         --             --              - 5.61
Standard & Poor's 500 Index**                          - 7.29         -22.68    +129.29/+105.48/-1.50
Standard & Poor's Barra Growth Index***                - 6.67         -23.34    +130.06/+111.82/-0.30


*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's ten year/since inception dates are from 10/21/94 for Class A
& Class B Shares, ten years for Class C & Class D Shares and from
1/03/03 for Class R Shares.



**An unmanaged broad-based Index comprised of common stocks. Since
inception total returns are for ten years from 10/31/94 and from
1/03/03, respectively.
***This unmanaged index is a capitalization-weighted index of all
the stocks in the Standard & Poor's 500 Index that have higher price-
to-book ratios. Since inception total returns are for ten years,
from 10/31/94 and from 1/31/03, respectively.



Average Annual Total Return


                                   % Return Without   % Return With
                                     Sales Charge     Sales Charge**
Class A Shares*

One Year Ended 2/28/03                    -28.46%        -32.21%
Five Years Ended 2/28/03                  - 2.75         - 3.80
Inception (10/21/94) through 2/28/03      + 8.60         + 7.90

*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.



                                   % Return Without   % Return With
                                     Sales Charge     Sales Charge**
Class B Shares*

One Year Ended 2/28/03                    -29.20%        -32.03%
Five Years Ended 2/28/03                  - 3.75         - 4.07
Inception (10/21/94) through 2/28/03      + 7.48         + 7.48

*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after six years.
**Assuming payment of applicable contingent deferred sales charge.



                                   % Return Without   % Return With
                                     Sales Charge     Sales Charge**
Class C Shares*

One Year Ended 2/28/03                    -29.27%        -29.97%
Five Years Ended 2/28/03                  - 3.76         - 3.76
Ten Years Ended 2/28/03                   + 6.57         + 6.57

*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after four years.
**Assuming payment of applicable contingent deferred sales charge.



                                  % Return Without    % Return With
                                     Sales Charge     Sales Charge**
Class D Shares*

One Year Ended 2/28/03                    -28.64%        -32.38%
Five Years Ended 2/28/03                  - 3.00         - 4.04
Ten Years Ended 2/28/03                   + 7.41         + 6.84

*Maximum sales charge is 5.25%. (Prior to October 21, 1994, Class D
Shares (formerly Class A Shares) were offered at a higher-than-
maximum sales charge. Thus, actual returns would have been somewhat
lower than noted for the inception period.)
**Assuming maximum sales charge.



Aggregate Total Return


                                                     % Return Without
                                                       Sales Charge
Class R Shares

Inception (1/03/03) through 2/28/03                       -5.61%




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



PORTFOLIO INFORMATION


As of February 28, 2003


                                           Percent of
Ten Largest Holdings                       Net Assets

Microsoft Corporation                          6.3%
Wal-Mart Stores, Inc.                          5.3
The Proctor & Gamble Company                   3.7
International Business Machines Corporation    3.4
The Coca-Cola Company                          3.3
Amgen Inc.                                     3.3
Intel Corporation                              3.1
Verizon Communications                         2.9
HCA Inc.                                       2.8
Cisco Systems, Inc.                            2.6



                                           Percent of
Geographic Allocation                     Net Assets++

United States                                 96.1%
Netherlands                                    2.0
Switzerland                                    1.2
Canada                                         0.7

++Total may not equal 100%.



                                           Percent of
Five Largest Industries*                   Net Assets

Health Care Equipment & Supplies               8.6%
Software                                       7.6
Beverages                                      7.0
Multiline Retail                               6.3
Household Products                             6.1

*For Fund compliance purposes, "Industry" means any one or more of
the industry sub-classifications used by one or more widely
recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for
purposes of this report, which may combine such industry sub-
classifications for reporting ease.



Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



SCHEDULE OF INVESTMENTS


                       Shares                                                                                    Percent of
Industry*               Held                         Common Stocks                                      Value    Net Assets
                                                                                                         
Aerospace &            935,000  General Dynamics Corporation                                        $   55,408,100     1.3%
Defense

Air Freight &        1,571,600  United Parcel Service, Inc. (Class B)                                   90,429,864      2.1
Logistics

Banks                2,223,900  Northern Trust Corporation                                              71,164,800      1.6

Beverages            2,226,800  Anheuser-Busch Companies, Inc.                                         103,546,200      2.4
                     3,635,100  The Coca-Cola Company                                                  146,203,722      3.3
                     2,918,100  Coca-Cola Enterprises Inc.                                              58,887,258      1.3
                                                                                                    --------------   ------
                                                                                                       308,637,180      7.0

Biotechnology        2,673,600  ++Amgen Inc.                                                           145,898,352      3.3

Chemicals            1,130,600  Ecolab Inc.                                                             55,455,930      1.3

Commercial             256,900  ++Apollo Group, Inc. (Class A)                                          11,909,884      0.3
Services &           2,319,300  First Data Corporation                                                  80,363,745      1.8
Supplies                                                                                            --------------   ------
                                                                                                        92,273,629      2.1

Communications       8,269,008  ++Cisco Systems, Inc.                                                  115,518,042      2.6
Equipment

Computers &          1,891,500  International Business Machines Corporation                            147,442,425      3.4
Peripherals






                                                                                                         
Containers &           292,600  Ball Corporation                                                        15,589,728      0.4
Packaging

Diversified          3,083,200  State Street Corporation                                               113,615,920      2.6
Financials           2,079,100  T. Rowe Price Group Inc.                                                53,474,452      1.2
                                                                                                    --------------   ------
                                                                                                       167,090,372      3.8

Diversified          3,614,700  Verizon Communications                                                 124,996,326      2.9
Telecommunication
Services

Energy Equipment &     532,600  ++BJ Services Company                                                   18,305,462      0.4
Services             1,829,300  Baker Hughes Incorporated                                               56,744,886      1.3
                                                                                                    --------------   ------
                                                                                                        75,050,348      1.7

Food & Drug          2,393,700  SYSCO Corporation                                                       64,917,144      1.5
Retailing

Food Products          920,300  Archer-Daniels-Midland Company                                          10,031,270      0.2
                     1,552,400  Unilever NV (NY Registered Shares)                                      87,990,032      2.0
                                                                                                    --------------   ------
                                                                                                        98,021,302      2.2

Health Care          1,391,700  ++Alcon, Inc.                                                           54,485,055      1.2
Equipment &          2,513,200  ++Boston Scientific Corporation                                        111,008,044      2.5
Supplies             1,982,600  Medtronic, Inc.                                                         88,622,220      2.0
                       846,000  Stryker Corporation                                                     55,159,200      1.3
                       234,600  ++Varian Medical Systems, Inc.                                          11,859,030      0.3
                     1,237,000  ++Zimmer Holdings, Inc.                                                 54,910,430      1.3
                                                                                                    --------------   ------
                                                                                                       376,043,979      8.6




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



SCHEDULE OF INVESTMENTS (continued)


                       Shares                                                                                    Percent of
Industry*               Held                         Common Stocks                                      Value    Net Assets
                                                                                                         
Health Care          2,962,600  HCA Inc.                                                            $  122,177,624     2.8%
Providers &          3,066,800  Health Management Associates, Inc. (Class A)                            54,957,056      1.2
Services             2,339,500  ++Tenet Healthcare Corporation                                          42,508,715      1.0
                                                                                                    --------------   ------
                                                                                                       219,643,395      5.0

Hotels,                860,800  ++Brinker International, Inc.                                           23,861,376      0.6
Restaurants &          980,400  ++Starbucks Corporation                                                 23,000,184      0.5
Leisure              3,156,800  ++YUM! Brands, Inc.                                                     75,163,408      1.7
                                                                                                    --------------   ------
                                                                                                       122,024,968      2.8

Household Products   1,290,700  The Clorox Company                                                      54,609,517      1.2
                     1,014,900  Colgate-Palmolive Company                                               51,059,619      1.2
                     1,985,300  The Procter & Gamble Company                                           162,516,658      3.7
                                                                                                    --------------   ------
                                                                                                       268,185,794      6.1

Industrial             857,000  3M Co.                                                                 107,442,090      2.5
Conglomerates

Insurance            1,634,000  Everest Re Group, Ltd.                                                  87,255,600      2.0
                     1,326,900  Marsh & McLennan Companies, Inc.                                        54,004,830      1.2
                                                                                                    --------------   ------
                                                                                                       141,260,430      3.2

Internet &             299,500  ++eBay Inc.                                                             23,480,800      0.5
Catalog Retail

Media                7,675,600  ++AOL Time Warner Inc.                                                  86,887,792      2.0
                     2,589,100  ++Clear Channel Communications, Inc.                                    94,528,041      2.2
                     1,817,400  ++Fox Entertainment Group, Inc. (Class A)                               48,579,102      1.1
                     3,347,600  ++Rogers Communications, Inc. 'B'                                       30,896,429      0.7
                                                                                                    --------------   ------
                                                                                                       260,891,364      6.0

Multiline Retail       856,600  ++Kohl's Corporation                                                    41,887,740      1.0
                     4,838,000  Wal-Mart Stores, Inc.                                                  232,514,280      5.3
                                                                                                    --------------   ------
                                                                                                       274,402,020      6.3

Oil & Gas            2,762,800  ++TransMontaigne Inc. (a)                                               10,774,920      0.2

Semiconductor        7,832,960  Intel Corporation                                                      135,118,560      3.1
Equipment &
Products

Software             1,106,700  ++Electronic Arts Inc.                                                  58,422,693      1.3
                    11,678,200  Microsoft Corporation                                                  276,890,122      6.3
                                                                                                    --------------   ------
                                                                                                       335,312,815      7.6

Specialty Retail       337,900  ++AutoZone, Inc.                                                        22,233,820      0.5
                     1,635,100  ++Bed Bath & Beyond Inc.                                                54,007,353      1.2
                     2,350,400  Lowe's Companies, Inc.                                                  92,370,720      2.1
                     2,733,700  The TJX Companies, Inc.                                                 43,930,559      1.0
                                                                                                    --------------   ------
                                                                                                       212,542,452      4.8

                                Total Common Stocks (Cost--$4,992,113,047)                           4,115,017,129     93.9




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



SCHEDULE OF INVESTMENTS (concluded)


                       Shares                                                                                    Percent of
                        Held                     Short-Term Securities                                  Value    Net Assets
                                                                                                            
                   411,716,610  Merrill Lynch Premier Institutional Fund (b)(c)                     $  411,716,610     9.4%







                     Beneficial
                      Interest
                                                                                                            
                 $ 302,488,803  Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (c)            302,488,803      6.9
                   503,209,191  Merrill Lynch Liquidity Series, LLC Money Market Series (b)(c)         503,209,191     11.5
                                                                                                    --------------   ------
                                                                                                       805,697,994     18.4

                                Total Short-Term Securities (Cost--$1,217,414,604)                   1,217,414,604     27.8

Total Investments (Cost--$6,209,527,651)                                                             5,332,431,733    121.7
Liabilities in Excess of Other Assets                                                                (948,024,858)   (21.7)
                                                                                                    --------------   ------
Net Assets                                                                                          $4,384,406,875   100.0%
                                                                                                    ==============   ======

*For Fund compliance purposes, "Industry" means any one or more of
the industry sub-classifications used by one or more widely
recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for
purposes of this report, which may combine such industry sub-
classifications for reporting ease.
++Non-income producing security.
(a)Investments in companies 5% or more of whose outstanding
securities are held by the Fund (such companies are defined as
"Affiliated Companies" in Section 2(a)(3) of the Investment Company
Act of 1940) are as follows:


                                  Net Share       Net      Dividend
Industry        Affiliate          Activity       Cost      Income

Oil & Gas  TransMontaigne Inc.    (154,400)    $(849,200)     ++

++Non-income producing security.
(b)Security was purchased with the cash proceeds from securities
loans.
(c)Investments in companies considered to be an affiliate of the
Fund (such companies are defined as "Affiliated Companies" in
Section 2(a)(3) of the Investment Company Act of 1940) are as
follows:


                                                          Dividend/
                                               Net         Interest
Affiliate                                    Activity       Income

Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I                     $302,488,803   $853,446
Merrill Lynch Liquidity Series,
LLC Money Market Series                     $503,209,191     16,667
Merrill Lynch Premier Institutional Fund     411,716,610     18,136


See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



FINANCIAL INFORMATION

Statement of Assets and Liabilities as of February 28, 2003
                                                                                                   
Assets:         Investments, at value (including securities loaned of $897,325,221)
                (identified cost--$6,209,527,651)                                                           $ 5,332,431,733
                Cash                                                                                                  2,939
                Foreign cash (cost--$270,818)                                                                       298,956
                Receivables:
                   Securities sold                                                        $     5,195,131
                   Capital shares sold                                                          3,956,082
                   Dividends                                                                    3,076,031
                   Interest                                                                       296,572
                   Security lending--net                                                           34,803        12,558,619
                                                                                          ---------------
                Prepaid registration fees                                                                           132,879
                                                                                                            ---------------
                Total assets                                                                                  5,345,425,126
                                                                                                            ---------------

Liabilities:    Collateral on securities loaned, at value                                                       914,925,801
                Payables:
                   Securities purchased                                                        28,967,431
                   Capital shares redeemed                                                      9,513,357
                   Investment adviser                                                           2,066,392
                   Distributor                                                                  1,790,185        42,337,365
                                                                                          ---------------
                Accrued expenses and other liabilities                                                            3,755,085
                                                                                                            ---------------
                Total liabilities                                                                               961,018,251
                                                                                                            ---------------

Net Assets:     Net assets                                                                                  $ 4,384,406,875
                                                                                                            ===============

Net Assets      Class A Shares of capital stock, $.10 par value, 150,000,000
Consist of:     shares authorized                                                                           $     8,925,220
                Class B Shares of capital stock, $.10 par value, 500,000,000
                shares authorized                                                                                13,059,001
                Class C Shares of capital stock, $.10 par value, 300,000,000
                shares authorized                                                                                 4,547,838
                Class D Shares of capital stock, $.10 par value, 300,000,000
                shares authorized                                                                                10,265,571
                Class R Shares of capital stock, $.10 par value, 500,000,000
                shares authorized                                                                                         1
                Paid-in capital in excess of par                                                              7,812,273,778
                Accumulated investment loss--net                                          $  (13,985,068)
                Accumulated realized capital losses on investments and foreign
                currency transactions--net                                                (2,573,611,686)
                Unrealized depreciation on investments and foreign currency
                transactions--net                                                           (877,067,780)
                                                                                          ---------------
                Total accumulated losses--net                                                               (3,464,664,534)
                                                                                                            ---------------
                Net assets                                                                                  $ 4,384,406,875
                                                                                                            ===============






                                                                                                   
Net Asset       Class A--Based on net assets of $1,112,629,028 and 89,252,201
Value:                   shares outstanding                                                                 $         12.47
                                                                                                            ===============
                Class B--Based on net assets of $1,491,149,955 and 130,590,005
                         shares outstanding                                                                 $         11.42
                                                                                                            ===============
                Class C--Based on net assets of $522,280,220 and 45,478,383
                         shares outstanding                                                                 $         11.48
                                                                                                            ===============
                Class D--Based on net assets of $1,258,347,578 and 102,655,713
                         shares outstanding                                                                 $         12.26
                                                                                                            ===============
                Class R--Based on net assets of $94.38 and 8.244 shares outstanding                         $         11.45
                                                                                                            ===============

See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



FINANCIAL INFORMATION (continued)

Statement of Operations for the Six Months Ended February 28, 2003
                                                                                                   
Investment      Dividends (net of $133,375 foreign withholding tax)                                         $    19,242,322
Income:         Interest                                                                                          1,619,799
                Securities lending--net                                                                             643,895
                                                                                                            ---------------
                Total income                                                                                     21,506,016
                                                                                                            ---------------

Expenses:       Investment advisory fees                                                  $    14,340,216
                Account maintenance and distribution fees--Class B                              8,180,669
                Account maintenance and distribution fees--Class C                              2,798,012
                Transfer agent fees--Class B                                                    2,655,478
                Transfer agent fees--Class D                                                    1,885,392
                Account maintenance fees--Class D                                               1,660,924
                Transfer agent fees--Class A                                                    1,632,196
                Transfer agent fees--Class C                                                      940,044
                Accounting services                                                               389,587
                Professional fees                                                                 365,290
                Printing and shareholder reports                                                  146,619
                Custodian fees                                                                    118,971
                Directors' fees and expenses                                                       62,837
                Registration fees                                                                  57,810
                Pricing fees                                                                       46,080
                Other                                                                             103,861
                                                                                          ---------------
                Total expenses                                                                                   35,383,986
                                                                                                            ---------------
                Investment loss--net                                                                           (13,877,970)
                                                                                                            ---------------

Realized &      Realized losson:
Unrealized         Investments--net                                                         (633,475,334)
Gain (Loss) on     Foreign currency transactions--net                                           (181,625)     (633,656,959)
Investments &                                                                             ---------------
Foreign         Change in unrealized appreciation/depreciation on:
Currency           Investments--net                                                           140,706,624
Transactions--     Foreign currency transactions--net                                              18,762       140,725,386
Net:                                                                                      ---------------   ---------------
                Total realized and unrealized loss on investments and
                foreign currency transactions--net                                                            (492,931,573)
                                                                                                            ---------------
                Net Decrease in Net Assets Resulting from Operations                                        $ (506,809,543)
                                                                                                            ===============

See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



FINANCIAL INFORMATION (continued)

Statements of Changes in Net Assets

                                                                                           For the Six          For the
                                                                                           Months Ended        Year Ended
                                                                                           February 28,        August 31,
Increase (Decrease) in Net Assets:                                                             2003               2002
                                                                                                   
Operations:     Investment loss--net                                                      $  (13,877,970)   $  (38,864,498)
                Realized loss on investments and foreign currency transactions--net         (633,656,959)     (929,479,009)
                Change in unrealized appreciation/depreciation on investments and
                foreign currency transactions--net                                            140,725,386     (429,942,276)
                                                                                          ---------------   ---------------
                Net decrease in net assets resulting from operations                        (506,809,543)   (1,398,285,783)
                                                                                          ---------------   ---------------

Capital Share   Net increase (decrease) in net assets derived from capital share
Transactions:   transactions                                                                 (64,034,158)     1,189,916,446
                                                                                          ---------------   ---------------

Net Assets:     Total decrease in net assets                                                (570,843,701)     (208,369,337)
                Beginning of period                                                         4,955,250,576     5,163,619,913
                                                                                          ---------------   ---------------
                End of period*                                                            $ 4,384,406,875   $ 4,955,250,576
                                                                                          ===============   ===============

                *Accumulated investment loss--net                                         $  (13,985,068)   $     (107,098)
                                                                                          ===============   ===============

See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003




FINANCIAL INFORMATION (continued)

Financial Highlights
                                                                                         Class A
The following per share data and ratios                       For the
have been derived from information                           Six Months
provided in the financial statements.                          Ended
                                                              Feb. 28,            For the Year Ended August 31,
Increase (Decrease) in Net Asset Value:                         2003         2002         2001         2000          1999
                                                                                               
Per Share       Net asset value, beginning of period         $    13.84   $    17.46   $    29.98   $    21.99   $    16.19
Operating                                                    ----------   ----------   ----------   ----------   ----------
Performance:       Investment income (loss)--net++              --+++++        (.02)          .08          .02          .13
                   Realized and unrealized gain (loss)
                   on investments and foreign currency
                   transactions--net                             (1.37)       (3.60)      (10.64)         9.91         6.37
                                                             ----------   ----------   ----------   ----------   ----------
                Total from investment operations                 (1.37)       (3.62)      (10.56)         9.93         6.50
                                                             ----------   ----------   ----------   ----------   ----------
                Less distributions:
                   Realized gain on investments--net                 --           --           --       (1.94)        (.70)
                   In excess of realized gain on
                   investments--net                                  --           --       (1.96)           --           --
                                                             ----------   ----------   ----------   ----------   ----------
                Total distributions                                  --           --       (1.96)       (1.94)        (.70)
                                                             ----------   ----------   ----------   ----------   ----------
                Net asset value, end of period               $    12.47   $    13.84   $    17.46   $    29.98   $    21.99
                                                             ==========   ==========   ==========   ==========   ==========

Total           Based on net asset value per share           (9.90%)+++     (20.73%)     (36.71%)       47.01%       41.08%
Investment                                                   ==========   ==========   ==========   ==========   ==========
Return:**

Ratios to       Expenses                                          .95%*         .94%         .80%         .76%         .81%
Average                                                      ==========   ==========   ==========   ==========   ==========
Net Assets:     Investment income (loss)--net                   (.03%)*       (.09%)         .35%         .09%         .60%
                                                             ==========   ==========   ==========   ==========   ==========

Supplemental    Net assets, end of period (in thousands)     $1,112,629   $1,170,884   $  950,922   $  882,072   $  472,464
Data:                                                        ==========   ==========   ==========   ==========   ==========
                Portfolio turnover                               44.13%       92.35%      149.86%       98.71%       52.72%
                                                             ==========   ==========   ==========   ==========   ==========

*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.

See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



FINANCIAL INFORMATION (continued)

Financial Highlights (continued)
                                                                                         Class B
The following per share data and ratios                       For the
have been derived from information                           Six Months
provided in the financial statements.                          Ended
                                                              Feb. 28,            For the Year Ended August 31,
Increase (Decrease) in Net Asset Value:                         2003         2002         2001         2000          1999
                                                                                               
Per Share       Net asset value, beginning of period         $    12.74   $    16.24   $    28.06   $    20.75   $    15.39
Operating                                                    ----------   ----------   ----------   ----------   ----------
Performance:       Investment loss--net++                         (.06)        (.17)        (.13)        (.23)        (.08)
                   Realized and unrealized gain (loss)
                   on investments and foreign currency
                   transactions--net                             (1.26)       (3.33)       (9.95)         9.32         6.05
                                                             ----------   ----------   ----------   ----------   ----------
                Total from investment operations                 (1.32)       (3.50)      (10.08)         9.09         5.97
                                                             ----------   ----------   ----------   ----------   ----------
                Less distributions:
                   Realized gain on investments--net                 --           --           --       (1.78)        (.61)
                   In excess of realized gain on
                   investments--net                                  --           --       (1.74)           --           --
                                                             ----------   ----------   ----------   ----------   ----------
                Total distributions                                  --           --       (1.74)       (1.78)        (.61)
                                                             ----------   ----------   ----------   ----------   ----------
                Net asset value, end of period               $    11.42   $    12.74   $    16.24   $    28.06   $    20.75
                                                             ==========   ==========   ==========   ==========   ==========

Total           Based on net asset value per share          (10.36%)+++     (21.55%)     (37.36%)       45.55%       39.58%
Investment                                                   ==========   ==========   ==========   ==========   ==========
Return:**

Ratios to       Expenses                                         1.99%*        1.96%        1.81%        1.77%        1.83%
Average                                                      ==========   ==========   ==========   ==========   ==========
Net Assets:     Investment loss--net                           (1.08%)*      (1.10%)       (.62%)       (.92%)       (.41%)
                                                             ==========   ==========   ==========   ==========   ==========

Supplemental    Net assets, end of period (in thousands)     $1,491,150   $1,802,731   $2,299,511   $3,411,474   $2,000,535
Data:                                                        ==========   ==========   ==========   ==========   ==========
                Portfolio turnover                               44.13%       92.35%      149.86%       98.71%       52.72%
                                                             ==========   ==========   ==========   ==========   ==========


*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Aggregate total investment return.

See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003




FINANCIAL INFORMATION (continued)

Financial Highlights (continued)
                                                                                         Class C
The following per share data and ratios                       For the
have been derived from information                           Six Months
provided in the financial statements.                          Ended
                                                              Feb. 28,            For the Year Ended August 31,
Increase (Decrease) in Net Asset Value:                         2003         2002         2001         2000          1999
                                                                                               
Per Share       Net asset value, beginning of period         $    12.82   $    16.34   $    28.26   $    20.88   $    15.45
Operating                                                    ----------   ----------   ----------   ----------   ----------
Performance:       Investment loss--net++                         (.07)        (.17)        (.13)        (.24)        (.09)
                   Realized and unrealized gain (loss)
                   on investments and foreign currency
                   transactions--net                             (1.27)       (3.35)      (10.01)         9.39         6.10
                                                             ----------   ----------   ----------   ----------   ----------
                Total from investment operations                 (1.34)       (3.52)      (10.14)         9.15         6.01
                                                             ----------   ----------   ----------   ----------   ----------
                Less distributions:
                   Realized gain on investments--net                 --           --           --       (1.77)        (.58)
                   In excess of realized gain on
                   investments--net                                  --           --       (1.78)           --           --
                                                             ----------   ----------   ----------   ----------   ----------
                Total distributions                                  --           --       (1.78)       (1.77)        (.58)
                                                             ----------   ----------   ----------   ----------   ----------
                Net asset value, end of period               $    11.48   $    12.82   $    16.34   $    28.26   $    20.88
                                                             ==========   ==========   ==========   ==========   ==========

Total           Based on net asset value per share          (10.45%)+++     (21.54%)     (37.35%)       45.53%       39.65%
Investment                                                   ==========   ==========   ==========   ==========   ==========
Return:**

Ratios to       Expenses                                         2.00%*        1.97%        1.83%        1.78%        1.83%
Average                                                      ==========   ==========   ==========   ==========   ==========
Net Assets:     Investment loss--net                           (1.09%)*      (1.11%)       (.66%)       (.93%)       (.43%)
                                                             ==========   ==========   ==========   ==========   ==========

Supplemental    Net assets, end of period (in thousands)     $  522,280   $  596,871   $  616,400   $  627,021   $  307,988
Data:                                                        ==========   ==========   ==========   ==========   ==========
                Portfolio turnover                               44.13%       92.35%      149.86%       98.71%       52.72%
                                                             ==========   ==========   ==========   ==========   ==========

*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Aggregate total investment return.

See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



FINANCIAL INFORMATION (continued)

Financial Highlights (continued)






                                                                                         Class D
The following per share data and ratios                       For the
have been derived from information                           Six Months
provided in the financial statements.                          Ended
                                                              Feb. 28,            For the Year Ended August 31,
Increase (Decrease) in Net Asset Value:                         2003         2002         2001         2000          1999
                                                                                               
Per Share       Net asset value, beginning of period         $    13.63   $    17.23   $    29.63   $    21.77   $    16.06
Operating                                                    ----------   ----------   ----------   ----------   ----------
Performance:       Investment income (loss)--net++                (.02)        (.05)          .03        (.04)          .08
                   Realized and unrealized gain (loss)
                   on investments and foreign currency
                   transactions--net                             (1.35)       (3.55)      (10.52)         9.80         6.31
                                                             ----------   ----------   ----------   ----------   ----------
                Total from investment operations                 (1.37)       (3.60)      (10.49)         9.76         6.39
                                                             ----------   ----------   ----------   ----------   ----------
                Less distributions:
                   Realized gain on investments--net                 --           --           --       (1.90)        (.68)
                   In excess of realized gain on
                   investments--net                                  --           --       (1.91)           --           --
                                                             ----------   ----------   ----------   ----------   ----------
                Total distributions                                  --           --       (1.91)       (1.90)        (.68)
                                                             ----------   ----------   ----------   ----------   ----------
                Net asset value, end of period               $    12.26   $    13.63   $    17.23   $    29.63   $    21.77
                                                             ==========   ==========   ==========   ==========   ==========

Total           Based on net asset value per share          (10.05%)+++     (20.89%)     (36.88%)       46.67%       40.67%
Investment                                                   ==========   ==========   ==========   ==========   ==========
Return:**

Ratios to       Expenses                                         1.20%*        1.18%        1.04%        1.01%        1.05%
Average                                                      ==========   ==========   ==========   ==========   ==========
Net Assets:     Investment income (loss)--net                   (.28%)*       (.33%)         .14%       (.17%)         .36%
                                                             ==========   ==========   ==========   ==========   ==========

Supplemental    Net assets, end of period (in thousands)     $1,258,348   $1,384,765   $1,296,787   $1,712,701   $  795,607
Data:                                                        ==========   ==========   ==========   ==========   ==========
                Portfolio turnover                               44.13%       92.35%      149.86%       98.71%       52.72%
                                                             ==========   ==========   ==========   ==========   ==========


*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Aggregate total investment return.

See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



FINANCIAL INFORMATION (concluded)

Financial Highlights (concluded)





                                                                                                                  Class R

                                                                                                                  For the
                                                                                                                   Period
                                                                                                                 January 3,
The following per share data and ratios have been derived                                                        2003++ to
from information provided in the financial statements.                                                          February 28,
Increase (Decrease) in Net Asset Value:                                                                             2003
                                                                                                           
Per Share       Net asset value, beginning of period                                                             $    12.13
Operating                                                                                                        ----------
Performance:       Investment loss--net++++                                                                         --+++++
                   Realized and unrealized loss on investments and foreign currency
                   transactions--net                                                                                  (.68)
                                                                                                                 ----------
                Total from investment operations                                                                      (.68)
                                                                                                                 ----------
                Net asset value, end of period                                                                   $    11.45
                                                                                                                 ==========

Total           Based on net asset value per share                                                               (5.61%)+++
Investment                                                                                                       ==========
Return:**

Ratios to       Expenses                                                                                             1.44%*
Average                                                                                                          ==========
Net Assets:     Investment loss--net                                                                                (.47%)*
                                                                                                                 ==========

Supplemental    Net assets, end of period (in thousands)                                                         $ --++++++
Data:                                                                                                            ==========
                Portfolio turnover                                                                                   44.13%
                                                                                                                 ==========

*Annualized.
**Total investment returns exclude the effects of sales charges.
++Commencement of operations.
++++Based on average shares outstanding.
++++++Amount is less than $1,000.
+++Aggregate total investment return.
+++++Amount is less than $.01 per share.

See Notes to Financial Statements.




Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003


NOTES TO FINANCIAL STATEMENTS


1. Significant Accounting Policies:
Merrill Lynch Fundamental Growth Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Fund's
financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America, which
may require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are,
in the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are
of a normal, recurring nature. The Fund offers five classes of
shares. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. Class R Shares are sold only to
certain retirement plans. All classes of shares have identical
voting, dividend, liquidation and other rights and the same terms
and conditions, except that Class B, Class C, Class D and Class R
Shares bear certain expenses related to the account maintenance of
such shares, and Class B, Class C and Class R Shares also bear
certain expenses related to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating
to its account maintenance and distribution expenditures. Income,
expenses (other than expenses attributable to a specific class) and
realized and unrealized gains and losses on investments and foreign
currency transactions are allocated daily to each class based on its
relative net assets. The following is a summary of significant
accounting policies followed by the Fund.

(a) Valuation of investments--Portfolio securities that are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities that are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written or
purchased are valued at the last sale price in the case of exchange-
traded options. In the case of options traded in the over-the-
counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). Short-term securities are



valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are
stated at market value. Securities and assets for which market value
quotations are not available are valued at their fair value as
determined in good faith by or under the direction of the Fund's
Board of Directors. Occasionally, events affecting the values of
securities and other assets may occur between the times at which
valuations of such securities are determined (that is, close of the
market on which such security trades) and the close of business on
the NYSE. If events (for example, company announcement, natural
disasters, market volatility) occur during such periods that are
expected to materially affect the value for such securities, those
securities may be valued at their fair market value as determined in
good faith by the Fund's Board of Directors or by the investment
adviser using a pricing service and/or procedures approved by the
Board of Directors of the Fund.

(b) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.

* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.



Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003


NOTES TO FINANCIAL STATEMENTS (continued)


* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).

Written and purchased options are non-income producing investments.

(c) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into U.S. dollars. Realized and unrealized gains or
losses from investments include the effects of foreign exchange
rates on investments.

(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.



(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend
date. Interest income is recognized on the accrual basis.

(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.

(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.

(h) Securities lending--The Fund may lend securities to financial
institutions that provide cash or securities issued or guaranteed by
the U.S. government as collateral, which will be maintained at all
times in an amount equal to at least 100% of the current market
value of the loaned securities. The market value of the loaned
securities is determined at the close of business of the Fund and
any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral
for the loaned securities, it collects a fee from the borrower. The
Fund typically receives the income on loaned securities but does not
receive the income on the collateral. Where the Fund receives cash
collateral, it may invest such collateral and retain the amount
earned on such investment, net of any amount rebated to the
borrower. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities
within five business days. The Fund may pay reasonable finder's,
lending agent, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation
to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access
to the collateral. The Fund also could suffer a loss where the value
of the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of
losses on investments made with cash collateral.



Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003


2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Investment Managers, L.P. ("MLIM"). The general
partner of MLIM is Princeton Services, Inc. ("PSI"), an indirect,
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Fund has also entered into a
Distribution Agreement and Distribution Plans with FAM Distributors,
Inc. ("FAMD" or the "Distributor"), which is a wholly-owned
subsidiary of Merrill Lynch Group, Inc.

MLIM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at the annual rate of .65% of
the average net assets of the Fund not exceeding $1 billion, .625%
of average net assets of the Fund in excess of $1 billion but not
exceeding $1.5 billion, .60% of net assets in excess of $1.5 billion
but not exceeding $5 billion, .575% of net assets in excess of
$5 billion but not exceeding $7.5 billion and .55% of net assets in
excess of $7.5 billion. MLIM has entered into a Sub-Advisory
Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K."), an affiliate of MLIM, pursuant to which MLAM U.K. provides
investment advisory services to MLIM with respect to the Fund. There
is no increase in the aggregate fees paid by the Fund for these
services.

Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:


                               Account
                             Maintenance      Distribution
                                 Fee              Fee



Class B                          .25%             .75%
Class C                          .25%             .75%
Class D                          .25%               --
Class R                          .25%             .25%


Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of
ML & Co., also provides account maintenance and distribution
services to the Fund. The ongoing account maintenance fee
compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C, Class D and Class R
shareholders. The ongoing distribution fee compensates the
Distributor and MLPF&S for providing shareholder and distribution-
related services to Class B, Class C and Class R shareholders.

For the six months ended February 28, 2003, FAMD earned underwriting
discounts and direct commissions and MLPF&S earned dealer
concessions on sales of the Fund's Class A and Class D Shares as
follows:


                                 FAMD          MLPF&S

Class A                         $ 1,293       $  6,491
Class D                         $10,268       $159,156


For the six months ended February 28, 2003, MLPF&S received
contingent deferred sales charges of $1,141,844 and $103,564
relating to transactions in Class B and Class C Shares,
respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $535 relating to transactions subject to front-end sales
charge waivers in Class D Shares.

The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
MLPF&S or its affiliates. As of February 28, 2003, the Fund lent
securities with a value of $295,325,196 to MLPF&S or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, as the
securities lending agent for a fee based on a share of the returns
on investment of cash collateral. MLIM, LLC may, on behalf of the
Fund, invest cash collateral received by the Fund for such loans,
among other things, in a private investment company managed by MLIM,
LLC or in registered money market funds advised by MLIM or its
affiliates. For the six months ended February 28, 2003, MLIM, LLC
received $235,075 in securities lending agent fees.



Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003



NOTES TO FINANCIAL STATEMENTS (concluded)


In addition, MLPF&S received $770,783 in commissions on the
execution of portfolio security transactions for the Fund for the
six months ended February 28, 2003.

Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.

For the six months ended February 28, 2003, the Fund reimbursed MLIM
$52,787 for certain accounting services.

Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, FDS, PSI, MLAM U.K., FAMD, and/or ML & Co.


3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 28, 2003 were $1,995,511,255 and
$2,246,347,644, respectively.

Net realized gains (losses) for the six months ended February 28,
2003 and net unrealized gains (losses) as of February 28, 2003 were
as follows:



                                     Realized           Unrealized
                                       Gains              Gains
                                      (Losses)           (Losses)

Long-term investments            $ (633,506,819)    $ (877,095,918)
Short-term investments                    31,485                 --
Foreign currency
transactions                           (181,625)             28,138
                                 ---------------    ---------------
Total                            $ (633,656,959)    $ (877,067,780)
                                 ===============    ===============


As of February 28, 2003, net unrealized depreciation for Federal
income tax purposes aggregated $886,376,365, of which $60,168,816
related to appreciated securities and $946,545,181 related to
depreciated securities. At February 28, 2003, the aggregate cost of
investments for Federal income tax purposes was $5,303,882,297.


4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $(64,034,158) for the six months ended February 28,
2003, and $1,189,916,446 for the year ended August 31, 2002.

Transactions in capital shares for each class were as follows:


Class A Shares for the Six Months                         Dollar
Ended February 28, 2003                  Shares           Amount

Shares sold                           18,248,692    $   240,380,032
Automatic conversion of shares               324              4,359
                                 ---------------    ---------------
Total issued                          18,249,016        240,384,391
Shares redeemed                     (13,588,993)      (176,846,305)
                                 ---------------    ---------------
Net increase                           4,660,023    $    63,538,086
                                 ===============    ===============



Class A Shares for the Year                               Dollar
Ended August 31, 2002                    Shares           Amount

Shares sold                           34,717,222    $   583,277,596
Shares issued resulting
from reorganization                   19,487,126        344,060,907
                                 ---------------    ---------------
Total issued                          54,204,348        927,338,503
Shares redeemed                     (24,076,905)      (388,632,466)
                                 ---------------    ---------------
Net increase                          30,127,443    $   538,706,037
                                 ===============    ===============



Class B Shares for the Six Months                         Dollar
Ended February 28, 2003                  Shares           Amount

Shares sold                           13,558,506    $   163,333,752
Automatic conversion of shares       (4,070,976)       (49,539,681)
Shares redeemed                     (20,348,556)      (244,053,215)
                                 ---------------    ---------------
Net decrease                        (10,861,026)    $ (130,259,144)
                                 ===============    ===============



Class B Shares for the Year                               Dollar
Ended August 31, 2002                    Shares           Amount

Shares sold                           30,347,369    $   469,938,109
Shares issued resulting
from reorganization                   28,546,496        467,486,105
                                 ---------------    ---------------
Total issued                          58,893,865        937,424,214
Automatic conversion of shares      (11,431,398)      (177,848,673)
Shares redeemed                     (47,590,133)      (720,768,369)
                                 ---------------    ---------------
Net increase (decrease)                (127,666)    $    38,807,172
                                 ===============    ===============





Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003




Class C Shares for the Six Months                         Dollar
Ended February 28, 2003                  Shares           Amount

Shares sold                            5,324,156    $    64,918,858
Shares redeemed                      (6,408,930)       (77,220,325)
                                 ---------------    ---------------
Net decrease                         (1,084,774)    $  (12,301,467)
                                 ===============    ===============



Class C Shares for the Year                               Dollar
Ended August 31, 2002                    Shares           Amount

Shares sold                           18,368,346    $   288,911,732
Shares issued resulting
from reorganization                    2,529,131         41,661,129
                                 ---------------    ---------------
Total issued                          20,897,477        330,572,861
Shares redeemed                     (12,062,719)      (181,589,481)
                                 ---------------    ---------------
Net increase                           8,834,758    $   148,983,380
                                 ===============    ===============



Class D Shares for the Six Months                         Dollar
Ended February 28, 2003                  Shares           Amount

Shares sold                           12,420,361    $   159,943,038
Automatic conversion of shares         3,800,615         49,539,681
                                 ---------------    ---------------
Total issued                          16,220,976        209,482,719
Shares redeemed                     (15,180,526)      (194,490,093)
Automatic conversion of shares             (328)            (4,359)
                                 ---------------    ---------------
Net increase                           1,040,122    $    14,988,267
                                 ===============    ===============



Class D Shares for the Year                               Dollar
Ended August 31, 2002                    Shares           Amount

Shares sold                           23,587,473    $   385,998,425
Automatic conversion of shares        10,735,327        177,848,673
Shares issued resulting
from reorganization                   20,927,326        364,424,777
                                 ---------------    ---------------
Total issued                          55,250,126        928,271,875
Shares redeemed                     (28,888,207)      (464,852,018)
                                 ---------------    ---------------
Net increase                          26,361,919    $   463,419,857
                                 ===============    ===============



Class R Shares for the
Period January 3, 2003++                                  Dollar
to February 28, 2003                     Shares           Amount

Shares sold                                    8    $           100
                                 ---------------    ---------------
Net increase                                   8    $           100
                                 ===============    ===============


++Commencement of operations.



5. Short-Term Borrowings:



The Fund, along with certain other funds managed by MLIM and its
affiliates, is a party to a $500,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the
credit agreement to fund shareholder redemptions and for other
lawful purposes other than for leverage. The Fund may borrow up to
the maximum amount allowable under the Fund's current prospectus and
statement of additional information, subject to various other legal,
regulatory or contractual limits. The Fund pays a commitment fee of
..09% per annum based on the Fund's pro rata share of the unused
portion of the credit agreement. Amounts borrowed under the credit
agreement bear interest at a rate equal to, at each fund's election,
the Federal Funds rate plus .50% or a base rate as determined by
Bank One, N.A. On November 29, 2002, the credit agreement was
renewed for one year under the same terms, except that the total
commitment was reduced from $1,000,000,000 to $500,000,000. The Fund
did not borrow under the credit agreement during the six months
ended February 28, 2003.


6. Capital Loss Carryforward:
On August 31, 2002, the Fund had a net capital loss carryforward of
$1,168,023,497, of which $98,873,827 expires in 2008, $99,588,881
expires in 2009 and $969,560,789 expires in 2010. This amount will
be used to offset like amounts of any future taxable gains.



Merrill Lynch Fundamental Growth Fund, Inc., February 28, 2003


OFFICERS AND DIRECTORS


Terry K. Glenn, President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Andre F. Perold, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Robert C. Doll, Jr., Senior Vice President
Lawrence R. Fuller, Vice President and
   Portfolio Manager
Donald C. Burke, Vice President and Treasurer
Susan B. Baker, Secretary


Melvin R. Seiden, Director of Merrill Lynch Fundamental Growth Fund,
Inc. has recently retired. The Fund's Board of Directors wishes
Mr. Seiden well in his retirement.



Custodian
J.P. Morgan Chase Bank
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245


Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863

EX-17.(C)

<R>Prospectus May 28, 2003</R>

Mercury Growth Opportunity Fund

This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep it for future reference.

The Securities And Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

[LOGO] MERCURYFUNDS

Table of Contents

		PAGE
[ICON]	FUND FACTS
	About the Mercury Growth Opportunity Fund	2
	Risk/Return Bar Chart	4
	Fees and Expenses	6
[ICON]	ABOUT THE DETAILS
	How the Fund Invests	8
<R>	Investment Risks	10
</R>	Statement of Additional Information	16
[ICON]	ACCOUNT CHOICES
	Pricing of Shares	17
	How to Buy, Sell, Transfer and Exchange Shares	22
	How Shares are Priced	27
	Participation in Fee-Based Programs	27
	Dividends and Taxes	28
[ICON]	THE MANAGEMENT TEAM
	Management of the Fund	30
	Financial Highlights	31
[ICON]	TO LEARN MORE
	Shareholder Reports	Back Cover
	Statement of Additional Information	Back Cover

 

MERCURY GROWTH OPPORTUNITY FUND

[ICON]   FUND FACTS

In an effort to help you better understand the many concepts involved in making an investment decision, we have defined the highlighted terms in this prospectus in the sidebar.

<R>Equity Securities — common stock, preferred stock, securities convertible into common stock or securities or other instruments whose price is linked to the value of common stock.</R>

ABOUT THE MERCURY GROWTH OPPORTUNITY FUND

What is the Fund’s investment objective?

The investment objective of the Fund is to seek long term capital growth.

What are the Fund’s main investment strategies?

The Fund invests primarily in equity securities of growth companies. The Fund selects companies on the basis of their long term potential for expanding their earnings, profitability and size. The Fund also selects companies on the basis of their long term potential for gaining increased market recognition for their securities. The Fund does not select companies with the objective of providing current income. The Fund may also invest in securities issued by foreign entities and in securities denominated in currencies other than the U.S. dollar.

What are the main risks of investing in the Fund?

<R>The Fund cannot guarantee that it will achieve its investment objective.

As with any fund, the value of the Fund’s investments — and therefore the value of Fund shares -- may fluctuate. These changes may occur because particular stock markets in which the Fund invests are rising or falling. At other times, there are specific factors that may affect the value of a particular investment. Also, Fund management may select securities that underperform the markets, the relevant indices or other funds with similar investment objectives and investment strategies. If the value of the Fund’s investments goes down, you may lose money.</R>

The Fund may invest in foreign securities. Foreign investing involves special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. Foreign securities may also be less liquid and harder to value than U.S. securities. These risks are greater for investments in emerging markets.

<R>The Fund is a non-diversified fund, which means that it may invest more of its assets in securities of a single issuer than if it were a diversified fund. Because the Fund may invest in a smaller number of issuers, the Fund is more exposed to developments affecting and the risks associated with individual issuers, which may have a greater impact on the Fund’s performance.</R>

 

 2 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   Fund Facts

Who should invest?

<R>Investors should consider their own investment goals, time horizon, and risk tolerance before investing in the Fund. An investment in the Fund may not be appropriate for all investors and is not intended to be a complete investment program.</R>

The Fund may be an appropriate investment for you if you:<R>

• Are investing with long term goals

• Want a professionally managed portfolio of equity securities of growth companies </R>

• Are willing to accept the risk that the value of your investment may decline in order to seek long term capital growth

• Are not looking for a significant amount of current income

 

MERCURY GROWTH OPPORTUNITY FUND 3 

[ICON]   Fund Facts

RISK/RETURN BAR CHART

<R>The bar chart and table shown below provide an indication of the risks of investing in the Fund. The bar chart shows changes in the Fund’s performance for Class B shares for each complete calendar year since the Fund’s inception. Sales charges are not reflected in the bar chart. If these amounts were reflected, returns would be less than those shown. The table compares the average annual total return of each class of the Fund’s shares with the Standard & Poor’s (S&P) 500 Index, a broad measure of market performance. How the Fund performed in the past (before and after taxes) is not necessarily an indication of how the Fund will perform in the future.</R>

<R>During the period shown in the bar chart, the highest return for a quarter was 26.74% (quarter ended December 31, 1998) and the lowest return for a quarter was -16.98% (quarter ended June 30, 2002). The year-to-date return as of March 31, 2003 was -2.23%. </R>

 

 4 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   Fund Facts

<R>After-tax returns are shown only for Class B shares and will vary for other classes. The after-tax returns are calculated using the historical highest marginal Federal individual income tax rates in effect during the periods measured and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts or through tax advantaged education savings accounts.

Average Annual Total Returns (for the periods ended December 31, 2002)	Class	One Year		Five Year		Life of Fund†
Mercury Growth Opportunity Fund	I
Return Before Taxes*		-32.85	%	-2.08	%	3.89	%
Mercury Growth Opportunity Fund	A
Return Before Taxes*		-32.99	%	-2.32	%	3.67	%
Mercury Growth Opportunity Fund	B
Return Before Taxes*		-32.66	%	-2.40	%	3.59	%
Return After Taxes on Distributions*		-32.66	%	-3.64	%	2.32	%
Return After Taxes on Distributions and
Sale of Fund Shares*		-20.06	%	-1.78	%	2.91	%
Mercury Growth Opportunity Fund	C
Return Before Taxes*		-30.63	%	-2.12	%	3.55	%
S&P 500 Index**		-22.10	%	-0.59	%	6.38	%††

* Includes all applicable fees and sales charges.

** The S&P 500(R) Index is a widely recognized, unmanaged index of common stock prices. Performance of the index does not reflect the deduction of fees, expenses and taxes. Past performance is not predictive of future performance.

† Inception date is February 2, 1996.

†† Since February 28, 1996.</R>

 

MERCURY GROWTH OPPORTUNITY FUND 5 

[ICON]   Fund Facts

<R>UNDERSTANDING EXPENSES </R>

Fund investors pay various expenses, either directly or indirectly. Listed below are some of the main types of expenses that the Fund may charge:

<R>Expenses paid directly by the shareholder:

Shareholder Fees — these fees include sales charges that you may pay when you buy or sell shares of the Fund.

Expenses paid indirectly by the shareholder:</R>

Annual Fund Operating Expenses — expenses that cover the costs of operating the Fund.

Management Fee — a fee paid to the Investment Adviser for managing the Fund.

Distribution Fees — fees used to support the Fund’s marketing and distribution efforts, such as compensating financial advisors and other financial intermediaries, advertising and promotion.

Service (Account Maintenance) Fees — fees used to compensate securities dealers and other financial intermediaries for account maintenance activities.

FEES AND EXPENSES

<R>The Fund offers four different classes of shares. Although your money will be invested the same way no matter which class of shares you buy, there are differences among the fees and expenses associated with each class. Not everyone is eligible to buy every class. After determining which classes you are eligible to buy, decide which class best suits your needs. Your financial advisor can help you with this decision.</R>

This table shows the different fees and expenses that you may pay if you buy and hold the different classes of shares of the Fund. Future expenses may be greater or less than those indicated below.<R>

Shareholder Fees (Fees paid directly from your investment)(a):	Class I		Class A		Class B(b)		Class C
Maximum Sales Charge (Load) imposed on purchases     (as a percentage of offering price)	5.25%	(c)	5.25%	(c)	None		None
Maximum Deferred Sales Charge (Load)     (as a percentage of original purchase price     or redemption proceeds, whichever is lower)	None	(d)	None	(d)	4.00%	(c)	1.00%	(c)
Maximum Sales Charge (Load) imposed on     Dividend Reinvestments	None		None		None		None
Redemption Fee	None		None		None		None
Exchange Fee	None		None		None		None
Annual Fund Operating Expenses   (expenses that are deducted from Fund assets):
Management Fee	0.65%		0.65%		0.65%		0.65%
Distribution and/or Service (12b-1) Fees(e)	None		0.25%		1.00%		1.00%
Other Expenses (including transfer agency fees)(f)	0.91%		0.92%		1.00%		1.03%
Total Annual Fund Operating Expenses	1.56%		1.82%		2.65%		2.68%

(a) Certain securities dealers or other financial intermediaries may charge a fee to process a purchase or redemption of shares. See “How to Buy, Sell, Transfer and Exchange Shares.”</R>

(b) Class B shares automatically convert to Class A shares approximately eight years after you buy them and will no longer be subject to distribution fees.<R>

(c) Some investors may qualify for reductions in or waivers of the sales charge (load).</R>

(d) You may pay a deferred sales charge if you purchase $1 million or more and you redeem within one year.<R>

(e) The Fund calls the “Service Fee” an “Account Maintenance Fee.” Account Maintenance Fee is the term used elsewhere in this Prospectus and in all other Fund materials. If you hold Class B or C shares over time, it may cost you more in distribution and account maintenance (12b-1) fees than the maximum sales charge that you would have paid if you had bought one of the other classes. </R>

(f) Financial Data Services, Inc., an affiliate of the Investment Adviser, provides transfer agency services to the Fund. The Fund pays a fee for these services. The Investment Adviser or its affiliates also provide certain accounting services to the Fund and the Fund reimburses the Investment Adviser or its affiliates for such services.

 

 6 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   Fund Facts

Example:

These examples are intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods indicated, that your investment has a 5% return each year, that you pay the sales charges, if any, that apply to the particular class and that the Fund’s operating expenses remain the same. This assumption is not meant to indicate that you will receive a 5% annual rate of return. Your annual return may be more or less than the 5% used in this example. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:

Expenses if you did redeem your shares:

<R>
	Class I	Class A	Class B		Class C
One Year	$   675	$   700	$   668		$   371
Three Years	$   992	$1,067	$1,123		$   832
Five Years	$1,330	$1,458	$1,605		$1,420
Ten Years	$2,284	$2,550	$2,802	*	$3,012
</R>

Expenses if you did not redeem your shares:

<R>
	Class I	Class A	Class B		Class C
One Year	$   675	$   700	$   268		$   271
Three Years	$   992	$1,067	$   823		$   832
Five Years	$1,330	$1,458	$1,405		$1,420
Ten Years	$2,284	$2,550	$2,802	*	$3,012
</R>

* Assumes conversion to Class A shares approximately eight years after purchase. See note (b) to the Fees and Expenses table on the previous page.

 

MERCURY GROWTH OPPORTUNITY FUND 7 

[ICON]   About the Details

<R>About the Portfolio Manager — Lawrence R. Fuller is a Vice President and the Portfolio Manager of the Fund. Mr. Fuller has been a First Vice President of an affiliate of the Investment Adviser since 1997. Mr. Fuller has managed the Fund since 1997.

Thomas E. Burke is an associate portfolio manager of the Fund. Mr. Burke has been a Director of an affiliate of the Investment Adviser since 1998 and was a Vice President thereof from 1994 to 1998. Mr. Burke has been the Fund’s associate manager since 2002.</R>

About the Investment Adviser — The Fund is managed by Mercury Advisors.

HOW THE FUND INVESTS

The Fund’s investment objective is long term growth of capital.

<R>Outlined below are the main strategies the Fund uses in seeking to achieve its objective.

The Fund seeks to achieve its investment objective by investing in a diversified portfolio primarily consisting of equity securities of U.S. companies. Equity securities consist of:

• common stock</R>

• preferred stock

• securities convertible into common stock

• rights to subscribe for common stock

<R>Normally, the Fund will invest at least 65% of its total assets in equity securities.

Fund management emphasizes growth companies that possess above-average growth rates in earnings, resulting from a variety of factors including, but not limited to, above-average growth rates in sales, profit margin improvement, proprietary or niche products or services, leading market shares, and underlying strong industry growth. Fund management believes that companies that possess above-average earnings growth frequently provide the prospect of above-average stock market returns, although such companies tend to have higher relative stock market valuation. The Fund may invest in companies of any size; however, emphasis will be given to companies having medium to large stock market capitalizations ($500 million or more). Fund management may also select growth companies on the basis of their long term potential for gaining increased market recognition. The Fund does not select companies with the objective of providing current income. </R>

To analyze a security, Fund management focuses on the long range view of a company’s prospects including a fundamental analysis of:

• company’s management

• financial structure

• product development

• marketing ability

• other relevant factors

 

 8 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   About the Details

Fund management’s fundamental analysis of a company does not guarantee successful results. Additionally, full realization of the market potential of aggressive growth companies takes time and, for this reason, the Fund should be considered a long term investment and not as a vehicle for seeking short term profits.

Fund management will select the percentages of the total portfolio invested in equity, fixed income and other types of securities based on its view of market or economic conditions. Fund management may consider general economic and financial trends in various industries, such as inflation, commodity prices, interest movements, estimates of growth in industrial output and profits, and government fiscal policies. Fund management will seek to allocate the Fund’s investments among the various types of securities in which the Fund may invest in a manner that it believes will best capitalize on the economic and financial trends that it perceives. There is no guarantee Fund management will be able to correctly forecast economic or financial trends or be able to select investments that will benefit from the trends it perceives.

The Fund may invest up to 20% of its total assets in equity securities of foreign issuers. There are no limits on the geographical allocations of these investments. Investments in American Depositary Receipts are not subject to the 20% restriction.

<R>In addition to the main strategies discussed above, the Fund may use certain other investment strategies.

The Fund will normally invest a portion of its assets in short term debt securities, such as commercial paper or Treasury bills. As a temporary measure for defensive purposes, the Fund may invest without limitation in these securities. The Fund may also increase its investment in these securities when Fund management is unable to find enough attractive long term investments, to reduce exposure to long term investments when management believes it is advisable to do so on a temporary basis, or to meet redemptions. Investments in short term debt securities can be sold easily and have limited risk of loss but earn only limited returns. Short term investments may therefore limit the potential for the Fund to achieve its investment objective.

The Fund also can invest in non-convertible preferred stock and fixed income securities of growth companies during temporary periods if warranted by market or economic conditions.

The Fund may also lend its portfolio securities, and invest uninvested cash balances in affiliated money market funds. The Fund may use derivative securities.</R>

 

MERCURY GROWTH OPPORTUNITY FUND 9 

[ICON]   About the Details

INVESTMENT RISKS

This section contains a summary discussion of the general risks of investing in the Fund. As with any fund, there can be no guarantee that the Fund will meet its objective, or that the Fund’s performance will be positive over any period of time.

