UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-04077
Name of Fund: BlackRock U.S. Government Fund
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, BlackRock U.S. Government Fund, 800 Scudders Mill Road,
Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton,
NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 08/31/06
Date of reporting period: 09/01/05 - 08/31/06
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY
REAL ESTATE
BlackRock
U.S. Government Fund
ANNUAL REPORT AUGUST 31, 2006
(BLACKROCK logo)
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
This report is not authorized for use as an offer of sale or a solicitation
of an offer to buy shares of the Fund unless accompanied or preceded by the
Fund's current prospectus. Past performance results shown in this report
should not be considered a representation of future performance. Investment
return and principal value of shares will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost. Statements and
other information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-441-7762; (2) at
www.blackrock.com; and (3) on the Securities and Exchange Commission's Web
site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.blackrock.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
BlackRock U.S. Government Fund
Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS...logo)
It's Fast, Convenient, & Timely!
To sign up today, go to www.blackrock.com/edelivery.
BlackRock U.S. Government Fund
Portfolio Information as of August 31, 2006
Percent of
Total
Asset Mix Investments
U.S. Government Agency Mortgage-Backed
Obligations 38.9%
U.S. Government Agency Mortgage-Backed
Obligations--Collateralized Mortgage
Obligations 25.9
U.S. Government & Agency Obligations 15.0
Non-U.S. Government Agency Mortgage-
Backed Obligations--Collateralized
Mortgage Obligations 11.3
Other* 8.9
* Includes portfolio holdings in short-term investments and options.
Proxy Results
During the six-month period ended August 31, 2006, BlackRock U.S. Government
Fund's shareholders voted on the following proposals. Proposals 1 and 3 were
approved at a shareholders' meeting on August 31, 2006. A description of the
proposals and number of shares voted were as follows:
Shares Voted Shares Voted Shares Voted
For Against Abstain
1. To approve a new investment advisory agreement. 77,940,093 2,197,591 2,114,710
3. To approve a contingent subadvisory agreement. 77,754,360 2,271,411 2,226,623
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
A Letter to Shareholders
Dear Shareholder
It is my pleasure to welcome you to BlackRock.
On September 29, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch
Investment Managers, L.P. ("MLIM") united to form one of the largest asset
management firms in the world. Now with more than $1 trillion in assets under
management, over 4,000 employees in 18 countries and representation in key
markets worldwide, BlackRock's global presence means greater depth and scale
to serve you.
The new BlackRock unites some of the finest money managers in the industry.
Our ranks include more than 500 investment professionals globally - portfolio
managers, research analysts, risk management professionals and traders. With
offices strategically located around the world, our investment professionals
have in-depth local knowledge and the ability to leverage our global presence
and robust infrastructure to deliver focused investment solutions. BlackRock's
professional investors are supported by disciplined investment processes and
best-in-class technology, ensuring that our portfolio managers are well
equipped to research, uncover and capitalize on the opportunities the world's
markets have to offer.
The BlackRock culture emphasizes excellence, teamwork and integrity in the
management of a variety of equity, fixed income, cash management, alternative
investment and real estate products. Our firm's core philosophy is grounded in
the belief that experienced investment and risk professionals using disciplined
investment processes and sophisticated analytical tools can consistently add
value to client portfolios.
As you probably are aware, former MLIM investment products now carry the
"BlackRock" name. This is reflected in newspapers and online fund reporting
resources. Your account statements will reflect the BlackRock name beginning
with the October month-end reporting period. Unless otherwise communicated to
you, your funds maintain the same investment objectives that they did prior to
the combination of MLIM and BlackRock. Importantly, this union does not affect
your brokerage account or your relationship with your financial advisor.
Clients of Merrill Lynch remain clients of Merrill Lynch.
We view this combination of asset management leaders as a complementary union
that reinforces our commitment to shareholders. Individually, each firm made
investment performance its single most important mission. Together, we are
even better prepared to capitalize on market opportunities on behalf of our
shareholders. Our focus on investment excellence is accompanied by an
unwavering commitment to service, enabling us to assist clients, in
cooperation with their financial professionals, in working toward their
investment goals. We thank you for allowing us the opportunity, and we look
forward to serving your investment needs in the months and years ahead as the
new BlackRock.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
Vice Chairman
BlackRock, Inc.
Data, including assets under management, are as of June 30, 2006.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
A Discussion With Your Fund's Portfolio Managers
We continued to focus on providing a competitive yield while also seeking to
enhance the overall structure of the portfolio and protect the Fund's value
amid rising interest rates.
How did the Fund perform during the fiscal year in light of the existing
market conditions?
For the 12-month period ended August 31, 2006, Merrill Lynch U.S. Government
Fund's Class A, Class B, Class C, Class I and Class R Shares had total returns
of +1.13%, +0.61%, +0.65%, +1.38% and +0.98%, respectively. (Fund results
shown do not reflect sales charges and would be lower if sales charges were
included. Complete performance information can be found on pages 6 and 7 of
this report to shareholders.) For the same period, the benchmark Citigroup
Government/Mortgage Index returned +1.99% and the Lipper Intermediate U.S.
Government Funds category provided an average return of +1.34%. (Funds in this
Lipper category invest at least 65% of their assets in securities issued or
guaranteed by the U.S. government, its agencies or its instrumentalities, with
dollar-weighted average maturities of five to 10 years.)
The Federal Reserve Board (the Fed) advanced its monetary tightening campaign
with seven quarter-point interest rate hikes during the past year, before
pausing on August 8. This brought the target federal funds rate to 5.25% at
period-end. Over the course of the 12 months, interest rates rose all along
the curve, with the two-year Treasury yield increasing 95 basis points (0.95%)
to 4.79% and the 10-year Treasury yield increasing 72 basis points to 4.74%.
The yield curve, which had flattened considerably since the Fed began
increasing interest rates in 2004, has toyed with bouts of inversion since the
start of 2006, with short-term issues intermittently providing higher yields
than long-term issues. At period-end, the one-month Treasury was offering the
highest yield on the curve, at 5.12%, while the 30-year Treasury yield stood
at 4.88%. Because bond prices move in the opposite direction of yields, it was
a fairly challenging period for fixed income investment.
What factors most influenced Fund performance?
The Fund traditionally has had an above-average position in agency commercial
mortgage product relative to its peers. Our exposure to this area of the
market performed well, particularly since the start of 2006, providing an
excess return over Treasury issues of 69 basis points year-to-date. However,
some of that benefit was offset by the Fund's duration profile (a measure of
interest rate sensitivity). For much of the period, we had positioned the Fund
with a slightly short duration in anticipation of a more aggressive Fed and
higher interest rates going forward. Although interest rates did rise year-
over-year as anticipated, they also fell at times when the Fed began to soften
its stance on inflation and expectations for future rate hikes declined. As
new Fed Chairman Ben Bernanke sought to establish credibility with the markets,
his statements often resulted in uncertainty regarding the direction of
interest rates. We monitored and actively adjusted the Fund's duration profile
throughout the year based on our expectation of interest rate direction, with
some success. However, amid the uncertain Fed rhetoric, we also found ourselves
with incorrect duration biases at times, and this ultimately detracted from
performance.
Contributing positively to performance was our sector rotation out of Treasury
securities and into agency debentures and AAA-rated commercial mortgage-backed
securities (CMBS). We made this move when CMBS cheapened to attractive levels
compared to Treasury issues, and sold some of our exposure when CMBS prices
became expensive. This, coupled with our residential mortgage exposure, worked
out well. Residential mortgages performed extremely well in the new year
following a volatile period of underperformance in mid-to-late 2005. Also
additive to the Fund's yield were asset-backed securities (ABS), which were
used as cash equivalent alternatives against forward commitments (agreements
to buy or sell securities at a specified price with settlement to occur at a
specific future date).
What changes were made to the portfolio during the period?
As discussed in our last report to shareholders, the largest change in the
portfolio over the course of the past year has been a move away from
residential mortgage pass-through securities in favor of collateralized
mortgage obligations (CMOs) and hybrid adjustable rate mortgages (ARMs). This
was largely a defensive move aimed at positioning the portfolio for rising
interest rates, mortgage duration extension and a resteepening of the yield
curve as the Fed approached the end of its two-year rate-hiking campaign.
These structured securities offered capital appreciation potential and better
prepayment protection than the straight residential mortgage market. CMOs, for
example, are pools of mortgages structured to provide a certain cash flow
based on the prepayment speeds of the underlying mortgages. We were able to
purchase both CMOs and hybrid ARMs at relatively inexpensive levels, and both
appreciated in price during the period.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Other notable portfolio activity included an increased dependence on sector
rotation within the portfolio. Last year we had a relatively heavy weighting
in agency commercial mortgage-backed securities, a core position we
established in an effort to generate additional yield in the portfolio. This
performed as anticipated, adding 20 basis points in overall yield. In the last
six months of the year, we reduced that core position significantly in favor
of a more tactical sector rotation strategy. This involved shifting in and out
of CMBS, agency debentures and residential mortgages as attractive
opportunities presented themselves in the form of spread widening.
Finally, in August, the Fed opted to pause in its interest rate-hiking program
and the 10-year Treasury yield fell to its lowest level since March. We viewed
this as a catalyst for spreads to tighten in the near-term and took the
opportunity to increase our overall exposure to spread sectors. As such, we
added residential mortgages, commercial mortgages and agency debentures across
the board to increase the Fund's overweighting in these sectors, while
simultaneously selling comparable duration Treasury issues.
How would you characterize the Fund's position at the close of the period?
We believe the Fed's monetary tightening activity is near its end, as
prospects for inflation have dwindled and the economy appears to be slowing,
led by a deceleration in the residential housing market. With that, we expect
that interest rates will be fairly range-bound and that opportunities to
enhance returns will reside more in sector rotation rather than duration
positioning. As such, we will look to keep the Fund's duration fairly close to
neutral versus the benchmark and continue to allocate assets away from the
government sector in favor of high-quality spread sectors, where we see
greater value.
As investors begin to anticipate a Fed ease (that is, interest rate cut), we
would look to position the portfolio with more of a yield curve steepening
bias. Historically, the Treasury curve begins to resteepen within six months
of the Fed's final tightening move.
At period-end, the Fund continued to favor CMOs and hybrid ARMs over
residential mortgages. Both of these security types offer exposure to the
mortgage market but with more protection in the event that interest rates do
continue to rise. The portfolio also was modestly overweight in spread
product, with the majority of that exposure in the front end of the yield
curve. Within that allocation to spread product, the Fund was underweight to
agency debentures and overweight in AAA-rated CMBS.
Frank Viola
Vice President and Co-Portfolio Manager
Thomas Musmanno
Vice President and Co-Portfolio Manager
Laura Powers
Vice President and Co-Portfolio Manager
September 13, 2006
Effective October 2, 2006, the Fund's Class A, Class B, Class C and Class I
Shares were redesignated Investor A, Investor B, Investor C and Institutional
Shares, respectively. Class R Shares remain the same.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Performance Data
About Fund Performance
The Fund has multiple share classes:
* Class A Shares incur a maximum initial sales charge (front-end load) of 4%
and an account maintenance fee of 0.25% per year (but no distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales charge of
4%, declining to 0% after six years. All Class B Shares purchased prior to
December 1, 2002 will maintain the four-year schedule. In addition, Class B
Shares are subject to a distribution fee of 0.50% per year and an account
maintenance fee of 0.25% per year. These shares automatically convert to Class
A Shares after approximately ten years. (There is no initial sales charge for
automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.55% per year and an
account maintenance fee of 0.25% per year. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within one year
of purchase.
* Class I Shares are not subject to any front-end sales charge. Class I Shares
bear no ongoing distribution or account maintenance fees and are available
only to eligible investors.
* Class R Shares do not incur a maximum sales charge (front-end load) or
deferred sales charge. These shares are subject to a distribution fee of 0.25%
per year and an account maintenance fee of 0.25% per year. Class R Shares are
available only to certain retirement plans. Prior to inception, Class R Share
performance results are those of Class I Shares (which have no distribution or
account maintenance fees) restated for Class R Share fees.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.blackrock.com to obtain performance data current to
the most recent month-end. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. Figures shown in each of the following tables assume reinvestment
of all dividends and capital gain distributions, if any, at net asset value on
the payable date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer agency fees
applicable to each class, which are deducted from the income available to be
paid to shareholders.
