MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Quarterly Report
September 30, 1997
Investing in emerging market securities involves a number of risk
factors and special considerations, including restrictions on
foreign investments and on repatriation of capital invested in
emerging markets, currency fluctuations, and potential price
volatility and less liquidity of securities traded in emerging
markets. In addition, there may be less publicly available
information about the issuers of securities, and such issuers may
not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which US companies
are subject. Therefore, the Fund is designed as a long-term
investment for investors capable of assuming the risks of investing
in emerging markets. The Fund should be considered as a vehicle for
diversification and not as a complete investment program. Please
refer to the prospectus for details.
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.
<PAGE>
Merrill Lynch
Dragon Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH DRAGON FUND, INC.
Asset Allocation
As a Percentage* of
Net Assets as of
September 30, 1997
A map illustrating the following percentages:
India 0.0%**
Indonesia 3.6%
Singapore 6.9%
Malaysia 4.7%
Thailand 1.9%
China 7.5%
Hong Kong 65.0%
South Korea 1.9%
Philippines 3.4%
[FN]
*Total may not equal 100%.
**Holdings are less than 0.1%.
DEAR SHAREHOLDER
The quarter ended September 30, 1997 proved to be one of the most
difficult in recent years for the dragon stock markets. Turmoil in
the currency markets created the impetus for widespread share price
declines, as reflected in the 20.30% decline in the unmanaged Morgan
Stanley Far East Free (Ex-Japan and Ex-Taiwan) Index for the three-
month period ended September 30, 1997. Merrill Lynch Dragon Fund,
Inc.'s Class A, Class B, Class C and Class D Shares had total
returns of -16.76%, -16.92%, -16.96% and -16.81%, respectively, for
the same period. (Fund results shown do not reflect sales charges,
and would be lower if sales charges were included. Complete
performance information, including average annual total returns, can
be found on pages 4--6 of this report to shareholders).
<PAGE>
Portfolio Matters
There were two types of currency devaluations that took place in the
dragon countries during the September quarter. The first was a
devaluation driven by fundamental factors, as was the case in
Thailand. With a large current account deficit, a highly leveraged
property market, an increasing level of nonperforming loans at banks
because of their exposure to the property sector, and a large amount
of private sector foreign borrowing, Thailand could not support its
overvalued currency peg to the US dollar. The second type of
devaluation took place in the wake of the Thai baht devaluation
because investors feared that the negative fundamentals in Thailand
would spread to other dragon countries. This was the case in the
Philippines and Indonesia. In Malaysia, the currency devaluation was
initially caused by negative investor sentiment, but ultimately was
the result of deteriorating fundamentals.
However, no matter what the cause, the negative effects of currency
devaluations are the same. First, higher interest rates are needed
to support the currency until stability returns to the foreign
exchange market. Second, with higher interest rates sustained over a
period of several months, we expect that corporate earnings will be
downgraded through the rest of 1997 and possibly into the first
quarter of 1998. Third, lower corporate earnings, high interest
rates, and the decline in domestic demand associated with the
negative wealth effect of declining stock markets will probably
result in lower gross domestic product (GDP) growth.
In our view, economic recovery for most dragon countries will depend
on two factors: the policies pursued by governments, and the state
of their economies prior to the currency devaluations. Therefore,
our longer-term outlook is more optimistic for the Philippines and
Indonesia, whose governments are pursuing appropriate policies to
stabilize their currencies and whose economies are on a stronger
footing. In our view, Singapore is also likely to emerge more
quickly from the currency crisis, since the country has a strong
current account surplus and its banks are in strong financial
positions.
Recovery is likely to be more difficult for Malaysia and Thailand,
in our view. Although Thailand received a $15 billion aid package
from the International Monetary Fund to inject liquidity into its
financial system, the government will not take the tough steps
needed to get the economy back on track, in our opinion.
