MERRILL
LYNCH
DRAGON
FUND, INC.
FUND LOGO
Annual Report December 31, 1993
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.
Merrill Lynch
Dragon Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH DRAGON FUND, INC.
Asset Allocation
As a Percentage
Of Net Assets
As of
December 31, 1993
IMAGE MATERIAL APPEAR HERE. SEE APPENDIX: GRAPHIC AND
IMAGE MATERIAL, ITEM 1.
DEAR SHAREHOLDER
During 1993, all of the stock markets in which Merrill Lynch Dragon Fund,
Inc. invests rose strongly, with share prices in most cases increasing
between 50%-100%. Economic fundamentals in most developing Asian economies
were very positive, coupled with relatively low interest rates. As a result,
the stock markets benefited from very strong liquidity inflows from both
domestic and foreign sources. Investment results for these stock markets
far exceeded investors' expectations, and many US and Japanese investors
directed their assets toward the greater opportunities offered by emerging
Asian stock markets.
<PAGE>
For the year ended December 31, 1993, the Hong Kong stock market was
the second-best performer among the markets in which the Fund invests,
appreciating 109.9% in US dollar terms, as measured by Morgan Stanley
Capital International. As noted in our last report to shareholders,
we had become concerned that an overheating economy in The People's
Republic of China would cause economic problems for Hong Kong. Following
the announcement of China's new austerity program designed to reduce the
amount of credit available to state-owned enterprises, and in anticipation
of the resulting slowdown in the Chinese and Hong Kong economies, we went
from a neutral to underweighted position in Hong Kong stocks. During the
latter half of 1993, however, investors ignored the deteriorating economic
fundamentals in China and Hong Kong-as well as the continued political
tensions between China and the United Kingdom regarding the transfer of
Hong Kong to China--as strong liquidity inflows from US and Japanese in-
vestors pushed share prices higher. Despite our underweighted exposure
in Hong Kong, it remains the Fund's largest country allocation.
Malaysia was the third-best performing stock market in 1993, rising
107.3% for the year in US dollar terms as measured by Morgan Stanley
Capital International. Good corporate earnings growth and declining
interest rates spurred the rally in Malaysian stocks, although later
in the year the market became more speculative and liquidity-driven.
However, despite the rapid expansion of price/earnings ratios, strong
earnings growth for many Malaysian companies support these higher
valuations to some degree. At the same time, the Malaysian government
has been able to control inflation despite strong economic growth. The
country's export growth is also strong, and industrial production has
been very impressive. As a result of the positive fundamentals, the Fund
was overweighted in Malaysia throughout 1993.
The Fund's third-largest country exposure is Singapore, where we have a
neutral market weighting. Singaporean stocks also appreciated during
the period: as measured by Morgan Stanley Capital International, Singaporean
stocks rose 97.1% in 1993 in US dollar terms. The Singaporean stock market
has benefited from an improving economy after a slowdown in economic growth
in 1992. News of strong growth in exports and the economy overall fueled
the stock market rally. We expect that the Singaporean economy is likely
to further benefit in 1994, as a stronger US economy should prompt further
increases in exports.
The Thai stock market also performed very well in 1993 after beginning the
year with relatively poor results. One year ago, higher wage levels squeezed
corporate profit margins and limited the outlook for earnings growth. In-
vestors have been anticipating improved corporate profits in Thailand, and
strong liquidity inflows led share prices higher in the latter half of the
year. Lower interest rates and a government commitment to liberalizing the
economy led to higher stock prices in Indonesia. Reduced interest expenses
and increased demand led to good earnings growth for many companies there,
further supporting stock prices.
<PAGE>
The Philippines provided the best performance among Asian stock markets in
1993. Morgan Stanley Capital International reported a 121.4% increase in
Philippine stocks in 1993, measured in US dollars. Investors were encouraged
that improved economic growth, coupled with the likelihood that the country's
power shortage will be solved, would improve the investment environment in
the Philippines. The Fund was overweighted in Philippine stocks throughout
1993.
The Korean stock market was the poorest performer among the developing Asian
markets during 1993, with a 29.1% increase as measured by Morgan Stanley
Capital International in US dollar terms. A change in government and new
regulations requiring greater disclosure of ownership of financial assets
made Korean stocks relatively less attractive to investors. Furthermore,
the country's export growth has been slowing.
Investment Strategy
As cash inflows continued into the Fund, we increased holdings in all
of the countries in which we invested during the December quarter. Most
significantly, we invested in warrants of several companies in Hong Kong
to participate in the ongoing stock market rally there. In Hong Kong
we also invested in shares of the hotel company Shangri-La Asia Ltd.
and Innovative International Holdings Ltd., a small manufacturing
company. Another notable increase in country exposure was in India
through the purchase of convertible securities of SCICI, Ltd., a
financial company. During the three-month period, we sold some of
the Fund's investments in Malaysian stocks whose valuations had
become somewhat overextended, in our view. We prefer to focus our
investments on companies such as Pacific Chemical, a new Malaysian
position, whose shares are selling at more reasonable valuations. We
continue to research investment opportunities in The People's Republic
of China.
Fiscal Year in Review
Throughout the fiscal year, the Fund was as close to being fully in-
vested in stocks as possible, which benefited total return for the
period. While underweighting Hong Kong moderated performance, overweight-
ing Malaysia and the Philippines enhanced results. Exceptionally strong
stock markets throughout the developing Asian economies during the year
are reflected in the +87.46% and +86.15% total returns for the Fund's
Class A and Class B Shares, respectively, for 1993.
In Conclusion
The performance of the "dragon" stock markets as a group in 1993 has
been astounding by any standards. The significant rise in share prices
is not likely to be repeated in 1994. Some correction and consolidation
are necessary in these stock markets if they are to appreciate further.