Recent Performance Results
6-Month 12-Month 10-Year Standardized
As of August 31, 2006 Total Return Total Return Total Return 30-Day Yield
Class A Shares* +1.50% +1.13% +70.11% 4.13%
Class B Shares* +1.23 +0.61 +61.54 3.78
Class C Shares* +1.21 +0.65 +60.73 3.72
Class I Shares* +1.53 +1.38 +74.40 4.55
Class R Shares* +1.37 +0.98 +66.81 4.05
Citigroup Government/Mortgage Index** +1.87 +1.99 +85.52 --
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge
was included. Cumulative total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains distributions at net asset
value on the payable date.
** This unmanaged Index is a subset of the Citigroup U.S. Broad Investment Grade (USBIG) Index, tracking
the performance of the U.S. Treasury/government-sponsored component (fixed rate issues with a maturity
of one year or longer) and the mortgage component (15- and 30-year mortgages) of the USBIG.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Performance Data (concluded)
Total Return Based on a $10,000 Investment
A line graph illustrating the growth of a $10,000 investment in Class A, Class
B, Class C, Class I and Class R Shares*++ compared to a similar investment in
Citigroup Government/Mortgage Index++++. Values illustrated are as follows:
Class A Shares*++
Date Value
August 1996 $ 9,600.00
August 1997 $10,493.00
August 1998 $11,317.00
August 1999 $11,428.00
August 2000 $12,237.00
August 2001 $13,636.00
August 2002 $14,668.00
August 2003 $14,952.00
August 2004 $15,645.00
August 2005 $16,148.00
August 2006 $16,331.00
Class B Shares*++
Date Value
August 1996 $10,000.00
August 1997 $10,873.00
August 1998 $11,667.00
August 1999 $11,721.00
August 2000 $12,486.00
August 2001 $13,842.00
August 2002 $14,813.00
August 2003 $15,022.00
August 2004 $15,637.00
August 2005 $16,056.00
August 2006 $16,154.00
Class C Shares*++
Date Value
August 1996 $10,000.00
August 1997 $10,868.00
August 1998 $11,656.00
August 1999 $11,704.00
August 2000 $12,462.00
August 2001 $13,809.00
August 2002 $14,771.00
August 2003 $14,971.00
August 2004 $15,576.00
August 2005 $15,969.00
August 2006 $16,073.00
Class I Shares*++
Date Value
August 1996 $10,000.00
August 1997 $10,968.00
August 1998 $11,859.00
August 1999 $12,006.00
August 2000 $12,874.00
August 2001 $14,382.00
August 2002 $15,524.00
August 2003 $15,848.00
August 2004 $16,624.00
August 2005 $17,202.00
August 2006 $17,440.00
Class R Shares*++
Date Value
August 1996 $10,000.00
August 1997 $10,914.00
August 1998 $11,742.00
August 1999 $11,828.00
August 2000 $12,620.00
August 2001 $14,029.00
August 2002 $15,068.00
August 2003 $15,376.00
August 2004 $16,045.00
August 2005 $16,520.00
August 2006 $16,681.00
Citigroup Government/Mortgage Index++++
Date Value
August 1996 $10,000.00
August 1997 $10,973.00
August 1998 $12,166.00
August 1999 $12,264.00
August 2000 $13,233.00
August 2001 $14,786.00
August 2002 $16,097.00
August 2003 $16,542.00
August 2004 $17,484.00
August 2005 $18,190.00
August 2006 $18,552.00
* Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
++ The Fund invests at least 80% of its assets in U.S. government and U.S.
government agency securities, including GNMA mortgage-backed certificates
and other mortgage-backed government securities.
++++ This unmanaged Index is a subset of the Citigroup U.S. Broad Investment
Grade (USBIG) Index, tracking the performance of the U.S. Treasury/
government sponsored component (fixed rate issues with a maturity of
one year or longer) and the mortgage component (15-year and 30-year
mortgages) of USBIG.
Past performance is not indicative of future results.
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 8/31/06 +1.13% -2.91%
Five Years Ended 8/31/06 +3.67 +2.83
Ten Years Ended 8/31/06 +5.46 +5.03
Return Without Return With
CDSC CDSC++++++
Class B Shares++
One Year Ended 8/31/06 +0.61% -3.26%
Five Years Ended 8/31/06 +3.14 +2.78
Ten Years Ended 8/31/06 +4.91 +4.91
Return Without Return With
CDSC CDSC++++++
Class C Shares++++
One Year Ended 8/31/06 +0.65% -0.32%
Five Years Ended 8/31/06 +3.08 +3.08
Ten Years Ended 8/31/06 +4.86 +4.86
Class I Shares Return
One Year Ended 8/31/06 +1.38%
Five Years Ended 8/31/06 +3.93
Ten Years Ended 8/31/06 +5.72
Class R Shares Return
One Year Ended 8/31/06 +0.98%
Five Years Ended 8/31/06 +3.52
Ten Years Ended 8/31/06 +5.25
* Maximum sales charge is 4%.
** Assuming maximum sales charge.
++ Maximum contingent deferred sales charge is 4% and is reduced
to 0% after six years.
++++ Maximum contingent deferred sales charge is 1% and is reduced
to 0% after one year.
++++++ Assuming payment of applicable contingent deferred sales
charge.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses
related to transactions, including sales charges, redemption fees and exchange
fees; and (b) operating expenses including advisory fees, distribution fees
including 12b-1 fees, and other Fund expenses. The following example (which is
based on a hypothetical investment of $1,000 invested on March 1, 2006 and
held through August 31, 2006) is intended to assist shareholders both in
calculating expenses based on an investment in the Fund and in comparing these
expenses with similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during
the period covered by this report, shareholders can divide their account value
by $1,000 and then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders'
ongoing costs only and do not reflect any transactional expenses, such as
sales charges, redemption fees or exchange fees. Therefore, the second table
is useful in comparing ongoing expenses only, and will not help shareholders
determine the relative total expenses of owning different funds. If these
transactional expenses were included, shareholder expenses would have been
higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value March 1, 2006
March 1, August 31, to August 31,
2006 2006 2006
Actual
Class A $1,000 $1,015.00 $ 8.99
Class B $1,000 $1,012.30 $11.77
Class C $1,000 $1,012.10 $11.97
Class I $1,000 $1,015.30 $ 7.72
Class R $1,000 $1,013.70 $10.15
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,016.28 $ 9.00
Class B $1,000 $1,013.50 $11.77
Class C $1,000 $1,013.30 $11.98
Class I $1,000 $1,017.54 $ 7.73
Class R $1,000 $1,015.12 $10.16
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.77% for Class A, 2.32% for Class B, 2.36% for Class C, 1.52% for Class I and 2.00% for Class R),
multiplied by the average account value over the period, multiplied by 184/365 (to reflect the
one-half year period shown).
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in
the most recent fiscal half year divided by 365.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Schedule of Investments
Face Interest Maturity
Issue Amount Rate Date(s) Value
U.S. Government & Agency Obligations--17.0%
Fannie Mae $ 7,500,000 4.25 % 5/15/2009 $ 7,356,293
39,200,000 6.625 9/15/2009 40,962,079
18,625,000 7.25 1/15/2010 19,898,745
Federal Farm Credit Bank 15,500,000 4.55 6/08/2020 14,472,273
Federal Home Loan Bank System 25,000,000 4.375 9/17/2010 (d) 24,398,375
U.S. Treasury Bonds 11,000,000 6.875 8/15/2025 13,576,409
22,200,000 7.125 2/15/2023 (d) 27,562,676
15,000,000 7.625 2/15/2025 19,798,830
7,502,000 8.125 8/15/2019 9,807,110
U.S. Treasury Notes 6,500,000 3.375 2/28/2007 6,445,413
25,000,000 4.50 2/15/2009 (d) 24,857,425
42,500,000 4.50 11/15/2010 (d) 42,189,538
Total U.S. Government & Agency Obligations (Cost--$256,800,532)--17.0% 251,325,166
U.S. Government Agency Mortgage-Backed Obligations*--43.9%
Fannie Mae Guaranteed Pass-Through Certificates 5,089,064 4.28 2/01/2010 4,936,211
25,558,509 4.85 (1) 9/01/2035 25,155,794
18,000,000 4.94 12/01/2012 17,761,072
31,548,427 4.954 (1) 9/01/2035 30,903,511
870,241 5.00 11/01/2019 853,499
676,839 5.00 8/01/2035 648,636
39,220,000 5.10 2/01/2013 38,767,182
9,730,302 5.50 3/01/2021 9,695,524
77,138,268 5.50 (2) 12/01/2034 - 9/15/2036 75,708,968
19,988,096 5.826 (1) 7/01/2036 19,912,028
2,365,759 6.50 12/01/2008 - 2/01/2014 2,403,308
15,144,477 6.50 3/01/2033 - 1/01/2036 15,388,765
4,782,748 7.50 7/01/2016 - 12/01/2032 4,953,702
19,415 8.00 9/01/2024 - 9/01/2027 20,585
935,372 8.50 8/01/2012 - 7/15/2023 1,004,398
308,086 11.00 2/01/2011 - 8/01/2020 338,389
223,451 13.00 9/01/2013 - 3/01/2015 249,613
Freddie Mac Mortgage Participation Certificates 30,374,252 4.50 9/01/2020 - 2/01/2021 29,170,194
16,348,864 5.00 1/01/2019 - 6/01/2019 16,037,001
42,461,559 5.00 7/01/2035 - 2/01/2036 40,732,922
15,293,388 5.005 (1) 10/01/2035 14,925,391
23,307,562 5.50 3/01/2016 - 1/01/2021 23,233,876
15,936,000 5.50 (2) 9/15/2036 15,647,160
22,964,982 6.00 10/01/2009 - 10/01/2020 23,170,991
20,908,720 6.00 5/01/2029 - 3/01/2035 21,008,219
11,283,808 6.50 8/01/2029 - 4/01/2036 11,477,979
