ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE BlackRock Funds Equity Portfolios Annual Report September 30, 2005 [GRAPHIC APPEARS HERE] NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE BlackRock
BlackRock Funds EQUITY PORTFOLIOS *Investment Trust *Mid-Cap Growth Equity *Global Resources *Large Cap Value Equity *Aurora *All-Cap Global Resources *Large Cap Growth Equity *Small/Mid-Cap Growth *Health Sciences *Dividend AchieversTM *Small Cap Value Equity *U.S. Opportunities *Legacy *Small Cap Core Equity *International *Mid-Cap Value Equity *Small Cap Growth Equity Opportunities *Global Science & Technology *Asset Allocation Opportunities *Index Equity TABLE Of CONTENTS Shareholder Letter ........................................................... 1 Portfolio Summaries Investment Trust ...................................................... 2-3 Large Cap Value Equity ................................................ 4-5 Large Cap Growth Equity ............................................... 6-7 Dividend Achievers(TM) ................................................ 8-9 Legacy .............................................................. 10-11 Mid-Cap Value Equity ................................................ 12-13 Mid-Cap Growth Equity ............................................... 14-15 Aurora .............................................................. 16-17 Small/Mid-Cap Growth ................................................ 18-19 Small Cap Value Equity .............................................. 20-21 Small Cap Core Equity ............................................... 22-23 Small Cap Growth Equity ............................................. 24-25 Global Science & Technology Opportunities ........................... 26-27 Global Resources .................................................... 28-29 All-Cap Global Resources ............................................ 30-31 Health Sciences ..................................................... 32-33 U.S. Opportunities .................................................. 34-35 International Opportunities ......................................... 36-37 Asset Allocation .................................................... 38-39 Index Equity ........................................................ 40-41 Note on Performance Information ..................................... 42-43 Statements of Net Assets and/or Statements of Assets and Liabilities .... 44-132 Portfolio Financial Statements Statements of Operations .......................................... 134-137 Statements of Changes in Net Assets ............................... 138-145 Financial Highlights .............................................. 146-171 Notes to Financial Statements .......................................... 172-212 Report of Independent Registered Public Accounting Firm ................ 213-214 Fund Management 215-219 Additional Information ............................. 221 DFA Investment Trust Company Annual Report.............................. 223-254 PRIVACY PRINCIPLES OF BLACKROCK FUNDS BlackRock Funds is committed to maintaining the privacy of its shareholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock Funds collects, how we protect that information, and why in certain cases we may share such information with select other parties. BlackRock Funds does not receive any nonpublic personal information relating to its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record owners of BlackRock Funds, BlackRock Funds receives nonpublic personal information on account applications or other forms. With respect to these shareholders, BlackRock Funds also has access to specific information regarding their transactions in BlackRock Funds. BlackRock Funds does not disclose any nonpublic personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders' accounts (for example, to a transfer agent). BlackRock Funds restricts access to nonpublic personal information about its shareholders to BlackRock employees with a legitimate business need for the information. BlackRock Funds maintains physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our shareholders.
BlackRock Funds September 30, 2005 Dear Shareholder: We are pleased to present the Annual Report of the BlackRock Funds' Equity Portfolios for the year ended September 30, 2005. On January 31, 2005, the State Street Research Funds reorganized into BlackRock Funds and we at BlackRock would like to welcome the former State Street Research Funds shareholders and our new shareholders to the BlackRock Funds Family. The Annual Report includes important information on each Portfolio: .. Portfolio Summary - discusses recent portfolio management activity and highlights total returns. .. Fund Profile - displays characteristics of each Portfolio's holdings as of September 30, 2005. .. Expense Example - discusses costs in a shareholder account and provides information for a shareholder to estimate his or her expenses by share class and to compare expenses of each share class to other funds. .. Statement of Net Assets and/or Statement of Assets and Liabilities - lists portfolio holdings and includes each holding's market value and par amount/number of shares as of September 30, 2005. The Statement of Net Assets also contains the net asset value for each share class of a Portfolio. The net asset value for each share class may be found in the Statement of Assets and Liabilities. .. Statement of Operations - displays the components of each Portfolio's investment income and provides a detailed look at each Portfolio's expenses. The Statement of Operations also lists the aggregate change in value of a Portfolio's securities due to market fluctuations and security sales. .. Statements of Changes in Net Assets - compares Portfolio information from the prior period to the current period. Specifically, it details shareholder distributions by share class, aggregate realized gains and losses, and the change in net assets from the beginning of the period to the end of the period. .. Financial Highlights - include each Portfolio's expense ratios, net asset values, total returns, distributions per share, and turnover ratios for the last five years or since inception. .. Notes to Financial Statements - provide additional information on fees, a summary of significant accounting policies, a list of affiliated transactions, and a summary of purchases and sales of securities. .. Fund Management Table - lists information regarding BlackRock Funds' Trustees and Officers. In addition to these items, a summary of shareholder privileges is listed on the inside back cover of the report. Shareholders can find information on this page describing how to access account balances, recent transactions, and share prices. It also includes a summary of the Fund's various investment plans. At BlackRock, we maintain an unwavering commitment to placing our clients first and we value the trust you have placed in us. We hope you find the report informative, and we thank you for making BlackRock part of your investment strategy. Should you have questions concerning this report, please contact your financial advisor or contact us at 1-800-441-7762 or visit us at www.blackrock.com/funds. Sincerely, [GRAPHIC APPEARS HERE] Anne Ackerley Managing Director BlackRock Advisors,Inc. 1
Investment Trust Portfolio Total Net Assets (9/30/05): $1.3 billion Performance Benchmark: S&P 500(R) Index Investment Approach: Seeks long-term capital appreciation. The Portfolio normally invests at least 80% of its assets in equity securities. The portfolio management team uses quantitative techniques to analyze a universe of approximately 800 companies, including those in the S&P 500(R) Index and about 300 other large and medium capitalization companies. Using a multi-factor model, the management team identifies stocks with rising earnings expectations that sell at low relative valuations when compared with their sector peers. Based on this information, and using sophisticated risk measurement tools, the portfolio management team selects stocks, together with their appropriate weightings, that it believes will maximize the Portfolio's return per unit of risk. The Portfolio seeks to maintain market capitalization, sector allocations and style characteristics similar to the S&P 500(R) Index. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Select Equity Portfolio reorganized with the State Street Research Large Cap Analyst and Investment Trust Funds (the SSR Funds) and was renamed the BlackRock Investment Trust Portfolio (the Portfolio). The SSR Funds transferred substantially all of their assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. . The Institutional, Service and Investor A share classes outperformed the benchmark for the annual period. The Investor B and C share classes underperformed the benchmark for the annual period. . The equity market, as measured by the S&P 500(R) Index, was up a solid 12.25% with the bulk of the returns coming from the fourth calendar quarter of 2004. While large capitalization stocks returns were solid, small capitalization stocks outperformed large by almost 6% over the annual period continuing a trend seen over the last few years. Within large capitalization stocks, value stocks outperformed growth stocks - the Russell 1000 Value Index was up 16.7% while the Russell 1000 Growth Index was up 11.6% - consistent with the trend of the past five years. Over the past three years, large capitalization value stocks have outperformed large capitalization growth stocks by 5.74% on an annualized basis. . From a sector perspective, the returns were dominated by the energy and utilities sectors, which returned 46% and 34%, respectively. The increasing demand for oil (particularly in China and India) coupled with the loss of supply infrastructure - due in significant part to the hurricane destruction in the Gulf of Mexico - led to the dramatic surge in oil and gasoline prices, which dominated investor concern. The technology sector was up in line with the broad market while most other sectors posted slightly positive returns. . The multi-factor model was slightly predictive over the course of the annual period with particular strength early in the period. The model was flat for the third calendar quarter of 2005 as investors seem to be focused on broader macroeconomic issues such as the impact of hurricanes in the Gulf region, as well as the direction of oil prices and interest rates. The valuation factors were strong early on and faded in the third calendar quarter of 2005. Earnings expectation factors gained predictive power over the course of the third calendar quarter of 2005. The most predictive factors for the year included the estimate momentum, earnings revision and forecast earnings to price. The weakest factors included forecast estimate dispersion and return on equity. . From a sector relative perspective, the consumer cyclical, basic materials, and energy sectors were the best performing sectors leading to the Portfolio's outperformance. Our positions in Nordstrom in the consumer cyclical sector, Consol Energy in the basic materials sector and Valero Energy in the energy sector were the primary drivers of performance. The technology sector underperformed for the annual period due to our lack of exposure to select poorly ranked names, which outperformed our highly-ranked technology holdings. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INVESTMENT TRUST PORTFOLIO AND THE S&P 500(R) INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A S&P 500(R) Index ------------- ---------- ---------------- 09/30/1995 $ 10,000 $ 9,429 $ 10,000 12/31/1995 10,598 9,973 10,602 03/31/1996 11,136 10,469 11,171 06/30/1996 11,647 10,937 11,673 09/30/1996 11,984 11,242 12,033 12/31/1996 13,111 12,296 13,036 03/31/1997 13,457 12,607 13,386 06/30/1997 15,810 14,787 15,723 09/30/1997 17,077 15,957 16,901 12/31/1997 17,236 16,088 17,386 03/31/1998 19,614 18,290 19,811 06/30/1998 20,046 18,673 20,465 09/30/1998 17,772 16,535 18,429 12/31/1998 21,479 19,956 22,354 03/31/1999 22,435 20,837 23,468 06/30/1999 24,159 22,407 25,122 09/30/1999 22,565 20,907 23,554 12/31/1999 25,940 24,005 27,058 03/31/2000 26,363 24,385 27,679 06/30/2000 25,236 23,309 26,944 09/30/2000 24,402 22,504 26,683 12/31/2000 22,093 20,339 24,595 03/31/2001 18,514 17,023 21,679 06/30/2001 19,286 17,710 22,948 09/30/2001 15,791 14,495 19,580 12/31/2001 17,377 15,921 21,672 03/31/2002 16,703 15,299 21,732 06/30/2002 14,191 12,978 18,820 09/30/2002 11,931 10,904 15,569 12/31/2002 12,848 11,717 16,882 03/31/2003 12,450 11,351 16,351 06/30/2003 14,253 12,973 18,868 09/30/2003 14,651 13,313 19,367 12/31/2003 16,425 14,903 21,725 03/31/2004 17,100 15,509 22,093 06/30/2004 17,272 15,640 22,473 09/30/2004 17,157 15,522 22,053 12/31/2004 18,819 16,994 24,089 03/31/2005 18,472 16,664 23,572 06/30/2005 18,790 16,942 23,894 09/30/2005 19,340 17,430 24,756 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 12.72% 17.47% (4.54)% 6.82% Service Class 12.41% 17.14% (4.83)% 6.50% Investor A Class (Load Adjusted) 5.83% 14.65% (6.10)% 5.71% Investor A Class (NAV) 12.30% 16.93% (4.98)% 6.34% Investor B Class (Load Adjusted) 6.92% 15.21% (6.00)% 5.58% Investor B Class (NAV) 11.42% 16.08% (5.68)% 5.58% Investor C Class (Load Adjusted) 10.49% 16.10% (5.66)% 5.58% Investor C Class (NAV) 11.49% 16.10% (5.66)% 5.58% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 9/13/93; Service Shares, 9/15/93; Investor A Shares, 10/13/93; Investor B Shares, 3/27/96; and Investor C Shares, 9/27/96. See "Note on Performance Information" on page 42 for further information on how performance data was calculated,including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 2
Investment Trust Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) General Electric Co. 3.5% Microsoft Corp. 3.2 Exxon Mobil Corp. 2.9 Intel Corp. 2.5 Pfizer, Inc. 2.4 Bank of America Corp. 2.2 ConocoPhillips 2.0 International Business Machines Corp. 1.8 Citigroup, Inc. 1.8 Altria Group, Inc. 1.6 ---- Total 23.9% ==== Top Ten Industries (% of long-term investments) Oil & Gas 10.2% Manufacturing 9.3 Banks 8.9 Computer Software & Services 6.3 Pharmaceuticals 5.5 Insurance 5.5 Retail Merchandising 4.9 Finance 4.5 Computer & Office Equipment 4.4 Telecommunications 4.3 ---- Total 63.8% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,047.00 1,046.10 1,046.00 1,041.40 1,042.20 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.16 5.69 5.95 9.77 9.78 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,020.89 1,019.37 1,019.11 1,015.30 1,015.30 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.11 5.63 5.89 9.70 9.70 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.81%, 1.11%, 1.16%, 1.91%, and 1.91% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 3
Large Cap Value Equity Portfolio Total Net Assets (9/30/05): $361.1 million Performance Benchmark: Russell 1000 Value Index Investment Approach: Seeks long-term capital appreciation with a secondary objective of current income by investing at least 80% of its net assets in equity securities issued by U.S. large capitalization value companies (defined as those with market capitalizations equal to those within the universe of Russell 1000 Value Index stocks). The portfolio management team uses quantitative techniques to analyze a universe of approximately 800 value companies. The management team uses a multi-factor model, which identifies the key factors that drive the performance of value stocks. Using this multi-factor model, the management team identifies stocks with low relative valuations and improving earnings expectations when compared with their sector peers. Based on this information, and using sophisticated risk measurement tools, the management team selects stocks, together with their appropriate weightings, that it believes will maximize the Portfolio's return per unit of risk. The Portfolio seeks to maintain market capitalization, sector allocations and style characteristics similar to those of the Russell 1000 Value Index. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Large Cap Value Equity Portfolio (the Portfolio) reorganized with the State Street Research Large Cap Value Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. . The Institutional share class outperformed the benchmark for the annual period. The Service, Investor A, B and C share classes underperformed the benchmark for the annual period. . The equity market, as measured by the S&P 500(R) Index, was up a solid 12.25% with the bulk of the returns coming from the fourth calendar quarter of 2004. While large capitalization stocks returns were solid, small capitalization stocks outperformed large by almost 6% over the annual period continuing a trend seen over the last few years. Within large capitalization stocks, value stocks outperformed growth stocks - the Russell 1000 Value Index was up 16.7% while the Russell 1000 Growth Index was up 11.6% - consistent with the trend of past five years. Over the past three years, large capitalization value stocks have outperformed large capitalization growth stocks by 5.74% on an annualized basis. . From a sector perspective, the returns were dominated by the energy and utilities sectors, which returned 46% and 34%, respectively. The increasing demand for oil (particularly in China and India) coupled with the loss of supply infrastructure - due in significant part to the hurricane destruction in the Gulf of Mexico - led to the dramatic surge in oil and gasoline prices, which dominated investor concern. The technology sector was up in line with the broad market while most other sectors posted slightly positive returns. . The multi-factor model was slightly predictive over the course of the annual period with particular strength early in the period. The model was flat for the third calendar quarter of 2005 as investors seem to be focused on broader macroeconomic issues such as the impact of hurricanes in the Gulf region, as well as the direction of oil prices and interest rates. The valuation factors were strong early on in the year, but faded in the third calendar quarter of 2005. Fortunately, the strength of the price momentum factor offset the weakness of the valuation factors. Earnings expectation factors gained predictive power over the course of the third calendar quarter of 2005. The most predictive factors for the annual period included price momentum, estimate momentum, earnings revision and forecast earnings to price. The weakest factors included forecast estimate dispersion, return on equity and earnings surprise. . From a sector relative perspective, the utilities, basic materials, and energy sectors were the best performing sectors leading to the Portfolio's outperformance. Our positions in TXU Corp in the utilities sector, Consol Energy in the basic materials sector and Valero Energy in the energy sector were the primary drivers of performance. The health sector underperformed for the annual period due to our positions in select large pharmaceutical companies that are highly-ranked by the model. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE LARGE CAP VALUE EQUITY PORTFOLIO AND THE RUSSELL 1000 VALUE INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Russell 1000 Value Index ------------- ---------- ------------------------ 09/30/1995 $ 10,000 $ 9,425 $ 10,000 12/31/1995 10,705 10,077 10,664 03/31/1996 11,312 10,637 11,267 06/30/1996 11,700 10,995 11,461 09/30/1996 12,101 11,359 11,795 12/31/1996 13,295 12,476 12,971 03/31/1997 13,517 12,662 13,304 06/30/1997 15,371 14,376 15,265 09/30/1997 16,658 15,563 16,785 12/31/1997 17,103 15,971 17,535 03/31/1998 19,251 17,948 19,579 06/30/1998 18,962 17,660 19,666 09/30/1998 16,280 15,154 17,388 12/31/1998 18,896 17,563 20,275 03/31/1999 19,111 17,745 20,566 06/30/1999 21,292 19,741 22,885 09/30/1999 18,784 17,404 20,644 12/31/1999 19,584 18,139 21,767 03/31/2000 19,296 17,840 21,871 06/30/2000 18,407 16,998 20,846 09/30/2000 19,956 18,398 22,485 12/31/2000 21,537 19,847 23,294 03/31/2001 20,274 18,643 21,930 06/30/2001 20,865 19,179 23,001 09/30/2001 18,315 16,809 20,482 12/31/2001 19,433 17,812 21,992 03/31/2002 19,347 17,716 22,892 06/30/2002 16,203 14,816 20,942 09/30/2002 13,295 12,154 17,011 12/31/2002 14,778 13,478 18,579 03/31/2003 13,979 12,735 17,675 06/30/2003 16,244 14,795 20,728 09/30/2003 16,476 14,988 21,156 12/31/2003 18,586 16,873 24,158 03/31/2004 19,395 17,589 24,890 06/30/2004 19,456 17,623 25,109 09/30/2004 19,716 17,865 25,497 12/31/2004 21,677 19,609 28,143 03/31/2005 21,776 19,682 28,168 06/30/2005 22,138 19,990 28,640 09/30/2005 23,026 20,772 29,752 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 16.79% 20.09% 2.90% 8.70% Service Class 16.45% 19.73% 2.60% 8.38% Investor A Class (Load Adjusted) 9.55% 17.22% 1.25% 7.58% Investor A Class (NAV) 16.27% 19.56% 2.46% 8.22% Investor B Class (Load Adjusted) 10.88% 17.84% 1.31% 7.42% Investor B Class (NAV) 15.38% 18.68% 1.67% 7.42% Investor C Class (Load Adjusted) 14.37% 18.68% 1.69% 7.43% Investor C Class (NAV) 15.37% 18.68% 1.69% 7.43% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 4/20/92; Investor A Shares, 5/2/92; Service Shares, 7/29/93; Investor B Shares, 1/18/96; and Investor C Shares, 8/16/96. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 4
Large Cap Value Equity Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Exxon Mobil Corp. 5.3% Bank of America Corp. 4.1 Citigroup, Inc. 3.7 Pfizer, Inc. 3.2 ConocoPhillips 2.9 Wachovia Corp. 2.2 SBC Communications, Inc. 2.1 General Electric Co. 1.9 ChevronTexaco Corp. 1.8 PPL Corp. 1.7 ---- Total 28.9% ==== Top Ten Industries (% of long-term investments) Banks 16.9% Oil & Gas 15.9 Insurance 7.1 Energy & Utilities 6.9 Telecommunications 6.1 Pharmaceuticals 5.4 Finance 5.1 Manufacturing 5.1 Real Estate 4.1 Entertainment & Leisure 4.1 ---- Total 76.7% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,057.40 1,055.60 1,055.30 1,051.50 1,051.40 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.07 5.62 6.13 10.08 9.98 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,020.99 1,019.47 1,018.96 1,015.05 1,015.15 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.01 5.53 6.04 9.95 9.85 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.79%, 1.09%, 1.19%, 1.96%, and 1.94% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 5
Large Cap Growth Equity Portfolio Total Net Assets (9/30/05): $56.1 million Performance Benchmark: Russell 1000 Growth Index Investment Approach: Seeks long-term capital appreciation by investing at least 80% of its net assets in equity securities issued by U.S. large capitalization growth companies (defined as those with market capitalizations equal to those within the universe of Russell 1000 Growth Index stocks). The portfolio management team uses quantitative techniques to analyze a universe of approximately 700 growth companies. The management team uses a multi-factor model, which identifies the key factors that drive the performance of growth stocks. Using this multi-factor model, the management team identifies stocks with rising earnings expectations that sell at attractive relative valuations when compared with their sector peers. Based on this information, and using sophisticated risk measurement tools, the management team selects stocks, together with their appropriate weightings, that it believes will maximize the Portfolio's return per unit of risk. The Portfolio seeks to maintain market capitalization, sector allocations and style characteristics similar to those of the Russell 1000 Growth Index. Recent Portfolio Management Activity: . All share classes outperformed the benchmark for the annual period. . The equity market, as measured by the S&P 500 Index, was up a solid 12.25% with the bulk of the returns coming from the fourth calendar quarter of 2004. While large capitalization stocks returns were solid, small capitalization stocks outperformed large by almost 6% over the annual period continuing a trend seen over the last few years. Within large capitalization stocks, value stocks outperformed growth stocks - the Russell 1000 Value Index was up 16.7% while the Russell 1000 Growth Index was up 11.6% - consistent with the trend of the past five years. Over the past three years, large capitalization value stocks have outperformed large capitalization growth stocks by 5.74% on an annualized basis. . From a sector perspective, the returns were dominated by the energy and utilities sectors, which returned 46% and 34%, respectively. The increasing demand for oil (particularly in China and India) coupled with the loss of supply infrastructure - due in significant part to the hurricane destruction in the Gulf of Mexico - led to the dramatic surge in oil and gasoline prices, which dominated investor concern. The technology sector was up in line with the broad market while most other sectors posted slightly positive returns. . The multi-factor model was predictive over the course of the year with particular strength early in the period. The model was flat for the third quarter of 2005 as investors seem to be focused on broader macroeconomic issues such as the impact of hurricanes in the Gulf region, as well as the direction of oil prices and interest rates. The valuation factors were strong early on in the year, but faded in the third calendar quarter of 2005. Fortunately, the strength of the price momentum factor offset the weakness of the valuation factors. Earnings expectation factors gained predictive power over the course of the third calendar quarter of 2005. The most predictive factors for the year included price momentum, estimate momentum, earnings revision and book to price. The weakest factors included forecast estimate dispersion and earnings surprise. . From a sector relative perspective, the technology, consumer cyclical, and consumer services sectors were the best performing sectors leading to the Portfolio's outperformance. Our positions in highly-ranked LSI Logic, Activision, Nordstrom, and Darden Restaurants were some of the key holdings that drove performance. The commercial services sector underperformed for the annual period as some of our highly-ranked holdings did not keep pace with their sector peers. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE LARGE CAP GROWTH EQUITY PORTFOLIO AND THE RUSSELL 1000 GROWTH INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Russell 1000 Growth Index ------------- ---------- ------------------------- 09/30/1995 $ 10,000 $ 9,428 $ 10,000 12/31/1995 10,252 9,658 10,455 03/31/1996 10,901 10,262 11,017 06/30/1996 11,542 10,851 11,718 09/30/1996 11,867 11,142 12,140 12/31/1996 12,339 11,568 12,873 03/31/1997 12,261 11,490 12,942 06/30/1997 14,585 13,655 15,390 09/30/1997 15,866 14,839 16,546 12/31/1997 15,845 14,796 16,798 03/31/1998 18,514 17,262 19,343 06/30/1998 19,687 18,340 20,221 09/30/1998 17,732 16,495 18,384 12/31/1998 22,391 20,811 23,300 03/31/1999 24,157 22,422 24,781 06/30/1999 24,604 22,820 25,734 09/30/1999 24,019 22,253 24,792 12/31/1999 30,564 28,301 31,025 03/31/2000 32,356 29,908 33,236 06/30/2000 31,311 28,930 32,339 09/30/2000 29,519 27,217 30,600 12/31/2000 22,810 21,003 24,068 03/31/2001 16,556 15,228 19,038 06/30/2001 17,276 15,864 20,641 09/30/2001 13,112 12,037 16,634 12/31/2001 14,913 13,673 19,153 03/31/2002 14,510 13,281 18,657 06/30/2002 11,628 10,644 15,173 09/30/2002 9,668 8,831 12,890 12/31/2002 10,317 9,413 13,812 03/31/2003 10,173 9,264 13,665 06/30/2003 11,398 10,373 15,620 09/30/2003 11,787 10,711 16,231 12/31/2003 12,954 11,766 17,921 03/31/2004 13,271 12,037 18,062 06/30/2004 13,444 12,172 18,412 09/30/2004 12,853 11,631 17,450 12/31/2004 14,106 12,753 19,050 03/31/2005 13,660 12,334 18,272 06/30/2005 14,164 12,780 18,722 09/30/2005 14,539 13,105 19,473 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 13.12% 14.57% (13.21)% 3.81% Service Class 12.84% 14.24% (13.48)% 3.50% Investor A Class (Load Adjusted) 6.25% 11.82% (14.62)% 2.74% Investor A Class (NAV) 12.67% 14.06% (13.60)% 3.35% Investor B Class (Load Adjusted) 7.37% 12.27% (14.54)% 2.59% Investor B Class (NAV) 11.87% 13.19% (14.24)% 2.59% Investor C Class (Load Adjusted) 10.76% 13.23% (14.25)% 2.57% Investor C Class (NAV) 11.76% 13.23% (14.25)% 2.57% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 11/1/89; Investor A Shares, 3/14/92; Service Shares, 7/29/93; Investor B Shares, 1/24/96; and Investor C Shares, 1/24/97. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 6
Large Cap Growth Equity Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) General Electric Co. 5.4% Microsoft Corp. 4.1 Johnson & Johnson 3.5 Intel Corp. 3.1 International Business Machines Corp. 2.5 The Procter & Gamble Co. 2.5 Cisco Systems, Inc. 2.0 Amgen, Inc. 2.0 PepsiCo, Inc. 1.9 The Home Depot, Inc. 1.7 ---- Total 28.7% ==== Top Ten Industries (% of long-term investments) Manufacturing 12.9% Computer Software & Services 9.7 Retail Merchandising 8.5 Medical Instruments & Supplies 7.2 Computer & Office Equipment 7.2 Medical & Medical Services 5.7 Electronics 5.6 Pharmaceuticals 4.4 Soaps & Cosmetics 3.8 Entertainment & Leisure 3.3 ---- Total 68.3% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,064.30 1,062.60 1,062.50 1,058.50 1,057.40 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.24 5.79 6.31 10.17 10.16 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,020.84 1,019.31 1,018.81 1,015.00 1,015.00 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.16 5.69 6.19 10.00 10.00 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.82%, 1.12%, 1.22%, 1.97%, and 1.97% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 7
Dividend Achievers(TM) Portfolio Total Net Assets (9/30/05): $33.1 million Performance Benchmark: Russell 1000 Value Index Investment Approach: Seeks to provide total return through a combination of current income and capital appreciation by investing primarily in U.S. large-capitalization stocks with long-term consistent dividend history. The Portfolio invests at least 80% of its assets in common stocks included in the universe of common stocks which Mergent(R), a recognized provider of financial information, has identified as Dividend Achievers(TM). To qualify for the Dividend Achievers(TM) universe, an issuer must have raised its annual regular cash dividend on a pre-tax basis for at least each of the last ten consecutive years. These issuers are also subject to additional screening criteria applied by Mergent(R) such as liquidity. The Portfolio will be constructed from a broad universe of stocks that the fund management team believes to be value stocks and all stocks in the Dividend Achievers(TM) universe. The portfolio management team screens these issuers utilizing BlackRock's proprietary Quantitative Equity Model, which uses earnings momentum and valuation factors to rank stocks within a sector and industry based upon their expected return, to continuously evaluate fund holdings. The Portfolio will be constructed with consideration of the characteristics of the Russell 1000 Value Index, such as style, sector, industry, capitalization and volatility. The Portfolio may invest up to 20% of its assets in common stocks of issuers that are not included in the Dividend Achievers(TM) universe, and in fixed income securities when, in the opinion of the portfolio management team, it is advantageous for the Portfolio to do so. Recent Portfolio Management Activity: . All share classes underperformed the benchmark for the annual period. . The equity market, as measured by the S&P 500 Index, was up a solid 12.25% with the bulk of the returns coming from the fourth calendar quarter of 2004. While large capitalization stocks returns were solid, small capitalization stocks outperformed large by almost 6% over the annual period continuing a trend seen over the last few years. Within large capitalization stocks, value stocks outperformed growth stocks - the Russell 1000 Value Index was up 16.7% while the Russell 1000 Growth Index was up 11.6% - consistent with the trend of past five years. Over the past three years, large capitalization value stocks have outperformed large capitalization growth stocks by 5.74% on an annualized basis. . From a sector perspective, the returns were dominated by the energy and utilities sectors, which returned 46% and 34%, respectively. The increasing demand for oil (particularly in China and India) coupled with the loss of supply infrastructure - due in significant part to the hurricane destruction in the Gulf of Mexico - led to the dramatic surge in oil and gasoline prices, which dominated investor concern. The technology sector was up in line with the broad market while most other sectors posted slightly positive returns. . The Portfolio's stock selection is based on three criteria. During the annual period, two of the criteria created headwinds for the Portfolio while the third criteria proved modestly helpful. As the Portfolio is committed to maintaining at least 80% of the Portfolio in Dividend Achievers(TM) stocks, the performance of these stocks is a key determinant to the overall performance of the Portfolio. For the annual period, Mergent's Dividend Achievers(TM) universe of stocks underperformed the Russell 1000 Value Index by 10.4% creating significant pressure. Secondly, stocks in the value universe with little or no dividend yield significantly outperformed those with high yields creating additional performance challenges. The last criteria in stock selection is the Quantitative Equity Model. The model was slightly positive over the course of the annual period with particular strength early in the period. The model was flat for the third calendar quarter of 2005 as investors seem to be focused on broader macroeconomic issues such as the impact of hurricanes in the Gulf region, as well as the direction of oil prices and interest rates. The valuation factors were strong early on in the annual period, but faded in the third calendar quarter of 2005. Fortunately, the strength of the price momentum factor offset the weakness of the valuation factors. Earnings expectation factors gained predictive power over the course of the third calendar quarter of 2005. The most predictive factors for the year included price momentum, estimate momentum, earnings revision and forecast earnings to price. The weakest factors included forecast estimate dispersion, return on equity and earnings surprise. . From a sector relative perspective, the energy, technology and health sectors were the sectors with weakest performance. The lack of exposure to several large non-Dividend Achievers(TM) stocks led to weakness in the energy and technology sectors. In the health care sector, our positions in select large pharmaceutical companies, which are highly-ranked, high-yielding Dividend Achievers(TM) stocks, led to poor relative performance. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE DIVIDEND ACHIEVERS(TM) PORTFOLIO AND THE RUSSELL 1000 VALUE INDEX FROM INCEPTION. [LINE CHART] Institutional Investor A Russell 1000 Growth Index ------------- ---------- ------------------------- 09/30/1995 $ 10,000 $ 9,428 $ 10,000 12/31/1995 10,252 9,658 10,455 03/31/1996 10,901 10,262 11,017 06/30/1996 11,542 10,851 11,718 09/30/1996 11,867 11,142 12,140 12/31/1996 12,339 11,568 12,873 03/31/1997 12,261 11,490 12,942 06/30/1997 14,585 13,655 15,390 09/30/1997 15,866 14,839 16,546 12/31/1997 15,845 14,796 16,798 03/31/1998 18,514 17,262 19,343 06/30/1998 19,687 18,340 20,221 09/30/1998 17,732 16,495 18,384 12/31/1998 22,391 20,811 23,300 03/31/1999 24,157 22,422 24,781 06/30/1999 24,604 22,820 25,734 09/30/1999 24,019 22,253 24,792 12/31/1999 30,564 28,301 31,025 03/31/2000 32,356 29,908 33,236 06/30/2000 31,311 28,930 32,339 09/30/2000 29,519 27,217 30,600 12/31/2000 22,810 21,003 24,068 03/31/2001 16,556 15,228 19,038 06/30/2001 17,276 15,864 20,641 09/30/2001 13,112 12,037 16,634 12/31/2001 14,913 13,673 19,153 03/31/2002 14,510 13,281 18,657 06/30/2002 11,628 10,644 15,173 09/30/2002 9,668 8,831 12,890 12/31/2002 10,317 9,413 13,812 03/31/2003 10,173 9,264 13,665 06/30/2003 11,398 10,373 15,620 09/30/2003 11,787 10,711 16,231 12/31/2003 12,954 11,766 17,921 03/31/2004 13,271 12,037 18,062 06/30/2004 13,444 12,172 18,412 09/30/2004 12,853 11,631 17,450 12/31/2004 14,106 12,753 19,050 03/31/2005 13,660 12,334 18,272 06/30/2005 14,164 12,780 18,722 09/30/2005 14,539 13,105 19,473 For period ending September 30, 2005 Average Annual Total Return 1 Year From Inception ------ -------------- Institutional Class 9.83% 8.83% Service Class 9.32% 8.35% Investor A Class (Load Adjusted) 3.18% 2.63% Investor A Class (NAV) 9.50% 8.52% Investor B Class (Load Adjusted) 4.37% 4.18% Investor B Class (NAV) 8.87% 7.94% Investor C Class (Load Adjusted) 7.72% 7.80% Investor C Class (NAV) 8.72% 7.80% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio on 9/8/04. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 8
Dividend Achievers(TM) Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Exxon Mobil Corp. 5.7% Bank of America Corp. 4.3 ChevronTexaco Corp. 4.2 Pfizer, Inc. 3.8 Citigroup, Inc. 3.5 Altria Group, Inc. 2.5 ConocoPhillips 2.5 General Electric Co. 2.3 SBC Communications, Inc. 2.3 McDonald's Corp. 1.9 ---- Total 33.0% ==== Top Ten Industries (% of long-term investments) Banks 16.3% Oil & Gas 16.2 Manufacturing 6.8 Insurance 6.7 Finance 6.4 Pharmaceuticals 6.3 Energy & Utilities 5.8 Telecommunications 5.8 Real Estate 4.7 Tobacco 3.0 ---- Total 78.0% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,036.90 1,035.50 1,035.00 1,030.80 1,030.70 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.60 6.12 6.58 10.39 10.33 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,020.43 1,018.86 1,018.45 1,014.64 1,014.69 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.57 6.14 6.55 10.36 10.31 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.90%, 1.20%, 1.29%, 2.04%, and 2.03% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 9
Legacy Portfolio Total Net Assets (9/30/05): $278.6 million Performance Benchmark: Russell 1000 Growth Index Investment Approach: Seeks to provide long-term growth of capital by normally investing at least 65% of its net assets in common and preferred stock and securities convertible into common and preferred stocks of mid- and large-capitalization companies. The Portfolio seeks to invest in fundamentally sound companies with strong management, superior earnings growth prospects and attractive valuations. The disciplined investment process uses a bottom-up stock selection approach as the primary driver of returns. The Portfolio emphasizes large companies that exhibit stable growth and accelerated earnings. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Legacy Portfolio (the Portfolio) reorganized with the State Street Research Legacy Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. For periods prior to January 31, 2005, the performance information shown reflects the performance of the SSR Fund, which had substantially similar investment goals and strategies as the Portfolio. . All share classes outperformed the benchmark for the annual period. . Equity markets rallied in the final quarter of 2004, but have provided mixed results thus far in 2005. Investors continue to exhibit caution, as worries over oil prices, interest rates and economic growth remain in the spotlight. Nevertheless, the S&P 500(R) Index managed to produce double digit gains, rising 12.25% over the annual period. Within the Portfolio's benchmark, the Russell 1000 Growth Index, all major sectors posted positive returns. However, the energy sector was the primary driver of total return as energy prices climbed significantly. Other sector leaders included health care and utilities. . The Portfolio benefited from strong stock selection across several sectors including the energy, financials and materials sectors. Stock selection decisions in the consumer staples, industrials and information technology ("IT") sectors created a drag on return comparisons. Additionally, our overweight to the energy sector was a significant contributor to the Portfolio's relative gains. . Both absolute and relative gains in the Portfolio were largely the result of good stock selection and our overweight to the strong performing energy sector. Energy stocks continued to strengthen throughout the period. Near-term events such as the devastating Gulf Coast hurricanes coupled with the long-term supply/demand dynamics for oil, coal, and natural gas pushed energy stocks higher during the period. Key contributors included exploration and production companies, EOG Resources and Newfield Exploration, and coal producer, Consol Energy. . Broad-based strength among our positions in the financials sector resulted in favorable return comparisons. Good stock selection propelled gains, with holdings such as Goldman Sachs, Franklin Resources and Chicago Mercantile Exchange making large contributions to performance. Additionally, our decision to underweight some of the troubled firms within the insurance and the thrifts and mortgage industries aided returns. . Stock selection within the IT sector resulted in weak relative performance, as Portfolio positions tended to underperform benchmark holdings. Internet software and services names held in the Portfolio, such as Yahoo and VeriSign, were detractors. Select positions within the industrials sector also detracted from returns. Conglomerate Tyco International was the primary detractor. After a strong 2003 and 2004, Tyco has struggled in 2005, and we have sold our position on concerns that the company cannot sustain growth. . Deteriorating fundamentals within select consumer segments led us to reduce our overall exposure to the consumer sectors during the annual period. At the same time, we continued to gradually increase our energy exposure, primarily by adding to existing positions that will continue to benefit in the current supply constrained environment. At the close of the annual period, the Portfolio's largest overweights were in energy and health care, while the largest underweights were in industrials and consumer staples. In general, sector weightings are a function of our bottom-up stock selection process and are, therefore, dependent on where we are finding individual opportunities within our investment universe. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE LEGACY PORTFOLIO AND THE RUSSELL 1000 GROWTH INDEX FROM INCEPTION. [LINE CHART] Institutional Investor A Russell 1000 Growth Index ------------- ---------- ------------------------- 12/31/1997 $ 10,000 $ 9,425 $ 10,000 03/31/1998 11,470 10,801 11,515 06/30/1998 12,290 11,565 12,038 09/30/1998 10,730 10,085 10,944 12/31/1998 13,227 12,429 13,871 03/31/1999 13,907 13,070 14,752 06/30/1999 14,908 13,994 15,320 09/30/1999 14,027 13,164 14,759 12/31/1999 16,608 15,569 18,470 03/31/2000 16,668 15,616 19,786 06/30/2000 16,228 15,116 19,252 09/30/2000 16,849 15,672 18,217 12/31/2000 15,698 14,597 14,328 03/31/2001 13,037 12,108 11,334 06/30/2001 13,547 12,579 12,288 09/30/2001 11,376 10,561 9,903 12/31/2001 12,787 11,853 11,402 03/31/2002 12,867 11,919 11,107 06/30/2002 10,896 10,081 9,033 09/30/2002 9,285 8,591 7,674 12/31/2002 9,815 9,072 8,223 03/31/2003 9,655 8,921 8,135 06/30/2003 10,966 10,118 9,299 09/30/2003 11,336 10,458 9,663 12/31/2003 12,686 11,693 10,669 03/31/2004 12,787 11,778 10,753 06/30/2004 13,057 12,014 10,961 09/30/2004 12,586 11,580 10,388 12/31/2004 13,957 12,825 11,341 03/31/2005 13,207 12,127 10,878 06/30/2005 13,657 12,532 11,145 09/30/2005 14,197 13,032 11,593 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year From Inception ------ ------ ------ -------------- Institutional Class 12.80% 15.21% (3.37)% 4.63% Service Class 12.54% 14.90% (3.62)% 4.27% Investor A Class (Load Adjusted) 6.06% 12.64% (4.75)% 3.48% Investor A Class (NAV) 12.54% 14.90% (3.62)% 4.27% Investor B Class (Load Adjusted) 7.22% 13.16% (4.70)% 3.51% Investor B Class (NAV) 11.72% 14.07% (4.31)% 3.51% Investor C Class (Load Adjusted) 10.72% 14.07% (4.31)% 3.51% Investor C Class (NAV) 11.72% 14.07% (4.31)% 3.51% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 12/31/97; Investor A Shares, 12/31/97; Investor C Shares, 12/31/97; Investor B Shares, 1/1/99; and Service Shares, 1/28/05. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 10
Legacy Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Microsoft Corp. 4.8% General Electric Co. 4.3 Google, Inc. - Class A 4.2 Johnson & Johnson 3.4 UnitedHealth Group, Inc. 3.2 America Express Co. 3.1 Yahoo!, Inc. 3.0 CONSOL Energy, Inc. 2.9 The Procter & Gamble Co. 2.7 St. Jude Medical, Inc. 2.6 ---- Total 34.2% ==== Top Ten Industries (% of long-term investments) Computer Software & Services 17.7% Manufacturing 10.1 Medical & Medical Services 8.6 Finance 8.6 Oil & Gas 7.9 Medical Instruments & Supplies 7.5 Retail Merchandising 7.4 Pharmaceuticals 7.3 Semiconductors & Related Devices 3.0 Metal & Mining 2.9 ---- Total 81.0% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,075.00 1,073.80 1,074.60 1,070.50 1,070.50 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.72 7.02 7.02 10.90 10.90 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,019.42 1,018.15 1,018.15 1,014.34 1,014.34 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.58 6.85 6.85 10.66 10.66 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.10%, 1.35%, 1.35%, 2.10%, and 2.10% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 11
Mid-Cap Value Equity Portfolio Total Net Assets (9/30/05): $789.5 million Performance Benchmark: Russell Midcap Value Index Investment Approach: Seeks long-term capital appreciation by investing primarily in mid-capitalization stocks believed by the Portfolio management team to be worth more than is indicated by current market price. The Portfolio normally invests at least 80% of assets in equity securities issued by US mid-capitalization value companies. The Portfolio defines these companies as those with market capitalizations comparable in size to the companies in the Russell Midcap Value Index. The Portfolio management team uses fundamental analysis to examine each company for financial strength before deciding to purchase the stock. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Mid-Cap Value Equity Portfolio (the Portfolio) reorganized with the State Street Research Mid Cap Value Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. For periods prior to January 31, 2005, the performance information shown reflects the performance of the SSR Fund, which had similar investment goals and strategies as the Portfolio. . All share classes underperformed the benchmark for the annual period. . The domestic equity markets posted solid gains during the annual period. Within the Portfolio's benchmark, the Russell Midcap Value Index, all major sectors posted positive returns. However, the energy sector was the primary driver of total return as energy prices climbed significantly. Other sector leaders included health care and utilities. During the annual period, the Portfolio's holdings in the energy and industrials sectors aided returns relative to the benchmark. However, these gains were overshadowed by relative weakness in the health care and materials sectors. . Growing global demand and constrained supply continued to apply upward pressure on energy prices as crude oil approached $70 a barrel during the annual period. The corresponding positive impact on energy-related stocks proved to be among the greatest contributors to relative performance as the Portfolio benefited from solid stock selection within the sector. Key contributors included exploration and production companies, EOG Resources and Newfield Exploration, and coal producer, Consol Energy. In the industrials sector, stock selection, particularly among commercial services and electrical equipment suppliers, powered favorable return comparisons. The most notable contributor during the period was York International. The share price of the supplier of heating, ventilation and air conditioning systems appreciated sharply following the late August announcement of its acquisition by Johnson Controls. The position was sold from the Portfolio during the annual period. . Stock selection, particularly among health care providers and equipment and supply manufacturers, proved to be a drag on relative return in the health care sector. Likewise, stock selection in the materials sector detracted from return comparisons relative to the benchmark. Specifically, containers and packaging names held in the Portfolio, including a specialty packaging manufacturer and Bowater, hindered relative returns as industry profit margins were squeezed by higher raw materials costs. . Our investment approach is driven by our focus on adding value through bottom-up fundamental research. As a result, portfolio positioning and corresponding sector weights relative to the benchmark are largely determined by stock selection. During the annual period, the impact of buy/sell decisions within the Portfolio, combined with the performance of underlying holdings, resulted in increased allocations to the consumer staples and utilities sectors, and decreased exposure to the industrials and materials sectors. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE MID-CAP VALUE EQUITY PORTFOLIO AND THE RUSSELL MIDCAP VALUE INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Russell Midcap Value Index ------------- ---------- -------------------------- 09/30/1995 $ 10,000 $ 9,426 $ 10,000 12/31/1995 10,439 9,825 10,454 03/31/1996 10,977 10,333 11,039 06/30/1996 11,461 10,774 11,251 09/30/1996 12,010 11,292 11,575 12/31/1996 13,108 12,307 12,572 03/31/1997 13,281 12,463 12,786 06/30/1997 14,641 13,732 14,397 09/30/1997 16,485 15,452 16,233 12/31/1997 16,756 15,697 16,893 03/31/1998 18,862 17,661 18,581 06/30/1998 18,807 17,598 18,104 09/30/1998 15,931 14,908 15,632 12/31/1998 17,695 16,547 17,753 03/31/1999 17,115 15,995 17,200 06/30/1999 18,836 17,591 19,124 09/30/1999 16,868 15,743 17,090 12/31/1999 17,205 16,037 17,735 03/31/2000 17,305 16,129 17,914 06/30/2000 17,031 15,852 17,613 09/30/2000 19,018 17,700 19,313 12/31/2000 21,729 20,205 21,137 03/31/2001 21,942 20,389 20,391 06/30/2001 24,507 22,746 21,827 09/30/2001 20,535 19,057 19,306 12/31/2001 25,730 23,855 21,629 03/31/2002 28,020 25,968 23,337 06/30/2002 25,291 23,419 22,246 09/30/2002 19,271 17,828 18,252 12/31/2002 20,644 19,090 19,542 03/31/2003 18,740 17,306 18,749 06/30/2003 22,708 20,933 22,104 09/30/2003 24,005 22,123 23,417 12/31/2003 27,908 25,690 26,981 03/31/2004 29,715 27,350 28,423 06/30/2004 30,619 28,157 28,915 09/30/2004 30,748 28,247 29,417 12/31/2004 34,491 31,677 33,376 03/31/2005 34,338 31,506 33,635 06/30/2005 35,481 32,547 35,217 09/30/2005 37,385 34,248 37,102 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 21.59% 24.72% 14.47% 14.10% Service Class 21.31% 24.33% 14.12% 13.78% Investor A Class (Load Adjusted) 14.29% 21.89% 12.76% 13.10% Investor A Class (NAV) 21.24% 24.31% 14.11% 13.77% Investor B Class (Load Adjusted) 15.83% 22.70% 13.09% 12.94% Investor B Class (NAV) 20.33% 23.47% 13.33% 12.94% Investor C Class (Load Adjusted) 19.34% 23.48% 13.34% 12.96% Investor C Class (NAV) 20.34% 23.48% 13.34% 12.96% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 8/25/86; Institutional Shares, 6/1/93; Investor C Shares, 6/1/93; Investor B Shares, 1/1/99; and Service Shares, 1/28/05; . See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 12
Mid-Cap Value Equity Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) CIT Group, Inc. 1.9% The Brink's Co. 1.9 Questar Corp. 1.9 NCR Corp. 1.9 CONSOL Energy, Inc. 1.8 Radian Group, Inc. 1.8 Boston Properties, Inc. 1.8 Ambac Financial Group, Inc. 1.7 W.W. Grainger, Inc. 1.7 Sovereign Bancorp, Inc. 1.7 ---- Total 18.1% ==== Top Ten Industries (% of long-term investments) Manufacturing 10.5% Energy & Utilities 9.0 Finance 8.5 Retail Merchandising 8.0 Insurance 7.4 Banks 7.3 Oil & Gas 6.2 Real Estate 4.8 Computer & Office Equipment 4.3 Computer Software & Services 4.3 ---- Total 70.3% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,088.70 1,087.90 1,087.00 1,083.40 1,083.40 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.24 6.54 6.54 10.45 10.45 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,019.92 1,018.65 1,018.65 1,014.85 1,014.85 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.08 6.35 6.35 10.15 10.15 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.00%, 1.25%, 1.25%, 2.00%, and 2.00% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 13
Mid-Cap Growth Equity Portfolio Total Net Assets (9/30/05): $446.7 million Performance Benchmark: Russell Midcap Growth Index Investment Approach: Seeks long-term capital appreciation by investing normally at least 80% of assets in equity securities issued by U.S. mid-capitalization growth companies that the portfolio management team believes have above-average earnings growth potential. The Portfolio defines these companies as those with market capitalizations comparable in size to the companies in the Russell Midcap Growth Index. The management team would expect these companies to have products, technologies, management, markets and opportunities which will facilitate earnings growth over time that is well above the growth rate of the overall economy and the rate of inflation. The portfolio management team uses a bottom up investment style to select securities based upon fundamental analysis (such as analysis of earnings, cash flows, competitive position and management's abilities). Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Mid-Cap Growth Equity Portfolio (the Portfolio) reorganized with the State Street Research Mid Cap Growth Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. . All share classes underperformed the benchmark for the annual period. . After closing 2004 with a substantial rally, the U.S. equity market has been volatile in 2005 and only managed to produce slight gains. While corporate profits have continued to grow steadily, investors have begun to fear rising interest rates and energy prices, and a corresponding slowdown in the economy. . The Portfolio performed well during the annual period due to strong performance from our energy stock holdings. Growth in worldwide demand has driven energy prices higher throughout the annual period, pushing energy stocks to high levels. The Portfolio benefited from a relatively high energy sector exposure during this period. In addition, stock selection in the sector also contributed to performance, as shares of EOG Resources and Consol Energy rose rapidly during the annual period. Stock selection decisions in other sectors, including the health care and information technology ("IT") sectors, countered the success in the energy sector and led to the Portfolio's underperformance. In the health care sector, the Portfolio's exposure to the biotechnology industry accounted for much of the detraction in this sector. Our positions in Biogen and Elan Pharmaceuticals substantially declined in value after the unforeseeable withdrawal of Tysabri, a drug which figured prominently in the growth thesis for these stocks. Both positions were immediately sold from the Portfolio. Despite excellent results in the communications equipment industry, the Portfolio's IT sector allocation also led to underperformance. Relative weakness in Avid Technology, a maker of media editing software, as well as several IT services companies including Alliance Data Systems and BISYS Group led to the disappointment in the sector. . Our investment approach is driven by our focus on adding value through bottom-up fundamental research. As a result, portfolio positioning and corresponding sector weights relative to the benchmark are largely determined by stock selection. During the annual period, we increased our weightings in the energy and IT sectors, while reducing the Portfolio's exposure to the consumer discretionary and health care sectors. As of the beginning of the fourth calendar quarter of 2005, the Portfolio holds a significant overweight in the IT sector where the portfolio management team has found many diverse opportunities. The largest underweight is in the financials sector, where we do not find compelling long-term growth opportunities. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE MID-CAP GROWTH EQUITY PORTFOLIO AND THE RUSSELL MIDCAP GROWTH INDEX FROM INCEPTION. [LINE CHART] Institutional Investor A Russell Midcap Growth Index ------------- ---------- --------------------------- 12/27/1996 $ 10,000 $ 9,425 $ 10,000 12/31/1996 10,040 9,463 10,009 03/31/1997 8,930 8,407 9,644 06/30/1997 10,570 9,934 11,063 09/30/1997 12,200 11,442 12,612 12/31/1997 11,521 10,802 12,265 03/31/1998 12,963 12,133 13,729 06/30/1998 13,135 12,285 13,721 09/30/1998 11,218 10,478 11,430 12/31/1998 14,093 13,141 14,456 03/31/1999 16,050 14,957 14,951 06/30/1999 18,058 16,801 16,508 09/30/1999 19,288 17,923 15,682 12/31/1999 31,151 28,920 21,874 03/31/2000 37,868 35,115 26,494 06/30/2000 34,322 31,767 24,531 09/30/2000 36,964 34,166 25,151 12/31/2000 27,667 25,545 19,305 03/31/2001 20,360 18,789 14,462 06/30/2001 20,852 19,200 16,802 09/30/2001 16,002 14,723 12,131 12/31/2001 18,865 17,331 15,414 03/31/2002 18,673 17,147 15,142 06/30/2002 15,660 14,354 12,377 09/30/2002 12,947 11,849 10,251 12/31/2002 13,481 12,321 11,191 03/31/2003 13,545 12,382 11,189 06/30/2003 15,810 14,415 13,288 09/30/2003 16,173 14,723 14,239 12/31/2003 18,074 16,448 15,971 03/31/2004 19,442 17,680 16,743 06/30/2004 19,677 17,845 16,919 09/30/2004 18,715 16,962 16,186 12/31/2004 20,894 18,933 18,443 03/31/2005 20,467 18,522 18,135 06/30/2005 21,364 19,323 18,757 09/30/2005 22,326 20,165 19,986 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year From Inception ------ ------ ------ -------------- Institutional Class 19.29% 19.92% (9.59)% 9.60% Service Class 19.03% 19.57% (9.86)% 9.28% Investor A Class (Load Adjusted) 12.10% 17.07% (11.07)% 8.34% Investor A Class (NAV) 18.89% 19.39% (10.01)% 9.07% Investor B Class (Load Adjusted) 13.46% 17.65% (10.91)% 8.31% Investor B Class (NAV) 17.96% 18.49% (10.68)% 8.31% Investor C Class (Load Adjusted) 16.96% 18.49% (10.67)% 8.31% Investor C Class (NAV) 17.96% 18.49% (10.67)% 8.31% The inception date of the Portfolio's Institutional, Service, Investor A, Investor B and Investor C Shares was 12/27/96. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 14
Mid-Cap Growth Equity Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) EOG Resources, Inc. 3.2% CONSOL Energy, Inc. 3.0 Newfield Exploration Co. 2.2 Navteg Corp. 2.1 American Tower Corp. - Class A 2.0 Ceridian Corp. 2.0 Shire Pharmaceuticals Group PLC - ADR 2.0 Community Health Systems, Inc. 2.0 WellPoint, Inc. 1.9 ENSCO International, Inc. 1.8 ---- Total 22.2% ==== Top Ten Industries (% of long-term investments) Telecommunications 11.9% Medical & Medical Services 10.3 Oil & Gas 9.6 Computer Software & Services 9.2 Retail Merchandising 8.5 Medical Instruments & Supplies 6.6 Metal & Mining 5.6 Semiconductors & Related Devices 4.4 Entertainment & Leisure 4.0 Manufacturing 3.8 ---- Total 73.9% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,090.80 1,087.50 1,088.70 1,084.30 1,084.30 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.45 8.01 8.33 12.23 12.23 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,018.76 1,017.23 1,016.93 1,013.12 1,013.12 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.24 7.77 8.07 11.88 11.88 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.23%, 1.53%, 1.59%, 2.34%, and 2.34% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 15
Aurora Portfolio Total Net Assets (9/30/05): $2.7 billion Performance Benchmark: Russell 2500 Value Index Investment Approach: Seeks high total return, consisting principally of capital appreciation by investing at least 80% of its net assets in small- and mid-capitalization common and preferred stocks and securities convertible into common and preferred stock. The Portfolio considers issuers of small- and mid-capitalization value stocks to be companies that are comparable in size to the companies in the Russell 2500 Value Index or a similar index. In choosing among small- and mid-capitalization stocks, the management team takes a value approach, searching for those companies that appear to be trading below their true worth. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Aurora Portfolio (the Portfolio) reorganized with the State Street Research Aurora Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. For periods prior to January 31, 2005, the performance information shown reflects the performance of the SSR Fund, which had substantially similar investment goals and strategies as the Portfolio. The SSR Fund's benchmark was the Russell 2000 Value Index while the Portfolio's benchmark is the Russell 2500 Value Index. . All share classes underperformed the benchmark for the annual period. . The domestic equity markets posted solid gains during the annual period. Within the Portfolio's benchmark, the Russell 2500 Value Index, all major sectors posted positive returns. However, the energy sector was the primary driver of total return as energy prices climbed significantly. Other sector leaders included health care, industrials and utilities. During the annual period, the Portfolio's holdings in the energy and financials sectors aided returns relative to the benchmark. However, these gains were overshadowed by relative weakness in the information technology, health care and industrials sectors. . Growing global demand for and constrained supply of energy continued to apply upward pressure on energy prices as crude oil approached $70 a barrel during the annual period. The corresponding positive impact on energy-related stocks proved to be among the greatest contributors to relative performance as the Portfolio benefited from stock selection and an overweight in the sector relative to the benchmark. Key contributors included exploration and production companies, Vintage Petroleum and EOG Resources, and oil services firm, Global Industries. In the financials sector, allocation within the sector was the key driver of favorable comparisons. Specifically, underweights in commercial banks, real estate investment trusts ("REITs") and mortgage finance companies benefited relative sector returns. . Stock selection within the information technology sector was the single greatest detractor from relative performance during the annual period. Within the sector, the most notable areas of weakness were attributable to communications and electronics equipment holdings. Stock selection in the health care sector also proved to be a drag on relative return due to health care providers and service stocks held in the Portfolio. Additionally, stock selection in the industrials sector also hampered relative performance. Notable detractors included GrafTech International and Trinity Industries, both of which were sold during the period. . Our investment approach is driven by our focus on adding value through bottom-up fundamental research. As a result, portfolio positioning and corresponding sector weights relative to the benchmark are largely determined by stock selection. During the annual period, the impact of buy/sell decisions within the Portfolio, combined with the performance of underlying holdings, resulted in increased allocations to the financials and utilities sectors, and decreased exposure to the industrials, information technology and materials sectors. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE AURORA PORTFOLIO, THE RUSSELL 2000 VALUE INDEX AND THE RUSSELL 2500 VALUE INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Russell 2000 Value Index Russell 2500 Value Index ------------- ---------- ------------------------ ------------------------ 09/30/1995 $ 10,000 $ 9,424 $ 10,000 $ 10,000 12/31/1995 10,355 9,754 10,291 10,384 03/31/1996 11,711 11,023 10,743 10,854 06/30/1996 13,598 12,794 11,182 11,187 09/30/1996 14,395 13,536 11,348 11,534 12/31/1996 16,245 15,271 12,490 12,690 03/31/1997 16,843 15,813 12,459 12,793 06/30/1997 20,312 19,053 14,340 14,607 09/30/1997 24,917 23,375 16,188 16,425 12/31/1997 23,877 22,394 16,460 16,890 03/31/1998 26,540 24,872 17,836 18,502 06/30/1998 24,712 23,148 17,192 17,839 09/30/1998 18,879 17,666 14,119 14,901 12/31/1998 20,307 18,991 15,402 16,565 03/31/1999 19,351 18,089 13,909 15,240 06/30/1999 23,708 22,143 16,211 17,681 09/30/1999 23,260 21,709 14,944 16,153 12/31/1999 27,193 25,363 15,174 16,813 03/31/2000 30,085 27,990 15,752 17,597 06/30/2000 32,385 30,079 16,060 17,492 09/30/2000 35,894 33,311 17,238 18,697 12/31/2000 37,482 34,753 18,635 20,308 03/31/2001 38,563 35,736 18,817 19,907 06/30/2001 43,215 40,016 21,007 21,895 09/30/2001 35,663 32,986 18,205 19,168 12/31/2001 43,531 40,253 21,249 22,286 03/31/2002 47,656 44,035 23,286 24,183 06/30/2002 43,241 39,867 22,792 23,339 09/30/2002 33,014 30,398 17,940 19,051 12/31/2002 35,069 32,289 18,823 20,088 03/31/2003 32,618 30,011 17,867 19,130 06/30/2003 39,828 36,619 21,927 23,201 09/30/2003 43,977 40,399 23,621 25,005 12/31/2003 52,669 48,344 27,487 29,113 03/31/2004 55,003 50,448 29,388 30,912 06/30/2004 56,369 51,662 29,638 31,069 09/30/2004 53,982 49,446 29,682 31,146 12/31/2004 60,721 55,572 33,601 35,394 03/31/2005 58,750 53,732 32,265 34,642 06/30/2005 60,243 55,050 33,902 36,488 09/30/2005 62,953 57,507 34,951 37,784 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 16.62% 24.01% 11.89% 20.20% Service Class 16.30% 23.68% 11.54% 19.82% Investor A Class (Load Adjusted) 9.61% 21.26% 10.23% 19.12% Investor A Class (NAV) 16.30% 23.68% 11.54% 19.82% Investor B Class (Load Adjusted) 10.94% 22.01% 10.47% 18.94% Investor B Class (NAV) 15.44% 22.79% 10.74% 18.94% Investor C Class (Load Adjusted) 14.45% 22.81% 10.74% 18.94% Investor C Class (NAV) 15.45% 22.81% 10.74% 18.94% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 2/13/95; Investor A Shares, 2/13/95; Investor C Shares, 2/13/95; Investor B Shares, 1/1/99; and Service Shares, 1/28/05. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 16
Aurora Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) GTECH Holdings, Corp. 1.8% Vintage Petroleum, Inc. 1.7 Humana, Inc. 1.6 The Brink's Co. 1.5 Allmerica Financial Corp. 1.4 Affiliated Managers Group, Inc. 1.4 Bausch & Lomb, Inc. 1.4 Walter Industries, Inc. 1.4 Radian Group, Inc. 1.4 Linens 'n Things, Inc. 1.3 ----- Total 14.9% ===== Top Ten Industries (% of long-term investments) Insurance 10.3% Retail Merchandising 8.0 Manufacturing 6.7 Oil & Gas 5.5 Banks 5.3 Energy & Utilities 5.1 Business Services 4.6 Telecommunications 4.6 Aerospace 4.3 Finance 4.2 ---- Total 58.6% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,071.60 1,070.30 1,070.30 1,065.90 1,066.20 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.13 7.32 7.32 11.29 11.29 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,019.01 1,017.84 1,017.84 1,013.93 1,013.93 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.99 7.16 7.16 11.07 11.07 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.18%, 1.41%, 1.41%, 2.18%, and 2.18% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 17
Small/Mid-Cap Growth Portfolio Total Net Assets (9/30/05): $281.6 million Performance Benchmark: Russell 2500 Growth Index Investment Approach: Seeks to provide growth of capital by investing at least 80% of its total assets in small-capitalization and mid-capitalization companies. The Portfolio views small- and mid-capitalization companies as those that are less mature and appear to have the potential for rapid growth. The Portfolio generally defines small- and mid-capitalization companies as those that have similar market capitalizations to those in the Russell 2500 Growth Index or a similar index. The portfolio management team uses research to identify potential investments, examining such features as a company's financial condition, business prospects, competitive position and business strategy. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Small/Mid-Cap Growth Portfolio (the Portfolio) reorganized with the State Street Research Emerging Growth Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. For periods prior to January 31, 2005, the performance information shown reflects the performance of the SSR Fund, which had substantially similar investment goals and strategies as the Portfolio. The SSR Fund's benchmark was the Russell 2000 Growth Index while the Portfolio's benchmark is the Russell 2500 Growth Index. . The Institutional, Service and Investor A share classes outperformed the benchmark for the annual period. The Investor B and C share classes underperformed the benchmark for the annual period. . After closing 2004 with a substantial rally, the U.S. equity market has been volatile in 2005 and only managed to produce slight gains. While corporate profits have continued to grow steadily, investors have begun to fear rising interest rates and energy prices, and a corresponding slowdown in the economy. . The Portfolio performed well during the annual period due to strong performance from our health care and energy stock holdings. Growth in worldwide demand has driven energy prices higher throughout the year, pushing energy stocks to high levels. The Portfolio benefited from a relatively high energy sector exposure during the annual period. In addition, stock selection in the health care sector, particularly in the health care providers and services industry, also contributed to performance. LCA-Vision, an operator of laser vision correction centers, was the top performing health care stock in the Portfolio, more than doubling in value during our holding period. In addition, the Portfolio's positions in Lifepoint Hospitals and Community Health Systems contributed significantly to the success in the health care sector. Conversely, despite producing solid relative results in the semiconductor industry, the Portfolio's overall investment in information technology ("IT") lagged behind that of the benchmark. Internet stocks Autobytel and Ask Jeeves both detracted substantially from IT performance overall, each falling more than 30% in a positive market environment for technology stocks. . Our investment approach is driven by our focus on adding value through bottom-up fundamental research. As a result, portfolio positioning and corresponding sector weights relative to the benchmark are largely determined by stock selection. During the year we have increased our weightings in the energy and IT sectors, while reducing the Portfolio's exposure to the financials and health care sectors. As of the beginning of the fourth calendar quarter of 2005, the Portfolio holds a significant overweight in the IT sector where the portfolio management team found many diverse opportunities in the IT services industry. The Portfolio's largest underweight is in the financials sector, where we do not find compelling long-term growth opportunities. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE SMALL/MID-CAP GROWTH PORTFOLIO, THE RUSSELL 2000 GROWTH INDEX AND THE RUSSELL 2500 GROWTH INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Russell 2000 Growth Index Russell 2500 Growth Index ------------- ---------- ------------------------- ------------------------- 09/30/1995 $ 10,000 $ 9,426 $ 10,000 $ 10,000 12/31/1995 9,703 9,144 10,148 10,175 03/31/1996 10,143 9,562 10,731 10,887 06/30/1996 11,412 10,749 11,358 11,443 09/30/1996 11,709 11,021 11,261 11,600 12/31/1996 12,202 11,470 11,291 11,708 03/31/1997 11,628 10,945 10,106 10,771 06/30/1997 14,068 13,224 11,881 12,522 09/30/1997 17,370 16,312 13,891 14,605 12/31/1997 15,838 14,865 12,752 13,436 03/31/1998 18,365 17,224 14,268 14,933 06/30/1998 16,446 15,406 13,448 14,205 09/30/1998 12,189 11,423 10,442 11,050 12/31/1998 15,319 14,331 12,911 13,852 03/31/1999 14,702 13,742 12,693 13,706 06/30/1999 17,171 16,032 14,565 16,010 09/30/1999 15,796 14,746 13,850 15,454 12/31/1999 23,357 21,804 18,475 21,538 03/31/2000 26,233 24,470 20,190 24,799 06/30/2000 23,820 22,206 18,702 23,086 09/30/2000 23,119 21,536 17,959 22,407 12/31/2000 19,927 18,530 14,331 18,072 03/31/2001 16,617 15,449 12,152 14,473 06/30/2001 20,316 18,870 14,336 17,550 09/30/2001 16,246 15,044 10,310 12,799 12/31/2001 20,265 18,724 13,008 16,114 03/31/2002 20,181 18,643 12,753 15,637 06/30/2002 17,259 15,984 10,752 13,037 09/30/2002 15,300 14,153 8,438 10,551 12/31/2002 15,199 14,039 9,071 11,425 03/31/2003 15,047 13,893 8,719 11,059 06/30/2003 19,117 17,638 10,825 13,572 09/30/2003 20,451 18,854 11,958 14,925 12/31/2003 23,338 21,496 13,475 16,717 03/31/2004 25,449 23,442 14,227 17,637 06/30/2004 24,132 22,210 14,240 17,660 09/30/2004 21,092 19,389 13,384 16,670 12/31/2004 23,946 21,999 15,402 19,156 03/31/2005 23,068 21,172 14,351 18,327 06/30/2005 23,879 21,902 14,850 18,979 09/30/2005 25,601 23,474 15,789 20,173 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year -------- ------- ------- ------- Institutional Class 21.38% 18.72% 2.06% 9.86% Service Class 20.99% 18.35% 1.72% 9.55% Investor A Class (Load Adjusted) 14.11% 16.07% 0.54% 8.91% Investor A Class (NAV) 21.07% 18.37% 1.74% 9.55% Investor B Class (Load Adjusted) 15.59% 16.66% 0.71% 8.78% Investor B Class (NAV) 20.09% 17.51% 1.04% 8.78% Investor C Class (Load Adjusted) 19.15% 17.50% 1.09% 8.80% Investor C Class (NAV) 20.15% 17.50% 1.09% 8.80% The performance information above includes information relating to each class of the portfolio since the commencement of operations of the portfolio, rather than the date such class was introduced. The inception dates of the portfolio's share classes were as follows: institutional shares, 10/4/93; investor a shares, 2/1/94; investor c shares, 2/1/94; investor b shares, 1/1/99 and service shares, 1/28/05. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 18
Small/Mid-Cap Growth Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Laureate Education, Inc. 2.3% Digitas, Inc. 2.1 Vintage Petroleum, Inc. 2.0 Community Health Systems, Inc. 1.9 SonicWALL, Inc. 1.8 Airgas, Inc. 1.8 ADTRAN, Inc. 1.7 Station Casinos, Inc. 1.7 Massey Energy Co. 1.6 Foundry Networks 1.6 ---- Total 18.5% ==== Top Ten Industries (% of long-term investments) Business Services 12.0% Computer Software & Services 11.5 Medical & Medical Services 10.4 Oil & Gas 9.0 Telecommunications 7.8 Medical Instruments & Supplies 6.5 Retail Merchandising 5.3 Personal Services 4.7 Metal & Mining 4.0 Pharmaceuticals 4.0 ---- Total 75.2% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,109.80 1,107.10 1,108.70 1,103.30 1,104.00 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.82 7.13 7.14 11.07 11.08 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,019.42 1,022.68 1,018.15 1,014.34 1,014.34 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.58 2.32 6.85 10.66 10.66 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.10%, 1.35%, 1.35%, 2.10%, and 2.10% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 19
Small Cap Value Equity Portfolio Total Net Assets (9/30/05): $128.6 million Performance Benchmark: Russell 2000 Value Index Investment Approach: Seeks long-term capital appreciation by investing in small capitalization stocks of companies believed by the portfolio manager to be worth more than is indicated by current market price. The Portfolio normally invests at least 80% of its net assets in equity securities issued by U.S. small capitalization value companies (market capitalizations under $2 billion). The portfolio manager uses fundamental analysis to examine each company for financial strength before deciding to purchase the stock. Recent Portfolio Management Activity: . All share classes outperformed the benchmark for the annual period. . The domestic equity markets posted solid gains during the annual period. Within the Portfolio's benchmark, the Russell 2000 Value Index, all major sectors posted positive returns. However, the energy sector was the primary driver of total return as energy prices climbed significantly. Other sector leaders included industrials and utilities. During the annual period, the Portfolio's holdings in the industrials and health care sectors aided returns relative to the benchmark, more than offsetting relative weakness in the consumer staples and consumer discretionary sectors. . Stock selection within the industrials sector was the greatest contributor to positive returns during the annual period. Specifically, strong performance from Walter Industries and Administaff was among the key drivers of favorable sector comparisons. The natural resources segment of Walter Industries, a diversified industrials firm, powered the stock higher as coal prices increased dramatically during the annual period. Stronger-than-expected first and second quarter earnings at Administaff, a human resources management firm, fueled stock price gains during the annual period. In the health care sector, holdings among health care providers and equipment and supply manufacturers were the primary contributors to outperformance relative to the benchmark. Notable contributors included DJ Orthopedics and Sybron Dental Specialties. . Although stock selection within the consumer staples sector, particularly among food products producers, proved to be a modest drag on relative sector performance during the annual period, this negative impact was largely offset by the positive effect of an overweight in the sector, particularly among beverage and personal products producers. In the consumer discretionary sector, however, stock selection and an overweight position relative to the benchmark combined to drive less favorable comparisons. Within the sector, the most notable detractors included RV manufacturer, Fleetwood Enterprises, and Handleman, a manager and distributor of prerecorded music. . Our investment approach is driven by our focus on adding value through bottom-up fundamental research. As a result, portfolio positioning and corresponding sector weights relative to the benchmark are largely determined by stock selection. During the annual period, the impact of buy/sell decisions within the Portfolio, combined with the performance of underlying holdings, resulted in increased allocations to the energy, financials and information technology sectors, and decreased exposure to the consumer discretionary, health care and materials sectors. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE SMALL CAP VALUE EQUITY PORTFOLIO AND THE RUSSELL 2000VALUE INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Russell 2000 Value Index ------------- ---------- ------------------------ 09/30/1995 $ 10,000 $ 9,427 $ 10,000 12/31/1995 10,291 9,697 10,291 03/31/1996 10,842 10,199 10,743 06/30/1996 11,216 10,531 11,182 09/30/1996 11,264 10,564 11,348 12/31/1996 12,336 11,572 12,490 03/31/1997 12,237 11,460 12,459 06/30/1997 14,512 13,577 14,340 09/30/1997 16,598 15,513 16,188 12/31/1997 16,745 15,627 16,460 03/31/1998 18,060 16,831 17,836 06/30/1998 17,112 15,929 17,192 09/30/1998 13,771 12,809 14,119 12/31/1998 15,704 14,593 15,402 03/31/1999 13,397 12,425 13,909 06/30/1999 15,715 14,556 16,211 09/30/1999 14,490 13,413 14,944 12/31/1999 14,943 13,814 15,174 03/31/2000 15,319 14,143 15,752 06/30/2000 15,566 14,362 16,060 09/30/2000 16,976 15,639 17,238 12/31/2000 17,985 16,570 18,635 03/31/2001 17,418 16,029 18,817 06/30/2001 19,450 17,876 21,007 09/30/2001 17,055 15,652 18,205 12/31/2001 19,032 17,446 21,249 03/31/2002 20,656 18,913 23,286 06/30/2002 19,447 17,794 22,792 09/30/2002 15,648 14,289 17,940 12/31/2002 15,872 14,483 18,823 03/31/2003 15,671 14,286 17,867 06/30/2003 18,785 17,103 21,927 09/30/2003 20,335 18,486 23,621 12/31/2003 23,480 21,319 27,487 03/31/2004 25,354 22,995 29,388 06/30/2004 25,225 22,862 29,638 09/30/2004 24,579 22,254 29,682 12/31/2004 28,217 25,538 33,601 03/31/2005 28,021 25,340 32,265 06/30/2005 29,058 26,260 33,902 09/30/2005 29,684 26,801 34,951 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------- ------- ------- BlackRock Class 20.68% 23.79% 11.82% 11.49% Institutional Class 20.77% 23.79% 11.82% 11.49% Service Class 20.46% 23.46% 11.51% 11.16% Investor A Class (Load Adjusted) 13.47% 20.91% 10.07% 10.36% Investor A Class (NAV) 20.43% 23.33% 11.37% 11.01% Investor B Class (Load Adjusted) 15.24% 21.66% 10.34% 10.19% Investor B Class (NAV) 19.58% 22.45% 10.55% 10.19% Investor C Class (Load Adjusted) 18.53% 22.41% 10.53% 10.19% Investor C Class (NAV) 19.49% 22.41% 10.53% 10.19% Effective July 1, 2005, the fund closed to new investors. Existing shareholders on the date of closing may make additional investments in current accounts. In addition, new accounts may be opened by (i) any investor if the tax id number for the new account will be the same as that for a current account and (ii) 401(k), 403(b), 457 and other similar group retirement plan programs that have current accounts. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 4/13/92; Investor A Shares, 6/2/92; Service Shares, 7/29/93; Investor B Shares, 10/3/94; Investor C Shares, 10/1/96; and BlackRock Shares, 4/12/04. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the portfolio is actively managed and its composition will vary. 20
Small Cap Value Equity Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Banta Corp. 2.6% Washington Group International, Inc. 2.5 Laidlaw International, Inc. 2.4 Gaylord Entertainment Co. 2.3 Jarden Corp. 2.1 Max Re Capital Ltd. 2.0 Sybron Dental Specialties, Inc. 1.9 Affiliated Managers Group, Inc. 1.9 Foundation Coal Holdings, Inc. 1.9 Whiting Petroleum Corp. 1.8 ---- Total 21.4% ==== Top Ten Industries (% of long-term investments) Retail Merchandising 11.5% Banks 10.8 Computer Software & Services 6.6 Energy & Utilities 5.5 Insurance 5.3 Business Services 5.2 Oil & Gas 4.9 Medical Instruments & Supplies 4.1 Manufacturing 4.0 Construction 3.8 ---- Total 61.7% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses -------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- ------------ Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,058.60 1,059.40 1,057.30 1,057.70 1,054.00 1,053.10 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.63 5.01 6.45 6.45 10.30 10.29 Hypothetical Expenses (5% return before expenses) -------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- ------------ Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,019.47 1,020.08 1,018.65 1,018.65 1,014.85 1,014.85 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.53 4.92 6.35 6.35 10.15 10.15 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.09%, 0.97%, 1.25%, 1.25%, 2.00%, and 2.00% for BlackRock, the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 21
Small Cap Core Equity Portfolio Total Net Assets (9/30/05): $48.3 million Performance Benchmark: Russell 2000 Index Investment Approach: Seeks long-term capital appreciation by normally investing at least 80% of assets in the equity securities of U.S. small capitalization companies (market capitalizations under $2 billion). The portfolio management team seeks to achieve consistent and sustainable performance through various market cycles by emphasizing stock selection. Stock selection is determined by looking at companies using a range of valuation criteria, including the strength of their management and business franchise. The portfolio management team uses fundamental analysis to examine each company for financial strength before deciding to purchase the stock. Recent Portfolio Management Activity: . All share classes outperformed the benchmark for the annual period. . The domestic equity markets posted solid gains during the annual period. Within the Portfolio's benchmark, the Russell 2000 Index, all major sectors posted positive returns. However, the energy sector was the primary driver of total return as energy prices climbed significantly. Other sector leaders included industrials, telecommunication services and utilities. During the annual period, the Portfolio's holdings in the information technology, consumer discretionary and health care sectors aided returns relative to the benchmark, more than offsetting relative weakness in the consumer staples and financials sectors. . Stock selection in the information technology sector proved to be the single largest contributor to outperformance during the annual period, driven primarily by strength in software and communications equipment providers. Key contributors included Ascential Software, which was acquired by IBM in May, Titan Corp., which was acquired by L-3 Communications in July, and Arris Group. In the consumer discretionary sector, stock selection, most notably among hotel, restaurant and gaming stocks, added the greatest value. Orient Express Hotels and Gaylord Entertainment were among the strongest performers. Elsewhere within the sector, Portfolio returns benefited from solid performance from select specialty retailers. In the health care sector, holdings among health care providers and equipment and supply manufacturers were the primary contributors to outperformance relative to the benchmark. . Consumer staples proved to be an area of relative weakness, driven primarily by stock selection among personal products producers. Specifically, Portfolio holdings in NBTY and Nu Skin Enterprises declined during the annual period. In the financials sector, disappointing performance from select holdings, most notably in the insurance and mortgage finance industries, detracted from relative return. These stocks came under pressure as the market reacted to increasing interest rates and the impact of hurricanes Katrina and Rita on insurance company profit margins. . Our investment approach is driven by our focus on adding value through bottom-up fundamental research. As a result, portfolio positioning and corresponding sector weights relative to the benchmark are largely determined by stock selection. During the annual period, the impact of buy/sell decisions within the Portfolio, combined with the performance of underlying holdings, resulted in increased allocations to the energy, financials and information technology sectors, and reduced exposure to the consumer staples, health care and industrials sectors. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE SMALL CAP CORE EQUITY PORTFOLIO AND THE RUSSELL 2000 INDEX FROM INCEPTION. [LINE CHART] Institutional Investor A Russell 2000 Index ------------- ---------- ------------------ 01/02/2002 $ 10,000 $ 9,425 $ 10,000 03/31/2002 10,680 10,066 10,420 06/30/2002 10,010 9,434 9,550 09/30/2002 8,350 7,870 7,506 12/31/2002 8,900 8,388 7,968 03/31/2003 8,570 8,077 7,610 06/30/2003 10,750 10,132 9,392 09/30/2003 12,000 11,310 10,245 12/31/2003 14,009 13,185 11,733 03/31/2004 15,566 14,633 12,467 06/30/2004 15,586 14,642 12,526 09/30/2004 14,929 14,013 12,168 12/31/2004 17,004 15,950 13,883 03/31/2005 16,444 15,413 13,142 06/30/2005 17,156 16,056 13,709 09/30/2005 17,930 16,775 14,352 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year From Inception ------- ------ -------------- Institutional Class 20.10% 29.01% 16.88% Service Class 20.22% 28.94% 16.83% Investor A Class (Load Adjusted) 12.80% 26.18% 14.82% Investor A Class (NAV) 19.71% 28.70% 16.65% Investor B Class (Load Adjusted) 14.31% 27.37% 15.67% Investor B Class (NAV) 18.81% 28.08% 16.21% Investor C Class (Load Adjusted) 17.74% 28.06% 16.19% Investor C Class (NAV) 18.74% 28.06% 16.19% The inception date of the Portfolio's Institutional, Service, Investor A, Investor B and Investor C Shares was 1/2/02. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 22
Small Cap Core Equity Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Aviall, Inc. 3.0% Laureate Education, Inc. 2.7 TETRA Technologies, Inc. 2.3 KCS Energy, Inc. 2.0 Airgas, Inc. 2.0 Universal American Financial Corp. 1.9 The Brink's Co. 1.9 Gaylord Entertainment Co. 1.8 Vintage Petroleum, Inc. 1.8 Foundation Coal Holdings, Inc. 1.8 ---- Total 21.2% ==== Top Ten Industries (% of long-term investments) Computer Software & Services 8.0% Banks 7.7 Business Services 6.7 Medical & Medical Services 5.9 Medical Instruments & Supplies 5.7 Retail Merchandising 5.5 Entertainment & Leisure 5.2 Aerospace 5.2 Manufacturing 4.8 Insurance 4.7 ---- Total 59.4% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,090.30 1,089.20 1,088.40 1,085.00 1,084.30 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.81 8.38 9.00 12.81 12.80 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,018.40 1,016.88 1,016.27 1,012.56 1,012.56 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.60 8.12 8.73 12.44 12.44 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.30%, 1.60%, 1.72%, 2.45%, and 2.45% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 23
Small Cap Growth Equity Portfolio Total Net Assets (9/30/05): $573.7 million Performance Benchmark: Russell 2000 Growth Index Investment Approach: Seeks long-term capital appreciation by investing at least 80% of its net assets in equity securities issued by U.S. small capitalization growth companies (market capitalizations under $2 billion). The management team would expect these companies to have products, technologies, management, markets and opportunities which will facilitate earnings growth over time that is well above the growth rate of the overall economy and the rate of inflation. The management team uses a bottom up investment style and selects securities based upon fundamental analysis (such as analysis of earnings, cash flows, competitive position and management's abilities). Recent Portfolio Management Activity: . The Institutional, Service and Investor A share classes outperformed the benchmark for the annual period. The Investor B and C share classes underperformed the benchmark for the annual period. . After closing 2004 with a substantial rally, the U.S. equity market has been volatile in 2005 and only managed to produce slight gains. While corporate profits have continued to grow steadily, investors have begun to fear rising interest rates and energy prices, and a corresponding slowdown in the economy. . The Portfolio produced strong absolute and relative performance during the annual period as a result of both sector positioning and stock selection. Growth in worldwide demand has driven energy prices higher throughout the year, pushing energy stocks to high levels. The Portfolio benefited from relatively high energy sector exposure during the annual period. Stock selection in the health care sector also contributed to performance. During the annual period, Hologic, a maker of medical imaging equipment, tripled in value and contributed tremendously to the Portfolio's success in the health care sector. In addition, two of our holdings, CTI Molecular Imaging and Accredo Health, surged higher due to their acquisition by larger companies at substantial premiums. Information technology ("IT") stocks lagged the broader market during the annual period, but positive stock selection made this a top-contributing sector for the Portfolio. Adtran, O2Micro International, and VeriFone Holdings delivered strong returns in this sector. Conversely, the industrials sector produced relative weakness for the Portfolio. Our holdings trailed the benchmark as a result of poor stock selection in the commercial services industry. Several of the Portfolio's holdings performed poorly during the second calendar quarter of 2005 after a strong performance in 2004. . Our investment approach is driven by our focus on adding value through bottom-up fundamental research. As a result, portfolio positioning and corresponding sector weights relative to the benchmark are largely determined by stock selection. During the annual period we have increased our weightings in the energy and information technology sectors, while reducing the Portfolio's exposure to the industrials and health care sectors. As of the beginning of the fourth calendar quarter of 2005, the Portfolio holds a significant overweight in the IT sector where the portfolio management team has found many diverse opportunities in the IT services industry. The Portfolio's largest underweight is in the financials sector, where we do not find compelling long-term growth opportunities. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE SMALL CAP GROWTH EQUITY PORTFOLIO AND THE RUSSELL 2000 GROWTH INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Russell 2000 Growth Index ------------- ---------- ------------------------- 09/30/1995 $ 10,000 $ 9,427 $ 10,000 12/31/1995 10,738 10,069 10,148 03/31/1996 12,114 11,347 10,731 06/30/1996 13,869 12,977 11,358 09/30/1996 14,587 13,650 11,261 12/31/1996 14,128 13,204 11,291 03/31/1997 11,380 10,617 10,106 06/30/1997 13,856 12,920 11,881 09/30/1997 16,905 15,736 13,891 12/31/1997 15,428 14,345 12,752 03/31/1998 16,913 15,701 14,268 06/30/1998 16,272 15,095 13,448 09/30/1998 13,197 12,226 10,442 12/31/1998 16,566 15,323 12,911 03/31/1999 17,018 15,737 12,693 06/30/1999 17,780 16,422 14,565 09/30/1999 19,129 17,650 13,850 12/31/1999 28,570 26,338 18,475 03/31/2000 34,378 31,654 20,190 06/30/2000 31,143 28,602 18,702 09/30/2000 31,186 28,586 17,959 12/31/2000 24,769 22,693 14,331 03/31/2001 18,672 17,100 12,152 06/30/2001 20,085 18,368 14,336 09/30/2001 14,431 13,177 10,310 12/31/2001 16,263 14,825 13,008 03/31/2002 15,304 13,936 12,753 06/30/2002 13,177 11,981 10,752 09/30/2002 11,063 10,049 8,438 12/31/2002 11,813 10,713 9,071 03/31/2003 11,309 10,250 8,719 06/30/2003 14,001 12,680 10,825 09/30/2003 15,070 13,628 11,958 12/31/2003 18,340 16,567 13,475 03/31/2004 19,680 17,752 14,227 06/30/2004 19,262 17,372 14,240 09/30/2004 17,848 16,081 13,384 12/31/2004 20,245 18,238 15,402 03/31/2005 19,557 17,598 14,351 06/30/2005 19,852 17,858 14,850 09/30/2005 21,253 19,103 15,789 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 19.08% 24.31% (7.38)% 7.83% Service Class 18.82% 24.02% (7.61)% 7.48% Investor A Class (Load Adjusted) 11.94% 21.44% (8.83)% 6.69% Investor A Class (NAV) 18.79% 23.88% (7.75)% 7.32% Investor B Class (Load Adjusted) 13.42% 22.18% (8.69)% 6.54% Investor B Class (NAV) 17.92% 22.95% (8.44)% 6.54% Investor C Class (Load Adjusted) 16.90% 22.98% (8.42)% 6.55% Investor C Class (NAV) 17.90% 22.98% (8.42)% 6.55% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 9/14/93; Service and Investor A Shares, 9/15/93; Investor B Shares, 1/18/96; and Investor C Shares, 9/6/96. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 24
Small Cap Growth Equity Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Laureate Education, Inc. 2.3% Massey Energy Co. 2.1 TETRA Technologies, Inc. 2.0 SonicWALL, Inc. 2.0 Vintage Petroleum, Inc. 2.0 Digitas, Inc. 2.0 Watson Wyatt & Co. Holdings 2.0 Micromuse, Inc. 1.8 Airgas, Inc. 1.8 O2Micro International Ltd. 1.8 ----- Total 19.8% ===== Top Ten Industries (% of long-term investments) Computer Software & Services 16.5% Business Services 14.6 Oil & Gas 12.7 Medical Instruments & Supplies 7.7 Medical & Medical Services 6.2 Entertainment & Leisure 5.7 Retail & Merchandising 5.6 Semiconductors & Related Devices 5.0 Personal Services 4.0 Metal & Mining 3.3 ---- Total 81.3% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,086.80 1,085.30 1,085.50 1,081.40 1,081.40 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.02 6.33 6.33 10.23 10.23 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,020.13 1,018.86 1,018.86 1,015.05 1,015.05 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.87 6.14 6.14 9.95 9.95 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.96%, 1.21%, 1.21%, 1.96%, and 1.96% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 25
Global Science & Technology Opportunities Portfolio Total Net Assets (9/30/05): $24.4 million Performance Benchmark: Pacific Stock Exchange Technology Index Investment Approach: Seeks long-term capital appreciation by investing primarily in equity securities of U.S. and non-U.S. companies in all capitalization ranges selected for their rapid and sustainable growth potential from the development, advancement and use of science and/or technology. The Portfolio normally invests up to 80% of its net assets in equity securities issued by science and technology companies in all market capitalization ranges. The Portfolio may invest up to 25% of its net assets in stocks of issuers in emerging market countries. The Portfolio management team uses a multi-factor screen to identify stocks that have above-average return potential. The factors and weights assigned to a factor may change depending on market conditions. The most influential factors over time have been revenue and earnings growth, estimate revisions, profitability and relative value. Recent Portfolio Management Activity: . The Institutional, Service and Investor A share classes outperformed the benchmark for the annual period. The Investor B and C share classes underperformed the benchmark for the annual period. . During the annual period, international markets significantly outperformed the U.S. equity market with emerging markets generating the greatest return. International market returns in the period were higher even though foreign currencies weakened relative to the U.S. dollar. Following the pattern of recent years, small capitalization stocks outperformed large capitalization stocks and value stocks outperformed growth stocks. Globally, as measured by the S&P/Citigroup Broad Market Index, the energy, materials and utilities sectors outperformed the broader index during the period while the industrials sector performed in-line with the index. The consumer discretionary, technology and health care sectors were the worst performers in the period. . The annual period was comprised of a cyclical advance from October 2004 through February 2005. This was followed by a two-month consolidation and then a cyclical rally lasting through the end of the annual period. The cyclical advances were primarily driven by better-than-expected GDP growth in countries outside of the U.S. Energy led the world equity markets as commodity prices reached record highs due to both strong economic demand and supply shocks resulting from the active hurricane season in the U.S. . For the annual period, security selection was the primary driver of the Portfolio's outperformance versus its benchmark, particularly in the information technology, telecommunication services and industrials sectors. In contrast, sector selection was a modest detractor from performance as the Portfolio maintained a relative overweight in the health care sector, which underperformed in the period, and held an underweight allocation to the information technology sector, which outperformed the benchmark. . In the information technology sector, the primary contributors to performance were MEMC Electronic Materials Inc., Powerwave Technologies Inc. and SiRF Technology Holdings Inc. Wireless subscriber growth and the build out of third generation (3G) mobile networks have been drivers of technology stocks, including Powerwave Technologies and SiRF Technology Holdings. . The Portfolio also benefited from the strength of wireless carriers, both domestically and internationally. Alamosa Holdings was the largest contributor to performance, followed by Bharti Televenture, an Indian company. Wireless substitution has become a global phenomenon and the global carriers are experiencing strong subscriber growth and solid average revenue per user (ARPU) trends. . The Portfolio's underweight to biotechnology stocks led to a modest underperformance in health care relative to the benchmark. While stock selection was strong within the sector, leading to the Portfolio's stocks outperforming those of the benchmark, the Portfolio's large underweight to the sector negated the positive returns. Positions in select pharmaceutical companies experienced declines, which additionally hurt performance as pharmaceuticals are not included in the benchmark. Health care provider stocks, however, had a positive impact on performance due to strong absolute performance. . At the end of the period, the Portfolio maintained its relative underweight to the information technology sector and relative overweight to the health care sector. We are cautious on the outlook for many information technology companies due to margin pressure. With emerging countries, such as China and India, becoming more integrated into the world supply chain, technology companies are experiencing price erosion as these buyers are not focused on purchasing leading edge technology. We maintain a favorable view of industrial technology as a result of the continued industrialization and urbanization of emerging market countries. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE GLOBAL SCIENCE & TECHNOLOGY OPPORTUNITIES PORTFOLIO AND THE PACIFIC STOCK EXCHANGE TECHNOLOGY INDEX FROM INCEPTION. [LINE CHART] Pacific Stock Exchange Institutional Investor A Technology Index ------------- ---------- ---------------------- 05/15/2000 $ 10,000 $ 9,425 $ 10,000 06/30/2000 11,400 10,745 10,789 09/30/2000 12,490 11,753 10,178 12/31/2000 9,490 8,926 7,983 03/31/2001 6,190 5,815 6,494 06/30/2001 6,830 6,400 7,121 09/30/2001 4,410 4,128 5,077 12/31/2001 5,850 5,476 6,752 03/31/2002 5,680 5,306 6,732 06/30/2002 4,520 4,213 5,049 09/30/2002 3,600 3,355 3,795 12/31/2002 3,820 3,553 4,512 03/31/2003 3,660 3,402 4,497 06/30/2003 4,760 4,420 5,545 09/30/2003 5,470 5,071 6,084 12/31/2003 6,070 5,627 6,887 03/31/2004 6,270 5,796 7,059 06/30/2004 5,820 5,382 7,275 09/30/2004 5,410 5,005 6,736 12/31/2004 6,230 5,749 7,719 03/31/2005 5,650 5,212 7,190 06/30/2005 5,950 5,485 7,403 09/30/2005 6,610 6,079 8,136 For period ending September 30, 2005 Average Annual Total Return From 1 Year 3 Year 5 Year Inception ------ ------ -------- ----------- Institutional Class 22.18% 22.45% (11.95)% (7.41)% Service Class 21.68% 22.17% (12.20)% (7.67)% Investor A Class (Load Adjusted) 14.57% 19.50% (13.38)% (8.84)% Investor A Class (NAV) 21.47% 21.91% (12.35)% (7.83)% Investor B Class (Load Adjusted) 16.16% 20.25% (13.38)% (8.70)% Investor B Class (NAV) 20.66% 21.05% (13.03)% (8.53)% Investor C Class (Load Adjusted) 19.66% 21.05% (13.03)% (8.53)% Investor C Class (NAV) 20.66% 21.05% (13.03)% (8.53)% The inception date of the Portfolio's Institutional, Service, Investor A, Investor B, and Investor C Shares was 5/15/00. See "Note On Performance Information" on Page 42 for Further Information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 26
Global Science & Technology Opportunities Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Genentech, Inc. 1.9% Powerwave Technologies, Inc. 1.8 Apple Computer, Inc. 1.8 Roche Holding AG 1.7 Broadcom Corp. - Class A 1.7 Samsung Electronics Co. Ltd. 1.6 Harris Corp. 1.6 Ibiden Co., Ltd. 1.6 Texas Instruments, Inc. 1.6 Motorola, Inc. 1.6 ---- Total 16.9% ==== Top Ten Industries (% of long-term investments) Computer Software & Service 17.0% Telecommunications 15.4 Semiconductors & Related Devices 14.6 Pharmaceuticals 9.2 Computer & Office Equipment 8.6 Medical & Medical Services 8.5 Electronics 6.3 Medical Instruments & Supplies 4.7 Manufacturing 4.5 Aerospace 2.9 ---- Total 91.7% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,169.90 1,166.70 1,166.40 1,161.40 1,161.40 Expenses Incurred During Period (4/01/05 - 9/30/05) 7.78 9.40 10.10 14.14 14.14 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,017.74 1,016.22 1,015.56 1,011.75 1,011.75 Expenses Incurred During Period (4/01/05 - 9/30/05) 7.26 8.78 9.44 13.25 13.25 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.43%, 1.73%, 1.86%, 2.61%, and 2.61% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 27
Global Resources Portfolio Total Net Assets (9/30/05): $1.2 billion Performance Benchmark: Lipper Natural Resources Funds Index S&P 500(R) Index Investment Approach: Seeks to provide long-term growth of capital by investing at least 80% of its total assets in securities of global energy and natural resources companies and companies in associated businesses, as well as utilities. The Portfolio may invest in companies located anywhere in the world and will generally invest in at least three countries and in companies tied economically to a number of countries. In selecting investments, the management team seeks to invest in companies and industries that appear to have the potential for above-average long-term performance. These may include companies that are expected to show above-average growth over the long term as well as those that appear to be trading below their true worth. The Portfolio may invest up to 20% of its assets in other U.S. and foreign investments including stocks and bonds of companies not associated with energy or natural resources. While the Portfolio tends to emphasize smaller companies, from time to time it may emphasize companies of other sizes. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Global Resources Portfolio (the Portfolio) reorganized with the State Street Research Global Resources Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. For periods prior to January 31, 2005, the performance information shown reflects the performance of the SSR Fund, which had substantially similar investment goals and strategies as the Portfolio. . All share classes outperformed the benchmarks for the annual period. . During the annual period, the Portfolio posted substantial gains in a market environment in which the energy sector has provided clear market leadership as the underlying commodity prices have risen substantially. Sustained long-term global economic growth and strong incremental demand coming from China due to the continued urbanization of the country combined with limited excess supply of energy resources have created significant tightness within the worldwide energy system. With this as a back-drop, strong economic growth, a hotter than normal summer in U.S., continued geo-political turmoil and significant storm activity in the Gulf of Mexico, a major U.S. oil and gas production and refining area, have propelled energy prices to historically high levels. . While nearly all areas of the energy sector have posted substantial gains in over the last year, as the entire industry has benefited from higher prices and growing demand in this environment, the Portfolio's emphasis on coal producers, oil and gas exploration and production companies, and drillers provided the greatest boost to absolute and relative return comparisons. As energy commodity prices have moved higher, having significant exposure to those companies with the greatest leverage to price has been beneficial to performance. Coal companies such as Consol Energy, Peabody Energy, and Arch Coal all benefited from rising long-term contract pricing as well as increasing global demand for coal, stemming from greater use of electricity and steel manufacturing. . In contrast, a lack of exposure to refiners such as Valero modestly detracted from return. Refiners continued to benefit from a wide price differential between light and heavy crude oil and rising volumes. We strongly believe that this cannot continue and profit margins at refiners will be compressed going forward. As a result, we continue to remain cautious in this area of the sector. . In this environment, the Portfolio's positioning has not changed dramatically as we continue to favor oil and gas exploration and production companies, oil service providers, drillers, and coal producers. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE GLOBAL RESOURCES PORTFOLIO, THE LIPPER NATURAL RESOURCES FUNDS INDEX AND THE S&P 500(R) INDEX FORTHE PAST TEN YEARS. Lipper Natural Institutional Investor A Resources Funds Index S&P 500(R) Index ------------- ---------- --------------------- ---------------- 09/30/1995 $ 10,000 $ 9,424 $ 10,000 $ 10,000 12/31/1995 10,456 9,850 10,650 10,602 03/31/1996 12,121 11,414 11,518 11,171 06/30/1996 13,857 13,044 12,050 11,673 09/30/1996 15,247 14,337 12,501 12,033 12/31/1996 17,841 16,770 13,725 13,036 03/31/1997 17,272 16,221 13,198 13,386 06/30/1997 18,476 17,344 14,554 15,723 09/30/1997 23,490 22,034 16,995 16,901 12/31/1997 18,886 17,703 15,746 17,386 03/31/1998 18,806 17,635 16,341 19,811 06/30/1998 15,869 14,867 15,277 20,465 09/30/1998 11,576 10,840 12,801 18,429 12/31/1998 9,747 9,120 12,106 22,354 03/31/1999 9,863 9,221 13,217 23,468 06/30/1999 12,008 11,215 15,694 25,122 09/30/1999 13,089 12,221 15,852 23,554 12/31/1999 11,283 10,532 16,163 27,058 03/31/2000 13,061 12,184 18,072 27,679 06/30/2000 16,625 15,498 18,764 26,944 09/30/2000 19,059 17,750 20,108 26,683 12/31/2000 20,847 19,393 20,888 24,595 03/31/2001 20,702 19,236 19,858 21,679 06/30/2001 21,378 19,846 19,270 22,948 09/30/2001 17,746 16,467 16,283 19,580 12/31/2001 20,325 18,849 18,260 21,672 03/31/2002 22,875 21,156 20,086 21,732 06/30/2002 22,711 20,990 18,855 18,820 09/30/2002 19,359 17,824 15,751 15,569 12/31/2002 21,494 19,772 16,942 16,882 03/31/2003 21,165 19,458 16,739 16,351 06/30/2003 25,937 23,824 18,394 18,868 09/30/2003 27,358 25,107 18,371 19,367 12/31/2003 34,546 31,683 21,387 21,725 03/31/2004 37,765 34,605 22,835 22,093 06/30/2004 40,589 37,180 23,993 22,473 09/30/2004 45,599 41,746 26,869 22,053 12/31/2004 51,138 46,770 28,927 24,089 03/31/2005 58,483 53,472 32,914 23,572 06/30/2005 61,221 55,933 34,411 23,894 09/30/2005 81,345 74,258 42,704 24,756 For Period Ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 78.39% 61.37% 33.67% 23.32% Investor A Class (Load Adjusted) 67.65% 57.76% 31.58% 22.20% Investor A Class (NAV) 77.88% 60.91% 33.14% 22.93% Investor B Class (Load Adjusted) 72.21% 59.39% 32.12% 22.03% Investor B Class (NAV) 76.71% 59.85% 32.25% 22.03% Investor C Class (Load Adjusted) 75.64% 59.81% 32.28% 22.05% Investor C Class (NAV) 76.64% 59.81% 32.28% 22.05% effective January 31, 2005, the fund closed to new investors. Existing shareholders on the date of closing may make additional investments in current accounts. in addition, new accounts may be opened by (i) any investor if the tax id number for the new account will be the same as that for a current account and (ii) 401(k), 403 (b), 457 and other similar group retirement plan programs that have current accounts. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 3/2/90; Institutional Shares, 6/1/93; Investor C Shares, 6/1/93; and Investor B Shares, 1/1/99. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the portfolio is actively managed and its composition will vary. 28
Global Resources Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Peabody Energy Corp. 7.8% CONSOL Energy, Inc. 7.4 Massey Energy Co. 4.8 Arch Coal, Inc. 4.5 Penn West Energy Trust 4.4 Newfield Exploration Co. 4.0 Plains Exploration & Production Co. 4.0 Patterson-UTI Energy, Inc. 3.8 Vintage Petroleum, Inc. 3.6 BJ Services Co. 2.8 ---- Total 47.1% ==== Industries (% of long-term investments) Oil & Gas 64.4% Metal & Mining 28.7 Conglomerates 2.2 Energy & Utilities 2.0 Manufacturing 1.5 Transportation 0.9 Finance 0.2 Motor Vehicles 0.1 ----- Total 100.0% ===== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------- Institutional Investor Investor Investor Class A Class B Class C Class --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,390.90 1,388.70 1,383.80 1,383.80 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.23 8.02 12.19 12.19 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------- Institutional Investor Investor Investor Class A Class B Class C Class --------------- --------------- --------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,019.72 1,018.20 1,014.64 1,014.64 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.28 6.80 10.36 10.36 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.04%, 1.34%, 2.04%, and 2.04% for the Institutional, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 29
All-Cap Global Resources Portfolio Inception Date: February 16, 2005 Total Net Assets (9/30/05): $244.4 million Performance Benchmark: Lipper Natural Resources Funds Index S&P 500(R) Index Investment Approach: Seeks to provide long-term growth of capital by investing at least 80% of its total assets in securities of global energy and natural resources companies and companies in associated businesses, as well as utilities. The Portfolio may invest in companies located anywhere in the world and will generally invest in at least three countries and in companies tied economically to a number of countries. In selecting investments, the management team seeks to invest in companies and industries that appear to have the potential for above-average long-term performance. These may include companies that are expected to show above-average growth over the long term as well as those that appear to be trading below their true worth. The Portfolio may invest up to 20% of its assets in other U.S. and foreign investments including stocks and bonds of companies not associated with energy or natural resources. The Portfolio does not limit its investments to companies of any particular size, and may invest in securities of companies with small to large capitalizations. Recent Portfolio Management Activity: . All share classes outperformed the benchmarks since its inception in February 2005. . Since inception, the Portfolio posted substantial gains in a market environment in which the energy sector has provided clear market leadership as the underlying energy commodity prices have risen substantially. Sustained long-term global economic growth and strong incremental demand coming from China due to the continued urbanization of the country combined with limited excess supply of energy resources have created significant tightness within the worldwide energy system. With this as a back-drop, strong economic growth, a hotter than normal summer in U.S., continued geo-political turmoil and significant storm activity in the Gulf of Mexico, a major U.S. oil and gas production and refining area, have propelled energy prices to historically high levels. . Despite the volatility in the energy sector since the inception of the Portfolio, gains in the energy sector have been fairly broad based across industries contributing to the Portfolio's strong absolute returns. The Portfolio's emphasis on coal producers and exploration and production companies has provided the most significant boost to relative returns. Additionally, strong stock selection within the integrated oil and gas industry has also aided absolute return comparisons. In general, the Portfolio's emphasis on companies with market capitalizations between $5 and $15 billion, particularly within the Portfolio's holdings in the integrated oil and gas industry, has aided performance, as these companies' revenues tend to have greater exposure in a rising price environment. Coal companies such as Consol Energy, Peabody Energy, and Arch Coal all benefited from rising long-term contract pricing as well as increasing global demand for coal, stemming from greater use of electricity and steel manufacturing. . In contrast, a lack of exposure to refiners such as Valero modestly detracted from return comparisons. This area of the sector generated the largest returns over the period as refiners continue to benefit from a wide price differential between light and heavy crude oil and rising volumes. We strongly believe that this cannot continue and profit margins at refiners will be compressed going forward. As a result, we continue to remain cautious in this area of the sector. . In this environment, the Portfolio's positioning has not changed dramatically as we continue to favor oil and gas exploration and production companies, oil service providers, drillers, and coal producers. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE ALL-CAP GLOBAL RESOURCES PORTFOLIO, THE LIPPER NATURAL RESOURCES FUNDS INDEX AND THE S&P 500(R) INDEX FROM INCEPTION. [LINE CHART] Lipper Natural Resources Institutional Investor A Funds Index S&P 500(R) Index ------------- ---------- -------------- ---------------- 02/16/2005 $ 10,000 $ 9,425 $ 10,000 $ 10,000 02/28/2005 10,190 9,604 10,449 9,950 03/31/2005 10,060 9,482 10,248 9,774 04/30/2005 9,490 8,944 9,589 9,589 05/31/2005 9,890 9,321 9,942 9,894 06/30/2005 10,670 10,057 10,714 9,908 07/31/2005 11,610 10,933 11,645 10,276 08/31/2005 12,640 11,904 12,477 10,183 09/30/2005 13,560 12,724 13,295 10,265 Average Annual Total Return From Inception ---------- Institutional Class 35.60% Service Class 35.10% Investor A Class (Load Adjusted) 27.24% Investor A Class (NAV) 35.00% Investor B Class (Load Adjusted) 29.90% Investor B Class (NAV) 34.40% Investor C Class (Load Adjusted) 33.60% Investor C Class (NAV) 34.60% The inception date of the Portfolio's Institutional, Service, Investor A, Investor B, and Investor C shares was 02/16/2005. See "Note on Performance Information" on page 42 for further information on how performance data was calculated,including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 30
All-Cap Global Resources Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Peabody Energy Corp. 3.4% EOG Resources, Inc. 3.4 Massey Energy Co. 3.2 CONSOL Energy, Inc. 3.1 Arch Coal, Inc. 2.7 Statoil ASA - ADR 2.5 Cairn Energy PLC 2.4 Canadian Natural Resources 2.3 McDermott International, Inc. 2.3 Talisman Energy, Inc. - ADR 2.2 ----- Total 27.5% ===== Industries (% of long-term investments) Oil & Gas 70.5% Metal & Mining 24.0 Energy & Utilities 4.1 Conglomerate 1.4 ----- Total 100.0% ===== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,347.90 1,343.00 1,342.00 1,338.70 1,338.00 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.12 7.87 7.87 11.96 11.96 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,019.72 1,018.20 1,018.20 1,014.64 1,014.64 Expenses Incurred During Period (4/01/05 - 9/30/05) 5.28 6.80 6.80 10.36 10.36 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.04%, 1.34%, 1.34%, 2.04%, and 2.04% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the period the fund was open during the one-half year period). 31
Health Sciences Portfolio Total Net Assets (9/30/05): $347.3 million Performance Benchmark: Lipper Health/Biotechnology Funds Index S&P 500(R) Index Investment Approach: Seeks to provide long-term growth of capital by investing at least 80% of its total assets in securities of companies in health sciences and related industries. The management team expects to invest in health sciences companies comparable in size to those in the health care sector of the Russell 3000(Reg. TM) Index or similar companies, including non-U.S. companies. In selecting investments, the management team seeks to invest in companies and industries that appear to have the potential for above-average growth over the long term. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Health Sciences Portfolio (the Portfolio) reorganized with the State Street Research Health Sciences Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. For periods prior to January 31, 2005, the performance information shown reflects the performance of the SSR Fund, which had substantially similar investment goals and strategies as the Portfolio. . All share classes outperformed the Lipper Health/Biotechnology Funds Index and the S&P 500(R) Index for the annual period. . U.S. equity markets posted solid gains during the annual period, with the majority of positive returns coming during the fourth quarter of 2004. Despite investors exhibiting caution as concern over oil prices, interest rates and economic growth remained in the spotlight, the S&P 500(R) Index gained 12.25% in the annual period. The health care sector, within the broader S&P 500(R) Index, also delivered positive returns in the period, rising 10.26%. In this environment, all industries within the Portfolio posted absolute gains in the annual period. . The Portfolio's allocation to the biotechnology industry was the most significant contributor to performance in the period. A diverse mix of securities contributed to returns, as both large and small capitalization stocks made a positive impact on both relative and absolute returns. Within the large capitalization universe, holdings in Amgen Inc. and Genentech Inc. led outperformance while allocations to Momenta Pharmaceuticals Inc. and ViroPharma Inc. drove performance in the small capitalization universe. . The Portfolio's positioning in the healthcare providers & services and healthcare equipment & supplies industries benefited performance in the period. Within the health care providers & services industry, managed care providers, including WellPoint Inc., Aetna Inc. and UnitedHealth Group Inc., aided returns while medical equipment maker Aspect Medical Systems Inc. drove returns in the healthcare equipment and supplies industry. . The Portfolio experienced modest absolute gains in the pharmaceuticals industry, however, select securities hurt overall performance. The Portfolio's exposure to Elan Corp. Plc detracted from performance as its shares declined due to the unexpected withdrawal of a major drug it produces. Additionally, positions in two large pharmaceutical companies detracted from absolute gains during the period, though our underweight to these companies helped relative returns. The Portfolio's exposure to select European-based companies, including Roche Holdings Ltd., led gains among non-U.S. pharmaceuticals. . The Portfolio's positioning continues to reflect our long-term view that health care will remain a rapidly growing segment of the U.S. economy. During the latter part of the annual period, we modestly decreased our exposure to the biotechnology industry following a period of strength. Within the biotechnology industry, we continue to find more compelling investment opportunities among small- and mid-capitalization securities. In addition, the weighting to the health care services industry was increased, predominantly by adding to our HMO and Pharmacy Benefit Manager ("PBM") exposure. Within the pharmaceuticals industry, we continue to favor the stronger pipelines of European-based companies and remain cautious on large capitalization pharmaceuticals. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE HEALTH SCIENCES PORTFOLIO, THE LIPPER HEALTH/BIOTECHNOLOGY FUNDS INDEX AND THE S&P 500(R) INDEX FROM INCEPTION. [LINE CHART] Institutional Investor A Lipper Health/Biotechnology Funds Index S&P 500(R) Index ------------- ---------- --------------------------------------- ---------------- 12/21/1999 $ 10,000 $ 9,425 $ 10,000 $ 10,000 12/31/1999 10,580 9,972 10,647 10,253 03/31/2000 11,930 11,244 11,651 10,488 06/30/2000 14,295 13,473 13,747 10,209 09/30/2000 17,001 16,024 15,153 10,111 12/31/2000 16,434 15,479 15,297 9,319 03/31/2001 14,074 13,265 12,311 8,215 06/30/2001 16,242 15,288 13,941 8,695 09/30/2001 14,869 13,984 12,610 7,419 12/31/2001 17,075 16,042 13,697 8,212 03/31/2002 15,972 15,003 12,812 8,234 06/30/2002 13,560 12,730 10,852 7,131 09/30/2002 12,119 11,361 9,974 5,899 12/31/2002 13,192 12,362 10,108 6,397 03/31/2003 13,387 12,546 10,199 6,196 06/30/2003 18,048 16,898 11,892 7,149 09/30/2003 19,750 18,471 12,190 7,338 12/31/2003 22,040 20,600 13,193 8,232 03/31/2004 23,317 21,782 13,880 8,371 06/30/2004 23,507 21,940 14,089 8,515 09/30/2004 22,717 21,184 13,533 8,356 12/31/2004 25,324 23,599 14,741 9,128 03/31/2005 23,888 22,245 13,912 8,932 06/30/2005 26,359 24,542 14,918 9,054 09/30/2005 28,784 26,774 16,082 9,380 For period ending September 30, 2005 Average Annual Total Return From 1 Year 3 Year 5 Year Inception ------ ------ ------ ---------- Institutional Class 26.71% 33.42% 11.11% 20.08% Service Class 26.60% 33.15% 10.85% 19.84% Investor A Class (Load Adjusted) 19.10% 30.47% 9.51% 18.58% Investor A Class (NAV) 26.39% 33.08% 10.81% 19.80% Investor B Class (Load Adjusted) 20.99% 31.44% 9.84% 19.07% Investor B Class (NAV) 25.49% 32.11% 10.11% 19.15% Investor C Class (Load Adjusted) 24.56% 32.15% 10.07% 19.11% Investor C Class (NAV) 25.56% 32.15% 10.07% 19.11% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 12/21/99; Institutional Shares, 10/16/00; Investor B Shares, 10/16/00; Investor C Shares, 10/16/00; and Service Shares, 1/28/05 . See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 32
Health Sciences Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Roche Holdings Ltd. 6.9% WellPoint, Inc. 6.2 UnitedHealth Group, Inc. 5.8 Caremark Rx, Inc. 4.7 Baxter International, Inc. 4.6 Genetech, Inc. 3.7 Wyeth 3.6 Cigna Corp. 3.1 Amgen, Inc. 3.0 Medco Health Solutions, Inc. 2.6 ----- Total 44.2% ===== Industries (% of long-term investments) Pharmaceuticals 41.2% Medical & Medical Services 34.0 Medical Instruments & Supplies 15.4 Insurance 9.4 ----- Total 100.0% ===== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,204.90 1,205.00 1,203.60 1,199.00 1,198.90 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.91 8.57 8.56 12.40 12.40 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,018.65 1,017.13 1,017.13 1,013.58 1,013.58 Expenses Incurred During Period (4/01/05 - 9/30/05) 6.35 7.87 7.87 11.42 11.42 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.25%, 1.55%, 1.55%, 2.25%, and 2.25% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 33
U.S. Opportunities Portfolio Total Net Assets (9/30/05): $96.0 million Performance Benchmark: S&P/Citigroup Extended Market Index U.S. ("S&P/Citigroup EMI U.S.") Investment Approach: Seeks long-term capital appreciation by normally investing at least 80% of its net assets in equity securities of U.S. emerging capitalization companies (defined as those with market capitalizations equal to those within the universe of the S&P/Citigroup EMI U.S. stocks) with relatively attractive earnings growth potential and valuation. The Portfolio management team uses a multi-factor screen to identify stocks that have above-average return potential. The factors and the weight assigned to a factor may change depending on market conditions. The most influential factors over time have been revenue and earnings growth, estimate revisions, profitability and relative value. Recent Portfolio Management Activity: . All share classes outperformed the benchmark for the annual period. . During the annual period, international markets significantly outperformed the U.S. equity market with emerging markets generating the greatest return. International market returns in the period were higher even though foreign currencies weakened relative to the U.S. dollar. Following the pattern of recent years, small capitalization stocks outperformed large capitalization stocks and value stocks outperformed growth stocks. Globally, as measured by the S&P/Citigroup Broad Market Index, the energy, materials and utilities sectors outperformed the broader index during the period while the industrials sector performed in-line with the index. The consumer discretionary, technology and health care sectors were the worst performers in the period. . The annual period was comprised of a cyclical advance from October 2004 through February 2005. This was followed by a two-month consolidation and then a cyclical rally lasting through the end of the annual period. The cyclical advances were primarily driven by better-than-expected GDP growth in countries outside of the U.S. Energy led the world equity markets as commodity prices reached record highs due to both strong economic demand and supply shocks resulting from the active hurricane season in the U.S. . For the annual period, security selection was the primary driver of the Portfolio's outperformance versus its benchmark, particularly in the information technology and consumer discretionary sectors. This was slightly offset by the Portfolio's security selection in the materials, health care and industrials sectors. . Within the information technology sector, allocations to Powerwave Technologies Inc., aQuantive Inc. and MEMC Electronic Materials Inc. contributed the most to performance. While the Portfolio benefited from security selection within the sector, at the end of the annual period we were underweight to the information technology sector due to continued concern about the margin performance for the broader industry and demand following the Christmas season. The cyclical nature of the industry has become more pronounced with the consumer driving an increasing percentage of the business. . In the consumer discretionary sector, solid stock selection and an overweight in hotel and gaming stocks contributed positively to performance in the annual period. Scientific Games Corp. and Gaylord Entertainment Company were positive contributors, as was Genesco Inc., a shoe retailer. . Detracting from performance during the period was lack of exposure to select medical device companies in the healthcare sector. In addition, poor stock selection in the industrials sector hurt performance as the Portfolio's exposure to EGL Inc. and GrafTech International Ltd. detracted from returns as each stock fell sharply in the period. . The Portfolio was cyclically biased throughout much of the annual period. The cyclical bias was reduced in the latter part of the period as high energy prices and the potential for rising interest rates could have a negative impact on global economic growth. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE U.S. OPPORTUNITIES PORTFOLIO AND THE S&P/CITIGROUP EMI U.S. FROM INCEPTION. [LINE CHART] Institutional Investor A S&P/Citigroup EMI U.S. ------------- ---------- ---------------------- 05/01/1998 $ 10,000 $ 9,425 $ 10,000 06/30/1998 10,950 10,320 9,518 09/30/1998 9,390 8,841 7,732 12/31/1998 13,030 12,253 9,126 03/31/1999 15,880 14,920 8,645 06/30/1999 20,950 19,661 9,897 09/30/1999 24,730 23,186 9,234 12/31/1999 41,897 39,221 11,107 03/31/2000 55,260 51,678 12,415 06/30/2000 53,197 49,701 11,970 09/30/2000 50,359 46,992 12,452 12/31/2000 38,649 36,015 11,544 03/31/2001 30,128 28,045 10,447 06/30/2001 36,305 33,752 11,892 09/30/2001 27,054 25,120 9,716 12/31/2001 33,256 30,851 11,524 03/31/2002 30,464 28,220 12,034 06/30/2002 25,578 23,660 11,072 09/30/2002 20,257 18,721 9,084 12/31/2002 20,381 18,809 9,693 03/31/2003 19,854 18,312 9,318 06/30/2003 23,732 21,848 11,230 09/30/2003 25,686 23,631 12,104 12/31/2003 30,122 27,679 13,843 03/31/2004 31,503 28,907 14,689 06/30/2004 31,782 29,141 14,773 09/30/2004 31,549 28,907 14,495 12/31/2004 35,644 32,634 16,519 03/31/2005 34,807 31,830 16,031 06/30/2005 36,451 33,306 16,769 09/30/2005 39,631 36,185 17,723 For period ending September 30, 2005 Average Annual Total Return From 1 Year 3 Year 5 Year Inception ------ ------ -------- --------- Institutional Class 25.61% 25.07% (4.68)% 20.40% Service Class 25.24% 24.67% (4.99)% 20.03% Investor A Class (Load Adjusted) 17.96% 22.14% (6.21)% 18.93% Investor A Class (NAV) 25.18% 24.57% (5.09)% 19.89% Investor B Class (Load Adjusted) 19.77% 22.86% (6.07)% 19.02% Investor B Class (NAV) 24.27% 23.63% (5.80)% 19.02% Investor C Class (Load Adjusted) 23.24% 23.61% (5.82)% 19.00% Investor C Class (NAV) 24.24% 23.61% (5.82)% 19.00% The inception date of the Portfolio's Institutional, Service, Investor A, Investor B, and Investor C Shares was 5/1/98. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 34
U.S. Opportunities Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) American Tower Corp. - Class A 1.4% Powerwave Technologies, Inc. 1.4 T. Rowe Price Group, Inc. 1.4 Phelps Dodge Corp. 1.4 E*TRADE Financial Corp. 1.4 Goodrich Corp. 1.3 CB Richard Ellis Group, Inc. - Class A 1.3 Washington Group International, Inc. 1.3 MDU Resources Group, Inc. 1.3 ENSCO International, Inc. 1.3 ---- Total 13.5% ==== Top Ten Industries (% of long-term investments) Oil & Gas 9.7% Manufacturing 7.2 Telecommunications 6.5 Energy & Utilities 6.5 Metal & Mining 5.7 Medical & Medical Services 5.6 Entertainment & Leisure 5.5 Retail Merchandising 5.1 Real Estate 4.9 Business Services 4.3 ---- Total 61.0% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,138.60 1,137.10 1,136.80 1,132.30 1,132.00 Expenses Incurred During Period (4/01/05 - 9/30/05) 8.58 10.18 10.71 14.70 14.70 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,016.88 1,015.35 1,014.85 1,011.04 1,011.04 Expenses Incurred During Period (4/01/05 - 9/30/05) 8.12 9.65 10.15 13.96 13.96 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.60%, 1.90%, 2.00%, 2.75%, and 2.75% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 35
International Opportunities Portfolio Total Net Assets (9/30/05): $718.2 million Performance Benchmark: S&P/Citigroup Extended Market Index Global Ex-U.S. ("S&P/Citigroup EMI Global Ex-U.S.") Investment Approach: Seeks long-term capital appreciation by normally investing at least 80% of its net assets in equity securities issued by international emerging capitalization companies (defined as those with market capitalizations equal to those within the universe of S&P/Citigroup EMI Global Ex-U.S. stocks). The Portfolio may invest up to 25% of its net assets in stocks of issuers in emerging market countries. The Portfolio management team uses a multi-factor screen to identify stocks that have above average return potential. The factors and the weight assigned to a factor may change depending on market conditions. The most influential factors over time have been revenue and earnings growth, estimate revisions, profitability and relative value. Recent Portfolio Management Activity: . All share classes outperformed the benchmark for the annual period. . During the annual period, international markets significantly outperformed the U.S. equity market with emerging markets generating the greatest return. International market returns in the period were higher even though foreign currencies weakened relative to the U.S. dollar. Following the pattern of recent years, small capitalization stocks outperformed large capitalization stocks and value stocks outperformed growth stocks. Globally, as measured by the S&P/Citigroup Broad Market Index, the energy, materials and utilities sectors outperformed the broader index during the period while the industrials sector performed in-line with the index. The consumer discretionary, technology and health care sectors were the worst performers in the period. . The annual period was comprised of a cyclical advance from October 2004 through February 2005. This was followed by a two-month consolidation and then a cyclical rally lasting through the end of the annual period. The cyclical advances were primarily driven by better-than-expected GDP growth in countries outside of the U.S. Energy led the world equity markets as commodity prices reached record highs due to both strong economic demand and supply shocks resulting from the active hurricane season in the U.S. . For the annual period, the Portfolio's country allocation, sector allocation and individual security selection all benefited relative performance versus its benchmark. Country allocation was aided by the Portfolio's overweight positions in the strong performing markets of Norway, Austria and India. In addition, the Portfolio's underweight positions in Taiwan, Switzerland and the United Kingdom were beneficial to performance as these markets underperformed for the period. Positive country selection was slightly tempered by the Portfolio's overweight allocations to Hong Kong and Thailand, as well as an underweight allocation to Australia. . From a sector perspective, the industrials and consumer discretionary sectors were the best performing sectors versus the benchmark. Asian construction and machinery stocks, including Hanjin Heavy Industries & Construction Co., Hyundai Development Co. and Sumitomo Heavy Industries Ltd., helped drive industrial sector performance. Within the consumer discretionary sector, small European retails, including Lindex AB and Cortefiel S.A., and the Japanese homebuilder, Joint Corp., drove outperformance in the sector. The Portfolio's underweight to the utilities sector and its small allocation to cash resulted in negative relative performance for the period. . As a result of the integration of China and India into world markets, we are maintaining the cyclical bias of the Portfolio with overweight positions in the industrials and materials sectors at the end of the annual period. We believe that a significant replacement cycle exists for machinery which should help dampen overall cyclical exposure for these stocks. The largest overall exposure versus the benchmark at the end of the period is the Portfolio's substantial overweight to Japan as we believe there to be significant opportunity for domestic related Japanese stocks. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERNATIONAL OPPORTUNITIES PORTFOLIO AND THE S&P/CITIGROUP EMI GLOBAL EX-U.S. FROM INCEPTION. [LINE CHART] Institutional Investor A S&P/Citigroup EMI Global Ex-U.S. ------------- ---------- -------------------------------- 09/26/1997 $ 10,000 $ 9,497 $ 10,000 09/30/1997 9,970 9,468 10,028 12/31/1997 9,483 8,996 8,904 03/31/1998 11,384 10,788 10,356 06/30/1998 11,997 11,350 10,158 09/30/1998 9,614 9,092 8,574 12/31/1998 10,538 9,935 9,681 03/31/1999 10,764 10,127 9,846 06/30/1999 12,722 11,963 10,587 09/30/1999 14,601 13,702 11,070 12/31/1999 26,522 24,889 12,137 03/31/2000 33,056 30,958 12,420 06/30/2000 28,509 26,693 12,053 09/30/2000 28,037 26,213 11,372 12/31/2000 24,365 22,749 10,613 03/31/2001 21,041 19,625 9,586 06/30/2001 21,601 20,118 9,847 09/30/2001 18,501 17,205 8,290 12/31/2001 20,182 18,744 9,056 03/31/2002 22,684 21,046 9,630 06/30/2002 22,821 21,140 9,742 09/30/2002 18,961 17,546 8,045 12/31/2002 19,572 18,098 8,433 03/31/2003 18,812 17,370 8,064 06/30/2003 21,825 20,130 9,934 09/30/2003 24,850 22,890 11,272 12/31/2003 29,217 26,892 13,071 03/31/2004 30,974 28,478 14,351 06/30/2004 29,828 27,397 14,316 09/30/2004 30,463 27,949 14,481 12/31/2004 36,235 33,219 16,899 03/31/2005 37,104 34,002 17,441 06/30/2005 37,142 33,990 17,370 09/30/2005 43,280 39,578 19,327 For period ending September 30, 2005 Average Annual Total Return From 1 Year 3 Year 5 Year Inception ------ ------ -------- --------- Institutional Class 41.95% 31.63% 9.05% 20.06% Service Class 41.58% 31.25% 8.68% 19.68% Investor A Class (Load Adjusted) 34.45% 28.89% 7.47% 18.73% Investor A Class (NAV) 41.52% 31.12% 8.58% 19.49% Investor B Class (Load Adjusted) 35.94% 29.42% 7.47% 18.63% Investor B Class (NAV) 40.44% 30.11% 7.76% 18.63% Investor C Class (Load Adjusted) 39.47% 30.12% 7.77% 18.63% Investor C Class (NAV) 40.47% 30.12% 7.77% 18.63% The inception date of the Portfolio's Institutional, Service, Investor A, Investor B, and Investor C Shares was 9/26/97. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 36
International Opportunities Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Bharti Tele-Ventures Ltd. 1.7% Antofagasta PLC 1.4 Prosafe ASA 1.4 Federal Home Loan Bank, Discount Notes 1.4 Exel PLC 1.4 Mitsui Trust Holdings, Inc. 1.4 Rheinmetall AG 1.3 Tullow Oil PLC 1.3 Yamaha Motor Co., Ltd. 1.2 Zinifex Ltd. 1.1 ----- Total 13.6% ===== Top Ten Countries (% of long-term investments) Japan 31.9% United Kingdom 15.7 Germany 9.0 Norway 4.6 Canada 4.0 South Korea 3.9 United States 3.5 Sweden 3.5 Finland 2.9 Hong Kong 2.7 ---- Total 81.7% ==== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,165.40 1,163.50 1,163.30 1,158.90 1,158.70 Expenses Incurred During Period (4/01/05 - 9/30/05) 7.87 9.49 9.49 13.64 13.64 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,017.64 1,016.12 1,016.12 1,012.21 1,012.21 Expenses Incurred During Period (4/01/05 - 9/30/05) 7.36 8.88 8.88 12.79 12.79 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 1.45%, 1.75%, 1.75%, 2.52%, and 2.52% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 37
Asset Allocation Portfolio Total Net Assets (9/30/05): $772.4 million Performance Benchmark: 60% S&P 500(R) Index / 40% Lehman Brothers U.S. Aggregate Index Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management. The Portfolio uses an asset allocation strategy, investing varying percentages of its portfolio in three major categories: stocks, bonds and, to a lesser extent, money market instruments. The fund management team uses a combination of quantitative and fundamental analysis to evaluate the relative attractiveness of various segments in the equity universe, defined by style, capitalization range and geographic location. The fund management team regularly reviews and allocates varying percentages of the fund to equity investment management team members responsible for security selection within these distinctive disciplines, including stocks of large, middle and small capitalization companies, companies that appear to be trading below their true worth, companies with significant growth opportunities, firms in specialized sectors and international companies. Within each discipline, investment decisions are primarily the result of bottom-up security selection that, in turn, drives sector and industry weightings as well as average market capitalization. The fixed income investment management team selects bonds from several sectors including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities, collateralized mortgage obligations, asset-backed securities and corporate bonds. The Portfolio invests primarily in dollar-denominated investment grade bonds, but may invest up to 20% of its fixed income allocation in any combination of non-investment grade bonds (high yield or junk bonds), non-dollar denominated bonds and bonds of emerging market issuers. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Balanced Portfolio reorganized with the State Street Research Asset Allocation Fund (the SSR Fund) and was renamed the BlackRock Asset Allocation Portfolio (the Portfolio). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. For periods prior to January 31, 2005, the performance information shown reflects the performance of the SSR Fund, which had similar investment goals and strategies as the Portfolio. . All share classes of the Portfolio outperformed the benchmark for the annual period. . The equity market, as measured by the S&P 500 Index, returned 12.25% for the annual period, with much of the strength driven by a strong fourth quarter of 2004. During the annual period, mid-capitalization stocks outperformed both small and large capitalization stocks while value stocks outperformed growth stocks. Overall, mid-capitalization value stocks were the best performing stocks. In the fixed income markets, interest rates, as measured by the 10-year Treasury bond, increased by 0.21% ending the period at 4.33%. During the annual period, the Federal Open Market Committee increased the Federal Funds target rate eight times, in 25 basis point increments, to 3.75%. The high yield and emerging market sectors outperformed the general fixed income market, with much of the outperformance occurring during the fourth quarter of 2004. . During the annual period, due to equity market outperformance versus the fixed income market, the Portfolio's overweight to equity aided performance. The Portfolio's outperformance was mainly due to the tactical allocation among the different equity styles. With respect to market capitalization exposure, the Portfolio benefited from its overweight to mid-capitalization stocks. In terms of style, the Portfolio's exposure to value stocks was largely beneficial. During the annual period, the Portfolio reduced its exposure to value stocks. The Portfolio's allocation to energy and international stocks was beneficial to performance. Despite the run-up in energy stocks, the Portfolio maintained its exposure to the energy sector. The portfolio management team continues to believe in the long-term value in energy stocks due to the long-term imbalance between limited supply and growing global demand, and the recent supply distortions caused by Hurricane Katrina. The Portfolio maintained an allocation to international stocks due to their attractive relative valuations and earnings growth prospects. Within the fixed income portion of the Portfolio, the allocation to high yield and emerging markets securities had a positive impact on performance relative to the benchmark. The Portfolio continued to favor low duration, high quality fixed income securities during the annual period. Towards the end of the annual period, the Portfolio reduced its exposure to mortgages. . The Portfolio continued to emphasize equities over fixed income; ending the annual period with a 68% equity/31% fixed income/1% cash target allocation. This represents an overweight position to equities and underweight position to fixed income relative to the normal strategic allocation of 60% equity/40% fixed income/0% cash allocation. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE ASSET ALLOCATION PORTFOLIO AND 60% S&P 500(R) INDEX/40% LEHMAN BROTHERS U.S. AGGREGATE INDEX FOR THE PAST TEN YEARS. 60% S&P 500(R) Index, Institutional Investor A 40% Lehman Brothers U.S. Aggregate ------------- ---------- ---------------------------------- 09/30/1995 $ 10,000 $ 9,429 $ 10,000 12/31/1995 10,209 9,620 10,533 03/31/1996 10,734 10,109 10,793 06/30/1996 11,176 10,519 11,108 09/30/1996 11,605 10,916 11,402 12/31/1996 12,294 11,556 12,110 03/31/1997 12,104 11,371 12,282 06/30/1997 13,283 12,473 13,733 09/30/1997 14,642 13,739 14,541 12/31/1997 14,328 13,437 14,970 03/31/1998 15,727 14,740 16,304 06/30/1998 15,728 14,732 16,783 09/30/1998 14,303 13,388 16,084 12/31/1998 15,551 14,545 18,111 03/31/1999 15,662 14,643 18,616 06/30/1999 16,391 15,315 19,335 09/30/1999 15,839 14,789 18,657 12/31/1999 17,608 16,429 20,285 03/31/2000 18,352 17,114 20,767 06/30/2000 18,227 16,973 20,579 09/30/2000 18,806 17,518 20,720 12/31/2000 19,165 17,840 20,083 03/31/2001 18,455 17,164 18,879 06/30/2001 19,374 18,006 19,595 09/30/2001 17,205 15,978 18,174 12/31/2001 20,043 18,580 19,338 03/31/2002 20,018 18,562 19,387 06/30/2002 18,382 17,033 18,074 09/30/2002 16,411 15,193 16,473 12/31/2002 16,921 15,655 17,439 03/31/2003 16,591 15,338 17,206 06/30/2003 18,694 17,250 18,949 09/30/2003 19,299 17,815 19,247 12/31/2003 21,281 19,632 20,661 03/31/2004 22,141 20,390 21,092 06/30/2004 22,138 20,392 21,101 09/30/2004 21,964 20,198 21,134 12/31/2004 23,728 21,804 22,376 03/31/2005 23,394 21,495 22,049 06/30/2005 23,841 21,871 22,498 09/30/2005 24,834 22,760 22,928 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 13.07% 14.81% 5.72% 9.52% Service Class 12.76% 14.45% 5.39% 9.22% Investor A Class (Load Adjusted) 6.15% 12.19% 4.14% 8.57% Investor A Class (NAV) 12.68% 14.42% 5.37% 9.21% Investor B Class (Load Adjusted) 7.33% 12.72% 4.29% 8.43% Investor B Class (NAV) 11.83% 13.63% 4.63% 8.43% Investor C Class (Load Adjusted) 10.85% 13.60% 4.64% 8.42% Investor C Class (NAV) 11.85% 13.60% 4.64% 8.42% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 12/29/88; Institutional Shares, 6/1/93; Investor C Shares, 6/1/93; Investor B Shares, 1/1/99; and Service Shares, 1/28/05. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 38
Asset Allocation Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) U.S. Treasury Notes 1.3% U.S. Treasury Bonds 1.3 General Electric Co. 1.2 Exxon Mobil Corp. 1.2 MidCap Spdr Trust Series 1 1.1 Microsoft Corp. 1.1 Banco Santader, Certificate of Deposit 1.0 Federal Home Loan Mortgage Corp. 0.9 CONSOL Energy, Inc. 0.8 Bank of America Corp. 0.8 ---- Total 10.7% ==== Credit Quality (% of long-term investments)/1/ AAA 72.6% AA 8.4 A 8.3 BBB 6.8 \BBB 3.9 ----- Total 100.0% ===== Top Ten Industries (% of long-term investments) Oil & Gas 8.9% Banks 6.8 Finance 4.7 Manufacturing 4.4 Telecommunications 4.0 Computer Software & Services 3.9 Pharmaceuticals 3.9 Retail Merchandising 3.5 Insurance 3.3 Energy & Utilities 3.0 ---- Total 46.4% ==== 1 Using the higher of Standard & Poor's ("S&P") or Moody's Investor Service ("Moody's"). - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,061.60 1,059.30 1,058.90 1,054.70 1,054.90 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.44 5.99 6.45 10.35 10.30 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,020.63 1,019.11 1,018.65 1,014.80 1,014.85 Expenses Incurred During Period (4/01/05 - 9/30/05) 4.37 5.89 6.35 10.20 10.15 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.86%, 1.16%, 1.25%, 2.01%, and 2.00% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 39
Index Equity Portfolio Advisor to the Index Master Portfolio Dimensional Fund Advisors Inc. Total Net Assets (9/30/05): $1.3 billion Performance Benchmark: S&P 500(R) Index Investment Approach: Seeks to approximate the investment performance of the S&P 500(R) Index, in terms of its total investment return. In pursuit of this goal, the Portfolio invests all of its assets indirectly, through the The U.S. Large Company Series (the Index Master Portfolio) of The DFA Investment Trust Company, in the stocks of the S&P 500(R) Index. The Index Master Portfolio, under normal market conditions, invests at least 95% of its total assets in substantially all the stocks of the S&P 500(R) Index in approximately the same proportion as they are represented in the Index. Recent Portfolio Management Activity: . All share classes underperformed the benchmark for the annual period. . The rally in U.S. equity markets during late 2004 - spurred by falling oil prices, the presidential election resolution and generally benign economic releases - was modestly offset by market weakness in the first quarter of 2005. In the latter portion of the first half of the annual period, investors became increasingly concerned about the impact that higher commodity prices might have on the overall economy and inflation. . Whereas every sector of the S&P 500(R) Index posted solid returns during the fourth quarter of 2004, during the first quarter of 2005, investors favored defensive areas of the market with only four of the ten sectors in the S&P 500(R) Index generating positive returns. Higher-beta segments of the market, which performed well in the fourth quarter of 2004, declined in the first quarter of 2005. Most notably, the information technology, telecommunication services and financial sectors posted the largest losses. Small capitalization stocks also fell out of favor with investors, losing 5.3% during the quarter compared to a loss of 1.9% for large capitalization stocks. From a valuation standpoint, stronger performance by more defensive areas of the market, such as the energy and utilities sectors, helped value stocks to continue their significant outperformance over their growth counterparts in the large capitalization universe throughout the first half of the annual period. . In the second half of the annual period, the U.S. equity markets modestly rebounded from the negative performance of the first quarter of 2005, with the S&P 500(R) Index returning 1.4% and 3.6% in the second and third quarters of 2005. Inflation fears grew in the period in the face of high energy prices and raw materials costs. Both producers and consumers began to feel the effects of higher prices. In addition, the Federal Reserve continued its tightening cycle, increasing the Federal Funds Target Rate to 3.75%, the eighth 25 basis point incremental rise in the annual period. . In a reversal of recent trends, growth stocks outperformed value stocks in the large capitalization universe during the second half of the annual period. While returns were positive for all capitalization ranges in the period, large capitalization stocks underperformed their small and mid-capitalization counterparts. From a sector perspective, the energy, utilities and information technology sectors posted returns greater than the S&P 500(R) Index throughout the period. In contrast, the materials, consumer discretionary and industrials sectors all underperformed the S&P 500(R) Index in the period. The energy sector posted the highest absolute return in the period, a result of surging energy costs in the aftermath of hurricanes in the Gulf coast. . The Portfolio, through the investment of all of its assets in The U.S. Large Company Series of The DFA Investment Trust Company, holds substantially all of the stocks contained in the S&P 500(R) Index in approximately the same proportion as the Index. For the annual period ended September 30, 2005, the S&P 500(R) Index returned 12.3%. The Institutional, Service, Investor A, Investor B and Investor C class shares of the Portfolio posted total returns of 12.2%, 11.8%, 11.8%, 10.9% and 10.9%, respectively, for the annual period. The return of each class was less than the return of the S&P(R) 500 Index primarily because of Portfolio and class-specific expenses. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INDEX EQUITY PORTFOLIO AND THE S&P 500(R) INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A S&P 500(R) Index ------------- ---------- ---------------- 09/30/1995 $ 10,000 $ 9,700 $ 10,000 12/31/1995 10,596 10,275 10,602 03/31/1996 11,142 10,786 11,171 06/30/1996 11,630 11,249 11,673 09/30/1996 11,982 11,573 12,033 12/31/1996 12,967 12,520 13,036 03/31/1997 13,304 12,830 13,386 06/30/1997 15,608 15,037 15,723 09/30/1997 16,772 16,143 16,901 12/31/1997 17,235 16,560 17,386 03/31/1998 19,631 18,836 19,811 06/30/1998 20,267 19,443 20,465 09/30/1998 18,267 17,495 18,429 12/31/1998 22,157 21,200 22,354 03/31/1999 23,221 22,195 23,468 06/30/1999 24,815 23,683 25,122 09/30/1999 23,265 22,172 23,554 12/31/1999 26,725 25,440 27,058 03/31/2000 27,332 25,974 27,679 06/30/2000 26,539 25,181 26,944 09/30/2000 26,313 24,928 26,683 12/31/2000 24,255 22,951 24,595 03/31/2001 21,374 20,182 21,679 06/30/2001 22,601 21,311 22,948 09/30/2001 19,268 18,150 19,580 12/31/2001 21,314 20,040 21,672 03/31/2002 21,358 20,049 21,732 06/30/2002 18,492 17,333 18,820 09/30/2002 15,288 14,316 15,569 12/31/2002 16,577 15,492 16,882 03/31/2003 16,047 14,976 16,351 06/30/2003 18,506 17,246 18,868 09/30/2003 18,987 17,667 19,367 12/31/2003 21,295 19,778 21,725 03/31/2004 21,645 20,078 22,093 06/30/2004 22,009 20,391 22,473 09/30/2004 21,591 19,983 22,053 12/31/2004 23,571 21,797 24,089 03/31/2005 23,068 21,307 23,572 06/30/2005 23,374 21,570 23,894 09/30/2005 24,219 22,330 24,756 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 12.17% 16.57% (1.65)% 9.25% Service Class 11.78% 16.10% (2.06)% 8.84% Investor A Class (Load Adjusted) 8.39% 14.81% (2.77)% 8.36% Investor A Class (NAV) 11.75% 15.97% (2.18)% 8.70% Investor B Class (Load Adjusted) 6.43% 14.25% (3.29)% 7.93% Investor B Class (NAV) 10.93% 15.14% (2.90)% 7.93% Investor C Class (Load Adjusted) 9.90% 15.11% (2.92)% 7.92% Investor C Class (NAV) 10.90% 15.11% (2.92)% 7.92% The Investor B and C Classes of the BlackRock Index Equity Portfolio closed to investors as of 4:00 p.m., May 28, 2004. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 4/20/92; Investor A Shares, 6/2/92; Service Shares, 7/29/93; Investor B Shares, 2/7/96; and Investor C Shares, 8/14/96. See "Note on Performance Information" on page 42 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 40
Index Equity Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments)/1/ Exxon Mobil Corp. 3.6% General Electric Co. 3.2 Microsoft Corp. 2.1 Citigroup, Inc. 2.1 Johnson & Johnson 1.7 Pfizer, Inc. 1.7 Bank of America Corp. 1.5 American International Group, Inc. 1.4 Altria Group, Inc. 1.4 Intel Corp. 1.4 ----- Total 20.1% ===== Sector Allocation (% of long-term investments)/2/ Financials 19.3% Technology 15.3 Health Care 13.3 Industrials 11.1 Consumer Discretionary 10.7 Energy 10.3 Consumer Staples 9.6 Utilities 3.6 Telecommunications 3.1 Materials 2.9 Other 0.8 ----- Total 100.0% ===== 1 Represents the Top Ten Holdings of The U.S. Large Company Series of The DFA Investment Trust Company. 2 Represents the Sector Allocation of The U.S. Large Company Series of The DFA Investment Trust Company. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,049.90 1,047.90 1,048.00 1,044.20 1,043.90 Expenses Incurred During Period (4/01/05 - 9/30/05) 0.92 2.72 2.72 6.56 6.56 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,024.09 1,022.31 1,022.31 1,018.50 1,018.50 Expenses Incurred During Period (4/01/05 - 9/30/05) 0.91 2.69 2.69 6.50 6.50 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.18%, 0.53%, 0.53%, 1.28%, and 1.28% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period).The Example reflects the expenses for both the Index Equity Portfolio and The U.S. Large Company Series of The DFA Investment Trust Company. 41
BlackRock Funds NOTE ON PERFORMANCE INFORMATION The performance information on the previous pages includes information for each class of each Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. Performance information for each class introduced after the commencement of operations of a Portfolio is therefore based on the performance history of a predecessor class or predecessor classes. If a class of shares in a Portfolio (the "Subsequent Class") has more than one predecessor class, the performance data predating the introduction of the Subsequent Class is based initially on the performance of the Portfolio's first operational predecessor class (the "Initial Class"); thereafter, the performance of the Subsequent Class is based upon the performance of any other predecessor class or classes which were introduced after the Initial Class and which had total operating expenses more similar to those of the Subsequent Class. In the case of Investor A, Investor B, Investor C and Service Shares, the performance information for periods prior to their introduction dates has not been restated to reflect the shareholder servicing and/or distribution fees and certain other expenses borne by these share classes which, if reflected, would reduce the performance quoted. Accordingly, the performance information may be used in assessing each Portfolio's performance history but does not reflect how the distinct classes would have performed on a relative basis prior to the introduction of these classes, which would require an adjustment to the ongoing expenses. Additionally, the performance information above does not reflect accounting adjustments required under accounting principles generally accepted in the United States of America and as a result there may be variances between what is reported within this section and that reported in the total return calculation in the Financial Highlights. Performance for the Legacy, Mid-Cap Value Equity, Aurora, Small/Mid-Cap Growth, Global Resources, Health Sciences and Asset Allocation Portfolios for the periods prior to January 31, 2005 is based on performance of certain former State Street Research mutual funds that reorganized with the Portfolios on that date. Performance information is restated to reflect the current maximum front-end sales charge (in the case of Investor A Shares) or the maximum contingent deferred sales charge (in the case of Investor B and Investor C Shares), and assumes the reinvestment of dividends and distributions. The maximum front-end sales charges for Investor A Shares are as follows: Investment Trust, Large Cap Value Equity, Large Cap Growth Equity, Dividend AchieversTM, Legacy, Mid-Cap Value Equity, Mid-Cap Growth Equity, Aurora, Small/Mid Cap Growth, Small Cap Value Equity, Small Cap Core Equity, Small Cap Growth Equity, Global Science &Technology Opportunities, Global Resources, All-Cap Global Resources, Health Sciences, U.S.Opportunities, and Asset Allocation Portfolios - 5.75%; International Opportunities Portfolio - 5.00%; Index Equity Portfolio - 3.00%. The maximum contingent deferred sales charge for Investor B Shares and Investor C Shares of all of the Portfolios is 4.50% and 1.00%, respectively. The performance information also reflects fee waivers and reimbursements that subsidize and reduce the total operating expenses of each Portfolio. The Portfolios' returns would have been lower if there were no such waivers and reimbursements. BlackRock Advisors, Inc. is under no obligation to waive or continue waiving its fees after February 1, 2006 or February 1, 2007 as described in the prospectus of the Portfolios. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The performance shown in the line graphs is that of Institutional Shares and Investor A Shares of the Portfolios. The actual performance of Investor B, Investor C and Service Shares is lower than the performance of Institutional Shares because Investor B, Investor C and Service Shares have higher expenses than Institutional Shares. Excluding the effects of sales charges, the actual performance of Investor B and Investor C Shares is lower than the performance of Investor A Shares because Investor B and Investor C Shares have higher expenses than Investor A Shares. Purchasers of Investor A Shares generally pay a front-end sales charge, while purchasers of Investor B and Investor C Shares may pay a contingent deferred sales charge (depending on how long they hold their shares) when they sell their shares. Important Tax Information for Shareholders of the BlackRock Equity Portfolios During the fiscal year ended September 30, 2005, the following Portfolios of the BlackRock Funds declared the following dividends from net realized capital gains: Short-term Long-term capital gain capital gain per share per share -------------- ------------- Dividends Achievers(TM) Portfolio ........ $ 0.0029 $ 0.0075 Mid-Cap Value Equity Portfolio ........... 2.3684 0.8364 Aurora Portfolio ......................... 0.5875 3.2550 Small Cap Value Equity Portfolio ......... 2.0218 0.9653 Small Cap Core Equity Portfolio .......... -- 0.1096 Health Sciences Portfolio ................ -- 0.0095 Because each Portfolio's fiscal year is not the calendar year, another notification will be sent with respect to calendar year 2005. The second notification, which reflects the amounts to be used by calendar year taxpayers on their U.S. federal income tax returns, has been made in conjunction with Form 1099-DIV and will be mailed in January 2006. For Corporate Shareholders Only: The percentage of dividends from net investment income declared in the fiscal year ended September 30, 2005 which qualify for the corporate dividends received deduction is as follows: BlackRock Investment Trust Portfolio ............... 100.0% BlackRock Large Cap Value Equity Portfolio ......... 100.0 BlackRock Dividends AchieversTM Portfolio .......... 100.0 BlackRock Mid-Cap Value Equity Portfolio ........... 10.2 BlackRock Small Cap Value Equity Portfolio ......... 6.0 BlackRock Asset Allocation Portfolio ............... 61.7 42
BlackRock Funds Important Tax Information for Shareholders of the International Opportunities Portfolio. BlackRock International Opportunities Portfolio paid foreign taxes of $1,150,579 and recognized foreign source income of $11,053,815. Pursuant to Section 853 of the Internal Revenue Code, the Portfolio designates such amounts as having been paid in connection with dividends distributed from investment taxable income during the fiscal year ended September 30, 2005. Qualified Dividend Income: For taxable non-corporate shareholders, the net investment income and net short-term capital gains representing qualified dividend income subject to the 15% tax rate category based on the Portfolios' tax year-ends as of September 30, 2005 are estimated as follows: Qualified Dividends --------- BlackRock Investment Trust Portfolio .................... 100.0% BlackRock Large Cap Value Equity Portfolio .............. 100.0 BlackRock Dividends Achievers(TM) Portfolio ............. 100.0 BlackRock Mid-Cap Value Equity Portfolio ................ 8.8 BlackRock Small Cap Value Equity Portfolio .............. 5.0 BlackRock International Opportunities Portfolio ......... 100.0 BlackRock Asset Allocation Portfolio .................... 72.5 The final Qualified Dividend Income to be used by calendar year taxpayers on their U.S. federal income tax returns, will be reflected on the Form 1099-DIV and will be mailed in January 2006. - ------------------------------------------------------------------------------- 43
BlackRock Funds STATEMENT OF NET ASSETS INVESTMENT TRUST PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 99.6% Aerospace -- 1.7% General Dynamics Corp. 116,900 $ 13,975,395 Raytheon Co. 227,700 8,657,154 ---------------- 22,632,549 ---------------- Banks -- 8.9% AmSouth Bancorp.(b) 292,300 7,383,498 Bank of America Corp.(b) 703,900 29,634,190 Citigroup, Inc.(b) 543,900 24,758,328 Comerica, Inc. 172,500 10,160,250 Key Corp.(b) 263,000 8,481,750 National City Corp.(b) 365,200 12,212,288 U.S. Bancorp. 405,300 11,380,824 Wachovia Corp.(b) 331,200 15,761,808 ---------------- 119,772,936 ---------------- Beverages & Bottling -- 2.2% Constellation Brands, Inc.(c) 262,000 6,812,000 Pepsi Bottling Group, Inc. 279,200 7,971,160 PepsiCo, Inc. 261,000 14,801,310 ---------------- 29,584,470 ---------------- Chemicals -- 1.6% The Dow Chemical Co. 209,500 8,729,865 The Lubrizol Corp. 193,000 8,362,690 Lyondell Chemical Co. 167,500 4,793,850 ---------------- 21,886,405 ---------------- Computer & Office Equipment -- 4.3% Cisco Systems, Inc.(c) 1,058,100 18,971,733 Hewlett-Packard Co. 498,200 14,547,440 International Business Machines Corp. 308,700 24,763,914 ---------------- 58,283,087 ---------------- Computer Software & Services -- 6.3% Checkfree Corp.(b)(c) 201,600 7,624,512 Computer Sciences Corp.(b)(c) 215,300 10,185,843 eBay, Inc.(c) 156,000 6,427,200 Emulex Corp.(c) 337,300 6,816,833 Microsoft Corp.(b) 1,647,500 42,390,175 Oracle Corp.(c) 869,800 10,776,822 ---------------- 84,221,385 ---------------- Construction -- 0.8% Pulte Homes, Inc. 251,200 10,781,504 ---------------- Electronics -- 3.4% Intel Corp.(b) 1,364,600 33,637,390 L-3 Communications Holdings, Inc.(b) 159,500 12,611,665 ---------------- 46,249,055 ---------------- Energy & Utilities -- 3.7% FirstEnergy Corp. 188,800 9,840,256 PG&E Corp. 382,400 15,009,200 PPL Corp. 517,400 16,727,542 Sempra Energy 180,500 8,494,330 ---------------- 50,071,328 ---------------- Entertainment & Leisure -- 2.8% Comcast Corp. -- Class A(c) 312,600 8,996,628 Time Warner, Inc. 785,900 14,232,649 The Walt Disney Co. 626,200 15,110,206 ---------------- 38,339,483 ---------------- Finance -- 4.5% American Express Co. 300,300 17,249,232 The Bear Stearns Cos., Inc.(b) 90,800 9,965,300 Capital One Financial Corp. 8,000 636,160 CIT Group, Inc. 232,100 10,486,278 Countrywide Financial Corp.(b) 188,498 6,216,664 Franklin Resources, Inc. 98,600 8,278,456 Washington Mutual, Inc.(b) 182,100 7,141,962 ---------------- 59,974,052 ---------------- Food & Agriculture -- 1.0% ConAgra Foods, Inc. 285,500 7,066,125 Tyson Foods, Inc. - Class A(b) 362,400 6,541,320 ---------------- 13,607,445 ---------------- Insurance -- 5.5% Aetna, Inc. 106,800 9,199,752 The Allstate Corp. 147,700 8,166,333 American International Group, Inc. 252,600 15,651,096 CHUBB Corp.(b) 104,300 9,340,065 Genworth Financial, Inc.(b) 242,400 7,814,976 Hartford Financial Services Group 99,800 7,701,566 Prudential Financial, Inc.(b) 130,400 8,809,824 W.R. Berkley Corp. 169,450 6,689,886 ---------------- 73,373,498 ---------------- Manufacturing -- 9.3% Acco Brands Corp.(c) 10 282 Black & Decker Corp. 80,300 6,591,827 Eaton Corp. 146,000 9,278,300 Energizer Holdings, Inc.(b)(c) 124,900 7,081,830 Fortune Brands, Inc.(b) 88,300 7,181,439 General Electric Co.(d) 1,403,000 47,239,010 Ingersoll-Rand Co. - Class A 203,000 7,760,690 ITT Industries, Inc. 90,800 10,314,880 Newell Rubbermaid, Inc. 277,800 6,292,170 Nike, Inc. 79,400 6,485,392 Nucor Corp. 12,400 731,476 The Stanley Works 210,900 9,844,812 Textron, Inc. 86,700 6,218,124 ---------------- 125,020,232 ---------------- Medical & Medical Services -- 4.0% Amgen, Inc.(c) 259,300 20,658,431 Coventry Health Care, Inc.(c) 148,571 12,780,077 HCA, Inc.(b) 174,500 8,362,040 McKesson Corp.(b) 256,400 12,166,180 ---------------- 53,966,728 ---------------- Medical Instruments & Supplies -- 2.7% Bausch & Lomb, Inc. 120,700 9,738,076 Becton, Dickinson & Co. 152,600 8,000,818 Johnson & Johnson(b) 294,600 18,642,288 ---------------- 36,381,182 ---------------- Metal & Mining -- 0.6% CONSOL Energy, Inc. 110,700 8,443,089 ---------------- Motor Vehicles -- 1.4% Ford Motor Co.(b) 459,100 4,526,726 Harley-Davidson, Inc.(b) 167,600 8,118,544 PACCAR, Inc. 85,700 5,818,173 ---------------- 18,463,443 ---------------- See accompanying notes to financial statements. 44
BlackRock Funds STATEMENT OF NET ASSETS INVESTMENT TRUST PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Oil & Gas -- 10.1% ConocoPhillips 388,700 $ 27,174,017 Devon Energy Corp. 209,900 14,407,536 Exxon Mobil Corp.(b) 602,100 38,257,434 Kerr-McGee Corp. 140,400 13,634,244 Nabors Industries Ltd.(c) 103,700 7,448,771 Newfield Exploration Co.(c) 238,800 11,725,080 Patterson-UTI Energy, Inc. 417,100 15,048,968 Valero Energy Corp. 77,100 8,716,926 ---------------- 136,412,976 ---------------- Paper & Forest Products -- 0.6% Georgia-Pacific Corp. 256,400 8,732,984 ---------------- Pharmaceuticals -- 5.5% Hospira, Inc.(c) 141,200 5,784,964 Merck & Co., Inc. 556,300 15,136,923 Pfizer, Inc. 1,278,900 31,934,133 Wyeth 451,800 20,904,786 ---------------- 73,760,806 ---------------- Publishing & Printing -- 0.9% The McGraw-Hill Companies, Inc. 250,100 12,014,804 ---------------- Railroad & Shipping -- 1.0% Burlington Northern Santa Fe Corp. 224,200 13,407,160 ---------------- Real Estate -- 1.5% Cendant Corp. 574,400 11,855,616 Centex Corp. 6,700 432,686 Simon Property Group, Inc. 99,500 7,374,940 ---------------- 19,663,242 ---------------- Restaurants -- 0.9% McDonald's Corp.(b) 347,600 11,641,124 ---------------- Retail Merchandising -- 4.9% AutoNation, Inc.(c) 340,800 6,805,776 Barnes & Noble, Inc. 160,928 6,066,986 Federated Department Stores, Inc. 114,900 7,683,363 The Home Depot, Inc. 386,300 14,733,482 The Kroger Co.(c) 326,900 6,730,871 Nordstrom, Inc. 264,900 9,091,368 Target Corp.(b) 184,800 9,596,664 Wal-Mart Stores, Inc.(b) 108,400 4,750,088 ---------------- 65,458,598 ---------------- Security Brokers & Dealers -- 1.2% E*TRADE Financial Corp.(c) 36,700 645,920 Lehman Brothers Holdings, Inc.(b) 133,800 15,585,024 ---------------- 16,230,944 ---------------- Semiconductors & Related Devices -- 0.5% Freescale Semiconductor, Inc. - Class A(b)(c) 138,900 3,251,649 Freescale Semiconductor, Inc. - Class B(b)(c) 138,900 3,275,262 ---------------- 6,526,911 ---------------- Soaps & Cosmetics -- 1.1% The Procter & Gamble Co.(b) 247,300 14,704,458 ---------------- Telecommunications -- 4.3% Motorola, Inc. 753,600 16,647,024 SBC Communications, Inc.(b) 696,800 16,702,296 Sprint Nextel Corp. 815,936 19,402,958 Verizon Communications, Inc. 155,900 5,096,371 ---------------- 57,848,649 ---------------- Tobacco -- 1.6% Altria Group, Inc. 286,900 21,147,399 ---------------- Transportation -- 0.8% CNF, Inc. 187,700 9,854,250 Ryder Systems, Inc. 9,200 314,824 ---------------- 10,169,074 ---------------- TOTAL COMMON STOCKS (Cost $1,069,980,495) 1,338,771,000 ---------------- Par/Shares Maturity (000) ---------------- ---------------- SHORT TERM INVESTMENTS -- 12.1% Banco Santader, Certificate of Deposit 3.70%(e) 05/10/06 $ 14,026 14,026,480 Morgan Stanley, Floating Rate Notes 4.02%(e)(f) 11/07/05 33,292 33,292,270 4.01%(e)(f) 11/14/05 9,371 9,370,804 4.02%(e)(f) 01/05/06 8,858 8,858,290 Institutional Money Market Trust(e)(g) 97,006 97,006,460 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $162,554,304) 162,554,304 ---------------- TOTAL INVESTMENTS IN SECURITIES -- 111.7% (Cost $1,232,534,799(a)) 1,501,325,304 LIABILITIES IN EXCESS OF OTHER ASSETS -- (11.7)% (156,909,494) ---------------- NET ASSETS -- 100.0% (Applicable to 39,159,907 Institutional shares, 116,987 Service shares, 41,837,322 Investor A shares, 19,312,912 Investor B shares and 1,895,366 Investor C shares outstanding) $ 1,344,415,810 ================ See accompanying notes to financial statements. 45
BlackRock Funds STATEMENT OF NET ASSETS INVESTMENT TRUST PORTFOLIO (Concluded) AS OF SEPTEMBER 30, 2005 Value ------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($523,607,060/39,159,907) $ 13.37 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($1,565,888/116,987) $ 13.39 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($552,118,024/41,837,322) $ 13.20 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($13.20/0.9425) $ 14.01 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($243,231,936/19,312,912) $ 12.59 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($23,892,902/1,895,366) $ 12.61 ======= - ---------- (a) Cost for Federal income tax purposes is $1,235,135,871. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 288,803,128 Gross unrealized depreciation (22,613,695) ---------------- $ 266,189,433 ================ (b) Total or partial securities on loan. (c) Non-income producing security. (d) Securities, or a portion thereof, pledged as collateral with a value of $1,515,150 on 20 long S&P 500 futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $6,171,500, with an unrealized gain of $50,425 (including commissions of $63). (e) Securities purchased with the cash proceeds from securities loaned. (f) Rates shown are the rates as of September 30, 2005. (g) Represents an investment in an affiliate. See accompanying notes to financial statements. 46
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES INVESTMENT TRUST PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $1,232,534,799)............ $ 1,501,325,304 Dividends receivable ................................. 1,899,740 Interest receivable .................................. 22,368 Investments sold receivable .......................... 22,387,937 Capital shares sold receivable ....................... 248,283 Prepaid expenses ..................................... 54,546 Futures margin receivable ............................ 12,726 ---------------- TOTAL ASSETS ...................................... 1,525,950,904 ---------------- LIABILITIES Cash Overdraft ....................................... 2,750,289 Payable upon return of securities loaned ............. 162,554,304 Investments purchased payable ........................ 13,604,393 Capital shares redeemed payable ...................... 1,514,189 Advisory fees payable ................................ 196,029 Administrative fees payable .......................... 153,534 Transfer agent fees payable .......................... 217,268 Other accrued expenses payable ....................... 545,082 Futures sold payable ................................. 6 ---------------- TOTAL LIABILITIES ................................. 181,535,094 ---------------- NET ASSETS (Applicable to 39,159,907 Institutional shares,116,987 Service shares, 41,837,322 Investor A shares, 19,312,912 Investor B shares and 1,895,366 Investor C shares outstanding) ............. $ 1,344,415,810 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($523,607,060/39,159,907)..... $ 13.37 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($1,565,888/116,987)................ $ 13.39 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($552,118,024/41,837,322)........ $ 13.20 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($13.20/0.9425)....................................... $ 14.01 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($243,231,936/19,312,912)........ $ 12.59 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($23,892,902/1,895,366).......... $ 12.61 ======= See accompanying notes to financial statements. 47
BlackRock Funds STATEMENT OF NET ASSETS LARGE CAP VALUE EQUITY PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 97.4% Advertising -- 0.4% R.H. Donnelley Corp.(b) 25,100 $ 1,587,826 ---------------- Aerospace -- 1.6% General Dynamics Corp. 19,800 2,367,090 Lockheed Martin Corp. 26,700 1,629,768 Raytheon Co. 48,600 1,847,772 ---------------- 5,844,630 ---------------- Banks -- 16.5% AmSouth Bancorp. 98,700 2,493,162 Bank of America Corp.(c) 338,300 14,242,430 Citigroup, Inc.(c)(d) 287,000 13,064,240 Comerica, Inc. 66,100 3,893,290 J.P. Morgan Chase & Co., Inc. 163,900 5,561,127 Key Corp.(c) 104,000 3,354,000 National City Corp.(c) 130,500 4,363,920 U.S. Bancorp. 174,800 4,908,384 Wachovia Corp.(c) 162,100 7,714,339 ---------------- 59,594,892 ---------------- Beverages & Bottling -- 0.9% Constellation Brands, Inc.(b) 60,200 1,565,200 Pepsi Bottling Group, Inc. 54,100 1,544,555 ---------------- 3,109,755 ---------------- Broadcasting -- 0.3% Liberty Media Corp. - Class A(b) 134,800 1,085,140 ---------------- Chemicals -- 1.0% Eastman Chemical Co. 37,900 1,780,163 The Lubrizol Corp. 41,600 1,802,528 ---------------- 3,582,691 ---------------- Computer & Office Equipment -- 2.1% Hewlett-Packard Co. 84,000 2,452,800 International Business Machines Corp. 44,800 3,593,856 Western Digital Corp.(b) 119,900 1,550,307 ---------------- 7,596,963 ---------------- Computer Software & Services -- 0.6% Microsoft Corp. 83,400 2,145,882 ---------------- Electronics -- 0.5% L-3 Communications Holdings, Inc.(c) 24,100 1,905,587 ---------------- Energy & Utilities - 6.5% CenterPoint Energy, Inc. 217,400 3,232,738 CMS Energy Corp.(b) 195,800 3,220,910 FirstEnergy Corp. 49,000 2,553,880 PG&E Corp. 97,300 3,819,025 PPL Corp. 185,500 5,997,215 Sempra Energy 55,800 2,625,948 TXU Corp. 18,300 2,065,704 ---------------- 23,515,420 ---------------- Entertainment & Leisure -- 3.9% Comcast Corp.(b) 80,400 2,362,152 GTECH Holdings Corp. 58,800 1,885,128 Time Warner, Inc. 245,600 4,447,816 The Walt Disney Co. 230,000 5,549,900 ---------------- 14,244,996 ---------------- Finance -- 5.0% Affiliated Managers Group, Inc.(b) 31,400 2,273,988 The Bear Stearns Cos., 27,600 3,029,100 Capital One Financial Corp.(c) 28,000 2,226,560 CIT Group, Inc. 54,100 2,444,238 Countrywide Financial Corp.(c) 56,200 1,853,476 Fannie Mae 57,500 2,577,150 Washington Mutual, Inc.(c) 90,400 3,545,488 ---------------- 17,950,000 ---------------- Food & Agriculture -- 1.3% Dean Foods Co.(b) 68,900 2,677,454 Tyson Foods, Inc. - Class A(c) 102,000 1,841,100 ---------------- 4,518,554 ---------------- Insurance -- 7.0% ACE Ltd. 38,300 1,802,781 The Allstate Corp. 58,000 3,206,820 American International Group, Inc. 74,000 4,585,040 CHUBB Corp.(c) 37,500 3,358,125 Genworth Financial, Inc.(c) 63,300 2,040,792 Hartford Financial Services Group 52,600 4,059,142 MetLife, Inc. 45,500 2,267,265 Nationwide Financial Services, Inc. 43,600 1,746,180 W.R. Berkley Corp. 52,550 2,074,674 ---------------- 25,140,819 ---------------- Machinery & Heavy Equipment -- 0.4% Caterpillar, Inc.(c) 25,400 1,492,250 ---------------- Manufacturing -- 4.9% Black & Decker Corp. 11,800 968,662 Cummins, Inc. 25,100 2,208,549 Energizer Holdings, Inc 25,900 1,468,530 Fortune Brands, Inc.(b)(c) 16,400 1,333,812 General Electric Co. 194,000 6,531,980 Nucor Corp.(c) 31,400 1,852,286 The Sherwin-Williams Co.(c) 42,100 1,855,347 The Stanley Works 34,100 1,591,788 ---------------- 17,810,954 ---------------- Medical & Medical Services -- 1.5% Coventry Health Care, Inc.(b) 36,750 3,161,235 HCA, Inc.(c) 44,700 2,142,024 ---------------- 5,303,259 ---------------- Metal & Mining -- 1.2% CONSOL Energy, Inc. 25,800 1,967,766 Phelps Dodge Corp.(c) 18,800 2,442,684 ---------------- 4,410,450 ---------------- Motor Vehicles -- 0.5% PACCAR, Inc. 24,500 1,663,305 ---------------- Oil & Gas -- 15.5% Amerada Hess Corp.(c) 36,000 4,950,000 ChevronTexaco Corp.(c) 95,200 6,162,296 ConocoPhillips 148,200 10,360,662 Devon Energy Corp. 52,900 3,631,056 Exxon Mobil Corp. 291,000 18,490,140 Kerr-McGee Corp. 40,100 3,894,111 Nabors Industries Ltd.(b) 26,000 1,867,580 Oneok, Inc. 84,000 2,857,680 See accompanying notes to financial statements. 48
Blackrock funds STATEMENT OF NET ASSETS LARGE CAP VALUE EQUITY PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Oil & Gas (Continued) Valero Energy Corp. 32,900 $ 3,719,674 ---------------- 55,933,199 ---------------- Paper & Forest Products -- 1.1% Georgia-Pacific Corp. 73,400 2,500,004 Louisiana-Pacific Corp. 53,300 1,475,877 ---------------- 3,975,881 ---------------- Pharmaceuticals -- 5.2% Merck & Co., Inc. 128,800 3,504,648 Pfizer, Inc. 456,900 11,408,793 Wyeth 85,500 3,956,085 ---------------- 18,869,526 ---------------- Publishing & Printing -- 0.9% The McGraw-Hill Companies, Inc. 65,400 3,141,816 ---------------- Railroad & Shipping -- 1.3% Burlington Northern Santa Fe Corp. 77,400 4,628,520 ---------------- Real Estate -- 4.0% Cendant Corp. 99,300 2,049,552 Centex Corp. 31,900 2,060,102 General Growth Properties, Inc.(c) 79,400 3,567,442 HRPT Properties Trust 216,900 2,691,729 Simon Property Group, Inc. 57,000 4,224,840 ---------------- 14,593,665 ---------------- Restaurants -- 0.9% McDonald's Corp.(c) 94,200 3,154,758 ---------------- Retail Merchandising -- 2.3% AutoNation, Inc.(b) 98,800 1,973,036 Barnes & Noble, Inc. 39,800 1,500,460 Federated Department Stores, Inc. 39,800 2,661,426 The Kroger Co.(b) 102,200 2,104,298 ---------------- 8,239,220 ---------------- Security Brokers & Dealers -- 2.2% E*TRADE Financial Corp.(b) 177,500 3,124,000 Lehman Brothers Holdings, Inc.(c) 41,700 4,857,216 ---------------- 7,981,216 ---------------- Semiconductors & Related Devices -- 0.3% Freescale Semiconductor, Inc. - Class A(b) 26,350 616,854 Freescale Semiconductor, Inc. - Class B(b)(c) 26,350 621,333 ---------------- 1,238,187 ---------------- Telecommunications -- 6.0% ALLTEL Corp.(c) 37,000 2,409,070 Motorola, Inc. 92,000 2,032,280 SBC Communications, Inc.(c) 312,900 7,500,213 Sprint Nextel Corp. 214,914 5,110,655 Verizon Communications, Inc. 136,500 4,462,185 ---------------- 21,514,403 ---------------- Tobacco -- 1.6% Altria Group, Inc.(c) 79,800 5,882,058 ---------------- TOTAL COMMON STOCKS (Cost $272,234,909) 351,655,822 ---------------- Par/Shares Maturity (000) ---------------- ---------------- SHORT TERM INVESTMENTS -- 24.3% Banco Santader, Certificate of Deposit 3.70%(e) 05/10/06 $ 9,548 9,547,507 Federal Home Loan Bank, Discount Notes 3.18%(f) 10/03/05 600 599,894 Morgan Stanley, Floating Rate Notes 4.02%(e)(g) 11/07/05 15,839 15,839,367 4.01%(e)(g) 11/14/05 2,115 2,115,453 4.02%(e)(g) 01/05/06 5,238 5,238,181 Galileo Money Market Fund 9,690 9,690,482 Institutional Money Market Trust(e)(h) 44,756 44,756,386 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $87,787,270) 87,787,270 ---------------- See accompanying notes to financial statements. 49
BlackRock Funds STATEMENT OF NET ASSETS LARGE CAP VALUE EQUITY PORTFOLIO (Concluded) As of September 30, 2005 Value ---------------- TOTAL INVESTMENTS IN SECURITIES -- 121.7% (Cost $360,022,179(a)) $ 439,443,092 LIABILITIES IN EXCESS OF OTHER ASSETS -- (21.7)% (78,300,420) ---------------- NET ASSETS -- 100.0% (Applicable to 8,805,230 Institutional shares, 1,677,290 Service shares, 10,576,576 Investor A shares, 3,018,140 Investor B shares and 735,580 Investor C shares outstanding) $ 361,142,672 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($128,501,167/8,805,230) $ 14.59 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($24,542,202/1,677,290) $ 14.63 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($154,336,701/10,576,576) $ 14.59 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($14.59/0.9425) $ 15.48 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($43,219,288/3,018,140) $ 14.32 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($10,543,314/735,580) $ 14.33 ======= - ---------- (a) Cost for Federal income tax purposes is $362,259,969. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 83,278,253 Gross unrealized depreciation (6,095,130) ---------------- $ 77,183,123 ================ (b) Non-income producing security. (c) Total or partial securities on loan. (d) Securities, or a portion thereof, pledged as collateral with a value of $3,148,650 on 26 long S&P 500 futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $8,022,950, with an unrealized gain of $17,150 (including commissions of $82). (e) Securities purchased with the cash proceeds from securities loaned. (f) The rate shown is the effective yield on the discount notes at the time of purchase. (g) Rates shown are the rates as of September 30, 2005. (h) Represents an investment in an affiliate. See accompanying notes to financial statements. 50
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES LARGE CAP VALUE EQUITY PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $360,022,179).............. $ 439,443,092 Dividends receivable ................................. 561,360 Interest receivable .................................. 16,229 Investments sold receivable .......................... 8,578,746 Capital shares sold receivable ....................... 179,081 Prepaid expenses ..................................... 27,390 Other assets ......................................... 2,035 Futures margin receivable ............................ 16,464 ---------------- TOTAL ASSETS ...................................... 448,824,397 ---------------- LIABILITIES Payable upon return of securities loaned ............. 77,496,894 Investments purchased payable ........................ 9,260,679 Capital shares redeemed payable ...................... 494,062 Advisory fees payable ................................ 139,308 Administrative fees payable .......................... 54,622 Transfer agent fees payable .......................... 45,522 Other accrued expenses payable ....................... 190,635 Futures sold payable ................................. 3 ---------------- TOTAL LIABILITIES ................................. 87,681,725 ---------------- NET ASSETS (Applicable to 8,805,230 Institutional shares,1,677,290 Service shares, 10,576,576 Investor A shares, 3,018,140 Investor B shares and 735,580 Investor C shares outstanding) ............... $ 361,142,672 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($128,501,167/8,805,230)...... $ 14.59 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($24,542,202/1,677,290)............. $ 14.63 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($154,336,701/10,576,576)........ $ 14.59 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($14.59/0.9425) ...................................... $ 15.48 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($43,219,288/3,018,140).......... $ 14.32 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($10,543,314/735,580)............ $ 14.33 ================ See accompanying notes to financial statements. 51
BlackRock Funds STATEMENT OF NET ASSETS LARGE CAP GROWTH EQUITY PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 99.7% Advertising - 0.6% R.H. Donnelley Corp.(b) 5,700 $ 360,582 ---------------- Aerospace -- 2.4% The Boeing Co. 8,800 597,960 General Dynamics Corp. 2,600 310,830 Lockheed Martin Corp. 7,200 439,488 ---------------- 1,348,278 ---------------- Banks --0.6% Synovus Financial Corp. 11,600 321,552 ---------------- Beverages & Bottling -- 3.0% Constellation Brands, Inc.(b) 10,400 270,400 Pepsi Bottling Group, Inc. 12,100 345,455 PepsiCo, Inc. 18,800 1,066,148 ---------------- 1,682,003 ---------------- Business Services -- 1.0% Alliance Data Systems Corp.(b)(c) 13,600 532,440 ---------------- Chemicals -- 0.5% The Dow Chemical Co. 7,000 291,690 ---------------- Computer & Office Equipment -- 7.2% Apple Computer, Inc.(b) 17,400 932,814 Cisco Systems, Inc.(b)(d) 62,600 1,122,418 Hewlett-Packard Co. 18,900 551,880 International Business Machines Corp. 17,600 1,411,872 ---------------- 4,018,984 ---------------- Computer Software & Services -- 9.7% Activision, Inc.(b) 22,201 454,011 Checkfree Corp.(b) 4,300 162,626 Computer Sciences Corp.(b) 11,000 520,410 eBay, Inc.(b) 9,700 399,640 Google, Inc. - Class A(b) 1,700 537,982 Microsoft Corp. 88,200 2,269,386 Oracle Corp.(b) 64,700 801,633 VeriSign, Inc.(b) 14,100 301,317 ---------------- 5,447,005 ---------------- Construction -- 0.8% Lennar Corp. 7,800 466,128 ---------------- Electronics -- 5.6% AES Corp.(b) 28,400 466,612 Amphenol Corp. 7,800 314,652 Intel Corp. 70,800 1,745,220 L-3 Communications Holdings, Inc.(c) 7,400 585,118 ---------------- 3,111,602 ---------------- Entertainment & Leisure -- 3.3% Comcast Corp.(b) 24,400 716,872 GTECH Holdings Corp. 14,800 474,488 The Walt Disney Co. 27,800 670,814 ---------------- 1,862,174 ---------------- Finance -- 2.9% Affiliated Managers Group, Inc.(b)(c) 4,600 333,132 American Express Co. 12,700 729,488 Capital One Financial Corp.(c) 3,700 294,224 Providian Financial Corp.(b) 15,900 281,112 ---------------- 1,637,956 ---------------- Food & Agriculture -- 1.0% Campbell Soup Co. 10,300 306,425 Hershey Foods Corp. 4,700 264,657 ---------------- 571,082 ---------------- Insurance -- 3.3% American International Group, Inc. 9,100 563,836 The Progressive Corp. 2,900 303,833 W.R. Berkley Corp. 7,800 307,944 WellPoint, Inc.(b) 9,000 682,380 ---------------- 1,857,993 ---------------- Machinery & Heavy Equipment -- 1.2% Caterpillar, Inc.(c) 11,200 658,000 ---------------- Manufacturing -- 12.9% Black & Decker Corp. 5,900 484,331 Corning, Inc.(b) 17,600 340,208 Dade Behring Holdings, Inc. 16,500 604,890 Fortune Brands, Inc.(c) 5,000 406,650 General Electric Co. 89,900 3,026,933 ITT Industries, Inc. 3,600 408,960 Nike, Inc. 6,900 563,592 Nucor Corp. 6,700 395,233 The Sherwin-Williams Co.(c) 12,000 528,840 The Stanley Works 10,100 471,468 ---------------- 7,231,105 ---------------- Medical & Medical Services -- 5.7% Amgen, Inc.(b) 13,800 1,099,446 Coventry Health Care, Inc.(b) 6,999 602,054 McKesson Corp.(c) 10,900 517,205 UnitedHealth Group, Inc. 17,100 961,020 ---------------- 3,179,725 ---------------- Medical Instruments & Supplies -- 7.2% Bausch & Lomb, Inc. 6,100 492,148 Becton, Dickinson & Co. 10,800 566,244 C.R. Bard, Inc. 4,900 323,547 Invitrogen Corp.(b) 3,400 255,782 Johnson & Johnson 31,100 1,968,008 Respironics, Inc.(b) 10,600 447,108 ---------------- 4,052,837 ---------------- Oil & Gas -- 3.0% Devon Energy Corp. 8,300 569,712 Newfield Exploration Co.(b) 8,200 402,620 Patterson-UTI Energy, Inc. 19,200 692,736 ---------------- 1,665,068 ---------------- Pharmaceuticals -- 4.4% Genentech, Inc.(b) 3,300 277,893 Gilead Sciences, Inc.(b) 11,200 546,112 Merck & Co., Inc. 19,300 525,153 Pfizer, Inc. 19,400 484,418 Wyeth 13,600 629,272 ---------------- 2,462,848 ---------------- Publishing & Printing -- 1.0% The McGraw-Hill Companies, Inc. 11,800 566,872 ---------------- Railroad & Shipping -- 0.7% Burlington Northern Santa Fe Corp. 6,400 382,720 ---------------- Real Estate -- 0.6% Cendant Corp. 17,500 361,200 ---------------- See accompanying notes to financial statements. 52
BlackRock Funds STATEMENT OF NET ASSETS LARGE CAP GROWTH EQUITY PORTFOLIO (Concluded) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Restaurants -- 0.8% Darden Restaurants, Inc. 14,900 $ 452,513 ---------------- Retail Merchandising -- 8.5% Advance Auto Parts, Inc.(b) 9,500 367,460 Barnes & Noble, Inc. 7,500 282,750 Coach, Inc.(b) 14,900 467,264 The Home Depot, Inc. 25,400 968,756 Michaels Stores, Inc. 15,300 505,818 Nordstrom, Inc. 15,800 542,256 Staples, Inc. 14,500 309,140 Target Corp.(c) 14,200 737,406 Wal-Mart Stores, Inc.(c) 13,600 595,952 ---------------- 4,776,802 ---------------- Security Brokers & Dealers -- 0.7% E*TRADE Financial Corp.(b) 22,600 397,760 ---------------- Semiconductors & Related Devices -- 3.0% Freescale Semiconductor, Inc. - Class A(b) 6,200 145,142 Freescale Semiconductor, Inc. - Class B(b)(c) 6,200 146,196 LSI Logic Corp.(b) 53,000 522,050 Texas Instruments, Inc. 26,000 881,400 ---------------- 1,694,788 ---------------- Soaps & Cosmetics -- 3.8% The Gillette Co. 12,400 721,680 The Procter & Gamble Co.(c) 23,400 1,391,364 ---------------- 2,113,044 ---------------- Telecommunications -- 1.9% Motorola, Inc.(c) 36,300 801,867 Sprint Nextel Corp. 10,954 260,486 ---------------- 1,062,353 ---------------- Tobacco -- 1.1% Altria Group, Inc. 8,300 611,793 ---------------- Transportation -- 1.3% CNF, Inc. 8,200 430,500 Ryder Systems, Inc. 8,800 301,136 ---------------- 731,636 ---------------- TOTAL COMMON STOCKS (Cost $40,600,037) 55,910,533 ---------------- Par/Shares Maturity (000) ---------------- ---------------- SHORT TERM INVESTMENTS -- 9.2% Morgan Stanley, Floating Rate Notes 4.02%(e)(f) 11/07/05 $ 1,915 1,915,250 Galileo Money Market Fund 203 203,363 Institutional Money Market Trust(f)(g) 3,029 3,029,234 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $5,147,847) 5,147,847 ---------------- TOTAL INVESTMENTS IN SECURITIES -- 108.9% (Cost $45,747,884(a)) $ 61,058,380 LIABILITIES IN EXCESS OF OTHER ASSETS - (8.9)% (4,998,978) ---------------- NET ASSETS -- 100.0% (Applicable to 2,165,249 Institutional shares, 607,128 Service shares, 1,652,300 Investor A shares, 1,129,962 Investor B shares and 252,877 Investor C shares outstanding) $ 56,059,402 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($21,841,472/2,165,249) $ 10.09 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($5,971,748/607,128) $ 9.84 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($16,001,952/1,652,300) $ 9.68 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.68/0.9425) $ 10.27 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($10,008,260/1,129,962) $ 8.86 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($2,235,970/252,877) $ 8.84 ======= (a) Cost for Federal income tax purposes is $45,972,593. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 15,730,083 Gross unrealized depreciation (644,296) ---------------- $ 15,085,787 ================ (b) Non-income producing security. (c) Total or partial securities on loan. (d) Securities, or a portion thereof, pledged as collateral with a value of $670,582 on 1 long S&P 500 futures contract expiring December 2005. The value of such contract on September 30, 2005 was $308,575, with an unrealized loss of $1,425 (including commissions of $3). (e) Rates shown are the rates as of September 30, 2005. (f) Securities purchased with the cash proceeds from securities loaned. (g) Represents an investment in an affiliate. See accompanying notes to financial statements. 53
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES LARGE CAP GROWTH EQUITY PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $45,747,884)............... $ 61,058,380 Dividends receivable ................................. 51,052 Interest receivable .................................. 1,898 Investments sold receivable .......................... 716,780 Capital shares sold receivable ....................... 14,068 Prepaid expenses ..................................... 19,396 Futures margin receivable ............................ 631 ---------------- TOTAL ASSETS ...................................... 61,862,205 ---------------- LIABILITIES Payable upon return of securities loaned ............. 4,944,484 Investments purchased payable ........................ 522,608 Capital shares redeemed payable ...................... 249,503 Advisory fees payable ................................ 18,634 Administrative fees payable .......................... 7,334 Transfer agent fees payable .......................... 17,763 Other accrued expenses payable ....................... 42,477 ---------------- TOTAL LIABILITIES ................................. 5,802,803 ---------------- NET ASSETS (Applicable to 2,165,249 Institutional shares,607,128 Service shares, 1,652,300 Investor A shares, 1,129,962 Investor B shares and 252,877 Investor C shares outstanding) .... $ 56,059,402 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($21,841,472/2,165,249)....... $ 10.09 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($5,971,748/607,128)................ $ 9.84 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($16,001,952/1,652,300).......... $ 9.68 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.68/0.9425) ....................................... $ 10.27 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($10,008,260/1,129,962).......... $ 8.86 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($2,235,970/252,877)............. $ 8.84 ================ See accompanying notes to financial statements. 54
BlackRock Funds STATEMENT OF NET ASSETS DIVIDEND ACHIEVERS(TM) PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 97.8% Aerospace - 2.1% General Dynamics Corp.(b) 3,900 $ 466,245 United Technologies Corp. 4,100 212,544 ---------------- 678,789 ---------------- Banks -- 16.0% AmSouth Bancorp.(b) 7,700 194,502 Bank of America Corp.(b) 33,200 1,397,720 Bank of Hawaii Corp. 4,050 199,341 BB&T Corp. 5,250 205,012 Citigroup, Inc.(b) 24,700 1,124,344 Comerica, Inc.(b) 6,700 394,630 Key Corp.(b) 12,350 398,287 National City Corp.(b) 12,800 428,032 TD Banknorth, Inc. 7,000 210,980 Wachovia Corp.(b) 7,450 354,546 Wells Fargo & Co. 6,500 380,705 ---------------- 5,288,099 ---------------- Beverages & Bottling -- 0.6% The Coca-Cola Co. 4,250 183,558 ---------------- Broadcasting -- 0.6% Media General, Inc. - Class A 3,600 208,836 ---------------- Chemicals -- 0.6% Rohm and Haas Co. 5,200 213,876 ---------------- Computer & Office Equipment -- 1.6% International Business Machines Corp. 2,800 224,616 Pitney Bowes, Inc. 6,900 288,006 ---------------- 512,622 ---------------- Computer Software & Services-- 1.2% Diebold, Inc. 6,300 217,098 Microsoft Corp. 6,800 174,964 ---------------- 392,062 ---------------- Construction -- 1.1% Martin Marietta Materials, Inc. 4,750 372,685 ---------------- Electronics -- 0.5% Emerson Electric Co. 2,300 165,140 ---------------- Energy & Utilities -- 5.7% Consolidated Edison, Inc. 8,350 405,392 MDU Resources Group, Inc. 11,000 392,150 Pinnacle West Capital Corp. 8,700 383,496 Progress Energy, Inc. 5,450 243,888 UGI Corp. 9,200 258,980 Vectren Corp. 6,650 188,528 ---------------- 1,872,434 ---------------- Entertainment & Leisure -- 0.8% The Walt Disney Co. 11,200 270,256 ---------------- Finance -- 6.2% American Capital Strategies Ltd. 3,000 109,980 CIT Group, Inc. 6,000 271,080 Fannie Mae 5,200 233,064 Franklin Resources, Inc. 4,000 335,840 Freddie Mac 3,100 175,026 Indymac Bancorp, Inc. 3,850 152,383 Nuveen Investments - Class A(b) 5,500 216,645 Protective Life Corp. 5,100 210,018 Washington Mutual, Inc.(b) 9,050 354,941 ---------------- 2,058,977 ---------------- Insurance -- 6.6% The Allstate Corp. 8,750 483,787 American International Group, Inc.(b) 5,700 353,172 CHUBB Corp.(b) 4,400 394,020 Lincoln National Corp. 3,600 187,272 Mercury General Corp.(b) 3,900 233,961 Old Republic International Corp. 5,900 157,353 The St. Paul Travelers Cos., Inc.(b) 8,050 361,204 ---------------- 2,170,769 ---------------- Machinery & Heavy Equipment -- 1.0% Caterpillar, Inc.(b) 5,400 317,250 ---------------- Manufacturing -- 6.7% General Electric Co. 22,400 754,208 Nucor Corp.(b) 4,900 289,051 Reynold American, Inc. 2,200 182,644 The Sherwin-Williams Co.(b) 6,500 286,455 The Stanley Works 4,900 228,732 V.F. Corp. 5,500 318,835 Wolverine World Wide, Inc. 7,450 156,823 ---------------- 2,216,748 ---------------- Medical & Medical Services -- 0.8% Health Care Property Investors, Inc. 9,400 253,706 ---------------- Medical Instruments & Supplies -- 1.0% Hillenbrand Industries, Inc. 3,300 155,265 Johnson & Johnson 3,000 189,840 ---------------- 345,105 ---------------- Motor Vehicles -- 1.0% Ford Motor Co.(b) 15,450 152,337 Harley-Davidson, Inc.(b) 3,600 174,384 ---------------- 326,721 ---------------- Motor Vehicles & Car Bodies -- 0.4% Genuine Parts Co. 2,850 122,265 ---------------- Oil & Gas -- 15.9% ChevronTexaco Corp.(b)(c) 20,900 1,352,857 ConocoPhillips 11,600 810,956 Devon Energy Corp. 3,300 226,512 Energen Corp. 5,600 242,256 Exxon Mobil Corp.(c) 29,100 1,849,014 Helmerich & Payne, Inc. 7,550 455,944 National Fuel Gas Co. 9,400 321,480 ---------------- 5,259,019 ---------------- Personal Services -- 0.6% The Servicemaster Co. 13,600 184,144 ---------------- Pharmaceuticals -- 6.1% Bristol-Myers Squibb Co.(b) 6,300 151,578 Merck & Co., Inc. 18,500 503,385 Pfizer, Inc. 49,100 1,226,027 West Pharmaceutical Services, Inc. 5,100 151,317 ---------------- 2,032,307 ---------------- See accompanying notes to financial statements. 55
BlackRock Funds STATEMENT OF NET ASSETS DIVIDEND ACHIEVERS(TM) PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Plastics -- 1.0% Sonoco Products Co. 12,150 $ 331,816 ---------------- Publishing & Printing -- 1.9% The McGraw-Hill Companies, Inc. 5,500 264,220 R.R. Donnelley & Sons Corp.(b) 9,700 359,579 ---------------- 623,799 ---------------- Real Estate -- 4.6% CBL & Associates Properties, Inc. 5,200 213,148 Cendant Corp. 6,300 130,032 Commercial Net Lease Realty 7,800 156,000 General Growth Properties, Inc.(b) 8,000 359,440 HRPT Properties Trust 12,900 160,089 Kimco Realty Corp. 8,800 276,496 Tanger Factory Outlet Centers, Inc. 8,600 239,166 ---------------- 1,534,371 ---------------- Restaurants -- 1.8% McDonald's Corp. 18,100 606,169 ---------------- Retail Merchandising -- 1.5% The Home Depot, Inc. 6,800 259,352 RPM International, Inc. 13,600 250,240 ---------------- 509,592 ---------------- Semiconductors & Related Devices -- 0.4% Linear Technology Corp. 3,900 146,601 ---------------- Soaps & Cosmetics -- 1.0% Colgate-Palmolive Co. 3,100 163,649 Kimberly-Clark Corp. 2,950 175,613 ---------------- 339,262 ---------------- Telecommunications -- 5.6% ALLTEL Corp.(b) 5,650 367,872 AT&T Corp. 8,000 158,400 BellSouth Corp. 16,700 439,210 CenturyTel, Inc. 4,400 153,912 SBC Communications, Inc.(b) 31,000 743,070 ---------------- 1,862,464 ---------------- Tobacco -- 2.9% Altria Group, Inc.(b) 11,100 818,181 Loews Corp. - Carolina Group 3,900 154,557 ---------------- 972,738 ---------------- TOTAL COMMON STOCKS (Cost $31,217,349) 32,372,180 ---------------- Par/Shares Maturity (000) Value ---------------- ---------------- ---------------- SHORT TERM INVESTMENTS - 33.1% Banco Santader, Certificate of Deposit 3.70%(d) 05/10/06 $ 927 $ 926,522 Morgan Stanley, Floating Rate Notes 4.02%(d)(e) 11/07/05 1,249 1,249,055 4.01%(d)(e) 11/14/05 367 366,727 4.02%(d)(e) 01/05/06 396 396,323 Galileo Money Market Fund 403 402,777 Institutional Money Market Trust(d)(f) 7,614 7,614,238 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $10,955,642) 10,955,642 ---------------- TOTAL INVESTMENTS IN SECURITIES - 130.9% (Cost $42,172,990(a)) 43,327,822 LIABILITIES IN EXCESS OF OTHER ASSETS - (30.9)% (10,229,366) ---------------- NET ASSETS - 100.0% (Applicable to 314,473 Institutional shares, 35,113 Service shares, 1,361,194 Investor A shares, 327,966 Investor B shares and 1,041,844 Investor C shares outstanding) $ 33,098,456 ================ See accompanying notes to financial statements. 56
BlackRock Funds STATEMENT OF NET ASSETS DIVIDEND ACHIEVERS(TM) PORTFOLIO (Concluded) As of September 30, 2005 Value ---------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($3,379,415/314,473) $ 10.75 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($376,455/35,113) $ 10.72 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($14,636,761/1,361,194) $ 10.75 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.75/0.9425) $ 11.41 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($3,522,968/327,966) $ 10.74 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($11,182,857/1,041,844) $ 10.73 ================ - ---------- (a) Cost for Federal income tax purposes is $42,211,958. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 2,198,565 Gross unrealized depreciation (1,082,701) ---------------- $ 1,115,864 ================ (b) Total or partial securities on loan. (c) Securities, or a portion thereof, pledged as collateral with a value of $385,762 on 9 long E-Mini S&P 500 futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $555,435, with an unrealized gain of $2,948 (including commissions of $14). (d) Securities purchased with the cash proceeds from securities loaned. (e) Rates shown are the rates as of September 30, 2005. (f) Represents an investment in an affiliate. See accompanying notes to financial statements. 57
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES DIVIDEND ACHIEVERS(TM) PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $42,172,990)............... $ 43,327,822 Dividends receivable ................................. 52,212 Interest receivable .................................. 1,051 Capital shares sold receivable ....................... 338,218 Prepaid expenses ..................................... 31,188 Futures margin receivable ............................ 1,159 ---------------- TOTAL ASSETS ...................................... 43,751,650 ---------------- LIABILITIES Payable upon return of securities loaned ............. 10,552,865 Capital shares redeemed payable ...................... 40,058 Advisory fees payable ................................ 8,315 Administrative fees payable .......................... 5,383 Transfer agent fees payable .......................... 2,890 Other accrued expenses payable ....................... 43,681 Futures sold payable ................................. 2 ---------------- TOTAL LIABILITIES ................................. 10,653,194 ---------------- NET ASSETS (Applicable to 314,473 Institutional shares,35,113 Service shares, 1,361,194 Investor A shares, 327,966 Investor B shares and 1,041,844 Investor C shares outstanding) ............. $ 33,098,456 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($3,379,415/314,473).......... $ 10.75 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($376,455/35,113)................... $ 10.72 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($14,636,761/1,361,194).......... $ 10.75 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.75/0.9425) ...................................... $ 11.41 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($3,522,968/327,966)............. $ 10.74 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($11,182,857/1,041,844).......... $ 10.73 ================ See accompanying notes to financial statements. 58
BlackRock Funds STATEMENT OF NET ASSETS LEGACY PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 99.6% Aerospace - 1.1% General Dynamics Corp.(b) 24,800 $ 2,964,840 ---------------- Beverages & Bottling -- 2.2% PepsiCo, Inc. 108,100 6,130,351 ---------------- Broadcasting -- 1.0% XM Satellite Radio Holdings, Inc.(b)(c) 80,700 2,897,937 ---------------- Business Services -- 1.2% Alliance Data Systems Corp.(b)(c) 86,700 3,394,305 ---------------- Computer & Office Equipment -- 2.5% Apple Computer, Inc.(c) 47,700 2,557,197 Hewlett-Packard Co. 150,400 4,391,680 ---------------- 6,948,877 ---------------- Computer Software & Services -- 17.6% Adobe Systems, Inc.(b) 103,700 3,095,445 Cognizant Technology Solutions Corp.(c) 60,700 2,828,013 Electronic Arts, Inc.(c) 23,900 1,359,671 EMC Corp.(b)(c) 466,600 6,037,804 Google, Inc. - Class A(c) 36,711 11,617,563 Microsoft Corp. 522,340 13,439,808 Salesforce.Com, Inc.(c) 101,700 2,351,304 Yahoo!, Inc.(c) 249,900 8,456,616 ---------------- 49,186,224 ---------------- Electronics -- 1.7% Intel Corp. 195,300 4,814,145 ---------------- Entertainment & Leisure -- 2.2% Comcast Corp. - Class A(c) 115,190 3,315,168 Marriott International, Inc. - Class A(b) 22,300 1,404,900 Starwood Hotels & Resorts Worldwide, Inc.(b) 23,700 1,354,929 ---------------- 6,074,997 ---------------- Finance -- 8.6% American Express Co. 149,450 8,584,408 Chicago Mercantile Exchange(b) 9,600 3,238,080 Franklin Resources, Inc. 56,276 4,724,933 The Goldman Sachs Group, Inc.(b) 18,500 2,249,230 SLM Corp. 94,600 5,074,344 ---------------- 23,870,995 ---------------- Food & Agriculture -- 0.9% Monsanto Co. 40,200 2,522,550 ---------------- Insurance -- 1.1% WellPoint, Inc.(c) 39,100 2,964,562 ---------------- Manufacturing -- 10.0% Corning, Inc.(c) 245,400 4,743,582 Danaher Corp. 103,300 5,560,639 General Electric Co. 357,030 12,021,200 Nike, Inc. 26,700 2,180,856 Polo Ralph Lauren Corp. 68,400 3,440,520 ---------------- 27,946,797 ---------------- Medical & Medical Services -- 8.6% Amgen, Inc.(c) 90,002 7,170,459 Caremark Rx, Inc.(c) 55,500 2,771,115 PacifiCare Health Systems, Inc.(c) 21,300 1,699,314 Quest Diagnostics, Inc. 66,100 3,340,694 UnitedHealth Group, Inc. 159,000 8,935,800 ---------------- 23,917,382 ---------------- Medical Instruments & Supplies -- 7.5% Cytyc Corp.(c) 58,500 1,570,725 Johnson & Johnson 149,820 9,480,610 St. Jude Medical, Inc.(c) 156,500 7,324,200 Stryker Corp. 50,500 2,496,215 ---------------- 20,871,750 ---------------- Metal & Mining -- 2.9% CONSOL Energy, Inc. 104,900 8,000,723 ---------------- Oil & Gas - 7.8% EOG Resources, Inc. 90,600 6,785,940 Exxon Mobil Corp.(b) 65,027 4,131,816 GlobalSantaFe Corp. 89,400 4,078,428 Newfield Exploration Co.(c) 67,200 3,299,520 Schlumberger Ltd.(b) 42,700 3,603,026 ---------------- 21,898,730 ---------------- Pharmaceuticals -- 7.3% Allergan, Inc.(b) 34,500 3,160,890 Amylin Pharmaceuticals, Inc.(c) 39,600 1,377,684 Genentech, Inc.(c) 31,500 2,652,615 Genzyme Corp.(c) 57,900 4,147,956 Novartis AG - ADR 56,300 2,871,300 Sanofi-Aventis - ADR 72,600 3,016,530 Teva Pharmaceutical Industries Ltd. - ADR(b) 93,200 3,114,744 ---------------- 20,341,719 ---------------- Retail Merchandising -- 7.4% Chico's FAS, Inc.(b)(c) 54,200 1,994,560 Coach, Inc.(c) 65,700 2,060,352 CVS Corp.(b) 138,200 4,009,182 Kohl's Corp.(c) 69,400 3,482,492 Staples, Inc. 114,550 2,442,206 Target Corp.(b) 72,700 3,775,311 Walgreen Co. 64,600 2,806,870 ---------------- 20,570,973 ---------------- Semiconductors & Related Devices -- 3.0% Broadcom Corp. - Class A(c) 53,000 2,486,230 Freescale Semiconductor, Inc. - Class A(b)(c) 130,800 3,062,028 Texas Instruments, Inc.(b) 84,000 2,847,600 ---------------- 8,395,858 ---------------- Soaps & Cosmetics -- 2.7% The Procter & Gamble Co. 127,000 7,551,420 ---------------- Telecommunications -- 2.3% Harman International Industries, Inc. 16,200 1,656,774 Qualcomm, Inc. 59,400 2,658,150 Sprint Nextel Corp. 86,000 2,045,080 ---------------- 6,360,004 ---------------- TOTAL COMMON STOCKS (Cost $225,891,548) 277,625,139 ---------------- See accompanying notes to financial statements. 59
BlackRock Funds STATEMENT OF NET ASSETS LEGACY PORTFOLIO (Concluded) As of September 30, 2005 Number of Shares Value ---------------- ---------------- WARRANTS -- 0.0% Lucent Technologies, Inc. (issued 12/10/04, expiring 12/10/07, strike price $2.75)(c)(d) (Cost $8,011) 12,138 $ 11,531 ---------------- Par/Shares Maturity (000) -------------- ---------------- SHORT TERM INVESTMENTS -- 17.7% Banco Santader, Certificate of Deposit 3.70%(e) 05/10/06 $ 582 $ 581,979 Morgan Stanley, Floating Rate Notes 4.02%(e)(f) 11/07/05 9,560 9,560,171 4.01%(e)(f) 11/14/05 892 892,216 4.02%(e)(f) 01/05/06 5,791 5,791,094 Galileo Money Market Fund 2,099 2,098,685 Institutional Money Market Trust(e)(g) 30,309 30,309,454 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $49,233,599) 49,233,599 ---------------- TOTAL INVESTMENTS IN SECURITIES -- 117.3% (Cost $275,133,158(a)) 326,870,269 LIABILITIES IN EXCESS OF OTHER ASSETS - (17.3)% (48,310,373) ---------------- NET ASSETS -- 100.0% (Applicable to 3,674,169 Institutional shares, 8 Service shares, 8,711,263 Investor A shares, 6,545,757 Investor B shares and 1,575,132 Investor C shares outstanding) $ 278,559,896 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($52,154,290/3,674,169) $ 14.19 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($107/8)(h) $ 13.81 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($120,370,757/8,711,263) $ 13.82 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($13.82/0.9425) $ 14.66 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($85,464,627/6,545,757) $ 13.06 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,570,115/1,575,132) $ 13.06 ================ - ---------- (a) Cost for Federal income tax purposes is $275,335,960. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 54,849,190 Gross unrealized depreciation (3,314,881) ---------------- $ 51,534,309 ================ (b) Total or partial securities on loan. (c) Non-income producing security. (d) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 12,138. These warrants were exercisable as of 12/10/04. (e) Securities purchased with the cash proceeds from securities loaned. (f) Rates shown are the rates as of September 30, 2005. (g) Represents an investment in an affiliate. (h) Exact net assets and shares outstanding at September 30, 2005 were $106.57 and 7.717, respectively. See accompanying notes to financial statements. 60
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES LEGACY PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $275,133,158).............. $ 326,870,269 Dividends and reclaims receivable .................... 140,437 Interest receivable .................................. 11,237 Investments sold receivable .......................... 4,465,463 Capital shares sold receivable ....................... 57,958 Prepaid expenses ..................................... 64,127 ---------------- TOTAL ASSETS ...................................... 331,609,491 ---------------- LIABILITIES Payable upon return of securities loaned ............. 47,134,914 Investments purchased payable ........................ 5,039,151 Capital shares redeemed payable ...................... 510,423 Advisory fees payable ................................ 147,302 Transfer agent fees payable .......................... 44,357 Other accrued expenses payable ....................... 173,448 ---------------- TOTAL LIABILITIES ................................. 53,049,595 ---------------- NET ASSETS (Applicable to 3,674,169 Institutional shares, 8 Service shares, 8,711,263 Investor A shares, 6,545,757 Investor B shares and 1,575,132 Investor C shares outstanding) .................................. $ 278,559,896 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($52,154,290/3,674,169)....... $ 14.19 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($107/8)(a)......................... $ 13.81 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($120,370,757/8,711,263)......... $ 13.82 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($13.82/0.9425) ...................................... $ 14.66 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($85,464,627/6,545,757).......... $ 13.06 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,570,115/1,575,132).......... $ 13.06 ================ - --------- (a) Exact net assets and shares outstanding at September 30, 2005 were $106.57 and 7.717, respectively. See accompanying notes to financial statements. 61
BlackRock Funds STATEMENT OF NET ASSETS MID-CAP VALUE EQUITY PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 96.4% Banks -- 7.0% City National Corp. 164,500 $ 11,529,805 Comerica, Inc.(b) 199,800 11,768,220 Hudson City Bancorp., Inc. 836,700 9,956,730 North Fork Bancorp., Inc. 359,850 9,176,175 Sovereign Bancorp., Inc. 584,500 12,882,380 ---------------- 55,313,310 ---------------- Beverages & Bottling -- 0.7% Coca-Cola Enterprises, Inc. 297,800 5,807,100 ---------------- Broadcasting -- 1.5% Belo Corp. 248,300 5,676,138 Lin TV Corp.(c) 465,820 6,498,189 ---------------- 12,174,327 ---------------- Business Services -- 3.5% The Brink's Co. 357,900 14,695,374 W.W. Grainger, Inc. 207,090 13,030,103 ---------------- 27,725,477 ---------------- Chemicals -- 2.2% Ashland, Inc. 179,500 9,915,580 FMC Corp.(b)(c) 85,700 4,903,754 Lyondell Chemical Co.(b) 88,600 2,535,732 ---------------- 17,355,066 ---------------- Computer & Office Equipment -- 4.1% American Power Conversion Corp. 155,700 4,032,630 Avery Dennison Corp.(b) 149,900 7,853,261 Lexmark International, Inc.(b)(c) 108,100 6,599,505 NCR Corp.(c) 445,000 14,199,950 Phase Metrics, Inc.(c)(d)(e) 108,409 2,168 ---------------- 32,687,514 ---------------- Computer Software & Services -- 4.1% DST Systems, Inc.(c) 190,400 10,439,632 IAC/InterActiveCorp(b)(c) 218,600 5,541,510 TIBCO Software, Inc.(c) 671,000 5,609,560 Unisys Corp.(c) 1,631,900 10,835,816 ---------------- 32,426,518 ---------------- Construction -- 0.6% Dycom Industries, Inc.(b)(c) 222,200 4,492,884 ---------------- Containers - 3.5% Owens-Illinois, Inc.(c) 488,000 10,062,560 Pactiv Corp.(b)(c) 550,300 9,641,256 Smurfit-Stone Container Corp.(c) 773,400 8,012,424 ---------------- 27,716,240 ---------------- Energy & Utilities -- 8.6% Constellation Energy Group 180,900 11,143,440 PPL Corp. 377,200 12,194,876 Public Service Enterprise Group, Inc.(b) 195,600 12,588,816 Questar Corp. 165,600 14,592,672 Reliant Energy, Inc.(c) 562,300 8,681,912 Sempra Energy(b) 190,800 8,979,048 ---------------- 68,180,764 ---------------- Entertainment & Leisure -- 0.9% Hilton Hotels Corp. 327,700 7,314,264 ---------------- Finance -- 8.2% Ambac Financial Group, Inc. 181,250 13,060,875 Capital One Financial Corp.(b) 111,500 8,866,480 CIT Group, Inc. 326,400 14,746,752 Freedom Pay, Inc.(d)(e) 43,051 431 H&R Block, Inc. 456,500 10,946,870 Mellon Financial Corp. 181,300 5,796,161 Nuveen Investments - Class A 277,600 10,934,664 ---------------- 64,352,233 ---------------- Food & Agriculture -- 3.6% Dean Foods Co.(c) 246,000 9,559,560 Del Monte Foods Co.(c) 687,800 7,380,094 The J. M. Smucker Co. 132,500 6,431,550 Treehouse Foods, Inc.(c) 175,280 4,711,526 ---------------- 28,082,730 ---------------- Insurance -- 7.2% Allmerica Financial Corp.(c) 274,100 11,276,474 Assurant, Inc.(b) 106,600 4,057,196 Axis Capital Holdings Ltd. 370,000 10,548,700 Endurance Specialty Holdings Ltd. 308,100 10,509,291 Everest Re Group Ltd. 67,500 6,608,250 Radian Group, Inc. 255,100 13,545,810 ---------------- 56,545,721 ---------------- Manufacturing -- 10.1% American Standard Co. Inc. 177,000 8,239,350 Briggs & Stratton Corp. 109,000 3,770,310 Brunswick Corp. 174,400 6,580,112 ITT Industries, Inc. 28,200 3,203,520 Jones Apparel Group, Inc. 342,400 9,758,400 Newell Rubbermaid, Inc. 302,800 6,858,420 The Sherwin-Williams Co.(b) 230,000 10,136,100 Snap-On, Inc. 308,500 11,143,020 The Stanley Works 201,200 9,392,016 Textron, Inc. 152,500 10,937,300 ---------------- 80,018,548 ---------------- Measuring & Controlling Devices -- 1.1% Thermo Electron Corp.(c) 272,300 8,414,070 ---------------- Medical & Medical Services -- 1.4% MedImmune, Inc.(b)(c) 124,000 4,172,600 Universal Health Service, Inc. 141,600 6,744,408 ---------------- 10,917,008 ---------------- Medical Instruments & Supplies -- 1.3% Hillenbrand Industries, Inc. 225,000 10,586,250 ---------------- Metal & Mining -- 1.8% CONSOL Energy, Inc. 183,900 14,026,053 ---------------- Oil & Gas -- 6.0% CNX Gas Corp.(c)(e) 62,300 1,209,558 Diamond Offshore Drilling, Inc. 186,800 11,441,500 EOG Resources, Inc. 165,400 12,388,460 KeySpan Corp. 254,300 9,353,154 Newfield Exploration Co.(c) 259,300 12,731,630 ---------------- 47,124,302 ---------------- Paper & Forest Products -- 1.3% Bowater, Inc.(b) 356,200 10,069,774 ---------------- See accompanying notes to financial statements. 62
BlackRock Funds STATEMENT OF NET ASSETS MID-CAP VALUE EQUITY PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Pharmaceuticals -- 1.2% Watson 258,000 $ 9,445,380 ---------------- Pharmaceuticals, Inc.(b)(c) Publishing & Printing -- 2.1% Dow Jones & Company, Inc.(b) 212,200 8,103,918 R.R. Donnelley & Sons Corp.(b) 221,900 8,225,833 ---------------- 16,329,751 ---------------- Railroad & Shipping -- 0.8% CSX Corp. 135,800 6,311,984 ---------------- Real Estate -- 4.6% Boston Properties, Inc. 188,600 13,371,740 Cendant Corp. 589,600 12,169,344 Reckson Associates Realty Corp. 306,900 10,603,395 ---------------- 36,144,479 ---------------- Retail Merchandising -- 7.7% AnnTaylor Stores Corp.(c) 378,200 10,041,210 Federated Department Stores, Inc. 150,900 10,090,683 The Kroger Co.(b)(c) 348,400 7,173,556 Linens 'n Things, Inc.(c) 346,500 9,251,550 Office Depot, Inc.(b)(c) 283,100 8,408,070 Officemax, Inc. 374,000 11,844,580 Saks, Inc.(c) 213,600 3,951,600 ---------------- 60,761,249 ---------------- Semiconductors & Related Devices -- 1.0% Cypress Semiconductor Corp.(b)(c) 532,700 8,017,135 ---------------- Telecommunications -- 0.3% Scientific-Atlanta, Inc. 67,600 2,535,676 ---------------- TOTAL COMMON STOCKS (Cost $651,506,320) 760,875,807 ---------------- Par/Shares Maturity (000) Value -------------- ---------------- ---------------- SHORT TERM INVESTMENTS -- 14.2% Banco Santader, Certificate of Deposit 3.70%(f) 05/10/06 $ 10,396 $ 10,395,862 Morgan Stanley, Floating Rate Notes 4.02%(f)(g) 11/07/05 3,759 3,759,272 4.01%(f)(g) 11/14/05 6,426 6,425,595 4.02%(f)(g) 01/05/06 2,660 2,659,912 Federal Home Loan Bank, Discount Notes 3.18%(h) 10/03/05 24,800 24,795,619 Galileo Money Market Fund 9,936 9,936,043 Institutional Money Market Trust(f)(i) 54,169 54,169,221 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $112,141,524) 112,141,524 ---------------- TOTAL INVESTMENTS IN SECURITIES -- 110.6% (Cost $763,647,844(a)) 873,017,331 LIABILITIES IN EXCESS OF OTHER ASSETS - (10.6)% (83,543,128) ---------------- NET ASSETS -- 100.0% (Applicable to 3,865,844 Institutional shares, 65,358 Service shares, 37,087,717 Investor A shares, 10,340,355 Investor B shares and 8,117,221 Investor C shares outstanding) $ 789,474,203 ================ See accompanying notes to financial statements. 63
BlackRock Funds STATEMENT OF NET ASSETS MID-CAP VALUE EQUITY PORTFOLIO (Concluded) As of September 30, 2005 Value -------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($53,110,958/3,865,844) $ 13.74 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($889,459/65,358) $ 13.61 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($500,479,129/37,087,717) $ 13.49 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($13.49/0.9425) $ 14.31 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($131,650,619/10,340,355) $ 12.73 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($103,344,038/8,117,221) $ 12.73 ============== - ---------- (a) Cost for Federal income tax purposes is $767,343,803. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 131,934,354 Gross unrealized depreciation (26,260,826) -------------- $ 105,673,528 ============== (b) Total or partial securities on loan. (c) Non-income producing security. (d) Security is illiquid. As of September 30, 2005, the Portfolio held less than 0.01% of its net assets, with a current market value of $2,599 in these securities. (e) Securities valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, this security had a total market value of $1,212,157 which represents less than 0.15% of net assets. (f) Securities purchased with the cash proceeds from securities loaned. (g) Rates shown are the rates as of September 30, 2005. (h) The rate shown is the effective yield on the discount notes at the time of purchase. (i) Represents an investment in an affiliate. See accompanying notes to financial statements. 64
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES MID-CAP VALUE EQUITY PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $763,647,844).............. $ 873,017,331 Dividends receivable ................................. 1,202,608 Interest receivable .................................. 31,185 Investments sold receivable .......................... 3,490,670 Capital shares sold receivable ....................... 2,199,666 Prepaid expenses ..................................... 26,975 Other assets ......................................... 4,070 ---------------- TOTAL ASSETS ...................................... 879,972,505 ---------------- LIABILITIES Payable upon return of securities loaned ............. 77,409,862 Investments purchased payable ........................ 2,064,128 Capital shares redeemed payable ...................... 10,134,700 Advisory fees payable ................................ 349,696 Administrative fees payable .......................... 48,094 Transfer agent fees payable .......................... 90,698 Other accrued expenses payable ....................... 401,124 ---------------- TOTAL LIABILITIES ................................. 90,498,302 ---------------- NET ASSETS (Applicable to 3,865,844 Institutional shares, 65,358 Service shares, 37,087,717 Investor A shares, 10,340,355 Investor B shares and 8,117,221 Investor C shares outstanding) ............. $ 789,474,203 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($53,110,958/3,865,844)....... $ 13.74 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($889,459/65,358)................... $ 13.61 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($500,479,129/37,087,717)........ $ 13.49 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($13.49/0.9425) ...................................... $ 14.31 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($131,650,619/10,340,355)........ $ 12.73 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($103,344,038/8,117,221)......... $ 12.73 ================ See accompanying notes to financial statements. 65
BlackRock Funds STATEMENT OF NET ASSETS MID-CAP GROWTH EQUITY PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 98.1% Advertising -- 1.3% Getty Images, Inc.(b) 66,900 $ 5,756,076 ---------------- Aerospace -- 1.7% Alliant Techsystems, Inc.(b) 101,300 7,562,045 ---------------- Broadcasting -- 2.9% CKX, Inc.(b) 307,700 3,867,789 Univision Communications, Inc. -- Class A(b) 168,700 4,475,611 XM Satellite Radio Holdings, Inc.(b)(c) 130,600 4,689,846 ---------------- 13,033,246 ---------------- Business Services -- 3.0% Alliance Data Systems Corp.(b)(c) 131,500 5,148,225 The Corporate Executive Board Co. 73,100 5,700,338 Equifax, Inc. 71,300 2,491,222 ---------------- 13,339,785 ---------------- Computer Software & Services -- 9.0% Adobe Systems, Inc.(c) 244,000 7,283,400 CACI International, Inc.(b) 64,300 3,896,580 Ceridian Corp.(b) 420,100 8,717,075 Enterasys Networks, Inc.(b) 29,413 39,413 Foundry Networks, Inc.(b) 251,100 3,188,970 NAVTEQ Corp.(b) 181,500 9,065,925 Symantec Corp.(b) 154,603 3,503,304 VeriFone Holdings, Inc.(b) 109,500 2,202,045 VeriSign, Inc.(b) 106,000 2,265,220 ---------------- 40,161,932 ---------------- Containers -- 0.9% Owens-Illinois, Inc.(b) 204,900 4,225,038 ---------------- Electronics -- 3.1% Amphenol Corp. 133,500 5,385,390 Cogent, Inc.(b)(c) 125,400 2,978,250 National Semiconductor Corp. 216,256 5,687,533 ---------------- 14,051,173 ---------------- Entertainment & Leisure -- 3.9% GTECH Holdings Corp. 137,500 4,408,250 Marriott International, Inc. - Class A 35,500 2,236,500 Marvel Entertainment, Inc.(b) 253,200 4,524,684 Orient-Express Hotels Ltd. - Class A 148,500 4,220,370 Starwood Hotels & Resorts Worldwide, Inc.(c) 38,000 2,172,460 ---------------- 17,562,264 ---------------- Finance -- 2.6% Nuveen Investments - Class A 120,400 4,742,556 Providian Financial Corp.(b)(c) 118,900 2,102,152 T. Rowe Price Group, Inc. 74,200 4,845,260 ---------------- 11,689,968 ---------------- Insurance -- 2.9% Endurance Specialty Holdings Ltd. 129,900 4,430,889 WellPoint, Inc.(b) 109,300 8,287,126 ---------------- 12,718,015 ---------------- Machinery & Heavy Equipment -- 0.7% Dresser-Rand Group, Inc.(b) 28,100 692,103 Lennox International, Inc. 92,000 2,521,720 ---------------- 3,213,823 ---------------- Manufacturing -- 3.8% IDEX Corp. 83,000 3,531,650 Pentair, Inc. 186,100 6,792,650 Sealed Air Corp.(b) 69,600 3,303,216 The Warnaco Group, Inc.(b) 142,000 3,111,220 ---------------- 16,738,736 ---------------- Medical & Medical Services -- 9.1% Caremark Rx, Inc.(b) 153,700 7,674,241 Community Health Systems, Inc.(b) 221,400 8,592,534 Coventry Health Care, Inc.(b) 66,900 5,754,738 Medco Health Solutions, Inc.(b) 132,100 7,243,043 Omnicare, Inc.(c) 123,600 6,950,028 Triad Hospitals, Inc.(b) 99,975 4,525,868 ---------------- 40,740,452 ---------------- Medical Instruments & Supplies -- 7.4% Charles River Laboratories International, Inc.(b) 148,800 6,490,656 Cytyc Corp.(b) 253,100 6,795,735 Fisher Scientific International, Inc.(b) 84,000 5,212,200 Kinetic Concepts, Inc.(b)(c) 80,100 4,549,680 Martek Biosciences Corp.(b)(c) 123,100 4,324,503 Varian Medical Systems, Inc.(b)(c) 146,100 5,772,411 ---------------- 33,145,185 ---------------- Metal & Mining -- 5.5% CONSOL Energy, Inc. 172,000 13,118,440 Massey Energy Co. 111,800 5,709,626 MSC Industrial Direct Co., Inc. 174,400 5,784,848 ---------------- 24,612,914 ---------------- Oil & Gas -- 9.4% Amerada Hess Corp. 17,500 2,406,250 CNX Gas Corp.(b)(d) 36,700 712,532 ENSCO International, Inc. 172,800 8,050,752 EOG Resources, Inc. 186,600 13,976,340 Newfield Exploration Co.(b) 195,400 9,594,140 Noble Corp. 74,500 5,100,270 Stolt Offshore SA - ADR(b) 190,800 2,209,464 ---------------- 42,049,748 ---------------- Personal Services -- 0.7% Laureate Education, Inc.(b) 65,300 3,197,741 ---------------- Pharmaceuticals -- 3.2% Cephalon, Inc.(b) 48,700 2,260,654 Forest Laboratories, Inc.(b) 83,100 3,238,407 Shire Pharmaceuticals Group PLC - ADR 234,256 8,665,130 ---------------- 14,164,191 ---------------- Restaurants -- 0.9% Ruby Tuesday, Inc. 181,300 3,945,088 ---------------- Retail Merchandising -- 8.4% Abercrombie & Fitch Co. - Class A 45,100 2,248,235 Bed, Bath & Beyond, Inc.(b) 156,500 6,288,170 CDW Corp.(c) 79,600 4,690,032 Chico's FAS, Inc.(b)(c) 149,200 5,490,560 Coach, Inc.(b) 105,400 3,305,344 Staples, Inc. 241,072 5,139,655 Urban Outfitters, Inc.(b) 78,800 2,316,720 See accompanying notes to financial statements. 66
BlackRock Funds STATEMENT OF NET ASSETS MID-CAP GROWTH EQUITY PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Retail Merchandising (Continued) Williams-Sonoma, Inc.(b)(c) 205,000 $ 7,861,750 ---------------- 37,340,466 ---------------- Semiconductors & Related Devices - 4.3% Altera Corp.(b)(c) 308,200 5,889,702 Freescale Semiconductor, Inc. - Class B(b)(c) 211,800 4,994,244 Lam Research Corp.(b)(c) 160,000 4,875,200 Linear Technology Corp. 97,300 3,657,507 ---------------- 19,416,653 ---------------- Telecommunications - 11.7% ADTRAN, Inc. 147,000 4,630,500 Amdocs Ltd.(b) 245,800 6,816,034 American Tower Corp. - Class A(b) 350,900 8,754,955 Avid Technology, Inc.(b) 191,300 7,919,820 Harris Corp. 161,500 6,750,700 Nextel Partners, Inc. - Class A(b)(c) 264,800 6,646,480 Polycom, Inc.(b) 204,600 3,308,382 Scientific-Atlanta, Inc. 140,300 5,262,653 Syniverse Holdings, Inc.(b) 142,600 2,196,040 ---------------- 52,285,564 ---------------- Transportation - 0.7% Landstar System, Inc. 75,700 3,030,271 ---------------- Waste Management - 1.0% Stericycle, Inc.(b) 75,700 4,326,255 ---------------- TOTAL COMMON STOCKS (Cost $341,400,312) 438,306,629 ---------------- WARRANTS - 0.0% Dime Bancorp, Inc. (issued 12/26/00, no expiration date, strike price $0.30)(e) 57,900 9,264 MicroStrategy, Inc. (issued 06/21/02, expiring 06/24/07, strike price $400)(d)(f) 13 2 ---------------- TOTAL WARRANTS (Cost $17,331) 9,266 ================ Par/Shares Maturity (000) Value -------------- ---------------- ---------------- SHORT TERM INVESTMENTS -- 9.7% Banco Santader, Certificate of Deposit 3.70%(g) 05/10/06 $ 1,947 $ 1,946,858 Morgan Stanley, Floating Rate Notes 4.02%(g)(h) 11/07/05 4,844 4,843,764 4.01%(g)(h) 11/14/05 134 133,645 4.02%(g)(h) 01/05/06 3,802 3,801,905 Galileo Money Market Fund 1,153 1,152,750 Institutional Money Market Trust(g)(i) 31,437 31,436,669 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $43,315,591) 43,315,591 ---------------- TOTAL INVESTMENTS IN SECURITIES -- 107.8% (Cost $384,733,234(a)) 481,631,486 LIABILITIES IN EXCESS OF OTHER ASSETS -- (7.8)% (34,956,229) ---------------- NET ASSETS -- 100.0% (Applicable to 7,219,597 Institutional shares, 112,752 Service shares, 29,568,600 Investor A shares, 6,567,268 Investor B shares and 2,305,471 Investor C shares outstanding) $ 446,675,257 ================ See accompanying notes to financial statements. 67
BlackRock Funds STATEMENT OF NET ASSETS MID-CAP GROWTH EQUITY PORTFOLIO (Concluded) As of September 30, 2005 Value ---------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($75,406,653/7,219,597) $ 10.44 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($1,135,542/112,752) $ 10.07 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($290,284,864/29,568,600) $ 9.82 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.82/0.9425) $ 10.42 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($59,100,472/6,567,268) $ 9.00 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,747,726/2,305,471) $ 9.00 ================ - ---------- (a) Cost for Federal income tax purposes is $385,555,123. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 102,374,333 Gross unrealized depreciation (6,297,970) ---------------- $ 96,076,363 ================ (b) Non-income producing security. (c) Total or partial securities on loan. (d) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, this security had a total market value of $712,534 which represents less than 0.16% of net assets. (e) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 57,900. These warrants were exercisable as of 12/26/00. (f) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 1.30. These warrants were exercisable as of 6/24/02. (g) Securities purchased with the cash proceeds from securities loaned. (h) Rates shown are the rates as of September 30, 2005. (i) Represents an investment in an affiliate. See accompanying notes to financial statements. 68
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES MID-CAP GROWTH EQUITY PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $384,733,234).............. $ 481,631,486 Dividends receivable ................................. 47,353 Interest receivable .................................. 9,952 Investments sold receivable .......................... 19,396,999 Capital shares sold receivable ....................... 75,297 Prepaid expenses ..................................... 24,420 Other assets ......................................... 2,035 ---------------- TOTAL ASSETS ...................................... 501,187,542 ---------------- LIABILITIES Payable upon return of securities loaned ............. 42,162,841 Investments purchased payable ........................ 11,121,051 Capital shares redeemed payable ...................... 628,655 Advisory fees payable ................................ 285,227 Administrative fees payable .......................... 34,614 Transfer agent fees payable .......................... 87,667 Other accrued expenses payable ....................... 192,230 ---------------- TOTAL LIABILITIES ................................. 54,512,285 ---------------- NET ASSETS (Applicable to 7,219,597 Institutional shares,112,752 Service shares, 29,568,600 Investor A shares, 6,567,268 Investor B shares and 2,305,471 Investor C shares outstanding) ............. $ 446,675,257 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($75,406,653/7,219,597)....... $ 10.44 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($1,135,542/112,752)................ $ 10.07 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($290,284,864/29,568,600)........ $ 9.82 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.82/0.9425) ....................................... $ 10.42 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($59,100,472/6,567,268).......... $ 9.00 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,747,726/2,305,471).......... $ 9.00 ================ See accompanying notes to financial statements. 69
BlackRock Funds STATEMENT OF NET ASSETS AURORA PORTFOLIO As of September 30, 2005 Number of Shares Value ------------ ------------- COMMON STOCKS -- 100.2% Aerospace -- 4.3% AAR Corp.(b) 365,892 $ 6,286,025 Alliant Techsystems,Inc.(b) 281,300 20,999,045 Esterline Technologies Corp.(b) 533,700 20,221,893 Goodrich Corp. 532,300 23,602,182 HEICO Corp. 650,300 15,086,960 Teledyne Technologies,Inc.(b) 477,700 16,466,319 Triumph Group,Inc.(b) 360,000 13,381,200 ------------- 116,043,624 ------------- Banks -- 5.3% City National Corp. 457,900 32,094,211 First Niagara Financial Group, Inc. 885,200 12,782,288 Hudson City Bancorp.,Inc. 1,299,000 15,458,100 Sovereign Bancorp.,Inc.(c) 1,477,400 32,561,896 Sterling Bancshares,Inc. 1,190,941 17,518,742 TD Banknorth, Inc.(c) 329,538 9,932,276 Zions Bancorp.(c) 311,200 22,160,552 ------------- 142,508,065 ------------- Broadcasting -- 0.3% Gray Communications,Inc. 735,100 7,784,709 ------------- Business Services -- 4.6% The Brink's Co. 967,100 39,709,126 Hiedrick & Struggles International,Inc.(b) 753,700 24,404,806 Manpower, Inc. 294,900 13,090,611 National Financial Partners Corp. 423,600 19,121,304 NCO Group, Inc.(b) 519,900 10,741,134 Stewart Enterprises,Inc. - Class A 2,761,200 18,306,756 ------------- 125,373,737 ------------- Chemicals -- 1.0% Church & Dwight Co.,Inc.(c) 491,200 18,144,928 Minerals Technologies, Inc.(c) 154,000 8,810,340 ------------- 26,955,268 ------------- Computer & Office Equipment -- 0.7% Electronics for Imaging, Inc.(b) 875,300 20,079,382 ------------- Computer Software & Services -- 4.1% Ceridian Corp.(b) 814,000 16,890,500 DST Systems, Inc.(b) 413,176 22,654,440 Hyperion Solutions Corp.(b) 179,300 8,722,945 Mercury Interactive Corp.(b) 215,800 8,545,680 MRO Software, Inc.(b) 854,440 14,388,770 ProQuest Co.(b) 433,900 15,707,180 Sybase, Inc.(b) 355,800 8,332,836 Veritas DGC, Inc.(b) 403,800 14,787,156 ------------- 110,029,507 ------------- Construction -- 2.8% Apogee Enterprises,Inc. 948,496 16,219,282 Champion Enterprises, Inc.(b) 1,497,400 22,131,572 ElkCorp(c) 420,200 15,030,554 Martin Marietta Materials, Inc. 296,600 23,271,236 ------------- 76,652,644 ------------- Containers -- 1.1% Packaging Corp. of America 880,900 17,098,269 Smurfit-Stone Container Corp.(b) 1,257,300 13,025,628 ------------- 30,123,897 ------------- Electronics -- 0.7% Amphenol Corp. 282,800 11,408,152 COMMON STOCKS (Continued) Electronics (Continued) Excel Technology,Inc.(b) 300,286 $ 7,714,347 ------------- 19,122,499 ------------- Energy & Utilities -- 5.2% CMS Energy Corp.(b) 1,828,900 30,085,405 Constellation Energy Group 254,797 15,695,495 DPL, Inc. 657,800 18,286,840 MDU Resources Group, Inc. 395,300 14,092,445 UGI Corp. 584,800 16,462,120 Westar Energy, Inc. 660,100 15,928,213 Wisconsin Energy Corp.(c) 714,200 28,510,864 ------------- 139,061,382 ------------- Entertainment & Leisure -- 4.1% Boyd Gaming Corp. 222,500 9,594,200 Gaylord Entertainment Co.(b) 438,400 20,889,760 GTECH Holdings Corp. 1,547,800 49,622,468 Pinnacle Entertainment,Inc.(b) 1,044,600 19,147,518 Steiner Leisure Ltd.(b) 324,100 11,009,677 ------------- 110,263,623 ------------- Finance -- 4.2% Affiliated Managers Group,Inc.(b)(c) 530,900 38,447,778 American Capital Strategies Ltd.(c) 471,100 17,270,526 CIT Group, Inc. 370,300 16,730,154 MCG Capital Corp. 1,057,700 17,843,399 MoneyGram International, Inc. 542,000 11,766,820 Nuveen Investments - Class A(c) 292,100 11,505,819 ------------- 113,564,496 ------------- Food & Agriculture -- 1.2% Dean Foods Co.(b) 720,400 27,994,744 TreeHouse Foods, Inc.(b) 144,080 3,872,870 ------------- 31,867,614 ------------- Furniture -- 1.7% Steelcase, Inc. 562,400 8,132,304 Walter Industries, Inc. 765,200 37,433,584 ------------- 45,565,888 ------------- Insurance -- 10.3% Allmerica Financial Corp.(b) 948,200 39,008,948 AmerUs Group Co. 346,800 19,895,916 CIGNA Corp. 194,800 22,959,128 Harleysville Group, Inc. 488,777 11,730,648 Hub International Ltd. 678,600 15,390,648 Humana, Inc.(b) 874,000 41,847,120 Odyssey Re Holdings Corp.(c) 747,700 19,096,258 Ohio Casualty Corp. 939,100 25,468,392 Platinum Underwriters Holdings Ltd. 501,300 14,983,857 Radian Group, Inc.(c) 698,200 37,074,420 United America Indemnity Ltd.(b) 881,700 16,179,195 Universal American Financial Corp.(b) 600,000 13,644,000 ------------- 277,278,530 ------------- Machinery & Heavy Equipment -- 3.9% Flowserve Corp.(b) 306,600 11,144,910 JLG Industries, Inc. 588,000 21,514,920 The Manitowoc Co., Inc. 653,400 32,833,350 Stewart & Stevenson Services, Inc. 504,700 12,037,095 See accompanying notes to financial statements. 70
