BLACKROCK FUNDS - Notes to Mutual Funds Financial Statements - 12-7-2007 by BACAX-Agreements


									Notes to Financial Statements                                                                        BlackRock Index Equity Portfolio

1. Significant Accounting Policies:
     BlackRock Index Equity Portfolio (the “Portfolio”) is part of BlackRock Funds SM (the “Fund”).The Fund is registered under
the Investment Company Act of 1940, as amended, as an open-end management investment company. Effective June 4, 2007, 
the Portfolio invests all of its assets in Master S&P 500 Index Series (the “Series”) of the Quantitative Master Series LLC, which
has the same investment objective and strategies as the Portfolio. Prior to June 4, 2007, the Portfolio invested all of its assets in 
The U.S. Large Company Series (the “Master”) of The DFA Investment Trust Company, which had a similar investment
objective and strategies as the Series.The value of the Portfolio’s investment in the Series reflects the Portfolio’s proportionate
interest in the net assets of the Series.The performance of the Portfolio is directly affected by the performance of the Series.The
financial statements of the Series as of December 31, 2006, including the Schedule of Investments, are included elsewhere in this 
report, as well as the unaudited Statement of Assets and Liabilities and Schedule of Investments as of September 30, 2007, and 
should be read in conjunction with the Portfolio’s financial statements.The Portfolio’s financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may require the use of management accruals and
estimates. Actual results may differ from these estimates.The percentage of the Series owned by the Portfolio at September 30, 
2007 was 25.7%.

      The Portfolio offers multiple classes of shares. Institutional and Service Shares are sold only to certain eligible investors.
Investor A Shares are sold with a front-end sales charge. Shares of Investor B and Investor C Shares may be subject to a
contingent deferred sales charge. All classes of shares have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Service, Investor A, Investor B and Investor C Shares bear certain expenses related to
the shareholder servicing of such shares, and Investor B and Investor C Shares also bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect to matters relating to its shareholder servicing
and distribution expenditures (except that Investor B shareholders may vote on certain changes to the Investor A distribution
plan). Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains and losses are
allocated daily to each class based on its relative net assets. The following is a summary of significant accounting policies
followed by the Portfolio.

     (a) Valuation of investments — The Portfolio records its investment in the Series at fair value. Valuation of securities held
by the Series is discussed in Note 1(a) of the Series’ Notes to Financial Statements, which are included elsewhere in this report.

     (b) Investment income and expenses — The Portfolio records daily its proportionate share of the Series’, and previously
the Master’s, income, expenses and realized and unrealized gains and losses. In addition, the Portfolio accrues its own
expenses. Other operating expenses incurred by the Fund are prorated to the Portfolio on the basis of relative net assets.

     (c) Investment transactions — Investment transactions in the Series are accounted for on a trade date basis.

     (d) Income taxes — It is the Portfolio’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 shareholders. Therefore, no federal
income tax provision is required.

     (e) Recent accounting pronouncements — In July 2006, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement
No. 109.” FIN 48 prescribes the minimum recognition threshold a tax position must meet in connection with accounting for
uncertainties in income tax positions taken or expected to be taken by an entity, including mutual funds, before being measured
and recognized in the financial statements. Adoption of FIN 48 is required for the last net asset value calculation in the first
required financial statement reporting period for fiscal years beginning after December 15, 2006. The impact on the Portfolio’s
financial statements, if any, is currently being assessed.

     In September 2006, Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), was
issued and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework 
for measuring fair value and expands disclosures about fair value measurements. At this time, management is evaluating the
implications of FAS 157 and its impact on the Portfolio’s financial statements, if any, has not been determined.

     In addition, in February 2007, FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“FAS 159”), which is effective for fiscal years beginning after November 15, 2007. 
Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity 
also elects to apply the provisions of FAS 157. FAS 159 permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. At this time, management is evaluating the implications of FAS
159 and its impact on the Portfolio’s financial statements, if any, has not been determined.
                     BLACKROCK INDEX EQUITY PORTFOLIO                                     SEPTEMBER 30, 2007                          13
Notes to Financial Statements (continued)                                                                BlackRock Index Equity Portfolio

