MERRILL LYNCH
DRAGON FUND, INC.
FUND LOGO
Quarterly Report
September 30, 1998
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.
Merrill Lynch
Dragon Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
MERRILL LYNCH DRAGON FUND, INC.
Map Depicting Asset Allocation As a Percentage* of Net Assets as of
September 30, 1998
INDIA 1.2%
INDONESIA 1.2%
SINGAPORE 11.1%
MALAYSIA 4.6%
THAILAND 9.2%
CHINA 3.2%
HONG KONG 34.2%
SOUTH KOREA 7.4%
TAIWAN 5.5%
PHILIPPINES 4.0%
[FN]
*Total may not equal 100%.
Merrill Lynch Dragon Fund, Inc., September 30, 1998
DEAR SHAREHOLDER
For the quarter ended September 30, 1998, Merrill Lynch Dragon Fund,
Inc.'s Class A, Class B, Class C and Class D Shares had total
investment returns of -5.96%, -6.30%, -6.23% and -5.97%,
respectively, compared to the -8.31% total return for the unmanaged
Morgan Stanley Combined Far East Free (Ex-Japan and Ex-Taiwan)
Index. (Fund results do not reflect sales charges, and would be
lower if sales charges were included. Complete performance
information can be found on pages 4 and 5 of this report to
shareholders.)
Investment Review
During the quarter ended September 30, 1998, there were unexpectedly
strong "contagion effects" from the Asian crisis that spread to
stock markets worldwide. First, the Japanese economy, which was
already in a slump, was further weakened by economic collapse in the
rest of Asia. Since Asia is at least one-third of Japan's export
market, an economic decline will have a significant negative impact
on Japanese exports. The reluctance and inability of the Japanese
authorities to deal with their own economic and banking problems
have resulted in a recession, which is harming the chances of a
recovery in the rest of Asia. Although Japan unveiled a bank bailout
package after the September quarter's close, it remains to be seen
whether the measures will be successful in solving the problems of
Japan's banks and ultimately providing much-needed stimulus to the
economy.
Second, deflation and falling demand in Asia have negatively
affected prices of nearly all commodities. This has led to slowing
growth in commodity-producing countries, which include most of Latin
America, Russia, Australia and Canada. The devaluation of the
Russian ruble was largely initiated by falling commodity prices,
which in turn caused deterioration in the Russian current account.
Investors are waiting to see if other economies, most notably The
People's Republic of China and Hong Kong, can avoid devaluing their
currencies. During the September quarter, investors appeared to
anticipate ongoing difficulties for emerging economies worldwide,
and global equities fell accordingly.
Fears of a severe credit crunch and capital market instability led
the US Federal Reserve Board to cut the Federal Funds rate recently
by a total of 50 basis points (0.50%). During the month of October,
this monetary policy easing resulted in stock market rallies
throughout the world, especially in Asia. On average, Asian stock
markets rose 30% during October.
The most significant events in Asia during the September quarter
were the intervention by the Hong Kong Monetary Authority (HKMA) in
the stock market and the imposition of capital controls in Malaysia.
These controls may limit the Fund's ability to repatriate proceeds
of its Malaysian investments. The Fund's investments in Malaysia may
not be available to meet redemptions. Also, we will not be able to
reallocate the Fund's current investments in Malaysia to other
investment opportunities outside Malaysia so long as the
restrictions remain in place (currently anticipated to be at least
until September 1999). This will affect the Fund's performance in
the upcoming quarters. As of September 30, 1998, approximately 4.6%
of the Fund's net assets was invested in Malaysia. It is possible
that Malaysia will impose additional restrictions, or that other
countries will impose similar (or other) restrictions. In these
circumstances, it is possible that the percentage of the Fund's
portfolio subject to currency controls may increase.