BlackRock Funds STATEMENT OF NET ASSETS AURORA PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ------------ ------------- COMMON STOCKS (Continued) Machinery & Heavy Equipment (Continued) Wabtec Corp. 1,025,337 $ 27,971,193 ------------- 105,501,468 ------------- Manufacturing -- 6.7% Belden CDT, Inc. 738,900 14,356,827 Briggs & Stratton Corp.(c) 409,000 14,147,310 Crown Holdings, Inc.(b) 1,731,200 27,595,328 Herley Microwave Systems, Inc.(b) 929,000 17,307,270 K2, Inc.(b) 1,088,000 12,403,200 Ladish Co., Inc.(b) 738,100 12,872,464 Playtex Products, Inc.(b) 1,455,500 16,010,500 Rinker Group Ltd. - ADR(c) 540,200 34,362,122 Roper Industries, Inc. 508,800 19,990,752 Valmont Industries, Inc. 437,169 12,835,282 ------------- 181,881,055 ------------- Measuring & Controlling Devices -- 0.7% LeCroy Corp.(b) 513,133 7,620,025 Watts Water Technologies, Inc. 353,400 10,195,590 ------------- 17,815,615 ------------- Medical & Medical Services -- 2.4% LifePoint Hospitals, Inc.(b)(c) 656,336 28,701,573 RehabCare Group,Inc.(b) 744,800 15,283,296 STERIS Corp. 861,500 20,495,085 ------------- 64,479,954 ------------- Medical Instruments & Supplies -- 2.7% Bausch & Lomb, Inc. 464,300 37,459,724 Cytyc Corp.(b) 193,300 5,190,105 Fisher Scientific International, Inc.(b) 217,900 13,520,695 Viasys Healthcare, Inc.(b) 702,900 17,565,471 ------------- 73,735,995 ------------- Metal & Mining -- 3.0% Alpha Natural Resources, Inc.(b) 739,300 22,208,572 Massey Energy Co.(c) 702,900 35,897,103 RTI International Metals, Inc.(b) 602,800 23,720,180 ------------ 81,825,855 ------------ Motor Vehicles -- 1.0% Oshkosh Truck Corp. 615,600 26,569,296 ------------- Oil & Gas - 5.5% CNX Gas Corp.(b)(c)(d) 591,100 11,476,236 Core Laboratories NV(b) 692,800 22,349,728 EOG Resources, Inc. 469,700 35,180,530 Global Industries, Inc.(b) 1,388,400 20,465,016 Oneok, Inc.(c) 424,700 14,448,294 Vintage Petroleum, Inc. 991,000 45,249,060 ------------- 149,168,864 ------------- Paper & Forest Products -- 2.1% Caraustar Industries, Inc.(b) 788,021 8,652,471 Kadant, Inc.(b) 1,214,600 24,364,876 Rayonier, Inc. 396,233 22,830,945 ------------- 55,848,292 ------------- Pharmaceuticals -- 0.4% Valeant Pharmaceuticals International(c) 500,100 10,042,008 ------------- Publishing & Printing -- 0.3% Journal Register Co. 467,300 7,560,914 ------------- COMMON STOCKS (Continued) Railroad & Shipping -- 0.4% RailAmerica, Inc.(b) 956,000 $ 11,376,400 ------------- Real Estate -- 2.8% Heritage Property Investment Trust(c) 484,700 16,964,500 Highland Hospitality Corp. 594,600 6,100,596 Host Marriott Corp. 1,536,700 25,970,230 Ryland Group, Inc. 373,500 25,554,870 ------------- 74,590,196 ------------- Restaurants -- 1.0% CKE Restaurants, Inc.(c) 982,900 12,954,622 Papa John's International, Inc.(b) 260,100 13,036,212 ------------- 25,990,834 ------------- Retail Merchandising -- 8.0% AnnTaylor Stores Corp .(b)(c) 1,124,300 29,850,165 BJ's Wholesale Club, Inc.(b)(c) 1,182,600 32,876,280 Federated Department Stores, Inc. 327,500 21,899,925 Linens 'n Things, Inc.(b)(c) 1,361,200 36,344,040 Longs Drug Stores Corp.(c) 452,979 19,428,269 Officemax, Inc.(c) 764,400 24,208,548 Pier 1 Imports, Inc. 1,077,500 12,143,425 Reebok International Ltd 200,300 11,330,971 Saks, Inc.(b) 1,540,600 28,501,100 ------------- 216,582,723 ------------- Security Brokers & Dealers -- 0.6% A.G. Edwards, Inc. 366,400 16,051,984 ------------- Semiconductors & Related Devices -- 0.8% Cypress Semiconductor Corp.(b)(c) 1,012,900 15,244,145 IXYS Corp.(b) 701,271 7,405,422 ------------- 22,649,567 ------------- Telecommunications -- 4.6% Amdocs Ltd.(b) 521,100 14,450,103 Anaren, Inc.(b) 934,170 13,171,797 Avaya, Inc.(b) 1,325,600 13,653,680 Cablevision Systems New York Group - Class A(b) 519,000 15,917,730 Nextel Partners, Inc.- Class A(b)(c) 1,368,100 34,339,310 Premiere Global Services, Inc.(b) 1,466,600 11,996,788 Scientific-Atlanta, Inc. 565,500 21,211,905 ------------- 124,741,313 ------------- Transportation -- 1.7% Kirby Corp.(b) 251,300 12,421,759 Laidlaw International, Inc. 1,363,500 32,955,795 ------------- 45,377,554 ------------- TOTAL COMMON STOCKS (Cost $2,000,165,305) 2,704,064,752 ------------- See accompanying notes to financial statements. 71
BlackRock Funds STATEMENT OF NET ASSETS AURORA PORTFOLIO (Concluded) As of September 30, 2005 Par/shares Maturity (000) Value -------- ---------- --------------- SHORT TERM INVESTMENTS -- 6.6% Morgan Stanley, Floating Rate Notes 4.01%(e)(f) 11/14/05 $ 7,747 $ 7,746,680 Galileo Money Market Fund 903 903,032 Institutional Money Market Trust(f)(g) 168,828 168,827,843 --------------- TOTAL SHORT TERM INVESTMENTS (Cost $177,477,555) 177,477,555 --------------- TOTAL INVESTMENTS IN SECURITIES -- 106.8% (Cost $2,177,642,860(a)) 2,881,542,307 LIABILITIES IN EXCESS OF OTHER ASSETS -- (6.8)% (182,613,055) --------------- NET ASSETS -- 100.0% (Applicable to 3,818,832 Institutional shares, 4 Service shares, 40,363,015 Investor A shares, 11,394,466 Investor B shares and 10,594,522 Investor C shares outstanding) $ 2,698,929,252 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($165,837,474/3,818,832) $ 43.43 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($159/4)(h) $ 41.88 =============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($1,690,496,896/40,363,015) $ 41.88 =============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($41.88/0.9425) $ 44.44 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($436,642,428/11,394,466) $ 38.32 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($405,952,295/10,594,522) $ 38.32 =============== - ---------- (a) Cost for Federal income tax purposes is $2,183,317,284. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 708,547,402 Gross unrealized depreciation (10,322,379) --------------- $ 698,225,023 =============== (b) Non-income producing security. (c) Total or partial securities on loan. (d) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, these securities had a total market value of $11,476,236 which represents less than 0.43% of net assets. (e) Rates shown are the rates as of September 30, 2005. (f) Securities purchased with the cash proceeds from securities loaned. (g) Represents an investment in an affiliate. (h) Exact net assets and shares outstanding at September 30, 2005 were $159.30 and 3.804, respectively. See accompanying notes to financial statements. 72
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES AURORA PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $2,177,642,860) ............................... $ 2,881,542,307 Dividends receivable ..................................................... 2,768,463 Interest receivable ...................................................... 77,431 Investments sold receivable .............................................. 11,723,681 Capital shares sold receivable ........................................... 2,355,836 Prepaid expenses ......................................................... 83,069 --------------- TOTAL ASSETS ........................................................... 2,898,550,787 --------------- LIABILITIES Payable upon return of securities loaned ................................. 176,574,523 Investments purchased payable ............................................ 1,572,075 Capital shares redeemed payable .......................................... 17,380,868 Advisory fees payable .................................................... 1,805,047 Administrative fees payable .............................................. 494,178 Transfer agent fees payable .............................................. 245,709 Other accrued expenses payable ........................................... 1,549,135 --------------- TOTAL LIABILITIES ...................................................... 199,621,535 --------------- NET ASSETS (Applicable to 3,818,832 Institutional shares, 4 Service shares, 40,363,015 Investor A shares, 11,394,466 Investor B shares and 10,594,522 Investor C shares outstanding) ................................ $ 2,698,929,252 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($165,837,474/3,818,832) ......................... $ 43.43 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($159/4)(a) ............................................ $ 41.88 =============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($1,690,496,896/40,363,015) ......................... $ 41.88 =============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($41.88/0.9425) ............... $ 44.44 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($436,642,428/11,394,466) ........................... $ 38.32 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($405,952,295/10,594,522) ........................... $ 38.32 =============== - --------- (a) Exact net assets and shares outstanding at September 30, 2005 were $159.30 and 3.804, respectively. See accompanying notes to financial statements. 73
BlackRock Funds STATEMENT OF NET ASSETS SMALL/MID-CAP GROWTH PORTFOLIO As of September 30, 2005 Number of Shares Value ----------- ------------ COMMON STOCKS -- 98.5% Advertising -- 0.9% Getty Images, Inc.(b) 29,000 $ 2,495,160 ------------ Aerospace -- 0.8% Alliant Techsystems,Inc.(b) 30,600 2,284,290 ------------ Air Transportation -- 0.2% ExpressJet Holdings, Inc.(b) 68,600 615,342 ------------ Broadcasting -- 1.5% CKX, Inc.(b) 227,700 2,862,189 Radio One, Inc. - Class D(b) 107,300 1,410,995 ------------ 4,273,184 ------------ Business Services -- 11.8% Advisory Board Co.(b) 61,500 3,200,460 The Corporate Executive Board Co. 49,200 3,836,616 CoStar Group, Inc.(b)(c) 67,600 3,158,272 Digitas, Inc.(b) 503,700 5,722,032 Equifax, Inc. 60,700 2,120,858 Gartner, Inc. - Class A(b) 250,700 2,930,683 Global Cash Access, Inc.(b) 24,500 345,450 Global Payments, Inc. 42,500 3,303,100 Heartland Payment Systems, Inc.(b) 135,800 3,240,188 Navigant Consulting, Inc.(b)(c) 120,100 2,301,116 Net 1 UEPS Technologies, Inc.(b) 109,800 2,461,716 VistaPrint Ltd.(b) 46,500 709,125 ------------ 33,329,616 ------------ Chemicals -- 1.3% Agrium, Inc. 169,800 3,730,506 ------------ Computer & Office Equipment -- 0.5% Hutchinson Technology, Inc.(b) 54,500 1,423,540 ------------ Computer Software & Services -- 11.3% Anteon International Corp.(b)(c) 50,000 2,138,000 Autobytel, Inc.(b)(d) 73,042 365,940 BEA Systems, Inc.(b) 254,500 2,285,410 Borland Software Corp.(b) 422,100 2,456,622 CACI International, Inc.(b) 39,300 2,381,580 Ceridian Corp.(b) 111,600 2,315,700 Foundry Networks, Inc.(b) 356,700 4,530,090 Hyperion Solutions Corp.(b) 53,500 2,602,775 McData Corp. - Class A(b) 707,700 3,708,348 SonicWALL, Inc.(b) 774,300 4,916,805 VeriFone Holdings, Inc.(b) 208,000 4,182,880 ------------ 31,884,150 ------------ Construction -- 0.5% Jacobs Engineering Group, Inc.(b) 19,400 1,307,560 ----------- Entertainment & Leisure -- 5.3% GTECH Holdings Corp. 98,300 3,151,498 Marvel Entertainment, Inc.(b) 102,500 1,831,675 Orient-Express Hotels Ltd. - Class A 86,500 2,458,330 Scientific Games Corp. - Class A(b)(c) 87,100 2,700,100 Station Casinos, Inc. 70,200 4,658,472 ----------- 14,800,075 ----------- Finance -- 2.5% Affiliated Managers Group, Inc.(b)(c) 39,600 2,867,832 Nuveen Investments - Class A(c) 55,100 2,170,389 COMMON STOCKS (Continued) Finance (Continued) Wright Express Corp.(b) 98,000 $ 2,115,820 ------------ 7,154,041 ------------ Machinery & Heavy Equipment -- 1.0% Bucyrus International, Inc. - Class A 6,600 324,258 Dresser-Rand Group, Inc 43,400 1,068,942 Lennox International, Inc. 51,900 1,422,579 ------------ 2,815,779 ------------ Manufacturing -- 2.8% Actuant Corp. - Class A 55,400 2,592,720 Gardner Denver, Inc.(b) 69,900 3,117,540 The Warnaco Group, Inc.(b) 106,100 2,324,651 ------------ 8,034,911 ------------ Medical & Medical Services -- 9.3% Community Health Systems, Inc.(b) 133,900 5,196,659 Coventry Health Care, Inc.(b) 42,100 3,621,442 Digene Corp.(b) 97,400 2,775,900 Medco Health Solutions, Inc.(b) 22,687 1,243,928 Noven Pharmaceuticals, Inc.(b) 200,900 2,812,600 Omnicare, Inc.(c) 64,700 3,638,081 Pediatrix Medical Group, Inc.(b) 40,100 3,080,482 Triad Hospitals, Inc.(b) 84,200 3,811,734 ------------ 26,180,826 ------------ Medical Instruments & Supplies -- 7.3% Advanced Medical Optics, Inc.(b) 93,900 3,563,505 Charles River Laboratories International, Inc.(b) 44,400 1,936,728 Hologic, Inc.(b) 38,100 2,200,275 Kyphon, Inc.(b) 82,500 3,625,050 Martek Biosciences Corp.(b)(c) 76,900 2,701,497 Varian Medical Systems, Inc.(b)(c) 79,200 3,129,192 Wright Medical Group, Inc.(b) 140,200 3,460,136 ------------ 20,616,383 ------------ Metal & Mining -- 3.9% Alpha Natural Resources, Inc.(b) 113,900 3,421,556 CONSOL Energy, Inc. 39,800 3,035,546 Massey Energy Co. 89,000 4,545,230 ------------ 11,002,332 ------------ Motor Vehicles -- 0.7% Wabash National Corp. 99,000 1,946,340 ----------- Oil & Gas -- 8.9% Airgas, Inc.(c) 163,900 4,856,357 Diamond Offshore Drilling, Inc. 39,500 2,419,375 Energy Partners Ltd.(b) 64,200 2,004,324 ENSCO International, Inc. 79,100 3,685,269 National-Oilwell, Inc.(b) 45,700 3,007,060 Pride International, Inc.(b) 117,100 3,338,521 Vintage Petroleum, Inc. 123,500 5,639,010 ------------ 24,949,916 ------------ Personal Services -- 4.0% Corinthian Colleges, Inc.(b) 133,400 1,770,218 Educate, Inc.(b) 196,100 2,941,500 Laureate Education, Inc.(b) 131,500 6,439,555 ------------ 11,151,273 ------------ See accompanying notes to financial statements. 74
BlackRock Funds STATEMENT OF NET ASSETS SMALL/MID-CAP GROWTH PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ----------- ------------ COMMON STOCKS (Continued) Pharmaceuticals -- 3.8% Alkermes, Inc.(b) 264,800 $ 4,448,640 Endo Pharmaceuticals Holdings, Inc.(b) 141,200 3,765,804 Shire Pharmaceuticals Group PLC - ADR 65,500 2,422,845 ------------ 10,637,289 ------------ Restaurants -- 2.6% RARE Hospitality International, Inc.(b) 94,000 2,415,800 Ruth's Chris Steak House, Inc.(b) 127,900 2,350,802 Texas Roadhouse, Inc.(b) 165,200 2,461,480 ------------ 7,228,082 ------------ Retail Merchandising -- 4.6% 99 Cents Only Stores(b) 56,600 523,550 Central Garden & Pet Co.(b) 66,900 3,027,225 Coldwater Creek, Inc.(b) 73,000 1,841,060 Dick's Sporting Goods, Inc.(b)(c) 88,915 2,677,231 Jos. A. Bank Clothiers, Inc.(b) 65,600 2,835,232 Williams-Sonoma, Inc.(b) 56,800 2,178,280 ------------ 13,082,578 ------------ Semiconductors & Related Devices -- 3.8% Integrated Device Technology, Inc.(b) 270,400 2,904,096 Microsemi Corp.(b) 173,300 4,426,082 O2Micro International Ltd.(b) 208,200 3,277,068 ------------ 10,607,246 ------------ Telecommunications -- 7.7% ADTRAN, Inc.(c) 152,700 4,810,050 Amdocs Ltd.(b) 111,000 3,078,030 American Tower Corp. - Class A(b) 145,700 3,635,215 Avid Technology, Inc.(b) 50,400 2,086,560 Harris Corp. 45,500 1,901,900 NeuStar, Inc. - Class A(b) 10,900 348,691 Polycom, Inc.(b) 122,300 1,977,591 Scientific-Atlanta, Inc. 55,100 2,066,801 Syniverse Holdings, Inc.(b) 109,400 1,684,760 ------------ 21,589,598 ------------ Transportation -- 0.7% Landstar System, Inc. 47,400 1,897,422 ------------ Waste Management -- 0.8% Stericycle, Inc.(b) 41,800 2,388,870 ------------ TOTAL COMMON STOCKS (Cost $236,235,571) 277,426,309 ------------ Par/Shares Maturity (000) value -------- ----------- ------------- SHORT TERM INVESTMENTS - 12.0% Morgan Stanley, Floating Rate Notes 4.02%(e)(f) 11/07/05 $ 1,097 $ 1,097,384 4.01%(e)(f) 11/14/05 2,989 2,988,972 4.02%(e)(f) 01/05/06 1,335 1,334,604 Galileo Money Market Fund 7,080 7,079,941 Institutional Money Market Trust(f)(g) 21,269 21,268,527 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $33,769,428) 33,769,428 ------------- TOTAL INVESTMENTS IN SECURITIES - 110.5% (Cost $270,004,999(a)) 311,195,737 LIABILITIES IN EXCESS OF OTHER ASSETS - (10.5)% (29,552,840) ------------- NET ASSETS - 100.0% (Applicable to 1,327,781 Institutional shares, 8 Service Shares, 14,892,838 Investor A shares, 1,912,217 Investor B shares and 1,605,120 Investor C shares outstanding) $ 281,642,897 ============= See accompanying notes to financial statements. 75
BlackRock Funds STATEMENT OF NET ASSETS SMALL/MID-CAP GROWTH PORTFOLIO (Concluded) As of September 30, 2005 Value ------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($20,132,511/1,327,781) $ 15.16 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($113/8)(h) $ 14.47 ============= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($215,623,072/14,892,838) $ 14.48 ========= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($14.48/0.9425) $ 15.36 ========= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($24,924,537/1,912,217) $ 13.03 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,962,664/1,605,120) $ 13.06 ======= - ---------- (a) Cost for Federal income tax purposes is $270,946,080. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 48,454,048 Gross unrealized depreciation (8,204,391) ------------- $ 40,249,657 ============= - ---------- (b) Non-income producing security. (c) Total or partial securities on loan. (d) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, this security had a total market value of $365,940 which represents 0.13% of net assets. (e) Rates shown are the rates as of September 30, 2005. (f) Securities purchased with the cash proceeds from securities loaned. (g) Represents an investment in an affiliate. (h) Exact net assets and shares outstanding at September 30, 2005 were $112.90 and 7.805, respectively. See accompanying notes to financial statements. 76
Blackrock funds STATEMENT OF ASSETS AND LIABILITIES SMALL/MID-CAP GROWTH PORTFOLIO As of september 30, 2005 ASSETS Investments at value (Cost $274,004,999) ................................. $ 311,195,737 Dividends receivable ..................................................... 22,824 Interest receivable ...................................................... 4,633 Investments sold receivable .............................................. 2,065,182 Capital shares sold receivable ........................................... 514,360 Prepaid expenses ......................................................... 59,266 Other assets ............................................................. 13,387 ------------- TOTAL ASSETS ........................................................... 313,875,389 ------------ LIABILITIES Payable upon return of securities loaned ................................. 26,689,488 Investments purchased payable ............................................ 3,745,834 Capital shares redeemed payable .......................................... 1,380,061 Advisory fees payable .................................................... 208,576 Administrative fees payable .............................................. 20,302 Transfer agent fees payable .............................................. 39,378 Other accrued expenses payable ........................................... 148,853 ------------- TOTAL LIABILITIES ...................................................... 32,232,492 ------------- NET ASSETS (Applicable to 1,327,781 Institutional shares, 8 Service shares, 14,892,838 Investor A shares, 1,912,217 Investor B shares and 1,605,120 Investor C shares outstanding) ................................. $ 281,642,897 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($20,132,511/1,327,781) .......................... $ 15.16 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($113/8)(a) ............................................ $ 14.47 ============= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($215,623,072/14,892,838) ........................... $ 14.48 ============= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($14.48/0.9425) ............... $ 15.36 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($24,924,537/1,912,217) ............................. $ 13.03 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,962,664/1,605,120) ............................. $ 13.06 ============= - --------- (a) Exact net assets and shares outstanding at September 30, 2005 were $112.90 and 7.805, respectively. See accompanying notes to financial statements. 77
BlackRock Funds STATEMENT OF NET ASSETS SMALL CAP VALUE EQUITY PORTFOLIO As of september 30, 2005 Number of shares value ----------- ------------- COMMON STOCKS -- 94.8% Aerospace -- 0.7% K&F Industries 56,100 $ 938,553 ------------ Holdings, Inc.(b) Banks -- 10.2% Cathay General Bancorp. 31,800 1,127,628 Central Pacific Financial Corp. 27,200 956,896 First Niagara Financial Group, Inc. 123,200 1,779,008 Gold Banc Corp., Inc. 129,700 1,932,530 Sterling Financial Corp. 74,025 1,669,264 Taylor Capital Group, Inc. 23,400 884,988 Trustmark Corp. 64,400 1,793,540 Umpqua Holdings Corp. 45,100 1,096,832 Wintrust Financial Corp 38,400 1,929,984 ------------ 13,170,670 ------------ Business Services -- 5.0% The Brink's Co. 49,000 2,011,940 Digitas, Inc.(b) 102,100 1,159,856 Hiedrick & Struggles International, Inc.(b) 56,300 1,822,994 National Financial Partners Corp. 30,800 1,390,312 ------------ 6,385,102 ------------ Chemicals -- 0.4% Church & Dwight Co., Inc. 14,500 535,630 ------------ Computer & Office Equipment -- 2.3% Electronics for Imaging, Inc.(b) 86,600 1,986,604 Imation Corp. 22,700 973,149 ------------ 2,959,753 ------------ Computer Software & Services -- 6.2% Borland Software Corp.(b) 185,500 1,079,610 Brooks Automation, Inc.(b) 39,700 529,201 FileNET Corp.(b) 32,800 915,120 Hyperion Solutions Corp.(b) 24,400 1,187,060 Manhattan Associates, Inc.(b) 46,600 1,081,120 Novatel Wireless, Inc.(b)(c) 41,500 600,505 ProQuest Co.(b) 14,600 528,520 RSA Security, Inc.(b) 68,300 868,093 TIBCO Software, Inc.(b) 147,800 1,235,608 ------------ 8,024,837 ------------ Construction -- 3.6% Dycom Industries, Inc.(b) 78,700 1,591,314 Washington Group International, Inc.(b) 57,500 3,098,675 ------------ 4,689,989 ------------ Containers -- 0.2% Packaging Corp. of America 10,500 203,805 ------------ Energy & Utilities -- 5.2% Black Hills Corp. 22,700 984,499 ITC Holdings Corp.(c) 43,400 1,257,732 Northwestern Corp. 61,600 1,859,704 PNM Resources, Inc. 63,300 1,814,811 Thomas & Betts Corp.(b) 24,000 825,840 ----------- 6,742,586 ----------- Entertainment & Leisure -- 3.4% Gaylord Entertainment Co.(b) 58,000 2,763,700 Kerzner International Ltd.(b) 15,400 855,470 Pinnacle Entertainment, Inc.(b) 39,100 716,703 ------------ 4,335,873 ------------ COMMON STOCKS (Continued) Finance -- 1.8% Affiliated Managers Group,Inc.(b)(c) 31,800 $ 2,302,956 ------------ Food & Agriculture -- 3.5% Chiquita Brands International, Inc.(c) 48,100 1,344,395 Diamond Foods, Inc.(b) 31,600 540,360 Hain Celestial Group, Inc.(b) 44,200 857,480 Lance, Inc. 37,700 658,242 TreeHouse Foods, Inc.(b) 40,100 1,077,888 ------------ 4,478,365 ------------ Furniture -- 1.1% Walter Industries, Inc. 28,000 1,369,760 ------------ Insurance -- 5.0% Allmerica Financial Corp.(b) 31,500 1,295,910 Aspen Insurance Holding 37,000 1,093,350 Max Re Capital Ltd. 97,300 2,412,067 Universal American Financial Corp.(b) 71,700 1,630,458 ------------ 6,431,785 ------------ Machinery & Heavy Equipment -- 2.7% Axcelis Technologies, Inc.(b) 113,100 590,382 Lennox International, Inc. 66,700 1,828,247 Lone Star Technologies, Inc.(b) 19,000 1,056,210 ------------ 3,474,839 ------------ Manufacturing -- 3.8% Actuant Corp. - Class A 19,000 889,200 Aptargroup, Inc. 21,400 1,065,934 Briggs & Stratton Corp 37,900 1,310,961 Fleetwood Enterprises, Inc.(b) 39,100 480,930 K2, Inc.(b) 99,700 1,136,580 ------------ 4,883,605 ------------ Medical & Medical Services -- 1.2% Amedisys, Inc.(b)(c) 20,100 783,900 Per-Se Technologies,Inc.(b) 38,500 795,410 ------------ 1,579,310 ------------ Medical Instruments & Supplies -- 3.9% DJ Orthopedics, Inc.(b) 53,100 1,536,714 Polymedica Corp. 31,900 1,114,586 Sybron Dental Specialties, Inc.(b) 55,500 2,307,690 ------------ 4,958,990 ------------ Metal & Mining -- 2.8% Alpha Natural Resources Inc. (b) 43,800 1,315,752 Foundation Coal Holdings, Inc. 59,600 2,291,620 ------------ 3,607,372 ------------ Motor Vehicles -- 1.4% Tenneco Automotive, Inc.(b) 54,300 950,793 Winnebago Industries, Inc.(c) 31,400 909,658 ------------ 1,860,451 ------------ Oil & Gas -- 4.6% Airgas, Inc. 46,100 1,365,943 CNX Gas Corp.(b)(d) 28,000 543,621 Comstock Resources, Inc.(b) 33,300 1,092,573 Vintage Petroleum, Inc. 17,300 789,918 See accompanying notes to financial statements. 78
BlackRock Funds STATEMENT OF NET ASSETS SMALL CAP VALUE EQUITY PORTFOLIO (Continued) As of September 30, 2005 Number of shares value ----------- ------------- COMMON STOCKS (Continued) Oil & Gas (Continued) Whiting Petroleum Corp.(b) 49,400 $ 2,165,696 ------------- 5,957,751 ------------- Paper & Forest Products -- 0.9% Bowater, Inc.(c) 41,500 1,173,205 ------------- Publishing & Printing -- 3.3% Banta Corp. 61,200 3,114,468 PRIMEDIA, Inc.(b) 265,000 1,083,850 ------------- 4,198,318 ------------- Real Estate -- 2.9% HomeBanc Corp. 75,000 579,000 Sunstone Hotel Investors, Inc. 27,200 663,408 Trustreet Properties, Inc. 53,900 843,535 U-Store-It Trust 83,100 1,684,437 ------------- 3,770,380 ------------- Restaurants -- 2.1% Landry's Restaurants, Inc. 21,300 624,090 Lone Star Steakhouse & Saloon, Inc. 36,700 954,200 Triarc Cos. - Class A(c) 66,500 1,117,200 ------------- 2,695,490 ------------- Retail Merchandising -- 10.9% AnnTaylor Stores Corp.(b) 23,700 629,235 BJ's Wholesale Club, Inc.(b) 33,400 928,520 The Finish Line, Inc. - Class A 69,400 1,012,546 Handleman Co. 117,100 1,478,973 Jarden Corp.(b) 63,800 2,620,266 Linens 'n Things, Inc.(b) 70,100 1,871,670 Officemax, Inc. 39,600 1,254,132 Pier 1 Imports, Inc. 81,200 915,124 RC2 Corp.(b) 34,300 1,157,968 Saks, Inc.(b) 20,200 373,700 The Sports Authority, Inc.(b) 38,100 1,121,664 Stage Stores, Inc. 22,800 612,636 ------------- 13,976,434 ------------- Semiconductors & Related Devices -- 0.5% Integrated Device Technology, Inc.(b) 54,300 583,182 ------------- Telecommunications -- 2.9% Dobson Communications Corp. - Class A(b) 98,900 759,552 Polycom, Inc.(b) 37,700 609,60 Tekelec(b) 63,700 1,334,51 Ubiquitel, Inc.(b) 120,100 1,049,67 ------------- 3,753,350 ------------- Transportation -- 2.3% Laidlaw International, Inc. 120,000 2,900,400 ------------- TOTAL COMMON STOCKS (Cost $105,755,760) 121,942,741 ------------- Par/Shares Maturity (000) -------- ------------ SHORT TERM INVESTMENTS - 9.4% Federal Home Loan Bank, Discount Notes 3.18%(e) 10/03/05 $ 1,000 999,823 Galileo Money Market Fund 6,023 6,023,040 Institutional Money Market Trust(f)(g) 5,002 5,001,530 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $12,024,393) 12,024,393 ------------- TOTAL INVESTMENTS IN SECURITIES - 104.2% (Cost $117,780,153(a)) 133,967,134 LIABILITIES IN EXCESS OF OTHER ASSETS - (4.2)% (5,368,468) ------------- NET ASSETS - 100.0% (Applicable to 340,461 BlackRock, 4,540,622 Institutional shares, 227,752 Service shares, 2,145,848 Investor A shares, 967,654 Investor B shares and 482,906 Investor C shares outstanding) $ 128,598,666 ============= See accompanying notes to financial statements. 79
BlackRock Funds STATEMENT OF NET ASSETS SMALL CAP VALUE EQUITY PORTFOLIO (Concluded) As of September 30, 2005 Value ------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($5,162,286/340,461) $ 15.16 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($68,880,491/4,540,622) $ 15.17 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($3,405,045/227,752) $ 14.95 ============= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($31,888,964/2,145,848) $ 14.86 ============= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($14.86/0.9425) $ 15.77 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($12,848,079/967,654) $ 13.28 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($6,413,801/482,906) $ 13.28 ============= - ---------- (a) Cost for Federal income tax purposes is $117,902,070. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 19,235,338 Gross unrealized depreciation (3,170,274) ------------- $ 16,065,064 ============= (b) Non-income producing security. (c) Total or partial securities on loan. (d) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, these securities had a total market value of $543,621 which represents 0.42% of net assets. (e) The rate shown is the effective yield on the discount notes at the time of purchase. (f) Represents an investment in an affiliate. (g) Securities purchased with the cash proceeds from securities loaned. See accompanying notes to financial statements. 80
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES SMALL CAP VALUE EQUITY PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $117,780,153)........................... $ 133,967,134 Dividends receivable .............................................. 68,459 Interest receivable ............................................... 17,571 Investments sold receivable ....................................... 1,734,435 Capital shares sold receivable .................................... 25,169 Prepaid expenses .................................................. 25,806 -------------- TOTAL ASSETS ................................................... 135,838,574 -------------- LIABILITIES Payable upon return of securities loaned .......................... 5,001,530 Investments purchased payable ..................................... 1,952,979 Capital shares redeemed payable ................................... 132,604 Advisory fees payable ............................................. 58,274 Administrative fees payable ....................................... 20,510 Transfer agent fees payable ....................................... 14,349 Other accrued expenses payable .................................... 59,662 -------------- TOTAL LIABILITIES .............................................. 7,239,908 -------------- NET ASSETS (Applicable to 340,461 BlackRock shares, 4,540,622 Institutional shares, 227,752 Service shares, 2,145,848 Investor A shares, 967,654 Investor B shares and 482,906 Investor C shares outstanding) ............................ $ 128,598,666 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($5,162,286/340,461)........................... $ 15.16 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($68,880,491/4,540,622).................... $ 15.17 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($3,405,045/227,752)............................. $ 14.95 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($31,888,964/2,145,848)....................... $ 14.86 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($14.86/0.9425)......... $ 15.77 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($12,848,079/967,654)......................... $ 13.28 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($6,413,801/482,906).......................... $ 13.28 ============== See accompanying notes to financial statements. 81
BlackRock Funds STATEMENT OF NET ASSETS SMALL CAP CORE EQUITY PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 95.5% Aerospace -- 4.9% AAR Corp.(b) 22,300 $ 383,114 Aviall, Inc.(b) 40,700 1,374,846 Orbital Sciences Corp.(b) 50,250 628,125 ---------------- 2,386,085 ---------------- Banks -- 7.4% Cathay General Bancorp. 16,700 592,182 Central Pacific Financial Corp. 18,450 649,071 Gold Banc Corp., Inc. 39,600 590,040 Umpqua Holdings Corp. 24,150 587,328 Wintrust Financial Corp 15,000 753,900 WSFS Financial Corp. 6,700 394,563 ---------------- 3,567,084 ---------------- Broadcasting -- 0.7% Alliance Atlantis Communications,Inc.(b) 13,300 363,422 ---------------- Business Services -- 6.4% The Brink's Co. 21,250 872,525 Digitas, Inc.(b) 31,800 361,248 HMS Holdings Corp.(b) 55,650 385,655 National Financial Partners Corp. 16,150 729,011 Navigant Consulting, Inc.(b)(c) 12,900 247,164 Watson Wyatt & Co. Holdings 17,950 483,752 ---------------- 3,079,355 ---------------- Computer & Office Equipment -- 0.7% Electronics for Imaging, Inc.(b) 15,050 345,247 ---------------- Computer Software & Services -- 7.6% Borland Software Corp.(b) 62,450 363,459 CACI International, 9,600 581,760 Foundry Networks, Inc.(b) 34,950 443,865 Micromuse, Inc.(b) 73,950 582,726 Progress Software Corp.(b ) 14,500 460,665 SkillSoft PLC - ADR(b) 157,500 721,350 TIBCO Software, Inc.(b) 63,650 532,114 ---------------- 3,685,939 ---------------- Construction -- 1.0% Dycom Industries, Inc.(b) 23,200 469,104 ---------------- Energy & Utilities -- 1.1% ITC Holdings Corp.(c) 17,900 518,742 ---------------- Entertainment & Leisure -- 5.0% Gaylord Entertainment Co.(b) 17,400 829,110 Kerzner International Ltd.(b) 7,450 413,847 Marvel Entertainment, Inc.(b) 12,400 221,588 Orient-Express Hotels Ltd. - Class A 15,350 436,247 Pinnacle Entertainment, Inc.(b) 15,100 276,783 Scientific Games Corp. - Class A(b)(c) 7,250 224,750 ---------------- 2,402,325 ---------------- Finance -- 0.9% Affiliated Managers Group, Inc.(b)(c) 5,900 427,278 ---------------- Food & Agriculture -- 2.6% Chiquita Brands International, Inc.(c) 17,750 496,112 Diamond Foods, Inc.(b) 12,900 220,590 Lance, Inc. 29,950 522,927 ---------------- 1,239,629 ---------------- Insurance -- 4.5% Allmerica Financial Corp.(b) 16,750 689,095 Max Re Capital Ltd. 24,300 602,397 Universal American Financial Corp.(b) 38,600 877,764 ---------------- 2,169,256 ---------------- Machinery & Heavy Equipment -- 0.7% Lennox International, Inc. 13,250 363,182 ---------------- Manufacturing -- 4.5% Applied Films Corp.(b) 11,550 242,550 Aptargroup, Inc. 11,900 592,739 Fleetwood Enterprises, 25,450 313,035 Hexel Corp.(b) 33,800 618,202 K2, Inc.(b) 17,100 194,940 Maidenform Brands, Inc.(b) 17,150 235,813 ---------------- 2,197,279 ---------------- Medical & Medical Services -- 5.2% Amedisys, Inc.(b)(c) 6,300 245,700 Community Health Systems, Inc.(b) 6,700 260,027 Digirad Corp.(b) 55,600 268,326 Pediatrix Medical Group, Inc.(b) 8,450 649,129 Per-Se Technologies, In 27,750 573,315 VCA Antech, Inc.(b) 6,250 159,500 Vital Images, Inc.(b) 16,000 356,160 ---------------- 2,512,157 ---------------- Medical Instruments & Supplies -- 5.9% DJ Orthopedics, Inc.(b) 19,800 573,012 Hologic, Inc.(b) 10,850 626,587 IntraLase Corp.(b) 14,400 211,824 Martek Biosciences Corp.(b) 6,500 228,345 MWI Veterinary Supply, Inc.(b) 20,500 408,975 Symmetry Medical, Inc.(b) 10,100 239,370 Syneron Medical Ltd.(b)15,000 548,100 ---------------- 2,836,213 ---------------- Metal & Mining -- 1.7% Foundation Coal Holdings, Inc. 21,100 811,295 ---------------- Motor Vehicles -- 0.8% Tenneco Automotive, Inc.(b) 21,100 369,461 ---------------- Oil & Gas -- 13.2% Airgas, Inc.(c) 30,700 909,641 Cimarex Energy Co.(b)(c) 9,520 431,542 Double Eagle Petroleum Co.(b) 20,700 495,765 Energy Partners Ltd.(b) 7,800 243,516 Goodrich Petroleum Corp.(b) 20,250 475,267 KCS Energy, Inc.(b) 34,150 940,150 Superior Energy Serivces, Inc.(b) 22,000 507,980 TETRA Technologies, Inc 34,200 1,067,724 Tidewater, Inc.(c) 9,400 457,498 Vintage Petroleum, Inc. 18,150 828,729 ---------------- 6,357,812 ---------------- Personal Services -- 2.6% Laureate Education, Inc.(b) 25,950 1,270,772 ---------------- See accompanying notes to financial statements. 82
BlackRock Funds STATEMENT OF NET ASSETS SMALL CAP CORE EQUITY PORTFOLIO (Concluded) As of September 30, 2005 Number Of Shares Value --------------- ---------------- COMMON STOCKS (Continued) Pharmaceuticals -- 1.9% Nabi Biopharmaceuticals(b)(c) 47,300 $ 619,630 Valeant Pharmaceuticals International 14,100 283,128 ---------------- 902,758 ---------------- Publishing & Printing -- 0.9% Banta Corp. 8,200 417,298 ---------------- Real Estate -- 2.5% Eagle Hospitality Properties Trust, Inc. 63,150 630,237 LaSalle Hotel Properties 17,600 606,320 ---------------- 1,236,557 ---------------- Restaurants -- 0.6% RARE Hospitality International,Inc.(b) 11,200 287,840 ---------------- Retail Merchandising -- 5.2% Dick's Sporting Goods, Inc.(b)(c) 11,700 352,287 DSW, Inc. - Class A(b) 17,100 362,520 Handleman Co. 52,950 668,759 Hot Topic, Inc.(b) 14,600 224,256 Jarden Corp.(b) 11,975 491,813 Pier 1 Imports, Inc. 19,000 214,130 The Sports Authority, Inc.(b) 7,050 207,552 ---------------- 2,521,317 ---------------- Semiconductors & Related Devices -- 3.6% Integrated Device Technology, Inc.(b) 39,875 428,258 O2Micro International Ltd.(b) 49,300 775,982 Rudolph Technologies, Inc.(b) 41,750 562,372 ---------------- 1,766,612 ---------------- Telecommunications -- 2.7% ADTRAN, Inc.(c) 23,350 735,525 Ubiquitel, Inc.(b) 65,850 575,529 ---------------- 1,311,054 ---------------- Transportation -- 0.7% SCS Transportation, Inc.(b) 21,450 336,980 ---------------- TOTAL COMMON STOCKS (Cost $42,255,890) 46,152,053 ---------------- Par/shares Maturity (000) ---------------- ---------------- SHORT TERM INVESTMENTS -- 14.0% Morgan Stanley, Floating Rate Notes 4.02%(d)(e) 11/07/05 $ 245 245,144 4.01%(d)(e) 11/14/05 169 168,509 4.02%(d)(e) 01/05/06 160 160,455 Galileo Money Market Fund 1,373 1,372,906 Institutional Money Market Trust(e)(f) 4,800 4,799,682 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $6,746,696) 6,746,696 ---------------- TOTAL INVESTMENTS IN SECURITIES --109.5% (Cost $49,002,586(a)) $ 52,898,749 LIABILITIES IN EXCESS OF OTHER ASSETS -- (9.5)% (4,597,833) ---------------- NET ASSETS -- 100.0% (Applicable to 717,302 Institutional shares, 5,349 Service shares, 686,068 Investor A shares, 365,661 Investor B shares and 1,002,007 Investor C shares $ 48,300,916 outstanding) ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONALSHARE ($12,640,920/717,302) $ 17.62 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($94,121/5,349)(g) $ 17.59 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($11,996,852/686,068) $ 17.49 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($17.49/0.9425) $ 18.56 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($6,302,814/365,661) $ 17.24 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($17,266,209/1,002,007) $ 17.23 ================ - ---------- (a) Cost for Federal income tax purposes is $49,122,268. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 5,045,812 Gross unrealized depreciation (1,269,331) ------------ $ 3,776,481 ================ (b) Non-income producing security. (c) Total or partial securities on loan. (d) Rates shown are the rates as of September 30, 2005. (e) Securities purchased with the cash proceeds from securities loaned. (f) Represents an investment in an affiliate. (g) Exact net assets and shares outstanding at September 30, 2005 were $94,121.46 and 5,349.333, respectively. See accompanying notes to financial statements. 83
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES SMALL CAP CORE EQUITY PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $49,002,586) ........................... $ 52,898,749 Dividends and reclaims receivable ................................. 26,118 Interest receivable ............................................... 5,150 Investments sold receivable ....................................... 266,770 Capital shares sold receivable .................................... 566,793 Prepaid expenses .................................................. 11,489 -------------- TOTAL ASSETS ................................................... 53,775,069 -------------- LIABILITIES Payable upon return of securities loaned .......................... 5,373,790 Capital shares redeemed payable ................................... 22,874 Advisory fees payable ............................................. 29,444 Administrative fees payable ....................................... 7,213 Transfer agent fees payable ....................................... 868 Other accrued expenses payable .................................... 39,964 -------------- TOTAL LIABILITIES .............................................. 5,474,153 -------------- NET ASSETS (Applicable to 717,302 Institutional shares, 5,349 Service shares, 686,068 Investor A shares, 365,661 Investor B shares and 1,002,007 Investor C shares outstanding) .......................... $ 48,300,916 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($12,640,920/717,302) ..................... $ 17.62 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($94,121/5,349)(a) .............................. $ 17.59 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($11,996,852/686,068) ........................ $ 17.49 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($17.49/0.9425) ................................................... $ 18.56 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($6,302,814/365,661) ......................... $ 17.24 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($17,266,209/1,002,007) ...................... $ 17.23 ============== - --------- (a) Exact net assets and shares outstanding at September 30, 2005 were $94,121.46 and 5,349.333, respectively. See Accompanying Notes to Financial Statements. 84
Blackrock Funds STATEMENT OF NET ASSETS SMALL CAP GROWTH EQUITY PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 98.1% Air Transportation -- 0.5% ExpressJet Holdings, Inc.(b) 348,100 $ 3,122,457 ---------------- Broadcasting -- 2.8% CKX, Inc.(b) 464,500 5,838,765 Outdoor Channel Holdings, Inc.(b) 338,300 4,993,308 Spanish Broadcasting Systems, Inc. - Class A(b) 717,600 5,152,368 ---------------- 15,984,441 ---------------- Business Services -- 14.4% Advisory Board Co.(b) 96,400 5,016,656 CoStar Group, Inc.(b)(c) 137,500 6,424,000 DiamondCluster International, Inc.(b) 595,700 4,515,406 Digitas, Inc.(b) 1,003,110 11,395,330 Forrester Research, Inc.(b) 253,500 5,277,870 Gartner, Inc.-- Class A(b) 525,800 6,146,602 Global Cash Access, Inc.(b) 50,300 709,230 Global Payments, Inc. 116,900 9,085,468 Heartland Payment Systems, Inc.(b) 279,200 6,661,712 Hudson Highland Group, Inc.(b) 197,000 4,919,090 Navigant Consulting, Inc.(b)(c) 231,900 4,443,204 Net 1 UEPS Technologies, Inc.(b) 229,900 5,154,358 VistaPrint Ltd.(b) 94,700 1,444,175 Watson Wyatt & Co. Holdings 415,200 11,189,640 ---------------- 82,382,741 ---------------- Chemicals -- 1.2% Agrium, Inc. 318,900 7,006,233 ---------------- Computer & Office Equipment -- 0.5% Hutchinson Technology, Inc.(b) 109,100 2,849,692 ---------------- Computer Software & Services -- 16.2% Anteon International Corp.(b)(c) 101,900 4,357,244 The BISYS Group, Inc.(b) 336,398 4,517,825 Borland Software Corp.(b) 1,255,700 7,308,174 CACI International, Inc.(b) 80,100 4,854,060 Foundry Networks, Inc.(b) 742,000 9,423,400 Interwoven, Inc.(b) 665,300 5,435,501 McData Corp.-- Class A(b) 1,665,278 8,726,057 Micromuse, Inc.(b) 1,298,500 10,232,180 Progress Software Corp.(b) 195,000 6,195,150 SkillSoft PLC-- ADR(b) 2,015,730 9,232,043 SonicWALL, Inc.(b) 1,800,500 11,433,175 VeriFone Holdings, Inc.(b) 424,000 8,526,640 Verity, Inc.(b) 270,600 2,873,772 ---------------- 93,115,221 ---------------- Entertainment & Leisure -- 5.6% Argosy Gaming Co.(b) 119,106 5,596,791 Orient-Express Hotels Ltd. - Class A 176,400 5,013,288 Scientific Games Corp.- Class A(b)(c) 189,700 5,880,700 Vail Resorts, Inc.(b) 320,900 9,225,875 World Wrestling Entertainment, Inc. 474,200 6,164,600 ---------------- 31,881,254 ---------------- Finance -- 1.4% Affiliated Managers Group, Inc.(b) 51,900 3,758,598 Wright Express Corp.(b) 199,900 4,315,841 ----------- 8,074,439 ---------------- Food & Agriculture -- 0.1% Diamond Foods, Inc.(b) 34,100 $ 583,110 ---------------- Machinery & Heavy Equipment -- 1.0% Bucyrus International, Inc.- Class A 13,300 653,429 Dresser-Rand Group, Inc.(b) 85,700 2,110,791 Lennox International, Inc. 105,800 2,899,978 ---------------- 5,664,198 ---------------- Manufacturing -- 2.9% Actuant Corp.- Class A 112,900 5,283,720 Gardner Denver, Inc.(b) 146,000 6,511,600 The Warnaco Group, Inc.(b ) 216,600 4,745,706 ---------------- 16,541,026 ---------------- Medical & Medical Services -- 5.3% CryoLife(b) 875,000 6,081,250 Digene Corp.(b) 240,500 6,854,250 Digirad Corp.(b) 405,600 1,957,426 Noven Pharmaceuticals, Inc.(b) 409,700 5,735,800 Pediatrix Medical Group, Inc.(b) 124,900 9,594,818 ---------------- 30,223,544 ---------------- Medical Instruments & Supplies -- 8.4% Advanced Medical Optics, Inc.(b) 209,000 7,931,550 Bruker BioSciences Corp.(b) 463,100 2,028,378 Charles River Laboratories International, Inc.(b) 146,488 6,389,807 Hologic, Inc.(b) 140,475 8,112,431 IntraLase Corp.(b) 256,500 3,773,115 Kyphon, Inc.(b) 164,200 7,214,948 Martek Biosciences Corp.(b)(C) 134,400 4,721,472 Wright Medical Group, Inc.(b) 318,234 7,854,015 ---------------- 48,025,716 ---------------- Metal & Mining -- 3.2% Alpha Natural Resources, Inc.(b) 213,700 6,419,548 Massey Energy Co.(c) 234,200 11,960,594 ---------------- 18,380,142 ---------------- Motor Vehicles -- 0.7% Wabash National Corp. 201,500 3,961,490 ---------------- Oil & Gas -- 12.4% Airgas, Inc. 344,200 10,198,646 Atwood Oceanics, Inc.(b) 93,700 7,890,477 Energy Partners Ltd.(b) 132,000 4,121,040 KCS Energy, Inc.(b) 344,000 9,470,320 Oceaneering Internationa Inc.(b) 163,900 8,753,899 Remington Oil & Gas Corp.- Class B(b) 194,443 8,069,385 TETRA Technologies, Inc.(b) 366,450 11,440,569 Vintage Petroleum, Inc. 250,100 11,419,566 ---------------- 71,363,902 ---------------- Personal Services -- 3.9% Corinthian Colleges, Inc.(b) 266,700 3,539,109 Educate, Inc.(b) 420,800 6,312,000 Laureate Education, Inc.(b) 261,800 12,820,346 ---------------- 22,671,455 ---------------- Pharmaceuticals -- 1.2% Nabi Biopharmaceuticals(b)(c) 513,600 6,728,160 ---------------- See accompanying notes to financial statements. 85
BlackRock Funds STATEMENT OF NET ASSETS SMALL CAP GROWTH EQUITY PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Publishing & Printing -- 1.0% Playboy Enterprises, B(b) 415,503 $ 5,858,592 ---------------- Restaurants -- 1.9% RARE Hospitality International, Inc.(b) 46,050 1,183,485 Ruth's Chris Steak House, Inc.(b) 256,000 4,705,280 Texas Roadhouse, Inc.(b) 337,300 5,025,770 ---------------- 10,914,535 ---------------- Retail Merchandising -- 5.5% 99 Cents Only Stores(b) 118,000 1,091,500 Central Garden & Pet Co.(b) 136,300 6,167,575 Coldwater Creek, Inc.(b) 149,700 3,775,434 Design Within Reach, Inc.(b) 307,800 2,779,434 Dick's Sporting Goods, Inc.(b)(c) 181,621 5,468,608 J. Jill Group, Inc.(b) 404,900 6,405,518 Jos. A. Bank Clothiers, Inc.(b) 134,100 5,795,802 ---------------- 31,483,871 ---------------- Semiconductors & Related Devices -- 4.9% Integrated Device Technology, Inc.(b) 526,080 5,650,099 Microsemi Corp.(b) 286,100 7,306,994 O2Micro International Ltd.(b) 627,800 9,881,572 Rudolph Technologies, Inc.(b) 410,630 5,531,186 ---------------- 28,369,851 ---------------- Telecommunications -- 3.1% ADTRAN, Inc.(c) 311,400 9,809,100 NeuStar, Inc. -- Class A(b) 21,800 697,382 Polycom, Inc.(b) 249,400 4,032,798 Syniverse Holdings, Inc.(b) 195,300 3,007,620 ---------------- 17,546,900 ---------------- TOTAL COMMON STOCKS (Cost $461,377,477) 562,732,970 ---------------- WARRANTS -- 0.0% MicroStrategy, Inc. (issued 06/21/02, expiring 06/24/07, strike price $400)(d)(e) 638 121 TIMCO Aviation Services, Inc. (issued 02/28/02, expiring 12/31/07, strike price $5.16)(e)(f) 692 0 ---------------- TOTAL WARRANTS (Cost $6) 121 ---------------- Par/shares Maturity (000) Value ---------------- ---------------- ---------------- SHORT TERM INVESTMENTS -- 6.5% Federal Home Loan Bank, Discount Notes 3.18%(g) 10/03/05 $ 3,400 $ 3,399,399 Morgan Stanley, Floating Rate Notes 4.01%(h)(i) 11/14/05 6,024 6,023,986 4.02%(h)(i) 01/05/06 227 226,524 Galileo Money Market Fund 9,992 9,991,868 Institutional Money Market Trust(i)(j) 17,448 17,448,244 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $37,090,021) 37,090,021 ---------------- TOTAL INVESTMENTS IN SECURITIES --104.6% (Cost $498,467,504(a)) 599,823,112 LIABILITIES IN EXCESS OF OTHER ASSETS -- (4.6)% (26,151,944) ---------------- NET ASSETS -- 100.0% (Applicable to 20,697,398 Institutional shares, 1,480,731 Service shares, 9,950,356 Investor A shares, 1,061,979 Investor B shares and 1,055,928 Investor C shares outstanding) $ 573,671,168 ================ See accompanying notes to financial statements. 86
BlackRock Funds STATEMENT OF NET ASSETS SMALL CAP GROWTH EQUITY PORTFOLIO (Concluded) As of September 30, 2005 Value ---------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($357,856,729/20,697,398) $ 17.29 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($24,490,617/1,480,731) $ 16.54 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($160,373,647/9,950,356) $ 16.12 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($16.12/0.9425) $ 17.10 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($15,516,301/1,061,979) $ 14.61 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($15,433,874/1,055,928) $ 14.62 ================ - ---------- (a) Cost for Federal income tax purposes is $500,871,465. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 119,623,710 Gross unrealized depreciation (20,672,063) ---------------- $ 98,951,647 ================ (b) Non-income producing security. (c) Total or partial securities on loan. (d) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 63.80. These warrants were exercisable as of 6/24/02. (e) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, this security had a total market value of $121 which represents less than 0.01% of net assets. (f) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 692. These warrants were exercisable as of 5/30/02. (g) The rate shown is the effective yield on the discount notes at the time of purchase. (h) Rates shown are the rates as of September 30, 2005. (i) Securities purchased with the cash proceeds from securities loaned. (j) Represents an investment in an affiliate. See accompanying notes to financial statements. 87
BlackRock Funds STATEMENT OF NET ASSETS GLOBAL SCIENCE & TECHNOLOGY OPPORTUNITIES PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 98.2% Belgium -- 1.1% Telecommunications -- 1.1% Option NV(b) 4,800 $ 263,892 ---------------- Canada -- 0.8% Pharmaceuticals -- 0.8% Cardiome Pharma Corp.(b) 22,100 194,259 ---------------- Finland -- 0.7% Telecommunications -- 0.7% Nokia Corp. - ADR 10,600 179,246 ---------------- Germany -- 1.3% Computer Software & Services -- 0.8% SAP AG - ADR 4,300 186,319 ---------------- Pharmaceuticals -- 0.5% Merck KGAA 1,500 126,647 ---------------- Total Germany 312,966 ---------------- India -- 1.1% Telecommunications -- 1.1% Bharti Tele-Ventures Ltd.(b) 35,000 266,534 ---------------- Japan -- 6.9% Computer Software & Services -- 0.5% Otsuka Corp. 1,300 126,742 ---------------- Electronic Components & Accessories -- 1.4% Hoya Corp.- When Issued Shs(b) 5,400 183,907 Omron Corp. 6,000 146,374 ---------------- 330,281 ---------------- Machinery & Heavy Equipment -- 2.4% Hitachi Construction Machinery Co., Ltd. 13,100 250,811 Komatsu Ltd. 13,300 181,417 Nabtesco Corp. 19,000 166,464 ---------------- 598,692 ---------------- Manufacturing -- 2.6% Hoya Corp. 1,800 59,873 Ibiden Co., Ltd. 9,400 392,289 Shimadzu Corp. 27,000 190,815 ---------------- 642,977 ---------------- Total Japan 1,698,692 ---------------- Mexico -- 0.9% Telecommunications -- 0.9% America Movil S.A. - ADR 8,600 226,352 ---------------- Norway -- 0.5% Computer Software & Services -- 0.5% Fast Search & Transfer ASA(b) 30,000 113,576 ---------------- Russia -- 0.9% Telecommunications -- 0.9% Mobile Telesystems - ADR 5,600 227,808 ---------------- South Korea -- 1.6% Electronics -- 1.6% Samsung Electronics Co. Ltd. 700 395,199 ---------------- Switzerland -- 1.7% Pharmaceuticals -- 1.7% Roche Holding AG 3,000 418,383 ---------------- Taiwan -- 4.1% Computer & Office Equipment -- 2.4% High Tech Computer Corp. 10,800 131,642 Lite-On Technology Corp. 200,867 $ 224,258 Mitac Technology Corp. 140,000 116,858 Quanta Computer, Inc. 63,123 103,476 ---------------- 576,234 ---------------- Electronics -- 1.0% Hon Hai Precision Industry Co. Ltd. 51,895 241,606 ---------------- Semiconductors & Related Devices -- 0.7% Powerchip Semiconducto319,000 177,834 Taiwan Semiconductor Manufacturing Co. Ltd. 1 1 ---------------- 177,835 ---------------- Total Taiwan 995,675 ---------------- United Kingdom -- 1.1% Aerospace -- 0.8% Meggitt PLC 35,900 205,933 ---------------- Computer Software & Services -- 0.3% Autonomy Corp. PLC(b) 10,500 62,832 ---------------- Total United Kingdom 268,765 ---------------- United States -- 75.5% Aerospace -- 2.0% Goodrich Corp. 5,500 243,870 Raytheon Co. 6,300 239,526 ---------------- 483,396 ---------------- Business Services -- 2.0% Aquantive, Inc.(b) 15,400 310,002 Global Payments, Inc. 2,200 170,984 ---------------- 480,986 ---------------- Computer & Office Equipment -- 6.1% Apple Computer, Inc.(b) 7,900 423,519 Cisco Systems, Inc.(b) 15,600 279,708 Computer Associates International, Inc. 31 862 Dell, Inc.(b) 6,700 229,140 Hewlett-Packard Co.(c) 10,800 315,360 International Business Machines Corp. 3,100 248,682 ---------------- 1,497,271 ---------------- Computer Software & Services -- 15.0% Adobe Systems, Inc.(c) 5,900 176,115 Advanced Micro Devices, Inc. (b) 12,100 304,920 Autodesk, Inc. 2,900 134,676 BEA Systems, Inc.(b) 18,600 167,028 Cadence Design Systems, Inc.(b)(c) 7,900 127,664 Compuware Corp.(b) 25,900 246,050 Electronic Arts, Inc.(b) 3,200 182,048 EMC Corp.(b) 8,600 111,284 Enterasys Networks, Inc.(b) 2,414 3,235 Google, Inc. - Class A(b) 1,000 316,460 Informatica Corp.(b)(c) 26,900 323,338 Juniper Networks, Inc.(b) 10,400 247,416 Microsoft Corp. 9,400 241,862 OpenTV Corp.(b) 51,100 146,657 Oracle Corp.(b)(c) 20,500 253,995 Progress Software Corp.(b) 4,500 142,965 See accompanying notes to financial statements. 88
BlackRock Funds STATEMENT OF NET ASSETS GLOBAL SCIENCE & TECHNOLOGY OPPORTUNITIES PORTFOLIO (CONTINUED) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) United States (Continued) Computer Software & Services (Continued) Sybase, Inc.(b) 5,500 $ 128,810 Symantec Corp.(b) 5,700 129,162 Unica Corp.(b) 3,200 35,136 Yahoo!, Inc.(b) 7,300 247,032 ---------------- 3,665,853 ---------------- Electronics -- 3.6% Agilent Technologies, Inc.(b) 6,500 212,875 Coherent, Inc.(b) 4,300 125,904 Intel Corp. 7,000 172,550 Intersil Corp. - Class A 8,600 187,308 National Semiconductor Corp. 6,800 178,840 ---------------- 877,477 ---------------- Insurance -- 0.7% WellPoint, Inc.(b) 2,400 181,968 ---------------- Manufacturing -- 1.8% Powerwave Technologies, Inc.(b)(c) 33,200 431,268 ---------------- Measuring & Controlling Devices -- 1.5% KLA-Tencor Corp.(c) 7,400 360,824 ---------------- Medical & Medical Services -- 8.3% Amgen, Inc.(b) 3,700 294,779 Baxter International, Inc. 6,300 251,181 Caremark Rx, Inc.(b) 3,400 169,762 Coventry Health Care, Inc.(b) 2,500 215,050 Express Scripts, Inc.(b) 2,800 174,160 LifePoint Hospitals, Inc.(b)(c) 3,600 157,428 Medco Health Solutions, Inc.(b) 2,500 137,075 Millipore Corp.(b) 4,200 264,138 UnitedHealth Group, Inc.(c) 4,200 236,040 WebMD Corp.(b) 12,000 132,960 ---------------- 2,032,573 ---------------- Medical Instruments & Supplies -- 4.6% Alcon, Inc. 2,100 268,548 Boston Scientific Corp.(b) 3,267 76,350 Cytyc Corp.(b) 7,400 198,690 MWI Veterinary Supply, Inc.(b) 5,100 101,745 St. Jude Medical, Inc.(b) 2,800 131,040 Varian Medical Systems, Inc.(b) 3,400 134,334 Zimmer Holdings, Inc.(b) 3,000 206,670 ---------------- 1,117,377 ---------------- Pharmaceuticals -- 6.0% Amylin Pharmaceuticals, Inc.(b)(c) 3,642 126,705 First Horizon Pharmaceutical Corp.(b) 5,625 111,769 Genentech, Inc.(b) 5,505 463,576 Gilead Sciences, Inc.(b) 3,900 190,164 Keryx Biopharmaceuticals, Inc.(b) 7,000 110,320 Momenta Pharmaceuticals, Inc.(b) 3,100 84,475 Panacos Pharmaceuticals, Inc.(b) 11,218 109,263 Shire Pharmaceuticals Group PLC - ADR 3,400 125,766 Vertex Pharmaceuticals, Inc.(b) 6,400 143,040 ---------------- 1,465,078 ---------------- Semiconductors & Related Devices -- 13.6% Agere Systems, Inc. - ADR(b) 11,400 118,674 Applied Materials, Inc. 14,800 251,008 Broadcom Corp. - Class A(b) 8,800 412,808 Lam Research Corp.(b)(c) 4,400 134,068 LSI Logic Corp.(b) 19,300 190,105 Marvell Technology Group Ltd.(b) 4,300 198,273 MEMC Electronic Materials, Inc.(b) 11,600 264,364 Microsemi Corp.(b) 7,400 188,996 Novellus Systems, Inc.(b) 9,100 228,228 NVIDIA Corp.(b) 8,100 277,668 O2Micro International Ltd.(b) 8,100 127,494 SiRF Technology Holdings, Inc.(b) 10,600 319,378 Texas Instruments, Inc.(c) 11,500 389,850 Varian Semiconductor Equipment Associates, Inc.(b) 5,600 237,272 ---------------- 3,338,186 ---------------- Telecommunications -- 10.3% ADC Telecommunications, (b) 4,900 112,014 ADTRAN, Inc.(c) 6,400 201,600 Alamosa Holdings, Inc.(b) 10,800 184,788 Amdocs Ltd.(b) 4,500 124,785 Comverse Technology, Inc.(b) 9,500 249,565 Harris Corp. 9,400 392,920 Motorola, Inc.(c) 17,300 382,157 Qualcomm, Inc. 7,100 317,725 Scientific-Atlanta, Inc. 9,100 341,341 Sprint Nextel Corp. 8,745 207,956 ---------------- 2,514,851 ---------------- Total United States 18,447,108 ---------------- TOTAL COMMON STOCKS (Cost $19,021,319) 24,008,455 ---------------- Par/shares Maturity (000) Value ---------------- ---------------- ---------------- SHORT TERM INVESTMENTS -- 16.2% Banco Santader, Certificate of Deposit 3.70%(d) 05/10/06 $ 224 224,141 Morgan Stanley, Floating Rate Notes 4.01%(d)(e) 11/14/05 171 171,414 Galileo Money Market Fund 465 464,657 Institutional Money Market Trust(d)(f) 3,104 3,104,457 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $3,964,669) 3,964,669 ---------------- See accompanying notes to financial statements. 89
BlackRock Funds STATEMENT OF NET ASSETS GLOBAL SCIENCE & TECHNOLOGY OPPORTUNITIES PORTFOLIO (Concluded) As of September 30, 2005 Value ---------------- TOTAL INVESTMENTS IN SECURITIES -- 114.4% (Cost $22,985,988(a)) $27,973,124 LIABILITIES IN EXCESS OF OTHER ASSETS -- (14.4)% (3,529,626) ---------------- NET ASSETS -- 100.0% (Applicable to 128,124 Institutional shares, 17,846 Service shares, 1,502,340 Investor A shares, 1,776,468 Investor B shares and 451,217 Investor C shares) $24,443,498 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($846,582/128,124) $ 6.61 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($116,221/17,846) $ 6.51 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($9,688,352/1,502,340) $ 6.45 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($6.45/0.9425) $ 6.84 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($10,998,463/1,776,468) $ 6.19 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($2,793,880/451,217) $ 6.19 ================ - ---------- (a) Cost for Federal income tax purposes is $23,077,532. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $5,197,269 Gross unrealized depreciation (301,677) ---------------- $4,895,592 ================ (b) Non-income producing security. (c) Total or partial securities on loan. (d) Securities purchased with the cash proceeds from securities loaned. (e) Rates shown are the rates as of September 30, 2005. (f) Represents an investment in an affiliate. See accompanying notes to financial statements. 90
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES GLOBAL SCIENCE & TECHNOLOGY OPPORTUNITIES PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $22,985,988) ........................... $ 27,973,124 Cash denominated in foreign currencies (Cost $14,011) 13,910 Dividends and reclaims receivable (net of withholding tax of $2,757) .................................................... 9,378 Interest receivable ............................................... 1,084 Investments sold receivable ....................................... 268,189 Capital shares sold receivable .................................... 19,079 Prepaid expenses .................................................. 15,385 -------------- TOTAL ASSETS ................................................... 28,300,149 -------------- LIABILITIES Payable upon return of securities loaned .......................... 3,500,012 Investments purchased payable ..................................... 202,276 Capital shares redeemed payable ................................... 86,888 Advisory fees payable ............................................. 15,842 Administrative fees payable ....................................... 4,472 Transfer agent fees payable ....................................... 9,159 Other accrued expenses payable .................................... 38,002 -------------- TOTAL LIABILITIES .............................................. 3,856,651 -------------- NET ASSETS (Applicable to 128,124 Institutional shares,17,846 Service shares, 1,502,340 Investor A shares, 1,776,468 Investor B shares and 451,217 Investor C shares outstanding) ............................ $ 24,443,498 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($846,582/128,124) ........................ $ 6.61 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($116,221/17,846) ............................... $ 6.51 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($9,688,352/1,502,340) ....................... $ 6.45 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE($6.45/0.9425) .......... $ 6.84 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($10,998,463/1,776,468) ..................... $ 6.19 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($2,793,880/451,217) ........................ $ 6.19 ============== See accompanying notes to financial statements. 91
BlackRock Funds STATEMENT OF NET ASSETS GLOBAL RESOURCES PORTFOLIO As of September 30, 2005 Number of shares Value ---------------- ---------------- COMMON STOCKS -- 98.8% Canada -- 24.9% Banks -- 0.0% Quest Capital Corp.(b) 61,000 $ 121,411 ---------------- Energy & Utilities -- 0.1% Tusk Energy Corp.(c) 300,846 1,254,605 ---------------- Metal & Mining -- 3.7% AXMIN, Inc.(b) 2,581,000 1,267,594 Bema Gold Corp.(b) 250,000 672,500 Canico Resource Corp.(b) 450,000 7,719,714 Crystallex International Corp.(b) 2,600,000 4,085,385 Fording Canadian Coal Trust(d) 18,979 807,936 Gateway Gold Corp.(b) 500,000 452,352 Gold Reserve, Inc.(b) 1,000,000 2,300,000 Mag Silver Corp.(b) 2,026,200 2,094,985 Mena Resources, Inc.(b) 20,000 6,893 Minefinders Corp. Ltd.(b) 250,000 1,220,000 Nevsun Resources Ltd. (acquired 8/8/97 through 9/9/04, cost $4,883,732)(b)(e)(f) (g) 1,554,800 3,295,544 NovaGold Resources, Inc.(b) 691,418 5,538,258 Orezone Resources, Inc.(b) 334,182 630,586 Radius Gold, Inc.(b) 569,700 343,607 Romarco Minerals, Inc.(b) 223,000 38,428 Southwestern Resources Corp.(b) 566,900 5,250,883 St. Jude Resources Ltd.(b) 1,096,400 2,503,412 Stratagold Corp.(b) 1,000,000 620,369 Sunridge Gold Corp.(b) 870,700 870,250 Virginia Gold Mines, Inc.(b) 823,100 5,489,225 X-Cal Resources Ltd.(b) 1,755,500 400,834 ---------------- 45,608,755 ---------------- Motor Vehicles -- 0.1% Westport Innovations, Inc. (acquired 12/17/03 through 9/15/04, cost $1,052,339)(b)(e)(f) 959,500 1,157,419 ---------------- Oil & Gas -- 20.9% Accrete Energy, Inc.(b) 13,690 120,315 Alberta Clipper Energy, Inc.(b) 379,215 1,552,017 Baytex Energy Trust 1,112,748 17,785,176 Bow Valley Energy Ltd.(b) 634,600 3,193,231 C1 Energy Ltd.(b)(d) 647,099 1,756,300 Canadian Superior Energy, Inc. 85,468 213,670 Canex Energy, Inc(b) 403,200 1,146,441 Capitol Energy Resources Ltd.(b) 438,026 2,075,772 Chamaelo Exploration Ltd.(b) 52,180 357,428 Cinch Energy Corp.(b) 901,980 2,844,431 Compton Petroleum Corp.(b) 1,171,300 15,844,744 Crew Energy, Inc. (acquired 6/24/98 through 6/18/04, cost $1,910,170)(b)(f)(g) 811,615 13,986,128 Cyries Energy, Inc.(b) 69,096 1,056,146 Delphi Energy Corp.(b) 747,963 3,415,650 Drillers Technology Corp.(b) 200,000 284,336 Ember Resources, Inc.(b) 274,224 1,682,298 Endev Energy, Inc.(b) 1,538,300 2,730,396 Equinox Minerals Ltd.(b) 1,552,114 1,337,338 Esprit Energy Trust 533,525 6,661,018 Fairborne Energy Trust 317,020 5,050,577 Fairquest Energy Ltd.(b) 105,567 976,900 First Calgary Petroleums Ltd.(b) 652,612 5,319,412 Galleon Energy, Inc. - Class A(b) 1,222,178 24,115,006 Hawker Resources, Inc.(b) 227,509 1,117,354 HSE Integrated Ltd.(b) 28,238 $ 66,909 KICK Energy Ltd.(b) 219,700 1,527,640 Leader Energy Services Ltd.(b) 454,104 1,752,874 Masters Energy, Inc.(b) 27,741 108,755 Midnight Oil Exploration Ltd.(b) 550,300 2,086,266 Midnight Oil Exploration Ltd. (acquired 9/29/05, cost $1,971,490)(b)(f)(g) 577,400 1,970,105 Niko Resources Ltd. (acquired 5/2/03 through 11/10/03, cost $689,948)(f)(g) 39,000 1,713,769 Oilexco, Inc.(b) 1,498,900 5,217,608 Pacific Rodera Energy, Inc.(b) 990,200 1,134,729 Paramount Resources Ltd. - Class A(b) 408,900 12,049,268 Penn West Energy Trust 1,701,400 53,522,414 Precision Drilling Corp.(b) 312,000 15,350,400 ProEx Energy Ltd.(b) 69,096 1,069,839 ProspEx Resources Ltd.(b) 1,504,120 4,924,742 Purcell Energy Ltd.(b)(e) 735,620 2,218,396 Real Resources, Inc.(b) 412,737 9,708,530 Sequoia Oil & Gas Trust 297,320 5,369,487 Tag Oil Ltd.(c) 198,000 198,239 Technicoil Corp. (acquired 6/15/04, cost $548,935)(b)(f)(g) 753,100 2,439,821 Tempest Energy Corp. - Class A(b) 357,600 1,750,102 Thunder Energy Trust 568,896 6,646,760 Trilogy Energy Trust 308,900 7,425,737 True Energy, Inc.(b) 553,735 2,814,955 Vault Energy Trust 130,450 1,543,235 West Energy Ltd.(b) 2,735 19,347 White Fire Energy Ltd.(b) 297,320 791,590 Zenas Energy Corp.(b) 143,628 785,833 ---------------- 258,829,434 ---------------- Transportation -- 0.1% Railpower Technologies Corp.(b) 360,600 1,684,001 ---------------- Total Canada 308,655,625 ---------------- Norway -- 0.6% Transportation -- 0.6% Stolt-Nielsen SA(b) 170,000 6,813,758 ---------------- United Kingdom -- 1.4% Finance -- 0.1% Archipelago Holdings, Inc.(c) 2,247,400 1,288,181 ---------------- Oil & Gas -- 1.3% Expro International Group PLC 563,941 5,457,235 Tullow Oil PLC 1,244,198 5,722,878 Venture Production PLC(b) 514,729 4,389,119 ---------------- 15,569,232 ---------------- Total United Kingdom 16,857,413 ---------------- United States -- 71.9% Conglomerates -- 2.2% (acquired 2/18/04 Stolt-Nielsen SA through 9/9/04, cost $9,786,849)(b)(d)(f)(g) 676,100 27,098,764 ---------------- Energy & Utilities -- 1.9% KFX, Inc.(b)(d) 393,400 6,735,008 See accompanying notes to financial statements. 92
BlackRock Funds STATEMENT OF NET ASSETS GLOBAL RESOURCES PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) United States (Continued) Energy & Utilities (Continued) Longview Energy Co. (acquired 8/13/04, cost $1,281,000)(c)(e)(f)(g) 85,400 $ 1,281,000 McDermott International, Inc.(b) 415,000 15,193,150 ---------------- 23,209,158 ---------------- Finance -- 0.1% NGP Capital Resources Co. 64,500 971,370 ---------------- Manufacturing -- 1.4% Maverick Tube Corp.(b) 401,579 12,047,370 NS Group, Inc.(b) 150,000 5,887,500 ---------------- 17,934,870 ---------------- Metal & Mining -- 24.6% Alpha Natural Resources, Inc.(b) 27,500 826,100 Arch Coal, Inc.(d) 806,300 54,425,250 Coeur d'Alene Mines Corp.(b) 500,000 2,115,000 CONSOL Energy, Inc. (acquired 8/13/01 through 4/21/04, cost $22,890,341)(f)(g) 1,181,600 90,120,632 Massey Energy Co.(d) 1,148,400 58,648,788 Peabody Energy Corp. 1,132,000 95,484,200 Randgold Resources Ltd.(b) 200,000 3,144,000 ---------------- 304,763,970 ---------------- Oil & Gas -- 41.5% Allis-Chalmers Energy, Inc.(b) 131,700 1,559,328 BJ Services Co.(d) 957,200 34,449,628 Bois d'Arc Energy, Inc.(b) 101,900 1,753,699 Brigham Exploration Co.(b) 81,900 1,052,415 CanArgo Energy Corp.(b)(d) 5,024,200 9,495,738 Clayton Williams Energy, Inc.(b) 321,130 13,872,816 Comstock Resources, Inc.(b) 275,300 9,032,593 Cross Timbers Royalty Trust 2,490 135,207 Denbury Resources, Inc.(b) 273,800 13,810,472 Diamond Offshore Drilling, Inc. 333,400 20,420,750 The Exploration Co.(b) 282,200 2,031,840 Global Industries, Inc.(b) 189,496 2,793,171 Goodrich Petroleum Corp.(b) 62,600 1,469,222 Grey Wolf, Inc.(b) 471,900 3,978,117 Halliburton Co.(d) 390,000 26,722,800 Matador Resources Co. (acquired 10/14/03, cost $978,460)(c)(e)(f)(g) 97,846 1,320,921 Nabors Industries Ltd.(b)(d) 346,500 24,889,095 National-Oilwell, Inc.(b) 128,600 8,461,880 Newfield Exploration Co.(b) 993,924 48,801,668 Newpark Resources, Inc.(b) 500,000 4,210,000 Noble Corp. 90,700 6,209,322 Parallel Petroleum Corp.(b) 192,300 2,692,200 Patterson-UTI Energy, Inc. 1,272,408 45,908,481 Penn Virginia Corp. 560,000 32,317,600 PetroQuest Energy, Inc.(b) 411,600 4,297,104 Pioneer Drilling Co. (acquired 2/13/04 through 3/23/05, cost $1,400,445)(b)(f)(g) 176,000 3,435,520 Pioneer Natural Resources Co. 379,200 20,825,664 Plains Exploration & Production Co.(b) 1,137,505 48,707,964 Pride International, Inc.(b) 334,300 9,530,893 Rowan Cos., Inc.(d) 481,700 17,095,533 Transocean, Inc.(b) 420,800 25,799,248 Treasure Island Royalty Trust(b) 507,439 403,414 Universal Compression Holdings, Inc.(b) 35,200 $ 1,399,904 Vintage Petroleum, Inc. 952,600 43,495,716 Weatherford International Ltd.(b)(d) 301,100 20,673,526 ---------------- 513,053,449 ---------------- Transportation -- 0.2% Hornbeck Offshore Service, Inc.(b) 65,900 2,413,917 ---------------- Waste Management -- 0.0% Republic Resources, Inc.(b) 28,750 1,078 ---------------- Total United States 889,446,576 ---------------- TOTAL COMMON STOCKS (Cost $559,119,398) 1,221,773,372 ---------------- WARRANTS -- 0.0% Nevsun Resources Ltd. (issued 12/18/03, expiring 12/18/08, strike price 10.00 CAD)(c)(h) 250,000 2,154 Oilexco Inc. (issued 01/21/04, expiring 12/22/05, strike price 1.65 CAD)(i) 118,775 245,615 Purcell Energy Ltd. (issued 07/24/03, expiring 07/23/08, strike price 5.00 CAD)(c)(j) 735,620 304,237 Westport Innovations, Inc. (issued 09/29/04, expiring 3/29/06, strike price 2.10 CAD)(k) 92,850 12,000 ---------------- TOTAL WARRANTS (Cost $195) 564,006 ---------------- Par/shares Maturity (000) Value ---------------- ---------------- ---------------- SHORT TERM INVESTMENTS -- 11.7% Banco Santader, Certificate of Deposit 3.70%(l) 05/10/06 $ 4,067 $ 4,066,925 Morgan Stanley, Floating Rate Notes 4.02%(l)(m) 11/07/05 5,878 5,877,714 4.01%(l)(m) 11/14/05 7,237 7,237,263 Galileo Money Market Fund 17,976 17,975,598 Institutional Money Market Trust(l)(n) 109,250 109,250,270 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $144,407,770) 144,407,770 ---------------- See accompanying notes to financial statements. 93
BlackRock Funds STATEMENT OF NET ASSETS GLOBAL RESOURCES PORTFOLIO (Continued) As of September 30, 2005 Value ---------------- TOTAL INVESTMENTS IN SECURITIES -- 110.5% (Cost $703,527,363(a)) $ 1,366,745,148 LIABILITIES IN EXCESS OF OTHER ASSETS -- (10.5)% (129,609,246) ---------------- NET ASSETS -- 100.0% (Applicable to 513,754 Institutional shares, 11,539,035 Investor A shares, 1,697,316 Investor B shares and 2,901,440 Investor C shares outstanding) $ 1,237,135,902 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($40,905,448/513,754) $ 79.62 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($877,120,397/11,539,035) $ 76.01 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($76.01/0.9425) $ 80.65 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($117,844,759/1,697,316) $ 69.43 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($201,265,298/2,901,440) $ 69.37 ================ - ---------- (a) Cost for Federal income tax purposes is $703,758,557. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 677,722,363 Gross unrealized depreciation (14,735,772) ---------------- $ 662,986,591 ================ (b) Non-income producing security. (c) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, this security had a total market value of $5,649,337 which represents 0.46% of net assets. (d) Total or partial securities on loan. (e) Security is illiquid. As of September 30, 2005, the Portfolio held 0.75% of its net assets, with a current market value of $9,273,280 in these securities. (f) Security restricted as to public resale. These securities are ineligible for resale into the public market until such time that either (I) a resale Registration Statement has been filed with the SEC and declared effective or (II) resale is permitted under Rule 144A without the need for an effective registration statement. As of September 30, 2005, the Portfolio held 11.95% of its net assets, with a current market value of $147,819,623 and a current cost of $47,393,709 in these securities. (g) Security valued under consistently applied procedures established by the Board. (h) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 250,000. These warrants were exercisable as of 12/18/03. (i) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 118,775. These warrants were exercisable as of 1/21/04. (j) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 735,620. These warrants were exercisable as of 7/24/03. (k) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 92,850. These warrants were exercisable as of 9/29/04. (l) Securities purchased with the cash proceeds from securities loaned. (m) Rates shown are the rates as of September 30, 2005. (n) Represents an investment in an affiliate. See accompanying notes to financial statements. 94
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES GLOBAL RESOURCES PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $703,527,363) .......................... $1,366,745,148 Dividends receivable (net of withholding tax of $24,260) .......... 845,325 Interest receivable ............................................... 54,711 Investments sold receivable ....................................... 3,848,237 Capital shares sold receivable .................................... 1,351,922 Prepaid expenses .................................................. 96,679 Other assets ...................................................... 4,071 -------------- TOTAL ASSETS ................................................... 1,372,946,093 -------------- LIABILITIES Payable upon return of securities loaned .......................... 126,432,172 Investments purchased payable ..................................... 5,303,755 Capital shares redeemed payable ................................... 2,612,450 Advisory fees payable ............................................. 713,755 Administrative fees payable ....................................... 46,167 Transfer agent fees payable ....................................... 69,892 Other accrued expenses payable .................................... 632,000 -------------- TOTAL LIABILITIES .............................................. 135,810,191 -------------- NET ASSETS (Applicable to 513,754 Institutional shares, 11,539,035 Investor A shares, 1,697,316 Investor B shares and 2,901,440 Investor C shares outstanding) .......................... $1,237,135,902 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($40,905,448/513,754) ..................... $ 79.62 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($877,120,397/11,539,035) .................... $ 76.01 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($76.01/0.9425) ........ $ 80.65 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($117,844,759/1,697,316) ..................... $ 69.43 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($201,265,298/2,901,440) ..................... $ 69.37 ============== See accompanying notes to financial statements. 95
BlackRock Funds STATEMENT OF NET ASSETS ALL-CAP GLOBAL RESOURCES PORTFOLIO As of September 30, 2005 Number of Shares Value -------------- ---------------- COMMON STOCKS -- 94.5% Australia -- 3.7% Metal & Mining -- 3.2% BHP Billiton Ltd. - ADR 143,900 $ 4,918,502 Macarthur Coal Ltd. 588,300 2,906,682 ---------------- 7,825,184 ---------------- Oil & Gas -- 0.5% Santos Ltd. 130,200 1,243,834 ---------------- Total Australia 9,069,018 ---------------- Austria -- 1.9% Oil & Gas -- 1.9% OMV AG 76,400 4,551,227 ---------------- Canada -- 11.5% Metal & Mining -- 1.2% Teck Cominco Ltd. 67,100 3,015,048 ---------------- Oil & Gas -- 10.3% Canadian Natural Resources Ltd. 8,000 361,882 Compton Petroleum Corp.(b) 172,400 2,332,139 Galleon Energy, Inc. -- Class A(b) 192,100 3,790,358 Husky Energy, Inc. 64,000 3,560,641 Nexen, Inc. 39,200 1,872,859 Pason Systems, Inc. 56,000 1,311,460 Penn West Energy Trust 83,100 2,614,149 Petro Canada 58,500 2,452,705 Real Resources, Inc.(b) 75,072 1,765,867 Talisman Energy, Inc. - ADR 104,000 5,079,360 ---------------- 25,141,420 ---------------- Total Canada 28,156,468 ---------------- Denmark -- 0.2% Oil & Gas -- 0.2% A P Moller - Maersk A/S 40 409,713 ---------------- France -- 1.2% Oil & Gas -- 1.2% Total SA - ADR(c) 21,300 2,892,966 ---------------- Netherlands -- 2.5% Oil & Gas -- 2.5% Core Laboratories NV(b) 82,500 2,661,450 SBM Offshore NV 40,200 3,363,611 ---------------- 6,025,061 ---------------- Norway -- 3.2% Oil & Gas -- 3.2% Statoil ASA - ADR(c) 237,900 5,873,751 Stolt Offshores SA(b) 176,700 2,051,565 ---------------- 7,925,316 ---------------- United Kingdom -- 4.9% Metal & Mining -- 1.4% Rio Tinto PLC - ADR 21,300 3,499,590 ---------------- Oil & Gas -- 3.5% BG Group PLC - ADR(c) 64,000 3,052,160 Cairn Energy PLC(b) 158,100 5,484,804 ---------------- 8,536,964 ---------------- Total United Kingdom 12,036,554 ---------------- United States -- 65.4% Energy & Utilities -- 3.9% McDermott International, Inc.(b) 143,900 5,268,179 Questar Corp. 47,900 $ 4,220,948 ---------------- 9,489,127 ---------------- Metal & Mining -- 16.8% Arch Coal, Inc.(c) 93,900 6,338,251 CONSOL Energy, Inc. 93,900 7,161,753 Goldcorp, Inc. 229,225 4,593,669 Massey Energy Co.(c) 143,900 7,348,973 Natural Resource Partners LP(c) 37,459 2,336,692 Newmont Mining Corp. 27,800 1,311,326 Pan American Silver Corp.(b) 118,000 2,083,880 Peabody Energy Corp. 93,100 7,852,985 Silver StandarResources(b)(c) 143,900 1,971,430 ---------------- 40,998,959 ---------------- Oil & Gas -- 43.4% Amerada Hess Corp.(c) 27,800 3,822,500 Bois d'Arc Energy, Inc.(b) 39,500 679,795 BP PLC 27,800 1,969,630 Burlington Resources, Inc. 46,500 3,781,380 Canadian Natural Resources 119,300 5,391,167 Chesapeake Energy Corp.(c) 118,000 4,513,500 CNX Gas Corp.(b)(c)(d) 9,600 186,384 Comstock Resources, Inc.(b) 70,400 2,309,824 Double Eagle Petroleum Co.(b)(c) 82,591 1,978,054 Encana Corp. 79,400 4,629,814 ENSCO International, Inc. 103,400 4,817,406 EOG Resources, Inc. 104,000 7,789,600 Exxon Mobil Corp.(c) 31,600 2,007,864 Global Industries, Inc.(b) 158,100 2,330,394 GlobalSantaFe Corp. 20,700 944,334 Goodrich Petroleum Corp.(b) 79,400 1,863,518 Hydril(b) 40,200 2,759,328 Kerr-McGee Corp. 47,500 4,612,725 Nabors Industries Ltd.(b)(c) 21,300 1,529,979 National-Oilwell, Inc.(b) 54,139 3,562,346 Newfield Exploration Co.(b) 79,400 3,898,540 Noble Corp. 64,000 4,381,440 Noble Energy, Inc. 80,600 3,780,140 Occidental Petroleum Corp. 24,050 2,054,592 Patterson-UTI Energy, Inc. 40,200 1,450,416 Range Resources Corp. 35,600 1,374,516 Rowan Cos., Inc.(c) 96,600 3,428,334 Schlumberger Ltd.(c) 17,800 1,501,964 Suncor Energy, Inc. 67,100 4,061,563 Transocean, Inc.(b) 79,500 4,874,145 Vintage Petroleum, Inc. 106,500 4,862,790 Weatherford International Ltd.(b)(c) 46,500 3,192,690 The Williams Companies, Inc. 141,500 3,544,575 XTO Energy, Inc. 50,433 2,285,624 ---------------- 106,170,871 ---------------- Transportation -- 1.3% Stolt-Nielsen SA(b)(c) 79,500 3,186,440 ---------------- Total United States 159,845,397 ---------------- TOTAL COMMON STOCKS (Cost $190,499,560) 230,911,720 ---------------- See accompanying notes to financial statements. 96
BlackRock Funds STATEMENT OF NET ASSETS ALL-CAP GLOBAL RESOURCES PORTFOLIO (Concluded) As of September 30, 2005 Par/shares Maturity (000) Value ---------------- ---------------- ---------------- SHORT TERM INVESTMENTS -- 19.3% Banco Santader, Certificate of Deposit 3.70%(e) 05/10/06 $ 35 $ 34,642 Morgan Stanley, Floating Rate Notes 4.02%(e)(f) 11/07/05 5,037 5,037,004 4.02%(e)(f) 01/05/06 6,051 6,050,836 Galileo Money Market Fund 12,257 12,256,922 Institutional Money Market Trust(e)(g) 23,896 23,895,901 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $47,275,305) 47,275,305 ---------------- TOTAL INVESTMENTS IN SECURITIES -- 113.8% (Cost $237,774,865(a)) 278,187,025 LIABILITIES IN EXCESS OF OTHER ASSETS -- (13.8)% (33,785,801) ---------------- NET ASSETS -- 100.0% (Applicable to 6,797,862 Institutional shares, 10 Service shares, 6,514,504 Investor A shares 1,192,091 Investor B shares and 3,588,594 Investor C shares outstanding) $ 244,401,224 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($92,145,462/6,797,862) $ 13.56 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($135/10)(h) $ 13.52 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($87,948,632/6,514,504) $ 13.50 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($13.50/0.9425) $ 14.32 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($16,019,462/1,192,091) $ 13.44 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($48,287,533/3,588,594) $ 13.46 ================ - ------------------- (a) Cost for Federal income tax purposes is $237,816,284. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 40,577,450 Gross unrealized depreciation (206,708) ---------------- $ 40,370,742 ================ (b) Non-income producing security. (c) Total or partial securities on loan. (d) Securities valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, these securities had a total market value of $186,384 which represents 0.08% of net assets. (e) Securities purchased with the cash proceeds from securities loaned. (f) Rates shown are the rates as of September 30, 2005. (g) Represents an investment in an affiliate. (h) Exact net assets and shares outstanding at September 30, 2005 were $135.22 and 10, respectively. See accompanying notes to financial statements. 97
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES ALL-CAP GLOBAL RESOURCES PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $237,774,865) .......................... $ 278,187,025 Dividends and reclaims receivable ................................. 130,665 Interest receivable ............................................... 36,763 Capital shares sold receivable .................................... 10,313,043 Prepaid expenses .................................................. 62,120 -------------- TOTAL ASSETS ................................................... 288,729,616 -------------- LIABILITIES Payable upon return of securities loaned .......................... 35,018,383 Investments purchased payable ..................................... 8,544,102 Capital shares redeemed payable ................................... 558,091 Advisory fees payable ............................................. 47,924 Administrative fees payable ....................................... 22,074 Transfer agent fees payable ....................................... 10,006 Other accrued expenses payable .................................... 127,805 Foreign taxes payable ............................................. 7 -------------- TOTAL LIABILITIES .............................................. 44,328,392 -------------- NET ASSETS (Applicable to 6,797,862 Institutional shares,10 Service shares, 6,514,504 Investor A shares, 1,192,091 Investor B shares and 3,588,594 Investor C shares outstanding) ... $ 244,401,224 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($92,145,462/6,797,862) ................... $ 13.56 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($135/10)(a) .................................... $ 13.52 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($87,948,632/6,514,504) ...................... $ 13.50 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($13.50/0.9425) ........ $ 14.32 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($16,019,462/1,192,091) ...................... $ 13.44 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($48,287,533/3,588,594) ...................... $ 13.46 ============== - --------- (a) Exact net assets and shares outstanding at September 30, 2005 were $135.22 and 10, respectively. See accompanying notes to financial statements. 98
BlackRock Funds STATEMENT OF NET ASSETS HEALTH SCIENCES PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS - 91.3% Insurance - 8.5% CIGNA Corp. 84,300 $ 9,935,598 WellPoint, Inc.(b) 260,936 19,784,167 ---------------- 29,719,765 ---------------- Medical & Medical Services -- 31.1% Amgen, Inc.(b) 119,123 9,490,529 Baxter International, Inc. 365,150 14,558,531 Caremark Rx, Inc.(b) 298,670 14,912,593 Community Health Systems, Inc.(b) 126,530 4,910,629 Coventry Health Care, Inc.(b) 33,700 2,898,874 Express Scripts, Inc.(b)(c) 101,986 6,343,529 LifePoint Hospitals, Inc.(b)(c) 27,800 1,215,694 Manor Care, Inc. 74,700 2,869,227 Medco Health Solutions, Inc.(b) 149,920 8,220,114 MedImmune, Inc.(b)(c) 165,200 5,558,980 Millipore Corp.(b) 108,100 6,798,409 Omnicare, Inc.(c) 59,000 3,317,570 Orchid Cellmark Inc.(b) 29,809 253,377 Triad Hospitals, Inc.(b) 30,800 1,394,316 UnitedHealth Group, Inc.(c) 325,800 18,309,960 Viropharma, Inc.(b) 146,800 3,053,440 WebMD Corp.(b) 341,700 3,786,036 ---------------- 107,891,808 ---------------- Medical Instruments & Supplies -- 14.1% Aspect Medical Systems, Inc.(b) 111,381 3,300,219 Bausch & Lomb, Inc. 48,300 3,896,844 Boston Scientific Corp.(b)(c) 72,300 1,689,651 Cytyc Corp.(b) 274,000 7,356,900 DENTSPLY International, Inc. 43,710 2,361,214 DJ Orthopedics, Inc.(b) 38,940 1,126,924 Kinetic Concepts, Inc.(b)(c) 71,740 4,074,832 MWI Veterinary Supply, Inc.(b) 71,600 1,428,420 Respironics, Inc.(b) 193,700 8,170,266 St. Jude Medical, Inc.(b) 33,400 1,563,120 Symmetry Medical, Inc.(b) 44,500 1,054,650 Varian Medical Systems, Inc.(b)(c) 146,900 5,804,019 Zimmer Holdings, Inc.(b)(c) 102,500 7,061,225 ---------------- 48,888,284 ---------------- Pharmaceuticals -- 37.6% Abbott Laboratories(c) 49,750 2,109,400 Alexion Pharmaceuticals, Inc.(b) 92,580 2,562,614 Amylin Pharmaceuticals, Inc.(b)(c) 150,744 5,244,384 Arena Pharmaceuticals, Inc.(b) 409,200 4,051,080 AstraZeneca PLC - ADR 107,530 5,064,663 BioMarin Pharmaceutical, Inc.(b) 369,822 3,228,546 Bristol-Myers Squibb Co.(c) 102,960 2,477,218 Cardiome Pharma Corp.(b) 652,700 5,737,233 Gene Logic, Inc.(b) 645,380 3,155,908 Genentech, Inc.(b) 139,839 11,775,842 Gilead Sciences, Inc.(b) 56,200 2,740,312 Hospira, Inc.(b) 83,400 3,416,898 ICOS Corp.(b) 573 15,826 InterMune, Inc.(b) 67,381 1,115,156 iShares Nasdaq Biotechnology Index Fund(b) 40 3,066 Keryx Biopharmaceuticals, Inc.(b) 192,100 3,027,496 Merck & Co., Inc. 130,700 3,556,347 Momenta Pharmaceuticals, Inc.(b) 137,540 3,747,965 Myriad Genetics, Inc.(b) 34,800 760,728 Panacos Pharmaceuticals, Inc.(b) 297,300 2,895,702 Pfizer, Inc. 196,059 4,895,593 Renovis, Inc.(b) 102,000 1,380,060 Roche Holding AG 313,600 21,867,485 Sanofi-Aventis - ADR 160,140 6,653,817 Schering-Plough Corp. 329,600 6,938,080 Shire Pharmaceuticals Group PLC -- ADR 80,400 2,973,996 Taro Pharmaceutical Industries Ltd.(b)(c) 176,004 4,528,583 Vertex Pharmaceuticals, Inc.(b) 144,600 3,231,810 Wyeth 247,700 11,461,079 ---------------- 130,616,887 ---------------- TOTAL COMMON STOCKS (Cost $280,350,757) 317,116,744 ---------------- Par/shares Maturity (000) Value ---------------- ---------------- ---------------- SHORT TERM INVESTMENTS -- 16.6% Banco Santader, Certificate of Deposit 3.70%(d) 05/10/06 $ 374 373,568 Federal Home Loan Bank, Discount Notes 3.18%(e) 10/03/05 19,300 19,296,590 Morgan Stanley, Floating Rate Notes 4.02%(d)(f) 11/07/05 4,152 4,151,686 4.01%(d)(f) 11/14/05 761 761,008 4.02%(d)(f) 01/05/06 3,268 3,267,534 U.S. Treasury Bills 3.00% 10/13/05 2,500 2,497,500 Galileo Money Market Fund 9,982 9,981,563 Institutional Money Market Trust(d)(g) 17,440 17,439,518 ---------------- TOTAL SHORT TERM INVESTMENTS (Cost $57,768,967) 57,768,967 ---------------- TOTAL INVESTMENTS IN SECURITIES -- 107.9% (Cost $338,119,724(a)) 374,885,711 See accompanying notes to financial statements. 99
BlackRock Funds STATEMENT OF NET ASSETS HEALTH SCIENCES PORTFOLIO (CONCLUDED) As of September 30, 2005 Number of Contracts Value ----------- ------------- OPTIONS -- (0.1)% Genentech, Inc., Strike Price 85, Expires 10/22/05 (360) $ (90,000) Genentech, Inc., Strike Price 90, Expires 11/19/05 (360) (68,040) Martek Biosciences Corp., Strike Price 35, Expires 10/22/05 (450) (51,750) Momenta Pharmaceuticals, Inc., Strike Price 30, Expires 10/22/05 (830) (91,300) Momenta Pharmaceuticals, Inc., Strike Price 35, Expires 11/19/05 (355) (30,175) Myriad Genetics, Inc., Strike Price 20, Expires 10/22/05 (348) (62,640) Renovis, Inc., Strike Price 12.5, Expires 10/22/05 (570) (14,250) Shire Pharmaceuticals, Strike Price 40, Expires 10/22/05 (664) (13,280) Viropharma, Inc., Strike Price 20, Expires 10/22/05 (470) (79,900) Zimmer Holdings, Inc., Strike Price 75, Expires 10/22/05 (483) (4,830) ------------ TOTAL OPTIONS (Premiums received $(632,059)) (506,165) ------------ LIABILITIES IN EXCESS OF OTHER ASSETS -- (7.8)% (27,035,251) ------------ NET ASSETS -- 100.0% (Applicable to 1,277,264 Institutional shares, 2,720 Service shares, 7,738,823 Investor A shares, 1,933,676 Investor B shares and 3,629,824 Investor C shares outstanding) $347,344,295 ============ Value ------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($31,229,254/1,277,264) $ 24.45 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($65,671/2,720)(h) $ 24.15 ============ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($186,544,720/7,738,823) $ 24.11 ============ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($24.11/0.9425) $ 25.58 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($45,073,384/1,933,676) $ 23.31 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($84,431,266/3,629,824) $ 23.26 ============ - ---------- (a) Cost for Federal income tax purposes is $339,117,729. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 38,698,271 Gross unrealized depreciation (2,930,289) ------------ $ 35,767,982 ============ (b) Non-income producing security. (c) Total or partial securities on loan. (d) Securities purchased with the cash proceeds from securities loaned. (e) The rate shown is the effective yield on the discount notes at the time of purchase. (f) Rates shown are the rates as of September 30, 2005. (g) Represents an investment in an affiliate. (h) Exact net assets and shares outstanding at September 30, 2005 were $65,670.73 and 2,719.678, respectively. See accompanying notes to financial statements. 100
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES HEALTH SCIENCES PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $338,119,724)........................... $ 374,885,711 Dividends and reclaims receivable ................................. 65,564 Interest receivable ............................................... 32,464 Investments sold receivable ....................................... 8,992,456 Capital shares sold receivable .................................... 8,930,598 Prepaid expenses .................................................. 67,989 -------------- TOTAL ASSETS ................................................... 392,974,782 -------------- LIABILITIES Payable upon return of securities loaned .......................... 25,993,314 Investments purchased payable ..................................... 18,061,945 Capital shares redeemed payable ................................... 610,984 Advisory fees payable ............................................. 193,266 Administrative fees payable ....................................... 33,382 Transfer agent fees payable ....................................... 24,219 Options written at fair value (premiums received $632,059)......... 506,165 Other accrued expenses payable .................................... 207,212 -------------- TOTAL LIABILITIES .............................................. 45,630,487 -------------- NET ASSETS (Applicable to 1,277,264 Institutional shares, 2,720 Service shares, 7,738,823 Investor A shares, 1,933,676 Investor B shares and 3,629,824 Investor C shares outstanding) ............... $ 347,344,295 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($31,229,254/1,277,264).................... $ 24.45 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($65,671/2,720)(a)............................... $ 24.15 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($186,544,720/7,738,823)...................... $ 24.11 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($24.11/0.9425)......... $ 25.58 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($45,073,384/1,933,676)....................... $ 23.31 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($84,431,266/3,629,824)....................... $ 23.26 ============== - --------- (a) Exact net assets and shares outstanding at September 30, 2005 were $65,670.73 and 2,719.678, respectively. See accompanying notes to financial statements. 101
BlackRock Funds STATEMENT OF NET ASSETS U.S. OPPORTUNITIES PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 95.7% Aerospace -- 3.3% Curtiss - Wright Corp. 11,000 $ 678,810 Esterline Technologies Corp.(b)(c) 13,500 511,515 Goodrich Corp. 27,800 1,232,652 Teledyne Technologies, Inc.(b) 20,500 706,635 ---------- 3,129,612 ---------- Banks -- 4.1% City National Corp. 12,300 862,107 Colonial BancGroup, Inc. 36,300 813,120 Compass Bancshares, Inc. 13,800 632,454 Cullen/Frost Bankers, Inc. 14,500 715,430 Franklin Bank Corp.(b) 23,500 379,525 Sovereign Bancorp., Inc.(c) 23,000 506,920 ---------- 3,909,556 ---------- Business Services -- 4.1% Alliance Data Systems Corp.(b)(c) 11,800 461,970 Aquantive, Inc.(b) 58,100 1,169,553 Cohen & Steers, Inc. 25,700 514,000 The Dun & Bradstreet Corp.(b) 11,500 757,505 Global Payments, Inc. 10,000 777,200 Korn/Ferry International(b) 15,600 255,684 Tidel Technologies, Inc.(b) 28,993 9,060 ---------- 3,944,972 ---------- Chemicals -- 2.1% Church & Dwight Co., Inc.(c) 14,000 517,160 The Lubrizol Corp. 17,000 736,610 Olin Corp. 38,700 734,913 ---------- 1,988,683 ---------- Computer Software & Services -- 3.1% Advanced Micro Devices, Inc.(b) 34,500 869,400 Informatica Corp.(b)(c) 77,400 930,348 Interwoven, Inc.(b) 64,500 526,965 Salesforce.Com, Inc.(b)(c) 21,500 497,080 Unica Corp.(b) 12,500 137,250 ---------- 2,961,043 ---------- Construction -- 3.1% Beacon Roofing Supply, Inc.(b) 13,700 447,579 EMCor Group, Inc.(b) 12,000 711,600 Hovanian Enterprises, Inc.(b)(c) 12,700 650,240 Washington Group International, Inc.(b) 22,500 1,212,525 ---------- 3,021,944 ---------- Electronics -- 0.8% Amphenol Corp. 18,300 738,222 ---------- Energy & Utilities -- 6.2% Atmos Energy Corp. 26,000 734,500 Equitable Resources, Inc. 24,800 968,688 MDU Resources Group, Inc. 33,800 1,204,970 PPL Corp. 36,200 1,170,346 Sempra Energy(c) 21,200 997,672 UGI Corp. 30,500 858,575 ---------- 5,934,751 ---------- Entertainment & Leisure -- 5.3% Gaylord Entertainment Co.(b) 14,900 709,985 Hilton Hotels Corp. 38,700 863,784 Kerzner International Ltd.(b) 10,300 572,165 Penn National Gaming, Inc.(b) 27,600 858,636 Scientific Games Corp. - Class A(b)(c) 19,300 598,300 Station Casinos, Inc. 13,500 895,860 Warner Music Group Corp.(b) 32,500 601,575 ---------- 5,100,305 ---------- Finance -- 1.4% T. Rowe Price Group, Inc. 19,900 1,299,470 ---------- Food & Agriculture -- 0.3% Diamond Foods, Inc.(b) 19,400 331,740 ---------- Furniture -- 0.6% Herman Miller, Inc. 19,000 575,700 ---------- Insurance -- 3.3% Aspen Insurance Holdings Ltd. 23,600 697,380 Assurant, Inc.(c) 26,100 993,366 Endurance Specialty Holdings Ltd. 16,500 562,815 The PMI Group, Inc. 16,200 645,894 Willis Group Holdings Ltd. 8,000 300,400 ---------- 3,199,855 ---------- Machinery & Heavy Equipment -- 1.7% Astec Industries, Inc.(b) 15,000 425,850 Dresser-Rand Group, Inc.(b) 19,300 475,359 Joy Global, Inc.(c) 15,250 769,515 ---------- 1,670,724 ---------- Manufacturing -- 6.9% Cooper Industries, Inc. 8,500 587,690 Gardner Denver, Inc.(b) 18,600 829,560 ITT Industries, Inc.(c) 7,000 795,200 Paralux Fragrance, Inc.(b) 15,000 437,100 Polo Ralph Lauren Corp. 21,000 1,056,300 Powerwave Technologies, Inc.(b) 100,100 1,300,299 Rexam PLC - Sponsored ADR 15,500 700,600 Rockwell Automation, Inc. 7,900 417,910 V.F. Corp. 8,000 463,760 ---------- 6,588,419 ---------- Medical & Medical Services -- 4.5% LifePoint Hospitals, Inc.(b)(c) 16,100 704,053 Manor Care, Inc. 8,500 326,485 Medco Health Solutions, Inc.(b) 14,700 806,001 Millipore Corp.(b) 18,100 1,138,309 Triad Hospitals, Inc.(b) 15,000 679,050 WebMD Corp.(b) 64,000 709,120 ---------- 4,363,018 ---------- Medical Instruments & Supplies -- 2.0% Bausch & Lomb, Inc. 6,100 492,148 DENTSPLY International, Inc. 8,500 459,170 MWI Veterinary Supply, Inc.(b) 19,700 393,015 Varian Medical Systems, Inc.(b) 15,000 592,650 ---------- 1,936,983 ---------- Metal & Mining -- 5.4% Arch Coal, Inc.(c) 15,500 1,046,250 CONSOL Energy, Inc. 8,500 648,295 Freeport-McMoRan Copper & Gold, Inc. - Class B 12,900 626,811 Inco Ltd. 17,000 804,950 See accompanying notes to financial statements. 102
BlackRock Funds STATEMENT OF NET ASSETS U.S. OPPORTUNITIES PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Metal & Mining (Continued) Oregon Steel Mills, Inc.(b) 28,900 $ 806,310 Phelps Dodge Corp.(c) 10,000 1,299,300 ---------- 5,231,916 ---------- Motor Vehicles -- 0.4% Rush Enterprises, Inc. CL A(b) 25,000 382,000 ---------- Oil & Gas -- 9.3% Chesapeake Energy Corp. 22,000 841,500 Cimarex Energy Co.(b)(c) 11,377 515,720 CNX Gas Corp.(b)(d) 7,600 147,554 Diamond Offshore Drilling, Inc. 17,000 1,041,250 ENSCO International, Inc. 25,500 1,188,045 Grant Prideco, Inc.(b) 19,700 800,805 National-Oilwell, Inc.(b) 11,300 743,540 Newfield Exploration Co.(b) 22,000 1,080,200 Noble Energy, Inc. 15,600 731,640 St. Mary Land & Exploration Co. 22,500 823,500 Weatherford International Ltd.(b) 14,500 995,570 ---------- 8,909,324 ---------- Personal Services -- 0.6% Educate, Inc.(b) 36,000 540,000 ---------- Pharmaceuticals -- 4.5% Amylin Pharmaceuticals, Inc.(b)(c) 18,500 643,615 BioMarin Pharmaceutical, Inc.(b) 50,000 436,500 Cardiome Pharma Corp.(b) 58,200 511,578 Caremark Rx, Inc.(b) 15,500 773,915 First Horizon Pharmaceutical Corp.(b) 22,350 444,095 Hospira, Inc.(b) 18,000 737,460 Keryx Biopharmaceuticals, Inc.(b) 26,800 422,368 Momenta Pharmaceuticals, Inc.(b) 12,200 332,450 ---------- 4,301,981 ---------- Real Estate -- 4.6% Archstone-Smith Trust 22,500 897,075 CB Richard Ellis Group, Inc. - Class A(b) 24,800 1,220,160 Host Marriott Corp. 52,500 887,250 Kimco Realty Corp. 29,000 911,180 Strategic Hotel Capital, Inc. 30,000 547,800 ---------- 4,463,465 ---------- Restaurants -- 0.1% Ruth's Chris Steak House, Inc.(b) 6,000 110,280 ---------- Retail Merchandising -- 4.9% Abercrombie & Fitch Co. - Class A 8,600 428,710 BJ's Wholesale Club, Inc.(b) 14,700 408,660 Charming Shoppes, Inc.(b) 56,500 602,855 Dick's Sporting Goods, Inc.(b)(c) 15,000 451,650 Pacific Sunwear of California, Inc.(b) 20,800 445,952 The Pantry, Inc.(b) 18,204 680,283 Saks, Inc.(b) 21,900 405,150 Tiffany & Co. New 14,000 556,780 Urban Outfitters, Inc.(b) 23,400 687,960 ---------- 4,668,000 ---------- Security Brokers & Dealers -- 1.3% E*TRADE Financial Corp.(b) 72,900 1,283,040 ---------- Semiconductors & Related Devices -- 3.5% Integrated Device Technology, Inc.(b) 51,500 553,110 Lam Research Corp.(b)(c) 9,000 274,230 MEMC Electronic Materials, Inc.(b) 35,000 797,650 Microsemi Corp.(b) 29,100 743,214 O2Micro International Ltd.(b) 33,600 528,864 Varian Semiconductor Equipment Associates, Inc.(b) 12,000 508,440 ---------- 3,405,508 ---------- Telecommunications -- 6.2% Alamosa Holdings, Inc.(b) 42,700 730,597 Amdocs Ltd.(b) 23,000 637,790 American Tower Corp. - Class A(b) 52,500 1,309,875 Comverse Technology, Inc.(b) 37,300 979,871 New Skies Satellites Holdings Ltd. 25,000 526,250 Nextel Partners, Inc. - Class A(b)(c) 11,000 276,100 NII Holdings, Inc.(b) 11,200 945,840 Otelco, Inc. 37,319 578,071 ---------- 5,984,394 ---------- Transportation -- 0.9% Pacer International, Inc. 18,000 474,480 Trinity Industries, Inc. 9,600 388,704 ----------- 863,184 ---------- Waste Management -- 1.2% URS Corp.(b) 27,500 1,110,725 ---------- TOTAL COMMON STOCKS (Cost $69,733,431) 91,948,814 ---------- WARRANTS -- 0.0% Bioject Medical Technologies, Inc. (issued 07/19/02, expiring 05/23/06, strike price $.01)(d)(e) (Cost $0) 15,000 150 ---------- Par/shares Maturity (000) Value ---------------- ---------------- ---------------- SHORT TERM INVESTMENTS - 18.9% Morgan Stanley, Floating Rate Notes 4.02%(f)(g) 11/07/05 $ 2,861 $ 2,861,276 4.01%(f)(g) 11/14/05 1,515 1,514,706 Galileo Money Market Fund 4,492 4,492,190 Institutional Money Market Trust(g)(h) 9,254 9,254,249 ----------- TOTAL SHORT TERM INVESTMENTS (Cost $18,122,421) 18,122,421 ----------- See accompanying notes to financial statements. 103
BlackRock Funds STATEMENT OF NET ASSETS U.S. OPPORTUNITIES PORTFOLIO (Concluded) As of September 30, 2005 VALUE ------------- TOTAL INVESTMENTS IN SECURITIES -- 114.6% (Cost $87,855,852(a)) $ 110,071,385 LIABILITIES IN EXCESS OF OTHER ASSETS -- (14.6)% (14,026,143) ------------- NET ASSETS -- 100.0% (Applicable to 249,982 Institutional shares, 18,902 Service shares, 1,263,181 Investor A shares, 1,583,519 Investor B shares and 886,764 Investor C shares outstanding) $ 96,045,242 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($6,389,565/249,982) $ 25.56 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($471,859/18,902) $ 24.96 ============= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($31,276,954/1,263,181) $ 24.76 ============= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($24.76/0.9425) $ 26.27 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($37,132,433/1,583,519) $ 23.45 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,774,431/886,764) $ 23.43 ============= - ---------- (a) Cost for Federal income tax purposes is $87,856,681. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 23,063,168 Gross unrealized depreciation (848,464) ------------- $ 22,214,704 ============= (b) Non-income producing security. (c) Total or partial securities on loan. (d) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, these securities had a total market value of $147,704 which represents less than 0.02% of net assets. (e) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 15,000. These warrants will become exercisable on 5/23/06. (f) Rates shown are the rates as of September 30, 2005. (g) Securities purchased with the cash proceeds from securities loaned. (h) Represents an investment in an affiliate. See accompanying notes to financial statements. 104
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES U.S. OPPORTUNITIES PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $87,855,852)............................ $ 110,071,385 Dividends receivable .............................................. 81,129 Interest receivable ............................................... 12,083 Investments sold receivable ....................................... 686,294 Capital shares sold receivable .................................... 92,225 Prepaid expenses .................................................. 17,460 -------------- TOTAL ASSETS ................................................... 110,960,576 -------------- LIABILITIES Payable upon return of securities loaned .......................... 13,630,231 Investments purchased payable ..................................... 508,680 Capital shares redeemed payable ................................... 561,026 Advisory fees payable ............................................. 88,760 Administrative fees payable ....................................... 16,764 Transfer agent fees payable ....................................... 25,480 Other accrued expenses payable .................................... 84,393 -------------- TOTAL LIABILITIES .............................................. 14,915,334 -------------- NET ASSETS (Applicable to 249,982 Institutional shares,18,902 Service shares, 1,263,181 Investor A shares, 1,583,519 Investor B shares and 886,764 Investor C shares outstanding) ................. $ 96,045,242 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($6,389,565/249,982)....................... $ 25.56 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($471,859/18,902)................................ $ 24.96 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($31,276,954/1,263,181)....................... $ 24.76 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($24.76/0.9425)......... $ 26.27 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($37,132,433/1,583,519)....................... $ 23.45 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,774,431/886,764)......................... $ 23.43 ============== See accompanying notes to financial statements. 105
BlackRock Funds STATEMENT OF NET ASSETS INTERNATIONAL OPPORTUNITIES PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS -- 96.9% Australia -- 1.1% Metal & Mining - 1.1% Zinifex Ltd.(b) 2,283,900 $ 7,953,097 ------------- Austria -- 1.7% Construction - 0.6% Wienerberger AG 99,483 3,932,879 ------------- Machinery & Heavy Equipment -- 0.4% Andritz AG 30,600 3,061,365 ------------- Telecommunications -- 0.7% Telekom Austria AG 252,600 5,040,244 ------------- Total Austria 12,034,488 ------------- Belgium -- 0.6% Metal & Mining - 0.6% Umicore 40,716 4,454,839 ------------- Brazil -- 0.7% Telecommunications -- 0.7% Telemig Celular Participacoes SA-ADR 53,000 1,791,400 Tim Participacoes SA-ADR 184,600 3,429,868 ------------- 5,221,268 ------------- Canada -- 3.9% Metal & Mining - 3.3% First Quantum Minerals Ltd. 213,300 5,559,473 Inco Ltd. 151,100 7,159,218 Inmet Mining Corp.(b) 296,100 5,319,391 Teck Cominco Ltd. 125,200 5,625,694 ------------- 23,663,776 ------------- Transportation -- 0.6% Canadian Pacific Railway Ltd. 101,900 4,393,483 ------------- Total Canada Denmark -- 0.8% 28,057,259 ------------- Food & Agriculture -- 0.8% Danisco A/S 84,200 5,692,958 ------------- Finland -- 2.9% Banks -- 0.5% OKO Bank -- Class A 220,900 3,648,686 ------------- Machinery & Heavy Equipment -- 1.2% Kone Oyj -- New Class B Shares(b) 63,100 4,298,313 Metso Oyj 168,600 4,291,075 ------------- 8,589,388 ------------- Retail Merchandising -- 0.9% Kesko Oyj -- Class B 222,000 6,177,447 ------------- Transportation -- 0.3% Cargotec Corporation -- B Share(b) 63,100 1,907,995 ------------- Total Finland France -- 1.3% 20,323,516 ------------- Computer & Office Equipment -- 0.8% Neopost SA 62,000 6,028,598 ------------- Computer Software & Services -- 0.5% Atos Origin SA(b) 54,100 3,838,522 ------------- Total France Germany -- 8.8% 9,867,120 ------------- Aerospace -- 0.6% MTU Aero Engines Holding AG(b) 128,900 4,040,606 ------------- Air Transportation -- 0.8% Deutsche Lufthansa 437,900 5,823,321 ------------- Construction -- 1.0% Bilfinger Berger AG 139,400 7,495,798 ------------- Durable Goods -- 0.0% Gerry Weber International A 13,888 253,672 ------------- Electronics -- 0.4% Techem AG(b) 62,100 2,687,858 ------------- Energy & Utilities -- 0.5% Solarworld AG 23,400 3,504,231 ------------- Finance -- 0.7% AWD Holding AG 131,500 5,060,680 ------------- Machinery & Heavy Equipment -- 1.3% Rheinmetall AG 138,500 9,184,018 ------------- Manufacturing -- 2.4% Adidas-Salomon AG 32,100 5,595,430 MAN AG 73,500 3,782,091 Norddeutsche Affinerie AG 238,100 5,281,989 Solon AG Fuer Solartechnik(b) 70,000 2,451,684 ------------- 17,111,194 ------------- Real Estate -- 0.6% IVG Immobilien AG 213,100 4,393,391 ------------- Telecommunications -- 0.5% Freenet.De AG 151,500 3,894,217 ------------- Total Germany 63,448,986 ------------- Greece -- 0.6% Banks -- 0.6% Piraeus Bank SA 202,200 4,241,805 ------------- Hong Kong -- 2.6% Containers -- 0.4% Cosco Pacific Ltd. 1,564,200 3,044,622 ------------- Entertainment & Leisure -- 0.7% Regal Hotels International Holdings Ltd. 67,131,000 5,192,047 ------------- Real Estate -- 1.5% New World Development Co., Ltd. 5,164,100 6,789,832 Wheelock & Co., Ltd. 2,045,000 3,637,782 ------------- 10,427,614 ------------- Total Hong Kong 18,664,283 ------------- India - 2.2% Banks -- 0.6% Industrial Development Bank of India Ltd. 1,521,100 4,184,251 ------------- Telecommunications -- 1.6% Bharti Tele-Ventures Ltd.(b) 1,493,257 11,635,201 ------------- Total India 15,819,452 ------------- Italy -- 0.9% Construction -- 0.9% Buzzi Unicem SpA 400,600 6,317,408 ------------- See accompanying notes to financial statements. 106
BlackRock Funds STATEMENT OF NET ASSETS INTERNATIONAL OPPORTUNITIES PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- COMMON STOCKS (Continued) Japan -- 31.1% Banks -- 4.0% Bank of Kyoto Ltd. 357,000 $ 3,578,189 The Bank of Yokohama Ltd. 836,000 6,380,272 The Chiba Bank Ltd. 650,000 5,293,365 The Iyo Bank Ltd. 550,600 5,499,199 The Joyo Bank Ltd. 789,200 4,818,479 The Musashino Bank Ltd. 49,700 3,056,370 ------------- 28,625,874 ------------- Chemicals -- 0.7% Tokai Carbon Co., Ltd. 1,197,000 5,343,939 ------------- Electronics -- 0.8% Daido Steel Co., Ltd. 882,000 5,680,783 ------------- Finance -- 5.0% K.K. DaVinci Advisors(b) 1,250 4,764,426 Mitsui Trust Holdings, Inc. 683,400 9,478,603 Nissin Co., Ltd. 1,753,860 2,336,623 Nissin Co., Ltd. 1,700,160 2,220,078 Orix Corp. 29,900 5,408,064 Pacific Management Corp. 1,150 4,748,544 Sanyo Shinpan Finance Co. Ltd. 81,800 6,654,279 ------------- 35,610,617 ------------- Food & Agriculture -- 1.5% Morinaga & Co., Ltd 1,604,000 4,443,762 The Nisshin Oillio V 1,057,000 6,267,020 ------------- 10,710,782 ------------- Machinery & Heavy Equipment -- 4.5% Hitachi Construction Machinery Co., Ltd. 366,600 7,018,899 Juki Corp. 1,030,200 5,726,363 Komatsu Ltd. 384,600 5,246,088 Miura Co., Ltd 159,800 3,722,181 Nabtesco Corp. 532,000 4,660,985 Sumitomo Heavy Industries Ltd. 855,400 6,075,498 ------------- 32,450,014 ------------- Manufacturing -- 3.9% Asahi Diamond 558,600 4,361,752 Industry Co. Ltd. Ibiden Co., Ltd. 168,600 7,036,157 Kobe Steel Ltd. 1,723,800 5,247,141 Koyo Seiko Co., Ltd. 477,700 7,215,656 Shimadzu Corp. 602,000 4,254,473 ------------- 28,115,179 ------------- Medical Instruments & Supplies -- 1.1% Nihon Kohden Corp. 267,000 4,379,328 Terumo Corp. 106,600 3,432,945 ------------- 7,812,273 ------------- Motor Vehicles -- 2.7% Futaba Industrial Co., Ltd. 191,800 4,205,250 Keihin Corp. 264,300 5,316,781 SHOWA Corp. 138,300 2,004,825 Yamaha Motor Co., Ltd. 395,000 8,172,534 ------------- 19,699,390 ------------- Real Estate -- 1.0% Joint Corp. 158,100 7,379,116 ------------- Retail Merchandising -- 4.3% Culture Convenience Club Co., Ltd. 169,000 5,576,672 Japan (Continued) Retail Merchandising (Continued) FamilyMart Co., Ltd. 133,400 4,013,535 Sundrug Co., Ltd. 89,200 5,099,841 Takashimaya Co., Ltd. 318,900 4,068,549 Tsuruha Co., Ltd. 94,000 3,690,665 Xebio Co., Ltd. 85,200 3,397,777 Yamada Denki Co., Ltd. 69,000 5,253,838 ------------- 31,100,877 ------------- Security Brokers & Dealers -- 0.6% Ichiyoshi Securities Co., Ltd. 392,700 4,455,728 ------------- Tires & Rubber -- 1.0% Zeon Corp. 645,700 7,064,302 ------------- Total Japan 224,048,874 ------------- Mexico -- 0.6% Metal & Mining -- 0.6% Grupo Mexico SA-Series B 2,332,800 4,586,143 ------------- Netherlands -- 0.8% Construction -- 0.8% Koninklijke BAM Groep NV 60,000 5,526,687 ------------- Norway -- 4.5% Banks -- 0.7% Sparebanken Midt-Norge 34,700 1,925,325 Sparebanken Nord-Norge 66,520 1,279,564 Sparebanken Rogaland 56,500 1,731,987 ------------- 4,936,876 ------------- Electronics -- 0.7% Eltek ASA(b) 295,000 4,928,498 ------------- Manufacturing -- 0.6% Orkla ASA 111,700 4,254,472 ------------- Oil & Gas -- 2.5% Prosafe ASA 268,500 10,082,691 Smedvig ASA -- Class A 316,900 7,795,847 ------------- 17,878,538 ------------- Total Norway 31,998,384 ------------- Portugal -- 0.5% Telecommunications -- 0.5% PT Multimedia -- Servicos de Telecomunicacoes e Multimedia, SGPS, SA 330,400 3,505,443 ------------- Singapore -- 1.6% Oil & Gas -- 0.8% Singapore Petroleum Co., Ltd. 1,569,500 5,480,941 ------------- Real Estate -- 0.8% Capitaland Ltd. 3,006,000 5,586,765 ------------- Total Singapore 11,067,706 ------------- South Africa -- 0.6% Retail Merchandising -- 0.6% Edgars Consolidated 830,500 4,147,471 ------------ Stores Ltd. South Korea -- 3.8% Chemicals -- 0.7% Honam Petrochemical Corp. 98,200 4,902,929 ------------- Construction -- 1.0% Hanjin Heavy Industries Co., Ltd. 334,600 7,132,136 ------------- See accompanying notes to financial statements. 107
BlackRock Funds STATEMENT OF NET ASSETS INTERNATIONAL OPPORTUNITIES PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value -------------- ------------- COMMON STOCKS (Continued) South Korea (Continued) Machinery & Heavy Equipment -- 0.7% Doosan Infracore Co., Ltd. 443,000 $ 5,019,107 ------------- Retail Merchandising -- 0.5% Hyundai Department Store Co., Ltd. 54,100 3,641,296 ------------- Security Brokers & Dealers -- 0.9% Korea Investment Holdings Co., Ltd. 225,700 6,609,554 ------------- Total South Korea Spain -- 1.0% 27,305,022 ------------- Air Transportation -- 0.5% Iberia Lineas Aereas de Espana SA 1,560,000 3,987,317 ------------- Construction -- 0.5% ACS, Actividades de Construccion y Servicios SA 120,500 3,523,052 ------------- Total Spain Sweden -- 3.4% 7,510,369 ------------- Manufacturing -- 1.8% SKF AB -- B Shares 548,200 7,163,185 SSAB Svenskt Stal AB -- Series A 191,740 5,817,031 ------------- 12,980,216 ------------- Motor Vehicles -- 0.4% Scania AB 81,800 2,963,174 ------------- Oil & Gas -- 0.3% PA Resources AB(b) 161,500 2,376,347 ------------- Retail Merchandising -- 0.9% Lindex AB 117,500 6,103,363 ------------- Total Sweden 24,423,100 ------------- Switzerland -- 2.4% Food Distribution -- 0.8% Barry Callebaut AG(b) 18,542 5,493,926 ------------- Industrial -- 0.9% SGS Societe Generale de Surveillance Holding SA 8,900 6,892,884 ------------- Machinery & Heavy Equipment -- 0.7% Sauer AG(b) 72,500 4,920,496 ------------- Total Switzerland 17,307,306 ------------- Taiwan -- 0.9% Computer & Office Equipment -- 0.5% High Tech Computer Corp. 304,800 3,715,225 Quanta Computer, Inc. 1 1 ------------- 3,715,226 ------------- Security Brokers & Dealers -- 0.4% Yuanta Core Pacific Securities Co. 3,987,123 2,547,106 ------------- Total Taiwan 6,262,332 ------------- Thailand -- 1.1% Banks -- 0.6% Siam Commercial Bank Public Co. Ltd. (Foreign Shares)(d) 3,568,500 4,445,456 ------------- Telecommunications -- 0.5% Advanced Info Service Public Co. Ltd. (Foreign Shares)(d) 1,240,100 3,186,903 ------------- Total Thailand 7,632,359 ------------- United Kingdom -- 15.4% Aerospace - 0.9% Meggitt PLC 1,071,565 6,146,815 ------------- Construction -- 1.3% Carillion PLC 887,400 4,160,226 Taylor Woodrow PLC 854,200 4,899,945 ------------- 9,060,171 ------------- Electronics -- 0.6% Ultra Electronics Holdings PLC 254,800 4,219,169 ------------- Energy & Utilities -- 0.5% Viridian Group PLC 269,130 3,780,370 ------------- Entertainment & Leisure -- 2.3% Hilton Group PLC 467,600 2,601,638 IG Group Holdings PLC(b) 1,175,200 3,596,744 Intercontinental Hotels Group PLC 302,422 3,836,054 Millennium & Copthorne Hotels PLC 447,600 2,929,837 Whitbread PLC 194,914 3,274,087 ------------- 16,238,360 ------------- Manufacturing -- 1.4% IMI PLC 509,700 3,868,330 Rexam PLC 705,500 6,421,464 ------------- 10,289,794 ------------- Measuring & Controlling Devices -- 1.0% Rotork PLC 683,900 7,210,917 ------------- Medical Instruments & Supplies -- 0.7% Alliance Unichem PLC 322,828 4,948,703 ------------ Metal & Mining -- 1.4% Antofagasta PLC 369,500 10,145,134 ------------- Miscellaneous Services -- 0.6% Aggreko PLC 1,033,200 4,277,125 ------------- Oil & Gas -- 1.2% Tullow Oil PLC 1,928,000 8,868,130 ------------- Soaps & Cosmetics -- 0.4% McBride PLC 949,800 2,570,841 ------------- Transportation -- 1.9% Arriva PLC 389,300 4,046,168 Exel PLC 440,310 9,557,730 ------------- 13,603,898 ------------- Waste Management -- 1.2% Kelda Group PLC 385,400 4,789,715 Severn Trent PLC 233,500 4,093,664 ------------- 8,883,379 ------------- Total United Kingdom 110,242,806 ------------- See accompanying notes to financial statements. 108
BlackRock Funds STATEMENT OF NET ASSETS INTERNATIONAL OPPORTUNITIES PORTFOLIO (Concluded) As of September 30, 2005 Number of shares Value ---------------- -------------- COMMON STOCKS (Continued) United States -- 1.1% Broadcasting -- 0.6% Central European Media Enterprises Ltd. -- A shares(b) 81,800 $ 4,319,858 ------------- Telecommunications -- 0.5% NII Holdings, Inc.(b) 45,400 3,834,030 ------------- Total United States 8,153,888 ------------- TOTAL COMMON STOCKS (Cost $548,297,671) 695,814,369 ------------- PREFERRED STOCKS -- 0.8% Brazil -- 0.8% Companhia Siderurgica de Tubarao (Cost $4,317,774) 78,654,800 5,664,959 ------------- WARRANTS -- 0.0% Playmates Holdings Ltd. (issued 05/24/05, expiring 05/23/06, strike price $2.03)(e) (Cost $784) 1,170,300 22,930 ------------- Par/shares Maturity (000) ---------------- ---------------- SHORT TERM INVESTMENTS -- 2.3% Federal Home Loan Bank Discount Notes 3.18%(f) 10/03/05 $ 10,000 9,998,055 Galileo Money Market Fund 6,937 6,936,738 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $16,934,793) 16,934,793 ------------- TOTAL INVESTMENTS IN SECURITIES -- 100.0% (Cost $569,551,022(a)) 718,437,051 LIABILITIES IN EXCESS OF OTHER ASSETS -- 0.0% (264,673) ------------- NET ASSETS -- 100.0% (Applicable to 6,292,278 Institutional shares, 1,320,766 Service shares, 7,604,596 Investor A shares, 2,313,284 Investor B shares and 4,075,744 Investor C shares outstanding) $ 718,172,378 ============= Value ------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($216,069,795/6,292,278) $ 34.34 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($44,308,300/1,320,766) $ 33.55 ============= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($253,709,608/7,604,596) $ 33.36 ============= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($33.36/0.950) $ 35.12 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($73,946,244/2,313,284) $ 31.97 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($130,138,431/4,075,744) $ 31.93 ============= - ---------- (a) Cost for Federal income tax purposes is $571,585,581. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 151,397,224 Gross unrealized depreciation (4,545,754) ------------- $ 146,851,470 ============= (b) Non-income producing security. (c) When-issued security. (d) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, the securities had a total market value of $7,609,409 which represents 1.06% of net assets. (e) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 1,170,300. These warrants were exercisable as of 5/24/05. (f) The rate shown is the effective yield on the discount notes at the time of purchase. See accompanying notes to financial statements. 109
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO As of September 30, 2005 Number of Shares Value ---------------- ------------- COMMON STOCKS -- 67.1% Australia -- 0.8% Metal & Mining -- 0.4% BHP Billiton Ltd. 167,054 $ 2,838,450 ------------- Pharmaceuticals -- 0.1% CSL Ltd. 39,550 1,159,771 ------------- Retail Merchandising -- 0.3% Woolworths Ltd. 155,314 1,972,410 ------------- Total Australia 5,970,631 ------------- Belgium -- 0.2% Beverages & Bottling -- 0.2% Inbev NV 38,670 1,534,343 ------------- Canada -- 1.2% Energy & Utilities -- 0.0% Tusk Energy Corp.(b) 10,557 44,025 ------------- Metal & Mining -- 0.3% Bema Gold Corp.(c) 50,000 134,500 Fording Canadian Coal Trust(d) 6,394 272,193 Gateway Gold Corp.(c) 100,000 90,470 Gold Reserve, Inc.(c) 100,000 230,000 Minefinders Corp. Ltd.(c) 40,000 195,200 NovaGold Resources, Inc.(c) 66,700 534,267 Southwestern Resources Corp.(c) 47,300 438,114 Stratagold Corp.(c) 200,000 124,074 Sunridge Gold Corp.(c) 76,700 76,660 ------------- 2,095,478 ------------- Motor Vehicles -- 0.0% Westport Innovations, Inc. (acquired 12/17/03 through 9/15/04, cost $75,001)(c)(e)(f)(g) 70,500 85,042 ------------- Oil & Gas -- 0.9% Accrete Energy, Inc.(c) 4,960 43,591 Alberta Clipper Energy, Inc.(c) 20,126 82,370 C1 Energy Ltd.(c) 85,733 232,689 Canadian Superior Energy, Inc.(c) 1,723 4,308 Canex Energy, Inc(c) 7,800 22,178 Capitol Energy Resources Ltd.(c) 9,422 44,650 Chamaelo Exploration Ltd.(c) 2,340 16,029 Cinch Energy Corp.(c) 40,320 127,151 Compton Petroleum Corp.(c) 66,500 899,578 Crew Energy, Inc. (acquired 5/12/04, cost $36,232)(c)(e)(f) 9,400 161,985 Delphi Energy Corp.(c) 23,028 105,160 Ember Resources, Inc.(c) 12,136 74,454 Endev Energy, Inc.(c) 231,700 411,255 Esprit Energy Trust 36,375 454,139 First Calgary Petroleums Ltd.(c) 12,822 104,512 Galleon Energy, Inc. - Class A(c) 51,563 1,017,398 Hawker Resources, Inc.(c) 7,921 38,902 HSE Integrated Ltd.(c) 561 1,329 KICK Energy Ltd.(c) 9,100 63,275 Leader Energy Services Ltd.(c) 15,957 61,595 Midnight Oil Exploration Ltd.(c) 81,200 303,443 Niko Resources Ltd. (acquired 6/20/03 through 11/10/03, cost $40,606)(e)(f) 2,000 87,886 Oilexco, Inc.(c) 62,300 216,864 Pacific Rodera Energy, Inc.(c) 37,300 42,744 Paramount Resources Ltd. -- Class A(c) 15,600 459,693 Precision Drilling Corp.(c) 6,800 334,560 ProspEx Resources Ltd.(c) 43,140 141,248 Purcell Energy Ltd.(c)(g) 68,773 207,397 Real Resources, Inc.(c) 6,185 145,486 Sequoia Oil & Gas Trust 11,220 202,624 Tag Oil Ltd.(b) 4,000 4,005 Technicoil Corp. (acquired 6/15/04, cost $24,418)(c)(e)(f) 33,500 108,530 Tempest Energy Corp. -- Class A(c) 14,700 71,942 Thunder Energy Trust 30,194 352,769 True Energy, Inc.(c) 26,870 136,596 Vault Energy Trust 5,850 69,206 West Energy Ltd.(c) 143 1,012 White Fire Energy Ltd.(c) 11,220 29,872 Zenas Energy Corp.(c) 4,327 23,674 ------------- 6,906,099 ------------- Transportation -- 0.0% Railpower Technologies Corp.(c) 17,600 82,192 ------------- Total Canada 9,212,836 ------------- Finland -- 0.2% Finance -- 0.2% Sampo Oyj 112,854 1,796,020 ------------- France -- 1.8% Banks -- 0.2% Credit Agricole SA 53,465 1,572,822 ------------- Construction -- 0.4% Autoroutes du Sud de la France 25,894 1,503,196 Vinci SA 14,789 1,277,542 ------------- 2,780,738 ------------- Entertainment & Leisure -- 0.2% Vivendi Universal SA 51,174 1,675,712 ------------- Insurance -- 0.3% Axa 69,787 1,921,723 ------------- Medical Instruments & Supplies -- 0.2% Essilor International SA 20,316 1,687,632 ------------- Oil & Gas -- 0.3% Gaz de France 18,812 630,976 Technip SA 32,590 1,934,740 ------------- 2,565,716 ------------- Telecommunications -- 0.2% SES Global 111,395 1,751,159 ------------- Total France 13,955,502 ------------- Germany -- 1.0% Chemicals -- 0.2% Bayer AG 40,922 1,504,300 ------------- Finance -- 0.2% Hypo Real Estate Holding AG 37,138 1,883,250 ------------- Insurance -- 0.3% Allianz AG 14,579 1,974,615 ------------- Motor Vehicles -- 0.2% Bayerische Motoren Werke AG 29,031 1,367,145 ------------- Retail Merchandising -- 0.1% Metro AG 21,380 1,056,073 ------------- Total Germany 7,785,383 ------------- See accompanying notes to financial statements. 110
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ------------- COMMON STOCKS (Continued) Greece -- 0.2% Telecommunications -- 0.2% Hellenic Telecommunications Organization SA(c) 78,856 $ 1,582,007 ------------- Hong Kong -- 0.1% Machinery & Heavy Equipment -- 0.1% Techtronics Industries Co. Ltd. 444,000 1,136,077 ------------- Italy -- 0.3% Oil & Gas -- 0.3% Eni SpA 71,458 2,128,844 ------------- Japan -- 2.8% Banks -- 0.3% Mizuho Financial Group, Inc. 328 2,089,430 ------------- Chemicals -- 0.2% Daicel Chemical Industries Ltd. 240,000 1,556,379 ------------- Conglomerates -- 0.3% Mitsui & Co. Ltd. 200,000 2,507,500 ------------- Construction -- 0.3% Daiwa House Industry Co. Ltd. 82,000 1,074,378 Obayashi Corp. 202,000 1,397,282 ------------- 2,471,660 ------------- Electronics -- 0.2% Sony Corp. 35,900 1,181,463 ------------- Energy & Utilities -- 0.2% Hokkaido Electric Power Co. 21,100 449,590 Tokyo Electric Power Co. 49,000 1,240,780 ------------- 1,690,370 ------------- Finance -- 0.1% Sanyo Shinpan Finance Co. Ltd. 11,200 911,099 ------------- Machinery & Heavy Equipment -- 0.4% Komatsu Ltd. 133,000 1,814,170 Toyoda Machine Works Ltd. 97,000 1,084,339 ------------- 2,898,509 ------------- Metal & Mining -- 0.1% Marubeni Corp. 164,000 764,002 ------------- Motor Vehicles -- 0.1% Suzuki Motor Corp. 43,800 811,540 ------------- Oil & Gas -- 0.1% Nippon Oil Corp. 130,000 1,152,726 ------------- Pharmaceuticals -- 0.2% Astellas Pharma, Inc. 36,800 1,386,413 ------------- Real Estate -- 0.3% Tokyo Tatemono Co. Ltd. 214,000 1,744,627 Urban Corp. 14,000 692,959 ------------- 2,437,586 ------------- Total Japan 21,858,677 ------------- Norway -- 0.3% Banks -- 0.2% DNB NOR ASA 142,139 1,470,561 ------------- Transportation -- 0.1% Stolt-Nielsen SA(c) 13,000 521,052 ------------- Total Norway 1,991,613 ------------- Singapore -- 0.2% Business Services -- 0.1% Jardine Matheson Holdings Ltd. 49,600 848,160 ------------- Conglomerates -- 0.1% Keppel Corp. Ltd. 116,000 871,974 ------------- Total Singapore 1,720,134 ------------- South Africa -- 0.2% Banks -- 0.1% ABSA Group Ltd. 61,364 905,350 ------------- Telecommunications -- 0.1% MTN Group Ltd. 116,000 961,360 ------------- Total South Africa 1,866,710 ------------- Spain -- 0.3% Banks -- 0.3% Banco Bilbao Vizcaya Argentaria SA 124,573 2,191,288 ------------- Sweden -- 0.3% Telecommunications -- 0.3% Telefonaktiebolaget LM Ericsson 602,571 2,206,178 ------------- Switzerland -- 1.0% Banks -- 0.2% Credit Suisse Group 36,768 1,634,133 ------------- Chemicals -- 0.1% Syngenta AG(c) 7,462 784,255 ------------- Food & Agriculture -- 0.3% Nestle SA 9,038 2,656,895 ------------- Pharmaceuticals -- 0.4% Roche Holding AG 19,375 2,702,056 ------------- Total Switzerland 7,777,339 ------------- Thailand -- 0.2% Banks -- 0.2% Kasikornbank Public Co.Ltd. 779,200 1,271,311 ------------- United Kingdom -- 2.1% Air Transportation -- 0.2% BAA PLC 161,042 1,777,769 ------------- Energy & Utilities -- 0.2% Scottish Power PLC 154,718 1,564,259 ------------- Finance -- 0.0% Archipelago Holdings, I78,900 45,225 ------------- Insurance -- 0.3% Prudential PLC 217,484 1,979,540 ------------- Oil & Gas -- 0.4% BG Group PLC 226,117 2,152,123 Expro International Group PLC 22,880 221,409 Tullow Oil PLC 97,735 449,547 Venture Production PLC(c) 20,752 176,954 ------------- 3,000,033 ------------- Pharmaceuticals -- 0.6% AstraZeneca PLC 37,525 1,749,255 Glaxosmithkline PLC 114,449 2,919,637 ------------- 4,668,892 ------------- Publishing & Printing -- 0.3% Reed Elsevier PLC 219,868 2,040,136 ------------- See accompanying notes to financial statements. 111
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value --------------- ------------- COMMON STOCKS (Continued) United Kingdom (Continued) Retail Merchandising -- 0.1% Next PLC 37,434 $ 921,843 ------------- Total United Kingdom 15,997,697 ------------- United States -- 53.9% Advertising -- 0.1% Getty Images, Inc.(c) 6,400 550,656 R.H. Donnelley Corp.(c) 6,225 393,794 ------------- 944,450 ------------- Aerospace -- 0.8% AAR Corp.(c) 10,000 171,800 Alliant Techsystems, Inc.(c) 8,500 634,525 Aviall, Inc.(c) 18,100 611,418 General Dynamics Corp.(d) 22,450 2,683,897 Lockheed Martin Corp. 5,800 354,032 Orbital Sciences Corp.(c) 22,600 282,500 Raytheon Co. 31,400 1,193,828 ------------- 5,932,000 ------------- Air Transportation -- 0.1% ExpressJet Holdings, Inc.(c) 1,700 15,249 Ryanair Holdings PLC -- ADR(c) 23,129 1,053,063 SkyWest, Inc. 1,375 36,878 ------------- 1,105,190 ------------- Banks -- 3.8% AmSouth Bancorp.(d) 49,100 1,240,266 Associated Banc-Corp. 1,575 48,006 Bank of America Corp.(d) 141,700 5,965,570 Bank of Hawaii Corp. 1,000 49,220 Cathay General Bancorp. 7,000 248,220 Central Pacific Financial Corp. 8,650 304,307 Citigroup, Inc.(d) 112,400 5,116,448 City National Corp. 9,250 648,332 Colonial BancGroup, Inc. 2,600 58,240 Comerica, Inc.(d) 41,565 2,448,178 Cullen/Frost Bankers, Inc. 1,025 50,574 Flagstar Bancorp., Inc. 1,800 28,980 Gold Banc Corp., Inc. 18,650 277,885 Hudson City Bancorp., Inc. 47,275 562,572 J.P. Morgan Chase & Co., Inc. 36,100 1,224,873 Key Corp.(d) 48,600 1,567,350 National City Corp.(d) 62,000 2,073,280 North Fork Bancorp., Inc. 20,305 517,778 Sovereign Bancorp., Inc.(d) 31,650 697,566 TD Banknorth, Inc. 1,500 45,210 U.S. Bancorp. 75,900 2,131,272 Umpqua Holdings Corp. 10,000 243,200 Wachovia Corp.(d) 67,700 3,221,843 Wintrust Financial Corp 6,600 331,716 WSFS Financial Corp. 3,500 206,115 Zions Bancorp.(d) 575 40,946 ------------- 29,347,947 ------------- Beverages & Bottling -- 0.7% The Coca-Cola Co. 5,600 241,864 Coca-Cola Enterprises, Inc. 16,760 326,820 Constellation Brands, Inc.(c)(d) 42,550 1,106,300 Pepsi Bottling Group, Inc. 37,300 1,064,915 PepsiAmericas, Inc. 1,500 34,095 PepsiCo, Inc. 50,950 2,889,374 ------------- 5,663,368 ------------- Broadcasting -- 0.4% Alliance Atlantis Communications, Inc.(c) 8,400 $ 229,530 Belo Corp.(d) 13,980 319,583 CKX, Inc.(c) 34,500 433,665 Liberty Media Corp. - Class A(c)(d) 29,300 235,865 Lin TV Corp.(c) 26,125 364,444 Media General, Inc. - Class A 575 33,356 Outdoor Channel Holdings, Inc.(c) 1,600 23,616 Spanish Broadcasting Systems, Inc. - Class A(c) 3,800 27,284 Univision Communications, Inc. - Class A(c)(d) 15,500 411,215 XM Satellite Radio Holdings, Inc.(c)(d) 34,450 1,237,099 ------------- 3,315,657 ------------- Business Services -- 0.7% Advisory Board Co.(c) 400 20,816 Alliance Data Systems Corp.(c)(d) 37,325 1,461,274 The Brink's Co. 29,970 1,230,568 The Corporate Executive Board Co. 6,700 522,466 CoStar Group, Inc.(c)(d) 700 32,704 DiamondCluster International, Inc.(c) 2,900 21,982 Digitas, Inc.(c) 20,750 235,720 Equifax, Inc. 6,200 216,628 Forrester Research, Inc.(c) 1,200 24,984 FTI Consulting, Inc.(c) 1,500 37,890 Gartner, Inc. - Class A(c) 2,800 32,732 Global Cash Access, Inc.(c) 200 2,820 Global Payments, Inc. 600 46,632 Heartland Payment Systems, Inc.(c) 1,400 33,404 HMS Holdings Corp.(c) 25,800 178,794 Hudson Highland Group, Inc.(c) 900 22,473 National Financial Partners Corp. 7,000 315,980 Navigant Consulting, Inc.(c)(d) 7,200 137,952 Net 1 UEPS Technologies, Inc.(c) 1,100 24,662 VistaPrint Ltd.(c) 500 7,625 W.W. Grainger, Inc. 11,936 751,013 Watson Wyatt & Co. Holdings 10,500 282,975 ------------- 5,642,094 ------------- Chemicals -- 0.5% Agrium, Inc. 1,600 35,152 Ashland, Inc. 10,110 558,477 The Dow Chemical Co. 18,400 766,728 Eastman Chemical Co. 8,100 380,457 FMC Corp.(c) 5,805 332,162 The Lubrizol Corp. 28,325 1,227,322 Lyondell Chemical Co.(d) 23,300 666,846 ------------- 3,967,144 ------------- Computer & Office Equipment -- 1.4% American Power Conversion Corp. 8,390 217,301 Apple Computer, Inc.(c) 12,800 686,208 Avery Dennison Corp.(d) 8,415 440,862 Cisco Systems, Inc.(c) 97,500 1,748,175 Electronics for Imaging, Inc.(c) 6,750 154,845 Hewlett-Packard Co.(d) 109,000 3,182,800 Hutchinson Technology, Inc.(c) 500 13,060 International Business Machines Corp.(d) 38,800 3,112,536 Lexmark International, Inc.(c)(d) 5,825 355,616 See accompanying notes to financial statements. 112
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value --------------- ------------- COMMON STOCKS (Continued) United States (Continued) Computer & Office Equipment (Continued) NCR Corp.(c) 25,860 $ 825,193 Phase Metrics, Inc.(b)(c)(g) 50,574 1,011 Western Digital Corp.(c) 26,600 343,938 ------------- 11,081,545 ------------- Computer Software & Services -- 3.8% Activision, Inc.(c) 1,751 35,808 Adobe Systems, Inc.(d) 50,900 1,519,365 Anteon International Corp.(c)(d) 500 21,380 The BISYS Group, Inc.(c) 1,700 22,831 Borland Software Corp.(c) 32,800 190,896 CACI International, Inc.(c) 10,400 630,240 Cadence Design Systems, Inc.(c)(d) 1,700 27,472 Ceridian Corp.(c) 40,200 834,150 Checkfree Corp.(c)(d) 17,100 646,722 Cognizant Technology Solutions Corp.(c) 16,600 773,394 Computer Sciences Corp.(c) 16,300 771,153 DST Systems, Inc.(c) 10,780 591,067 eBay, Inc.(c) 14,400 593,280 Electronic Arts, Inc.(c) 6,600 375,474 EMC Corp.(c) 126,800 1,640,792 Emulex Corp.(c) 33,600 679,056 Foundry Networks, Inc.(c) 41,900 532,130 Google, Inc. -- Class A(c) 10,120 3,202,575 IAC/InterActiveCorp(c (d) 12,301 311,830 Ingram Micro, Inc. - Class A(c) 2,600 48,204 Interwoven, Inc.(c) 3,500 28,595 McAfee, Inc.(c) 1,550 48,701 McData Corp. -- Class A(c) 8,200 42,968 Micromuse, Inc.(c) 38,400 302,592 Microsoft Corp.(d) 313,820 8,074,589 NAVTEQ Corp.(c) 17,100 854,145 Oracle Corp.(c)(d) 88,500 1,096,515 Progress Software Corp.(c) 7,250 230,333 Salesforce.Com, Inc.(c)(d) 28,400 656,608 Sandisk Corp.(c) 1,550 74,788 SkillSoft PLC -- ADR(c) 79,200 362,736 SonicWALL, Inc.(c) 10,100 64,135 Sybase, Inc.(c) 1,300 30,446 Symantec Corp.(c) 14,168 321,047 TIBCO Software, Inc.(c) 68,675 574,123 Unisys Corp.(c) 91,910 610,282 VeriFone Holdings, Inc.(c) 12,100 243,331 VeriSign, Inc.(c) 9,700 207,289 Verity, Inc.(c) 1,200 12,744 Yahoo!, Inc.(c) 69,750 2,360,340 ------------- 29,644,126 ------------- Construction -- 0.2% D.R. Horton, Inc. 1,700 61,574 Dycom Industries, Inc.(c) 22,500 454,950 Lennar Corp. 1,675 100,098 Pulte Homes, Inc. 23,200 995,744 ------------- 1,612,366 ------------- Containers -- 0.3% Owens-Illinois, Inc.(c) 44,760 922,951 Pactiv Corp.(c)(d) 30,990 542,945 Smurfit-Stone Container Corp.(c) 41,810 433,152 ------------- 1,899,048 ------------- Credit Institutions -- 0.0% CSG Systems Inc.(c) 2,650 57,532 ------------- Electronics -- 1.0% Amphenol Corp. 15,300 617,202 Arrow Electronics, Inc.(c) 2,450 76,832 Cogent, Inc.(c)(d) 11,000 261,250 Intel Corp. 186,154 4,588,696 L-3 Communications Holdings, Inc.(d) 19,775 1,563,609 National Semiconductor Corp. 19,100 502,330 ------------- 7,609,919 ------------- Energy & Utilities -- 1.9% Alliant Energy Corp. 2,000 58,260 CenterPoint Energy, Inc. 52,400 779,188 CMS Energy Corp.(c) 46,300 761,635 Constellation Energy Group 10,200 628,320 FirstEnergy Corp. 28,200 1,469,784 ITC Holdings Corp.(d) 7,750 224,595 KFX, Inc.(c)(d) 11,500 196,880 Longview Energy Co. (acquired 8/13/04, cost $48,000) (b)(e)(f)(g) 3,200 48,000 McDermott International, Inc.(c) 8,200 300,202 MDU Resources Group, Inc. 1,400 49,910 NSTAR 2,100 60,732 PG&E Corp. 57,600 2,260,800 Pinnacle West Capital Corp. 675 29,754 PPL Corp. 111,360 3,600,269 Public Service Enterprise Group, Inc.(d) 10,980 706,673 Questar Corp. 9,320 821,278 Reliant Energy, Inc.(c)(d) 31,655 488,753 Sempra Energy(d) 39,100 1,840,046 TXU Corp. 4,700 530,536 ------------- 14,855,615 ------------- Entertainment & Leisure -- 1.5% Ameristar Casinos, Inc. 1,300 27,092 Argosy Gaming Co.(c) 500 23,495 Comcast Corp.(c)(d) 46,700 1,372,046 Comcast Corp. -- Class A(c) 32,000 920,960 Expedia, Inc.(c) 1 20 Gaylord Entertainment Co.(c) 8,300 395,495 GTECH Holdings Corp. 26,125 837,567 Harrah's Entertainment, Inc.(h) 0 19 Hilton Hotels Corp. 18,480 412,474 Kerzner International Ltd.(c) 1,500 83,325 Marriott International, Inc. -- Class A(d) 9,500 598,500 Marvel Entertainment, Inc.(c) 30,000 536,100 Orient-Express Hotels Ltd. -- Class A 22,100 628,082 Pinnacle Entertainment, Inc.(c) 6,800 124,644 Scientific Games Corp. -- Class A(c)(d) 800 24,800 Starwood Hotels & Resorts Worldwide, Inc.(d) 10,100 577,417 Time Warner, Inc. 126,500 2,290,915 Vail Resorts, Inc.(c) 1,600 46,000 The Walt Disney Co. 108,300 2,613,279 World Wrestling Entertainment, Inc. 2,300 29,900 ------------- 11,542,130 ------------- See accompanying notes to financial statements. 113
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value -------------- ------------- COMMON STOCKS (Continued) United States (Continued) Finance -- 2.6% Affiliated Managers Group, Inc.(c)(d) 10,250 $ 742,305 Ambac Financial Group, Inc. 9,835 708,710 American Express Co. 53,640 3,081,082 The Bear Stearns Cos., Inc. 15,900 1,745,025 Capital One Financial Corp.(d) 24,145 1,920,010 Chicago Mercantile Exchange(d) 2,600 876,980 CIT Group, Inc. 43,620 1,970,752 Countrywide Financial Corp.(d) 36,400 1,200,472 Fannie Mae 12,500 560,250 Franklin Resources, Inc. 15,270 1,282,069 The Goldman Sachs Group, Inc.(d) 5,050 613,979 H&R Block, Inc. 25,710 616,526 Indymac Bancorp, Inc. 1,075 42,548 Legg Mason, Inc. 425 46,618 Mellon Financial Corp. 10,100 322,897 MoneyGram International, Inc. 2,650 57,532 NGP Capital Resources Co. 2,700 40,662 Nuveen Investments -- Class A(d) 25,720 1,013,111 Protective Life Corp. 850 35,003 Providian Financial Corp.(c)(d) 11,200 198,016 SLM Corp. 25,900 1,389,276 T. Rowe Price Group, Inc. 5,800 378,740 Washington Mutual, Inc.(d) 37,500 1,470,750 Wright Express Corp.(c) 1,000 21,590 ------------- 20,334,903 ------------- Food & Agriculture -- 0.7% Chiquita Brands International, Inc.(d) 8,000 223,600 ConAgra Foods, Inc. 26,700 660,825 Dean Foods Co.(c) 29,940 1,163,468 Del Monte Foods Co.(c) 38,760 415,895 Diamond Foods, Inc.(c) 5,800 99,180 Flowers Foods, Inc. 1,275 34,782 The J. M. Smucker Co. 7,500 364,050 Lance, Inc. 6,700 116,982 Monsanto Co. 11,050 693,387 TreeHouse Foods, Inc.(c) 9,903 266,193 Tyson Foods, Inc. -- Class A(d) 55,900 1,008,995 ------------- 5,047,357 ------------- Insurance -- 2.4% ACE Ltd. 8,200 385,974 Aetna, Inc. 9,600 826,944 Allmerica Financial Corp.(c) 20,625 848,512 The Allstate Corp. 26,200 1,448,598 American Financial Group, Inc. 1,275 43,261 American International Group, Inc.(d) 42,000 2,602,320 Assurant, Inc.(d) 6,000 228,360 Axis Capital Holdings Ltd. 20,870 595,004 CHUBB Corp.(d) 15,800 1,414,890 Endurance Specialty Holdings Ltd. 29,300 999,423 Everest Re Group Ltd. 4,430 433,697 First American Corp. 1,400 63,938 Genworth Financial, Inc.(d) 36,400 1,173,536 Hartford Financial Services Group(d) 20,200 1,558,834 Max Re Capital Ltd. 11,050 273,929 MetLife, Inc. 9,800 488,334 Nationwide Financial Services, Inc. 10,500 $ 420,525 Ohio Casualty Corp. 1,800 48,816 Prudential Financial, Inc.(d) 11,900 803,964 Radian Group, Inc.(d) 13,880 737,028 Universal American Financial Corp.(c) 17,000 386,580 W.R. Berkley Corp. 36,000 1,421,280 WellPoint, Inc.(c) 20,400 1,546,728 ------------- 18,750,475 ------------- Machinery & Heavy Equipment -- 0.1% Caterpillar, Inc.(d) 5,600 329,000 Dresser-Rand Group, Inc.(c) 3,000 73,890 Kennametal, Inc. 850 41,684 Lennox International, Inc. 14,500 397,445 Terex Corp.(c) 500 24,715 ------------- 866,734 ------------- Manufacturing -- 4.2% Actuant Corp. -- Class A 600 28,080 American Standard Co. Inc. 9,570 445,484 Applied Films Corp.(c) 5,400 113,400 Aptargroup, Inc. 5,650 281,427 Black & Decker Corp. 12,125 995,341 BorgWarner, Inc. 750 42,345 Briggs & Stratton Corp.(d) 5,875 203,216 Brunswick Corp. 10,125 382,016 Corning, Inc.(c) 66,500 1,285,445 Cummins, Inc. 6,150 541,139 Danaher Corp. 28,450 1,531,464 Eaton Corp. 14,800 940,540 Energizer Holdings, Inc.(c)(d) 16,150 915,705 Fleetwood Enterprises, Inc.(c) 13,000 159,900 Fortune Brands, Inc.(d) 14,400 1,171,152 Gardner Denver, Inc.(c) 700 31,220 General Electric Co. 273,470 9,207,735 Harsco Corp. 875 57,374 Hexel Corp.(c) 17,850 326,476 IDEX Corp. 7,600 323,380 Ingersoll-Rand Co. - Class A 19,600 749,308 ITT Industries, Inc.(d) 7,935 901,416 Jones Apparel Group, In1 9,310 550,335 K2, Inc.(c) 8,100 92,340 Maidenform Brands, Inc.(c) 7,950 109,312 Newell Rubbermaid, Inc.(d) 42,725 967,721 Nike, Inc. 14,500 1,184,360 Nucor Corp.(d) 23,100 1,362,669 Pentair, Inc. 16,500 602,250 Polo Ralph Lauren Corp. 20,150 1,013,545 Precision Castparts Corp. 1,300 69,030 Sealed Air Corp.(c) 6,600 313,236 The Sherwin-Williams Co.(d) 23,555 1,038,069 Snap-On, Inc. 19,350 698,922 The Stanley Works 42,250 1,972,230 Textron, Inc. 16,400 1,176,208 Timken Co. 1,300 38,519 V.F. Corp. 625 36,231 The Warnaco Group, Inc.(c) 14,500 317,695 ------------- 32,176,235 ------------- See accompanying notes to financial statements. 114
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ------------- ------------- COMMON STOCKS (Continued) United States (Continued) Measuring & Controlling Devices -- 0.1% Thermo Electron Corp.(c) 15,350 $ 474,315 ------------- Medical & Medical Services -- 2.4% Amedisys, Inc.(c)(d) 3,150 122,850 Amgen, Inc.(c) 49,002 3,903,989 Caremark Rx, Inc.(c) 29,250 1,460,453 Community Health Systems, Inc.(c) 20,700 803,367 Covance, Inc.(c) 975 46,790 Coventry Health Care, Inc.(c) 27,972 2,406,151 CryoLife(c) 7,400 51,430 Digene Corp.(c) 1,000 28,500 Digirad Corp.(c) 32,450 156,604 HCA, Inc. 23,900 1,145,288 LifePoint Hospitals, Inc.(c)(d) 1,250 54,663 McKesson Corp.(d) 23,000 1,091,350 Medco Health Solutions, Inc.(c) 12,600 690,858 MedImmune, Inc.(c)(d) 6,705 225,623 Noven Pharmaceuticals, Inc.(c) 2,000 28,000 Omnicare, Inc.(d) 11,000 618,530 PacifiCare Health Systems, Inc.(c) 6,550 522,559 Pediatrix Medical Group, Inc.(c) 4,300 330,326 Per-Se Technologies, Inc.(c) 11,900 245,854 Pharmaceutical Product Development, Inc.(c) 500 28,755 Quest Diagnostics, Inc. 18,000 909,720 Triad Hospitals, Inc.(c) 9,900 448,173 UnitedHealth Group, Inc.(d) 43,800 2,461,560 Universal Health Services, Inc. 7,945 378,420 VCA Antech, Inc.(c) 3,700 94,424 Vital Images, Inc.(c) 7,550 168,063 ------------- 18,422,300 ------------- Medical Instruments & Supplies -- 1.9% Advanced Medical Optics, Inc.(c) 1,000 37,950 Bausch & Lomb, Inc. 14,300 1,153,724 Becton, Dickinson & Co. 15,400 807,422 Biosite, Inc.(c) 450 27,837 Bruker BioSciences Corp.(c) 2,300 10,074 Charles River Laboratories International, Inc.(c) 14,800 645,576 Cytyc Corp.(c) 41,100 1,103,535 DJ Orthopedics, Inc.(c) 8,800 254,672 Edwards Lifesciences Corp.(c) 925 41,079 Fisher Scientific International, Inc.(c) 7,800 483,990 Hillenbrand Industries, Inc. 12,645 594,947 Hologic, Inc.(c) 6,750 389,813 IntraLase Corp.(c) 7,750 114,003 Invitrogen Corp.(c) 700 52,661 Johnson & Johnson 67,740 4,286,587 Kinetic Concepts, Inc.(c)(d) 7,500 426,000 Kyphon, Inc.(c) 700 30,758 Martek Biosciences Corp.(c)(d) 14,850 521,680 Mentor Corp.(d) 1,025 56,385 MWI Veterinary Supply, Inc.(c) 8,500 169,575 Respironics, Inc.(c) 1,250 52,725 St. Jude Medical, Inc.(c) 43,000 2,012,400 Stryker Corp. 14,100 696,963 Symmetry Medical, Inc.(c) 4,550 107,835 Syneron Medical Ltd. 6,900 252,102 Varian Medical Systems, Inc.(c) 13,500 533,385 Wright Medical Group, Inc.(c) 1,500 37,020 ------------- 14,900,698 ------------- Metal & Mining -- 1.6% Alpha Natural Resources, Inc.(c) 2,000 60,080 Arch Coal, Inc.(d) 14,700 992,250 CONSOL Energy, Inc. (acquired 6/11/03 through 8/30/05, cost $1,882,214)(e)(f) 84,440 6,440,239 Foundation Coal Holdings, Inc. 11,300 434,485 Massey Energy Co. 35,900 1,833,413 MSC Industrial Direct Co., Inc. 15,200 504,184 Peabody Energy Corp. 18,800 1,585,780 Phelps Dodge Corp. 4,100 532,713 ------------- 12,383,144 ------------- Motor Vehicles -- 0.3% Ford Motor Co.(d) 39,900 393,414 Harley-Davidson, Inc. 15,600 755,664 PACCAR, Inc. 13,100 889,359 Tenneco Automotive, 9,400 164,594 Wabash National Corp. 1,000 19,660 ------------- 2,222,691 ------------- Oil & Gas -- 6.5% Airgas, Inc.(d) 15,600 462,228 Allis-Chalmers Energy, Inc.(c) 2,600 30,784 Amerada Hess Corp.(d) 9,500 1,306,250 Atwood Oceanics, Inc.(c) 400 33,684 Bois d'Arc Energy, Inc.(c) 2,400 41,304 Cal Dive International, Inc.(c) 675 42,802 CanArgo Energy Corp.(c) 191,100 361,179 Chesapeake Energy Corp.(d) 1,975 75,544 ChevronTexaco Corp.(d) 20,900 1,352,857 Cimarex Energy Co.(c)(d) 6,326 286,758 Clayton Williams Energy, Inc.(c) 35,000 1,512,000 CNX Gas Corp.(b)(c)(d) 7,500 145,613 Comstock Resources, Inc.(c) 3,200 104,992 ConocoPhillips 71,600 5,005,556 Devon Energy Corp. 31,002 2,127,977 Diamond Offshore Drilling, Inc. 10,130 620,462 Double Eagle Petroleum Co.(c) 9,300 222,735 Energen Corp. 1,650 71,379 Energy Partners Ltd.(c) 4,400 137,368 ENSCO International, Inc. 16,100 750,099 EOG Resources, Inc. 51,850 3,883,565 The Exploration Co.(c) 10,900 78,480 Exxon Mobil Corp.(d) 137,204 8,717,942 GlobalSantaFe Corp. 24,800 1,131,376 Goodrich Petroleum Corp.(c) 10,300 241,741 Grant Prideco, Inc.(c) 1,450 58,942 Grey Wolf, Inc.(c) 38,900 327,927 Helmerich & Payne, Inc. 1,075 64,919 KCS Energy, Inc.(c) 17,700 487,281 Kerr-McGee Corp. 21,700 2,107,287 KeySpan Corp. 13,725 504,805 Matador Resources Co. (acquired 10/14/03, cost $8,950) (b)(e)(f)(g) 895 12,082 Nabors Industries Ltd.(c)(d) 20,300 1,458,149 National-Oilwell, Inc.(c) 2,600 171,080 See accompanying notes to financial statements. 115
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ------------- ------------- COMMON STOCKS (Continued) United States (Continued) Oil & Gas (Continued) Newfield Exploration Co.(c) 71,945 $ 3,532,500 Noble Corp. 11,200 766,752 Noble Energy, Inc. 1,650 77,385 Novatek Oao - ADR(c) 46,192 1,103,989 Oceaneering International, Inc.(c) 700 37,387 Oneok, Inc.(d) 18,975 645,530 Parallel Petroleum Corp.(c) 7,000 98,000 Patterson-UTI Energy, Inc. 52,550 1,896,004 PetroQuest Energy, Inc.(c) 8,100 84,564 Pioneer Drilling Co. (acquired 2/13/04 through 3/23/05, cost $74,615)(c)(e)(f) 10,900 212,768 Plains Exploration & Production Co.(c) 14,500 620,890 Pride International, Inc.(c) 9,700 276,547 Remington Oil & Gas Corp. - Class B(c) 800 33,200 Rowan Cos., Inc.(d) 9,300 330,057 Schlumberger Ltd.(d) 11,700 987,246 Stolt Offshore SA - ADR (acquired 8/10/05 through 8/16/05, cost $212,229)(c)(e)(f) 17,000 196,860 Superior Energy Serivces, Inc.(c) 9,750 225,128 Tel Offshore Trust(h) 0 4 TETRA Technologies, Inc.(c) 16,675 520,594 Tidewater, Inc.(d) 4,550 221,448 Transocean, Inc.(c) 12,400 760,244 Treasure Island Royalty Trust(c) 300,000 238,500 Valero Energy Corp. 14,300 1,616,758 Vintage Petroleum, Inc. 42,800 1,954,248 ------------- 50,373,750 ------------- Paper & Forest Products -- 0.3% Bowater, Inc.(d) 20,055 566,955 Georgia-Pacific Corp. 34,600 1,178,476 Louisiana-Pacific Corp. 19,000 526,110 ------------- 2,271,541 ------------- Personal Services -- 0.1% Corinthian Colleges, Inc.(c)(d) 1,300 17,251 Educate, Inc.(c) 2,100 31,500 Education Management Corp.(c) 1,925 62,062 Laureate Education, Inc.(c)(d) 19,200 940,224 ------------- 1,051,037 ------------- Pharmaceuticals -- 2.5% Allergan, Inc.(d) 9,350 856,647 Amylin Pharmaceuticals, Inc.(c) 11,000 382,690 Barr Pharmaceuticals, Inc.(c) 650 35,698 Cephalon, Inc.(c)(d) 4,775 221,656 Forest Laboratories, Inc.(c) 7,600 296,172 Genentech, Inc.(c) 8,600 724,206 Genzyme Corp.(c) 16,100 1,153,404 Hospira, Inc.(c) 12,900 528,513 Kos Pharmaceuticals, Inc.(c) 850 56,890 Merck & Co., Inc. 77,800 2,116,938 Nabi Biopharmaceuticals(c)(d) 23,950 313,745 Novartis AG - ADR 15,680 799,680 Pfizer, Inc. 223,800 5,588,286 Sanofi-Aventis - ADR 19,650 816,458 Shire Pharmaceuticals Group PLC - ADR 21,600 798,984 Teva Pharmaceutical Industries Ltd. - ADR(d) 25,500 $ 852,210 Valeant Pharmaceuticals International 7,850 157,628 Vertex Pharmaceuticals, Inc.(c) 2,000 44,700 Watson Pharmaceuticals, Inc.(c)(d) 14,520 531,577 Wyeth 60,800 2,813,216 ------------- 19,089,298 ------------- Publishing & Printing -- 0.4% Banta Corp. 3,800 193,382 Dow Jones & Company, Inc.(d) 11,535 440,522 The McGraw-Hill Companies, Inc. 37,600 1,806,304 Playboy Enterprises, Inc. - Class B(c) 2,200 31,020 R.R. Donnelley & Sons Corp.(d) 12,020 445,581 Scholastic Corp.(c) 1,525 56,364 ------------- 2,973,173 ------------- Railroad & Shipping -- 0.4% Burlington Northern Santa Fe Corp. 36,900 2,206,620 CSX Corp. 7,635 354,875 ------------- 2,561,495 ------------- Real Estate -- 1.0% Boston Properties, Inc. 10,040 711,836 Cendant Corp. 107,200 2,212,608 Centex Corp. 7,000 452,060 Developers Diversified Realty Corp.(d) 1,025 47,868 Eagle Hospitality Properties Trust, Inc. 28,400 283,432 General Growth Properties, Inc.(d) 17,700 795,261 Highwoods Property 1,000 29,510 HRPT Properties Trust 47,700 591,957 LaSalle Hotel Properties 8,300 285,935 The Macerich Co. 875 56,822 Reckson Associates Realty Corp. 17,265 596,506 Simon Property Group, Inc. 21,000 1,556,520 Trizec Properties, Inc. 2,200 50,732 ------------- 7,671,047 ------------- Restaurants -- 0.3% Darden Restaurants, Inc. 1,350 41,000 Jack in the Box, Inc.(c) 1,150 34,396 McDonald's Corp.(d) 49,200 1,647,708 RARE Hospitality International, Inc.(c) 4,300 110,510 Ruby Tuesday, Inc. 16,100 350,336 Ruth's Chris Steak House, Inc.(c) 1,300 23,894 Texas Roadhouse, Inc.(c) 1,700 25,330 ------------- 2,233,174 ------------- Retail Merchandising -- 2.9% 99 Cents Only Stores(c) 600 5,550 Abercrombie & Fitch Co. - Class A 4,200 209,370 Advance Auto Parts, Inc.(c) 1,050 40,614 American Eagle Outfitters, Inc. 2,000 47,060 AnnTaylor Stores Corp.(c) 21,325 566,179 AutoNation, Inc.(c)(d) 54,850 1,095,355 Barnes & Noble, Inc. 21,675 817,148 Bed, Bath & Beyond, Inc.(c) 15,200 610,736 See accompanying notes to financial statements. 116
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Comtinued) As of September 30, 2005 Number of Shares Value ------------- ------------- COMMON STOCKS (Continued) United States (Continued) Retail Merchandising (Continued) CDW Corp.(d) 7,200 $ 424,224 Central Garden & Pet Co.(c) 700 31,675 Chico's FAS, Inc.(c)(d) 28,200 1,037,760 Coach, Inc.(c) 27,270 855,187 Coldwater Creek, Inc.(c) 700 17,654 CVS Corp. 37,800 1,096,578 Design Within Reach, Inc.(c) 1,500 13,545 Dick's Sporting Goods, Inc.(c)(d) 6,438 193,848 DSW, Inc. - Class A(c) 7,900 167,480 Federated Department Stores, Inc. 32,685 2,185,646 Handleman Co. 28,000 353,640 The Home Depot, Inc. 34,800 1,327,272 Hot Topic, Inc.(c) 6,650 102,144 J. Jill Group, Inc.(c) 2,100 33,222 Jarden Corp.(c) 5,700 234,099 Jos. A. Bank Clothiers, Inc.(c) 700 30,254 Kohl's Corp.(c) 19,250 965,965 The Kroger Co.(c)(d) 72,790 1,498,746 Linens 'n Things, Inc.(c)(d) 19,545 521,852 Longs Drug Stores Corp.(d) 1,300 55,757 Michaels Stores, Inc. 1,850 61,161 The Neiman-Marcus Group, Inc. - Class A 250 24,988 Nordstrom, Inc. 26,100 895,752 Office Depot, Inc.(c)(d) 15,925 472,972 Officemax, Inc.(d) 21,100 668,237 Payless ShoeSource, Inc.(c) 1,950 33,930 Pier 1 Imports, Inc. 8,350 94,104 Saks, Inc.(c) 12,000 222,000 The Sports Authority, Inc.(c) 3,300 97,152 Staples, Inc. 52,700 1,123,564 Target Corp.(d) 37,200 1,931,796 Urban Outfitters, Inc.(c) 7,200 211,680 Walgreen Co. 18,000 782,100 Wal-Mart Stores, Inc. 10,100 442,582 Whole Foods Market, Inc. 250 33,612 Williams-Sonoma, Inc.(c) 20,300 778,505 ------------- 22,412,695 ------------- Security Brokers & Dealers -- 1.6% A.G. Edwards, Inc. 800 35,048 E*TRADE Financial Corp.(c) 94,450 1,662,320 iShares Russell 2000 Value Index Fund 363 23,932 Lehman Brothers Holdings, Inc.(d) 20,100 2,341,248 Midcap SPDR Trust Series 1 61,977 8,111,550 ------------- 12,174,098 ------------- Semiconductors & Related Devices -- 0.9% Altera Corp.(c)(d) 29,200 558,012 Broadcom Corp. - Class A(c) 14,500 680,195 Cypress Semiconductor Corp.(c) 28,845 434,117 Freescale Semiconductor, Inc. - Class A(c)(d) 54,400 1,273,504 Freescale Semiconductor, Inc. - Class B(c)(d) 38,000 896,040 Integrated Device Technology, Inc.(c) 22,110 237,461 Lam Research Corp.(c)(d) 14,200 432,674 Linear Technology Corp. 9,100 342,069 LSI Logic Corp.(c) 5,150 50,728 Microsemi Corp.(c) 1,200 30,648 O2Micro International Ltd.(c) 24,600 $ 387,204 QLogic Corp.(c) 1,600 54,720 Rudolph Technologies, Inc.(c) 22,500 303,075 Texas Instruments, Inc.(d) 23,400 793,260 ------------- 6,473,707 ------------- Soaps & Cosmetics -- 0.4% The Procter & Gamble Co.(d) 56,180 3,340,463 ------------- Telecommunications -- 2.3% ADTRAN, Inc.(d) 28,000 882,000 ALLTEL Corp.(d) 7,600 494,836 Amdocs Ltd.(c) 25,200 698,796 American Tower Corp. - Class A(c) 32,900 820,855 Anixter International Inc.(c) 900 36,297 Avid Technology, Inc.(c) 17,200 712,080 CenturyTel, Inc. 925 32,356 Harman International Industries, Inc. 4,450 455,102 Harris Corp. 16,950 708,510 Motorola, Inc.(d) 96,800 2,138,312 NeuStar, Inc. - Class A(c) 100 3,199 Nextel Partners, Inc. - Class A(c)(d) 24,600 617,460 Polycom, Inc.(c) 19,900 321,783 Qualcomm, Inc. 16,000 716,000 SBC Communications, Inc.(d) 133,000 3,188,010 Scientific-Atlanta, Inc. 16,870 632,794 Sprint Nextel Corp. 148,136 3,522,674 Syniverse Holdings, Inc.(c) 13,500 207,900 Ubiquitel, Inc.(c) 28,900 252,586 Verizon Communications, Inc. 44,300 1,448,167 West Corp.(c) 1,400 52,346 ------------- 17,942,063 ------------- Tobacco -- 0.4% Altria Group, Inc.(d) 40,800 3,007,368 ------------- Transportation -- 0.3% C.H. Robinson 875 56,105 Worldwide, Inc. CNF, Inc.(d) 18,425 967,313 Hornbeck Offshore Services, Inc.(c) 1,300 47,619 J.B. Hunt Transport Services, Inc.(d) 700 13,307 Landstar System, Inc. 7,000 280,210 Ryder Systems, Inc.(d) 14,375 491,912 SCS Transportation, Inc.(c) 12,200 191,662 ------------- 2,048,128 ------------- Waste Management -- 0.1% Republic Services, Inc. 1,375 48,524 Stericycle, Inc.(c) 7,000 400,050 ------------- 448,574 ------------- Total United States 415,870,594 ------------- TOTAL COMMON STOCKS (Cost $425,586,970) 517,853,184 ------------- PREFERRED STOCKS -- 0.3% Netherlands -- 0.3% Manufacturing -- 0.2% STMicroelectronics N.V 90,528 1,561,863 ------------- See accompanying notes to financial statements. 117
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Number of Shares Value ---------------- ---------------- PREFERRED STOCKS (Continued) Netherlands (Continued) Transportation -- 0.1% TNT NV 26,642 $ 663,938 ------------- Total Netherlands 2,225,801 ------------- TOTAL PREFERRED STOCKS (Cost $2,279,603) 2,225,801 ------------- WARRANTS -- 0.0% Oilexco Inc. (issued 01/21/04, expiring 12/22/05, strike price 1.65 CAD)(i) 9,725 20,110 Purcell Energy Ltd. (issued 07/24/03, expiring 07/23/08, strike price 5.00 CAD)(b)(j) 68,773 28,443 Westport Innovations, Inc. (issued 9/29/04, expiring 3/29/06, strike price 2.10 CAD)(k) 3,650 472 ------------- TOTAL WARRANTS (Cost $0) 49,025 ------------- Par Maturity (000) Value ----------- ---------------- ---------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 4.8% Federal Home Loan Bank, Unsecured Bonds 2.25% 01/09/07 $ 3,250 $ 3,165,149 Federal Home Loan Mortgage Corp., Unsecured Notes 3.25% 11/02/07 4,350 4,250,668 4.62% 05/28/13 150 146,590 Federal National Mortgage Association, Unsecured Notes 2.35% 04/06-04/07 1,005 986,005 3.02% 06/01/06 4,750 4,705,132 1.75% 06/16/06 90 88,426 4.00% 10/16/06 2,450 2,440,097 5.00% 08/02/12 325 322,065 5.12% 05/27/15 900 889,575 Resolution Funding Corp. Strip Bonds 6.29% 07/15/18 150 81,733 6.30% 10/15/18 150 80,665 Small Business Investment Cos. Pass-Through, Series 97-P10C, Class 1 6.85% 08/01/07 226 233,804 U.S. Treasury Bonds 10.38% 11/15/12 295 331,668 8.88% 02/15/19 635 909,662 8.50% 02/15/20 1,000 1,412,070 6.25% 08/23-05/30 5,330 6,501,242 5.38% 02/15/31 750 840,234 U.S. Treasury Notes 4.00% 08/07-09/07 8,045 8,017,923 4.12% 08/15/08 895 893,672 3.88% 09/15/10 1,000 985,859 ------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $37,102,589) 37,282,239 ------------- Par Maturity (000) Value ----------- ---------------- ---------------- MORTGAGE PASS-THROUGHS -- 7.3% Federal Home Loan Mortgage Corp. Gold 8.00% 08/08-08/27 $ 39 $ 41,773 8.50%(l) 07/01/09 0 9 4.00% 05/10-05/19 223 216,956 6.00% 04/13-06/16 195 200,669 4.50% 05/19-10/19 1,470 1,441,266 5.00% 06/20-09/35 7,108 7,062,795 9.50% 12/01/22 398 436,815 7.50% 09/01/27 0 489 6.50% 01/29-08/32 133 136,491 5.50% 07/33-10/35 2,520 2,521,175 Federal National Mortgage Association 8.00% 04/08-02/33 321 342,099 7.00% 08/08-10/32 578 604,721 8.50% 02/01/09 21 21,647 6.50% 01/11-10/33 678 702,476 6.00% 09/11-02/34 3,053 3,109,573 5.50% 04/17-02/34 10,690 10,829,689 5.00% 01/18-10/35 15,731 15,536,290 4.50% 10/18-10/35 5,039 4,905,622 7.50% 07/29-01/31 784 830,094 Federal National Mortgage Association 1 Year Treasury ARM 4.64%(m) 09/01/35 2,900 2,886,973 Government National Mortgage Association 6.50% 02/09-11/28 601 624,722 7.50% 11/10-12/29 68 70,911 6.00% 10/23-10/35 1,957 2,001,679 7.00% 01/25-05/32 312 328,719 5.00% 10/20/33 1,571 1,552,560 5.50% 12/15/34 90 92,026 Government National Mortgage Association 1 Year CMT 3.75%(m) 05/20/34 251 247,900 MLCC Mortgage Investors, Inc., Series 95-C2 (IO) 1.22%(n) 06/15/21 1,559 58,954 ------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $56,867,898) 56,805,093 ------------- MULTIPLE CLASS MORTGAGE PASS-THROUGHS -- 0.0% Structured Asset Securities Corp., Series 96-CFL, Class X1 (IO) 2.06%(n) (Cost $120,053) 02/25/28 993 88,150 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.7% Banc of America Alternative Loan Trust, Series 04-6, Class 4A1 5.00% 07/25/19 82 79,611 Countrywide Alternative Loan Trust, Series 04-27CB, Class A1 6.00% 12/25/34 201 200,994 Countrywide Home Loans, Series 03-27, Class M 3.96%(m) 06/25/33 794 768,788 Countrywide Home Loans, Series 03-58, Class B1 4.53%(m) 02/19/34 245 237,706 See accompanying notes to financial statements. 118
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ----------- ---------------- ---------------- COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) Fannie Mae Grantor Trust, Series 03-T1, Class R (IO) 0.53%(n) 11/25/12 $ 6,727 $ 215,212 Federal Home Loan Mortgage Corp., Series 2529, Class MB 5.00% 11/15/17 100 99,887 Federal Home Loan Mortgage Corp., Series 2574, Class HP 5.00% 02/15/18 1,420 1,409,048 Federal Home Loan Mortgage Corp., Series 2668, Class AD 4.00% 01/15/15 237 234,273 Federal Home Loan Mortgage Corp., Series 2707, Class PW 4.00% 07/15/14 439 435,182 Federal Home Loan Mortgage Corp., Series 2730, Class PA 3.75% 03/15/11 484 482,606 Federal Home Loan Mortgage Corp., Series 2748, Class LJ 4.00% 03/15/10 162 161,846 Federal Home Loan Mortgage Corp., Series 2864, Class NA 5.50% 01/15/31 190 191,786 Federal Home Loan Mortgage Corp., Series 2973, Class EB 5.50% 04/15/35 1,150 1,159,360 Federal Home Loan Mortgage Corp., Series 2990, Class WF 4.17% 02/15/35 1,411 1,410,704 Federal Home Loan Mortgage Corp., Series 2996, Class MK 5.50% 06/15/35 939 946,098 Federal National Mortgage Association, Series 03-16, Class BC 5.00% 03/25/18 50 49,758 Federal National Mortgage Association, Series 03-84, Class GA 4.50% 04/25/09 662 661,494 Federal National Mortgage Association, Series 03-87, Class TJ 4.50% 09/25/18 125 122,126 Federal National Mortgage Association, Series 04-31, Class PK 3.50% 06/25/10 583 578,794 Federal National Mortgage Association, Series 04-88, Class HA 6.50% 07/25/34 90 93,754 Federal National Mortgage Association, Series 04-99, Class AO 5.50% 01/25/34 152 152,724 Federal National Mortgage Association, Series 05-3, Class AP 5.50% 02/25/35 130 130,880 Federal National Mortgage Association, Series 05-48, Class AR 5.50% 02/25/35 2,168 2,183,994 Federal National Mortgage Association, Series 05-51, Class TA 5.50% 05/01/35 2,259 2,273,731 Federal National Mortgage Association, Series 05-57, Class EG 4.13%(m) 03/25/35 1,090 1,090,255 Federal National Mortgage Association, Series 05-57, Class PA 5.50% 05/25/27 794 802,108 Federal National Mortgage Association, Series 05-80, Class PB 5.50% 04/25/30 1,452 1,470,792 Harborview Mortgage Loan Trust, Series 05-10, Class 2A1A 3.98%(m) 11/19/35 1,549 1,548,572 Impac CMB Trust, Series 02-4F, Class M1 5.58%(m) 11/25/32 29 28,602 Impac CMB Trust, Series 02-8, Class A 4.29%(m) 03/25/33 34 33,614 Impac CMB Trust, Series 03-5, Class M1 4.39%(m) 08/25/33 73 73,070 Impac CMB Trust, Series 03-7, Class M 5.48%(m) 08/25/33 40 40,012 Impac CMB Trust, Series 04-1, Class M4 5.03%(m) 03/25/34 135 135,825 Impac CMB Trust, Series 04-5, Class 1A1 4.19%(m) 10/25/34 305 305,465 Impac CMB Trust, Series 04-7, Class 1A1 4.20%(m) 11/25/34 748 749,273 Impac CMB Trust, Series 04-7, Class M4 5.03%(m) 11/25/34 357 358,051 Indymac Index Mortgage Loan Trust, Series 05-AR18, Class 2A1B 4.48%(m) 10/25/35 2,150 2,174,859 Master Alternative Loans Trust, Series 04-4, Class 1A1 5.50% 05/25/34 155 153,669 Salomon Brothers Mortgage Securities VI, Series 87-1 (IO) 11.00%(n) 02/17/17 54 13,024 Salomon Brothers Mortgage Securities VI, Series 87-1 (PO) 11.50%(o) 02/17/17 60 55,310 Salomon Brothers Mortgage Securities VI, Series 87-2 (IO) 11.00%(n) 03/06/17 40 10,407 Salomon Brothers Mortgage Securities VI, Series 87-2 (PO) 11.50%(o) 03/06/17 40 35,643 See accompanying notes to financial statements. 119
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ----------- ---------------- --------------- COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) Structured Asset Securities Corp., Series 01-21A, Class B2 6.47%(m) 01/25/32 $ 45 $ 44,700 Structured Asset Securities Corp., Series 03-2A, Class B2II 5.39%(m) 02/25/33 214 211,528 Washington Mutual Mortgage Loan Trust, Series 03-AR8, Class B1 4.20%(m) 08/25/33 397 390,917 Washington Mutual Mortgage Securities Corp., Series 03-AR4, Class A6 3.42%(m) 05/25/33 850 830,700 Washington Mutual, Series 03-AR3, Class A5 3.93%(m) 04/25/33 298 292,726 Washington Mutual, Series 03-AR3, Class B2 4.74%(m) 04/25/33 211 208,551 Washington Mutual, Series 03-AR5, Class A6 3.70%(m) 06/25/33 850 825,181 Washington Mutual, Series 03-AR5, Class B2 4.51%(m) 06/25/33 444 441,166 Washington Mutual, Series 04-AR1, Class B1 4.51%(m) 03/25/34 1,245 1,199,416 Washington Mutual, Series 04-AR3, Class B1 4.19%(m) 06/25/34 224 218,519 Wells Fargo Mortgage Backed Securities, Series 04-K, Class 1A2 4.48%(m) 07/25/34 483 469,465 ------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $28,956,806) 28,491,776 ------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 4.6% Bank of America-First Union Commercial Mortgage, Series 01-3, Class A2 5.46% 04/11/37 1,375 1,413,141 Bear Stearns Commercial Mortgage Securities, Inc., Series 00-WF2, Class A2 7.32% 10/15/32 475 521,111 Bear Stearns Commercial Mortgage Securities, Series 99-WF2, Class A2 7.08% 07/15/31 250 267,585 Bear Stearns Commercial Mortgage Securities, Series 02-TOP6, Class A1 5.92% 10/15/36 836 864,424 Bear Stearns Commercial Mortgage Securities, Series 04-PWR4, Class A1 4.36% 06/11/41 874 866,508 CDC Commercial Mortgage Trust, Series 02-FX1, Class A1 5.25% 05/15/19 1,641 1,665,563 Chase Commercial Mortgage Securities Corp., Series 98-2, Class A2 6.39% 11/18/30 1,475 1,540,853 Commercial Mortgage Acceptance Corp., Series 98-C2, Class C 6.28%(m) 09/15/30 275 286,915 DLG Commercial Mortgage Corp., Series 99-CG1, Class A1B 6.46% 03/10/32 150 157,465 First Union-Chase Commercial Mortgage Trust, Series 99-C2, Class A2 6.64%(p) 04/15/09 1,984 2,084,584 First Union-Lehman Brothers-Bank of America Commercial Mortgage Trust, Series 98-C2, Class C3 6.56% 11/18/35 170 176,406 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% 08/15/36 177 189,241 GGP Mall Properties Trust, Series 01-C1A, Class C2 5.56%(q) 11/15/11 490 494,241 GGP Mall Properties Trust, Series 01-C1A, Class C3 5.07%(q) 02/15/14 41 40,776 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 05-LDP3, Class A4A 4.94% 08/15/42 1,275 1,264,628 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series FL1A, Class F 5.70%(m) 02/17/15 53 53,007 J.P. Morgan Commercial Mortgage Finance Corp., Series 97-C5, Class C 7.24% 09/15/29 1,600 1,705,501 J.P. Morgan Commercial Mortgage Finance Corp., Series 99-C7, Class A1 6.18% 10/15/35 19 19,471 J.P. Morgan Commercial Mortgage Finance Corp., Series 99-C7, Class A2 6.51% 10/15/35 600 625,474 J.P. Morgan Commercial Mortgage Finance Corp., Series 99-PLS1, Class A2 7.30%(m) 02/15/32 1,550 1,642,225 J.P. Morgan Commercial Mortgage Finance Corp., Series 99-PLSI, Class D 7.30%(m) 02/15/32 650 697,276 Lehman Brothers Commercial Conduit Mortgage Trust, Series 98-C4, Class A1B 6.21% 10/15/35 460 476,504 Lehman Brothers Commercial Conduit Mortgage Trust, Series 99-C2, Class A2 7.32% 10/15/32 250 270,648 Lehman Brothers Commercial Conduit Mortgage Trust, Series 99-C2, Class E 7.47% 10/15/32 125 135,221 See accompanying notes to financial statements. 120
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ---------------- ---------------- ---------------- COMMERCIAL MORTGAGE BACKED SECURITIES (Continued) Lehman Brothers-UBS Commercial Mortgage Trust, Series 01-C7, Class A3 5.64% 12/15/25 $2,106 $ 2,150,074 Lehman Brothers-UBS Commercial Mortgage Trust, Series 01-C7, Class A4 5.93% 12/15/25 825 857,535 Lehman Brothers-UBS Commercial Mortgage Trust, Series 01-WM, Class A1 6.16%(q) 07/14/16 771 801,655 Lehman Brothers-UBS Commercial Mortgage Trust, Series 02-C4, Class A3 4.07% 09/15/26 1,747 1,710,427 Lehman Brothers-UBS Commercial Mortgage Trust, Series 03-C8, Class A1 3.64% 11/15/27 485 474,349 Lehman Brothers-UBS Commercial Mortgage Trust, Series 04-C2, Class A1 2.95% 03/15/29 335 320,132 Lehman Brothers-UBS Commercial Mortgage Trust, Series 04-C2, Class A2 3.25% 03/15/29 1,500 1,431,541 Lehman Brothers-UBS Commercial Mortgage Trust, Series 04-C6, Class A1 3.88% 08/15/29 253 247,537 Morgan Stanley Capital I, Series 97-WF1, Class A2 7.22%(q) 07/15/29 376 385,797 Morgan Stanley Capital I, Series 99-WF1, Class A2 6.21% 11/15/31 475 492,059 Morgan Stanley Capital I, Series 04-XLF, Class G 4.82%(q) 04/15/16 300 301,767 Morgan Stanley Dean Witter Capital I, Series 99-WF1, Class A1 5.91% 11/15/31 37 36,745 Morgan Stanley Dean Witter Capital I, Series 02-TOP7, Class A1 5.38% 01/15/39 620 631,714 Mortgage Capital Funding, Inc., Series 98-MC2, Class B 6.55% 06/18/30 295 307,514 Nationslink Funding Corp., Series 98-2, Class A2 6.48% 08/20/30 216 224,889 Nationslink Funding Corp., Series 98-2, Class B 6.80% 08/20/30 525 552,540 Nationslink Funding Corp., Series 99, Class 1 6.32% 01/20/31 2,110 2,192,365 Nationslink Funding Corp., Series 99-2, Class D 7.55%(m) 06/20/31 175 188,206 Salomon Brothers Mortgage Securities VII, Series 00-C1, Class A2 7.52% 12/18/09 460 496,529 Salomon Brothers Mortgage Securities VII, Series 00-C3, Class A2 6.59% 12/18/33 $1,325 $ 1,414,155 Salomon Brothers Mortgage Securities VII, Series 01-MMA, Class A2 6.13%(q) 02/18/34 165 167,546 Wachovia Bank Commercial Mortgage Trust, Series 03-C5, Class A1 2.99% 06/15/35 1,056 985,823 Wachovia Bank Commercial Mortgage Trust, Series 04-C12, Class A1 3.40% 07/15/41 1,181 1,151,403 Wachovia Bank Commercial Mortgage Trust, Series 04-WHL3, Class G 4.35%(q) 03/15/14 250 250,249 ----------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $36,052,214) 35,231,319 ----------- ASSET BACKED SECURITIES -- 4.0% Americredit Automobile Receivables Trust, Series 02-D, Class A4 3.40% 04/13/09 330 327,572 Ameriquest Mortgage Securities, Inc., Series 02-3, Class M2 5.08%(m) 08/25/32 425 427,938 Amortizing Residential Collateral Trust, Series 02-BC1, Class B 5.88%(m) 01/25/32 114 114,100 Amortizing Residential Collateral Trust, Series 02-BC3, Class M2 4.93%(m) 06/25/32 204 206,549 Amortizing Residential Collateral Trust, Series 02-BC5, Class M2 5.03%(m) 07/25/32 250 251,785 Asset Backed Funding Corp. Net Interest Margin Trust, Series 04-OPT4, Class N1 4.45% 05/26/34 40 40,164 Bank One Issuance Trust, Series 02-C3, Class C3 3.76% 08/15/08 300 299,795 Capital Auto Receivables Asset Trust, Series 05-1, Class A4 4.05% 07/15/09 1,800 1,785,384 Caterpillar Financial Asset Trust, Series 04-A, Class A3 3.13% 01/26/09 500 493,799 Centex Home Equity Loan Trust, Series 03-B, Class M3 6.93%(m) 06/25/33 475 489,168 Centex Home Equity, Series 02-A, Class MF2 6.54% 01/25/32 341 342,759 Chase Funding Mortgage Loan Asset-Backed Certificates, Series 03-2, Class 1A4 3.99% 08/25/29 275 273,060 See accompanying notes to financial statements. 121
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value --------------- ---------------- ---------------- ASSET BACKED SECURITIES (Continued) Chase Manhattan Auto Owner Trust, Series 02-A, Class CTFS 4.17% 09/15/08 $ 214 $ 214,033 Chase Manhattan Auto Owner Trust, Series 03-B, Class CTFS 2.43% 02/16/10 1,081 1,058,168 Citibank Credit Card Issuance Trust, Series 01-C3, Class C3 6.65% 05/15/08 575 582,664 Citibank Credit Card Issuance Trust, Series 03-A6, Class A6 2.90% 05/17/10 250 239,961 Citibank Credit Card Issuance Trust, Series 04, Class A1 2.55% 01/20/07 450 439,272 Countrywide Asset-Backed Certificates, Series 02-2, Class M2 4.98%(m) 12/25/31 61 60,929 Countrywide Asset-Backed Certificates, Series 03-2, Class M2 5.48%(m) 03/26/33 1,075 1,093,276 Countrywide Asset-Backed Certificates, Series 03-3, Class B 7.14%(m) 11/25/31 250 253,976 Countrywide Asset-Backed Certificates, Series 03-3, Class M6 6.54%(m) 07/25/32 1,500 1,533,521 Countrywide Asset-Backed Certificates, Series 03-BCI, Class M2 5.83%(m) 09/25/32 300 303,228 Countrywide Asset-Backed Certificates, Series 04-13, Class AV4 4.12%(m) 06/25/35 169 169,700 Credit-Based Asset Servicing and Securitization, Series 04-CB4, Class M1 5.77%(m) 05/25/35 275 277,945 DaimlerChrysler Auto Trust, Series 05-B, Class A3 4.04% 09/08/09 2,175 2,157,491 Distribution Financial Services Trust, Series 01-1, Class A4 5.67% 01/17/17 5 4,855 Fleet Commercial Loan Master LLC, Series 02-1A, Class B1 4.69%(q) 11/16/09 475 475,946 Fleet Commercial Loan Master LLC, Series 02-1A, Class C1 5.89%(q) 11/16/09 750 753,809 Ford Credit Auto Owner Trust, Series 03-A, Class B2 4.18%(m) 08/15/07 325 325,847 Ford Credit Auto Owner Trust, Series 03-B, Class C 4.18% 01/15/08 75 74,759 General Electric Business Loan Trust, Series 03-1, Class A 4.20%(q) 04/15/31 286 289,227 General Electric Business Loan Trust, Series 03-1, Class B 5.07%(q) 04/15/31 191 196,598 General Electric Business Loan Trust, Series 03-2A, Class B 4.77%(q) 11/15/31 $1,078 $1,111,309 General Electric Business Loan Trust, Series 04-1, Class B 4.47%(q) 05/15/32 253 253,048 Granite Mortgages PLC, Series 04-2, Class 1C 4.59%(m) 06/20/44 160 160,058 Green Tree Financial Corp., Series 96-6, Class A6 7.95% 09/15/27 759 802,709 Green Tree Financial Corp., Series 96-7, Class A6 7.65% 10/15/27 403 424,617 Hedged Mutual Fund Fee Trust, Series 03-1A, Class 2 5.22%(q) 11/30/10 1,383 1,382,651 HFG Healthco-4 LLC, Series 02-1A, Class A 4.82%(q) 06/05/07 200 199,711 HFG Healthco-4 LLC, Series 02-1A, Class B 5.02%(m) 06/05/07 125 124,864 Knollwood CDO Ltd., Series 04-1A, Class C 6.76%(q) 01/10/39 193 192,434 Long Beach Asset Holdings Corp. Net Interest Margin, Series 04-2, Class N1 4.94% 06/25/34 20 20,245 Long Beach Mortgage Loan Trust, Series 03-4, Class M5A 7.83%(m) 08/25/33 200 205,970 Long Beach Mortgage Loan Trust, Series 04-1, Class M5 4.93%(m) 02/25/34 475 479,735 Lothian Mortgages PLC, Series 3A, Class A1 3.79%(q) 07/24/19 183 182,718 Massachusetts RRB Special Purpose Trust, Series 01-1, Class A 6.53% 06/01/15 1,104 1,182,452 MBNA Credit Card Master Note Trust, Series 04-A4, Class A4 2.70% 09/15/09 350 341,141 MBNA Credit Card Master Notes Trust, Series 01-C3, Class C3 6.55% 12/15/08 575 584,087 Nissan Auto Receivables Owner Trust, Series 03-C, Class A3 2.23% 03/15/07 620 617,511 Option One Mortgage Loan Trust, Series 02-6, Class M1 4.58%(m) 11/25/32 150 150,887 Option One Mortgage Loan Trust, Series 02-6, Class M2 5.53%(m) 11/25/32 575 579,837 Option One Mortgage Loan Trust, Series 03-4, Class A4 4.15%(m) 07/25/33 209 209,294 Option One Mortgage Loan Trust, Series 03-4, Class M5A 7.58%(m) 07/25/33 275 278,758 See accompanying notes to financial statements. 122
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ---------------- -------------- -------------- ASSET BACKED SECURITIES (Continued) Option One Mortgage Loan Trust, Series 03-5, Class M4 6.73%(m) 08/25/33 $ 125 $ 128,563 Pacific Coast Asset Backed Securties CDO, Series 1A, Class A 4.08%(q) 10/25/36 291 283,689 PSE&G Transition Funding LLC, Series 01-1, Class A3 5.98% 06/15/08 366 368,944 Residential Asset Mortgage Products, Inc., Series 03-RZ2, Class B 5.50%(m) 04/25/33 963 958,452 Residential Asset Securities Corp., Series 02-KS4, Class AIIB 4.08%(m) 07/25/32 78 77,676 Residential Asset Securities Corp., Series 03-KS10, Class MII2 5.18%(m) 12/25/33 1,000 1,014,855 Residential Asset Securities Corp., Series 04-KS3, Class MII3 5.63%(m) 04/25/34 400 399,989 Residential Funding Mortgage Securities ll, Series 04-HS2, Class AI1 3.79%(m) 12/25/18 86 86,441 Small Business Administration Participation Certificates, Series 97-20F, Class 1 7.20% 06/01/17 787 828,974 Structured Asset Investment Loan Trust, Series 03-BC2, Class M2 5.78%(m) 04/25/33 350 351,476 Structured Asset Investment Loan Trust, Series 03-BC3, Class M2 5.78%(m) 04/25/33 250 250,963 Structured Asset Receivables Trust, Series 03-2 3.40%(q) 01/21/09 863 863,222 Sutter CBO Ltd., Series 01-1A, Class A3L 5.37%(q) 05/15/07 425 426,062 ----------- TOTAL ASSET BACKED SECURITIES (Cost $30,919,239) 31,080,620 ----------- CORPORATE BONDS -- 6.3% Aerospace -- 0.1% Lockheed Martin Corp., Senior Debentures 8.50% 12/01/29 45 61,966 Lockheed Martin Tactical Systems, Inc., Senior Debentures 7.00% 09/15/23 150 174,321 Northrop Grumman Corp., Debentures 7.88% 03/01/26 75 94,738 Northrop Grumman Corp., Senior Debentures 7.75% 02/15/31 200 258,292 Northrop Grumman Corp., Senior Unsecured Notes 4.08% 11/16/06 280 278,647 ----------- 867,964 ----------- Banks -- 1.5% Bank of America Corp., Capital Securities 8.07%(q) 12/31/26 $ 225 $ 241,618 Bank of America Corp., Senior Notes 5.88% 02/15/09 45 46,657 Bank of America Corp., Senior Unsecured Notes 3.25% 08/15/08 75 72,346 4.50% 08/01/10 460 455,538 5.38% 06/15/14 25 25,763 Bank of America Corp., Subordinated Notes 7.40% 01/15/11 325 362,948 Bank of New York Co., Inc., Senior Subordinated Notes 3.80% 02/01/08 275 270,207 BankBoston N.A., Subordinated Notes 7.38% 09/15/06 125 128,165 Barclays Bank PLC 6.28% 12/15/49 100 98,500 Citigroup Capital ll, Capital Securities 7.75% 12/01/36 225 238,644 Citigroup, Inc., Senior Unsecured Notes 3.50% 02/01/08 90 87,836 Citigroup, Inc., Subordinated Notes 5.00% 09/15/14 944 938,903 Citigroup, Inc., Unsecured Notes 3.62% 02/09/09 175 169,677 4.12% 02/22/10 1,425 1,392,524 Crestar Capital Trust I, Capital Securities 8.16% 12/15/26 175 187,710 Depfa ACS Bank, Senior Notes 3.62% 10/29/08 150 146,192 First Union Capital l, Capital Securities 7.94% 01/15/27 325 348,161 Fleetboston Financial Corp., Senior Unsecured Notes 3.85% 02/15/08 60 59,109 HBOS Treasury Services PLC, Senior Unsecured Notes 3.60%(q) 08/15/07 35 34,382 HBOS Treasury Services PLC, Unsecured Notes 3.50%(q) 11/30/07 65 63,551 HSBC Bank USA, Subordinated Notes 3.87% 06/07/07 1,000 990,418 J.P. Morgan Chase & Co., Senior Unsecured Notes 5.35% 03/01/07 50 50,498 5.25% 05/30/07 25 25,294 J.P. Morgan Chase & Co., Subordinated Notes 6.75% 02/01/11 550 597,438 M&T Bank Corp., Senior Unsecured Notes 3.85%(g)(m) 04/01/13 225 220,123 See accompanying notes to financial statements. 123
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ---------------- ---------------- ---------------- CORPORATE BONDS (Continued) Banks (Continued) The Royal Bank of Scotland Capital Trust 4.71%(m) 12/29/49 $ 90 $ 86,829 Sumitomo Mitsui Banking Corp., Subordinated Notes 5.62%(q) 12/31/49 250 249,152 SunTrust Bank, Inc., Senior Unsecured Notes 3.62% 10/15/07 170 166,802 Swedish Export Credit Corp., Unsecured Notes 2.88% 01/26/07 75 73,703 U.S. Bancorp., Senior Unsecured Notes 3.95% 08/23/07 15 14,834 U.S. Bank N.A., Senior Bank Notes 3.53%(m) 10/01/07 250 249,558 4.40% 08/15/08 1,075 1,069,220 UBS Preferred Funding Trust I, Capital Securities 8.62%(m) 10/29/49 35 40,546 Wachovia Bank N.A., Senior Bank Notes 4.38% 08/15/08 600 596,659 Wachovia Corp., Unsecured Notes 3.62% 02/17/09 35 33,950 Wells Fargo & Co., Senior Unsecured Notes 4.00% 08/15/08 195 191,929 4.20% 01/15/10 1,200 1,177,572 Wells Fargo & Co., Unsecured Notes 3.50% 04/04/08 50 48,794 4.62% 08/09/10 40 39,785 ----------- 11,291,535 ----------- Broadcasting -- 0.1% Charter Communications Holdings LLC, Senior Unsecured Notes 8.00%(q) 04/30/12 300 301,500 DirecTV Holdings LLC, Senior Unsecured Notes 6.38%(q) 06/15/15 60 59,100 News America, Inc., Senior Debentures 7.75% 01/20/24 25 28,678 7.28% 06/30/28 35 38,804 News America, Inc., Senior Unsecured Notes 6.20% 12/15/34 525 525,793 ----------- 953,875 ----------- Chemicals -- 0.1% BCP Crystal U.S. Holdings Corp., Senior Subordinated Notes 9.62% 06/15/14 183 204,503 Equistar Chemical/Funding, Senior Unsecured Notes 10.12% 09/01/08 250 270,000 Nalco Co., Senior Subordinated Notes 8.88% 11/15/13 300 307,500 Rhodia SA, Senior Notes 10.25%(d) 06/01/10 $ 135 $ 142,762 ----------- 924,765 ----------- Computer Software & Services -- 0.0% Sungard Data Systems, Inc., Senior Unsecured Notes 9.12%(q) 08/15/13 45 46,631 ----------- Construction -- 0.2% Ainsworth Lumber Co. Ltd., Senior Unsecured Notes 7.77%(m) 10/01/10 400 399,000 K. Hovnanian Enterprises, Inc., Senior Unsecured Notes 6.25%(q) 01/15/16 470 437,100 Lennar Corp., Senior Unsecured Notes 5.60%(q) 05/31/15 90 88,148 Pulte Homes, Inc., Senior Unsecured Notes 6.38% 05/15/33 250 238,463 ----------- 1,162,711 ----------- Containers -- 0.0% Crown Holdings, Inc., Senior Secured Notes 9.50% 03/01/11 10 10,950 ----------- Energy & Utilities -- 0.5% AES Eastern Energy LP, Pass-Through Certificates 9.00% 01/02/17 510 595,495 Centerpoint Energy, Inc., Senior Unsecured Notes 7.25% 09/01/10 355 385,428 Dominion Resources, Inc., Senior Unsecured Notes 7.20% 09/15/14 450 505,736 DTE Energy Co., Senior Unsecured Notes 6.45% 06/01/06 350 354,189 FirstEnergy Corp., Senior Unsecured Notes 7.38% 11/15/31 80 94,176 Florida Power Corp., First Mortgage Bonds 6.65% 07/15/11 100 108,489 Georgia Power Co., Senior Unsecured Notes 4.88% 07/15/07 525 527,269 Indiana Michigan Power, Senior Unsecured Notes 6.12% 12/15/06 325 330,159 Pennsylvania Electric Co., Senior Unsecured Notes 5.12% 04/01/14 50 49,650 Progress Energy, Inc., Senior Unsecured Notes 7.75% 03/01/31 200 238,810 Reliant Energy, Inc., Senior Secured Notes 9.25% 07/15/10 50 54,250 See accompanying notes to financial statements. 124
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ---------------- ---------------- ---------------- CORPORATE BONDS (Continued) Energy & Utilities (Continued) 6.75% 12/15/14 $ 10 $ 9,775 TXU Corp., Senior Unsecured Notes 4.80% 11/15/09 825 794,893 ---------- 4,048,319 ---------- Entertainment & Leisure -- 0.3% Comcast Cable Communications Corp., Senior Unsecured Notes 7.05% 03/15/33 815 907,054 Comcast Cable Holdings LLC, Senior Debentures 7.88% 08/13-02/26 7 8,275 CSC Holdings, Inc., Senior Unsecured Notes 8.12% 07/15/09 600 604,500 Riddell Bell Holdings, Inc., Senior Subordinated Notes 8.38% 10/01/12 110 110,275 TCI Communications, Inc., Senior Notes 7.12% 02/15/28 35 39,252 Time Warner Cos., Inc., Debentures 6.95% 01/15/28 205 222,131 Time Warner Cos., Inc., Senior Debentures 7.57% 02/01/24 30 34,248 7.70% 05/01/32 525 622,277 Wynn Las Vegas LLC, First Mortgage Notes 6.62% 12/01/14 25 23,813 ---------- 2,571,825 ---------- Finance -- 1.0% Associates Corp. NA, Subordinated Debentures 6.88% 11/15/08 175 186,314 Berkshire Hathaway Finance Corp., Senior Unsecured Notes 3.38% 10/15/08 75 72,401 4.12% 01/15/10 35 34,258 Berkshire Hathaway Finance Corp., Unsecured Notes 4.75%(q) 05/15/12 425 422,144 Berkshire Hathaway, Inc., Senior Unsecured Notes 3.57%(m) 01/11/08 60 60,034 Credit Suisse First Boston USA, Inc., Senior Unsecured Notes 4.12% 01/15/10 350 341,168 Crown European Holdings SA, Senior Secured Notes 10.88% 03/01/13 40 46,400 Eksportfinans ASA, Unsecured Notes 3.38% 01/15/08 155 151,490 General Electric Capital Corp., Senior Unsecured Notes 4.25% 01/15/08 245 243,525 6.12% 02/22/11 975 1,034,066 6.75% 03/15/32 50 58,814 General Electric Capital Corp., Unsecured Notes 3.45%(m) 01/15/08 400 400,864 3.77%(m) 07/28/08 $ 150 $ 150,261 3.60% 10/15/08 70 68,055 4.12% 09/01/09 2,450 2,402,676 Household Finance Corp., Senior Unsecured Notes 6.38% 10/15/11 225 240,670 HSBC Finance Corp., Senior Unsecured Notes 4.75% 05/15/09 50 49,861 International Lease Finance Corp., Senior Unsecured Notes 5.75% 02/15/07 525 530,843 J.P. Morgan Capital Trust I, Capital Securities 7.54% 01/15/27 175 186,225 Lehman Brothers Holdings, Inc., Unsecured Notes 4.00% 01/22/08 200 197,650 Lehman Brothers Holdings, Senior Unsecured Notes 3.95% 11/10/09 375 363,644 Merrill Lynch & Co., Inc., Senior Unsecured Notes 3.70% 04/21/08 425 415,562 Nationwide Building Society, Senior Unsecured Notes 3.50%(q) 07/31/07 75 73,586 Student Loan Marketing Corp., Senior Unsecured Notes 5.62% 04/10/07 250 253,850 ---------- 7,984,361 ---------- Insurance -- 0.3% Allstate Financial Global Funding LLC, Senior Unsecured Notes 6.15%(q) 02/01/06 50 50,292 Allstate Financial Global Funding LLC, Unsecured Notes 2.50%(q)(r) 06/20/08 325 306,634 ASIF Global Financing, Unsecured Notes 3.85%(q) 11/26/07 25 24,578 3.90%(q)(r) 10/22/08 95 92,507 Liberty Mutual Group, Inc., Unsecured Notes 6.50%(q) 03/15/35 265 243,334 Marsh & McLennan Cos., Inc., Senior Unsecured Notes 5.75% 09/15/15 175 173,325 MassMutual Global Funding II, Senior Secured Notes 2.55%(q) 07/15/08 50 47,231 MetLife, Inc., Senior Unsecured Notes 5.70% 06/15/35 310 307,359 Monumental Global Funding II, Unsecured Note 3.45%(q) 11/30/07 350 343,323 Protective Life Corp., Secured Notes 3.70% 11/24/08 60 58,280 Sun Life of Canada Capital Trust, Capital Securities 8.53%(q) 05/29/49 195 210,844 See accompanying notes to financial statements. 125
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ---------------- ---------------- ---------------- CORPORATE BONDS (Continued) Insurance (Continued) TIAA Global Markets, Senior Unsecured Notes 3.88%(q) 01/22/08 $ 55 $ 54,067 Wellpoint, Inc., Unsecured Notes 5.95% 12/15/34 300 312,768 ---------- 2,224,542 ---------- Leasing -- 0.0% United Rentals N.A., Inc., Senior Subordinated Notes 7.75%(d) 11/15/13 200 193,000 ---------- Manufacturing -- 0.0% Ispat Inland ULC, Senior Secured Notes 9.75% 04/01/14 10 11,600 ---------- Medical & Medical Services -- 0.0% Iasis Healthcare Corp., Senior Subordinated Notes 8.75% 06/15/14 70 72,800 UnitedHealth Group, Inc., Senior Unsecured Notes 7.50% 11/15/05 175 175,544 ---------- 248,344 ---------- Metal & Mining -- 0.1% Ipsco, Inc., Senior Notes 8.75% 06/01/13 450 497,250 TRIMAS Corp., Senior Subordinated Notes 9.88% 06/15/12 395 325,875 ---------- 823,125 ---------- Motor Vehicles -- 0.0% Arvinmeritor, Inc., Senior Unsecured Notes 8.75% 03/01/12 40 39,400 DaimlerChrysler AG, Senior Debentures 7.45% 03/01/27 15 16,322 DaimlerChrysler NA Holdings Corp., Senior Unsecured Notes 8.50% 01/18/31 175 211,873 Delco Remy International, Inc., Senior Subordinated Notes 9.38%(g)(q) 04/15/12 50 28,000 ---------- 295,595 ---------- Oil & Gas -- 0.3% Anadarko Finance Co., Senior Unsecured Notes 7.50% 05/01/31 160 196,978 ANR Pipeline Co., Senior Debentures 9.62% 11/01/21 60 74,100 7.38% 02/15/24 15 15,466 Chesapeake Energy Corp., Senior Unsecured Notes 6.25% 01/15/18 80 78,400 Consolidated Natural Gas, Inc., Senior Debentures 5.00% 03/01/14 20 19,732 Dynegy Holdings, Inc., Secured Notes 10.12%(q) 07/15/13 130 144,950 El Paso Natural Gas Co., Senior Notes 7.62% 08/01/10 $ 25 $ 25,995 El Paso Natural Gas Co., Senior Unsecured Notes 8.38% 06/15/32 15 17,156 Enterprise Products Operating LP, Senior Unsecured Notes 4.95% 06/01/10 125 122,854 5.60% 10/15/14 150 149,472 Gazstream SA, Unsecured Notes 5.62%(q) 07/22/13 290 289,556 Kern River Funding Corp., Senior Unsecured Notes 4.89%(q) 04/30/18 246 243,494 Newfield Exploration Co., Senior Subordinated Notes 6.62% 09/01/14 250 260,000 Northwest Pipeline Corp., Senior Unsecured Notes 8.12% 03/01/10 120 128,100 Petro-Canada, Senior Unsecured Notes 5.95% 05/15/35 220 220,899 ---------- 1,987,152 ---------- Pharmaceuticals -- 0.1% Bristol-Myers Squibb Co., Senior Debentures 6.88% 08/01/97 25 28,770 Merck & Co., Inc., Senior Unsecured Notes 4.38% 02/15/13 410 390,765 ---------- 419,535 ---------- Railroad & Shipping -- 0.0% Union Pacific Corp., Senior Debentures 7.12% 02/01/28 150 176,508 ---------- Real Estate -- 0.4% Avalonbay Communities, Inc., Senior Unsecured Notes 7.50% 12/15/10 25 27,842 EOP Operating LP, Senior Notes 6.80% 01/15/09 775 817,719 EOP Operating LP, Senior Unsecured Notes 7.50% 04/19/29 30 34,712 ERP Operating LP, Senior Notes 6.58% 04/13/15 170 185,915 The Rouse Co., Unsecured Notes 3.62% 03/15/09 1,200 1,121,693 Simon Property Group LP, Senior Unsecured Notes 7.38% 01/20/06 400 403,269 ---------- 2,591,150 ---------- Retail Merchandising -- 0.1% May Department Stores Co., Debentures 7.88% 03/01/30 125 149,008 May Department Stores Co., Senior Debentures 8.12% 08/15/35 200 225,417 See accompanying notes to financial statements. 126
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ---------------- ---------------- ---------------- CORPORATE BONDS (Continued) Retail Merchandising (Continued) Movie Gallery, Inc., Senior Unsecured Notes 11.00%(d) 05/01/12 $ 55 $ 49,087 ----------- 423,512 ----------- Semiconductors & Related Devices -- 0.0% Magnachip Semiconductor, Secured Notes 7.12%(m) 12/15/11 30 29,850 ----------- Telecommunications -- 0.8% America Movil SA de CV, Unsecured Notes 6.38% 03/01/35 75 72,722 American Tower Corp., Senior Unsecured Notes 7.50%(d) 05/01/12 800 848,000 Cincinnati Bell, Inc., Senior Unsecured Notes 7.25%(d) 07/15/13 20 21,250 Deutsche Telekom International Finance BV (Netherlands), Senior Unsecured Notes 8.75% 06/15/30 265 342,120 Eircom Funding (Ireland), Senior Subordinated Notes 8.25% 08/15/13 600 651,000 L-3 Communications Corp., Senior Subordinated Notes 6.38%(q) 10/15/15 35 35,262 Qwest Corp., Unsecured Notes 7.88% 09/01/11 100 104,500 7.12%(q) 06/15/13 75 78,000 Rogers Wireless, Inc., Senior Secured Notes 9.62% 05/01/11 550 635,250 SBC Communications, Inc., Unsecured Notes 4.39%(q) 06/05/06 1,125 1,123,628 6.45% 06/15/34 15 15,832 6.15% 09/15/34 5 5,117 Sprint Capital Corp., Senior Unsecured Notes 8.75% 03/15/32 325 435,802 Superior Essex Communications & Essex Group, Senior Notes 9.00% 04/15/12 500 505,000 Verizon Global Funding Corp., Senior Unsecured Notes 7.75% 12/01/30 365 444,671 Verizon Maryland, Inc., Debentures 5.12% 06/15/33 10 8,657 Vodafone Group PLC, Unsecured Notes 5.00% 09/15/15 400 396,959 ----------- 5,723,770 ----------- Yankee -- 0.4% AID-Israel, Unsecured Notes 5.50%(s) 4/24-09/33 185 198,396 Banque Centrale de Tunisie (Tunisia), Senior Unsecured Notes 7.38%(s) 04/25/12 $ 425 $ 480,250 Corp Andina de Fomento (Spain), Senior Unsecured Notes 6.88%(s) 03/15/12 125 137,066 Japan Finance Corp. for Municipal Enterprises, Unsecured Notes 4.62%(s) 04/21/15 900 893,362 Nationwide Building Society (United Kingdom), Unsecured Notes 2.62%(q)(s) 01/30/07 550 536,502 Omi Corp. (Mali), Senior Notes 7.62%(s) 12/01/13 235 239,700 Suncor Energy, Inc. (Canada) 5.95%(s) 12/01/34 20 21,239 Teck Cominco Ltd. (Canada), Senior Unsecured Notes 6.12%(s) 10/01/35 175 171,610 Telecom Italia Capital (Luxembourg), Senior Unsecured Notes 4.95%(q)(s) 09/30/14 475 459,673 United Mexican States, Bonds 8.12%(s) 12/30/19 180 218,970 United Mexican States, Senior Unsecured Notes 8.30%(s) 08/15/31 25 31,250 Vodafone Group PLC (United Kingdom), Senior Unsecured Notes 7.75%(s) 02/15/10 70 78,079 ----------- 3,466,097 ----------- TOTAL CORPORATE BONDS (Cost $48,356,284) 48,476,716 ----------- FOREIGN BONDS -- 0.3% Bundesrepublic Deutschland (Germany) (EUR) 4.75% (Cost $2,197,562) 07/04/34 1,500 2,179,298 ----------- TAXABLE MUNICIPAL BONDS -- 0.1% Atlantic Marine Corp. Communities, Notes 5.34%(q) 12/01/50 600 600,000 Ohana Military Communities LLC, Military Housing Revenue Bonds (Navy Hawaii Housing Privatization Project) Series 04-A, Class 1 6.19% 04/01/49 25 27,276 ----------- TOTAL TAXABLE MUNICIPAL BONDS (Cost $625,000) 627,276 ----------- See accompanying notes to financial statements. 127
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ---------------- ---------------- ---------------- SHORT TERM INVESTMENTS -- 19.3% Banco Santader, Certificate of Deposit 3.70%(t) 05/10/06 $ 7,873 $ 7,873,017 Federal Home Loan Bank, Discount Notes 3.18%(u) 10/03/05 10,000 9,998,233 Federal National Mortgage Association, Discount Notes 3.50% 10/03/05 3,500 3,499,319 Morgan Stanley, Floating Rate Notes 4.02%(m)(t) 11/07/05 10,271 10,270,644 4.01%(m)(t) 11/14/05 4,083 4,083,020 4.02%(m)(t) 01/05/06 12,214 12,214,343 U.S. Treasury Bills 3.15% 11/17/05 14,350 14,290,986 Galileo Money Market Fund 9,784 9,783,531 Institutional Money Market Trust(t)(v) 77,248 77,247,763 ------------ TOTAL SHORT TERM INVESTMENTS (Cost $149,260,856) 149,260,856 ------------ TOTAL INVESTMENTS IN SECURITIES -- 117.8% (Cost $818,325,074(a)) $909,651,353 ------------ Number of Contracts Value ---------------- ---------------- CALL SWAPTIONS WRITTEN -- (0.1)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (320)(w) $(153,472) Citibank, Strike Price 5.67, Expires 01/04/10 (50)(w) (34,314) Deutsche Bank, Strike Price 5.015, Expires 01/29/07 (35)(w) (12,996) Union Bank, Strike Price 4.725, Expires 06/13/07 (790)(w) (231,865) Warburg Dillon Read LLC, Strike Price 5.00, Expires (370)(w) (169,904) 06/16/10 ----------- TOTAL CALL SWAPTIONS WRITTEN (Premiums received $668,790) (602,551) ----------- PUT SWAPTIONS WRITTEN -- (0.1)% Barclays Capital, S trike Price 5.135, Expires 04/21/08 (320)(w) (112,928) Citibank, Strike Price 5.67, Expires 01/04/10 (50)(w) (15,207) Deutsche Bank, Strike Price 5.015, Expires 01/29/07 (35)(w) (9,384) Union Bank, Strike Price 4.725, Expires 06/13/07 (790)(w) (329,114) Warburg Dillon Read LLC, Strike Price 5.00, Expires (370)(w) (187,183) 06/16/10 ---------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $668,790) (653,816) ---------- See accompanying notes to financial statements. 128
BlackRock Funds STATEMENT OF NET ASSETS ASSET ALLOCATION PORTFOLIO (Concluded) As of September 30, 2005 Value ---------------- LIABILITIES IN EXCESS OF OTHER ASSETS -- (17.6)% $(135,960,372) ---------------- NET ASSETS -- 100.0% (Applicable to 1,918,215 Institutional shares, 140,180 Service shares, 31,758,099 Investor A shares, 11,838,472 Investor B shares and 4,394,244 Investor C shares outstanding) $ 772,434,614 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($29,752,239/1,918,215) $15.51 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($2,171,034/140,180) $15.49 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($491,556,692/31,758,099) $15.48 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($15.48/0.9425) $16.42 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($181,583,235/11,838,472) $15.34 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($67,371,414/4,394,244) $15.33 ================ - ------------------- (a) Cost for Federal income tax purposes is $821,526,498. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $99,101,243 Gross unrealized depreciation (10,976,388) ----------- $88,124,855 =========== (b) Securities valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, these securities had a total market value of $328,405 which represents 0.04% of net assets. (c) Non-income producing security. (d) Total or partial securities on loan. (e) Security valued under consistently applied procedures established by the Board. (f) Security restricted as to public resale. These securities are ineligible for resale into the public market until such time that either (I) a resale Registration Statement has been filed with the SEC and declared effective or (II) resale is permitted under Rule 144A without the need for an effective registration statement. As of September 30, 2005, the Portfolio held 0.95% of its net assets, with a current market value of $7,353,392 and a current cost of $2,402,265 in these securities. (g) Security is illiquid. As of September 30, 2005, the Portfolio held 0.08% of its net assets, with a current market value of $601,655 in these securities. (h) Shares held at end of period are less than 1. (i) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 9,725. These warrants were exercisable as of 1/21/04. (j) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 68,773. These warrants were exercisable as of 7/24/03. (k) As of September 30, 2005, the aggregate amount of shares called for by these warrants is 3,650. These warrants were exercisable as of 9/29/04. (l) Par held at end of period is less than 1,000. (m) Rates shown are the rates as of September 30, 2005. (n) Rates shown are the effective yields as of September 30, 2005. (o) Interest rate of underlying collateral. (p) Securities, or a portion thereof, with a market value of $1,284,980 have been pledged as collateral for swap and swaption contracts. (q) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 2.0% of its net assets, with a current market value of $15,981,244, in securities restricted as to resale. (r) Securities, or a portion thereof, pledged as collateral with a value of $403,066 on 217 Short U.S. Treasury Note future contract, 211 Long U.S. Treasury Notes future contracts, 133 Long Treasury Bonds futures contracts, and 58 short Euro-Bobl futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $74,558,514, with an unrealized loss of $522,151 (including commissions of $1,379). (s) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (t) Securities purchased with the cash proceeds from securities loaned. (u) The rate shown is the effective yield on the discount notes at the time of purchase. (v) Represents an investment in an affiliate. (w) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 129
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES ASSET ALLOCATION PORTFOLIO As of September 30, 2005 ASSETS Investments at value (Cost $818,325,074).............. $909,651,353 Cash denominated in foreign currencies (Cost $3,093,400).......................... 3,090,502 Dividends and reclaims receivable .................... 714,759 Interest receivable .................................. 1,587,867 Investments sold receivable .......................... 62,926,900 Capital shares sold receivable ....................... 827,237 Prepaid expenses ..................................... 21,029 Unrealized appreciation on forward foreign currency contracts .................... 8,439 Unrealized appreciation on interest rate swaps ....... 264,344 Futures margin receivable ............................ 3,808 ------------ TOTAL ASSETS ...................................... 979,096,238 ------------ LIABILITIES Payable upon return of securities loaned ............. 111,688,786 Investments purchased payable ........................ 91,023,679 Capital shares redeemed payable ...................... 1,236,296 Advisory fees payable ................................ 218,472 Administrative fees payable .......................... 139,959 Transfer agent fees payable .......................... 93,975 Other accrued expenses payable ....................... 478,911 Swaptions written, at fair value (premiums received $1,337,580)................... 1,256,367 Foreign taxes payable ................................ 2,869 Futures margin payable ............................... 58,266 Futures sold payable ................................. 35 Unrealized depreciation on forward foreign currency contracts .................... 4,990 Unrealized depreciation on interest rate swaps ....... 459,019 ------------ TOTAL LIABILITIES ................................. 206,661,624 ------------ NET ASSETS (Applicable to 1,918,215 Institutional shares,140,180 Service shares, 31,758,099 Investor A shares, 11,838,472 Investor B shares and 4,394,244 Investor C shares outstanding) ....................... $772,434,614 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($29,752,239/1,918,215)....... $ 15.51 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($2,171,034/140,180)................ $ 15.49 ============ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($491,556,692/31,758,099)........ $ 15.48 ============ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($15.48/0.9425)........................ .............. $ 16.42 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($181,583,235/11,838,472)........ $ 15.34 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($67,371,414/4,394,244).......... $ 15.33 ============ See accompanying notes to financial statements. 130
BlackRock Funds STATEMENT OF NET ASSETS INDEX EQUITY PORTFOLIO As of September 30, 2005 Value ---------------- Investment in The U.S. Large Company Series of The DFA Investment Trust Company -- 100.2% (Cost $1,040,173,789) $1,327,794,602 LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.2)% (2,688,158) ---------------- NET ASSETS -- 100.0% (Applicable to 25,183,897 Institutional shares, 2,923,124 Service shares, 12,628,189 Investor A shares, 5,934,632 Investor B shares and 9,902,270 Investor C shares outstanding) $1,325,106,444 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($595,049,925/25,183,897) $ 23.63 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($68,636,772/2,923,124) $ 23.48 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($296,266,401/12,628,189) $ 23.46 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($23.46/0.970) $ 24.19 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($136,877,834/5,934,632) $ 23.06 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($228,275,512/9,902,270) $ 23.05 ================ See accompanying notes to financial statements and accompanying financial statements and related notes for The Dfa Investment Trust Company. 131
BlackRock Funds INVESTMENT ABBREVIATIONS ADR American Depository Receipts CMT Constant Maturity Treasury IO Interest Only NVDR Non Voting Depository Receipts PLC Public Limited Company PO Principal Only 132
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Blackrock Funds STATEMENTS OF OPERATIONS For the Period Ended September 30, 2005 Large Cap Large Cap Investment Value Growth Divident Trust Equity Equity AchiversTM Portfolio Portfolio Portfolio Portfolio 10/1/04-9/30/05 10/1/04-9/30/05 10/1/04-9/30/05 10/1/04-9/30/05 ----------------- ----------------- ----------------- --------------- Investment income: Interest ........................................ $ 100,359 $ 48,432 $ 17,126 $ 14,602 Securities lending income ....................... 57,942 19,629 3,516 2,137 Dividends and reclaims .......................... 18,298,686 7,770,890 1,083,548 630,260 Foreign taxes withheld .......................... -- -- (357) (45) ------------ ----------- ----------- ---------- Total investment income ....................... 18,456,987 7,838,951 1,103,833 646,954 ------------ ----------- ----------- ---------- Expenses: Investment advisory fee ......................... 5,239,291 1,766,013 377,793 121,609 Administration fee .............................. 742,418 272,929 58,386 18,794 Administration fee - class specific ............. 1,410,510 465,969 99,808 31,749 Custodian fee ................................... 123,935 58,342 32,266 26,127 Transfer agent fee .............................. 2,224,415 338,302 101,981 18,960 Transfer agent fee - class specific ............. 176,142 57,844 12,390 3,925 Shareholder servicing fees - class specific ..... 1,486,203 497,508 109,991 43,150 Distribution fees - class specific .............. 1,877,555 480,206 121,645 66,429 Legal and audit fee ............................. 177,258 62,490 23,857 22,107 Printing fee .................................... 367,072 94,997 26,944 3,652 Registration fees and expenses .................. 48,085 48,312 43,618 75,020 Trustees' fees .................................. 32,089 11,011 2,466 790 Licensing fees .................................. -- -- -- 32,147 Other ........................................... 86,225 9,696 11,180 6,457 ------------ ----------- ----------- ---------- Total expenses ................................ 13,991,198 4,163,619 1,022,325 470,916 ------------ ----------- ----------- ---------- Less investment advisory fees waived.......... (1,130,568) (156,151) (120,900) (107,888) Less administration fees waived .............. -- -- -- (12,785) Less administration fees waived - class specific .................................... (780,624) (205,509) (48,090) (6,932) Less distribution fees waived - class specific .................................... (400,526) (121,392) (17,612) (9,364) Less custodian fees waived ................... (9,700) (3,097) (1,520) (970) Less transfer agent fees waived .............. (159,228) (23,735) (5,119) (1,495) Less expenses reimbursed by advisor........... -- -- -- (8,157) Less expenses reimbursed by distributor (Note D) ........................ -- -- -- -- Reimbursement of distribution fees (Note D) .................................... -- -- -- -- ------------ ----------- ----------- ---------- Net expenses .................................. 11,510,552 3,653,735 829,084 323,325 ------------ ----------- ----------- ---------- Net investment income (loss) .................... 6,946,435 4,185,216 274,749 323,629 ------------ ----------- ----------- ---------- Realized and unrealized gain (loss) on investments and foreign currency transactions: Net increase from payment by affiliate (Note D) ....................................... -- -- -- -- Investment transactions ........................ 161,357,593 46,991,163 15,245,011 (403,215) Futures and options contracts .................. (24,969) 62,682 83,076 64,896 ------------ ----------- ----------- ---------- 161,332,624 47,053,845 15,328,087 (338,319) ------------ ----------- ----------- ---------- Change in unrealized appreciation (depreciation) from: Investments .................................... 243,695,510 21,728,980 (6,622,887) 1,162,011 Futures and options contracts .................. 50,486 (3,947) (8,387) 2,961 ------------ ----------- ----------- ---------- 243,745,996 21,725,033 (6,631,274) 1,164,972 ------------ ----------- ----------- ---------- Net gain on investments and foreign currency transactions .................................... 405,078,620 68,778,878 8,696,813 826,653 ------------ ----------- ----------- ---------- Net increase in net assets resulting from operations ...................................... $412,025,055 $72,964,094 $ 8,971,562 $1,150,282 ============ =========== =========== ========== Legacy Legacy Portfolio Portfolio 11/1/04-9/30/05 11/1/03-10/31/04 ----------------- ----------------- Investment income: Interest ........................................ $ 52,748 $ 58,904 Securities lending income ....................... 30,012 71,531 Dividends and reclaims .......................... 4,027,170 2,660,940 Foreign taxes withheld .......................... (34,752) (32,242) ----------- ----------- Total investment income ....................... 4,075,178 2,759,133 ----------- ----------- Expenses: Investment advisory fee ......................... 1,758,575 2,172,192 Administration fee .............................. 178,866 107,908 Administration fee - class specific ............. 278,963 -- Custodian fee ................................... 44,300 153,507 Transfer agent fee .............................. 469,751 1,089,375 Transfer agent fee - class specific ............. 34,630 -- Shareholder servicing fees - class specific ..... 555,009 -- Distribution fees - class specific .............. 883,345 1,639,956 Legal and audit fee ............................. 63,391 63,000 Printing fee .................................... 118,562 103,808 Registration fees and expenses .................. 124,789 61,750 Trustees' fees .................................. 12,882 28,442 Licensing fees .................................. -- -- Other ........................................... 6,630 38,210 ----------- ----------- Total expenses ................................ 4,529,693 5,458,148 ----------- ----------- Less investment advisory fees waived.......... -- -- Less administration fees waived .............. -- -- Less administration fees waived - class specific .................................... (241,385) -- Less distribution fees waived - class specific .................................... (82,972) -- Less custodian fees waived ................... (2,607) (9,261) Less transfer agent fees waived .............. (29,531) -- Less expenses reimbursed by advisor........... -- -- Less expenses reimbursed by distributor (Note D) ........................ -- -- Reimbursement of distribution fees (Note D) .................................... -- -- ----------- ----------- Net expenses .................................. 4,173,198 5,448,887 ----------- ----------- Net investment income (loss) .................... (98,020) (2,689,754) ----------- ----------- Realized and unrealized gain (loss) on investments and foreign currency transactions: Net increase from payment by affiliate (Note D) ....................................... 294,363 15,707 Investment transactions ........................ 10,863,747 49,361,911 Futures and options contracts .................. -- -- ----------- ----------- 11,158,110 49,377,618 ----------- ----------- Change in unrealized appreciation (depreciation) from: Investments .................................... 19,011,842 32,508,263) Futures and options contracts .................. 3,519 -- ----------- ----------- 19,015,361 32,508,263) ----------- ----------- Net gain on investments and foreign currency transactions .................................... 30,173,471 16,869,355 ----------- ----------- Net increase in net assets resulting from operations ...................................... $30,075,451 $14,179,601 =========== =========== See accompanying notes to financial statements. 134
BlackRock Funds Mid-cap Mid-cap Mid-cap Value Value Growth Equity Equity Equity Aurora Portfolio Portfolio Portfolio Portfolio 3/1/05-9/30/05 7/1/04-2/28/05 10/1/04-9/30/05 10/1/04-9/30/05 ----------------- ----------------- ----------------- --------------- Investment income: Interest ........................................ $ 383,740 $ 832,474 $ 112,575 $ 1,876,190 Securities lending income ....................... 29,730 95,612 27,704 1,185,253 Dividends and reclaims .......................... 6,061,244 9,546,084 1,474,895 29,579,151 Foreign taxes withheld .......................... (2,727) -- (975) (54,850) ----------- ----------- ------------ ------------ Total investment income ....................... 6,471,987 10,474,170 1,614,199 32,585,744 ----------- ----------- ------------ ------------ Expenses: Investment advisory fee ......................... 3,472,893 3,038,640 2,766,100 25,627,116 Administration fee .............................. 354,899 114,891 293,898 1,411,872 Administration fee - class specific ............. 629,456 88,510 501,885 2,688,100 Custodian fee ................................... 55,837 106,832 48,922 302,848 Transfer agent fee .............................. 608,564 1,108,449 932,440 3,467,756 Transfer agent fee - class specific ............. 78,150 10,987 62,303 353,170 Shareholder servicing fees - class specific ..... 998,678 1,047,061 702,359 7,388,439 Distribution fees - class specific .............. 1,242,773 1,174,289 732,269 8,496,367 Legal and audit fee ............................. 101,994 52,379 69,068 256,084 Printing fee .................................... 219,127 180,196 152,865 1,156,598 Registration fees and expenses .................. 49,170 171,370 48,709 61,966 Trustees' fees .................................. 14,621 14,829 11,477 105,727 Licensing fees .................................. -- -- -- -- Other ........................................... 42,253 32,265 28,627 289,362 ----------- ----------- ------------ ------------ Total expenses ................................ 7,868,415 7,140,698 6,350,922 51,605,405 ----------- ----------- ------------ ------------ Less investment advisory fees waived.......... (600,552) (61,303) (127,946) -- Less administration fees waived .............. -- -- -- -- Less administration fees waived - class specific .................................... (607,206) (87,493) (185,273) -- Less distribution fees waived - class specific .................................... (274,186) (38,049) (209,447) (1,267,403) Less custodian fees waived ................... (4,726) (4,726) (4,112) (13,062) Less transfer agent fees waived .............. (51,234) (51,234) (67,872) (141,720) Less expenses reimbursed by advisor........... -- -- -- -- Less expenses reimbursed by distributor (Note D) ........................ -- (271,500) -- -- Reimbursement of distribution fees (Note D) .................................... -- (91,069) -- -- ----------- ----------- ------------ ------------ Net expenses .................................. 6,330,511 6,535,324 5,756,272 50,183,220 ----------- ----------- ------------ ------------ Net investment income (loss) .................... 141,476 3,938,846 (4,142,073) (17,597,476) ----------- ----------- ------------ ------------ Realized and unrealized gain (loss) on investments and foreign currency transactions: Net increase from payment by affiliate (Note D) ....................................... -- 554,230 -- 203,165 Investment transactions ........................ 52,648,354 55,516,938 50,869,792 469,614,985 Futures and options contracts .................. -- -- -- -- ----------- ----------- ------------ ------------ 52,648,354 56,071,168 50,869,792 469,818,150 ----------- ----------- ------------ ------------ Change in unrealized appreciation (depreciation) from: Investments .................................... 1,969,402 25,454,000 66,962,559 30,943,367 Futures and options contracts .................. -- -- -- -- ----------- ----------- ------------ ------------ 1,969,402 25,454,000 66,962,559 30,943,367 ----------- ----------- ------------ ------------ Net gain on investments and foreign currency transactions .................................... 54,617,756 81,525,168 117,832,351 500,761,517 ----------- ----------- ------------ ------------ Net increase in net assets resulting from operations ...................................... $54,759,232 $85,464,014 $113,690,278 $483,164,041 =========== =========== ============ ============ Small/Mid-cap Small Cap Small Cap Small Cap Growth Value Equity Core Equity Growth Equity Portfolio Portfolio Portfolio Portfolio 10/1/04-9/30/05 10/1/04-9/30/05 10/1/04-9/30/05 10/1/04-9/30/05 ----------------- ----------------- --------------- ---------------- Investment income: Interest ........................................ $ 118,943 $ 67,965 $ 28,323 $ 514,311 Securities lending income ....................... 84,191 21,000 8,266 43,199 Dividends and reclaims .......................... 1,452,521 1,540,045 142,529 2,251,007 Foreign taxes withheld .......................... (1,401) (3,277) (517) (4,976) ----------- ----------- ---------- ----------- Total investment income ....................... 1,654,254 1,625,733 178,601 2,803,541 ----------- ----------- ---------- ----------- Expenses: Investment advisory fee ......................... 2,534,041 727,645 253,984 2,903,801 Administration fee .............................. 201,632 112,454 21,589 445,733 Administration fee - class specific ............. 294,340 185,242 36,539 765,314 Custodian fee ................................... 23,303 31,754 19,348 85,046 Transfer agent fee .............................. 919,160 82,325 22,216 260,947 Transfer agent fee - class specific ............. 36,539 23,036 4,536 95,004 Shareholder servicing fees - class specific ..... 727,731 158,736 48,070 525,855 Distribution fees - class specific .............. 586,666 197,960 101,133 408,918 Legal and audit fee ............................. 79,148 33,145 19,285 89,455 Printing fee .................................... 165,609 39,778 12,729 220,379 Registration fees and expenses .................. 106,033 60,513 63,179 69,672 Trustees' fees .................................. 17,480 4,349 818 18,112 Licensing fees .................................. -- -- -- -- Other ........................................... 32,976 13,432 6,526 33,250 ----------- ----------- ---------- ----------- Total expenses ................................ 5,724,658 1,670,369 609,952 5,921,486 ----------- ----------- ---------- ----------- Less investment advisory fees waived.......... (29,657) -- (88,870) -- Less administration fees waived .............. -- -- -- -- Less administration fees waived - class specific .................................... (267,930) (15,760) (8,721) -- Less distribution fees waived - class specific .................................... (151,655) (33,539) (6,630) (147,507) Less custodian fees waived ................... (2,798) (2,260) (1,356) (4,675) Less transfer agent fees waived .............. (22,847) (4,878) (1,775) (17,260) Less expenses reimbursed by advisor........... -- -- -- -- Less expenses reimbursed by distributor (Note D) ........................ (355,506) -- -- -- Reimbursement of distribution fees (Note D) .................................... -- -- -- -- ----------- ----------- ---------- ----------- Net expenses .................................. 4,894,265 1,613,932 502,600 5,752,044 ----------- ----------- ---------- ----------- Net investment income (loss) .................... (3,240,011) 11,801 (323,999) (2,948,503) ----------- ----------- ---------- ----------- Realized and unrealized gain (loss) on investments and foreign currency transactions: Net increase from payment by affiliate (Note D) ....................................... -- -- -- -- Investment transactions ........................ 43,816,536 24,313,119 832,757 45,796,132 Futures and options contracts .................. -- -- -- -- ----------- ----------- ---------- ----------- 43,816,536 24,313,119 832,757 45,796,132 ----------- ----------- ---------- ----------- Change in unrealized appreciation (depreciation) from: Investments .................................... 25,247,218 927,970 3,352,781 48,085,897 Futures and options contracts .................. -- -- -- -- ----------- ----------- ---------- ----------- 25,247,218 927,970 3,352,781 48,085,897 ----------- ----------- ---------- ----------- Net gain on investments and foreign currency transactions .................................... 69,063,754 25,241,089 4,185,538 93,882,029 ----------- ----------- ---------- ----------- Net increase in net assets resulting from operations ...................................... $65,823,743 $25,252,890 $3,861,539 $90,933,526 =========== =========== ========== =========== 135
BlackRock Funds STATEMENTS OF OPERATIONS (Concluded) For The Period Ended September 30, 2005 All-Cap Global Science Global Global Global & Technology Resources Resources Resources Portfolio Portfolio Portfolio Portfolio 10/1/04-9/30/05 3/1/05-9/30/05 7/1/04-2/28/05 2/16/05 1-9/30/05 ----------------- ---------------- ---------------- ------------------ Investment income: Interest ........................................ $ 6,161 $ 345,661 $ 183,027 $ 90,467 Securities lending income ....................... 2,812 269,085 172,565 35,611 Dividends and reclaims .......................... 178,069 8,460,613 4,139,881 573,111 Foreign taxes withheld .......................... (14,882) (732,167) (338,237) (28,106) Net investment income from Master (See Note A) ........................................ -- -- -- -- ---------- ------------ ------------ ----------- Total investment income ....................... 172,160 8,343,192 4,157,236 671,083 ---------- ------------ ------------ ----------- Expenses: Investment advisory fee ......................... 227,219 4,336,255 3,718,767 379,732 Administration fee .............................. 21,460 461,883 116,612 43,036 Administration fee - class specific ............. 36,714 830,407 108,534 71,357 Custodian fee ................................... 26,119 157,783 157,280 82,304 Transfer agent fee .............................. 86,862 358,882 712,293 42,937 Transfer agent fee - class specific ............. 4,557 104,523 13,597 8,858 Shareholder servicing fees - class specific ..... 60,455 1,404,385 1,198,486 70,168 Distribution fees - class specific .............. 117,886 1,560,886 1,420,045 103,879 Legal and audit fees ............................ 22,318 137,417 37,648 72,234 Printing fees ................................... 24,000 258,477 135,412 26,538 Registration fees and expenses .................. 45,901 85,497 40,502 35,228 Trustees' fees .................................. 847 23,662 21,374 1,336 Other ........................................... 9,163 45,142 20,267 13,661 ---------- ------------ ------------ ----------- Total expenses ................................ 683,501 9,765,199 7,700,817 951,268 ---------- ------------ ------------ ----------- Less investment advisory waived .............. (97,367) -- -- (170,780) Less administration fees waived - class specific .................................... (1,765) (521,273) (22,859) (52,956) Less distribution fees waived - class specific .................................... (9,630) (408,069) (52,480) (17,253) Less custodian fees waived ................... (1,562) (13,321) -- (7,793) Less transfer agent fees waived .............. (4,462) (35,595) -- (3,360) Less expenses reimbursed by advisor........... -- -- -- -- Reimbursement of distribution fees (Note D) .................................... -- -- -- -- ---------- ------------ ------------ ----------- Net expenses .................................. 568,715 8,786,941 7,625,478 699,126 ---------- ------------ ------------ ----------- Net investment income (loss) .................... (396,555) (443,749) (3,468,242) (28,043) ---------- ------------ ------------ ----------- Realized and unrealized gain (loss) on investments and foreign currency transactions: Net increase from payment by affiliate (Note D) ....................................... -- -- 12,780 - Net realized gain (loss) from: Investment transactions ........................ 1,480,323 54,145,172 79,408,370 (77,770) Futures and options contracts .................. -- -- -- -- Swap and swaption contracts .................... -- -- -- -- Foreign currency related transactions .......... 9,961 62,833 21,031 (63,267) Master (See Note A) ............................ -- -- - -- ---------- ------------ ------------ ----------- 1,490,284 54,208,005 79,442,181 (141,037) ---------- ------------ ------------ ----------- Change in unrealized appreciation (depreciation) from: Investments .................................... 3,725,972 263,549,536 226,280,120 40,412,160 Futures and options contracts .................. -- -- -- -- Swap and swaption contracts .................... -- -- -- -- Foreign currency related transactions .......... (1,327) 117,154 2,148 (9,028) Master (See Note A) ............................ -- -- -- -- ---------- ------------ ------------ ----------- 3,724,645 263,666,690 226,282,268 40,403,132 ---------- ------------ ------------ ----------- Net gain on investments and foreign currency transactions .................................... 5,214,929 317,874,695 305,724,449 40,262,095 ---------- ------------ ------------ ----------- Net increase in net assets resulting from operations ...................................... $4,818,374 $317,430,946 $302,256,207 $40,234,052 ========== ============ ============ =========== STATEMENTS OF OPERATIONS (Concluded) For The Period Ended September 30, 2005 Health Health International Sciences Sciences U.S. Opportunities Opportunities Portfolio Portfolio Portfolio Portfolio 3/1/05-9/30/05 3/1/04-2/28/05 10/1/04-9/30/05 10/1/04-9/30/05 -------------- -------------- ------------------ --------------- Investment income: $ 141,834 $ 97,627 $ 525,256 Interest ........................................ $ 311,352 46,298 12,111 2,304 Securities lending income ....................... 36,421 643,884 807,658 16,890,830 Dividends and reclaims .......................... 660,329 (15,258) (540) (1,168,882) Foreign taxes withheld .......................... (31,911) Net investment income from Master (See Note A) ........................................ -- -- -- -- ----------- ----------- ----------- ------------ Total investment income ....................... 976,191 816,758 916,856 16,249,508 ----------- ----------- ----------- ------------ Expenses: Investment advisory fee ......................... 849,899 902,820 1,059,732 4,989,791 Administration fee .............................. 96,322 109,056 81,888 419,855 Administration fee - class specific ............. 161,887 17,387 140,075 721,315 Custodian fee ................................... 28,990 105,866 20,398 486,297 Transfer agent fee .............................. 182,493 341,678 194,103 406,864 Transfer agent fee - class specific ............. 20,096 2,158 17,388 89,543 Shareholder servicing fees - class specific ..... 264,341 288,382 226,051 862,833 Distribution fees - class specific .............. 395,535 397,127 472,525 1,268,038 Legal and audit fees ............................ 57,334 49,176 30,014 87,376 Printing fees ................................... 62,815 67,679 60,281 211,559 Registration fees and expenses .................. 47,621 53,140 45,725 69,304 Trustees' fees .................................. 4,206 10,235 3,313 16,722 Other ........................................... 11,248 16,020 11,931 57,300 ----------- ----------- ----------- ------------ Total expenses ................................ 2,182,787 2,360,724 2,363,424 9,686,797 ----------- ----------- ----------- ------------ Less investment advisory waived .............. -- -- -- -- Less administration fees waived - class specific .................................... (47,650) (371) (7,606) (82,065) Less distribution fees waived - class specific .................................... (62,415) (6,915) (30,821) (169,351) Less custodian fees waived ................... (2,729) -- (1,344) (26,149) Less transfer agent fees waived .............. (15,604) -- (9,178) (27,962) Less expenses reimbursed by advisor........... -- (162,313) -- -- Reimbursement of distribution fees (Note D) .................................... -- - -- -- ----------- ----------- ----------- ------------ Net expenses .................................. 2,054,389 2,191,125 2,314,475 9,381,270 ----------- ----------- ----------- ------------ Net investment income (loss) .................... (1,078,198) (1,374,367) (1,397,619) 6,868,238 ----------- ----------- ----------- ------------ Realized and unrealized gain (loss) on investments and foreign currency transactions: Net increase from payment by affiliate (Note D) ....................................... -- -- -- -- Net realized gain (loss) from: Investment transactions ........................ 12,290,095 2,830,919 15,197,435 49,801,464 Futures and options contracts .................. -- (199,057) -- -- Swap and swaption contracts .................... 767,188 -- -- -- Foreign currency related transactions .......... -- -- -- (217,366) Master (See Note A) ............................ -- -- -- -- ----------- ----------- ----------- ------------ 13,057,283 2,631,862 15,197,435 49,584,098 ----------- ----------- ----------- ------------ Change in unrealized appreciation (depreciation) from: Investments .................................... 20,081,466 832,983 7,564,012 115,037,560 Futures and options contracts .................. 125,894 -- -- -- Swap and swaption contracts .................... -- - - -- -- Foreign currency related transactions .......... (295) 347 -- (686,312) Master (See Note A) ............................ -- -- -- - ----------- ----------- ----------- ------------ 20,207,065 833,330 7,564,012 114,351,248 ----------- ----------- ----------- ------------ Net gain on investments and foreign currency transactions .................................... 33,264,348 3,465,192 22,761,447 163,935,346 ----------- ----------- ----------- ------------ Net increase in net assets resulting from operations ...................................... $32,186,150 $ 2,090,825 $21,363,828 $170,803,584 =========== =========== =========== ============ - --------- /1/ Commencement of operations. See accompanying notes to financial statements. 136
BlackRock Funds Asset Asset Index Allocation Allocation Equity Portfolio Portfolio Portfolio 3/1/05-9/30/05 4/1/04-2/28/05 10/1/04-9/30/05 ---------------- ---------------- ---------------- Investment income: Interest ........................................ $ 7,232,968 $ 11,943,413 $ -- Securities lending income ....................... 61,376 119,283 -- Dividends and reclaims .......................... 5,410,029 5,679,996 -- Foreign taxes withheld .......................... (178,351) (34,188) -- Net investment income from Master (See Note A) ........................................ -- -- 28,700,247 ------------ ------------ ------------- Total investment income ....................... 12,526,022 17,708,504 28,700,247 ------------ ------------ ------------- Expenses: Investment advisory fee ......................... 2,497,837 4,533,788 -- Administration fee .............................. 369,929 148,991 1,040,747 Administration fee - class specific ............. 658,948 100,077 1,982,888 Custodian fee ................................... 249,418 305,880 8,583 Transfer agent fee .............................. 733,538 1,268,250 434,170 Transfer agent fee - class specific ............. 81,827 12,455 247,026 Shareholder servicing fees - class specific ..... 1,091,456 1,417,703 1,812,585 Distribution fees - class specific .............. 1,372,280 1,558,927 3,465,271 Legal and audit fees ............................ 127,840 14,726 190,882 Printing fees ................................... 184,490 90,516 303,972 Registration fees and expenses .................. 49,734 70,094 74,936 Trustees' fees .................................. 15,556 25,940 44,851 Other ........................................... 55,608 49,780 68,512 ------------ ------------ ------------- Total expenses ................................ 7,488,461 9,597,127 9,674,423 ------------ ------------ ------------- Less investment advisory waived .............. (373,779) (3,438) (602,393) Less administration fees waived - class specific .................................... (26,306) (3,735) (820,119) Less distribution fees waived - class specific .................................... (291,627) (45,002) (310,324) Less custodian fees waived ................... (20,434) -- (321) Less transfer agent fees waived .............. (66,077) -- (33,580) Less expenses reimbursed by advisor........... -- -- -- Reimbursement of distribution fees (Note D) .................................... -- (294,508) -- ------------ ------------ ------------- Net expenses .................................. 6,710,238 9,250,444 7,907,686 ------------ ------------ ------------- Net investment income (loss) .................... 5,815,784 8,458,060 20,792,561 ------------ ------------ ------------- Realized and unrealized gain (loss) on investments and foreign currency transactions: Net increase from payment by affiliate (Note D) ....................................... -- 90,574 -- Net realized gain (loss) from: Investment transactions ........................ 29,954,563 24,909,337 -- Futures and options contracts .................. 406,290 4,478,555 -- Swap and swaption contracts .................... (110,297) -- -- Foreign currency related transactions .......... (286,994) 3,502,916 -- Master (See Note A) ............................ -- -- (3,338,645) ------------ ------------ ------------- 29,963,562 32,981,382 (3,338,645) ------------ ------------ ------------- Change in unrealized appreciation (depreciation) from: Investments .................................... (4,872,828) 10,705,967 -- Futures and options contracts .................. 225,878 (1,810,201) -- Swap and swaption contracts .................... 4,726 -- -- Foreign currency related transactions .......... (1,649) (1,406,191) -- Master (See Note A) ............................ -- -- 135,530,934 ------------ ------------ ------------- (4,643,873) 7,489,575 135,530,934 ------------ ------------ ------------- Net gain on investments and foreign currency transactions .................................... 25,319,689 40,470,957 132,192,289 ------------ ------------ ------------- Net increase in net assets resulting from operations ...................................... $ 31,135,473 $ 48,929,017 $ 152,984,850 ============ ============ ============= 137
Blackrock Funds STATEMENTS OF CHANGES IN NET ASSETS Investment Trust Portfolio ------------------------------------ For the For the Year Ended Year Ended 9/30/05 9/30/04 ------------------- ---------------- Increase (decrease) in net assets: Operations: Net investment income (loss) .................................... $ 6,946,435 $ 464,290 Net increase from payment by affiliate (Note D) ................. -- -- Net realized gain (loss) on investments, futures, options and foreign currency related transactions .......................... 161,332,624 15,696,575 Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions .......................... 243,745,996 591,617 --------------- ------------- Net increase (decrease) in net assets resulting from operations 412,025,055 16,752,482 --------------- ------------- Distributions to shareholders from: Net investment income: Institutional Class ............................................. (399,790) (709,723) Service Class ................................................... (8,995) (17,360) Investor A Class ................................................ (55,462) (136,214) Investor B Class ................................................ -- (30,018) Investor C Class ................................................ -- (379) --------------- ------------- Total distributions from net investment income .................. (464,247) (893,694) --------------- ------------- Net realized gains: Institutional Class ............................................. -- -- Service Class ................................................... -- -- Investor A Class ................................................ -- -- Investor B Class ................................................ -- -- Investor C Class ................................................ -- -- --------------- ------------- Total distributions from net realized gains ..................... -- -- --------------- ------------- Total distributions to shareholders ............................. (464,247) (893,694) --------------- ------------- Capital share transactions ........................................ 839,029,123 (27,355,965) --------------- ------------- Redemption fees ................................................... 25,621 4,192 --------------- ------------- Total increase (decrease) in net assets ......................... 1,250,615,552 (11,492,985) Net assets: Beginning of period ............................................. 93,800,258 105,293,243 --------------- ------------- End of period ................................................... $ 1,344,415,810 $ 93,800,258 =============== ============= End of period undistributed net investment income (accumulated net investment loss) ........................................... $ 6,946,198 $ 464,010 Large Cap Value Equity Portfolio ----------------------------------- For the For the Year Ended Year Ended 9/30/05 9/30/04 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) .................................... $ 4,185,216 $ 3,325,937 Net increase from payment by affiliate (Note D) ................. -- -- Net realized gain (loss) on investments, futures, options and foreign currency related transactions .......................... 47,053,845 42,318,711 Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions .......................... 21,725,033 6,506,748 ------------- -------------- Net increase (decrease) in net assets resulting from operations 72,964,094 52,151,396 ------------- -------------- Distributions to shareholders from: Net investment income: Institutional Class ............................................. (2,034,319) (1,933,922) Service Class ................................................... (344,743) (624,913) Investor A Class ................................................ (1,525,700) (688,191) Investor B Class ................................................ (178,881) (61,593) Investor C Class ................................................ (54,665) (22,492) ------------- -------------- Total distributions from net investment income .................. (4,138,308) (3,331,111) ------------- -------------- Net realized gains: Institutional Class ............................................. -- -- Service Class ................................................... -- -- Investor A Class ................................................ -- -- Investor B Class ................................................ -- -- Investor C Class ................................................ -- -- ------------- -------------- Total distributions from net realized gains ..................... -- -- ------------- -------------- Total distributions to shareholders ............................. (4,138,308) (3,331,111) ------------- -------------- Capital share transactions ........................................ 52,250,770 (108,979,335) ------------- -------------- Redemption fees ................................................... 19,462 14,983 ------------- -------------- Total increase (decrease) in net assets ......................... 121,096,018 (60,144,067) Net assets: Beginning of period ............................................. 240,046,654 300,190,721 ------------- -------------- End of period ................................................... $ 361,142,672 $ 240,046,654 ============= ============== End of period undistributed net investment income (accumulated net investment loss) ........................................... $ 88,982 $ 42,074 See accompanying notes to financial statements. 138
Blackrock Funds Dividend Large Cap Achievers(TM) Legacy Growth Equity Portfolio Portfolio Portfolio - ------------------------------- ---------------------------------- ----------------------------------------------------- For the For the For the For the For the For the For the Year Ended Year Ended Year Ended Period 9/08/04 1 Period 11/01/04 Year Ended Year Ended 9/30/05 9/30/04 9/30/05 Through 9/30/04 Through 9/30/05 10/31/04 10/31/03 - --------------- --------------- ---------------- ----------------- ----------------- ----------------- ----------------- $ 274,749 $ (207,097) $ 323,629 $ 1,692 $ (98,020) $ (2,689,754) $ (1,952,085) -- -- -- -- 294,363 15,707 -- 15,328,087 26,413,485 (338,319) (3,038) 10,863,747 49,361,911 (16,699,994) (6,631,274) (14,892,253) 1,164,972 (7,180) 19,015,361 (32,508,263) 80,572,206 ------------- ------------- ------------ ----------- ------------- ------------- ------------- 8,971,562 11,314,135 1,150,282 (8,526) 30,075,451 14,179,601 61,920,127 ------------- ------------- ------------ ----------- ------------- ------------- ------------- -- -- (82,607) -- -- -- -- -- (4,273) -- -- -- -- -- -- (154,885) -- -- -- -- -- -- (19,034) -- -- -- -- -- -- (62,561) -- -- -- -- ------------- ------------- ------------ ----------- ------------- ------------- ------------- -- -- (323,360) -- -- -- -- ------------- ------------- ------------ ----------- ------------- ------------- ------------- -- -- (4,624) -- -- -- -- -- -- (100) -- -- -- -- -- -- (5,999) -- -- -- -- -- -- (348) -- -- -- -- -- -- (2,127) -- -- -- -- ------------- ------------- ------------ ----------- ------------- ------------- ------------- -- -- (13,198) -- -- -- -- ------------- ------------- ------------ ----------- ------------- ------------- ------------- -- -- (336,558) -- -- -- -- ------------- ------------- ------------ ----------- ------------- ------------- ------------- (48,061,594) (41,160,092) 30,277,478 2,000,500 (60,152,321) (55,470,941) 46,837,642 ------------- ------------- ------------ ----------- ------------- ------------- ------------- 6,781 2,387 15,280 -- 5,452 -- -- ------------- ------------- ------------ ----------- ------------- ------------- ------------- (39,083,251) (29,843,570) 31,106,482 1,991,974 (30,071,418) (41,291,340) 108,757,769 95,142,653 124,986,223 1,991,974 -- 308,631,314 349,922,654 241,164,885 ------------- ------------- ------------ ----------- ------------- ------------- ------------- $ 56,059,402 $ 95,142,653 $ 33,098,456 $ 1,991,974 $ 278,559,896 $ 308,631,314 349,922,654 ============= ============= ============ =========== ============= ============= ============= $ 274,749 $ -- $ 1,961 $ 1,692 $ -- $ -- $ -- 139
Blackrock Funds STATEMENTS OF CHANGES IN NET ASSETS (Continued) Mid-Cap Value Equity Portfolio ---------------------------------------------------- For The For The Period Ended For The Period Year Ended 3/1/05-9/30/05 7/1/04-2/28/05 6/30/04 ---------------- ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................................... $ 141,476 $ 3,237,587 $ 2,069,311 Net increase from payment by affiliate (Note D) ........................ -- 554,230 40,116 Net realized gain (loss) on investments, futures, options and foreign currency related transactions ................................. 52,648,354 55,516,938 95,045,065 Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions ................................. 1,969,402 25,454,000 48,344,054 ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations ........ 54,759,232 84,762,755 145,498,546 ------------- ------------- ------------- Distributions to shareholders from: Net investment income: Institutional Class .................................................... -- (383,894) (242,767) Service Class .......................................................... -- -- (1,614,937) Investor A Class ....................................................... -- (4,857,110) -- Investor B Class ....................................................... -- (80,308) -- Investor C Class ....................................................... -- (80,956) -- ------------- ------------- ------------- Total distributions from net investment income ......................... -- (5,402,268) (1,857,704) ------------- ------------- ------------- Net realized gains: BlackRock Class ........................................................ -- -- -- Institutional Class .................................................... -- (2,033,124) -- Service Class .......................................................... -- -- -- Investor A Class ....................................................... -- (29,684,283) -- Investor B Class ....................................................... -- (7,665,103) -- Investor C Class ....................................................... -- (6,254,749) -- ------------- ------------- ------------- Total distributions from net realized gains ............................ -- (45,637,259) -- ------------- ------------- ------------- Total distributions to shareholders .................................... -- (51,039,527) (1,857,704) ------------- ------------- ------------- Capital share transactions ............................................... 14,437,796 45,632,219 84,026,827 ------------- ------------- ------------- Redemption fees .......................................................... 58,561 610 -- ------------- ------------- ------------- Total increase (decrease) in net assets ................................ 69,255,589 79,356,057 227,667,669 Net assets: Beginning of period .................................................... 720,218,614 640,862,557 413,194,888 ------------- ------------- ------------- End of period .......................................................... $ 789,474,203 $ 720,218,614 $ 640,862,557 ============= ============= ============= End of period undistributed net investment income (accumulated net investment loss) .................................................. $ 201,780 $ (163,219) $ 2,001,462 Mid-Cap Growth Equity Portfolio ----------------------------------- For The For the Year Ended Year Ended 9/30/05 9/30/04 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................................... $ (4,142,073) $ (1,638,806) Net increase from payment by affiliate (Note D) ........................ -- -- Net realized gain (loss) on investments, futures, options and foreign currency related transactions ................................. 50,869,792 15,836,766 Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions ................................. 66,962,559 5,337,808 ------------- ------------- Net increase (decrease) in net assets resulting from operations ........ 113,690,278 19,535,768 ------------- ------------- Distributions to shareholders from: Net investment income: Institutional Class .................................................... -- -- Service Class .......................................................... -- -- Investor A Class ....................................................... -- -- Investor B Class ....................................................... -- -- Investor C Class ....................................................... -- -- ------------- ------------- Total distributions from net investment income ......................... -- -- ------------- ------------- Net realized gains: BlackRock Class ........................................................ -- -- Institutional Class .................................................... -- -- Service Class .......................................................... -- -- Investor A Class ....................................................... -- -- Investor B Class ....................................................... -- -- Investor C Class ....................................................... -- -- ------------- ------------- Total distributions from net realized gains ............................ -- -- ------------- ------------- Total distributions to shareholders .................................... -- -- ------------- ------------- Capital share transactions ............................................... 210,823,335 (30,635,659) ------------- ------------- Redemption fees .......................................................... 7,782 14,939 ------------- ------------- Total increase (decrease) in net assets ................................ 324,521,395 (11,084,952) Net assets: Beginning of period .................................................... 122,153,862 133,238,814 ------------- ------------- End of period .......................................................... $ 446,675,257 $ 122,153,862 ============= ============= End of period undistributed net investment income (accumulated net investment loss) .................................................. $ -- $ -- See accompanying notes to financial statements. 140