However, long-term fundamentals continue to look positive for the region
as the countries become more industrialized and increase the value added
in their economies. We believe that exports, consumer demand and in-
frastructure development will be the foundations of a high level of
economic growth for the "dragon" countries in the next decade.
<PAGE>
We thank you for your investment in Merrill Lynch Dragon Fund, Inc.,
and we look forward to continuing to serve your financial needs through-
out the Fund's new fiscal year and beyond.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Kara Tan Bhala)
Kara Tan Bhala
Vice President and Portfolio Manager
February 8, 1994
PERFORMANCE DATA
None of the past results shown should be considered a representation of
future performance. Investment return and principal value of Class A and
Class B Shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost.
GRAPHIC MATERIAL APPEARS HERE. SEE APPENDIX: GRAPHIC AND
IMAGE MATERIAL, ITEM 2.
Average Annual % Return Without % Return With
Total Return Sales Charge Sales Charge**
Class A Shares*
Year Ended 12/31/93 +87.46% +75.28%
Inception (5/29/92) through 12/31/93 +50.28 +44.07
[FN]
*Maximum sales charge is 6.5%, which became effective on September 15, 1993.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 12/31/93 +86.15% +82.15%
Inception (5/29/92) through 12/31/93 +49.15 +47.65
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0% after 4
years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
<TABLE>
<CAPTION>
Performance Net Asset Value Capital Gains
Summary-- Period Covered Beginning Ending Distributed Dividends Paid* % Change**
Class A Shares
<S> <C> <C> <C> <C> <C>
5/29/92-12/31/92 $10.00 $10.12 -- $0.080 + 2.02%
1993 10.12 18.77 $0.006 0.182 +87.46
------- -------
Total $0.006 Total $0.262
Cumulative total return as of 12/31/93: +91.25%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date, and do
not include sales charge; results would be lower if sales charge was included.
</TABLE>
<TABLE>
<CAPTION>
Performance Net Asset Value Capital Gains
Summary-- Period Covered Beginning Ending Distributed Dividends Paid* % Change**
Class B Shares
<S> <C> <C> <C> <C> <C>
5/29/92-12/31/92 $10.00 $10.13 -- $0.020 + 1.50%
1993 10.13 18.74 $0.006 0.103 +86.15
------- -------
Total $0.006 Total $0.123
Cumulative total return as of 12/31/93: +88.95%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date, and do
not reflect deduction of any sales charge; results would be lower if sales charge was deducted.
</TABLE>
<TABLE>
<CAPTION>
Recent 12 Month 3 Month
Performance 12/31/93 9/30/93 12/31/92 % Change % Change
Results*
<S> <C> <C> <C> <C> <C>
Class A Shares $18.77 $13.44 $10.12 +85.54%(1) +39.70%(1)
Class B Shares 18.74 13.38 10.13 +85.06 (1) +40.11 (1)
Class A Shares--Total Return +87.46 (2) +41.16 (2)
Class B Shares--Total Return +86.15 (3) +40.93 (3)
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction of any sales charges.
(1)Percent change includes reinvestment of $0.006 per share capital gains distributions.
(2)Percent change includes reinvestment of $0.182 per share ordinary income dividends and $0.006 per share capital gains
distributions.
(3)Percent change includes reinvestment of $0.103 per share ordinary income dividends and $0.006 per share capital gains
distributions.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Hong Kong
Apparel 16,900,000 Yue Yuen Industrial Holdings $ 3,678,253 $ 5,197,138 0.4%
Banking 131,600 Dao Heng Bank Group Ltd. 369,701 570,840 0.1
1,371,141 HSBC Holdings, Ltd. 9,671,550 20,417,094 1.5
1,164,800 Hang Seng Bank, Ltd. 6,114,856 11,387,078 0.9
------------ ------------ ---
16,156,107 32,375,012 2.5
Building & 1,259,500 Kumagai Gumi, Ltd. 1,406,751 1,810,236 0.1
Construction 5,000,000 Paul Y-ITC Construction Holdings Ltd. 1,817,723 1,569,986 0.1
17,400,000 UDL Holdings, Ltd. 3,981,773 3,694,937 0.3
------------ ------------ ---
7,206,247 7,075,159 0.5
Diversified 22,948,000 Guandong Investments, Ltd. 8,876,237 17,234,028 1.3
3,299,000 Hutchison Whampoa, Ltd. 7,966,690 16,445,876 1.3
789,472 Jardine Matheson Holdings Ltd. 6,480,846 8,228,991 0.6
6,800,000 Swire 'A' Peregrine (Warrants) (a)+++ 1,090,968 3,081,704 0.2
2,177,000 Swire Pacific Ltd. 'A' 10,201,012 19,591,027 1.5
------------ ------------ ---
34,615,753 64,581,626 4.9
Electrical Equipment 3,825,000 Johnson Electric Holdings Ltd. 7,098,888 9,806,422 0.8
Electronics 16,600,000 ASM Pacific Technology 5,454,485 8,812,637 0.7
Finance 2,632,000 Guoco Group, Ltd. 8,418,021 13,120,808 1.0
1,500,000 Peregrine Investment Holdings 3,269,819 3,690,276 0.3
5,000,000 Sun Hung Kai & Co. Ltd. 3,350,915 4,046,355 0.3
------------ ------------ ---
15,038,755 20,857,439 1.6
Food 5,233,200 Lam Soon (HK), Limited 4,188,961 4,302,838 0.3
Food Chains 14,384,000 Fairwood Holdings, Ltd. 6,450,162 6,006,526 0.5
Insurance 19,767,000 ++National Mutual Asia, Ltd. 7,969,425 18,684,333 1.4
3,936,000 ++National Mutual Asia, Ltd.