With the deteriorating global economic environment, deflation and
lack of political leadership worldwide, we chose to sell positions
in Hong Kong as the market rallied on news of the government
intervention in the equity market through significant purchases of
key domestic stocks. As of September 30, our Hong Kong exposure
stood at 34.2% of net assets, which is underweighted relative to the
unmanaged Morgan Stanley Combined Far East Free (Ex-Japan and Ex-
Taiwan) Index. During the quarter, we sold some of our investments
in the Philippines, since we are concerned about President Estrada's
questionable actions and policies. We also sold our City Development
Ltd. position in Singapore since we expect further deterioration in
property prices. With the purchase of Republic of Korea government
bonds - which are yielding 7.5 percentage points over US Treasury
securities of comparable maturity--our exposure to South Korea
increased to 7.4% from 4.7%. We also raised the Fund's short-term
investments from 12.4% of net assets at the beginning of the quarter
to 16.8%. We allowed our currency hedge for Hong Kong dollars to
expire on September 25.
Investment Outlook
The goal of the HKMA intervention in the stock market in mid-August
was to squeeze speculators that were using the so-called double-play
strategy. The HKMA believed that this speculation was adding
undesirable volatility to the stock and currency markets and was
also pushing interest rates to levels not supported by economic
fundamentals. When speculative investors use the double-play
strategy, they go short Hang Seng Index futures and stocks, and
simultaneously sell the Hong Kong dollar short. With the mechanism
that pegs the Hong Kong dollar to the US dollar, selling Hong Kong
dollars automatically results in higher interbank interest rates.
This, in turn, causes the Hang Seng Index to fall. Speculators took
advantage of the current low liquidity levels of the interbank
market to turn quick profits using this strategy. The HKMA also made
it more difficult to short index futures and to hold short stock and
currency positions. Measures were also introduced to increase the
liquidity of the interbank market. Although it is possible that many
long-term investors will be relieved by the lower volatility that
these measures should bring to the Hong Kong stock market, we
believe that investors in general may become more cautious about
establishing positions in Hong Kong. From a fundamental viewpoint,
the stock market is susceptible to renewed declines since asset
prices probably have not fully adjusted to the deflationary
environment in Hong Kong.
The government in The People's Republic of China has been attempting
to reflate the economy through interest rate cuts, which have lent
some support to the stock market. Further cuts may be forthcoming,
since real interest rates remain quite high, and the government has
finally realized that the country is now suffering from deflation,
as opposed to inflation. Its currency, the renminbi, is likely to
remain stable through the rest of the year, in our opinion, because
of the positive current account, large foreign exchange reserves,
and capital account controls on the currency.
Taiwan has been one of the better-performing stock markets in the
region. However, the external and domestic environments remain poor
and, in our view, the stock market is overvalued. We believe the
economy will slow sharply in the months ahead, and if US equity
prices resume their decline, investor sentiment relative to Taiwan
may deteriorate further. Taiwan's competitive position has eroded in
relation to Asian countries that have devalued their currencies, as
well as to China, which has been aggressively cutting export prices.
As a result, Taiwanese exports have fallen substantially.
In South Korea, monetary authorities and industrialists have been
slow in tackling the country's banking problems and in restructuring
the chaebols, or large conglomerates. Asset prices still have not
adjusted fully to the new economic environment, in our view. We
expect that labor unrest may increase in South Korea in the coming
months.
Capital controls in Malaysia are likely to hurt Singapore's economy
because of slowing trade, a decline in the financial services
industry, and fewer tourists. Singapore's stock market fell sharply
since the announcement of Malaysia's capital controls, and financial
firms have been especially hard-hit. However, we believe that
Singapore's financial and economic infrastructures remain strong and
are able to weather the economic dislocations of its neighbors.
There are rumors that Indonesia is examining the possibility of
instituting capital controls, although they are unlikely to hurt the
already damaged economy. It seems unlikely that President Habibie
will be able to stay in power for long. There is growing civil
unrest as the economy continues to worsen.