<R>Set forth below are the main risks of investing in the Fund:</R>

Market and Selection Risk

Market risk is the risk that a stock market in one or more countries in which the Fund invests will go down in value, including the possibility that one or more markets will go down sharply and unpredictably. Selection risk is the risk that the securities that Fund management selects will underperform the markets, the relevant indices or other funds with similar investment objectives and investment strategies.

<R>Non-Diversification Risk

The Fund is a non-diversified portfolio. Because it may invest in a smaller number of issuers, the Fund is more exposed to developments affecting and the risks associated with individual issuers, which may have a greater impact on the Fund’s performance.

Investing Style Risk

The Fund follows an investment style that favors growth companies. Historically, growth stocks have performed best during the later stages of economic expansion. Therefore, the growth investment style may over time go in and out of favor. At times when the growth investing style is out of favor, the Fund may underperform other equity funds that use different investment styles.

Foreign Market Risk

Since the Fund may invest in foreign securities, it offers the potential for more diversification than a fund that invests only in the United States. This is because securities traded on foreign markets have often (though not always) performed differently than securities traded in the United States. However, such investments involve special risks not present in U.S. investments that can increase the chances that the Fund will lose money. In particular, the Fund is subject to the risk that because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may make it difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States.</R>

 

 10 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   About the Details

Foreign Economy Risk

The economies of certain foreign markets often do not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain such economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or retaliatory measures.

Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Any of these actions could severely affect security prices, impair the Fund’s ability to purchase or sell foreign securities or transfer the Fund’s assets or income back into the United States, or otherwise adversely affect the Fund’s operations.

Other foreign market risks include foreign exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments and political and social instability. Legal remedies available to investors in some foreign countries may be less extensive than those available to investors in the United States or other foreign countries.

Currency Risk

<R>Securities in which the Fund invests may be denominated or quoted in currencies other than the U.S. dollar. Changes in foreign currency exchange rates affect the value of the Fund’s portfolio. Generally, when the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. dollars. The risk, generally known as “currency risk,” means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.</R>

 

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[ICON]   About the Details

<R>The Fund may also be subject to certain other risks associated with its investments and investment strategies, including:</R>

Convertibles

Convertibles are generally debt securities or preferred stocks that may be converted into common stock. Convertibles typically pay current income as either interest (debt security convertibles) or dividends (preferred stocks). A convertible’s value usually reflects both the stream of current income payments and the value of the underlying common stock. The market value of a convertible performs like that of a regular debt security; that is, if market interest rates rise, the value of a convertible usually falls. Since it is convertible into common stock, the convertible also has the same types of market and issuer risk as the underlying common stock.

<R>Warrants</R>

A warrant gives the Fund the right to buy a quantity of stock. The warrant specifies the amount of underlying stock, the purchase (or “exercise”) price, and the date the warrant expires. The Fund has no obligation to exercise the warrant and buy the stock. A warrant has value only if the Fund can exercise it or sell it before it expires. If the price of the underlying stock does not rise above the exercise price before the warrant expires, the warrant generally expires without any value and the Fund loses any amount it paid for the warrant. Thus, investments in warrants may involve substantially more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock.

Small Cap and Emerging Growth Securities

Small cap or emerging growth companies may have limited product lines or markets. They may be less financially secure than larger, more established companies. They may depend on a small number of key personnel. If a product fails, or if management changes, or there are other adverse developments, the Fund’s investment in a small cap or emerging growth company may lose substantial value.

The securities of small cap and emerging growth companies generally trade in lower volumes and are subject to greater and less predictable price changes than securities of larger, more established companies. Investing in smaller and emerging growth companies requires a long term view.

 

 12 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   About the Details

Depositary Receipts

The Fund may invest in securities of foreign issuers in the form of Depositary Receipts. American Depositary Receipts are receipts typically issued by an American bank or trust company that show evidence of underlying securities issued by a foreign corporation. European Depositary Receipts evidence a similar ownership arrangement. The Fund may also invest in unsponsored Depositary Receipts. The issuers of such unsponsored Depositary Receipts are not obligated to disclose material information in the United States. Therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts.

Derivatives

The Fund may use derivative instruments including futures, forwards, options indexed securities and inverse securities. Derivatives allow the Fund to increase or decrease its risk exposure more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

<R>Credit risk — the risk that the counterparty (the party on the other side of the transaction) on a derivative transaction will be unable to honor its financial obligation to the Fund

Currency risk — the risk that changes in the exchange rate between currencies will adversely affect the value (in US dollar terms) of an investment

Leverage risk — the risk associated with certain types of investments or trading strategies (such as borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested

Liquidity risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth</R>

The Fund may use derivatives for hedging purposes, including anticipatory hedges. Hedging is a strategy in which the Fund uses a derivative to offset the risk associated with other Fund holdings. While hedging can reduce losses, it can also reduce or eliminate gains or cause losses if the market moves in a different manner than anticipated by the Fund or if the cost of the derivative outweighs

 

MERCURY GROWTH OPPORTUNITY FUND 13 

[ICON]   About the Details

<R>the benefit of the hedge. Hedging also involves the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced and may be increased. There can be no assurance that the Fund’s hedging strategy will reduce risk or that hedging transactions will be either available or cost effective. The Fund is not required to use hedging and may choose not to do so.

Indexed and Inverse Securities

The Fund may invest in securities whose potential returns are directly related to changes in an underlying index, known as indexed securities. The return on indexed securities will rise when the underlying index rises and fall when the index falls. The Fund may also invest in securities whose return is inversely related to changes in an index (“inverse securities”). In general, the return on inverse securities will decrease when the underlying index goes up and increase when that index goes down. Certain indexed securities, including inverse securities (which move in an opposite direction to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.</R>

Covered Call Options

The Fund can sell covered call options, which are options that give the purchaser the right to require the Fund to sell a security owned by the Fund to the purchaser at a specified price within a limited time period. The Fund will receive a premium (an upfront payment) for selling a covered call option, and if the option expires unexercised because the price of the underlying security has gone down the premium received by the Fund will partially offset any losses on the underlying security. By writing a covered call option, however, the Fund limits its ability to sell the underlying security and gives up the opportunity to profit from any increase in the value of the underlying security beyond the sale price specified in the option.

Short Term Trading

The Fund can buy and sell securities whenever it sees a market opportunity, and therefore the Fund may engage in short term trading. Short term trading may increase the Fund’s expenses and have tax consequences.

Repurchase Agreement Risk

The Fund may enter into repurchase agreements. Under a repurchase agreement, the seller agrees to repurchase a security at a mutually agreed upon time and price. If the other party to a repurchase agreement defaults on its

 

 14 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   About the Details

obligation under the agreement, the Fund may suffer delays and incur costs or even lose money in exercising its rights under the agreements.

When Issued Securities, Delayed Delivery Securities and Forward Commitments

When issued and delayed delivery securities and forward commitments involve the risk that the security the Fund buys will lose value prior to its delivery to the Fund. There also is the risk that the security will not be issued or that the other party will not meet its obligation. If this occurs, the Fund both loses the investment opportunity for the assets it has set aside to pay for the security and any gain in the security’s price.

Borrowing and Leverage

<R>The Fund may borrow for temporary emergency purposes, including to meet redemptions. Borrowings may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund’s portfolio. Borrowing will cost the Fund interest expense and other fees. The cost of borrowing may reduce the Fund’s return. Certain securities that the Fund buys may create leverage including, for example, when issued securities, indexed and inverse securities, forward commitments, options, warrants and reverse repurchase agreements.</R>

Illiquid Securities

The Fund may invest up to 15% of its net assets in illiquid securities that it cannot easily sell within seven days at current value or that have contractual or legal restrictions on sale. If the Fund buys illiquid securities it may be unable to quickly sell them or may be able to sell them only at a price below current value.

Restricted Securities

Restricted securities have contractual or legal restrictions on their resale. They include private placement securities that the Fund buys directly from the issuer. Private placement and other restricted securities may not be listed on an exchange and may have no active trading market.

Restricted securities may be illiquid. The Fund may be unable to sell them on short notice or may be able to sell them only at a price below current value. The Fund may get only limited information about the issuer, so it may be less able to predict a loss. In addition, if Fund management receives material adverse nonpublic information about the issuer, the Fund will not be able to sell the securities.

 

MERCURY GROWTH OPPORTUNITY FUND 15 

[ICON]   About the Details

Rule 144A Securities

Rule 144A securities are restricted securities that can be resold to qualified institutional buyers but not to the general public. Rule 144A securities may have an active trading market, but carry the risk that the active trading market may not continue.

Securities Lending

<R>The Fund may lend securities with a value up to 33¹/3% of its total assets to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral. Securities lending involves the risk that the borrower may fail to return the securities in a timely manner or at all. As a result, the Fund may lose money and there may be a delay in recovering the loaned securities. The Fund could also lose money if it does not recover the securities and/or the value of the collateral falls, including the value of investments made with cash collateral. These events could trigger adverse tax consequences to the Fund.</R>

STATEMENT OF ADDITIONAL INFORMATION

If you would like further information about the Fund, including how it invests, please see the Statement of Additional Information.

 

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PRICING OF SHARES

<R>The Fund offers four classes of shares, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Each share class represents an ownership interest in the same investment portfolio. When you choose your class of shares, you should consider the size of your investment and how long you plan to hold your shares. Your financial advisor or other financial intermediary can help you determine which share class is best suited to your personal financial goals.</R>

For example, if you select Class I or Class A shares, you generally pay the Distributor a sales charge at the time of purchase. If you buy Class A shares, you also pay out of Fund assets an ongoing account maintenance fee of 0.25%. You may be eligible for a sales charge reduction or waiver.

Certain financial intermediaries may charge additional fees in connection with transactions in Fund shares. The Investment Adviser, the Distributor or their affiliates may make payments out of their own resources to selected securities dealers and other financial intermediaries for providing services intended to result in the sale of Fund shares or for shareholder servicing activities.

If you select Class B or Class C shares, you will invest the full amount of your purchase price, but you will be subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. In addition, you may be subject to a deferred sales charge when you sell Class B or Class C shares.

The Fund’s shares are distributed by FAM Distributors, Inc., an affiliate of the Investment Adviser.

 

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[ICON]   Account Choices

To better understand the pricing of the Fund’s shares, we have summarized the information below:

	Class I	Class A	Class B	Class C
Availability	Limited to certain investors including: • Current Class I    shareholders • Certain   Retirement Plans • Participants in   certain sponsored   programs • Certain affiliates   of selected   securities dealers   and other financial   intermediaries	Generally available through selected securities dealers and other financial intermediaries.	Generally available through selected securities dealers and other financial intermediaries.	Generally available through selected securities dealers and other financial intermediaries.
Initial Sales Charge?	Yes. Payable at time of purchase. Lower sales charges available for certain larger investments.	Yes. Payable at time of purchase. Lower sales charges available for certain larger investments.	No. Entire purchase price is invested in shares of the Fund.	No. Entire purchase price is invested in shares of the Fund.
Deferred Sales Charge?	No. (May be charged for purchases over $1 million that are redeemed within one year.)	No. (May be charged for purchases over $1 million that are redeemed within one year.)	Yes. Payable if you redeem within six years of purchase.	Yes. Payable if you redeem within one year of purchase.
Account Maintenance and Distribution Fees?	No.	0.25% Account Maintenance Fee. No Distribution Fee.	0.25% Account Maintenance Fee. 0.75% Distribution Fee.	0.25% Account Maintenance Fee. 0.75% Distribution Fee.
Conversion to Class A Shares?	No.	N/A	Yes, automatically after approximately eight years.	No.

 

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<R>Right of Accumulation — permits you to pay the sales charge that would apply to the cost or value (whichever is higher) of all qualifying shares you own in Mercury mutual funds.

Letter of Intent — permits you to pay the sales charge that would be applicable if you add up all qualifying shares of Mercury mutual funds that you agree to buy within a 13-month period. Certain restrictions apply. </R>

Class I and A Shares — Initial Sales Charge Options

If you select Class I or A shares, you will pay a sales charge at the time of purchase as shown in the following table.

Your Investment	As a % of Offering Price	As a % of Your Investment*	Dealer Compensation as a % of Offering Price
Less than $25,000	5.25%	5.54%	5.00%
$25,000 but less   than $50,000	4.75%	4.99%	4.50%
$50,000 but less   than $100,000	4.00%	4.17%	3.75%
$100,000 but less   than $250,000	3.00%	3.09%	2.75%
$250,000 but less   than $1,000,000	2.00%	2.04%	1.80%
$1,000,000 and over**	0.00%	0.00%	0.00%

* Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class I or Class A shares, you may not pay an initial sales charge. In that case, the Investment Adviser compensates the selling dealer from its own resources. If you redeem your shares within one year after purchase, you may be charged a deferred sales charge. This charge is 1.00% of the lesser of the original cost of the shares being redeemed or your redemption proceeds. A sales charge of 0.75% will be charged on purchases of $1,000,000 or more of Class I and Class A shares by certain employer sponsored retirement or savings plans.

No initial sales charge applies to Class I or Class A shares that you buy through reinvestment of dividends.

A reduced or waived sales charge on a purchase of Class I or Class A shares may apply for:

• Purchases under a Right of Accumulation or Letter of Intent

• Certain trusts managed by banks, thrifts or trust companies including those affiliated with the Investment Adviser or its affiliates

• Certain employer-sponsored retirement or savings plans

• Certain investors, including directors or trustees of mutual funds sponsored by the Investment Adviser or its affiliates, employees of the Investment Adviser and its affiliates and employees or customers of selected dealers

 

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[ICON]   Account Choices

• Certain fee-based programs managed by the Investment Adviser or its affiliates and other financial intermediaries that have agreements with the Distributor or its affiliates.

• Certain fee-based programs of selected securities dealers and other financial intermediaries that have an agreement with the Distributor or its affiliates

• Purchases through certain financial advisers that meet and adhere to standards established by the Investment Adviser or its affiliates

• Purchases through certain accounts over which the Investment Adviser or an affiliate exercises investment discretion

Only certain investors are eligible to buy Class I shares, including existing Class I shareholders of the Fund, certain retirement plans and participants in certain programs sponsored by the Investment Adviser or its affiliates. Your financial advisor or financial intermediary can help you determine whether you are eligible to buy Class I shares or to participate in any of these programs.

If you decide to buy shares under the initial sales charge alternative and you are eligible to buy both Class I and Class A shares, you should buy Class I shares since Class A shares are subject to a 0.25% account maintenance fee, while Class I shares are not.

If you redeem Class I or Class A shares and within 30 days buy new shares of the same class, you will not pay a sales charge on the new purchase amount. The amount eligible for this “Reinstatement Privilege” may not exceed the amount of your redemption proceeds. To exercise the privilege, contact your financial advisor, selected securities dealer, or other financial intermediary or contact the Fund’s Transfer Agent at 1-888-763-2260.

Class B and Class C Shares — Deferred Sales Charge Options

If you select Class B or Class C shares, you do not pay an initial sales charge at the time of purchase. However, if you redeem your Class B shares within six years after purchase or Class C shares within one year after purchase, you may be required to pay a deferred sales charge. You will also pay distribution fees of 0.75% and account maintenance fees of 0.25% each year under distribution plans that the Fund has adopted under Rule 12b-1. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying other types of sales charges. The Distributor uses the money that it receives from the deferred sales charge and the distribution fees to cover the costs of marketing, advertising and compensating the financial advisor, selected securities dealer or other financial intermediary who assists you in your decision in purchasing Fund shares.

 

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[ICON]   Account Choices

Class B Shares

If you redeem Class B shares within six years after purchase, you may be charged a deferred sales charge. The amount of the charge gradually decreases as you hold your shares over time, according to the following schedule:

Year Since Purchase	Sales Charge*
0 – 1	4.00%
1 – 2	4.00%
2 – 3	3.00%
3 – 4	3.00%
4 – 5	2.00%
5 – 6	1.00%
6 and thereafter	0.00%

* The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired by dividend reinvestment are not subject to a deferred sales charge. Mercury funds may not all have identical deferred sales charge schedules. If you exchange your shares for the shares of another Mercury fund, the higher charge, if any, would apply.

The deferred sales charge relating to Class B shares may be reduced or waived in certain circumstances, such as:

• Certain post-retirement withdrawals from an IRA or other retirement plan if you are over 591 /2 years old

• Redemption by certain eligible 401(a) and 401(k) plans and certain retirement plan rollovers

• Redemption in connection with participation in certain fee-based programs managed by the Investment Adviser or its affiliates or in connection with involuntary termination of an account in which Fund shares are held

• Redemption in connection with participation in certain fee-based programs managed by selected securities dealers or other financial intermediaries that have agreements with the Distributor or its affiliates

• Withdrawals resulting from shareholder death or disability as long as the waiver request is made within one year after death or disability or, if later, reasonably promptly following completion of probate

• Withdrawal through the Systematic Withdrawal Plan of up to 10% per year of your Class B account value at the time the plan is established

 

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[ICON]   Account Choices

Your Class B shares convert automatically into Class A shares approximately eight years after purchase. Any Class B shares received through reinvestment of dividends paid on converting shares will also convert at that time. Class A shares are subject to lower annual expenses than Class B shares. The conversion of Class B shares to Class A shares is not a taxable event for Federal income tax purposes.

Different conversion schedules may apply to Class B shares of different Mercury mutual funds. If you acquire your Class B shares in an exchange from another fund with a shorter conversion schedule, the Fund’s eight year conversion schedule will apply. If you exchange your Class B shares in the Fund for Class B shares of a fund with a longer conversion schedule, the other fund’s conversion schedule will apply. The length of time that you hold the original and exchanged Class B shares in both funds will count toward the conversion schedule.

The conversion schedule may be modified in certain other cases as well.

Class C Shares

<R>If you redeem Class C shares within one year after purchase, you may be charged a deferred sales charge of 1.00%. The charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. You will not be charged a deferred sales charge when you redeem shares that you acquire through reinvestment of Fund dividends. The deferred sales charge relating to Class C shares may be reduced or waived in connection with involuntary termination of an account in which Fund shares are held, withdrawals through the Systematic Withdrawal Plan and redemptions of Class C shares by certain retirement plans.</R>

Class C shares do not offer a conversion privilege.

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES

<R>The chart on the following pages summarizes how to buy, sell, transfer and exchange shares through your financial advisor, a selected securities dealer, broker, investment adviser, service provider or other financial intermediary. You may also buy, sell, transfer and exchange shares through the Transfer Agent. To learn more about buying shares through the Transfer Agent, call 1-888-763-2260. Because the selection of a mutual fund involves many considerations, your financial advisor or financial intermediary may help you with this decision. The Fund does not issue share certificates.</R>

 

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[ICON]   Account Choices

Because of the high costs of maintaining smaller shareholder accounts, a Fund may redeem the shares in your account (without charging any deferred sales charge) if the net asset value of your account falls below $500 due to redemptions you have made. You will be notified that the value of your account is less than $500 before the Fund makes an involuntary redemption. You will then have 60 days to make an additional investment to bring the value of your account to at least $500 before a Fund takes any action. This involuntary redemption does not apply to retirement plans or Uniform Gifts or Transfers to Minors Act accounts.

 

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[ICON]   Account Choices

If You Want To	Your Choices	Information Important for You to Know
Buy Shares	First, select the share class appropriate for you	Please refer to the pricing of shares table on page 18. Be sure to read this Prospectus carefully.
	Next, determine the amount of your investment	The minimum initial investment for the Fund is $1,000 for all accounts except:   •  $500 for certain fee-based programs   •  $100 for retirement plans (The minimum for initial investments may be waived or reduced under certain circumstances.)
	Have your financial advisor, securities dealer or financial intermediary submit your purchase order	The price of your shares is based on the next calculation of net asset value after your order is placed. Generally, any purchase orders placed prior to the close of business on the New York Stock Exchange (generally, 4:00 p.m. Eastern time) will be priced at the net asset value determined that day. Certain financial intermediaries, however, may require submission of orders prior to that time. Purchase orders placed after that time will be priced at the net asset value determined on the next business day. The Fund may reject any order to buy shares and may suspend the sale of shares at any time. Selected securities dealers or financial intermediaries may charge a fee to process a purchase. For example, the fee charged by Merrill Lynch, Pierce, Fenner & Smith Incorporated is currently $5.35. The fees charged by other securities dealers or financial intermediaries may be higher or lower.
	Or contact the Transfer Agent	To purchase shares directly, call the Transfer Agent at 1-888-763-2260 and request a purchase application. Mail the completed purchase application to the Transfer Agent at the address on the inside back cover of this Prospectus.
Add to Your Investment	Purchase additional shares	The minimum investment for additional purchases is generally $100 for all accounts except:   •  $50 for certain fee-based programs   •  $1 for retirement plans (The minimums for additional purchases may be waived under certain circumstances.)
	Acquire additional shares through the automatic dividend reinvestment plan	All dividends are automatically reinvested without a sales charge.
	Participate in the automatic investment plan	You may invest a specific amount on a periodic basis through your securities dealer or other financial intermediary. The current minimum for such automatic investments is $100. The minimum may be waived or revised under certain circumstances.

 

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[ICON]   Account Choices

If You Want To	Your Choices	Information Important for You to Know
Transfer Shares to Another Securities Dealer or Financial Intermediary	Transfer to a participating securities dealer or financial intermediary	You may transfer your Fund shares to another securities dealer or other financial intermediary if authorized agreements are in place between the Distributor and the transferring securities dealer or financial intermediary and the Distributor and the receiving securities dealer or other financial intermediary. Certain shareholder services may not be available for all transferred shares. You may only purchase additional shares of a fund previously owned before transfer. All future trading of these shares must be coordinated by the receiving securities dealer or other financial intermediary.
	Transfer to a non-participating securities dealer or other financial intermediary	You must either:   •  Transfer your shares to an account with the Transfer      Agent; or   •  Sell your shares, paying any applicable deferred sales      charge.
Sell Your Shares	Have your financial advisor, securities dealer or financial intermediary submit your sales order	The price of your shares is based on the next calculation of net asset value after your order is placed. Generally, for your redemption request to be priced at the net asset value on the day of your request, you must submit your request to your dealer or other financial intermediary prior to that day’s close of business on the New York Stock Exchange (generally 4:00 p.m. Eastern time). Certain financial intermediaries, however, may require submission or orders prior to that time. Any redemption request placed after that time will be priced at the net asset value at the close of business on the next business day. Certain securities dealers or financial intermediaries may charge a fee in connection with a sale of shares. For example, Merrill Lynch, Pierce, Fenner & Smith Incorporated currently charges a fee of $5.35. No processing fee is charged if you redeem shares directly through the Transfer Agent. The fees charged by other securities dealers or financial intermediaries may be higher or lower. The Fund may reject an order to sell shares under certain circumstances.
	Sell through the Transfer Agent	You may sell shares held at the Transfer Agent by writing to the Transfer Agent at the address on the inside back cover of this prospectus. All shareholders on the account must sign the letter. A signature guarantee generally will be required but may be waived in certain limited circumstances. You can obtain a signature guarantee from a bank, securities dealer, securities broker, credit union, savings association, national securities exchange and registered securities association. A notary public seal will not be acceptable. The Transfer Agent will normally mail redemption proceeds within seven days following receipt of a properly completed request. If you make a redemption request before the Fund has collected payment for the purchase of shares, the Fund or the Transfer Agent may delay mailing your proceeds. This delay usually will not exceed ten days. You may also sell shares held at the Transfer Agent by telephone request if the amount being sold is less than $50,000 and if certain other conditions are met. Contact the Transfer Agent at 1-888-763-2260 for details.

 

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[ICON]   Account Choices

If You Want To	Your Choices	Information Important for You to Know
Sell Shares Systematically	Participate in the Fund’s Systematic Withdrawal Plan	You can generally arrange through your selected dealer or financial intermediary for systematic sales of shares of a fixed dollar amount on a monthly, bi-monthly, quarterly, semi-annual or annual basis, subject to certain conditions. Under either method, you must have dividends automatically reinvested. For Class B and Class C shares your total annual withdrawals cannot be more than 10% per year of the value of your shares at the time your plan is established. The deferred sales charge is waived for systematic redemptions. Ask your financial advisor, securities dealer or other financial intermediary for details.
Exchange Your Shares	Select the fund into which you want to exchange. Be sure to read that fund’s prospectus	<R>You can exchange your shares of the Fund for shares of other mutual funds advised by the Investment Adviser or its affiliates or for shares of the Summit Cash Reserves Fund. You must have held the shares used in the exchange for at least 15 calendar days before you can exchange to another fund. Each class of Fund shares is generally exchangeable for shares of the same class of another fund. If you own Class I shares and wish to exchange into a fund in which you have no Class I shares (and you are not eligible to buy Class I shares), you will exchange into Class A shares. If you own Class I or Class A shares and wish to exchange into Summit Cash Reserves Fund, you will exchange into Class A shares of Summit. Class B or Class C shares can be exchanged for Class B shares of Summit Cash Reserves Fund. </R> Some funds may impose a different initial or deferred sales charge schedule. If you exchange Class I or Class A shares for shares of a fund with a higher initial sales charge than you originally paid, you may be charged the difference at the time of exchange. If you exchange Class B or Class C shares for shares of a fund with a different deferred sales charge schedule, the higher schedule will generally apply. The time you hold Class B or Class C shares in both funds will count when determining your holding period for calculating a deferred sales charge at redemption. Your time in both funds will also count when determining the holding period for a conversion from Class B to Class A shares. To exercise the exchange privilege contact your financial advisor, selected securities dealer or other financial intermediary or call the Transfer Agent at 1-888-763-2260. Although there is currently no limit on the number of exchanges that you can make, the exchange privilege may be modified or terminated at any time in the future.

<R>The Fund reserves the right to reject any purchase order, including exchanges. Short-term or excessive trading into and out of the Fund, particularly in larger amounts, may harm performance by disrupting portfolio management strategies and by increasing expenses. Accordingly, the Fund may reject purchase orders, including exchanges, from market timers or investors that Fund management has determined are short-term or excessive or that will be disruptive to the Fund. For these purposes, Fund management may consider an investor’s trading history in the Fund or other funds advised by the Investment Adviser or its affiliates, and accounts under common ownership or control. </R>

 

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<R>Net Asset Value — the market value of the Fund’s total assets after deducting liabilities, divided by the number of shares outstanding.</R>

HOW SHARES ARE PRICED

<R>When you buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates its net asset value (generally by using market quotations) each day the New York Stock Exchange is open as of the close of business on the Exchange based on prices at the time of closing. The Exchange generally closes at 4:00 p.m. Eastern time. If events that are expected to materially affect the value of securities traded in other markets occur between the close of those markets and the close of business on the New York Stock Exchange, those securities may be valued at their fair value. The net asset value used in determining your share price is the next one calculated after your purchase or redemption order is placed. Foreign securities owned by the Funds may trade on weekends or other days when the Fund does not price its shares. As a result, the Fund’s net asset value may change on days when you will not be able to purchase or redeem Fund shares. </R>

The Fund may accept orders from certain authorized financial intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the intermediary or designee and the order will receive the net asset value next computed by the Fund after such acceptance. If payment for a purchase order is not made by a designated later time, the order will be canceled and the financial intermediary could be held liable for any losses.

Generally, Class I shares will have the highest net asset value because that class has the lowest expenses, and Class A shares will have a higher net asset value than Class B or Class C shares. Also, dividends paid on Class I and Class A shares will generally be higher than dividends paid on Class B and Class C shares because Class I and Class A shares have lower expenses.

PARTICIPATION IN FEE-BASED PROGRAMS

If you participate in certain fee-based programs offered by the Investment Adviser, an affiliate of the Investment Adviser, selected securities dealers or other financial intermediaries that have an agreement with the Distributor or its affiliates, you may be able to buy Class I shares at net asset value, including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances.

You generally cannot transfer shares held through a fee-based program into another account. Instead, you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to

 

MERCURY GROWTH OPPORTUNITY FUND 27 

[ICON]   Account Choices

Dividends — ordinary income and capital gains paid to shareholders. Dividends may be reinvested in additional Fund shares as they are paid

distribution and account maintenance fees. This may be a taxable event and you will pay any applicable sales charges.

<R>If you leave one of these programs, your shares may be redeemed or automatically exchanged into another class of the Fund’s shares or into Summit Cash Reserves Fund. The class you receive may be the class you originally owned when you entered the program, or in certain cases, a different class. If the exchange is into Class B shares, the period before conversion to Class A shares may be modified. Any redemption or exchange will be at net asset value. However, if you participate in the program for less than a specified period, you may be charged a fee in accordance with the terms of the program.</R>

Details about these features and the relevant charges are included in the client agreement for each fee-based program and are available from your financial advisor, selected securities dealer or other financial intermediary.

DIVIDENDS AND TAXES

<R>The Fund will distribute net investment income and net realized capital gains, if any, at least annually. The Fund may also pay a special distribution at the end of the calendar year to comply with Federal tax requirements. Dividends may be reinvested automatically in shares of the Fund at net asset value without a sales charge or may be taken in cash. If your account is with a securities dealer that has an agreement with the Fund, contact your financial advisor about which option you would like. If your account is with the Transfer Agent, and you would like to receive dividends in cash, contact the Transfer Agent. Although this cannot be predicted with any certainty, the Fund anticipates that the majority of its dividends, if any, will consist of capital gains. Capital gains may be taxable to you at different rates, depending, in part, on how long the Fund held the assets sold.</R>

You will pay tax on dividends from the Fund whether you receive them in cash or additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares, and any gain on the transaction may be subject to tax. Capital gain dividends are generally taxed at different rates than ordinary income dividends.

If you are neither a lawful permanent resident nor a citizen of the United States or if you are a foreign entity, the Fund’s ordinary income dividends (which include distributions of the excess of net short term capital gains over net long term capital losses) will generally be subject to a 30% US withholding tax, unless a lower treaty rate applies.

 

 28 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   Account Choices

Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.

By law, your dividends and redemption proceeds will be subject to a withholding tax if you have not provided a taxpayer identification number or social security number or if the number you have provided is incorrect.

This section summarizes some of the consequences under current Federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in the Fund under all applicable tax laws.

<R>ELECTRONIC DELIVERY

The Fund is now offering electronic delivery of communications to its shareholders. In order to receive this service, you must register your account and provide us with e-mail information. To sign up for this service, simply access this website http://www.icsdelivery.com/live/ and follow the instructions. When you visit the site, you will obtain a personal identification number (PIN). You will need this PIN should you wish to update your e-mail address, choose to discontinue this service and/or make any other changes to the service. This service is not available for certain retirement accounts at this time. </R>

 

MERCURY GROWTH OPPORTUNITY FUND 29 

[ICON]   The Management Team

MANAGEMENT OF THE FUND

<R>Fund Asset Management, L.P., doing business as Mercury Advisors, the Fund’s Investment Adviser, manages the Fund’s investments under the overall supervision of the Fund’s Board of Directors. The Investment Adviser has the responsibility for making all investment decisions for the Fund. The Investment Adviser has a sub-advisory agreement with Funds Asset Management UK, an affiliate, under which the Investment Adviser may pay a fee for services it receives. For the fiscal year ended January 31, 2003, the Investment Adviser received a fee at the annual rate of 0.65% of the Fund’s average daily net assets.

Mercury Advisors was organized as an investment adviser in 1977 and offers investment advisory services to more than 50 registered investment companies. Funds Asset Management UK was organized as an investment adviser in 1986 and acts as sub-adviser to more than 50 registered investment companies. Mercury Advisors and its affiliates had approximately $442 billion in investment company and other portfolio assets under management as of March 2003. </R>

 

 30 MERCURY GROWTH OPPORTUNITY FUND

[ICON]   The Management Team

FINANCIAL HIGHLIGHTS

The Financial Highlights table is intended to help you understand the Fund’s performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends). The information has been audited by Deloitte & Touche LLP, whose report, along with the Fund’s financial statements, is included in the Fund’s Annual Report, which is available upon request.

<R>
	Class I† For the Year Ended January 31,										Class A† For the Year Ended January 31,
Increase (Decrease) in Net Asset Value:	2003		2002		2001		2000		1999		2003		2002		2001		2000		1999
Per Share Operating Performance:
Net asset value, beginning of year	$13.69		$17.49		$22.01		$18.53		$13.42		$13.61		$17.45		$21.93		$18.51		$13.42
Investment loss — net**	(.09	)	(.05	)	(.05	)	(.01	)	(.06	)	(.11	)	(.08	)	(.12	)	(.07	)	(.10	)
Realized and unrealized gain (loss)    on investments and foreign currency    transactions — net	(4.03	)	(3.32	)	(1.64	)	4.58		5.63		(4.01	)	(3.33	)	(1.61	)	4.58		5.62
Total from investment operations	(4.12	)	(3.37	)	(1.69	)	4.57		5.57		(4.12	)	(3.41	)	(1.73	)	4.51		5.52
Less distributions from realized gain   on investments — net	—		(.43	)	(2.83	)	(1.09	)	(.46	)	—		(.43	)	(2.75	)	(1.09	)	(.43	)
Net asset value, end of year	$9.57		$13.69		$17.49		$22.01		$18.53		$9.49		$13.61		$17.45		$21.93		$18.51
Total Investment Return:*
Based on net asset value per share	(30.09	%)	(19.27	%)	(8.37	%)	25.11	%	42.02	%	(30.27	%)	(19.55	%)	(8.57	%)	24.80	%	41.59	%
Ratios to Average Net Assets:
Expenses	1.56	%	1.30	%	1.31	%	1.36	%	1.56	%	1.82	%	1.56	%	1.55	%	1.62	%	1.80	%
Investment loss — net	(.77	%)	(.33	%)	(.25	%)	(.07	%)	(.39	%)	(1.03	%)	(.58	%)	(.55	%)	(.34	%)	(.64	%)
Supplemental Data:
Net assets, end of year (in thousands)	$2,146		$2,550		$2,142		$939		$582	\	$13,770		$11,847		$10,515		$7,659		$3,700
Portfolio turnover	89.63	%	131.76	%	100.88	%	81.27	%	40.59	%	89.63	%	131.76	%	100.88	%	81.27	%	40.59	%
</R>

* Total investment returns exclude the effects of sales charges.

** Based on average shares outstanding.

† Prior to April 3, 2000, Class I shares were designated as Class A shares, and Class A shares were designated as Class D shares.

 

MERCURY GROWTH OPPORTUNITY FUND 31 

[ICON]   The Management Team

FINANCIAL HIGHLIGHTS (concluded)

<R>
	Class B For the Year Ended January 31,										Class C For the Year Ended January 31,
Increase (Decrease) in Net Asset Value:	2003		2002		2001		2000		1999		2003		2002		2001		2000		1999
Per Share Operating Performance:
Net asset value, beginning of year	$13.25		$17.13		$21.44		$18.26		$13.27		$13.21		$17.09		$21.40		$18.24		$13.26
Investment loss — net†	(.21	)	(.20	)	(.30	)	(.22	)	(.23	)	(.21	)	(.20	)	(.30	)	(.23	)	(.24	)
Realized and unrealized gain (loss)   on investments and foreign currency   transactions— net	(3.88	)	(3.25	)	(1.56	)	4.48		5.54		(3.87	)	(3.25	)	(1.56	)	4.47		5.55
Total from investment operations	(4.09	)	(3.45	)	(1.86	)	4.26		5.31		(4.08	)	(3.45	)	(1.86	)	4.24		5.31
Less distributions from realized gain   on investments — net	—		(.43	)	(2.45	)	(1.08	)	(.32	)	—		(.43	)	(2.45	)	(1.08	)	(.33	)
Net asset value, end of year	$9.16		$13.25		$17.13		$21.44		$18.26		$9.13		$13.21		$17.09		$21.40		$18.24
Total Investment Return:*
Based on net asset value per share	(30.87	%)	(20.16	%)	(9.31	%)	23.76	%	40.41	%	(30.89	%)	(20.20	%)	(9.34	%)	23.68	%	40.39	%
Ratios to Average Net Assets:
Expenses	2.65	%	2.39	%	2.36	%	2.45	%	2.66	%	2.68	%	2.42	%	2.38	%	2.48	%	2.71	%
Investment loss — net	(1.87	%)	(1.42	%)	(1.38	%)	(1.16	%)	(1.50	%)	(1.90	%)	(1.44	%)	(1.41	%)	(1.20	%)	(1.55	%)
Supplemental Data:
Net assets, end of year (in thousands)	$50,933		$85,072		$109,589		$115,216		$69,601		$33,258		$55,039		$69,476		$72,650		$40,710
Portfolio turnover	89.63	%	131.76	%	100.88	%	81.27	%	40.59	%	89.63	%	131.76	%	100.88	%	81.27	%	40.59	%
</R>

* Total investment returns exclude the effects of sales charges.

† Based on average shares outstanding.

 

 32 MERCURY GROWTH OPPORTUNITY FUND

Fund
Mercury Growth Opportunity Fund of
The Asset Program, Inc.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(866-MERCURY)

<R>Investment Adviser
Mercury Advisors
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536<R>

Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011

Sub-Adviser
Funds Asset Management, UK
33 King William Street
London, England
EC4 R9AS

Transfer Agent
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 44062
Jacksonville, Florida 32232-4062
(888-763-2260)

<R>Independent Auditors
Deloitte & Touche LLP
750 College Road East
Princeton, New Jersey 08540<R>

Distributor
FAM Distributors, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

<R>Custodian
The Bank of New York
100 Church Street
New York, New York 10007

Counsel
Sidley Austin Brown & Wood LLP
787 Seventh Avenue
New York, New York 10019-6018</R>

Accounting Services Provider
State Street Bank and Trust Company
500 College Road East
Princeton, New Jersey 08540

 

MERCURY GROWTH OPPORTUNITY FUND

[ICON]   To Learn More

SHAREHOLDER REPORTS

<R>Additional information about the Fund’s investments is available in the Funds’ Annual and Semi-Annual Reports. In the Fund’s Annual Report you will find a discussion of the relevant market conditions and investment strategies that significantly affected the Fund’s performance during its last fiscal year. You may obtain these reports at no cost by calling 1-888-763-2260.</R>

If you hold your Fund shares through a brokerage account or directly at the Transfer Agent, you may receive only one copy of each shareholder report and certain other mailings regardless of the number of Fund accounts you have. If you prefer to receive separate shareholder reports for each account (or if you are receiving multiple copies and prefer to receive only one), call your financial advisor, or other financial intermediary, or write to the Transfer Agent at its mailing address. Include your name, address, tax identification number and brokerage or mutual fund account number. If you have any questions, please call your financial advisor or other financial intermediary or call the Transfer Agent at 1-888-763-2260.

STATEMENT OF ADDITIONAL INFORMATION

The Funds’ Statement of Additional Information contains further information about the Funds and is incorporated by reference (legally considered to be part of this prospectus). You may request a free copy by writing or calling the Fund at Financial Data Services, Inc., P.O. Box 44062, Jacksonville, Florida 32232-4062 or by calling 1-888-763-2260.

Contact your financial advisor or other financial intermediary, or contact the Fund at the telephone number or address indicated above if you have any questions.

Information about the Funds (including the Statement of Additional Information) can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information on the operation of the Public Reference Room. This information is also available on the SEC’s Internet Site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-0102.

You should rely only on the information contained in this Prospectus. No one is authorized to provide you with information that is different from information in this Prospectus.

Investment Company Act File #811-7177.
<R>Code #MF-19094-05-03 </R>
© Fund Asset Management, L.P.

[ICON]MERCURYFUNDS

STATEMENT OF ADDITIONAL INFORMATION

Mercury Growth Opportunity Fund

P.O. Box 9011, Princeton, New Jersey 08543-9011 • Phone No. (888) 763-2260

     <R>The Mercury Growth Opportunity Fund (the “Fund”) is a series of The Asset Program, Inc. (the “Program”), a professionally-managed open-end management investment company organized as a Maryland corporation. The Fund seeks long term capital growth by investing primarily in a portfolio of equity securities of growth companies. There can be no assurance that the investment objective of the Fund will be realized. For more information on the Fund’s investment objective and policies, see “Investment Objective and Policies.”

     The Fund offers four classes of shares, each with a different combination of sales charges, ongoing fees and other features. These alternatives permit an investor to choose the method of purchasing shares that the investor believes is most beneficial given the amount of the purchase, the length of time the investor expects to hold the shares and other relevant circumstances.

     This Statement of Additional Information is not a prospectus and should be read in conjunction with the Prospectus of the Fund, dated May 28, 2003 (the “Prospectus”), which has been filed with the Securities and Exchange Commission (the “Commission”) and can be obtained, without charge, by calling the Fund at 1-888-763-2260 or your financial advisor, or by writing to the address listed above. The Prospectus is incorporated by reference into this Statement of Additional Information, and this Statement of Additional Information is incorporated by reference into the Prospectus. The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference to the Fund’s 2003 Annual Report to shareholders. You may request a copy of the Annual Report or the Prospectus at no charge by calling 1-888-763-2260 between 8:30 a.m. and 5:30 p.m. Eastern time on any business day. </R>

Mercury Advisors — Investment Adviser
FAM Distributors, Inc. — Distributor

The date of this Statement of Additional Information is May 28, 2003.

TABLE OF CONTENTS

<R>
		Page
INVESTMENT OBJECTIVE AND POLICIES		2
	Equity Securities	2
	Debt Securities	3
	Foreign Securities	4
	Derivatives	5
	Convertible Securities	9
	Other Investment Policies and Practices	11
	Suitability	14
	Non-Diversified Status	14
	Investment Restrictions	15
	Portfolio Turnover	16
MANAGEMENT OF THE PROGRAM		16
	Directors and Officers	16
	Compensation of Directors	21
	Management and Advisory Arrangements	22
	Code of Ethics	24
PURCHASE OF SHARES		25
	Initial Sales Charge Alternatives — Class I and Class A Shares	25
	Reduced Initial Sales Charges	27
	Deferred Sales Charge Alternatives — Class B and Class C Shares	28
	Distribution Plans	31
	Limitations on the Payment of Deferred Sales Charges	32
REDEMPTION OF SHARES		33
	Redemption	34
	Repurchase	34
	Reinstatement Privilege — Class I and Class A Shares	35
PRICING OF SHARES		35
	Determination of Net Asset Value	35
	Computation of Offering Price Per Share	37
PORTFOLIO TRANSACTIONS AND BROKERAGE		37
SHAREHOLDER SERVICES		40
	Investment Account	40
	Exchange Privilege	40
	Fee-Based Programs	42
	Retirement and Education Savings Plans	42
	Automatic Investment Plans	43
	Automatic Dividend Reinvestment Plan	43
	Systematic Withdrawal Plan	43
DIVIDENDS AND TAXES		44
	Dividends	44
	Taxes	44
PERFORMANCE DATA		46
GENERAL INFORMATION		48
	Description of Shares	48
	Independent Auditors	48
	Accounting Services Provider	48
	Custodian	48
	Transfer Agent	48
	Legal Counsel	49
	Reports to Shareholders	49
	Shareholder Inquiries	49
	Additional Information	49
FINANCIAL STATEMENTS		50
APPENDIX — LONG TERM AND SHORT TERM OBLIGATION RATINGS		A-1
</R>

INVESTMENT OBJECTIVE AND POLICIES

     <R>The Mercury Growth Opportunity Fund seeks long term growth of capital. The Fund will seek to achieve its investment objective by investing in a portfolio of equity securities placing particular emphasis on companies that have exhibited above-average growth rates in earnings. The investment objective of the Fund is a fundamental policy of the Fund that may not be changed without approval of a majority of the Fund’s outstanding voting securities. The Fund is classified as non-diversified within the meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”)

     The Fund will give particular emphasis to companies that possess above-average growth rates in earnings, resulting from a variety of factors including, but not limited to, above-average growth rates in sales, profit margin improvement, proprietary or niche products or services, leading market shares, and underlying strong industry growth. Fund management believes that companies that possess above-average earnings growth frequently provide the prospect of above-average stock market returns, although such companies tend to have higher relative stock market valuations. Emphasis also will be given to companies having medium to large stock market capitalizations ($500 million or more).

     The Fund may invest up to 20% of its total assets in equity securities of foreign issuers with the foregoing characteristics. Except as otherwise set forth herein, there are no prescribed limits on the geographical allocation of the Fund’s assets. (Purchases of American Depositary Receipts (“ADRs”), however, will not be subject to this restriction.) The Fund may invest in securities of foreign issuers in the form of ADRs, European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. ADRs are receipts typically used by an American bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs are receipts issued in Europe which evidence a similar ownership arrangement. Generally, ADRs, which are issued in registered form, are designed for use in the U.S. securities markets and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradable both in the United States and Europe and are designed for use throughout the world.

     Investment emphasis will be on equities, primarily common stock and, to a lesser extent, securities convertible into common stock. The Fund also may invest in nonconvertible preferred stocks and debt securities during temporary periods as market or economic conditions may warrant. Up to 5% of the Fund’s total assets may be invested in debt securities rated below investment grade (i.e., Ba or lower by Moody’s Investors Service, Inc. (“Moody’s”) or BB or lower by Standard & Poor’s (“S&P”) or Fitch Ratings (“Fitch”)), or which possess, in the judgment of the Investment Adviser, similar credit characteristics. See “Debt Securities — Credit Quality.”

Equity Securities

     The Fund will, except during temporary periods as market or economic conditions may warrant, maintain at least 65% of its total assets invested in equity securities. In purchasing equity securities for the Fund, Fund Asset Management, L.P. (“FAM”), doing business as Mercury Advisors (the “Investment Adviser”) will seek to identify the securities of companies and industry sectors which are expected to provide high total return relative to alternative equity investments. The Fund generally will seek to invest in securities the Investment Adviser believes to be undervalued. Undervalued issues include securities selling at a discount from the price-to-book value ratios and price-earnings ratios computed with respect to the relevant stock market averages. The Fund also may consider as undervalued securities selling at a discount from their historic price-to-book value or price-earnings ratios, even though these ratios may be above the ratios for the stock market averages. Securities offering dividend yields higher than the yields for the relevant stock market averages or higher than such securities’ historic yields may also be considered to be undervalued. The Fund may also invest in the securities of small and emerging growth companies when such companies are expected to provide a higher total return than other equity investments. Such companies are characterized by rapid historical growth rates, above-average returns on equity or special investment value in terms of their products or services, research capabilities or other unique attributes. The Investment Adviser will seek to identify small and emerging growth companies that possess superior management, marketing ability, research and product development skills and sound balance sheets.</R>

     Investment in the securities of small and emerging growth companies involves greater risk than investment in larger, more established companies. Such risks include the fact that securities of small or emerging growth companies may be subject to more abrupt or erratic market movements that larger, more established companies or

 

2

the market average in general. Also, these companies may have limited products lines, markets or financial resources, or they may be dependent on a limited management group.

     There may be periods when market and economic conditions exist that favor certain types of tangible assets as compared to other types of investments.

Debt Securities

     <R>The Fund may invest in debt securities. Debt securities, such as bonds, involve credit risk. This is the risk that the borrower will not make timely payments of principal and interest. The degree of credit risk depends on the issuer’s financial condition and on the terms of the bonds. This risk is minimized to the extent the Fund limits its debt investments to U.S. Government securities. All debt securities, however, are subject to interest rate risk. This is the risk that the value of the security may fall when interest rates rise. In general, the market price of debt securities with longer maturities will go up or down more in response to changes in interest rates than the market price of shorter term securities.</R>

     Portfolio Maturity. The portion of the Fund invested in debt securities is not limited as to the maturities of its portfolio investments. The Investment Adviser may adjust the average maturity of the Fund’s investments from time to time, depending on its assessment of the relative yields available on securities of different maturities and its assessment of future interest rate patterns. Thus, at various times the average maturity of the Fund may be relatively short (from under one year to five years, for example) and at other times may be relatively long (over 10 years, for example).

     <R>Credit Quality. The Fund is authorized to invest up to 5% of its total assets in fixed income securities rated below Ba by Moody’s or BB by S&P or Fitch or in unrated securities that, in the Investment Adviser’s judgment, possess similar credit characteristics (“high yield bonds”). Investment in high yield bonds (which are sometimes referred to as “junk” bonds) involves substantial risk. Investments in high yield bonds will be made only when, in the judgment of the Investment Adviser, such securities provide attractive total return potential, relative to the risk of such securities, as compared to higher quality debt securities. Securities rated BB or lower by S&P or Fitch or Ba or lower by Moody’s are considered by those rating agencies to have varying degrees of speculative characteristics. Consequently, although high yield bonds can be expected to provide higher yields, such securities may be subject to greater market price fluctuations and risk of loss of principal than lower yielding, higher rated fixed income securities. The Fund will not invest in debt securities in the lowest rating categories (CC or lower for S&P or Fitch or Ca or lower for Moody’s) unless the Investment Adviser believes that the financial condition of the issuer or the protection afforded the particular securities is stronger than would otherwise be indicated by such low ratings. See Appendix — “Long Term and Short Term Obligation Ratings” for additional information regarding high yield bonds.</R>

     High yield bonds may be issued by less creditworthy companies or by larger, highly leveraged companies and are frequently issued in corporate restructurings such as mergers and leveraged buyouts. Such securities are particularly vulnerable to adverse changes in the issuer’s industry and in general economic conditions. High yield bonds frequently are junior obligations of their issuers, so that in the event of the issuer’s bankruptcy, claims of the holders of high yield bonds will be satisfied only after satisfaction of the claims of senior security holders. While the high yield bonds in which the portfolios may invest normally do not include securities which, at the time of investment, are in default or the issuers of which are in bankruptcy, there can be no assurance that such events will not occur after the Fund purchases a particular security, in which case the Fund may experience losses and incur costs.

     High yield bonds tend to be more volatile than higher rated fixed income securities so that adverse economic events may have a greater impact on the prices of high yield bonds than on higher rated fixed income securities. Like higher rated fixed income securities, high yield bonds are generally purchased and sold through dealers who make a market in such securities for their own accounts. However, there are fewer dealers in the high yield bond market which may be less liquid than the market for higher rated fixed income securities even under normal economic conditions. Also, there may be significant disparities in the prices quoted for high yield bonds by various dealers. Adverse economic conditions or investor perceptions (whether or not based on economic fundamentals) may impair the liquidity of this market and may cause the prices the Fund receives for its high yield bonds to be reduced, or the Fund may experience difficulty in liquidating a portion of its portfolio. Under such conditions, judgment may play a greater role in valuing certain of the Fund’s securities than in the case of securities trading in a more liquid market.

 

3

Foreign Securities

     The Fund may invest up to 20% of its total assets in companies located in countries other than the United States. As a result, the Fund’s investments may include companies organized, traded or having substantial operations outside the United States. This may expose the Fund to risks associated with foreign investments. Foreign investments involve certain risks not typically involved in domestic investments, including fluctuations in foreign exchange rates, future political and economic developments, different legal systems and the existence or possible imposition of exchange controls or other U.S. or non-U.S. governmental laws or restrictions applicable to such investments. Securities prices in different countries are subject to different economic, financial and social factors. Because the Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of securities in the portfolio and the unrealized appreciation or depreciation of investments insofar as U.S. investors are concerned. Foreign currency exchange rates are determined by forces of supply and demand in the foreign exchange markets. These forces are, in turn, affected by international balance of payments and other economic and financial conditions, government intervention, speculation and other factors. With respect to certain countries, there may be the possibility of expropriation of assets, confiscatory taxation, high rates of inflation, political or social instability or diplomatic developments that could affect investment in those countries. In addition, certain investments may be subject to non-U.S. withholding taxes.

     International Investing in Countries with Smaller Capital Markets. The risks associated with investments in foreign securities discussed above are often heightened for investments in small capital markets.

     There may be less publicly available information about an issuer in a smaller capital market than would be available about a U.S. company, and it may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject. As a result, traditional investment measurements, such as price-earnings ratios, as used in the United States, may not be applicable in certain capital markets.

     Smaller capital markets, while often growing in trading volume, typically have substantially less volume than U.S. markets, and securities in many smaller capital markets are less liquid and their prices may be more volatile than securities of comparable U.S. companies. Brokerage commissions, custodial services, and other costs relating to investment in smaller capital markets are generally more expensive than in the United States. Such markets have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Further, satisfactory custodial services for investment securities may not be available in some countries having smaller capital markets, which may result in the Fund’s incurring additional costs and delays in transporting and custodying such securities outside such countries. Delays in settlement problems could result in temporary periods when Fund assets are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser. There is generally less government supervision and regulation of exchanges, brokers and issuers in countries having smaller capital markets than there are in the United States.

     As a result, Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular country. The Fund may invest in countries in which foreign investors, including Fund management, have had no or limited prior experience.

     Investments in Securities Denominated in Foreign Currencies. The Fund may invest in securities denominated in currencies other than the U.S. dollar. In selecting securities denominated in foreign currencies, the Investment Adviser will consider, among other factors, the effect of movement in currency exchange rates on the U.S. dollar value of such securities. An increase in the value of a currency will increase the total return to the Fund of securities denominated in such currency. Conversely, a decline in the value of the currency will reduce the total return. The Investment Adviser may seek to hedge all or a portion of the Fund’s foreign securities through the use of forward foreign currency contracts, currency options, futures contracts and options thereon or derivative securities. See “Indexed and Inverse Floating Rate Securities,” and “— Options and Futures Transactions” below.

 

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Derivatives

     The Fund may use instruments referred to as Derivatives. Derivatives allow the Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments.

     Hedging. The Fund may use Derivatives for hedging purposes. Hedging is a strategy in which a Derivative is used to offset the risk that other Fund holdings may decrease in value. Losses on the other investment may be substantially reduced by gains on a Derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce or eliminate gains if the market moves in a different manner than anticipated by the Fund or if the cost of the Derivative outweighs the benefit of the hedge. Hedging also involves the risk that changes in the value of the Derivative will not match those of the holdings being hedged as expected by the Fund, in which case any losses on the holdings being hedged may not be reduced.

     The Fund may use the following types of derivative investments and trading strategies:

     <R>Indexed and Inverse Securities. The Fund may invest in securities the potential return of which is based on an index or interest rate. As an illustration, the Fund may invest in a debt security that pays interest based on the current value of an interest rate index, such as the prime rate. The Fund may also invest in a security that returns principal at maturity based on the level of a securities index or a basket of securities, or based on the relative changes of two indices. In addition, the Fund may invest in securities the potential return of which is based inversely on the change in an index or interest rate (that is, a security the value of which will move in the opposite direction of changes to an index or interest rate). For example, the Fund may invest in securities that pay a higher rate of interest when a particular index decreases and pay a lower rate of interest (or do not fully return principal) when the value of the index increases. If the Fund invests in such securities, it may be subject to reduced or eliminated interest payments or loss of principal in the event of an adverse movement in the relevant interest rate, index or indices. Indexed and inverse securities involve credit risk, and certain indexed and inverse securities may involve leverage risk, liquidity risk and currency risk. The Fund may invest in indexed and inverse securities for hedging purposes only or to increase returns. When used for hedging purposes, indexed and inverse securities involve correlation risk. (Furthermore, where such a security includes a contingent liability, in the event of such an adverse movement, the Fund may be required to pay substantial additional margin to maintain the position.) </R>

     Options and Futures Transactions. The Fund may engage in various portfolio strategies to seek to increase its return through the use of listed or over-the-counter (“OTC”) options on its portfolio securities and to hedge its portfolio against adverse movements in the markets in which it invests. The Fund is authorized to write (i.e., sell) covered put and call options on its portfolio securities or securities in which it anticipates investing and purchase put and call options on securities. In addition, the Fund may engage in transactions in stock index options, stock index futures and related options on such futures and may deal in forward foreign exchange transactions and foreign currency options and futures and related options on such futures. Each of these portfolio strategies is described in more detail below. Although certain risks are involved in options and futures transactions, the Investment Adviser believes that, because the Fund will (i) write only covered options on portfolio securities or securities in which they anticipate investing and (ii) engage in other options and futures transactions only for hedging purposes, the options and portfolio strategies of the Fund will not subject it to the risks frequently associated with the speculative use of options and futures transactions. While the Fund’s use of hedging strategies is intended to reduce the volatility of the net asset value of its shares, its net asset value will fluctuate. There can be no assurance that the Fund’s hedging transactions will be effective. Furthermore, the Fund will only engage in hedging activities from time to time and may not necessarily be engaging in hedging activities when movements in the equity or debt markets, interest rates or currency exchange rates occur.