1,133,892 7.00 4/01/2032 1,167,088
820,329 7.50 5/01/2009 - 10/01/2011 842,398
13,192,531 7.50 8/01/2017 - 12/01/2032 13,671,601
770,343 8.00 1/01/2008 - 7/01/2012 792,939
1,337,928 8.00 10/01/2027 - 8/01/2032 1,408,237
273,158 8.50 1/01/2025 - 7/01/2025 293,442
275 10.00 7/01/2019 300
150,872 11.00 4/01/2012 - 9/01/2020 165,982
148,546 11.50 7/01/2013 - 6/01/2020 160,524
133,250 12.00 6/01/2013 - 6/01/2020 147,350
180,892 12.50 12/01/2015 - 7/01/2019 194,842
257,616 13.00 9/01/2010 - 2/01/2016 284,883
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Schedule of Investments (continued)
Face Interest Maturity
Issue Amount Rate Date(s) Value
U.S. Government Agency Mortgage-Backed Obligations* (concluded)
Ginnie Mae MBS Certificates $ 40,983,713 5.00 % 12/15/2034 - 1/15/2035 $ 39,732,172
9,630,900 5.10 10/15/2007 - 12/01/2015 9,448,298
12,527,200 5.11 8/01/2045 - 1/15/2047 12,010,753
20,205,877 5.50 1/15/2007 - 11/30/2045 20,412,256
2,383,700 5.65 5/15/2007 2,431,970
7,846,700 5.70 3/01/2015 - 8/15/2046 7,883,564
49,061,300 5.80 4/15/2046 50,566,010
1,884,119 6.00 5/15/2024 - 11/15/2031 1,904,771
34,553,684 6.09 10/15/2008 36,338,727
3,395,497 7.00 4/15/2023 - 4/15/2032 3,503,498
3,922,765 7.50 2/15/2025 - 12/15/2031 4,086,050
4,239 10.50 1/15/2016 4,694
52 11.00 1/15/2016 58
Total U.S. Government Agency Mortgage-Backed Obligations (Cost--$657,894,742)--43.9% 651,557,325
U.S. Government Agency Mortgage-Backed Obligations*--Collateralized Mortgage Obligations--29.3%
Fannie Mae Trust 1998-M1-IO2 23,354,719 0.686 (1)(3) 2/25/2013 345,918
2003-28-TB 4,956,351 5.00 8/25/2022 4,851,891
2004-T9-A1 10,727,943 5.494 (1) 4/25/2035 10,734,809
2005-25-PD 13,934,000 5.50 11/25/2030 13,777,680
2005-36-CD 18,300,000 5.50 11/25/2031 18,114,939
2005-103-AT 17,789,584 5.50 6/25/2024 17,784,074
2006-18-PC 10,000,000 5.50 1/25/2032 9,858,480
2006-58-DA 16,494,590 5.50 9/25/2025 16,495,027
2003-41-YF 14,674,253 5.624 (1) 6/25/2028 14,698,183
2004-29-FW 5,669,863 5.624 (1) 12/25/2017 5,681,263
2004-61-TF 15,738,239 5.724 (1) 10/25/2031 15,847,982
2006-37-DB 17,000,000 6.00 4/25/2035 17,090,262
273-2 211,546 7.00 (3) 7/1/2026 47,188
1997-M8-A2 217,112 7.16 1/25/2022 216,772
1996-W1-AL 983,975 7.25 3/25/2026 1,011,798
Freddie Mac Multi-Class Certificates SF4-B 3,401,249 2.37 12/15/2009 3,305,823
2618-PT 15,000,000 4.50 10/15/2031 13,924,833
2957-KN 19,121,000 5.50 6/15/2030 18,937,022
2958-MD 15,000,000 5.50 1/15/2031 14,853,167
2963-DL 9,214,000 5.50 2/15/2031 9,106,431
3081-CP 9,000,000 5.50 10/15/2034 8,798,702
2643-OF 23,166,823 5.68 (1) 7/15/2028 23,217,030
1220-A 344,277 5.725 (1) 2/15/2022 344,285
3136-PD 9,000,000 6.00 12/15/2034 9,091,103
3173-PE 16,365,000 6.00 4/15/2035 16,518,430
1220-B 2,799 536.00 (1)(3) 2/15/2022 33,588
Ginnie Mae Trust 2005-9-IO 135,626,843 0.778 (1)(3) 1/16/2045 7,176,681
2006-5-IO 132,932,435 0.797 (1)(3) 1/16/2046 7,353,769
2006-30-IO 50,949,770 0.80 (1)(3) 5/16/2046 3,009,221
2005-90-IO 134,862,284 0.912 (1)(3) 11/16/2045 7,390,521
2006-15-IO 140,489,938 0.916 (1)(3) 4/16/2046 7,372,814
2005-50-IO 34,545,106 1.012 (1)(3) 6/16/2045 2,249,239
2004-10-IO 57,404,856 1.033 (1)(3) 1/16/2044 2,551,715
2004-77-IO 158,339,945 1.065 (1)(3) 9/16/2044 7,730,394
2003-109-B 38,172,095 3.225 9/16/2021 36,756,090
2004-103-A 7,346,273 3.878 12/16/2019 7,168,639
2005-29-Z 4,761,887 4.25 (1) 4/16/2045 3,663,566
2004-97-C 8,400,000 4.522 (1) 2/16/2028 8,009,506
2005-9-Z 5,360,478 4.65 (1) 1/16/2045 4,532,437
2005-12-C 20,000,000 4.658 12/16/2030 19,198,508
2005-67-Z 5,742,860 4.723 (1) 8/16/2045 4,769,938
2005-59-B 10,000,000 4.816 (1) 10/16/2029 9,743,545
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Schedule of Investments (continued)
Face Interest Maturity
Issue Amount Rate Date(s) Value
U.S. Government Agency Mortgage-Backed Obligations*--Collateralized Mortgage Obligations (concluded)
Ginnie Mae Trust 2005-59-ZA $ 9,096,101 4.959 %(1) 3/16/2046 $ 7,980,145
(concluded) 2005-10-ZB 2,972,081 5.175 (1) 12/16/2044 2,732,041
2001-58-C 20,000,000 5.494 (1) 8/16/2027 20,037,888
Total U.S. Government Agency Mortgage-Backed Obligations--Collateralized Mortgage Obligations
(Cost--$439,474,009)--29.3% 434,113,337
Face
Amount Issue
Non-U.S. Government Agency Mortgage-Backed Obligations*--Collateralized Mortgage Obligations--12.7%
$ 11,250,000 Ameriquest Mortgage Securities, Inc. Series 2004-IA1 Class M1, 6.124% due
9/25/2034 (1) 11,302,856
7,055,000 Banc of America Alternative Loan Trust Series 2005-10 Class 1CB3, 5.50% due
11/25/2035 6,839,784
11,836,649 CS First Boston Mortage Securities Corp. Series 2005-11 Class 6A5, 6% due
12/25/2035 11,915,739
396,847 Centex Home Equity Series 2004-B Class AV1, 5.524% due 3/25/2034 (1) 396,872
14,045,400 Citimortgage Alternative Loan Trust Series 2006-A2 Class A2, 6% due 5/25/2036 14,093,576
4,681,520 Countrywide Home Equity Loan Trust Series 2004-K Class 2A, 5.63% due
2/15/2034 (1) 4,690,939
16,150,000 Credit Suisse Mortgage Capital Certificates Series 2006-C3 Class A3, 6.022%
due 6/15/2038 (1) 16,638,027
8,500,000 Greenwich Capital Commercial Funding Corp. Series 2006-GG7 Class A4, 6.11%
due 7/10/2038 (1) 8,820,315
JPMorgan Chase Commercial Mortgage Securities Corp. (1):
16,500,000 Series 2006-CB15 Class A4, 5.814% due 6/12/2043 16,906,276
13,000,000 Series 2006-LDP7 Class A4, 6.066% due 4/15/2045 13,457,868
20,854,377 JPMorgan Mortgage Trust Series 2005-A2 Class 4A1, 5.209% due 4/25/2035 (1) 20,323,320
8,800,000 Master Asset Securitization Trust Series 2003-9 Class 2A8, 5.50% due 10/25/2033 8,512,935
6,408,779 Residential Asset Mortgage Products, Inc. Series 2004-RS9 Class AII2, 5.664%
due 5/25/2034 (1) 6,425,365
Residential Funding Mortgage Security I:
9,500,000 Series 2006-S1 Class 1A5, 5.25% due 1/25/2036 9,395,812
11,712,000 Series 2006-S3 Class A2, 5.50% due 3/25/2036 11,284,106
759,169 Securitized Asset-Backed Receivables LLC Trust Series 2004-OP1 Class A2, 5.574%
due 2/25/2034 (1) 759,165
4,714,444 Washington Mutual Series 2004-AR12 Class A3, 5.698% due 10/25/2044 (1) 4,729,831
6,747,201 Wells Fargo Home Equity Trust Series 2004-2 Class A32, 5.664% due 2/25/2032 (1) 6,759,064
15,639,182 Wells Fargo Mortgage-Backed Securities Trust Series 2005-13 Class A1, 5%
due 11/25/2020 15,402,127
Total Non-U.S. Government Agency Mortgage-Backed Obligations--Collateralized Mortgage Obligations
(Cost--$185,741,112)--12.7% 188,653,977
Short-Term Securities
Repurchase Agreement 32,100,000 Credit Suisse LLC, purchased on 8/31/2006 to yield 5.28% to 9/01/2006,
repurchase price of $32,104,708 collateralized by FHLMC 7.087% due 7/01/2033
and FNMA 6.125% due 8/01/2036 32,100,000
Beneficial
Interest
$ 77,223 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I, 5.11% (a)(b) 77,223
116,607,500 Merrill Lynch Liquidity Series, LLC Money Market Series, 5.33% (a)(b)(c) 116,607,500
Total Short-Term Securities (Cost--$148,784,723)--10.0% 148,784,723
Total Investments (Cost--$1,688,695,118)--112.9% 1,674,434,528
Number of
Contracts Put Options Written
1,000 UST BONDS (10 YEAR), expiring November 2006 at USD 103 (31,250)
Total Put Options Written (Premiums Received--$199,805)--0.0% (31,250)
Total Investments, Net of Options Written
(Cost--$1,688,495,313**)--112.9% 1,674,403,278
Liabilities in Excess of Other Assets--(12.9%) (190,810,355)
---------------
Net Assets--100.0% $ 1,483,592,923
===============
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Schedule of Investments (concluded)
* Mortgage-Backed Obligations are subject to principal paydowns. As
a result of prepayments or refinancings of the underlying instruments,
the average life may be substantially less than the original maturity.
** The cost and unrealized appreciation (depreciation) of investments,
net of options written, as of August 31, 2006, as computed for federal
income tax purposes, were as follows:
Aggregate cost $ 1,688,495,313
==================
Gross unrealized appreciation $ 7,825,537
Gross unrealized depreciation (21,917,572)
------------------
Net unrealized depreciation $ (14,092,035)
==================
(1) Floating rate security.
(2) Represents or includes a "to-be-announced" transaction. The Fund has
committed to purchasing securities for which all specific information is
not available at this time.
(3) Represents the interest only portion of a mortgage-backed obligation.
(a) Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of
1940, were as follows:
Net Interest
Issue Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $ 77,223 $ 29,954
Merrill Lynch Liquidity Series, LLC
Money Market Series $90,235,000 $ 89,044
(b) Represents the current yield as of August 31, 2006.
(c) Security was purchased with the cash proceeds from securities loans.
(d) Security, or a portion of security, is on loan.