(Warrants) (a)+++ 563,540 2,280,668 0.2
------------ ------------ ---
8,532,965 20,965,001 1.6
Leisure 5,670,000 Hong Kong & Shanghai Hotels 4,644,068 10,939,143 0.8
2,300,000 Shangri-La Asia, Ltd.+++ 2,976,049 3,424,835 0.3
2,650,000 Television Broadcasts Ltd. 9,839,412 10,980,189 0.8
------------ ------------ ---
17,459,529 25,344,167 1.9
<PAGE>
Miscellaneous- 15,912,000 C.P. Pokphand Co., Ltd. 6,359,896 7,005,153 0.5
Consumer 12,342,000 Gold Lion Holdings Ltd. 4,865,134 8,310,035 0.7
11,450,000 M.C. Packaging (HK), Ltd. 5,643,217 6,004,467 0.5
------------ ------------ ---
16,868,247 21,319,655 1.7
Real Estate 7,940,000 Amoy Properties Ltd. 6,819,473 13,159,653 1.0
3,000,000 Amoy Properties Ltd. (Warrants) (a)+++ 1,004,519 2,369,545 0.2
2,423,000 Cheung Kong Holdings Ltd. 8,260,078 14,824,129 1.1
10,000,000 Great Eagle Holdings Co. 4,841,967 9,128,577 0.7
5,280,000 Hong Kong Land Holdings Ltd. 9,802,571 18,732,617 1.5
3,345,557 New World Development Co., Ltd. 7,953,643 17,760,953 1.4
1,250,000 New World Development Co., Ltd.
(Warrants) (a)+++ 1,030,075 3,657,905 0.3
2,410,100 Sun Hung Kai Properties Ltd. 9,663,004 22,156,817 1.7
------------ ------------ ---
49,375,330 101,790,196 7.9
Retail Stores 11,658,000 Giordano Holdings Ltd. 5,547,673 6,038,068 0.4
Telecommunications 9,950,000 ABC Communications Holdings Ltd. 2,390,343 5,024,602 0.4
12,312,000 Innovative International Holdings Ltd. 5,646,650 6,934,766 0.5
------------ ------------ ---
8,036,993 11,959,368 0.9
Utilities 1,975,200 China Light & Power Co., Ltd. 7,767,094 14,450,188 1.1
160,000 ++Consolidated Electric Power Inc.+++ 2,592,518 2,720,000 0.2
4,272,400 Hong Kong & China Gas Co. (The) 6,874,118 12,391,786 1.0
5,716,800 Hong Kong Telecommunications, Ltd. 7,803,114 12,065,757 0.9
------------ ------------ ---
25,036,844 41,627,731 3.2
Total Investments in Hong Kong 230,745,192 388,058,983 29.8
India Foreign Bonds $2,600,000 ++SCICI Ltd., 3.50% due 4/01/2004 2,699,375 3,464,500 0.2
Miscellaneous 12,000 Housing Development Finance 1,016,086 937,351 0.1
Total Investments in India 3,715,461 4,401,851 0.3
Indonesia Food 1,507,440 ++P.T. Mayorah Indah 3,509,779 8,678,226 0.7
Miscellaneous-Consumer 776,500 ++P.T. Modern Photo Film 5,119,000 7,799,953 0.6
Pharmaceuticals 663,000 P.T. Kalbe Farma 3,774,666 5,183,369 0.4
Real Estate 1,720,500 P.T. Duta Anggada Realty 4,050,619 7,581,450 0.6
Tobacco 2,170,000 P.T. Hanjaya Mandala Sampoerna 4,892,468 13,212,272 1.0
Total Investments in Indonesia 21,346,532 42,455,270 3.3
<PAGE>
Malaysia Automotive 4,875,000 Tan Chong Motor Holdings BHD 5,021,389 7,604,457 0.6
Banking 1,859,000 Arab-Malaysian Merchant Bank BHD 5,933,911 17,122,823 1.3
3,030,000 Malayan Banking BHD 7,136,396 21,381,616 1.6
2,700,000 Public Bank BHD 'Foreign' 2,361,656 6,279,851 0.5
------------ ------------ ---
15,431,963 44,784,290 3.4
Building & 1,266,000 Ekran BHD 4,942,249 7,993,315 0.6
Construction 1,712,500 George Kent Holdings BHD 2,197,862 4,324,977 0.3
2,215,000 I.J.M. Corp. BHD 4,774,407 8,802,414 0.7
4,671,000 Malayan Cement BHD 5,232,118 9,541,504 0.8
------------ ------------ ---
17,146,636 30,662,210 2.4
Conglomerates 2,570,000 Malaysian Resources Corp. BHD 5,580,056 6,633,798 0.5
9,000,000 Renong BHD 8,454,940 14,306,407 1.1
------------ ------------ ---
14,034,996 20,940,205 1.6
Consumer Products 1,360,000 Berjaya Singer BHD 3,026,424 3,586,258 0.3
1,500,000 Berjaya Singer TSR+++ 1,298,343 1,632,312 0.1
------------ ------------ ---
4,324,767 5,218,570 0.4
Finance 3,296,000 Affin Holdings BHD 4,696,934 6,120,705 0.5
Food 1,721,700 Nestle Malaysia BHD 7,333,320 10,870,529 0.8
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in US dollars)
<CAPTION>
Shares Held/ Value Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Malaysia Forest Products 1,465,000 Aokam Perdana (Ordinary) $ 6,236,221 $ 15,779,016 1.2%
(concluded) 1,100,000 Aokam Perdana TSR (Warrants) (a)+++ 3,472,786 11,643,454 0.9
580,000 Pacific Chemical 3,018,004 3,468,152 0.3
------------ ------------ ---
12,727,011 30,890,622 2.4
Leisure 1,000,000 Berjaya Sports TOTO BHD 2,482,327 2,766,945 0.2
3,059,250 Magnum Corp. BHD 4,365,007 9,089,693 0.7
4,000,000 Pernas International Hotels &
Properties BHD 3,815,457 6,090,994 0.5
2,599,000 Resorts World BHD 7,036,115 16,699,239 1.3