2. Transactions with Affiliates:
      For the period October 1, 2006 to June 3, 2007, the Portfolio entered into an Administration Agreement with PFPC Inc. 
(“PFPC”), an indirect, wholly owned subsidiary of The PNC Financial Services Group, Inc. (“PNC”), and BlackRock Advisors,
LLC (“BlackRock”) (collectively, the “Administrator”), an indirect, wholly owned subsidiary of BlackRock, Inc. Effective June 4, 
2007, the Portfolio entered into an Administration Agreement with BlackRock and State Street Bank and Trust Company (“State
Street”). The Portfolio pays a monthly fee based upon the average daily value of net assets for the performance of
administrative services (other than investment advice and related portfolio activities) necessary to the operation of the
Portfolio. For such services, the Portfolio pays a monthly fee based upon the average daily net assets at the following annual
rates: .075% of the first $500 million of average daily net assets; .065% of average daily net assets in excess of $500 million but
not exceeding $1 billion; and .055% of average daily net assets in excess of $1 billion. In addition, each of the share classes is
charged an administration fee based upon the average daily net assets of each respective class at the following rates: .025% of
the first $500 million, .015% of the next $500 million and .005% of assets in excess of $1 billion. BlackRock contractually agreed
to waive or reimburse fees or expenses until February 1, 2008 in order to limit expenses. This agreement is reviewed annually by 
the Portfolio’s Board of Trustees. The current expense limitation as a percentage of net assets are as follows: .18% for
Institutional; .615% for Service; .785% for Investor A, and 1.24% for Investor B and Investor C. Merrill Lynch & Co., Inc. 
(“Merrill Lynch”) and PNC are principal owners of BlackRock, Inc.

      If in the following two years the operating expenses of a share class that previously received a waiver or reimbursement
from BlackRock and the Fund are less than the expense limit for that share class, the share class is required to repay BlackRock
and the Fund up to the amount of fees waived or expenses reimbursed under the agreement if: (1) the Portfolio of which the 
share class is a part has more than $50 million in assets, (2) BlackRock continues to be the Portfolio’s investment advisor and
(3) the Board of the Fund approved the payments to BlackRock at the previous quarterly meeting. 

      At September 30, 2007, the amounts subject to possible future reimbursement under the expense limitation agreement are 
as follows:
              Expiring                       Expiring                       Expiring                                Total Waivers
             January 31,                    January 31,                    January 31,                                Subject to
                2008                           2009                           2010                                  Reimbursement
             $1,120,125                     $ 131,162                      $ 87,300                                 $ 1,338,587

      Effective June 4, 2007, State Street became the custodian of the Portfolio. Previously, PFPC Trust Company (“PTC”), an
indirect, wholly owned subsidiary of PNC, served as custodian for the Portfolio. For these services, each custodian received a
custodian fee computed daily and paid monthly, based on a percentage of the average daily gross assets of the Portfolio. The
fee was paid at the following rates: 0.0073% of the first $250 million of average gross assets, 0.006% of the next $250 million of
average gross assets, 0.0056% of the next $250 million of average gross assets, 0.0048% of the next $250 million of average
gross assets, and 0.004% of average gross assets in excess of $1 billion; plus per transaction charges and other miscellaneous
fees incurred on behalf of the Portfolio.

      The Portfolio earned income on positive cash balances in demand deposit accounts that are maintained by PFPC on behalf
of the Portfolio. The Portfolio earned income in the amount of $1,616 for the year ended September 30, 2007. 

    The Portfolio has also entered into a Distribution Agreement and Distribution Plan with BlackRock Distributors, Inc.
(“BDI”). BDI is an affiliate of BlackRock, Inc.

     Pursuant to the Distribution Plan adopted by the Portfolio in accordance with Rule 12b-1 under the Investment Company
Act of 1940, the Portfolio pays the Distributor ongoing service and distribution fees. The fees are accrued daily and paid
monthly at annual rates based upon the average daily net assets of the shares as follows:
                                                                                                          Service           Distribution
                                                                                                            Fee                  Fee      
     Service                                                                                                 .15%                   —    
     Investor A                                                                                              .15%                   —    
     Investor B                                                                                              .15%                   .75%
     Investor C                                                                                              .15%                   .75%

    In addition, the Fund may pay brokers, dealers, financial institutions and industry professionals ( including PNC, Merrill
Lynch and their affiliates) fees for the provision of personal services to shareholders.

     Pursuant to the written agreements, Merrill Lynch and Hilliard Lyons, an indirect, wholly owned subsidiary of PNC,
provide the Portfolio with sub-accounting, recordkeeping, sub-transfer agency and other administrative services with respect to
sub-accounts they service. For these services, each receives an annual fee per shareholder account which will vary depending
on share class. For the year ended September 30, 2007, the Portfolio paid Merrill Lynch and Hilliard Lyons, $100,531 and $37,687, 
respectively, for these services.

     For the year ended September 30, 2007, BDI earned underwriting discounts and direct commissions and Merrill Lynch, 
Pierce, Fenner & Smith Incorporated, a wholly owned subsidiary of Merrill Lynch, and BDI earned dealer concessions on sales 
of the Portfolio’s Investor A Shares, which totaled $6,054.
14                                   BLACKROCK INDEX EQUITY PORTFOLIO                             SEPTEMBER 30, 2007     
Notes to Financial Statements (continued)                                                           BlackRock Index Equity Portfolio

      For the year ended September 30, 2007, affiliates received contingent deferred sales charges of $530, $95,657 and $5,514 
relating to transactions in Institutional, Investor B and Investor C Shares, respectively.