     Writing Covered Options. The Fund is authorized to write (i.e., sell) covered call options on the securities in which it may invest and to enter into closing purchase transactions with respect to certain of such options. A covered call option is an option where a Fund in return for a premium gives another party a right to buy specified securities owned by the Fund at a specified future date and price set at the time of the contract. The principal reason for writing call options is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing covered call options, a Fund gives up the opportunity, while the option is in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, the Fund’s ability to sell the underlying security will be limited while the option is in effect unless the Fund effects

 

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a closing purchase transaction. A closing purchase transaction cancels out the Fund’s position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. Covered call options serve as a partial hedge against the price of the underlying security declining. The Fund may not write covered options on underlying securities exceeding 15% of its total assets.

     The Fund also may write put options which give the holder of the option the right to sell the underlying security to the Fund at the stated exercise price. The Fund will receive a premium for writing a put option which increases the Fund’s return. The Fund writes only covered put options, which means that so long as the Fund is obligated as the writer of the option it will, through its custodian, have deposited and maintained cash, cash equivalents, U.S. Government securities or other high grade liquid debt or equity securities denominated in U.S. dollars or non-U.S. currencies with a securities depository with a value equal to or greater than the exercise price of the underlying securities. By writing a put, the Fund will be obligated to purchase the underlying security at a price that may be higher than the market value of that security at the time of exercise for as long as the option is outstanding. The Fund may engage in closing transactions in order to terminate put options that it has written.

     Purchasing Options. The Fund is authorized to purchase put options to hedge against a decline in the market value of its securities. By buying a put option, the Fund has a right to sell the underlying security at the exercise price, thus limiting the Fund’s risk of loss through a decline in the market value of the security until the put option expires. The amount of any appreciation in the value of the underlying security will be partially offset by the amount of the premium paid for the put option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale transaction, and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out the Fund’s position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. In certain circumstances, the Fund may purchase call options on securities held in its portfolio on which it has written call options or on securities which it intends to purchase. The Fund will not purchase options on securities (including stock index options discussed below) if, as a result of such purchase, the aggregate cost of all outstanding options on securities held by the Fund would exceed 5% of the market value of the Fund’s total assets.

     Stock Index Options. The Fund is authorized to engage in transactions in stock index options. The Fund may purchase or write put and call options on stock indexes to hedge against the risks of market-wide stock price movements in the securities in which the Fund invests. Options on indexes are similar to options on securities, except that on exercise or assignment, the parties to the contract pay or receive an amount of cash equal to the difference between the closing value of the index and the exercise price of the option times a specified multiple. The Fund may invest in stock index options based on a broad market index, e.g., the Standard & Poor’s Composite 500 Index, or on a narrow index representing an industry or market segment, e.g., the AMEX Oil & Gas Index.

     Stock Index Futures and Interest Futures Contracts. The Fund may purchase and sell stock index futures contracts and the interest rate futures contracts, as a hedge against adverse changes in the market value of portfolio securities, as described below. Stock index futures contracts and interest rate futures contracts are herein together referred to as “futures contracts.”

     A futures contract is an agreement between two parties which obligates the purchaser of the futures contract to buy and the seller of a futures contract to sell a financial instrument for a set price on a future date. The terms of a futures contract require either actual delivery of the financial instrument underlying the contract or, in the case of a stock index futures contract, a cash settlement based upon the difference in value of the index between the time the contract was entered into and the time of its settlement. The Fund may effect transactions in stock index futures contracts in connection with the equity securities it invests; the Fund may invest in interest rate futures contracts in connection with the debt securities in which it invests. Transactions by the Fund in futures contracts are subject to limitations as described below under “Restrictions on the Use of Futures Transactions.”

     The Fund may sell futures contracts in anticipation of or during a market decline to attempt to offset the decrease in market value of its securities that might otherwise result. When the Fund is not fully invested in the securities markets and anticipates a significant advance, it may purchase futures in order to gain rapid market exposure. This technique generally will allow the Fund to gain exposure to a market in a manner which is more efficient than purchasing individual securities and may in part or entirely offset increases in the cost of securities in such market that the Fund ultimately purchases. As such purchases are made, an equivalent amount of futures

 

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contracts will be terminated by offsetting sales. The Program does not consider purchases of futures contracts by the Fund to be a speculative practice under these circumstances. It is anticipated that, in a substantial majority of these transactions, the Fund will purchase such securities upon termination of the long futures position, whether the long position is the purchase of a futures contract or the purchase of a call option or the writing of a put option on a future, but under unusual circumstances (e.g., the Fund experiences a significant amount of redemptions), a long futures position may be terminated without the corresponding purchase of securities.

     The Fund also has authority to purchase and write call and put options on futures contracts and stock indexes and in connection with its hedging (including anticipatory hedging) activities. Generally, these strategies are utilized under the same market and market sector conditions (i.e., conditions relating to specific types of investments) in which the Fund enters into futures transactions. The Fund may purchase put options or write call options on futures contracts or stock indexes rather than selling the underlying futures contract in anticipation of a decrease in the market value of its securities. Similarly, the Fund may purchase call options, or write put options on futures contracts or stock indexes, as a substitute for the purchase of such futures contract to hedge against the increased cost resulting from an increase in the market value of securities which the Fund intends to purchase.

     The Fund may engage in options and futures transactions on U.S. and foreign exchanges and in the over-the-counter markets (“OTC options”). In general, exchange-traded contracts are third-party contracts (i.e., performance of the parties’ obligations is guaranteed by an exchange or clearing corporation) with standardized strike prices and expiration dates. OTC options are two-party contracts with prices and terms negotiated by the buyer and seller. See “Restrictions on OTC Options” below for information as to restrictions on the use of OTC options.

     Foreign Currency Hedging. The Fund is authorized to deal in forward foreign exchange among currencies of the different countries in which it will invest and multinational currency units as a hedge against possible variations in the foreign exchange rates among these currencies. Foreign currency hedging is accomplished through contractual agreements to purchase or sell a specified currency at a specified future date (up to one year) and price set at the time of the contract. The Fund’s dealings in forward foreign exchange will be limited to hedging involving either specific transactions or portfolio positions.

     Transaction hedging is the purchase or sale of forward foreign currency with respect to specific receivables or payables of the Fund accruing in connection with the purchase and sale of its portfolio securities, the sale and redemption of shares of the Fund or the payment of dividends by the Fund. Position hedging is the sale of forward foreign currency with respect to portfolio security positions denominated or quoted in such foreign currency. The Fund will not speculate in forward foreign exchange.

     <R>Hedging against a decline in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. Such transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Moreover, it may not be possible for a Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates.</R>

     The Fund also is authorized to purchase or sell listed or OTC foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-U.S. dollar denominated securities owned by the Fund sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. As an illustration, the Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a yen denominated security. In such circumstances, for example, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a “straddle”). By selling such a call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in the relative value of the yen to the dollar. The Investment Adviser believes that “straddles” of the type which may be utilized by the Fund constitute hedging transactions and are consistent with the policies described above.

     Certain differences exist between these foreign currency hedging instruments. Foreign currency options provide the holder thereof the right to buy or sell a currency at a fixed price on a future date. A futures contract on a foreign currency is an agreement between two parties to buy and sell a specified amount of a currency for a set price on a

 

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future date. Futures contracts and options on futures contracts are traded on boards of trade or futures exchanges. The Fund will not speculate in foreign currency options, futures or related options. Accordingly, the Fund will not hedge a currency substantially in excess of the market value of securities which it has committed or anticipates to purchase which are denominated in such currency and, in the case of securities which have been sold by the Fund but not yet delivered, the proceeds thereof in its denominated currency. The Fund is limited regarding potential net liabilities from foreign currency options, futures or related options to no more than 20% of its total assets.

     Restrictions on the Use of Futures Transactions. Regulations of the Commodity Futures Trading Commission (the “CFTC”) applicable to the Fund provide that the futures trading activities described herein will not result in the Fund being deemed a “commodity pool” as defined under such regulations if the Fund adheres to certain restrictions. In particular, the Fund may purchase and sell futures contracts and options thereon (i) for bona fide hedging purposes and (ii) for non-hedging purposes, if the aggregate initial margin and premiums required to establish positions in such contracts and options does not exceed 5% of the liquidation value of the Fund’s holdings, after taking into account unrealized profits and unrealized losses on any such contracts and options. Margin deposits may consist of cash or securities acceptable to the broker and the relevant contract market.

     When the Fund purchases a futures contract, or writes a put option or purchases a call option thereon, an amount of cash and cash equivalents will be deposited in a segregated account in the name of the Fund with the Fund’s custodian so that the amount so segregated, plus the amount of initial and variation margin held in the account of its broker, equals the market value of the futures contract, thereby ensuring that the use of such futures contract is unleveraged.

     Restrictions on OTC Options. The Fund may engage in OTC options, including OTC stock index options, OTC foreign currency options and options on foreign currency futures, only with such banks or dealers which have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million.

     The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures contracts) if, as a result of such transaction, the sum of the market value of OTC options currently outstanding which are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and margin deposits on the Fund’s existing OTC options on futures contracts exceed 15% (10% to the extent required by certain state laws) of the total assets of the Fund taken at market value, together with all other assets of the Fund which are illiquid or are not otherwise readily marketable. However, if the OTC option is sold by the Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is “in-the-money”) (i.e., current market value of the underlying security minus the option’s strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is “in-the-money.” This policy as to OTC options is not a fundamental policy of the Fund and may be amended by the Directors of the Fund without the approval of its shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the Commission staff of its position.

     Risk Factors in Options and Futures Transactions. Utilization of options and futures transactions to hedge the Fund involves the risk of imperfect correlation in movements in the price of options and futures and movements in the price of the securities or currencies which are the subject of the hedge. If the price of the options or futures moves more or less than the price of the hedged securities or currencies, the Fund will experience a gain or loss which will not be completely offset by movements in the price of the subject of the hedge. The successful use of options and futures also depends on the Investment Adviser’s ability to correctly predict price movements in the market involved in a particular options or futures transaction. To compensate for imperfect correlations, the Fund may purchase or sell index options or futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the stock index options or futures contracts. Conversely, the Fund may purchase or sell fewer stock index options or futures contracts if the volatility of the price of the hedged securities is historically less than that of the stock index options or futures contracts. The risk of imperfect correlation generally tends to diminish as the maturity date of the stock index option or futures contract approaches.

 

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     The Fund intends to enter into options and futures transactions, on an exchange or in the over-the-counter market, only if there appears to be a liquid secondary market for such options or futures or, in the case of over-the-counter transactions, the Investment Adviser believes the Fund can receive in each business day at least two independent bids or offers. However, there can be no assurance that a liquid secondary market will exist at any specific time. Thus, it may be possible to close an options or futures position. The inability to close options and futures positions also could have an adverse impact on the Fund’s ability to hedge effectively its portfolio. There is also a risk of loss by the Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom the Fund has an open position in an option, a futures contract or a related option.

     The exchanges on which the Fund intends to conduct options transactions have generally established limitations governing the maximum number of call or put options on the same underlying security or currency (whether or not covered) which may be written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). “Trading limits” are imposed on the maximum number of contracts which any person may trade on a particular trading day. The Investment Adviser does not believe that these trading and position limits will have any adverse impact on the portfolio strategies for hedging the Portfolio’s holdings.

     All options referred to herein and in the Fund’s Prospectus are options issued by the Options Clearing Corporation (the “Clearing Corporation”) which are currently traded on the Chicago Board Options Exchange, American Stock Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange or New York Stock Exchange (“NYSE”). An option gives the purchaser of the option the right to buy, and obligates the writer (seller) to sell the underlying security at the exercise price during the option period. The option period normally ranges from three to nine months from the date the option is written. For writing an option, the Program receives a premium, which is the price of such option on the exchange on which it is traded. The exercise price of the option may be below, equal to, or above the current market value of the underlying security at the time the option is written.

     The writer may terminate its obligation prior to the expiration date of the option by executing a closing purchase transaction which is effected by purchasing on an exchange an option of the same series (i.e., same underlying security, exercise price and expiration date) as the option previously written. Such a purchase does not result in the ownership of an option. A closing purchase transaction ordinarily will be effected to realize a profit on an outstanding call option, to prevent an underlying security from being called, to permit the sale of the underlying security or to permit the writing of a new call option containing different terms on such underlying security. The cost of such a liquidation purchase plus transaction costs may be greater than the premium received upon the original option, in which event the Fund will have incurred a loss in the transaction. An option may be closed out only on an exchange which provides a secondary market for an option of the same series and there is no assurance that a liquid secondary market on an exchange will exist for any particular option. A covered option writer unable to effect a closing purchase transaction will not be able to sell the underlying security until the option expires or the underlying security is delivered upon exercise, with the result that the writer will be subject to the risk of market decline in the underlying security during such period. The Fund will write an option on a particular security only if management believes that a liquid secondary market will exist on an exchange for options of the same series which will permit the Fund to make a closing purchase transaction in order to close out its position.

Convertible Securities

     Convertible securities entitle the holder to receive interest payments paid on corporate debt securities or the dividend preference on a preferred stock until such time as the convertible security matures or is redeemed or until the holder elects to exercise the conversion privilege. Synthetic convertible securities may be either (i) a debt security or preferred stock that may be convertible only under certain contingent circumstances or that may pay the holder a cash amount based on the value of shares of underlying common stock partly or wholly in lieu of a conversion right (a “Cash-Settled Convertible”), (ii) a combination of separate securities chosen by the Investment Adviser in order to create the economic characteristics of a convertible security, i.e., a fixed income security paired with a security with equity conversion features, such as an option or warrant (a “Manufactured Convertible”) or (iii) a synthetic security manufactured by another party.

     The characteristics of convertible securities make them appropriate investments for an investment company seeking a high total return from capital appreciation and investment income. These characteristics include the potential for capital appreciation as the value of the underlying common stock increases, the relatively high yield

 

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received from dividend or interest payments as compared to common stock dividends and decreased risks of decline in value relative to the underlying common stock due to their fixed-income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is generally less than would be the case if the securities were issued in nonconvertible form.

     In analyzing convertible securities, the Investment Adviser will consider both the yield on the convertible security relative to its credit quality and the potential capital appreciation that is offered by the underlying common stock, among other things.

     Convertible securities are issued and traded in a number of securities markets. Even in cases where a substantial portion of the convertible securities held by the Fund are denominated in United States dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. With respect to convertible securities denominated in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate established at the time the security is issued. As a result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which the share price is quoted will affect the value of the convertible security. As described below, the Fund is authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of such fluctuations.

     Apart from currency considerations, the value of convertible securities is influenced by both the yield of nonconvertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield) is sometimes referred to as its “investment value.” To the extent interest rates change, the investment value of the convertible security typically will fluctuate. However, at the same time, the value of the convertible security will be influenced by its “conversion value,” which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the underlying common stock. If, because of a low price of the common stock the conversion value is substantially below the investment value of the convertible security, the price of the convertible security is governed principally by its investment value.

     To the extent the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the price of the convertible security will be influenced principally by its conversion value. A convertible security will sell at a premium over the conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed-income security. The yield and conversion premium of convertible securities issued in Japan and the Euromarket are frequently determined at levels that cause the conversion value to affect their market value more than the securities’ investment value.

     Holders of convertible securities generally have a claim on the assets of the issuer prior to the common stockholders but may be subordinated to other debt securities of the same issuer. A convertible security may be subject to redemption at the option of the issuer at a price established in the charter provision, indenture or other governing instrument pursuant to which the convertible security was issued. If a convertible security held by the Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock or sell it to a third party. Certain convertible debt securities may provide a put option to the holder which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain circumstances.

     As indicated above, synthetic convertible securities may include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled Convertibles are instruments that are created by the issuer and have the economic characteristics of traditional convertible securities but may not actually permit conversion into the underlying equity securities in all circumstances. As an example, a private company may issue a Cash-Settled Convertible that is convertible into common stock only if the company successfully completes a public offering of its common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation. Manufactured Convertibles are created by the Investment Adviser by combining separate securities that possess one of the two principal characteristics of a convertible security, i.e., fixed income (“fixed income component”) or a right to acquire equity securities (“convertibility component”). The fixed income component is achieved by investing in nonconvertible fixed income securities, such as nonconvertible bonds, preferred stocks and money market instruments. The convertibility component is achieved by investing in call options, warrants, or other

 

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securities with equity conversion features (“equity features”) granting the holder the right to purchase a specified quantity of the underlying stocks within a specified period of time at a specified price or, in the case of a stock index option, the right to receive a cash payment based on the value of the underlying stock index.

Other Investment Policies and Practices

     Fixed Income Securities. The Fund is authorized to invest in fixed income securities. To the extent the Fund invests in fixed income securities, the net asset value of its shares will be affected by changes in the general level of interest rates. Typically, when interest rates decline, the value of a portfolio of fixed income securities can be expected to rise. Conversely, when interest rates rise typically the value of a portfolio of fixed income securities can be expected to decline.

     Temporary Investments. For temporary or defensive purposes or in anticipation of redemptions, the Fund is authorized to invest up to 100% of its assets in money market instruments (short term, high quality debt instruments), including obligations of or guaranteed by the U.S. Government or its instrumentalities or agencies, certificates of deposit, bankers’ acceptances and other bank obligations, commercial paper rated in the highest category by a nationally recognized rating agency or other fixed income securities deemed by the Investment Adviser to be consistent with the objectives of the Fund, or the Fund may hold its assets in cash. The obligations of commercial banks may be issued by U.S. banks, foreign branches of U.S. banks (“Eurodollar” obligations) or U.S. branches of foreign banks (“Yankeedollar” obligations). Except during extraordinary periods, the Fund would not expect that such securities or cash held for redemptions would exceed 20% of its total assets.

     Borrowing and Leverage. The Fund may borrow up to 33¹/3% of its total assets, taken at market value, but only from banks as a temporary measure for extraordinary or emergency purposes, including to meet redemptions or to settle securities transactions. The Fund will not purchase securities at any time when borrowings exceed 5% of its total assets, except (a) to honor prior commitments or (b) to exercise subscription rights when outstanding borrowings have been obtained exclusively for settlements of other securities transactions. The purchase of securities while borrowings are outstanding will have the effect of leveraging the Fund. Such leveraging increases the Fund’s exposure to capital risk, and borrowed funds are subject to interest costs that will reduce net income. The use of leverage by the Fund creates an opportunity for greater total return, but, at the same time, creates special risks. For example, leveraging may exaggerate changes in the net asset value of Fund shares and in the yield on the Fund’s portfolio. Although the principal of such borrowings will be fixed, the Fund’s assets may change in value during the time the borrowings are outstanding. Borrowings will create interest expenses for the Fund which can exceed the income from the assets purchased with the borrowings. To the extent the income or capital appreciation derived from securities purchased with borrowed funds exceeds the interest the Fund will have to pay on the borrowings, the Fund’s return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such borrowed funds is not sufficient to cover the cost of borrowing, the return to the Fund will be less than if leverage had not been used, and therefore the amount available for distribution to shareholders as dividends will be reduced. In the latter case, the Investment Adviser in its best judgment nevertheless may determine to maintain the Fund’s leveraged position if it expects that the benefits to the Fund’s shareholders of maintaining the leveraged position will outweigh the current reduced return.

     Certain types of borrowings by the Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage, portfolio composition requirements and other matters. It is not anticipated that observance of such covenants would impede the Investment Adviser from managing the Fund’s portfolio in accordance with the Fund’s investment objectives and policies. However, a breach of any such covenants not cured within the specified cure period may result in acceleration of outstanding indebtedness and require the Fund to dispose of portfolio investments at a time when it may be disadvantageous to do so.

     The Fund at times may borrow from affiliates of the Investment Adviser, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace.

     When Issued Securities, Delayed Delivery Securities and Forward Commitments. The Fund may purchase or sell securities that it is entitled to receive on a when issued basis. The Fund may also purchase or sell securities on a delayed delivery basis. The Fund may also purchase or sell securities through a forward commitment. These transactions involve the purchase or sale of securities by the Fund at an established price with payment and delivery taking place in the future. The Fund enters into these transactions to obtain what is considered an advantageous price to the Fund at the time of entering into the transaction. The Fund has not established any limit on the

 

11

percentage of its assets that may be committed in connection with these transactions. When the Fund purchases securities in these transactions, the Fund segregates liquid securities in an amount equal to the amount of its purchase commitments.

     There can be no assurance that a security purchased on a when issued basis will be issued or that a security purchased or sold through a forward commitment will be delivered. The value of securities in these transactions on the delivery date may be more or less than the Fund’s purchase price. The Fund may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period.

     Warrants. The Fund may invest in warrants, which are securities permitting, but not obligating, the warrant holder to subscribe for other securities. Buying a warrant does not make the Fund a shareholder of the underlying stock. The warrant holder has no right to dividends or votes on the underlying stock. A warrant does not carry any right to assets of the issuer, and for this reason investment in warrants may be more speculative than other equity-based investments.

     Standby Commitment Agreements. The Fund may enter into standby commitment agreements. These agreements commit the Fund, for a stated period of time, to purchase a stated amount of securities which may be issued and sold to that Fund at the option of the issuer. The price of the security is fixed at the time of the commitment. At the time of entering into the agreement the Fund is paid a commitment fee, regardless of whether or not the security is ultimately issued. The Fund will enter into such agreements for the purpose of investing in the security underlying the commitment at a price that is considered advantageous to the Fund. The Fund will not enter into a standby commitment with a remaining term in excess of 45 days and will limit its investment in such commitments so that the aggregate purchase price of securities subject to such commitments, together with the value of portfolio securities subject to legal restrictions on resale that affect their marketability, will not exceed 15% of its net assets taken at the time of the commitment. The Fund segregates liquid assets in an aggregate amount equal to the purchase price of the securities underlying the commitment.

     There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear the risk of a decline in the value of such security and may not benefit from an appreciation in the value of the security during the commitment period.

     The purchase of a security subject to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued, and the value of the security thereafter will be reflected in the calculation of the Fund’s net asset value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee will be recorded as income on the expiration date of the standby commitment.

     Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in securities pursuant to repurchase agreements or purchase and sale contracts. Repurchase agreements and purchase and sale contracts may be entered into only with financial institutions which have capital of at least $50 million or whose obligations are guaranteed by an entity having capital of at least $50 million. Under such agreements, the other party agrees, upon entering into the contract with the Fund, to repurchase the security at a mutually agreed upon time and price in a specified currency, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period, although such return may be affected by currency fluctuations. In the case of repurchase agreements, the prices at which the trades are conducted do not reflect accrued interest on the underlying obligation; whereas, in the case of purchase and sale contracts, the prices take into account accrued interest. Such agreements usually cover sort periods, such as under one week. Repurchase agreements may be construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. In the case of a repurchase agreement, as a purchaser, the Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement; the Fund does not have the right to seek additional collateral in the case of purchase and sale contracts. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the Fund but only constitute collateral for the seller’s obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs or possible losses in connection with disposition of the collateral.

 

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     A purchase and sale contract differs from a repurchase agreement in that the contract arrangements stipulate that securities are owned by the Fund. In the event of a default under such a repurchase agreement or under a purchase and sale contract, instead of the contractual fixed rate, the rate of return to the Fund would be dependent upon intervening fluctuations of the market values of such securities and the accrued interest on the securities. In such event, the Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to perform. The Fund may not invest in repurchase agreements or purchase and sale contracts maturing in more than seven days if such investments, together with the Fund’s other illiquid investments, would exceed 15% of the Fund’s total assets.

     <R>Securities Lending. The Fund may lend securities with a value not exceeding 33¹/3% of its total assets or the limit prescribed by applicable law to banks, brokers and other financial institutions. In return, the Fund receives collateral in cash or securities issued or guaranteed by the U.S. Government, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Fund maintains the ability to obtain the right to vote or consent on proxy proposals involving material events affecting securities loaned. The Fund receives the income on the loaned securities. Where the Fund receives securities as collateral, the Fund receives a fee for its loans from the borrower and does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned, net of any amount rebated to the borrower. As a result, the Fund’s yield may increase. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard time period for settlement of securities transactions. The Fund is obligated to return the collateral to the borrower at the termination of the loan. The Fund could suffer a loss in the event the Fund must return the cash collateral and there are losses on investments made with the cash collateral. In the event the borrower defaults on any of its obligations with respect to a securities loan, a Fund could suffer a loss where there are losses on investments made with the cash collateral or, where the value of the securities collateral falls below the market value of the borrowed securities. The Fund could also experience delays and costs in gaining access to the collateral. The Fund may pay reasonable finder’s, lending agent, administrative and custodial fees in connection with its loans. The Fund has received an exemptive order from the Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) or its affiliates and to retain an affiliate of the Fund as lending agent. </R>

     Illiquid or Restricted Securities. The Fund may invest up to 15% of its net assets in securities that lack an established secondary trading market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may be less than would be obtained for a comparable more liquid security. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of the Fund’s assets in illiquid securities may restrict the ability of the Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute where the Fund’s operations require cash, such as when the Fund redeems shares or pays dividends, and could result in the Fund borrowing to meet short term cash requirements or incurring capital losses on the sale of illiquid investments.

     The Fund may invest in securities that are not registered (“restricted securities”) under the Securities Act of 1933, as amended (the “Securities Act”). Restricted securities may be sold in private placement transactions between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the laws of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To the extent that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the Fund or less than their fair market value. In addition, issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by the Fund are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Certain of the Fund’s investments in private placements may consist of direct investments and may include investments in smaller, less seasoned issuers, which may involve greater risks. These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. In making investments in such securities, the Fund may obtain access to material nonpublic information which may restrict the Fund’s ability to conduct portfolio transactions in such securities.

 

13

     144A Securities. The Fund may purchase restricted securities that can be offered and sold to “qualified institutional buyers” under Rule 144A under the Securities Act. The Directors have determined to treat as liquid Rule 144A securities that are either freely tradable in their primary markets offshore or have been determined to be liquid in accordance with the policies and procedures adopted by the Fund’s Directors. The Directors have adopted guidelines and delegated to the Investment Adviser the daily function of determining and monitoring liquidity of restricted securities. The Directors, however, will retain sufficient oversight and be ultimately responsible for the determinations. Since it is not possible to predict with assurance exactly how this market for restricted securities sold and offered under Rule 144A will continue to develop, the Directors will carefully monitor the Fund’s investments in these securities. This investment practice could have the effect of increasing the level of illiquidity in the Fund to the extent that qualified institutional buyers become for a time uninterested in purchasing these securities.

     <R>Investment in Other Investment Companies. The Fund may invest in other investment companies whose investment objectives and policies are consistent with those of the Fund. In accordance with the Investment Company Act, the Fund may invest up to 10% of its total assets in securities of other investment companies. In addition, under the Investment Company Act the Fund may not own more than 3% of the total outstanding voting stock of any investment company and not more than 5% of the value of the Fund’s total assets may be invested in securities of any investment company. The Fund has received an exemptive order from the Commission permitting it to invest in affiliated registered money market funds and in an affiliated private investment company without regard to such limitations, provided however, that in all cases the Fund’s aggregate investment of cash in shares of such investment companies shall not exceed 25% of the Fund’s total assets at any time. If the Fund acquires shares in investment companies, shareholders would bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of such investment companies (including management and advisory fees). Investments by the Fund in wholly owned investment entities created under the laws of certain countries will not be deemed an investment in other investment companies. </R>

Suitability

     The economic benefit of an investment in the Fund depends upon many factors beyond the control of the Fund, the Investment Adviser and its affiliates. Because of its emphasis on growth securities, the Fund should be considered a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in the Fund will depend on, among other things, such investor’s investment objectives and such investor’s ability to accept the risks associated with investing in growth securities, including the risk of loss of principal.

Non-Diversified Status

     The Fund is classified as non-diversified within the meaning of the Investment Company Act, which means that the Fund is not limited by such Act in the proportion of its assets that it may invest in securities of a single issuer. The Fund’s investments are limited, however, in order to qualify for the special tax treatment afforded regulated investment companies under the Internal Revenue Code of 1986, as amended (the “Code”). See “Taxes.” To qualify, the Fund will comply with certain requirements, including limiting its investments so that at the close of each quarter of the taxable year (i) not more than 25% of the market value of the Fund’s total assets will be invested in the securities of a single issuer and (ii) with respect to 50% of the market value of its total assets, not more than 5% of the market value of its total assets will be invested in the securities of a single issuer, and the Fund will not own more than 10% of the outstanding voting securities of a single issuer. A fund which elects to be classified as “diversified” under the Investment Company Act must satisfy the foregoing 5% and 10% requirements with respect to 75% of its total assets. To the extent that the Fund assumes large positions in the securities of a small number of issuers, the Fund’s net asset value may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.

     <R>For purposes of the diversification requirements set forth above with respect to regulated investment companies, and to the extent required by the Commission, the Fund, as a non-fundamental policy, will consider securities issued or guaranteed by the government of any one foreign country as the obligations of a single issuer. </R>

 

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Investment Restrictions

     The Program has adopted the following restrictions and policies relating to the investment of the Fund’s assets and its activities. The fundamental restrictions set forth below may not be changed with respect to the Fund without the approval of the holders of a majority of the Fund’s outstanding voting securities (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). Unless otherwise provided, all references to the assets of the Fund below are in terms of current market value.

     <R>Under its fundamental investment restrictions, the Fund may not: </R>

     1. Invest more than 25% of its assets, taken at market value, in the securities of issuers in any particular industry (excluding the U.S. Government and its agencies and instrumentalities).

     2. Make investments for the purpose of exercising control or management.

     3. Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies that invest in real estate or interests therein.

     4. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in governmental obligations, commercial paper, pass-through instruments, certificates of deposit, bankers’ acceptances, repurchase agreements or any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the guidelines set forth in the Fund’s Prospectus and Statement of Additional Information, as they may be amended from time to time.

     5. Issue senior securities to the extent such issuance would violate applicable law.

     6. Borrow money, except that (i) the Fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33¹/3% of its total assets (including the amount borrowed), (ii) the Fund may borrow up to an additional 5% of its total assets for temporary purposes, (iii) the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities and (iv) the Fund may purchase securities on margin to the extent permitted by applicable law. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund’s investment policies as set forth in the Fund’s Prospectus and Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when issued and forward commitment transactions and similar investment strategies. The Fund will not purchase securities while borrowings exceed 5% of its assets. The Fund has no present intention to borrow money in amounts exceeding 5% of its assets.

     7. Underwrite securities of other issuers except insofar as the Fund technically may be deemed an underwriter under the Securities Act in selling portfolio securities.

     8. Purchase or sell commodities or contracts on commodities, except to the extent that the Fund may do so in accordance with applicable law and the Fund’s Prospectus and Statement of Additional Information, as they may be amended from time to time, and without registering as a commodity pool operator under the Commodity Exchange Act.

     <R>Under its non-fundamental investment restrictions, which may be changed by the Program’s Board of Directors without shareholder approval, the Fund may not:</R>

     (a) Purchase securities of other investment companies, except to the extent such purchases are permitted by applicable law. As a matter of policy, however, the Fund will not purchase shares of any registered open-end investment company or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G) (the “fund of funds” provisions) of the Investment Company Act, at any time the Fund’s shares are owned by another investment company that is part of the same group of investment companies as the Program.

     (b) Make short sales of securities or maintain a short position, except to the extent permitted by applicable law.

     (c) Invest in securities that cannot be readily resold because of legal or contractual restrictions or that cannot otherwise be marketed, redeemed or put to the issuer or a third party, if at the time of acquisition more than 15% of its net assets would be invested in such securities. This restriction shall not apply to securities that mature within seven days or securities that the Directors of the Program have otherwise determined to be

 

15

liquid pursuant to applicable law. Securities purchased in accordance with Rule 144A under the Securities Act and determined to be liquid by the Program’s Board of Directors are not subject to the limitations set forth in this investment restriction.

     (d) Notwithstanding fundamental investment restriction (6) above, borrow amounts in excess of 10% of its total assets, taken at market value, and then only from banks as a temporary measure for extraordinary or emergency purposes such as redemption of Fund shares. The Fund will not purchase securities while borrowing exceeds 5% (taken at market value) of its total assets.

     <R>If a percentage restriction on the investment or use of assets set forth above is adhered to at the time a transaction is effected, later changes in percentages resulting from changing values will not be considered a violation.

     For purposes of investment restriction 1 above, industry means any one or more of the industry sub-classifications used by one or more widely recognized market indices or ratings group indices, and/or as defined by Fund management. </R>

     The staff of the Commission has taken the position that purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of such transaction, the sum of the market value of OTC options currently outstanding that are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding that were sold by the Fund and margin deposits on the Fund’s existing OTC options on futures contracts exceeds 15% of the net assets of the Fund taken at market value, together with all other Fund assets that are illiquid or are not otherwise readily marketable. However, if the OTC option is sold by the Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is “in-the-money” (i.e., current market value of the underlying securities minus the option’s strike price). The repurchase price with the primary dealers is typically a formula price that is generally based on a multiple of the premium received for the option plus the amount by which the option is “in-the-money.” This policy as to OTC options is not a fundamental policy of the Fund and may be amended by the Directors without the approval of the shareholders. However, the Directors will not change or modify this policy prior to the change or modification by the Commission staff of its position.

<R>Portfolio Turnover</R>

     While the Fund generally does not expect to engage in trading for short term gains, it will effect portfolio transactions without regard to holding period if, in Fund management’s judgement, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry or in general market, economic or financial conditions. The portfolio turnover rate is calculated by dividing the lesser of the Fund’s annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. government securities and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax consequences, such as increased capital gain dividends and/or ordinary income dividends and in correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by the Fund. See “Dividends and Taxes-Taxes.”

MANAGEMENT OF THE PROGRAM

Directors and Officers

     <R>The Directors of the Program consist of eight individuals, seven of whom are not “interested persons” of the Program as defined in the Investment Company Act (the “non-interested Directors”) . The Directors are responsible for the overall supervision of the operations of the Program and perform the various duties imposed on the directors of investment companies by the Investment Company Act.</R>

 

16

     <R>Each non-interested Director is a member of the Program’s Audit Committee (the “Committee”). The principal responsibilities of the Committee are the appointment, compensation and oversight of the Fund’s independent accountants, including the resolution of disagreements regarding financial reporting between the Fund, management and such independent accountants. The Committee’s responsibilities include, without limitation, to (i) review with the independent accountants the arrangements for and scope of annual and special audits and any other services provided by the independent accountants to the Fund; (ii) discuss with the independent accountants certain matters relating to the Fund’s financial statements, including any adjustment to such financial statements recommended by such independent accountants or any other results of any audit; (iii) ensure that the independent accountants submit on a periodic basis a formal written statement with respect to their independence, discuss with the independent accountants any relationships or services disclosed in the statement that may impact the objectivity and independence of the Fund’s independent accountants and recommend that the Board take appropriate action in response thereto to satisfy itself of the independent accountants’ independence; and (iv) consider the comments of the independent accountants with respect to the quality and adequacy of the Fund’s accounting and financial reporting policies and practices and internal controls and Fund management’s responses thereto. The Board has adopted a written charter for the Committee. The Committee also reviews and nominates candidates to serve as non-interested Directors. The Committee generally will not consider nominees recommended by shareholders. The Committee has retained independent legal counsel to assist it in connection with these duties. The Committee met four times during the fiscal year ended January 31, 2003.

     Biographical Information. Certain biographical and other information relating to the non-interested Directors of the Program is set forth below, including their ages, their principal occupations for at least the last five years, the length of the time served, the total number of portfolios overseen in the complex of funds advised by the Investment Adviser and its affiliates, (“Affiliate-advised funds”) and other public directorships.

Name, Address* and Age of Director	Position(s) Held with the Program	Term of Office** and Length of Time Served	Principal Occupation(s)  During Past Five Years	Number of Affiliate-Advised Funds Overseen	Public Directorships
James H. Bodurtha (59)	Director	Director since 2002	Director and Executive Vice President, The China Business Group, Inc., since 1996; Chairman and Chief Executive Officer, China Enterprise Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.	42 registered investment companies consisting of 60 portfolios	None </R>

 

17

<R>
Name, Address* and Age of Director	Position(s) Held with the Program	Term of Office** and Length of Time Served	Principal Occupation(s)  During Past Five Years	Number of Affiliate-Advised Funds Overseen	Public Directorships
Joe Grills (68)	Director	Director since 1994	Member of the Committee of Investment of Employee Benefit Assets of the Association of Financial Professionals (“CIEBA”) since 1986; Member of CIEBA’s Executive Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International Business Machines Corporation (“IBM”) and Chief Investment Officer of IBM Retirement Funds from 1986 until 1993; Member of the Investment Advisory Committee of the State of New York Common Retirement Fund since 1997; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from 1997 to 2000; Director, Duke Management Company since 1992 and Vice Chairman since 1998; Director, LaSalle Street Fund from 1995 to 2001; Director, Kimco Realty Corporation since 1997; Member of The Investment Advisory Committee of The Virginia Retirement System since 1998 and Vice Chairman thereof since 2002; Director, Montpelier Foundation since 1998 and Vice Chairman thereof since 2002; Member of the Investment Committee of the Woodberry Forest School since 2000; Member of the Investment Committee of the National Trust for Historic Preservation since 2000.	42 registered investment companies consisting of 60 portfolios	Kimco Realty Corporation
Herbert I. London (64)	Director	Director since 2002	John M. Olin Professor of Humanities, New York University since 1993 and Professor thereof since 1980; President, Hudson Institute since 1997 and Trustee thereof since 1980; Dean, Gallatin Division of New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson Institute from 1984 to 1985; Director, Damon Corp. from 1991 to 1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner, Hypertech LP since 1996.	42 registered investment companies consisting of 60 portfolios	None </R>

 

18

<R>
Name, Address* and Age of Director	Position(s) Held with the Program	Term of Office** and Length of Time Served	Principal Occupation(s)  During Past Five Years	Number of Affiliate-Advised Funds Overseen	Public Directorships
André F. Perold(51)	Director	Director since 2002	Harvard Business School: George Gund Professor of Finance and Banking since 2000; Sylvan C. Coleman Professor of Financial Management from 1993 to 2000; Trustee, Commonfund from 1989 to 2001; Director, Sanlam Limited since 2001; Director, Genbel Securities Limited and Gensec Bank since 1999; Director, Stockback.com since 2000; Director, Sanlam Investment Management from 1999 to 2001; Director, Bulldogresearch.com from 2000 to 2001; Director, Quantec Limited from 1991 to 1999; Director and Chairman of the Board of UNX, Inc. since 2003.	42 registered investment companies consisting of 60 portfolios	None
Roberta Cooper Ramo(60)	Director	Director since 2002	Shareholder, Modrall, Sperling, Roehl, Harris & Sisk, P.A. since 1993; President, American Bar Association from 1995 to 1996 and Member of the Board of Governors thereof from 1994 to 1997; Shareholder, Poole, Kelly & Ramo, Attorneys at Law, P.C. from 1977 to 1993; Director, Coopers, Inc. since 1999; Director of ECMC Group (provider of services to students, schools and lenders) since 2001; Director, United New Mexico Bank (now Wells Fargo) from 1983 to 1988; Director, First National Bank of New Mexico (now Wells Fargo) from 1975 to 1976.	42 registered investment companies consisting of 60 portfolios	None
Robert S. Salomon, Jr. (66)	Director	Director since 1995	Principal of STI Management (investment adviser) since 1994; Chairman and CEO of Salomon Brothers Asset Management from 1992 until 1995; Chairman of Salomon Brothers equity mutual funds from 1992 until 1995; regular columnist with Forbes Magazine since 1992; Director of Stock Research and U.S. Equity Strategist at Salomon Brothers from 1975 until 1991; Trustee, Commonfund from 1980 to 2001.	42 registered investment companies consisting of 60 portfolios	None
Stephen B. Swensrud(69)	Director	Director since 1994	Chairman of Fernwood Associates (investment adviser) since 1996; Principal, Fernwood Associates (financial consultants) since 1975; Chairman of R.P.P. Corporation (manufacturing company) since 1978; Director of International Mobile Communications, Inc. (telecommunications company) since 1998.	43 registered investment companies consisting of 61 portfolios	None </R>

(footnotes on next page)

 

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<R>(footnotes from previous page)

* The address of each non-interested Director is P.O. Box 9095, Princeton, New Jersey 08543-9095.

** Each Director serves until his or her successor is elected and qualified, or until his or her death or resignation, or removal as provided in the Program’s by-laws or charter or by statute, or until December 31 of the year in which he or she turns 72.

     Certain biographical and other information about the Director who is an officer and an “interested person” of the Program as defined in the Investment Company Act (the “interested Director”) and the other officers of the Program, with respect to the Fund, is set forth below, including their ages, their principal occupations for at least the last five years, the length of time served, the total number of portfolios overseen in Affiliate-advised funds and other public directorships held.

Name, Address* and Age	Position(s) Held with the Program	Term of Office** and Length of Time Served	Principal Occupation(s)  During Past Five Years	Number of Affiliate-Advised Funds Overseen	Public Directorships
Terry K. Glenn (62)***	Director and President	Director*** and President since 1999	President and Chairman of the Affiliate-advised funds since 1999; Chairman of Merrill Lynch Investment Managers (“MLIM”) (Americas Region) from 2000 to 2002; Executive Vice President of Merrill Lynch Investment Managers, L.P. (“MLIM”) and FAM (which terms as used herein include their corporate predecessors) from 1983 to 2000; President of FAM Distributors, Inc. (“FAMD” or the “Distributor” ) from 1986 to 2002, and Director thereof from 1991 to 2002; Executive Vice President and Director of Princeton Services, Inc. (“Princeton Services”) from 1993 to 2002; President of Princeton Administrators, L.P. from 1988 to 2002; Director of Financial Data Services, Inc. from 1985 to 2002.	117 registered investment companies consisting of 161 portfolios	None
Donald C. Burke (42)	Vice President and Treasurer	Vice President Since 1994 and Treasurer since 1999	First Vice President of FAM and MLIM since 1997 and the Treasurer thereof since 1999; Senior Vice President and Treasurer of Princeton Services since 1999; Vice President of FAMD since 1999; Vice President of FAM and MLIM from 1990 to 1997; Director of Taxation of MLIM since 1990.	116 registered investment company consisting of 160 portfolios	None
Lawrence R. Fuller (61)	Vice President and Portfolio Manager	Vice President since 1996	Managing Director of MLIM since 2000; Director (Equities) of MLIM from 1997 to 2000.	3 registered investment company consisting of 4 portfolios	None </R>

 

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<R>
Name, Address* and Age	Position(s) Held with the Program	Term of Office** and Length of Time Served	Principal Occupation(s)  During Past Five Years	Number of Affiliate-Advised Funds Overseen	Public Directorships
Phillip S. Gillespie (39)	Secretary	Secretary Since 2003	First Vice President of MLIM since 2001; Director of MLIM from 2000 to 2001; Vice President of MLIM from 1999 to 2000; Attorney associated with MLIM since 1998; Assistant General Counsel of Chancellor LGT Asset Management Inc. from 1997 to 1998; Senior Counsel and Attorney in the Division of Investment Management and the Office of General Counsel at the U.S. Securities and Exchange Commission from 1993 to 1997.	21 registered investment company consisting of  30 portfolios	None

* The address of each officer is P.O. Box 9011, Princeton, New Jersey 08543-9011.

** Elected by and serves at the pleasure of the Board of Directors of the Program.

*** Mr. Glenn is an “interested person,” as defined in the Investment Company Act, of the Program based on his former positions with FAM, MLIM, FAMD, Princeton Services and Princeton Administrators, L.P.

**** As a Director, Mr. Glenn serves until his successor is elected and qualified or until the earlier of his death or resignation, or removal as provided in the Fund’s by-laws or charter or by statute, or until December 31 of the year in which he turns 72.

     Share Ownership. Information relating to each Director’s share ownership in the Fund and in all registered funds in the family of funds advised by Mercury Advisors and its affiliates that are overseen by the respective Director (“Supervised Funds”) as of December 31, 2002 is set forth in the chart below:

Name	Aggregate Dollar Range  of Equity in the Program	Aggregate Dollar Range of Securities  in All Supervised Funds
Interested Directors:
Terry K. Glenn	None		Over $100,000
Non-Interested Directors:
James H. Bodurtha	None		$50,001 - $100,000
Joe Grills	None		Over $100,000
Herbert I. London	None		Over $100,000
André F. Perold	None		None
Roberta Cooper Ramo	None		$50,001 - $100,000
Robert S. Salomon, Jr.	None		None
Stephen B. Swensrud	None		None

     As of May 9, 2003, the Directors and officers of the Program as a group owned an aggregate of less than 1% of the outstanding shares of the Fund. As of December 31, 2002, none of the non-interested Directors of the Program or their immediate family members owned beneficially or of record any securities in Merrill Lynch & Co., Inc (“ML & Co.”).<R>

Compensation of Directors

     <R>Each non-interested Director receives an aggregate annual retainer of $132,000 for his or her services to Affiliate-advised funds, including the Program. The portion of the annual retainer allocated to each Affiliate-advised fund is determined quarterly based on the relative net assets of each such fund. In addition, each non-interested Director receives a fee per in-person Board meeting attended and per in-person Committee meeting attended. The annual per meeting fees paid to each non-interested Director aggregate $100,000 for all Affiliate-advised funds for which that Director serves and are allocated equally among those funds.</R>

 

21

     <R>The following table sets forth the compensation earned by the non-interested Directors for the fiscal year ended January 31, 2003 and the aggregate compensation paid to them by Affiliate-advised funds for the calendar year ended December 31, 2002.

Name	Compensation from Program	Pension or Retirement Benefits Accrued as Part of Program Expense	Aggregate Compensation from Program and Other Affiliate- Advised Funds(1)
James H. Bodurtha*†	$3,596	None	$276,150
Joe Grills†	$4,196	None	$266,097
Herbert I. London*	$3,596	None	$276,150
André F. Perold*	$3,596	None	$276,150
Roberta Cooper Ramo*	$3,596	None	$276,150
Robert S. Salomon, Jr.	$4,196	None	$255,647
Stephen B. Swensrud	$4,196	None	$315,564
Melvin R. Seiden(2)	$4,196	None	$255,647

</R>

* Ms. Ramo and Messrs. Bodurtha, London and Perold were elected to serve as Directors of the Program on April 15, 2002.<R>

† Co-Chairman of the Committee.

(1) For the number of Affiliate-advised funds from which each Director receives compensation, see the table beginning on page 17.

(2) Retired effective January 1, 2003.

     The Directors of the Program are eligible for waived or reduced sales charges on purchases of Class I shares. See “Purchase of Shares — Reduced Initial Sales Charges — Purchase Privileges of Certain Persons.” </R>

Management and Advisory Arrangements

     Investment Advisory Services. The Investment Adviser provides the Program with investment advisory and management services with respect to the Fund. Subject to the supervision of the Board of Directors, the Investment Adviser is responsible for the actual management of the Fund’s portfolio and reviews the Fund’s holdings in light of its own research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the Investment Adviser. The Investment Adviser performs certain of the other administrative services and provides all the office space, facilities, equipment and necessary personnel for management of the Program.

     <R>Investment Advisory Fee. The Program, on behalf of the Fund, has entered into an investment advisory agreement with the Investment Adviser (the “Investment Advisory Agreement”). As compensation for its services to the Fund, the Investment Adviser receives a fee at the annual rate of 0.65% of the average daily net assets of the Fund.

     Prior to April 3, 2000, MLIM, an affiliate of the Investment Adviser under common control and management with the Investment Adviser, acted as investment adviser to the Fund. The table below sets forth for the periods indicated the total advisory fee paid by the Fund to the Investment Adviser and MLIM.

Fiscal year ended January 31,	Fee Amount
2003	$   810,748
2002	$1,055,233
2001
Investment Adviser	$1,135,466
MLIM	$   219,011

     The Investment Adviser has also entered into a sub-advisory agreement (the “Sub-Advisory Agreement”) with Merrill Lynch Asset Management U.K. Limited, doing business as Funds Asset Management UK (“FAM UK”), pursuant to which the Investment Adviser pays FAM UK a fee for providing investment advisory services to the Investment Adviser with respect to the Fund in an amount to be determined from time to time by the Investment Adviser and FAM UK but in no event in excess of the amount that the Investment Adviser actually receives for providing services to the Fund pursuant to the Investment Advisory Agreement. MLIM, which served as investment adviser to the Fund prior to April 3, 2000, paid no fees to FAM UK under its sub-advisory agreement for the period from February 1, 2000 to April 3, 2000. For the period from April 3, 2000 to January 31, 2001, and for the fiscal years ended January 31, 2002 and 2003, the Investment Adviser paid no fees to FAM UK pursuant to the Sub-Advisory Agreement.</R>

 

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     <R>Payment of Program Expenses. The Investment Advisory Agreement obligates the Investment Adviser to provide investment advisory services and to pay all compensation of and furnish office space for officers and employees of the Fund connected with investment and economic research, trading and investment management of the Fund, as well as the fees of all Directors of the Fund who are affiliated persons of ML & Co. or any of its affiliates. The Fund pays all other expenses incurred in the operation of the Fund, including among other things: taxes, expenses for legal and auditing services, costs of preparing, printing and mailing proxies, stock certificates, shareholder reports, prospectuses and statements of additional information, except to the extent paid by the Distributor; charges of the custodian and the transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal and state securities laws; fees and expenses of unaffiliated Directors; accounting and pricing costs (including the daily calculations of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring expenses; and other expenses properly payable by the Fund. Certain accounting services are provided to the Fund by State Street Bank and Trust Company (“State Street”) pursuant to an agreement between State Street and the Program on behalf of the Fund. The Fund pays a fee for these services. In addition, the Fund reimburses the Investment Adviser for other accounting services. The Distributor will pay certain promotional expenses of the Program incurred in connection with the offering of shares of the Program. Certain expenses will be financed by the Program pursuant to distribution plans in compliance with Rule 12b-1 under the Investment Company Act. See “Purchase of Shares — Distribution Plans.” </R>

     Organization of the Investment Adviser. Fund Asset Management, L.P., doing business as Mercury Advisors, is the Fund’s Investment Adviser. The Investment Adviser is a limited partnership, the partners of which are ML & Co., a financial services holding company and the parent of Merrill Lynch, and Princeton Services. ML & Co. and Princeton Services are “controlling persons” of the Investment Adviser as defined under the Investment Company Act because of their ownership of its voting securities or their power to exercise a controlling influence over its management or policies.

     The following entities may be considered “controlling persons” of FAM UK: Merrill Lynch Europe PLC (FAM UK’s parent), a subsidiary of Merrill Lynch International Holdings, Inc., a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML & Co.

     Duration and Termination. Unless earlier terminated as described herein, the Investment Advisory Agreement and the Sub-Advisory Agreement for the Fund will continue in effect from year to year if approved annually (a) by the Directors of the Program or by a majority of the outstanding shares of the Fund and (b) by a majority of the Directors who are not parties to such contract or interested persons (as defined in the Investment Company Act) of any such party. Such contracts are not assignable and may be terminated without penalty on 60 days’ written notice at the option of either party or by vote of the shareholders of the Fund.

     <R>In connection with its consideration of the Investment Advisory Agreement, the Board reviewed information derived from a number of sources and covering a range of issues. The Board considered the services provided to the Fund by the Investment Adviser under the Investment Advisory Agreement, as well as other services provided by the Investment Adviser and its affiliates under other agreements, and the personnel who provide these services. In addition to investment advisory services, the Investment Adviser and its affiliates provide administrative services, shareholder services, oversight of fund accounting, marketing services, assistance in meeting legal and regulatory requirements, and other services necessary for the operation of the Fund. The Board also considered the Investment Adviser’s costs of providing services, and the direct and indirect benefits to the Investment Adviser from its relationship with the Fund. The benefits considered by the Board included not only the Investment Adviser’s compensation for investment advisory services and the Investment Adviser’s profitability under the Investment Advisory Agreement, but also compensation paid to the Investment Adviser or its affiliates for other, non-advisory, services provided to the Fund. The Directors also considered the Investment Adviser’s access to research services from brokers to which the Investment Adviser may have allocated Fund brokerage in a “soft dollar” arrangement. In connection with its consideration of the Investment Advisory Agreement, the Board also compared the Fund’s advisory fee rate, expense ratios and historical performance to those of comparable funds. Based in part on this comparison, and taking into account the various services provided to the Fund by the Investment Adviser and its affiliates as well as the advisory services required to manage an equity growth portfolio, the Board concluded that the advisory fee rate was reasonable. The Board considered whether there should be changes in the advisory fee rate or structure in order to enable the Fund to participate in any economies of scale that the Investment Adviser may experience as a result of growth in the Fund’s assets.</R>

 

23

     <R>Based on the information reviewed and the discussions, the Board, including a majority of the non-interested Directors, concluded that the investment advisory fee rate was reasonable in relation to the services provided. The non-interested Directors were represented by independent counsel who assisted in their deliberations.

     Transfer Agency Services. Financial Data Services, Inc. (the “Transfer Agent”), a subsidiary of ML & Co., acts as the Fund’s Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the “Transfer Agency Agreement”). Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. The Fund currently pays between $16.00 and $20.00 for each Class I or Class A shareholder account and between $19.00 and $23.00 for each Class B or Class C shareholder account, depending on the level of service required. For purposes of the Transfer Agency Agreement, the term “account” includes a shareholder account maintained directly by the Transfer Agent and any other account representing the beneficial interest of a person in the relevant share class on a recordkeeping system, provided the recordkeeping system is maintained by a subsidiary of ML & Co. </R>

     The table below sets forth information about the total amounts paid by the Fund to the Transfer Agent for the periods indicated.

<R>
	Fiscal year ended January 31,	Transfer Agent Fee*
	2003	$876,571
	2002	$806,873
	2001	$848,773

* For the fiscal year ended January 31, 2001 and the period February 1, 2001 to June 30, 2001, the Fund paid fees to the Transfer Agent at lower rates than the ones currently in effect. If the current rates had been in effect for the periods shown, the fees paid may have been higher. The current rates became effective July 1, 2001.

     Accounting Services. The Program, on behalf of the Fund, has entered into an agreement with State Street, pursuant to which State Street provides certain accounting services to the Fund. The Fund pays a fee for these services. Prior to January 1, 2001 the Investment Adviser provided accounting services to the Fund and was reimbursed by the Fund at its cost in connection with such services. The Investment Adviser continues to provide certain accounting services to the Fund and the Fund reimburses the Investment Adviser for these services.</R>

     The table below shows the amounts paid by the Fund to State Street and the Investment Adviser for accounting services for the periods indicated:<R>

Fiscal year ended January 31,	Paid to State Street		Paid to the Investment Adviser
2003	$67,030		$    4,704
2002	$72,932		$  12,655
2001	$  8,898	*	$233,435

* Represents payments pursuant to the agreement with State Street effective on January 1, 2001.</R>

     Distribution Expenses. The Fund has entered into a distribution agreement with the Distributor in connection with the continuous offering of each class of shares of the Fund (the “Distribution Agreement”). The Distribution Agreement obligates the Distributor to pay certain expenses in connection with the offering of each class of shares of the Fund. After the prospectuses, statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of copies thereof used in connection with the offering to financial intermediaries and potential investors. The Distributor also pays for other supplementary sales literature and advertising costs. The Distribution Agreement is subject to the same renewal requirements and termination provisions as the Investment Advisory Agreement described above.

Code of Ethics

     The Board of Directors of the Program has approved a Code of Ethics under Rule 17j-1 of the Investment Company Act that covers the Program, the Investment Adviser, FAM UK and the Distributor. The Code of Ethics establishes procedures for personal investing and restricts certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased or held by the Fund.

 

24

PURCHASE OF SHARES

     Reference is made to “Account Choices — How to Buy, Sell, Transfer and Exchange Shares” in the Prospectus for certain information as to the purchase of Fund shares.