2,504,000 Tanjong PLC 7,760,037 15,809,842 1.2
------------ ------------ ---
25,458,943 50,456,713 3.9
<PAGE>
Oil & Gas Offshore 7,500,000 Promet BHD 5,754,101 10,752,089 0.8
Development
Property & Forest 3,694,000 Land & General BHD 7,170,230 13,308,004 1.0
Products
Real Estate 1,450,000 Hong Leong Properties BHD 2,965,612 3,042,711 0.2
Telecommunications 3,375,000 Leader Universal Cable BHD 7,763,214 17,423,398 1.3
2,890,000 Technology Resources Industries BHD+++ 5,596,725 15,134,262 1.2
1,611,000 Telekom Malaysia BHD 8,939,145 13,223,064 1.0
------------ ------------ ---
22,299,084 45,780,724 3.5
Tobacco 1,167,000 Rothmans of Pall Mall (Malaysia) BHD 6,320,033 11,269,081 0.9
Transportation 2,218,000 Malaysian International Shipping Co. BHD 6,043,232 8,237,697 0.6
Total Investments in Malaysia 156,728,251 299,938,607 23.0
Philippines
Beverages 2,352,400 San Miguel Corp. 'B' 9,778,846 21,678,138 1.7
International Trade 8,610,320 International Container Terminal 6,447,223 13,983,914 1.1
Telecommunications 42,380 Philippine Long Distance Telephone Co. 1,802,121 3,438,078 0.2
(ADR)*
Utilities-Electric 571,200 Manila Electric Co. (MERALCO) 'B' 3,557,443 10,319,124 0.8
Total Investments in the Philippines 21,585,633 49,419,254 3.8
Singapore
Airlines 1,040,000 Singapore Airlines 'Foreign' Ltd. 6,170,157 8,731,343 0.6
Automotive 1,722,000 Cycle & Carriage, Ltd. 7,118,254 9,102,612 0.7
Banking 920,000 Development Bank of Singapore Ltd. 7,785,618 10,412,935 0.8
1,366,866 OCBC Bank 'Foreign' 8,898,717 14,790,714 1.1
1,139,625 United Overseas Bank 8,026,670 11,126,936 0.9
------------ ------------ ---
24,711,005 36,330,585 2.8
Beverages 464,623 Fraser & Neave Ltd. (Warrants) (a)+++ 494,534 2,109,296 0.2
Conglomerates 1,308,000 ACMA Ltd. 8,068,496 10,411,940 0.8
Electronics 13,610,000 I.P.C. Corp.+++ 9,203,041 17,774,254 1.4
Marine/Offshore 2,612,500 Sembawang Maritime LMD 7,582,565 12,022,699 0.9
Oil Services $2,090,000 Sembawang Maritime LMD, 1.50% due
10/25/1998 1,325,470 3,119,403 0.3
------------ ------------ ---
8,908,035 15,142,102 1.2
<PAGE>
Publishing & 645,000 Singapore Press Holdings Ltd. 6,234,575 10,830,224 0.8
Broadcasting
Shipping 1,096,000 Sembawang Shipyard Ltd. 8,263,711 10,428,358 0.8
Steel 3,143,000 Natsteel Ltd. 8,554,420 10,945,771 0.8
Telecommunications 9,810,000 Goldtron, Ltd. 6,338,699 15,556,904 1.2
1,635,000 Goldtron, Ltd. (Warrants) (a)+++ 1,194,319 2,236,940 0.2
------------ ------------ ---
7,533,018 17,793,844 1.4
Total Investments in Singapore 95,259,246 149,600,329 11.5
South Korea
Automotive 21,403 Dong ah Tire Industries Co. 839,781 1,426,424 0.1
Retail Stores 87,000 Shinsegae Department Stores 3,155,863 5,562,136 0.4
13,920 Shinsegae Department Stores Co.
(New Shares)+++ 336,622 863,037 0.1
------------ ------------ ---
3,492,485 6,425,173 0.5
Utilities 5,362 Korea Mobile Telecommunications Corp. 979,459 2,861,040 0.2
246,000 Korean Electric & Power Corp. 6,197,512 6,675,009 0.5
------------ ------------ ---
7,176,971 9,536,049 0.7
Total Investments in South Korea 11,509,237 17,387,646 1.3
Taiwan
Closed-End Funds 343,300 The R.O.C. Taiwan 2,904,850 4,720,375 0.3
Food & Beverage 182,880 ++President Enterprises (ADR)* 3,119,745 4,846,320 0.4
Total Investments in Taiwan 6,024,595 9,566,695 0.7
Thailand
Banking 2,160,000 Bangkok Bank 7,125,428 21,320,799 1.7
4,390,000 Industrial Finance Corp. of Thailand 8,764,194 10,661,183 0.8
1,228,000 The Siam Commercial Bank, Ltd. 5,096,511 10,582,060 0.8
------------ ------------ ---
20,986,133 42,564,042 3.3
Building & 1,097,000 Christiani & Nielson 'Local' 7,169,983 14,351,665 1.1
Construction 329,100 Christiani & Nielson 'Local'
(Warrants) (a)+++ 647,325 644,536 0.0
886,000 Land & House Public Co. (b) 6,096,295 22,488,367 1.8
------------ ------------ ---
13,913,603 37,484,568 2.9
<PAGE>
Health & Personal Care 147,400 International Cosmetics Co. 4,652,742 6,327,865 0.4
Industrials 506,000 Thai Glass Industries Ltd. 4,552,964 6,025,225 0.5
Mutual Funds 12,600,000 Ruam Pattana Fund II 4,999,163 8,636,898 0.7
Publishing & 283,700 Post Publishing Public Co. Ltd. 2,672,649 2,778,104 0.2
Broadcasting
Telecommunications 71,000 International Engineering Co. Ltd. 1,479,971 1,524,011 0.1
210,000 International Engineering Co. Ltd.