Blackrock funds Small/Mid-Cap Aurora Growth Portfolio Portfolio ------------------------------------ ----------------------------------- For the For the For the For the Year Ended Year Ended Year Ended Year Ended 9/30/05 9/30/04 9/30/05 9/30/04 ----------------- ------------------ ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ...................... $ (17,597,476) $ (24,381,485) $ (3,240,011) $ (3,915,660) Net increase from payment by affiliate (Note D) ............................... 203,165 426,457 - 200,956 Net realized gain (loss) on investments, futures, options and foreign currency related transactions ............................. 469,614,985 376,473,622 43,816,536 (16,219,909) Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions ............................. 30,943,367 274,337,207 25,247,218 (10,056,987) --------------- --------------- -------------- ------------- Net increase (decrease) in net assets resulting from operations ........................ 483,164,041 626,855,801 65,823,743 (29,991,600) --------------- --------------- -------------- ------------- Distributions to shareholders from: Net investment income: Institutional Class ............................... -- -- -- -- Service Class ..................................... -- -- -- -- Investor A Class .................................. -- -- -- -- Investor B Class .................................. -- -- -- -- Investor C Class .................................. -- -- -- -- --------------- --------------- -------------- ------------- Total distributions from net investment income ................................ -- -- -- -- --------------- --------------- -------------- ------------- Net realized gains: BlackRock Class ................................... -- -- -- -- Institutional Class ............................... (16,052,024) (83,129) -- -- Service Class ..................................... -- -- -- -- Investor A Class .................................. (223,189,239) (1,074,654) -- -- Investor B Class .................................. (47,894,772) (240,069) -- -- Investor C Class .................................. (50,120,639) (244,717) -- -- --------------- --------------- -------------- ------------- Total distributions from net realized gains ....... (337,256,674) (1,642,569) -- -- --------------- --------------- -------------- ------------- Total distributions to shareholders ............... (337,256,674) (1,642,569) -- -- --------------- --------------- -------------- ------------- Capital share transactions .......................... (966,776,906) 67,410,778 (217,664,309) 282,999,700 --------------- --------------- -------------- ------------- Redemption fees ..................................... 64,455 -- 17,328 -- --------------- --------------- -------------- ------------- Total increase (decrease) in net assets ........... (820,805,084) 692,624,010 (151,823,238) 253,008,100 Net assets: Beginning of period ............................... 3,519,734,336 2,827,110,326 433,466,135 180,458,035 --------------- --------------- -------------- ------------- End of period ..................................... $ 2,698,929,252 $ 3,519,734,336 $ 281,642,897 $ 433,466,135 =============== =============== ============== ============= End of period undistributed net investment income (accumulated net investment loss) ......... $ -- $ -- $ -- $ -- Small Cap Value Small Cap Core Equity Portfolio Equity Portfolio ---------------------------- ----------------------------- For the For the For the For the For the Year Ended Year Ended Year Ended Year Ended Year Ended 9/30/05 9/30/05 9/30/04 9/30/05 9/30/04 ---------------- ------------- ------------- ----------- ------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ...................... $ (17,597,476) $ 11,801 $ (639,504) $ (323,999) $ (71,169) Net increase from payment by affiliate (Note D) ............................... 203,165 -- -- - - Net realized gain (loss) on investments, futures, options and foreign currency related transactions ............................. 469,614,985 24,313,119 27,881,364 832,757 53,507 Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions ............................. 30,943,367 927,970 (1,229,217) 3,352,781 339,684 ---------------- ------------- ------------- ----------- ---------- Net increase (decrease) in net assets resulting from operations ........................ 483,164,041 25,252,890 26,012,643 3,861,539 322,022 ---------------- ------------- ------------- ----------- ---------- Distributions to shareholders from: Net investment income: Institutional Class ............................... -- -- -- -- -- Service Class ..................................... -- -- -- -- -- Investor A Class .................................. -- -- -- -- -- Investor B Class .................................. -- -- -- -- -- Investor C Class .................................. -- -- -- -- -- ---------------- ------------- ------------- ----------- ---------- Total distributions from net investment income ................................ -- -- -- -- -- ---------------- ------------- ------------- ----------- ---------- Net realized gains: BlackRock Class ................................... -- (1,130,480) -- -- -- Institutional Class ............................... (16,052,024) (12,364,497) (8,168,630) (23,123) (16,091) Service Class ..................................... -- (436,328) (494,170) (1) (1) Investor A Class .................................. (223,189,239) (6,644,284) (4,743,664) (29,098) (9,184) Investor B Class .................................. (47,894,772) (3,267,502) (2,034,282) (12,855) (2,549) Investor C Class .................................. (50,120,639) (1,382,122) (807,811) (38,775) (1,706) ---------------- ------------- ------------- ----------- ---------- Total distributions from net realized gains ....... (337,256,674) (25,225,213) (16,248,557) (103,852) (29,531) ---------------- ------------- ------------- ----------- ---------- Total distributions to shareholders ............... (337,256,674) (25,225,213) (16,248,557) (103,852) (29,531) ---------------- ------------- ------------- ----------- ---------- Capital share transactions .......................... (966,776,906) (3,500,476) (10,393,367) 35,071,402 7,908,888 ---------------- ------------- ------------- ----------- ---------- Redemption fees ..................................... 64,455 6,303 4,681 6,903 18,007 ---------------- ------------- ------------- ----------- ---------- Total increase (decrease) in net assets ........... (820,805,084) (3,466,496) (624,600) 38,835,992 8,219,386 ---------------- ------------- ------------- ----------- ---------- Beginning of period ............................... 3,519,734,336 132,065,162 132,689,762 9,464,924 1,245,538 ---------------- ------------- ------------- ----------- ---------- End of period ..................................... $ 2,698,929,252 $ 128,598,666 $ 132,065,162 $ 48,300,916 $ 9,464,924 ================ ============= ============= ============ ========== End of period undistributed net investment income (accumulated net investment loss) ......... $ -- $ 11,801 $ -- $ -- $ -- 141
BlackRock Funds STATEMENTS OF CHANGES IN NET ASSETS (Continued) Small Cap Growth Equity Portfolio ----------------------------------- For the For the Year Ended Year Ended 9/30/05 9/30/04 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................................... $ (2,948,503) $ (4,273,122) Net increase from payment by affiliate (Note D) ................ -- -- Net realized gain (loss) on investments, futures, options and foreign currency related transactions ......................... 45,796,132 58,198,019 Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions ......................... 48,085,897 2,050,695 ------------- ------------- Net increase (decrease) in net assets resulting from operations 90,933,526 55,975,592 ------------- ------------- Distributions to shareholders from: Net investment income: Institutional Class ............................................ -- -- Investor A Class ............................................... -- -- Investor B Class ............................................... -- -- Investor C Class ............................................... -- -- ------------- ------------- Total distributions from net investment income ................. -- -- ------------- ------------- Net realized gains: Institutional Class ............................................ -- -- Investor A Class ............................................... -- -- Investor B Class ............................................... -- -- Investor C Class ............................................... -- -- ------------- ------------- Total distributions from net realized gains .................... -- -- ------------- ------------- Total distributions to shareholders ............................ -- -- ------------- ------------- Capital share transactions ....................................... 10,896,279 89,115,438 ------------- ------------- Redemption fees .................................................. 181,665 41,261 ------------- ------------- Total increase (decrease) in net assets ........................ 102,011,470 145,132,291 Net assets: Beginning of period ............................................ 471,659,698 326,527,407 ------------- ------------- End of period .................................................. $ 573,671,168 $ 471,659,698 ============= ============= End of period undistributed net investment income (accumulated net investment loss) .......................................... $ -- $ -- Global Science and Technology Opportunities Portfolio ------------------------------- For the For the Year Ended Year Ended 9/30/05 9/30/04 --------------- --------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ................................... $ (396,555) $ (663,846) Net increase from payment by affiliate (Note D) ................ -- -- Net realized gain (loss) on investments, futures, options and foreign currency related transactions ......................... 1,490,284 4,229,223 Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions ......................... 3,724,645 (3,682,232) ------------ ------------ Net increase (decrease) in net assets resulting from operations 4,818,374 (116,855) ------------ ------------ Distributions to shareholders from: Net investment income: Institutional Class ............................................ -- -- Investor A Class ............................................... -- -- Investor B Class ............................................... -- -- Investor C Class ............................................... -- -- ------------ ------------ Total distributions from net investment income ................. -- -- ------------ ------------ Net realized gains: Institutional Class ............................................ -- -- Investor A Class ............................................... -- -- Investor B Class ............................................... -- -- Investor C Class ............................................... -- -- ------------ ------------ Total distributions from net realized gains .................... -- -- ------------ ------------ Total distributions to shareholders ............................ -- -- ------------ ------------ Capital share transactions ....................................... (7,543,976) (7,732,472) ------------ ------------ Redemption fees .................................................. 2,297 11,289 ------------ ------------ Total increase (decrease) in net assets ........................ (2,723,305) (7,838,038) Net assets: Beginning of period ............................................ 27,166,803 35,004,841 ------------ ------------ End of period .................................................. $ 24,443,498 $ 27,166,803 ============ ============ End of period undistributed net investment income (accumulated net investment loss) .......................................... $ -- $ -- See accompanying notes to financial statements. 142
BlackRock Funds All-Cap Global Global Health Resources Resources Sciences Portfolio Portfolio Portfolio - ------------------------------------------------------- ------------------ -------------------------------------------------- For the For the For the For the For the For the For the Period Ended Period Ended Year Ended Period Ended Period Ended Year Ended Year Ended 3/1/05-9/30/05 7/1/04-2/28/05 6/30/04 2/16/05 1-9/30/05 3/1/05-9/30/05 2/28/05 2/29/04 - ------------------- ----------------- ----------------- ------------------ ---------------- ----------------- --------------- $ (443,749) $ (3,468,242) $ 1,224,536 $ (28,043) $ (1,078,198) $ (1,374,367) $ (492,038) -- 12,780 274,458 -- -- -- -- 54,208,005 79,429,401 49,398,915 (141,037) 13,057,283 2,631,862 10,260,728 263,666,690 226,282,268 113,653,804 40,403,132 20,207,065 833,330 15,869,865 --------------- ------------- ------------- ------------- ------------- ------------- ------------ 317,430,946 302,256,207 164,551,713 40,234,052 32,186,150 2,090,825 25,638,555 --------------- ------------- ------------- ------------- ------------- ------------- ------------ -- (181,199) (239,164) -- -- -- -- -- (3,733,634) (3,857,057) -- -- -- -- -- (448,727) (681,846) -- -- -- -- -- (740,345) (992,836) -- -- -- -- --------------- ------------- ------------- ------------- ------------- ------------- ------------ -- (5,103,905) (5,770,903) -- -- -- -- --------------- ------------- ------------- ------------- ------------- ------------- ------------ -- (820,327) -- -- (2,568) (271,998) (59,350) -- (17,122,033) -- -- (41,146) (3,693,722) (1,219,588) -- (2,773,442) -- -- (15,739) (1,432,836) (617,283) -- (4,875,287) -- -- (15,894) (970,853) (195,094) --------------- ------------- ------------- ------------- ------------- ------------- ------------ -- (25,591,089) -- -- (75,347) (6,369,409) (2,091,315) --------------- ------------- ------------- ------------- ------------- ------------- ------------ -- (30,694,994) (5,770,903) -- (75,347) (6,369,409) (2,091,315) --------------- ------------- ------------- ------------- ------------- ------------- ------------ (50,140,775) 42,478,605 284,528,279 204,128,207 179,642,409 42,894,626 50,919,824 --------------- ------------- ------------- ------------- ------------- ------------- ------------ 46,530 323 -- 38,965 36,207 306 -- --------------- ------------- ------------- ------------- ------------- ------------- ------------ 267,336,701 314,040,141 443,309,089 244,401,224 211,789,419 38,616,348 74,467,064 969,799,201 655,759,060 212,449,971 -- 135,554,876 96,938,528 22,471,464 --------------- ------------- ------------- ------------- ------------- ------------- ------------ $ 1,237,135,902 $ 969,799,201 $ 655,759,060 $ 244,401,224 $ 347,344,295 $ 135,554,876 $ 96,938,528 =============== ============= ============= ============= ============= ============= ============ $ (3,567,059) $ (5,178,168) $ 3,393,979 $ -- $ -- $ -- $ -- 143
BlackRock Funds STATEMENTS OF CHANGES IN NET ASSETS (Concluded) U.S. Opportunities portfolio ------------------------------------- For the For the Year Ended Year Ended 9/30/05 9/30/04 ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................................... $ (1,397,619) $ (1,910,678) Net increase from payment by affiliate (Note D) ........................ -- -- Net realized gain (loss) on investments, futures, options and foreign currency related transactions ................................. 15,197,435 21,382,725 Net unrealized gain (loss) on investments, futures, options and foreign currency related transactions ................................. 7,564,012 1,106,908 ------------- ------------- Net increase (decrease) in net assets resulting from operations ........ 21,363,828 20,578,955 ------------- ------------- Distributions to shareholders from: Net investment income: Institutional Class .................................................... -- -- Service Class .......................................................... -- -- Investor A Class ....................................................... -- -- Investor B Class ....................................................... -- -- Investor C Class ....................................................... -- -- ------------- ------------- Total distributions from net investment income ......................... -- -- ------------- ------------- Net realized gains- BlackRock Class ........................................................ -- -- Institutional Class .................................................... -- -- Service Class .......................................................... -- -- Investor A Class ....................................................... -- -- Investor B Class ....................................................... -- -- Investor C Class ....................................................... -- -- ------------- ------------- Total distributions from net realized gains ............................ -- -- ------------- ------------- Total distributions to shareholders .................................... -- -- ------------- ------------- Capital share transactions ............................................... (26,240,680) (18,603,484) ------------- ------------- Redemption fees .......................................................... 7,627 4,220 ------------- ------------- Total increase (decrease) in net assets ................................ (4,869,225) 1,979,691 Net assets: Beginning of period .................................................... 100,914,467 98,934,776 ------------- ------------- End of period .......................................................... $ 96,045,242 $ 100,914,467 ============= ============= End of period undistributed net investment income (accumulated net investment loss) .................................................. $ -- $ -- - --------- /1/ Commencement of operations. See accompanying notes to financial statements. 144
BlackRock Funds International Asset Index Opportunities Allocation Equity Portfolio Portfolio Portfolio - ----------------------------------- ---------------------------------------------------- --------------------------------------- For the For The For The For The For The For The Year Ended Year Ended Period Ended For The Period Year Ended Year Ended Year Ended 9/30/05 9/30/04 3/1/05-9/30/05 4/1/04-2/28/05 3/31/04 9/30/05 9/30/04 - ----------------- ----------------- ---------------- ----------------- ----------------- ------------------- ------------------- $ 6,868,238 $ (549,024) $ 5,815,784 $ 8,458,060 $ 8,516,159 $ 20,792,561 $ 15,612,410 -- -- -- 90,574 -- -- -- 49,584,098 27,213,448 29,963,562 32,890,808 88,662,078 (3,338,645) 4,494,513 114,351,248 11,162,948 (4,643,873) 7,489,575 61,187,645 135,530,934 170,850,631 ------------- ------------- ------------- ------------- ------------- --------------- --------------- 170,803,584 37,827,372 31,135,473 48,929,017 158,365,882 152,984,850 190,957,554 ------------- ------------- ------------- ------------- ------------- --------------- --------------- (1,442,124) (52,346) (337,855) (549,136) (378,790) (11,360,943) (9,484,238) (249,027) (2,626) (19,977) -- -- (1,107,048) (960,810) (1,244,655) (38,301) (4,253,377) (13,021,288) (6,788,195) (5,058,819) (3,441,512) (134,589) (31,274) (633,349) (2,669,527) (865,650) (1,445,481) (616,709) (279,752) (29,065) (240,743) (1,074,297) (237,660) (2,325,818) (966,846) ------------- ------------- ------------- ------------- ------------- --------------- --------------- (3,350,147) (153,612) (5,485,301) (17,314,248) (8,270,295) (21,298,109) (15,470,115) ------------- ------------- ------------- ------------- ------------- --------------- --------------- -- -- -- -- -- -- -- -- -- -- (669,622) -- -- -- -- -- -- -- -- -- -- -- -- -- (17,005,778) -- -- -- -- -- -- (5,240,921) -- -- -- -- -- -- (2,030,016) -- -- -- ------------- ------------- ------------- ------------- ------------- --------------- --------------- -- -- -- (24,946,337) -- -- -- ------------- ------------- ------------- ------------- ------------- --------------- --------------- (3,350,147) (153,612) (5,485,301) (42,260,585) (8,270,295) (21,298,109) (15,470,115) ------------- ------------- ------------- ------------- ------------- --------------- --------------- 234,875,667 122,058,194 (66,734,439) 147,427,659 30,609,858 (197,754,594) (247,163,288) ------------- ------------- ------------- ------------- ------------- --------------- --------------- 201,642 86,362 44,269 4,202 -- 96,968 44,920 ------------- ------------- ------------- ------------- ------------- --------------- --------------- 402,530,746 159,818,316 (41,039,998) 154,100,293 180,705,445 (65,970,885) (71,630,929) 315,641,632 155,823,316 813,474,612 659,374,319 478,668,874 1,391,077,329 1,462,708,258 ------------- ------------- ------------- ------------- ------------- --------------- --------------- $ 718,172,378 $ 315,641,632 $ 772,434,614 $ 813,474,612 $ 659,374,319 $ 1,325,106,444 $ 1,391,077,329 ============= ============= ============= ============= ============= =============== =============== $ 5,137,726 $ 1,566,230 $ 1,210,069 $ (4,173,594) $ 4,682,594 $ 324,224 $ 829,772 145
BlackRock Funds FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Distributions asset foreign currency Distributions from net Net value Net and options from net Distributions realized Asset value beginning investment (both realized investment from capital end of of period income (loss) and unrealized) income capital gains period - ------------------------------------------------------------------------------------------------------------------------------------ - ---------------- Investment Trust - ---------------- Institutional Class 9/30/05 $ 11.95 $ 0.14/5/ $ 1.38 $ (0.10) $ -- $ -- $ 13.37 9/30/04 10.32 0.09/5/ 1.67 (0.13) -- -- 11.95 9/30/03 /21/ 8.50 0.10 1.83 (0.11) -- -- 10.32 9/30/02 /21/ 11.25 0.11 (2.86) -- -- -- 8.50 9/30/01 /21/ 20.77 0.06 (6.46) (0.05) (0.02) (3.05) 11.25 Service Class 9/30/05 $ 11.97 $ 0.13/5/ $ 1.35 $ (0.06) $ -- $ -- $ 13.39 9/30/04 10.33 0.065 1.67 (0.09) -- -- 11.97 9/30/03 /21/ 8.44 0.10 1.79 -- -- -- 10.33 9/30/02 /21/ 11.21 0.01 (2.78) -- -- -- 8.44 9/30/01 /21/ 20.73 0.01 (6.43) (0.03) (0.02) (3.05) 11.21 Investor A Class 9/30/05 $ 11.79 $ 0.09/5/ $ 1.70 $ (0.38) $ -- $ -- $ 13.20 9/30/04 10.18 0.04/5/ 1.64 (0.07) -- -- 11.79 9/30/03 /21/ 8.41 0.06 1.79 (0.08) -- -- 10.18 9/30/02 /21/ 11.17 (0.01) (2.75) -- -- -- 8.41 9/30/01 /21/ 20.69 (0.02) (6.42) (0.01) (0.02) (3.05) 11.17 Investor B Class 9/30/05 $ 11.30 $ --/5/ $ 1.29 $ -- $ -- $ -- $ 12.59 9/30/04 9.78 (0.04)/5/ 1.57 (0.01) -- -- 11.30 9/30/03 /21/ 8.06 (0.02) 1.74 -- -- -- 9.78 9/30/02 /21/ 10.79 (0.10) (2.63) -- -- -- 8.06 9/30/01 /21/ 20.21 (0.13) (6.22) -- (0.02) (3.05) 10.79 Investor C Class 9/30/05 $ 11.31 $ --/5/ $ 1.30 $ -- $ -- $ -- $ 12.61 9/30/04 9.77 (0.04)/5/ 1.58 -- -- -- 11.31 9/30/03 /21/ 8.06 (0.02)/5/ 1.73 -- -- -- 9.77 9/30/02 /21/ 10.79 (0.11) (2.62) -- -- -- 8.06 9/30/01 /21/ 20.20 (0.15) (6.19) (0.02) -- (3.05) 10.79 - ---------------------- Large Cap Value Equity - ---------------------- Institutional Class 9/30/05 $ 12.70 $ 0.23/5/ $ 1.89 $ (0.23) $ -- $ -- $ 14.59 9/30/04 10.77 0.18/5/ 1.93 (0.18) -- -- 12.70 9/30/03 /21/ 8.82 0.16 1.94 (0.15) -- -- 10.77 9/30/02 /21/ 12.60 0.10 (3.42) (0.09) -- (0.37) 8.82 9/30/01 /21/ 15.13 0.14 (1.28) (0.14) -- (1.25) 12.60 Service Class 9/30/05 $ 12.73 $ 0.19/5/ $ 1.88 $ (0.17) $ -- $ -- $ 14.63 9/30/04 10.79 0.14/5/ 1.94 (0.14) -- -- 12.73 9/30/03 /21/ 8.83 0.12 1.96 (0.12) -- -- 10.79 9/30/02 /21/ 12.61 0.06 (3.42) (0.05) -- (0.37) 8.83 9/30/01 /21/ 15.13 0.10 (1.27) (0.10) -- (1.25) 12.61 See accompanying notes to financial statements. 146
BlackRock Funds Ratio of Net Investment Ratio of Total Income to Ratio of Net Expense to Ratio of Net Average Net Net Assets Expenses to Average Net Investment Income Assets Portfolio Total End of Period Average Net Assets (Excluding to Average (Excluding Turnover Return (000) Assets Waivers) Net Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - ---------------- Investment Trust - ---------------- Institutional Class 9/30/05 12.72%/10/ $ 523,607 0.81% 1.09% 1.09% 0.81% 105% 9/30/04 17.11 51,593 0.81 0.99 0.81 0.63 72 9/30/03 /21/ 22.80 60,886 0.81 0.96 0.93 0.79 98 9/30/02 /21/ (24.44) 134,859 0.81 0.87 0.36 0.30 124 9/30/01 /21/ (35.29) 755,701 0.81 0.82 0.38 0.37 114 Service Class 9/30/05 12.41%/10/ $ 1,566 1.11% 1.32% 1.02% 0.81% 105% 9/30/04 16.83 1,714 1.07 1.23 0.56 0.40 72 9/30/03 /21/ 22.39 1,988 1.11 1.26 0.64 0.49 98 9/30/02 /21/ (24.71) 3,797 1.11 1.16 0.06 0.02 124 9/30/01 /21/ (35.49) 143,283 1.11 1.12 0.07 0.06 114 Investor A Class 9/30/05 12.30%/3/,/10/ $ 552,118 1.16% 1.43% 0.71% 0.44% 105% 9/30/04 16.60/3/ 17,632 1.26 1.47 0.37 0.16 72 9/30/03 /21/ 22.09/3/ 19,408 1.28 1.43 0.45 0.30 98 9/30/02 /21/ (24.71)/3/ 24,816 1.28 1.36 (0.04) (0.11) 124 9/30/01 /21/ (35.65)/3/ 37,267 1.28 1.30 (0.09) (0.10) 114 Investor B Class 9/30/05 11.42%/4/,/10 $ 243,232 1.91% 2.08% (0.02)% (0.19)% 105% 9/30/04 15.70/4/ 20,448 2.01 2.13 (0.39) (0.50) 72 9/30/03 /21/ 21.34/4/ 21,182 2.03 2.18 (0.30) (0.45) 98 9/30/02 /21/ (25.30)/4/ 22,119 2.03 2.11 (0.78) (0.86) 124 9/30/01 /21/ (36.11)/4/ 40,403 2.03 2.05 (0.84) (0.85) 114 Investor C Class 9/30/05 11.49%/4/,/10/ $ 23,893 1.91% 2.07% (0.01)% (0.17)% 105% 9/30/04 15.78/4/,/10/ 2,413 2.03 2.14 (0.39) (0.50) 72 9/30/03 /21/ 21.22/4/ 1,829 2.03 2.18 (0.25) (0.40) 98 9/30/02 /21/ (25.30)/4/ 1,923 2.03 2.11 (0.80) (0.87) 124 9/30/01 /21/ (36.07)/4/ 3,955 2.03 2.04 (0.09) (0.09) 114 - ---------------------- Large Cap Value Equity - ---------------------- Institutional Class 9/30/05 16.79%/10/ $ 128,501 0.79% 0.99% 1.66% 1.46% 93% 9/30/04 19.67/10/ 114,374 0.79 0.91 1.45 1.33 75 9/30/03 /21/ 23.93 151,602 0.79 0.91 1.27 1.15 150 9/30/02 /21/ (27.41) 369,792 0.79 0.84 0.72 0.68 128 9/30/01 /21/ (8.22) 1,345,903 0.79 0.80 1.00 0.99 114 Service Class 9/30/05 16.36%/10/ $ 24,542 1.09% 1.23% 1.37% 1.23% 93% 9/30/04 19.35/10/ 46,353 1.09 1.22 1.15 1.03 75 9/30/03 /21/ 23.60 62,080 1.09 1.21 0.98 0.87 150 9/30/02 /21/ (27.66) 133,903 1.09 1.15 0.45 0.40 128 9/30/01 /21/ (8.44) 254,166 1.09 1.10 0.69 0.69 114 147
BlackRock Funds FINANCIAL HIGHLIGHTS (Concluded) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Distributions asset foreign currency Distributions from net Net value Net and options From net realized Asset value beginning investment (both realized investment capital end of of period income (loss) and unrealized) income gains period - ------------------------------------------------------------------------------------------------------------------ - ---------------------- Large Cap Value Equity (Continued) - ---------------------- Invester A Class 9/30/05 $ 12.71 $ 0.17/5/ $ 1.89 $ (0.18) $ -- $ 14.59 9/30/04 10.78 0.13/5/ 1.93 (0.13) -- 12.71 9/30/03 /21/ 8.83 0.09 1.96 (0.10) -- 10.78 9/30/02 /21/ 12.59 0.02 (3.39) (0.02) (0.37) 8.83 9/30/01 /21/ 15.11 0.07 (1.27) (0.07) (1.25) 12.59 Investor B Class 9/30/05 $ 12.48 $ 0.07/5/ $ 1.85 $ (0.08) $ -- $ 14.32 9/30/04 10.58 0.03/5/ 1.91 (0.04) -- 12.48 9/30/03 /21/ 8.66 0.01 1.93 (0.02) -- 10.58 9/30/02 /21/ 12.43 (0.07) (3.33) -- (0.37) 8.66 9/30/01 /21/ 14.97 (0.03) (1.26) -- (1.25) 12.43 Investor C Class 9/30/05 $ 12.48 $ 0.07/5/ $ 1.86 $ (0.08) $ -- $ 14.33 9/30/04 10.59 0.03/5/ 1.90 (0.04) -- 12.48 9/30/03 /21/ 8.67 0.01 1.93 (0.02) -- 10.59 9/30/02 /21/ 12.44 (0.07) (3.33) -- (0.37) 8.67 9/30/01 /21/ 14.97 (0.03) (1.25) -- (1.25) 12.44 - ----------------------- Large Cap Growth Equity - ----------------------- Institutional Class 9/30/05 $ 8.92 $ 0.07/5/ 1.10 $ -- $ -- $ 10.09 9/30/04 8.18 0.02/5/ 0.72 -- -- 8.92 9/30/03 /21/ 6.71 0.03 1.44 -- -- 8.18 9/30/02 /21/ 9.10 (0.01) (2.38) -- -- 6.71 9/30/01 /21/ 23.72 (0.02) (11.82) -- (2.78) 9.10 Service Class 9/30/05 $ 8.72 $ 0.05/5/ $ 1.07 $ -- $ -- $ 9.84 9/30/04 8.03 (0.01)/5/ 0.70 -- -- 8.72 9/30/03 /21/ 6.60 (0.01) 1.44 -- -- 8.03 9/30/02 /21/ 8.99 (0.02) (2.37) -- -- 6.60 9/30/01 /21/ 23.52 (0.05) (11.70) -- (2.78) 8.99 Investor A Class 9/30/05 $ 8.60 $ 0.04/5/ $ 1.04 $ -- $ -- $ 9.68 9/30/04 7.92 (0.02)/5/ 0.70 -- -- 8.60 9/30/03 /21/ 6.53 (0.02) 1.41 -- -- 7.92 9/30/02 /21/ 8.90 (0.05) (2.32) -- -- 6.53 9/30/01 /21/ 23.36 (0.09) (11.59) -- (2.78) 8.90 Investor B Class 9/30/05 $ 7.92 $ (0.03)/5/ $ 0.97 $ -- $ -- $ 8.86 9/30/04 7.35 (0.08)/5/ 0.65 -- -- 7.92 9/30/03 /21/ 6.11 (0.07) 1.31 -- -- 7.35 9/30/02 /21/ 8.39 (0.12) (2.16) -- -- 6.11 9/30/01 /21/ 22.34 (0.19) (10.98) -- (2.78) 8.39 Investor C Class 9/30/05 $ 7.91 $ (0.03)/5/ $ 0.96 $ -- $ -- $ 8.84 9/30/04 7.34 (0.08)/5/ 0.65 -- -- 7.91 9/30/03 /21/ 6.10 (0.07) 1.31 -- -- 7.34 9/30/02 /21/ 8.37 (0.13) (2.14) -- -- 6.10 9/30/01 /21/ 22.31 (0.19) (10.97) -- (2.78) 8.37 See accompanying notes to financial statements. 148
BlackRock Funds Ratio of Net Investment Ratio of Total Income to Ratio of Net Expense to Ratio of Net Average Net Net Assets Expenses to Average Net Investment Income Assets Portfolio Total End of Period Average Net Assets (Excluding to Average (Excluding Turnover Return (000) Assets Waivers) Net Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - ---------------------- Large Cap Value Equity (Continued) - ---------------------- Invester A Class 9/30/05 16.27%/3/,/10/ $ 154,337 1.18% 1.35% 1.25% 1.08% 93% 9/30/04 19.19/3/,/10/ 54,311 1.19 1.36 1.05 0.88 75 9/30/03 /21/ 23.32/3/ 63,733 1.26 1.38 0.83 0.71 150 9/30/02 /21/ (27.70)/3/ 76,044 1.27 1.32 0.22 0.17 128 9/30/01 /21/ (8.64)/3/ 57,672 1.27 1.27 0.53 0.52 114 Investor B Class 9/30/05 15.38%/4/,/10/ $ 43,219 1.96% 2.02% 0.48% 0.42% 93% 9/30/04 18.34/4/,/10/ 18,203 1.99 2.08 0.25 0.16 75 9/30/03 /21/ 22.42/4/ 17,634 2.01 2.13 0.09 (0.03) 150 9/30/02 /21/ (28.32)/4/ 17,312 2.01 2.07 (0.51) (0.56) 128 9/30/01 /21/ (9.36)/4/ 29,178 2.01 2.02 (0.23) (0.24) 114 Investor C Class 9/30/05 15.46%/4/,/10/ $ 10,543 1.93% 1.99% 0.51% 0.45% 93% 9/30/04 18.27/4/,/10/ 6,805 1.99 2.05 0.26 0.20 75 9/30/03 /21/ 22.40/4/ 5,141 2.01 2.13 0.09 (0.03) 150 9/30/02 /21/ (28.29)/4/ 5,868 2.01 2.06 (0.50) (0.55) 128 9/30/01 /21/ (9.29)/4/ 9,738 2.01 2.02 (0.24) (0.25) 114 - ----------------------- Large Cap Growth Equity - ----------------------- Institutional Class 9/30/05 13.12%/10/ $ 21,841 0.82% 1.15% 0.77% 0.44% 63% 9/30/04 9.05/10/ 27,725 0.82 1.01 0.20 0.01 70 9/30/03 /21/ 21.91/10/ 36,686 0.82 0.93 0.19 0.08 90 9/30/02 /21/ (26.26) 100,521 0.82 0.87 (0.05) (0.09) 130 9/30/01 /21/ (55.58) 557,928 0.82 0.83 (0.11) (0.12) 164 Service Class 9/30/05 12.84%/10/ $ 5,972 1.12% 1.40% 0.55% 0.27% 63% 9/30/04 8.59/10/ 33,182 1.12 1.30 (0.10) (0.27) 70 9/30/03 /21/ 21.67/10/ 43,625 1.12 1.22 (0.11) (0.22) 90 9/30/02 /21/ (26.59) 130,932 1.12 1.17 (0.30) (0.34) 130 9/30/01 /21/ (55.68) 158,367 1.12 1.13 (0.41) (0.42) 164 Investor A Class 9/30/05 12.56%/3/,/10/ $ 16,002 1.22% 1.50% 0.38% 0.10% 63% 9/30/04 8.59/3/,/10/ 18,985 1.27 1.50 (0.26) (0.49) 70 9/30/03 /21/ 21.29/3/,/10/ 27,739 1.29 1.40 (0.27) (0.38) 90 9/30/02 /21/ (26.63)/3/ 34,513 1.29 1.34 (0.48) (0.52) 130 9/30/01 /21/ (55.78)/3/ 35,609 1.29 1.30 (0.59) (0.60) 164 Investor B Class 9/30/05 11.87%/4/,/10/ $ 10,008 1.97% 2.15% (0.37)% (0.55)% 63% 9/30/04 7.76/4/,/10/ 12,693 2.03 2.16 (1.01) (1.14) 70 9/30/03 /21/ 20.30/4/,/10/ 14,358 2.04 2.15 (1.01) (1.12) 90 9/30/02 /21/ (27.18)/4/ 14,332 2.04 2.09 (1.23) (1.28) 130 9/30/01 /21/ (56.08)/4/ 25,986 2.04 2.05 (1.33) (1.34) 164 Investor C Class 9/30/05 11.76%/4/,/10/ $ 2,236 1.97% 2.15% (0.40)% (0.58)% 63% 9/30/04 7.77/4/,/10/ 2,558 2.03 2.18 (1.01) (1.16) 70 9/30/03 /21/ 20.33/4/,/10/ 2,579 2.04 2.15 (1.01) (1.12) 90 9/30/02 /21/ (27.12)/4/ 2,424 2.04 2.09 (1.23) (1.28) 130 9/30/01 /21/ (56.11)/4/ 4,711 2.04 2.05 (1.33) (1.34) 164 149
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, asset foreign currency value Net and options beginning investment (both realized of period income (loss) and unrealized) - -------------------------------------------------------------------------------- - ---------------------- Dividend Achievers(TM) - ---------------------- Institutional Class 9/30/05 $ 9.96 $ 0.22/5/ $ 0.71 9/08/04 /1/ through 9/30/04 10.00 0.01/5/ (0.05) Service Class 9/30/05 $ 9.95 $ 0.18/5/ $ 0.75 9/08/04 /1/ through 9/30/0 10.00 --/5/ (0.05) Investor A Class 9/30/05 $ 9.96 $ 0.17/5/ $ 0.77 9/08/04 /1/ through 9/30/04 10.00 0.01/5/ (0.05) Investor B Class 9/30/05 $ 9.96 $ 0.09/5/ $ 0.79 9/08/04 /1/ through 9/30/04 10.00 0.01/5/ (0.05) Investor C Class 9/30/05 $ 9.96 $ 0.10/5/ $ 0.77 9/08/04 /1/ through 9/30/04 10.00 0.01/5/ (0.05) - ------ Legacy - ------ Institutional Class 11/01/04 through 9/30/05 $ 12.78 $ 0.05/5/ $ 1.36 10/31/04 12.17 (0.04) 0.65 10/31/03 10.14 (0.02) 2.05 10/31/02 /21/ 11.74 -- (1.60) 10/31/01 /21/ 16.61 (0.01) (4.86) Service Class 1/28/051 through 9/30/05 $ 12.96 $ (0.05)/5/ $ 0.90 Investor A Class 11/01/04 through 9/30/05 $ 12.47 $ 0.02/5/ $ 1.33 10/31/04 11.91 (0.08) 0.64 10/31/03 9.96 (0.05) 2.00 10/31/02 /21/ 11.56 (0.03) (1.57) 10/31/01 /21/ 16.39 (0.05) (4.78) Investor B Class 11/01/04 through 9/30/05 $ 11.86 $ (0.06)/5/ $ 1.26 10/31/04 11.41 (0.15) 0.60 10/31/03 9.61 (0.12) 1.91 10/31/02 /21/ 11.23 (0.11) (1.51) 10/31/01 /21/ 16.05 (0.15) (4.67) Investor C Class 11/01/04 through 9/30/05 $ 11.86 $ (0.06)/5/ $ 1.26 10/31/04 11.41 (0.15) 0.60 10/31/03 9.61 (0.11) 1.91 10/31/02 /21/ 11.23 (0.11) (1.51) 10/31/01 /21/ 16.05 (0.15) (4.67) Distributions from net Redemption Net Distributions realized Fees Added Asset value from net investment capital To Paid-In end of income gains Capital period - ------------------------------------------------------------------------------------------- - ---------------------- Dividend Achievers(TM) - ---------------------- Institutional Class 9/30/05 $ (0.14) $ (0.01) $ 0.01 $ 10.75 9/08/04 /1/ through 9/30/04 -- -- -- 9.96 Service Class 9/30/05 $ (0.15) $ (0.01) $ 0.01 $ 10.72 9/08/04 /1/ through 9/30/04 -- -- -- 9.95 Investor A Class 9/30/05 $ (0.14) $ (0.01) $ 0.01 $ 10.75 9/08/04 /1/ through 9/30/04 -- -- -- 9.96 Investor B Class 9/30/05 $ (0.09) $ (0.01) $ 0.01 $ 10.74 9/08/04 /1/ through 9/30/04 -- -- -- 9.96 Investor C Class 9/30/05 $ (0.09) $ (0.01) $ 0.01 $ 10.73 9/08/04 /1/ through 9/30/04 -- -- -- 9.96 - ------ Legacy - ------ Institutional Class 11/01/04 through 9/30/05 $ -- $ -- $ -- $ 14.19 10/31/04 -- -- -- 12.78 10/31/03 -- -- -- 12.17 10/31/02 /21/ -- -- -- 10.14 10/31/01 /21/ -- -- -- 11.74 Service Class 1/28/05 /1/ through 9/30/05 $ -- $ -- $ -- $ 13.81 Investor A Class 11/01/04 through 9/30/05 $ -- $ -- $ -- $ 13.82 10/31/04 -- -- -- 12.47 10/31/03 -- -- -- 11.91 10/31/02 /21/ -- -- -- 9.96 10/31/01 /21/ -- -- -- 11.56 Investor B Class 11/01/04 through 9/30/05 $ -- $ -- $ -- $ 13.06 10/31/04 -- -- -- 11.86 10/31/03 -- -- -- 11.41 10/31/02 /21/ -- -- -- 9.61 10/31/01 /21/ -- -- -- 11.23 Investor C Class 11/01/04 through 9/30/05 $ -- $ -- $ -- $ 13.06 10/31/04 -- -- -- 11.86 10/31/03 -- -- -- 11.41 10/31/02 /21/ -- -- -- 9.61 10/31/01 /21/ -- -- -- 11.23 See accompanying notes to financial statements. 150
Blackrock funds Ratio of Net Net Assets Expenses to Total End of Period Average Net Return (000) Assets - -------------------------------------------------------------------------------- - ---------------------- Dividend Achievers(TM) - ---------------------- Institutional Class 9/30/05 9.83%/17/ $ 3,379 0.90% 9/08/04 /1/ through 9/30/04 (0.40) 1,992 0.90/2/ Service Class 9/30/05 9.43%/17/ $ 376 1.20% 9/08/04 /1/ through 9/30/04 (0.50) --/20/ 1.20/2/ Investor A Class 9/30/05 9.50%/3/,/17/ $ 14,637 1.29% 9/08/04 /1/ through 9/30/04 (0.40)/3/ --/20/ 1.30/2/ Investor B Class 9/30/05 8.87%/4/,/17/ $ 3,523 2.03% 9/08/04 /1/ through 9/30/04 (0.40)/4/ --/20/ 2.05/2/ Investor C Class 9/30/05 8.72%/4/,/17/ $ 11,183 2.02% 9/08/04 /1/ through 9/30/04 (0.40)/4/ --/20/ 2.05/2/ - ------ Legacy - ------ Institutional Class 11/01/04 through 9/30/05 11.03%/10/,/22/ $ 52,154 1.05%/2/ 10/31/04 5.01 52,399 1.14 10/31/03 20.02 60,878 1.08 10/31/02 /21/ (13.63) 41,161 1.08 10/31/01 /21/ (29.32) 5,077 1.03 Service Class 1/28/05 /1/ through 9/30/05 6.56%/10/,/22/ $ --/20/ 1.58%/2/ Investor A Class 11/01/04 through 9/30/05 10.83%/3/,/10/,/22/ $ 120,371 1.31%/2/ 10/31/04 4.70/3/ 99,435 1.44 10/31/03 19.58/3/ 103,247 1.38 10/31/02 /21/ (13.84)/3/ 76,798 1.38 10/31/01 /21/ (29.47)/3/ 103,774 1.33 Investor B Class 11/01/04 through 9/30/05 10.12%/4/,/10/,/23/ $ 85,465 2.05%/2/ 10/31/04 3.94/4/ 97,938 2.14 10/31/03 18.73/4/ 108,125 2.08 10/31/02 /21/ (14.43)/4/ 90,564 2.08 10/31/01 /21/ (29.99)/4/ 129,464 2.03 Investor C Class 11/01/04 through 9/30/05 10.12%/4/,/10/,/23/ $ 20,570 2.05%/2/ 10/31/04 3.94/4/ 23,854 2.14 10/31/03 18.73/4/ 30,516 2.08 10/31/02 /21/ (14.43)/4/ 31,274 2.08 10/31/01 /21/ (30.03)/4/ 46,809 2.03 Ratio of total ratio of net expense to ratio of net investment income average net investment income to average net portfolio assets (excluding to average net assets (excluding turnover waivers) assets waivers) rate - ------------------------------------------------------------------------------------------------------ - ---------------------- Dividend Achievers(TM) - ---------------------- Institutional Class 9/30/05 1.86% 2.03% 1.07% 68% 9/08/04 /1/ through 9/30/04 1.68/2/ 1.41/2/ 0.63/2/ 9 Service Class 9/30/05 1.81% 1.68% 1.07% 68% 9/08/04 /1/ through 9/30/04 1.98/2/ 1.11/2/ 0.33/2/ 9 Investor A Class 9/30/05 1.93% 1.64% 1.00% 68% 9/08/04 /1/ through 9/30/04 2.08/2/ 1.01/2/ 0.23/2/ 9 Investor B Class 9/30/05 2.53% 0.88% 0.38% 68% 9/08/04 /1/ through 9/30/04 2.58/2/ 0.51/2/ 0.27/2/ 9 Investor C Class 9/30/05 2.55% 0.91% 0.38% 68% 9/08/04 /1/ through 9/30/04 2.58/2/ 0.51/2/ 0.27/2/ 9 - ------ Legacy - ------ Institutional Class 11/01/04 through 9/30/05 1.15%/2/ 0.43%/2/ 0.33%/2/ 70% 10/31/04 1.14 (0.31) (0.31) 91 10/31/03 1.08 (0.19) (0.19) 113 10/31/02 /21/ 1.09 0.03 0.02 31 10/31/01 /21/ 1.05 (0.09) (0.11) 22 Service Class 1/28/05 /1/ through 9/30/05 1.83%/2/ (0.55)%/2/ (0.80)%/2/ 70% Investor A Class 1.48%/2/ 0.21%/2/ 0.04%/2/ 70% 11/01/04 through 9/30/05 1.44 (0.62) (0.62) 91 10/31/04 1.38 (0.47) (0.47) 113 10/31/03 1.39 (0.28) (0.29) 31 10/31/02 /21/ 1.35 (0.39) (0.41) 22 10/31/01 /21/ Investor B Class 11/01/04 through 9/30/05 2.15%/2/ (0.53)%/2/ (0.63)%/2/ 70% 10/31/04 2.14 (1.31) (1.31) 91 10/31/03 2.08 (1.17) (1.17) 113 10/31/02 /21/ 2.09 (0.98) (0.99) 31 10/31/01 /21/ 2.05 (1.09) (1.11) 22 Investor C Class 11/01/04 through 9/30/05 2.15%/2/ (0.51)%/2/ (0.61)%/2/ 70% 10/31/04 2.14 (1.30) (1.30) 91 10/31/03 2.08 (1.15) (1.15) 113 10/31/02 /21/ 2.09 (0.99) (1.00) 31 10/31/01 /21/ 2.05 (1.08) (1.10) 22 151
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Distributions asset foreign currency from net Net value Net and options Distributions realized Asset value beginning investment (both realized from net investment capital end of of period income (loss) and unrealized) income gains Period - ------------------------------------------------------------------------------------------------------------------------------- - --------------------- Mid-Cap Value Equity* - --------------------- Institutional Class 3/01/05 through 9/30/05 $ 12.73 $ 0.04/5/ $ 0.97 $ -- $ -- $ 13.74 7/01/04 through 2/28/05 12.14 0.11 1.44 (0.15) (0.81) 12.73 6/30/04 9.07 0.08 3.08 (0.09) -- 12.14 6/30/03 10.66 0.08 (1.21) -- (0.46) 9.07 6/30/02 /21/ 11.85 0.04 0.30 -- (1.53) 10.66 6/30/01 /21/ 8.74 0.10 3.59 (0.15) (0.43) 11.85 Service Class 3/01/05 through 9/30/05 $ 12.63 $ 0.02/5/ $ 0.96 $ -- $ -- $ 13.61 1/28/05 /1/ through 2/28/05 12.04 (0.01) 0.60 -- -- 12.63 Investor A Class 3/01/05 through 9/30/05 $ 12.53 $ 0.02/5/ $ 0.94 $ -- $ -- $ 13.49 7/01/04 through 2/28/05 11.92 0.07 1.45 (0.11) (0.80) 12.53 6/30/04 8.91 0.05 3.02 (0.06) -- 11.92 6/30/03 10.53 0.06 (1.22) -- (0.46) 8.91 6/30/02 /21/ 11.73 0.02 0.29 -- (1.51) 10.53 6/30/01 /21/ 8.66 0.06 3.56 (0.13) (0.42) 11.73 Investor B Class 3/01/05 through 9/30/05 $ 11.87 $ (0.04)/5/ $ 0.90 $ -- $ -- $ 12.73 7/01/04 through 2/28/05 11.28 (0.03) 1.41 (0.01) (0.78) 11.87 6/30/04 8.45 (0.02) 2.85 -- -- 11.28 6/30/03 10.05 (0.01) (1.15) -- (0.44) 8.45 6/30/02 /21/ 11.30 (0.06) 0.28 -- (1.47) 10.05 6/30/01 /21/ 8.36 (0.02) 3.45 (0.08) (0.41) 11.30 Investor C Class 3/01/05 through 9/30/05 $ 11.87 $ (0.04)/5/ $ 0.90 $ -- $ -- $ 12.73 7/01/04 through 2/28/05 11.28 (0.03) 1.40 (0.01) (0.77) 11.87 6/30/04 8.45 (0.02) 2.85 -- -- 11.28 6/30/03 10.04 (0.01) (1.14) -- (0.44) 8.45 6/30/02 /21/ 11.28 (0.05) 0.28 -- (1.47) 10.04 6/30/01 /21/ 8.35 (0.01) 3.42 (0.07) (0.41) 11.28 - --------------------- Mid-Cap Growth Equity - --------------------- Institutional Class 9/30/05 $ 8.76 $ (0.07)/5/ $ 1.75 $ -- $ -- $ 10.44 9/30/04 7.57 (0.06)/5/ 1.25 -- -- 8.76 9/30/03 /21/ 6.06 (0.05) 1.56 -- -- 7.57 9/30/02 /21/ 7.49 (0.06)/5/ (1.37) -- -- 6.06 9/30/01 /21/ 26.58 0.01 (11.62) -- (7.48) 7.49 Service Class 9/30/05 $ 8.46 $ (0.07)/5/ $ 1.68 $ -- $ -- $ 10.07 9/30/04 7.33 (0.08)/5/ 1.21 -- -- 8.46 9/30/03 /21/ 5.89 (0.07) 1.51 -- -- 7.33 9/30/02 /21/ 7.31 (0.11) (1.31) -- -- 5.89 9/30/01 /21/ 26.19 (0.03) (11.37) -- (7.48) 7.31 *The performance prior to January 31, 2005 set forth in this table is the financial data of the State Street Research Mid-Cap Value Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Mid-Cap Value Equity Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratios of 1.56483770, 1.57950264, 1.62345461 and 1.63087248 for Institutional, Class A, Class B and Class C shares, respectively. See accompanying notes to financial statements. 152
BlackRock Funds Ratio of Net Investment Ratio of Total Income to Net Assets Ratio of Net Expense to Ratio of Net Average Net End of Expenses to Average Net Investment Income Assets Portfolio Total Period Average Net Assets (Excluding to Average (Excluding Turnover Return (000) Assets Waivers) Net Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - --------------------- Mid-Cap Value Equity* - --------------------- Institutional Class 3/01/05 through 9/30/05 7.94%/10/ $ 53,111 1.00%/2/ 1.30%/2/ 0.49%/2/ 0.19%/2/ 60% 7/01/04 through 2/28/05 13.07 50,383 0.99/2/ 1.09/2/ 1.18/2/ 1.08/2/ 53 6/30/04 34.83 30,181 0.98 1.03 0.76 0.71 86 6/30/03 (10.21) 26,099 0.99 1.18 0.93 0.75 66 6/30/02 /21/ 3.20 35,116 0.95 1.15 0.42 0.23 69 6/30/01 /21/ 43.89 34,577 0.95 1.25 0.90 0.62 116 Service Class 3/01/05 through 9/30/05 7.76%/10/ $ 889 1.25%/2/ 1.54%/2/ 0.20%/2/ (0.09)%/2/ 60% 1/28/05 /1/ through 2/28/05 4.89 1,374 1.25/2/ 1.49/2/ 0.39/2/ 0.14/2/ 53 Investor A Class 7.66%/3/,/10/ $ 500,479 1.25%/2/ 1.64%/2/ 0.24%/2/ (0.15)%/2/ 60% 3/01/05 through 9/30/05 12.98/3/ 448,237 1.24/2/ 1.38/2/ 0.92/2/ 0.78/2/ 53 7/01/04 through 2/28/05 34.51/3/ 363,188 1.28 1.33 0.47 0.42 86 6/30/04 (10.61)/3/ 194,034 1.29 1.48 0.65 0.47 66 6/30/03 2.96/3/ 242,113 1.25 1.41 0.16 0.01 69 6/30/02 /21/ 43.49/3/ 107,448 1.25 1.55 0.59 0.31 116 6/30/01 /21/ Investor B Class 3/01/05 through 9/30/05 7.25%/4/,/10/ $ 131,651 2.00%/2/ 2.29%/2/ (0.52)%/2/ (0.81)%/2/ 60% 7/01/04 through 2/28/05 12.39/4/ 128,568 1.99/2/ 2.09/2/ 0.20/2/ 0.10/2/ 53 6/30/04 33.53/4/ 109,815 1.98 2.03 (0.24) (0.29) 86 6/30/03 (11.13)/4/ 79,536 1.99 2.18 (0.05) (0.23) 66 6/30/02 /21/ 2.20/4/ 91,416 1.95 2.10 (0.52) (0.66) 69 6/30/01 /21/ 42.51/4/ 25,957 1.95 2.25 (0.18) (0.46) 116 Investor C Class 3/01/05 through 9/30/05 7.25%/4/,/10/ $ 103,344 2.00%/2/ 2.29%/2/ (0.50)%/2/ (0.79)%/2/ 60% 7/01/04 through 2/28/05 12.40/4/ 91,657 1.99/2/ 2.09/2/ 0.19/2/ 0.09/2/ 53 6/30/04 33.53/4/ 82,758 1.98 2.03 (0.24) (0.29) 86 6/30/03 (11.09)/4/ 58,499 1.99 2.19 (0.04) (0.23) 66 6/30/02 /21/ 2.25/4/ 62,505 1.95 2.09 (0.51) (0.64) 69 6/30/01 /21/ 42.48/4/ 14,062 1.95 2.25 (0.09) (0.37) 116 - --------------------- Mid-Cap Growth Equity - --------------------- Institutional Class 9/30/05 19.18%/10/ $ 75,407 1.23% 1.41% (0.72)% (0.90)% 85% 9/30/04 15.72/10/ 40,337 1.23 1.28 (0.65) (0.69) 29 9/30/03 /21/ 24.92/10/ 46,970 1.21 1.23 (0.52) (0.54) 168 9/30/02 /21/ (19.09) 77,693 1.14 1.14 (0.76) (0.76) 279 9/30/01 /21/ (56.71) 301,779 1.13 1.13 0.06 0.06 584 Service Class 9/30/05 19.03%/10/ $ 1,136 1.53% 1.60% (0.77)% (0.84)% 85% 9/30/04 15.42/10/ 10,871 1.53 1.56 (0.97) (0.99) 29 9/30/03 /21/ 24.45/10/ 14,115 1.51 1.53 (0.80) (0.83) 168 9/30/02 /21/ (19.43) 24,082 1.45 1.45 (1.07) (1.07) 279 9/30/01 /21/ (56.78) 37,691 1.44 1.44 (0.28) (0.28) 584 153
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Distributions asset foreign currency from net Net value Net and options Distributions realized Asset value beginning investment (both realized from net investment capital end of of period income (loss) and unrealized) income gains period - ------------------------------------------------------------------------------------------------------------------------------- - --------------------- Mid-Cap Growth Equity (Continued) - --------------------- Investor A Class 9/30/05 $ 8.26 $ (0.11)/5/ $ 1.67 $ -- $ -- $ 9.82 9/30/04 7.17 (0.09)/5/ 1.18 -- -- 8.26 9/30/03 /21/ 5.77 (0.07) 1.47 -- -- 7.17 9/30/02 /21/ 7.17 (0.11) (1.29) -- -- 5.77 9/30/01 /21/ 25.92 (0.04) (11.23) -- (7.48) 7.17 Investor B Class 9/30/05 $ 7.63 $ (0.15)/5/ $ 1.52 $ -- $ -- $ 9.00 9/30/04 6.67 (0.14)/5/ 1.10 -- -- 7.63 9/30/03 /21/ 5.41 (0.11) 1.37 -- -- 6.67 9/30/02 /21/ 6.77 (0.16) (1.20) -- -- 5.41 9/30/01 /21/ 25.12 (0.12) (10.75) -- (7.48) 6.77 Investor C Class 9/30/05 $ 7.63 $ (0.15)/5/ $ 1.52 $ -- $ -- $ 9.00 9/30/04 6.67 (0.14)/5/ 1.10 -- -- 7.63 9/30/03 /21/ 5.41 (0.11) 1.37 -- -- 6.67 9/30/02 /21/ 6.77 (0.18) (1.18) -- -- 5.41 9/30/01 /21/ 25.10 (0.13) (10.72) -- (7.48) 6.77 - ------ Aurora - ------ Institutional Class 9/30/05 $ 40.71 $ (0.04)/5/ $ 6.60 $ -- $ (3.84) $ 43.43 9/30/04 23.18 (0.11) 7.66 -- (0.02) 40.71 9/30/03 25.05 (0.11) 8.39 -- (0.15) 33.18 9/30/02 /21/ 27.06 (0.14) (1.87) -- -- 25.05 9/30/01 /21/ 29.66 0.13 (0.39) (0.03) (2.31) 27.06 Service Class 1/28/05/1/ through 9/30/05 $ 38.18 $ (0.06)/5/ $ 3.76 $ -- $ -- $ 41.88 Investor A Class 9/30/05 $ 39.49 $ (0.16)/5/ $ 6.39 $ -- $ (3.84) $ 41.88 9/30/04 32.28 (0.22) 7.45 -- (0.02) 39.49 9/30/03 24.43 (0.19) 8.19 -- (0.15) 32.28 9/30/02 /21/ 26.51 (0.23) (1.85) -- -- 24.43 9/30/01 /21/ 29.17 0.02 (0.37) -- (2.31) 26.51 Investor B Class 9/30/05 $ 36.67 $ (0.40)/5/ $ 5.89 $ -- $ (3.84) $ 38.32 9/30/04 30.19 (0.45) 6.95 -- (0.02) 36.67 9/30/03 23.02 (0.36) 7.68 -- (0.15) 30.19 9/30/02 /21/ 25.16 (0.42) (1.72) -- -- 23.02 9/30/01 /21/ 27.99 (0.18) (0.34) -- (2.31) 25.16 Investor C Class 9/30/05 $ 36.67 $ (0.42)/5/ $ 5.91 $ -- $ (3.84) $ 38.32 9/30/04 30.18 (0.45) 6.96 -- (0.02) 36.67 9/30/03 23.01 (0.35) 7.67 -- (0.15) 30.18 9/30/02 /21/ 25.16 (0.42) (1.73) -- -- 23.01 9/30/01 /21/ 27.99 (0.18) (0.34) -- (2.31) 25.11 See accompanying notes to financial statements. 154
BlackRock Funds Ratio of Net Investment Ratio of Total Income to Net Assets Ratio of Net Expense to Ratio of Net Average Net End of Expenses to Average Net Investment Income Assets Portfolio Total Period Average Net Assets (Excluding to Average (Excluding Turnover Return (000) Assets Waivers) Net Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - --------------------- Mid-Cap Growth Equity (Continued) - --------------------- Investor A Class 9/30/05 18.89%/3/,/10/ $ 290,285 1.58% 1.78% (1.14)% (1.34)% 85% 9/30/04 15.20/3/,/10/ 27,777 1.67 1.77 (1.09) (1.19) 29 9/30/03 /21/ 24.26/3/,/10/ 25,960 1.68 1.71 (0.96) (0.98) 168 9/30/02 /21/ (19.53)/3/ 26,242 1.62 1.62 (1.24) (1.24) 279 9/30/01 /21/ (56.91)/3/ 38,225 1.60 1.60 (0.38) (0.38) 584 Investor B Class 9/30/05 17.96%/4/,/10/ $ 59,100 2.33% 2.41% (1.82)% (1.90)% 85% 9/30/04 14.39/4/,/10/ 31,900 2.44 2.45 (1.86) (1.87) 29 9/30/03 /21/ 23.29/4/,/10/ 33,982 2.43 2.45 (1.69) (1.71) 168 9/30/02 /21/ (20.09)/4/ 33,822 2.37 2.37 (1.98) (1.98) 279 9/30/01 /21/ (57.24)/4/ 51,186 2.35 2.35 (1.12) (1.12) 584 Investor C Class 9/30/05 17.96%/4/,/10/ $ 20,748 2.33% 2.41% (1.83)% (1.91)% 85% 9/30/04 14.39/4/,/10/ 11,269 2.44 2.45 (1.86) (1.87) 29 9/30/03 /21/ 23.29/4/,/10/ 12,212 2.43 2.45 (1.69) (1.71) 168 9/30/02 /21/ (20.09)/4/ 12,092 2.37 2.37 (1.98) (1.98) 279 9/30/01 /21/ (57.19)/4/ 21,144 2.35 2.35 (1.10) (1.10) 584 - ------ Aurora - ------ Institutional Class 9/30/05 16.62%/10/ $ 165,837 1.14% 1.14% (0.09)% (0.09)% 73% 9/30/04 22.75 197,475 1.10 1.10 (0.27) (0.27) 33 9/30/03 33.21 142,460 1.25 1.25 (0.38) (0.38) 48 9/30/02 /21/ (7.43) 92,789 1.17 1.18 (0.43) (0.44) 42 9/30/01 /21/ (0.64) 76,711 1.13 1.14 0.36 0.35 26 Service Class 1/28/05/1/ through 9/30/05 9.69%/10/ $ --/20/ 0.78%/2/ 0.81%/2/ 0.32%/2/ 0.29%/2/ 73% Investor A Class 9/30/05 16.28%/3/,/10/ $1,690,497 1.40% 1.47% (0.36)% (0.43)% 73% 9/30/04 22.39/3/ 2,169,836 1.40 1.40 (0.57) (0.57) 33 9/30/03 32.90/3/ 1,682,504 1.55 1.55 (0.69) (0.69) 48 9/30/02 /21/ (7.85)/3/ 1,449,869 1.47 1.48 (0.73) (0.74) 42 9/30/01 /21/ (0.98)/3/ 1,334,548 1.43 1.44 0.08 0.07 26 Investor B Class 9/30/05 15.44%/4/,/10/ $ 436,642 2.14% 2.15% (1.10)% (1.11)% 73% 9/30/04 21.53/4/ 470,430 2.10 2.10 (1.27) (1.27) 33 9/30/03 31.96/4/ 401,016 2.25 2.25 (1.39) (1.39) 48 9/30/02 /21/ (8.51)/4/ 340,529 2.17 2.18 (1.43) (1.44) 42 9/30/01 /21/ (1.67)/4/ 299,062 2.13 2.14 (0.63) (0.64) 26 Investor C Class 9/30/05 15.45%/4/,/10/ $ 405,952 2.14% 2.15% (1.10)% (1.11)% 73% 9/30/04 21.57/4/ 493,980 2.10 2.10 (1.27) (1.27) 33 9/30/03 31.97/4/ 409,076 2.25 2.25 (1.39) (1.39) 48 9/30/02 /21/ (8.55)/4/ 402,010 2.17 2.18 (1.43) (1.44) 42 9/30/01 /21/ (1.67)/4/ 378,733 2.13 2.14 (0.62) (0.63) 26 155
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Distributions asset foreign currency from net Net value Net and options Distributions Realized Asset value beginning investment (both realized from net investment capital end of of period income (loss) and unrealized) income gains period - ------------------------------------------------------------------------------------------------------------------------------- - -------------------- Small/Mid-Cap Growth - -------------------- Institutional Class 9/30/05 $ 12.49 $ (0.17)/5/ $ 2.84 $ -- $ -- $ 15.16 9/30/04 12.11 (0.10) 0.48 -- -- 12.49 9/30/03 9.06 (0.08) 3.13 -- -- 12.11 9/30/02 /21/ 9.62 (0.06) (0.50) -- -- 9.06 9/30/01 /21/ 16.48 (0.04) 4.54 -- (2.28) 9.62 Service Class 1/28/051 through 9/30/05 $ 12.81 $ (0.06)/5/ $ 1.72 $ -- $ -- $ 14.47 Investor A Class 9/30/05 $ 11.96 $ (0.13)/5/ $ 2.65 $ -- $ -- $ 14.48 9/30/04 11.63 (0.14) 0.47 -- -- 11.96 9/30/03 8.73 (0.11) 3.01 -- -- 11.63 9/30/02 /21/ 9.27 (0.09) (0.45) -- -- 8.73 9/30/01 /21/ 16.08 (0.08) (4.45) -- (2.28) 9.27 Investor B Class 9/30/05 $ 10.84 $ (0.19)/5/ 2.38 $ -- $ -- $ 13.03 9/30/04 10.62 (0.21) 0.43 -- -- 10.84 9/30/03 8.03 (0.16) 2.75 -- -- 10.62 9/30/02 /21/ 8.60 (0.15) (0.42) -- -- 8.03 9/30/01 /21/ 15.17 (0.15) (4.14) -- (2.28) 8.60 Investor C Class 9/30/05 $ 10.87 $ (0.20)/5/ $ 2.39 $ -- $ -- $ 13.06 9/30/04 10.64 (0.21) 0.44 -- -- 10.87 9/30/03 8.05 (0.16) 2.75 -- -- 10.64 9/30/02 /21/ 8.61 (0.15) (0.41) -- -- 8.05 9/30/01 /21/ 15.17 (0.15) (4.13) -- (2.28) 8.61 - ---------------------- Small Cap Value Equity - ---------------------- BlackRock 9/30/05 $ 15.23 $ 0.025 $ 2.89 $ -- $ (2.99) $ 15.16 4/12/041 through 9/30/04 16.02 --/5/ (0.79) -- -- 15.23 Institutional Class 9/30/05 $ 15.22 $ 0.045 $ 2.90 $ -- $ (2.99) $ 15.17 9/30/04 14.17 (0.02)/5/ 2.86 -- (1.79) 15.22 9/30/03 /21/ 12.81 0.01 3.31 -- (1.96) 14.17 9/30/02 /21/ 16.18 -- (1.02) (0.02) (2.33) 12.81 9/30/01 /21/ 17.12 0.16 (0.11) (0.15) (0.84) 16.18 Service Class 9/30/05 $ 15.07 $ --/5/ $ 2.87 $ -- $ (2.99) $ 14.95 9/30/04 14.09 (0.07)/5/ 2.84 -- (1.79) 15.07 9/30/03 /21/ 12.77 (0.03) 3.31 -- (1.96) 14.09 9/30/02 /21/ 16.18 (0.04) (1.04) -- (2.33) 12.77 9/30/01 /21/ 17.10 0.10 (0.08) (0.10) (0.84) 16.18 See accompanying notes to financial statements. 156
BlackRock Funds Ratio of Net Investment Ratio of Total Income to Net Assets Ratio of Net Expense to Ratio of Net Average Net End of Expenses to Average Net Investment Income Assets Portfolio Total Period Average Net Assets (Excluding to Average (Excluding Turnover Return (000) Assets Waivers) Net Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - -------------------- Small/Mid-Cap Growth - -------------------- Institutional Class 9/30/05 21.38%/10/ $ 20,133 1.10% 1.28% (0.72)% (0.90)% 122% 9/30/04 3.14 87,520 1.09 1.28 (0.80) (0.99) 208 9/30/03 33.66 7,809 1.10 1.55 (0.78) (1.23) 167 9/30/02 /21/ (5.82) 6,054 1.10 1.69 (0.60) (1.19) 168 9/30/01 /21/ 29.73 5,810 1.10 1.77 (0.39) (1.06) 282 Service Class 1/28/051 through 9/30/05 12.96%/10/ $ --/20/ 1.41% 1.48% (0.70)% (0.77)% 122% Investor A Class 9/30/05 21.07%/3/,/10/ $ 215,622 1.37%* 1.64% (0.87)% (1.14)% 122% 9/30/04 2.84/3/ 268,065 1.39 1.56 (1.09) (1.26) 208 9/30/03 33.223 117,571 1.40 1.78 (1.10) (1.48) 167 9/30/02 /21/ (5.93)/3/ 41,474 1.40 1.98 (0.90) (1.48) 168 9/30/01 /21/ (30.22)/3/ 39,522 1.40 2.07 (0.69) (1.36) 282 Investor B Class 9/30/05 20.20%/4/,/10/ $ 24,925 2.10% 2.30% (1.58)% (1.78)% 122% 9/30/04 2.17/4/ 24,880 2.09 2.25 (1.79) (1.95) 208 9/30/03 32.25/4/ 19,797 2.10 2.54 (1.78) (2.22) 167 9/30/02 /21/ (6.63)/4/ 13,288 2.10 2.68 (1.60) (2.18) 168 9/30/01 /21/ (30.48)/4/ 12,749 2.10 2.77 (1.39) (2.06) 282 Investor C Class 9/30/05 20.15%/4/,/10/ $ 20,963 2.10% 2.32% (1.60)% (1.82)% 122% 9/30/04 2.16/4/ 29,627 2.09 2.26 (1.79) (1.96) 208 9/30/03 32.17/4/ 13,530 2.10 2.51 (1.79) (2.20) 167 9/30/02 /21/ (6.50)/4/ 5,794 2.10 2.68 (1.60) (2.18) 168 9/30/01 /21/ (30.40)/4/ 5,332 2.10 2.77 (1.39) (2.06) 282 - ---------------------- Small Cap Value Equity - ---------------------- BlackRock 9/30/05 20.60%/10/ 5,162 1.07% 1.08% 0.16% 0.15% 133% 4/12/04 /1/ through 9/30/04 (4.93)/10/ 4,787 1.10/2/ 1.33/2/ (0.17)/2/ (0.40)/2/ 154 Institutional Class 9/30/05 20.77%/10/ $ 68,880 0.97% 1.00% 0.26% 0.23% 133% 9/30/04 20.87/10/ 66,083 0.95 0.98 (0.15) (0.18) 154 9/30/03 /21/ 29.96/10/ 69,641 0.91 0.94 0.09 0.06 240 9/30/02 /21/ (8.25) 122,732 0.88 0.89 -- (0.01) 260 9/30/01 /21/ 0.47 367,167 0.87 0.87 0.87 0.87 184 Service Class 9/30/05 20.46%/10/ $ 3,405 1.24% 1.25% (0.03)% (0.04)% 133% 9/30/04 20.45/10/ 3,288 1.25 1.29 (0.45) (0.48) 154 9/30/03 /21/ 29.70/10/ 4,139 1.21 1.24 (0.19) (0.22) 240 9/30/02 /21/ (8.64) 7,242 1.18 1.19 (0.24) (0.25) 260 9/30/01 /21/ 0.28 47,095 1.17 1.17 0.56 0.56 184 *For the period October 1, 2004, through January 31, 2005, the expense ratio reflects the expenses of the State Street Research Emergin g Growth Fund prior to its reorganization with the Small/Mid-Cap Growth Portfolio on January 31, 2005. The expense ratio for the period October 1, 2004 through January 31, 2005 was 1.41%. The expense ratio of the Portfolio for the period February 1, 2005, through September 30, 2005, was 1.35%. 157
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Distributions asset foreign currency Distributions from net Redemption Net value Net and options from net realized Fees Added Asset value beginning investment (both realized investment capital to Paid-In end of of period income (loss) and unrealized) income gains Capital period - ------------------------------------------------------------------------------------------------------------------------------------ --------------------- Small Cap Value Equity (Continued) - ---------------------- Investor A Class 9/30/05 $ 15.00 $ --/5/ $ 2.85 $ -- $ (2.99) $ -- $ 14.86 9/30/04 14.04 (0.09)/5/ 2.84 -- (1.79) -- 15.00 9/30/03 /21/ 12.76 (0.05) 3.29 -- (1.96) -- 14.04 9/30/02 /21/ 16.18 (0.10) (0.99) -- (2.33) -- 12.76 9/30/01 /21/ 17.10 0.06 (0.07) (0.07) (0.84) -- 16.18 Investor B Class 9/30/05 $ 13.77 $ (0.10)/5/ $ 2.60 $ -- $ (2.99) $ -- $ 13.28 9/30/04 13.11 (0.19)/5/ 2.64 -- (1.79) -- 13.77 9/30/03 /21/ 12.11 (0.13) 3.09 -- (1.96) -- 13.11 9/30/02 /21/ 15.58 (0.20) (0.94) -- (2.33) -- 12.11 9/30/01 /21/ 16.56 (0.06) (0.07) (0.01) (0.84) -- 15.58 Investor C Class 9/30/05 $ 13.78 $ (0.10)/5/ $ 2.59 $ -- $ (2.99) $ -- $ 13.28 9/30/04 13.11 (0.19)/5/ 2.65 -- (1.79) -- 13.78 9/30/03 /21/ 12.12 (0.14) 3.09 -- (1.96) -- 13.11 9/30/02 /21/ 15.59 (0.20) (0.94) -- (2.33) -- 12.12 9/30/01 /21/ 16.57 (0.05) (0.08) (0.01) (0.84) -- 15.59 - --------------------- Small Cap Core Equity - --------------------- Institutional Class 9/30/05 $ 14.77 $ (0.10)/5/ $ 3.06 $ -- $ (0.11) $ -- $ 17.62 9/30/04 11.99 (0.13)/5/ 3.01 -- (0.15) 0.05 14.77 9/30/03 /21/ 8.35 (0.06) 3.70 -- -- -- 11.99 1/02/02 /1/,/21/ through 9/30/02 10.00 (0.04) (1.61) -- -- -- 8.35 Service Class 9/30/05 $ 14.73 $ (0.13)/5/ $ 3.10 $ -- $ (0.11) $ -- $ 17.59 9/30/04 11.99 (0.20)/5/ 3.04 -- (0.15) 0.05 14.73 9/30/03 /21/ 8.35 -- 3.64 -- -- -- 11.99 1/02/02 /1/,/21/ through 9/30/02 10.00 -- (1.65) -- -- -- 8.35 Investor A Class 9/30/05 $ 14.71 $ (0.17)/5/ $ 3.06 $ -- $ (0.11) $ -- $ 17.49 9/30/04 11.99 (0.24)/5/ 3.04 -- (0.15) 0.07 14.71 9/30/03 /21/ 8.35 -- 3.64 -- -- -- 11.99 1/02/02 /1/,/21/ through 9/30/02 10.00 -- (1.65) -- -- -- 8.35 Investor B Class 9/30/05 $ 14.61 $ (0.28)5 $ 3.02 $ -- $ (0.11) $ -- $ 17.24 9/30/04 11.99 (0.37)5 3.07 -- (0.15) 0.07 14.61 9/30/03 /21/ 8.35 -- 3.64 -- -- -- 11.99 1/02/02 /1/,/21/ through 9/30/02 10.00 -- (1.65) -- -- -- 8.35 Investor C Class 9/30/05 $ 14.60 $ (0.28)5 $ 3.02 $ -- $ (0.11) $ -- $ 17.23 9/30/04 11.99 (0.28)5 2.99 -- (0.15) 0.05 14.60 9/30/03 /21/ 8.35 -- 3.64 -- -- -- 11.99 1/02/02 /1/,/21/ through 9/30/02 10.00 -- (1.65) -- -- -- 8.35 See accompanying notes to financial statements. 158
BlackRock Funds Ratio of Net Investment Ratio of Total Income to Net Assets Ratio of Net Expense to Ratio of Net Average Net End of Expenses to Average Net Investment Income Assets Portfolio Total Period Average Net Assets (Excluding to Average (Excluding Turnover Return (000) Assets Waivers) Net Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - ---------------------- Small Cap Value Equity (Continued) - ---------------------- Investor A Class 9/30/05 20.43%/3/,10 $ 31,889 1.24% 1.35% (0.01)% (0.12)% 133% 9/30/04 20.38/3/,/10/ 35,240 1.35 1.47 (0.55) (0.67) 154 9/30/03 /21/ 29.37/3/,/10/ 38,052 1.38 1.41 (0.37) (0.40) 240 9/30/02 /21/ (8.71)/3/ 43,884 1.35 1.37 (0.62) (0.64) 260 9/30/01 /21/ 0.09/3/ 28,195 1.34 1.34 0.38 0.38 184 Investor B Class 9/30/05 19.58%/4/,/10/ $ 12,848 2.00% 2.00% (0.76)% (0.76)% 133% 9/30/04 19.45/4/,/10/ 15,952 2.07 2.09 (1.28) (1.30) 154 9/30/03 /21/ 28.52/4/,/10/ 15,019 2.13 2.16 (1.12) (1.15) 240 9/30/02 /21/ (9.46)/4/ 14,402 2.10 2.12 (1.32) (1.34) 260 9/30/01 /21/ (0.66)/4/ 16,599 2.09 2.09 (0.37) (0.37) 184 Investor C Class 9/30/05 19.49%/4/,/10/ $ 6,414 2.00% 2.00% (0.76)% (0.76)% 133% 9/30/04 19.53/4/,/10/ 6,715 2.09 2.11 (1.30) (1.32) 154 9/30/03 /21/ 28.42/4/,/10/ 5,839 2.13 2.16 (1.13) (1.15) 240 9/30/02 /21/ (9.45)/4/ 6,113 2.10 2.12 (1.32) (1.33) 260 9/30/01 /21/ (0.65)/4/ 7,051 2.09 2.09 (0.37) (0.37) 184 - --------------------- Small Cap Core Equity - --------------------- Institutional Class 9/30/05 20.10%/10/ $ 12,641 1.30% 1.81% (0.59)% (1.10)% 118% 9/30/04 24.51/18/ 1,802 1.30 2.37 (0.89) (1.96) 78 9/30/03 /21/ 43.59 1,238 1.30 2.96 (0.62) (2.28) 218 1/02/02 /1/,/21/ through 9/30/02 (16.50) 835 1.30/2/ 2.53/2/ (0.60)/2/ (1.83)/2/ 233 Service Class 9/30/05 20.22%/10/ $ 94 1.60% 2.01% (0.80)% (1.21)% 118% 9/30/04 24.17/18/ --/20/ 1.60 2.67 (1.19) 2.26 78 9/30/03 /21/ 43.59 --/20/ 1.60 3.26 (0.92) (2.58) 218 1/02/02 /1/,/21/ through 9/30/02 (16.50) --/20/ 1.60/2/ 2.83/2/ (0.90)/2/ (2.13)/2/ 233 Investor A Class 9/30/05 19.71%/3/,/10/ $ 11,997 1.71% 2.17% (1.01)% (1.47)% 118% 9/30/04 24.01/3/,/1 3,154 1.74 2.89 (1.32) (2.48) 78 9/30/03 /21/ 43.59/3/ 7 1.77 3.43 (1.09) (2.75) 218 1/02/02 /1/,/21/ through 9/30/02 (16.50)/3/ --/20/ 1.77/2/ 3.00/2/ (1.07)/2/ (2.30)/2/ 233 Investor B Class 9/30/05 18.81%/4/,/10/ $ 6,303 2.44% 2.81% (1.74)% (2.11)% 118% 9/30/04 23.17/4/,/19/ 1,157 2.49 3.56 (2.07) (3.15) 78 9/30/03 /21/ 43.594 --/20/ 2.52 4.18 (1.84) (3.50) 218 1/02/02 /1/,/21/ through 9/30/02 (16.50)/4/ --/20/ 2.52/2/ 3.75/2/ (1.82)/2/ (3.05)/2/ 233 Investor C Class 9/30/05 18.82%/4/,/10/ $ 17,266 2.44% 2.80% (1.74)% (2.10)% 118% 9/30/04 23.08/4/,/18/ 3,352 2.47 3.56 (2.03) (3.11) 78 9/30/03 /21/ 43.59/4/ --/20/ 2.52 4.18 (1.84) (3.50) 218 1/02/02 /1/,/21/ through 9/30/02 (16.50)/4/ --/20/ 2.52/2/ 3.75/2/ (1.82)/2/ (3.05)/2/ 233 159
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Distributions Net asset foreign currency Distributions from net Redemption Asset value Net and options from net Distributions realized Fees Added value beginning investment (both realized investment from capital to Paid-In end of of period income (loss) and unrealized) income Capital gains Capital period - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------- Small Cap Growth Equity - ----------------------- Institutional Class 9/30/05 $14.52 $(0.06)/5/ $ 2.82 $ -- $ -- $ -- $0.01 $17.29 9/30/04 12.26 (0.11)/5/ 2.37 -- -- -- -- 14.52 9/30/03 /21/ 9.00 (0.09) 3.35 -- -- -- -- 12.26 9/30/02 /21/ 11.74 (0.17) (2.57) -- -- -- -- 9.00 9/30/01 /21/ 35.76 0.09 (15.38) (0.12) (0.10) (8.51) -- 11.74 Service Class 9/30/05 $13.92 $(0.11)/5/ $ 2.72 $ -- $ -- $ -- $0.01 $16.54 9/30/04 11.79 (0.15)/5/ 2.28 -- -- -- -- 13.92 9/30/03 /21/ 8.67 (0.12) 3.24 -- -- -- -- 11.79 9/30/02 /21/ 11.36 (0.19) (2.50) -- -- -- -- 8.67 9/30/01 /21/ 34.91 0.03 (14.89) (0.08) (0.10) (8.51) -- 11.36 Investor A Class 9/30/05 $13.57 $(0.10)/5/ $ 2.64 $ -- $ -- $ -- $0.01 $16.12 9/30/04 11.51 (0.16)/5/ 2.22 -- -- -- -- 13.57 9/30/03 /21/ 8.48 (0.13) 3.16 -- -- -- -- 11.51 9/30/02 /21/ 11.12 (0.14) (2.50) -- -- -- -- 8.48 9/30/01 /21/ 34.47 (0.01) (14.65) (0.08) (0.10) (8.51) -- 11.12 Investor B Class 9/30/05 $12.39 $(0.20)/5/ $ 2.41 $ -- $ -- $ -- $0.01 $14.61 9/30/04 10.59 (0.24)/5/ 2.04 -- -- -- 0.01 12.39 9/30/03 /21/ 7.86 (0.19) 2.92 -- -- -- -- 10.59 9/30/02 /21/ 10.39 (0.23) (2.30) -- -- -- -- 7.86 9/30/01 /21/ 33.05 (0.12) (13.85) (0.08) (0.10) (8.51) -- 10.39 Investor C Class 9/30/05 $12.40 $(0.19)/5/ $ 2.40 $ -- $ -- $ -- $0.01 $14.62 9/30/04 10.60 (0.25)/5/ 2.05 -- -- -- 0.01 12.40 9/30/03 /21/ 7.86 (0.18) 2.92 -- -- -- -- 10.60 9/30/02 /21/ 10.39 (0.23) (2.30) -- -- -- -- 7.86 9/30/01 /21/ 33.05 (0.12) (13.85) (0.08) (0.10) (8.51) -- 10.39 - ----------------------------------------- Global Science & Technology Opportunities - ----------------------------------------- Institutional Class 9/30/05 $ 5.42 $(0.04)/5/ $ 1.23 $ -- $ -- $ -- $ -- $ 6.61 9/30/04 5.46 (0.07)/5/ 0.03 -- -- -- -- 5.42 9/30/03 /21/ 3.59 (0.05) 1.92 -- -- -- -- 5.46 9/30/02 /21/ 4.41 (0.06)/5/ (0.76) -- -- -- -- 3.59 9/30/01 /21/ 12.49 0.01 (8.09) -- -- -- -- 4.41 Service Class 9/30/05 $ 5.35 $(0.06)/5/ $ 1.22 $ -- $ -- $ -- $ -- $ 6.51 9/30/04 5.41 (0.08)/5/ 0.02 -- -- -- -- 5.35 9/30/03 /21/ 3.57 (0.06)/5/ 1.90 -- -- -- -- 5.41 9/30/02 /21/ 4.39 (0.06)/5/ (0.76) -- -- -- -- 3.57 9/30/01 /21/ 12.47 -- (8.08) -- -- -- -- 4.39 Investor A Class 9/30/05 $ 5.31 $(0.07)/5/ $ 1.21 $ -- $ -- $ -- $ -- $ 6.45 9/30/04 5.38 (0.09)/5/ 0.02 -- -- -- -- 5.31 9/30/03 /21/ 3.55 (0.07) 1.90 -- -- -- -- 5.38 9/30/02 /21/ 4.38 (0.09) (0.74) -- -- -- -- 3.55 9/30/01 /21/ 12.47 (0.03) (8.06) -- -- -- -- 4.38 See accompanying notes to financial statements. 160
BlackRock Funds Net Ratio of Total Ratio of Net Assets Ratio of Net Expense to Ratio of Net Investment Income End of Expenses to Average Net Investment Income to Average Net Portfolio Total Period Average Net Assets (Excluding to Average Net Assets (Excluding Turnover Return (000) Assets Waivers) Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - ----------------------- Small Cap Growth Equity - ----------------------- Institutional Class 9/30/05 19.08%/14/ $357,857 0.94% 0.95% (0.40)% (0.41)% 91% 9/30/04 8.43/10/ 272,324 0.92 0.93 (0.73) (0.74) 81 9/30/03 /21/ 36.22/10/ 164,856 0.89 0.92 (0.75) (0.78) 167 9/30/02 /21/ (23.34) 176,858 0.85 0.87 (0.67) (0.69) 238 9/30/01 /21/ (53.73) 843,359 0.82 0.82 0.52 0.52 363 Service Class 9/30/05 18.82%/14/ $ 24,491 1.19% 1.19% (0.70)% (0.70)% 91% 9/30/04 18.07/10/ 29,569 1.20 1.20 (1.02) (1.02) 81 9/30/03 /21/ 35.99/10/ 23,466 1.19 1.22 (1.05) (1.08) 167 9/30/02 /21/ (23.68) 29,023 1.15 1.17 (0.97) (0.99) 238 9/30/01 /21/ (53.76) 141,001 1.11 1.11 0.20 0.20 363 Investor A Class 9/30/05 18.79%/3/,/14/ $160,374 1.19% 1.29% (0.66)% (0.76)% 91% 9/30/04 17.90/3/,/10/ 131,795 1.30 1.40 (1.12) (1.22) 81 9/30/03 /21/ 35.73/3/,/10/ 102,642 1.37 1.40 (1.22) (1.25) 167 9/30/02 /21/ (23.74)/3/ 95,620 1.33 1.36 (1.14) (1.17) 238 9/30/01 /21/ (53.90)/3/ 85,211 1.29 1.29 0.02 0.02 363 Investor B Class 9/30/05 17.92%/4/,/15/ $ 15,516 1.94% 1.94% (1.45)% (1.45)% 91% 9/30/04 17.00/4/,/16/ 23,983 2.07 2.07 (1.89) (1.89) 81 9/30/03 /21/ 34.73/4/,/10/ 24,167 2.11 2.14 (1.97) (2.00) 167 9/30/02 /21/ (24.35)/4/ 21,958 2.07 2.10 (1.89) (1.92) 238 9/30/01 /21/ (54.22)/4/ 37,351 2.03 2.03 (0.69) (0.69) 363 Investor C Class 9/30/05 17.90%/4/,/15/ $ 15,434 1.94% 1.94% (1.41)% (1.41)% 91% 9/30/04 16.98/4/,/15/ 13,989 2.08 2.08 (1.90) (1.90) 81 9/30/03 /21/ 34.86/4/,/10/ 11,396 2.11 2.14 (1.97) (2.00) 167 9/30/02 /21/ (24.35)/4/ 9,665 2.07 2.10 (1.89) (1.92) 238 9/30/01 /21/ (54.21)/4/ 18,170 2.03 2.03 (0.67) (0.67) 363 - ----------------------------------------- Global Science & Technology Opportunities - ----------------------------------------- Institutional Class 9/30/05 21.96%/10/ $ 847 1.43% 1.98% (0.73)% (1.28)% 113% 9/30/04 (0.73)/10/ 1,592 1.43 1.63 (1.12) (1.32) 115 9/30/03 /21/ 52.09 2,821 1.35 1.63 (1.06) (1.34) 226 9/30/02 /21/ (18.59) 2,385 1.20 1.31 (1.00) (1.11) 587 9/30/01 /21/ (64.69) 7,189 1.20 1.45 0.14 (0.11) 748 Service Class 9/30/05 21.68%/10/ $ 116 1.73% 2.27% (1.04)% (1.58)% 113% 9/30/04 (1.11)/10/ 86 1.73 1.94 (1.41) (1.61) 115 9/30/03 /21/ 51.54 108 1.67 1.88 (1.38) (1.59) 226 9/30/02 /21/ (18.68) 30 1.50 1.63 (1.30) (1.43) 587 9/30/01 /21/ (64.80) 19 1.50 1.73 -- (0.24) 748 Investor A Class 9/30/05 21.47%/3/,/10/ $ 9,688 1.84% 2.35% (1.16)% (1.67)% 113% 9/30/04 (1.30)/3/,/10/ 9,929 1.89 2.14 (1.56) (1.81) 115 9/30/03 /21/ 51.55/3/ 11,406 1.83 2.10 (1.53) (1.81) 226 9/30/02 /21/ (18.95)/3/ 9,104 1.67 1.79 (1.47) (1.59) 587 9/30/01 /21/ (64.88)/3/ 14,551 1.67 1.91 (0.36) (0.60) 748 161
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, asset Foreign Currency Net value Net and options Distributions Distributions Asset value beginning investment (both realized from net investment from end of of period income (loss) and unrealized) income Capital period - ---------------------------------------------------------------------------------------------------------------------------- - --------------------------- Global Science & Technology Opportunities (Continued) - --------------------------- Investor B Class 9/30/05 $ 5.13 $ (0.11)/5/ $ 1.17 $ -- $ -- $ 6.19 9/30/04 5.24 (0.13)/5/ 0.02 -- -- 5.13 9/30/03 /21/ 3.49 (0.10) 1.85 -- -- 5.24 9/30/02 /21/ 4.33 (0.14) (0.70) -- -- 3.49 9/30/01 /21/ 12.44 (0.09) (8.02) -- -- 4.33 Investor C Class 9/30/05 $ 5.14 $ (0.11)/5/ $ 1.16 $ -- $ -- $ 6.19 9/30/04 5.24 (0.13)/5/ 0.03 -- -- 5.14 9/30/03 /21/ 3.49 (0.10) 1.85 -- -- 5.24 9/30/02 /21/ 4.33 (0.15) (0.69) -- -- 3.49 9/30/01 /21/ 12.44 (0.10) (8.01) -- -- 4.33 - ---------------- Global Resources - ---------------- Institutional Class 3/01/05 through 9/30/05 $ 58.80 $ 0.15/5/ $ 20.67 $ -- $ -- $ 79.62 7/01/04 through 2/28/05 41.25 (0.08) 19.52 (0.34) (1.55) 58.80 6/30/04 26.85 0.27 14.78 (0.65) -- 41.25 6/30/03 23.51 (0.04) 3.38 -- -- 26.85 6/30/02 /21/ 22.13 (0.09) 1.47 -- -- 23.51 6/30/01 /21/ 17.21 (0.18) 5.10 -- -- 22.13 Investor A Class 3/01/05 through 9/30/05 $ 56.23 $ 0.03/5/ $ 19.75 $ -- $ -- $ 76.01 7/01/04 through 2/28/05 39.58 (0.15) 18.69 (0.34) (1.55) 56.23 6/30/04 25.81 0.21 14.15 (0.59) -- 39.58 6/30/03 22.74 (0.10) 3.17 -- -- 25.81 6/30/02 /21/ 21.50 (0.15) 1.39 -- -- 22.74 6/30/01 /21/ 16.79 (0.22) 4.93 -- -- 21.50 Investor B Class 3/01/05 through 9/30/05 $ 51.58 $ (0.19)/5/ $ 18.04 $ -- $ -- $ 69.43 7/01/04 through 2/28/05 36.52 (0.32) 17.18 (0.25) (1.55) 51.58 6/30/04 23.89 (0.06) 13.14 (0.45) -- 36.52 6/30/03 21.20 (0.23) 2.92 -- -- 23.89 6/30/02 /21/ 20.16 (0.27) 1.31 -- -- 21.20 6/30/01 /21/ 15.85 (0.33) 4.64 -- -- 20.16 Investor C Class 3/01/05 through 9/30/05 $ 51.53 $ (0.19)/5/ $ 18.03 $ -- $ -- $ 69.37 7/01/04 through 2/28/05 36.48 (0.30) 17.14 (0.24) (1.55) 51.53 6/30/04 23.88 (0.03) 13.10 (0.47) -- 36.48 6/30/03 21.18 (0.23) 2.93 -- -- 23.88 6/30/02 /21/ 20.14 (0.28) 1.32 -- -- 21.18 6/30/01/21/ 15.84 (0.34) 4.64 -- -- 20.14 - ------------------------ All-Cap Global Resources - ------------------------ Institutional Class 2/16/05 /1/ through 9/30/05 $ 10.00 $ 0.02/5/ $ 3.54 $ -- $ -- $ 13.56 Service Class 2/16/05 /1/ through 9/30/05 $ 10.00 $ 0.03/5/ $ 3.49 $ -- $ -- $ 13.52 See accompanying notes to financial statements. 162
BlackRock Funds Ratio of Total Ratio of Net Expense to Ratio of Net Investment Net Assets Ratio of Net Average Net Investment Income to End of Expenses to Assets Income to Average Net Assets Portfolio Total Period Average Net (Excluding Average Net (Excluding Turnover Return (000) Assets Waivers) Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - --------------------------- Global Science & Technology Opportunities (Continued) - --------------------------- Investor B Class 9/30/05 20.66%/4/,/10/ $ 10,998 2.59% 3.00% (1.91)% (2.32)% 113% 9/30/04 (2.10)/4/,/10/ 12,315 2.65 2.82 (2.33) (2.50) 115 9/30/03 /21/ 50.144 16,646 2.57 2.85 (2.28) (2.55) 226 9/30/02 /21/ (19.40)/4/ 12,944 2.38 2.50 (2.18) (2.29) 587 9/30/01 /21/ (65.19)/4/ 22,062 2.42 2.65 (1.12) (1.35) 748 Investor C Class 9/30/05 20.43%/4/,/10/ $ 2,794 2.59% 3.00% (1.91)% (2.32)% 113% 9/30/04 (1.91)/4/,/10/ 3,244 2.65 2.80 (2.33) (2.48) 115 9/30/03 /21/ 50.144 4,024 2.57 2.85 (2.28) (2.55) 226 9/30/02 /21/ (19.40)/4/ 3,010 2.59 2.72 (2.37) (2.50) 587 9/30/01 /21/ (65.19)/4/ 5,708 2.42 2.65 (1.09) (1.32) 748 - ---------------- Global Resources - ---------------- Institutional Class 3/01/05 through 9/30/05 35.41%/10/ $ 40,906 1.04%/2/ 1.18%/2/ 0.42%/2/ 0.28%/2/ 9% 7/01/04 through 2/28/05 47.95 29,188 1.01/2/ 1.02/2/ (0.16)/2/ (0.17)/2/ 22 6/30/04 56.49 20,044 1.04 1.04 0.79 0.79 27 6/30/03 14.21 10,144 1.30 1.31 (0.20) (0.20) 33 6/30/02 /21/ 6.24 7,995 1.43 1.44 (0.42) (0.42) 38 6/30/01 /21/ 28.59 6,935 1.31 1.33 (0.89) (0.89) 38 Investor A Class 3/01/05 through 9/30/05 35.18%/3/,/10/ $ 877,120 1.34%/2/ 1.52%/2/ 0.10%/2/ (0.08)%/2/ 9% 7/01/04 through 2/28/05 47.693 676,234 1.36/2/ 1.38/2/ (0.52)/2/ (0.54)/2/ 22 6/30/04 56.063 406,209 1.34 1.34 0.64 0.64 27 6/30/03 13.503 103,987 1.60 1.61 (0.47) (0.47) 33 6/30/02 /21/ 5.773 89,883 1.73 1.74 (0.73) (0.73) 38 6/30/01 /21/ 28.053 81,880 1.61 1.63 (1.11) (1.11) 38 Investor B Class 3/01/05 through 9/30/05 34.60%/4/,/10/ $ 117,845 2.04%/2/ 2.18%/2/ (0.60)%/2/ (0.74)%/2/ 9% 7/01/04 through 2/28/05 47.094 94,506 2.01/2/ 2.02/2/ (1.17)/2/ (1.18)/2/ 22 6/30/04 55.074 66,704 2.04 2.04 (0.20) (0.20) 27 6/30/03 12.694 29,782 2.30 2.31 (1.17) (1.17) 33 6/30/02 /21/ 5.164 25,626 2.43 2.44 (1.41) (1.41) 38 6/30/01 /21/ 27.194 19,237 2.31 2.33 (1.78) (1.78) 38 Investor C Class 3/01/05 through 9/30/05 34.62%/4/,/10/ $ 201,265 2.04%/2/ 2.17%/2/ (0.61)%/2/ (0.74)%/2/ 9% 7/01/04 through 2/28/05 47.014 169,871 2.01/2/ 2.02/2/ (1.17)/2/ (1.18)/2/ 22 6/30/04 55.054 122,088 2.04 2.04 (0.10) (0.10) 27 6/30/03 12.754 37,601 2.30 2.31 (1.18) (1.18) 33 6/30/02 /21/ 5.164 31,853 2.43 2.44 (1.43) (1.43) 38 6/30/01/21/ 27.154 30,214 2.31 2.33 (1.83) (1.83) 38 - ------------------------ All-Cap Global Resources - ------------------------ Institutional Class 2/16/05 /1/ through 9/30/05 35.60%/10/ $ 92,147 1.04%/2/ 1.54%/2/ 0.25%/2/ (0.25)%/2/ 12% Service Class 2/16/05 /1/ through 9/30/05 35.20%/10/ $ --/20/ 1.34%/2/ 1.77%/2/ 0.01%/2/ (0.42)%/2/ 12% 163
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Asset foreign currency Net value Net and options Distributions Distributions Asset value beginning investment (both realized from net investment from end of of Period income (loss) and unrealized) income Capital period - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------ All-Cap Global Resources (Continued) - ------------------------ Investor A Class 2/16/05/1/ through 9/30/05 $ 10.00 $ --/5/ $ 3.50 $ -- $ -- $ 13.50 Investor B Class 2/16/05/1/ through 9/30/05 $ 10.00 $(0.05)/5/ $ 3.49 $ -- $ -- $ 13.44 Investor C Class 2/16/05/1/ through 9/30/05 $ 10.00 $(0.05)/5/ $ 3.51 $ -- $ -- $ 13.46 - --------------- Health Sciences - --------------- Institutional Class 3/01/05 through 9/30/05 $ 20.50 $ (0.06)/5/ $ 4.02 $ -- $ (0.01) $ 24.45 2/28/05 21.15 (0.15) 0.57 -- (1.07) 20.50 2/29/04 11.64 (0.06) 10.21 -- (0.64) 21.15 2/28/03 /21/ 14.48 (0.09) (2.71) -- (0.04) 11.64 2/28/02 /21/ 14.14 (0.08) 0.47 -- (0.05) 14.48 2/28/01 /21/ 15.50 0.01 (0.68) -- (0.69) 14.14 Service Class 3/01/05 through 9/30/05 $ 20.24 $ (0.12)/5/ $ 4.04 $ -- $ (0.01) $ 24.15 1/28/05/1/ through 2/28/05 20.30 (0.01) (0.05) -- -- 20.24 Investor A Class 3/01/05 through 9/30/05 $ 20.24 $ (0.09)/5/ $ 3.97 $ -- $ (0.01) $ 24.11 2/28/05 20.96 (0.17) 0.52 -- (1.07) 20.24 2/29/04 11.57 (0.12) 10.15 -- (0.64) 20.96 2/28/03 /21/ 14.43 (0.12) (2.70) -- (0.04) 11.57 2/28/02 /21/ 14.14 (0.13) 0.47 -- (0.05) 14.43 2/28/01 /21/ 13.33 (0.06) 1.88 -- (1.01) 14.14 Investor B Class 3/01/05 through 9/30/05 $ 19.65 $ (0.17)/5/ $ 3.84 $ -- $ (0.01) $ 23.31 2/28/05 20.52 (0.28) 0.48 -- (1.07) 19.65 2/29/04 11.41 (0.24) 9.99 -- (0.64) 20.52 2/28/03 /21/ 14.34 (0.21) (2.68) -- (0.04) 11.41 2/28/02 /21/ 14.14 (0.23) 0.48 -- (0.05) 14.34 2/28/01 /21/ 15.50 (0.04) (0.63) -- (0.69) 14.14 Investor C Class 3/01/05 through 9/30/05 $ 19.61 $ (0.18)/5/ $ 3.84 $ -- $ (0.01) $ 23.26 2/28/05 20.47 (0.22) 0.43 -- (1.07) 19.61 2/29/04 11.39 (0.23) 9.95 -- (0.64) 20.47 2/28/03 /21/ 14.31 (0.21) (2.67) -- (0.04) 11.39 2/28/02 /21/ 14.11 (0.23) 0.48 -- (0.05) 14.31 2/28/01 /21/ 15.50 (0.04) (0.66) -- (0.69) 14.11 See accompanying notes to financial statements. 164
BlackRock Funds Ratio of Total Ratio of Net Expense to Ratio of Net Investment Net Assets Ratio of Net Average Net Investment Income to End of Expenses to Assets Income to Average Net Assets Portfolio Total Period Average Net (Excluding Average Net (Excluding Turnover Return (000) Assets Waivers) Assets Waivers) Rate - --------------------------------------------------------------------------------------------------------------------------------- - ------------------------ All-Cap Global Resources (Continued) - ------------------------ Investor A Class 2/16/05/1/ through 9/30/05 35.00%/3/,/10/ $ 87,949 1.34%/2/ 1.87%/2/ 0.01%/2/ (0.52)%/2/ 12% Investor B Class 2/16/05/1/ through 9/30/05 34.40%/4/,/10/ $ 16,019 2.04%/2/ 2.49%/2/ (0.64)%/2/ (1.09)%/2/ 12% Investor C Class 2/16/05/1/ through 9/30/05 34.60%/4/,/10/ $ 48,288 2.04%/2/ 2.48%/2/ (0.70)%/2/ (1.14)%/2/ 12% - --------------- Health Sciences - --------------- Institutional Class 3/01/05 through 9/30/05 19.32%/10/ $ 31,229 1.25%/2/ 1.37%/2/ (0.47)%/2/ (0.59)%/2/ 77% 2/28/05 1.84 4,262 1.25 1.37 (0.59) (0.71) 173 2/29/04 87.73 5,067 1.25 1.84 (0.38) (0.97) 106 2/28/03 /21/ (19.42) 988 1.25 2.75 (0.69) (2.18) 157 2/28/02 /21/ 2.76 1,109 1.25 3.25 (0.56) (2.53) 75 2/28/01 /21/ (4.48) 946 1.25 6.86 0.18 (5.40) 139 Service Class 3/01/05 through 9/30/05 19.37%/10/ $ 66 1.55%/2/ 1.64%/2/ (0.90)%/2/ (0.99)%/2/ 77% 1/28/05/1/ through 2/28/05 (0.30) --/20/ 0.82/2/ 0.82/2/ (0.70)/2/ (0.70)/2/ 173 Investor A Class 3/01/05 through 9/30/05 19.17%/3/,/10/ $ 186,545 1.55%/2/ 1.69%/2/ (0.68)%/2/ (0.82)%/2/ 77% 2/28/05 1.52/3/ 76,550 1.58 1.73 (0.90) (1.05) 173 2/29/04 87.13/3/ 54,638 1.55 2.11 (0.71) (1.27) 106 2/28/03 /21/ (19.63)/3/ 9,250 1.55 3.04 (0.99) (2.47) 157 2/28/02 /21/ 2.41/3/ 13,069 1.55 3.41 (0.88) (2.71) 75 2/28/01 /21/ 14.31/3/ 6,863 1.54 8.44 (0.48) (7.35) 139 Investor B Class 3/01/05 through 9/30/05 18.68%/4/,/10/ $ 45,073 2.25%/2/ 2.33%/2/ (1.35)%/2/ (1.43)%/2/ 77% 2/28/05 0.80/4/ 29,495 2.25 2.39 (1.58) (1.71) 173 2/29/04 85.89/4/ 22,825 2.25 2.91 (1.44) (2.10) 106 2/28/03 /21/ (20.24)/4/ 9,290 2.25 3.74 (1.69) (3.17) 157 2/28/02 /21/ 1.77/4/ 11,399 2.25 3.99 (1.59) (3.30) 75 2/28/01 /21/ (4.47)/4/ 4 ,645 2.25 8.54 (0.81) (7.07) 139 Investor C Class 3/01/05 through 9/30/05 18.67%/4/,/10/ $ 84,431 2.25%/2/ 2.32%/2/ (1.41)%/2/ (1.48)%/2/ 77% 2/28/05 0.86/4/ 25,248 2.25 2.41 (1.56) (1.71) 173 2/29/04 85.87/4/ 11,017 2.25 2.77 (1.38) (1.90) 106 2/28/03 /21/ (20.21)/4/ 1,291 2.25 3.74 (1.69) (3.18) 157 2/28/02 /21/ 1.77/4/ 1,314 2.25 3.99 (1.58) (3.29) 75 2/28/01 /21/ (4.67)/4/ 645 2.25 8.15 (0.83) (6.70) 139 165
BlackRock Fun ds FINANCIAL HIGHLIGHTS ( Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net On investments, asset foreign currency value Net and options beginning investment (both realized of period income (loss) and unrealized) - --------------------------------------------------------------------- U. S. Opportunities - --------------------------------------------------------------------- Institutional Class 9/30/05 $ 20.34 $ (0.15)/5/ $ 5.37 9/30/04 16.56 (0.17)/5/ 3.95 9/30/03 /21/ 13.06 (0.16) 3.66 9/30/02 /21/ 17.76 (0.23)/5/ (4.06) 9/30/01 /21/ 45.41 0.04 (17.61) Service Class 9/30/05 $ 19.93 $ (0.21)/5/ $ 5.24 9/30/04 16.27 (0.22)/5/ 3.88 9/30/03 /21/ 12.88 (0.19) 3.58 9/30/02 /21/ 17.51 (0.51) (3.79) 9/30/01 /21/ 45.08 (0.05) (17.44) Investor A Class 9/30/05 $ 19.78 $ (0.22)/5/ $ 5.20 9/30/04 16.17 (0.26)/5/ 3.87 9/30/03 /21/ 12.81 (0.21) 3.57 9/30/02 /21/ 17.41 (0.42) (3.89) 9/30/01 /21/ 44.93 (0.09) (17.35) Investor B Class 9/30/05 $ 18.87 $ (0.37)/5/ $ 4.95 9/30/04 15.55 (0.39)/5/ 3.71 9/30/03 /21/ 12.41 (0.32) 3.46 9/30/02 /21/ 16.86 (0.54) (3.78) 9/30/01 /21/ 44.15 (0.28) (16.93) Investor C Class 9/30/05 $ 18.85 $ (0.37)/5/ $ 4.95 9/30/04 15.53 (0.38)/5/ 3.70 9/30/03 /21/ 12.40 (0.32) 3.45 9/30/02 /21/ 16.85 (0.55) (3.77) 9/30/01 /21/ 44.14 (0.29) (16.92) - -------------- International Opportunities - -------------- Institutional Class 9/30/05 $ 24.44 $ 0.53/5/ $ 9.68 9/30/04 19.96 0.08/5/ 4.41 9/30/03 /21/ 15.22 -- 4.73 9/30/02 /21/ 14.86 0.05 0.27 9/30/01 /21/ 22.54 0.30 (7.93) Service Class 9/30/05 $ 23.93 $ 0.44/5/ $ 9.45 9/30/04 19.59 0.06/5/ 4.30 9/30/03 /21/ 14.98 0.05 4.55 9/30/02 /21/ 14.66 (0.02) 0.30 9/30/01 /21/ 22.36 0.29 (7.94) Investor A Class 9/30/05 $ 23.78 $ 0.44/5/ $ 9.38 9/30/04 19.49 (0.02)/5/ 4.32 9/30/03 /21/ 14.94 0.01 4.53 9/30/02 /21/ 14.65 (0.03) 0.28 9/30/01 /21/ 22.34 0.13 (7.77) Distributions from net Redemption Net Distributions realized Fees Added Asset value from net investment capital to Paid-In end of income gains Capital period - -------------------------------------------------------------------------------- - ------------------- U. S. Opportunities - ------------------- Institutional Class 9/30/05 $ -- $ -- $ -- $ 25.56 9/30/04 -- -- -- 20.34 9/30/03 /21/ -- -- -- 16.56 9/30/02 /21/ (0.41) -- -- 13.06 9/30/01 /21/ -- (10.08) -- 17.76 Service Class 9/30/05 $ -- $ -- $ -- $ 24.96 9/30/04 -- -- -- 19.93 9/30/03 /21/ -- -- -- 16.27 9/30/02 /21/ (0.33) -- -- 12.88 9/30/01 /21/ -- (10.08) -- 17.51 Investor A Class 9/30/05 $ -- $ -- $ -- $ 24.76 9/30/04 -- -- -- 19.78 9/30/03 /21/ -- -- -- 16.17 9/30/02 /21/ (0.29) -- -- 12.81 9/30/01 /21/ -- (10.08) -- 17.41 Investor B Class 9/30/05 $ -- $ -- $ -- $ 23.45 9/30/04 -- -- -- 18.87 9/30/03 /21/ -- -- -- 15.55 9/30/02 /21/ (0.13) -- -- 12.41 9/30/01 /21/ -- (10.08) -- 16.86 Investor C Class 9/30/05 $ -- $ -- $ -- $ 23.43 9/30/04 -- -- -- 18.85 9/30/03 /21/ -- -- -- 15.53 9/30/02 /21/ (0.13) -- -- 12.40 9/30/01 /21/ -- (10.08) -- 16.85 - -------------- International Opportunities - -------------- Institutional Class 9/30/05 $(0.32) $ -- $0.01 $ 34.34 9/30/04 (0.02) -- 0.01 24.44 9/30/03/21/ -- -- 0.01 19.96 9/30/02/21/ -- -- 0.04 15.22 9/30/01/21/ -- (0.05) -- 14.86 Service Class 9/30/05 $(0.28) $ -- $0.01 $ 33.55 9/30/04 (0.02) -- -- 23.93 9/30/03/21/ -- -- 0.01 19.59 9/30/02/21/ -- -- 0.04 14.98 9/30/01/21/ -- (0.05) -- 14.66 Investor A Class 9/30/05 $(0.25) $ -- $0.01 $ 33.36 9/30/04 (0.02) -- 0.01 23.78 9/30/03/21/ -- -- 0.01 19.49 9/30/02/21/ -- -- 0.04 14.94 9/30/01/21/ -- (0.05) -- 14.65 See accompanying notes to financial statements. 166
BlackRock Funds Ratio of Total Ratio of Net Expense to Ratio of Net Investment Net Assets Ratio of Net Average Net Investment Income to End of Expenses to Assets Income to Average Net Assets Portfolio Total Period Average Net (Excluding Average Net (Excluding Turnover Return (000) Assets Waivers) Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------- U. S. Opportunities - ------------------- Institutional Class 9/30/05 25.66%/10/ $ 6,390 1.60% 1.73% (0.65)% (0.78)% 94% 9/30/04 22.83/10/ 6,074 1.60 1.65 (0.92) (0.97) 106 9/30/03 /21/ 26.80 7,235 1.52 1.59 (0.87) (0.94) 248 9/30/02 /21/ (25.04) 10,867 1.45 1.49 (1.23) (1.27) 361 9/30/01 /21/ (46.34) 35,869 1.45 1.47 0.15 0.14 402 Service Class 9/30/05 25.24%/10/ $ 472 1.90% 1.97% (0.96)% (1.03)% 94% 9/30/04 22.50/10/ 2,303 1.90 1.97 (1.15) (1.22) 106 9/30/03 /21/ 26.32 421 1.83 1.89 (1.17) (1.24) 248 9/30/02 /21/ (25.26) 483 1.75 1.79 (1.51) (1.56) 361 9/30/01 /21/ (46.55) 1,059 1.75 1.77 (0.19) (0.21) 402 Investor A Class 9/30/05 25.18%/3/,/10/ $ 31,277 1.97% 2.08% (1.02)% (1.13)% 94% 9/30/04 22.33/3/,/10/ 31,282 2.04 2.15 (1.36) (1.46) 106 9/30/03 /21/ 26.23/3/ 29,258 2.00 2.06 (1.34) (1.40) 248 9/30/02 /21/ (25.39)/3/ 28,733 1.92 1.97 (1.68) (1.73) 361 9/30/01 /21/ (46.61)/3/ 51,232 1.93 1.94 (0.30) (0.32) 402 Investor B Class 9/30/05 24.27%/4/,/10/ $ 37,132 2.72% 2.73% (1.77)% (1.78)% 94% 9/30/04 21.35/4/,/10/ 40,994 2.80 2.81 (2.12) (2.13) 106 9/30/03 /21/ 25.30/4/ 41,259 2.74 2.81 (2.09) (2.15) 248 9/30/02 /21/ (25.92)/4/ 43,883 2.67 2.72 (2.43) (2.47) 361 9/30/01 /21/ (47.01)/4/ 79,401 2.67 2.69 (1.06) (1.08) 402 Investor C Class 9/30/05 24.30%/4/,/10/ $ 20,774 2.72% 2.73% (1.77)% (1.78)% 94% 9/30/04 21.38/4/,/10/ 20,261 2.81 2.83 (2.13) (2.15) 106 9/30/03 /21/ 25.24/4/ 20,761 2.74 2.81 (2.09) (2.15) 248 9/30/02 /21/ (25.93)/4/ 22,020 2.67 2.72 (2.43) (2.48) 361 9/30/01 /21/ (47.02)/4/ 42,007 2.67 2.69 (1.02) (1.04) 402 - -------------- International Opportunities - -------------- Institutional Class 9/30/05 42.13%/11/ $ 216,070 1.45% 1.51% 1.81% 1.75% 86% 9/30/04 22.54/12/ 96,535 1.45 1.58 0.31 0.17 98 9/30/03 /21/ 31.14/13/ 57,950 1.41 1.51 0.42 0.32 72 9/30/02 /21/ 2.42 54,164 1.33 1.43 0.27 0.17 104 9/30/01 /21/ (33.93) 60,531 1.33 1.40 1.36 1.30 207 Service Class 9/30/05 41.65%/11/ $ 44,308 1.74% 1.76% 1.52% 1.50% 86% 9/30/04 22.25/10/ 19,167 1.75 1.91 0.21 0.05 98 9/30/03 /21/ 30.78/14/ 1,573 1.72 1.80 0.30 0.22 72 9/30/02 /21/ 2.18 670 1.60 1.70 (0.17) (0.27) 104 9/30/01 /21/ (34.29) 500 1.63 1.84 1.50 1.29 207 Investor A Class 41.60%/3/,/12/ $ 253,710 1.75% 1.86% 1.53% 1.42% 86% 9/30/05 22.11/3/,/13/ 99,879 1.89 2.06 (0.06) (0.24) 98 9/30/04 30.45/3/,/13/ 37,934 1.89 1.98 0.05 (0.04) 72 9/30/03 /21/ 1.98/3/,/10/ 25,969 1.80 1.91 (0.17) (0.27) 104 9/30/02 /21/ (34.27)/3/ 28,781 1.80 1.89 0.80 0.72 207 9/30/01 /21/ 167
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, asset foreign currency value Net and options Distributions beginning investment (both realized from net investment of period income (loss) and unrealized) income - -------------------------------------------------------------------------------------------------------- - --------------------------------------- International Opportunities (Continued) - --------------------------------------- Investor B Class 9/30/05 $22.80 $ 0.18/5/ $ 9.05 $(0.07) 9/30/04 18.83 (0.21)/5/ 4.19 (0.02) 9/30/03 /21/ 14.54 (0.12) 4.40 -- 9/30/02 /21/ 14.37 (0.16) 0.29 -- 9/30/01 /21/ 22.06 0.01 (7.65) -- Investor C Class 9/30/05 $22.80 $ 0.21/5/ $ 9.01 $(0.10) 9/30/04 18.84 (0.21)/5/ 4.18 (0.02) 9/30/03 /21/ 14.54 (0.11)/5/ 4.40 -- 9/30/02 /21/ 14.36 (0.15) 0.29 -- 9/30/01 /21/ 22.06 0.01 (7.66) -- - ----------------- Asset Allocation* - ----------------- Institutional Class 3/01/05 through 9/30/05 $14.99 $ 0.17/5/ $ 0.52 $(0.17) 4/01/04 through 2/28/05 14.91 0.20 0.82 (0.40) 3/31/04 11.38 0.24 3.54 (0.25) 3/31/03 /21/ 14.17 0.28 (2.68) (0.33) 3/31/02 /21/ 14.05 0.32 0.83 (0.35) 3/31/01 /21/ 16.26 0.42 (0.41) (0.33) Service Class 3/01/05 through 9/30/05 $14.97 $ 0.14/5/ $ 0.52 $(0.14) 1/28/05 /1/ through 2/28/05 14.63 0.01 0.33 -- Investor A Class 3/01/05 through 9/30/05 $14.95 $ 0.13/5/ $ 0.53 $(0.13) 4/01/04 through 2/28/05 14.89 0.18 0.80 (0.38) 3/31/04 11.36 0.19 3.55 (0.21) 3/31/03 /21/ 14.15 0.24 (2.68) (0.29) 3/31/02 /21/ 14.03 0.28 0.83 (0.31) 3/31/01 /21/ 16.24 0.39 (0.40) (0.31) Investor B Class 3/01/05 through 9/30/05 $14.81 $ 0.07/5/ $ 0.51 $(0.05) 4/01/04 through 2/28/05 14.74 0.08 0.81 (0.28) 3/31/04 11.26 0.10 3.49 (0.11) 3/31/03 /21/ 14.01 0.15 (2.63) (0.21) 3/31/02 /21/ 13.90 0.17 0.83 (0.21) 3/31/01 /21/ 16.08 0.26 (0.37) (0.19) Investor C Class 3/01/05 through 9/30/05 $14.81 $ 0.06/5/ $ 0.52 $(0.06) 4/01/04 through 2/28/05 14.74 0.08 0.81 (0.28) 3/31/04 11.25 0.10 3.50 (0.11) 3/31/03 /21/ 14.01 0.15 (2.65) (0.21) 3/31/02 /21/ 13.89 0.18 0.80 (0.19) 3/31/01 /21/ 16.05 0.27 (0.38) (0.18) Distributions From Net Redemption Net Realized Fees Added Asset Value Capital to Paid-In end of Gains Capital period - ------------------------------------------------------ ------------- ------------ - --------------------------------------- International Opportunities (Continued) - --------------------------------------- Investor B Class 9/30/05 $ -- $0.01 $31.97 9/30/04 -- 0.01 22.80 9/30/03 /21/ -- 0.01 18.83 9/30/02 /21/ -- 0.04 14.54 9/30/01 /21/ (0.05) -- 14.37 Investor C Class 9/30/05 $ -- $0.01 $31.93 9/30/04 -- 0.01 22.80 9/30/03 /21/ -- 0.01 18.84 9/30/02 /21/ -- 0.04 14.54 9/30/01 /21/ (0.05) -- 14.36 - ----------------- Asset Allocation* - ----------------- Institutional Class 3/01/05 through 9/30/05 $ -- $ -- $15.51 4/01/04 through 2/28/05 (0.54) -- 14.99 3/31/04 -- -- 14.91 3/31/03 /21/ (0.06) -- 11.38 3/31/02 /21/ (0.68) -- 14.17 3/31/01 /21/ (1.89) -- 14.05 Service Class 3/01/05 through 9/30/05 $ -- $ -- $15.49 1/28/051 through 2/28/05 -- -- 14.97 Investor A Class 3/01/05 through 9/30/05 $ -- $ -- $15.48 4/01/04 through 2/28/05 (0.54) -- 14.95 3/31/04 -- -- 14.89 3/31/03 /21/ (0.06) -- 11.36 3/31/02 /21/ (0.68) -- 14.15 3/31/01 /21/ (1.89) -- 14.03 Investor B Class 3/01/05 through 9/30/05 $ -- $ -- $15.34 4/01/04 through 2/28/05 (0.54) -- 14.81 3/31/04 -- -- 14.74 3/31/03 /21/ (0.06) -- 11.26 3/31/02 /21/ (0.68) -- 14.01 3/31/01 /21/ (1.88) -- 13.90 Investor C Class 3/01/05 through 9/30/05 $ -- $ -- $15.33 4/01/04 through 2/28/05 (0.54) -- 14.81 3/31/04 -- -- 14.74 3/31/03 /21/ (0.05) -- 11.25 3/31/02 /21/ (0.67) -- 14.01 3/31/01 /21/ (1.87) -- 13.89 *The performance prior to January 31, 2005 set forth in this table is the financial data of the State Street Research Asset Allocation Fund, series of a predecessor company, the State Street Research Funds. BlackRock Funds acquired all of the assets and certain stated liabilities of the State Street Research Asset Allocation Fund on January 31, 2005. The net asset values and other per share information listed have been restated to reflect the conversion ratios of 0.71889936, 0.71991517, 0.72321182 and 0.72727901 for Institutional, Class A, Class B and Class C shares, respectively. See accompanying notes to financial statements. 168
BlackRock Funds Ratio of Total Ratio of Net Expense to Ratio of Net Investment Net Assets Ratio of Net Average Net Investment Income to End of Expenses to Assets Income to Average Net Assets Portfolio Total Period Average Net (Excluding Average Net (Excluding Turnover Return (000) Assets Waivers) Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ - --------------------------------------- International Opportunities (Continued) - --------------------------------------- Investor B Class 9/30/05 40.58%/4/,/11/ $ 73,946 2.50% 2.51% 0.68% 0.67% 86% 9/30/04 21.18/4/,/12/ 45,167 2.65 2.72 (0.94) (1.00) 98 9/30/03 /21/ 29.51/4/,/12/ 31,454 2.63 2.72 (0.74) (0.83) 72 9/30/02 /21/ 1.18/4/,/10/ 25,917 2.54 2.64 (0.93) (1.03) 104 9/30/01 /21/ (34.71)/4/ 27,895 2.55 2.64 0.06 (0.03) 207 Investor C Class 9/30/05 40.60%/4/,/12/ $130,138 2.50% 2.51% 0.75% 0.74% 86% 9/30/04 21.12/4/,/12/ 54,894 2.65 2.72 (0.86) (0.93) 98 9/30/03 /21/ 29.57/4/,/12/ 26,912 2.63 2.72 (0.71) (0.80) 72 9/30/02 /21/ 1.25/4/,/10/ 18,599 2.55 2.66 (0.95) (1.05) 104 9/30/01 /21/ (34.71)/4/ 21,019 2.55 2.66 0.07 (0.03) 207 - ----------------- Asset Allocation* - ----------------- Institutional Class 3/01/05 through 9/30/05 4.66%/10/ $ 29,752 0.86%/2/ 1.11%/2/ 1.90%/2/ 1.65%/2/ 90% 4/01/04 through 2/28/05 7.17 31,328 1.03/2/ 1.05/2/ 1.71/2/ 1.70/2/ 101 3/31/04 33.46 21,989 1.15 1.15 1.74 1.74 216 3/31/03 /21/ (17.12) 17,992 1.12 1.13 2.21 2.21 181 3/31/02 /21/ 8.47 26,821 1.10 1.11 2.27 2.27 186 3/31/01 /21/ 0.56 26,917 1.17 1.19 2.85 2.85 181 Service Class 3/01/05 through 9/30/05 4.44%/10/ $ 2,171 1.16%/2/ 1.36%/2/ 1.60%/2/ 1.40%/2/ 90% 1/28/051 through 2/28/05 2.32 2,171 1.16/2/ 1.26/2/ (0.17)/2/ (0.27)/2/ 101 Investor A Class 3/01/05 through 9/30/05 4.44%/3/,/10/ $491,557 1.25%/2/ 1.46%/2/ 1.51%/2/ 1.30%/2/ 90% 4/01/04 through 2/28/05 6.78/3/ 526,929 1.24/2/ 1.32/2/ 1.55/2/ 1.47/2/ 101 3/31/04 32.94/3/ 357,100 1.45 1.45 1.43 1.43 216 3/31/03 /21/ (17.37)/3/ 252,069 1.42 1.43 1.92 1.92 181 3/31/02 /21/ 8.15/3/ 320,614 1.40 1.41 1.95 1.95 186 3/31/01 /21/ 0.29/3/ 272,813 1.44 1.46 2.61 2.61 181 Investor B Class 3/01/05 through 9/30/05 3.94%/4/,/10/ $181,583 2.01%/2/ 2.11%/2/ 0.75%/2/ 0.65%/2/ 90% 4/01/04 through 2/28/05 6.20/4/ 187,689 2.04/2/ 2.04/2/ 0.73/2/ 0.73/2/ 101 3/31/04 32.03/4/ 133,083 2.15 2.15 0.72 0.72 216 3/31/03 /21/ (17.91)/4/ 75,963 2.12 2.13 1.22 1.22 181 3/31/02 /21/ 7.30/4/ 81,440 2.10 2.11 1.25 1.25 186 3/31/01 /21/ (0.35)/4/ 56,543 2.17 2.19 1.86 1.86 181 Investor C Class 3/01/05 through 9/30/05 3.90%/4/,/10/ $ 67,371 2.00%/2/ 2.11%/2/ 0.75%/2/ 0.64%/2/ 90% 4/01/04 through 2/28/05 6.20/4/ 65,357 2.04/2/ 2.04/2/ 0.76/2/ 0.76/2/ 101 3/31/04 32.14/4/ 42,262 2.15 2.15 0.72 0.72 216 3/31/03 /21/ 17.96)/4/ 19,079 2.12 2.13 1.21 1.21 181 3/31/02 /21/ 7.31/4/ 13,226 2.10 2.11 1.26 1.26 186 3/31/01 /21/ (0.35)/4/ 12,687 2.17 2.19 1.89 1.89 181 169
BlackRock Funds FINANCIAL HIGHLIGHTS (Concluded) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Gain (loss) Net on investments, Distributions asset foreign currency from net Net value Net and options Distributions realized Asset value beginning investment (both realized from net investment capital end of of period income (loss) and unrealized) income gains period - --------------------------------------------------------------------------------------------------------------------------- - ------------ Index Equity - ------------ Institutional Class 9/30/05 $21.49 $ 0.45/5/ $ 2.15 $(0.46) $-- $23.63 9/30/04 19.19 0.34/5/ 2.29 (0.33) -- 21.49 9/30/03 /21/ 15.69 0.30 3.48 (0.28) -- 19.19 9/30/02 /21/ 20.03 0.25 (4.34) (0.25) -- 15.69 9/30/01 /21/ 27.59 0.26 (7.63) (0.19) -- 20.03 Service Class 9/30/05 $21.35 $ 0.37/5/ $ 2.13 $(0.37) $-- $23.48 9/30/04 19.08 0.25/5/ 2.27 (0.25) -- 21.35 9/30/03 /21/ 15.62 0.21 3.47 (0.22) -- 19.08 9/30/02 /21/ 19.97 0.25 (4.41) (0.19) -- 15.62 9/30/01 /21/ 27.54 0.16 (7.61) (0.12) -- 19.97 Investor A Class 9/30/05 $21.34 $ 0.36/5/ $ 3.47 $(1.71) $-- $23.46 9/30/04 19.07 0.22/5/ 2.28 (0.23) -- 21.34 9/30/03 /21/ 15.62 0.18 3.46 (0.19) -- 19.07 9/30/02 /21/ 19.95 0.13 (4.31) (0.15) -- 15.62 9/30/01 /21/ 27.51 0.12 (7.60) (0.08) -- 19.95 Investor B Class 9/30/05 $20.98 $ 0.20/5/ $ 1.88 $ -- $-- $23.06 9/30/04 18.75 0.06/5/ 2.24 (0.07) -- 20.98 9/30/03 /21/ 15.35 0.04 3.42 (0.06) -- 18.75 9/30/02 /21/ 19.61 (0.01) (4.25) -- -- 15.35 9/30/01 /21/ 27.15 (0.06) (7.48) -- -- 19.61 Investor C Class 9/30/05 $20.97 $ 0.19/5/ $ 2.09 $(0.20) $-- $23.05 9/30/04 18.74 0.06/5/ 2.24 (0.07) -- 20.97 9/30/03 /21/ 15.35 0.04 3.41 (0.06) -- 18.74 9/30/02 /21/ 19.61 (0.01) (4.25) -- -- 15.35 9/30/01 /21/ 27.15 (0.06) (7.48) -- -- 19.61 /1/ Commencement of operations of share class. /2/ Annualized. /3/ Sales load not reflected in total return. /4/ Contingent deferred sales load not reflected in total return. /5/ Calculated using the average shares outstanding method. /6/ For period 12/1/00 through 9/30/01. /7/ For period 12/1/01 through 9/30/02. /8/ For period 12/1/02 through 9/30/03. /9/ For period 12/1/03 through 9/30/04. /10/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. There was no impact to the return. /11/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. The impact to the return, for redemption fees received during the period, is 4 basis points. /12/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. The impact to the return, for redemption fees received during the period, is 5 basis points. See accompanying notes to financial statements. 170
BlackRock Funds Ratio of Total Ratio of Net Ratio of Net Expense to Ratio of Net Investment Income Net assets Expenses to Average Net Investment Income to Average Net Portfolio Total end of period Average Net Assets (Excluding To Average Net Assets (Excluding Turnover Return (000) Assets Waivers) Assets Waivers) Rate - ------------------------------------------------------------------------------------------------------------------------------------ Institutional Class 9/30/05 12.17%/10/ $ 595,050 0.18%++ 0.37% 1.95% 1.76% 7% 9/30/04 13.71/10/ 546,947 0.18++ 0.36++ 1.56 1.38 2/9/ 9/30/03 /21/ 24.20 618,249 0.18++ 0.37++ 1.63 1.44 10/8/ 9/30/02 /21/ (20.65) 741,161 0.18++ 0.33++ 1.35 1.20 6/7/ 9/30/01 /21/ (26.78) 557,845 0.18++ 0.33++ 1.11 0.96 8/6/ Service Class 9/30/05 11.78%/10/ $ 68,637 0.55%++ 0.60% 1.62% 1.57% 7% 9/30/04 13.2010 74,641 0.56++ 0.67++ 1.17 1.06 2/9/ 9/30/03 /21/ 23.68 72,505 0.61++ 0.67++ 1.19 1.13 10/8/ 9/30/02 /21/ (21.02) 63,468 0.61++ 0.67++ 0.87 0.81 6/7/ 9/30/01 /21/ (27.10) 292,389 0.61++ 0.63++ 0.68 0.66 8/6/ Investor A Class 9/30/05 11.75%/3/,/10/ $ 296,266 0.55%++ 0.70%++ 1.59% 1.44% 7% 9/30/04 13.10/3/,/10/ 312,606 0.70++ 0.84++ 1.04 0.90 2/9/ 9/30/03 /21/ 23.41/3/ 281,505 0.79++ 0.85++ 1.01 0.96 10/8/ 9/30/02 /21/ (21.09)/3/ 222,736 0.79++ 0.78++ 0.72 0.72 6/7/ 9/30/01 /21/ (27.23)/3/ 76,363 0.79++ 0.81++ 0.50 0.48 8/6/ Investor B Class 9/30/05 10.89%/4/,/10/ $ 136,878 1.31%++ 1.35%++ 0.86% 0.82% 7% 9/30/04 12.25/4/,/10/ 177,754 1.46++ 1.50++ 0.28 0.24 2/9/ 9/30/03 /21/ 22.59/4/ 192,614 1.54++ 1.59++ 0.27 0.21 10/8/ 9/30/02 /21/ (21.72)/4/ 175,100 1.53++ 1.55++ (0.04) (0.05) 6/7/ 9/30/01 /21/ (27.77)/4/ 262,027 1.53++ 1.55++ (0.25) (0.26) 8/6/ Investor C Class 9/30/05 10.90%/4/,/10/ $ 228,276 1.31%++ 1.35%++ 0.86% 0.82% 7% 9/30/04 12.26/4/,/10/ 279,130 1.46++ 1.50++ 0.28 0.24 2/9/ 9/30/03 /21/ 22.52/4/ 297,835 1.54++ 1.59++ 0.27 0.21 10/8/ 9/30/02 /21/ (21.72)/4/ 270,958 1.53++ 1.55++ (0.04) (0.05) 6/7/ 9/30/01 /21/ (27.77)/4/ 382,356 1.53++ 1.55++ (0.25) (0.26) 8/6/ /13/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. The impact to the return, for redemption fees received during the period, is 6 basis points. /14/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. The impact to the return, for redemption fees received during the period, is 7 basis points. /15/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. The impact to the return, for redemption fees received during the period, is 8 basis points. /16/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. The impact to the return, for redemption fees received during the period, is 9 basis points. /17/ Redemption fee of 2.00% received by the Portfolios is reflected in total returns calculations. The impact to the return, for redemption fees received during the period, is 10 basis points. /18/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. The impact to the return, for redemption fees received during the period, is 42 basis points. /19/ Redemption fee of 2.00% received by the Portfolios is reflected in total return calculations. The impact to the return, for redemption fees received during the period, is 59 basis points. /20/ Net assets end of period are less than $1,000. /21/ Audited by other auditors. /22/ The total return includes an impact of 8 basis points related to payments made by SSRM prior to January 31, 2005. /23/ The total return includes an impact of 9 basis points related to payments made by SSRM prior to January 31, 2005. ++ Including expenses allocated from the U.S. Large Company Series of The DFA Investment Trust Company of 0.06% for the years ended 9/30/00 through September 30, 2005. 171
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (A) Organization BlackRock Funds(SM) (the "Fund") was organized on December 22, 1988, as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund currently has 50 portfolios, 20 of which are included in these financial statements (the "Portfolios"). Each Portfolio is authorized to issue an unlimited number of shares with a par value of $0.001. Each Portfolio of the Fund may offer as many as seven classes of shares. Shares of all classes of a Portfolio represent equal pro rata interests in such Portfolio, except that each class bears different expenses, which reflect the difference in the range of services provided to them, mostly due to differences in distribution and service fees. The Index Equity Portfolio accrues its respective share of income net of expenses daily on its investment in The U.S. Large Company Series of The DFA Investment Trust Company (the "Master"), which is treated as a partnership for federal income tax purposes. All of the net investment income and realized and unrealized gains and losses from the security transactions of the Master are allocated pro rata at the time of such determination. The Index Equity Portfolio allocated $29,397,476 in gross investment income and $697,231 in expenses from the Master during the year ended September 30, 2005. These amounts are presented on the Statement of Operations as net investment income from the Master in the amount of $28,700,247. Under the Fund's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of the duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund. However, based on experience, the Fund considers the risk of loss from such claims to be remote. (B) Fund Reorganizations BlackRock, Inc., the parent of BlackRock Advisors, Inc. ("BlackRock"), recently acquired SSRM Holdings, Inc., the parent of State Street Research & Management Co. ("SSRM"), the investment adviser of the former State Street Research mutual funds. The Boards of Trustees (the "Board") and shareholders of the State Street Research Funds approved a reorganization with similarly-managed BlackRock Portfolios (the "Reorganization"), as indicated below. In connection with the Reorganization, five State Street Research Funds reorganized with newly established BlackRock Portfolios, as indicated below. The Reorganization was a tax-free event and took place after the close of business on January 28, 2005. State Street Research Funds Blackrock Portfolios - ----------------------------- ---------------------- Investment Trust Investment Trust/1/,/2/ Large Cap Analyst Investment Trust/1/,/2/ Large Cap Value Large Cap Value/2/ Mid-Cap Growth Mid-Cap Growth/2/ Mid-Cap Value/2/ Mid-Cap Value Asset Allocation/2/ Asset Allocation/3/ Legacy/2/ Legacy/4/ Aurora/2/ Aurora/4/ Emerging Growth/2/ Small/Mid-Cap Growth/4/ Global Resources/2/ Global Resources/4/ Health Sciences/2/ Health Sciences/4/ /1/ Effective January 31, 2005, the BlackRock Select Equity Portfolio changed its name to the BlackRock Investment Trust Portfolio. /2/ Denotes the surviving or continuing portfolio for purposes of maintaining the financial statements and performance history in the post-Reorganization funds. /3/ Effective January 31, 2005, the BlackRock Balanced Portfolio changed its name to the BlackRock Asset Allocation Portfolio. /4/ New BlackRock Portfolios. 172
BlackRock Funds Under the Agreements and Plans of Reorganizations with respect to the Reorganization, the State Street Research Class A, Class B and Class R Shares were exchanged for BlackRock Investor A Class Shares, State Street Research Class B(1) Shares were exchanged for BlackRock Investor B Class Shares, State Street Research Class C Shares were exchanged for BlackRock Investor C Class Shares and State Street Research Class S Shares were exchanged for BlackRock Institutional Class Shares. The conversion ratios for each Share Class mentioned above were as follows: State Street Research Funds Class A Class B(1) Class B Class C Class R Class S - ----------------------------- ----------------------------------------------------------------------------------------------- Investment Trust ............ 0.77806224 0.77277277 0.75918073 0.77475000 -- 0.78011714 Large Cap Analyst ........... 0.89751180 0.89305973 0.87054964 0.89425000 -- 0.89987336 Large Cap Value ............. 1.24981582 1.21431253 1.20156181 1.21745329 -- 1.24909774 Mid-Cap Growth .............. 0.73009098 0.67146166 0.63731327 0.67353407 -- 0.73322751 Mid-Cap Value ............... 1.57950264 1.62345461 1.56116554 1.63087248 1.57489743 1.56483770 Asset Allocation ............ 0.71991517 0.72321182 0.71704180 0.72727901 -- 0.71889936 Legacy ...................... 1.00000000 1.00000000 0.98101559 1.00000000 0.99614138 1.00000000 Aurora ...................... 1.00000000 1.00000000 0.95337751 1.00000000 -- 1.00000000 Emerging Growth ............. 1.00000000 1.00000000 0.91664065 1.00000000 0.99539494 1.00000000 Global Resources ............ 1.00000000 1.00000000 0.92094612 1.00000000 0.99768147 1.00000000 Health Sciences ............. 1.00000000 1.00000000 0.96497882 1.00000000 -- 1.00000000 The net assets before and after the Reorganization and shares issued and redeemed in the Reorganization were as follows: State street Existing Combined net assets Prior net assets Blackrock portfolios' research funds' blackrock portfolios as of january 28, 2005 as of january 28, 2005 shares issued shares redeemed - --------------------------- ------------------------------------------------------------------------------------------- Investment Trust ......... $1,498,152,592 $ 94,173,891 112,830,577 144,941,372 Large Cap Value .......... 375,958,467 220,398,231 11,510,360 9,304,166 Mid-Cap Growth ........... 469,599,671 112,602,647 40,325,986 56,565,182 Mid-Cap Value ............ 700,767,573 31,360,120 56,941,640 35,763,533 Asset Allocation ......... 808,215,456 118,597,457 47,307,662 65,619,686 State Street New Combined Net Assets Prior Net Assets Blackrock Portfolios Research Fund's Blackrock Portfolios as of January 28, 2005 as of January 28, 2005 Shares Issued Shares Redeemed - ------------------------------- ------------------------------------------------------------------------------------------ Legacy ....................... $ 303,167,930 N/A 23,774,854 23,821,894 Aurora ....................... 3,307,156,075 N/A 88,632,067 88,854,760 Small/Mid-Cap Growth ......... 352,288,988 N/A 27,815,846 27,932,833 Global Resources ............. 825,347,266 N/A 17,184,504 17,250,833 Health Sciences .............. 138,374,397 N/A 6,894,017 6,898,634 173
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Included in the net assets from the State Street Research Funds were the following components: Net Undistributed Accumulated Unrealized Paid In Net Investment Realized Appreciation/ Net State Street Research Fund Capital Income (Loss) Gain (Loss) (Depreciation) Assets - ---------------------------- --------------------------------------------------------------------------------------- Investment Trust ........... $1,347,362,021 $ 884,681 $ (310,301,295) $325,455,127 $1,363,400,534 Large Cap Analyst .......... 40,605,783 (20,664) (3,696,837) 3,689,885 40,578,167 Large Cap Value ............ 140,661,636 (51,872) (11,642,475) 26,592,947 155,560,236 Mid-Cap Growth ............. 578,507,467 (1,354,506) (280,110,666) 59,954,730 356,997,025 Legacy ..................... 385,380,697 1,305,278 (123,774,086) 40,256,041 303,167,930 Mid-Cap Value .............. 578,833,036 289,106 (794,901) 91,080,212 669,407,453 Aurora ..................... 2,419,708,570 (9,149,900) 259,837,698 636,759,707 3,307,156,075 Emerging Growth ............ 341,584,995 (1,676,121) (34,054,396) 46,434,510 352,288,988 Global Resources ........... 501,649,873 (4,726,637) 46,159,901 282,264,129 825,347,266 Health Sciences ............ 124,221,974 (1,286,711) 118,458 15,320,676 138,374,397 Asset Allocation ........... 628,277,636 (4,066,275) 2,317,491 63,089,147 689,617,999 In April of 2005, BlackRock determined that the BlackRock Asset Allocation Portfolio held high yield bonds as a result of the Reorganization. The Portfolio sold the bonds and BlackRock reimbursed the Portfolio for the realized losses incurred from the date of the Reorganization through April 18, 2005. The amount of the reimbursement for the realized losses was $90,574 (See Note (D)). (C) Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. Investment Valuation -- Valuation of investments held by each Portfolio is as follows: investments traded on a national securities exchange or on the NASDAQ National Market System are valued at the last reported sale price that day or the NASDAQ official closing price, if applicable; investments traded on a national securities exchange for which there were no sales on that day and investments traded on other over-the-counter markets for which market quotations are readily available are valued at the mean of the bid and asked prices; and an option or futures contract is valued at the last sales price prior to 4:00 p.m. (Eastern time), as quoted on the principal exchange or board of trade on which such option or contract is traded, or in the absence of a sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern time). The amortized cost method of valuation will be used with respect to debt obligations with sixty days or less remaining to maturity unless the investment adviser and/or sub-adviser under the supervision of the Board determines such method does not represent fair value. Any assets which are denominated in a non-U.S. currency are translated into U.S. dollars at the prevailing market rates. In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the market value of such investment, the investment will be valued by, under the direction of or in accordance with a method approved by the Board as reflecting fair value ("Fair Value Assets"). The investment adviser and/or sub-adviser will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to a valuation committee. Such valuation committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to and ratified by the Board. When determining the price for a Fair Value Asset, the investment adviser and/or sub-adviser shall seek to determine the price that the Portfolio might reasonably expect to receive from the current sale of that asset in an arms-length transaction. Fair value determinations shall be based upon all available factors that the adviser and/or sub-adviser deems relevant. The Index Equity Portfolio's investment reflects its proportionate interest in the net assets of the Master. Dividends to Shareholders -- Dividends from net investment income, which are recorded on the ex-dividend date, are declared and paid quarterly for the Portfolios. Net realized capital gains, if any, are distributed at least annually. 174
BlackRock Funds Foreign Currency Translation -- The books and records of the Portfolios are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (I) market value of investment securities, assets and liabilities at the current rate of exchange; and (II) purchases and sales of investment securities, income and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions. The Portfolios do not isolate that portion of gains and losses on investment securities which is due to changes in the foreign exchange rates from that which is due to changes in the market prices of such securities. The Portfolios report forward foreign currency related transactions as components of realized gains for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes. Forward Foreign Currency Contracts -- Certain Portfolios may enter into forward foreign currency contracts as a hedge against either specific transactions or portfolio positions. These contracts are adjusted by the daily forward exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settle-ment date. Such contracts, which protect the value of the Portfolios' investment securities against a decline in the value of currency, do not eliminate fluctuations in the underlying prices of the securities. They simply establish an exchange rate at a future date. Also, although such contracts tend to minimize the risk of loss due to a decline in the value of a hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of such foreign currency increase. Risks may arise upon entering into these contracts from the potential inability of counterparts to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The aggregate principal amounts of the contracts are not recorded as the Portfolios intend to settle the contracts prior to delivery. Under the terms of foreign currency contracts open at September 30, 2005, the Portfolios are obligated to deliver or receive currency in exchange for U.S. dollars as indicated below: Unrealized Value At Foreign Settlement Currency Currency Contract September 30, Exchange Date Amount Sold Amount 2005 Gain(Loss) - ------------ ----------------- ---------------------------------- ----------------- ----------------- ---------------- International Opportunities 12/15/05 20,000,000 Canadian Dollar ................. $ 16,970,150 $ 17,268,664 $ (298,514) 12/15/05 32,000,000 Australian Dollar ............... 24,627,200 24,362,391 264,809 12/15/05 47,000,000 European Currency Unit .......... 58,785,249 56,910,868 1,874,381 12/15/05 22,000,000 Swiss Franc ..................... 17,898,257 17,186,426 711,831 12/15/05 10,500,000 Great British Pound ............. 19,327,769 18,559,343 768,426 ------------ ------------ ---------- $ 137,608,625 $134,287,692 $3,320,933 ============ ============ ========== Unrealized Value At Foreign Settlement Currency Currency Contract September 30, Exchange Date Amount Bought Amount 2005 Loss - --------- ----------- ----------------------------------- ----------------- ----------------- ---------------- International Opportunities 12/15/05 210,000,000 Norwegian Krone ................. $ 33,588,177 $ 32,245,844 $(1,342,333) 12/15/05 7,500,000,000 Japanese Yen .................... 68,629,784 66,757,655 (1,872,129) ------------- ------------- ------------ $ 102,217,961 $ 99,003,499 (3,214,462) ============= ============= ============ Unrealized Value At Foreign Settlement Currency Currency Contract September 30, Exchange Date Amount Sold Amount 2005 Gain - --------- -------------- ----------------------------------- ----------------- ----------------- ---------------- Asset Allocation 10/20/05 1,942,000 European Currency Unit .......... $ 2,352,902 $ 2,344,463 $ 8,439 ============= ============= ============ 175
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Unrealized Value At Foreign Settlement Currency Currency Contract September 30, Exchange Date Amount Bought Amount 2005 Loss - -------- -------- ---------------------------------- -------------- ----------------- ---------- Asset Allocation 10/20/05 201,957 European Currency Unit .......... $ 248,461 $ 243,811 $ (4,650) ========== ============= =========== Swap Agreements -- The Portfolios may invest in swap agreements for the purpose of hedging against changes in interest rates or foreign currencies. Swap agreements involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest or a specified amount of a currency (e.g., an exchange of floating rate payments for fixed rate payments) with respect to a notional amount of principal. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as an unrealized gain or loss in the Statements of Operations. Net payments of interest are recorded as realized gain or loss. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statements of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreement may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest and/or exchange rates. At September 30, 2005, the Asset Allocation Portfolio had the following swap agreements outstanding: Unrealized Termination Interest Interest Notional amount Appreciation Portfolio Counter-party Date Receivable Rate Payable Rate (U.S. Dollars) (Depreciation) - -------------------------------------------------------------------------------------------------------------------------------- Asset Allocation Morgan Stanley 06/14/2006 3.21% 3.85%/1/ $ 2,145,000 $ (261) Deutsche Bank 08/02/2007 4.39% 3.70%/1/ 10,500,000 (22,050) Deutsche Bank 09/02/2007 4.73% 3.87%/1/ 12,000,000 (75,120) JP Morgan Chase 09/20/2007 3.89%/1/ 4.35% 18,000,000 66,240 Morgan Stanley 06/17/2010 4.31% 3.89%/1/ 600,000 (1,797) Morgan Stanley 07/01/2015 4.17% 3.50%/1/ 11,300,000 (213,902) Morgan Stanley 07/01/2010 3.50%/1/ 4.39% 6,300,000 176,240 Union Bank of Switzerland 09/27/2010 3.22% 3.97%/1/ 100,000 (603) Morgan Stanley 06/14/2014 3.85%/1/ 5.31% 600,000 (32,198) Merrill Lynch 07/22/2014 3.63%/1/ 4.93% 600,000 (9,030) Goldman Sachs 10/01/2014 3.50%/1/ 4.51% 600,000 2,836 Union Bank of Switzerland 03/23/2015 3.96%/1/ 4.96% 5,000,000 (73,000) JP Morgan Chase 05/26/2015 3.84%/1/ 4.50% 1,700,000 15,299 Morgan Stanley 08/02/2015 4.73%/1/ 3.70% 600,000 (1,589) JP Morgan Chase 09/20/2015 4.70% 3.89%/1/ 3,900,000 (24,414) Merrill Lynch 07/29/2019 3.68%/1/ 5.37% 100,000 (5,055) Merrill Lynch 08/13/2019 5.16% 3.79%/1/ 125,000 3,523 Merrill Lynch 10/27/2019 4.78% 3.66%/1/ 100,000 206 /1/ Rate shown is based on the 3 month LIBOR as of the most recent payment date. 176
Blackrock Funds Investment Transactions and Investment Income -- Investment transactions are accounted for on the trade date. The cost of investments sold and the related gain or loss thereon is determined by use of the high cost method for both financial reporting and federal income tax purposes. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are accreted or amortized, respectively, for book and tax purposes using the effective yield-to-maturity method over the term of the instrument. Dividends are recorded on the ex-dividend date. Paydown gains and losses on mortgage and asset-backed securities are presented as an adjustment to interest income. Repurchase Agreements -- Money market instruments may be purchased from banks and non-bank dealers subject to the seller's agreement to repurchase them at an agreed upon date and price. Collateral for repurchase agreements may have longer maturities than the maximum permissible remaining maturity of portfolio investments. The seller is required on a daily basis to maintain the value of the securities subject to the agreement at not less than the repurchase price. The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system or held in a separate account by the Portfolio's custodian or an authorized securities depository. Reverse Repurchase Agreements -- The Portfolios may enter into reverse repurchase agreements with qualified third party broker-dealers as determined by and under the direction of the Board. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance and is included within the related liability on the Statements of Assets and Liabilities. At the time the Portfolio enters into a reverse repurchase agreement, it identifies for segregation certain liquid securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement. Futures Transactions -- The Portfolios may invest in financial futures contracts for the purposes of hedging their existing portfolio securities, or securities that the Portfolios intend to purchase, against fluctuations in value caused by changes in prevailing market interest rates. The Portfolios may also invest in futures contracts and options on futures contracts to commit funds awaiting investments in stocks or to maintain cash liquidity or, except with respect to the Index Equity Portfolio, for other hedging purposes. Certain Portfolios may also invest in these instruments to increase returns. These Portfolios' futures contracts obligate a Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. Upon entering into a futures contract, the Portfolio is required to deposit cash or pledge securities as initial margin. Subsequent payments, which are dependent on the daily fluctuations in the value of the underlying security or securities, are made or received by the Portfolio each day (daily variation margin) and are recorded as cumulative unrealized gains or losses until the contracts are closed. When the contracts are closed, the Portfolio records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Portfolio's basis in the contracts. Risks of entering into futures contracts include the possibility that there will not be a perfect price correlation between the futures contracts and the underlying securities. Second, it is possible that a lack of liquidity for futures contracts could exist in the market, resulting in an inability to liquidate a futures position prior to its maturity date. Third, the purchase of a futures contract involves the risk that a Portfolio could lose more than the original margin deposit required to initiate a futures transaction. Stripped Mortgage Backed Securities -- The Asset Allocation Portfolio may invest in stripped mortgage-backed securities issued by the U.S. Government, its agencies and instrumentalities. Stripped mortgage-backed securities are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. In certain cases, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on IO's is sensitive to the rate of principal repayments (including prepayments) on the related underlying mortgage assets, and principal payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Portfolio may not fully recoup its initial investment in IO's. Such securities will be considered liquid only if so determined in accordance with guidelines approved by the Board. The Portfolio also may invest in stripped mortgage-backed securities that are privately issued. These securities will be considered illiquid for purposes of the Portfolio's limit on illiquid securities. Investing in Government Sponsored Enterprises -- The Asset Allocation Portfolio invests in securities issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and similar United States Government sponsored entities such as Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Banks ("FHLB's"). Freddie Mac, Fannie Mae, and FHLB's, although chartered and sponsored by Congress, are not funded by Congressional appropriations and the debt and mortgage-backed securities issued by Freddie Mac, Fannie Mae and FHLB's are neither guaranteed nor insured by the U.S. Government. 177
Blackrock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Option Writing/Purchasing-- The Portfolios may write or purchase financial options contracts for the purpose of hedging or earning additional income, which may be deemed speculative. When a Portfolio writes or purchases an option, an amount equal to the premium received or paid by the Portfolio is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by the Portfolio on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commissions, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or proceeds from the sale in determining whether the Portfolio has realized a gain or loss on investment transactions. The Portfolio, as writer of an option may have no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Swaptions Writing -- The Portfolios may write swaption contracts to manage exposure to fluctuations in interest rates and to enhance portfolio yield. Swaption contracts written by the Portfolios represent an option that gives the purchaser the right, but not the obligation, to enter into a previously agreed upon swap contract on a future date. If a written call swaption is exercised, the writer will enter a swap and is obligated to pay the fixed rate and receive a floating rate in exchange. If a written put swaption is exercised, the writer will enter a swap and is obligated to pay the floating rate and receive a fixed rated in exchange. Swaptions are marked to market daily based upon quotations from market makers. When a portfolio writes a swaption, the premium received is recorded as a liability and is subsequently adjusted to the current market values of the swaption. Changes in the values of the swaption are reported as unrealized gains or losses in the Statements of Assets and Liabilities or Statements of Net Assets. Gain or loss is recognized when the swaption contract expires or is closed. Premiums received from writing swaptions that expire or are exercised are treated by the Portfolio as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. Entering into a swaption contract involves, to varying degrees, the elements of credit, market and interest rate risk, associated with both option contracts and swap contracts. To reduce credit risk from potential counterparty default, the Portfolios enter into swaption contracts with counterparties whose creditworthiness has been evaluated by BlackRock. The Portfolios bear the market risk arising from any change in index values or interest rates. Written Option and Swaption transactions entered into during the period ended September 30, 2005, are summarized as follows: Health Sciences Asset Allocation -------------------------------------------------------- Number of Number of Contracts Premium Contracts Premium -------------------------------------------------------- Balance at 02/28/05 ................ -- $ -- (243) $ (79,281) Written ............................ (16,353) (1,415,404) (3,064) (1,293,196) Purchased .......................... 95 523 1,922 88,288 Expired ............................ 9,954 715,364 (1,042) (7,291) Closed ............................. 1,414 67,458 (703) (46,100) Exercised .......................... -- -- -- -- -------- ------------ ------- ------------- Balance at 9/30/05 ................. (4,890) $ (632,059) (3,130) $ (1,337,580) ======== ============ ======= ============= TBA Purchase Commitments -- The Portfolios except Index Equity may enter into to be announced ("TBA") purchase commitments to purchase or sell securities for a fixed price at a future date. TBA commitments are considered securities in themselves, and involve a risk of loss if the value of the security to be purchased/sold declines/increases prior to settlement date, which is in addition to the risk of decline in the value of the Portfolio's other assets. Unsettled TBA commitments are valued at the current market value of the underlying securities, according to the procedures described under "Security Valuation". Mortgage Dollar Rolls -- The Asset Allocation Portfolio may enter into mortgage dollar rolls (principally using TBA's) in which the Portfolio sells mortgage securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities at an agreed-upon price on a fixed date. The Portfolio accounts for such dollar rolls as purchases and sales and receives compensation, in either "fee" or "drop", as consideration for entering 178
Blackrock Funds into the commitment to repurchase. The Portfolio must maintain liquid securities having a value not less than the repurchase price (including accrued interest) for such dollar rolls. The market value of the securities that the Portfolio is required to purchase may decline below the agreed upon repurchase price of those securities. In a "fee" roll, the compensation received is recorded as deferred income and amortized to income over the roll period. In a "drop" roll, the compensation is paid via a lower price for the security upon its repurchase. The counterparty receives all principal and interest payments, including prepayments, made in respect of a security subject to such a contract while it is the holder. Mortgage dollar rolls may be renewed with a new purchase and repurchase price and a cash settlement made on settlement date without physical delivery of the securities subject to the contract. A Portfolio engages in dollar rolls for the purpose of enhancing its yield, principally by earning a negotiated fee. Financing Transactions -- The Portfolios may enter into financial transactions consisting of the sale by the Portfolio of securities, together with a commitment to repurchase similar securities at a future date. The difference between the selling price and the future purchase price is an adjustment to interest income. If the counterparty to whom the Portfolio sells the security becomes insolvent, the Portfolio's right to repurchase the security may be restricted. The value of the security may change over the term of the financing transaction. Inflation-indexed Bonds -- Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal. Securities Lending -- Through an agreement with PFPC Trust Co., (the "lending agent") the Portfolios may lend portfolio securities to certain brokers, dealers or other financial institutions that pay the Portfolios a negotiated fee. Prior to the close of each business day, loans of U.S. securities are secured by collateral at least equal to 102% of the market value of the securities on loan. Loans of foreign securities are secured by collateral at least equal to 105% of the market value of securities on loan. However, due to market fluctuations, the value of the securities lent may exceed the value of the collateral. On the next business day, the collateral is adjusted based on the prior day's market fluctuations and the current day's lending activity. Cash collateral received in connection with the securities lending is invested in short-term investments by the lending agent. The lending agent has hired BlackRock Capital Management, Inc. ("BCM"), a wholly-owned subsidiary of BlackRock, Inc., and pays BCM to provide advisory services with respect to the collateral of all of the clients of its securities lending program. The lending agent may invest such collateral in short-term investments, including the Institutional Money Market Trust (the "Trust"), a portfolio of money market securities, or high-quality, short-term instruments with a maturity date not to exceed 397 days. BCM serves as investment adviser to the Trust, but receives no fees from the Trust for these services. Administrative and accounting services are provided by PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of The PNC Financial Services Group, Inc. PFPC is paid a fee from the Trust at an annual rate not to exceed 0.10% of the Trust's average daily net assets. At September 30, 2005, the market value of securities on loan, cash collateral invested in the Trust and total value of collateral held in connection with securities lending is summarized as follows: Market Value Market Value of Total Market of Securities Cash Collateral Value of On Loan Invested in the Trust Collateral Received ------------------------------------------------------------- Investment Trust ................ $ 157,537,052 $ 97,006,460 $ 162,554,304 Large Cap Value Equity .......... 75,173,805 44,756,386 77,496,894 Large Cap Growth Equity ......... 4,803,423 3,029,234 4,944,484 Dividend Achievers .............. 10,238,279 7,614,238 10,552,865 Legacy .......................... 46,119,207 30,309,454 47,134,914 Mid-Cap Value Equity ............ 75,626,246 54,169,221 77,409,862 Mid-Cap Growth Equity ........... 41,047,084 31,436,669 42,162,841 Aurora .......................... 170,485,111 168,827,843 176,574,523 Small/Mid-Cap Growth ............ 26,025,659 21,268,527 26,689,488 Small Cap Value Equity .......... 4,843,121 5,001,530 5,001,530 Small Cap Core Equity ........... 5,270,841 4,799,682 5,373,790 179
Blackrock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Market Value Market Value of Total Market of Securities Cash Collateral Value of on Loan Invested in the Trust Collateral Received ------------------------------------------------------------- Small Cap Growth Equity ......... $ 23,058,062 $ 17,448,244 $ 23,698,754 Global Sciences & Technology Opportunities .................. 3,391,814 3,104,457 3,500,012 Global Resources ................ 120,570,015 109,250,270 126,432,172 All-Cap Global Resources ........ 33,393,425 23,895,901 35,018,383 Health Sciences ................. 25,211,741 17,439,518 25,993,314 U.S. Opportunities .............. 13,225,815 9,254,249 13,630,231 Asset Allocation ................ 108,354,352 77,247,763 111,688,786 In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. Prior to January 31, 2005, State Street Bank and Trust Company served as the securities lending agent for State Street Research Legacy Fund, State Street Research Mid-Cap Value Fund, State Street Research Aurora Fund, State Street Research Emerging Growth Fund, State Street Research Global Resources Fund, State Street Research Health Sciences Fund and State Street Research Asset Allocation Fund. These Funds received cash or securities as collateral in an amount equal to at least 100% of the market value of any loaned securities plus accrued interest. Cash collateral was invested in State Street Navigator Securities Lending Prime Portfolio. Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles") requires the use of management estimates. Actual results could differ from these estimates. Other -- Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuations in exchange rates. Some countries in which the Portfolios invest require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if there is a deterioration in a country's balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad. The securities exchanges of certain foreign markets are substantially smaller, less liquid and more volatile than the major securities markets in the United States. Consequently, acquisition and disposition of securities by the Portfolios may be inhibited. In addition, a significant proportion of the aggregate market value of equity securities listed on the major securities exchanges in emerging markets are held by a smaller number of investors. This may limit the number of shares available for acquisition or disposition by the Portfolio. Expenses that are directly related to one of the Portfolios are charged directly to that Portfolio. Other operating expenses are prorated to the Portfolios on the basis of relative net assets. Class-specific expenses are borne by that class. Differences in net expense ratios between classes of a Portfolio are due to class-specific expenses, waivers and accrual adjustments. Income, other expenses and realized and unrealized gains and losses of a Portfolio are allocated to the respective class on the basis of the relative net assets each day. 180
Blackrock Funds The following table provides a list of the Portfolios included in this report along with a summary of their respective class-specific fee arrangements as provided under the Fund's Amended and Restated Distribution and Service Plan (the "Plan"). Fees are expressed as a percentage of average daily net asset values of the respective classes. Class Specific Fee Arrangement - ------------------------------------------------------------------------------------------------------------------------ Portfolio Share Classes - ------------------------------------------------------------------------------------------------------------------------ BlackRock Institutional Service ---------------------- ---------------------- ---------------------- Contractual Actual Contractual Actual Contractual Actual Period Fees (1) Fees (5) Fees Fees (5) Fees (1) Fees (5) -------------- ----------- -------- ----------- -------- ----------- -------- Investment Trust 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Large Cap Value Equity 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Large Cap Growth Equity 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Dividend AchieversTM 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Legacy Pre-1/31/05 N/A N/A None None N/A N/A Post-1/31/05 N/A N/A None None 0.25% 0.25% Mid-Cap Value Equity Pre-1/31/05 N/A N/A None None N/A N/A Post-1/31/05 N/A N/A None None 0.25% 0.25% Mid-Cap Growth Equity 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Aurora Pre-1/31/05 N/A N/A None None N/A N/A Post-1/31/05 N/A N/A None None 0.25% 0.25% Small/Mid-Cap Growth Pre-1/31/05 N/A N/A None None N/A N/A Post-1/31/05 N/A N/A None None 0.25% 0.25% Small Cap Value Equity 9/1/04-9/30/05 0.25% 0.25% None None 0.25% 0.25% Small Cap Core Equity 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Small Cap Growth Equity 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Global Science & Technology 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Opportunities Global Resources Pre-1/31/05 N/A N/A None None N/A N/A Post-1/31/05 N/A N/A None None N/A N/A All-Cap Global Resources 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Health Sciences Pre-1/31/05 N/A N/A None None N/A N/A Post-1/31/05 N/A N/A None None 0.25% 0.25% U.S. Opportunities 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% International Opportunities 9/1/04-9/30/05 N/A N/A None None 0.25% 0.25% Asset Allocation Pre-1/31/05 N/A N/A None None N/A N/A Post-1/31/05 N/A N/A None None 0.25% 0.25% Index Equity 9/1/04-9/30/05 N/A N/A None None 0.15% 0.15% Portfolio Share Classes - --------------------------------------------------------------------------------------------------------------- Investor A Investor B Investor C ---------------------------- ----------------------- ----------------------- Contractual Actual Contractual Actual Contractual Actual Fees Fees (5) Fees (4) Fees (5) Fees (4) Fees (5) ----------- --------- ----------- -------- ----------- -------- Investment Trust 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Large Cap Value Equity 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Large Cap Growth Equity 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Dividend AchieversTM 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Legacy 0.30%/2/ 0.30% 1.00% 1.00% 1.00% 1.00% 0.35%/3/ 0.35% 1.00% 1.00% 1.00% 1.00% Mid-Cap Value Equity 0.30%/2/ 0.30% 1.00% 1.00% 1.00% 1.00% 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Mid-Cap Growth Equity 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Aurora 0.30%/2/ 0.30% 1.00% 1.00% 1.00% 1.00% 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Small/Mid-Cap Growth 0.30%/2/ 0.30% 1.00% 1.00% 1.00% 1.00% 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Small Cap Value Equity 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Small Cap Core Equity 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Small Cap Growth Equity 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Global Science & Technology 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Opportunities Global Resources 0.30%/2/ 0.30% 1.00% 1.00% 1.00% 1.00% 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% All-Cap Global Resources 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Health Sciences 0.30%/2/ 0.30% 1.00% 1.00% 1.00% 1.00% 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% U.S. Opportunities 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% International Opportunities 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Asset Allocation 0.30%/2/ 0.30% 1.00% 1.00% 1.00% 1.00% 0.35%/3/ 0.25% 1.00% 1.00% 1.00% 1.00% Index Equity 0.25%/3/ 0.15% 0.90% 0.90% 0.90% 0.90% (1)-- themaximum annual contractual fees are comprised of a 0.25% service fee, with exception of Index Equity which has a service fee of 0.15%. (2)-- the maximum annual contractual fees are comprised of a 0.05% distribution fee and a 0.25% service fee. (3)-- the maximum annual contractual fees are comprised of a 0.10% distribution fee and a 0.25% service fee, with exception of Index Equity which contractual fees are comprised of a 0.10% distribution fee and a 0.15% service fee. (4)-- the maximum annual contractual fees are comprised of a 0.75% distribution fee and a 0.25% service fee, with the exception of Index Equity which contractual fees are comprised of a 0.75% distribution fee and a 0.15% service fee. (5)-- the actual fees are as of September 30, 2005 for Post-January 31, 2005 and are as of January 31, 2005 for Pre-January 31, 2005. 181
Blackrock Funds NOTES TO FINANCIAL STATEMENTS (Continued) The BlackRock share class bears a transfer agent fee at an annual rate not to exceed 0.005% of the average daily net assets plus per account fees and disbursements. Institutional, Service, Investor A, Investor B and Investor C share classes bear a transfer agent fee at an annual rate not to exceed 0.018% of the average daily net assets of such respective classes plus per account fees and disbursements. The Index Equity Portfolio invests solely in The U.S. Large Company Series (the "Series") of The DFA Investment Trust Company (the "DFA Trust"), collectively, the Master. Advisory fees are accrued daily and paid monthly to Dimensional Fund Advisors, Inc. at the Series level as described within the DFA Trust financial statements which are included elsewhere in the report and should be read in conjunction with the financial statements of the Index Equity Portfolio. For the period ended September 30, 2005, the following shows the various types of class-specific expenses borne directly by each class of each fund and any associated waivers of those expenses. Share Classes Administration Fees --------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C Total --------------------------------------------------------------------------- ----------- Investment Trust ............ $ -- $ 544,597 $ 2,498 $ 575,557 $ 261,603 $ 26,255 $ 1,410,510 Large Cap Value Equity ...... -- 178,140 43,284 176,180 53,043 15,322 465,969 Large Cap Growth Equity ..... -- 36,032 18,051 25,606 16,670 3,449 99,808 Dividend Achievers(TM) ...... -- 6,722 328 13,704 2,458 8,537 31,749/1/ Legacy ...................... -- 50,958 -- 120,472 87,103 20,430 278,963 Mid-Cap Value Equity ........ -- 42,152 890 397,519 109,120 79,775 629,456 Mid-Cap Growth Equity ....... -- 91,397 5,120 303,960 75,065 26,343 501,885 Aurora ...................... -- 143,499 -- 1,688,136 436,561 419,904 2,688,100 Small/Mid-Cap Growth ........ -- 25,821 -- 220,551 24,018 23,950 294,340 Small Cap Value Equity ...... 2,152 98,202 4,382 48,714 22,039 9,753 185,242 Small Cap Core Equity ....... -- 8,711 37 9,556 4,960 13,275 36,539 Small Cap Growth Equity ..... -- 460,401 40,633 213,734 29,140 21,406 765,314 Global Science & Technology Opportunities ............... -- 1,650 136 13,998 16,652 4,278 36,714 Global Resources ............ -- 26,091 -- 581,438 81,277 141,601 830,407 All-Cap Global Resources .... -- 30,659 -- 23,950 5,179 11,569 71,357 Health Sciences ............. -- 8,324 12 89,148 29,971 34,432 161,887 U.S. Opportunities .......... -- 8,830 1,070 44,792 56,576 28,807 140,075 International Opportunities . -- 219,719 44,922 244,501 85,556 126,617 721,315 Asset Allocation ............ -- 25,099 1,840 423,083 154,241 54,685 658,948 Index Equity ................ -- 820,119 102,140 450,673 234,481 375,475 1,982,888/2/ /1/ Fund also had a Fund level administration fee waiver of $12,785. /2/ Fund also had a Fund level administration fee waiver of $602,393 and a class level administration fee waiver of $820,119. 182
Blackrock Funds Share Classes Administration Fees Waived --------------------------------------------------------------------------- Blackrock Institutional Service Investor A Investor B Investor C Total --------------------------------------------------------------------------- ----------- Investment Trust ............ $ -- $ (544,598) $ (1,334) $ (160,629) $ (68,291) $ (5,772) $ ( 780,624) Large Cap Value Equity ...... -- (178,140) (27,369) -- -- -- (205,509) Large Cap Growth Equity ..... -- (36,032) (12,058) -- -- -- (48,090) Dividend Achievers(TM) ...... -- (6,722) (210) -- -- -- (6,932) Legacy ...................... -- (44,131) -- (103,745) (75,660) (17,849) (241,385) Mid-Cap Value Equity ........ -- (42,152) (883) (386,807) (102,541) (74,823) (607,206) Mid-Cap Growth Equity ....... -- (82,800) (1,899) (78,911) (16,111) (5,552) (185,273) Small/Mid-Cap Growth ........ -- (25,522) -- (196,373) (22,085) (23,950) (267,930) Small Cap Value Equity ...... -- (15,760) -- -- -- -- (15,760) Small Cap Core Equity ....... -- (8,711) (10) -- -- -- (8,721) Global Science & Technology Opportunities .............. -- (1,649) (116) -- -- -- (1,765) Global Resources ............ -- (23,172) -- (304,010) (71,338) (122,753) (521,273) All-Cap Global Resources .... -- (30,659) -- (11,927) (3,259) (7,111) (52,956) Health Sciences ............. -- (5,664) (6) (14,626) (13,882) (13,472) (47,650) U.S. Opportunities .......... -- (7,168) (438) -- -- -- (7,606) International Opportunities . -- (82,065) -- -- -- -- (82,065) Asset Allocation ............ -- (25,098) (1,208) -- -- -- (26,306) Index Equity ................ -- (820,119) -- -- -- -- (820,119) Share Classes Transfer agent fees --------------------------------------------------------------------------- Blackrock Institutional Service Investor A Investor B Investor C Total --------------------------------------------------------------------------- ----------- Investment Trust ............ $ -- $ 67,907 $ 310 $ 72,187 $ 32,475 $ 3,263 $ 176,142 Large Cap Value Equity ...... -- 22,113 5,373 21,871 6,585 1,902 57,844 Large Cap Growth Equity ..... -- 4,473 2,241 3,179 2,069 428 12,390 Dividend Achievers(TM) ...... -- 834 41 1,685 305 1,060 3,925 Legacy ...................... -- 6,326 -- 14,955 10,813 2,536 34,630 Mid-Cap Value Equity ........ -- 5,233 110 49,358 13,546 9,903 78,150 Mid-Cap Growth Equity ....... -- 11,346 636 37,733 9,318 3,270 62,303 Aurora ...................... -- 17,814 -- 229,036 54,194 52,126 353,170 Small/Mid-Cap Growth ........ -- 3,205 -- 27,379 2,982 2,973 36,539 Small Cap Value Equity ...... 307 12,191 544 6,047 2,736 1,211 23,036 Small Cap Core Equity ....... -- 1,081 4 1,187 616 1,648 4,536 Small Cap Growth Equity ..... -- 57,153 5,044 26,533 3,617 2,657 95,004 Global Science & Technology Opportunities .............. -- 205 17 1,738 2,066 531 4,557 Global Resources ............ -- 3,239 -- 73,616 10,090 17,578 104,523 All-Cap Global Resources .... -- 3,806 -- 2,973 643 1,436 8,858 Health & Sciences ........... -- 1,033 1 11,067 3,721 4,274 20,096 U.S. Opportunities .......... -- 1,096 133 5,560 7,023 3,576 17,388 International Opportunities . -- 27,276 5,576 30,352 10,621 15,718 89,543 Asset Allocation ............ -- 3,116 228 52,548 19,147 6,788 81,827 Index Equity ................ -- 102,681 12,680 55,946 29,108 46,611 247,026 183
Blackrock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Share Classes Shareholder Service Fees --------------------------------------------------------------------------- Blackrock Institutional Service Investor A Investor B Investor C Total --------------------------------------------------------------------------- ----------- Investment Trust ............ $ -- $ -- $ 4,309 $ 991,059 $ 447,103 $ 43,732 $ 1,486,203 Large Cap Value Equity ...... -- -- 74,628 305,768 90,804 26,308 497,508 Large Cap Growth Equity ..... -- -- 31,193 44,120 28,733 5,945 109,991 Dividend Achievers(TM) ...... -- -- 567 23,490 4,252 14,841 43,150 Legacy ...................... -- -- -- 292,633 212,355 50,021 555,009 Mid-Cap Value Equity ........ -- -- 1,532 674,373 186,453 136,320 998,678 Mid-Cap Growth Equity ....... -- -- 8,933 519,398 128,974 45,054 702,359 Aurora ...................... -- -- -- 5,100,211 1,149,068 1,139,160 7,388,439 Small/Mid-Cap Growth ........ -- -- -- 598,663 62,541 66,527 727,731 Small Cap Value Equity ...... 12,411 -- 7,565 83,952 37,990 16,818 158,736 Small Cap Core Equity ....... -- -- 63 16,506 8,570 22,931 48,070 Small Cap Growth Equity ..... -- -- 70,103 368,614 50,224 36,914 525,855 Global Science & Technology Opportunities .............. -- -- 235 24,135 28,710 7,375 60,455 Global Resources ............ -- -- -- 1,021,496 140,105 242,784 1,404,385 All-Cap Global Resources .... -- -- -- 41,293 8,929 19,946 70,168 Health Sciences ............. -- -- 21 153,625 51,624 59,071 264,341 U.S. Opportunities .......... -- -- 1,833 77,207 97,529 49,482 226,051 International Opportunities . -- -- 74,601 422,109 147,638 218,485 862,833 Asset Allocation ............ -- -- 3,172 728,767 265,881 93,636 1,091,456 Index Equity ................ -- -- 158,820 699,902 367,845 586,018 1,812,585 Share Classes Distribution Fees ----------------------------------- Investor A Investor B Investor C Total ------------------------------------ ----------- Investment Trust ............ $ 400,526 $1,342,261 $ 134,768 $ 1,877,555 Large Cap Value Equity ...... 117,684 283,466 79,056 480,206 Large Cap Growth Equity ..... 17,612 86,198 17,835 121,645 Dividend Achievers(TM) ...... 9,364 12,757 44,308 66,429 Legacy ...................... 95,969 637,118 150,258 883,345 Mid-Cap Value Equity ........ 274,186 559,616 408,971 1,242,773 Mid-Cap Growth Equity ....... 209,447 387,030 135,792 732,269 Aurora ...................... 1,629,349 3,448,242 3,418,776 8,496,367 Small/Mid-Cap Growth ........ 199,450 187,634 199,582 586,666 Small Cap Value Equity ...... 33,539 113,968 50,453 197,960 Small Cap Core Equity ....... 6,630 25,711 68,792 101,133 Small Cap Growth Equity ..... 147,507 150,670 110,741 408,918 Global Science & Technology Opportunities .............. 9,630 86,131 22,125 117,886 Global Resources ............ 408,069 420,400 732,417 1,560,886 All-Cap Global Resources .... 17,253 26,787 59,839 103,879 Health Sciences ............. 62,415 155,022 178,098 395,535 U.S. Opportunities .......... 30,821 292,599 149,105 472,525 International Opportunities . 169,351 442,922 655,765 1,268,038 Asset Allocation ............ 291,627 797,800 282,853 1,372,280 Index Equity ................ 310,324 1,212,833 1,942,114 3,465,271 184
Blackrock Funds The distribution fees for the Investor A share class include accruals for the State Street Research Class B shares for the period prior to the Reorganization on January 31, 2005 for the Investment Trust, Large Cap Value Equity, Mid-Cap Growth Equity, Aurora, Health Sciences and Asset Allocation Portfolios; and for State Street Research Class B and R share classes for the Legacy, Mid-Cap Value Equity, Small/Mid-Cap Growth and Global Resources Portfolios. Share Classes Distribution Fees Waived ------------- Investor A ------------- Investment Trust .................................. $ (400,526) Large Cap Value Equity ............................ (121,392)/(1)/ Large Cap Growth Equity ........................... (17,612) Dividend Achievers(TM) ............................ (9,364) Legacy ............................................ (82,972) Mid-Cap Value Equity .............................. (274,186) Mid-Cap Growth Equity ............................. (209,447) Aurora ............................................ (1,267,403) Small/Mid-Cap Growth .............................. (151,655) Small Cap Value Equity ............................ (33,539) Small Cap Core Equity ............................. (6,630) Small Cap Growth Equity ........................... (147,507) Global Science & Technology Opportunities ......... (9,630) Global Resources .................................. (408,069) All-Cap Global Resources .......................... (17,253) Health Sciences ................................... (62,415) U.S. Opportunities ................................ (30,821) International Opportunities ....................... (169,351) Asset Allocation .................................. (291,627) Index Equity ...................................... (310,324) /(1)/ Includes a prior period write-off of $3,708. (D) Transactions with Affiliates and Related Parties Pursuant to an Investment Advisory Agreement, BlackRock Advisors, Inc. ("BlackRock"), a wholly-owned subsidiary of BlackRock, Inc., serves as investment adviser for each of the Fund's Equity Portfolios, except for the Index Equity Portfolio. BlackRock Financial Management, Inc. ("BFM"), a wholly-owned subsidiary of BlackRock, serves as the sub-adviser for the Asset Allocation Portfolio. BlackRock International, Ltd. ("BIL"), an indirect wholly-owned subsidiary of BlackRock, serves as the subadvisor for the International Opportunities Portfolio. BlackRock, Inc. is an indirect majority-owned subsidiary of The PNC Financial Services Group, Inc. For its advisory services, BlackRock is entitled to receive fees at the following annual rates, computed daily and payable monthly, based on each Portfolio's average daily net assets: Large Cap Value Equity, Large Cap Growth Equity, Dividend Achievers(TM), Small Cap Value Equity, Small Cap Growth Equity, Asset Allocation and Investment Trust -- 0.55% of the first $1 billion, 0.50% of the next $1 billion, 0.475% of the next $1 billion and 0.45% of net assets in excess of $3 billion. Mid-Cap Value Equity and Mid-Cap Growth Equity -- 0.80% of the first $1 billion, 0.70% of the next $1 billion, 0.675% of the next $1 billion and 0.625% of net assets in excess of $3 billion. U.S Opportunities -- 1.10% of the first $1 billion, 1.05% of the next $1 billion, 1.025% of the next $1 billion and 1.00% of the net assets in excess of $3 billion. Global Science & Technology Opportunities -- 0.90% of the first $1 billion, 0.85% of the next $1 billion, 0.80% of the next $1 billion and 0.75% of net assets in excess of $3 billion. Global Resources, Health Sciences, Small/Mid-Cap Growth and All-Cap Global Resources -- 0.75% of the first $1 billion, 0.70% of the next $1 billion, 0.675% of the next $1 billion and 0.65% of net assets in excess of $3 billion. International Opportunities -- 1.00% of the first $1 billion, 0.95% of the next $1 billion, 0.90% of the next $1 billion and 0.85% of net assets in excess of $3 billion. 185
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Small Cap Core Equity -- 1.00% of net assets. Legacy -- 0.65% of the first $1billion, 0.60% of the next $1 billion, 0.575% of the next $1 billion and 0.55% of net assets in excess of $3 billion. Aurora -- 0.85% of the first $1 billion, 0.80% of the next $1 billion, 0.75% of the next $1 billion and 0.70% of net assets in excess of $3 billion. The Index Equity Portfolio pays no advisory fee but bears its proportionate cost of the fee paid by the Master. For the period ended September 30, 2005, the fund proportionate cost of the fee paid was $343,330. Prior to January 31, 2005, the following Funds had entered into an agreement with State Street Research & Management Co. to provide advisory, statistical and research facilities and services. Fees were earned monthly at the following annual rates: State Street Research Legacy -- 0.65% of net assets State Street Research Mid-Cap Value Equity -- 0.65% of net assets State Street Research Aurora -- 0.85% of net assets State Street Research Emerging Growth -- 0.75% of net assets State Street Research Global Resources -- 0.75% of net assets State Street Research Health Sciences -- 0.75% of net assets State Street Research Asset Allocation -- 0.75% of the first $500 million in net assets annually, 0.70% of the next $500 million, and 0.65% of any amount over $1 billion. In the interest of limiting the expenses of the Portfolios, BlackRock and the Fund have entered into a series of annual expense limitation agreements. The agreements set a limit on certain operating expenses of each Portfolio for the next year and require BlackRock and the Fund to waive or reimburse fees or expenses if these operating expenses exceed that limit. These expense limits apply to the aggregate expenses incurred on a share class (excluding: interest, taxes, brokerage commissions and other extraordinary expenses). For the year ended September 30, 2005, the amount reimbursed by BlackRock and the Fund was $8,157 and $355,506 in the Dividend Achievers(TM) and Small/Mid-Cap Growth Portfolios, respectively. BlackRock and the Fund contractually agreed to waive or reimburse fees or expenses until February 1, 2006, in order to limit expenses as follows. This agreement is reviewed annually by the Fund's Board. Share Classes Portfolio --------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C --------------------------------------------------------------------------- Investment Trust ............ NA 0.81% 1.11% 1.16% 1.91% 1.91% Large Cap Value Equity ...... NA 0.79% 1.09% 1.25% 2.00% 2.00% Large Cap Growth Equity ..... NA 0.82% 1.12% 1.29% 2.04% 2.04% Dividend Achievers .......... NA 0.90% 1.20% 1.30% 2.05% 2.05% Legacy Portfolio ............ NA 1.10% 1.35% 1.35% 2.10% 2.10% Mid-Cap Value Equity ........ NA 1.00% 1.25% 1.25% 2.00% 2.00% Mid-Cap Growth Equity ....... NA 1.23% 1.53% 1.58% 2.33% 2.33% Aurora ...................... NA 1.19% 1.44% 1.44% 2.19% 2.19% Small/Mid-Cap Growth ........ NA 1.10% 1.35% 1.35% 2.10% 2.10% Small Cap Value Equity ...... 1.10% 0.97% 1.27% 1.44% 2.19% 2.19% Small Cap Core Equity ....... NA 1.30% 1.60% 1.77% 2.52% 2.52% Small Cap Growth Equity ..... NA 0.99% 1.29% 1.46% 2.21% 2.21% Global Sciences & Technology Opportunities .............. NA 1.43% 1.73% 1.90% 2.65% 2.65% Global Resources ............ NA 1.04% 1.34% 1.34% 2.04% 2.04% All-Cap Global Resources .... NA 1.04% 1.34% 1.34% 2.04% 2.04% Health Sciences ............. NA 1.25% 1.55% 1.55% 2.25% 2.25% U.S. Opportunities .......... NA 1.60% 1.90% 2.07% 2.82% 2.82% International Opportunities . NA 1.45% 1.75% 1.92% 2.67% 2.67% Asset Allocation ............ NA 0.86% 1.16% 1.33% 2.08% 2.08% Index Equity ................ NA 0.18% 0.62% 0.79% 1.54% 1.54% 186
BlackRock Funds Prior to January 31, 2005, the State Street Research Mid-Cap Value Equity, Emerging Growth and Health Sciences Funds limited expenses to 1.25% (plus 12b-1 fees), 1.10% (plus 12b-1 fees) and 1.00% (plus 12b-1 fees), respectively. If in the following two years the operating expenses of a share class that previously received a waiver or reimbursement from BlackRock and the Fund are less than the expense limit for that share class, the share class is required to repay BlackRock and the Fund up to the amount of fees waived or expenses reimbursed under the agreement if: (1) the Portfolio of which the share class is a part has more than $50 million in assets, (2) BlackRock continues to be the Portfolio's investment adviser and (3) the Board of Trustees of the Fund has approved the payments to BlackRock at the previous quarterly meeting. At September 30, 2005, the amounts subject to possible future reimbursement under the expense limitation agreement are as follows: Total Waivers Expiring Expiring Expiring Subject To January 31, 2006 January 31, 2007 January 31, 2008 Reimbursement ---------------- ---------------- ---------------- ------------- Investment Trust .................................. $ 169,360 $ 141,352 $ 1,846,278 $ 2,156,990 Large Cap Value Equity ............................ 357,981 255,627 208,483 822,091 Large Cap Growth Equity ........................... 154,813 166,424 101,950 423,187 Dividend AchieversTM .............................. -- 99,646 94,992 194,638 Legacy ............................................ -- 1,199 240,186 241,385 Mid-Cap Value ..................................... -- 14,086 1,342,468 1,356,554 Mid-Cap Growth Equity ............................. 5,005 43,430 300,190 348,625 Aurora ............................................ -- -- -- -- Small/Mid-Cap Growth Equity ....................... -- 5,030 292,557 297,587 Small Cap Value Equity ............................ -- 25,127 11,503 36,630 Small Cap Core Equity ............................. 12,634 52,283 57,075 121,992 Small Cap Growth Equity ........................... -- 6,742 -- 6,742 U.S. Opportunities ................................ -- 15,890 5,718 21,608 Global Science & Technology Opportunities ......... 23,534 71,419 65,013 159,966 Global Resources .................................. -- 2,647 541,485 544,132 All Cap Global Resources .......................... -- -- 223,736 223,736 Health Sciences ................................... -- 62 47,959 48,021 International Opportunities ....................... 41,722 185,626 81,759 309,107 Asset Allocation .................................. -- 346 159,044 159,390 Index Equity ...................................... -- 1,333,005 723,112 2,056,117 The following waivers previously incurred on the portfolios which were subject to recoupment by BlackRock expired on January 31, 2005, in the amounts of $310,818 for Investment Trust, $610,816 for Large Cap Value Equity, $274,930 for Large Cap Growth Equity, $23,495 for Mid-Cap Value Equity, $30,063 for Mid-Cap Growth Equity, $86,158 for Small Cap Value Equity, $13,541 for Small Cap Core Equity, $227,030 for Small Cap Growth Equity, $107,597 for U.S. Opportunities, $101,278 for Global Science & Technology Opportunities, $178,760 for International Opportunities, and $146,109 for Asset Allocation. As of September 30, 2005, there is $6,742 in prior period waivers on Small Cap Growth Equity subject to recoupment by BlackRock upon approval from the Board of Directors of the Fund. BlackRock pays BIL and BFM fees for their sub-advisory services. PFPC Inc., ("PFPC"), an indirect wholly-owned subsidiary of The PNC Financial Services Group, Inc., and BlackRock act as co-administrators for the Fund. For these services, the co-administrators receive a combined administration fee computed daily and payable monthly, based on a percentage of the average daily net assets of each Portfolio, at the following annual rates: 0.085% of the first $500 million, 0.075% of the next $500 million and 0.065% of assets in excess of $1 billion. In addition, each of the share classes, except for the BlackRock class, is charged an administration fee based on the following percentage of average daily net assets of each respective class: 0.145% of the first $500 million, 0.135% of the next $500 million and 0.125% of assets in excess of $1 billion. The BlackRock class is charged an admistration fee of 0.035% of the first $500 million, 0.025% of the next $500 million and 0.015% of assets in excess of $1 billion based upon average daily net assets of its class. In addition, PFPC and BlackRock may have, at their discretion, voluntarily waived all or any portion of their administration fees for any portfolio or share class. 187
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Prior to January 31, 2005, State Street Research Legacy Fund, State Street Research Mid-Cap Value Equity Fund, State Street Research Aurora Fund, State Street Research Emerging Growth Fund, State Street Research Global Resources Fund, State Street Research Health Sciences Fund and State Street Research Asset Allocation Fund paid SSRM for certain administrative costs incurred in providing other assistance and services to each Fund. The fee was based on actual costs allocated equally among the State Street Research Funds. PFPC Trust Co., an indirect subsidiary of The PNC Financial Services Group, Inc., serves as custodian for each of the Fund's Portfolios. Prior to January 31, 2005, State Street Bank and Trust Co. served as the State Street Research Funds' custodian and record keeper for the State Street Research Legacy Fund, State Street Research Mid-Cap Value Equity Fund, State Street Research Aurora Fund, State Street Research Emerging Growth Fund, State Street Research Global Resources Fund, State Street Research Health Sciences Fund and State Street Research Asset Allocation Fund. Since January 31, 2005, BlackRock has maintained a call center which is responsible for providing certain shareholder services to the BlackRock Funds, such as responding to shareholder inquiries and processing transactions based upon instructions from shareholders with respect to the subscription and redemption of fund shares. During the period February 1, 2005 through September 30, 2005, the following amounts have been accrued by each portfolio to reimburse BlackRock for costs incurred running the call center, which are a component of the Transfer Agent fees in the accompanying Statement of Operations. BlackRock Institutional Service Investor A Investor B Investor C Total --------------------------------------------------------------------------- ----------- Investment Trust ............ $ -- $ 40,995 $ 131 $ 44,827 $ 19,745 $ 1,950 $ 107,648 Large Cap Value Equity ...... -- 9,661 2,112 11,910 3,501 943 28,127 Large Cap Growth Equity ..... -- 1,680 778 1,211 769 166 4,604 Dividend Achievers(TM) ...... -- 398 29 1,069 229 748 2,473 Legacy ...................... -- 4,052 -- 9,588 6,908 1,623 22,171 Mid-Cap Value Equity ........ -- 3,968 81 37,687 10,302 7,541 59,579 Mid-Cap Growth Equity ....... -- 5,794 110 23,159 4,732 1,661 35,456 Aurora ...................... -- 10,424 -- 141,318 33,428 31,884 217,054 Small/Mid-Cap Growth ........ -- 1,912 -- 16,675 1,834 1,824 22,245 Small Cap Value Equity ...... 524 5,382 271 2,554 1,178 523 10,432 Small Cap Core Equity ....... -- 645 4 695 382 1,021 2,747 Small Cap Growth ............ -- 26,563 2,167 11,912 1,468 1,196 43,306 Global Science & Technology Opportunities ............. -- 73 7 717 844 212 1,853 Global Resources ............ -- 2,332 -- 54,262 7,456 13,030 77,080 All-Cap Global Resources .... -- 3,607 -- 2,770 619 1,383 8,379 Health & Sciences ........... -- 641 1 8,445 3,009 3,177 15,273 U.S. Opportunities .......... -- 465 34 2,368 2,942 1,479 7,288 International Opportunities . -- 13,758 2,780 15,706 5,050 7,942 45,236 Asset Allocation ............ -- 2,234 168 38,427 14,027 4,875 59,731 Index Equity ................ -- 44,205 5,412 23,522 11,677 18,897 103,713 Pursuant to the Fund's Amended and Restated Distribution and Service Plan (the "Plan"), the Fund may pay BlackRock Distributors, Inc. (the "Distributor") and/or BlackRock or any other affiliate of PNC Financial Services Group, Inc. fees for distribution and sales support services. Currently, only Investor A Shares, Investor B Shares and Investor C Shares bear the expense of distribution fees under the Plan. In addition, the Fund may pay brokers, dealers, financial institutions and industry professionals (including PNC Financial Services Group, Inc. and its affiliates) ("service organizations") fees for the provision of personal services to shareholders. BlackRock may receive some of the service fees paid by the Fund in return for providing services to shareholders. Prior to January 31, 2005, State Street Research Service Center, a division of State Street Research Investment Services, Inc., provided certain shareholder services to the State Street Research Funds, such as responding to inquiries and instructions from investors with respect to the purchase and redemption of shares of the Funds. For the period October 1, 2004 through January 31, 2005, the State Street Research Funds paid $115,357, $324,764, $1,712,817, $543,616, $290,168, $51,797 and $226,546, for State Street Research Legacy, Mid-Cap Value Equity, Aurora, Emerging Growth, Global Resources, Health Sciences and Asset Allocation Funds, respectively. 188
BlackRock Funds As of the fiscal year ended September 30, 2005, affiliated payables were as follows: PNC Bank PFPC(1) BlackRock(2) Affiliates(3) --------- ----------- ------------ Investment Trust ............ $ 254,914 $ 338,464 $ 335,683 Large Cap Value Equity ...... 49,401 188,906 81,146 Large Cap Growth Equity ..... 8,987 26,140 14,799 Dividend Achievers .......... 4,426 13,278 14,897 Legacy ...................... 51,245 143,434 111,641 Mid Cap Value Equity ........ 105,758 385,359 295,383 Mid Cap Growth Equity ....... 108,071 313,907 125,962 Aurora ...................... 280,425 2,288,931 1,051,253 Small/Mid Cap Growth ........ 42,889 224,714 81,435 Small Cap Value Equity ...... 13,438 77,170 24,635 Small Cap Core Equity ....... 7,481 35,236 20,641 Small Cap Growth Equity ..... 51,977 358,375 63,557 Global Science and Technology Opportunities .............. 8,194 19,048 13,305 Global Resources ............ 118,109 738,128 420,420 All Cap Global Resources .... 37,999 61,548 55,615 Health Sciences ............. 45,802 215,750 129,365 U.S. Opportunities .......... 17,054 103,648 53,900 International Opportunities . 114,887 693,242 217,655 Asset Allocation ............ 143,540 341,356 305,393 (1)-- payables to PFPC are for Accounting, Administration, Custody and Transfer Agent services provided. (2)-- payables to BlackRock are for Advisory, Administration and Call Center services provided, and for amounts due BlackRock for costs incurred related to the BlackRock Funds Call Center. (3)-- payables to PNC Bank affiliates are for distribution and sales support services as described under the Plan. The total payable on behalf of the Fund, was $5,313,103, a portion of which is paid to service organizations, including other PNC Bank affiliates. State Street Research Investment Service, Inc., from time to time and in varying amounts, voluntarily assumed some portion of fees or expenses relating to the State Street Research Funds. During the period ended January 31, 2005, the amount of such expenses assumed by State Street Research Investment Service, Inc. were $271,500, $355,506 and $162,313 for the Mid-Cap Value Equity, Emerging Growth and Health Sciences Funds, respectively. Prior to January 31, 2005, State Street Research Investment Service, Inc. reimbursed a total of $91,069 and $294,508 to Mid-Cap Value Equity and Asset Allocation Portfolios, respectively, reflecting the estimated excess of payments received over costs incurred under the plans of distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940. This amount is shown as "Reimbursement of distribution fees" in the Statement of Operations. Prior to January 31, 2005, SSRM conducted an internal review regarding the use of fund brokerage commissions in consideration of the distribution of shares. In connection with this review, SSRM determined to reimburse the funds the entire amount of any such identified brokerage commissions, and reviewed this matter with the Board of the funds. The amount of reimbursement in the State Street Research Legacy, Mid-Cap Value, Aurora, Global Resources and Asset Allocation Portfolios amounted to $294,363, $144,758, $203,165, $12,780 and $41,520, respectively, and are shown as "Net increase from payment by affiliate" on the Statements of Operations. Prior to January 31, 2005, SSRM reimbursed the State Street Research Mid-Cap Value Equity and Asset Allocation Portfolios $409,472 and $49,054, respectively, as a result of a corporate action processing error. This amount is included in the total amount of "Net increase from payment by affiliate" on the Statements of Operations. 189
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) (E) Purchases and Sales of Securities For the period ended September 30, 2005, purchases and sales of securities, other than short-term investments, dollar rolls and U.S. government securities, were as follows: Purchases Sales -------------- -------------- Investment Trust ....................... $1,055,886,237 $1,263,589,772 Large Cap Value Equity ................. 299,299,492 382,685,229 Large Cap Growth Equity ................ 43,205,991 87,603,732 Dividend Achievers(TM) ................. 43,831,471 14,095,538 Legacy ................................. 205,542,875 263,907,159 Mid-Cap Value Equity ................... 438,342,893 432,358,841 Mid-Cap Growth Equity .................. 296,122,110 377,948,968 Aurora ................................. 2,223,055,572 3,422,831,860 Small/Mid-Cap Growth ................... 411,881,843 631,631,754 Small Cap Value Equity ................. 171,030,280 200,151,241 Small Cap Core Equity .................. 63,630,454 29,034,163 Small Cap Growth Equity ................ 474,814,639 467,584,915 Global Science & Technology Opportunities ......................... 27,987,245 35,491,149 Global Resources ....................... 90,235,233 103,506,107 All-Cap Global Resources ............... 200,561,079 9,984,853 Health Sciences ........................ 295,485,078 137,680,538 U.S. Opportunities ..................... 88,793,727 117,797,843 International Opportunities ............ 655,278,001 419,859,535 Asset Allocation ....................... 508,363,560 543,773,808 For the period ended September 30, 2005, purchases and sales of U.S. government securities were as follows: Purchases Sales -------------- -------------- Mid Cap Value Equity ................... $ 18,892,198 $ -- Aurora ................................. 25,989,111 -- Small Cap Core Equity .................. 1,799,862 -- Small Cap Growth Equity ................ 38,973,184 1,897,841 Global Resources ....................... 54,530,172 -- All-Cap Global Resources ............... 68,796,590 52,286,304 Health Sciences ........................ 128,132,434 12,387,196 U.S Opportunities ...................... 997,997 -- International Opportunities ............ 65,462,167 13,295,140 Asset Allocation ....................... 452,936,068 248,539,304 190
BlackRock Funds (F) Capital Shares Transactions in capital shares for each period were as follows: Investment Trust -------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Shares issued from the reorganization:/1/ Institutional Class ............ 40,828,647 $ 46,463,113 -- $ -- Investor A Class ............... 48,798,086 639,980,511 -- -- Investor B Class ............... 21,137,337 357,050,314 -- -- Investor C Class ............... 2,066,507 31,339,748 -- -- Shares sold: Institutional Class ............ 2,716,252 34,941,259 216,622 2,456,412 Service Class .................. 5,636 72,739 8,197 93,107 Investor A Class ............... 936,331 11,972,355 183,221 2,109,353 Investor B Class ............... 554,461 6,784,563 139,593 1,538,514 Investor C Class ............... 78,252 948,732 85,616 944,576 Shares issued in reinvestment of dividends: Institutional Class ............ 7,404 94,993 13,608 152,539 Service Class .................. 587 7,556 1,287 14,481 Investor A Class ............... 3,914 49,674 11,067 122,834 Investor B Class ............... -- -- 2,456 26,280 Investor C Class ............... -- -- 18 197 Shares redeemed: Institutional Class ............ (8,708,215) (112,424,984) (1,814,412) (21,040,940) Service Class .................. (32,367) (422,901) (58,824) (678,027) Investor A Class ............... (9,396,717) (120,682,165) (604,302) (6,941,701) Investor B Class ............... (4,188,219) (51,463,775) (499,549) (5,498,048) Investor C Class ............... (462,731) (5,682,609) (59,437) (655,542) ------------- -------------- ------------ -------------- Net increase (decrease) ......... 94,345,165 $ 839,029,123 (2,374,839) $ (27,355,965) ============= ============== ============ ============== /1/ See Note (B). 191
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Large Cap Value Equity -------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Share issued from the reorganization:/1/ Institutional Class ............ 1,149,957 $ 6,180,742 -- $ -- Investor A Class ............... 7,681,441 91,431,755 -- -- Investor B Class ............... 2,233,885 26,120,761 -- -- Investor C Class ............... 445,078 5,234,452 -- -- Shares sold: Institutional Class ............ 1,340,339 19,027,258 316,937 3,903,308 Service Class .................. 65,078 900,102 493,431 6,007,440 Investor A Class ............... 1,331,671 18,650,102 636,019 7,793,537 Investor B Class ............... 206,511 2,822,575 156,179 1,857,657 Investor C Class ............... 147,844 1,984,287 218,843 2,628,823 Shares issued in reinvestment of dividends: Institutional Class ............ 38,244 536,503 31,312 385,701 Service Class .................. 23,723 331,668 49,696 613,098 Investor A Class ............... 94,311 1,322,164 45,966 567,650 Investor B Class ............... 10,352 141,418 3,582 43,292 Investor C Class ............... 1,992 27,134 659 8,032 Shares redeemed: Institutional Class ............ (2,726,129) (37,957,095) (5,418,443) (65,488,958) Service Class .................. (2,054,144) (27,545,118) (2,654,757) (32,310,859) Investor A Class ............... (2,804,802) (39,168,278) (2,322,080) (28,657,371) Investor B Class ............... (891,730) (12,222,080) (366,792) (4,399,303) Investor C Class ............... (404,422) (5,567,580) (159,711) (1,931,382) ------------- -------------- ------------ -------------- Net increase (decrease) ......... 5,889,199 $ 52,250,770 (8,969,159) $ (108,979,335) ============= ============== ============ ============== /1/ See Note (B). Large Cap Growth Equity -------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Shares sold: Institutional Class ......... 128,319 $ 1,231,659 414,248 $ 3,748,569 Service Class ............... 90,689 810,121 1,491,678 12,963,992 Investor A Class ............ 342,912 3,177,738 408,084 3,544,786 Investor B Class ............ 124,782 1,071,723 141,746 1,142,700 Investor C Class ............ 64,250 547,106 65,005 522,781 Shares redeemed: Institutional Class ......... (1,071,602) (10,289,833) (1,789,964) (16,165,845) Service Class ............... (3,287,254) (30,028,357) (3,123,574) (27,376,334) Investor A Class ............ (898,658) (8,356,933) (1,701,982) (14,854,493) Investor B Class ............ (597,102) (5,081,808) (491,755) (3,942,213) Investor C Class ............ (134,801) (1,143,010) (92,909) (744,035) ------------- -------------- ------------ -------------- Net decrease ................. (5,238,465) $ (48,061,594) (4,679,423) $ (41,160,092) ============= ============== ============ ============== 192
BlackRock Funds Dividend Achievers(TM) -------------------------------------------------------------- For the Year Ended For the Period 9/8/04 /1/ 9/30/05 Through 9/30/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Shares sold: Institutional Class ........... 520,745 $ 5,509,967 200,010 $ 2,000,100 Service Class ................. 36,472 383,000 10 100 Investor A Class .............. 1,566,635 16,480,346 10 100 Investor B Class .............. 346,872 3,664,700 10 100 Investor C Class .............. 1,077,229 11,334,145 10 100 Shares issued in reinvestment of dividends: Institutional Class ........... 6,612 69,595 -- -- Service Class ................. 243 2,564 -- -- Investor A Class .............. 10,075 106,355 -- -- Investor B Class .............. 1,299 13,721 -- -- Investor C Class .............. 3,121 32,928 -- -- Shares redeemed: Institutional Class ........... (412,894) (4,405,581) -- -- Service Class ................. (1,612) (17,339) -- -- Investor A Class .............. (215,526) (2,280,818) -- -- Investor B Class .............. (20,215) (215,881) -- -- Investor C Class .............. (38,516) (400,224) -- -- ------------- -------------- ------------ -------------- Net increase ................... 2,880,540 $ 30,277,478 200,050 $ 2,000,500 ============= ============== ============ ============== /1/ Commencement of operations. 193
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Legacy -------------------------------------------------------------- For the Period For the Year Ended 11/1/04 Through 9/30/05 10/31/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Net change in shares from reorganization:/1/ State Street Research Fund: Investor A Class (Formerly Class A, Class B and Class R) ........ (47,039) $ -- -- $ -- Shares sold: Institutional Class (Formerly Class S) ............. 173,928 2,330,227 28,583 361,227 Service Class ................... 8 100 -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ 898,902 11,847,252 3,342,153 41,469,311 Investor B Class (Formerly Class B/1/) .......................... 270,843 3,387,849 475,624 5,595,734 Investor C Class (Formerly Class C) ............................. 137,658 1,730,474 277,077 3,269,502 Shares issued in reinvestment of dividends: Institutional Class (Formerly Class S) ....................... -- -- -- -- Service Class ................... -- -- -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ -- -- -- -- Investor B Class (Formerly Class B/1/) .......................... -- -- -- -- Investor C Class (Formerly Class C) ............................. -- -- -- -- Shares redeemed: Institutional Class (Formerly Class S) ....................... (601,280) (8,146,542) (928,675) (11,749,962) Service Class ................... -- -- -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ (2,980,221) (39,260,058) (5,218,348) (63,485,226) Investor B Class (Formerly Class B/1/) .......................... (1,984,310) (24,844,468) (1,692,058) (19,854,531) Investor C Class (Formerly Class C) ............................. (573,661) (7,197,155) (939,768) (11,076,996) ------------- -------------- ------------ -------------- Net decrease ....................... (4,705,172) $ (60,152,321) (4,655,412) $ (55,470,941) ============= ============== ============ ============== /1/ See Note (B). 194
BlackRock Funds Mid-Cap Value Equity ---------------------------------------------------------------------------------------------- For the For the For the Period Period Year Ended 3/1/05 Through 9/30/05 7/1/04 Through 2/28/05 6/30/2004 ------------------------------ ----------------------------- ----------------------------- Shares Value Shares Value Shares Value ------------- -------------- ------------ -------------- ----------------------------- Net change in shares from reorganization:/1/ State Street Research Fund: Institutional Class (Formerly Class S) ........................ -- $ -- 923,822 $ -- -- $ -- Investor A Class (Formerly Class A, Class B and Class R) ... -- -- 13,319,536 -- -- -- Investor B Class (Formerly Class B/1/) ..................... -- -- 3,942,678 -- -- -- Investor C Class (Formerly Class C) ........................ -- -- 2,992,071 -- -- -- BlackRock Fund: Institutional Class (Formerly Class S) ........................ -- -- 1,247,151 15,137,406 -- -- Service Class .................... -- -- 109,386 1,317,419 -- -- Investor A Class (Formerly Class A, Class B and Class R) ... -- -- 385,111 4,599,212 -- -- Investor B Class (Formerly Class B/1/) ..................... -- -- 665,825 7,539,866 -- -- Investor C Class (Formerly Class C) ........................ -- -- 244,284 2,766,217 -- -- Shares sold: Institutional Class (Formerly Class S) ........................ 732,026 9,690,025 1,344,505 18,173,943 468,759 7,741,584 Service Class .................... 13,705 178,478 1,813 22,497 -- -- Investor A Class (Formerly Class A, Class B and Class R) ... 7,206,377 93,027,146 7,009,420 126,713,520 10,977,111 187,930,330 Investor B Class (Formerly Class B/1/) ..................... 601,835 7,368,349 732,609 12,944,207 956,816 15,709,737 Investor C Class (Formerly Class C) ........................ 1,460,280 17,909,975 1,411,687 25,304,297 1,323,060 22,013,072 Shares issued in reinvestment of dividends: Institutional Class (Formerly Class S) ........................ 16,311 199,976 112,046 2,202,945 13,906 234,742 Investor A Class (Formerly Class A, Class B and Class R) ... 208,098 2,507,385 1,419,250 27,659,321 89,918 1,507,074 Investor B Class (Formerly Class B/1/) ..................... 58,105 662,980 313,255 5,942,189 -- -- Investor C Class (Formerly Class C) ........................ 29,827 340,332 190,603 3,632,426 -- -- Shares redeemed: Institutional Class (Formerly Class S) ........................ (839,167) (10,927,942) (1,260,543) (17,700,748) (732,645) (12,486,339) Service Class .................... (57,141) (720,163) (2,405) (30,059) -- -- Investor A Class (Formerly Class A, Class B and Class R) ... (6,109,543) (78,603,990) (8,538,739) (149,448,063) (6,610,528) (108,711,069) Investor B Class (Formerly Class B/1/) ..................... (1,151,006) (13,982,367) (816,608) (13,838,156) (761,699) (12,440,660) Investor C Class (Formerly Class C) ........................ (1,094,870) (13,212,388) (1,614,114) (27,306,220) (1,071,849) (17,471,644) ------------- -------------- ------------ -------------- ------------ -------------- Net increase ....................... 1,074,837 $ 14,437,796 24,132,643 $ 45,632,219 4,652,849 $ 84,026,827 ============= ============== ============ ============== ============ ============== /1/ See Note (B). 195
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Mid-Cap Growth Equity -------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Shares issued from the reorganization:/1/ Institutional Class ............ 3,275,088 $ 13,802,408 -- $ -- Investor A Class ............... 31,578,913 253,476,463 -- -- Investor B Class ............... 3,522,140 37,124,253 -- -- Investor C Class ............... 1,428,274 (7,360,832) -- -- Shares sold: Institutional Class ............ 2,345,154 22,965,023 1,138,699 10,071,810 Service Class .................. 17,450 155,138 290,419 2,373,896 Investor A Class ............... 1,021,818 9,334,452 728,127 5,999,086 Investor B Class ............... 830,004 2,614,913 346,652 2,637,708 Investor C Class ............... 72,047 602,344 120,482 898,547 Shares redeemed: Institutional Class ............ (3,006,643) (29,368,498) (2,741,486) (23,538,563) Service Class .................. (1,189,627) (10,999,181) (931,008) (7,817,212) Investor A Class ............... (6,394,733) (59,275,292) (987,595) (8,047,211) Investor B Class ............... (1,966,081) (16,599,730) (1,259,848) (9,597,814) Investor C Class ............... (671,908) (5,648,126) (474,226) (3,615,906) ------------- -------------- ------------ -------------- Net increase (decrease) ......... 30,861,896 $ 210,823,335 (3,769,784) $ (30,635,659) ============= ============== ============ ============== /1/ See Note (B). 196
BlackRock Funds Aurora -------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Net change in shares from reorganization:/1/ State Street Research Fund: Investor A Class (Formerly Class A and Class B) ................. (222,692) $ -- -- $ -- Shares sold: Institutional Class (Formerly Class S) ....................... 2,229,078 94,092,286 2,488,213 98,297,733 Service Class ................... 9 350 -- -- Investor A Class (Formerly Class A and Class B) ................. 12,247,171 490,698,212 21,949,292 845,611,604 Investor B Class (Formerly Class B/1/) .......................... 777,325 28,668,813 1,603,178 57,403,099 Investor C Class (Formerly Class C) ............................. 1,472,276 54,374,605 2,676,532 96,224,763 Shares issued in reinvestment of dividends: Institutional Class (Formerly Class S) ....................... 387,865 15,999,438 2,027 78,602 Service Class ................... -- -- -- -- Investor A Class (Formerly Class A and Class B) ................. 3,880,515 154,053,052 21,034 788,605 Investor B Class (Formerly Class B/1/) .......................... 975,164 35,778,753 5,030 177,068 Investor C Class (Formerly Class C) ............................. 771,557 28,301,088 4,009 141,078 Shares redeemed: Institutional Class (Formerly Class S) ....................... (3,648,419) (150,381,329) (1,933,475) (75,747,346) Service Class ................... (5) (205) -- -- Investor A Class (Formerly Class A and Class B) ................. (35,468,838) (1,413,550,841) (20,427,745) (782,354,303) Investor B Class (Formerly Class B/1/) .......................... (3,185,878) (117,157,977) (2,065,212) (73,852,145) Investor C Class (Formerly Class C) ............................. (5,120,173) (187,653,151) (2,762,239) (99,357,980) ------------- -------------- ------------ -------------- Net increase (decrease) ............ (24,905,045) $ (966,776,906) 1,560,644 $ 67,410,778 ============= ============== ============ ============== /1/ See Note (B). 197
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Small/Mid-Cap Growth -------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Net change in shares from reorganization:/1/ State Street Research Fund: Investor A Class (Formerly Class A, Class B and Class R) ........ (116,987) $ -- -- $ -- Shares sold: Institutional Class (Formerly Class S) ....................... 2,652,708 36,366,909 6,902,293 97,401,258 Service Class ................... 8 100 -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ 8,248,677 107,248,880 19,953,301 267,106,896 Investor B Class (Formerly Class B/1/) .......................... 199,160 2,380,035 841,240 10,286,273 Investor C Class (Formerly Class C) ............................. 293,979 3,483,481 1,796,388 21,845,563 Shares issued in reinvestment of dividends: Institutional Class (Formerly Class S) ....................... -- -- -- -- Service Class ................... -- -- -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ -- -- -- -- Investor B Class (Formerly Class B/1/) .......................... -- -- -- -- Investor C Class (Formerly Class C) ............................. -- -- -- -- Shares redeemed: Institutional Class (Formerly Class S) ....................... (8,333,821) (113,230,665) (538,478) (7,285,710) Service Class ................... -- -- -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ (17,739,321) (230,036,170) (7,610,612) (97,424,044) Investor B Class (Formerly Class B/1/) .......................... (581,269) (6,919,663) (411,875) (4,915,125) Investor C Class (Formerly Class C) ............................. (1,415,023) (16,957,216) (342,131) (4,015,411) ------------- -------------- ------------ -------------- Net increase (decrease) ............ (16,791,889) $ (217,664,309) 20,590,126 $ 282,999,700 ============= ============== ============ ============== /1/ See Note (B). 198
BlackRock Funds Small Cap Value Equity -------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------ ----------------------------- Shares Value Shares Value ------------- -------------- ------------ -------------- Shares sold: BlackRock Class ............... 79,167 $ 1,205,944 315,702 $ 4,770,100 Institutional Class ........... 428,835 6,107,825 521,530 7,823,358 Service Class ................. 103,969 1,476,011 65,337 975,578 Investor A Class .............. 444,645 6,474,828 547,652 8,197,136 Investor B Class .............. 234,368 2,988,553 231,497 3,164,522 Investor C Class .............. 123,921 1,581,212 135,519 1,856,956 Shares issued in reinvestment of dividends: BlackRock Class ............... 80,062 1,130,480 -- -- Institutional Class ........... 704,737 9,943,832 478,137 6,837,365 Service Class ................. 30,692 427,853 33,951 482,112 Investor A Class .............. 426,767 5,910,720 309,675 4,375,692 Investor B Class .............. 172,345 2,145,694 103,156 1,346,196 Investor C Class .............. 52,129 649,004 29,701 387,903 Shares redeemed: BlackRock Class ............... (133,119) (2,051,600) (1,351) (20,000) Institutional Class ........... (935,092) (13,949,995) (1,571,511) (23,832,897) Service Class ................. (125,052) (1,907,104) (174,903) (2,606,851) Investor A Class .............. (1,075,029) (15,452,737) (1,218,073) (18,004,283) Investor B Class .............. (597,314) (7,804,238) (322,299) (4,438,190) Investor C Class .............. (180,539) (2,376,758) (123,055) (1,708,064) ------------- -------------- ------------ -------------- Net decrease ................... (164,508) $ (3,500,476) (639,335) $ (10,393,367) ============= ============== ============ ============== 199 BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Small Cap Core Equity ------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------- ----------------------------- Shares Value Shares Value ------------- ------------- ------------- ------------- Shares sold: Institutional Class ........... 662,746 $ 11,041,559 124,804 $ 1,824,326 Service Class ................. 5,339 89,712 -- -- Investor A Class .............. 570,418 9,435,861 320,205 4,683,838 Investor B Class .............. 299,990 4,881,715 81,510 1,178,698 Investor C Class .............. 810,068 13,179,089 233,839 3,405,315 Shares issued in reinvestment of dividends: Institutional Class ........... 679 11,014 103 1,401 Service Class ................. -- 1 -- 1 Investor A Class .............. 1,508 24,368 648 8,857 Investor B Class .............. 680 10,886 188 2,550 Investor C Class .............. 835 13,381 82 1,114 Shares redeemed: Institutional Class ........... (68,139) (1,141,664) (106,127) (1,545,748) Service Class ................. -- -- -- -- Investor A Class .............. (100,221) (1,615,518) (107,069) (1,552,486) Investor B Class .............. (14,220) (228,327) (2,497) (34,973) Investor C Class .............. (38,423) (630,675) (4,404) (64,005) ------------- ------------- ------------ ------------- Net increase ................... 2,131,260 $ 35,071,402 541,282 $ 7,908,888 ============= ============= ============ ============= Small Cap Core Equity ------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------- ----------------------------- Shares Value Shares Value ------------- ------------- ------------- ------------- Shares sold: Institutional Class ........... 6,461,991 $ 102,625,766 9,110,273 $ 136,169,237 Service Class ................. 397,592 6,027,945 931,862 13,440,785 Investor A Class .............. 3,017,395 44,828,546 4,817,353 65,691,548 Investor B Class .............. 68,983 930,996 287,742 3,759,718 Investor C Class .............. 243,155 3,303,443 398,471 5,122,745 Shares redeemed: Institutional Class ........... (4,517,880) (72,480,383) (3,801,835) (55,800,303) Service Class ................. (1,040,419) (15,772,098) (797,925) (11,305,544) Investor A Class .............. (2,780,729) (41,526,849) (4,023,966) (55,474,563) Investor B Class .............. (941,889) (12,749,638) (634,790) (8,164,011) Investor C Class .............. (315,541) (4,291,449) (345,714) (4,324,174) ------------- ------------- ------------ ------------- Net increase .................... 592,658 $ 10,896,279 5,941,471 $ 89,115,438 ============= ============= ============ ============= 200
BlackRock Funds Small Cap Core Equity ------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------- ----------------------------- Shares Value Shares Value ------------- ------------- ------------- ------------- Shares sold: Institutional Class ........... 13,205 $ 76,233 67,134 $ 397,026 Service Class ................. 3,407 20,000 4,538 29,200 Investor A Class .............. 199,850 1,176,923 361,677 2,123,218 Investor B Class .............. 76,275 430,583 177,136 1,045,059 Investor C Class .............. 51,620 296,457 83,807 487,728 Shares redeemed: Institutional Class ........... (179,040) (1,056,338) (289,383) (1,640,289) Service Class ................. (1,581) (9,264) (8,508) (47,856) Investor A Class .............. (568,551) (3,296,666) (611,686) (3,519,972) Investor B Class .............. (698,308) (3,892,430) (953,314) (5,358,747) Investor C Class .............. (232,187) (1,289,474) (219,524) (1,247,839) ------------- ------------- ------------ ------------- Net decrease .................... (1,335,310) $ (7,543,976) (1,388,123) $ (7,732,472) ============= ============= ============ ============= 201
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Global Resources --------------------------------------------------------------------------------------------- For the For the For the Period Period Year Ended 3/1/05 through 9/30/05 7/1/04 through 2/28/05 6/30/04 ----------------------------- ----------------------------- ----------------------------- Shares Value Shares Value Shares Value ------------- ------------- ------------- ------------- ------------- ------------- Net change in shares from reorganization:/1/ State Street Research Fund: Investor A Class (Formerly Class A, Class B and Class R) ............................. -- $ -- (66,329) $ -- -- $ -- Shares sold: -- -- Institutional Class (Formerly Class S) ....................... 136,773 8,270,801 148,500 6,997,371 271,772 9,113,747 Investor A Class (Formerly Class A, Class B and Class R) ............................. 2,342,330 141,107,678 3,470,009 159,385,219 10,307,500 339,803,562 Investor B Class (Formerly Class B/1/) .................... 98,635 5,511,235 274,083 11,326,726 896,835 26,709,892 Investor C Class (Formerly Class C) ....................... 155,994 8,467,932 551,493 23,517,245 2,236,902 68,602,549 Shares issued in reinvestment of dividends: Institutional Class (Formerly Class S) ....................... -- -- 17,826 888,813 6,925 237,341 Investor A Class (Formerly Class A, Class B and Class R) ............................. -- -- 367,069 17,395,794 107,280 3,500,772 Investor B Class (Formerly Class B/1/) .................... -- -- 51,725 2,266,714 19,360 590,047 Investor C Class (Formerly Class C) ....................... -- -- 78,414 3,432,162 29,496 898,161 Shares redeemed: Institutional Class (Formerly Class S) ....................... (119,441) (7,316,366) (155,837) (7,836,183) (170,538) (5,251,269) Investor A Class (Formerly Class A, Class B and Class R) ............................. (2,829,239) (164,820,925) (3,112,124) (133,160,606) (4,367,520) (134,940,591) Investor B Class (Formerly Class B/1/) .................... (233,615) (12,682,219) (320,242) (13,400,554) (336,078) (10,133,803) Investor C Class (Formerly Class C) ....................... (551,406) (28,678,911) (679,776) (28,334,096) (493,976) (14,602,129) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) ............ (999,969) $ (50,140,775) 624,811 $ 42,478,605 8,507,958 $ 284,528,279 ============= ============= ============= ============= ============= ============= /1/ See Note (B). 202
BlackRock Funds All-Cap Global Resources ----------------------------- For the Period 2/16/051 through 9/30/2005 ----------------------------- Shares Value ------------- ------------- Shares sold: BlackRock Class .......................... -- $ -- Institutional Class ...................... 8,151,696 90,216,705 Service Class ............................ 10 100 Investor A Class ......................... 6,907,625 79,348,642 Investor B Class ......................... 1,292,692 14,456,440 Investor C Class ......................... 3,651,295 42,360,158 Shares issued in reinvestment of dividends: BlackRock Class .......................... -- -- Institutional Class ...................... -- -- Service Class ............................ -- -- Investor A Class ......................... -- -- Investor B Class ......................... -- -- Investor C Class ......................... -- -- Shares redeemed: BlackRock Class .......................... -- -- Institutional Class ...................... (1,353,834) (15,756,025) Service Class ............................ -- -- Investor A Class ......................... (393,121) (4,570,710) Investor B Class ......................... (100,601) (1,238,157) Investor C Class ......................... (62,701) (688,946) ------------- ------------- Net increase .............................. 18,093,061 $ 204,128,207 ============= ============= /1/ Commencement of operations. 203
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Health Sciences --------------------------------------------------------------------------------------------- For the For the For the Period Year Ended Year Ended 3/1/05 through 9/30/05 2/28/05 2/29/04 ----------------------------- ----------------------------- ----------------------------- Shares Value Shares Value Shares Value ------------- ------------- ------------- ------------- ------------- ------------- Net change in shares from reorgani-zation:/1/ State Street Research Fund: Investor A Class (Formerly Class A, Class B and Class R) ....... -- $ -- (4,617) $ -- -- $ -- Shares sold: Institutional Class (Formerly Class S) ...................... 1,145,468 27,119,489 128,213 2,671,247 183,218 3,639,921 Service Class .................. 2,715 63,300 5 100 -- -- Investor A Class (Formerly Class A, Class B and Class R) ....... 4,956,440 113,905,634 2,836,559 57,282,345 2,738,554 50,111,142 Investor B Class (Formerly Class B/1/) ......................... 544,629 11,879,605 558,845 10,973,167 397,168 7,191,329 Investor C Class (Formerly Class C) ............................ 2,533,859 56,543,316 961,093 18,966,442 494,043 9,163,916 Shares issued in reinvestment of dividends: Institutional Class (Formerly Class S) ...................... 78 1,746 12,094 257,622 3,043 58,784 Investor A Class (Formerly Class A, Class B and Class R) ....... 1,563 34,234 148,553 3,118,081 57,770 1,103,393 Investor B Class (Formerly Class B/1/) ......................... 642 13,639 64,065 1,311,510 31,705 594,591 Investor C Class (Formerly Class C) ............................ 407 8,632 25,134 512,969 8,373 156,831 Shares redeemed: Institutional Class (Formerly Class S) ...................... (76,215) (1,692,023) (171,969) (3,493,427) (31,546) (578,844) Investor A Class (Formerly Class A, Class B and Class R) ....... (1,001,580) (21,722,738) (1,971,584) (39,527,347) (967,899) (17,048,788) Investor B Class (Formerly Class B/1/) ......................... (112,555) (2,376,890) (234,528) (4,562,237) (130,198) (2,141,232) Investor C Class (Formerly Class C) ............................ (192,002) (4,135,535) (236,874) (4,615,846) (77,584) (1,331,219) ------------- ------------- ------------- ------------- ------------- ------------- Net increase ....................... 7,803,449 $ 179,642,409 2,114,989 $ 42,894,626 2,706,647 $ 50,919,824 ============= ============= ============= ============= ============= ============= /1/ See Note (B). 204
BlackRock Funds U.S. Opportunities ------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------- ----------------------------- Shares Value Shares Value ------------- ------------- ------------- ------------- Shares sold: Institutional Class ............ 41,040 $ 921,837 117,054 $ 2,283,248 Service Class .................. 3,497 70,610 101,311 1,970,021 Investor A Class ............... 112,410 2,505,614 223,876 4,273,087 Investor B Class ............... 36,960 800,145 77,348 1,397,751 Investor C Class ............... 107,652 2,400,105 86,540 1,571,088 Shares redeemed: Institutional Class ............ (89,659) (2,021,552) (255,355) (4,914,411) Service Class .................. (100,170) (2,152,175) (11,639) (221,344) Investor A Class ............... (430,990) (9,474,413) (451,932) (8,551,449) Investor B Class ............... (625,873) (13,112,443) (559,049) (10,148,159) Investor C Class ............... (295,588) (6,178,408) (348,429) (6,263,316) ------------- ------------- ------------- ------------- Net decrease ..................... (1,240,721) $ (26,240,680) (1,020,275) $ (18,603,484) ============= ============= ============= ============= International Opportunities ------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------- ----------------------------- Shares Value Shares Value ------------- ------------- ------------- ------------- Shares sold: Institutional Class ............ 3,124,637 $ 90,893,095 1,675,872 $ 39,545,723 Service Class .................. 832,415 23,659,396 926,448 21,482,231 Investor A Class ............... 4,521,618 128,498,832 3,199,383 73,871,653 Investor B Class ............... 695,853 18,889,974 686,235 14,936,708 Investor C Class ............... 2,137,054 58,642,481 1,411,947 31,064,713 Shares issued in reinvestment of dividends: Institutional Class ............ 29,812 827,590 1,323 29,679 Service Class .................. 8,721 237,123 114 2,497 Investor A Class ............... 34,965 945,460 1,346 29,462 Investor B Class ............... 3,472 90,492 975 20,582 Investor C Class ............... 5,986 155,815 738 15,558 Shares redeemed: Institutional Class ............ (811,565) (23,267,346) (631,675) (14,723,802) Service Class .................. (321,418) (9,020,020) (205,804) (4,765,889) Investor A Class ............... (1,152,328) (32,651,828) (946,356) (21,631,960) Investor B Class ............... (367,450) (10,037,117) (375,821) (8,266,369) Investor C Class ............... (474,830) (12,988,280) (433,956) (9,552,592) ------------- ------------- ------------- ------------- Net increase ..................... 8,266,942 $ 234,875,667 5,310,769 $ 122,058,194 ============= ============= ============= ============= 205
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Asset Allocation --------------------------------------------------------------------------------------------- For the For the For the Period Period Year Ended 3/1/05 through 9/30/05 4/1/04 through 2/28/05 3/31/04 --------------------------------------------------------------------------------------------- Shares Value Shares Value Shares Value ------------- ------------- ------------- ------------- ------------- ------------- Net change in shares from reorganization:/1/ State Street Research Fund: Institutional Class (Formerly Class S) .......... -- $ -- (431,759) $ -- -- $ -- Investor A Class (Formerly Class A, Class B and Class R) ........ -- -- (12,435,419) -- -- -- Investor B Class (Formerly Class B/1/) ....... -- -- (3,883,624) -- -- -- Investor C Class (Formerly Class C) .......... -- -- (1,561,222) -- -- -- BlackRock Fund: Institutional Class (Formerly Class S) .......... -- -- 756,058 11,073,022 -- -- Service Class ................ -- -- 159,024 2,325,985 -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ -- -- 4,260,378 62,273,644 -- -- Investor B Class (Formerly Class B/1/) ....... -- -- 2,633,550 38,144,193 -- -- Investor C Class (Formerly Class C) .......... -- -- 330,149 4,780,614 -- -- Shares sold: Institutional Class (Formerly Class S) .......... 286,450 4,309,548 843,355 11,040,921 290,764 2,764,953 Service Class ................ 14,692 219,083 6,047 90,163 -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ 1,686,903 25,359,821 9,147,740 97,457,497 9,714,452 94,326,907 Investor B Class (Formerly Class B/1/) ....... 804,846 11,974,666 2,760,767 29,631,133 4,525,455 43,919,902 Investor C Class (Formerly Class C) .......... 641,305 9,566,052 2,286,784 24,055,515 1,980,006 19,760,160 Shares issued in reinvestment of dividends: Institutional Class (Formerly Class S) .......... 16,029 240,227 115,141 1,215,396 38,395 376,594 Service Class ................ 1,144 17,133 -- -- -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ 263,316 3,938,180 2,609,782 27,513,302 665,521 6,521,284 Investor B Class (Formerly Class B/1/) ....... 36,219 536,310 666,138 6,990,057 84,483 817,086 Investor C Class (Formerly Class C) .......... 8,022 118,805 149,839 1,581,290 23,301 225,953 Shares redeemed: Institutional Class (Formerly Class S) .......... (474,289) (7,052,006) (1,243,828) (14,502,160) (476,957) (4,549,408) Service Class ................ (20,740) (312,598) (19,987) (296,380) -- -- Investor A Class (Formerly Class A, Class B and Class R) ........ (5,426,561) (80,927,628) (11,410,029) (125,727,173) 12,055,243) (115,596,398) Investor B Class (Formerly Class B/1/ ........ (1,675,868) (24,814,424) (1,985,558) (22,062,236) (1,463,343) (14,138,963) Investor C Class (Formerly Class C) .......... (669,175) (9,907,608) (733,924) (8,157,124) (392,657) (3,818,212) ------------- ------------- ------------- ------------- ------------- ------------- Net increase (decrease) .......... (4,507,707) $ (66,734,439) (6,980,598) $ 147,427,659 2,934,177 $ 30,609,858 ============= ============= ============= ============= ============= ============= /1/ See Note (B). 206
BlackRock Funds Index Equity ------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------- ----------------------------- Shares Value Shares Value ------------- ------------- ------------- ------------- Shares sold: Institutional Class ............. 2,794,314 $ 63,688,843 3,269,684 $ 69,335,844 Service Class ................... 1,019,854 23,215,326 1,299,490 27,524,523 Investor A Class ................ 2,301,502 52,312,632 3,945,583 83,560,549 Investor B Class ................ 78,863 1,755,296 411,956 8,501,106 Investor C Class ................ 61,824 1,383,869 1,143,687 23,613,472 Shares issued in reinvestment of dividends: Institutional Class ............. 229,903 5,278,647 209,619 4,493,609 Service Class ................... 48,096 1,096,662 44,696 951,634 Investor A Class ................ 210,258 4,791,418 155,141 3,301,221 Investor B Class ................ 38,721 867,668 17,517 364,388 Investor C Class ................ 41,397 927,186 18,164 377,866 Shares redeemed: Institutional Class ............. (3,295,354) (74,676,043) (10,233,505) (220,082,336) Service Class ................... (1,640,323) (37,319,806) (1,649,576) (35,098,252) Investor A Class ................ (4,534,077) (103,153,784) (4,210,051) (89,446,482) Investor B Class ................ (2,657,216) (59,452,086) (2,229,229) (46,418,387) Investor C Class ................ (3,512,901) (78,470,422) (3,739,728) (78,142,043) ------------- ------------- ------------- ------------- Net decrease ...................... (8,815,139) $(197,754,594) (11,546,552) $(247,163,288) ============= ============= ============= ============= There is a 2% redemption fee on shares of the Portfolios redeemed or exchanged which have been held 90 days or less. The redemption fees are collected and retained by the Fund for the benefit of the remaining shareholders. The redemption fees are recorded as a credit to paid in capital. On September 30, 2005, three shareholders held approximately 35% of the outstanding shares of the Large Cap Value Equity Portfolio, four shareholders held approximately 62% of Large Cap Growth Equity Portfolio, three shareholders held approximately 26% of the Dividend AchieversTM Portfolio, two shareholders held approximately 13% of the Mid-Cap Value Equity Portfolio, one shareholder held approximately 8% of the Mid-Cap Growth Equity Portfolio, two shareholders held approximately 19% of the Aurora Portfolio, two shareholders held approximately 20% of the Small/ Mid-Cap Growth Portfolio, three shareholders held approximately 57% of the Small Cap Value Equity Portfolio, two shareholders held 34% of the Small Cap Core Equity Portfolio, five shareholders held approximately 51% of the Small Cap Growth Equity Portfolio, five shareholders held approximately 37% of the U.S. Opportunities Portfolio, three shareholders held approximately 44% of the Global Science & Technology Opportunities Portfolio, three shareholders held approximately 32% of the Global Resources Portfolio, two shareholders held approximately 20% of the All-Cap Global Resources Portfolio, three shareholders held approximately 32% of the Health Sciences Portfolio, three shareholders held approximately 20% of the International Opportunities Portfolio, four shareholders held approximately 61% of the Index Equity Portfolio and one shareholder held approximately 7% of the Asset Allocation Portfolio. Some of the shareholders are comprised of omnibus accounts, which are held on behalf of several individual shareholders. 207
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) (G) At September 30, 2005, net assets consisted of: Investment Large Cap Large Cap Dividend Trust Value Equity Growth Equity Achievers(TM) ---------------- ---------------- ---------------- ---------------- Capital paid in ......................................... $ 1,274,245,341 $ 311,230,293 $ 422,935,804 $ 32,293,258 End of period undistributed net investment income ....... 6,946,198 88,982 274,749 1,961 Accumulated net realized gain (loss) on investment transactions and futures ............................... (205,616,722) (29,614,750) (382,460,226) (354,555) Net unrealized appreciation (depreciation) on investment transactions and futures ............................... 268,840,993 79,438,147 15,309,075 1,157,792 ---------------- ---------------- ---------------- ---------------- $ 1,344,415,810 $ 361,142,672 $ 56,059,402 $ 33,098,456 ================ ================ ================ ================ Mid-Cap Large Cap Legacy Value Equity Growth Equity Aurora ---------------- ----------------- ---------------- ---------------- Capital paid in ......................................... $ 343,003,850 $ 607,104,571 $ 624,763,175 $ 1,530,880,231 End of period undistributed net investment income ....... -- 201,780 -- -- Accumulated net realized gain (loss) on investment transactions ........................................... (116,181,065) 72,798,366 (274,986,168) 464,149,574 Net unrealized appreciation on investment transactions .. 51,737,111 109,369,486 96,898,250 703,899,447 ---------------- ---------------- ---------------- ---------------- $ 278,559,896 $ 789,474,203 $ 446,675,257 $ 2,698,929,252 ================ ================ ================ ================ Small/Mid-Cap Small Cap Small Cap Small Cap Growth Value Equity Core Equity Growth Equity ---------------- ---------------- ---------------- ---------------- Capital paid in ......................................... $ 231,799,948 $ 90,819,318 $ 44,002,933 $ 1,119,312,095 End of period undistributed net investment income ....... -- 11,801 -- -- Accumulated net realized gain (loss) on investment transactions ........................................... 8,652,211 21,580,566 401,820 (646,996,535) Net unrealized appreciation on investment transactions .. 41,190,738 16,186,981 3,896,163 101,355,608 ---------------- ---------------- ---------------- ---------------- $ 281,642,897 $ 128,598,666 $ 48,300,916 $ 573,671,168 ================ ================ ================ ================ Global Science & Technology Global All-Cap Health Opportunities Resources Global Resources Sciences ---------------- ---------------- ---------------- ---------------- Capital paid in ......................................... $ 98,240,800 $ 476,112,010 $ 204,075,862 $ 300,020,040 End of period undistributed net investment income (distributions in excess of net investment income or accumulated net investment loss) ....................... -- (3,567,059) -- -- Accumulated net realized gain (loss) on investment transactions and foreign currency related transactions . (78,784,112) 101,253,428 (77,770) 10,432,318 Net unrealized appreciation (depreciation) on investment transactions and foreign currency related transactions . 4,986,810 663,337,523 40,403,132 36,891,937 ---------------- ---------------- ---------------- ---------------- $ 24,443,498 $ 1,237,135,902 $ 244,401,224 $ 347,344,295 ================ ================ ================ ================ 208
BlackRock Funds U.S. International Asset Opportunities Opportunities Allocation Index Equity ---------------- ---------------- ---------------- ---------------- Capital paid in ......................................... $ 175,388,710 $ 548,989,520 $ 683,758,396 $ 1,147,295,258 End of period undistributed net investment income (distributions in excess of net investment income or accumulated net investment loss) ....................... -- 5,137,726 1,210,069 324,224 Accumulated net realized gain (loss) on investment transactions, futures, options, swaptions, swap contracts and foreign currency related transactions .............. (101,559,002) 15,285,709 (3,400,661) (304,342,233) Net unrealized appreciation (depreciation) on investment transactions, futures, options, swaptions, swap contracts and foreign currency related transactions .............. 22,215,534 148,759,423 90,866,810 481,829,195 ---------------- ---------------- ---------------- ---------------- $ 96,045,242 $ 718,172,378 $ 772,434,614 $ 1,325,106,444 ================ ================ ================ ================ (H) Federal Tax Information No provision is made for Federal taxes as it is the Fund's intention to have each Portfolio continue to qualify for and elect the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended, and to make the requisite distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes. Short-term capital gain and foreign currency distributions that are reported in the Statement of Changes in Net Assets are reported as ordinary income for federal tax purposes. Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain, as appropriate, in the period that the differences arise. The following permanent differences as of September 30, 2005, attributable to realized foreign currency gains/(losses), foreign futures realized gains/(losses), paydown adjustments and certain net operating losses which for tax purposes, are not available to offset future income, were reclassified to the following accounts: Increase Increase (Decrease) (Decrease) Increase Accumulated Undistributed (Decrease) Net Realized Net Investment Paid In-Capital Gain (Loss) Income ---------------- ---------------- ---------------- Investment Trust .................................... $ 271,612,346 $ (271,612,346) $ -- Large Cap Value Equity .............................. 11,635,325 (11,635,325) -- Legacy .............................................. (98,020) -- 98,020 Mid-Cap Value Equity ................................ 426,675 (650,198) 223,523 Mid-Cap Growth Equity ............................... (84,986,990) 80,844,917 4,142,073 Aurora .............................................. (17,362,757) (234,719) 17,597,476 Small/Mid-Cap Growth Equity ......................... (3,240,011) -- 3,240,011 Small Cap Core Equity ............................... -- (323,999) 323,999 Small Cap Growth Equity ............................. (2,948,503) -- 2,948,503 Global Science & Technology Opportunities ........... (386,594) (9,961) 396,555 Global Resources .................................... -- (2,054,858) 2,054,858 All-Cap Global Resources ............................ (91,310) 63,267 28,043 Health Sciences ..................................... (7) (1,078,191) 1,078,198 U.S. Opportunities .................................. (1,397,619) -- 1,397,619 International Opportunities ......................... -- (53,405) 53,405 Asset Allocation .................................... 40,828,825 (45,882,005) 5,053,180 209
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) The tax character of distributions paid during the years ended September 30, 2005, and September 30, 2004 were as follows: Ordinary Long-Term Total Income Capital Gain Distributions ------------- ------------- ------------- Investment Trust 9/30/05 ........................ $ 464,247 $ -- $ 464,247 9/30/04 ........................ 893,694 -- 893,694 Large Cap Value 9/30/05 ........................ 4,138,309 -- 4,138,309 9/30/04 ........................ 3,331,111 -- 3,331,111 Dividend Acheivers 9/30/05 ........................ 327,123 9,435 336,558 Mid-Cap Value 9/30/05 ........................ 5,355,456 1,906,200 7,261,656 9/30/04 ........................ 194,370 -- 194,370 Aurora 9/30/05 ........................ 51,296,874 285,959,800 337,256,674 9/30/04 ........................ -- 1,642,569 1,642,569 Small Cap Value 9/30/05 ........................ 17,073,528 8,151,685 25,225,213 9/30/04 ........................ 6,523,912 9,724,645 16,248,557 Small Cap Core 9/30/05 ........................ -- 103,852 103,852 9/30/04 ........................ -- 29,531 29,531 Health Sciences 3/1/04 through 2/28/05 ......... -- 75,346 75,346 International Opportunities 9/30/05 ........................ 3,350,147 -- 3,350,147 9/30/04 ........................ 153,612 -- 153,612 Asset Allocation -- 9/30/05 ........................ 6,400,932 7,557 6,408,489 9/30/04 ........................ 1,647,304 -- 1,647,304 Index Equity/*/ 11/30/04 ....................... 15,470,115 -- 15,470,115 11/30/03 ....................... 15,555,745 -- 15,555,745 /*/ BlackRock Index Equity Portfolio has a tax year end of 11/30. 210
BlackRock Funds As of September 30, 2005, the tax components of distributable earnings/(accumulated losses) were as follows: Undistributed Undistributed Accumulated Post- Ordinary Long-Term Capital October Income Capital Gain Losses Losses ------------- ------------- ------------- ------------- Investment Trust .............................. $ 6,946,198 $ 33,496,464 $ 236,461,626 $ -- Large Cap Value Equity ........................ 88,980 -- 27,359,811 -- Large Cap Growth Equity ....................... 274,749 -- 382,236,942 -- Dividend Achievers(TM) ........................ 1,881 -- -- 312,559 Legacy ........................................ -- -- 115,958,263 -- Mid-Cap Value Equity .......................... 37,738,676 38,957,427 -- -- Mid-Cap Growth Equity ......................... -- 5,857,028 280,021,307 -- Aurora ........................................ -- 469,823,998 -- -- Small/Mid-Cap Growth .......................... -- 9,593,293 -- -- Small Cap Value Equity ........................ 11,952,816 9,761,467 -- -- Small Cap Core Equity ......................... 184,044 337,458 -- -- Small Cap Growth Equity ....................... -- -- 644,592,574 -- Global Science & Technology Opportunities ..... -- -- 78,692,568 -- Global Resources .............................. 20,030,276 81,433,314 -- -- All-Cap Global Resources ...................... -- -- 36,351 -- Health Sciences ............................... 4,999,268 6,431,055 -- -- U.S. Opportunities ............................ -- -- 101,558,173 -- International Opportunities ................... 8,670,681 15,445,686 -- 1,765,259 Asset Allocation .............................. 1,776,579 32,265,162 33,239,576 368,822 The estimated Post-October losses represent lo sses realized on investment transactions from November 1, 2004 through September 30, 2005 that, in accordance with Federal income tax regulations, the Portfolios may defer and treat as having arisen in the following fiscal year. For Federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. At September 30, 2005, the Portfolios had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates: Expiring September 30 ----------------------------------------------------------------------------- 2009 2010 2011 2013 Total ------------- ------------- ------------- ------------- ------------- Investment Trust .............. $ 199,128,674 $ 21,399,511 $ 15,933,441 $ -- $ 236,461,626 Large Cap Value Equity ........ -- 23,567,552 3,792,259 -- 27,359,811 Large Cap Growth Equity ....... -- 376,597,358 5,639,584 -- 382,236,942 Legacy ........................ 21,280,418 76,300,059 18,377,786 -- 115,958,263 Mid-Cap Growth Equity ......... 157,179,901 106,543,783 16,297,623 -- 280,021,307 Small Cap Growth Equity ....... -- 539,605,482 104,987,092 -- 644,592,574 Global Science & Technology Opportunities ................ 6,619,658 72,072,910 -- -- 78,692,568 All-Cap Global Resources ...... -- -- -- 36,351 36,351 U.S. Opportunities ............ -- 85,044,662 16,513,511 -- 101,558,173 Asset Allocation .............. 8,409,633 24,829,943 -- -- 33,239,576 Expiring November 30 ------------------------------------------------------------- 2009 2010 2011 Total ------------- ------------- ------------- ------------- Index Equity ................. $ 5,288,740 $ 79,252,195 $ 117,169,455 $ 201,710,390 211
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Concluded) As of September 30, 2005 the following capital loss carryforwards were used to offset net taxable gains for the following Portfolios: Investment Trust ......................... $ 127,421,771 Large Cap Value Equity ................... 45,527,415 Large Cap Growth Equity .................. 15,030,777 Dividend Achievers ....................... 2,818 Legacy ................................... 10,995,750 Mid-Cap Growth Equity .................... 43,505,099 Small/Mid-Cap Growth Equity .............. 8,855,140 Small-Cap Growth Equity .................. 45,173,640 Global Science & Technology Opportunities. 1,372,383 U.S. Opportunities ....................... 15,143,106 International Opportunities .............. 34,119,135 Asset Allocation ......................... 9,558,121 As of September 30, 2005 the following capital loss carryforwards were written off due to merger limitations with State Street Research Funds for the following Portfolios: Investment Trust ......................... $ 41,035,435 Mid-Cap Growth Equity .................... 360,817,885 212
BlackRock Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of BlackRock Funds: We have audited the accompanying statements of net assets of the Investment Trust, Large Cap Value Equity, Large Cap Growth Equity, Dividend Achievers(TM), Legacy, Mid-Cap Value Equity, Mid-Cap Growth Equity, Aurora, Small/Mid-Cap Growth, Small Cap Value Equity, Small Cap Core Equity, Small Cap Growth Equity, Global Science & Technology Opportunities, Global Resources, All-Cap Global Resources, Health Sciences, U.S. Opportunities, International Opportunities, Asset Allocation, and Index Equity Portfolios [twenty of the fifty portfolios constituting BlackRock Funds (the "Fund")], and the statements of assets and liabilities of the Investment Trust, Large Cap Value Equity, Large Cap Growth Equity, Dividend AchieversTM, Legacy, Mid-Cap Value Equity, Mid-Cap Growth Equity, Aurora, Small/Mid-Cap Growth, Small Cap Value Equity, Small Cap Core Equity, Global Science & Technology Opportunities, Global Resources, All-Cap Global Resources, Health Sciences, U.S. Opportunities, and Asset Allocation Portfolios as of September 30, 2005, the related statements of operations for the periods then ended, the related statements of operations for the periods ended February 28, 2005 for the Mid-Cap Value Equity, Global Resources, Health Sciences and Asset Allocation Portfolios, the related statement of operations for the period ended October 31, 2004 for the Legacy Portfolio, the statements of changes in net assets and financial highlights for the periods ended September 30, 2005 and September 30, 2004 for the Investment Trust (formerly "BlackRock Select Equity Portfolio"), Large Cap Value Equity, Large Cap Growth Equity, Dividend AchieversTM, Mid-Cap Growth Equity, Small Cap Value Equity, Small Cap Core Equity, Small Cap Growth Equity, Global Science & Technology Opportunities, U.S. Opportunities, International Opportunities, and Index Equity Portfolios, the statements of changes in net assets for the periods ended September 30, 2005 and September 30, 2004 and the financial highlights for the periods ended September 30, 2005, September 30, 2004 and September 30, 2003 for the Aurora (formerly "State Street Research Aurora Fund") and Small/Mid-Cap Growth (formerly "State Street Research Emerging Growth Fund") Portfolios, the statements of changes in net assets and financial highlights for the periods ended September 30, 2005, October 31, 2004, and October 31, 2003 for the Legacy Portfolio (formerly "State Street Research Legacy Fund"), the statements of changes in net assets for the periods ended September 30, 2005, February 28, 2005 and June 30, 2004 and the financial highlights for the periods ended September 30, 2005, February 28, 2005, June 30, 2004 and June 30, 2003 for the Mid-Cap Value Equity (formerly "State Street Research Mid-Cap Value Fund") and Global Resources (formerly "State Street Research Global Resources Fund") Portfolios, the statements of changes in net assets and financial highlights for the period ended September 30, 2005 for the All-Cap Global Resources Portfolio, the statements of changes in net assets and financial highlights for the periods ended September 30, 2005, February 28, 2005, and February 29, 2004 for the Health Sciences (formerly "State Street Research Health Sciences Fund") Portfolio and the statements of changes in net assets and financial highlights for the periods ended September 30, 2005, February 28, 2005, and March 31, 2004 for the Asset Allocation (formerly "BlackRock Balanced Portfolio") Portfolio. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Portfolios for the periods ended February 28, 2003, February 28, 2002, and February 28, 2001, March 31, 2003, March 31, 2002, March 31, 2001, June 30, 2002, June 30, 2001, September 30, 2003 (except the Aurora and Small/Mid-Cap Growth Portfolios), September 30, 2002, September 30, 2001, October 31, 2002 and October 31, 2001 were audited by other auditors whose reports, dated August 9, 2002, November 8, 2002, December 13, 2002, April 7, 2003 and May 9, 2003, expressed unqualified opinions on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Portfolios are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolios' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2005, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. 213
BlackRock Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of the Portfolios as of September 30, 2005, the results of their operations, changes in their net assets, and their financial highlights for each of the periods indicated in the first paragraph above, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania November 25, 2005 214
BlackRock Funds FUND MANAGEMENT (Unaudited) Information pertaining to the Trustees and officers of the Fund is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (888) 825-2257. Institutional and service share class investors should call (800) 441-7450. Number of Term of Portfolios Other Total Fund Office/(1)/ in Fund Directorships Compensation Position(s) and Length Complex/(2)/ Held by for the Name, Address and Held with of Time Principal Occupation(s) Overseen Trustee Year Ending Age Fund Served During Past Five Years by Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------------- INTERESTED TRUSTEES - ----------------------------------------------------------------------------------------------------------------------------------- Richard S. Davis/(3)/ Trustee Since 2005 Managing Director, BlackRock, Inc. 55 None N/A BlackRock, Inc. (since 2005); Chief Executive Officer, (includes 40 E. 52nd Street State Street Research & 50 New York, NY 10022 Management Company (2000-2005); Portfolios Age: 59 Chairman of the Board of Trustees, of the Fund State Street Research mutual funds and 5 ("SSR Funds") (2000-2005); Senior Portfolios Vice President, Metropolitan Life of Insurance Company (1999-2000); BlackRock Chairman, SSR Realty (2000-2004). Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------------- Laurence D. Fink/(4)/ Trustee Since 2000 Director, Chairman and Chief 55 Director, N/A BlackRock, Inc. Executive Officer of BlackRock, Inc. (includes BlackRock, 40 E. 52nd Street since its formation in 1998 and of 50 Inc. New York, NY 10022 BlackRock, Inc.'s predecessor Portfolios Age: 51 entities since 1988; Chairman of the of the Fund Management Committee; formerly, and 5 Managing Director of the First Portfolios Boston Corporation, Member of its of Management Committee, Co-head of BlackRock its Taxable Fixed Income Division Bond and Head of its Mortgage and Real Allocation Estate Products Group; Chairman of Target the Board of Nomura BlackRock Shares) Asset Management and several of BlackRock's alternative investment vehicles; Director of several of BlackRock's offshore funds; Co-Chairman of the Board of Trustees of Mount Sinai-NYU; Co-Chairman of the Board of Trustees of NYU Hospitals Center; member of the Board of Trustees of NYU; member of the Board of Executives of the New York Stock Exchange, and Trustee of the American Folk Art Museum. - ----------------------------------------------------------------------------------------------------------------------------------- 215
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Number of Term of Portfolios Other Total Fund Office/(1)/ in Fund Directorships Compensation Position(s) and Length Complex/(2)/ Held by for the Name, Address and Held with of Time Principal Occupation(s) Overseen Trustee Year Ending Age Fund Served During Past Five Years by Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------------- DISINTERESTED TRUSTEES - ----------------------------------------------------------------------------------------------------------------------------------- Bruce R. Bond Trustee Since 2005 Retired; Trustee and 55 Director, $ 84,600 c/o BlackRock Funds member of the (includes Avaya, Inc. 100 Bellevue Parkway Governance Committee, 50 (information Wilmington, DE 19809 SSR Funds Portfolios technology). Age: 59 (1997-2005). of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------------- Peter S. Drotch Trustee Since 2005 Retired; Trustee and member 55 Director, $ 84,600 c/o BlackRock Funds of the (includes First 100 Bellevue Parkway Audit Committee, SSR Funds 50 Marblehead Wilmington, DE 19809 (2003-2005); Partner, Portfolios Corp. Age: 64 Pricewater- of the Fund (student loan houseCoopers LLP and 5 processing and (accounting firm) Portfolios securitization); (1964-2000). of Trustee, BlackRock University of Bond Connecticut; Allocation Trustee, Target Huntington Shares) Theatre. - ----------------------------------------------------------------------------------------------------------------------------------- Honorable Stuart E. Trustee and Since 2001 Partner, Covington & Burling 55 Director, $ 130,100 Eizenstat Chairman of firm) (2001-Present); Deputy (includes Mirant Covington & Burling the Secretary of the Treasury 50 Corporation; 1201 Pennsylvania Nominating (1999-2001); Under Secretary of Portfolios Advisory Avenue, NW Committee State for Economic, Business and of the Fund Board member, Washington, DC 20004 Agricultural Affairs (1997-1999); and 5 The Coca-Cola Age: 62 Under Secretary of Commerce for Portfolios Company; International Trade (1996-1997); of Advisory Board U.S. Ambassador to the European BlackRock member, Group Union (1993-1996); Chairman, Bond Menatep; International Board of Governors, Allocation Advisory Weizmann Institute of Science. Target Board member, Shares) BT Americas. - ----------------------------------------------------------------------------------------------------------------------------------- Robert M. Hernandez Trustee, Vice Since 1996 Retired; Director (1991-2001), Vice 55 Lead Director, $ 140,100 c/o BlackRock Funds Chairman of Chairman and Chief Financial Officer (includes ACE 100 Bellevue Parkway the Board and (1994-2001), Executive Vice 50 Limited Wilmington, DE 19809 Chairman of President-Accounting and Finance Portfolios (insurance Age: 61 the Audit and Chief Financial Officer of the Fund company); Committee (1991-1994), USX Corporation (a and 5 Director diversified company principally Portfolios and Chairman engaged in energy and steel of of the businesses). BlackRock Board, RTI Bond International Allocation Metals, Target Inc.: Director, Shares) Eastman Chemical Company. - ----------------------------------------------------------------------------------------------------------------------------------- 216
BlackRock Funds FUND MANAGEMENT (Unautied) (Continued) Number of Term of Portfolios Other Total Fund Office/(1)/ in Fund Directorships Compensation Position(s) and Length Complex/(2)/ Held by for the Name, Address and Held with of Time Principal Occupation(s) Overseen Trustee Year Ending Age Fund Served During Past Five Years by Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------------- Dr. Matina Horner Trustee and Since 2004 Retired; Executive Vice President of 55 Chair of the $ 104,550 c/o BlackRock Funds Chairperson Teachers Insurance and Annuity (includes Board of the 100 Bellevue Parkway of the Association and College Retirement 50 Massachusetts Wilmington, DE 19809 Governance Equities Fund (TIAA-CREF) Portfolios General Age: 66 Committee ( 1989-2003). of the Fund Hospital and 5 Institute of Portfolios Health of Professions; BlackRock Chair of Bond the Board of Allocation the Greenwall Target Foundation; Shares) Trustee, Century Foundation (formerly The Twentieth Century Fund); Director, N STAR (formerly called Boston Edison); Director, The Neiman Marcus Group; Honorary Trustee, Massachusetts General Hospital Corporation. - ----------------------------------------------------------------------------------------------------------------------------------- Toby Rosenblatt Trustee Since 2005 President, Founders Investment Ltd. 55 Director, A.P. $ 84,600 c/o BlackRock Funds (private investments) (since 1999); (includes Pharma, Inc. 100 Bellevue Parkway Trustee, SSR Funds (1993-2003). 50 Wilmington, DE 19809 Portfolios Age: 67 of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------------- David R. Wilmerding, Trustee and Since 1996 Chairman, Wilmerding & Associates, 56 None $ 135,100 Jr. Chairperson Inc. (investment advisers) (since (includes c/o BlackRock Funds of 1989); Chairman, Coho Partners, 50 100 Bellevue Parkway the Board Ltd. (investment advisers) (since Portfolios Wilmington, DE 19809 2003); Director, Beaver Management of the Fund, Age: 70 Corporation (land management 5 Portfolios corporation); Managing General of Partner, Chestnut Street Exchange BlackRock Fund. Bond Allocation Target Shares and 1 Portfolio of Chestnut Street Exchange Fund, which is managed by BlackRock Financial Management Inc. and BlackRock Institutional Management Corporation.) - ----------------------------------------------------------------------------------------------------------------------------------- 217
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Term of Total Fund Office/(5)/ Compensation Position(s) and Length for the Name, Address and Held with of Time Principal Occupation(s) Year Ending Age Fund Served During Past Five Years 9/30/05 - -------------------------------------------------------------------------------------------------------------------- OFFICERS WHO ARE NOT TRUSTEES - -------------------------------------------------------------------------------------------------------------------- Anne Ackerley Vice Since 2003 Managing Director, BlackRock, Inc. (since May N/A BlackRock, Inc. President (previously 2000); First Vice President and Operating 40 E. 52nd Street served as Officer, Mergers and Acquisitions Group New York, NY 10022 Assistant (1997-2000), First Vice President and Operating Age: 43 Secretary Officer, Public Finance Group (1995-1997), and since First Vice President, Emerging Markets Fixed 2000) Income Research (1994-1995), Merrill Lynch & Co. - -------------------------------------------------------------------------------------------------------------------- Edward Baer Assistant Since 2005 Director and Senior Counsel of BlackRock, Inc. N/A BlackRock, Inc. Secretary (since 2004); Associate, Willkie Farr & 40 E. 52nd Street Gallagher LLP (2000-2004); Associate, Morgan New York, NY 10022 Lewis & Bockius LLP (1995-2000). Age: 37 - -------------------------------------------------------------------------------------------------------------------- Bart Battista Chief Since 2004 Chief Compliance Officer and Anti-Money $ 368,547 BlackRock, Inc. Compliance Laundering Compliance Officer of BlackRock, 40 E. 52nd Street Officer and Inc. (since 2004); Managing Director (since New York, NY 10022 Anti-Money 2003), and Director (1998-2002) of BlackRock, Age: 46 Laundering Inc.; Compliance Officer at Moore Capital Compliance Management (1995-1998). Officer - -------------------------------------------------------------------------------------------------------------------- Ellen L. Corson Assistant Since 1998 Senior Director and Vice President of Fund N/A PFPC Inc. Treasurer Accounting and Administration, PFPC Inc. 103 Bellevue Parkway (since 2003); Vice President and Director of Wilmington, DE 19809 Mutual Fund Accounting and Administration, Age: 41 PFPC Inc. (since November 1997); Assistant Vice President, PFPC Inc. (March 1997-November 1997); Senior Accounting Officer, PFPC Inc. (March 1993-March 1997). - -------------------------------------------------------------------------------------------------------------------- Henry Gabbay President Since 2005 Managing Director, BlackRock, Inc. (since N/A BlackRock, Inc. 1989). 40 E. 52nd Street New York, NY 10022 Age: 57 - -------------------------------------------------------------------------------------------------------------------- Brian P. Kindelan Secretary Since 1997 Managing Director and Senior Counsel (since N/A BlackRock Advisors, Inc. January 2005), Director and Senior Counsel 100 Bellevue Parkway (2001-2004) and Vice President and Senior Wilmington, DE 19809 Counsel (1998-2000), BlackRock Advisors, Age: 46 Inc.; Senior Counsel, PNC Bank Corp. May 1995-April 1998). - -------------------------------------------------------------------------------------------------------------------- William McGinley Treasurer Since 2005 Managing Director of BlackRock, Inc. (since N/A BlackRock, Inc. 2004); Partner, PricewaterhouseCoopers LLP 100 Bellevue Parkway (1990-2004). Wilmington, DE 19809 Age: 38 - -------------------------------------------------------------------------------------------------------------------- Vincent Tritto Assistant Since 2003 Managing Director and Assistant Secretary N/A BlackRock, Inc. Secretary (since January 2005) and Director and Senior 40 E. 52nd Street Counsel (2002-2004) of BlackRock, Inc. New York, NY 10022 Executive Director (2000-2002) and Vice Age: 44 President (1998-2000), Morgan Stanley & Co. Incorporated and Morgan Stanley Asset Management Inc. and officer of various Morgan Stanley-sponsored investment vehicles: Counsel (1998); Associate (1988-1997), Rogers & Wells LLP, New York, NY. - -------------------------------------------------------------------------------------------------------------------- 218
BlackRock Funds FUND MANAGEMENT (Unaudited) (Concluded) (1) Each Trustee holds office for an indefinite term until the earlier of (1) the next meeting of shareholders at which Trustees are elected and until his or her successor is elected and qualified and (2) such time as such Trustee resigns or his or her term as a Trustee is terminated in accordance with the Fund's code of regulations and Declaration of Trust. (2) A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, that have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. (3) Mr. Fink is an interested person of the Fund due to his position at BlackRock, Inc. (4) Mr. Davis is an interested person of the Fund due to his position at BlackRock, Inc. (5) Each officer holds office for an indefinite term until the earlier of (1) the next meeting of trustees at which his or her successor is appointed and (2) such time as such officer resigns or his or her term as an officer is terminated in accordance with the Fund's code of regulations and Declaration of Trust. 219
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BlackRock Funds ADDITIONAL INFORMATION (Unaudited) (A) A proxy statement was sent to shareholders of all portfolios of the Fund asking them to consider and vote upon the election of nine trustees to the Board of Trustees of the Fund (the "Board"). Five of the nine nominees were already serving as trustees of the Fund and the additional nominees had previously served as trustees of the State Street Research Funds. Due to the increased size and complexity of the Fund resulting from the reorganization with the State Street Research Funds, and an increase in the responsibilities of boards of trustees of funds generally, the Board believed it was in the best interest of the Fund to increase the size of the Board. On April 29, 2005, the special meeting of shareholders was held, at which all of the nominees included in the proxy were duly elected to the Board. The votes for the election of trustees were as follows: Affirmative Negative ------------- --------- Bruce R. Bond .................... 3,006,153,475 9,427,152 Richard S. Davis ................. 3,006,504,966 9,075,661 Peter S. Drotch .................. 3,006,391,368 9,189,259 Stuart E. Eizenstat .............. 3,005,972,578 9,608,049 Laurence D. Fink ................. 3,006,652,923 8,927,704 Robert M. Hernandez .............. 3,006,095,141 9,485,487 Dr Matina Horner ................. 3,005,916,103 9,664,525 Toby Rosenblatt .................. 3,006,157,679 9,422,948 David R. Wilmerding, Jr. ......... 3,006,022,868 9,557,759 (B) PricewaterhouseCoopers LLP ("PwC"), the Fund's former independent auditor, has been hired as an internal audit supporting service provider by The PNC Financial Services Group, Inc. ("PNC"), the parent company of the Fund's investment adviser and certain other service providers. In order to provide certain services to PNC and its affiliates which would have caused PwC to no longer be independent with respect to the Fund, PwC declined to stand for re-election as independent auditor of the Fund after the completion of the fiscal 2003 audit. The Fund's Audit Committee approved engaging Deloitte & Touche LLP as the independent auditor to audit the Fund's financial statements for fiscal year 2006. A majority of the Fund's Board of Trustees, including a majority of the independent Trustees, approved the appointment of Deloitte & Touche LLP as the Fund's independent auditor for the Fund's fiscal 2006 audit on November 29, 2005, subject to the right of the Fund, by a majority vote of the shareholders at any meeting called for that purpose, to terminate the appointment without penalty. (C) As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and various information requests from the Securities and Exchange Commission in connection with ongoing industry-wide investigations of mutual fund matters. 221
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THE DFA INVESTMENT TRUST COMPANY THE U.S. LARGE COMPANY SERIES
TABLE OF CONTENTS THE DFA INVESTMENT TRUST COMPANY THE U.S. LARGE COMPANY SERIES Page Schedule of Investments as of September 30, 2005 (Unaudited)..... 225 Statement of Assets & Liabilities as of September 30, 2005 (Unaudited).................................................. 230 Financial Statements as of and for the year ended November 30, 2004 (Audited): Performance Chart............................................ 231 Disclosure of Fund Expenses.................................. 232 Disclosure of Portfolio Holdings (Unaudited)................. 233 Schedule of Investments...................................... 234 Statement of Assets and Liabilities.......................... 239 Statement of Operations...................................... 240 Statements of Changes in Net Assets.......................... 241 Financial Highlights......................................... 242 Notes to Financial Statements................................ 243 Report of Independent Registered Certified Public Accounting Firm..................................................... 246 Fund Management.............................................. 247 Voting Proxies on Fund Portfolio Securities...................... 254 This report is submitted for the information of the Fund's shareholders. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus.