Furthermore, the present Thai government may not be able to stay in
power. In the case of Malaysia, the government took steps to
restrict share trading which, in our view, have set the country back
in its progress toward recognition as an international financial
center. Although these restrictions were subsequently removed, we
expect that it will take some time for foreign investors' confidence
to be restored in Malaysia. The government's current policies are
not addressing the problems of an overheating economy and property
market, and appear to stress strong GDP growth even though the
economy needs to slow down to contain inflationary pressures. The
Malaysian currency is at its lowest level relative to the US dollar
since 1973.
<PAGE>
The People's Republic of China and Hong Kong were not untouched by
the currency crisis. Hong Kong's currency market was under
speculative attack, which led to higher interbank interest rates.
Stock markets in both countries also declined because of a high
level of redemptions from mutual funds investing in Southeast Asia.
Hong Kong is the region's most liquid market with the shortest
settlement period.
Unlike other dragon countries, China is in an upturn in its business
cycle. Exports remain strong, and the economy is now being driven by
increased liquidity as disinflation has brought about lower interest
rates. Increasing liquidity in China should flow into Hong Kong.
Since the early 1990s, there has been a clear link between Chinese
business cycles and movements in the Hong Kong stock market. The
correlation bolsters the argument that China's economy is gradually
edging out US interest rates as the most important influence on the
Hong Kong stock market.
Economic problems also plague South Korea. High-level bankruptcies
are increasing, and likely to continue to do so in 1998. The South
Korean stock market has been supported by liquidity flows, but we
believe that these flows are unlikely to be sustained. The
government has yet to address the country's need for economic and
financial deregulation. In our view, South Korea's long-term
economic outlook will remain uncertain until substantial
restructuring takes place.
Investment Strategy
When the baht crisis spread to the other Southeast Asian countries,
we sold down our positions in Indonesia, the Philippines, Singapore
and Malaysia. We believe that these stock markets are likely to
continue to be weak over the next six months as investors "derate"
them in light of higher risk premiums. In the shorter term, these
stock markets are likely to continue to be negatively impacted by
the three primary effects of currency devaluation, as we have
discussed.
We sold most of our holdings in banks and financial institutions
because of rising interest rates and falling loan growth. We also
sold companies, which have high US dollar debt. In Singapore and
Malaysia, we sold companies that have significant exposure to the
real estate sector. Property prices had already been declining in
both countries before the currency crisis, and high interest rates
and the negative wealth effect will aggravate the situation. We have
held onto more defensive issues, such as consumer non-durables, and
companies with high net cash positions.
As of September 30, we were overweighted only in Hong Kong and
China. As of that date, we were underweighted in Malaysia
and the Philippines, and substantially underweighted in Singapore,
South Korea and Thailand. Our cash position stood at 4.1% of net
assets.
<PAGE>
In Conclusion
In the near term, we expect that we will raise the Fund's cash
position further and orient our investments even more defensively.
However, if currencies have stabilized by the end of 1997, we
believe that values will begin to appear in individual stocks in the
dragon countries. When this occurs, we expect to position the Fund
for a possible recovery in our markets in 1998. We foresee that our
strategy at that time will be driven more from a stock-specific, as
opposed to macroeconomic, perspective.
We thank you for your investment in Merrill Lynch Dragon Fund, Inc.,
and we look forward to reviewing our outlook and strategy with you
again in our upcoming annual report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Kara Tan Bhala)
Kara Tan Bhala
Vice President and Portfolio Manager
October 21, 1997
PERFORMANCE DATA
About Fund
Performance
Investors are able to purchase shares of the Fund through the
Merrill Lynch Select Pricing SM System, which offers four pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 5.25% and bear no ongoing distribution or account
maintenance fees. Class A Shares are available only to eligible
investors, as detailed in the Fund's prospectus. If you were a Class
A shareholder prior to October 21, 1994, your Class A Shares were
redesignated to Class D Shares on October 21, 1994. However, in the
case of certain eligible investors, the shares were simultaneously
exchanged for Class A Shares.