'Local' 2,253,878 3,898,942 0.3
------------ ------------ ---
3,733,849 5,422,953 0.4
Total Investments in Thailand 55,511,103 109,239,655 8.4
Total Long-Term Investments 602,425,250 1,070,068,290 82.1
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Value Percent of
COUNTRIES Face Amount Short-Term Investments Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
United Commercial Paper** $ 10,000,000 Daimler-Benz North America Corp., 3.25%
States due 1/18/1994 $ 9,984,653 $ 9,984,653 0.8%
34,435,000 General Electric Capital Corp., 3.22%
due 1/03/1994 34,428,840 34,428,840 2.6
Total Short-Term Investments 44,413,493 44,413,493 3.4
Total Investments $646,838,743 1,114,481,783 85.5
============
Other Assets Less Liabilities 188,209,393 14.5
-------------- -----
Net Assets $1,302,691,176 100.0%
============== =====
<FN>
*American Depositary Receipt (ADR).
**Commercial Paper is traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
(a)Warrants entitle the Fund to purchase a predetermined number of
shares of Common Stock. The purchase price and number of shares are subject
to adjustment under certain conditions until the expiration date.
(b)Previously held as Land and Houses Co., Ltd. 'Foreign' and Land and Houses Co., Ltd. 'Local.'
+++Non-income producing security.
<PAGE>
++Restricted securities as to resale. The value of the Fund's investment in restricted
securities was approximately $48,474,000, representing 3.7% of net assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Consolidated Electric Power Inc. 11/29/93 $ 2,592,518 $ 2,720,000
National Mutual Asia, Ltd. 11/25/92-8/11/93 7,969,425 18,684,333
National Mutual Asia, Ltd. (Warrants) 12/18/92-3/09/93 563,540 2,280,668
P.T. Mayorah Indah 1/08/93-7/30/93 3,509,779 8,678,226
P.T. Modern Photo Film 6/26/92-8/26/93 5,119,000 7,799,953
President Enterprises (ADR) 7/01/93-8/24/93 3,119,745 4,846,320
SCICI Ltd., 3.50% due 4/01/2004 10/18/93-10/22/93 2,699,375 3,464,500
Total $25,573,382 $48,474,000
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of December 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$646,838,743) (Note 1a) $1,114,481,783
Foreign cash (Note 1c) 3,603,532
Receivables:
Capital shares sold $194,999,950
Dividends 1,425,206
Securities sold 1,032,380
Interest 18,446 197,475,982
------------ --------------
Deferred organization expenses (Note 1g) 58,995
Prepaid registration fees and other assets (Note 1g) 340,719
--------------
Total assets 1,315,961,011
--------------
Liabilities: Payables:
Securities purchased 6,026,383
Capital shares redeemed 5,175,460
Investment adviser (Note 2) 864,935
Distributor (Note 2) 709,836 12,776,614
------------
Accrued expenses and other liabilities 493,221
--------------
Total liabilities 13,269,835
--------------
<PAGE>
Net Assets: Net assets $1,302,691,176
==============
Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized $ 1,661,106
Consist of: Class B Shares of Common Stock, $0.10 par value, 100,000,000 shares authorized 5,287,601
Paid-in capital in excess of par 816,210,955
Accumulated distributions in excess of investment income--net (2,267,236)
Undistributed realized capital gains from investments and foreign currency
transactions--net 14,345,023
Unrealized appreciation on investments and foreign currency transactions--net 467,453,727
--------------
Net assets $1,302,691,176
==============
Net Asset
Value: Class A--Based on net assets of $311,848,005 and 16,611,057 shares outstanding $ 18.77
==============
Class B--Based on net assets of $990,843,171 and 52,876,010 shares outstanding $ 18.74
==============
<FN>
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Ten Months Ended December 31, 1993
<S> <S> <C> <C>
Investment Dividends (net of $1,251,984 foreign withholding tax) $ 11,613,371
Income --------------
(Notes Interest and discount earned 1,541,904
1e & 1f): Total income 13,155,275
--------------
Expenses: Investment advisory fees (Note 2) 5,988,153
Distribution and account maintenance fees--Class B (Note 2) 4,567,720
Custodian fees 1,022,611
Transfer agent fees--Class B (Note 2) 482,412
Account maintenance fee--Class A (Note 2) 355,108
Transfer agent fees--Class A (Note 2) 137,387
Registration fees (Note 1g) 136,528
Printing and shareholder reports 103,659
Accounting services (Note 2) 78,380
Professional fees 62,906
Directors' fees and expenses 26,703
Amortization of organization expenses (Note 1g) 14,389
Pricing fees 4,372
Other 7,031
--------------
Total expenses 12,987,359
--------------
Investment income--net 167,916
--------------
<PAGE>
Realized Realized gain (loss) from:
Unrealized Investments--net $ 22,520,082
Gain (Loss) Foreign currency transactions (163,100) 22,356,982
on Invest- ------------
ments & Change in unrealized appreciation/depreciation on:
Foreign Investments--net 424,153,653
Currency Foreign currency transactions (185,503) 423,968,150
Trans- ------------ --------------
actions--Net Net realized and unrealized gain on investments and foreign currency transactions 446,325,132
(Notes 1c,1f --------------
& 3): Net Increase in Net Assets Resulting from Operations $ 446,493,048
==============
<FN>
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION> For the Ten For the Period
Months Ended May 29,1992++
Increase (Decrease) in Net Assets: Dec. 31, 1993 to Feb 28,1993
<S> <S> <C> <C>
Operations: Investment income (loss)--net $ 167,916 $ (60,824)
Realized gain (loss) on investments and foreign currency transactions--net 22,356,982 (2,044,479)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net 423,968,150 43,485,577
-------------- ------------
Net increase in net assets resulting from operations 446,493,048 41,380,274
-------------- ------------
Dividends & Investment income--net:
Distributions Class A (145,883) --
to Share- Class B (22,033) --
holders (Note In excess of investment income--net:
1h): Class A (958,265) (593,674)
Class B (144,731) (509,742)
Realized gain on investments--net:
Class A (1,408,405) (4,334)
Class B (4,539,541) (15,200)
-------------- ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders (7,218,858) (1,122,950)
-------------- ------------
Capital Net increase in net assets derived from capital share transactions 386,806,540 436,253,122
Share Trans- -------------- ------------
actions
(Note 4):
Net Assets: Total increase in net assets 826,080,730 476,510,446
Beginning of period 476,610,446 100,000
-------------- ------------
End of period $1,302,691,176 $476,610,446
============== ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
For the For the For the For the
Ten Months Period Ten Months Period
The following per share data and ratios have been derived Ended May 29, 1992++ Ended May 29, 1992++
from information provided in the financial statements. Dec. 31, to Feb. 28, Dec. 31, to Feb. 28,
1993 1993 1993++++++ 1993++++++
Increase (Decrease) in Net Asset Value:
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 11.01 $ 10.00 $ 11.01 $ 10.00
Operating -------- -------- -------- --------
Performance: Investment income (loss)--net .07 .05 (.02) (.02)
Realized and unrealized gain on investments
and foreign currency transactions--net 7.88 1.04 7.86 1.05
-------- -------- -------- --------
Total from investment operations 7.95 1.09 7.84 1.03
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.01) -- --++++ --
In excess of investment income--net (.07) (.08) --++++ (.02)
Realized gain on investments--net (.11) --++++ (.11) --++++
-------- -------- -------- --------
Total dividends and distributions (.19) (.08) (.11) (.02)
-------- -------- -------- --------
Net asset value, end of period $ 18.77 $ 11.01 $ 18.74 $ 11.01
======== ======== ======== ========
<PAGE>
Total Based on net asset value per share 72.31%+++ 10.99%+++ 71.27%+++ 10.32%+++
Investment ======== ======== ======== ========
Return:**
Ratios to Expenses, excluding account maintenance
Average and distribution fees 1.34%* 1.48%* 1.35%* 1.49%*
Net Assets: ======== ======== ======== ========
Expenses 1.59%* 1.73%* 2.35%* 2.49%*
======== ======== ======== ========
Investment income (loss)--net .61%* .69%* (.15)%* (.08)%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $311,848 $111,180 $990,843 $365,430
Data: ======== ======== ======== ========
Portfolio turnover 16.62% 4.65% 16.62% 4.65%
======== ======== ======== ========
<FN>
++Commencement of Operations.
++++Amount was less than $.01 per share.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Dragon Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The shares of the Fund are divided
into Class A Shares and Class B Shares. Class A Shares are sold with
a front-end sales charge. Class B Shares may be subject to a contingent
deferred sales charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and conditions,
except that Class A Shares bear the expenses of the ongoing account
maintenance fee with respect to the Class A Shares and Class B Shares
bear the expenses of the ongoing account maintenance and distribution fees
with respect to the Class B Shares, and each class has exclusive voting
rights with respect to matters relating to their respective account
maintenance and distribution plans. The following is a summary of
significant accounting policies followed by the Fund.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the principal
market on which such securities are traded, as of the close of business
on the day the securities are being valued or, lacking any sales, at the
last available bid price. Securities traded in the over-the-counter market
are valued at the last available bid prices obtained from one or more
dealers in the over-the-counter market prior to the time of valuation.
Portfolio securities which are traded both in the over-the-counter market
and on a stock exchange are valued according to the broadest and most
representative market. Short-term securities with a remaining maturity
of sixty days or less are valued at amortized cost, which approximates
market. Options written by the Fund are valued at the last asked price
in the case of exchange-traded options or, in the case of options traded
in the over-the-counter market, the average of the last asked price as
obtained from one or more dealers. Options purchased by the Fund are
valued at the last bid price in the case of exchange-traded options or,
in the case of options traded in the over-the-counter market, the average
of the last bid price as obtained from two or more dealers unless there
is only one dealer, in which case that dealer's price is used. Other invest-
ments, including futures contracts and related options, are stated at market
value. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund.
(b) Repurchase agreements--The Fund invests in US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the underlying
securities, marks to market such securities and, if necessary, receives
additions to such securities daily to ensure that the contract is fully
collateralized.
(c) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are
the result of settling (realized) or valuing (unrealized) such transactions
expressed in foreign currencies into US dollars. Realized and unrealized
gains or losses from investments include the effects of foreign exchange
rates on investments.
The Fund is authorized to enter into forward foreign exchange contracts as
a hedge against either specific transactions or portfolio positions. Such
contracts are not entered on the Fund's records. However, the effect on
operations is recorded from the date the Fund enters into such contracts.
Premium or discount is amortized over the life of the contracts.
(d) Options--When the Fund sells an option, an amount equal to the premium
received by the Fund is reflected as an asset and an equivalent liability.
The amount of the liability is subsequently marked to market to reflect the
current value of the option written.