* Swaps outstanding as of August 31, 2006 were as follows:
Unrealized
Notional Appreciation
Amount (Depreciation)
Receive (pay) a variable return
based on the change in the since
inception return of the Lehman
Brothers U.S. Agency Index and pay
a floating rate based on 1-month
LIBOR minus 0.05%
Broker, Lehman Brothers
Special Finance
Expires October 2006 $25,000,000 --
Receive (pay) a variable return
based on the change in the since
inception return of the Lehman
Brothers U.S. Treasury Index and pay
a floating rate based on 1-month
LIBOR minus 0.12%
Broker, Lehman Brothers
Special Finance
Expires November 2006 $50,000,000 --
Receive a fixed rate of 5.418%
and pay a floating rate based on
3-month LIBOR
Broker, UBS Warburg
Expires May 2008 $ 9,685,000 $ 27,410
Pay a fixed rate of 5.50% and
receive a floating rate based on
3-month LIBOR
Broker, UBS Warburg
Expires May 2011 $10,000,000 (134,146)
Pay a fixed rate of 4.8875% and
receive a floating rate based on
3-month LIBOR
Broker, JPMorgan Chase Bank
Expires December 2014 $93,000,000 2,268,436
Pay a fixed rate of 5.151% and
receive a floating rate based on
3-month LIBOR
Broker, JPMorgan Chase Bank
Expires March 2016 $54,000,000 510,072
Receive a fixed rate of 5.643%
and pay a floating rate based on
3-month LIBOR
Broker, UBS Warburg
Expires May 2016 $ 3,645,000 99,011
-----------
Total $ 2,770,783
===========
See Notes to Financial Statements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Statement of Assets and Liabilities
As of August 31, 2006
Assets
Investments, at value (including securities loaned of $113,291,475)
(identified cost--$1,572,010,395) $ 1,557,749,805
Investments in affiliated securities, at value (identified cost--$116,684,723) 116,684,723
Cash on deposit for options written 135,000
Unrealized appreciation on swaps 2,904,929
Receivables:
Securities sold $ 9,703,638
Interest 8,266,763
Beneficial interest sold 1,808,786
Swaps 1,361,859
Principal paydowns 241,169
Securities lending 15,548 21,397,763
---------------
Prepaid expenses 9,322
---------------
Total assets 1,698,881,542
---------------
Liabilities
Collateral on securities loaned, at value 116,607,500
Options written, at value (premiums received--$199,805) 31,250
Unrealized depreciation on swaps 134,146
Bank overdraft 3,636
Payables:
Securities purchased 89,982,949
Beneficial interest redeemed 4,224,759
Dividends to shareholders 1,492,965
Swaps 1,126,232
Investment adviser 482,041
Distributor 455,074
Other affiliates 323,352 98,087,372
---------------
Accrued expenses and other liabilities 424,715
---------------
Total liabilities 215,288,619
---------------
Net Assets
Net assets $ 1,483,592,923
===============
Net Assets Consist of
Class A Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized $ 6,929,910
Class B Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 2,360,544
Class C Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 2,146,963
Class I Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 3,168,818
Class R Shares of beneficial interest, $.10 par value, unlimited number of
shares authorized 315,160
Paid-in capital in excess of par 1,508,616,960
Accumulated distributions in excess of investment income--net $ (1,492,965)
Accumulated realized losses--net (27,131,215)
Unrealized depreciation--net (11,321,252)
---------------
Total accumulated losses--net (39,945,432)
---------------
Net Assets $ 1,483,592,923
===============
Net Asset Value
Class A--Based on net assets of $689,013,888 and 69,299,101 shares of beneficial
interest outstanding $ 9.94
===============
Class B--Based on net assets of $234,712,080 and 23,605,439 shares of beneficial
interest outstanding $ 9.94
===============
Class C--Based on net assets of $213,450,145 and 21,469,628 shares of beneficial
interest outstanding $ 9.94
===============
Class I--Based on net assets of $315,124,947 and 31,688,179 shares of beneficial
interest outstanding $ 9.94
===============
Class R--Based on net assets of $31,291,863 and 3,151,604 shares of beneficial
interest outstanding $ 9.93
===============
See Notes to Financial Statements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Statement of Operations
For the Year Ended August 31, 2006
Investment Income
Interest (including $29,954 from affiliates) $ 86,776,486
Securities lending--net 89,044
---------------
Total income 86,865,530
---------------
Expenses
Interest expense $ 8,459,316
Investment advisory fees 7,347,406
Account maintenance and distribution fees--Class B 2,085,029
Account maintenance and distribution fees--Class C 1,817,516
Account maintenance fees--Class A 1,748,954
Transfer agent fees--Class A 1,708,846
Transfer agent fees--Class I 795,501
Short sale expense 778,515
Transfer agent fees--Class B 738,790
Transfer agent fees--Class C 621,825
Accounting services 418,403
Custodian fees 193,952
Professional fees 164,102
Account maintenance and distribution fees--Class R 129,436
Registration fees 112,552
Printing and shareholder reports 107,030
Transfer agent fees--Class R 65,182
Pricing fees 63,179
Trustees' fees and expenses 53,522
Other 78,857
---------------
Total expenses 27,487,913
---------------
Investment income--net 59,377,617
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net (40,410,666)
Financial futures contracts and swaps--net 11,520,824
Options written--net (1,421,459)
Short sales--net 1,711,389 (28,599,912)
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (26,451,237)
Swaps--net 8,641,898
Options written--net 696,080 (17,113,259)
--------------- ---------------
Total realized and unrealized loss--net (45,713,171)
---------------
Net Increase in Net Assets Resulting from Operations $ 13,664,446
===============
See Notes to Financial Statements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Statements of Changes in Net Assets
For the Year Ended
August 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 59,377,617 $ 53,245,250
Realized gain (loss)--net (28,599,912) 25,606,893
Change in unrealized appreciation/depreciation--net (17,113,259) (25,136,802)
--------------- ---------------
Net increase in net assets resulting from operations 13,664,446 53,715,341
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net:
Class A (29,797,210) (27,412,537)
Class B (10,341,234) (11,609,588)
Class C (8,364,191) (8,117,957)
Class I (14,539,807) (13,783,700)
Class R (1,049,693) (467,783)
Realized gain--net:
Class A (897,119) --
Class B (370,126) --
Class C (288,609) --
Class I (413,656) --
Class R (30,543) --
--------------- ---------------
Net decrease in net assets resulting from dividends and distributions to shareholders (66,092,188) (61,391,565)
--------------- ---------------
Beneficial Interest Transactions
Net decrease in net assets derived from beneficial interest transactions (168,429,370) (184,361,007)
--------------- ---------------
Net Assets
Total decrease in net assets (220,857,112) (192,037,231)
Beginning of year 1,704,450,035 1,896,487,266
--------------- ---------------
End of year* $ 1,483,592,923 $ 1,704,450,035
=============== ===============
* Undistributed (accumulated distributions in excess of) investment income--net $ (1,492,965) $ 1,278,118
=============== ===============
See Notes to Financial Statements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Statement of Cash Flows
For the Year Ended August 31, 2006
Cash Provided by Operating Activities
Net increase in net assets resulting from operations $ 13,664,446
Adjustments to reconcile net increase in net assets resulting from operations to net cash used
for operating activities:
Increase in receivables (1,969,269)
Decrease in prepaid expenses and other assets 152,217
Increase in cash on deposit for options written 135,000
Increase in other liabilities 188,846
Realized and unrealized loss--net 45,713,171
Realized and unrealized gain on financial futures contracts 151,782
Amortization of premium/discount and payups 3,023,766
Proceeds from sales and paydowns of long-term securities 1,850,655,755
Proceeds from short sales 443,255,260
Other investment related transactions 15,229,762
Purchases of long-term securities (1,698,322,707)
Cover of short sale investments (461,868,169)
Proceeds from sales of short-term investments 27,434,307
Premiums received from options written 7,451,853
Premiums paid on closing options written (9,935,332)
---------------
Cash provided by operating activities 234,960,688
---------------
Cash Used for Financing Activities
Proceeds from issuance of Beneficial Interest 344,276,800
Cash payments on Beneficial Interest (541,964,905)
Cash receipts from borrowings 912,229,724
Cash payments from borrowings (912,229,724)
Dividends paid to shareholders (37,318,694)
Increase in bank overdraft 3,636
---------------
Cash used for financing activities (235,003,163)
---------------
Cash
Net decrease in cash (42,475)
Cash at beginning of year 42,475
---------------
Cash at end of year --
===============
Cash Flow Information
Cash paid for interest $ 8,459,316
===============
Noncash Financing Activities
Capital shares issued in reinvestment of dividends and distributions paid to shareholders $ 28,451,292
===============
See Notes to Financial Statements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Financial Highlights
The following per share data Class A Class B
and ratios have been derived
from information provided in For the Year Ended August 31, For the Year Ended August 31,
the financial statements. 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning
of year $ 10.27 $ 10.31 $ 10.13 $ 10.25 $ 9.95 $ 10.27 $ 10.31 $ 10.13 $ 10.26 $ 9.95
---------------------------------------------- ----------------------------------------------
Investment income--net .39++ .32++ .27++ .32 .43 .34++ .26++ .22++ .26 .38
Realized and unrealized
gain (loss)--net (.28) .01 .19 (.12) .30 (.29) .01 .19 (.13) .31
---------------------------------------------- ----------------------------------------------
Total from investment operations .11 .33 .46 .20 .73 .05 .27 .41 .13 .69
---------------------------------------------- ----------------------------------------------
Less dividends and distributions
from:
Investment income--net (.43) (.37) (.28) (.32) (.43) (.37) (.31) (.23) (.26) (.38)
Realized gain--net (.01) -- -- -- -- (.01) -- -- -- --
---------------------------------------------- ----------------------------------------------
Total dividends and distributions (.44) (.37) (.28) (.32) (.43) (.38) (.31) (.23) (.26) (.38)
---------------------------------------------- ----------------------------------------------
Net asset value, end of year $ 9.94 $ 10.27 $ 10.31 $ 10.13 $ 10.25 $ 9.94 $ 10.27 $ 10.31 $ 10.13 $ 10.26
============================================== ==============================================
Total Investment Return*
Based on net asset value
per share 1.13% 3.22% 4.63% 1.93% 7.54% .61% 2.68% 4.09% 1.40% 6.99%
============================================== ==============================================
Ratios to Average Net Assets
Expenses, excluding interest
expense 1.09% 1.01% .98% .95% .97% 1.62% 1.53% 1.50% 1.47% 1.49%
============================================== ==============================================
Expenses 1.64% 1.01% .98% .95% .97% 2.16% 1.53% 1.50% 1.47% 1.49%
============================================== ==============================================
Investment income--net 3.95% 3.11% 2.65% 3.09% 4.30% 3.46% 2.55% 2.14% 2.58% 3.76%
============================================== ==============================================
Supplemental Data
Net assets, end of year
(in thousands) $ 689,014 $769,309 $798,279 $855,543 $819,410 $234,712 $332,744 $438,679 $591,435 $613,282
============================================== ==============================================
Portfolio turnover 107.39% 336.73% 508.54% 428.59% 426.77% 107.39% 336.73% 508.54% 428.59% 426.77%
============================================== ==============================================
* Total investment returns exclude the effects of sales charges.
++ Based on average shares outstanding.
See Notes to Financial Statements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Financial Highlights (continued)
The following per share data Class C Class I
and ratios have been derived
from information provided in For the Year Ended August 31, For the Year Ended August 31,
the financial statements. 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning
of year $ 10.26 $ 10.31 $ 10.13 $ 10.25 $ 9.95 $ 10.27 $ 10.31 $ 10.13 $ 10.26 $ 9.95
---------------------------------------------- ----------------------------------------------
Investment income--net .34++ .26++ .21++ .26 .37 .42++ .35++ .29++ .34 .46
Realized and unrealized
gain (loss)--net (.28) --+++ .19 (.12) .30 (.29) --+++ .20 (.13) .31
---------------------------------------------- ----------------------------------------------
Total from investment operations .06 .26 .40 .14 .67 .13 .35 .49 .21 .77
---------------------------------------------- ----------------------------------------------
Less dividends and distributions
from:
Investment income--net (.37) (.31) (.22) (.26) (.37) (.45) (.39) (.31) (.34) (.46)
Realized gain--net (.01) -- -- -- -- (.01) -- -- -- --
---------------------------------------------- ----------------------------------------------
Total dividends and distributions (.38) (.31) (.22) (.26) (.37) (.46) (.39) (.31) (.34) (.46)
---------------------------------------------- ----------------------------------------------
Net asset value, end of year $ 9.94 $ 10.26 $ 10.31 $ 10.13 $ 10.25 $ 9.94 $ 10.27 $ 10.31 $ 10.13 $ 10.26
============================================== ==============================================
Total Investment Return*
Based on net asset value
per share .65% 2.53% 4.03% 1.35% 6.94% 1.38% 3.47% 4.89% 2.08% 7.91%
============================================== ==============================================
Ratios to Average Net Assets
Expenses, excluding interest
expense 1.67% 1.59% 1.55% 1.52% 1.54% .85% .76% .73% .70% .72%
============================================== ==============================================
Expenses 2.22% 1.59% 1.55% 1.52% 1.54% 1.40% .76% .73% .70% .72%
============================================== ==============================================
Investment income--net 3.38% 2.51% 2.09% 2.52% 3.40% 4.20% 3.38% 2.89% 3.34% 4.53%
============================================== ==============================================
Supplemental Data
Net assets, end of year
(in thousands) $ 213,450 $247,884 $301,532 $414,539 $384,119 $315,125 $334,660 $349,958 $328,408 $296,305
============================================== ==============================================
Portfolio turnover 107.39% 336.73% 508.54% 428.59% 426.77% 107.39% 336.73% 508.54% 428.59% 426.77%
============================================== ==============================================
* Total investment returns exclude the effects of sales charges. Effective December 28, 2005,
Class I Shares are no longer subject to any front-end sales charge.
++ Based on average shares outstanding.
+++ Amount is less than $.01 per share.
See Notes to Financial Statements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Financial Highlights (concluded)
Class R
For the Period
January 3,
2003++++ to
The following per share data and ratios have been derived For the Year Ended August 31, August 31,
from information provided in the financial statements. 2006 2005 2004 2003
Per Share Operating Performance
Net asset value, beginning of period $ 10.25 $ 10.29 $ 10.12 $ 10.31
---------- ---------- ---------- ----------
Investment income--net .36++ .31++ .23++ .24
Realized and unrealized gain (loss)--net (.27) (.01) .20 (.19)
---------- ---------- ---------- ----------
Total from investment operations .09 .30 .43 .05
---------- ---------- ---------- ----------
Less dividends and distributions from:
Investment income--net (.40) (.34) (.26) (.24)
Realized gain--net (.01) -- -- --
---------- ---------- ---------- ----------
Total from dividends and distributions (.41) (.34) (.26) (.24)
---------- ---------- ---------- ----------
Net asset value, end of period $ 9.93 $ 10.25 $ 10.29 $ 10.12
========== ========== ========== ==========
Total Investment Return
Based on net asset value per share .98% 2.96% 4.34% .44%+++
========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding interest expense 1.36% 1.27% 1.21% 1.23%*
========== ========== ========== ==========
Expenses 1.91% 1.27% 1.21% 1.23%*
========== ========== ========== ==========
Investment income--net 3.65% 2.97% 2.25% 2.81%*
========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 31,292 $ 19,854 $ 8,040 $ 77
========== ========== ========== ==========
Portfolio turnover 107.39% 336.73% 508.54% 428.59%
========== ========== ========== ==========
* Annualized.
++ Based on average shares outstanding.
++++ Commencement of operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
On September 29, 2006, Merrill Lynch U.S. Government Fund was renamed
BlackRock U.S. Government Fund (the "Fund"). The Fund is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. The Fund offers multiple classes of shares. Class
A Shares are sold with a front-end sales charge. Shares of Class B and Class C
may be subject to a contingent deferred sales charge. Class I Shares are sold
only to certain eligible investors. Class R Shares are sold only to certain
retirement plans. All classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that
Class A, Class B, Class C and Class R Shares bear certain expenses related to
the account maintenance of such shares, and Class B, Class C and Class R
Shares also bear certain expenses related to the distribution of such shares.