<PAGE>
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.75% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after approximately 8 years. (There is no initial
sales charge for automatic share conversions.)
* Class C Shares are subject to a distribution fee of 0.75% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
* Class D Shares incur a maximum initial sales charge of 5.25% and
an account maintenance fee of 0.25% (but no distribution fee).
None of the past results shown should be considered a representation
of future performance. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the ex-dividend date. Investment return and principal value of
shares will fluctuate so that shares, when redeemed, may be worth
more or less than their original cost. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<TABLE>
Performance
Summary--
Class A Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $17.43 $15.05 $0.241 $0.251 -10.82%
1995 15.05 15.99 -- 0.176 + 7.44
1996 15.99 18.09 0.071 -- +13.59
1/1/97--9/30/97 18.09 15.30 -- -- -15.42
----- ------
Total $0.312 Total $0.427
Cumulative total return as of 9/30/97: - 7.94%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charges; results would be lower if
sales charge was included.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <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
1994 18.74 15.03 0.241 0.122 -17.86
1995 15.03 15.98 -- 0.025 + 6.49
1996 15.98 17.89 0.071 -- +12.41
1/1/97--9/30/97 17.89 15.02 -- -- -16.04
------ ------
Total $0.318 Total $0.270
Cumulative total return as of 9/30/97: +55.99%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<TABLE>
Performance
Summary--
Class C Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $17.29 $14.92 $0.241 $0.229 -10.98%
1995 14.92 15.79 -- 0.091 + 6.46
1996 15.79 17.68 0.071 -- +12.43
1/1/97--9/30/97 17.68 14.84 -- -- -16.06
------ ------
Total $0.312 Total $0.320
Cumulative total return as of 9/30/97: -10.57%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class D Shares
<CAPTION>
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <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
1994 18.77 15.08 0.241 0.211 -17.24
1995 15.08 16.05 -- 0.136 + 7.35
1996 16.05 18.11 0.071 -- +13.29
1/1/97--9/30/97 18.11 15.29 -- -- -15.57
------ ------
Total $0.318 Total $0.609
Cumulative total return as of 9/30/97: +62.52%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charges; results would be lower if
sales charge was included.
</TABLE>
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month
9/30/97 6/30/97 9/30/96 % Change % Change
<S> <C> <C> <C> <C> <C>
ML Dragon Fund, Inc.--Class A Shares $15.30 $18.38 $17.10 -10.16%(1) -16.76%
ML Dragon Fund, Inc.--Class B Shares 15.02 18.08 16.96 -11.08(1) -16.92
ML Dragon Fund, Inc.--Class C Shares 14.84 17.87 16.76 -11.09(1) -16.96
ML Dragon Fund, Inc.--Class D Shares 15.29 18.38 17.14 -10.43(1) -16.81
ML Dragon Fund, Inc.--Class A Shares--Total Return -10.16(1) -16.76
ML Dragon Fund, Inc.--Class B Shares--Total Return -11.08(1) -16.92
ML Dragon Fund, Inc.--Class C Shares--Total Return -11.09(1) -16.96
ML Dragon Fund, Inc.--Class D Shares--Total Return -10.43(1) -16.81
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.071 per share capital
gains distributions.