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series September 30, 2005 ------------------------- (Unaudited) Shares Value+ --------- --------------- COMMON STOCKS -- (99.4%) Financials -- (19.2%) Ace, Ltd................................ 106,100 $ 4,994,127 AFLAC, Inc.............................. 184,600 8,362,380 Allstate Corp........................... 241,700 13,363,593 AMBAC Financial Group, Inc.............. 39,400 2,839,164 American Express Co..................... 456,700 26,232,848 American International Group, Inc....... 955,100 59,177,996 AmSouth Bancorporation.................. 129,000 3,258,540 AON Corp................................ 117,200 3,759,776 Bank of America Corp.................... 1,478,800 62,257,480 Bank of New York Co., Inc............... 286,500 8,425,965 BB&T Corp............................... 201,500 7,868,575 Bear Stearns Companies, Inc............. 41,400 4,543,650 Capital One Financial Corp.............. 106,300 8,452,976 Chubb Corp.............................. 73,000 6,537,150 Cincinnati Financial Corp............... 64,300 2,693,527 CIT Group, Inc.......................... 74,200 3,352,356 Citigroup, Inc.......................... 1,902,800 86,615,456 Comerica, Inc........................... 61,600 3,628,240 Compass Bancshares, Inc................. 45,800 2,099,014 Countrywide Financial Corp.............. 218,800 7,216,024 E*TRADE Financial Corp.................. 136,400 2,400,640* Federal Home Loan Mortgage Corporation............................ 254,300 14,357,778 Federal National Mortgage Association... 356,200 15,964,884 Federated Investors, Inc................ 31,200 1,036,776 Fifth Third Bancorp..................... 204,700 7,518,631 First Horizon National Corp............. 46,000 1,672,100 Franklin Resources, Inc................. 54,600 4,584,216 Golden West Financial Corp.............. 94,000 5,582,660 Hartford Financial Services Group, Inc.. 110,200 8,504,134 Huntington Bancshares, Inc.............. 85,000 1,909,950 Janus Capital Group, Inc................ 82,000 1,184,900 Jefferson-Pilot Corp.................... 49,600 2,538,032 JPMorgan Chase & Co..................... 1,292,900 43,868,097 KeyCorp................................. 150,600 4,856,850 Lehman Brothers Holdings, Inc........... 100,200 11,671,296# Lincoln National Corp................... 63,500 3,303,270 Loews Corp.............................. 49,900 4,611,259 M&T Bank Corp........................... 29,700 3,139,587 Marsh & McLennan Companies, Inc......... 197,000 5,986,830 Marshall & Ilsley Corp.................. 76,300 3,319,813 MBIA, Inc............................... 49,300 2,988,566 MBNA Corp............................... 462,900 11,405,856 Mellon Financial Corp................... 153,900 4,920,183 Merrill Lynch & Co., Inc................ 340,900 20,914,215 MetLife, Inc............................ 278,400 13,872,672 MGIC Investment Corp.................... 34,200 2,195,640# Moody's Corp............................ 93,000 4,750,440 Morgan Stanley.......................... 399,700 21,559,818 National City Corp...................... 209,300 6,998,992 North Fork Bancorporation, Inc.......... 176,100 4,490,550 Northern Trust Corp..................... 68,300 3,452,565 PNC Financial Services Group............ 107,000 6,208,140 Principal Financial Group, Inc.......... 102,900 4,874,373 Progressive Corp........................ 72,600 7,606,302 Providian Financial Corp................ 108,500 1,918,280* Prudential Financial, Inc............... 188,800 12,755,328 Regions Financial Corp.................. 169,500 5,274,840 Safeco Corp............................. 46,000 2,455,480 Schwab (Charles) Corp................... 382,500 5,519,475 SLM Corp................................ 153,700 8,244,468 September 30, 2005 ------------------------- (Unaudited) Shares Value+ --------- --------------- Sovereign Bancorp, Inc.................. 133,100 $ 2,933,524 State Street Corp....................... 121,800 5,958,456 SunTrust Banks, Inc..................... 133,400 9,264,630 Synovus Financial Corp.................. 114,700 3,179,484 T. Rowe Price Group, Inc................ 47,800 3,121,340 The Goldman Sachs Group, Inc............ 171,100 20,802,338 The St. Paul Travelers Companies, Inc... 248,600 11,154,682 Torchmark Corp.......................... 38,400 2,028,672 U.S. Bancorp............................ 672,700 18,889,416 UnumProvident Corp...................... 109,600 2,246,800 Wachovia Corp........................... 580,500 27,625,995 Washington Mutual, Inc.................. 323,700 12,695,514 Wells Fargo & Co........................ 621,300 36,389,541 XL Capital, Ltd......................... 51,700 3,517,151# Zions Bancorporation.................... 33,200 2,364,172 --------------- Total Financials (Cost $557,425,997)..................... 788,268,438 --------------- Information Technology -- (15.2%) ADC Telecommunications, Inc............. 42,900 980,694* Adobe Systems, Inc...................... 180,900 5,399,865 Advanced Micro Devices, Inc............. 146,600 3,694,320* Affiliated Computer Services, Inc. Class A................................ 46,200 2,522,520* Agilent Technologies, Inc............... 181,900 5,957,225* Altera Corp............................. 137,100 2,619,981* Analog Devices, Inc..................... 137,100 5,091,894 Andrew Corp............................. 59,800 666,770* Apple Computer, Inc..................... 305,400 16,372,494* Applied Materials, Inc.................. 597,200 10,128,512 Applied Micro Circuits Corp............. 112,400 337,200* Autodesk, Inc........................... 84,100 3,905,604 Automatic Data Processing, Inc.......... 213,500 9,189,040 Avaya, Inc.............................. 156,100 1,607,830* BMC Software, Inc....................... 80,200 1,692,220* Broadcom Corp........................... 104,000 4,878,640* Ciena Corp.............................. 212,700 561,528* Cisco Sytems, Inc....................... 2,352,100 42,173,153* Citrix Systems, Inc..................... 62,700 1,576,278* Computer Associates International, Inc.. 170,500 4,741,605 Computer Sciences Corp.................. 68,000 3,217,080* Compuware Corp.......................... 142,800 1,356,600* Comverse Technology, Inc................ 74,100 1,946,607* Convergys Corp.......................... 51,500 740,055* Corning, Inc............................ 541,800 10,472,994* Dell, Inc............................... 882,400 30,178,080* Electronic Arts, Inc.................... 111,700 6,354,613* Electronic Data Systems Corp............ 191,000 4,286,040 EMC Corp................................ 887,200 11,480,368* First Data Corp......................... 284,000 11,360,000 Fiserv, Inc............................. 69,200 3,174,204* Freescale Semiconductor, Inc. Class B... 149,100 3,515,778* Gateway, Inc............................ 97,000 261,900* Hewlett-Packard Co...................... 1,054,400 30,788,480 Intel Corp.............................. 2,242,500 55,277,625 International Business Machines Corp.... 587,300 47,113,206 Intuit, Inc............................. 66,700 2,988,827* Jabil Circuit, Inc...................... 63,300 1,957,236* JDS Uniphase Corp....................... 606,600 1,346,652* KLA-Tencor Corp......................... 72,700 3,544,852 Lexmark International, Inc.............. 43,700 2,667,885* Linear Technology Corp.................. 112,900 4,243,911 LSI Logic Corp.......................... 143,800 1,416,430* Lucent Technologies, Inc................ 1,635,900 5,316,675* 225
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Continued) September 30, 2005 ------------------------- (Unaudited) Shares Value+ --------- --------------- Maxim Integrated Products, Inc........ 120,700 $ 5,147,855 Mercury Interactive Corp.............. 31,900 1,263,240* Micron Technology, Inc................ 226,800 3,016,440* Microsoft Corp........................ 3,390,800 87,245,284 Molex, Inc............................ 53,300 1,422,044 Motorola, Inc......................... 908,700 20,073,183 National Semiconductor Corp........... 126,300 3,321,690 NCR Corp.............................. 68,400 2,182,644* Network Appliance, Inc................ 135,400 3,214,396* Novell, Inc........................... 140,600 1,047,470* Novellus Systems, Inc................. 51,000 1,279,080* Nvidia Corp........................... 62,100 2,128,788* Oracle Corp........................... 1,388,000 17,197,320* Parametric Technology Corp............ 100,200 698,394* Paychex, Inc.......................... 122,600 4,546,008 PMC-Sierra, Inc....................... 67,100 591,151* QLogic Corp........................... 33,400 1,142,280* Qualcomm, Inc......................... 600,100 26,854,475 Sabre Holdings Corp................... 48,300 979,524 Sanmina-SCI Corp...................... 193,500 830,115* Scientific-Atlanta, Inc............... 56,400 2,115,564 Siebel Systems, Inc................... 192,200 1,985,426 Solectron Corp........................ 357,800 1,398,998* Sun Microsystems, Inc................. 1,255,100 4,919,992* Symantec Corp......................... 440,900 9,990,794* Symbol Technologies, Inc.............. 93,620 906,242 Tektronix, Inc........................ 31,100 784,653 Tellabs, Inc.......................... 164,700 1,732,644* Teradyne, Inc......................... 72,400 1,194,600* Texas Instruments, Inc................ 597,400 20,251,860 Unisys Corp........................... 125,300 831,992* Xerox Corp............................ 353,100 4,819,815* Xilinx, Inc........................... 128,600 3,581,510 Yahoo!, Inc........................... 461,500 15,617,160* --------------- Total Information Technology (Cost $567,780,541)................... 623,416,102 --------------- Health Care -- (13.2%) Abbott Laboratories................... 572,100 24,257,040 Aetna, Inc............................ 106,700 9,191,138 Allergan, Inc......................... 48,100 4,406,922 AmerisourceBergen Corp................ 38,200 2,952,860 Amgen, Inc............................ 454,100 36,178,147* Applera Corp. -- Applied Biosystems Group................................ 71,900 1,670,956 Bard (C.R.), Inc...................... 38,800 2,561,964 Bausch & Lomb, Inc.................... 19,800 1,597,464 Baxter International, Inc............. 229,100 9,134,217 Becton Dickinson & Co................. 92,000 4,823,560 Biogen Idec, Inc...................... 124,500 4,915,260* Biomet, Inc........................... 91,900 3,189,849 Boston Scientific Corp................ 217,300 5,078,301* Bristol-Myers Squibb Co............... 719,800 17,318,388 Cardinal Health, Inc.................. 157,100 9,966,424 Caremark Rx, Inc...................... 165,600 8,268,408* Chiron Corp........................... 40,100 1,749,162* Cigna Corp............................ 47,300 5,574,778 Coventry Health Care, Inc............. 39,500 3,397,790* Eli Lilly & Co........................ 417,300 22,333,896 Express Scripts, Inc.................. 54,700 3,402,340* Fisher Scientific International, Inc.. 44,900 2,786,045* Forest Laboratories, Inc.............. 125,100 4,875,147* Genzyme Corp.......................... 94,500 6,769,980* Gilead Sciences, Inc.................. 167,800 8,181,928* September 30, 2005 ------------------------- (Unaudited) Shares Value+ --------- --------------- Guidant Corp......................... 121,500 $ 8,370,135 HCA, Inc............................. 166,300 7,969,096 Health Management Associates, Inc.... 91,000 2,135,770 Hospira, Inc......................... 58,800 2,409,036* Humana, Inc.......................... 59,800 2,863,224* IMS Health, Inc...................... 83,100 2,091,627 Johnson & Johnson.................... 1,094,800 69,278,944 King Pharmaceuticals, Inc............ 89,000 1,368,820* Laboratory Corp. of America Holdings. 49,700 2,420,887* Manor Care, Inc...................... 29,100 1,117,731 McKesson Corp........................ 113,500 5,385,575 Medco Health Solutions, Inc.......... 112,000 6,140,960* Medimmune, Inc....................... 90,700 3,052,055* Medtronic, Inc....................... 445,700 23,898,434 Merck & Co., Inc..................... 808,100 21,988,401 Millipore Corp....................... 19,000 1,194,910* Mylan Laboratories, Inc.............. 80,500 1,550,430 PerkinElmer, Inc..................... 47,900 975,723 Pfizer, Inc.......................... 2,712,700 67,736,119 Quest Diagnostics, Inc............... 61,300 3,098,102 Schering-Plough Corp................. 543,400 11,438,570 St. Jude Medical, Inc................ 134,200 6,280,560* Stryker Corp......................... 106,900 5,284,067 Tenet Healthcare Corp................ 172,500 1,937,175* Thermo Electron Corp................. 59,500 1,838,550* UnitedHealth Group, Inc.............. 464,900 26,127,380 Waters Corp.......................... 42,300 1,759,680* Watson Pharmaceuticals, Inc.......... 38,400 1,405,824* WellPoint, Inc....................... 225,800 17,120,156* Wyeth................................ 493,600 22,838,872 Zimmer Holdings, Inc................. 91,000 6,268,990* --------------- Total Health Care (Cost $406,560,227).................. 541,927,767 --------------- Industrials -- (11.0%) 3M Co................................ 281,600 20,658,176 Allied Waste Industries, Inc......... 80,300 678,535* American Power Conversion Corp....... 62,900 1,629,110 American Standard Companies, Inc..... 67,500 3,142,125 Avery Dennison Corp.................. 40,700 2,132,273 Boeing Co............................ 302,000 20,520,900 Burlington Northern Santa Fe Corp.... 137,400 8,216,520 Caterpillar, Inc..................... 249,100 14,634,625 Cendant Corp......................... 385,100 7,948,464 Cintas Corp.......................... 50,800 2,085,340 Cooper Industries, Ltd............... 34,100 2,357,674 CSX Corp............................. 79,900 3,713,752 Cummins, Inc......................... 17,100 1,504,629 Danaher Corp......................... 87,500 4,710,125 Deere & Co........................... 88,800 5,434,560 Donnelley (R.R.) & Sons Co........... 79,000 2,928,530 Dover Corp........................... 74,500 3,038,855 Eaton Corp........................... 54,300 3,450,765 Emerson Electric Co.................. 152,000 10,913,600 Equifax, Inc......................... 47,900 1,673,626 FedEx Corp........................... 111,500 9,714,995 Fluor Corp........................... 31,900 2,053,722 General Dynamics Corp................ 74,000 8,846,700 General Electric Co.................. 3,901,600 131,366,872 Goodrich (B.F.) Co................... 44,700 1,981,998 Honeywell International, Inc......... 314,700 11,801,250 Illinois Tool Works, Inc............. 76,800 6,322,944 Ingersoll-Rand Co., Ltd. Class A..... 124,100 4,744,343 ITT Industries, Inc.................. 34,100 3,873,760 226
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Continued) September 30, 2005 ----------------------- (Unaudited) Shares Value+ ------- --------------- L-3 Communications Holdings, Inc... 43,700 $ 3,455,359 Lockheed Martin Corp............... 133,900 8,173,256 Masco Corp......................... 158,400 4,859,712 Monster Worldwide, Inc............. 44,800 1,375,808* Navistar International Corp........ 22,700 736,161* Norfolk Southern Corp.............. 148,900 6,039,384 Northrop Grumman Corp.............. 131,400 7,141,590 Paccar, Inc........................ 63,100 4,283,859 Pall Corp.......................... 45,800 1,259,500 Parker Hannifin Corp............... 44,100 2,836,071 Pitney Bowes, Inc.................. 84,200 3,514,508 Raytheon Co........................ 166,100 6,315,122 Robert Half International, Inc..... 62,300 2,217,257 Rockwell Automation, Inc........... 66,800 3,533,720 Rockwell Collins, Inc.............. 65,000 3,140,800 Ryder System, Inc.................. 23,600 807,592 Southwest Airlines Co.............. 255,000 3,786,750 Textron, Inc....................... 49,200 3,528,624 Tyco International, Ltd............ 744,900 20,745,465 Union Pacific Corp................. 97,100 6,962,070 United Parcel Service, Inc......... 407,500 28,170,475 United Technologies Corp........... 377,200 19,554,048 W.W. Grainger, Inc................. 27,900 1,755,468 Waste Management, Inc.............. 206,900 5,919,409 --------------- Total Industrials (Cost $329,473,506)................ 452,190,776 --------------- Consumer Discretionary -- (10.7%) Apollo Group, Inc. Class A......... 53,800 3,571,782* AutoNation, Inc.................... 66,400 1,326,008* Autozone, Inc...................... 20,500 1,706,625* Bed Bath and Beyond, Inc........... 108,800 4,371,584* Best Buy Co., Inc.................. 149,000 6,485,970 Big Lots, Inc...................... 41,900 460,481* Black & Decker Corp................ 29,600 2,429,864 Brunswick Corp..................... 35,800 1,350,734 Carnival Corp...................... 158,800 7,936,824# Centex Corp........................ 47,200 3,048,176 Circuit City Stores, Inc........... 60,500 1,038,180 Clear Channel Communications, Inc.. 199,700 6,568,133 Coach, Inc......................... 139,900 4,387,264* Comcast Corp. Class A.............. 808,200 23,744,916* Cooper Tire & Rubber Co............ 22,500 343,575 Dana Corp.......................... 55,300 520,373 Darden Restaurants, Inc............ 49,400 1,500,278 Delphi Corp........................ 206,600 570,216 Dillards, Inc. Class A............. 23,700 494,856 Disney (Walt) Co................... 739,800 17,851,374 Dollar General Corp................ 118,100 2,165,954 Dow Jones & Co., Inc............... 21,700 828,723 Eastman Kodak Co................... 105,700 2,571,681 eBay, Inc.......................... 408,600 16,834,320* Family Dollar Stores, Inc.......... 60,700 1,206,109 Federated Department Stores, Inc... 97,600 6,526,512 Ford Motor Co...................... 682,000 6,724,520 Fortune Brands, Inc................ 53,700 4,367,421 Gannett Co., Inc................... 89,800 6,180,934 Gap, Inc........................... 213,300 3,717,819 General Motors Corp................ 208,100 6,369,941 Genuine Parts Co................... 64,100 2,749,890 Goodyear Tire & Rubber Co.......... 64,800 1,010,232* H&R Block, Inc..................... 119,500 2,865,610 Harley-Davidson, Inc............... 101,000 4,892,440 Harrahs Entertainment, Inc......... 67,600 4,406,844 September 30, 2005 ------------------------- (Unaudited) Shares Value+ --------- --------------- Hasbro, Inc.......................... 65,900 $ 1,294,935 Hilton Hotels Corp................... 120,600 2,691,792 Home Depot, Inc...................... 787,700 30,042,878 Horton (D.R.), Inc................... 100,200 3,629,244 International Game Technology........ 125,500 3,388,500 Interpublic Group of Companies, Inc.. 155,600 1,811,184* Johnson Controls, Inc................ 70,900 4,399,345 Jones Apparel Group, Inc............. 43,600 1,242,600 KB Home.............................. 28,500 2,086,200 Knight-Ridder, Inc................... 25,500 1,496,340 Kohl's Corp.......................... 126,900 6,367,842* Leggett & Platt, Inc................. 69,400 1,401,880 Limited Brands, Inc.................. 128,500 2,625,255 Liz Claiborne, Inc................... 39,500 1,553,140 Lowe's Companies, Inc................ 287,000 18,482,800 Marriott International, Inc. Class A. 63,000 3,969,000 Mattel, Inc.......................... 148,600 2,478,648 Maytag Corp.......................... 29,400 536,844 McDonald's Corp...................... 460,100 15,408,749 McGraw-Hill Companies, Inc........... 137,600 6,610,304 Meredith Corp........................ 15,400 768,306 Newell Rubbermaid, Inc............... 101,300 2,294,445 News Corp. Class A................... 901,600 14,055,944 NIKE, Inc. Class B................... 70,300 5,742,104 Nordstrom, Inc....................... 81,500 2,797,080 Office Depot, Inc.................... 116,400 3,457,080* OfficeMax, Inc....................... 26,000 823,420 Omnicom Group, Inc................... 67,000 5,603,210 Penney (J.C.) Co., Inc............... 92,200 4,372,124 Pulte Homes, Inc..................... 79,000 3,390,680 RadioShack Corp...................... 49,400 1,225,120 Reebok International, Ltd............ 19,300 1,091,801 Sears Holdings Corp.................. 37,600 4,678,192*# Sherwin-Williams Co.................. 41,900 1,846,533 Snap-On, Inc......................... 21,300 769,356 Staples, Inc......................... 270,500 5,767,060 Starbucks Corp....................... 141,400 7,084,140* Starwood Hotels & Resorts Worldwide, Inc................................. 80,100 4,579,317 Target Corp.......................... 325,600 16,908,408 The New York Times Co. Class A....... 53,500 1,591,625 The Stanley Works.................... 26,700 1,246,356 The TJX Companies, Inc............... 171,500 3,512,320 Tiffany & Co......................... 52,400 2,083,948 Time Warner, Inc..................... 1,727,700 31,288,647 Tribune Co........................... 97,600 3,307,664 Univision Communications, Inc. Class A............................. 84,700 2,247,091* V.F. Corp............................ 32,900 1,907,213 Viacom, Inc. Class B................. 583,500 19,261,335 Visteon Corp......................... 47,400 463,572 Wendy's International, Inc........... 42,500 1,918,875 Whirlpool Corp....................... 24,600 1,863,942 Yum! Brands, Inc..................... 105,000 5,083,050 --------------- Total Consumer Discretionary (Cost $366,604,175).................. 437,673,601 --------------- Energy -- (10.2%) Amerada Hess Corp.................... 29,400 4,042,500 Anadarko Petroleum Corp.............. 87,000 8,330,250 Apache Corp.......................... 121,000 9,101,620 Baker Hughes, Inc.................... 125,400 7,483,872 BJ Services Co....................... 118,600 4,268,414 Burlington Resources, Inc............ 140,200 11,401,064 ChevronTexaco Corp................... 828,800 53,648,224 227
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Continued) September 30, 2005 ------------------------- (Unaudited) Shares Value+ --------- --------------- ConocoPhillips.................. 512,300 $ 35,814,893 Devon Energy Corp............... 166,800 11,449,152 El Paso Corp.................... 242,700 3,373,530 EOG Resources, Inc.............. 88,400 6,621,160 Exxon Mobil Corp................ 2,320,600 147,450,924 Halliburton Co.................. 187,100 12,820,092 Kerr-McGee Corp................. 42,500 4,127,175 Kinder Morgan, Inc.............. 35,200 3,384,832 Marathon Oil Corp............... 134,700 9,284,871 Murphy Oil Corp................. 60,400 3,012,148 Nabors Industries, Ltd.......... 58,000 4,166,140* National-Oilwell, Inc........... 63,800 4,198,040* Noble Corp...................... 50,300 3,443,538 Occidental Petroleum Corp....... 147,100 12,566,753 Rowan Companies, Inc............ 40,100 1,423,149 Schlumberger, Ltd............... 216,500 18,268,270 Sunoco, Inc..................... 50,300 3,933,460 The Williams Companies, Inc..... 210,600 5,275,530 Transocean, Inc................. 121,000 7,418,510* Valero Energy Corp.............. 112,500 12,719,250 Weatherford International, Ltd.. 50,900 3,494,794* XTO Energy, Inc................. 133,000 6,027,560 --------------- Total Energy (Cost $216,659,025)............. 418,549,715 --------------- Consumer Staples -- (9.6%) Alberto-Culver Co. Class B...... 27,800 1,244,050 Albertson's, Inc................ 135,600 3,478,140 Altria Group, Inc............... 763,800 56,299,698 Anheuser-Busch Companies, Inc... 285,900 12,305,136 Archer-Daniels-Midland Co....... 239,400 5,903,604 Avon Products, Inc.............. 173,300 4,679,100 Brown-Forman Corp. Class B...... 30,500 1,815,970 Campbell Soup Co................ 68,100 2,025,975 Clorox Co....................... 55,800 3,099,132 Coca-Cola Co.................... 764,200 33,005,798 Coca-Cola Enterprises, Inc...... 110,900 2,162,550 Colgate-Palmolive Co............ 191,200 10,093,448 ConAgra, Inc.................... 190,600 4,717,350 Constellation Brands, Inc....... 72,100 1,874,600* Costco Wholesale Corp........... 176,400 7,601,076 CVS Corp........................ 299,200 8,679,792 General Mills, Inc.............. 134,700 6,492,540 Gillette Co..................... 330,900 19,258,380 Heinz (H.J.) Co................. 125,500 4,585,770 Hershey Foods Corp.............. 67,600 3,806,556 Kellogg Co...................... 94,300 4,350,059 Kimberly-Clark Corp............. 175,300 10,435,609 McCormick & Co., Inc............ 49,300 1,608,659 Molson Coors Brewing Co......... 21,100 1,350,611 Pepsi Bottling Group, Inc....... 51,100 1,458,905 PepsiCo, Inc.................... 614,600 34,853,966 Procter & Gamble Co............. 905,900 53,864,814 Reynolds American, Inc.......... 31,500 2,615,130 Safeway, Inc.................... 165,100 4,226,560 Sara Lee Corp................... 288,800 5,472,760 Supervalu, Inc.................. 50,000 1,556,000 Sysco Corp...................... 233,000 7,309,210 The Kroger Co................... 266,500 5,487,235* Tyson Foods, Inc. Class A....... 92,500 1,669,625 UST, Inc........................ 60,500 2,532,530 Walgreen Co..................... 376,300 16,350,235 Wal-Mart Stores, Inc............ 919,200 40,279,344 Wrigley (Wm.) Jr. Co............ 66,200 4,758,456 --------------- Total Consumer Staples (Cost $260,049,662)............. 393,308,373 --------------- September 30, 2005 ------------------------- (Unaudited) Shares Value+ --------- --------------- Utilities -- (3.6%) AES Corp.............................. 240,400 $ 3,949,772* Allegheny Energy, Inc................. 59,900 1,840,128* Ameren Corp........................... 75,000 4,011,750 American Electric Power Co., Inc...... 144,700 5,744,590 Calpine Corp.......................... 209,000 541,310*# CenterPoint Energy, Inc............... 113,900 1,693,693 Cinergy Corp.......................... 73,200 3,250,812 CMS Energy Corp....................... 80,700 1,327,515* Consolidated Edison, Inc.............. 89,900 4,364,645 Constellation Energy Group............ 65,500 4,034,800 Dominion Resources, Inc............... 125,400 10,801,956 DTE Energy Co......................... 65,500 3,003,830 Duke Energy Corp...................... 341,000 9,946,970 Dynegy, Inc........................... 105,400 496,434* Edison International.................. 119,900 5,668,872 Entergy Corp.......................... 76,400 5,678,048 Exelon Corp........................... 246,800 13,188,992 FirstEnergy Corp...................... 121,400 6,327,368 FPL Group, Inc........................ 145,000 6,902,000 KeySpan Corp.......................... 64,100 2,357,598 Nicor, Inc............................ 16,200 680,886 NiSource, Inc......................... 100,300 2,432,275 Peoples Energy Corp................... 14,000 551,320 PG&E Corp............................. 137,300 5,389,025 Pinnacle West Capital Corp............ 36,300 1,600,104 PPL Corp.............................. 139,700 4,516,501 Progress Energy, Inc.................. 92,500 4,139,375 Public Service Enterprise Group, Inc.. 88,000 5,663,680 Sempra Energy......................... 94,300 4,437,758 Southern Co........................... 274,900 9,830,424 TECO Energy, Inc...................... 76,500 1,378,530 TXU Corp.............................. 88,400 9,978,592 Xcel Energy, Inc...................... 148,200 2,906,202 --------------- Total Utilities (Cost $103,072,914)................... 148,635,755 --------------- Telecommunication Services -- (3.1%) Alltel Corp........................... 140,500 9,147,955 AT&T Corp............................. 295,200 5,844,960 BellSouth Corp........................ 674,400 17,736,720 CenturyTel, Inc....................... 47,800 1,672,044 Citizens Communications Co............ 126,300 1,711,365 Qwest Communications International, Inc.................................. 561,300 2,301,330* SBC Communications, Inc............... 1,216,000 29,147,520 Sprint Corp........................... 1,079,500 25,670,510 Verizon Communications, Inc........... 1,017,700 33,268,613 --------------- Total Telecommunication Services (Cost $143,890,139)................... 126,501,017 --------------- Materials -- (2.9%) Air Products & Chemicals, Inc......... 81,600 4,499,424 Alcoa, Inc............................ 321,100 7,841,262 Allegheny Technologies, Inc........... 31,000 960,380 Ashland, Inc.......................... 27,300 1,508,052 Ball Corp............................. 40,200 1,476,948 Bemis Co., Inc........................ 39,300 970,710 Dow Chemical Co....................... 355,000 14,792,850 DuPont (E.I.) de Nemours & Co., Inc... 366,100 14,340,137 Eastman Chemical Co................... 30,000 1,409,100 Ecolab, Inc........................... 67,800 2,164,854 Engelhard Corp........................ 44,200 1,233,622 Freeport-McMoRan Copper & Gold, Inc. Class B.............................. 65,300 3,172,927 228
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Continued) September 30, 2005 ----------------------- (Unaudited) Shares Value+ ------- --------------- Georgia-Pacific Corp..................... 95,800 $ 3,262,948 Hercules, Inc............................ 41,500 507,130* International Flavors & Fragrances, Inc.. 30,100 1,072,764 International Paper Co................... 180,500 5,378,900 Louisiana-Pacific Corp................... 40,800 1,129,752 MeadWestavco Corp........................ 67,700 1,869,874 Monsanto Co.............................. 98,900 6,205,975 Newmont Mining Corp...................... 164,200 7,745,314 Nucor Corp............................... 57,500 3,391,925 Pactiv Corp.............................. 55,100 965,352* Phelps Dodge Corp........................ 35,700 4,638,501 PPG Industries, Inc...................... 62,500 3,699,375 Praxair, Inc............................. 119,000 5,703,670 Rohm & Haas Co........................... 53,500 2,200,455 Sealed Air Corp.......................... 30,500 1,447,530* Sigma-Aldrich Corp....................... 24,800 1,588,688 Temple-Inland, Inc....................... 41,600 1,699,360 United States Steel Corp................. 42,000 1,778,700 Vulcan Materials Co...................... 37,600 2,790,296 Weyerhaeuser Co.......................... 90,200 6,201,250 --------------- Total Materials (Cost $89,910,252)....................... 117,648,025 --------------- Real Estate Investment Trusts -- (0.7%) Apartment Investment & Management Co. Class A................................. 35,200 1,365,056 Archstone-Smith Trust.................... 77,900 3,105,873 Equity Office Properties Trust........... 151,100 4,942,481 Equity Residential....................... 105,700 4,000,745 Plum Creek Timber Co., Inc............... 67,700 2,566,507 ProLogis................................. 90,800 4,023,348 Public Storage, Inc...................... 30,400 2,036,800 September 30, 2005 --------------------------- (Unaudited) Shares Value+ ----------- --------------- Simon Property Group, Inc............. 67,400 $ 4,995,688 Vornado Realty Trust.................. 43,400 3,759,308 --------------- Total Real Estate Investment Trusts (Cost $25,713,256).................... 30,795,806 --------------- TOTAL COMMON STOCKS (Cost $3,067,139,694)................. $ 4,078,915,375 --------------- Face Amount (000) ----------- TEMPORARY CASH INVESTMENTS -- (0.6%) Repurchase Agreement, Merrill Lynch Triparty Repo 3.33%, 10/03/05 (Collateralized by $11,540,000 U.S. Treasury Note 3.625%, 05/15/13, valued at $11,259,160) to be repurchased at $11,039,969 (Cost $11,036,906)(triangle up)....... $11,037 11,036,906 Repurchase Agreement, PNC Capital Markets, Inc. 3.61%, 10/03/05 (Collateralized by $13,247,000 FHLMC Note 4.00%, 09/22/09, valued at $12,982,060) to be repurchased at $12,793,848 (Cost $12,790,000)........ 12,790 12,790,000 --------------- TOTAL TEMPORARY CASH INVESTMENTS (Cost $23,826,906).................... 23,826,906 --------------- TOTAL INVESTMENTS -- (100.0%) (Cost $3,090,966,600)++............... $ 4,102,742,281 =============== - ------------- + See Note B to Financial Statements. * Non-Income Producing Securities. # Total or Partial Securities on Loan. (triangle up)Security purchased with cash proceeds from securities on loan. ++The cost for federal income tax purposes is $3,267,355,903. 229
STATEMENT OF ASSETS AND LIABILITIES THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Amounts in thousands) September 30, 2005 ------------------ (Unaudited) Assets: Investments at Value (including $10,733 of securities on loan) $4,102,742 Cash.......................................................... 496 Receivables: Dividends and Interest...................................... 4,557 Securities Lending Income................................... 37 Futures Margin Variation.................................... 19 Prepaid Expenses and Other Assets............................. 10 ---------- Total Assets.............................................. 4,107,861 ---------- Liabilities: Payables: Upon Return of Securities Loaned............................ 11,037 Due to Advisor.............................................. 86 Accrued Expenses and Other Liabilities........................ 271 ---------- Total Liabilities......................................... 11,394 ---------- Net Assets..................................................... $4,096,467 ========== Investments at Cost........................................... $3,079,930 ========== 230
PERFORMANCE CHART THE DFA INVESTMENT TRUST COMPANY THE DFA INVESTMENT TRUST COMPANY PERFORMANCE CHART The U.S. Large Company Series vs. S&P 500 Index November 30, 1994-November 30, 2004 [CHART] Average Annual One Five From Total Return Year Years 9/23/1999 - ------------------------------------------------------------ 12.77% -1.89% 11.77% Past performance is not predictive of future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. S&P 500 Index is courtesy of (C) Stocks, Bonds, Bills and Inflation Yearbook (TM), Ibbotson Associates, Chicago (annually updated works by Roger C. Ibbotson and Rex A. Sinquefield). 231
DISCLOSURE OF FUND EXPENSES THE DFA INVESTMENT TRUST COMPANY The following Expense Table is shown so that you can understand the impact of fees on your investment. All mutual funds have operating expenses. As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports, among others. Operating expenses, legal and audit services, which are deducted from a fund's gross income, directly reduce the investment return of the fund. A fund's expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing fees (in dollars) of investing in the fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period. The Expense Table below illustrates your fund's costs in two ways. . Actual fund return. This section helps you to estimate the actual expenses after fee waivers that you paid over the period. The "Ending Account Value" shown is derived from the fund's actual return, and "Expenses Paid During Period" shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, a $7,500 account value divided by $1,000=7.5), then multiply the result by the number given for your fund under the heading "Expenses Paid During Period." . Hypothetical 5% annual return. This section is intended to help you compare your fund's costs with those of other mutual funds. It assumes that the fund had an annual return of 5% before expenses, but the expense ratio is unchanged. In this case, because the return used is not the fund's actual return, the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission ("SEC") requires all mutual funds to calculate expenses based on a 5% annual return. You can assess your fund's cost by comparing this hypothetical example with the hypothetical examples that appear in shareholders reports of other funds. Please note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect any transactional costs (if any). The "Annualized Expense Ratio" represents the actual expenses for the six month period indicated. For the Period June 1, 2004 to November 30, 2004 Expense Table Beginning Ending Expenses Account Account Annualized Paid Value Value Expense During The U.S. Large Company Series 6/01/04 11/30/04 Ratio Period* ----------------------------- --------- --------- ---------- -------- Actual Fund Return........... $1,000.00 $1,056.20 0.05% $0.26 Hypothetical 5% Annual Return $1,000.00 $1,024.75 0.05% $0.25 - ------------- * Expenses are equal to the fund's annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 366. 232
DISCLOSURE OF PORTFOLIO HOLDINGS (Unaudited) THE DFA INVESTMENT TRUST COMPANY The SEC has adopted the requirement that all Funds file a complete Schedule of Investments with the SEC for their first and third fiscal quarters on Form N-Q for fiscal quarters starting after July 9, 2004. For The DFA Investment Trust Company, this would be for the fiscal quarters ending August 31 and February 28 (February 29 during leap year). The Form N-Q filing must be made within 60 days of the end of the quarter. The DFA Investment Trust Company filed its first Form N-Q with the SEC on October 27, 2004. It is available upon request, without charge, by calling collect: (310) 395-8005 or by mailing a request to Dimensional Fund Advisors Inc., 1299 Ocean Avenue, 11th floor, Santa Monica, California 90401, or by visiting the SEC's website at http://www.sec.gov, or they may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. (call 1-800-732-0330 for information on the operation of the Public Reference Room). PORTFOLIO HOLDINGS AS OF NOVEMBER 30, 2004 The SEC adopted a requirement that all Funds present their categories of portfolio holdings in a table, chart or graph format in their annual and semi-annual shareholder reports, whether or not a Schedule of Investments is utilized. The following table, which presents portfolio holdings as a percent of total investments before short-term investments and collateral for loaned securities, is provided in compliance with such requirement. The categories shown below represent broad industry sectors. Each industry sector consists of one or more specific industry classifications. The U.S. Large Company Series ----------------------------- Financials.................. 20.0% Information Technology...... 16.3 Health Care................. 12.4 Industrials................. 11.9 Consumer Discretionary...... 11.4 Consumer Staples............ 10.5 Energy...................... 7.5 Telecommunication Services.. 3.3 Materials................... 3.2 Utilities................... 3.0 REITS....................... 0.5 ----- 100.0% ===== 233
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series November 30, 2004 ------------------------- Shares Value+ --------- --------------- COMMON STOCKS -- (88.1%) 3M Co............................... 244,500 $ 19,459,755 Abbott Laboratories................. 487,600 20,459,696 Ace, Ltd............................ 88,700 3,585,254 ADC Telecommunications, Inc......... 252,600 593,610* Adobe Systems, Inc.................. 74,900 4,535,944# Advanced Micro Devices, Inc......... 110,900 2,359,952* AES Corp............................ 201,900 2,471,256* Aetna, Inc.......................... 48,000 5,688,480 Affiliated Computer Services, Inc. Class A............................ 40,000 2,367,200* AFLAC, Inc.......................... 158,400 5,959,008 Agilent Technologies, Inc........... 151,700 3,472,413* Air Products & Chemicals, Inc....... 71,000 4,064,750 Alberto-Culver Co. Class B.......... 28,300 1,310,290 Albertson's, Inc.................... 114,900 2,906,970# Alcoa, Inc.......................... 271,700 9,232,366# Allegheny Energy, Inc............... 42,800 819,192* Allegheny Technologies, Inc......... 29,800 655,600 Allergan, Inc....................... 41,100 3,020,850 Allied Waste Industries, Inc........ 99,400 903,546*# Allstate Corp....................... 216,400 10,928,200 Alltel Corp......................... 96,300 5,459,247 Altera Corp......................... 116,100 2,633,148* Altria Group, Inc................... 640,800 36,839,592 AMBAC Financial Group, Inc.......... 33,900 2,757,087 Amerada Hess Corp................... 28,500 2,532,225 Ameren Corp......................... 60,700 2,939,094# American Electric Power Co., Inc.... 123,600 4,223,412 American Express Co................. 396,000 22,061,160 American International Group, Inc... 813,800 51,554,230 American Power Conversion Corp...... 62,600 1,323,364 American Standard Companies, Inc.... 66,800 2,601,192* AmerisourceBergen Corp.............. 35,100 2,068,794# Amgen, Inc.......................... 395,400 23,739,816*# AmSouth Bancorporation.............. 110,500 2,865,265 Anadarko Petroleum Corp............. 78,200 5,442,720 Analog Devices, Inc................. 118,200 4,367,490# Andrew Corp......................... 50,200 712,840* Anheuser-Busch Companies, Inc....... 250,200 12,532,518 Anthem, Inc......................... 43,600 4,417,988*# AON Corp............................ 98,600 2,082,432# Apache Corp......................... 101,800 5,503,308 Apartment Investment & Management Co. Class A........................ 29,600 1,076,552# Apollo Group, Inc. Class A.......... 60,200 4,797,940*# Apple Computer, Inc................. 121,200 8,126,460* Applera Corp. -- Applied Biosystems Group.............................. 63,000 1,291,500 Applied Materials, Inc.............. 530,400 8,825,856* Applied Micro Circuits Corp......... 97,800 359,904* Archer-Daniels-Midland Co........... 203,300 4,309,960 Ashland, Inc........................ 22,200 1,313,130 #AT&T Corp.......................... 248,200 4,542,060 Autodesk, Inc....................... 35,500 2,322,055 Automatic Data Processing, Inc...... 182,500 8,309,225 AutoNation, Inc..................... 83,300 1,542,716* Autozone, Inc....................... 26,000 2,225,600*# Avaya, Inc.......................... 141,400 2,321,788*# Avery Dennison Corp................. 34,500 2,023,770 Avon Products, Inc.................. 147,700 5,544,658# Baker Hughes, Inc................... 104,200 4,619,186# Ball Corp........................... 35,100 1,570,023 Bank of America Corp................ 1,270,500 58,786,035 November 30, 2004 ------------------------- Shares Value+ --------- --------------- Bank of New York Co., Inc............... 243,000 $ 7,997,130 Bard (C.R.), Inc........................ 32,700 1,959,057# Bausch & Lomb, Inc...................... 16,600 977,408# Baxter International, Inc............... 192,000 6,076,800 BB&T Corp............................... 173,200 7,352,340 Bear Stearns Companies, Inc............. 32,200 3,142,076 Becton Dickinson & Co................... 78,300 4,289,274 Bed Bath and Beyond, Inc................ 93,900 3,749,239*# BellSouth Corp.......................... 571,800 15,335,676 Bemis Co., Inc.......................... 33,400 929,856 Best Buy Co., Inc....................... 101,500 5,722,570 Big Lots, Inc........................... 36,000 417,600*# Biogen Idec, Inc........................ 105,700 6,202,476* Biomet, Inc............................. 79,300 3,796,091# BJ Services, Co......................... 50,400 2,553,768# Black & Decker Corp..................... 25,000 2,102,250 BMC Software, Inc....................... 69,700 1,295,026* Boeing Co............................... 262,200 14,046,054 Boston Scientific Corp.................. 263,000 9,155,030*# Bristol-Myers Squibb Co................. 607,600 14,278,600 Broadcom Corp........................... 100,600 3,271,512*# Brown-Forman Corp. Class B.............. 37,900 1,819,958 Brunswick Corp.......................... 29,900 1,459,718 Burlington Northern Santa Fe Corp....... 116,300 5,238,152 Burlington Resources, Inc............... 123,300 5,722,353# Calpine Corp............................ 166,300 645,244*# Campbell Soup Co........................ 128,200 3,657,546 Capital One Financial Corp.............. 75,400 5,924,932 Cardinal Health, Inc.................... 134,400 7,026,432 Caremark Rx, Inc........................ 145,500 5,203,080* Carnival Corp........................... 197,700 10,480,077 Caterpillar, Inc........................ 107,000 9,795,850# Cendant Corp............................ 329,700 7,474,299 CenterPoint Energy, Inc................. 96,100 1,072,476 Centex Corp............................. 38,600 2,025,342# CenturyTel, Inc......................... 42,200 1,389,224 ChevronTexaco Corp...................... 665,300 36,325,380 Chiron Corp............................. 58,600 1,908,602* Chubb Corp.............................. 59,700 4,549,737 CIENA Corp.............................. 177,800 453,390* CIGNA Corp.............................. 43,000 3,010,860 Cincinnati Financial Corp............... 52,600 2,356,480 Cinergy Corp............................ 56,400 2,334,396 Cintas Corp............................. 53,500 2,392,520 Circuit City Stores, Inc................ 62,100 968,139 Cisco Systems, Inc...................... 2,111,900 39,513,649* CIT Group, Inc.......................... 65,800 2,812,950 Citigroup, Inc.......................... 1,618,000 72,405,500 Citizens Communications Co.............. 103,600 1,481,480# Citrix Systems, Inc..................... 52,800 1,246,608* Clear Channel Communications, Inc....... 184,300 6,207,224 Clorox Co............................... 66,500 3,665,480 CMS Energy Corp......................... 59,300 604,860* Coach, Inc.............................. 58,800 2,930,592* Coca-Cola Co............................ 757,800 29,789,118 Coca-Cola Enterprises, Inc.............. 146,500 3,047,200 Colgate-Palmolive Co.................... 165,900 7,629,741 Comcast Corp. Class A................... 698,000 20,967,920* Comerica, Inc........................... 53,500 3,290,250 Computer Associates International, Inc.. 182,800 5,580,884# Computer Sciences Corp.................. 58,900 3,186,490*# Compuware Corp.......................... 120,600 695,862* Comverse Technology, Inc................ 61,100 1,299,597* ConAgra, Inc............................ 165,000 4,463,250 234
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Continued) November 30, 2004 ------------------------- Shares Value+ --------- --------------- ConocoPhillips ....................... 215,100 $ 19,571,949 Consolidated Edison, Inc.............. 75,400 3,306,290 Constellation Energy Group............ 54,800 2,394,760 Convergys Corp........................ 44,500 661,715* Cooper Industries, Ltd................ 29,600 1,962,776 Cooper Tire & Rubber Co............... 23,400 477,828# Coors (Adolph) Co. Class B............ 11,700 876,330 Corning, Inc.......................... 435,300 5,476,074* Costco Wholesale Corp................. 144,000 6,998,400 Countrywide Financial Corp............ 175,900 5,841,639 Crane Co.............................. 18,400 556,784 CSX Corp.............................. 67,100 2,558,523 Cummins, Inc.......................... 13,800 1,098,756 CVS Corp.............................. 124,700 5,657,639 Dana Corp............................. 46,600 761,910 Danaher Corp.......................... 96,300 5,477,544 Darden Restaurants, Inc............... 49,300 1,343,918 Deere & Co............................ 77,500 5,559,075 Dell, Inc............................. 779,800 31,597,496*# Delphi Corp........................... 175,300 1,577,700# Delta Air Lines, Inc.................. 39,200 273,224*# Deluxe Corp........................... 15,600 616,824 Devon Energy Corp..................... 151,000 6,254,420 Dillards, Inc. Class A................ 26,100 657,198 Disney (Walt) Co...................... 641,700 17,248,896# Dollar General Corp................... 102,600 2,026,350 Dominion Resources, Inc............... 103,100 6,749,957 Donnelley (R.R.) & Sons Co............ 68,400 2,373,480 Dover Corp............................ 63,500 2,568,575 Dow Chemical Co....................... 293,400 14,807,898# Dow Jones & Co., Inc.................. 25,600 1,094,400 DTE Energy Co......................... 54,300 2,382,684 Duke Energy Corp...................... 292,900 7,404,512# DuPont (E.I.) de Nemours & Co., Inc... 311,700 14,126,244# Dynegy, Inc........................... 118,500 669,525*# E*TRADE Financial Corp................ 116,600 1,616,076* Eastman Chemical Co................... 24,300 1,321,434# Eastman Kodak Co...................... 89,500 2,927,545 Eaton Corp............................ 47,300 3,188,020 eBay, Inc............................. 206,500 23,220,925*# Ecolab, Inc........................... 80,400 2,812,392 Edison International.................. 101,800 3,247,420# El Paso Corp.......................... 200,200 2,090,088# Electronic Arts, Inc.................. 94,800 4,635,720*# Electronic Data Systems Corp.......... 160,000 3,592,000 EMC Corp.............................. 751,100 10,079,762* Emerson Electric Co................... 131,200 8,766,784 Engelhard Corp........................ 38,800 1,159,732 Entergy Corp.......................... 70,900 4,595,738 EOG Resources, Inc.................... 36,800 2,762,576# Equifax, Inc.......................... 42,500 1,173,850# Equity Office Properties Trust........ 125,800 3,453,210 Equity Residential.................... 87,700 2,956,367 Exelon Corp........................... 206,200 8,600,602 Express Scripts, Inc.................. 24,200 1,741,432*# Exxon Mobil Corp...................... 2,031,900 104,134,875 Family Dollar Stores, Inc............. 52,600 1,541,180 Federal Home Loan Mortgage Corporation.......................... 214,600 14,648,596 Federal National Mortgage Association. 302,300 20,768,010 Federated Department Stores, Inc...... 56,200 3,079,760 Federated Investors, Inc.............. 33,900 997,338 FedEx Corp............................ 93,800 8,913,814 Fifth Third Bancorp .................. 178,000 8,964,080 November 30, 2004 ------------------------- Shares Value+ --------- --------------- First Data Corp.......................... 267,800 $ 11,003,902 First Horizon National Corp.............. 38,600 1,686,820 FirstEnergy Corp......................... 103,000 4,349,690 Fiserv, Inc.............................. 61,000 2,349,110* Fisher Scientific International, Inc..... 35,900 2,029,786* Fluor Corp............................... 26,100 1,354,590 Ford Motor Co............................ 571,500 8,103,870# Forest Laboratories, Inc................. 115,700 4,508,829* Fortune Brands, Inc...................... 45,000 3,531,600 FPL Group, Inc........................... 57,900 4,072,107# Franklin Resources, Inc.................. 77,900 5,112,577 Freeport-McMoRan Copper & Gold, Inc. Class B................................. 55,300 2,163,889 Gannett Co., Inc......................... 83,100 6,854,919 Gap, Inc................................. 282,300 6,168,255 Gateway, Inc............................. 116,400 792,684* General Dynamics Corp.................... 62,400 6,761,664 General Electric Co...................... 3,297,700 116,606,672 General Mills, Inc....................... 118,700 5,399,663 General Motors Corp...................... 176,400 6,807,276# Genuine Parts Co......................... 54,700 2,374,527# Genzyme Corp............................. 71,200 3,987,912*# Georgia-Pacific Corp..................... 80,600 2,950,766 Gilead Sciences, Inc..................... 134,500 4,634,870* Gillette Co.............................. 312,900 13,608,021 Golden West Financial Corp............... 47,700 5,687,748# Goodrich (B.F.) Co....................... 37,100 1,177,925 Goodyear Tire & Rubber Co................ 54,800 691,576*# Grainger (W.W.), Inc..................... 28,400 1,756,824 Great Lakes Chemical Corp................ 15,900 465,870# Guidant Corp............................. 98,300 6,372,789 H&R Block, Inc........................... 51,500 2,456,550 Halliburton Co........................... 137,900 5,702,165 Harley-Davidson, Inc..................... 92,200 5,331,004 Harrahs Entertainment, Inc............... 35,000 2,149,000# Hartford Financial Services Group, Inc... 91,600 5,862,400 Hasbro, Inc.............................. 55,200 1,050,456 HCA, Inc................................. 150,800 5,944,536 Health Management Associates, Inc........ 76,000 1,678,840 Heinz (H.J.) Co.......................... 109,100 4,054,156 Hercules, Inc............................ 34,900 520,010*# Hershey Foods Corp....................... 76,900 3,983,420# Hewlett-Packard Co....................... 943,200 18,864,000 Hilton Hotels Corp....................... 120,200 2,483,332 Home Depot, Inc.......................... 685,700 28,627,975 Honeywell International, Inc............. 268,500 9,486,105 Hospira, Inc............................. 48,700 1,569,601* Humana, Inc.............................. 49,800 1,236,036* Huntington Bancshares, Inc............... 71,700 1,739,442# Illinois Tool Works, Inc................. 94,400 8,895,312 IMS Health, Inc.......................... 73,000 1,647,610 Ingersoll-Rand Co., Ltd. Class A......... 54,100 4,026,122 Intel Corp............................... 2,003,600 44,780,460# International Business Machines Corp..... 523,200 49,306,368 International Flavors & Fragrances, Inc.. 29,400 1,190,700 International Game Technology............ 107,600 3,803,660 International Paper Co................... 151,900 6,306,888 Interpublic Group of Companies, Inc...... 131,800 1,635,638*# Intuit, Inc.............................. 59,800 2,502,032* ITT Industries, Inc...................... 28,800 2,451,456 Jabil Circuit, Inc....................... 62,800 1,573,768* Janus Capital Group, Inc................. 74,800 1,237,940 JDS Uniphase Corp........................ 449,800 1,425,866* Jefferson-Pilot Corp..................... 42,600 2,095,494 235
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Continued) November 30, 2004 ------------------------- Shares Value+ --------- --------------- Johnson & Johnson.................... 927,000 $ 55,916,640 Johnson Controls, Inc................ 59,400 3,647,160 Jones Apparel Group, Inc............. 39,000 1,385,670 JPMorgan Chase & Co.................. 1,112,500 41,885,625 KB Home.............................. 14,500 1,274,405# Kellogg Co........................... 129,100 5,641,670 Kerr-McGee Corp...................... 47,200 2,937,256# KeyCorp.............................. 127,100 4,231,159# KeySpan Corp......................... 50,000 1,976,000 Kimberly-Clark Corp.................. 154,500 9,827,745 Kinder Morgan, Inc................... 38,600 2,674,980# King Pharmaceuticals, Inc............ 75,400 938,730*# KLA-Tencor Corp...................... 61,300 2,762,178*# Knight-Ridder, Inc................... 24,200 1,647,778 Kohl's Corp.......................... 106,700 4,925,272* Laboratory Corp. of America Holdings. 43,600 2,090,620* Leggett & Platt, Inc................. 59,900 1,788,015 Lehman Brothers Holdings, Inc........ 84,700 7,096,166 Lexmark International, Inc........... 40,500 3,438,450*# Lilly (Eli) & Co..................... 353,100 18,830,823 Limited Brands, Inc.................. 147,600 3,607,344# Lincoln National Corp................ 55,000 2,531,100 Linear Technology Corp............... 96,000 3,663,360 Liz Claiborne, Inc................... 33,600 1,379,952 Lockheed Martin Corp................. 139,000 8,456,760# Loews Corp........................... 57,900 4,047,789 Louisiana-Pacific Corp............... 34,100 834,427 Lowe's Companies, Inc................ 243,500 13,472,855 LSI Logic Corp....................... 120,200 635,858* Lucent Technologies, Inc............. 1,346,000 5,289,780*# M&T Bank Corp........................ 36,600 3,858,006 Manor Care, Inc...................... 27,300 940,485 Marathon Oil Corp.................... 108,100 4,263,464 Marriott International, Inc. Class A. 71,500 4,064,775 Marsh & McLennan Companies, Inc...... 162,600 4,648,734 Marshall & Ilsley Corp............... 69,600 2,901,624 Masco Corp........................... 135,300 4,772,031# Mattel, Inc.......................... 129,300 2,450,235# Maxim Integrated Products, Inc....... 101,400 4,153,344# May Department Stores Co............. 91,000 2,558,920# #Maytag Corp......................... 24,700 496,470 MBIA, Inc............................ 44,700 2,680,212 MBNA Corp............................ 399,100 10,600,096 McCormick & Co., Inc................. 42,800 1,560,060 McDonald's Corp...................... 392,400 12,062,376 McGraw-Hill Companies, Inc........... 59,300 5,202,389 McKesson Corp........................ 91,700 2,709,735 MeadWestavco Corp.................... 63,000 2,119,950 Medco Health Solutions, Inc.......... 85,000 3,206,200* Medimmune, Inc....................... 77,800 2,069,480* Medtronic, Inc....................... 377,700 18,148,485 Mellon Financial Corp................ 132,400 3,868,728 Merck & Co., Inc..................... 693,000 19,417,860 Mercury Interactive Corp............. 29,100 1,327,251* Meredith Corp........................ 15,700 827,704 Merrill Lynch & Co., Inc............. 293,400 16,345,314 MetLife, Inc......................... 234,300 9,137,700 MGIC Investment Corp................. 30,800 2,094,400 Micron Technology, Inc............... 191,000 2,116,280*# Microsoft Corp....................... 3,395,900 91,044,079 Millipore Corp....................... 15,500 755,160* Molex, Inc........................... 59,200 1,632,144 Monsanto Co.......................... 83,400 3,838,068 Monster Worldwide, Inc............... 37,000 1,043,030* November 30, 2004 ------------------------- Shares Value+ --------- --------------- Moody's Corp.......................... 46,200 $ 3,730,650 Morgan Stanley........................ 343,100 17,412,325 Motorola, Inc......................... 737,900 14,211,954 Mylan Laboratories, Inc............... 83,900 1,523,624# Nabors Industries, Ltd................ 46,500 2,418,000* National City Corp.................... 207,000 7,675,560 National Semiconductor Corp........... 111,800 1,728,428* Navistar International Corp........... 21,800 897,070* NCR Corp.............................. 29,400 1,756,062* Network Appliance, Inc................ 111,700 3,368,872* Newell Rubbermaid, Inc................ 85,900 1,982,572 Newmont Mining Corp................... 138,500 6,557,975 Nextel Communications, Inc............ 347,800 9,898,388* Nicor, Inc............................ 13,800 509,220# NIKE, Inc. Class B.................... 82,300 6,967,518 NiSource, Inc......................... 82,300 1,793,317 Noble Corp............................ 41,800 2,025,210* Nordstrom, Inc........................ 43,900 1,920,625 Norfolk Southern Corp................. 123,000 4,222,590 North Fork Bancorporation, Inc........ 145,950 4,203,360 Northern Trust Corp................... 68,700 3,231,648 Northrop Grumman Corp................. 112,000 6,308,960 Novell, Inc........................... 120,800 736,880*# Novellus Systems, Inc................. 44,600 1,201,524* Nucor Corp............................ 49,600 2,623,840# Nvidia Corp........................... 52,000 994,760* Occidental Petroleum Corp............. 122,300 7,363,683 Office Depot, Inc..................... 97,800 1,603,920* OfficeMax, Inc........................ 27,500 832,425 Omnicom Group, Inc.................... 58,500 4,738,500 Oracle Corp........................... 1,615,000 20,445,900* Paccar, Inc........................... 54,200 4,233,020# Pactiv Corp........................... 46,900 1,165,465* Pall Corp............................. 39,100 1,059,219 Parametric Technology Corp............ 84,100 491,985* Parker Hannifin Corp.................. 37,300 2,790,040 Paychex, Inc.......................... 118,100 3,916,196 Penney (J.C.) Co., Inc................ 90,000 3,474,000 Peoples Energy Corp................... 11,800 526,516 Peoplesoft, Inc....................... 114,600 2,705,706*# Pepsi Bottling Group, Inc............. 79,400 2,224,788 PepsiCo, Inc.......................... 529,100 26,407,381 PerkinElmer, Inc...................... 40,000 853,200 Pfizer, Inc........................... 2,358,400 65,492,768 PG&E Corp............................. 125,200 4,164,152* Phelps Dodge Corp..................... 29,400 2,855,622# Pinnacle West Capital Corp............ 28,500 1,259,700# Pitney Bowes, Inc..................... 72,200 3,160,194 Plum Creek Timber Co., Inc............ 57,300 2,120,100 PMC-Sierra, Inc....................... 55,300 610,512* PNC Financial Services Group.......... 88,200 4,798,080 Power-One, Inc........................ 26,200 240,778* PPG Industries, Inc................... 53,600 3,616,392 PPL Corp.............................. 59,000 3,065,050 Praxair, Inc.......................... 101,500 4,557,350 Principal Financial Group, Inc........ 97,900 3,688,872 Procter & Gamble Co................... 794,000 42,463,120 Progress Energy, Inc.................. 77,100 3,385,461 Progressive Corp...................... 62,500 5,686,875 ProLogis.............................. 56,800 2,285,064 Providian Financial Corp.............. 91,400 1,466,970* Prudential Financial, Inc............. 162,100 7,934,795 Public Service Enterprise Group, Inc.. 74,100 3,259,659# Pulte Homes, Inc...................... 39,600 2,188,296# 236
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Continued) November 30, 2004 ------------------------- Shares Value+ --------- --------------- QLogic Corp.......................... 28,800 $ 990,432* Qualcomm, Inc........................ 508,400 21,159,608 Quest Diagnostics, Inc............... 31,800 2,981,250# Qwest Communications International, Inc................................. 566,900 2,267,600* RadioShack Corp...................... 49,900 1,575,343 Raytheon Co.......................... 140,900 5,683,906 Reebok International, Ltd............ 18,500 719,280# Regions Financial Corp............... 144,300 5,049,057 Reynolds American, Inc............... 46,200 3,494,106# Robert Half International, Inc....... 53,800 1,454,214 Rockwell Automation, Inc............. 57,600 2,724,480# Rockwell Collins, Inc................ 55,300 2,204,258 Rohm & Haas Co....................... 70,100 3,090,709 Rowan Companies, Inc................. 33,400 865,060* Ryder System, Inc.................... 20,100 1,078,164# Sabre Holdings Corp.................. 42,900 990,132 Safeco Corp.......................... 39,400 1,909,718# Safeway, Inc......................... 139,600 2,691,488* Sanmina-SCI Corp..................... 162,800 1,437,524* Sara Lee Corp........................ 247,800 5,818,344 SBC Communications, Inc.............. 1,035,000 26,050,950 Schering-Plough Corp................. 459,900 8,209,215 Schlumberger, Ltd.................... 184,400 12,102,172 Schwab (Charles) Corp................ 426,800 4,600,904 Scientific-Atlanta, Inc.............. 47,800 1,415,836# Sealed Air Corp...................... 26,200 1,346,942* Sears, Roebuck & Co.................. 66,200 3,444,386# Sempra Energy........................ 72,400 2,677,352 Sherwin-Williams Co.................. 44,500 1,984,700 Siebel Systems, Inc.................. 157,900 1,591,632* Sigma-Aldrich Corp................... 21,600 1,290,168 Simon Property Group, Inc............ 69,000 4,283,520 SLM Corp............................. 136,200 6,969,354 Snap-On, Inc......................... 18,100 572,141 Solectron Corp....................... 300,400 1,877,500* Southern Co.......................... 230,600 7,561,374 Southwest Airlines Co................ 246,800 3,882,164 Sovereign Bancorp, Inc............... 107,200 2,342,320 Sprint Corp.......................... 453,700 10,348,897 St. Jude Medical, Inc................ 110,600 4,218,284*# Staples, Inc......................... 155,400 4,958,814# Starbucks Corp....................... 124,100 6,981,866* Starwood Hotels & Resorts Worldwide, Inc................................. 65,000 3,398,850 State Street Corp.................... 105,000 4,678,800 Stryker Corp......................... 125,300 5,511,947 Sun Microsystems, Inc................ 1,038,900 5,765,895*# Sungard Data Systems, Inc............ 90,100 2,388,551* Sunoco, Inc.......................... 23,500 1,940,160# SunTrust Banks, Inc.................. 111,800 7,971,340# Supervalu, Inc....................... 42,500 1,342,575 Symantec Corp........................ 98,400 6,278,904* Symbol Technologies, Inc............. 74,800 1,133,968 Synovus Financial Corp............... 96,600 2,608,200 Sysco Corp........................... 199,700 6,939,575# T. Rowe Price Group, Inc............. 39,700 2,348,652 Target Corp.......................... 282,100 14,449,162# TECO Energy, Inc..................... 62,100 929,016# Tektronix, Inc....................... 28,700 900,319 Tellabs, Inc......................... 130,000 1,111,500* Temple-Inland, Inc................... 17,400 1,036,866 Tenet Healthcare Corp................ 145,600 1,579,760* Teradyne, Inc........................ 60,600 1,033,836* November 30, 2004 ------------------------- Shares Value+ --------- --------------- Texas Instruments, Inc................. 540,700 $ 13,074,126# Textron, Inc........................... 43,300 3,144,446 The Goldman Sachs Group, Inc........... 151,800 15,902,568 The Kroger Co.......................... 230,800 3,734,344*# The New York Times Co. Class A......... 45,900 1,881,900 The St. Paul Travelers Companies, Inc.. 208,900 7,620,672 The Stanley Works...................... 25,600 1,197,056# The TJX Companies, Inc................. 152,700 3,594,558# Thermo Electron Corp................... 51,000 1,542,750* Tiffany & Co........................... 45,600 1,395,360# Time Warner, Inc....................... 1,428,100 25,291,651* Torchmark Corp......................... 34,300 1,883,413 Toys R Us, Inc......................... 66,800 1,291,912*# Transocean, Inc........................ 100,200 4,035,054* Tribune Co............................. 99,400 4,310,978 TXU Corp............................... 92,700 5,823,414 Tyco International, Ltd................ 627,400 21,312,778 U.S. Bancorp........................... 587,000 17,392,810 Union Pacific Corp..................... 81,000 5,138,640 Unisys Corp............................ 104,600 1,201,854* United Parcel Service, Inc............. 351,200 29,553,480 United States Steel Corp............... 35,400 1,853,544 United Technologies Corp............... 159,800 15,593,284 UnitedHealth Group, Inc................ 207,600 17,199,660 Univision Communications, Inc. Class A. 100,700 3,031,070* Unocal Corp............................ 82,700 3,807,508 UnumProvident Corp..................... 92,600 1,441,782 UST, Inc............................... 51,600 2,271,948 Valero Energy Corp..................... 79,800 3,733,842 VERITAS Software Corp.................. 135,200 2,960,880* Verizon Communications, Inc............ 864,700 35,651,581 VF Corp................................ 34,400 1,857,256 Viacom, Inc. Class B................... 541,900 18,803,930# Visteon Corp........................... 40,500 342,630 Vulcan Materials Co.................... 31,900 1,654,015 Wachovia Corp.......................... 501,560 25,955,730 Walgreen Co............................ 320,000 12,217,600# Wal-Mart Stores, Inc................... 1,325,100 68,984,706 Washington Mutual, Inc................. 272,500 11,093,475 Waste Management, Inc.................. 181,100 5,398,591# Waters Corp............................ 36,900 1,721,754*# Watson Pharmaceuticals, Inc............ 34,200 993,510*# Wellpoint Health Networks, Inc......... 49,100 6,142,410* Wells Fargo & Co....................... 527,400 32,577,498# Wendy's International, Inc............. 35,500 1,266,285 Weyerhaeuser Co........................ 74,800 4,936,800 Whirlpool Corp......................... 20,700 1,336,185 Williams Companies, Inc................ 173,500 2,892,245 Winn-Dixie Stores, Inc................. 44,400 177,600# Worthington Industries, Inc............ 27,300 587,223# Wrigley (Wm.) Jr. Co................... 70,200 4,829,760 Wyeth.................................. 416,600 16,609,842 Xcel Energy, Inc....................... 124,900 2,255,694# Xerox Corp............................. 262,100 4,015,372*# Xilinx, Inc............................ 108,400 3,384,248 XL Capital, Ltd........................ 43,200 3,255,552# Yahoo!, Inc............................ 425,000 15,988,500*# Yum! Brands, Inc....................... 90,800 4,122,320 Zimmer Holdings, Inc................... 76,500 6,242,400* Zions Bancorporation................... 28,000 1,862,000 --------------- TOTAL COMMON STOCKS (Cost $2,594,671,624).................. $ 3,405,448,115 --------------- 237
SCHEDULE OF INVESTMENTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Continued) Face Amount (000) Value+ ----------- --------------- TEMPORARY CASH INVESTMENTS -- (11.9%) Repurchase Agreement, Merrill Lynch Triparty Repo 1.94%, 12/01/04 (Collateralized by $389,672,000 U.S. Treasury Bills, maturities ranging from 12/02/04 to 05/26/05, valued at $388,193,618) to be repurchased at $380,599,191 (Cost $380,578,682)(triangle up)...... $ 380,579 $ 380,578,682 Repurchase Agreement, PNC Capital Markets, Inc. 1.88%, 12/01/04 (Collateralized by $77,939,000 FHLMC Notes 4.20%, 10/20/09, valued at $78,273,358) to be repurchased at $77,463,045 (Cost $77,459,000)........................................................... 77,459 77,459,000 --------------- TOTAL TEMPORARY CASH INVESTMENTS (Cost $458,037,682)...................................................................... 458,037,682 --------------- TOTAL INVESTMENTS -- (100.0%) (Cost $3,052,709,306).................................................................... $ 3,863,485,797 =============== - ------------- + See Note B to Financial Statements. * Non-Income Producing Securities. # Total or Partial Securities on Loan. (triangle up)Security purchased with cash proceeds from securities on loan. See accompanying Notes to Financial Statements. 238
STATEMENT OF ASSETS AND LIABILITIES THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Amounts in thousands) November 30, 2004 ----------------- Assets: Investments at Value (including $365,201 of securities on loan)............................ $3,863,486 Cash............................................ 4,320 Receivables: Dividends and Interest......................... 16,343 Fund Shares Sold............................... 3,420 Securities Lending............................. 23 Prepaid Expenses and Other Assets............... 2 ---------- Total Assets................................. 3,887,594 ---------- Liabilities: Payables: Upon Return of Securities Loaned............... 380,579 Fund Shares Redeemed........................... 12,686 Due to Advisor................................. 73 Payable for Futures Margin Variation............ 128 Accrued Expenses and Other Liabilities.......... 209 ---------- Total Liabilities............................ 393,675 ---------- Net Assets........................................ $3,493,919 ========== Investments at Cost............................. $3,052,709 ========== See accompanying Notes to Financial Statements. 239
STATEMENT OF OPERATIONS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Amounts in thousands) For the Year Ended Nov. 30, 2004 ---------- Investment Income Dividends...................................................... $ 66,149 Interest....................................................... 661 Income from Securities Lending................................. 356 -------- Total Investment Income...................................... 67,166 -------- Expenses Investment Advisory Services................................... 823 Accounting & Transfer Agent Fees............................... 494 Custodian Fees................................................. 108 Legal Fees..................................................... 29 Audit Fees..................................................... 43 S&P 500 Fees................................................... 80 Shareholders' Reports.......................................... 36 Trustees' Fees and Expenses.................................... 33 Other.......................................................... 58 -------- Total Expenses............................................... 1,704 -------- Net Investment Income (Loss)................................. 65,462 -------- Net Realized and Unrealized Gain (Loss) on Investment Securities Net Realized Gain (Loss) on Investment Securities Sold......... (2,763) Net Realized Gain (Loss) on Futures............................ 9,374 Change in Unrealized Appreciation (Depreciation) of: Investment Securities........................................ 317,965 Futures...................................................... 714 -------- Net Gain (Loss) on Investment Securities....................... 325,290 -------- Net Increase (Decrease) in Net Assets Resulting from Operations. $390,752 ======== See accompanying Notes to Financial Statements. 240
STATEMENT OF CHANGES IN NET ASSETS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Amounts in thousands) Year Year Ended Ended Nov. 30, Nov. 30, 2004 2003 ---------- ---------- Increase (Decrease) in Net Assets Operations: Net Investment Income (Loss)...................................... $ 65,462 $ 45,762 Net Realized Gain (Loss) on Investment Securities Sold............ (2,763) (137,474) Net Realized Gain (Loss) on Futures............................... 9,374 9,903 Change in Unrealized Appreciation (Depreciation) of: Investment Securities........................................... 317,965 447,952 Futures......................................................... 714 (3,012) ---------- ---------- Net Increase (Decrease) in Net Assets Resulting from Operations. 390,752 363,131 ---------- ---------- Transactions in Interest: Contributions..................................................... 571,038 547,508 Withdrawals....................................................... (468,868) (533,199) ---------- ---------- Net Increase (Decrease) from Transactions in Interest........... 102,170 14,309 ---------- ---------- Total Increase (Decrease)....................................... 492,922 377,440 ---------- ---------- Net Assets Beginning of Period............................................... 3,000,997 2,623,557 ---------- ---------- End of Period..................................................... $3,493,919 $3,000,997 ========== ========== See accompanying Notes to Financial Statements. 241
FINANCIAL HIGHLIGHTS THE DFA INVESTMENT TRUST COMPANY The U.S. Large Company Series (Amounts in thousands) Year Year Year Year Year Ended Ended Ended Ended Ended Nov. 30, Nov. 30, Nov. 30, Nov. 30, Nov. 30, 2004 2003 2002 2001 2000 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of Period................................. N/A N/A N/A N/A N/A ---------- ---------- ---------- ---------- ---------- Income from Investment Operations Net Investment Income (Loss)............ -- -- -- -- -- Net Gains (Losses) on Securities (Realized and Unrealized)............. -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total from Investment Operations........ -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Less Distributions Net Investment Income................... -- -- -- -- -- Net Realized Gains...................... -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total Distributions................. -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period........... N/A N/A N/A N/A N/A ========== ========== ========== ========== ========== Total Return............................. 12.77% 15.05% (16.59)% (12.30)% (4.25)% ========== ========== ========== ========== ========== Net Assets, End of Period (thousands).... $3,493,919 $3,000,997 $2,623,557 $2,831,650 $3,138,812 Ratio of Expenses to Average Net Assets.. 0.05% 0.05% 0.05% 0.05% 0.06% Ratio of Net Investment Income to Average Net Assets............................. 1.99% 1.75% 1.53% 1.26% 1.12% Portfolio Turnover Rate.................. 2% 8% 11% 8% 8% - ------------- N/A Not applicable as The U.S. Large Company Series is organized as a partnership and does not have a unitized value. See accompanying Notes to Financial Statements. 242
NOTES TO FINANCIAL STATEMENTS THE DFA INVESTMENT TRUST COMPANY A. Organization: The DFA Investment Trust Company (the "Trust") is an open-end management investment company registered under the Investment Company Act of 1940. The Trust consists of twenty-one series, of which The U.S. Large Company Series (the "Series") is presented in this report. B. Significant Accounting Policies: The following significant accounting policies are in conformity with accounting principles generally accepted in the United States of America. Such policies are consistently followed by the Series in preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operation during the reporting period. Actual results could differ from those estimates and those differences could be material. 1. Security Valuation: Securities held by the Series which are listed on a securities exchange and for which market quotations are readily available are valued at the last quoted sale price of the day. Securities held by the Series that are listed on Nasdaq are valued at the NASDAQ Official Closing Price ("NOCP"). If there is no such reported sale price or NOCP for the day, the Series values securities at the mean between the quoted bid and asked prices. Price information on listed securities is taken from the exchange where the security is primarily traded. Unlisted securities for which market quotations are readily available are valued at the mean between the most recent bid and asked prices. Securities for which quotations are not readily available, or for which market quotations have become unreliable, are valued in good faith at fair value using methods determined by the Board of Trustees. 2. Deferred Compensation Plan: Each eligible Trustee of the Trust may elect participation in the Deferred Compensation Plan (the "Plan"). Under the Plan, effective January 1, 2002, such Trustees may defer payment of a percentage of their total fees earned as a Trustee. These deferred amounts may be treated as though such amounts had been invested in shares of the following Dimensional Fund Advisors Inc. funds: U.S. Large Cap Value Portfolio, U.S. Micro Cap Portfolio, DFA International Value Portfolio, Emerging Markets Portfolio and/or DFA Two-Year Global Fixed Income Portfolio. Contributions made under the Plan and the change in unrealized appreciation (depreciation) and income, are included in Trustees' Fees and Expenses. At November 30, 2004, the total liability for deferred compensation to Trustees is included in Accrued Expenses and Other Liabilities in the amount of $55,348. 3. Other: Security transactions are accounted for on the trade date. Costs used in determining realized gains and losses on the sale of investment securities are on the basis of identified cost. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Discount and premium on securities purchased are amortized over the lives of the respective securities utilizing the effective interest method. Expenses directly attributable to a Series are directly charged. Common expenses of the Trust are allocated using methods approved by the Board of Trustees, generally based on average net assets. C. Investment Advisor: Dimensional Fund Advisors Inc. ("Dimensional" or the "Advisor") provides investment advisory services to the Series. For the year ended November 30, 2004, the Series' advisory fees were accrued daily and paid monthly to the Advisor based on an effective annual rate of 0.025 of 1% of average daily net assets. Certain officers of the Trust are also officers, directors and shareholders of the Advisor. D. Purchases and Sales of Securities: For the year ended November 30, 2004, the Series made the following purchases and sales of investment securities other than short-term securities (amounts in thousands): Purchases $226,523 Sales.... 62,048 There were no purchases or sales of U.S. Government Securities during the year ended November 30, 2004. E. Federal Income Taxes: No provision for federal income taxes is required since the Series is treated as a partnership for federal income tax purposes. Any interest, dividends and gains or losses have been deemed to have been "passed down" to its Feeder Funds. 243
NOTES TO FINANCIAL STATEMENTS (Continued) THE DFA INVESTMENT TRUST COMPANY At November 30, 2004, the total cost of securities and net realized gains or losses on securities sold for federal income tax purposes were different from amounts reported for financial reporting purposes. The federal tax cost, aggregate gross unrealized appreciation and depreciation of securities held by the Series, at November 30, 2004 were as follows (amounts in thousands): Net Unrealized Federal Unrealized Unrealized Appreciation/ Tax Cost Appreciation Depreciation (Depreciation) -------- ------------ ------------ -------------- $3,213,488 $1,038,480 $(388,482) $649,998 F. Financial Instruments: In accordance with the Series' investment objectives and policies, the Series may invest in certain financial instruments that have off-balance sheet risk in excess of the amounts recognized in the financial statements and concentrations of credit and market risk. These instruments and their significant corresponding risks are described below: 1. Repurchase Agreements: The Series may purchase money market instruments subject to the counterparty's agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Trust's custodian or a third party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements were entered into on November 30, 2004. 2. Futures Contracts: During the year ended November 30, 2004, the Series entered into futures contracts in accordance with its investment objectives. Upon entering into a futures contract, the Series deposits cash with a broker, equal to the minimum "initial margin" requirements of the exchange on which the contract is traded. Subsequent payments are received from or paid to the broker each day, based on the fluctuation in the market value of the contract. These receipts or payments are known as "variation margin" and are recorded daily by the Series as unrealized gains or losses until the contracts are closed. When the contracts are closed, the Series 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. At November 30, 2004, the Series had outstanding 270 long futures contracts on the S&P 500 Index, all of which expired on December 17, 2004. The value of such contracts on November 30, 2004 was $79,251,750, which resulted in an unrealized gain of $2,955,600. Approximately $4,320,000 of cash has been segregated as collateral for the open futures contracts and has been accounted for as cash on the Statement of Assets and Liabilities. Risks arise upon entering into futures contracts from potential imperfect price correlations between the futures contracts and the underlying securities, from the possibility of an illiquid secondary market for these instruments and from the possibility that the Series could lose more than the initial margin requirements. G. Line of Credit: The Trust, together with other Dimensional-advised portfolios, has entered into a $50 million unsecured discretionary line of credit effective June 2004 with its domestic custodian bank. Each portfolio is permitted to borrow, subject to its investment limitations, up to a maximum of $50 million, as long as total borrowings under the line of credit do not exceed $50 million in the aggregate. Borrowings under the line of credit are charged interest at the then current federal funds rate plus 1%. Each portfolio is individually, and not jointly, liable for its particular advances under the line of credit. There is no commitment fee on the unused portion of the line of credit, since this is not a committed facility. The agreement for the discretionary line of credit may be terminated by either party at any time. The agreement for the line of credit expires on June 28, 2005. There were no borrowings under the discretionary line of credit by the Series during the year ended November 30, 2004. The Trust, together with other Dimensional-advised portfolios, has also entered into an additional $150 million unsecured line of credit effective April 2004 with its international custodian bank. Each portfolio is permitted to borrow, subject to investment limitations, up to a maximum of $150 million, as long as total borrowings under the line of credit do not exceed $150 million in the aggregate. Each portfolio is individually, and not jointly liable for its particular advances under the line of credit. Borrowings under the line of credit are charged interest at rates agreed to by the parties at the time of borrowing. There is no commitment fee on the unused line of credit. The agreement of the line of credit expires in April 2005. There were no borrowings by the Series under the line of credit during the year ended November 30, 2004. 244
NOTES TO FINANCIAL STATEMENTS (Continued) THE DFA INVESTMENT TRUST COMPANY H. Securities Lending: As of November 30, 2004, the Series had securities on loan to broker/dealers, for which the Series held cash collateral. The Series invests the cash collateral, as described below, and records a liability for the return of the collateral, during the period the securities are on loan. Loans of securities are required at all times to be secured by collateral at least equal to 100% of the market value of the securities on loan. However, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. In the event that the borrower fails to return loaned securities, and cash collateral being maintained by the borrower is insufficient to cover the value of loaned securities and provided such collateral insufficiency is not the result of investment losses, PNCBank, National Association, the lending agent, has agreed to pay the amount of the shortfall to the portfolio or, at the option of the lending agent, to replace the securities. The cash collateral received by each portfolio from securities on loan is invested in repurchase agreements collateralized by U.S. government securities. Securities pledged as collateral for the repurchase agreements are held by a custodian bank until the agreements are repurchased. I. Contractual Obligations: In the normal course of business, the Trust enters into contracts that contain a variety of representations and warranties and which provide general indemnification. The Trust's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust and/or its affiliates that have not yet occurred. However, based on experience, the Trust expects the risk of loss to be remote. 245
Report of Independent Registered Certified Public Accounting Firm THE DFA INVESTMENT TRUST COMPANY To the Shareholders of The U.S. Large Company Series and Board of Trustees of The DFA Investment Trust Company In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The U.S. Large Company Series (one of the portfolios constituting The DFA Investment Trust Company, hereafter referred to as the "Series") at November 30, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the Standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at November 30, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Fort Lauderdale, Florida January 14, 2005 246
FUND MANAGEMENT THE DFA INVESTMENT TRUST COMPANY Trustees/Directors Each Board of Trustees/Directors of The DFA Investment Trust Company Inc. ("DFAITC"), DFA Investment Dimensions Group Inc. ("DFAIDG"), Dimensional Investment Group Inc. ("DIG") and Dimensional Emerging Markets Value Fund Inc. ("DEM") (each, the "Fund" and collectively, the "Funds") is responsible for establishing the Fund's policies and for overseeing the management of the Fund. The Trustees/Directors of the Funds, including all of the disinterested Directors, have adopted written procedures to monitor potential conflicts of interest that might develop between portfolios of the Funds (the "Feeder Portfolios") that invest in certain series of DFAITC or DEM (the "Master Funds"). Each Board has two standing committees, an Audit Committee and a Portfolio Performance and Service Review Committee (the "Performance Committee"). The Audit Committee is comprised of George M. Constantinides, Roger G. Ibbotson and Abbie J. Smith. Each member of the Audit Committee is a disinterested Director. The Audit Committee oversees the Fund's accounting and financial reporting policies and practices, the Fund's internal controls, the Fund's financial statements and the independent audits thereof and performs other oversight functions as requested by the Board of Trustee's/Directors. The Audit Committee recommends the appointment of each Fund's independent registered certified public accounting firm and also acts as a liaison between the Fund's independent registered certified public accounting firm and the full Board. There were four Audit Committee meetings held during the fiscal year ended November 30, 2004. The Performance Committee is comprised of Messrs. Constantinides and Ibbotson, Ms. Smith, John R. Gould, Myron S. Scholes and Robert C. Merton. Each member of the Fund's Performance Committee is a disinterested Director. The Performance Committee regularly reviews and monitors the investment performance of the Fund's series and reviews the performance of the Fund's service providers. There were three Performance Committee meetings held during the fiscal year ended November 30, 2004. Certain biographical information for each disinterested Trustee/Director and each interested Trustee/Director of the Funds is set forth in the tables below, including a description of each Trustee/Director's experience as a Trustee/Director of the Funds and as a director or trustee of other funds, as well as other recent professional experience. The statements of additional information (together, "SAI") of the Funds include additional information about each Trustee/Director. You may obtain copies of the SAI and prospectus of each Fund advised by Dimensional Fund Advisors Inc. by calling collect (310) 395-8005 or by mailing a request to Dimensional Fund Advisors, Inc. 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. Prospectuses are also available at www.dfafunds.com. - ----------------------------------------------------------------------------------------------------------------------- Name, Age, Position Portfolios within the with the Fund Term of Office/1/ and DFA Fund Complex/2/ Principal Occupation(s) During Past 5 Years and and Address Length of Service Overseen Other Directorships of Public Companies Held - ----------------------------------------------------------------------------------------------------------------------- Disinterested Trustees/Directors - ----------------------------------------------------------------------------------------------------------------------- George M. Constantinides DFAITC -- since 1993 75 portfolios in 4 Leo Melamed Professor of Finance, Graduate Director of DFAIDG, DFAIDG -- since 1983 investment companies School of Business, University of Chicago. DIG and DEM. DIG -- since 1993 Trustee of DFAITC. DEM -- since 1993 1101 E. 58th Street Chicago, IL 60637 Date of Birth: 9/22/47 - ----------------------------------------------------------------------------------------------------------------------- John P. Gould Director of DFAITC -- since 1993 75 portfolios in 4 Steven G. Rothmeier Distinguished Service DFAIDG, DIG and DFAIDG -- since 1986 investment companies Professor of Economics, Graduate School of DEM. Trustee of DFAITC. DIG -- since 1993 Business, University of Chicago. Senior Vice- 1101 E. 58th Street DEM -- since 1993 President, Lexecon Inc. (economics, law, Chicago, IL 60637 strategy and finance consulting). Formerly, Date of Birth: 1/19/39 President, Cardean University (division of UNext.com). Member of the Boards of Milwaukee Mutual Insurance Company and UNext.com. Formerly, Trustee, First Prairie Funds (registered investment company). Trustee, Harbor Fund (registered investment company) (13 Portfolios). - ----------------------------------------------------------------------------------------------------------------------- 247
FUND MANAGEMENT (Continued) THE DFA INVESTMENT TRUST COMPANY - -------------------------------------------------------------------------------------------------------------------------- Name, Age, Position Portfolios within the with the Fund Term of Office/1/ and DFA Fund Complex/2/ Principal Occupation(s) During Past 5 Years and and Address Length of Service Overseen Other Directorships of Public Companies Held - -------------------------------------------------------------------------------------------------------------------------- Roger G. Ibbotson DFAITC -- since 1993 75 portfolios in 4 Professor in Practice of Finance, Yale School of Director of DFAIDG, DIG DFAIDG -- since 1981 investment companies Management. Director, BIRR Portfolio Analysis, and DEM. Trustee of DIG -- since 1993 Inc. (software products). Chairman, Ibbotson DFAITC. Yale School of DEM -- since 1993 Associates, Inc., Chicago, IL (software, data, Management publishing and consulting). Partner, Zebra P.O. Box 208200 Capital Management, LLC (hedge fund New Haven, manager). Formerly, Director, Hospital Fund, CT 06520-8200 Inc. (investment management services). Date of Birth: 5/27/43 - -------------------------------------------------------------------------------------------------------------------------- Robert C. Merton DFA ITC -- since 2003 75 portfolios in 4 John and Natty McArthur University Professor, Director of DFAIDG, DIG DFA IDG -- since 2003 investment companies Graduate School of Business Administration, and DEM. Trustee of DFA DIG -- since 2003 Harvard University (since 1998). George Fisher DFAITC. Harvard DEM -- since 2003 Baker Professor of Business Administration, Business School Graduate School of Business Administration, 397 Morgan Hall Harvard University (1988-1998), Cofounder, Soldiers Field Boston, Chief Science Officer, Integrated Finance Limited MA 02163 (since 2002). Director, MF Risk, Inc. (risk Date of Birth: 7/31/44 management software) (since 2001). Director, Peninsula Banking Group (bank) (since 2003). Director, Community First Financial Group (bank holding company) (since 2003). Formerly, Co-Founder and Principal, Long-Term Capital Management. Director, Vical Incorporated (biopharmaceutical product development). - -------------------------------------------------------------------------------------------------------------------------- Myron S. Scholes DFAITC -- since 1993 75 portfolios in 4 Frank E. Buck Professor Emeritus of Finance, Director of DFAIDG, DFAIDG -- since 1981 investment companies Stanford University. Managing Partner, Oak Hill DIG and DEM. DIG -- since 1993 Capital Management (private equity firm). Trustee of DFAITC. DEM -- since 1993 Chairman, Oak Hill Platinum Partners (hedge Oak Hill Capital fund). Director, Chicago Mercantile Exchange. Management, Inc. Consultant, Arbor Investors. Formerly, Director, 2775 Sand Hill Rd. Smith Breeden Family of Funds. Director, Suite 220 Menlo Park, American Century Fund Complex (registered CA 94025 investment companies) (38 Portfolios); and Date of Birth: 7/01/41 Director, Chicago Mercantile Exchange Holdings Inc - -------------------------------------------------------------------------------------------------------------------------- Abbie J. Smith Director of DFAITC -- since 2000 75 portfolios in 4 Boris and Irene Stern Professor of Accounting, DFAIDG, DIG and DEM. DFAIDG -- since 2000 investment companies Graduate School of Business, University of Trustee of DFAITC. DIG -- since 2000 Chicago, Formerly, Marvin Bower Fellow, Graduate School of DEM -- since 2000 Harvard Business School (9/01 to 8/02). Business University of Director, HON Industries Inc. (office furniture) Chicago 1101 East and Director, Ryder System Inc. (transportation). 58th Street, Chicago, IL 60637 Date of Birth: 4/30/53 - -------------------------------------------------------------------------------------------------------------------------- 248
FUND MANAGEMENT (Continued) THE DFA INVESTMENT TRUST COMPANY - ------------------------------------------------------------------------------------------------------------------------- Name, Age, Position Portfolios within the with the Fund Term of Office/1/ and DFA Fund Complex/2/ Principal Occupation(s) During Past 5 Years and and Address Length of Service Overseen Other Directorships of Public Companies Held - ------------------------------------------------------------------------------------------------------------------------- Interested Trustees/Directors** - ------------------------------------------------------------------------------------------------------------------------- David G. Booth Chairman, DFAITC -- since 1993 75 portfolios in 4 Chairman, Director, Chief Executive Officer, Director, Chief Executive DFAIDG -- since 1981 investment companies Chief Investment Officer and President of Officer, Chief Investment DIG -- since 1992 Dimensional Fund Advisors Inc., DFA Securities Officer and President of DEM -- since 1993 Inc., DFAIDG, DIG and DEM. Chairman, Trustee, DFAIDG, DIG and DEM. Chief Executive Officer, Chief Investment Officer Chairman, Trustee, Chief and President of DFAITC. Director of Executive Officer, Chief Dimensional Fund Advisors Ltd. and formerly Investment Officer Chief Investment Officer. Director, Chief and President of DFAITC. Investment Officer and President of DFA 1299 Ocean Avenue Australia Ltd. Formerly, Director of Dimensional Santa Monica, Funds PLC. Chairman, Director, Chief Executive CA 90401 Officer and Chief Investment Officer of Date of Birth: 12/02/46 Dimensional Fund Advisors Canada Inc. (All Chief Investment Officer positions held starting 1/1/2003 except for Dimensional Fund Advisors Canada Inc., which was from 6/17/2003.) Limited Partner, Oak Hill Partners. Director, University of Chicago Business School. Formerly, Director, SA Funds (registered investment company). Formerly Director, Assante Corporation (investment management) (until 2002). - ------------------------------------------------------------------------------------------------------------------------- Rex A. Sinquefield* DFAITC -- since 1993 75 portfolios in 4 Chairman and Director (and prior to 1/1/2003, Chairman and Director of DFAIDG -- since 1981 investment companies Chief Investment Officer) of Dimensional Fund DFAIDG, DIG and DEM. DIG -- since 1992 Advisors Inc., DFA Securities Inc., DFAIDG, DIG Trustee and Chairman of DEM -- since 1993 and DEM. Chairman, Trustee (and prior to DFAITC. 1299 Ocean 1/1/2003, Chief Investment Officer) of DFAITC. Avenue Santa Monica, Director and formerly President of Dimensional CA 90401 Fund Advisors Ltd. Director (and prior to Date of Birth: 9/07/44 1/1/2003, Chief Investment Officer) of DFA Australia Ltd. Director of Dimensional Funds PLC and Dimensional Fund Advisors Canada Inc. Trustee, St. Louis University. Life Trustee and Member of Investment Committee, DePaul University. Director, The German St. Vincent Orphan Home. Member of Investment Committee, Archdiocese of St. Louis. - ------------------------------------------------------------------------------------------------------------------------- /1 /Each Trustee/Director holds office for an indefinite term until his or her successor is elected and qualified. /2 /Each Trustee/Director is a director or trustee of each of the four registered investment companies within the DFA Fund Complex, which includes the Funds. * Rex A. Sinquefield and Jeanne C. Sinquefield are husband and wife. **Interested Directors are described as such because they are deemed to be "interested persons," as that term is defined under the Investment Company Act of 1940, as amended, due to their positions with Dimensional Fund Advisors Inc. 249
FUND MANAGEMENT (Continued) THE DFA INVESTMENT TRUST COMPANY Officers The name, age, information regarding positions with the Funds and the principal occupation for each officer of the Funds are set forth below. Each officer listed below holds the same office (except as otherwise noted) in the following entities: Dimensional Fund Advisors Inc. ("Dimensional"), DFA Securities Inc., DFAIDG, DIG, DFAITC and DEM (collectively, the "DFA Entities"). The address of each officer is: Dimensional Fund Advisors Inc. 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401, unless otherwise indicated. Name, Age, Position with the Fund Term of Office/1/ and and Address Length of Service Principal Occupation(s) During Past 5 Years - -------------------------------------------------------------------------------------------------------------- Officers - -------------------------------------------------------------------------------------------------------------- Arthur H. Barlow Since 1993 Vice President of all the DFA Entities. Formerly, Vice Vice President President of DFA Australia Limited and Dimensional Fund Date of Birth: 11/7/55 Advisors Ltd. - -------------------------------------------------------------------------------------------------------------- Valerie A. Brown Since 2001 Vice President and Assistant Secretary of all the DFA Vice President and Entities, DFA Australia Limited, Dimensional Fund Advisors Assistant Secretary Ltd., and since June 2003, Dimensional Fund Advisors Canada Date of Birth: 1/24/67 Inc. Prior to April 2001, legal counsel for Dimensional (since March 2000). Associate, Jones, Day, Reavis & Pogue from October 1991 to February 2000. - -------------------------------------------------------------------------------------------------------------- Stephen A. Clark Since 2004 Vice President of all the DFA Entities. April 2001 to April Vice President 2004, Portfolio Manager of Dimensional. Formerly, Graduate Date of Birth: 8/20/72 Student at the University of Chicago (September 2000 to March 2001); and Associate of US Bancorp Piper Jaffrey (September 1999 to September 2000). - -------------------------------------------------------------------------------------------------------------- Truman A. Clark Since 1996 Vice President of all the DFA Entities. Formerly, Vice Vice President President of DFA Australia Limited and Dimensional Fund Date of Birth: 4/8/41 Advisors Ltd. - -------------------------------------------------------------------------------------------------------------- Christopher S. Crossan Since 2004 Vice President of all the DFA Entities. Formerly, Senior Vice President Compliance Officer, INVESCO Institutional, Inc. and its Date of Birth: 12/21/65 affiliates (August 2000 to January 2004); Branch Chief, Investment Company and Investment Advisor Inspections, Securities and Exchange Commission (April 1994 to August 2000). - -------------------------------------------------------------------------------------------------------------- James L. Davis Since 1999 Vice President of all the DFA Entities. Formerly, Vice Vice President President of DFA Australia Limited and Dimensional Fund Date of Birth: 11/29/56 Advisors Ltd. Formerly at Kansas State University, Arthur Andersen & Co., and Phillips Petroleum Co. - -------------------------------------------------------------------------------------------------------------- Robert T. Deere Since 1994 Vice President of all the DFA Entities and DFA Australia Vice President Limited. Formerly, Vice President of Dimensional Fund Date of Birth: 10/8/57 Advisors Ltd. - -------------------------------------------------------------------------------------------------------------- Robert W. Dintzner Since 2001 Vice President of all the DFA Entities. Formerly, Vice Vice President President of DFA Australia Limited. Prior to April 2001, Date of Birth: 3/18/70 marketing supervisor and marketing coordinator for Dimensional. - -------------------------------------------------------------------------------------------------------------- Richard A. Eustice Since 1998 Vice President and Assistant Secretary of all the DFA Vice President and Entities and DFA Australia Limited. Formerly, Vice Assistant Secretary President of Dimensional Fund Advisors Ltd. Date of Birth: 8/5/65 - -------------------------------------------------------------------------------------------------------------- Eugene F. Fama, Jr. Since 1993 Vice President of all the DFA Entities. Formerly, Vice Vice President President of DFA Australia Limited and Dimensional Fund Date of Birth: 1/21/61 Advisors Ltd. 250
FUND MANAGEMENT (Continued) THE DFA INVESTMENT TRUST COMPANY Name, Age, Position with the Fund Term of Office/1/ and and Address Length of Service Principal Occupation(s) During Past 5 Years - ----------------------------------------------------------------------------------------------------------- Gretchen A. Flicker Since 2004 Vice President of all DFA Entities. Prior to Vice President April 2004, institutional client service Date of Birth: 6/9/71 representative of Dimensional. - ----------------------------------------------------------------------------------------------------------- Glenn S. Freed Since 2001 Vice President of all the DFA Entities. Formerly, Vice President Professor and Associate Dean of the Leventhal Date of Birth: 11/24/61 School of Accounting (September 1998 to August 2001) and Academic Director Master of Business Taxation Program (June 1996 to August 2001) at the University of Southern California Marshall School of Business. - ----------------------------------------------------------------------------------------------------------- Henry F. Gray Since 2000 Vice President of all the DFA Entities. Formerly, Vice President Vice President of DFA Australia Limited. Prior to Date of Birth: 9/22/67 July 2000, Portfolio Manager. - ----------------------------------------------------------------------------------------------------------- Kamyab Hashemi-Nejad Since 1997 Vice President, Controller and Assistant Vice President, Controller and Treasurer of all the DFA Entities, DFA Australia Assistant Treasurer Limited, and Dimensional Fund Advisors Ltd. Date of Birth: 1/22/61 Formerly, Assistant Secretary of Dimensional Fund Advisors Ltd. - ----------------------------------------------------------------------------------------------------------- Christine W. Ho Since 2004 Vice President of all DFA Entities. Prior to Vice President April 2004, Assistant Controller of Dimensional. Date of Birth: 11/29/1967 - ----------------------------------------------------------------------------------------------------------- Jeff J. Jeon Since 2004 Vice President of all DFA Entities. Prior to Vice President April 2004, counsel of Dimensional. Formerly, an Date of Birth: 11/8/73 Associate at Gibson, Dunn & Crutcher LLP (September 1997 to August 2001). - ----------------------------------------------------------------------------------------------------------- Patrick Keating Since 2003 Vice President of all the DFA Entities and Vice President Dimensional Fund Advisors Canada Inc. Formerly, Date of Birth: 12/21/54 Director, President and Chief Executive Officer, Assante Asset Management, Inc. (October 2000 to December 2002); Director, Assante Capital Management (October 2000 to December 2002); President and Chief Executive Officer, Assante Capital Management (October 2000 to April 2001); Executive Vice President, Assante Corporation (May 2001 to December 2002); Director, Assante Asset Management Ltd. (September 1997 to December 2002); President and Chief Executive Officer, Assante Asset Management Ltd. (September 1998 to May 2001); Executive Vice President, Loring Ward (financial services company) (January 1996 to September 1998). - ----------------------------------------------------------------------------------------------------------- Joseph F. Kolerich Since 2004 Vice President of all the DFA Entities. From Vice President April 2001 to April 2004, Portfolio Manager for Date of Birth: 11/7/71 Dimensional. Formerly, a trader at Lincoln Capital Fixed Income Management (formerly Lincoln Capital Management Company). - ----------------------------------------------------------------------------------------------------------- Heather H. Mathews Since 2004 Vice President of all the DFA Entities. Prior to Vice President April 2004, Portfolio Manager for Dimensional Date of Birth: 12/12/69 Fund Advisors Inc. Formerly, Graduate Student at Harvard University (August 1998 to June 2000). - ----------------------------------------------------------------------------------------------------------- David M. New Since 2003 Vice President of all the DFA Entities. Formerly, Vice President Client Service Manager of Dimensional. Formerly, Date of Birth: 2/9/60 Director of Research, Wurts and Associates (investment consulting firm) (December 2000 to June 2002); and President, Kobe Investment Research (August 1999 to November 2000). - ----------------------------------------------------------------------------------------------------------- 251
FUND MANAGEMENT (Continued) THE DFA INVESTMENT TRUST COMPANY Name, Age, Position with the Fund Term of Office/1/ and and Address Length of Service Principal Occupation(s) During Past 5 Years - ------------------------------------------------------------------------------------------------------------ Catherine L. Newell Vice President Vice President and Secretary of all the DFA Vice President and Secretary since 1997 Entities. Vice President and Assistant Secretary Date of Birth: 5/7/64 and Secretary of DFA Australia Limited (since February 2002, since 2000 April 1997 and May 2002, respectively). Vice President and Secretary of Dimensional Fund Advisors Canada Inc. (since June 2003). Director, Dimensional Funds plc (since January 2002). Formerly, Assistant Secretary of all DFA Entities and Dimensional Fund Advisors Ltd. - ------------------------------------------------------------------------------------------------------------ David A. Plecha Since 1993 Vice President of all the DFA Entities, DFA Vice President Australia Limited and Dimensional Fund Advisors Date of Birth: 10/26/61 Ltd. - ------------------------------------------------------------------------------------------------------------ Eduardo A. Repetto Since 2002 Vice President of all the DFA Entities. Formerly, Vice President Research Associate for Dimensional (June 2000 to Date of Birth: 1/28/67 April 2002). Formerly, Research Scientist (August 1998 to June 2000), California Institute of Technology. - ------------------------------------------------------------------------------------------------------------ Michael T. Scardina Since 1993 Vice President, Chief Financial Officer and Vice President, Chief Financial Treasurer of all the DFA Entities, DFA Australia Officer and Treasurer Limited and Dimensional Fund Advisors Ltd., and Date of Birth: 10/12/55 since June 2003, Dimensional Fund Advisors Canada Inc. Director, Dimensional Fund Advisors Ltd. (since February 2002) and Dimensional Funds, plc (January 2002). - ------------------------------------------------------------------------------------------------------------ David E. Schneider Since 2001 Vice President of all the DFA Entities. Prior to Vice President Santa Monica, 2001, Regional Director of Dimensional. CA Date of Birth: 1/26/46 - ------------------------------------------------------------------------------------------------------------ John C. Siciliano Since 2001 Vice President of all the DFA Entities. Director Vice President Santa Monica, of Dimensional Fund Advisors, Ltd. Formerly, Vice CA Date of Birth: 8/24/54 President of DFA Australia Limited. Formerly, Director of Dimensional Funds plc. Formerly, Managing Principal, Payden & Rygel Investment Counsel (April 1998 to December 2000). - ------------------------------------------------------------------------------------------------------------ Jeanne C. Sinquefield, Ph.D.* Since 1988 Executive Vice President of all the DFA Entities Executive Vice President Santa and DFA Australia Limited. Vice President Monica, CA (formerly, Executive Vice President) of Date of Birth: 12/2/46 Dimensional Fund Advisors Ltd. (since January 2003) and Dimensional Fund Advisor Canada Inc. (since June 2003). - ------------------------------------------------------------------------------------------------------------ Grady M. Smith Since 2004 Vice President of all the DFA Entities. Prior to Vice President April 2004, Portfolio Manager of Dimensional. Date of Birth: 5/26/56 Formerly, Principal of William M. Mercer, Incorporated (July 1995 to June 2001). - ------------------------------------------------------------------------------------------------------------ Carl G. Snyder Since 2000 Vice President of all the DFA Entities. Prior to Vice President Santa Monica, July 2000, Portfolio Manager of Dimensional. CA Date of Birth: 6/8/63 Formerly, Vice President of DFA Australia Limited. - ------------------------------------------------------------------------------------------------------------ Lawrence R. Spieth Since 2004 Vice President of all the DFA Entities. Prior to Vice President April 2004, institutional client service Date of Birth: 11/10/47 representative of Dimensional. - ------------------------------------------------------------------------------------------------------------ Bradley G. Steiman Since 2004 Vice President of all the DFA Entities and Vice President Dimensional Fund Advisors Canada Inc. (since June Date of Birth: 3/25/73 2003). Prior to April 2002, Regional Director of Dimensional. Formerly, Vice President and General Manager of Assante Global Advisors (July 2000 to April 2002); Vice President of Assante Asset Management Inc. (March 2000 to July 2000); and Private Client Manager at Loring Ward Investment Counsel Ltd. (June 1997 to February 2002). - ------------------------------------------------------------------------------------------------------------ 252
FUND MANAGEMENT (Continued) THE DFA INVESTMENT TRUST COMPANY Name, Age, Position with the Fund Term of Office/1/ and and Address Length of Service Principal Occupation(s) During Past 5 Years - --------------------------------------------------------------------------------------------------------- Karen E. Umland Since 1997 Vice President of all the DFA Entities, DFA Vice President Santa Monica, Australia Limited, Dimensional Fund Advisors CA Date of Birth: 3/10/66 Ltd., and since June 2003, Dimensional Fund Advisors Canada Inc. - --------------------------------------------------------------------------------------------------------- Carol W. Wardlaw Since 2004 Vice President of all the DFA Entities. Prior to Vice President April 2004, institutional client service Date of Birth: 8/7/58 representative of Dimensional. - --------------------------------------------------------------------------------------------------------- Weston J. Wellington Since 1997 Vice President of all the DFA Entities. Formerly, Vice President Santa Monica, Vice President of Dimensional Fund Advisors Ltd. CA Date of Birth: 3/1/51 - --------------------------------------------------------------------------------------------------------- Daniel M. Wheeler Since 2001 Vice President of all the DFA Entities. Prior to Vice President Santa Monica, 2001, Director of Financial Advisors Services of CA Date of Birth: 3/3/45 Dimensional. Director of Dimensional Fund Advisors Ltd. (since October 2003) and President of Dimensional Fund Advisors Canada Inc. (since June 2003). /1/ Each officer holds office for an indefinite term at the pleasure of the Boards of Trustee/Directors and until his or her successor is elected and qualified. * Rex A. Sinquefield and Jeanne C. Sinquefield are husband and wife. 253
VOTING PROXIES ON FUND PORTFOLIO SECURITIES THE DFA INVESTMENT TRUST COMPANY A description of the policies and procedures that the Fund uses in voting proxies relating to securities held in the portfolio is available without charge, upon request, by calling collect: (310) 395-8005. Information regarding how the Advisor votes these proxies is available from the EDGAR database on the SEC's website at http://www.sec.gov and from the Advisor's website at http://www.dfaus.com and reflects the twelve-month period beginning July 1 and ending June 30. 254
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BlackRock Funds Investment Adviser Custodian BlackRock Advisors, Inc. PFPC Trust Co. Wilmington, Delaware 19809 Philadelphia, Pennsylvania 19153 Sub-Adviser -- International Co-Administrator and Transfer Agent Opportunities Portfolio PFPC Inc. BlackRock International, Ltd. Wilmington, Delaware 19809 Edinburgh, Scotland EH3 8JB Sub-Adviser -- Asset Allocation Distributor Portfolio BlackRock Distributors, Inc. BlackRock Financial Management, Inc. King of Prussia, Pennsylvania 19406 New York, NY 10022 Co-Administrator BlackRock Advisors, Inc. Wilmington, Delaware 19809 Counsel Simpson Thacher & Bartlett LLP New York, New York 10017 Independent Registered Public Accountant Deloitte & Touche LLP Philadelphia, Pennsylvania 19103 The Fund will mail only one copy of shareholder documents, including prospectuses, annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called "householding" and it is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact the Fund at (800) 441-7762. The Fund has delegated proxy voting responsibilities to BlackRock and its affiliates, subject to the general oversight of the Fund's Board of Trustees. A description of the policies and procedures that BlackRock and its affiliates use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling (800)-441-7762, or on the website of the Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information on how proxies relating to the Fund's voting securities were voted (if any) by BlackRock during the most recent 12-month period ended June 30th is available, upon request and without charge, by calling (800) 441-7762 or on the website of the Commission at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings for the first and third quarters of its fiscal year with the Commission on Form N-Q. The Fund's Form N-Q is available on the Commission's website at http://www.sec.gov and may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's Form N-Q may also be obtained upon request, without charge, by calling (800) 441-7762.
BlackRock Funds FUND SPECTRUM BlackRock Funds is a leading mutual fund company currently managing approximately $26 billion in the following portfolios designed to fit a broad range of investment goals. Each portfolio is managed by recognized experts in equity, fixed income, international, and tax-free investing. STOCK PORTFOLIOS Investment Trust Small Cap Core Equity Large Cap Value Equity Small Cap Growth Equity Large Cap Growth Equity Global Science & Technology Opportunities Dividend Achievers(TM) Global Resources Legacy All-Cap Global Resources Mid-Cap Value Equity Health Sciences Mid-Cap Growth Equity U.S. Opportunities Aurora International Opportunities Small/Mid-Cap Growth Index Equity Small Cap Value Equity STOCK & BOND PORTFOLIOS Asset Allocation BOND PORTFOLIOS Enhanced Income Government Income Low Duration Bond Inflation Protected Bond Intermediate Government Bond GNMA Intermediate Bond Managed Income Intermediate PLUS Bond International Bond Core Bond Total Return High Yield Bond Core PLUS Total Return TAX-FREE BOND PORTFOLIOS UltraShort Municipal Ohio Tax-Free Income Tax-Free Income Delaware Tax-Free Income Pennsylvania Tax-Free Income Kentucky Tax-Free Income New Jersey Tax-Free Income MONEY MARKET PORTFOLIOS Money Market North Carolina Municipal Money Market U.S. Treasury Money Market Ohio Municipal Money Market Municipal Money Market Pennsylvania Municipal Money Market New Jersey Municipal Money Market Virginia Municipal Money Market SHAREHOLDER PRIVILEGES Account Information Call us at 1-800-441-7762 to get information about your account balances, recent transactions and share prices. You can also reach us on the web at www.blackrock.com. Automatic Investment Plans Investor Class shareholders who want to invest regularly can arrange to have $50 or more automatically deducted from their checking or savings account and invested in any of the BlackRock portfolios. Systematic Withdrawal Plans Investor Class shareholders can establish a systematic withdrawal plan and receive periodic payments of $50 or more from their BlackRock portfolios, as long as their account is at least $10,000. Retirement Plans Shareholders may make investments in conjunction with Traditional, Rollover, Roth, Coverdell and Simple IRA's. Additional Information About The BlackRock Funds For additional reports or additional information, as well as more current information about portfolio holdings and characteristics, BlackRock Fund shareholders and prospective investors may call 1-800-441-7762.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by PNC Bank, National Association or any other bank and shares are not federally insured by, guaranteed by, obligations of or otherwise supported by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Investments in shares of the fund involve investment risks, including the possible loss of the principal amount invested. EQ-ANN 11/05 BlackRock
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE BlackRock Funds Money Market Portfolios Annual Report September 30, 2005 [GRAPHIC APPEARS HERE] NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE BlackRock
BlackRock Funds MONEY MARKET PORTFOLIOS *Money Market *North Carolina Municipal Money Market *U.S. Treasury Money Market *Ohio Municipal Money Market *Municipal Money Market *Pennsylvania Municipal Money Market *New Jersey Municipal Money Market *Virginia Municipal Money Market TABLE OF CONTENTS Shareholder Letter .........................................................1 Fund Profile/Expense Example Money Market ..........................................................2 U.S. Treasury Money Market ............................................3 Municipal Money Market ................................................4 New Jersey Municipal Money Market .....................................5 North Carolina Municipal Money Market .................................6 Ohio Municipal Money Market ...........................................7 Pennsylvania Municipal Money Market ...................................8 Virginia Municipal Money Market .......................................9 Statements of Net Assets ...............................................10-40 Key to Investment Abbreviations.......................................41 Portfolio Financial Statements Statements of Operations ..........................................42-43 Statements of Changes in Net Assets ...............................44-45 Financial Highlights ..............................................46-53 Notes to Financial Statements ..........................................54-67 Report of Independent Registered Public Accounting Firm ...................68 Fund Management ........................................................69-73 Additional Information .................................................74-75 PRIVACY PRINCIPLES OF BLACKROCK FUNDS BlackRock Funds is committed to maintaining the privacy of its shareholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock Funds collects, how we protect that information, and why in certain cases we may share such information with select other parties. BlackRock Funds does not receive any nonpublic personal information relating to its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record owners of BlackRock Funds, BlackRock Funds receives nonpublic personal information on account applications or other forms. With respect to these shareholders, BlackRock Funds also has access to specific information regarding their transactions in BlackRock Funds. BlackRock Funds does not disclose any nonpublic personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders' accounts (for example, to a transfer agent). BlackRock Funds restricts access to nonpublic personal information about its shareholders to BlackRock employees with a legitimate business need for the information. BlackRock Funds maintains physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our shareholders.
BlackRock Funds September 30, 2005 Dear Shareholder: We are pleased to present the Annual Report of the BlackRock Funds' Money Market Portfolios for the year ended September 30, 2005. On January 31, 2005, the State Street Research Funds reorganized into BlackRock Funds and we at BlackRock would like to welcome the former State Street Research Funds shareholders and our new shareholders to the BlackRock Funds Family. The Annual Report includes important information on each Portfolio: .. Fund Profile - displays characteristics of each Portfolio's holdings as of September 30, 2005. .. Expense Example - discusses costs in a shareholder account and provides information for a shareholder to estimate his or her expenses by share class and to compare expenses of each share class to other funds. .. Statements of Net Assets - lists portfolio holdings and includes each holding's market value and par amount as of September 30, 2005. The Statement of Net Assets also contains the net asset value for each share class of a Portfolio. .. Statements of Operations - displays the components of each Portfolio's investment income and provides a detailed look at each Portfolio's expenses. The Statement of Operations also lists the aggregate change in value of a Portfolio's securities due to market fluctuations and security sales. .. Statements of Changes in Net Assets - compares Portfolio information from the prior period to the current period. Specifically, it details shareholder distributions by share class, aggregate realized gains and losses, and the change in net assets from the beginning of the period to the end of the period. .. Financial Highlights - include each Portfolio's expense ratios, net asset values, total returns, and distributions per share for the last five years or since inception. .. Notes to Financial Statements - provide additional information on fees, a summary of significant accounting policies, a list of affiliated transactions, and a summary of purchases and sales of securities. .. Fund Management Table - lists information regarding BlackRock Funds' Trustees and Officers. In addition to these items, a summary of shareholder privileges is listed on the inside back cover of the report. Shareholders can find information on this page describing how to access account balances, recent transactions, and share prices. It also includes a summary of the Fund's various investment plans. At BlackRock, we maintain an unwavering commitment to placing our clients first and we value the trust you have placed in us. We hope you find the report informative, and we thank you for making BlackRock part of your investment strategy. Should you have questions concerning this report, please contact your financial advisor or contact us at 1-800-441-7762 or visit us at www.blackrock.com/funds. Sincerely, [GRAPHIC APPEARS HERE] Anne Ackerley Managing Director BlackRock Advisors, Inc. 1
Money Market Portfolio FUND PROFILE Portfolio Diversification (% of portfolio) Commercial Paper 52.4% Variable Rate Obligations 23.7 Master Notes 9.4 Repurchase Agreements 7.9 Certificates of Deposit 6.3 Corporate Bonds 0.3 ----- Total 100.0% ===== Maturity Information - ---------------------------------------------- Maturity Par Percentage - ------------- ----------- ----------- 1-7 Days 259,713,000 16.6% 8-14 Days 103,000,000 6.6 15-30 Days 410,068,000 26.2 31-60 Days 362,412,000 23.2 61-90 Days 380,039,000 24.3 over 150 Days 49,250,000 3.1 ----- 100.0% ===== Average Weighted Maturity - 46 days - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Actual Expenses ----------------------------------------------------------------------------------------------- Hilliard Institutional Service Lyons Investor Investor Investor Class Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- --------------- Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,014.50 1,013.00 1,012.80 1,012.80 1,010.40 1,010.40 Expenses Incurred During Period (04/01/05 - 9/30/05) 2.12 3.63 3.89 3.89 6.25 6.25 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------------------------- Hilliard Institutional Service Lyons Investor Investor Investor Class Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- --------------- Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.87 1,021.35 1,021.09 1,021.09 1,018.71 1,018.71 Expenses Incurred During Period (04/01/05 - 9/30/05) 2.13 3.65 3.91 3.91 6.29 6.29 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.42%, 0.72%, 0.77%, 0.77%, 1.24%, and 1.24% for the Institutional, Service, Hilliard Lyons, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 2
U.S. Treasury Money Market Portfolio FUND PROFILE Portfolio Diversification (% of portfolio) Repurchase Agreements 100.0% ----- Total 100.0% ===== Maturity Information - ----------------------------------------- Maturity Par Percentage - ----------- ------------- ----------- 1-7 Days 455,343,000 100.0% ----- 100.0% ===== Average Weighted Maturity - 3 days - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Actual Expenses -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,013.80 1,012.30 1,012.10 Expenses Incurred During Period (04/01/05 - 9/30/05) 2.07 3.58 3.78 Hypothetical Expenses (5% return before expenses) -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.92 1,021.40 1,021.19 Expenses Incurred During Period (04/01/05 - 9/30/05) 2.08 3.60 3.81 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.41%, 0.71%, and 0.75% for the Institutional, Service, and Investor A share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 3
Municipal Money Market Portfolio FUND PROFILE Largest State Concentration (% of portfolio) North Carolina 16.5% Maryland 6.6 Virginia 6.5 Texas 5.5 Illinois 4.3 Massachusetts 4.3 Pennsylvania 3.6 Ohio 3.2 Florida 3.2 Michigan 3.1 ---- Total 56.8% ==== Maturity Information - --------------------------------------------- Maturity Par Percentage - --------------- ------------- ----------- 1-7 Days 236,806,000 80.1% 15-30 Days 2,892,000 1.0 31-60 Days 2,000,000 0.7 61-90 Days 9,995,000 3.4 91-120 Days 17,254,455 5.8 121-150 Days 3,700,000 1.2 over 150 Days 23,030,000 7.8 ----- 100.0% ===== Average Weighted Maturity - 37 days - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Actual Expenses ---------------------------------------------------------------------------- Investor Institutional Class Service Class Hilliard Lyons Class A Class --------------------- --------------- ---------------------- --------------- Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,010.50 1,009.00 1,010.00 1,008.70 Expenses Incurred During Period (04/01/05 - 9/30/05) 2.12 3.63 2.62 3.82 Hypothetical Expenses (5% return before expenses) ---------------------------------------------------------------------------- Investor Institutional Class Service Class Hilliard Lyons Class A Class --------------------- --------------- ---------------------- --------------- Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.87 1,021.35 1,022.36 1,021.15 Expenses Incurred During Period (04/01/05 - 9/30/05) 2.13 3.65 2.64 3.85 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.42%, 0.72%, 0.52%, and 0.76% for the Institutional, Service, Hilliard Lyons, and Investor A share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 4
New Jersey Municipal Money Market Portfolio FUND PROFILE Portfolio Diversification (% of portfolio) Variable Rate Demand Notes 76.2% Municipal Bonds 20.4 Commercial Paper 3.4 ----- Total 100.0% ===== Maturity Information - --------------------------------------------- Maturity Par Percentage - --------------- ------------- ----------- 1-7 Days 111,680,000 76.3% 31-60 Days 6,425,000 4.4 61-90 Days 6,033,450 4.1 91-120 Days 10,574,000 7.2 over 150 Days 11,710,050 8.0 ----- 100.0% ===== Average Weighted Maturity - 42 days - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Actual Expenses -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,010.60 1,009.10 1,008.90 Expenses Incurred During Period (04/01/05 - 9/30/05) 1.97 3.48 3.68 Hypothetical Expenses (5% return before expenses) -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,023.02 1,021.50 1,021.29 Expenses Incurred During Period (04/01/05 - 9/30/05) 1.98 3.50 3.71 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.39%, 0.69%, and 0.73% for the Institutional, Service, and Investor A share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 5
North Carolina Municipal Money Market Portfolio FUND PROFILE Portfolio Diversification (% of portfolio) Variable Rate Demand Notes 83.1% Municipal Bonds 7.9 Municipal Put Bonds 6.8 Commercial Paper 2.2 ----- Total 100.0% ===== Maturity Information - -------------------------------------------- Maturity Par Percentage - --------------- ------------ ----------- 1-7 Days 52,348,000 85.8% 91-120 Days 4,020,000 6.6 121-150 Days 380,000 0.6 over 150 Days 4,240,000 7.0 ----- 100.0% ===== Average Weighted Maturity - 32 days - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Actual Expenses -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,011.30 1,009.80 1,009.60 Expenses Incurred During Period (04/01/05 - 9/30/05) 1.51 3.02 3.27 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ----------------- Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,023.48 1,021.95 1,021.70 Expenses Incurred During Period (04/01/05 - 9/30/05) 1.52 3.05 3.30 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.30%, 0.60%, and 0.65% for the Institutional, Service, and Investor A share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 6
Ohio Municipal Money Market Portfolio FUND PROFILE Portfolio Diversification (% of portfolio) Variable Rate Demand Notes 74.9% Municipal Bonds 23.4 Municipal Put Bonds 1.7 ----- Total 100.0% ===== Maturity Information - -------------------------------------------- Maturity Par Percentage - --------------- ------------ ----------- 1-7 Days 93,350,000 77.9% 31-60 Days 4,820,000 4.0 61-90 Days 3,480,000 2.9 91-120 Days 1,922,675 1.6 121-150 Days 2,450,000 2.0 over 150 Days 13,849,000 11.6 ----- 100.0% ===== Average Weighted Maturity - 44 days - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Actual Expenses -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,011.00 1,009.50 1,009.30 Expenses Incurred During Period (04/01/05 - 9/30/05) 1.97 3.48 3.73 Hypothetical Expenses (5% return before expenses) -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,023.02 1,021.50 1,021.24 Expenses Incurred During Period (04/01/05 - 9/30/05) 1.98 3.50 3.76 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.39%, 0.69%, and 0.74% for the Institutional, Service, and Investor A share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 7
Pennsylvania Municipal Money Market Portfolio FUND PROFILE Portfolio Diversification (% of portfolio) Variable Rate Demand Notes 84.1% Commercial Paper 7.9 Municipal Put Bonds 6.4 Municipal Bonds 1.6 ----- Total 100.0% ===== Maturity Information - --------------------------------------------- Maturity Par Percentage - --------------- ------------- ----------- 1-7 Days 506,779,000 93.0% 31-60 Days 20,450,000 3.8 61-90 Days 7,000,000 1.3 91-120 Days 2,400,000 0.4 121-150 Days 7,875,000 1.4 over 150 Days 370,000 0.1 ----- 100.0% ===== Average Weighted Maturity - 11 days - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Actual Expenses -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,010.90 1,009.30 1,009.60 Expenses Incurred During Period (04/01/05 - 9/30/05) 2.12 3.63 3.38 Hypothetical Expenses (5% return before expenses) -------------------------------------------------------- Institutional Class Service Class Investor A Class --------------------- --------------- ------------------ Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.87 1,021.35 1,021.60 Expenses Incurred During Period (04/01/05 - 9/30/05) 2.13 3.65 3.40 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.42%, 0.72%, and 0.67% for the Institutional, Service, and Investor A share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 8
Virginia Municipal Money Market Portfolio FUND PROFILE Portfolio Diversification (% of portfolio) Variable Rate Demand Notes 88.6% Municipal Bonds 10.6 Commerical Paper 0.8 ----- Total 100.0% ===== Maturity Information - -------------------------------------------- Maturity Par Percentage - --------------- ------------ ----------- 1-7 Days 21,490,000 89.5% 61-90 Days 775,000 3.2 91-120 Days 1,000,000 4.2 over 150 Days 750,000 3.1 ----- 100.0% ===== Average Weighted Maturity - 19 days - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Hypothetical Expenses Actual Expenses (5% return before expenses) --------------------------------------- -------------------------------------- Institutional Class Service Class Institutional Class Service Class --------------------- --------------- --------------------- -------------- Beginning Account Value (04/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,010.90 1,009.40 1,023.48 1,021.95 Expenses Incurred During Period (04/01/05 - 9/30/05) 1.51 3.02 1.52 3.05 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.30% and 0.60% for the Institutional and Service classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 9
BlackRock Funds STATEMENT OF NET ASSETS MONEY MARKET PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- CERTIFICATES OF DEPOSIT -- 6.3% Yankee -- 6.3% Credit Suisse First Boston, New York (A-1, P-1) 3.93%(b) 12/21/05 $ 5,000 $ 5,000,336 Depfa Bank PLC, New York (A-1+, P-1) 2.49%(b) 11/01/05 15,000 15,000,000 Eurohypo AG, New York (A-1, P-1) 3.70%(b) 11/09/05 70,000 69,719,417 Societe Generale, New York (A-1+, P-1) 3.34%(b) 11/04/05 8,000 7,999,995 -------------- TOTAL CERTIFICATES OF DEPOSIT (Cost $97,719,748) 97,719,748 -------------- COMMERCIAL PAPER -- 52.4% Asset-Backed Securities -- 37.6% Brahms Funding Corp. (A-1, P-1) 3.83% 10/28/05 40,000 39,885,100 Citigroup Funding (A-1, P-1) 3.75% 11/01/05 25,000 24,919,271 CRC Funding LLC (A-1, P-1) 3.73% 11/03/05 60,427 60,220,390 Emerald Certificates (A-1+, P-1) 3.56% 10/18/05 32,483 32,428,393 Giro Funding U.S. Funding Corp. (A-1, P-1) 3.82% 12/15/05 43,839 43,490,115 3.87% 12/19/05 28,700 28,456,265 K2 (USA) LLC (A-1+, P-1) 3.73% 11/21/05 52,785 52,506,075 Lake Constance Funding LLC (A-1+, P-1) 3.77% 12/01/05 17,000 16,891,403 Liberty Street Funding (A-1, P-1) 3.72% 11/14/05 6,600 6,569,992 Lockhart Funding LLC (A-1, P-1) 3.79% 10/25/05 72,000 71,818,080 Nova Notes Program (A-1+, P-1) 3.78% 12/01/05 26,000 25,833,470 Park Granada LLC (A-1+, P-1) 3.71% 10/31/05 25,000 24,922,708 3.89% 11/28/05 49,000 48,692,906 Silver Tower U.S. Funding (A-1, P-1) 3.88% 12/07/05 24,500 24,323,083 Tulip Funding Corp. (A-1+, P-1) 3.68% 10/07/05 23,815 23,800,393 Victory Receivables Corp. (A-1, P-1) 3.75% 10/17/05 62,900 62,795,167 -------------- 587,552,811 -------------- Banks -- 12.4% Banco Santander Puerto Rico (A-1, P-1) 3.74% 10/14/05 53,000 53,000,000 3.69% 10/17/05 18,500 18,500,000 Bank of America Corp. (A-1+, P-1) 3.67% 10/24/05 11,650 11,622,684 Barclays U.S. Funding Corp. (A-1+, P-1) 3.66% 10/25/05 70,000 69,828,967 Lloyds Bank (A-1, P-1) 3.78% 11/01/05 40,000 40,000,171 -------------- 192,951,822 -------------- Security Brokers & Dealers -- 1.7% Goldman Sachs Group (A-1, P-1) 3.76% 10/24/05 26,675 26,610,920 -------------- Telephone Communications -- 0.7% SBC Communications, Inc. (A-1, P-1) 3.73% 11/07/05 10,600 10,559,364 -------------- TOTAL COMMERCIAL PAPER (Cost $817,674,917) 817,674,917 -------------- MASTER NOTES -- 9.4% Domestic Certificates of Deposit -- 3.8% Washington Mutual Bank F.A. (A-1, P-1) 3.95% 12/13/05 60,000 60,000,000 -------------- Security Brokers & Dealers -- 5.6% Bank of America Securities LLC (A-1+, P-1) 4.02%(c) 10/03/05 15,250 15,250,000 Merrill Lynch Mortgage Capital, Inc. (A-1, P-1)(d) 3.95%(c) 10/04/05 22,000 22,000,000 Morgan Stanley Mortgage Capital, Inc. (A-1, P-1)(d) 4.11%(c) 10/03/05 50,000 50,000,000 -------------- 87,250,000 -------------- TOTAL MASTER NOTES (Cost $147,250,000) 147,250,000 -------------- CORPORATE BONDS -- 0.3% Manufacturing -- 0.3% General Electric Co. (A-1+, P-1) 3.70%(c) (Cost $4,500,151) 10/24/05 4,500 4,500,151 -------------- VARIABLE RATE OBLIGATIONS -- 23.8% Asset-Backed Securities -- 2.4% Racers XL (A-1, P-1) 3.82%(c)(e) 10/24/05 11,360 11,360,000 3.86%(c)(e) 08/21/06 25,000 25,000,000 -------------- 36,360,000 -------------- Banks -- 5.7% HBOS Treasury Services PLC (A-1+, P-1) 4.01%(c)(e) 12/27/05 65,000 65,000,000 Westpac Banking Corp. (AA-, Aa3)(d) 3.84%(c) 10/11/06 24,250 24,250,000 -------------- 89,250,000 -------------- Finance Services -- 3.2% Cullinan Finance Corp. (AAA, Aaa) 3.84%(c) 12/15/05 50,000 49,992,898 -------------- Life Insurance -- 4.8% MetLife Global Funding I (AA, Aa2) 3.91%(c)(e) 10/28/05 15,000 15,000,000 Transamerica Occidental Life Insurance Co. (A-1+, P-1) 4.01%(c)(f) 12/01/05 60,000 60,000,000 -------------- 75,000,000 -------------- See accompanying notes to financial statements 10
BlackRock Funds STATEMENT OF NET ASSETS MONEY MARKET PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- VARIABLE RATE OBLIGATIONS (Continued) Municipal Bonds -- 1.6% De Kalb County Development Authority University RB Series 1995B DN (A-1+, VMIG-1) 3.84%(c) 10/07/05 $ 3,875 $ 3,875,000 North Myrtle Beach Corp. RB Series 2005 DN (National Bank of South Carolina LOC) (A-1, F-1) 3.90%(c) 10/07/05 6,100 6,100,000 South Central Texas IDRB Series 1990 DN (Bank One N.A. LOC) (A-1, P-1) 3.86%(c) 10/07/05 14,800 14,800,000 -------------- 24,775,000 -------------- Security Brokers & Dealers -- 3.2% Merrill Lynch & Co., Inc. (A+, Aa3) 3.93%(c) 10/11/05 50,000 50,000,000 -------------- Short-Term Business Credit Institutions -- 2.9% General Electric Capital Corp. (AAA, Aaa) 3.89%(c) 10/17/05 45,000 45,000,000 -------------- TOTAL VARIABLE RATE OBLIGATIONS (Cost $370,377,898) 370,377,898 -------------- REPURCHASE AGREEMENTS -- 7.9% Morgan Stanley & Co., Inc. 3.85% 10/03/05 123,873 123,873,000 (Agreement dated 09/30/05 to be repurchased at $123,912,743, collateralized by $126,184,291 Federal Home Loan Mortgage Corp. Bonds and Adjustable Rate Mortgage Notes, Federal National Mortgage Assoc. Bonds and Variable Rate Notes 4.50% to 7.00% due from 07/01/08 to 09/01/35. The value of the collateral is $128,227,091.) -------------- TOTAL REPURCHASE AGREEMENTS (Cost $123,873,000) 123,873,000 -------------- TOTAL INVESTMENTS IN SECURITIES -- 100.1% (Cost $1,561,395,714(a)) 1,561,395,714 LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.1)% (1,658,122) -------------- NET ASSETS -- 100.0% (Applicable to 574,569,026 Institutional shares, 411,875,118 Service shares, 116,070,313 Hilliard Lyons shares, 433,649,650 Investor A shares, 18,715,914 Investor B shares and 5,043,471 Investor C shares) $1,559,737,592 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($574,472,981/574,569,026) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($411,831,266/411,875,118) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER HILLIARD LYONS SHARE ($116,065,887/116,070,313) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR A SHARE ($433,608,897/433,649,650) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR B SHARE ($18,715,701/18,715,914) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR C SHARE ($5,042,860/5,043,471) $ 1.00 ======= - ---------- (a) Aggregate cost for Federal income tax purposes. (b) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (c) Rates shown are the rates as of September 30, 2005 and maturities shown are the next interest readjustment date. (d) Ratings reflect those of guarantor. (e) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. As of September 30, 2005, the portfolio held 7.5% of its net assets, with a current market value of $116,360,000, in securities restricted as to resale. (f) Illiquid security. As of September 30, 2005, the Portfolio held 3.9% of its net assets, with a current market value of $60,000,000 in these securities. See accompanying notes to financial statements 11
BlackRock Funds STATEMENT OF NET ASSETS U.S. TREASURY MONEY MARKET PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- REPURCHASE AGREEMENTS -- 100.3% Deutsche Bank Securities, Inc. 3.25% 10/03/05 $100,000 $100,000,000 (Agreement dated 09/30/05 to be repurchased at $100,027,083, collateralized by $233,269,000 U.S. Treasury Strip Principals 6.25% to 7.25% due from 08/15/22 to 05/15/30. The value of the collateral is $102,000,317.) J.P. Morgan Securities, Inc. 3.25% 10/03/05 100,000 100,000,000 (Agreement dated 09/30/05 to be repurchased at $100,027,083, collateralized by $180,953,000 U.S. Treasury Strips and Strip Principals 0.00% to 8.88% due from 02/15/13 to 02/15/24. The value of the collateral is $102,001,759.) Lehman Brothers, Inc. 3.35% 10/03/05 100,000 100,000,000 (Agreement dated 09/30/05 to be repurchased at $100,027,917, collateralized by $101,510,000 U.S. Treasury Bonds and Notes 2.75% to 9.38% due from 02/15/06 to 11/15/14. The value of the collateral is $101,979,701.) Morgan Stanley & Co., Inc. 3.25% 10/03/05 55,343 55,343,000 (Agreement dated 09/30/05 to be repurchased at $55,357,989, collateralized by $38,411,000 U.S. Treasury Bonds 8.88% to 9.00% due from 11/15/18 to 02/15/19. The value of the collateral is $56,451,294.) UBS Securities LLC 3.33% 10/03/05 100,000 100,000,000 (Agreement dated 09/30/05 to be repurchased at $100,027,750, collateralized by $183,777,000 U.S. Treasury Strips and Strip Principals 0.00% to 7.13% due from 02/15/18 to 02/15/23. The value of the collateral is $102,000,006.) -------------- TOTAL REPURCHASE AGREEMENTS (Cost $455,343,000) 455,343,000 -------------- Value -------------- TOTAL INVESTMENTS IN SECURITIES -- 100.3% (Cost $455,343,000(a)) $455,343,000 LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.3)% (1,260,697) -------------- NET ASSETS -- 100.0% (Applicable to 164,931,807 Institutional shares, 257,241,669 Service shares and 31,978,478 Investor A shares) $454,082,303 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($164,904,680/164,931,807) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($257,187,342/257,241,669) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR A SHARE ($31,990,281/31,978,478) $ 1.00 ======= - ---------- (a) Aggregate cost for Federal income tax purposes. See accompanying notes to financial statements 12
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS -- 98.5% Alabama -- 2.1% Alexander City Industrial Board IDRB Series 2000 DN (Southtrust Bank LOC) (A-1, P-1) 2.85%(b) 10/07/05 $ 975 $ 975,000 Columbia IDRB (Alabama Power Co. Project) Series 1995B DN (The Southern Co. Guaranty) (A-1, VMIG-1) 2.82%(b) 10/03/05 700 700,000 Columbia IDRB (Alabama Power Co. Project) Series 1999A DN (The Southern Co. Guaranty) (A-1, VMIG-1) 2.82%(b) 10/03/05 1,000 1,000,000 Geneva County Health Care Authority RB Series 2001 DN (Southtrust Bank LOC) 2.80%(b) 10/07/05 2,833 2,833,000 Jefferson County GO Warrants Series 2001B DN (Morgan Guaranty Trust LOC, Bayerische Landesbank Girozentrale SBPA) (A-1+, VMIG-1) 2.80%(b) 10/03/05 800 800,000 --------- 6,308,000 --------- Alaska -- 2.3% Alaska Housing Finance Corp. RB (Merrill Lynch P-Float Trust Receipts) Series 1998 PA-332 DN (MBIA Insurance, Merrill Lynch Capital Services Liquidity Facility) (A-1) 2.79%(b)(c) 10/07/05 6,000 6,000,000 Anchorage Water RB (Wachovia Merlots Trust Receipts) Series 2004C-32 MB (MBIA Insurance, Wachovia Bank N.A. SBPA) (MIG-1) 2.85%(c) 04/20/06 1,000 1,000,000 --------- 7,000,000 --------- Arizona -- 1.0% Pima County IDA Single Family Mortgage RB (Draw Down Project) Series 2003 AMT MB (Trinity Funding Guaranty) 3.80%(b) 10/25/05 2,892 2,892,000 --------- Arkansas -- 0.9% Little Rock Residential Housing & Public Facilities Board Capital Improvement RB (Park Systems Project) Series 2001 DN (Bank of America N.A. LOC) (A-1+) 2.85%(b) 10/07/05 2,570 2,570,000 --------- California -- 3.0% California Economic Recovery RB Series 2004C-21 DN (XLCA Guaranty, Dexia Credit Local SBPA) (A-1+, VMIG-1) 2.72%(b) 10/07/05 500 500,000 California Infrastructure & Economic Development Bank RB (Asian Art Museum Foundation Project) Series 2003 DN (MBIA Insurance, J.P. Morgan Chase Bank SBPA) (A-1+) 2.76%(b) 10/07/05 3,500 3,500,000 Golden State Tobacco Securitization Corp. RB (Merrill Lynch P-Float Trust Receipts) Series 2004 PA-1236 DN (Merrill Lynch & Co. Guaranty, Merrill Lynch Capital Services SBPA) (F-1+) 2.83%(b)(c) 10/07/05 1,330 1,330,000 Pleasant Valley School District of Ventura County GO (Merrill Lynch P-Float Trust Receipts) Series 2005 PT-2783 DN (MBIA Insurance, Dexia Credit Local SBPA) (A-1+, AAA) 2.77%(b)(c) 10/07/05 150 150,000 Puttable Floating Option Tax-Exempt Receipts RB Series 2005-PZP-2 DN (Merrill Lynch Capital Services SBPA) (F-1+) 2.90%(b) 10/07/05 1,490 1,490,000 Sacramento Municipal Utility District RB Series 2000A DN (AMBAC Insurance, Wachovia Bank N.A. LOC) (VMIG-1) 2.76%(b)(c) 10/03/05 1,400 1,400,000 Southern California Public Power Authority RB (San Juan Power Project) Series 2002 DN (FSA Insurance, Wachovia Bank N.A. LOC) (VMIG-1) 2.76%(b)(c) 10/07/05 685 685,000 --------- 9,055,000 --------- Colorado -- 2.0% Colorado Education Loan Program RB Series 2005 TRAN (SP-1+, MIG-1) 4.00% 08/07/06 2,500 2,527,155 Colorado Housing & Finance Authority RB (Single Family Mortgage Project) Series 2005 MB (Trinity Funding Insurance) (SP-1+, MIG-1) 2.80% 07/05/06 2,000 2,000,000 See accompanying notes to financial statements 13
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Colorado (Continued) Denver Urban Renewal Authority Tax Increment RB (Merrill Lynch P-Float Trust Receipts) Series 2004 PT-999 DN (Lloyds Bank SBPA) (A-1, AA-) 2.84%(b)(c) 10/07/05 $1,500 $ 1,500,000 ---------- 6,027,155 ---------- Delaware -- 1.8% Delaware Economic Development Authority RB (Catholic Diocese of Wilmington Project) Series 2002 DN (Allied Irish Bank PLC LOC) (VMIG-1) 2.85%(b) 10/07/05 3,400 3,400,000 Delaware Economic Development Authority RB (St. Anne's Episcopal School Project) Series 2001 DN (Wilmington Trust Co. LOC) (A-1) 2.85%(b) 10/07/05 2,000 2,000,000 ---------- 5,400,000 ---------- Florida -- 3.1% Florida Housing Finance Corp. Multi-Family RB (Merrill Lynch P-Float Trust Receipts) Series 2000 PT-1234 DN (Merrill Lynch Capital Services SBPA) (A-1) 2.84%(b)(c) 10/07/05 1,470 1,470,000 Greater Orlando Aviation Authority RB (Special Purpose Cessna Aircraft Project) Series 2001 AMT DN (Textron, Inc. Guaranty) (A-2, P-1) 3.85%(b) 10/07/05 4,000 4,000,000 Lee County IDRB Series 1997 AMT DN (SunTrust Bank LOC) 2.89%(b) 10/07/05 1,865 1,865,000 Putnam County Development Authority PCRB (Seminole Electric Co-op Project) Series 1984H-3 MB (A-1, MIG-1) 2.80% 03/15/06 2,000 2,000,000 ---------- 9,335,000 ---------- Illinois -- 4.2% Chicago GO Tender Notes Series 2004 MB (State Street Bank & Trust Co. LOC) (SP-1+, MIG-1) 2.20% 12/08/05 1,000 1,000,000 Illinois Development Finance Authority IDRB (Royal Continental Box Co. Project) Series 1995A AMT DN (ABN-AMRO Bank N.V. LOC) (A-1) 2.84%(b) 10/07/05 100 100,000 Metropolitan Pier & Exposition Authority RB (Bear Stearns Trust Certificates) Series 2005A-224 DN (MBIA Insurance, Bear Stearns Capital Markets Liquidity Facility) (VMIG-1) 2.90%(b)(c) 10/07/05 600 600,000 Metropolitan Pier & Exposition Authority RB (Dedicated State Tax Receipts) Series 2005Z-5 DN (MBIA Insurance, Goldman Sachs Liquidity Facility) (F-1+) 2.83%(b)(c) 10/07/05 1,400 1,400,000 Metropolitan Pier & Exposition Authority RB (Dedicated State Tax Receipts) Series 2005PZ-44 DN (MBIA Insurance, Merrill Lynch Capital Services SBPA) (F-1+) 2.83%(b)(c) 10/07/05 500 500,000 Metropolitan Pier & Exposition Authority RB (TOC Trust Receipts) Series 2005Z-1 DN (MBIA Insurance, Goldman Sachs Liquidity Facility) (A-1, AAA) 2.83%(b)(c) 10/07/05 600 600,000 Quad Cities Regional Economic Development Authority RB (Whitey's Ice Cream Manufacturing Project) Series 1995 AMT DN (Bank One N.A. LOC) 2.93%(b) 10/07/05 805 805,000 Regional Transportation Authority GO (Wachovia Merlots Trust Receipts) Series 2001A-86 DN (FGIC Insurance, Wachovia Bank N.A. LOC) (VMIG-1) 2.77%(b)(c) 10/07/05 2,375 2,375,000 Rockford RB (Fairhaven Christian Center Project) Series 2000 DN (Bank One N.A. LOC) 2.88%(b) 10/07/05 1,700 1,700,000 Roselle Village IDRB (Abrasive-Form, Inc. Project) Series 1995 AMT DN (ABN-AMRO Bank N.V. LOC) 2.89%(b) 10/07/05 1,000 1,000,000 Schaumburg IDRB (Termax Corp. Project) Series 2000 AMT DN (Bank One N.A. LOC) 2.93%(b) 10/07/05 1,600 1,600,000 See accompanying notes to financial statements 14
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Illinois (Continued) Will County Community Unit School District 365 GO Series 2005 DN (FSA Insurance, Merrill Lynch Capital Services SBPA) (F-1+) 2.83%(b)(c) 10/07/05 $1,000 $ 1,000,000 ----------- 12,680,000 ----------- Indiana -- 1.8% Dekko Foundation Educational Facilities RB Series 2001 DN (Bank One N.A. LOC) 2.98%(b) 10/07/05 2,700 2,700,000 Hendricks County Industrial Redevelopment Commission Tax Increment RB (Heartland Crossing Project) Series 2000A DN (Huntington National Bank LOC) 2.95%(b) 10/07/05 1,100 1,100,000 Indiana Transportation Finance Authority Highway RB Series 2004B-21 DN (FGIC Insurance, Wachovia Bank SBPA) (A-1) 2.77%(b)(c) 10/07/05 100 100,000 Monroe County IDRB (Griner Engineering, Inc. Project) Series 1997 AMT DN (Fifth Third Bank N.A. LOC) 2.96%(b) 10/07/05 615 615,000 Vigo County Independent School Corp. Temporary Loan Notes RB Series 2005 MB 3.25% 12/29/05 1,000 1,001,218 ----------- 5,516,218 ----------- Iowa -- 0.2% Cedar Rapids Community School District TAN Series 2005 MB 3.75% 06/30/06 500 503,441 ----------- Kentucky -- 2.4% Kentucky Association of Counties Advance Revenue COP Series 2005 TRAN (SP-1+) 4.00% 06/30/06 3,000 3,027,193 Newport Industrial Building RB (Newport Holdings Project) Series 2001A AMT DN (Huntington National Bank LOC) 3.06%(b) 10/07/05 1,670 1,670,000 Pulaski County Solid Waste Disposal RB (National Rural Utilities for East Kentucky Power Project) Series 1993B AMT MB (National Rural Utilities Guaranty) (MIG-1) 2.85% 02/15/06 2,500 2,500,000 ----------- 7,197,193 ----------- Louisiana -- 2.2% Iberville Parish PCRB (Air Products & Chemicals Project) Series 1992 DN (A-1) 2.77%(b) 10/07/05 4,000 4,000,000 West Baton Rouge Parish Industrial District No. 3 RB (Dow Chemical Co. Project) Series 1994B DN (P-2) 2.93%(b) 10/03/05 2,500 2,500,000 ---------- 6,500,000 ---------- Maryland -- 6.5% Baltimore County RB (Odyssey School Facility Project) Series 2001 DN (M&T Bank Corp. LOC) (A-1) 2.83%(b) 10/07/05 2,815 2,815,000 Baltimore County RB (St. Paul's School for Girls Facility Project) Series 2000 DN (M&T Bank Corp. LOC) (A-1) 2.80%(b) 10/07/05 1,825 1,825,000 Maryland Economic Development Authority RB (Association of Catholic Charities Project) Series 1999A DN (M&T Bank Corp. LOC) (A-1) 2.78%(b) 10/07/05 2,395 2,395,000 Maryland Economic Development Authority RB (Association of Catholic Charities Project) Series 1999B DN (M&T Bank Corp. LOC) (A-1) 2.78%(b) 10/07/05 1,425 1,425,000 Maryland Economic Development Corp. RB (American Health Assistance Foundation Facility Project) Series 2001 DN (M&T Bank Corp. LOC) (A-1) 2.83%(b) 10/07/05 3,435 3,435,000 Maryland Economic Development Corp. RB (Mirage-Tucker LLC Facility Project) Series 2002 DN (M&T Bank Corp. LOC) (VMIG-1) 2.90%(b) 10/07/05 1,325 1,325,000 Maryland Health & Higher Education Facilities Authority RB (Adventist Healthcare Project) Series 2003B DN (M&T Bank Corp. LOC) (VMIG-1) 2.80%(b) 10/07/05 6,200 6,200,000 ---------- 19,420,000 ---------- See accompanying notes to financial statements 15
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Massachusetts -- 4.2% Commonwealth of Massachusetts GO (Wachovia Merlots Trust Receipts) Series 2002A-9 DN (FSA Insurance, Wachovia Bank N.A. SBPA) (A-1) 2.76%(b)(c) 10/07/05 $1,495 $1,495,000 Gill-Montague Regional School District GO Series 2005 BAN (SP-1+) 3.63% 07/28/06 2,090 2,103,952 Massachusetts State RB Series 2005A DN (Citibank LOC) (A-1+, VMIG-1) 2.76%(b) 10/07/05 3,000 3,000,000 Medford GO Series 2005 BAN (SP-1, MIG-1) 3.00% 01/26/06 2,000 2,001,579 Milton GO Series 2005 BAN (MIG-1) 3.25% 01/20/06 2,049 2,053,802 Whitman Hanson Regional School District BAN (SP-1+) 3.25% 01/13/06 2,000 2,005,737 ---------- 12,660,070 ---------- Michigan -- 3.1% Detroit Economic Development Corp. RB (E.H. Association Ltd. Project) Series 2002 DN (Charter One Bank LOC) 2.82%(b) 10/07/05 3,190 3,190,000 Detroit Sewer & Disposal Authority RB (Second Lien Project) Series 2001E DN (FGIC Insurance) (A-1+, MIG-1) 2.55%(b) 10/05/05 2,100 2,100,000 Hartland School District GO Series 2005 BAN 3.50% 08/24/06 1,460 1,465,062 Michigan Municipal Bond Authority RB Series 2005C MB (J.P. Morgan Chase Bank LOC) (SP-1+) 4.25% 08/18/06 1,000 1,010,406 Michigan Strategic Fund Limited Obligation RB (Horizons of Michigan Project) Series 2001 DN (Huntington National Bank LOC) 2.95%(b) 10/07/05 1,475 1,475,000 ---------- 9,240,468 ---------- Minnesota -- 0.3% Minnesota Housing Finance Agency RB (Residential Housing Project) Series 2005D MB (SP-1+, MIG-1) 2.90% 05/18/06 1,000 1,000,000 ---------- Mississippi -- 2.6% Mississippi Development Bank Special Obligation RB (Correctional Facilities Project) Series 2002 DN (AMBAC Insurance, Amsouth Bank of Alabama SBPA) (A-1) 2.85%(b) 10/07/05 3,720 3,720,000 Mississippi Development Bank Special Obligation RB (Wachovia Merlots Trust Receipts) Series 2000HH MB (AMBAC Insurance) (Aaa) 2.83%(b)(c) 07/19/06 3,000 3,000,000 Mississippi GO Series 2005-800 MB (Aa3) 4.00% 04/01/06 1,000 1,005,152 ---------- 7,725,152 ---------- Multi-State -- 7.3% Clipper Tax-Exempt Certficates Trust RB (Certified Partner Multi-State Project) Series 2004-9 AMT DN (State Street Bank & Trust Liquidity Facility) (VMIG-1) 2.95%(b)(c) 10/06/05 7,188 7,188,000 Clipper Tax-Exempt Certificates Trust RB (Certified Partner Multi-State Project) Series 2005-7 DN (FGIC & MBIA Insurance, State Street Bank & Trust SBPA) (A-1+, VMIG-1) 2.87%(b)(c) 10/07/05 1,700 1,700,000 Municipal Securities Pool Trust Receipts RB Series 2004-18 DN (Societe Generale SBPA) (A-1+) 2.90%(b)(c) 10/07/05 9,065 9,065,000 Puttable Floating Option Tax-Exempt Receipts RB Series 2005A DN (Merrill Lynch Capital Services SBPA) (F-1+) 2.90%(b)(c) 10/07/05 2,100 2,100,000 Puttable Floating Option Tax-Exempt Receipts RB Series 2005PZP-007 DN (Multiple LOCs) (F-1+) 2.85%(b)(c) 10/07/05 2,000 2,000,000 ---------- 22,053,000 ---------- Nevada -- 1.0% Clark County Economic Development RB (Lutheran Secondary School Association Project) Series 2000 DN (M&T Bank Corp. LOC) (VMIG-1) 2.95%(b) 10/07/05 1,500 1,500,000 See accompanying notes to financial statements 16
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Nevada (Continued) Reno Capital Improvement RB (Bear Stearns Trust Certificates) Series 2002A DN (FGIC Insurance, Bear Stearns LOC) (A-1) 2.81%(b)(c) 10/07/05 $1,390 $1,390,000 ---------- 2,890,000 ---------- New Hampshire -- 0.8% New Hampshire Health & Education Facilities Authority RB (Tilton School Project) Series 1999 DN (KeyBank N.A. LOC) 2.82%(b) 10/07/05 2,260 2,260,000 ---------- New Jersey -- 0.7% East Rutherford GO Series 2005 BAN (A3) 3.50% 01/18/06 2,205 2,209,945 ---------- New Mexico -- 2.3% New Mexico Housing Authority Region III Multi-Family RB (Ladera Senior Apartments Project) Series 2005 AMT DN (AEGON GIC) (A-1+, AA) 2.75%(b) 12/30/05 7,000 7,000,000 ---------- North Carolina -- 16.3% Buncombe County Metropolitan Sewer District Sewer System RB Series 2004 DN (XLCA Insurance, Bank of America N.A. SBPA) (A-1+, VMIG-1) 2.75%(b) 10/07/05 3,500 3,500,000 Charlotte Airport RB Series 2004D DN (MBIA Insurance, Bank of America N.A. SBPA) (A-1+, VMIG-1) 2.73%(b) 10/07/05 1,185 1,185,000 Charlotte COP (Governmental Facilities Project) Series 2003F DN (Bank of America N.A. SBPA) (A-1+, VMIG-1) 2.75%(b) 10/07/05 1,500 1,500,000 Guilford County Industrial Facilities & Pollution Control Financing Authority RB (Quantum Group, Inc. Project) Series 2000 AMT DN (Bank of America N.A. LOC) (F-1+, AA) 2.80%(b) 10/07/05 615 615,000 Guilford County Industrial Facilities PCRB (Recreational Facilities-YMCA Project) Series 2002 DN (Branch Banking & Trust Co. LOC) (VMIG-1) 2.77%(b) 10/07/05 1,700 1,700,000 North Carolina GO Series 2002F DN (Wachovia Bank N.A. LOC) (A-1, VMIG-1) 2.62%(b) 10/07/05 1,100 1,100,000 North Carolina GO Series 2003A-23 DN (Wachovia Bank N.A. SBPA) (A-1) 2.77%(b)(c) 10/07/05 300 300,000 North Carolina Medical Care Commission Health Care Facilities RB (Carolina Meadows, Inc. Project) Series 2004 DN (Allied Irish Bank PLC LOC) (VMIG-1) 2.77%(b) 10/07/05 2,000 2,000,000 North Carolina Medical Care Commission Health Care Facilities RB (Novant Health Group Project) Series 2004A DN (J.P. Morgan Chase Bank SBPA) (A-1+, VMIG-1) 2.75%(b) 10/07/05 2,100 2,100,000 North Carolina Medical Care Commission Health Care Facilities RB (Novant Health Group Project) Series 2004B DN (Morgan Guaranty Trust LOC) (A-1+, VMIG-1) 2.67%(b) 10/07/05 3,000 3,000,000 North Carolina Medical Care Commission Hospital RB (Baptist Hospitals Project) Series 2000 DN (Wachovia Bank N.A. LOC) (A-1, VMIG-1) 2.74%(b) 10/07/05 6,400 6,400,000 North Carolina Medical Care Commission Hospital RB (Lutheran Retirement Project) Series 1999 DN (Bank of America N.A. LOC) (F-1+) 2.75%(b) 10/07/05 1,965 1,965,000 North Carolina Medical Care Commission Hospital RB (McDowell Hospital, Inc. Project) Series 1999 DN (Wachovia Bank N.A. SBPA) (A-1) 2.75%(b) 10/03/05 150 150,000 North Carolina Medical Care Commission Hospital RB (Moses H. Cone Memorial Hospital Project) Series 1993 DN (Wachovia Bank N.A. LOC) (A-1+) 2.78%(b) 10/07/05 300 300,000 North Carolina Medical Care Commission Hospital RB (Park Ridge Hospital Project) Series 1988 DN (NationsBank LOC) (A-1+) 2.74%(b) 10/07/05 3,125 3,125,000 North Carolina Medical Care Commission Retirement Facilities RB (United Methodist Project) Series 2005B DN (Branch Banking & Trust Co. LOC) (VMIG-1) 2.77%(b) 10/07/05 1,300 1,300,000 North Carolina Medical Care Community Hospital RB (Moses Cone Health Systems) Series 2004A DN (A-1+) 2.75%(b) 10/07/05 1,500 1,500,000 See accompanying notes to financial statements 17
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) North Carolina (Continued) North Carolina Municipal Power Agency RB (Merrill Lynch P-Float Trust Receipts, Catawba Electric Co. Project) Series 2003 MB (AMBAC Insurance, Merrill Lynch Capital Services SPBA) (F-1+) 2.40%(c) 01/19/06 $2,000 $ 2,000,000 Raleigh County COP (Downtown Improvement Project) Series 2004A DN (Depfa Bank PLC SBPA) (A-1+, VMIG-1) 2.74%(b) 10/07/05 700 700,000 Raleigh County COP (Packaging Facilities Project) Series 2000A DN (Bank of America N.A. SBPA) (A-1+, VMIG-1) 2.74%(b) 10/07/05 1,255 1,255,000 Raleigh Durham Airport Authority RB Series 2002 AMT DN (FGIC Insurance) (VMIG-1, F-1+) 2.83%(b) 10/07/05 800 800,000 Rockingham County Industrial Facilities PCRB (Whiteridge, Inc. Project) Series 1998 AMT DN (Branch Banking & Trust Co. LOC) (Aa3, VMIG-1) 2.87%(b) 10/07/05 60 60,000 Union County GO Series 2005B DN (Depfa Bank PLC SBPA) 2.75%(b) 10/07/05 5,000 5,000,000 Wake County GO (CDC Trust Receipts) Series 2005-9-A DN (IXIS Municipal Products Liquidity Facility) (A-1+) 2.79%(b)(c) 10/07/05 1,700 1,700,000 Winston-Salem Water & Sewer System RB Series 2002C DN (A-1+, VMIG-1) 2.74%(b) 10/07/05 5,675 5,675,000 ---------- 48,930,000 ---------- North Dakota -- 0.1% North Dakota Housing Finance Agency RB Series 2001A-19 AMT DN (Wachovia Bank N.A. LOC) (VMIG-1) 2.82%(b)(c) 10/07/05 330 330,000 ---------- Ohio -- 3.1% Huber Heights GO (Water Systems Improvement Project) Series 2005 MB 3.25% 11/01/05 2,000 2,001,079 Lucas County Economic Development RB (Maumee Valley Country Day School Project) Series 1998 AMT DN (American National Bank & Trust Co. LOC) 3.73%(b) 10/07/05 1,030 1,030,000 Montgomery County Healthcare Facilities RB Series 2002 DN (Bank One N.A. LOC) 2.88%(b) 10/07/05 2,100 2,100,000 Ohio Higher Educational Facility Community RB Series 2000C DN (Fifth Third Bank N.A. LOC) 2.83%(b) 10/07/05 840 840,000 Ohio PCRB (Ross Incineration Project) Series 2000-1 AMT DN (Bank One N.A. LOC) 2.93%(b) 10/07/05 775 775,000 Summit County Civic Facility RB (Akron Area Electric Junction Project) Series 2001 DN 2.82%(b) 10/07/05 1,360 1,360,000 Wood County IDRB (Aluminite, Inc. Project) Series 1997 AMT DN (Sky Bank LOC) 3.73%(b) 10/07/05 1,280 1,280,000 ---------- 9,386,079 ---------- Pennsylvania -- 3.6% Delaware County IDA PCRB (Exelon Generation Co. LLC Project) DN (Wachovia Bank LOC) (A-1+, VMIG-1) 2.95%(b) 10/07/05 400 400,000 Lancaster County Hospital Authority RB (Health Center-Masonic Homes Project) Series 1996 DN (Wachovia Bank LOC) (VMIG-1) 2.75%(b) 10/07/05 3,100 3,100,000 Philadelphia Authority IDRB (Settlement Music School Project) Series 2004 DN (Allied Irish Bank PLC) (VMIG-1) 2.78%(b) 10/07/05 1,250 1,250,000 Philadelphia IDRB (Gift of Life Donor Program Project) Series 2003 DN (Commerce Bank N.A. LOC) (A-1, VMIG-1) 2.78%(b) 10/07/05 1,000 1,000,000 Philadelphia Water RB (ABN-AMRO Munitops Trust Certificates) Series 2005-15 AMT MB (FSA Insurance, ABN-AMRO Bank N.V. SBPA) (F-1+) 2.85%(c) 12/08/05 2,995 2,995,000 Venango County GO (Scrubgrass Project) Series 2005 TECP (Dexia Bank N.A. LOC) (A-1+, P-1) 2.80% 10/07/05 2,000 2,000,000 ---------- 10,745,000 ---------- See accompanying notes to financial statements 18
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Puerto Rico -- 1.1% Commonwealth of Puerto Rico GO (Tender Option Certificates) Series 2001 DN (FSA Insurance, Bank of New York Liquidity Facility) (A-1+) 2.76%(b)(c) 10/03/05 $ 100 $ 100,000 Commonwealth of Puerto Rico Highway & Transportation Authority RB (Merrill Lynch P-Float Trust Receipts) Series 2002 PT-1052 DN (Merrill Lynch & Co. Guaranty, Merrill Lynch Capital Services SBPA) (A-1) 2.78%(b)(c) 10/07/05 700 700,000 Commonwealth of Puerto Rico Highway & Transportation Authority RB Series 1998A DN (AMBAC Insurance, Bank of Nova Scotia SBPA) (A-1+, VMIG-1) 2.72%(b) 10/07/05 700 700,000 Puerto Rico Public Financing Corp. RB (Morgan Stanley Trust Certificates) Series 2001-520 DN (MBIA Insurance, Morgan Stanley Dean Witter Liquidity Facility) (VMIG-1) 2.73%(b)(c) 10/07/05 1,845 1,845,000 ---------- 3,345,000 ---------- South Carolina -- 1.9% Greenwood County Exempt Facility IDRB Series 2004 AMT DN (Fuji Photo Film Co. Guaranty) (A-1+) 2.91%(b) 10/07/05 1,500 1,500,000 Greenwood School District No. 50 GO Series 2005 MB (AA, Aa1) 3.00% 03/01/06 680 680,612 Medical University Hospital Authority RB Series 2005A-5 DN (MBIA Insurance, Bank of America N.A. SBPA) (VMIG-1) 2.80%(b)(c) 10/07/05 2,230 2,230,000 South Carolina Housing Finance & Development RB (Arrington Place Apartment Project) Series 2001 AMT DN (SunTrust Bank LOC) (VMIG-1) 2.85%(b) 10/07/05 1,300 1,300,000 ---------- 5,710,612 ---------- Texas -- 5.4% Frisco Independent School District GO Series 2004C-24 DN (VMIG-1) 2.77%(b)(c) 10/07/05 3,430 3,430,000 Gulf Coast IDRB (Cinergy Solutions Project) Series 2004 AMT DN (Cinergy Co. Guaranty) (A-2, VMIG-2) 3.00%(b) 10/07/05 2,800 2,800,000 Lower Colorado River Authority RB (Wachovia Merlots Trust Receipts) Series 2000 DN (FSA Insurance, Wachovia Bank N.A. SBPA) (Aaa, VMIG-1) 2.77%(b)(c) 10/07/05 1,900 1,900,000 Lower Neches Valley Authority PCRB (Chevron USA, Inc. Project) Series 1987 MB (Chevron-Texaco Guaranty) (A-1+, P-1) 2.83% 02/15/06 1,200 1,200,000 Northside Independent School District GO (School Building Project) Series 2005 MB (Depfa Bank SBPA) (A-1+, VMIG-1) 2.85% 06/15/06 1,800 1,800,000 San Antonio Electric & Gas Systems RB (Jr. Lien Project) Series 2004 MB (Banque Nationale de Paribas SBPA) (A-1+, MIG-1) 2.20% 12/01/05 5,000 5,000,000 ---------- 16,130,000 ---------- Vermont -- 0.1% Vermont Educational & Health Buildings Financing Agency RB (Rutland Medical Center Project) Series 2001A DN (National Westminster Bank LOC) (A-1) 2.82%(b) 10/07/05 400 400,000 ---------- Virginia -- 6.4% Alexandria IDRB (Goodwin House Project) Series 2005 DN (F-1+) 2.80%(b) 10/07/05 1,600 1,600,000 Alexandria IDRB (YMCA of Billings Project) Series 1998 DN (M&T Bank Corp. LOC) (A-1) 2.74%(b) 10/07/05 2,625 2,625,000 Chesapeake Bay Bridge & Tunnel Commonwealth District RB (Wachovia Merlots Trust Receipts) Series 2003 DN (MBIA Insurance, Wachovia Bank N.A. Liquidity Facility) (VMIG-1) 2.77%(b)(c) 10/03/05 1,095 1,095,000 Commonwealth of Virginia Transportation Board RB (Citibank Trust Receipts) Series 2002-1013 DN (Citibank Liquidity Facility) (A-1+) 2.79%(b)(c) 10/07/05 395 395,000 See accompanying notes to financial statements 19
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Virginia (Continued) Fairfax County Economic Development Authority RB (National Industries for Severe Handicap Project) Series 2002 DN (SunTrust Bank LOC) (VMIG-1) 2.75%(b) 10/07/05 $ 450 $ 450,000 Fairfax County GO Series 2005-1036 DN (Morgan Stanley Group Liquidity Facility) (AAA, F-1+) 2.78%(b)(c) 10/07/05 1,610 1,610,000 Fairfax County IDRB (Fairfax Hospital System Project) Series 1988B DN (Inova Health System Liquidity Facility) (A-1+, VMIG-1) 2.66%(b) 10/07/05 100 100,000 Halifax County GO (Vepco Project) Series 2005 TECP (Dominion Resources Guaranty) (A-2, P-1) 2.53% 10/07/05 2,000 2,000,000 Hampton Roads Regional Jail Authority Facilities RB (Citibank Trust Receipts) Series 2004 ROC-RR-II-R-2156 DN (MBIA Insurance, Citibank Liquidity Facility) (VMIG-1) 2.79%(b)(c) 10/07/05 670 670,000 Harrisonburg Redevelopment & Housing Authority Lease Purchase RB Series 2001A DN (Societe Generale LOC) (A-1+) 2.78%(b) 10/07/05 1,600 1,600,000 Loudoun County IDRB (Hill School Project) Series 2002 DN (SunTrust Bank LOC) (AA-, A-1+) 2.75%(b) 10/07/05 1,100 1,100,000 Loudoun County IDRB (Howard Hughes Medical Institute Project) Series 2003F DN (A-1+, VMIG-1) 2.73%(b) 10/07/05 400 400,000 Norfolk Redevelopment & Housing Authority Multi-Family Housing RB (Residential Rental Project) Series 2003 AMT DN (SunTrust Bank LOC) 2.90%(b) 10/07/05 2,055 2,055,000 Prince William County GO (Vepco Project) Series 2005 TECP (Dominion Resources Guaranty) (A-2, P-1) 2.53% 10/07/05 400 400,000 Richmond IDRB (Diocese of Virginia Church School Project) Series 2001 DN (SunTrust Bank LOC) (VMIG-1) 2.81%(b) 10/03/05 600 600,000 Roanoke IDA Hospital RB Series 2002 DN (J.P. Morgan Chase Bank SBPA) (A-1+, VMIG-1) 2.81%(b) 10/07/05 500 500,000 Tobacco Settlement Financing Corp. RB (Merrill Lynch P-Float Trust Receipts) Series 2005 PA-1303 DN (Merrill Lynch & Co. Guaranty, Merrill Lynch Capital Services SBPA) (F-1+) 2.83%(b)(c) 10/07/05 1,200 1,200,000 Virginia Public Building Authority RB Series 2004 ROCS-RR- II-6027 DN (Citibank Liquidity Facility) (A-1+, AA+) 2.79%(b)(c) 10/07/05 900 900,000 ---------- 19,300,000 ---------- Washington -- 1.9% Energy Northwest Electric RB (Project No. 3) Series 2003B-3-1 DN (A-1+, VMIG-1) 2.74%(b) 10/07/05 5,000 5,000,000 Yakima County Public Corp. RB (Michelsen Packaging Co. Project) Series 2000 AMT DN (Bank of America N.A. LOC) (A-1+) 2.85%(b) 10/07/05 605 605,000 ---------- 5,605,000 ---------- Wisconsin -- 2.8% Amery IDRB (Plastech Corp. Project) Series 1997 AMT DN (U.S. Bank N.A. LOC) 2.94%(b) 10/07/05 2,000 2,000,000 Mequon IDRB (Johnson Level GRW Investment Project) Series 1995 AMT DN (Bank One N.A. LOC) 2.93%(b) 10/03/05 565 565,000 Wisconsin Health & Educational Facilities Authority RB (Froedtert & Community Health Project) Series 2005B DN (A-1+, F-1+) 2.75%(b) 10/07/05 5,900 5,900,000 ---------- 8,465,000 ---------- See accompanying notes to financial statements 20
BlackRock Funds STATEMENT OF NET ASSETS MUNICIPAL MONEY MARKET PORTFOLIO (Concluded) As of September 30, 2005 Value -------------- TOTAL INVESTMENTS IN SECURITIES -- 98.5% (Cost $295,789,333(a)) $295,789,333 OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.5% 4,501,881 ------------ NET ASSETS -- 100.0% (Applicable to 75,733,412 Institutional shares, 93,879,107 Service shares, 126,408,918 Hilliard Lyons shares and 4,261,760 Investor A shares) $300,291,214 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($75,788,509/75,733,412) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($93,844,118/93,879,107) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER HILLIARD LYONS SHARE ($126,396,805/126,408,918) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR A SHARE ($4,261,782/4,261,760) $ 1.00 ======= - ---------- (a) Aggregate cost for Federal income tax purposes. (b) Rates shown are the rates as of September 30, 2005 and maturities shown are the next interest readjustment date or the date the principal owed can be recovered through demand. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. As of September 30, 2005, the portfolio held 23.8% of its net assets, with a current market value of $71,448,000, in securities restricted as to resale. See accompanying notes to financial statements 21
BlackRock Funds STATEMENT OF NET ASSETS NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS -- 98.3% New Jersey - 98.3% Bernards Township GO Series 2005 BAN 4.25% 09/08/06 $2,335 $2,361,546 Chester Township GO Series 2005 BAN 3.75% 05/26/06 1,028 1,035,179 Egg Harbor GO Series 2005 BAN 3.75% 12/08/05 3,033 3,039,549 Jersey City Redevelopment Authority RB (Dixon Hills Project) Series 2000A DN (Federal National Mortgage Association Guaranty, Federal National Mortgage Association Liquidity Facility) (A-1+) 2.75%(b) 10/07/05 3,350 3,350,000 Little Ferry GO Series 2005 BAN 4.00% 07/21/06 1,100 1,110,563 Manville GO Series 2006 BAN 3.50% 06/27/06 2,683 2,694,230 Middle Township GO (Special Emergency Notes) Series 2005 MB 4.00% 07/21/06 1,000 1,009,370 Middle Township GO Series 2005C BAN 3.75% 01/20/06 2,408 2,415,666 Middlesex County Improvement Authority RB (Woodbridge Township Guaranteed Project) Series 2004 MB 3.50% 12/22/05 3,000 3,008,901 New Jersey Economic Development Authority Multi-Mode IDRB (V&S Amboy Galvanizing LLC Project) Series 1999 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 2,270 2,270,000 New Jersey Economic Development Authority RB (Cigarette Project) Series 2004R ROC-II DN (Citigroup Guaranty) (VMIG-1) 2.83%(b)(c) 10/07/05 2,085 2,085,000 New Jersey Economic Development Authority RB (Citibank P-Float Trust Receipts) Series 2004 ROCS-II-R-309 DN (Assured Guaranty Corp. Insurance, Citibank N.A. SBPA) (A-1+) 2.80%(b)(c) 10/07/05 7,495 7,495,000 New Jersey Economic Development Authority RB (Denglas Technologies Project) Series 2000 AMT DN (Commerce Bank N.A. LOC) 2.90%(b) 10/07/05 1,200 1,200,000 New Jersey Economic Development Authority RB (First Mortgage-Winchester Project) Series 2004B DN (VMIG-1) 2.78%(b) 10/07/05 2,365 2,365,000 New Jersey Economic Development Authority RB (Hamilton Industrial Development Project) Series 1998 AMT DN (Wachovia Bank N.A. LOC) 2.81%(b) 10/07/05 1,625 1,625,000 New Jersey Economic Development Authority RB (J. James Realty Co. Project) Series 1998 AMT DN (Wachovia Bank N.A. LOC) 2.86%(b) 10/07/05 580 580,000 New Jersey Economic Development Authority RB (Jacea LLC Project) Series 2004 AMT DN (Wachovia Bank N.A. LOC) 2.86%(b) 10/07/05 3,465 3,465,000 New Jersey Economic Development Authority RB (Landesbank Hessen-Thuringen Girozentrale P-Float Trust Receipts) Series 2004 MT-035 DN (Assured Guaranty Corp. Insurance, Landesbank Hessen-Thuringen Girozentrale SBPA) (A-1) 2.78%(b)(c) 10/07/05 6,850 6,850,000 New Jersey Economic Development Authority RB (Macon Trust) Series 2005H DN (FGIC Insurance, Bank of America N.A. LOC) (A-1+) 2.78%(b)(c) 10/07/05 625 625,000 New Jersey Economic Development Authority RB (Nandan Co. Project) Series 2000 AMT DN (M&T Bank Corp. LOC) (A-1) 2.80%(b) 10/07/05 3,480 3,480,000 New Jersey Economic Development Authority RB (Nandan Co. Project) Series 2001 AMT DN (M&T Bank Corp. LOC) (A-1) 2.80%(b) 10/07/05 1,765 1,765,000 New Jersey Economic Development Authority RB (Pennington Montessori School Project) Series 1998 DN (Wachovia Bank N.A. LOC) 2.86%(b) 10/07/05 1,125 1,125,000 New Jersey Economic Development Authority RB (Princeton Day School Project) Series 2005 DN 2.75% 10/07/05 5,000 5,000,000 New Jersey Economic Development Authority RB (Project PT-2634) Series 2005 DN (FSA Insurance, Merrill Lynch SBPA) (A-1) 2.78%(b)(c) 10/07/05 7,700 7,700,000 See accompanying notes to financial statements 22
BlackRock Funds STATEMENT OF NET ASSETS NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) New Jersey (Continued) New Jersey Economic Development Authority RB (Thermal Energy LP Project) Series 1995 AMT DN (Bank One N.A. LOC) (VMIG-1) 2.80%(b) 10/07/05 $ 750 $ 750,000 New Jersey Economic Development Authority Thermal Energy Facilities RB (Marina Energy LLC Project) Series 2001A AMT DN (Wachovia Bank N.A. LOC) (A-1, VMIG-1) 2.77%(b) 10/07/05 2,000 2,000,000 New Jersey Educational Facilities Authority RB (Princeton University Project) TECP 2.70% 11/04/05 5,000 5,000,000 New Jersey Environmental Infrastructure Trust RB Series 2004-585 AMT DN (J.P. Morgan Chase Bank SBPA) (VMIG-1) 2.80%(b)(c) 10/07/05 4,030 4,030,000 New Jersey Health Care Facilites Financing Authority RB Series 2004A-4 DN (VMIG-1) 2.72%(b) 10/07/05 200 200,000 New Jersey Health Care Facilities Financing Authority RB (Beth Israel Hospital Project) Series 2004A-2 DN (Commerce Bank LOC) (VIMG-1) 2.75%(b) 10/07/05 1,185 1,185,000 New Jersey Health Care Facilities Financing Authority RB (Merrill Lynch P-Float Trust Receipts) Series 2001 PT-1319 DN (AMBAC Insurance, Merrill Lynch Capital Services SBPA) (A-1) 2.80%(b)(c) 10/07/05 7,930 7,930,000 New Jersey Health Care Facilities Financing Authority RB (Recovery Management Systems, Inc. Project) Series 2005 DN (Commerce Bank N.A. LOC) (VMIG-1) 2.75%(b) 10/07/05 2,900 2,900,000 New Jersey Health Care Facilities Financing Authority RB Series 2004-943 DN (Morgan Stanley Group Liquidity Facility, FGIC Insurance) (F-1+) 2.79%(b) 10/07/05 3,530 3,530,000 New Jersey Healthcare Facilities Financing Authority RB (Virtua Health Project) Series 2004 DN (Wachovia Bank LOC) (VMIG-1) 2.71%(b) 10/07/05 1,600 1,600,000 New Jersey Housing & Mortgage Finance Agency Multi-Family RB Series 2005-1012 AMT DN (FGIC Insurance, Morgan Stanley Liquid Facility) (VIMG-1) 2.81%(b)(c) 10/07/05 $2,605 $2,605,000 New Jersey Housing & Mortgage Finance Agency RB (Multi-Family Housing Project) Series 2002D DN (FSA Insured, Lehman SBPA) (VMIG-1) 2.78%(b)(c) 10/07/05 700 700,000 New Jersey Housing & Mortgage Finance Agency RB (Wachovia Merlots Trust Receipts) Series 2000A-2 DN (MBIA Insurance, Wachovia Bank N.A. SBPA) (Aaa) 2.81%(b)(c) 10/07/05 1,285 1,285,000 New Jersey Tobacco Settlement Financing Corp. RB (Merrill Lynch P-Float Trust Receipts) Series 2005 PA-1284 DN (Merrill Lynch SBPA, Merrill Lynch Guarantor) (A-1) 2.81%(b)(c) 10/07/05 5,975 5,975,000 New Jersey Transportation Trust Fund Authority RB Series 2004-967 DN (FSA Insurance, Morgan Stanley Group Liquidity Facility) (AAA, F-1+) 2.77%(b)(c) 10/07/05 3,000 3,000,000 New Jersey Turnpike Authority RB Series 2003C-3 DN (FSA Insurance) (A-1+, VMIG-1) 2.73%(b) 10/07/05 530 530,000 New Jersey Turnpike Authority RB Series 2005-II-R-4071 DN (Citigroup Liquidity Facility, FSA Insurance) (VMIG-1) 2.78%(b)(c) 10/07/05 2,500 2,500,000 Port Authority of New York & New Jersey RB Series 2005-1089 DN 2.82%(b)(c) 10/07/05 1,760 1,760,000 Port Authority of New York & New Jersey RB Series 2005-1095 DN 2.82%(b)(c) 10/07/05 2,980 2,980,000 Port Authority of New York & New Jersey RB Series 2005-3177 DN 2.80%(b)(c) 10/07/05 6,585 6,585,000 Port Authority of New York & New Jersey Special Obligation RB (Merrill Lynch P-Float Trust Receipts) Series 2004-056 AMT DN (FGIC Insurance, Banque Nationale de Paribas SBPA) (F-1+) 2.80%(b)(c) 10/07/05 7,855 7,855,000 See accompanying notes to financial statements 23
BlackRock Funds STATEMENT OF NET ASSETS NEW JERSEY MUNICIPAL MONEY MARKET PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) New Jersey (Continued) Salem County Pollution Control Financing Authority RB (Atlantic City Electric Co. Project) Series 1997A DN (Bank of New York LOC) (A-1+, VMIG-1) 2.74%(b) 10/07/05 $ 800 $ 800,000 Southampton GO Series 2005B BAN 4.00% 07/28/06 2,564 2,588,014 Vernon Township GO Series 2005 BAN 3.25% 01/13/06 3,000 3,007,932 Washington Township Warren County GO Series 2004 BAN 3.25% 11/01/05 1,425 1,426,184 Weehawken Township GO Series 2005 BAN 4.00% 07/14/06 1,000 1,007,601 West Milford Township GO Series 2005 BAN 3.25% 01/28/06 5,166 5,175,889 ------------ TOTAL INVESTMENTS IN SECURITIES -- 98.3% (Cost $146,560,624(a)) 146,560,624 OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.7% 2,589,120 ------------ NET ASSETS -- 100.0% (Applicable to 74,324,326 Institutional shares, 59,813,494 Service shares and 15,020,488 Investor A shares) $149,149,744 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($74,329,012/74,324,326) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($59,794,066/59,813,494) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR A SHARE ($15,026,666/15,020,488) $ 1.00 ======= - ---------- (a) Aggregate cost for Federal income tax purposes. (b) Rates shown are the rates as of September 30, 2005 and maturities shown are the next interest readjustment date or the date the principal owed can be recovered through demand. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. As of September 30, 2005, the fund held 48.2% of its net assets, with a current market value of $71,960,000, in securities restricted as to resale. See accompanying notes to financial statements 24
BlackRock Funds STATEMENT OF NET ASSETS NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS - 99.6% North Carolina - 98.7% Charlotte GO Series 1998 MB (AAA, Aaa) 5.25% 02/01/06 $ 230 $ 232,049 Charlotte Water & Sewer System GO Series 2005 TECP (Wachovia Bank LOC) (A-1+, P-1) 2.88% 06/08/06 1,400 1,400,000 Charlotte Water & Sewer System RB Series 2005 TECP (Wachovia Bank LOC) (F-1+, A-1+) 2.90% 04/26/06 1,300 1,300,000 Cleveland County Industrial Facilities PCRB (Blanchford Rubber Project) Series 2003 DN (Bank One N.A. LOC) 2.83%(b) 10/07/05 2,530 2,530,000 Guilford County Industrial Facilities PCRB (Recreational Facilities-YMCA Project) Series 2002 DN (Branch Banking & Trust Co. LOC) (VMIG-1) 2.77%(b) 10/07/05 115 115,000 High Point Combined Enterprise System RB Series 2005-998 DN (FGIC Insurance, Morgan Stanley Liquidity Facility) (F-1+) 2.78%(b)(c) 10/07/05 683 683,000 Lee County Industrial Facilities PCRB (Trion, Inc. Project) Series 1995 DN (Wachovia Bank N.A. LOC) 2.85%(b) 10/07/05 100 100,000 Lee County Industrial Facilities PCRB (Var-Arden Corp. Project) Series 1999 AMT DN (Comerica Bank N.A. LOC) 2.91%(b) 10/07/05 5,000 5,000,000 Mecklenburg County Industrial Facilities PCRB (Peidmont Plastics Project) Series 1997 AMT DN (Branch Banking & Trust Co. LOC) (Aa3, VMIG-1) 2.87%(b) 10/07/05 990 990,000 Mecklenburg County Public Improvement GO Series MB 1998A (AAA, Aaa) 4.40% 02/01/06 150 150,812 North Carolina Clipper Certificates of Partnership Trust RB Series 2005 144A DN (State Street Bank & Trust LOC) (VMIG-1) 2.83%(b)(c) 10/07/05 2,745 2,745,000 North Carolina Eastern Municipal Power Systems RB Series 1996A MB (MBIA Insured) (AAA, Aaa) 6.00% 01/01/06 2,020 2,036,655 North Carolina Educational Facilities Finance Agency RB (Duke University Project) Series 1991B DN (A-1+, VMIG-1) 2.70%(b) 10/07/05 2,800 2,800,000 North Carolina Housing Finance Agency RB Series 2002 ROC-II-R-175 DN (Salomon Smith Barney Liquidity Facility) (VMIG-1) 2.83%(b)(c) 10/07/05 5,920 5,920,000 North Carolina Medical Care Commission Health Care Facilities RB (Carolina Meadows, Inc. Project) Series 2004 DN (Allied Irish Bank PLC LOC) (VMIG-1) 2.77%(b) 10/07/05 3,000 3,000,000 North Carolina Medical Care Commission Health Care Facilities RB (Lutheran Services for the Aging Project) Series 1998 DN (Branch Banking & Trust Co. LOC) (A-1, VMIG-1) 2.75%(b) 10/07/05 100 100,000 North Carolina Medical Care Commission Health Care Facilities RB (Novant Health Group Project) Series 2004A DN (J.P. Morgan Chase Bank SBPA) (A-1+, VMIG-1) 2.75%(b) 10/07/05 500 500,000 North Carolina Medical Care Commission Hospital RB (Aces-Pooled Equipment Financing Project) Series 1985 DN (MBIA Insurance, KBC Bank SBPA) (A-1+, VMIG-1) 2.75%(b) 10/07/05 1,100 1,100,000 North Carolina Medical Care Commission Hospital RB (Baptist Hospital Project) Series 1996 DN (Wachovia Bank N.A. LOC) (A-1+, VMIG-1) 2.76%(b) 10/07/05 200 200,000 North Carolina Medical Care Commission Hospital RB (Lincoln Health System Project) Series 1996A DN (Bank of America N.A. LOC) (A-1, VMIG-1) 2.75%(b) 10/07/05 600 600,000 North Carolina Medical Care Commission Hospital RB (Park Ridge Hospital Project) Series 1988 DN (NationsBank LOC) (A-1+) 2.74%(b) 10/07/05 800 800,000 See accompanying notes to financial statements 25
BlackRock Funds STATEMENT OF NET ASSETS NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) North Carolina (Continued) North Carolina Medical Care Commission Retirement Facilities RB (Aldersgate Project) Series 2001 DN (Branch Banking & Trust Co. LOC) (A-1) 2.88%(b) 10/07/05 $1,185 $1,185,000 North Carolina Medical Care Commission Retirement Facilities RB (Brookwood Project) Series 2001C DN (Branch Banking & Trust Co. LOC) (A-1) 2.88%(b) 10/07/05 600 600,000 North Carolina Medical Care Community Hospital RB (Moses Cone Health System Project) Series 2001B DN (Chase Manhattan LOC) (A-1+) 2.75%(b) 10/07/05 700 700,000 North Carolina Medical Care Community Hospital RB (Moses Cone Health System Project) Series 2004A DN (A-1+) 2.75%(b) 10/07/05 1,700 1,700,000 North Carolina Municipal Power Agency RB (Merrill Lynch P-Float Trust Receipts, Catawba Electric Co. Project) Series 2003 MB (AMBAC Insurance, Merrill Lynch Capital Services SPBA) (F-1+) 2.40%(c) 01/19/06 2,000 2,000,000 North Carolina Ports Authority Exempt Facilities RB (Wilmington Bulk LLC Project) Series 2001A AMT DN (Branch Banking & Trust Co. LOC) (VMIG-1) 2.87%(b) 10/07/05 1,205 1,205,000 North Carolina State GO (Public Improvement Projects) Series 2002A DN (Landesbank Hessen-Thuringen Girozentrale LOC) (A-1+, VMIG-1) 2.74%(b) 10/07/05 1,300 1,300,000 Raleigh County COP (Downtown Improvement Project) Series 2004A DN (Depfa Bank PLC SBPA) (A-1+, VMIG-1) 2.74%(b) 10/07/05 100 100,000 Raleigh Durham Airport Authority Airport RB (P-Floats Trust Reciepts) Series 2005-100 AMT DN (VMIG-1) 2.83%(b)(c) 10/07/05 3,000 3,000,000 Raleigh Durham Airport Authority RB Series 2002 AMT DN (FGIC Insurance) (VMIG-1, F-1+) 2.83%(b) 10/07/05 2,500 2,500,000 Richmond County Industrial Facilities PCRB (Ritz-Craft Corp., Inc.) Series 2005 DN (Mercantile Safe Deposit & Trust Co. LOC) (A-1+, VMIG-1) 2.80%(b) 10/07/05 4,500 4,500,000 Rockingham County Industrial Facilities PCRB (Medibeg, Inc. Project) Series 1997 AMT DN (Wachovia Bank N.A. LOC) (Aa2) 2.85%(b) 10/07/05 1,200 1,200,000 Rockingham County Industrial Facilities PCRB (Whiteridge, Inc. Project) Series 1998 AMT DN (Branch Banking & Trust Co. LOC) (Aa3, VMIG-1) 2.87%(b) 10/07/05 540 540,000 Rutherford County Industrial Facilities PCRB (All American Homes Project) Series 1996 AMT DN (Bank One N.A. LOC) 2.93%(b) 10/07/05 1,100 1,100,000 Sampson County Industrial Facilities PCRB (Dubose Strapping, Inc. Project) Series 1997 DN (Wachovia Bank N.A. LOC) 2.90%(b) 10/07/05 700 700,000 Wake County GO (CDC Trust Receipts) Series 2005-9-A DN (IXIS Municipal Products Liquidity Facility) (A-1+) 2.79%(b)(c) 10/07/05 300 300,000 Wake County GO (Public Improvement) Series 2002 MB (AAA, Aaa) 4.50% 03/01/06 1,540 1,552,233 Wake County GO Series 1996 MB (AAA, Aaa) 4.50% 03/01/06 1,000 1,007,156 Wake County GO Series 2004A MB (Landesbank Hessen-Thuringen Girozentrale SBPA) (A-1+, MIG-1) 4.00% 04/01/06 1,000 1,006,353 Wake County Housing Finance Authority RB (Casa Melvid Multi-Family Housing Project) Series 2001A AMT DN (SunTrust Bank LOC) (VMIG-1) 2.85%(b) 10/07/05 2,800 2,800,000 Washington County Industrial Facilities PCRB (Mackey's Ferry Sawmill, Inc. Project) Series 1997 AMT DN (Wachovia Bank N.A. LOC) (Aa2) 2.85%(b) 10/07/05 500 500,000 See accompanying notes to financial statements 26
BlackRock Funds STATEMENT OF NET ASSETS NORTH CAROLINA MUNICIPAL MONEY MARKET PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) North Carolina (Continued) Winston-Salem COP (Risk Acceptance Management Corp. Project) Series 1988 DN (National Westminster Bank LOC) (A-1+) 2.79%(b) 10/07/05 $415 $ 415,000 Winston-Salem GO Series 1990 DN (Wachovia Bank N.A. LOC) (A-1+, VMIG-1) 2.74%(b) 10/07/05 220 220,000 ----------- 62,433,258 ----------- Puerto Rico -- 0.9% Commonwealth of Puerto Rico Highway & Transportation Authority RB (Merrill Lynch P-Float Trust Receipts) Series 2002 PT-1052 DN (Merrill Lynch & Co. Guaranty, Merrill Lynch Capital Services SBPA) (A-1) 2.78%(b)(c) 10/07/05 600 600,000 ----------- TOTAL INVESTMENTS IN SECURITIES -- 99.6% (Cost $63,033,258(a)) 63,033,258 OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.4% 228,924 ----------- NET ASSETS -- 100.0% (Applicable to 56,020,525 Institutional shares, 6,923,202 Service shares and 321,469 Investor A shares) $63,262,182 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($56,017,320/56,020,525) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($6,923,410/6,923,202) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR A SHARE ($321,452/321,469) $ 1.00 ======= - ---------- (a) Cost for Federal income tax purposes is $63,040,883. (b) Rates shown are the rates as of September 30, 2005 and maturities shown are the next interest readjustment date or the date the principal owed can be recovered through demand. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. As of September 30, 2005, the fund held 24.1% of its net assets, with a current market value of $15,248,000, in securities restricted as to resale. See accompanying notes to financial statements 27
BlackRock Funds STATEMENT OF NET ASSETS OHIO MUNICIPAL MONEY MARKET PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS -- 100.1% Ohio -- 100.1% Akron COP Series 2005 MB (Assured Guaranty Insurance) 3.00% 12/01/05 $1,120 $1,120,802 American Municipal Power, Inc. GO (Amherst City Project) Series 2004 BAN 2.35% 12/01/05 865 865,000 American Municipal Power, Inc. GO (Cleveland Public Power Project) Series 2005 BAN 3.10% 08/17/06 1,783 1,783,000 American Municipal Power, Inc. GO (Columbus Electric System Project) Series 2005 BAN 3.00% 07/13/06 500 500,000 American Municipal Power, Inc. GO (Gorsuch Station Project) Series 2005-A DN 2.85%(b) 10/07/05 1,000 1,000,000 American Municipal Power, Inc. GO (Lakeview Project) Series 2005 BAN 2.55% 02/02/06 525 525,000 American Municipal Power, Inc. GO (Milan Village Project) Series 2005 BAN 2.55% 01/12/06 563 562,675 American Municipal Power, Inc. GO (Ohio, Inc. Hubbard Project) Series 2004 BAN 2.45% 12/14/05 495 495,000 American Municipal Power, Inc. GO (Plymouth Village Project) Series 2004 BAN 2.15% 11/09/05 435 435,000 American Municipal Power, Inc. GO (St. Mary's Project) Series 2004 BAN 1.90% 10/06/05 1,500 1,500,000 American Municipal Power, Inc. GO (St. Mary's Project) Series 2005 BAN 3.20% 10/05/06 500 500,000 American Municipal Power, Inc. GO (Woodville Village Project) Series 2005 BAN 3.25% 07/20/06 800 801,239 Ashtabula County IDRB (Brighton Manor, Inc. Project) Series 1986 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 200 200,000 Brooklyn IDRB (Dylon Industries, Inc. Project) Series 1999 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 820 820,000 Brunswick GO Series 2005 BAN 2.90% 04/06/06 2,030 2,032,023 Clark County GO Series 2005 BAN 2.75% 02/23/06 1,925 1,926,858 Cleveland Airport System RB (Stars Certificates Project) Series 2004 DN (Banque Nationale de Paribas LOC) (VMIG-1) 2.83%(b)(c) 10/07/05 $5,585 $5,585,000 Columbus Regional Airport Authority RB Series 2005 DN (U.S. Bank N.A. LOC) (Aa1, VMIG-1) 2.77%(b) 10/07/05 900 900,000 Cuyahoga County Civic Facility RB (Orion Services, Inc. Project) Series 2001 DN (Bank One N.A. LOC) 2.88%(b) 10/07/05 3,400 3,400,000 Cuyahoga County Economic Development RB (Berea Children's Home Project) Series 2000 DN (Huntington National Bank LOC) (VMIG-1) 2.95%(b) 10/07/05 1,940 1,940,000 Cuyahoga County IDRB (Great Lakes Brewing Co. Project) Series 2001 AMT DN (Huntington National Bank LOC) 3.05%(b) 10/07/05 1,170 1,170,000 Cuyahoga County IDRB (Trio Diversified Co. Project) Series 2000 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 1,765 1,765,000 Cuyahogo County IDRB (Marine Mechanical Corp. Project) Series 2000 AMT DN 2.86%(b) 10/07/05 2,330 2,330,000 Darke County GO Series 2005 BAN 01/05/06- 3.75% 07/11/06 2,000 2,009,986 Delaware County Economic Development RB (The Columbus Zoological Park Associates, Inc. Project) Series 2003 DN (Huntington National Bank LOC) 2.95%(b) 10/07/05 2,295 2,295,000 Delaware County IDRB (Air Waves, Inc. Project) Series 1995 DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 80 80,000 Englewood GO Series 2005 BAN 4.00% 08/29/06 625 629,959 Franklin County Economic Development RB (Columbus Montessori Educational Center Project) Series 2000 DN (Huntington National Bank LOC) 2.85%(b) 10/07/05 1,620 1,620,000 See accompanying notes to financial statements 28
BlackRock Funds STATEMENT OF NET ASSETS OHIO MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Ohio (Continued) Franklin County Health Care Facilities RB (Heritage Day Health Centers Project) Series 2002 DN 2.95%(b) 10/07/05 $1,225 $1,225,000 Fulton County IDRB (Haas Door Co. & Nofziger Doors International, Inc. Project) Series 1999 AMT DN (National City Bank N.A. LOC) 2.91%(b) 10/07/05 690 690,000 Geauga County RB (Thistle Lane Project) Series 2000 AMT DN (Huntington National Bank LOC) 3.05%(b) 10/07/05 2,310 2,310,000 Greene County IDRB (AFC Stamping & Production, Inc., Barsplice Products Project) Series 1995 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 280 280,000 Huber Heights GO (Brandt Pike Project) Series 2005 MB 3.25% 03/31/06 1,155 1,158,345 Huber Heights GO (Water Systems Improvement Project) Series 2005 MB 3.25% 11/01/05 1,000 1,000,540 Lebanon GO (Fire Department Improvement Project) Series 2005 BAN 3.75% 07/05/06 1,120 1,127,850 Licking County GO (Moundview Project) Series 2005 BAN 4.00% 09/07/06 700 705,703 Lorain County IDRB (Ohio Metallurgical Services Project) Series 2001 AMT DN (First Merit Bank N.A. LOC) 3.03%(b) 10/07/05 1,920 1,920,000 Lyndhurst City GO Series 2005 BAN 2.65% 03/02/06 425 425,345 Mahoning County IDRB (M&J Development Ltd. Project) Series 2002 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 2,600 2,600,000 Mentor IDRB (Arrow Machine Co. Ltd. Project) Series 1997 DN (First Merit Bank N.A. LOC) 2.87%(b) 10/07/05 1,335 1,335,000 Montgomery County GO Series 2005 BAN 3.00% 12/01/05 1,000 1,001,110 Montgomery County Healthcare Facilities RB Series 2002 DN (Bank One N.A. LOC) 2.88%(b) 10/07/05 500 500,000 North Canton GO Series 2005 BAN 4.00%(b) 10/07/05 500 504,345 North Olmsted GO Series 2005 BAN 3.15% 05/03/06 875 876,452 Ohio Building Authority RB (Adult Correctional Building Funds Project) Series 2001 MB (FSA Insurance) 5.00% 10/01/05 100 100,000 Ohio Building Authority RB (Merrill Lynch P-Floats Trust Receipts) Series 2005-2937 DN (A-1) 2.78%(b)(c) 10/07/05 400 400,000 Ohio Higher Educational Facility Community RB Series 2000C DN (Fifth Third Bank N.A. LOC) 2.83%(b) 10/07/05 495 495,000 Ohio Higher Educational Facility RB (Ashland University Project) Series 2004 DN (KeyBank N.A. LOC) (A-1) 2.80%(b) 10/07/05 1,250 1,250,000 Ohio Higher Educational Facility RB (Cedarville University Project) Series 2004 DN (KeyBank N.A. LOC) 2.82%(b) 10/07/05 1,295 1,295,000 Ohio Housing Finance Agency Mortgage RB (Wachovia Merlots Trust Receipts) Series 2001A-78 DN (Wachovia Bank N.A. LOC) (VMIG-1) 2.82%(b)(c) 10/07/05 445 445,000 Ohio Housing Finance Agency Mortgage RB Series 2001 AMT DN (Bank of America N.A. LOC) (VMIG-1) 2.87%(b)(c) 10/07/05 1,550 1,550,000 Ohio Housing Finance Agency Multi-Family Housing RB (Lincoln Park Association Project) Series 1985 MB (Bank One N.A. LOC) (MIG-1) 3.50%(b) 11/01/05 1,715 1,715,000 Ohio Housing Finance Agency RB (Clipper Tax-Exempt Certificates Trust Project) Series 2004-08 AMT DN (Lloyds Bank SBPA) (VMIG-1) 2.87%(b)(c) 10/07/05 8,450 8,450,000 Ohio IDRB (Ashley Ward, Inc. Project) Series 1997 AMT DN (Fifth Third Bank N.A. LOC) 2.88%(b) 10/07/05 470 470,000 Ohio PCRB (Ross Incineration Project) Series 2000-1 AMT DN (Bank One N.A. LOC) 2.93%(b) 10/07/05 1,725 1,725,000 Pepper Pike City GO Series 2005 BAN 3.00% 06/22/06 396 396,563 See accompanying notes to financial statements 29
BlackRock Funds STATEMENT OF NET ASSETS OHIO MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Ohio (Continued) Portage County IDRB (Action Super Abrasive Project) Series 1996 AMT DN (National City Bank N.A. LOC) 2.97%(b) 10/07/05 $ 780 $ 780,000 Portage County IDRB (Bauer/Hibbard Properties Ltd. Project) Series 1998 DN (National City Bank N.A. LOC) 2.96%(b) 10/07/05 805 805,000 Putnam County Health Care Facilities RB (Hilty Memorial Home Project) Series 2004 DN (LaSalle Bank N.A. LOC) 2.84%(b) 10/07/05 3,560 3,560,000 Richland County GO Series 2005 BAN 3.25% 03/29/06 965 967,994 4.00% 08/08/06 475 479,127 Rickenbacker Port Authority RB (P-Float Trust Receipts) Series 2004 PT-2453 AMT DN (Merrill Lynch Guaranty) (F-1+) 2.88%(b)(c) 10/07/05 5,235 5,235,000 St. Mary's GO Series 2005 BAN 3.30% 09/14/06 500 501,152 Stark County IDRB (Thakar Properties LLC Project) Series 2002 AMT DN 2.86%(b) 10/07/05 3,715 3,715,000 Strongsville IDRB (Web Plastics Co. Project) Series 1997 DN (National City Bank N.A. LOC) 2.96%(b) 10/07/05 580 580,000 Summit County IDRB (Flutes LLC Project) Series 2002 AMT DN (Marshall & Ilsley Bank LOC) 2.86%(b) 10/07/05 2,490 2,490,000 Summit County IDRB (Jendrisak Properties Project) Series 2001 AMT DN (First Merit Bank N.A. LOC) 3.03%(b) 10/07/05 2,070 2,070,000 Summit County IDRB (KB Compost Services, Inc. Project) Series 2001 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 1,650 1,650,000 Summit County IDRB (Sigma Properties Project) Series 2000A AMT DN (National City Bank N.A. LOC) 2.91%(b) 10/07/05 1,075 1,075,000 Summit County IDRB (Waltco Truck Equipment Project) Series 1988 AMT MB (Skandinaviska Enskilda LOC) 3.40%(b) 01/15/06 360 360,000 Summit County Port Authority RB (Meadow Lane Building LLC Project) Series 2003A AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 2,500 2,500,000 Toledo Multi-Family Housing RB (Cherrywood Apartments Project) Series 2001 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 2,735 2,735,000 Trumbull County IDRB (Ellwood Engineered Project) Series 2004 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 1,700 1,700,000 Trumbull County IDRB (United Steel Service, Inc. Project) Series 2000B AMT DN (Bank One N.A. LOC) 2.98%(b) 10/07/05 380 380,000 Vermilion City GO Series 2004 BAN 1.90% 10/06/05 415 415,011 Washington Court House GO (School Construction Project) Series 2005 BAN 3.40% 11/15/05 1,670 1,671,371 Western Reserve Housing Development Corp. Economic RB (Trumbull Metropolitan Housing Project) Series 2003 DN (KeyBank N.A. LOC) 2.88%(b) 10/07/05 3,480 3,480,000 Wood County Economic Development RB (Hammill Manufacturing Co. Project) Series 2000 AMT DN (Sky Bank LOC) 3.73%(b) 10/07/05 1,660 1,660,000 Wood County Economic Development RB (Precision Aggregate II Project) Series 1996 AMT DN (Mid American National Banking & Trust LOC) 3.73%(b) 10/07/05 1,780 1,780,000 Wood County Economic Development RB (Sun Seed Holding Co., Inc. Project) Series 2001A AMT DN (Sky Bank LOC) 3.73%(b) 10/07/05 1,685 1,685,000 Wood County Economic Development RB (Toledo Electrical Joint Apprenticeship & Training Fund Project) Series 2000 DN (Sky Bank LOC) 3.73%(b) 10/07/05 780 780,000 See accompanying notes to financial statements 30
BlackRock Funds STATEMENT OF NET ASSETS OHIO MUNICIPAL MONEY MARKET PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value ------------ ---------- ------------- MUNICIPAL BONDS (Continued) Ohio (Continued) Wood County IDRB (TMT Leasing LLC Project) Series 2004 DN (Huntington National Bank LOC) 3.05%(b) 10/07/05 $2,130 $ 2,130,000 ------------ 119,927,450 ------------ TOTAL INVESTMENTS IN SECURITIES -- 100.1% (Cost $119,927,450(a)) 119,927,450 LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.1)% (113,247) ------------ NET ASSETS -- 100.0% (Applicable to 88,712,189 Institutional shares, 10,226,778 Service shares and 20,902,433 Investor A shares) $119,814,203 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($88,697,188/88,712,189) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($10,224,211/10,226,778) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR A SHARE ($20,892,804/20,902,433) $ 1.00 ======= - ---------- (a) Aggregate cost for Federal income tax purposes. (b) Rates shown are the rates as of September 30, 2005 and maturities shown are the next interest readjustment date or the date the principal owed can be recovered through demand. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. As of September 30, 2005, the fund held 18.1% of its net assets, with a current market value of $21,665,000, in securities restricted as to resale. See accompanying notes to financial statements 31
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS -- 101.5% Pennsylvania -- 101.2% Allegheny County GO Series 2003C-56 MB (AAA, Aaa) 4.00% 10/01/05 $ 6,595 $6,595,000 Allegheny County IDRB (Carnegie Museums Pittsburgh Project) Series 2005 DN (Citizens Bank LOC) (Aaa, VMIG-1) 2.75%(b) 10/07/05 4,000 4,000,000 Allegheny County IDRB (Commonwealth Development Parkway Project) Series 1994A DN (National City Bank N.A. LOC) (Aa3) 2.79%(b)(c) 10/07/05 2,400 2,400,000 Allegheny County IDRB (UPMC Health System Project) Series 2002C DN (Comerica Bank N.A. LOC) (A-1) 2.77%(b) 10/07/05 1,700 1,700,000 Allentown Package Authority RB Series 2004 MB (FSA Insurance) (Aaa, AAA) 2.50% 10/01/05 280 280,000 Berks County IDRB (Backman Co. Project) Series 1994 AMT DN (M&T Bank Corp. LOC) (P-1) 2.81%(b) 10/07/05 1,615 1,615,000 Berks County IDRB (Beacon Container Corp. Project) Series 1997A AMT DN (Wachovia Bank N.A. LOC) (P-1) 2.90%(b) 10/07/05 605 605,000 Berks County IDRB (Tray Pak Co. Project) RB Series 2001A AMT DN (Wachovia Bank N.A. LOC) 2.90%(b) 10/07/05 2,885 2,885,000 Blair County IDRB Series 2003 AMT DN (Fulton Bank LOC) (A-1, VMIG-1) 2.95%(b) 10/07/05 2,035 2,035,000 Bucks County IDRB (LTL Color Compounders Project) Series 1999B DN (Wilmington Trust Co. LOC) 2.90%(b) 10/07/05 935 935,000 Cambria County IDA Resource Recovery RB (Cambria Cogen Co. Project) Series 1998A-2 AMT DN (Bayerische Landesbank Girozentrale LOC) (VMIG-1) 2.93%(b) 10/07/05 16,000 16,000,000 Carlisle Area School District GO Series 2004-G44 DN (MBIA Insurance, J.P. Morgan Chase Bank SBPA) (VMIG-1) 2.79%(b)(d) 10/07/05 2,030 2,030,000 Chester County Health & Education Facilities Retirement Community RB (Kendal Crosslands Community Project) Series 2003 DN (Allied Irish Bank PLC LOC) (A-1) 2.77%(b) 10/07/05 1,965 1,965,000 Chester County IDA Student Housing RB (University Student Housing Limited Project) Series 2003 DN (Royal Bank of Scotland PLC LOC) (VMIG-1) 2.80%(b) 10/07/05 8,150 8,150,000 Chester County IDRB (RV Industrial, Inc. Project) Series 2001AMT DN (M&T Bank Corp. LOC) (A-1) 2.90%(b) 10/07/05 3,850 3,850,000 Crawford County IDRB Series 2000 AMT DN (National City Bank N.A. LOC) 2.91%(b) 10/07/05 1,165 1,165,000 Cumberland County IDRB (Lawrence Schiff Silk Co. Project) Series 1998 AMT DN (Wachovia Bank N.A. LOC) 2.90%(b) 10/07/05 755 755,000 Dauphin County IDRB Series 2005 AMT DN (Citizens Bank LOC) (A-1+) 2.78%(b) 10/07/05 4,000 4,000,000 Delaware County IDA Airport Facilites RB (United Parcel Service Project) Series 1985 DN (A-1+, Aaa) 2.87%(b) 10/03/05 3,415 3,415,000 Delaware Valley Regional Finance Authority Local Government RB Series 1985B DN (National Australia Bank LOC) (A-2, VMIG-1) 2.75%(b) 10/07/05 1,300 1,300,000 Delaware Valley Regional Finance Authority Local Government RB Series 2002 DN (Merrill Lynch & Co. SPBA) (A-1+) 2.85%(b)(d) 10/07/05 4,995 4,995,000 East Hempfield Township IDRB (Herley Industrial, Inc. Project) Series 2001 AMT DN (M&T Bank Corp. LOC) (A-1) 2.90%(b) 10/07/05 2,700 2,700,000 Erie County IDRB (American Turned Products Project) Series 1997 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 1,305 1,305,000 See accompanying notes to financial statements 32
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Pennsylvania (Continued) Erie County IDRB (Reed Manufacturing Project) Series 1997 AMT DN (National City Bank N.A. LOC) 2.96%(b) 10/07/05 $ 200 $ 200,000 Erie County Water Authority RB Series 2005 DN (FSA Insurance, J.P. Morgan Chase Bank LOC) (A-1+, Aaa) 2.76%(b) 10/07/05 600 600,000 Fayette County IDRB (Dynamic Material Corp. Project) Series 1998 AMT DN (KeyBank N.A. LOC) 2.89%(b) 10/07/05 1,765 1,765,000 Franklin County IDRB (Chambersburg Hospital Project) Series 2000 DN (AMBAC Insurance, Wachovia Bank N.A. SBPA) (A-1) 2.85%(b) 10/07/05 2,105 2,105,000 Franklin County IDRB (Menno Haven Project) Series 2001 DN (Radian Insurance, Fleet National Bank SBPA) (A-1+) 2.83%(b) 10/07/05 1,680 1,680,000 Franklin County IDRB (Precast System Project) Series 2001A AMT DN (M&T Bank Corp. LOC) (A-1) 2.90%(b) 10/07/05 1,760 1,760,000 Geisinger Authority Health System RB (Geisinger Health System Project) Series 2005B DN (A-1+, VMIG-1) 2.81%(b) 10/03/05 5,300 5,300,000 Greater Latrobe School Authority RB (School Building Project) Series 1998 MB 4.45% 04/01/06 200 202,261 Harrisburg Authority School RB (Harrisburg Project) Series 2003 DN (AMBAC Insurance, Westdeutsche Landesbank Girozentrale Liquidity Facility) (A-1+) 2.75%(b) 10/07/05 14,890 14,890,000 Horizon Hospital System Authority Health & Housing Facility RB (St. Paul Homes Project) Series 2002 DN (M&T Bank Corp. LOC) (VMIG-1) 2.80%(b) 10/07/05 7,455 7,455,000 Horizon Hospital System Authority Health & Housing Facility RB (St. Paul Homes Project) Series 2005 DN (M&T Bank Corp. LOC) (A-1+) 2.80%(b) 10/07/05 7,900 7,900,000 Lackawanna County IDRB (Herff Jones, Inc. Project) Series 2001 AMT DN (National City Bank N.A. LOC) 2.86%(b) 10/07/05 2,800 2,800,000 Lancaster County Hospital Authority RB (Health Center Luthercare Project) Series 1999 DN (M&T Bank Corp. LOC) (A-1) 2.80%(b) 10/07/05 5,085 5,085,000 Lancaster County Hospital Authority RB (Health Center-Masonic Homes Project) Series 1996 DN (Wachovia Bank LOC) (VMIG-1) 2.75%(b) 10/07/05 200 200,000 Lancaster County Hospital Authority RB (Lancaster General Hospital Project) Series 2002 DN (Fulton Bank LOC) (VMIG-1) 2.90%(b) 10/07/05 4,000 4,000,000 Lancaster County Hospital Authority RB (Landis Homes Retirement Community Project) Series 2002 DN (M&T Bank Corp. LOC) (A-1) 2.80%(b) 10/07/05 4,510 4,510,000 Lancaster County Hospital Authority RB (Quarryville Presbyterian Project) Series 2000 DN (M&T Bank Corp. LOC) (A-1) 2.77%(b) 10/07/05 3,175 3,175,000 Lancaster County IDRB (Clean Creek Partners Project) Series 2000 AMT DN (M&T Bank Corp. LOC) (A-1) 2.90%(b) 10/07/05 5,030 5,030,000 Lancaster County IDRB (D&P Skibo LLC Project) Series 2001 AMT DN (Wachovia Bank N.A. LOC) 2.90%(b) 10/07/05 1,705 1,705,000 Lancaster County IDRB (John F. Martin & Sons Project) Series 2001 AMT DN (Fulton Bank LOC) (A-2) 3.00%(b) 10/07/05 700 700,000 Lancaster County IDRB (Miller Building Systems Project) Series 1998 AMT DN (Bank One N.A. LOC) 2.93%(b) 10/07/05 1,500 1,500,000 Lancaster County IDRB (Oakfront LP Project) Series 2001 AMT DN (M&T Bank Corp. LOC) (A-2, P-1) 2.90%(b) 10/07/05 2,320 2,320,000 Lawrence County IDRB (L&N Metallurgical Products Project) Series 1996 AMT DN (Banque Nationale de Paribas LOC) 3.01%(b) 10/07/05 4,150 4,150,000 See accompanying notes to financial statements 33
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Pennsylvania (Continued) Lawrence County IDRB (Villa Maria Project) Series 2003 DN (Allied Irish Bank PLC LOC) (VMIG-1) 2.77%(b) 10/07/05 $5,345 $5,345,000 Lebanon County Health Facility RB Series 2000 DN (Northern Trust LOC) (A-1+) 2.80%(b) 10/07/05 3,000 3,000,000 Lebanon County Health Facility RB Series 2002 DN (Radian Insurance, Fleet National Bank SPBA) (A-1) 2.85%(b) 10/07/05 5,100 5,100,000 Mercer County Industrial Authority Economic Development RB (Solar Atmospheres Western Pennsylvania Project) Series 2001 DN (Fulton Bank LOC) (A-1) 2.77%(b) 10/07/05 2,460 2,460,000 Montgomery County Higher Education & Health Authority RB (Pennsylvania Higher Education & Health Loan Project) Series 1996A DN (M&T Bank Corp. LOC) (A-2) 2.74%(b) 10/07/05 2,890 2,890,000 Montgomery County IDRB (Apple Fresh Foods Ltd. Project) Series 1996 AMT DN (Wachovia Bank N.A. LOC) (VMIG-1) 2.85%(b) 10/07/05 695 695,000 Montgomery County IDRB (First Mortgage Meadowood Corp. Project) Series 2005 DN (Citizens Bank LOC) (VMIG-1) 2.78%(b) 10/07/05 4,650 4,650,000 Montgomery County IDRB (Laneko Engineering Co. Project) Series 1999A AMT DN (Wachovia Bank N.A. LOC) 2.85%(b) 10/07/05 930 930,000 North Pocono School District GO Series 2003-8 DN (ABN-AMRO Bank N.V. SBPA, FGIC Insurance) (F-1+) 2.77%(b)(d) 10/07/05 295 295,000 Northampton County IDRB (Bethlehem Contracting Project) Series 2001A AMT DN (M&T Bank Corp. LOC) (A-1) 2.90%(b) 10/07/05 3,440 3,440,000 Northampton County IDRB (Trent Family Partnership Project) Series 2002 AMT DN (Wachovia Bank N.A. LOC) 2.90%(b) 10/07/05 2,065 2,065,000 Pennsylvania Economic Development Financing Authority RB (Homewood Retirement Project) Series 1992E DN (M&T Bank Corp. LOC) (VMIG-1) 2.71%(b) 10/07/05 4,825 4,825,000 Pennsylvania Economic Development Financing Authority RB (Material Technology Project) Series 2000D AMT DN (Wachovia Bank N.A. LOC) 2.85%(b) 10/07/05 800 800,000 Pennsylvania Economic Development Financing Authority RB (Merrill Lynch P-Float Trust Receipts) Series 2004 PA-1282 DN (Merrill Lynch & Co. LOC) (A-1) 2.82%(b) 10/07/05 5,000 5,000,000 Pennsylvania Economic Development Financing Authority RB (Merrill Lynch P-Float Trust Receipts) Series 2005 PA-3114 AMT DN (Merrill Lynch Capital Services SBPA, Merrill Lynch & Co. Guaranty) 2.82%(b)(d) 10/07/05 4,015 4,015,000 Pennsylvania Economic Development Financing Authority RB (Sunoco, Inc. Project) Series 2004A AMT DN (Sunoco, Inc. Guaranty) (A-2, P-2) 2.88%(b) 10/07/05 4,700 4,700,000 Pennsylvania Energy Development Authority RB (B&W Ebensburg Project) Series 1988 DN (Swiss Bank LOC) (A-1+, VMIG-1) 2.78%(b) 10/07/05 1,000 1,000,000 Pennsylvania Higher Education Assistance Agency Student Loan RB Series 1988E AMT DN (Lloyds Bank LOC, Merrill Lynch Capital Services SBPA) (A-1+, VMIG-1) 2.79%(b) 10/07/05 300 300,000 Pennsylvania Higher Educational Facilities Authority RB (Drexel University Project) Series 2003B DN (Aaa, AA) 2.75%(b) 10/07/05 8,060 8,060,000 See accompanying notes to financial statements 34
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Pennsylvania (Continued) Pennsylvania Higher Educational Assistance Agency Student Loan RB Series 1988A AMT DN (Student Loan Marketing Association Guaranty, Westdeutsche Landesbank Gironzentrale SBPA) (A-1+, VMIG-1) 2.79%(b) 10/07/05 $ 1,300 $1,300,000 Pennsylvania Higher Educational Assistance Agency Student Loan RB Series 1994A AMT DN (Student Loan Marketing Association Guaranty) (A-1+, VMIG-1) 2.79%(b) 10/07/05 1,500 1,500,000 Pennsylvania Higher Educational Assistance Agency Student Loan RB Series 1997A AMT DN (Dexia Credit Local SBPA) (A-1+, VMIG-1) 2.81%(b) 10/07/05 2,300 2,300,000 Pennsylvania Higher Educational Assistance Agency Student Loan RB Series 2001A AMT DN (AMBAC Insurance) (A-1+, VMIG-1) 2.81%(b) 10/07/05 1,000 1,000,000 Pennsylvania Higher Educational Assistance Agency Student Loan RB Series 2002A AMT DN (FSA Insurance) (A-1+, VMIG-1) 2.81%(b) 10/07/05 19,000 19,000,000 Pennsylvania Higher Educational Facilities Authority RB (Association of Independent Colleges & Universities Project) Series 2004M-3 MB (M&T Bank Corp. LOC) (A-1) 2.00% 11/01/05 4,000 4,000,000 Pennsylvania Higher Educational Facilities Authority RB (Holy Family College Project) Series 2002A DN (Commerce Bank N.A. LOC) (VMIG-1) 2.78%(b) 10/07/05 1,025 1,025,000 Pennsylvania Higher Educational Facilities Authority RB (Lycoming College Project) Series 2003 MB (Allied Irish Bank PLC Liquidity Facility) (MIG-1) 2.00% 11/01/05 5,500 5,500,000 Pennsylvania Higher Educational Facilities Authority RB (Merrill Lynch P-Float Trust Receipts) Series 2004 MT-042 DN (Lloyds Bank LOC, Merrill Lynch Capital Services SBPA) (F-1+) 2.81%(b)(d) 10/07/05 18,300 18,300,000 Pennsylvania Higher Educational Facilities Authority RB (Merrill Lynch P-Float Trust Receipts) Series 2005-2498 DN (Merrill Lynch Guaranty) (F-1+) 2.85%(b)(d) 10/07/05 5,060 5,060,000 Pennsylvania Higher Educational Facilities Authority RB (Mount Aloysuis College Project) Series 2003 DN (Allied Irish Bank PLC LOC) (A-1) 2.78%(b) 10/07/05 2,500 2,500,000 Pennsylvania Higher Educational Facilities Authority RB (Mount Aloysuis College Project) Series 2003 MB (M&T Bank Corp. LOC) (MIG-1) 2.00% 11/01/05 1,300 1,300,000 Pennsylvania Higher Educational Facilities Authority RB (TOC Trust Receipts) Series 2005P DN (Goldman Sachs PLC Liquidity Facility) (A-1) 2.78%(b)(d) 10/07/05 2,500 2,500,000 Pennsylvania Higher Educational Facilities Authority RB Series 1998 DN (Banque Nationale de Paribas LOC) (VMIG-1) 2.82%(b) 10/07/05 2,900 2,900,000 Pennsylvania Housing Finance Agency Single Family Mortgage RB (Landesbank Hessen P-Float Trust Receipts) Series 2004-83B AMT DN (Landesbank Hessen SBPA) (A-1+, VMIG-1) 2.83%(b) 10/07/05 12,700 12,700,000 Pennsylvania Housing Finance Agency Single Family Mortgage RB (Landesbank Hessen P-Float Trust Receipts) Series 2004-85C AMT DN (Landesbank Hessen SBPA) (A-1+, VMIG-1) 2.83%(b) 10/07/05 10,000 10,000,000 Pennsylvania Housing Finance Agency Single Family Mortgage RB Series 2005-87C AMT DN (Depfa Bank PLC SBPA) (A-1+, VMIG-1) 2.83%(b) 10/07/05 22,300 22,300,000 Pennsylvania Housing Financing Agency RB Series 2005 AMT DN (Depfa Bank SBPA) (VMIG-1) 2.83%(b) 10/07/05 15,900 15,900,000 Pennsylvania State GO Second Series 2003 DN (Wachovia Bank N.A. LOC) (VMIG-1) 2.77%(b)(d) 10/07/05 2,955 2,955,000 Pennsylvania State Turnpike Commission RB (ABN-AMRO Munitops Trust Certificates) Series 2004-9 MB (AAA, Aaa) 2.77%(d) 10/05/05 13,435 13,435,000 Philadelphia Airport RB (Merrill Lynch P-Float Trust Receipts) Series 2005-3077 AMT DN (MBIA Insurance, Merrill Lynch Capital Services SBPA) 2.83%(b)(d) 10/07/05 1,000 1,000,000 See accompanying notes to financial statements 35
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Pennsylvania (Continued) Philadelphia Authority IDRB (Airport Project) Series 1998P-1 AMT DN (FGIC Insurance, Bank of America N.A. SBPA) 2.90%(b)(d) 10/07/05 $ 5,000 $5,000,000 Philadelphia Authority IDRB (Airport Project) Series 2005C AMT DN (MBIA Insurance, JP Morgan Chase SBPA) (A-1+, VMIG-1) 2.83%(b) 10/07/05 9,000 9,000,000 Philadelphia Authority IDRB (Girard Estate Facility Leasing Project) Series 2001 DN (Morgan Guaranty Trust LOC) (A-1+) 2.76%(b) 10/07/05 2,900 2,900,000 Philadelphia Authority IDRB (Greater Philadelphia Health System Project) Series 2003 DN (Commerce Bank N.A. Liquidity Facility) (VMIG-1) 2.78%(b) 10/07/05 4,645 4,645,000 Philadelphia Authority IDRB (Inglis Housing Project) Series 1997 MB (Morgan Guaranty Trust LOC) (A-1+) 2.70% 01/03/06 2,400 2,400,000 Philadelphia Authority IDRB (Universal Community Homes Project) Series 2003 DN (Wachovia Bank N.A. LOC) 2.85%(b) 10/07/05 2,745 2,745,000 Philadelphia GO Series 2003A MB 4.00% 02/15/06 375 376,923 Philadelphia Hospital & Higher Education (Childrens Hospital Philadelphia Project) Series 2005-A DN (Fleet Bank LOC) (A-1+, VMIG-1) 2.81%(b) 10/03/05 1,000 1,000,000 Philadelphia IDRB (Gift of Life Donor Program Project) Series 2003 DN (Commerce Bank N.A. LOC) (A-1, VMIG-1) 2.78%(b) 10/07/05 1,900 1,900,000 Philadelphia Redevelopment Authority RB Series 2005 AMT DN (FGIC Insurance) (Deutsche Bank Liquidity Facility) (F1+) 2.80%(b)(d) 10/07/05 10,310 10,310,000 Philadelphia School District GO Series 1999 MB (MBIA Insurance) 5.25% 03/01/06 170 171,763 Philadelphia School District GO Series 2005 DN (AMBAC Insurance) 2.78%(b)(d) 10/07/05 5,305 5,305,000 Philadelphia Water RB (ABN-AMRO Munitops Trust Certificates) Series 2005-15 AMT MB (FSA Insurance, ABN-AMRO Bank N.V. SBPA) (F-1+) 2.85%(d) 12/08/05 7,000 7,000,000 Pittsburgh Water & Sewer Systems RB (Merrill Lynch P-Float Trust Receipts) Series 2005-71 AMT MB (Merrill Lynch Capital Services SBPA, Merrill Lynch & Co. Guaranty) 2.83%(b)(d) 10/07/05 5,725 5,725,000 Scranton Lackawanna Health & Welfare Authority RB (Wachovia Merlots Trust Receipts) Series 2002A-18 DN (Wachovia Bank N.A. LOC) (VMIG-1) 2.77%(b)(d) 10/07/05 2,550 2,550,000 South Allegheny County School District GO Series 2005A MB (FSA Insurance) (AAA) 3.00% 10/03/05 1,040 1,040,000 Southcentral General Authority RB (Homewood Hanover Project) Series 2003 DN (M&T Bank Corp. LOC) (A-1) 2.80%(b) 10/07/05 18,500 18,500,000 Southcentral General Authority RB (York Cerebral Palsy Home Project) Series 2000 DN (Fulton Bank LOC) (A-1) 2.90%(b) 10/07/05 3,600 3,600,000 Southcentral General Authority RB Series 2003 DN (AMBAC Insurance) (A-1) 2.80%(b) 10/07/05 8,000 8,000,000 Southeastern Pennsylvania Transportation Authority Municipal Securities Trust Certificates RB (Bear Stearns Municipal Trust Certificates) Series 2001-9016A DN (FGIC Insurance) (A-1) 2.78%(b)(d) 10/07/05 575 575,000 Southeastern Pennsylvania Transportation Authority Municipal Securities Trust Certificates RB (Bear Stearns Municipal Trust Certificates) Series 2001-9022 DN (FGIC Insurance) (A-1) 2.78%(b)(d) 10/07/05 100 100,000 State Public School Building Authority RB (Philadelphia School District Project) Series 2003-24 DN (FSA Insurance, ABN-AMRO Bank N.V. SBPA) (VMIG-1) 2.77%(b)(d) 10/07/05 2,145 2,145,000 See accompanying notes to financial statements 36
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Pennsylvania (Continued) State Public School Building Authority RB (Wachovia Merlots Trust Receipts) Series 2004A-1 DN (FSA Insurance, Wachovia Bank N.A. LOC) (VMIG-1) 2.77%(b)(d) 10/07/05 $ 3,630 $ 3,630,000 Union County Hospital Authority RB (Evangelical Community Hospital Project) Series 2001 MB (Fleet National Bank SPBA, Radian Insurance) (A-1) 2.45% 02/01/06 7,500 7,500,000 Union County IDRB (Playworld Systems, Inc. Project) Series 1999 AMT DN (Wachovia Bank N.A. LOC) 2.90%(b) 10/07/05 1,000 1,000,000 Union County IDRB (Stabler Cos., Inc. Project) Series 2001 AMT DN (M&T Bank Corp. LOC) (A-1) 2.90%(b) 10/07/05 7,205 7,205,000 Upper Merion Municipal Utility Authority RB Series 2003 DN (Commerce Bank N.A. LOC) (VMIG-1) 2.78%(b) 10/07/05 560 560,000 Upper St. Clair Township GO Series 2002 MB (FSA Insurance, ABN-AMRO Bank N.V. SBPA) (AAA, MIG-1) 2.87%(b)(d) 11/23/05 9,650 9,650,000 Venango County GO (Scrubgrass Project) Series 2005 TECP (Dexia Bank N.A. LOC) (A-1+, P-1) 2.80% 10/07/05 23,094 23,094,000 Venango County IDRB (Scrubgrass Project) AMT MB 2.80% 10/07/05 18,000 18,000,000 Westmoreland County IDRB (Industrial Development McCutcheon Enterprise Project) Series 1999 AMT DN (National City Bank N.A. LOC) 2.86%(b) 10/07/05 1,900 1,900,000 York County Hospital Authority RB (Homewood Retirement Centers of The United Church of Christ, Inc. Project) Series 1990 DN (M&T Bank Corp. LOC) (VMIG-1) 2.71%(b) 10/07/05 4,950 4,950,000 York County IDRB (Allied-Signal, Inc. Project) Series 1993 DN (FGIC Insurance) (A-1) 2.93%(b) 10/07/05 1,000 1,000,000 York County IDRB (Interstate Holdings Co. Project) Series 2003 AMT DN (Wachovia Bank N.A. Liquidity Facility) 2.90%(b) 10/07/05 1,335 1,335,000 York County IDRB (York Sheet Metal, Inc. Project) Series 1998 DN (Wachovia Bank N.A. LOC) 2.81%(b) 10/07/05 2,450 2,450,000 York County IDRB Series 2000 AMT DN (M&T Bank Corp. LOC) (A-2) 2.90%(b) 10/07/05 2,560 2,560,000 York General Authority RB (Strand Capitol Performing Arts Center Project) Series 2002 DN (M&T Bank Corp. LOC) (A-2) 2.83%(b) 10/07/05 3,800 3,800,000 ----------- 543,379,947 ----------- Puerto Rico - 0.3% Puerto Rico Public Financing Corp. RB (Morgan Stanley Trust Certificates) Series 2001-520 DN (MBIA Insurance, Morgan Stanley Dean Witter Liquidity Facility) (VMIG-1) 2.73%(b)(d) 10/07/05 1,500 1,500,000 ----------- TOTAL INVESTMENTS IN SECURITIES -- 101.5% (Cost $544,879,947(a)) 544,879,947 LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.5)% (8,205,132) ----------- NET ASSETS -- 100.0% (Applicable to 430,391,572 Institutional shares, 34,230,571 Service shares and 72,081,947 Investor A shares) $536,674,815 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($430,376,411/430,391,572) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($34,219,117/34,230,571) $ 1.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INVESTOR A SHARE ($72,079,287/72,081,947) $ 1.00 ======= See accompanying notes to financial statements 37
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA MUNICIPAL MONEY MARKET PORTFOLIO (Concluded) As of September 30, 2005 - ---------- (a) Aggregate cost for Federal income tax purposes. (b) Rates shown are the rates as of September 30, 2005 and maturities shown are the next interest readjustment date or the date the principal owed can be recovered through demand. (c) Illiquid security. As of September 30, 2005, the Portfolio held 0.5% of its net assets, with a current market value of $2,400,000 in these securities. (d) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. As of September 30, 2005, the fund held 20.1% of its net assets, with a current market value of $108,075,000, in securities restricted as to resale. See accompanying notes to financial statements 38
BlackRock Funds STATEMENT OF NET ASSETS VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS -- 99.4% Virginia -- 90.8% Alexandria IDRB (Association for Supervision & Curriculum Development Project) Series 1997 DN (Wachovia Bank N.A. LOC) (A-1) 2.75%(b) 10/07/05 $ 300 $ 300,000 Alexandria IDRB (YMCA of Billings Project) Series 1998 DN (M&T Bank Corp. LOC) (A-1) 2.74%(b) 10/07/05 1,000 1,000,000 Arlington County IDRB (Woodbury Park Project) Series 2005A DN (Federal Home Loan Mortgage Liquidity Facility) (AAA, VMIG-1) 2.75%(b) 10/07/05 700 700,000 Chesapeake Bay Bridge & Tunnel Commonwealth District RB (Wachovia Merlots Trust Receipts) Series 2003 DN (MBIA Insurance, Wachovia Bank N.A. Liquidity Facility) (VMIG-1) 2.77%(b)(c) 10/03/05 500 500,000 Chesterfield County IDRB (Merrill Lynch P-Float Trust Receipts) Series 2004 PT-2133 DN (Merrill Lynch & Co. Guaranty, Merrill Lynch Capital Services SBPA) (F-1+, AA-) 2.84%(b)(c) 10/07/05 1,250 1,250,000 Fairfax County Economic Development Authority RB (Citibank Trust Receipts) Series 2003-4024 DN (Citibank Liquidity Facility) (VMIG-1) 2.79%(b)(c) 10/07/05 700 700,000 Fairfax County GO Series 2005-1036 DN (Morgan Stanley Group Liquidity Facility) (AAA, F-1+) 2.78%(b)(c) 10/07/05 245 245,000 Fairfax County IDRB (Fairfax Hospital System Project) Series 1988B DN (Inova Health System Liquidity Facility) (A-1+, VMIG-1) 2.66%(b) 10/07/05 500 500,000 Fairfax County IDRB (Inova Health Systems Project) Series 2000 DN (Inova Health System Liquidity Facility) (A-1+, VMIG-1) 2.66%(b) 10/07/05 800 800,000 Harrisonburg Redevelopment & Housing Authority Lease Purchase RB Series 2001A DN (Societe Generale LOC) (A-1+) 2.78%(b) 10/07/05 1,300 1,300,000 Henrico County Economic Development Authority Residential Care Facility RB (Westminster Centerbury Project) Series 2003B DN (KBC Bank LOC) (VMIG-1) 2.75%(b) 10/07/05 100 100,000 Loudoun County IDRB (Howard Hughes Medical Institute Project) Series 2003D DN (A-1+, VMIG-1) 2.74%(b) 10/07/05 300 300,000 Loudoun County IDRB (Howard Hughes Medical Institute Project) Series 2003E DN (A-1+, VMIG-1) 2.82%(b) 10/03/05 400 400,000 Newport News IDRB Series 2004 DN (Bank of America N.A. LOC) (Aa1, VMIG-1) 2.75%(b) 10/07/05 1,050 1,050,000 Prince William County GO (Vepco Project) Series 2005 TECP (Dominion Resources Guaranty) (A-2, P-1) 2.53% 10/07/05 200 200,000 Richmond GO Series 1993A MB 5.30% 01/15/06 1,000 1,007,707 Richmond IDRB (Diocese of Virginia Church School Project) Series 2001 DN (SunTrust Bank LOC) (VMIG-1) 2.81%(b) 10/03/05 400 400,000 Tobacco Settlement Financing Corp. RB (Merrill Lynch P-Float Trust Receipts) Series 2005 PA-1303 DN (Merrill Lynch & Co. Guaranty, Merrill Lynch Capital Services SBPA) (F-1+) 2.83%(b)(c) 10/07/05 3,050 3,050,000 University of Virginia RB (Wachovia Merlots Trust Receipts) Series 2003B-31 DN (Wachovia Bank N.A. SBPA) (VMIG-1) 2.77%(b)(c) 10/07/05 900 900,000 Virginia Beach Development Authority IDRB (Ocean Ranch Motel Corp. Project) Series 1998 DN (Branch Banking & Trust Co. LOC) (VMIG-1) 2.77%(b) 10/07/05 800 800,000 Virginia College Building Authority RB Series 2003-379 DN (J.P. Morgan Chase Bank LOC) (A-1+) 2.79%(b)(c) 10/07/05 2,395 2,395,000 See accompanying notes to financial statements 39
BlackRock Funds STATEMENT OF NET ASSETS VIRGINIA MUNICIPAL MONEY MARKET PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value ------------ ----------- -------------- MUNICIPAL BONDS (Continued) Virginia (Continued) Virginia Public Building Authority RB Series 2004 ROCS-RR- II-6027 DN (Citibank Liquidity Facility) (A-1+, AA+) 2.79%(b)(c) 10/07/05 $1,195 $1,195,000 Virginia Public School Authority RB (Merrill Lynch P-Floats Trust Receipts) Series 2005-2746 (Merrill Lynch & Co. Guaranty, Merrill Lynch Captial Services SBPA) 2.77%(b)(c) 10/07/05 600 600,000 Virginia Resource Authority Clean Water State Revolving Fund RB (Merrill Lynch P-Float Trust Receipts) Series 2000 PA-790 DN (Merrill Lynch & Co. Guaranty, Merrill Lynch Captial Services SBPA) (A-1) 2.77%(b)(c) 10/07/05 505 505,000 Virginia State Public School Authority RB Series 2003 MB (AA+, Aa1) 4.00% 04/15/06 750 755,566 Winchester Authority Residential Care Facility IDRB (Westminster-Cantenbury Project) Series 2005B DN (Branch Banking & Trust LOC) (VMIG-1) 2.77%(b) 10/07/05 1,000 1,000,000 ---------- 21,953,273 ---------- Puerto Rico -- 5.4% Commonwealth of Puerto Rico Electric Power Authority RB (Goldman Sachs Trust Receipts) Series 2002-1 DN (MBIA Insurance, Bank of New York SBPA) (A-1+) 2.77%(b)(c) 10/07/05 800 800,000 Commonwealth of Puerto Rico Highway & Transportation Authority RB (Merrill Lynch P-Float Trust Receipts) Series 2002 PT-1052 DN (Merrill Lynch & Co. Guaranty, Merrill Lynch Capital Services SBPA) (A-1) 2.78%(b)(c) 10/07/05 500 500,000 ========== 1,300,000 ---------- Guam -- 3.2% Guam Government Ltd. GO Series 2001-A MB (FSA Insurance) (AAA, Aaa) 5.00% 12/01/05 775 778,111 ---------- TOTAL INVESTMENTS IN SECURITIES -- 99.4% (Cost $24,031,384(a)) 24,031,384 OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.6% 137,856 ---------- NET ASSETS -- 100.0% (Applicable to 24,170,014 Institutional shares) $24,169,240 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($24,169,240/24,170,014) $ 1.00 ======= - ---------- (a) Aggregate cost for Federal income tax purposes. (b) Rates shown are the rates as of September 30, 2005 and maturities shown are the next interest readjustment date or the date the principal owed can be recovered through demand. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. As of September 30, 2005, the fund held 52.3% of its net assets, with a current market value of $12,640,000, in securities restricted as to resale. See accompanying notes to financial statements 40
BlackRock Funds Key to Investment Abbreviations AMBAC ...........................American Municipal Bond Assurance Corp. AMT .............................................Alternative Minimum Tax BAN ..............................................Bond Anticipation Note CDC ...................................................CDC Funding Group COP .......................................Certificates of Participation DN .........................................................Demand Notes FGIC ...................................Financial Guaranty Insurance Co. FSA ........................................Financial Security Assurance GIC .....................................Guaranteed Investment Contracts GO ...................................................General Obligation IDA ....................................Industrial Development Authority IDRB ................................Industrial Development Revenue Bond LOC ....................................................Letter of Credit MB .......................................................Municipal Bond MBIA ...............................Municipal Bond Insurance Association PCRB .....................................Pollution Control Revenue Bond RB .........................................................Revenue Bond ROC ............................................Reset Option Certificate SBPA ...................................Stand-by Bond Purchase Agreement TAN ...............................................Tax Anticipation Note TECP ........................................Tax-Exempt Commercial Paper TOC ...........................................Tender Option Certificate TRAN ..................................Tax and Revenue Anticipation Note XLCA ...............................................XL Capital Assurance The ratings provided by the Fitch Investors Service, Moody's Investors Service, Inc. and Standard & Poor's Ratings Service of the investments in the various Portfolios are believed to be the most recent ratings available at September 30, 2005. The ratings have not been audited by the Independent Registered Public Accounting Firm and, therefore, are not covered by the Report of the Independent Registered Public Accounting Firm. 41
BlackRock Funds STATEMENTS OF OPERATIONS U.S. Treasury Municipal Money Market Money Market Money Market For the Year Ended September 30, 2005 Portfolio Portfolio Portfolio ---------------- --------------- --------------- Investment income: Interest ....................................... $ 40,371,174 $ 11,479,224 $ 7,032,790 ------------ ------------ ----------- Expenses: Investment advisory fee ........................ 6,353,854 1,957,165 1,483,174 Administration fee ............................. 1,101,251 369,383 280,155 Administration fee - class specific ............ 1,388,260 413,179 313,115 Custodian fee .................................. 145,293 55,182 45,453 Transfer agent fee ............................. 471,860 55,237 42,340 Transfer agent fee - class specific ............ 263,431 78,288 59,325 Shareholder servicing fees - class specific..... 2,375,419 636,404 554,473 Distribution fees - class specific ............. 692,827 38,650 138,774 Legal and audit fees ........................... 204,673 71,148 61,701 Printing fee ................................... 340,282 62,641 53,597 Registration fees and expenses ................. 72,227 46,522 54,907 Trustees' fees ................................. 50,952 14,641 11,269 Other .......................................... 78,269 38,178 21,370 ------------ ------------ ----------- Total expenses ................................ 13,538,598 3,836,618 3,119,653 Less investment advisory fees waived.......... (2,874,530) (959,206) (721,549) Less administration fees waived .............. -- -- -- Less administration fees waived - class specific .............................. (671,768) (266,759) (140,115) Less custodian fee waived .................... (7,193) (2,958) (3,140) Less transfer agent fee waived ............... (41,529) (6,338) (4,237) Less distribution fees waived - class specific .................................... (544,105) (38,650) (138,774) Less shareholder servicing fees waived - class specific ..................... (49,451) -- (332,197) ------------ ------------ ----------- Net expenses .................................. 9,350,022 2,562,707 1,779,641 ------------ ------------ ----------- Net investment income ........................... 31,021,152 8,916,517 5,253,149 ------------ ------------ ----------- Net realized gain (loss) on investments ......... (12,296) (13,138) 11,076 ------------ ------------ ----------- Net increase in net assets resulting from operations ................................ $ 31,008,856 $ 8,903,379 $ 5,264,225 ============ ============ =========== See accompanying notes to financial statements. 42
Mew Jersey North Carolina Ohio Pennsylvania Virginia Municipal Municipal Municipal Municipal Municipal Money Market Money Market Money Market Money Market Money Market Portfolio Portfolio Portfolio Portfolio Portfolio -------------- --------------- -------------- ---------------- ------------- Investment income: Interest ....................................... $ 3,230,298 $ 1,314,471 $ 3,280,326 $ 11,164,516 $ 425,200 ----------- ----------- ----------- ------------ --------- Expenses: Investment advisory fee ........................ 682,969 276,705 675,663 2,276,680 89,319 Administration fee ............................. 129,005 52,267 127,625 428,765 16,871 Administration fee - class specific ............ 144,182 58,416 142,640 480,630 18,856 Custodian fee .................................. 22,754 11,336 23,549 58,088 6,882 Transfer agent fee ............................. 23,052 9,507 20,160 73,324 4,713 Transfer agent fee - class specific ............ 27,319 11,074 27,027 91,067 3,572 Shareholder servicing fees - class specific..... 187,550 1,821 80,108 163,382 4 Distribution fees - class specific ............. 13,738 325 24,758 54,517 -- Legal and audit fees ........................... 36,204 40,873 36,302 84,862 18,784 Printing fee ................................... 22,905 7,725 18,578 90,325 2,941 Registration fees and expenses ................. 16,209 15,119 13,016 18,490 16,926 Trustees' fees ................................. 5,333 1,824 5,420 17,624 299 Other .......................................... 10,439 6,780 10,649 28,479 4,034 ----------- ----------- ----------- ------------ --------- Total expenses ................................ 1,321,659 493,772 1,205,495 3,866,233 183,201 Less investment advisory fees waived.......... (380,906) (247,044) (369,321) (1,032,835) (89,319) Less administration fees waived .............. -- -- -- -- (14,770) Less administration fees waived - class specific .............................. (100,118) (57,923) (114,196) (411,404) (18,856) Less custodian fee waived .................... (1,149) (883) (1,268) (3,009) (422) Less transfer agent fee waived ............... (2,217) (793) (1,928) (6,758) (283) Less distribution fees waived - class specific .................................... (13,738) (325) (24,758) (54,517) -- Less shareholder servicing fees waived - class specific ..................... -- -- -- -- -- ----------- ----------- ----------- ------------ --------- Net expenses .................................. 823,531 186,804 694,024 2,357,710 59,551 ----------- ----------- ----------- ------------ --------- Net investment income ........................... 2,406,767 1,127,667 2,586,302 8,806,806 365,649 ----------- ----------- ----------- ------------ --------- Net realized gain (loss) on investments ......... (2,025) 6,898 -- (33,844) (506) ----------- ----------- ----------- ------------ --------- Net increase in net assets resulting from operations ................................ $ 2,404,742 $ 1,134,565 $ 2,586,302 $ 8,772,962 $ 365,143 =========== =========== =========== ============ ========= 43
BlackRock Funds STATEMENTS OF CHANGES IN NET ASSETS Money Market Portfolio --------------------------------------- For the For the Year Year Ended Ended 9/30/05 9/30/04 ------------------- ------------------- Increase (decrease) in net assets: Operations: Net investment income ........................... $ 31,021,152 $ 16,426,664 Net realized gain (loss) on investments ......... (12,296) 76,821 -------------- --------------- Net increase in net assets resulting from operations ..................................... 31,008,856 16,503,485 -------------- --------------- Distributions to shareholders from: Net investment income: Institutional Class ............................. (11,776,659) (11,959,475) Service Class ................................... (7,897,918) (2,148,489) Hilliard Lyons Class ............................ (2,356,333) (553,341) Investor A Class ................................ (8,655,993) (1,750,399) Investor B Class ................................ (262,118) (13,456) Investor C Class ................................ (72,131) (1,504) -------------- --------------- Total distributions from net investment income ......................................... (31,021,152) (16,426,664) -------------- --------------- Capital share transactions ........................ 103,371,897 (1,597,395,056) -------------- --------------- Total increase (decrease) in net assets ......... 103,359,601 (1,597,318,235) Net assets: Beginning of year ............................... 1,456,377,991 3,053,696,226 -------------- --------------- End of year ..................................... $1,559,737,592 $ 1,456,377,991 ============== =============== End of period undistributed net investment income ......................................... $ 64,239 $ 64,239 U.S.Treasury Municipal Money Market Portfolio Money Market Portfolio ----------------------------------- ---------------------------------- For the For the For the For the Year Year Year Year Ended Ended Ended Ended 9/30/05 9/30/04 9/30/05 9/30/04 ----------------- ----------------- ---------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income ........................... $ 8,916,517 $ 3,056,516 $ 5,253,149 $ 3,446,121 Net realized gain (loss) on investments ......... (13,138) 8,597 11,076 2,605 ------------- ------------- ------------- ------------- Net increase in net assets resulting from operations ..................................... 8,903,379 3,065,113 5,264,225 3,448,726 ------------- ------------- ------------- ------------- Distributions to shareholders from: Net investment income: Institutional Class ............................. (3,930,861) (2,049,993) (1,830,876) (2,271,744) Service Class ................................... (4,276,660) (864,910) (1,193,977) (354,795) Hilliard Lyons Class ............................ -- -- (2,152,442) (791,645) Investor A Class ................................ (708,996) (141,613) (75,854) (27,937) Investor B Class ................................ -- -- -- -- Investor C Class ................................ -- -- -- -- ------------- ------------- ------------- ------------- Total distributions from net investment income ......................................... (8,916,517) (3,056,516) (5,253,149) (3,446,121) ------------- ------------- ------------- ------------- Capital share transactions ........................ 16,889,278 (242,262,681) (31,069,940) (347,358,162) ------------- ------------- ------------- ------------- Total increase (decrease) in net assets ......... 16,876,140 (242,254,084) (31,058,864) (347,355,557) Net assets: Beginning of year ............................... 437,206,163 679,460,247 331,350,078 678,705,635 ------------- ------------- ------------- ------------- End of year ..................................... $ 454,082,303 $ 437,206,163 $ 300,291,214 $ 331,350,078 ============= ============= ============= ============= End of period undistributed net investment income ......................................... $ 46,591 $ 46,591 $ -- $ -- See accompanying notes to financial statements 44
BlackRock Funds New Jersey Municipal North Carolina Municipal Ohio Municipal Money Market Portfolio Money Market Portfolio Money Market Portfolio ---------------------------- ----------------------------- ---------------------------- For the For the For the For the For the For the Year Year Year Year Year Year Ended Ended Ended Ended Ended Ended 9/30/05 9/30/04 9/30/05 9/30/04 9/30/05 9/30/04 ------------- ------------- ------------ --------------- ------------- ------------- Increase (decrease) in net assets: Operations: Net investment income ................. $ 2,406,767 $ 926,093 $ 1,127,667 $ 684,695 $ 2,586,302 $ 1,075,474 Net realized gain (loss) on investments .......................... (2,025) 6,081 6,898 (9,007) -- -- ------------- ------------- ------------ --------------- ------------- ------------- Net increase in net assets resulting from operations ...................... 2,404,742 932,174 1,134,565 675,688 2,586,302 1,075,474 ------------- ------------- ------------ --------------- ------------- ------------- Distributions to shareholders from: Net investment income: Institutional Class ................... (1,340,022) (589,129) (1,115,968) (681,816) (2,074,310) (861,610 Service Class ......................... (875,861) (274,543) (6,820) (1,083) (147,686) (92,021 Hilliard Lyons Class .................. -- -- -- -- -- -- Investor A Class ...................... (190,884) (62,421) (4,879) (1,796) (364,306) (121,843 Investor B Class ...................... -- -- -- -- -- -- Investor C Class ...................... -- -- -- -- -- -- ------------- ------------- ------------ --------------- ------------- ------------- Total distributions from net investment income .................... (2,406,767) (926,093) (1,127,667) (684,695) (2,586,302) (1,075,474 ------------- ------------- ------------ --------------- ------------- ------------- Capital share transactions .............. (4,098,458) (6,118,893) 4,608,534 (104,373,941) (49,696,441) 35,359,206 ------------- ------------- ------------ --------------- ------------- ------------- Total increase (decrease) in net assets ................................ (4,100,483) (6,112,812) 4,615,432 (104,382,948) (49,696,441) 35,359,206 Net assets: Beginning of year ..................... 153,250,227 159,363,039 58,646,750 163,029,698 169,510,644 134,151,438 ------------- ------------- ------------ --------------- ------------- ------------- End of year ........................... $ 149,149,744 $ 153,250,227 $ 63,262,182 $ 58,646,750 $ 119,814,203 $ 169,510,644 ============= ============= ============ =============== ============= ============= End of period undistributed net investment income .................... $ -- $ -- $ -- $ -- $ -- $ -- Pennsylvania Municipal Virginia Municipal Money Market Portfolio Money Market Portfolio ----------------------------------- --------------------------------- For the For the For the For the Year Year Year Year Ended Ended Ended Ended 9/30/05 9/30/04 9/30/05 9/30/04 ----------------- ----------------- ---------------- ---------------- Increase (decrease) in net assets: Operations: Net investment income ................. $ 8,806,806 $ 3,424,471 $ 365,649 $ 137,645 Net realized gain (loss) on investments .......................... (33,844) 34,005 (506) 584 ------------- ------------- ------------ ------------- Net increase in net assets resulting from operations ...................... 8,772,962 3,458,476 365,143 138,229 ------------- ------------- ------------ ------------- Distributions to shareholders from: Net investment income: Institutional Class ................... (7,394,998) (3,106,702) (365,617) (133,087) Service Class ......................... (518,169) (161,394) (32) (4,558) Hilliard Lyons Class .................. -- -- -- -- Investor A Class ...................... (893,639) (156,375) -- -- Investor B Class ...................... -- -- -- -- Investor C Class ...................... -- -- -- -- ------------- ------------- ------------ ------------- Total distributions from net investment income .................... (8,806,806) (3,424,471) (365,649) (137,645) ------------- ------------- ------------ ------------- Capital share transactions .............. 48,065,937 (5,693,646) 6,312,686 (45,117,405) ------------- ------------- ------------ ------------- Total increase (decrease) in net assets ................................ 48,032,093 (5,659,641) 6,312,180 (45,116,821) Net assets: Beginning of year ..................... 488,642,722 494,302,363 17,857,060 62,973,881 ------------- ------------- ------------ ------------- End of year ........................... $ 536,674,815 $ 488,642,722 $ 24,169,240 $ 17,857,060 ============= ============= ============ ============= End of period undistributed net investment income .................... $ -- $ -- $ -- $ -- 45
BlackRock Funds FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net asset Distributions asset value Net from net value beginning investment investment end of of period income income period =========================================================================== - ---------------------- Money Market Portfolio - ---------------------- Institutional Class 9/30/05 $ 1.00 $ 0.0233 $ (0.0233) $ 1.00 9/30/04 1.00 0.0083 (0.0083) 1.00 9/30/03 /11/ 1.00 0.0103 (0.0103) 1.00 9/30/02 /11/ 1.00 0.0186 (0.0186) 1.00 9/30/01 /11/ 1.00 0.0496 (0.0496) 1.00 Service Class 9/30/05 $ 1.00 $ 0.0203 $ (0.0203) $ 1.00 9/30/04 1.00 0.0054 (0.0054) 1.00 9/30/03 /11/ 1.00 0.0073 (0.0073) 1.00 9/30/02 /11/ 1.00 0.0156 (0.0156) 1.00 9/30/01 /11/ 1.00 0.0466 (0.0466) 1.00 Hilliard Lyons Class 9/30/05 $ 1.00 $ 0.0198 $ (0.0198) $ 1.00 9/30/04 1.00 0.0043 (0.0043) 1.00 9/30/03 /11/ 1.00 0.0056 (0.0056) 1.00 9/30/02 /11/ 1.00 0.0139 (0.0139) 1.00 9/30/01 /11/ 1.00 0.0450 (0.0450) 1.00 Investor A Class 9/30/05 $ 1.00 $ 0.0199 $ (0.0199) $ 1.00 9/30/04 1.00 0.0044 (0.0044) 1.00 9/30/03 /11/ 1.00 0.0056 (0.0056) 1.00 9/30/02 /11/ 1.00 0.0139 (0.0139) 1.00 9/30/01 /11/ 1.00 0.0449 (0.0449) 1.00 Investor B Class 9/30/05 $ 1.00 $ 0.0151 $ (0.0151) $ 1.00 9/30/04 1.00 0.0015 (0.0015) 1.00 9/30/03 /11/ 1.00 0.0014 (0.0014) 1.00 9/30/02 /11/ 1.00 0.0079 (0.0079) 1.00 9/30/01 /11/ 1.00 0.0389 (0.0389) 1.00 Investor C Class 9/30/05 $ 1.00 $ 0.0151 $ (0.0151) $ 1.00 9/30/04 1.00 0.0014 (0.0014) 1.00 9/30/03 /11/ 1.00 0.0014 (0.0014) 1.00 9/30/02 /11/ 1.00 0.0078 (0.0078) 1.00 9/30/01 /11/ 1.00 0.0389 (0.0389) 1.00 - ------------------------------------ U.S. Treasury Money Market Portfolio - ------------------------------------ Institutional Class 9/30/05 $ 1.00 $ 0.0221 $ (0.0221) $ 1.00 9/30/04 1.00 0.0072 (0.0072) 1.00 9/30/03 /11/ 1.00 0.0091 (0.0091) 1.00 9/30/02 /11/ 1.00 0.0166 (0.0166) 1.00 9/30/01 /11/ 1.00 0.0464 (0.0464) 1.00 Service Class 9/30/05 $ 1.00 $ 0.0190 $ (0.0190) $ 1.00 9/30/04 1.00 0.0042 (0.0042) 1.00 9/30/03 /11/ 1.00 0.0061 (0.0061) 1.00 9/30/02 /11/ 1.00 0.0136 (0.0136) 1.00 9/30/01 /11/ 1.00 0.0435 (0.0435) 1.00 See accompanying notes to financial statements. 46
BlackRock Funds Ratio of net Net Ratio of total investment income (Loss) assets Ratio of expenses to average Ratio of net to average end of net expenses to net assets investment income net assets Total period average net (excluding to average net (excluding return (000) assets waivers) assets waivers) ============================================================================================================ - ---------------------- Money Market Portfolio - ---------------------- Institutional Class 9/30/05 2.36% $ 574,473 0.42% 0.71% 2.30% 2.01% 9/30/04 0.84 593,380 0.42 0.63 0.78 0.57 9/30/03 /11/ 1.04 2,006,202 0.42 0.62 1.04 0.84 9/30/02 /11/ 1.87 2,462,579 0.42 0.61 1.86 1.67 9/30/01 /11/ 5.08 2,507,649 0.42 0.60 4.96 4.79 Service Class 9/30/05 2.05% $ 411,831 0.72% 0.96% 2.02% 1.78% 9/30/04 0.54 374,441 0.71 0.93 0.54 0.32 9/30/03 /11/ 0.74 431,854 0.72 0.94 0.74 0.53 9/30/02 /11/ 1.57 567,574 0.72 0.91 1.60 1.41 9/30/01 /11/ 4.77 853,306 0.72 0.90 4.66 4.49 Hilliard Lyons Class 9/30/05 2.00% $ 116,066 0.77% 1.07% 1.98% 1.68% 9/30/04 0.43 116,254 0.82 1.13 0.42 0.11 9/30/03 /11/ 0.57 148,277 0.89 1.10 0.56 0.34 9/30/02 /11/ 1.40 144,271 0.89 1.08 1.40 1.21 9/30/01 /11/ 4.59 163,056 0.89 1.07 4.49 4.31 Investor A Class 9/30/05 2.01% $ 433,609 0.76% 1.06% 2.04% 1.74% 9/30/04 0.44 362,495 0.82 1.13 0.43 0.12 9/30/03 /11/ 0.57 451,676 0.89 1.11 0.57 0.36 9/30/02 /11/ 1.39 539,268 0.89 1.08 1.38 1.19 9/30/01 /11/ 4.59 531,518 0.89 1.07 4.43 4.25 Investor B Class 9/30/05 1.52% $ 18,716 1.24% 1.74% 1.66% 1.16% 9/30/04 0.15 8,924 1.10 1.79 0.14 (0.55) 9/30/03 /11/ 0.14 13,490 1.34 1.86 0.15 (0.37) 9/30/02 /11/ 0.79 21,864 1.49 1.837 0.77 0.427 9/30/01 /11/ 3.96 15,853 1.49 1.827 3.64 3.317 Investor C Class 9/30/05 1.52% $ 5,043 1.24% 1.73% 1.79% 1.30% 9/30/04 0.15 884 1.10 1.79 0.14 (0.56) 9/30/03/11/ 0.14 2,197 1.35 1.86 0.15 (0.35) 9/30/02/11/ 0.79 7,873 1.49 1.839 0.79 0.459 9/30/01/11/ 3.96 9,429 1.49 1.829 3.68 3.359 - ------------------------------------ U.S. Treasury Money Market Portfolio - ------------------------------------ Institutional Class 9/30/05 2.23% $ 164,905 0.41% 0.73% 2.18% 1.86% 9/30/04 0.72 176,136 0.41 0.70 0.68 0.39 9/30/03 /11/ 0.92 379,240 0.41 0.70 0.93 0.64 9/30/02 /11/ 1.68 526,344 0.41 0.68 1.62 1.35 9/30/01 /11/ 4.74 380,200 0.41 0.68 4.61 4.34 Service Class 9/30/05 1.93% $ 257,187 0.71% 0.98% 1.99% 1.72% 9/30/04 0.42 219,788 0.71 0.99 0.41 0.13 9/30/03 /11/ 0.62 250,314 0.71 1.00 0.61 0.32 9/30/02 /11/ 1.37 265,841 0.71 0.98 1.39 1.11 9/30/01 /11/ 4.43 398,130 0.71 0.98 4.39 4.12 47
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net asset Distributions asset value Net from net value beginning investment investment end of of period income income period =============================================================================================== - ----------------------------------------------- U.S. Treasury Money Market Portfolio (Continued) - ----------------------------------------------- Investor A Class 9/30/05 $ 1.00 $ 0.0186 $ (0.0186) $ 1.00 9/30/04 1.00 0.0031 (0.0031) 1.00 9/30/03 /11/ 1.00 0.0044 (0.0044) 1.00 9/30/02 /11/ 1.00 0.0119 (0.0119) 1.00 9/30/01 /11/ 1.00 0.0417 (0.0417) 1.00 Investor C Class 1/22/02 /3/,/11/ through 2/6/02 $ 1.00 $ 0.0003 $ (0.0003) $ 1.00 - -------------------------------- Municipal Money Market Portfolio - -------------------------------- Institutional Class 9/30/05 $ 1.00 $ 0.0172 $ (0.0172) $ 1.00 9/30/04 1.00 0.0073 (0.0073) 1.00 9/30/03 /11/ 1.00 0.0092 (0.0092) 1.00 9/30/02 /11/ 1.00 0.0142 (0.0142) 1.00 9/30/01 /11/ 1.00 0.0315 (0.0315) 1.00 Service Class 9/30/05 $ 1.00 $ 0.0143 $ (0.0143) $ 1.00 9/30/04 1.00 0.0043 (0.0043) 1.00 9/30/03 /11/ 1.00 0.0062 (0.0062) 1.00 9/30/02 /11/ 1.00 0.0112 (0.0112) 1.00 9/30/01 /11/ 1.00 0.0285 (0.0285) 1.00 Hilliard Lyons Class 9/30/05 $ 1.00 $ 0.0163 $ (0.0163) $ 1.00 9/30/04 1.00 0.0056 (0.0056) 1.00 9/30/03 /11/ 1.00 0.0070 (0.0070) 1.00 9/30/02 /11/ 1.00 0.0120 (0.0120) 1.00 9/30/01 /11/ 1.00 0.0292 (0.0292) 1.00 Investor A Class 9/30/05 $ 1.00 $ 0.0136 $ (0.0136) $ 1.00 9/30/04 1.00 0.0042 (0.0042) 1.00 9/30/03 /11/ 1.00 0.0048 (0.0048) 1.00 9/30/02 /11/ 1.00 0.0095 (0.0095) 1.00 9/30/01 /11/ 1.00 0.0268 (0.0268) 1.00 - ------------------------------------------- New Jersey Municipal Money Market Portfolio - ------------------------------------------- Institutional Class 9/30/05 $ 1.00 $ 0.0175 $ (0.0175) $ 1.00 9/30/04 1.00 0.0074 (0.0074) 1.00 9/30/03 /11/ 1.00 0.0089 (0.0089) 1.00 9/30/02 /11/ 1.00 0.0134 (0.0134) 1.00 9/30/01 /11/ 1.00 0.0305 (0.0305) 1.00 Service Class 9/30/05 $ 1.00 $ 0.0145 $ (0.0145) $ 1.00 9/30/04 1.00 0.0044 (0.0044) 1.00 9/30/03 /11/ 1.00 0.0059 (0.0059) 1.00 9/30/02 /11/ 1.00 0.0104 (0.0104) 1.00 9/30/01 /11/ 1.00 0.0275 (0.0275) 1.00 See accompanying notes to financial statements. 48
BlackRock Funds Ratio of net Net Ratio of total investment income (Loss) assets Ratio of expenses to average Ratio of net to average end of net expenses to net assets investment income net assets Total period average net (excluding to average net (excluding return (000) assets waivers) assets waivers) ======================================================================================================== - ----------------------------------------------- U.S. Treasury Money Market Portfolio (Continued) - ----------------------------------------------- Investor A Class 9/30/05 1.88% $ 31,990 0.75% 1.07% 1.83% 1.51% 9/30/04 0.31 41,283 0.82 1.19 0.31 (0.06) 9/30/03 /11/ 0.44 49,906 0.88 1.17 0.47 0.17 9/30/02 /11/ 1.20 68,299 0.88 1.16 1.15 0.87 9/30/01 /11/ 4.26 35,178 0.88 1.15 4.17 3.90 Investor C Class 1/22/02 /3/,/11/ through 2/6/02 0.03% $ --/6/ 1.48%/2/ 1.76%/2/ 0.72%/2/ 0.44%/2/ Institutional Class 9/30/05 1.74% $ 75,789 0.42% 0.74% 1.69% 1.37% 9/30/04 0.73 126,534 0.42 0.71 0.69 0.41 9/30/03 /11/ 0.92 437,613 0.42 0.71 0.92 0.64 9/30/02 /11/ 1.43 428,743 0.42 0.70 1.41 1.13 9/30/01 /11/ 3.19 491,052 0.42 0.69 3.11 2.83 Service Class 9/30/05 1.44% $ 93,844 0.72% 0.99% 1.45% 1.18% 9/30/04 0.43 70,344 0.72 1.00 0.42 0.14 9/30/03 /11/ 0.62 88,769 0.72 1.01 0.63 0.34 9/30/02 /11/ 1.12 104,474 0.72 1.00 1.13 0.85 9/30/01 /11/ 2.88 138,402 0.72 0.99 2.82 2.54 Hilliard Lyons Class 9/30/05 1.64% $ 126,397 0.52% 1.09% 1.62% 1.05% 9/30/04 0.57 127,151 0.59 1.13 0.56 0.02 9/30/03 /11/ 0.70 143,305 0.64 0.93 0.70 0.41 9/30/02 /11/ 1.20 147,755 0.64 0.92 1.17 0.89 9/30/01 /11/ 2.96 101,506 0.64 0.94 2.92 2.63 Investor A Class 9/30/05 1.37% $ 4,262 0.79% 1.11% 1.29% 0.97% 9/30/04 0.43 7,322 0.72 1.19 0.42 (0.05) 9/30/03 /11/ 0.49 9,019 0.85 1.18 0.47 0.15 9/30/02 /11/ 0.95 6,587 0.89 1.17 0.96 0.68 9/30/01 /11/ 2.71 9,013 0.89 1.16 2.65 2.37 - ------------------------------------------- New Jersey Municipal Money Market Portfolio - ------------------------------------------- Institutional Class 9/30/05 1.76% $ 74,329 0.39% 0.74% 1.73% 1.38% 9/30/04 0.74 80,530 0.39 0.72 0.74 0.40 9/30/03 /11/ 0.89 77,267 0.39 0.72 0.89 0.56 9/30/02 /11/ 1.35 86,573 0.39 0.71 1.34 1.02 9/30/01 /11/ 3.10 97,007 0.39 0.70 3.03 2.72 Service Class 9/30/05 1.46% $ 59,794 0.69% 0.99% 1.45% 1.15% 9/30/04 0.44 59,899 0.69 1.01 0.44 0.12 9/30/03 /11/ 0.59 64,313 0.69 1.02 0.59 0.26 9/30/02 /11/ 1.04 65,074 0.69 1.01 1.04 0.71 9/30/01 /11/ 2.79 60,296 0.69 1.00 2.75 2.44 49
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net asset Distributions asset value Net from net value beginning investment investment end of of period income income period ========================================================================================= - ------------------------------------------------------- New Jersey Municipal Money Market Portfolio (Continued) - ------------------------------------------------------- Investor A Class 9/30/05 $ 1.00 $ 0.0138 $ (0.0138) $ 1.00 9/30/04 1.00 0.0044 (0.0044) 1.00 9/30/03 /11/ 1.00 0.0045 (0.0045) 1.00 9/30/02 /11/ 1.00 0.0087 (0.0087) 1.00 9/30/01 /11/ 1.00 0.0258 (0.0258) 1.00 - ----------------------------------------------- North Carolina Municipal Money Market Portfolio - ----------------------------------------------- Institutional Class 9/30/05 $ 1.00 $ 0.0185 $ (0.0185) $ 1.00 9/30/04 1.00 0.0084 (0.0084) 1.00 9/30/03 /11/ 1.00 0.0097 (0.0097) 1.00 9/30/02 /11/ 1.00 0.0134 (0.0134) 1.00 9/30/01 /11/ 1.00 0.0313 (0.0313) 1.00 Service Class 9/30/05 $ 1.00 $ 0.0155 $ (0.0155) $ 1.00 9/30/04 1.00 0.0054 (0.0054) 1.00 9/30/03 /11/ 1.00 0.0067 (0.0067) 1.00 9/30/02 /11/ 1.00 0.0104 (0.0104) 1.00 9/30/01 /11/ 1.00 0.0283 (0.0283) 1.00 Investor A Class 9/30/05 $ 1.00 $ 0.0151 $ (0.0151) $ 1.00 9/30/04 1.00 0.0054 (0.0054) 1.00 9/30/03 /11/ 1.00 0.0053 (0.0053) 1.00 9/30/02 /11/ 1.00 0.0082 (0.0082) 1.00 9/30/01 /11/ 1.00 0.0266 (0.0266) 1.00 Investor B Class 10/1/01 /11/ through 12/14/01 $ 1.00 $ 0.0012 $ (0.0012) $ 1.00 9/30/01 /11/ 1.00 0.0203 (0.0203) 1.00 - ------------------------------------- Ohio Municipal Money Market Portfolio - ------------------------------------- Institutional Class 9/30/05 $ 1.00 $ 0.0182 $ (0.0182) $ 1.00 9/30/04 1.00 0.0087 (0.0087) 1.00 9/30/03 /11/ 1.00 0.0105 (0.0105) 1.00 9/30/02 /11/ 1.00 0.0154 (0.0154) 1.00 9/30/01 /11/ 1.00 0.0331 (0.0331) 1.00 Service Class 9/30/05 $ 1.00 $ 0.0152 $ (0.0152) $ 1.00 9/30/04 1.00 0.0057 (0.0057) 1.00 9/30/03 /11/ 1.00 0.0075 (0.0075) 1.00 9/30/02 /11/ 1.00 0.0124 (0.0124) 1.00 9/30/01 /11/ 1.00 0.0301 (0.0301) 1.00 Investor A Class 9/30/05 $ 1.00 $ 0.0150 $ (0.0150) $ 1.00 9/30/04 1.00 0.0046 (0.0046) 1.00 9/30/03 /11/ 1.00 0.0058 (0.0058) 1.00 9/30/02 /11/ 1.00 0.0107 (0.0107) 1.00 9/30/01 /11/ 1.00 0.0284 (0.0284) 1.00 See accompanying notes to financial statements. 50
BlackRock Funds Ratio of net Net Ratio of total investment income (Loss) assets Ratio of expenses to average Ratio of net to average end of net expenses to net assets investment income net assets Total period average net (excluding to average net (excluding return (000) assets waivers) assets waivers) =================================================================================================================================== - ------------------------------------------------------- New Jersey Municipal Money Market Portfolio (Continued) - ------------------------------------------------------- Investor A Class 9/30/05 1.39% $ 15,027 0.75% 1.11% 1.40% 1.04% 9/30/04 0.44 12,821 0.69 1.21 0.43 (0.09) 9/30/03 /11/ 0.45 17,783 0.82 1.19 0.44 0.07 9/30/02 /11/ 0.87 14,244 0.86 1.18 0.87 0.54 9/30/01 /11/ 2.61 16,417 0.86 1.17 2.40 2.09 - ----------------------------------------------- North Carolina Municipal Money Market Portfolio - ----------------------------------------------- Institutional Class 9/30/05 1.87% $ 56,017 0.30% 0.80% 1.84% 1.34% 9/30/04 0.85 58,168 0.30 0.74 0.84 0.40 9/30/03 /11/ 0.97 162,465 0.30 0.74 0.96 0.53 9/30/02 /11/ 1.35 156,476 0.30 0.72 1.32 0.90 9/30/01 /11/ 3.18 115,139 0.30 0.70 3.10 2.70 Service Class 9/30/05 1.56% $ 6,923 0.60% 1.07% 1.69% 1.22% 9/30/04 0.54 160 0.60 1.03 0.55 0.11 9/30/03 /11/ 0.67 227 0.60 1.04 0.63 0.20 9/30/02 /11/ 1.05 205 0.60 1.02 1.14 0.71 9/30/01 /11/ 2.87 519 0.60 1.00 2.80 2.40 Investor A Class 9/30/05 1.52% $ 321 0.64% 1.15% 1.51% 1.00% 9/30/04 0.55 319 0.60 1.23 0.54 (0.09) 9/30/03 /11/ 0.53 338 0.74 1.21 0.53 0.06 9/30/02 /11/ 0.88 375 0.77 1.19 0.88 0.46 9/30/01 /11/ 2.70 415 0.77 1.17 2.52 2.12 Investor B Class 10/1/01 /11/ through 12/14/01 0.12% $ --/4/ 1.37%/2/ 1.79%/2/ 0.60%/2/ 0.18%/2/ 9/30/01 /11/ 2.05 6 1.37 1.77 2.02 1.62 - ------------------------------------- Ohio Municipal Money Market Portfolio - ------------------------------------- Institutional Class 9/30/05 1.83% $ 88,697 0.39% 0.73% 1.79% 1.45% 9/30/04 0.87 122,030 0.39 0.72 0.87 0.54 9/30/03 /11/ 1.06 94,936 0.39 0.72 1.05 0.71 9/30/02 /11/ 1.55 104,426 0.39 0.72 1.52 1.19 9/30/01 /11/ 3.36 77,620 0.39 0.71 3.31 2.98 Service Class 9/30/05 1.53% $ 10,224 0.69% 0.98% 1.50% 1.21% 9/30/04 0.57 15,311 0.69 1.01 0.56 0.24 9/30/03 /11/ 0.75 13,061 0.69 1.03 0.75 0.41 9/30/02 /11/ 1.25 11,511 0.69 1.02 1.19 0.87 9/30/01 /11/ 3.05 12,667 0.69 1.01 2.95 2.63 Investor A Class 9/30/05 1.51% $ 20,893 0.71% 1.06% 1.47% 1.12% 9/30/04 0.46 32,171 0.80 1.20 0.46 0.06 9/30/03 /11/ 0.58 26,154 0.86 1.19 0.59 0.25 9/30/02 /11/ 1.07 30,851 0.86 1.18 1.09 0.77 9/30/01 /11/ 2.88 44,050 0.86 1.18 2.84 2.51 51
BlackRock Funds FINANCIAL HIGHLIGHTS (Concluded) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net asset Distributions asset value Net from net value beginning investment investment end of of period income income period ============================================================================================ - --------------------------------------------- Pennsylvania Municipal Money Market Portfolio - --------------------------------------------- Institutional Class 9/30/05 $ 1.00 $ 0.0178 $ (0.0178) $ 1.00 9/30/04 1.00 0.0073 (0.0073) 1.00 9/30/03 /11/ 1.00 0.0093 (0.0093) 1.00 9/30/02 /11/ 1.00 0.0131 (0.0131) 1.00 9/30/01 /11/ 1.00 0.0299 (0.0299) 1.00 Service Class 9/30/05 $ 1.00 $ 0.0148 $ (0.0148) $ 1.00 9/30/04 1.00 0.0043 (0.0043) 1.00 9/30/03 /11/ 1.00 0.0063 (0.0063) 1.00 9/30/02 /11/ 1.00 0.0101 (0.0101) 1.00 9/30/01 /11/ 1.00 0.0269 (0.0269) 1.00 Investor A Class 9/30/05 $ 1.00 $ 0.0155 $ (0.0155) $ 1.00 9/30/04 1.00 0.0045 (0.0045) 1.00 9/30/03 /11/ 1.00 0.0049 (0.0049) 1.00 9/30/02 /11/ 1.00 0.0084 (0.0084) 1.00 9/30/01 /11/ 1.00 0.0252 (0.0252) 1.00 Investor Class B 12/12/01 /1/,/11/ through 4/9/02 $ 1.00 $ 0.0003 $ (0.0003) $ 1.00 - ----------------------------------------- Virginia Municipal Money Market Portfolio - ----------------------------------------- Institutional Class 9/30/05 $ 1.00 $ 0.0181 $ (0.0181) $ 1.00 9/30/04 1.00 0.0082 (0.0082) 1.00 9/30/03 /11/ 1.00 0.0094 (0.0094) 1.00 9/30/02 /11/ 1.00 0.0144 (0.0144) 1.00 9/30/01 /11/ 1.00 0.0323 (0.0323) 1.00 Service Class 05/13/05 through 06/27/05 /9/ $ 1.00 $ 0.0023 $ (0.0023) $ 1.00 10/01/03 through 10/07/03 /8/,/11/ 1.00 0.0001 (0.0001) 1.00 9/30/03 /11/ 1.00 0.0084 (0.0084) 1.00 9/30/02 /11/ 1.00 0.0124 (0.0124) 1.00 9/30/01 /11/ 1.00 0.0293 (0.0293) 1.00 Investor A Class 10/1/01 through 3/12/02 /11/ $ 1.00 $ 0.0051 $ (0.0051) $ 1.00 9/30/01 /11/ 1.00 0.0276 (0.0276) 1.00 /1/ Commencement of operations of share class. /2/ Annualized. /3/ Reissuance of shares. /4/ There were no Investor B shares outstanding as of September 30, 2002. /5/ There were no Investor A shares outstanding as of September 30, 2002. /6/ There were no Investor C shares outstanding as of September 30, 2002. See accompanying notes to financial statements. 52
BlackRock Funds Ratio of net Net Ratio of total investment income (Loss) assets Ratio of expenses to average Ratio of net to average end of net expenses to net assets investment income net assets Total period average net (excluding to average net (excluding return (000) assets waivers) assets waivers) ==================================================================================================================================== - --------------------------------------------- Pennsylvania Municipal Money Market Portfolio - --------------------------------------------- Institutional Class 9/30/05 1.79% $430,376 0.42% 0.72% 1.78% 1.48% 9/30/04 0.73 426,130 0.42 0.71 0.73 0.44 9/30/03 /11/ 0.93 416,412 0.42 0.71 0.93 0.64 9/30/02 /11/ 1.31 466,039 0.42 0.70 1.30 1.02 9/30/01 /11/ 3.03 459,885 0.42 0.69 2.97 2.70 Service Class 9/30/05 1.49% $ 34,219 0.72% 0.97% 1.47% 1.22% 9/30/04 0.43 32,866 0.72 0.99 0.43 0.15 9/30/03 /11/ 0.63 44,164 0.72 1.01 0.64 0.35 9/30/02 /11/ 1.01 54,574 0.72 1.01 1.01 0.73 9/30/01 /11/ 2.72 75,431 0.72 0.99 2.73 2.46 Investor A Class 9/30/05 1.56% $ 72,079 0.65% 0.96% 1.64% 1.33% 9/30/04 0.45 29,647 0.70 1.17 0.44 (0.03) 9/30/03 /11/ 0.49 33,726 0.87 1.18 0.51 0.19 9/30/02 /11/ 0.84 68,204 0.88 1.16 0.83 0.55 9/30/01 /11/ 2.54 75,332 0.89 1.16 2.46 2.19 Investor Class B 12/12/01 /1/,/11/ through 4/9/02 0.05% $ --/4/ 1.49%/2/ 1.76%/2/ 0.14%/2/ (0.13)%/2/ - ----------------------------------------- Virginia Municipal Money Market Portfolio - ----------------------------------------- Institutional Class 9/30/05 1.83% $ 24,169 0.30% 0.92% 1.84% 1.22% 9/30/04 0.82 17,857 0.30 0.89 0.83 0.23 9/30/03 /11/ 0.95 21,963 0.30 0.75 0.93 0.48 9/30/02 /11/ 1.45 19,808 0.30 0.75 1.50 1.06 9/30/01 /11/ 3.28 53,823 0.30 0.73 3.26 2.83 Service Class 05/13/05 through 06/27/05 /9/ 0.23%/10/ $ --/9/ 0.60%/2/ 1.18%/2/ 1.96%/2/ 1.38%/2/ 10/01/03 through 10/07/03 /8/,/11/ 0.01 --/8/ 0.40/2/ 1.06/2/ 0.71/2/ 0.04/2/ 9/30/03 /11/ 0.85 41,011 0.40 1.05 0.85 0.19 9/30/02 /11/ 1.25 44,143 0.40 1.00 1.19 0.60 9/30/01 /11/ 2.97 611 0.60 1.03 2.94 2.51 Investor A Class 10/1/01 through 3/12/02 /11/ 0.51% $ --/5/ 0.77%/2/ 1.20%/2/ 1.21%/2/ 0.77%/2/ 9/30/01 /11/ 2.80 3,008 0.77 1.20 2.72 2.28 /7/ Certain prior year amounts were reclassified to conform to current year presentation. /8/ There were no Service shares outstanding as of September 30, 2004. /9/ There were no Service shares outstanding as of September 30, 2005. /10/ Not Annualized. /11/ Audited by other auditors. 53
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (A) Organization BlackRock Funds(SM) (the "Fund") was organized on December 22, 1988, as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the "1940 Act"), as amended, as an open-end management investment company. The Fund currently has 50 registered portfolios, eight of which are included in these financial statements (the "Portfolios"). Each Portfolio is authorized to issue an unlimited number of shares with a par value of $0.001. Each portfolio of the Fund may offer as many as seven classes of shares. Shares of all classes of a Portfolio represent equal pro rata interests in such Portfolio, except that each class bears different expenses which reflect the difference in the range of services provided to them, mostly due to differences in distribution and service fees. As of September 30, 2005, no BlackRock Shares were outstanding. Under the Fund's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund. However, based on experience, the Fund considers the risk of loss from such claims to be remote. (B) Fund Reorganization On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. ("BlackRock"), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company ("SSRM"), the investment adviser to the former State Street Research mutual funds. On January 31, 2005, the Money Market Portfolio acquired all of the assets and certain stated liabilities of the State Street Research Money Market Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the State Street Research shareholders on January 25, 2005. Under the Agreement and Plan of Reorganization, 8,688,440 Class B and 154,741,254 Class E shares of the State Street Research Money Market Fund were exchanged for 8,688,440 and 154,741,254 Investor A Class shares of the BlackRock Money Market Portfolio, respectively; 15,158,957 Class B(1) shares of the State Street Research Money Market Fund were exchanged for 15,158,957 Investor B Class shares of the BlackRock Money Market Portfolio; 4,761,926 Class C shares of the State Street Research Money Market Fund were exchanged for 4,761,926 Investor C Class shares of the BlackRock Money Market Portfolio and 26,966,565 Class S shares of the State Street Research Money Market Fund were exchanged for 26,966,565 Institutional Class shares of the BlackRock Money Market Portfolio. The assets of the State Street Research Money Market Fund, which consisted of securities and related receivables less liabilities, were converted on a tax-free basis. Upon the reorganization of such funds on January 31, 2005, the value of the BlackRock Money Market Portfolio's net assets (including $210,334,574 in net assets of the State Street Research Money Market Fund) was $1,605,776,413 before the open of business. (C) Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed by the Portfolios in the preparation of their financial statements. Security Valuation -- Portfolio securities are valued under the amortized cost method which approximates current market value in accordance with Rule 2a-7 of the 1940 Act. Under this method, securities are valued at cost when purchased and thereafter, a constant proportionate amortization of any discount or premium is recorded until the maturity of the security. Regular review and monitoring of the valuation is performed in an attempt to avoid dilution or other unfair results to shareholders. The Fund seeks to maintain the net asset value per share of each Portfolio at $1.00, although there is no assurance that it will be able to do so on a continuing basis. Dividends to Shareholders -- Dividends from net investment income are declared daily and paid monthly. Net realized capital gains, if any, are distributed at least annually. Investment Transactions and Investment Income - Investment transactions are accounted for on the trade date. The cost of investments sold is determined by use of the specific identification method, generally first in first out, for both financial reporting and federal income tax purposes. Interest income is recorded on the accrual basis. Repurchase Agreements -- Money market instruments may be purchased from banks and non-bank dealers subject to the seller's agreement to repurchase them at an agreed upon date and price. Collateral for repurchase agreements may have longer maturities than the maximum permissible remaining maturity of portfolio investments. The seller is 54
BlackRock Funds required on a daily basis to maintain the value of the securities subject to the agreement at not less than the repurchase price. The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system or held in a separate account by the Portfolio's custodian or an authorized securities depository. Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles") requires the use of management estimates. Actual results could differ from these estimates. Other -- Expenses that are directly related to one of the Portfolios are charged directly to that Portfolio. Other operating expenses are prorated to the Portfolios on the basis of relative net assets. Class-specific expenses are borne by that class. Differences in net expense ratios between classes of a Portfolio are due to class-specific expenses, waivers and accrual adjustments. Income, other expenses and realized and unrealized gains and losses of a Portfolio are allocated to the respective class on the basis of the relative net assets each day. The following table provides a list of the Portfolios included in this report along with a summary of their respective class-specific fee arrangements as provided under the Fund's Amended and Restated Distribution and Service Plan (the "Plan"). Fees are expressed as a percentage of average daily net asset values of the respective classes. Class-Specific Fee Arrangement ------------------------------ Share Classes ------------------------------------------------------------------------ Institutional Service Hilliard Lyons ---------------------- ---------------------- ---------------------- Contractual Actual Contractual Actual Contractual Actual Portfolio Fees Fees (4) Fees (1) Fees (4) Fees (2) Fees (4) --------- ----------- -------- ----------- -------- ----------- -------- Money Market None None 0.25% 0.25% 0.35% 0.25% U.S. Treasury None None 0.25% 0.25% N/A N/A Municipal None None 0.25% 0.25% 0.35% None New Jersey Municipal None None 0.25% 0.25% N/A N/A North Carolina Municipal None None 0.25% 0.25% N/A N/A Ohio Municipal None None 0.25% 0.25% N/A N/A Pennsylvania Municipal None None 0.25% 0.25% N/A N/A Virginia Municipal None None 0.25% N/A N/A N/A Share Classes ------------------------------------------------------------------------ Investor A Investor B Investor C ---------------------- ---------------------- ---------------------- Contractual Actual Contractual Actual Contractual Actual Portfolio Fees (2) Fees (4) Fees (3) Fees (4) Fees (3) Fees (4) --------- ----------- -------- ----------- -------- ----------- -------- Money Market 0.35% 0.25% 1.00% 0.75% 1.00% 0.75% U.S. Treasury 0.35% 0.25% 1.00% N/A 1.00% N/A Municipal 0.35% 0.25% 1.00% N/A 1.00% N/A New Jersey Municipal 0.35% 0.25% 1.00% N/A 1.00% N/A North Carolina Municipal 0.35% 0.25% 1.00% N/A 1.00% N/A Ohio Municipal 0.35% 0.25% 1.00% N/A 1.00% N/A Pennsylvania Municipal 0.35% 0.25% 1.00% N/A 1.00% N/A Virginia Municipal 0.35% N/A 1.00% N/A 1.00% N/A (1) -- the maximum annual contractual fees are comprised of a 0.25% service fee. (2) -- the maximum annual contractual fees are comprised of a 0.10% distribution fee and a 0.25% service fee. (3) -- the maximum annual contractual fees are comprised of a 0.75% distribution fee and a 0.25% service fee. (4) -- the actual fees are as of September 30, 2005. Each of the Institutional, Service, Hilliard Lyons, Investor A, Investor B and Investor C share classes bear a Transfer Agent fee at an annual rate not to exceed 0.018% of the average daily net assets of such respective classes plus per account fees and disbursements. 55
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) For the year ended September 30, 2005, the following shows the various types of class-specific expenses borne directly by each class of each Portfolio and any associated waivers of those expenses. Administration Fees Share Classes -------------------------------------------------------------------------------- Hilliard Institutional Service Lyons Investor A Investor B Investor C --------------- ------------ ------------ ------------ ------------ ------------ Money Market ..................... $ 482,728 $ 369,860 $ 113,002 $ 403,832 $ 14,976 $ 3,862 U.S. Treasury .................... 171,513 204,949 -- 36,717 -- -- Municipal ........................ 103,103 78,176 126,235 5,601 -- -- New Jersey Municipal ............. 73,643 57,488 -- 13,051 -- -- North Carolina Municipal ......... 57,723 384 -- 309 -- -- Ohio Municipal ................... 109,815 9,305 -- 23,520 -- -- Pennsylvania Municipal ........... 395,355 33,484 -- 51,791 -- -- Virginia Municipal ............... 18,854 2 -- -- -- -- Administration Fees TOTAL ------------ Money Market ..................... $ 1,388,260 U.S. Treasury .................... 413,179 Municipal ........................ 313,115 New Jersey Municipal ............. 144,182 North Carolina Municipal ......... 58,416 Ohio Municipal ................... 142,640 Pennsylvania Municipal ........... 480,630 Virginia Municipal ............... 18,856* * Fund also had a fund level administration waiver of $14,770. Administration Fees Waived Share Classes ----------------------------------------------------------------------------- Hilliard Institutional Service Lyons Investor A Investor B Investor C Total --------------- ------------ --------- ------------ ------------ ------------ ------------ Money Market ..................... $ 482,728 $ 179,361 $-- $-- $ 8,229 $ 1,450 $ 671,768 U.S. Treasury .................... 171,513 95,246 -- -- -- -- 266,759 Municipal ........................ 103,103 37,012 -- -- -- -- 140,115 New Jersey Municipal ............. 73,643 26,475 -- -- -- -- 100,118 North Carolina Municipal ......... 57,722 201 -- -- -- -- 57,923 Ohio Municipal ................... 109,815 4,381 -- -- -- -- 114,196 Pennsylvania Municipal ........... 395,355 16,049 -- -- -- -- 411,404 Virginia Municipal ............... 18,854 2 -- -- -- -- 18,856 Transfer Agent Fees Share Classes ------------------------------------------------------------------------------ Hilliard Institutional Service Lyons Investor A Investor B Investor C Total --------------- ----------- ----------- ------------ ------------ ------------ ------------ Money Market ..................... $ 91,847 $ 70,079 $ 21,412 $ 76,524 $ 2,837 $ 732 $ 263,431 U.S. Treasury .................... 32,497 38,833 -- 6,958 -- -- 78,288 Municipal ........................ 19,535 14,811 23,918 1,061 -- -- 59,325 New Jersey Municipal ............. 13,954 10,892 -- 2,473 -- -- 27,319 North Carolina Municipal ......... 10,942 73 -- 59 -- -- 11,074 Ohio Municipal ................... 20,807 1,763 -- 4,457 -- -- 27,027 Pennsylvania Municipal ........... 74,910 6,344 -- 9,813 -- -- 91,067 Virginia Municipal ............... 3,572 -- -- -- -- -- 3,572 56
BlackRock Funds Shareholder Service Fees Share Classes ------------------------------------------------------------------ Hilliard Service Lyons Investor A Investor B Investor C Total ------------ ------------ -------------- ------------ ------------ -------------- Money Market ........................ $ 975,043 $ 305,685 $ 1,042,319 $ 42,329 $ 10,043 $ 2,375,419 U.S. Treasury ....................... 540,763 -- 95,641 -- -- 636,404 Municipal ........................... 206,036 332,197 16,240 -- -- 554,473 New Jersey Municipal ................ 150,488 -- 37,062 -- -- 187,550 North Carolina Municipal ............ 1,012 -- 809 -- -- 1,821 Ohio Municipal ...................... 24,488 -- 55,620 -- -- 80,108 Pennsylvania Municipal .............. 88,115 -- 75,267 -- -- 163,382 Virginia Municipal Money Market ..... 4 -- -- -- -- 4 Shareholder Service Fees Waived Share Classes ---------------------------------------------------- Hilliard Service Lyons Investor B Investor C Total --------- ---------- ------------ ------------ ----------- Money Market ................. $-- $ -- $ 39,334 $ 10,117 $ 49,451 Municipal .................... -- 332,197 -- -- 332,197 Distribution Fees Share Classes ------------------------------------------------------------- Hilliard Lyons Investor A Investor B Investor C Total ---------------- ------------ ------------ ------------ ------------ Money Market ..................... $ 118,954 $ 425,151 $ 118,229 $ 30,493 $ 692,827 U.S. Treasury .................... -- 38,650 -- -- 38,650 Municipal ........................ 132,879 5,895 -- -- 138,774 New Jersey Municipal ............. -- 13,738 -- -- 13,738 North Carolina Municipal ......... -- 325 -- -- 325 Ohio Municipal ................... -- 24,758 -- -- 24,758 Pennsylvania Municipal ........... -- 54,517 -- -- 54,517 Distribution Fees Waived Share Classes ------------------------------- Hilliard Lyons Investor A Total ---------------- ------------ ------------ Money Market ..................... $ 118,954 $ 425,151 $ 544,105 U.S. Treasury .................... -- 38,650 38,650 Municipal ........................ 132,879 5,895 138,774 New Jersey Municipal ............. -- 13,738 13,738 North Carolina Municipal ......... -- 325 325 Ohio Municipal ................... -- 24,758 24,758 Pennsylvania Municipal ........... -- 54,517 54,517 57
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) (D) Transactions with Affiliates and Related Parties Pursuant to an Investment Advisory Agreement, BlackRock serves as investment adviser to the Portfolios. BlackRock Institutional Management Corp. ("BIMC"), a wholly-owned subsidiary of BlackRock, serves as sub-adviser for all of the Portfolios. BlackRock, Inc. is an indirect majority-owned subsidiary of The PNC Financial Services Group, Inc. For its advisory services, BlackRock is entitled to receive fees, computed daily and payable monthly, at the following annual rates, based on each Portfolio's average daily net assets: 0.45% of the first $1 billion, 0.40% of the next $1 billion, 0.375% of the next $1 billion and 0.35% of net assets in excess of $3 billion. In the interest of limiting the expenses of the Portfolios, BlackRock and the Fund have entered into a series of annual expense limitation agreements. The agreements set a limit on certain operating expenses of each Portfolio for the next year and require BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit. These expense limits apply to the aggregate expenses incurred on a share class (excluding: interest, taxes, brokerage commissions and other extraordinary expenses). BlackRock has contractually agreed to waive or reimburse fees or expenses until February 1, 2006, in order to limit expenses as follows. This agreement is reviewed annually by the Fund's Board. Portfolio Share Classes -------------------------------------------------------------------------------- Institutional Service Hilliard Lyons Investor A Investor B Investor C --------------- --------- ---------------- ------------ ------------ ----------- Money Market ................. 0.42% 0.72% 0.91% 0.89% 1.49% 1.49% U.S. Treasury ................ 0.41% 0.71% NA 0.88% NA NA Municipal .................... 0.42% 0.72% 0.66% 0.89% NA NA New Jersey Municipal ......... 0.39% 0.69% NA 0.96% NA NA North Carolina Municipal ..... 0.30% 0.60% NA 0.87% NA NA Ohio Municipal ............... 0.39% 0.69% NA 0.96% NA NA Pennsylvania Municipal ....... 0.42% 0.72% NA 0.99% NA NA Virginia Municipal ........... 0.30% NA NA NA NA NA If in the following two years the operating expenses of a share class that previously received a waiver or reimbursement from BlackRock are less than the expense limit for that share class, the share class is required to repay BlackRock up to the amount of fees waived or expenses reimbursed under the agreement if: (1) the Portfolio of which the share class is a part has more than $50 million in assets, (2) BlackRock continues to be the Portfolio's investment adviser and (3) the Board of Trustees of the Fund has approved the payments to BlackRock at the previous quarterly meeting. At September 30, 2005, the amounts subject to possible future reimbursement under the expense limitation agreement are as follows: Expiring Expiring Expiring Total waivers subject January 31, 2006 January 31, 2007 January 31, 2008 to reimbursement ------------------ ------------------ ------------------ ---------------------- Money Market ................. $ 6,569,912 $ 3,692,376 $ 1,969,872 $ 12,232,160 U.S. Treasury ................ 2,107,024 1,317,236 786,143 4,210,403 Municipal .................... 1,946,590 1,151,500 423,264 3,521,354 New Jersey Municipal ......... 553,395 479,468 293,867 1,326,730 North Carolina Municipal ..... 645,013 261,156 200,227 1,106,396 Ohio Municipal ............... 492,327 431,627 276,709 1,200,663 Pennsylvania Municipal ....... 1,505,526 1,334,315 886,830 3,726,671 Virginia Municipal ........... 233,309 101,140 86,880 421,329 58
BlackRock Funds The following waivers previously incurred on the portfolios which were subject to recoupment by BlackRock expired on January 31, 2005, in the amounts of $7,697,755 for Money Market Portfolio, $2,639,070 for U.S. Treasury Money Market Portfolio, $2,114,002 for Municipal Money Market Portfolio, $582,682 for New Jersey Municipal Money Market Portfolio, $611,462 for North Carolina Municipal Money Market Portfolio, $506,362 for Ohio Municipal Money Market Portfolio, $1,845,254 for Pennsylvania Municipal Money Market Portfolio and $282,198 for Virginia Municipal Money Market Portfolio. BlackRock pays BIMC a fee for its subadvisory services. PFPC Inc. ("PFPC"), an indirect wholy-owned subsidiary of The PNC Financial Services Group, Inc., and BlackRock act as co-administrators for the Fund. For these services, the co-administrators receive a combined administration fee computed daily and payable monthly, based on a percentage of the average daily net assets of each Portfolio, at the following annual rates: 0.085% of the first $500 million, 0.075% of the next $500 million and 0.065% of assets in excess of $1 billion. In addition, each of the share classes is charged an administration fee based on the following percentage of average daily net assets of each respective class: 0.095% of the first $500 million, 0.085% of the next $500 million and 0.075% of assets in excess of $1 billion. In addition, PFPC and BlackRock may have, at their discretion, voluntarily waived all or any portion of their administration fees for any Portfolio or share class. PFPC Trust Co., an indirect subsidiary of The PNC Financial Services Group, Inc., serves as custodian for each of the Fund's Portfolios. The custodian has agreed to voluntarily waive a portion of their fees during the year. PFPC serves as transfer and dividend disbursing agent. The transfer agent has agreed to voluntarily waive a portion of their fees during the year. Pursuant to the Fund's Amended and Restated Distribution and Service Plan (the "Plan"), the Fund may pay BlackRock Distributors, Inc. (the "Distributor") and/or BlackRock or any other affiliate of PNC Financial Services Group, Inc. fees for distribution and sales support services. Currently, only Hilliard Lyons Shares, Investor A Shares, Investor B Shares and Investor C Shares bear the expense of distribution fees under the Plan. In addition, the Fund may pay brokers, dealers, financial institutions and industry professionals (including PNC Financial Services Group, Inc. and its affiliates) ("service organizations") fees for the provision of personal services to shareholders. BlackRock may receive some of the service fees paid by the Fund in return for providing services to shareholders. Currently, only Hilliard Lyons Shares, Investor A Shares, Investor B Shares, Investor C Shares and Service Shares bear the expense of service fees under the Plan. Since January 31, 2005, BlackRock has maintained a call center which is responsible for providing certain shareholder services to the BlackRock Funds, such as responding to shareholder inquiries and processing transactions based upon instructions from shareholders with respect to the subscription and redemption of fund shares. During the period February 1, 2005 through September 30, 2005, the following amounts have been accrued by each portfolio to reimburse BlackRock for costs incurred running the call center, which are a component of the Transfer Agent fees in the accompanying Statement of Operations. Hilliard Institutional Service Lyons Investor A Investor B Investor C Total --------------- ----------- --------- ------------ ------------ ------------ ------------ Money Market ..................... $ 37,670 $ 29,733 $ 9,196 $ 35,513 $ 1,529 $ 452 $ 114,093 U.S. Treasury .................... 14,852 17,710 -- 3,203 -- -- 35,765 Municipal ........................ 9,088 6,604 10,401 416 -- -- 26,509 New Jersey Municipal ............. 5,746 4,969 -- 1,079 -- -- 11,794 North Carolina Municipal ......... 4,627 38 -- 26 -- -- 4,691 Ohio Municipal ................... 8,380 573 -- 2,089 -- -- 11,042 Pennsylvania Municipal ........... 32,399 2,725 -- 5,079 -- -- 40,203 Virginia Municipal ............... 2,064 -- -- -- -- -- 2,064 59
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) As of the fiscal year ended September 30, 2005, affiliated payables were as follows: PFPC(1) BlackRock(2) PFPC(3) ------------ -------------- ------------ Money Market ..................... $ 118,017 $ 448,729 $ 208,485 U.S. Treasury .................... 34,443 120,300 63,758 Municipal ........................ 22,891 83,568 20,307 New Jersey Municipal ............. 11,307 33,081 15,108 North Carolina Municipal ......... 4,839 2,267 254 Ohio Municipal ................... 9,271 26,926 5,999 Pennsylvania Municipal ........... 37,644 136,687 21,417 Virginia Municipal ............... 2,192 761 -- (1) -- payables to PFPC are for Accounting, Administration, Custody and Transfer Agent services. (2) -- payables to BlackRock are for Advisory and Administration services and for amounts due BlackRock for costs incurred related to the BlackRock Funds Call Center. (3) -- payables to PNC Bank affiliates are for distribution and sales support services as described under the Plan. The total payable on behalf of the Fund, as of September 30, 2005, was $5,313,103, a portion of which is paid to service organizations, including other PNC Bank affiliates. In April of 2005, BlackRock determined that the Municipal Money Market Portfolio had purchased a security, the interest on which is subject to the Federal Alternative Minimum Tax ("AMT") (an "AMT Security"), in violation of the Portfolio's investment policy that limits the Portfolio investments in AMT securities to 20% of its nets assets. Once the issue was identified, the amount of AMT securities were decreased and the Portfolio did not incur a gain or loss. Due to the violation of investment policy, the Advisor reimbursed the Portfolio $3,098, which represents the additional tax liability that would be incurred by shareholders if all of the shareholders of the Portfolio were subject to the AMT. 60
BlackRock Funds (E) Capital Shares Because the Portfolios have each sold and redeemed shares only at a constant net asset value of $1.00 per share, the number of shares represented by such sales, acquisitions, reinvestments, and redemptions is the same as the dollar amounts shown on the next page for such transactions. Transactions in capital shares for each period were as follows: Money Market ------------------------------------------- For the Year For the Year Ended Ended 09/30/05 9/30/04 ------------------- --------------------- Shares issued from the acquisition:/(1)/ Institutional Class .................... $ 26,966,565 $ -- Investor A Class ....................... 163,429,694 -- Investor B Class ....................... 15,158,957 -- Investor C Class ....................... 4,761,926 -- Shares sold: Institutional Class .................... 1,471,011,786 2,276,620,055 Service Class .......................... 1,456,169,230 1,474,934,413 Hilliard Lyons Class ................... 114,338,508 173,608,883 Investor A Class ....................... 364,963,335 171,522,913 Investor B Class ....................... 9,040,751 3,083,308 Investor C Class ....................... 4,097,308 328,491 Shares issued in reinvestment of dividends: Institutional Class .................... 411,878 5,468 Service Class .......................... 1,285,575 356,508 Hilliard Lyons Class ................... 2,448,010 497,046 Investor A Class ....................... 8,575,542 1,548,464 Investor B Class ....................... 235,555 8,642 Investor C Class ....................... 64,255 940 Shares redeemed: Institutional Class .................... (1,517,293,240) (3,689,497,408) Service Class .......................... (1,420,060,947) (1,532,716,956) Hilliard Lyons Class ................... (116,973,705) (206,133,442) Investor A Class ....................... (465,850,554) (262,262,407) Investor B Class ....................... (14,643,659) (7,658,078) Investor C Class ....................... (4,764,873) (1,641,896) ---------------- ----------------- Net increase (decrease) ................... $ 103,371,897 $ (1,597,395,056) ================ ================= /(1)/ See Note (B). 61
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) U.S. Treasury ----------------------------------------- For the Year For the Year Ended Ended 9/30/05 9/30/04 ------------------- ------------------- Shares sold: Institutional Class .................... $ 581,006,132 $ 615,824,214 Service Class .......................... 1,246,791,596 1,039,846,394 Investor A Class ....................... 31,284,000 28,719,726 Shares issued in reinvestment of dividends: Institutional Class .................... 536 402 Service Class .......................... 210,607 18,679 Investor A Class ....................... 736,089 120,288 Shares redeemed: Institutional Class .................... (592,231,695) (818,934,544) Service Class .......................... (1,209,596,697) (1,070,394,239) Investor A Class ....................... (41,311,290) (37,463,601) ---------------- ---------------- Net increase (decrease) ................... $ 16,889,278 $ (242,262,681) ================ ================ Municipal ---------------------------------------- For the Year For the Year Ended Ended 9/30/05 9/30/04 ------------------ ------------------- Shares sold: Institutional Class .................... $ 285,681,384 $ 623,753,440 Service Class .......................... 228,128,150 233,032,663 Hilliard Lyons Class ................... 136,113,807 126,790,716 Investor A Class ....................... 32,576,400 18,673,688 Shares issued in reinvestment of dividends: Institutional Class .................... 8,419 2,237 Service Class .......................... 211,590 53,046 Hilliard Lyons Class ................... 2,251,776 742,597 Investor A Class ....................... 79,599 25,918 Shares redeemed: Institutional Class .................... (336,438,973) (934,868,983) Service Class .......................... (204,841,772) (251,500,050) Hilliard Lyons Class ................... (139,124,201) (143,666,837) Investor A Class ....................... (35,716,119) (20,396,597) -------------- --------------- Net decrease .............................. $ (31,069,940) $ (347,358,162) ============== =============== 62
BlackRock Funds New Jersey Municipal ----------------------------------- For the Year For the Year Ended Ended 9/30/05 9/30/04 ---------------- ---------------- Shares sold: Institutional Class .................... $ 227,139,327 $ 201,648,068 Service Class .......................... 60,335,438 20,828,471 Investor A Class ....................... 32,747,181 32,564,149 Shares issued in reinvestment of dividends: Institutional Class .................... 106,670 32,143 Service Class .......................... 52,789 13,401 Investor A Class ....................... 197,999 60,914 Shares redeemed: Institutional Class .................... (233,444,754) (198,420,615) Service Class .......................... (60,492,949) (25,258,071) Investor A Class ....................... (30,740,159) (37,587,353) -------------- -------------- Net decrease .............................. $ (4,098,458) $ (6,118,893) ============== ============== North Carolina Municipal -------------------------------------- For the Year For the Year Ended Ended 9/30/05 9/30/04 ---------------- ------------------- Shares sold: Institutional Class .................... $ 209,741,015 $ 202,122,387 Service Class .......................... 7,584,781 519,017 Investor A Class ....................... 42,000 42,000 Shares issued in reinvestment of dividends: Institutional Class .................... 613,029 206,053 Service Class .......................... -- 54 Investor A Class ....................... 5,082 1,717 Shares redeemed: Institutional Class .................... (212,511,399) (306,616,657) Service Class .......................... (821,749) (585,549) Investor A Class ....................... (44,225) (62,963) -------------- --------------- Net increase (decrease) ................... $ 4,608,534 $ (104,373,941) ============== =============== 63
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Ohio Municipal ------------------------------------- For the Year For the Year Ended Ended 9/30/05 9/30/04 ------------------ ---------------- Shares sold: Institutional Class .................... $ 416,216,719 $ 288,880,251 Service Class .......................... 102,881,674 157,732,223 Investor A Class ....................... 74,822,659 57,848,699 Shares issued in reinvestment of dividends: Institutional Class .................... 193,067 91,212 Service Class .......................... 34,216 44,984 Investor A Class ....................... 384,943 109,169 Shares redeemed: Institutional Class .................... (449,742,164) (261,878,328) Service Class .......................... (108,002,227) (155,527,630) Investor A Class ....................... (86,485,328) (51,941,374) -------------- -------------- Net increase (decrease) ................... $ (49,696,441) $ 35,359,206 ============== ============== Pennsylvania Municipal ----------------------------------- For the Year For the Year Ended Ended 9/30/05 9/30/04 ---------------- ---------------- Shares sold: Institutional Class .................... $ 691,010,747 $ 562,836,682 Service Class .......................... 82,803,397 59,624,658 Investor A Class ....................... 150,289,355 94,465,452 Shares issued in reinvestment of dividends: Institutional Class .................... 113,667 28,073 Service Class .......................... 183,050 43,501 Investor A Class ....................... 914,451 146,226 Shares redeemed: Institutional Class .................... (686,849,356) (553,173,570) Service Class .......................... (81,630,970) (70,969,774) Investor A Class ....................... (108,768,404) (98,694,894) -------------- -------------- Net increase (decrease) ................... $ 48,065,937 $ (5,693,646) ============== ============== Virginia Municipal ------------------------------------- For the Year For the Year Ended Ended 9/30/05 9/30/04 ---------------- ------------------ Shares sold: Institutional Class .................... $ 94,946,827 $ 71,096,927 Service Class .......................... 14,980 -- Shares issued in reinvestment of dividends: Institutional Class .................... 36,052 15,183 Shares redeemed: Institutional Class .................... (88,670,193) (75,219,028) Service Class .......................... (14,980) (41,010,487) ------------- -------------- Net increase (decrease) ................... $ 6,312,686 $ (45,117,405) ============= ============== 64
BlackRock Funds On September 30, 2005, four shareholders held approximately 78% of the outstanding shares of the Money Market Portfolio, four shareholders held approximately 88% of the outstanding shares of the U.S. Treasury Money Market Portfolio, four shareholders held approximately 92% of the outstanding shares of the Municipal Money Market Portfolio, four shareholders held approximately 93% of the outstanding shares of the New Jersey Municipal Money Market Portfolio, five shareholders held approximately 92% of the outstanding shares of the North Carolina Municipal Money Market Portfolio, two shareholders held approximately 81% of the outstanding shares of the Ohio Municipal Money Market Portfolio, two shareholders held approximately 86% of the outstanding shares of the Pennsylvania Municipal Money Market Portfolio and four shareholders held approximately 96% of the outstanding shares of the Virginia Municipal Money Market Portfolio. Some of the shareholders are comprised of omnibus accounts, which are held on behalf of several individual shareholders. (F) At September 30, 2005, net assets consisted of: New Jersey Money Market U.S. Treasury Municipal Municipal ------------------ ----------------- ---------------- ---------------- Capital paid-in ............. $ 1,559,870,253 $ 454,086,291 $ 300,288,514 $ 149,151,769 Undistributed net investment income .................... 64,239 46,591 -- -- Accumulated net realized gain (loss) on investment transactions .............. (196,900) (50,579) 2,700 (2,025) --------------- ------------- ------------- ------------- $ 1,559,737,592 $ 454,082,303 $ 300,291,214 $ 149,149,744 =============== ============= ============= ============= North Carolina Ohio Pennsylvania Virginia Municipal Municipal Municipal Municipal --------------- ---------------- ---------------- --------------- Capital paid-in .................. $ 63,265,075 $ 119,841,401 $ 536,708,659 $ 24,169,823 Accumulated net realized loss on investment transactions ......... (2,893) (27,198) (33,844) (583) ------------ ------------- ------------- ------------ $ 63,262,182 $ 119,814,203 $ 536,674,815 $ 24,169,240 ============ ============= ============= ============ (G) Federal Tax Information No provision is made for federal taxes as it is the Fund's intention to have each Portfolio continue to qualify for and elect the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended, and to make the requisite distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes. Short-term capital gain distributions that are reported in the Statements of Changes in Net Assets are reported as ordinary income for federal tax purposes. There were no short-term or long-term capital gain distributions for the fiscal year ended September 30, 2005. Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. Dividends from tax-free income and net investment income and distributions from net capital gains are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain, as appropriate, in the period that the differences arise. The following permanent differences as of September 30, 2005 attributable to capital loss carryover expiration and redemptions that represent capital gain distributions which for tax purposes, are not available to offset future income, were reclassified to the following accounts: 65
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Concluded) Decrease Increase (Decrease) Increase in Accumulated Net Undistributed Net Paid-in-Capital Realized Gain (Loss) Investment Income ----------------- ---------------------- -------------------- Money Market .............................. 1,987 (1,987) -- New Jersey Municipal Money Market ......... 4,786 (4,786) -- Pennsylvania Muni Money Market ............ 11,260 (11,260) -- The tax character of distributions paid during the fiscal years ended September 30, 2005 and September 30, 2004 were as follows: Tax-Free Ordinary Income Income ------------ --------------- Money Market 9/30/05 ............... $ -- $ 31,021,152 9/30/04 ............... -- 16,426,664 U.S. Treasury 9/30/05 ............... -- 8,916,517 9/30/04 ............... -- 3,056,516 Municipal Money 9/30/05 ............... 5,253,149 -- 9/30/04 ............... 3,446,121 -- New Jersey Municipal 9/30/05 ............... 2,406,767 -- 9/30/04 ............... 926,093 -- North Carolina Municipal 9/30/05 ............... 1,127,667 -- 9/30/04 ............... 684,695 -- Ohio Municipal 9/30/05 ............... 2,586,302 -- 9/30/04 ............... 1,075,474 -- Pennsylvania Municipal 9/30/05 ............... 8,806,806 -- 9/30/04 ............... 3,424,471 -- Virginia Municipal 9/30/05 ............... 365,649 -- 9/30/04 ............... 137,645 -- As of September 30, 2005, the components of distributable earnings/(accumulated losses) were as follows: Undistributed Undistributed Undistributed Accumulated Post- Tax-Free Ordinary Long-Term Capital October Income Income Capital Gain Losses Losses --------------- --------------- --------------- --------------- ----------- Money Market ..................... $ -- $ 2,224,886 $ -- $ (184,604) $ 12,296 U.S. Treasury .................... -- 1,095,900 -- (37,441) 13,138 Municipal ........................ 275,633 -- 2,700 -- -- New Jersey Municipal ............. 219,553 -- -- -- 2,025 North Carolina Municipal ......... 58,442 -- 4,732 -- -- Ohio Municipal ................... 177,421 -- -- (27,198) -- Pennsylvania Municipal ........... 781,629 -- -- -- 33,844 Virginia Municipal ............... 42,631 -- -- (77) 506 Post-October losses represent losses realized on investment transactions from November 1, 2004 through September 30, 2005 that, in accordance with Federal income tax regulations, the Portfolios may defer and treat as having arisen in the following fiscal year. For Federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. During the fiscal year ended September 30, 2005, $8,376 of Municipal Money Market's and $784 of North Carolina Municipal Money Market's capital loss carryforward were used to offset net taxable gains realized in the fiscal year September 30, 2005. 66
BlackRock Funds At September 30, 2005, the Portfolios had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates: Expiring September 30 -------------------------------------------------------------------------------------- 2006 2007 2008 2009 2010 2011 Total -------- --------- -------- ----------- --------- ----------- ------------ Money Market ............... $ 547 $ 268 $ -- $ 97,341 $ -- $ 86,448 $ 184,604 U.S. Treasury .............. -- -- -- 13,150 11,911 12,380 37,441 Ohio Municipal ............. 3,203 16,541 6,193 -- -- 1,261 27,198 Virginia Municipal ......... -- -- -- -- 77 -- 77 67
BlackRock Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of BlackRock Funds: We have audited the accompanying statements of net assets of the Money Market, U.S. Treasury Money Market, Municipal Money Market, New Jersey Municipal Money Market, North Carolina Municipal Money Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, and Virginia Municipal Money Market Portfolios [eight of the fifty portfolios constituting BlackRock Funds (the "Fund"), collectively the "Portfolios"], as of September 30, 2005 and the related statements of operations for the year then ended, the statements of changes in net assets and financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Portfolios for the periods ended September 30, 2003, September 30, 2002 and September 30, 2001 were audited by other auditors whose report, dated November 26, 2003, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2005, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Portfolios as of September 30, 2005, the results of their operations for the year then ended, the changes in their net assets and their financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Philadelphia, Pennsylvania November 25, 2005 68
BlackRock Funds FUND MANAGEMENT (Unaudited) Information pertaining to the Trustees and officers of the Fund is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (888) 825-2257. Institutional and service share class investors should call (800) 441-7450. - ----------------------------------------------------------------------------------------------------------------------------------- Number of Portfolios Total Fund Term of in Fund Other Compensation Position(s) Office/(1)/ Complex/(2) Directorships for the Name, Address and Held with and Length Principal Occupation(s) Overseen Held by Year Ending Age Fund of Time During Past Five Years by Trustee Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------------- Interested Trustees - ----------------------------------------------------------------------------------------------------------------------------------- Richard S. Davis/(3)/ Trustee Since 2005 Managing Director, BlackRock, Inc. 55 None N/A BlackRock, Inc. (since 2005); Chief Executive Officer, (includes 40 E. 52nd Street State Street Research & 50 New York, NY 10022 Management Company (2000-2005); Portfolios Age: 59 Chairman of the Board of Trustees, of the Fund State Street Research mutual funds and 5 ("SSR Funds") (2000-2005); Senior Portfolios Vice President, Metropolitan Life of Insurance Company (1999-2000); BlackRock Chairman, SSR Realty (2000-2004). Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------------- Laurence D. Fink/(4)/ Trustee Since 2000 Director, Chairman and Chief 55 Director, N/A BlackRock, Inc. Executive Officer of BlackRock, Inc. (includes BlackRock, 40 E. 52nd Street since its formation in 1998 and of 50 Inc. New York, NY 10022 BlackRock, Inc.'s predecessor Portfolios Age: 52 entities since 1988; Chairman of the of the Fund Management Committee; formerly, and 5 Managing Director of the First Portfolios Boston Corporation, Member of its of Management Committee, Co-head of BlackRock its Taxable Fixed Income Division Bond and Head of its Mortgage and Real Allocation Estate Products Group; Chairman of Target the Board of Nomura BlackRock Shares) Asset Management and several of BlackRock's alternative investment vehicles; Director of several of BlackRock's offshore funds; Co-Chairman of the Board of Trustees of Mount Sinai-NYU; Co-Chairman of the Board of Trustees of NYU Hospitals Center; member of the Board of Trustees of NYU; member of the Board of Executives of the New York Stock Exchange, and Trustee of the American Folk Art Museum. - ----------------------------------------------------------------------------------------------------------------------------------- 69
BlackRock funds FUND MANAGEMENT (Unaudited) (Continued) - ----------------------------------------------------------------------------------------------------------------------------------- Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) and Length Complex(2) Directorships for the Name, Address and Held With of Time Principal Occupation(s) Overseen Held by Year Ending Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------------- DISINTERESTED TRUSTEES - ----------------------------------------------------------------------------------------------------------------------------------- Bruce R. Bond Trustee Since 2005 Retired; Trustee and member 55 Director, Avaya, $ 84,600 c/o BlackRock Funds of the Governance Committee, (includes Inc.(information 100 Bellevue Parkway SSR Funds (1997-2005). 50 technology). Wilmington, DE 19809 Portfolios Age: 59 of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------------- Peter S. Drotch Trustee Since 2005 Retired; Trustee and member 55 Director, First $ 84,600 c/o BlackRock Funds of the Audit Committee, (includes Marblehead Corp. 100 Bellevue Parkway SSR Funds (2003-2005); Partner, 50 (student loan Wilmington, DE 19809 Pricewater- houseCoopers LLP Portfolios processing and Age: 64 (accounting firm) ( 1964-2000). of the Fund securitization); and 5 Trustee, University Portfolios of Connecticut; of Trustee, Huntington BlackRock Theatre. Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------------- Honorable Stuart E. Trustee and Since 2001 Partner, Covington & Burling 55 Director, Mirant $130,100 Eizenstat Covington Chairman of (law firm) (2001-Present); (includes Corporation; Advisory & Burling 1201 the Deputy Secretary of the 50 Board member, The Pennsylvania Avenue, Nominating Treasury (1999-2001); Under Portfolios Coca-Cola Company; NW Committee Secretary of State for of the Fund Advisory Board Washington, DC 20004 Economic, Business and and 5 member, Group Age: 62 Agricultural Affairs Portfolios Menatep; Advisory (1997-1999); Under Secretary of of Board member, BT Commerce for International BlackRock Americas. Trade (1996-1997); U.S. Bond Ambassador to the European Allocation Union (1993-1996); Chairman, Target International Board of Shares) Governors, Weizmann Institute of Science. - ----------------------------------------------------------------------------------------------------------------------------------- Robert M. Hernandez Trustee, Since 1996 Retired; Director (1991-2001), 55 Lead Director, ACE $140,100 c/o BlackRock Funds Vice Vice Chairman and Chief (includes Limited (insurance 100 Bellevue Parkway Chairman of Financial Officer (1994-2001), 50 company); Director Wilmington, DE 19809 the Board Executive Vice President- Portfolios and Chairman of the Age: 61 and Accounting and Finance and of the Fund Board, RTI Chairman of Chief Financial Officer and 5 International Metals, the Audit (1991-1994), USX Corporation Portfolios Inc.: Director, Committee (a diversified company of Eastman Chemical principally engaged in energy BlackRock Company. and steel businesses). Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------------- 70
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) - ----------------------------------------------------------------------------------------------------------------------------------- Number of Portfolios Total Fund Term of in Fund Other Compensation Position(s) Office/(1)/ Complex/(2)/ Directorships for the Name, Address and Held With and Length Principal Occupation(s) Overseen Held by Year Ending Age Fund of Time During Past Five Years by Trustee Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------------- Dr. Matina Horner Trustee and Since 2004 Retired; Executive Vice 55 Chair of the Board of $104,550 c/o BlackRock Funds Chairperson President of Teachers (includes the Massachusetts 100 Bellevue Parkway of the Insurance and Annuity 50 General Hospital Wilmington, DE 19809 Governance Association and College Portfolios Institute of Health Age: 66 Committee Retirement Equities Fund of the Fund Professions; Chair of (TIAA-CREF) (1989-2003). and 5 the Board of the Portfolios Greenwall Foundation; of Trustee, Century BlackRock Foundation (formerly Bond The Twentieth Century Allocation Fund); Director, N Target STAR (formerly called Shares) Boston Edison); Director, The Neiman Marcus Group; Honorary Trustee, Massachusetts General Hospital Corporation. - ----------------------------------------------------------------------------------------------------------------------------------- Toby Rosenblatt Trustee Since 2005 President, Founders 55 Director, A.P. Pharma, $ 84,600 c/o BlackRock Funds Investment Ltd. (private (includes Inc. 100 Bellevue Parkway investments) (since 1999); 50 Wilmington, DE 19809 Trustee, SSR Funds Portfolios Age: 67 (1993-2003). of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------------- David R. Wilmerding, Trustee and Since 1996 Chairman, Wilmerding & 56 None $135,100 Jr. c/o BlackRock Chairperson Associates, Inc. (investment (includes Funds 100 Bellevue of the advisers) (since 1989); 50 Parkway Wilmington, Board Chairman, Coho Partners, Portfolios DE 19809 Age: 70 Ltd. (investment advisers) of the Fund, (since 2003); Director, 5 Portfolios Beaver Management Corporation of (land management BlackRock corporation); Managing Bond General Partner, Chestnut Allocation Street Exchange Fund. Target Shares and 1 Portfolio of Chestnut Street Exchange Fund, which is managed by BlackRock Financial Management Inc. and BlackRock Institutional Management Corporation.) - ----------------------------------------------------------------------------------------------------------------------------------- 71
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) - ------------------------------------------------------------------------------------------------------------------------ Term of Total Fund Office/(5)/ Compensation Position(s) and Length for the Name, Address and Held With of Time Principal Occupation(s) Year Ending Age Fund Served During Past Five Years 9/30/05 - ------------------------------------------------------------------------------------------------------------------------ OFFICERS WHO ARE NOT TRUSTEES - ------------------------------------------------------------------------------------------------------------------------ Anne Ackerley Vice President Since 2003 Managing Director, BlackRock, Inc. (since May N/A BlackRock, Inc. (previously 2000); First Vice President and Operating 40 E. 52nd Street served as Officer, Mergers and Acquisitions Group New York, NY 10022 Assistant (1997-2000), First Vice President and Operating Age: 43 Secretary Officer, Public Finance Group (1995-1997), and since First Vice President, Emerging Markets Fixed 2000) Income Research (1994-1995), Merrill Lynch & Co. - ------------------------------------------------------------------------------------------------------------------------ Edward Baer Assistant Since 2005 Director and Senior Counsel of BlackRock, Inc. N/A BlackRock, Inc. Secretary (since 2004); Associate, Willkie Farr & 40 E. 52nd Street Gallagher LLP (2000-2004); Associate, Morgan New York, NY 10022 Lewis & Bockius LLP (1995-2000). Age: 37 - ------------------------------------------------------------------------------------------------------------------------ Bart Battista Chief Since 2004 Chief Compliance Officer and Anti-Money $368,547 BlackRock, Inc. Compliance Laundering Compliance Officer of BlackRock, 40 E. 52nd Street Officer and Inc. (since 2004); Managing Director (since New York, NY 10022 Anti-Money 2003), and Director (1998-2002) of BlackRock, Age: 46 Laundering Inc.; Compliance Officer at Moore Capital Compliance Management (1995-1998). Officer - ------------------------------------------------------------------------------------------------------------------------ Ellen L. Corson Assistant Since 1998 Senior Director and Vice President of Fund N/A PFPC Inc. Treasurer Accounting and Administration, PFPC Inc. 103 Bellevue Parkway (since 2003); Vice President and Director of Wilmington, DE 19809 Mutual Fund Accounting and Administration, Age: 41 PFPC Inc. (since November 1997); Assistant Vice President, PFPC Inc. (March 1997-November 1997); Senior Accounting Officer, PFPC Inc. (March 1993-March 1997). - ------------------------------------------------------------------------------------------------------------------------ Henry Gabbay President Since 2005 Managing Director, BlackRock, Inc. (since N/A BlackRock, Inc. 1989). 40 E. 52nd Street New York, NY 10022 Age: 57 - ------------------------------------------------------------------------------------------------------------------------ Brian P. Kindelan Secretary Since 1997 Managing Director and Senior Counsel (since N/A BlackRock Advisors, Inc. January 2005), Director and Senior Counsel 100 Bellevue Parkway (2001-2004) and Vice President and Senior Wilmington, DE 19809 Counsel (1998-2000), BlackRock Advisors, Age: 46 Inc.; Senior Counsel, PNC Bank Corp. May 1995-April 1998). - ------------------------------------------------------------------------------------------------------------------------ 72
BlackRock Funds FUND MANAGEMENT (Unaudited) (Concluded) - -------------------------------------------------------------------------------------------------------------- Term of Total Fund Office/(5)/ Compensation Position(s) and Length for the Name, Address and Held With of Time Principal Occupation(s) Year Ending Age Fund Served During Past Five Years 9/30/05 - -------------------------------------------------------------------------------------------------------------- William McGinley Treasurer Since 2005 Managing Director of BlackRock, Inc. (since N/A BlackRock, Inc. 2004); Partner, PricewaterhouseCoopers LLP 100 Bellevue Parkway ( 1990-2004). Wilmington, DE 19809 Age: 38 - -------------------------------------------------------------------------------------------------------------- Vincent Tritto Assistant Since 2003 Managing Director and Assistant Secretary N/A BlackRock, Inc. Secretary (since January 2005) and Director and Senior 40 E. 52nd Street Counsel (2002-2004) of BlackRock, Inc. New York, NY 10022 Executive Director (2000-2002) and Vice Age: 44 President (1998-2000), Morgan Stanley & Co. Incorporated and Morgan Stanley Asset Management Inc. and officer of various Morgan Stanley-sponsored investment vehicles: Counsel (1998); Associate (1988-1997), Rogers & Wells LLP, New York, NY. - -------------------------------------------------------------------------------------------------------------- (1) Each Trustee holds office for an indefinite term until the earlier of (1) the next meeting of shareholders at which Trustees are elected and until his or her successor is elected and qualified and (2) such time as such Trustee resigns or his or her term as a Trustee is terminated in accordance with the Fund's code of regulations and Declaration of Trust. (2) A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, that have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. (3) Mr. Davis is an interested person of the Fund due to his position at BlackRock, Inc. (4) Mr. Fink is an interested person of the Fund due to his position at BlackRock, Inc. (5) Each officer holds office for an indefinite term until the earlier of (1) the next meeting of trustees at which his or her successor is appointed and (2) such time as such officer resigns or his or her term as an officer is terminated in accordance with the Fund's code of regulations and Declaration of Trust. 73
BlackRock Funds ADDITIONAL INFORMATION (Unaudited) (A) A proxy statement was sent to shareholders of all portfolios of the Fund asking them to consider and vote upon the election of nine trustees to the Board of Trustees of the Fund (the "Board"). Five of the nine nominees were already serving as trustees of the Fund and the additional nominees had previously served as trustees of the State Street Research Funds. Due to the increased size and complexity of the Fund resulting from the reorganization with the State Street Research Funds, and an increase in the responsibilities of boards of trustees of funds generally, the Board believed it was in the best interest of the Fund to increase the size of the Board. In addition, shareholders of the Money Market Portfolio were asked to consider and vote upon a proposal to change the fundamental investment limitation on the concentration of investments in the banking industry to a concentration of investments in the financial services industry. The proposed change was designed to provide greater flexibility in managing the Money Market Portfolio. On April 29, 2005, the special meeting of shareholders was held, at which all of the nominees included in the proxy were duly elected to the Board and the change to the fundamental investment limitation as described above of the Money Market Portfolio was approved by its shareholders. The votes for the election of trustees were as follows: Affirmative Negative --------------- ---------- Bruce R. Bond .................... 3,006,153,475 9,427,152 Richard S. Davis ................. 3,006,504,966 9,075,661 Peter S. Drotch .................. 3,006,391,368 9,189,259 Stuart E. Eizenstat .............. 3,005,972,578 9,608,049 Laurence D. Fink ................. 3,006,652,923 8,927,704 Robert M. Hernandez .............. 3,006,095,141 9,485,487 Dr Matina Horner ................. 3,005,916,103 9,664,525 Toby Rosenblatt .................. 3,006,157,679 9,422,948 David R. Wilmerding, Jr. ......... 3,006,022,868 9,557,759 The votes for the change to the fundamental investment limitation on the concentration of investments for the Money Market Portfolio were as follows: For Against Abstain Broker non-votes ----------- ---------- --------- ---------------- 755,131,268 28,770,439 3,373,727 40,243,976 (B) PricewaterhouseCoopers LLP ("PwC"), the Fund's former independent registered public accounting firm, has been hired as an internal audit supporting service provider by The PNC Financial Services Group, Inc. ("PNC"), the parent company of the Fund's investment adviser and certain other service providers. In order to provide certain services to PNC and its affiliates which would have caused PwC to no longer be independent with respect to the Fund, PwC declined to stand for re-election as the independent registered public accounting firm of the Fund after the completion of the fiscal 2003 audit. The Fund's Audit Committee approved engaging Deloitte & Touche LLP as the independent registered public accounting firm to audit the Fund's financial statements for fiscal year 2006. A majority of the Fund's Board of Trustees, including a majority of the independent Trustees, approved the appointment of Deloitte & Touche LLP as the Fund's independent registered public accounting firm for the Fund's fiscal 2006 audit on November 29, 2005, subject to the right of the Fund, by a majority vote of the shareholders at any meeting called for that purpose, to terminate the appointment without penalty. 74
BlackRock Funds (C) As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and various information requests from the Securities and Exchange Commission in connection with ongoing industry-wide investigations of mutual fund matters. (D) As required by the Internal Revenue Code, the following BlackRock Portfolios for the year ended September 30, 2005 are designating long-term capital gain distributions as follows: Long-Term Capital Gain ------------ BlackRock North Carolina Municipal Market Portfolio $ 4,732 BlackRock Municipal Money Market Portfolio $ 2,700 75
BlackRock Funds Investment Adviser BlackRock Advisors, Inc. Wilmington, Delaware 19809 Sub-Adviser BlackRock Institutional Management Corporation Wilmington, Delaware 19809 Custodian PFPC Trust Co. Philadelphia, Pennsylvania 19153 Co-Administrator and Transfer Agent PFPC Inc. Wilmington, Delaware 19809 Distributor BlackRock Distributors, Inc. King of Prussia, Pennsylvania 19406 Co-Administrator BlackRock Advisors, Inc. Wilmington, Delaware 19809 Counsel Simpson Thacher & Bartlett LLP New York, New York 10017 Independent Registered Public Accounting Firm Deloitte & Touche LLP Philadelphia, Pennsylvania 19103 The Fund will mail only one copy of shareholder documents, including prospectuses, annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called "householding" and it is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact the Fund at (800) 441-7762. The Fund has delegated proxy voting responsibilities to BlackRock and its affiliates, subject to the general oversight of the Fund's Board of Trustees. A description of the policies and procedures that BlackRock and its affiliates use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling (800)441-7762, or on the website of the Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information on how proxies relating to the Fund's voting securities were voted (if any) by BlackRock during the most recent 12-month period ended June 30th is available, upon request and without charge, by calling (800) 441-7762 or on the website of the Commission at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings for the first and third quarters of its fiscal year with the Commission on Form N-Q. The Fund's Form N-Q is available on the Commission's website at http://www.sec.gov and may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's Form N-Q may also be obtained upon request, without charge, by calling (800) 441-7762.