The Philippines' stock market finally succumbed to the Asian
financial collapse and declined sharply during the August quarter.
There are two reasons for this sharp correction. First, President
Estrada has not been pushing for financial and economic reforms.
Second, the economy has been negatively impacted by falling demand
from the rest of Asia, and exports have slowed considerably.
The Thai economy appears to be bottoming. If the monetary
authorities prove capable of solving the problems of the banking
system, the economy may recover by next year. However, we do not
foresee a sharp recovery, but a slow, shallow one.
Merrill Lynch Dragon Fund, Inc., September 30, 1998
India has been one of the more resilient economies during the Asian
financial turmoil. Although the Indian economy is not doing well, it
is performing better than other Asian economies. The Reserve Bank of
India has been loosening monetary policy recently, which has eased
the country's liquidity situation and provided some short-term
support to the stock market. However, the political situation is a
key variable in India, with an unstable coalition government and its
questionable commitment to financial reform. Although India's
relatively closed economy has not served the country well in the
past, at this time it is providing some insulation from the
devastating economic and financial effects in the rest of Asia.
In Conclusion
We expect to continue to follow a defensive investment strategy
through the balance of 1998. In our view, the primary problem in
Asia is the immense indebtedness of the private sector. Banks are in
poor shape and are not making loans, so lower interest rates may not
do much to stimulate Asian economies. For this reason, we believe
that it is crucial for Asian governments to solve their banking
problems before their economies can move forward again.
We thank you for your continued 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
Senior Vice President and
Portfolio Manager
November 10, 1998
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.
* 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 "Recent Performance
Results" and "Average Annual Total Return" 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>
Recent
Performance
Results*
<CAPTION>
12 Month 3 Month Since Inception
Total Return Total Return Total Return
<S> <C> <C> <C>
ML Dragon Fund, Inc. Class A Shares -52.30% -5.96% -56.09%
ML Dragon Fund, Inc. Class B Shares -52.82 -6.30 -26.40
ML Dragon Fund, Inc. Class C Shares -52.78 -6.23 -57.77
ML Dragon Fund, Inc. Class D Shares -52.34 -5.97 -22.54
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the ex-dividend date. The
Fund's inception periods areClass A Shares & Class C Shares, from
10/21/94 to 9/30/98 and Class B Shares & Class D Shares, from
5/29/92 to 9/30/98.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/98 -52.30% -54.81%
Inception (10/21/94) through 9/30/98 -18.84 -19.94
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/98 -52.82% -54.20%
Five Years Ended 9/30/98 -11.30 -11.30
Inception (5/29/92) through 9/30/98 - 4.72 - 4.72
[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 9/30/98 -52.78% -53.13%
Inception (10/21/94) through 9/30/98 -19.64 -19.64
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 9/30/98 -52.34% -54.84%
Five Years Ended 9/30/98 -10.58 -11.54
Inception (5/29/92) through 9/30/98 - 3.95 - 4.76
[FN]
*Maximum sales charge is 5.25%.
**Assuming maximum sales charge.
Merrill Lynch Dragon Fund, Inc., September 30, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Amount/ Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost Value Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
China Appliances 1,207,000 Guangdong Kelon Electrical Holdings
Company Limited (Class H) $ 1,239,261 $ 810,067 0.3%
Conglomerates 472,000 Shanghai Industrial Holdings Limited 1,731,322 944,244 0.3
Infrastructure US$ 1,302,000 New World Infrastructure Limited,
5% due 7/15/2001(a) 1,684,567 976,500 0.4
4,867,000 Zhejiang Expressway Co. Ltd. (Class H) 861,134 848,019 0.3
------------ ------------ ------
2,545,701 1,824,519 0.7
Mining 107,520 Yanzhou Coal Mining Co., Ltd. (ADR)* 1,693,440 927,360 0.3
Telecommunications 84,450 China Telecom (Hong Kong) Ltd.