</TABLE>
<PAGE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/97 -10.16% -14.88%
Inception (10/21/94) through 9/30/97 - 2.77 - 4.54
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/97 -11.08% -14.62%
Five Years Ended 9/30/97 + 9.26 + 9.26
Inception (5/29/92) through 9/30/97 + 8.68 + 8.68
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 9/30/97 -11.09% -11.97%
Inception (10/21/94) through 9/30/97 - 3.72 - 3.72
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 9/30/97 -10.43% -15.13%
Five Years Ended 9/30/97 +10.09 + 8.91
Inception (5/29/92) through 9/30/97 + 9.52 + 8.42
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
<TABLE>
SCHEDULE OF INVESTMENTS (in US dollars)
<CAPTION>
Shares Held/ Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
China Conglomerates 755,000 Beijing Enterprises Holdings Limited $ 1,230,014 $ 4,751,680 0.5%
6,166,000 China Merchants Holdings
International Co., Ltd. 6,389,771 14,263,556 1.5
3,592,000 China Resources Enterprise Ltd. 5,559,969 15,040,165 1.6
10,622,014 Guangdong Investments, Ltd. 7,545,724 11,187,570 1.2
1,425,000 Shanghai Industrial Holdings Ltd. 7,843,016 8,857,909 0.9
------------ ------------ ------
28,568,494 54,100,880 5.7
Infrastructure 441,800 New World Infrastructure, Ltd. 1,230,149 1,164,735 0.1
US$ 8,797,000 New World Infrastructure, Ltd.,
5% due 7/15/2001(b) 11,209,632 9,870,234 1.1
------------ ------------ ------
12,439,781 11,034,969 1.2
Real Estate 9,245,600 China Overseas Land & Investment Co. 4,654,022 5,824,800 0.6
Total Long-Term Investments in China 45,662,297 70,960,649 7.5
Hong Kong Banking 2,230,600 Dah Sing Financial Holdings Ltd. 13,255,654 9,368,635 1.0
7,183,000 Guoco Group, Ltd. 32,731,159 28,683,730 3.0
2,766,626 HSBC Holdings, Ltd. 40,563,814 92,602,240 9.9
------------ ------------ ------
86,550,627 130,654,605 13.9
<PAGE>
Conglomerates 7,246,000 Citic Pacific Ltd. 27,000,446 41,108,736 4.4
21,950,015 First Pacific Company Ltd. 24,909,838 21,984,055 2.3
9,329,000 Hutchison Whampoa, Ltd. 52,502,520 91,927,662 9.8
2,043,000 Swire Pacific Ltd. 'A' 14,461,424 15,643,286 1.7
7,980,000 Swire Pacific Ltd. 'B' 10,614,645 11,808,090 1.2
------------ ------------ ------
129,488,873 182,471,829 19.4
Insurance 24,157,000 National Mutual Asia, Ltd. 12,624,588 25,911,489 2.8
Publishing & 8,188,000 South China Morning
Broadcasting Post Holdings Ltd. 4,992,818 7,459,990 0.8
4,802,000 Television Broadcasts Ltd. 19,125,112 17,003,722 1.8
------------ ------------ ------
24,117,930 24,463,712 2.6
Real Estate 8,108,000 Cheung Kong Holdings Ltd. 48,829,447 91,159,990 9.7
5,516,514 New World Development Co., Ltd. 24,303,813 33,364,287 3.5
US$ 5,150,000 New World Development Co., Ltd.,
4.375% due 12/11/2000 (b) 5,822,455 6,746,500 0.7
6,119,100 Sun Hung Kai Properties, Ltd. 45,264,000 71,961,502 7.7