<PAGE>
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis
of the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent
of the premiums received or paid (or gain or loss to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(e) Income taxes--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
and to distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
NOTES TO FINANCIAL STATEMENTS (concluded)
(f) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend date, except that if the
ex-dividend date has passed, certain dividends from foreign securities are
recorded as soon as the Fund is informed of the ex-dividend date. Interest
income (including amortization of discount) is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on the
identified cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a straight-
line basis over a five-year period. Prepaid registration fees are
charged to expense as the related shares are issued.
(h) Dividends and distributions--Dividends and distributions paid
by the Fund are recorded on the ex-dividend dates. Dividends in the
amount of approximately $1,300,000 were paid due to the recognition
of taxable income relating to Passive Foreign Investment Companies.
(i) Reclassifications--Certain 1992 amounts have been reclassified to
conform to the 1993 presentations.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill
Lynch Asset Management ("MLAM"). MLAM is the name under which Merrill
Lynch Investment Management, Inc. ("MLIM") does business. MLIM is an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. The
Fund has also entered into a Distribution Agreement and Distribution
Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"),
a wholly-owned subsidiary of MLIM.
<PAGE>
Effective January 1, 1994, the investment advisory business of MLAM
reorganized from a corporation to a limited partnership. The general
partner of MLAM is Princeton Services, Inc., an indirect wholly-owned
subsidiary of Merrill Lynch & Co.
MLAM 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 of 1.0%, on an annual basis, of the average
daily value of the Fund's net assets. Certain of the states in which the
shares of the Fund are qualified for sale impose limitations on the
expenses of the Fund. The most restrictive annual expense limitation
requires that the Investment Adviser reimburse the Fund to the extent
the Fund's expenses (excluding interest, taxes, distribution fees,
brokerage fees and commissions, and extraordinary items) exceed 2.5% of
the Fund's first $30 million of average daily net assets, 2.0% of the next
$70 million of average daily net assets, and 1.5% of the average daily net
assets in excess thereof. No fee payment will be made to MLAM during any
fiscal year which will cause such expenses to exceed the expense limita-
tions at the time of such payment.
The Fund has adopted separate Plans of Distribution (the "Distribution
Plans") for Class A and Class B Shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940 pursuant to which MLFD receives from the
Fund at the end of each month (a) an account maintenance fee, at an annual
rate of 0.25% of the average daily net assets of the Fund's Class A Shares
in order to compensate the Distributor in connection with account
maintenance activities, and (b) an account maintenance fee of 0.25% and a
distribution fee of 0.75% of the average daily net assets of the Fund's
Class B Shares in order to compensate the Distributor and Merrill Lynch
for providing distribution and account maintenance services to the Fund.
As authorized by the Distribution Plans, the Distributor has entered into
an agreement with Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF&S"),
which provides for the compensation of MLPF&S in connection with account
maintenance activities for Class A Shares and for providing distribution-
related services to the Fund for Class B Shares. For the ten months ended
December 31, 1993, MLFD earned $355,108 and $4,567,720 for Class A and
Class B Shares, respectively, under the Distribution Plans, all of which
was paid to MLPF&S pursuant to the agreement.
For the ten months ended December 31, 1993, MLFD earned under-
writing discounts of $183,544, and MLPF&S earned dealer conces-
sions of $2,764,832 on sales of the Fund's Class A Shares.
For the ten months ended December 31, 1993, MLPF&S received
contingent deferred sales charges of $807,253 relating to trans-
actions in Class B Shares and $75,638 in commissions on the
execution of portfolio security transactions for the Fund during
the period.
<PAGE>
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, MLFD and/or Merrill Lynch &
Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the ten months ended December 31, 1993 were $325,713,579 and
$100,190,826, respectively.
Net realized and unrealized gains (losses) as of December 31, 1993
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $ 22,520,073 $467,643,040
Short-term investments 9 --
Foreign currency transactions (163,100) (189,313)
------------ ------------
Total $ 22,356,982 $467,453,727
============ ============
As of December 31, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $467,643,040, of which $468,702,774
related to appreciated securities and $1,059,734 related to depreciated
securities. At December 31, 1993, the aggregate cost of investments
for Federal income tax purposes was $646,838,743.
4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $386,806,540 for the ten months ended December 31, 1993 and
$436,253,122 for the period ended February 28, 1993.
Transactions in capital shares for Class A and Class B Shares were
as follows:
<PAGE>
Class A Shares for the Ten Months Dollar
Ended December 31, 1993 Shares Amount
Shares sold 7,846,115 $114,904,877
Shares issued to shareholders in
reinvestment of dividends and
distributions 120,851 2,113,683
---------- -----------
Total issued 7,966,966 117,018,560
Shares redeemed (1,451,683) (20,944,207)
---------- -----------
Net increase 6,515,283 $96,074,353
========== ===========
Class A Shares for the Period Dollar
May 29, 1992++ to February 28, 1993 Shares Amount
Shares sold 10,664,260 $107,804,104
Shares issued to shareholders in
reinvestment of dividends and
distributions 52,203 514,718
---------- ------------
Total issued 10,716,463 108,318,822
Shares redeemed (625,689) (6,360,726)
---------- ------------
Net increase 10,090,774 $101,958,096
========== ============
<FN>
++ Prior to May 29, 1992 (commencement of operations), the Fund issued 5,000
Class A Shares to MLAM for $50,000.