(ADR)* (Class H) 3,016,723 2,533,500 0.9
Utilities-- 4,152,000 Beijing Datang Power Generation Co.
Electric & Ltd. (Class H) 2,010,079 991,378 0.4
Gas 88,800 Huaneng Power International,
Inc. (ADR)* 1,372,562 910,200 0.3
------------ ------------ ------
3,382,641 1,901,578 0.7
Total Long-Term Investments in China 13,609,088 8,941,268 3.2
Hong Kong Banking 772,867 HSBC Holdings, Ltd. 15,653,581 14,164,581 5.1
Conglomerates 3,546,000 Hutchison Whampoa Limited 25,532,851 18,672,793 6.7
4,715,000 Swire Pacific Ltd. 'B' 3,187,026 2,221,186 0.8
------------ ------------ ------
28,719,877 20,893,979 7.5
Electronics 1,100,000 Johnson Electric Holdings Limited 2,223,341 2,086,990 0.8
Infrastructure 907,000 Cheung Kong Infrastructure
Holdings Limited 2,674,080 1,966,649 0.7
Insurance 3,881,000 National Mutual Asia Limited 3,599,001 1,890,911 0.7
Publishing & 5,746,000 South China Morning Post
Broadcasting Holdings Ltd. 3,563,574 2,261,913 0.8
881,000 Television Broadcasts Ltd. 3,257,987 2,251,394 0.8
------------ ------------ ------
6,821,561 4,513,307 1.6
Real Estate 1,828,000 Cheung Kong Holdings Ltd. 8,537,375 8,469,954 3.0
796,599 Sun Hung Kai Properties, Ltd. 3,609,571 2,822,231 1.0
------------ ------------ ------
12,146,946 11,292,185 4.0
Telecommuni- 1,028,000 Hong Kong Telecommunications
cations Limited (ADR)* 19,210,408 19,660,500 7.1
Utilities-- 2,757,000 CLPHoldings, Ltd. 12,582,160 13,450,516 4.8
Electric & 4,205,817 Hong Kong and China Gas Company
Gas Limited 6,535,992 5,156,848 1.9
------------ ------------ ------
19,118,152 18,607,364 6.7
Total Long-Term Investments
in Hong Kong 110,166,947 95,076,466 34.2
India Finance 47 Housing Development Finance
Corp., Ltd. 4,608 2,682 0.0
Telecommunications 287,000 Mahanagar Telephone Nigam Ltd. (GDR)** 3,431,946 3,408,125 1.2
Total Long-Term Investments in India 3,436,554 3,410,807 1.2
Indonesia Oil & Gas 404,300 Gulf Indonesia Resources, Ltd. (ADR)* 8,334,119 3,360,744 1.2
Producers
Total Long-Term Investments in
Indonesia 8,334,119 3,360,744 1.2
Malaysia Consumer Products 1,230,000 Amway (Malaysia) Holdings BHD 1,994,644 1,958,289 0.7
Food 1,296,700 Nestle Malaysia BHD 5,698,097 4,640,821 1.7
Gaming/Leisure 1,747,000 Berjaya Sports ToTo BHD 5,342,419 1,379,211 0.5
Publishing & 2,643,000 Star Publications Malaysia BHD 7,556,692 2,851,658 1.0
Broadcasting
Utilities-- 2,444,000 YTL Power International BHD 2,233,582 1,865,158 0.7
Electric &
Gas
Total Long-Term Investments
in Malaysia 22,825,434 12,695,137 4.6
Philippines Conglomerates 20,709,320 Benpres Holdings Corporation 6,203,476 1,333,014 0.5
Infrastructure 5,560,950 International Container Terminal
Services, Inc. (ICTSI) 513,912 191,757 0.0
Real Estate 11,123,184 Ayala Land, Inc. 'B' 8,578,588 1,636,514 0.6
Retail 48,797,170 SM Prime Holdings, Inc. 9,207,130 6,057,580 2.2
Utilities-- 1,062,893 Manila Electric Co. (MERALCO) 'B' 5,894,132 2,040,266 0.7
Electric &
Gas
Total Long-Term Investments in
the Philippines 30,397,238 11,259,131 4.0
Singapore Airlines 1,214,000 Singapore Airlines Ltd. (Foreign) 10,644,242 6,672,311 2.4
Banking 762,000 Development Bank of Singapore Ltd.