------------ ------------ ------
124,219,715 203,232,279 21.6
Utilities-- 21,470,198 Hong Kong and China Gas Company Ltd. 24,807,446 44,255,577 4.7
Electric & Gas
Total Long-Term Investments in
Hong Kong 401,809,179 610,989,491 65.0
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)
<CAPTION>
Shares Held/ Percent of
COUNTRIES Industries Face Amount Long-Term Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
India Finance 522 Housing Development Finance
Corp., Ltd. $ 51,177 $ 47,134 0.0%
Total Long-Term Investments in India 51,177 47,134 0.0
<PAGE>
Indonesia Banking 1,472,736 P.T. Bank International Indonesia
(Foreign) (Warrants) (a) 189,261 125,464 0.0
Conglomerates 7,735,000 P.T. Astra International (Foreign) 12,188,274 7,026,450 0.7
Food 4,647,550 P.T. Fiskar Agung Perkasa 5,477,321 2,767,243 0.3
Infrastructure 32,865,000 P.T. Citra Marga Nusaphala Persada
(Foreign) 14,433,923 10,035,114 1.1
Oil & Gas 87,000 Gulf Indonesia Resources, Ltd. 1,696,500 1,935,750 0.2
Telecommunications 240,500 P.T. Telekomunikasi Indonesia
(Series B) (ADR)* 6,793,351 5,381,187 0.6
Tobacco 2,965,500 P.T. Hanjaya Mandala Sampoerna
(Foreign) 1,703,085 6,112,099 0.7
Total Long-Term Investments
in Indonesia 42,481,715 33,383,307 3.6
Malaysia Banking 1,720,000 Malayan Banking BHD 8,203,909 8,645,082 0.9
5,035,333 Public Bank BHD (Foreign) 9,688,116 4,363,024 0.5
------------ ------------ ------
17,892,025 13,008,106 1.4
Conglomerates 3,370,880 Renong BHD 4,923,068 3,326,184 0.3
Construction 4,219,000 I.J.M. Corp. BHD 5,372,002 3,486,562 0.4
Food 1,409,700 Nestle Malaysia BHD 6,139,518 8,302,581 0.9
Leisure 4,225,000 Berjaya Sports ToTo BHD 10,746,895 12,116,096 1.3
Publishing & 1,793,000 Star Publications Malaysia BHD 6,160,202 4,146,623 0.4
Broadcasting
Total Long-Term Investments
in Malaysia 51,233,710 44,386,152 4.7
Philippines Conglomerates 1,015,583 Benpres Holdings Corp. (GDR)** 7,797,920 4,020,896 0.4
Construction 13,504,100 DMCI Holdings Inc. 4,260,106 1,089,040 0.1
Infrastructure 30,070,733 International Container Terminal
Services, Inc. (ICTSI) 7,713,352 6,261,062 0.7
Real Estate 12,810,987 Ayala Land, Inc. 'B' 10,878,228 6,292,787 0.7
Retail 53,264,170 SM Prime Holdings, Inc. 9,921,185 9,996,794 1.0
Utilities-- 1,351,993 Manila Electric Co. (MERALCO) 'B' 6,517,356 4,718,099 0.5
Electric & Gas
Total Long-Term Investments
in the Philippines 47,088,147 32,378,678 3.4
<PAGE>
Singapore Airlines 1,373,000 Singapore Airlines Ltd. (Foreign) 11,529,043 10,147,090 1.1
Automotive 59,000 Cycle & Carriage, Ltd. 407,313 356,933 0.0
Banking 1,720,000 Development Bank of Singapore
Ltd. (Foreign) 20,608,863 17,548,725 1.9
1,981,704 United Overseas Bank (Foreign) 14,572,348 14,645,687 1.6
------------ ------------ ------
35,181,211 32,194,412 3.5
Publishing & 685,400 Singapore Press Holdings Ltd.