Each class has exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures (except that Class B
shareholders may vote upon material changes to the Class A distribution plan).
Income, expenses (other than expenses attributable to a specific class) and
realized and unrealized gains and losses are allocated daily to each class
based on its relative net assets. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--Debt securities are traded primarily in the over-
the-counter ("OTC") markets and are valued at the last available bid price in
the OTC market or on the basis of values obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
direction of the Board of Trustees. Such valuations and procedures will be
reviewed periodically by the Board of Trustees of the Fund. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their closing prices as of the close of such exchanges. Options written or
purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the OTC market, valuation is the
last asked price (options written) or the last bid price (options purchased).
Swap agreements are valued based upon quoted fair valuations received daily by
the Fund from a pricing service or counterparty. Short-term investments with a
remaining maturity of 60 days or less are valued at amortized cost which
approximates market value, under which method the investment is valued at cost
and any premium or discount is amortized on a straight line basis to maturity.
Repurchase agreements are valued at cost plus accrued interest. Investments in
open-end investment companies are valued at their net asset value each
business day. Securities and other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the Fund.
Equity securities that are held by the Fund, which are traded on stock
exchanges or the Nasdaq National Market are valued at the last sale price or
official close price on the exchange, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last available
bid price for long positions, and at the last available asked price for short
positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Trustees of the Fund. Long
positions traded in the OTC market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price obtained from one or more dealers or
pricing services approved by the Board of Trustees of the Fund. Short
positions traded in the OTC market are valued at the last available asked
price. Valuation of other short-term investment vehicles is generally based on
the net asset value of the underlying investment vehicle or amortized cost.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
Generally, trading in foreign securities is substantially completed each day
at various times prior to the close of business on the New York Stock Exchange
("NYSE"). The values of such securities used in computing the net asset value
of the Fund's shares are determined as of such times. Foreign currency exchange
rates also are generally determined prior to the close of business on the NYSE.
As of October 2, 2006, foreign currency exchange rates will be determined at
the close of business on the NYSE. Occasionally, events affecting the values of
such securities and such exchange rates may occur between the times at which
they are determined and the close of business on the NYSE that may not be
reflected in the computation of the Fund's net asset value. If events (for
example, a company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined in
good faith by the Fund's Board of Trustees or by the Investment Adviser using a
pricing service and/or procedures approved by the Fund's Board of Trustees.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Notes to Financial Statements (continued)
(b) Repurchase agreements--The Fund may invest in U.S. government securities
pursuant to repurchase agreements. Under such agreements, the counterparty
agrees to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks-to-market such
securities and, if necessary, receives additional securities daily to ensure
that the contract is fully collateralized. If the counterparty defaults and
the fair value of the collateral declines, liquidation of the collateral by
the Fund may be delayed or limited.
(c) Reverse repurchase agreements--The Fund may enter into reverse repurchase
agreements. Under reverse repurchase agreements, the Fund sells securities to
the counterparty and agrees to repurchase them at a mutually agreed upon date
and price, and may exchange their respective commitments to pay or receive
interest. If the counterparty defaults on its obligation, the Fund's ability
to receive interest will be delayed or limited. Furthermore, if the Fund does
not have sufficient client income to pay its obligation under the reverse
repurchase agreement, the Fund would be in default and the counterparty would
be able to terminate the repurchase agreement. At the time a portfolio enters
into a reverse repurchase agreement, it will establish a segregated account
with the custodian containing cash, or cash equivalents of liquid high grade
debt securities having a value at least equal to the repurchase price.
(d) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such financial futures contracts. Financial futures
contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract,
the Fund deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
* Options--The Fund may write and purchase call and put options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premiums paid or received).
Written and purchased options are non-income producing investments.
* Swaps--The Fund may enter into swap agreements, which are OTC contracts in
which the Fund and a counterparty agree to make periodic net payments on a
specified notional amount. The net payments can be made for a set period of
time or may be triggered by a predetermined credit event. The net periodic
payments may be based on a fixed or variable interest rate; the change in
market value of a specified security, basket of securities, or index; or the
return generated by a security. These periodic payments received or made by
the Fund are recorded in the accompanying Statement of Operations as realized
gains or losses, respectively. Gains or losses are realized upon termination
of the swap agreements. Swaps are marked-to-market daily and changes in the
value are recorded as unrealized appreciation (depreciation). Risks include
changes in the returns of the underlying instruments, failure of the
counterparties to perform under contracts' terms and the possible lack of
liquidity with respect to the swap agreements.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Notes to Financial Statements (continued)
* Short sales--When a Fund engages in a short sale, an amount equal to the
proceeds received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the market value of the short sale. The Fund maintains a segregated
account of securities as collateral for the short sales. The Fund is exposed
to market risk based on the amount, if any, that the market value of the stock
exceeds the market value of the securities in the segregated account. The Fund
is required to repay the counterparty any dividends or interest received on
the security sold short.
(e) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(f) Recent accounting pronouncement--In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48") entitled
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109." FIN 48 prescribes the minimum recognition threshold a tax
position must meet in connection with accounting for uncertainties in income
tax positions taken or expected to be taken by an entity including mutual
funds before being measured and recognized in the financial statements.
Adoption of FIN 48 is required for fiscal years beginning after December 15,
2006. The impact on the fund's financial statements, if any, is currently
being assessed.
(g) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income and extended delivery fees are recognized on the accrual
basis. The Fund amortizes all premiums and discounts on debt securities.
(h) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(i) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded
on the ex-dividend dates.
(j) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the market value
of the borrowed securities, in the event of borrower default or in the event
of losses on investments made with cash collateral.
(k) Mortgage dollar rolls--The Fund may sell mortgage-backed securities for
delivery in the current month and simultaneously contract to repurchase
substantially similar (same type, coupon and maturity) securities on a
specific future date.
(l) Bank overdraft--The Fund recorded a bank overdraft, which resulted from
management estimates of available cash.
(m) Reclassifications--U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the
current year, $2,191,090 has been reclassified between paid-in capital in
excess of par and accumulated distributions in excess of net investment income
and $247,655 has been reclassified between accumulated distributions in excess
of net investment income and accumulated net realized capital losses as a
result of permanent differences attributable to a tax return of capital,
swap agreements, accounting for paydowns, and the reclassification of
distributions. These reclassifications have no effect on net assets or net
asset values per share.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Notes to Financial Statements (continued)
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services,
Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund has also entered into
a Distribution Agreement and Distribution Plans with FAM Distributors, Inc.
("FAMD" or the "Distributor"), which is a wholly owned subsidiary of Merrill
Lynch Group, Inc.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee based upon the average daily value of the Fund's net assets at the
following rates:
Portion of Average Daily Value of Net Assets: Rate
Not exceeding $500 million .500%
In excess of $500 million but not
exceeding $1 billion .475%
In excess of $1 billion but not
exceeding $1.5 billion .450%
In excess of $1.5 billion but not
exceeding $2 billion .425%
In excess of $2 billion but not
exceeding $2.5 billion .400%
In excess of $2.5 billion but not
exceeding $3.5 billion .375%
In excess of $3.5 billion but not
exceeding $5 billion .350%
In excess of $5 billion but not
exceeding $6.5 billion .325%
Exceeding $6.5 billion .300%
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are accrued daily
and paid monthly at annual rates based upon the average daily net assets of
the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .50%
Class C .25% .55%
Class R .25% .25%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, also provides
account maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B, Class C and Class R shareholders.
The ongoing distribution fee compensates the Distributor and MLPF&S for
providing shareholder and distribution-related services to Class B, Class C
and Class R shareholders.
For the year ended August 31, 2006, FAMD earned underwriting discounts and
direct commissions and MLPF&S earned dealer concessions on sales of the Fund's
Class A and Class I Shares as follows:
FAMD MLPF&S
Class A $ 3,687 $ 30,882
Class I $ 3,106 $ 27,102
For the year ended August 31, 2006, MLPF&S received contingent deferred sales
charges of $224,697 and $5,911 relating to transactions in Class B and Class C
Shares, respectively. Furthermore, MLPF&S received contingent deferred sales
charges of $13 and $839 relating to transactions subject to front-end sales
charge waivers in Class A and Class I Shares, respectively.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to MLPF&S or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private
investment company managed by MLIM, LLC or in registered money market funds
advised by Merrill Lynch Investment Managers, L.P. ("MLIM"), an affiliate of
FAM. For the year ended August 31, 2006, MLIM, LLC received $34,558 in
securities lending agent fees.
For the year ended August 31, 2006, the Fund reimbursed MLIM $31,777 for
certain accounting services.
In addition, MLPF&S received $6,640 in commissions on the execution of
portfolio security transactions for the Fund for the year ended August 31,
2006.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Fund's transfer agent.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Notes to Financial Statements (continued)
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction will close
on September 29, 2006.
On August 31, 2006, shareholders of the Fund approved a new Investment
Advisory Agreement with BlackRock Advisors, Inc. (the "Manager"), a wholly
owned subsidiary of BlackRock, Inc. BlackRock Advisors, Inc. was reorganized
into BlackRock Advisors, LLC. The new advisory agreement will become effective
on September 29, 2006 and the investment advisory fee is unchanged. In
addition, the Manager has entered into a sub-advisory agreement with BlackRock
Financial Management, Inc., an affiliate, under which the Manager pays the Sub-
Adviser for services it provides a fee equal to 59% of the management fee paid
to the Manager.
In connection with the closing, the Fund's Transfer Agent will become PFPC,
Inc., an affiliate of the Fund. In addition, BlackRock Distributors, Inc., an
affiliate of BlackRock, Inc., will become an additional distributor. MLIM, LLC,
the security lending agent, will become BlackRock Investment Management, LLC.
During the year ended August 31, 2006, certain officers and/or trustees
of the Fund are officers and/or directors of FAM, PSI, FAMD, FDS, MLIM,
ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases (including pay-ups) and sales (including paydowns) of investments,
excluding short-term securities, for the year ended August 31, 2006 were
$1,702,599,036 and $1,837,219,398, respectively.
Transactions in call and put options written for the year ended August 31,
2006 were as follows:
Call Options Number of Premiums
Written Contracts* Received
Outstanding call options written,
beginning of year 164 $ 527,750
Options written 395 3,075,344
Options expired (25) (52,500)
Options closed (534) (3,550,594)
--------------- ---------------
Outstanding call options written,
end of year -- --
=============== ===============
* Some contracts include a notional amount of $1,000,000.
Put Options Number of Premiums
Written Contracts* Received
Outstanding put options
written, beginning
of year 164 $ 734,075
Options written 3,473 4,376,509
Options expired (2,025) (203,360)
Options closed (612) (4,707,419)
--------------- ---------------
Outstanding put options
written, end of year 1,000 $ 199,805
=============== ===============
* Some contracts include a notional amount of $1,000,000.
4. Shares of Beneficial Interest:
Net decrease in net assets derived from beneficial interest
transactions was $168,429,370 and $184,361,007 for the years ended
August 31, 2006 and August 31, 2005, respectively.