(Foreign) 8,585,372 3,078,788 1.1
Electronics 1,011,000 Elec & Eltek International
Holdings Limited 5,916,473 5,014,560 1.8
2,108,000 Natsteel Electronics Ltd. 4,044,964 4,634,343 1.7
------------ ------------ ------
9,961,437 9,648,903 3.5
Publishing & 936,486 Singapore Press Holdings Ltd.
Broadcasting (Foreign) 9,459,224 7,790,139 2.8
Telecommunications 2,267,000 Singapore Telecommunications Limited 3,462,746 3,798,538 1.3
Total Long-Term Investments in
Singapore 42,113,021 30,988,679 11.1
South Banking 971,294 Kookmin Bank 4,721,624 2,364,403 0.9
Korea
Electronics 118,488 Samsung Display Devices Co., Ltd. 4,065,824 2,773,396 1.0
63,459 Samsung Electronics Co., Ltd. 2,526,097 1,736,725 0.6
------------ ------------ ------
6,591,921 4,510,121 1.6
Sovereign US$ 9,453,000 Republic of Korea, 8.875% due
Government 4/15/2008 7,435,675 8,120,855 2.9
Obligations
Utilities-- 408,890 Korea Electric Power Corporation 4,827,926 5,683,527 2.0
Electric &
Gas
Total Long-Term Investments in
South Korea 23,577,146 20,678,906 7.4
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Percent of
COUNTRIES Industries Shares Held Long-Term Investments Cost Value Net Assets
<S> <S> <C> <S> <C> <C> <C>
Taiwan Electronics 225,664 Advanced Semiconductor Engineering,
Inc. (GDR)** $ 4,058,625 $ 2,053,542 0.7%
707,000 Compeq Manufacturing Co., Ltd. 4,809,674 4,134,503 1.5
903,000 Hon Hai Precision Industry 4,644,877 4,039,737 1.5
268,105 Taiwan Semiconductor Manufacturing
Company Ltd. (TSMC)(ADR)* 4,809,614 3,284,286 1.2
------------ ------------ ------
18,322,790 13,512,068 4.9
Insurance 157,500 Fubon Insurance Co., Ltd. (GDR)** 2,257,875 1,642,725 0.6
Total Long-Term Investments in Taiwan 20,580,665 15,154,793 5.5
Thailand Banking 1,525,400 Bangkok Bank Public Company Limited 3,692,805 1,448,898 0.5
1,542,000 Thai Farmers Bank Public Company
Limited 2,420,679 1,035,030 0.4
------------ ------------ ------
6,113,484 2,483,928 0.9
Oil & Gas 1,001,500 PTT Exploration and Production Public
Co. Ltd. (Foreign) 10,315,952 8,827,812 3.2
Publishing & 1,013,900 BEC World Public Company Limited
Broadcasting (Foreign) 4,725,097 4,956,502 1.8
Telecommunications 622,600 Advanced Info Service Public Company
Limited (Foreign) 3,323,448 3,564,022 1.3
Utilities-- 2,369,800 Electricity Generating Public Company
Electric & Limited (Foreign) 3,901,093 5,672,394 2.0
Gas
Total Long-Term Investments
in Thailand 28,379,074 25,504,658 9.2
Total Long-Term Investments 303,419,286 227,070,589 81.6
<CAPTION>
Face
Amount Short-Term Investments
<S> <S> <S> <C> <S> <C> <C> <C>
United Commercial US$ 7,000,000 Edison Asset Securitization LLC,
States Paper*** 5.53% due 10/01/1998 7,000,000 7,000,000 2.5
8,150,000 General Motors Acceptance Corp.,
5.88% due 10/01/1998 8,150,000 8,150,000 2.9
8,000,000 Lexington Parker Inc., 5.56% due
10/07/1998 7,992,587 7,992,587 2.9
5,000,000 Republic Industries, Inc., 5.52%