BlackRock Funds FUND SPECTRUM BlackRock Funds is a leading mutual fund company currently managing approximately $26 billion in the following portfolios designed to fit a broad range of investment goals. Each portfolio is managed by recognized experts in equity, fixed income, international, and tax-free investing. STOCK PORTFOLIOS - -------------------------------------- Investment Trust Small Cap Core Equity Large Cap Value Equity Small Cap Growth Equity Large Cap Growth Equity Global Science & Technology Opportunities Dividend AchieversTM Global Resources Legacy All-Cap Global Resources Mid-Cap Value Equity Health Sciences Mid-Cap Growth Equity U.S. Opportunities Aurora International Opportunities Small/Mid-Cap Growth Index Equity Small Cap Value Equity STOCK & BOND PORTFOLIOS - -------------------------------------- Asset Allocation BOND PORTFOLIOS - -------------------------------------- Enhanced Income Government Income Low Duration Bond Inflation Protected Bond Intermediate Government Bond GNMA Intermediate Bond Managed Income Intermediate PLUS Bond International Bond Core Bond Total Return High Yield Bond Core PLUS Total Return TAX-FREE BOND PORTFOLIOS - -------------------------------------- UltraShort Municipal Ohio Tax-Free Income Tax-Free Income Delaware Tax-Free Income Pennsylvania Tax-Free Income Kentucky Tax-Free Income New Jersey Tax-Free Income MONEY MARKET PORTFOLIOS - -------------------------------------- Money Market North Carolina Municipal Money Market U.S. Treasury Money Market Ohio Municipal Money Market Municipal Money Market Pennsylvania Municipal Money Market New Jersey Municipal Money Market Virginia Municipal Money Market SHAREHOLDER PRIVILEGES Account Information Call us at 1-800-441-7762 to get information about your account balances, recent transactions and share prices. You can also reach us on the web at www.blackrock.com. Automatic Investment Plans Investor Class shareholders who want to invest regularly can arrange to have $50 or more automatically deducted from their checking or savings account and invested in any of the BlackRock portfolios. Systematic Withdrawal Plans Investor Class shareholders can establish a systematic withdrawal plan and receive periodic payments of $50 or more from their BlackRock portfolios, as long as their account is at least $10,000. Retirement Plans Shareholders may make investments in conjunction with Traditional, Rollover, Roth, Coverdell and Simple IRA's. Additional Information About the Blackrock Funds For additional reports or additional information, as well as more current information about portfolio holdings and characteristics, BlackRock Fund shareholders and prospective investors may call 1-800-441-7762.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by PNC Bank, National Association or any other bank and shares are not federally insured by, guaranteed by, obligations of or otherwise supported by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Investments in shares of the fund involve investment risks, including the possible loss of the principal amount invested. MM-ANN 11/05 BlackRock
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE BlackRock Funds Taxable Bond Portfolios Annual Report September 30, 2005 [GRAPHIC APPEARS HERE] NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE [LOGO OF BLACKROCK]
BlackRock Funds TAXABLE BOND PORTFOLIOS *Enhanced Income *Intermediate PLUS Bond *GNMA *Low Duration Bond *Core Bond Total Return *Managed Income *Intermediate Government Bond *Core PLUS Total Return *International Bond *Intermediate Bond *Government Income *High Yield Bond *Inflation Protected Bond TABLE of CONTENTS Shareholder Letter ............................................................1 Portfolio Summaries Enhanced Income ........................................................2-3 Low Duration Bond ......................................................4-5 Intermediate Government Bond ...........................................6-7 Intermediate Bond ......................................................8-9 Intermediate PLUS Bond ...............................................10-11 Core Bond Total Return ...............................................12-13 Core PLUS Total Return ...............................................14-15 Government Income ....................................................16-17 Inflation Protected Bond .............................................18-19 GNMA .................................................................20-21 Managed Income .......................................................22-23 International Bond ...................................................24-25 High Yield Bond ......................................................26-27 Note on Performance Information ........................................ 28 Statements of Net Assets/Schedule of Investments .........................29-109 Intermediate PLUS Bond Statement of Assets and Liabilities ..............60 Core Bond Total Return Statement of Assets and Liabilities ..............70 Core PLUS Total Return Statement of Assets and Liabilities ..............79 Government Income Statement of Assets and Liabilities ...................82 GNMA Statement of Assets and Liabilities ................................87 Managed Income Statement of Assets and Liabilities ......................94 High Yield Statement of Assets and Liabilities .........................109 Investment Abbreviations ...............................................110 Portfolio Financial Statements Statements of Operations ...........................................112-113 Statement of Cash Flows Enhanced Income ........................................................114 Low Duration ...........................................................115 Intermediate Government ................................................116 Statements of Changes in Net Assets .....................................118-121 Financial Highlights ....................................................122-139 Notes to Financial Statements ...........................................140-172 Report of Independent Registered Public Accounting Firm .....................173 Fund Management (Unaudited) .............................................174-178 Additional Information (Unaudited) ..........................................179 PRIVACY PRINCIPLES OF BLACKROCK FUNDS BlackRock Funds is committed to maintaining the privacy of its shareholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock Funds collects, how we protect that information, and why in certain cases we may share such information with select other parties. BlackRock Funds does not receive any nonpublic personal information relating to its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record owners of BlackRock Funds, BlackRock Funds receives nonpublic personal information on account applications or other forms. With respect to these shareholders, BlackRock Funds also has access to specific information regarding their transactions in BlackRock Funds. BlackRock Funds does not disclose any nonpublic personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders' accounts (for example, to a transfer agent). BlackRock Funds restricts access to nonpublic personal information about its shareholders to BlackRock employees with a legitimate business need for the information. BlackRock Funds maintains physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our shareholders.
BlackRock Funds September 30, 2005 Dear Shareholder: We are pleased to present the Annual Report of the BlackRock Funds' Taxable Bond Portfolios for the year ended September 30, 2005. On January 31, 2005, the State Street Research Funds reorganized into BlackRock Funds and we at BlackRock would like to welcome the former State Street Research Funds shareholders and our new shareholders to the BlackRock Funds Family. The Annual Report includes important information on each Portfolio: .. Portfolio Summary - discusses recent portfolio management activity and highlights total returns. .. Fund Profile - displays characteristics of each Portfolio's holdings as of September 30, 2005. .. Expense Example - discusses costs in a shareholder account and provides information for a shareholder to estimate his or her expenses by share class and to compare expenses of each share class to other funds. .. Statement of Net Assets (or Schedule of Investments/Statement of Assets and Liabilities) - lists portfolio holdings and includes each holding's market value and par amount/number of shares as of September 30, 2005. The Statement of Net Assets also contains the net asset value for each share class of a Portfolio. If your Portfolio has a Schedule of Investments, then the net asset value for each share class may be found in the Statement of Assets and Liabilities. .. Statement of Operations - displays the components of each Portfolio's investment income and provides a detailed look at each Portfolio's expenses. The Statement of Operations also lists the aggregate change in value of a Portfolio's securities due to market fluctuations and security sales. .. Statement of Cash Flows - explains the change during the period in cash and cash equivalents (including foreign currency). .. Statements of Changes in Net Assets - compares Portfolio information from the prior period to the current period. Specifically, it details shareholder distributions by share class, aggregate realized gains and losses, and the change in net assets from the beginning of the period to the end of the period. .. Financial Highlights - include each Portfolio's expense ratios, net asset values, total returns, distributions per share, and turnover ratios for the last five years or since inception. .. Notes to Financial Statements - provide additional information on fees, a summary of significant accounting policies, a list of affiliated transactions, and a summary of purchases and sales of securities. .. Fund Management Table - lists information regarding BlackRock Funds' Trustees and Officers. In addition to these items, a summary of shareholder privileges is listed on the inside back cover of the report. Shareholders can find information on this page describing how to access account balances, recent transactions, and share prices. It also includes a summary of the Fund's various investment plans. At BlackRock, we maintain an unwavering commitment to placing our clients first and we value the trust you have placed in us. We hope you find the report informative, and we thank you for making BlackRock part of your investment strategy. Should you have questions concerning this report, please contact your financial advisor or contact us at 1-800-441-7762 or visit us at www.blackrock.com/funds. Sincerely, /s/ Anne Ackerley - ----------------- Anne Ackerley Managing Director BlackRock Advisors, Inc. 1
Enhanced Income Portfolio Total Net Assets (9/30/05): $56.3 million Performance Benchmark: Citigroup 1 Year Treasury Index Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management by investing primarily in bonds diversified among several categories. The management team selects bonds from several sectors including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS"), corporate bonds and non-U.S. Government securities. The Portfolio may also invest in money market instruments. The Portfolio's dollar weighted effective duration will be between 0 and 18 months during normal market conditions. Individual investments will be restricted to those securities whose maximum effective duration at the time of purchase is less than 5 years. Recent Portfolio Management Activity: . The BlackRock, Institutional and Service share classes outperformed the benchmark for the annual period. The Investor A share class underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 5-year Treasury, increased by a modest 0.82%, ending the period at 4.19%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. Investment grade corporate securities lagged behind the other domestic spread sectors. Corporate bond performance was driven by both solid credit fundamentals and strong investor demand in the beginning of the period. However, with the downgrading of both General Motors and Ford, two of the largest corporate bond issuers in the world, to below investment grade, investors became noticeably more cautious. In spite of higher short-term interest rates and flattening of the yield curve, which has dramatically reduced the carry advantage of MBS, the sector was able to post a positive excess return over Treasuries. Valuations of ABS remained stable, and spreads remained near historically tight levels despite robust supply. Demand has continued to be firm for higher quality assets in the sector. The net supply of agencies continued to be negative as government sponsored enterprises were unable to grow given unresolved accounting issues and intense political scrutiny. This lack of supply has kept spreads tight. CMBS, the best performing domestic spread sector during the annual period, has enjoyed strong demand due to the sector's attractive relative value characteristics. . During the annual period, the Portfolio's short duration position relative to its benchmark benefited performance as interest rates increased. The Portfolio's allocation to the agency sector aided performance, as agencies returned 0.76% over duration-adjusted Treasuries. Within the agency sector, the Portfolio continues to focus on callable debentures. The Portfolio's allocation to the ABS sector benefited performance, as the sector returned 0.75% over duration-adjusted Treasuries for the annual period. The Portfolio increased its allocation to ABS during the annual period, concentrating in non-prepayment sensitive sectors such as autos and credit cards. The Portfolio maintained its allocation to the MBS sector, which benefited returns. Within the mortgages sector, the Portfolio continues to favor adjustable rate mortgages and short duration CMOs. The Portfolio also increased its allocation to CMBS during the annual period, as the portfolio management team believes the sector is attractively valued relative to agencies and MBS. The CMBS sector provided strong excess returns versus Treasuries for the annual period. Lastly, the Portfolio's allocation to the corporate sector was a positive contributor to performance, as the sector returned 0.29% over duration-adjusted Treasuries. Within the corporate sector, the Portfolio continues to maintain a bias towards financials and high credit quality issues. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE ENHANCED INCOME PORTFOLIO AND THE CITIGROUP 1 YEAR TREASURY INDEX FROM INCEPTION. [LINE CHART] Institutional Investor A Citigroup 1 Year Treasury Index ------------- ---------- ------------------------------- 03/04/2004 $ 10,000 $ 9,699 $ 10,000 03/31/2004 10,032 9,719 10,016 06/30/2004 10,007 9,678 9,983 09/30/2004 10,059 9,706 10,031 12/31/2004 10,106 9,715 10,047 03/31/2005 10,132 9,743 10,068 06/30/2005 10,207 9,816 10,152 09/30/2005 10,265 9,863 10,197 For period ending September 30, 2005 Average Annual Total Return 1 Year From Inception -------- -------------- BlackRock Class 2.15% 1.73% Institutional Class 2.05% 1.68% Service Class 1.76% 1.63% Investor A Class (Load Adjusted) (1.46)% (0.87)% Investor A Class (NAV) 1.62% 1.07% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: BlackRock Shares, 3/4/04; Institutional Shares, 3/19/04; Service Shares, 3/19/04; Investor A Shares, 3/19/04. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 2
Enhanced Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 92.2% AA 4.3 A 1.8 BBB 1.7 ----- Total 100.0% ===== Sector Allocation (% of long-term investments) Asset Backed Securities 36.1% U.S. Government & Agency Obligations 18.2 Collateralized Mortgage Obligations 15.7 Mortgage Pass-Throughs 11.2 Corporate Bonds 9.8 Commercial Mortgage Backed Securities 8.4 Multi-Class Mortgage Pass-Throughs 0.5 Taxable Municipal Bonds 0.1 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 1.39 Effective Duration/2/ 0.82 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Hypothetical Expenses Actual Expenses (5% return before expenses) ---------------------------------------------------- ---------------------------------------------------- BlackRock Institutional Service Investor BlackRock Institutional Service Investor Class Class Class A Class Class Class Class A Class ---------- ------------- ---------- ---------- ---------- ------------- ---------- ----------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,013.70 1,013.20 1,011.80 1,012.40 1,023.32 1,022.87 1,021.19 1,021.19 Expenses Incurred During Period (4/01/05 - 9/30/05) 1.67 2.12 3.78 3.78 1.68 2.13 3.81 3.81 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.33%, 0.42%, 0.75%, and 0.75% for the BlackRock, Institutional, Service, and Investor A share class, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 3
Low Duration Bond Portfolio Total Net Assets (9/30/05): $1.5 billion Performance Benchmark: Merrill Lynch 1-3 Year Treasury Index Investment Approach: Seeks to realize a rate of return that exceeds the total return of the Merrill Lynch 1-3 Year Treasury Index by investing primarily in investment grade bonds that allow it to maintain an average portfolio duration that is within +/- 20% of the duration of the benchmark. The management team selects bonds from several sectors including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS"), and corporate bonds. The Portfolio may invest up to 5% of its assets in non-investment grade bonds or convertible securities with a minimum rating of 'B' and up to 10% of its assets in non-dollar denominated bonds of issuers located outside of the United States. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. Recent Portfolio Management Activity: . The BlackRock, Service, Institutional and Investor A share classes outperformed the benchmark for the annual period. The Investor B and C share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy which was driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 5-year Treasury, increased by a modest 0.82%, ending the period at 4.19%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. Investment grade corporate securities lagged behind the other domestic spread sectors. Corporate bond performance was driven by both solid credit fundamentals and strong investor demand in the beginning of the period. However, with the downgrading of both General Motors and Ford, two of the largest corporate bond issuers in the world, to below investment grade, investors became noticeably more cautious. In spite of higher short-term interest rates and flattening of the yield curve, which has dramatically reduced the carry advantage of MBS, the sector was able to post a positive excess return over Treasuries. Valuations of ABS remained stable, and spreads remained near historically tight levels despite robust supply. Demand has continued to be firm for higher quality assets in the sector. The net supply of agencies continued to be negative as government sponsored enterprises were unable to grow given unresolved accounting issues and intense political scrutiny. This lack of supply has kept spreads tight. CMBS, the best performing domestic spread sector during the annual period, has enjoyed strong demand due to the sector's attractive relative value characteristics. . During the annual period, the Portfolio's short duration position relative to its benchmark benefited performance as interest rates increased. The Portfolio's allocation to the agency sector aided performance, as agencies returned 0.76% over duration-adjusted Treasuries. Within the agency sector, the Portfolio continues to focus on callable debentures. The Portfolio's allocation to the ABS sector benefited performance, as the sector returned 0.75% over duration-adjusted Treasuries for the annual period. The Portfolio increased its allocation to ABS during the annual period, concentrating in non-prepayment sensitive sectors such as autos and credit cards. The Portfolio maintained its allocation to the MBS sector, which benefited returns. Within the mortgages sector, the Portfolio continues to favor adjustable rate mortgages ("ARMs") and short duration CMOs. The Portfolio also increased its allocation to CMBS during the annual period as the portfolio management team believes the sector is attractively valued relative to agencies and MBS. The CMBS sector provided strong excess returns versus Treasuries. Lastly, the Portfolio's allocation to the corporate sector was a positive contributor to performance, as the sector returned 0.29% over duration-adjusted Treasuries for the annual period. Within the corporate sector, the Portfolio continues to maintain a bias towards financials and high credit quality issues. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE LOW DURATION BOND PORTFOLIO AND THE MERRILL LYNCH 1-3 YEAR TREASURY INDEX FOR THE PAST TEN YEARS. [LINE CHART] Merrill Lynch 1-3 Institutional Investor A Year Treasury Index ------------- ---------- ------------------- 09/30/1995 $ 10,000 $ 9,696 $ 10,000 12/31/1995 10,198 9,888 10,252 03/31/1996 10,209 9,883 10,286 06/30/1996 10,321 9,979 10,390 09/30/1996 10,489 10,129 10,561 12/31/1996 10,712 10,332 10,762 03/31/1997 10,761 10,368 10,833 06/30/1997 10,993 10,579 11,072 09/30/1997 11,211 10,777 11,289 12/31/1997 11,360 10,907 11,478 03/31/1998 11,545 11,071 11,647 06/30/1998 11,732 11,237 11,825 09/30/1998 12,028 11,507 12,189 12/31/1998 12,114 11,576 12,282 03/31/1999 12,256 11,698 12,355 06/30/1999 12,338 11,763 12,426 09/30/1999 12,498 11,901 12,583 12/31/1999 12,605 11,990 12,658 03/31/2000 12,770 12,132 12,817 06/30/2000 12,977 12,314 13,037 09/30/2000 13,284 12,591 13,311 12/31/2000 13,647 12,920 13,670 03/31/2001 14,024 13,275 14,047 06/30/2001 14,183 13,397 14,212 09/30/2001 14,640 13,812 14,693 12/31/2001 14,702 13,867 14,805 03/31/2002 14,739 13,872 14,806 06/30/2002 15,068 14,166 15,157 09/30/2002 15,420 14,493 15,522 12/31/2002 15,574 14,611 15,657 03/31/2003 15,663 14,682 15,749 06/30/2003 15,819 14,830 15,862 09/30/2003 15,855 14,851 15,929 12/31/2003 15,868 14,849 15,953 03/31/2004 16,017 14,961 16,113 06/30/2004 15,868 14,824 15,941 09/30/2004 16,018 14,953 16,095 12/31/2004 16,082 14,989 16,098 03/31/2005 16,075 14,972 16,057 06/30/2005 16,203 15,096 16,239 09/30/2005 16,248 15,113 16,253 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------- ------- ------ ------- BlackRock Class 1.49% 1.88% 4.27% 5.09% Institutional Class 1.43% 1.76% 4.11% 4.97% Service Class 1.17% 1.47% 3.81% 4.67% Investor A Class (Load Adjusted) (1.94)% 0.37% 3.10% 4.22% Investor A Class (NAV) 1.07% 1.41% 3.72% 4.54% Investor B Class (Load Adjusted) (4.02)% (0.44)% 2.59% 3.85% Investor B Class (NAV) 0.41% 0.68% 2.95% 3.85% Investor C Class (Load Adjusted) (0.57)% 0.68% 2.95% 3.85% Investor C Class (NAV) 0.41% 0.68% 2.95% 3.85% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 7/17/92; Service Shares, 1/12/96; Investor A Shares, 1/12/96; Investor B Shares, 11/18/96; Investor C Shares, 2/24/97; and BlackRock Shares, 6/3/97. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 4
Low Duration Bond Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 90.8% AA 5.7 A 1.4 BBB 2.1 ----- Total 100.0% ===== Sector Allocation (% of long-term investments) U.S. Government & Agency Obligations 32.4% Asset Backed Securities 25.4 Collateralized Mortgage Obligations 11.6 Mortgage Pass-Throughs 10.6 Corporate Bonds 10.6 Commercial Mortgage Backed Securities 6.5 Foreign Bonds 1.6 Taxable Municipal Bonds 0.5 Preferred Stocks 0.5 Multiple Class Mortgage Pass-Throughs 0.1 ---- Total 99.8% ==== Portfolio Statistics Average maturity (years) 2.55 Effective Duration/2/ 1.53 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,011.50 1,010.80 1,009.50 1,009.50 1,005.70 1,006.70 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.02 2.77 4.08 4.08 7.84 7.85 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.97 1,022.21 1,020.89 1,020.89 1,017.08 1,017.08 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.03 2.79 4.11 4.11 7.92 7.92 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.40%, 0.55%, 0.81%, 0.81%, 1.56%, and 1.56% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 5
Intermediate Government Bond Portfolio Total Net Assets (9/30/05) $656.3 million Performance Benchmark: Lehman Brothers Intermediate Government Index Investment Approach: Seeks to maximize total return consistent with income generation and prudent investment management by investing primarily in the highest rated government and agency bonds that allow it to maintain an average portfolio duration that is within +/- 20% of the Lehman Brothers Intermediate Government Index. The Portfolio normally invests at least 80% of its assets in bonds that are issued or guaranteed by the U.S. Government and its agencies. The management team selects bonds from several sectors including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS") and corporate bonds. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Intermediate Government Bond Portfolio (the Portfolio) reorganized with the State Street Research Government Income Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. . The Institutional share class outperformed the benchmark for the annual period. The Investor A, B, C and Service share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. Investment grade corporate securities lagged behind the other domestic spread sectors. Corporate bond performance was driven by both solid credit fundamentals and strong investor demand in the beginning of the period. However, with the downgrading of both General Motors and Ford, two of the largest corporate bond issuers in the world, to below investment grade, investors became noticeably more cautious. In spite of higher short-term interest rates and flattening of the yield curve, which has dramatically reduced the carry advantage of MBS, the sector was able to post a positive excess return over Treasuries. Valuations of ABS remained stable, and spreads remained near historically tight levels despite robust supply. The net supply of agencies continued to be negative as government sponsored enterprises were unable to grow given unresolved accounting issues and intense political scrutiny. This lack of supply has kept spreads tight. CMBS, the best performing domestic spread sector during the annual period, has enjoyed strong demand due to the sector's attractive relative value characteristics. . During the annual period, the Portfolio benefited from its short duration position relative to its benchmark as interest rates increased. The Portfolio's underweight to agencies detracted from performance as the sector returned 0.76% for the annual period. The Portfolio continues to maintain an underweight position in agencies with a focus on callable debentures. The Portfolio's allocation to ABS, with a focus on non-prepayment sensitive sectors such as autos and credit cards, contributed to performance as the sector returned 0.75% over duration-adjusted Treasuries. The Portfolio's allocation to CMBS and MBS contributed to performance as the sectors returned 0.79% and 0.74%, respectively. Furthermore, the Portfolio maintained its allocation to corporate securities, which was beneficial to performance. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE GOVERNMENT BOND PORTFOLIO AND THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT INDEX FOR THE PAST TEN YEARS. [LINE CHART] Lehman Brothers Institutional Investor A Intermediate Government Index ------------- ---------- ----------------------------- 09/30/1995 $10,000 $ 9,598 $10,000 12/31/1995 10,292 9,878 10,335 03/31/1996 10,238 9,805 10,264 06/30/1996 10,300 9,852 10,333 09/30/1996 10,482 10,016 10,510 12/31/1996 10,746 10,255 10,754 03/31/1997 10,744 10,241 10,750 06/30/1997 11,043 10,515 11,051 09/30/1997 11,329 10,774 11,333 12/31/1997 11,576 10,997 11,584 03/31/1998 11,748 11,147 11,758 06/30/1998 11,974 11,348 11,976 09/30/1998 12,442 11,778 12,534 12/31/1998 12,458 11,779 12,565 03/31/1999 12,479 11,785 12,531 06/30/1999 12,413 11,709 12,507 09/30/1999 12,536 11,811 12,633 12/31/1999 12,562 11,833 12,628 03/31/2000 12,766 11,999 12,835 06/30/2000 12,986 12,204 13,068 09/30/2000 13,356 12,537 13,418 12/31/2000 13,848 12,984 13,951 03/31/2001 14,292 13,384 14,369 06/30/2001 14,351 13,437 14,429 09/30/2001 15,078 14,113 15,145 12/31/2001 15,062 14,068 15,125 03/31/2002 15,050 14,040 15,085 06/30/2002 15,589 14,525 15,668 09/30/2002 16,281 15,152 16,423 12/31/2002 16,426 15,268 16,583 03/31/2003 16,570 15,399 16,737 06/30/2003 16,870 15,644 17,019 09/30/2003 16,785 15,546 16,997 12/31/2003 16,744 15,505 16,962 03/31/2004 17,069 15,787 17,337 06/30/2004 16,732 15,458 16,937 09/30/2004 17,122 15,786 17,320 12/31/2004 17,189 15,831 17,357 03/31/2005 17,089 15,739 17,240 06/30/2005 17,425 16,032 17,638 09/30/2005 17,358 15,955 17,546 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------- -------- ------- ------- Institutional Class 1.38% 2.16% 5.38% 5.67% Service Class 1.08% 1.85% 5.05% 5.35% Investor A Class (Load Adjusted) (3.01)% 0.37% 4.09% 4.78% Investor A Class (NAV) 1.07% 1.74% 4.94% 5.21% Investor B Class (Load Adjusted) (4.17)% (0.14)% 3.79% 4.49% Investor B Class (NAV) 0.22% 0.95% 4.13% 4.49% Investor C Class (Load Adjusted) (0.76)% 0.95% 4.15% 4.50% Investor C Class (NAV) 0.22% 0.95% 4.15% 4.50% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 4/20/92; Investor A Shares, 5/11/92; Service Shares, 7/29/93; Investor C Shares, 10/8/96; and Investor B Shares, 10/11/96. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 6
Intermediate Government Bond Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 99.3% AA 0.4 A 0.3 ----- Total 100.0% ===== Sector Allocation (% of long-term investments) U.S. Government & Agency Obligations 49.2% Mortgage Pass-Throughs 25.4 Collateralized Mortgage Obligations 8.3 Commercial Mortgage Backed Securities 6.4 Asset Backed Securities 6.3 Corporate Bonds 3.4 Taxable Municipal Bonds 0.7 Project Loans 0.2 Multiple Class Mortgage Pass-Throughs 0.1 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 4.25 Effective Duration/2/ 2.84 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,015.80 1,014.30 1,013.80 1,010.00 1,010.00 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.03 4.54 5.00 8.82 8.82 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.95 1,020.43 1,019.97 1,016.12 1,016.12 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.05 4.57 5.03 8.88 8.88 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.60%, 0.90%, 0.99%, 1.75%, and 1.75% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 7
Intermediate Bond Portfolio Total Net Assets (9/30/05): $897.7 million Performance Benchmark: Lehman Brothers Intermediate Government/Credit Index Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management by investing primarily in bonds that allow it to maintain an average portfolio duration that is within +/- 20% of the Lehman Brothers Intermediate Government/Credit Index. The Portfolio normally invests at least 80% of its assets in bonds and only buys securities rated investment grade at the time of purchase by at least one major rating agency or determined by the management team to be of similar quality. The portfolio management team selects bonds from several categories including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS") and corporate bonds. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. The Portfolio's dollar-weighted average maturity will be between 3 and 10 years. Recent Portfolio Management Activity: . The BlackRock share class outperformed the benchmark for the annual period. The Institutional, Investor A, B, C and Service share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. Investment grade corporate securities lagged behind the other domestic spread sectors. Corporate bond performance was driven by both solid credit fundamentals and strong investor demand in the beginning of the period. However, with the downgrading of General Motors and Ford, two of the largest corporate bond issuers in the world, to below investment grade, investors became noticeably more cautious. In spite of higher short-term interest rates and flattening of the yield curve, which has dramatically reduced the carry advantage of MBS, the sector was able to post a positive excess return over Treasuries. Valuations of ABS remained stable, and spreads remained near historically tight levels despite robust supply. The net supply of agencies continued to be negative as government sponsored enterprises were unable to grow given unresolved accounting issues and intense political scrutiny. This lack of supply has kept spreads tight. CMBS, the best performing domestic spread sector during the annual period, has enjoyed strong demand due to the sector's attractive relative value characteristics. . During the annual period, the Portfolio was short duration relative to its benchmark which benefited performance as interest rates increased. The Portfolio maintained an underweight to the corporate sector on a duration basis which detracted from performance as the sector outperformed duration-adjusted Treasuries in the period. However, successful security selection generally offset the negative effect of the sector underweight. Within the corporate sector, the Portfolio exhibited a bias towards financials and higher quality issues. The Portfolio maintained its position to the mortgage sector with positions in short duration adjustable rate mortgages and CMOs. The overweight to the mortgage sector benefited performance for the period as the sector returned 0.74% over duration-adjusted Treasuries. The Portfolio was relatively underweight to its benchmark in Treasuries, with a focus on off-the-run securities, and also maintained a relative underweight to agency securities with holdings focused in callable debentures. Instead, the Portfolio held overweight allocations to the CMBS and ABS sectors, both of which aided performance as the sectors returned 0.79% and 0.75%, respectively, over duration-adjusted Treasuries. The management team favored CMBS securities as they believed the sector to be attractively valued relative to agencies and corporate securities. Within the ABS sector, the Portfolio focused on non-prepayment sensitive issues. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE BOND PORTFOLIO AND THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CREDIT INDEX FOR THE PAST TEN YEARS. [LINE CHART] Lehman Brothers Intermediate Institutional Investor A Government/Credit Index ------------- ---------- ---------------------------- 09/30/1995 $ 10,000 $ 9,602 $ 10,000 12/31/1995 10,333 9,913 10,351 03/31/1996 10,253 9,835 10,265 06/30/1996 10,328 9,895 10,330 09/30/1996 10,510 10,058 10,513 12/31/1996 10,778 10,302 10,771 03/31/1997 10,773 10,285 10,759 06/30/1997 11,092 10,577 11,076 09/30/1997 11,393 10,852 11,375 12/31/1997 11,598 11,034 11,618 03/31/1998 11,782 11,196 11,799 06/30/1998 11,992 11,382 12,021 09/30/1998 12,396 11,752 12,560 12/31/1998 12,420 11,761 12,596 03/31/1999 12,487 11,811 12,573 06/30/1999 12,435 11,747 12,524 09/30/1999 12,533 11,826 12,639 12/31/1999 12,542 11,821 12,645 03/31/2000 12,756 11,995 12,835 06/30/2000 12,988 12,198 13,053 09/30/2000 13,396 12,581 13,428 12/31/2000 13,888 13,029 13,925 03/31/2001 14,363 13,458 14,397 06/30/2001 14,446 13,506 14,493 09/30/2001 15,167 14,165 15,160 12/31/2001 15,122 14,121 15,173 03/31/2002 15,161 14,141 15,139 06/30/2002 15,639 14,569 15,678 09/30/2002 16,337 15,202 16,388 12/31/2002 16,645 15,475 16,665 03/31/2003 16,923 15,721 16,917 06/30/2003 17,409 16,142 17,377 09/30/2003 17,382 16,119 17,373 12/31/2003 17,370 16,110 17,383 03/31/2004 17,768 16,448 17,814 06/30/2004 17,360 16,056 17,364 09/30/2004 17,829 16,478 17,834 12/31/2004 17,910 16,542 17,912 03/31/2005 17,792 16,422 17,756 06/30/2005 18,170 16,761 18,197 09/30/2005 18,089 16,674 18,102 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------- ------ ------ ------- BlackRock Class 1.61% 3.61% 6.35% 6.23% Institutional Class 1.46% 3.45% 6.19% 6.11% Service Class 1.30% 3.20% 5.91% 5.81% Investor A Class (Load Adjusted) (2.87)% 1.73% 4.93% 5.25% Investor A Class (NAV) 1.20% 3.13% 5.80% 5.67% Investor B Class (Load Adjusted) (3.95)% 1.29% 4.68% 5.07% Investor B Class (NAV) 0.44% 2.36% 5.01% 5.07% Investor C Class (Load Adjusted) (0.43)% 2.36% 5.00% 5.08% Investor C Class (NAV) 0.54% 2.36% 5.00% 5.08% The performance information above includes information relating to each class of the portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 9/17/93; Service Shares, 9/23/93; Investor A shares, 5/20/94; Investor B Shares, 2/5/98; BlackRock Shares, 5/1/98 and Investor C Shares, 10/16/98. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 8
Intermediate Bond Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 73.4% AA 14.0 A 6.4 BBB 5.9 less than BBB 0.3 ----- Total 100.0% ===== Sector Allocation (% of long-term investments) Corporate Bonds 32.8% U.S. Government & Agency Obligations 32.7 Collateralized Mortgage Obligations 9.2 Asset Backed Securities 9.1 Commercial Mortgage Backed Securities 7.8 Mortgage Pass-Throughs 6.5 Taxable Municipal Bonds 1.5 Multiple Class Mortgage Pass-Throughs 0.2 Certificate of Deposit 0.1 Project Loans 0.1 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 4.51 Effective Duration/2/ 3.14 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,017.40 1,016.70 1,016.50 1,015.40 1,011.60 1,011.60 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.28 3.03 4.35 4.34 8.12 8.17 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.72 1,021.95 1,020.63 1,020.63 1,016.83 1,016.78 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.28 3.05 4.37 4.37 8.17 8.22 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.45%, 0.60%, 0.86%, 0.86%, 1.61%, and 1.62% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 9
Intermediate Plus Bond Portfolio Total Net Assets (9/30/05): $31.0 million Performance Benchmark: Lehman Brothers Intermediate Aggregate Index Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management, by investing primarily in bonds that allow it to maintain an average portfolio duration that is within +/- 20% of the duration of the Lehman Brothers Intermediate Aggregate Index. The Portfolio invests primarily in dollar-denominated investment grade bonds, but may invest up to 20% of its assets in any combination of non-investment grade bonds (high yield or junk bonds), non-dollar denominated bonds and bonds of emerging market issuers. The Portfolio's investment in non-dollar denominated bonds may be on a currency hedged or unhedged basis. The portfolio management team selects bonds from several categories including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS") and corporate bonds. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. The Portfolio's dollar-weighted average maturity will be between 3 and 10 years. Recent Portfolio Management Activity: . In late January, the Portfolio changed its benchmark to the Lehman Brothers Intermediate Aggregate Index. The new benchmark more adequately reflects the universe of securities in which the Portfolio will invest. . The BlackRock, Institutional, Service and Investor A share classes of the Portfolio outperformed the Lehman Brothers Intermediate Government/Credit Index, the Portfolio's former benchmark, while the Investor B and C share classes underperformed that benchmark for the annual period. All share classes of the Portfolio underperformed the Lehman Brothers Intermediate Aggregate Index, the Portfolio's current benchmark, for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. Investment grade corporate securities lagged behind the other domestic spread sectors. Corporate bond performance was driven by both solid credit fundamentals and strong investor demand in the beginning of the period. However, with the downgrading of both General Motors and Ford to below investment grade, two of the largest corporate bond issuers in the world, investors became noticeably more cautious. In spite of higher short-term interest rates and flattening of the yield curve, which has dramatically reduced the carry advantage of MBS, the sector was able to post a positive excess return over Treasuries. Valuations of ABS remained stable, and spreads remained near historically tight levels despite robust supply. The net supply of agencies continued to be negative as government sponsored enterprises were unable to grow given unresolved accounting issues and intense political scrutiny. This lack of supply has kept spreads tight. CMBS, the best performing domestic spread sector during the annual period, has enjoyed strong demand due to the sector's attractive relative value characteristics. . During the annual period, the Portfolio's short duration position relative to its benchmark benefited performance as interest rates increased. The Portfolio's underweight to corporate securities on a duration basis, with a bias towards financials and higher quality credits, detracted from performance as the sector outperformed duration-adjusted Treasuries. The underweight to MBS detracted from performance, as the sector returned 0.74% over duration-adjusted Treasuries. The Portfolio's overweight to CMBS aided performance as the sector returned 0.79% over duration-adjusted Treasuries. The portfolio management team believes the sector is attractively valued relative to agencies and corporates. An overweight to ABS was beneficial to performance as the sector returned 0.75% over duration-adjusted Treasuries. The Portfolio maintained its focus on non-prepayment sensitive issues within this sector. Lastly, an allocation to the emerging markets and high yield sectors benefited performance as each sector outperformed duration-adjusted Treasuries. The portfolio management team sold out of emerging market securities towards the end of the period to realize gains. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERMEDIATE PLUS BOND PORTFOLIO, THE LEHMAN BROTHERS INTERMEDIATE AGGREGATE INDEX AND THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CREDIT INDEX FROM INCEPTION. [LINE CHART] Lehman Brothers Lehman Brothers Intermediate Intermediate Institutional Investor A Aggregate Index Government/Credit Index ------------- ---------- --------------- ----------------------- 08/18/2004 $ 10,000 $ 9,597 $ 10,000 $ 10,000 09/30/2004 10,060 9,655 10,064 10,063 12/31/2004 10,109 9,701 10,142 10,107 03/31/2005 10,059 9,643 10,085 10,019 06/30/2005 10,259 9,833 10,329 10,268 09/30/2005 10,239 9,809 10,289 10,214 For Period Ending September 30, 2005 Average Annual Total Return 1 Year From Inception ------------ --------------- BlackRock Class 1.98% 2.29% Institutional Class 1.78% 2.14% Service Class 1.58% 1.78% Investor A Class (Load Adjusted) (2.48)% (1.72)% Investor A Class (NAV) 1.60% 1.97% Investor B Class (Load Adjusted) (3.67)% (2.32)% Investor B Class (NAV) 0.81% 1.26% Investor C Class (Load Adjusted) (0.22)% 1.24% Investor C Class (NAV) 0.78% 1.24% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio on 8/18/04. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 10
Intermediate Plus Bond Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 85.2% AA 7.3 A 2.0 BBB 3.4 less than BBB 2.1 ----- Total 100.0% ===== Sector Allocation (% of long-term investments) Mortgage Pass-Throughs 26.7% U.S. Government & Agency Obligations 24.1 Corporate Bonds 18.8 Commercial Mortgage Backed Securities 10.4 Asset Backed Securities 8.4 Collateralized Mortgage Obligations 8.1 Foreign Bonds 2.1 Taxable Municipal Bonds 0.9 Multiple Class Mortgage Pass-Throughs 0.4 Preferred Stocks 0.1 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 5.03 Effective Duration/2/ 2.92 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,018.50 1,018.00 1,017.00 1,017.20 1,013.20 1,013.00 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.02 2.78 4.05 4.05 7.82 7.82 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.97 1,022.21 1,020.94 1,020.94 1,017.13 1,017.13 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.03 2.79 4.06 4.06 7.87 7.87 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.40%, 0.55%, 0.80%, 0.80%, 1.55%, and 1.55% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the period the fund was open during the one-half year period). 11
Core Bond Total Return Portfolio Total Net Assets (9/30/05): $2.7 billion Performance Benchmark: Lehman Brothers U.S. Aggregate Index Investment Approach: Seeks to realize a total return that exceeds that of the Lehman Brothers U.S. Aggregate Index by normally investing at least 80% of its assets in bonds that allow it to maintain an average portfolio duration that is within +/- 20% of the duration of the benchmark. The Portfolio management team selects bonds from several categories including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS") and corporate bonds. The Portfolio may invest up to 10% of its assets in non-dollar denominated bonds of issuers located outside of the United States. The Portfolio's investment in non-dollar denominated bonds may be on a currency hedged or unhedged basis. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. Recent Portfolio Management Activity: . The BlackRock and Institutional share classes outperformed the benchmark for the annual period. The Investor A, B, C and Service share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. Investment grade corporate securities lagged behind the other domestic spread sectors. Corporate bond performance was driven by both solid credit fundamentals and strong investor demand in the beginning of the period. However, with the downgrading of both General Motors and Ford, two of the largest corporate bond issuers in the world, to below investment grade, investors became noticeably more cautious. In spite of higher short-term interest rates and flattening of the yield curve, which has dramatically reduced the carry advantage of MBS, the sector was able to post a positive excess return over Treasuries. Valuations of ABS remained stable, and spreads remained near historically tight levels despite robust supply. The net supply of agencies continued to be negative as government sponsored enterprises were unable to grow given unresolved accounting issues and intense political scrutiny. This lack of supply has kept spreads tight. CMBS, the best performing domestic spread sector during the annual period, has enjoyed strong demand due to the sector's attractive relative value characteristics. . During the annual period, the Portfolio's short duration position relative to its benchmark benefited performance as interest rates increased. The Portfolio also benefited from its yield curve positioning during the annual period. The Portfolio's overweight to CMBS aided performance as the sector returned 0.79% over duration-adjusted Treasuries. The portfolio management team believes the sector is attractively valued relative to agencies and MBS. The Portfolio also benefited from the overweight to ABS, as the sector returned 0.75% over duration-adjusted Treasuries. The Portfolio maintained its focus on non-prepayment sensitive issues within this sector. The Portfolio's underweight to MBS detracted from performance, as the sector returned 0.74% over duration-adjusted Treasuries. Within the sector, the Portfolio favored 15-year over 30-year pass-throughs. Additionally, the Portfolio maintained allocations to CMOs and adjustable rate mortgages. The Portfolio continued to be underweight corporate securities on a duration-weight basis, with a bias towards financials and higher quality credits. Lastly, an underweight to agencies relative to its benchmark detracted from performance. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE CORE BOND TOTAL RETURN PORTFOLIO AND THE LEHMAN BROTHERS U.S. AGGREGATE INDEX FOR THE PAST TEN YEARS. [LINE CHART] Lehman Brothers Institutional Investor A U.S. Aggregate Index ------------- ---------- -------------------- 09/30/1995 $ 10,000 $ 9,602 $ 10,000 12/31/1995 10,441 10,025 10,426 03/31/1996 10,194 9,778 10,240 06/30/1996 10,255 9,824 10,298 09/30/1996 10,460 10,009 10,488 12/31/1996 10,818 10,339 10,803 03/31/1997 10,788 10,298 10,743 06/30/1997 11,148 10,630 11,139 09/30/1997 11,509 10,962 11,510 12/31/1997 11,794 11,219 11,849 03/31/1998 11,985 11,388 12,032 06/30/1998 12,268 11,644 12,313 09/30/1998 12,726 12,062 12,833 12/31/1998 12,756 12,077 12,877 03/31/1999 12,739 12,046 12,811 06/30/1999 12,614 11,914 12,698 09/30/1999 12,705 11,986 12,785 12/31/1999 12,677 11,946 12,770 03/31/2000 12,995 12,231 13,051 06/30/2000 13,219 12,414 13,279 09/30/2000 13,631 12,800 13,679 12/31/2000 14,228 13,345 14,254 03/31/2001 14,652 13,741 14,687 06/30/2001 14,670 13,741 14,769 09/30/2001 15,409 14,416 15,450 12/31/2001 15,394 14,386 15,458 03/31/2002 15,400 14,374 15,472 06/30/2002 15,960 14,879 16,044 09/30/2002 16,543 15,389 16,779 12/31/2002 16,884 15,708 17,043 03/31/2003 17,150 15,925 17,280 06/30/2003 17,605 16,334 17,712 09/30/2003 17,567 16,300 17,687 12/31/2003 17,611 16,310 17,742 03/31/2004 18,014 16,668 18,214 06/30/2004 17,678 16,344 17,769 09/30/2004 18,213 16,843 18,337 12/31/2004 18,409 16,996 18,512 03/31/2005 18,367 16,964 18,423 06/30/2005 18,805 17,356 18,977 09/30/2005 18,725 17,271 18,849 For Period Ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year -------- -------- -------- --------- BlackRock Class 2.96% 4.36% 6.75% 6.63% Institutional Class 2.81% 4.22% 6.56% 6.47% Service Class 2.54% 3.95% 6.25% 6.17% Investor A Class (Load Adjusted) (1.60)% 2.51% 5.31% 5.62% Investor A Class (NAV) 2.54% 3.92% 6.17% 6.05% Investor B Class (Load Adjusted) (2.77)% 2.04% 5.04% 5.28% Investor B Class (NAV) 1.67% 3.11% 5.36% 5.28% Investor C Class (Load Adjusted) 0.79% 3.11% 5.38% 5.29% Investor C Class (NAV) 1.77% 3.11% 5.38% 5.29% The Performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's Share classes were as follows: Institutional Shares, 12/9/92; Service Shares, 1/12/96; Investor A Shares, 1/31/96; Investor B Shares, 3/18/96; Investor C Shares, 2/28/97; and BlackRock Shares, 5/1/97. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 12
Core Bond Total Return Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 82.8% AA 9.6 A 3.3 BBB 4.0 less than BBB 0.3 ----- Total 100.0% ===== Sector Allocation (% of long-term investments) U.S. Government & Agency Obligations 24.7% Mortgage Pass-Throughs 24.1 Corporate Bonds 21.2 Asset Backed Securities 9.7 Commercial Mortgage Backed Securities 9.2 Collateralized Mortgage Obligations 8.9 Foreign Bonds 1.6 Taxable Municipal Bonds 0.4 Certificate of Deposit 0.2 ---- Total 100.0% ====== Portfolio Statistics Average maturity (years) 6.86 Effective Duration/2/ 3.76 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,020.20 1,019.50 1,018.20 1,018.10 1,014.30 1,014.30 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.03 2.78 4.10 4.10 7.88 7.88 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.97 1,022.21 1,020.89 1,020.89 1,017.08 1,017.08 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.03 2.79 4.11 4.11 7.92 7.92 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.40%, 0.55%, 0.81%, 0.81%, 1.56%, and 1.56% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 13
Core Plus Total Return Portfolio Total Net Assets (9/30/05): $326.3 million Performance Benchmark: Lehman Brothers U.S. Aggregate Index Investment Approach: Seeks to realize a total return that exceeds that of the Lehman Brothers U.S. Aggregate Index by normally investing at least 80% of its assets in bonds that allow it to maintain an average portfolio duration that is within +/- 20% of the duration of the benchmark. The portfolio management team invests primarily in dollar-denominated investment grade bonds but may invest up to 20% of its assets in any combination of non-investment grade bonds (high yield or junk bonds), non-dollar denominated bonds and bonds of emerging market issuers. The Portfolio's investment in non-dollar denominated bonds may be on a currency hedged or unhedged basis. The portfolio management team selects bonds from several categories including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS") and corporate bonds. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. Recent Portfolio Management Activity: . The BlackRock and Institutional share classes outperformed the benchmark for the annual period. The Investor A share class performed in line with the benchmark for the annual period. The Service, Investor B and C share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. Investment grade corporate securities lagged behind the other domestic spread sectors. Corporate bond performance was driven by both solid credit fundamentals and strong investor demand in the beginning of the period. However, with the downgrading of both General Motors and Ford, two of the largest corporate bond issuers in the world, to below investment grade, investors became noticeably more cautious. In spite of higher short-term interest rates and flattening of the yield curve, which has dramatically reduced the carry advantage of MBS, the sector was able to post a positive excess return over Treasuries. Valuations of ABS remained stable, and spreads remained near historically tight levels despite robust supply. The net supply of agencies continued to be negative as government sponsored enterprises were unable to grow given unresolved accounting issues and intense political scrutiny. This lack of supply has kept spreads tight. CMBS, the best performing domestic spread sector during the annual period, has enjoyed strong demand due to the sector's attractive relative value characteristics. . During the annual period, the Portfolio's short duration position relative to its benchmark benefited performance as interest rates increased. The Portfolio also benefited from its yield curve positioning during the annual period. The Portfolio's overweight to ABS was also beneficial as the sector returned 0.75% over duration-adjusted Treasuries. The Portfolio maintained its focus on non-prepayment sensitive issues within this sector. Also, the Portfolio's overweight to CMBS contributed to performance as the sector returned 0.79%. On the contrary, the Portfolio's underweight to MBS detracted from performance as the sector returned 0.74% over duration-adjusted Treasuries for the annual period. Within the sector, the Portfolio favored 15-year over 30-year pass-throughs. Additionally, the Portfolio maintained allocations to CMOs and adjustable rate mortgages. The Portfolio's underweight to agencies relative to its benchmark detracted from performance as the sector returned 0.76%. Furthermore, the Portfolio continued to be underweight corporate securities on a duration-weight basis, with a bias towards financials and higher quality credits. Lastly, the Portfolio's allocations to high yield, with a focus on higher quality issues, and emerging market were beneficial to performance as the sectors returned 4.88% and 12.62%, respectively, over duration-adjusted Treasuries. The Portfolio's non-dollar allocation represented approximately 1.80% of the Portfolio, with allocations to Germany and New Zealand Dollar securities, at the end of the annual period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE CORE PLUS TOTAL RETURN PORTFOLIO AND THE LEHMAN BROTHERS U.S. AGGREGATE INDEX FROM INCEPTION. [LINE CHART] Institutional Investor A Lehman Brothers U.S. Aggregate Index ------------- ---------- ------------------------------------ 12/07/2001 $ 10,000 $ 9,597 $ 10,000 12/31/2001 10,098 9,691 10,086 03/31/2002 10,061 9,648 10,095 06/30/2002 10,358 9,921 10,468 09/30/2002 10,721 10,257 10,948 12/31/2002 10,992 10,507 11,120 03/31/2003 11,143 10,642 11,275 06/30/2003 11,489 10,963 11,557 09/30/2003 11,455 10,921 11,540 12/31/2003 11,492 10,957 11,576 03/31/2004 11,705 11,172 11,884 06/30/2004 11,434 10,937 11,594 09/30/2004 11,788 11,276 11,964 12/31/2004 11,926 11,400 12,079 03/31/2005 11,892 11,359 12,021 06/30/2005 12,197 11,642 12,382 09/30/2005 12,151 11,590 12,299 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year From Inception -------- -------- -------------- BlackRock Class 3.21% 4.61% 5.56% Institutional Class 3.08% 4.26% 5.24% Service Class 2.77% 4.35% 5.31% Investor A Class (Load Adjusted) (1.31)% 2.75% 3.94% Investor A Class (NAV) 2.79% 4.16% 5.07% Investor B Class (Load Adjusted) (2.45)% 2.25% 3.62% Investor B Class (NAV) 2.02% 3.35% 4.32% Investor C Class (Load Adjusted) 0.93% 3.32% 4.30% Investor C Class (NAV) 1.93% 3.32% 4.30% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio on 12/7/01. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 14
Core PLUS Total Return Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 81.9% AA 8.3 A 3.5 BBB 4.5 less than BBB 1.8 ----- Total 100.0% ===== Sector Allocation (% of long-term investments) Mortgage Pass-Throughs 26.4% U.S. Government & Agency Obligations 21.0 Corporate Bonds 20.9 Collateralized Mortgage Obligations 10.7 Commercial Mortgage Backed Securities 9.6 Asset Backed Securities 9.0 Foreign Bonds 1.8 Taxable Municipal Bonds 0.4 Preferred Stocks 0.1 Certificate of Deposit 0.1 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 6.97 Effective Duration/2/ 3.77 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ------------- ------------- ------------- ------------- ------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.40 1,021.83 1,020.20 1,020.30 1,015.50 1,015.60 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.03 2.79 4.05 4.10 7.88 7.93 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ------------- ------------- ------------- ------------- ------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.97 1,022.21 1,020.94 1,020.89 1,017.08 1,017.03 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.03 2.79 4.06 4.11 7.92 7.97 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.40%, 0.55%, 0.80%, 0.81%, 1.56%, and 1.57% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 15
Government Income Portfolio Total Net Assets (9/30/05): $543.8 million Performance Benchmark: Lehman Brothers Mortgage/Merrill Lynch 10-Year Treasury Index Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management, by investing primarily in the highest rated government and agency bonds in the ten to fifteen year maturity range and in mortgages guaranteed by the U.S. Government or its agencies. Securities purchased for the Portfolio are rated in the highest rating category (AAA or Aaa) at the time of purchase by at least one major rating agency or are determined by the management team to be of similar quality. The portfolio management team selects bonds from several categories including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS") and corporate bonds. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. Recent Portfolio Management Activity: . All share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. While MBS have returned 0.74% over duration-adjusted Treasuries, higher short-term rates and flattening of the yield curve has dramatically reduced the carry advantage of MBS. Domestic banks, who have been the primary sponsor of MBS, have reduced their MBS holdings. Additionally, with the portfolio growth of the government sponsored enterprises falling, the MBS market has become much more reliant on overseas demand. . During the annual period, the Portfolio's short duration position relative to its benchmark benefited performance as interest rates increased. The Portfolio also benefited from its overweight to 15-year maturity bonds as 15-year issues outperformed 30-year issues. The Portfolio continues to have a bias toward 15-year maturity bonds relative to 30-year maturity bonds as 15-year issues tend to exhibit a better convexity and more stable duration profile. In terms of sector allocation, the Portfolio largely had an underweight to MBS during the annual period, which was a detractor from performance. The Portfolio's non-benchmark allocation to CMBS was also beneficial to performance as the sector returned 0.79% over duration-adjusted Treasuries. At the end of the annual period, the Portfolio was underweight Treasuries and overweight mortgages relative to the benchmark. The Portfolio continues to maintain a small allocation to non-benchmark holdings such as adjustable rate mortgages, CMBS, agencies and CMOs. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE GOVERNMENT INCOME PORTFOLIO AND THE LEHMAN BROTHERS MORTGAGE/MERRILL LYNCH 10-YEAR TREASURY INDEX FOR THE PAST TEN YEARS. [LINE CHART] Investor A Lehman Brothers Mortgage/Merrill Lynch 10 year Treasury In ---------- ---------------------------------------------------------- 09/30/1995 $ 9,553 $ 10,000 12/31/1995 9,941 10,453 03/31/1996 9,743 10,210 06/30/1996 9,769 10,210 09/30/1996 9,976 10,400 12/31/1996 10,280 10,734 03/31/1997 10,257 10,623 06/30/1997 10,658 11,075 09/30/1997 11,022 11,467 12/31/1997 11,362 11,844 03/31/1998 11,543 12,022 06/30/1998 11,830 12,292 09/30/1998 12,249 13,020 12/31/1998 12,270 13,013 03/31/1999 12,167 12,867 06/30/1999 11,990 12,628 09/30/1999 12,077 12,711 12/31/1999 11,993 12,583 03/31/2000 12,252 12,923 06/30/2000 12,520 13,165 09/30/2000 12,969 13,511 12/31/2000 13,605 14,220 03/31/2001 13,992 14,546 06/30/2001 13,960 14,459 09/30/2001 14,932 15,277 12/31/2001 14,848 15,109 03/31/2002 14,838 15,033 06/30/2002 15,665 15,735 09/30/2002 16,660 16,817 12/31/2002 16,859 16,879 03/31/2003 17,031 17,055 06/30/2003 17,461 17,410 09/30/2003 17,382 17,303 12/31/2003 17,372 17,264 03/31/2004 17,924 17,829 06/30/2004 17,303 17,295 09/30/2004 17,963 17,956 12/31/2004 18,052 18,091 03/31/2005 17,947 17,969 06/30/2005 18,516 18,654 09/30/2005 18,324 18,432 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year -------- -------- -------- ------- BlackRock Class 2.43% 3.70% 7.45% 6.88% Service Class 1.92% 3.20% 7.14% 6.72% Investor A Class (Load Adjusted) (2.61)% 1.65% 6.18% 6.24% Investor A Class (NAV) 2.01% 3.22% 7.16% 6.73% Investor B Class (Load Adjusted) (3.14)% 1.38% 6.05% 5.94% Investor B Class (NAV) 1.25% 2.45% 6.36% 5.94% Investor C Class (Load Adjusted) 0.28% 2.46% 6.35% 5.92% Investor C Class (NAV) 1.25% 2.46% 6.35% 5.92% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 10/3/94; Investor B Shares, 10/3/94; Investor C Shares, 2/28/97; BlackRock Shares, 2/10/03; and service shares, 10/27/04. See "Note on Performance Information" on page 28 for further information on how performance data was calculated. The performance shown in the line graph is that of Investor A Shares of the Portfolio. Excluding the effects of sales charges, the actual performance of Investor B and Investor C Shares is lower than the performance of investor A Shares because Investor B and Investor C Shares have higher expenses than investor A Shares. Purchases of Investor A Shares generally pay a front-end sales charge, while purchasers of Investor B and Investor C shares may pay a contingent deferred sales charge (depending on how long they hold their shares) when they sell their shares. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 16
Government Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 99.7% AA 0.3 ------ Total 100.0% ====== Sector Allocation (% of long-term investments) Mortgage Pass-Throughs 66.2% U.S. Government & Agency Obligations 32.9 Collateralized Mortgage Obligations 0.4 Asset Backed Securities 0.3 Commercial Mortgage Backed Securities 0.2 ------ Total 100.0% ====== Portfolio Statistics Average maturity (years) 6.68 Effective Duration/2/ 4.61 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------- BlackRock Service Investor Investor Investor Class Class A Class B Class C Class ----------- ----------- ----------- ----------- ----------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,023.10 1,021.10 1,021.10 1,017.20 1,017.30 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.28 4.36 4.36 8.14 8.09 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------- BlackRock Service Investor Investor Investor Class Class A Class B Class C Class ----------- ----------- ----------- ----------- ----------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.72 1,020.63 1,020.63 1,016.83 1,016.88 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.28 4.37 4.37 8.17 8.12 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.45%, 0.86%, 0.86%, 1.61%, and 1.60% for the BlackRock, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 17
Inflation Protected Bond Portfolio Total Net Assets (9/30/05): $38.6 million Performance Benchmark: Lehman Global Real: U.S. TIPS Index Investment Approach: Seeks to maximize real return, consistent with preservation of real capital and prudent investment management. The Portfolio normally invests at least 80% of its assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies or instrumentalities, and U.S. and non-U.S. corporations. The Portfolio maintains an average portfolio duration that is within +/- 20% of the Lehman Global Real: U.S. TIPS Index. The Portfolio may invest up to 20% of its assets in non investment grade bonds or securities of emerging market issuers. The Portfolio may also invest up to 20% of its assets in non-dollar denominated securities of non-U.S. issuers, and may invest without limit in U.S. dollar denominated securities of non-U.S. issuers. The management team may also purchase U.S. Treasury and agency securities, commercial and residential mortgage backed securities, collateralized mortgage obligations ("CMOs"), asset-backed securities and corporate bonds. Securities are purchased for the Portfolio when the management team believes that they have the potential for above-average real return. Recent Portfolio Management Activity: . The BlackRock, Institutional, Service and Investor A share classes outperformed the benchmark for the annual period. The Investor B and C share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . Treasury Inflation Protected Securities ("TIPS") outperformed nominal Treasuries during the annual period. During the first half of the annual period, TIPS found support from dollar weakness and rising commodity prices. However, in the second quarter of 2005, TIPS struggled due to a combination of lower commodity prices, a stronger dollar and a decline in the core Consumer Price Index. TIPS rebounded in the third quarter of 2005 due to higher energy and commodity prices, driven in large part by damage done during Hurricanes Katrina and Rita. Ten-year breakevens (measure of inflation expectations equal to the difference between yields on inflation-linked bonds and equivalent maturity nominal Treasuries) rallied from 2.28% to 2.55% during the third quarter of 2005, as investors raised their future inflation expectation due to higher energy prices. . During the annual period, the Portfolio's short duration relative to its benchmark benefited performance as interest rates rose during the quarter. In terms of the Portfolio's non-benchmark allocations, the Portfolio reduced its exposure to commercial mortgage-backed securities (through the use of a total return swap) during the annual period. The Portfolio maintained its allocation to adjustable rate mortgages which continues to give the Portfolio exposure to an attractively priced, high quality spread product in the front end of the yield curve. The Portfolio's non-US position, which includes holdings in Canada, Sweden, Germany and the U.K., was beneficial to performance. Lastly, the Portfolio established a position in emerging market debt through Argentine inflation-linked bonds as real yields appeared attractive. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INFLATION PROTECTED BOND PORTFOLIO AND THE LEHMAN GLOBAL REAL: U.S. TIPS INDEX FROM INCEPTION. [LINE CHART] Institutional Investor A Lehman Global Real: U.S. TIPS Index ------------- ---------- ----------------------------------- 06/28/2004 $ 10,000 $ 9,699 $ 10,000 06/30/2004 10,110 9,806 10,118 09/30/2004 10,540 10,195 10,506 12/31/2004 10,808 10,438 10,771 03/31/2005 10,796 10,427 10,735 06/30/2005 11,098 10,703 11,062 09/30/2005 11,151 10,758 11,065 For period ending September 30, 2005 Average Annual Total Return 1 Year From Inception ------ -------------- BlackRock Class 5.91% 8.85% Institutional Class 5.80% 9.05% Service Class 5.52% 7.59% Investor A Class (Load Adjusted) 2.40% 5.98% Investor A Class (NAV) 5.52% 8.58% Investor B Class (Load Adjusted) 0.14% 4.79% Investor B Class (NAV) 4.62% 7.93% Investor C Class (Load Adjusted) 3.70% 8.24% Investor C Class (NAV) 4.70% 8.24% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio on 6/28/04. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as the periods indicated, the Portfolio is actively managed and its composition will vary. 18
Inflation Protected Bond Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 99.5% BBB 0.2 less than BBB 0.3 ----- Total 100.0% ===== Sector Allocation (% of long-term investments) U.S. Government & Agency Obligations 91.2% Foreign Bonds 4.5 Mortgage Pass-Throughs 4.1 Corporate Bonds 0.2 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 10.87 Effective Duration/2/ 7.53 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ------------- ------------- ------------- ------------- ------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,034.10 1,032.90 1,032.00 1,031.70 1,027.70 1,027.60 Expenses Incurred During Period (4/01/05 - 9/30/05) 1.53 2.04 3.57 3.57 7.37 7.32 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ------------- ------------- ------------- ------------- ------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,023.48 1,022.97 1,021.45 1,021.45 1,017.64 1,017.69 Expenses Incurred During Period (4/01/05 - 9/30/05) 1.52 2.03 3.55 3.55 7.36 7.31 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.30%, 0.40%, 0.70%, 0.70%, 1.45%, and 1.44% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the period the fund was open during the one-half year period). 19
GNMA Portfolio Total Net Assets (9/30/05): $202.4 million Performance Benchmark: Lehman Brothers GNMA MBS Index Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management, by investing primarily in securities issued by the Government National Mortgage Association ("GNMA") as well as other U.S. Government securities in the five to ten year maturity range. Securities purchased by the Portfolio are rated in the highest rating category (AAA or Aaa) at the time of purchase by at least one major rating agency or are determined by the portfolio management team to be of similar quality. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. Recent Portfolio Management Activity: . All share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The major domestic spread sectors - agencies, corporate securities, asset-backed securities ("ABS"), commercial mortgage-backed securities ("CMBS") and mortgage-backed securities ("MBS") - all posted positive excess returns over duration-weighted Treasuries during the annual period. While MBS have returned 0.74% over duration-adjusted Treasuries, higher short-term rates and flattening of the yield curve has dramatically reduced the carry advantage of MBS. Domestic banks, who have been the primary sponsor of MBS, have reduced their MBS holdings. Additionally, with the portfolio growth of the government sponsored enterprises falling, the MBS market has become much more reliant on overseas demand. . During the annual period, the Portfolio's short duration position relative to its benchmark benefited performance as interest rates increased. The Portfolio also benefited from its overweight to 15-year maturity bonds as 15-year issues outperformed 30-year issues. The Portfolio continues to have a bias toward 15-year maturity bonds over 30-year maturity bonds as 15-year issues tend to exhibit a better convexity and more stable duration profile. In terms of sector allocation, the Portfolio largely had an underweight to MBS during the annual period, which was a detractor from performance. The Portfolio's non-benchmark allocation to ABS was beneficial to performance as the sector returned 0.75% over duration-adjusted Treasuries. At the end of the annual period, the Portfolio maintained an underweight to MBS and held small non-benchmark positions in adjustable rate mortgages, CMBS, collateralized mortgage obligations and ABS. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE GNMA PORTFOLIO AND THE LEHMAN BROTHERS GNMA MBS INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Lehman Brothers GNMA MBS Index ------------- ---------- ------------------------------ 05/18/1998 $ 10,000 $ 9,597 $ 10,000 06/30/1998 10,099 9,684 10,077 09/30/1998 10,331 9,896 10,334 12/31/1998 10,448 9,996 10,426 03/31/1999 10,529 10,061 10,531 06/30/1999 10,409 9,935 10,486 09/30/1999 10,503 10,013 10,581 12/31/1999 10,477 9,977 10,627 03/31/2000 10,702 10,179 10,834 06/30/2000 10,963 10,415 11,064 09/30/2000 11,311 10,722 11,396 12/31/2000 11,719 11,141 11,808 03/31/2001 12,073 11,464 12,126 06/30/2001 12,186 11,557 12,283 09/30/2001 12,762 12,088 12,755 12/31/2001 12,884 12,200 12,778 03/31/2002 13,029 12,323 12,915 06/30/2002 13,478 12,730 13,334 09/30/2002 13,773 12,994 13,695 12/31/2002 14,020 13,210 13,889 03/31/2003 14,119 13,288 14,005 06/30/2003 14,262 13,406 14,081 09/30/2003 14,324 13,448 14,141 12/31/2003 14,471 13,570 14,285 03/31/2004 14,660 13,730 14,511 06/30/2004 14,533 13,596 14,380 09/30/2004 14,892 13,919 14,728 12/31/2004 15,031 14,039 14,907 03/31/2005 15,001 14,002 14,915 06/30/2005 15,232 14,208 15,220 09/30/2005 15,231 14,198 15,227 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year From Inception ------ ------ ------ -------------- BlackRock Class 2.44% 3.51% 6.19% 5.92% Institutional Class 2.28% 3.41% 6.13% 5.88% Service Class 2.02% 3.09% 5.81% 5.55% Investor A Class (Load Adjusted) (2.04)% 1.60% 4.92% 4.87% Investor A Class (NAV) 2.01% 3.00% 5.78% 5.46% Investor B Class (Load Adjusted) (3.16)% 1.17% 4.59% 4.65% Investor B Class (NAV) 1.25% 2.24% 4.92% 4.65% Investor C Class (Load Adjusted) 0.27% 2.25% 4.93% 4.63% Investor C Class (NAV) 1.26% 2.25% 4.93% 4.63% The performance information above includes information relating to each class of the portfolio since the commencement of operations of the portfolio on 5/18/98. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 20
GNMA Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 99.2% AA 0.8 ------ Total 100.0% ====== Sector Allocation (% of long-term investments) Mortgage Pass-Throughs 96.2% Collaterized Mortgage Obligations 1.7 Asset Backed Securities 0.9 U.S. Government & Agency Obligations 0.6 Commercial Mortgage Backed Securities 0.6 ------ Total 100.0% ====== Portfolio Statistics Average maturity (years) 5.76 Effective Duration/2/ 2.64 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ------------- ------------- ------------- ------------- ------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,015.10 1,015.40 1,013.10 1,014.00 1,010.30 1,010.30 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.27 3.03 4.34 4.29 8.11 8.11 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ------------- ------------- ------------- ------------- ------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.72 1,021.95 1,020.63 1,020.69 1,016.83 1,016.83 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.28 3.05 4.37 4.31 8.17 8.17 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.45%, 0.60%, 0.86%, 0.85%, 1.61%, and 1.61% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 21
Managed Income Portfolio Total Net Assets (9/30/05): $705.7 million Performance Benchmark: Lehman Brothers U.S. Aggregate Index Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management, by investing primarily in investment grade bonds that allow it to maintain an average portfolio duration that is within +/- 20% of the duration of the Lehman Brothers U.S. Aggregate Index. The Portfolio normally invests at least 80% of its assets in bonds and only buys securities rated investment grade at the time of purchase by at least one major rating agency or determined by the management team to be of similar quality. The Portfolio may invest up to 10% of its assets in non-dollar denominated bonds of issuers located outside of the United States. The Portfolio's investment in non-dollar denominated bonds may be on a currency hedged or unhedged basis. The portfolio management team selects bonds from several categories including: U.S. Treasuries and agency securities, commercial and residential mortgage-backed securities ("CMBS" and "MBS"), collateralized mortgage obligations ("CMOs"), asset-backed securities ("ABS") and corporate bonds. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. Recent Portfolio Management Activity: . The Institutional share class outperformed the benchmark for the annual period. The Investor A, B, C and Service share classes underperformed the benchmark for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. In the beginning of the second half of the annual period, longer maturity yields largely declined due to the perceived softening of the global economy driven primarily by the dramatic upswing in oil prices. However, by the end of September, the evidence of economic vitality was compelling enough to survive not only surging energy costs but two highly destructive hurricanes. Longer maturity yields increased as the Fed began to signal that its greater concern was increasing inflation. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The major domestic spread sectors - agencies, corporate securities, ABS, CMBS and MBS - all posted positive excess returns over duration-weighted Treasuries during the annual period. Investment grade corporate securities lagged behind the other domestic spread sectors. Corporate bond performance was driven by both solid credit fundamentals and strong investor demand in the beginning of the period. However, with the downgrading of both General Motors and Ford, two of the largest corporate bond issuers in the world, to below investment grade, investors became noticeably more cautious. In spite of higher short-term interest rates and flattening of the yield curve, which has dramatically reduced the carry advantage of MBS, the sector was able to post a positive excess return over Treasuries. Valuations of ABS remained stable, and spreads remained near historically tight levels despite robust supply. The net supply of agencies continued to be negative as government sponsored enterprises were unable to grow given unresolved accounting issues and intense political scrutiny. This lack of supply has kept spreads tight. CMBS, the best performing domestic spread sector during the annual period, has enjoyed strong demand due to the sector's attractive relative value characteristics. . During the annual period, the Portfolio's short duration position relative to its benchmark benefited performance as interest rates increased. The Portfolio also benefited from its yield curve positioning during the annual period. The Portfolio's overweight to ABS also contributed to performance as the sector returned 0.75% over duration-adjusted Treasuries. The Portfolio maintained its focus on non-prepayment sensitive issues within this sector. Lastly, the Portfolio's overweight to CMBS contributed to performance as the sector returned 0.79% for the annual period. On the contrary, the Portfolio's underweight to MBS detracted from performance as the sector returned 0.74% over duration-adjusted Treasuries. Within this sector, the Portfolio favored 15-year over 30-year pass-throughs. Additionally, the Portfolio maintained allocations to CMOs and adjustable rate mortgages. The Portfolio's underweight to agencies relative to its benchmark detracted from performance as the sector returned 0.76% for the annual period. Lastly, the Portfolio continued to be underweight corporate securities on a duration-weight basis, with a bias toward financials and higher quality credits. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE MANAGED INCOME PORTFOLIO AND THE LEHMAN BROTHERS U.S. AGGREGATE INDEX FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Lehman Brothers U.S. Aggregate Index ------------- ---------- ------------------------------------ 09/30/1995 $ 10,000 $ 9,549 $ 10,000 12/31/1995 10,424 9,943 10,426 03/31/1996 10,216 9,732 10,240 06/30/1996 10,258 9,761 10,298 09/30/1996 10,433 9,915 10,488 12/31/1996 10,782 10,236 10,803 03/31/1997 10,751 10,194 10,743 06/30/1997 11,138 10,548 11,139 09/30/1997 11,502 10,881 11,510 12/31/1997 11,802 11,152 11,849 03/31/1998 11,975 11,302 12,032 06/30/1998 12,289 11,585 12,313 09/30/1998 12,566 11,832 12,833 12/31/1998 12,663 11,909 12,877 03/31/1999 12,670 11,902 12,811 06/30/1999 12,540 11,766 12,698 09/30/1999 12,637 11,843 12,785 12/31/1999 12,585 11,781 12,770 03/31/2000 12,855 12,019 13,051 06/30/2000 13,077 12,225 13,279 09/30/2000 13,502 12,595 13,679 12/31/2000 14,086 13,137 14,254 03/31/2001 14,524 13,530 14,687 06/30/2001 14,570 13,556 14,769 09/30/2001 15,310 14,215 15,450 12/31/2001 15,307 14,196 15,458 03/31/2002 15,287 14,160 15,472 06/30/2002 15,839 14,654 16,044 09/30/2002 16,354 15,113 16,779 12/31/2002 16,765 15,475 17,043 03/31/2003 17,021 15,693 17,280 06/30/2003 17,511 16,126 17,712 09/30/2003 17,499 16,095 17,687 12/31/2003 17,534 16,108 17,742 03/31/2004 17,925 16,449 18,214 06/30/2004 17,577 16,110 17,769 09/30/2004 18,112 16,583 18,337 12/31/2004 18,285 16,740 18,512 03/31/2005 18,244 16,671 18,423 06/30/2005 18,688 17,060 18,977 09/30/2005 18,630 16,990 18,849 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------ ------ ------ ------- Institutional Class 2.86% 4.44% 6.65% 6.42% Service Class 2.45% 4.09% 6.31% 6.10% Investor A Class (Load Adjusted) (2.15)% 2.41% 5.19% 5.44% Investor A Class (NAV) 2.45% 3.98% 6.17% 5.93% Investor B Class (Load Adjusted) (2.73)% 2.15% 5.05% 5.28% Investor B Class (NAV) 1.69% 3.21% 5.38% 5.28% Investor C Class (Load Adjusted) 0.71% 3.21% 5.35% 5.26% Investor C Class (NAV) 1.69% 3.21% 5.35% 5.26% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Institutional Shares, 11 /1/89; Investor A Shares, 2 /5 /92; Service Shares, 7/29/93; Investor B Shares, 7/15 /97; and Investor C Shares, 11/22/99. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 22
Managed Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 84.2% AA 8.7 A 3.9 BBB 3.0 less than BBB 0.2 ------ Total 100.0% ====== Sector Allocation (% of long-term investments) U.S. Government & Agency Obligations 26.3% Mortgage Pass-Throughs 24.8 Corporate Bonds 20.5 Commercial Mortgage Backed Securities 10.5 Asset Backed Securities 8.5 Collateralized Mortgage Obligations 4.8 Project Loans 2.3 Taxable Municipal Bonds 1.3 Foreign Bonds 0.8 Certificate of Deposit 0.2 ------ Total 100.0% ====== Portfolio Statistics Average maturity (years) 7.01 Effective Duration/2/ 3.77 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class ------------- ------------- ------------- ------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.20 1,018.60 1,019.10 1,015.30 1,014.40 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.29 4.81 5.26 9.09 9.09 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class ------------- ------------- ------------- ------------- ------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.70 1,020.18 1,019.72 1,015.86 1,015.86 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.30 4.82 5.28 9.14 9.14 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.65%, 0.95%, 1.04%, 1.80%, and 1.80% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 23
International Bond Portfolio Total Net Assets (9/30/05): $820.5 million Performance Benchmark: Citigroup Non-U.S.World Government Bond Index Investment Approach: Seeks to realize a total return that exceeds that of the Citigroup Non-U.S. World Government Bond Index by investing primarily in non-dollar denominated bonds of issuers located outside of the United States in the five to fifteen year maturity range. The Portfolio normally invests at least 80% of its assets in bonds and at least 65% of it assets in bonds of a diversified group on non-U.S. issuers from at least three developed countries. The Portfolio may only buy securities rated investment grade at the time of purchase by at least one major rating agency or determined by the management team to be of similar quality. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. Recent Portfolio Management Activity: . All share classes of the Portfolio underperformed the benchmark for the annual period. . Non-U.S. bond markets outperformed during the first half of the annual period, mainly due to strong performance during the fourth quarter of 2004. The rebound in U.S. economic growth and the determination of the Federal Reserve to maintain their measured tightening process contrasted with more sluggish conditions in Europe and Japan. Disappointing economic releases dampened optimism for a significant European rebound as higher oil prices and the strong euro continued to hamper manufacturing, resulting in sluggish GDP growth in the entire Euro-zone. Japan also experienced disappointing economic news as fourth quarter GDP was released as a modest negative number, the third consecutive quarter of negative growth. In the Dollar Bloc, Canadian bonds outperformed U.S. bonds as the Bank of Canada halted their tightening program given the strength of the Canadian dollar. In contrast, the Reserve Bank of Australia and the Reserve Bank of New Zealand both raised official rates with a 25 basis point rise to 5.50% in Australia and a 50 basis point increase to 6.75% in New Zealand. . In the first half of the annual period, the Portfolio held a short duration stance in Japan and the Euro Bloc versus its benchmark. The Portfolio had a yield curve flattening bias in the Euro and Asia Blocs. The Portfolio maintained a short duration position in the U.S. with a yield curve flattening bias. From a country perspective, the Portfolio benefited from its overweight country allocations to New Zealand versus Australia; and Sweden and Denmark versus the Euro Bloc. The Portfolio additionally held overweights to Mexico and Germany with an underweight to Japan. The Portfolio was underweight United Kingdom ("U.K.") bonds versus euro bonds in the period. From a sector perspective, the Portfolio was overweight U.K. and Swedish swap spread products and held a position in Danish mortgages, all of which benefited performance. . During the second half of the annual period, economic growth remained lackluster in Europe and market participants expressed doubt regarding the sustainability of the European economic expansion. In contrast, the Bank of Canada resumed its tightening stance by raising rates 25 basis points to 2.75% in September. Despite hawkish rhetoric, the Reserve Bank of New Zealand did not raise interest rates in the second half of the annual period. During the latter half of the period, several developments in Japan reinforced the notion of a sustainable economic recovery. The second quarter GDP release highlighted the continued recovery in domestic demand, labor force numbers showed strength and the Nikkei surged more than 20% during the third quarter of 2005. . In the second half of the annual period, within the Dollar Bloc, the Portfolio maintained a short duration stance in the U.S. While this detracted from performance during the second quarter of 2005, our short duration position aided performance during the third quarter of 2005. The Portfolio held an underweight country allocation to Australia versus an overweight position in New Zealand. The Portfolio's yield curve flattening bias in Canada and a position in Canadian dollar supranationals benefited performance in the second half of the annual period. In the Pan Europe Bloc, the Portfolio held underweight duration positions in the Euro Bloc and the U.K. While the short duration position in the U.K. detracted from returns during the second quarter of 2005 when rates rallied across the curve, the Portfolio benefited from this position in the third quarter of 2005 as the majority of the yields across the curve increased. In addition, the Portfolio held overweight country allocations to Germany and Poland. In the Asia Bloc, the Portfolio's underweight to Japan detracted from performance as rates rallied during the second quarter of 2005, while the underweight benefited performance in the third quarter of 2005 as rates increased. We maintained a yield curve flattening bias in Japan throughout the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE INTERNATIONAL BOND PORTFOLIO AND THE CITIGROUP NON-U.S. WORLD GOVERNMENT BOND INDEX FOR THE PAST TEN YEARS. [LINE CHART] Citigroup Non-U.S. Service Investor A World Government Bond Index --------- ---------- ------------------------------ 09/30/1995 $ 10,000 $ 9,498 $ 10,000 12/31/1995 10,487 9,960 10,207 03/31/1996 10,524 9,995 10,035 06/30/1996 10,763 10,220 10,075 09/30/1996 11,180 10,611 10,403 12/31/1996 11,578 10,982 10,624 03/31/1997 11,689 11,083 10,010 06/30/1997 12,080 11,449 10,292 09/30/1997 12,435 11,780 10,314 12/31/1997 12,729 12,053 10,171 03/31/1998 13,056 12,358 10,213 06/30/1998 13,278 12,563 10,383 09/30/1998 13,949 13,192 11,381 12/31/1998 14,148 13,375 11,980 03/31/1999 14,348 13,558 11,401 06/30/1999 14,214 13,426 10,889 09/30/1999 14,172 13,380 11,555 12/31/1999 14,174 13,376 11,373 03/31/2000 14,460 13,640 11,241 06/30/2000 14,830 13,984 11,152 09/30/2000 15,124 14,255 10,647 12/31/2000 15,783 14,870 11,074 03/31/2001 16,327 15,376 10,530 06/30/2001 16,462 15,496 10,323 09/30/2001 16,935 15,935 11,123 12/31/2001 16,996 15,985 10,682 03/31/2002 16,907 15,896 10,482 06/30/2002 17,346 16,302 11,947 09/30/2002 17,845 16,763 12,286 12/31/2002 18,134 17,027 13,030 03/31/2003 18,518 17,380 13,516 06/30/2003 19,268 18,060 14,085 09/30/2003 19,747 18,519 14,473 12/31/2003 21,001 19,670 15,443 03/31/2004 21,212 19,876 15,686 06/30/2004 20,548 19,245 15,155 09/30/2004 21,108 19,767 15,652 12/31/2004 23,274 21,795 17,317 03/31/2005 22,515 21,084 16,780 06/30/2005 21,716 20,354 16,328 09/30/2005 21,574 20,204 16,144 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year -------- ------ ------ ------- BlackRock Class 2.62% 6.88% 7.70% 8.30% Institutional Class 2.46% 6.80% 7.65% 8.28% Service Class 2.21% 6.53% 7.36% 7.99% Investor A Class (Load Adjusted) (2.89)% 4.63% 6.13% 7.29% Investor A Class (NAV) 2.21% 6.42% 7.22% 7.84% Investor B Class (Load Adjusted) (2.94)% 4.57% 6.11% 7.08% Investor B Class (NAV) 1.45% 5.63% 6.43% 7.08% Investor C Class (Load Adjusted) 0.56% 5.65% 6.48% 7.10% Investor C Class (NAV) 1.53% 5.65% 6.48% 7.10% The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Service Shares, 7/1/91; Investor B Shares, 4 /19/96; Investor A Shares, 4/22/96; Institutional Shares, 6/10/96; and Investor C Shares, 9/11/96. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph * above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 24
International Bond Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 79.2% AA 15.8 A 4.6 BBB 0.4 ------ Total 100.0% ====== Top 10 Country Allocation (% of long-term investments) Germany 25.8% United States 17.4 Japan 8.6 United Kingdom 7.2 Canada 7.2 Ireland 6.5 France 6.2 Italy 5.5 Poland 3.1 Finland 2.8 ----- Total 90.3% ===== Portfolio Statistics Average maturity (years) 7.59 Effective Duration/2/ 4.47 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 960.10 959.40 958.20 958.20 954.60 954.70 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.83 4.72 5.89 5.89 9.60 9.56 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.04 1,020.13 1,018.91 1,018.91 1,015.05 1,015.10 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.96 4.87 6.09 6.09 9.95 9.90 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.78%, 0.96%, 1.20%, 1.20%, 1.96%, and 1.95% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period) and 134/365 for the BlackRock class (to reflect the period the class was open during the one-half year.) 25
High Yield Bond Portfolio Total Net Assets (9/30/05): $916.7 million Performance Benchmark: Lehman Brothers U.S. Corporate High Yield 2% Issuer Cap Index Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management, by investing primarily in non-investment grade bonds with maturities of ten years or less. The Portfolio normally invests at least 80% of its net assets in high yield bonds, including convertible and preferred securities. The high yield securities purchased by the Portfolio will generally be in the lower rating categories of major rating agencies (BB or lower by Standard & Poor's or Ba or lower by Moody's) or will be determined by the portfolio management team to be of similar quality. The Portfolio may invest up to 10% of its assets in non-dollar denominated bonds of issuers located outside of the United States. The management team evaluates sectors of the high yield market and individual bonds within these sectors. Securities are purchased for the Portfolio when the management team determines that they have the potential for above average total return. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock High Yield Bond Portfolio (the Portfolio) reorganized with the State Street Research High Income Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. . In July, the Portfolio changed its benchmark to the Lehman Brothers U.S. Corporate High Yield 2% Issuer Cap Index from the Lehman Brothers U.S. Corporate High Yield Index. The recent downgrade of General Motors' ("GM") debt securities from investment grade to high yield and the subsequent introduction of GM into high yield indices at as much as a 6% weight has changed the composition of many indices. The new benchmark's 2% issuer limit allows BlackRock to overweight a particular issuer and to maintain prudent diversification. . All share classes outperformed the Portfolio's former and current benchmarks for the annual period. . During the first half of the annual period, yields largely increased as the Federal Reserve ("Fed") continued to pursue its policy of interest rate "normalization". The Fed Funds target rate began the fiscal year at 1.75%. For the next twelve months, the Fed emphasized sustainable economic growth, contained inflation, and accommodative monetary conditions. During the annual period, the Federal Open Market Committee voted a 0.25% tightening at each of its eight meetings lifting the Fed Funds target rate to 3.75%. In contrast, longer interest rates, as measured by the 10-year Treasury, increased by a modest 0.21%, ending the period at 4.33%. . The high yield market returned 4.88% over duration-adjusted Treasuries during the annual period. Much of the out-performance is attributable to the fourth quarter of 2004. However, a reassessment of risk was triggered by the much-reduced earnings forecast by GM and widespread expectation of an eventual downgrade to below investment grade. The market facilitated a relatively smooth transition once rating agency Standard & Poor's cut GM's rating to high yield status. Lastly, in the aftermath of Hurricanes Katrina and Rita, high crude oil prices have gotten the most attention, but the rally in fuel commodities has been broad-based. . During the annual period, in terms of credit biases, the Portfolio's overweight to B-rated issues relative to BB-rated issues was beneficial to performance as B-rated issues returned 4.66% over duration-adjusted Treasuries. In terms of sector biases, the Portfolio's overweight to the electric, construction machinery and media non-cable sectors and underweight to the automotive suppliers sector were beneficial to performance. However, the Portfolio's underweight to the building materials, wirelines and media cable sectors detracted from performance. At the end of the annual period, the Portfolio continues to have an overweight to `B' and split-rated `CCC' securities and an underweight to `BB' securities. From a sector perspective, at the end of the annual period, the Portfolio was overweight in the electric, aerospace/defense, transportation services and construction machinery sectors and underweight in airlines, home construction, media non-cable, and health care sectors. The Portfolio remains biased toward companies with pricing power and the ability to generate free cash flow to reduce debt. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE HIGH YIELD BOND PORTFOLIO, THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD 2% ISSUER CAP INDEX AND THE LEHMAN BROTHERS U.S. CORPORATE HIGH YIELD INDEX FROM INCEPTION. [LINE CHART] Lehman Brothers U.S. Corporate Lehman Brothers U.S. Corporate Institutional Investor A High Yield 2% Issuer Cap Index* High Yield Index ------------- ---------- -------------------------------- ------------------------------- 11/19/1998 $ 10,000 $ 9,497 $ 10,000 $ 10,000 12/31/1998 10,128 9,613 10,011 10,160 03/31/1999 10,465 9,922 10,196 10,347 06/30/1999 10,622 10,059 10,231 10,382 09/30/1999 10,593 10,019 10,086 10,234 12/31/1999 11,013 10,394 10,250 10,402 03/31/2000 10,883 10,269 10,011 10,159 06/30/2000 10,994 10,362 10,127 10,276 09/30/2000 10,923 10,282 10,182 10,334 12/31/2000 10,221 9,610 9,657 9,793 03/31/2001 10,764 10,110 10,283 10,415 06/30/2001 10,647 9,988 10,054 10,177 09/30/2001 10,318 9,667 9,630 9,746 12/31/2001 10,941 10,239 10,184 10,310 03/31/2002 11,210 10,478 10,360 10,483 06/30/2002 10,860 10,140 9,842 9,810 09/30/2002 10,510 9,800 9,547 9,523 12/31/2002 11,060 10,301 10,159 10,164 03/31/2003 11,785 10,949 10,922 10,938 06/30/2003 13,024 12,088 12,025 12,044 09/30/2003 13,346 12,373 12,359 12,377 12/31/2003 14,164 13,133 13,083 13,109 03/31/2004 14,518 13,446 13,394 13,416 06/30/2004 14,450 13,368 13,265 13,287 09/30/2004 15,085 13,944 13,907 13,931 12/31/2004 15,894 14,700 14,540 14,568 03/31/2005 15,702 14,494 14,307 14,334 06/30/2005 16,000 14,760 14,678 14,730 09/30/2005 16,391 15,112 14,823 14,866 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year From Inception ------ ------ ------ -------------- BlackRock Class 8.82% 16.14% 8.62% 7.60% Institutional Class 8.66% 15.97% 8.46% 7.47% Service Class 8.38% 15.64% 8.14% 7.13% Investor A Class (Load Adjusted) 2.94% 13.55% 6.90% 6.20% Investor A Class (NAV) 8.38% 15.53% 8.01% 7.00% Investor B Class (Load Adjusted) 3.10% 13.79% 6.95% 6.20% Investor B Class (NAV) 7.57% 14.68% 7.23% 6.20% Investor C Class (Load Adjusted) 6.44% 14.67% 7.19% 6.18% Investor C Class (NAV) 7.44% 14.67% 7.19% 6.18% * The performance for the Lehman Brothers U.S. corporate high yield 2% issuer cap index in the chart starts on 12/1/1998. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio on 11/19/98. See "Note on Performance Information" on page 28 for further information on how performance data was calculated, including important information on the line graph + above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 26
High Yield Bond Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ BBB or BBB 5.1% BB 27.6 B 51.0 CCC 11.2 <CCC 1.0 Unrated 4.1 ------ Total 100.0% ====== Top 10 Industries (% of long-term investments) Energy & Utilities 11.6% Telecommunications 10.2 Oil & Gas 10.0 Manufacturing 6.1 Broadcasting 5.9 Entertainment & Leisure 5.0 Finance 5.0 Chemicals 4.5 Business Services 3.9 Construction 3.2 ----- Total 65.4% ===== Portfolio Statistics Average maturity (years) 6.12 Modified Duration/2/ 5.18 - ---------- 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Modified duration assumes that cash flows remain constant as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) or redemption/exchange fees, where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,044.70 1,043.90 1,042.60 1,042.60 1,038.70 1,038.70 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.82 3.59 4.92 4.92 8.74 8.79 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------ BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class ---------- ------------- ---------- ---------- ---------- ---------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.21 1,021.45 1,020.13 1,020.13 1,016.32 1,016.27 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.79 3.55 4.87 4.87 8.68 8.73 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.55%, 0.70%, 0.96%, 0.96%, 1.71%, and 1.72% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 27
BlackRock Funds NOTE ON PERFORMANCE INFORMATION The performance information above includes information for each class of each Portfolio since the commencement of operations of each Portfolio, rather than the date such class was introduced. Performance information for each class introduced after the commencement of operations of a Portfolio is therefore based on the performance history of a predecessor class or predecessor classes. If a class of shares in a Portfolio (the "Subsequent Class") has more than one predecessor class, the performance data predating the introduction of the Subsequent Class is based initially on the performance of the Portfolio's first operational predecessor class (the "Initial Class"); thereafter, the performance of the Subsequent Class is based upon the performance of any other predecessor class or classes which were introduced after the Initial Class and which had total operating expenses more similar to those of the Subsequent Class. In the case of Investor A, Investor B, Investor C and Service Shares, the performance information for periods prior to their introduction dates has not been restated to reflect the shareholder servicing and/or distribution fees and certain other expenses borne by these share classes which, if reflected, would reduce the performance quoted. Accordingly, the performance information may be used in assessing each Portfolio's performance history but does not reflect how the distinct classes would have performed on a relative basis prior to the introduction of these classes, which would require an adjustment to the ongoing expenses. Additionally, the performance information above does not reflect accounting adjustments required under accounting principles generally accepted in the United States of America and as a result there may be variances between what is reported within this section and that reported in the total return calculation in the Financial Highlights. Performance information is restated to reflect the current maximum front-end sales charge (in the case of Investor A Shares) or the maximum contingent deferred sales charge (in the case of Investor B and Investor C Shares), and assumes the reinvestment of dividends and distributions. The maximum front-end sales charges for Investor A Shares are as follows: Intermediate PLUS Bond, Intermediate Government Bond, Intermediate Bond, Core Bond Total Return, Core PLUS Total Return and GNMA - 4.00%; Government Income and Managed Income - 4.50%; International Bond and High Yield Bond - 5.00%; and Inflation Protected Bond, Enhanced Income and Low Duration Bond - 3.00%. The maximum contingent deferred sales charge for Investor B Shares and Investor C Shares of all of the Portfolios is 4.50% and 1.00%, respectively. The performance information also reflects fee waivers and reimbursements that subsidize and reduce the total operating expenses of each Portfolio. The Portfolios' returns would have been lower if there were not such waivers and reimbursements. BlackRock Advisors, Inc. is under no obligation to waive or continue waiving its fees after February 1, 2006 or February 1, 2007 as described in the prospectus of the Portfolios. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. + The performance shown in the line graph is that of Institutional Shares and Investor A Shares of the Portfolios. The actual performance of Investor B, Investor C and Service Shares is lower than the performance of Institutional Shares because Investor B, Investor C and Service Shares have higher expenses than Institutional Shares. Excluding the effects of sales charges, the actual performance of Investor B and Investor C Shares is lower than the performance of Investor A Shares because Investor B and Investor C Shares have higher expenses than Investor A Shares. Purchasers of Investor A Shares generally pay a front-end sales charge, while purchasers of Investor B and Investor C Shares may pay a contingent deferred sales charge (depending on how long they hold their shares) when they sell their shares. * The performance shown in the line graph is that of Service Shares and Investor A Shares of the Portfolios. The actual performance of Investor B and Investor C Shares is lower than the performance of Service Shares because Investor B and Investor C Shares have higher expenses than Service Shares. Excluding the effects of sales charges, the actual performance of Investor B and Investor C Shares is lower than the performance of Investor A Shares because Investor B and Investor C Shares have higher expenses than Investor A shares. Purchasers of Investor A Shares generaly pay a front-end sales charge, while purchasers of Investor B and Investor C Shares may pay a contingent deferred sales charge (depending on how long they hold their shares) when they sell their shares. Important Tax Information for Shareholders of the BlackRock Taxable Bond Portfolios (unaudited) During the fiscal year ended September 30, 2005, the following portfolios of the BlackRock Funds declared the following dividends from net realized capital gains: Short-term Long-term capital gain capital gain per share per share -------------- ------------- Intermediate Government Bond Portfolio ...... $ -- $ 0.0475 Intermediate Bond Portfolio ................. -- 0.0766 Intermediate PLUS Bond Portfolio ............ 0.006 0.0028 Core Bond Total Return Portfolio ............ 0.0001 0.0167 Inflation Protected Portfolio ............... 0.1012 0.0009 Managed Income Portfolio .................... 0.0001 0.0384 High Yield Bond Portfolio ................... 0.1265 0.0101 International Bond Portfolio ................ 0.0022 0.0038 Because the Portfolios' fiscal year is not the calendar year, another notification will be sent with respect to calendar year 2005. The second notification, which reflects the amounts to be used by calendar year taxpayers on their U.S. federal income tax returns, has been made in conjunction with form 1099-DIV and will be mailed in January 2006. 28
BlackRock Funds STATEMENT OF NET ASSETS ENHANCED INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value --------------- ------------ --------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 17.1% Federal Home Loan Bank 1.70% 12/30/05 $ 745 $ 740,921 Federal Home Loan Mortgage Corp., Unsecured Notes 5.25% 01/15/06 1,725 1,730,673 1.88% 02/15/06 900 892,732 Federal National Mortgage Association 2.77% 12/29/06 275 269,688 Federal National Mortgage Association, Unsecured Notes 2.75% 05/10/06 800 792,798 2.71% 01/30/07 550 538,259 6.62% 09/15/09 75 80,597 U.S. Treasury Bonds 12.75% 11/15/10 255 257,610 10.38% 11/15/12 325 365,397 U.S. Treasury Notes 2.38% 08/31/06 140 137,851 3.12% 01/31/07 2,300 2,269,274 4.00% 08/31/07 1,470 1,465,005 4.12% 08/15/08 65 64,904 ---------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $9,673,824) 9,605,709 ---------- MORTGAGE PASS-THROUGHS -- 10.5% Federal Home Loan Mortgage Corp. ARM 3.54%(b) 05/01/34 701 680,634 3.57%(b) 07/01/34 717 709,787 4.31%(b) 11/01/34 497 493,930 4.87%(b) 05/01/35 763 759,490 4.96%(b) 10/01/37 211 211,327 Federal National Mortgage Association 5.00% 10/18/20 1,700 1,695,219 Federal National Mortgage Association ARM 4.87%(b) 06/01/35 452 456,819 5.33%(b) 10/01/35 400 397,750 Government National Mortgage Association II ARM 4.12%(b) 11/20/29 74 75,650 3.50%(b) 08/20/31 130 131,299 Government National Mortgage Association II Hybrid 3.75%(b) 06/20/34 319 315,101 ---------- TOTAL MORTGAGE PASS-THROUGHS (Cost $5,962,392) 5,927,006 ---------- MULTIPLE CLASS MORTGAGE PASS-THROUGHS -- 0.5% Federal National Mortgage Association, Series 05-68, Class PB 5.75% (Cost $256,441) 07/25/35 249 253,791 ---------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 14.7% Adjustable Rate Mortgage Trust, Series 04-4, Class 5A3 4.20%(b) 03/25/35 360 360,616 Banc of America Funding Corp., Series 04-C, Class 4A2 4.14%(b) 12/20/34 456 457,407 Bear Stearns Mortgage Trust, Series 04-12, Class 1A1 4.18%(b) 01/25/35 352 352,267 Bear Stearns Mortgage Trust, Series 04-13, Class A1 4.20%(b) 11/25/34 511 513,708 Bear Stearns Mortgage Trust, Series 04-7, Class 4A 3.20%(b) 10/25/34 272 268,048 Countrywide Home Loans, Series 04-29, Class 1A1 4.10%(b) 02/25/35 587 586,766 Credit Suisse First Boston Mortgage Securities Corp., Series 02-10, Class 2A1 7.50% 05/25/32 75 76,015 Federal Home Loan Mortgage Corp., Series 2763, Class PA 4.50% 09/15/10 96 96,427 Federal Home Loan Mortgage Corp., Series 2808, Class PA 4.00% 09/15/12 745 742,799 Federal Home Loan Mortgage Corp., Series SF5, Class GB 1.77% 12/15/07 343 337,471 Federal National Mortgage Association, Series 02-39, Class FB 4.14%(b) 03/18/32 56 56,279 Federal National Mortgage Association, Series 04-25, Class PA 5.50% 10/25/30 121 122,640 Federal National Mortgage Association, Series 04-36, Class BS 5.50% 11/25/30 165 166,203 Federal National Mortgage Association, Series 04-W10, Class A1 5.75% 08/25/34 181 181,799 GSAA Home Equity Trust, Series 04-8, Class A3A 4.20%(b) 09/25/34 348 348,624 GSR Mortgage Loan Trust, Series 04-9, Class 3A1 3.69%(b) 08/25/34 159 158,947 Merrill Lynch Mortgage Investors, Inc., Series 97-B, Class A 3.85%(b) 03/15/26 629 630,014 Merrill Lynch Mortgage Investors, Inc., Series 04-E, Class A2A 3.72%(b) 11/25/29 390 389,969 MortgageIT Trust, Series 04-1, Class A1 4.22%(b) 11/25/34 527 527,795 Residential Accredit Loans, Inc., Series 01-QS19, Class A1 6.00% 12/25/16 250 249,422 Structured Asset Securities Corp., Series 04-3AC, Class A2 4.92%(b) 03/25/34 235 234,499 Structured Mortgage Loan Trust, Series 04-13, Class A2 4.13%(b) 09/25/34 365 364,576 See accompanying notes to financial statements. 29
BlackRock Funds STATEMENT OF NET ASSETS ENHANCED INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) Washington Mutual Mortgage Loan Trust, Series 03-AR8, Class A 4.03% 08/25/33 $ 255 $ 252,100 Wells Fargo Mortgage Backed Securities Trust, Series 04-V, Class 1A2 3.83%(b) 10/25/34 835 823,655 ---------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $8,337,412) 8,298,046 ---------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 7.8% Bayview Financial Acquisition Trust, Series 98-1, Class A1 7.01%(c) 05/25/29 239 237,581 Bear Stearns Commercial Mortgage Securities, Series 00-WF, Class A1 7.11% 10/15/32 308 319,783 Commercial Mortgage Acceptance Corp., Series 98-C2, Class A2 6.03% 09/15/30 314 321,725 Credit Suisse First Boston Mortgage Securities Corp., Series 98-C1, Class A1B 6.48% 05/17/40 304 315,367 Credit Suisse First Boston Mortgage Securities Corp., Series 00-C1, Class A1 7.32% 04/15/42 388 405,198 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% 08/15/36 160 170,778 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 03-C2, Class X2 (IO) 0.29%(c)(d) 05/10/40 6,799 49,436 Goldman Sachs Mortgage Securities Corp. II, Series 98-C1, Class A3 6.14% 10/18/30 474 489,609 Homebanc Mortgage Trust, Series 05-4, Class A1 4.10%(b) 10/25/35 645 647,213 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C5, Class A1 6.41% 12/15/19 394 404,560 Merrill Lynch Mortgage Trust, Series 02-MW1, Class XP (IO) 1.55%(c)(d) 07/12/34 2,521 118,443 Nationslink Funding Corp., Series 99, Class 1 6.32% 01/20/31 436 452,771 Structured Asset Receivable Trust, Series 04-1 4.13%(b)(c) 04/21/11 482 481,829 ---------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $4,469,124) 4,414,293 ---------- ASSET BACKED SECURITIES -- 33.8% American Express Credit Account Master Trust, Series 01-1, Class A 3.91%(b) 09/15/08 625 625,343 Auto Receivables Owner Trust, Series 05-1, Class A3 3.53% 10/21/08 550 543,059 Bank One Issuance Trust, Series 03-A2, Class A2 3.82%(b) 10/15/08 600 600,124 BMW Vehicle Owner Trust, Series 05-A, Class A3 4.02% 02/25/09 575 571,401 Capital Auto Receivables Asset Trust, Series 04-1, Class A3 2.00% 11/15/07 702 693,018 Capital Auto Receivables Asset Trust, Series 04-2, Class A2 3.35% 02/15/08 725 716,278 Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 400 390,156 Chase Manhattan Auto Owner Trust, Series 03-C, Class A3 2.26% 11/15/07 655 650,069 Citibank Credit Card Issuance Trust, Series 03-A2, Class A2 2.70% 01/15/06 375 373,407 Citibank Credit Card Issuance Trust, Series 04, Class A1 2.55% 01/20/07 325 317,252 Citibank Credit Card Issuance Trust, Series 04-A4, Class A4 3.20% 08/24/07 300 292,764 Conseco Finance Securitizations Corp., Series 01-4, Class A3 6.09% 09/01/33 275 276,775 Countrywide Asset-Backed Certificates, Series 05-BC4, Class 2A1 3.79%(b) 11/25/28 625 625,000 DaimlerChrysler Auto Trust, Series 03-A, Class A3 2.12% 11/08/06 133 132,946 DaimlerChrysler Auto Trust, Series 03-B, Class A3 2.25% 08/08/07 455 453,174 DaimlerChrysler Auto Trust, Series 04-B, Class A2 2.48% 02/08/07 297 296,816 Discover Card Master Trust I, Series 01-2, Class A 3.93%(b) 07/15/08 525 525,254 Discover Card Master Trust I, Series 02-4, Class A 3.83%(b) 10/17/05 430 429,996 Ford Credit Auto Owner Trust, Series 05-A, Class A3 3.48% 11/15/08 675 667,467 Ford Credit Auto Owner Trust, Series 05-B, Class A3 4.17% 01/15/09 225 223,812 Ford Credit Auto Owner Trust, Series 05-C, Class A2 4.24% 03/15/08 475 474,980 Green Tree Financial Corp., Series 99-1, Class A4 5.76% 11/01/18 249 249,422 Honda Auto Receivables Owner Trust, Series 02-3, Class A4 3.61% 12/18/07 376 374,243 See accompanying notes to financial statements. 30
BlackRock Funds STATEMENT OF NET ASSETS ENHANCED INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- ASSET BACKED SECURITIES (Continued) Honda Auto Receivables Owner Trust, Series 03-2, Class A3 1.69% 02/21/07 $ 269 $ 267,596 Honda Auto Receivables Owner Trust, Series 04-2, Class A2 2.52% 02/15/07 269 268,069 Honda Auto Receivables Owner Trust, Series 04-2, Class A3 3.30% 06/16/08 150 148,545 Honda Auto Receivables Owner Trust, Series 05-4, Class A3 4.51% 05/20/09 325 324,730 Long Beach Asset Holdings Corp. Series 05-2, Class N1 4.15%(c) 04/25/35 229 228,334 MBNA Master Credit Card Trust, Series 96-G, Class A 3.95%(b) 12/15/08 1,180 1,181,687 Nissan Auto Receivables Owner Trust, Series 03-A, Class A3 1.89% 12/15/06 122 122,304 Nissan Auto Receivables Owner Trust, Series 03-C, Class A4 2.70% 12/17/07 675 666,800 Nissan Auto Receivables Owner Trust, Series 04-C, Class A3 2.85% 10/15/07 550 543,895 Option One Mortgage Loan Trust, Series 01-4, Class A 4.43%(b) 01/25/32 32 31,846 Option One Mortgage Loan Trust, Series 05-4, Class A2 4.08% 11/25/35 525 525,000 Residential Asset Securities Corp., Series 01-KS4, Class AIB 4.15%(b) 05/25/32 334 333,897 Saxson Asset Securities Trust, Series 02-3, Class AV 4.23%(b) 12/25/32 33 32,943 Specialty Underwriting & Residential Finance, Series 05-BC3, Class A2A 3.87%(b) 06/25/36 575 575,000 Standard Credit Card Master Trust, Series 95-9, Class A 6.55% 10/07/07 600 600,312 USAA Auto Owner Trust, Series 03-1, Class A3 1.58% 06/15/07 169 168,429 USAA Auto Owner Trust, Series 04-1, Class A3 2.06% 04/15/08 508 502,059 USAA Auto Owner Trust, Series 04-2, Class A3 3.03% 06/16/08 250 247,420 USAA Auto Owner Trust, Series 05-1, Class A2 3.55% 09/17/07 350 348,915 USAA Auto Owner Trust, Series 05-1, Class A3 3.93% 07/15/09 325 321,942 USAA Auto Owner Trust, Series 05-2, Class A3 4.07% 12/15/09 650 644,222 Vanderbilt Mortgage & Finance, Inc., Series 99-D, Class IA3 7.06%(b) 10/07/17 39 39,794 WFS Financial Owner Trust, Series 02-4, Class A3A 2.39% 08/20/07 1 730 WFS Financial Owner Trust, Series 02-4, Class A4A 3.11% 08/20/10 425 419,546 ----------- TOTAL ASSET BACKED SECURITIES (Cost $19,161,804) 19,046,771 ----------- CORPORATE BONDS -- 9.2% Aerospace -- 0.4% Northrop Grumman Corp., Senior Unsecured Notes 4.08% 11/16/06 150 149,275 Northrop Grumman Corp., Unsecured Notes 7.00% 03/01/06 45 45,492 ----------- 194,767 ----------- Banks -- 2.1% Banc One Corp., Senior Unsecured Notes 2.62% 06/30/08 20 19,007 Bank of America Corp., Senior Unsecured Notes 3.88% 01/15/08 100 98,530 3.25% 08/15/08 20 19,292 Bayerische Landesbank New York, Senior Notes 2.50% 04/28/06 500 494,854 Citigroup, Inc., Senior Unsecured Notes 3.50% 02/01/08 200 195,190 J.P. Morgan Chase & Co., Senior Unsecured Notes 5.25% 05/30/07 150 151,763 U.S. Central Credit Union, Unsecured Notes 2.75% 05/30/08 30 28,598 Wells Fargo & Co., Senior Unsecured Notes 5.12% 02/15/07 180 181,048 ----------- 1,188,282 ----------- Energy & Utilities -- 0.0% PSEG Funding Trust, Capital Security 5.38% 11/16/07 25 25,195 ----------- Finance -- 3.1% General Electric Capital Corp., Unsecured Notes 3.45%(b) 07/07-01/08 1,450 1,450,244 3.60% 10/15/08 125 121,526 Golden West Financial Corp., Senior Unsecured Notes 4.12% 08/15/07 15 14,892 See accompanying notes to financial statements. 31
BlackRock Funds STATEMENT OF NET ASSETS ENHANCED INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Finance (Continued) Household Finance Corp., Unsecured Notes 4.12% 12/15/08 $ 150 $ 147,410 ---------- 1,734,072 ---------- Insurance -- 0.3% ASIF Global Financing, Unsecured Notes 3.90%(c) 10/22/08 20 19,475 Metropolitan Life Global Funding, Inc., Unsecured Notes 2.60%(c) 06/19/08 75 70,892 Prudential Insurance Co., Notes 6.38%(c) 07/23/06 100 101,381 ---------- 191,748 ---------- Oil & Gas -- 0.2% Consolidated Natural Gas Co., Senior Unsecured Notes 5.38% 11/01/06 130 131,002 ---------- Pharmaceuticals -- 0.6% Merck & Co., Inc., Senior Unsecured Notes 5.25% 07/01/06 50 50,208 Merck & Co., Inc., Unsecured Notes 4.73%(b)(c) 02/22/06 300 300,106 ---------- 350,314 ---------- Railroad & Shipping -- 0.2% Canadian National Railway Co., Senior Notes 6.45% 07/15/06 125 126,782 ---------- Real Estate -- 0.3% Avalonbay Communities, Inc., Senior Unsecured Notes 8.25% 07/15/08 140 152,355 ---------- Retail Merchandising -- 0.3% Federated Department Stores, Inc., Senior Unsecured Notes 6.62% 09/01/08 25 26,174 May Department Stores Co., Unsecured Notes 3.95% 07/15/07 150 147,894 ---------- 174,068 ---------- Telecommunications -- 1.1% BellSouth Corp., Unsecured Notes 4.26%(b)(c)(e) 04/26/06 250 249,648 Lenfest Communications, Inc., Senior Notes 7.62% 02/15/08 125 132,242 Sprint Capital Corp., Senior Unsecured Notes 7.12% 01/30/06 75 75,617 Verizon Global Funding Corp., Senior Unsecured Notes 6.12% 06/15/07 125 128,174 Vodafone Group PLC, Senior Unsecured Notes 3.95% 01/30/08 10 9,863 ---------- 595,544 ---------- Transportation -- 0.2% Union Pacific Corp., Senior Unsecured Notes 5.75% 10/15/07 75 76,463 Union Pacific Corp., Unsecured Notes 6.79% 11/09/07 50 52,082 ---------- 128,545 ---------- Yankee -- 0.4% Republic of Italy, Unsecured Notes 2.75%(f) 12/15/06 125 122,934 Tyco International Group SA (Luxembourg), Senior Unsecured Notes 5.80%(f) 08/01/06 75 75,706 ---------- 198,640 ---------- TOTAL CORPORATE BONDS (Cost $5,229,448) 5,191,314 ---------- TAXABLE MUNICIPAL BONDS -- 0.1% New York Sales Tax Asset Receivables Corp. Revenue Bonds, Series 04, Class B 3.29% (Cost $80,000) 10/15/07 80 78,174 ---------- Par/Shares (000) ----------- SHORT TERM INVESTMENTS -- 9.9% Federal National Mortgage Association, Discount Notes 3.50%(g) 10/03/05 3,800 3,799,261 Galileo Money Market Fund 1,771 1,771,067 --------- TOTAL SHORT TERM INVESTMENTS (Cost $5,570,328) 5,570,328 --------- TOTAL INVESTMENTS IN SECURITIES -- 103.6% (Cost $58,740,773(a)) 58,385,432 LIABILITIES IN EXCESS OF OTHER ASSETS -- (3.6)% (2,047,227) ---------- NET ASSETS -- 100.0% (Applicable to 2,397,110 BlackRock shares, 3,311,002 Institutional shares, 5,005 Service shares, 239 Investor A shares outstanding) $ 56,338,205 ============ See accompanying notes to financial statements. 32
BlackRock Funds STATEMENT OF NET ASSETS ENHANCED INCOME PORTFOLIO (Concluded) As of September 30, 2005 Value ------------ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($23,641,717/2,397,110) $ 9.86 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($32,645,566/3,311,002) $ 9.86 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($48,569/5,005) $ 9.70 ============ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($2,353/239) $ 9.85 ============ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.85/0.970) $ 10.15 ============ - ---------- (a) Cost for Federal income tax purposes is $58,742,280. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 19,576 Gross unrealized depreciation (376,424) ------------ $ (356,848) ============ (b) Rates shown are the rates as of September 30, 2005. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 3.3% of its net assets, with a current market value of $1,857,125 in securities restricted as to resale. (d) Rates shown are the effective yields as of September 30, 2005. (e) Securities, or a portion thereof, pledged as collateral with a value of $249,648 on 29 long U.S. Treasury Note futures contracts and 70 short U.S. Treasury Note futures contacts expiring December 2005. The value of such contracts on September 30, 2005 was $13,450,985 with an unrealized gain of $20,256 (including commissions of $218). (f) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (g) The rate shown is the effective yield on the discount notes at the time of purchase. See accompanying notes to financial statements. 33
BlackRock Funds STATEMENT OF NET ASSETS LOW DURATION BOND PORTFOLIO As of September 30, 2005 Number of Shares Value ---------- --------------- PREFERRED STOCKS -- 0.6% Raytheon Co. Trust I (Cost $9,572,030) 180,000 $ 9,314,280 --------------- Par Maturity (000) Value ------------- ---------- --------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 40.4% Federal Home Loan Mortgage Corp., Unsecured Notes 5.25% 01/15/06 $ 47,875 48,032,461 1.88% 02/15/06 39,350 39,032,249 Federal National Mortgage Association 2.77%(b) 12/29/06 7,640 7,492,426 Federal National Mortgage Association, Unsecured Notes 2.71% 01/30/07 44,825 43,868,076 6.62% 09/15/09 23,695 25,463,168 Small Business Administration Participation Certificates, Series 97, Class A 4.35%(b)(c) 08/15/22 965 918,768 U.S. Treasury Bonds 10.38%(d)(e) 11/15/12 9,020 10,141,159 U.S. Treasury Notes 1.50% 03/31/06 19,585 19,354,719 2.25%(f) 04/30/06 99,580 98,599,734 2.75%(f) 07/31/06 20,215 19,997,850 2.50%(f) 10/31/06 103,305 101,541,584 2.88%(f) 11/30/06 88,935 87,660,028 3.88%(f) 07/31/07 10,905 10,847,072 4.00%(f) 08/31/07 56,490 56,298,047 4.12% 08/15/08 14,540 14,518,423 4.25%(f) 08/15/15 19,285 19,164,469 --------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $608,392,457) 602,930,233 --------------- MORTGAGE PASS-THROUGHS -- 13.2% Federal Home Loan Mortgage Corp. 8.25% 06/01/09 3 2,775 Federal Home Loan Mortgage Corp. ARM 5.21%(b) 07/01/20 591 593,465 3.54%(b) 05/01/34 5,715 5,552,322 3.33%(b) 07/01/34 1,232 1,219,479 3.57%(b) 07/01/34 4,096 4,054,909 4.31%(b) 11/01/34 17,843 17,726,409 Federal National Mortgage Association 6.50% 11/01/08 423 438,918 6.00% 03/12-02/17 1,228 1,264,548 5.50% 01/01/20 95 96,660 5.00% 10/18/20 47,200 47,067,274 Federal National Mortgage Association 1Year CMT 4.91%(b) 09/01/29 69 70,019 5.21%(b) 12/01/30 819 844,071 6.64%(b) 12/01/31 808 824,828 5.54%(b) 08/01/32 1,881 1,918,482 5.52%(b) 01/01/33 4,055 4,055,176 Federal National Mortgage Association ARM 4.15%(b) 10/01/33 1,063 1,055,288 4.29%(b) 01/01/34 959 953,819 4.01%(b) 04/01/34 904 887,120 3.93%(b) 05/01/34 19,236 18,980,076 4.56%(b) 02/01/35 26,931 26,764,443 4.87%(b) 06/01/35 15,253 15,400,934 6.18%(b) 04/01/40 2,751 2,819,861 Federal National Mortgage Association COFI 4.82%(b) 05/01/27 150 152,998 Federal National Mortgage Association MULTI 3.89%(b) 12/01/09 8,396 8,406,425 Government National Mortgage Association 7.25%(g) 04/15/06 0 413 6.00% 12/08-02/11 792 810,994 6.50% 06/15/09 626 650,681 Government National Mortgage Association 1 Year CMT 3.75%(b) 05/20/34 13,894 13,714,178 Government National Mortgage Association II Hybrid 3.75%(b) 06/20/34 20,485 20,220,151 --------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $197,345,388) 196,546,716 --------------- MULTIPLE CLASS MORTGAGE PASS-THROUGHS -- 0.2% Federal National Mortgage Association Grantor Trust, Series 02-T6, Class A1 3.31% (Cost $2,362,930) 02/25/32 2,469 2,320,597 --------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 14.5% Bear Stearns Mortgage Trust, Series 04-13, Class A1 4.20%(b) 11/25/34 13,692 13,755,959 Bear Stearns Mortgage Trust, Series 04-7, Class 4A 3.20%(b) 10/25/34 15,324 15,092,188 Countrywide Alternative Loan Trust, Series 05-CB, Class 2A3 5.50% 07/25/35 10,641 10,693,539 Countrywide Home Loans, Series 04-29, Class 1A1 4.10%(b) 02/25/35 10,577 10,568,572 Federal Home Loan Mortgage Corp. Strip Notes, Series 19, Class F 3.29%(b) 06/01/28 1,362 1,352,362 Federal Home Loan Mortgage Corp., Series 1165, Class LD 7.00% 11/15/21 2,067 2,067,313 Federal Home Loan Mortgage Corp., Series 2642, Class JA 5.00% 11/15/16 5,501 5,503,580 Federal Home Loan Mortgage Corp., Series 2663, Class LA 5.00% 09/15/23 2,361 2,365,225 See accompanying notes to financial statements. 34
BlackRock Funds STATEMENT OF NET ASSETS LOW DURATION BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- --------------- COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) Federal Home Loan Mortgage Corp., Series 2744, Class PB 5.50% 03/15/26 $ 10,347 $ 10,405,943 Federal Home Loan Mortgage Corp., Series 2996, Class PB 5.50% 05/15/35 12,519 12,598,060 Federal National Mortgage Association, Series 03-27, Class TJ 4.00% 10/25/16 1,982 1,974,926 Federal National Mortgage Association, Series 04-W10, Class A1 5.75% 08/25/34 23,854 23,942,951 Goldman Sachs Mortgage Securities Corp. II, Series 00-1, Class A 4.15%(b)(c) 06/20/24 683 683,942 Goldman Sachs Mortgage Securities Corp., Series 04-11, Class 2A2 4.15%(b) 12/25/34 12,510 12,522,604 GSR Mortgage Loan Trust, Series 04-9, Class 3A1 3.69%(b) 08/25/34 20,759 20,758,544 Harborview Mortgage Loan Trust, Series 05-10, Class 2A1A 3.98%(b) 11/19/35 15,985 15,985,256 Merrill Lynch Mortgage Investors, Inc., Series 97-B, Class A 3.85%(b) 03/15/26 1,624 1,627,236 MLCC Mortgage Investors, Inc., Series 99-A, Class A 4.15%(b) 03/15/25 862 865,988 MortgageIT Trust, Series 04-1, Class A1 4.22%(b) 11/25/34 17,081 17,102,035 Residential Accredit Loans, Inc., Series 01-QS19, Class A1 6.00% 12/25/16 533 531,361 Residential Funding Mortgage Securities I, Inc., Series 04-SRI, Class A1 5.50% 09/25/33 13,578 13,658,202 Structured Asset Securities Corp., Series 04-3AC, Class A2 4.92%(b) 03/25/34 13,270 13,249,207 Structured Mortgage Loan Trust, Series 04-13, Class A2 4.13%(b) 09/25/34 8,000 8,000,281 Washington Mutual Mortgage Securities Corp., Series 02-AR1, Class IA1 5.09%(b) 11/25/30 1,065 1,081,807 --------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $218,149,562) 216,387,081 --------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 8.1% Bayview Financial Acquisition Trust, Series 98-1, Class A1 7.01%(c) 05/25/29 586 583,155 Citigroup Commercial Mortgage Trust, Series 05-EMG, Class A1 4.15%(c) 09/20/51 11,616 11,453,770 Commercial Mortgage Acceptance Corp., Series 98-C2, Class A2 6.03% 09/15/30 10,184 10,420,311 Credit Suisse First Boston Mortgage Securities Corp., Series 98-C2, Class A2 6.30% 11/11/30 8,503 8,855,687 First Union-Chase Commercial Mortgage Trust, Series 99-C2, Class A2 6.64% 04/15/09 15,020 15,783,666 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% 08/15/36 9,061 9,688,200 Goldman Sachs Mortgage Securities Corp. II, Series 98-C1, Class A3 6.14% 10/18/30 12,609 13,012,891 Goldman Sachs Mortgage Securities Corp. II, Series 03-C1, Class X2 (IO) 0.97%(c)(h) 01/10/40 268,661 7,258,605 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C5, Class A1 6.41% 12/15/19 10,607 10,900,642 Lehman Brothers-UBS Commercial Mortgage Trust, Series 03-C3, Class XCP (IO) 1.30%(c)(h) 02/15/37 40,827 1,552,698 Lehman Brothers-UBS Commercial Mortgage Trust, Series 03-C5, Class XCP (IO) 1.15%(c)(h) 04/15/37 194,719 5,282,225 Nationslink Funding Corp., Series 99, Class 1 6.32% 01/20/31 10,674 11,090,507 Structured Asset Receivables Trust, Series 03-1 3.18%(b)(c) 01/21/10 15,427 15,450,661 --------------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $123,262,476) 121,333,018 --------------- PROJECT LOANS -- 0.0% Federal Housing Authority 7.43% (Cost $22,719) 09/01/22 23 23,680 --------------- ASSET BACKED SECURITIES -- 31.6% Amresco Independence Funding, Inc., Series 99-1, Class A 4.75%(b) 06/15/20 4,971 4,933,625 Bank One Issuance Trust, Series 03-A3, Class A3 3.88%(b) 12/15/10 14,550 14,587,185 Bank One Issuance Trust, Series 04-A2, Class A2 3.80%(b) 10/15/09 15,000 15,004,656 BMW Vehicle Owner Trust, Series 05-A, Class A3 4.02% 02/25/09 14,075 13,986,890 Business Loan Express, Inc., Series 98-1, Class A 5.25%(b)(c) 01/15/25 390 380,379 Capco America Securitization Corp., Series 98-D7, Class PS1 (IO) 1.45%(c)(h) 10/15/30 34,736 1,250,852 See accompanying notes to financial statements. 35
BlackRock Funds STATEMENT OF NET ASSETS LOW DURATION BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- --------------- ASSET BACKED SECURITIES (Continued) Capital Auto Receivables Asset Trust, Series 02-3, Class A3 3.58%(e) 10/16/06 $ 2,093 $ 2,092,126 Capital Auto Receivables Asset Trust, Series 02-5, Class A4 2.92% 04/15/08 12,768 12,663,455 Capital Auto Receivables Asset Trust, Series 04-1, Class A3 2.00% 11/15/07 15,453 15,250,856 Capital Auto Receivables Asset Trust, Series 04-2, Class A2 3.35% 02/15/08 18,300 18,079,833 Capital Auto Receivables Asset Trust, Series 05-1, Class A4 4.05% 07/15/09 12,825 12,720,861 Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 13,875 13,533,536 Chase Manhattan Auto Owner Trust, Series 02-B, Class A4 4.21% 01/15/09 10,049 10,049,950 Citibank Credit Card Issuance Trust, Series 03-A2, Class A2 2.70% 01/15/06 16,395 16,325,370 Citibank Credit Card Issuance Trust, Series 04, Class A1 2.55% 01/20/07 17,550 17,131,608 Citibank Credit Card Issuance Trust, Series 04-A4, Class A4 3.20% 08/24/07 16,700 16,297,196 Countrywide Asset-Backed Certificates, Series 05-BC4, Class 2A1 3.79%(b) 11/25/28 17,664 17,664,000 DaimlerChrysler Auto Trust, Series 03-B, Class A3 2.25% 08/08/07 12,968 12,907,076 DaimlerChrysler Auto Trust, Series 05-A, Class A2 3.17% 09/08/07 5,628 5,607,294 Epoch, Series 02, Class 2l 3.49%(b)(c) 05/30/07 8,500 8,585,000 Ford Credit Auto Owner Trust, Series 05-A, Class A2 3.08% 07/15/07 8,690 8,660,211 Ford Credit Auto Owner Trust, Series 05-A, Class A3 3.48% 11/15/08 17,500 17,304,700 Ford Credit Auto Owner Trust, Series 05-C, Class A2 4.24% 03/15/08 12,500 12,499,475 Green Tree Financial Corp., Series 93-4, Class A5 7.05% 01/15/19 1,798 1,852,222 Green Tree Financial Corp., Series 96-8, Class A6 7.60% 10/15/27 4,215 4,428,772 Green Tree Financial Corp., Series 98-6, Class A6 6.27% 06/01/30 203 204,484 Green Tree Financial Corp., Series 99-2, Class A3 6.08% 12/01/30 5,127 5,169,569 Heller Financial Commercial Mortgage Asset Corp., Series 98-1, Class A 4.12%(b)(c) 07/15/24 2,598 2,539,953 Honda Auto Receivables Owner Trust, Series 04-2, Class A2 2.52% 02/15/07 6,887 6,866,697 Honda Auto Receivables Owner Trust, Series 04-2, Class A3 3.30% 06/16/08 17,915 17,741,224 Honda Auto Receivables Owner Trust, Series 04-3, Class A3 2.91% 10/20/08 15,350 15,083,370 Honda Auto Receivables Owner Trust, Series 05-4, Class A3 4.51% 05/20/09 11,150 11,140,746 IFC Small Business Administration Loan-Backed Certificates, Series 97-1, Class A 4.50%(b)(c) 01/15/24 962 962,334 MBNA Master Credit Card Trust, Series 99-L, Class A 4.02%(b) 03/16/09 21,175 21,228,014 The Money Store Small Business Administration Loan-Backed Securities, Series 96-2, Class A 4.36%(b) 04/15/24 229 223,463 The Money Store Small Business Administration Loan-Backed Securities, Series 97-1, Class A 4.25%(b) 01/15/25 633 618,173 The Money Store Small Business Administration Loan-Backed Securities, Series 97-1, Class B 4.73%(b) 01/15/25 360 343,357 Mortgage Capital Funding, Inc., Series 98-MC1, Class X (IO) 0.64%(h) 03/18/30 74,924 881,018 Nissan Auto Receivables Owner Trust, Series 05-B, Class A3 3.99% 07/15/09 15,350 15,219,372 Option One Mortgage Loan Trust, Series 05-4, Class A2 4.08%(b) 11/25/35 14,375 14,375,000 PBG Equipment Trust, Series 00-1A, Class A 6.27%(c) 01/20/12 1,597 1,598,838 PMC Capital Limited Partnership, Series 98-1, Class A 5.25%(b)(c) 04/01/21 3,096 3,147,419 Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A1 3.95%(b) 05/25/25 11,700 11,700,000 Specialty Underwriting & Residential Finance, Series 05-BC3, Class A2A 3.87%(b) 06/25/36 15,725 15,725,000 Student Loan Marketing Association Student Loan Trust, Series 05-5, Class A1 3.46%(b) 01/25/18 14,075 14,059,602 See accompanying notes to financial statements. 36
BlackRock Funds STATEMENT OF NET ASSETS LOW DURATION BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- --------------- ASSET BACKED SECURITIES (Continued) SWB Loan Backed Certificates, Series 98-1, Class AV 4.25%(b)(c) 09/15/24 $ 806 $ 806,420 USAA Auto Owner Trust, Series 05-1, Class A2 3.55% 09/17/07 9,850 9,819,465 USAA Auto Owner Trust, Series 05-1, Class A3 3.93% 07/15/09 8,650 8,568,604 USAA Auto Owner Trust, Series 05-2, Class A3 4.07% 12/15/09 20,750 20,565,532 --------------- TOTAL ASSET BACKED SECURITIES (Cost $474,595,594) 472,384,782 --------------- CORPORATE BONDS -- 13.2% Aerospace -- 0.2% Northrop Grumman Corp., Senior Unsecured Notes 4.08% 11/16/06 2,225 2,214,253 Northrop Grumman Corp., Unsecured Notes 7.00% 03/01/06 1,000 1,010,934 --------------- 3,225,187 --------------- Banks -- 3.7% Bank of America Corp., Senior Unsecured Notes 3.25% 08/15/08 2,175 2,098,027 Bayerische Landesbank New York, Senior Notes 2.50% 04/28/06 12,300 12,173,396 Citigroup, Inc., Senior Unsecured Notes 3.50%(d) 02/01/08 5,200 5,074,940 J.P. Morgan Chase & Co., Senior Unsecured Notes 6.00% 08/01/08 3,180 3,291,904 State Street Capital Trust II, Capital Securities 4.29%(b) 02/15/08 1,700 1,699,422 U.S. Bank N.A., Subordinated Notes 6.50% 02/01/08 3,580 3,725,620 U.S. Central Credit Union, Unsecured Notes 2.75% 05/30/08 3,700 3,527,025 Wells Fargo & Co., Senior Unsecured Notes 3.97%(b) 09/15/09 22,515 22,514,325 Wells Fargo & Co., Unsecured Notes 3.50% 04/04/08 1,200 1,171,064 --------------- 55,275,723 --------------- Energy & Utilities -- 0.4% Dominion Resources, Inc., Senior Unsecured Notes 3.66% 11/15/06 4,550 4,502,166 Virginia Electric & Power Co., Senior Unsecured Notes 5.75% 03/31/06 2,315 2,329,226 --------------- 6,831,392 --------------- Finance -- 4.4% Eksportfinans ASA, Unsecured Notes 3.38% 01/15/08 9,315 9,104,062 General Electric Capital Corp., Notes 8.75% 05/21/07 5,320 5,670,514 General Electric Capital Corp., Unsecured Notes 3.45%(b) 07/07-01/08 34,750 34,676,835 4.12% 03/04/08 8,300 8,219,390 Household Finance Corp., Unsecured Notes 4.12% 12/15/08 4,375 4,299,444 Nationwide Building Society, Senior Unsecured Notes 3.50%(c) 07/31/07 1,975 1,937,771 PSEG Funding Trust I, Capital Securities 5.38% 11/16/07 1,250 1,259,743 Student Loan Marketing Corp., Senior Unsecured Notes 3.62% 03/17/08 650 635,348 --------------- 65,803,107 --------------- Insurance -- 0.2% ASIF Global Financing, Unsecured Notes 3.90%(c) 10/22/08 2,540 2,473,350 Prudential Insurance Co., Notes 6.38%(c) 07/23/06 1,250 1,267,260 --------------- 3,740,610 --------------- Pharmaceuticals -- 0.6% Merck & Co., Inc., Senior Unsecured Notes 5.25% 07/01/06 1,750 1,757,282 Merck & Co., Inc., Unsecured Notes 4.73%(b)(c) 02/22/06 6,800 6,802,400 --------------- 8,559,682 --------------- Railroad & Shipping -- 0.3% Canadian National Railway Co., Senior Notes 6.45% 07/15/06 3,970 4,026,592 --------------- Real Estate -- 0.3% Avalonbay Communities, Inc., Senior Unsecured Notes 8.25% 07/15/08 3,945 4,293,142 --------------- Retail Merchandising -- 0.4% Federated Department Stores, Inc., Senior Unsecured Notes 6.62% 09/01/08 800 837,580 May Department Stores Co., Unsecured Notes 3.95% 07/15/07 4,675 4,609,344 --------------- 5,446,924 --------------- Telecommunications -- 1.4% BellSouth Corp., Unsecured Notes 4.26%(b)(c) 04/26/06 5,450 5,442,326 Lenfest Communications, Inc., Senior Notes 7.62% 02/15/08 3,850 4,073,069 Sprint Capital Corp., Senior Unsecured Notes 7.12% 01/30/06 4,023 4,056,105 See accompanying notes to financial statements. 37
BlackRock Funds STATEMENT OF NET ASSETS LOW DURATION BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- --------------- CORPORATE BONDS (Continued) Telecommunications (Continued) Verizon Global Funding Corp., Senior Unsecured Notes 6.12% 06/15/07 $ 5,415 $ 5,552,487 Vodafone Group PLC, Senior Unsecured Notes 3.95% 01/30/08 1,543 1,521,792 --------------- 20,645,779 --------------- Transportation -- 0.3% Union Pacific Corp., Senior Unsecured Notes 5.75% 10/15/07 2,025 2,064,490 Union Pacific Corp., Unsecured Notes 6.79% 11/09/07 1,775 1,848,918 --------------- 3,913,408 --------------- Yankee -- 1.0% Republic of Italy, Unsecured Notes 2.75%(i) 12/15/06 13,100 12,883,457 Tyco International Group SA (Luxembourg), Senior Unsecured Notes 5.80%(i) 08/01/06 2,200 2,220,707 --------------- 15,104,164 --------------- TOTAL CORPORATE BONDS (Cost $198,536,834) 196,865,710 --------------- FOREIGN BONDS -- 2.0% Bundesrepublic Deutschland (Germany) (EUR) 4.75% 07/04/34 2,275 3,305,269 4.00% 01/04/37 9,175 11,904,060 General Electric Capital Corp., Senior Unsubordinated Notes (NZD) 6.50% 09/28/15 545 368,541 Government of New Zealand (NZD) 7.00% 07/15/09 12,655 9,087,069 Province of Manitoba (NZD) 6.38% 09/01/15 1,300 888,699 Province of Ontario, Unsecured Notes (NZD) 6.25% 06/16/15 7,480 5,101,045 --------------- TOTAL FOREIGN BONDS (Cost $30,687,458) 30,654,683 --------------- TAXABLE MUNICIPAL BONDS -- 0.7% New York Sales Tax Asset Receivables Corp. Revenue Bonds, Series 04, Class B 3.29% 10/15/07 2,640 2,579,729 Texas Public Finance Authority Unemployment Compensation Obligation Assessment Revenue Bonds, Series 03, Class B 2.62% 06/15/06 7,430 7,348,493 --------------- TOTAL TAXABLE MUNICIPAL BONDS (Cost $10,065,510) 9,928,222 --------------- SHORT TERM INVESTMENTS -- 1.3% Federal Home Loan Bank, Discount Notes 3.18%(j) 10/03/05 10,200 10,198,198 Galileo Money Market Fund 9,661 9,660,784 --------------- TOTAL SHORT TERM INVESTMENTS (Cost $19,858,982) 19,858,982 --------------- TOTAL INVESTMENTS IN SECURITIES -- 125.8% (Cost $1,892,851,940(a)) 1,878,547,984 LIABILITIES IN EXCESS OF OTHER ASSETS -- (25.8)% (385,643,768) --------------- NET ASSETS -- 100.0% (Applicable to 54,726,015 BlackRock shares, 38,135,228 Institutional shares, 38,011,617 Service shares, 7,616,105 Investor A shares, 4,626,719 Investor B shares and 7,262,514 Investor C shares outstanding) $ 1,492,904,216 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($543,043,548/54,726,015) $ 9.92 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($378,711,829/38,135,228) $ 9.93 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($377,470,306/38,011,617) $ 9.93 =============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($75,652,111/7,616,105) $ 9.93 =============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.93/0.970) $ 10.24 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($45,941,679/4,626,719) $ 9.93 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($72,084,743/7,262,514) $ 9.93 =============== See accompanying notes to financial statements. 38
BlackRock Funds STATEMENT OF NET ASSETS LOW DURATION BOND PORTFOLIO (Concluded) As of September 30, 2005 - ---------- (a) Cost for Federal income tax purposes is $1,893,054,880. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 8,995,982 Gross unrealized depreciation (23,502,878) ------------- $ (14,506,896) ============= (b) Rates shown are the rates as of September 30, 2005. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 5.4% of its net assets, with a current market value of $80,378,128 in securities restricted as to resale. (d) Securities, or a portion thereof, with a market value of $2,391,938 have been pledged as collateral for swap and swaption contracts. (e) Securities, or a portion thereof, pledged as collateral with a value of $9,138,035 on 1,496 long U.S. Treasury Note futures contracts, 2,076 short U.S. Treasury Note futures contracts and 408 short Euro-Bobl futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $586,775,514 with an unrealized gain of $131,799 (including commissions of $8,879). (f) Securities, or a portion thereof, subject to financing transactions. (g) Par held is less than $1,000. (h) Rates shown are the effective yields as of September 30, 2005. (i) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (j) The rate shown is the effective yield on the discount notes at the time of purchase. See accompanying notes to financial statements. 39
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE GOVERNMENT BOND PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------- ---------- --------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 58.6% Federal Home Loan Bank 4.00% 07/13/07 $ 6,212 $ 6,146,606 2.75% 01/09/08 4,410 4,241,084 Federal Home Loan Bank, Unsecured Notes 2.40% 03/30/07 6,000 5,829,096 3.00% 04/30/07 5,010 4,905,036 Federal Home Loan Mortgage Corp., Unsecured Notes 2.50% 08/24/06 4,525 4,452,627 2.75%(b) 09/15/06 8,100 7,979,812 3.01% 04/07-04/07 10,760 10,547,156 3.50% 07/30/07 3,910 3,852,066 3.30% 09/14/07 7,125 6,988,891 3.25% 11/02/07 6,918 6,760,028 3.06% 07/15/08 3,155 3,044,152 Federal National Mortgage Association, Debentures 5.88% 02/02/06 3,800 3,821,869 Federal National Mortgage Association, Unsecured Notes 2.10% 04/19/06 5,400 5,337,657 2.00% 04/20/06 5,100 5,038,295 2.75% 05/10/06 5,925 5,871,663 2.80% 11/17/06 5,000 4,914,240 2.71% 01/30/07 7,275 7,119,693 3.00% 02/23/07 5,000 4,906,075 4.15% 07/13/07 8,855 8,796,353 3.53% 10/19/07 8,950 8,753,923 7.12% 06/15/10 13,375 14,818,136 6.62% 11/15/10 5,000 5,467,200 4.75% 02/21/13 1,595 1,583,983 4.12% 04/15/14 18,475 17,834,804 Small Business Administration Participation Certificates, Series 96-20H, Class 1 7.25% 08/01/16 1,628 1,711,050 Small Business Administration Participation Certificates, Series 96-20J, Class 1 7.20% 10/01/16 1,485 1,556,669 Small Business Administration Participation Certificates, Series 98-20J, Class 1 5.50% 10/01/18 2,555 2,611,529 U.S. Treasury Bonds 12.75% 11/15/10 2,275 2,298,282 10.62%(c) 08/15/15 26,000 38,907,570 9.88%(d) 11/15/15 7,700 11,114,473 8.75% 08/15/20 2,900 4,197,185 8.00% 11/15/21 1,150 1,591,942 6.25% 08/15/23 5,105 6,104,263 U.S. Treasury Notes 1.62% 02/28/06 1,180 1,169,353 2.75% 06/30/06 10,880 10,777,151 7.00% 07/15/06 17,175 17,550,703 2.38% 08/15/06 7,775 7,662,628 3.88%(c) 07/07-07/10 8,645 8,551,392 4.00%(c) 08/07-09/07 64,090 63,872,451 3.38%(c) 10/15/09 3,615 3,503,304 3.50% 12/15/09 1,955 1,901,695 3.62%(c) 01/15/10 13,655 13,339,761 6.50%(c) 02/15/10 16,505 17,983,997 5.75% 08/15/10 1,130 1,205,171 4.25%(c) 11/14-08/15 7,485 7,436,135 4.12%(c) 05/15/15 1,510 1,483,987 --------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $383,938,354) 385,541,136 --------------- MORTGAGE PASS-THROUGHS -- 30.2% Federal Home Loan Mortgage Corp. 9.00% 12/01/09 407 430,971 Federal Home Loan Mortgage Corp. ARM 3.54%(b) 05/01/34 3,970 3,856,925 3.57%(b) 07/01/34 3,995 3,954,526 3.74%(b) 07/01/34 2,441 2,371,374 4.40%(b) 11/01/34 3,131 3,112,250 4.33%(b) 03/01/35 9,697 9,551,181 4.77%(b) 03/35-09/35 21,575 21,450,548 4.78%(b) 04/01/35 11,428 11,366,006 Federal National Mortgage Association 3.55% 11/16/07 6,675 6,559,082 8.00% 04/08-06/08 658 676,662 6.50% 05/08-10/33 2,044 2,124,436 3.25% 05/16/08 6,725 6,524,319 6.09% 10/01/08 6,703 6,895,807 8.50% 02/09-08/09 734 760,960 9.00% 05/09-04/16 663 700,939 5.00% 03/15-06/23 5,104 5,066,617 6.00% 04/01/16 5 5,058 7.00% 01/17-04/32 1,734 1,812,967 4.50% 10/01/18 20 20,019 5.50% 01/24-10/35 6,115 6,172,270 7.50% 07/01/29 736 780,523 See accompanying notes to financial statements. 40
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE GOVERNMENT BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- --------------- MORTGAGE PASS-THROUGHS (Continued) Federal National Mortgage Association ARM 4.47%(b) 12/01/32 $ 5,125 $ 5,157,293 4.01%(b) 04/01/34 2,128 2,088,428 3.89%(b) 05/01/34 2,353 2,303,489 4.42%(b) 06/01/34 8,230 8,168,590 3.72%(b) 07/01/34 3,415 3,310,500 4.51%(b) 07/01/34 10,259 10,179,008 4.64%(b) 02/01/35 14,074 14,031,342 4.60%(b) 03/01/35 6,482 6,448,044 4.77%(b) 07/01/35 7,125 7,062,933 4.95%(b) 07/01/35 15,831 15,814,979 Federal National Mortgage Association Hybrid, ARM 3.47%(b) 06/01/34 2,740 2,725,600 Federal National Mortgage Association Multi-Family 6.54%(b) 12/01/18 552 564,967 Government National Mortgage Association 6.00% 02/15/11 468 478,609 9.50% 09/15/19 46 50,417 5.00% 05/20/35 10,704 10,759,428 Government National Mortgage Association II ARM 4.50%(b) 02/20/35 4,845 4,834,578 Government National Mortgage Association II Hybrid 3.75%(b) 06/20/34 3,320 3,277,057 3.50%(b) 07/20/34 7,432 7,248,083 MLCC Mortgage Investors, Inc., Series 95-C2 (IO) 1.22%(e) 06/15/21 1,952 73,809 --------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $199,476,517) 198,770,594 --------------- MULTIPLE CLASS MORTGAGE PASS-THROUGHS -- 0.1% Federal National Mortgage Association Grantor Trust, Series 02-T6, Class A1 3.31% (Cost $605,594) 02/25/32 654 614,468 --------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.9% Bear Stearns Mortgage Trust, Series 04-13, Class A1 4.20%(b) 11/25/34 2,546 2,557,135 Countrywide Alternative Loan Trust, Series 05-56, Class 1A1 4.69%(b) 11/25/35 6,100 6,161,000 Credit Suisse First Boston Mortgage Securities Corp., Series 01-33, Class 4A1 6.50% 04/25/16 26 26,196 Deutsche Mortgage Securities, Inc., Series 04-4, Class 3AR1 3.74%(b) 06/25/34 1,234 1,217,096 Federal Home Loan Mortgage Corp., Series 1361, Class I 6.00% 09/15/07 109 109,801 Federal Home Loan Mortgage Corp., Series 2668, Class AD 4.00% 01/15/15 2,418 2,385,322 Federal Home Loan Mortgage Corp., Series 2718, Class MR 4.00% 08/15/13 2,439 2,417,749 Federal Home Loan Mortgage Corp., Series 2730, Class PA 3.75% 03/15/11 $ 3,256 $ 3,244,490 Federal Home Loan Mortgage Corp., Series 2748, Class LJ 4.00% 03/15/10 2,109 2,103,998 Federal Home Loan Mortgage Corp., Series 2990, Class WF 4.17%(b) 02/15/35 4,134 4,133,462 Federal National Mortgage Association, Series 01-35, Class VC 6.50% 07/25/31 4,200 4,220,415 Federal National Mortgage Association, Series 01-T2, Class B 6.02% 11/25/10 3,600 3,800,072 Federal National Mortgage Association, Series 04-W10, Class A1 5.75% 08/25/34 3,133 3,145,126 Federal National Mortgage Association, Series 05-29, Class JB 4.50% 04/25/35 8,849 8,769,182 Federal National Mortgage Association, Series 05-57, Class PA 5.50% 05/25/27 3,618 3,657,231 Federal National Mortgage Association, Series 05-68, Class PC 5.50% 07/25/35 5,306 5,383,778 GSR Mortgage Loan Trust, Series 04-9, Class 3A1 3.69%(b) 08/25/34 3,139 3,139,213 MortgageIT Trust, Series 04-1, Class A1 4.22%(b) 11/25/34 2,819 2,822,239 Structured Mortgage Loan Trust, Series 04-13, Class A2 4.13%(b) 09/25/34 1,286 1,286,204 Summit Mortgage Trust, Series 00-1, Class B1 6.29%(b)(f) 12/28/12 65 65,256 Washington Mutual Mortgage Securities Corp., Series 03-AR4, Class A6 3.42%(b) 05/25/33 4,350 4,251,227 --------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $65,377,760) 64,896,192 --------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 7.7% Bear Stearns Commercial Mortgage Securities, Series 02-TOP6, Class A1 5.92% 10/15/36 2,328 2,408,038 Bear Stearns Commercial Mortgage Securities, Series 04-PWR4, Class A1 4.36% 06/11/41 2,175 2,155,162 Chase Commercial Mortgage Securities Corp., Series 98-2, Class A1 6.02% 11/18/30 19 19,337 See accompanying notes to financial statements. 41
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE GOVERNMENT BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- --------------- COMMERCIAL MORTGAGE BACKED SECURITIES (Continued) First Union National Bank Commercial Mortgage Trust, Series 00-C2, Class A2 7.20% 10/15/32 $ 3,640 $ 3,991,380 First Union-Chase Commercial Mortgage Trust, Series 99-C2, Class A2 6.64% 04/15/09 5,992 6,296,402 General Electric Capital Commercial Mortgage Corp., Series 02-1A, Class A3 6.27% 12/10/35 3,540 3,788,596 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 97-C1, Class X (IO) 1.53%(e) 07/15/29 10,700 464,284 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% 08/15/36 1,446 1,546,235 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 01-C1, Class A3 5.87% 10/12/35 3,580 3,749,557 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 01-CIBC, Class A3 6.26% 03/15/33 1,650 1,754,699 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C5, Class A1 6.41% 12/15/19 2,154 2,213,842 Lehman Brothers-UBS Commercial Mortgage Trust, Series 01-C7, Class A3 5.64% 12/15/25 3,817 3,897,010 Lehman Brothers-UBS Commercial Mortgage Trust, Series 04-C2, Class A2 3.25% 03/15/29 2,100 2,004,158 Lehman Brothers-UBS Commercial Mortgage Trust, Series 04-C4, Class A1 3.82% 06/15/29 2,334 2,299,110 Master Asset Backed Securities Trust, Series 05-HE2, Class A2 3.95%(b) 10/25/35 5,425 5,425,000 Morgan Stanley Dean Witter Capital I, Series 99-WF1, Class A1 5.91% 11/15/31 230 230,606 Morgan Stanley Dean Witter Capital I, Series 02-TOP7, Class A1 5.38% 01/15/39 3,475 3,540,921 Wachovia Bank Commercial Mortgage Trust, Series 03-C5, Class A1 2.99% 06/15/35 2,561 2,391,146 Wachovia Bank Commercial Mortgage Trust, Series 04-C12, Class A1 3.40% 07/15/41 2,342 2,282,607 --------------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $51,088,775) 50,458,090 --------------- PROJECT LOANS -- 0.3% Federal Housing Authority, Merrill Lynch Project, Series 29, Class 1A1 7.43% 06/01/22 442 452,648 Federal Housing Authority, USGI Project, Series 56 7.46% 01/01/23 1,301 1,335,130 --------------- TOTAL PROJECT LOANS (Cost $1,782,084) 1,787,778 --------------- ASSET BACKED SECURITIES -- 7.5% Boston Edison Co., Series 99-1, Class A4 6.91% 09/15/09 3,591 3,687,760 Capital Auto Receivables Asset Trust, Series 02-3, Class A3 3.58% 10/16/06 681 680,571 Capital Auto Receivables Asset Trust, Series 05-1, Class A4 4.05% 07/15/09 5,325 5,281,761 Chase Credit Card Master Trust, Series 03-6, Class A 3.68%(b) 02/15/11 6,750 6,770,511 Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 2,225 2,170,243 Citibank Credit Card Issuance Trust, Series 04-A4, Class A4 3.20% 08/24/07 2,700 2,634,876 Green Tree Financial Corp., Series 97-5, Class A7 7.13% 05/15/29 2,102 2,258,447 MBNA Credit Card Master Note Trust, Series 04-A4, Class A4 2.70%(g) 09/15/09 3,000 2,924,064 MBNA Credit Card Master Notes Trust, Series 03-A1, Class A1 3.30% 07/15/10 6,700 6,518,250 The Money Store Small Business Administration Loan Trust, Series 99-1, Class A 3.82%(b) 07/15/25 1,017 1,008,921 Structured Asset Receivables Trust, Series 03-2 3.40%(b)(f) 01/21/09 2,745 2,744,605 Student Loan Marketing Student Loan Trust, Series 04-2, Class A2 3.18%(b) 04/25/13 6,505 6,502,494 Student Loan Marketing Student Loan Trust, Series 05-6, Class A5B 3.67%(b) 07/27/26 5,150 5,150,562 SWB Loan-Backed Certificates, Series 99-1, Class A 7.38%(f) 05/15/25 877 885,993 --------------- TOTAL ASSET BACKED SECURITIES (Cost $49,297,517) 49,219,058 --------------- CORPORATE BONDS - 4.1% Banks - 0.6% Depfa Bank PLC, Senior Notes 4.25% 08/16/10 3,850 3,786,764 --------------- See accompanying notes to financial statements. 42
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE GOVERNMENT BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- --------------- CORPORATE BONDS (Continued) Finance -- 1.8% General Electric Capital Corp., Unsecured Notes 3.45%(b) 01/15/08 $ 6,650 $ 6,664,364 Private Export Funding Corp., Senior Unsecured Notes 3.38% 02/15/09 5,250 5,079,107 --------------- 11,743,471 --------------- Oil & Gas -- 0.4% ENSCO Offshore Co. 6.36% 12/01/15 2,433 2,604,999 --------------- Yankee -- 1.3% International Bank for Reconstruction & Development (Multiple Countries), Unsecured Notes 1.00%(h) 02/05/15 4,100 2,971,859 Japan Finance Corp. for Municipal Enterprises, Unsecured Notes 4.62%(h) 04/21/15 2,800 2,779,350 National L-Bank Landeskreditbank Baden-Wurttemberg (Germany), Unsecured Notes 4.25%(h) 09/15/10 2,700 2,658,557 --------------- 8,409,766 --------------- TOTAL CORPORATE BONDS (Cost $26,685,863) 26,545,000 --------------- TAXABLE MUNICIPAL BONDS -- 0.9% Stanislaus County, California Taxable Pension Obligation Refunding Revenue Bonds, Series 95 7.15% 08/15/13 3,200 3,488,160 United States Department of Housing and Urban Development, Section 108 Government Guaranteed Participation Certificates, Series 03-A 4.44% 08/01/11 2,099 2,084,708 --------------- TOTAL TAXABLE MUNICIPAL BONDS (Cost $5,299,000) 5,572,868 --------------- Number of Shares --------- SHORT TERM INVESTMENTS -- 0.0% Galileo Money Market Fund (Cost $29,745) 29,745 29,745 --------------- TOTAL INVESTMENTS IN SECURITIES -- 119.3% (Cost $783,581,209(a)) $ 783,434,929 =============== Number of Contracts ---------- CALL SWAPTIONS WRITTEN -- (0.2)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (970)(i) (465,212) Citibank, Strike Price 5.67, Expires 01/04/10 (390)(i) (267,652) Warburg Dillon Read LLC, Strike Price 5.00, Expires 06/16/10 (1,080)(i) (495,936) --------------- TOTAL CALL SWAPTIONS WRITTEN (Premiums received $1,158,410) (1,228,800) --------------- PUT SWAPTIONS WRITTEN -- (0.1)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (970)(i) (342,313) Citibank, Strike Price 5.67, Expires 01/04/10 (390)(i) (118,617) Warburg Dillon Read LLC, Strike Price 5.00, Expires 06/16/10 (1,080)(i) (546,372) --------------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $1,158,410) (1,007,302) --------------- LIABILITIES IN EXCESS OF OTHER ASSETS -- (19.0)% (124,909,194) --------------- NET ASSETS -- 100.0% (Applicable to 21,069,314 Institutional shares, 82,642 Service shares, 33,745,460 Investor A shares, 7,368,723 Investor B shares and 1,973,889 Investor C shares outstanding) $ 656,289,633 =============== See accompanying notes to financial statements. 43
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE GOVERNMENT BOND PORTFOLIO (Concluded) As of September 30, 2005 Value ------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($214,980,138/21,069,314) $ 10.20 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($842,456/82,642) $ 10.19 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($345,131,015/33,745,460) $ 10.23 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.23/0.960) $ 10.66 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($75,181,663/7,368,723) $ 10.20 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($20,154,361/1,973,889) $ 10.21 ======= - ---------- (a) Cost for Federal income tax purposes is $779,842,077. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 6,944,520 Gross unrealized depreciation (3,351,668) ------------ $ 3,592,852 ============ (b) Rates shown are the rates as of September 30, 2005. (c) Securities, or a portion thereof, subject to financing transactions. (d) Securities, or a portion thereof, with a market value of $1,797,080 have been pledged as collateral for swap and swaption contracts. (e) Rates shown are the effective yields as of September 30, 2005. (f) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 0.6% of its net assets, with a current market value of $3,695,854, in securities restricted as to resale. (g) Securities, or a portion thereof, pledged as collateral with a value of $2,924,064 on 1,130 short U.S. Treasury Note futures contracts, 521 long U.S. Treasury Note futures contracts and 39 long Euro-dollar futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $187,342,861 with an unrealized loss of $640,008 (including commissions of $4,057). (h) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (i) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 44
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE BOND PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ----------- ---------- ------------ U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 35.4% Federal Home Loan Mortgage Corp., Unsecured Notes 2.60% 08/07/06 $ 5,955 $ 5,868,855 3.30% 09/14/07 9,420 9,240,050 3.25% 11/02/07 9,000 8,794,485 3.75% 02/27/09 10,025 9,793,733 5.00% 10/27/14 5,500 5,459,278 Federal National Mortgage Association, Subordinated Notes 4.62% 05/01/13 1,960 1,927,464 Federal National Mortgage Association, Unsecured Notes 2.15% 04/13/06 9,875 9,763,590 2.74%(b) 05/05/06 8,030 7,959,135 1.75% 06/16/06 4,175 4,101,971 2.71% 01/30/07 9,625 9,419,525 3.00% 04/19/07 5,600 5,488,325 4.15% 07/13/07 12,015 11,935,425 5.00% 08/02/12 9,930 9,840,332 4.75% 02/21/13 10,740 10,665,819 Small Business Administration Participation Certificates, Series 92-20H, Class 1 7.40% 08/01/12 647 675,796 Small Business Administration Participation Certificates, Series 96-20H, Class 1 7.25% 08/01/16 1,857 1,951,197 Small Business Administration, Series 01-P10, Class B-1 6.34%(b) 08/01/11 2,155 2,266,481 Small Business Investment Cos. Pass-Through, Series 97-P10D, Class 1 6.51% 11/10/07 93 95,914 U.S. Treasury Bonds 10.38%(c)(d) 11/15/12 4,545 5,109,930 8.12%(d) 08/15/19 6,475 8,840,143 8.75% 08/15/20 1,760 2,547,257 6.25% 08/15/23 8,215 9,823,020 U.S. Treasury Notes 2.38% 08/15/06 1,550 1,527,598 4.00%(e) 08/07-02/15 33,335 32,776,705 3.38%(e) 10/15/09 26,320 25,506,765 3.50% 12/15/09 4,755 4,625,350 5.75% 08/15/10 12,505 13,336,870 5.00% 02/11-08/11 2,180 2,262,965 4.88% 02/15/12 750 775,283 4.25%(e) 11/14-08/15 56,950 56,560,455 4.12%(e) 05/15/15 40,320 39,625,407 ------------ TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $321,892,748) 318,565,123 ------------ MORTGAGE PASS-THROUGHS -- 7.0% Federal Home Loan Bank 4.12% 02/15/08 4,500 4,470,269 Federal Home Loan Mortgage Corp. 3.00% 04/19/07 7,820 7,663,123 Federal National Mortgage Association 3.55% 11/16/07 8,985 8,828,966 3.25% 05/16/08 8,594 8,337,546 8.50% 08/01/09 168 169,084 5.00% 03/02/15 4,955 4,860,731 6.00% 05/16-02/17 705 725,374 5.50% 01/01/20 476 483,302 Federal National Mortgage Association ARM 4.01%(b) 04/01/34 6,704 6,579,474 4.98% 08/01/35 13,650 13,618,007 4.83%(b) 09/01/35 4,550 4,537,351 Government National Mortgage Association 7.25% 04/15/06 1 1,133 MLCC Mortgage Investors, Inc., Series 95-C2 (IO) 1.22%(f) 06/15/21 3,139 118,690 Structured Asset Securities Corp., Series 03-AL1, Class A 3.36%(g) 04/25/31 2,796 2,576,967 ------------ TOTAL MORTGAGE PASS-THROUGHS (Cost $63,406,843) 62,970,017 ------------ MULTIPLE CLASS MORTGAGE PASS-THROUGHS -- 0.2% Federal National Mortgage Association Grantor Trust, Series 02-T6, Class A1 3.31% (Cost $1,700,816) 02/25/32 1,836 1,725,739 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS -- 10.0% Bear Stearns Mortgage Trust, Series 04-12, Class 1A1 4.18%(b) 01/25/35 1,129 1,130,962 Bear Stearns Mortgage Trust, Series 04-13, Class A1 4.20%(b) 11/25/34 7,642 7,677,081 Bear Stearns Mortgage Trust, Series 04-7, Class 4A 3.20%(b) 10/25/34 7,530 7,416,001 Countrywide Alternative Loan Trust, Series 05-56, Class 1A1 4.69%(b) 11/25/35 9,360 9,453,600 Countrywide Home Loans, Series 04-29, Class 1A1 4.10%(b) 02/25/35 6,721 6,715,588 Credit Suisse First Boston Mortgage Securities Corp., Series 01-33, Class 4A1 6.50% 04/25/16 71 71,033 Federal Home Loan Mortgage Corp., Series 1361, Class I 6.00% 09/15/07 203 203,916 Federal Home Loan Mortgage Corp., Series 96T-2, Class A 7.00% 01/25/21 740 737,976 See accompanying notes to financial statements. 45
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ----------- ---------- ------------ COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) Federal National Mortgage Association, Series 89-16, Class B (PO) 10.00%(h) 03/25/19 $ 125 $ 104,307 Federal National Mortgage Association, Series 05-29, Class AT 4.50% 04/25/35 3,090 3,042,538 Federal National Mortgage Association, Series 05-29, Class WB 4.75% 04/25/35 3,580 3,576,384 Federal National Mortgage Association, Series 05-57, Class FG 4.23%(b) 05/25/35 4,942 4,960,040 Federal National Mortgage Association, Series 05-57, Class PA 5.50% 05/25/27 4,780 4,831,747 Federal National Mortgage Association, Series 05-62, Class CQ 4.75% 07/25/35 3,791 3,697,666 GSAA Home Equity Trust, Series 04-8, Class A3A 4.20%(b) 09/25/34 1,281 1,282,936 MortgageIT Trust, Series 04-1, Class A1 4.22%(b) 11/25/34 8,910 8,921,207 Structured Mortgage Loan Trust, Series 04-13, Class A2 4.13%(b) 09/25/34 4,866 4,866,290 Structured Mortgage Loan Trust, Series 04-6, Class 4A1 4.85%(b) 06/25/34 10,257 10,025,554 Summit Mortgage Trust, Series 00-1, Class B1 6.29%(b)(g) 12/28/12 109 108,597 Wells Fargo Mortgage Backed Securities Trust, Series 04-5, Class A1 4.53%(b) 06/25/34 10,717 10,622,420 ----------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $89,700,403) 89,445,843 ----------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 8.5% Banc of America Commercial Mortgage, Inc., Series 01-1, Class A2 6.50% 04/15/36 4,950 5,304,425 Bayview Financial Acquisition Trust, Series 98-1, Class A1 7.01%(g) 05/25/29 368 366,668 Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PWR9, Class A4A 4.87% 09/11/42 5,030 5,022,928 Chase Commercial Mortgage Securities Corp., Series 00-3, Class A2 7.32% 10/15/32 2,005 2,201,060 Commercial Mortgage Acceptance Corp., Series 98-C2, Class A2 6.03% 09/15/30 5,223 5,344,208 Credit Suisse First Boston Mortgage Securities Corp., Series 02-CP5, Class A2 4.94% 12/15/35 6,185 6,189,114 Federal Home Loan Mortgage Corp., Series 2626, Class NA 5.00% 06/15/23 4,490 4,518,686 Federal National Mortgage Association, Series 05-83, Class LA 5.50% 10/25/35 5,960 6,030,608 First Union National Bank Commercial Mortgage Trust, Series 00-C2, Class A2 7.20%(b) 10/15/32 4,430 4,857,641 First Union National Bank Commercial Mortgage Trust, Series 01-C3, Class A3 6.42% 08/15/33 7,025 7,533,422 General Electric Capital Commercial Mortgage Corp., Series 02-1A, Class A3 6.27% 12/10/35 4,850 5,189,628 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 97 7.43% 02/21/21 501 513,438 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 97-C1, Class X (IO) 1.53%(f) 07/15/29 16,017 694,986 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% 08/15/36 4,472 4,781,789 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 00-C2, Class A2 7.46% 08/16/33 4,690 5,148,433 Lehman Brothers Commercial Conduit Mortgage Trust, Series 99-C2, Class A1 7.10% 10/15/32 2,815 2,870,711 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C5, Class A1 6.41% 12/15/19 4,607 4,734,849 NationsLink Funding Corp., Series 99-SL, Class A6 6.61% 11/10/30 3,029 3,046,233 NYC Mortgage Loan Trust, Series 96, Class A1 6.75%(g) 06/25/11 1,736 1,764,556 ----------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $77,103,893) 76,113,383 ----------- PROJECT LOANS -- 0.2% Federal Housing Authority, USGI Project, Series 56 7.46% (Cost $1,287,864) 01/01/23 1,280 1,313,243 ----------- See accompanying notes to financial statements. 46
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ----------- ---------- ------------ CERTIFICATE OF DEPOSIT -- 0.2% SunTrust Bank, Inc. 4.42% (Cost $1,375,000) 06/15/09 $ 1,375 $ 1,359,738 ------------ ASSET BACKED SECURITIES -- 9.9% Amresco Independence Funding, Inc., Series 00-1, Class A 4.65%(b)(g) 01/15/27 1,463 1,462,675 Boston Edison Co., Series 99-1, Class A4 6.91% 09/15/09 4,414 4,532,442 Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 6,100 5,949,879 Citibank Credit Card Issuance Trust, Series 04, Class A1 2.55% 01/20/07 7,880 7,692,141 Citibank Credit Card Issuance Trust, Series 04-A4, Class A4 3.20% 08/24/07 8,375 8,172,995 Countrywide Asset-Backed Certificates, Series 04-12, Class 2AV3 3.96%(b) 10/25/35 7,290 7,289,902 DaimlerChrysler Auto Trust, Series 04-5, Class A3 3.18% 09/08/08 7,300 7,228,679 Epoch, Series 02, Class 2l 3.49%(b)(g) 05/30/07 4,900 4,949,000 Green Tree Financial Corp., Series 96-7, Class A6 7.65%(c) 10/15/27 1,329 1,401,237 IFC Small Business Administration Loan-Backed Certificates, Series 97-1, Class A 4.50%(b)(g) 01/15/24 677 676,822 MBNA Credit Card Master Note Trust, Series 04-A4, Class A4 2.70% 09/15/09 7,900 7,700,035 MBNA Master Credit Card Trust, Series 96-G, Class A 3.95%(b) 12/15/08 4,415 4,421,310 The Money Store Small Business Administration Loan Trust, Series 97-2, Class A 4.30%(b) 02/15/29 779 753,466 The Money Store Small Business Administration Loan Trust, Series 99-1, Class A 3.82%(b) 07/15/25 1,849 1,834,402 PBG Equipment Trust, Series 00-1A, Class A 6.27%(g) 01/20/12 1,397 1,398,413 PMC Capital Limited Partnership, Series 98-1, Class A 5.25%(b)(g) 04/01/21 1,024 1,040,839 Structured Asset Receivables Trust, Series 03-2 3.40%(b)(g) 01/21/09 5,690 5,688,414 Student Loan Marketing Association Student Loan Trust, Series 05-5, Class A1 3.46%(b) 01/25/18 7,475 7,466,822 Student Loan Marketing Student Loan Trust, Series 05-8 Class A4 4.28% 01/25/28 7,375 7,342,734 SWB Loan-Backed Certificates, Series 99-1, Class A 7.38%(g) 05/15/25 1,868 1,886,309 ------------ TOTAL ASSET BACKED SECURITIES (Cost $89,172,325) 88,888,516 ------------ CORPORATE BONDS -- 35.5% Aerospace -- 0.7% Lockheed Martin Corp., Debentures 7.65% 05/01/16 1,340 1,622,726 Northrop Grumman Corp., Senior Unsecured Notes 4.08% 11/16/06 1,445 1,438,021 7.12% 02/15/11 935 1,033,306 Raytheon Co., Senior Notes 6.75% 08/15/07 1,752 1,810,398 ------------ 5,904,451 ------------ Banks -- 11.0% Banc One Corp., Senior Unsecured Notes 2.62% 06/30/08 60 57,022 Bank of America Corp., Senior Unsecured Notes 3.25% 08/15/08 3,100 2,990,291 Bank of America Corp., Subordinated Notes 7.20% 04/15/06 795 805,542 7.80% 02/15/10 1,115 1,244,448 Bank of New York Co., Inc., Senior Subordinated Notes 3.80% 02/01/08 1,400 1,375,599 Bank One N.A., Senior Bank Notes 5.50% 03/26/07 1,385 1,404,432 Bank One N.A., Senior Unsecured Notes 3.70% 01/15/08 2,325 2,279,523 BankBoston N.A., Subordinated Bank Notes 6.38% 04/15/08 2,575 2,678,950 BankBoston N.A., Subordinated Notes 7.00% 09/15/07 450 469,544 Barclays Bank PLC, Subordinated Notes 7.38%(b)(g) 06/29/49 1,500 1,682,698 Citigroup, Inc., Senior Unsecured Notes 5.75% 05/10/06 2,150 2,167,557 5.00% 03/06/07 2,690 2,708,669 Citigroup, Inc., Subordinated Notes 7.75% 06/15/06 3,480 3,553,390 6.38% 11/15/08 1,710 1,793,643 Citigroup, Inc., Unsecured Notes 4.12% 02/22/10 6,585 6,434,928 Depfa ACS Bank, Senior Notes 3.62% 10/29/08 5,150 5,019,257 Deutsche Bank AG, Deposit Notes 3.84%(b) 03/15/07 1,975 1,966,112 Fleet National Bank, Subordinated Bank Notes 5.75% 01/15/09 900 927,891 See accompanying notes to financial statements. 47
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ----------- ---------- ------------ CORPORATE BONDS (Continued) Banks (Continued) Fleetboston Financial Corp., Senior Unsecured Notes 3.85% 02/15/08 $ 685 $ 674,831 HBOS Treasury Services PLC, Unsecured Notes 3.75%(g) 09/30/08 1,360 1,327,746 HSBC Bank USA, Subordinated Notes 3.87% 06/07/07 10,900 10,795,556 The Huntington National Bank, Subordinated Bank Notes 2.75% 10/16/06 750 734,858 J.P. Morgan Chase & Co., Senior Unsecured Notes 5.25% 05/30/07 8,210 8,306,517 J.P. Morgan Chase & Co., Subordinated Notes 6.25% 02/15/11 1,500 1,594,708 Sumitomo Mitsui Banking Corp., Subordinated Notes 5.62%(g) 12/31/49 1,450 1,445,084 SunTrust Bank, Inc., Senior Unsecured Notes 3.62% 10/15/07 1,485 1,457,067 4.00% 10/15/08 1,100 1,078,287 Swedish Export Credit Corp., Unsecured Notes 3.50% 01/15/08 6,625 6,493,162 U.S. Bank N.A., Senior Bank Notes 2.40% 03/12/07 4,560 4,425,936 4.40% 08/15/08 675 671,371 3.75% 02/06/09 850 826,013 U.S. Bank N.A., Subordinated Notes 6.30% 07/15/08 1,360 1,420,610 U.S. Central Credit Union, Unsecured Notes 2.75% 05/30/08 1,915 1,825,474 UBS Preferred Funding Trust I, Capital Securities 8.62%(b) 10/29/49 475 550,270 Wachovia Bank N.A., Senior Bank Notes 4.38% 08/15/08 850 845,266 Wachovia Corp., Subordinated Notes 5.62% 12/15/08 2,150 2,216,925 Wachovia Corp., Unsecured Notes 4.95% 11/01/06 3,000 3,013,305 Wells Fargo & Co., Senior Unsecured Notes 5.90% 05/21/06 1,600 1,614,013 5.25% 12/01/07 1,700 1,725,796 4.00% 08/15/08 1,295 1,274,604 4.20% 01/15/10 675 662,384 Wells Fargo & Co., Unsecured Notes 4.62% 08/09/10 3,150 3,133,050 World Savings Bank, Unsecured Notes 4.12% 03/10/08 1,375 1,358,188 ------------ 99,030,517 ------------ Broadcasting -- 0.4% Cox Communications, Inc., Senior Unsecured Notes 7.75% 11/01/10 295 326,438 Cox Communications, Inc., Senior Unsecured Notes 7.12% 10/01/12 900 979,007 News America, Inc., Unsecured Notes 5.30% 12/15/14 2,550 2,537,352 ------------ 3,842,797 ------------ Construction -- 0.1% Lennar Corp., Senior Unsecured Notes 5.60%(g) 05/31/15 410 401,566 Pulte Homes, Inc., Senior Unsecured Notes 5.20% 02/15/15 700 662,921 ------------ 1,064,487 ------------ Energy & Utilities -- 1.8% American Electric Power Co., Senior Notes 4.71%(b) 08/16/07 1,205 1,203,909 Dominion Resources, Inc., Senior Unsecured Notes 3.66% 11/15/06 2,250 2,226,346 5.12% 12/15/09 455 458,881 DTE Energy Co., Senior Unsecured Notes 5.63% 08/16/07 1,475 1,494,960 NiSource Finance Corp., Unsecured Notes 4.39%(b) 11/23/09 2,450 2,455,635 PECO Energy Co., First Refunding Mortgages 5.95% 11/01/11 1,900 2,010,377 PSEG Funding Trust, Capital Security 5.38% 11/16/07 1,450 1,461,301 TXU Corp., Senior Unsecured Notes 4.80% 11/15/09 2,400 2,312,417 Virginia Electric and Power Co., Unsecured Notes 5.73% 11/25/08 2,514 2,585,337 ------------ 16,209,163 ------------ Entertainment & Leisure -- 0.6% Comcast Cable Communications Corp., Senior Notes 8.38% 11/05-05/07 2,440 2,465,174 Comcast Cable Holdings LLC, Senior Debentures 7.88% 08/01/13 735 848,315 Time Warner Cos., Inc., Senior Unsecured Notes 6.75% 04/15/11 1,610 1,729,008 Turner Broadcasting Corp., Senior Notes 8.38% 07/01/13 300 353,562 ------------ 5,396,059 ------------ Finance -- 7.7% Archstone-Smith Trust Corp., Senior Unsecured Notes 5.00% 08/15/07 850 853,969 See accompanying notes to financial statements. 48
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Finance (Continued) Associates Corp. of North America, Senior Notes 6.25% 11/01/08 $ 2,000 $ 2,092,328 BAE Systems Holdings, Inc., Unsecured Notes 5.20%(g) 08/15/15 1,230 1,211,415 The Bear Stearns Cos., Inc., Unsecured Notes 3.25% 03/25/09 3,500 3,338,895 Berkshire Hathaway Finance Corp., Senior Unsecured Notes 3.40% 07/02/07 2,400 2,359,032 4.12% 01/15/10 2,565 2,510,648 Cable and Wireless Optus Finance Ltd., Unsecured Notes 8.00%(g) 06/22/10 1,425 1,620,596 CitiFinancial Credit Co., Unsecured Notes 6.62% 11/15/06 2,675 2,737,961 General Electric Capital Corp., Unsecured Notes 5.38% 03/15/07 950 962,039 3.45%(b) 07/07-01/08 10,785 10,793,184 3.50% 08/15/07 3,820 3,753,303 4.12% 03/08-09/09 8,255 8,098,236 3.60% 10/15/08 5,635 5,478,386 The Goldman Sachs Group, Inc., Unsecured Notes 4.75% 07/15/13 2,000 1,954,312 Household Finance Corp., Senior Unsecured Notes 7.20% 07/15/06 1,975 2,014,686 5.75% 01/30/07 500 507,755 Lehman Brothers Holdings, Inc., Senior Notes 6.62% 02/05/06 625 630,031 Lehman Brothers Holdings, Inc., Unsecured Notes 4.00% 01/22/08 3,125 3,088,281 Nationwide Building Society, Unsecured Notes 4.25%(g) 02/01/10 350 342,787 Nuveen Investments, Senior Unsecured Notes 5.50% 09/15/15 925 912,431 Principal Life Global Funding I, Unsecured Notes 3.62%(g) 04/30/08 1,085 1,057,517 Prudential Financial, Inc., Senior Unsecured Notes 3.75% 05/01/08 1,375 1,346,208 Prudential Funding LLC, Senior Unsecured Notes 6.60%(g) 05/15/08 810 848,127 SP Power Assets Ltd., Unsecured Notes 3.80%(g) 10/22/08 1,325 1,291,411 Student Loan Marketing Corp., Senior Unsecured Notes 3.62% 03/17/08 4,200 4,105,328 Swedbank, Capital Securities 7.50%(b)(g) 09/29/49 2,200 2,562,780 Washington Mutual Finance Corp., Senior Unsecured Notes 6.25% 05/15/06 2,750 2,781,045 ------------- 69,252,691 ------------- Insurance -- 1.9% Allstate Financial Global Funding, Unsecured Notes 5.25%(g) 02/01/07 1,430 1,438,870 ASIF Global Financing, Unsecured Notes 3.90%(g) 10/22/08 320 311,603 CHUBB Corp., Senior Unsecured Notes 4.93% 11/16/07 2,925 2,938,478 MassMutual Global Funding II, Senior Secured Notes 2.55%(g) 07/15/08 2,535 2,394,617 Metlife, Inc., Unsecured Notes 5.00% 06/15/15 1,825 1,797,330 Metropolitan Life Global Funding, Inc., Unsecured Notes 2.60%(g) 06/19/08 1,540 1,455,654 New York Life Global Funding, Unsecured Notes 3.88%(g) 01/15/09 2,945 2,873,843 Protective Life Corp., Secured Notes 3.70% 11/24/08 680 660,511 TIAA Global Markets, Senior Unsecured Notes 3.88%(g) 01/22/08 3,000 2,949,093 ------------- 16,819,999 ------------- Medical & Medical Services -- 0.4% Wellpoint Health Network, Inc., Senior Unsecured Notes 6.38% 06/15/06 2,750 2,785,032 WellPoint, Inc., Unsecured Notes 3.50% 09/01/07 630 615,519 ------------- 3,400,551 ------------- Motor Vehicles -- 0.3% DaimlerChrysler N.A. Holding Corp., Unsecured Notes 4.88% 06/15/10 2,000 1,962,020 6.50% 11/15/13 475 502,211 General Motors Acceptance Corp., Unsecured Notes 5.11%(b) 09/23/08 475 440,110 ------------- 2,904,341 ------------- Oil & Gas -- 1.6% Anadarko Petroleum Corp., Senior Unsecured Notes 3.25% 05/01/08 1,600 1,545,592 Encana Corp., Unsecured Notes 4.60% 08/15/09 175 174,050 Ocean Energy, Inc., Senior Unsecured Notes 4.38% 10/01/07 1,660 1,649,974 See accompanying notes to financial statements. 49
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ----------- ---------- ------------- CORPORATE BONDS (Continued) Oil & Gas (Continued) Texas Eastern Transmission LLP, Senior Unsecured Notes 5.25% 07/15/07 $ 1,590 $ 1,602,036 Tosco Corp., Senior Notes 7.62% 05/15/06 2,525 2,570,266 Tosco Corp., Senior Unsecured Notes 7.25% 01/01/07 805 831,030 Union Pacific Resources, Inc., Debentures 7.38% 05/15/06 5,845 5,939,747 ------------- 14,312,695 ------------- Pharmaceuticals -- 0.7% Merck & Co., Inc., Unsecured Notes 4.73%(b)(g) 02/22/06 3,600 3,601,271 2.50% 03/30/07 1,640 1,590,551 Schering-Plough Corp., Senior Notes 5.30%(b) 12/01/13 795 819,744 ------------- 6,011,566 ------------- Real Estate -- 0.8% Avalonbay Communities, Inc., Senior Unsecured Notes 5.00% 08/01/07 1,380 1,385,713 EOP Operating LP, Unsecured Notes 4.65% 10/01/10 765 753,441 ERP Operating LP, Senior Notes 7.12% 10/15/17 725 824,680 The Rouse Co., Unsecured Notes 3.62% 03/15/09 600 560,847 5.38% 11/26/13 1,405 1,337,682 Simon Property Group, Inc., Unsecured Notes 3.75% 01/30/09 2,550 2,461,222 ------------- 7,323,585 ------------- Retail Merchandising -- 0.2% Federated Department Stores, Inc., Senior Unsecured Notes 6.62% 09/01/08 820 858,518 May Department Stores Co., Debentures 7.45% 10/15/16 860 980,430 ------------- 1,838,948 ------------- Telecommunications -- 2.3% AT&T Broadband Corp., Unsecured Notes 8.38% 03/15/13 885 1,047,104 BellSouth Corp., Unsecured Notes 4.26%(b)(g) 04/26/06 2,750 2,746,128 Centurytel, Inc., Unsecured Notes 5.00% 02/15/15 625 590,175 Continental Cablevision, Inc., Senior Notes 8.30% 05/15/06 1,050 1,074,069 Lenfest Communications, Inc., Senior Notes 7.62% 02/15/08 1,815 1,920,161 Qwest Corp., Unsecured Notes 8.88% 03/15/12 340 370,600 SBC Communications, Inc., Senior Unsecured Notes 5.88% 02/01/12 130 135,961 SBC Communications, Inc., Unsecured Notes 4.39%(g) 06/05/06 1,900 1,897,682 Sprint Capital Corp., Senior Unsecured Notes 7.62% 01/30/11 1,125 1,258,881 TCI Communications, Inc., Senior Debentures 8.75% 08/01/15 965 1,198,217 Verizon New Jersey, Inc., Senior Debentures 5.88% 01/17/12 5,015 5,191,879 Vodafone Group PLC, Senior Unsecured Notes 3.95% 01/30/08 2,595 2,559,332 Vodafone Group PLC, Unsecured Notes 5.00% 09/15/15 600 595,439 ------------- 20,585,628 ------------- Yankee -- 5.0% Canadian National Railway Co., Senior Unsecured Notes 4.25%(i) 08/01/09 2,075 2,043,854 Eksportfinans ASA (Norway), Unsecured Notes 4.38%(i) 07/15/09 6,550 6,529,171 Japan Finance Corp. for Municipal Enterprises, Unsecured Notes 4.62%(i) 04/21/15 2,000 1,985,250 KFW Bankengruppe (Germany), Senior Unsecured Notes 3.25%(i) 09/21/07 3,400 3,332,248 Landeskreditbank Baden-Wurttemberg-Forderbank (Germany), Unsecured Notes 3.42%(i) 07/27/06 19,090 18,957,515 National Westminster Bank (United Kingdom), Subordinated Notes 7.75%(b)(i) 04/29/49 1,550 1,635,988 Nationwide Building Society (United Kingdom), Unsecured Notes 2.62%(g)(i) 01/30/07 2,045 1,994,812 Province of Quebec (Canada), Unsecured Notes 5.75%(i) 02/15/09 1,355 1,405,748 Scottish Power PLC (United Kingdom), Unsecured Notes 4.90%(i) 03/15/10 2,300 2,298,661 Telecom Italia Capital (Luxembourg), Senior Unsecured Notes 5.25%(i) 11/15/13 665 660,285 4.95%(g)(i) 09/30/14 625 604,833 Telefonica Europe BV (Netherlands), Senior Unsecured Notes 7.75%(i) 09/15/10 2,775 3,128,296 See accompanying notes to financial statements. 50
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------ ---------- ------------- CORPORATE BONDS (Continued) Yankee (Continued) Tyco International Group SA (Luxembourg), Senior Unsecured Notes 5.80%(i) 08/01/06 $ 650 $ 656,118 Vodafone Group PLC (United Kingdom), Senior Unsecured Notes 7.75%(i) 02/15/10 280 312,317 ------------- 45,545,096 ------------- TOTAL CORPORATE BONDS (Cost $321,962,457) 319,442,574 ------------- TAXABLE MUNICIPAL BONDS -- 1.6% Connecticut State General Obligation, Series 04, Class B 5.00% 12/01/15 1,010 1,096,315 Elmhurst, Illinois Sales Tax Revenue Bonds, Series 98 5.62% 05/15/10 250 251,752 Oregon School Board Taxable Pension Deferred Interest Bonds, Series A 1.00% 06/30/07 2,700 2,497,986 Port Authority of New York & New Jersey Revenue Notes, Series 04, Class XX 3.30% 09/15/07 4,200 4,104,786 Sales Tax Asset Receivable Corp. Revenue Bonds, Series 04, Class B 3.83% 10/15/09 1,280 1,243,200 Texas Public Finance Authority Taxable Revenue Bonds, Series 03 3.12% 06/15/07 2,020 1,975,722 University Maryland System Auxiliary Facility & Tuition Revenue Bonds, Series 05, Class A 5.00% 04/01/16 1,315 1,439,728 Wisconsin General Revenue Bonds, Series 03, Class A 4.80% 05/01/13 1,910 1,908,739 ------------- TOTAL TAXABLE MUNICIPAL BONDS (Cost $14,655,796) 14,518,228 ------------- Number of Shares ---------- SHORT TERM INVESTMENTS -- 0.5% Galileo Money Market Fund (Cost $4,182,443) 4,182,443 4,182,443 ------------- TOTAL INVESTMENTS IN SECURITIES -- 109.0% (Cost $986,440,588(a)) 978,524,847 Number of Contracts ----------- CALL SWAPTIONS WRITTEN -- (0.3)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (1,220)(j) (585,112) Citibank, Strike Price 5.67, Expires 01/04/10 (1,250)(j) (857,859) Warburg Dillon Read LLC, Strike Price 5.00, Expires 06/16/10 (1,410)(j) (647,472) ------------- TOTAL CALL SWAPTIONS WRITTEN (Premiums received $1,872,885) (2,090,443) ------------- PUT SWAPTIONS WRITTEN -- (0.1)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (1,220)(j) (430,538) Citibank, Strike Price 5.67, Expires 01/04/10 (1,250)(j) (380,183) Warburg Dillon Read LLC, Strike Price 5.00, Expires 06/16/10 (1,410)(j) (713,319) ------------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $1,872,885) (1,524,040) ------------- LIABILITIES IN EXCESS OF OTHER ASSETS -- (8.6)% (77,231,001) ------------- NET ASSETS -- 100.0% (Applicable to 46,709,206 BlackRock shares, 33,952,927 Institutional shares, 10,139,795 Service shares, 3,355,099 Investor A shares, 1,136,248 Investor B shares and 986,500 Investor C shares outstanding) $ 897,679,363 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($435,528,760/46,709,206) $ 9.32 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($316,522,453/33,952,927) $ 9.32 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($94,557,217/10,139,795) $ 9.33 ============= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($31,272,404/3,355,099) $ 9.32 ============= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.32/0.960) $ 9.71 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($10,594,226/1,136,248) $ 9.32 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR C SHARE ($9,204,303/986,500) $ 9.33 ============= See accompanying notes to financial statements. 51
BlackRock Funds STATEMENT OF NET ASSETS INTERMEDIATE BOND PORTFOLIO (Concluded) As of September 30, 2005 (a) Cost for Federal income tax purposes is $987,186,727. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 2,724,574 Gross unrealized depreciation (11,386,454) ------------- $ (8,661,880) ============= (b) Rates shown are the rates as of September 30, 2005. (c) Securities, or a portion thereof, pledged as collateral with a value of $3,738,069 on 519 long U.S. Treasury Note futures contracts and 1,101 short U.S. Treasury Note futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $174,701,633 with an unrealized loss of $418,254 (including commissions of $3,119). (d) Securities, or a portion thereof, with a market value of $1,185,765 have been pledged as collateral for swap and swaption contracts. (e) Securities, or a portion thereof, subject to financing transactions. (f) Rates shown are the effective yields as of September 30, 2005. (g) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 6.5% of its net assets, with a current market value of $57,979,392 in securities restricted as to resale. (h) Interest rate of underlying collateral. (i) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (j) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 52
BlackRock Funds SCHEDULE OF INVESTMENTS INTERMEDIATE PLUS BOND PORTFOLIO As of September 30, 2005 Number of Shares Value ----------- ------------- PREFERRED STOCKS -- 0.1% Raytheon Co. Trust I (Cost $42,375) 800 $ 41,397 ------------- Par Maturity (000) Value ------------- ---------- ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 21.3% Federal Home Loan Mortgage Corp., Unsecured Notes 3.01% 04/19/07 $ 275 269,524 5.00% 10/27/14 100 99,260 Federal National Mortgage Association, Unsecured Notes 2.15% 04/13/06 300 296,615 2.74%(b) 05/05/06 225 223,014 1.75% 06/16/06 125 122,813 2.71% 01/30/07 250 244,663 4.75% 02/21/13 200 198,619 5.12% 05/27/15 100 98,842 Small Business Administration Participation Certificates, Series 96-20E, Class 1 7.60% 05/01/16 115 121,591 U.S. Treasury Bonds 10.38%(c) 11/15/12 205 230,481 8.75% 08/15/20 100 144,730 8.00% 11/15/21 225 311,467 6.25% 08/15/23 555 663,637 U.S. Treasury Notes 3.62% 04/30/07 1,400 1,388,187 4.00% 08/07-02/15 1,790 1,767,271 3.38% 02/15/08 175 171,842 4.25% 08/14-08/15 1,410 1,400,864 ------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $7,829,650) 7,753,420 ------------- MORTGAGE PASS-THROUGHS -- 23.6% Federal Home Loan Mortgage Corp. ARM 3.33%(b) 07/01/34 261 258,677 Federal Home Loan Mortgage Corp. Gold 4.50% 03/10-10/20 336 330,217 5.00% 06/20-09/35 995 982,878 5.50% 10/01/35 400 400,000 Federal Home Loan Mortgage Corp. Gold ARM 4.01%(b) 03/01/34 144 141,273 Federal National Mortgage Association 6.00% 08/16-10/34 647 658,302 5.00% 01/18-10/35 2,603 2,573,295 5.50% 10/18-02/34 633 652,741 4.50% 10/20-10/35 400 389,031 Federal National Mortgage Association ARM 4.15%(b) 10/01/33 317 315,011 4.31%(b) 12/01/33 209 208,190 4.29%(b) 01/01/34 274 272,520 4.01%(b) 04/01/34 414 406,597 Federal National Mortgage Corp. 4.50% 05/17/20 97 95,158 Government National Mortgage Association 5.50% 10/13/35 900 899,437 -------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $8,651,026) 8,583,327 -------------- MULTIPLE CLASS MORTGAGE PASS-THROUGHS -- 0.4% Federal Home Loan Mortgage Corp., Series 05, Class B1 4.50% 05/01/20 95 93,016 Structured Asset Securities Corp., Series 96-CFL, Class X1 (IO) 2.06%(d) 02/25/28 397 35,260 ------------- TOTAL MULTIPLE CLASS MORTGAGE PASS-THROUGHS (Cost $120,775) 128,276 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 7.2% Bear Stearns Mortgage Trust, Series 04-13, Class A1 4.20%(b) 11/25/34 217 217,612 Countrywide Alternative Loan Trust, Series 05-56, Class 1A1 4.69%(b) 11/25/35 290 292,900 Countrywide Home Loans, Series 04-29, Class 1A1 4.10%(b) 02/25/35 163 162,802 Federal Home Loan Mortgage Corp., Series 2927, Class BA 5.50% 12/31/49 110 110,656 Federal Home Loan Mortgage Corp., Series 2949, Class PA 5.50% 03/15/34 224 226,816 Federal Home Loan Mortgage Corp., Series 2996, Class MK 5.50% 06/15/35 99 99,589 Federal National Mortgage Association, Series 04-25, Class PA 5.50% 10/25/30 202 204,401 Federal National Mortgage Association, Series 04-36, Class BS 5.50% 11/25/30 165 166,203 Federal National Mortgage Association, Series 05-48, Class AR 5.50% 02/25/35 108 109,200 Federal National Mortgage Association, Series 05-57, Class FG 4.23%(b) 05/25/35 118 118,803 Federal National Mortgage Association, Series 05-57, Class PA 5.50% 05/25/27 132 133,685 Goldman Sachs Residential Mortgage Loan Trust, Series 03-13, Class 1A1 4.51%(b) 10/25/33 190 185,156 See accompanying notes to financial statements. 53
BlackRock Funds SCHEDULE OF INVESTMENTS INTERMEDIATE PLUS BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) MortgageIT Trust, Series 04-1, Class A1 4.22%(b) 11/25/34 $ 293 $ 293,220 Structured Mortgage Loan Trust, Series 04-13, Class A2 4.13%(b) 09/25/34 109 108,693 Wells Fargo Mortgage Backed Securities Trust, Series 04-5, Class A1 4.53%(b) 06/25/34 193 191,204 ------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $2,651,944) 2,620,940 ------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 9.2% Banc of America Commercial Mortgage, Inc., Series 02-2, Class A3 5.12% 07/11/43 130 131,306 Banc of America Commercial Mortgage, Inc., Series 05-4, Class A5A 4.93% 07/10/45 160 160,809 Bear Stearns Commercial Mortgage Securities, Inc., Series 00-WF2, Class A2 7.32% 10/15/32 110 120,678 Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PWR9, Class A4A 4.87% 09/11/42 170 169,761 Bear Stearns Commericial Mortgage Securities, Inc., Series 05-PWR7, Class A2 4.94% 02/11/41 140 140,815 Chase Commercial Mortgage Securities Corp., Series 97-1, Class X (IO) 2.12%(d) 04/19/15 2,478 51,642 Chase Commercial Mortgage Securities Corp., Series 00-3, Class A2 7.32% 10/15/32 55 60,378 Chase Manhattan Bank-First Union National Bank, Series 99-1, Class A2 7.44% 08/15/31 185 200,806 Citigroup Commercial Mortgage Trust, Series 05-EMG, Class A2 4.22%(e) 09/20/51 150 146,204 Credit Suisse First Boston Mortgage Securities Corp., Series 97-C1, Class AX (IO) 1.72%(d)(e) 06/20/29 2,387 81,749 Credit Suisse First Boston Mortgage Securities Corp., Series 97-C2, Class AX (IO) 1.10%(d) 01/17/35 683 14,662 Credit Suisse First Boston Mortgage Securities Corp., Series 00-C1, Class A1 7.32% 04/15/42 138 143,614 Donaldson, Lufkin and Jenrette, Inc. Commerical Mortgage Corp., Series 98-CF1, Class A1B 6.41% 02/18/31 191 197,117 Donaldson, Lufkin and Jenrette, Inc. Commerical Mortgage Corp., Series 00-CKP1, Class A1B 7.18% 08/10/10 100 109,212 First Union National Bank Commercial Mortgage Trust, Series 01-C3, Class A3 6.42% 08/15/33 250 268,093 General Electric Capital Commercial Mortgage Corp., Series 00-1, Class A2 6.50% 01/15/33 125 133,686 General Electric Capital Commercial Mortgage Corp., Series 02-1A, Class A3 6.27% 12/10/35 170 181,905 General Electric Capital Commercial Mortgage Corp., Series 05-C1, Class A3 4.58% 06/10/48 130 128,466 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 97-C1, Class X (IO) 1.53%(d) 07/15/29 1,759 76,340 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C2, Class A2 6.94% 09/15/33 100 106,550 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 00-C2, Class A2 7.46% 08/16/33 115 126,241 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C3, Class A2 7.95% 05/15/25 140 155,987 Lehman Brothers-UBS Commercial Mortgage Trust, Series 01-C2, Class A2 6.65% 11/15/27 150 162,116 Lehman Brothers-UBS Commercial Mortgage Trust, Series 03-C7, Class A3 4.56%(b) 09/15/27 110 108,304 Lehman Brothers-UBS Commercial Mortgage Trust, Series 05-C1, Class A3 4.54% 12/15/49 150 147,627 Morgan Stanley Capital I, Inc., Series 97-HF1, Class X 1.69%(e) 07/15/29 398 6,797 ------------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $3,403,131) 3,330,865 ------------- ASSET BACKED SECURITIES -- 7.4% Capital Auto Receivables Asset Trust, Series 04-2, Class A4 3.75% 07/15/09 225 220,417 Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 175 170,693 Citibank Credit Card Issuance Trust, Series 03-A3, Class A3 3.10% 03/10/10 125 120,899 See accompanying notes to financial statements. 54
BlackRock Funds SCHEDULE OF INVESTMENTS INTERMEDIATE PLUS BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- ASSET BACKED SECURITIES (Continued) Citibank Credit Card Issuance Trust, Series 04, Class A1 2.55% 01/20/07 $ 225 $ 219,636 DaimlerChrysler Auto Trust, Series 05-B, Class A3 4.04% 09/08/09 225 223,189 Discover Card Master Trust I, Series 01-2, Class A 3.93%(b) 07/15/08 250 250,121 Green Tree Financial Corp., Series 99-2, Class A3 6.08% 12/01/30 71 71,938 Honda Auto Receivables Owner Trust, Series 05-4, Class A3 4.51% 05/20/09 225 224,813 MBNA Credit Card Master Note Trust, Series 04-A4, Class A4 2.70% 09/15/09 175 170,570 Nissan Auto Receivables Owner Trust, Series 03-C, Class A3 2.23% 03/15/07 112 111,152 Nissan Auto Receivables Owner Trust, Series 05-C, Class A3 4.21% 07/15/09 250 248,461 Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A1 3.95%(b) 05/25/25 250 250,000 Standard Credit Card Master Trust I, Series 94-2, Class A 7.25% 04/07/06 235 238,413 Student Loan Marketing Student Loan Trust, Series 05-6, Class A5B 3.67%(b) 07/27/26 175 175,019 ------------- TOTAL ASSET BACKED SECURITIES (Cost $2,720,187) 2,695,321 ------------- CORPORATE BONDS -- 16.6% Aerospace -- 0.3% BE Aerospace, Inc., Senior Notes 8.50% 10/01/10 5 5,437 Lockheed Martin Tactical Systems, Inc., Senior Debentures 7.00% 09/15/23 30 34,864 Northrop Grumman Corp., Senior Unsecured Notes 4.08% 11/16/06 35 34,831 7.12% 02/15/11 20 22,103 Raytheon Co., Senior Unsecured Notes 4.50% 11/15/07 7 6,969 ------------- 104,204 ------------- Banks -- 3.9% Bank of America Corp., Senior Unsecured Notes 3.25% 08/15/08 75 72,346 4.50% 08/01/10 25 24,757 Bank of America Corp., Subordinated Notes 7.80% 02/15/10 5 5,580 Bank of New York Co., Inc., Senior Notes 3.75% 02/15/08 25 24,531 Bank One N.A., Senior Bank Notes 5.50% 03/26/07 50 50,702 Citigroup, Inc., Senior Unsecured Notes 6.20% 03/15/09 $ 35 $ 36,689 Citigroup, Inc., Subordinated Notes 6.38% 11/15/08 30 31,467 Citigroup, Inc., Unsecured Notes 4.12% 02/22/10 260 254,075 Depfa ACS Bank, Senior Notes 3.62% 10/29/08 50 48,731 HBOS Treasury Services PLC, Unsecured Notes 3.50%(e) 11/30/07 30 29,331 HSBC Bank USA, Subordinated Notes 3.87% 06/07/07 225 222,844 J.P. Morgan Chase & Co., Senior Unsecured Notes 5.25% 05/30/07 75 75,882 J.P. Morgan Chase & Co., Subordinated Notes 7.12% 06/15/09 25 26,956 SunTrust Bank, Inc., Senior Unsecured Notes 3.62% 10/15/07 70 68,683 4.00% 10/15/08 40 39,210 Swedish Export Credit Corp., Unsecured Notes 3.50% 01/15/08 75 73,508 U.S. Bancorp., Senior Unsecured Notes 3.95% 08/23/07 115 113,729 UBS Preferred Funding Trust I, Capital Securities 8.62%(b) 10/29/49 10 11,585 Wachovia Corp., Senior Notes 3.50% 08/15/08 15 14,552 Wells Fargo & Co., Senior Unsecured Notes 5.90% 05/21/06 100 100,876 Wells Fargo & Co., Unsecured Notes 4.62% 08/09/10 100 99,462 ------------- 1,425,496 ------------- Broadcasting -- 0.5% Cablevision Systems Corp., Senior Unsecured Notes 7.89%(b) 04/01/09 15 15,375 Charter Communications Holdings LLC, Unsecured Notes 10.25% 09/15/10 45 46,237 Cox Communications, Inc., Senior Unsecured Notes 7.12% 10/01/12 25 27,195 DirecTV Holdings LLC, Senior Unsecured Notes 6.38%(e) 06/15/15 10 9,850 News America, Inc., Unsecured Notes 5.30% 12/15/14 75 74,628 ------------- 173,285 ------------- See accompanying notes to financial statements. 55
BlackRock Funds SCHEDULE OF INVESTMENTS INTERMEDIATE PLUS BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Business Services -- 0.0% Service Corp. International, Senior Unsecured Notes 7.70% 04/15/09 $ 5 $ 5,250 ------------- Chemicals -- 0.0% BCP Crystal U.S. Holdings Corp., Senior Subordinated Notes 9.62% 06/15/14 10 11,175 ------------- Computer Software & Services -- 0.0% Sungard Data Systems, Inc., Senior Unsecured Notes 9.12%(e) 08/15/13 5 5,181 ------------- Construction -- 0.1% International Steel Group, Inc., Senior Unsecured Notes 6.50% 04/15/14 15 14,813 K. Hovnanian Enterprises, Inc., Senior Unsecured Notes 6.25%(e) 01/15/16 35 32,550 Lennar Corp., Senior Unsecured Notes 5.60%(e) 05/31/15 5 4,897 ------------- 52,260 ------------- Containers -- 0.0% Crown Holdings, Inc., Senior Secured Notes 9.50% 03/01/11 5 5,475 ------------- Energy & Utilities -- 0.9% AES Corp., Senior Secured Notes 8.75%(e) 05/15/13 10 10,950 Dominion Resources, Inc., Senior Unsecured Notes 7.20% 09/15/14 40 44,954 Midwest Generation LLC, Pass-Through Certificates 8.56% 01/02/16 24 26,019 Midwest Generation LLC, Senior Secured Notes 8.75% 05/01/34 10 11,137 NiSource Finance Corp., Unsecured Notes 4.39%(b) 11/23/09 75 75,172 PSEG Funding Trust, Capital Security 5.38% 11/16/07 50 50,390 Reliant Energy, Inc., Senior Secured Notes 6.75% 12/15/14 5 4,888 Transcontinental Gas Pipe Line Corp., Senior Notes 8.88% 07/15/12 5 5,850 TXU Corp., Senior Unsecured Notes 4.80% 11/15/09 100 96,351 ------------- 325,711 ------------- Entertainment & Leisure -- 0.4% Comcast Cable Communications Corp., Senior Unsecured Notes 6.38% 01/30/06 5 5,032 Comcast Cable Communications, Inc., Senior Unsecured Notes 6.75% 01/30/11 35 37,634 Comcast Cable Holdings LLC, Senior Debentures 7.88% 08/01/13 5 5,771 MGM Mirage, Inc., Senior Notes 6.00% 10/01/09 20 19,750 Mohegan Tribal Gaming Authority, Senior Unsecured Notes 6.12% 02/15/13 10 9,937 Seneca Gaming Corp., Senior Unsecured Notes 7.25% 05/01/12 15 15,375 Time Warner Cos., Inc., Senior Unsecured Notes 6.75% 04/15/11 35 37,587 Turner Broadcasting Corp., Senior Notes 8.38% 07/01/13 15 17,678 ------------- 148,764 ------------- Finance -- 3.3% BAE Systems Holdings, Inc., Unsecured Notes 5.20%(e) 08/15/15 40 39,396 The Bear Stearns Cos., Inc., Unsecured Notes 3.25% 03/25/09 50 47,698 Berkshire Hathaway Finance Corp., Senior Unsecured Notes 4.12% 01/15/10 80 78,305 CCH I LLC 11.00%(e)(f) 10/01/15 26 25,187 Crown European Holdings SA, Senior Secured Notes 10.88% 03/01/13 10 11,600 General Electric Capital Corp., Unsecured Notes 3.50% 08/15/07 50 49,127 3.45%(b) 01/15/08 425 425,918 4.12% 03/08-09/09 250 245,363 3.60% 10/15/08 10 9,722 3.75% 12/15/09 65 62,772 Household Finance Corp., Senior Notes 6.45% 02/01/09 20 20,945 Morgan Stanley, Senior Unsecured Notes 3.88% 01/15/09 25 24,369 Morgan Stanley, Unsecured Notes 4.00% 01/15/10 50 48,390 Nationwide Building Society, Senior Unsecured Notes 3.50%(e) 07/31/07 50 49,058 Principal Life Global Funding I, Unsecured Notes 3.62%(e) 04/30/08 20 19,493 Prudential Funding LLC, Senior Unsecured Notes 6.60%(e) 05/15/08 25 26,177 ------------- 1,183,520 ------------- See accompanying notes to financial statements. 56
BlackRock Funds SCHEDULE OF INVESTMENTS INTERMEDIATE PLUS BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Food & Agriculture -- 0.1% Smithfield Foods, Inc., Senior Unsecured Notes 7.00% 08/01/11 $ 25 $ 25,500 ------------- Industrial -- 0.1% Osprey Trust / Osprey I, Inc., Senior Secured Notes 0.13%(b)(d)(e)(g)(h) 01/15/49 50 24,000 ------------- Insurance -- 0.9% Allstate Financial Global Funding, Unsecured Notes 5.25%(e) 02/01/07 25 25,155 ASIF Global Financing, Unsecured Notes 3.90%(e) 10/22/08 45 43,819 CHUBB Corp., Senior Unsecured Notes 4.93% 11/16/07 75 75,346 MassMutual Global Funding II, Senior Secured Notes 2.55%(e) 07/15/08 35 33,062 Metlife, Inc., Unsecured Notes 5.00% 06/15/15 50 49,242 New York Life Global Funding, Unsecured Notes 3.88%(e) 01/15/09 45 43,913 TIAA Global Markets, Senior Unsecured Notes 3.88%(e) 01/22/08 45 44,236 ------------- 314,773 ------------- Manufacturing -- 0.1% Briggs & Stratton Corp., Senior Unsecured Notes 8.88% 03/15/11 20 22,850 Ispat Inland ULC, Senior Secured Notes 9.75% 04/01/14 22 25,520 ------------- 48,370 ------------- Medical & Medical Services -- 0.1% Bio-Rad Laboratories, Inc., Senior Subordinated Notes 6.12% 12/15/14 10 9,725 Wellpoint Health Network, Inc., Senior Unsecured Notes 6.38% 06/15/06 25 25,318 ------------- 35,043 ------------- Metal & Mining -- 0.0% TRIMAS Corp., Senior Subordinated Notes 9.88% 06/15/12 5 4,125 ------------- Motor Vehicles -- 0.1% Arvinmeritor, Inc., Senior Notes 6.80% 02/15/09 10 9,550 DaimlerChrysler N.A. Holding Corp., Notes 4.75% 01/15/08 25 24,912 ------------- 34,462 ------------- Oil & Gas -- 0.6% Anadarko Petroleum Corp., Senior Unsecured Notes 3.25% 05/01/08 50 48,300 ANR Pipeline Co., Senior Debentures 9.62% 11/01/21 5 6,175 7.38% 02/15/24 5 5,155 Chesapeake Energy Corp., Senior Unsecured Notes 6.25% 01/15/18 30 29,400 Devon Financing Corp., Senior Unsecured Notes 6.88% 09/30/11 35 38,473 Dynegy Holdings, Inc., Secured Notes 10.12%(e) 07/15/13 15 16,725 Encana Corp.(Canada), Bonds 6.30% 11/01/11 25 26,767 KCS Energy, Inc., Senior Unsecured Notes 7.12%(e) 04/01/12 5 5,125 Northwest Pipeline Corp., Senior Unsecured Notes 8.12% 03/01/10 15 16,012 The Williams Cos., Inc., Senior Unsecured Notes 7.12% 09/01/11 10 10,425 ------------- 202,557 ------------- Paper & Forest Products -- 0.0% Bowater Canada Finance Corp., Senior Unsecured Notes 7.95% 11/15/11 5 5,038 Georgia-Pacific Corp., Senior Unsecured Notes 8.00% 01/15/24 5 5,506 ------------- 10,544 ------------- Pharmaceuticals -- 0.8% Merck & Co., Inc., Senior Unsecured Notes 5.25% 07/01/06 25 25,104 Merck & Co., Inc., Unsecured Notes 4.73%(b)(e) 02/22/06 250 250,089 2.50% 03/30/07 25 24,246 ------------- 299,439 ------------- Railroad & Shipping -- 0.0% Burlington Northern Santa Fe Corp., Debentures 7.29% 06/01/36 10 12,306 ------------- Real Estate -- 0.2% AMR Real Estate, Senior Unsecured Notes 8.12% 06/01/12 5 5,275 The Rouse Co., Unsecured Notes 3.62% 03/15/09 40 37,390 5.38% 11/26/13 40 38,083 ------------- 80,748 ------------- Retail Merchandising -- 0.1% Federated Department Stores, Inc., Senior Unsecured Notes 6.30% 04/01/09 10 10,424 May Department Stores Co., Debentures 7.45% 10/15/16 10 11,400 See accompanying notes to financial statements. 57
BlackRock Funds SCHEDULE OF INVESTMENTS INTERMEDIATE PLUS BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Retail Merchandising (Continued) Movie Gallery, Inc., Senior Unsecured Notes 11.00% 05/01/12 $ 5 $ 4,463 ------------- 26,287 ------------- Semiconductors & Related Devices -- 0.0% Freescale Semiconductor, Inc., Senior Unsecured Notes 6.35%(b) 07/15/09 5 5,138 Magnachip Semiconductor, Secured Notes 7.12%(b) 12/15/11 10 9,950 ------------- 15,088 ------------- Telecommunications -- 1.0% AT&T Broadband Corp., Unsecured Notes 8.38% 03/15/13 140 165,644 Cincinnati Bell, Inc., Senior Unsecured Notes 7.25% 07/15/13 15 15,937 Intelsat Bermuda Ltd., Senior Unsecured Notes 8.70%(b)(e) 01/15/12 10 10,200 L-3 Communications Corp., Senior Subordinated Notes 6.38%(e) 10/15/15 5 5,037 Qwest Corp., Unsecured Notes 7.12%(b)(e) 06/15/13 15 15,600 Rogers Wireless, Inc., Senior Secured Notes 7.50% 03/15/15 25 26,938 Verizon Maryland, Inc., Senior Debentures 6.12% 03/01/12 30 31,364 Verizon New Jersey, Inc., Senior Debentures 5.88% 01/17/12 70 72,469 ------------- 343,189 ------------- Transportation -- 0.2% Overseas Shipholding Group, Inc., Senior Unsecured Notes 7.50% 02/15/24 10 9,975 Union Pacific Corp., Senior Notes 6.62% 02/01/08 50 52,075 ------------- 62,050 ------------- Waste Management -- 0.1% Allied Waste N.A., Inc., Senior Notes 8.88% 04/01/08 15 15,638 Allied Waste N.A., Inc., Senior Secured Notes 8.50% 12/01/08 25 26,062 ------------- 41,700 ------------- Yankee -- 2.8% Abitibi-Consolidated, Inc. (Canada), Senior Unsecured Notes 8.38%(i) 04/01/15 5 4,925 Canadian National Railway Co., Senior Unsecured Notes 4.25%(i) 08/01/09 40 39,400 Eksportfinans ASA (Norway), Unsecured Notes 4.38%(i) 07/15/09 20 19,936 Japan Finance Corp. for Municipal Enterprises, Unsecured Notes 4.62%(i) 04/21/15 100 99,263 Landeskreditbank Baden-Wurttemberg-Forderbank (Germany), Unsecured Notes 3.42%(i) 07/27/06 575 571,010 Omi Corp. (Mali), Senior Notes 7.62%(i) 12/01/13 5 5,100 Scottish Power PLC (United Kingdom), Unsecured Notes 4.90%(i) 03/15/10 25 24,985 Telecom Italia Capital (Luxembourg), Senior Unsecured Notes 5.25%(i) 11/15/13 25 24,823 4.95%(e)(i) 09/30/14 40 38,709 Telefonica Europe BV (Netherlands), Senior Unsecured Notes 7.75%(i) 09/15/10 115 129,641 Tyco International Group SA (Luxembourg), Senior Unsecured Notes 5.80%(i) 08/01/06 30 30,282 Vodafone Group PLC (United Kingdom), Senior Unsecured Notes 7.75%(i) 02/15/10 35 39,040 ------------- 1,027,114 ------------- TOTAL CORPORATE BONDS (Cost $6,104,248) 6,047,616 ------------- FOREIGN BONDS -- 1.9% Bundesrepublic Deutschland (Germany) (EUR) 4.75% 07/04/34 50 72,643 4.00% 01/04/37 125 162,181 Government of New Zealand (NZD) 6.00% 11/15/11 145 101,229 6.50% 04/15/13 215 154,792 Province of Manitoba (NZD) 6.38% 09/01/15 30 20,508 Province of Ontario, Unsecured Notes (NZD) 6.25% 06/16/15 120 81,835 Republic of Italy (USD) 4.38% 10/25/06 80 80,005 ------------- TOTAL FOREIGN BONDS (Cost $679,337) 673,193 ------------- TAXABLE MUNICIPAL BONDS -- 0.8% Connecticut State General Obligation, Series 04, Class B 5.00% 12/01/15 30 32,564 Port Authority of New York & New Jersey Revenue Notes, Series 04, Class XX 3.30% 09/15/07 125 122,166 See accompanying notes to financial statements. 58
BlackRock Funds SCHEDULE OF INVESTMENTS INTERMEDIATE PLUS BOND PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- TAXABLE MUNICIPAL BONDS (Continued) Sales Tax Asset Receivable Corp. Revenue Bonds, Series 04, Class B 3.60% 10/15/08 $ 35 $ 34,069 University Maryland System Auxiliary Facility & Tuition Revenue Bonds, Series 05, Class A 5.00% 04/01/16 35 38,320 Wisconsin General Revenue Bonds, Series 03, Class A 4.80% 05/01/13 50 49,967 ------------- TOTAL TAXABLE MUNICIPAL BONDS (Cost $282,941) 277,086 ------------- Par/Shares (000) ---------- SHORT TERM INVESTMENTS - 11.5% U.S. Treasury Bills 3.15% 11/17/05 3,500 3,485,606 Galileo Money Market Fund 678 678,062 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $4,163,668) 4,163,668 ------------- TOTAL INVESTMENTS IN SECURITIES -- 100.0% (Cost $36,649,282(a)) $ 36,315,109 ============= Number of Contracts ---------- CALL SWAPTIONS WRITTEN -- (0.2)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (30)(j) (14,388) Citibank, Strike Price 5.67, Expires 01/04/10 (40)(j) (27,452) Warburg Dillon Read LLC, Strike Price 5.00, Expires 06/16/10 (40)(j) (18,368) ------------- TOTAL CALL SWAPTIONS WRITTEN (Premiums received $53,450) (60,208) ------------- PUT SWAPTIONS WRITTEN -- (0.1)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (30)(j) (10,587) Citibank, Strike Price 5.67, Expires 01/04/10 (40)(j) (12,166) Warburg Dillon Read LLC, Strike Price 5.00, Expires 06/16/10 (40)(j) (20,236) ------------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $53,450) (42,989) ------------- - ---------- (a) Cost for Federal income tax purposes is $36,674,047. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 71,663 Gross unrealized depreciation (430,601) --------- $(358,938) ========= (b) Rates shown are the rates as of September 30, 2005. (c) Securities, or a portion thereof, pledged as collateral with a value of $112,430 on 4 long U.S. Treasury Note futures contracts, 27 short U.S. Treasury Note futures contacts, 7 short Euro-Bobl futures contracts and 3 long Euro-dollar futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $5,099,881 with an unrealized gain of $14,470 (including commissions of $96). (d) Rates shown are the effective yields as of September 30, 2005. (e) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 3.4% of its net assets, with a market value of $1,041,677 in securities restricted as to resale. (f) Security valued at fair value as determined in good faith by or under the direction of the Trustees. As of September 30, 2005, this security had a total market value of $25,187 which represents less than 0.08% of net assets. (g) Non-income producing security. (h) Security in default. (i) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (j) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 59
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES INTERMEDIATE PLUS BOND PORTFOLIO September 30, 2005 ASSETS Investments at value (Cost $36,649,282)............................................ $ 36,315,109 Cash denominated in foreign currencies (Cost $243,576)............................. 241,703 Interest receivable ............................................................... 237,116 Principal receivable .............................................................. 12,985 Investments sold receivable ....................................................... 9,235,935 Receivable from affiliate ......................................................... 10,549 Receivable from advisor ........................................................... 3,115 Prepaid expenses .................................................................. 10,923 Unrealized appreciation on forward foreign currency contracts ..................... 2,303 Unrealized appreciation on interest rate swaps .................................... 1,800 Futures margin receivable ......................................................... 6,142 ------------- TOTAL ASSETS ................................................................... 46,077,680 ------------- LIABILITIES Investments purchased payable ..................................................... 14,899,174 Distributions payable ............................................................. 28,221 Transfer agent fees payable ....................................................... 1,263 Other accrued expenses payable .................................................... 35,263 Swaptions written, at fair value (Premiums received $106,900)...................... 103,197 Futures margin payable ............................................................ 984 Unrealized depreciation on forward foreign currency contracts ..................... 4,914 Unrealized depreciation on interest rate swaps .................................... 23,701 ------------- TOTAL LIABILITIES .............................................................. 15,096,717 ------------- NET ASSETS (Applicable to 3,067,213 BlackRock shares, 81,143 Institutional shares, 10 Service shares, 1,974 Investor A shares, 198 Investor B shares and 10 Investor C shares outstanding) ................................................. $ 30,980,963 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($30,133,434/3,067,213)........................................ $ 9.82 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($825,559/81,143).......................................... $ 10.17 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($102/10)(a)..................................................... $ 10.19 ============= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($19,784/1,974)............................................... $ 10.02 ============= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.02/0.950).......................... $ 10.55 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($1,982/198).................................................. $ 10.01 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($101/10)(b).................................................. $ 10.13 ============= - ---------- (a) Exact net assets and shares outstanding at September 30, 2005 were $101.98 and 10.009, respectively. (b) Exact net assets and shares outstanding at September 30, 2005 were $101.36 and 10.009, respectively. See accompanying notes to financial statements. 60
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO As of September 30, 2005 Number of Shares Value ---------- ------------- PREFERRED STOCKS -- 0.0% Centaur Funding Corp.(b) (Cost $216,892) 205 $ 271,740 ------------- Par Maturity (000) Value ------------- ---------- ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 23 1% Federal Home Loan Mortgage Corp., Unsecured Notes 3.35% 11/09/07 $ 6,425 6,298,183 4.62% 05/28/13 7,375 7,207,337 Federal National Mortgage Association, Unsecured Notes 2.35% 04/06-04/07 9,135 8,962,613 3.02% 06/01/06 60,450 59,878,989 1.75% 06/16/06 4,175 4,101,971 4.00% 10/16/06 26,225 26,118,999 2.71% 01/30/07 14,300 13,994,724 5.12% 05/27/15 11,275 11,144,402 Overseas Private Investment Co. 4.09% 05/29/12 329 304,678 4.30% 05/29/12 919 869,413 4.64% 05/29/12 686 659,369 4.68% 05/29/12 387 365,453 4.87% 05/29/12 2,925 2,844,240 5.40% 05/29/12 3,655 3,680,498 5.46% 05/29/12 419 430,517 5.79% 05/29/12 741 763,091 5.88%(c) 05/29/12 395 398,179 5.94% 05/29/12 1,408 1,456,496 5.95% 05/29/12 401 413,059 6.10% 05/29/12 473 491,682 6.81% 05/29/12 572 601,909 6.89% 05/29/12 4,567 4,827,787 6.91% 05/29/12 1,535 1,605,551 7.35% 05/29/12 413 438,557 Resolution Funding Corp. Strip Bonds 6.29%(d) 07/15/18 2,850 1,552,922 6.30%(d) 10/15/18 2,850 1,532,639 Small Business Administration Participation Certificates, Series 92-20H, Class 1 7.40% 08/01/12 39 40,548 Small Business Administration Participation Certificates, Series 96-20J, Class 1 7.20% 10/01/16 1,157 1,212,214 Small Business Administration Participation Certificates, Series 97-20B, Class 1 7.10% 02/01/17 1,200 1,260,799 Small Business Investment Cos. Pass-Through, Series 97-P10C, Class 1 6.85% 08/01/07 1,310 1,356,064 Small Business Investment Cos. Pass-Through, Series 97-P10D, Class 1 6.51% 11/10/07 87 89,520 Small Business Investment Cos. Pass-Through, Series 03-10A, Class 1 4.63% 03/10/13 8,514 8,513,642 U.S. Treasury Bonds 8.75% 05/17-08/20 4,570 6,512,205 8.12%(e) 08/15/19 46,135 62,986,870 8.50%(e)(f) 02/15/20 44,990 63,529,029 8.00% 11/15/21 8,320 11,517,351 6.25% 08/15/23 30,790 36,816,896 6.00%(e) 02/15/26 33,678 39,718,991 6.75%(e)(f) 08/15/26 30,565 39,174,549 6.12% 11/15/27 45 54,297 5.38% 02/15/31 1,000 1,120,312 U.S. Treasury Notes 4.62% 05/15/06 405 406,408 7.00% 07/15/06 7,370 7,531,219 4.00% 08/07-02/15 107,730 106,997,609 6.00% 08/15/09 2,300 2,445,997 3.62% 01/15/10 465 454,265 3.88% 07/10-09/10 24,465 24,113,554 4.12% 08/15/10 1,145 1,139,857 5.00% 02/15/11 320 331,788 4.88% 02/15/12 2,360 2,439,558 4.25% 08/13-08/15 69,165 68,732,814 4.75% 05/15/14 30,810 31,741,510 ------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $676,013,109) 681,181,124 ------------- MORTGAGE PASS-THROUGHS -- 22.6% Federal Home Loan Mortgage Corp. Gold 4.00% 07/10-05/19 8,616 8,452,095 5.50% 03/11-10/35 49,992 50,273,240 6.00% 10/11-06/34 21,420 21,979,822 6.50% 06/13-10/34 2,430 2,503,192 4.50% 04/18-08/20 38,181 37,504,676 5.00% 04/18-09/35 117,914 116,971,402 8.00% 11/22-10/25 22 23,077 7.00% 03/25-05/31 251 262,440 7.50% 07/26-03/32 271 287,263 Federal National Mortgage Association 6.50% 06/08-08/35 96,346 99,163,608 7.00% 11/08-08/32 9,720 10,162,185 5.50% 06/11-07/35 84,641 85,733,786 6.00% 09/11-11/34 35,161 35,759,432 4.00% 06/14-03/20 124 119,524 8.00% 11/01/15 8 8,809 4.50% 01/18-10/35 31,993 31,146,384 5.00% 01/18-08/35 135,705 133,737,533 7.50% 09/01/22 2 2,570 Federal National Mortgage Association ARM 6.43%(g) 01/01/31 5,847 5,936,172 4.83%(g) 09/01/35 16,546 16,500,499 See accompanying notes to financial statements. 61
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- MORTGAGE PASS-THROUGHS (Continued) Government National Mortgage Association 7.00% 03/13-02/33 $ 4,230 $ 4,446,211 6.00% 11/14-09/34 3,078 3,151,150 9.00% 07/15/18 6 6,305 6.50% 03/24-04/32 1,443 1,504,556 7.50% 11/15/29 4 4,192 5.50% 03/32-11/34 20 32,133 MLCC Mortgage Investors, Inc., Series 95-C2 (IO) 1.22%(d) 06/15/21 5,068 191,624 ------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $669,754,852) 665,863,880 ------------- MULTIPLE CLASS MORTGAGE PASS-THROUGHS -- 0.0% Structured Asset Securities Corp., Series 96-CFL, Class X1 (IO) 2.06%(d) (Cost $698,062) 02/25/28 7,051 625,866 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.3% Banc of America Alternative Loan Trust, Series 04-6, Class 4A1 5.00% 07/25/19 8,427 8,204,486 Countrywide Alternative Loan Trust, Series 04-27CB, Class A1 6.00% 12/25/34 14,271 14,299,892 Federal Home Loan Mortgage Corp., Series 1361, Class I 6.00% 09/15/07 375 376,461 Federal Home Loan Mortgage Corp., Series 1591, Class PK 6.35% 10/15/23 8,496 8,713,758 Federal Home Loan Mortgage Corp., Series 2529, Class MB 5.00% 11/15/17 8,292 8,282,619 Federal Home Loan Mortgage Corp., Series 2594, Class TV 5.50% 03/15/14 7,027 7,162,744 Federal Home Loan Mortgage Corp., Series 2864, Class NA 5.50% 01/15/31 13,530 13,657,182 Federal Home Loan Mortgage Corp., Series 2922, Class GA 5.50% 05/15/34 18,730 18,826,352 Federal Home Loan Mortgage Corp., Series 2996, Class MK 5.50% 06/15/35 11,136 11,214,548 Federal National Mortgage Association, Series 96-48, Class Z 7.00% 11/25/26 4,262 4,436,576 Federal National Mortgage Association, Series 03-16, Class BC 5.00% 03/25/18 3,860 3,841,351 Federal National Mortgage Association, Series 03-87, Class TJ 4.50% 09/25/18 9,907 9,679,238 Federal National Mortgage Association, Series 04-28, Class PB 6.00% 08/25/28 14,121 14,295,718 Federal National Mortgage Association, Series 04-88, Class HA 6.50% 07/25/34 11,223 11,644,529 Federal National Mortgage Association, Series 04-99, Class AO 5.50% 01/25/34 13,667 13,763,318 Federal National Mortgage Association, Series 05-3, Class AP 5.50% 02/25/35 10,665 10,737,202 Federal National Mortgage Association, Series 05-57, Class EG 4.13%(g) 03/25/35 13,747 13,754,618 Federal National Mortgage Association, Series 05-57, Class PA 5.50% 05/25/27 21,840 22,076,118 Federal National Mortgage Association, Series 05-70, Class NA 5.50% 08/25/35 1,156 1,172,457 Goldman Sachs Residential Mortgage Loan Trust, Series 03-10, Class 2A1 4.48%(g) 10/25/33 7,879 7,552,228 Goldman Sachs Residential Mortgage Loan Trust, Series 03-13, Class 1A1 4.51%(g) 10/25/33 15,877 15,442,007 Salomon Brothers Mortgage Securities VI, Series 87-1 (IO) 11.00%(d) 02/17/17 215 52,319 Salomon Brothers Mortgage Securities VI, Series 87-1 (PO) 11.50%(h) 02/17/17 224 207,536 Salomon Brothers Mortgage Securities VI, Series 87-2 (IO) 11.00%(d) 03/06/17 160 41,599 Salomon Brothers Mortgage Securities VI, Series 87-2 (PO) 11.50%(h) 03/06/17 160 142,480 Salomon Brothers Mortgage Securities, Series 87-3, Class A (PO) 13.00%(h) 10/23/17 94 86,011 Summit Mortgage Trust, Series 00-1, Class B1 6.29%(b)(g) 12/28/12 185 185,361 Wells Fargo Mortgage Backed Securities, Series 04-K, Class 1A2 4.48%(g) 07/25/34 26,412 25,697,670 ------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $249,551,955) 245,546,378 ------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 8.6% Banc of America Commercial Mortgage, Inc., Series 01-1, Class A2 6.50% 04/15/36 13,750 14,734,515 Banc of America Commercial Mortgage, Inc., Series 05-1, Class A4 5.03%(g) 11/10/42 13,880 13,878,751 Banc of America Commercial Mortgage, Inc., Series 05-4, Class A5A 4.93% 07/10/45 13,781 13,850,689 See accompanying notes to financial statements. 62
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- COMMERCIAL MORTGAGE BACKED SECURITIES (Continued) Bear Stearns Commercial Mortgage Securities, Inc., Series 04-PWR6, Class A6 4.82% 11/11/41 $ 14,200 $ 14,070,209 Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PWR9, Class A4A 4.87% 09/11/42 14,730 14,709,290 Chase Commercial Mortgage Securities Corp., Series 97-1, Class X (IO) 2.12%(d) 04/19/15 26,322 548,493 Chase Commercial Mortgage Securities Corp., Series 99-2, Class A2 7.20% 01/15/32 10,105 10,959,712 Chase Commercial Mortgage Securities Corp., Series 00-3, Class A2 7.32% 10/15/32 5,755 6,317,757 Commercial Mortgage Acceptance Corp., Series 98-C2, Class A2 6.03% 09/15/30 14,674 15,013,828 Credit Suisse First Boston Mortgage Securities Corp., Series 97-C1, Class AX (IO) 1.72%(b)(d) 06/20/29 39,352 1,347,795 Credit Suisse First Boston Mortgage Securities Corp., Series 97-C2, Class AX (IO) 1.10%(d) 01/17/35 13,179 282,880 First Union National Bank Commercial Mortgage Trust, Series 00-C2, Class A2 7.20% 10/15/32 10,000 10,965,330 First Union-Lehman Brothers Commercial Mortgage Trust, Series 97-C1, Class D 7.50% 04/18/29 50 52,148 First Union-Lehman Brothers-Bank of America Commercial Mortgage Trust, Series 98-C2, Class C3 6.56% 11/18/35 10,605 11,002,816 General Electric Capital Commercial Mortgage Corp., Series 02-1A, Class A3 6.27% 12/10/35 14,170 15,162,272 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 97-C1, Class X (IO) 1.53%(d) 07/15/29 35,669 1,547,695 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% 08/15/36 10,330 11,045,195 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 00-C2, Class A2 7.46% 08/16/33 11,470 12,591,157 General Motors Acceptance Corp., Commercial Mortgage Securities, Inc., Series 03-C3, Class A3 4.65% 04/10/40 1,840 1,817,147 Goldman Sachs Mortgage Securities Corp. II, Series 98-C1, Class A2 6.62% 10/18/30 30 31,278 Goldman Sachs Mortgage Securities Corp. II, Series 98-C1, Class A3 6.14% 10/18/30 6,349 6,552,346 Goldman Sachs Mortgage Securities Corp. II, Series 04-GG2, Class A6 5.40% 08/10/38 640 657,448 Homebanc Mortgage Trust, Series 05-4, Class A1 4.10%(g) 10/25/35 12,735 12,769,175 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 01-C1, Class A3 5.87% 10/12/35 14,370 15,050,598 Lehman Brothers Commercial Conduit Mortgage Trust, Series 98-C4, Class X (IO) 5.00%(d) 09/15/23 14,319 280,377 Lehman Brothers Commercial Conduit Mortgage Trust, Series 99-C2, Class A1 7.10% 10/15/32 703 716,540 Lehman Brothers Commercial Conduit Mortgage Trust, Series 99-C2, Class A2 7.32% 10/15/32 85 92,020 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C5, Class A1 6.41% 12/15/19 9,485 9,746,897 Merrill Lynch Mortgage Investors, Inc., Series 03-KEY1, Class A4 5.24% 11/12/35 7,100 7,202,960 Morgan Stanley Capital Investments, Series 99-FNV1, Class A2 6.53% 03/15/31 10,415 10,895,942 Residential Asset Mortgage Products, Inc., Series 04-RS7, Class AI3 4.45% 07/25/28 350 347,900 Wachovia Bank Commercial Mortgage Trust, Series 03, Class C6 5.12% 08/15/35 18,000 18,161,397 ------------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $256,789,352) 252,402,557 ------------- CERTIFICATE OF DEPOSIT -- 0.1% SunTrust Bank, Inc. 4.42% (Cost $3,795,000) 06/15/09 3,795 3,752,875 ------------- ASSET BACKED SECURITIES -- 9.1% Bank One Issuance Trust, Series 03-A3, Class A3 3.88%(g) 12/15/10 24,025 24,086,401 Capital Auto Receivables Asset Trust, Series 05-1, Class A4 4.05% 07/15/09 19,850 19,688,818 Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 18,875 18,410,486 Citibank Credit Card Issuance Trust, Series 03-A6, Class A6 2.90% 05/17/10 17,060 16,374,939 See accompanying notes to financial statements. 63
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value -------------- ---------- ------------- ASSET BACKED SECURITIES (Continued) Citibank Credit Card Issuance Trust, Series 04, Class A1 2.55% 01/20/07 $ 21,980 $ 21,455,997 Citibank Credit Card Issuance Trust, Series 04-A4, Class A4 3.20% 08/24/07 23,700 23,128,356 Countrywide Asset-Backed Certificates, Series 04-12, Class 2A1 3.95%(g) 01/25/29 20,139 20,139,000 Countrywide Asset-Backed Certificates, Series 04-14, Class A4 4.11%(g) 06/25/35 14,283 14,319,166 Greenwich Capital Commercial Funding Corp., Series 04-GG1A, Class A4 4.76% 06/10/36 5,255 5,237,553 MBNA Credit Card Master Note Trust, Series 03, Class A7 2.65% 11/15/10 20,000 19,044,938 MBNA Credit Card Master Note Trust, Series 04-A4, Class A4 2.70% 09/15/09 21,400 20,858,323 Structured Asset Receivables Trust, Series 03-2 3.40%(b)(g) 01/21/09 14,214 14,209,968 Structured Mortgage Loan Trust, Series 05-19XS, Class 1A1 4.15%(g) 10/25/35 16,675 16,674,758 Student Loan Marketing Association Student Loan Trust, Series 99-3, Class A2 3.32%(g) 07/25/12 12,221 12,251,887 Student Loan Marketing Association Student Loan Trust, Series 05-5, Class A1 3.46%(g) 01/25/18 21,950 21,925,987 ------------- TOTAL ASSET BACKED SECURITIES (Cost $271,300,022) 267,806,577 ------------- CORPORATE BONDS -- 19.8% Aerospace -- 0.4% Lockheed Martin Corp., Senior Debentures 8.50% 12/01/29 3,205 4,413,333 Northrop Grumman Corp., Senior Debentures 7.75% 03/15/26 1,100 1,373,306 Northrop Grumman Corp., Senior Unsecured Notes 4.08% 11/16/06 3,860 3,841,356 7.12% 02/15/11 1,710 1,889,789 Raytheon Co., Senior Notes 6.15% 11/01/08 18 18,715 ------------- 11,536,499 ------------- Banks -- 6.8% Banc One Corp., Senior Unsecured Notes 2.62% 06/30/08 2,836 2,695,229 Bank of America Corp., Senior Unsecured Notes 3.88% 01/15/08 2,275 2,241,562 Bank of America Corp., Senior Unsecured Notes 3.25% 08/15/08 1,300 1,253,993 4.50% 08/01/10 6,000 5,941,800 Bank of America Corp., Subordinated Notes 6.25% 04/01/08 1,385 1,435,852 Bank of New York Co., Inc., Senior Subordinated Notes 3.80% 02/01/08 3,100 3,045,970 Bank One Texas N.A., Subordinated Bank Notes 6.25% 02/15/08 3,225 3,344,193 BankBoston N.A., Subordinated Bank Notes 6.38% 03/08-04/08 2,275 2,363,167 Barclays Bank PLC 6.28% 12/15/49 1,830 1,802,550 Citigroup Global Markets Holdings, Inc., Senior Unsecured Notes 6.50% 02/15/08 2,880 2,998,434 Citigroup, Inc., Senior Unsecured Notes 5.75% 05/10/06 4,095 4,128,440 5.50% 08/09/06 2,500 2,522,515 5.00% 03/06/07 4,165 4,193,905 3.50% 02/01/08 16,620 16,220,289 6.20% 03/15/09 1,700 1,782,017 Citigroup, Inc., Subordinated Notes 7.75% 06/15/06 675 689,235 6.38% 11/15/08 1,010 1,059,403 Citigroup, Inc., Unsecured Notes 3.62% 02/09/09 1,080 1,047,146 4.12% 02/22/10 14,650 14,316,127 4.62% 08/03/10 3,085 3,065,497 5.85% 12/11/34 1,700 1,778,193 Depfa ACS Bank, Senior Notes 3.62% 10/29/08 8,000 7,796,904 Deutsche Bank AG, Deposit Notes 3.84%(g) 03/15/07 5,500 5,475,250 Export-Import Bank Korea, Unsecured Notes 4.12%(b) 02/10/09 135 131,986 Fleet National Bank, Subordinated Bank Notes 5.75% 01/15/09 1,590 1,639,274 FleetBoston Financial Corp., Senior Unsecured Notes 4.20% 11/30/07 3,310 3,279,217 HBOS Treasury Services PLC, Senior Unsecured Notes 3.60%(b) 08/15/07 2,750 2,701,465 HBOS Treasury Services PLC, Unsecured Notes 3.50%(b) 11/30/07 5,450 5,328,547 HSBC Bank USA, Subordinated Notes 3.87% 06/07/07 22,275 22,061,561 The Huntington National Bank, Subordinated Bank Notes 2.75% 10/16/06 1,685 1,650,980 See accompanying notes to financial statements. 64
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Banks (Continued) J.P. Morgan Chase & Co., Senior Unsecured Notes 5.35% 03/01/07 $ 4,902 $ 4,950,824 5.25% 05/30/07 450 455,290 4.00% 02/01/08 1,915 1,889,732 3.62% 05/01/08 2,509 2,449,732 Korea Development Bank, Notes 4.25% 11/13/07 70 69,310 National City Bank Indiana, Unsecured Notes 3.30% 05/15/07 1,000 979,599 National City Bank, Unsecured Notes 3.38% 10/15/07 4,235 4,162,895 The Royal Bank of Scotland Capital Trust 4.71%(g) 12/29/49 1,395 1,345,857 6.80% 12/31/49 3,000 3,067,722 SunTrust Bank, Inc., Senior Unsecured Notes 3.62% 10/15/07 2,855 2,801,297 4.00% 10/15/08 3,000 2,940,783 Swedish Export Credit Corp., Unsecured Notes 2.88% 01/26/07 2,700 2,653,317 U.S. Bancorp., Senior Unsecured Notes 3.95% 08/23/07 1,315 1,300,469 U.S. Bank N.A., Senior Bank Notes 2.40% 03/12/07 6,500 6,308,900 4.40% 08/15/08 7,450 7,409,941 UBS Preferred Funding Trust I, Capital Securities 8.62%(g) 10/29/49 1,390 1,610,265 Wachovia Bank N.A., Senior Bank Notes 4.38% 08/15/08 7,550 7,507,954 Wachovia Corp., Senior Notes 3.50% 08/15/08 1,945 1,886,862 Wells Fargo & Co., Senior Unsecured Notes 4.00% 08/15/08 4,190 4,124,008 4.20% 01/15/10 3,970 3,895,801 Wells Fargo & Co., Unsecured Notes 4.62% 08/09/10 6,735 6,698,759 World Savings Bank, Unsecured Notes 4.12% 03/10/08 3,675 3,630,065 ------------- 200,130,083 ------------- Broadcasting -- 0.3% News America, Inc., Senior Debentures 7.75% 01/24-12/45 1,395 1,603,223 7.12% 04/08/28 1,175 1,280,040 7.28% 06/30/28 300 332,604 7.62% 11/30/28 2,010 2,310,795 8.45% 08/01/34 840 1,054,682 6.75% 01/09/38 30 32,651 8.25% 10/17/49 45 54,412 7.90% 12/01/49 120 138,941 News America, Inc., Senior Unsecured Notes 6.20% 12/15/34 850 851,284 ------------- 7,658,632 ------------- CORPORATE BONDS (Continued) Construction -- 0.0% Lennar Corp., Senior Unsecured Notes 5.60%(b) 05/31/15 1,310 1,283,054 ------------- Energy & Utilities -- 0.5% Centerpoint Eneregy Resources Corp., Unsecured Notes 7.88% 04/01/13 205 236,486 Detroit Edison Co., Senior Notes 6.35% 10/15/32 5 5,395 Detroit Edison Co., Senior Secured Notes 6.12% 10/01/10 210 221,304 Dominion Resources, Inc., Senior Unsecured Notes 6.25% 06/30/12 60 63,613 FirstEnergy Corp., Senior Unsecured Notes 5.50% 11/15/06 415 418,508 6.45% 11/15/11 185 196,883 7.38% 11/15/31 330 388,476 Florida Power & Light Co., First Mortgage Bonds 5.90% 03/01/33 550 569,094 4.95% 06/01/35 2,200 2,038,957 Korea Electric Power Corp., Notes 5.12%(b) 04/23/34 75 74,471 Niagara Mohawk Power Corp., Senior Notes 7.62% 10/01/05 378 378,049 Pennsylvania Electric Co., Senior Unsecured Notes 5.12% 04/01/14 1,525 1,514,331 Scottish Power PLC, Unsecured Notes 5.38% 03/15/15 2,150 2,168,464 Tenaska Alabama II Partners LP, Senior Secured Notes 6.12%(b) 03/30/23 136 139,748 TXU Corp., Senior Unsecured Notes 4.80% 11/15/09 6,000 5,781,042 ------------- 14,194,821 ------------- Entertainment & Leisure -- 0.7% Comcast Cable Communications Corp., Senior Notes 8.38% 11/01/05 160 160,491 Comcast Cable Communications Corp., Senior Unsecured Notes 6.38% 01/30/06 95 95,603 7.05% 03/15/33 1,235 1,374,492 Comcast Cable Holdings LLC, Senior Debentures 9.80% 02/01/12 260 319,761 7.88% 08/13-02/26 5,005 5,960,689 Comcast Corp., Unsecured Notes 5.65% 06/15/35 1,870 1,748,001 Mashantucket West Pequot, Notes 5.91%(b) 09/01/21 1,060 1,066,127 Time Warner Cos., Inc., Debentures 6.95% 01/15/28 8,720 9,448,687 Time Warner Cos., Inc., Senior Debentures 9.12% 01/15/13 605 738,734 8.05% 01/15/16 70 82,187 See accompanying notes to financial statements. 65
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Entertainment & Leisure (Continued) Time Warner Cos., Inc., Senior Unsecured Notes 6.75% 04/15/11 $ 1,080 $ 1,159,831 ------------- 22,154,603 ------------- Finance -- 4.6% BAE Systems Holdings, Inc., Unsecured Notes 5.20%(b) 08/15/15 4,260 4,195,631 BankBoston Capital Trust I, Capital Securities 8.25% 12/15/26 75 80,615 Berkshire Hathaway Finance Corp., Senior Unsecured Notes 3.40% 07/02/07 8,030 7,892,928 4.12% 01/15/10 895 876,035 Berkshire Hathaway Finance Corp., Unsecured Notes 4.75%(b) 05/15/12 4,000 3,973,115 Eksportfinans ASA, Unsecured Notes 3.38% 01/15/08 12,900 12,607,879 General Electric Capital Corp., Unsecured Notes 5.38% 03/15/07 6,490 6,572,248 3.45%(g) 07/07-01/08 41,180 41,233,721 4.12% 03/08-09/09 21,780 21,370,393 3.60% 10/15/08 1,425 1,385,395 Golden West Financial Corp., Senior Unsecured Notes 4.12% 08/15/07 160 158,848 HSBC Finance Corp., Senior Unsecured Notes 7.88% 03/01/07 2,200 2,296,954 4.75% 05/15/09 2,780 2,772,291 Lehman Brothers Holdings, Inc., Senior Unsecured Notes 7.88% 08/15/10 2,307 2,611,709 Morgan Stanley, Senior Unsecured Notes 5.80% 04/01/07 2,000 2,035,980 Nationwide Building Society, Senior Unsecured Notes 3.50%(b) 07/31/07 7,250 7,113,337 Nationwide Building Society, Unsecured Notes 4.25%(b) 02/01/10 2,100 2,056,720 NB Capital Trust IV, Capital Securities 8.25% 04/15/27 125 135,137 Platinum Underwriters Finance, Inc., Senior Unsecured Notes 7.50%(b) 06/01/17 2,800 2,782,377 Pricoa Global Funding I, Senior Secured Notes 4.35%(b) 06/15/08 2,735 2,709,094 Qwest Capital Funding, Inc., Senior Notes 6.38% 07/15/08 3,350 3,249,500 SP Powerassets Ltd., Unsecured Notes 5.00%(b) 10/22/13 300 302,406 Swedbank, Capital Securities 7.50%(b)(g) 09/29/49 2,800 3,261,720 Telecom Polska SA Eurofinance BV, Senior Notes 7.75%(b) 12/10/08 110 119,006 USAA Capital Corp., Senior Unsecured Notes 4.00%(b) 12/10/07 3,065 3,028,012 ------------- 134,821,051 ------------- Industrial -- 0.0% Osprey Trust / Osprey I, Inc., Senior Secured Notes 7.63%(b)(d)(g)(i)(j) 01/15/49 2,375 1,140,000 ------------- Insurance -- 1.2% Allstate Financial Global Funding LLC, Senior Unsecured Notes 6.15%(b) 02/01/06 4,400 4,425,718 Liberty Mutual Group, Inc., Unsecured Notes 6.50%(b) 03/15/35 1,875 1,721,704 Marsh & McLennan Cos., Inc., Senior Unsecured Notes 5.75% 09/15/15 1,910 1,891,721 MassMutual Global Funding II, Senior Secured Notes 2.55%(b) 07/15/08 3,740 3,532,886 MetLife, Inc., Senior Unsecured Notes 6.38% 06/15/34 900 979,201 5.70% 06/15/35 2,025 2,007,747 Monumental Global Funding II, Senior Unsecured Notes 5.20%(b) 01/30/07 2,650 2,666,014 Monumental Global Funding II, Unsecured Notes 3.85%(b) 03/03/08 210 206,095 New York Life Global Funding, Unsecured Notes 3.88%(b) 01/15/09 2,000 1,951,676 Protective Life Corp., Secured Notes 3.70% 11/24/08 1,885 1,830,976 Prudential Financial, Inc., Unsecured Notes 5.40% 06/13/35 2,500 2,369,049 Sun Life of Canada Capital Trust, Capital Securities 8.53%(b) 05/29/49 2,880 3,114,000 TIAA Global Markets, Senior Unsecured Notes 3.88%(b) 01/22/08 5,965 5,863,780 Wellpoint, Inc., Unsecured Notes 5.95% 12/15/34 2,890 3,012,998 XL Capital Ltd. (Kyrgyzstan), Senior Unsecured Notes 6.38% 11/15/24 740 756,828 ------------- 36,330,393 ------------- Manufacturing -- 0.1% Belvoir Land LLC Revenue Bonds, Unsecured Notes 5.27%(b) 12/15/47 2,000 1,918,320 See accompanying notes to financial statements. 66
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Manufacturing (Continued) ITT Industries, Inc., Debentures 7.40% 11/15/25 $ 125 $ 149,052 ------------- 2,067,372 ------------- Motor Vehicles -- 0.1% DaimlerChrysler AG, Senior Debentures 7.45% 03/01/27 1,425 1,550,598 DaimlerChrysler N.A. Holding Corp., Unsecured Notes 4.05% 06/04/08 205 199,071 General Motors Acceptance Corp., Debentures 6.51%(d) 12/01/12 1,630 834,350 ------------- 2,584,019 ------------- Oil & Gas -- 0.6% Anadarko Finance Co., Senior Unsecured Notes 7.50% 05/01/31 980 1,206,487 Atlantic Richfield Co., Debentures 9.12%(f) 03/01/11 4,960 5,972,832 Consolidated Natural Gas Co., Debentures 6.80% 12/15/27 2,500 2,820,052 Consolidated Natural Gas Co., Senior Unsecured Notes 5.38% 11/01/06 2,405 2,423,543 Devon Financing Corp., Senior Unsecured Notes 6.88% 09/30/11 110 120,914 7.88% 09/30/31 2,335 2,940,421 Halliburton Co., Debentures 7.60% 08/15/46 1,429 1,717,234 Pemex Project Funding Master Trust 9.50%(b) 09/15/27 45 59,107 Petro-Canada, Senior Unsecured Notes 5.95% 05/15/35 1,820 1,827,439 ------------- 19,088,029 ------------- Pharmaceuticals -- 0.1% Bristol-Myers Squibb Co., Senior Debentures 6.88% 08/01/97 1,679 1,932,180 Merck & Co., Inc., Senior Debentures 6.40% 03/01/28 1,000 1,079,577 ------------- 3,011,757 ------------- Real Estate -- 0.3% Avalonbay Communities, Inc., Unsecured Notes 4.95% 03/15/13 2,300 2,258,759 Camden Property Trust, Unsecured Notes 4.70% 07/15/09 1,400 1,382,024 EOP Operating LP, Unsecured Notes 4.65% 10/01/10 665 654,952 Pulte Homes, Inc., Senior Unsecured Notes 6.00% 02/15/35 1,040 943,242 The Rouse Co., Unsecured Notes 3.62% 03/15/09 1,455 1,360,052 5.38% 11/26/13 1,685 1,604,267 ------------- 8,203,296 ------------- Retail Merchandising -- 0.1% Federated Department Stores, Senior Debentures 6.79% 07/15/27 590 629,748 May Department Stores Co., Debentures 7.88% 03/01/30 375 447,023 6.70% 07/15/34 1,000 1,047,231 May Department Stores Co., Senior Debentures 8.12% 08/15/35 1,150 1,296,150 May Department Stores Co., Unsecured Notes 4.80% 07/15/09 50 49,802 ------------- 3,469,954 ------------- Telecommunications -- 1.5% BellSouth Corp., Unsecured Notes 4.26%(b)(g) 04/26/06 13,325 13,306,238 Continental Cablevision, Inc., Senior Notes 8.30%(f) 05/15/06 5,655 5,784,630 Deutsche Telekom International Finance BV (Netherlands), Senior Unsecured Notes 8.75% 06/15/30 1,285 1,658,959 GTE Corp., Debentures 6.94% 04/15/28 475 519,248 New England Telephone & Telegraph Co., Debentures 7.88% 11/15/29 1,355 1,576,683 SBC Communications, Inc., Unsecured Notes 4.39%(b) 06/05/06 11,500 11,485,970 6.45% 06/15/34 1,625 1,715,188 6.15% 09/15/34 265 271,190 Sprint Capital Corp., Senior Notes 6.12% 11/15/08 70 72,690 6.88% 11/15/28 1,055 1,165,433 Sprint Capital Corp., Senior Unsecured Notes 8.38% 03/15/12 55 64,726 8.75% 03/15/32 2,740 3,674,143 Verizon Global Funding Corp., Senior Unsecured Notes 7.75% 12/01/30 75 91,371 Verizon Global Funding Corp., Unsecured Notes 5.85% 09/15/35 1,600 1,573,515 Verizon Maryland, Inc., Debentures 5.12% 06/15/33 650 562,695 Vodafone Group PLC, Unsecured Notes 5.00% 09/15/15 1,625 1,612,647 ------------- 45,135,326 ------------- See accompanying notes to financial statements. 67
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Transportation -- 0.1% Canadian National Railway Co., Senior Unsecured Notes 6.25% 08/01/34 $ 600 $ 662,802 Union Pacific Corp., Senior Unsecured Notes 6.25% 05/01/34 1,825 1,979,262 ------------- 2,642,064 ------------- Yankee -- 2.4% AID-Israel, Unsecured Notes 5.50%(k) 04/24-09/33 12,210 13,102,786 Canadian Pacific Railroad Co., Senior Unsecured Notes 6.25%(k) 10/15/11 1,900 2,029,586 Encana Corp. (Canada) 6.50%(k) 08/15/34 50 56,246 France Telecom, Senior Unsecured Notes 7.45%(k) 03/01/06 60 60,696 8.00%(k) 03/01/11 600 681,281 8.50%(g)(k) 03/01/31 195 261,330 Japan Finance Corp. for Municipal Enterprises, Unsecured Notes 4.62%(k) 04/21/15 10,500 10,422,562 National L-Bank Landeskreditbank Baden-Wurttemberg (Germany), Unsecured Notes 4.25%(k) 09/15/10 10,575 10,412,674 Pemex Finance Ltd. (Luxembourg), Senior Unsecured Notes 9.03%(k) 02/15/11 1,700 1,881,543 Russia Federation, Unsecured Notes 12.75%(b)(k)(l) 06/24/28 275 517,687 Scottish Power PLC (United Kingdom), Unsecured Notes 4.90%(k) 03/15/10 3,200 3,198,138 Sumitomo Mitsui Banking Corp. (Japan), Unsecured Notes 5.62%(b)(g)(k) 12/31/49 3,300 3,288,813 Suncor Energy, Inc. (Canada) 5.95%(k) 12/01/34 285 302,653 Teck Cominco Ltd. (Canada), Senior Unsecured Notes 6.12%(k) 10/01/35 1,900 1,863,191 Telecom Italia Capital (Luxembourg), Senior Unsecured Notes 5.25%(k) 11/15/13 285 282,979 4.95%(b)(k) 09/30/14 960 929,023 Telecom Italia Capital (Luxembourg), Unsecured Notes 6.00%(b)(k) 09/30/34 3,010 2,949,631 Telefonica Europe BV (Netherlands), Senior Unsecured Notes 7.75%(k) 09/15/10 2,075 2,339,177 United Mexican States (Mexico), Senior Unsecured Notes 8.00%(k) 09/24/22 4,235 5,145,525 United Mexican States, Bonds 8.12%(k) 12/30/19 2,975 3,619,088 United Mexican States, Senior Unsecured Notes 8.30%(k) 08/15/31 295 368,750 Vodafone Group PLC (United Kingdom), Senior Unsecured Notes 7.75%(k) 02/15/10 5,875 6,553,087 ------------- 70,266,446 ------------- TOTAL CORPORATE BONDS (Cost $586,096,505) 585,717,399 ------------- FOREIGN BONDS -- 1.5% Bundesrepublic Deutschland (Germany) (EUR) 4.75% 07/04/34 5,100 7,409,613 4.00% 01/04/37 13,550 17,580,383 General Electric Capital Corp., Senior Unsubordinated Notes (NZD) 6.50% 09/28/15 1,075 726,939 Government of New Zealand (NZD) 6.00% 11/15/11 390 272,272 6.50% 04/15/13 13,335 9,600,680 Province of Manitoba (NZD) 6.38% 09/01/15 2,590 1,770,562 Province of Ontario, Unsecured Notes (NZD) 6.25% 06/16/15 11,640 7,937,990 ------------- TOTAL FOREIGN BONDS (Cost $45,541,477) 45,298,439 ------------- TAXABLE MUNICIPAL BONDS -- 0.4% Connecticut State General Obligation, Series 04, Class B 5.00% 12/01/15 2,945 3,196,680 Fort Irwin Land LLC Military Housing Revenue Bonds, Class II, Series A 5.30%(b) 12/15/35 3,415 3,314,087 University Maryland System Auxiliary Facility & Tuition Revenue Bonds, Series 05, Class A 5.00% 04/01/16 3,825 4,187,801 ------------- TOTAL TAXABLE MUNICIPAL BONDS (Cost $10,994,440) 10,698,568 ------------- See accompanying notes to financial statements. 68
BlackRock Funds SCHEDULE OF INVESTMENTS CORE BOND TOTAL RETURN PORTFOLIO (Concluded) As of September 30, 2005 Par/Shares Maturity (000) Value ------------- ---------- ------------- SHORT TERM INVESTMENTS -- 6.5% Federal Home Loan Bank, Discount Notes 3.67%(m) 10/26/05 $ 75,000 $ 74,808,854 3.67%(m) 10/27/05 5,850 5,834,494 3.70%(m) 11/04/05 1,784 1,777,766 3.66%(m) 11/10/05 370 368,493 3.69%(m) 11/10/05 917 913,240 Federal National Mortgage Association, Discount Notes 3.50%(m) 10/03/05 64,400 64,387,478 3.65%(m) 10/11/05 500 499,493 3.69%(m) 11/09/05 1,900 1,892,405 Federal Home Loan Bank, Discount Notes 3.18%(m) 10/03/05 33,500 33,494,082 Galileo Money Market Fund 8,544 8,544,451 Institutional Money Market Trust(n)(o) 144 143,810 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $192,664,566) 192,664,566 ------------- TOTAL INVESTMENTS IN SECURITIES -- 100.0% (Cost $2,963,416,232(a)) $2,951,829,969 ============== Number of Contracts ---------- CALL SWAPTIONS WRITTEN -- (0.3)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (3,420)(p) (1,640,232) Citibank, Strike Price 5.67, Expires 01/04/10 (3,270)(p) (2,244,160) Deutsche Bank, Strike Price 5.015, Expires 01/29/07 (2,992)(p) (1,110,744) Union Bank, Strike Price 4.725, Expires 06/13/07 (8,800)(p) (2,582,800) ------------- TOTAL CALL SWAPTIONS WRITTEN (Premiums received $7,736,873) (7,577,936) ------------- PUT SWAPTIONS WRITTEN -- (0.3)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (3,420)(p) (1,206,918) Citibank, Strike Price 5.67, Expires 01/04/10 (3,270)(p) (994,560) Deutsche Bank, Strike Price 5.015, Expires 01/29/07 (2,992)(p) (802,021) Union Bank, Strike Price 4.725, Expires 06/13/07 (8,800)(p) (3,666,080) ------------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $7,736,873) (6,669,579) ------------- - ---------- (a) Cost for Federal Income tax purposes is $2,965,610,378. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 18,980,891 Gross unrealized depreciation (32,761,300) ------------- $ (13,780,409) ============= (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 4.5% of its net assets, with a current market value of $118,672,429, in securities restricted as to resale. (c) Securities valued at fair value as determined in good faith by or under the direction of the Trustees. These securities had a total market value of $398,179 which represents 0.01% of net assets. (d) Rates shown are the effective yields as of September 30, 2005. (e) Securities, or a portion thereof, with a market value of $14,090,515 have been pledged as collateral for swap and swaption contracts. (f) Securities, or a portion thereof, pledged as collateral with a value of $9,214,164 on 3,783 short U.S. Treasury Note futures contracts, 452 long U.S. Treasury Note futures contracts, 291 long U.S. Treasury Bond futures contracts and 658 short Euro-Bobl futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $577,645,422, with an unrealized gain of $1,022,469 (including commissions of $11,557). (g) Rates shown are the rates as of September 30, 2005. (h) Interest rate of underlying collateral. (i) Security in default. (j) Non-income producing security. (k) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (l) Total or partial securities on loan. (m) The rate shown is the effective yield on the discount notes at the time of purchase. (n) Securities purchased with the cash proceeds from securities loaned. (o) Represents an investment in an affiliated security. (p) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 69
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES CORE BOND TOTAL RETURN PORTFOLIO September 30, 2005 ASSETS Investments at value (Cost $2,963,416,232) $ 2,951,829,969 Cash denominated in foreign currencies (Cost $26,420,604) 26,409,951 Interest receivable 18,571,797 Investments sold receivable 487,631,833 Capital shares sold receivable 4,141,307 Prepaid expenses 87,857 Unrealized appreciation on forward foreign currency contracts 217,245 Unrealized appreciation on interest rate swaps 2,752,191 Futures margin receivable 775,100 ---------------- TOTAL ASSETS 3,492,417,250 ---------------- LIABILITIES Payable upon return of securities loaned 143,810 Investments purchased payable 807,433,506 Capital shares redeemed payable 2,678,791 Distributions payable 3,892,388 Advisory fees payable 427,573 Administrative fees payable 284,908 Transfer agent fees payable 124,381 Other accrued expenses payable 535,367 Swaptions written, at fair value (premiums received $15,473,746) 14,247,515 Futures margin payable 15,863 Futures sold payable 566 Unrealized depreciation on forward foreign currency contracts 387,117 Unrealized depreciation on interest rate swaps 7,945,175 ---------------- TOTAL LIABILITIES 838,116,960 ---------------- NET ASSETS (Applicable to 160,148,945 BlackRock shares, 63,910,952 Institutional shares, 16,448,667 Service shares, 22,247,170 Investor A shares, 5,132,830 Investor B shares and 7,682,198 Investor C shares outstanding) $ 2,654,300,290 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($1,543,861,060/160,148,945) $ 9.64 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($614,700,225/63,910,952) $ 9.62 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($158,199,685/16,448,667) $ 9.62 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($214,196,061/22,247,170) $ 9.63 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.63/0.960) $ 10.03 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($49,389,304/5,132,830) $ 9.62 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($73,953,955/7,682,198) $ 9.63 ================ See accompanying notes to financial statements. 70
BlackRock Funds SCHEDULE OF INVESTMENTS CORE PLUS TOTAL RETURN PORTFOLIO As of September 30, 2005 Number of Shares Value ---------- ------------ PREFERRED STOCKS -- 0.1% Raytheon Co.Trust I (Cost $469,966) 8,950 $ 463,127 ------------- Par Maturity (000) Value ------------- ---------- ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 19.5% Federal National Mortgage Association, Notes 3.12% 03/16/09 $ 1,800 1,718,365 Federal National Mortgage Association, Unsecured Notes 2.35% 04/06-04/07 3,335 3,247,242 3.02% 06/01/06 9,000 8,914,986 1.75% 06/16/06 185 181,764 4.00% 10/06-01/09 7,245 7,171,716 4.75% 02/21/13 1,430 1,420,123 5.12% 05/27/15 1,350 1,334,363 Resolution Funding Corp. Strip Bonds 6.29%(b) 07/15/18 100 54,488 6.30%(b) 10/15/18 100 53,777 Small Business Administration Participation Certificates, Series 02-P10B, Class 1 5.20% 08/01/12 527 536,949 Small Business Administration Participation Certificates, Series 04-P10A, Class 1 4.50% 02/01/14 1,426 1,419,155 U.S. Treasury Bonds 8.12%(c) 08/15/19 5,335 7,283,731 8.50% 02/15/20 2,650 3,741,985 8.75% 08/15/20 3,135 4,537,301 8.00% 11/15/21 1,255 1,737,293 6.25%(c) 08/15/23 6,530 7,808,195 6.00%(c) 02/15/26 5,400 6,368,625 6.75% 08/15/26 1,145 1,467,524 6.12%(c) 11/15/27 440 530,905 5.38% 02/15/31 200 224,062 U.S. Treasury Notes 4.00% 08/07-09/07 6,500 6,478,001 3.88% 09/15/10 810 798,546 4.25% 08/15/15 6,345 6,305,344 ------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $73,183,179) 73,334,440 ------------- MORTGAGE PASS-THROUGHS -- 24.6% Federal Home Loan Mortgage Corp. Gold 4.00% 05/10-05/19 797 781,535 6.00% 05/13-08/17 715 735,045 5.50% 08/17-10/35 3,692 3,697,440 5.00% 10/18-09/35 12,686 12,577,508 4.50% 10/18-08/20 5,281 5,184,238 6.50% 04/31-12/34 1,382 1,421,824 Federal National Mortgage Association 6.00% 04/09-04/35 3,728 3,792,930 5.50% 07/14-08/35 19,456 19,699,657 6.50% 03/16-08/34 13,709 14,109,121 5.00% 09/17-07/35 18,676 18,425,365 4.50% 10/18-10/35 5,369 5,243,344 4.00% 05/01/20 34 32,560 7.00% 03/31-07/34 602 629,997 Federal National Mortgage Association ARM 4.58%(d) 01/01/35 2,905 2,900,524 Government National Mortgage Association 6.00% 11/28-10/33 38 39,653 6.50% 04/15/31 233 243,121 7.00% 06/31-09/31 306 321,824 5.50% 11/33-10/34 23 24,272 Government National Mortgage Association 1 Year CMT 3.75%(d) 05/20/34 2,491 2,458,347 ------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $92,840,286) 92,318,305 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS - 10.0% Bank of America Alternative Loan Trust, Series 04-7, Class 4A1 5.00% 08/25/19 959 935,008 Countrywide Alternative Loan Trust, Series 04-18CB, Class 2A5 4.09%(d) 09/25/34 1,532 1,534,439 Countrywide Alternative Loan Trust, Series 04-27CB, Class A1 6.00% 12/25/34 1,765 1,768,745 Countrywide Home Loans, Series 04-29, Class 1A1 4.10%(d) 02/25/35 1,660 1,658,547 Federal Home Loan Mortgage Corp., Series 2825, Class VP 5.50% 06/15/15 1,360 1,384,998 Federal Home Loan Mortgage Corp., Series 2877, Class PA 5.50% 07/15/33 1,249 1,260,219 Federal Home Loan Mortgage Corp., Series 2922, Class GA 5.50% 05/15/34 2,768 2,782,123 Federal Home Loan Mortgage Corp., Series 2927, Class BA 5.50% 12/31/49 1,809 1,820,794 Federal National Mortgage Association, Series 99-7, Class AB 6.00% 03/25/29 871 868,947 Federal National Mortgage Association, Series 02-73, Class AN 5.00% 11/25/17 1,800 1,797,176 See accompanying notes to financial statements. 71
BlackRock Funds SCHEDULE OF INVESTMENTS CORE PLUS TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) Federal National Mortgage Association, Series 03-35, Class TE 5.00% 05/25/18 $ 1,680 $ 1,676,433 Federal National Mortgage Association, Series 03-46, Class PT 3.00% 08/25/22 1,775 1,730,745 Federal National Mortgage Association, Series 04-29, Class HC 7.50% 07/25/30 1,609 1,713,846 Federal National Mortgage Association, Series 04-60, Class LB 5.00% 04/25/34 2,211 2,194,625 Federal National Mortgage Association, Series 04-99, Class AO 5.50% 01/25/34 1,659 1,670,421 Federal National Mortgage Association, Series 05-15, Class PL 5.50% 01/25/35 1,980 1,992,756 Federal National Mortgage Association, Series 05-57, Class EG 4.13%(d) 03/25/35 1,571 1,571,539 Federal National Mortgage Association, Series 05-57, Class PA 5.50% 05/25/27 1,067 1,079,026 Federal National Mortgage Association, Series 05-70, Class NA 5.50% 08/25/35 731 741,554 Federal National Mortgage Association, Series 05-80, Class PB 5.50% 04/25/30 1,919 1,944,437 Harborview Mortgage Loan Trust, Series 05-10, Class 2A1A 3.98%(d) 11/19/35 2,223 2,222,950 Indymac Index Mortage Loan Trust, Series 05-AR18, Class 2A1B 4.48%(d) 10/25/35 3,125 3,161,133 ------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $37,963,995) 37,510,461 ------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 8.9% Banc of America Commercial Mortgage, Inc., Series 01-1, Class A2 6.50% 04/15/36 2,030 2,175,350 Bear Stearns Commercial Mortgage Securities, Inc., Series 00-WF2, Class A2 7.32% 10/15/32 1,400 1,535,906 Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PWR9, Class A4A 4.87% 09/11/42 1,800 1,797,469 Chase Commercial Mortgage Securities Corp., Series 99-2, Class A2 7.20% 01/15/32 285 309,106 Chase Commercial Mortgage Securities Corp., Series 00-1, Class A2 7.76% 04/15/32 536 578,239 Commercial Mortgage Acceptance Corp., Series 98-C2, Class A2 6.03% 09/15/30 2,149 2,198,453 Credit Suisse First Boston Mortgage Securities Corp., Series 01-CK6, Class A3 6.39% 10/15/11 325 348,822 General Electric Capital Commercial Mortgage Corp., Series 01-3, Class A2 6.07% 06/10/38 1,670 1,771,492 General Electric Capital Commercial Mortgage Corp., Series 02-1A, Class A3 6.27% 12/10/35 1,730 1,851,146 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% 08/15/36 1,498 1,601,622 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 00-C1, Class A2 7.72% 03/15/33 1,490 1,637,803 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 00-C2, Class A2 7.46% 08/16/33 1,390 1,525,868 Goldman Sachs Mortgage Securities Corp. II, Series 99-C1, Class A2 6.11%(d) 11/18/30 1,765 1,821,161 Goldman Sachs Mortgage Securities Corp. II, Series 03-C1, Class X2 (IO) 0.97%(b)(e) 01/10/40 22,541 608,994 Goldman Sachs Mortgage Securities Corp. II, Series 04-GG2, Class A4 4.96% 08/10/38 1,625 1,636,034 Greenwich Capital Commercial Funding Corp., Series 05-GG3, Class A3 4.57% 08/10/42 2,445 2,412,824 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 01-CIB2, Class A3 6.43% 04/15/35 820 877,805 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 01-CIBC, Class A3 6.26% 03/15/33 1,150 1,222,972 Lehman Brothers Commercial Conduit Mortgage Trust, Series 98-C4, Class A1B 6.21% 10/15/35 900 932,291 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C4, Class A2 7.37% 08/15/26 1,245 1,368,796 Lehman Brothers-UBS Commercial Mortgage Trust, Series 02-C7, Class A2 3.90% 12/15/26 510 501,398 See accompanying notes to financial statements. 72