     <R>The Fund issues four classes of shares: shares of Class I and Class A are sold to investors choosing the initial sales charge alternatives and shares of Class B and Class C are sold to investors choosing the deferred sales charge alternatives. Each Class I, Class A, Class B and Class C share of the Fund represents an identical interest in the investment portfolio of the Fund, and has the same rights, except that Class A, Class B and Class C shares bear the expenses of the ongoing account maintenance fees (also known as service fees) and Class B and Class C shares bear the expenses of the ongoing distribution fees and the additional incremental transfer agency costs resulting from the deferred sales charge arrangements. The contingent deferred sales charges (“CDSCs”), distribution fees and account maintenance fees that are imposed on Class B and Class C shares, as well as the account maintenance fees that are imposed on Class A shares, are imposed directly against those classes and not against all assets of the Fund, and, accordingly, such charges do not affect the net asset value of any other class or have any impact on investors choosing another sales charge option. Dividends paid by the Fund for each class of shares are calculated in the same manner at the same time and differ only to the extent that account maintenance and distribution fees and any incremental transfer agency costs relating to a particular class are borne exclusively by that class. Class A, Class B and Class C shares each have exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted with respect to such class pursuant to which the account maintenance and/or distribution fees are paid (except that Class B shareholders may vote upon any material changes to expenses charged under the distribution plan for Class A shares). Each class has different exchange privileges. See “Shareholder Services — Exchange Privilege.” </R>

     Investors should understand that the purpose and function of the initial sales charges with respect to the Class I and Class A shares are the same as those of the CDSCs and distribution fees with respect to the Class B and Class C shares in that the sales charges and distribution fees applicable to each class provide for the financing of the distribution of the shares of the Fund. The distribution-related revenues paid with respect to a class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes of shares.

     The Fund offers its shares at a public offering price equal to the next determined net asset value per share plus any sales charge applicable to the class of shares selected by the investor. The applicable offering price for purchase orders is based upon the net asset value of the Fund next determined after receipt of the purchase order by the Distributor. As to purchase orders received by securities dealers or other financial intermediaries prior to the close of business on the NYSE (generally 4:00 p.m. Eastern time) which includes orders received after the determination of net asset value on the previous day, the applicable offering price will be based on the net asset value on the day the order is placed with the Distributor, provided that the orders are received by the Distributor prior to 30 minutes after the close of business on the NYSE on that day. If the purchase orders are not received prior to 30 minutes after the close of business on the NYSE on that day, such orders shall be deemed received on the next business day. Dealers or other financial intermediaries have the responsibility of submitting purchase orders to the Fund not later than 30 minutes after the close of business on the NYSE.

     The Fund or the Distributor may suspend the continuous offering of Fund shares of any class at any time in response to conditions in the securities markets or otherwise and may thereafter resume such offering from time to time. Any order may be rejected by the Fund or the Distributor. Neither the Distributor, the securities dealers nor other financial intermediaries are permitted to withhold placing orders to benefit themselves by a price change. Certain securities dealers or other financial intermediaries may charge a processing fee to confirm a purchase of shares. For example, the fee currently charged by Merrill Lynch is $5.35. Purchases made directly through the Transfer Agent are not subject to the processing fee.

Initial Sales Charge Alternatives — Class I and Class A Shares

     Investors who prefer an initial sales charge alternative may elect to purchase Class A shares or, if an eligible investor, Class I shares. Investors choosing the initial sales charge alternatives who are eligible to purchase Class I shares should purchase Class I shares rather than Class A shares because there is an account maintenance fee imposed on Class A shares.

 

25

     Investors qualifying for significantly reduced initial sales charges may find the initial sales charge alternative particularly attractive, because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with purchases of Class B or Class C shares. Investors not qualifying for reduced initial sales charges who expect to maintain their investment for an extended period of time also may elect to purchase Class I or Class A shares, because over time the accumulated ongoing account maintenance and distribution fees on Class B or Class C shares may exceed the initial sales charges and, in the case of Class A shares, the account maintenance fee. Although some investors who previously purchased Class I shares may no longer be eligible to purchase Class I shares of other Affiliated-Advised Funds, those previously purchased Class I shares, together with Class A, Class B and Class C share holdings, will count toward a right of accumulation which may qualify the investor for a reduced initial sales charge on new initial sales charge purchases. In addition, the ongoing Class B and Class C account maintenance and distribution fees will cause Class B and Class C shares to have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing Class A account maintenance fees will cause Class A shares to have a higher expense ratio, pay lower dividends and have a lower total return than Class I shares.

     The term “purchase,” as used in the Prospectus and this Statement of Additional Information in connection with an investment in Class I and Class A shares of the Fund, refers to a single purchase by an individual or to concurrent purchases, which in the aggregate are at least equal to the prescribed amounts, by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his or her or their own account and to single purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary is involved. The term “purchase” also includes purchases by any “company,” as that term is defined in the Investment Company Act, but does not include purchases by any such company that has not been in existence for at least six months or which has no purpose other than the purchase of shares of a Fund or shares of other registered investment companies at a discount; provided, however, that it shall not include purchases by any group of individuals whose sole organizational nexus is that the participants therein are credit cardholders of a company, policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an investment adviser.

     Eligible Class I Investors. The Distributor may reallow discounts to selected dealers or other financial intermediaries and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers or other financial intermediaries. Since securities dealers or other financial intermediaries selling Class I and Class A shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act.

     Class I shares are offered to a limited group of investors and also will be issued upon reinvestment of dividends paid on outstanding Class I shares. Investors who currently own Class I shares in a shareholder account are entitled to purchase additional Class I shares of a Fund in that account. Certain employer-sponsored retirement or savings plans, including eligible 401(k) plans, may purchase Class I shares at net asset value provided such plans meet the required minimum number of eligible employees or required amount of assets advised by the Investment Adviser or any of its affiliates. Also eligible to purchase Class I shares at net asset value are participants in certain investment programs including certain managed accounts for which a trust institution, thrift, or bank trust department provides discretionary trustee services, certain collective investment trusts for which a trust institution, thrift, or bank trust department serves as trustee, certain purchases made in connection with certain fee-based programs and certain purchases made through certain financial advisers that meet and adhere to standards established by the Investment Adviser. In addition, Class I shares are offered at net asset value to ML & Co. and its subsidiaries and their directors and employees, to members of the Boards of Mercury and Affiliate-Advised Funds, including the Fund, and to employees of certain selected dealers. Class I shares may also be offered at net asset value to certain accounts over which the Investment Adviser or an affiliate exercises investment discretion.

 

26

     The following table sets forth information regarding Class I and Class A sales charge information for the Fund.

Class I Shares
For the Fiscal Year Ended January 31,	Gross Sales Charges Collected	Sales Charges Retained by Distributor	Sales Charges Paid to Merrill Lynch	CDSCs Received on Redemption of Load-Waived Shares
2003	$  56	$ 2	$  54	$0
2002	$153	$ 7	$146	$0
2001	$174	$ 8	$166	$0
Class A Shares
For the Fiscal Year Ended January 31,	Gross Sales Charges Collected	Sales Charges Retained by Distributor	Sales Charges Paid to Merrill Lynch	CDSCs Received on Redemption of Load-Waived Shares
2003	$  6,051	$   341	$  5,710	$0
2002	$22,820	$1,018	$21,802	$2
2001	$38,757	$1,917	$36,840	$0

     The Distributor may reallow discounts to selected dealers and financial intermediaries and retain the balance over such discounts. At times the Distributor may reallow the entire sales charge to such dealers and financial intermediaries. Since securities dealers and other financial intermediaries selling Class I and Class A shares of the Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act. </R>

Reduced Initial Sales Charges

     Reductions in or exemptions from the imposition of a sales load are due to the nature of the investors and/or the reduced sales efforts that will be needed to obtain such investments.

     Reinvested Dividends. No initial sales charges are imposed upon Class I and Class A shares issued as a result of the automatic reinvestment of dividends.

     Right of Accumulation. Reduced sales charges are applicable through a right of accumulation under which eligible investors are permitted to purchase shares of the Fund subject to an initial sales charge at the offering price applicable to the total of (a) the public offering price of the shares then being purchased plus (b) an amount equal to the then current net asset value or cost, whichever is higher, of the purchaser’s combined holdings of all classes of shares of the Fund and of other Mercury mutual funds. For any such right of accumulation to be made available, the Distributor must be provided at the time of purchase, by the purchaser or the purchaser’s securities dealer or other financial intermediary, with sufficient information to permit confirmation of qualification. Acceptance of the purchase order is subject to such confirmation. The right of accumulation may be amended or terminated at any time. Shares held in the name of a nominee or custodian under pension, profit-sharing, or other employee benefit plans may not be combined with other shares to qualify for the right of accumulation.

     Letter of Intent. Reduced sales charges are applicable to purchases aggregating $25,000 or more of Class I or Class A shares of the Fund or any other Mercury mutual funds made within a 13-month period starting with the first purchase pursuant to the Letter of Intent. The Letter of Intent is available only to investors whose accounts are established and maintained at the Fund’s Transfer Agent. The Letter of Intent is not available to employee benefit plans for which affiliates of the Investment Adviser provide plan participant record-keeping services. The Letter of Intent is not a binding obligation to purchase any amount of Class I or Class A shares; however, its execution will result in the purchaser paying a lower sales charge at the appropriate quantity purchase level. A purchase not originally made pursuant to a Letter of Intent may be included under a subsequent Letter of Intent executed within 90 days of such purchase if the Distributor is informed in writing of this intent within such 90-day period. The value of Class I and Class A shares of the Fund and of other Mercury mutual funds presently held, at cost or maximum offering price (whichever is higher), on the date of the first purchase under the Letter of Intent, may be included as a credit toward the completion of such Letter, but the reduced sales charge applicable to the amount covered by such Letter will be applied only to new purchases. If the total amount of shares does not equal the amount stated in the Letter of Intent (minimum of $25,000), the investor will be notified and must pay, within

 

27

20 days of the execution of such Letter, the difference between the sales charge on the Class I or Class A shares purchased at the reduced rate and the sales charge applicable to the shares actually purchased through the Letter. Class I or Class A shares equal to 5.0% of the intended amount will be held in escrow during the 13-month period (while remaining registered in the name of the purchaser) for this purpose. The first purchase under the Letter of Intent must be at least 5.0% of the dollar amount of such Letter. If a purchase during the term of such Letter would otherwise be subject to a further reduced sales charge based on the right of accumulation, the purchaser will be entitled on that purchase and subsequent purchases to that further reduced percentage sales charge but there will be no retroactive reduction of the sales charges on any previous purchase.

     The value of any shares redeemed or otherwise disposed of by the purchaser prior to termination or completion of the Letter of Intent will be deducted from the total purchases made under such Letter. An exchange from the Summit Cash Reserves Fund (“Summit”), a series of Financial Institutions Series Trust, into the Fund that creates a sales charge will count toward completing a new or existing Letter of Intent from the Fund.

     Employer-Sponsored Retirement or Savings Plans and Certain Other Arrangements. Certain employer-sponsored retirement or savings plans and certain other arrangements may purchase Class I or Class A shares at net asset value, based on the number of employees or number of employees eligible to participate in the plan, the aggregate amount invested by the plan in specified investments. Certain other plans may purchase Class B shares with a waiver of the CDSC upon redemption, based on similar criteria. Such Class B shares will convert into Class A shares approximately ten years after the plan purchases the first share of any Mercury mutual fund. Minimum purchase requirements may be waived or varied for such plans. For additional information regarding purchases by employer-sponsored retirement or savings plans and certain other arrangements, call your plan administrator or your selected dealer.

     Managed Trusts. Class I shares are offered at net asset value to certain trusts to which trust institutions, thrifts, and bank trust departments provide discretionary trustee services.

     Purchase Privileges of Certain Persons. Directors of the Program, members of the Boards of other investment companies advised by the Investment Adviser or its affiliates, directors and employees of ML & Co. and its subsidiaries (the term “subsidiaries,” when used herein with respect to ML & Co., includes the Investment Adviser, MLIM, and certain other entities directly or indirectly wholly owned and controlled by ML & Co.), employees of certain selected dealers and financial intermediaries, and any trust, pension, profit-sharing or other benefit plan for such persons, may purchase Class I shares of the Fund at net asset value. The Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity of these persons with the Fund. Employees and directors or trustees wishing to purchase shares of the Fund must satisfy the Fund’s suitability standards.

     Class I and Class A shares may also be offered at net asset value to certain accounts over which the Investment Adviser or an affiliate exercises investment discretion.

     Acquisition of Certain Investment Companies. Class A shares may be offered at net asset value in connection with the acquisition of the assets of or merger or consolidation with a personal holding company or a public or private investment company.

     Purchases Through Certain Financial Advisers. Reduced sales charges may be applicable for purchases of Class I or Class A shares of the Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Investment Adviser from time to time.

Deferred Sales Charge Alternatives — Class B and Class C Shares

     Investors choosing the deferred sales charge alternatives should consider Class B shares if they intend to hold their shares for an extended period of time and Class C shares if they are uncertain as to the length of time they intend to hold their assets in Mercury mutual funds.

     Because no initial sales charges are deducted at the time of the purchase, Class B and Class C shares provide the benefit of putting all of the investor’s dollars to work from the time the investment is made. The deferred sales charge alternatives may be particularly appealing to investors that do not qualify for the reduction in initial sales charges. Both Class B and Class C shares are subject to ongoing account maintenance fees and distribution fees; however, the ongoing account maintenance and distribution fees potentially may be offset to the extent any return

 

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is realized on the additional funds initially invested in Class B or Class C shares. In addition, Class B shares will be converted into Class A shares of the Fund after a conversion period of approximately eight years, and thereafter investors will be subject to lower ongoing fees.

     The public offering price of Class B and Class C shares for investors choosing the deferred sales charge alternatives is the next determined net asset value per share without the imposition of a sales charge at the time of purchase. See “Pricing of Shares — Determination of Net Asset Value” below.

     Contingent Deferred Sales Charges — Class B Shares. Class B shares that are redeemed within six years of purchase may be subject to a CDSC at the rates set forth below charged as a percentage of the dollar amount subject thereto. In determining whether a CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest applicable rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over six years or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the six-year period. A transfer of shares from a shareholder’s account to another account will be assumed to be made in the same order as a redemption.

     The following table sets forth the Class B CDSC:

Year Since Purchase Payment Made	CDSC as a Percentage of Dollar Amount Subject to Charge
0 - 1	4.0%
1 - 2	4.0%
2 - 3	3.0%
3 - 4	3.0%
4 - 5	2.0%
5 - 6	1.0%
6 and thereafter	None

     To provide an example, assume an investor purchased 100 shares at $10 per share (at a cost of $1,000) and in the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not be subject to a CDSC because they were issued through dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 3.0% (the applicable rate in the third year after purchase).

     As discussed in the Prospectus under “Account Choices — Pricing of Shares — Class B and C Shares — Deferred Sales Charge Options,” while Class B shares redeemed within six years of purchase are subject to a CDSC under most circumstances, the charge may be reduced or waived in certain instances. These include certain post-retirement withdrawals from an individual retirement account (“IRA”) or other retirement plan or redemption of Class B shares in certain circumstances following the death of a Class B shareholder. In the case of such withdrawal, the reduction or waiver applies to: (a) any partial or complete redemption in connection with a distribution following retirement under a tax-deferred retirement plan on attaining age 591/2 in the case of an IRA or other retirement plan, or part of a series of equal periodic payments (not less frequently than annually) made for life (or life expectancy) or any redemption resulting from the tax-free return of an excess contribution to an IRA (certain legal documentation may be required at the time of liquidation establishing eligibility for qualified distribution); or (b) any partial or complete redemption following the death or disability (as defined in the Internal Revenue Code of 1986, as amended (the “Code”)) of a Class B shareholder (including one who owns the Class B shares as joint tenant with his or her spouse), provided the redemption is requested within one year of the death or initial determination of disability, or if later, reasonably promptly following completion of probate or in connection with involuntary termination of an account in which Fund shares are held (certain legal documentation may be required at the time of liquidation establishing eligibility for qualified distribution).

 

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     The change may also be reduced or waived in other instances, such as: (a) redemptions by certain eligible 401(a) and 401(k) plans and certain retirement plan rollovers; (b) redemptions in connection with participation in certain fee-based programs managed by the Investment Adviser or its affiliates; (c) redemptions in connection with participation in certain fee-based programs managed by selected dealers that have agreements with the Investment Adviser; or (d) withdrawals through the Systematic Withdrawal Plan of up to 10% per year of your account value at the time the plan is established. See “Shareholder Services — Fee-Based Programs” and “— Systematic Withdrawal Plan.”

     <R>Class B shareholders of the Fund exercising the exchange privilege described under “Shareholder Services — Exchange Privilege” will continue to be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares acquired as a result of the exchange. </R>

     Conversion of Class B Shares to Class A Shares. After approximately eight years (the “Conversion Period”), Class B shares of the Fund will be converted automatically into Class A shares of that Fund. Class A shares are subject to an ongoing account maintenance fee of 0.25% of the average daily net assets of a Fund but are not subject to the distribution fee that is borne by Class B shares. Automatic conversion of Class B shares into Class A shares will occur at least once each month (on the “Conversion Date”) on the basis of the relative net asset value of the shares of the two classes on the Conversion Date, without the imposition of any sales load, fee or other charge. Conversion of Class B shares to Class A shares will not be deemed a purchase or sale of the shares for Federal income tax purposes.

     In addition, shares purchased through reinvestment of dividends on Class B shares also will convert automatically to Class A shares. The Conversion Date for dividend reinvestment shares will be calculated taking into account the length of time the shares underlying such dividend reinvestment shares were outstanding. If at the Conversion Date the conversion of Class B shares to Class A shares of the Fund in a single account will result in less than $50 worth of Class B shares being left in the account, all of the Class B shares of the Fund held in the account on the Conversion Date will be converted to Class A shares of the Fund.

     The Conversion Period may be modified for investors that participate in certain fee-based programs. See “Shareholder Services — Fee-Based Programs.”

     <R>Contingent Deferred Sales Charges — Class C Shares. Class C shares that are redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto. In determining whether a Class C CDSC is applicable to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases in net asset value above the initial purchase price. In addition, no Class C CDSC will be assessed on shares derived from reinvestment of dividends. It will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A transfer of shares from a shareholder’s account to another account will be assumed to be made in the same order as a redemption. The Class C CDSC may be waived in connection with involuntary termination of an account in which Fund shares are held, withdrawals through the Systematic Withdrawal Plans and redemption of Class C shares by certain retirement plans. See “Shareholder Services — Systematic Withdrawal Plan.” </R>

Class B and Class C Sales Charge Information.

Class B Shares*
For the Fiscal Year Ended January 31,	CDSCs Received by Distributor	CDSCs Paid to Merrill Lynch
2003	$157,317	$157,317
2002	$156,717	$156,717
2001	$214,319	$214,319

* Additional Class B CDSCs payable to the Distributor may have been waived or converted to a contingent obligation in connection with a shareholder’s participation in certain fee-based programs.</R>

 

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<R>
	Class C Shares
	For the Fiscal Year Ended January 31,	CDSCs Received by Distributor	CDSCs Paid to Merrill Lynch
	2003	$10,709	$10,709
	2002	$10,279	$10,279
	2001	$21,850	$21,850

     Proceeds from the CDSC and the distribution fee are paid to the Distributor and are used in whole or in part by the Distributor to defray the expenses of securities dealers and other financial intermediaries (including Merrill Lynch) related to providing distribution-related services to the Fund in connection with the sale of the Class B and Class C shares, such as the payment of compensation to financial advisors for selling Class B and Class C shares from a dealer’s own funds. The combination of the CDSC and the ongoing distribution fee facilitates the ability of the Fund to sell the Class B and Class C shares without a sales charge being deducted at the time of purchase. See “Distribution Plans” below. Imposition of the CDSC and the distribution fee on Class B and Class C shares is limited by the NASD asset-based sales charge rule. See “Limitations on the Payment of Deferred Sales Charges” below. </R>

Distribution Plans

     Reference is made to “Account Choices — Pricing of Shares” in the Prospectus for certain information with respect to separate distribution plans for Class A, Class B, and Class C shares pursuant to Rule 12b-1 under the Investment Company Act (each a “Distribution Plan”) with respect to the account maintenance and/or distribution fees paid by the Funds to the Distributor with respect to such classes.

     The Distribution Plan for each of the Class A, Class B and Class C shares provides that the Fund pays the Distributor an account maintenance fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets of the Fund attributable to shares of the relevant class in order to compensate the Distributor, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) in connection with account maintenance activities with respect to Class A, Class B and Class C shares. Each of those classes has exclusive voting rights with respect to the Distribution Plan adopted with respect to such class pursuant to which account maintenance and/or distribution fees are paid (except that Class B shareholders may vote on any material changes to expenses charged under the Class A Distribution Plan).

     The Distribution Plans for Class B and Class C shares provide that the Fund also pays the Distributor a distribution fee relating to the shares of the relevant class, accrued daily and paid monthly, at the annual rate of 1.00% of the average daily net assets of the Fund attributable to the shares of the relevant class in order to compensate the Distributor, a selected securities dealer or other financial intermediary (pursuant to a sub-agreement) for providing shareholder and distribution services, and bearing certain distribution-related expenses of the Fund, including payments to financial advisors or other financial intermediaries for selling Class B and Class C shares of the Fund. The Distribution Plans relating to Class B and Class C shares are designed to permit an investor to purchase Class B and Class C shares through selected securities dealers or other financial intermediaries, without the assessment of an initial sales charge, and at the same time compensate the dealer and financial intermediaries to compensate its financial advisors, selected securities dealers or other financial intermediaries in connection with the sale of the Class B and Class C shares.

     The Fund’s Distribution Plans are subject to the provisions of Rule 12b-1 under the Investment Company Act. In their consideration of each Distribution Plan, the Directors must consider all factors they deem relevant, including information as to the benefits of each Distribution Plan to the Fund and the related class of shareholders. Each Distribution Plan further provides that, so long as the Distribution Plan remains in effect, the selection and nomination of non-interested Directors shall be committed to the discretion of the non-interested Directors then in office. In approving each Distribution Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is reasonable likelihood that such Distribution Plan will benefit the Fund and its related class of shareholders. Each Distribution Plan can be terminated at any time, without penalty, by the vote of a majority of the non-interested Directors or by the vote of the holders of a majority of the outstanding related class of voting securities of the Fund. A Distribution Plan cannot be amended to increase materially the amount to be spent by the Fund without the approval of the related class of shareholders, and all material amendments

 

31

are required to be approved by the vote of Directors, including a majority of the non-interested Directors who have no direct or indirect financial interest in such Distribution Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further requires that the Fund preserve copies of its Distribution Plans and any report made pursuant to such plan for a period of not less than six years from the date of such Distribution Plan or such report, the first two years in an easily accessible place.

     <R>Among other things, each Distribution Plan provides that the Distributor shall provide and the Directors shall review quarterly reports of the disbursement of the account maintenance and/or distribution fees paid to the Distributor. Payments under the Distribution Plans are based on a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred and, accordingly, distribution-related revenues from each Distribution Plan may be more or less than distribution-related expenses of the related class. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their consideration quarterly, and, in connection with their deliberations as to the continuance of the Class B and Class C Distribution Plans, annually. Distribution-related revenues consist of the account maintenance fees, distribution fees and the CDSCs. Distribution-related expenses consist of financial advisor compensation, branch office and regional operation center selling and transaction processing expenses, advertising, sales promotion and marketing expenses, and interest expense.

     As of January 31, 2003, direct cash distribution revenues for the period since the commencement of operations of Class B shares exceeded direct cash distribution expenses by $3,562,126 (6.99% of Class B net assets at that date). As of January 31, 2003, direct cash distribution revenues for the period since the commencement of operations of Class C shares exceeded direct cash distribution expenses by $1,952,381 (5.86% of Class C net assets at that date).

     For the fiscal year ended January 31, 2003, the Fund paid the Distributor $33,138 pursuant to the Class A Distribution Plan (based on the average net assets subject to such Class A Distribution Plan of approximately $13.3 million), all of which was paid to Merrill Lynch for providing account maintenance activities in connection with Class A shares. For the fiscal year ended January 31, 2003, the Fund paid the Distributor $662,705 pursuant to the Class B Distribution Plan (based on the average net assets subject to such Class B Distribution Plan of approximately $66.3 million), all of which was paid to Merrill Lynch for providing account maintenance and distribution related activities and services in connection with Class B shares. For the fiscal year ended January 31, 2003, the Fund paid the Distributor $428,919 pursuant to the Class C Distribution Plan (based on the average net assets subject to such Class C Distribution Plan of approximately $42.9 million), all of which was paid to Merrill Lynch for providing account maintenance and distribution related activities and services in connection with Class C shares. </R>

Limitations on the Payment of Deferred Sales Charges

     The maximum sales charge rule in the Conduct Rules of the NASD imposes a limitation on certain asset-based sales charges such as the distribution fee and the CDSC borne by the Class B and Class C shares, but not the account maintenance fee. The maximum sales charge rule is applied separately to each class. As applicable to the Fund, the maximum sales charge rule limits the aggregate of distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of Class B shares and Class C shares, computed separately (defined to exclude shares issued pursuant to dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment of the distribution fee and the CDSC). In connection with the Class B shares, the Distributor has voluntarily agreed to waive interest charges on the unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the maximum amount payable to the Distributor (referred to as the “voluntary maximum”) in connection with the Class B shares is 6.75% of eligible gross sales. The Distributor retains the right to stop waiving the interest charges at any time. To the extent payments would exceed the voluntary maximum, the Fund will not make further payments of the distribution fee with respect to Class B shares and any CDSCs will be paid to the Fund rather than to the Distributor; however, the Fund will continue to make payments of the account maintenance fee. In certain circumstances the amount payable pursuant to the voluntary maximum may exceed the amount payable under the NASD formula. In such circumstance payment in excess of the amount payable under the NASD formula will not be made.

 

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     <R>The following table sets forth comparative information as of January 31, 2003 with respect to the Class B and Class C shares indicating the maximum allowable payments that can be made under the NASD maximum sales charge rule and, with respect to the Class B shares, the Distributor’s voluntary maximum for the periods indicated.

	Data Calculated as of January 31, 2003 (In thousands)
	Eligible Gross Sales(1)	Aggregate Sales Charges(2)	Allowable Interest on Unpaid Balance(3)	Maximum Amount Payable	Amounts Previously Paid to Distributor(4)	Aggregate Unpaid Balance	Annual Distribution Fee at Current Net Asset Level(5)
Class B Shares, for the   period February 2, 1996   (commencement of operations)   to January 31, 2003
Under NASD Rule as   Adopted	$107,745	$6,729	$1,602	$8,330	$4,158	$4,172	$403
Under Distributor’s    Voluntary Waiver	$107,745	$6,729	$   544	$7,273	$4,158	$3,114	$403
Class C Shares, for the   period February 2, 1996   (commencement of operations)   to January 31, 2003
Under NASD Rule as   Adopted	$  87,635	$5,476	$1,394	$6,869	$2,103	$4,767	$263

</R>

(1) Purchase price of all eligible Class B or Class C shares sold during the periods indicated other than shares acquired through dividend reinvestment and the exchange privilege.

(2) Includes amounts attributable to exchanges from Summit that are not reflected in Eligible Gross Sales. Shares of Summit can only be purchased by exchange from another fund (the “redeemed fund”). Upon such an exchange, the maximum allowable sales charge payment to the redeemed fund is reduced in accordance with the amount of the redemption. This amount is then added to the maximum allowable sales charge payment with respect to Summit. Upon an exchange out of Summit, the remaining balance of this amount is deducted from the maximum allowable sales charge payment to Summit and added to the maximum allowable sales charge payment to the fund into which the exchange is made.

(3) Interest is computed on a monthly basis based upon the prime rate, as reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD Rule.

(4) Consists of CDSC payments, distribution fee payments and accruals. See “Fund Facts — Fees and Expenses” in the Prospectus. This figure may include CDSCs that were deferred when a shareholder redeemed shares prior to the expiration of the applicable CDSC period and invested the proceeds, without the imposition of a sales charge, in class A shares in conjunction with the shareholder’s participation in the MFA Program. The CDSC is booked as a contingent obligation that may be payable if the shareholder terminates participation in the MFA Program.

(5) Provided to illustrate the extent to which the current level of distribution fee payments (not including any CDSC payments) is amortizing the unpaid balance. No assurance can be given that payments of the distribution fee will reach either the voluntary maximum (with respect to Class B shares) or the NASD maximum (with respect to Class B and Class C shares).

REDEMPTION OF SHARES

     Reference is made to “Account Choices — How to Buy, Sell, Transfer and Exchange Shares” in the Prospectus.

     The Fund is required to redeem for cash all shares upon receipt of a written request in proper form. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. Except for any CDSC that may be applicable, there will be no charge for redemption if the redemption request is sent directly to the Transfer Agent. Shareholders liquidating their holdings will receive upon redemption all dividends reinvested through the date of redemption.

     The right to redeem shares or to receive payment with respect to any such redemption may be suspended for more than seven days only for any period during which trading on the NYSE is restricted as determined by the Commission or during which the NYSE is closed (other than customary weekend and holiday closings), for any period during which an emergency exists, as defined by the Commission, as a result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably practicable, and for such other periods as the Commission may by order permit for the protection of shareholders.

     The value of shares of the Fund at the time of redemption may be more or less than the shareholder’s cost, depending in part on the market value of the securities held by the Fund at such time.

 

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     The Fund has entered into a joint committed line of credit with other investment companies advised by the Investment Adviser and its affiliates and a syndicate of banks that is intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from Fund shareholders in extraordinary or emergency circumstances.

Redemption

     A shareholder wishing to redeem shares held with the Transfer Agent may do so without charge by tendering the shares directly to the Fund’s Transfer Agent, Financial Data Services, Inc., P.O. Box 44062, Jacksonville, Florida 32232-4062. Redemption requests delivered other than by mail should be delivered to Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of shares deposited with the Transfer Agent may be accomplished by a written letter requesting redemption. Redemption requests should not be sent to the Program or the Fund. A redemption request in either event requires the signature(s) of all persons in whose name(s) the shares are registered, signed exactly as such name(s) appear(s) on the Transfer Agent’s register. The signature(s) on the redemption request may require a guarantee by an “eligible guarantor institution” as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), the existence and validity of which may be verified by the Transfer Agent through the use of industry publications. In the event a signature guarantee is required, notarized signatures are not sufficient. In general, signature guarantees are waived on redemptions of less than $50,000 as long as the following requirements are met: (i) all requests require the signature(s) of all persons in whose name(s) shares are recorded on the Transfer Agent’s register; (ii) all checks must be mailed to the stencil address of record on the Transfer Agent’s register and (iii) the stencil address must not have changed within 30 days. Certain rules may apply regarding certain account types such as but not limited to UGMA/UTMA accounts, Joint Tenancies With Rights of Survivorship, contra broker transactions and institutional accounts. In certain instances, the Transfer Agent may require additional documents such as, but not limited to, trust instruments, death certificates, appointments as executor or administrator, or certificates of corporate authority.

     A shareholder may also redeem shares held with the Transfer Agent by telephone request. To request a redemption from your account, call the Transfer Agent at 1-800-763-2260. The request must be made by the shareholder of record and be for an amount less than $50,000. Before telephone requests will be honored, signature approval from all shareholders of record on the account must be obtained. The shares being redeemed must have been held for at least 15 days. Telephone redemption requests will not be honored in the following situations: the accountholder is deceased, the proceeds are to be sent to someone other than the shareholder of record, funds are to be wired to the client’s bank account, a systematic withdrawal plan is in effect, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced, the address on the account has changed within the last 30 days or share certificates have been issued on the account.

     Since this account feature involves a risk of loss from unauthorized or fraudulent transactions, the Transfer Agent will take certain precautions to protect your account from fraud. Telephone redemption may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time.

     For shareholders redeeming directly with the Transfer Agent, payments will generally be mailed within seven days of receipt of a proper notice of redemption. At various times the Fund may be requested to redeem shares for which it has not yet received good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank). The Fund may delay or cause to be delayed the mailing of a redemption check until such time as good payment (e.g., cash, Federal funds or certified check drawn on a U.S. bank) has been collected for the purchase of such Fund shares, which will not usually exceed 10 days. In the event that a shareholder account held directly with the Transfer Agent contains a fractional share balance, such fractional share balance will be automatically redeemed by the Fund.

Repurchase

     The Fund also will repurchase its shares through a selected securities dealer or other financial intermediary. The Fund normally will accept orders to repurchase shares by wire or telephone from dealers for their customers at the net asset value next computed after the order is placed. Shares will be priced at the net asset value calculated on the day the request is received, provided that the request for repurchase is submitted to the selected

 

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securities dealer or other financial intermediary prior to the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) and such request is received by the Fund from such selected securities dealer or other financial intermediary not later than 30 minutes after the close of business on the NYSE on the same day.

     Dealers have the responsibility of submitting such repurchase requests to the Fund not later than 30 minutes after the close of business on the NYSE in order to obtain that day’s closing price.

     The foregoing repurchase arrangements are for the convenience of shareholders and do not involve a charge by the Fund (other than any applicable CDSC). Securities firms that do not have selected dealer agreements with the Distributor, however, may impose a transaction charge on the shareholder for transmitting the notice of repurchase to the Fund. Certain securities dealers or other financial intermediaries may charge a processing fee to confirm a repurchase of shares. For example, the fee currently charged by Merrill Lynch is $5.35. Fees charged by other securities dealers may be higher or lower. Repurchases made through the Fund’s Transfer Agent, on accounts held at the Transfer Agent, are not subject to the processing fee. The Fund reserves the right to reject any order for repurchase, which right of rejection might adversely affect shareholders seeking redemption through the repurchase procedure. A shareholder whose order for repurchase is rejected by the Fund, however, may redeem Fund shares as set forth above.

Reinstatement Privilege — Class I and Class A Shares

     Shareholders of the Fund who have redeemed their Class I and Class A shares have a privilege to reinstate their accounts by purchasing Class I or Class A shares, as the case may be, at net asset value without a sales charge up to the dollar amount redeemed. The reinstatement privilege may be exercised by sending a notice of exercise along with a check for the amount to be reinstated to the Transfer Agent within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. Alternatively, the reinstatement privilege may be exercised through the investor’s financial advisor within 30 days after the date the request for redemption was accepted by the Transfer Agent or the Distributor. The reinstatement will be made at the net asset value per share next determined after the notice of reinstatement is received and cannot exceed the amount of the redemption proceeds.

PRICING OF SHARES

Determination of Net Asset Value

     Reference is made to “Account Choices — How Shares are Priced” in the Prospectus.

     The net asset value of the shares of all classes of the Fund is determined once daily Monday through Friday as of the close of business on the NYSE on each day the NYSE is open for trading based on prices at the time of closing. The NYSE generally closes at 4:00 p.m. Eastern time. Any assets or liabilities initially expressed in terms of non-U.S. dollar currencies are translated into U.S. dollars at the prevailing market rates as quoted by one or more banks or dealers on the day of valuation. The NYSE is not open for trading on New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

     Net asset value is computed by dividing the value of the securities held by the Fund plus any cash or other assets (including interest and dividends accrued but not yet received) minus all liabilities (including accrued expenses) by the total number of shares of the Fund outstanding at such time, rounded to the nearest cent. Expenses, including the fees payable to the Investment Adviser and Distributor, are accrued daily.

     The per share net asset value of Class A, Class B and Class C shares generally will be lower than the per share net asset value of Class I shares, reflecting the daily expense accruals of the account maintenance, distribution and higher transfer agency fees applicable with respect to Class B and Class C shares, and the daily expense accruals of the account maintenance fees applicable with respect to Class A shares. Moreover, the per share net asset value of the Class B and Class C shares of the Fund generally will be lower than the per share net asset value of Class A shares, reflecting the daily expense accruals of the distribution fees and higher transfer agency fees applicable with respect to Class B and Class C shares. It is expected, however, that the per share net asset value of the four classes of the Fund will tend to converge (although not necessarily meet) immediately after the payment of dividends, which will differ by approximately the amount of the expense accrual differentials between the classes.

 

35

     <R>Portfolio securities of the Fund that are traded on stock exchanges or NASDAQ National are valued at the last sale price or official close price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available ask price for short positions. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market by or under the authority of the Board of Directors of the Program. Long positions in securities traded in the OTC market, NASDAQ Small Cap or Bulletin Board are valued at the last available bid price or yield equivalent obtained from one or more dealers or pricing services approved by the Board of Directors of the Fund. Short positions in securities traded in the OTC market are valued at the last available ask price. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market. When the Fund writes an option, the amount of the premium received is recorded on its books as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based on the last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last ask price. Options purchased by the Fund are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Other investments, including financial futures contracts and related options, are generally valued at market value. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless the Investment Adviser believes that this method no longer produces fair valuations. Repurchase agreements will be valued at cost plus accrued interest. Securities and assets for which market quotations are not readily available are stated at fair value as determined in good faith by or under the direction of the Board of Directors of the Program. Such valuations and procedures will be reviewed periodically by the Board of Directors. </R>

     The Fund values debt securities on the basis of valuations provided by dealers or by a pricing service which uses information with respect to transactions in such securities, quotations from dealers, market transactions in comparable securities, various relationships between securities and yield to maturity. Portfolio securities (other than short-term obligations but including listed issues) may be valued on the basis of prices furnished by one or more pricing services which determine prices for normal, institutional-size trading units of such securities using market information, transactions for comparable securities and various relationships between securities which are generally recognized by institutional traders. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless this method no longer produces fair valuations.

     <R>Generally, trading in non-U.S. securities, as well as U.S. Government securities and money market instruments, is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Fund’s shares are determined as of such times. Foreign currency exchange rates also are generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that may not be reflected in the computation of the Fund’s net asset value. If events (e.g. a company announcement, market volatility or a natural disaster) occur during such periods that are expected to materially affect the value of such securities, then those securities may be valued at their fair value as determined in good faith by the Board of Directors of the Program or by the Investment Adviser using a pricing service and/or procedures approved by the Directors. </R>

     Option Accounting Principles. When the Fund sells an option, an amount equal to the premium received by the Fund is included in that Fund’s Statement of Assets and Liabilities as a deferred credit. The amount of such liability subsequently will be marked-to-market to reflect the current market value of the option written. If current market value exceeds the premium received there is an unrealized loss; conversely, if the premium exceeds current market value there is an unrealized gain. The current market value of a traded option is the last sale price or, in the absence of a sale, the last offering price. If an option expires on its stipulated expiration date or if the Fund enters into a closing purchasing transaction, the affected Fund will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option will be extinguished. If an option is exercised, the Fund will realize a gain or loss from the sale of the underlying security and the proceeds of sales are increased by the premium originally received.

 

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<R>Computation of Offering Price Per Share

     An illustration of the computation of the offering price for Class I, Class A, Class B and Class C shares of the Fund based on the value of its net assets and number of shares outstanding on January 31, 2003 is as follows:

	Class I	Class A	Class B	Class C
Net Assets	$2,145,827	$13,770,435	$50,933,300	$33,257,826
Number of Shares Outstanding	224,303	1,450,827	5,562,573	3,642,825
Net Asset Value Per Share (net assets    divided by number of shares outstanding)	$         9.57	$           9.49	$           9.16	$           9.13
Sales Charge (for Class I and Class A Shares:    5.25% of Offering Price (5.54% of net   amount invested))*	.53	.53	**	**
Offering Price	$      10.10	$        10.02	$           9.16	$           9.13

</R>

* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable.

** Class B and Class C shares are not subject to an initial sales charge but may be subject to a CDSC on redemption. See “Purchase of Shares — Deferred Sales Charge Alternatives — Class B and Class C Shares” herein.

PORTFOLIO TRANSACTIONS AND BROKERAGE

     Subject to policies established by the Directors of the Program, the Investment Adviser is primarily responsible for the execution of the Fund’s portfolio transactions and the allocation of brokerage. The Investment Adviser does not execute transactions through any particular broker or dealer, but seeks to obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities. While the Investment Adviser generally seeks reasonably competitive trade execution costs, the Fund does not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements, the Investment Adviser may select a broker based partly upon brokerage or research services provided to the Investment Adviser and its clients, including the Fund. In return for such services, the Investment Adviser may pay a higher commission than other brokers would charge if the Investment Adviser determines in good faith that the commission is reasonable in relation to the services provided.

     Section 28(e) of the Exchange Act (“Section 28(e)”) permits an investment adviser, such as the Investment Adviser, under certain circumstances, to cause an account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount of commission another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research services provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services include (1) furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing functions incidental thereto (such as clearance, settlement, and custody). The Investment Adviser believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Fund.

     To the extent research services may be a factor in selecting brokers, such services may be in written form or through direct contact with individuals and may include information as to particular companies and securities as well as market, economic, or institutional areas and information which assists in the valuation of investments. Examples of research-oriented services for which the Investment Adviser might use Fund commissions include research reports and other information on the economy, industries, groups of securities, individual companies, statistical information, political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance and other analysis. Except as noted immediately below, research services furnished by brokers may be used in servicing some or all client accounts and not all services may be used in connection with the account that paid commissions to the broker providing such services. In some cases, research information received from brokers by mutual fund management personnel or personnel principally responsible for the Investment Adviser’s individually managed portfolios is not necessarily shared by and between such personnel. Any investment advisory or other fees paid by the Fund to the Investment Adviser are not reduced as a result of the Investment Adviser’s receipt of research services.

 

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     In some cases the Investment Adviser may receive a service from a broker that has both a “research” and a “non-research” use. When this occurs, the Investment Adviser makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the service that is used for research purposes may be paid for with client commissions, while the Investment Adviser will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation, the Investment Adviser faces a potential conflict of interest, but the Investment Adviser believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.

     From time to time, the Fund may purchase new issues of securities in a fixed price offering. In these situations, the broker may be a member of the selling group that will, in addition to selling securities, provide the Investment Adviser with research services. The NASD has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the broker will provide research “credits” in these situations at a rate that is higher than that which is available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).

     In addition, consistent with the Conduct Rules of the NASD and policies established by the Board of Directors of the Fund and subject to best execution, the Investment Adviser may consider sales of shares of the Fund as a factor in the selection of brokers or dealers to execute portfolio transactions for the Fund; however, whether or not a particular broker or dealer sells shares of the Fund neither qualifies nor disqualifies such broker or dealer to execute transactions for the Fund.

     The Fund anticipates that its brokerage transactions involving securities of issuers domiciled in countries other than the United States generally will be conducted primarily on the principal stock exchanges of such countries. Brokerage commissions and other transaction costs on foreign stock exchange transactions generally are higher than in the United States, although the Fund will endeavor to achieve the best net results in effecting its portfolio transactions. There generally is less governmental supervision and regulation of foreign stock exchanges and brokers than in the United States.

     Foreign equity securities may be held by the Fund in the form of ADRs, EDRs, GDRs or other securities convertible into foreign equity securities. ADRs, EDRs and GDRs may be listed on stock exchanges, or traded in over-the-counter markets in the United States or Europe, as the case may be. ADRs, like other securities traded in the United States, will be subject to negotiated commission rates.

     The Fund’s ability and decisions to purchase or sell portfolio securities of foreign issuers may be affected by laws or regulations relating to the convertibility and repatriation of assets. Because the shares of each Fund are redeemable on a daily basis in U.S. dollars, the Program intends to manage each Fund so as to give reasonable assurance that it will be able to obtain U.S. dollars to the extent necessary to meet anticipated redemptions. Under present conditions, it is not believed that these considerations will have significant effect on the Program’s portfolio strategies.

     Information about the brokerage commissions paid by the Fund, including commissions paid to Merrill Lynch, is set forth in the following table:<R>

Fiscal Year Ended January 31,	Aggregate Brokerage Commissions Paid	Commissions Paid to Merrill Lynch
2003	$360,187	$43,137
2002	$514,999	$92,321
2001	$308,175	$46,492

     For the fiscal year ended January 31, 2003, the brokerage commissions paid to Merrill Lynch represented 11.98% of the aggregate brokerage commissions paid and involved 13.27% of the Fund’s dollar amount of transactions involving payment of brokerage commissions. </R>

     Under the Investment Company Act, persons affiliated with the Fund and persons who are affiliated with such persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since transactions in the OTC market usually involve transactions with dealers acting as principal for their own accounts, affiliated persons of the Fund, including Merrill Lynch and any of its affiliates, will not serve as the Fund’s dealer in such transactions. However, affiliated persons of the Fund may serve as its broker in listed or OTC transactions conducted on an

 

38

agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. In addition, the Fund may not purchase securities during the existence of any underwriting syndicate for such securities of which Merrill Lynch is a member or in a private placement in which Merrill Lynch serves as placement agent except pursuant to procedures adopted by the Board of Trustees of the Fund that either comply with rules adopted by the Commission or with interpretations of the Commission staff.

     Because of the affiliation of Merrill Lynch with the Investment Adviser, the Fund is prohibited from engaging in certain transactions involving Merrill Lynch or its affiliates except for brokerage transactions permitted under the Investment Company Act involving only usual and customary commissions or transactions pursuant to an exemptive order under the Investment Company Act. Without such an exemptive order, the Fund would be prohibited from engaging in portfolio transactions with Merrill Lynch or any of its affiliates acting as principal.

     <R>The Program, on behalf of the Fund, has received an exemptive order from the Commission permitting it to lend portfolio securities to Merrill Lynch or its affiliates. Pursuant to that order, the Program also has retained an affiliated entity of the Investment Adviser as the securities lending agent (the “lending agent”) for a fee, including a fee based on a share of the returns on investment of cash collateral. For the fiscal years ended January 31, 2003 and 2002, the lending agent received $1,189 and $161, respectively, in securities lending agent fees from the Fund. In connection with securities lending activities, the lending agent may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by the lending agent or in registered money market funds advised by the Investment Adviser or its affiliates. Pursuant to the same order, the Fund may invest its uninvested cash in registered money market funds advised by the Investment Adviser or its affiliates, or in a private investment company managed by the lending agent. If the Fund acquires shares in either the private investment company or an affiliated money market fund, shareholders would bear both their proportionate share of the Fund’s expenses and, indirectly, the expenses of such other entities. However, in accordance with the exemptive order, the investment adviser to the private investment company will not charge any advisory fees with respect to shares purchased by the Fund. Such shares also will not be subject to a sales load, redemption fee, distribution fee or service fee, or, in the case of the shares of an affiliated money market fund, the payment of any such sales load, redemption fee, distribution fee or service fee will be offset by the Investment Adviser’s waiver of a portion of its advisory fee. </R>

     Section 11(a) of the Exchange Act generally prohibits members of the U.S. national securities exchanges from executing exchange transactions for their affiliates and institutional accounts that they manage unless the member (i) has obtained prior express authorization from the account to effect such transactions, (ii) at least annually furnishes the account with a statement setting forth the aggregate compensation received by the member in effecting such transactions, and (iii) complies with any rules the Commission has prescribed with respect to the requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a broker for the Program in any of its portfolio transactions executed on any such securities exchange of which it is a member, appropriate consents have been obtained from the Program and annual statements as to aggregate compensation will be provided to the Program. Securities may be held by, or be appropriate investments for, the Program as well as other funds or investment advisory clients of the Investment Adviser or its affiliates.

     The Board of Directors have considered the possibility of seeking to recapture for the benefit of the Fund brokerage commissions and other expenses of possible portfolio transactions by conducting portfolio transactions through affiliated entities. For example, brokerage commissions received by affiliated brokers could be offset against the advisory fee paid to the Investment Adviser. After considering all factors deemed relevant, the Directors made a determination not to seek such recapture. The Directors will reconsider this matter from time to time.

     Because of different objectives or other factors, a particular security may be bought for one or more clients of the Investment Adviser or its affiliates when one or more clients of the Investment Adviser or its affiliates are selling the same security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Fund or other clients or funds for which the Investment Adviser or an affiliate act as investment adviser, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a

 

39

manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Investment Adviser or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price.

SHAREHOLDER SERVICES

     The Fund offers a number of shareholder services described below that are designed to facilitate investment in its shares. Full details as to each such service and copies of the various plans or how to change options with respect thereto, can be obtained from the Fund by calling the telephone number on the cover page hereof, or from the Distributor, a selected securities dealer or other financial intermediary. Certain of these services are available only to U.S. investors.

Investment Account

     Each shareholder whose account is maintained at the Transfer Agent has an Investment Account and will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as transaction confirmations for automatic investment purchases and the reinvestment of dividends. The statements also will show any other activity in the account since the preceding statement. Shareholders also will receive separate confirmations for each purchase or sale transaction other than automatic investment purchases and the reinvestment of dividends. A shareholder with an account held at the Transfer Agent may make additions to his or her Investment Account at any time by mailing a check directly to the Transfer Agent. The Fund does not issue share certificates.

     Shareholders considering transferring their Class I or Class A shares from a selected securities dealer or other financial intermediary to another brokerage firm or financial institution should be aware that, if the firm to which the Class I or Class A shares are to be transferred will not take delivery of Fund shares, a shareholder either must redeem the Class I or Class A shares so that the cash proceeds can be transferred to the account at the new firm or such shareholder must continue to maintain an Investment Account at the Transfer Agent for those Class I or Class A shares.

     Shareholders interested in transferring their Class B or Class C shares from a selected dealer or financial intermediary and who do not wish to have an Investment Account maintained for such shares at the Transfer Agent may request their new brokerage firm to maintain such shares in an account registered in the name of the brokerage firm for the benefit of the shareholder at the Transfer Agent.

     Certain shareholder services may not be available for the transferred shares. After the transfer, the shareholder may purchase additional shares of funds owned before the transfer, and all future trading of these assets must be coordinated by the new firm.

     Shareholders considering transferring a tax-deferred retirement account, such as an individual retirement account, from a selected securities dealer or other financial intermediary to another brokerage firm or financial institution should be aware that, if the firm to which the retirement account is to be transferred will not take delivery of shares of each Fund, a shareholder must either redeem the shares (paying any applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm, or such shareholder must continue to maintain a retirement account at a selected dealer for those shares.

Exchange Privilege

     <R>U.S. shareholders of each class of shares of the Fund have an exchange privilege with other Mercury mutual funds and other multi-class Affiliate-advised funds and Summit, which is a money market fund specifically designated as available for exchange by holders of Class I, Class A, Class B and Class C shares. Shares with a net asset value of at least $100 are required to qualify for the exchange privilege and any shares used in an exchange must have been held by the shareholder for at least 15 days. Before effecting an exchange, shareholders should obtain a currently effective prospectus of the fund into which the exchange is to be made. Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes. </R>

 

40

     <R>Exchanges of Class I and Class A Shares. Under the Fund’s pricing system, Class I shareholders may exchange Class I shares of the Fund for Class I shares of a second mutual fund. If the Class I shareholder wants to exchange Class I shares for shares of a second mutual fund, but does not hold Class I shares of the second fund in his or her account at the time of exchange and is not otherwise eligible to acquire Class I shares of the second fund, the shareholder will receive Class A shares of the second fund as a result of the exchange. Class A shares also may be exchanged for Class I shares of a second mutual fund at any time as long as, at the time of the exchange, the shareholder is eligible to acquire Class I shares of any mutual fund.

     Exchanges of Class I or Class A shares outstanding (“outstanding Class I or Class A shares”) for Class I or Class A shares of another mutual fund or for Class A shares of Summit (“new Class I or Class A shares”) are transacted on the basis of relative net asset value per Class I or Class A share, respectively, plus an amount equal to the difference, if any, between the sales charge previously paid on the outstanding Class I or Class A shares and the sales charge payable at the time of the exchange on the new Class I or Class A shares. With respect to outstanding Class I or Class A shares as to which previous exchanges have taken place, the “sales charge previously paid” shall include the aggregate of the sales charges paid with respect to such Class I or Class A shares in the initial purchase and any subsequent exchange. Class I or Class A shares issued pursuant to dividend reinvestment are sold on a no-load basis in each of the funds offering Class I or Class A shares. For purposes of the exchange privilege, Class I and Class A shares acquired through dividend reinvestment shall be deemed to have been sold with a sales charge equal to the sales charge previously paid on the Class I or Class A shares on which the dividend was paid. Based on this formula, Class I and Class A shares of the Fund generally may be exchanged into the Class I and Class A shares, respectively, of the other funds with a reduced or without a sales charge.

     Exchanges of Class B and Class C Shares. In addition, outstanding Class B or Class C shares can be exchanged for Class B or Class C shares, respectively, of another mutual fund or for Class B shares of Summit (“new Class B or Class C shares”) on the basis of relative net asset value per Class B or Class C share, without the payment of any CDSC that might otherwise be due on redemption of the outstanding shares. Class B shareholders of the Fund exercising the exchange privilege will continue to be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the new Class B shares acquired through use of the exchange privilege. In addition, Class B shares of the Fund acquired through use of the exchange privilege will be subject to the Fund’s CDSC schedule if such schedule is higher than the CDSC schedule relating to the Class B shares of the fund from which the exchange was made. For purposes of computing the CDSC that may be payable on a disposition of the new Class B or Class C shares, the holding period for the outstanding Class B or Class C shares is “tacked” to the holding period of the new Class B or Class C shares. For example, an investor may exchange Class B shares of the Fund for those of another fund (“new Fund”) after having held the Fund’s Class B shares for two-and-a-half years. The 3.0% CDSC that generally would apply to a redemption would not apply to the exchange. Four years later the investor may decide to redeem the Class B shares of new Fund and receive cash. There will be no CDSC due on this redemption since by “tacking” the two-and-a-half year holding period of the Fund’s Class B shares to the four year holding period for the new Fund Class B shares, the investor will be deemed to have held the new Fund Class B shares for more than six years.

     Exchanges for Shares of a Money Market Fund. Class I and Class A shares are exchangeable for Class A shares of Summit and Class B and Class C shares are exchangeable for Class B shares of Summit. Class A shares of Summit have an exchange privilege back into Class I or Class A shares of Affiliate-advised funds; Class B shares of Summit have an exchange privilege back into Class B or Class C shares of Affiliate-advised funds and, in the event of such an exchange, the period of time that Class B shares of Summit are held will count toward satisfaction of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any Conversion Period with respect to Class B shares. Class B shares of Summit will be subject to a distribution fee at an annual rate of 0.75% of average daily net assets of such Class B shares. This exchange privilege does not apply with respect to certain fee-based programs for which alternative exchange arrangements may exist. Please see your financial advisor for further information.

     Prior to October 12, 1998, exchanges from the Fund and other Affiliate-advised funds into a money market fund were directed to certain Affiliate-advised money market funds other than Summit. Shareholders who exchanged Affiliate-advised fund shares for such other money market funds and subsequently wish to exchange those money market fund shares for shares of the Fund will be subject to the CDSC schedule applicable to Fund shares, if any. The holding period for those money market fund shares will not count toward satisfaction of the </R>

 

41

holding period requirement for reduction of the CDSC imposed on such shares, if any, and, with respect to Class B shares, toward satisfaction of the Conversion Period. However, the holding period for Class B or Class C shares of the Fund received in exchange for such money market fund shares will be aggregated with the holding period for the fund shares originally exchanged for such money market fund shares for purposes of reducing the CDSC or satisfying the Conversion Period.

     Exercise of the Exchange Privilege. To exercise the exchange privilege, a shareholder should contact his or her financial advisor, who will advise the Fund of the exchange. Shareholders of the Fund and shareholders of the other funds described above with shares for which certificates have not been issued may exercise the exchange privilege by wire through their securities dealers or other financial intermediary. The Fund reserves the right to require a properly completed Exchange Application.

     Telephone exchange requests are also available in accounts held with the Transfer Agent for amounts up to $50,000. To request an exchange from your account, call the Transfer Agent at 1-888-763-2260. The request must be from the shareholder of record. Before telephone requests will be honored, signature approval from all shareholders of record must be obtained. The shares being exchanged must have been held for at least 15 days. Telephone requests for an exchange will not be honored in the following situations: the accountholder is deceased, the request is by an individual other than the accountholder of record, the account is held by joint tenants who are divorced or the address on the account has changed within the last 30 days. Telephone exchanges may be refused if the caller is unable to provide: the account number, the name and address registered on the account and the social security number registered on the account. The Fund or the Transfer Agent may temporarily suspend telephone transactions at any time.