Class B Shares for the Ten Months Dollar
Ended December 31, 1993 Shares Amount
Shares sold 23,415,440 $343,265,805
Shares issued to shareholders in
reinvestment of dividends and
distributions 227,775 3,976,951
---------- ------------
Total issued 23,643,215 347,242,756
Shares redeemed (3,945,149) (56,510,569)
Net increase ---------- ------------
19,698,066 $290,732,187
========== ============
<PAGE>
Class B Shares for the Period Dollar
May 29, 1992++ to February 28, 1993 Shares Amount
Shares sold 34,279,325 $345,656,628
Shares issued to shareholders in
reinvestment of dividends and
distributions 47,212 465,987
---------- ------------
Total issued 34,326,537 346,122,615
Shares redeemed (1,153,593) (11,827,589)
Net increase ---------- ------------
33,172,944 $334,295,026
========== ============
<FN>
++ Prior to May 29, 1992 (commencement of operations), the Fund issued 5,000
Class A Shares to MLAM for $50,000.
5. Commitments:
At December 31, 1993, the Fund had entered into forward exchange con-
tracts under which it had agreed to buy various foreign currencies with
an approximate value of $4,029,000.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Dragon Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, in-
cluding the schedule of investments, of Merrill Lynch Dragon Fund, Inc.
as of December 31, 1993, the related statements of operations for the
ten-month period then ended, and changes in net assets and the financial
highlights for the ten-month period then ended and the period May 29, 1992
(commencement of operations) to February 28, 1993. These financial
statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and the financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
Our procedures included confirmation of securities owned at December 31,
1993 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
<PAGE>
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Dragon Fund, Inc. as of December 31, 1993, the
results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity
with generally accepted accounting principles.
Deloitte & Touche
Princeton, New Jersey
February 4, 1994
PORTFOLIO INFORMATION
For the Quarter Ended December 31, 1993
Additions Amoy Properties Ltd. (Warrants)
Berjaya Singer BHD
Berjaya Singer TSR
Berjaya Sports TOTO BHD
Christiani & Nielson 'Local' (Warrants)
Consolidated Electric Power Inc.
Dao Heng Bank Group Ltd.
Goldtron, Ltd. (Warrants)
Hong Leong Properties BHD
Housing Development Finance
Innovative International Holdings Ltd.
International Engineering Co. Ltd.
New World Development Co. Ltd. (Warrants)
Pacific Chemical
Paul Y-ITC Construction Holdings Ltd.
Peregrine Investment Holdings
P.T. Duta Anggada Realty
SCICI Ltd., 3.50% due 4/01/2004
Sembawang Maritime LMD, 1.50% due 10/25/1998
Shangri-La Asia, Ltd.
Shinsegae Department Stores Co. (New Shares)
Sun Hung Kai & Co. Ltd.
Swire 'A' Peregrine (Warrants)
Television Broadcasts Ltd.
Deletions Antah Holdings BHD
Applied International Holdings
Bank of East Asia (The)
Granite Industries BHD
Idris Hydraulic (Malaysia) BHD
Indian Opportunity Fund
Mandarin Oriental International
Perusahaan Sadur Timah Malaysia
Semi Tech Global Co., Ltd. (New Shares)
Sian Cement Co., Ltd. 'Foreign'
<PAGE>
</TABLE>
<TABLE>
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by
Merrill Lynch Dragon Fund, Inc. during the ten-month period ended
December 31, 1993:
<CAPTION>
Domestic Domestic
Qualifying Non-Qualifying Foreign Total Foreign Taxes Long-Term
Record Payable Ordinary Ordinary Source Ordinary Paid or Capital
Date Date Income Income Income Income Withheld Gains
<S> <C> <C> <C> <C> <C> <C> <C>
Class A Shares:
12/20/93 12/29/93 $0.007151 $0.094680 $0.079876 $0.181707 $0.023275 $0.005840
Class B Shares:
12/20/93 12/29/93 $0.004060 $0.053747 $0.045344 $0.103151 $0.023275 $0.005840
</TABLE>
The qualifying domestic ordinary income qualifies for the dividends
received deduction for corporations. All of the foreign taxes paid or
withheld represent taxes incurred by the Fund on dividends received by
the Fund from foreign sources. Foreign taxes paid or withheld should
be included in taxable income with an offsetting deduction from gross
income or as a credit for taxes paid to foreign governments. You should
consult your tax adviser regarding the appropriate treatment of foreign
taxes paid.
Please retain this information for your records.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Terry K. Glenn, Executive Vice President
Norman R. Harvey, Senior Vice President
Donald C. Burke, Vice President
Kara W. Y. Tan Bhala, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
APPENDIX: ITEM 1
<PAGE>
Assett Allocation as a Percentage of Net Assets as of December 30, 1993
A map illustrating the following percentages:
India 0.3%
Indonesia 3.3%
Singapore 11.5%
Malyasia 23.0%
Thailand 8.4%
Hong Kong 29.8%
South Korea 1.3%
Taiwan 0.7%
Philippines 3.8%
APPENDIX: ITEM 2
Total Return Based on a $10,000 Investment
A line graph decpicting the growth of an investment in the Fund's
Class A and Class B Shares compared to growth of an investment in
the Morgan Stanley Combined Far East Ex-Japan Free Index.
Beginning and ending values are:
5/29/92** 12/31/93
ML Dragon Fund, Inc.,++-- $ 9,350 $17,882
Class A Shares*
ML Dragon Fund, Inc.,++-- $ 10,000 $18,595
Class B Shares*
Morgan Stanley Combined Far $ 10,000 $20,317
East Ex-Japan Index++++
[FN]
*Assuming maximum sales charge, transaction costs and other operating
expenses, including advisory fees.
**Commencement of Operations.
++ML Dragon Fund, Inc. invests primarily (at least 65% of the
Fund's net assets) in developing Asia-Pacific equity and debt securities.
++++This unmanaged market capitalization-weighted Index is comprised of a
representative sampling of stocks of large--medium--and small--capitalization
companies in Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore
and Thailand and which are freely purchasable by foreign investors.
<PAGE>