BlackRock Funds SCHEDULE OF INVESTMENTS CORE PLUS TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- COMMERCIAL MORTGAGE BACKED SECURITIES (Continued) Morgan Stanley Capital Investments, Series 98-HF2, Class A2 6.48% 11/15/30 $ 341 $ 354,459 Morgan Stanley Capital Investments, Series 99-FNV1, Class A2 6.53% 03/15/31 500 523,089 Salomon Brothers Mortgage Securities VII, Series 00-C3, Class A2 6.59% 12/18/33 1,650 1,761,024 Salomon Brothers Mortgage Securities VII, Series 01-C2, Class A3 6.50% 10/13/11 1,960 2,110,661 ------------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $34,045,233) 33,462,784 ------------- CERTIFICATE OF DEPOSIT -- 0.1% SunTrust Bank, Inc. 4.42% (Cost $430,000) 06/15/09 430 425,227 ------------- ASSET BACKED SECURITIES -- 8.4% American Express Credit Account Master Trust, Series 05-3, Class A 3.77%(d) 01/18/11 2,675 2,678,424 Asset Securitization Corp., Series 97-D5, Class A1C 6.75% 02/14/43 945 979,029 Capital Auto Receivables Asset Trust, Series 05-1, Class A4 4.05% 07/15/09 2,650 2,628,482 Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 2,275 2,219,012 Citibank Credit Card Issuance Trust, Series 03-A3, Class A3 3.10% 03/10/10 1,125 1,088,087 Citibank Credit Card Issuance Trust, Series 03-A6, Class A6 2.90% 05/17/10 1,805 1,732,518 Citibank Credit Card Issuance Trust, Series 04, Class A1 2.55% 01/20/07 3,270 3,192,043 Countrywide Asset-Backed Certificates, Series 04-13, Class AV4 4.12%(d) 06/25/35 2,050 2,055,253 MBNA Credit Card Master Note Trust, Series 03, Class A7 2.65% 11/15/10 3,250 3,094,802 MBNA Credit Card Master Note Trust, Series 03-A6, Class A6 2.75% 10/15/10 1,500 1,434,247 MBNA Credit Card Master Note Trust, Series 04-A4, Class A4 2.70% 09/15/09 2,620 2,553,683 Structured Asset Receivables Trust, Series 03-2 3.40%(d)(e) 01/21/09 1,395 1,394,436 Structured Asset Securities Corp., Series 03-AL2, Class A 3.36%(e) 01/25/31 810 739,641 Student Loan Marketing Student Loan Trust, Series 04-5, Class A2 3.68%(d) 04/25/14 2,780 2,781,777 Student Loan Marketing Student Loan Trust, Series 05-6, Class A5B 3.67%(d) 07/27/26 2,800 2,800,306 ------------- TOTAL ASSET BACKED SECURITIES (Cost $31,912,931) 31,371,740 ------------- CORPORATE BONDS -- 19.5% Aerospace -- 0.4% BE Aerospace, Inc., Senior Notes 8.50% 10/01/10 110 119,625 Lockheed Martin Corp., Senior Debentures 8.50% 12/01/29 370 509,495 Northrop Grumman Corp., Debentures 7.88% 03/01/26 105 132,633 Northrop Grumman Corp., Senior Debentures 7.75% 02/15/31 215 277,664 Northrop Grumman Corp., Senior Unsecured Notes 4.08% 11/16/06 495 492,609 ------------- 1,532,026 ------------- Banks -- 6.3% Banc One Corp., Senior Unsecured Notes 2.62% 06/30/08 220 209,080 Bank of America Corp., Senior Unsecured Notes 3.88% 01/15/08 210 206,913 3.25% 08/15/08 460 443,721 3.38%(f) 02/17/09 565 542,979 4.50% 08/01/10 855 846,707 Bank of America Corp., Subordinated Notes 7.80% 02/15/10 75 83,707 Bank of New York Co., Inc., Senior Subordinated Notes 3.80% 02/01/08 400 393,028 Barclays Bank PLC 6.28% 12/15/49 200 197,000 Citigroup, Inc., Senior Unsecured Notes 5.75% 05/10/06 2,000 2,016,332 4.25% 07/29/09 1,945 1,916,914 Citigroup, Inc., Unsecured Notes 3.62% 02/09/09 75 72,719 4.12% 02/22/10 2,475 2,418,595 5.85% 12/11/34 150 156,899 Depfa ACS Bank, Senior Notes 3.62% 10/29/08 850 828,421 Deutsche Bank AG, Deposit Notes 3.84%(d) 03/15/07 800 796,400 HBOS Treasury Services PLC, Unsecured Notes 3.50%(e) 11/30/07 350 342,200 3.75%(e) 09/30/08 505 493,023 HSBC Bank USA, Senior Bank Notes 3.88% 09/15/09 340 330,290 HSBC Bank USA, Subordinated Notes 3.87% 06/07/07 2,275 2,253,201 4.62% 04/01/14 415 403,559 See accompanying notes to financial statements. 73
BlackRock Funds SCHEDULE OF INVESTMENTS CORE PLUS TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Banks (Continued) J.P. Morgan Chase & Co., Senior Unsecured Notes 5.25% 05/30/07 $ 75 $ 75,882 J.P. Morgan Chase & Co., Subordinated Notes 5.75% 10/15/08 375 385,321 7.12% 06/15/09 100 107,826 National City Bank, Unsecured Notes 3.38% 10/15/07 455 447,253 The Royal Bank of Scotland Capital Trust 4.71%(d) 12/29/49 200 192,954 SunTrust Bank, Inc., Senior Unsecured Notes 3.62% 10/15/07 665 652,491 4.00% 10/15/08 325 318,585 Swedish Export Credit Corp., Unsecured Notes 2.88% 01/26/07 375 368,516 U.S. Bancorp., Senior Unsecured Notes 3.95% 08/23/07 115 113,729 U.S. Bank N.A., Senior Bank Notes 2.40% 03/12/07 715 693,979 4.40% 08/15/08 1,225 1,218,413 UBS Preferred Funding Trust I, Capital Securities 8.62%(d) 10/29/49 40 46,339 VTB Capital SA, Senior Notes 6.25%(e) 07/02/35 625 650,781 Wachovia Bank N.A., Senior Bank Notes 4.38% 08/15/08 950 944,709 Wachovia Corp., Subordinated Notes 6.30% 04/15/28 440 458,407 Wells Fargo & Co., Senior Unsecured Notes 4.00% 08/15/08 1,155 1,136,809 4.20% 01/15/10 600 588,786 Wells Fargo & Co., Unsecured Notes 4.62% 08/09/10 255 253,628 ------------- 23,606,096 ------------- Broadcasting -- 0.3% Charter Communications Holdings LLC, Unsecured Notes 10.25% 09/15/10 30 30,825 DirecTV Holdings LLC, Senior Unsecured Notes 6.38%(e) 06/15/15 80 78,800 News America, Inc., Senior Debentures 7.12% 04/08/28 125 136,174 7.30% 04/30/28 150 166,518 7.28% 06/30/28 125 138,585 7.62% 11/30/28 140 160,951 News America, Inc., Senior Unsecured Notes 6.20% 12/15/34 325 325,491 ------------- 1,037,344 ------------- Business Services -- 0.0% Service Corp. International, Senior Unsecured Notes 7.70% 04/15/09 110 115,500 ------------- Chemicals -- 0.0% BCP Crystal U.S. Holdings Corp., Senior Subordinated Notes 9.62% 06/15/14 55 61,462 ------------- Computer Software & Services -- 0.0% Sungard Data Systems, Inc., Senior Unsecured Notes 9.12%(e) 08/15/13 65 67,356 ------------- Construction -- 0.2% D.R. Horton, Inc., Senior Unsecured Notes 8.50% 04/15/12 25 26,625 International Steel Group, Inc., Senior Unsecured Notes 6.50% 04/15/14 20 19,750 K. Hovnanian Enterprises, Inc., Senior Unsecured Notes 6.25%(e) 01/15/16 680 632,400 Lennar Corp., Senior Unsecured Notes 5.60%(e) 05/31/15 75 73,457 ------------- 752,232 ------------- Containers -- 0.0% Crown Holdings, Inc., Senior Secured Notes 9.50% 03/01/11 35 38,325 ------------- Energy & Utilities - 0.8% AES Ironwood LLC, Senior Secured Notes 8.86% 11/30/25 94 107,216 Centerpoint Energy, Inc., Senior Unsecured Notes 7.25% 09/01/10 480 521,143 Chesapeake Energy Corp., Senior Unsecured Notes 6.25% 01/15/18 230 225,400 FirstEnergy Corp., Senior Unsecured Notes 7.38% 11/15/31 150 176,580 Midwest Generation LLC, Pass-Through Certificates 8.56% 01/02/16 132 145,706 Midwest Generation LLC, Senior Secured Notes 8.75% 05/01/34 45 50,119 Northwest Pipeline Corp., Senior Unsecured Notes 8.12% 03/01/10 175 186,812 Orion Power Holdings, Inc., Senior Unsecured Notes 12.00% 05/01/10 120 144,300 Progress Energy, Inc., Senior Unsecured Notes 7.75% 03/01/31 360 429,858 See accompanying notes to financial statements. 74
BlackRock Funds SCHEDULE OF INVESTMENTS CORE PLUS TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Energy & Utilities (Continued) Reliant Energy, Inc., Senior Secured Notes 9.25% 07/15/10 $ 10 $ 10,850 6.75% 12/15/14 5 4,888 Tenaska Alabama Partners LP, Senior Secured Notes 7.00%(e) 06/30/21 100 102,107 Transcontinental Gas Pipe Line Corp., Senior Notes 8.88% 07/15/12 180 210,600 TXU Corp., Senior Unsecured Notes 6.50% 11/15/24 400 374,712 TXU Corp., Senior Unsecured Notes 4.80% 11/15/09 300 289,052 ------------- 2,979,343 ------------- Entertainment & Leisure -- 0.7% Comcast Cable Communications Corp., Senior Unsecured Notes 7.05% 03/15/33 190 211,460 Comcast Cable Holdings LLC, Senior Debentures 7.88% 08/13-02/26 290 340,204 Comcast Corp., Unsecured Notes 5.65% 06/15/35 25 23,369 K2, Inc., Senior Unsecured Notes 7.38% 07/01/14 80 80,000 Mashantucket West Pequot, Notes 5.91%(e) 09/01/21 100 100,578 MGM Mirage, Inc., Senior Notes 6.00% 10/01/09 230 227,125 Mohegan Tribal Gaming Authority, Senior Unsecured Notes 6.12% 02/15/13 70 69,562 Time Warner Cos., Inc., Senior Debentures 7.57% 02/01/24 720 821,958 7.62% 04/15/31 100 117,153 7.70% 05/01/32 285 337,808 Time Warner Cos., Inc., Senior Unsecured Notes 6.75% 04/15/11 200 214,784 Wynn Las Vegas LLC, First Mortgage Notes 6.62% 12/01/14 35 33,338 ------------- 2,577,339 ------------- Finance -- 4.6% Associates Corp. of North America, Senior Notes 6.25% 11/01/08 275 287,695 BAE Systems Holdings, Inc., Unsecured Notes 5.20%(e) 08/15/15 575 566,312 Berkshire Hathaway Finance Corp., Senior Unsecured Notes 3.40% 07/02/07 410 403,001 3.38% 10/15/08 500 482,672 4.12% 01/15/10 620 606,862 California Preferred Fund Trust, Notes 7.00% 12/31/49 200 208,000 Crown European Holdings SA, Senior Secured Notes 10.88% 03/01/13 130 150,800 Eksportfinans ASA, Unsecured Notes 3.38% 01/15/08 1,555 1,519,787 General Electric Capital Corp., Senior Unsecured Notes 6.50% 12/10/07 200 207,857 General Electric Capital Corp., Unsecured Notes 3.45%(d) 07/07-01/08 5,495 5,502,249 4.12% 03/08-09/09 3,440 3,373,793 Household Finance Corp., Senior Unsecured Notes 7.20% 07/15/06 50 51,005 HSBC Finance Corp., Senior Unsecured Notes 4.75% 05/15/09 340 339,057 Lehman Brothers Holdings, Inc., Senior Notes 6.62% 02/05/06 851 857,851 Morgan Stanley, Senior Unsecured Notes 5.80% 04/01/07 700 712,593 Nationwide Building Society, Senior Unsecured Notes 3.50%(e) 07/31/07 850 833,977 Nationwide Building Society, Unsecured Notes 4.25%(e) 02/01/10 70 68,557 Student Loan Marketing Corp., Senior Unsecured Notes 5.62% 04/10/07 570 578,779 USAA Capital Corp., Senior Unsecured Notes 4.00%(e) 12/10/07 370 365,535 ------------- 17,116,382 ------------- Food & Agriculture -- 0.0% Smithfield Foods, Inc., Senior Unsecured Notes 7.00% 08/01/11 100 102,000 ------------- Insurance -- 0.8% Allstate Financial Global Funding LLC, Senior Unsecured Notes 6.15%(e) 02/01/06 500 502,923 American General Corp., Senior Unsecured Notes 7.50%(f) 08/11/10 150 166,093 Liberty Mutual Group, Inc., Unsecured Notes 6.50%(e) 03/15/35 390 358,114 Marsh & McLennan Cos., Inc., Senior Unsecured Notes 5.75% 09/15/15 230 227,799 MetLife, Inc., Senior Unsecured Notes 5.70% 06/15/35 350 347,018 New York Life Insurance Co., Unsecured Notes 5.88%(e) 05/15/33 100 103,998 See accompanying notes to financial statements. 75
BlackRock Funds SCHEDULE OF INVESTMENTS CORE PLUS TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Insurance (Continued) Protective Life Corp., Secured Notes 3.70% 11/24/08 $ 330 $ 320,542 TIAA Global Markets, Senior Unsecured Notes 3.88%(e) 01/22/08 465 457,110 Wellpoint, Inc., Unsecured Notes 5.95% 12/15/34 345 359,683 XL Capital Ltd. (Kyrgyzstan), Senior Unsecured Notes 6.38% 11/15/24 155 158,525 ------------- 3,001,805 ------------- Manufacturing -- 0.2% Belvoir Land LLC Revenue Bonds, Unsecured Notes 5.27%(e) 12/15/47 325 311,727 Briggs & Stratton Corp., Senior Unsecured Notes 8.88% 03/15/11 50 57,125 Ispat Inland ULC, Senior Secured Notes 9.75% 04/01/14 415 481,400 Navistar International Corp., Senior Unsecured Notes 6.25% 03/01/12 25 23,750 ------------- 874,002 ------------- Medical & Medical Services -- 0.1% Bio-Rad Laboratories, Inc., Senior Subordinated Notes 7.50% 08/15/13 40 42,300 Bio-Rad Laboratories, Inc., Senior Subordinated Notes 6.12% 12/15/14 100 97,250 HCA, Inc., Unsecured Notes 5.50% 12/01/09 85 83,373 ------------- 222,923 ------------- Metal & Mining -- 0.0% TRIMAS Corp., Senior Subordinated Notes 9.88% 06/15/12 70 57,750 ------------- Motor Vehicles -- 0.1% DaimlerChrysler AG, Senior Debentures 7.45% 03/01/27 135 146,899 DaimlerChrysler N.A. Holding Corp., Unsecured Notes 4.05% 06/04/08 65 63,120 ------------- 210,019 ------------- Oil & Gas -- 0.7% Anadarko Finance Co., Senior Unsecured Notes 7.50% 05/01/31 185 227,755 ANR Pipeline Co., Senior Debentures 9.62% 11/01/21 10 12,350 7.38% 02/15/24 5 5,155 Consolidated Natural Gas, Inc., Senior Debentures 5.00% 03/01/14 235 231,853 Consolidated Natural Gas, Inc., Senior Unsecured Notes 6.25% 11/01/11 150 159,402 Devon Financing Corp., Senior Unsecured Notes 7.88% 09/30/31 375 472,230 Dynegy Holdings, Inc., Secured Notes 10.12%(e) 07/15/13 205 228,575 El Paso Natural Gas Co., Debentures 8.62% 01/15/22 130 148,670 El Paso Natural Gas Co., Senior Notes 7.62% 08/01/10 5 5,199 El Paso Natural Gas Co., Senior Unsecured Notes 8.38% 06/15/32 5 5,719 Enterprise Products Operating LP, Senior Unsecured Notes 4.00% 10/15/07 225 220,815 4.95% 06/01/10 450 442,274 KCS Energy, Inc., Senior Unsecured Notes 7.12%(e) 04/01/12 35 35,875 Petro-Canada, Senior Unsecured Notes 5.95% 05/15/35 235 235,961 Phillips Petroleum Co., Senior Debentures 7.00% 03/30/29 80 96,316 The Williams Cos., Inc., Senior Unsecured Notes 7.62% 07/15/19 70 75,950 7.75% 06/15/31 25 27,063 ------------- 2,631,162 ------------- Paper & Forest Products -- 0.0% Georgia-Pacific Corp., Senior Unsecured Notes 8.00% 01/15/24 30 33,038 ------------- Pharmaceuticals -- 0.1% Bristol-Myers Squibb Co., Senior Debentures 6.88% 08/01/97 195 224,404 ------------- Railroad & Shipping -- 0.1% Union Pacific Corp., Senior Debentures 7.12% 02/01/28 225 264,762 ------------- Real Estate -- 0.5% AMR Real Estate, Senior Unsecured Notes 8.12% 06/01/12 75 79,125 7.12%(e) 02/15/13 40 40,000 Avalonbay Communities, Inc., Senior Unsecured Notes 6.62% 09/15/11 180 194,131 Camden Property Trust, Unsecured Notes 4.70% 07/15/09 380 375,121 See accompanying notes to financial statements. 76
BlackRock Funds SCHEDULE OF INVESTMENTS CORE PLUS TOTAL RETURN PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Real Estate (Continued) EOP Operating LP, Unsecured Notes 4.65% 10/01/10 $ 160 $ 157,582 ERP Operating LP, Senior Notes 6.58% 04/13/15 240 262,468 Pulte Homes, Inc., Senior Unsecured Notes 6.00% 02/15/35 85 77,092 The Rouse Co., Unsecured Notes 5.38% 11/26/13 825 785,472 ------------- 1,970,991 ------------- Retail Merchandising -- 0.2% Delhaize America, Inc., Senior Debentures 9.00% 04/15/31 105 121,206 Federated Department Stores, Senior Debentures 6.79% 07/15/27 240 256,169 May Department Stores Co., Debentures 6.70% 07/15/34 125 130,904 Movie Gallery, Inc., Senior Unsecured Notes 11.00% 05/01/12 85 85,212 ------------- 593,491 ------------- Semiconductors & Related Devices -- 0.0% Freescale Semiconductor, Inc., Senior Unsecured Notes 6.35%(d) 07/15/09 50 51,375 Magnachip Semiconductor, Secured Notes 7.12%(d) 12/15/11 140 139,300 ------------- 190,675 ------------- Telecommunications -- 2.0% AT&T Broadband Corp., Unsecured Notes 8.38% 03/15/13 625 739,480 BellSouth Corp., Unsecured Notes 4.26%(d)(e) 04/26/06 1,550 1,547,818 Cincinnati Bell, Inc., Senior Unsecured Notes 7.25% 07/15/13 200 212,500 Continental Cablevision, Inc., Senior Notes 8.30% 05/15/06 400 409,169 Deutsche Telekom International Finance BV (Netherlands), Senior Unsecured Notes 8.75% 06/15/30 30 38,731 GTE Corp., Debentures 6.94% 04/15/28 75 81,987 Intelsat Bermuda Ltd., Senior Unsecured Notes 8.70%(d)(e) 01/15/12 90 91,800 L-3 Communications Corp., Senior Subordinated Notes 6.38%(e) 10/15/15 50 50,375 New Jersey Bell Telephone, Debentures 7.85% 11/15/29 35 41,581 Qwest Corp., Unsecured Notes 7.88% 09/01/11 130 135,850 7.12%(d)(e) 06/15/13 135 140,400 Rogers Wireless, Inc., Senior Secured Notes 7.50% 03/15/15 125 134,687 SBC Communications, Inc., Unsecured Notes 4.39%(e) 06/05/06 1,500 1,498,170 6.45% 06/15/34 230 242,765 6.15% 09/15/34 25 25,584 Sprint Capital Corp., Senior Unsecured Notes 8.75% 03/15/32 350 469,325 TCI Communications, Inc., Senior Debentures 8.75% 08/01/15 360 447,003 Verizon Global Funding Corp., Senior Unsecured Notes 7.75% 12/01/30 260 316,752 Verizon Global Funding Corp., Unsecured Notes 5.85% 09/15/35 25 24,586 Verizon Maryland, Inc., Debentures 5.12% 06/15/33 95 82,240 Vodafone Group PLC, Unsecured Notes 5.00% 12/13-09/15 625 622,906 ------------- 7,353,709 ------------- Transportation -- 0.0% Overseas Shipholding Group, Inc., Senior Unsecured Notes 7.50% 02/15/24 115 114,712 ------------- Yankee -- 1.4% Abitibi-Consolidated, Inc. (Canada), Senior Unsecured Notes 8.38%(g) 04/01/15 50 49,250 AID-Israel, Unsecured Notes 5.50%(g) 09/23-04/24 1,475 1,584,845 Encana Corp. (Canada) 6.50%(g) 08/15/34 140 157,489 France Telecom, Senior Unsecured Notes 8.50%(d)(g) 03/01/31 55 73,709 Japan Finance Corp. for Municipal Enterprises, Unsecured Notes 4.62%(g) 04/21/15 800 794,100 Omi Corp. (Mali), Senior Notes 7.62%(g) 12/01/13 50 51,000 Sumitomo Mitsui Banking Corp. (Japan), Unsecured Notes 5.62%(d)(e)(g) 12/31/49 450 448,474 Teck Cominco Ltd. (Canada), Senior Unsecured Notes 6.12%(g) 10/01/35 225 220,641 Telecom Italia Capital (Luxembourg), Unsecured Notes 6.00%(e)(g) 09/30/34 540 529,170 See accompanying notes to financial statements. 77
BlackRock Funds SCHEDULE OF INVESTMENTS CORE PLUS TOTAL RETURN PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Yankee (Continued) Telefonica Europe BV (Netherlands), Senior Unsecured Notes 7.75%(g) 09/15/10 $ 160 $ 180,370 United Mexican States (Mexico), Senior Unsecured Notes 8.00%(g) 09/24/22 605 735,075 United Mexican States, Bonds 8.12%(g) 12/30/19 460 559,590 ------------- 5,383,713 ------------- TOTAL CORPORATE BONDS (Cost $73,217,672) 73,112,561 ------------- FOREIGN BONDS -- 1.7% Bundesrepublic Deutschland (Germany) (EUR) 4.75% 07/04/34 475 690,111 4.00% 01/04/37 1,925 2,497,582 General Electric Capital Corp., Senior Unsubordinated Notes (NZD) 6.50% 09/28/15 260 175,818 Mexican Fixed Rate Bonds (MXP) 12/24/08- 8.00% 12/07/23 5,090 459,383 12/24/09- 9.00% 12/20/12 9,823 934,747 9.50% 12/18/14 1,000 100,140 Province of Manitoba (NZD) 6.38% 09/01/15 635 434,095 Province of Ontario, Unsecured Notes (NZD) 6.25% 06/16/15 1,480 1,009,298 ------------- TOTAL FOREIGN BONDS (Cost $6,225,153) 6,301,174 ------------- TAXABLE MUNICIPAL BONDS -- 0.4% Connecticut State General Obligation, Series 04, Class B 5.00% 12/01/15 380 412,475 Fort Irwin Land California LLC Revenue Bonds, Series 05 5.40%(e) 12/15/47 600 584,976 University Maryland System Auxiliary Facility & Tuition Revenue Bonds, Series 05, Class A 5.00% 04/01/16 500 547,425 ------------- TOTAL TAXABLE MUNICIPAL BONDS (Cost $1,585,090) 1,544,876 ------------- Par/Shares (000) ---------- SHORT TERM INVESTMENTS -- 6.8% Federal Home Loan Bank, Discount Notes 3.18%(h) 10/03/05 8,600 8,598,481 Federal National Mortgage Association, Discount Notes 3.50%(h) 10/03/05 9,400 9,398,172 Galileo Money Market Fund 7,558 7,558,068 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $25,554,721) 25,554,721 ------------- Value ------------- TOTAL INVESTMENTS IN SECURITIES -- 100.0% (Cost $377,428,226(a)) $ 375,399,416 ============= Number of Contracts ---------- CALL SWAPTIONS WRITTEN -- (0.3)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (500)(i) (239,800) Citibank, Strike Price 5.67, Expires 01/04/10 (370)(i) (253,926) Deutsche Bank, Strike Price 5.015, Expires 01/29/07 (442)(i) (163,929) Union Bank, Strike Price 4.725, Expires 06/13/07 (1,130)(i) (331,655) ------------- TOTAL CALL SWAPTIONS WRITTEN (Premiums received $1,016,338) (989,310) ------------- PUT SWAPTIONS WRITTEN -- (0.3)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (500)(i) (176,450) Citibank, Strike Price 5.67, Expires 01/04/10 (370)(i) (112,534) Deutsche Bank, Strike Price 5.015, Expires 01/29/07 (442)(i) (118,366) Union Bank, Strike Price 4.725, Expires 06/13/07 (1,130)(i) (470,758) ------------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $1,016,338) (878,108) ------------- - ---------- (a) Cost for Federal income tax purposes is $377,580,438. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 2,440,257 Gross unrealized depreciation (4,621,279) ------------- $ (2,181,022) ============= (b) Rates shown are the effective yields as of September 30, 2005. (c) Securities, or a portion thereof, with a market value of $3,049,411 have been pledged as collateral for swap and swaption contracts. (d) Rates shown are the rates as of September 30, 2005. (e) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 4.3% of its net assets, with a current market value of $14,047,660 in securities restricted as to resale. (f) Securities, or a portion thereof, pledged as collateral with a value of $709,072 on 22 long U.S. Treasury Bond futures contracts, 52 long U.S. Treasury Note futures contracts, 430 short U.S. Treasury Note futures contacts and 87 short Euro-Bobl futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $66,632,724 with an unrealized gain of $214,639 (including commissions of $1,324). (g) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (h) The rate shown is the effective yield on the discount notes at the time of purchase. (i) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 78
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES CORE PLUS TOTAL RETURN PORTFOLIO September 30, 2005 ASSETS Investments at value (Cost $377,428,226) ................................ $ 375,399,416 Cash denominated in foreign currencies (Cost $3,267,062) ................ 3,265,430 Interest receivable ..................................................... 2,398,158 Interest receivable on interest rate swaps .............................. 21,263 Investments sold receivable ............................................. 40,042,985 Capital shares sold receivable .......................................... 595,996 Prepaid expenses ........................................................ 16,943 Unrealized appreciation on forward foreign currency contracts ........... 44,944 Unrealized appreciation on interest rate swaps .......................... 340,915 Futures margin receivable ............................................... 84,803 -------------- TOTAL ASSETS ......................................................... 422,210,853 -------------- LIABILITIES Investments purchased payable ........................................... 91,939,304 Capital shares redeemed payable ......................................... 697,991 Distributions payable ................................................... 177,302 Advisory fees payable ................................................... 43,978 Administrative fees payable ............................................. 22,817 Transfer agent fees payable ............................................. 16,219 Other accrued expenses payable .......................................... 63,165 Swaptions written, at fair value (premiums received $2,032,676) ......... 1,867,418 Futures margin payable .................................................. 2,235 Unrealized depreciation on forward foreign currency contracts ........... 41,666 Unrealized depreciation on interest rate swaps .......................... 1,028,189 -------------- TOTAL LIABILITIES .................................................... 95,900,284 -------------- NET ASSETS (Applicable to 31,746,942 BlackRock shares, 12 Institutional shares,12 Service shares, 8,528 Investor A shares, 13,318 Investor B shares and 5,119 Investor C shares outstanding) ......................... $ 326,310,569 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($326,033,329/31,746,942) ........................... $ 10.27 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($119/12)(a) .................................... $ 10.21 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($120/12)(b) .......................................... $ 10.33 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($87,665/8,528) .................................... $ 10.28 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.28/0.960) ............... $ 10.71 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($136,800/13,318) .................................. $ 10.27 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($52,537/5,119) .................................... $ 10.26 ============== - --------- (a) Exact net assets and shares outstanding at September 30, 2005 were $118.50 and 11.604, respectively. (b) Exact net assets and shares outstanding at September 30, 2005 were $119.78 and 11.593, respectively. See accompanying notes to financial statements. 79
BlackRock Funds SCHEDULE OF INVESTMENTS GOVERNMENT INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 25.3% Small Business Administration Participation Certificates, Series 96-20J, Class 1 7.20% 10/01/16 $ 142 $ 149,043 Small Business Administration Participation Certificates, Series 98-20J, Class 1 5.50% 10/01/18 124 127,004 Small Business Investment Cos. Pass-Through, Series 03-10A, Class 1 4.63% 03/10/13 1,062 1,061,701 U.S. Treasury Bonds 8.00%(b) 11/15/21 2,820 3,903,718 6.50% 11/15/26 735 919,095 5.38% 02/15/31 4,000 4,481,248 U.S. Treasury Notes 3.50% 12/15/09 2,475 2,407,517 4.25% 11/14-08/15 154,105 153,044,047 ------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $167,690,234) 166,093,373 ------------- MORTGAGE PASS-THROUGHS -- 50.9% Federal Home Loan Mortgage Corp. Gold 5.50% 10/13-10/35 653 661,272 6.00% 10/13-10/33 2,251 2,312,916 5.00% 04/18-08/35 31,286 30,718,554 4.50% 05/18-10/35 1,552 1,529,397 8.00% 01/25-11/26 152 162,310 7.50% 11/01/25 1 1,432 6.50% 03/29-10/34 541 556,822 7.00% 09/31-04/32 169 176,329 Federal National Mortgage Association 7.00% 08/09-12/11 29 29,959 6.00% 11/09-05/35 6,436 6,559,542 4.00% 05/10-10/20 16,661 16,105,959 6.50% 01/13-04/35 9,796 10,106,399 5.50%(b) 12/13-08/35 153,064 153,215,709 8.00% 08/01/14 14 14,028 5.00% 02/18-09/35 88,466 86,782,383 4.50% 04/18-10/35 24,348 23,708,659 7.50% 06/24-04/26 49 52,412 Government National Mortgage Association 8.00% 04/20/13 80 85,630 6.00% 01/14-06/14 272 281,317 5.50% 03/14-08/33 560 571,886 7.00% 10/27-06/28 329 346,431 7.50% 11/15/27 1 582 6.50% 10/15/34 84 87,293 ------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $336,859,210) 334,067,221 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 0.3% Federal National Mortgage Association, Series 03-130, Class SP (IO) 3.17%(c) 08/25/28 7,268 191,229 Goldman Sachs Residential Mortgage Loan Trust, Series 03-13, Class 1A1 4.51%(d) 10/25/33 1,828 1,777,497 Salomon Brothers Mortgage Securities VI, Series 87-1 (IO) 11.00%(c) 02/17/17 38 9,194 Salomon Brothers Mortgage Securities VI, Series 87-1 (PO) 11.50%(e) 02/17/17 38 34,933 ------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $2,234,906) 2,012,853 ------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 0.1% General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% (Cost $1,070,138) 08/15/36 976 1,043,132 ------------- PROJECT LOANS -- 0.0% Federal Housing Authority 7.43% (Cost $2,905) 09/01/22 3 2,871 ------------- ASSET BACKED SECURITIES -- 0.2% The Money Store Small Business Administration Loan Trust, Series 99-1, Class A 3.82%(d) 07/15/25 92 91,720 Structured Asset Receivables Trust, Series 03-2 3.40%(d)(f) 01/21/09 1,351 1,350,168 ------------- TOTAL ASSET BACKED SECURITIES (Cost $1,439,880) 1,441,888 ------------- Par/Shares (000) ---------- SHORT TERM INVESTMENTS -- 23.2% Federal Home Loan Bank, Discount Notes 3.18%(g) 10/03/05 35,100 35,093,799 3.67%(g) 10/26/05 50,000 49,872,569 Federal National Mortgage Association, Discount Notes 3.50%(g) 10/03/05 59,900 59,888,353 Galileo Money Market Fund 7,259 7,259,052 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $152,113,773) 152,113,773 ------------- TOTAL INVESTMENTS IN SECURITIES -- 100.0% (Cost $661,411,046(a)) $ 656,775,111 ============= See accompanying notes to financial statements. 80
BlackRock Funds SCHEDULE OF INVESTMENTS GOVERNMENT INCOME PORTFOLIO (Concluded) As of September 30, 2005 Number of Contracts Value ---------- ----------- CALL OPTIONS PURCHASED -- 0.0% Euro Dollar 1 year Mid-Curve futures, Strike Price 96.0, Expires 12/19/05 (Cost $41,578) 251 $ 10,981 ----------- CALL SWAPTIONS WRITTEN -- 0.0% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (Premiums received $266,570) (610)(h) (292,556) ----------- PUT OPTIONS PURCHASED -- 0.0% Euro Dollar 1 year Mid-Curve futures, Strike Price 95.25, Expires 12/19/05 (Cost $41,578) 251 67,456 ----------- PUT SWAPTIONS WRITTEN -- 0.0% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (Premiums received $266,570) (610)(h) (215,269) ----------- - ---------- (a) Cost for Federal income tax purposes is $662,252,580. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 731,405 Gross unrealized depreciation (6,208,874) ----------- $(5,477,469) =========== (b) Securities, or a portion thereof, pledged as collateral with a value of $3,143,552 on 974 long U.S. Treasury Note futures contracts and 1,116 short U.S. Treasury Note futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $268,704,350 with an unrealized loss of $1,019,247 (including commissions of $4,540). (c) Rates shown are the effective yields as of September 30, 2005. (d) Rates shown are the rates as of September 30, 2005. (e) Interest rate of underlying collateral. (f) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 0.2% of its net assets, with a current market value of $1,350,168, in securities restricted as to resale. (g) The rate shown is the effective yield on the discount notes at the time of purchase. (h) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 81
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES GOVERNMENT INCOME PORTFOLIO September 30, 2005 ASSETS Investments at value (Cost $661,411,046).......................$ 656,775,111 Option purchased at value (premiums paid $83,156).............. 78,437 Collateral received for swap contracts ........................ 1,259,139 Interest receivable ........................................... 3,564,235 Investments sold receivable ................................... 360,088,832 Capital shares sold receivable ................................ 2,047,103 Prepaid expenses .............................................. 33,592 Unrealized appreciation on interest rate swaps ................ 845,105 Futures margin receivable ..................................... 146,173 --------------- TOTAL ASSETS ................................................ 1,024,837,727 --------------- LIABILITIES Payable upon termination of swap contracts .................... 1,259,139 Investments purchased payable ................................. 476,437,752 Capital shares redeemed payable ............................... 1,419,209 Distributions payable ......................................... 326,765 Advisory fees payable ......................................... 43,784 Administrative fees payable ................................... 101,024 Transfer agent fees payable ................................... 29,628 Other accrued expenses payable ................................ 242,131 Swaptions written, at fair value (Premiums received $533,140).. 507,825 Futures margin payable ........................................ 163,960 Unrealized depreciation on interest rate swaps ................ 481,507 --------------- TOTAL LIABILITIES ........................................... 481,012,724 --------------- NET ASSETS (Applicable to 840,037 BlackRock shares, 19,539,261 Service shares, 22,678,236 Investor A shares, 3,894,376 Investor B shares and 2,923,930 Investor C shares outstanding) .........................................$ 543,825,003 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($9,164,334/840,037).......................$ 10.91 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($212,962,549/19,539,261)....................$ 10.90 =============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($247,379,845/22,678,236).................$ 10.91 =============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.91/0.955).......$ 11.42 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($42,478,732/3,894,376)...................$ 10.91 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($31,839,543/2,923,930)...................$ 10.89 =============== See accompanying notes to financial statements. 82
BlackRock Funds STATEMENT OF NET ASSETS INFLATION PROTECTED BOND PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 82.1% Federal National Mortgage Association, Unsecured Notes 2.35% 04/29/06 $ 800 $ 791,416 U.S. Treasury Inflation Protected Bonds 1.88% 07/15/15 170 172,313 2.38% 01/15/25 3,590 3,982,041 3.62%(b) 04/15/28 1,765 2,790,377 3.88% 04/15/29 2,430 3,954,507 U.S. Treasury Inflation Protected Notes 3.88% 01/15/09 1,180 1,525,463 4.25% 01/15/10 1,155 1,500,694 0.88% 04/15/10 1,750 1,759,180 3.50% 01/15/11 945 1,168,684 3.38% 01/15/12 480 585,054 3.00% 07/15/12 2,975 3,518,864 1.88% 07/15/13 2,425 2,615,045 2.00% 01/14-07/14 5,325 5,714,497 1.62% 01/15/15 1,495 1,511,962 U.S. Treasury Notes 4.25% 08/15/15 75 74,531 ------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $31,488,177) 31,664,628 ------------- MORTGAGE PASS-THROUGHS -- 3.7% Federal National Mortgage Association ARM 4.42%(c) 06/01/34 516 512,608 4.64%(c) 02/01/35 902 899,089 ------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $1,424,067) 1,411,697 ------------- CORPORATE BONDS -- 0.2% Yankee -- 0.2% Abitibi-Consolidated, Inc. (Canada), Senior Unsecured Notes 8.38%(d) 04/01/15 5 4,925 United Mexican States, Senior Unsecured Notes 6.62%(d) 03/03/15 25 27,200 6.75%(d) 09/27/34 50 53,250 ------------- 85,375 ------------- TOTAL CORPORATE BONDS (Cost $83,342) 85,375 ------------- FOREIGN BONDS -- 4.1% Bundesrepublic Deutschland (Germany) (EUR) 4.75% 07/04/34 100 145,286 4.00% 01/04/37 175 227,053 Canada Government Real Return (CND) 3.00% 12/01/36 440 519,572 Government of Canada Bonds (CND) 4.50% 06/01/15 360 323,212 Government of France, Treasury Inflation Protected Notes (EUR) 2.25% 07/25/20 175 250,218 FOREIGN BONDS (Continued) Republic of Argentina, Treasury Inflation Protected Notes (ARA) 4.67% 12/31/38 600 100,678 ------------- TOTAL FOREIGN BONDS (Cost $1,475,347) 1,566,019 ------------- Par/Shares (000) ---------- SHORT TERM INVESTMENTS -- 7.3% U.S. Treasury Bills 3.15% 11/17/05 2,000 1,991,775 Galileo Money Market Fund 840 839,968 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $2,832,093) 2,831,743 ------------- TOTAL INVESTMENTS IN SECURITIES -- 97.4% (Cost $37,303,026(a)) 37,559,462 Number of Contracts ---------- CALL OPTIONS PURCHASED -- 0.0% Euro Dollar 1 year Mid-Curve futures, Strike Price 96.0, Expires 12/19/05 (Cost $3,313) 20 875 ------------- CALL OPTIONS WRITTEN -- (0.0)% March 10 year U.S. Treasury Notes futures, Strike Price 112.0, Expires 02/24/06 (Premiums received $10,242) (14) (8,094) ------------- CALL SWAPTIONS WRITTEN -- (0.2)% Deutsche Bank, Strike Price 4.575, Expires 01/11/07 (130)(e) (27,326) Union Bank, Strike Price 4.725, Expires 06/13/07 (140)(e) (41,090) ------------- TOTAL CALL SWAPTIONS WRITTEN (Premiums received $82,080) (68,416) ------------- PUT OPTIONS PURCHASED -- 0.1% December 90 Day Euro Dollar futures, Strike Price 95.75, Expires 12/19/05 41 17,681 December 90 Day Euro Dollar futures, Strike Price 96.0, Expires 12/19/05 21 20,606 Euro Dollar 1 year Mid-Curve futures, Strike Price 95.25, Expires 12/19/05 20 5,375 December 10 year U.S. Treasury Notes futures, Strike Price 108.0, Expires 11/22/05 (14) (10,062) ------------- TOTAL PUT OPTIONS PURCHASED (Cost $6,391) 33,600 ------------- See accompanying notes to financial statements. 83
BlackRock Funds STATEMENT OF NET ASSETS INFLATION PROTECTED BOND PORTFOLIO (Concluded) As of September 30, 2005 Number of Contracts Value ---------- ------------ PUT OPTIONS WRITTEN -- (0.1)% December 10 year U.S. Treasury Notes futures, Strike Price 110.0, Expires 11/22/05 (7) $ (6,016) December 90 Day Euro Dollar futures, Strike Price 95.875, Expires 12/19/05 (42) (28,875) March 10 year U.S. Treasury Notes futures, Strike Price 108.0, Expires 02/24/06 14 3,062 ------------- TOTAL PUT OPTIONS WRITTEN (Premiums received $10,353) (31,829) ------------- PUT SWAPTIONS WRITTEN -- (0.2)% Deutsche Bank, Strike Price 5.15, Expires 01/11/07 (130)(e) (28,769) Union Bank, Strike Price 4.725, Expires 06/13/07 (140)(e) (58,324) ------------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $104,765) (87,093) ------------- OTHER ASSETS IN EXCESS OF LIABILITIES -- 3.0% 1,154,248 ------------- NET ASSETS -- 100.0% (Applicable to 2,219,875 BlackRock shares, 549,339 Institutional shares, 155 Service shares, 381,548 Investor A shares, 195,112 Investor B shares and 356,025 Investor C shares outstanding) $ 38,552,753 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($22,974,687/2,219,875) $ 10.35 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($5,787,700/549,339) $ 10.54 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($1,634/155)(f) $ 10.56 ============= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($3,994,180/381,548) $ 10.47 ============= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.47/0.970) $ 10.79 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($2,045,339/195,112) $ 10.48 ============= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR C SHARE ($3,749,213/356,025) $ 10.53 ============= - ---------- (a) Cost for Federal Income tax purposes is $37,418,037. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 891,098 Gross unrealized depreciation (749,673) ------------- $ 141,425 ============= (b) Securities, or a portion thereof, pledged as collateral with a value of $261,680 on 8 short Canadian Government Bond futures contracts, 51 short U.S. Treasury Note futures contracts, 11 short Euro-Bobl futures contracts, 2 short Euro-Bund contracts and 10 short U.S. Treasury Bond futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $9,245,685, with an unrealized gain of $63,191 (including commissions of $186). (c) Rates shown are the rates as of September 30, 2005. (d) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (e) Each swaption contract is equivalent to $10,000 notional amount. (f) Exact net assets and shares outstanding at September 30, 2005 were $1,634.48 and 154.776, respectively. See accompanying notes to financial statements. 84
BlackRock Funds SCHEDULE OF INVESTMENTS GNMA PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 0.5% U.S. Treasury Bonds 6.50% (Cost $1,341,816) 11/15/2026 $ 1,130 $ 1,413,030 ------------- MORTGAGE PASS-THROUGHS -- 75.2% Federal Home Loan Mortgage Corp. Gold 5.50% 06/13-02/18 639 648,817 6.00% 11/13-10/33 356 365,866 6.50% 12/13-08/30 432 435,715 8.00% 07/01/17 52 55,108 9.00% 12/01/19 1 872 7.50% 09/26-03/27 10 10,924 4.50% 04/28-09/35 0 2,071 5.00% 09/01/33 78 76,394 Federal National Mortgage Association 6.50% 02/13-04/35 306 323,904 5.50% 12/13-07/35 15,608 15,629,322 8.00% 08/01/14 106 107,546 6.00% 04/16-01/35 909 924,827 4.00% 07/01/18 149 143,567 4.50% 08/18-06/34 2,830 2,771,740 8.50% 10/01/24 5 5,424 5.00% 07/01/35 99 97,377 Government National Mortgage Association 8.00%(b) 12/07-08/24 527 562,701 5.50% 11/08-10/34 88,006 88,857,086 6.50% 03/16-11/34 24,405 25,309,495 7.00%(b) 09/17-05/32 2,113 2,224,867 9.00% 05/18-07/21 263 287,959 10.00% 12/15/20 3 3,710 7.50% 10/25-11/29 490 520,092 5.00% 10/27-09/35 28,718 28,385,875 6.00% 01/28-05/35 39,706 40,595,209 4.50% 12/34-01/35 5,554 5,346,800 ------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $215,117,218) 213,693,268 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.3% Federal National Mortgage Association, Series 03-130, Class SP (IO) 3.17%(c) 08/25/28 8,231 216,545 Goldman Sachs Residential Mortgage Loan Trust, Series 03-13, Class 1A1 4.51%(d) 10/25/33 3,655 3,554,995 ------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $3,980,039) 3,771,540 ------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 0.5% General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% (Cost $1,355,946) 08/15/36 1,243 1,329,300 ------------- PROJECT LOANS -- 0.0% Federal Housing Authority 7.43% (Cost $15,001) 09/01/22 15 15,069 ------------- ASSET BACKED SECURITIES -- 0.7% The Money Store Small Business Administration Loan Trust, Series 99-1, Class A 3.82%(d) 07/15/25 277 275,160 Structured Asset Receivables Trust, Series 03-2 3.40%(d)(e) 01/21/09 1,727 1,726,445 ------------- TOTAL ASSET BACKED SECURITIES (Cost $2,000,269) 2,001,605 ------------- Par/Shares (000) ---------- SHORT TERM INVESTMENTS -- 21.8% Federal Home Loan Bank, Discount Notes 3.18%(f) 10/03/05 1,100 1,099,806 Federal National Mortgage Association, Discount Notes 3.50%(f) 10/03/05 53,900 53,889,519 Galileo Money Market Fund 7,027 7,026,909 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $62,016,234) 62,016,234 ------------- TOTAL INVESTMENTS IN SECURITIES -- 100.0% (Cost $285,826,523(a)) $ 284,240,046 ============= Number of Contracts ---------- CALL OPTIONS PURCHASED -- 0.0% Euro Dollar 1 year Mid-Curve futures, Strike Price 96.0, Expires 12/19/05 (Cost $15,737) 95 4,157 ------------- CALL SWAPTIONS WRITTEN -- (0.1)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (Premiums received $131,100) (300)(g) (143,880) ------------- PUT OPTIONS PURCHASED -- 0.0% Euro Dollar 1 year Mid-Curve futures, Strike Price 95.25, Expires 12/19/05 (Cost $15,737) 95 25,531 ------------- PUT SWAPTIONS WRITTEN -- 0.0% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (Premiums received $131,100) (300)(g) (105,870) ------------- See accompanying notes to financial statements. 85
BlackRock Funds SCHEDULE OF INVESTMENTS GNMA PORTFOLIO (Concluded) As of September 30, 2005 - ---------- (a) Cost for Federal Income tax purposes is $285,866,109. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 649,986 Gross unrealized depreciation (2,276,049) ------------- $ (1,626,063) ============= (b) Securities, or a portion thereof, pledged as collateral with a value of $403,793 on 179 short U.S. Treasury Note futures contracts, 122 short Interest Rate Swap futures contracts and 145 long U.S. Treasury Bond futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $63,661,063, with an unrealized gain of $138,268 (including commissions of $981). (c) Rates shown are the effective yields as of September 30, 2005. (d) Rates shown are the rates as of September 30, 2005. (e) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 0.9% of its net assets, with a current market value of $1,726,445, in securities restricted as to resale. (f) The rate shown is the effective yield on the discount notes at the time of purchase. (g) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 86
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES GNMA PORTFOLIO September 30, 2005 ASSETS Investments at value (Cost $285,826,523) .................... $ 284,240,046 Option purchased at value (premiums paid $31,474) ........... 29,688 Interest receivable ......................................... 953,012 Investments sold receivable ................................. 51,674,301 Capital shares sold receivable .............................. 223,824 Prepaid expenses ............................................ 28,386 Unrealized appreciation on interest rate swaps .............. 296,610 Futures margin receivable ................................... 36,262 --------------- TOTAL ASSETS ............................................. 337,482,129 --------------- LIABILITIES Investments purchased payable ............................... 132,862,695 Capital shares redeemed payable ............................. 803,558 Distributions payable ....................................... 527,603 Advisory fees payable ....................................... 4,490 Administrative fees payable ................................. 36,651 Transfer agent fees payable ................................. 13,576 Other accrued expenses payable .............................. 115,191 Swaptions written, at fair value (premiums received $262,200) 249,750 Unrealized depreciation on interest rate swaps .............. 481,769 --------------- TOTAL LIABILITIES ........................................ 135,095,283 --------------- NET ASSETS (Applicable to 1,126,429 BlackRock shares, 12,535,727 Institutional shares, 838,920 Service shares, 1,569,894 Investor A shares, 2,038,993 Investor B shares and 2,752,856 Investor C shares outstanding) .................... $ 202,386,846 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($10,915,055/1,126,429) ................. $ 9.69 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($121,571,303/12,535,727) ........... $ 9.70 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($8,129,079/838,920) ...................... $ 9.69 =============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($15,288,164/1,569,894) ................ $ 9.74 =============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.74/0.960) .... $ 10.15 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($19,792,149/2,038,993) ................ $ 9.71 =============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($26,691,096/2,752,856) ................ $ 9.70 =============== See accompanying notes to financial statements 87
BlackRock Funds SCHEDULE OF INVESTMENTS MANAGED INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 26.3% Federal National Mortgage Association, Unsecured Notes 2.35% 04/06-04/07 $ 9,980 $ 9,725,858 1.75% 06/16/06 2,120 2,082,917 4.00% 10/06-01/09 13,870 13,730,664 4.75% 02/21/13 2,990 2,969,348 Overseas Private Investment Co. 4.09% 05/29/12 464 429,319 4.30% 05/29/12 1,295 1,225,082 4.64% 05/29/12 966 929,111 4.68% 05/29/12 546 514,956 4.87% 05/29/12 4,122 4,007,793 5.40% 05/29/12 5,150 5,186,156 5.46% 05/29/12 590 606,638 5.79% 05/29/12 1,044 1,075,265 5.88%(b) 05/29/12 556 561,070 5.94% 05/29/12 1,984 2,052,335 5.95% 05/29/12 565 582,037 6.10% 05/29/12 667 692,825 6.81% 05/29/12 807 848,145 6.89% 05/29/12 6,436 6,802,791 6.91% 05/29/12 2,163 2,262,367 7.35% 05/29/12 582 617,967 Resolution Funding Corp. Strip Bonds 6.29%(c) 07/15/18 1,725 939,927 6.30%(c) 10/15/18 1,725 927,650 Small Business Administration Participation Certificates, Series 96-20B, Class 1 6.38% 02/01/16 2,055 2,125,031 Small Business Administration Participation Certificates, Series 96-20K, Class 1 6.95% 11/01/16 3,595 3,757,270 Small Business Administration Participation Certificates, Series 97, Class A 4.35%(d)(e) 08/15/22 751 714,597 Small Business Administration Participation Certificates, Series 97-20B, Class 1 7.10% 02/01/17 2,609 2,741,603 Small Business Administration Participation Certificates, Series 97-20G, Class 1 6.85% 07/01/17 4,869 5,099,440 U.S. Treasury Bonds 8.12%(f) 08/15/19 28,480 38,882,975 8.50% 02/15/20 4,175 5,895,392 8.75% 08/15/20 1,175 1,700,583 8.00% 11/15/21 6,380 8,831,815 6.25% 08/15/23 6,665 7,969,620 6.00%(f) 02/15/26 8,820 10,402,088 6.75% 08/15/26 3,280 4,203,910 5.38% 02/15/31 465 520,945 U.S. Treasury Notes 4.00% 08/07-02/15 47,340 46,664,797 4.75% 05/15/14 295 303,919 4.25%(g) 11/14-08/15 8,985 8,921,871 ------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $204,096,851) 207,506,077 ------------- MORTGAGE PASS-THROUGHS -- 24.8% Federal Home Loan Mortgage Corp. 3.00% 04/19/07 5,900 5,781,640 5.00% 07/01/20 199 198,817 5.50% 08/35-10/35 3,180 3,256,774 Federal Home Loan Mortgage Corp. Gold 6.50% 03/09-12/30 1,029 1,062,433 4.00% 05/01/10 2,095 2,056,274 6.00% 11/14-11/34 6,298 6,425,934 5.50% 10/17-10/35 8,383 8,399,177 4.50% 10/18-08/20 8,406 8,256,547 5.00% 10/18-09/35 23,895 23,663,224 7.50% 11/25-10/27 32 34,116 7.00% 04/29-04/32 77 80,459 Federal Home Loan Mortgage Corp., ARM 4.37%(d) 01/01/35 8,902 8,844,811 Federal National Mortgage Association 7.00% 06/06-09/34 2,463 2,579,280 6.00% 01/09-10/33 5,821 5,921,938 6.50% 02/11-10/33 24,392 25,119,840 5.50% 09/13-09/35 22,664 22,923,441 5.00% 01/18-09/35 45,853 45,299,001 4.50% 10/18-10/35 16,482 16,068,035 4.30%(d) 12/01/34 7,548 7,500,239 Government National Mortgage Association 9.50% 09/16-11/16 20 21,573 9.00% 03/15/18 13 14,658 6.50% 12/23-10/34 1,078 1,123,216 6.00% 11/28-10/33 625 640,587 5.50% 11/33-12/34 64 66,780 MLCC Mortgage Investors, Inc., Series 95-C2 (IO) 1.22%(c) 06/15/21 7,452 281,762 ------------- TOTAL MORTGAGE PASS-THROUGHS (Cost $196,277,418) 195,620,556 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 4.8% Banc of America Alternative Loan Trust, Series 04-11, Class 2CB1 6.00% 12/25/34 3,384 3,374,396 Countrywide Alternative Loan Trust, Series 05-56, Class 1A1 4.69%(d) 11/25/35 6,540 6,605,400 Federal Home Loan Mortgage Corp., Series 2587, Class WX 5.00% 03/15/18 2,370 2,360,654 Federal Home Loan Mortgage Corp., Series 2825, Class VP 5.50% 06/15/15 3,470 3,532,681 Federal Home Loan Mortgage Corp., Series 2933, Class HD 5.50% 02/15/35 3,565 3,593,288 Federal National Mortgage Association, Series 03-118, Class FD 4.23%(d) 12/25/33 4,039 4,072,257 Federal National Mortgage Association, Series 04-82, Class HJ 5.50% 09/25/32 7,400 7,449,358 See accompanying notes to financial statements. 88
BlackRock Funds SCHEDULE OF INVESTMENTS MANAGED INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- COLLATERALIZED MORTGAGE OBLIGATIONS (Continued) Federal National Mortgage Association, Series 05-48, Class AR 5.50% 02/25/35 $ 3,085 $ 3,107,228 Federal National Mortgage Association, Series 05-57, Class PA 5.50% 05/25/27 3,798 3,838,661 Summit Mortgage Trust, Series 00-1, Class B1 6.29%(d)(e) 12/28/12 142 141,644 ------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $38,694,211) 38,075,567 ------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 10.5% Banc of America Commercial Mortgage, Inc., Series 01-1, Class A2 6.50% 04/15/36 4,030 4,318,552 Bear Stearns Commercial Mortgage Securities, Inc., Series 00-WF2, Class A2 7.32% 10/15/32 4,590 5,035,579 Bear Stearns Commercial Mortgage Securities, Inc., Series 04-PWR6, Class A6 4.82% 11/11/41 4,155 4,117,023 Bear Stearns Commercial Mortgage Securities, Inc., Series 05-PWR9, Class A4A 4.87% 09/11/42 3,940 3,934,460 Commercial Mortgage Acceptance Corp., Series 98-C2, Class A2 6.03% 09/15/30 4,262 4,361,160 Credit Suisse First Boston Mortgage Securities Corp., Series 02-CP5, Class A2 4.94% 12/15/35 4,865 4,868,236 Donaldson, Lufkin and Jenrette, Inc. Commerical Mortgage Corp., Series 98-CF1, Class A1B 6.41% 02/18/31 7,413 7,638,271 General Electric Capital Commercial Mortgage Corp., Series 02-1A, Class A3 6.27% 12/10/35 3,800 4,066,100 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 99-C3, Class A2 7.18% 08/15/36 3,773 4,034,057 Goldman Sachs Mortgage Securities Corp. II, Series 98-C1, Class A3 6.14% 10/18/30 5,115 5,278,598 Goldman Sachs Mortgage Securities Corp. II, Series 04-GG2, Class A4 4.96% 08/10/38 3,500 3,523,765 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 01-C1, Class A3 5.87% 10/12/35 3,840 4,021,872 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 01-CIB2, Class A3 6.43% 04/15/35 3,320 3,554,041 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C4, Class A2 7.37% 08/15/26 5,680 6,244,786 Lehman Brothers-UBS Commerical Mortgage Trust, Series 03-C7, Class A2 4.06%(d) 09/15/27 2,480 2,421,561 Morgan Stanley Capital Investments, Series 98-HF2, Class A2 6.48% 11/15/30 4,345 4,510,852 Salomon Brothers Mortgage Securities VII, Series 00-C1, Class A2 7.52% 12/18/09 5,565 6,006,917 USGI, Series 87 7.43% 12/01/22 113 115,799 Wachovia Bank Commercial Mortgage Trust, Series 03, Class C6 5.12% 08/15/35 4,470 4,510,080 ------------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $84,269,505) 82,561,709 ------------- PROJECT LOANS -- 2.3% Whittier Rehab at Haverhill Project Loan 7.60% 12/01/39 10,845 11,321,680 Whittier Rehab at Westborough Project Loan 8.12% 02/28/37 6,924 7,193,048 ------------- TOTAL PROJECT LOANS (Cost $17,507,908) 18,514,728 ------------- CERTIFICATE OF DEPOSIT -- 0.2% SunTrust Bank, Inc. 4.42% (Cost $1,260,000) 06/15/09 1,260 1,246,014 ------------- ASSET BACKED SECURITIES -- 8.5% American Express Credit Account Master Trust, Series 05-3, Class A 3.77%(d) 01/18/11 5,525 5,532,072 American Express Credit Account Master Trust, Series 05-5, Class A 3.81%(d) 02/15/13 5,350 5,348,850 Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 5,675 5,535,338 Citibank Credit Card Issuance Trust, Series 00, Class A3 6.88% 11/16/09 6,275 6,573,249 Citibank Credit Card Issuance Trust, Series 04, Class A1 2.55% 01/20/07 9,150 8,931,864 Countrywide Asset-Backed Certificates, Series 04-14, Class A4 4.11%(d) 06/25/35 4,191 4,201,763 Ford Credit Auto Owner Trust, Series 05-A, Class A3 3.48% 11/15/08 7,450 7,366,858 See accompanying notes to financial statements. 89
BlackRock Funds SCHEDULE OF INVESTMENTS MANAGED INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- ASSET BACKED SECURITIES (Continued) Ford Credit Auto Owner Trust, Series 05-C, Class A3 4.30% 08/15/09 $ 5,325 $ 5,324,883 Green Tree Financial Corp., Series 96-7, Class A6 7.65% 10/15/27 4,138 4,362,942 MBNA Credit Card Master Note Trust, Series 04-A4, Class A4 2.70% 09/15/09 7,200 7,017,754 Railcar Leasing LLC, Series 97-1, Class A1 6.75%(e) 07/15/06 1,597 1,607,337 Small Business Administration Participation Certificates, Series 97-20F, Class 1 7.20% 06/01/17 748 787,001 Structured Asset Receivables Trust, Series 03-2 3.40%(d)(e) 01/21/09 4,074 4,072,639 ------------- TOTAL ASSET BACKED SECURITIES (Cost $67,194,149) 66,662,550 ------------- CORPORATE BONDS -- 20.5% Aerospace -- 0.5% Lockheed Martin Corp., Senior Debentures 8.50% 12/01/29 985 1,356,359 Northrop Grumman Corp., Senior Unsecured Notes 4.08% 11/16/06 1,205 1,199,180 7.12% 02/15/11 915 1,011,203 Raytheon Co., Senior Unsecured Notes 4.50% 11/15/07 383 381,296 ------------- 3,948,038 ------------- Banks -- 6.7% Banc One Corp., Senior Unsecured Notes 2.62% 06/30/08 835 793,553 Bank of America Corp., Senior Unsecured Notes 3.38% 02/17/09 1,350 1,297,384 4.50% 08/01/10 130 128,739 Bank of America Corp., Subordinated Notes 7.80%(h) 02/15/10 1,190 1,328,156 Bank of New York Co., Inc., Senior Notes 3.75% 02/15/08 1,350 1,324,682 BankBoston N.A., Subordinated Notes 7.00% 09/15/07 1,500 1,565,145 Citigroup, Inc., Senior Unsecured Notes 6.20% 03/15/09 1,200 1,257,894 Citigroup, Inc., Subordinated Notes 6.00% 10/31/33 685 726,566 Citigroup, Inc., Unsecured Notes 3.62% 02/09/09 3,655 3,543,815 4.12% 02/22/10 3,900 3,811,119 Depfa Bank PLC, Senior Notes 4.25% 08/16/10 3,900 3,835,943 Deutsche Bank AG, Deposit Notes 3.84%(d) 03/15/07 1,600 1,592,800 HBOS Treasury Services PLC, Senior Unsecured Notes 3.60%(e) 08/15/07 855 839,910 HBOS Treasury Services PLC, Unsecured Notes 3.50%(e) 11/30/07 1,630 1,593,676 HSBC Bank USA, Subordinated Notes 3.87% 06/07/07 5,575 5,521,580 The Huntington National Bank, Subordinated Bank Notes 2.75% 10/16/06 480 470,309 J.P. Morgan Chase & Co., Senior Unsecured Notes 5.25% 05/30/07 3,380 3,419,735 Lloyds TSB Bank PLC, Subordinated Notes 6.90% 11/29/49 2,000 2,062,698 National City Bank, Unsecured Notes 3.38% 10/15/07 185 181,850 The Royal Bank of Scotland Capital Trust 4.71%(d) 12/29/49 600 578,863 6.80% 12/31/49 1,000 1,022,574 Sumitomo Mitsui Banking Corp., Subordinated Notes 5.62%(d)(e) 12/31/49 875 872,034 SunTrust Bank, Inc., Senior Unsecured Notes 3.62% 10/15/07 1,540 1,511,033 Swedish Export Credit Corp., Unsecured Notes 2.88% 01/26/07 1,550 1,523,201 U.S. Bancorp., Senior Unsecured Notes 3.95% 08/23/07 335 331,298 U.S. Bank N.A., Senior Bank Notes 2.87% 02/01/07 1,040 1,015,362 2.40% 03/12/07 1,580 1,533,548 U.S. Bank N.A., Subordinated Notes 6.50% 02/01/08 2,420 2,518,436 Wachovia Bank N.A., Senior Bank Notes 4.38% 08/15/08 1,625 1,615,950 Wachovia Corp., Senior Notes 3.50% 08/15/08 1,165 1,130,177 Wells Fargo & Co., Senior Unsecured Notes 4.00% 08/15/08 1,105 1,087,596 4.20% 01/15/10 580 569,160 Wells Fargo & Co., Unsecured Notes 4.62% 08/09/10 2,115 2,103,619 ------------- 52,708,405 ------------- Broadcasting -- 0.2% News America, Inc., Senior Debentures 7.12% 04/08/28 300 326,819 7.62% 11/30/28 1,150 1,322,096 News America, Inc., Senior Unsecured Notes 6.20% 12/15/34 275 275,415 ------------- 1,924,330 ------------- See accompanying notes to financial statements. 90
BlackRock Funds SCHEDULE OF INVESTMENTS MANAGED INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Energy & Utilities -- 0.4% Dominion Resources, Inc., Unsecured Notes 5.95% 06/15/35 $ 250 $ 244,222 FirstEnergy Corp., Senior Unsecured Notes 7.38% 11/15/31 305 359,046 Florida Power & Light Co., First Mortgage Bonds 5.90% 03/01/33 175 181,076 4.95% 06/01/35 600 556,079 Florida Power Corp., First Mortgage Bonds 6.65% 07/15/11 960 1,041,492 TXU Corp., Senior Unsecured Notes 6.50% 11/15/24 1,000 936,779 ------------- 3,318,694 ------------- Entertainment & Leisure -- 0.6% Comcast Cable Communications Corp., Senior Unsecured Notes 6.38% 01/30/06 413 415,623 Comcast Cable Holdings LLC, Senior Debentures 7.88% 02/15/26 1,040 1,241,154 Comcast Corp., Unsecured Notes 5.65% 06/15/35 265 247,711 TCI Communications, Inc., Senior Notes 7.12% 02/15/28 620 695,324 Time Warner Cos., Inc., Senior Debentures 9.15% 02/01/23 535 692,295 7.57% 02/01/24 750 856,207 7.70% 05/01/32 760 900,820 ------------- 5,049,134 ------------- Finance -- 4.9% Associates Corp. of North America, Senior Notes 6.25%(h) 11/01/08 690 721,854 BAE Systems Holdings, Inc., Unsecured Notes 5.20%(e) 08/15/15 1,160 1,142,472 The Bear Stearns Cos., Inc., Unsecured Notes 2.88% 07/02/08 1,000 952,949 Berkshire Hathaway Finance Corp., Senior Unsecured Notes 3.38% 10/15/08 1,925 1,858,287 4.12% 01/15/10 1,260 1,233,301 California Preferred Fund Trust, Notes 7.00% 12/31/49 800 832,000 Eksportfinans ASA, Unsecured Notes 3.38% 01/15/08 3,770 3,684,628 General Electric Capital Corp., Unsecured Notes 3.45%(d) 01/15/08 10,250 10,272,140 4.12% 03/08-09/09 10,160 9,991,074 Household Finance Corp., Senior Unsecured Notes 6.50% 11/15/08 1,615 1,695,878 Lehman Brothers Holdings, Inc., Senior Unsecured Notes 7.00% 02/01/08 345 362,177 Nationwide Building Society, Senior Unsecured Notes 3.50%(e) 07/31/07 1,725 1,692,484 Nationwide Building Society, Unsecured Notes 4.25%(e) 02/01/10 90 88,145 Student Loan Marketing Corp., Senior Unsecured Notes 3.62% 03/17/08 3,155 3,083,883 USAA Capital Corp., Senior Unsecured Notes 4.00%(e) 12/10/07 920 908,897 ------------- 38,520,169 ------------- Insurance -- 1.8% Allstate Financial Global Funding, Unsecured Notes 5.25%(e) 02/01/07 1,150 1,157,134 ASIF Global Financing, Unsecured Notes 3.90%(e) 10/22/08 285 277,522 Liberty Mutual Group, Inc., Unsecured Notes 6.50%(e) 03/15/35 530 486,668 Marsh & McLennan Cos., Inc., Senior Unsecured Notes 5.75% 09/15/15 510 505,119 MetLife, Inc., Senior Unsecured Notes 6.38% 06/15/34 350 380,800 5.70% 06/15/35 500 495,740 Monumental Global Funding II, Unsecured Notes 2.80%(e) 07/15/08 2,480 2,382,715 New York Life Global Funding, Unsecured Notes 3.88%(e) 01/15/09 775 756,274 Protective Life Corp., Secured Notes 3.70% 11/24/08 990 961,627 Prudential Financial, Inc., Unsecured Notes 5.40% 06/13/35 650 615,953 Sun Life of Canada Capital Trust, Capital Securities 8.53%(e) 05/29/49 1,720 1,859,750 TIAA Global Markets, Senior Unsecured Notes 4.12%(e) 11/15/07 1,850 1,830,242 3.88%(e) 01/22/08 1,165 1,145,231 Wellpoint, Inc., Unsecured Notes 5.95% 12/15/34 675 703,728 XL Capital Ltd. (Kyrgyzstan), Senior Unsecured Notes 6.38% 11/15/24 260 265,912 ------------- 13,824,415 ------------- Manufacturing -- 0.1% Belvoir Land LLC Class II, Unsecured Notes 5.40%(e) 12/15/47 1,175 1,136,613 ------------- Medical & Medical Services -- 0.1% Wellpoint Health Network, Inc., Senior Unsecured Notes 6.38% 06/15/06 700 708,917 ------------- See accompanying notes to financial statements. 91
BlackRock Funds SCHEDULE OF INVESTMENTS MANAGED INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Metal & Mining -- 0.1% Noranda, Inc., Unsecured Notes 5.50% 06/15/17 $ 475 $ 457,880 ------------- Motor Vehicles -- 0.1% DaimlerChrysler AG, Senior Debentures 7.45% 03/01/27 870 946,681 DaimlerChrysler N.A. Holding Corp., Unsecured Notes 4.05% 06/04/08 150 145,662 General Motors Acceptance Corp., Unsecured Notes 5.11%(d) 09/23/08 75 69,491 ------------- 1,161,834 ------------- Oil & Gas -- 0.7% Anadarko Finance Co., Senior Unsecured Notes 7.50% 05/01/31 310 381,644 Consolidated Natural Gas Co., Senior Unsecured Notes 5.38% 11/01/06 1,850 1,864,263 Devon Energy Corp., Senior Debentures 7.95% 04/15/32 575 732,970 Devon Financing Corp., Senior Unsecured Notes 7.88% 09/30/31 60 75,557 Petro-Canada, Senior Unsecured Notes 5.95% 05/15/35 515 517,105 Texaco Capital, Inc., Debentures 8.88% 09/01/21 1,350 1,880,822 ------------- 5,452,361 ------------- Real Estate -- 0.4% EOP Operating LP, Senior Notes 7.25% 06/15/28 230 259,482 EOP Operating LP, Unsecured Notes 4.65% 10/01/10 255 251,147 ERP Operating LP, Senior Notes 7.12% 10/15/17 495 563,057 Pulte Homes, Inc., Senior Unsecured Notes 6.00% 02/15/35 280 253,950 The Rouse Co., Unsecured Notes 3.62% 03/15/09 1,615 1,509,612 ------------- 2,837,248 ------------- Retail Merchandising -- 0.2% Federated Department Stores, Senior Debentures 6.79% 07/15/27 320 341,558 May Department Stores Co., Debentures 7.88% 03/01/30 220 262,254 May Department Stores Co., Unsecured Notes 5.75% 07/15/14 655 664,851 ------------- 1,268,663 ------------- Telecommunications -- 1.5% AT&T Broadband Corp., Unsecured Notes 8.38% 03/15/13 700 828,218 BellSouth Telecommunications, Debentures 6.40%(c) 12/15/35 900 473,748 Continental Cablevision, Inc., Senior Notes 8.30% 05/15/06 2,640 2,700,517 Deutsche Telekom International Finance BV (Netherlands), Senior Unsecured Notes 8.75% 06/15/30 590 761,701 GTE Corp., Debentures 6.94% 04/15/28 150 163,973 New England Telephone & Telegraph Co., Debentures 7.88% 11/15/29 200 232,721 SBC Communications, Inc., Unsecured Notes 4.39%(e) 06/05/06 3,000 2,996,340 6.45% 06/15/34 435 459,143 6.15% 09/15/34 70 71,635 Sprint Capital Corp., Senior Unsecured Notes 8.75% 03/15/32 1,035 1,387,860 Verizon Global Funding Corp., Senior Unsecured Notes 7.75% 12/01/30 80 97,462 Verizon Global Funding Corp., Unsecured Notes 5.85% 09/15/35 675 663,827 Vodafone Group PLC, Senior Unsecured Notes 7.88% 02/15/30 660 840,581 Vodafone Group PLC, Unsecured Notes 5.00% 12/16/13 90 90,185 ------------- 11,767,911 ------------- Yankee -- 2.2% AID-Israel, Unsecured Notes 5.50%(i) 09/18/23 5,000 5,392,900 Japan Finance Corp. for Municipal Enterprises, Unsecured Notes 4.62%(i) 04/21/15 1,600 1,588,200 National L-Bank Landeskreditbank Baden-Wurttemberg (Germany), Unsecured Notes 4.25%(i) 09/15/10 2,800 2,757,020 Pemex Finance Ltd. (Luxembourg), Senior Unsecured Notes 9.03%(i) 02/15/11 3,505 3,879,299 Province of Quebec (Canada), Debentures 6.12%(i) 01/22/11 710 759,507 Suncor Energy, Inc. (Canada) 5.95%(i) 12/01/34 70 74,336 Teck Cominco Ltd. (Canada), Senior Unsecured Notes 6.12%(i) 10/01/35 475 465,798 Telecom Italia Capital (Luxembourg), Senior Unsecured Notes 4.95%(e)(i) 09/30/14 615 595,155 Telecom Italia Capital (Luxembourg), Unsecured Notes 6.00%(e)(i) 09/30/34 760 744,757 See accompanying notes to financial statements. 92
BlackRock Funds SCHEDULE OF INVESTMENTS MANAGED INCOME PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Yankee (Continued) Telefonica Europe BV (Netherlands), Senior Unsecured Notes 7.75%(i) 09/15/10 $ 475 $ 535,474 United Mexican States, Senior Unsecured Notes 6.75%(i) 09/27/34 725 772,125 ------------- 17,564,571 ------------- TOTAL CORPORATE BONDS (Cost $161,407,544) 161,649,183 ------------- FOREIGN BONDS -- 0.8% Bundesrepublic Deutschland (Germany) (EUR) 4.75% 07/04/34 925 1,343,900 4.00% 01/04/37 3,825 4,962,728 ------------- TOTAL FOREIGN BONDS (Cost $6,225,506) 6,306,628 ------------- TAXABLE MUNICIPAL BONDS -- 1.3% Connecticut State General Obligation, Series 04, Class B 5.00% 12/01/15 780 846,659 Los Angeles County Pension Obligation Revenue Bonds, Series 95, Class D 6.97% 06/30/08 7,355 7,797,624 Ohana Military Communities LLC, Military Housing Revenue Bonds (Navy Hawaii Housing Privatization Project) Series 04-A, Class 1 6.19% 04/01/49 750 818,287 University Maryland System Auxiliary Facility & Tuition Revenue Bonds, Series 05, Class A 5.00% 04/01/16 1,015 1,111,273 ------------- TOTAL TAXABLE MUNICIPAL BONDS (Cost $10,114,904) 10,573,843 ------------- Number of Shares ---------- SHORT TERM INVESTMENTS -- 0.0% Galileo Money Market Fund (Cost $118,039) 118,039 118,039 ------------- TOTAL INVESTMENTS IN SECURITIES -- 100.0% (Cost $787,166,035(a)) $ 788,834,894 ============= Number of Contracts Value ---------- ------------- CALL SWAPTIONS WRITTEN -- (0.3)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (960)(j)$ (460,416) Citibank, Strike Price 5.67, Expires 01/04/10 (1,000)(j) (686,287) Deutsche Bank, Strike Price 5.015, Expires 01/29/07 (877)(j) (325,630) Union Bank, Strike Price 4.725, Expires 06/13/07 (2,330)(j) (683,855) ------------- TOTAL CALL SWAPTIONS WRITTEN (2,156,188) (Premiums received $2,173,739) ------------- PUT SWAPTIONS WRITTEN -- (0.3)% Barclays Capital, Strike Price 5.135, Expires 04/21/08 (960)(j) (338,784) Citibank, Strike Price 5.67, Expires 01/04/10 (1,000)(j) (304,147) Deutsche Bank, Strike Price 5.015, Expires 01/29/07 (877)(j) (235,124) Union Bank, Strike Price 4.725, Expires 06/13/07 (2,330)(j) (970,678) ------------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $2,173,739) (1,848,733) ------------- - ---------- (a) Cost for Federal income tax purposes is $788,534,763. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 9,341,365 Gross unrealized depreciation (9,041,234) ------------- $ 300,131 ------------- (b) Securities valued at fair value as determined in good faith by or under the direction of the Trustees. These securities had a total market value of $561,070 which represents 0.008% of net assets. (c) Rates shown are the effective yields as of September 30, 2005. (d) Rates shown are the rates as of September 30, 2005. (e) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 4.1% of its net assets, with a current market value of $29,042,236, in securities restricted as to resale. (f) Securities, or a portion thereof, with a market value of $2,157,014 have been pledged as collateral for swap and swaption contracts. (g) Securities, or a portion thereof, subject to financing transactions. (h) Securities, or a portion thereof, pledged as collateral with a value of $2,050,009 on 133 long U.S. Treasury Note futures contracts, 1,330 short U.S. Treasury Note futures contracts, 169 short Euro Bobl futures contracts expiring December 2005. The value of such contracts on September 30, 2005 was $180,185,560, with an unrealized gain of $296,054 (including commissions of $3,020). (i) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (j) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 93
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES MANAGED INCOME PORTFOLIO September 30, 2005 ASSETS Investments at value (Cost $787,166,035)...................................... $ 788,834,894 Cash denominated in foreign currencies (Cost $6,765,559)...................... 6,760,530 Interest receivable .......................................................... 5,568,429 Principal receivable ......................................................... 135,493 Interest receivable on interest rate swaps ................................... 86,995 Investments sold receivable .................................................. 84,359,081 Capital shares sold receivable ............................................... 768,144 Prepaid expenses ............................................................. 36,671 Unrealized appreciation on forward foreign currency contracts 20,959 Unrealized appreciation on interest rate swaps ............................... 2,120,981 Futures margin receivable .................................................... 292,967 ------------- TOTAL ASSETS .............................................................. 888,985,144 ------------- LIABILITIES Investments purchased payable ................................................ 171,736,587 Capital shares redeemed payable .............................................. 311,973 Distributions payable ........................................................ 2,357,774 Advisory fees payable ........................................................ 258,755 Administrative fees payable .................................................. 55,560 Transfer agent fees payable .................................................. 36,756 Other accrued expenses payable ............................................... 137,209 Payable on closing swap ...................................................... 923,000 Payable for financing transactions ........................................... 706,852 Swaptions written, at fair value (Premiums received $4,347,478) 4,004,921 Futures margin payable ....................................................... 4,074 Futures sold payable ......................................................... 10 Unrealized depreciation on forward foreign currency contracts 1,112 Unrealized depreciation on interest rate swaps ............................... 2,778,661 -------------- TOTAL LIABILITIES ......................................................... 183,313,244 -------------- NET ASSETS (Applicable to 57,534,556 Institutional shares, 7,971,982 Service shares, 2,886,585 Investor A shares, 649,067 Investor B shares and 116,572 Investor C shares outstanding) ........................................ $ 705,671,900 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($587,061,246/57,534,556)............................. $ 10.20 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($81,337,118/7,971,982)..................................... $ 10.20 ============== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($29,462,396/2,886,585).................................. $ 10.21 ============== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.21/0.955)..................... $ 10.69 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($6,624,518/649,067)..................................... $ 10.21 ============== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($1,186,622/116,572)..................................... $ 10.18 ============== See accompanying notes to financial statements. 94
BlackRock Funds STATEMENT OF NET ASSETS INTERNATIONAL BOND PORTFOLIO As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- FOREIGN BONDS -- 65.6% Australia - 0.1% QBE Insurance Group Ltd., Senior Unsecured Bonds (GBP) 5.62% 09/28/09 $ 620 $ 1,120,499 ------------- Austria -- 1.6% Bank Austria Creditanstalt, Senior Unsecured Notes (GBP) 5.62% 07/12/11 3,490 6,461,588 Republic of Austria (EUR) 3.90% 10/20/05 5,850 7,058,044 ------------- 13,519,632 ------------- Belgium -- 0.6% Kingdom of Belgium (EUR) 3.75%(b) 03/28/09 4,250 5,324,349 ------------- Canada -- 5.9% Government of Canada Bonds (CND) 5.25% 06/01/12 30,000 28,072,979 4.50% 06/01/15 13,490 12,111,477 Province of Manitoba (NZD) 6.38% 09/01/15 11,780 8,052,983 Province of Ontario, Unsecured Notes (NZD) 6.25% 06/16/15 1,050 716,056 ------------- 48,953,495 ------------- Finland -- 2.3% Finnish Government Bonds (EUR) 3.00% 07/04/08 4,300 5,258,160 4.25% 07/04/15 10,385 13,718,122 ------------- 18,976,282 ------------- France -- 2.5% France Government Bonds (EUR) 5.75% 10/25/32 1,500 2,473,427 French Treasury Notes (EUR) 3.00% 07/08-01/10 11,050 13,504,639 Government of France, Treasury Inflation Protected Notes (EUR) 2.25% 07/25/20 2,650 3,789,014 Reseau Ferre de France, Unsecured Notes (GBP) 5.25% 12/07/28 435 837,448 ------------- 20,604,528 ------------- Germany -- 21.3% Bundesobligation (EUR) 3.50% 10/09/09 26,350 32,814,316 Bundesrepublic Deutschland (EUR) 4.25% 07/04/14 4,005 5,256,288 3.75% 01/04/15 11,365 14,391,675 6.25% 01/04/24 19,475 32,184,009 5.50% 01/04/31 3,420 5,424,124 4.75% 07/04/34 31,300 45,474,682 4.00% 01/04/37 3,930 5,098,960 Bundesschatzanweisungen Bonds (EUR) 2.00% 06/15/07 28,870 34,593,321 ------------- 175,237,375 ------------- Ireland -- 5.3% Depfa ACS Bank (JPY) 1.65% 12/20/16 3,030,000 26,779,196 Irish Treasury Notes (EUR) 3.25% 04/18/09 14,000 17,258,165 ------------- 44,037,361 ------------- Italy -- 4.6% Buoni Poliennali Del Tesoro (EUR) 5.00% 02/01/12 6,500 8,763,084 4.25% 02/01/15 22,150 28,799,033 ------------- 37,562,117 ------------- Japan -- 7.1% Development Bank of Japan (JPY) 1.60% 06/20/14 1,660,000 14,989,394 1.70% 09/20/22 401,000 3,466,908 Japan Finance Corp. (GBP) 5.75% 08/09/19 2,860 5,602,190 Japan Government Bonds (JPY) 1.90% 06/20/14 1,500,000 13,840,259 1.30% 03/20/15 1,850,000 16,145,796 Japan Government, Treasury Inflation Protected Notes (JPY) 0.50% 06/10/15 479,000 4,108,437 ------------- 58,152,984 ------------- Mexico -- 0.9% Mexican Fixed Rate Bonds (MXP) 9.00% 12/24/09 56,720 5,398,674 8.00% 12/13-12/23 10,380 923,913 9.50% 12/18/14 7,800 781,094 ------------- 7,103,681 ------------- Netherlands -- 1.5% Netherland Government Bonds (EUR) 5.75% 02/15/07 1,845 2,325,497 4.25% 07/15/13 7,400 9,683,621 ------------- 12,009,118 ------------- New Zealand -- 0.8% General Electric Capital Corp., Senior Unsubordinated Notes (NZD) 6.50% 09/28/15 5,945 4,020,139 New Zealand Government Bonds (NZD) 6.00% 12/15/17 3,775 2,639,618 ------------- 6,659,757 ------------- See accompanying notes to financial statements. 95
BlackRock Funds STATEMENT OF NET ASSETS INTERNATIONAL BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- FOREIGN BONDS (Continued) Poland -- 2.6% Poland Government Bonds (PLN) 6.00% 05/24/09 $ 50,415 $ 16,230,326 5.00% 10/24/13 16,425 5,149,845 ------------- 21,380,171 ------------- Portugal -- 0.5% Portugal Government Bonds (EUR) 4.38% 06/16/14 2,950 3,888,709 ------------- South Africa -- 0.2% Republic of South Africa (GBP) 9.38% 02/06/06 775 1,390,348 ------------- Spain -- 1.5% Bonos y Obligation del Estado (EUR) 6.00% 01/31/08 1,650 2,148,682 4.00% 01/31/10 700 890,413 5.75% 07/30/32 2,475 4,072,024 Kingdom of Spain (EUR) 5.00% 07/30/12 4,155 5,647,370 ------------- 12,758,489 ------------- Sweden -- 0.3% AB Spintab, Notes (EUR) 4.38% 04/20/09 1,780 2,257,432 ------------- United Kingdom -- 6.0% Aviva PLC, Subordinated Notes (EUR) 5.70% 06/29/49 630 866,667 BP Capital Markets PLC, Senior Unsecured Notes (GBP) 5.12% 12/07/08 1,345 2,423,265 Network Rail Infrastructure Finance (GBP) 4.88% 11/27/15 1,630 2,963,035 Royal Bank of Scotland PLC (GBP) 5.50%(c) 12/03/49 690 1,260,603 United Kingdom Treasury Bonds (GBP) 4.75% 06/10-09/15 9,840 17,979,619 8.00% 06/07/21 2,000 5,011,640 5.00% 03/07/25 1,600 3,092,042 United Kingdom Treasury Inflation Protected Gilt Stock (GBP) 6.05%(c) 05/20/09 3,544 15,636,581 ------------- 49,233,452 ------------- TOTAL FOREIGN BONDS (Cost $534,971,898) 540,169,779 ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 3.2% U.S. Treasury Bills 3.16%(d) 11/10/05 3,800 3,786,666 U.S. Treasury Notes 3.88%(d)(e) 07/15/10 4,455 4,387,306 4.12% 08/10-05/15 10,720 10,575,442 4.25% 08/15/15 7,310 7,264,313 ------------- TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS (Cost $26,165,989) 26,013,727 ------------- MORTGAGE PASS-THROUGHS -- 1.0% Federal Home Loan Mortgage Corp. ARM 4.64%(c) (Cost $7,550,897) 02/01/35 7,533 7,509,996 ------------- COLLATERALIZED MORTGAGE OBLIGATIONS -- 1 6% Bear Stearns Mortgage Trust, Series 04-13, Class A1 4.20%(c) 11/25/34 5,067 5,090,704 Countrywide Alternative Loan Trust, Series 05-56, Class 1A1 4.69%(c) 11/25/35 7,780 7,857,800 ------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (Cost $12,924,913) 12,948,504 ------------- COMMERCIAL MORTGAGE BACKED SECURITIES -- 5.4% Banc of America Commercial Mortgage, Inc., Series 01-1, Class A2 6.50% 04/15/36 3,690 3,954,208 Banc of America Commercial Mortgage, Inc., Series 04-5, Class A3 4.56% 11/10/41 2,470 2,435,272 Banc of America Commercial Mortgage, Inc., Series 05-1, Class A4 4.88%(c) 11/10/42 4,320 4,319,611 Bear Stearns Commercial Mortgage Securities, Inc., Series 04-PWR6, Class A6 4.82% 11/11/41 3,210 3,180,660 Commercial Mortgage Acceptance Corp., Series 98-C2, Class A2 6.03% 09/15/30 3,913 4,003,687 Credit Suisse First Boston Mortgage Securities Corp., Series 02-CP5, Class A2 4.94% 12/15/35 5,655 5,658,761 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc., Series 00-C2, Class A2 7.46% 08/16/33 1,890 2,074,742 Goldman Sachs Mortgage Securities Corp. II, Series 05-GG4, Class A4 4.76% 07/10/39 5,075 4,978,328 J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 01-C1, Class A3 5.87% 10/12/35 4,530 4,744,552 J.P. Morgan Chase Commercial Mortgage Security, Series 04-CBX, Class A4 4.53% 11/12/39 2,700 2,653,371 Lehman Brothers-UBS Commercial Mortgage Trust, Series 00-C4, Class A2 7.37% 08/15/26 1,800 1,978,981 Lehman Brothers-UBS Commercial Mortgage Trust, Series 04-C8, Class A4 4.51% 12/15/29 3,825 3,747,546 See accompanying notes to financial statements. 96
BlackRock Funds STATEMENT OF NET ASSETS INTERNATIONAL BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- COMMERCIAL MORTGAGE BACKED SECURITIES (Continued) Morgan Stanley Capital Investments, Series 99-FNV1, Class A2 6.53% 03/15/31 $ 685 $ 716,632 ------------- TOTAL COMMERCIAL MORTGAGE BACKED SECURITIES (Cost $45,161,471) 44,446,351 ------------- ASSET BACKED SECURITIES -- 3.1% Chase Issuance Trust, Series 04-A9, Class A9 3.22% 06/15/10 3,450 3,365,095 Citibank Credit Card Issuance Trust, Series 03-A6, Class A6 2.90%(e) 05/17/10 1,375 1,319,786 Citibank Credit Card Issuance Trust, Series 04-A4, Class A4 3.20%(c) 08/24/07 3,175 3,098,419 Ford Credit Auto Owner Trust, Series 05-C, Class A3 4.30% 08/15/09 6,300 6,299,861 Greenwich Capital Commercial Funding Corp., Series 04-GG1A, Class A4 4.76% 06/10/36 740 737,543 Student Loan Marketing Association Student Loan Trust, Series 99-3, Class A2 3.32%(c)(e) 07/25/12 698 700,108 Student Loan Marketing Association Student Loan Trust, Series 03-7 (GBP) 5.15% 09/15/39 1,280 2,331,925 Student Loan Marketing Association Student Loan Trust, Series 05-6, Class A2 3.64%(c) 07/25/16 7,225 7,218,180 ------------- TOTAL ASSET BACKED SECURITIES (Cost $25,076,900) 25,070,917 ------------- CORPORATE BONDS -- 0.3% Citigroup, Inc., Unsecured Bonds 2.24% 12/09/22 200,000 1,748,105 Pemex Project Funding Master Trust, Senior Unsecured Notes 5.75%(f) 12/15/15 480 475,200 ------------- TOTAL CORPORATE BONDS (Cost $2,433,157) 2,223,305 ------------- Par/Shares Maturity (000) Value ------------- ---------- ------------- SHORT TERM INVESTMENTS -- 20.1% French Discount Treasury Bills (EUR) 2.00% 10/20/05 $ 18,000 $ 21,671,688 Federal Home Loan Bank, Discount Notes 3.15%(g) 10/03/05 26,000 25,995,450 3.18%(g) 10/03/05 30,000 29,994,700 3.44%(g) 10/05/05 5,000 4,998,089 3.67%(g) 10/26/05 75,000 74,808,854 Galileo Money Market Fund 7,529 7,528,877 ------------- TOTAL SHORT TERM INVESTMENTS (Cost $165,567,192) 164,997,658 ------------- TOTAL INVESTMENTS IN SECURITIES -- 100.3% (Cost $819,852,417(a)) 823,380,237 Number of Contracts ---------- CALL SWAPTIONS WRITTEN -- (0.2)% Union Bank, Strike Price 4.725, Expires 06/13/07 (2,650)(h) (777,775) Warburg Dillon Read LLC, Strike Price 5.00, Expires 06/16/10 (1,230)(h) (564,816) ------------- TOTAL CALL SWAPTIONS WRITTEN (Premiums received $1,637,760) (1,342,591) ------------- PUT SWAPTIONS WRITTEN -- (0.2)% Union Bank, Strike Price 4.725, Expires 06/13/07 (2,650)(h) (1,103,990) Warburg Dillon Read LLC, Strike Price 5.00, Expires 06/16/10 (1,230)(h) (622,257) ------------- TOTAL PUT SWAPTIONS WRITTEN (Premiums received $1,637,760) (1,726,247) ------------- See accompanying notes to financial statements. 97
BlackRock Funds STATEMENT OF NET ASSETS INTERNATIONAL BOND PORTFOLIO (Concluded) As of September 30, 2005 Value ---------------- OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.0% $ 139,210 ---------------- NET ASSETS -- 100.0% (Applicable to 8,869,119 BlackRock shares, 31,148,729 Institutional shares, 9,639,197 Service shares, 16,364,811 Investor A shares, 1,768,153 Investor B shares and 5,868,796 Investor C shares outstanding) $ 820,450,609 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($98,721,284/8,869,119) $ 11.13 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($346,746,124/31,148,729) $ 11.13 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($107,401,769/9,639,197) $ 11.14 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($182,321,196/16,364,811) $ 11.14 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($11.14/.950) $ 11.73 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($19,705,481/1,768,153) $ 11.14 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR C SHARE ($65,554,755/5,868,796) $ 11.17 ================ - ---------- (a) Cost for Federal income tax purposes is $820,300,351. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 20,662,862 Gross unrealized depreciation (17,582,976) ---------------- $ 3,079,886 ================ (b) Security is illiquid. As of September 30, 2005, the Portfolio held 0.6% of its net assets, with a current market value of $5,324,349 in these securities. (c) Rates shown are the rates as of September 30, 2005. (d) Securities, or a portion thereof, with a market value of $5,012,748 have been pledged as collateral for swap and swaption contracts. (e) Securities, or a portion thereof, pledged as collateral with a value of $2,315,335 on 945 short U.S. Treasury Note futures contracts, 778 short Australian Treasury Bond futures contracts, 2 short Gilt British futures contracts, 117 short Canadian Bond futures contracts, 17 short Euro Bund futures contracts, 57 long Euro Bobl futures contracts, 13 long Japan Government Bond futures contracts expiring December 2005 and 156 short Canadian Bank Acceptance futures contracts expiring March 2006. The value of such contracts on September 30, 2005 was $332,328,334 with an unrealized gain of $1,081,622 (including commissions of $5,154). (f) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of June 30, 2005, the Portfolio held 0.1% of its net assets, with a current market value of $475,200 in securities restricted as to resale. (g) The rate shown is the effective yield on the discount notes at the time of purchase. (h) Each swaption contract is equivalent to $10,000 notional amount. See accompanying notes to financial statements. 98
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO As of September 30, 2005 Number of Shares Value ------------- ------------- COMMON STOCKS -- 0.3% American Tower Corp. - Class A(b) 475 $ 11,851 Freedom Pay, Inc.(b)(c) 314,534 3,146 HCI Direct, Inc., Class A(c)(d) 242,857 2,671,427 Mach Gen LLC(b)(d) 412 0 Mattress Discounters Corp.(b)(c)(d) 22,488 0 Phase Metrics, Inc.(b)(c) 842,908 16,858 Reunion Industries, Inc.(b) 8,341 1,835 ------------- TOTAL COMMON STOCKS (Cost $16,368,549) 2,705,117 ------------- PREFERRED STOCKS -- 0.0% Adelphia Business Solutions, Inc., Series B(b) 2,200 0 Paxson Communications Corp.(e) 18 126,259 ------------- TOTAL PREFERRED STOCKS (Cost $1,982,681) 126,259 ------------- WARRANTS -- 0.0% DIVA Systems Corp. (issued 02/19/98, expiring 03/01/08, strike price $.01)(b)(c)(f) 4,500 0 Mattress Discounters Co. (issued 08/03/99, expiring 07/15/07, strike price $.01)(b) 1,500 2 Ubiquitel, Inc. (issued 04/11/00 expiring 04/15/10, strike price $22.74)(b)(c)(f) 3,000 0 ------------- TOTAL WARRANTS (Cost $116,295) 2 ------------- Par Maturity (000) Value ------------- ----------- ------------- ASSET BACKED SECURITIES -- 0.1% Continental Airlines, Inc., Pass-Through Certificates, Series 99-1B 6.80% (Cost $1,354,391) 08/02/18 $ 1,608 1,367,091 ------------- CORPORATE BONDS -- 83.7% Aerospace -- 2.3% AAR Corp., Senior Unsecured Notes 6.88% 12/15/07 1,845 1,881,898 8.39%(f) 05/15/11 3,850 3,927,000 Amor Holdings, Inc., Senior Subordinated Notes 8.25% 08/15/13 2,200 2,370,500 BE Aerospace, Inc., Senior Notes 8.50% 10/01/10 3,825 4,159,687 BE Aerospace, Inc., Senior Subordinated Notes 8.88% 05/01/11 4,565 4,787,544 Sequa Corp., Senior Unsecured Notes 8.88% 04/01/08 1,390 1,452,550 9.00% 08/01/09 595 632,188 Standard Aero Holdings, Inc., Senior Subordinated Notes 8.25% 09/01/14 4,555 4,406,962 ------------- 23,618,329 ------------- Broadcasting -- 5.0% Adelphia Communications Corp., Senior Notes 0.13%(b)(g) 12/31/49 1,500 1,425,000 10.50%(b)(g) 12/31/49 2,000 1,500,000 Adelphia Communications Corp., Senior Unsecured Notes 12.74%(b)(g) 10/01/10 5,950 4,492,250 Allbritton Communications Co., Senior Subordinated Notes 7.75% 12/15/12 2,510 2,491,175 Cablevision Systems Corp., Senior Unsecured Notes 7.89%(h) 04/01/09 3,855 3,951,375 Charter Communications Holdings LLC, Senior Unsecured Notes 8.00%(f) 04/30/12 1,825 1,834,125 Charter Communications Holdings LLC, Unsecured Notes 10.25% 09/15/10 3,360 3,452,400 Charter Communications, Inc., Senior Unsecured Notes 5.88%(f) 11/16/09 6,295 5,196,774 Charter I Communications Holdings, Inc., LLC, Company Guarantee 11.12%(f)(i) 01/15/14 2,415 1,956,150 17.15%(i) 01/01/15 9,850 6,254,750 DirecTV Holdings LLC, Senior Unsecured Notes 6.38%(f) 06/15/15 1,265 1,246,025 Echostar DBS Corp., Senior Unsecured Notes 6.75%(h) 10/01/08 1,585 1,612,737 Fisher Communications, Inc., Senior Unsecured Notes 8.62% 09/15/14 1,145 1,222,288 Nexstar Finance Holdings LLC, Inc., Senior Unsecured Notes 11.74%(i) 04/01/13 920 680,800 Paxson Communications Corp., Senior Subordinated Notes 11.37%(i) 01/15/09 2,935 2,846,950 Rainbow National Services LLC, Senior Subordinated Notes 10.38% 09/01/14 6,895 7,756,875 Rogers Cable, Inc., Senior Secured Notes 6.75% 03/15/15 640 646,400 Young Broadcasting, Inc., Senior Subordinated Notes 10.00%(j) 03/01/11 3,020 2,853,900 ------------- 51,419,974 ------------- Business Services -- 3.4% Crystal U.S. Holdings, Senior Unsecured Notes 9.08%(i) 10/01/14 3,190 2,233,000 DI Finance/Dyncorp International, Senior Subordinated Notes 9.50%(f) 02/15/13 7,885 8,200,400 Knowledge Learning CTR, Senior Subordinated Notes 7.75%(f) 02/01/15 5,250 5,118,750 See accompanying notes to financial statements. 99
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Business Services (Continued) Newpage Corp., Senior Secured Notes 9.94%(h) 05/01/12 $ 1,175 $ 1,110,375 Newpage Corp., Senior Secured Notes 10.00%(j) 05/01/12 7,335 6,913,238 Rent-A-Center, Senior Subordinated Notes 7.50% 05/01/10 925 879,906 Service Corp. International, Senior Unsecured Notes 7.70% 04/15/09 3,050 3,202,500 UGS Corp., Senior Subordinated Notes 10.00% 06/01/12 2,590 2,836,050 United Rentals N.A., Inc., Senior Subordinated Notes 7.00%(j) 02/15/14 1,395 1,290,375 1.88%(j) 10/15/23 1,760 1,863,400 Xerox Corp., Senior Unsecured Notes 7.62% 06/15/13 650 690,625 ------------- 34,338,619 ------------- Chemicals -- 3.9% Airgas, Inc., Senior Subordinated Notes 9.12% 10/01/11 1,240 1,336,100 Airgas, Inc., Senior Unsecured Notes 6.25% 07/15/14 614 623,210 BCI US Finance Borden 2, Senior Secured Notes 9.10%(f)(h) 07/15/10 1,120 1,131,200 BCP Crystal U.S. Holdings Corp., Senior Subordinated Notes 9.62% 06/15/14 2,607 2,913,322 Equistar Chemical/Funding, Senior Unsecured Notes 10.12% 09/01/08 3,725 4,023,000 10.62% 05/01/11 1,635 1,782,150 Equistar Chemicals LP, Senior Unsecured Notes 8.75% 02/15/09 1,215 1,263,600 Huntsman Advance Materials, Senior Secured Notes 11.00% 07/15/10 2,025 2,268,000 Huntsman LLC, Senior Secured Notes 11.62% 10/15/10 1,971 2,251,868 Huntsman LLC, Senior Unsecured Notes 11.50% 07/15/12 1,114 1,272,745 IMC Global, Inc., Senior Unsecured Notes 10.88% 06/01/08 1,505 1,700,650 IMC Global, Inc., Senior Notes 10.88% 08/01/13 1,430 1,687,400 Innophos, Inc., Senior Subordinated Notes 8.88%(f) 08/15/14 4,625 4,729,062 Lyondell Chemical Co., Senior Secured Notes 9.62% 05/01/07 2,325 2,441,250 11.12% 07/15/12 1,120 1,257,200 Nalco Co., Senior Subordinated Notes 8.88% 11/15/13 3,790 3,884,750 Nova Chemicals Corp., Senior Unsecured Notes 6.50% 01/15/12 490 480,200 PQ Corp., Senior Subordinated Notes 7.50%(f) 02/15/13 1,195 1,162,138 Rhodia SA, Senior Notes 10.25%(j) 06/01/10 2,165 2,289,488 Rockwood Specialties Group, Inc., Senior Subordinated Notes 10.62% 05/15/11 1,094 1,192,460 ------------- 39,689,793 ------------- Computer Software & Services -- 1.3% NDC Health Corp., Senior Subordinated Notes 10.50% 12/01/12 2,930 3,354,850 Sungard Data Systems, Inc., Senior Unsecured Notes 8.52%(f)(h) 08/15/13 1,070 1,107,450 9.12%(f) 08/15/13 3,645 3,777,131 Xerox Corp., Debentures 7.20% 04/01/16 2,135 2,327,150 Xerox Corp., Senior Notes 6.88% 08/15/11 2,690 2,811,050 ------------- 13,377,631 ------------- Construction -- 2.8% Ahern Rentals, Inc., Senior Secured Notes 9.25%(f) 08/15/13 4,075 4,166,688 Ainsworth Lumber Co. Ltd., Senior Unsecured Notes 7.77%(h) 10/01/10 3,800 3,790,500 Beazer Homes USA, Inc., Senior Unsecured Notes 8.62% 05/15/11 580 610,450 Compression Polymers Holdings, Senior Unsecured Notes 10.50%(f) 07/01/13 2,450 2,272,375 D.R. Horton, Inc., Senior Unsecured Notes 6.88% 05/01/13 1,300 1,371,500 K. Hovnanian Enterprises, Inc., Senior Unsecured Notes 10.50% 10/01/07 2,000 2,180,000 North American Energy Partners, Inc., Senior Secured Notes 9.00% 06/01/10 6,700 6,968,000 North American Energy Partners, Inc., Senior Unsecured Notes 8.75% 12/01/11 4,070 3,876,675 NVR, Inc., Senior Unsecured Notes 5.00% 06/15/10 1,605 1,572,900 Texas Industries, Inc., Senior Unsecured Notes 7.25%(f) 07/15/13 1,500 1,571,250 ------------- 28,380,338 ------------- See accompanying notes to financial statements. 100
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Containers -- 0.7% Ball Corp., Senior Unsecured Notes 6.88% 12/15/12 $ 575 $ 586,500 Concentra Operating Corp., Senior Subordinated Notes 9.12% 06/01/12 2,145 2,241,525 Crown Holdings, Inc., Debentures 8.00% 04/15/23 1,195 1,159,150 Crown Holdings, Inc., Senior Debentures 7.38% 12/15/26 920 874,000 Crown Holdings, Inc., Senior Secured Notes 9.50% 03/01/11 585 640,575 Pliant Corp., Senior Secured Notes 11.62%(f) 06/15/09 1,328 1,407,187 ------------- 6,908,937 ------------- Electronics -- 0.9% Amkor Technology, Inc., Senior Unsecured Notes 9.25%(j) 02/15/08 2,540 2,381,250 Celestica, Inc., Senior Subordinated Notes 7.62% 07/01/13 1,700 1,689,375 Condor Systems, Inc., Senior Subordinated Notes, Series B 11.88%(b)(g) 05/01/09 1,500 0 Flextronics International Ltd., Senior Subordinated Notes 6.50% 05/15/13 4,135 4,217,700 Stats Chippac LTD, Senior Unsecured Notes 7.50% 07/19/10 430 434,300 ------------- 8,722,625 ------------- Energy & Utilities -- 9.9% AES Eastern Energy LP, Pass-Through Certificates 9.00% 01/02/17 3,487 4,071,021 AES Eastern Energy, Pass Through Certificates, Series 99-B 9.67% 01/02/29 500 625,000 AES Ironwood LLC, Senior Secured Notes 8.86% 11/30/25 3,988 4,545,966 AES Red Oak LLC, Senior Secured Notes 8.54% 11/30/19 2,974 3,331,018 Calpine Generating Co., Unsecured Notes 11.50%(j) 04/01/11 2,300 2,116,000 CE Generation LLC, Senior Notes 7.42% 12/15/18 6,459 6,862,172 Centerpoint Energy, Inc., Senior Unsecured Notes 7.25% 09/01/10 505 548,286 CMS Energy Corp., Senior Notes 7.50% 01/15/09 740 775,150 CMS Energy Corp., Senior Unsecured Notes 9.88% 10/15/07 2,285 2,484,937 Colorado Interstate Gas, Senior Unsecured Notes 5.95%(f) 03/15/15 725 705,969 El Paso Corp., Senior Debentures 10.75% 10/01/10 390 438,750 Elwood Energy LLC, Senior Secured Notes 8.16% 07/05/26 11,405 12,659,453 FPL Energy National Wind, Senior Secured Notes 6.12%(f) 03/25/19 628 625,025 Homer City Funding LLC, Senior Secured Notes 8.73% 10/01/26 1,690 2,006,839 Massey Energy Co., Senior Unsecured Notes 2.25% 04/01/24 1,270 2,102,828 Midwest Generation LLC, Pass-Through Certificates 8.30% 07/02/09 165 173,250 8.56% 01/02/16 4,523 4,974,836 Midwest Generation LLC, Senior Secured Notes 8.75% 05/01/34 815 907,706 Mirant Americas Generation, LLC, Senior Unsecured Notes 7.62%(b)(g) 05/01/06 1,155 1,155,000 Mirant Corp., Senior Unsecured Notes 5.75%(b)(c)(g)(h) 07/15/07 900 956,250 7.90%(b)(f)(g)(j) 07/15/09 1,240 1,506,600 7.40%(b)(f)(g)(j) 07/15/49 3,270 3,940,350 Mirant Mid-Atlantic LLC, Pass-Through Certificates 8.62%(c) 06/30/12 6,418 6,834,793 Mission Energy Holding Co., Senior Secured Notes 13.50% 07/15/08 8,515 9,994,481 Northwestern Corp., Notes 5.88% 11/01/14 2,320 2,369,300 Orion Power Holdings, Inc., Senior Unsecured Notes 12.00% 05/01/10 7,850 9,439,625 Reliant Energy, Inc., Senior Secured Notes 9.25% 07/15/10 1,065 1,155,525 6.75% 12/15/14 385 376,337 Sithe Independence Funding Corp., Notes 9.00%(i) 12/30/13 1,535 1,674,700 Tenaska Alabama Partners LP, Senior Secured Notes 7.00%(f) 06/30/21 4,625 4,722,449 Transcontinental Gas Pipe Line Corp., Senior Notes 8.88% 07/15/12 3,645 4,264,650 TXU Corp., Senior Unsecured Notes 4.80% 11/15/09 925 891,244 6.50% 11/15/24 715 669,797 TXU Corp., Senior Unsecured Notes, Series P 5.55% 11/15/14 650 617,063 TXU Corp., Senior Unsecured Notes, Series R 6.55% 11/15/34 880 816,730 ------------- 101,339,100 ------------- See accompanying notes to financial statements. 101
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Entertainment & Leisure -- 4.3% Choctaw Resort Development Enterprise, Senior Unsecured Notes 7.25%(f) 11/15/19 $ 540 $ 542,700 Cinemark, Inc., Senior Unsecured Notes 9.75%(h)(i)(k) 03/15/14 755 528,500 CSC Holdings, Inc., Senior Unsecured Notes 8.12% 07/15/09 450 453,375 K2, Inc., Senior Unsecured Notes 7.38% 07/01/14 1,420 1,420,000 Lazydays RV Center, Inc., Senior Notes 11.75% 05/15/12 4,205 4,462,556 Mashantucket West Pequot, Notes 5.91%(f) 09/01/21 500 502,890 MGM Mirage, Inc., Senior Notes 6.00% 10/01/09 3,820 3,772,250 MGM Mirage, Inc., Senior Unsecured Notes 6.75% 09/01/12 825 831,187 Mohegan Tribal Gaming Authority, Senior Unsecured Notes 6.12% 02/15/13 1,790 1,778,812 Penn National Gaming, Inc., Senior Subordinated Notes 6.75% 03/01/15 770 758,450 Riddell Bell Holdings, Inc., Senior Subordinated Notes 8.38% 10/01/12 2,235 2,240,588 San Pasqual Casino, Senior Unsecured Notes 8.00%(f) 09/15/13 2,030 2,040,150 Seneca Gaming Corp., Senior Unsecured Notes 7.25%(f) 05/01/12 7,170 7,338,500 Station Casinos, Inc., Senior Notes 6.00% 04/01/12 1,450 1,448,188 Universal City Florida Holding Co., Senior Unsecured Notes 8.44%(h) 05/01/10 5,200 5,408,000 Virgin River Casino Corp., Senior Secured Notes 9.00%(f) 01/15/12 2,930 3,047,200 Waterford Gaming LLC, Senior Unsecured Notes 8.62%(f) 09/15/12 3,318 3,517,080 WMG Holdings Corp., Senior Discount Notes 8.88%(i) 12/15/14 2,455 1,718,500 Wynn Las Vegas LLC, First Mortgage Notes 6.62% 12/01/14 1,780 1,695,450 ------------- 43,504,376 ------------- Finance -- 4.3% ALH Finance Corp., Senior Subordinated Notes 8.50% 01/15/13 630 600,075 Ameriserve Finance Trust, Senior Secured Notes 12.00%(b)(c)(f)(g)(j) 09/15/06 500 25,000 Arch Western Finance, Senior Notes 6.75%(h) 07/01/13 1,575 1,606,500 Borden US / Nova Scotia Finance, Senior Secured Notes 9.00%(f) 07/15/14 1,715 1,766,450 Calpine Canada Energy Finance ULC, Senior Unsecured Notes 8.50%(j) 05/01/08 12,005 7,263,025 Capital Guardian Ltd., Subordinated Bonds 11.45%(f) 05/24/13 1,000 1,043,100 Crown European Holdings SA, Senior Secured Notes 10.88% 03/01/13 2,090 2,424,400 Ford Motor Credit Co., Unsecured Notes 5.70%(j) 01/15/10 11,820 10,737,418 Hilcorp Energy/Finance, Senior Notes 10.50%(f) 09/01/10 4,935 5,428,500 Jason, Inc., Second Lien Notes Certificates 15.00%(c)(d)(e)(h) 12/15/07 1,590 1,590,425 K&F Acquisition, Inc., Senior Subordinated Notes 7.75% 11/15/14 2,115 2,146,725 Nell Af Sarl, Senior Unsecured Notes 8.38%(j) 08/15/15 3,340 3,264,850 Poster Financial Group, Inc., Senior Secured Notes 8.75% 12/01/11 1,780 1,831,175 Salton Sea Funding, Senior Secured Notes 7.48% 11/30/18 1,049 1,146,427 Vanguard Health Holdings II, Senior Subordinated Notes 9.00% 10/01/14 2,495 2,669,650 Zais Investment Grade Ltd., Secured Notes 9.95%(e)(f) 09/23/14 1,275 127,476 ------------- 43,671,196 ------------- Food & Agriculture -- 0.9% B&G Foods Holding Corp., Senior Notes 8.00% 10/01/11 2,170 2,197,125 Gold Kist, Inc., Senior Notes 10.25% 03/15/14 1,946 2,198,980 Merisant Co., Senior Subordinated Notes 10.75%(f)(h)(j) 07/15/13 4,620 3,141,600 Nebco Evans Holding Co., Senior Notes 17.25%(b)(c)(d)(g)(i) 07/15/07 800 0 Smithfield Foods, Inc., Senior Unsecured Notes 7.00% 08/01/11 1,190 1,213,800 ------------- 8,751,505 ------------- Insurance -- 0.8% Coventry Health Care, Inc., Senior Unsecured Notes 5.88% 01/15/12 990 1,012,275 6.12% 01/15/15 990 1,019,700 Crum & Forster Holdings Corp., Senior Notes 10.38% 06/15/13 2,160 2,359,800 See accompanying notes to financial statements. 102
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Insurance (Continued) Fairfax Financial Holdings Ltd., Debenture Notes 8.30% 04/15/26 $ 530 $ 463,750 Fairfax Financial Holdings Ltd., Senior Notes 6.88%(j) 04/15/08 665 666,663 Fairfax Financial Holdings Ltd., Senior Unsecured Notes 7.75% 04/26/12 1,010 969,600 First Mercury Holdings, Senior Unsecured Notes 11.80%(f)(h) 08/15/12 1,800 1,799,406 ------------- 8,291,194 ------------- Leasing -- 0.4% United Rentals N.A., Inc., Senior Subordinated Notes 7.75%(j) 11/15/13 4,015 3,874,475 ------------- Machinery & Heavy Equipment -- 0.3% Chart Industries, Inc., Senior Subordinated Notes 9.12%(f) 10/15/15 1,050 1,050,000 JLG Industries, Inc., Senior Subordinated Notes 8.38%(j) 06/15/12 2,315 2,453,900 ------------- 3,503,900 ------------- Manufacturing -- 5.3% Accuride Corp., Senior Subordinated Notes 8.50% 02/01/15 3,775 3,699,500 Argo Tech Corp., Senior Unsecured Notes 9.25% 06/01/11 1,625 1,714,375 Blount International, Inc., Senior Subordinated Notes 8.88% 08/01/12 4,050 4,313,250 California Steel Industries, Inc., Senior Unsecured Notes 6.12% 03/15/14 1,990 1,870,600 Delco Remy International, Inc., Senior Secured Notes 7.60%(h) 04/15/09 1,185 1,146,487 Erico International Corp., Senior Subordinated Notes 8.88% 03/01/12 4,405 4,526,138 General Cable Corp., Senior Unsecured Notes 9.50% 11/15/10 3,230 3,407,650 Gentek, Inc., Escrow Bonds 0.00%(l) 12/01/33 1,000 0 Goodman Global Holdings, Senior Subordinated Notes 7.88%(f)(j) 12/15/12 3,960 3,583,800 Goodman Global Holdings, Senior Unsecured Notes 6.41%(f)(h) 06/15/12 1,160 1,125,200 Graham Packaging Co., Senior Subordinated Notes 9.88%(j) 10/15/14 2,465 2,366,400 Ispat Inland ULC, Senior Secured Notes 9.75% 04/01/14 5,449 6,320,840 Metaldyne Corp., Senior Unsecured Notes 11.00%(f)(h)(j) 11/01/13 3,200 2,784,000 Navistar International Corp., Senior Unsecured Notes 6.25% 03/01/12 6,115 5,809,250 Norcross Safety Products LLC, Senior Subordinated Notes 9.88% 08/15/11 3,350 3,592,875 Park-Ohio Industries, Inc., Senior Subordinated Notes 8.38% 11/15/14 4,120 3,574,100 Quiksilver, Inc., Senior Unsecured Notes 6.88%(f) 04/15/15 100 96,500 Russell Metals, Inc., Senior Subordinated Notes 6.38% 03/01/14 1,415 1,372,550 Stanadyne Corp., Senior Subordinated Notes 10.00% 08/15/14 2,415 2,390,850 ------------- 53,694,365 ------------- Medical & Medical Services -- 1.6% Bio-Rad Laboratories, Inc., Senior Subordinated Notes 7.50% 08/15/13 2,820 2,982,150 Duloxetine Royalty, Senior Secured Notes 13.00% 10/15/13 2,500 2,500,000 HCA, Inc., Unsecured Notes 5.50% 12/01/09 3,350 3,285,881 6.75% 07/15/13 730 745,016 Select Medical Corp., Senior Unsecured Notes 9.93%(f)(h) 09/15/15 3,960 3,940,200 U.S. Oncology, Inc., Senior Unsecured Notes 9.00% 08/15/12 2,425 2,619,000 ------------- 16,072,247 ------------- Medical Instruments & Supplies -- 1.5% Insight Health Services, Notes 9.15%(f)(h) 11/01/11 4,225 4,119,375 National Nephrology Associates, Senior Subordinated Notes 9.00%(f) 11/01/11 2,645 2,942,563 Perkinelmer, Inc., Senior Subordinated Notes 8.88% 01/15/13 3,235 3,550,412 Universal Hospital Services, Inc., Senior Notes 10.12% 11/01/11 4,525 4,649,438 ------------- 15,261,788 ------------- Metal & Mining -- 2.4% Alpha Natural Resources, Senior Unsecured Notes 10.00% 06/01/12 3,395 3,768,450 Century Aluminum Co., Senior Unsecured Notes 7.50% 08/15/14 2,605 2,683,150 See accompanying notes to financial statements. 103
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Metal & Mining (Continued) Foundation PA Coal Co., Senior Unsecured Notes 7.25% 08/01/14 $ 3,225 $ 3,370,125 Ipsco, Inc., Senior Notes 8.75% 06/01/13 4,800 5,304,000 Plains E&P Co., Senior Unsecured Notes 7.12% 06/15/14 450 474,750 Southern Peru Copper Corp., Senior Unsecured Notes 6.38%(f) 07/27/15 1,575 1,568,810 7.50%(f) 07/27/35 3,100 3,022,500 TRIMAS Corp., Senior Subordinated Notes 9.88% 06/15/12 4,890 4,034,250 ------------- 24,226,035 ------------- Motor Vehicles -- 1.8% Arvinmeritor, Inc., Senior Notes 6.80% 02/15/09 465 444,075 Arvinmeritor, Inc., Senior Unsecured Notes 8.75% 03/01/12 360 354,600 Delco Remy International, Inc., Senior Subordinated Notes 9.38%(c)(f) 04/15/12 700 392,000 Eagle-Picher, Inc., Senior Notes 9.75%(b)(g)(j) 09/01/13 3,285 2,430,900 Holley Performance Products, Senior Unsecured Notes 12.25%(j) 09/15/07 6,025 5,302,000 Nationsrent, Inc., Senior Unsecured Notes 9.50% 05/01/15 3,750 3,900,000 Sunstate Equipment Co. LLC, Senior Secured Notes 10.50%(f) 04/01/13 5,000 5,131,250 ------------- 17,954,825 ------------- Oil & Gas -- 8.6% ANR Pipeline Co., Senior Debentures 9.62% 11/01/21 3,515 4,341,025 Chesapeake Energy Corp., Senior Unsecured Notes 7.00% 08/15/14 415 437,825 6.38% 06/15/15 2,080 2,093,000 6.88% 01/15/16 2,200 2,255,000 Chesapeake Energy Corp., Senior Unsecured Notes 6.25% 01/15/18 1,975 1,935,500 Citgo Petroleum Corp., Senior Unsecured Notes 6.00% 10/15/11 1,330 1,330,000 Compton Petroleum Corp., Senior Unsecured Notes 9.90% 05/15/09 3,000 3,210,000 Dynegy Holdings, Inc., Secured Notes 10.12%(f) 07/15/13 5,040 5,619,600 Dynegy Holdings, Inc., Senior Secured Notes 9.88%(f) 07/15/10 490 533,487 Dynegy-Roseton Danskammer LLC, Pass-Through Certificates 7.27% 11/08/10 2,785 2,764,112 El Paso CGP Co., Senior Debentures 9.62% 05/15/12 3,285 3,629,925 El Paso CGP Co., Senior Unsecured Notes 7.62%(f)(h) 08/16/07 2,175 2,221,219 06/15/10- 7.75% 10/15/35 2,550 2,481,000 7.42% 02/15/37 2,190 2,014,800 El Paso Natural Gas Co., Senior Notes 7.62% 08/01/10 1,290 1,341,308 El Paso Natural Gas Co., Senior Unsecured Notes 8.38%(h) 06/15/32 340 388,875 Exco Resources, Inc., Senior Secured Notes 7.25% 01/15/11 3,605 3,731,175 Frontier Oil Corp., Senior Unsecured Notes 6.62% 10/01/11 4,415 4,547,450 KCS Energy, Inc., Senior Unsecured Notes 7.12%(f) 04/01/12 4,725 4,843,125 Newfield Exploration Co., Senior Subordinated Notes 8.38% 08/15/12 420 453,600 6.62% 09/01/14 250 260,000 Northwest Pipeline Corp., Senior Notes 6.62% 12/01/07 500 512,500 Ocean Rig Norway AS, Senior Secured Notes 8.38%(f) 07/01/13 960 1,039,200 Pacific Energy Partners, Senior Unsecured Notes 6.25%(f) 09/15/15 830 835,188 Pogo Producing Co., Senior Subordinated Notes 6.88%(f) 10/01/17 2,225 2,255,594 The Premcor Refining Group, Inc., Senior Notes 6.75% 05/01/14 2,500 2,668,750 7.50% 06/15/15 1,195 1,290,600 Pride International, Inc., Senior Unsecured Notes 7.38% 07/15/14 1,190 1,285,200 Range Resources Corp., Senior Subordinated Notes 7.38% 07/15/13 2,325 2,464,500 6.38% 03/15/15 430 432,150 Tennessee Gas Pipeline, Senior Unsecured Notes 8.38% 06/15/32 1,565 1,797,794 Transcontinental Gas Pipeline Corp., Senior Debentures 7.25% 12/01/26 2,515 2,738,206 Utilicorp Canada Finance, Senior Unsecured Notes 7.75% 06/15/11 6,780 7,135,950 See accompanying notes to financial statements. 104
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Oil & Gas (Continued) Whiting Petroleum Corp., Senior Subordinated Notes 05/01/12- 7.25% 05/01/13 $ 2,355 $ 2,388,388 7.00%(f) 02/01/14 2,500 2,531,250 The Williams Cos., Inc., Certificates of Participation 7.75%(f) 08/01/13 2,360 2,318,700 The Williams Cos., Inc., Credit Link Certificates 6.75%(f) 04/15/09 2,800 2,866,500 The Williams Cos., Inc., Senior Unsecured Notes 5.89%(f)(h) 10/01/10 2,110 2,099,450 7.62% 07/15/19 500 542,500 7.75% 06/15/31 325 351,812 ------------- 87,986,258 ------------- Paper & Forest Products -- 2.2% Bowater Canada Finance Corp., Senior Unsecured Notes 7.95% 11/15/11 4,075 4,105,563 Bowater, Inc., Senior Unsecured Notes 6.87%(h) 03/15/10 510 507,450 Caraustar Industries, Inc., Senior Subordinated Notes 9.88% 04/01/11 7,590 7,599,488 Cascades, Inc., Unsecured Notes 7.25% 02/15/13 2,275 2,223,812 Donohue Forest Products, Senior Notes 7.62% 05/15/07 1,515 1,568,025 Georgia-Pacific Corp., Debentures 7.70% 06/15/15 900 993,375 Georgia-Pacific Corp., Senior Notes 7.38% 07/15/08 2,500 2,634,375 Georgia-Pacific Corp., Senior Unsecured Notes 8.00% 01/15/24 425 468,031 Norske Skog Canada Ltd., Senior Unsecured Notes 7.38% 03/01/14 1,480 1,406,000 Pliant Corp., Senior Secured Notes 11.12%(j) 09/01/09 640 550,400 ------------- 22,056,519 ------------- Pharmaceuticals -- 0.8% Curative Health Services, Senior Unsecured Notes 10.75%(j) 05/01/11 4,115 2,633,600 Elan Finance Corp., Unsecured Notes 7.75%(f) 11/15/11 6,000 5,287,500 Elan Finance Corp., Unsecured Notes 7.79%(f)(h) 11/15/11 510 446,888 ------------- 8,367,988 ------------- Plastics -- 0.0% Graham Packaging Co., Senior Unsecured Notes 8.50% 10/15/12 385 377,300 ------------- Publishing & Printing -- 1.9% American Media Operation, Inc., Senior Subordinated Notes, Series B 10.25% 05/01/09 3,330 3,246,750 Dex Media West/Finance, Senior Subordinated Notes 9.88% 08/15/13 2,298 2,536,418 Nextmedia Operating, Inc., Senior Subordinated Notes 10.75% 07/01/11 1,960 2,097,200 Primedia, Inc., Senior Notes 7.62% 04/01/08 824 832,240 Primedia, Inc., Senior Unsecured Notes 9.16%(h) 05/15/10 1,300 1,365,000 8.00% 05/15/13 1,000 1,007,500 Quebecor Media, Inc., Senior Unsecured Notes 11.12% 07/15/11 1,075 1,175,781 Vertis, Inc., Senior Notes 13.50%(j) 12/07/09 5,075 4,212,250 Vertis, Inc., Senior Unsecured Notes 10.88%(j) 06/15/09 2,585 2,546,225 ------------- 19,019,364 ------------- Real Estate -- 0.9% AMR Real Estate, Senior Unsecured Notes 8.12% 06/01/12 3,075 3,244,125 7.12%(f) 02/15/13 3,225 3,225,000 La Quinta Properties, Inc., Senior Notes 8.88% 03/15/11 520 556,400 Ventas Realty L.P., Senior Unsecured Notes 6.75%(f) 06/01/10 2,360 2,407,200 ------------- 9,432,725 ------------- Retail Merchandising -- 2.2% AutoNation, Inc., Senior Unsecured Notes 9.00% 08/01/08 1,600 1,728,000 Duane Reade, Inc., Senior Secured Notes 8.37%(h) 12/15/10 800 764,000 Finlay Fine Jewelry Corp., Senior Unsecured Notes 8.38% 06/01/12 5,080 4,298,950 GSC Holdings Corp., Senior Unsecured Notes 7.88%(f)(h) 10/01/11 460 461,150 8.00%(f) 10/01/12 650 646,750 Movie Gallery, Inc., Senior Unsecured Notes 11.00%(j) 05/01/12 6,540 5,836,950 Neiman Marcus Group, Inc., Senior Unsecured Notes 9.00%(f) 10/15/15 1,926 1,926,000 Rite Aid Corp., Senior Unsecured Notes 6.12%(f)(j) 12/15/08 4,855 4,612,250 See accompanying notes to financial statements. 105
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Retail Merchandising (Continued) Shopko Stores, Inc., Senior Notes 9.25% 03/15/22 $ 1,915 $ 2,278,850 ------------- 22,552,900 ------------- Security Brokers & Dealers -- 0.1% Rural Metro Corp., Senior Subordinated Notes 9.88%(f) 03/15/15 925 973,562 ------------- Semiconductors & Related Devices -- 1.1% Freescale Semiconductor, Inc., Senior Unsecured Notes 6.35%(h) 07/15/09 1,550 1,592,625 6.88% 07/15/11 735 764,400 Magnachip Semiconductor, Notes 6.88% 12/15/11 1,505 1,444,800 Magnachip Semiconductor, Secured Notes 7.12%(h) 12/15/11 3,135 3,119,325 Magnachip Semiconductor, Senior Subordinated Notes 8.00% 12/15/14 2,385 2,182,275 Stats Chippac LTD, Inc., Senior Unsecured Notes 6.75% 11/15/11 2,100 2,037,000 ------------- 11,140,425 ------------- Telecommunications -- 8.7% American Tower Corp., Senior Unsecured Notes 7.50%(j) 05/01/12 5,025 5,326,500 Asia Global Crossing Ltd., Senior Unsecured Notes 13.38%(b)(g) 10/15/10 2,000 65,000 CCO Holdings LLC, Capital Corp., Senior Unsecured Notes 8.00%(h) 12/15/10 1,270 1,254,125 Centennial Communications, Senior Subordinated Notes 10.75%(j) 12/15/08 3,530 3,627,075 Centennial Communications, Senior Unsecured Notes 8.12% 02/01/14 2,535 2,687,100 Charter Communications, Inc., Senior Unsecured Notes 5.88% 11/16/09 500 412,500 Cincinnati Bell, Inc., Senior Unsecured Notes 7.25%(j) 07/15/13 5,365 5,700,313 CSC Holdings, Inc., Senior Unsecured Notes 7.62% 04/01/11 1,835 1,807,475 6.75%(f) 04/15/12 360 339,300 Dobson Cellular Systems, Inc., Senior Secured Notes 8.38% 11/01/11 3,145 3,317,975 Dobson Cellular Systems, Inc., Senior Secured Notes 8.44%(h) 11/01/11 1,595 1,654,813 Dobson Communications Corp., Debentures 1.50%(f) 10/01/25 930 900,110 Dobson Communications Corp., Senior Unsecured Notes 8.10%(f)(h) 10/15/12 1,330 1,311,713 Eircom Funding (Ireland), Senior Subordinated Notes 8.25% 08/15/13 2,650 2,875,250 Intelsat Bermuda Ltd., Senior Unsecured Notes 8.70%(f)(h) 01/15/12 4,870 4,967,400 8.25%(f) 01/15/13 950 954,750 8.62%(f) 01/15/15 900 918,000 IWO Holdings, Inc., Senior Unsecured Notes 8.08%(i) 01/15/15 3,297 2,316,142 L-3 Communications Corp., Senior Subordinated Notes 6.38%(f) 10/15/15 1,910 1,924,325 Lucent Technologies, Inc., Debentures 6.50% 01/15/28 4,856 4,200,440 Lucent Technologies, Inc., Senior Debentures 6.45% 03/15/29 3,140 2,747,500 Lucent Technologies, Inc., Senior Unsecured Notes 5.50% 11/15/08 265 263,012 MCI, Inc., Senior Notes 8.74% 05/01/14 1,225 1,365,875 MCI, Inc., Senior Unsecured Notes 7.69% 05/01/09 495 513,562 Nortel Networks Ltd., Unsecured Notes 6.12% 02/15/06 245 245,000 PanAmSat Corp., Senior Debentures 6.88% 01/15/28 2,690 2,461,350 PF Net Communications, Inc., Senior Unsecured Notes 13.75%(b)(g) 05/15/10 1,000 0 Qwest Communications International, Senior Unsecured Notes 7.29%(h) 02/15/09 485 478,938 Qwest Corp., Senior Unsecured Notes 7.88% 09/01/11 3,175 3,317,875 Qwest Corp., Unsecured Notes 8.88%(h) 03/15/12 1,740 1,896,600 7.12%(f)(h) 06/15/13 2,000 2,080,000 Qwest Services Corp., Senior Subordinated Notes 13.50%(h) 12/15/10 6,440 7,381,850 Rogers Wireless, Inc., Senior Secured Notes 7.00%(h) 12/15/10 795 824,812 9.62% 05/01/11 1,750 2,021,250 7.25% 12/15/12 360 379,800 7.50% 03/15/15 500 538,750 Rogers Wireless, Inc., Senior Subordinated Notes 8.00%(j) 12/15/12 2,730 2,880,150 Rural Cellular Corp., Senior Subordinated Notes 9.75%(j) 01/15/10 1,110 1,121,100 Rural Cellular Corp., Senior Unsecured Notes 9.88% 02/01/10 5,695 5,965,512 See accompanying notes to financial statements. 106
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value ------------- ---------- ------------- CORPORATE BONDS (Continued) Telecommunications (Continued) Suncom Wireless, Inc., Senior Subordinated Notes 9.38%(j) 02/01/11 $ 1,480 $ 1,213,600 Superior Essex Communications & Essex Group, Senior Notes 9.00% 04/15/12 4,845 4,893,450 ------------- 89,150,292 ------------- Transportation -- 2.5% Allied Holdings, Inc., Senior Notes, Series B 8.62%(b)(g)(j) 10/01/07 5,590 3,018,600 CHC Helicopter Corp., Senior Subordinated Notes 7.38%(f) 05/01/14 3,310 3,392,750 General Maritime Corp., Senior Unsecured Notes 10.00% 03/15/13 1,675 1,842,500 H-Lines Finance Holding, Senior Notes 10.25%(f)(i) 04/01/13 4,713 3,829,313 Horizon Lines LLC, Senior Unsecured Notes 9.00% 11/01/12 3,700 3,959,000 Hornbeck Offshore Services, Inc., Senior Unsecured Notes 6.12% 12/01/14 955 949,031 Overseas Shipholding Group, Inc., Debentures 8.75% 12/01/13 3,980 4,517,300 Stanadyne Holdings, Inc., Senior Unsecured Notes 12.00%(i) 02/15/15 4,755 2,686,575 Teekay Shipping Corp., Senior Unsecured Notes 8.88% 07/15/11 1,250 1,421,875 ------------- 25,616,944 ------------- Waste Management -- 0.3% Allied Waste N.A., Inc., Senior Secured Notes 8.50% 12/01/08 1,740 1,813,950 Casella Waste Systems, Inc., Senior Subordinated Notes 9.75% 02/01/13 1,225 1,316,875 ------------- 3,130,825 ------------- Yankee -- 0.6% Abitibi-Consolidated, Inc. (Canada), Senior Unsecured Notes 8.38%(j)(m) 04/01/15 1,300 1,280,500 Ainsworth Lumber Co. Ltd. (Canada), Senior Unsecured Notes 7.25%(m) 10/01/12 840 789,600 Compagnie Generale de Geophysique (France), Senior Unsecured Notes 7.50%(f)(m) 05/15/15 1,650 1,742,812 Omi Corp. (Mali), Senior Notes 7.62%(m) 12/01/13 2,355 2,402,100 ------------- 6,215,012 ------------- TOTAL CORPORATE BONDS (Cost $855,937,214) 852,621,366 ------------- FOREIGN BONDS -- 1.4% Aero Investments (EUR) 10.63%(e)(f)(h) 03/01/15 4,359 5,241,881 Cablecom Luxembourg SCA (EUR) 4.87%(f)(h) 04/15/12 1,650 2,004,238 Eggborough Power Station Terminal (EUR) 7.00%(h) 09/08/15 1,300 5,519,583 Hellas Telecom III (EUR) 8.50% 10/15/13 1,230 1,482,946 ------------- TOTAL FOREIGN BONDS (Cost $13,389,051) 14,248,648 ------------- TERM LOANS -- 0.6% Blb Wembley Term 2nd Lien 7.32%(h) 08/31/12 500 509,375 Healthsouth Corp., Senior Unsecured Notes 8.77%(h) 03/21/10 1,000 1,001,250 Hit Entertainment, Senior Notes 9.33%(h) 01/31/13 1,500 1,526,250 Mach Gen LLC Tranche A Construction 0.00%(g)(h) 12/31/49 362 423,913 Mach Gen LLC Tranche B Construction 0.00%(g)(h) 12/31/49 604 705,987 Mach Gen LLC Working Capital Communications 0.00%(g)(h) 12/31/49 96 102,009 Mach Gen LLC Working Capital LOC 0.00%(g)(h) 12/31/49 45 44,935 Polar Corp. Term 2nd Lien Loan 10.27%(h) 05/30/10 1,250 1,268,750 Synventive Mezz Loan, Notes 14.00%(h) 02/17/14 500 500,000 ------------- TOTAL TERM LOANS (Cost $6,026,845) 6,082,469 ------------- See accompanying notes to financial statements. 107
BlackRock Funds SCHEDULE OF INVESTMENTS HIGH YIELD BOND PORTFOLIO (Concluded) As of September 30, 2005 Par/Shares Maturity (000) Value ------------- ---------- ------------- SHORT TERM INVESTMENTS -- 13.9% Federal National Mortgage Association, Discount Notes 3.50%(n) 10/03/05 $ 29,000 $ 28,994,361 Galileo Money Market Fund 8,885 8,885,167 Institutional Money Market Trust(o)(p) 103,315 103,315,470 -------------- TOTAL SHORT TERM INVESTMENTS (Cost $141,194,998) 141,194,998 -------------- TOTAL INVESTMENTS IN SECURITIES -- 100.0% (Cost $1,036,370,024(a)) $1,018,345,950 ============== Number of Contracts ----------- PUT OPTIONS WRITTEN -- 0.0% Neiman Marcus Senior Bridge Debt Option, Strike 100.00, Expires 10/30/05 (84) (62,685) Neiman Marcus Senior Bridge Debt Option, Strike 100.00, Expires 10/30/05 (36) (26,865) -------------- TOTAL PUT OPTIONS WRITTEN (Premiums received $89,553) (89,550) -------------- - ---------- (a) Cost for Federal income tax purposes is $1,037,273,374. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 20,721,142 Gross unrealized depreciation (39,648,566) ------------- $ (18,927,424) ------------- (b) Non-income producing security. (c) Security is illiquid. As of September 30, 2005, the Portfolio held 1.4% of its net assets, with a current market value of $12,489,899 in these securities. (d) Securities valued at fair value as determined in good faith by or under the direction of the Trustees. These securities had a total market value of $4,261,852 which represents 0.5% of net assets. (e) Payment in kind security. (f) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 20.8% of its net assets, with a current market value of $190,274,176 in securities restricted as to resale. (g) Security in default. (h) Rates shown are the rates as of September 30, 2005. (i) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified date and rate. The rates shown are the effective yields as of September 30, 2005. (j) Total or partial securities on loan. (k) Rates shown are the effective yields as of September 30, 2005. (l) Security held in escrow for future payments (m) Security is a foreign domiciled issuer which is registered with the Securities and Exchange Commission. (n) The rate shown is the effective yield on the discount notes at the time of purchase. (o) Securities purchased with the cash proceeds from securities loaned. (p) Represents an investment in an affiliated security. See accompanying notes to financial statements. 108
BlackRock Funds STATEMENT OF ASSETS AND LIABILITIES HIGH YIELD PORTFOLIO September 30, 2005 ASSETS Investments at value (Cost $1,036,370,024) ................... $ 1,018,345,950 Cash denominated in foreign currencies (Cost $1,084,530) ..... 1,089,071 Interest receivable .......................................... 18,797,102 Investments sold receivable .................................. 5,887,226 Capital shares sold receivable ............................... 1,156,083 Prepaid expenses ............................................. 58,915 Unrealized appreciation on forward foreign currency contracts 19,047 Unrealized appreciation on interest rate swaps ............... 189,251 ---------------- TOTAL ASSETS .............................................. 1,045,542,645 ---------------- LIABILITIES Payable upon return of securities loaned ..................... 103,315,470 Investments purchased payable ................................ 20,706,110 Swaps payable ................................................ 16,335 Capital shares redeemed payable .............................. 1,442,881 Distributions payable ........................................ 2,444,081 Advisory fees payable ........................................ 201,101 Administrative fees payable .................................. 153,138 Transfer agent fees payable .................................. 68,701 Other accrued expenses payable ............................... 320,308 Options written, at fair value (premiums received $89,553) ... 89,550 Unrealized depreciation on forward foreign currency contracts 2,986 Unrealized depreciation on interest rate swaps ............... 83,124 ---------------- TOTAL LIABILITIES ......................................... 128,843,785 ---------------- NET ASSETS (Applicable to 20,950,486 BlackRock shares, 20,490,338 Institutional shares,19,533,333 Service shares, 32,488,847 Investor A shares, 13,648,656 Investor B shares and 6,168,003 Investor C shares outstanding) ..................... $ 916,698,860 ===============- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($169,532,360/20,950,486) ................ $ 8.09 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($165,805,121/20,490,338) ............ $ 8.09 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($158,082,732/19,533,333) .................. $ 8.09 ================ NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($262,919,913/32,488,847) ............... $ 8.09 ================ MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($8.09/0.950) ..... $ 8.52 ================ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($110,420,303/13,648,656) ............... $ 8.09 ---------------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($49,938,431/6,168,003) ................. $ 8.10 ---------------- See accompanying notes to financial statements. 109
BlackRock Funds Investment Abbreviations ARM Adjustable Rate Mortgage CMT Constant Maturity Treasury Rate CND Canadian Dollar COFI Cost of Funds Index DKK Danish Krone EUR European Currency Unit GBP Great British Pound IO Interest Only JPY Japanese Yen LLC Limited Liability Company MULTI Multi-issued pools MXP Mexican Peso NZD New Zealand Dollar PLC Project Loan Certificate PLN Polish Zloty PO Principal Only SEK Swedish Krone 110
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BlackRock Funds STATEMENTS OF OPERATIONS For the Period Ended September 30, 2005 Enhanced Low Duration Intermediate Intermediate Intermediate Income Bond Government Bond PLUS Bond Portfolio Portfolio Bond Portfolio Portfolio Portfolio -------------- -------------- -------------- -------------- -------------- Investment income: Interest ................................ $ 1,872,570 $ 61,752,030 $ 25,242,285 $ 38,592,487 $ 1,077,123 Securities lending income ............... 6 171 434 7,402 -- Dividends ............................... -- 538,125 -- -- 2,800 -------------- -------------- -------------- -------------- -------------- Total investment income ............... 1,872,576 62,290,326 25,242,719 38,599,889 1,079,923 -------------- -------------- -------------- -------------- -------------- Expenses: Investment advisory fee ................. 234,659 8,237,547 2,863,740 4,598,222 131,286 Administration fee ...................... 49,865 1,267,646 472,983 739,733 22,319 Administration fee - class specific ..... 59,831 1,724,855 831,306 840,409 9,357 Custodian fee ........................... 21,800 191,938 103,122 120,948 35,522 Transfer agent fee ...................... 5,982 409,406 396,056 151,559 3,273 Transfer agent fee - class specific ..... 7,576 220,838 103,196 107,264 1,331 Shareholder servicing fees - class ...... specific ............................... 79 1,507,824 853,801 372,525 28 Distribution fees - class specific ...... 2 1,211,414 845,748 211,160 14 Legal and audit fees .................... 29,240 239,185 103,877 139,382 22,147 Printing fee ............................ 7,625 332,531 120,036 178,153 4,395 Registration fees and expenses .......... 35,427 109,691 49,482 67,920 34,586 Trustees' fees .......................... 1,889 60,723 19,374 32,060 892 Other ................................... 2,256 139,837 59,605 83,682 9,100 -------------- -------------- -------------- -------------- -------------- Total expenses excluding interest expense .............................. 456,231 15,653,435 6,822,326 7,643,017 274,250 Interest expense .................... 7,485 2,663 698 -- -- -------------- -------------- -------------- -------------- -------------- Total expenses ........................ 463,716 15,656,098 6,823,024 7,643,017 274,250 -------------- -------------- -------------- -------------- -------------- Less investment advisory fees waived ............................. (214,614) (4,157,712) (815,569) (2,001,206) (131,286) Less administration fees waived ..... -- -- -- -- (22,319) Less administration fee waived - class specific ..................... (28,156) (255,112) (336,300) (182,964) (9,133) Less distribution fee waived - class specific ........................... (2) (80,741) (262,823) (31,873) (10) Less custodian fees waived .......... (1,141) (9,674) (7,332) (6,790) (2,254) Less transfer agent fees waived ..... (499) (23,835) (31,571) (10,501) (114) Less expenses reimbursed by advisor ............................ -- -- -- -- (3,910) -------------- -------------- -------------- -------------- -------------- Net expenses .......................... 219,304 11,129,024 5,369,429 5,409,683 105,224 -------------- -------------- -------------- -------------- -------------- Net investment income ..................... 1,653,272 51,161,302 19,873,290 33,190,206 974,699 -------------- -------------- -------------- -------------- -------------- Realized and unrealized gain (loss) on investments and foreign currency transactions: Net realized gain (loss) from: Investment transactions ............... (180,326) (15,209,504) (3,087,711) 2,271,175 (159,902) Futures and options contracts ......... 113,047 101,603 116,843 2,233,368 (7,796) Swap and swaption contracts ........... (75,691) (745,565) 84,684 (3,530,875) 20,560 Foreign currency related transactions . 3,259 2,436,340 -- -- 12,611 -------------- -------------- -------------- -------------- -------------- (139,711) (13,417,126) (2,886,184) 973,668 (134,527) -------------- -------------- -------------- -------------- -------------- Change in unrealized appreciation (depreciation) from: Investments ........................... (334,284) (14,421,003) (13,724,930) (21,534,441) (339,534) Futures and options contracts ......... 23,735 677,741 (424,356) (127,805) 14,533 Swap and swaption contracts ........... (15,346) (2,081,550) 337,826 1,492,209 (18,196) Foreign currency related transactions . 5,793 553,469 -- -- (4,105) -------------- -------------- -------------- -------------- -------------- (320,102) (15,271,343) (13,811,460) (20,170,037) (347,302) -------------- -------------- -------------- -------------- -------------- Net gain (loss) on investments and foreign currency transactions .................... (459,813) (28,688,469) (16,697,644) (19,196,369) (481,829) -------------- -------------- -------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations ................ $ 1,193,459 $ 22,472,833 $ 3,175,646 $ 13,993,837 $ 492,870 -------------- -------------- -------------- -------------- -------------- See accompanying notes to financial statements. 112
Inflation Core Bond Core PLUS Government Protected Total Return Total Return Income Bond Portfolio Portfolio Portfolio Portfolio -------------- -------------- -------------- -------------- Investment income: Interest ................................ $ 117,700,876 $ 15,006,730 $ 21,076,138 $ 1,520,808 Securities lending income ............... 21,414 -- -- -- Dividends ............................... 9,307 18,200 -- -- -------------- -------------- -------------- -------------- Total investment income ............... 117,731,597 15,024,930 21,076,138 1,520,808 -------------- -------------- -------------- -------------- Expenses: Investment advisory fee ................. 12,036,872 1,713,939 2,200,173 137,988 Administration fee ...................... 1,837,992 291,370 373,326 29,323 Administration fee - class specific ..... 1,913,561 120,128 624,405 22,134 Custodian fee ........................... 405,990 106,593 200,912 16,438 Transfer agent fee ...................... 437,068 37,217 161,838 7,518 Transfer agent fee - class specific ..... 268,309 17,154 77,583 2,908 Shareholder servicing fees - class ...... specific ............................... 1,165,718 1,033 709,668 23,170 Distribution fees - class specific ...... 366,340 67,610 86,600 22,504 Legal and audit fees .................... 388,306 41,874 114,063 5,320 Printing fee ............................ 91,151 12,952 47,212 91,847 Registration fees and expenses .......... 90,902 12,442 14,508 1,113 Trustees' fees .......................... 221,720 40,508 46,016 4,983 Other ................................... -- -- -- -- -------------- -------------- -------------- -------------- Total expenses excluding interest expense .............................. 20,370,498 2,463,304 5,728,352 379,501 Interest expense .................... -- -- -- -- -------------- -------------- -------------- -------------- Total expenses ........................ 20,370,498 2,463,304 5,728,352 379,501 -------------- -------------- -------------- -------------- Less investment advisory fees waived ............................. (5,551,434) (962,907) (1,267,772) (137,988) Less administration fees waived ..... -- -- -- (29,323) Less administration fee waived - class specific ..................... (424,649) (119,854) (3,860) (9,591) Less distribution fee waived - class specific ........................... (171,855) (34) (179,180) (3,014) Less custodian fees waived .......... (22,456) (6,067) (14,366) (1,557) Less transfer agent fees waived ..... (29,602) (1,512) (12,013) (558) Less expenses reimbursed by advisor ............................ -- -- -- (47,967) -------------- -------------- -------------- -------------- Net expenses .......................... 14,170,502 1,372,930 4,251,161 149,503 -------------- -------------- -------------- -------------- Net investment income ..................... 103,561,095 13,652,000 16,824,977 1,371,305 -------------- -------------- -------------- -------------- Realized and unrealized gain (loss) on investments and foreign currency transactions: Net realized gain (loss) from: Investment transactions ............... 3,534,582 1,616,022 2,050,472 535,664 Futures and options contracts ......... 496,743 70,875 (1,281,507) 142,918 Swap and swaption contracts ........... 816,310 193,583 (1,125,499) 2,558 Foreign currency related transactions . 4,642,599 288,125 -- (763) -------------- -------------- -------------- -------------- 9,490,234 2,168,605 (356,534) 680,377 -------------- -------------- -------------- -------------- Change in unrealized appreciation (depreciation) from: Investments ........................... (45,249,618) (5,873,366) (9,128,325) (294,406) Futures and options contracts ......... 5,041,868 642,922 (954,035) 68,091 Swap and swaption contracts ........... (2,654,750) (245,222) 439,976 34,547 Foreign currency related transactions . 1,504,414 336,968 -- (18,407) -------------- -------------- -------------- -------------- (41,358,086) (5,138,698) (9,642,384) (210,175) -------------- -------------- -------------- -------------- Net gain (loss) on investments and foreign currency transactions .................... (31,867,852) (2,970,093) (9,998,918) 470,202 -------------- -------------- -------------- -------------- Net increase (decrease) in net assets resulting from operations ................ $ 71,693,243 $ 10,681,907 $ 6,826,059 $ 1,841,507 -------------- -------------- -------------- -------------- Managed International High Yield GNMA Income Bond Bond Portfolio Portfolio Portfolio Portfolio -------------- -------------- -------------- ------------- Investment income: Interest ................................ $ 11,151,629 $ 37,226,406 $ 24,123,568 $ 66,949,977 Securities lending income ............... -- 4,764 691 622,559 Dividends ............................... -- -- 2,233,898 -------------- -------------- -------------- ------------- Total investment income ............... 11,151,629 37,231,170 24,124,259 69,806,434 -------------- -------------- -------------- ------------- Expenses: Investment advisory fee ................. 1,224,301 3,652,204 3,944,350 4,137,013 Administration fee ...................... 189,210 597,831 587,295 670,552 Administration fee - class specific ..... 311,203 1,047,955 949,803 1,043,883 Custodian fee ........................... 136,915 171,889 201,059 112,278 Transfer agent fee ...................... 65,731 115,370 393,075 602,275 Transfer agent fee - class specific ..... 38,707 131,478 118,431 130,519 Shareholder servicing fees - class specific ............................... 194,367 296,986 873,887 1,300,143 Distribution fees - class specific ...... 432,622 100,792 742,334 1,470,609 Legal and audit fees .................... 53,555 118,758 109,504 134,522 Printing fee ............................ 39,382 95,754 200,417 154,226 Registration fees and expenses .......... 50,936 51,308 107,043 70,234 Trustees' fees .......................... 7,964 25,686 24,527 28,302 Other ................................... 22,179 70,042 73,331 128,278 -------------- -------------- -------------- ------------- Total expenses excluding interest expense .............................. 2,767,072 6,476,053 8,325,056 9,982,834 Interest expense .................... 12,063 2,014 -- 7,677 -------------- -------------- -------------- ------------- Total expenses ........................ 2,779,135 6,478,067 8,325,056 9,990,511 -------------- -------------- -------------- ------------- Less investment advisory fees waived ............................. (786,389) (263,326) (50,613) (1,475,677) Less administration fees waived ..... -- -- -- -- Less administration fee waived - class specific ..................... (13,856) (947,681) (28,017) (60,017) Less distribution fee waived - class specific ........................... (16,192) (33,586) (171,698) (211,597) Less custodian fees waived .......... (8,418) (9,108) (17,617) (6,422) Less transfer agent fees waived ..... (4,760) (10,229) (27,607) (44,155) Less expenses reimbursed by advisor ............................ -- -- -- -- -------------- -------------- -------------- ------------- Net expenses .......................... 1,949,520 5,214,137 8,029,504 8,192,643 -------------- -------------- -------------- ------------- Net investment income ..................... 9,202,109 32,017,033 16,094,755 61,613,791 -------------- -------------- -------------- ------------- Realized and unrealized gain (loss) on investments and foreign currency transactions: Net realized gain (loss) from: Investment transactions ............... 1,798,509 1,590,440 12,847,457 24,094,487 Futures and options contracts ......... (1,907,059) (176,600) 1,463,566 -- Swap and swaption contracts ........... (504,902) (141,453) 410,292 694,659 Foreign currency related transactions . -- 1,496,226 (21,047,503) 559,863 -------------- -------------- -------------- ------------- (613,452) 2,768,613 (6,326,188) 25,349,009 -------------- -------------- -------------- ------------- Change in unrealized appreciation (depreciation) from: Investments ........................... (4,325,572) (16,877,382) (14,122,201) (27,091,354) Futures and options contracts ......... 491,300 1,954,113 800,267 (68,389) Swap and swaption contracts ........... (236,440) (406,633) (147,761) 5,033 Foreign currency related transactions . -- 591,231 (4,739,910) 26,737 -------------- -------------- -------------- ------------- (4,070,712) (14,738,671) (18,209,605) (27,127,973) -------------- -------------- -------------- ------------- Net gain (loss) on investments and foreign currency transactions .................... (4,684,164) (11,970,058) (24,535,793) (1,778,964) -------------- -------------- -------------- ------------- Net increase (decrease) in net assets resulting from operations ................ $ 4,517,945 $ 20,046,975 $ (8,441,038) $ 59,834,827 -------------- -------------- -------------- ------------- 113
BlackRock Funds STATEMENT OF CASH FLOWS ENHANCED INCOME PORTFOLIO FOR THE YEAR ENDED SEPTEMBER 30, 2005 Increase in cash Cash flows from operating activities: Net increase in net assets from operations .......................................... $ 1,193,459 Adjustments to reconcile net increase in net assets from operations to net cash used for operating activities: Purchase of long-term investment securities ...................................... (115,214,879) Proceeds from disposition of long-term investment securities ..................... 111,914,888 Net sale of short term investment securities ..................................... 1,350,857 Net change in swap transactions .................................................. (75,691) Change in foreign currency contracts ............................................. 521,573 Amortization of premium .......................................................... 16,177 Increase in futures variation margin ............................................. (10,984) Decrease in interest receivable .................................................. 21,707 Increase in principal paydown receivable ......................................... (41,472) Decrease in prepaid expenses ..................................................... 11,501 Decrease in investments purchased payable ........................................ (335,545) Increase in accrued expenses ..................................................... 4,580 Decrease in receivable from advisor .............................................. 41,732 Net increase in unrealized appreciation on foreign currency related transactions .................................................................... (5,793) Net decrease in unrealized appreciation on investment securities ................. 334,284 Net decrease in unrealized appreciation on swap and swaption contracts .......................................................... 15,346 Net increase in unrealized appreciation on futures and options ................... (23,735) Net realized loss on investment securities ....................................... 180,326 Net realized gain on futures and options ......................................... (113,047) Net realized loss on swap and swaption contracts ................................. 75,691 Net realized gain on foreign currency related transactions ....................... (3,259) -------------- Net cash used for operating activities .............................................. (142,284) -------------- Cash flows from financing activities: Proceeds from units sold ......................................................... 71,988,054 Payments on units redeemed ....................................................... (70,022,419) Cash distributions paid .......................................................... (1,321,593) -------------- Net cash provided by financing activities ........................................ 644,042 -------------- Net increase in cash ................................................................. 501,758 -------------- Cash and cash eqivalents (including foreign currency): Beginning balance ................................................................... 460 -------------- Ending balance ...................................................................... $ 502,218 ============== Supplemental disclosure of cash flow information: Reinvestment of dividends and distributions (non-cash financing activity) ............ $ 270,456 Cash paid during the year for interest ............................................... $ (7,485) See accompanying notes to financial statements. 114
BlackRock Funds STATEMENT OF CASH FLOWS LOW DURATION PORTFOLIO FOR THE YEAR ENDED SEPTEMBER 30, 2005 Increase in cash Cash flows from operating activities: Net increase in net assets from operations ............................................... $ 22,472,833 Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: Purchase of long-term investment securities ........................................... (2,731,080,498) Proceeds from disposition of long-term investment securities .......................... 2,873,495,615 Net purchase of short term investment securities ...................................... (18,246,877) Net change in swap transactions ....................................................... (745,565) Change in foreign currency contracts .................................................. (7,340,796) Amortization of premium ............................................................... 5,412,072 Increase in futures variation margin .................................................. (169,690) Decrease in interest receivable ....................................................... 10,680,183 Decrease in investments sold receivable ............................................... 21,632,577 Increase in principal paydown receivable .............................................. (509,753) Decrease in payable upon return of securities loaned .................................. (882,000) Decrease in prepaid expenses .......................................................... 44,128 Increase in investments purchased payable ............................................. 49,102,303 Decrease in accrued expenses .......................................................... (135,632) Net increase in unrealized appreciation on foreign currency related transactions ......................................................................... (553,469) Net decrease in unrealized appreciation on investment securities ...................... 14,421,003 Net decrease in unrealized appreciation on swap and swaption contracts ................ 2,081,550 Net increase in unrealized appreciation on futures and options ........................ (677,741) Net realized loss on investment securities ............................................ 15,209,504 Net realized gain on futures and options .............................................. (101,603) Net realized loss on swap and swaption contracts ...................................... 745,565 Net realized gain on foreign currency related transactions ............................ (2,436,340) ----------------- Net cash provided by operating activities ................................................ 252,417,369 ----------------- Cash flows from financing activities: Net borrowing (repayment) of reverse repurchase agreements and other short term borrowings ................................................................ 161,897,918 Proceeds from units sold .............................................................. 577,060,929 Payments on units redeemed (net of redemption fees) ................................... (955,574,061) Cash distributions paid ............................................................... (19,441,924) ----------------- Net cash used for financing activities ................................................... (236,057,138) ----------------- Net increase in cash ...................................................................... 16,360,231 ----------------- Cash and cash equivalents (including foreign currency): Beginning balance ........................................................................ 9,254 ----------------- Ending balance ........................................................................... $ 16,369,485 ================= Supplemental disclosure of cash flow information: Reinvestment of dividends and distributions (non-cash financing activity) ................. $ 29,913,785 Cash paid during the year for interest .................................................... $ (2,663) 115
BlackRock Funds STATEMENT OF CASH FLOWS INTERMEDIATE GOVERNMENT PORTFOLIO FOR THE YEAR ENDED SEPTEMBER 30, 2005 Increase (decrease) in cash Cash flows from operating activities: Net increase in net assets from operations ............................... $ 3,175,646 Adjustments to reconcile net increase in net assets from operations to net cash operating activities: Purchase of long-term investment securities ........................... (1,416,884,486) Proceeds from disposition of long-term investment securities .......... 1,400,049,349 Net change in options/swaptions ....................................... 2,312,677 Net change in swap transactions ....................................... (285,864) Net sale of short term investment securities .......................... 9,515,002 Amortization of premium ............................................... 3,510,042 Increase in futures variation margin .................................. (111,363) Increase in interest receivable ....................................... (3,047,019) Increase in investments sold receivable ............................... (2,843,191) Increase in principal paydown receivable .............................. (836,622) Increase in prepaid expenses .......................................... (5,208) Increase in investments purchased payable ............................. 3,972,935 Increase in accrued expenses .......................................... 369,384 Net decrease in unrealized appreciation on investment securities ...... 13,724,930 Net decrease in unrealized appreciation on futures and options ........ 424,356 Net increase in unrealized appreciation on swap and swaption contracts ............................................... (337,826) Net realized loss on investment securities ............................ 3,087,711 Net realized gain on futures and options .............................. (116,843) Net realized gain on swap and swaption contracts ...................... (84,684) ----------------- Net cash provided by operating activities ................................ 15,588,926 ----------------- Cash flows from financing activities: Net borrowing (repayment) of reverse repurchase agreements and other short term borrowings ................................................ 110,549,983 Proceeds from units sold .............................................. 82,654,934 Payments on units redeemed (net of redemption fees) ................... (199,099,769) Cash distributions paid ............................................... (9,694,074) ----------------- Net cash used for financing activities ................................... (15,588,926) ----------------- Net increase (decrease) in cash ........................................... -- ----------------- Cash: Beginning balance ........................................................ -- ----------------- Ending balance ........................................................... $ -- ================= Supplemental disclosure of cash flow information: Reinvestment of dividends and distributions (non-cash financing activity) . $ 9,092,562 Cash paid during the year for interest .................................... $ (698) See accompanying notes to financial statements. 116
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BlackRock Funds STATEMENTS OF CHANGES IN NET ASSETS Enhanced Income Low Duration Portfolio Bond Portfolio ` ----------------------------------- ------------------------------------- For the For the For the Year Ended For the Period Year Ended Year Ended 9/30/05 3/4/04/1/-9/30/04 9/30/05 9/30/04 ------------- ------------------ ------------------ ----------------- Increase (decrease) in net assets: Operations: Net investment income ............................ $ 1,653,272 $ 335,513 $ 51,161,302 $ 36,962,711 Net realized gain (loss) on investments, futures, options, swap and swaption contracts and foreign currency related transactions .................................... (139,711) (219,169) (13,417,126) (10,723,689) Net unrealized appreciation/depreciation on investments, futures, options, swap and swaption contracts and foreign currency related transactions .................................... (320,102) (30,863) (15,271,343) (10,258,210) ------------- ------------------ ---------------- ---------------- Net increase (decrease) in net assets resulting from operations ................................. 1,193,459 85,481 22,472,833 15,980,812 ------------- ------------------ ---------------- ---------------- Distributions to shareholders from: Net investment income: BlackRock Class .................................. (685,290) (213,539) (21,399,011) (16,101,779) Institutional Class .............................. (991,596) (153,489) (12,976,033) (9,546,236) Service Class .................................... (869) (2) (10,327,815) (4,914,169) Investor A Class ................................. (31) (1) (2,215,025) (1,638,667) Investor B Class ................................. -- -- (1,096,050) (667,531) Investor C Class ................................. -- -- (1,841,995) (1,422,382) ------------- ------------------ ---------------- ---------------- Total distributions from net investment income ... (1,677,786) (367,031) (49,855,929) (34,290,764) ------------- ------------------ ---------------- ---------------- Capital: Institutional Class .............................. -- -- -- -- Service Class .................................... -- -- -- -- Investor A Class ................................. -- -- -- -- Investor B Class ................................. -- -- -- -- Investor C Class ................................. -- -- -- -- ------------- ------------------ ---------------- ---------------- Total distributions from capital ................. -- -- -- -- ------------- ------------------ ---------------- ---------------- Net realized gains: BlackRock Class .................................. -- -- -- (3,237,280) Institutional Class .............................. -- -- -- (2,090,517) Service Class .................................... -- -- -- (1,158,715) Investor A Class ................................. -- -- -- (463,589) Investor B Class ................................. -- -- -- (352,109) Investor C Class ................................. -- -- -- (776,700) ------------- ------------------ ---------------- ---------------- Total distributions from net realized gains ...... -- -- -- (8,078,910) ------------- ------------------ ---------------- ---------------- Total distributions to shareholders .............. (1,677,786) (367,031) (49,855,929) (42,369,674) ------------- ------------------ ---------------- ---------------- Capital share transactions (Note D) .................. 2,178,387 54,925,695 (353,543,952) 164,789,326 ------------- ------------------ ---------------- ---------------- Redemption fees ...................................... -- -- 3,856 -- ------------- ------------------ ---------------- ---------------- Total increase (decrease) in net assets .......... 1,694,060 54,644,145 (380,923,192) 138,400,464 Net assets: Beginning of period .............................. 54,644,145 -- 1,873,827,408 1,735,426,944 ------------- ------------------ ---------------- ---------------- End of period .................................... $ 56,338,205 $ 54,644,145 $ 1,492,904,216 $ 1,873,827,408 ============= ================== ================ ================ End of period undistributed net investment income (distributions in excess of net investment income)$ 14,165 $ (12,452) $ 4,928,237 $ 370,456 Intermediate Government Bond Portfolio ---------------------------- For the For the Year Ended Year Ended 9/30/05 9/30/04 ------------- ------------- Increase (decrease) in net assets: Operations: Net investment income .............................. $ 19,873,290 $ 10,699,389 Net realized gain (loss) on investments, futures, options, swap and swaption contracts and foreign currency related transactions ..................... (2,886,184) 1,787,815 Net unrealized appreciation/depreciation on investments, futures, options, swap and swaption contracts and foreign currency related transactions ...................................... (13,811,460) (6,798,758) ------------- ------------- Net increase (decrease) in net assets resulting from operations ........................................ 3,175,646 5,688,446 ------------- ------------- Distributions to shareholders from: Net investment income: BlackRock Class .................................... -- -- Institutional Class ................................ (5,987,593) (8,451,541) Service Class ...................................... (28,235) (46,005) Investor A Class ................................... (6,367,147) (1,704,214) Investor B Class ................................... (1,067,572) (310,631) Investor C Class ................................... (342,355) (419,572) ------------- ------------- Total distributions from net investment income ..... (13,792,902) (10,931,963) ------------- ------------- Capital: Institutional Class ................................ (1,705,727) -- Service Class ...................................... (8,044) -- Investor A Class ................................... (1,813,851) -- Investor B Class ................................... (304,127) -- Investor C Class ................................... (97,529) -- ------------- ------------- Total distributions from capital ................... (3,929,278) -- ------------- ------------- Net realized gains: BlackRock Class .................................... -- -- Institutional Class ................................ (1,106,478) -- Service Class ...................................... (6,048) -- Investor A Class ................................... (183,301) -- Investor B Class ................................... (47,030) -- Investor C Class ................................... (55,783) -- ------------- ------------- Total distributions from net realized gains ........ (1,398,640) -- ------------- ------------- Total distributions to shareholders ................ (19,120,820) (10,931,963) ------------- ------------- Capital share transactions (Note D) .................... 366,560,310 (6,172,509) ------------- ------------- Redemption fees ........................................ 838 -- ------------- ------------- Total increase (decrease) in net assets ............ 350,615,974 (11,416,026) Net assets: Beginning of period ................................ 305,673,659 317,089,685 ------------- ------------- End of period ...................................... $ 656,289,633 $ 305,673,659 ============= ============= End of period undistributed net investment income (distributions in excess of net investment income) ........................................... $ (751,511) $ (313,895) - ---------- 1 Commencement of operations. See accompanying notes to financial statements. 118
BlackRock Funds Intermediate Intermediate PLUS Bond Portfolio Bond Portfolio ---------------------------- -------------------------- For the For the For the For the Period Year Ended Year Ended Year Ended 8/18/04/1/- 9/30/05 9/30/04 9/30/05 9/30/04 ------------- ------------- ------------- ------------ Increase (decrease) in net assets: Operations: Net investment income .............................. $ 33,190,206 $ 33,037,063 $ 974,699 $ 118,733 Net realized gain (loss) on investments, futures, options, swap and swaption contracts and foreign currency related transactions ..................... 973,668 7,771,479 (134,527) 14,953 Net unrealized appreciation/depreciation on investments, futures, options, swap and swaption contracts and foreign currency related transactions ...................................... (20,170,037) (17,841,712) (347,302) 5,297 ------------- ------------- ------------ ------------ Net increase (decrease) in net assets resulting from operations ........................................ 13,993,837 22,966,830 492,870 138,983 ------------- ------------- ------------ ------------ Distributions to shareholders from: Net investment income: BlackRock Class .................................... (15,416,741) (15,750,126) (986,708) (121,847) Institutional Class ................................ (10,587,518) (13,010,903) (4,907) -- Service Class ...................................... (2,833,389) (2,218,577) -- -- Investor A Class ................................... (965,616) (1,285,713) (373) -- Investor B Class ................................... (277,811) (339,078) (14) -- Investor C Class ................................... (265,015) (363,366) -- -- ------------- ------------- ------------ ------------ Total distributions from net investment income ..... (30,346,090) (32,967,763) (992,002) (121,847) ------------- ------------- ------------ ------------ Capital: Institutional Class ................................ -- -- -- -- Service Class ...................................... -- -- -- -- Investor A Class ................................... -- -- -- -- Investor B Class ................................... -- -- -- -- Investor C Class ................................... -- -- -- -- ------------- ------------- ------------ ------------ Total distributions from capital ................... -- -- -- -- ------------- ------------- ------------ ------------ Net realized gains: BlackRock Class .................................... (3,605,317) (8,456,396) (22,983) -- Institutional Class ................................ (2,617,586) (8,468,244) -- -- Service Class ...................................... (720,929) (1,395,950) -- -- Investor A Class ................................... (278,111) (910,295) -- -- Investor B Class ................................... (106,933) (311,883) -- -- Investor C Class ................................... (110,018) (351,717) -- -- ------------- ------------- ------------ ------------ Total distributions from net realized gains ........ (7,438,894) (19,894,485) (22,983) -- ------------- ------------- ------------ ------------ Total distributions to shareholders ................ (37,784,984) (52,862,248) (1,014,985) (121,847) ------------- ------------- ------------ ------------ Capital share transactions (Note D) .................... (2,239,453) 69,338,781 5,506,774 25,979,168 ------------- ------------- ------------ ------------ Redemption fees ........................................ 327 -- -- -- ------------- ------------- ------------ ------------ Total increase (decrease) in net assets ............ (26,030,273) 39,443,363 4,984,659 25,996,304 Net assets: Beginning of period ................................ 923,709,636 884,266,273 25,996,304 -- ------------- ------------- ------------ ------------ End of period ...................................... $ 897,679,363 $ 923,709,636 $ 30,980,963 $ 25,996,304 ============= ============= ============ ============ End of period undistributed net investment income (distributions in excess of net investment income) ........................................... $ 3,098,801 $ 435,858 $ 9,476 $ 157 Core Bond Core PLUS Total Return Portfolio Total Return Portfolio --------------------------------- ----------------------------- For the For the For the For the Year Ended Year Ended Year Ended Year Ended 9/30/05 9/30/04 9/30/05 9/30/04 ---------------- --------------- ------------- ------------- Increase (decrease) in net assets: Operations: Net investment income ......................................... $ 103,561,095 $ 99,866,904 $ 13,652,000 $ 10,331,787 Net realized gain (loss) on investments, futures, options, swap and swaption contracts and foreign currency related transactions ................................ 9,490,234 3,895,102 2,168,605 (912,455) Net unrealized appreciation/depreciation on investments, futures, options, swap and swaption contracts and foreign currency related transactions ................................................. (41,358,086) (14,325,035) (5,138,698) 984,328 ---------------- --------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations ................................................... 71,693,243 89,436,971 10,681,907 10,403,660 ---------------- --------------- ------------- ------------- Distributions to shareholders from: Net investment income: BlackRock Class ............................................... (61,252,277) (48,517,179) (13,248,140) (9,749,470) Institutional Class ........................................... (23,166,365) (33,017,672) (7) (4) Service Class ................................................. (5,497,287) (5,040,584) (885) (251) Investor A Class .............................................. (6,235,815) (4,395,274) (1,220) (249) Investor B Class .............................................. (1,486,721) (1,743,639) (2,999) (1,831) Investor C Class .............................................. (2,243,809) (2,388,478) (636) (3) ---------------- --------------- ------------- ------------- Total distributions from net investment income ................ (99,882,274) (95,102,826) (13,253,887) (9,751,808) ---------------- --------------- ------------- ------------- Capital: Institutional Class ........................................... -- -- -- -- Service Class ................................................. -- -- -- -- Investor A Class .............................................. -- -- -- -- Investor B Class .............................................. -- -- -- -- Investor C Class .............................................. -- -- -- -- ---------------- --------------- ------------- ------------- Total distributions from capital .............................. -- -- -- -- ---------------- --------------- ------------- ------------- Net realized gains: BlackRock Class ............................................... (2,614,942) (26,256,064) -- (2,841,616) Institutional Class ........................................... (1,031,692) (22,929,791) -- (2) Service Class ................................................. (256,095) (3,469,665) -- (2) Investor A Class .............................................. (232,258) (2,988,709) -- (96) Investor B Class .............................................. (94,378) (1,715,637) -- (900) Investor C Class .............................................. (143,147) (2,208,746) -- (2) ---------------- --------------- ------------- ------------- Total distributions from net realized gains ................... (4,372,512) (59,568,612) -- (2,842,618) ---------------- --------------- ------------- ------------- Total distributions to shareholders ........................... (104,254,786) (154,671,438) (13,253,887) (12,594,426) ---------------- --------------- ------------- ------------- Capital share transactions (Note D) ............................... 161,228,013 242,826,510 43,644,304 63,092,827 ---------------- --------------- ------------- ------------- Redemption fees ................................................... -- 1 -- -- ---------------- --------------- ------------- ------------- Total increase (decrease) in net assets ....................... 128,666,470 177,592,044 41,072,324 60,902,061 Net assets: Beginning of period ........................................... 2,525,633,820 2,348,041,776 285,238,245 224,336,184 ---------------- --------------- ------------- ------------- End of period ...................................... $ 2,654,300,290 $ 2,525,633,820 $ 326,310,569 $ 285,238,245 ================ =============== ============= ============= End of period undistributed net investment income (distributions in excess of net investment income) ...................................................... $ 846,059 $ (2,223,824) $ 609,923 $ 228,560 119
BlackRock Funds STATEMENTS OF CHANGES IN NET ASSETS (Concluded) Government Income Portfolio ------------------------------- For the For the Year Ended Year Ended 9/30/05 9/30/04 ------------- ------------- Increase (decrease) in net assets: Operations: Net investment income .................................. $ 16,824,977 $ 6,350,140 Net realized gain (loss) on investments, futures, options, swap and swaption contracts and foreign currency related transactions ......................... (356,534) (2,257,615) Net unrealized appreciation/depreciation on investments, futures, options, swap and swaption contracts and foreign currency related transactions .......................................... (9,642,384) 1,061,473 ------------- ------------- Net increase (decrease) in net assets resulting from operations ............................................ 6,826,059 5,153,998 ------------- ------------- Distributions to shareholders from: Net investment income: BlackRock Class ........................................ (511,763) (186,632) Institutional Class .................................... -- -- Service Class .......................................... (7,849,415) -- Investor A Class ....................................... (7,517,673) (3,390,674) Investor B Class ....................................... (1,517,239) (1,246,261) Investor C Class ....................................... (976,151) (688,847) ------------- ------------- Total distributions from net investment income ......... (18,372,241) (5,512,414) ------------- ------------- Capital: BlackRock Class ........................................ (22,490) -- Service Class .......................................... (344,955) -- Investor A Class ....................................... (330,376) -- Investor B Class ....................................... (66,677) -- Investor C Class ....................................... (42,899) -- ------------- ------------- Total distributions from capital ....................... (807,397) -- ------------- ------------- Net realized gains: BlackRock Class ........................................ -- (40) Institutional Class .................................... -- -- Service Class .......................................... -- -- Investor A Class ....................................... -- (1,252,750) Investor B Class ....................................... -- (740,622) Investor C Class ....................................... -- (407,937) ------------- ------------- Total distributions from net realized gains ............ -- (2,401,349) ------------- ------------- Total distributions to shareholders .................... (19,179,638) (7,913,763) ------------- ------------- Capital share transactions (Note D) ........................ 348,126,461 40,817,268 ------------- ------------- Redemption fees .......................................... 78 -- ------------- ------------- Total increase (decrease) in net assets ................ 335,772,960 38,057,503 Net assets: Beginning of period .................................... 208,052,043 169,994,540 ------------- ------------- End of period .......................................... $ 543,825,003 $ 208,052,043 ============= ============= End of period undistributed net investment income (distributions in excess of net investment income) .............................................. $ 215,576 $ 1,022,088 Inflation Protected GNMA Bond Portfolio Portfolio -------------------------------------- ---------------------------------- For the For the For the Year Ended For the Period Year Ended Year Ended 9/30/05 6/28/04/1/-9/30/04 9/30/05 9/30/04 --------------- ------------------- --------------- --------------- Increase (decrease) in net assets: Operations: Net investment income .............................$ 1,371,305 $ 226,154 $ 9,202,109 $ 12,573,800 Net realized gain (loss) on investments, futures, options, swap and swaption contracts and foreign currency related transactions .................... 680,377 230,428 (613,452) 107,676 Net unrealized appreciation/depreciation on investments, futures, options, swap and swaption contracts and foreign currency related transactions ..................................... (210,175) 551,836 (4,070,712) (2,663,323) --------------- ------------------- --------------- --------------- Net increase (decrease) in net assets resulting from operations .................................. 1,841,507 1,008,418 4,517,945 10,018,153 --------------- ------------------- --------------- --------------- Distributions to shareholders from: Net investment income: BlackRock Class ................................... (1,287,901) (244,948) (458,891) (1,338,791) Institutional Class ............................... (167,696) -- (5,481,541) (8,673,330) Service Class ..................................... (23) -- (229,895) (93,657) Investor A Class .................................. (140,624) (116) (618,625) (947,977) Investor B Class .................................. (40,615) (29) (711,108) (1,270,170) Investor C Class .................................. (66,562) -- (998,790) (1,985,772) --------------- ------------------- --------------- --------------- Total distributions from net investment income .... (1,703,421) (245,093) (8,498,850) (14,309,697) --------------- ------------------- --------------- --------------- Capital: BlackRock Class ................................... -- -- -- -- Service Class ..................................... -- -- -- -- Investor A Class .................................. -- -- -- -- Investor B Class .................................. -- -- -- -- Investor C Class .................................. -- -- -- -- --------------- ------------------- --------------- --------------- Total distributions from capital .................. -- -- -- -- --------------- ------------------- --------------- --------------- Net realized gains: BlackRock Class ................................... (245,658) -- -- -- Institutional Class ............................... (16,405) -- -- -- Service Class ..................................... (1) -- -- -- Investor A Class .................................. (8,360) -- -- -- Investor B Class .................................. (1,956) -- -- -- Investor C Class .................................. (3,694) -- -- -- --------------- ------------------- --------------- --------------- Total distributions from net realized gains ....... (276,074) -- -- -- --------------- ------------------- --------------- --------------- Total distributions to shareholders ............... (1,979,495) (245,093) (8,498,850) (14,309,697) --------------- ------------------- --------------- --------------- Capital share transactions (Note D) ................... 17,767,043 20,160,373 (41,195,146) (84,565,804) --------------- ------------------- --------------- --------------- Redemption fees ....................................... -- -- 1,692 15 --------------- ------------------- --------------- --------------- Total increase (decrease) in net assets ........... 17,629,055 20,923,698 (45,174,359) (88,857,333) Net assets: Beginning of period 20,923,698 -- 247,561,205 336,418,538 --------------- ------------------- --------------- --------------- End of period .....................................$ 38,552,753 $ 20,923,698 $ 202,386,846 $ 247,561,205 =============== =================== =============== =============== End of period undistributed net investment income (distributions in excess of net investment income) ..........................................$ 141,690 $ 51,317 $ 1,825,109 $ (325,015) - ---------- 1 Commencement of operations. See accompanying notes to financial statements. 120
BlackRock Funds Managed Income Portfolio ---------------------------------- For the For the Year Ended Year Ended 9/30/05 9/30/04 --------------- --------------- Increase (decrease) in net assets: Operations: Net investment income .............................. $ 32,017,033 $ 38,800,743 Net realized gain (loss) on investments, futures, options, swap and swaption contracts and foreign currency related transactions ..................... 2,768,613 196,121 Net unrealized appreciation/depreciation on investments, futures, options, swap and swaption contracts and foreign currency related transactions ...................................... (14,738,671) (11,092,359) --------------- --------------- Net increase (decrease) in net assets resulting from operations ........................................ 20,046,975 27,904,505 --------------- --------------- Distributions to shareholders from: Net investment income: BlackRock Class .................................... -- -- Institutional Class ................................ (26,826,072) (33,874,661) Service Class ...................................... (3,120,883) (3,677,325) Investor A Class ................................... (1,340,701) (1,797,350) Investor B Class ................................... (251,998) (330,340) Investor C Class ................................... (37,389) (27,287) --------------- --------------- Total distributions from net investment income ..... (31,577,043) (39,706,963) --------------- --------------- Capital: BlackRock Class .................................... -- -- Service Class ...................................... -- -- Investor A Class ................................... -- -- Investor B Class ................................... -- -- Investor C Class ................................... -- -- --------------- --------------- Total distributions from capital ................... -- -- --------------- --------------- Net realized gains: BlackRock Class .................................... -- -- Institutional Class ................................ (2,338,691) (20,585,568) Service Class ...................................... (263,605) (2,347,707) Investor A Class ................................... (128,734) (1,248,261) Investor B Class ................................... (32,026) (267,625) Investor C Class ................................... (4,139) (19,166) --------------- --------------- Total distributions from net realized gains ........ (2,767,195) (24,468,327) --------------- --------------- Total distributions to shareholders ................ (34,344,238) (64,175,290) --------------- --------------- Capital share transactions (Note D) .................... (49,835,255) (157,771,373) --------------- --------------- Redemption fees ........................................ -- -- --------------- --------------- Total increase (decrease) in net assets ............ (64,132,518) (194,042,158) Net assets: Beginning of period ................................ 769,804,418 963,846,576 --------------- --------------- End of period ...................................... $ 705,671,900 $ 769,804,418 =============== =============== End of period undistributed net investment income (distributions in excess of net investment income) .......................................... $ 1,816,732 $ 284,886 International High Yield Bond Portfolio Bond Portfolio -------------------------------------------------------------- For the For the For the For the Year Ended Year Ended Year Ended Year Ended 9/30/05 9/30/04 9/30/05 9/30/04 -------------- ------------- ------------- ------------- Increase (decrease) in net assets: Operations: Net investment income .................................. $ 16,094,755 $ 7,189,923 $ 61,613,791 $ 44,111,805 Net realized gain (loss) on investments, futures, options, swap and swaption contracts and foreign currency related transactions ......................... (6,326,188) 10,996,047 25,349,009 33,594,357 Net unrealized appreciation/depreciation on investments, futures, options, swap and swaption contracts and foreign currency related transactions .......................................... (18,209,605) (64,501) (27,127,973) (6,063,310) -------------- ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations ............................................ (8,441,038) 18,121,469 59,834,827 71,642,852 -------------- ------------- ------------- ------------- Distributions to shareholders from: Net investment income: BlackRock Class ........................................ (3,836,007) (423,849) (10,447,236) (6,682,859) Institutional Class .................................... (13,371,592) (4,289,402) (11,719,171) (12,247,677) Service Class .......................................... (4,647,433) (2,578,046) (9,855,000) (7,116,452) Investor A Class ....................................... (7,771,213) (3,713,909) (14,980,576) (4,942,313) Investor B Class ....................................... (772,214) (425,800) (6,797,925) (6,367,995) Investor C Class ....................................... (2,060,078) (787,077) (3,593,974) (4,444,804) -------------- ------------- ------------ ------------- Total distributions from net investment income ......... (32,458,537) (12,218,083) (57,393,882) (41,802,100) -------------- ------------- ------------ ------------- Capital: BlackRock Class ........................................ -- -- -- -- Service Class .......................................... -- -- -- -- Investor A Class ....................................... -- -- -- -- Investor B Class ....................................... -- -- -- -- Investor C Class ....................................... -- -- -- -- -------------- ------------- ------------- ------------- Total distributions from capital ....................... -- -- -- -- -------------- ------------- ------------- ------------- Net realized gains: BlackRock Class ........................................ (31,979) -- (2,217,477) -- Institutional Class .................................... (111,687) -- (2,744,299) -- Service Class .......................................... (45,846) -- (2,126,281) -- Investor A Class ....................................... (76,674) -- (1,216,391) -- Investor B Class ....................................... (9,510) -- (1,516,927) -- Investor C Class ....................................... (22,658) -- (990,873) -- -------------- ------------- ------------- ------------- Total distributions from net realized gains ............ (298,354) -- (10,812,248) -- -------------- ------------- ------------- ------------- Total distributions to shareholders .................... (32,756,891) (12,218,083) (68,206,130) (41,802,100) -------------- ------------- ------------- ------------- Capital share transactions (Note D) ........................ 435,410,598 201,930,564 296,865,467 22,209,066 -------------- ------------- ------------- ------------- Redemption fees ............................................ 49,151 47,581 26,956 56,693 -------------- ------------- ------------- ------------- Total increase (decrease) in net assets ................ 394,261,820 207,881,531 288,521,120 52,106,511 Net assets: Beginning of period .................................... 426,188,789 218,307,258 628,177,740 576,071,229 -------------- ------------- ------------- ------------- End of period .......................................... $ 820,450,609 $ 426,188,789 $ 916,698,860 $ 628,177,740 ============== ============= ============= ============= End of period undistributed net investment income (distributions in excess of net investment income) .............................................. $ (18,600,877) $ 2,946,297 $ 3,568,504 $ (1,207,716) - ---------- 1 Commencement of operations. See accompanying notes to financial statements. 121
BlackRock Funds FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain asset (loss) on value Net investments beginning investment (both realized of period income/14/ and unrealized)/14/ --------- ---------- ------------------- - ------------------------- Enhanced Income Portfolio - ------------------------- BlackRock Class 9/30/05 $ 9.94 $ 0.29/7/ $ (0.08) 3/04/04/1/ through 9/30/04 10.00 0.11/7/ (0.05) Institutional Class 9/30/05 $ 9.94 $ 0.27/7/ $ (0.07) 3/19/04/1/ through 9/30/04 10.00 0.09/7/ (0.05) Service Class 9/30/05 $ 9.86 $ 0.27/7/ $ (0.11) 3/19/04/1/ through 9/30/04 10.00 0.14/7/ (0.08) Investor A Class 9/30/05 $ 9.93 $ 0.28/7/ $ (0.12) 3/19/04/1/ through 9/30/04 10.00 0.06/7/ (0.07) - --------------------------- Low Duration Bond Portfolio - --------------------------- BlackRock Class 9/30/05 $ 10.09 $ 0.32/7/ $ (0.17) 9/30/04 10.23 0.23/7/ (0.11) 9/30/03/16/ 10.25 0.30 0.01 9/30/02/16/ 10.20 0.42 0.13 9/30/01/16/ 9.81 0.57 0.42 Institutional Class 9/30/05 $ 10.09 $ 0.31/7/ $ (0.17) 9/30/04 10.23 0.21/7/ (0.11) 9/30/03/16/ 10.25 0.26 0.03 9/30/02/16/ 10.21 0.41 0.12 9/30/01/16/ 9.82 0.56 0.41 Service Class 9/30/05 $ 10.09 $ 0.28/7/ $ (0.16) 9/30/04 10.23 0.19/7/ (0.12) 9/30/03/16/ 10.25 0.24 0.02 9/30/02/16/ 10.21 0.38 0.12 9/30/01/16/ 9.82 0.53 0.41 Investor A Class 9/30/05 $ 10.10 $ 0.28/7/ $ (0.17) 9/30/04 10.24 0.18/7/ (0.12) 9/30/03/16/ 10.26 0.21 0.04 9/30/02/16/ 10.21 0.36 0.13 9/30/01/16/ 9.82 0.52 0.41 Investor B Class 9/30/05 $ 10.09 $ 0.21/7/ $ (0.17) 9/30/04 10.23 0.10/7/ (0.11) 9/30/03/16/ 10.25 0.15 0.03 9/30/02/16/ 10.21 0.29 0.12 9/30/01/16/ 9.82 0.44 0.41 Investor C Class 9/30/05 $ 10.09 $ 0.21/7/ $ (0.17) 9/30/04 10.23 0.10/7/ (0.11) 9/30/03/16/ 10.25 0.15 0.03 9/30/02/16/ 10.21 0.30 0.11 9/30/01/16/ 9.82 0.44 0.41 Net Distributions Distributions asset from net Distributions from net value investment from realized end of income/6/ capital gains period ------------- ------------- ------------- -------- - ------------------------- Enhanced Income Portfolio - ------------------------- BlackRock Class 9/30/05 $ (0.29) $ -- $ -- $ 9.86 3/04/04/1/ through 9/30/04 (0.12) -- -- 9.94 Institutional Class 9/30/05 $ (0.28) $ -- $ -- $ 9.86 3/19/04/1/ through 9/30/04 (0.10) -- -- 9.94 Service Class 9/30/05 $ (0.32) $ -- $ -- $ 9.70 3/19/04/1/ through 9/30/04 (0.20) -- -- 9.86 Investor A Class 9/30/05 $ (0.24) $ -- $ -- $ 9.85 3/19/04/1/ through 9/30/04 (0.06) -- -- 9.93 - --------------------------- Low Duration Bond Portfolio - --------------------------- BlackRock Class 9/30/05 $ (0.32) $ -- $ -- $ 9.92 9/30/04 (0.21) -- (0.04) 10.09 9/30/03/16/ (0.32) -- (0.01) 10.23 9/30/02/16/ (0.45) -- (0.05) 10.25 9/30/01/16/ (0.60) -- -- 10.20 Institutional Class 9/30/05 $ (0.30) $ -- $ -- $ 9.93 9/30/04 (0.20) (0.01) (0.04) 10.09 9/30/03/16/ (0.30) -- (0.01) 10.23 9/30/02/16/ (0.44) -- (0.05) 10.25 9/30/01/16/ (0.58) -- -- 10.21 Service Class 9/30/05 $ (0.28) $ -- $ -- $ 9.93 9/30/04 (0.17) (0.01) (0.04) 10.09 9/30/03/16/ (0.27) -- (0.01) 10.23 9/30/02/16/ (0.41) -- (0.05) 10.25 9/30/01/16/ (0.55) -- -- 10.21 Investor A Class 9/30/05 $ (0.28) $ -- $ -- $ 9.93 9/30/04 (0.16) -- (0.04) 10.10 9/30/03/16/ (0.26) -- (0.01) 10.24 9/30/02/16/ (0.39) -- (0.05) 10.26 9/30/01/16/ (0.54) -- -- 10.21 Investor B Class 9/30/05 $ (0.20) $ -- $ -- $ 9.93 9/30/04 (0.09) (0.01) (0.04) 10.09 9/30/03/16/ (0.19) -- (0.01) 10.23 9/30/02/16/ (0.32) -- (0.05) 10.25 9/30/01/16/ (0.46) -- -- 10.21 Investor C Class 9/30/05 $ (0.20) $ -- $ -- $ 9.93 9/30/04 (0.09) (0.01) (0.04) 10.09 9/30/03/16/ (0.19) -- (0.01) 10.23 9/30/02/16/ (0.32) -- (0.05) 10.25 9/30/01/16/ (0.46) -- -- 10.21 See accompanying notes to financial statements. 122
BlackRock Funds Ratio of net expenses to Net average net assets Ratio of net assets end of expenses to (excluding Total period average net interest return (000) assets expense) -------------- -------------- -------------- -------------- - ------------------------- Enhanced Income Portfolio - ------------------------- BlackRock Class 9/30/05 2.15% $ 23,641 0.32% 0.30% 3/04/04/1/ through 9/30/04 0.58 18,677 0.30/2,15/ 0.30/2,15/ Institutional Class 9/30/05 2.05% $ 32,646 0.41% 0.40% 3/19/04/1/ through 9/30/04 0.40 35,967 0.40/2,15/ 0.40/2,15/ Service Class 9/30/05 1.66% $ 49 0.74% 0.71% 3/19/04/1/ through 9/30/04 0.61 -- 0.71/2/ 0.71/2/ Investor A Class 9/30/05 1.62%/3/ $ 2 0.74% 0.71% 3/19/04/1/ through 9/30/04 (0.12)/3/ -- 0.71/2/ 0.71/2/ - --------------------------- Low Duration Bond Portfolio - --------------------------- BlackRock Class 9/30/05 1.49%/8/ $ 543,043 0.40% 0.40% 9/30/04 1.18 772,355 0.40 0.40 9/30/03/16/ 2.98 625,363 0.40 0.40 9/30/02/16/ 5.58 281,844 0.40 0.40 9/30/01/16/ 10.38 114,205 0.99 0.40 Institutional Class 9/30/05 1.43%/8/ $ 378,712 0.55% 0.55% 9/30/04 1.03 477,622 0.55 0.55 9/30/03/16/ 2.82 477,420 0.55 0.55 9/30/02/16/ 5.32 298,698 0.55 0.55 9/30/01/16/ 10.21 135,243 1.24 0.55 Service Class 9/30/05 1.17%/8/ $ 377,470 0.81% 0.81% 9/30/04 0.73 345,733 0.84 0.84 9/30/03/16/ 2.52 248,426 0.85 0.85 9/30/02/16/ 5.01 120,857 0.85 0.85 9/30/01/16/ 9.88 42,909 1.41 0.85 Investor A Class 9/30/05 1.07%/3,8/ $ 75,652 0.81% 0.81% 9/30/04 0.69/3/ 87,317 0.88 0.88 9/30/03/16/ 2.47/3/ 102,047 0.90 0.90 9/30/02/16/ 4.93/3/ 69,211 1.02 1.02 9/30/01/16/ 9.70/3/ 12,808 1.43 1.00 Investor B Class 9/30/05 0.41%/4,8/ $ 45,942 1.56% 1.56% 9/30/04 (0.06)/4/ 66,253 1.63 1.63 9/30/03/16/ 1.70/4/ 83,937 1.65 1.65 9/30/02/16/ 4.05/4/ 53,087 1.77 1.77 9/30/01/16/ 8.89/4/ 20,485 2.28 1.76 Investor C Class 9/30/05 0.41%/4,8/ $ 72,085 1.57% 1.57% 9/30/04 (0.06)/4/ 124,548 1.63 1.63 9/30/03/16/ 1.70/4/ 198,234 1.65 1.65 9/30/02/16/ 4.05/4/ 118,851 1.77 1.77 9/30/01/16/ 8.89/4/ 9,282 1.99 1.72 Ratio of net Ratio of total investment expenses income to average Ratio of net to average net assets investment income net assets Portfolio (excluding to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate -------------- ----------------- -------------- -------------- - ------------------------- Enhanced Income Portfolio - ------------------------- BlackRock Class 9/30/05 0.72% 2.94% 2.54% 147% 3/04/04/1/ through 9/30/04 1.14/2,15/ 1.87/2,15/ 1.03/2,15/ 208 Institutional Class 9/30/05 0.83% 2.74% 2.32% 147% 3/19/04/1/ through 9/30/04 1.26/2,15/ 1.77/2,15/ 0.91/2,15/ 208 Service Class 9/30/05 1.09% 2.77% 2.42% 147% 3/19/04/1/ through 9/30/04 1.51/2/ 1.46/2/ 0.66/2/ 208 Investor A Class 9/30/05 1.19% 2.77% 2.32% 147% 3/19/04/1/ through 9/30/04 1.61/2/ 1.46/2/ 0.56/2/ 208 - --------------------------- Low Duration Bond Portfolio - --------------------------- BlackRock Class 9/30/05 0.68% 3.22% 2.94% 127% 9/30/04 0.65 2.25 1.99 216 9/30/03/16/ 0.67 2.31 2.04 195 9/30/02/16/ 0.79 3.86 3.47 195 9/30/01/16/ 1.28 5.78 5.48 168 Institutional Class 9/30/05 0.80% 3.07% 2.82% 127% 9/30/04 0.78 2.09 1.86 216 9/30/03/16/ 0.80 2.28 2.03 195 9/30/02/16/ 0.81 3.76 3.50 195 9/30/01/16/ 1.52 5.64 5.36 168 Service Class 9/30/05 1.05% 2.82% 2.58% 127% 9/30/04 1.07 1.83 1.60 216 9/30/03/16/ 1.10 1.94 1.69 195 9/30/02/16/ 1.11 3.40 3.15 195 9/30/01/16/ 1.68 5.25 4.97 168 Investor A Class 9/30/05 1.15% 2.81% 2.47% 127% 9/30/04 1.27 1.74 1.35 216 9/30/03/16/ 1.20 1.91 1.61 195 9/30/02/16/ 1.27 3.18 2.93 195 9/30/01/16/ 1.70 4.91 4.64 168 Investor B Class 9/30/05 1.81% 2.06% 1.81% 127% 9/30/04 1.92 1.00 0.71 216 9/30/03/16/ 1.95 1.17 0.87 195 9/30/02/16/ 2.02 2.48 2.23 195 9/30/01/16/ 2.55 4.29 4.02 168 Investor C Class 9/30/05 1.81% 2.06% 1.82% 127% 9/30/04 1.93 0.98 0.69 216 9/30/03/16/ 1.95 1.16 0.86 195 9/30/02/16/ 2.00 2.30 2.05 195 9/30/01/16/ 2.26 4.04 3.77 168 123
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain asset (loss) on value Net investments beginning investment (both realized of period income/14/ and unrealized)/14/ --------- ---------- ------------------- - -------------------------------------- Intermediate Government Bond Portfolio - -------------------------------------- Institutional Class 9/30/05 $ 10.45 $ 0.39/7/ $ (0.25) 9/30/04 10.63 0.38/7/ (0.17) 9/30/03/16/ 10.82 0.48 (0.15) 9/30/02/16/ 10.55 0.55 0.26 9/30/01/16/ 9.91 0.61 0.63 Service Class 9/30/05 $ 10.44 $ 0.36/7/ $ (0.25) 9/30/04 10.62 0.35/7/ (0.17) 9/30/03/16/ 10.81 0.45 (0.16) 9/30/02/16/ 10.55 0.52 0.25 9/30/01/16/ 9.91 0.58 0.63 Investor A Class 9/30/05 $ 10.47 $ 0.35/7/ $ (0.24) 9/30/04 10.65 0.33/7/ (0.17) 9/30/03/16/ 10.84 0.44 (0.16) 9/30/02/16/ 10.57 0.51 0.25 9/30/01/16/ 9.91 0.56 0.65 Investor B Class 9/30/05 $ 10.45 $ 0.27/7/ $ (0.24) 9/30/04 10.62 0.25/7/ (0.16) 9/30/03/16/ 10.82 0.34 (0.15) 9/30/02/16/ 10.55 0.43 0.25 9/30/01/16/ 9.91 0.49 0.63 Investor C Class 9/30/05 $ 10.46 $ 0.27/7/ $ (0.24) 9/30/04 10.63 0.26/7/ (0.17) 9/30/03/16/ 10.83 0.34 (0.15) 9/30/02/16/ 10.55 0.42 0.27 9/30/01/16/ 9.91 0.49 0.63 - --------------------------- Intermediate Bond Portfolio - --------------------------- BlackRock Class 9/30/05 $ 9.57 $ 0.35/7/ $ (0.20) 9/30/04 9.89 0.35/7/ (0.09) 9/30/03/16/ 9.81 0.49 0.13 9/30/02/16/ 9.72 0.55 0.18 9/30/01/16/ 9.13 0.57 0.61 Institutional Class 9/30/05 $ 9.57 $ 0.34/7/ $ (0.20) 9/30/04 9.89 0.34/7/ (0.10) 9/30/03/16/ 9.81 0.47 0.14 9/30/02/16/ 9.71 0.54 0.19 9/30/01/16/ 9.13 0.57 0.59 Service Class 9/30/05 $ 9.57 $ 0.31/7/ $ (0.19) 9/30/04 9.89 0.31/7/ (0.10) 9/30/03/16/ 9.81 0.44 0.14 9/30/02/16/ 9.71 0.52 0.18 9/30/01/16/ 9.13 0.53 0.60 Net Distributions Distributions asset from net Distributions from net value investment from realized end of income/6/ capital gains period ------------- ------------- ------------- ------------- - -------------------------------------- Intermediate Government Bond Portfolio - -------------------------------------- Institutional Class 9/30/05 $ (0.26) $ (0.08) $ (0.05) $ 10.20 9/30/04 (0.39) -- -- 10.45 9/30/03/16/ (0.52) -- -- 10.63 9/30/02/16/ (0.54) -- -- 10.82 9/30/01/16/ (0.60) -- -- 10.55 Service Class 9/30/05 $ (0.24) $ (0.07) $ (0.05) $ 10.19 9/30/04 (0.36) -- -- 10.44 9/30/03/16/ (0.48) -- -- 10.62 9/30/02/16/ (0.51) -- -- 10.81 9/30/01/16/ (0.57) -- -- 10.55 Investor A Class 9/30/05 $ (0.23) $ (0.07) $ (0.05) $ 10.23 9/30/04 (0.34) -- -- 10.47 9/30/03/16/ (0.47) -- -- 10.65 9/30/02/16/ (0.49) -- -- 10.84 9/30/01/16/ (0.55) -- -- 10.57 Investor B Class 9/30/05 $ (0.18) $ (0.05) $ (0.05) $ 10.20 9/30/04 (0.26) -- -- 10.45 9/30/03/16/ (0.39) -- -- 10.62 9/30/02/16/ (0.41) -- -- 10.82 9/30/01/16/ (0.48) -- -- 10.55 Investor C Class 9/30/05 $ (0.18) $ (0.05) $ (0.05) $ 10.21 9/30/04 (0.26) -- -- 10.46 9/30/03/16/ (0.39) -- -- 10.63 9/30/02/16/ (0.41) -- -- 10.83 9/30/01/16/ (0.48) -- -- 10.55 - ---------------------------- Intermediate Bond Portfolio - ---------------------------- BlackRock Class 9/30/05 $ (0.32) $ -- $ (0.08) $ 9.32 9/30/04 (0.36) -- (0.22) 9.57 9/30/03/16/ (0.52) -- (0.02) 9.89 9/30/02/16/ (0.54) -- (0.10) 9.81 9/30/01/16/ (0.59) -- -- 9.72 Institutional Class 9/30/05 $ (0.31) $ -- $ (0.08) $ 9.32 9/30/04 (0.34) -- (0.22) 9.57 9/30/03/16/ (0.51) -- (0.02) 9.89 9/30/02/16/ (0.53) -- (0.10) 9.81 9/30/01/16/ (0.58) -- -- 9.71 Service Class 9/30/05 $ (0.28) $ -- $ (0.08) $ 9.33 9/30/04 (0.31) -- (0.22) 9.57 9/30/03/16/ (0.48) -- (0.02) 9.89 9/30/02/16/ (0.50) -- (0.10) 9.81 9/30/01/16/ (0.55) -- -- 9.71 See accompanying notes to financial statements. 124
BlackRock Funds Ratio of net Net expenses to assets Ratio of net average net end of expenses to assets Total period average net (excluding return (000) assets interest expense) ---------------- ----------------- --------------- ----------------- - -------------------------------------- Intermediate Government Bond Portfolio - -------------------------------------- Institutional Class 9/30/05 1.38% $ 214,980 0.60% 0.60% 9/30/04 2.01 236,212 0.60 0.60 9/30/03/16/ 3.09 230,609 0.60 0.60 9/30/02/16/ 7.97 281,983 0.60 0.60 9/30/01/16/ 12.90 309,383 1.33 0.60 Service Class 9/30/05 1.08% $ 842 0.90% 0.90% 9/30/04 1.71 1,235 0.86 0.86 9/30/03/16/ 2.79 1,447 0.90 0.90 9/30/02/16/ 7.56 2,007 0.91 0.90 9/30/01/16/ 12.56 32,336 1.56 0.90 Investor A Class 9/30/05 1.07%/3/ $ 345,132 0.99% 0.99% 9/30/04 1.54/3/ 43,500 1.05 1.05 9/30/03/16/ 2.60/3/ 54,693 1.07 1.07 9/30/02/16/ 7.46/3/ 52,507 1.08 1.07 9/30/01/16/ 12.58/3/ 14,033 1.64 1.04 Investor B Class 9/30/05 0.22%/4/ $ 75,182 1.75% 1.75% 9/30/04 0.88/4/ 10,533 1.80 1.80 9/30/03/16/ 1.75/4/ 12,312 1.82 1.82 9/30/02/16/ 6.68/4/ 8,197 1.81 1.81 9/30/01/16/ 11.55/4/ 3,518 2.34 1.81 Investor C Class 9/30/05 0.22%/4/ $ 20,154 1.75% 1.75% 9/30/04 0.88/4/ 14,194 1.80 1.80 9/30/03/16/ 1.75/4/ 18,028 1.82 1.82 9/30/02/16/ 6.77/4/ 7,389 1.81 1.81 9/30/01/16/ 11.55/4/ 1,677 2.24 1.77 - ---------------------------- Intermediate Bond Portfolio - ---------------------------- BlackRock Class 9/30/05 1.61% $ 435,529 0.45% 0.45% 9/30/04 2.72 444,821 0.45 0.45 9/30/03/16/ 6.56 392,112 0.45 0.45 9/30/02/16/ 7.87 371,857 0.48 0.45 9/30/01/16/ 13.39 524,046 0.70 0.45 Institutional Class 9/30/05 1.46% $ 316,522 0.60% 0.60% 9/30/04 2.57 332,460 0.60 0.60 9/30/03/16/ 6.40 371,079 0.61 0.60 9/30/02/16/ 7.82 378,616 0.63 0.60 9/30/01/16/ 13.11 502,749 0.95 0.60 Service Class 9/30/05 1.30% $ 94,557 0.86% 0.86% 9/30/04 2.26 84,013 0.89 0.89 9/30/03/16/ 6.08 56,632 0.89 0.89 9/30/02/16/ 7.50 35,198 0.94 0.90 9/30/01/16/ 12.77 35,351 1.21 0.90 Ratio of net Ratio of total investment expenses income to average Ratio of net to average net assets investment income net assets Portfolio (excluding to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate -------------- ----------------- -------------- -------------- - -------------------------------------- Intermediate Government Bond Portfolio - -------------------------------------- Institutional Class 9/30/05 0.89% 3.78% 3.49% 194% 9/30/04 0.84 3.62 3.38 200 9/30/03/16/ 0.85 4.51 4.26 143 9/30/02/16/ 0.83 5.38 5.16 183 9/30/01/16/ 1.54 5.98 5.76 157 Service Class 9/30/05 1.14% 3.48% 3.24% 194% 9/30/04 1.08 3.38 3.16 200 9/30/03/16/ 1.15 4.22 3.97 143 9/30/02/16/ 1.12 5.34 5.12 183 9/30/01/16/ 1.78 5.66 5.44 157 Investor A Class 9/30/05 1.25% 3.43% 3.17% 194% 9/30/04 1.33 3.17 2.89 200 9/30/03/16/ 1.32 3.99 3.75 143 9/30/02/16/ 1.30 4.83 4.61 183 9/30/01/16/ 1.85 5.30 5.09 157 Investor B Class 9/30/05 1.90% 2.69% 2.54% 194% 9/30/04 1.98 2.43 2.25 200 9/30/03/16/ 2.06 3.22 2.97 143 9/30/02/16/ 2.04 4.00 3.78 183 9/30/01/16/ 2.56 4.68 4.47 157 Investor C Class 9/30/05 1.90% 2.66% 2.51% 194% 9/30/04 1.98 2.45 2.27 200 9/30/03/16/ 2.06 3.13 2.89 143 9/30/02/16/ 2.03 3.93 3.71 183 9/30/01/16/ 2.45 4.58 4.37 157 - --------------------------- Intermediate Bond Portfolio - --------------------------- BlackRock Class 9/30/05 0.70% 3.75% 3.50% 194% 9/30/04 0.69 3.67 3.43 216 9/30/03/16/ 0.69 4.92 4.68 220 9/30/02/16/ 0.81 5.80 5.48 239 9/30/01/16/ 0.92 6.08 5.86 250 Institutional Class 9/30/05 0.83% 3.60% 3.37% 194% 9/30/04 0.81 3.53 3.32 216 9/30/03/16/ 0.84 4.81 4.59 220 9/30/02/16/ 0.84 5.66 5.45 239 9/30/01/16/ 1.16 6.03 5.83 250 Service Class 9/30/05 1.08% 3.34% 3.12% 194% 9/30/04 1.10 3.23 3.02 216 9/30/03/16/ 1.11 4.44 4.22 220 9/30/02/16/ 1.15 5.36 5.15 239 9/30/01/16/ 1.41 5.70 5.49 250 125
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain asset (loss) on value Net investments beginning investment (both realized of period income/14/ and unrealized)/14/ ----------- ------------ -------------------- - --------------------------------------- Intermediate Bond Portfolio (Continued) - --------------------------------------- Investor A Class 9/30/05 $ 9.57 $ 0.32/7/ $ (0.20) 9/30/04 9.88 0.31/7/ (0.09) 9/30/03/16/ 9.81 0.43 0.14 9/30/02/16/ 9.71 0.49 0.19 9/30/01/16/ 9.12 0.52 0.61 Investor B Class 9/30/05 $ 9.57 $ 0.24/7/ $ (0.20) 9/30/04 9.89 0.23/7/ (0.09) 9/30/03/16/ 9.81 0.36 0.14 9/30/02/16/ 9.72 0.43 0.17 9/30/01/16/ 9.13 0.45 0.61 Investor C Class 9/30/05 $ 9.57 $ 0.25/7/ $ (0.20) 9/30/04 9.89 0.23/7/ (0.09) 9/30/03/16/ 9.82 0.35 0.14 9/30/02/16/ 9.72 0.42 0.19 9/30/01/16/ 9.14 0.45 0.60 - -------------------------------- Intermediate PLUS Bond Portfolio - -------------------------------- BlackRock Class 9/30/05 $ 10.01 $ 0.37/7/ $ (0.17) 8/18/04/1/ through 9/30/04 10.00 0.10/7/ (0.04) Institutional Class 9/30/05 $ 10.06 $ 0.31/7/ $ (0.13) 8/18/04/1/ through 9/30/04 10.00 0.06/7/ -- Service Class 9/30/05/10/ $ 10.04 $ 0.33/7/ $ (0.17) 8/18/04/1/ through 9/30/04 10.00 0.01/7/ 0.03 Investor A Class 9/30/05 $ 10.06 $ 0.33/7/ $ (0.17) 8/18/04/1/ through 9/30/04 10.00 0.06/7/ -- Investor B Class 9/30/05 $ 10.06 $ 0.23/7/ $ (0.15) 8/18/04/1/ through 9/30/04 10.00 0.06/7/ -- Investor C Class 9/30/05 $ 10.06 $ 0.19/7/ $ (0.11) 8/18/04/1/ through 9/30/04 10.00 0.06/7/ -- - -------------------------------- Core Bond Total Return Portfolio - -------------------------------- BlackRock Class 9/30/05 $ 9.76 $ 0.40/7/ $ (0.11) 9/30/04 10.03 0.40/7/ (0.06) 9/30/03/16/ 10.02 0.45 0.16 9/30/02/16/ 9.98 0.54 0.20 9/30/01/16/ 9.36 0.58 0.62 Institutional Class 9/30/05 $ 9.74 $ 0.39/7/ $ (0.12) 9/30/04 10.01 0.39/7/ (0.04) 9/30/03/16/ 10.00 0.44 0.16 9/30/02/16/ 9.98 0.53 0.18 9/30/01/16/ 9.36 0.57 0.62 Net Distributions Distributions asset from net from net value investment realized end of income/6/ gains period ---------------- --------------- ----------- - --------------------------------------- Intermediate Bond Portfolio (Continued) - --------------------------------------- Investor A Class 9/30/05 $ (0.29) $ (0.08) $ 9.32 9/30/04 (0.31) (0.22) 9.57 9/30/03/16/ (0.48) (0.02) 9.88 9/30/02/16/ (0.48) (0.10) 9.81 9/30/01/16/ (0.54) -- 9.71 Investor B Class 9/30/05 $ (0.21) $ (0.08) $ 9.32 9/30/04 (0.24) (0.22) 9.57 9/30/03/16/ (0.40) (0.02) 9.89 9/30/02/16/ (0.41) (0.10) 9.81 9/30/01/16/ (0.47) -- 9.72 Investor C Class 9/30/05 $ (0.21) $ (0.08) $ 9.33 9/30/04 (0.24) (0.22) 9.57 9/30/03/16/ (0.40) (0.02) 9.89 9/30/02/16/ (0.41) (0.10) 9.82 9/30/01/16/ (0.47) -- 9.72 - -------------------------------- Intermediate PLUS Bond Portfolio - -------------------------------- BlackRock Class 9/30/05 $ (0.38) $ (0.01) $ 9.82 8/18/04/1/ through 9/30/04 (0.05) -- 10.01 Institutional Class 9/30/05 $ (0.06) $ (0.01) $ 10.17 8/18/04/1/ through 9/30/04 -- -- 10.06 Service Class 9/30/05/10/ $ -- $ (0.01) $ 10.19 8/18/04/1/ through 9/30/04 -- -- 10.04 Investor A Class 9/30/05 $ (0.19) $ (0.01) $ 10.02 8/18/04/1/ through 9/30/04 -- -- 10.06 Investor B Class 9/30/05 $ (0.12) $ (0.01) $ 10.01 8/18/04/1/ through 9/30/04 -- -- 10.06 Investor C Class 9/30/05 $ -- $ (0.01) $ 10.13 8/18/04/1/ through 9/30/04 -- -- 10.06 - -------------------------------- Core Bond Total Return Portfolio - -------------------------------- BlackRock Class 9/30/05 $ (0.39) $ (0.02) $ 9.64 9/30/04 (0.36) (0.25) 9.76 9/30/03/16/ (0.55) (0.05) 10.03 9/30/02/16/ (0.58) (0.12) 10.02 9/30/01/16/ (0.58) -- 9.98 Institutional Class 9/30/05 $ (0.37) $ (0.02) $ 9.62 9/30/04 (0.37) (0.25) 9.74 9/30/03/16/ (0.54) (0.05) 10.01 9/30/02/16/ (0.57) (0.12) 10.00 9/30/01/16/ (0.57) -- 9.98 See accompanying notes to financial statements. 126
BlackRock Funds Ratio of net expenses to Net average net assets Ratio of net assets end of expenses to (excluding Total period average net interest return (000) assets expense) ----------- ------------- -------------- -------------- - --------------------------------------- Intermediate Bond Portfolio (Continued) - --------------------------------------- Investor A Class 9/30/05 1.20%/3/ $ 31,272 0.86% 0.86% 9/30/04 2.33/3/ 33,977 0.93 0.93 9/30/03/16/ 5.92/3/ 38,547 0.94 0.94 9/30/02/16/ 7.32/3/ 26,805 1.12 1.07 9/30/01/16/ 12.58/3/ 7,106 1.33 1.06 Investor B Class 9/30/05 0.44%/4/ $ 10,594 1.61% 1.61% 9/30/04 1.46/4/ 14,106 1.68 1.68 9/30/03/16/ 5.24/4/ 12,850 1.69 1.69 9/30/02/16/ 6.41/4/ 6,291 1.86 1.81 9/30/01/16/ 11.87/4/ 2,933 2.05 1.80 Investor C Class 9/30/05 0.54%/4/ $ 9,204 1.61% 1.61% 9/30/04 1.46/4/ 14,334 1.67 1.67 9/30/03/16/ 5.13/4/ 13,046 1.68 1.68 9/30/02/16/ 6.52/4/ 3,950 1.85 1.80 9/30/01/16/ 11.74/4/ 885 2.11 1.81 - -------------------------------- Intermediate PLUS Bond Portfolio - -------------------------------- BlackRock Class 9/30/05 1.98% $ 30,133 0.40% 0.40% 8/18/04/1/ through 9/30/04 0.57 25,918 0.40/2,15/ 0.40/2,15/ Institutional Class 9/30/05 1.78% $ 826 0.55% 0.55% 8/18/04/1/ through 9/30/04 0.60 -- 0.55/2/ 0.55/2/ Service Class 9/30/05/10/ 1.58% $ -- 0.80% 0.80% 8/18/04/1/ through 9/30/04 0.40 -- 0.81/2/ 0.81/2/ Investor A Class 9/30/05 1.60%/3/ $ 20 0.80% 0.80% 8/18/04/1/ through 9/30/04 0.60/3/ -- 0.81/2/ 0.81/2/ Investor B Class 9/30/05 0.81%/4/ $ 2 1.55% 1.55% 8/18/04/1/ through 9/30/04 0.60/4/ -- 1.56/2/ 1.56/2/ Investor C Class 9/30/05 0.78%/4/ $ -- 1.55% 1.55% 8/18/04/1/ through 9/30/04 0.60/4/ -- 1.56/2/ 1.56/2/ - -------------------------------- Core Bond Total Return Portfolio - -------------------------------- BlackRock Class 9/30/05 2.96% $ 1,543,861 0.40% 0.40% 9/30/04 3.83 1,400,826 0.40 0.40 9/30/03/16/ 6.33 1,035,461 0.40 0.40 9/30/02/16/ 7.74 763,736 0.46 0.40 9/30/01/16/ 13.21 530,153 0.47 0.40 Institutional Class 9/30/05 2.81% $ 614,700 0.55% 0.55% 9/30/04 3.68 697,687 0.55 0.55 9/30/03/16/ 6.19 907,864 0.55 0.55 9/30/02/16/ 7.36 918,935 0.60 0.55 9/30/01/16/ 13.04 1,088,073 0.63 0.55 Ratio of net Ratio of total investment expenses Ratio of net income to average investment to average net assets income net assets Portfolio (excluding to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate ---------------- ---------------- --------------- ---------- - --------------------------------------- Intermediate Bond Portfolio (Continued) - --------------------------------------- Investor A Class 9/30/05 1.18% 3.34% 3.02% 194% 9/30/04 1.29 3.20 2.83 216 9/30/03/16/ 1.21 4.46 4.19 220 9/30/02/16/ 1.33 5.22 5.01 239 9/30/01/16/ 1.54 5.44 5.24 250 Investor B Class 9/30/05 1.83% 2.59% 2.37% 194% 9/30/04 1.94 2.45 2.18 216 9/30/03/16/ 1.96 3.67 3.40 220 9/30/02/16/ 2.07 4.45 4.24 239 9/30/01/16/ 2.25 4.67 4.47 250 Investor C Class 9/30/05 1.83% 2.59% 2.37% 194% 9/30/04 1.93 2.45 2.18 216 9/30/03/16/ 1.95 3.51 3.25 220 9/30/02/16/ 2.06 4.37 4.16 239 9/30/01/16/ 2.31 4.74 4.54 250 - -------------------------------- Intermediate PLUS Bond Portfolio - -------------------------------- BlackRock Class 9/30/05 1.04% 3.72% 3.08% 217% 8/18/04/1/ through 9/30/04 3.40/2,15/ 3.91/2,15/ 0.91/2,15/ 114 Institutional Class 9/30/05 1.18% 3.63% 3.00% 217% 8/18/04/1/ through 9/30/04 3.52/2/ 3.76/2/ 0.79/2/ 114 Service Class 9/30/05/10/ 1.42% 3.37% 2.75% 217% 8/18/04/1/ through 9/30/04 3.77/2/ 3.50/2/ 0.54/2/ 114 Investor A Class 9/30/05 1.52% 3.37% 2.65% 217% 8/18/04/1/ through 9/30/04 3.87/2/ 3.50/2/ 0.44/2/ 114 Investor B Class 9/30/05 2.17% 2.62% 2.00% 217% 8/18/04/1/ through 9/30/04 4.52/2/ 2.75/2/ (0.21)/2/ 114 Investor C Class 9/30/05 2.17% 2.62% 2.00% 217% 8/18/04/1/ through 9/30/04 4.52/2/ 2.75/2/ (0.21)/2/ 114 - -------------------------------- Core Bond Total Return Portfolio - -------------------------------- BlackRock Class 9/30/05 0.64% 4.13% 3.89% 351% 9/30/04 0.63 4.13 3.89 360 9/30/03/16/ 0.65 4.52 4.28 659/9/ 9/30/02/16/ 0.79 5.48 5.14 359 9/30/01/16/ 0.72 6.04 5.80 304 Institutional Class 9/30/05 0.77% 4.00% 3.78% 351% 9/30/04 0.76 3.97 3.76 360 9/30/03/16/ 0.78 4.44 4.21 659/9/ 9/30/02/16/ 0.82 5.36 5.14 359 9/30/01/16/ 0.85 5.91 5.68 304 127
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain asset Net (loss) on value investment investments beginning income (both realized of period (loss)/14/ and unrealized)/14/ ------------ ------------ ------------------- - -------------------------------------------- Core Bond Total Return Portfolio (Continued) - -------------------------------------------- Service Class 9/30/05 $ 9.74 $ 0.36/7/ $ (0.11) 9/30/04 10.01 0.36/7/ (0.04) 9/30/03/16/ 9.99 0.42 0.16 9/30/02/16/ 9.98 0.52 0.15 9/30/01/16/ 9.36 0.54 0.62 Investor A Class 9/30/05 $ 9.75 $ 0.36/7/ $ (0.11) 9/30/04 10.01 0.35/7/ (0.02) 9/30/03/16/ 10.00 0.40 0.16 9/30/02/16/ 9.99 0.47 0.18 9/30/01/16/ 9.36 0.53 0.62 Investor B Class 9/30/05 $ 9.75 $ 0.29/7/ $ (0.13) 9/30/04 10.01 0.28/7/ (0.02) 9/30/03/16/ 10.00 0.33 0.16 9/30/02/16/ 9.98 0.41 0.18 9/30/01/16/ 9.35 0.46 0.62 Investor C Class 9/30/05 $ 9.75 $ 0.29/7/ $ (0.12) 9/30/04 10.02 0.28/7/ (0.03) 9/30/03/16/ 10.01 0.33 0.16 9/30/02/16/ 9.99 0.42 0.17 9/30/01/16/ 9.35 0.46 0.63 - -------------------------------- Core PLUS Total Return Portfolio - -------------------------------- BlackRock Class 9/30/05 $ 10.34 $ 0.41/7/ $ (0.08) 9/30/04 10.46 0.38/7/ (0.01) 9/30/03/16/ 10.31 0.42 0.29 12/07/01/1,16/ through 9/30/02 10.00 0.40 0.32 Institutional Class 9/30/05 $ 10.28 $ 0.47/7/ $ (0.16) 9/30/04 10.46 0.28/7/ 0.02 9/30/03/16/ 10.31 0.40 0.29 12/07/01/1,16/ through 9/30/02 10.00 0.24 0.47 Service Class 9/30/05 $ 10.40 $ 0.38/7/ $ (0.09) 9/30/04 10.46 0.38/7/ 0.01 9/30/03/16/ 10.31 0.37 0.29 12/07/01/1,16/ through 9/30/02 10.00 0.23 0.48 Investor A Class 9/30/05 $ 10.35 $ 0.36/7/ $ (0.07) 9/30/04 10.46 0.33/7/ -- 9/30/03/16/ 10.31 0.37 0.29 12/07/01/1,16/ through 9/30/02 10.00 0.08 0.59 Investor B Class 9/30/05 $ 10.34 $ 0.29/7/ $ (0.08) 9/30/04 10.46 0.25/7/ -- 9/30/03/16/ 10.31 0.29 0.29 12/07/01/1,16/ through 9/30/02 10.00 0.43 0.21 Net Distributions Distributions asset from net from net value investment realized end of income/6/ gains period --------------- --------------- ----------- - -------------------------------------------- Core Bond Total Return Portfolio (Continued) - -------------------------------------------- Service Class 9/30/05 $ (0.35) $ (0.02) $ 9.62 9/30/04 (0.34) (0.25) 9.74 9/30/03/16/ (0.51) (0.05) 10.01 9/30/02/16/ (0.54) (0.12) 9.99 9/30/01/16/ (0.54) -- 9.98 Investor A Class 9/30/05 $ (0.35) $ (0.02) $ 9.63 9/30/04 (0.34) (0.25) 9.75 9/30/03/16/ (0.50) (0.05) 10.01 9/30/02/16/ (0.52) (0.12) 10.00 9/30/01/16/ (0.52) -- 9.99 Investor B Class 9/30/05 $ (0.27) $ (0.02) $ 9.62 9/30/04 (0.27) (0.25) 9.75 9/30/03/16/ (0.43) (0.05) 10.01 9/30/02/16/ (0.45) (0.12) 10.00 9/30/01/16/ (0.45) -- 9.98 Investor C Class 9/30/05 $ (0.27) $ (0.02) $ 9.63 9/30/04 (0.27) (0.25) 9.75 9/30/03/16/ (0.43) (0.05) 10.02 9/30/02/16/ (0.45) (0.12) 10.01 9/30/01/16/ (0.45) -- 9.99 - -------------------------------- Core PLUS Total Return Portfolio - -------------------------------- BlackRock Class 9/30/05 $ (0.40) $ -- $ 10.27 9/30/04 (0.36) (0.13) 10.34 9/30/03/16/ (0.50) (0.06) 10.46 12/07/01/1,16/ through 9/30/02 (0.41) -- 10.31 Institutional Class 9/30/05 $ (0.38) $ -- $ 10.21 9/30/04 (0.35) (0.13) 10.28 9/30/03/16/ (0.48) (0.06) 10.46 12/07/01/1,16/ through 9/30/02 (0.40) -- 10.31 Service Class 9/30/05 $ (0.36) $ -- $ 10.33 9/30/04 (0.32) (0.13) 10.40 9/30/03/16/ (0.45) (0.06) 10.46 12/07/01/1,16/ through 9/30/02 (0.40) -- 10.31 Investor A Class 9/30/05 $ (0.36) $ -- $ 10.28 9/30/04 (0.31) (0.13) 10.35 9/30/03/16/ (0.45) (0.06) 10.46 12/07/01/1,16/ through 9/30/02 (0.36) -- 10.31 Investor B Class 9/30/05 $ (0.28) $ -- $ 10.27 9/30/04 (0.24) (0.13) 10.34 9/30/03/16/ (0.37) (0.06) 10.46 12/07/01/1,16/ through 9/30/02 (0.33) -- 10.31 See accompanying notes to financial statements. 128
BlackRock Funds Ratio of net Net expenses to assets Ratio of net average net end of expenses to assets Total period average net (excluding return (000) assets interest expense) ---------- ------------ -------------- ------------------- - -------------------------------------------- Core Bond Total Return Portfolio (Continued) - -------------------------------------------- Service Class 9/30/05 2.54% $ 158,200 0.81% 0.81% 9/30/04 3.38 152,085 0.84 0.84 9/30/03/16/ 5.98 139,499 0.85 0.85 9/30/02/16/ 6.94 115,774 0.91 0.85 9/30/01/16/ 12.71 112,748 0.91 0.85 Investor A Class 9/30/05 2.54%/3/ $ 214,196 0.81% 0.81% 9/30/04 3.44/3/ 132,561 0.88 0.88 9/30/03/16/ 5.81/3/ 113,190 0.90 0.90 9/30/02/16/ 6.75/3/ 90,460 1.08 1.02 9/30/01/16/ 12.63/3/ 22,123 1.07 1.02 Investor B Class 9/30/05 1.67%/4/ $ 49,389 1.56% 1.56% 9/30/04 2.66/4/ 56,758 1.63 1.63 9/30/03/16/ 5.03/4/ 70,550 1.65 1.65 9/30/02/16/ 6.06/4/ 56,047 1.83 1.76 9/30/01/16/ 11.69/4/ 36,314 1.81 1.75 Investor C Class 9/30/05 1.77%/4/ $ 73,954 1.56% 1.56% 9/30/04 2.56/4/ 85,717 1.62 1.62 9/30/03/16/ 5.02/4/ 81,478 1.65 1.65 9/30/02/16/ 6.06/4/ 47,326 1.82 1.76 9/30/01/16/ 11.80/4/ 21,678 1.79 1.75 - -------------------------------- Core PLUS Total Return Portfolio - -------------------------------- BlackRock Class 9/30/05 3.21% $ 326,033 0.40% 0.40% 9/30/04 3.65 285,096 0.40 0.40 9/30/03/16/ 7.00 224,248 0.40 0.40 12/07/01/1,16/ through 9/30/02 7.37 95,503 0.32/2/ 0.32/2/ Institutional Class 9/30/05 3.08% $ -- 0.55% 0.55% 9/30/04 2.91 -- 0.55 0.55 9/30/03/16/ 6.84 -- 0.55 0.55 12/07/01/1,16/ through 9/30/02 7.21 -- 0.52/2/ 0.52/2/ Service Class 9/30/05 2.77% $ -- 0.80% 0.80% 9/30/04 3.78 29 0.78 0.78 9/30/03/16/ 6.53 -- 0.85 0.85 12/07/01/1,16/ through 9/30/02 7.22 -- 0.82/2/ 0.82/2/ Investor A Class 9/30/05 2.79%/3/ $ 88 0.80% 0.80% 9/30/04 3.25/3/ 9 0.86 0.86 9/30/03/16/ 6.47/3/ 8 0.90 0.90 12/07/01/1,16/ through 9/30/02 6.88/3/ 2 0.99/2/ 0.99/2/ Investor B Class 9/30/05 2.02%/4/ $ 137 1.56% 1.56% 9/30/04 2.38/4/ 103 1.63 1.63 9/30/03/16/ 5.68/4/ 80 1.65 1.65 12/07/01/1,16/ through 9/30/02 6.46/4/ -- 1.74/2/ 1.74/2/ Ratio of net Ratio of total investment expenses Ratio of net income to average investment to average net assets income net assets Portfolio (excluding to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate --------------- ---------------- ---------------- ---------- - -------------------------------------------- Core Bond Total Return Portfolio (Continued) - -------------------------------------------- Service Class 9/30/05 1.03% 3.73% 3.51% 351% 9/30/04 1.05 3.69 3.48 360 9/30/03/16/ 1.08 4.09 3.86 659/9/ 9/30/02/16/ 1.13 5.07 4.85 359 9/30/01/16/ 1.13 5.56 5.34 304 Investor A Class 9/30/05 1.13% 3.72% 3.40% 351% 9/30/04 1.23 3.65 3.30 360 9/30/03/16/ 1.25 4.01 3.66 659/9/ 9/30/02/16/ 1.30 4.89 4.67 359 9/30/01/16/ 1.28 5.34 5.13 304 Investor B Class 9/30/05 1.78% 2.97% 2.75% 351% 9/30/04 1.88 2.88 2.63 360 9/30/03/16/ 2.00 3.26 2.91 659/9/ 9/30/02/16/ 2.04 4.14 3.92 359 9/30/01/16/ 2.02 4.62 4.41 304 Investor C Class 9/30/05 1.78% 2.93% 2.71% 351% 9/30/04 1.87 2.89 2.64 360 9/30/03/16/ 2.00 3.22 2.87 659/9/ 9/30/02/16/ 2.04 4.14 3.92 359 9/30/01/16/ 2.00 4.57 4.36 304 - -------------------------------- Core PLUS Total Return Portfolio - -------------------------------- BlackRock Class 9/30/05 0.72% 3.98% 3.66% 358% 9/30/04 0.71 3.68 3.37 412 9/30/03/16/ 0.75 3.61 3.26 1,021/10/ 12/07/01/1,16/ through 9/30/02 0.72/2/ 3.94/2/ 3.54/2/ 330 Institutional Class 9/30/05 0.83% 3.83% 3.55% 358% 9/30/04 0.82 3.53 3.26 412 9/30/03/16/ 0.90 3.47 3.12 1,021/10/ 12/07/01/1,16/ through 9/30/02 0.93/2/ 3.80/2/ 3.38/2/ 330 Service Class 9/30/05 1.08% 3.57% 3.29% 358% 9/30/04 1.07 3.74 3.45 412 9/30/03/16/ 1.20 3.17 2.82 1,021/10/ 12/07/01/1,16/ through 9/30/02 1.23/2/ 3.50/2/ 3.08/2/ 330 Investor A Class 9/30/05 1.19% 3.56% 3.17% 358% 9/30/04 1.28 3.21 2.79 412 9/30/03/16/ 1.25 3.12 2.77 1,021/10/ 12/07/01/1,16/ through 9/30/02 1.40/2/ 3.33/2/ 2.91/2/ 330 Investor B Class 9/30/05 1.84% 2.84% 2.56% 358% 9/30/04 1.97 2.46 2.12 412 9/30/03/16/ 2.00 2.36 2.01 1,021/10/ 12/07/01/1,16/ through 9/30/02 2.15/2/ 2.58/2/ 2.16/2/ 330 129
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain asset Net (loss) on value investment investments beginning income (both realized of period (loss)/14/ and unrealized)/14/ ----------- ------------- -------------------- - -------------------------------------------- Core PLUS Total Return Portfolio (Continued) - -------------------------------------------- Investor C Class 9/30/05 $ 10.33 $ 0.28/7/ $ (0.07) 9/30/04 10.46 0.27/7/ (0.03) 9/30/03/16/ 10.31 0.29 0.29 12/07/01/1,16/ through 9/30/02 10.00 0.43 0.21 - --------------------------- Government Income Portfolio - --------------------------- BlackRock Class 9/30/05 $ 11.18 $ 0.48/7/ $ (0.21) 9/30/04 11.34 0.47/7/ (0.05) 2/10/03/1,16/ through 9/30/03 11.27 0.60/7/ (0.19) Service Class 10/27/04/1/ through 09/30/05 $ 11.21 $ 0.40/7/ $ (0.24) Investor A Class 9/30/05 $ 11.18 $ 0.43/7/ $ (0.21) 9/30/04 11.33 0.40/7/ (0.04) 9/30/03/16/ 11.40 0.34/7/ 0.14 9/30/02/16/ 10.99 0.45/7/ 0.74 9/30/01/16/ 10.03 0.56 0.94 Investor B Class 9/30/05 $ 11.18 $ 0.35/7/ $ (0.21) 9/30/04 11.33 0.31/7/ (0.03) 9/30/03/16/ 11.40 0.30/7/ 0.10 9/30/02/16/ 10.98 0.39/7/ 0.73 9/30/01/16/ 10.03 0.48 0.93 Investor C Class 9/30/05 $ 11.16 $ 0.35/7/ $ (0.21) 9/30/04 11.31 0.31/7/ (0.03) 9/30/03/16/ 11.38 0.30/7/ 0.10 9/30/02/16/ 10.97 0.36/7/ 0.75 9/30/01/16/ 10.02 0.47 0.94 - ---------------------------------- Inflation Protected Bond Portfolio - ---------------------------------- BlackRock Class 9/30/05 $ 10.38 $ 0.41/7/ $ 0.19 6/28/04/1/ through 9/30/04 10.00 0.12/7/ 0.38 Institutional Class 9/30/05 $ 10.54 $ 0.42/7/ $ 0.18 6/28/04/1/ through 9/30/04 10.00 0.16/7/ 0.38 Service Class 9/30/05 $ 10.39 $ 0.43/7/ $ 0.14 6/28/04/1/ through 9/30/04 10.00 (0.02)/7/ 0.41 Investor A Class 9/30/05 $ 10.50 $ 0.42/7/ $ 0.13 6/28/04/1/ through 9/30/04 10.00 0.01/7/ 0.51 Investor B Class 9/30/05 $ 10.51 $ 0.38/7/ $ 0.09 6/28/04/1/ through 9/30/04 10.00 (0.01)/7/ 0.53 Investor C Class 9/30/05 $ 10.55 $ 0.36/7/ $ 0.12 6/28/04/1/ through 9/30/04 10.00 (0.01)/7/ 0.56 Net Distributions Distributions asset from net Distributions from net value investment from realized end of income/6/ capital gains period --------------- --------------- --------------- ----------- - -------------------------------------------- Core PLUS Total Return Portfolio (Continued) - -------------------------------------------- Investor C Class 9/30/05 $ (0.28) $ -- $ -- $ 10.26 9/30/04 (0.24) -- (0.13) 10.33 9/30/03/16/ (0.37) -- (0.06) 10.46 12/07/01/1,16/ through 9/30/02 (0.33) -- -- 10.31 - --------------------------- Government Income Portfolio - --------------------------- BlackRock Class 9/30/05 $ (0.52) $ (0.02) $ -- $ 10.91 9/30/04 (0.42) -- (0.16) 11.18 2/10/03/1,16/ through 9/30/03 (0.34) -- -- 11.34 Service Class 10/27/04/1/ through 09/30/05 $ (0.45) $ (0.02) $ -- $ 10.90 Investor A Class 9/30/05 $ (0.47) $ (0.02) $ -- $ 10.91 9/30/04 (0.36) -- (0.16) 11.18 9/30/03/16/ (0.46) -- (0.09) 11.33 9/30/02/16/ (0.51) -- (0.27) 11.40 9/30/01/16/ (0.54) -- -- 10.99 Investor B Class 9/30/05 $ (0.39) $ (0.02) $ -- $ 10.91 9/30/04 (0.27) -- (0.16) 11.18 9/30/03/16/ (0.38) -- (0.09) 11.33 9/30/02/16/ (0.43) -- (0.27) 11.40 9/30/01/16/ (0.46) -- -- 10.98 Investor C Class 9/30/05 $ (0.39) $ (0.02) $ -- $ 10.89 9/30/04 (0.27) -- (0.16) 11.16 9/30/03/16/ (0.38) -- (0.09) 11.31 9/30/02/16/ (0.43) -- (0.27) 11.38 9/30/01/16/ (0.46) -- -- 10.97 - ---------------------------------- Inflation Protected Bond Portfolio - ---------------------------------- BlackRock Class 9/30/05 $ (0.53) $ -- $ (0.10) $ 10.35 6/28/04/1/ through 9/30/04 (0.12) -- -- 10.38 Institutional Class 9/30/05 $ (0.50) $ -- $ (0.10) $ 10.54 6/28/04/1/ through 9/30/04 -- -- -- 10.54 Service Class 9/30/05 $ (0.30) $ -- $ (0.10) $ 10.56 6/28/04/1/ through 9/30/04 -- -- -- 10.39 Investor A Class 9/30/05 $ (0.48) $ -- $ (0.10) $ 10.47 6/28/04/1/ through 9/30/04 (0.02) -- -- 10.50 Investor B Class 9/30/05 $ (0.40) $ -- $ (0.10) $ 10.48 6/28/04/1/ through 9/30/04 (0.01) -- -- 10.51 Investor C Class 9/30/05 $ (0.40) $ -- $ (0.10) $ 10.53 6/28/04/1/ through 9/30/04 -- -- -- 10.55 See accompanying notes to financial statements. 130
BlackRock Funds Ratio of net Net expenses to assets Ratio of net average net end of expenses to assets Total period average net (excluding return (000) assets interest expense) ----------- --------- -------------- ----------------- - -------------------------------------------- Core PLUS Total Return Portfolio (Continued) - -------------------------------------------- Investor C Class 9/30/05 2.02%/4/ $ 53 1.55% 1.56% 9/30/04 2.28/4/ -- 1.63 1.63 9/30/03/16/ 5.68/4/ -- 1.65 1.65 12/07/01/1,16/ through 9/30/02 6.46/4/ -- 1.74/2/ 1.74/2/ - --------------------------- Government Income Portfolio - --------------------------- BlackRock Class 9/30/05 2.43% $ 9,164 0.45% 0.45% 9/30/04 3.85 10,899 0.44 0.44 2/10/03/1,16/ through 9/30/03 3.68 3 0.29/2/ 0.29/2/ Service Class 10/27/04/1/ through 09/30/05 1.46% $ 212,963 0.85%/2/ 0.85%/2/ Investor A Class 9/30/05 2.01%/3/ $ 247,380 0.86% 0.86% 9/30/04 3.34/3/ 126,332 0.98 0.98 9/30/03/16/ 4.34/3/ 86,559 1.07 1.07 9/30/02/16/ 11.47/3/ 42,845 1.11 1.07 9/30/01/16/ 15.36/3/ 12,040 1.31 1.06 Investor B Class 9/30/05 1.25%/4/ $ 42,479 1.61% 1.61% 9/30/04 2.57/4/ 44,786 1.73 1.73 9/30/03/16/ 3.56/4/ 53,897 1.82 1.82 9/30/02/16/ 10.74/4/ 48,240 1.87 1.82 9/30/01/16/ 14.41/4/ 29,936 2.10 1.82 Investor C Class 9/30/05 1.25%/4/ $ 31,840 1.61% 1.61% 9/30/04 2.57/4/ 26,036 1.73 1.73 9/30/03/16/ 3.56/4/ 29,537 1.82 1.82 9/30/02/16/ 10.66/4/ 18,378 1.84 1.81 9/30/01/16/ 14.42/4/ 3,589 2.04 1.80 - ----------------------------------- Inflation Protected Bond Portfolio - ----------------------------------- BlackRock Class 9/30/05 5.91% $ 22,975 0.30% 0.30% 6/28/04/1/ through 9/30/04 5.05 20,763 0.30/2,15/ 0.30/2,15/ Institutional Class 9/30/05 5.90% $ 5,788 0.40% 0.40% 6/28/04/1/ through 9/30/04 5.40 -- 0.40/2/ 0.40/2/ Service Class 9/30/05 5.52% $ 2 0.69% 0.69% 6/28/04/1/ through 9/30/04 3.90 -- 0.71/2/ 0.71/2/ Investor A Class 9/30/05 5.42%/3/ $ 3,994 0.69% 0.69% 6/28/04/1/ through 9/30/04 5.21/3/ 93 0.71/2/ 0.71/2/ Investor B Class 9/30/05 4.62%/4/ $ 2,045 1.44% 1.44% 6/28/04/1/ through 9/30/04 5.21/4/ 61 1.44/2/ 1.44/2/ Investor C Class 9/30/05 4.70%/4/ $ 3,749 1.42% 1.42% 6/28/04/1/ through 9/30/04 5.51/4/ 6 1.44/2/ 1.44/2/ Ratio of net Ratio of total investment expenses Ratio of net income to Average investment to average net assets income net assets Portfolio (excluding to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate ------------------ ----------------- -------------- ----------- - -------------------------------------------- Core PLUS Total Return Portfolio (Continued) - -------------------------------------------- Investor C Class 9/30/05 1.84% 2.78% 2.49% 358% 9/30/04 1.97 2.46 2.12 412 9/30/03/16/ 2.00 2.37 2.02 1,021/10/ 12/07/01/1,16/ through 9/30/02 2.15/2/ 2.58/2/ 2.16/2/ 330 - ---------------------------- Government Income Portfolio - ---------------------------- BlackRock Class 0.77% 4.35% 4.03% 662% 9/30/05 0.78% 4.25 3.92 345 9/30/04 0.47/2/ 2.95/2/ 2.76/2/ 1,981/11/ 2/10/03/1,16/ through 9/30/03 Service Class 1/27/04/1/ through 09/30/05 1.15%/2/ 3.95%/2/ 3.65%/2/ 662% Investor A Class 9/30/05 1.26% 3.92% 3.52% 662% 9/30/04 1.38 3.63 3.23 345 9/30/03/16/ 1.34 3.05 2.78 1,981/11/ 9/30/02/16/ 1.41 4.26 3.97 615 9/30/01/16/ 1.60 5.25 4.96 849 Investor B Class 9/30/05 1.90% 3.20% 2.91% 662% 9/30/04 2.03 2.81 2.51 345 9/30/03/16/ 2.09 2.62 2.35 1,981/11/ 9/30/02/16/ 2.17 3.69 3.40 615 9/30/01/16/ 2.39 4.62 4.33 849 Investor C Class 9/30/05 1.90% 3.19% 2.90% 662% 9/30/04 2.03 2.81 2.51 345 9/30/03/16/ 2.09 2.61 2.34 1,981/11/ 9/30/02/16/ 2.13 3.42 3.13 615 9/30/01/16/ 2.33 4.50 4.21 849 - ---------------------------------- Inflation Protected Bond Portfolio - ---------------------------------- BlackRock Class 9/30/05 0.97% 4.01% 3.34% 419% 6/28/04/1/ through 9/30/04 2.61/2,15/ 4.29/2,15/ 1.98/2,15/ 96 Institutional Class 9/30/05 1.06% 4.00% 3.34% 419% 6/28/04/1/ through 9/30/04 2.73/2/ 4.19/2/ 1.86/2/ 96 Service Class 9/30/05 1.29% 3.71% 3.11% 419% 6/28/04/1/ through 9/30/04 2.98/2/ 3.88/2/ 1.61/2/ 96 Investor A Class 9/30/05 1.39% 4.06% 3.36% 419% 6/28/04/1/ through 9/30/04 3.08/2/ 3.88/2/ 1.51/2/ 96 Investor B Class 9/30/05 2.07% 3.65% 3.02% 419% 6/28/04/1/ through 9/30/04 3.73/2/ 3.15/2/ 0.86/2/ 96 Investor C Class 9/30/05 2.04% 3.46% 2.84% 419% 6/28/04/1/ through 9/30/04 3.73/2/ 3.15/2/ 0.86/2/ 96 131
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain Net asset (loss) on Distributions Distributions asset value Net investments from net from net value beginning investment (both realized investment realized end of of period income/14/ and unrealized)/14/ income/6/ gains period ----------- ------------ ------------------- -------------- ------------- -------- - -------------- GNMA Portfolio - -------------- BlackRock Class 9/30/05 $ 9.87 $ 0.44/7/ $ (0.20) $ (0.42) $ -- $ 9.69 9/30/04 10.02 0.48/7/ (0.14) (0.49) -- 9.87 12/19/02/1,16/ through 9/30/03 10.27 0.41 (0.18) (0.48) -- 10.02 Institutional Class 9/30/05 $ 9.88 $ 0.43/7/ $ (0.21) $ (0.40) $ -- $ 9.70 9/30/04 10.02 0.47/7/ (0.09) (0.52) -- 9.88 9/30/03/16/ 10.23 0.48 (0.08) (0.61) -- 10.02 9/30/02/16/ 10.28 0.61 0.18 (0.63) (0.21) 10.23 9/30/01/16/ 9.70 0.63 0.58 (0.63) -- 10.28 Service Class 9/30/05 $ 9.87 $ 0.39/7/ $ (0.19) $ (0.38) $ -- $ 9.69 9/30/04 10.01 0.44/7/ (0.08) (0.50) -- 9.87 9/30/03/16/ 10.23 0.50 (0.14) (0.58) -- 10.01 9/30/02/16/ 10.29 0.56 0.19 (0.60) (0.21) 10.23 9/30/01/16/ 9.72 0.60 0.57 (0.60) -- 10.29 Investor A Class 9/30/05 $ 9.92 $ 0.41/7/ $ (0.21) $ (0.38) $ -- $ 9.74 9/30/04 10.06 0.43/7/ (0.09) (0.48) -- 9.92 9/30/03/16/ 10.27 0.46 (0.11) (0.56) -- 10.06 9/30/02/16/ 10.32 0.54 0.20 (0.58) (0.21) 10.27 9/30/01/16/ 9.71 0.58 0.61 (0.58) -- 10.32 Investor B Class 9/30/05 $ 9.89 $ 0.33/7/ $ (0.21) $ (0.30) $ -- $ 9.71 9/30/04 10.03 0.36/7/ (0.09) (0.41) -- 9.89 9/30/03/16/ 10.24 0.38 (0.11) (0.48) -- 10.03 9/30/02/16/ 10.29 0.47 0.19 (0.50) (0.21) 10.24 9/30/01/16/ 9.71 0.51 0.58 (0.51) -- 10.29 Investor C Class 9/30/05 $ 9.88 $ 0.34/7/ $ (0.22) $ (0.30) $ -- $ 9.70 9/30/04 10.01 0.36/7/ (0.08) (0.41) -- 9.88 9/30/03/16/ 10.23 0.38 (0.12) (0.48) -- 10.01 9/30/02/16/ 10.27 0.45 0.22 (0.50) (0.21) 10.23 9/30/01/16/ 9.68 0.51 0.59 (0.51) -- 10.27 - ------------------------ Managed Income Portfolio - ------------------------ Institutional Class 9/30/05 $ 10.41 $ 0.46/7/ $ (0.18) $ (0.45) $ (0.04) $ 10.20 9/30/04 10.80 0.47/7/ (0.10) (0.48) (0.28) 10.41 9/30/03/16/ 10.71 0.55 0.17 (0.63) -- 10.80 9/30/02/16/ 10.60 0.60 0.10 (0.59) -- 10.71 9/30/01/16/ 9.92 0.61 0.68 (0.61) -- 10.60 See accompanying notes to financial statements. 132
BlackRock Funds Ratio of net expenses to Net average net assets Ratio of net assets end of expenses to (excluding Total period average net interest return (000) assets expense) --------- ---------- ------------ ------------ - -------------- GNMA Portfolio - -------------- BlackRock Class 9/30/05 2.44% $ 10,915 0.45% 0.45% 9/30/04 4.02 10,659 0.50 0.45 12/19/02/1,16/ through 9/30/03 2.33 59,935 0.35/2/ 0.35/2/ Institutional Class 9/30/05 2.28% $ 121,571 0.61% 0.60% 9/30/04 3.97 151,558 0.66 0.60 9/30/03/16/ 4.00 172,358 0.64 0.60 9/30/02/16/ 8.03 183,328 0.95 0.60 9/30/01/16/ 12.84 117,528 1.34 0.60 Service Class 9/30/05 2.02% $ 8,129 0.86% 0.86% 9/30/04 3.67 2,271 0.94 0.89 9/30/03/16/ 3.58 1,554 0.93 0.90 9/30/02/16/ 7.61 1,069 1.14 0.90 9/30/01/16/ 12.38 224 1.59 0.90 Investor A Class 9/30/05 2.01%/3/ $ 15,288 0.86% 0.86% 9/30/04 3.50/3/ 18,080 1.05 0.99 9/30/03/16/ 3.50/3/ 18,978 1.11 1.07 9/30/02/16/ 7.50/3/ 13,620 1.36 1.07 9/30/01/16/ 12.74/3/ 3,672 1.81 1.07 Investor B Class 9/30/05 1.25%/4/ $ 19,792 1.62% 1.61% 9/30/04 2.74/4/ 25,439 1.80 1.74 9/30/03/16/ 2.74/4/ 32,486 1.85 1.82 9/30/02/16/ 6.72/4/ 23,928 2.07 1.80 9/30/01/16/ 11.48/4/ 4,936 2.53 1.77 Investor C Class 9/30/05 1.26%/4/ $ 26,691 1.62% 1.61% 9/30/04 2.85/4/ 39,542 1.80 1.74 9/30/03/16/ 2.64/4/ 51,109 1.85 1.82 9/30/02/16/ 6.84/4/ 36,220 1.94 1.79 9/30/02/16/ 11.62/4/ 1,225 2.48 1.75 - ------------------------ Managed Income Portfolio - ------------------------ Institutional Class 9/30/05 2.76% $ 587,061 0.65% 0.65% 9/30/04 3.60 644,083 0.65 0.65 9/30/03/16/ 6.91 810,452 0.65 0.65 9/30/02/16/ 6.82 924,211 0.75 0.65 9/30/01/16/ 13.39 1,042,238 1.07 0.65 Ratio of net Ratio of total investment expenses Ratio of net income to average investment to average net assets income net assets Portfolio (excluding to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate -------------- -------------- ------------- --------- - -------------- GNMA Portfolio - -------------- BlackRock Class 9/30/05 0.85% 4.53% 4.13% 521% 9/30/04 0.83 4.85 4.51 228 12/19/02/1,16/ through 9/30/03 0.61/2/ 3.32/2/ 3.05/2/ 1,365/12/ Institutional Class 9/30/05 0.97% 4.40% 4.04% 521% 9/30/04 0.97 4.74 4.43 228 9/30/03/16/ 0.95 4.89 4.58 1,365/12/ 9/30/02/16/ 1.24 5.99 5.70 401 9/30/01/16/ 1.66 6.30 5.97 773 Service Class 9/30/05 1.23% 3.97% 3.60% 521% 9/30/04 1.25 4.45 4.13 228 9/30/03/16/ 1.25 4.70 4.39 1,365/12/ 9/30/02/16/ 1.44 5.37 5.07 401 9/30/01/16/ 1.92 5.97 5.65 773 Investor A Class 9/30/05 1.32% 4.13% 3.67% 521% 9/30/04 1.46 4.34 3.93 228 9/30/03/16/ 1.42 4.27 3.96 1,365/12/ 9/30/02/16/ 1.65 5.18 4.89 401 9/30/01/16/ 2.13 5.77 5.45 773 Investor B Class 9/30/05 1.97% 3.40% 3.05% 521% 9/30/04 2.11 3.62 3.31 228 9/30/03/16/ 2.16 3.56 3.25 1,365/12/ 9/30/02/16/ 2.36 4.44 4.15 401 9/30/01/16/ 2.83 4.67 4.36 773 Investor C Class 9/30/05 1.98% 3.44% 3.08% 521% 9/30/04 2.11 3.62 3.31 228 9/30/03/16/ 2.16 3.55 3.24 1,365/12/ 9/30/02/16/ 2.23 4.13 3.84 401 9/30/01/16/ 2.79 4.54 4.23 773 - ------------------------ Managed Income Portfolio - ------------------------ Institutional Class 9/30/05 0.83% 4.45% 4.27% 252% 9/30/04 0.81 4.50 4.34 284 9/30/03/16/ 0.82 5.06 4.89 613/13/ 9/30/02/16/ 0.90 5.63 5.50 290 9/30/01/16/ 1.19 5.99 5.87 262 133
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain asset (Loss) on value Net investments beginning investment (both realized of period income/14/ and unrealized)/14/ --------- ---------- --------------------- - ------------------------------------ Managed Income Portfolio (Continued) - ------------------------------------ Service Class 9/30/05 $ 10.41 $ 0.43/7/ $ (0.18) 9/30/04 10.80 0.44/7/ (0.10) 9/30/03/16/ 10.71 0.54 0.15 9/30/02/16/ 10.60 0.57 0.10 9/30/01/16/ 9.92 0.58 0.68 Investor A Class 9/30/05 $ 10.41 $ 0.42/7/ $ (0.17) 9/30/04 10.80 0.42/7/ (0.10) 9/30/03/16/ 10.71 0.49 0.18 9/30/02/16/ 10.60 0.53 0.12 9/30/01/16/ 9.92 0.56 0.68 Investor B Class 9/30/05 $ 10.41 $ 0.35/7/ $ (0.17) 9/30/04 10.80 0.35/7/ (0.11) 9/30/03/16/ 10.71 0.41 0.18 9/30/02/16/ 10.60 0.46 0.11 9/30/01/16/ 9.92 0.49 0.68 Investor C Class 9/30/05 $ 10.38 $ 0.34/7/ $ (0.16) 9/30/04 10.78 0.35/7/ (0.12) 9/30/03/16/ 10.68 0.41 0.19 9/30/02/16/ 10.57 0.46 0.11 9/30/01/16/ 9.91 0.49 0.66 - ----------------------------- International Bond Portfolio - ----------------------------- BlackRock Class 9/30/05 $ 11.41 $ 0.30/7/ $ 0.03 5/18/04/1/ through 9/30/04 10.96 0.11/7/ 0.51 Institutional Class 9/30/05 $ 11.41 $ 0.28/7/ $ 0.03 9/30/04 11.07 0.28/7/ 0.51 9/30/03/16/ 10.54 0.29/7/ 0.81 9/30/02/16/ 10.53 0.42/7/ 0.17 9/30/01/16/ 10.69 0.55 0.68 Service Class 9/30/05 $ 11.42 $ 0.26/7/ $ 0.02 9/30/04 11.08 0.25/7/ 0.50 9/30/03/16/ 10.54 0.26/7/ 0.81 9/30/02/16/ 10.53 0.37/7/ 0.19 9/30/01/16/ 10.69 0.50 0.70 Investor A Class 9/30/05 $ 11.42 $ 0.25/7/ $ 0.03 9/30/04 11.07 0.23/7/ 0.52 9/30/03/16/ 10.54 0.24/7/ 0.81 9/30/02/16/ 10.53 0.35/7/ 0.19 9/30/01/16/ 10.69 0.47 0.71 Net Distributions Distributions asset from net Distributions from net value investment from realized end of income/6/ capital gains period ------------- ------------- --------------- -------- - ------------------------------------ Managed Income Portfolio (Continued) - ------------------------------------ Service Class 9/30/05 $ (0.42) $ -- $ (0.04) $ 10.20 9/30/04 (0.45) -- (0.28) 10.41 9/30/03/16/ (0.60) -- -- 10.80 9/30/02/16/ (0.56) -- -- 10.71 9/30/01/16/ (0.58) -- -- 10.60 Investor A Class 9/30/05 $ (0.41) $ -- $ (0.04) $ 10.21 9/30/04 (0.43) -- (0.28) 10.41 9/30/03/16/ (0.58) -- -- 10.80 9/30/02/16/ (0.54) -- -- 10.71 9/30/01/16/ (0.56) -- -- 10.60 Investor B Class 9/30/05 $ (0.34) $ -- $ (0.04) $ 10.21 9/30/04 (0.35) -- (0.28) 10.41 9/30/03/16/ (0.50) -- -- 10.80 9/30/02/16/ (0.46) -- -- 10.71 9/30/01/16/ (0.49) -- -- 10.60 Investor C Class 9/30/05 $ (0.34) $ -- $ (0.04) $ 10.18 9/30/04 (0.35) -- (0.28) 10.38 9/30/03/16/ (0.50) -- -- 10.78 9/30/02/16/ (0.46) -- -- 10.68 9/30/01/16/ (0.49) -- -- 10.57 - ---------------------------- International Bond Portfolio - ---------------------------- BlackRock Class 9/30/05 $ (0.60) $ -- $ (0.01) $ 11.13 5/18/04/1/ through 9/30/04 (0.17) -- -- 11.41 Institutional Class 9/30/05 $ (0.58) $ -- $ (0.01) $ 11.13 9/30/04 (0.45) -- -- 11.41 9/30/03/16/ (0.33) (0.17) (0.07) 11.07 9/30/02/16/ (0.58) -- -- 10.54 9/30/01/16/ (1.39) -- -- 10.53 Service Class 9/30/05 $ (0.55) $ -- $ (0.01) $ 11.14 9/30/04 (0.41) -- -- 11.42 9/30/03/16/ (0.29) (0.17) (0.07) 11.08 9/30/02/16/ (0.55) -- -- 10.54 9/30/01/16/ (1.36) -- -- 10.53 Investor A Class 9/30/05 $ (0.55) $ -- $ (0.01) $ 11.14 9/30/04 (0.40) -- -- 11.42 9/30/03/16/ (0.28) (0.17) (0.07) 11.07 9/30/02/16/ (0.53) -- -- 10.54 9/30/01/16/ (1.34) -- -- 10.53 See accompanying notes to financial statements. 134
BlackRock Funds Ratio of net expenses to Net average net assets Ratio of net assets end of expenses to (excluding Total period average net interest return (000) assets expense) ----------- ---------- -------------- ------------ - ------------------------------------ Managed Income Portfolio (Continued) - ------------------------------------ Service Class 9/30/05 2.45% $ 81,337 0.95% 0.95% 9/30/04 3.29 80,253 0.95 0.95 9/30/03/16/ 6.58 92,336 0.95 0.95 9/30/02/16/ 6.50 137,084 1.06 0.95 9/30/01/16/ 13.05 238,117 1.37 0.95 Investor A Class 9/30/05 2.45%/3/ $ 29,462 1.05% 1.05% 9/30/04 3.13/3/ 35,462 1.10 1.10 9/30/03/16/ 6.41/3/ 49,870 1.12 1.12 9/30/02/16/ 6.32/3/ 52,794 1.12 1.12 9/30/01/16/ 12.86/3/ 20,196 1.13 1.13 Investor B Class 9/30/05 1.69%/4/ $ 6,625 1.80% 1.80% 9/30/04 2.36/4/ 9,136 1.85 1.85 9/30/03/16/ 5.61/4/ 10,425 1.87 1.87 9/30/02/16/ 5.53/4/ 9,582 1.99 1.87 9/30/01/16/ 12.03/4/ 7,981 2.21 1.87 Investor C Class 9/30/05 1.69%/4/ $ 1,187 1.79% 1.79% 9/30/04 2.26/4/ 870 1.84 1.84 9/30/03/16/ 5.73/4/ 763 1.87 1.87 9/30/02/16/ 5.54/4/ 554 2.00 1.87 9/30/01/16/ 11.84/4/ 345 2.03 1.86 - ---------------------------- International Bond Portfolio - ---------------------------- BlackRock Class 9/30/05 2.62%/8/ $ 98,721 0.78% 0.78% 5/18/04/1/ through 9/30/04 5.71 35,748 0.78/2/ 0.78/2/ Institutional Class 9/30/05 2.46%/8/ $ 346,746 0.94% 0.94% 9/30/04 7.20/8/ 133,544 0.94 0.94 9/30/03/16/ 10.78 64,038 0.94 0.94 9/30/02/16/ 5.79 35,425 1.05 0.90 9/30/01/16/ 12.30 73,636 2.43 0.88 Service Class 9/30/05 2.21%/8/ $ 107,402 1.19% 1.19% 9/30/04 6.89/8/ 80,024 1.23 1.23 9/30/03/16/ 10.55 48,584 1.24 1.24 9/30/02/16/ 5.47 27,131 1.30 1.20 9/30/01/16/ 11.97 11,045 2.74 1.20 Investor A Class 9/30/05 2.21%/3,8/ $ 182,321 1.18% 1.18% 9/30/04 6.84/3,8/ 123,145 1.31 1.31 9/30/03/16/ 10.27/3/ 74,821 1.41 1.41 9/30/02/16/ 5.29/3/ 39,727 1.47 1.37 9/30/01/16/ 11.79/3/ 16,827 2.88 1.36 Ratio of net Ratio of total investment expenses Ratio of net income to average investment to average net assets income net assets Portfolio (excluding to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate -------------- -------------- -------------- -------- - ------------------------------------ Managed Income Portfolio (Continued) - ------------------------------------ Service Class 9/30/05 1.08% 4.13% 4.00% 252% 9/30/04 1.11 4.21 4.05 284 9/30/03/16/ 1.13 4.74 4.56 613/13/ 9/30/02/16/ 1.19 5.30 5.17 290 9/30/01/16/ 1.48 5.69 5.57 262 Investor A Class 9/30/05 1.18% 4.06% 3.93% 252% 9/30/04 1.30 4.06 3.86 284 9/30/03/16/ 1.30 4.57 4.40 613/13/ 9/30/02/16/ 1.38 5.14 5.00 290 9/30/01/16/ 1.61 5.47 5.35 262 Investor B Class 9/30/05 1.84% 3.34% 3.30% 252% 9/30/04 1.95 3.31 3.21 284 9/30/03/16/ 2.05 3.80 3.63 613/13/ 9/30/02/16/ 2.11 4.43 4.30 290 9/30/01/16/ 2.33 4.71 4.60 262 Investor C Class 9/30/05 1.83% 3.27% 3.23% 252% 9/30/04 1.95 3.34 3.24 284 9/30/03/16/ 2.05 3.77 3.60 613/13/ 9/30/02/16/ 2.14 4.44 4.30 290 9/30/01/16/ 2.14 4.60 4.49 262 - ---------------------------- International Bond Portfolio - ---------------------------- BlackRock Class 9/30/05 0.83% 2.59% 2.54% 164% 5/18/04/1/ through 9/30/04 0.89/2/ 2.58/2/ 2.47/2/ 240 Institutional Class 9/30/05 0.95% 2.43% 2.42% 164% 9/30/04 0.96 2.44 2.41 240 9/30/03/16/ 0.94 2.69 2.69 209 9/30/02/16/ 1.05 3.89 3.89 206 9/30/01/16/ 2.43 5.54 5.54 111 Service Class 9/30/05 1.20% 2.19% 2.18% 164% 9/30/04 1.25 2.18 2.15 240 9/30/03/16/ 1.24 2.41 2.41 209 9/30/02/16/ 1.30 3.55 3.55 206 9/30/01/16/ 2.74 5.08 5.08 111 Investor A Class 9/30/05 1.29% 2.17% 2.06% 164% 9/30/04 1.43 2.06 1.93 240 9/30/03/16/ 1.41 2.21 2.21 209 9/30/02/16/ 1.47 3.36 3.36 206 9/30/01/16/ 2.88 4.85 4.85 111 135
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain asset (loss) on value Net investments beginning investment (both realized of period income/14/ and unrealized)/14/ --------- ------------- ------------------- - ---------------------------------------- International Bond Portfolio (Continued) - ---------------------------------------- Investor B Class 9/30/05 $ 11.42 $ 0.17/7/ $ 0.02 9/30/04 11.07 0.15/7/ 0.51 9/30/03/16/ 10.54 0.16/7/ 0.81 9/30/02/16/ 10.53 0.27/7/ 0.19 9/30/01/16/ 10.69 0.39 0.71 Investor C Class 9/30/05 $ 11.45 $ 0.17/7/ $ 0.02 9/30/04 11.10 0.15/7/ 0.51 9/30/03/16/ 10.56 0.15/7/ 0.83 9/30/02/16/ 10.55 0.27/7/ 0.19 9/30/01/16/ 10.69 0.39 0.73 - ------------------------- High Yield Bond Portfolio - ------------------------- BlackRock Class 9/30/05 $ 8.14 $ 0.64/7/ $ 0.05 9/30/04 7.74 0.62/7/ 0.37 9/30/03/16/ 6.75 0.71 1.03 9/30/02/16/ 7.39 0.85 (0.66) 9/30/01/16/ 8.92 0.99 (1.45) Institutional Class 9/30/05 $ 8.14 $ 0.63/7/ $ 0.04 9/30/04 7.74 0.61/7/ 0.37 9/30/03/16/ 6.75 0.73 1.00 9/30/02/16/ 7.39 0.82 (0.64) 9/30/01/16/ 8.92 0.94 (1.41) Service Class 9/30/05 $ 8.14 $ 0.61/7/ $ 0.04 9/30/04 7.74 0.59/7/ 0.37 9/30/03/16/ 6.75 0.73 0.98 9/30/02/16/ 7.39 0.86 (0.71) 9/30/01/16/ 8.92 0.88 (1.38) Investor A Class 9/30/05 $ 8.14 $ 0.60/7/ $ 0.05 9/30/04 7.73 0.58/7/ 0.38 9/30/03/16/ 6.75 0.73 0.96 9/30/02/16/ 7.40 0.82 (0.69) 9/30/01/16/ 8.92 0.90 (1.40) Investor B Class 9/30/05 $ 8.14 $ 0.55/7/ $ 0.04 9/30/04 7.73 0.52/7/ 0.38 9/30/03/16/ 6.75 0.65 0.98 9/30/02/16/ 7.39 0.74 (0.66) 9/30/01/16/ 8.91 0.83 (1.40) Net Distributions Distributions asset from net Distributions from net value investment from realized end of income/6/ capital gains period ------------- ------------- ------------- ------- - ---------------------------------------- International Bond Portfolio (Continued) - ---------------------------------------- Investor B Class 9/30/05 $ (0.46) $ -- $ (0.01) $ 11.14 9/30/04 (0.31) -- -- 11.42 9/30/03/16/ (0.20) (0.17) (0.07) 11.07 9/30/02/16/ (0.45) -- -- 10.54 9/30/01/16/ (1.26) -- -- 10.53 Investor C Class 9/30/05 $ (0.46) $ -- $ (0.01) $ 11.17 9/30/04 (0.31) -- -- 11.45 9/30/03/16/ (0.20) (0.17) (0.07) 11.10 9/30/02/16/ (0.45) -- -- 10.56 9/30/01/16/ (1.26) -- -- 10.55 - ------------- High Yield Bond Portfolio - ------------- BlackRock Class 9/30/05 $ (0.60) $ -- $ (0.14) $ 8.09 9/30/04 (0.59) -- -- 8.14 9/30/03/16/ (0.75) -- -- 7.74 9/30/02/16/ (0.83) -- -- 6.75 9/30/01/16/ (1.07) -- -- 7.39 Institutional Class 9/30/05 $ (0.58) $ -- $ (0.14) $ 8.09 9/30/04 (0.58) -- -- 8.14 9/30/03/16/ (0.74) -- -- 7.74 9/30/02/16/ (0.82) -- -- 6.75 9/30/01/16/ (1.06) -- -- 7.39 Service Class 9/30/05 $ (0.56) $ -- $ (0.14) $ 8.09 9/30/04 (0.56) -- -- 8.14 9/30/03/16/ (0.72) -- -- 7.74 9/30/02/16/ (0.79) -- -- 6.75 9/30/01/16/ (1.03) -- -- 7.39 Investor A Class 9/30/05 $ (0.56) $ -- $ (0.14) $ 8.09 9/30/04 (0.55) -- -- 8.14 9/30/03/16/ (0.71) -- -- 7.73 9/30/02/16/ (0.78) -- -- 6.75 9/30/01/16/ (1.02) -- -- 7.40 Investor B Class 9/30/05 $ (0.50) $ -- $ (0.14) $ 8.09 9/30/04 (0.49) -- -- 8.14 9/30/03/16/ (0.65) -- -- 7.73 9/30/02/16/ (0.72) -- -- 6.75 9/30/01/16/ (0.95) -- -- 7.39 See accompanying notes to financial statements. 136
BlackRock Funds Ratio of net expenses to Net average net assets Ratio of net assets end of expenses to (excluding Total period average net interest return (000) assets expense) --------------- ---------- ------------ ------------ - ---------------------------------------- International Bond Portfolio (Continued) - ---------------------------------------- Investor B Class 9/30/05 1.45%/4,8/ $ 19,705 1.93% 1.93% 9/30/04 6.04/4,8/ 16,780 2.06 2.06 9/30/03/16/ 9.45/4/ 13,087 2.16 2.16 9/30/02/16/ 4.51/4/ 11,470 2.25 2.11 9/30/01/16/ 10.96/4/ 7,393 3.63 2.10 Investor C Class 9/30/05 1.45%/4,8/ $ 65,555 1.93% 1.93% 9/30/04 6.03/4,8/ 36,947 2.04 2.04 9/30/03/16/ 9.53/4/ 17,777 2.15 2.15 9/30/02/16/ 4.50/4/ 8,427 2.23 2.11 9/30/01/16/ 11.15/4/ 4,182 3.64 2.10 - -------------------------- High Yield Bond Portfolio - -------------------------- BlackRock Class 9/30/05 8.69%/8/ $ 169,532 0.55% 0.55% 9/30/04 13.20 126,976 0.55 0.55 9/30/03/16/ 27.17 57,207 0.61 0.55 9/30/02/16/ 2.15 32,240 0.73 0.55 9/30/01/16/ (5.52) 27,766 0.84 0.55 Institutional Class 9/30/05 8.53%/8/ $ 165,805 0.70% 0.70% 9/30/04 13.03/8/ 162,166 0.70 0.70 9/30/03/16/ 26.98 170,902 0.76 0.70 9/30/02/16/ 2.00 94,065 0.87 0.70 9/30/01/16/ (5.66) 95,663 1.06 0.70 Service Class 9/30/05 8.24%/8/ $ 158,083 0.96% 0.96% 9/30/04 12.71/8/ 112,004 0.99 0.99 9/30/03/16/ 26.61 85,247 1.06 1.00 9/30/02/16/ 1.69 29,344 1.17 1.00 9/30/01/16/ (5.95) 9 1.36 1.00 Investor A Class 9/30/05 8.24%/3,8/ $ 262,920 0.96% 0.96% 9/30/04 12.70/3,8/ 72,806 1.10 1.09 9/30/03/16/ 26.25/3/ 82,391 1.22 1.17 9/30/02/16/ 1.38/3/ 18,932 1.33 1.17 9/30/01/16/ (5.98)/3/ 8,980 1.52 1.17 Investor B Class 9/30/05 7.44%/4,8/ $ 110,420 1.71% 1.71% 9/30/04 11.87/4,8/ 92,243 1.85 1.84 9/30/03/16/ 25.34/4/ 107,078 1.98 1.92 9/30/02/16/ 0.75/4/ 57,612 2.09 1.92 9/30/01/16/ (6.71)/4/ 49,786 2.27 1.91 Ratio of net Ratio of total investment expenses Ratio of net income to average investment to average net assets income net assets Portfolio (excluding to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate -------------- -------------- ------------- --------- - ---------------------------------------- International Bond Portfolio (Continued) - ---------------------------------------- Investor B Class 9/30/05 1.95% 1.43% 1.41% 164% 9/30/04 2.09 1.32 1.29 240 9/30/03/16/ 2.16 1.51 1.51 209 9/30/02/16/ 2.25 2.64 2.64 206 9/30/01/16/ 3.63 4.17 4.17 111 Investor C Class 9/30/05 1.94% 1.42% 1.41% 164% 9/30/04 2.07 1.32 1.29 240 9/30/03/16/ 2.15 1.44 1.44 209 9/30/02/16/ 2.23 2.62 2.62 206 9/30/01/16/ 3.64 4.20 4.20 111 - ------------------------- High Yield Bond Portfolio - ------------------------- BlackRock Class 9/30/05 0.77% 7.91% 7.69% 129% 9/30/04 0.73 7.71 7.53 172 9/30/03/16/ 0.77 9.83 9.67 212 9/30/02/16/ 0.89 11.15 11.01 301 9/30/01/16/ 1.10 5.54 5.29 331 Institutional Class 9/30/05 0.89% 7.75% 7.56% 129% 9/30/04 0.85 7.63 7.48 172 9/30/03/16/ 0.90 9.63 9.49 212 9/30/02/16/ 1.01 10.94 10.80 301 9/30/01/16/ 1.22 11.22 11.06 331 Service Class 9/30/05 1.14% 7.51% 7.33% 129% 9/30/04 1.14 7.30 7.16 172 9/30/03/16/ 1.20 9.31 9.17 212 9/30/02/16/ 1.34 11.37 11.20 301 9/30/01/16/ 1.52 11.82 11.66 331 Investor A Class 9/30/05 1.25% 7.41% 7.12% 129% 9/30/04 1.34 7.29 7.05 172 9/30/03/16/ 1.36 8.81 8.68 212 9/30/02/16/ 1.48 10.42 10.28 301 9/30/01/16/ 1.68 10.55 10.39 331 Investor B Class 9/30/05 1.89% 6.74% 6.56% 129% 9/30/04 1.99 6.49 6.35 172 9/30/03/16/ 2.12 8.39 8.25 212 9/30/02/16/ 2.23 9.81 9.66 301 9/30/01/16/ 2.43 10.01 9.85 331 137
BlackRock Funds FINANCIAL HIGHLIGHTS (CONCLUDED) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain asset (loss) on Distributions value Net investments from net beginning investment (both realized investment of period income/14/ and unrealized)/14/ income/6/ --------- ---------- ------------------- ------------- - ------------------------------------- High Yield Bond Portfolio (Continued) - ------------------------------------- Investor C Class 9/30/05 $ 8.15 $ 0.55/7/ $ 0.04 $ (0.50) 9/30/04 7.74 0.52/7/ 0.38 (0.49) 9/30/03/16/ 6.75 0.67 0.97 (0.65) 9/30/02/16/ 7.40 0.76 (0.69) (0.72) 9/30/01/16/ 8.92 0.83 (1.40) (0.95) Net Distributions asset Distributions from net value from realized end of capital gains period ------------- ------------- -------- - ------------------------------------- High Yield Bond Portfolio (Continued) - ------------------------------------- Investor C Class 9/30/05 $ -- $ (0.14) $ 8.10 9/30/04 -- -- 8.15 9/30/03/16/ -- -- 7.74 9/30/02/16/ -- -- 6.75 9/30/01/16/ -- -- 7.40 See accompanying notes to financial statements. 138
BlackRock Funds Ratio of net expenses to Net average net assets Ratio of net assets end of expenses to (excluding Total period average net interest return (000) assets expense) ------------- --------- -------------- ------------ - ------------------------------------- High Yield Bond Portfolio (Continued) - ------------------------------------- Investor C Class 9/30/05 7.44%/4,8/ $ 49,939 1.72% 1.72% 9/30/04 11.86/4,8/ 61,983 1.85 1.85 9/30/03/16/ 25.48/4/ 73,246 1.97 1.92 9/30/02/16/ 0.61/4/ 21,939 2.08 1.91 9/30/01/16/ (6.70)/4/ 11,319 2.25 1.91 Ratio of net Ratio of total investment expenses Ratio of net income to average investment to average net assets income net assets Portfolio (excluding) to average net (excluding turnover waivers) assets/14/ waivers)/14/ rate ------------- -------------- --------------- ---------- - ------------------------------------- High Yield Bond Portfolio (Continued) - ------------------------------------- Investor C Class 9/30/05 1.89% 6.77% 6.60% 129% 9/30/04 1.99 6.50 6.35 172 9/30/03/16/ 2.11 8.14 8.00 212 9/30/02/16/ 2.23 9.73 9.59 301 9/30/01/16/ 2.41 9.63 9.47 331 - ---------- 1 Commencement of operations of share class. 2 Annualized. 3 Sales load not reflected in total return. 4 Contingent deferred sales load not reflected in total return. 5 Reissuance of shares. 6 Certain prior year amounts were reclassified to conform to current year presentation (Note C). 7 Calculated using the average shares outstanding method. 8 Redemption fee of 2.00% is reflected in total return calculations. 9 Includes dollar roll transactions, excluding these transactions the portfolio turnover would have been 257%. 10 Includes dollar roll transactions, excluding these transactions the portfolio turnover would have been 319%. 11 Includes dollar roll transactions, excluding these transactions the portfolio turnover would have been 371%. 12 Includes dollar roll transactions, excluding these transactions the portfolio turnover would have been 268%. 13 Includes dollar roll transactions, excluding these transactions the portfolio turnover would have been 206%. 14 Refer to Section C of the Notes to Financial Statements. 15 Non-annualized ratios were previously disclosed as annualized. Ratios updated to reflect annualization. 16 Audited by other auditors. 139
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (A) Organization BlackRock Funds(SM) (the "Fund") was organized on December 22, 1988, as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund currently has 50 portfolios, thirteen of which are included in these financial statements (the "Portfolios"). Each Portfolio is authorized to issue an unlimited number of shares with a par value of $0.001. Each portfolio of the Fund may offer as many as seven classes of shares. Shares of all classes of a Portfolio represent equal pro rata interests in such Portfolio, except that each class bears different expenses which reflect the difference in the range of services provided to them, mostly due to differences in distribution and service fees. Under the Fund's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund. However, based on experience, the Fund considers the risk of loss from such claims to be remote. (B) Fund Reorganization On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. ("BlackRock"), a wholly owned subsidiary of BlackRock, Inc., acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company ("SSRM"), the investment adviser to the former State Street Research mutual funds. On January 31, 2005, the BlackRock Intermediate Government Bond Portfolio acquired all of the assets and certain stated liabilities of the State Street Research Government Income Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the State Street Research shareholders on January 25, 2005. Under the Agreement and Plan of Reorganization, 28,802,131 Class A shares, 1,440,271 Class B shares and 8,786 Class R shares of the State Street Research Government Income Fund were exchanged for 34,230,267, 1,704,773 and 10,444 Investor A Class shares , respectively, of the BlackRock Intermediate Government Bond Portfolio; 6,655,830 Class B(1) shares of the State Street Research Government Income Fund were exchanged for 7,860,023 Investor B Class shares of the BlackRock Intermediate Government Bond Portfolio; 1,118,423 Class C shares of the State Street Research Government Income Fund were exchanged for 1,326,873 Investor C Class shares of the BlackRock Intermediate Government Bond Portfolio; and 506,641 Class S shares of the State Street Research Government Income Fund were exchanged for 603,030 Institutional shares of the BlackRock Intermediate Government Bond Portfolio. The assets of the State Street Research Government Income Fund, which consisted of securities and related receivables less liabilities, were converted on a tax-free basis. Upon the reorganization of such funds on January 31, 2005, the value of the BlackRock Intermediate Government Bond Portfolio's net assets (including $474,664,383 in net assets of the State Street Research Government Income Fund, including $2,522,392 of unrealized depreciation, undistributed net investment income of $68,232 and undistributed net realized loss on investments of ($21,212,995), which was classified as paid-in-capital) was $771,988,963 before the open of business. On January 31, 2005, the BlackRock High Yield Bond Portfolio acquired all of the assets and certain stated liabilities of the State Street Research High Income Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the State Street Research shareholders on January 25, 2005. Under the Agreement and Plan of Reorganization, 58,203,330 Class A shares and 8,812,212 Class B shares of the State Street Research High Income Fund were exchanged for 24,943,276 and 3,736,993 Investor A Class shares, respectively, of the BlackRock High Yield Bond Portfolio; 10,782,618 Class B(1) shares of the State Street Research High Income Fund were exchanged for 4,562,480 Investor B Class shares of the BlackRock High Yield Bond Portfolio; 2,998,505 Class C shares of the State Street Research High Income Fund were exchanged for 1,274,746 Investor C Class shares of the BlackRock High Yield Bond Portfolio; and 1,179,029 Class S shares of the State Street Research High Income Fund were exchanged for 499,336 Institutional shares of the BlackRock High Yield Bond Portfolio. The assets of the State Street Research High Income Fund, which consisted of securities and related receivables less liabilities, were converted on a tax-free basis. Upon the reorganization of such funds on January 31, 2005, the value of the BlackRock High Yield Bond Portfolio's net assets (including $288,908,495 in net assets of the State Street Research High Income Fund, including $1,371,468 of unrealized appreciation, undistributed net investment loss of ($41,660) and undistributed net realized loss on investments of ($450,012,483), which was classified as paid-in-capital) was $944,088,761 before the open of business. 140
BlackRock Funds On April 25, 2005, the BlackRock Core Bond Total Return Portfolio acquired all of the assets and certain stated liabilities of the CIGNA Investment Securities Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the CIGNA Investment Securities Fund shareholders on April 15, 2005. Under the Agreement and Plan of Reorganization, 4,792,215 Class A shares of the CIGNA Investment Securities Fund were exchanged for 9,164,715 Investor A Class shares of the BlackRock Core Bond Total Return Portfolio. The assets of the CIGNA Investment Securities Fund, which consisted of securities and related receivables less liabilities, were converted on a tax-free basis. Upon the reorganization of such funds on April 25, 2005, the value of the BlackRock Core Bond Total Return Portfolio's net assets (including $88,882,541 in net assets of the CIGNA Investment Securities Fund, including $873,954 of unrealized appreciation, undistributed net investment loss of ($21,863) and undistributed net realized loss on investments of ($1,612,651), which was classified as paid-in-capital) was $2,662,804,984 before the open of business. (C) Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. Investment Valuation -- Valuation of investments held by each Portfolio is as follows: fixed income investments are valued by using market quotations or prices provided by market makers; a portion of the fixed income investments are valued utilizing one or more pricing services approved by the Board of Trustees (the "Board"); an option or futures contract is valued at the last sales price prior to 4:00 p.m. (Eastern time), as quoted on the principal exchange or board of trade on which such option or futures contract is traded, or in the absence of a sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern time); the amortized cost method of valuation will be used with respect to debt securities with sixty days or less remaining to maturity unless the investment adviser and/or sub-adviser under the supervision of the Board determines that such method does not represent fair value. Any assets which are denominated in a non-U.S. currency are translated into U.S. dollars at the prevailing market rates. In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the market value of such investment, the investment will be valued by, under the direction of or in accordance with a method approved by the Board as reflecting fair value ("Fair Value Assets"). The investment adviser and/or sub-adviser will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to a valuation committee. Such valuation committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to and ratified by the Board. When determining the price for a Fair Value Asset, the investment adviser and/or sub-adviser shall seek to determine the price that the Portfolio might reasonably expect to receive from the current sale of that asset in an arm's-length transaction. Fair value determinations shall be based upon all available factors that the adviser and/or sub-adviser deems relevant. Dividends to Shareholders -- Dividends from net investment income are declared by each Portfolio each day on "settled" shares (i.e. shares for which the particular Portfolio has received payment) and are paid monthly. Over the course of a year, substantially all of each Portfolio's net investment income will be declared as dividends. The amount of the daily dividend for each Portfolio will be based on periodic projections of its net investment income. Net realized capital gains, if any, are distributed at least annually. Foreign Currency Translation -- The books and records of the Portfolios are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (I) Market value of investment securities, assets and liabilities at the current rate of exchange; and (II) Purchases and sales of investment securities, income and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions. The Portfolios isolate that portion of gains and losses on investment securities which is due to changes in the foreign exchange rates from that which is due to changes in market prices of such securities. The Portfolios report certain foreign currency related transactions as components of realized and unrealized gains for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes. Forward Foreign Currency Contracts -- Certain Portfolios may enter into forward foreign currency contracts as a hedge against either specific transactions or Portfolio positions. These contracts are adjusted by the daily forward 141