     This exchange privilege may be modified or terminated in accordance with the rules of the Commission. The Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain funds may suspend the continuous offering of their shares to the general public at any time and may thereafter resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the exchange legally may be made. It is contemplated that the exchange privilege may be applicable to other new mutual funds whose shares may be distributed by the Distributor.

Fee-Based Programs

     Certain fee-based programs, including pricing alternatives for securities transactions (each referred to in this paragraph as a “program”), may permit the purchase of Class I shares at net asset value. Under specified circumstances, participants in certain Programs may deposit other classes of shares, which will be exchanged for Class I shares. Initial or deferred sales charges otherwise due in connection with such exchanges may be waived or modified, as may the Conversion Period applicable to the deposited shares. Termination of participation in certain programs may result in the redemption of shares held therein or the automatic exchange thereof to another class at net asset value. In addition, upon termination of participation in a program, shares that have been held for less than specified periods within such program may be subject to a fee based on the current value of such shares. These programs also generally prohibit such shares from being transferred to another account, to another broker-dealer or to the Transfer Agent. Except in limited circumstances (which may also involve an exchange as described above), such shares must be redeemed and another class of shares purchased (which may involve the imposition of initial or deferred sales charges and distribution and account maintenance fees) in order for the investment not to be subject to program fees. Additional information regarding certain specific programs offered through particular selected dealers or financial intermediaries (including charges and limitations on transferability applicable to shares that may be held in such programs) is available in each such program’s client agreement and from the Transfer Agent at 1-888-763-2260.

Retirement and Education Savings Plans

     The minimum initial purchase to establish a retirement plan is $100. Dividends received in retirement and education savings plans are exempt from Federal taxation until distributed from the plans and, in the case of Roth IRAs and education savings plans, may be exempt from taxation when distributed, as well. Investors considering participation in any retirement or education savings plan should review specific tax laws relating thereto and should consult their attorneys or tax advisers with respect to the establishment and maintenance of any such plan.

 

42

Automatic Investment Plans

     A shareholder may make additions to an Investment Account at any time by purchasing Class I shares (if he or she is an eligible Class I investor) or Class A, Class B or Class C shares at the applicable public offering price. These purchases may be made either through the shareholder’s securities dealer or financial intermediary or by mail directly to the Transfer Agent, acting as agent for such securities dealer or financial intermediary. You may also add to your account by automatically investing a specific amount in the Fund on a periodic basis through your selected dealer or financial intermediary. The current minimum for such automatic additional investments is $100 ($1 or more for retirement accounts). This minimum may be waived or revised under certain circumstances.

Automatic Dividend Reinvestment Plan

     <R>Dividends paid by the Fund may be taken in cash or automatically reinvested in shares of the Fund at net asset value without a sales charge. You should consult with your financial advisor about which option you would like. If you choose the reinvestment option, dividends paid with respect to Fund shares will be automatically reinvested, without sales charge, in additional full and fractional shares of the Fund. Such reinvestment will be at the net asset value of shares of the Fund as determined as of the close of business on the NYSE on the monthly payment date for such dividends. No CDSC will be imposed upon redemption of shares issued as a result of the automatic reinvestment of dividends. </R>

     Shareholders may, at any time, elect to have subsequent dividends paid with respect to shares of the Fund in cash, rather than reinvested in Fund shares (provided that, in the event that a payment on an account maintained at the Transfer Agent would amount to $10.00 or less, a shareholder will not receive such payment in cash and such payment will automatically be reinvested in additional shares). If the shareholder’s account is maintained with the Transfer Agent, he or she may contact the Transfer Agent in writing or by telephone (1-888-763-2260). For other accounts, the shareholder should contact his or her financial advisor, selected securities dealer or other financial intermediary. Commencing ten days after the receipt by the Transfer Agent of such notice, those instructions will be effected. The Fund is not responsible for any failure of delivery to the shareholder’s address of record and no interest will accrue on amounts represented by uncashed dividend checks. Cash payments can also be directly deposited to the shareholder’s bank account.

Systematic Withdrawal Plan

     A shareholder may elect to receive systematic withdrawals from his or her Investment Account by check or through automatic payment by direct deposit to his or her bank account on either a monthly or quarterly basis as provided below. Quarterly withdrawals are available for shareholders who have acquired Fund shares having a value, based on cost or the current offering price, of $5,000 or more, and monthly withdrawals are available for shareholders with shares having a value of $10,000 or more.

     <R>At the time of each withdrawal payment, sufficient shares are redeemed from those on deposit in the shareholder’s account to provide the withdrawal payment specified by the shareholder. The shareholder may specify the dollar amount and class of shares to be redeemed. Redemptions will be made at net asset value as determined as of the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m. Eastern time) on the 24th day of each month or the 24th day of the last month of each quarter, whichever is applicable. If the NYSE is not open for business on such date, the shares will be redeemed at the net asset value determined as of the close of business on the following business day. The check for the withdrawal payment will be mailed, or the direct deposit for withdrawal payment will be made on the next business day following redemption. When a shareholder is making systematic withdrawals, dividends and distributions on all shares in the Investment Account are reinvested automatically in Fund shares. A shareholder’s systematic withdrawal plan may be terminated at any time, without a charge or penalty, by the shareholder, the Fund, the Transfer Agent or the Distributor. </R>

     With respect to redemptions of Class B and Class C shares pursuant to a systematic withdrawal plan, the maximum number of Class B or Class C shares that can be redeemed from an account annually shall not exceed 10% of the value of shares of such class in that account at the time the election to join the systematic withdrawal plan was made. Any CDSC that otherwise might be due on such redemption of Class B or Class C shares will be waived. Shares redeemed pursuant to a systematic withdrawal plan will be redeemed in the same order as Class B or Class C shares are otherwise redeemed. See “Purchase of Shares — Deferred Sales Charge Alternatives — Class B and C Shares.” Where the systematic withdrawal plan is applied to Class B shares, upon conversion of

 

43

the last Class B shares in an account to Class A shares, a shareholder must make a new election to join the systematic withdrawal program with respect to the Class A shares. If an investor wishes to change the amount being withdrawn in a systematic withdrawal plan the investor should contact his or her financial advisor.

     Withdrawal payments generally should not be considered as dividends. Withdrawals generally are treated as sales of shares and may result in taxable gain or loss. If periodic withdrawals continuously exceed reinvested dividends, the shareholder’s original investment may be reduced correspondingly. Purchases of additional shares concurrent with withdrawals are ordinarily disadvantageous to the shareholder because of sales charges and tax liabilities. The Fund will not knowingly accept purchase orders for shares of the Fund from investors who maintain a systematic withdrawal plan unless such purchase is equal to at least one year’s scheduled withdrawals or $1,200, whichever is greater. Periodic investments may not be made into an Investment Account in which the shareholder has elected to make systematic withdrawals.

DIVIDENDS AND TAXES

Dividends

     The Fund intends to distribute substantially all of its net investment income, if any. Dividends from such net investment income are paid at least annually. All net realized capital gains, if any, will be distributed to the Fund’s shareholders at least annually. From time to time, the Fund may declare a special distribution at or about the end of the calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year. If in any fiscal year, the Fund has net income from certain foreign currency transactions, such income will be distributed at least annually.

     For information concerning the manner in which dividends may be reinvested automatically in shares of the Fund see “Shareholder Services — Automatic Dividend Reinvestment Plan.” A shareholder may also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders, as discussed below, whether they are reinvested in shares of the Fund or received in cash. The per share dividends on Class B and Class C shares will be lower than the per share dividends on Class I and Class A shares as a result of the account maintenance, distribution and higher transfer agency fees applicable with respect to the Class B and Class C shares; similarly, the per share dividends on Class A shares will be lower than the per share dividends on Class I shares as a result of the account maintenance fees applicable with respect to the Class A shares. See “Pricing of Shares — Determination of Net Asset Value.”

Taxes

     The Fund intends to continue to qualify for the special tax treatment afforded regulated investment companies (“RICs”) under the Internal Revenue Code of 1986, as amended (the “Code”). As long as the Fund so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its net ordinary income and net realized capital gains that it distributes to Class I, Class A, Class B and Class C shareholders (together, the “shareholders”). The Fund intends to distribute substantially all of such income.

     The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not distribute during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98% of its capital gains, determined, in general, on an October 31 year end, plus certain undistributed amounts from previous years. While the Fund intends to distribute its income and capital gains in the manner necessary to minimize imposition of the 4% excise tax, there can be no assurance that sufficient amounts of the Fund’s taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, the Fund will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirements.

     <R>Dividends paid by the Fund from its ordinary income or from an excess of net short term capital gains over net long term capital losses (together referred to hereafter as “ordinary income dividends”) are taxable to shareholders as ordinary income. Distributions made from an excess of net long term capital gains over net short term capital losses (including gains or losses from certain transactions in warrants, futures and options) (“capital gain dividends”) are taxable to shareholders as long term capital gains, regardless of the length of time the shareholder has owned Fund shares. Any loss upon the sale or exchange of Fund shares held for six months or less will be treated as long term capital loss to the extent of any capital gain dividends received by the shareholder. Distributions in excess of the Fund’s earnings and profits will first reduce the adjusted tax basis of a holder’s shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Generally not later than 60 days after the close of its taxable year, the Fund will provide its shareholders with a written notice designating the amount of any capital gain dividends. </R>

 

44

     Dividends are taxable to shareholders even though they are reinvested in additional shares of the Fund. A portion of the Fund’s ordinary income dividends may be eligible for the dividends received deduction allowed to corporations under the Code, if certain requirements are met. For this purpose, the Fund will allocate dividends eligible for the dividends received deduction among the Class I, Class A, Class B and Class C shareholders according to a method (which it believes is consistent with the Commission rule permitting the issuance and sale of multiple classes of stock) that is based on the gross income allocable to Class I, Class A, Class B and Class C shareholders during the taxable year, or such other method as the Internal Revenue Service (“IRS”) may prescribe. If the Fund pays a dividend in January that was declared in the previous October, November or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which such dividend was declared.

     No gain or loss will be recognized by Class B shareholders on the conversion of their Class B shares into Class A shares. A shareholder’s basis in the Class A shares acquired will be the same as such shareholder’s basis in the Class B shares converted, and the holding period of the acquired Class A shares will include the holding period for the converted Class B shares.

     If a shareholder exercises an exchange privilege within 90 days of acquiring the shares, then the loss the shareholder can recognize on the exchange will be reduced (or the gain increased) to the extent any sales charge paid on the exchanged shares reduces any sales charge the shareholder would have owed upon the purchase of the new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as an amount paid for the new shares.

     A loss realized on a sale or exchange of shares of the Fund will be disallowed if such shares are acquired (whether through the automatic reinvestment of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date that the shares are disposed of. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.

     Ordinary income dividends paid to shareholders who are non-resident aliens or foreign entities will be subject to a 30% U.S. withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Nonresident shareholders are urged to consult their own tax advisers concerning the applicability of the U.S. withholding tax.

     Under certain provisions of the Code, some shareholders may be subject to a withholding tax on ordinary income dividends, capital gain dividends and redemption payments (“backup withholding”). Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to such Fund’s knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding.

     Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.

     <R>Certain transactions of the Fund are subject to complex federal income tax provisions that may, among other things, a) affect the character of gains and losses realized (with capital gains generally subject to tax at lower rates than ordinary income), b) disallow, suspend or otherwise limit the allowance of certain losses or deductions, and c) accelerate the recognition of income. Operation of these rules could, therefore, affect the character, amount and timing of distributions to shareholders. Special tax rules also will require the Fund to mark to market certain types of positions in its portfolio (i.e., treat them as sold on the last day of the taxable year), and may result in the recognition of income without a corresponding receipt of cash. The Fund intends to monitor its transactions, make appropriate tax elections and make appropriate entries in its books and records to lessen the effect the these tax rules and avoid any possible disqualification for the special treatment afforded RICs under the Code. </R>

     The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action either prospectively or retroactively.

     Ordinary income and capital gain dividends may also be subject to state and local taxes.

 

45

     Certain states exempt from state income taxation dividends paid by RICs that are derived from interest on U.S. Government obligations. State law varies as to whether dividend income attributable to U.S. Government obligations is exempt from state income tax.

     Shareholders are urged to consult their tax advisers regarding specific questions as to Federal, foreign, state or local taxes. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in the Funds.

PERFORMANCE DATA

     <R>From time to time the Fund may include its average annual total return and other total return data in advertisements or information furnished to present or prospective shareholders. Total return figures are based on the Fund’s historical performance and are not intended to indicate future performance. Average annual total return is determined separately for Class I, Class A, Class B and Class C shares in accordance with formulas specified by the Commission.

     Quotations of average annual total return before tax for the specified periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount invested to the redeemable value of such investment at the end of each period. Average annual total return before taxes is computed assuming all dividends are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class I and Class A shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares but does not take into account taxes payable on dividends or on redemption.

     Quotations of average annual total return after taxes on dividends for the specified periods are computed by finding the average annual compounded rates of return that would equate the initial amount invested to the ending value of such investment at the end of each period assuming payment of taxes on dividends received during such period. Average annual total return after taxes on dividends is computed assuming all dividends, less the taxes due on such dividends, are invested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of Class I and Class A shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares. The taxes due on dividends are calculated by applying the highest marginal Federal individual income tax rates in effect on the reinvestment date for that dividend. The taxable amount and tax character of each dividend are specified by the Fund on the dividend declaration date, but may be adjusted to reflect subsequent recharacterizations of distributions. The applicable tax rates may vary over the measurement period. The effects of state and local taxes are not reflected. Applicable tax credits, such as foreign credits, are taken into account according to Federal law. The ending value is determined assuming complete redemption at the end of the applicable periods with no tax consequences associated with such redemption. </R>

     Quotations of average annual total return after taxes on both dividends and redemption for the specified periods are computed by finding the average annual compounded rates of return that would equate the initial amount invested to the ending value of such investment at the end of each period assuming payment of taxes on dividends received during such period as well as on complete redemption. Average annual total return after taxes on distributions and redemption is computed assuming all dividends, less the taxes due on such dividends, are reinvested and taking into account all applicable recurring and non-recurring expenses, including the maximum sales charge in the case of Class I and Class A shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of Class B and Class C shares and assuming, for all classes of shares, complete redemption and payment of taxes due on such redemption. The ending value is determined assuming complete redemption at the end of the applicable periods, subtracting capital gains taxes resulting from the redemption and adding the presumed tax benefit from capital losses resulting from redemption. The taxes due on dividends and on the deemed redemption are calculated by applying the highest marginal Federal individual income tax rates in effect on the reinvestment and/or the redemption date. The rates used correspond to the tax character of each component of each dividend and/or the redemption payment. The applicable tax rates may vary over the measurement period. The effects of state and local taxes are not reflected.

     The Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical investment of $1,000 or some other amount, for various periods other than those noted below. Such data will be computed as described

 

46

above, except that (1) as required by the periods of the quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time.

     Set forth in the tables below is total return information, before and after taxes, for the Class I, Class A, Class B and Class C shares of the Fund for the periods indicated, expressed as a percentage based on a hypothetical $1,000 investment.<R>

	Class I Shares		Class A Shares		Class B Shares		Class C Shares
	Average Annual Total Return (including maximum applicable sales charge)
One year ended January 31, 2003	-33.76	%	-33.93	%	-33.63	%	-31.58	%
Five years ended January 31, 2003	-2.74	%	-3.00	%	-3.06	%	-2.79	%
Inception (February 2, 1996) to
January 31, 2003	3.45	%	3.21	%	3.14	%	3.10	%
	Average Annual Total Return After Taxes on Dividends (including maximum applicable sales charge)
One year ended January 31, 2003	-33.77	%	-33.93	%	-33.63	%	-31.58	%
Five years ended January 31, 2003	-4.13	%	-4.35	%	-4.30	%	-4.01	%
Inception (February 2, 1996) to
January 31, 2003	2.01	%	1.81	%	1.88	%	1.84	%
	Average Annual Total Return After Taxes on Dividends and Redemption (including maximum applicable sales charge)
One year ended January 31, 2003	-20.73	%	-20.83	%	-20.65	%	-19.39	%
Five years ended January 31, 2003	-2.10	%	-2.29	%	-2.27	%	-2.06	%
Inception (February 2, 1996) to
January 31, 2003	2.72	%	2.54	%	2.56	%	2.53	%
</R>

     Total return figures are based on the Fund’s historical performance and are not intended to indicate future performance. The Fund’s total return will vary depending on market conditions, the securities comprising the Fund’s portfolio, the Fund’s operating expenses and amount of realized and unrealized net capital gains or losses during the period. The value of an investment in the Fund will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost.

     In order to reflect the reduced sales charges in the case of Class I or Class A shares or the waiver of the CDSC in the case of Class B or Class C shares applicable to certain investors, as described under “Purchase of Shares” and “Redemption of Shares,” respectively, the total return data quoted by the Fund in advertisements directed to such investors may take into account the reduced, and not the maximum, sales charge or may take into account the CDSC and therefore may reflect greater total return since, due to the reduced sales charges or the waiver of sales charges, a lower amount of expenses is deducted.

     <R>On occasion, the Fund may compare its performance to various indices including, among other things, the Standard & Poor’s 500 Index, the Value Line Composite Index, the Dow Jones Industrial Average, or other published indices, or to data contained in publications such as Lipper Analytical Services, Inc., Morningstar Publications, Inc. (“Morningstar”), Money Magazine, U.S. News & World Report, BusinessWeek, Forbes Magazine, Fortune Magazine and Thomson Financial. When comparing its performance to a market index, the Fund may refer to various statistical measures derived from the historic performance of the Fund and the index, such as standard deviation and beta. As with other performance data, performance comparisons should not be considered indicative of the Fund’s relative performance for any future period. From time to time, the Fund may include its Morningstar risk-adjusted performance rating in advertisements or supplemental sales literature. The Fund may from time to time quote in advertisements or other materials other applicable measures of performance and may also make reference to awards that may be given to the Investment Adviser.</R>

 

47

     The Fund may provide information designed to help investors understand how the Fund is seeking to achieve its investment objectives. This may include information about past, current or possible economic, market, political or other conditions, descriptive information on general principles of investing such as asset allocation, diversification and risk tolerance, discussion of the Fund’s portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Fund’s performance or portfolio composition to that of other funds or types of investments, indices relevant to the comparison being made, or to a hypothetical or model portfolio. The Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to those of other funds or types of investments. As with other performance data, performance comparisons should not be considered indicative of the Fund’s relative performance for any future period.

GENERAL INFORMATION

Description of Shares

     <R>The Program was incorporated under Maryland law on May 12, 1994. As of the date of this Statement of Additional Information, the Program has an authorized capital of 222,500,000 shares of Common Stock par, value $0.10 per share, of which 42,500,000 shares have been designated to the Fund as follows: 6,250,000 Class I shares, 6,250,000 Class A shares, 15,000,000 Class B shares and 15,000,000 Class C shares. The Board of Directors of the Program may classify and reclassify the shares of a Fund into additional classes of Common Stock at a future date.

     Shareholders are entitled to one vote for each share held and fractional votes for fractional shares held and will vote on the election of Directors and any other matter submitted to a shareholder vote. The Program does not intend to hold meetings of shareholders in any year in which the Investment Company Act does not require shareholders to act on any of the following matters: (i) election of Directors; (ii) approval of an investment advisory agreement; (iii) approval of a distribution agreement; and (iv) ratification of selection of independent auditors. Generally, under Maryland law, a meeting of shareholders may be called for any purpose on the written request of the holders of at least 10% of the outstanding shares of the Program. Voting rights for Directors are not cumulative. Shares issued are fully paid and non-assessable and have no preemptive rights. Conversion rights and redemption rights are discussed elsewhere herein and in the Prospectus. Each share is entitled to participate equally in dividends declared by the Program and in the net assets of the Program on liquidation or dissolution after satisfaction of outstanding liabilities.</R>

Independent Auditors

     <R>Deloitte & Touche LLP, 750 College Road East, Princeton, New Jersey 08540, has been selected as the independent auditors of the Fund. The independent auditors are responsible for auditing the annual financial statements of the Fund.</R>

Accounting Services Provider

     State Street Bank and Trust Company, 500 College Road East, Princeton, New Jersey 08540, provides certain accounting services for the Fund.

Custodian

     <R>The Bank of New York, 100 Church Street, New York, New York 10007, (the “Custodian”) acts as the Custodian of the Program’s assets. Under its contract with the Program, the Custodian is authorized to establish separate accounts in foreign currencies and to cause foreign securities owned by the Program to be held in its offices outside the United States and with certain foreign banks and securities depositories. The Custodian is responsible for safeguarding and controlling the Program’s cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Program’s investments.</R>

Transfer Agent

     Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Fund’s Transfer Agent. The Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening, maintenance and servicing of shareholder accounts. See “Your Account— How to Buy, Sell, Transfer and Exchange Shares” in the Program.

 

48

Legal Counsel

     <R>Sidley Austin Brown & Wood LLP, 787 Seventh Avenue, New York, New York 10019-6018, is counsel for the Program and the Fund. </R>

Reports to Shareholders

     The fiscal year of the Fund ends on January 31 of each year. The Fund sends to its shareholders at least semi-annually reports showing its portfolio and other information. An Annual Report, containing financial statements audited by independent auditors, is sent to shareholders each year. After the end of each year, shareholders will receive Federal income tax information regarding dividends.

Shareholder Inquiries

     Shareholder inquiries may be addressed to the Fund at the address or telephone number set forth on the cover page of this Statement of Additional Information.

Additional Information

     The Prospectus and this Statement of Additional Information do not contain all the information set forth in the Registration Statement and the exhibits relating thereto, which the Corporation has filed with the Commission, Washington, D.C., under the Securities Act and the Investment Company Act, to which reference is hereby made.

     As of the date of this Statement of Additional Information, the Investment Adviser owned 100% of the Merrill Lynch classes of the Fund.

     Under a separate agreement, Mercury Advisors (“Mercury”) has granted the Fund the right to use the “Mercury” name and has reserved the right to withdraw its consent to the use of such name by the Fund at any time or to grant the use of such name to any other company, and the Fund has granted Mercury under certain conditions, the use of any other name it might assume in the future, with respect to any corporation organized by Mercury.

     <R>To the knowledge of the Fund, the following persons or entities owned beneficially or of record 5% or more of any class of the Fund’s shares as of May 9, 2003.

Name	Address	Percentage and Class
Mr. Christopher Hagy	800 Scudders Mill Road Plainsboro, NJ 08536	7.11% of Class I
Merrill Lynch Trust Company, Fsb(1) Ttee Fbo Merrill Lynch Trust Company	800 Scudders Mill Road Plainsboro, NJ 08536	10.40% of Class I
Merrill Lynch Trust Company, Fsb(1) Ttee Fbo Merrill Lynch Trust Company	800 Scudders Mill Road Plainsboro, NJ 08536	37.59% of Class I
Gift Growth & Income Portfolio Gift College Investing Plan Ark Teacher Retirement System	800 Scudders Mill Road Plainsboro, NJ 08536	8.15% of Class A
Gift Growth & Income Portfolio Gift College Investing Plan Ark Teacher Retirement System	800 Scudders Mill Road Plainsboro, NJ 08536	13.55% Of Class A

</R>

* Merrill Lynch Trust Company is the record holder on behalf of certain employee retirement, personal trust or savings plan accounts for which it acts as trustee.

 

49

FINANCIAL STATEMENTS

     <R>The Fund’s audited financial statements are incorporated in this Statement of Additional Information by reference to its 2003 Annual Report. You may request a copy of the Annual Report at no additional charge by calling 1-888-673-2260 between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.</R>

 

50

<R>Appendix A

DESCRIPTION OF BOND RATINGS

Description of Moody’s Investors Service, Inc.’s (“Moody’s”) Bond Ratings

Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edge.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.

Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.

A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.

Baa Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present, but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.

Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.

B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.

Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.

Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.

C Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.

     Note: Moody’s applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

Description of Moody’s U.S. Short-Term Ratings

MIG 1/VMIG 1 This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.

MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.

MIG 3/VMIG 3 This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established. </R>

 

A-1

<R>

SG This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.

Description of Moody’s Commercial Paper Ratings

     Moody’s Commercial Paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody’s employs the following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers:

     Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of short term promissory obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structures with moderate reliance on debt and ample asset protection; broad margins in earning coverage of fixed financial charges and high internal cash generation; and well established access to a range of financial markets and assured sources of alternate liquidity.

     Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of short term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.

     Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of short term promissory obligations. The effects of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes to the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.

     Issuers rated Not Prime do not fall within any of the Prime rating categories.

Description of Standard & Poor’s, a Division of The McGraw-Hill Companies, Inc. (“Standard & Poor’s”), Debt Ratings

     A Standard & Poor’s issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations or a specific program. It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation.

     The issue credit rating is not a recommendation to purchase, sell or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.

     The issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor’s from other sources Standard & Poor’s considers reliable. Standard & Poor’s does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

     The issue credit ratings are based, in varying degrees, on the following considerations:

     I. Likelihood of payment—capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation;

     II. Nature of and provisions of the obligation;

     III. Protection afforded to, and relative position of, the obligation in the event of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.

Long Term Issue Credit Ratings

AAA An obligation rated “AAA” has the highest rating assigned by Standard & Poor’s. Capacity to meet its financial commitment on the obligation is extremely strong.

AA An obligation rated “AA” differs from the highest rated issues only in small degree. The Obligor’s capacity to meet its financial commitment on the obligation is very strong. </R>

 

A-2

<R>

A An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB
B
CCC
CC
C An obligation rated “BB,” “B,” “CCC,” “CC”, and “C” are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and “C” the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major risk exposures to adverse conditions.

D An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized.

c The “c” subscript is used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long term credit rating of the issuer is below an investment-grade level and/or the issuer’s bonds are deemed taxable.

p The letter “p” indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to the completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

* Continuance of the ratings is contingent upon Standard & Poor’s receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.

r This symbol is attached to the ratings of instruments with significant noncredit risks. It highlights risks to principal or volatility of expected returns which are not addressed in the credit rating.

N.R. This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor’s does not rate a particular obligation as a matter of policy.

     Plus (+) or Minus (-): The ratings from “AA” to “CCC” may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

Description of Standard & Poor’s Commercial Paper Ratings

     A Standard & Poor’s commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from “A-1” for the highest-quality obligations to “D” for the lowest. These categories are as follows:

A-1 A short-term obligation rated “A-1” is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

A-2 A short-term obligation rated “A-2” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

A-3 A short-term obligation rated “A-3” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. </R>

 

A-3

<R>

B A short-term obligation rated “B” is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

C A short-term obligation rated “C” is currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation.

D A short-term obligation rated “D” is in payment default. The “D” rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The “D” rating will also be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

c The “c” subscript is used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long term credit rating of the issuer is below an investment-grade level and/or the issuer’s bonds are deemed taxable.

p The letter “p” indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

* Continuance of the ratings is contingent upon Standard & Poor’s receipt of an executed copy of the escrow agreement or closing

r The “r” highlights derivative, hybrid, and certain other obligations that Standard & Poor’s believes may experience high volatility or high variability in expected returns as a result of noncredit risks. Examples of such obligations are securities with principal or interest return indexed to equities, commodities, or currencies; certain swaps and options, and interest-only and principal-only mortgage securities. The absence of an “r” symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.

     A commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based on current information furnished to Standard & Poor’s by the issuer or obtained by Standard & Poor’s from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information.

     A Standard & Poor’s note rating reflects the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three years will most likely receive a long term debt rating. The following criteria will be used in making that assessment.

—Amortization schedule—the larger the final maturity relative to other maturities, the more likely it will be treated as a note.

—Source of payment—the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.

     Note rating symbols are as follows:

SP-1 Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest with some vulnerability to adverse financial and economic changes over the term of the notes.

SP-3 Speculative capacity to pay principal and interest. </R>

 

A-4

<R>Description of Fitch Ratings’ (“Fitch”) Investment Grade Bond Ratings

     Fitch investment grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The rating represents Fitch’s assessment of the issuer’s ability to meet the obligations of a specific debt issue or class of debt in a timely manner.

     The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer’s future financial strength and credit quality.

     Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or financial guarantees unless otherwise indicated.

     Bonds carrying the same rating are of similar but not necessarily identical credit quality since the rating categories do not fully reflect small differences in the degrees of credit risk.

     Fitch ratings are not recommendations to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect of any security.

     Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons.

AAA Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.

AA Bonds considered to be investment grade and of very high credit quality. The obligor’s ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated “AAA.” Because bonds rated in the “AAA” and “AA” categories are not significantly vulnerable to foreseeable future developments, short term debt of these issuers is generally rated “F-1+.”

A Bonds considered to be investment grade and of high credit quality. The obligor’s ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.

BBB Bonds considered to be investment grade and of satisfactory-credit quality. The obligor’s ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.

     Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the “AAA” category.

Description of Fitch’s Speculative Grade Bond Ratings

     Fitch speculative grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings (“BB” to “C”) represent Fitch’s assessment of the likelihood of timely payment of principal and interest in accordance with the terms of obligation for bond issues not in default. For defaulted bonds, the rating (“DDD” to “D”) is an assessment of the ultimate recovery value through reorganization or liquidation. The rating takes into consideration special features of the issue, its relationship to other obligations of the issuer, the current and prospective financial condition and operating performance of the issuer and any guarantor, as well as the economic and political environment that might affect the issuer’s future financial strength.

     Bonds that have the rating are of similar but not necessarily identical credit quality since rating categories cannot fully reflect the differences in degrees of credit risk. </R>

 

A-5

<R>

BB Bonds are considered speculative. The obligor’s ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements.

B Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor’s limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue.

CCC Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment.

CC Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time.

C Bonds are in imminent default in payment of interest or principal.

D
DD
DDD Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. “DDD” represents the highest potential for recovery on these bonds, and “D” represents the lowest potential for recovery.

     Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the “DDD,” “DD,” or “D” categories.

Description of Fitch’s Short term Ratings

     Fitch’s short term ratings apply to debt obligations that are payable on demand or have original maturities of up to three years, including commercial paper, certificates of deposit, medium-term notes, and investment notes.

     The short term rating places greater emphasis than a long term rating on the existence of liquidity necessary to meet the issuer’s obligations in a timely manner.

     Fitch short term ratings are as follows:

F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment.

F-1 Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated “F-1+”

F-2 Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned “F-1+” and “F-1” ratings.

F-3 Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade.

F-S Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions.

D Default. Issues assigned this rating are in actual or imminent payment default.

LOC The symbol “LOC” indicates that the rating is based on a letter of credit issued by a commercial bank.

NR Indicates that Fitch does not rate the specific issue.

Conditional A conditional rating is premised on the successful completion of a project or the occurrence of a specific event.

Suspended A rating is suspended when Fitch deems the amount of information available from the issuer to be inadequate for rating purposes. </R>

 

A-6

<R>

Withdrawn A rating will be withdrawn when an issue matures or is called or refinanced and, at Fitch’s discretion, when an issuer fails to furnish proper and timely information.

FitchAlert Ratings are placed on FitchAlert to notify investors of an occurrence that is likely to result in a rating change and the likely direction of such change. These are designated as “Positive,” indicating a potential upgrade, “Negative,” for potential downgrade, or “Evolving,” where ratings may be raised or lowered. FitchAlert is relatively short term, and should be resolved within 12 months.

     Ratings Outlook: An outlook is used to describe the most likely direction of any rating change over the intermediate term. It is described as “Positive” or “Negative.” The absence of a designation indicates a stable outlook. </R>

<R>CODE #18472-05-03</R>

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Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. Mercury Growth Opportunity Fund, A Series of The Asset Program, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper PORTFOLIO INFORMATION (UNAUDITED) GEOGRAPHIC ALLOCATION As a Percentage of Net Assets as of January 31, 2003++ Percent of Countries Net Assets United States 90.7% Netherlands 2.1 Switzerland 1.1 Canada 0.7 ++Total may not equal 100%. AS OF JANUARY 31, 2003 Ten Largest Equity Percent of Holdings Net Assets Microsoft Corporation 6.4% Wal-Mart Stores, Inc. 5.3 The Proctor & Gamble Company 3.8 International Business Machines Corporation 3.6 The Coca-Cola Company 3.3 Amgen Inc. 3.1 Verizon Communications 2.9 Intel Corporation 2.9 State Street Corporation 2.7 HCA Inc. 2.7 Percent of Five Largest Industries* Net Assets Media 8.0% Software 7.7 Beverages 7.3 Health Care Equipment & Supplies 7.1 Diversified Financials 6.3 *For Fund compliance purposes, "Industry" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub- classifications for reporting ease. January 31, 2003, Mercury Growth Opportunity Fund DEAR SHAREHOLDER Fiscal Year in Review We are pleased to provide you with this annual report to shareholders. For the fiscal year ended January 31, 2003, Mercury Growth Opportunity Fund's Class I, Class A, Class B and Class C Shares had total returns of -30.09%, -30.27%, -30.87% and -30.89%, respectively. The total return for the Lipper Large Cap Growth Funds Average was -28.46%, while the total return for the unmanaged Standard & Poor's 500 Index was -23.02% for the same period. (Fund results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 6 - 9 of this report to shareholders.) The stocks of large-capitalization growth companies experienced among the worst absolute and relative investment returns during the fiscal year ended January 31, 2003. Investment returns were more negative during the second-half of the fiscal year as the Bush administration began its global campaign to gather public and political support for disarming the political regime in Iraq. Historically, global equity markets, including the U.S. market, have not produced the best investment returns during a period when war was being contemplated publicly or underway in a major geographical area. The fiscal year ended January 31, 2003 is the third consecutive year of negative investment returns on most U.S. equities and for most global equity markets, which is a relatively unique historical experience in the post-World War II period. We have continued to focus our investments on the largest and highest- quality companies with prospects, in our opinion, for an above- average long-run rate of growth in earnings and above-average returns on equity. The gradual recovery of U.S. business profitability from the economic recession of 2001 has resulted in a fairly narrow group of companies where business profitability has improved with any degree of quarterly consistency. Negative surprises have been more the "order of the environment." The greatest negative influences on the Fund's investment performance during the fiscal year ended January 31, 2003 were the stock price declines of selected holdings in the hospital management and information technology industries. Individual stock investments on a comparative basis that hurt the Fund most were our investment holdings in AOL Time Warner Inc. and Tenet Healthcare Corporation. Positive comparative influences on the Fund's investment returns were from selected stock holdings in the specialty retailing, restaurant, media, food and financial services industries. Equity investments in the following companies had a positive effect on the comparative investment performance over the fiscal year: Bed, Bath & Beyond Inc., Lowe's Companies, Inc., Wal-Mart Stores, Inc., Yum! Brands, Inc. and Brinker International, Inc. in the retailing and restaurant industries and Marsh & McLennan Companies, Inc., Wells Fargo Company, MBNA Corporation, Fannie Mae and American Express Co. in the financial services industry. In the health care sector, investments in Amgen Inc., HCA Inc. and Health Management Associates, Inc. were positive relative contributors to investment results. In the consumer staples industry, stock holdings in Procter & Gamble Co., Unilever NV and Colgate-Palmolive Company were comparatively positive contributors to results. In the industrial sector, the most positive comparative investment performance was from the meaningful investment position in 3M Co. We have avoided investment in the equities of General Electric Co. and Tyco International, which had contributed positively to our investment results earlier in the fiscal year ended January 31, 2003. January 31, 2003, Mercury Growth Opportunity Fund During the months of October and November 2002 and January 2003, there were broad-based and meaningful stock price increases for companies in the information technology and ethical drug industries. We have an underweighted investment position in the information technology sector where we are focused on the largest companies, which we believe will survive and possibly prosper in what may be a very long-term recovery of industry profitability. The statements by the senior managements of IBM Corp., Microsoft Corp., Intel Corp. and Cisco Systems Inc. were not positive when reporting their most recent quarterly business results and business outlooks. The Fund has investments in all of these companies because we believe they will prosper in the long run. However, the foreseeable near-term outlook is rather unexciting from a growth perspective. In the ethical drug industry, we have no investment exposure to any of the large pharmaceutical companies. We believe that the optimism on the part of some investors for the incremental revenue growth from a Federal pharmaceutical benefit program is too ambitious. We also believe that the downward pressure on pricing of ethical drugs will continue by the major state Medicare reimbursement organizations, which are currently attempting to form a non-profit pharmacy benefit management organization. Although stocks of major pharmaceutical companies appear to have an attractive valuation, we are skeptical about the outlook for future growth of revenues and profits. Market Outlook U.S. monetary policy is geared to promote a relatively high rate of real economic activity led by growth in real consumer spending with the lowest Federal Reserve Board interest rates in more than 40 years and many consumer finance operations offering zero interest rate loans for even multi-year periods of time. The decline in U.S. consumer finance rates for motor vehicles and home ownership appear to have had, and may continue to have, a very positive effect on real demand for these goods. During the fiscal year ended January 31, 2003, U.S. real wage growth rates slowed, which is a normal phenomenon in the first few years of an economic recovery following a recession such as the one we experienced in the first three calendar quarters of 2001. The household sector may have raised a record amount of absolute liquidity in the fiscal quarter ended January 31, 2003. The lackluster general merchandise retail sales in the latest holiday season may reflect concerns about the likelihood of a military confrontation with Iraq. There was a major uptrend in U.S. equity markets in January 1991 at the end of the Gulf War and a recovery in U.S. real economic growth rates in the second-half of 1991. We can only wait and see what happens this time around. The Bush administration is proposing a pull forward of the tax rate decreases legislated in 2001 that should take effect in 2004 and 2006. The Bush administration also proposes making these decreases permanent. Federal spending on defense systems, equipment and personnel is leading a double-digit rate of growth in nominal government spending. In our opinion, all of these actions are a positive for increased overall real economic growth in upcoming quarterly periods. It is likely that these potential increases in spending may improve corporate profitability, overall business profits and stock market values. January 31, 2003, Mercury Growth Opportunity Fund In Conclusion We thank you for your investment in Mercury Growth Opportunity Fund during what has been a most difficult period of time for achieving investment results for large-capitalization growth companies. We will continue to seek what we believe are the best investment opportunities given the very challenging equity investment conditions. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Lawrence R. Fuller) Lawrence R. Fuller Senior Vice President and Portfolio Manager March 5, 2003 January 31, 2003, Mercury Growth Opportunity Fund FUND PERFORMANCE DATA ABOUT FUND PERFORMANCE The Fund offers four classes of shares, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. CLASS I SHARES incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution and account maintenance fees. Class I Shares are available only to eligible investors. CLASS A SHARES incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). CLASS B SHARES are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first two years, decreasing to 3% for each of the next two years and decreasing 1% each year thereafter to 0% after the sixth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class A Shares after approximately eight years. CLASS C SHARES are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. In addition, Class C Shares may be subject to a 1% contingent deferred sales charge if redeemed within one year after purchase. None of the past results shown should be considered a representation of future performance. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Figures shown in each of the following tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex- dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. January 31, 2003, Mercury Growth Opportunity Fund FUND PERFORMANCE DATA (CONTINUED) RECENT PERFORMANCE RESULTS 6-Month 12-Month Since Inception As of January 31, 2003 Total Return Total Return Total Return Class I*++ -9.12% -30.09% +33.80% Class A*++ -9.27 -30.27 +31.64 Class B* -9.66 -30.87 +24.11 Class C* -9.69 -30.89 +23.78 Standard & Poor's 500 Index** -5.26 -23.02 +48.59 *Investment results shown do not reflect sales charges. Results shown would be lower if a sales charge was included. Total investment returns are based on changes in the Fund's net asset values for the periods shown, and assume reinvestment of all dividends and capital gains at net asset value on the ex-dividend date. The Fund commenced operations on 2/02/96. **This unmanaged broad-based Index is comprised of large- capitalization U.S. stocks. Since inception total return is from 2/29/96. ++Prior to April 3, 2000, Class I Shares were designated Class A Shares and Class A Shares were designated Class D Shares. January 31, 2003, Mercury Growth Opportunity Fund FUND PERFORMANCE DATA (CONTINUED) TOTAL RETURN BASED ON A $10,000 INVESTMENT A line graph illustrating the growth of a $10,000 investment in Mercury Growth Opportunity Fund++ Class I and Class A Shares* compared to a similar investment in Standard & Poor's 500 Index++++. Values illustrated are as follows: Mercury Growth Opportunity Fund++ Class I Shares* Date Value 02/02/1996** $ 9,475.00 January 1997 $11,171.00 January 1998 $13,798.00 January 1999 $19,596.00 January 2000 $24,517.00 January 2001 $22,465.00 January 2002 $18,136.00 January 2003 $12,679.00 Mercury Growth Opportunity Fund++ Class A Shares* Date Value 02/02/1996** $ 9,475.00 January 1997 $11,162.00 January 1998 $13,763.00 January 1999 $19,487.00 January 2000 $24,320.00 January 2001 $22,236.00 January 2002 $17,889.00 January 2003 $12,474.00 Standard & Poor's 500 Index++++ Date Value 02/29/1996** $10,000.00 January 1997 $12,518.00 January 1998 $15,887.00 January 1999 $21,049.00 January 2000 $23,227.00 January 2001 $23,018.00 January 2002 $19,297.00 January 2003 $14,854.00 A line graph illustrating the growth of a $10,000 investment in Mercury Growth Opportunity Fund++ Class B and Class C Shares* compared to a similar investment in Standard & Poor's 500 Index++++. Values illustrated are as follows: Mercury Growth Opportunity Fund++ Class B Shares* Date Value 02/02/1996** $10,000.00 January 1997 $11,680.00 January 1998 $14,268.00 January 1999 $20,034.00 January 2000 $24,794.00 January 2001 $22,486.00 January 2002 $17,853.00 January 2003 $12,342.00 Mercury Growth Opportunity Fund++ Class C Shares* Date Value 02/02/1996** $10,000.00 January 1997 $11,670.00 January 1998 $14,257.00 January 1999 $20,015.00 January 2000 $24,755.00 January 2001 $22,443.00 January 2002 $17,910.00 January 2003 $12,378.00 Standard & Poor's 500 Index++++ Date Value 02/29/1996** $10,000.00 January 1997 $12,518.00 January 1998 $15,887.00 January 1999 $21,049.00 January 2000 $23,227.00 January 2001 $23,018.00 January 2002 $19,297.00 January 2003 $14,854.00 *Assuming maximum sales charge, transaction costs and other operating expenses, including advisory fees. **Commencement of operations. ++Mercury Growth Opportunity Fund invests in a portfolio of equity securities, placing particular emphasis on large-capitalization companies that are anticipated to exhibit above-average growth rates in earnings. ++++This unmanaged broad-based Index is comprised of common stocks. The starting date for the Index in each graph is from 2/29/96. Past performance is not predictive of future performance. January 31, 2003, Mercury Growth Opportunity Fund FUND PERFORMANCE DATA (CONCLUDED) AVERAGE ANNUAL TOTAL RETURN % Return % Return Without Sales With Sales Class I Shares*++ Charge Charge** One Year Ended 1/31/03 -30.09% -33.76% Five Years Ended 1/31/03 - 1.68 - 2.74 Inception (2/02/96) through 1/31/03 + 4.25 + 3.45 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. ++Prior to April 3, 2000, Class I Shares were designated as Class A Shares. % Return % Return Without Sales With Sales Class A Shares*++ Charge Charge** One Year Ended 1/31/03 -30.27% -33.93% Five Years Ended 1/31/03 - 1.95 - 3.00 Inception (2/02/96) through 1/31/03 + 4.01 + 3.21 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. ++Prior to April 3, 2000, Class A Shares were designated as Class D Shares. % Return % Return Without With Class B Shares* CDSC CDSC** One Year Ended 1/31/03 -30.87% -33.63% Five Years Ended 1/31/03 - 2.75 - 3.06 Inception (2/02/96) through 1/31/03 + 3.13 + 3.13 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after six years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without With Class C Shares* CDSC CDSC** One Year Ended 1/31/03 -30.89% -31.58% Five Years Ended 1/31/03 - 2.79 - 2.79 Inception (2/02/96) through 1/31/03 + 3.10 + 3.10 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after one year. **Assuming payment of applicable contingent deferred sales charge. January 31, 2003, Mercury Growth Opportunity Fund SCHEDULE OF INVESTMENTS

In U.S. Dollars Shares Percent of Industry* Held Common Stocks Value Net Assets Aerospace & 21,300 General Dynamics Corporation $ 1,408,782 1.4% Defense Air Freight & 35,900 United Parcel Service, Inc. (Class B) 2,165,847 2.2 Logistics Banks 50,200 Northern Trust Corporation 1,714,832 1.7 Beverages 52,400 Anheuser-Busch Companies, Inc. 2,487,428 2.5 81,800 The Coca-Cola Company 3,309,628 3.3 66,900 Coca-Cola Enterprises Inc. 1,473,807 1.5 ------------ ------ 7,270,863 7.3 Biotechnology 61,700 ++Amgen Inc. 3,141,764 3.1 Chemicals 25,400 Ecolab Inc. 1,252,220 1.2 Commercial 5,800 ++Apollo Group, Inc. (Class A) 257,578 0.2 Services & 52,400 First Data Corporation 1,802,560 1.8 Supplies 23,000 H&R Block, Inc. 871,470 0.9 ------------ ------ 2,931,608 2.9 Communications 179,700 ++Cisco Systems, Inc. 2,400,792 2.4 Equipment Computers & 45,900 International Business Machines Peripherals Corporation 3,590,757 3.6 Diversified 28,400 American Express Company 1,009,052 1.0 Financials 20,100 Fannie Mae 1,300,470 1.3 69,300 State Street Corporation 2,743,587 2.7 46,700 T. Rowe Price Group Inc. 1,248,291 1.3 ------------ ------ 6,301,400 6.3 Diversified 75,700 Verizon Communications 2,897,795 2.9 Telecommunication Services Food & Drug 54,700 SYSCO Corporation 1,606,539 1.6 Retailing Food Products 20,700 Archer-Daniels-Midland Company 249,435 0.2 36,300 Unilever NV (NY Registered Shares) 2,058,573 2.1 ------------ ------ 2,308,008 2.3 Health Care 28,700 ++Alcon, Inc. 1,102,080 1.1 Equipment & 57,200 ++Boston Scientific Corporation 2,313,740 2.3 Supplies 22,600 Medtronic, Inc. 1,015,192 1.0

January 31, 2003, Mercury Growth Opportunity Fund SCHEDULE OF INVESTMENTS (CONTINUED)

In U.S. Dollars Shares Percent of Industry* Held Common Stocks Value Net Assets Health Care 19,000 Stryker Corporation $ 1,144,560 1.1% Equipment & 5,300 ++Varian Medical Systems, Inc. 276,978 0.3 Supplies 31,300 ++Zimmer Holdings, Inc. 1,283,300 1.3 (concluded) ------------ ------ 7,135,850 7.1 Health Care 62,300 HCA Inc. 2,662,702 2.7 Providers & 65,100 Health Management Associates, Inc. Services (Class A) 1,205,652 1.2 53,300 ++Tenet Healthcare Corporation 958,867 0.9 ------------ ------ 4,827,221 4.8 Hotels, 19,900 ++Brinker International, Inc. 592,025 0.6 Restaurants & 72,100 ++YUM! Brands, Inc. 1,671,278 1.7 Leisure ------------ ------ 2,263,303 2.3 Household 29,000 The Clorox Company 1,108,380 1.1 Products 22,800 Colgate-Palmolive Company 1,160,748 1.2 44,800 The Procter & Gamble Company 3,833,536 3.8 ------------ ------ 6,102,664 6.1 Industrial 19,500 3M Co. 2,428,725 2.4 Conglomerates Insurance 16,800 American International Group, Inc. 909,216 0.9 37,400 Everest Re Group, Ltd. 1,887,578 1.9 29,800 Marsh & McLennan Companies, Inc. 1,270,374 1.3 ------------ ------ 4,067,168 4.1 Media 177,100 ++AOL Time Warner Inc. 2,064,986 2.1 59,200 ++Clear Channel Communications, Inc. 2,372,736 2.4 40,800 ++Fox Entertainment Group, Inc. (Class A) 1,127,304 1.1 76,500 ++Rogers Communications, Inc. 'B' 736,730 0.7 44,572 ++Viacom, Inc. (Class B) 1,718,251 1.7 ------------ ------

8,020,007 8.0 Multiline Retail 16,200 ++Kohl's Corporation 848,394 0.8 110,200 Wal-Mart Stores, Inc. 5,267,560 5.3 ------------ ------ 6,115,954 6.1 Semiconductor 183,700 Intel Corporation 2,889,601 2.9 Equipment & Products Software 24,900 ++Electronic Arts Inc. 1,289,073 1.3 134,700 Microsoft Corporation 6,391,515 6.4 ------------ ------ 7,680,588 7.7

January 31, 2003, Mercury Growth Opportunity Fund SCHEDULE OF INVESTMENTS (CONCLUDED)

In U.S. Dollars Shares Percent of Industry* Held Common Stocks Value Net Assets Specialty Retail 1,000 ++AutoZone, Inc. $ 65,710 0.1% 37,100 ++Bed Bath & Beyond Inc. 1,243,592 1.2 52,900 Lowe's Companies, Inc. 1,808,122 1.8 61,500 The TJX Companies, Inc. 1,129,140 1.1 ------------ ------ 4,246,564 4.2 Total Common Stocks (Cost--$114,277,287) 94,768,852 94.6

Short-Term Securities Common $1,588,974 Merrill Lynch Premier Institutional Stock Fund (a) (b) 1,588,974 1.6

Partnership Interest Partnership 5,956,984 Merrill Lynch Liquidity Series, LLC Interest Cash Sweep Series I (a) 5,956,984 6.0 1,942,078 Merrill Lynch Liquidity Series, LLC Money Market Series (a) (b) 1,942,078 1.9 ------------ ------ 7,899,062 7.9 Total Short-Term Investments (Cost--$9,488,036) 9,488,036 9.5 Total Investments (Cost--$123,765,323) 104,256,888 104.1 Liabilities in Excess of Other Assets (4,149,500) (4.1) ------------ ------ Net Assets $100,107,388 100.0% ============ ====== *For Fund compliance purposes, "Industry" means any one of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. These industry classifications are unaudited. ++Non-income producing security. (a)Investments in companies considered to be an affiliate of the Fund (such companies are defined as "Affiliated Companies" in Section 2 (a)(3) of the Investment Company Act of 1940) are as follows: Dividend/ Net Interest Affiliate Activity Income Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $5,956,984 $11,592 Merrill Lynch Liquidity Series, LLC Money Market Series $1,942,078 931 Merrill Lynch Premier Institutional Fund 1,588,974 2,033 Merrill Lynch Institutional Fund -- 96 (b)Security was purchased with the cash proceeds from securities loans. See Notes to Financial Statements.

January 31, 2003, Mercury Growth Opportunity Fund STATEMENT OF ASSETS AND LIABILITIES

As of January 31, 2003 Assets: Investments, at value (including securities loaned of $3,477,149) (identified cost--$123,765,323) $ 104,256,888 Receivables: Securities sold $ 889,993 Dividends 83,289 Capital shares sold 82,744 Interest 6,604 Loaned securities income 72 1,062,702 -------------

Prepaid registration fees and other assets 5,359 ------------- Total assets 105,324,949 ------------- Liabilities: Collateral on securities loaned, at value 3,531,052 Payables: Securities purchased 1,028,291 Capital shares redeemed 379,278 Distributor 78,415 Investment adviser 65,465 1,551,449 ------------- Accrued expenses and other liabilities 135,060 ------------- Total liabilities 5,217,561 ------------- Net Assets: Net assets $ 100,107,388 ============= Net Assets Consist of: Class I Shares of capital stock, $.10 par value, 6,250,000 shares authorized $ 22,430 Class A Shares of capital stock, $.10 par value, 6,250,000 shares authorized 145,083 Class B Shares of capital stock, $.10 par value, 15,000,000 shares authorized 556,257 Class C Shares of capital stock, $.10 par value, 15,000,000 shares authorized 364,282 Paid-in capital in excess of par 173,370,855 Accumulated realized capital losses on investments and foreign currency transactions--net $(54,843,084) Unrealized depreciation on investments--net (19,508,435) ------------- Total accumulated losses--net (74,351,519) ------------- Net assets $ 100,107,388 ============= Net Asset Value: Class I--Based on net assets of $2,145,827 and 224,303 shares outstanding $ 9.57 ============= Class A--Based on net assets of $13,770,435 and 1,450,827 shares outstanding $ 9.49 ============= Class B--Based on net assets of $50,933,300 and 5,562,573 shares outstanding $ 9.16 ============= Class C--Based on net assets of $33,257,826 and 3,642,825 shares outstanding $ 9.13 ============= See Notes to Financial Statements.

January 31, 2003, Mercury Growth Opportunity Fund STATEMENT OF OPERATIONS

For the Year Ended January 31, 2003 Investment Income: Dividends (net of $11,136 foreign withholding tax) $ 879,370 Interest 84,471 Securities lending--net 3,060 ------------- Total income 966,901 ------------- Expenses: Investment advisory fees $ 810,748 Account maintenance and distribution fees--Class B 662,705 Transfer agent fees--Class B 466,385 Account maintenance and distribution fees--Class C 428,919 Transfer agent fees--Class C 314,217 Printing and shareholder reports 114,581 Transfer agent fees--Class A 81,866 Accounting services 71,734 Registration fees 58,589 Professional fees 57,664 Custodian fees 33,476 Account maintenance fees--Class A 33,138 Transfer agent fees--Class I 14,103 Directors' fees and expenses 8,863 Pricing fees 2,912 Other 18,050 ------------- Total expenses 3,177,950 ------------- Investment loss--net (2,211,049) ------------- Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net: Realized gain (loss) on: Investments--net (22,368,198) Foreign currency transactions--net 3,806 (22,364,392) ------------- Change in unrealized appreciation/depreciation on: Investments--net (22,045,704) Foreign currency transactions--net 6,048 (22,039,656) ------------- ------------- Total realized and unrealized loss on investments and foreign currency transactions--net (44,404,048) ------------- Net Decrease in Net Assets Resulting from Operations $(46,615,097) ============= See Notes to Financial Statements.

January 31, 2003, Mercury Growth Opportunity Fund STATEMENTS OF CHANGES IN NET ASSETS

For the Year Ended January 31, Increase (Decrease)in Net Assets: 2003 2002 Operations: Investment loss--net $ (2,211,049) $ (2,201,545) Realized losson investments and foreign currency transactions--net (22,364,392) (31,985,922) Change in unrealized appreciation/depreciation on investments and foreign currency transactions--net (22,039,656) (5,230,376) ------------- ------------- Net decrease in net assets resulting from operations (46,615,097) (39,417,843) ------------- ------------- Distributions to Shareholders: Realized gain on investments--net: Class I -- (86,449) Class A -- (294,044) Class B -- (2,792,980) Class C -- (1,796,089) ------------- ------------- Net decrease in net assets resulting from distributions to shareholders -- (4,969,562) ------------- ------------- Capital Share Transactions: Net increase (decrease) in net assets derived from capital share transactions (7,785,645) 7,173,844 ------------- ------------- Net Assets: Total decrease in net assets (54,400,742) (37,213,561) Beginning of year 154,508,130 191,721,691 ------------- ------------- End of year* $ 100,107,388 $ 154,508,130 ============= ============= *Accumulated investment loss--net $ (2,211,316) $ (267) ============= ============= See Notes to Financial Statements.