Broadcasting (Foreign) 8,187,700 10,086,004 1.1
Real Estate 647,000 City Development Ltd. 5,521,951 4,189,209 0.4
3,053,000 DBS Land Ltd. 9,818,745 7,427,835 0.8
------------ ------------ ------
15,340,696 11,617,044 1.2
Total Long-Term Investments
in Singapore 70,645,963 64,401,483 6.9
South Korea Telecommunications 19,752 SK Telecom (c) 17,039,643 12,093,503 1.3
Utilities-- 254,740 Korean Electric & Power Corp. 9,586,623 5,663,989 0.6
Electric & Gas
Total Long-Term Investments
in South Korea 26,626,266 17,757,492 1.9
Thailand Banking US$ 6,911,000 Bangkok Bank Public Company Ltd.,
3.25% due 3/03/2004 (b) 8,195,207 3,973,825 0.4
Oil & Gas 1,014,500 PTT Exploration and Production
Public Co., Ltd. (Foreign) 9,964,256 13,489,658 1.5
Total Long-Term Investments
in Thailand 18,159,463 17,463,483 1.9
Total Long-Term Investments 703,757,917 891,767,869 94.9
Short-Term Investments
<PAGE>
United Commercial US$ 38,682,000 General Motors Acceptance Corp.,
States Paper*** 6.50% due 10/01/1997 38,682,000 38,682,000 4.1
Total Short-Term Investments 38,682,000 38,682,000 4.1
Total Investments $742,439,917 930,449,869 99.0
============
Unrealized Depreciation on Forward Foreign Exchange Contracts++ (217,273) (0.0)
Other Assets Less Liabilities 9,524,482 1.0
------------ ------
Net Assets $939,757,078 100.0%
============ ======
Net Asset Value: Class A--Based on net assets of $20,152,443 and
1,317,057 shares outstanding $ 15.30
============
Class B--Based on net assets of $687,282,490 and
45,769,591 shares outstanding $ 15.02
============
Class C--Based on net assets of $36,433,003 and
2,454,597 shares outstanding $ 14.84
============
Class D--Based on net assets of $195,889,142 and
12,809,724 shares outstanding $ 15.29
============
<FN>
*American Depositary Receipts (ADR).
**Global Depositary Receipts (GDR).
***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)Convertible security.
(c)Formerly known as Korea Mobile Telecommunications Corp.
++Forward foreign exchange contracts sold as of September 30, 1997
were as follows:
Expiration Unrealized
Foreign Currency Sold Date Depreciation
HK$ 373,901,000 September 1998 $ (217,273)
Total Unrealized Depreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$47,500,000) $ (217,273)
==========
</TABLE>
<PAGE>
PORTFOLIO INFORMATION
Investments
As of 9/30/97
Ten Largest Equity Holdings Percent of
Represented in the Portfolio Net Assets
HSBC Holdings, Ltd. 9.9%
Hutchison Whampoa, Ltd. 9.8
Cheung Kong Holdings Ltd. 9.7
Sun Hung Kai Properties, Ltd. 7.7
Hong Kong and China Gas Company Ltd. 4.7
Citic Pacific Ltd. 4.4
New World Development Co., Ltd. 3.5
Guoco Group, Ltd. 3.0
National Mutual Asia, Ltd. 2.8
First Pacific Company Ltd. 2.3
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Conglomerates 26.5%
Real Estate 24.1
Banking 19.2
Utilities--Electric & Gas 5.8
Publishing & Broadcasting 4.1
Infrastructure 3.0
Insurance 2.8
Telecommunications 1.9
Oil & Gas 1.7
Leisure 1.3
EQUITY PORTFOLIO CHANGES
For the Quarter Ended September 30, 1997
Additions
*Arab-Malaysia Merchant Bank BHD
*China Southern Airlines
Dah Sing Financial Holdings Ltd.
*Guangdong Brewery Holdings
Gulf Indonesia Resources, Ltd.
<PAGE>
Deletions
AMMB Holdings BHD
ASM Pacific Technology Ltd.
*Arab-Malaysia Merchant Bank BHD
*China Southern Airlines
Essar Steel Ltd.
Fraser & Neave Ltd.
*Guangdong Brewery Holdings
Hicom Holdings BHD
Malaysian Plantation BHD
Malaysian Resources Corporation BHD
Overseas Chinese Banking Corp. (Foreign)
P.T. Bank International Indonesia (Foreign)
P.T. Lippo Life Insurance (Foreign)
Philippine Commercial International Bank, Inc.
Ruam Pattana Fund II
San Miguel Corporation 'B'
Telekom Malaysia BHD
Tenaga Nasional BHD
United Engineers BHD
Wharf Holdings Ltd.
[FN]
*Added and deleted in the same quarter.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Donald Cecil, Director
Edward H. Meyer, Director
Charles C. Reilly, Director
Richard R. West, Director
Edward D. Zinbarg, 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 and Portfolio Manager
Gerald M. Richard, Treasurer
James W. Harshaw, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
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Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