due 10/19/1998 4,986,200 4,986,200 1.8
5,000,000 Thames Asset Global Securitization
Inc., 5.60% due 10/13/1998 4,990,667 4,990,667 1.8
6,000,000 Variable Funding Capital Corp., 5.55%
due 10/08/1998 5,993,525 5,993,525 2.2
------------ ------------ ------
39,112,979 39,112,979 14.1
US Government 7,528,000 Federal Home Loan Mortgage
Agency Corporation, 5.44% due 10/14/1998 7,513,211 7,513,211 2.7
Obligations***
Total Short-Term Investments 46,626,190 46,626,190 16.8
Total Investments $350,045,476 273,696,779 98.4
============
Other Assets Less Liabilities 4,343,291 1.6
------------ ------
Net Assets $278,040,070 100.0%
============ ======
Net Asset Value: Class A--Based on net assets of $13,337,785
and 2,222,114 shares outstanding $ 6.00
============
Class B--Based on net assets of $192,837,910
and 33,224,880 shares outstanding $ 5.80
============
Class C--Based on net assets of $14,196,475
and 2,482,222 shares outstanding $ 5.72
============
Class D--Based on net assets of $57,667,900
and 9,632,877 shares outstanding $ 5.99
============
<FN>
*American Depositary Receipts (ADR).
**Global Depositary Receipts (GDR).
***Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis. The interest rates shown reflect the
rates paid at the time of purchase by the Fund.
(a)Convertible security.
</TABLE>
PORTFOLIO INFORMATION
Investments
As of 9/30/98
Ten Largest Equity Holdings Percent of
Represented in the Portfolio Net Assets
Hong Kong Telecommunications Limited (ADR) 7.1%
Hutchison Whampoa Limited 6.7
HSBC Holdings, Ltd. 5.1
CLP Holdings, Ltd. 4.8
PTT Exploration and Production Public Co. Ltd.
(Foreign) 3.2
Cheung Kong Holdings Ltd. 3.0
Singapore Press Holdings Ltd. (Foreign) 2.8
Singapore Airlines Ltd. (Foreign) 2.4
SM Prime Holdings, Inc. 2.2
Korea Electric Power Corporation 2.0
Ten Largest Industries Percent of
Represented in the Portfolio Net Assets
Utilities--Electric & Gas 12.8%
Telecommunications 11.8
Electronics 10.8
Conglomerates 8.3
Banking 8.0
Publishing & Broadcasting 7.2
Real Estate 4.6
Oil & Gas 3.2
Sovereign Government Obligations 2.9
Airlines 2.4
Merrill Lynch Dragon Fund, Inc., September 30, 1998
EQUITY PORTFOLIO CHANGES
For the Quarter Ended September 30, 1998
Additions
Benpres Holdings Corporation
China Telecom (Hong Kong) Ltd. (ADR)(Class H)
Johnson Electric Holdings Limited
Singapore Telecommunications Limited
Deletions
Benpres Holdings Corporation (GDR)
China Telecom (Hong Kong) Limited
City Development Ltd.
Creative Technology Ltd.
Genting BHD
New World Development Co., Ltd.
Public Bank BHD (Foreign)
Resorts World BHD
Sime Darby BHD
Telekom Malaysia BHD
United Overseas Bank (Foreign)
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
Kara W.Y. Tan Bhala, Senior Vice President and
Portfolio Manager
Donald C. Burke, Vice President
Gerald M. Richard, Treasurer
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