January 31, 2003, Mercury Growth Opportunity Fund FINANCIAL HIGHLIGHTS

The following per share data and ratios have been derived from information provided in the financial statements. Class I+++ Increase (Decrease) in For the Year Ended January 31, Net Asset Value: 2003 2002 2001 2000 1999 Per Share Operating Performance: Net asset value, beginning of year $ 13.69 $ 17.49 $ 22.01 $ 18.53 $ 13.42 -------- -------- -------- -------- -------- Investment loss--net++ (.09) (.05) (.05) (.01) (.06) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (4.03) (3.32) (1.64) 4.58 5.63 -------- -------- -------- -------- -------- Total from investment operations (4.12) (3.37) (1.69) 4.57 5.57 -------- -------- -------- -------- -------- Less distributions from realized gain on investments--net -- (.43) (2.83) (1.09) (.46) -------- -------- -------- -------- -------- Net asset value, end of year $ 9.57 $ 13.69 $ 17.49 $ 22.01 $ 18.53 ======== ======== ======== ======== ======== Total Investment Return:* Based on net asset value per share (30.09%) (19.27%) (8.37%) 25.11% 42.02% ======== ======== ======== ======== ======== Ratios to Average Net Assets: Expenses 1.56% 1.30% 1.31% 1.36% 1.56% ======== ======== ======== ======== ======== Investment loss--net (.77%) (.33%) (.25%) (.07%) (.39%) ======== ======== ======== ======== ======== Supplemental Data: Net assets, end of year (in thousands) $ 2,146 $ 2,550 $ 2,142 $ 939 $ 582 ======== ======== ======== ======== ======== Portfolio turnover 89.63% 131.76% 100.88% 81.27% 40.59% ======== ======== ======== ======== ======== *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Prior to April 3, 2000, Class I Shares were designated as Class A Shares. See Notes to Financial Statements.

January 31, 2003, Mercury Growth Opportunity Fund FINANCIAL HIGHLIGHTS (CONTINUED)

The following per share data and ratios have been derived from information provided in the financial statements. Class A+++ Increase (Decrease) in For the Year Ended January 31, Net Asset Value: 2003 2002 2001 2000 1999 Per Share Operating Performance: Net asset value, beginning of year $ 13.61 $ 17.45 $ 21.93 $ 18.51 $ 13.42 -------- -------- -------- -------- -------- Investment loss--net++ (.11) (.08) (.12) (.07) (.10) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (4.01) (3.33) (1.61) 4.58 5.62 -------- -------- -------- -------- -------- Total from investment operations (4.12) (3.41) (1.73) 4.51 5.52 -------- -------- -------- -------- -------- Less distributions from realized gain on investments--net -- (.43) (2.75) (1.09) (.43) -------- -------- -------- -------- -------- Net asset value, end of year $ 9.49 $ 13.61 $ 17.45 $ 21.93 $ 18.51 ======== ======== ======== ======== ======== Total Investment Return:* Based on net asset value per share (30.27%) (19.55%) (8.57%) 24.80% 41.59% ======== ======== ======== ======== ======== Ratios to Average Net Assets: Expenses 1.82% 1.56% 1.55% 1.62% 1.80% ======== ======== ======== ======== ======== Investment loss--net (1.03%) (.58%) (.55%) (.34%) (.64%) ======== ======== ======== ======== ======== Supplemental Data: Net assets, end of year (in thousands) $ 13,770 $ 11,847 $ 10,515 $ 7,659 $ 3,700 ======== ======== ======== ======== ======== Portfolio turnover 89.63% 131.76% 100.88% 81.27% 40.59% ======== ======== ======== ======== ======== *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Prior to April 3, 2000, Class A Shares were designated as Class D Shares. See Notes to Financial Statements.

January 31, 2003, Mercury Growth Opportunity Fund FINANCIAL HIGHLIGHTS (CONTINUED)

The following per share data and ratios have been derived from information provided in the financial statements. Class B Increase (Decrease) in For the Year Ended January 31, Net Asset Value: 2003 2002 2001 2000 1999 Per Share Operating Performance: Net asset value, beginning of year $ 13.25 $ 17.13 $ 21.44 $ 18.26 $ 13.27 -------- -------- -------- -------- -------- Investment loss--net++ (.21) (.20) (.30) (.22) (.23) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (3.88) (3.25) (1.56) 4.48 5.54 -------- -------- -------- -------- -------- Total from investment operations (4.09) (3.45) (1.86) 4.26 5.31 -------- -------- -------- -------- -------- Less distributions from realized gain on investments--net -- (.43) (2.45) (1.08) (.32) -------- -------- -------- -------- -------- Net asset value, end of year $ 9.16 $ 13.25 $ 17.13 $ 21.44 $ 18.26 ======== ======== ======== ======== ======== Total Investment Return:* Based on net asset value per share (30.87%) (20.16%) (9.31%) 23.76% 40.41% ======== ======== ======== ======== ======== Ratios to Average Net Assets: Expenses 2.65% 2.39% 2.36% 2.45% 2.66% ======== ======== ======== ======== ======== Investment loss--net (1.87%) (1.42%) (1.38%) (1.16%) (1.50%) ======== ======== ======== ======== ======== Supplemental Data: Net assets, end of year (in thousands) $ 50,933 $ 85,072 $109,589 $115,216 $ 69,601 ======== ======== ======== ======== ======== Portfolio turnover 89.63% 131.76% 100.88% 81.27% 40.59% ======== ======== ======== ======== ======== *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.

January 31, 2003, Mercury Growth Opportunity Fund FINANCIAL HIGHLIGHTS (CONCLUDED)

The following per share data and ratios have been derived from information provided in the financial statements. Class C Increase (Decrease) in For the Year Ended January 31, Net Asset Value: 2003 2002 2001 2000 1999 Per Share Operating Performance: Net asset value, beginning of year $ 13.21 $ 17.09 $ 21.40 $ 18.24 $ 13.26 -------- -------- -------- -------- -------- Investment loss--net++ (.21) (.20) (.30) (.23) (.24) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net (3.87) (3.25) (1.56) 4.47 5.55 -------- -------- -------- -------- -------- Total from investment operations (4.08) (3.45) (1.86) 4.24 5.31 -------- -------- -------- -------- -------- Less distributions from realized gain on investments--net -- (.43) (2.45) (1.08) (.33) -------- -------- -------- -------- -------- Net asset value, end of year $ 9.13 $ 13.21 $ 17.09 $ 21.40 $ 18.24 ======== ======== ======== ======== ======== Total Investment Return:* Based on net asset value per share (30.89%) (20.20%) (9.34%) 23.68% 40.39% ======== ======== ======== ======== ======== Ratios to Average Net Assets: Expenses 2.68% 2.42% 2.38% 2.48% 2.71% ======== ======== ======== ======== ======== Investment loss--net (1.90%) (1.44%) (1.41%) (1.20%) (1.55%) ======== ======== ======== ======== ======== Supplemental Data: Net assets, end of year (in thousands) $ 33,258 $ 55,039 $ 69,476 $ 72,650 $ 40,710 ======== ======== ======== ======== ======== Portfolio turnover 89.63% 131.76% 100.88% 81.27% 40.59% ======== ======== ======== ======== ======== *Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. See Notes to Financial Statements.

January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Mercury Growth Opportunity Fund (the "Fund") is part of The Asset Program, Inc. (the "Program") which is registered under the Investment Company Act of 1940 as a non-diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. The Fund offers four classes of shares. Class I and Class A Shares are sold with a front-end sales charge. Class B and Class C Shares may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class A, Class B and Class C Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures (except that Class B shareholders may vote upon any material changes under the distribution plan for Class A Shares). Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses on investments and foreign currency transactions are allocated daily to each class based on its relative net assets. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that are traded on stock exchanges are valued at the last sale price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. Securities that are traded in the over- the-counter market are valued at the last available bid price in the over-the-counter market prior to the time of valuation. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Program's Board of Directors as the primary market. Securities that are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange-traded options. In the case of options traded in the over-the-counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including financial futures contracts and related options, are stated at market value. Securities and assets for which market quotations are not readily available are valued at fair market value as determined in good faith by or under the direction of the Program's Board of Directors. January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) (b) Repurchase agreements--The Fund may invest in securities pursuant to repurchase agreements. Under such agreements, the counterparty agrees to repurchase the security at a mutually agreed upon time and price. The Fund takes possession of the underlying securities, marks to market such securities and, if necessary, receives additions to such securities daily to ensure that the contract is fully collateralized. If the counterparty defaults and the fair value of the collateral declines, liquidation of the collateral by the Fund may be delayed or limited. (c) Derivative financial instruments--The Fund may engage in various portfolio investment strategies to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts for the purpose of hedging the market risk on existing securities or the intended purchase of securities. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. * Options--The Fund is authorized to purchase and write call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). Written and purchased options are non-income producing investments. January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) * Forward foreign exchange contracts--The Fund is authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. The contract is marked to market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. * Foreign currency options and futures--The Fund may also purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-U.S. dollar denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. (d) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into U.S. dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (e) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (f) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income is recognized on the accrual basis. (g) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. (h) Dividends and distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) (i) Expenses--Certain expenses have been allocated to the individual Funds in the Program on a pro rata basis based upon the respective aggregate net asset value of each Fund included in the Program. (j) Securities lending--The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. Where the Fund receives securities as collateral for the loaned securities, it collects a fee from the borrower. The Fund typically receives the income on the loaned securities but does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral. (k) Reclassification--Accounting principles generally accepted in the United States of America require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the current year's permanent book/tax differences of $2,207,510 have been reclassified between paid-in capital in excess of par and accumulated net investment loss and $3,806 has been reclassified between accumulated net realized capital losses and accumulated net investment loss. These reclassifications have no effect on net assets or net asset values per share. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) FAM is responsible for the management of the Fund's portfolios and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee of .65%, on an annual basis, of the average daily value of the Fund's net assets. FAM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of FAM, pursuant to which MLAM U.K. provides investment advisory services to FAM with respect to the Fund. There is no increase in the aggregate fees paid by the Fund for these services. Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Distribution Fees Fees Class A .25% -- Class B .25% .75% Class C .25% .75% Pursuant to a sub-agreement with the Distributor, selected dealers also provide account maintenance and distribution services to the Program. The ongoing account maintenance fee compensates the Distributor and selected dealers for providing account maintenance services to Class A, Class B and Class C shareholders. The ongoing distribution fee compensates the Distributor and selected dealers for providing shareholder and distribution-related services to Class B and Class C shareholders. For the year ended January 31, 2003, FAMD earned underwriting discounts and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned dealer concessions on sales of the Fund's Class I and Class A Shares as follows: FAMD MLPF&S Class I $ 2 $ 54 Class A $336 $5,710 For the year ended January 31, 2003, MLPF&S, received contingent deferred sales charges of $157,317 and $10,709 relating to transactions in Class B and Class C Shares, respectively. January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to MLPF&S or its affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by MLIM, LLC or in registered money market funds advised by FAM or its affiliates. For the year ended January 31, 2003, MLIM, LLC received $1,189 in securities lending agent fees. In addition, MLPF&S received $43,137 in commissions on the execution of portfolio security transactions for the Fund for the year ended January 31, 2003. Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. For the year ended January 31, 2003, the Fund reimbursed FAM $4,704 for certain accounting services. Certain officers and/or directors of the Program are officers and/or directors of FAM, PSI, MLAM U.K., FDS, FAMD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the year ended January 31, 2003 were $107,582,547 and $107,340,266, respectively. Net realized gains (losses) for the year ended January 31, 2003 and net unrealized losses as of January 31, 2003 were as follows: Realized Unrealized Gains (Losses) Losses Long-term investments $ (22,368,225) $ (19,508,435) Short-term investments 27 -- Foreign currency transactions 3,806 -- -------------- -------------- Total $ (22,364,392) $ (19,508,435) ============== ============== As of January 31, 2003, net unrealized depreciation for Federal income tax purposes aggregated $20,094,383, of which $1,154,893 related to appreciated securities and $21,249,276 related to depreciated securities. At January 31, 2003, the aggregated cost of investments for Federal income tax purposes was $124,351,271. January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. Capital Share Transactions: Net increase (decrease) in net assets derived from capital share transactions was $(7,785,645) and $7,173,844 for the years ended January 31, 2003 and January 31, 2002, respectively. Class I Shares for the Year Dollar Ended January 31, 2003 Shares Amount Shares sold 106,248 $ 1,208,046 Shares redeemed (68,304) (784,527) ------------- -------------- Net increase 37,944 $ 423,519 ============= ============== Class I Shares for the Year Dollar Ended January 31, 2002 Shares Amount Shares sold 148,898 $ 2,234,430 Shares issued to shareholders in reinvestment of distributions 5,478 75,594 ------------- -------------- Total issued 154,376 2,310,024 Shares redeemed (90,470) (1,226,180) ------------- -------------- Net increase 63,906 $ 1,083,844 ============= ============== Class A Shares for the Year Dollar Ended January 31, 2003 Shares Amount Shares sold 1,485,692 $ 16,258,841 Automatic conversion of shares 49,360 591,112 ------------- -------------- Total issued 1,535,052 16,849,953 Shares redeemed (954,462) (10,168,923) ------------- -------------- Net increase 580,590 $ 6,681,030 ============= ============== Class A Shares for the Year Dollar Ended January 31, 2002 Shares Amount Shares sold 467,088 $ 6,456,686 Automatic conversion of shares 72,311 1,047,042 Shares issued to shareholders in reinvestment of distributions 19,965 274,318 ------------- -------------- Total issued 559,364 7,778,046 Shares redeemed (291,792) (3,896,764) ------------- -------------- Net increase 267,572 $ 3,881,282 ============= ============== Class B Shares for the Year Dollar Ended January 31, 2003 Shares Amount Shares sold 470,713 $ 5,262,975 Automatic conversion of shares (50,892) (591,112) Shares redeemed (1,280,011) (13,902,091) ------------- -------------- Net decrease (860,190) $ (9,230,228) ============= ============== January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) Class B Shares for the Year Dollar Ended January 31, 2002 Shares Amount Shares sold 942,500 $ 13,538,977 Shares issued to shareholders in reinvestment of distributions 181,446 2,436,815 ------------- -------------- Total issued 1,123,946 15,975,792 Automatic conversion of shares (73,984) (1,047,042) Shares redeemed (1,024,981) (14,330,019) ------------- -------------- Net increase 24,981 $ 598,731 ============= ============== Class C Shares for the Year Dollar Ended January 31, 2003 Shares Amount Shares sold 454,865 $ 5,090,933 Shares redeemed (978,343) (10,750,899) ------------- -------------- Net decrease (523,478) $ (5,659,966) ============= ============== Class C Shares for the Year Dollar Ended January 31, 2002 Shares Amount Shares sold 717,032 $ 10,252,221 Shares issued to shareholders in reinvestment of distributions 114,189 1,530,134 ------------- -------------- Total issued 831,221 11,782,355 Shares redeemed (730,200) (10,172,368) ------------- -------------- Net increase 101,021 $ 1,609,987 ============= ============== 5. Short-Term Borrowings: The Fund, along with certain other funds managed by FAM and its affiliates, is a party to a $500,000,000 credit agreement with Bank One, N.A. and certain other lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of ..09% per annum based on the Fund's pro rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank One, N.A. On November 29, 2002, the credit agreement was renewed for one year under the same terms, except that the total commitment was reduced from $1,000,000,000 to $500,000,000. The Fund did not borrow under the credit agreement during the year ended January 31, 2003. January 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONCLUDED) 6. Capital Loss Carryforward: The tax character of distributions paid during the fiscal years ended January 31, 2003 and January 31, 2002 was as follows: 1/31/2003 1/31/2002 Distributions paid from: Net long-term capital gains $ -- $ 4,969,562 ------------- -------------- Total taxable distributions $ -- $ 4,969,562 ============= ============== As of January 31, 2003, the components of accumulated losses on a tax basis were as follows: Undistributed ordinary income--net $ -- Undistributed long-term capital gains--net -- -------------- Total undistributed earnings--net -- Capital loss carryforward (52,615,781)* Unrealized losses--net (21,735,738)** -------------- Total accumulated losses--net $ (74,351,519) ============== *On January 31, 2003, the Fund had a net capital loss carryforward of $52,615,781, of which $28,654,300 expires in 2009 and $23,961,481 expires in 2010. This amount will be available to offset like amounts of any future taxable gains. **The difference between book-basis and tax-basis net unrealized losses is attributable primarily to the tax deferral of losses on wash sales and the deferral of post-October capital losses for tax purposes. January 31, 2003, Mercury Growth Opportunity Fund INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders, Mercury Growth Opportunity Fund of The Asset Program, Inc. We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Mercury Growth Opportunity Fund as of January 31, 2003, the related statements of operations for the year then ended and changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years presented. These financial statements and the financial highlights are the responsibility of the Program's management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at January 31, 2003 by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of Mercury Growth Opportunity Fund as of January 31, 2003, the results of its operations, the changes in its net assets, and the financial highlights for the respective stated periods in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Princeton, New Jersey March 12, 2003 January 31, 2003, Mercury Growth Opportunity Fund OFFICERS AND DIRECTORS

INTERESTED DIRECTOR Number of Portfolios in Other Position(s) Length Fund Complex Directorships Held of Time Overseen by Held by Name, Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director Terry K. Glenn* President 1999 to Chairman, Americas Region since 2001 and 117 Funds None P.O. Box 9011 and present Executive Vice President since 1983 of 162 Portfolios Princeton, Director and Fund Asset Management ("FAM") and NJ 08543-9011 1996 to Merrill Lynch Investment Managers, L.P. Age: 62 present ("MLIM"); President of Merrill Lynch Mutual Funds since 1999; Executive Vice President and Director of Princeton Services, Inc. ("Princeton Services") since 1993; President of Princeton Administrators, L.P. since 1988; Director of Financial Data Services, Inc. since 1985. *Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or MLIM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of the Fund based on his positions as Chairman (Americas Region) and Executive Vice President of FAM and MLIM; Executive Vice President of Princeton Services; and President of Princeton Administrators, L.P. The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund President, Mr. Glenn serves at the pleasure of the Board of Directors.

INDEPENDENT DIRECTORS Number of Portfolios in Other Position(s) Length Fund Complex Directorships Held of Time Overseen by Held by Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director James H. Bodurtha Director 2002 to Director and Executive Vice President of 42 Funds None P.O. Box 9095 present The China Business Group, Inc. since 1995; 61 Portfolios Princeton, Chairman, Berkshire Holding Corporation NJ 08543-9095 since 1982. Age: 58 Joe Grills Director 1994 to Member of the Committee of Investment 42 Funds Kimco Realty P.O. Box 9095 present of Employee Benefit Assets of the 61 Portfolios Corporation Princeton, Association of Financial Professionals NJ 08543-9095 ("CIEBA") since 1986; Member of CIEBA's Age: 67 Executive Committee since 1988; Member of the Investment Advisory Committees of the State of New York Common Retirement Fund since 1989; Member of the Investment Advisory Committee of the Howard Hughes Medical Institute from 1997 to to 2000; Director, Duke Management Company since 1992 and Vice Chairman thereof since 1998; Director LaSalle Street Fund from 1995 to 2001; Member of the Investment Advisory Committee of the Virginia Retirement System since 1998; Director, Montpelier Foundation since 1998 and Vice Chairman thereof since 2000; Director, Kimco Realty since 1997; Member of the Investment Committee of the Woodberry Forest School since 2000; Member of the Investment Committee of the National Trust for Historic Preservation since 2000.

January 31, 2003, Mercury Growth Opportunity Fund OFFICERS AND DIRECTORS (CONTINUED)

INDEPENDENT DIRECTORS (concluded) Number of Portfolios in Other Position(s) Length Fund Complex Directorships Held of Time Overseen by Held by Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director Herbert I. London Director 2002 to John M. Olin Professor of Humanities, 42 Funds None P.O. Box 9095 present New York University since 1993 and 61 Portfolios Princeton, Professor thereof since 1980; President NJ 08543-9095 of Hudson Institute since 1997 and Age: 63 Trustee thereof since 1980. Andre F. Perold Director 2002 to George Gund Professor of Finance and 42 Funds None P.O. Box 9095 present Banking, Harvard Business School since 61 Portfolios Princeton, 2000 and a member of the faculty since NJ 08543-9095 1979; Director of Stockback.com since Age: 50 2002; Director of Quantec Limited from 1991 to 1999; Director of Bulldogresearch.com from 2000 to 2001; Director of Sanlam Investment Management from 1999 to 2001; Director of Genbel Securities since 1999; Director of Gensec Bank since 1999; Director of Sanlam Limited and Sanlam Life since 2001. Roberta Cooper Ramo Director 2002 to Shareholder, Modrall, Sperling, Roehl, 42 Funds Cooper's, Inc.; P.O. Box 9095 present Harris & Sisk, P.A. since 1993; Director, 61 Portfolios ECMC Group Princeton, Cooper's Inc. since 1999 and Chairman NJ 08543-9095 thereof since 2000; Director, ECMC Group

Age: 60 since 2001. Robert S. Salomon, Jr. Director 1996 to Principal of STI Management since 1994; 42 Funds None P.O. Box 9095 present Trustee of Commonfund from 1980 to 2001; 61 Portfolios Princeton, Director of Rye Country Day School NJ 08543-9095 since 2001. Age: 66 Stephen B. Swensrud Director 1994 to Chairman, Fernwood Advisors (investment 42 Funds International P.O. Box 9095 present adviser) since 1996; Principal of Fernwood 61 Portfolios Mobile Princeton, Associates (financial consultant) since Communications, NJ 08543-9095 1975; Chairman of RPP Corporation since Inc. Age: 69 1978; Director, International Mobile Communications since 1998. *The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.

January 31, 2003, Mercury Growth Opportunity Fund OFFICERS AND DIRECTORS (CONCLUDED)

FUND OFFICERS Position(s) Length Held of Time Name, Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Donald C. Burke Vice 1994 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof P.O. Box 9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services Princeton, and and since 1999; Vice President of FAMD since 1999; Director of MLIM Taxation NJ 08543-9011 Treasurer 1999 to since 1990. Age: 42 present Robert C. Doll, Jr. Senior Vice 1999 to President and Global Chief Investment Officer of MLIM and member of the P.O. Box 9011 President present Executive Management Committee of ML & Co., Inc. since 2001; Chief Princeton, Investment Officer, Senior Vice President and Co-Head of MLIM Americas NJ 08543-9011 from 1999 to 2001; Chief Investment Officer of Oppenheimer Funds, Inc. Age: 48 from 1987 to 1999 and Executive Vice President from 1991 to 1999. Lawrence R. Fuller Senior Vice 1998 to Managing Director (Equities) of MLIM since 2000; First Vice President of P.O. Box 9011 President present MLIM from 1997 to 2000. Princeton, NJ 08543-9011 Age: 61 Susan B. Baker Secretary 2002 to Director (Legal Advisory) of MLIM since 1999 and Vice President from 1993 P.O. Box 9011 present to 1999; Attorney associated with MLIM since 1987. Princeton, NJ 08543-9011 Age: 45 *Officers of the Fund serve at the pleasure of the Board of Directors.

Further information about the Fund's Officers and Directors is available in the Fund's Statement of Additional Information, which can be obtained without charge by calling 1-888-763-2260. Custodian The Bank of New York 100 Church Street New York, NY 10286 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 888-763-2260 Melvin R. Seiden, Director of Mercury Growth Opportunity Fund, has recently retired. The Fund's Board of Directors wishes Mr. Seiden well in his retirement. January 31, 2003, Mercury Growth Opportunity Fund EX-17.(E) 12 e15840ex17e.txt SEMI-ANNUAL REPORT (BULL LOGO) Merrill Lynch Investment Managers www.mlim.ml.com Semi-Annual Report July 31, 2003 Mercury Growth Opportunity Fund This report is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of the Fund unless accompanied or preceded by the Fund's current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2) on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's website at http://www.sec.gov. Mercury Growth Opportunity Fund, A Series of The Asset Program, Inc. Box 9011 Princeton, NJ 08543-9011 Printed on post-consumer recycled paper PORTFOLIO INFORMATION GEOGRAPHIC ALLOCATION As a Percentage of Net Assets as of July 31, 2003++ Percent of Country Net Assets United States 92.1% Netherlands 1.4 Switzerland 1.5 Canada 1.9 ++Total may not equal 100%. AS OF JULY 31, 2003 Ten Largest Equity Percent of Holdings Net Assets Intel Corporation 5.3% General Electric Company 4.9 Cisco Systems, Inc. 4.0 3M Co. 3.2 Verizon Communications 2.4 Lowe's Companies, Inc. 2.4 Medtronic, Inc. 2.3 Amgen Inc. 2.2 Citigroup Inc. 2.2 United Parcel Service, Inc. (Class B) 2.0 Percent of Five Largest Industries* Net Assets Specialty Retail 10.9% Semiconductors & Semiconductor Equipment 8.9 Health Care Equipment & Supplies 8.7 Industrial Conglomerates 8.1 Communications Equipment 5.0 *For Fund compliance purposes, "Industries" means any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub- classifications for reporting ease. July 31, 2003, Mercury Growth Opportunity Fund DEAR SHAREHOLDER We are pleased to provide you with this semi-annual report to shareholders. For the six-month period ended July 31, 2003, Mercury Growth Opportunity Fund, Inc.'s Class A, Class B, Class C and Class I Shares had total returns of +15.38%, +14.74%, +14.79% and +15.46%, respectively. The unmanaged benchmark Standard & Poor's 500 (S&P 500) Index had a total return of +16.79%, while the Lipper Large Cap Growth Funds Average was +17.72% for the same period. (Fund results shown do not reflect sales charges and would be lower if sales charges were included. Complete performance information can be found on pages 5 - 7 of this report to shareholders.) While the Fund provided positive absolute performance, it did not parallel the return of the benchmark S&P 500 Index. The Fund focuses on the highest quality and largest capitalization growth stocks in the benchmark Index. As a group, these companies provided lower total investment returns during the period than the lower-quality, smaller-capitalization growth stocks in the Index. Portfolio Matters In late March 2003, we began moving the portfolio toward companies with smaller average stock market capitalizations, while still focusing on high quality in terms of management, financials and caliber of products and/or services as well as on the individual companies' prospects for above-average earnings growth. Along these lines, we added several new stocks to the portfolio, including International Game Technology, InterActiveCorp, eBay Inc., Ross Stores, Inc., Tiffany & Co., PETsMART, Inc., Coach, Inc., Nike, Inc., SUPERVALU Inc., Devon Energy Corporation, Citigroup Inc., Gilead Sciences, Inc., DENTSPLY International Inc., Anthem Inc., UnitedHealth Group Incorporated, Wellpoint Health Networks Inc., Forest Laboratories, Inc., Hewitt Associates, Inc., General Electric Company, ITT Industries, Inc., Affiliated Computer Services, Inc., Altera Corporation, ASM Lithography Holding NV, Xilinx, Inc., Citrix Systems Inc., Symantec Corporation, Mercury Interactive Corporation and Nortel Networks Corporation. The Fund's average weighted market capitalization at the close of the period was about $50 billion, down from almost $80 billion at the beginning of the period. Many of the additions contributed positively to the Fund's absolute performance as well as to its relative performance versus its benchmark and peer group of Lipper Large Cap Growth Funds in July 2003. The Fund's investments in hospital management companies HCA Inc., Tenet Healthcare Corporation and Health Management Associates, Inc. detracted from performance in the six months ended July 31, 2003. As a result, we eliminated these positions from the portfolio. Our fundamental business outlook for the hospital management industry turned negative as we saw changes in U.S. Medicare reimbursement policies and practices and renewed competition from non-profit hospitals for the first time in approximately 20 years. July 31, 2003, Mercury Growth Opportunity Fund The Fund's holdings in two of the largest information technology companies, Microsoft Corporation and International Business Machines Corporation (IBM), also hindered performance during the period. We sold our position in IBM when the U.S. Securities and Exchange Commission announced a formal investigation of the company's reported earnings for the years 2000 and 2001. We eliminated our position in Microsoft after CEO Steven Ballmer sold more than $1 billion of his personal stock and announced that the company's business outlook for both the short term and intermediate term was not favorable. Investment Outlook The portfolio is structured to benefit from real growth in consumer spending and the start of a recovery in overall corporate and small business capital spending. We believe the increased Federal spending, which is heavily geared toward homeland security and Defense Department supplies, could continue at elevated levels as the post-war rebuilding effort in Iraq requires more U.S. involvement than initially anticipated. Most important in the United States are the recent tax rebates, which appear to be making an impact in terms of higher levels of retail sales, and the lower Federal income tax and withholding tax rates. The Federal tax law changes also included substantial tax incentives for capital investment by both large corporations and small businesses. The Fund is most overweight in the consumer discretionary sector. This reflects our optimism for a strengthening U.S. economy and improving corporate profits, which we believe could translate into higher stock market levels during the remainder of 2003. In Conclusion On August 14, 2003, the Fund's Board of Directors approved a plan of reorganization, subject to shareholder approval and certain other conditions, whereby Merrill Lynch Fundamental Growth Fund, Inc. will acquire all of the assets and will assume all of the liabilities of the Fund in exchange for newly issued shares of Merrill Lynch Fundamental Growth Fund, Inc. We thank you for your investment in Mercury Growth Opportunity Fund. Sincerely, (Terry K. Glenn) Terry K. Glenn President and Director (Lawrence R. Fuller) Lawrence R. Fuller Vice President and Portfolio Manager August 15, 2003 July 31, 2003, Mercury Growth Opportunity Fund FUND PERFORMANCE DATA ABOUT FUND PERFORMANCE The Fund offers multiple classes of shares, each with its own sales charge and expense structure, allowing you to invest in the way that best suits your needs. Prior to April 3, 2000, Class A Shares were designated Class D Shares and Class I Shares were designated Class A Shares. CLASS A SHARES incur a maximum initial sales charge of 5.25% and an account maintenance fee of 0.25% (but no distribution fee). CLASS B SHARES are subject to a maximum contingent deferred sales charge of 4% if redeemed during the first two years, decreasing to 3% for each of the next two years and decreasing 1% each year thereafter to 0% after the sixth year. In addition, Class B Shares are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. These shares automatically convert to Class A Shares after approximately eight years. CLASS C SHARES are subject to a distribution fee of 0.75% and an account maintenance fee of 0.25%. In addition, Class C Shares may be subject to a 1% contingent deferred sales charge if redeemed within one year after purchase. CLASS I SHARES incur a maximum initial sales charge (front-end load) of 5.25% and bear no ongoing distribution and account maintenance fees. Class I Shares are available only to eligible investors. None of the past results shown should be considered a representation of future performance. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Figures shown in each of the following tables assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Dividends paid to each class of shares will vary because of the different levels of account maintenance, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. July 31, 2003, Mercury Growth Opportunity Fund FUND PERFORMANCE DATA (CONTINUED) RECENT PERFORMANCE RESULTS 6-Month 12-Month Since Inception As of July 31, 2003 Total Return Total Return Total Return Class A* +15.38% + 4.68% +51.89% Class B* +14.74 + 3.65 +42.40 Class C* +14.79 + 3.66 +42.08 Class I* +15.46 + 4.94 +54.49 Standard & Poor's 500 Index** +16.79 +10.64 +75.14 *Investment results shown do not reflect sales charges. Results shown would be lower if a sales charge was included. Total investment returns are based on changes in the Fund's net asset values for the periods shown, and assume reinvestment of all dividends and capital gains at net asset value on the ex-dividend date. The Fund commenced operations on 2/02/96. **This unmanaged Index covers 500 industrial, utility, transportation and financial companies of the U.S. markets (mostly NYSE issues), representing about 75% of NYSE market capitalization and 30% of NYSE issues. Since inception total return is from 2/02/96. July 31, 2003, Mercury Growth Opportunity Fund FUND PERFORMANCE DATA (CONCLUDED) AVERAGE ANNUAL TOTAL RETURN % Return % Return Without Sales With Sales Class A Shares* Charge Charge** One Year Ended 7/31/03 +4.68% -0.81% Five Years Ended 7/31/03 -2.61 -3.66 Inception (2/02/96) through 7/31/03 +5.74 +4.98 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. % Return % Return Without With Class B Shares* CDSC CDSC** One Year Ended 7/31/03 +3.65% -0.35% Five Years Ended 7/31/03 -3.45 -3.76 Inception (2/02/96) through 7/31/03 +4.83 +4.83 *Maximum contingent deferred sales charge is 4% and is reduced to 0% after six years. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without With Class C Shares* CDSC CDSC** One Year Ended 7/31/03 +3.66% +2.66% Five Years Ended 7/31/03 -3.47 -3.47 Inception (2/02/96) through 7/31/03 +4.80 +4.80 *Maximum contingent deferred sales charge is 1% and is reduced to 0% after one year. **Assuming payment of applicable contingent deferred sales charge. % Return % Return Without Sales With Sales Class I Shares* Charge Charge** One Year Ended 7/31/03 +4.94% -0.57% Five Years Ended 7/31/03 -2.37 -3.42 Inception (2/02/96) through 7/31/03 +5.98 +5.22 *Maximum sales charge is 5.25%. **Assuming maximum sales charge. July 31, 2003, Mercury Growth Opportunity Fund SCHEDULE OF INVESTMENTS

In U.S. Dollars Shares Percent of Industry+++ Held Common Stocks Value Net Assets Aerospace & 20,700 General Dynamics Corporation $ 1,642,338 1.5% Defense Air Freight & 34,400 United Parcel Service, Inc. (Class B) 2,169,952 2.0

Logistics Beverages 20,200 Anheuser-Busch Companies, Inc. 1,046,764 1.0 Biotechnology 35,000 ++Amgen Inc. 2,435,300 2.2 26,300 ++Gilead Sciences, Inc. 1,802,865 1.7 ------------ ------ 4,238,165 3.9 Capital Markets 25,800 Northern Trust Corporation 1,126,428 1.0 27,000 State Street Corporation 1,239,300 1.2 43,900 T. Rowe Price Group Inc. 1,781,901 1.6 ------------ ------ 4,147,629 3.8 Chemicals 58,200 Ecolab Inc. 1,438,122 1.3 Commercial 20,600 ++Apollo Group, Inc. (Class A) 1,334,056 1.2 Services & 14,700 ++Career Education Corporation 1,225,980 1.1 Supplies 13,500 ++Hewitt Associates, Inc. (Class A) 348,570 0.3 ------------ ------ 2,908,606 2.6 Communications 227,000 ++Cisco Systems, Inc. 4,431,040 4.0 Equipment 368,900 ++Nortel Networks Corporation 1,088,255 1.0 ------------ ------ 5,519,295 5.0 Computers & 50,000 Hewlett-Packard Company 1,058,500 1.0 Peripherals 23,000 ++SanDisk Corporation 1,303,870 1.2 ------------ ------ 2,362,370 2.2 Containers & 19,300 Ball Corporation 959,210 0.9 Packaging Diversified 53,600 Citigroup Inc. 2,401,280 2.2 Financial Services Diversified 76,500 Verizon Communications 2,666,790 2.4 Telecommunication Services

July 31, 2003, Mercury Growth Opportunity Fund SCHEDULE OF INVESTMENTS (CONTINUED)

In U.S. Dollars Shares Percent of Industry+++ Held Common Stocks Value Net Assets Energy 27,800 ++BJ Services Company $ 952,150 0.9% Equipment & 36,000 Baker Hughes Incorporated 1,130,760 1.0 Service ------------ ------ 2,082,910 1.9 Food Products 63,100 Archer-Daniels-Midland Company 829,134 0.8 Food & Staples 45,000 SUPERVALU Inc. 1,059,750 1.0 Retailing 36,800 SYSCO Corporation 1,108,784 1.0 ------------ ------ 2,168,534 2.0 Health Care 33,300 Alcon, Inc. 1,697,301 1.5 Equipment & 29,700 ++Boston Scientific Corporation 1,877,931 1.7 Supplies 25,000 DENTSPLY International Inc. 1,085,250 1.0 48,100 Medtronic, Inc. 2,477,150 2.3 15,000 Stryker Corporation 1,147,800 1.0 20,800 ++Varian Medical Systems, Inc. 1,276,288 1.2 ------------ ------ 9,561,720 8.7 Health Care 14,900 ++Anthem, Inc. 1,125,099 1.0 Providers & 27,100 UnitedHealth Group Incorporated 1,411,639 1.3 Services 15,600 ++WellPoint Health Networks Inc. 1,304,940 1.2 ------------ ------ 3,841,678 3.5 Hotels, 20,100 ++Brinker International, Inc. 703,500 0.7 Restaurants & 27,800 ++Krispy Kreme Doughnuts, Inc. 1,213,748 1.1 Leisure 45,000 ++Starbucks Corporation 1,229,850 1.1 70,900 ++YUM! Brands, Inc. 2,122,037 1.9 ------------ ------ 5,269,135 4.8 IT Services 24,900 ++Affiliated Computer Services, Inc. (Class A) 1,233,795 1.1 28,100 First Data Corporation 1,061,056 1.0 35,000 Paychex, Inc. 1,138,550 1.0 ------------ ------ 3,433,401 3.1 Industrial 25,100 3M Co. 3,519,020 3.2 Conglomerates 189,000 General Electric Company 5,375,160 4.9 ------------ ------ 8,894,180 8.1

July 31, 2003, Mercury Growth Opportunity Fund SCHEDULE OF INVESTMENTS (CONTINUED)

In U.S. Dollars Shares Percent of Industry+++ Held Common Stocks Value Net Assets Internet & 15,400 ++eBay Inc. $ 1,650,880 1.5% Catalog Retail 58,800 International Game Technology 1,496,460 1.4 ------------ ------ 3,147,340 2.9 Machinery 17,600 ITT Industries, Inc. 1,173,920 1.1 Media 43,000 ++Fox Entertainment Group, Inc. (Class A) 1,301,610 1.2 30,000 ++InterActiveCorp 1,214,100 1.1 66,700 Rogers Communications, Inc. 'B' 1,026,372 0.9 ------------ ------ 3,542,082 3.2 Oil & Gas 20,300 Devon Energy Corporation 961,611 0.9 Pharmaceuticals 19,900 ++Forest Laboratories, Inc. 952,812 0.9 Semiconductors & 115,100 ++ASM Lithography Holding NV Semiconductor (NY Registered Shares) 1,489,394 1.3 Equipment 67,300 ++Altera Corporation 1,294,852 1.2 230,700 Intel Corporation 5,755,965 5.3 45,000 ++Xilinx, Inc. 1,182,600 1.1 ------------ ------ 9,722,811 8.9 Software 48,900 ++Citrix Systems, Inc. 887,535 0.8 13,300 ++Electronic Arts Inc. 1,117,200 1.0 27,600 ++Mercury Interactive Corporation 1,086,336 1.0 27,800 ++Symantec Corporation 1,300,206 1.2 ------------ ------ 4,391,277 4.0 Specialty Retail 16,300 ++AutoZone, Inc. 1,357,138 1.2 34,200 ++Bed, Bath & Beyond Inc. 1,327,986 1.2 55,900 Lowe's Companies, Inc. 2,658,604 2.4 71,300 ++PETsMART, Inc. 1,413,879 1.3 14,300 ++Rent A Center Inc. 1,042,756 1.0 26,100 Ross Stores, Inc. 1,192,770 1.1 65,900 The TJX Companies, Inc. 1,281,755 1.2 47,600 Tiffany & Co. 1,635,536 1.5 ------------ ------ 11,910,424 10.9 Textiles, Apparel 31,200 ++Coach, Inc. 1,653,600 1.5 & Luxury Goods 19,000 Nike, Inc. (Class B) 983,060 0.9 ------------ ------ 2,636,660 2.4 Total Common Stocks (Cost--$97,902,141) 106,020,150 96.9

July 31, 2003, Mercury Growth Opportunity Fund SCHEDULE OF INVESTMENTS (CONCLUDED)

In U.S. Dollars Beneficial Interest/ Percent of Shares Held Short-Term Securities Value Net Assets $3,807,852 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (a) $ 3,807,852 3.5% $4,280,339 Merrill Lynch Liquidity Series, LLC Money Market Series (a) (b) 4,280,339 3.9 2,853,561 Merrill Lynch Premier Institutional Fund (a) (b) 2,853,561 2.6 Total Short-Term Securities (Cost--$10,941,752) 10,941,752 10.0 Total Investments (Cost--$108,843,893) 116,961,902 106.9 Liabilities in Excess of Other Assets (7,556,888) (6.9) ------------ ------ Net Assets $109,405,014 100.0% ============ ====== ++Non-income producing security. +++For Fund compliance purposes, "Industry" means any one of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. (a)Investments in companies considered to be an affiliate of the Fund (such companies are defined as "Affiliated Companies" in Section 2(a)(3) of the Investment Company Act of 1940) are as follows: Dividend/ Net Interest Affiliate Activity Income Merrill Lynch Institutional Fund -- $ 14 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $(2,149,132) $ 24,202 Merrill Lynch Liquidity Series, LLC Money Market Series $ 2,338,261 $ 542 Merrill Lynch Premier Institutional Fund 1,264,587 $ 351 (b)Security was purchased with the cash proceeds from securities loans. See Notes to Financial Statements.

July 31, 2003, Mercury Growth Opportunity Fund STATEMENT OF ASSETS AND LIABILITIES

As of July 31, 2003 Assets: Investments, at value (including securities loaned of $6,972,185) (identified cost--$108,843,893) $ 116,961,902 Cash 213 Receivables: Capital shares sold $ 69,362 Dividends 68,559 Interest 3,606 Securities lending--net 193 141,720 ------------- Prepaid registration fees and other assets 5,359 ------------- Total assets 117,109,194 ------------- Liabilities: Collateral on securities loaned, at value 7,133,900 Payables: Capital shares redeemed 263,195 Distributor 79,311 Investment adviser 65,667 Other affiliates 58,791 466,964 ------------- Accrued expenses and other liabilities 103,316 ------------- Total liabilities 7,704,180 ------------- Net Assets: Net assets $ 109,405,014 ============= Net Assets Consist of: Class A Shares of capital stock, $.10 par value, 6,250,000 shares authorized $ 156,670 Class B Shares of capital stock, $.10 par value, 15,000,000 shares authorized 510,554 Class C Shares of capital stock, $.10 par value, 15,000,000 shares authorized 342,454 Class I Shares of capital stock, $.10 par value, 6,250,000 shares authorized 24,196 Paid-in capital in excess of par 168,256,533 Accumulated investment loss--net $ (817,636) Accumulated realized capital losses on investments and foreign currency transactions--net (67,185,766) Unrealized appreciation on investments--net 8,118,009 ------------- Total accumulated losses--net (59,885,393) ------------- Net assets $ 109,405,014 ============= Net Asset Value: Class A--Based on net assets of $17,149,735 and 1,566,704 shares outstanding $ 10.95 ============= Class B--Based on net assets of $53,683,782 and 5,105,536 shares outstanding $ 10.51 ============= Class C--Based on net assets of $35,898,550 and 3,424,537 shares outstanding $ 10.48 ============= Class I--Based on net assets of $2,672,947 and 241,959 shares outstanding $ 11.05 ============= See Notes to Financial Statements.

July 31, 2003, Mercury Growth Opportunity Fund STATEMENT OF OPERATIONS

For the Six Months Ended July 31, 2003 Investment Income: Dividends (net of $146 foreign withholding tax) $ 445,318 Interest 24,563 Securities lending--net 907 ------------- Total income 470,788 ------------- Expenses: Investment advisory fees $ 332,913 Account maintenance and distribution fees--Class B 255,274 Transfer agent fees--Class B 189,873 Account maintenance and distribution fees--Class C 168,955 Transfer agent fees--Class C 130,204 Transfer agent fees--Class A 47,675 Printing and shareholder reports 36,736 Accounting services 35,496 Registration fees 22,622 Account maintenance fees--Class A 19,041 Professional fees 18,539 Custodian fees 11,037 Transfer agent fees--Class I 7,377 Directors' fees and expenses 4,482 Pricing fees 1,128 Other 7,072 ------------- Total expenses 1,288,424 ------------- Investment loss--net (817,636) ------------- Realized & Unrealized Gain (Loss) on Investments & Foreign Currency Transactions--Net:

Realized loss on: Investments--net (12,341,730) Foreign currency transactions--net (952) (12,342,682) ------------- Change in unrealized appreciation/depreciation on investments--net 27,626,444 ------------- Total realized and unrealized gain on investments and foreign currency transactions--net 15,283,762 ------------- Net Increase in Net Assets Resulting from Operations $ 14,466,126 ============= See Notes to Financial Statements.

July 31, 2003, Mercury Growth Opportunity Fund STATEMENTS OF CHANGES IN NET ASSETS

For the Six For the Months Ended Year Ended July 31, January 31, Increase (Decrease)in Net Assets: 2003 2003 Operations: Investment loss--net $ (817,636) $ (2,211,049) Realized losson investments and foreign currency transactions--net (12,342,682) (22,364,392) Change in unrealized appreciation/depreciation on investments--net 27,626,444 (22,039,656) ------------- ------------- Net increase (decrease) in net assets resulting from operations 14,466,126 (46,615,097) ------------- ------------- Capital Share Transactions: Net decrease in net assets derived from capital share transactions (5,168,500) (7,785,645) ------------- ------------- Net Assets: Total increase (decrease) in net assets 9,297,626 (54,400,742) Beginning of period 100,107,388 154,508,130 ------------- ------------- End of period* $ 109,405,014 $ 100,107,388 ============= ============= *Accumulated investment loss--net $ (817,636) -- ============= ============= See Notes to Financial Statements.

July 31, 2003, Mercury Growth Opportunity Fund FINANCIAL HIGHLIGHTS

The following per share data and ratios have been derived from information provided in the financial statements. Class A+++++ For the Six Months Ended Increase (Decrease) in July 31, For the Year Ended January 31, Net Asset Value: 2003 2003 2002 2001 2000 Per Share Operating Performance: Net asset value, beginning of period $ 9.49 $ 13.61 $ 17.45 $ 21.93 $ 18.51 --------- --------- --------- --------- --------- Investment loss--net++ (.04) (.11) (.08) (.12) (.07) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net 1.50 (4.01) (3.33) (1.61) 4.58 --------- --------- --------- --------- --------- Total from investment operations 1.46 (4.12) (3.41) (1.73) 4.51 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net -- -- (.43) (2.75) (1.09) --------- --------- --------- --------- --------- Net asset value, end of period $ 10.95 $ 9.49 $ 13.61 $ 17.45 $ 21.93 ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share 15.38%+++ (30.27%) (19.55%) (8.57%) 24.80% ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses 1.79%* 1.82% 1.56% 1.55% 1.62% ========= ========= ========= ========= ========= Investment loss--net (.88%)* (1.03%) (.58%) (.55%) (.34%) ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands) $ 17,150 $ 13,770 $ 11,847 $ 10,515 $ 7,659 ========= ========= ========= ========= ========= Portfolio turnover 63.97% 89.63% 131.76% 100.88% 81.27% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding.

+++Aggregate total investment return. +++++Prior to April 3, 2000, Class A Shares were designated as Class D Shares. See Notes to Financial Statements. July 31, 2003, Mercury Growth Opportunity Fund FINANCIAL HIGHLIGHTS (CONTINUED)

The following per share data and ratios have been derived from information provided in the financial statements. Class B For the Six Months Ended Increase (Decrease) in July 31, For the Year Ended January 31, Net Asset Value: 2003 2003 2002 2001 2000 Per Share Operating Performance: Net asset value, beginning of period $ 9.16 $ 13.25 $ 17.13 $ 21.44 $ 18.26 --------- --------- --------- --------- --------- Investment loss--net++ (.08) (.21) (.20) (.30) (.22) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net 1.43 (3.88) (3.25) (1.56) 4.48 --------- --------- --------- --------- --------- Total from investment operations 1.35 (4.09) (3.45) (1.86) 4.26 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net -- -- (.43) (2.45) (1.08) --------- --------- --------- --------- --------- Net asset value, end of period $ 10.51 $ 9.16 $ 13.25 $ 17.13 $ 21.44 ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share 14.74%+++ (30.87%) (20.16%) (9.31%) 23.76% ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses 2.66%* 2.65% 2.39% 2.36% 2.45% ========= ========= ========= ========= ========= Investment loss--net (1.74%)* (1.87%) (1.42%) (1.38%) (1.16%) ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands) $ 53,684 $ 50,933 $ 85,072 $ 109,589 $ 115,216 ========= ========= ========= ========= ========= Portfolio turnover 63.97% 89.63% 131.76% 100.88% 81.27% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.

July 31, 2003, Mercury Growth Opportunity Fund FINANCIAL HIGHLIGHTS (CONTINUED)

The following per share data and ratios have been derived from information provided in the financial statements. Class C For the Six Months Ended Increase (Decrease) in July 31, For the Year Ended January 31, Net Asset Value: 2003 2003 2002 2001 2000 Per Share Operating Performance: Net asset value, beginning of period $ 9.13 $ 13.21 $ 17.09 $ 21.40 $ 18.24 --------- --------- --------- --------- --------- Investment loss--net++ (.08) (.21) (.20) (.30) (.23) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net 1.43 (3.87) (3.25) (1.56) 4.47 --------- --------- --------- --------- --------- Total from investment operations 1.35 (4.08) (3.45) (1.86) 4.24 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net -- -- (.43) (2.45) (1.08) --------- --------- --------- --------- --------- Net asset value, end of period $ 10.48 $ 9.13 $ 13.21 $ 17.09 $ 21.40 ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share 14.79%+++ (30.89%) (20.20%) (9.34%) 23.68% ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses 2.69%* 2.68% 2.42% 2.38% 2.48% ========= ========= ========= ========= ========= Investment loss--net (1.77%)* (1.90%) (1.44%) (1.41%) (1.20%) ========= ========= ========= ========= ========= Supplemental Data:

Net assets, end of period (in thousands) $ 35,898 $ 33,258 $ 55,039 $ 69,476 $ 72,650 ========= ========= ========= ========= ========= Portfolio turnover 63.97% 89.63% 131.76% 100.88% 81.27% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. See Notes to Financial Statements.

July 31, 2003, Mercury Growth Opportunity Fund FINANCIAL HIGHLIGHTS (CONCLUDED)

The following per share data and ratios have been derived from information provided in the financial statements. Class I+++++ For the Six Months Ended Increase (Decrease) in July 31, For the Year Ended January 31, Net Asset Value: 2003 2003 2002 2001 2000 Per Share Operating Performance: Net asset value, beginning of period $ 9.57 $ 13.69 $ 17.49 $ 22.01 $ 18.53 --------- --------- --------- --------- --------- Investment loss--net++ (.03) (.09) (.05) (.05) (.01) Realized and unrealized gain (loss) on investmentsand foreign currency transactions--net 1.51 (4.03) (3.32) (1.64) 4.58 --------- --------- --------- --------- --------- Total from investment operations 1.48 (4.12) (3.37) (1.69) 4.57 --------- --------- --------- --------- --------- Less distributions from realized gain on investments--net -- -- (.43) (2.83) (1.09) --------- --------- --------- --------- --------- Net asset value, end of period $ 11.05 $ 9.57 $ 13.69 $ 17.49 $ 22.01 ========= ========= ========= ========= ========= Total Investment Return:** Based on net asset value per share 15.46%+++ (30.09%) (19.27%) (8.37%) 25.11% ========= ========= ========= ========= ========= Ratios to Average Net Assets: Expenses 1.54%* 1.56% 1.30% 1.31% 1.36% ========= ========= ========= ========= ========= Investment loss--net (.63%)* (.77%) (.33%) (.25%) (.07%) ========= ========= ========= ========= ========= Supplemental Data: Net assets, end of period (in thousands) $ 2,673 $ 2,146 $ 2,550 $ 2,142 $ 939 ========= ========= ========= ========= ========= Portfolio turnover 63.97% 89.63% 131.76% 100.88% 81.27% ========= ========= ========= ========= ========= *Annualized. **Total investment returns exclude the effects of sales charges. ++Based on average shares outstanding. +++Aggregate total investment return. +++++Prior to April 3, 2000, Class I Shares were designated as Class A Shares. See Notes to Financial Statements.