Transactions in shares of beneficial interest for each class were as follows:
Class A Shares for the Year Dollar
Ended August 31, 2006 Shares Amount
Shares sold 14,034,123 $ 139,430,194
Automatic conversion of shares 1,919,435 19,124,470
Shares issued to shareholders in
reinvestment of dividends and
distributions 1,207,088 12,026,011
--------------- ---------------
Total issued 17,160,646 170,580,675
Shares redeemed (22,801,500) (227,761,721)
--------------- ---------------
Net decrease (5,640,854) $ (57,181,046)
=============== ===============
Class A Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 13,755,263 $ 141,240,518
Automatic conversion of shares 1,537,836 15,782,440
Shares issued to shareholders in
reinvestment of dividends 1,088,754 11,168,892
--------------- ---------------
Total issued 16,381,853 168,191,850
Shares redeemed (18,900,986) (194,005,388)
--------------- ---------------
Net decrease (2,519,133) $ (25,813,538)
=============== ===============
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Notes to Financial Statements (continued)
Class B Shares for the Year Dollar
Ended August 31, 2006 Shares Amount
Shares sold 3,157,042 $ 31,497,878
Shares issued to shareholders in
reinvestment of dividends and
distributions 808,510 8,059,966
--------------- ---------------
Total issued 3,965,552 39,557,844
--------------- ---------------
Shares redeemed (10,852,414) (108,231,513)
Automatic conversion of shares (1,919,232) (19,124,470)
--------------- ---------------
Total redeemed (12,771,646) (127,355,983)
--------------- ---------------
Net decrease (8,806,094) $ (87,798,139)
=============== ===============
Class B Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 3,965,033 $ 40,697,638
Shares issued to shareholders in
reinvestment of dividends 832,873 8,544,862
--------------- ---------------
Total issued 4,797,906 49,242,500
--------------- ---------------
Shares redeemed (13,411,984) (137,655,114)
Automatic conversion of shares (1,537,822) (15,782,440)
Total redeemed (14,949,806) (153,437,554)
--------------- ---------------
Net decrease (10,151,900) $ (104,195,054)
=============== ===============
Class C Shares for the Year Dollar
Ended August 31, 2006 Shares Amount
Shares sold 4,562,366 $ 45,490,143
Shares issued to shareholders in
reinvestment of dividends and
distributions 683,248 6,804,286
--------------- ---------------
Total issued 5,245,614 52,294,429
Shares redeemed (7,924,594) (78,982,746)
--------------- ---------------
Net decrease (2,678,980) $ (26,688,317)
=============== ===============
Class C Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 4,015,656 $ 41,183,291
Shares issued to shareholders in
reinvestment of dividends 592,719 6,079,698
--------------- ---------------
Total issued 4,608,375 47,262,989
Shares redeemed (9,720,117) (99,718,766)
--------------- ---------------
Net decrease (5,111,742) $ (52,455,777)
=============== ===============
Class I Shares for the Year Dollar
Ended August 31, 2006 Shares Amount
Shares sold 10,661,158 $ 106,292,718
Shares issued to shareholders in
reinvestment of dividends and
distributions 53,204 528,527
--------------- ---------------
Total issued 10,714,362 106,821,245
Shares redeemed (11,620,728) (115,699,933)
--------------- ---------------
Net decrease (906,366) $ (8,878,688)
=============== ===============
Class I Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 14,818,949 $ 152,032,859
Shares issued to shareholders in
reinvestment of dividends 41,103 421,526
--------------- ---------------
Total issued 14,860,052 152,454,385
Shares redeemed (16,211,687) (166,192,288)
--------------- ---------------
Net decrease (1,351,635) $ (13,737,903)
=============== ===============
Class R Shares for the Year Dollar
Ended August 31, 2006 Shares Amount
Shares sold 2,135,593 $ 21,295,285
Shares issued to shareholders in
reinvestment of dividends and
distributions 103,968 1,032,502
--------------- ---------------
Total issued 2,239,561 22,327,787
Shares redeemed (1,024,602) (10,210,967)
--------------- ---------------
Net increase 1,214,959 $ 12,116,820
=============== ===============
Class R Shares for the Year Dollar
Ended August 31, 2005 Shares Amount
Shares sold 1,626,211 $ 16,665,960
Shares issued to shareholders in
reinvestment of dividends 43,218 442,418
--------------- ---------------
Total issued 1,669,429 17,108,378
Shares redeemed (514,000) (5,267,113)
--------------- ---------------
Net increase 1,155,429 $ 11,841,265
=============== ===============
5. Reverse Repurchase Agreement:
For the year ended August 31, 2006, the Fund's average amount outstanding was
approximately $183,246,000 and daily weighted average interest rate was 4.58%.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Notes to Financial Statements (concluded)
6. Short-Term Borrowings:
The Fund, along with certain other funds managed by FAM and its affiliates, is
a party to a $500,000,000 credit agreement with a group of lenders, which
expires November 2006. The Fund may borrow under the credit agreement to fund
shareholder redemptions and for other lawful purposes other than for leverage.
The Fund may borrow up to the maximum amount allowable under the Fund's
current prospectus and statement of additional information, subject to various
other legal, regulatory or contractual limits. The Fund pays a commitment fee
of .07% per annum based on the Fund's pro rata share of the unused portion of
the credit agreement. Amounts borrowed under the credit agreement bear
interest at a rate equal to, at each Fund's election, the federal funds rate
plus .50% or a base rate as defined in the credit agreement. The Fund did not
borrow under the credit agreement during the year ended August 31, 2006.
7. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended August
31, 2006 and August 31, 2005 was as follows:
8/31/2006 8/31/2005
Distributions paid from:
Ordinary income $ 63,901,098 $ 61,391,565
Tax return of capital 2,191,090 --
--------------- ---------------
Total taxable distributions $ 66,092,188 $ 61,391,565
=============== ===============
As of August 31, 2006, the components of accumulated losses on a tax basis
were as follows:
Accumulated distributions in excess
of investment income--net $ (1,492,965)
Undistributed long-term capital gains--net --
---------------
Accumulated distributions in excess
of investment income--net (1,492,965)
Capital loss carryforward (825,757)*
Unrealized losses--net (37,626,710)**
---------------
Total accumulated losses--net $ (39,945,432)
===============
* On August 31, 2006, the Fund had a net capital loss carryforward
of $825,757, all of which expires in 2014. This amount will be
available to offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized
losses is attributable primarily to the tax deferral of losses on
straddles, the realization of tax purposes of unrealized gains
(losses) on certain futures contracts and the deferral of post-
October capital losses for tax purposes.
8. Plan of Reorganization:
On February 15, 2006, the Fund's Board of Trustees approved a plan of
reorganization, subject to shareholder approval and certain other conditions,
whereby BlackRock Government Income Portfolio (the "Portfolio"), a portfolio
of BlackRock Funds (SM), will acquire substantially all of the assets and
assume substantially all of the liabilities of the Fund in exchange for newly
issued shares of the Portfolio.
9. Share Class Redesignation:
Effective October 2, 2006, Class A, Class B, Class C and Class I Shares will
be redesignated Investor A1, Investor B1, Investor C1 and Institutional
Shares, respectively. Class R Shares will remain Class R Shares. Investor B1
and Investor C1 Shares will no longer be available for purchase except through
dividend reinvestment in connection with existing holdings or through certain
authorized qualified employee benefit plans.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees
of BlackRock U.S. Government Fund:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of BlackRock U.S. Government Fund
(formerly Merrill Lynch U.S. Government Fund) as of August 31, 2006, and the
related statement of operations and cash flows for the year then ended, the
statements of changes in 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. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. The Fund 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
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 August 31, 2006, by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
BlackRock U.S. Government Fund as of August 31, 2006, the results of its
operations and cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 20, 2006
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distributions paid monthly by BlackRock U.S. Government Fund for the fiscal
year ended August 31, 2006:
Federal Obligation Interest
Month Paid: September 2005 - August 2006 9.05%*
Interest-Related Dividends for Non-U.S. Residents
Month Paid: September 2005 24.75%**
October 2005 - December 2005 87.76%**
January 2006 - August 2006 99.30%**
* The law varies in each state as to whether and what percentage of dividend
income attributable to Federal Obligations is exempt from state income tax.
We recommend that you consult your tax advisor to determine if any portion
of the dividends you received is exempt from state income taxes.
** Represents the portion of the taxable ordinary income dividends eligible
for exemption from U.S. withholding tax for non-resident aliens and foreign
corporations.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement--Matters Considered by the Board
In connection with the combination of Merrill Lynch's investment advisory
business, including Fund Asset Management, L.P. (the "Previous Investment
Adviser"), with that of BlackRock, Inc. ("BlackRock") to create a new
independent company ("New BlackRock") (the "Transaction"), the Fund's Board of
Trustees considered and approved a new investment advisory agreement (the
"BlackRock Investment Advisory Agreement") between the Fund and BlackRock
Advisors, LLC ("BlackRock Advisors"). The Fund's shareholders subsequently
approved the BlackRock Investment Advisory Agreement and it became effective
on September 29, 2006, replacing the investment advisory agreement with the
Previous Investment Adviser (the "Previous Investment Advisory Agreement").
The Board discussed the BlackRock Investment Advisory Agreement at telephonic
and in-person meetings held during April and May 2006. The Board, including
the independent trustees, approved the BlackRock Investment Advisory Agreement
at an in-person meeting held on May 9, 2006.
To assist the Board in its consideration of the BlackRock Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent trustees, through their independent legal
counsel, also requested and received additional information from Merrill Lynch
and BlackRock in connection with their consideration of the BlackRock
Investment Advisory Agreement. The additional information was provided in
advance of the May 9, 2006 meeting. In addition, the independent trustees
consulted with their counsel and Fund counsel on numerous occasions,
discussing, among other things, the legal standards and certain other
considerations relevant to the trustees' deliberations.
At the Board meetings, the trustees discussed with Merrill Lynch management
and certain BlackRock representatives the Transaction, its strategic rationale
and BlackRock's general plans and intentions regarding the Fund. At these
Board meetings, representatives of Merrill Lynch and BlackRock made
presentations to and responded to questions from the Board. The trustees also
inquired about the plans for and anticipated roles and responsibilities of
certain employees and officers of the Previous Investment Adviser, and of its
affiliates, to be transferred to BlackRock in connection with the Transaction.
The independent trustees of the Board also conferred separately and with their
counsel about the Transaction and other matters related to the Transaction,
including a proposed reorganization in which the BlackRock Government Income
Portfolio, a series of BlackRock Funds (SM), would acquire substantially all
of the assets and certain stated liabilities of the Fund. The independent
trustees did so on a number of occasions, including in connection with the
April and May 2006 meetings. After the presentations and after reviewing the
written materials provided, the independent trustees met in executive sessions
with their counsel to consider the BlackRock Investment Advisory Agreement.
In connection with the Board's review of the BlackRock Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the trustees about a variety
of matters. The advice included the following, among other matters:
* that there was not expected to be any diminution in the nature, quality
and extent of services provided to the Fund and its shareholders by
BlackRock Advisors, including compliance services;
* that operation of New BlackRock as an independent investment management
firm would enhance its ability to attract and retain talented
professionals;
* that the Fund was expected to benefit from having access to BlackRock's
state of the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions (R) brand name;
* that BlackRock had no present intention to alter any applicable expense
waivers or reimbursements that were currently in effect and, while it
reserved the right to do so in the future, it would seek the approval of
the Board before making any changes;
* that BlackRock and Merrill Lynch would enter into an agreement, for an
initial three-year period and automatically renewable from year to year
thereafter (or until any proposed Fund reorganization takes place), in
connection with the Transaction under which Merrill Lynch-affiliated
broker-dealers would continue to offer the Fund as an investment product;
* that BlackRock Advisors would have substantially the same access to the
Merrill Lynch sales force when distributing shares of the Fund as was
currently being provided to the Previous Investment Adviser and that other
arrangements between the Previous Investment Adviser and Merrill Lynch
sales channels would be preserved;
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
* that the Fund would have access to BlackRock's network of third party
brokers, retirement plan platforms and registered investment advisers;
* that in connection with the Transaction, Merrill Lynch and BlackRock had
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Previous Investment Adviser (or affiliates),
respectively; and
* that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they had a financial interest in the
matters being considered that was different from that of Fund
shareholders.
The trustees considered the information provided by Merrill Lynch and
BlackRock above, and, among other factors, the following:
* the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
* the potential for expanding distribution of Fund shares through improved
access to third party distribution (in the event the proposed
reorganization of the Fund does not take place);
* the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
* the compliance policies and procedures of BlackRock Advisors;
* the terms and conditions of the BlackRock Investment Advisory Agreement,
including the fact that the Fund's advisory fee schedule would not
increase under the BlackRock Investment Advisory Agreement, but would
remain the same;
* that in February 2006, the Board had performed a full annual review of the
Previous Investment Advisory Agreement, as required by the 1940 Act, and
had determined that the Previous Investment Adviser had the capabilities,
resources and personnel necessary to provide the advisory and
administrative services that were then being provided to the Fund; and
that the advisory and/or management fees paid by the Fund, taking into
account any applicable agreed-upon fee waivers and breakpoints, had
represented reasonable compensation to the Previous Investment Adviser in
light of the services provided, the costs to the Previous Investment
Adviser of providing those services, economies of scale, the fees and
other expenses paid by similar funds (including information provided by
Lipper Inc. ["Lipper"]), and such other matters as the trustees had
considered relevant in the exercise of their reasonable judgment; and
* that Merrill Lynch had agreed to pay all expenses of the Fund in
connection with the Board's consideration of the BlackRock Investment
Advisory Agreement and related agreements and all costs of shareholder
approval of the BlackRock Investment Advisory Agreement and as a result
the Fund would bear no costs in obtaining shareholder approval of the
BlackRock Investment Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the BlackRock Investment Advisory Agreement, the Board
assessed the nature, quality and scope of the services to be provided to the
Fund by the personnel of BlackRock Advisors and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory
requirements. In its review of the BlackRock Investment Advisory Agreement,
the Board also considered a range of information in connection with its
oversight of the services to be provided by BlackRock Advisors and its
affiliates. Among the matters considered were: (a) fees (in addition to
management fees) to be paid to BlackRock Advisors and its affiliates by the
Fund; (b) Fund operating expenses paid to third parties; (c) the resources
devoted to and compliance reports relating to the Fund's investment objective,
policies and restrictions, and its compliance with its Code of Ethics and
BlackRock Advisors' compliance policies and procedures; and (d) the nature,
cost and character of non-investment management services to be provided by
BlackRock Advisors and its affiliates.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Disclosure of New Investment Advisory Agreement (continued)
In the period prior to the Board meeting to consider renewal of the Previous
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Previous Investment Advisory Agreement. These
materials included (a) information compiled by Lipper on the fees and expenses
and the investment performance of the Fund as compared to a comparable group
of funds as classified by Lipper; (b) a discussion by the Fund's portfolio
management team on investment strategies used by the Fund during its most
recent fiscal year; (c) information on the profitability to the Previous
Investment Adviser of the Previous Investment Advisory Agreement and other
payments received by the Previous Investment Adviser and its affiliates from
the Fund; and (d) information provided by the Previous Investment Adviser
concerning services related to the valuation and pricing of Fund portfolio
holdings, the Fund's portfolio turnover statistics and direct and indirect
benefits to the Previous Investment Adviser and its affiliates from their
relationship with the Fund.