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settlement date. Such contracts, which protect the value of the Portfolio's investment securities against a decline in the value of currency, do not eliminate fluctuations in the underlying prices of the securities. They simply establish an exchange rate at a future date. Also, although such contracts tend to minimize the risk of loss due to a decline in the value of a hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of such foreign currency increase. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The aggregate principal amounts of the contracts are not recorded as the Portfolios intend to settle the contracts prior to delivery. Under the terms of foreign currency contracts open at September 30, 2005, the Portfolios are obligated to deliver or receive currency in exchange for U.S. dollars as indicated below: 142
BlackRock Funds Net Unrealized Value at Foreign Settlement Currency Currency Contract September 30, Exchange Date Amount Sold Amount 2005 Gain/(Loss) - ------------ -------------- --------------------------------- ------------ ------------- ------------ Low Duration Bond 10/20/05 11,610,911 European Currency Unit .......... $ 14,067,630 $ 14,017,177 $ 50,453 10/27/05 33,881,000 New Zealand Dollar .............. 23,140,723 23,379,110 (238,387) ------------ ------------ ------------ $ 37,208,353 $ 37,396,287 $ (187,934) ============ ============ ============ Intermediate PLUS Bond 10/20/05 198,103 European Currency Unit .......... $ 240,019 $ 239,158 $ 861 10/27/05 593,975 New Zealand Dollar .............. 405,685 409,864 (4,179) ------------ ------------ ------------ $ 645,704 $ 649,022 $ (3,318) ============ ============ ============ Core Bond Total Return 10/20/05 22,270,611 European Currency Unit .......... $ 26,982,783 $ 26,886,010 $ 96,773 10/27/05 37,286,500 New Zealand Dollar .............. 25,466,679 25,729,027 (262,348) ------------ ------------ ------------ $ 52,449,462 $ 52,615,037 $ (165,575) ============ ============ ============ Core PLUS Total Return 10/20/05 3,114,703 European Currency Unit .......... $ 3,773,734 $ 3,760,200 $ 13,534 10/26/05 23,498,423 Mexican Peso .................... 2,178,200 2,169,181 9,019 10/27/05 3,314,255 New Zealand Dollar .............. 2,263,636 2,286,955 (23,319) ------------ ------------ ------------ $ 8,215,570 $ 8,216,336 $ (766) ============ ============ ============ Inflation Protected Bond 10/20/05 517,478 European Currency Unit .......... $ 631,426 $ 624,721 $ 6,705 10/24/05 1,311,000 Great British Pound ............. 2,294,878 2,318,516 (23,638) 10/25/05 6,942,074 Swedish Krone ................... 894,205 900,306 (6,101) 10/28/05 926,300 Canadian Dollar ................. 771,898 798,630 (26,732) ------------ ------------ ------------ $ 4,592,407 $ 4,642,173 $ (49,766) ============ ============ ============ Managed Income 10/20/05 4,812,543 European Currency Unit .......... $ 5,830,815 $ 5,809,903 $ 20,912 ============ ============ ============ International Bond 10/20/05 100,100,000 European Currency Unit .......... $122,460,336 $120,779,071 $ 1,681,265 10/24/05 12,253,497 Great British Pound ............. 21,720,650 21,676,395 44,255 10/24/05 3,275,406 European Currency Unit .......... 3,960,280 3,954,171 6,109 10/25/05 233,749,756 Swedish Krone ................... 30,112,135 30,242,264 (130,129) 10/25/05 7,113,918 European Currency Unit .......... 8,578,213 8,574,023 4,190 10/26/05 74,417,631 Mexican Peso .................... 6,898,186 6,876,863 21,323 10/27/05 1,273,737,800 Japanese Yen .................... 11,555,248 11,265,735 289,513 10/27/05 28,959,215 New Zealand Dollar .............. 19,732,844 20,033,602 (300,758) 10/28/05 34,464,206 Canadian Dollar ................. 28,588,062 29,715,183 (1,127,121) 10/28/05 65,584,007 Polish Zloty .................... 19,502,675 20,187,769 (685,094) 11/25/05 6,140,000 European Currency Unit .......... 7,492,922 7,402,674 90,248 ------------ ------------ ------------ $280,601,551 $280,707,750 $ (106,199) ============ ============ ============ High Yield Bond 10/20/05 6,593,500 European Currency Unit .......... $ 7,976,009 $ 7,959,948 $ 16,061 ============ ============ ============ 143
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Net Unrealized Value at Foreign Settlement Currency Currency Contract September 30, Exchange Date Amount Bought Amount 2005 Gain/(Loss) - ------------ -------------- --------------------------------- ------------- -------------- ------------- Low Duration Bond 10/20/05 991,153 European Currency Unit .......... $ 1,219,381 $ 1,196,561 $ (22,820) 10/27/05 13,208,156 New Zealand Dollar .............. 8,889,144 9,114,103 224,959 ------------- -------------- ------------- $ 10,108,525 $ 10,310,664 $ 202,139 ============= ============== ============= Intermediate PLUS Bond 10/20/05 21,971 European Currency Unit .......... $ 27,030 $ 26,524 $ (506) 10/27/05 97,528 New Zealand Dollar .............. 66,085 67,298 1,213 ------------- -------------- ------------- $ 93,115 $ 93,822 $ 707 ============= ============== ============= Core Bond Total Return 10/20/05 3,809,846 European Currency Unit .......... $ 4,687,120 $ 4,599,405 $ (87,715) 10/27/05 9,330,523 New Zealand Dollar .............. 6,354,979 6,438,397 83,418 ------------- -------------- ------------- $ 11,042,099 $ 11,037,802 $ (4,297) ============= ============== ============= Core PLUS Total Return 10/20/05 696,040 European Currency Unit .......... $ 856,314 $ 840,289 $ (16,025) 10/26/05 8,526,690 Mexican Peso .................... 785,632 787,114 1,482 10/27/05 1,171,668 New Zealand Dollar .............. 789,906 808,493 18,587 ------------- -------------- ------------- $ 2,431,852 $ 2,435,896 $ 4,044 ============= ============== ============= Inflation Protected Bond 10/20/05 5,509 European Currency Unit .......... $ 6,778 $ 6,651 $ (127) 10/24/05 940,000 Great British Pound ............. 1,633,077 1,662,399 29,322 10/25/05 7,000,000 Swedish Krone ................... 895,713 907,819 12,106 10/27/05 365,262 Japanese Yen .................... 3,282 3,233 (49) ------------- -------------- ------------- $ 2,538,850 $ 2,580,102 $ 41,252 ============= ============== ============= Managed Income 10/20/05 48,273 European Currency Unit .......... $ 59,389 $ 58,277 $ (1,112) 10/27/05 2,745 New Zealand Dollar .............. 1,847 1,894 47 ------------- -------------- ------------- $ 61,236 $ 60,171 $ (1,065) ============= ============== ============= International Bond 10/20/05 156,752,355 European Currency Unit .......... $ 190,491,887 $ 189,131,069 $ (1,360,818) 10/21/05 4,812,760 Australian Dollar ............... 3,594,710 3,672,364 77,654 10/24/05 3,339,166 European Currency Unit .......... 4,143,522 4,031,144 (112,378) 10/24/05 4,692,900 Great British Pound ............. 8,272,214 8,302,061 29,847 10/25/05 14,276,456 Norwegian Krone ................. 2,173,845 2,190,380 16,535 10/25/05 9,573,653 Swiss Francs .................... 7,457,597 7,439,256 (18,341) 10/25/05 311,884,866 Swedish Krone ................... 40,348,346 40,392,003 43,657 10/26/05 9,161,047 Mexican Peso .................... 851,438 846,564 (4,874) 10/26/05 3,300,000 Singapore Dollar ................ 1,965,184 1,954,814 (10,370) 10/27/05 25,618,624,853 Japanese Yen .................... 231,367,404 226,587,167 (4,780,237) 10/27/05 9,116,261 New Zealand Dollar .............. 6,262,789 6,306,438 43,649 10/28/05 11,390,931 Canadian Dollar ................. 9,588,604 9,821,292 232,688 10/28/05 54,951,461 Danish Krone .................... 8,922,140 8,887,939 (34,201) 10/28/05 13,949,260 Polish Zloty .................... 4,227,693 4,293,797 66,104 11/25/05 15,140,000 Singapore Dollar ................ 9,107,041 8,979,994 (127,047) 11/25/05 2,101,330,760 Japanese Yen .................... 19,198,511 18,625,878 (572,633) -------------- -------------- ------------- $ 547,972,925 $ 541,462,160 $ (6,510,765) ============== ============== ============= 144
BlackRock Funds Swap Agreements -- The Portfolios may invest in swap agreements for the purpose of hedging against changes in interest rates or foreign currencies. Swap agreements involve the exchange by the Portfolios with another party of their respective commitments to pay or receive interest or a specified amount of a currency (e.g., an exchange of floating rate payments for fixed rate payments) with respect to a notional amount of principal. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as an unrealized gain or loss in the Statements of Operations. Net payments of interest are recorded as realized gain or loss. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statements of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counter-party to the agreement may default on its obligation to perform and that there may be unfavorable changes in the fluctuation of interest and/or exchange rates. At September 30, 2005, the following Portfolios had swap agreements outstanding: Interest Interest Unrealized Termination Receivable Payable Notional amount Appreciation Portfolio Counter-party Date Rate Rate (Local Currency) (Depreciation) - ---------------------- -------------- ----------- ---------- ---------- ---------------- -------------- Enhanced Income Deutsche Bank 08/31/07 4.41% 3.86%/1/ $ 5,700,000 $ (12,478) Deutsche Bank 09/30/10 4.55% 4.02%/1/ 700,000 (2,868) Low Duration Bond Deutsche Bank 02/10/07 2.68% 3.76%/1/ 80,300,000 (2,094,400) Goldman Sachs 09/27/07 4.38% 3.97%/1/ 65,300,000 (233,720) Deutsche Bank 09/30/10 4.55% 4.02%/1/ 17,900,000 (73,346) Intermediate Government Deutsche Bank 02/10/07 2.68% 3.76%/1/ 12,800,000 (333,852) Bond Union Bank of 04/22/07 3.63%/1/ 3.04% 24,000,000 385,200 Switzerland Deutsche Bank 08/02/07 4.39% 3.70%/1/ 29,200,000 (61,321) Deutsche Bank 08/17/07 4.44% 3.80%/1/ 40,900,000 (59,208) Goldman Sachs 09/27/07 4.38% 3.97%/1/ 11,600,000 (41,518) Union Bank of 09/27/08 4.42% 3.97%/1/ 3,300,000 (16,129) Switzerland Morgan Stanley 06/17/10 4.31% 3.89%/1/ 4,100,000 (12,277) Morgan Stanley 07/01/10 4.17% 3.50%/1/ 32,600,000 (617,098) Morgan Stanley 06/14/14 3.85%/1/ 5.31% 4,700,000 (252,214) JP Morgan 05/26/15 3.84%/1/ 4.50% 4,900,000 44,097 Chase Morgan Stanley 07/01/15 3.50%/1/ 4.39% 17,000,000 480,327 Morgan Stanley 07/01/15 3.50%/1/ 4.39% 18,100,000 506,340 Intermediate Bond Union Bank of 04/22/07 3.63%/1/ 3.04% 76,000,000 1,219,800 Switzerland Deutsche Bank 08/02/07 4.39% 3.70%/1/ 38,800,000 (81,481) Deutsche Bank 08/17/07 4.44% 3.80%/1/ 45,400,000 (65,723) Goldman Sachs 09/27/07 4.38% 3.97%/1/ 95,100,000 (340,380) Union Bank of 09/27/08 4.42% 3.97%/1/ 7,400,000 (36,168) Switzerland Morgan Stanley 06/17/10 4.31% 3.89%/1/ 15,900,000 (47,612) Union Bank of 08/31/10 3.86%/1/ 4.50% 17,800,000 104,842 Switzerland Union Bank of 09/27/10 4.51% 3.97%/1/ 42,800,000 (257,946) Switzerland Morgan Stanley 06/14/14 3.85%/1/ 5.31% 14,400,000 (772,740) Merrill Lynch 07/22/14 3.63%/1/ 4.93% 15,300,000 (230,265) Goldman Sachs 10/01/14 3.50%/1/ 4.51% 16,100,000 76,106 JP Morgan 05/26/15 3.84%/1/ 4.50% 6,400,000 57,595 Chase Morgan Stanley 07/01/15 3.50%/1/ 4.39% 22,000,000 621,600 Morgan Stanley 08/02/15 4.73% 3.70%/1/ 14,700,000 (38,935) Intermediate PLUS Bond Deutsche Bank 08/02/07 4.39% 3.70%/1/ 1,100,000 (2,310) Deutsche Bank 08/17/07 4.44% 3.80%/1/ 2,000,000 (2,895) Union Bank of 09/27/10 4.51% 3.97%/1/ 1,200,000 (7,232) Switzerland JP Morgan 04/08/12 3.56%/1/ 4.72% 700,000 (10,956) Chase Union Bank of 11/26/14 3.84%/1/ 4.58% 1,000,000 (308) Switzerland JP Morgan 05/26/15 3.84%/1/ 4.50% 200,000 1,800 Chase 145
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Interest Interest Unrealized Termination Receivable Payable Notional amount Appreciation Portfolio Counter-party Date Rate Rate (Local Currency) (Depreciation) - ---------------------- -------------- ----------- ---------- ---------- ---------------- -------------- Core Bond Total Return Morgan Stanley 06/14/06 3.22% 3.85%/1/ $ 114,465,000 $ (13,923) Morgan Stanley 06/17/06 3.21% 3.89%/1/ 84,600,000 (10,526) Deutsche Bank 08/02/07 4.39% 3.70%/1/ 111,900,000 (234,994) Deutsche Bank 08/17/07 4.44% 3.80%/1/ 162,400,000 (235,096) Union Bank of 09/27/08 4.42% 3.97%/1/ 29,700,000 (145,159) Switzerland Morgan Stanley 06/17/10 4.31% 3.89%/1/ 40,000,000 (119,779) Merrill Lynch 07/15/10 4.37% 3.60%/1/ 64,480,000 (669,947) Union Bank of 08/31/10 3.86%/1/ 4.50% 36,850,000 217,047 Switzerland Union Bank of 09/27/10 4.51% 3.97%/1/ 33,100,000 (199,487) Switzerland Morgan Stanley 02/17/14 3.80%/1/ 4.41% 34,300,000 754,959 Goldman Sachs 04/22/14 3.63%/1/ 4.89% 30,000,000 (733,449) Citibank 06/10/14 3.83%/1/ 5.24% 29,000,000 (1,428,479) Morgan Stanley 06/14/14 3.85%/1/ 5.31% 37,300,000 (2,001,612) Merrill Lynch 07/22/14 3.63%/1/ 4.93% 41,100,000 (618,555) Goldman Sachs 10/01/14 3.50%/1/ 4.51% 10,200,000 48,216 Merrill Lynch 03/17/15 3.87%/1/ 4.90% 53,400,000 (566,574) JP Morgan 05/26/15 3.84%/1/ 4.50% 18,400,000 165,587 Chase Morgan Stanley 07/11/15 4.44% 3.55%/1/ 22,800,000 (553,090) Morgan Stanley 08/02/15 4.73% 3.70%/1/ 39,100,000 (103,561) Union Bank of 12/07/15 5.94%/2/ N/A/3/ 14,900,000 1,325,504 Switzerland Merrill Lynch 07/29/19 3.68%/1/ 5.37% 6,150,000 (310,944) Merrill Lynch 08/13/19 5.16% 3.79%/1/ 8,175,000 230,372 Merrill Lynch 10/27/19 4.78% 3.66%/1/ 5,100,000 10,506 Core PLUS Total Return Morgan Stanley 06/14/06 3.22% 3.85%/1/ 10,855,000 (1,320) Morgan Stanley 06/17/06 3.21% 3.89%/1/ 8,000,000 (995) Deutsche Bank 08/02/07 4.39% 3.70%/1/ 16,100,000 (33,811) Deutsche Bank 08/17/07 4.44% 3.80%/1/ 21,500,000 (31,124) JP Morgan 09/20/07 3.89%/1/ 4.35% 24,000,000 88,320 Chase Union Bank of 09/27/08 4.42% 3.97%/1/ 2,300,000 (11,241) Switzerland Morgan Stanley 06/17/10 4.31% 3.89%/1/ 5,300,000 (15,871) Merrill Lynch 07/15/10 4.37% 3.60%/1/ 8,205,000 (85,250) Union Bank of 09/27/10 4.51% 3.97%/1/ 5,600,000 (33,750) Switzerland Morgan Stanley 02/17/14 3.80%/1/ 4.41% 3,500,000 77,037 Goldman Sachs 04/22/14 3.63%/1/ 4.89% 8,000,000 (195,586) Morgan Stanley 06/14/14 3.85%/1/ 5.31% 4,300,000 (230,749) Merrill Lynch 07/22/14 3.63%/1/ 4.93% 4,900,000 (73,745) Merrill Lynch 03/17/15 3.87%/1/ 4.90% 6,200,000 (65,782) Deutsche Bank 04/01/15 5.03% 3.50%/1/ 3,500,000 (70,275) JP Morgan 05/26/15 3.84%/1/ 4.50% 2,400,000 21,598 Chase Morgan Stanley 07/11/15 4.44% 3.55%/1/ 4,000,000 (97,033) Morgan Stanley 08/02/15 4.73% 3.70%/1/ 4,700,000 (12,449) JP Morgan 09/20/15 4.70% 3.89%/1/ 5,200,000 (32,552) Chase Union Bank of 12/07/15 5.94%/2/ N/A/3/ 1,400,000 124,544 Switzerland Merrill Lynch 07/29/19 3.68%/1/ 5.37% 725,000 (36,656) Merrill Lynch 08/13/19 5.16% 3.79%/1/ 1,000,000 28,180 Merrill Lynch 10/27/19 4.78% 3.66%/1/ 600,000 1,236 146
BlackRock Funds Interest Interest Unrealized Termination Receivable Payable Notional amount Appreciation Portfolio Counter-party Date Rate Rate (Local Currency) (Depreciation) - ---------------------- -------------- ----------- ---------- ---------- ---------------- --------------- Government Income Morgan Stanley 06/14/06 3.22% 3.85%/1/ $ 8,190,000 $ (996) Morgan Stanley 06/17/06 3.21% 3.89%/1/ 6,100,000 (759) Deutsche Bank 03/23/07 4.53%/4/ N/A/5/ 160,000,000 (235,500) Union Bank of 04/16/07 3.61%/1/ 3.00% 10,000,000 166,700 Switzerland Deutsche Bank 08/02/07 4.39% 3.70%/1/ 22,500,000 (47,251) Deutsche Bank 03/23/10 3.96%/1/ 4.60% 34,100,000 32,526 Morgan Stanley 06/17/10 4.31% 3.89%/1/ 5,900,000 (17,667) Union Bank of 08/16/10 3.79%/1/ 4.56% 7,400,000 21,682 Switzerland Union Bank of 09/27/10 4.51% 3.97%/1/ 1,500,000 (9,040) Switzerland Merrill Lynch 07/22/14 3.63%/1/ 4.93% 3,300,000 (49,665) Morgan Stanley 10/01/14 3.50%/1/ 4.52% 3,400,000 13,178 Union Bank of 11/26/14 3.84%/1/ 4.58% 50,000,000 (15,385) Switzerland Union Bank of 03/21/15 4.88% 3.92%/1/ 6,000,000 55,320 Switzerland Deutsche Bank 03/24/15 5.08% 3.96%/1/ 11,100,000 266,559 Deutsche Bank 03/29/15 5.11% 3.96%/1/ 11,000,000 289,140 Morgan Stanley 07/11/15 4.44% 3.55%/1/ 4,000,000 (97,033) Morgan Stanley 08/02/15 4.73% 3.70%/1/ 3,100,000 (8,211) Inflation Protected Bond JP Morgan 05/26/15 3.84%/1/ 4.50% 300,000 2,700 Chase Deutsche Bank 09/29/15 4.05%/1/ 4.76% 300,000 511 GNMA Morgan Stanley 06/14/06 3.22% 3.85%/1/ 16,185,000 (1,969) Morgan Stanley 06/17/06 3.21% 3.89%/1/ 12,000,000 (1,493) Deutsche Bank 03/23/07 4.53%/4/ N/A/5/ 80,000,000 (117,750) Union Bank of 04/16/07 3.61%/1/ 3.00% 15,000,000 250,050 Switzerland Deutsche Bank 08/02/07 4.39% 3.70%/1/ 9,200,000 (19,320) Deutsche Bank 03/23/10 3.96%/1/ 4.60% 17,100,000 16,311 Union Bank of 08/16/10 3.79%/1/ 4.56% 4,900,000 14,357 Switzerland Union Bank of 09/27/10 4.51% 3.97%/1/ 3,000,000 (18,080) Switzerland Morgan Stanley 06/14/14 3.85%/1/ 5.31% 3,800,000 (203,918) Merrill Lynch 07/22/14 3.63%/1/ 4.93% 4,300,000 (64,715) Morgan Stanley 10/01/14 3.50%/1/ 4.52% 4,100,000 15,892 Morgan Stanley 07/11/15 4.44% 3.55%/1/ 1,800,000 (43,665) Morgan Stanley 08/02/15 4.73% 3.70%/1/ 4,100,000 (10,859) Managed Income Morgan Stanley 06/14/06 3.22% 3.85%/1/ 46,345,000 (5,637) Morgan Stanley 06/17/06 3.21% 3.89%/1/ 34,200,000 (4,255) Union Bank of 04/16/07 3.61%/1/ 3.00% 50,000,000 833,500 Switzerland Deutsche Bank 08/02/07 4.39% 3.70%/1/ 30,700,000 (64,471) Deutsche Bank 08/17/07 4.44% 3.80%/1/ 11,400,000 (16,503) JP Morgan 09/20/07 3.89%/1/ 4.35% 78,000,000 287,040 Chase Morgan Stanley 06/17/10 4.31% 3.89%/1/ 10,800,000 (32,340) Merrill Lynch 07/15/10 4.37% 3.60%/1/ 17,020,000 (176,838) Union Bank of 09/27/10 4.51% 3.97%/1/ 2,300,000 (13,862) Switzerland Goldman Sachs 10/04/10 4.66% 4.07%/1/ 37,000,000 (97,953) Morgan Stanley 02/17/14 3.80%/1/ 4.41% 12,000,000 264,125 Goldman Sachs 04/22/14 3.63%/1/ 4.89% 20,000,000 (488,966) Citibank 06/10/14 3.83%/1/ 5.24% 9,500,000 (467,950) Morgan Stanley 06/14/14 3.85%/1/ 5.31% 12,100,000 (649,317) Merrill Lynch 07/22/14 3.63%/1/ 4.93% 13,100,000 (197,155) Merrill Lynch 03/17/15 3.87%/1/ 4.90% 17,000,000 (180,370) Union Bank of 03/21/15 4.88% 3.92%/1/ 10,000,000 92,200 Switzerland JP Morgan 05/26/15 3.84%/1/ 4.50% 4,900,000 44,097 Chase Morgan Stanley 07/11/15 4.44% 3.55%/1/ 6,000,000 (145,550) Morgan Stanley 08/02/15 4.73% 3.70%/1/ 12,500,000 (33,108) JP Morgan 09/20/15 4.70% 3.89%/1/ 16,900,000 (105,794) Chase Union Bank of 12/07/15 5.94%/2/ N/A/3/ 5,900,000 524,864 Switzerland Merrill Lynch 07/29/19 3.68%/1/ 5.37% 1,950,000 (98,592) Merrill Lynch 08/13/19 5.16% 3.79%/1/ 2,550,000 71,859 Merrill Lynch 10/27/19 4.78% 3.66%/1/ 1,600,000 3,296 147
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Interest Interest Unrealized Termination Receivable Payable Notional amount Appreciation Portfolio Counter-party Date Rate Rate (Local Currency) (Depreciation) - ---------------------- -------------- ----------- ---------- ---------- ---------------- ----------------- International Bond Morgan Stanley 06/14/06 3.22% 3.85%/1/ $ 11,050,000 $ (1,344) Morgan Stanley 06/17/06 3.21% 3.89%/1/ 8,200,000 (1,020) Deutsche Bank 04/01/07 4.28% 3.50%/1/ 20,000,000 (79,478) Union Bank of 05/19/07 N/A/6/ 4.49%/7/ 20,000,000 GBP (30,428) Switzerland Citibank 08/15/07 2.26% 2.12%/8/ 139,000,000 SGD (124,253) Morgan Stanley 07/01/10 4.17% 3.50%/1/ 36,900,000 (698,494) Citibank 08/15/10 2.10%/8/ 2.63% 57,750,000 SGD 38,644 Morgan Stanley 08/26/10 1.67%/9/ 2.84% 135,000,000 SEK 23,620 Merrill Lynch 09/29/10 1.66%/9/ 2.86% 90,000,000 SEK 21,425 Deutsche Bank 08/02/12 6.42% 6.98%/10/ 3,100,000 NZD (22,162) Morgan Stanley 02/17/14 3.80%/1/ 4.41% 4,100,000 90,243 Morgan Stanley 06/14/14 3.85%/1/ 5.31% 5,800,000 (311,243) Deutsche Bank 04/01/15 5.03% 3.50%/1/ 11,000,000 (220,863) Morgan Stanley 07/01/15 3.50%/1/ 4.39% 20,500,000 573,479 Union Bank of 08/25/15 6.47% 6.98%/10/ 10,000,000 NZD (40,703) Switzerland High Yield Bond Citibank 12/20/09 3.75% N/A/11/ 6,000,000 6,573 JP Morgan 12/20/09 N/A/12/ 3.75% 3,500,000 (69,635) Chase Citibank 03/20/10 4.74% N/A/13/ 6,000,000 120,968 Merrill Lynch 06/20/10 N/A/14/ 0.99% 2,000,000 3,116 Merrill Lynch 06/20/10 1.90% N/A/15/ 2,000,000 29,240 JP Morgan 12/20/10 N/A/16/ 2.33% 1,000,000 -- Chase Merrill Lynch 12/20/10 2.45% N/A/17/ 3,000,000 29,354 Morgan Stanley 12/20/10 N/A/16/ 2.30% 1,000,000 -- - ---------- /1/ Rate shown is based on the 3 month LIBOR as of the most recent payment date. /2/ Per the terms of the agreement, rate becomes effective 12/07/05. /3/ Rate to be determined based on the 3 month LIBOR on 12/07/05. /4/ Per the terms of the agreement, rate becomes effective 03/23/06. /5/ Rate to be determined based on the 3 month LIBOR on 03/23/06. /6/ Rate to be determined based on the 6 month GBP LIBOR on 05/19/06. /7/ Per the terms of the agreement, rate becomes effective 05/19/06. /8/ Rate shown is based on the 6 month SIBOR as of the most recent payment date. /9/ Rate shown is based on the 3 month STIBOR as of the most recent payment date. /10/ Rate shown is based on the 3 month BBA NZD LIBOR as of the most recent payment date. /11/ Rate to be determined upon notice of event of default by The Goodyear Tire & Rubber Company on 7.857% bond issue maturing 08/15/2011. /12/ Rate to be determined upon notice of event of default by DJ CDX:NA.HY3. /13/ Rate to be determined upon notice of event of default by Levi Strauss & Company on 12.25% bond issue maturing 12/15/2012. /14/ Rate to be determined upon notice of event of default by Teco Energy, Inc. on 7.20% bond issue maturing 05/01/2011. /15/ Rate to be determined upon notice of event of default by CMS Energy Corporation on 8.50% bond issue maturing 04/15/2011. /16/ Rate to be determined upon notice of event of default by NRG Energy, Inc. on 8.00% bond issue maturing 12/15/2013. /17/ Rate to be determined upon notice of event of default by Utilicorp Canada Finance Corp. on 7.75% bond issue maturing 06/15/2011. 148
BlackRock Funds As a result of recent changes in GAAP, the Portfolio's have previously reclassified periodic payments made under interest rate swap agreements, previously included within interest income or expense, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to amounts appearing in the per share amounts in prior years financial highlights. Net investment income ratios in the financial highlights (from 2001-2003), have also been modified accordingly. This reclassification had no effect on the Portfolio's net asset value, either in total or per share, or their total increase (decrease) in net assets from operations during any period. The effects of these reclassifications in the financial highlights are as follows: Low Duration Bond ------------------------------------------------------------------------------------------ BlackRock Institutional Service Investor A Investor B Investor C ----------- ------------- ------------ ------------ ------------ ------------ Net Investment Income Ratio 9/30/2003 .................... --% (0.01)% (0.01)% (0.01)% (0.01)% (0.01)% 9/30/2002 .................... --% --% --% --% --% --% 9/30/2001 .................... --% --% (0.01)% (0.01)% --% (0.01)% Net Investment Income per Share 9/30/2003 .................... $ -- $ -- $ -- $ -- $ -- $ -- 9/30/2002 .................... $ -- $ -- $ -- $ -- $ -- $ -- 9/30/2001 .................... $ -- $ -- $ -- $ -- $ -- $ -- Intermediate Government Bond -------------------------------------------------------------------------- Institutional Service Investor A Investor B Investor C --------------- ----------- ------------ ------------ ------------ Net Investment Income Ratio 9/30/2003 .................... 0.05% 0.05% 0.05% 0.05% 0.05% 9/30/2002 .................... 0.12% 0.11% 0.12% 0.12% 0.12% 9/30/2001 .................... 0.01% 0.01% 0.01% 0.01% 0.01% Net Investment Income per Share 9/30/2003 .................... $ -- $ 0.01 $ 0.01 $ -- $ -- 9/30/2002 .................... $ 0.01 $ 0.01 $ 0.02 $ 0.02 $ 0.01 9/30/2001 .................... $ -- $ -- $ -- $ 0.01 $ 0.01 Intermediate Bond --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C ------------ --------------- ----------- ------------ ------------ ------------- Net Investment Income Ratio 9/30/2003 .................... (0.08)% (0.07)% (0.08)% (0.08)% (0.07)% (0.07)% 9/30/2002 .................... (0.02)% (0.02)% (0.02)% (0.02)% (0.02)% (0.02)% 9/30/2001 .................... 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% Net Investment Income per Share 9/30/2003 .................... $ -- $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.01) 9/30/2002 .................... $ (0.01) $ (0.01) $ -- $ (0.01) $ -- $ -- 9/30/2001 .................... $ -- $ 0.01 $ -- $ 0.01 $ -- $ -- Core Bond Total Return --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C ------------ --------------- ----------- ------------ ------------ ------------- Net Investment Income Ratio 9/30/2003 .................... 0.02% 0.01% 0.01% 0.01% 0.02% 0.01% 9/30/2002 .................... (0.10)% (0.10)% (0.10)% (0.10)% (0.10)% (0.10)% 9/30/2001 .................... 0.02% 0.01% 0.01% 0.01% 0.02% 0.01% Net Investment Income per Share 9/30/2003 .................... $ -- $ -- $ -- $ -- $ -- $ -- 9/30/2002 .................... $ (0.01) $ (0.01) $ -- $ (0.01) $ -- $ -- 9/30/2001 .................... $ -- $ -- $ -- $ 0.01 $ -- $ -- 149
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Core PLUS Total Return ----------------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C ------------- ------------- ------------- ------------ ------------ ------------- Net Investment Income Ratio 9/30/2003 .................... (0.01)% (0.01)% (0.01)% (0.01)% (0.01)% (0.01)% Net Investment Income per Share 9/30/2003 .................... $ -- $ -- $ -- $ -- $ -- $ -- Government Income -------------------------------------------------------- BlackRock Investor A Investor B Investor C ----------- ------------ ------------ ------------ Net Investment Income Ratio 9/30/2003 .................... 0.07% 0.07% 0.07% 0.07% 9/30/2002 .................... --% 0.20% 0.20% 0.21% 9/30/2001 .................... --% 0.09% 0.10% 0.09% Net Investment Income per Share 9/30/2003 .................... $ 0.01 $ 0.01 $ 0.01 $ 0.01 9/30/2002 .................... $ -- $ 0.02 $ 0.02 $ 0.02 9/30/2001 .................... $ -- $ 0.01 $ 0.01 $ -- GNMA ----------------------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C ----------- --------------- ------------ ------------ ------------ ------------ Net Investment Income Ratio 9/30/2003 .................... 0.11% 0.12% 0.11% 0.12% 0.12% 0.11% 9/30/2002 .................... --% 0.37% 0.36% 0.37% 0.37% 0.36% 9/30/2001 .................... --% (0.10)% (0.10)% (0.10)% (0.10)% (0.10)% Net Investment Income per Share 9/30/2003 .................... $ -- $ 0.02 $ 0.01 $ 0.01 $ 0.01 $ 0.01 9/30/2002 .................... $ -- $ 0.02 $ 0.01 $ 0.03 $ 0.02 $ 0.01 9/30/2001 .................... $ -- $ (0.01) $ (0.01) $ (0.01) $ -- $ -- Managed Income ---------------------------------------------------------------------------- Institutional Service Investor A Investor B Investor C --------------- ------------- ------------ ------------ ------------ Net Investment Income Ratio 9/30/2003 .................... (0.03)% (0.03)% (0.03)% (0.02)% (0.02)% 9/30/2002 .................... (0.04)% (0.04)% (0.04)% (0.04)% (0.05)% 9/30/2001 .................... 0.01% 0.01% 0.01% 0.01% 0.01% Net Investment Income per Share 9/30/2003 .................... $ -- $ -- $ -- $ -- $ -- 9/30/2002 .................... $ (0.01) $ (0.01) $ (0.01) $ (0.01) $ (0.01) 9/30/2001 .................... $ -- $ -- $ -- $ -- $ -- Investment Transactions and Investment Income -- Investment transactions are accounted for on the trade date. The cost of investments sold and the related gain or loss is determined by use of the specific identification method, generally first in first out, for both financial reporting and federal income tax purposes. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are accreted or amortized, respectively, for book and tax purposes using the effective yield-to-maturity method over the term of the instrument. Dividends are recorded on the ex-dividend date. Paydown gains and losses on mortgage and asset-backed securities are presented as an adjustment to interest income. Repurchase Agreements -- Money market instruments may be purchased from banks and non-bank dealers subject to the seller's agreement to repurchase them at an agreed upon date and price. Collateral for repurchase agreements may have longer maturities than the maximum permissible remaining maturity of portfolio investments. The seller is required on a daily basis to maintain the value of the securities subject to the agreement at not less than the repurchase price. The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system or held in a separate account by the Portfolio's custodian or an authorized securities depository. 150
BlackRock Funds Reverse Repurchase Agreements -- The Portfolios may enter into reverse repurchase agreements with qualified third party brokers-dealers as determined by and under the direction of the Board. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance and is included within the related liability on the statement of assets and liabilities. At the time the Portfolios enter into a reverse repurchase agreement, it identifies for segregation certain liquid securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement. Futures Transactions -- The Portfolios use futures and options on futures contracts typically as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The Portfolio may also use these instruments for leverage. These futures contracts obligate a Portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. Upon entering into a futures contract, the Portfolios are required to deposit cash or pledge securities as initial margin. Subsequent payments, which are dependent on the daily fluctuations in the value of the underlying security or securities, are made or received by the Portfolios each day (daily variation margin) and are recorded as cumulative unrealized gains or losses until the contracts are closed. When the contracts are closed, the Portfolios record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Portfolios' basis in the contracts. Risks of entering into futures contracts include the possibility that there will not be a perfect price correlation between the futures contracts and the underlying securities. Second, it is possible that a lack of liquidity for futures contracts could exist in the market, resulting in an inability to liquidate a futures position prior to its maturity date. Third, the purchase of a futures contract involves the risk that a Portfolio could lose more than the original margin deposit required to initiate a futures transaction. Stripped Mortgage Backed Securities -- The Portfolios may invest in stripped mortgage-backed securities issued by the U.S. Government, its agencies and instrumentalities. Stripped mortgage-backed securities are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. In certain cases, one class will receive all of the interest (the interest-only or "IO" class), while the other class will receive all of the principal (the principal-only or "PO" class). The yield to maturity on IOs is sensitive to the rate of principal repayments (including pre-payments) on the related underlying mortgage assets, and principal pre-payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated pre-payments of principal, a Portfolio may not fully recoup its initial investment in IOs. Such securities will be considered liquid only if so determined in accordance with guidelines established by the Trustees. The Portfolios also may invest in stripped mortgage-backed securities that are privately issued. These securities will be considered illiquid for purposes of each Portfolio's limit on illiquid securities. Investing in Government Sponsored Enterprises -- The Portfolios invest in securities issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and similar United States Government sponsored entities such as Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Banks ("FHLB's"). Freddie Mac, Fannie Mae, and FHLB's, although chartered and sponsored by Congress, are not funded by Congressional appropriations and the debt and mortgage-backed securities issued by Freddie Mac, Fannie Mae and FHLB's are neither guaranteed nor insured by the United States Government. Option Writing/Purchasing -- The Portfolios may write or purchase financial options contracts for the purpose of hedging or earning additional income, which may be deemed speculative. When the Portfolios write or purchase an option, an amount equal to the premium received or paid by the Portfolios is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by the Portfolios on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commissions, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or proceeds from the sale in determining whether the Portfolios have realized a gain or a loss on investment transactions. The Portfolios as writers of an option may have no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Swaptions Writing -- The Portfolios may write swaption contracts to manage exposure to fluctuations in interest rates and to enhance portfolio yield. Swaption contracts wirtten by the Portfolios represent an option that gives the purchaser the right, but not the obligation, to enter into a previously agreed upon swap contract on a future date. If a written call swaption is exercised, the writer will enter a swap and is obligated to pay the fixed rate and receive a floating 151
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) rate in exchange. If a written put swaption is exercised, the writer will enter a swap and is obligated to pay the floating rate and receive a fixed rate in exchange. Swaptions are marked to market daily based upon quotations from market makers. When a Portfolio writes a swaption, the premium received is recorded as a liability and is subsequently adjusted to the current market value of the swaption. Changes in the value of the swaption are reported as unrealized gains or losses in the Statements of Assets and Liabilities or Statements of Net Assets. Gain or loss is recognized when the swaption contract expires or is closed. Premiums received from writing swaptions that expire or are exercised are treated by the Portfolio as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. Entering into a swaption contract involves, to varying degrees, the elements of credit, market and interest rate risk, associated with both option contracts and swap contracts. To reduce credit risk from potential counterparty default, the Portfolios enter into swaption contracts with counterparties whose creditworthiness has been evaluated by BlackRock. The Portfolios bear the market risk arising from any change in index values or interest rates. Written or purchased option and swaption transactions entered into during the year ended September 30, 2005 are summarized as follows: Intermediate Intermediate Intermediate Government Bond Bond PLUS Bond ----------------------------- ----------------------------- -------------------------- Number of Number of Number of Contracts Premium Contracts Premium Contracts Premium ----------- --------------- ----------- -------------- ----------- ------------ Balance at 9/30/04 ......... 4,410 $ 568,835 11,512 $ 1,350,390 2 1,325 Purchased .................. (4,913) (412,289) (9,349) (814,019) (126) (12,592) Written .................... 8,153 2,740,842 17,190 5,007,347 983 167,305 Expired .................... (1,169) (350,456) (2,994) (844,086) (310) (16,831) Closed ..................... (1,601) (230,112) (8,599) (953,862) (329) (32,307) ----------- --------------- ----------- -------------- ----------- ------------ Balance at 9/30/05 ......... 4,880 $ 2,316,820 7,760 $ 3,745,770 220 $ 106,900 =========== =============== =========== ============== =========== ============ Core Bond Core Plus Total Return Total Return Government Income ----------------------------- ---------------------------- -------------------------- Number of Number of Number of Contracts Premium Contracts Premium Contracts Premium ----------- --------------- ---------- -------------- ----------- ------------ Balance at 9/30/04 ......... 37,600 $ 6,144,238 3,642 $ 552,320 (72) $ (30,885) Purchased .................. (36,228) (2,655,999) (4,454) (332,054) (1,655) (284,276) Written .................... 66,931 19,205,385 8,736 2,493,443 1,860 868,652 Expired .................... (8,979) (4,254,423) (506) (334,740) 10 30,196 Closed ..................... (22,361) (2,965,455) (2,535) (346,293) 575 (133,703) ----------- --------------- ----------- -------------- ----------- ------------ Balance at 9/30/05 ......... 36,963 $ 15,473,746 4,883 $ 2,032,676 718 $ 449,984 =========== =============== =========== ============== =========== ============ Inflation Protected Bond GNMA Managed Income ----------------------------- ----------------------------- -------------------------- Number of Number of Number of Contracts Premium Contracts Premium Contracts Premium ----------- --------------- ----------- -------------- ----------- ------------ Balance at 9/30/04 ......... 6 $ 4,032 (108) $ (47,058) 14,500 $ 2,500,874 Purchased .................. (300) (38,045) (742) (131,294) (10,701) (771,922) Written .................... 812 308,209 1,724 434,560 18,132 5,446,674 Expired .................... 58 2,861 (712) 55,943 (4,241) (1,899,088) Closed ..................... (75) (79,322) 248 (81,424) (7,356) (929,060) ----------- --------------- ----------- -------------- ----------- ------------ Balance at 9/30/05 ......... 501 $ 197,735 410 $ 230,727 10,334 $ 4,347,478 =========== =============== =========== ============== =========== ============ 152
BlackRock Funds International Bond High Yield Bond ----------------------------- --------------------------- Number of Number of Contracts Premium Contracts Premium ----------- --------------- ----------- ------------- Balance at 9/30/04 ......... 56 $ 37,002 302 $ 162,256 Purchased .................. (1,897) (226,388) -- -- Written .................... 9,282 3,420,699 822 463,612 Expired .................... (1,508) (139,886) (1,005) (536,315) Closed ..................... 1,827 184,093 -- -- ----------- --------------- ----------- ------------- Balance at 9/30/05 ......... 7,760 $ 3,275,520 119 $ 89,553 =========== =============== =========== ============= TBA Purchase Commitments -- The Portfolios may enter into to be announced ("TBA") commitments purchase or sell securities for a fixed price at a future date. TBA commitments are considered securities in themselves, and involve a risk of loss if the value of the security to be purchased/sold declines/increases prior to settlement date, which is in addition to the risk of decline in the value of a Portfolios' other assets. Unsettled TBA commitments are valued at the current market value of the underlying securities, according to the procedures described under "Security Valuation". Mortgage Dollar Rolls -- The Portfolios may enter into mortgage dollar rolls (principally using TBA's) in which the Portfolios sell mortgage securities for delivery in the current month and simultaneously contracts to repurchase similar, but not identical, securities at an agreed-upon price on a fixed date. The Portfolios account for such dollar rolls as purchases and sales and receive compensation, in either "fee" or "drop", as consideration for entering into the commitment to repurchase. A Portfolio must maintain liquid securities having a value not less than the repurchase price (including accrued interest) for such dollar rolls. The market value of the securities that a Portfolio is required to purchase may decline below the agreed upon repurchase price of those securities. In a "fee" roll, the compensation is recorded as deferred income and amortized to income over the roll period. In a "drop" roll, the compensation is paid via a lower price for the security upon its repurchase. The counterparty receives all principal and interest payments, including prepayments, made in respect of a security subject to such a contract while it is the holder. Mortgage dollar rolls may be renewed with a new purchase and repurchase price and a cash settlement made on settlement date without physical delivery of the securities subject to the contract. A Portfolio engages in dollar rolls for the purpose of enhancing its yield, principally by earning a negotiated fee. Financing Transactions -- The Portfolios may enter into financing transactions consisting of a sale by the Portfolio of securities, together with a commitment to repurchase similar securities at a future date. The difference between the selling price and the future purchase price is an adjustment to interest income. If the counterparty to whom the Portfolio sells the security becomes insolvent, a Portfolio's right to repurchase the security may be restricted. The value of the security may change over the term of the financing transaction. Inflation-indexed Bonds -- Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal. Bridge Debt Commitments -- At September 30, 2005, the High Yield Bond Portfolio had $65,541 in commitments outstanding to fund high yield bridge debt. The High Yield Bond Portfolio is entitled to a fee upon the expiration of the commitment period, generally within six months of the initial commitment date. The bridge debt terms approximate market rates at the time the commitment is entered into. Securities Lending -- Through an agreement with PFPC Trust Co., the Portfolios may lend portfolio securities to certain brokers, dealers or other financial institutions that pay the Portfolios a negotiated fee. Prior to the close of each business day, loans of U.S. securities are secured by collateral at least equal to 102% of the market value of the securities on loan. Loans of foreign securities are secured by collateral at least equal to 105% of the market value of securities on loan. However, due to market fluctuations, the value of the securities lent may exceed the value of the collateral. On the next business day, the collateral is adjusted based on the prior day's market fluctuations and the current day's lending activity. Cash collateral received in connection with the securities lending is invested in short-term investments by the lending agent. The lending agent has hired BlackRock Capital Management, Inc. ("BCM"), a 153
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) wholly-owned subsidiary of BlackRock, Inc., and pays BCM to provide advisory services with respect to the collateral of all of the clients of its securities lending program. The lending agent may invest such collateral in short-term investments, including the Institutional Money Market Trust (the "Trust"), a portfolio of money market securities, or high-quality, short-term instruments with a maturity date not to exceed 397 days. BCM serves as investment adviser to the Trust, but receives no fees from the Trust for these services. Administrative and accounting services are provided by PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of The PNC Financial Services Group, Inc. PFPC is paid a fee from the Trust at an annual rate not to exceed 0.10% of the Trust's average daily net assets. At September 30, 2005, the market value of securities on loan, cash collateral invested in the Trust and total value of collateral held in connection with securities lending is summarized as follows: Market Value Market Value of Total Market of Securities Cash Collateral Value of On Loan Invested in the Trust Collateral Received --------------- ---------------------- ------------------- Core Bond Total Return ......... $ 137,423 $ 143,810 $ 143,810 High Yield Bond ................ 97,696,768 103,315,470 103,315,470 In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("Generally Accepted Accounting Principles") requires the use of management estimates. Actual results could differ from these estimates. Transfers In-Kind -- During the current fiscal year, September 30, 2005, there were no transfers In-kinds. During the period ended September 30, 2004, certain shareholders of the Enhanced Income Portfolio, Core Bond Total Return Portfolio and the Intermediate Plus Portfolio transferred cash and securities with a value of $31,831,191, $183,623,838 and $22,630,997, respectively, in exchange for Portfolio shares. The securities contributed were subject to a taxable event prior to the in-kind transfers to the Portfolios and had the same market value and cost basis as of the date of transfer. Accordingly, for purposes of generally accepted accounting principles, the book cost of any securities transferred in-kind to the Portfolios were equal to the market value of such securities on their date of contribution to the Portfolios resulting in no difference between book cost and tax cost. Other -- Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuations in exchange rates. Some countries in which the Portfolios invest require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if there is deterioration in a country's balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad. The securities exchanges of certain foreign markets are substantially smaller, less liquid and more volatile than the major securities markets in the United States. Consequently, acquisition and disposition of securities by the Portfolios may be inhibited. Expenses that are directly related to one of the Portfolios are charged directly to that Portfolio. Other operating expenses are prorated to the Portfolios on the basis of relative net assets. Class-specific expenses are borne by that class. Differences in net expense ratios between classes of a Portfolio are due to class-specific expenses, waivers and accrual adjustments. Income, other expenses and realized and unrealized gains and losses of a Portfolio are allocated to the respective class on the basis of the relative net assets each day. 154
BlackRock Funds The following table provides a list of the Portfolios included in this report along with a summary of their respective class-specific fee arrangements as provided under the Fund's Amended and Restated Distribution and Service Plan (the "Plan"). Fees are expressed as a percentage of average daily net asset values of the respective classes. Class Specific Fee Arrangements ------------------------------------------------------------------------------ Portfolio Share Classes ------------------------------------------------------------------------------ Blackrock Institutional Service ---------------------- --------------------- ----------------------- Contractual Actual Contractual Actual Contractual Actual Fees Fees(4) Fees Fees(4) Fees(1) Fees(4) ----------- -------- ------------- --------- ------------- --------- Enhanced Income None None None None 0.25% 0.25% Low Duration Bond None None None None 0.25% 0.25% Intermediate Government Bond N/A N/A None None 0.25% 0.25% Intermediate Bond None None None None 0.25% 0.25% Intermediate PLUS Bond None None None None 0.25% 0.25% Core Bond Total Return None None None None 0.25% 0.25% Core PLUS Total Return None None None None 0.25% 0.25% Government Income None None N/A N/A 0.25% 0.25% Inflation Protected Bond None None None None 0.25% 0.25% GNMA None None None None 0.25% 0.25% Managed Income N/A N/A None None 0.25% 0.25% International Bond None None None None 0.25% 0.25% High Yield Bond None None None None 0.25% 0.25% Class Specific Fee Arrangements --------------------------------------------------------------------------- Portfolio Share Classes --------------------------------------------------------------------------- Investor A Investor B Investor C -------------------- -------------------- ------------------------ Contractual Actual Contractual Actual Contractual Actual Fees(2) Fees(4) Fees(3) Fees(4) Fees(3) Fees(4) ---------- ------- ----------- -------- ------------- -------- Enhanced Income 0.35% 0.25% N/A N/A N/A N/A Low Duration Bond 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Intermediate Government Bond 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Intermediate Bond 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Intermediate PLUS Bond 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Core Bond Total Return 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Core PLUS Total Return 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Government Income 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Inflation Protected Bond 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% GNMA 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Managed Income 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% International Bond 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% High Yield Bond 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% - ---------- (1) -- The maximum annual contractual fees are comprised of a 0.25% service fee. (2) -- The maximum annual contractual fees are comprised of a 0.10% distribution fee and a 0.25% service fee. (3) -- The maximum annual contractual fees are comprised of a 0.75% distribution fee and a 0.25% service fee. (4) -- The actual fees are as of September 30, 2005. The BlackRock shares bear a transfer agent fee at an annual rate not to exceed 0.005% of the average daily net assets plus per account fees and disbursements. Institutional, Service, Investor A, Investor B and Investor C share classes bear a tranfer agent fee at an annual rate not to exceed 0.018% of the average daily net assets of such respective classes plus per account fees and disbursements. For the year ended September 30, 2005, the following shows the various types of class specific expenses borne directly by each class of each Portfolio and any associated waivers of those expenses. Share Classes Administration Fees ------------------------------------------ BlackRock Institutional Service ----------- --------------- ----------- Enhanced Income ...................... $ 8,027 $ 51,758 $ 44 Low Duration Bond .................... 220,785 629,260 538,457 Intermediate Government Bond ......... -- 335,153 1,739 Intermediate Bond .................... 156,911 467,106 135,466 Intermediate PLUS Bond ............... 9,133 208 -- Core Bond Total Return ............... 379,698 869,913 222,384 Core PLUS Total Return ............... 119,847 -- 39 Government Income .................... 3,860 -- 258,669 Inflation Protected Bond ............. 8,830 5,036 1 GNMA ................................. 3,780 194,647 8,669 Managed Income ....................... -- 875,805 110,407 International Bond ................... 28,017 415,017 148,548 High Yield Bond ...................... 49,882 237,298 206,083 Share Classes Administration Fees ------------------------------------------------------------- Investor A Investor B Investor C Total ------------ ------------ ------------ ------------- Enhanced Income ...................... $ 2 $ -- $ -- $ 59,831 Low Duration Bond .................... 117,475 80,905 137,973 1,724,855 Intermediate Government Bond ......... 381,631 84,436 28,347 831,306 Intermediate Bond .................... 46,237 17,745 16,944 840,409 Intermediate PLUS Bond ............... 16 -- -- 9,357 Core Bond Total Return ............... 249,371 76,530 115,665 1,913,561 Core PLUS Total Return ............... 50 161 31 120,128 Government Income .................... 259,301 62,319 40,256 624,405 Inflation Protected Bond ............. 4,371 1,452 2,444 22,134 GNMA ................................. 23,525 33,487 47,095 311,203 Managed Income ....................... 48,743 11,347 1,653 1,047,955 International Bond ................... 248,124 29,219 80,878 949,803 High Yield Bond ...................... 307,106 158,874 84,640 1,043,883 155
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Share Classes Administration Fees Waived ---------------------------------------------------------------- BlackRock Institutional Service Total ------------- --------------- ------------- -------------- Enhanced Income ...................... $ (8,027) $ (20,129) $ -- $ (28,156) Low Duration Bond .................... (220,785) (34,327) -- (255,112) Intermediate Government Bond ......... -- (335,153) (1,147) (336,300) Intermediate Bond .................... (156,911) (26,053) -- (182,964) Intermediate PLUS Bond ............... (9,133) -- -- (9,133)/1/ Core Bond Total Return ............... (379,698) (44,951) -- (424,649) Core PLUS Total Return ............... (119,847) -- (7) (119,854) Government Income .................... (3,860) -- -- (3,860) Inflation Protected Bond ............. (8,830) (761) -- (9,591)/2/ GNMA ................................. (3,780) (10,076) -- (13,856) Managed Income ....................... -- (875,805) (71,876) (947,681) International Bond ................... (28,017) -- -- (28,017) High Yield Bond ...................... (49,882) (10,135) -- (60,017) - ---------- /1/ Fund also had a fund level administration fee waiver of $22,319 /2/ Fund also had a fund level administration fee waiver of $29,323 Share Classes Transfer Agent Fees --------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C Total ----------- -------------- --------- ------------ ------------ ------------ ---------- Enhanced Income ...................... $ 1,146 $ 6,425 $ 5 $ -- $ -- $ -- $ 7,576 Low Duration Bond .................... 34,157 78,115 66,843 14,552 10,043 17,128 220,838 Intermediate Government Bond ......... - 41,605 216 47,375 10,482 3,518 103,196 Intermediate Bond .................... 22,416 57,986 16,816 5,740 2,203 2,103 107,264 Intermediate PLUS Bond ............... 1,305 24 -- 2 -- -- 1,331 Core Bond Total Return ............... 76,566 109,322 27,606 30,956 9,500 14,359 268,309 Core PLUS Total Return ............... 17,121 -- 3 6 20 4 17,154 Government Income .................... 551 -- 32,111 32,189 7,735 4,997 77,583 Inflation Protected Bond ............. 1,261 625 -- 538 180 304 2,908 GNMA ................................. 540 24,163 1,080 2,920 4,157 5,847 38,707 Managed Income ....................... -- 110,107 13,706 6,051 1,408 206 131,478 International Bond ................... 4,003 51,519 18,440 30,802 3,627 10,040 118,431 High Yield Bond ...................... 7,126 29,458 25,583 38,124 19,722 10,506 130,519 156
BlackRock Funds Share Classes Shareholder Service Fees ---------------------------------------------------------------------- Service Investor A Investor B Investor C Total ---------- ----------- ----------- ------------ ------------- Enhanced Income ...................... $ 77 $ 2 $ -- $ -- $ 79 Low Duration Bond .................... 928,902 202,033 139,369 237,520 1,507,824 Intermediate Government Bond ......... 3,000 656,576 145,395 48,830 853,801 Intermediate Bond .................... 233,113 79,649 30,577 29,186 372,525 Intermediate PLUS Bond ............... -- 26 2 -- 28 Core Bond Total Return ............... 383,421 431,881 131,891 199,376 1,146,569 Core PLUS Total Return ............... 65 86 278 55 484 Government Income .................... 447,429 447,790 107,404 69,425 1,072,048 Inflation Protected Bond ............. 1 7,535 2,503 4,216 14,255 GNMA ................................. 14,999 40,558 57,713 81,097 194,367 Managed Income ....................... 190,563 84,022 19,546 2,855 296,986 International Bond ................... 254,988 428,695 50,444 139,760 873,887 High Yield Bond ...................... 351,919 528,721 273,837 145,666 1,300,143 Share Classes Distribution Fees --------------------------------------------------- Investor A Investor B Investor C Total ------------ ------------ ------------ ------------ Enhanced Income ..................... $ 2 $ -- $ -- $ 2 Low Duration Bond ................... 80,741 418,107 712,566 1,211,414 Intermediate Government Bond ........ 262,823 436,433 146,492 845,748 Intermediate Bond ................... 31,873 91,729 87,558 211,160 Intermediate PLUS Bond .............. 10 4 -- 14 Core Bond Total Return .............. 171,855 395,731 598,132 1,165,718 Core PLUS Total Return .............. 34 832 167 1,033 Government Income ................... 179,180 322,214 208,274 709,668 Inflation Protected Bond ............ 3,014 7,510 12,646 23,170 GNMA ................................ 16,192 173,140 243,290 432,622 Managed Income ...................... 33,586 58,639 8,567 100,792 International Bond .................. 171,698 151,353 419,283 742,334 High Yield Bond ..................... 211,597 821,561 437,451 1,470,609 Share Classes Distribution Fees Waived -------------- Investor A -------------- Enhanced Income ...................... $ (2) Low Duration Bond .................... (80,741) Intermediate Government Bond ......... (262,823) Intermediate Bond .................... (31,873) Intermediate PLUS Bond ............... (10) Core Bond Total Return ............... (171,855) Core PLUS Total Return ............... (34) Government Income .................... (179,180) Inflation Protected Bond ............. (3,014) GNMA ................................. (16,192) Managed Income ....................... (33,586) International Bond ................... (171,698) High Yield Bond ...................... (211,597) (D) Transactions with Affiliates and Related Parties Pursuant to an Investment Advisory Agreement, BlackRock serves as investment adviser to the Portfolios. BlackRock Financial Management, Inc., ("BFM"), a wholly-owned subsidiary of BlackRock, serves as sub-adviser for all of the Portfolios. BlackRock, Inc. is an indirect majority-owned subsidiary of The PNC Financial Services Group, Inc. 157
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) For its advisory services, BlackRock is entitled to receive fees, computed daily and payable monthly, at the following annual rates, based on each Portfolio's average daily net assets: Each Portfolio Except the Enhanced Income, International Bond, Inflation International Bond Inflation Protected Protected Bond & GNMA & GNMA Bond ------------------------------- -------------------- -------------------- Investment Investment Investment Average Daily Net Assets Advisory Fee Advisory Fee Advisory Fee - ------------------------------- ------------------------------- -------------------- -------------------- first $1 billion .500% .550% .400% $1 billion--$2 billion .450 .500 .375 $2 billion--$3 billion .425 .475 .350 greater than $3 billion .400 .450 .325 The investment advisory fee for the Enhanced Income Portfolio is .40%. In the interest of limiting the expenses of the Portfolios, BlackRock and the Fund have entered into a series of annual expense limitation agreements. The agreements set a limit on certain of the operating expenses of each Portfolio for the next year and require BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit. These expense limits apply to the aggregate expenses incurred on a share class (excluding: interest, taxes, brokerage commissions and other extraordinary expenses). At September 30, 2005, the receivable from BlackRock in the Intermediate PLUS Bond Portfolio was $3,115 and Inflation Protected Bond Portfolio was $6,954. BlackRock has contractually agreed to waive or reimburse fees or expenses until February 1, 2006, in order to limit expenses as follows. This agreement is reviewed annually by the Fund's Board. Share Classes Portfolio --------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C ----------- --------------- --------- ------------ ------------ ----------- Enhanced Income ...................... 0.30% 0.40% 0.75% 0.80% NA NA Low Duration Bond .................... 0.40% 0.55% 0.85% 0.90% 1.65% 1.65% Intermediate Government Bond ......... NA 0.60% 0.90% 1.07% 1.82% 1.82% Intermediate Bond .................... 0.45% 0.60% 0.90% 0.95% 1.70% 1.70% Intermediate PLUS Bond ............... 0.40% 0.55% 0.85% 0.90% 1.65% 1.65% Core Bond Total Return ............... 0.40% 0.55% 0.85% 0.90% 1.65% 1.65% Core PLUS Total Return ............... 0.40% 0.55% 0.85% 0.90% 1.65% 1.65% Government Income .................... 0.45% NA 0.90% 1.07% 1.82% 1.82% Inflation Protected Bond ............. 0.30% 0.40% 0.75% 0.85% 1.60% 1.60% GNMA ................................. 0.45% 0.60% 0.90% 1.07% 1.82% 1.82% Managed Income ....................... NA 0.65% 0.95% 1.12% 1.87% 1.87% International Bond ................... 0.78% 1.03% 1.33% 1.50% 2.25% 2.25% High Yield Bond ...................... 0.55% 0.70% 1.00% 1.17% 1.92% 1.92% If in the following two years the operating expenses of a share class that previously received a waiver or reimbursement from BlackRock are less than the expense limit for that share class, the share class is required to repay BlackRock up to the amount of fees waived or expenses reimbursed under the agreement if: (1) the Portfolio of which the share class is a part has more than $50 million in assets, (2) BlackRock continues to be the Portfolio's investment adviser and (3) the Board of Trustees of the Fund has approved the payments to BlackRock at the previous quarterly meeting. 158
BlackRock Funds At September 30, 2005, the amounts subject to possible future reimbursement under the expense limitation agreement are as follows: Total Waivers Expiring Expiring Expiring subject to January 31, 2006 January 31, 2007 January 31, 2008 Reimbursement ------------------ ------------------ ------------------ ---------------- Enhanced Income ................... $ -- $ 271,986 $ 153,323 $ 425,309 Low Duration Bond ................. 3,619,537 4,373,486 2,669,664 10,662,687 Intermediate Government Bond ...... 639,093 642,708 693,880 1,975,681 Intermediate Bond ................. 1,750,280 2,070,723 1,396,711 5,217,714 Intermediate PLUS Bond ............ -- 146,763 110,897 257,660 Core Bond Total Return ............ 5,029,818 5,428,876 3,841,291 14,299,985 Core PLUS Total Return ............ 606,696 941,716 749,877 2,298,289 Government Income ................. 361,714 363,760 549,200 1,274,674 Inflation Protected Bond .......... -- 182,698 154,557 337,255 GNMA .............................. 830,940 696,440 445,389 1,972,769 Managed Income .................... 1,600,137 1,236,727 793,353 3,630,217 International Bond ................ 16,453 26,818 32,530 75,801 High Yield Bond ................... 740,256 686,917 595,184 2,022,357 The following waivers previously incurred on the portfolios which were subject to recoupment by BlackRock expired on January 31, 2005, in the amounts of $1,912,708 for Low Duration Bond, $655,308 for Intermediate Government Bond, $1,861,005 for Intermediate Bond, $4,450,377 for Core Bond Total Return, $266,493, for Core PLUS Total Return, $170,412 for Government Income, $600,858 for GNMA, $1,721,558 for Managed Income, and $425,847 for High Yield Bond. BlackRock pays BFM fees for its sub-advisory services. PFPC and BlackRock act as co-administrators for the Fund. For these services, the co-administrators receive a combined administration fee computed daily and payable monthly, based on a percentage of the average daily net assets of each Portfolio, at the following annual rates: 0.085% of the first $500 million, 0.075% of the next $500 million and 0.065% of assets in excess of $1 billion. In addition, each of the share classes, except for the BlackRock Class, is charged an administration fee based on the following percentage of average daily net assets of each respective class: 0.145% of the first $500 million, 0.135% of the next $500 million and 0.125% of assets in excess of $1 billion. The BlackRock Class is charged an administration fee of 0.035% of the first $500 million, 0.025% of the next $500 million and 0.015% of assets in excess of $1 billion based upon average daily net assets. In addition, PFPC and BlackRock may have, at their discretion, voluntarily waived all or any portion of their administration fees for any Portfolio or share class. 159
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Pursuant to the Fund's Amended and Restated Distribution and Service Plan (the "Plan"), the Portfolio may pay BlackRock Distributors, Inc. (the "Distributor") and/or BlackRock or any other affiliate of PNC Financial Services Group, Inc. fees for distribution and sales support services. Currently, only Investor A Shares, Investor B Shares and Investor C Shares bear the expense of distribution fees under the Plan. In addition, the Portfolio may pay brokers, dealers, financial institutions and industry professionals (including PNC Financial Services Group, Inc. and its affiliates) ("service organizations") fees for the provision of personal services to shareholders. BlackRock may receive some of the service fees paid by the Portfolio in return for providing services to shareholders. Currently, only Investor A Shares, Investor B Shares, Investor C Shares and Service Shares bear the expense of service fees under the Plan. Since January 31, 2005, BlackRock has maintained a call center which is responsible for providing certain shareholder services to the BlackRock Funds, such as responding to shareholder inquiries and processing transactions based upon instructions from shareholders with respect to the subscription and redemption of fund shares. During the period February 1, 2005 through September 30, 2005, the following amounts have been accrued by each portfolio to reimburse BlackRock for costs incurred running the call center, which are a component of the Transfer Agent fees in the accompanying Statement of Operations. BlackRock Institutional Service Investor A Investor B Investor C Total ----------- -------------- --------- ------------ ------------ ---------- ---------- Enhanced Income .................. $ 1,893 $ 1,851 $ 3 $ -- $ -- $ -- $ 3,747 Low Duration Bond ................ 50,332 31,316 28,379 5,789 3,903 6,289 126,008 Intermediate Government Bond ..... -- 17,062 82 27,908 6,130 1,703 52,885 Intermediate Bond ................ 34,362 23,724 7,368 2,268 873 775 69,370 Intermediate PLUS Bond ........... 1,929 -- -- 2 -- -- 1,931 Core Bond Total Return ........... 122,606 44,481 11,859 16,723 3,992 5,959 205,620 Core PLUS Total Return ........... 27,688 -- 2 3 9 3 27,705 Government Income ................ 901 -- 16,343 16,314 3,405 2,293 39,256 Inflation Protected Bond ......... 2,114 366 -- 377 145 226 3,228 GNMA ............................. 817 9,937 619 1,201 1,697 2,264 16,535 Managed Income ................... -- 45,869 5,971 2,570 557 93 55,060 International Bond ............... 7,278 25,081 8,476 14,256 1,622 4,877 61,590 High Yield Bond .................. 11,816 12,063 12,070 21,117 8,901 4,223 70,190 As of the fiscal year ended September 30, 2005, affiliated payables were as follows: PNC Bank PFPC(1) BlackRock(2) Affiliates(3) ---------- -------------- --------------- Enhanced Income ...................... $ 5,403 $ 8,435 $ 11 Low Duration Bond .................... 118,559 430,837 194,918 Intermediate Government Bond ......... 80,674 259,661 151,394 Intermediate Bond .................... 69,866 265,017 42,515 Intermediate PLUS Bond ............... 6,067 466 5 Core Bond Total Return ............... 185,574 674,550 179,655 Core PLUS Total Return ............... 29,065 60,344 169 Government Income .................... 61,385 129,449 155,008 Inflation Protected .................. 6,203 1,265 5,472 GNMA ................................. 22,274 36,580 44,049 Managed Income ....................... 62,575 298,236 29,083 International Bond ................... 104,611 507,758 132,744 High Yield Bond ...................... 109,378 333,811 221,396 - ---------- (1) -- payables to PFPC are for Accounting, Administration, Custody and Transfer Agent services provided as of September 30, 2005. (2) -- payables to BlackRock are for Advisory and Administration services provided as of September 30, 2005, and for amounts due BlackRock for costs incurred related to the BlackRock Funds Call Center. (3) -- payables to PNC Bank affiliates are for distribution and sales support services as described under the Plan. The total payable on behalf of the Fund, as of September 30, 2005, was $5,313,103, a portion of which is paid to service organizations, including other PNC Bank affiliates. 160
BlackRock Funds (E) Purchases and Sales of Securities For the year ended September 30, 2005, purchases and sales of securities, other than short-term investments, dollar rolls and U.S. government securities, were as follows: Purchases Sales ---------------- ---------------- Enhanced Income ...................... $ 62,970,411 $ 17,164,003 Low Duration Bond .................... 1,258,891,609 493,878,838 Intermediate Government Bond ......... 458,553,526 315,255,283 Intermediate Bond .................... 626,608,581 499,001,850 Intermediate PLUS Bond ............... 31,787,826 28,833,739 Core Bond Total Return ............... 2,164,091,312 3,599,523,613 Core PLUS Total Return ............... 572,873,212 493,063,701 Government Income .................... 2,350,711,307 2,216,100,539 Inflation Protected Bond ............. 8,601,751 3,560,290 GNMA ................................. 1,008,625,877 907,059,897 Managed Income ....................... 837,675,531 915,296,235 International Bond ................... 1,235,909,342 730,841,519 High Yield Bond ...................... 1,096,090,099 1,041,394,519 For the year ended September 30, 2005, purchases and sales of U.S. government securities were as follows: Purchases Sales ---------------- ---------------- Enhanced Income ...................... $ 55,435,661 $ 73,802,083 Low Duration Bond .................... 1,479,624,228 2,011,603,856 Intermediate Government Bond ......... 892,318,936 944,429,434 Intermediate Bond .................... 1,606,306,941 1,338,218,245 Intermediate PLUS Bond ............... 54,282,393 44,669,637 Core Bond Total Return ............... 7,924,182,309 4,990,586,010 Core PLUS Total Return ............... 857,607,914 738,680,286 Government Income .................... 1,201,277,337 1,064,809,957 Inflation Protected Bond ............. 173,126,668 135,237,085 GNMA ................................. 444,676,129 364,482,524 Managed Income ....................... 1,361,207,094 1,328,994,473 International Bond ................... 1,394,044,388 691,493,261 High Yield Bond ...................... 109,988,534 3,197,477 161
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) (F) Capital Shares Transactions in capital shares for each period were as follows: Enhanced Income ------------------------------------------------------------------------ For the Year Ended For the Period 3/4/04/1/ 9/30/05 Through 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ........................ 2,557,797 $ 25,360,401 5,073,642 $ 50,670,272/2/ Institutional Class .................... 4,696,240 46,518,977 4,224,099 42,063,617 Service Class .......................... 4,995 48,742 10 100 Investor A Class ....................... 226 2,230 10 100 Shares issued in reinvestment of dividends: BlackRock Class ........................ 27,096 268,396 16,269 162,231 Institutional Class .................... 201 1,987 1,266 12,605 Service Class .......................... 4 43 -- -- Investor A Class ....................... 3 30 -- -- Shares redeemed: BlackRock Class ........................ (2,066,288) (20,475,433) (3,211,406) (31,937,984) Institutional Class .................... (5,002,721) (49,546,947) (608,083) (6,045,246) Service Class .......................... (4) (39) -- -- ----------------- --------------- --------------- ---------------- Net increase .............................. 217,549 $ 2,178,387 5,495,807 $ 54,925,695 ================= =============== =============== ================ Low Duration Bond ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ............................. 23,677,584 $ 237,200,862 44,025,335 $ 446,498,575 Institutional Class ......................... 13,140,496 131,840,889 24,282,119 245,998,351 Service Class ............................... 15,491,086 155,287,978 16,906,063 171,124,176 Investor A Class ............................ 3,372,366 33,802,475 6,586,743 66,824,073 Investor B Class ............................ 305,370 3,060,506 1,237,328 12,527,828 Investor C Class ............................ 1,111,687 11,134,000 2,875,003 29,091,603 Shares issued in reinvestment of dividends: BlackRock Class ............................. 1,577,075 15,770,232 1,397,157 14,141,528 Institutional Class ......................... 89,590 896,842 211,305 2,142,104 Service Class ............................... 1,015,873 10,161,607 632,774 6,408,949 Investor A Class ............................ 180,216 1,803,602 150,038 1,520,489 Investor B Class ............................ 55,823 558,285 49,840 505,072 Investor C Class ............................ 72,317 723,217 80,404 814,680 Shares redeemed: BlackRock Class ............................. (47,103,065) (471,633,795) (29,993,094) (302,896,298) Institutional Class ......................... (22,415,014) (224,670,022) (23,820,299) (241,181,632) Service Class ............................... (12,747,828) (127,637,535) (7,559,029) (76,490,802) Investor A Class ............................ (4,584,912) (45,968,058) (8,056,604) (81,466,569) Investor B Class ............................ (2,299,034) (23,042,304) (2,925,422) (29,616,425) Investor C Class ............................ (6,267,123) (62,832,733) (9,991,118) (101,156,376) ----------------- --------------- --------------- ---------------- Net increase (decrease) ........................ (35,327,493) $ (353,543,952) 16,088,543 $ 164,789,326 ================= =============== =============== ================ - ---------- 1 Commencement of operations. 2 Includes 3,183,119 shares issued in exchange for cash and securities transferred in-kind with a value of $31,831,191. See Note (C). 162
BlackRock Funds Intermediate Government Bond ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares issued from the reorganization:/1/ Institutional Class .................... 603,030 $ 6,247,476 -- $ -- Investor A Class ....................... 35,945,484 373,247,336 -- -- Investor B Class ....................... 7,860,023 81,415,016 -- -- Investor C Class ....................... 1,326,873 13,754,555 -- -- Shares sold: Institutional Class .................... 4,935,111 50,660,534 7,030,782 73,254,751 Service Class .......................... 53,163 551,290 15,696 163,328 Investor A Class ....................... 2,301,849 23,697,849 1,938,301 20,278,933 Investor B Class ....................... 305,328 4,572,462 240,142 2,516,240 Investor C Class ....................... 166,254 3,465,591 498,526 5,220,024 Shares issued in reinvestment of dividends: Institutional Class .................... 209,245 2,162,681 34,701 361,433 Service Class .......................... 1,790 18,467 1,200 12,556 Investor A Class ....................... 504,455 5,201,764 148,299 1,554,893 Investor B Class ....................... 140,188 1,443,361 18,053 188,928 Investor C Class ....................... 25,817 266,289 18,338 192,130 Shares redeemed: Institutional Class .................... (7,281,755) (75,223,527) (6,165,653) (64,253,054) Service Class .......................... (90,576) (933,270) (34,895) (360,371) Investor A Class ....................... (9,159,278) (94,649,944) (3,069,832) (32,098,235) Investor B Class ....................... (1,944,875) (20,013,613) (409,168) (4,270,645) Investor C Class ....................... (902,590) (9,324,007) (855,357) (8,933,420) ----------------- --------------- --------------- ---------------- Net increase (decrease) ................... 34,999,536 $ 366,560,310 (590,867) $ (6,172,509) ================= =============== =============== ================ - ---------- /1/ See Note (B). Intermediate Bond ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ............................. 10,943,920 $ 103,766,106 22,194,526 $ 212,446,272 Institutional Class ......................... 7,910,204 74,474,551 7,323,200 70,358,931 Service Class ............................... 4,061,951 38,342,245 4,484,117 42,898,126 Investor A Class ............................ 1,146,433 10,812,049 2,301,278 22,081,709 Investor B Class ............................ 168,492 1,587,038 514,527 4,943,361 Investor C Class ............................ 167,224 1,575,377 853,762 8,248,621 Shares issued in reinvestment of dividends: BlackRock Class ............................. 1,503,241 14,177,881 2,117,759 20,302,155 Institutional Class ......................... 240,047 2,268,072 713,471 6,828,346 Service Class ............................... 367,148 3,460,910 380,166 3,646,160 Investor A Class ............................ 111,485 1,051,081 208,853 2,003,401 Investor B Class ............................ 17,501 165,066 26,753 256,573 Investor C Class ............................ 14,516 137,001 26,824 257,392 Shares redeemed: BlackRock Class ............................. (12,225,385) (115,777,289) (17,474,823) (166,947,949) Institutional Class ......................... (8,948,280) (84,224,943) (10,819,909) (103,213,183) Service Class ............................... (3,068,291) (28,892,569) (1,812,220) (17,318,652) Investor A Class ............................ (1,454,381) (13,699,059) (2,858,148) (27,250,206) Investor B Class ............................ (523,981) (4,940,189) (366,749) (3,497,597) Investor C Class ............................ (692,275) (6,522,781) (702,324) (6,704,679) ----------------- --------------- --------------- ---------------- Net increase (decrease) ........................ (260,431) $ (2,239,453) 7,111,063 $ 69,338,781 ================= =============== =============== ================ 163
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Intermediate PLUS Bond ------------------------------------------------------------------------ For the Year Ended For the Period 08/18/04/1/ 09/30/05 Through 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ......................... 2,918,957 $ 28,908,265 2,587,024 $ 25,870,985/2/ Institutional Class ..................... 81,163 829,560 10 100 Service Class ........................... -- -- 10 100 Investor A Class ........................ 1,927 19,367 10 100 Investor B Class ........................ 187 1,879 10 100 Investor C Class ........................ -- -- 10 100 Shares issued in reinvestment of dividends: BlackRock Class ......................... 82,753 820,654 10,755 107,683 Institutional Class ..................... -- 1 -- -- Investor A Class ........................ 37 373 -- -- Investor B Class ........................ 1 14 -- -- Shares redeemed: BlackRock Class ......................... (2,532,276) (25,073,039) -- -- Institutional Class ..................... (30) (300) -- -- ----------------- --------------- --------------- ---------------- Net increase .............................. 552,719 $ 5,506,774 2,597,829 $ 25,979,168 ================= =============== =============== ================ - ---------- /1/ Commencement of operations. /2/ Includes 2,263,100 shares issued in exchage for cash and securities transferred in-kind with a value of $22,630,997. See Note (C). Core Bond Total Return ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Proceeds from the CIGNA Merger/1/ Investor A Class ............................ 9,164,716 $ 88,882,541 -- $ -- Shares sold: BlackRock Class ............................. 72,943,333 710,880,147 81,098,736 789,585,824/2/ Institutional Class ......................... 14,121,667 137,024,604 26,144,657 252,656,949 Service Class ............................... 3,124,016 30,340,448 3,697,122 35,865,812 Investor A Class ............................ 7,182,115 68,960,212 7,005,512 68,270,389 Investor B Class ............................ 838,821 8,145,914 890,516 8,667,236 Investor C Class ............................ 1,440,182 14,007,464 3,948,277 38,572,706 Shares issued in reinvestment of dividends: BlackRock Class ............................. 5,151,864 50,150,246 6,196,050 60,273,505 Institutional Class ......................... 325,876 3,169,280 2,256,020 21,880,616 Service Class ............................... 393,907 3,828,505 639,548 6,211,063 Investor A Class ............................ 564,587 5,487,417 646,516 6,283,630 Investor B Class ............................ 66,679 647,871 146,718 1,427,283 Investor C Class ............................ 38,229 371,797 70,845 689,098 Shares redeemed: BlackRock Class ............................. (61,453,820) (598,016,374) (47,023,192) (456,436,915) Institutional Class ......................... (22,164,275) (215,691,754) (47,480,602) (458,774,449) Service Class ............................... (2,684,772) (26,080,827) (2,662,425) (25,922,395) Investor A Class ............................ (8,261,374) (80,230,420) (5,361,239) (51,943,127) Investor B Class ............................ (1,596,836) (15,512,697) (2,259,950) (21,914,448) Investor C Class ............................ (2,584,498) (25,136,361) (3,362,504) (32,566,267) ----------------- --------------- --------------- ---------------- Net increase .................................. 16,610,417 $ 161,228,013 24,590,605 $ 242,826,510 ================= =============== =============== ================ - ---------- /1/ See Note (B). /2/ Includes 19,013,204 shares issued in exchange for cash and securities transferred in-kind with a value of $183,623,838. See Note (C). 164
BlackRock Funds Core PLUS Total Return ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ............................ 20,067,484 $ 207,899,062 13,869,951 $ 142,757,694 Institutional Class ........................ 51 524 -- -- Service Class .............................. -- -- 2,781 28,000 Investor A Class ........................... 8,153 84,401 571 5,780 Investor B Class ........................... 4,032 41,806 3,938 40,392 Investor C Class ........................... 5,489 57,000 -- -- Shares issued in reinvestment of dividends: BlackRock Class ............................ 1,082,570 11,199,468 1,158,111 11,907,717 Institutional Class ........................ 1 6 -- 5 Service Class .............................. 80 834 24 253 Investor A Class ........................... 111 1,147 35 365 Investor B Class ........................... 229 2,372 168 1,730 Investor C Class ........................... 62 636 -- 5 Shares redeemed: BlackRock Class ............................ (16,967,035) (175,591,962) (8,898,892) (91,625,793) Institutional Class ........................ (51) (527) -- -- Service Class .............................. (2,885) (29,944) -- -- Investor A Class ........................... (597) (6,181) (466) (4,737) Investor B Class ........................... (937) (9,743) (1,792) (18,584) Investor C Class ........................... (443) (4,595) -- -- ----------------- --------------- --------------- ---------------- Net increase .................................. 4,196,314 $ 43,644,304 6,134,429 $ 63,092,827 ================= =============== =============== ================ Government Income ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ............................ -- $ 1 962,906 $ 10,785,337 Service Class .............................. 20,018,360 224,095,636 -- -- Investor A Class ........................... 15,705,001 173,372,996 8,254,569 91,605,279 Investor B Class ........................... 1,054,848 11,666,233 813,536 9,028,628 Investor C Class ........................... 1,196,333 13,196,771 740,703 8,204,120 Shares issued in reinvestment of dividends: BlackRock Class ............................ 48,339 534,250 16,934 186,475 Service Class .............................. 241,137 2,654,457 -- -- Investor A Class ........................... 471,025 5,201,492 310,038 3,440,580 Investor B Class ........................... 76,964 850,428 105,693 1,174,795 Investor C Class ........................... 51,223 564,964 54,418 603,660 Shares redeemed: BlackRock Class ............................ (183,175) (2,002,148) (5,189) (58,352) Service Class .............................. (720,236) (7,931,475) -- -- Investor A Class ........................... (4,798,560) (53,075,253) (4,903,988) (53,940,688) Investor B Class ........................... (1,243,847) (13,757,205) (1,668,127) (18,404,329) Investor C Class ........................... (656,734) (7,244,686) (1,072,691) (11,808,237) ----------------- --------------- --------------- ---------------- Net increase .................................. 31,260,678 $ 348,126,461 3,608,802 $ 40,817,268 ================= =============== =============== ================ 165
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Inflation Protected Bond ------------------------------------------------------------------------ For the Year Ended For the Period 06/28/04/1/ 9/30/05 Through 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ............................ 1,114,622 $ 11,640,391 2,000,010 $ 20,000,102 Institutional Class ........................ 619,259 6,536,438 10 100 Service Class .............................. 143 1,498 10 100 Investor A Class ........................... 592,223 6,211,445 8,902 92,956 Investor B Class ........................... 217,150 2,273,598 5,844 61,094 Investor C Class ........................... 375,454 3,950,746 574 6,000 Shares issued in reinvestment of dividends: BlackRock Class ............................ 6,148 63,843 -- 1 Institutional Class ........................ 7,358 77,671 -- -- Service Class .............................. 2 24 -- -- Investor A Class ........................... 12,079 126,662 -- 2 Investor B Class ........................... 2,444 25,643 2 19 Investor C Class ........................... 4,464 47,091 -- -- Shares redeemed: BlackRock Class ............................ (900,905) (9,381,838) -- (1) Institutional Class ........................ (77,288) (816,190) -- -- Investor A Class ........................... (231,656) (2,415,819) -- -- Investor B Class ........................... (30,328) (316,726) -- -- Investor C Class ........................... (24,467) (257,434) -- -- ----------------- --------------- --------------- ---------------- Net increase .................................. 1,686,702 $ 17,767,043 2,015,352 $ 20,160,373 ================= =============== =============== ================ - ---------- /1/ Commencement of operations. GNMA ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ............................ 112 $ 1,100 7,743 $ 77,432 Institutional Class ........................ 1,224,881 12,039,086 2,753,451 27,123,287 Service Class .............................. 797,088 7,867,549 123,324 1,216,598 Investor A Class ........................... 479,134 4,725,445 896,224 8,911,508 Investor B Class ........................... 130,958 1,290,150 456,867 4,531,094 Investor C Class ........................... 315,345 3,095,297 1,208,682 11,999,511 Shares issued in reinvestment of dividends: BlackRock Class ............................ 46,832 458,892 57,209 564,581 Institutional Class ........................ 6,790 66,675 18,460 182,613 Service Class .............................. 6,106 59,880 8,806 79,966 Investor A Class ........................... 41,656 410,176 57,839 574,179 Investor B Class ........................... 40,105 393,684 67,877 672,159 Investor C Class ........................... 25,500 250,129 49,441 488,662 Shares redeemed: BlackRock Class ............................ (464) (4,588) (4,966,583) (49,690,525) Institutional Class ........................ (4,038,772) (39,726,163) (4,626,153) (45,685,645) Service Class .............................. (194,386) (1,902,805) (57,171) (554,739) Investor A Class ........................... (773,584) (7,638,274) (1,017,767) (10,094,068) Investor B Class ........................... (705,005) (6,925,054) (1,191,717) (11,738,181) Investor C Class ........................... (1,593,289) (15,656,325) (2,356,064) (23,224,236) ----------------- --------------- --------------- ---------------- Net decrease .................................. (4,190,993) $ (41,195,146) (8,509,532) $ (84,565,804) ================= =============== =============== ================ 166
BlackRock Funds Managed Income ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: Institutional Class ........................ 4,721,056 $ 48,808,111 3,443,975 $ 35,951,136 Service Class .............................. 4,378,267 45,218,402 4,433,492 46,198,406 Investor A Class ........................... 620,512 6,408,922 570,805 5,950,344 Investor B Class ........................... 135,723 1,402,256 107,781 1,126,942 Investor C Class ........................... 41,170 426,350 34,767 362,960 Shares issued in reinvestment of dividends: Institutional Class ........................ 243,639 2,523,415 1,668,069 17,415,674 Service Class .............................. 184,693 1,906,988 307,188 3,208,282 Investor A Class ........................... 136,893 1,415,011 275,744 2,884,964 Investor B Class ........................... 13,039 134,801 26,510 277,153 Investor C Class ........................... 1,097 11,310 1,107 11,516 Shares redeemed: Institutional Class ........................ (9,318,309) (96,359,348) (18,238,033) (188,924,478) Service Class .............................. (4,302,614) (44,536,765) (5,576,224) (58,216,243) Investor A Class ........................... (1,277,114) (13,200,211) (2,055,845) (21,478,189) Investor B Class ........................... (377,402) (3,896,421) (221,467) (2,301,380) Investor C Class ........................... (9,506) (98,076) (22,880) (238,460) ----------------- --------------- --------------- ---------------- Net decrease .................................. (4,808,856) $ (49,835,255) (15,245,011) $ (157,771,373) ================= =============== =============== ================ International Bond ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares sold: BlackRock Class ............................ 8,425,996 $ 99,741,689 3,438,204 $ 38,322,016 Institutional Class ........................ 25,836,761 307,795,012 12,598,557 143,701,530 Service Class .............................. 5,793,762 68,495,942 14,327,492 160,851,025 Investor A Class ........................... 10,809,908 128,016,737 7,379,261 83,985,204 Investor B Class ........................... 687,467 8,202,390 528,566 6,047,568 Investor C Class ........................... 3,605,149 42,794,722 2,102,139 24,069,974 Shares issued in reinvestment of dividends: BlackRock Class ............................ 227,780 2,679,636 34,973 393,135 Institutional Class ........................ 267,437 3,147,143 135,936 1,537,371 Service Class .............................. 383,524 4,526,581 230,005 2,605,444 Investor A Class ........................... 541,901 6,399,493 300,294 3,398,972 Investor B Class ........................... 43,122 510,377 25,707 291,106 Investor C Class ........................... 115,886 1,369,607 45,702 518,500 Shares redeemed: BlackRock Class ............................ (2,918,326) (33,604,277) (339,508) (3,810,564) Institutional Class ........................ (6,661,800) (78,194,908) (6,813,808) (76,313,065) Service Class .............................. (3,546,075) (41,217,400) (11,936,202) (133,411,074) Investor A Class ........................... (5,773,239) (67,619,357) (3,650,626) (41,338,051) Investor B Class ........................... (431,547) (5,024,195) (266,978) (3,022,485) Investor C Class ........................... (1,080,369) (12,608,594) (521,630) (5,896,042) ----------------- --------------- --------------- ---------------- Net increase .................................. 36,327,337 $ 435,410,598 17,618,084 $ 201,930,564 ================= =============== =============== ================ 167
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) High Yield Bond ------------------------------------------------------------------------ For the Year Ended For the Year Ended 9/30/05 9/30/04 ----------------------------------- ---------------------------------- Shares Value Shares Value ----------------- --------------- --------------- ---------------- Shares issued from the reorganization:/1/ Institutional Class ........................ 499,336 $ 4,119,515 -- $ -- Investor A Class ........................... 28,680,269 236,635,082 -- -- Investor B Class ........................... 4,562,480 37,633,102 -- -- Investor C Class ........................... 1,274,746 10,520,796 -- -- Shares sold: BlackRock Class ............................ 7,315,006 59,096,944 10,537,232 84,539,437 Institutional Class ........................ 7,571,836 65,363,033 8,671,443 69,329,774 Service Class .............................. 9,805,652 79,698,157 7,643,139 61,340,427 Investor A Class ........................... 3,642,531 34,582,933 7,416,713 59,235,980 Investor B Class ........................... 1,252,655 10,272,635 2,067,712 16,574,993 Investor C Class ........................... 1,027,665 10,387,994 1,996,826 16,006,791 Shares issued in reinvestment of dividends: BlackRock Class ............................ 1,426,346 11,649,664 830,734 6,662,361 Institutional Class ........................ 375,742 3,087,049 152,431 1,221,478 Service Class .............................. 411,312 3,347,060 126,014 1,010,749 Investor A Class ........................... 1,267,862 10,294,391 351,549 2,811,695 Investor B Class ........................... 549,068 4,479,462 363,924 2,910,188 Investor C Class ........................... 253,565 2,075,165 250,916 2,008,325 Shares redeemed: BlackRock Class ............................ (3,386,198) (27,517,060) (3,165,692) (25,563,660) Institutional Class ........................ (7,873,773) (64,362,195) (10,991,762) (88,005,527) Service Class .............................. (4,437,678) (35,963,148) (5,028,290) (39,768,982) Investor A Class ........................... (10,042,859) (81,611,317) (9,479,104) (75,936,201) Investor B Class ........................... (4,047,039) (44,405,828) (4,946,611) (39,306,922) Investor C Class ........................... (3,996,445) (32,517,967) (4,101,802) (32,861,840) ----------------- --------------- --------------- ---------------- Net increase .................................. 36,132,079 $ 296,865,467 2,695,372 $ 22,209,066 ================= =============== =============== ================ - ---------- 1 See Note (B). On September 30, 2005, two shareholders held approximately 92% of the outstanding shares of the Enhanced Income Portfolio, two shareholders held approximately 43% of the outstanding shares of the Low Duration Bond Portfolio, two shareholders held approximately 40% of the outstanding shares of the Intermediate Government Portfolio, five shareholders held approximately 66% of the outstanding shares of the Intermediate Bond Portfolio, four shareholders held 95% of the Intermediate PLUS Portfolio, two shareholders held approximately 27% of the outstanding shares of the Core Bond Total Return Portfolio, six shareholders held approximately 70% of the outstanding shares of the Core PLUS Total Return Portfolio, three shareholders held approximately 59% of the outstanding shares of the Government Income Portfolio, four shareholder held approximately 70% of the outstanding shares of the Inflation Protected Portfolio, three shareholders held approximately 71% of the outstanding shares of the GNMA Portfolio, two shareholders held approximately 87% of the outstanding shares of the Managed Income Portfolio, two shareholders held approximately 29% of the outstanding shares of the International Bond Portfolio and two shareholders held approximately 23% of the outstanding shares of the High Yield Bond Portfolio. Some of the shareholders are comprised of omnibus accounts, which are held on behalf of several individual shareholders. 168
BlackRock Funds (G) At September 30, 2005, net assets consisted of: Low Intermediate Intermediate Enhanced Duration Government Intermediate PLUS Income Bond Bond Bond Bond --------------- ------------------ ---------------- ---------------- --------------- Capital paid-in ........................ $ 57,104,082 $ 1,531,596,033 $ 680,822,417 $ 902,813,028 $ 31,485,942 End of period undistributed net investment income (distributions in excess of net investment income) .................... 14,165 4,928,237 (751,511) 3,098,801 9,476 Accumulated net realized gain (loss) on investment transactions, futures, options, swaptions, swap contracts and foreign currency related transactions .......................... (429,077) (27,034,815) (14,172,529) (238,449) (172,450) Net unrealized depreciation on investment transactions futures, options, swaptions, swap contracts and foreign currency related transactions ......... (350,965) (16,585,239) (9,608,744) (7,994,017) (342,005) --------------- ------------------ ---------------- ---------------- --------------- $ 56,338,205 $ 1,492,904,216 $ 656,289,633 $ 897,679,363 $ 30,980,963 =============== ================== ================ ================ =============== Core Bond Core PLUS Government Inflation Total Return Total Return Income Protected Bond GNMA ----------------- ---------------- ---------------- ---------------- ---------------- Capital paid-in ................ $ 2,658,581,959 $ 326,743,419 $ 553,253,985 $ 37,927,416 $ 211,009,379 End of period undistributed net investment income (distributions in excess of net investment income) ............ 846,059 609,923 215,576 141,690 1,825,109 Accumulated net realized gain (loss) on investment transactions, futures, options, swaptions, swap contracts and foreign currency related transactions .................. 10,329,970 1,295,286 (4,373,570) 141,986 (8,824,937) Net unrealized appreciation (depreciation) on investment transactions, futures, options, swaptions, swap contracts and foreign currency related transactions .................. (15,457,698) (2,338,059) (5,270,988) 341,661 (1,622,705) ----------------- ----------------- ---------------- --------------- --------------- $ 2,654,300,290 $ 326,310,569 $ 543,825,003 $ 38,552,753 $ 202,386,846 ================= ================= ================ =============== =============== 169
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Managed International High Yield Income Bond Bond ---------------- ----------------- ---------------- Capital paid-in ........................ $ 700,032,465 $ 843,104,515 $ 977,230,170 End of period undistributed net investment income (distributions in excess of net investment income) .................... 1,816,732 (18,600,877) 3,568,504 Accumulated net realized gain on investment transactions, futures, options, swaptions, swap contracts and foreign currency related transactions ......... 2,164,442 (1,353,258) (45,789,878) Net unrealized appreciation (depreciation) on investment transactions, futures, options, swaptions, swap contracts and foreign currency related transactions .......................... 1,658,261 (2,699,771) (18,309,936) ---------------- ----------------- ---------------- $ 705,671,900 $ 820,450,609 $ 916,698,860 ================ ================= ================ (H) Federal Tax Information No provision is made for federal taxes as it is the Fund's intention to have each Portfolio continue to qualify for and elect the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended, and to make the requisite distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes. Short-term capital gain and foreign currency distributions that are reported in the Statement of Changes in Net Assets are reported as ordinary income for federal tax purposes. There were no short term or long term capital gain distributions for the year ended September 30, 2005. Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain, as appropriate, in the period that the differences arise. The following permanent differences as of September 30, 2005, attributable to interest rate swaps, realized foreign currency gains/(losses), foreign futures realized gains/(losses), return of capital, bond bifurcation and paydown adjustments were reclassified to the following accounts: Increase/ Increase/ (Decrease) (Decrease) Increase/ Accumulated Undistributed (Decrease) Net Realized Net Investment Paid in-capital Gain (Loss) Income ----------------- ---------------- --------------- Enhanced Income ...................... $ -- $ (51,131) $ 51,131 Low Duration Bond .................... -- (3,252,408) 3,252,408 Intermediate Government Bond ......... 14,045,612 (11,456,886) (2,588,726) Intermediate Bond .................... -- 181,173 (181,173) Intermediate PLUS Bond ............... -- (26,622) 26,622 Core Bond Total Return ............... 1,621,953 (1,013,015) (608,938) Core PLUS Total Return ............... -- 16,750 (16,750) Government Income .................... (807,396) (740,753) 1,548,149 Inflation Protected Bond ............. 70,256 (492,745) 422,489 GNMA ................................. (79,852) (1,367,013) 1,446,865 Managed Income ....................... -- (1,091,856) 1,091,856 International Bond ................... -- 5,183,392 (5,183,392) High Yield Bond ...................... 68,815,630 (69,371,941) 556,311 170
BlackRock Funds Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. The estimated tax character of distributions paid during the year ended September 30, 2005, and the tax character of distributions paid during the year ended September 30, 2004, were as follows: Ordinary Tax Return Long-Term Total Income of Capital Capital Gain Distributions ---------- ------------ -------------- -------------- Enhanced Income ......................... 9/30/05 ................................ $ 1,677,786 $ -- $ -- $ 1,677,786 9/30/04 ................................ 367,031 -- -- 367,031 Low Duration Bond ....................... 9/30/05 ................................ 49,855,929 -- -- 49,855,929 9/30/04 ................................ 42,369,674 -- -- 42,369,674 Intermediate Government Bond ............ 9/30/05 ................................ 13,795,146 3,929,278 1,396,396 19,120,820 9/30/04 ................................ 10,931,963 -- -- 10,931,963 Intermediate Bond ....................... 9/30/05 ................................ 30,447,058 -- 7,337,926 37,784,984 9/30/04 ................................ 35,663,787 -- 17,198,461 52,862,248 Intermediate PLUS Bond .................. 9/30/05 ................................ 1,007,615 -- 7,371 1,014,986 9/30/04 ................................ 121,847 -- -- 121,847 Core Bond Total Return .................. 9/30/05 ................................ 99,908,300 -- 4,346,486 104,254,786 9/30/04 ................................ 126,658,867 -- 28,012,571 154,671,438 Core PLUS Total Return .................. 9/30/05 ................................ 13,253,887 -- -- 13,253,887 9/30/04 ................................ 11,165,451 -- 1,428,975 12,594,426 Government Income ....................... 9/30/05 ................................ 18,372,241 807,397 -- 19,179,638 9/30/04 ................................ 6,519,101 -- 1,394,662 7,913,763 Inflation Protected Bond ................ 9/30/05 ................................ 1,977,061 -- 2,434 1,979,495 9/30/04 ................................ 245,093 -- -- 245,093 GNMA .................................... 9/30/05 ................................ 8,498,850 -- -- 8,498,850 9/30/04 ................................ 14,309,697 -- -- 14,309,697 Managed Income .......................... 9/30/05 ................................ 31,584,376 -- 2,759,862 34,344,238 9/30/04 ................................ 47,616,005 -- 16,559,285 64,175,290 International Bond ...................... 9/30/05 ................................ 31,309,603 -- 1,447,289 32,756,892 9/30/04 ................................ 12,218,083 -- -- 12,218,083 High Yield Bond ......................... 9/30/05 ................................ 67,406,689 -- 799,441 68,206,130 9/30/04 ................................ 41,802,100 -- -- 41,802,100 171
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Concluded) As of September 30, 2005, the estimated tax components of distributable earnings/(accumulated losses) were as follows: Undistributed Undistributed Accumulated Post- Ordinary Long-Term Capital October Income Capital Gain Losses Losses --------------- --------------- ------------- ----------- Enhanced Income ...................... $ 193,354 $ -- $ (311,997) $ (95,535) Low Duration Bond .................... 6,453,666 -- (11,482,103) (15,687,185) Intermediate Government Bond ......... -- -- (18,555,724) -- Intermediate Bond .................... 3,647,106 -- -- (5,763) Intermediate PLUS Bond ............... 26,076 -- (9,328) (141,079) Core Bond Total Return ............... 11,088,556 7,736,766 -- -- Core PLUS Total Return ............... 1,759,781 606,211 -- -- Government Income .................... -- -- (1,797,794) (2,753,539) Inflation Protected Bond ............. 661,715 242,436 -- (18,704) GNMA ................................. 2,083,429 -- (6,717,752) (1,930,311) Managed Income ....................... 7,096,909 -- -- -- International Bond ................... -- -- -- (23,597,374) High Yield Bond ...................... 10,105,699 11,484,690 (60,670,785) -- The estimated Post-October losses represent losses realized on investment transactions from November 1, 2004 through September 30, 2005 that, in accordance with Federal income tax regulations, the Portfolios may defer and treat as having arisen in the following fiscal year. For Federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. At September 30, 2005, the Portfolios had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates: Expiring September 30 --------------------------------------------------- 2007 2008 2009 2010 ------------- -------- ------------- -------------- Enhanced Income ...................... $ -- $ -- $ -- $ -- Low Duration Bond .................... -- -- -- -- Intermediate Government Bond ......... 6,551,479 -- 2,367,580 -- Intermediate PLUS Bond ............... -- -- -- -- Government Income .................... -- -- -- -- GNMA ................................. -- -- -- 603,989 High Yield Bond ...................... -- -- -- 60,670,785 Expiring September 30 -------------------------------------------------------- 2011 2012 2013 Total ------------- ------------ -------------- -------------- Enhanced Income ...................... $ -- $ 240,751 $ 71,246 $ 311,997 Low Duration Bond .................... -- 440,690 11,041,413 11,482,103 Intermediate Government Bond ......... 9,601,882 34,783 -- 18,555,724 Intermediate PLUS Bond ............... -- -- 9,328 9,328 Government Income .................... -- 74,687 1,723,107 1,797,794 GNMA ................................. 1,576,264 2,473,978 2,063,521 6,717,752 High Yield Bond ...................... -- -- -- 60,670,785 $1,159,407, $8,144,845 and $1,525,253 of its capital loss carryforward was used to offset net taxable gains realized in the fiscal year ended September 30, 2005 for the Intermediate Government Bond, High Yield Bond and Core Bond Total Return, respectively. 172
BlackRock Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of BlackRock Funds: We have audited the accompanying statements of net assets of the Enhanced Income, Low Duration, Intermediate Government Bond, Intermediate Bond, Inflation Protected Bond, International Bond, and High Yield Bond Portfolios [seven of the fifty portfolios constituting BlackRock Funds (the "Fund")], and the statements of assets and liabilities, including the schedules of investments, of Intermediate PLUS Bond, Core Bond Total Return, Core PLUS Total Return, Government Income, GNMA, and Managed Income Portfolios [six of the fifty portfolios constituting the Fund, collectively the "Portfolios"] as of September 30, 2005 and the related statements of operations for the year then ended, the statements of cash flows of the Enhanced Income, Low Duration, and Intermediate Government Portfolios for the year then ended, and the statements of changes in net assets and financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Portfolios for the periods ended September 30, 2003, September 30, 2002 and September 30, 2001, before the adjustments for the Low Duration Bond, Intermediate Government Bond, Intermediate Bond, Core Bond Total Return, Core PLUS Total Return, Government Income, GNMA and Managed Income Portfolios, described in Note C to the financial statements, were audited by other auditors whose report, dated November 26, 2003, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Portfolios are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolios' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2005, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. We also audited the adjustments described in Note C that were applied to restate the financial highlights of the Portfolios named above for the periods ended September 30, 2003, 2002, and 2001. In our opinion, such adjustments are appropriate and have been properly applied. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of the Portfolios as of September 30, 2005, the results of their operations and their cash flows for the year then ended, and the changes in their net assets and their financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania November 25, 2005 173
BlackRock Funds FUND MANAGEMENT (Unaudited) Information pertaining to the Trustees and officers of the Fund is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (888) 825-2257. Institutional and service share class investors should call (800) 441-7450. Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) and Length Complex/(2)/ Directorships for the Name, Address Held with of Time Principal Occupation(s) Overseen Held by Year Ending and Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEES - ------------------------------------------------------------------------------------------------------------------------------------ Richard Trustee Since 2005 Managing Director, BlackRock, Inc. 55 None N/A S. Davis/(3)/ (since 2005); Chief Executive (includes BlackRock, Inc. Officer, State Street Research & 50 40 E. 52nd Street Management Company (2000-2005); Portfolios New York, Chairman of the Board of Trustees, of the Fund NY 10022 State Street Research mutual funds and 5 Age: 59 ("SSR Funds") (2000-2005); Senior Portfolios Vice President, Metropolitan Life of Insurance Company (1999-2000); BlackRock Chairman, SSR Realty (2000-2004). Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Laurence Trustee Since 2000 Director, Chairman and Chief 55 Director, N/A D. Fink/(4)/ Executive Officer of BlackRock, (includes BlackRock, Inc. BlackRock, Inc. Inc. since its formation in 1998 50 40 E. 52nd Street and of BlackRock, Inc.'s predecessor Portfolios New York, NY 10022 entities since 1988; Chairman of of the Fund Age: 52 the Management Committee; formerly, and 5 Managing Director of the First Portfolios Boston Corporation, Member of its of Management Committee, Co-head of BlackRock its Taxable Fixed Income Division Bond and Head of its Mortgage and Real Allocation Estate Products Group; Chairman of Target the Board of Nomura BlackRock Shares) Asset Management and several of BlackRock's alternative investment vehicles; Director of several of BlackRock's offshore funds; Co-Chairman of the Board of Trustees of Mount Sinai-NYU; Co-Chairman of the Board of Trustees of NYU Hospitals Center; member of the Board of Trustees of NYU; member of the Board of Executives of the New York Stock Exchange, and Trustee of the American Folk Art Museum. 174
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) and Length Complex/(2)/ Directorships for the Name, Address Held With of Time Principal Occupation(s) Overseen Held by Year Ending and Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES - ------------------------------------------------------------------------------------------------------------------------------------ Bruce R. Bond Trustee Since 2005 Retired; Trustee and member of 55 Director, Avaya, $ 84,600 c/o BlackRock the Governance Committee, SSR (includes Inc. (information Funds Funds (1997-2005). 50 technology). 100 Bellevue Portfolios Parkway of the Fund Wilmington, DE and 5 19809 Portfolios Age: 59 of BlackRock Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Peter S. Drotch Trustee Since 2005 Retired; Trustee and member of 55 Director, First $ 84,600 c/o BlackRock the Audit Committee, SSR Funds (includes Marblehead Corp. Funds (2003-2005); Partner, Pricewater- 50 (student loan 100 Bellevue houseCoopers LLP (accounting Portfolios processing and Parkway firm)(1964-2000). of the Fund securitization); Wilmington, and 5 Trustee, DE 19809 Portfolios University of Age: 64 of Connecticut; BlackRock Trustee, Bond Huntington Allocation Theatre. Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Honorable Trustee and Since 2001 Partner, Covington & Burling (law 55 Director, Mirant $ 130,100 Stuart Chairman of firm) (2001-Present); Deputy (includes Corporation; E. Eizenstat the Secretary of the Treasury 50 Advisory Board Covington & Nominating (1999-2001); Under Secretary of Portfolios member, The Burling Committee State for Economic, Business and of the Fund Coca-Cola Company; 1201 Pennsylvania Agricultural Affairs (1997-1999); and 5 Advisory Board Avenue, Under Secretary of Commerce for Portfolios member, Group NW Washington, International Trade (1996-1997); of Menatep; Advisory DC 20004 U.S. Ambassador to the European BlackRock Board member, BT Age: 62 Union (1993-1996); Chairman, Bond Americas. International Board of Governors, Allocation Weizmann Institute of Science. Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Robert M. Trustee, Since 1996 Retired; Director (1991-2001), 55 Lead Director, ACE $ 140,100 Hernandez Vice Vice Chairman and Chief Financial (includes Limited (insurance c/o BlackRock Chairman of Officer (1994-2001), Executive Vice 50 company); Director Funds the Board President-Accounting and Finance Portfolios and Chairman of the 100 Bellevue and Chairman and Chief Financial Officer of the Fund Board, RTI Parkway of the Audit (1991-1994), USX Corporation (a and 5 International Metals, Wilmington, Committee diversified company principally Portfolios Inc.: Director, DE 19809 engaged in energy and steel of Eastman Chemical Age: 61 businesses). BlackRock Company. Bond Allocation Target Shares) 175
BlackRock Funds Fund Management (Unaudited) (Continued) Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) and Length Complex/(2)/ Directorships for the Name, Address and Held with of Time Principal Occupation(s) Overseen Held by Year Ending Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ Dr. Matina Horner Trustee and Since 2004 Retired; Executive Vice 55 Chair of the Board of $ 104,550 c/o BlackRock Funds Chairperson of President of Teachers (includes the Massachusetts 100 Bellevue Parkway the Governance Insurance and Annuity 50 General Hospital Wilmington, DE 19809 Committee Association and College Portfolios Institute of Health Age: 66 Retirement Equities Fund of the Fund Professions; Chair of (TIAA-CREF) (1989-2003). and 5 the Board of the Portfolios Greenwall Foundation; of Trustee, Century BlackRock Foundation (formerly Bond The Twentieth Century Allocation Fund); Director, N Target STAR (formerly called Shares) Boston Edison); Director, The Neiman Marcus Group; Honorary Trustee, Massachusetts General Hospital Corporation. - ------------------------------------------------------------------------------------------------------------------------------------ Toby Rosenblatt Trustee Since 2005 President, Founders 55 Director, A.P. Pharma, $ 84,600 c/o BlackRock Funds Investment Ltd. (private (includes Inc. 100 Bellevue Parkway investments) (since 50 Wilmington, DE 19809 1999); Trustee, SSR Portfolios Age: 67 Funds (1993-2003). of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ David R. Wilmerding, Jr. Trustee and Since 1996 Chairman, Wilmerding & 56 None $ 135,100 c/o BlackRock Funds Chairperson of Associates, Inc. (includes 100 Bellevue Parkway the Board (investment advisers) 50 Wilmington, DE 19809 (since 1989); Chairman, Portfolios Age: 70 Coho Partners, Ltd. of the Fund, (investment advisers) 5 Portfolios Corporation (land of management (since BlackRock 2003); Director, Beaver Bond Management corporation); Allocation Managing General Partner, Target Chestnut Street Exchange Shares and Fund. 1 Portfolio of Chestnut Street Exchange Fund, which is managed by BlackRock Financial Management Inc. and BlackRock Institutional Management Corporation.) - ------------------------------------------------------------------------------------------------------------------------------------ 176
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Term of Total Fund Office/(5)/ Compensation Position(s) and Length for the Name, Address and Held with of Time Principal Occupation(s) Year Ending Age Fund Served During Past Five Years 9/30/05 - ---------------------------------------------------------------------------------------------------------------------- OFFICERS WHO ARE NOT TRUSTEES Anne Ackerley Vice President Since 2003 Managing Director, BlackRock, Inc. (since May N/A BlackRock, Inc. (previously 2000); First Vice President and Operating 40 E. 52nd Street served as Officer, Mergers and Acquisitions Group New York, NY 10022 Assistant (1997-2000), First Vice President and Age: 43 Secretary Operating Officer, Public Finance Group since (1995-1997), and First Vice President, 2000) Emerging Markets Fixed Income Research (1994-1995), Merrill Lynch & Co. - ---------------------------------------------------------------------------------------------------------------------- Edward Baer Assistant Since 2005 Director and Senior Counsel of BlackRock, Inc. N/A BlackRock, Inc. Secretary (since 2004); Associate, Willkie Farr & 40 E. 52nd Street Gallagher LLP (2000-2004); Associate, Morgan New York, NY 10022 Lewis & Bockius LLP (1995-2000). Age: 37 - ---------------------------------------------------------------------------------------------------------------------- Bart Battista Chief Since 2004 Chief Compliance Officer and Anti-Money $ 368,547 BlackRock, Inc. Compliance Laundering Compliance Officer of BlackRock, 40 E. 52nd Street Officer and Inc. (since 2004); Managing Director (since New York, NY 10022 Anti-Money 2003), and Director (1998-2002) of BlackRock, Age: 46 Laundering Inc.; Compliance Officer at Moore Capital Compliance Management (1995-1998). Officer - ---------------------------------------------------------------------------------------------------------------------- Ellen L. Corson Assistant Since 1998 Senior Director and Vice President of Fund N/A PFPC Inc. Treasurer Accounting and Administration, PFPC Inc. 103 Bellevue Parkway (since 2003); Vice President and Director of Wilmington, DE 19809 Mutual Fund Accounting and Administration, Age: 41 PFPC Inc. (since November 1997); Assistant Vice President, PFPC Inc. (March 1997-November 1997); Senior Accounting Officer, PFPC Inc. (March 1993-March 1997). - ---------------------------------------------------------------------------------------------------------------------- Henry Gabbay President Since 2005 Managing Director, BlackRock, Inc. (since N/A BlackRock, Inc. 1989). 40 E. 52nd Street New York, NY 10022 Age: 57 - ---------------------------------------------------------------------------------------------------------------------- Brian P. Kindelan Secretary Since 1997 Managing Director and Senior Counsel (since N/A BlackRock Advisors, Inc. January 2005), Director and Senior Counsel 100 Bellevue Parkway (2001-2004) and Vice President and Senior Wilmington, DE 19809 Counsel (1998-2000), BlackRock Advisors, Age: 46 Inc.; Senior Counsel, PNC Bank Corp. May 1995-April 1998). - ---------------------------------------------------------------------------------------------------------------------- William McGinley Treasurer Since 2005 Managing Director of BlackRock, Inc. (since N/A BlackRock, Inc. 2004); Partner, PricewaterhouseCoopers LLP 100 Bellevue Parkway (1990-2004). Wilmington, DE 19809 Age: 38 - ---------------------------------------------------------------------------------------------------------------------- Vincent Tritto Assistant Since 2003 Managing Director and Assistant Secretary N/A BlackRock, Inc. Secretary (since January 2005) and Director and Senior 40 E. 52nd Street Counsel (2002-2004) of BlackRock, Inc. New York, NY 10022 Executive Director (2000-2002) and Vice Age: 44 President (1998-2000), Morgan Stanley & Co. Incorporated and Morgan Stanley Asset Management Inc. and officer of various Morgan Stanley-sponsored investment vehicles: Counsel (1998); Associate (1988-1997), Rogers & Wells LLP, New York, NY. - ---------------------------------------------------------------------------------------------------------------------- 177
BlackRock Funds FUND MANAGEMENT (Unaudited) (Concluded) (1) Each Trustee holds office for an indefinite term until the earlier of (1) the next meeting of shareholders at which Trustees are elected and until his or her successor is elected and qualified and (2) such time as such Trustee resigns or his or her term as a Trustee is terminated in accordance with the Fund's code of regulations and Declaration of Trust. (2) A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, that have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. (3) Mr. Davis is an interested person of the Fund due to his position at BlackRock, Inc. (4) Mr. Fink is an interested person of the Fund due to his position at BlackRock, Inc. (5) Each officer holds office for an indefinite term until the earlier of (1) the next meeting of trustees at which his or her successor is appointed and (2) such time as such officer resigns or his or her term as an officer is terminated in accordance with the Fund's code of regulations and Declaration of Trust. 178
BlackRock Funds ADDITIONAL INFORMATION (Unaudited) (A) A proxy statement was sent to shareholders of all portfolios of the Fund asking them to consider and vote upon the election of nine trustees to the Board of Trustees of the Fund (the "Board"). Five of the nine nominees were already serving as trustees of the Fund and the additional nominees had previously served as trustees of the State Street Research Funds. Due to the increased size and complexity of the Fund resulting from the reorganization with the State Street Research Funds, and an increase in the responsibilities of boards of trustees of funds generally, the Board believed it was in the best interest of the Fund to increase the size of the Board. On April 29, 2005, the special meeting of shareholders was held, at which all of the nominees included in the proxy were duly elected to the Board. The votes for the election of trustees were as follows: Affirmative Negative -------------- ---------- Bruce R. Bond ...................... 3,006,153,475 9,427,152 Richard S. Davis ................... 3,006,504,966 9,075,661 Peter S. Drotch .................... 3,006,391,368 9,189,259 Stuart E. Eizenstat ................ 3,005,972,578 9,608,049 Laurence D. Fink ................... 3,006,652,923 8,927,704 Robert M. Hernandez ................ 3,006,095,141 9,485,487 Dr Matina Horner ................... 3,005,916,103 9,664,525 Toby Rosenblatt .................... 3,006,157,679 9,422,948 David R. Wilmerding, Jr. ........... 3,006,022,868 9,557,759 (B) PricewaterhouseCoopers LLP ("PwC"), the Fund's former independent auditor, has been hired as an internal audit supporting service provider by The PNC Financial Services Group, Inc. ("PNC"), the parent company of the Fund's investment adviser and certain other service providers. In order to provide certain services to PNC and its affiliates which would have caused PwC to no longer be independent with respect to the Fund, PwC declined to stand for re-election as independent auditor of the Fund after the completion of the fiscal 2003 audit. The Fund's Audit Committee approved engaging Deloitte & Touche LLP as the independent registered public accounting firm to audit the Fund's financial statements for fiscal year 2006. A majority of the Fund's Board of Trustees, including a majority of the independent Trustees, approved the appointment of Deloitte & Touche LLP as the Fund's independent registered public accounting firm for the Fund's fiscal 2005 audit on November 29, 2005, subject to the right of the Fund, by a majority vote of the shareholders at any meeting called for that purpose, to terminate the appointment without penalty. (C) As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and various information requests from the Securities and Exchange Commission in connection with ongoing industry-wide investigations of mutual fund matters. 179
BlackRock Funds Investment Adviser BlackRock Advisors, Inc. Wilmington, Delaware 19809 Sub-Adviser BlackRock Financial Management, Inc. New York, New York 10022 Custodian PFPC Trust Co. Philadelphia, Pennsylvania 19153 Co-Administrator and Transfer Agent PFPC Inc. Wilmington, Delaware 19809 Distributor BlackRock Distributors, Inc. King of Prussia, Pennsylvania 19406 Co-Administrator BlackRock Advisors, Inc. Wilmington, Delaware 19809 Counsel Simpson Thacher & Bartlett LLP New York, New York 10017 Independent Registered Public Accounting Firm Deloitte & Touche LLP Philadelphia, Pennsylvania 19103 The Fund will mail only one copy of shareholder documents, including prospectuses, annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called "householding" and it is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact the Fund at (800) 441-7762. The Fund has delegated proxy voting responsibilities to BlackRock and its affiliates, subject to the general oversight of the Fund's Board of Trustees. A description of the policies and procedures that BlackRock and its affiliates use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling (800) 441-7762, or on the website of the Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information on how proxies relating to the Fund's voting securities were voted (if any) by BlackRock during the most recent 12-month period ended June 30th is available, upon request and without charge, by calling (800) 441-7762 or on the website of the Commission at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings for the first and third quarters of its fiscal year with the Commission on Form N-Q. The Fund's Form N-Q is available on the Commission's website at http://www.sec.gov and may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's Form N-Q may also be obtained upon request, without charge, by calling (800) 441-7762.
BlackRock Funds FUND SPECTRUM BlackRock Funds is a leading mutual fund company currently managing approximately $26 billion in the following portfolios designed to fit a broad range of investment goals. Each portfolio is managed by recognized experts in equity, fixed income, international, and tax-free investing. STOCK PORTFOLIOS Investment Trust Small Cap Core Equity Large Cap Value Equity Small Cap Growth Equity Large Cap Growth Equity Global Science & Technology Opportunities Dividend AchieversTM Global Resources Legacy All-Cap Global Resources Mid-Cap Value Equity Health Sciences Mid-Cap Growth Equity U.S. Opportunities Aurora International Opportunities Small/Mid-Cap Growth Index Equity Small Cap Value Equity STOCK & BOND PORTFOLIOS Asset Allocation BOND PORTFOLIOS Enhanced Income Government Income Low Duration Bond Inflation Protected Bond Intermediate Government Bond GNMA Intermediate Bond Managed Income Intermediate PLUS Bond International Bond Core Bond Total Return High Yield Bond Core PLUS Total Return TAX-FREE BOND PORTFOLIOS UltraShort Municipal Ohio Tax-Free Income Tax-Free Income Delaware Tax-Free Income Pennsylvania Tax-Free Income Kentucky Tax-Free Income New Jersey Tax-Free Income MONEY MARKET PORTFOLIOS Money Market North Carolina Municipal Money Market U.S. Treasury Money Market Ohio Municipal Money Market Municipal Money Market Pennsylvania Municipal Money Market New Jersey Municipal Money Market Virginia Municipal Money Market SHAREHOLDER PRIVILEGES Account Information Call us at 1-800-441-7762 to get information about your account balances, recent transactions and share prices. You can also reach us on the web at www.blackrock.com. Automatic Investment Plans Investor Class shareholders who want to invest regularly can arrange to have $50 or more automatically deducted from their checking or savings account and invested in any of the BlackRock portfolios. Systematic Withdrawal Plans Investor Class shareholders can establish a systematic withdrawal plan and receive periodic payments of $50 or more from their BlackRock portfolios, as long as their account is at least $10,000. Retirement Plans Shareholders may make investments in conjunction with Traditional, Rollover, Roth, Coverdell and Simple IRA's. Additional Information About The BlackRock Funds For additional reports or additional information, as well as more current information about portfolio holdings and characteristics, BlackRock Fund shareholders and prospective investors may call 1-800-441-7762.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by PNC Bank, National Association or any other bank and shares are not federally insured by, guaranteed by, obligations of or otherwise supported by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Investments in shares of the fund involve investment risks, including the possible loss of the principal amount invested. BND-ANN1 11/05 [LOGO OF BLACKROCK]
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE BlackRock Funds Tax-Free Bond Portfolios Annual Report September 30, 2005 [GRAPHIC APPEARS HERE] NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE BlackRock
BlackRock Funds TAX-FREE BOND PORTFOLIOS *UltraShort Municipal *New Jersey Tax-Free Income *Tax-Free Income *Ohio Tax-Free Income *Pennsylvania Tax-Free Income *Delaware Tax-Free Income *Kentucky Tax-Free Income TABLE OF CONTENTS Shareholder Letter ............................................................1 Portfolio Summaries UltraShort Municipal ......................................................2-3 Tax-Free Income ...........................................................4-5 Pennsylvania Tax-Free Income ..............................................6-7 New Jersey Tax-Free Income ................................................8-9 Ohio Tax-Free Income ....................................................10-11 Delaware Tax-Free Income ................................................12-13 Kentucky Tax-Free Income ................................................14-15 Note on Performance Information ............................................16 Statements of Net Assets ..................................................17-36 Key to Investment Abbreviations ............................................37 Portfolio Financial Statements Statements of Operations ...................................................38 Statements of Changes in Net Assets .....................................40-41 Financial Highlights ....................................................42-51 Notes to Financial Statements .............................................52-66 Report of Independent Registered Public Accounting Firm ......................67 Fund Management .............................. ............................68-72 Additional Information .......................................................73 PRIVACY PRINCIPLES OF BLACKROCK FUNDS BlackRock Funds is committed to maintaining the privacy of its shareholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock Funds collects, how we protect that information, and why in certain cases we may share such information with select other parties. BlackRock Funds does not receive any nonpublic personal information relating to its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record owners of BlackRock Funds, BlackRock Funds receives nonpublic personal information on account applications or other forms. With respect to these shareholders, BlackRock Funds also has access to specific information regarding their transactions in BlackRock Funds. BlackRock Funds does not disclose any nonpublic personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders' accounts (for example, to a transfer agent). BlackRock Funds restricts access to nonpublic personal information about its shareholders to BlackRock employees with a legitimate business need for the information. BlackRock Funds maintains physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our shareholders.
BlackRock Funds September 30, 2005 Dear Shareholder: We are pleased to present the Annual Report of the BlackRock Funds' Tax-Free Bond Portfolios for the year ended September 30, 2005. On January 31, 2005, the State Street Research Funds reorganized into BlackRock Funds and we at BlackRock would like to welcome the former State Street Research Funds shareholders and our new shareholders to the BlackRock Funds Family. The Annual Report includes important information on each Portfolio: .. Portfolio Summary - discusses recent portfolio management activity and highlights total returns. .. Fund Profile - displays characteristics of each Portfolio's holdings as of September 30, 2005. .. Expense Example - discusses costs in a shareholder account and provides information for a shareholder to estimate his or her expenses by share class and to compare expenses of each share class to other funds. .. Statement of Net Assets - lists portfolio holdings and includes each holding's market value and par amount/number of shares as of September 30, 2005. The Statement of Net Assets also contains the net asset value for each share class of a Portfolio. .. Statement of Operations - displays the components of each Portfolio's investment income and provides a detailed look at each Portfolio's expenses. The Statement of Operations also lists the aggregate change in value of a Portfolio's securities due to market fluctuations and security sales. .. Statements of Changes in Net Assets - compare Portfolio information from the prior period to the current period. Specifically, it details shareholder distributions by share class, aggregate realized gains and losses, and the change in net assets from the beginning of the period to the end of the period. .. Financial Highlights - include each Portfolio's expense ratios, net asset values, total returns, distributions per share, and turnover ratios for the last five years or since inception. .. Notes to Financial Statements - provide additional information on fees, a summary of significant accounting policies, a list of affiliated transactions, and a summary of purchases and sales of securities. .. Fund Management Table - lists information regarding BlackRock Funds' Trustees and Officers. In addition to these items, a summary of shareholder privileges is listed on the inside back cover of the report. Shareholders can find information on this page describing how to access account balances, recent transactions, and share prices. It also includes a summary of the Fund's various investment plans. At BlackRock, we maintain an unwavering commitment to placing our clients first and we value the trust you have placed in us. We hope you find the report informative, and we thank you for making BlackRock part of your investment strategy. Should you have questions concerning this report, please contact your financial advisor or contact us at 1-800-441-7762 or visit us at www.blackrock.com/funds. Sincerely, [GRAPHIC APPEARS HERE] Anne Ackerley Managing Director BlackRock Advisors,Inc. 1
UltraShort Municipal Portfolio Total Net Assets (9/30/05): $42.9 million Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management. The Portfolio invests primarily in bonds issued by or on behalf of states, possessions and territories of the United States, their political subdivisions and their agencies or authorities (and related tax-exempt derivative securities), the interest on which is exempt from Federal income tax ("municipal securities"). These municipal securities may not be exempt from the Federal Alternative Minimum Tax. The Portfolio normally invests at least 80% of its assets in municipal securities, including both general obligation and revenue bonds, from a diverse range of issuers. Recent Portfolio Management Activity: . All share classes of the Portfolio outperformed the Lipper Peer Group (Short Municipal Debt Funds) for the annual period. . During the annual period, municipal bonds outperformed taxable bonds. Historically municipal bonds have lagged behind taxable bonds in rallying bond markets and outperformed them in higher rate environments. The attractive municipal bond relative values compared to Treasury securities during the first half of the annual period attracted new buyers into the market. It was the combination of strong demand from traditional buyers, especially insurance companies, and opportunistic purchases from the non-traditional buyers that drove municipal returns. During the annual period, the 2-year to 10-year portion of the municipal yield curve flattened by approximately 84 basis points versus the Treasury marketplace, where the curve flattened by 136 basis points. This trend is partially the result of a renewed interest in municipal bonds toward the end of the annual period from retail investors who have been mostly absent from the market due to the historic low interest rate environment in the past couple of years. . The municipal market remains fundamentally strong. While hurricanes Katrina and Rita have struck the Gulf Coast, it is too early to determine the extent of the damage and the immediate and long term effects on the economy. Despite the hurricanes and rising interest rates, the municipal bond market continued to perform well to the end of the annual period. In general, the credit quality of the states have significantly improved over the past year as the more robust national economy produced higher state tax flows and revenues in conjunction with modestly restrained increases in state spending. Year-to-date, in 2005, only 5 states have seen revenue receipts come in under their projections. One example of such strength is California, which continues to benefit from an expanding economy, resulting in a revenue increase of 11.64% year over year. . The municipal new issue market continues on a record setting pace with approximately $310.0 billion issued year-to-date 2005, a 15% increase over last year's pace. It is on track to surpass the record set in 2003. Despite a higher interest rate environment, which typically slows new issue supply, the flattening of the Treasury yield curve has created more advance refunding opportunities. Refunding issuance stands at $106.6 billion, or 55% greater than 2004 year-to-date. . During the annual period, the 200 basis points increase of the Fed Funds rate resulted in the outperformance of cash equivalent securities over one year maturities. The Portfolio continues to hold slightly more than 50% of its assets in maturities under 60 days, which has led to the Portfolio's outperformance versus the Lipper Peer Group and Lehman Brothers One Year Municipal Bond Index. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE ULTRASHORT MUNICIPAL PORTFOLIO, THE LEHMAN BROTHERS 1 YEAR MUNICIPAL BOND INDEX AND THE LIPPER SHORT MUNICIPAL DEBT FUNDS FROM INCEPTION. [LINE CHART] Institutional Investor A Lehman Brothers 1 Year Municipal Bond Index Lipper Short Municipal Debt Funds ------------- ---------- ------------------------------------------- --------------------------------- 03/03/2004 $ 10,000 $ 9,699 $ 10,000 $ 10,000 03/31/2004 10,000 9,690 10,001 9,989 06/30/2004 9,955 9,682 9,971 9,916 09/30/2004 10,009 9,721 10,047 10,017 12/31/2004 10,044 9,741 10,049 10,040 03/31/2005 10,060 9,752 10,048 10,023 06/30/2005 10,121 9,800 10,122 10,097 09/30/2005 10,162 9,842 10,163 10,136 For period ending September 30, 2005 Average Annual Total Return From 1 Year Inception ------------ ------------ BlackRock Class 1.64% 1.14% Institutional Class 1.54% 1.03% Service Class 1.23% 0.67% Investor A Class (Load Adjusted) (1.81)% (1.01)% Investor A Class (NAV) 1.25% 0.93% The performance of the Lehman Brothers 1 Year Municipal Bond Index (the "Benchmark") is presented for comparative purposes in response to requirements of the Securities and Exchange Commission. However, BlackRock believes that differences between the ways in which the portfolio is managed and the Benchmark is constructed may make comparisons between the portfolio and Benchmark performance less meaningful to investors. Therefore, the performance of the Lipper Short Municipal Debt Funds is also presented. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: BlackRock shares, 3/3/04; Institutional Shares, 3/19/04; Service Shares, 3/19/04; and Investor a shares, 3/19/04. See "Note on Performance Information" on page 16 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 2
UltraShort Municipal Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 9.8% AA 33.9 A 30.0 BBB 16.7 Unrated 9.6 ----- Total 100.0% ===== Largest State Concentration (% of portfolio, excluding money market investments) Ohio 12.6% Kentucky 10.8 Texas 10.7 New York 7.5 North Carolina 5.9 Washington 4.8 Colorado 4.4 Pennsylvania 4.1 Tennessee 4.0 Virginia 3.2 ----- Total 68.0% ===== Portfolio Statistics Average maturity (years) 0.35 Modified Duration/2/ 0.34 1 Using the highest of Standard & Poor's ("S&P's"), Fitch Ratings ("Fitch"), or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Modified duration assumes that cash flows remain constant as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------- BlackRock Institutional Service Investor Class Class Class A Class --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,010.70 1,010.20 1,009.00 1,009.20 Expenses Incurred During Period (4/01/05 - 9/30/05) 1.76 2.27 3.68 3.68 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------- BlackRock Institutional Service Investor Class Class Class A Class --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,023.22 1,022.72 1,021.29 1,021.29 Expenses Incurred During Period (4/01/05 - 9/30/05) 1.78 2.28 3.71 3.71 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.35%, 0.45%, 0.73%, and 0.73% for the BlackRock, Institutional, Service, and Investor A share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 3
Tax-Free Income Portfolio Total Net Assets (9/30/05): $399.7 million Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management. The Portfolio invests primarily in bonds issued by or on behalf of states, possessions and territories of the United States, their political subdivisions and their agencies and authorities (and related tax-exempt derivative securities), the interest on which the portfolio manager believes is exempt from Federal income tax, including the Federal Alternative Minimum Tax ("municipal securities"). The Portfolio normally invests at least 80% of its assets in municipal securities, including both general obligation and revenue bonds, from a diverse range of issuers. The Portfolio emphasizes securities in the ten to twenty year maturity range. Recent Portfolio Management Activity: . All share classes of the Portfolio underperformed the Lipper Peer Group (General Municipal Debt Funds) for the annual period. . During the annual period, municipal bonds outperformed taxable bonds. Historically municipal bonds have lagged behind taxable bonds in rallying bond markets and outperformed them in higher rate environments. The attractive municipal bond relative values compared to Treasury securities during the first half of the annual period attracted new buyers into the market. It was the combination of strong demand from traditional buyers, especially insurance companies, and opportunistic purchases from the non-traditional buyers that drove municipal returns. During the annual period, the 2-year to 10-year portion of the municipal yield curve flattened by approximately 84 basis points versus the Treasury marketplace, where the curve flattened by 136 basis points. This trend is partially the result of a renewed interest in municipal bonds toward the end of the annual period from retail investors who have been mostly absent from the market due to the historic low interest rate environment in the past couple of years. . The municipal market remains fundamentally strong. While hurricanes Katrina and Rita have struck the Gulf Coast, it is too early to determine the extent of the damage and the immediate and long term effects on the economy. Despite the hurricanes and rising interest rates, the municipal bond market continued to perform well to the end of the annual period. In general, the credit quality of the states have significantly improved over the past year as the more robust national economy produced higher state tax flows and revenues in conjunction with modestly restrained increases in state spending. Year-to-date, in 2005, only 5 states have seen revenue receipts come in under their projections. One example of such strength is California, which continues to benefit from an expanding economy, resulting in a revenue increase of 11.64% year over year. . The municipal new issue market continues on a record setting pace with approximately $310.0 billion issued year-to-date 2005, a 15% increase over last year's pace. It is on track to surpass the record set in 2003. Despite a higher interest rate environment, which typically slows new issue supply, the flattening of the Treasury yield curve has created more advance refunding opportunities. Refunding issuance stands at $106.6 billion, or 55% greater than 2004 year-to-date. . During the annual period, the 2-year, 5-year and 10-year portions of the municipal yield curve rose by 110, 58 and 30 basis points, respectively, while the 30-year portion declined 11 basis points. The Portfolio's overall bias towards a higher interest rate environment, and investments in the short to intermediate portion of the yield curve, detracted from performance as the longer portions of the municipal yield curve were the best performers during the annual period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE TAX-FREE INCOME PORTFOLIO, THE LEHMAN BROTHERS MUNICIPAL BOND INDEX AND THE LIPPER GENERAL MUNICIPAL DEBT FUNDS FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Lehman Brothers Municipal Bond Index Lipper General Municipal Debt Funds ------------- ---------- ------------------------------------ ----------------------------------- 09/30/1995 $ 10,000 $ 9,602 $ 10,000 $ 10,000 12/31/1995 10,458 10,020 10,412 10,466 03/31/1996 10,369 9,933 10,287 10,279 06/30/1996 10,466 10,013 10,366 10,332 09/30/1996 10,745 10,268 10,604 10,569 12/31/1996 11,056 10,553 10,875 10,821 03/31/1997 11,047 10,532 10,849 10,770 06/30/1997 11,445 10,899 11,223 11,146 09/30/1997 11,829 11,252 11,562 11,492 12/31/1997 12,176 11,568 11,875 11,814 03/31/1998 12,336 11,706 12,012 11,927 06/30/1998 12,516 11,862 12,194 12,086 09/30/1998 12,876 12,190 12,569 12,439 12/31/1998 12,957 12,252 12,645 12,450 03/31/1999 13,025 12,302 12,757 12,512 06/30/1999 12,798 12,073 12,531 12,227 09/30/1999 12,660 11,929 12,481 12,058 12/31/1999 12,418 11,687 12,383 11,870 03/31/2000 12,774 12,008 12,746 12,209 06/30/2000 12,938 12,148 12,939 12,341 09/30/2000 13,268 12,444 13,252 12,625 12/31/2000 13,778 12,907 13,832 13,167 03/31/2001 14,046 13,143 14,139 13,422 06/30/2001 14,169 13,231 14,231 13,488 09/30/2001 14,570 13,602 14,630 13,833 12/31/2001 14,436 13,461 14,541 13,682 03/31/2002 14,573 13,560 14,678 13,792 06/30/2002 14,947 13,904 15,215 14,258 09/30/2002 15,310 14,226 15,938 14,884 12/31/2002 15,302 14,201 15,938 14,827 03/31/2003 15,305 14,188 16,129 14,930 06/30/2003 15,848 14,674 16,545 15,321 09/30/2003 15,830 14,640 16,558 15,315 12/31/2003 16,022 14,800 16,785 15,537 03/31/2004 16,185 14,933 17,075 15,756 06/30/2004 15,888 14,642 16,671 15,386 09/30/2004 16,378 15,095 17,320 15,930 12/31/2004 16,621 15,295 17,537 16,115 03/31/2005 16,672 15,332 17,531 16,080 06/30/2005 16,951 15,579 18,044 16,512 09/30/2005 16,897 15,519 18,022 16,484 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------------ ---------- ---------- ---------- BlackRock Class 3.23% 3.40% 4.99% 5.40% Institutional Class 3.17% 3.34% 4.95% 5.39% Service Class 2.91% 3.02% 4.63% 5.07% Investor A Class (Load Adjusted) (1.28)% 1.56% 3.66% 4.49% Investor A Class (NAV) 2.81% 2.94% 4.52% 4.92% Investor B Class (Load Adjusted) (2.32)% 1.08% 3.39% 4.20% Investor B Class (NAV) 2.14% 2.18% 3.74% 4.20% Investor C Class (Load Adjusted) 1.15% 2.18% 3.72% 4.20% Investor C Class (NAV) 2.14% 2.18% 3.72% 4.20% The performance of the Lehman Brothers Municipal Bond Index (the "Benchmark") is presented for comparative purposes in response to requirements of the Securities and Exchange Commission. However, BlackRock believes that differences between the ways in which the portfolio is managed and the Benchmark is constructed may make comparisons between the portfolio and Benchmark performance less meaningful to investors. Therefore, the performance of the Lipper General Municipal Debt Funds is also presented. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 5/14/90; Institutional Shares, 1/21/93; Service Shares, 7/29/93; Investor B Shares, 7/18/96, Investor C Shares, 2/28/97 and BlackRock Shares, 12/22/03. See "Note on Performance Information" on page 16 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 4
Tax-Free Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 65.0% AA 18.2 A 7.6 BBB 6.6 <BBB 1.4 Unrated 1.2 ----- Total 100.0% ===== Largest State Concentration (% of long-term investments) Pennsylvania 9.6% New York 8.8 Texas 8.0 Washington 7.9 California 7.4 New Jersey 7.3 Georgia 6.8 Puerto Rico 6.6 Massachusetts 5.1 Florida 4.7 ----- Total 72.2% ===== Portfolio Statistics Average maturity (years) 8.42 Modified Duration/2/ 7.33 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Modified duration assumes that cash flows remain constant as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ----------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,013.30 1,013.50 1,012.20 1,012.20 1,008.40 1,008.40 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.27 3.03 4.34 4.34 8.11 8.11 Hypothetical Expenses (5% return before expenses) ----------------------------------------------------------------------------------------------- BlackRock Institutional Service Investor Investor Investor Class Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,022.72 1,021.95 1,020.63 1,020.63 1,016.83 1,016.83 Expenses Incurred During Period (4/01/05 - 9/30/05) 2.28 3.05 4.37 4.37 8.17 8.17 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.45%, 0.60%, 0.86%, 0.86%, 1.61%, and 1.61% for the BlackRock, Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 5
Pennsylvania Tax-Free Income Portfolio Total Net Assets (9/30/05): $660.3 million Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management. The Portfolio invests primarily in bonds issued by or on behalf of states, possessions and territories of the United States, their political subdivisions and their agencies or authorities (and related tax-exempt derivative securities), the interest on which the portfolio manager believes is exempt from Federal income tax (including the Federal Alternative Minimum Tax) and Pennsylvania state income tax ("municipal securities"). The Portfolio normally invests at least 80% of its assets in municipal securities, including both general obligation and revenue bonds, from a diverse range of issuers (including issuers located outside of Pennsylvania). The Portfolio emphasizes securities in the ten to twenty year maturity range. Recent Portfolio Management Activity: . All share classes of the Portfolio underperformed the Lipper Peer Group (Pennsylvania Municipal Debt Funds) for the annual period. . During the annual period, municipal bonds outperformed taxable bonds. Historically municipal bonds have lagged behind taxable bonds in rallying bond markets and outperformed them in higher rate environments. The attractive municipal bond relative values compared to Treasury securities during the first half of the annual period attracted new buyers into the market. It was the combination of strong demand from traditional buyers, especially insurance companies, and opportunistic purchases from the non-traditional buyers that drove municipal returns. During the annual period, the 2-year to 10-year portion of the municipal yield curve flattened by approximately 84 basis points versus the Treasury marketplace, where the curve flattened by 136 basis points. This trend is partially the result of a renewed interest in municipal bonds toward the end of the annual period from retail investors who have been mostly absent from the market due to the historic low interest rate environment in the past couple of years. . The municipal market remains fundamentally strong. While hurricanes Katrina and Rita have struck the Gulf Coast, it is too early to determine the extent of the damage and the immediate and long term effects on the economy. Despite the hurricanes and rising interest rates, the municipal bond market continued to perform well to the end of the annual period. In general, the credit quality of the states have significantly improved over the past year as the more robust national economy produced higher state tax flows and revenues in conjunction with modestly restrained increases in state spending. Year-to-date, in 2005, only 5 states have seen revenue receipts come in under their projections. One example of such strength is California, which continues to benefit from an expanding economy, resulting in a revenue increase of 11.64% year over year. . The municipal new issue market continues on a record setting pace with approximately $310.0 billion issued year-to-date 2005, a 15% increase over last year's pace. It is on track to surpass the record set in 2003. New issue volume in Pennsylvania year-to-date at $13.2 billion is running approximately 33% ahead of last year's pace. Despite a higher interest rate environment, which typically slows new issue supply, the flattening of the Treasury yield curve has created more advance refunding opportunities. Refunding issuance stands at $106.6 billion, or 55% greater than 2004 year-to-date. . During the annual period, the 2-year, 5-year and 10-year portions of the municipal yield curve rose by 110, 58 and 30 basis points, respectively, while the 30-year portion declined 11 basis points. The Portfolio's overall bias towards a higher interest rate environment, and investments in the short to intermediate portion of the yield curve, detracted from performance as the longer portions of the municipal yield curve were the best performers during the annual period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE PA TAX-FREE INCOME PORTFOLIO, THE LEHMAN BROTHERS MUNICIPAL BOND INDEX AND THE LIPPER PENNSYLVANIA MUNICIPAL DEBT FUNDS FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Lehman Brothers Municipal Bond Index Lipper Pennsylvania Municipal Debt Funds ------------- ---------- ------------------------------------ ---------------------------------------- 09/30/1995 $ 10,000 $ 9,600 $ 10,000 $ 10,000 12/31/1995 10,420 9,992 10,412 10,465 03/31/1996 10,299 9,865 10,287 10,279 06/30/1996 10,391 9,941 10,366 10,350 09/30/1996 10,629 10,158 10,604 10,589 12/31/1996 10,900 10,406 10,875 10,831 03/31/1997 10,860 10,356 10,849 10,793 06/30/1997 11,193 10,662 11,223 11,148 09/30/1997 11,525 10,966 11,562 11,475 12/31/1997 11,848 11,262 11,875 11,793 03/31/1998 11,993 11,387 12,012 11,912 06/30/1998 12,184 11,555 12,194 12,075 09/30/1998 12,506 11,848 12,569 12,377 12/31/1998 12,573 11,898 12,645 12,389 03/31/1999 12,674 11,981 12,757 12,464 06/30/1999 12,464 11,769 12,531 12,228 09/30/1999 12,404 11,700 12,481 12,033 12/31/1999 12,285 11,574 12,383 11,814 03/31/2000 12,596 11,855 12,746 12,130 06/30/2000 12,779 12,013 12,939 12,256 09/30/2000 13,086 12,288 13,252 12,558 12/31/2000 13,508 12,670 13,832 13,041 03/31/2001 13,814 12,929 14,139 13,279 06/30/2001 13,857 12,954 14,231 13,368 09/30/2001 14,218 13,289 14,630 13,749 12/31/2001 14,146 13,194 14,541 13,630 03/31/2002 14,257 13,282 14,678 13,731 06/30/2002 14,733 13,722 15,215 14,184 09/30/2002 15,146 14,091 15,938 14,806 12/31/2002 15,180 14,093 15,938 14,763 03/31/2003 15,325 14,223 16,129 14,906 06/30/2003 15,710 14,552 16,545 15,277 09/30/2003 15,625 14,455 16,558 15,254 12/31/2003 15,824 14,622 16,785 15,474 03/31/2004 15,925 14,711 17,075 15,684 06/30/2004 15,647 14,438 16,671 15,305 09/30/2004 16,066 14,809 17,320 15,819 12/31/2004 16,249 14,962 17,537 16,023 03/31/2005 16,249 14,934 17,531 16,028 06/30/2005 16,498 15,162 18,044 16,449 09/30/2005 16,452 15,105 18,022 16,426 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------------ ---------- ---------- ---------- Institutional Class 2.41% 2.79% 4.68% 5.10% Service Class 2.10% 2.49% 4.38% 4.78% Investor A Class (Load Adjusted) (2.12)% 0.97% 3.37% 4.21% Investor A Class (NAV) 2.00% 2.35% 4.22% 4.64% Investor B Class (Load Adjusted) (3.14)% 0.55% 3.14% 3.89% Investor B Class (NAV) 1.25% 1.62% 3.48% 3.89% Investor C Class (Load Adjusted) 0.27% 1.62% 3.47% 3.92% Investor C Class (NAV) 1.24% 1.62% 3.47% 3.92% The performance of the Lehman Brothers Municipal Bond Index (the "Benchmark") is presented for comparative purposes in response to requirements of the Securities and Exchange Commission. However, BlackRock believes that differences between the ways in which the portfolio is managed and the Benchmark is constructed may make comparisons between the portfolio and Benchmark performance less meaningful to investors. Therefore, the performance of the Lipper Pennsylvania Municipal Debt Funds is also presented. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 5/14/90; Institutional Shares, 1/21/93; Service Shares, 7/29/93; Investor B Shares, 7/18/96, Investor C Shares, 2/28/97 and BlackRock Shares, 12/22/03. See "Note on Performance Information" on page 16 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 6
Pennsylvania Tax-Free Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 74.9% AA 10.0 A 11.1 BBB 3.9 Unrated 0.1 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 6.59 Modified Duration/2/ 5.55 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Modified duration assumes that cash flows remain constant as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,012.50 1,011.00 1,011.50 1,007.70 1,007.70 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.03 4.54 5.04 8.86 8.81 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.95 1,020.43 1,019.92 1,016.07 1,016.12 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.05 4.57 5.08 8.93 8.88 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.60%, 0.90%, 1.00%, 1.76%, and 1.75% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 7
New Jersey Tax-Free Income Portfolio Total Net Assets (9/30/05): $172.7 million Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management. The Portfolio invests primarily in bonds issued by or on behalf of states, possessions and territories of the United States, their political subdivisions and their agencies or authorities (and related tax-exempt derivative securities), the interest on which the portfolio manager believes is exempt from Federal income tax (including the Federal Alternative Minimum Tax) and New Jersey state income tax ("municipal securities"). The Portfolio normally invests at least 80% of its assets in municipal securities, including both general obligation and revenue bonds, from a diverse range of issuers (including issuers located outside of New Jersey). The Portfolio emphasizes securities in the ten to twenty year maturity range. Recent Portfolio Management Activity: . All share classes of the Portfolio underperformed the Lipper Peer Group (New Jersey Municipal Debt Funds) for the annual period. . During the annual period, municipal bonds outperformed taxable bonds. Historically municipal bonds have lagged behind taxable bonds in rallying bond markets and outperformed them in higher rate environments. The attractive municipal bond relative values compared to Treasury securities during the first half of the annual period attracted new buyers into the market. It was the combination of strong demand from traditional buyers, especially insurance companies, and opportunistic purchases from the non-traditional buyers that drove municipal returns. During the annual period, the 2-year to 10-year portion of the municipal yield curve flattened by approximately 84 basis points versus the Treasury marketplace, where the curve flattened by 136 basis points. This trend is partially the result of a renewed interest in municipal bonds toward the end of the annual period from retail investors who have been mostly absent from the market due to the historic low interest rate environment in the past couple of years. . The municipal market remains fundamentally strong. While hurricanes Katrina and Rita have struck the Gulf Coast, it is too early to determine the extent of the damage and the immediate and long term effects on the economy. Despite the hurricanes and rising interest rates, the municipal bond market continued to perform well to the end of the annual period. In general, the credit quality of the states have significantly improved over the past year as the more robust national economy produced higher state tax flows and revenues in conjunction with modestly restrained increases in state spending. Year-to-date, in 2005, only 5 states have seen revenue receipts come in under their projections. One example of such strength is California, which continues to benefit from an expanding economy, resulting in a revenue increase of 11.64% year over year. . The municipal new issue market continues on a record setting pace with approximately $310.0 billion issued year-to-date 2005, a 15% increase over last year's pace. It is on track to surpass the record set in 2003. New issue volume in New Jersey year-to-date at $12.0 billion is running approximately 9% ahead of last year's pace. Despite a higher interest rate environment, which typically slows new issue supply, the flattening of the Treasury yield curve has created more advance refunding opportunities. Refunding issuance stands at $106.6 billion, or 55% greater than 2004 year-to-date. . During the annual period, the 2-year, 5-year and 10-year portions of the municipal yield curve rose by 110, 58 and 30 basis points, respectively, while the 30-year portion declined 11 basis points. The Portfolio's overall bias towards a higher interest rate environment, and investments in the short to intermediate portion of the yield curve, detracted from performance as the longer portions of the municipal yield curve were the best performers during the annual period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE NJ TAX-FREE INCOME PORTFOLIO, THE LEHMAN BROTHERS MUNICIPAL BOND INDEX AND THE LIPPER NEW JERSEY MUNICIPAL DEBT FUNDS FOR THE PAST TEN YEARS. [LINE CHART] Service Investor A Lehman Brothers Municipal Bond Index Lipper New Jersey Municipal Debt Funds ---------- ---------- ------------------------------------ -------------------------------------- 09/30/1995 $ 10,000 $ 9,599 $ 10,000 $ 10,000 12/31/1995 10,353 9,937 10,412 10,423 03/31/1996 10,261 9,840 10,287 10,243 06/30/1996 10,289 9,864 10,366 10,313 09/30/1996 10,468 10,031 10,604 10,539 12/31/1996 10,730 10,278 10,875 10,780 03/31/1997 10,701 10,247 10,849 10,751 06/30/1997 11,000 10,529 11,223 11,079 09/30/1997 11,318 10,828 11,562 11,401 12/31/1997 11,616 11,109 11,875 11,701 03/31/1998 11,712 11,195 12,012 11,808 06/30/1998 11,883 11,354 12,194 11,970 09/30/1998 12,255 11,705 12,569 12,323 12/31/1998 12,310 11,752 12,645 12,366 03/31/1999 12,350 11,785 12,757 12,434 06/30/1999 12,097 11,539 12,531 12,188 09/30/1999 12,053 11,492 12,481 12,019 12/31/1999 11,967 11,406 12,383 11,820 03/31/2000 12,206 11,628 12,746 12,117 06/30/2000 12,382 11,790 12,939 12,264 09/30/2000 12,637 12,029 13,252 12,551 12/31/2000 13,129 12,492 13,832 13,081 03/31/2001 13,437 12,779 14,139 13,364 06/30/2001 13,508 12,831 14,231 13,466 09/30/2001 13,868 13,179 14,630 13,735 12/31/2001 13,709 13,021 14,541 13,620 03/31/2002 13,918 13,203 14,678 13,760 06/30/2002 14,397 13,664 15,215 14,210 09/30/2002 14,859 14,084 15,938 14,730 12/31/2002 14,871 14,101 15,938 14,720 03/31/2003 15,018 14,223 16,129 14,800 06/30/2003 15,394 14,586 16,545 15,185 09/30/2003 15,280 14,471 16,558 15,161 12/31/2003 15,472 14,635 16,785 15,404 03/31/2004 15,667 14,813 17,075 15,605 06/30/2004 15,324 14,494 16,671 15,220 09/30/2004 15,859 14,996 17,320 15,750 12/31/2004 16,059 15,182 17,537 15,962 03/31/2005 16,028 15,136 17,531 15,985 06/30/2005 16,371 15,469 18,044 16,411 09/30/2005 16,283 15,383 18,022 16,382 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------------ ---------- ---------- ---------- Institutional Class 2.99% 3.41% 5.51% 5.23% Service Class 2.68% 3.10% 5.20% 5.00% Investor A Class (Load Adjusted) (1.54)% 1.60% 4.19% 4.40% Investor A Class (NAV) 2.58% 2.98% 5.04% 4.83% Investor B Class(Load Adjusted) (2.63)% 1.13% 3.92% 4.11% Investor B Class (NAV) 1.81% 2.21% 4.26% 4.11% Investor C Class(Load Adjusted) 0.82% 2.18% 4.29% 4.12% Investor C Class (NAV) 1.81% 2.18% 4.29% 4.12% The performance of the Lehman Brothers Municipal Bond Index (the "Benchmark") is presented for comparative purposes in response to requirements of the Securities and Exchange Commission. However, BlackRock believes that differences between the ways in which the portfolio is managed and the Benchmark is constructed may make comparisons between the portfolio and Benchmark performance less meaningful to investors. Therefore, the performance of the Lipper New Jersey Municipal Debt Funds is also presented. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 5/14/90; Institutional Shares, 1/21/93; Service Shares, 7/29/93; Investor B Shares, 7/18/96, Investor C Shares, 2/28/97 and BlackRock Shares, 12/22/03. See "Note on Performance Information" on page 16 for further information on how performance data was calculated, including important information on the line graph* above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 8
New Jersey Tax-Free Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 61.0% AA 12.1 A 6.6 BBB 18.3 Unrated 2.0 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 7.29 Modified Duration/2/ 6.70 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Modified duration assumes that cash flows remain constant as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,018.30 1,015.90 1,016.30 1,011.70 1,011.60 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.04 4.55 5.00 8.83 8.93 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.95 1,020.43 1,019.97 1,016.12 1,016.01 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.05 4.57 5.03 8.88 8.99 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.60%, 0.90%, 0.99%, 1.75%, and 1.77% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 9
Ohio Tax-Free Income Portfolio Total Net Assets (9/30/05): $126.6 million Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management. The Portfolio invests primarily in bonds issued by or on behalf of states, possessions and territories of the United States, their political subdivisions and their agencies or authorities (and related tax-exempt derivative securities), the interest on which the portfolio manager believes is exempt from Federal income tax (including the Federal Alternative Minimum Tax) and Ohio state income tax ("municipal securities"). The Portfolio normally invests at least 80% of its assets in municipal securities, including both general obligation and revenue bonds, from a diverse range of issuers (including issuers located outside of Ohio). The Portfolio emphasizes securities in the ten to twenty year maturity range. Recent Portfolio Management Activity: . All share classes of the Portfolio underperformed the Lipper Peer Group (Ohio Municipal Debt Funds) for the annual period. . During the annual period, municipal bonds outperformed taxable bonds. Historically municipal bonds have lagged behind taxable bonds in rallying bond markets and outperformed them in higher rate environments. The attractive municipal bond relative values compared to Treasury securities during the first half of the annual period attracted new buyers into the market. It was the combination of strong demand from traditional buyers, especially insurance companies, and opportunistic purchases from the non-traditional buyers that drove municipal returns. During the annual period, the 2-year to 10-year portion of the municipal yield curve flattened by approximately 84 basis points versus the Treasury marketplace, where the curve flattened by 136 basis points. This trend is partially the result of a renewed interest in municipal bonds toward the end of the annual period from retail investors who have been mostly absent from the market due to the historic low interest rate environment in the past couple of years. . The municipal market remains fundamentally strong. While hurricanes Katrina and Rita have struck the Gulf Coast, it is too early to determine the extent of the damage and the immediate and long term effects on the economy. Despite the hurricanes and rising interest rates, the municipal bond market continued to perform well to the end of the annual period. In general, the credit quality of the states have significantly improved over the past year as the more robust national economy produced higher state tax flows and revenues in conjunction with modestly restrained increases in state spending. Year-to-date, in 2005, only 5 states have seen revenue receipts come in under their projections. One example of such strength is California, which continues to benefit from an expanding economy, resulting in a revenue increase of 11.64% year over year. . The municipal new issue market continues on a record setting pace with approximately $310.0 billion issued year-to-date 2005, a 15% increase over last year's pace. It is on track to surpass the record set in 2003. New issue volume in Ohio year-to-date at $9.0 billion is running approximately 12% ahead of last year's pace. Despite a higher interest rate environment, which typically slows new issue supply, the flattening of the Treasury yield curve has created more advance refunding opportunities. Refunding issuance stands at $106.6 billion, or 55% greater than 2004 year-to-date. . During the annual period, the 2-year, 5-year and 10-year portions of the municipal yield curve rose by 110, 58 and 30 basis points, respectively, while the 30-year portion declined 11 basis points. The Portfolio's overall bias towards a higher interest rate environment through most of the annual period detracted from performance as the longer portions of the municipal yield curve were the best performers during the annual period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE OH TAX-FREE INCOME PORTFOLIO, THE LEHMAN BROTHERS MUNICIPAL BOND INDEX AND THE LIPPER OHIO MUNICIPAL DEBT FUNDS FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Lehman Brothers Municipal Bond Index Lipper Ohio Municipal Debt Funds ------------- ---------- ------------------------------------ -------------------------------- 09/30/1995 $ 10,000 $ 9,599 $ 10,000 $ 10,000 12/31/1995 10,444 10,017 10,412 10,425 03/31/1996 10,276 9,845 10,287 10,243 06/30/1996 10,364 9,916 10,366 10,317 09/30/1996 10,612 10,142 10,604 10,551 12/31/1996 10,879 10,385 10,875 10,797 03/31/1997 10,850 10,346 10,849 10,757 06/30/1997 11,186 10,654 11,223 11,090 09/30/1997 11,517 10,956 11,562 11,395 12/31/1997 11,821 11,232 11,875 11,691 03/31/1998 11,929 11,321 12,012 11,801 06/30/1998 12,119 11,488 12,194 11,952 09/30/1998 12,503 11,838 12,569 12,275 12/31/1998 12,572 11,890 12,645 12,315 03/31/1999 12,661 11,960 12,757 12,393 06/30/1999 12,359 11,661 12,531 12,162 09/30/1999 12,330 11,620 12,481 12,019 12/31/1999 12,192 11,476 12,383 11,837 03/31/2000 12,532 11,783 12,746 12,163 06/30/2000 12,717 11,955 12,939 12,303 09/30/2000 13,010 12,204 13,252 12,583 12/31/2000 13,557 12,702 13,832 13,089 03/31/2001 13,921 13,028 14,139 13,340 06/30/2001 14,015 13,101 14,231 13,395 09/30/2001 14,495 13,533 14,630 13,723 12/31/2001 14,351 13,384 14,541 13,633 03/31/2002 14,522 13,527 14,678 13,742 06/30/2002 15,112 14,060 15,215 14,179 09/30/2002 15,712 14,602 15,938 14,783 12/31/2002 15,696 14,557 15,938 14,732 03/31/2003 15,852 14,697 16,129 14,871 06/30/2003 16,270 15,067 16,545 15,255 09/30/2003 16,150 14,939 16,558 15,203 12/31/2003 16,369 15,124 16,785 15,408 03/31/2004 16,571 15,292 17,075 15,605 06/30/2004 16,438 15,151 16,671 15,240 09/30/2004 16,929 15,588 17,320 15,781 12/31/2004 17,098 15,728 17,537 15,967 03/31/2005 17,111 15,738 17,531 15,923 06/30/2005 17,428 15,999 18,044 16,340 09/30/2005 17,360 15,921 18,022 16,274 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year 10 Year ------------ ---------- ---------- ---------- Institutional Class 2.55% 3.38% 5.94% 5.67% Service Class 2.24% 3.10% 5.64% 5.37% Investor A Class (Load Adjusted) (1.92)% 1.54% 4.60% 4.76% Investor A Class (NAV) 2.14% 2.93% 5.46% 5.19% Investor B Class (Load Adjusted) (3.02)% 1.07% 4.34% 4.41% Investor B Class (NAV) 1.38% 2.16% 4.68% 4.41% Investor C Class (Load Adjusted) 0.40% 2.19% 4.70% 4.42% Investor C Class (NAV) 1.38% 2.19% 4.70% 4.42% The performance of the Lehman Brothers Municipal Bond Index (the "Benchmark") is presented for comparative purposes in response to requirements of the Securities and Exchange Commission. However, BlackRock believes that differences between the ways in which the portfolio is managed and the Benchmark is constructed may make comparisons between the portfolio and Benchmark performance less meaningful to investors. Therefore, the performance of the Lipper Ohio Municipal Debt Funds is also presented. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 5/14/90; Institutional Shares, 1/21/93; Service Shares, 7/29/93; Investor B Shares, 7/18/96, Investor C Shares, 2/28/97 and BlackRock Shares, 12/22/03. See "Note on Performance Information" on page 16 for further information on how performance data was calculated, including important information on the line graph+ above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 10
Ohio Tax-Free Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 75.0% AA 11.5 A 3.3 BBB 10.2 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 5.52 Modified Duration/2/ 5.09 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Modified duration assumes that cash flows remain constant as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,014.60 1,012.10 1,011.70 1,007.80 1,008.80 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.03 4.54 4.99 8.81 8.76 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.95 1,020.43 1,019.97 1,016.12 1,016.17 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.05 4.57 5.03 8.88 8.83 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.60%, 0.90%, 0.99%, 1.75%, and 1.74% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 11
Delaware Tax-Free Income Portfolio Total Net Assets (9/30/05): $82.0 million Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management. The Portfolio invests primarily in bonds issued by or on behalf of states, possessions and territories of the United States, their political subdivisions and their agencies or authorities (and related tax-exempt derivative securities), the interest on which the portfolio manager believes is exempt from Federal income tax (including the Federal Alternative Minimum Tax) and Delaware state income tax ("municipal securities"). The Portfolio normally invests at least 80% of its assets in municipal securities, including both general obligation and revenue bonds, from a diverse range of issuers (including issuers located outside of Delaware). The Portfolio emphasizes securities in the ten to twenty year maturity range. Recent Portfolio Management Activity: . All share classes of the Portfolio underperformed the Lipper Peer Group (Other States Municipal Debt Funds) for the annual period. . During the annual period, municipal bonds outperformed taxable bonds. Historically municipal bonds have lagged behind taxable bonds in rallying bond markets and outperformed them in higher rate environments. The attractive municipal bond relative values compared to Treasury securities during the first half of the annual period attracted new buyers into the market. It was the combination of strong demand from traditional buyers, especially insurance companies, and opportunistic purchases from the non-traditional buyers that drove municipal returns. During the annual period, the 2-year to 10-year portion of the municipal yield curve flattened by approximately 84 basis points versus the Treasury marketplace, where the curve flattened by 136 basis points. This trend is partially the result of a renewed interest in municipal bonds toward the end of the annual period from retail investors who have been mostly absent from the market due to the historic low interest rate environment in the past couple of years. . The municipal market remains fundamentally strong. While hurricanes Katrina and Rita have struck the Gulf Coast, it is too early to determine the extent of the damage and the immediate and long term effects on the economy. Despite the hurricanes and rising interest rates, the municipal bond market continued to perform well to the end of the annual period. In general, the credit quality of the states have significantly improved over the past year as the more robust national economy produced higher state tax flows and revenues in conjunction with modestly restrained increases in state spending. Year-to-date, in 2005, only 5 states have seen revenue receipts come in under their projections. One example of such strength is California, which continues to benefit from an expanding economy, resulting in a revenue increase of 11.64% year over year. . The municipal new issue market continues on a record setting pace with approximately $310.0 billion issued year-to-date 2005, a 15% increase over last year's pace. It is on track to surpass the record set in 2003. New issue volume in Delaware year-to-date has been just under $980 million. Despite a higher interest rate environment, which typically slows new issue supply, the flattening of the Treasury yield curve has created more advance refunding opportunities. Refunding issuance stands at $106.6 billion, or 55% greater than 2004 year-to-date. . During the annual period, the 2-year, 5-year and 10-year portions of the municipal yield curve rose by 110, 58 and 30 basis points, respectively, while the 30-year portion declined 11 basis points. The Portfolio's overall bias towards a higher interest rate environment, and exposure to securities with maturities of 15 years or shorter, detracted from performance as the longer portions of the municipal yield curve were the best performers during the annual period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE DE TAX-FREE INCOME PORTFOLIO, THE LEHMAN BROTHERS MUNICIPAL BOND INDEX AND THE LIPPER OTHER STATES MUNICIPAL DEBT FUNDS FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Lehman Brothers Municipal Bond Index* Lipper Other States Municipal Debt Funds ------------- ---------- ------------------------------------ ---------------------------------------- 05/11/1998 $ 10,000 $ 9,597 $ 10,000 $ 10,000 06/30/1998 10,165 9,749 10,039 10,156 09/30/1998 10,516 10,074 10,348 10,439 12/31/1998 10,582 10,125 10,410 10,463 03/31/1999 10,673 10,200 10,502 10,528 06/30/1999 10,436 9,962 10,317 10,330 09/30/1999 10,400 9,916 10,275 10,192 12/31/1999 10,332 9,839 10,195 10,038 03/31/2000 10,612 10,094 10,494 10,303 06/30/2000 10,758 10,222 10,653 10,415 09/30/2000 10,972 10,413 10,910 10,666 12/31/2000 11,384 10,791 11,387 11,103 03/31/2001 11,638 11,019 11,640 11,301 06/30/2001 11,686 11,052 11,716 11,358 09/30/2001 12,087 11,418 12,044 11,651 12/31/2001 11,933 11,258 11,971 11,577 03/31/2002 12,059 11,364 12,084 11,658 06/30/2002 12,564 11,827 12,526 12,034 09/30/2002 13,145 12,359 13,121 12,524 12/31/2002 13,085 12,277 13,121 12,475 03/31/2003 13,187 12,370 13,279 12,576 06/30/2003 13,586 12,730 13,621 12,860 09/30/2003 13,490 12,625 13,632 12,836 12/31/2003 13,654 12,775 13,818 13,000 03/31/2004 13,783 12,881 14,057 13,129 06/30/2004 13,448 12,553 13,725 12,880 09/30/2004 14,005 13,047 14,259 13,269 12/31/2004 14,139 13,172 14,437 13,396 03/31/2005 14,078 13,101 14,432 13,369 06/30/2005 14,398 13,386 14,855 13,644 09/30/2005 14,308 13,289 14,837 13,632 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year From Inception ------------ ---------- ---------- --------------- Institutional Class 2.16% 2.87% 5.45% 4.97% Investor A Class (Load Adjusted) (2.20)% 1.06% 4.15% 3.92% Investor A Class (NAV) 1.85% 2.45% 5.00% 4.50% Investor B Class (Load Adjusted) (3.41)% 0.61% 3.88% 3.73% Investor B Class (NAV) 0.99% 1.68% 4.22% 3.73% Investor C Class (Load Adjusted) 0.12% 1.68% 4.22% 3.73% Investor C Class (NAV) 1.10% 1.68% 4.22% 3.73% * The performance of the Lehman Brothers Municipal Bond Index in the chart starts on june 1, 1998. The performance of the Lehman Brothers Municipal Bond Index (the "Benchmark") is presented for comparative purposes in response to requirements of the Securities and Exchange Commission. However, BlackRock believes that differences between the ways in which the portfolio is managed and the Benchmark is constructed may make comparisons between the portfolio and Benchmark performance less meaningful to investors. Therefore, the performance of the Lipper Other States Municipal Debt Funds is also presented. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 5/14/90; Institutional Shares, 1/21/93; Service Shares, 7/29/93; Investor B Shares, 7/18/96, Investor C Shares, 2/28/97 and BlackRock Shares, 12/22/03. See "Note on Performance Information" on page 16 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 12
Delaware Tax-Free Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 65.3% AA 3.5 A 17.9 BBB 13.3 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 7.03 Modified Duration/2/ 7.49 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Modified duration assumes that cash flows remain constant as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses --------------------------------------------------------------- Institutional Investor Investor Investor Class A Class B Class C Class --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,016.30 1,014.30 1,010.50 1,011.50 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.54 5.50 9.32 9.33 Hypothetical Expenses (5% return before expenses) --------------------------------------------------------------- Institutional Investor Investor Investor Class A Class B Class C Class --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.45 1,019.47 1,015.61 1,015.61 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.55 5.53 9.39 9.39 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.70%, 1.09%, 1.85%, and 1.85% for the Institutional, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 13
Kentucky Tax-Free Income Portfolio Total Net Assets (9/30/05): $82.3 million Investment Approach: Seeks to maximize total return, consistent with income generation and prudent investment management. The Portfolio invests primarily in bonds issued by or on behalf of states, possessions and territories of the United States, their political subdivisions and their agencies or authorities (and related tax-exempt derivative securities), the interest on which the portfolio manager believes is exempt from Federal income tax (including the Federal Alternative Minimum Tax) and Kentucky state income tax ("municipal securities"). The Portfolio normally invests at least 80% of its assets in municipal securities, including both general obligation and revenue bonds, from a diverse range of issuers (including issuers located outside of Kentucky). The Portfolio emphasizes securities in the ten to twenty year maturity range. Recent Portfolio Management Activity: . All share classes of the Portfolio underperformed the Lipper Peer Group (Kentucky Municipal Debt Funds) with the exception of the Institutional share class, which outperformed for the annual period. . During the annual period, municipal bonds outperformed taxable bonds. Historically municipal bonds have lagged behind taxable bonds in rallying bond markets and outperformed them in higher rate environments. The attractive municipal bond relative values compared to Treasury securities during the first half of the annual period attracted new buyers into the market. It was the combination of strong demand from traditional buyers, especially insurance companies, and opportunistic purchases from the non-traditional buyers that drove municipal returns. During the annual period, the 2-year to 10-year portion of the municipal yield curve flattened by approximately 84 basis points versus the Treasury marketplace, where the curve flattened by 136 basis points. This trend is partially the result of a renewed interest in municipal bonds toward the end of the annual period from retail investors who have been mostly absent from the market due to the historic low interest rate environment in the past couple of years. . The municipal market remains fundamentally strong. While hurricanes Katrina and Rita have struck the Gulf Coast, it is too early to determine the extent of the damage and the immediate and long term effects on the economy. Despite the hurricanes and rising interest rates, the municipal bond market continued to perform well to the end of the annual period. In general, the credit quality of the states have significantly improved over the past year as the more robust national economy produced higher state tax flows and revenues in conjunction with modestly restrained increases in state spending. Year-to-date, in 2005, only 5 states have seen revenue receipts come in under their projections. One example of such strength is California, which continues to benefit from an expanding economy, resulting in a revenue increase of 11.64% year over year. . The municipal new issue market continues on a record setting pace with approximately $310.0 billion issued year-to-date 2005, a 15% increase over last year's pace. It is on track to surpass the record set in 2003. New issue volume in Kentucky year-to-date is $2.8 billion, which is slightly ahead of last year's pace. Despite a higher interest rate environment, which typically slows new issue supply, the flattening of the Treasury yield curve has created more advance refunding opportunities. Refunding issuance stands at $106.6 billion, or 55% greater than 2004 year-to-date. . During the annual period, the 2-year, 5-year and 10-year portions of the municipal yield curve rose by 110, 58 and 30 basis points, respectively, while the 30-year portion declined 11 basis points. The Portfolio's overall bias towards a higher interest rate environment detracted from performance as the longer portions of the municipal yield curve were the best performers during the annual period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KY TAX-FREE INCOME PORTFOLIO, THE LEHMAN BROTHERS MUNICIPAL BOND INDEX AND THE LIPPER KENTUCKY MUNICIPAL DEBT FUNDS FOR THE PAST TEN YEARS. [LINE CHART] Institutional Investor A Lehman Brothers Municipal Bond Index* Lipper Kentucky Municipal Debt Funds ------------- ---------- ------------------------------------ ------------------------------------ 05/11/1998 $ 10,000 $ 9,597 $ 10,000 $ 10,000 06/30/1998 10,176 9,759 10,039 10,153 09/30/1998 10,495 10,053 10,348 10,416 12/31/1998 10,552 10,096 10,410 10,447 03/31/1999 10,609 10,139 10,502 10,509 06/30/1999 10,414 9,941 10,317 10,335 09/30/1999 10,366 9,883 10,275 10,228 12/31/1999 10,297 9,806 10,195 10,106 03/31/2000 10,500 9,988 10,494 10,334 06/30/2000 10,629 10,110 10,653 10,412 09/30/2000 10,849 10,296 10,910 10,633 12/31/2000 11,199 10,616 11,387 11,001 03/31/2001 11,469 10,859 11,640 11,196 06/30/2001 11,548 10,921 11,716 11,264 09/30/2001 11,815 11,160 12,044 11,504 12/31/2001 11,692 11,031 11,971 11,432 03/31/2002 11,868 11,173 12,084 11,544 06/30/2002 12,208 11,491 12,526 11,886 09/30/2002 12,453 11,708 13,121 12,270 12/31/2002 12,490 11,729 13,121 12,277 03/31/2003 12,600 11,819 13,279 12,398 06/30/2003 12,915 12,088 13,621 12,693 09/30/2003 12,872 12,045 13,632 12,674 12/31/2003 13,037 12,173 13,818 12,845 03/31/2004 13,197 12,321 14,057 13,023 06/30/2004 12,977 12,101 13,725 12,769 09/30/2004 13,387 12,471 14,259 13,196 12/31/2004 13,609 12,665 14,437 13,346 03/31/2005 13,638 12,679 14,432 13,333 06/30/2005 13,849 12,863 14,855 13,644 09/30/2005 13,836 12,839 14,837 13,603 For period ending September 30, 2005 Average Annual Total Return 1 Year 3 Year 5 Year From Inception ------------ ---------- ---------- --------------- Institutional Class 3.35% 3.57% 4.98% 4.49% Service Class 3.04% 3.29% 4.69% 4.19% Investor A Class (Load Adjusted) (1.22)% 1.74% 3.66% 3.44% Investor A Class (NAV) 2.95% 3.12% 4.51% 4.02% Investor B Class (Load Adjusted) (2.30)% 1.25% 3.39% 3.24% Investor B Class (NAV) 2.18% 2.35% 3.74% 3.24% Investor C Class (Load Adjusted) 1.18% 2.38% 3.75% 3.28% Investor C Class (NAV) 2.17% 2.38% 3.75% 3.28% * The performance of the Lehman Brothers Municipal Bond Index in the chart starts on june 1, 1998. The performance of the Lehman Brothers Municipal Bond Index (the "Benchmark") is presented for comparative purposes in response to requirements of the Securities and Exchange Commission. However, BlackRock believes that differences between the ways in which the portfolio is managed and the Benchmark is constructed may make comparisons between the portfolio and Benchmark performance less meaningful to investors. Therefore, the performance of the Lipper Kentucky Municipal Debt Funds is also presented. The performance information above includes information relating to each class of the Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. The inception dates of the Portfolio's share classes were as follows: Investor A Shares, 5/14/90; Institutional Shares, 1/21/93; Service Shares, 7/29/93; Investor B Shares, 7/18/96, Investor C Shares, 2/28/97 and BlackRock Shares, 12/22/03. See "Note on Performance Information" on page 16 for further information on how performance data was calculated, including important information on the line graph above. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 14
Kentucky Tax-Free Income Portfolio FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 53.6% AA 17.0 A 1.3 BBB 28.1 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 5.00 Modified Duration/2/ 5.19 1 Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. 2 Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the fund for every 1% change in interest rates. Modified duration assumes that cash flows remain constant as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur two types of costs: (1) transaction costs, including front and back end sales charges (loads) where applicable; and (2) ongoing costs, including advisory fees, distribution (12b-1) and service fees, where applicable; and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Actual Expenses ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,014.50 1,014.10 1,012.60 1,008.80 1,009.80 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.54 5.05 5.55 9.37 9.47 Hypothetical Expenses (5% return before expenses) ------------------------------------------------------------------------------- Institutional Service Investor Investor Investor Class Class A Class B Class C Class --------------- --------------- --------------- --------------- --------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,021.45 1,019.92 1,019.42 1,015.56 1,015.46 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.55 5.08 5.58 9.44 9.54 For each class of the Portfolio, expenses are equal to the annualized expense ratio of 0.70%, 1.00%, 1.10%, 1.86%, and 1.88% for the Institutional, Service, Investor A, B, and C share classes, respectively, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 15
BlackRock Funds NOTE ON PERFORMANCE INFORMATION The performance information above includes information for each class of each Portfolio since the commencement of operations of the Portfolio, rather than the date such class was introduced. Performance information for each class introduced after the commencement of operations of a Portfolio is therefore based on the performance history of a predecessor class or predecessor classes. If a class of shares in a Portfolio (the "Subsequent Class") has more than one predecessor class, the performance data predating the introduction of the Subsequent Class is based initially on the performance of the Portfolio's first operational predecessor class (the "Initial Class"); thereafter, the performance of the Subsequent Class is based upon the performance of any other predecessor class or classes which were introduced after the Initial Class and which had total operating expenses more similar to those of the Subsequent Class. In the case of Investor A, Investor B, Investor C and Service Shares, the performance information for periods prior to their introduction dates has not been restated to reflect the shareholder servicing and/or distribution fees and certain other expenses borne by these share classes which, if reflected, would reduce the performance quoted. Accordingly, the performance information may be used in assessing each Portfolio's performance history but does not reflect how the distinct classes would have performed on a relative basis prior to the introduction of these classes, which would require an adjustment to the ongoing expenses. Additionally, the performance information above does not reflect accounting adjustments required under accounting principles generally accepted in the United States of America and as a result there may be variances between what is reported within this section and that reported in the total return calculation in the Financial Highlights. Performance information is restated to reflect the current maximum front-end sales charge (in the case of Investor A Shares) or the maximum contingent deferred sales charge (in the case of Investor B and Investor C Shares), and assumes the reinvestment of dividends and distributions. The maximum front-end sales charges for Investor A Shares are as follows: UltraShort Municipal - 3.00% and Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Delaware Tax-Free Income and Kentucky Tax-Free Income - 4.00%. The maximum contingent deferred sales charge for Investor B Shares and Investor C Shares of all of the Portfolios is 4.50% and 1.00%, respectively. The performance information also reflects fee waivers and reimbursements that subsidize and reduce the total operating expenses of each Portfolio. The Portfolios' returns would have been lower if there were not such waivers and reimbursements. BlackRock Advisors, Inc. is under no obligation to waive or continue waiving its fees after February 1, 2006. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The performance information for the Lipper Short Municipal Debt Funds, Lipper General Municipal Debt Funds, Lipper Pennsylvania Municipal Debt Funds, Lipper New Jersey Municipal Debt Funds, Lipper Ohio Municipal Debt Funds, Lipper Other States Municipal Debt Funds and Lipper Kentucky Municipal Debt Funds represents the average of the total returns reported by all of the mutual funds designated by Lipper, Inc. as falling into the respective category. These total returns are reported net of expenses and other fees that the Securities and Exchange Commission requires to be reflected in a mutual fund's performance. + The performance shown in the line graph is that of Institutional Shares and Investor A Shares of the Portfolios. The actual performance of Investor B, Investor C and Service Shares is lower than the performance of Institutional Shares because Investor B, Investor C and Service Shares have higher expenses than Institutional Shares. Excluding the effects of sales charges, the actual performance of Investor B and Investor C Shares is lower than the performance of Investor A Shares because Investor B and Investor C Shares have higher expenses than Investor A Shares. Purchasers of Investor A Shares generally pay a front-end sales charge, while purchasers of Investor B and Investor C Shares may pay a contingent deferred sales charge (depending on how long they hold their shares) when they sell their shares. * The performance shown in the line graph is that of Service Shares and Investor A Shares of the Portfolios. The actual performance of Investor B and Investor C Shares is lower than the performance of Service Shares because Investor B and Investor C Shares have higher expenses than Service Shares. Excluding the effects of sales charges, the actual performance of Investor B and Investor C Shares is lower than the performance of Investor A Shares because Investor B and Investor C Shares have higher expenses than Investor A Shares. Purchasers of Investor A Shares generally pay a front-end sales charge, while purchasers of Investor B and Investor C Shares may pay a contingent deferred sales charge (depending on how long they hold their shares) when they sell their shares. Important Tax Information for Shareholders of the BlackRock Tax-Free Bond Portfolios During the fiscal year ended September 30, 2005, 100% of the income dividends paid by the UltraShort Municipal, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Delaware Tax-Free Income and Kentucky Tax-Free Income Portfolios were exempt-interest dividends for purposes of federal income taxes and accordingly, were exempt from such taxes. In January 2006, you will be furnished with a schedule showing the annual percentage breakdown by state or U.S. possession of the source of interest earned by each Portfolio in 2005. 16
BlackRock Funds STATEMENT OF NET ASSETS ULTRASHORT MUNICIPAL PORTFOLIO As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS -- 91.1% Alaska -- 2.3% Anchorage Wtr. Rev., Wachovia Merlots Tr. Receipts, Ser. 04C-32 2.85%(b)(c) 05/01/34 $1,000 $1,000,127 ---------- Colorado -- 3.5% Colorado Hsg. & Fin. Auth., Ser. 1B-4 AMT 2.80% 07/05/06 1,500 1,498,589 ---------- Florida -- 4.7% Putnam Cnty. Poll. Ctrl. Rev., Ser. 04 2.80%(b) 03/15/14 2,000 1,999,746 ---------- Indiana -- 4.7% Indiana St. Dev. Fin. Auth. Econ. Dev. Rev., IVC Coatings Prj., Ser. 00 AMT VRDN 2.93%(b) 08/01/16 500 500,000 North Vernon Ind. Econ. Dev. Rev., Adj.-Oak Meadows Apts. Prj., Ser. 95 VRDN 2.85%(b) 12/01/26 1,510 1,510,000 ---------- 2,010,000 ---------- Kentucky -- 8.5% Kentucky Econ. Dev. Fin. Auth., Ser. 04 VRDN 3.10%(b) 07/01/35 1,900 1,900,000 Pulaski Cnty. Solid Waste Disp. Rev., National Rural Utilities Eastern Kentucky Power Prj., Class B 2.85%(b) 08/15/23 1,750 1,749,966 ---------- 3,649,966 ---------- Michigan -- 6.7% Michigan St. Strategic - Kay Screen Printing Ltd. Oblig. Rev., (Bank One LOC), Ser. 05 VRDN 2.93%(b) 05/01/20 1,300 1,300,000 Oakland Cnty. Econ. Dev. Corp. Ltd. Oblig. Rev., Exhibit Enterprises, Inc. Prj., Ser. 04 AMT VRDN 2.91%(b) 06/01/34 965 965,000 Zeeland Hosp. Fin. Auth. Rev., Zeeland Cmnty. Hosp. Prj. VRDN, Ser. 04 2.91%(b) 09/01/31 625 625,000 ---------- 2,890,000 ---------- Minnesota -- 1.2% Minneapolis & St. Paul Met. Arpts. Comm. Arpt. Rev., Ser. 99B AMT 5.50% 01/01/10 500 534,970 ---------- Multi-State -- 1.8% Charter Mac Equity Issuer Tr. Rev., Ser. 04 AMT VRDN 2.88%(b)(c) 11/15/24 300 300,000 Mun. Securities Pool Tr. Receipts Rev., Ser. 04 PG-18 VRDN 2.90%(b)(c) 01/01/35 485 485,000 ---------- 785,000 ---------- New Jersey -- 0.9% Newark GO, Ser. 03 4.00% 07/15/08 385 394,348 ---------- New Mexico -- 2.3% Farmington Poll. Ctrl. Rev., Pub. Svcs. San Juan Prj., Ser. 03B 2.10%(b) 04/01/33 1,000 992,880 ---------- New York -- 5.9% New York City GO, Ser. 04I 5.00% 08/01/09 500 528,610 New York St. Pwr. Auth. Rev., Ser. 05 2.80% 03/01/20 2,000 2,000,545 ---------- 2,529,155 ---------- North Carolina -- 4.7% Charlotte Wtr. & Swr. Sys., Ser. 05 2.90% 04/29/06 1,000 1,000,372 North Carolina Mun. Pwr. Agcy. No. 1 Catawba Elec. Prj. Rev., P-Floats- PT-757, Ser. 03 2.40%(b)(c) 01/01/11 1,000 1,000,000 ---------- 2,000,372 ---------- Ohio -- 9.9% Cincinnati Sch. Dist. Bond GO, Ser. 05 3.00% 12/01/05 290 290,128 Clipper Tax-Exempt Cert. Tr., Ser. 04-08 VRDN 2.87%(b)(c) 07/01/08 781 781,000 Clipper Tax-Exempt Cert. Tr., Ser. 04-9 VRDN 2.95%(b)(c) 06/01/08 1,963 1,963,000 Columbus City Sch. Dist. GO Wachovia Merlots Tr. Receipts, Ser. 04C-29 2.85%(b)(c) 04/20/06 1,000 984,561 Ohio Bldg. Auth. Rev., St. Fac. Admin. Bldg. Fd. Prj., Ser. 03A 4.50% 04/01/08 220 227,269 ---------- 4,245,958 ---------- Oklahoma -- 2.3% Oklahoma Dev. Fin. Auth. Rev., ConocoPhillips Co. Prj., AMT, Ser. 04 2.42% 12/01/38 1,000 999,285 ---------- Oregon -- 2.5% Metro GO, Ref., Ser. 02A 4.38% 01/01/08 1,045 1,074,020 ---------- Pennsylvania -- 3.3% Pennsylvania Econ. Dev. Fin. Auth. Wastewater Treatment Rev., Sunoco Inc.-R&M Prj., Ser. 04A VRDN 2.88%(b) 10/01/34 1,400 1,400,000 ---------- South Carolina -- 1.9% Greenwood Cnty. Exempt Fac. Ind. Rev., Fuji Photo Film Prj., Ser. 04 VRDN 2.91%(b) 09/01/11 800 800,000 ---------- See accompanying notes to financial statements 17
BlackRock Funds STATEMENT OF NET ASSETS ULTRASHORT MUNICIPAL PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Tennessee -- 3.2% Coffee Cnty. Ind. Bd. Inc., Ind. Dev. Rev., Comtec Polymers, Inc. Prj., Ser. 97 AMT VRDN 2.95%(b) 05/01/12 $1,355 $ 1,355,000 ----------- Texas -- 8.4% Brazos Hbr. Ind. Dev. Corp. Environmental Facs. Rev., Conocophillips Co. Prj., Ser. 05 2.98% 08/01/38 1,200 1,200,890 Houston Texas Hsg. Fin. Corp. Rev., Ser. 04 PT-2101 AMT VRDN 2.88%(b)(c) 06/01/17 2,000 2,000,000 Texas St. Tpke. Auth. Ctr. Tpke. Sys. Rev., Ser. 02 5.00% 06/01/08 385 402,891 ----------- 3,603,781 ----------- Utah -- 1.2% Utah Associated Mun. Pwr. Sys. Rev., Payson Pwr. Prj., Ser. 03A 5.00% 04/01/08 500 521,855 ----------- Virginia -- 2.5% Fairfax Cnty. Ref., Pub. Import, Ser. 01A 4.25% 06/01/08 1,050 1,082,413 ----------- Washington -- 8.7% Energy Northwest Washington Wind Prj., Rev., Ser. 01A 4.55% 07/01/06 1,600 1,615,936 Seattle Hsg. Auth. Rev., (Key Corp. Bank N.A. LOC), Ser. 03 VRDN 2.82%(b) 12/01/36 2,100 2,100,000 ----------- 3,715,936 ----------- TOTAL MUNICIPAL BONDS (Cost $39,190,351) 39,083,401 ----------- SHORT TERM INVESTMENTS -- 8.2% Tennessee State TECP, Ser. 05 2.70% 12/06/05 2,000 1,999,725 Venango Ind. Dev. Rev., Ser. 05 2.80% 10/07/05 1,500 1,500,021 ----------- TOTAL SHORT TERM INVESTMENTS (Cost $3,500,000) 3,499,746 ----------- Number of Shares ----------- MONEY MARKET FUND -- 0.3% Wilmington Trust Tax-Free Money Market Fund (Cost $136,898) 136,898 136,898 ----------- TOTAL INVESTMENTS IN SECURITIES -- 99.6% (Cost $42,827,249(a)) 42,720,045 OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.4% 165,793 ----------- NET ASSETS -- 100.0% (Applicable to 3,266,052 BlackRock shares, 1,052,683 Institutional shares, 10 Service shares and 86 Investor A shares outstanding) $42,885,838 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($32,439,137/3,266,052) $ 9.93 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($10,445,730/1,052,683) $ 9.92 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($101/10)(d) $ 10.06 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($870/86)(e) $ 10.09 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.09/0.970) $ 10.40 ======= - ---------- (a) Also cost for Federal income tax purposes. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 1,957 Gross unrealized depreciation (109,161) ---------- $ (107,204) ========== (b) Rates shown are the rates as of September 30, 2005. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 19.9% of its net assets, with a current market value of $8,513,688 in securities restricted as to resale. (d) Exact net assets and shares outstanding at September 30, 2005 were $100.89 and 10.028, respectively. (e) Exact net assets and shares outstanding at September 30, 2005 were $870.35 and 86.30, respectively. See accompanying notes to financial statements 18
BlackRock Funds STATEMENT OF NET ASSETS TAX-FREE INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS -- 100.6% Alabama -- 3.5% Alabama Rev., Priv. Coll. & Tuskegee Univ. Prj., Ser. 96A 5.90% 09/01/16 $1,000 $ 1,045,240 Alabama St. Pub. Sch. & Coll. Auth. Cap. Imp. Rev., Ser. 99C 5.75% 07/01/18 3,000 3,278,400 Courtland Ind. Dev. Solid Waste Disp. Rev., Champion Intl. Corp. Prj., Ser. 99 AMT 6.00% 08/01/29 1,500 1,565,490 Jefferson Cnty. Swr. Rev., Ref. Warrants, Ser. 03B-8 5.25% 02/01/13 7,725 8,252,849 ----------- 14,141,979 ----------- Alaska -- 0.7% Alaska Ind. Dev. & Expt. Auth. Revolving Fd. Rev., Ser. 97A AMT 6.00% 04/01/07 2,500 2,605,050 ----------- Arizona -- 2.1% Salt River Ariz. Agric. Impt. & Pwr. Dist. Elec. Sys. Rev., Salt River Prj., Ser. 02B 5.00% 01/01/31 8,000 8,319,440 ----------- California -- 7.4% California St. Econ. Recovery GO, Ser. 04A 5.25% 07/01/13 7,500 8,291,625 California St. GO, Ser. 90 6.50% 11/01/06 340 352,930 Foothill Eastern Corridor Agcy. Toll Rd. Rev., Ser. 99 5.75% 01/15/40 8,500 8,651,385 Los Altos Sch. Dist. Cap. Apprec. GO, Ser. 01B 5.87%(b) 08/01/21 3,380 1,510,150 Sacramento Cnty. Sanit. Dist. Fing. Auth. Rev., Ser. 04A 5.00% 12/01/35 8,510 8,917,033 Sacramento Mun. Util. Dist. Elec. Rev., Prerefunded Ser. 92C 5.75%(c) 11/15/09 430 431,583 Stockton-East Wtr. Dist. Rev., Ser. 02B 6.12%(b) 04/01/28 4,495 1,234,192 ----------- 29,388,898 ----------- District of Columbia -- 0.0% District of Columbia GO, Prerefunded Ser. 93A-1 6.00%(c) 06/01/11 50 56,690 ----------- Florida -- 4.7% Broward Cnty. Wtr. & Swr. Util. Rev., Ser. 05A 5.00% 10/01/30 5,000 5,240,350 Florida St. Bd. of Ed. Cap. Outlay GO, Ser. 00D 5.75% 06/01/22 7,800 8,557,458 Hillsborough Cnty. Ind. Dev. Auth. Exempt Fac. Rev., Nat. Gypsum Prj., Ser. 00A AMT 7.12% 04/01/30 2,000 2,219,160 Tampa Wtr. & Swr. Rev., Ser. 02 10/01/14- 6.00% 10/01/16 2,455 2,897,741 ----------- 18,914,709 ----------- Georgia -- 6.8% Atlanta Arpt. Fac. Rev., Ser. 94A 6.50% 01/01/10 1,000 1,128,090 Atlanta Arpt. Passenger. Fac. Rev., Ser. 04J 5.00% 01/01/34 5,000 5,198,450 Augusta Wtr. & Swr. Rev., Ser. 04 5.25% 10/01/39 3,000 3,217,560 Cobb Cnty. & Marietta Wtr. Auth. Rev., Ser. 02 5.50% 11/01/14 1,000 1,129,190 Forsyth Cnty. Sch. Dist. GO, Ser. 92 6.70% 07/01/12 1,000 1,135,620 Fulton Cnty. Fac. Corp., Fulton Cnty. Pub. Purp. Prj., Ser. 99 5.50% 11/01/18 1,000 1,074,010 Fulton Cnty. Wtr. & Swr. Rev., Ser. 04 5.00% 01/01/35 5,000 5,201,600 5.25% 01/01/35 7,500 8,037,825 Georgia Mun. Elec. Auth. Pwr. Rev., Ser. 93B 5.70% 01/01/19 1,000 1,134,710 ----------- 27,257,055 ----------- Hawaii -- 1.0% Hawaii St. Hbr. Cap. Imp. Rev., Ser. 97 AMT 5.50% 07/01/27 3,750 3,873,525 ----------- Illinois -- 3.4% Chicago Wtr. Rev., Prerefunded Ser. 97 5.50%(c) 11/01/07 8,885 9,509,793 Chicago Wtr. Rev., Ser. 97 5.50% 11/01/22 1,020 1,084,474 Cook Cnty. GO, Prerefunded Ser. 96 5.88%(c) 11/15/06 2,000 2,085,240 Illinois Hsg. Dev. Auth. Rev., Multi-Fam. Prj., Ser. 94-5 6.65% 09/01/14 815 823,525 ----------- 13,503,032 ----------- Kentucky -- 1.4% Kentucky St. Property & Bldgs. Comm. Revenues, Ref-PJ No. 84., Ser. 05 5.00% 08/01/18 5,000 5,486,900 ----------- Louisiana -- 0.6% Orleans Rev., Levee Dist. Pub. Imp. Prj., Ser. 86 5.95% 11/01/15 2,170 2,244,930 ----------- Maryland -- 0.0% Maryland St. Hlth. & Hgr. Edl. Fac. Auth. Rev., Ser. 94D VRDN 2.74%(d) 01/01/29 80 80,000 ----------- See accompanying notes to financial statements 19
BlackRock Funds STATEMENT OF NET ASSETS TAX-FREE INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Massachusetts -- 5.1% Massachusetts St. Hlth. & Edl. Facs. Auth. Rev., Harvard Univ. Prj., Ser. 01DD 5.00% 07/15/35 $ 8,570 $ 8,886,833 Massachusetts St. Hlth. & Edl. Facs. Auth. Rev., Harvard Univ. Prj., Ser. 05B 5.00% 07/15/32 5,000 5,280,750 Massachusetts St. Hlth. & Edl. Facs. Auth. Rev., Newton-Wellesley Hosp. Prj., Ser. 97G 6.12% 07/01/15 1,000 1,064,610 Massachusetts St. Tpke. Auth. Met. Hwy. Sys. Rev., Ser. 97A 5.00% 01/01/37 5,000 5,122,700 ----------- 20,354,893 ----------- Michigan -- 0.5% Huron Vy. Sch. Dist. GO, Prerefunded Ser. 96 5.88%(c) 05/01/07 2,000 2,091,380 ----------- Missouri -- 0.4% Missouri St. Env. Imp. & Energy Res. Auth. Wtr. Poll. Rev., Drinking Wtr. Prj., Ser. 02B 5.25% 07/01/11 1,540 1,686,485 ----------- Multi-State -- 4.5% Charter Mac Equity Issue Tr., Ser. 99 6.62%(e) 06/30/09 3,000 3,244,560 Charter Mac Equity Issue Tr., Ser. 00 7.60%(e) 11/30/10 9,000 10,278,540 MuniMae Tax-Exempt Bond Subs., LLC, Ser. 00 6.88%(e) 06/30/09 4,000 4,365,080 ----------- 17,888,180 ----------- Nebraska -- 0.3% Omaha Pub. Pwr. Dist. Elec. Rev., Ser. 92B 6.15% 02/01/12 1,000 1,114,490 ----------- Nevada -- 1.7% Clark Cnty. Arpt. Rev., Ser. 04A-1 5.50% 07/01/15 1,780 1,947,676 Univ. of Nevada Univ. Revs. Cmnty. College Sys. Prj., Ser. 05A 5.00% 07/01/30 4,685 4,916,767 ----------- 6,864,443 ----------- New Jersey -- 7.3% New Jersey Econ. Dev. Auth. Rev., Seeing Eye Inc. Prj., Ser. 05 5.00% 12/01/24 2,340 2,481,477 New Jersey St. Edl. Fac. Auth. Rev., Princeton Univ. Prj., Ser. 05A 5.00% 07/01/30 2,500 2,650,150 New Jersey St. GO, Ser. 05L 5.25% 07/15/15 5,000 5,561,300 New Jersey St. Tpke. Auth. Rev., Prerefunded, Ser. 00A 5.75%(c) 01/01/10 2,820 3,098,080 New Jersey St. Tpke. Auth. Rev., Ser. 00A 5.75%(c) 01/01/16 1,180 1,296,360 New Jersey St. Trans. Tr. Fd. Auth. Trans. Sys. Rev., Prerefunded Ser. 00A 6.00%(c) 06/15/10 10,000 11,174,000 Port Auth. New York & New Jersey SO, JFK Intl. Arpt. Term. Prj., Ser. 97-6 AMT 6.25% 12/01/09 2,680 2,921,441 ----------- 29,182,808 ----------- New York -- 8.9% New York City GO, Prefunded Ser. 03I 5.75%(c) 03/01/13 520 592,451 New York City GO, Ser. 05O 06/01/30- 5.00% 06/01/33 8,355 8,640,421 New York City GO, Unrefunded Ser. 03I 5.75% 03/01/19 4,480 4,968,947 New York City Ind. Dev. Agcy. Rev., Term. One Grp. Assoc. Prj., Ser. 94 AMT 01/01/08- 6.00% 01/01/19 860 867,319 New York City Transitional Fin. Auth. Rev., Ser. 02A 5.25% 11/01/11 3,300 3,615,249 Sales Tax Asset Rcvbl. Corp. Rev., Ser. 04A 10/15/29- 5.00% 10/15/32 10,000 10,545,850 Tobacco Settlement Fin. Corp. Rev., Ser. 03A-1 5.50% 06/01/14 6,075 6,492,535 ----------- 35,722,772 ----------- North Carolina -- 1.4% North Carolina Mun. Pwr. Agcy. Rev., Catawba Elec. Prj., Ser. 92A 6.00% 01/01/10 300 331,905 Univ. of North Carolina Rev., Ser. 05 5.00% 12/01/34 5,000 5,255,850 ----------- 5,587,755 ----------- Ohio -- 1.1% Cleveland-Cuyahoga Cnty. Port Auth. Rev., Ser. 97 AMT 6.00%(c) 03/01/07 440 452,113 Greene Cnty. Swr. Sys. Rev. Ref-Govt. Enterprise, Ser. 05 5.00% 12/01/17 3,500 3,783,500 ----------- 4,235,613 ----------- Oregon -- 0.9% Clackamas Cnty. GO, Sch. Dist. No. 62 Oregon City Prj., Prerefunded Ser. 00C 5.50%(c) 06/15/10 3,185 3,490,155 ----------- Pennsylvania -- 9.6% Beaver Cnty. GO, Prerefunded Ser. 96A 5.75%(c) 10/01/06 1,000 1,028,180 See accompanying notes to financial statements 20
BlackRock Funds STATEMENT OF NET ASSETS TAX-FREE INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Pennsylvania (Continued) Central Bucks Sch. Dist. GO, Ser. A 5.00% 05/15/20 $ 3,000 $ 3,160,170 Delaware Cnty. Auth. Rev., Mercy Hlth. Corp. Prj., Ser. 96 5.75% 12/15/20 2,400 2,515,512 Delaware Vy. Regl. Fin. Auth. LOC Govt. Rev., Ser. 98A 5.50% 08/01/28 10,500 12,135,480 Delaware Vy. Regl. Fin. Auth. LOC Govt. RITES PA-1041 Rev., Ser. 02B 01/01/26 1,000 2,775,400 Lehigh Cnty. Gen. Purp. Auth. Rev., Kidspeace Oblig. Prj., Ser. 98 6.00% 11/01/23 2,650 2,770,946 Pennsylvania Con. Ctr. Auth. Rev., Ser. 94A 6.60% 09/01/09 3,535 3,598,665 Pennsylvania St. Hgr. Ed. Fac. Auth. Hlth. Svcs. Rev., Univ. of Pennsylvania Hlth. Svcs. Prj., Ser. 96A 5.88% 01/01/15 3,450 3,508,995 Philadelphia Ind. Dev. Auth. Arpt. Fac. Rev., Aero Philadelphia LLC Prj., Ser. 99 AMT 5.25% 01/01/09 600 604,386 Philadelphia Ind. Dev. Auth. Rev., PGH Dev. Corp. Prj., Ser. 93 5.25% 07/01/17 1,935 1,940,109 Philadelphia Sch. Dist. GO, Ser. 99C 5.75% 03/01/29 4,000 4,400,360 ----------- 38,438,203 ----------- Puerto Rico -- 6.6% Puerto Rico Cmwlth. Hwy. Rev., Ser. 05L 5.25% 07/01/38 10,000 11,504,700 Puerto Rico Cmwlth. Infra. Fin. Auth. Spec. RITES PA-782 Rev., Ser. 01G 10/01/40 3,985 5,432,033 Puerto Rico Elec. Pwr. Auth. Rev., Ser. 94S 7.00% 07/01/06 1,000 1,028,430 Puerto Rico Elec. Pwr. Auth. Rev., Ser. 05RR 5.00% 07/01/35 4,000 4,214,120 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Prerefunded Ser. 02E 5.50%(c) 02/01/12 2,990 3,312,083 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Ser. 02E 5.50% 08/01/29 1,010 1,087,982 ----------- 26,579,348 ----------- Rhode Island -- 0.7% Rhode Island Depositors Econ. Protection Corp. SO, Prerefunded Ser. 93 5.62%(c) 08/01/09 190 206,087 Rhode Island Depositors Econ. Protection Corp. SO, Ser. 93 5.62% 08/01/09 515 535,415 Rhode Island St. Hlth. & Ed. Bldg. Corp. Rev., Hosp. Fin. Lifespan Oblig. Grp. Prj., Ser. 96 5.50% 05/15/16 2,000 2,094,060 ----------- 2,835,562 ----------- South Carolina -- 1.3% South Carolina Trans. Infra. Rev., Ser. 04A 5.00% 10/01/33 5,000 5,200,200 ----------- Texas -- 8.1% Brazos River Auth. Poll. Ctrl. Rev., Texas Util. Elec. Co. Prj., Prerefunded Ser. 95C AMT 5.55%(c) 04/01/08 5,000 5,375,100 Dallas Ind. Dev. Corp. Rev., CR/PL, Inc. Prj., Ser. 87 AMT 7.50% 08/01/17 1,350 1,372,734 Frisco Indpt. Sch. Dist. GO, Ser. 05A 5.00% 07/15/30 4,600 4,792,050 Grand Prairie Indpt. Sch. Dist. GO, Prerefunded Ser. 00A 5.80%(c) 08/15/11 4,925 5,553,676 Harlandale Tex. Indpt. Sch. Dist. Ref., Ser. 05 5.00% 08/15/30 3,490 3,650,191 Texas Affordable Hsg. Corp. Multi-Fam. Hsg. Rev., Arborstone Prj., Ser. 01A 4.75%(f) 11/01/11 6,635 5,661,513 Texas Wtr. Fin. Assist. GO, Ser. 00 5.75% 08/01/22 3,445 3,768,417 Travis Cnty. Hlth. Fac. Dev. Corp. Rev., Ascension Hlth. Credit Prj., Prerefunded Ser. 99A 5.88%(c) 11/15/09 1,980 2,196,572 ----------- 32,370,253 ----------- Utah -- 0.0% Salt Lake City Hosp. Rev., Ser. 88A 8.12%(c) 05/15/15 100 123,131 ----------- Virginia -- 2.7% Pocahontas Pkwy. Toll Rd. Rev., Ser. 98B 5.85%(b) 08/15/23 14,300 5,140,993 Virginia St. Pub. Sch. Auth. Rev., Sch. Fing Prj., Ser. 05B 5.25% 08/01/16 5,000 5,586,350 ----------- 10,727,343 ----------- Washington -- 7.8% King Cnty. GO, Sch. Dist. No. 414 Lake Washington Prj., Ser. 00 5.75% 12/01/10 500 557,365 Pierce Cnty. GO, Sch. Dist. No. 416 White River Prj., Ser. 00 6.00% 12/01/13 5,345 6,007,620 See accompanying notes to financial statements 21
BlackRock Funds STATEMENT OF NET ASSETS TAX-FREE INCOME PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Washington (Continued) Port Seattle Washington Rev., Ser. 05A 5.00% 03/01/35 $ 6,000 $ 6,255,780 Washington St. GO, Ser. 00B 6.00% 01/01/25 14,000 15,488,900 Washington St. Pub. Pwr. Sply. Sys. Rev., Nuclear Prj. No. 3, Ser. 96A 6.00% 07/01/06 3,000 3,066,660 ------------ 31,376,325 ------------ West Virginia -- 0.1% West Virginia Pub. Energy Auth. Rev., Morgantown Energy Assoc. Prj., Ser. 90A AMT 5.05% 07/01/08 280 285,891 ------------ TOTAL MUNICIPAL BONDS (Cost $384,449,108) 402,027,438 ------------ TAXABLE MUNICIPAL BONDS -- 3.3% New York - 2.0% New York St. Environmental Fac. Corp. Clean Wtr. & Drinking Rev., New York City Mun. Wtr. Fin. Prj., Ser. 04 5.00% 06/15/34 7,600 7,954,008 ------------ Texas -- 1.3% Univ. of Texas Permanent Univ. Fd. Rev., Ser. 05A, Class B 5.00% 07/01/35 5,000 5,215,100 ------------ TOTAL TAXABLE MUNICIPAL BONDS (Cost $13,092,613) 13,169,108 ------------ MORTGAGE PASS-THROUGHS -- 0.0% Government National Mortgage Association 6.00% (Cost $4,704) 11/15/31 5 4,641 ------------ TOTAL INVESTMENTS IN SECURITIES -- 103.9% (Cost $397,546,425(a)) 415,201,187 LIABILITIES IN EXCESS OF OTHER ASSETS -- (3.9)% (15,494,167) ------------ NET ASSETS -- 100.0% (Applicable to 7,781,574 BlackRock shares, 26,892,726 Institutional shares, 210,381 Service shares, 814,928 Investor A shares, 439,928 Investor B shares and 209,371 Investor C shares outstanding) $399,707,020 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($85,552,636/7,781,574) $ 10.99 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($295,736,733/26,892,726) $ 11.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($2,311,643/210,381) $ 10.99 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($8,964,504/814,928) $ 11.00 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($11.00/0.960) $ 11.46 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($4,838,831/439,928) $ 11.00 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($2,302,673/209,371) $ 11.00 ======= - ---------- (a) Cost for Federal income tax purposes is $397,548,925. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 19,502,358 Gross unrealized depreciation (1,850,096) ------------ $ 17,652,262 ============ (b) The rate shown is the effective yield on the zero coupon bonds at the time of purchase. (c) This bond is prerefunded. U.S. government securities, held in escrow, are used to pay interest on this security, as well as refund the bond in full at date indicated, typically at a premium to par. (d) Rates shown are the rates as of September 30, 2005. (e) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 4.5% of its net assets, with a current market value of $17,888,180 in securities restricted as to resale. (f) Security is illiquid. As of September 30, 2005, the Portfolio held 1.4% of its net assets, with a current market value of $5,661,513 in these securities. See accompanying notes to financial statements 22
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA TAX-FREE INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS -- 101.8% Multi-State -- 8.2% Charter Mac Equity Issue Tr., Ser. 99 6.62%(b) 06/30/09 $25,000 $27,038,000 Charter Mac Equity Issue Tr., Ser. 00 7.60%(b) 11/30/10 10,000 11,420,600 MuniMae Tax-Exempt Bond Subs., LLC, Ser. 00 6.88%(b) 06/30/09 4,000 4,365,080 7.75%(b) 11/01/10 10,000 11,404,300 ----------- 54,227,980 ----------- Pennsylvania -- 81.2% Allegheny Cnty. Hosp. Dev. Auth. Rev., Hlth. Ctr. Univ. of Pittsburgh Med. Ctr. Prj., Ser. 97B 6.00% 07/01/25 7,000 8,445,920 Allegheny Cnty. Hosp. Dev. Auth. Rev., Prerefunded Ser. 95A 6.00%(c) 09/01/07 5,000 5,283,250 6.20%(c) 09/01/07 1,000 1,060,330 Allegheny Cnty. Hosp. Dev. Auth. Rev., Univ. of Pittsburgh Med. Ctr. Prj., Ser. 95 5.35% 12/01/17 10,000 10,224,300 Beaver Cnty. Hosp. Auth. Rev., Prerefunded Ser. 96A 5.80%(c) 10/01/06 5,830 5,997,088 Berks Cnty. GO, Ser. 98 5.38% 11/15/28 6,685 6,919,443 Bradford Area Sch. Dist. GO, Prerefunded Ser. 95 5.80%(c) 10/01/05 1,465 1,465,000 Central Bucks Sch. Dist. GO, Ser. A 5.00% 05/15/20 4,570 4,813,992 Dauphin Cnty. Gen. Auth. Hlth. Sys. Rev., Pinnacle Hlth. Sys. Prj., Ser. 97 5.50% 05/15/17 3,500 3,648,995 Dauphin Cnty. Gen. Auth. Hosp. Rev., Hapsco Western Pennsylvania Hosp. Prj., Ser. 92 6.25% 07/01/16 1,000 1,154,770 Delaware Cnty. Auth. Arpt. Fac. Rev., UTD Parcel Svc. Prj., Ser. 85 VRDN 2.87%(d) 12/01/15 70 70,000 Delaware Cnty. Auth. Coll. Rev., Haverford Coll. Prj., Ser. 00 5.75% 11/15/25 6,795 7,467,705 Delaware Cnty. Auth. Hosp. Rev., Ser. 95 5.50% 08/15/15 6,480 6,662,671 Delaware Cnty. Auth. Rev., Mercy Hlth. Corp. Prj., Ser. 96 5.75% 12/15/20 3,735 3,914,765 Delaware Cnty. Ind. Dev. Auth. Rev., Ser. 99 AMT 6.00% 06/01/29 3,400 3,705,592 Delaware Cnty. Mem. Hosp. Auth. Rev., Ser. 95 5.50% 08/15/19 3,000 3,084,570 Delaware Cnty. Rev., Prerefunded Ser. 95 5.50%(c) 10/01/05 1,075 1,075,000 Delaware River Port Auth. Pennsylvania & New Jersey Rev., Port Dist. Prj., Ser. 99B 5.70% 01/01/22 8,930 9,708,160 Delaware River Port Auth. Pennsylvania & New Jersey Rev., Ser. 99 5.75% 01/01/16 8,000 8,712,800 Delaware River Port Auth. Pennsylvania & New Jersey RITES Rev., Ser. 99 07/01/16 10,000 13,498,000 Delaware Vy. Regl. Fin. Auth. LOC Govt. Rev., Ser. 96A 5.90% 04/15/16 2,540 2,579,726 Delaware Vy. Regl. Fin. Auth. LOC Govt. Rev., Ser. 97B 5.60% 07/01/17 2,000 2,253,300 Delaware Vy. Regl. Fin. Auth. LOC Govt. Rev., Ser. 98A 5.50% 08/01/28 33,050 38,197,868 Delaware Vy. Regl. Fin. Auth. LOC Govt. RITES PA-1041 Rev., Ser. 02A 01/01/26 2,000 5,550,800 Dover Area Sch. Dist. GO, Prerefunded Ser. 96 5.75%(c) 04/01/06 2,445 2,480,232 Geisinger Auth. Hlth. Sys., Ser. 05C VRDN 2.81%(d) 08/01/28 6,600 6,600,000 Indiana Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev., New York St. Elec. & Gas Corp. Prj., Ser. 95A 6.00% 06/01/06 1,000 1,019,940 Kennett Cons. Sch. Dist. GO, Ser. 02A 5.50% 02/15/14 1,245 1,373,895 Lancaster Cnty. Hosp. Auth. Rev., Hlth. Ctr. Masonic Homes Prj., Ser. 94 5.30% 11/15/08 500 506,580 Lancaster Swr. Auth. Sply. SO, Ser. 98 5.25% 04/01/21 8,480 8,581,760 Lehigh Cnty. Gen. Purp. Auth. Rev., Kidspeace Oblig. Prj., Ser. 98 5.70% 11/01/09 3,000 3,132,480 6.00% 11/01/18 2,000 2,099,360 Luzerne Cnty. Flood Prot. Auth. Gtd. Rev., Prerefunded Ser. 96 5.60%(c) 07/15/06 4,720 4,819,262 Lycoming Cnty. Auth. Hosp. Rev., Divine Providence Hosp. Prj., Ser. 95 5.38% 11/15/10 6,480 6,625,606 McKeesport Area Sch. Dist. GO, Prerefunded Ser. 96A 5.75%(c) 10/01/06 1,750 1,799,315 Methacton Sch. Dist. Auth. Rev., Prerefunded Ser. 78 6.50%(c) 10/01/06 475 491,596 See accompanying notes to financial statements 23
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA TAX-FREE INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Pennsylvania (Continued) Montgomery Cnty. Hgr. Ed. & Hlth. Auth. Coll. Rev., Beaver Coll. Prj., Ser. 96 5.75% 04/01/12 $ 1,690 $ 1,746,615 Montgomery Cnty. Hgr. Ed. & Hlth. Auth. Rev., Holy Redeemer Hosp. Prj., Ser. 97A 5.25% 10/01/27 9,000 9,359,280 Montgomery Cnty. Hgr. Ed. & Hlth. Auth. Rev., Pottstown Hlth. Care Corp. Prj., Prerefunded Ser. 98 5.00%(c) 01/01/09 6,235 6,649,565 Northeastern Hosp. & Ed. Auth. Rev., Luzerne Cnty. Coll. Prj., Ser. 97 5.15% 08/15/16 3,245 3,361,885 Northeastern Hosp. & Ed. Auth. Rev., Wyoming Vy. Hlth. Care Prj., Ser. 94A 6.50% 01/01/07 1,000 1,019,630 Northgate Sch. Auth. Bldg. Rev., Ser. 78 6.38% 02/15/07 825 863,181 Parkland Sch. Dist. Rev., Prerefunded Ser. 96 5.75%(c) 03/01/06 2,910 2,944,716 Pennsbury Sch. Dist. GO, Ser. 02 01/15/18- 5.50% 01/15/19 4,625 5,068,986 Pennsylvania Con. Ctr. Auth. Rev., Ser. 89A 6.70% 09/01/16 1,000 1,184,280 Pennsylvania Con. Ctr. Auth. Rev., Ser. 94A 6.60% 09/01/09 10,330 10,531,799 Pennsylvania Hgr. Ed. Assistance Agcy. Rev., Cap. Acquisition Prj., Prerefunded Ser. 00 5.88%(c) 12/15/10 16,400 18,391,616 Pennsylvania Hgr. Ed. Fac. Auth. Rev., Univ. of Pennsylvania Prj., Ser. 98 5.75% 01/01/06 8,165 8,302,254 Pennsylvania Hsg. Fin. Agcy. Multi-Fam. FHA Ins. Rev., Ser. 92 8.10% 07/01/13 630 630,850 Pennsylvania Hsg. Fin. Agcy. Rev., Ser. 98 AMT 5.50%(e) 04/01/30 13,155 3,558,822 Pennsylvania Hsg. Fin. Agcy. Rev., Sgl. Fam. Mtg. Prj., Ser. 99-66A AMT 5.65% 04/01/29 9,545 9,707,838 Pennsylvania Infra. Investment Auth. Rev., Pennvest Ln. Pool Prj., Ser. 94 6.00% 09/01/06 1,930 1,983,036 Pennsylvania Intergovtl. Coop. Auth. Spec. Tax Rev., City of Philadelphia Fdg. Prj., Ser. 96 5.60% 06/15/12 1,000 1,018,310 06/15/16- 5.50% 06/15/20 10,500 10,683,190 Pennsylvania St. Dept. Gen. Svcs. COP, Ser. 01 4.25% 11/01/05 1,860 1,862,027 05/01/14- 5.00% 11/01/14 5,560 5,903,108 05/01/15- 5.25% 05/01/16 7,740 8,308,634 Pennsylvania St. Hgr. Ed. Assist. Agcy. Stud. Ln. Rev., Ser. 94A VRDN 2.79%(d) 12/01/24 1,700 1,700,000 Pennsylvania St. Hgr. Ed. Fac. Auth. Coll. & Univ. Rev., Bryn Mawr Coll. Prj., Prerefunded Ser. 95 6.00%(c) 12/01/05 1,200 1,230,120 Pennsylvania St. Hgr. Ed. Fac. Auth. Coll. & Univ. Rev., Lafayette Coll. Prj., Ser. 00 6.00% 05/01/30 155 170,550 Pennsylvania St. Hgr. Ed. Fac. Auth. Coll. & Univ. Rev., Trustees Univ. Prj., Ser. 98 5.50% 07/15/38 9,500 10,114,935 Pennsylvania St. Hgr. Ed. Fac. Auth. Hlth. Svcs. Rev., Univ. of Pennsylvania Hlth. Svcs. Prj., Ser. 96A 5.75% 01/01/17 12,250 12,455,922 Pennsylvania St. Hgr. Ed. Fac. Auth. Rev., Trustees Univ. of Pennsylvania, Ser. 05C 4.75% 07/15/35 6,700 6,777,988 5.00% 07/15/38 10,725 11,187,891 Pennsylvania St. Ind. Dev. Auth. Rev., Econ. Dev. Prj., Ser. 94 7.00% 01/01/06 1,000 1,009,770 Pennsylvania St. Ind. Dev. Auth. Rev., Econ. Dev. Prj., Ser. 02 5.50% 07/01/16 8,000 8,883,600 Pennsylvania St. Pub. Sch. Bldg. Auth. Rev., Philadelphia Sch. Dist. Lease Prj., Ser. 03 5.00% 06/01/33 7,500 7,764,750 Pennsylvania St. Univ. Rev., Ser. 05A 09/01/29- 5.00% 09/01/35 13,500 14,180,355 Philadelphia Gas Works Rev., Ser. 94 5.25% 08/01/24 2,900 2,942,920 Philadelphia Gas Works Rev., Ser. 01 08/01/14- 5.50% 08/01/18 7,415 8,049,894 Philadelphia GO, Ser. 94 5.90% 11/15/09 980 993,534 Philadelphia Hosp. & Hgr. Ed. Fac. Auth. Hosp. Rev., Frankford Hosp. Prj., Ser. 95 5.50% 01/01/07 1,235 1,255,390 5.60% 01/01/08 1,245 1,265,729 See accompanying notes to financial statements 24
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA TAX-FREE INCOME PORTFOLIO (Continued) As of september 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Pennsylvania (Continued) Philadelphia Hosp. & Hgr. Ed. Fac. Auth. Hosp. Rev., Nazareth Hosp. Franciscan Prj., Prerefunded Ser. 96B 5.00%(c) 07/01/06 $ 4,590 $ 4,751,706 Philadelphia Ind. Dev. Auth. Rev., American Coll. of Physicians Prj., Ser. 00 06/15/20- 5.50% 06/15/25 14,685 15,788,350 Philadelphia Ind. Dev. Auth. Rev., Girard Estate Coal Mining Prj., Ser. 96 5.38% 11/15/12 3,945 4,051,318 5.50% 11/15/16 1,650 1,693,230 Philadelphia Ind. Dev. Auth. Rev., PGH Dev. Corp. Prj., Ser. 93 5.50% 07/01/10 1,035 1,040,786 Philadelphia Pk. Auth. Rev., Arpt. Pk. Prj., Ser. 99 5.62% 09/01/18 4,430 4,782,406 Philadelphia Pk. Auth. Rev., Ser. 97 5.40% 09/01/15 5,900 6,151,045 Philadelphia Pk. Auth. Rev., Ser. 99 09/01/13- 5.62% 09/01/17 5,885 6,376,009 Philadelphia Sch. Dist. GO, Ser. 95A 6.25% 09/01/06 2,255 2,321,951 Philadelphia Sch. Dist. GO, Ser. 99C 5.75% 03/01/29 11,000 12,100,990 Philadelphia Sch. Dist. GO, Ser. 00A 02/01/12- 5.75% 02/01/13 10,215 11,405,763 Philadelphia Wtr. & Waste Wtr. Rev., Ser. 93 5.50% 06/15/07 6,780 7,057,641 Philadelphia Wtr. & Waste Wtr. Rev., Ser. 05A 5.00% 07/01/28 6,000 6,291,960 Pleasant Vy. Sch. Dist. GO, Prerefunded Ser. 95 5.60%(c) 11/15/05 1,180 1,183,847 Pleasant Vy. Sch. Dist. GO, Ser. 95 5.60% 11/15/14 205 205,668 Pottstown Borough Auth. Swr. Rev., Ser. 96 5.50% 11/01/16 1,360 1,396,162 Riverside Beaver Cnty. Sch. Dist. Rev., Prerefunded Ser. 96 5.50%(c) 02/15/06 3,725 3,761,207 Riverside Sch. Dist. GO, Prerefunded Ser. 00 5.50%(c) 10/15/10 3,300 3,620,958 South Fork Mun. Auth. Hosp. Rev., Good Samaritan Med. Ctr. Prj., Ser. 96B 5.38% 07/01/16 4,000 4,142,160 Southeastern Pennsylvania Trans. Auth. Rev., Ser. 97 5.55% 03/01/13 3,500 3,683,960 5.38% 03/01/17 6,270 6,580,177 Springford Sch. Dist. GO, Ser. 97 5.15% 02/01/18 10,010 10,271,625 Washington Cnty. Auth. Rev., Ser. 99 6.15% 12/01/29 6,340 6,625,871 MUNICIPAL BONDS (Continued) Pennsylvania (Continued) Washington Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev., West Penn Pwr. Co. Prj., Ser. 95G 6.05% 04/01/14 2,500 2,556,725 West Mifflin Sanit. Swr. Mun. Auth. Swr. Rev., Prerefunded Ser. 96 5.70%(c) 08/01/06 1,445 1,478,293 Westview Mun. Auth. SO, Ser. 85 9.25% 11/15/05 195 196,394 Williamsport Area Sch. Dist. Auth. Rev., Ser. 78 6.00% 03/01/07 70 72,302 Wilson Sch. Dist. GO, Prerefunded Ser. 97 5.50%(c) 05/15/07 8,015 8,343,054 ------------ 536,018,599 ------------ Puerto Rico -- 12.4% Puerto Rico Cmwlth. GO, Ser. 02 5.50% 07/01/12 20,000 22,407,200 Puerto Rico Cmwlth. Hwy. Rev., Ser. 05L 5.25% 07/01/38 16,000 18,407,520 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00A 10/01/16 400 554,624 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00B 10/01/17 500 701,760 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00C 10/01/18 500 697,900 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00D 10/01/19 690 960,425 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00E 10/01/20 250 347,020 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00F 10/01/24 250 344,710 Puerto Rico Elec. Pwr. Auth. Rev., Ser. 05RR 5.00% 07/01/35 6,000 6,321,180 Puerto Rico Elec. Pwr. Auth. Rev., Ser. 05SS 5.00% 07/01/30 10,000 10,600,600 Puerto Rico Mun. Fin. Agy. Rev., Ser. 99 5.50% 08/01/18 6,500 7,027,605 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Prerefunded Ser. 02E 5.50%(c) 02/01/12 9,340 10,346,105 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Ser. 02E 5.50% 08/01/29 3,160 3,403,983 ------------ 82,120,632 ------------ TOTAL MUNICIPAL BONDS (Cost $627,453,748) 672,367,211 ------------ See accompanying notes to financial statements 25
BlackRock Funds STATEMENT OF NET ASSETS PENNSYLVANIA TAX-FREE INCOME PORTFOLIO (Concluded) As of September 30, 2005 Number of Shares Value ----------- ------------ MONEY MARKET FUND -- 0.1% Wilmington Trust Tax-Free Money Market Fund (Cost $676,826) 676,826 $ 676,826 ------------ TOTAL INVESTMENTS IN SECURITIES -- 101.9% (Cost $628,130,574(a)) 673,044,037 LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.9)% (12,711,281) ------------- NET ASSETS -- 100.0% (Applicable to 58,633,721 Institutional shares, 454,401 Service shares, 2,870,346 Investor A shares, 1,296,387 Investor B shares and 170,958 Investor C shares outstanding) $660,332,756 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($610,549,756/58,633,721) $ 10.41 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($4,727,434/454,401) $ 10.40 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($29,875,385/2,870,346) $ 10.41 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.41/0.960) $ 10.84 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($13,407,502/1,296,387) $ 10.34 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($1,772,679/170,958) $ 10.37 ======= - ---------- (a) Cost for Federal income tax purposes is $628,269,159. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 45,876,612 Gross unrealized depreciation (1,101,734) ------------ $ 44,774,878 ============ (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 8.2% of its net assets, with a current market value of $54,227,980 in securities restricted as to resale. (c) This bond is prerefunded. U.S. government securities, held in escrow, are used to pay interest on this security, as well as refund the bond in full at date indicated, typically at a premium to par. (d) Rates shown are the rates as of September 30, 2005. (e) The rate shown is the effective yield on the zero coupon bonds at the time of purchase. See accompanying notes to financial statements 26
BlackRock Funds STATEMENT OF NET ASSETS NEW JERSEY TAX-FREE INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS -- 98.7% Multi-State -- 7.1% Charter Mac Equity Issue Tr., Ser. 99 6.62%(b) 06/30/09 $ 1,000 $ 1,081,520 Charter Mac Equity Issue Tr., Ser. 00 7.60%(b) 11/30/10 4,000 4,568,240 MuniMae Tax-Exempt Bond Subs., LLC, Ser. 00 6.88%(b) 06/30/09 4,000 4,365,080 7.75%(b) 11/01/10 2,000 2,280,860 ----------- 12,295,700 ----------- New Jersey -- 72.8% Delaware River Port Auth. Pennsylvania & New Jersey RITES PA-611 Rev., Ser. 00 01/01/26 5,000 6,293,300 Garden St. Preservation Tr. Cap. Apprec. Rev., Ser. 03B 5.17%(c) 11/01/24 10,000 4,169,300 Gloucester Cnty. Srs. Hsg. Dev. Corp. Rev., Sect. 8 Colonial Pk. Prj., Ser. 94A 6.20% 09/15/11 1,250 1,261,412 Hopatcong Boro GO, Ser. 03 5.75% 08/01/33 2,300 2,571,193 Jersey City GO, Ser. 96A 6.00% 10/01/05 1,655 1,655,000 Knowlton Twp. Bd. of Ed. GO, Ser. 91 6.60% 08/15/11 169 196,341 Middlesex Cnty. Imp. Auth. Rev., Heldrich Center Hotel Prj., Ser. A 01/01/15- 5.00% 01/01/20 2,000 2,039,440 Middlesex Cnty. Imp. Auth. Rev., Monroe Twp., Ser. 96 5.80% 09/15/13 1,725 1,786,048 Middlesex Cnty. Imp. Auth. Rev., New Brunswick Apts. Rental Hsg. Prj., Ser. 02 AMT 5.15% 02/01/24 3,000 3,070,770 New Jersey Econ. Dev. Auth. Lease Rev., Ser. 00 6.00% 06/01/21 4,780 5,293,372 New Jersey Econ. Dev. Auth. Rev., Kapkowski Rd. Landfill Prj., Ser. 02 6.50% 04/01/28 2,500 2,909,525 New Jersey Econ. Dev. Auth. Rev., Cigarette Tax, Ser. 04 5.75% 06/15/34 3,615 3,815,126 New Jersey Econ. Dev. Auth. Rev., Motor Vehicle Comm. Prj., Ser. 03A 3.52%(c) 07/01/12 4,000 3,065,400 New Jersey Econ. Dev. Auth. Rev., Performing Arts Ctr. Prj., Ser. 96C 5.75% 06/15/08 4,440 4,589,539 New Jersey Econ. Dev. Auth. Rev., Sch. Fac. Const. Prj., Ser. 03F 5.25% 06/15/13 5,000 5,462,050 New Jersey Econ. Dev. Auth. Rev., Seeing Eye Inc. Prj., Ser. 05 5.00% 12/01/24 6,500 6,892,990 New Jersey Econ. Dev. Auth. Rev., Ser. 99 6.20% 12/01/09 3,000 3,388,740 New Jersey Econ. Dev. Auth. Rev., St. Barnabas Med. Ctr. Prj., Ser. 97A 5.63%(c) 07/01/23 4,000 1,763,680 New Jersey Econ. Dev. Auth. Solid Waste Rev., Waste Management New Jersey Prj., Ser. 04A AMT 5.30% 06/01/15 1,000 1,055,740 New Jersey Edl. Facs. Auth. Rev., Rowan Coll. Prj., Prerefunded Ser. 96E 5.88%(d) 07/01/06 2,185 2,254,439 New Jersey Hlth. Care Fac. Fin. Auth. Rev., Kennedy Hlth. Sys. Prj., Ser. 01 5.50% 07/01/21 2,000 2,131,240 5.62% 07/01/31 455 482,491 New Jersey Hlth. Care Fac. Fin. Auth. Rev., Robert Wood Johnson Univ. Prj., Ser. 96C 5.75% 07/01/07 2,595 2,669,892 New Jersey Sports & Expo. Auth. Rev., Ser. 00A 5.50% 03/01/20 5,000 5,360,500 New Jersey St. Edl. Fac. Auth. Rev., Institute of Tech. Prj., Ser. 04B 5.00% 07/01/16 4,150 4,477,892 New Jersey St. Edl. Facs. Auth. Rev., Fairleigh Dickinson Univ. Prj., Ser. D 5.25% 07/01/32 3,000 3,080,340 New Jersey St. GO, Ser. 00 5.75% 05/01/12 2,500 2,810,450 New Jersey St. GO, Ser. 01H 5.25% 07/01/14 4,975 5,499,066 New Jersey St. Hsg. & Mtg. Fin. Agcy. Rev., Ser. 00B 6.25% 11/01/26 1,435 1,513,753 New Jersey St. Hwy. Auth. Rev., Garden St. Pkwy. Prj., Ser. 92 6.20% 01/01/10 750 817,972 New Jersey St. Tpke. Auth. Rev., Ser. 91C 6.50% 01/01/16 625 736,747 New Jersey St. Tpke. Auth. Rev., Prerefunded Ser. 91C 6.50%(d) 01/01/16 3,375 3,994,970 New Jersey St. Trans. Tr. Fd. Admin. Grant Rev., Prerefunded Ser. 00A 6.12%(d) 09/15/09 2,500 2,764,025 New Jersey St. Trans. Tr. Fd. Auth. Trans. Sys. Rev., Prerefunded Ser. 00A 6.00%(d) 06/15/10 2,500 2,793,500 New Jersey St. Trans. Tr. Fd. Auth. Trans. Sys. Rev., Prerefunded Ser. 01B 6.00%(d) 12/15/11 2,500 2,854,175 New Jersey St. Trans. Tr. Fd. Auth. Trans. Sys. Rev., Ser. 99A 5.75% 06/15/20 2,820 3,235,189 New Jersey St. Waste Wtr. Trtmnt. Tr. Rev., Ser. 96C 6.25% 05/15/06 3,455 3,525,966 See accompanying notes to financial statements 27
BlackRock Funds STATEMENT OF NET ASSETS NEW JERSEY TAX-FREE INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) New Jersey (Continued) North Hudson Swr. Auth. Rev., Ser. 01A 5.41%(c) 08/01/21 $5,000 $ 2,446,100 Port Auth. New York & New Jersey SO Rev., JFK Intl. Arpt. Term. Prj., Ser. 97-6 AMT 5.75% 12/01/22 2,000 2,129,660 Port Auth. New York & New Jersey SO, JFK Intl. Arpt. Term. Prj., Ser. 97-6 AMT 6.25% 12/01/09 7,000 7,630,630 Summit Cnty. GO, Ser. 01 5.25% 06/01/14 1,145 1,280,763 ------------ 125,768,726 ------------ Puerto Rico -- 18.8% Puerto Rico Cmwlth. GO, Pub. Imp. Prj., Ser. 01 5.50% 07/01/19 5,000 5,769,300 Puerto Rico Cmwlth. Hwy. & Trans. Auth. Rev., Prerefunded Ser. 00B 6.00%(d) 07/01/10 3,000 3,373,950 Puerto Rico Cmwlth. Hwy. & Trans. Auth. Rev., Ser. 00C 6.00% 07/01/29 2,000 2,249,300 Puerto Rico Cmwlth. Hwy. & Trans. Auth. Rev., Ser. 02D 5.38% 07/01/36 1,000 1,107,210 Puerto Rico Cmwlth. Infra. Fin. Auth. Rev., Ser. 05B 5.00% 07/01/41 5,000 5,139,400 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00A 10/01/16 400 554,624 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00B 10/01/17 500 701,760 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00C 10/01/18 500 697,900 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00D 10/01/19 650 904,748 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00E 10/01/20 250 347,020 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00F 10/01/24 250 344,710 Puerto Rico Cmwlth. Infra. Fin. Auth. Spec. RITES PA-569 Rev., Ser. 99 07/01/07 2,000 2,317,820 Puerto Rico Pub. Bldgs. Auth. Rev., Govt. Facs. Prj., Ser. 02 5.25% 07/01/25 3,000 3,376,380 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Prerefunded Ser. 02E 5.50%(d) 02/01/12 3,740 4,142,873 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Ser. 02E 5.50% 08/01/29 1,260 1,357,284 ------------ 32,384,279 ------------ TOTAL MUNICIPAL BONDS (Cost $158,889,609) $170,448,705 ------------ Number of Shares ----------- MONEY MARKET FUND -- 0.2% Wilmington Trust Tax-Free Money Market Fund (Cost $463,059) 463,059 463,059 ------------ TOTAL INVESTMENTS IN SECURITIES -- 98.9% (Cost $159,352,668(a)) 170,911,764 OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.1% 1,816,202 ------------ NET ASSETS -- 100.0% (Applicable to 11,897,968 Institutional shares, 1,286,226 Service shares, 670,023 Investor A shares, 944,021 Investor B shares and 174,121 Investor C shares outstanding) $172,727,966 ============ See accompanying notes to financial statements 28
BlackRock Funds STATEMENT OF NET ASSETS NEW JERSEY TAX-FREE INCOME PORTFOLIO (Concluded) As of September 30, 2005 Value ----------- NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($137,255,851/11,897,968) $ 11.54 ======== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($14,838,851/1,286,226) $ 11.54 ======== NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($7,729,018/670,023) $ 11.54 ======== MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($11.54/0.960) $ 12.02 ======== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($10,891,406/944,021) $ 11.54 ======== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($2,012,840/174,121) $ 11.56 ======== - ---------- (a) Also cost for Federal income tax purposes. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 12,315,062 Gross unrealized depreciation (755,966) ------------ $ 11,559,096 ============ (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 7.1% of its net assets, with a current market value of $12,295,700 in securities restricted as to resale. (c) The rate shown is the effective yield on the zero coupon bonds at the time of purchase. (d) This bond is prerefunded. U.S. government securities, held in escrow, are used to pay interest on this security, as well as refund the bond in full at date indicated, typically at a premium to par. See accompanying notes to financial statements 29
BlackRock Funds STATEMENT OF NET ASSETS OHIO TAX-FREE INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS -- 100.0% Multi-State -- 5.3% Charter Mac Equity Issue Tr., Ser. 99 6.62%(b) 06/30/09 $1,000 $ 1,081,520 Charter Mac Equity Issue Tr., Ser. 00 7.60%(b) 11/30/10 1,000 1,142,060 MuniMae Tax-Exempt Bond Subs., LLC, Ser. 00 6.88%(b) 06/30/09 2,000 2,182,540 7.75%(b) 11/01/10 2,000 2,280,860 ------------ 6,686,980 ------------ Ohio -- 69.3% Akron GO, Ser. 01 5.50% 12/01/21 1,000 1,111,410 Akron Swr. Sys. Rev., Ser. 96 5.88% 12/01/16 500 520,900 Brunswick GO, Ser. 94 6.30% 12/01/14 210 213,224 Butler Cnty. Trans. Imp. Dist. Rev., Ser. 97A 6.00% 04/01/11 600 649,464 Cleveland COP, Cleveland Stadium Prj., Ser. 97 5.25% 11/15/10 2,500 2,653,675 Cleveland Pkg. Fac. Rev., Ser. 96 6.00% 09/15/06 1,275 1,311,656 Cleveland St. Univ. Gen. Receipts Rev., Ser. 04 5.00% 06/01/34 3,000 3,134,820 Cleveland-Cuyahoga Cnty. Port Auth. Rev., Ser. 97 AMT 6.00%(c) 03/01/07 290 297,984 Columbus GO, Ser. 86 7.38% 07/01/06 1,000 1,032,340 Columbus GO, Ser. 02 5.00% 06/15/09 2,975 3,191,907 Cuyahoga Cnty. Multi-Fam. Rev., Ser. 02 AMT 5.35% 09/20/27 1,000 1,027,910 Fairfield City Sch. Dist. GO, Ser. 94 7.45% 12/01/14 1,000 1,232,540 Greater Cleveland Regl. Trans. Auth. Cap. Imp. Rev., Ser. 01A 5.12% 12/01/21 1,000 1,057,440 Greater Cleveland Regl. Trans. Auth. GO, Ser. 96 6.25% 12/01/06 2,935 3,044,094 Hamilton Cnty. Hosp. Fac. Rev., Ser. 02A VRDN 2.75%(d) 06/01/27 5,300 5,300,000 Hamilton Cnty. Sales Tax Rev., Ser. 01B 5.25% 12/01/32 5,000 5,298,800 Jackson Loc. Sch. Dist., Stark & Summit Cntys. Construction & Imp. GO, Ser. 04 5.00% 12/01/33 2,105 2,191,894 Kent St. Univ. Rev., Ser. 01 VRDN 2.79%(d) 05/01/31 4,000 4,000,000 Kings Sch. Dist. GO, Prerefunded Ser. 94 7.60%(c) 12/01/05 200 201,528 Lucas Cnty. GO, Ser. 96 6.00% 12/01/05 500 502,520 Marysville Sch. Dist. GO, Prerefunded Ser. 98 6.00%(c) 12/01/10 1,910 2,167,716 Mason City Sch. Dist. GO, Ser. 01 5.38% 12/01/18 3,000 3,289,770 New Albany Cmnty. Auth. Fac. Rev., Ser. 01B 5.12% 10/01/21 2,750 2,915,578 North Royalton City Sch. Dist. GO, Ser. 94 6.62% 12/01/06 100 104,140 Northwestern Sch. Dist. Rev., Wayne & Ashland Cntys. Prj., Ser. 94 7.20% 12/01/10 300 340,527 Ohio Hsg. Fin. Agcy. Rev., Wind River Prj., Ser. 94A AMT 5.55% 11/01/18 300 309,675 Ohio St. Bldg. Auth. Data Ctr. Rev., Ser. 93A 5.90% 10/01/07 450 474,656 Ohio St. Bldg. Auth. Disalle Govt. Ctr. Rev., Ser. 96A 6.00% 10/01/05 1,000 1,000,000 Ohio St. Comm. Sch. Cap. Fac. Rev., Prerefunded Ser. 94A 5.75%(c) 06/15/09 1,000 1,088,140 Ohio St. Env. Imp. Rev., USX Corp. Prj., Ser. 99 5.62% 05/01/29 1,000 1,069,880 Ohio St. Hgr. Ed. Fac. Denison Univ. Rev., Ser. 01 5.12% 11/01/21 3,000 3,202,170 Ohio St. Univ. GO, Ser. 02A 5.25% 12/01/18 3,290 3,569,091 Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Fac. Rev., Republic Steel Prj., Ser. 95 6.38% 06/01/07 835 863,540 Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Rev., Ser. 02 5.25% 06/01/12 3,415 3,762,681 Ohio St. Wtr. Dev. Auth. Rev., Fresh Water. Imp. Prj., Ser. 04 5.00% 12/01/34 3,000 3,128,220 Ohio St. Wtr. Dev. Auth. Rev., Steel-Cargill North Star Broken Hill Prj., Ser. 95 AMT 6.30% 09/01/20 500 513,560 Pickerington Loc. Sch. Dist. Fac. Construction & Imp. Rev., Ser. 01 5.25% 12/01/20 1,000 1,077,160 Scioto Cnty. Rev., Marine Term. Norfolk Southern Corp. Prj., Ser. 98 5.30%(d) 08/15/13 3,000 3,083,250 Springboro Wtr. Sys. Rev., Ser. 98 5.00% 12/01/18 2,500 2,599,900 Toledo GO, Ser. 96 6.00% 12/01/06 500 517,175 See accompanying notes to financial statements 30
BlackRock Funds STATEMENT OF NET ASSETS OHIO TAX-FREE INCOME PORTFOLIO (Continued) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Ohio (Continued) Trotwood-Madison City Sch. Dist. GO, Ser. 02 5.00% 12/01/30 $2,000 $ 2,076,600 Univ. of Cincinnati Rev., Ser. 01A 5.00% 06/01/31 2,000 2,068,480 Univ. of Toledo Rev., Ser. 02 5.25% 06/01/18 1,195 1,273,607 University of Akron Gen. Receipts. Rev., Ser. 04 VRDN 2.75%(d) 01/01/29 3,500 3,500,000 West Muskingum Loc. Sch. Dist., Sch. Fac. Constr. & Imp. GO, Ser. 03 5.00% 12/01/24 3,000 3,162,000 Westerville City Sch. Dist. GO, Ser. 87 6.25% 12/01/05 1,000 1,005,380 Westlake GO, Ser. 96 6.40% 12/01/08 1,560 1,644,614 ------------ 87,781,616 ------------ Puerto Rico -- 25.4% Puerto Rico Cmwlth. GO, Ser. 02 5.50% 07/01/11 5,000 5,567,800 Puerto Rico Cmwlth. Hwy. & Trans. Auth. RITES Rev., Ser. 98 07/01/18 5,000 5,631,100 Puerto Rico Cmwlth. Hwy. Rev., Ser. 05L 5.25% 07/01/38 2,800 3,221,316 Puerto Rico Cmwlth. Infra. Fin. Auth. Rev., Ser. 05B 5.00% 07/01/41 3,000 3,083,640 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00A 10/01/16 400 554,624 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00B 10/01/17 500 701,760 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00C 10/01/18 500 697,900 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00D 10/01/19 650 904,748 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00E 10/01/20 250 347,020 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00F 10/01/24 250 344,710 Puerto Rico Elec. Pwr. Auth. Rev., Ser. 05RR 5.00% 07/01/35 2,000 2,107,060 Puerto Rico Pub. Bldgs. Auth. RITES PA-577 Rev., Ser. 99 07/01/21 4,000 4,590,760 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Prerefunded Ser. 02E 5.50%(c) 02/01/12 2,990 3,312,083 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Ser. 02E 5.50% 08/01/29 1,010 1,087,982 ------------ 32,152,503 ------------ TOTAL MUNICIPAL BONDS (Cost $118,035,225) 126,621,099 ------------ Number of Shares ----------- MONEY MARKET FUND -- 1.5% Wilmington Trust Tax-Free Money Market Fund (Cost $1,922,945) 1,922,945 1,922,945 ------------ TOTAL INVESTMENTS IN SECURITIES -- 101.5% (Cost $119,958,170(a)) 128,544,044 LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.5)% (1,947,319) ------------ NET ASSETS -- 100.0% (Applicable to 9,444,286 Institutional shares, 69,051 Service shares, 833,722 Investor A shares, 885,418 Investor B shares and 663,297 Investor C shares outstanding) $126,596,725 ============ See accompanying notes to financial statements 31
BlackRock Funds STATEMENT OF NET ASSETS OHIO TAX-FREE INCOME PORTFOLIO (Concluded) As of September 30, 2005 VALUE ------------ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($100,500,513/9,444,286) $ 10.64 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($735,600/69,051) $ 10.65 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($8,873,351/833,722) $ 10.64 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($10.64/0.960) $ 11.08 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($9,423,807/885,418) $ 10.64 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($7,063,454/663,297) $ 10.65 ======= - ---------- (a) Also cost for Federal income tax purposes. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 8,644,477 Gross unrealized depreciation (58,603) ----------- $ 8,585,874 =========== (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 5.3% of its net assets, with a current market value of $6,686,980 in securities restricted as to resale. (c) This bond is prerefunded. U.S. government securities, held in escrow, are used to pay interest on this security, as well as refund the bond in full at date indicated, typically at a premium to par. (d) Rates shown are the rates as of September 30, 2005. See accompanying notes to financial statements 32