July 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies: Mercury Growth Opportunity Fund (the "Fund") is a series of The Asset Program, Inc. (the "Program"), which is registered under the Investment Company Act of 1940, as amended, as a non-diversified, open-end management investment company. The Fund's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require the use of management accruals and estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. The Fund offers multiple classes of shares. Class A and Class I Shares are sold with a front-end sales charge. Class B and Class C Shares may be subject to a contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Class A, Class B and Class C Shares bear certain expenses related to the account maintenance of such shares, and Class B and Class C Shares also bear certain expenses related to the distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its account maintenance and distribution expenditures (except that Class B shareholders may vote upon any material changes under the distribution plan for Class A Shares). Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses on investments and foreign currency transactions are allocated daily to each class based on its relative net assets. The following is a summary of significant accounting policies followed by the Fund. (a) Valuation of investments--Portfolio securities that are traded on stock exchanges or the Nasdaq National Market are valued at the last sale price or official closing price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available ask price for short positions. Securities traded in the over-the- counter market are valued at the last available bid price prior to the time of valuation. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Program's Board of Directors as the primary market. Securities that are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market. Options written or purchased are valued at the last sale price in the case of exchange-traded options. In the case of options traded in the over-the-counter market, valuation is the last asked price (options written) or the last bid price (options purchased). Short-term securities are valued at amortized cost, which approximates market value. Other investments, including financial futures contracts and related options, are stated at market value. Securities and assets for which market quotations are not readily available are valued at fair market value as determined in good faith by or under the direction of the Program's Board of Directors. Occasionally, events affecting the values of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the market on which such securities trade) and the close of business on the NYSE. If events (for example, company announcement, natural disasters, market volatility) occur during such periods that are expected to materially affect the value for such securities, those securities may be valued at their fair market value as determined in good faith by the Program's Board of Directors or by the investment adviser using a pricing service and/or procedures approved by the Board of Directors of the Program. July 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) (b) Repurchase agreements--The Fund may invest in securities pursuant to repurchase agreements. Under such agreements, the counterparty agrees to repurchase the security at a mutually agreed upon time and price. The Fund takes possession of the underlying securities, marks to market such securities and, if necessary, receives additions to such securities daily to ensure that the contract is fully collateralized. If the counterparty defaults and the fair value of the collateral declines, liquidation of the collateral by the Fund may be delayed or limited. (c) Derivative financial instruments--The Fund may engage in various portfolio investment strategies both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movement and movements in the securities markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. * Options--The Fund is authorized to purchase and write call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked to market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received). July 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) Written and purchased options are non-income producing investments. * Forward foreign exchange contracts--The Fund is authorized to enter into forward foreign exchange contracts as a hedge against either specific transactions or portfolio positions. The contract is marked-to-market daily and the change in market value is recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. * Foreign currency options and futures--The Fund may also purchase or sell listed or over-the-counter foreign currency options, foreign currency futures and related options on foreign currency futures as a short or long hedge against possible variations in foreign exchange rates. Such transactions may be effected with respect to hedges on non-U.S. dollar-denominated securities owned by the Fund, sold by the Fund but not yet delivered, or committed or anticipated to be purchased by the Fund. (d) Foreign currency transactions--Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into U.S. dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. (e) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (f) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund has determined the ex-dividend date. Interest income (including amortization of premium and discount) is recognized on the accrual basis. (g) Prepaid registration fees--Prepaid registration fees are charged to expense as the related shares are issued. July 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) (h) Dividends and distributions--Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. (i) Expenses--Certain expenses have been allocated to the individual Funds in the Program on a pro rata basis based upon the respective aggregate net asset value of each Fund included in the Program. (j) Securities lending--The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. Where the Fund receives securities as collateral for the loaned securities, it collects a fee from the borrower. The Fund typically receives the income on the loaned securities but does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with Fund Asset Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into a Distribution Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the "Distributor"), which is a wholly-owned subsidiary of Merrill Lynch Group, Inc. FAM is responsible for the management of the Fund's portfolios and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee of .65%, on an annual basis, of the average daily value of the Fund's net assets. FAM has entered into a Sub-Advisory Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an affiliate of FAM, pursuant to which MLAM U.K. provides investment advisory services to FAM with respect to the Fund. There is no increase in the aggregate fees paid by the Fund for these services. July 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor ongoing account maintenance and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the shares as follows: Account Maintenance Distribution Fees Fees Class A .25% -- Class B .25% .75% Class C .25% .75% Pursuant to a sub-agreement with the Distributor, selected dealers also provide account maintenance and distribution services to the Program. The ongoing account maintenance fee compensates the Distributor and selected dealers for providing account maintenance services to Class A, Class B and Class C shareholders. The ongoing distribution fee compensates the Distributor and selected dealers for providing shareholder and distribution-related services to Class B and Class C shareholders. For the six months ended July 31, 2003, FAMD earned underwriting discounts and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned dealer concessions on sales of the Fund's Class A Shares as follows: FAMD MLPF&S Class A $99 $1,807 For the six months ended July 31, 2003, MLPF&S, received contingent deferred sales charges of $47,299 and $3,078 relating to transactions in Class B and Class C Shares, respectively. The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to MLPF&S or its affiliates. As of July 31, 2003, the Fund lent securities with a value of $4,793,185 to MLPF&S or its affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by MLIM, LLC or in registered money market funds advised by FAM or its affiliates. For the six months ended July 31, 2003, MLIM, LLC received $389 in securities lending agent fees. In addition, MLPF&S received $35,253 in commissions on the execution of portfolio security transactions for the Fund for the six months ended July 31, 2003. July 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co., is the Fund's transfer agent. For the six months ended July 31, 2003, the Fund reimbursed FAM $1,214 for certain accounting services. Certain officers and/or directors of the Program are officers and/or directors of FAM, MLIM, LLC, PSI, MLAM U.K., FDS, FAMD, and/or ML & Co. 3. Investments: Purchases and sales of investments, excluding short-term securities, for the six months ended July 31, 2003 were $63,638,572 and $67,647,207, respectively. Net realized losses for the six months ended July 31, 2003 and net unrealized gains as of July 31, 2003 were as follows: Realized Unrealized Losses Gains Long-term investments $ (12,341,730) $ 8,118,009 Foreign currency transactions (952) -- --------------- --------------- Total $ (12,342,682) $ 8,118,009 =============== =============== As of July 31, 2003, net unrealized appreciation for Federal income tax purposes aggregated $7,532,061, of which $11,079,989 related to appreciated securities and $3,547,928 related to depreciated securities. At July 31, 2003, the aggregated cost of investments for Federal income tax purposes was $109,429,841. 4. Capital Share Transactions: Net decrease in net assets derived from capital share transactions was $5,168,500 and $7,785,645 for the six months ended July 31, 2003 and the year ended January 31, 2003, respectively. Class A Shares for the Six Months Dollar Ended July 31, 2003 Shares Amount Shares sold 279,391 $ 2,791,512 Automatic conversion of shares 38,347 386,261 --------------- --------------- Total issued 317,738 3,177,773 Shares redeemed (201,861) (2,037,893) --------------- --------------- Net increase 115,877 $ 1,139,880 =============== =============== July 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONTINUED) Class A Shares for the Year Dollar Ended January 31, 2003 Shares Amount Shares sold 1,485,692 $ 16,258,841 Automatic conversion of shares 49,360 591,112 --------------- --------------- Total issued 1,535,052 16,849,953 Shares redeemed (954,462) (10,168,923) --------------- --------------- Net increase 580,590 $ 6,681,030 =============== =============== Class B Shares for the Six Months Dollar Ended July 31, 2003 Shares Amount Shares sold 132,643 $ 1,276,985 Automatic conversion of shares (39,830) (386,261) Shares redeemed (549,850) (5,280,762) --------------- --------------- Net decrease (457,037) $ (4,390,038) =============== =============== Class B Shares for the Year Dollar Ended January 31, 2003 Shares Amount Shares sold 470,713 $ 5,262,975 Automatic conversion of shares (50,892) (591,112) Shares redeemed (1,280,011) (13,902,091) --------------- --------------- Net decrease (860,190) $ (9,230,228) =============== =============== Class C Shares for the Six Months Dollar Ended July 31, 2003 Shares Amount Shares sold 174,297 $ 1,679,240 Shares redeemed (392,585) (3,776,621) --------------- --------------- Net decrease (218,288) $ (2,097,381) =============== =============== Class C Shares for the Year Dollar Ended January 31, 2003 Shares Amount Shares sold 454,865 $ 5,090,933 Shares redeemed (978,343) (10,750,899) --------------- --------------- Net decrease (523,478) $ (5,659,966) =============== =============== Class I Shares for the Six Months Dollar Ended July 31, 2003 Shares Amount Shares sold 42,825 $ 429,602 Shares redeemed (25,169) (250,563) --------------- --------------- Net increase 17,656 $ 179,039 =============== =============== July 31, 2003, Mercury Growth Opportunity Fund NOTES TO FINANCIAL STATEMENTS (CONCLUDED) Class I Shares for the Year Dollar Ended January 31, 2003 Shares Amount Shares sold 106,248 $ 1,208,046 Shares redeemed (68,304) (784,527) --------------- --------------- Net increase 37,944 $ 423,519 =============== =============== 5. Short-Term Borrowings: The Fund, along with certain other funds managed by FAM and its affiliates, is a party to a $500,000,000 credit agreement with Bank One, N.A. and certain other lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions and for other lawful purposes other than for leverage. The Fund may borrow up to the maximum amount allowable under the Fund's current prospectus and statement of additional information, subject to various other legal, regulatory or contractual limits. The Fund pays a commitment fee of ..09% per annum based on the Fund's pro rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate equal to, at each fund's election, the Federal Funds rate plus .50% or a base rate as determined by Bank One, N.A. On November 29, 2002, the credit agreement was renewed for one year under the same terms, except that the total commitment was reduced from $1,000,000,000 to $500,000,000. The Fund did not borrow under the credit agreement during the six months ended July 31, 2003. 6. Capital Loss Carryforward: On January 31, 2003, the Fund had a net capital loss carryforward of $52,615,781, of which $28,654,300 expires in 2009 and $23,961,481 expires in 2010. This amount will be available to offset like amounts of any future taxable gains. 7. Reorganization Plan: On August 14, 2003, the Fund's Board of Directors approved a plan of reorganization, subject to shareholder approval and certain other conditions, whereby Merrill Lynch Fundamental Growth Fund, Inc. will acquire all of the assets and will assume all of the liabilities of the Fund in exchange for newly issued shares of Merrill Lynch Fundamental Growth Fund, Inc. July 31, 2003, Mercury Growth Opportunity Fund OFFICERS AND DIRECTORS Terry K. Glenn, President and Director James H. Bodurtha, Director Joe Grills, Director Herbert I. London, Director Andre F. Perold, Director Roberta Cooper Ramo, Director Robert S. Salomon, Jr., Director Stephen B. Swensrud, Director Robert C. Doll Jr., Senior Vice President Lawrence R. Fuller, Vice President and Portfolio Manager Donald C. Burke, Vice President and Treasurer Phillip S. Gillespie, Secretary Custodian The Bank of New York 100 Church Street New York, NY 10286 Transfer Agent Financial Data Services, Inc. 4800 Deer Lake Drive East Jacksonville, FL 32246-6484 888-763-2260 July 31, 2003, Mercury Growth Opportunity Fund -----END PRIVACY-ENHANCED MESSAGE-----

EX-17.(D)

(BULL LOGO)
Merrill Lynch Investment Managers


www.mlim.ml.com


Annual Report
January 31, 2003


Mercury
Growth Opportunity
Fund



This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.



Mercury Growth Opportunity Fund,
A Series of The Asset Program, Inc.
Box 9011
Princeton, NJ
08543-9011



Printed on post-consumer recycled paper



PORTFOLIO INFORMATION (UNAUDITED)


GEOGRAPHIC ALLOCATION

As a Percentage of Net Assets as of January 31, 2003++


                                Percent of
Countries                       Net Assets

United States                      90.7%
Netherlands                         2.1
Switzerland                         1.1
Canada                              0.7


++Total may not equal 100%.



AS OF JANUARY 31, 2003

Ten Largest Equity                Percent of
Holdings                          Net Assets

Microsoft Corporation                 6.4%



Wal-Mart Stores, Inc.                 5.3

The Proctor & Gamble Company          3.8

International Business Machines
Corporation                           3.6

The Coca-Cola Company                 3.3

Amgen Inc.                            3.1

Verizon Communications                2.9

Intel Corporation                     2.9

State Street Corporation              2.7

HCA Inc.                              2.7



                                  Percent of
Five Largest Industries*          Net Assets

Media                                 8.0%

Software                              7.7

Beverages                             7.3

Health Care Equipment &
Supplies                              7.1

Diversified Financials                6.3


*For Fund compliance purposes, "Industry" means any one or more of
the industry sub-classifications used by one or more widely
recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for
purposes of this report, which may combine such industry sub-
classifications for reporting ease.



January 31, 2003, Mercury Growth Opportunity Fund



DEAR SHAREHOLDER


Fiscal Year in Review
We are pleased to provide you with this annual report to
shareholders. For the fiscal year ended January 31, 2003, Mercury
Growth Opportunity Fund's Class I, Class A, Class B and Class C
Shares had total returns of -30.09%, -30.27%, -30.87% and -30.89%,
respectively. The total return for the Lipper Large Cap Growth Funds
Average was -28.46%, while the total return for the unmanaged
Standard & Poor's 500 Index was -23.02% for the same period. (Fund
results shown do not reflect sales charges and would be lower if
sales charges were included. Complete performance information can be
found on pages 6 - 9 of this report to shareholders.)

The stocks of large-capitalization growth companies experienced
among the worst absolute and relative investment returns during the
fiscal year ended January 31, 2003. Investment returns were more
negative during the second-half of the fiscal year as the Bush
administration began its global campaign to gather public and
political support for disarming the political regime in Iraq.
Historically, global equity markets, including the U.S. market, have
not produced the best investment returns during a period when war
was being contemplated publicly or underway in a major geographical
area. The fiscal year ended January 31, 2003 is the third
consecutive year of negative investment returns on most U.S.
equities and for most global equity markets, which is a relatively
unique historical experience in the post-World War II period. We
have continued to focus our investments on the largest and highest-
quality companies with prospects, in our opinion, for an above-
average long-run rate of growth in earnings and above-average
returns on equity. The gradual recovery of U.S. business



profitability from the economic recession of 2001 has resulted in a
fairly narrow group of companies where business profitability has
improved with any degree of quarterly consistency. Negative
surprises have been more the "order of the environment."

The greatest negative influences on the Fund's investment
performance during the fiscal year ended January 31, 2003 were the
stock price declines of selected holdings in the hospital management
and information technology industries. Individual stock investments
on a comparative basis that hurt the Fund most were our investment
holdings in AOL Time Warner Inc. and Tenet Healthcare Corporation.

Positive comparative influences on the Fund's investment returns
were from selected stock holdings in the specialty retailing,
restaurant, media, food and financial services industries. Equity
investments in the following companies had a positive effect on
the comparative investment performance over the fiscal year: Bed,
Bath & Beyond Inc., Lowe's Companies, Inc., Wal-Mart Stores, Inc.,
Yum! Brands, Inc. and Brinker International, Inc. in the retailing
and restaurant industries and Marsh & McLennan Companies, Inc.,
Wells Fargo Company, MBNA Corporation, Fannie Mae and American
Express Co. in the financial services industry. In the health
care sector, investments in Amgen Inc., HCA Inc. and Health
Management Associates, Inc. were positive relative contributors to
investment results. In the consumer staples industry, stock holdings
in Procter & Gamble Co., Unilever NV and Colgate-Palmolive Company
were comparatively positive contributors to results. In the
industrial sector, the most positive comparative investment
performance was from the meaningful investment position in 3M Co.
We have avoided investment in the equities of General Electric Co.
and Tyco International, which had contributed positively to our
investment results earlier in the fiscal year ended January 31,
2003.



January 31, 2003, Mercury Growth Opportunity Fund



During the months of October and November 2002 and January 2003,
there were broad-based and meaningful stock price increases for
companies in the information technology and ethical drug industries.
We have an underweighted investment position in the information
technology sector where we are focused on the largest companies,
which we believe will survive and possibly prosper in what may be a
very long-term recovery of industry profitability. The statements by
the senior managements of IBM Corp., Microsoft Corp., Intel Corp.
and Cisco Systems Inc. were not positive when reporting their most
recent quarterly business results and business outlooks. The Fund
has investments in all of these companies because we believe they
will prosper in the long run. However, the foreseeable near-term
outlook is rather unexciting from a growth perspective. In the
ethical drug industry, we have no investment exposure to any of the
large pharmaceutical companies. We believe that the optimism on the
part of some investors for the incremental revenue growth from a
Federal pharmaceutical benefit program is too ambitious. We also
believe that the downward pressure on pricing of ethical drugs will
continue by the major state Medicare reimbursement organizations,
which are currently attempting to form a non-profit pharmacy benefit
management organization. Although stocks of major pharmaceutical
companies appear to have an attractive valuation, we are skeptical
about the outlook for future growth of revenues and profits.


Market Outlook
U.S. monetary policy is geared to promote a relatively high rate of
real economic activity led by growth in real consumer spending with
the lowest Federal Reserve Board interest rates in more than 40
years and many consumer finance operations offering zero interest
rate loans for even multi-year periods of time. The decline in U.S.
consumer finance rates for motor vehicles and home ownership appear
to have had, and may continue to have, a very positive effect on
real demand for these goods. During the fiscal year ended January
31, 2003, U.S. real wage growth rates slowed, which is a normal
phenomenon in the first few years of an economic recovery following
a recession such as the one we experienced in the first three
calendar quarters of 2001. The household sector may have raised a
record amount of absolute liquidity in the fiscal quarter ended
January 31, 2003. The lackluster general merchandise retail sales in
the latest holiday season may reflect concerns about the likelihood
of a military confrontation with Iraq. There was a major uptrend in



U.S. equity markets in January 1991 at the end of the Gulf War and a
recovery in U.S. real economic growth rates in the second-half of
1991. We can only wait and see what happens this time around. The
Bush administration is proposing a pull forward of the tax rate
decreases legislated in 2001 that should take effect in 2004 and
2006. The Bush administration also proposes making these decreases
permanent. Federal spending on defense systems, equipment and
personnel is leading a double-digit rate of growth in nominal
government spending. In our opinion, all of these actions are a
positive for increased overall real economic growth in upcoming
quarterly periods. It is likely that these potential increases in
spending may improve corporate profitability, overall business
profits and stock market values.



January 31, 2003, Mercury Growth Opportunity Fund



In Conclusion
We thank you for your investment in Mercury Growth Opportunity Fund
during what has been a most difficult period of time for achieving
investment results for large-capitalization growth companies. We
will continue to seek what we believe are the best investment
opportunities given the very challenging equity investment
conditions.


Sincerely,



(Terry K. Glenn)
Terry K. Glenn
President and Director



(Lawrence R. Fuller)
Lawrence R. Fuller
Senior Vice President and
Portfolio Manager



March 5, 2003



January 31, 2003, Mercury Growth Opportunity Fund



FUND PERFORMANCE DATA


ABOUT FUND PERFORMANCE
The Fund offers four classes of shares, each with its own sales
charge and expense structure, allowing you to invest in the way that
best suits your needs.

CLASS I SHARES  incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution and account
maintenance fees. Class I Shares are available only to eligible
investors.

CLASS A SHARES incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).

CLASS B SHARES are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first two years, decreasing to
3% for each of the next two years and decreasing 1% each year
thereafter to 0% after the sixth year. In addition, Class B Shares
are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class A Shares after approximately eight years.

CLASS C SHARES are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares may be
subject to a 1% contingent deferred sales charge if redeemed within
one year after purchase.



None of the past results shown should be considered a representation
of future performance. Performance results do not reflect the
deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Figures shown in
each of the following tables assume reinvestment of all dividends
and capital gains distributions at net asset value on the ex-
dividend date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less
than their original cost. Dividends paid to each class of shares
will vary because of the different levels of account maintenance,
distribution and transfer agency fees applicable to each class,
which are deducted from the income available to be paid to
shareholders.



January 31, 2003, Mercury Growth Opportunity Fund



FUND PERFORMANCE DATA (CONTINUED)



RECENT PERFORMANCE RESULTS

                                  6-Month        12-Month    Since Inception
As of January 31, 2003          Total Return   Total Return    Total Return

Class I*++                         -9.12%          -30.09%        +33.80%

Class A*++                         -9.27           -30.27         +31.64

Class B*                           -9.66           -30.87         +24.11

Class C*                           -9.69           -30.89         +23.78

Standard & Poor's 500 Index**      -5.26           -23.02         +48.59


*Investment results shown do not reflect sales charges. Results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in the Fund's net asset
values for the periods shown, and assume reinvestment of all
dividends and capital gains at net asset value on the ex-dividend
date. The Fund commenced operations on 2/02/96.
**This unmanaged broad-based Index is comprised of large-
capitalization U.S. stocks. Since inception total return is from
2/29/96.
++Prior to April 3, 2000, Class I Shares were designated Class A
Shares and Class A Shares were designated Class D Shares.



January 31, 2003, Mercury Growth Opportunity Fund



FUND PERFORMANCE DATA (CONTINUED)


TOTAL RETURN BASED ON A $10,000 INVESTMENT

A line graph illustrating the growth of a $10,000 investment in
Mercury Growth Opportunity Fund++ Class I and Class A Shares*
compared to a similar investment in Standard & Poor's 500 Index++++.
Values illustrated are as follows:


Mercury Growth Opportunity Fund++
Class I Shares*

Date                       Value

02/02/1996**             $ 9,475.00
January 1997             $11,171.00
January 1998             $13,798.00
January 1999             $19,596.00
January 2000             $24,517.00
January 2001             $22,465.00
January 2002             $18,136.00



January 2003             $12,679.00



Mercury Growth Opportunity Fund++
Class A Shares*

Date                       Value

02/02/1996**             $ 9,475.00
January 1997             $11,162.00
January 1998             $13,763.00
January 1999             $19,487.00
January 2000             $24,320.00
January 2001             $22,236.00
January 2002             $17,889.00
January 2003             $12,474.00



Standard & Poor's 500 Index++++

Date                       Value

02/29/1996**             $10,000.00
January 1997             $12,518.00
January 1998             $15,887.00
January 1999             $21,049.00
January 2000             $23,227.00
January 2001             $23,018.00
January 2002             $19,297.00
January 2003             $14,854.00



A line graph illustrating the growth of a $10,000 investment in
Mercury Growth Opportunity Fund++ Class B and Class C Shares*
compared to a similar investment in Standard & Poor's 500 Index++++.
Values illustrated are as follows:


Mercury Growth Opportunity Fund++
Class B Shares*

Date                       Value

02/02/1996**             $10,000.00
January 1997             $11,680.00
January 1998             $14,268.00
January 1999             $20,034.00
January 2000             $24,794.00
January 2001             $22,486.00
January 2002             $17,853.00
January 2003             $12,342.00


Mercury Growth Opportunity Fund++
Class C Shares*

Date                       Value

02/02/1996**             $10,000.00
January 1997             $11,670.00
January 1998             $14,257.00
January 1999             $20,015.00
January 2000             $24,755.00
January 2001             $22,443.00
January 2002             $17,910.00
January 2003             $12,378.00


Standard & Poor's 500 Index++++

Date                       Value

02/29/1996**             $10,000.00
January 1997             $12,518.00
January 1998             $15,887.00
January 1999             $21,049.00
January 2000             $23,227.00
January 2001             $23,018.00
January 2002             $19,297.00



January 2003             $14,854.00


*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++Mercury Growth Opportunity Fund invests in a portfolio of equity
securities, placing particular emphasis on large-capitalization
companies that are anticipated to exhibit above-average growth rates
in earnings.
++++This unmanaged broad-based Index is comprised of common stocks.
The starting date for the Index in each graph is from 2/29/96.

Past performance is not predictive of future performance.



January 31, 2003, Mercury Growth Opportunity Fund



FUND PERFORMANCE DATA (CONCLUDED)


AVERAGE ANNUAL TOTAL RETURN

                                         % Return        % Return
                                      Without Sales     With Sales
Class I Shares*++                         Charge         Charge**

One Year Ended 1/31/03                    -30.09%        -33.76%
Five Years Ended 1/31/03                  - 1.68         - 2.74
Inception (2/02/96) through 1/31/03       + 4.25         + 3.45

*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
++Prior to April 3, 2000, Class I Shares were designated as Class A
Shares.



                                         % Return        % Return
                                      Without Sales     With Sales
Class A Shares*++                         Charge         Charge**

One Year Ended 1/31/03                    -30.27%        -33.93%
Five Years Ended 1/31/03                  - 1.95         - 3.00
Inception (2/02/96) through 1/31/03       + 4.01         + 3.21

*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
++Prior to April 3, 2000, Class A Shares were designated as Class D
Shares.



                                         % Return        % Return
                                          Without          With
Class B Shares*                            CDSC           CDSC**

One Year Ended 1/31/03                    -30.87%        -33.63%
Five Years Ended 1/31/03                  - 2.75         - 3.06
Inception (2/02/96) through 1/31/03       + 3.13         + 3.13

*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after six years.
**Assuming payment of applicable contingent deferred sales charge.



                                         % Return        % Return
                                          Without          With
Class C Shares*                            CDSC           CDSC**

One Year Ended 1/31/03                    -30.89%        -31.58%
Five Years Ended 1/31/03                  - 2.79         - 2.79
Inception (2/02/96) through 1/31/03       + 3.10         + 3.10

*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after one year.
**Assuming payment of applicable contingent deferred sales charge.



January 31, 2003, Mercury Growth Opportunity Fund



SCHEDULE OF INVESTMENTS


                                                                               In U.S. Dollars
                   Shares                                                              Percent of
Industry*           Held              Common Stocks                            Value   Net Assets
                                                                               
Aerospace &         21,300   General Dynamics Corporation                   $  1,408,782     1.4%
Defense

Air Freight &       35,900   United Parcel Service, Inc. (Class B)             2,165,847      2.2
Logistics

Banks               50,200   Northern Trust Corporation                        1,714,832      1.7

Beverages           52,400   Anheuser-Busch Companies, Inc.                    2,487,428      2.5
                    81,800   The Coca-Cola Company                             3,309,628      3.3
                    66,900   Coca-Cola Enterprises Inc.                        1,473,807      1.5
                                                                            ------------   ------
                                                                               7,270,863      7.3

Biotechnology       61,700   ++Amgen Inc.                                      3,141,764      3.1

Chemicals           25,400   Ecolab Inc.                                       1,252,220      1.2

Commercial           5,800   ++Apollo Group, Inc. (Class A)                      257,578      0.2
Services &          52,400   First Data Corporation                            1,802,560      1.8
Supplies            23,000   H&R Block, Inc.                                     871,470      0.9
                                                                            ------------   ------
                                                                               2,931,608      2.9

Communications     179,700   ++Cisco Systems, Inc.                             2,400,792      2.4
Equipment

Computers &         45,900   International Business Machines
Peripherals                  Corporation                                       3,590,757      3.6

Diversified         28,400   American Express Company                          1,009,052      1.0
Financials          20,100   Fannie Mae                                        1,300,470      1.3
                    69,300   State Street Corporation                          2,743,587      2.7
                    46,700   T. Rowe Price Group Inc.                          1,248,291      1.3
                                                                            ------------   ------
                                                                               6,301,400      6.3

Diversified         75,700   Verizon Communications                            2,897,795      2.9
Telecommunication
Services

Food & Drug         54,700   SYSCO Corporation                                 1,606,539      1.6
Retailing

Food Products       20,700   Archer-Daniels-Midland Company                      249,435      0.2
                    36,300   Unilever NV (NY Registered Shares)                2,058,573      2.1
                                                                            ------------   ------
                                                                               2,308,008      2.3

Health Care         28,700   ++Alcon, Inc.                                     1,102,080      1.1
Equipment &         57,200   ++Boston Scientific Corporation                   2,313,740      2.3
Supplies            22,600   Medtronic, Inc.                                   1,015,192      1.0





January 31, 2003, Mercury Growth Opportunity Fund



SCHEDULE OF INVESTMENTS (CONTINUED)


                                                                               In U.S. Dollars
                   Shares                                                              Percent of
Industry*           Held              Common Stocks                            Value   Net Assets
                                                                               
Health Care         19,000   Stryker Corporation                            $  1,144,560     1.1%
Equipment &          5,300   ++Varian Medical Systems, Inc.                      276,978      0.3
Supplies            31,300   ++Zimmer Holdings, Inc.                           1,283,300      1.3
(concluded)                                                                 ------------   ------
                                                                               7,135,850      7.1

Health Care         62,300   HCA Inc.                                          2,662,702      2.7
Providers &         65,100   Health Management Associates, Inc.
Services                     (Class A)                                         1,205,652      1.2
                    53,300   ++Tenet Healthcare Corporation                      958,867      0.9
                                                                            ------------   ------
                                                                               4,827,221      4.8

Hotels,             19,900   ++Brinker International, Inc.                       592,025      0.6
Restaurants &       72,100   ++YUM! Brands, Inc.                               1,671,278      1.7
Leisure                                                                     ------------   ------
                                                                               2,263,303      2.3

Household           29,000   The Clorox Company                                1,108,380      1.1
Products            22,800   Colgate-Palmolive Company                         1,160,748      1.2
                    44,800   The Procter & Gamble Company                      3,833,536      3.8
                                                                            ------------   ------
                                                                               6,102,664      6.1

Industrial          19,500   3M Co.                                            2,428,725      2.4
Conglomerates

Insurance           16,800   American International Group, Inc.                  909,216      0.9
                    37,400   Everest Re Group, Ltd.                            1,887,578      1.9
                    29,800   Marsh & McLennan Companies, Inc.                  1,270,374      1.3
                                                                            ------------   ------
                                                                               4,067,168      4.1

Media              177,100   ++AOL Time Warner Inc.                            2,064,986      2.1
                    59,200   ++Clear Channel Communications, Inc.              2,372,736      2.4
                    40,800   ++Fox Entertainment Group, Inc. (Class A)         1,127,304      1.1
                    76,500   ++Rogers Communications, Inc. 'B'                   736,730      0.7
                    44,572   ++Viacom, Inc. (Class B)                          1,718,251      1.7
                                                                            ------------   ------






                                                                               
                                                                               8,020,007      8.0

Multiline Retail    16,200   ++Kohl's Corporation                                848,394      0.8
                   110,200   Wal-Mart Stores, Inc.                             5,267,560      5.3
                                                                            ------------   ------
                                                                               6,115,954      6.1

Semiconductor      183,700   Intel Corporation                                 2,889,601      2.9
Equipment &
Products

Software            24,900   ++Electronic Arts Inc.                            1,289,073      1.3
                   134,700   Microsoft Corporation                             6,391,515      6.4
                                                                            ------------   ------
                                                                               7,680,588      7.7




January 31, 2003, Mercury Growth Opportunity Fund



SCHEDULE OF INVESTMENTS (CONCLUDED)


                                                                               In U.S. Dollars
                   Shares                                                              Percent of
Industry*           Held              Common Stocks                            Value   Net Assets
                                                                               
Specialty Retail     1,000   ++AutoZone, Inc.                               $     65,710     0.1%
                    37,100   ++Bed Bath & Beyond Inc.                          1,243,592      1.2
                    52,900   Lowe's Companies, Inc.                            1,808,122      1.8
                    61,500   The TJX Companies, Inc.                           1,129,140      1.1
                                                                            ------------   ------
                                                                               4,246,564      4.2

                             Total Common Stocks
                             (Cost--$114,277,287)                             94,768,852     94.6



                                  Short-Term Securities
                                                                               
Common          $1,588,974   Merrill Lynch Premier Institutional
Stock                        Fund (a) (b)                                      1,588,974      1.6




                Partnership
                  Interest
                                                                               
Partnership      5,956,984   Merrill Lynch Liquidity Series, LLC
Interest                     Cash Sweep Series I (a)                           5,956,984      6.0
                 1,942,078   Merrill Lynch Liquidity Series, LLC
                             Money Market Series (a) (b)                       1,942,078      1.9
                                                                            ------------   ------
                                                                               7,899,062      7.9

                             Total Short-Term Investments
                             (Cost--$9,488,036)                                9,488,036      9.5

                             Total Investments
                             (Cost--$123,765,323)                            104,256,888    104.1
                             Liabilities in Excess of Other Assets           (4,149,500)    (4.1)
                                                                            ------------   ------
                             Net Assets                                     $100,107,388   100.0%
                                                                            ============   ======


*For Fund compliance purposes, "Industry" means any one of the
industry sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by Fund
management. This definition may not apply for purposes of this
report, which may combine such industry sub-classifications for
reporting ease. These industry classifications are unaudited.
++Non-income producing security.
(a)Investments in companies considered to be an affiliate of the
Fund (such companies are defined as "Affiliated Companies" in
Section 2 (a)(3) of the Investment Company Act of 1940) are as
follows:

                                                                     Dividend/
                                                             Net      Interest
Affiliate                                                  Activity    Income

Merrill Lynch Liquidity Series, LLC Cash Sweep Series I   $5,956,984   $11,592
Merrill Lynch Liquidity Series, LLC Money Market Series   $1,942,078       931
Merrill Lynch Premier Institutional Fund                   1,588,974     2,033
Merrill Lynch Institutional Fund                                  --        96


(b)Security was purchased with the cash proceeds from securities
loans.

See Notes to Financial Statements.



January 31, 2003, Mercury Growth Opportunity Fund



STATEMENT OF ASSETS AND
LIABILITIES


As of January 31, 2003
                                                                              
Assets:
Investments, at value (including securities loaned of
  $3,477,149) (identified cost--$123,765,323)                                       $ 104,256,888
Receivables:
  Securities sold                                                  $     889,993
  Dividends                                                               83,289
  Capital shares sold                                                     82,744
  Interest                                                                 6,604
  Loaned securities income                                                    72        1,062,702
                                                                   -------------






                                                                              
Prepaid registration fees and other assets                                                  5,359
                                                                                    -------------
Total assets                                                                          105,324,949
                                                                                    -------------

Liabilities:
Collateral on securities loaned, at value                                               3,531,052
Payables:
  Securities purchased                                                 1,028,291
  Capital shares redeemed                                                379,278
  Distributor                                                             78,415
  Investment adviser                                                      65,465        1,551,449
                                                                   -------------
Accrued expenses and other liabilities                                                    135,060
                                                                                    -------------
Total liabilities                                                                       5,217,561
                                                                                    -------------
Net Assets:
Net assets                                                                          $ 100,107,388
                                                                                    =============

Net Assets Consist of:
Class I Shares of capital stock, $.10 par value, 6,250,000
  shares authorized                                                                 $      22,430
Class A Shares of capital stock, $.10 par value, 6,250,000
  shares authorized                                                                       145,083
Class B Shares of capital stock, $.10 par value, 15,000,000
  shares authorized                                                                       556,257
Class C Shares of capital stock, $.10 par value, 15,000,000
  shares authorized                                                                       364,282
Paid-in capital in excess of par                                                      173,370,855
Accumulated realized capital losses on investments and
  foreign currency transactions--net                               $(54,843,084)
Unrealized depreciation on investments--net                         (19,508,435)
                                                                   -------------
Total accumulated losses--net                                                        (74,351,519)
                                                                                    -------------
Net assets                                                                          $ 100,107,388
                                                                                    =============

Net Asset Value:
Class I--Based on net assets of $2,145,827 and
  224,303 shares outstanding                                                        $        9.57
                                                                                    =============
Class A--Based on net assets of $13,770,435 and
  1,450,827 shares outstanding                                                      $        9.49
                                                                                    =============
Class B--Based on net assets of $50,933,300 and
  5,562,573 shares outstanding                                                      $        9.16
                                                                                    =============
Class C--Based on net assets of $33,257,826 and
  3,642,825 shares outstanding                                                      $        9.13
                                                                                    =============

See Notes to Financial Statements.




January 31, 2003, Mercury Growth Opportunity Fund



STATEMENT OF OPERATIONS


For the Year Ended January 31, 2003
                                                                              
Investment Income:
Dividends (net of $11,136 foreign withholding tax)                                  $     879,370
Interest                                                                                   84,471
Securities lending--net                                                                     3,060
                                                                                    -------------
Total income                                                                              966,901
                                                                                    -------------

Expenses:
Investment advisory fees                                           $     810,748
Account maintenance and distribution fees--Class B                       662,705
Transfer agent fees--Class B                                             466,385
Account maintenance and distribution fees--Class C                       428,919
Transfer agent fees--Class C                                             314,217
Printing and shareholder reports                                         114,581
Transfer agent fees--Class A                                              81,866
Accounting services                                                       71,734
Registration fees                                                         58,589
Professional fees                                                         57,664
Custodian fees                                                            33,476
Account maintenance fees--Class A                                         33,138
Transfer agent fees--Class I                                              14,103
Directors' fees and expenses                                               8,863
Pricing fees                                                               2,912
Other                                                                     18,050
                                                                   -------------
Total expenses                                                                          3,177,950
                                                                                    -------------
Investment loss--net                                                                  (2,211,049)
                                                                                    -------------

Realized & Unrealized Gain (Loss) on Investments &
Foreign Currency Transactions--Net:
Realized gain (loss) on:
  Investments--net                                                  (22,368,198)
  Foreign currency transactions--net                                       3,806     (22,364,392)
                                                                   -------------
Change in unrealized appreciation/depreciation on:
  Investments--net                                                  (22,045,704)
  Foreign currency transactions--net                                       6,048     (22,039,656)
                                                                   -------------    -------------
Total realized and unrealized loss on investments and
  foreign currency transactions--net                                                 (44,404,048)
                                                                                    -------------
Net Decrease in Net Assets Resulting from Operations                                $(46,615,097)
                                                                                    =============

See Notes to Financial Statements.




January 31, 2003, Mercury Growth Opportunity Fund



STATEMENTS OF CHANGES
IN NET ASSETS


                                                                              For the
                                                                             Year Ended
                                                                            January 31,
Increase (Decrease)in Net Assets:                                        2003            2002
                                                                              
Operations:
Investment loss--net                                               $ (2,211,049)    $ (2,201,545)
Realized losson investments and foreign currency
  transactions--net                                                 (22,364,392)     (31,985,922)
Change in unrealized appreciation/depreciation on
  investments and foreign currency transactions--net                (22,039,656)      (5,230,376)
                                                                   -------------    -------------
Net decrease in net assets resulting from operations                (46,615,097)     (39,417,843)
                                                                   -------------    -------------

Distributions to Shareholders:
Realized gain on investments--net:
  Class I                                                                     --         (86,449)
  Class A                                                                     --        (294,044)
  Class B                                                                     --      (2,792,980)
  Class C                                                                     --      (1,796,089)
                                                                   -------------    -------------
Net decrease in net assets resulting from distributions
  to shareholders                                                             --      (4,969,562)
                                                                   -------------    -------------

Capital Share Transactions:
Net increase (decrease) in net assets derived from capital
  share transactions                                                 (7,785,645)        7,173,844
                                                                   -------------    -------------

Net Assets:
Total decrease in net assets                                        (54,400,742)     (37,213,561)
Beginning of year                                                    154,508,130      191,721,691
                                                                   -------------    -------------
End of year*                                                       $ 100,107,388    $ 154,508,130
                                                                   =============    =============

*Accumulated investment loss--net                                  $ (2,211,316)    $       (267)
                                                                   =============    =============

See Notes to Financial Statements.




January 31, 2003, Mercury Growth Opportunity Fund



FINANCIAL HIGHLIGHTS


The following per share data and ratios have been derived from
information provided in the financial statements.


                                                                      Class I+++
Increase (Decrease) in                                      For the Year Ended January 31,
Net Asset Value:                               2003         2002         2001          2000         1999
                                                                                  
Per Share Operating Performance:
Net asset value, beginning of
  year                                      $  13.69     $  17.49     $  22.01     $  18.53      $  13.42
                                            --------     --------     --------     --------      --------
Investment loss--net++                         (.09)        (.05)        (.05)        (.01)         (.06)
Realized and unrealized gain (loss)
  on investmentsand foreign
  currency transactions--net                  (4.03)       (3.32)       (1.64)         4.58          5.63
                                            --------     --------     --------     --------      --------
Total from investment operations              (4.12)       (3.37)       (1.69)         4.57          5.57
                                            --------     --------     --------     --------      --------
Less distributions from realized gain
  on investments--net                             --        (.43)       (2.83)       (1.09)         (.46)
                                            --------     --------     --------     --------      --------
Net asset value, end of year                $   9.57     $  13.69     $  17.49     $  22.01      $  18.53
                                            ========     ========     ========     ========      ========

Total Investment Return:*
Based on net asset value per
  share                                     (30.09%)     (19.27%)      (8.37%)       25.11%        42.02%
                                            ========     ========     ========     ========      ========

Ratios to Average Net Assets:
Expenses                                       1.56%        1.30%        1.31%        1.36%         1.56%
                                            ========     ========     ========     ========      ========
Investment loss--net                          (.77%)       (.33%)       (.25%)       (.07%)        (.39%)
                                            ========     ========     ========     ========      ========

Supplemental Data:
Net assets, end of year
  (in thousands)                            $  2,146     $  2,550     $  2,142     $    939      $    582
                                            ========     ========     ========     ========      ========
Portfolio turnover                            89.63%      131.76%      100.88%       81.27%        40.59%
                                            ========     ========     ========     ========      ========

*Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Prior to April 3, 2000, Class I Shares were designated as Class A
Shares.

See Notes to Financial Statements.




January 31, 2003, Mercury Growth Opportunity Fund




FINANCIAL HIGHLIGHTS (CONTINUED)


The following per share data and ratios have been derived from
information provided in the financial statements.


                                                                      Class A+++
Increase (Decrease) in                                      For the Year Ended January 31,
Net Asset Value:                               2003         2002         2001          2000         1999
                                                                                  
Per Share Operating Performance:
Net asset value, beginning of
  year                                      $  13.61     $  17.45     $  21.93     $  18.51      $  13.42
                                            --------     --------     --------     --------      --------
Investment loss--net++                         (.11)        (.08)        (.12)        (.07)         (.10)
Realized and unrealized gain (loss)
  on investmentsand foreign
  currency transactions--net                  (4.01)       (3.33)       (1.61)         4.58          5.62
                                            --------     --------     --------     --------      --------
Total from investment operations              (4.12)       (3.41)       (1.73)         4.51          5.52
                                            --------     --------     --------     --------      --------
Less distributions from realized
  gain on investments--net                        --        (.43)       (2.75)       (1.09)         (.43)
                                            --------     --------     --------     --------      --------
Net asset value, end of year                $   9.49     $  13.61     $  17.45     $  21.93      $  18.51
                                            ========     ========     ========     ========      ========

Total Investment Return:*
Based on net asset value per
  share                                     (30.27%)     (19.55%)      (8.57%)       24.80%        41.59%
                                            ========     ========     ========     ========      ========

Ratios to Average Net Assets:
Expenses                                       1.82%        1.56%        1.55%        1.62%         1.80%
                                            ========     ========     ========     ========      ========
Investment loss--net                         (1.03%)       (.58%)       (.55%)       (.34%)        (.64%)
                                            ========     ========     ========     ========      ========

Supplemental Data:
Net assets, end of year
  (in thousands)                            $ 13,770     $ 11,847     $ 10,515     $  7,659      $  3,700
                                            ========     ========     ========     ========      ========
Portfolio turnover                            89.63%      131.76%      100.88%       81.27%        40.59%
                                            ========     ========     ========     ========      ========

*Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Prior to April 3, 2000, Class A Shares were designated as Class D
Shares.

See Notes to Financial Statements.




January 31, 2003, Mercury Growth Opportunity Fund



FINANCIAL HIGHLIGHTS (CONTINUED)


The following per share data and ratios have been derived from
information provided in the financial statements.


                                                                       Class B
Increase (Decrease) in                                      For the Year Ended January 31,
Net Asset Value:                               2003         2002         2001          2000         1999
                                                                                  
Per Share Operating Performance:
Net asset value, beginning of
  year                                      $  13.25     $  17.13     $  21.44     $  18.26      $  13.27
                                            --------     --------     --------     --------      --------
Investment loss--net++                         (.21)        (.20)        (.30)        (.22)         (.23)
Realized and unrealized gain (loss)
  on investmentsand foreign
  currency transactions--net                  (3.88)       (3.25)       (1.56)         4.48          5.54
                                            --------     --------     --------     --------      --------
Total from investment operations              (4.09)       (3.45)       (1.86)         4.26          5.31
                                            --------     --------     --------     --------      --------
Less distributions from realized
  gain on investments--net                        --        (.43)       (2.45)       (1.08)         (.32)
                                            --------     --------     --------     --------      --------
Net asset value, end of year                $   9.16     $  13.25     $  17.13     $  21.44      $  18.26
                                            ========     ========     ========     ========      ========

Total Investment Return:*
Based on net asset value per
  share                                     (30.87%)     (20.16%)      (9.31%)       23.76%        40.41%
                                            ========     ========     ========     ========      ========

Ratios to Average Net Assets:
Expenses                                       2.65%        2.39%        2.36%        2.45%         2.66%
                                            ========     ========     ========     ========      ========
Investment loss--net                         (1.87%)      (1.42%)      (1.38%)      (1.16%)       (1.50%)
                                            ========     ========     ========     ========      ========

Supplemental Data:
Net assets, end of year
  (in thousands)                            $ 50,933     $ 85,072     $109,589     $115,216      $ 69,601
                                            ========     ========     ========     ========      ========
Portfolio turnover                            89.63%      131.76%      100.88%       81.27%        40.59%
                                            ========     ========     ========     ========      ========

*Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.

See Notes to Financial Statements.




January 31, 2003, Mercury Growth Opportunity Fund




FINANCIAL HIGHLIGHTS (CONCLUDED)


The following per share data and ratios have been derived from
information provided in the financial statements.


                                                                       Class C
Increase (Decrease) in                                      For the Year Ended January 31,
Net Asset Value:                               2003         2002         2001          2000         1999
                                                                                  
Per Share Operating Performance:
Net asset value, beginning of
  year                                      $  13.21     $  17.09     $  21.40     $  18.24      $  13.26
                                            --------     --------     --------     --------      --------
Investment loss--net++                         (.21)        (.20)        (.30)        (.23)         (.24)
Realized and unrealized gain (loss)
  on investmentsand foreign
  currency transactions--net                  (3.87)       (3.25)       (1.56)         4.47          5.55
                                            --------     --------     --------     --------      --------
Total from investment operations              (4.08)       (3.45)       (1.86)         4.24          5.31
                                            --------     --------     --------     --------      --------
Less distributions from realized
  gain on investments--net                        --        (.43)       (2.45)       (1.08)         (.33)
                                            --------     --------     --------     --------      --------
Net asset value, end of year                $   9.13     $  13.21     $  17.09     $  21.40      $  18.24
                                            ========     ========     ========     ========      ========

Total Investment Return:*
Based on net asset value per
  share                                     (30.89%)     (20.20%)      (9.34%)       23.68%        40.39%
                                            ========     ========     ========     ========      ========

Ratios to Average Net Assets:
Expenses                                       2.68%        2.42%        2.38%        2.48%         2.71%
                                            ========     ========     ========     ========      ========
Investment loss--net                         (1.90%)      (1.44%)      (1.41%)      (1.20%)       (1.55%)
                                            ========     ========     ========     ========      ========

Supplemental Data:
Net assets, end of year
  (in thousands)                            $ 33,258     $ 55,039     $ 69,476     $ 72,650      $ 40,710
                                            ========     ========     ========     ========      ========
Portfolio turnover                            89.63%      131.76%      100.88%       81.27%        40.59%
                                            ========     ========     ========     ========      ========

*Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.

See Notes to Financial Statements.




January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS


1. Significant Accounting Policies:
Mercury Growth Opportunity Fund (the "Fund") is part of The Asset
Program, Inc. (the "Program") which is registered under the
Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The Fund's financial statements are
prepared in conformity with accounting principles generally accepted
in the United States of America, which may require the use of
management accruals and estimates. The Fund offers four classes of
shares. Class I and Class A Shares are sold with a front-end sales
charge. Class B and Class C Shares may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class A, Class B and Class C Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to
the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures (except that Class B shareholders may
vote upon any material changes under the distribution plan for Class
A Shares). Income, expenses (other than expenses attributable to a
specific class) and realized and unrealized gains and losses on
investments and foreign currency transactions are allocated daily to
each class based on its relative net assets. The following is a
summary of significant accounting policies followed by the Fund.

(a) Valuation of investments--Portfolio securities that are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities that are traded in the over-
the-counter market are valued at the last available bid price in the
over-the-counter market prior to the time of valuation. In cases
where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the
authority of the Program's Board of Directors as the primary market.
Securities that are traded both in the over-the-counter market and
on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at
the last sale price in the case of exchange-traded options. In the



case of options traded in the over-the-counter market, valuation is
the last asked price (options written) or the last bid price
(options purchased). Short-term securities are valued at amortized
cost, which approximates market value. Other investments, including
financial futures contracts and related options, are stated at
market value. Securities and assets for which market quotations are
not readily available are valued at fair market value as determined
in good faith by or under the direction of the Program's Board of
Directors.



January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


(b) Repurchase agreements--The Fund may invest in securities
pursuant to repurchase agreements. Under such agreements, the
counterparty agrees to repurchase the security at a mutually agreed
upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary,
receives additions to such securities daily to ensure that the
contract is fully collateralized. If the counterparty defaults and
the fair value of the collateral declines, liquidation of the
collateral by the Fund may be delayed or limited.

(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. Losses may arise due to
changes in the value of the contract or if the counterparty does not
perform under the contract.

* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker
an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.

* Options--The Fund is authorized to purchase and write call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).

Written and purchased options are non-income producing investments.



January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. The contract is



marked to market daily and the change in market value is recorded by
the Fund as an unrealized gain or loss. When the contract is closed,
the Fund records a realized gain or loss equal to the difference
between the value at the time it was opened and the value at the
time it was closed.

* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.

(d) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into U.S. dollars. Realized and unrealized gains or
losses from investments include the effects of foreign exchange
rates on investments.

(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.

(f) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend
date. Interest income is recognized on the accrual basis.

(g) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.

(h) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.



January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


(i) Expenses--Certain expenses have been allocated to the individual
Funds in the Program on a pro rata basis based upon the respective
aggregate net asset value of each Fund included in the Program.

(j) Securities lending--The Fund may lend securities to financial
institutions that provide cash or securities issued or guaranteed by
the U.S. government as collateral, which will be maintained at all
times in an amount equal to at least 100% of the current market
value of the loaned securities. The market value of the loaned
securities is determined at the close of business of the Fund and
any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral
for the loaned securities, it collects a fee from the borrower. The
Fund typically receives the income on the loaned securities but does
not receive the income on the collateral. Where the Fund receives
cash collateral, it may invest such collateral and retain the amount
earned on such investment, net of any amount rebated to the
borrower. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities
within five business days. The Fund may pay reasonable finder's,
lending agent, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation
to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access



to the collateral. The Fund also could suffer a loss where the value
of the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of
losses on investments made with cash collateral.

(k) Reclassification--Accounting principles generally accepted in
the United States of America require that certain components of net
assets be adjusted to reflect permanent differences between
financial and tax reporting. Accordingly, the current year's
permanent book/tax differences of $2,207,510 have been reclassified
between paid-in capital in excess of par and accumulated net
investment loss and $3,806 has been reclassified between accumulated
net realized capital losses and accumulated net investment loss.
These reclassifications have no effect on net assets or net asset
values per share.


2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD"
or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.



January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


FAM is responsible for the management of the Fund's portfolios and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of .65%, on an annual basis,
of the average daily value of the Fund's net assets. FAM has entered
into a Sub-Advisory Agreement with Merrill Lynch Asset Management
U.K. Limited ("MLAM U.K."), an affiliate of FAM, pursuant to which
MLAM U.K. provides investment advisory services to FAM with respect
to the Fund. There is no increase in the aggregate fees paid by the
Fund for these services.

Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:


                                 Account
                               Maintenance       Distribution
                                   Fees              Fees

Class A                            .25%              --
Class B                            .25%             .75%
Class C                            .25%             .75%


Pursuant to a sub-agreement with the Distributor, selected dealers
also provide account maintenance and distribution services to the
Program. The ongoing account maintenance fee compensates the
Distributor and selected dealers for providing account maintenance
services to Class A, Class B and Class C shareholders. The ongoing
distribution fee compensates the Distributor and selected dealers
for providing shareholder and distribution-related services to Class
B and Class C shareholders.

For the year ended January 31, 2003, FAMD earned underwriting
discounts and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), a subsidiary of ML & Co., earned dealer concessions on
sales of the Fund's Class I and Class A Shares as follows:


                                         FAMD         MLPF&S

Class I                                  $  2         $   54



Class A                                  $336         $5,710


For the year ended January 31, 2003, MLPF&S, received contingent
deferred sales charges of $157,317 and $10,709 relating to
transactions in Class B and Class C Shares, respectively.



January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
MLPF&S or its affiliates. Pursuant to that order, the Fund also has
retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an
affiliate of FAM, as the securities lending agent for a fee based on
a share of the returns on investment of cash collateral. MLIM, LLC
may, on behalf of the Fund, invest cash collateral received by the
Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates. For the year ended January 31,
2003, MLIM, LLC received $1,189 in securities lending agent fees.

In addition, MLPF&S received $43,137 in commissions on the execution
of portfolio security transactions for the Fund for the year ended
January 31, 2003.

Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.

For the year ended January 31, 2003, the Fund reimbursed FAM $4,704
for certain accounting services.

Certain officers and/or directors of the Program are officers and/or
directors of FAM, PSI, MLAM U.K., FDS, FAMD, and/or ML & Co.


3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended January 31, 2003 were $107,582,547 and
$107,340,266, respectively.

Net realized gains (losses) for the year ended January 31, 2003 and
net unrealized losses as of January 31, 2003 were as follows:


                                      Realized          Unrealized
                                   Gains (Losses)         Losses

Long-term investments             $ (22,368,225)     $ (19,508,435)
Short-term investments                        27                 --
Foreign currency transactions              3,806                 --
                                  --------------     --------------
Total                             $ (22,364,392)     $ (19,508,435)
                                  ==============     ==============


As of January 31, 2003, net unrealized depreciation for Federal
income tax purposes aggregated $20,094,383, of which $1,154,893
related to appreciated securities and $21,249,276 related to
depreciated securities. At January 31, 2003, the aggregated cost of
investments for Federal income tax purposes was $124,351,271.



January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


4. Capital Share Transactions:
Net increase (decrease) in net assets derived from capital share
transactions was $(7,785,645) and $7,173,844 for the years ended



January 31, 2003 and January 31, 2002, respectively.



Class I Shares for the Year                               Dollar
Ended January 31, 2003                   Shares           Amount

Shares sold                              106,248     $    1,208,046
Shares redeemed                         (68,304)          (784,527)
                                   -------------     --------------
Net increase                              37,944     $      423,519
                                   =============     ==============



Class I Shares for the Year                               Dollar
Ended January 31, 2002                   Shares           Amount

Shares sold                              148,898     $    2,234,430
Shares issued to shareholders in
reinvestment of distributions              5,478             75,594
                                   -------------     --------------
Total issued                             154,376          2,310,024
Shares redeemed                         (90,470)        (1,226,180)
                                   -------------     --------------
Net increase                              63,906     $    1,083,844
                                   =============     ==============



Class A Shares for the Year                               Dollar
Ended January 31, 2003                   Shares           Amount

Shares sold                            1,485,692     $   16,258,841
Automatic conversion of shares            49,360            591,112
                                   -------------     --------------
Total issued                           1,535,052         16,849,953
Shares redeemed                        (954,462)       (10,168,923)
                                   -------------     --------------
Net increase                             580,590     $    6,681,030
                                   =============     ==============



Class A Shares for the Year                               Dollar
Ended January 31, 2002                   Shares           Amount

Shares sold                              467,088     $    6,456,686
Automatic conversion of shares            72,311          1,047,042
Shares issued to shareholders in
reinvestment of distributions             19,965            274,318
                                   -------------     --------------
Total issued                             559,364          7,778,046
Shares redeemed                        (291,792)        (3,896,764)
                                   -------------     --------------
Net increase                             267,572     $    3,881,282
                                   =============     ==============



Class B Shares for the Year                               Dollar
Ended January 31, 2003                   Shares           Amount

Shares sold                              470,713     $    5,262,975
Automatic conversion of shares          (50,892)          (591,112)
Shares redeemed                      (1,280,011)       (13,902,091)
                                   -------------     --------------
Net decrease                           (860,190)     $  (9,230,228)
                                   =============     ==============



January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


Class B Shares for the Year                               Dollar
Ended January 31, 2002                   Shares           Amount



Shares sold                              942,500     $   13,538,977
Shares issued to shareholders in
reinvestment of distributions            181,446          2,436,815
                                   -------------     --------------
Total issued                           1,123,946         15,975,792
Automatic conversion of shares          (73,984)        (1,047,042)
Shares redeemed                      (1,024,981)       (14,330,019)
                                   -------------     --------------
Net increase                              24,981     $      598,731
                                   =============     ==============



Class C Shares for the Year                               Dollar
Ended January 31, 2003                   Shares           Amount

Shares sold                              454,865     $    5,090,933
Shares redeemed                        (978,343)       (10,750,899)
                                   -------------     --------------
Net decrease                           (523,478)     $  (5,659,966)
                                   =============     ==============



Class C Shares for the Year                               Dollar
Ended January 31, 2002                   Shares           Amount

Shares sold                              717,032     $   10,252,221
Shares issued to shareholders in
reinvestment of distributions            114,189          1,530,134
                                   -------------     --------------
Total issued                             831,221         11,782,355
Shares redeemed                        (730,200)       (10,172,368)
                                   -------------     --------------
Net increase                             101,021     $    1,609,987
                                   =============     ==============



5. Short-Term Borrowings:
The Fund, along with certain other funds managed by FAM and its
affiliates, is a party to a $500,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the
credit agreement to fund shareholder redemptions and for other
lawful purposes other than for leverage. The Fund may borrow up to
the maximum amount allowable under the Fund's current prospectus and
statement of additional information, subject to various other legal,
regulatory or contractual limits. The Fund pays a commitment fee of
..09% per annum based on the Fund's pro rata share of the unused
portion of the credit agreement. Amounts borrowed under the credit
agreement bear interest at a rate equal to, at each fund's election,
the Federal Funds rate plus .50% or a base rate as determined by
Bank One, N.A. On November 29, 2002, the credit agreement was
renewed for one year under the same terms, except that the total
commitment was reduced from $1,000,000,000 to $500,000,000. The Fund
did not borrow under the credit agreement during the year ended
January 31, 2003.



January 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)


6. Capital Loss Carryforward:
The tax character of distributions paid during the fiscal years
ended January 31, 2003 and January 31, 2002 was as follows:


                                      1/31/2003         1/31/2002

Distributions paid from:
   Net long-term capital gains     $          --     $    4,969,562
                                   -------------     --------------
Total taxable distributions        $          --     $    4,969,562
                                   =============     ==============




As of January 31, 2003, the components of accumulated losses on a
tax basis were as follows:


Undistributed ordinary income--net                   $           --
Undistributed long-term capital gains--net                       --
                                                     --------------
Total undistributed earnings--net                                --
Capital loss carryforward                             (52,615,781)*
Unrealized losses--net                               (21,735,738)**
                                                     --------------
Total accumulated losses--net                        $ (74,351,519)
                                                     ==============

*On January 31, 2003, the Fund had a net capital loss carryforward
of $52,615,781, of which $28,654,300 expires in 2009 and $23,961,481
expires in 2010. This amount will be available to offset like
amounts of any future taxable gains.
**The difference between book-basis and tax-basis net unrealized
losses is attributable primarily to the tax deferral of losses on
wash sales and the deferral of post-October capital losses for tax
purposes.



January 31, 2003, Mercury Growth Opportunity Fund



INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders,
Mercury Growth Opportunity Fund of
The Asset Program, Inc.

We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Mercury
Growth Opportunity Fund as of January 31, 2003, the related
statements of operations for the year then ended and changes in net
assets for each of the years in the two-year period then ended, and
the financial highlights for each of the years presented. These
financial statements and the financial highlights are the
responsibility of the Program's management. Our responsibility is to
express an opinion on these financial statements and the financial
highlights based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned
at January 31, 2003 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed
other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Mercury Growth Opportunity Fund as of January 31, 2003, the results
of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with
accounting principles generally accepted in the United States of
America.