In their deliberations, the trustees considered information received in
connection with their most recent continuation of the Previous Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the BlackRock Investment Advisory Agreement. The trustees did
not identify any particular information that was all-important or controlling.
The trustees, including a majority of the independent trustees, concluded that
the terms of the BlackRock Investment Advisory Agreement are appropriate, that
the fees to be paid are reasonable in light of the services to be provided to
the Fund, and that the BlackRock Investment Advisory Agreement should be
approved and recommended to Fund shareholders.
Nature, Quality and Extent of Services Provided--The Board reviewed the
nature, quality and extent of services provided by the Previous Investment
Adviser, including the investment advisory services and the resulting
performance of the Fund, as well as the nature, quality and extent of services
expected to be provided by BlackRock Advisors. The Board focused primarily on
the Previous Investment Adviser's investment advisory services and the Fund's
investment performance, but also considered certain areas in which both the
Previous Investment Adviser and the Fund received services as part of the
Merrill Lynch complex. The Board compared the Fund's performance - both
including and excluding the effects of fees and expenses - to the performance
of a comparable group of mutual funds, and the performance of a relevant index
or combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Previous Investment Adviser's investment goals,
the Board attaches more importance to performance over relatively long periods
of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the BlackRock Investment Advisory Agreement, the
trustees considered, among other things, the expected impact of the
Transaction on the operations, facilities, organization and personnel of New
BlackRock and how it would affect the Fund; the ability of BlackRock Advisors
to perform its duties after the Transaction; and any anticipated changes to
the investment and other practices of the Fund. The trustees considered the
fact that it was being proposed that the BlackRock Government Income
Portfolio, a series of BlackRock Funds (SM), acquire substantially all of the
assets and certain stated liabilities of the Fund as part of a reorganization.
The trustees considered BlackRock's advice, in connection with both the
Transaction and the proposed reorganization, as to proposed changes in
portfolio management personnel of the Fund after the closing of the
Transaction.
The trustees were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the
art technology and risk management analytic tools, including the investment
tools provided under the BlackRock Solutions brand name.
The trustees were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund would continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch
affiliates (for example, transactions with a Merrill Lynch broker-dealer
acting as principal) absent revised or new regulatory relief. The trustees
were advised that a revision of existing regulatory relief with respect to
these restrictions was being sought from the Securities and Exchange
Commission and were advised of the possibility of receipt of such revised
regulatory relief.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the trustees
determined that the nature and quality of services to be provided to the Fund
under the BlackRock Investment Advisory Agreement were expected to be as good
as or better than that provided under the Previous Investment Advisory
Agreement. It was noted, however, that changes in personnel were expected to
follow the Transaction and the combination of the operations of the Previous
Investment Adviser and its affiliates with those of BlackRock. The trustees
noted that if portfolio managers or other personnel were to cease to be
available prior to the closing of the Transaction, the Board would consider
all available options, including seeking the investment advisory or other
services of BlackRock affiliates. Accordingly, the trustees concluded that,
overall, they were satisfied at the present time with assurances from
BlackRock and BlackRock Advisors as to the expected nature, quality and extent
of the services to be provided to the Fund under the BlackRock Investment
Advisory Agreement.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Costs of Services Provided and Profitability--It was noted that, in
conjunction with the recent review of the Previous Investment Advisory
Agreement, the trustees had received, among other things, a report from Lipper
comparing the Fund's fees and expenses to those of a peer group selected by
Lipper, and information as to the fees charged by the Previous Investment
Adviser or its affiliates to other registered investment company clients for
investment management services. The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory fees and the
effects of any fee waivers - compared to the other funds in its Lipper
category. They also compared the Fund's total expenses to those of other
comparable funds. The information showed that the Fund had fees and expenses
within the range of fees and expenses of comparable funds. The Board
considered the services to be provided by and the fees to be charged by
BlackRock Advisors to other funds with similar investment mandates and noted
that the fees charged by BlackRock Advisors in those cases, including fee
waivers and expense reimbursements, were generally comparable to those being
charged to the Fund. The Board also noted that, as a general matter, according
to the information provided by BlackRock, fees charged to institutional
clients were lower than the fees charged to the Fund, but BlackRock Advisors
provided less extensive services to such clients. The Board concluded that the
Fund's management fee and fee rate and overall expense ratio are reasonable
compared to those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the BlackRock Investment Advisory Agreement, the trustees considered,
among other things, whether advisory fees or other expenses would change as a
result of the Transaction. Based on their review of the materials provided and
the fact that the BlackRock Investment Advisory Agreement is substantially
similar to the Previous Investment Advisory Agreement in all material
respects, including the rate of compensation, the trustees determined that the
Transaction should not increase the total fees payable, including any fee
waivers or after any expense caps or expense reimbursements, for advisory and
administrative services. The trustees noted that it was not possible to
predict how the Transaction would affect BlackRock Advisors' profitability
from its relationship with the Fund.
The trustees discussed with BlackRock Advisors its general methodology to be
used in determining its profitability with respect to its relationship with
the Fund and noted that they expect to receive profitability information from
BlackRock Advisors on at least an annual basis.
Fees and Economies of Scale--The Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in
order to enable the Fund to participate in these economies of scale. The Board
determined that changes were not currently necessary and that the Fund
appropriately participated in these economies of scale.
In reviewing the Transaction, the trustees considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the BlackRock Investment Advisory
Agreement is substantially similar to the Previous Investment Advisory
Agreement in all material respects, including the rate of compensation, the
trustees determined that as a result of the Transaction, the Fund's total
advisory fees would be no higher than the fees under the Previous Investment
Advisory Agreement. The trustees concluded that because the rates for advisory
fees for the Fund would be no higher than the fee rates in effect at the time,
the proposed management fee structure, including any fee waivers, was
reasonable and that no additional changes were currently necessary.
Fall-Out Benefits--The trustees considered whether the Fund would generate any
fall-out benefits to BlackRock Advisors. Fall-out benefits are indirect
profits from other activities that accrue to the adviser or its affiliates
solely because of the existence of the Fund. In evaluating the fall-out
benefits to be received by BlackRock Advisors under the BlackRock Investment
Advisory Agreement, the trustees considered whether BlackRock Advisors would
experience such benefits to the same extent that the Previous Investment
Adviser was experiencing such benefits under the Previous Investment Advisory
Agreement. Based on their review of the materials provided, including
materials received in connection with their most recent continuance of the
Previous Investment Advisory Agreement, and their discussions with management
of the Previous Investment Adviser and BlackRock, the trustees determined that
BlackRock Advisors' fall-out benefits could include increased ability for
BlackRock to distribute shares of its funds and other investment products. The
trustees noted that any such benefits were difficult to quantify with
certainty at this time, and indicated that they would continue to evaluate
them going forward.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Disclosure of New Investment Advisory Agreement (concluded)
Investment Performance--The trustees considered investment performance for the
Fund. The trustees compared the Fund's performance - both including and
excluding the effects of fees and expenses - to the performance of a
comparable group of mutual funds, and the performance of a relevant index or
combination of indexes. The comparative information received from Lipper
showed Fund performance at various levels within the range of performance of
comparable funds over different time periods. The trustees believed the Fund's
performance was satisfactory. Also, the trustees took into account the
investment performance of funds advised by BlackRock Advisors. The Board
considered comparative information from Lipper which showed that the
performance of the funds advised by BlackRock Advisors was within the range of
performance of comparable funds over different time periods. The Board also
noted that, following the close of the Transaction and particularly if the
proposed reorganization of the Fund did not take place, BlackRock Advisors
intended to implement steps to seek to improve the investment performance of
the Fund, including changes in the portfolio management personnel. The Board
noted BlackRock's considerable investment management experience and
capabilities, but was unable to predict what effect, if any, consummation of
the Transaction would have on the future performance of the Fund.
Conclusion--After the independent trustees of the Fund deliberated in
executive session, the entire Board, including the independent trustees,
approved the BlackRock Investment Advisory Agreement, concluding that the
advisory fee rate was reasonable in relation to the services provided and that
the BlackRock Investment Advisory Agreement was in the best interests of the
shareholders. In approving the BlackRock Investment Advisory Agreement, the
Board anticipated that in the event the proposed reorganization of the Fund
did not take place, it expected to review the continuance of the agreement in
advance of the expiration of the initial two-year period.
New BlackRock Sub-Advisory Agreement--Matters Considered by the Board
At an in-person meeting held on August 22 - 23, 2006, the Board of Trustees,
including the independent trustees, discussed and approved the sub-advisory
agreement (the "BlackRock Sub-Advisory Agreement") between BlackRock Advisors
and its affiliate, BlackRock Financial Management, Inc. (the "Sub-Adviser").
The BlackRock Sub-Advisory Agreement became effective on September 29, 2006,
at the same time the BlackRock Investment Advisory Agreement became effective.
Pursuant to the BlackRock Sub-Advisory Agreement, the Sub-Adviser receives a
monthly fee from BlackRock Advisors equal to 59% of the advisory fee received
by BlackRock Advisors from the Fund. BlackRock Advisors pays the Sub-Adviser
out of its own resources, and there is no increase in Fund expenses as a
result of the BlackRock Sub-Advisory Agreement.
In approving the BlackRock Sub-Advisory Agreement at the August in-person
meeting, the Board reviewed its considerations in connection with its approval
of BlackRock Investment Advisory Agreement in May 2006. The Board relied on
the same information and considered the same factors as those discussed above
in connection with the approval of the BlackRock Investment Advisory
Agreement, and came to the same conclusions. In reviewing the sub-advisory fee
rate provided in the BlackRock Sub-Advisory Agreement, the Board noted the
fact that both BlackRock Advisors and the Sub-Adviser have significant
responsibilities under their respective advisory agreements. BlackRock
Advisors remains responsible for oversight of the Fund's operations and
administration, and the Sub-Adviser provides advisory services to the Fund and
is responsible for the day-to-day management of the Fund's portfolio under the
BlackRock Sub-Advisory Agreement. The Board also took into account the fact
that there is no increase in total advisory fees paid by the Fund as a result
of the BlackRock Sub-Advisory Agreement. Under all of the circumstances, the
Board concluded that it was a reasonable allocation of fees for the Sub-
Adviser to receive 59% of the advisory fee paid by the Fund to BlackRock
Advisors.
After the independent trustees deliberated in executive session, the entire
Board, including the independent trustees, approved the BlackRock Sub-Advisory
Agreement, concluding that the sub-advisory fee was reasonable in relation to
the services provided and that the BlackRock Sub-Advisory Agreement was in the
best interests of shareholders.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Officers and Trustees
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
Interested Trustee
Robert C. Doll, Jr.* President 2005 to Vice Chairman and Director of BlackRock, and 129 Funds None
P.O. Box 9011 and present Global Chief Investment Officer for Equities, 174 Portfolios
Princeton, Trustee Chairman of the BlackRock Private Client
NJ 08543-9011 Operating Committee, and member of the
Age: 52 BlackRock Executive Committee since 2006;
President of the Funds advised by Merrill Lynch
Investment Managers ("MLIM") and its affiliates
("MLIM/FAM-advised funds") from 2005 to
2006 and Chief Investment Officer thereof from
2001 to 2006; President of MLIM and Fund
Asset Management, L.P. ("FAM") from 2001
to 2006; Co-Head (Americas Region) thereof
from 2000 to 2001 and Senior Vice President
from 1999 to 2001; President and Director
of Princeton Services, Inc. ("Princeton
Services") since 2001; President of Princeton
Administrators, L.P. ("Princeton Administrators")
from 2001 to 2006; Chief Investment Officer
of OppenheimerFunds, Inc. in 1999 and
Executive Vice President thereof from 1991
to 1999.