BlackRock Funds STATEMENT OF NET ASSETS DELAWARE TAX-FREE INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS -- 100.8% Delaware -- 67.7% Delaware River & Bay Auth. Rev., Ser. 96 6.00% 01/01/06 $1,160 $ 1,168,804 Delaware River & Bay Auth. Rev., Ser. 03 5.25% 01/01/13 1,000 1,104,940 Delaware St. Econ. Dev. Auth. Poll. Ctrl. Rev., Delmarva Pwr. Prj., Ser. 02B 5.20% 02/01/19 1,000 1,068,700 Delaware St. Econ. Dev. Auth. Rev., Del. Tech. Pk. Univ. Del. Prj., Ser. 00 6.00% 02/01/21 1,000 1,110,580 Delaware St. Econ. Dev. Auth. Rev., Delmarva Pwr. Prj., Ser. 00 AMT 5.65% 07/01/28 3,850 4,008,428 Delaware St. Econ. Dev. Auth. Rev., First Mtg. Gilpin ACA CBI Prj., Ser. 98 5.62% 07/01/19 2,000 2,079,120 Delaware St. Econ. Dev. Auth. Rev., United Wtr. Delaware, Inc. Prj., Ser. 95 AMT 6.20% 06/01/25 2,000 2,051,540 Delaware St. Econ. Dev. Auth. Rev., Wtr. Dev. Prj., Ser. 92B 6.45% 12/01/07 1,165 1,241,191 Delaware St. GO, Ser. 03A 5.00% 01/01/10 1,000 1,072,000 Delaware St. GO, Ser. 03B 07/01/08- 5.00% 07/01/11 2,600 2,788,944 Delaware St. GO, Ser. 04A 5.00% 01/01/09 2,000 2,117,420 Delaware St. Hlth. Fac. Auth. Rev., Beebe Med. Ctr. Prj., Ser. 04A 5.50% 06/01/24 1,000 1,059,940 Delaware St. Hlth. Fac. Auth. Rev., Beebe Med. Ctr. Prj., Ser. 05A 06/01/24- 5.00% 06/01/30 2,500 2,564,235 Delaware St. Hlth. Fac. Auth. Rev., Catholic Hlth. East Prj., Ser. 03D 5.12% 11/15/24 1,750 1,810,322 5.25% 11/15/28 2,225 2,312,710 Delaware St. Hlth. Fac. Auth. Rev., Christiana Care Hlth. Svcs. Prj., Ser. 03 5.25% 10/01/12 3,000 3,287,910 Delaware St. Hlth. Fac. Auth. Rev., Med. Ctr. of Delaware Prj., Ser. 92 6.25% 10/01/05 1,875 1,875,000 Delaware St. Hsg. Auth. Rev., Multi-Fam. Mtg. Prj., Ser. 92C 7.38% 01/01/15 2,000 2,002,660 Delaware St. Hsg. Auth. Rev., Multi-Fam. Mtg. Prj., Ser. 01A 5.40% 07/01/24 2,835 2,892,465 Delaware St. Hsg. Auth. Rev., Sr. Sgl. Fam. Mtg. Prj., Ser. 00 AMT 5.90% 07/01/20 1,410 1,465,244 Delaware St. Hsg. Auth. Rev., Sr. Sgl. Fam. Mtg. Prj., Ser. 02A AMT 5.40% 01/01/34 1,070 1,087,302 Delaware St. Trans. Auth. Trans. Sys. Rev., Ser. 97 5.00% 07/01/08 1,000 1,043,610 Kent Cnty. Stud. Hsg. Rev., Delaware St. Univ. Prj., Ser. 04A 07/01/25- 5.00% 07/01/30 2,100 2,116,563 New Castle Cnty. GO, Ser. 02A 5.25% 10/01/12 1,745 1,937,439 New Castle Cnty. GO, Ser. 04 5.00% 10/01/20 2,695 2,908,309 Sussex Cnty. GO, Ser. 03 5.00% 10/15/08 2,270 2,391,695 Wilmington GO, Ser. 02 5.38% 06/01/17 1,500 1,637,700 Wilmington Pk. Auth. Gtd. Pk. Rev., Ser. 92A 6.00% 09/15/06 25 25,082 Wilmington Pk. Auth. Gtd. Pk. Rev., Ser. 02 09/15/14- 5.25% 09/15/15 2,965 3,299,639 ------------ 55,529,492 ------------ Multi-State -- 8.1% Charter Mac Equity Issue Tr., Ser. 99 6.62%(b) 06/30/09 1,000 1,081,520 Charter Mac Equity Issue Tr., Ser. 00 7.60%(b) 11/30/10 1,000 1,142,060 MuniMae Tax-Exempt Bond Subs., LLC, Ser. 00 6.88%(b) 06/30/09 2,000 2,182,540 7.75%(b) 11/01/10 2,000 2,280,860 ------------ 6,686,980 ------------ Puerto Rico -- 25.0% Puerto Rico Cmwlth. GO, Ser. 02 5.50% 07/01/11 1,000 1,113,560 Puerto Rico Cmwlth. Hwy. Rev., Ser. 05L 5.25% 07/01/38 2,000 2,300,940 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00A 10/01/16 400 554,624 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00B 10/01/17 500 701,760 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00C 10/01/18 500 697,900 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00D 10/01/19 650 904,748 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00E 10/01/20 250 347,020 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00F 10/01/24 250 344,710 Puerto Rico Elec. Pwr. Auth. Rev., Ser. 05RR 5.00% 07/01/35 1,500 1,580,295 See accompanying notes to financial statements 33
BlackRock Funds STATEMENT OF NET ASSETS DELAWARE TAX-FREE INCOME PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Puerto Rico (Continued) Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Ser. 98A 5.38% 06/01/14 $ 50 $ 56,428 Puerto Rico Pub. Fin. Corp. RITES Rev., Ser. 98 06/01/09 5,000 6,362,350 Puerto Rico Pub. Fin. Corp. RITES Rev., Ser. 99 06/01/14 4,025 5,503,463 ------------ 20,467,798 ------------ TOTAL MUNICIPAL BONDS (Cost $77,852,477) 82,684,270 ------------ Number of Shares ----------- MONEY MARKET FUND -- 0.6% Wilmington Trust Tax-Free Money Market Fund (Cost $466,137) 466,137 466,137 ------------ TOTAL INVESTMENTS IN SECURITIES -- 101.4% (Cost $78,318,614(a)) 83,150,407 LIABILITIES IN EXCESS OF OTHER ASSETS -- (1.4)% (1,130,812) ------------ NET ASSETS -- 100.0% (Applicable to 4,713,842 Institutional shares, 1,452,268 Investor A shares, 757,670 Investor B shares and 1,338,977 Investor C shares outstanding) $ 82,019,595 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($46,781,758/4,713,842) $ 9.92 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($14,420,784/1,452,268) $ 9.93 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.93/0.960) $ 10.34 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($7,523,933/757,670) $ 9.93 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($13,293,120/1,338,977) $ 9.93 ======= - ---------- (a) Cost for Federal income tax purposes is $78,381,554. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 5,152,306 Gross unrealized depreciation (383,453) ----------- $ 4,768,853 =========== (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 8.1% of its net assets, with a current market value of $6,686,980 in securities restricted as to resale. See accompanying notes to financial statements 34
BlackRock Funds STATEMENT OF NET ASSETS KENTUCKY TAX-FREE INCOME PORTFOLIO As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS -- 98.0% Kentucky -- 64.2% Boone Cnty. Sch. Dist. Fin. Corp. Sch. Bldg. Rev., Ser. 00B 5.38% 08/01/20 $2,500 $ 2,671,050 Bowling Green Sch. Dist. Fin. Corp. Rev., Ser. 00 01/01/18- 5.75% 01/01/20 2,185 2,384,388 Breckinridge Cnty. Lease Prg. Tr. Rev., Ser 99 VRDN 2.74%(b) 12/01/29 820 820,000 Frankfort Elec. & Wtr. Plant Bd. Rev., Ser. 99 5.60% 12/01/19 1,045 1,138,183 Grayson Cnty. Sch. Dist. Fin. Corp. Sch. Bldg. Rev., Prerefunded Ser. 95B 5.95%(c) 01/01/08 830 845,222 Hardin Cnty. Sch. Dist. Fin. Corp. Sch. Bldg. Rev., Ser. 00 5.50% 02/01/16 1,675 1,841,026 Hopkins Cnty. GO, Detention Fac. Prj., Ser. 00 5.75% 02/01/10 1,800 1,996,434 Jefferson Cnty. Sch. Dist. Fin. Corp. Sch. Bldg. Rev., Ser. 99A 5.25% 01/01/14 2,000 2,148,600 Kenton Cnty. Arpt. Bd. Arpt. Rev., Cincinnati Northern Kentucky Prj., Ser. 97A AMT 5.95% 03/01/07 1,730 1,796,276 6.30% 03/01/15 1,000 1,056,940 Kentucky Econ. Dev. Fin. Auth. Hlth. Sys. Rev., Norton Healthcare, Inc. Prj., Ser. 00A 6.62% 10/01/28 1,750 1,923,600 Kentucky Hsg. Corp. Hsg. Rev., Ser. 96D 5.80% 07/01/13 2,790 2,790,000 Kentucky Hsg. Corp. Hsg. Rev., Ser. 01F AMT 5.45% 01/01/32 2,990 3,079,132 Kentucky St. Econ. Dev. Fin. Auth. Hosp. Fac. Rev., Ser 97C VRDN 2.73%(b) 01/01/22 1,550 1,550,000 Kentucky St. Property & Bldg. Comm. Rev., Prj. 65, Prerefunded Ser. 00 5.95%(c) 02/01/10 2,325 2,577,100 Kentucky St. Tpke. Auth. Econ. Dev. Rev., Revitalization Prj., Ser. 95 6.50% 07/01/08 3,000 3,261,570 Kentucky St. Tpke. Auth. Econ. Dev. Rev., Revitalization Prj., Ser. 01A 5.50% 07/01/15 1,000 1,131,150 Lexington-Fayette Urban Cnty. Govt. GO, Ser. 00A 5.75% 02/01/20 1,500 1,642,695 Lexington-Fayette Urban Cnty. Govt. Swr. Sys. Rev., Ser. 01A 07/01/20- 5.00% 07/01/21 3,775 3,998,707 Louisville & Jefferson Cnty. Met. Swr. & Drain Sys. Rev., Ser. 97A 6.25% 05/15/07 1,015 1,078,133 Louisville & Jefferson Cnty. Met. Swr. & Drain Sys. Rev., Ser. 99A 5.75% 05/15/33 3,750 4,096,800 Louisville & Jefferson Cnty. Regl. Arpt. Auth. Arpt. Sys. Rev., Ser. 01A AMT 5.75% 07/01/15 1,755 1,924,954 Louisville & Jefferson Cnty. Regl. Arpt. Auth. Spec. Fac. Rev., Ser. 99 AMT 5.50% 03/01/19 4,285 4,322,579 Louisville Wtrwks. Brd. Wtr. Sys. Rev., Louisville Wtr. Co. Prj., Ser. 00 5.25% 11/15/16 2,590 2,787,047 ----------- 52,861,586 ----------- Multi-State -- 9.6% Charter Mac Equity Issue Tr., Ser. 99 6.62%(d) 06/30/09 1,000 1,081,520 Charter Mac Equity Issue Tr., Ser. 00 7.60%(d) 11/30/10 4,000 4,568,240 MuniMae Tax-Exempt Bond Subs., LLC, Ser. 00 7.75%(d) 11/01/10 2,000 2,280,860 ----------- 7,930,620 ----------- Puerto Rico -- 24.2% Puerto Rico Cmwlth. Hwy. & Trans. Auth. Rev., Ser. 00C 6.00% 07/01/29 5,000 5,623,250 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00A 10/01/16 400 554,624 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00B 10/01/17 500 701,760 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00C 10/01/18 500 697,900 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00D 10/01/19 650 904,748 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00E 10/01/20 250 347,020 Puerto Rico Cmwlth. Infra. Fin. Auth. SO RITES, Ser. 00F 10/01/24 250 344,710 Puerto Rico Cmwlth. Infra. Fin. Auth. Spec. RITES PA-569 Rev., Ser. 99 07/01/07 1,335 1,547,145 Puerto Rico Cmwlth. Pub. Imp. GO, Ser. 04A 5.00% 07/01/29 2,000 2,067,080 Puerto Rico Elec. Pwr. Auth. Rev., Ser. 05RR 5.00% 07/01/35 1,500 1,580,295 Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Prerefunded Ser. 02E 5.50%(c) 02/01/12 3,740 4,142,873 See accompanying notes to financial statements 35
BlackRock Funds STATEMENT OF NET ASSETS KENTUCKY TAX-FREE INCOME PORTFOLIO (Concluded) As of September 30, 2005 Par Maturity (000) Value -------- --------- ------------ MUNICIPAL BONDS (Continued) Puerto Rico (Continued) Puerto Rico Pub. Fin. Corp. Cmwlth. Approp. Rev., Ser. 02E 5.50% 08/01/29 $1,260 $ 1,357,284 ----------- 19,868,689 ----------- TOTAL MUNICIPAL BONDS (Cost $73,924,435) 80,660,895 ----------- Number of Shares ---------- MONEY MARKET FUND -- 0.6% Wilmington Trust Tax-Free Money Market Fund (Cost $533,849) 533,849 533,849 ----------- TOTAL INVESTMENTS IN SECURITIES -- 98.6% (Cost $74,458,284(a)) 81,194,744 OTHER ASSETS IN EXCESS OF LIABILITIES -- 1.4% 1,133,956 ----------- NET ASSETS -- 100.0% (Applicable to 7,344,051 Institutional shares, 25,594 Service shares, 658,014 Investor A shares, 369,103 Investor B shares and 96,557 Investor C shares outstanding) $82,328,700 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($71,187,735/7,344,051) $ 9.69 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SERVICE SHARE ($248,240/25,594) $ 9.70 ======= NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR A SHARE ($6,377,095/658,014) $ 9.69 ======= MAXIMUM OFFERING PRICE PER INVESTOR A SHARE ($9.69/0.960) $ 10.09 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 4.5%) PER INVESTOR B SHARE ($3,577,736/369,103) $ 9.69 ======= NET ASSET VALUE, OFFERING AND REDEMPTION PRICE (subject to a maximum contingent deferred sales charge of 1.0%) PER INVESTOR C SHARE ($937,895/96,557) $ 9.71 ======= - ---------- (a) Cost for Federal income tax purposes is $74,486,001. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $ 6,708,743 Gross unrealized depreciation 0 ----------- $ 6,708,743 =========== (b) Rates shown are the rates as of September 30, 2005. (c) This bond is prerefunded. U.S. government securities, held in escrow, are used to pay interest on this security, as well as refund the bond in full at date indicated, typically at a premium to par. (d) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional investors. As of September 30, 2005, the Portfolio held 9.6% of its net assets, with a current market value of $7,930,620 in securities restricted as to resale. See accompanying notes to financial statements 36
BlackRock Funds Key to Investment Abbreviations AMT Alternative Minimum Tax COP Certificates of Participation GO General Obligations LOC Letter of Credit RITES Residual Interest Tax-Exempt Security SO Special Obligations VRDN Variable Rate Demand Notes 37
BlackRock Funds STATEMENTS OF OPERATIONS For the Year Ended September 30, 2005 Pennsylvania New Jersey UltraShort Tax-Free Tax-Free Tax-Free Municipal Income Income Income Portfolio Portfolio Portfolio Portfolio ---------- ----------- ------------ -------------- Investment income: Interest ................................ $ 934,986 $20,483,253 $ 35,835,630 $ 9,322,413 --------- ----------- ------------ ------------ Expenses: Investment advisory fee ................. 195,478 2,114,853 3,373,547 912,954 Administration fee ...................... 36,924 359,525 556,032 155,202 Administration fee - class specific ..... 28,437 501,684 966,594 264,791 Custodian fee ........................... 7,610 51,924 67,470 25,781 Transfer agent fee ...................... 6,040 59,132 101,832 41,186 Transfer agent fee - class specific ..... 3,737 62,942 121,470 32,871 Shareholder servicing fees - class specific ............................... 5 47,677 141,217 91,402 Distribution fees - class specific ...... 2 66,651 169,907 114,581 Legal and audit fees .................... 27,193 71,879 111,708 44,287 Printing fees ........................... 4,867 57,939 79,338 21,653 Registration fees ....................... 42,938 51,254 20,811 15,798 Trustees' fees .......................... 1,452 14,847 23,728 6,409 Other ................................... 1,396 45,097 52,659 21,019 --------- ----------- ------------ ------------ Total expenses ........................ 356,079 3,505,404 5,786,313 1,747,934 --------- ----------- ------------ ------------ Less investment advisory fees waived ......................... (172,253) (937,506) (444,733) (176,862) Less administration fees waived - class specific ...................... (17,834) (58,458) (892,940) (226,515) Less distribution fees waived - class specific ...................... (2) (8,837) (32,065) (6,614) Less transfer agent fees waived....... (1,112) (4,988) (9,692) (3,360) Less custodian fees waived - class specific ...................... (801) (2,819) (3,816) (1,339) --------- ----------- ------------ ------------ Net expenses .......................... 164,077 2,492,796 4,403,067 1,333,244 --------- ----------- ------------ ------------ Net investment income .................... 770,909 17,990,457 31,432,563 7,989,169 --------- ----------- ------------ ------------ Realized and unrealized gain (loss) on investments: Net realized gain (loss) from: Investment transactions ................ (26,601) 1,971,413 1,714,742 705,504 Futures contracts ...................... -- (3,376,314) (3,763,778) (1,027,406) --------- ----------- ------------ ------------ (26,601) (1,404,901) (2,049,036) (321,902) --------- ----------- ------------ ------------ Change in unrealized appreciation/ depreciation from: Investments ............................ (40,862) (3,796,578) (14,671,547) (2,731,779) Futures contracts ...................... -- 529,042 944,039 263,370 --------- ----------- ------------ ------------ (40,862) (3,267,536) (13,727,508) (2,468,409) --------- ----------- ------------ ------------ Net loss on investments .................. (67,463) (4,672,437) (15,776,544) (2,790,311) --------- ----------- ------------ ------------ Net increase in net assets resulting from operations .............................. $ 703,446 $13,318,020 $ 15,656,019 $ 5,198,858 ========= =========== ============ =========== Ohio Delaware Kentucky Tax-Free Tax-Free Tax-Free Income Income Income Portfolio Portfolio Portfolio ------------ ------------ ------------ Investment income: Interest ................................ $ 6,275,269 $ 4,382,652 $ 4,581,771 ----------- ----------- ----------- Expenses: Investment advisory fee ................. 619,640 487,503 467,708 Administration fee ...................... 105,339 75,341 72,282 Administration fee - class specific ..... 179,608 128,548 123,305 Custodian fee ........................... 17,963 15,666 13,616 Transfer agent fee ...................... 21,865 17,479 14,004 Transfer agent fee - class specific ..... 22,297 15,959 15,306 Shareholder servicing fees - class specific ............................... 59,021 88,970 27,936 Distribution fees - class specific ...... 128,514 180,175 45,270 Legal and audit fees .................... 33,839 34,919 31,432 Printing fees ........................... 16,535 12,219 9,991 Registration fees ....................... 13,303 12,578 14,864 Trustees' fees .......................... 4,321 3,136 3,012 Other ................................... 18,919 13,958 12,364 ----------- ----------- ----------- Total expenses ........................ 1,241,164 1,086,451 851,090 ----------- ----------- ----------- Less investment advisory fees waived ......................... (127,833) (66,090) (57,002) Less administration fees waived - class specific ...................... (146,100) (76,329) (107,327) Less distribution fees waived - class specific ...................... (6,628) (13,851) (5,667) Less transfer agent fees waived....... (1,959) (1,472) (1,245) Less custodian fees waived - class specific ...................... (1,053) (811) (997) ----------- ----------- ----------- Net expenses .......................... 957,591 927,898 678,852 ----------- ----------- ----------- Net investment income .................... 5,317,678 3,454,754 3,902,919 ----------- ----------- ----------- Realized and unrealized gain (loss) on investments: Net realized gain (loss) from: Investment transactions ................ 2,678 158,990 725,565 Futures contracts ...................... (625,139) (432,035) (526,131) ----------- ----------- ----------- (622,461) (273,045) 199,434 ----------- ----------- ----------- Change in unrealized appreciation/ depreciation from: Investments ............................ (1,987,509) (1,637,176) (1,486,391) Futures contracts ...................... 139,061 103,289 142,609 ----------- ----------- ----------- (1,848,448) (1,533,887) (1,343,782) ----------- ----------- ----------- Net loss on investments .................. (2,470,909) (1,806,932) (1,144,348) ----------- ----------- ----------- Net increase in net assets resulting from operations .............................. $ 2,846,769 $ 1,647,822 $ 2,758,571 =========== =========== =========== See accompanying notes to financial statements. 38
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BlackRock Funds STATEMENTS OF CHANGES IN NET ASSETS UltraShort Municipal Tax-Free Portfolio Income Portfolio ----------------------------------- ------------------------------------ For the For the Period 03/03/04 /1/ For the For the Year Ended Through Year Ended Year Ended 9/30/05 9/30/04 9/30/05 9/30/04 --------------- ------------------- ----------------- ----------------- Increase (decrease) in net assets: Operations: Net investment income ................................... $ 770,909 $ 228,525 $ 17,990,457 $ 18,245,677 Net realized gain (loss) on investments, futures contracts .............................................. (26,601) (34,465) (1,404,901) (5,920,604) Net unrealized appreciation/depreciation on investments, futures contracts ......................... (40,862) (66,342) (3,267,536) 875,457 ------------ ------------ ------------- ------------- Net increase in net assets resulting from operations..... 703,446 127,718 13,318,020 13,200,530 ------------ ------------ ------------- ------------- Distributions to shareholders from: Net investment income: BlackRock Class ......................................... (568,745) (179,446) (4,340,396) (3,389,118) Institutional Class ..................................... (202,128) (49,079) (12,460,254) (14,335,425) Service Class ........................................... -- -- (96,764) (117,019) Investor A Class ........................................ (36) -- (341,312) (315,503) Investor B Class ........................................ -- -- (163,810) (210,750) Investor C Class ........................................ -- -- (76,008) (107,913) ------------ ------------ ------------- ------------- Total distributions from net investment income .......... (770,909) (228,525) (17,478,544) (18,475,728) ------------ ------------ ------------- ------------- Capital share transactions (Note E) ....................... (3,250,004) 46,304,112 (23,943,492) 77,137,177 ------------ ------------ ------------- ------------- Total increase (decrease) in net assets ................. (3,317,467) 46,203,305 (28,104,016) 71,861,979 Net assets: Beginning of period ..................................... 46,203,305 -- 427,811,036 355,949,057 ------------ ------------ ------------- ------------- End of period ........................................... $ 42,885,838 $ 46,203,305 $ 399,707,020 $ 427,811,036 ============ ============ ============= ============= End of period undistributed net investment income (distributions in excess of net investment income) ................................................ $ -- $ -- $ 900,332 $ 411,169 Pennsylvania Tax-Free Income Portfolio ---------------------------------- For the For the Year Ended Year Ended 9/30/05 9/30/04 ----------------- ---------------- Increase (decrease) in net assets: Operations: Net investment income ................................... $ 31,432,563 $ 35,471,728 Net realized gain (loss) on investments, futures contracts .............................................. (2,049,036) (10,787,108) Net unrealized appreciation/depreciation on investments, futures contracts ......................... (13,727,508) (4,661,640) ------------- -------------- Net increase in net assets resulting from operations..... 15,656,019 20,022,980 ------------- -------------- Distributions to shareholders from: Net investment income: BlackRock Class ......................................... -- -- Institutional Class ..................................... (30,597,699) (33,207,760) Service Class ........................................... (240,170) (265,934) Investor A Class ........................................ (1,460,868) (1,523,244) Investor B Class ........................................ (633,056) (805,047) Investor C Class ........................................ (68,761) (74,099) ------------- -------------- Total distributions from net investment income .......... (33,000,554) (35,876,084) ------------- -------------- Capital share transactions (Note E) ....................... (12,059,182) (115,369,997) ------------- -------------- Total increase (decrease) in net assets ................. (29,403,717) (131,223,101) Net assets: Beginning of period ..................................... 689,736,473 820,959,574 ------------- -------------- End of period ........................................... $ 660,332,756 $ 689,736,473 ============= ============== End of period undistributed net investment income (distributions in excess of net investment income) ................................................ $ 188,150 $ 1,789,206 - ---------- /1/ Commencement of operations. See accompanying notes to financial statements 40
BlackRock Funds New Jersey Tax-Free Ohio Tax-Free Income Portfolio Income Portfolio ---------------------------- ---------------------------- For the For the For the For the Year Ended Year Ended Year Ended Year Ended 9/30/05 9/30/04 9/30/05 9/30/04 ------------ ------------ ------------ ------------ Increase (decrease) in net assets: Operations: Net investment income ................................... $ 7,989,169 $ 7,867,767 $ 5,317,678 $ 5,683,096 Net realized gain (loss) on investments, futures contracts .............................................. (321,902) (886,203) (622,461) (969,457) Net unrealized appreciation/depreciation on investments, futures contracts ......................... (2,468,409) (686,024) (1,848,448) 598,508 ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations..... 5,198,858 6,295,540 2,846,769 5,312,147 ------------ ------------ ------------ ------------ Distributions to shareholders from: Net investment income: BlackRock Class ......................................... -- -- -- -- Institutional Class ..................................... (6,311,762) (6,863,373) (4,763,333) (4,470,836) Service Class ........................................... (628,369) (744,479) (33,600) (22,292) Investor A Class ........................................ (259,210) (261,877) (287,220) (227,306) Investor B Class ........................................ (362,564) (446,053) (359,459) (360,029) Investor C Class ........................................ (94,449) (94,055) (225,923) (192,153) ------------ ------------ ------------ ------------ Total distributions from net investment income .......... (7,656,354) (8,409,837) (5,669,535) (5,272,616) ------------ ------------ ------------ ------------ Capital share transactions (Note E) ....................... (13,800,815) 29,571,028 11,255,221 (3,878,630) ------------ ------------ ------------ ------------ Total increase (decrease) in net assets ................. (16,258,311) 27,456,731 8,432,455 (3,839,099) Net assets: Beginning of period ..................................... 188,986,277 161,529,546 118,164,270 122,003,369 ------------ ------------ ------------ ------------ End of period ........................................... $172,727,966 $188,986,277 $126,596,725 $118,164,270 ============ ============ ============ ============ End of period undistributed net investment income (distributions in excess of net investment income) ................................................ $ (226,463) $ (536,553) $ (142,938) $ 258,189 Delaware Tax-Free Kentucky Tax-Free Income Portfolio Income Portfolio ---------------------------- ----------------------------- For the For the For the For the Year Ended Year Ended Year Ended Year Ended 9/30/05 9/30/04 9/30/05 9/30/04 ------------ ------------ ------------ ------------ Increase (decrease) in net assets: Operations: Net investment income ................................... $ 3,454,754 $ 3,808,807 $ 3,902,919 $ 5,002,658 Net realized gain (loss) on investments, futures contracts .............................................. (273,045) (679,225) 199,434 (351,331) Net unrealized appreciation/depreciation on investments, futures contracts ......................... (1,533,887) (63,970) (1,343,782) (759,112) ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations..... 1,647,822 3,065,612 2,758,571 3,892,215 ------------ ------------ ------------ ------------ Distributions to shareholders from: Net investment income: BlackRock Class ......................................... -- -- -- -- Institutional Class ..................................... (2,228,062) (2,658,162) (2,743,762) (4,386,451) Service Class ........................................... -- -- (8,278) (6,946) Investor A Class ........................................ (530,720) (477,990) (187,856) (207,211) Investor B Class ........................................ (252,824) (312,260) (100,374) (124,106) Investor C Class ........................................ (431,096) (548,634) (35,193) (41,249) ------------ ------------ ------------ ------------ Total distributions from net investment income .......... (3,442,702) (3,997,046) (3,075,463) (4,765,963) ------------ ------------ ------------ ------------ Capital share transactions (Note E) ....................... (6,637,756) 5,180,305 (6,928,937) (34,434,107) ------------ ------------ ------------ ------------ Total increase (decrease) in net assets ................. (8,432,636) 4,248,871 (7,245,829) (35,307,855) Net assets: Beginning of period ..................................... 90,452,231 86,203,360 89,574,529 124,882,384 ------------ ------------ ------------ ------------ End of period ........................................... $ 82,019,595 $ 90,452,231 $ 82,328,700 $ 89,574,529 ============ ============ ============ ============ End of period undistributed net investment income (distributions in excess of net investment income) ................................................ $ (179,327) $ (190,807) $ 577,813 $ (240,247) 41
BlackRock Funds FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain Net asset (loss) on Distributions asset value Net investments from net value beginning investment (both realized investment end of of period income and unrealized) income period ----------- ------------ ----------------- --------------- ----------- ------------------------------ UltraShort Municipal Portfolio ------------------------------ BlackRock Class 9/30/05 $ 9.95 $ 0.18/7/ $ (0.02) $ (0.18) $ 9.93 3/03/04 /1/ through 9/30/04 10.00 0.07/7/ (0.05) (0.07) 9.95 Institutional Class 9/30/05 $ 9.94 $ 0.17/7/ $ (0.02) $ (0.17) $ 9.92 3/19/04 /1/ through 9/30/04 10.00 0.05/7/ (0.06) (0.05) 9.94 Service Class 9/30/05 $ 9.94 $ 0.26/7/ $ (0.14) $ --/8/ $ 10.06 3/19/04 /1/ through 9/30/04 10.00 0.03/7/ (0.07) (0.02) 9.94 Investor A Class 9/30/05 $ 9.98 $ 0.17/7/ $ (0.05) $ (0.01) $ 10.09 3/19/04 /1/ through 9/30/04 10.00 0.07/7/ (0.07) (0.02) 9.98 ------------------------- Tax-Free Income Portfolio ------------------------- BlackRock Class 9/30/05 $ 11.11 $ 0.49/7/ $ (0.17) $ (0.44) $ 10.99 12/22/03 /1/ through 9/30/04 11.22 0.37/7/ (0.10) (0.38) 11.11 Institutional Class 9/30/05 $ 11.11 $ 0.47/7/ $ (0.12) $ (0.46) $ 11.00 9/30/04 11.22 0.48/7/ (0.10) (0.49) 11.11 9/30/03 /10/ 11.38 0.54 (0.17) (0.53) 11.22 9/30/02 /10/ 11.38 0.57 (0.01) (0.56) 11.38 9/30/01 /10/ 10.92 0.57 0.48 (0.59) 11.38 Service Class 9/30/05 $ 11.10 $ 0.44/7/ $ (0.12) $ (0.43) $ 10.99 9/30/04 11.21 0.45/7/ (0.10) (0.46) 11.10 9/30/03 /10/ 11.38 0.49 (0.16) (0.50) 11.21 9/30/02 /10/ 11.38 0.55 (0.02) (0.53) 11.38 9/30/01 /10/ 10.92 0.54 0.47 (0.55) 11.38 Investor A Class 9/30/05 $ 11.12 $ 0.44/7/ $ (0.13) $ (0.43) $ 11.00 9/30/04 11.22 0.44/7/ (0.10) (0.44) 11.12 9/30/03 /10/ 11.38 0.48 (0.16) (0.48) 11.22 9/30/02 /10/ 11.38 0.52 (0.01) (0.51) 11.38 9/30/01 /10 10.92 0.52 0.48 (0.54) 11.38 Investor B Class 9/30/05 $ 11.11 $ 0.36/7/ $ (0.12) $ (0.35) $ 11.00 9/30/04 11.22 0.36/7/ (0.11) (0.36) 11.11 9/30/03 /10/ 11.38 0.40 (0.16) (0.40) 11.22 9/30/02 /10/ 11.38 0.43 (0.01) (0.42) 11.38 9/30/01 /10/ 10.92 0.42 0.49 (0.45) 11.38 Investor C Class 9/30/05 $ 11.12 $ 0.36/7/ $ (0.13) $ (0.35) $ 11.00 9/30/04 11.21 0.35/7/ (0.08) (0.36) 11.12 9/30/03 /10/ 11.38 0.41 (0.18) (0.40) 11.21 9/30/02 /10/ 11.38 0.43 (0.01) (0.42) 11.38 9/30/01 /10/ 10.93 0.41 0.49 (0.45) 11.38 See accompanying notes to financial statements. 42
BlackRock Funds Net Ratio of assets Ratio of net total expenses to Ratio of net end of expenses to average net assets investment income Total period average net (excluding to average net return (000) assets waivers) assets ---------------- ---------- -------------- -------------------- ------------------- ------------------------------ UltraShort Municipal Portfolio ------------------------------ BlackRock Class 9/30/05 1.64% $ 32,439 0.35% 0.79% 1.81% 3/03/04 /1/ through 9/30/04 0.16 32,027 0.35/2/ 0.92/2/ 1.14/2/ Institutional Class 9/30/05 1.54% $ 10,446 0.45% 0.91% 1.68% 3/19/04 /1/ through 9/30/04 (0.09) 14,176 0.45/2/ 1.04/2/ 0.96/2/ Service Class 9/30/05 1.23% $ --/11/ 0.68% 1.30% 2.59% 3/19/04 /1/ through 9/30/04 (0.34) -- 0.75/2/ 1.33/2/ 0.66/2/ Investor A Class 9/30/05 1.25%/3/ $ 1 0.71% 1.24% 1.74% 3/19/04 /1/ through 9/30/04 0.04/3,9/ -- 0.80/2/ 1.38/2/ 0.61/2/ ------------------------- Tax-Free Income Portfolio ------------------------- BlackRock Class 9/30/05 3.23% $ 85,552 0.45% 0.71% 4.39% 12/22/03 /1/ through 9/30/04 2.46/9/ 100,489 0.452 0.69/2/ 4.34/2/ Institutional Class 9/30/05 3.17% $295,737 0.60% 0.83% 4.24% 9/30/04 3.46 308,122 0.60 0.82 4.34 9/30/03 /10/ 3.40 334,685 0.60 0.83 4.80 9/30/02 /10/ 5.08 360,392 0.60 0.81 5.10 9/30/01 /10/ 9.81 351,551 0.60 0.81 5.06 Service Class 9/30/05 2.91% $ 2,312 0.86% 1.08% 3.99% 9/30/04 3.16 2,702 0.86 1.08 4.09 9/30/03 /10/ 2.99 2,971 0.90 1.13 4.46 9/30/02 /10/ 4.77 3,103 0.90 1.11 4.81 9/30/01 /10/ 9.49 3,651 0.90 1.11 4.77 Investor A Class 9/30/05 2.81%/3/ $ 8,965 0.86% 1.18% 3.99% 9/30/04 3.10/3/ 7,711 1.00 1.31 3.95 9/30/03 /10/ 2.91/3/ 8,573 1.07 1.30 4.31 9/30/02 /10/ 4.59/3/ 8,179 1.07 1.29 4.62 9/30/01 /10 9.30/3/ 7,309 1.07 1.28 4.61 Investor B Class 9/30/05 2.14%/4/ $ 4,839 1.61% 1.84% 3.24% 9/30/04 2.24/4/ 5,869 1.75 1.97 3.21 9/30/03 /10/ 2.14/4/ 7,161 1.82 2.05 3.57 9/30/02 /10/ 3.81/4/ 6,211 1.82 2.03 3.87 9/30/01 /10/ 8.49/4/ 4,884 1.81 2.02 3.82 Investor C Class 9/30/05 2.05%/4/ $ 2,303 1.62% 1.85% 3.26% 9/30/04 2.33/4/ 2,918 1.73 1.95 3.17 9/30/03 /10/ 2.05/4/ 2,559 1.82 2.05 3.59 9/30/02 /10/ 3.81/4/ 2,857 1.82 2.03 3.89 9/30/01 /10/ 8.39/4/ 2,604 1.81 2.02 3.80 Ratio of net investment income to average net assets Portfolio (excluding turnover waivers) rate ------------------ ----------- ------------------------------ UltraShort Municipal Portfolio ------------------------------ BlackRock Class 9/30/05 1.37% 89% 3/03/04 /1/ through 9/30/04 0.57/2/ 14 Institutional Class 9/30/05 1.22% 89% 3/19/04 /1/ through 9/30/04 0.37/2/ 14 Service Class 9/30/05 1.97% 89% 3/19/04 /1/ through 9/30/04 0.08/2/ 14 Investor A Class 9/30/05 1.21% 89% 3/19/04 /1/ through 9/30/04 0.03/2/ 14 ------------------------- Tax-Free Income Portfolio ------------------------- BlackRock Class 9/30/05 4.13% 91% 12/22/03 /1/ through 9/30/04 4.10/2/ 73 Institutional Class 9/30/05 4.01% 91% 9/30/04 4.12 73 9/30/03 /10/ 4.57 76 9/30/02 /10/ 4.89 47 9/30/01 /10/ 4.85 38 Service Class 9/30/05 3.77% 91% 9/30/04 3.87 73 9/30/03 /10/ 4.23 76 9/30/02 /10/ 4.60 47 9/30/01 /10/ 4.55 38 Investor A Class 9/30/05 3.67% 91% 9/30/04 3.64 73 9/30/03 /10/ 4.08 76 9/30/02 /10/ 4.41 47 9/30/01 /10 4.39 38 Investor B Class 9/30/05 3.01% 91% 9/30/04 2.99 73 9/30/03 /10/ 3.34 76 9/30/02 /10/ 3.66 47 9/30/01 /10/ 3.60 38 Investor C Class 9/30/05 3.03% 91% 9/30/04 2.96 73 9/30/03 /10/ 3.36 76 9/30/02 /10/ 3.68 47 9/30/01 /10/ 3.59 38 43
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain Net asset (loss) on Distributions asset value Net investments from net value beginning investment (both realized investment end of of period income and unrealized) income period ------------------------------------------------------------------------------- - -------------------------------------- Pennsylvania Tax-Free Income Portfolio - -------------------------------------- Institutional Class 9/30/05 $10.68 $0.50/7/ $(0.25) $(0.52) $10.41 9/30/04 10.90 0.51/7/ (0.21) (0.52) 10.68 9/30/03 /10/ 11.06 0.53 (0.19) (0.50) 10.90 9/30/02 /10/ 10.89 0.53 0.16 (0.52) 11.06 9/30/01 /10/ 10.56 0.55 0.34 (0.56) 10.89 Service Class 9/30/05 $10.67 $0.47/7/ $(0.25) $(0.49) $10.40 9/30/04 10.89 0.48/7/ (0.21) (0.49) 10.67 9/30/03 /10/ 11.05 0.49 (0.18) (0.47) 10.89 9/30/02 /10/ 10.88 0.50 0.16 (0.49) 11.05 9/30/01 /10/ 10.55 0.52 0.34 (0.53) 10.88 Investor A Class 9/30/05 $10.68 $0.46/7/ $(0.25) $(0.48) $10.41 9/30/04 10.89 0.46/7/ (0.20) (0.47) 10.68 9/30/03 /10/ 11.06 0.48 (0.20) (0.45) 10.89 9/30/02 /10/ 10.89 0.48 0.16 (0.47) 11.06 9/30/01 /10/ 10.56 0.49 0.35 (0.51) 10.89 Investor B Class 9/30/05 $10.61 $0.38/7/ $(0.25) $(0.40) $10.34 9/30/04 10.82 0.39/7/ (0.21) (0.39) 10.61 9/30/03 /10/ 10.98 0.40 (0.19) (0.37) 10.82 9/30/02 /10/ 10.81 0.40 0.16 (0.39) 10.98 9/30/01 /10/ 10.48 0.42 0.34 (0.43) 10.81 Investor C Class 9/30/05 $10.64 $0.38/7/ $(0.25) $(0.40) $10.37 9/30/04 10.85 0.39/7/ (0.21) (0.39) 10.64 9/30/03 /10/ 11.01 0.39 (0.18) (0.37) 10.85 9/30/02 /10/ 10.84 0.41 0.15 (0.39) 11.01 9/30/01 /10/ 10.51 0.41 0.35 (0.43) 10.84 - ------------------------------------ New Jersey Tax-Free Income Portfolio - ------------------------------------ Institutional Class 9/30/05 $11.70 $0.53/7/ $(0.18) $(0.51) $11.54 9/30/04 11.80 0.53/7/ (0.06) (0.57) 11.70 9/30/03 /10/ 12.10 0.62 (0.29) (0.63) 11.80 9/30/02 /10/ 11.83 0.61 0.28 (0.62) 12.10 9/30/01 /10/ 11.31 0.60 0.52 (0.60) 11.83 Service Class 9/30/05 $11.70 $0.49/7/ $(0.18) $(0.47) $11.54 9/30/04 11.80 0.50/7/ (0.07) (0.53) 11.70 9/30/03 /10/ 12.10 0.58 (0.29) (0.59) 11.80 9/30/02 /10/ 11.83 0.58 0.28 (0.59) 12.10 9/30/01 /10/ 11.31 0.57 0.51 (0.56) 11.83 See accompanying notes to financial statements. 44
BlackRock Funds Net Ratio of assets Ratio of net total expenses to Ratio of net end of expenses to average net assets investment income Total period average net (excluding to average net return (000) assets waivers) assets -------------------------------------------------------------------------------------------- - -------------------------------------- Pennsylvania Tax-Free Income Portfolio - -------------------------------------- Institutional Class 9/30/05 2.41% $610,550 0.60% 0.81% 4.71% 9/30/04 2.82 628,714 0.60 0.80 4.76 9/30/03 /10/ 3.16 752,199 0.60 0.80 4.80 9/30/02 /10/ 6.53 890,070 0.60 0.79 4.90 9/30/01 /10/ 8.65 903,225 0.60 0.79 5.10 Service Class 9/30/05 2.10% $ 4,727 0.90% 1.11% 4.41% 9/30/04 2.51 5,733 0.90 1.10 4.48 9/30/03 /10/ 2.86 6,118 0.90 1.11 4.51 9/30/02 /10/ 6.22 6,005 0.90 1.09 4.62 9/30/01 /10/ 8.33 6,911 0.90 1.09 4.81 Investor A Class 9/30/05 2.00%/3/ $ 29,875 1.00% 1.17% 4.32% 9/30/04 2.44/3/ 33,769 1.05 1.29 4.32 9/30/03 /10/ 2.59/3/ 35,874 1.08 1.28 4.34 9/30/02 /10/ 6.04/3/ 37,344 1.08 1.27 4.44 9/30/01 /10/ 8.14/3/ 39,306 1.07 1.26 4.62 Investor B Class 9/30/05 1.25%/4/ $ 13,408 1.76% 1.82% 3.60% 9/30/04 1.69/4/ 19,604 1.75 1.89 3.66 9/30/03 /10/ 1.93/4/ 24,795 1.82 2.03 3.63 9/30/02 /10/ 5.28/4/ 28,346 1.82 2.02 3.72 9/30/01 /10/ 7.40/4/ 26,062 1.82 2.01 3.90 Investor C Class 9/30/05 1.24%/4/ $ 1,773 1.75% 1.82% 3.59% 9/30/04 1.69/4/ 1,916 1.80 1.94 3.60 9/30/03 /10/ 1.92/4/ 1,974 1.82 2.03 3.61 9/30/02 /10/ 5.27/4/ 1,615 1.81 2.00 3.69 9/30/01 /10/ 7.38/4/ 875 1.81 2.00 3.84 - ------------------------------------ New Jersey Tax-Free Income Portfolio - ------------------------------------ Institutional Class 9/30/05 2.99% $137,256 0.60% 0.84% 4.51% 9/30/04 4.10 151,808 0.60 0.83 4.54 9/30/03 /10/ 2.80 124,713 0.60 0.83 5.17 9/30/02 /10/ 7.82 128,553 0.60 0.82 5.20 9/30/01 /10/ 10.07 129,635 0.60 0.82 5.12 Service Class 9/30/05 2.68% $ 14,839 0.90% 1.09% 4.21% 9/30/04 3.79 15,940 0.90 1.11 4.27 9/30/03 /10/ 2.50 16,534 0.90 1.13 4.87 9/30/02 /10/ 7.49 17,506 0.90 1.12 4.89 9/30/01 /10/ 9.75 16,530 0.90 1.12 4.82 Ratio of net investment income to average net assets Portfolio (excluding turnover waivers) rate ------------------------------- - -------------------------------------- Pennsylvania Tax-Free Income Portfolio - -------------------------------------- Institutional Class 9/30/05 4.50% 13% 9/30/04 4.56 2 9/30/03 /10/ 4.60 3 9/30/02 /10/ 4.71 22 9/30/01 /10/ 4.91 13 Service Class 9/30/05 4.20% 13% 9/30/04 4.28 2 9/30/03 /10/ 4.30 3 9/30/02 /10/ 4.43 22 9/30/01 /10/ 4.62 13 Investor A Class 9/30/05 4.15% 13% 9/30/04 4.09 2 9/30/03 /10/ 4.13 3 9/30/02 /10/ 4.25 22 9/30/01 /10/ 4.43 13 Investor B Class 9/30/05 3.54% 13% 9/30/04 3.52 2 9/30/03 /10/ 3.42 3 9/30/02 /10/ 3.53 22 9/30/01 /10/ 3.72 13 Investor C Class 9/30/05 3.52% 13% 9/30/04 3.46 2 9/30/03 /10/ 3.40 3 9/30/02 /10/ 3.50 22 9/30/01 /10/ 3.66 13 - ------------------------------------ New Jersey Tax-Free Income Portfolio - ------------------------------------ Institutional Class 9/30/05 4.27% 17% 9/30/04 4.31 15 9/30/03 /10/ 4.94 22 9/30/02 /10/ 4.98 14 9/30/01 /10/ 4.90 28 Service Class 9/30/05 4.02% 17% 9/30/04 4.06 15 9/30/03 /10/ 4.64 22 9/30/02 /10/ 4.67 14 9/30/01 /10/ 4.60 28 45
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain Net asset (loss) on Distributions asset value Net investments from net value beginning investment (both realized investment end of of period income and unrealized) income period ------------------------------------------------------------------------------- - ----------------------------------------------- New Jersey Tax-Free Income Portfolio (Continued) - ----------------------------------------------- Investor A Class 9/30/05 $11.70 $0.48/7/ $(0.18) $(0.46) $11.54 9/30/04 11.80 0.48/7/ (0.06) (0.52) 11.70 9/30/03 /10/ 12.10 0.56 (0.29) (0.57) 11.80 9/30/02 /10/ 11.83 0.55 0.29 (0.57) 12.10 9/30/01 /10/ 11.31 0.53 0.53 (0.54) 11.83 Investor B Class 9/30/05 $11.70 $0.39/7/ $(0.18) $(0.37) $11.54 9/30/04 11.80 0.39/7/ (0.06) (0.43) 11.70 9/30/03 /10/ 12.10 0.47 (0.29) (0.48) 11.80 9/30/02 /10/ 11.83 0.46 0.29 (0.48) 12.10 9/30/01 /10/ 11.31 0.43 0.54 (0.45) 11.83 Investor C Class 9/30/05 $11.72 $0.40/7/ $(0.19) $(0.37) $11.56 9/30/04 11.82 0.39/7/ (0.06) (0.43) 11.72 9/30/03 /10/ 12.13 0.46 (0.29) (0.48) 11.82 9/30/02 /5,10/ 11.85 0.45 0.31 (0.48) 12.13 2/6/01 /5,10/ through 9/30/01 11.70 0.29 0.15 (0.29) 11.85 - ------------------------------ Ohio Tax-Free Income Portfolio - ------------------------------ Institutional Class 9/30/05 $10.88 $0.48/7/ $(0.21) $(0.51) $10.64 9/30/04 10.87 0.54/7/ (0.03) (0.50) 10.88 9/30/03 /10/ 11.09 0.52 (0.22) (0.52) 10.87 9/30/02 /10/ 10.80 0.52 0.35 (0.58) 11.09 9/30/01 /10/ 10.22 0.57 0.57 (0.56) 10.80 Service Class 9/30/05 $10.89 $0.45/7/ $(0.21) $(0.48) $10.65 9/30/04 10.87 0.51/7/ (0.02) (0.47) 10.89 9/30/03 /10/ 11.09 0.52 (0.26) (0.48) 10.87 9/30/02 /10/ 10.80 0.48 0.36 (0.55) 11.09 9/30/01 /10/ 10.22 0.54 0.57 (0.53) 10.80 Investor A Class 9/30/05 $10.88 $0.44/7/ $(0.21) $(0.47) $10.64 9/30/04 10.87 0.49/7/ (0.03) (0.45) 10.88 9/30/03 /10/ 11.09 0.46 (0.21) (0.47) 10.87 9/30/02 /10/ 10.80 0.46 0.36 (0.53) 11.09 9/30/01 /10/ 10.22 0.52 0.57 (0.51) 10.80 Investor B Class 9/30/05 $10.88 $0.36/7/ $(0.21) $(0.39) $10.64 9/30/04 10.87 0.41/7/ (0.03) (0.37) 10.88 9/30/03 /10/ 11.09 0.39 (0.23) (0.38) 10.87 9/30/02 /10/ 10.80 0.39 0.35 (0.45) 11.09 9/30/01 /10/ 10.22 0.42 0.59 (0.43) 10.80 Investor C Class 9/30/05 $10.89 $0.36/7/ $ (0.21) $(0.39) $10.65 9/30/04 10.87 0.41/7/ (0.02) (0.37) 10.89 9/30/03 /10/ 11.09 0.40 (0.24) (0.38) 10.87 9/30/02 /10/ 10.80 0.39 0.35 (0.45) 11.09 9/30/01 10.22 0.41 0.60 (0.43) 10.80 See accompanying notes to financial statements. 46
BlackRock Funds Net Ratio of assets Ratio of net total expenses to Ratio of net end of expenses to average net assets investment income Total period average net (excluding to average net return (000) assets waivers) assets ----------------------------------------------------------------------------------------------- - ----------------------------------------------- New Jersey Tax-Free Income Portfolio (Continued) - ----------------------------------------------- Investor A Class 9/30/05 2.58%/3/ $ 7,729 0.99% 1.19% 4.11% 9/30/04 3.63/3/ 6,193 1.05 1.31 4.12 9/30/03 /10/ 2.32/3/ 5,995 1.08 1.30 4.70 9/30/02 /10/ 7.31/3/ 5,812 1.07 1.29 4.66 9/30/01 /10/ 9.56/3/ 3,207 1.07 1.29 4.64 Investor B Class 9/30/05 1.81%/4/ $ 10,891 1.75% 1.85% 3.36% 9/30/04 2.85/4/ 11,696 1.80 1.97 3.37 9/30/03 /10/ 1.55/4/ 12,411 1.82 2.04 3.93 9/30/02 /10/ 6.52/4/ 9,066 1.81 2.03 3.92 9/30/01 /10/ 8.75/4/ 5,707 1.79 2.01 3.85 Investor C Class 9/30/05 1.81%/4/ $ 2,013 1.76% 1.86% 3.37% 9/30/04 2.85/4/ 3,350 1.78 1.94 3.31 9/30/03 /10/ 1.47/4/ 1,877 1.82 2.04 3.91 9/30/02 /5,10/ 6.59/4/ 1,106 1.80 2.01 3.75 2/6/01 /5,10/ through 9/30/01 3.80/4,9/ 157 1.78/2/ 2.00/2/ 3.82/2/ - ------------------------------ Ohio Tax-Free Income Portfolio - ------------------------------ Institutional Class 9/30/05 2.55% $100,501 0.60% 0.85% 4.47% 9/30/04 4.82 96,730 0.60 0.84 4.97 9/30/03 /10/ 2.79 97,589 0.60 0.83 4.78 9/30/02 /10/ 8.40 96,974 0.60 0.81 4.93 9/30/01 /10/ 11.41 92,047 0.60 0.84 5.42 Service Class 9/30/05 2.24% $ 736 0.90% 1.10% 4.16% 9/30/04 4.60 700 0.81 1.02 4.74 9/30/03 /10/ 2.48 727 0.90 1.12 4.58 9/30/02 /10/ 8.08 205 0.90 1.12 4.59 9/30/01 /10/ 11.08 40 0.89 1.13 5.13 Investor A Class 9/30/05 2.14%/3/ $ 8,873 0.99% 1.20% 4.05% 9/30/04 4.34/3/ 5,043 1.07 1.34 4.56 9/30/03 /10/ 2.31/3/ 7,494 1.08 1.31 4.32 9/30/02 /10/ 7.90/3/ 15,587 1.06 1.28 4.37 9/30/01 /10/ 10.89/3/ 3,674 1.07 1.31 4.97 Investor B Class 9/30/05 1.38%/4/ $ 9,424 1.75% 1.85% 3.32% 9/30/04 3.57/4/ 10,280 1.79 1.97 3.78 9/30/03 /10/ 1.54/4/ 10,453 1.82 2.05 3.55 9/30/02 /10/ 7.10/4/ 8,740 1.81 2.03 3.65 9/30/01 /10/ 10.08/4/ 4,277 1.80 2.04 4.20 Investor C Class 9/30/05 1.38%/4/ $ 7,063 1.74% 1.84% 3.30% 9/30/04 3.66/4/ 5,411 1.77 1.95 3.80 9/30/03 /10/ 1.54/4/ 5,740 1.82 2.05 3.55 9/30/02 /10/ 7.09/4/ 3,632 1.80 2.01 3.60 9/30/01 10.08/4/ 1,496 1.80 2.04 4.05 Ratio of net investment income to average net assets Portfolio (excluding turnover waivers) rate --------------------------------- - ----------------------------------------------- New Jersey Tax-Free Income Portfolio (Continued) - ----------------------------------------------- Investor A Class 9/30/05 3.91% 17% 9/30/04 3.86 15 9/30/03 /10/ 4.48 22 9/30/02 /10/ 4.44 14 9/30/01 /10/ 4.42 28 Investor B Class 9/30/05 3.26% 17% 9/30/04 3.20 15 9/30/03 /10/ 3.71 22 9/30/02 /10/ 3.71 14 9/30/01 /10/ 3.64 28 Investor C Class 9/30/05 3.27% 17% 9/30/04 3.15 15 9/30/03 /10/ 3.69 22 9/30/02 /5,10/ 3.54 14 2/6/01 /5,10/ through 9/30/01 3.62/2/ 28 - ------------------------------ Ohio Tax-Free Income Portfolio - ------------------------------ Institutional Class 9/30/05 4.22% 10% 9/30/04 4.73 6 9/30/03 /10/ 4.55 18 9/30/02 /10/ 4.71 28 9/30/01 /10/ 5.18 19 Service Class 9/30/05 3.96% 10% 9/30/04 4.52 6 9/30/03 /10/ 4.36 18 9/30/02 /10/ 4.37 28 9/30/01 /10/ 4.89 19 Investor A Class 9/30/05 3.84% 10% 9/30/04 4.29 6 9/30/03 /10/ 4.09 18 9/30/02 /10/ 4.16 28 9/30/01 /10/ 4.73 19 Investor B Class 9/30/05 3.22% 10% 9/30/04 3.60 6 9/30/03 /10/ 3.32 18 9/30/02 /10/ 3.44 28 9/30/01 /10/ 3.97 19 Investor C Class 9/30/05 3.20% 10% 9/30/04 3.62 6 9/30/03 /10/ 3.32 18 9/30/02 /10/ 3.39 28 9/30/01 3.82 19 47
BlackRock Funds FINANCIAL HIGHLIGHTS (Continued) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain Net asset (loss) on Distributions asset value Net investments from net value beginning investment (both realized investment end of of period income and unrealized) income period ------------------------------------------------------------------------------- - ---------------------------------- Delaware Tax-Free Income Portfolio - ---------------------------------- Institutional Class 9/30/05 $10.13 $0.43/7/ $(0.21) $(0.43) $ 9.92 9/30/04 10.23 0.47/7/ (0.08) (0.49) 10.13 9/30/03 /10/ 10.54 0.52 (0.27) (0.56) 10.23 9/30/02 /10/ 10.20 0.55 0.31 (0.52) 10.54 9/30/01 /10/ 9.68 0.50 0.46 (0.44) 10.20 Service Class 10/1/01 /10/ through 5/2/02 $10.20 $0.29/7/ $(0.09) $(0.28) $10.12 9/30/01 /10/ 9.68 0.48 0.45 (0.41) 10.20 Investor A Class 9/30/05 $10.13 $0.39/7/ $(0.20) $(0.39) $ 9.93 9/30/04 10.24 0.42/7/ (0.09) (0.44) 10.13 9/30/03 /10/ 10.54 0.45 (0.24) (0.51) 10.24 9/30/02 /10/ 10.20 0.49 0.32 (0.47) 10.54 9/30/01 /10/ 9.68 0.45 0.47 (0.40) 10.20 Investor B Class 9/30/05 $10.14 $0.31/7/ $(0.21) $(0.31) $ 9.93 9/30/04 10.24 0.35/7/ (0.08) (0.37) 10.14 9/30/03 /10/ 10.54 0.37 (0.23) (0.44) 10.24 9/30/02 /10/ 10.20 0.42 0.32 (0.40) 10.54 9/30/01 /10/ 9.68 0.37 0.47 (0.32) 10.20 Investor C Class 9/30/05 $10.13 $0.31/7/ $(0.20) $(0.31) $ 9.93 9/30/04 10.24 0.35/7/ (0.09) (0.37) 10.13 9/30/03 /10/ 10.54 0.37 (0.23) (0.44) 10.24 9/30/02 /10/ 10.20 0.38 0.36 (0.40) 10.54 9/30/01 /10/ 9.68 0.36 0.48 (0.32) 10.20 See accompanying notes to financial statements. 48
BlackRock Funds Net Ratio of assets Ratio of net total expenses to Ratio of net end of expenses to average net assets investment income Total period average net (excluding to average net return (000) assets waivers) assets ---------------------------------------------------------------------------------------------- - ---------------------------------- Delaware Tax-Free Income Portfolio - ---------------------------------- Institutional Class 9/30/05 2.16% $46,782 0.70% 0.92% 4.24% 9/30/04 3.92 54,451 0.70 0.89 4.61 9/30/03 /10/ 2.53 54,512 0.70 0.90 5.06 9/30/02 /10/ 8.75 71,516 0.70 0.89 5.40 9/30/01 /10/ 10.16 79,535 0.70 0.90 4.99 Service Class 10/1/01 /10/ through 5/2/02 1.95%/9/ $ --/6/ 1.00%/2/ 1.17%/2/ 5.32%/2/ 9/30/01 /10/ 9.83 -- 0.87 1.02 4.83 Investor A Class 9/30/05 1.85%/3/ $14,421 1.09% 1.26% 3.86% 9/30/04 3.35/3/ 12,895 1.14 1.40 4.16 9/30/03 /10/ 2.15/3/ 8,634 1.17 1.36 4.48 9/30/02 /10/ 8.25/3/ 5,106 1.18 1.36 4.90 9/30/01 /10/ 9.65/3/ 4,304 1.17 1.37 4.53 Investor B Class 9/30/05 0.99%/4/ $ 7,524 1.84% 1.92% 3.10% 9/30/04 2.68/4/ 8,606 1.89 2.02 3.42 9/30/03 /10/ 1.38/4/ 8,528 1.92 2.09 3.70 9/30/02 /10/ 7.45/4/ 3,130 1.92 2.11 4.14 9/30/01 /10/ 8.84/4/ 2,505 1.91 2.11 3.79 Investor C Class 9/30/05 1.10%/4/ $13,293 1.85% 1.92% 3.11% 9/30/04 2.58/4/ 14,500 1.89 2.02 3.43 9/30/03 /10/ 1.38/4/ 14,529 1.91 2.08 3.56 9/30/02 /10/ 7.45/4/ 3,149 1.90 2.09 3.96 9/30/01 /10/ 8.84/4/ 638 1.92 2.12 3.78 Ratio of net investment income to average net assets Portfolio (excluding turnover waivers) rate --------------------------------- - ------------------------------- Delaware Tax-Free Income Portfo - ------------------------------- Institutional Class 9/30/05 4.02% 10% 9/30/04 4.42 3 9/30/03 /10/ 4.86 34 9/30/02 /10/ 5.22 17 9/30/01 /10/ 4.79 14 Service Class 10/1/01 /10/ through 5/2/02 5.14%/2/ 17% 9/30/01 /10/ 4.68 14 Investor A Class 9/30/05 3.69% 10% 9/30/04 3.90 3 9/30/03 /10/ 4.30 34 9/30/02 /10/ 4.71 17 9/30/01 /10/ 4.34 14 Investor B Class 9/30/05 3.02% 10% 9/30/04 3.29 3 9/30/03 /10/ 3.52 34 9/30/02 /10/ 3.96 17 9/30/01 /10/ 3.60 14 Investor C Class 9/30/05 3.04% 10% 9/30/04 3.30 3 9/30/03 /10/ 3.40 34 9/30/02 /10/ 3.77 17 9/30/01 /10/ 3.59 14 49
BlackRock Funds FINANCIAL HIGHLIGHTS (Concluded) FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net Net gain Net asset (loss) on Distributions asset value Net investments from net value beginning investment (both realized investment end of of period income and unrealized) income period - ------------------------------------------------------------------------------------------------------ - ---------------------------------- Kentucky Tax-Free Income Portfolio - ---------------------------------- Institutional Class 9/30/05 $ 9.73 $0.46/7/ $(0.14) $(0.36) $ 9.69 9/30/04 9.77 0.45/7/ (0.07) (0.42) 9.73 9/30/03 /10/ 9.99 0.48 (0.20) (0.50) 9.77 9/30/02 /10/ 9.94 0.49 0.07 (0.51) 9.99 9/30/01 /10/ 9.60 0.50 0.34 (0.50) 9.94 Service Class 9/30/05 $ 9.74 $0.43/7/ $(0.14) $(0.33) $ 9.70 9/30/04 9.78 0.43/7/ (0.08) (0.39) 9.74 9/30/03 /10/ 9.99 0.45 (0.19) (0.47) 9.78 9/30/02 /10/ 9.95 0.46 0.06 (0.48) 9.99 9/30/01 /10/ 9.60 0.47 0.35 (0.47) 9.95 Investor A Class 9/30/05 $ 9.73 $0.42/7/ $(0.14) $(0.32) $ 9.69 9/30/04 9.77 0.41/7/ (0.07) (0.38) 9.73 9/30/03 /10/ 9.99 0.44 (0.20) (0.46) 9.77 9/30/02 /10/ 9.94 0.44 0.07 (0.46) 9.99 9/30/01 /10/ 9.60 0.45 0.34 (0.45) 9.94 Investor B Class 9/30/05 $ 9.73 $0.35/7/ $(0.14) $(0.25) $ 9.69 9/30/04 9.77 0.33/7/ (0.07) (0.30) 9.73 9/30/03 /10/ 9.99 0.36 (0.20) (0.38) 9.77 9/30/02 /10/ 9.94 0.37 0.07 (0.39) 9.99 9/30/01 /10/ 9.60 0.37 0.35 (0.38) 9.94 Investor C Class 9/30/05 $ 9.76 $0.35/7/ $(0.15) $(0.25) $ 9.71 9/30/04 9.79 0.33/7/ (0.06) (0.30) 9.76 9/30/03 /10/ 10.02 0.36 (0.21) (0.38) 9.79 9/30/02 /10/ 9.97 0.37 0.07 (0.39) 10.02 9/30/01 /10/ 9.62 0.37 0.36 (0.38) 9.97 /1/ Commencement of operations of share class. /2/ Annualized. /3/ Sales load not reflected in total return. /4/ Contingent deferred sales load not reflected in total return. /5/ There were no Investor C shares outstanding as of September 30, 2000. /6/ There were no Service shares outstanding as of September 30, 2002. See accompanying notes to financial statements. 50
BlackRock Funds Net Ratio of assets Ratio of net total expenses to Ratio of net end of expenses to average net assets investment income Total period average net (excluding to average net return (000) assets waivers) assets --------------------------------------------------------------------------------------------- - ---------------------------------- Kentucky Tax-Free Income Portfolio - ---------------------------------- Institutional Class 9/30/05 3.35% $ 71,188 0.70% 0.91% 4.69% 9/30/04 4.01 78,549 0.70 0.89 4.61 9/30/03 /10/ 2.95 115,104 0.70 0.88 4.94 9/30/02 /10/ 5.82 135,938 0.70 0.87 4.99 9/30/01 /10/ 8.91 146,620 0.70 0.86 5.09 Service Class 9/30/05 3.04% $ 248 1.00% 1.17% 4.38% 9/30/04 3.69 247 1.00 1.17 4.40 9/30/03 /10/ 2.74 103 1.00 1.18 4.57 9/30/02 /10/ 5.40 92 1.00 1.17 4.69 9/30/01 /10/ 8.69 91 1.00 1.16 4.79 Investor A Class 9/30/05 2.95%/3/ $ 6,377 1.09% 1.26% 4.28% 9/30/04 3.53/3/ 5,482 1.15 1.36 4.19 9/30/03 /10/ 2.46/3/ 4,701 1.17 1.35 4.42 9/30/02 /10/ 5.33/3/ 3,612 1.18 1.35 4.52 9/30/01 /10/ 8.40/3/ 3,214 1.17 1.33 4.64 Investor B Class 9/30/05 2.18%/4/ $ 3,578 1.85% 1.92% 3.55% 9/30/04 2.76/4/ 3,897 1.89 2.02 3.44 9/30/03 /10/ 1.70/4/ 3,795 1.92 2.09 3.64 9/30/02 /10/ 4.55/4/ 2,311 1.91 2.08 3.71 9/30/01 /10/ 7.60/4/ 978 1.89 2.05 3.79 Investor C Class 9/30/05 2.07%/4/ $ 938 1.86% 1.92% 3.55% 9/30/04 2.86/4/ 1,399 1.88 2.00 3.43 9/30/03 /10/ 1.59/4/ 1,179 1.92 2.10 3.69 9/30/02 /10/ 4.53/4/ 1,036 1.90 2.08 3.61 9/30/01 /10/ 7.69/4/ 236 1.91 2.07 3.75 Ratio of net investment income to average net assets Portfolio (excluding turnover waivers) rate ----------------------------------- - ------------------------ Kentucky Tax-Free Income - ------------------------ Institutional Class 9/30/05 4.48% 4% 9/30/04 4.42 8 9/30/03 /10/ 4.76 37 9/30/02 /10/ 4.81 12 9/30/01 /10/ 4.93 32 Service Class 9/30/05 4.21% 4% 9/30/04 4.22 8 9/30/03 /10/ 4.39 37 9/30/02 /10/ 4.52 12 9/30/01 /10/ 4.63 32 Investor A Class 9/30/05 4.11% 4% 9/30/04 3.97 8 9/30/03 /10/ 4.24 37 9/30/02 /10/ 4.35 12 9/30/01 /10/ 4.47 32 Investor B Class 9/30/05 3.48% 4% 9/30/04 3.31 8 9/30/03 /10/ 3.46 37 9/30/02 /10/ 3.54 12 9/30/01 /10/ 3.62 32 Investor C Class 9/30/05 3.49% 4% 9/30/04 3.31 8 9/30/03 /10/ 3.50 37 9/30/02 /10/ 3.44 12 9/30/01 /10/ 3.57 32 /7/ Calculated using the average shares outstanding method. /8/ Less than $(.01) per share. /9/ Not Annualized. /10/ Audited by other auditors. /11/ Less than $1,000. 51
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (A) Organization BlackRock Funds(SM) (the "Fund") was organized on December 22, 1988, as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund currently has 50 registered portfolios, seven of which are included in these financial statements (the "Portfolios"). Each Portfolio is authorized to issue an unlimited number of shares with a par value of $0.001. Each portfolio of the Fund may offer as many as seven classes of shares. Shares of all classes of a Portfolio represent equal pro rata interests in such Portfolio, except that each class bears different expenses which reflect the difference in the range of services provided to them, mostly due to differences in distribution and service fees. As of September 30, 2005, no Hilliard Lyons Shares were outstanding. Under the Fund's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund. However, based on experience, the Fund considers the risk of loss from such claims to be remote. (B) Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. Investment Valuation -- Valuation of investments held by each Portfolio is as follows: fixed income investments are valued by using market quotations or prices provided by market makers; a portion of the fixed income investments are valued utilizing one or more pricing services approved by the Board of Trustees (the "Board"); an option or futures contract is valued at the last sales price prior to 4:00 p.m. (Eastern time), as quoted on the principal exchange or board of trade on which such option or futures contract is traded, or in the absence of a sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern time); the amortized cost method of valuation will be used with respect to debt obligations with sixty days or less remaining to maturity unless the investment adviser and/or sub-adviser under the supervision of the Board determines that such method does not represent fair value. In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the market value of such investment, the investment will be valued by, under the direction of, or in accordance with a method approved by the Board as reflecting fair value ("Fair Value Assets"). The investment adviser and/or sub-adviser will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to a valuation committee. Such valuation committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to and ratified by the Board. When determining the price for a Fair Value Asset, the investment adviser and/or sub-adviser shall seek to determine the price that the Portfolio might reasonably expect to receive from the current sale of that asset in an arm's-length transaction. Fair value determinations shall be based upon all available factors that the advisor and/or subadvisor deems relevant. Dividends to Shareholders -- Dividends from net investment income are declared by each Portfolio each day on "settled" shares (i.e. shares for which the particular Portfolio has received payment) and are paid monthly. Over the course of a year, substantially all of each Portfolio's net investment income will be declared as dividends. The amount of the daily dividend for each Portfolio will be based on periodic projections of its net investment income. Net realized capital gains, if any, are distributed at least annually. Swap Agreements -- The Portfolios may invest in swap agreements for the purpose of hedging against changes in interest rates. Swap agreements involve the exchange by the Portfolios with another party of their respective commitments to pay or receive interest (e.g., an exchange of floating rate payments for fixed rate payments) with respect to a notional amount of principal. Swaps are marked to market daily based upon quotations from market makers and the change, if any, is recorded as an unrealized gain or loss in the Statements of Operations. Net payments of interest are recorded as interest income or expense. Entering into these agreements involves, to varying degrees, elements of credit and market risk in excess of the amounts recognized on the Statements of Net Assets. Such risks involve the possibility that there will be no liquid market for these agreements, that the counter-party to the agreement may default on its obligation to perform and that there may be unfavorable change in the fluctuation of interest and/or exchange rates. There were no swap agreements held by the Portfolios for the year ending September 30, 2005. 52
BlackRock Funds As a result of changes in GAAP, the Portfolio's have previously reclassified periodic payments made under interest rate swap agreements, previously included within interest income or expense, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to amounts appearing in the per share amounts in prior years financial highlights. Prior year net investment income ratios in the financial highlights have also been modified accordingly. This reclassification had no effect on the Portfolio's net asset value, either in total or per share, or their total increase (decrease) in net assets from operations during any period. The effects of these reclassifications in the financial highlights are as follows: Tax-Free Income --------------------------------------------------------------- Institutional Service Investor A Investor B Investor C --------------- --------- ------------ ------------ ----------- Net Investment Income Ratio 9/30/2002 ........................... 0.08% 0.07% 0.07% 0.07% 0.07% Net Investment Income per Share 9/30/2002 ........................... $0.00 $0.01 $0.00 $0.00 $0.00 Pennsylvania Tax-Free Income --------------------------------------------------------------- Institutional Service Investor A Investor B Investor C --------------- --------- ------------ ------------ ----------- Net Investment Income Ratio 9/30/2002 ........................... 0.06% 0.06% 0.06% 0.07% 0.07% Net Investment Income per Share 9/30/2002 ........................... $0.00 $0.00 $0.00 $0.00 $0.01 New Jersey Tax-Free Income --------------------------------------------------------------- Institutional Service Investor A Investor B Investor C --------------- --------- ------------ ------------ ----------- Net Investment Income Ratio 9/30/2002 ........................... 0.06% 0.05% 0.05% 0.05% 0.05% Net Investment Income per Share 9/30/2002 ........................... $0.01 $0.01 $0.01 $0.01 $0.01 Ohio Tax-Free Income --------------------------------------------------------------- Institutional Service Investor A Investor B Investor C --------------- --------- ------------ ------------ ----------- Net Investment Income Ratio 9/30/2002 ........................... 0.04% 0.05% 0.05% 0.05% 0.05% Net Investment Income per Share 9/30/2002 ........................... $0.00 $0.01 $0.00 $0.01 $0.01 Delaware Tax-Free Income --------------------------------------------------------------- Institutional Service Investor A Investor B Investor C --------------- --------- ------------ ------------ ----------- Net Investment Income Ratio 9/30/2002 ........................... 0.06% 0.06% 0.05% 0.06% 0.05% Net Investment Income per Share 9/30/2002 ........................... $0.00 $0.00 $0.01 $0.01 $0.00 Kentucky Tax-Free Income --------------------------------------------------------------- Institutional Service Investor A Investor B Investor C --------------- --------- ------------ ------------ ----------- Net Investment Income Ratio 9/30/2002 ........................... 0.05% 0.06% 0.06% 0.06% 0.06% Net Investment Income per Share 9/30/2002 ........................... $0.00 $0.00 $0.00 $0.01 $0.01 53
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Investment Transactions and Investment Income -- Investment transactions are accounted for on the trade date. The cost of investments sold and the related gain or loss is determined by use of the specific identification method, generally first-in first-out, for both financial reporting and federal income tax purposes. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are amortized for book and tax purposes using the effective yield-to-maturity method over the term of the instrument. Futures Transactions -- The Portfolios may invest in financial futures contracts for the purpose of hedging their existing portfolio securities, or securities that the Portfolios intend to purchase, against fluctuations in value caused by changes in prevailing market interest rates or for leverage. Upon entering into a futures contract, a Portfolio is required to deposit cash or pledge securities as initial margin. Subsequent payments, which are dependent on the daily fluctuations in the value of the underlying security or securities, are made or received by the Portfolio each day (daily variation margin) and are recorded as cumulative unrealized gains or losses until the contracts are closed. When the contracts are closed, the Portfolio records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Portfolio's basis in the contracts. Risks of entering into futures contracts include the possibility that there will not be a perfect price correlation between the futures contracts and the underlying securities. Second, it is possible that a lack of liquidity for futures contracts could exist in the market, resulting in an inability to liquidate a futures position prior to its maturity date. Third, the purchase of a futures contract involves the risk that a Portfolio could lose more than the original margin deposit required to initiate a futures transaction. There were no futures held by the Portfolios at September 30, 2005. Tender Option Bonds -- A tender option bond is a synthetic floating or variable rate security issued when long term bonds are purchased in the primary or secondary market and are then deposited into a trust. Custodial receipts are then issued to investors, such as the Portfolios, evidencing ownership interests in the trust. The remarketing agent for the trust sets a floating or variable rate on typically a weekly basis. The creation of tender option bond trusts fulfills two objectives which municipal securities are deposited into the trusts: (i) the creation of the P-floats, the terms of which mimic, in certain respects, the variable rate demand securities issued in the primary municipal securities market, and (ii) the creation of a residual interest, which establishes an economically leveraged position in the municipal securities. Tender option bonds may be considered to be derivatives. Derivatives involve special risks, including possible default by the other party to the transaction, illiquidity and, to the extent the adviser's view as to certain market movements is incorrect, the risk that the use of derivatives could result in significantly greater losses than if they had not been used. Option Writing/Purchasing -- The Portfolios may write or purchase financial options contracts for the purpose of hedging or earning additional income, which may be deemed speculative. When the Portfolios write or purchase an option, an amount equal to the premium received or paid by the Portfolios is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by the Portfolios on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commissions, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or proceeds from the sale in determining whether the Portfolios have realized a gain or a loss on investment transactions. The Portfolios, as writers of options, may have no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bear the market risk of unfavorable change in the price of the security underlying the written options. There were no options held by the Portfolios at September 30, 2005. Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles") requires the use of management estimates. Actual results could differ from these estimates. Transfers In-Kind -- For the period ended September 30, 2004, certain shareholders of the UltraShort Municipal Portfolio and the Tax-Free Income Portfolio transferred cash and securities with a value of $26,907,505 and $93,607,559, respectively, in exchange for Portfolio shares. The securities contributed were subject to a taxable event prior to the in-kind transfers to the Portfolios and had the same market value and cost basis as of the date of transfer. Accordingly, for purposes of generally accepted accounting principles, the book cost of any securities transferred in-kind to the Portfolios were equal to the market value of such securities on their date of contribution to the Portfolios resulting in no difference between book cost and tax cost. There were no securities transferred in-kind to the Portfolios during the year ended September 30, 2005. 54
BlackRock Funds Other -- Expenses that are directly related to one of the Portfolios are charged directly to that Portfolio. Other operating expenses are prorated to the Portfolios on the basis of relative net assets. Class-specific expenses are borne by that class. Differences in net expense ratios between classes of a Portfolio are due to class-specific expenses, waivers and accrual adjustments. Income, other expenses and realized and unrealized gains and losses of a Portfolio are allocated to the respective class on the basis of the relative net assets each day. The following table provides a list of the Portfolios included in this report along with a summary of their respective class-specific fee arrangements as provided under the Fund's Amended and Restated Distribution and Service Plan (the "Plan"). Fees are expressed as a percentage of average daily net asset values of the respective classes. Class-Specific Fee Arrangements Portfolio Share Classes --------- --------------------------------------------------------------------- BlackRock Institutional Service --------------------- ---------------------- --------------------- Contractual Actual Contractual Actual Contractual Actual Fees Fees(4) Fees Fees(4) Fees(1) Fees(4) ----------- ------- ----------- ------- ----------- ------- UltraShort Municipal None None None None 0.25% 0.25% Tax-Free Income None None None None 0.25% 0.25% Pennsylvania Tax-Free Income N/A N/A None None 0.25% 0.25% New Jersey Tax-Free Income N/A N/A None None 0.25% 0.25% Ohio Tax-Free Income N/A N/A None None 0.25% 0.25% Delaware Tax-Free Income N/A N/A None None 0.25% N/A Kentucky Tax-Free Income N/A N/A None None 0.25% 0.25% Portfolio Share Classes --------- --------------------------------------------------------------------- Investor A Investor B Investor C --------------------- ---------------------- --------------------- Contractual Actual Contractual Actual Contractual Actual Fees Fees(4) Fees Fees(4) Fees(1) Fees(4) ----------- ------- ----------- ------- ----------- ------- UltraShort Municipal 0.35% 0.25% N/A N/A N/A N/A Tax-Free Income 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Pennsylvania Tax-Free Income 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% New Jersey Tax-Free Income 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Ohio Tax-Free Income 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Delaware Tax-Free Income 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% Kentucky Tax-Free Income 0.35% 0.25% 1.00% 1.00% 1.00% 1.00% (1) - the maximum annual contractual fees are comprised of a .25% service fee. (2) - the maximum annual contractual fees are comprised of a .10% distribution fee and a .25% service fee. (3) - the maximum annual contractual fees are comprised of a .75% distribution fee and a .25% service fee. (4) - the actual fees are as of September 30, 2005. The BlackRock share class bears a transfer agent fee at an annual rate not to exceed 0.005% of its average daily net assets plus per account fees and disbursements, and each of the Institutional, Service, Investor A, Investor B and Investor C share classes bear a tranfer agent fee at an annual rate not to exceed 0.018% of the average daily net assets of such respective classes plus per account fees and disbursements. For the year ended September 30, 2005, the following shows the various types of class-specific expenses borne directly by each class of each Portfolio and any associated waivers of those expenses. Share Classes Administration Fees ---------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C Total ----------- --------------- --------- ------------ ------------ ------------ ---------- UltraShort Municipal ................... $ 10,991 $ 17,443 $ -- $ 3 $ -- $ -- $28,437 Tax-Free Income ........................ 35,552 438,502 3,631 12,818 7,637 3,544 501,684 Pennsylvania Tax-Free Income ........... -- 885,840 7,500 46,584 24,052 2,618 966,594 New Jersey Tax-Free Income ............. -- 211,701 22,651 9,569 16,549 4,321 264,791 Ohio Tax-Free Income ................... -- 145,390 1,096 9,559 14,470 9,093 179,608 Delaware Tax-Free Income ............... -- 76,329 -- 20,061 11,889 20,269 128,548 Kentucky Tax-Free Income ............... -- 107,095 352 8,203 5,663 1,992 123,305 55
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Administration Fees Waived Share Classes ---------------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C Total ------------- --------------- ----------- -------------- ------------ ------------ ------------- UltraShort Municipal ............. $(10,991) $ (6,843) $ -- $ -- $ -- $ -- $ (17,834) Tax-Free Income .................. (35,552) (22,906) -- -- -- -- (58,458) Pennsylvania Tax-Free Income ..... -- (885,840) (7,100) -- -- -- (892,940) New Jersey Tax-Free Income ....... -- (211,701) (14,814) -- -- -- (226,515) Ohio Tax-Free Income ............. -- (145,390) (710) -- -- -- (146,100) Delaware Tax-Free Income ......... -- (76,329) -- -- -- -- (76,329) Kentucky Tax-Free Income ......... -- (107,095) (232) -- -- -- (107,327) Transfer Agent Fees Share Classes ---------------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C Total ------------- --------------- ----------- -------------- ------------ ------------ --------------- UltraShort Municipal ............. $1,570 $ 2,167 $ -- $ -- $ -- $ -- $ 3,737 Tax-Free Income .................. 5,079 54,434 450 1,591 948 440 62,942 Pennsylvania Tax-Free Income ..... -- 111,445 931 5,783 2,986 325 121,470 New Jersey Tax-Free Income ....... -- 26,280 2,812 1,188 2,055 536 32,871 Ohio Tax-Free Income ............. -- 18,048 137 1,187 1,796 1,129 22,297 Delaware Tax-Free Income ......... -- 9,476 -- 2,491 1,476 2,516 15,959 Kentucky Tax-Free Income ......... -- 13,294 44 1,018 703 247 15,306 Shareholder Service Fees Share Classes ------------------------------------------------------ Service Investor A Investor B Investor C Total --------- ------------ ------------ ------------ ---------- UltraShort Municipal ............. $ -- $ 5 $ -- $ -- $ 5 Tax-Free Income .................. 6,258 22,148 13,164 6,107 47,677 Pennsylvania Tax-Free Income ..... 15,027 80,297 41,380 4,513 141,217 New Jersey Tax-Free Income ....... 39,022 16,391 28,539 7,450 91,402 Ohio Tax-Free Income ............. 1,892 16,501 24,946 15,682 59,021 Delaware Tax-Free Income ......... -- 33,669 20,357 34,944 88,970 Kentucky Tax-Free Income ......... 606 14,129 9,768 3,433 27,936 Distribution Fees Share Classes ------------------------------------------ Investor A Investor B Investor C Total ------------ ------------ ------------ ---------- UltraShort Municipal ............. $ 2 $ -- $ -- $ 2 Tax-Free Income .................. 8,837 39,492 18,322 66,651 Pennsylvania Tax-Free Income ..... 32,065 124,305 13,537 169,907 New Jersey Tax-Free Income ....... 6,614 85,615 22,352 114,581 Ohio Tax-Free Income ............. 6,628 74,838 47,048 128,514 Delaware Tax-Free Income ......... 13,851 61,491 104,833 180,175 Kentucky Tax-Free Income ......... 5,667 29,304 10,299 45,270 Distribution Fees Waived Share Class ----------- Investor A Total ----------- -------- UltraShort Municipal ............. $ (2) $ (2) Tax-Free Income .................. (8,837) (8,837) Pennsylvania Tax-Free Income ..... (32,065) (32,065) New Jersey Tax-Free Income ....... (6,614) (6,614) Ohio Tax-Free Income ............. (6,628) (6,628) Delaware Tax-Free Income ......... (13,851) (13,851) Kentucky Tax-Free Income ......... (5,667) (5,667) 56
BlackRock Funds (C) Transactions with Affiliates and Related Parties Pursuant to an Investment Advisory Agreement, BlackRock Advisors, Inc. ("BlackRock"), a wholly-owned subsidiary of BlackRock, Inc., serves as investment adviser to the Portfolios. BlackRock Financial Management, Inc. ("BFM"), a wholly-owned subsidiary of BlackRock, serves as sub-adviser for all of the Portfolios. BlackRock, Inc. is an indirect majority-owned subsidiary of The PNC Financial Services Group, Inc. For its advisory services, BlackRock is entitled to receive fees, computed daily and payable monthly, at the following annual rates, based on each Portfolio's average daily net assets: Tax-free Income, Pennsylvania Delaware Tax-Free Tax-Free Income, New Jersey Tax-Free Income Income and Kentucky and Ohio Tax-Free Income Portfolios Tax-Free Income Portfolios --------------------------------------------- --------------------------- Investment Investment Average Daily Net Assets Advisory Fee Advisory Fee - --------------------------- --------------------------------------------- --------------------------- first $1 billion 0.500% 0.550% $1 billion -- $2 billion 0.450 0.500 $2 billion -- $3 billion 0.425 0.475 greater than $3 billion 0.400 0.450 The investment advisory fee for the UltraShort Municipal Portfolio is ..45%. For the year ended September 30, 2005, advisory fees and waivers for each Portfolio were as follows: Gross Net Advisory Advisory Fee Waiver Fee ------------ ------------ ------------ UltraShort Municipal ................. $ 195,478 $ 172,253 $ 23,225 Tax-Free Income ...................... 2,114,853 937,506 1,177,347 Pennsylvania Tax-Free Income ......... 3,373,547 444,733 2,928,814 New Jersey Tax-Free Income ........... 912,954 176,862 736,092 Ohio Tax-Free Income ................. 619,640 127,833 491,807 Delaware Tax-Free Income ............. 487,503 66,090 421,413 Kentucky Tax-Free Income ............. 467,708 57,002 410,706 In the interest of limiting the expenses of the Portfolios, BlackRock and the Fund have entered into a series of annual expense limitation agreements. The agreements set a limit on certain operating expenses of each Portfolio for the next year and requires BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit. These expense limits apply to the aggregate expenses incurred on a share class (excluding: interest, taxes, brokerage commissions and other extraordinary expenses). BlackRock has contractually agreed to waive or reimburse fees or expenses until February 1, 2006, in order to limit expenses as follows. This agreement is reviewed annually by the Fund's Board. Portfolio Share Classes --------------------------------------------------------------------------- BlackRock Institutional Service Investor A Investor B Investor C ----------- --------------- --------- ------------ ------------ ----------- UltraShort Municipal ................. 0.35% 0.45% 0.75% 0.80% NA NA Tax-Free Income ...................... 0.45% 0.60% 0.90% 1.07% 1.82% 1.82% Pennsylvania Tax-Free Income ......... NA 0.60% 0.90% 1.07% 1.82% 1.82% New Jersey Tax-Free Income ........... NA 0.60% 0.90% 1.07% 1.82% 1.82% Ohio Tax-Free Income ................. NA 0.60% 0.90% 1.07% 1.82% 1.82% Delaware Tax-Free Income ............. NA 0.70% NA 1.17% 1.92% 1.92% Kentucky Tax-Free Income ............. NA 0.70% 1.00% 1.17% 1.91% 1.91% 57
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) If in the following three years the operating expenses of a share class that previously received a waiver or reimbursement from BlackRock are less than the expense limit for that share class, the share class is required to repay BlackRock up to the amount of fees waived or expenses reimbursed under the agreement if: (1) the Portfolio of which the share class is a part has more than $50 million in assets, (2) BlackRock continues to be the Portfolio's investment adviser and (3) the Board of Trustees of the Fund has approved the payments to BlackRock at the previous quarterly meeting. At September 30, 2005, the amounts subject to possible future reimbursement under the expense limitation agreement are as follows: Expiring Expiring Expiring Total Waivers Subject Janaury 31, 2006 January 31, 2007 January 31, 2008 to Reimbursement ------------------ ------------------ ------------------ ---------------------- UltraShort Municipal ................. $ -- $ 269,648 $ 120,858 $ 390,506 Tax-Free Income ...................... 623,251 983,261 621,432 2,227,944 Pennsylvania Tax-Free Income ......... 1,383,044 1,357,799 834,314 3,575,157 New Jersey Tax-Free Income ........... 278,302 406,182 248,274 932,758 Ohio Tax-Free Income ................. 174,280 259,458 168,380 602,118 Delaware Tax-Free Income ............. 91,563 138,237 68,112 297,912 Kentucky Tax-Free Income ............. 138,922 171,865 110,262 421,049 The following waivers previously incurred on the portfolios which were subject to recoupment by BlackRock expired on January 31, 2005, in the amounts of $610,832 for Tax-Free Income, $1,493,625 for Pennsylvania Tax-Free Income, $281,833 for New Jersey Tax-Free Income, $167,924 for Ohio Tax-Free Income, $124,793 for Delaware Tax-Free Income, and $185,455 for Kentucky Tax-Free Income. BlackRock pays BFM fees for its sub-advisory services. PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of The PNC Financial Services Group, Inc., and BlackRock act as co-administrators for the Fund. For these services, the co-administrators receive a combined administration fee computed daily and payable monthly, based on a percentage of the average daily net assets of each Portfolio, at the following annual rates: 0.085% of the first $500 million, 0.075% of the next $500 million and 0.065% of assets in excess of $1 billion. In addition, each of the classes, with the exception of the BlackRock Class, is charged an administration fee based on the following percentage of average daily net assets of each respective class: 0.145% of the first $500 million, 0.135% of the next $500 million and 0.125% of assets in excess of $1 billion. The BlackRock Class is charged an administration fee based on the following percentage of average daily net assets: 0.035% of the first $500 million, 0.025% of the next $500 million and 0.015% of assets in excess of $1 billion. In addition, PFPC and BlackRock may have, at their discretion, voluntarily waived all or any portion of their administration fees for any Portfolio or share class. PFPC Trust Co., an indirect subsidiary of The PNC Financial Services Group, Inc., serves as custodian for each of the Fund's Portfolios. PFPC serves as transfer and dividend disbursing agent. The custodian and the transfer agent have voluntarily agreed to waive a portion of their fees during the period. Since January 31, 2005, BlackRock has maintained a call center which is responsible for providing certain shareholder services to the BlackRock Funds, such as responding to shareholder inquiries and processing transactions based upon instructions from shareholders with respect to the subscription and redemption of fund shares. During the period February 1, 2005 through September 30, 2005, the following amounts have been accrued by each portfolio to reimburse BlackRock for costs incurred running the call center, which are a component of the Transfer Agent fees in the accompanying Statement of Operations. 58
BlackRock Funds BlackRock Institutional Service Investor A Investor B Investor C Total ----------- --------------- --------- ------------ ------------ ------------ ---------- UltraShort Municipal ................. $2,479 $ 907 $ -- $ -- $ -- $ -- $ 3,386 Tax-Free Income ...................... 7,895 23,108 192 847 396 194 32,632 Pennsylvania Tax-Free Income ......... -- 44,126 366 2,294 1,149 126 48,061 New Jersey Tax-Free Income ........... -- 10,990 1,182 502 864 227 13,765 Ohio Tax-Free Income ................. -- 7,915 60 583 766 492 9,816 Delaware Tax-Free Income ............. -- 3,662 -- 1,096 614 1,055 6,427 Kentucky Tax-Free Income ............. -- 5,590 19 440 299 116 6,464 Pursuant to the Fund's Amended and Restated Distribution and Service Plan (the "Plan"), the Fund may pay BlackRock Distributors, Inc. (the "Distributor") and/or BlackRock or any other affiliate of PNC Financial Services Group, Inc. fees for distribution and sales support services. Currently, only Investor A Shares, Investor B Shares, and Investor C Shares bear the expense of distribution fees under the Plan. In addition, the Fund may pay brokers, dealers, financial institutions and industry professionals (including PNC Financial Services Group, Inc. and its affiliates) ("service organizations") fees for the provision of personal services to shareholders. BlackRock may receive some of the service fees paid by the Fund in return for providing services to shareholders. Currently, only Investor A Shares, Investor B Shares, Investor C Shares and Service Shares bear the expense of service fees under the Plan. At September 30, 2005, affiliated payables were as follows: PNC Bank PFPC(1) BlackRock(2) Affiliates(3) --------- -------------- -------------- UltraShort Municipal ................. $ 3,529 $ 2,411 $ 4 Tax-Free Income ...................... 33,766 136,370 8,265 Pennsylvania Tax-Free Income ......... 53,090 282,147 19,769 New Jersey Tax-Free Income ........... 15,550 68,774 15,510 Ohio Tax-Free Income ................. 10,962 46,930 15,425 Delaware Tax-Free Income ............. 7,398 33,757 20,166 Kentucky Tax-Free Income ............. 7,117 35,261 5,061 (1) - payables to PFPC are for Accounting, Administration, Custody and Transfer Agent services provided. (2) - payables to BlackRock are for Advisory and Administration services provided and for amounts due BlackRock for costs incurred related to the BlackRock Funds Call Center. (3) - payables to PNC affiliates are for distribution and sales support services as described under the Plan. The total payable on behalf of the Fund was $5,313,103, a portion of which is paid to service organizations, including other PNC Bank affiliates. (D) Purchases and Sales of Securities For the year ended September 30, 2005, purchases and sales of securities, other than short-term and U.S. government securities, were as follows: Purchases Sales --------------- --------------- UltraShort Municipal ................. $ 18,781,493 $ 10,038,600 Tax-Free Income ...................... 370,097,202 356,338,059 Pennsylvania Tax-Free Income ......... 99,610,584 82,400,528 New Jersey Tax-Free Income ........... 29,848,587 30,775,360 Ohio Tax-Free Income ................. 13,660,187 699,500 Delaware Tax-Free Income ............. 9,708,145 4,114,260 Kentucky Tax-Free Income ............. 3,604,330 9,763,612 59
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) (E) Capital Shares Transactions in capital shares for each period were as follows: UltraShort Municipal ----------------------------------------------------------------------- For the year ended for the period 3/3/04 /1/ 9/30/05 through 9/30/04 ----------------------------------- --------------------------------- Shares Value Shares Value --------------- ----------------- --------------- --------------- Shares sold: BlackRock Class ......................... 2,236,236 $ 22,229,904 4,724,012 $ 47,096,162 Institutional Class ..................... 531,983 5,283,813 2,199,629 21,849,294 Service Class ........................... -- -- 10 100 Investor A Class ........................ 4,970 50,016 10 100 Shares issued in reinvestment of dividends: BlackRock Class ......................... 59,428 590,642 14,923 148,416 Institutional Class ..................... 1,684 16,722 -- -- Service Class ........................... -- -- -- -- Investor A Class ........................ 3 26 -- -- Shares redeemed: BlackRock Class ......................... (2,249,340) (22,360,127) (1,519,207) (15,113,395) Institutional Class ..................... (907,432) (9,011,740) (773,181) (7,676,565) Service Class ........................... -- -- -- -- Investor A Class ........................ (4,897) (49,260) -- -- ---------- ------------- ---------- ------------- Net increase (decrease) ................... (327,365) $ (3,250,004) 4,646,196 $ 46,304,112 ========== ============= ========== ============= Tax-Free Income ------------------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------------ ---------------------------------- Shares Value Shares Value --------------- ------------------ --------------- ---------------- Shares sold: BlackRock Class ......................... 224,255 $ 2,503,094 9,128,740 $ 102,454,056 Institutional Class ..................... 3,591,390 39,912,181 5,197,884 58,332,260 Service Class ........................... 52,330 581,800 12,138 134,680 Investor A Class ........................ 597,804 6,639,654 90,300 1,006,406 Investor B Class ........................ 54,741 608,534 85,989 957,137 Investor C Class ........................ 60,412 671,999 203,583 2,287,251 Shares issued in reinvestment of dividends: BlackRock Class ......................... 386,166 4,293,119 295,571 3,273,698 Institutional Class ..................... 13,010 144,802 22,060 245,557 Service Class ........................... 5,756 63,944 7,420 82,417 Investor A Class ........................ 18,237 203,038 20,632 229,513 Investor B Class ........................ 6,196 68,962 9,385 104,430 Investor C Class ........................ 3,130 34,844 5,870 65,165 Shares redeemed: BlackRock Class ......................... (1,876,330) (20,731,399) (376,828) (4,117,585) Institutional Class ..................... (4,444,782) (49,461,550) (7,311,723) (81,231,082) Service Class ........................... (91,144) (1,012,587) (41,170) (456,705) Investor A Class ........................ (494,809) (5,504,634) (181,146) (2,006,621) Investor B Class ........................ (149,127) (1,658,868) (205,514) (2,279,774) Investor C Class ........................ (116,657) (1,300,425) (175,171) (1,943,626) ---------- -------------- ---------- ------------- Net increase (decrease) ................... (2,159,422) $ (23,943,492) 6,788,020 $ 77,137,177 ========== ============== ========== ============= /1/ Commencement of operations. 60
BlackRock Funds Pennsylvania Tax-Free Income ------------------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------------ ---------------------------------- Shares Value Shares Value --------------- ------------------ --------------- ---------------- Shares sold: Institutional Class .................... 8,822,824 $ 93,341,728 3,393,820 $ 36,620,210 Service Class .......................... 48,976 517,224 121,865 1,314,949 Investor A Class ....................... 348,356 3,686,712 404,459 4,358,919 Investor B Class ....................... 34,768 366,250 82,825 888,178 Investor C Class ....................... 34,135 357,808 81,677 882,020 Shares issued in reinvestment of dividends: Institutional Class .................... 97,496 1,030,731 15,321 164,756 Service Class .......................... 12,728 134,722 14,290 153,757 Investor A Class ....................... 106,902 1,130,750 92,369 994,378 Investor B Class ....................... 45,852 482,072 47,030 502,847 Investor C Class ....................... 3,826 40,313 4,685 50,309 Shares redeemed: Institutional Class .................... (9,131,240) (96,572,101) (13,577,018) (145,736,580) Service Class .......................... (144,415) (1,530,324) (160,769) (1,734,866) Investor A Class ....................... (747,020) (7,903,793) (627,889) (6,748,260) Investor B Class ....................... (631,808) (6,644,992) (574,808) (6,142,499) Investor C Class ....................... (47,135) (496,282) (88,192) (938,115) ---------- -------------- ----------- --------------- Net decrease .............................. (1,145,755) $ (12,059,182) (10,770,335) $ (115,369,997) ========== ============== =========== =============== New Jersey Tax-Free Income ------------------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------------ ---------------------------------- Shares Value Shares Value --------------- ------------------ --------------- ---------------- Shares sold: Institutional Class .................... 1,537,821 $ 17,984,593 7,071,031 $ 83,943,469 Service Class .......................... 29,258 343,064 36,098 424,155 Investor A Class ....................... 237,446 2,775,458 175,837 2,067,412 Investor B Class ....................... 42,331 494,772 89,465 1,045,404 Investor C Class ....................... 40,719 476,873 201,895 2,365,738 Shares issued in reinvestment of dividends: Institutional Class .................... 5,921 69,071 995 11,668 Service Class .......................... 35,652 416,398 39,168 457,776 Investor A Class ....................... 16,564 193,299 13,342 155,762 Investor B Class ....................... 21,648 252,755 23,715 277,360 Investor C Class ....................... 5,243 61,375 3,197 37,267 Shares redeemed: Institutional Class .................... (2,623,161) (30,654,400) (4,662,761) (55,129,130) Service Class .......................... (141,208) (1,651,138) (113,893) (1,324,603) Investor A Class ....................... (113,443) (1,322,639) (167,909) (1,952,173) Investor B Class ....................... (119,681) (1,402,303) (165,180) (1,909,634) Investor C Class ....................... (157,599) (1,837,993) (78,058) (899,443) ---------- -------------- ---------- -------------- Net increase (decrease) ................... (1,182,489) $ (13,800,815) 2,466,942 $ 29,571,028 ========== ============== ========== ============== 61
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Ohio Tax-Free Income --------------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ------------------------------- ----------------------------------- Shares Value Shares Value ------------- --------------- --------------- ----------------- Shares sold: Institutional Class .................... 1,340,116 $ 14,494,665 1,370,914 $ 14,795,802 Service Class .......................... 11,495 124,427 71,578 778,171 Investor A Class ....................... 412,979 4,460,886 145,363 1,578,175 Investor B Class ....................... 78,964 854,690 96,886 1,053,035 Investor C Class ....................... 267,788 2,898,539 155,647 1,694,055 Shares issued in reinvestment of dividends: Institutional Class .................... 8,467 91,428 5,107 55,174 Service Class .......................... 2,768 29,918 1,460 15,778 Investor A Class ....................... 20,430 220,359 11,911 128,852 Investor B Class ....................... 6,538 70,609 6,384 69,064 Investor C Class ....................... 2,565 27,698 2,224 24,072 Shares redeemed: Institutional Class .................... (792,870) (8,549,796) (1,464,476) (15,752,815) Service Class .......................... (9,486) (101,664) (75,650) (821,133) Investor A Class ....................... (62,962) (679,488) (383,242) (4,156,049) Investor B Class ....................... (144,619) (1,562,181) (120,222) (1,301,519) Investor C Class ....................... (103,937) (1,124,869) (188,841) (2,039,292) --------- ------------ ---------- ------------- Net increase (decrease) ................... 1,038,236 $ 11,255,221 (364,957) $ (3,878,630) ========= ============ ========== ============= Delaware Tax-Free Income ------------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ---------------------------------- ------------------------------ Shares Value Shares Value --------------- ---------------- ------------- -------------- Shares sold: Institutional Class .................... 986,401 $ 9,946,873 907,119 $ 9,185,613 Investor A Class ....................... 271,815 2,745,395 537,513 5,444,902 Investor B Class ....................... 55,487 559,640 133,384 1,344,342 Investor C Class ....................... 139,825 1,408,625 326,399 3,319,846 Shares issued in reinvestment of dividends: Institutional Class .................... 4,948 49,774 6,251 63,280 Investor A Class ....................... 27,261 274,272 20,590 207,937 Investor B Class ....................... 5,775 58,131 6,746 68,269 Investor C Class ....................... 5,281 53,146 5,629 56,858 Shares redeemed: Institutional Class .................... (1,653,128) (16,614,334) (863,835) (8,735,695) Investor A Class ....................... (119,168) (1,197,713) (129,041) (1,313,910) Investor B Class ....................... (152,705) (1,536,227) (123,902) (1,246,188) Investor C Class ....................... (237,132) (2,385,338) (320,378) (3,214,949) ---------- ------------- -------- ------------ Net increase (decrease) ................... (665,340) $ (6,637,756) 506,475 $ 5,180,305 ========== ============= ======== ============ 62
BlackRock Funds Kentucky Tax-Free Income ------------------------------------------------------------------------- For the Year Ended For the Year Ended 9/30/05 9/30/04 ---------------------------------- ------------------------------------ Shares Value Shares Value --------------- ---------------- --------------- ------------------ Shares sold: Institutional Class .................... 565,644 $ 5,528,249 494,416 $ 4,824,174 Service Class .......................... 1,020 9,900 17,525 169,829 Investor A Class ....................... 195,578 1,909,210 166,891 1,621,801 Investor B Class ....................... 13,530 132,160 56,399 548,160 Investor C Class ....................... 64,488 629,892 19,781 192,586 Shares issued in reinvestment of dividends: Institutional Class .................... 2,871 27,988 7,612 74,196 Service Class .......................... 581 5,672 307 2,958 Investor A Class ....................... 13,383 130,544 15,451 149,776 Investor B Class ....................... 8,118 79,206 8,650 83,912 Investor C Class ....................... 2,641 25,845 3,218 31,285 Shares redeemed: Institutional Class .................... (1,296,495) (12,649,723) (4,210,095) (40,628,351) Service Class .......................... (1,382) (13,451) (3,003) (28,979) Investor A Class ....................... (114,460) (1,115,126) (100,071) (961,863) Investor B Class ....................... (53,030) (517,295) (53,053) (513,591) Investor C Class ....................... (113,998) (1,112,008) - - ---------- ------------- ---------- -------------- Net decrease .............................. (711,511) $ (6,928,937) (3,575,972) $ (34,434,107) ========== ============= ========== ============== On September 30, 2005, five shareholders held approximately 88% of the UltraShort Municipal Portfolio, two shareholders held approximately 78% of the Tax-Free Income Portfolio, one shareholder held approximately 86% of the Pennsylvania Tax-Free Income Portfolio, one shareholder held approximately 78% of the New Jersey Tax-Free Income Portfolio, one shareholder held approximately 73% of the Ohio Tax-Free Income Portfolio, three shareholders held approximately 73% of the Delaware Tax-Free Income Portfolio and one shareholder held approximately 81% of the Kentucky Tax-Free Income Portfolio. Some of the shareholders are comprised of omnibus accounts, which are held on behalf of several individual shareholders. 63
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) (F) At September 30, 2005 net assets consisted of: Pennsylvania New Jersey UltraShort Tax-Free Tax-Free Tax-Free Municipal Income Income Income --------------- ---------------- ---------------- ---------------- Capital paid-in ............................................. $ 43,054,108 $ 403,737,854 $ 661,339,836 $ 169,082,112 End of period undistributed net investment income (distributions in excess of net investment income) ......... -- 900,332 188,150 (226,463) Accumulated net realized loss on investment transactions and futures contracts ...................................... (61,066) (22,585,928) (46,108,695) (7,686,779) Net unrealized appreciation/depreciation on investment transactions and futures contracts ......................... (107,204) 17,654,762 44,913,465 11,559,096 ------------ ------------- ------------- ------------- $ 42,885,838 $ 399,707,020 $ 660,332,756 $ 172,727,966 ============ ============= ============= ============= Ohio Delaware Kentucky Tax-Free Tax-Free Tax-Free Income Income Income ---------------- --------------- --------------- Capital paid-in ............................................. $ 122,001,567 $ 80,024,090 $ 79,976,674 End of period undistributed net investment income (distributions in excess of net investment income) ......... (142,938) (179,327) 577,813 Accumulated net realized loss on investment transactions and futures contracts ...................................... (3,847,778) (2,656,961) (4,962,247) Net unrealized appreciation on investment transactions and futures contracts .......................................... 8,585,874 4,831,793 6,736,460 ------------- ------------ ------------ $ 126,596,725 $ 82,019,595 $ 82,328,700 ============= ============ ============ (G) Federal Tax Information No provision is made for Federal taxes as it is the Fund's intention to have each Portfolio continue to qualify for and elect the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended, and to make the requisite distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes. Short-term capital gain distributions that are reported in the Statement of Changes in Net Assets are reported as ordinary income for federal tax purposes. There were no short-term or long-term capital gains distributions for the year ended September 30, 2005. Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. As of September 30, 2005, the following permanent differences attributable to market discount were reclassified to the following accounts: Increase (Decrease) Accumulated Undistributed Decrease Net Realized Net Investment Paid in-Capital Gain Income ----------------- -------------- --------------- UltraShort Municipal ................. $-- $ -- $ -- Tax-Free Income ...................... -- 22,750 (22,750) Pennsylvania Tax-Free Income ......... -- 33,065 (33,065) New Jersey Tax-Free Income ........... -- 22,725 (22,725) Ohio Tax-Free Income ................. -- 49,270 (49,270) Delaware Tax-Free Income ............. -- 572 (572) Kentucky Tax-Free Income ............. -- 9,396 (9,396) 64
BlackRock Funds The tax character of distributions paid during the years ended September 30, 2005 and September 30, 2004 were as follows: Tax-Free Ordinary Total Income Income Distributions ------------- ---------- -------------- UltraShort Municipal 9/30/05 ......................................... $ 770,909 $ -- $ 770,909 For the period 3/03/04 /1/ through 9/30/04 ...... 228,525 -- 228,525 Tax-Free Income 9/30/05 ......................................... 17,478,544 -- 17,478,544 9/30/04 ......................................... 18,475,728 -- 18,475,728 Pennsylvania Tax-Free Income 9/30/05 ......................................... 33,000,554 -- 33,000,554 9/30/04 ......................................... 35,861,484 14,600 35,876,084 New Jersey Tax-Free Income 9/30/05 ......................................... 7,656,354 -- 7,656,354 9/30/04 ......................................... 8,362,368 47,469 8,409,837 Ohio Tax-Free Income 9/30/05 ......................................... 5,669,535 -- 5,669,535 9/30/04 ......................................... 5,272,616 -- 5,272,616 Delaware Tax-Free Income 9/30/05 ......................................... 3,442,702 -- 3,442,702 9/30/04 ......................................... 3,997,046 -- 3,997,046 Kentucky Tax-Free Income 9/30/05 ......................................... 3,075,463 -- 3,075,463 9/30/04 ......................................... 4,721,493 44,470 4,765,963 /1/ Commencement of operations. As of September 30, 2005, the tax components of distributable earnings/(accumulated losses) were as follows: Undistributed Accumulated Post- Tax-Free Capital October Income Losses Losses --------------- ---------------- -------------- UltraShort Municipal ................. $ 17,470 $ (32,641) $ (28,425) Tax-Free Income ...................... 1,879,622 (22,035,923) (547,504) Pennsylvania Tax-Free Income ......... 1,894,243 (45,700,701) (269,411) New Jersey Tax-Free Income ........... 167,826 (7,686,779) -- Ohio Tax-Free Income ................. 114,217 (3,533,923) (313,855) Delaware Tax-Free Income ............. 27,699 (2,512,593) (81,428) Kentucky Tax-Free Income ............. 760,646 (4,934,530) -- The estimated Post-October losses represent losses realized on investment transactions from November 1, 2004 through September 30, 2005 that, in accordance with Federal income tax regulations, the Portfolios may defer and treat as having arisen in the following fiscal year. For Federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. 65
BlackRock Funds Notes to Financial Statements (Concluded) At September 30, 2005, the Portfolios had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates: Expiring September 30 ----------------------------------------- 2008 2009 2010 ------------- ------------- ------------- UltraShort Municipal ................ $ -- $ -- $ -- Tax-Free Income ...................... 3,717,571 1,756,215 -- Pennsylvania Tax-Free Income ......... 3,981,394 7,641,061 8,626,794 New Jersey Tax-Free Income ........... 733,444 2,652,175 162,686 Ohio Tax-Free Income ................. 41,989 -- -- Delaware Tax-Free Income ............. 83,140 -- -- Kentucky Tax-Free Income ............. 805,091 1,556,368 129,603 Expiring September 30 -------------------------------------------- 2011 2012 2013 Total --------------- ------------- -------------- -------------- UltraShort Municipal ................. $ -- $ 32,641 $ -- $ 32,641 Tax-Free Income ...................... 3,984,021 6,841,418 5,736,698 22,035,923 Pennsylvania Tax-Free Income ......... 15,329,699 -- 10,121,753 45,700,701 New Jersey Tax-Free Income ........... 2,530,579 883,300 724,595 7,686,779 Ohio Tax-Free Income ................. 1,883,560 825,006 783,368 3,533,923 Delaware Tax-Free Income ............. 1,312,264 493,468 623,721 2,512,593 Kentucky Tax-Free Income ............. 2,443,468 -- -- 4,934,530 $200,954 and $1,824 of its capital loss carryforward was used to offset net taxable gains realized in the fiscal year ended September 30, 2005 for the Kentucky Tax-Free Income and Ultra Short Municipal funds, respectively. Wash Sale Tax Gross Outstanding at Unrealized 9/30/2005 Book Cost Tax Cost Appreciation ---------------- ----------------- --------------- ------------- UltraShort Municipal ............. $ -- $ 42,827,249 $ 42,827,249 $ 1,957 Tax-Free Income .................. 2,500 397,546,425 397,548,925 19,502,358 PA Tax-Free Income ............... 138,585 628,130,574 628,269,159 45,876,612 NJ Tax-Free Income ............... -- 159,352,668 159,352,668 12,315,062 Ohio tax-Free Income ............. -- 119,958,170 119,958,170 8,644,477 DE Tax-Free Income ............... 62,940 78,318,614 78,381,554 5,152,306 Kentucky Tax-Free Income ......... 27,717 74,458,284 74,486,001 6,708,743 Tax Gross Tax Net Unrealized Appreciation/ Depreciation Depreciation Market Value ------------- ------------- -------------- UltraShort Municipal ............. $ (109,161) $ (107,204) $ 42,720,045 Tax-Free Income .................. (1,850,096) 17,652,262 415,201,187 PA Tax-Free Income ............... (1,101,734) 44,774,878 673,044,037 NJ Tax-Free Income ............... (755,966) 11,559,096 170,911,764 Ohio tax-Free Income ............. (58,603) 8,585,874 128,544,044 DE Tax-Free Income ............... (383,453) 4,768,853 83,150,407 Kentucky Tax-Free Income ......... -- 6,708,743 81,194,744 (H) Concentration of Credit Risk The Portfolios concentrate their investments in securities issued by state agencies, other governmental entities and U.S. territories. The Portfolios are more susceptible to adverse financial, social, environmental, economic, regulatory and political factors that may affect these states, which could seriously affect the ability of these states and their municipal subdivisions to meet continuing obligations for principal and interest payments, than if the Portfolios were not concentrated in securities issued by state agencies, other governmental entities and U.S. territories. 66
BlackRock Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of BlackRock Funds: We have audited the accompanying statements of net assets of the UltraShort Municipal, Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Delaware Tax-Free Income and Kentucky Tax-Free Income Portfolios [seven of the fifty portfolios constituting BlackRock Funds (the "Fund"), collectively the "Portfolios"], as of September 30, 2005 and the related statements of operations for the year then ended, and the statements of changes in net assets and financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Portfolios for the periods ended September 30, 2003, September 30, 2002 and September 30, 2001, before the adjustments for the Tax-Free Income, Pennsylvania Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Delaware Tax-Free Income and Kentucky Tax-Free Income Portfolios, described in Note B to the financial statements, were audited by other auditors whose report, dated November 26, 2003, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Portfolios are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolios' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2005, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. We also audited the adjustments described in Note B that were applied to restate the financial highlights of the Portfolios named above for the period ended September 30, 2002. In our opinion, such adjustments are appropriate and have been properly applied. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of the Portfolios as of September 30, 2005, the results of their operations for the year ended, and the changes in their net assets and their financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Philadelphia, Pennsylvania November 25, 2005 67
BlackRock Funds FUND MANAGEMENT (Unaudited) Information pertaining to the Trustees and officers of the Fund is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (888) 825-2257. Institutional and service share class investors should call (800) 441-7450. Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) And Length Complex/(2)/ Directorships for the Name, Address and Held with of Time Principal Occupation(s) Overseen Held by Year Ending Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEES - ------------------------------------------------------------------------------------------------------------------------------------ Richard S. Davis/(3)/ Trustee Since 2005 Managing Director, BlackRock, Inc. 55 None N/A BlackRock, Inc. (since 2005); Chief Executive Officer, (includes 40 E. 52nd Street State Street Research & 50 New York, NY 10022 Management Company (2000-2005); Portfolios Age: 59 Since 2000 Chairman of the Board of of the Fund Trustees, State Street Research mutual and 5 funds ("SSR Funds") (2000-2005); Portfolios Senior Vice President, Metropolitan of Life Insurance Company (1999-2000); BlackRock Chairman, SSR Realty (2000-2004). Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Laurence D. Fink/(4)/ Trustee Since 2000 Director, Chairman and Chief 55 Director, BlackRock, Inc. Executive Officer of BlackRock, Inc. (includes BlackRock, N/A 40 E. 52nd Street since its formation in 1998 and of 50 Inc. New York, NY 10022 BlackRock, Inc.'s predecessor Portfolios Age: 52 entities since 1988; Chairman of the of the Fund Management Committee; formerly, and 5 Managing Director of the First Portfolios Boston Corporation, Member of its of Management Committee, Co-head of BlackRock its Taxable Fixed Income Division Bond and Head of its Mortgage and Real Allocation Estate Products Group; Chairman of Target the Board of Nomura BlackRock Shares) Asset Management and several of BlackRock's alternative investment vehicles; Director of several of BlackRock's offshore funds; Co-Chairman of the Board of Trustees of Mount Sinai-NYU; Co-Chairman of the Board of Trustees of NYU Hospitals Center; member of the Board of Trustees of NYU; member of the Board of Executives of the New York Stock Exchange, and Trustee of the American Folk Art Museum. - ------------------------------------------------------------------------------------------------------------------------------------ 68
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) And Length Complex/(2)/ Directorships for the Name, Address and Held with of Time Principal Occupation(s) Overseen Held by Year Ending Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES - ------------------------------------------------------------------------------------------------------------------------------------ Bruce R. Bond Trustee Since 2005 Retired; Trustee and member of the 55 Director, Avaya $ 84,600 c/o BlackRock Funds Governance Committee, SSR Funds (includes Inc.(information 100 Bellevue Parkway (1997-2005). 50 technology). Wilmington, DE 19809 Portfolios Age: 59 of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Peter S. Drotch Trustee Since 2005 Retired; Trustee and member of the 55 Director, First $ 84,600 c/o BlackRock Funds Audit Committee, SSR Funds (includes Marblehead Corp. 100 Bellevue Parkway (2003-2005); Partner, Pricewater- 50 (student loan Wilmington, DE 19809 houseCoopers LLP (accounting firm) Portfolios processing and Age: 64 (1964-2000). of the Fund securitization); and 5 Trustee, Portfolios University of of Connecticut; Trustee BlackRock ,Huntington Theatre. Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Honorable Stuart E. Trustee and Since 2001 Partner, Covington & Burling (law 55 Director, Mirant $130,100 Eizenstat Covington Chairman of firm) (2001-Present); Deputy (includes Corporation; & Burling 1201 the Nominating Secretary of the Treasury 50 Advisory Pennsylvania Avenue, Committee (1999-2001); Under Secretary of Portfolios Board member, NW State for Economic, Business and of the Fund TheCoca-Cola Company; Washington, DC 20004 Agricultural Affairs (1997-1999); and 5 Advisory Board Age: 62 Under Secretary of Commerce for Portfolios member, Group International Trade (1996-1997); of Menatep; Advisory U.S. Ambassador to the European BlackRock Board member, BT Union (1993-1996); Chairman, Bond Americas. International Board of Governors, Allocation Weizmann Institute of Science. Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Robert M. Hernandez Trustee, Vice Since 1996 Retired; Director (1991-2001), Vice 55 Lead Director, ACE $140,100 c/o BlackRock Funds Chairman of Chairman and Chief Financial Officer (includes Limited (insurance 100 Bellevue Parkway the Board and (1994-2001), Executive Vice 50 company); Director Wilmington, DE 19809 Chairman of President-Accounting and Finance Portfolios and Chairman of the Age: 61 the Audit and Chief Financial Officer of the Fund Board, RTI Committee (1991-1994), USX Corporation (a and 5 International Metals, diversified company principally Portfolios Inc.: Director, engaged in energy and steel of Eastman Chemical businesses). BlackRock Company. Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ 69
BLACKROCK FUNDS FUND MANAGEMENT (Unaudited) (Continued) Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) And Length Complex/(2)/ Directorships for the Name, Address and Held with of Time Principal Occupation(s) Overseen Held by Year Ending Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ Dr. Matina Horner Trustee and Since 2004 Retired; Executive Vice President of 55 Chair of the Board $104,550 c/o BlackRock Funds Chairperson of Teachers Insurance and Annuity (includes of the Massachusetts 100 Bellevue Parkway the Governance Association and College Retirement 50 General Hospital Wilmington, DE 19809 Committee Equities Fund (TIAA-CREF) Portfolios Institute of Health Age: 66 (1989-2003). of the Fund Professions; Chair and 5 of the Board of the Portfolios Greenwall of Foundation; Trustee, BlackRock Century Foundation Bond (formerly The Allocation Twentieth Century Target Fund); Director, N X Shares) Fund); Director, N Boston Edison); Director, The Neiman Marcus Group; Honorary Trustee, Massachusetts General Hospital Corporation. - ------------------------------------------------------------------------------------------------------------------------------------ Toby Rosenblatt Trustee Since 2005 President, Founders Investment Ltd. 55 Director, A.P. $ 84,600 c/o BlackRock Funds (private investments) (since 1999); (includes Pharma, Inc. 100 Bellevue Parkway Trustee, SSR Funds (1993-2003). 50 Wilmington, DE 19809 Portfolios Age: 67 of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ David R. Trustee and Since 1996 Chairman, Wilmerding & Associates, 56 None $135,100 Wilmerding, Jr. Chairperson of Inc. (investment advisers) (since (includes c/o BlackRock Funds the Board 1989); Chairman, Coho Partners, 50 100 Bellevue Parkway Ltd. (investment advisers) (since Portfolios Wilmington, DE 19809 2003); Director, Beaver Management of the Fund, Age: 70 Corporation (land management 5 Portfolios corporation); Managing General of Partner, Chestnut Street Exchange BlackRock Fund. Bond Allocation Target Shares and 1 Portfolio of Chestnut Street Exchange Fund, which is managed by BlackRock Financial Management Inc. and BlackRock Institutional Management Corporation.) - ------------------------------------------------------------------------------------------------------------------------------------ 70
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Term of Total Fund Office(5) Compensation Position(s) and Length for the Name, Address and Held with of Time Principal Occupation(s) Year Ending Age Fund Served During Past Five Years 9/30/05 - ---------------------------------------------------------------------------------------------------------------------------- OFFICERS WHO ARE NOT TRUSTEES - ---------------------------------------------------------------------------------------------------------------------------- Anne Ackerley Vice President Since 2003 Managing Director, BlackRock, Inc. (since May N/A BlackRock, Inc. (previously 2000); First Vice President and Operating 40 E. 52nd Street served as Officer, Mergers and Acquisitions Group New York, NY 10022 Assistant (1997-2000), First Vice President and Operating Age: 43 Secretary Officer, Public Finance Group (1995-1997), and since First Vice President, Emerging Markets Fixed 2000) Income Research (1994-1995), Merrill Lynch & Co. - ---------------------------------------------------------------------------------------------------------------------------- Edward Baer Assistant Since 2005 Director and Senior Counsel of BlackRock, Inc. N/A BlackRock, Inc. Secretary (since 2004); Associate, Willkie Farr & 40 E. 52nd Street Gallagher LLP (2000-2004); Associate, Morgan New York, NY 10022 Lewis & Bockius LLP (1995-2000). - ---------------------------------------------------------------------------------------------------------------------------- Age: 37 Bart Battista Chief Since 2004 Chief Compliance Officer and Anti-Money $368,547 BlackRock, Inc. Compliance Laundering Compliance Officer of BlackRock, 40 E. 52nd Street Officer and Inc. (since 2004); Managing Director (since New York, NY 10022 Anti-Money 2003), and Director (1998-2002) of BlackRock, Age: 46 Laundering Inc.; Compliance Officer at Moore Capital Compliance Management (1995-1998). Officer - ---------------------------------------------------------------------------------------------------------------------------- Ellen L. Corson Assistant Since 1998 Senior Director and Vice President of Fund N/A PFPC Inc. Treasurer Accounting and Administration, PFPC Inc. 103 Bellevue Parkway (since 2003); Vice President and Director of Wilmington, DE 19809 Mutual Fund Accounting and Administration, Age: 41 PFPC Inc. (since November 1997); Assistant Vice President, PFPC Inc. (March 1997-November 1997); Senior Accounting Officer, PFPC Inc. (March 1993-March 1997). - ---------------------------------------------------------------------------------------------------------------------------- Henry Gabbay President Since 2005 Managing Director, BlackRock, Inc. (since N/A BlackRock, Inc. 1989). 40 E. 52nd Street New York, NY 10022 Age: 57 - ---------------------------------------------------------------------------------------------------------------------------- Brian P. Kindelan Secretary Since 1997 Managing Director and Senior Counsel (since N/A BlackRock Advisors, Inc. January 2005), Director and Senior Counsel 100 Bellevue Parkway (2001-2004) and Vice President and Senior Wilmington, DE 19809 Counsel (1998-2000), BlackRock Advisors, Age: 46 Inc.; Senior Counsel, PNC Bank Corp. May 1995-April 1998). - ---------------------------------------------------------------------------------------------------------------------------- William McGinley Treasurer Since 2005 Managing Director of BlackRock, Inc. (since N/A BlackRock, Inc. 2004); Partner, PricewaterhouseCoopers LLP 100 Bellevue Parkway (1990-2004). Wilmington, DE 19809 Age: 38 - ---------------------------------------------------------------------------------------------------------------------------- Vincent Tritto Assistant Since 2003 Managing Director and Assistant Secretary N/A BlackRock, Inc. Secretary (since January 2005) and Director and Senior 40 E. 52nd Street Counsel (2002-2004) of BlackRock, Inc. New York, NY 10022 Executive Director (2000-2002) and Vice Age: 44 President (1998-2000), Morgan Stanley & Co. Incorporated and Morgan Stanley Asset Management Inc. and officer of various Morgan Stanley-sponsored investment vehicles: Counsel (1998); Associate (1988-1997), Rogers & Wells LLP, New York, NY. - ---------------------------------------------------------------------------------------------------------------------------- 71
BlackRock Funds FUND MANAGEMENT (Unaudited) (Concluded) (1) Each Trustee holds office for an indefinite term until the earlier of (1) the next meeting of shareholders at which Trustees are elected and until his or her successor is elected and qualified and (2) such time as such Trustee resigns or his or her term as a Trustee is terminated in accordance with the Fund's code of regulations and Declaration of Trust. (2) A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, that have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. (3) Mr. Davis is an interested person of the Fund due to his position at BlackRock, Inc. (4) Mr. Fink is an interested person of the Fund due to his position at BlackRock, Inc. (5) Each officer holds office for an indefinite term until the earlier of (1) the next meeting of trustees at which his or her successor is appointed and (2) such time as such officer resigns or his or her term as an officer is terminated in accordance with the Fund's code of regulations and Declaration of Trust. 72
BlackRock Funds ADDITIONAL INFORMATION (Unaudited) (A) A proxy statement was sent to shareholders of all portfolios of the Fund asking them to consider and vote upon the election of nine trustees to the Board of Trustees of the Fund (the "Board"). Five of the nine nominees were already serving as trustees of the Fund and the additional nominees had previously served as trustees of the State Street Research Funds. Due to the increased size and complexity of the Fund resulting from the reorganization with the State Street Research Funds, and an increase in the responsibilities of boards of trustees of funds generally, the Board believed it was in the best interest of the Fund to increase the size of the Board. On April 29, 2005, the special meeting of shareholders was held, at which all of the nominees included in the proxy were duly elected to the Board. The votes for the election of trustees were as follows: Affirmative Negative --------------- ---------- Bruce R. Bond .................... 3,006,153,475 9,427,152 Richard S. Davis ................. 3,006,504,966 9,075,661 Peter S. Drotch .................. 3,006,391,368 9,189,259 Stuart E. Eizenstat .............. 3,005,972,578 9,608,049 Laurence D. Fink ................. 3,006,652,923 8,927,704 Robert M. Hernandez .............. 3,006,095,141 9,485,487 Dr Matina Horner ................. 3,005,916,103 9,664,525 Toby Rosenblatt .................. 3,006,157,679 9,422,948 David R. Wilmerding, Jr. ......... 3,006,022,868 9,557,759 (B) PricewaterhouseCoopers LLP ("PwC"), the Fund's former independent auditor, has been hired as an internal audit supporting service provider by The PNC Financial Services Group, Inc. ("PNC"), the parent company of the Fund's investment adviser and certain other service providers. In order to provide certain services to PNC and its affiliates which would have caused PwC to no longer be independent with respect to the Fund, PwC declined to stand for re-election as independent auditor of the Fund after the completion of the fiscal 2003 audit. The Fund's Audit Committee approved engaging Deloitte & Touche LLP as the independent registered public accounting firm to audit the Fund's financial statements for fiscal year 2006. A majority of the Fund's Board of Trustees, including a majority of the independent Trustees, approved the appointment of Deloitte & Touche LLP as the Fund's independent registered public accounting firm for the Fund's fiscal 2006 audit on November 29, 2005, subject to the right of the Fund, by a majority vote of the shareholders at any meeting called for that purpose, to terminate the appointment without penalty. (C) As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and various information requests from the Securities and Exchange Commission in connection with ongoing industry-wide investigations of mutual fund matters. 73
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BlackRock Funds Investment Adviser BlackRock Advisors, Inc. Wilmington, Delaware 19809 Sub-Adviser BlackRock Financial Management, Inc. New York, New York 10022 Custodian PFPC Trust Co. Philadelphia, Pennsylvania 19153 Co-Administrator and Transfer Agent PFPC Inc. Wilmington, Delaware 19809 Distributor BlackRock Distributors, Inc. King of Prussia, Pennsylvania 19406 Co-Administrator BlackRock Advisors, Inc. Wilmington, Delaware 19809 Counsel Simpson Thacher & Bartlett LLP New York, New York 10017 Independent Registered Public Accounting Firm Deloitte & Touche LLP Philadelphia, Pennsylvania 19103 The Fund will mail only one copy of shareholder documents, including prospectuses, annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called "householding" and it is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact the Fund at (800) 441-7762. The Fund has delegated proxy voting responsibilities to BlackRock and its affiliates, subject to the general oversight of the Fund's Board of Trustees. A description of the policies and procedures that BlackRock and its affiliates use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling (800) 441-7762, or on the website of the Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information on how proxies relating to the Fund's voting securities were voted (if any) by the Advisor during the most recent 12-month period ended June 30th is available, upon request and without charge, by calling (800) 441-7762 or on the website of the Commission at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings for the first and third quarters of its fiscal year with the Commission on Form N-Q. The Fund's Form N-Q is available on the Commission's website at http://www.sec.gov and may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's Form N-Q may also be obtained upon request, without charge, by calling (800) 441-7762.
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BlackRock Funds FUND SPECTRUM BlackRock Funds is a leading mutual fund company currently managing approximately $26 billion in the following portfolios designed to fit a broad range of investment goals. Each portfolio is managed by recognized experts in equity, fixed income, international, and tax-free investing. STOCK PORTFOLIOS - -------------------------------------- Investment Trust Small Cap Core Equity Large Cap Value Equity Small Cap Growth Equity Large Cap Growth Equity Global Science & Technology Dividend Achievers(TM) Opportunities Legacy Global Resources Mid-Cap Value Equity All-Cap Global Resources Mid-Cap Growth Equity Health Sciences Aurora U.S. Opportunities Small/Mid-Cap Growth International Opportunities Small Cap Value Equity Index Equity STOCK & BOND PORTFOLIOS - -------------------------------------- Asset Allocation BOND PORTFOLIOS - -------------------------------------- Enhanced Income Government Income Low Duration Bond Inflation Protected Bond Intermediate Government Bond GNMA Intermediate Bond Managed Income Intermediate PLUS Bond International Bond Core Bond Total Return High Yield Bond Core PLUS Total Return TAX-FREE BOND PORTFOLIOS - -------------------------------------- UltraShort Municipal Ohio Tax-Free Income Tax-Free Income Delaware Tax-Free Income Pennsylvania Tax-Free Income Kentucky Tax-Free Income New Jersey Tax-Free Income MONEY MARKET PORTFOLIOS - -------------------------------------- Money Market North Carolina Municipal Money Market U.S. Treasury Money Market Ohio Municipal Money Market Municipal Money Market Pennsylvania Municipal Money Market New Jersey Municipal Money Market Virginia Municipal Money Market SHAREHOLDER PRIVILEGES Account Information Call us at 1-800-441-7762 to get information about your account balances, recent transactions and share prices. You can also reach us on the web at www.blackrock.com. Automatic Investment Plans Investor Class shareholders who want to invest regularly can arrange to have $50 or more automatically deducted from their checking or savings account and invested in any of the BlackRock portfolios. Systematic Withdrawal Plans Investor Class shareholders can establish a systematic withdrawal plan and receive periodic payments of $50 or more from their BlackRock portfolios, as long as their account is at least $10,000. Retirement Plans Shareholders may make investments in conjunction with Traditional, Rollover, Roth, Coverdell and Simple IRA's. Additional Information About the Blackrock Funds For additional reports or additional information, as well as more current information about portfolio holdings and characteristics, BlackRock Fund shareholders and prospective investors may call 1-800-441-7762.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by PNC Bank, National Association or any other bank and shares are not federally insured by, guaranteed by, obligations of or otherwise supported by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Investments in shares of the fund involve investment risks, including the possible loss of the principal amount invested. BlackRock BND-ANN2 11/05
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE BlackRock Funds Strategic Portfolio Annual Report September 30, 2005 [GRAPHIC APPEARS HERE] NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE BlackRock
BlackRock Funds STRATEGIC PORTFOLIO TABLE OF CONTENTS Portfolio Summary Strategic Portfolio I.................... ................................ 1-2 Statement of Net Assets ...................................................... 3 Portfolio Financial Statements Statement of Operations..................................................... 4 Statements of Changes in Net Assets......................................... 5 Financial Highlights........................................................ 6 Notes to Financial Statements..... ........................................ 7-11 Report of Independent Registered Public Accounting Firm ............................................................. 12 Fund Management............................... ........................... 13-17 Additional Information ...................................................... 18 PRIVACY PRINCIPLES OF BLACKROCK FUNDS BlackRock Funds is committed to maintaining the privacy of its shareholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock Funds collects, how we protect that information, and why in certain cases we may share such information with select other parties. BlackRock Funds does not receive any nonpublic personal information relating to its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record owners of BlackRock Funds, BlackRock Funds receives nonpublic personal information on account applications or other forms. With respect to these shareholders, BlackRock Funds also has access to specific information regarding their transactions in BlackRock Funds. BlackRock Funds does not disclose any nonpublic personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders' accounts (for example, to a transfer agent). BlackRock Funds restricts access to nonpublic personal information about its shareholders to BlackRock employees with a legitimate business need for the information. BlackRock Funds maintains physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our shareholders.
BlackRock Strategic Portfolio I Total Net Assets (9/30/05): $71.3 million Performance Benchmark: Citigroup Non-U.S. World Government Bond Index (Hedged) Investment Approach: Seeks to maximize total return through the investment in a portfolio of investment grade fixed income securities of foreign and U.S. issuers denominated in foreign currencies, baskets of foreign currencies and the U.S. dollar. The Portfolio normally invests at least 65% of its total assets in non-dollar denominated bonds of issuers located outside of the United States. The Portfolio intends to primarily invest in developed countries, although it has the ability to invest up to 20% of its total assets in bonds of issuers in emerging market countries. The Portfolio may also invest in non-U.S. currencies. Securities are purchased for the Portfolio when the management team determines that they have the potential for above-average total return. When determining what securities to purchase and sell, the management team considers, among other things, the relative risk versus the potential reward of owning a security; the credit, interest rate and prepayment risk; and general market conditions. In addition, the management team conducts intense credit analysis and review of each security purchased or sold. Recent Portfolio Management Activity: . The Portfolio underperformed the benchmark for the annual period. . Non-U.S. bond markets outperformed during the first half of the annual period, mainly due to strong performance during the fourth quarter of 2004. The rebound in U.S. economic growth and the determination of the Federal Reserve to maintain their measured tightening process contrasted with more sluggish conditions in Europe and Japan. Disappointing economic releases dampened optimism for a significant European rebound as higher oil prices and the strong euro continued to hamper manufacturing, resulting in sluggish GDP growth in the entire Euro-zone. Japan also experienced disappointing economic news as fourth quarter GDP was released as a modest negative number, the third consecutive quarter of negative growth. In the Dollar Bloc, Canadian bonds outperformed U.S. bonds as the Bank of Canada halted their tightening program given the strength of the Canadian dollar. In contrast, the Reserve Bank of Australia and the Reserve Bank of New Zealand both raised official rates with a 25 basis point rise to 5.50% in Australia and a 50 basis point increase to 6.75% in New Zealand. . In the first half of the annual period, the Portfolio remained long duration in New Zealand and Mexico. The Portfolio initiated exposure to Swedish inflation-linked bonds given attractive break-even levels and scope for inflation to build. The Portfolio also held currency positions throughout the period with trades on the pound versus euro, yen versus euro and Mexican peso versus the U.S. dollar. . During the second half of the annual period, economic growth remained lackluster in Europe and market participants expressed doubt regarding the sustainability of the European economic expansion. In contrast, the Bank of Canada resumed its tightening stance by raising rates 25 basis points to 2.75% in September. Despite hawkish rhetoric, the Reserve Bank of New Zealand did not raise interest rates in the second half of the annual period. During the latter half of the period, several developments in Japan reinforced the notion of a sustainable economic recovery. The second quarter GDP release highlighted the continued recovery in domestic demand, labor force numbers showed strength and the Nikkei surged more than 20% during the third quarter of 2005. . In the second half of the annual period, the Portfolio sold out of its position in Swedish inflation-linked bonds which benefited performance. The Portfolio had exposure to New Zealand and Canadian government and corporate bonds. The Portfolio maintained exposure to euro government bonds and had an allocation to intermediate maturity Mexican government bonds. The Portfolio held currency positions in the period, maintaining a position in the yen versus euro. In addition, the Portfolio had trades on the Swedish Krona versus the euro and yen versus the U.S. dollar during the period. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE STRATEGIC PORTFOLIO I AND THE CITIGROUP NON-U.S. WORLD GOVERNMENT BOND INDEX (HEDGED) FROM INCEPTION. [LINE CHART] Institutional Citigroup Non-U.S. World Government Index (Hedged) ------------- -------------------------------------------------- 10/06/1997 $ 10,000 $ 10,000 12/31/1997 10,141 10,203 03/31/1998 10,303 10,515 06/30/1998 10,515 10,758 09/30/1998 11,084 11,319 12/31/1998 11,136 11,381 03/31/1999 11,131 11,590 06/30/1999 11,164 11,517 09/30/1999 11,290 11,572 12/31/1999 11,349 11,708 03/31/2000 11,478 11,962 06/30/2000 11,786 12,179 09/30/2000 12,245 12,378 12/31/2000 13,268 12,834 03/31/2001 13,709 13,186 06/30/2001 13,542 13,236 09/30/2001 14,144 13,524 12/31/2001 14,448 13,617 03/31/2002 14,484 13,563 06/30/2002 15,350 13,869 09/30/2002 15,521 14,326 12/31/2002 16,037 14,550 03/31/2003 16,070 14,742 06/30/2003 16,490 14,935 09/30/2003 16,512 14,819 12/31/2003 16,566 14,823 03/31/2004 16,949 15,071 06/30/2004 16,612 14,909 09/30/2004 16,956 15,263 12/31/2004 17,268 15,591 03/31/2005 17,215 15,784 06/30/2005 17,738 16,283 09/30/2005 17,714 16,337 For Period Ending September 30, 2005 Strategic Portfolio I - Average Annual Return 1 Year 3 Year 5 Year From Inception - ------------ ---------- ---------- --------------- 4.47% 4.51% 7.67% 7.43% Past Performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 1
Blackrock Strategic Portfolio I FUND PROFILE Credit Quality (% of long-term investments)/1/ AAA 75.3% AA 6.2 A 16.6 BBB 1.9 ----- Total 100.0% ===== Countries (% of long-term investments) Germany 35.5% Mexico 17.3 New Zealand 11.4 United States 10.2 Canada 9.7 France 6.1 Netherlands 5.6 Spain 4.2 ----- Total 100.0% ===== Portfolio Statistics Average maturity (years) 12.73 Effective Duration/2/ 4.07 - ---------- /1/ Using the higher of Standard & Poor's ("S&P's") or Moody's Investors Service ("Moody's") rating. /2/ Duration measures a Portfolio's price risk. Each year of duration represents an expected 1% change in the net asset value of the portfolio for every 1% change in interest rates. Effective duration is typically calculated for bonds with embedded options and assumes that expected cash flows will fluctuate as interest rates change. - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Hypothetical Expenses Actual Expenses (5% return before expenses) --------------------- ---------------------------- Institutional Class Institutional Class --------------------- ---------------------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,029.00 1,023.88 Expenses Incurred During Period (4/01/05 - 9/30/05) 1.12 1.12 For the Institutional share class of the Portfolio, expenses are equal to the annualized expense ratio of 0.22%, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 2
BlackRock Funds STATEMENT OF NET ASSETS BLACKROCK STRATEGIC PORTFOLIO I As of September 30, 2005 Par Maturity (000) Value ------------ --------- ------------- U.S. GOVERNMENT & AGENCY OBLIGATIONS - 8.2% U.S. Treasury Notes 3.50%(b) (Cost $5,974,413) 12/15/09 $ 6,000 $ 5,836,404 ----------- FOREIGN BONDS - 67.4% Canada - 7.8% Canada Government Bonds (CND) 3.25% 12/01/06 2,500 2,153,907 Province of Ontario, Unsecured Notes (NZD) 6.25% 06/16/15 5,000 3,409,790 ----------- 5,563,697 ----------- Germany - 28.6% Bundesrepublic Deutschland (EUR) 4.00% 01/04/37 13,100 16,996,532 KFW (CND) 5.05% 02/04/25 3,700 3,373,166 ----------- 20,369,698 ----------- Mexico - 13.9% Mexican Fixed Rate Bonds (MXP) 12/24/08- 8.00% 12/07/23 21,495 1,927,697 12/24/09- 9.00% 12/20/12 73,850 7,028,834 9.50% 12/18/14 9,700 971,361 ----------- 9,927,892 ----------- Netherlands - 4.5% Kingdom of Netherlands Bonds (EUR) 4.00%(c) 01/15/37 2,500 3,223,931 ----------- New Zealand - 9.2% General Electric Capital Corp., Senior Unsubor- dinated Notes (NZD) 6.50% 09/28/15 5,000 3,381,110 Government of New Zealand (NZD) 6.00% 04/15/15 4,500 3,147,468 ----------- 6,528,578 ----------- Spain - 3.4% Spain Letras del Tesoro (EUR) 2.02%(d) 12/23/05 2,000 2,400,251 ----------- TOTAL FOREIGN BONDS (Cost $46,788,418) 48,014,047 ----------- SHORT TERM INVESTMENTS - 25.5% Federal Home Loan Bank, Discount Notes 3.18%(e) 10/03/05 $13,000 $12,997,703 French Discount Treasury Bills (EUR) 2.01% 11/24/05 2,900 3,484,832 Galileo Money Market Fund 1,731 1,731,091 ----------- TOTAL SHORT TERM INVESTMENTS (Cost $18,199,589) 18,213,626 ----------- TOTAL INVESTMENTS IN SECURITIES - 101.1% (Cost $70,962,420(a)) 72,064,077 LIABILITIES IN EXCESS OF OTHER ASSETS - (1.1)% (778,049) ----------- NET ASSETS - 100.0% (Applicable to 8,116,371 Institutional shares outstanding) $71,286,028 =========== NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER INSTITUTIONAL SHARE ($71,286,028/8,116,371) $ 8.78 ====== - ---------- (a) Cost for Federal income tax purposes is $70,962,888. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $1,750,702 Gross unrealized depreciation (649,513) ---------- $1,101,189 ========== (b) Securities, or a portion thereof, pledged as collateral with a value of $1,459,101 on 277 long U.S. Treasury Note futures contracts and 572 short Euro Bobl futures contracts expiring December 2005 and 200 short Canadian Bank Acceptance futures contracts expiring March 2006. The value of such contracts on September 30, 2005 was $149,765,092, with an unrealized loss of $242,290 (including commissions of $2,683). (c) Security is illiquid. As of September 30, 2005, the Portfolio held 4.5% of its net assets, with a current market value of $3,223,931 in these securities. (d) The rate shown is the effective yield on the zero coupon bonds at the time of purchase. (e) The rate shown is the effective yield on the discount notes at the time of purchase. KEY TO INVESTMENT ABBREVIATIONS CND Canadian Dollar EUR Euro MXP Mexican Peso NZD New Zealand Dollar See accompanying notes to financial statements. 3
BlackRock Funds STATEMENT OF OPERATIONS BLACKROCK STRATEGIC PORTFOLIO I For the year ended September 30, 2005 Investment income: Interest .......................................................................... $ 2,959,927 ------------ Expenses: Investment advisory fee ........................................................... 139,505 Administration fee ................................................................ 160,431 Custodian fee ..................................................................... 39,573 Legal and audit fees .............................................................. 23,786 Transfer agent fee ................................................................ 18,039 Printing .......................................................................... 3,173 Trustees' fees .................................................................... 2,419 Other ............................................................................. 4,208 ------------ Total expenses excluding interest expense ....................................... 391,134 Interest expense .............................................................. 10,501 ------------ Total expenses .................................................................. 401,635 ------------ Less investment advisory fee waived ........................................... (139,505) Less administration fee waived ................................................ (107,497) Less transfer agent fee waived ................................................ (920) Less custodian fee waived ..................................................... (2,061) ------------ Net expenses .................................................................... 151,652 ------------ Net investment income ............................................................... 2,808,275 ------------ Realized and unrealized gain (loss) on investments and foreign currency transactions: Net realized gain (loss) from: Investment transactions ......................................................... 2,244,027 Futures contracts ............................................................... (442,985) Foreign currency transactions ................................................... 1,514,041 ------------ 3,315,083 ------------ Change in unrealized appreciation/depreciation from: Investments ...................................................................... (1,809,901) Futures contracts ................................................................ 232,364 Foreign currency transactions .................................................... (1,372,468) ------------ (2,950,005) ------------ Net gain on investments and foreign currency transactions ........................... 365,078 ------------ Net increase in net assets resulting from operations ................................ $ 3,173,353 ============ See accompanying notes to financial statements. 4
BlackRock Funds STATEMENTS OF CHANGES IN NET ASSETS BLACKROCK STRATEGIC PORTFOLIO I For the For the Year Ended Year Ended 9/30/05 9/30/04 ---------------- ---------------- Increase in net assets: Operations: Net investment income ......................................... $ 2,808,275 $ 3,051,524 Net realized gain (loss) on investments, futures contracts and foreign currency related transactions ........................ 3,315,083 (648,595) Net change in unrealized appreciation/depreciation on investments, futures contracts and foreign currency related transactions ................................................. (2,950,005) (299,876) ------------- ------------- Net increase in net assets resulting from operations .......... 3,173,353 2,103,053 ------------- ------------- Distributions to shareholders from: Net investment income ......................................... (2,808,275) (1,724,257) Capital ....................................................... -- (1,327,267) ------------- ------------- Total distributions to shareholders ........................... (2,808,275) (3,051,524) ------------- ------------- Capital share transactions: Shares sold ................................................... 59,016,869 48,655,002 Shares issued in reinvestment of dividends .................... 2,793,808 3,172,537 Shares redeemed ............................................... (58,199,623) (39,691,524) ------------- ------------- Net increase in net assets resulting from capital share transactions ................................................. 3,611,054 12,136,015 ------------- ------------- Total increase in net assets .................................. 3,976,132 11,187,544 ------------- ------------- Net assets: Beginning of year ............................................. 67,309,896 56,122,352 ------------- ------------- End of year ................................................... $ 71,286,028 $ 67,309,896 ============= ============= End of year undistributed net investment income (distributions in excess of net investment income) ................................. $ 1,700,677 $ (414,076) See accompanying notes to financial statements. 5
BlackRock Funds FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD For the For the Year Ended Year Ended 9/30/05 9/30/04 ------------ ------------ Per share operating performance: Net asset value, beginning of year ................................ $ 8.75 $ 8.85 ------ ------- Net investment income ........................................... 0.36/1/ 0.33/1/ Net realized and unrealized gain (loss) on investments .......... 0.03 (0.10) ------ ------- Net increase from investment operations ....................... 0.39 0.23 ------ ------- Distributions from net investment income ........................ (0.36) (0.16) Distributions from net realized gains ........................... -- -- Distributions from capital ...................................... -- (0.17) ------ ------- Total distributions ........................................... (0.36) (0.33) ------ ------- Net asset value, end of year .................................... $ 8.78 $ 8.75 ====== ======= Total Return ...................................................... 4.47% 2.69% Ratios / Supplemental data Net assets, end of year (in thousands) ............................ $ 71,286 $ 67,310 Ratio of expenses to average net assets ........................... 0.22% 0.42% Ratio of expenses to average net assets (excluding interest expense) ......................................................... 0.20% 0.23% Ratio of expenses to average net assets (excluding waivers) ....... 0.58% 0.71% Ratio of net investment income to average net assets .............. 4.03% 3.80% Ratio of net investment income to average net assets (excluding waivers) ......................................................... 3.67% 3.51% Portfolio turnover ................................................ 223% 203% For the For the For the Year Ended Year Ended Year Ended 9/30/03/2/ 9/30/02/2/ 9/30/01/2/ ------------ ------------ ----------- Per share operating performance: Net asset value, beginning of year ................................ $ 8.87 $ 9.20 $ 8.63 ------- ------- -------- Net investment income ........................................... 0.42 0.42 0.72 Net realized and unrealized gain (loss) on investments .......... 0.13 0.40 0.58 ------- ------- -------- Net increase from investment operations ....................... 0.55 0.82 1.30 ------- ------- -------- Distributions from net investment income ........................ (0.57) (1.15) (0.65) Distributions from net realized gains ........................... -- -- (0.08) Distributions from capital ...................................... -- -- -- ------- ------- -------- Total distributions ........................................... (0.57) (1.15) (0.73) ------- ------- -------- Net asset value, end of year .................................... $ 8.85 $ 8.87 $ 9.20 ======= ======= ======== Total Return ...................................................... 6.39% 9.74% 15.51% Ratios / Supplemental data Net assets, end of year (in thousands) ............................ $ 56,122 $ 31,253 $ 33,297 Ratio of expenses to average net assets ........................... 0.26% 0.85% 0.27% Ratio of expenses to average net assets (excluding interest expense) ......................................................... 0.26% 0.26% 0.26% Ratio of expenses to average net assets (excluding waivers) ....... 0.50% 1.15% 0.60% Ratio of net investment income to average net assets .............. 3.89% 4.73% 5.82% Ratio of net investment income to average net assets (excluding waivers) ......................................................... 3.65% 4.43% 5.49% Portfolio turnover ................................................ 235% 180% 189% - ---------- /1/ Calculated using the average shares outstanding method. /2/ Audited by other auditors. See accompanying notes to financial statements. 6
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (A) Organization BlackRock Funds(SM)(the "Fund") was organized on December 22, 1988 as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund currently has 50 investment portfolios. These financial statements relate to the Fund's Strategic Portfolio I (the "Portfolio"). The Portfolio is authorized to issue an unlimited number of shares with a par value of $0.001. Under the Fund's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund. However, based on experience, the Fund considers the risk of loss from such claims to be remote. (B) Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed by the Fund in preparation of its financial statements. Investment Valuation -- Valuation of investments held by the Portfolio is as follows: fixed income investments are valued by using market quotations or prices provided by market makers; a portion of the fixed income investments are valued utilizing one or more pricing services approved by the Board of Trustees (the "Board"); an option or futures contract is valued at the last sales price prior to 4:00 p.m. (Eastern time), as quoted on the principal exchange or board of trade on which such option or futures contract is traded, or in the absence of a sale, the mean between the last bid and asked prices prior to 4:00 p.m. (Eastern time); the amortized cost method of valuation will be used with respect to debt obligations with sixty days or less remaining to maturity unless the investment advisor under the supervision of the Board determines that such method does not represent fair value. Any assets which are denominated in a non-U.S. currency are translated into U.S. dollars at the prevailing market rates. In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the market value of such investment, the investment will be valued by, under the direction of or in accordance with a method approved by the Board as reflecting fair value ("Fair Value Assets"). The investment advisor will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to a valuation committee. Such valuation committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to and ratified by the Board. When determining the price for a Fair Value Asset, the investment advisor shall seek to determine the price that the Portfolio might reasonably expect to receive from the current sale of that asset in an arm's-length transaction. Fair value determinations shall be based upon all available factors that the advisor deems relevant. Dividends to Shareholders: Dividends from net investment income are declared by the Portfolio each day on "settled" shares (i.e. shares for which the Portfolio has received payment) and are paid monthly. Over the course of a year, substantially all of the Portfolio's net investment income will be declared as dividends. Net realized capital gains, if any, are distributed at least annually. Foreign Currency Translation: The books and records of the Portfolio are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (I) Market value of investment securities, assets and liabilities at the current rate of exchange; and (II) Purchases and sales of investment securities, income and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions. The Portfolio isolates that portion of gains and losses on investment securities which is due to changes in the foreign exchange rates from that which is due to changes in market prices of such securities. The Portfolio reports certain foreign currency related transactions as components of realized and unrealized gains for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes. Forward Foreign Currency Contracts: The Portfolio enters into forward foreign currency contracts. These contracts are adjusted by the daily forward exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settlement date. Such contracts, which protect the value of the Portfolio's investment securities against a decline in the value of currency, do not eliminate fluctuations in the underlying prices of the securities. They 7
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) simply establish an exchange rate at a future date. Also, although such contracts tend to minimize the risk of loss due to a decline in the value of a hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of such foreign currency increase. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. The aggregate principal amounts of the contracts are not recorded as the Portfolio intends to settle the contracts prior to delivery. Under the terms of foreign currency contracts open at September 30, 2005, the Portfolio is obligated to deliver or receive currency in exchange for U.S. dollars as indicated below: Unrealized Foreign Value At Exchange Settlement Date Currency Amount Currency Sold Contract Amount September 30, 2005 Gain (Loss) - ----------------- ----------------- ----------------------------- ----------------- -------------------- --------------- 10/20/05 21,308,329 Euro ........................ $ 25,793,854 $ 25,724,303 $ 69,551 10/21/05 4,500,000 Euro ........................ 5,506,722 5,432,873 73,849 10/25/05 45,404,000 Swedish Krona ............... 5,867,768 5,888,374 (20,606) 10/25/05 127,134,938 Mexican Peso ................ 11,714,148 11,736,053 (21,905) 10/27/05 16,236,000 New Zealand Dollar .......... 10,957,197 11,203,424 (246,227) 10/28/05 6,545,785 Canadian Dollar ............. 5,510,488 5,643,591 (133,103) 11/25/05 10,650,000 Euro ........................ 12,996,681 12,881,389 115,292 ------------ ------------ ----------- $ 78,346,858 $ 78,510,007 $ (163,149) ============ ============ =========== Unrealized Foreign Value At Exchange Settlement Date Currency Amount Currency Bought Contract Amount September 30, 2005 Gain (Loss) - ----------------- ----------------- ----------------------------- ----------------- -------------------- ----------------- 10/20/05 5,203,490 Euro ........................ $ 6,371,271 $ 6,281,871 $ (89,400) 10/25/05 45,404,335 Swedish Krona ............... 6,027,513 5,888,418 (139,095) 10/26/05 21,660,000 Mexican Peso ................ 2,013,105 1,999,473 (13,632) 10/27/05 2,405,755 New Zealand Dollar .......... 1,667,095 1,660,058 (7,037) 10/27/05 84,881,564 Japanese Yen ................ 762,739 751,320 (11,419) 10/28/05 78,360 Canadian Dollar ............. 67,152 67,560 408 11/25/05 4,604,719,600 Japanese Yen ................ 42,170,259 40,890,617 (1,279,642) ------------ ------------ ------------- $ 59,079,134 $ 57,539,317 $ (1,539,817) ============ ============ ============= Investment Transactions and Investment Income: Investment transactions are accounted for on the trade date. The cost of investments sold and the related gain or loss is determined by use of specific identification method, generally first in first out, for both financial reporting and federal income purposes. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are amortized for book and tax purposes using the effective yield-to-maturity method over the term of the instrument. Reverse Repurchase Agreements: The Portfolio may enter into reverse repurchase agreements with qualified third party brokers-dealers as determined by and under the direction of the Board. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. At the time the Portfolio enters into a reverse repurchase agreement, it identifies for segregation certain liquid securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement. There were no reverse repurchase agreements held by the Portfolio at September 30, 2005. Futures Transactions: The Portfolio invests in futures contracts typically as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The Portfolio may also use these instruments for leverage. These futures contracts obligate a portfolio, at maturity, to take or make delivery of securities, the cash value of a securities index or a stated quantity of a foreign currency. Upon entering into a futures contract, the Portfolio is required to deposit cash or pledge U.S. Government securities of an initial margin. Subsequent payments, which are dependent on the daily fluctuations in the value of the underlying security or securities, are made or received by the Portfolio each day (daily variation margin) and are recorded as cumulative unrealized gains or losses until the contracts are closed. When contracts are closed, the 8
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Portfolio records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Portfolio's basis in the contracts. Risks of entering into futures contracts include the possibility that there will not be a perfect price correlation between the futures contracts and the underlying securities. Second, it is possible that a lack of liquidity for futures contracts could exist in the secondary market, resulting in an inability to close a futures position prior to its maturity date. Third, the purchase of a futures contract involves the risk that a Portfolio could lose more than the original margin deposit required to initiate a futures transaction. Financing Transactions: The Portfolio may enter into financing transactions consisting of a sale by the Portfolio of securities, together with a commitment to repurchase similar securities at a future date. The difference between the selling price and the future purchase price is an adjustment to interest income. If the counterparty to whom the Portfolio sells the security becomes insolvent, a Portfolio's right to repurchase the security may be restricted. The value of the security may change over the term of the financing transaction. Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles") requires the use of management estimates. Actual results could differ from the estimates. Other: Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuations in exchange rates. Some countries in which the Portfolio invests require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if there is deterioration in a country's balance of payments or for the other reasons, a country may impose temporary restrictions on foreign capital remittances abroad. The securities exchanges of certain foreign markets are substantially smaller, less liquid and more volatile than the major securities markets in the United States. Consequently, acquisition and disposition of securities by the Portfolio may be inhibited. (C) Transactions with Affiliates and Related Parties Pursuant to an Investment Advisory Agreement, BlackRock Financial Management, Inc. ("BlackRock"), a wholly-owned subsidiary of BlackRock, Inc., serves as investment adviser to the Portfolio. For its advisory services, BlackRock is entitled to receive fees, computed daily and paid monthly, at the annual rate of 0.20% of the Portfolio's average daily net assets. BlackRock has contractually agreed to waive or reimburse all of its advisory fees for the Portfolio until February 1, 2006, and may reimburse the Portfolio for certain operating expenses. In the interest of limiting the expenses of the Portfolio, BlackRock and the Portfolio have entered into a series of annual expense limitation agreements. The agreements set a limit on certain operating expenses of the Portfolio for the next year and require BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit. These expense limits apply to the aggregate expenses incurred on a share class (excluding: interest, taxes, brokerage commissions and other extraordinary expenses). BlackRock has contractually agreed to waive or reimburse fees or expenses in order to limit expenses to 0.26% of the Portfolio's average daily net assets. This agreement is reviewed annually by the Fund's Board. If in the following two years the operating expenses of the Portfolio that previously received a waiver on reimbursement from BlackRock are less than the expense limit for the Portfolio, the Portfolio is required to repay BlackRock up to the amount of fees waived or expenses reimbursed under the agreement if: (1) the Portfolio has more than $50 million in assets, (2) BlackRock continues to be the Portfolio's investment advisor and (3) the Board of Trustees of the Fund has approved the payments to BlackRock at the previous quarterly meeting. At September 30, 2005, the amounts subject to possible future reimbursement under the expense limitation agreement are as follows: Total Waivers Expiring Expiring Subject to January 31, 2007 January 31, 2008 Reimbursement ------------------ ------------------ -------------- $ 158,645 $ 159,931 $ 318,576 9
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) PFPC Inc. ("PFPC"), an indirect subsidiary of The PNC Financial Services Group, Inc., and BlackRock Advisors, Inc. ("BAI"), act as co-administrators for the Portfolio. For theses services, the co-administrators receive a combined administration fee computed daily and payable monthly, based on a percentage of the average daily net assets of the Portfolio, at the following annual rates: 0.085% of the first $500 million, 0.075% of the next $500 million and 0.065% of assets in excess of $1 billion. In addition, the Portfolio is charged an administration fee based on the following percentage of average daily net assets of the Portfolio's Institutional share class: 0.145% of the first $500 million, 0.135% of the next $500 million and 0.125% of assets in excess of $1 billion. PFPC and BAI may, at their discretion, waive all or any portion of their administration fees for the Portfolio's Institutional Share Class. In addition, PFPC Trust Co., an indirect wholly-owned subsidiary of The PNC Financial Services Group, Inc., serves as custodian for the Portfolio. PFPC serves as transfer and dividend disbursing agent. The annual transfer agent fee will not exceed 0.018% of the average daily net assets of the Portfolio plus per account fees and disbursements. At year ended September 30, 2005, affiliated payables were as follows: PFPC/(1)/ .............. $ 7,502 BlackRock/(2)/ ......... 9,084 - ---------- (1) -- payables to PFPC are for Accounting, Administration, Custody and Transfer Agent services. (2) -- payables to BlackRock are for Advisory and Administration services. (D) Purchase and Sales of Securities For the year ended September 30, 2005, purchases and sales of investment securities, other than short-term investments and government securities, were $116,951,061 and $134,534,130, respectively. For the year ended September 30, 2005, purchases and sales of government securities were $54,053,658 and $17,100,873, respectively. (E) Capital Shares Transactions in capital shares for each period were as follows: For the For the Year Ended Year Ended 9/30/05 9/30/04 --------------- --------------- Shares sold ........................................ 6,719,554 5,536,840 Shares issued in reinvestment of dividends ......... 316,853 361,760 Shares redeemed .................................... (6,614,510) (4,547,851) ---------- ---------- Net increase ....................................... 421,897 1,350,749 ========== ========== On September 30, 2005, four shareholders held approximately 65% of the outstanding shares of the Portfolio. Some of the shareholders are comprised of omnibus accounts, which are held on behalf of several individual shareholders. (F) At September 30, 2005, net assets consisted of: Capital paid-in ............................................. $ 69,297,092 End of period undistributed net investment income 1,700,677 Accumulated net realized gain on investment transactions and foreign currency related transactions ...................... 648,931 Net unrealized depreciation on investment transactions and foreign currency related transactions ...................... (360,672) ------------ $ 71,286,028 ============ (G) Federal Tax Information No provision is made for Federal taxes as it is the Fund's intention to have the Portfolio continue to qualify for and elect the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended, and to make the requisite distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes. Short-term capital and foreign currency gain distributions that are reported in 10
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Concluded) the Statement of Changes in Net Assets are reported as ordinary income for Federal income tax purposes. There were no short-term or long-term capital gain distributions for the year ended September 30, 2005. Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain, as appropriate, in the period that the differences arise. The following permanent differences as of September 30, 2005, attributable to realized foreign currency gains/(losses), foreign futures realized gains/(losses), and distribution reclasses were reclassified to the following accounts: Increase Increase (Decrease) (Decrease) Accumulated Undistributed Net Realized Net Investment Gain Income ------------------ --------------- $ (2,114,753) $2,114,753 The tax character of distributions paid during the year ended September 30, 2005 and the tax character of distributions paid during the year ended September 30, 2004 were as follows: Tax Ordinary Long-term Return Total Date Income Capital Gain Of Capital Distributions - ----------- -------------- -------------- ------------ -------------- 9/30/05 $ 2,097,256 $ 711,019 $ -- $ 2,808,275 9/30/04 1,724,257 -- 1,327,267 3,051,524 As of September 30, 2005, the tax components of distributable earnings/(accumulated losses) were as follows: Undistributed Undistributed Accumulated Post- Ordinary Long-Term Capital October Income Capital Gain Losses Losses --------------- --------------- ------------- -------- $-- $ 196,391 $-- $-- For Federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. $539,578 of the Portfolio's capital loss carryforward was used to offset net taxable gains realized in the fiscal year ended September 30, 2005. 11
BlackRock Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of BlackRock Funds: We have audited the accompanying statement of net assets of the Strategic Portfolio I [one of the fifty portfolios constituting BlackRock Funds (the "Fund"), the "Portfolio"], as of September 30, 2005 and the related statement of operations for the year then ended, and the statements of changes in net assets and financial highlights for each of the two years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Portfolio for the periods ended September 30, 2003, September 30, 2002 and September 30, 2001 were audited by other auditors whose report, dated November 26, 2003, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Portfolio is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolio's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2005, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Portfolio as of September 30, 2005, the results of its operations, the changes in its net assets and its financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania November 25, 2005 12
BlackRock Funds FUND MANAGEMENT (Unaudited) Information pertaining to the Trustees and officers of the Fund is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (888) 825-2257. Institutional and service share class investors should call (800) 441-7450. Term Of Position(s) Office/(1)/ Name, Address and Held with and Length Age Fund of Time Served - ------------------------------------------------ INTERESTED TRUSTEES - ------------------------------------------------ Richard S. Davis/(3)/ Trustee Since 2005 BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 59 - ----------------------------------------------- Laurence D. Fink/(4)/ Trustee Since 2000 BlackRock, Inc. 40 E. 52nd Street New York, NY 10022 Age: 52 - ----------------------------------------------- Number of Portfolios Total Fund in Fund Other Compensation Complex/(2)/ Directorships for the Name, Address and Principal Occupation(s) Overseen Held by Year Ending Age During Past Five Years by Trustee Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------- INTERESTED TRUSTEES - ----------------------------------------------------------------------------------------------------------------- Richard S. Davis/(3)/ Managing Director, BlackRock, Inc. 55 None N/A BlackRock, Inc. (since 2005); Chief Executive Officer, (includes 40 E. 52nd Street State Street Research & 50 New York, NY 10022 Management Company (2000-2005); Portfolios Age: 59 Chairman of the Board of Trustees, of the Fund State Street Research mutual funds and 5 ("SSR Funds") (2000-2005); Senior Portfolios Vice President, Metropolitan Life of Insurance Company (1999-2000); BlackRock Chairman, SSR Realty (2000-2004). Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------- Laurence D. Fink/(4)/ Director, Chairman and Chief 55 Director, BlackRock, N/A BlackRock, Inc. Executive Officer of BlackRock, Inc. (includes Inc. 40 E. 52nd Street since its formation in 1998 and of 50 New York, NY 10022 BlackRock, Inc.'s predecessor Portfolios Age: 52 entities since 1988; Chairman of the of the Fund Management Committee; formerly, and 5 Managing Director of the First Portfolios Boston Corporation, Member of its of Management Committee, Co-head of BlackRock its Taxable Fixed Income Division Bond and Head of its Mortgage and Real Allocation Estate Products Group; Chairman of Target the Board of Nomura BlackRock Shares) Asset Management and several of BlackRock's alternative investment vehicles; Director of several of BlackRock's offshore funds; Co-Chairman of the Board of Trustees of Mount Sinai-NYU; Co-Chairman of the Board of Trustees of NYU Hospitals Center; member of the Board of Trustees of NYU; member of the Board of Executives of the New York Stock Exchange, and Trustee of the American Folk Art Museum. - ----------------------------------------------------------------------------------------------------------------- 13
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Term of Position(s) Office/(1)/ Name, Address and Held with and Length Age Fund of Time Served - --------------------------------------------------------------- DISINTERESTED TRUSTEES - --------------------------------------------------------------- Bruce R. Bond Trustee Since 2005 c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 59 - ---------------------------------------------------------------- Peter S. Drotch Trustee Since 2005 c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 64 - ---------------------------------------------------------------- Honorable Stuart E. Eizenstat Trustee and Since 2001 Covington & Burling Chairman of 1201 Pennsylvania Avenue, the Nominating NW Committee Washington, DC 20004 Age: 62 - ---------------------------------------------------------------- Robert M. Hernandez Trustee, Vice Since 1996 c/o BlackRock Funds Chairman of 100 Bellevue Parkway the Board and Wilmington, DE 19809 Chairman of Age: 61 the Audit Committee - ---------------------------------------------------------------- Number of Portfolios Total Fund in Fund Other Compensation Complex/(2)/ Directorships for the Name, Address and Principal Occupation(s) Overseen Held by Year Ending Age During Past Five Years by Trustee Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------- DISINTERESTED TRUSTEES - ----------------------------------------------------------------------------------------------------------------------------- Bruce R. Bond Retired; Trustee and member of the 55 Director, Avaya, Inc. $ 84,600 c/o BlackRock Funds Governance Committee, SSR Funds (includes (information 100 Bellevue Parkway ( 1997-2005). 50 technology). Wilmington, DE 19809 Portfolios Age: 59 of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------- Peter S. Drotch Retired; Trustee and member of the 55 Director, First $ 84,600 c/o BlackRock Funds Audit Committee, SSR Funds (includes Marblehead Corp. 100 Bellevue Parkway (2003-2005); Partner, Pricewater- 50 (student loan Wilmington, DE 19809 houseCoopers LLP (accounting firm) Portfolios processing and Age: 64 ( 1964-2000). of the Fund securitization); and 5 Trustee, University of Portfolios Connecticut; Trustee, of Huntington Theatre. BlackRock Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------- Honorable Stuart E. Eizenstat Partner, Covington & Burling (law 55 Director, Mirant $130,100 Covington & Burling firm) (2001-Present); Deputy (includes Corporation; Advisory 1201 Pennsylvania Avenue, Secretary of the Treasury 50 Board member, The NW (1999-2001); Under Secretary of Portfolios Coca-Cola Company; Washington, DC 20004 State for Economic, Business and of the Fund Advisory Board Age: 62 Agricultural Affairs (1997-1999); and 5 member, Group Under Secretary of Commerce for Portfolios Menatep; Advisory International Trade (1996-1997); of Board member, BT U.S. Ambassador to the European BlackRock Americas. Union (1993-1996); Chairman, Bond International Board of Governors, Allocation Weizmann Institute of Science. Target Shares) - ----------------------------------------------------------------------------------------------------------------------------- Robert M. Hernandez Retired; Director (1991-2001), Vice 55 Lead Director, ACE $140,100 c/o BlackRock Funds Chairman and Chief Financial Officer (includes Limited (insurance 100 Bellevue Parkway (1994-2001), Executive Vice 50 company); Director Wilmington, DE 19809 President-Accounting and Finance Portfolios and Chairman of the Age: 61 and Chief Financial Officer of the Fund Board, RTI (1991-1994), USX Corporation (a and 5 International Metals, diversified company principally Portfolios Inc.: Director, Eastman engaged in energy and steel of Chemical Company. businesses). BlackRock Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------- 14
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Term of Position(s) Office/(1)/ Name, Address and Held with and Length Age Fund of Time Served - --------------------------------------------------------- Dr. Matina Horner Trustee and Since 2004 c/o BlackRock Funds Chairperson of 100 Bellevue Parkway the Governance Wilmington, DE 19809 Committee Age: 66 - --------------------------------------------------------- Toby Rosenblatt Trustee Since 2005 c/o BlackRock Funds 100 Bellevue Parkway Wilmington, DE 19809 Age: 67 - --------------------------------------------------------- David R. Wilmerding, Jr. Trustee and Since 1996 c/o BlackRock Funds Chairperson of 100 Bellevue Parkway the Board Wilmington, DE 19809 Age: 70 - --------------------------------------------------------- Number of Portfolios Total Fund in Fund Other Compensation Complex/(2)/ Directorships for the Name, Address and Principal Occupation(s) Overseen Held by Year Ending Age During Past Five Years by Trustee Trustee 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------- Dr. Matina Horner Retired; Executive Vice President of 55 Chair of the Board of $104,550 c/o BlackRock Funds Teachers Insurance and Annuity (includes the Massachusetts 100 Bellevue Parkway Association and College Retirement 50 General Hospital Wilmington, DE 19809 Equities Fund (TIAA-CREF) Portfolios Institute of Health Age: 66 ( 1989-2003). of the Fund Professions; Chair of and 5 the Board of the Portfolios Greenwall Foundation; of Trustee, Century BlackRock Foundation (formerly Bond The Twentieth Century Allocation Fund); Director, N Target STAR (formerly called Shares) Boston Edison); Director, The Neiman Marcus Group; Honorary Trustee, Massachusetts General Hospital Corporation. - ----------------------------------------------------------------------------------------------------------------------------- Toby Rosenblatt President, Founders Investment Ltd. 55 Director, A.P. Pharma, $ 84,600 c/o BlackRock Funds (private investments) (since 1999); (includes Inc. 100 Bellevue Parkway Trustee, SSR Funds (1993-2003). 50 Wilmington, DE 19809 Portfolios Age: 67 of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ----------------------------------------------------------------------------------------------------------------------------- David R. Wilmerding, Jr. Chairman, Wilmerding & Associates, 56 None $135,100 c/o BlackRock Funds Inc. (investment advisers) (since (includes 100 Bellevue Parkway 1989); Chairman, Coho Partners, 50 Wilmington, DE 19809 Ltd. (investment advisers) (since Portfolios Age: 70 2003); Director, Beaver Management of the Fund, Corporation (land management 5 Portfolios corporation); Managing General of Partner, Chestnut Street Exchange BlackRock Fund. Bond Allocation Target Shares and 1 Portfolio of Chestnut Street Exchange Fund, which is managed by BlackRock Financial Management Inc. and BlackRock Institutional Management Corporation.) - ----------------------------------------------------------------------------------------------------------------------------- 15
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Term of Total Fund Office/(5)/ Compensation Position(s) and Length for the Name, Address and Held with of Time Principal Occupation(s) Year Ending Age Fund Served During Past Five Years 9/30/05 - ----------------------------------------------------------------------------------------------------------------------------- OFFICERS WHO ARE NOT TRUSTEES - ----------------------------------------------------------------------------------------------------------------------------- Anne Ackerley Vice President Since 2003 Managing Director, BlackRock, Inc. (since May N/A BlackRock, Inc. (previously 2000); First Vice President and Operating 40 E. 52nd Street served as Officer, Mergers and Acquisitions Group New York, NY 10022 Assistant (1997-2000), First Vice President and Operating Age: 43 Secretary Officer, Public Finance Group (1995-1997), and since First Vice President, Emerging Markets Fixed 2000) Income Research (1994-1995), Merrill Lynch & Co. - ----------------------------------------------------------------------------------------------------------------------------- Edward Baer Assistant Since 2005 Director and Senior Counsel of BlackRock, Inc. N/A BlackRock, Inc. Secretary (since 2004); Associate, Willkie Farr & 40 E. 52nd Street Gallagher LLP (2000-2004); Associate, Morgan New York, NY 10022 Lewis & Bockius LLP (1995-2000). Age: 37 Bart Battista Chief Since 2004 Chief Compliance Officer and Anti-Money $368,547 BlackRock, Inc. Compliance Laundering Compliance Officer of BlackRock, 40 E. 52nd Street Officer and Inc. (since 2004); Managing Director (since New York, NY 10022 Anti-Money 2003), and Director (1998-2002) of BlackRock, Age: 46 Laundering Inc.; Compliance Officer at Moore Capital Compliance Management (1995-1998). Officer - ----------------------------------------------------------------------------------------------------------------------------- Ellen L. Corson Assistant Since 1998 Senior Director and Vice President of Fund N/A PFPC Inc. Treasurer Accounting and Administration, PFPC Inc. 103 Bellevue Parkway (since 2003); Vice President and Director of Wilmington, DE 19809 Mutual Fund Accounting and Administration, Age: 41 PFPC Inc. (since November 1997); Assistant Vice President, PFPC Inc. (March 1997-November 1997); Senior Accounting Officer, PFPC Inc. (March 1993-March 1997). - ----------------------------------------------------------------------------------------------------------------------------- Henry Gabbay President Since 2005 Managing Director, BlackRock, Inc. (since N/A BlackRock, Inc. 1989). 40 E. 52nd Street New York, NY 10022 Age: 57 Brian P. Kindelan Secretary Since 1997 Managing Director and Senior Counsel (since N/A BlackRock Advisors, Inc. January 2005), Director and Senior Counsel 100 Bellevue Parkway (2001-2004) and Vice President and Senior Wilmington, DE 19809 Counsel (1998-2000), BlackRock Advisors, Age: 46 Inc.; Senior Counsel, PNC Bank Corp. May 1995-April 1998). - ----------------------------------------------------------------------------------------------------------------------------- William McGinley Treasurer Since 2005 Managing Director of BlackRock, Inc. (since N/A BlackRock, Inc. 2004); Partner, PricewaterhouseCoopers LLP 100 Bellevue Parkway ( 1990-2004). Wilmington, DE 19809 Age: 38 - ----------------------------------------------------------------------------------------------------------------------------- Vincent Tritto Assistant Since 2003 Managing Director and Assistant Secretary N/A BlackRock, Inc. Secretary (since January 2005) and Director and Senior 40 E. 52nd Street Counsel (2002-2004) of BlackRock, Inc. New York, NY 10022 Executive Director (2000-2002) and Vice Age: 44 President (1998-2000), Morgan Stanley & Co. Incorporated and Morgan Stanley Asset Management Inc. and officer of various Morgan Stanley-sponsored investment vehicles: Counsel (1998); Associate (1988-1997), Rogers & Wells LLP, New York, NY. - ----------------------------------------------------------------------------------------------------------------------------- 16
BlackRock Funds FUND MANAGEMENT (Unaudited) (Concluded) (1) Each Trustee holds office for an indefinite term until the earlier of (1) the next meeting of shareholders at which Trustees are elected and until his or her successor is elected and qualified and (2) such time as such Trustee resigns or his or her term as a Trustee is terminated in accordance with the Fund's code of regulations and Declaration of Trust. (2) A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, that have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. (3) Mr. Davis is an interested person of the Fund due to his position at BlackRock, Inc. (4) Mr. Fink is an interested person of the Fund due to his position at BlackRock, Inc. (5) Each officer holds office for an indefinite term until the earlier of (1) the next meeting of trustees at which his or her successor is appointed and (2) such time as such officer resigns or his or her term as an officer is terminated in accordance with the Fund's code of regulations and Declaration of Trust. 17
BlackRock Funds ADDITIONAL INFORMATION (Unaudited) (A) A proxy statement was sent to shareholders of all portfolios of the Fund asking them to consider and vote upon the election of nine trustees to the Board of Trustees of the Fund (the "Board"). Five of the nine nominees were already serving as trustees of the Fund and the additional nominees had previously served as trustees of the State Street Research Funds. Due to the increased size and complexity of the Fund resulting from the reorganization with the State Street Research Funds, and an increase in the responsibilities of boards of trustees of funds generally, the Board believed it was in the best interest of the Fund to increase the size of the Board. On April 29, 2005, the special meeting of shareholders was held, at which all of the nominees included in the proxy were duly elected to the Board. The votes for the election of trustees were as follows: Affirmative Negative --------------- ---------- Bruce R. Bond .................... 3,006,153,475 9,427,152 Richard S. Davis ................. 3,006,504,966 9,075,661 Peter S. Drotch .................. 3,006,391,368 9,189,259 Stuart E. Eizenstat .............. 3,005,972,578 9,608,049 Laurence D. Fink ................. 3,006,652,923 8,927,704 Robert M. Hernandez .............. 3,006,095,141 9,485,487 Dr Matina Horner ................. 3,005,916,103 9,664,525 Toby Rosenblatt .................. 3,006,157,679 9,422,948 David R. Wilmerding, Jr. ......... 3,006,022,868 9,557,759 (B) PricewaterhouseCoopers LLP ("PwC"), the Fund's former independent registered public accounting firm, has been hired as an internal audit supporting service provider by The PNC Financial Services Group, Inc. ("PNC"), the parent company of the Fund's investment adviser and certain other service providers. In order to provide certain services to PNC and its affiliates which would have caused PwC to no longer be independent with respect to the Fund, PwC declined to stand for re-election as independent registered public accounting firm of the Fund after the completion of the fiscal 2003 audit. The Fund's Audit Committee approved engaging Deloitte & Touche LLP as the independent registered public accounting firm to audit the Fund's financial statements for fiscal year 2006. A majority of the Fund's Board of Trustees, including a majority of the independent Trustees, approved the appointment of Deloitte & Touche LLP as the Fund's independent registered public accounting firm for the Fund's fiscal 2006 audit on November 29, 2005, subject to the right of the Fund, by a majority vote of the shareholders at any meeting called for that purpose, to terminate the appointment without penalty. (C) As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and various information requests from the Securities and Exchange Commission in connection with ongoing industry-wide investigations of mutual fund matters. 18
BlackRock Funds Investment Adviser BlackRock Financial Management, Inc. New York, New York 10022 Custodian PFPC Trust Co. Philadelphia, Pennsylvania 19153 Co-Administrator and Transfer Agent PFPC Inc. Wilmington, Delaware 19809 Distributor BlackRock Distributors, Inc. King of Prussia, Pennsylvania 19406 Co-Administrator BlackRock Advisors, Inc. Wilmington, Delaware 19809 Counsel Simpson Thacher & Bartlett LLP New York, New York 10017 Independent Registered Public Accounting Firm Deloitte & Touche LLP Philadelphia, Pennsylvania 19103 The Fund has delegated proxy voting responsibilities to BlackRock and its affiliates, subject to the general oversight of the Fund's Board of Trustees. A description of the policies and procedures that BlackRock and its affiliates use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling 1-800-441-7762, or on the website of the Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information on how proxies relating to the Fund's voting securities were voted (if any) by the Advisor during the most recent 12-month period ended June 30th is available, upon request and without charge, by calling (800) 441-7762 or on the website of the Commission at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings for the first and third quarters of its fiscal year with the Commission on Form N-Q. The Fund's Form N-Q is available on the Commission's website at http://www.sec.gov and may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's Form N-Q may also be obtained upon request, without charge, by calling (800) 441-7762. This report is for shareholder information. This is not a prospectus intended for use in the purchase or sale of Fund shares.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by PNC Bank, National Association or any other bank and shares are not federally insured by, guaranteed by, obligations of or otherwise supported by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Investments in shares of the fund involve investment risks, including the possible loss of the principal amount invested. BlackRock STRAT-ANN 11/05
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE BlackRock Funds Exchange Portfolio Annual Report September 30, 2005 [GRAPHIC APPEARS HERE] NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE BlackRock
BlackRock Funds EXCHANGE PORTFOLIO TABLE OF CONTENTS Shareholder Letter .........................................................1 Portfolio Summary Exchange Portfolio ..................................................2-3 Statement of Net Assets ....................................................4 Portfolio Financial Statements Statement of Operations ...............................................5 Statements of Changes in Net Assets ...................................6 Financial Highlights ..................................................7 Notes to Financial Statements ...........................................8-12 Report of Independent Registered Public Accounting Firm ...................13 Fund Management ........................................................14-18 Additional Information ....................................................19 PRIVACY PRINCIPLES OF BLACKROCK FUNDS BlackRock Funds is committed to maintaining the privacy of its shareholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock Funds collects, how we protect that information, and why in certain cases we may share such information with select other parties. BlackRock Funds does not receive any nonpublic personal information relating to its shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record owners of BlackRock Funds, BlackRock Funds receives nonpublic personal information on account applications or other forms. With respect to these shareholders, BlackRock Funds also has access to specific information regarding their transactions in BlackRock Funds. BlackRock Funds does not disclose any nonpublic personal information about its shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders' accounts (for example, to a transfer agent). BlackRock Funds restricts access to nonpublic personal information about its shareholders to BlackRock employees with a legitimate business need for the information. BlackRock Funds maintains physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our shareholders.
BlackRock Exchange Portfolio September 30, 2005 Dear Shareholder, We are pleased to present the Annual Report of the BlackRock Exchange Portfolio for the period ended September 30, 2005. On January 31, 2005, the State Street Research Funds reorganized into BlackRock Funds and we at BlackRock would like to welcome the former State Street Research Funds shareholders and our new shareholders to the BlackRock Funds Family. The Annual Report includes important information on the Portfolio: .. Portfolio Summary - discusses recent portfolio management activity and highlights total returns. .. Fund Profile - displays characteristics of the Portfolio's holdings as of September 30, 2005. .. Expense Example - discusses costs in a shareholder account and provides information for a shareholder to estimate his or her expenses and to compare expenses of the Portfolio to other funds. .. Statement of Net Assets - lists portfolio holdings and includes each holding's market value and number of shares as of September 30, 2005. The Statement of Net Assets also contains the net asset value for the Portfolio. .. Statement of Operations - displays the components of the Portfolio's investment income and provides a detailed look at the Portfolio's expenses. The Statement of Operations also lists the aggregate change in value of the Portfolio's securities due to market fluctuations and security sales. .. Statements of Changes in Net Assets - compares Portfolio information from the prior period to the current period. Specifically, it details shareholder distributions, aggregate realized gains and losses, and the change in net assets from the beginning of the period to the end of the period. .. Financial Highlights - include the Portfolio's expense ratios, net asset values, total returns, distributions per share, and turnover ratios for the current period and the last five years. .. Notes to Financial Statements - provide additional information on fees, a summary of significant accounting policies, a list of affiliated transactions, and a summary of purchases and sales of securities. .. Fund Management Table - lists information regarding BlackRock Funds' Trustees and Officers. At BlackRock, we maintain an unwavering commitment to placing our clients first and we value the trust you have placed in us. We hope you find the report informative, and we thank you for making BlackRock part of your investment strategy. Should you have questions concerning this report, please contact your financial advisor or contact us at 1-800-441-7762 or visit us at www.blackrock.com/funds. Sincerely, [GRAPHIC APPEARS HERE] Anne Ackerley Managing Director BlackRock Advisors,Inc. 1
BlackRock Exchange Portfolio Total Net Assets (9/30/05): $292.5 million Performance Benchmark: S&P 500(R) Index Investment Approach: Seeks long-term growth of capital and consequent long-term growth of income by investing largely in a diversified and supervised Portfolio of common stocks, or securities convertible into common stocks, believed by management to have growth potential over the years. In pursuing the Portfolio's investment objective, the management team seeks to minimize the recognition of capital gains. Recent Portfolio Management Activity: . On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. (BAI), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Company (SSRM), the investment adviser to the State Street Research mutual funds. In connection with the transaction, the BlackRock Exchange Portfolio (the Portfolio) reorganized with the State Street Research Exchange Fund (the SSR Fund). The SSR Fund transferred substantially all of its assets and liabilities to the Portfolio in exchange for shares of the Portfolio, which were then distributed to the SSR Fund shareholders. For periods prior to January 31, 2005, the performance information shown reflects the performance of the SSR Fund, which had substantially similar investment goals and strategies as the Portfolio. . The Portfolio underperformed the benchmark for the annual period. . U.S. equity markets posted solid gains during the annual period. Equity markets rallied in the final quarter of 2004, but have provided mixed results thus far in 2005. Investors continue to exhibit caution, as worries over oil prices, interest rates and economic growth remain in the spotlight. Nevertheless, the S&P 500(R) Index managed to produce double digit gains, rising 12.25% over the one year period. Within the Portfolio's benchmark, the S&P 500(R) Index, all major sectors were in positive territory. However, the energy sector was the primary driver of total return as energy prices climbed significantly. Other sector leaders included information technology and utilities. . Security selection was the major driver of the Portfolio's underperformance relative to its benchmark. In particular, weakness in the energy, consumer staples and information technology ("IT") sectors had a negative impact on performance. Security selection in industrials and telecommunication services aided performance during the period. Overall, sector allocation was positive, and the Portfolio's overweight to the strong performing energy sector aided returns. . Results within the energy sector were somewhat mixed. The Portfolio produced strong absolute gains within the energy sector, buoyed by our overweight to the sector. However, security selection had a negative impact on the Portfolio. Stocks within both the oil and gas and the energy equipment and services industries tended to underperform those within the benchmark. . Our exposure in the consumer staples sector detracted from performance. In particular, security selection within both the beverages and the food and staples retailing industries hampered relative returns. Most notably, positions in Anheuser-Busch and Wal-Mart contributed to relative underperformance. Holdings in the computers and peripherals and the IT services industries created a drag on returns within information technology. . In contrast, both the industrials and telecommunication sectors delivered strong relative gains. Strength in both our aerospace and defense and machinery holdings boosted returns. Key contributors in the industrials sector were Boeing and Caterpillar, while Verizon was a key contributor in telecommunication services. . At the end of the annual period, relative to the S&P 500(R), the Portfolio was overweight in the consumer staples, energy, and health care sectors and was underweight in the consumer discretionary, utilities and financials sectors. COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE EXCHANGE PORTFOLIO AND THE S&P 500(R) INDEX FOR THE PAST TEN YEARS. [LINE CHART] Exchange Portfolio S&P 500(R) Index ------------------ ---------------- 09/30/1995 $ 10,000 $ 10,000 12/31/1995 10,580 10,602 03/31/1996 11,451 11,171 06/30/1996 11,914 11,673 09/30/1996 12,474 12,033 12/31/1996 13,337 13,036 03/31/1997 13,768 13,386 06/30/1997 16,423 15,723 09/30/1997 17,288 16,901 12/31/1997 17,566 17,386 03/31/1998 19,874 19,811 06/30/1998 20,856 20,465 09/30/1998 18,640 18,429 12/31/1998 22,501 22,354 03/31/1999 24,227 23,468 06/30/1999 25,852 25,122 09/30/1999 24,259 23,554 12/31/1999 26,685 27,058 03/31/2000 26,889 27,679 06/30/2000 26,274 26,944 09/30/2000 26,188 26,683 12/31/2000 25,583 24,595 03/31/2001 22,100 21,679 06/30/2001 22,993 22,948 09/30/2001 20,475 19,580 12/31/2001 22,934 21,672 03/31/2002 23,542 21,732 06/30/2002 20,228 18,820 09/30/2002 17,228 15,569 12/31/2002 18,627 16,882 03/31/2003 18,302 16,351 06/30/2003 20,500 18,868 09/30/2003 20,856 19,367 12/31/2003 22,519 21,725 03/31/2004 22,938 22,093 06/30/2004 23,223 22,473 09/30/2004 22,881 22,053 12/31/2004 24,236 24,089 03/31/2005 23,575 23,572 06/30/2005 24,006 23,894 09/30/2005 24,981 24,756 For period ending September 30, 2005 Exchange Portfolio - Average Annual Return 1 Year 3 Year 5 Year 10 Year ------------ ----------- ------------- ---------- 9.18% 13.17% (0.94)% 9.58% THE INCEPTION DATE OF THE PORTFOLIO WAS 12/17/76. Past performance is not predictive of future results. The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. Although the holdings and sectors listed above were current as of the periods indicated, the Portfolio is actively managed and its composition will vary. 2
BlackRock Exchange Portfolio FUND PROFILE Top Ten Holdings (% of long-term investments) Exxon Mobil Corp. 6.8% American Express Co. 6.0 The Procter & Gamble Co. 5.0 Target Corp. 4.9 SLM Corp. 4.3 General Electric Co. 4.0 First Data Corp. 3.7 Microsoft Corp 3.5 Hewlett-Packard Co. 3.5 Berkshire Hathaway, Inc. - Class B 3.5 ----- Total 45.2% ===== Top Ten Industries (% of long-term investments) Oil & Gas 13.7% Finance 11.7 Pharmaceuticals 10.0 Computer & Office Equipment 8.1 Retail Merchandising 7.2 Computer Software & Services 7.2 Soaps & Cosmetics 5.0 Aerospace 5.0 Beverages & Bottling 4.2 Manufacturing 4.0 ----- Total 76.1% ===== - -------------------------------------------------------------------------------- EXPENSE EXAMPLE As a shareholder of the Portfolio, you incur ongoing costs, including advisory fees, and other Portfolio expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolio and to compare these costs with the ongoing costs of investing in other mutual funds. The Example below is based on an investment of $1,000 invested at the beginning of the period and held for the entire period April 1, 2005 to September 30, 2005. The information under "Actual Expenses," together with the amount you invested, allows you to estimate actual expenses incurred over the reporting period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.60) and multiply the result by the cost shown for your share class, in the row entitled "Expenses Incurred During Period", to estimate the expenses incurred on your account during this period. The information under "Hypothetical Expenses" provides information about hypothetical account values and hypothetical expenses based on the Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Portfolio's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expense you incurred for the period. You may use this information to compare the ongoing costs of investing in the Portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front and back end sales charges (loads) or redemption/exchange fees, where applicable. Therefore, the hypothetical information is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Hypothetical Expenses Actual Expenses (5% return before expenses) ----------------- --------------------------- BlackRock Class BlackRock Class ----------------- --------------------------- Beginning Account Value (4/01/05) $ 1,000.00 $ 1,000.00 Ending Account Value (9/30/05) 1,059.80 1,021.95 Expenses Incurred During Period (4/01/05 - 9/30/05) 3.10 3.05 For the BlackRock share class of the Portfolio, expenses are equal to the annualized expense ratio of 0.60%, multiplied by the average account value over the period, multiplied by 183/365 (to reflect the one-half year period). 3
BlackRock Funds STATEMENT OF NET ASSETS BLACKROCK EXCHANGE PORTFOLIO As of September 30, 2005 Number of Shares Value ----------- -------------- COMMON STOCKS -- 99.3% Aerospace -- 5.0% The Boeing Co. 131,800 $ 8,955,810 General Dynamics Corp. 46,500 5,559,075 ------------ 14,514,885 ------------ Banks -- 1.5% J.P. Morgan Chase & Co., Inc. 124,728 4,232,021 ------------ Beverages & Bottling -- 4.1% Anheuser-Busch Cos., Inc. 192,315 8,277,237 The Coca-Cola Co. 87,735 3,789,275 ------------ 12,066,512 ------------ Computer & Office Equipment -- 8.0% Dell, Inc.(b) 170,500 5,831,100 Hewlett-Packard Co. 349,270 10,198,684 International Business Machines Corp. 92,371 7,410,002 ------------ 23,439,786 ------------ Computer Software & Services -- 7.2% First Data Corp. 266,480 10,659,200 Microsoft Corp. 399,890 10,289,170 ------------ 20,948,370 ------------ Conglomerates -- 3.4% Berkshire Hathaway, Inc. - Class B(b) 3,687 10,069,197 ------------ Electronics -- 2.0% Agilent Technologies, Inc.(b) 29,749 974,280 Intel Corp. 200,000 4,930,000 ------------ 5,904,280 ------------ Finance -- 11.6% American Express Co. 305,626 17,555,158 Fannie Mae 88,105 3,948,866 SLM Corp. 233,200 12,508,848 ------------ 34,012,872 ------------ Food & Agriculture -- 0.1% General Mills, Inc. 8,497 409,555 ------------ Insurance -- 2.3% American International Group, Inc. 106,800 6,617,328 ------------ Machinery & Heavy Equipment -- 2.5% Caterpillar, Inc. 124,256 7,300,040 ------------ Manufacturing -- 4.0% General Electric Co. 344,970 11,615,140 ------------ Medical & Medical Services -- 3.4% Medco Health Solutions, Inc.(b) 11,124 609,929 Millipore Corp.(b) 150,000 9,433,500 ------------ 10,043,429 ------------ Medical Instruments & Supplies -- 3.8% Johnson & Johnson 124,195 7,859,060 Medtronic, Inc. 60,000 3,217,200 ------------ 11,076,260 ------------ Oil & Gas -- 13.6% BP PLC 131,321 9,304,093 Exxon Mobil Corp. 312,469 19,854,280 Schlumberger Ltd. 109,238 9,217,502 Transocean, Inc.(b) 21,148 1,296,584 ------------ 39,672,459 ------------ Pharmaceuticals -- 9.9% AstraZeneca PLC - ADR 76,000 3,579,600 Merck & Co., Inc. 83,999 2,285,613 Novartis AG - ADR 185,384 9,454,584 Pfizer, Inc. 280,383 7,001,163 Wyeth 145,544 6,734,321 ------------ 29,055,281 ------------ Retail Merchandising -- 7.2% Target Corp. 273,222 14,188,418 Wal-Mart Stores, Inc. 154,700 6,778,954 ------------ 20,967,372 ------------ Soaps & Cosmetics -- 5.0% The Procter & Gamble Co. 246,400 14,650,944 ------------ Telecommunications -- 2.8% Vodafone Group PLC - SP ADR 309,500 8,037,715 ------------ Tobacco -- 1.9% Altria Group, Inc. 77,000 5,675,670 ------------ TOTAL COMMON STOCKS (Cost $89,989,239) 290,309,116 ------------ SHORT TERM INVESTMENTS -- 0.7% Galileo Money Market Fund (Cost $2,110,964) 2,110,964 2,110,964 ------------ TOTAL INVESTMENTS IN SECURITIES (Cost $92,100,203(a)) 292,420,080 OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.0% 96,013 ------------ NET ASSETS -- 100.0% $292,516,093 ============ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER BLACKROCK SHARE ($292,516,093/548,167) $ 533.63 ======== - ---------- (a) Cost for Federal income tax purposes is $85,523,957. The gross unrealized appreciation (depreciation) on a tax basis is as follows: Gross unrealized appreciation $208,418,553 Gross unrealized depreciation (1,522,430) ------------ $206,896,123 ============ (b) Non-income producing security. KEY TO INVESTMENT ABBREVIATIONS ADR American Depository Receipts PLC Public Limited Co. SP Sponsored See accompanying notes to financial statements. 4
BlackRock Funds STATEMENT OF OPERATIONS BLACKROCK EXCHANGE PORTFOLIO For the For the Nine Months Ended Year Ended 9/30/05 12/31/04 ------------------- --------------- Investment income: Interest .................................................... $ 51,236 $ 38,550 Dividends and reclaims ...................................... 3,581,524 6,333,137 Foreign taxes witheld ....................................... (24,636) (79,760) Security lending income ..................................... -- 2,665 ------------ ------------ Total investment income ................................... 3,608,124 6,294,592 ------------ ------------ Expenses: Investment advisory fee ..................................... 1,082,951 1,515,452 Administration fee .......................................... 240,497 108,870 Printing fee ................................................ 71,122 9,300 Legal and audit fee ......................................... 50,417 53,021 Transfer agent fee .......................................... 34,693 11,810 Custodian fee ............................................... 27,964 93,500 Trustees' fees .............................................. 8,187 25,445 Registration fees and expenses .............................. 3,578 -- Other ....................................................... 15,586 28,638 ------------ ------------ Total expenses ............................................. 1,534,995 1,846,036 ------------ ------------ Less investment advisory fees waived ...................... (156,407) -- Less administration fees waived ........................... (68,117) -- Less transfer agent fee waived ............................ (2,496) -- Less custodian fees waived ................................ (1,842) -- ------------ ------------ Net expenses ............................................... 1,306,133 1,846,036 ------------ ------------ Net investment income ........................................ 2,301,991 4,448,556 ------------ ------------ Realized and unrealized gain (loss) on investments: Net increase from payment by affiliate ...................... -- 98,840 Net realized gain (loss) from: Investment transactions .................................... (2,560,750) 4,097,700 Redemption-in-kind transactions (Note C) ................... 8,537,884 22,587,741 ------------ ------------ 5,977,134 26,685,441 ------------ ------------ Change in unrealized appreciation from: Investments ................................................ 248,812 (9,213,483) ------------ ------------ Net gain on investments transactions ......................... 6,225,946 17,570,798 ------------ ------------ Net increase in net assets resulting from operations ......... $ 8,527,937 $ 22,019,354 ============ ============ See accompanying notes to financial statements. 5
BlackRock Funds STATEMENTS OF CHANGES IN NET ASSETS BLACKROCK EXCHANGE PORTFOLIO For the For the For the Nine Months Ended Year Ended Year Ended 9/30/05 12/31/04 12/31/03 ------------------- ---------------- ---------------- Increase (decrease) in net assets: Operations: Net investment income ........................................... $ 2,301,991 $ 4,448,556 $ 3,407,737 Net increase from payment by affiliate (Note D) ................. -- 98,840 -- Net realized gain (loss) on investment transactions ............. (2,560,750) 4,097,700 4,576,085 Net realized gain on redemption-in-kind transactions ............ 8,537,884 22,587,741 7,674,460 Change in unrealized appreciation (depreciation) on investments.. 248,812 (9,213,483) 39,112,155 ------------- ------------- ------------- Net increase in net assets resulting from operations ............ 8,527,937 22,019,354 54,770,437 ------------- ------------- ------------- Distributions to shareholders from: Net investment income ........................................... (1,671,755) (4,387,534) (3,497,110) ------------- ------------- ------------- Capital share transactions: Shares issued in reinvestment of dividends ...................... 335,703 911,070 627,059 Shares redeemed ................................................. (14,027,713) (28,889,729) (10,704,806) ------------- ------------- ------------- Net decrease in net assets resulting from capital share transactions ................................................... (13,692,010) (27,978,659) (10,077,747) ------------- ------------- ------------- Total increase(decrease) in net assets .......................... (6,835,828) (10,346,839) 41,195,580 Net assets: Beginning of period ............................................. 299,351,921 309,698,760 268,503,180 ------------- ------------- ------------- End of period ................................................... $ 292,516,093 $ 299,351,921 309,698,760 ============= ============= ============= End of period undistributed net investment income ................. $ 691,258 $ 61,022 $ -- See accompanying notes to financial statements. 6
BlackRock Funds FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD For the For the For the Nine Months Ended Year Ended Year Ended 9/30/05 12/31/04 /1/ 12/31/03 /2/ ------------------- ------------- ------------- Per share operating performance: Net asset value, beginning of period .............................. $ 520.73 $ 490.99 $ 411.01 --------- --------- --------- Net investment income ............................................ 4.10/3/ 7.61 5.40 Net realized and unrealized gain (loss) on investments ........... 11.80 29.63 80.08 Distributions from net investment income ......................... (3.00) (7.50) (5.50) --------- --------- --------- Net asset value, end of period ................................... $ 533.63 $ 520.73 $ 490.99 ========= ========= ========= Total Return ...................................................... 3.10%/5/ 7.63% 20.89% Ratios/Supplemental data Net assets, end of period (in thousands) .......................... $ 292,516 $ 299,352 $ 309,699 Ratio of expenses to average net assets ........................... 0.60%/6/ 0.61% 0.59% Ratio of expenses to average net assets (excluding waivers) ....... 0.71%/6/ 0.61% 0.59% Ratio of net investment income to average net assets .............. 1.06%/6/ 1.47% 1.20% Ratio of net investment income to average net assets (excluding waivers) ......................................................... 0.95%/6/ 1.47% 1.20% Portfolio turnover ................................................ - 4% 5% For the For the For the Year Ended Year Ended Year Ended 12/31/02 /2/ 12/31/01 /2/ 12/31/00 /2/ -------------- -------------- ------------- Per share operating performance: Net asset value, beginning of period .............................. $ 511.71 $ 575.76 $ 616.80 --------- --------- ---------- Net investment income ............................................ 4.74 4.22 4.75 Net realized and unrealized gain (loss) on investments ........... (100.64) (64.02) (41.19)/4/ Distributions from net investment income ......................... (4.80) (4.25) (4.60) --------- --------- ---------- Net asset value, end of period ................................... $ 411.01 $ 511.71 $ 575.76 ========= ========= ========== Total Return ...................................................... (18.78)% (10.35)% (4.13) Ratios/Supplemental data Net assets, end of period (in thousands) .......................... $ 268,503 $ 367,640 $ 437,804 Ratio of expenses to average net assets ........................... 0.60% 0.57% 0.55% Ratio of expenses to average net assets (excluding waivers) ....... 0.60% 0.57% 0.55% Ratio of net investment income to average net assets .............. 1.00% 0.81% 0.78% Ratio of net investment income to average net assets (excluding waivers) ......................................................... 1.00% 0.81% 0.78% Portfolio turnover ................................................ 3% 1% 11% - --------- /1/ During the year ended December 31, 2004, the Advisor reimbursed the Portfolio as part of an internal review regarding the use of fund brokerage commissions. These payments increased net realized and unrealized gain on investments per share by $0.17, and increased total return by 0.04%. /2/ Audited by other auditors. /3/ Calculated using the average shares outstanding method. /4/ After provision for federal tax on retained capital gains of $11.01. /5/ Not annualized. /6/ Annualized. See accompanying notes to financial statements. 7
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (A) Organization BlackRock Funds(SM) (the "Fund") was organized on December 22, 1988 as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. The Fund currently has 50 portfolios, one of which, the BlackRock Exchange Portfolio (the "Portfolio"), is included in these financial statements. The Portfolio is authorized to issue an unlimited number of shares with a par value of $0.001. Under the Fund's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts with its vendors and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund. However, based on experience, the Fund considers the risk of loss from such claims to be remote. (B) Fund Reorganization On January 31, 2005, BlackRock, Inc., the parent of BlackRock Advisors, Inc. ("BlackRock"), acquired SSRM Holdings, Inc., the parent of State Street Research & Management Co. ("SSRM"), the investment adviser to the former State Street Research mutual funds. In connection with the transaction, the BlackRock Exchange Portfolio reorganized with the State Street Research Exchange Fund. On January 31, 2005, the BlackRock Exchange Portfolio acquired all of the assets and certain stated liabilities of the State Street Research Exchange Fund. The reorganization was pursuant to an Agreement and Plan of Reorganization, which was approved by the State Street Research shareholders on January 25, 2005. In connection with the reorganization, the BlackRock Exchange Portfolio inherited the accounting and performance history of the State Street Research Exchange Fund. Under the Agreement and Plan of Reorganization, 572,959 shares of the State Street Research Exchange Fund were exchanged for 572,959 BlackRock Class shares of the BlackRock Exchange Portfolio. The BlackRock Exchange Portfolio commenced operations on this date as a result of this tax free reorganization. Included in the net assets from the State Street Research Exchange Fund was paid-in-capital of $84,329,708, undistributed net investment income of $265,841, accumulated realized gain of $14,157,803 and net unrealized appreciation of $189,448,466. Total net assets as of January 28, 2005 were $288,201,818. Accordingly, the information presented in the financial statements and related notes reflects operations of the predecessor State Street Research fund prior to January 31, 2005 and represents operations of the reorganized BlackRock Fund following the consummation of the reorganization. (C) Summary of Significant Accounting Policies The following is a summary of significant accounting policies followed by the Portfolio in the preparation of its financial statements. Investment Valuation -- Valuation of investments held by the Portfolio is as follows: investments traded on a national securities exchange or on the NASDAQ National Market System are valued at the last reported sale price that day or the NASDAQ official closing price, if applicable; investments traded on a national securities exchange for which there were no sales on that day and investments traded on other over-the-counter markets for which market quotations are readily available are valued at the mean of the bid and asked prices. The amortized cost method of valuation will be used with respect to debt obligations with sixty days or less remaining to maturity unless the investment adviser under the supervision of the Board of Trustees (the "Board") determines such method does not represent fair value. Any assets which are denominated in a non-U.S. currency are translated into U.S. dollars at the prevailing market rates. In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the market value of such investment, the investment will be valued by, under the direction of or in accordance with a method approved by the Board as reflecting fair value ("Fair Value Assets"). The investment adviser will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to a valuation committee. Such valuation committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to and ratified by the Board. When determining the price for a Fair Value Asset, the investment advisor shall seek to determine the price that the Portfolio might reasonably expect to receive from the current sale of that asset in an arms'-length transaction. Fair value determinations shall be based upon all available factors that the advisor deems relevant. 8
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) Dividends to Shareholders -- Dividends from net investment income, which are recorded on the ex-dividend date, are declared and paid quarterly for the Portfolio. Net realized short-term capital gains, if any, are distributed annually. The Portfolio's current practice is to retain long-term capital gains and to pay Federal taxes thereon at corporate capital gain tax rates on behalf of the shareholders. Investment Transactions and Investment Income -- Investment transactions are accounted for on the trade date. The cost of investments sold and the related gain or loss thereon is determined by use of the specific identification method, generally high cost, for both financial reporting and federal income tax purposes. Interest income is recorded on the accrual basis. Discounts and premiums on debt securities are accreted or amortized, respectively, for book and tax purposes using the effective yield-to-maturity method over the term of the instrument. Dividends are recorded on the ex-dividend date. Repurchase Agreements -- Money market instruments may be purchased from banks and non-bank dealers subject to the seller's agreement to repurchase them at an agreed upon date and price. Collateral for repurchase agreements may have longer maturities than the maximum permissible remaining maturity of portfolio investments. The seller is required on a daily basis to maintain the value of the securities subject to the agreement at not less than the repurchase price. The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system or held in a separate account by the Portfolio's custodian or an authorized securities depository. Redemptions-In-Kind -- The fund transferred securities and cash due to redemptions-in-kind. For purposes of generally accepted accounting principles, these transactions were treated as a sale of securities and the resulting gains and losses were recognized based on the market value of the securities on the date of the transfer. For tax purposes, no gains or losses were recognized. Gains and losses resulting from such redemptions in-kind are disclosed separately in the Statement of Operations. Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles") requires the use of management estimates. Actual results could differ from these estimates. Other -- Expenses that are directly related to the Portfolio are charged directly to the Portfolio. Other operating expenses incurred by the Fund are prorated to the Portfolio on the basis of relative net assets. (D) Transactions with Affiliates and Related Parties Prior to January 31, 2005, the State Street Research Exchange Fund entered in an agreement with SSRM to provide management advisory, statistical and research facilities and services. Fees were earned monthly at the annual rate of 0.50% of the Portfolio's average net assets. Effective January 31, 2005, pursuant to an Investment Advisory Agreement, BlackRock serves as investment advisor. BlackRock is an indirect majority-owned subsidiary of The PNC Financial Services Group, Inc. For its advisory services, BlackRock is entitled to receive fees computed daily and payable monthly at the annual rate of 0.50% of average daily net assets. The Portfolio's advisory fees were paid to BlackRock beginning January 31, 2005. Prior to that date the fees were paid to SSRM. See (Note B) above for more information on the fund reorganization. In the interest of limiting the expenses of the Portfolio, BlackRock and the Portfolio have entered into an annual expense limitation agreements. The agreement sets a limit on certain operating expenses of the Portfolio for the next year and requires BlackRock to waive or reimburse fees or expenses if these operating expenses exceed that limit. These expense limits apply to the aggregate expenses incurred (excluding: interest, taxes, brokerage commissions and other extraordinary expenses). BlackRock has contractually agreed to waive or reimburse fees or expenses until February 1, 2006, in order to limit expenses to 0.60% of average daily net assets. This agreement is reviewed annually by the Fund's Board. 9
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) At September 30, 2005, the amounts subject to possible future reimbursement under the expense limitation agreement are as follows: Total Waivers Expiring Expiring Subject to January 31, 2007 January 31, 2008 Reimbursement ------------------ ------------------ -------------- $ 3,839 $ 220,685 $ 224,524 Prior to January 31, 2005, the Portfolio paid SSRM for certain administrative costs incurred in providing other assistance and services to the Portfolio. The fee was based on actual costs allocated equally among the State Street Research funds. Effective January 31, 2005, PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of The PNC Financial Services Group, Inc., and BlackRock act as co-administrators for the Portfolio. For these services, the co-administrators receive a combined administration fee computed daily and payable monthly, based on a percentage of the average daily net assets of the Portfolio, at the following annual rates: 0.085% of the first $500 million, 0.075% of the next $500 million and 0.065% of assets in excess of $1 billion. In addition, the Portfolio is charged an administration fee based on the following percentage of average daily net assets of each respective class: 0.035% of the first $500 million, 0.025% of the next $500 million and 0.015% of assets in excess of $1 billion. PFPC and BlackRock may, at their discretion, waive all or any portion of their administration fees for the Portfolio. Prior to January 31, 2005, State Street Bank and Trust Co. served as the Portfolio's custodian and record keeper. Effective January 31, 2005, PFPC Trust Co., an indirect subsidiary of The PNC Financial Services Group, Inc., serves as custodian for the Portfolio. Prior to January 31, 2005, Boston Financial Data Services, Inc. served as the State Street Research Funds' transfer agent. Effective January 31, 2005, PFPC serves as transfer and dividend disbursing agent. The custodian and transfer agent have agreed to voluntarily waive a portion of their fees during the period. Prior to January 31, 2005, State Street Research Service Center, a division of State Street Research Investment Services, Inc., the State Street Research Funds' principal underwriter, provided certain shareholder services to the State Street Research Funds, such as responding to inquiries and instructions from investors with respect to the purchase and redemption of shares of the funds. For the month ended January 31, 2005, the State Street Research Exchange Fund paid $382 for these services. Subsequent to January 31, 2005, BlackRock operated an Investor Service center on behalf of the fund. As of the fiscal year ended September 30, 2005, affiliated payables were as follows: PFPC/(1)/ ........................ $ 18,632 BlackRock/(2)/ ................... 112,834 (1) - payables to PFPC are for Accounting, Administration, Custody and Transfer Agent services provided. (2) - payables to BlackRock are for Advisory and Administration services provided. During the year ended December 31, 2004, SSRM conducted an internal review regarding the use of fund brokerage commissions in consideration of the distribution of shares. In connection with this review, SSRM determined to reimburse the fund the entire amount of any such identified brokerage commissions, and reviewed this matter with the Board of Trustees of the State Street Research Fund. This amount is shown in the total amount of $98,840 as "Net increase from payment by affiliate" on the Statements of Changes in Net Assets. (E) Purchases and Sales of Securities For the nine months ended September 30, 2005, purchases and sales of securities, other than short-term investments and U.S. government securities, including $10,523,291 representing redemptions-in-kind, were $0 and $13,852,503, respectively. There were no purchases or sales of U.S. government securities for the nine months ended September 30, 2005. 10
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Continued) (F) Capital Shares Transactions in capital shares for each period were as follows: For the For the For the Nine Months Ended Year Ended Year Ended 9/30/05 12/31/04 12/31/03 ------------------- --------------- --------------- Shares issued in reinvestment of dividends .................... 653 1,790 1,360 Shares redeemed ............................................... (27,354)/1/ (57,683)/2/ (23,879)/3/ ------- ------- ------- Net decrease .................................................. (26,701) (55,893) (22,159) ======= ======= ======= - ---------- /1/ Including (20,440) representing redemptions-in-kind. /2/ Including (55,646) representing redemptions-in-kind. /3/ Including (19,964) representing redemptions-in-kind. On September 30, 2005, two shareholders held approximately 14% of the outstanding shares of the Portfolio. (G) At September 30, 2005, net assets consisted of: Capital paid-in .......................................... $ 93,410,907 End of period undistributed net investment income ........ 691,258 Accumulated net realized loss on investment transactions.. (1,905,949) Net unrealized appreciation on investment transactions ... 200,319,877 ------------ $292,516,093 ============ (H) Federal Tax Information No provision for Federal income taxes is necessary with respect to net investment income because it is the Portfolio's intention to qualify under Subchapter M of the Internal Revenue Code of 1986, as amended, and to make the requisite income distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes. The Portfolio currently retains and designates as undistributable gains all of its taxable net long-term capital gains and pays federal income taxes thereon on behalf of the shareholders. The Portfolio has a tax year end of 12/31. Dividends from net investment income are determined in accordance with U.S. Federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain, as appropriate, in the period that the differences arise. The following permanent differences as of December 31, 2004, attributable to redemptions in-kind distributions and directed brokerage reimbursement adjustments, which for tax purposes, are not available to offset future income, were reclassified to the following accounts: Increase Increase (Decrease) Increase (Decrease) (Decrease)in Accumulated Net Undistributed Net Paid in-Capital Realized Gain (Loss) Investment Income ----------------- ---------------------- -------------------- $ 21,804,809 $ (21,705,969) $ (98,840) The estimated tax character of distributions paid during the period ended September 30, 2005 and the years ended December 31, 2004 and December 31, 2003, respectively, were as follows: Ordinary Income -------------- 09/30/05 ........................... $ 1,671,755 12/31/04 ........................... 4,387,534 12/31/03 ........................... (3,497,110) 11
BlackRock Funds NOTES TO FINANCIAL STATEMENTS (Concluded) As of September 30, 2005, the estimate tax components of distributable earnings/(accumulated losses) were as follows: Undistributed Accumulated Ordinary Capital Income Losses --------------- ----------------- $ 691,258 $ (1,905,949) As of December 31, 2004, the Portfolios had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates: Expiring December 31 ------------------------------------------------ 2009 2010 Total -------------- -------------- -------------- $ 770,500 $ 7,112,583 $ 7,883,083 12
BlackRock Funds REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees and Shareholders of BlackRock Funds: We have audited the accompanying statement of net assets of the Exchange Portfolio [one of the fifty portfolios constituting BlackRock Funds (the "Fund"), the "Portfolio"] (formerly "State Street Exchange Fund"), as of September 30, 2005 and the related statement of operations for the period January 1, 2005 through September 30, 2005 and the year ended December 31, 2004, the statement of changes in net assets for the period then ended and the years ended December 31, 2004 and December 31, 2003, and the financial highlights for the period then ended and for the years ended December 31, 2004 and December 31, 2003. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Portfolio for the years ended December 31, 2002, December 31, 2001 and December 30, 2000 were audited by other auditors whose report, dated February 12, 2003, expressed an unqualified opinion on those financial highlights. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Portfolio is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolio's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2005, by correspondence with the custodians and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Portfolio as of September 30, 2005, the results of its operations, the changes in its net assets, and its financial highlights for the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Philadelphia, Pennsylvania November 25, 2005 13
BlackRock Funds FUND MANAGEMENT (Unaudited) Information pertaining to the Trustees and officers of the Fund is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (888) 825-2257. Institutional and service share class investors should call (800) 441-7450. Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) and Length Complex/(2)/ Directorships for the Name, Address and Held with of Time Principal Occupation(s) Overseen Held by Year Ending Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEES - ------------------------------------------------------------------------------------------------------------------------------------ Richard S. Davis/(3)/ Trustee Since 2005 Managing Director, BlackRock, Inc. 55 None N/A BlackRock, Inc. (since 2005); Chief Executive Officer, (includes 40 E. 52nd Street State Street Research & 50 New York, NY 10022 Management Company (2000-2005); Portfolios Age: 59 Chairman of the Board of Trustees, of the Fund State Street Research mutual funds and 5 ("SSR Funds") (2000-2005); Senior Portfolios Vice President, Metropolitan Life of Insurance Company (1999-2000); BlackRock Chairman, SSR Realty (2000-2004). Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Laurence D. Fink/(4)/ Trustee Since 2000 Director, Chairman and Chief 55 Director, N/A BlackRock, Inc. Executive Officer of BlackRock, Inc. (includes BlackRock, 40 E. 52nd Street since its formation in 1998 and of 50 Inc. New York, NY 10022 BlackRock, Inc.'s predecessor Portfolios Age: 52 entities since 1988; Chairman of the of the Fund Management Committee; formerly, and 5 Managing Director of the First Portfolios Boston Corporation, Member of its of Management Committee, Co-head of BlackRock its Taxable Fixed Income Division Bond and Head of its Mortgage and Real Allocation Estate Products Group; Chairman of Target the Board of Nomura BlackRock Shares) Asset Management and several of BlackRock's alternative investment vehicles; Director of several of BlackRock's offshore funds; Co-Chairman of the Board of Trustees of Mount Sinai-NYU; Co-Chairman of the Board of Trustees of NYU Hospitals Center; member of the Board of Trustees of NYU; member of the Board of Executives of the New York Stock Exchange, and Trustee of the American Folk Art Museum. - ------------------------------------------------------------------------------------------------------------------------------------ 14
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) and Length Complex/(2)/ Directorships for the Name, Address and Held with of Time Principal Occupation(s) Overseen Held by Year Ending Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ DISINTERESTED TRUSTEES - ------------------------------------------------------------------------------------------------------------------------------------ Bruce R. Bond Trustee Since 2005 Retired; Trustee and member of the 55 Director, $ 84,600 c/o BlackRock Funds Governance Committee, SSR Funds (includes Avaya, Inc. 100 Bellevue Parkway (1997-2005). 50 (information Wilmington, DE 19809 Portfolios technology). Age: 59 of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Peter S. Drotch Trustee Since 2005 Retired; Trustee and member of the 55 Director, $ 84,600 c/o BlackRock Funds Audit Committee, SSR Funds (includes First 100 Bellevue Parkway (2003-2005); Partner, Pricewater- 50 Marblehead Wilmington, DE 19809 houseCoopers LLP (accounting firm) Portfolios Corp. Age: 64 (1964-2000). of the Fund (student loan and 5 processing Portfolios and of securitization); BlackRock Trustee, Bond University of Allocation Connecticut; Target Trustee, Shares) Huntington Theatre. - ------------------------------------------------------------------------------------------------------------------------------------ Honorable Stuart E. Trustee and Since 2001 Partner, Covington & Burling (law 55 Director, Mirant $130,100 Eizenstat Covington Chairman of firm) (2001-Present); Deputy (includes Corporation; & Burling the Secretary of the Treasury 50 Advisory 1201 Pennsylvania Nominating (1999-2001); Under Secretary of Portfolios Board member, Avenue, NW Committee State for Economic, Business and of the Fund The Coca-Cola Washington, DC 20004 Agricultural Affairs (1997-1999); and 5 Company; Age: 62 Under Secretary of Commerce for Portfolios Advisory Board International Trade (1996-1997); of member, Group U.S. Ambassador to the European BlackRock Menatep; Union (1993-1996); Chairman, Bond Advisory International Board of Governors, Allocation Board member, BT Weizmann Institute of Science. Target Americas. Shares) - ------------------------------------------------------------------------------------------------------------------------------------ Robert M. Hernandez Trustee, Since 1996 Retired; Director (1991-2001), Vice 55 Lead Director, $140,100 c/o BlackRock Funds Vice Chairman and Chief Financial (includes ACE Limited 100 Bellevue Parkway Chairman of Officer (1994-2001), Executive Vice 50 insurance Wilmington, DE 19809 the Board President-Accounting and Finance Portfolios company); Age: 61 and and Chief Financial Officer of the Fund Director and Chairman of (1991-1994), USX Corporation (a and 5 Chairman of the the Audit diversified company principally Portfolios Board, RTI Committee engaged in energy and steel of International businesses). BlackRock Metals, Inc.: Bond Director, Allocation Eastman Chemical Target Company. Shares) - ------------------------------------------------------------------------------------------------------------------------------------ 15
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Number of Term of Portfolios Total Fund Office/(1)/ in Fund Other Compensation Position(s) and Length Complex/(2)/ Directorships for the Name, Address and Held with of Time Principal Occupation(s) Overseen Held by Year Ending Age Fund Served During Past Five Years by Trustee Trustee 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------------ Dr. Matina Horner Trustee and Since 2004 Retired; Executive Vice President 55 Chair of the $104,550 c/o BlackRock Funds Chairperson of Teachers Insurance and Annuity (includes Board of 100 Bellevue Parkway of the Association and College Retirement 50 the Wilmington, DE 19809 Governance Equities Fund (TIAA-CREF) Portfolios Massachusetts Age: 66 Committee (1989-2003). of the Fund General Hospital and 5 Health Institute Portfolios of Professions; of Chair of the BlackRock Board of the Bond Greenwall Allocation Foundation; Target Trustee, Century Shares) Foundation (formerly The Twentieth Century Fund); Director, N STAR (formerly called Boston Edison); Director, The Neiman Marcus Group; Honorary Trustee, Massachusetts General Hospital Corporation. - ------------------------------------------------------------------------------------------------------------------------------------ Toby Rosenblatt Trustee Since 2005 President, Founders Investment Ltd. 55 Director, $ 84,600 c/o BlackRock Funds (private investments) (since 1999); (includes A.P. Pharma, 100 Bellevue Parkway Trustee, SSR Funds (1993-2003). 50 Inc. Wilmington, DE 19809 Portfolios Age: 67 of the Fund and 5 Portfolios of BlackRock Bond Allocation Target Shares) - ------------------------------------------------------------------------------------------------------------------------------------ David R. Wilmerding, Jr. Trustee and Since 1996 Chairman, Wilmerding & Associates, 56 None $135,100 c/o BlackRock Funds Chairperson Inc. (investment advisers) (since (includes 100 Bellevue Parkway of the 1989); Chairman, Coho Partners, 50 Wilmington, DE 19809 Board Ltd. (investment advisers) (since Portfolios Age: 70 2003); Director, Beaver Management of the Fund, Corporation (land management 5 Portfolios corporation); Managing General of Partner, Chestnut Street Exchange BlackRock Fund. Bond Allocation Target Shares and 1 Portfolio of Chestnut Street Exchange Fund, which is managed by BlackRock Financial Management Inc. and BlackRock Institutional Management Corporation.) - ------------------------------------------------------------------------------------------------------------------------------------ 16
BlackRock Funds FUND MANAGEMENT (Unaudited) (Continued) Term of Total Fund Office/(5)/ Compensation Position(s) and Length for the Name, Address and Held with of Time Principal Occupation(s) Year Ending Age Fund Served During Past Five Years 9/30/05 - ------------------------------------------------------------------------------------------------------------------------------ OFFICERS WHO ARE NOT TRUSTEES - ------------------------------------------------------------------------------------------------------------------------------ Anne Ackerley Vice President Since 2003 Managing Director, BlackRock, Inc. (since May N/A BlackRock, Inc. (previously 2000); First Vice President and Operating 40 E. 52nd Street served as Officer, Mergers and Acquisitions Group New York, NY 10022 Assistant (1997-2000), First Vice President and Operating Age: 43 Secretary Officer, Public Finance Group (1995-1997), and since First Vice President, Emerging Markets Fixed 2000) Income Research (1994-1995), Merrill Lynch & Co. - --------------------------------------------------------------------------------------------------------------------------- Edward Baer Assistant Since 2005 Director and Senior Counsel of BlackRock, Inc. N/A BlackRock, Inc. Secretary (since 2004); Associate, Willkie Farr & 40 E. 52nd Street Gallagher LLP (2000-2004); Associate, Morgan New York, NY 10022 Lewis & Bockius LLP (1995-2000). Age: 37 - --------------------------------------------------------------------------------------------------------------------------- Bart Battista Chief Since 2004 Chief Compliance Officer and Anti-Money $368,547 BlackRock, Inc. Compliance Laundering Compliance Officer of BlackRock, 40 E. 52nd Street Officer and Inc. (since 2004); Managing Director (since New York, NY 10022 Anti-Money 2003), and Director (1998-2002) of BlackRock, Age: 46 Laundering Inc.; Compliance Officer at Moore Capital Compliance Management (1995-1998). Officer - --------------------------------------------------------------------------------------------------------------------------- Ellen L. Corson Assistant Since 1998 Senior Director and Vice President of Fund N/A PFPC Inc. Treasurer Accounting and Administration, PFPC Inc. 103 Bellevue Parkway (since 2003); Vice President and Director of Wilmington, DE 19809 Mutual Fund Accounting and Administration, Age: 41 PFPC Inc. (since November 1997); Assistant Vice President, PFPC Inc. (March 1997-November 1997); Senior Accounting Officer, PFPC Inc. (March 1993-March 1997). - --------------------------------------------------------------------------------------------------------------------------- Henry Gabbay President Since 2005 Managing Director, BlackRock, Inc. (since N/A BlackRock, Inc. 1989). 40 E. 52nd Street New York, NY 10022 Age: 57 - --------------------------------------------------------------------------------------------------------------------------- Brian P. Kindelan Secretary Since 1997 Managing Director and Senior Counsel (since N/A BlackRock Advisors, Inc. January 2005), Director and Senior Counsel 100 Bellevue Parkway (2001-2004) and Vice President and Senior Wilmington, DE 19809 Counsel (1998-2000), BlackRock Advisors, Age: 46 Inc.; Senior Counsel, PNC Bank Corp. May 1995-April 1998). - --------------------------------------------------------------------------------------------------------------------------- William McGinley Treasurer Since 2005 Managing Director of BlackRock, Inc. (since N/A BlackRock, Inc. 2004); Partner, PricewaterhouseCoopers LLP 100 Bellevue Parkway (1990-2004). Wilmington, DE 19809 Age: 38 - --------------------------------------------------------------------------------------------------------------------------- Vincent Tritto Assistant Since 2003 Managing Director and Assistant Secretary N/A BlackRock, Inc. Secretary (since January 2005) and Director and Senior 40 E. 52nd Street Counsel (2002-2004) of BlackRock, Inc. New York, NY 10022 Executive Director (2000-2002) and Vice Age: 44 President (1998-2000), Morgan Stanley & Co. Incorporated and Morgan Stanley Asset Management Inc. and officer of various Morgan Stanley-sponsored investment vehicles: Counsel (1998); Associate (1988-1997), Rogers & Wells LLP, New York, NY. - --------------------------------------------------------------------------------------------------------------------------- 17
BlackRock Funds FUND MANAGEMENT (Unaudited) (Concluded) (1) Each Trustee holds office for an indefinite term until the earlier of (1) the next meeting of shareholders at which Trustees are elected and until his or her successor is elected and qualified and (2) such time as such Trustee resigns or his or her term as a Trustee is terminated in accordance with the Fund's code of regulations and Declaration of Trust. (2) A Fund Complex means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services, that have a common investment adviser or that have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. (3) Mr. Davis is an interested person of the Fund due to his position at BlackRock, Inc. (4) Mr. Fink is an interested person of the Fund due to his position at BlackRock, Inc. (5) Each officer holds office for an indefinite term until the earlier of (1) the next meeting of trustees at which his or her successor is appointed and (2) such time as such officer resigns or his or her term as an officer is terminated in accordance with the Fund's code of regulations and Declaration of Trust. 18
BlackRock Funds ADDITIONAL INFORMATION (Unaudited) (A) A proxy statement was sent to shareholders of all portfolios of the Fund asking them to consider and vote upon the election of nine trustees to the Board of Trustees of the Fund (the "Board"). Five of the nine nominees were already serving as trustees of the Fund and the additional nominees had previously served as trustees of the State Street Research Funds. Due to the increased size and complexity of the Fund resulting from the reorganization with the State Street Research Funds, and an increase in the responsibilities of boards of trustees of funds generally, the Board believed it was in the best interest of the Fund to increase the size of the Board. On April 29, 2005, the special meeting of shareholders was held, at which all of the nominees included in the proxy were duly elected to the Board. The votes for the election of trustees were as follows: Affirmative Negative --------------- ---------- Bruce R. Bond .................... 3,006,153,475 9,427,152 Richard S. Davis ................. 3,006,504,966 9,075,661 Peter S. Drotch .................. 3,006,391,368 9,189,259 Stuart E. Eizenstat .............. 3,005,972,578 9,608,049 Laurence D. Fink ................. 3,006,652,923 8,927,704 Robert M. Hernandez .............. 3,006,095,141 9,485,487 Dr Matina Horner ................. 3,005,916,103 9,664,525 Toby Rosenblatt .................. 3,006,157,679 9,422,948 David R. Wilmerding, Jr. ......... 3,006,022,868 9,557,759 (B) The Fund's Audit Committee approved engaging Deloitte & Touche LLP as the independent registered public accounting firm to audit the Fund's financial statements for fiscal year 2006. A majority of the Fund's Board of Trustees, including a majority of the independent Trustees, approved the appointment of Deloitte & Touche LLP as the Fund's independent registered public accounting firm for the Fund's fiscal 2006 audit on November 29, 2005, subject to the right of the Fund, by a majority vote of the shareholders at any meeting called for that purpose, to terminate the appointment without penalty. (C) As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and various information requests from the Securities and Exchange Commission in connection with ongoing industry-wide investigations of mutual fund matters. 19
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BlackRock Funds Investment Adviser BlackRock Advisors, Inc. Wilmington, Delaware 19809 Custodian PFPC Trust Co. Philadelphia, Pennsylvania 19153 Co-Administrator and Transfer Agent PFPC Inc. Wilmington, Delaware 19809 Distributor BlackRock Distributors, Inc. King of Prussia, Pennsylvania 19406 Co-Administrator BlackRock Advisors, Inc. Wilmington, Delaware 19809 Counsel Simpson Thacher & Bartlett LLP New York, New York 10017 Independent Registered Public Accounting Firm Deloitte & Touche LLP Philadelphia, Pennsylvania 19103 The Fund will mail only one copy of shareholder documents, including prospectuses, annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called "householding" and it is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact the Fund at (800) 441-7762. The Fund has delegated proxy voting responsibilities to BlackRock and its affiliates, subject to the general oversight of the Fund's Board of Trustees. A description of the policies and procedures that BlackRock and its affiliates use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling 1-800-441-7762, or on the website of the Securities and Exchange Commission (the "Commission") at http://www.sec.gov. Information on how proxies relating to the Fund's voting securities were voted (if any) by BlackRock during the most recent 12-month period ended June 30th is available, upon request and without charge, by calling (800) 441-7762 or on the website of the Commission at http://www.sec.gov. The Fund files its complete schedule of portfolio holdings for the first and third quarters of its fiscal year with the Commission on Form N-Q. The Fund's Form N-Q is available on the Commission's website at http://www.sec.gov and may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund's Form N-Q may also be obtained upon request, without charge, by calling (800) 441-7762. This report is for shareholder information. This is not a prospectus intended for use in the purchase or sale of Fund shares.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by PNC Bank, National Association or any other bank and shares are not federally insured by, guaranteed by, obligations of or otherwise supported by the U.S. Government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other governmental agency. Investments in shares of the fund involve investment risks, including the possible loss of the principal amount invested. BlackRock EX-ANN 11/05