Deloitte & Touche LLP
Princeton, New Jersey
March 12, 2003



January 31, 2003, Mercury Growth Opportunity Fund




OFFICERS AND DIRECTORS


INTERESTED DIRECTOR

                                                                                             Number of
                                                                                           Portfolios in    Other
                       Position(s)   Length                                                 Fund Complex    Directorships
                           Held     of Time                                                 Overseen by     Held by
Name, Address & Age     with Fund    Served   Principal Occupation(s) During Past 5 Years     Director      Director
                                                                                             
Terry K. Glenn*        President    1999 to   Chairman, Americas Region since 2001 and       117 Funds      None
P.O. Box 9011          and          present   Executive Vice President since 1983 of       162 Portfolios
Princeton,             Director     and       Fund Asset Management ("FAM") and
NJ 08543-9011                       1996 to   Merrill Lynch Investment Managers, L.P.
Age: 62                             present   ("MLIM"); President of Merrill Lynch
                                              Mutual Funds since 1999; Executive Vice
                                              President and Director of Princeton
                                              Services, Inc. ("Princeton Services")
                                              since 1993; President of Princeton
                                              Administrators, L.P. since 1988;
                                              Director of Financial Data Services,
                                              Inc. since 1985.


*Mr. Glenn is a director, trustee or member of an advisory board of
certain other investment companies for which FAM or MLIM acts as
investment adviser. Mr. Glenn is an "interested person," as
described in the Investment Company Act, of the Fund based on his
positions as Chairman (Americas Region) and Executive Vice President
of FAM and MLIM; Executive Vice President of Princeton Services; and
President of Princeton Administrators, L.P. The Director's term is
unlimited. Directors serve until their resignation, removal or
death, or until December 31 of the year in which they turn 72. As
Fund President, Mr. Glenn serves at the pleasure of the Board of
Directors.




INDEPENDENT DIRECTORS

                                                                                             Number of
                                                                                           Portfolios in    Other
                       Position(s)   Length                                                 Fund Complex    Directorships
                           Held     of Time                                                 Overseen by     Held by
Name, Address & Age     with Fund   Served*   Principal Occupation(s) During Past 5 Years     Director      Director
                                                                                             
James H. Bodurtha      Director     2002 to   Director and Executive Vice President of        42 Funds      None
P.O. Box 9095                       present   The China Business Group, Inc. since 1995;   61 Portfolios
Princeton,                                    Chairman, Berkshire Holding Corporation
NJ 08543-9095                                 since 1982.
Age: 58


Joe Grills             Director     1994 to   Member of the Committee of Investment           42 Funds      Kimco Realty
P.O. Box 9095                       present   of Employee Benefit Assets of the            61 Portfolios    Corporation
Princeton,                                    Association of Financial Professionals
NJ 08543-9095                                 ("CIEBA") since 1986; Member of CIEBA's
Age: 67                                       Executive Committee since 1988; Member of
                                              the Investment Advisory Committees of the
                                              State of New York Common Retirement Fund
                                              since 1989; Member of the Investment
                                              Advisory Committee of the Howard Hughes
                                              Medical Institute from 1997 to to 2000;
                                              Director, Duke Management Company since
                                              1992 and Vice Chairman thereof since 1998;
                                              Director LaSalle Street Fund from 1995 to
                                              2001; Member of the Investment Advisory
                                              Committee of the Virginia Retirement System
                                              since 1998; Director, Montpelier Foundation
                                              since 1998 and Vice Chairman thereof since
                                              2000; Director, Kimco Realty since 1997;
                                              Member of the Investment Committee of the
                                              Woodberry Forest School since 2000; Member
                                              of the Investment Committee of the National
                                              Trust for Historic Preservation since 2000.





January 31, 2003, Mercury Growth Opportunity Fund



OFFICERS AND DIRECTORS (CONTINUED)


INDEPENDENT DIRECTORS (concluded)

                                                                                             Number of
                                                                                           Portfolios in    Other
                       Position(s)   Length                                                 Fund Complex    Directorships
                           Held     of Time                                                 Overseen by     Held by
Name, Address & Age     with Fund   Served*   Principal Occupation(s) During Past 5 Years     Director      Director
                                                                                             
Herbert I. London      Director     2002 to   John M. Olin Professor of Humanities,           42 Funds      None
P.O. Box 9095                       present   New York University since 1993 and           61 Portfolios
Princeton,                                    Professor thereof since 1980; President
NJ 08543-9095                                 of Hudson Institute since 1997 and
Age: 63                                       Trustee thereof since 1980.


Andre F. Perold        Director     2002 to   George Gund Professor of Finance and            42 Funds      None
P.O. Box 9095                       present   Banking, Harvard Business School since       61 Portfolios
Princeton,                                    2000 and a member of the faculty since
NJ 08543-9095                                 1979; Director of Stockback.com since
Age: 50                                       2002; Director of Quantec Limited from 1991
                                              to 1999; Director of Bulldogresearch.com
                                              from 2000 to 2001; Director of Sanlam
                                              Investment Management from 1999 to 2001;
                                              Director of Genbel Securities since 1999;
                                              Director of Gensec Bank since 1999;
                                              Director of Sanlam Limited and Sanlam
                                              Life since 2001.


Roberta Cooper Ramo    Director     2002 to   Shareholder, Modrall, Sperling, Roehl,          42 Funds      Cooper's, Inc.;
P.O. Box 9095                       present   Harris & Sisk, P.A. since 1993; Director,    61 Portfolios    ECMC Group
Princeton,                                    Cooper's Inc. since 1999 and Chairman
NJ 08543-9095                                 thereof since 2000; Director, ECMC Group






                                                                                             
Age: 60                                       since 2001.


Robert S. Salomon, Jr. Director     1996 to   Principal of STI Management since 1994;         42 Funds      None
P.O. Box 9095                       present   Trustee of Commonfund from 1980 to 2001;     61 Portfolios
Princeton,                                    Director of Rye Country Day School
NJ 08543-9095                                 since 2001.
Age: 66


Stephen B. Swensrud    Director     1994 to   Chairman, Fernwood Advisors (investment         42 Funds      International
P.O. Box 9095                       present   adviser) since 1996; Principal of Fernwood   61 Portfolios    Mobile
Princeton,                                    Associates (financial consultant) since                       Communications,
NJ 08543-9095                                 1975; Chairman of RPP Corporation since                       Inc.
Age: 69                                       1978; Director, International Mobile
                                              Communications since 1998.


*The Director's term is unlimited. Directors serve until their
resignation, removal or death, or until December 31 of the year in
which they turn 72.




January 31, 2003, Mercury Growth Opportunity Fund



OFFICERS AND DIRECTORS (CONCLUDED)


FUND OFFICERS

                       Position(s)   Length
                           Held     of Time
Name, Address & Age     with Fund   Served*   Principal Occupation(s) During Past 5 Years
                                     
Donald C. Burke        Vice         1994 to   First Vice President of FAM and MLIM since 1997 and Treasurer thereof
P.O. Box 9011          President    present   since 1999; Senior Vice President and Treasurer of Princeton Services
Princeton,             and          and       since 1999; Vice President of FAMD since 1999; Director of MLIM Taxation
NJ 08543-9011          Treasurer    1999 to   since 1990.
Age: 42                             present


Robert C. Doll, Jr.    Senior Vice  1999 to   President and Global Chief Investment Officer of MLIM and member of the
P.O. Box 9011          President    present   Executive Management Committee of ML & Co., Inc. since 2001; Chief
Princeton,                                    Investment Officer, Senior Vice President and Co-Head of MLIM Americas
NJ 08543-9011                                 from 1999 to 2001; Chief Investment Officer of Oppenheimer Funds, Inc.
Age: 48                                       from 1987 to 1999 and Executive Vice President from 1991 to 1999.


Lawrence R. Fuller     Senior Vice  1998 to   Managing Director (Equities) of MLIM since 2000; First Vice President of
P.O. Box 9011          President    present   MLIM from 1997 to 2000.
Princeton,
NJ 08543-9011
Age: 61


Susan B. Baker         Secretary    2002 to   Director (Legal Advisory) of MLIM since 1999 and Vice President from 1993
P.O. Box 9011                       present   to 1999; Attorney associated with MLIM since 1987.
Princeton,
NJ 08543-9011
Age: 45


*Officers of the Fund serve at the pleasure of the Board of
Directors.




Further information about the Fund's Officers and Directors is
available in the Fund's Statement of Additional Information, which
can be obtained without charge by calling 1-888-763-2260.



Custodian
The Bank of New York
100 Church Street
New York, NY 10286


Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
888-763-2260


Melvin R. Seiden, Director of Mercury Growth Opportunity Fund, has
recently retired. The Fund's Board of Directors wishes Mr. Seiden
well in his retirement.



January 31, 2003, Mercury Growth Opportunity Fund

EX-17.(E)

(BULL LOGO)
Merrill Lynch Investment Managers


www.mlim.ml.com


Semi-Annual Report
July 31, 2003


Mercury
Growth Opportunity
Fund



This report is not authorized for use as an offer of sale or a
solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus. Past
performance results shown in this report should not be considered a
representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Statements and other information herein are as dated and are subject
to change.

A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities is
available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) on www.mutualfunds.ml.com; and
(3) on the Securities and Exchange Commission's website at
http://www.sec.gov.



Mercury Growth Opportunity Fund,
A Series of The Asset Program, Inc.
Box 9011
Princeton, NJ
08543-9011


Printed on post-consumer recycled paper



PORTFOLIO INFORMATION


GEOGRAPHIC ALLOCATION

As a Percentage of Net Assets as of July 31, 2003++


                                    Percent of
Country                             Net Assets

United States                          92.1%
Netherlands                             1.4
Switzerland                             1.5
Canada                                  1.9

++Total may not equal 100%.



AS OF JULY 31, 2003



Ten Largest Equity                  Percent of
Holdings                            Net Assets

Intel Corporation                       5.3%
General Electric Company                4.9
Cisco Systems, Inc.                     4.0
3M Co.                                  3.2
Verizon Communications                  2.4
Lowe's Companies, Inc.                  2.4
Medtronic, Inc.                         2.3
Amgen Inc.                              2.2
Citigroup Inc.                          2.2
United Parcel Service, Inc.
(Class B)                               2.0



                                    Percent of
Five Largest Industries*            Net Assets

Specialty Retail                       10.9%
Semiconductors & Semiconductor
Equipment                               8.9
Health Care Equipment & Supplies        8.7
Industrial Conglomerates                8.1
Communications Equipment                5.0

*For Fund compliance purposes, "Industries" means any one or more
of the industry sub-classifications used by one or more widely
recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for
purposes of this report, which may combine such industry sub-
classifications for reporting ease.



July 31, 2003, Mercury Growth Opportunity Fund



DEAR SHAREHOLDER


We are pleased to provide you with this semi-annual report to
shareholders. For the six-month period ended July 31, 2003, Mercury
Growth Opportunity Fund, Inc.'s Class A, Class B, Class C and Class
I Shares had total returns of +15.38%, +14.74%, +14.79% and +15.46%,
respectively. The unmanaged benchmark Standard & Poor's 500 (S&P
500) Index had a total return of +16.79%, while the Lipper Large Cap
Growth Funds Average was +17.72% for the same period. (Fund results
shown do not reflect sales charges and would be lower if sales
charges were included. Complete performance information can be found
on pages 5 - 7 of this report to shareholders.)

While the Fund provided positive absolute performance, it did not
parallel the return of the benchmark S&P 500 Index. The Fund focuses
on the highest quality and largest capitalization growth stocks in
the benchmark Index. As a group, these companies provided lower
total investment returns during the period than the lower-quality,
smaller-capitalization growth stocks in the Index.


Portfolio Matters
In late March 2003, we began moving the portfolio toward companies
with smaller average stock market capitalizations, while still
focusing on high quality in terms of management, financials and
caliber of products and/or services as well as on the individual
companies' prospects for above-average earnings growth. Along these
lines, we added several new stocks to the portfolio, including
International Game Technology, InterActiveCorp, eBay Inc., Ross
Stores, Inc., Tiffany & Co., PETsMART, Inc., Coach, Inc., Nike,
Inc., SUPERVALU Inc., Devon Energy Corporation, Citigroup Inc.,
Gilead Sciences, Inc., DENTSPLY International Inc., Anthem Inc.,
UnitedHealth Group Incorporated, Wellpoint Health Networks Inc.,
Forest Laboratories, Inc., Hewitt Associates, Inc., General Electric
Company, ITT Industries, Inc., Affiliated Computer Services, Inc.,
Altera Corporation, ASM Lithography Holding NV, Xilinx, Inc., Citrix
Systems Inc., Symantec Corporation, Mercury Interactive Corporation
and Nortel Networks Corporation.



The Fund's average weighted market capitalization at the close of
the period was about $50 billion, down from almost $80 billion at
the beginning of the period. Many of the additions contributed
positively to the Fund's absolute performance as well as to its
relative performance versus its benchmark and peer group of Lipper
Large Cap Growth Funds in July 2003.

The Fund's investments in hospital management companies HCA Inc.,
Tenet Healthcare Corporation and Health Management Associates, Inc.
detracted from performance in the six months ended July 31, 2003. As
a result, we eliminated these positions from the portfolio. Our
fundamental business outlook for the hospital management industry
turned negative as we saw changes in U.S. Medicare reimbursement
policies and practices and renewed competition from non-profit
hospitals for the first time in approximately 20 years.



July 31, 2003, Mercury Growth Opportunity Fund



The Fund's holdings in two of the largest information technology
companies, Microsoft Corporation and International Business Machines
Corporation (IBM), also hindered performance during the period. We
sold our position in IBM when the U.S. Securities and Exchange
Commission announced a formal investigation of the company's
reported earnings for the years 2000 and 2001. We eliminated our
position in Microsoft after CEO Steven Ballmer sold more than
$1 billion of his personal stock and announced that the company's
business outlook for both the short term and intermediate term was
not favorable.


Investment Outlook
The portfolio is structured to benefit from real growth in consumer
spending and the start of a recovery in overall corporate and small
business capital spending. We believe the increased Federal
spending, which is heavily geared toward homeland security and
Defense Department supplies, could continue at elevated levels as
the post-war rebuilding effort in Iraq requires more U.S.
involvement than initially anticipated. Most important in the United
States are the recent tax rebates, which appear to be making an
impact in terms of higher levels of retail sales, and the lower
Federal income tax and withholding tax rates. The Federal tax law
changes also included substantial tax incentives for capital
investment by both large corporations and small businesses.

The Fund is most overweight in the consumer discretionary sector.
This reflects our optimism for a strengthening U.S. economy and
improving corporate profits, which we believe could translate into
higher stock market levels during the remainder of 2003.


In Conclusion
On August 14, 2003, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other
conditions, whereby Merrill Lynch Fundamental Growth Fund, Inc. will
acquire all of the assets and will assume all of the liabilities of
the Fund in exchange for newly issued shares of Merrill Lynch
Fundamental Growth Fund, Inc.

We thank you for your investment in Mercury Growth Opportunity Fund.


Sincerely,



(Terry K. Glenn)
Terry K. Glenn
President and Director



(Lawrence R. Fuller)
Lawrence R. Fuller
Vice President and
Portfolio Manager



August 15, 2003



July 31, 2003, Mercury Growth Opportunity Fund



FUND PERFORMANCE DATA


ABOUT FUND PERFORMANCE

The Fund offers multiple classes of shares, each with its own sales
charge and expense structure, allowing you to invest in the way that
best suits your needs. Prior to April 3, 2000, Class A Shares were
designated Class D Shares and Class I Shares were designated Class A
Shares.

CLASS A SHARES incur a maximum initial sales charge of 5.25% and an
account maintenance fee of 0.25% (but no distribution fee).

CLASS B SHARES are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first two years, decreasing to
3% for each of the next two years and decreasing 1% each year
thereafter to 0% after the sixth year. In addition, Class B Shares
are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class A Shares after approximately eight years.

CLASS C SHARES are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares may be
subject to a 1% contingent deferred sales charge if redeemed within
one year after purchase.

CLASS I SHARES incur a maximum initial sales charge (front-end load)
of 5.25% and bear no ongoing distribution and account maintenance
fees. Class I Shares are available only to eligible investors.

None of the past results shown should be considered a representation
of future performance. Performance results do not reflect the
deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares. Figures shown in
each of the following tables assume reinvestment of all dividends
and capital gains distributions at net asset value on the
ex-dividend date. Investment return and principal value of shares
will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Dividends paid to each class of
shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.



July 31, 2003, Mercury Growth Opportunity Fund



FUND PERFORMANCE DATA (CONTINUED)


RECENT PERFORMANCE RESULTS



                                   6-Month        12-Month    Since Inception
As of July 31, 2003              Total Return   Total Return    Total Return

Class A*                            +15.38%        + 4.68%         +51.89%
Class B*                            +14.74         + 3.65          +42.40
Class C*                            +14.79         + 3.66          +42.08
Class I*                            +15.46         + 4.94          +54.49
Standard & Poor's 500 Index**       +16.79         +10.64          +75.14

*Investment results shown do not reflect sales charges. Results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in the Fund's net asset
values for the periods shown, and assume reinvestment of all
dividends and capital gains at net asset value on the ex-dividend
date. The Fund commenced operations on 2/02/96.
**This unmanaged Index covers 500 industrial, utility,



transportation and financial companies of the U.S. markets (mostly
NYSE issues), representing about 75% of NYSE market capitalization
and 30% of NYSE issues. Since inception total return is from
2/02/96.



July 31, 2003, Mercury Growth Opportunity Fund



FUND PERFORMANCE DATA (CONCLUDED)


AVERAGE ANNUAL TOTAL RETURN


                                         % Return        % Return
                                      Without Sales     With Sales
Class A Shares*                           Charge         Charge**

One Year Ended 7/31/03                     +4.68%         -0.81%
Five Years Ended 7/31/03                   -2.61          -3.66
Inception (2/02/96) through 7/31/03        +5.74          +4.98

*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.



                                         % Return        % Return
                                         Without           With
Class B Shares*                            CDSC           CDSC**

One Year Ended 7/31/03                     +3.65%         -0.35%
Five Years Ended 7/31/03                   -3.45          -3.76
Inception (2/02/96) through 7/31/03        +4.83          +4.83

*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after six years.
**Assuming payment of applicable contingent deferred sales charge.



                                         % Return        % Return
                                         Without           With
Class C Shares*                            CDSC           CDSC**

One Year Ended 7/31/03                     +3.66%         +2.66%
Five Years Ended 7/31/03                   -3.47          -3.47
Inception (2/02/96) through 7/31/03        +4.80          +4.80

*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after one year.
**Assuming payment of applicable contingent deferred sales charge.



                                         % Return        % Return
                                      Without Sales     With Sales
Class I Shares*                           Charge         Charge**

One Year Ended 7/31/03                     +4.94%         -0.57%
Five Years Ended 7/31/03                   -2.37          -3.42
Inception (2/02/96) through 7/31/03        +5.98          +5.22

*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.



July 31, 2003, Mercury Growth Opportunity Fund



SCHEDULE OF INVESTMENTS


                                                                                         In U.S. Dollars

                     Shares                                                                      Percent of
Industry+++           Held                   Common Stocks                              Value    Net Assets
                                                                                         
Aerospace &          20,700   General Dynamics Corporation                           $  1,642,338      1.5%
Defense

Air Freight &        34,400   United Parcel Service, Inc. (Class B)                     2,169,952      2.0






                                                                                         
Logistics

Beverages            20,200   Anheuser-Busch Companies, Inc.                            1,046,764      1.0

Biotechnology        35,000   ++Amgen Inc.                                              2,435,300      2.2
                     26,300   ++Gilead Sciences, Inc.                                   1,802,865      1.7
                                                                                     ------------    ------
                                                                                        4,238,165      3.9

Capital Markets      25,800   Northern Trust Corporation                                1,126,428      1.0
                     27,000   State Street Corporation                                  1,239,300      1.2
                     43,900   T. Rowe Price Group Inc.                                  1,781,901      1.6
                                                                                     ------------    ------
                                                                                        4,147,629      3.8

Chemicals            58,200   Ecolab Inc.                                               1,438,122      1.3

Commercial           20,600   ++Apollo Group, Inc. (Class A)                            1,334,056      1.2
Services &           14,700   ++Career Education Corporation                            1,225,980      1.1
Supplies             13,500   ++Hewitt Associates, Inc. (Class A)                         348,570      0.3
                                                                                     ------------    ------
                                                                                        2,908,606      2.6


Communications      227,000   ++Cisco Systems, Inc.                                     4,431,040      4.0
Equipment           368,900   ++Nortel Networks Corporation                             1,088,255      1.0
                                                                                     ------------    ------
                                                                                        5,519,295      5.0

Computers &          50,000   Hewlett-Packard Company                                   1,058,500      1.0
Peripherals          23,000   ++SanDisk Corporation                                     1,303,870      1.2
                                                                                     ------------    ------
                                                                                        2,362,370      2.2

Containers &         19,300   Ball Corporation                                            959,210      0.9
Packaging

Diversified          53,600   Citigroup Inc.                                            2,401,280      2.2
Financial
Services

Diversified          76,500   Verizon Communications                                    2,666,790      2.4
Telecommunication
Services





July 31, 2003, Mercury Growth Opportunity Fund



SCHEDULE OF INVESTMENTS (CONTINUED)


                                                                                         In U.S. Dollars

                     Shares                                                                      Percent of
Industry+++           Held                   Common Stocks                              Value    Net Assets
                                                                                         
Energy               27,800   ++BJ Services Company                                  $    952,150      0.9%
Equipment &          36,000   Baker Hughes Incorporated                                 1,130,760      1.0
Service                                                                              ------------    ------
                                                                                        2,082,910      1.9

Food Products        63,100   Archer-Daniels-Midland Company                              829,134      0.8

Food & Staples       45,000   SUPERVALU Inc.                                            1,059,750      1.0
Retailing            36,800   SYSCO Corporation                                         1,108,784      1.0
                                                                                     ------------    ------
                                                                                        2,168,534      2.0

Health Care          33,300   Alcon, Inc.                                               1,697,301      1.5
Equipment &          29,700   ++Boston Scientific Corporation                           1,877,931      1.7
Supplies             25,000   DENTSPLY International Inc.                               1,085,250      1.0
                     48,100   Medtronic, Inc.                                           2,477,150      2.3
                     15,000   Stryker Corporation                                       1,147,800      1.0
                     20,800   ++Varian Medical Systems, Inc.                            1,276,288      1.2
                                                                                     ------------    ------
                                                                                        9,561,720      8.7

Health Care          14,900   ++Anthem, Inc.                                            1,125,099      1.0
Providers &          27,100   UnitedHealth Group Incorporated                           1,411,639      1.3
Services             15,600   ++WellPoint Health Networks Inc.                          1,304,940      1.2
                                                                                     ------------    ------
                                                                                        3,841,678      3.5

Hotels,              20,100   ++Brinker International, Inc.                               703,500      0.7
Restaurants &        27,800   ++Krispy Kreme Doughnuts, Inc.                            1,213,748      1.1
Leisure              45,000   ++Starbucks Corporation                                   1,229,850      1.1
                     70,900   ++YUM! Brands, Inc.                                       2,122,037      1.9
                                                                                     ------------    ------
                                                                                        5,269,135      4.8

IT Services          24,900   ++Affiliated Computer Services, Inc.
                              (Class A)                                                 1,233,795      1.1
                     28,100   First Data Corporation                                    1,061,056      1.0
                     35,000   Paychex, Inc.                                             1,138,550      1.0
                                                                                     ------------    ------
                                                                                        3,433,401      3.1

Industrial           25,100   3M Co.                                                    3,519,020      3.2
Conglomerates       189,000   General Electric Company                                  5,375,160      4.9
                                                                                     ------------    ------
                                                                                        8,894,180      8.1




July 31, 2003, Mercury Growth Opportunity Fund


SCHEDULE OF INVESTMENTS (CONTINUED)






                                                                                         In U.S. Dollars

                     Shares                                                                      Percent of
Industry+++           Held                   Common Stocks                              Value    Net Assets
                                                                                         
Internet &           15,400   ++eBay Inc.                                            $  1,650,880      1.5%
Catalog Retail       58,800   International Game Technology                             1,496,460      1.4
                                                                                     ------------    ------
                                                                                        3,147,340      2.9

Machinery            17,600   ITT Industries, Inc.                                      1,173,920      1.1

Media                43,000   ++Fox Entertainment Group, Inc. (Class A)                 1,301,610      1.2
                     30,000   ++InterActiveCorp                                         1,214,100      1.1
                     66,700   Rogers Communications, Inc. 'B'                           1,026,372      0.9
                                                                                     ------------    ------
                                                                                        3,542,082      3.2

Oil & Gas            20,300   Devon Energy Corporation                                    961,611      0.9

Pharmaceuticals      19,900   ++Forest Laboratories, Inc.                                 952,812      0.9

Semiconductors &    115,100   ++ASM Lithography Holding NV
Semiconductor                 (NY Registered Shares)                                    1,489,394      1.3
Equipment            67,300   ++Altera Corporation                                      1,294,852      1.2
                    230,700   Intel Corporation                                         5,755,965      5.3
                     45,000   ++Xilinx, Inc.                                            1,182,600      1.1
                                                                                     ------------    ------
                                                                                        9,722,811      8.9

Software             48,900   ++Citrix Systems, Inc.                                      887,535      0.8
                     13,300   ++Electronic Arts Inc.                                    1,117,200      1.0
                     27,600   ++Mercury Interactive Corporation                         1,086,336      1.0
                     27,800   ++Symantec Corporation                                    1,300,206      1.2
                                                                                     ------------    ------
                                                                                        4,391,277      4.0

Specialty Retail     16,300   ++AutoZone, Inc.                                          1,357,138      1.2
                     34,200   ++Bed, Bath & Beyond Inc.                                 1,327,986      1.2
                     55,900   Lowe's Companies, Inc.                                    2,658,604      2.4
                     71,300   ++PETsMART, Inc.                                          1,413,879      1.3
                     14,300   ++Rent A Center Inc.                                      1,042,756      1.0
                     26,100   Ross Stores, Inc.                                         1,192,770      1.1
                     65,900   The TJX Companies, Inc.                                   1,281,755      1.2
                     47,600   Tiffany & Co.                                             1,635,536      1.5
                                                                                     ------------    ------
                                                                                       11,910,424     10.9

Textiles, Apparel    31,200   ++Coach, Inc.                                             1,653,600      1.5
& Luxury Goods       19,000   Nike, Inc. (Class B)                                        983,060      0.9
                                                                                     ------------    ------
                                                                                        2,636,660      2.4

                              Total Common Stocks
                              (Cost--$97,902,141)                                     106,020,150     96.9




July 31, 2003, Mercury Growth Opportunity Fund



SCHEDULE OF INVESTMENTS (CONCLUDED)


                                                                                         In U.S. Dollars

              Beneficial Interest/                                                               Percent of
                  Shares Held            Short-Term Securities                          Value    Net Assets
                                                                                            
                 $3,807,852   Merrill Lynch Liquidity Series, LLC
                              Cash Sweep Series I (a)                                $  3,807,852      3.5%
                 $4,280,339   Merrill Lynch Liquidity Series, LLC
                              Money Market Series (a) (b)                               4,280,339      3.9
                  2,853,561   Merrill Lynch Premier Institutional
                              Fund (a) (b)                                              2,853,561      2.6

                              Total Short-Term Securities
                              (Cost--$10,941,752)                                      10,941,752     10.0

                              Total Investments
                              (Cost--$108,843,893)                                    116,961,902    106.9
                              Liabilities in Excess of Other Assets                   (7,556,888)     (6.9)
                                                                                     ------------    ------
                              Net Assets                                             $109,405,014    100.0%
                                                                                     ============    ======


++Non-income producing security.
+++For Fund compliance purposes, "Industry" means any one of the
industry sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by Fund
management. This definition may not apply for purposes of this
report, which may combine such industry sub-classifications for
reporting ease.
(a)Investments in companies considered to be an affiliate of the
Fund (such companies are defined as "Affiliated Companies" in
Section 2(a)(3) of the Investment Company Act of 1940) are as
follows:

                                                              Dividend/
                                                Net            Interest
Affiliate                                     Activity          Income

Merrill Lynch Institutional Fund                      --      $      14
Merrill Lynch Liquidity Series,
  LLC Cash Sweep Series I                   $(2,149,132)      $  24,202
Merrill Lynch Liquidity Series,
  LLC Money Market Series                   $  2,338,261      $     542
Merrill Lynch Premier Institutional Fund       1,264,587      $     351


(b)Security was purchased with the cash proceeds from securities
loans.

See Notes to Financial Statements.




July 31, 2003, Mercury Growth Opportunity Fund




STATEMENT OF ASSETS AND
LIABILITIES


As of July 31, 2003
                                                                                        
Assets:
Investments, at value (including securities loaned of
  $6,972,185) (identified cost--$108,843,893)                                                 $ 116,961,902
Cash                                                                                                    213
Receivables:
  Capital shares sold                                                        $      69,362
  Dividends                                                                         68,559
  Interest                                                                           3,606
  Securities lending--net                                                              193          141,720
                                                                             -------------
Prepaid registration fees and other assets                                                            5,359
                                                                                              -------------
Total assets                                                                                    117,109,194
                                                                                              -------------

Liabilities:
Collateral on securities loaned, at value                                                         7,133,900
Payables:
  Capital shares redeemed                                                          263,195
  Distributor                                                                       79,311
  Investment adviser                                                                65,667
  Other affiliates                                                                  58,791          466,964
                                                                             -------------
Accrued expenses and other liabilities                                                              103,316
                                                                                              -------------
Total liabilities                                                                                 7,704,180
                                                                                              -------------

Net Assets:
Net assets                                                                                    $ 109,405,014
                                                                                              =============

Net Assets Consist of:
Class A Shares of capital stock, $.10 par value, 6,250,000
  shares authorized                                                                             $   156,670
Class B Shares of capital stock, $.10 par value, 15,000,000
  shares authorized                                                                                 510,554
Class C Shares of capital stock, $.10 par value, 15,000,000
  shares authorized                                                                                 342,454
Class I Shares of capital stock, $.10 par value, 6,250,000
  shares authorized                                                                                  24,196
Paid-in capital in excess of par                                                                168,256,533
Accumulated investment loss--net                                             $   (817,636)
Accumulated realized capital losses on investments and
  foreign currency transactions--net                                          (67,185,766)
Unrealized appreciation on investments--net                                      8,118,009
                                                                             -------------
Total accumulated losses--net                                                                  (59,885,393)
                                                                                              -------------
Net assets                                                                                    $ 109,405,014
                                                                                              =============

Net Asset Value:
Class A--Based on net assets of $17,149,735 and
  1,566,704 shares outstanding                                                                $       10.95
                                                                                              =============
Class B--Based on net assets of $53,683,782 and
  5,105,536 shares outstanding                                                                $       10.51
                                                                                              =============
Class C--Based on net assets of $35,898,550 and
  3,424,537 shares outstanding                                                                $       10.48
                                                                                              =============
Class I--Based on net assets of $2,672,947 and
  241,959 shares outstanding                                                                  $       11.05
                                                                                              =============

See Notes to Financial Statements.




July 31, 2003, Mercury Growth Opportunity Fund



STATEMENT OF OPERATIONS


For the Six Months Ended July 31, 2003
                                                                                        
Investment Income:
Dividends (net of $146 foreign withholding tax)                                               $     445,318
Interest                                                                                             24,563
Securities lending--net                                                                                 907
                                                                                              -------------
Total income                                                                                        470,788
                                                                                              -------------

Expenses:
Investment advisory fees                                                     $     332,913
Account maintenance and distribution fees--Class B                                 255,274
Transfer agent fees--Class B                                                       189,873
Account maintenance and distribution fees--Class C                                 168,955
Transfer agent fees--Class C                                                       130,204
Transfer agent fees--Class A                                                        47,675
Printing and shareholder reports                                                    36,736
Accounting services                                                                 35,496
Registration fees                                                                   22,622
Account maintenance fees--Class A                                                   19,041
Professional fees                                                                   18,539
Custodian fees                                                                      11,037
Transfer agent fees--Class I                                                         7,377
Directors' fees and expenses                                                         4,482
Pricing fees                                                                         1,128
Other                                                                                7,072
                                                                             -------------
Total expenses                                                                                    1,288,424
                                                                                              -------------
Investment loss--net                                                                              (817,636)
                                                                                              -------------

Realized & Unrealized Gain (Loss) on Investments &
Foreign Currency Transactions--Net:






                                                                                        
Realized loss on:
  Investments--net                                                            (12,341,730)
  Foreign currency transactions--net                                                 (952)     (12,342,682)
                                                                             -------------
Change in unrealized appreciation/depreciation on
  investments--net                                                                               27,626,444
                                                                                              -------------
Total realized and unrealized gain on investments and
  foreign currency transactions--net                                                             15,283,762
                                                                                              -------------
Net Increase in Net Assets Resulting from Operations                                          $  14,466,126
                                                                                              =============

See Notes to Financial Statements.




July 31, 2003, Mercury Growth Opportunity Fund



STATEMENTS OF CHANGES
IN NET ASSETS



                                                                              For the Six        For the
                                                                             Months Ended       Year Ended
                                                                               July 31,        January 31,
Increase (Decrease)in Net Assets:                                                2003              2003
                                                                                        
Operations:
Investment loss--net                                                         $   (817,636)    $ (2,211,049)
Realized losson investments and foreign currency
  transactions--net                                                           (12,342,682)     (22,364,392)
Change in unrealized appreciation/depreciation on
  investments--net                                                              27,626,444     (22,039,656)
                                                                             -------------    -------------
Net increase (decrease) in net assets resulting
  from operations                                                               14,466,126     (46,615,097)
                                                                             -------------    -------------

Capital Share Transactions:
Net decrease in net assets derived from capital share
  transactions                                                                 (5,168,500)      (7,785,645)
                                                                             -------------    -------------

Net Assets:
Total increase (decrease) in net assets                                          9,297,626     (54,400,742)
Beginning of period                                                            100,107,388      154,508,130
                                                                             -------------    -------------
End of period*                                                               $ 109,405,014    $ 100,107,388
                                                                             =============    =============

*Accumulated investment loss--net                                            $   (817,636)               --
                                                                             =============    =============

See Notes to Financial Statements.




July 31, 2003, Mercury Growth Opportunity Fund



FINANCIAL HIGHLIGHTS


The following per share data and ratios have been derived from
information provided in the financial statements.


                                                                     Class A+++++
                                               For the
                                              Six Months
                                                Ended
Increase (Decrease) in                         July 31,            For the Year Ended January 31,
Net Asset Value:                                 2003         2003         2002         2001         2000
                                                                                   
Per Share Operating Performance:
Net asset value, beginning of
  period                                       $    9.49    $   13.61    $   17.45    $   21.93   $   18.51
                                               ---------    ---------    ---------    ---------   ---------
Investment loss--net++                             (.04)        (.11)        (.08)        (.12)       (.07)
Realized and unrealized gain (loss)
  on investmentsand foreign
  currency transactions--net                        1.50       (4.01)       (3.33)       (1.61)        4.58
                                               ---------    ---------    ---------    ---------   ---------
Total from investment operations                    1.46       (4.12)       (3.41)       (1.73)        4.51
                                               ---------    ---------    ---------    ---------   ---------
Less distributions from realized
  gain on investments--net                            --           --        (.43)       (2.75)      (1.09)
                                               ---------    ---------    ---------    ---------   ---------
Net asset value, end of period                 $   10.95    $    9.49    $   13.61    $   17.45   $   21.93
                                               =========    =========    =========    =========   =========

Total Investment Return:**
Based on net asset value per
  share                                        15.38%+++     (30.27%)     (19.55%)      (8.57%)      24.80%
                                               =========    =========    =========    =========   =========

Ratios to Average Net Assets:
Expenses                                          1.79%*        1.82%        1.56%        1.55%       1.62%
                                               =========    =========    =========    =========   =========
Investment loss--net                             (.88%)*      (1.03%)       (.58%)       (.55%)      (.34%)
                                               =========    =========    =========    =========   =========

Supplemental Data:
Net assets, end of period
  (in thousands)                               $  17,150    $  13,770    $  11,847    $  10,515   $   7,659
                                               =========    =========    =========    =========   =========
Portfolio turnover                                63.97%       89.63%      131.76%      100.88%      81.27%
                                               =========    =========    =========    =========   =========

*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.




+++Aggregate total investment return.
+++++Prior to April 3, 2000, Class A Shares were designated as Class
D Shares.

See Notes to Financial Statements.



July 31, 2003, Mercury Growth Opportunity Fund



FINANCIAL HIGHLIGHTS (CONTINUED)


The following per share data and ratios have been derived from
information provided in the financial statements.


                                                                       Class B
                                               For the
                                              Six Months
                                                Ended
Increase (Decrease) in                         July 31,            For the Year Ended January 31,
Net Asset Value:                                 2003         2003         2002         2001         2000
                                                                                   
Per Share Operating Performance:
Net asset value, beginning of
  period                                       $    9.16    $   13.25    $   17.13    $   21.44   $   18.26
                                               ---------    ---------    ---------    ---------   ---------
Investment loss--net++                             (.08)        (.21)        (.20)        (.30)       (.22)
Realized and unrealized gain (loss)
  on investmentsand foreign
  currency transactions--net                        1.43       (3.88)       (3.25)       (1.56)        4.48
                                               ---------    ---------    ---------    ---------   ---------
Total from investment operations                    1.35       (4.09)       (3.45)       (1.86)        4.26
                                               ---------    ---------    ---------    ---------   ---------
Less distributions from realized
  gain on investments--net                            --           --        (.43)       (2.45)      (1.08)
                                               ---------    ---------    ---------    ---------   ---------
Net asset value, end of period                 $   10.51    $    9.16    $   13.25    $   17.13   $   21.44
                                               =========    =========    =========    =========   =========

Total Investment Return:**
Based on net asset value per
  share                                        14.74%+++     (30.87%)     (20.16%)      (9.31%)      23.76%
                                               =========    =========    =========    =========   =========

Ratios to Average Net Assets:
Expenses                                          2.66%*        2.65%        2.39%        2.36%       2.45%
                                               =========    =========    =========    =========   =========
Investment loss--net                            (1.74%)*      (1.87%)      (1.42%)      (1.38%)     (1.16%)
                                               =========    =========    =========    =========   =========

Supplemental Data:
Net assets, end of period
  (in thousands)                               $  53,684    $  50,933    $  85,072    $ 109,589   $ 115,216
                                               =========    =========    =========    =========   =========
Portfolio turnover                                63.97%       89.63%      131.76%      100.88%      81.27%
                                               =========    =========    =========    =========   =========

*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Aggregate total investment return.

See Notes to Financial Statements.




July 31, 2003, Mercury Growth Opportunity Fund



FINANCIAL HIGHLIGHTS (CONTINUED)


The following per share data and ratios have been derived from
information provided in the financial statements.


                                                                       Class C
                                               For the
                                              Six Months
                                                Ended
Increase (Decrease) in                         July 31,            For the Year Ended January 31,
Net Asset Value:                                 2003         2003         2002         2001         2000
                                                                                   
Per Share Operating Performance:
Net asset value, beginning of
  period                                       $    9.13    $   13.21    $   17.09    $   21.40   $   18.24
                                               ---------    ---------    ---------    ---------   ---------
Investment loss--net++                             (.08)        (.21)        (.20)        (.30)       (.23)
Realized and unrealized gain (loss)
  on investmentsand foreign
  currency transactions--net                        1.43       (3.87)       (3.25)       (1.56)        4.47
                                               ---------    ---------    ---------    ---------   ---------
Total from investment operations                    1.35       (4.08)       (3.45)       (1.86)        4.24
                                               ---------    ---------    ---------    ---------   ---------
Less distributions from realized
  gain on investments--net                            --           --        (.43)       (2.45)      (1.08)
                                               ---------    ---------    ---------    ---------   ---------
Net asset value, end of period                 $   10.48    $    9.13    $   13.21    $   17.09   $   21.40
                                               =========    =========    =========    =========   =========

Total Investment Return:**
Based on net asset value per
  share                                        14.79%+++     (30.89%)     (20.20%)      (9.34%)      23.68%
                                               =========    =========    =========    =========   =========

Ratios to Average Net Assets:
Expenses                                          2.69%*        2.68%        2.42%        2.38%       2.48%
                                               =========    =========    =========    =========   =========
Investment loss--net                            (1.77%)*      (1.90%)      (1.44%)      (1.41%)     (1.20%)
                                               =========    =========    =========    =========   =========

Supplemental Data:




                                                                                   
Net assets, end of period
  (in thousands)                               $  35,898    $  33,258    $  55,039    $  69,476   $  72,650
                                               =========    =========    =========    =========   =========
Portfolio turnover                                63.97%       89.63%      131.76%      100.88%      81.27%
                                               =========    =========    =========    =========   =========


*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Aggregate total investment return.

See Notes to Financial Statements.




July 31, 2003, Mercury Growth Opportunity Fund



FINANCIAL HIGHLIGHTS (CONCLUDED)


The following per share data and ratios have been derived from
information provided in the financial statements.


                                                                     Class I+++++
                                               For the
                                              Six Months
                                                Ended
Increase (Decrease) in                         July 31,            For the Year Ended January 31,
Net Asset Value:                                 2003         2003         2002         2001         2000
                                                                                   
Per Share Operating Performance:
Net asset value, beginning of
  period                                       $    9.57    $   13.69    $   17.49    $   22.01   $   18.53
                                               ---------    ---------    ---------    ---------   ---------
Investment loss--net++                             (.03)        (.09)        (.05)        (.05)       (.01)
Realized and unrealized gain (loss)
  on investmentsand foreign
  currency transactions--net                        1.51       (4.03)       (3.32)       (1.64)        4.58
                                               ---------    ---------    ---------    ---------   ---------
Total from investment operations                    1.48       (4.12)       (3.37)       (1.69)        4.57
                                               ---------    ---------    ---------    ---------   ---------
Less distributions from realized gain
  on investments--net                                 --           --        (.43)       (2.83)      (1.09)
                                               ---------    ---------    ---------    ---------   ---------
Net asset value, end of period                 $   11.05    $    9.57    $   13.69    $   17.49   $   22.01
                                               =========    =========    =========    =========   =========

Total Investment Return:**
Based on net asset value per
  share                                        15.46%+++     (30.09%)     (19.27%)      (8.37%)      25.11%
                                               =========    =========    =========    =========   =========

Ratios to Average Net Assets:
Expenses                                          1.54%*        1.56%        1.30%        1.31%       1.36%
                                               =========    =========    =========    =========   =========
Investment loss--net                             (.63%)*       (.77%)       (.33%)       (.25%)      (.07%)
                                               =========    =========    =========    =========   =========

Supplemental Data:
Net assets, end of period
  (in thousands)                               $   2,673    $   2,146    $   2,550    $   2,142   $     939
                                               =========    =========    =========    =========   =========
Portfolio turnover                                63.97%       89.63%      131.76%      100.88%      81.27%
                                               =========    =========    =========    =========   =========

*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Aggregate total investment return.
+++++Prior to April 3, 2000, Class I Shares were designated as Class
A Shares.

See Notes to Financial Statements.




July 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS


1. Significant Accounting Policies:
Mercury Growth Opportunity Fund (the "Fund") is a series of The
Asset Program, Inc. (the "Program"), which is registered under the
Investment Company Act of 1940, as amended, as a non-diversified,
open-end management investment company. The Fund's financial
statements are prepared in conformity with accounting principles
generally accepted in the United States of America, which may
require the use of management accruals and estimates. These
unaudited financial statements reflect all adjustments, which are,
in the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are
of a normal, recurring nature. The Fund offers multiple classes of
shares. Class A and Class I Shares are sold with a front-end sales
charge. Class B and Class C Shares may be subject to a contingent
deferred sales charge. All classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and
conditions, except that Class A, Class B and Class C Shares bear
certain expenses related to the account maintenance of such shares,
and Class B and Class C Shares also bear certain expenses related to



the distribution of such shares. Each class has exclusive voting
rights with respect to matters relating to its account maintenance
and distribution expenditures (except that Class B shareholders may
vote upon any material changes under the distribution plan for Class
A Shares). Income, expenses (other than expenses attributable to a
specific class) and realized and unrealized gains and losses on
investments and foreign currency transactions are allocated daily to
each class based on its relative net assets. The following is a
summary of significant accounting policies followed by the Fund.

(a) Valuation of investments--Portfolio securities that are traded
on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official closing price on the exchange on which
such securities are traded, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last
available bid price for long positions, and at the last available
ask price for short positions. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Program's Board of
Directors as the primary market. Securities that are traded both in
the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market. Options
written or purchased are valued at the last sale price in the case
of exchange-traded options. In the case of options traded in the
over-the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). Short-term
securities are valued at amortized cost, which approximates market
value. Other investments, including financial futures contracts and
related options, are stated at market value. Securities and assets
for which market quotations are not readily available are valued at
fair market value as determined in good faith by or under the
direction of the Program's Board of Directors. Occasionally, events
affecting the values of securities and other assets may occur
between the times at which valuations of such securities are
determined (that is, close of the market on which such securities
trade) and the close of business on the NYSE. If events (for
example, company announcement, natural disasters, market volatility)
occur during such periods that are expected to materially affect the
value for such securities, those securities may be valued at their
fair market value as determined in good faith by the Program's Board
of Directors or by the investment adviser using a pricing service
and/or procedures approved by the Board of Directors of the Program.



July 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


(b) Repurchase agreements--The Fund may invest in securities
pursuant to repurchase agreements. Under such agreements, the
counterparty agrees to repurchase the security at a mutually agreed
upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary,
receives additions to such securities daily to ensure that the
contract is fully collateralized. If the counterparty defaults and
the fair value of the collateral declines, liquidation of the
collateral by the Fund may be delayed or limited.

(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies both to increase the return of the
Fund and to hedge, or protect, its exposure to interest rate
movement and movements in the securities markets. Losses may arise
due to changes in the value of the contract or if the counterparty
does not perform under the contract.

* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts.
Futures contracts are contracts for delayed delivery of securities
at a specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund



as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.

* Options--The Fund is authorized to purchase and write call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).



July 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


Written and purchased options are non-income producing investments.

* Forward foreign exchange contracts--The Fund is authorized to
enter into forward foreign exchange contracts as a hedge against
either specific transactions or portfolio positions. The contract is
marked-to-market daily and the change in market value is recorded by
the Fund as an unrealized gain or loss. When the contract is closed,
the Fund records a realized gain or loss equal to the difference
between the value at the time it was opened and the value at the
time it was closed.

* Foreign currency options and futures--The Fund may also purchase
or sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-U.S. dollar-denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated
to be purchased by the Fund.

(d) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into U.S. dollars. Realized and unrealized gains or
losses from investments include the effects of foreign exchange
rates on investments.

(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends and capital
gains at various rates.

(f) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Realized gains and losses on security
transactions are determined on the identified cost basis. Dividend
income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are
subsequently recorded when the Fund has determined the ex-dividend
date. Interest income (including amortization of premium and
discount) is recognized on the accrual basis.

(g) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.



July 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


(h) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.

(i) Expenses--Certain expenses have been allocated to the individual
Funds in the Program on a pro rata basis based upon the respective
aggregate net asset value of each Fund included in the Program.

(j) Securities lending--The Fund may lend securities to financial
institutions that provide cash or securities issued or guaranteed by
the U.S. government as collateral, which will be maintained at all
times in an amount equal to at least 100% of the current market
value of the loaned securities. The market value of the loaned
securities is determined at the close of business of the Fund and
any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral
for the loaned securities, it collects a fee from the borrower. The
Fund typically receives the income on the loaned securities but does
not receive the income on the collateral. Where the Fund receives
cash collateral, it may invest such collateral and retain the amount
earned on such investment, net of any amount rebated to the
borrower. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities
within five business days. The Fund may pay reasonable finder's,
lending agent, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation
to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access
to the collateral. The Fund also could suffer a loss where the value
of the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of
losses on investments made with cash collateral.


2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner. The Fund has also entered into a Distribution
Agreement and Distribution Plans with FAM Distributors, Inc. ("FAMD"
or the "Distributor"), which is a wholly-owned subsidiary of Merrill
Lynch Group, Inc.

FAM is responsible for the management of the Fund's portfolios and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of .65%, on an annual basis,
of the average daily value of the Fund's net assets. FAM has entered
into a Sub-Advisory Agreement with Merrill Lynch Asset Management
U.K. Limited ("MLAM U.K."), an affiliate of FAM, pursuant to which
MLAM U.K. provides investment advisory services to FAM with respect
to the Fund. There is no increase in the aggregate fees paid by the
Fund for these services.



July 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund
pays the Distributor ongoing account maintenance and distribution
fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares as follows:


                                   Account
                                 Maintenance        Distribution
                                     Fees               Fees



Class A                              .25%                 --
Class B                              .25%               .75%
Class C                              .25%               .75%


Pursuant to a sub-agreement with the Distributor, selected dealers
also provide account maintenance and distribution services to the
Program. The ongoing account maintenance fee compensates the
Distributor and selected dealers for providing account maintenance
services to Class A, Class B and Class C shareholders. The ongoing
distribution fee compensates the Distributor and selected dealers
for providing shareholder and distribution-related services to Class
B and Class C shareholders.

For the six months ended July 31, 2003, FAMD earned underwriting
discounts and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), a subsidiary of ML & Co., earned dealer concessions on
sales of the Fund's Class A Shares as follows:


                                     FAMD              MLPF&S

Class A                              $99               $1,807


For the six months ended July 31, 2003, MLPF&S, received contingent
deferred sales charges of $47,299 and $3,078 relating to
transactions in Class B and Class C Shares, respectively.

The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
MLPF&S or its affiliates. As of July 31, 2003, the Fund lent
securities with a value of $4,793,185 to MLPF&S or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the
securities lending agent for a fee based on a share of the returns
on investment of cash collateral. MLIM, LLC may, on behalf of the
Fund, invest cash collateral received by the Fund for such loans,
among other things, in a private investment company managed by MLIM,
LLC or in registered money market funds advised by FAM or its
affiliates. For the six months ended July 31, 2003, MLIM, LLC
received $389 in securities lending agent fees.

In addition, MLPF&S received $35,253 in commissions on the execution
of portfolio security transactions for the Fund for the six months
ended July 31, 2003.



July 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.

For the six months ended July 31, 2003, the Fund reimbursed FAM
$1,214 for certain accounting services.

Certain officers and/or directors of the Program are officers and/or
directors of FAM, MLIM, LLC, PSI, MLAM U.K., FDS, FAMD, and/or
ML & Co.


3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended July 31, 2003 were $63,638,572 and
$67,647,207, respectively.

Net realized losses for the six months ended July 31, 2003 and net
unrealized gains as of July 31, 2003 were as follows:



                                      Realized         Unrealized
                                       Losses            Gains



Long-term investments            $  (12,341,730)    $     8,118,009
Foreign currency transactions              (952)                 --
                                 ---------------    ---------------
Total                            $  (12,342,682)    $     8,118,009
                                 ===============    ===============


As of July 31, 2003, net unrealized appreciation for Federal income
tax purposes aggregated $7,532,061, of which $11,079,989 related to
appreciated securities and $3,547,928 related to depreciated
securities. At July 31, 2003, the aggregated cost of investments for
Federal income tax purposes was $109,429,841.


4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $5,168,500 and $7,785,645 for the six months ended July 31, 2003
and the year ended January 31, 2003, respectively.



Class A Shares for the Six Months                         Dollar
Ended July 31, 2003                       Shares          Amount

Shares sold                              279,391    $     2,791,512
Automatic conversion of shares            38,347            386,261
                                 ---------------    ---------------
Total issued                             317,738          3,177,773
Shares redeemed                        (201,861)        (2,037,893)
                                 ---------------    ---------------
Net increase                             115,877    $     1,139,880
                                 ===============    ===============



July 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONTINUED)


Class A Shares for the Year                               Dollar
Ended January 31, 2003                    Shares          Amount

Shares sold                            1,485,692    $    16,258,841
Automatic conversion of shares            49,360            591,112
                                 ---------------    ---------------
Total issued                           1,535,052         16,849,953
Shares redeemed                        (954,462)       (10,168,923)
                                 ---------------    ---------------
Net increase                             580,590    $     6,681,030
                                 ===============    ===============



Class B Shares for the Six Months                         Dollar
Ended July 31, 2003                       Shares          Amount

Shares sold                              132,643    $     1,276,985
Automatic conversion of shares          (39,830)          (386,261)
Shares redeemed                        (549,850)        (5,280,762)
                                 ---------------    ---------------
Net decrease                           (457,037)    $   (4,390,038)
                                 ===============    ===============



Class B Shares for the Year                               Dollar
Ended January 31, 2003                    Shares          Amount

Shares sold                              470,713    $     5,262,975
Automatic conversion of shares          (50,892)          (591,112)
Shares redeemed                      (1,280,011)       (13,902,091)
                                 ---------------    ---------------
Net decrease                           (860,190)    $   (9,230,228)
                                 ===============    ===============



Class C Shares for the Six Months                         Dollar



Ended July 31, 2003                       Shares          Amount

Shares sold                              174,297    $     1,679,240
Shares redeemed                        (392,585)        (3,776,621)
                                 ---------------    ---------------
Net decrease                           (218,288)    $   (2,097,381)
                                 ===============    ===============



Class C Shares for the Year                               Dollar
Ended January 31, 2003                    Shares          Amount

Shares sold                              454,865    $     5,090,933
Shares redeemed                        (978,343)       (10,750,899)
                                 ---------------    ---------------
Net decrease                           (523,478)    $   (5,659,966)
                                 ===============    ===============



Class I Shares for the Six Months                         Dollar
Ended July 31, 2003                       Shares          Amount

Shares sold                               42,825    $       429,602
Shares redeemed                         (25,169)          (250,563)
                                 ---------------    ---------------
Net increase                              17,656    $       179,039
                                 ===============    ===============



July 31, 2003, Mercury Growth Opportunity Fund



NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)


Class I Shares for the Year                               Dollar
Ended January 31, 2003                    Shares          Amount

Shares sold                              106,248    $     1,208,046
Shares redeemed                         (68,304)          (784,527)
                                 ---------------    ---------------
Net increase                              37,944    $       423,519
                                 ===============    ===============


5. Short-Term Borrowings:
The Fund, along with certain other funds managed by FAM and its
affiliates, is a party to a $500,000,000 credit agreement with Bank
One, N.A. and certain other lenders. The Fund may borrow under the
credit agreement to fund shareholder redemptions and for other
lawful purposes other than for leverage. The Fund may borrow up to
the maximum amount allowable under the Fund's current prospectus and
statement of additional information, subject to various other legal,
regulatory or contractual limits. The Fund pays a commitment fee of
..09% per annum based on the Fund's pro rata share of the unused
portion of the credit agreement. Amounts borrowed under the credit
agreement bear interest at a rate equal to, at each fund's election,
the Federal Funds rate plus .50% or a base rate as determined by
Bank One, N.A. On November 29, 2002, the credit agreement was
renewed for one year under the same terms, except that the total
commitment was reduced from $1,000,000,000 to $500,000,000. The Fund
did not borrow under the credit agreement during the six months
ended July 31, 2003.


6. Capital Loss Carryforward:
On January 31, 2003, the Fund had a net capital loss carryforward of
$52,615,781, of which $28,654,300 expires in 2009 and $23,961,481
expires in 2010. This amount will be available to offset like
amounts of any future taxable gains.


7. Reorganization Plan:
On August 14, 2003, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other
conditions, whereby Merrill Lynch Fundamental Growth Fund, Inc. will
acquire all of the assets and will assume all of the liabilities of



the Fund in exchange for newly issued shares of Merrill Lynch
Fundamental Growth Fund, Inc.



July 31, 2003, Mercury Growth Opportunity Fund



OFFICERS AND DIRECTORS


Terry K. Glenn, President and Director
James H. Bodurtha, Director
Joe Grills, Director
Herbert I. London, Director
Andre F. Perold, Director
Roberta Cooper Ramo, Director
Robert S. Salomon, Jr., Director
Stephen B. Swensrud, Director
Robert C. Doll Jr., Senior Vice President
Lawrence R. Fuller, Vice President and
   Portfolio Manager
Donald C. Burke, Vice President and
   Treasurer
Phillip S. Gillespie, Secretary



Custodian
The Bank of New York
100 Church Street
New York, NY 10286


Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
888-763-2260



July 31, 2003, Mercury Growth Opportunity Fund