* Mr. Doll is a director, trustee or member of an advisory board of certain other
investment companies for which BlackRock acts as investment adviser. Mr. Doll is
an "interested person," as defined in the Investment Company Act, of the Fund
based on his current and former positions with BlackRock, Inc. and its affiliates.
Trustees serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72. As Fund President, Mr. Doll serves at the pleasure
of the Board of Trustees.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Officers and Trustees (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
Independent Trustees*
James H. Bodurtha** Trustee 2002 to Director, The China Business Group, Inc. 39 Funds None
P.O. Box 9095 present since 1996 and Executive Vice President 59 Portfolios
Princeton, thereof from 1996 to 2003; Chairman of the
NJ 08543-9095 Board, Berkshire Holding Corporation since
Age: 62 1980; Partner, Squire, Sanders & Dempsey from
1980 to 1993.
Kenneth A. Froot Trustee 2005 to Professor, Harvard University since 1992; 39 Funds None
P.O. Box 9095 present Professor, Massachusetts Institute of 59 Portfolios
Princeton, Technology from 1986 to 1992.
NJ 08543-9095
Age: 49
Joe Grills** Trustee 1994 to Member of the Committee of Investment of 39 Funds Kimco Realty
P.O. Box 9095 present Employee Benefit Assets of the Association of 59 Portfolios Corporation
Princeton, Financial Professionals ("CIEBA") since 1986;
NJ 08543-9095 Member of CIEBA's Executive Committee since
Age: 71 1988 and its Chairman from 1991 to 1992;
Assistant Treasurer of International Business
Machines Corporation ("IBM") and Chief
Investment Officer of IBM Retirement Funds from
1986 to 1993; Member of the Investment Advisory
Committee of the State of New York Common
Retirement Fund since 1989; Member of the
Investment Advisory Committee of the Howard
Hughes Medical Institute from 1997 to 2000;
Director, Duke University Management Company
from 1992 to 2004, Vice Chairman thereof from
1998 to 2004, and Director Emeritus thereof since
2004; Director, LaSalle Street Fund from 1995 to
2001; Director, Kimco Realty Corporation since 1997;
Member of the Investment Advisory Committee of
the Virginia Retirement System since 1998, Vice
Chairman thereof from 2002 to 2005, and Chairman
thereof since 2005; Director, Montpelier Foundation
since 1998 and its Vice Chairman since 2000;
Member of the Investment Committee of the
Woodberry Forest School since 2000; Member of
the Investment Committee of the National Trust for
Historic Preservation since 2000.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Officers and Trustees (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Trustee Trustee
Independent Trustees* (concluded)
Herbert I. London Trustee 2002 to Chairman of the Board of Directors of 39 Funds None
P.O. Box 9095 present Vigilant Research, Inc. since 2006; Member 59 Portfolios
Princeton, of the Board of Directors for Grantham
NJ 08543-9095 University since 2006; Director of AIMS since
Age: 67 2006; Director of Reflex Security since 2006;
Director of InnoCentive, Inc. since 2006;
Director of Cerego, LLC since 2005; Professor
Emeritus, New York University since 2005; John M.
Olin Professor of Humanities, New York University
from 1993 to 2005; and Professor thereof from 1980
to 2005; President, Hudson Institute since 1997
and Trustee thereof since 1980; Dean, Gallatin
Division of New York University from 1976 to 1993;
Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corp.
from 1991 to 1995; Overseer, Center for Naval
Analyses from 1983 to 1993.
Roberta Cooper Ramo Trustee 2002 to Shareholder, Modrall, Sperling, Roehl, 39 Funds None
P.O. Box 9095 present Harris & Sisk, P.A. since 1993; President, 59 Portfolios
Princeton, American Bar Association from 1995 to 1996
NJ 08543-9095 and Member of the Board of Governors thereof
Age: 64 from 1994 to 1997; Shareholder, Poole, Kelly
and Ramo, Attorneys at Law P.C. from 1977 to
1993; Director of ECMC Group (service provider
to students, schools and lenders) since 2001;
Director, United New Mexico Bank (now Wells Fargo)
from 1983 to 1988; Director, First National Bank
of New Mexico (now Wells Fargo) from 1975 to 1976;
Vice President, American Law Institute since 2004.
Robert S. Salomon, Jr. Trustee 1996 to Principal of STI Management (investment 39 Funds None
P.O. Box 9095 present adviser) from 1994 to 2005; Chairman and 59 Portfolios
Princeton, CEO of Salomon Brothers Asset Management Inc.
NJ 08543-9095 from 1992 to 1995; Chairman of Salomon Brothers
Age: 69 Equity Mutual Funds from 1992 to 1995; regular
columnist with Forbes Magazine from 1992 to
2002; Director of Stock Research and U.S. Equity
Strategist at Salomon Brothers Inc. from 1975 to
1991; Trustee, Commonfund from 1980 to 2001.
* Trustees serve until their resignation, removal or death, or until December 31
of the year in which they turn 72.
** Co-Chairman of the Board of Trustees and the Audit Committee.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Officers and Trustees (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 1993 to Managing Director of BlackRock since 2006; Managing Director of MLIM and FAM
P.O. Box 9011 President present from 2005 to 2006 and Treasurer thereof from 1999 to 2006; First Vice President of
Princeton, and and MLIM and FAM from 1997 to 2005; Senior Vice President and Treasurer of Princeton
NJ 08543-9011 Treasurer 1999 to Services from 1999 to 2006 and Director from 2004 to 2006; Vice President of FAM
Age: 46 present Distributors, Inc. ("FAMD") from 1999 to 2006 and Director from 2004 to 2006; Vice
President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from
1990 to 2001; Vice President, Treasurer and Secretary of the IQ Funds from 2004
to 2006.
Thomas F. Musmanno Vice 2005 to Director of BlackRock since 2006; Director of MLIM from 2004 to 2006; Vice President
P.O. Box 9011 President present of MLIM from 1996 to 2004; Derivatives and Structured Products Specialist with
Princeton, MLIM from 2000 to 2002; Portfolio Manager with MLIM from 1996 to 2006.
NJ 08543-9011
Age: 37
Laura Powers Vice 2005 to Director of BlackRock since 2006; Director of MLIM from 1998 to 2006; Vice President
P.O. Box 9011 President present of MLIM from 1993 to 1997; Portfolio Manager with MLIM from 1992 to 2006.
Princeton,
NJ 08543-9011
Age: 43
Frank Viola Vice 2002 to Managing Director of BlackRock since 2006; Managing Director (Global Fixed Income)
P.O. Box 9011 President present of MLIM from 2002 to 2006; Head of the Global Fixed Income Structured Asset Team
Princeton, from 2002 to 2006; Director of MLIM from 2000 to 2001 and Vice President from
NJ 08543-9011 1997 to 2000.
Age: 41
Jeffrey Hiller Fund Chief 2004 to Managing Director of BlackRock and Fund Chief Compliance Officer since 2006; Chief
P.O. Box 9011 Compliance present Compliance Officer of the MLIM/FAM-advised funds and First Vice President and Chief
Princeton, Officer Compliance Officer of MLIM (Americas Region) from 2004 to 2006; Chief Compliance
NJ 08543-9011 Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 55 Investment Management from 2002 to 2004; Managing Director and Global Director
of Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Securities and Exchange
Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2004 to Director of BlackRock since 2006; Director (Legal Advisory) of MLIM from 2002 to
P.O. Box 9011 present 2006; Vice President of MLIM from 1999 to 2002; Attorney associated with MLIM
Princeton, from 1997 to 2006; Secretary of MLIM, FAM, FAMD and Princeton Services from
NJ 08543-9011 2004 to 2006.
Age: 46
* Officers of the Fund serve at the pleasure of the Board of Trustees.
Further information about the Fund's Officers and Trustees is available
in the Fund's Statement of Additional Information, which can be obtained
without charge by calling 1-800-441-7762.
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
Pre Transaction (Until September 29, 2006)
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville FL 32246-6484
Post Transaction (After September 29, 2006)
PFPC Inc.
Wilmington, DE 19809
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
Electronic copies of most financial reports and prospectuses are available on
the Fund's Web site. Shareholders can sign up for e-mail notifications of
quarterly statements, annual and semi-annual reports and prospectuses by
enrolling in the Fund's electronic delivery program.
To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial adviser. Please note that not all investment
advisers, banks or brokerages may offer this service.
Shareholders Who Hold Accounts Directly with BlackRock:
1) Access the BlackRock Web site at
http://www.blackrock.com/edelivery
2) Log into your account
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current and former
fund investors and individual clients (collectively, "Clients") and to
safeguarding their nonpublic personal information. The following information
is provided to help you understand what personal information BlackRock
collects, how we protect that information and why in certain cases we share
such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations
require BlackRock to provide you with additional or different privacy-related
rights beyond what is set forth below, then BlackRock will comply with those
specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about
you from different sources, including the following: (i) information we
receive from you or, if applicable, your financial intermediary, on
applications, forms or other documents; (ii) information about your
transactions with us, our affiliates, or others; (iii) information we receive
from a consumer reporting agency; and (iv) from visits to our Web sites.
BlackRock does not sell or disclose to nonaffiliated third parties any
nonpublic personal information about its Clients, except as permitted by law
or as is necessary to service Client accounts. These nonaffiliated third
parties are required to protect the confidentiality and security of this
information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to
provide you with information about other BlackRock products or services that
may be of interest to you. In addition, BlackRock restricts access to
nonpublic personal information about its Clients to those BlackRock employees
with a legitimate business need for the information. BlackRock maintains
physical, electronic and procedural safeguards that are designed to protect
the nonpublic personal information of its Clients, including procedures
relating to the proper storage and disposal of such information.
BLACKROCK U.S. GOVERNMENT FUND AUGUST 31, 2006
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of
the end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial
officer and principal accounting officer, or persons performing
similar functions. A copy of the code of ethics is available
without charge at www.blackrock.com.
Item 3 - Audit Committee Financial Expert - The registrant's board of
directors has determined that (i) the registrant has the following
audit committee financial experts serving on its audit committee and
(ii) each audit committee financial expert is independent: (1) Joe
Grills, (2) Robert S. Salomon, Jr., and (3) Stephen B. Swensrud
(retired as of December 31, 2005).
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending August 31, 2006 - $50,900
Fiscal Year Ending August 31, 2005 - $48,000
(b) Audit-Related Fees -
Fiscal Year Ending August 31, 2006 - $0
Fiscal Year Ending August 31, 2005 - $0
(c) Tax Fees - Fiscal Year Ending August 31, 2006 - $6,000
Fiscal Year Ending August 31, 2005 - $7,300
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending August 31, 2006 - $0
Fiscal Year Ending August 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services provided
to the registrant on an annual basis require specific pre-approval
by the Committee. The Committee also must approve other non-audit
services provided to the registrant and those non-audit services
provided to the registrant's affiliated service providers that
relate directly to the operations and the financial reporting of the
registrant. Certain of these non-audit services that the Committee
believes are a) consistent with the SEC's auditor independence rules
and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis
("general pre-approval"). However, such services will only be
deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending August 31, 2006 - $3,098,500
Fiscal Year Ending August 31, 2005 - $7,377,027
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's
independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,739,500, 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - The
registrant's Nominating Committee will consider nominees to the
Board recommended by shareholders when a vacancy becomes available.
Shareholders who wish to recommend a nominee should send nominations
which include biographical information and sets forth the
qualifications of the proposed nominee to the registrant's
Secretary. There have been no material changes to these procedures.
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
BlackRock U.S. Government Fund
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock U.S. Government Fund
Date: October 19, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock U.S. Government Fund
Date: October 19, 2006
By: /s/ Robert C. Doll, Jr.
-----------------------
Donald C. Burke,
Chief Financial Officer of
BlackRock U.S. Government Fund
Date: October 19, 2006