     BlackRock maintains a call center, which is responsible for providing certain shareholder services to the Portfolio, such as
responding to shareholder inquiries and processing transactions based upon instructions from shareholders with respect to the
subscription and redemption of Fund shares. During the year ended September 30, 2007, the following amounts have been 
accrued by the Portfolio to reimburse BlackRock for costs incurred running the call center, which are a component of the
transfer agent fees in the accompanying Statement of Operations.
                                                                                                                                       Call Center
            Institutional                                                                                                              $ 4,235
            Service                                                                                                                    $ 1,032
            Investor A                                                                                                                 $ 15,768
            Investor B                                                                                                                 $ 10,497
            Investor C                                                                                                                 $ 13,302

      PFPC is the Portfolio’s transfer agent.

      Certain officers and/or directors of the Fund are officers and/or directors of BlackRock, Inc. or its affiliates.

3. Capital Share Transactions:
     Net decrease in net assets derived from capital share transactions was $194,817,053 and $346,204,722 for the years ended
September 30, 2007 and September 30, 2006, respectively. 

      Transactions in capital shares for each class were as follows:
Institutional Shares for the Year Ended September 30, 2007                                                                    Shares                                      Amount     
Shares sold                                                                                                                 15,182,132                   $ 434,758,246 
Shares issued to shareholders in reinvestment of dividends                                                 

Total issued                                                                                                         15,238,344                             436,327,139 
Shares redeemed                                                                                            

Net decrease                                                                                                         (1,868,740)              
                                                                                                                                                         $ (52,548,078)                  

Institutional Shares for the Year Ended September 30, 2006                                                                    Shares                                      Amount     
Shares sold                                                                                                                    955,902                   $ 23,257,157 
Shares issued to shareholders in reinvestment of dividends                                                 

Total issued                                                                                                                 1,120,972                      27,321,485 
Shares redeemed                                                                                            

Net decrease                                                                                                                (6,709,989)   

Service Shares for the Year Ended September 30, 2007                                                                          Shares                                      Amount     
Shares sold                                                                                                                    689,177                   $                19,281,423 
Shares issued to shareholders in reinvestment of dividends                                                 

Total issued                                                                                                                   701,333                                    19,618,960 
Shares redeemed                                                                                            

Net decrease                                                                                                                  (537,152)   
                                                                                                                                                         $               (14,798,950)

Service Shares for the Year Ended September 30, 2006                                                                          Shares                                      Amount     
Shares sold                                                                                                                    845,168                   $                20,432,914 
Shares issued to shareholders in reinvestment of dividends                                                 

Total issued                                                                                                                   888,292                                    21,485,468 
Shares redeemed                                                                                            

Net decrease                                                                                                                (1,169,932)   
                                                                                                                                                         $               (27,867,132)

Investor A Shares for the Year Ended September 30, 2007                                                                       Shares                                      Amount     
Shares sold                                                                                                                  2,241,287                   $ 62,047,128 
Shares issued to shareholders in reinvestment of dividends                                                 

Total issued                                                                                                                 2,334,499                      64,633,161 
Shares redeemed                                                                                            

Net decrease                                                                                                                (1,554,175)   
                                                                                                                                                         $ (43,844,649)                  

Investor A Shares for the Year Ended September 30, 2006                                                                       Shares                                      Amount     
Shares sold                                                                                                                  2,091,839                   $ 50,941,404 
Shares issued to shareholders in reinvestment of dividends                              

Total issued                                                                                              2,265,928                     55,209,578 
Shares redeemed                                                                         

Net decrease                                                                                             (1,369,089)   
                                                                                                                                     $ (33,057,573)                 

Investor B Shares for the Year Ended September 30, 2007                                                    Shares                                    Amount     
Shares sold                                                                                                  28,652                  $      761,184 
Shares issued to shareholders in reinvestment of dividends                              

Total issued                                                                                                 36,183                         967,571 
Shares redeemed                                                                         

Net decrease                                                                                             (1,688,149)   
                                                                                                                                     $ (45,865,538)                 

Investor B Shares for the Year Ended September 30, 2006                                                    Shares                                    Amount     
Shares sold                                                                                                  84,414                  $ 1,998,703 
Shares issued to shareholders in reinvestment of dividends                              

Total issued                                                                                                105,495                     2,505,224 
Shares redeemed                                                                         

Net decrease                                                                                             (2,280,941)   
                                                                                                                                     $ (54,429,453)                 

15                                       BLACKROCK INDEX EQUITY PORTFOLIO     SEPTEMBER 30, 2007     
Notes to Financial Statements (concluded)                                                                 BlackRock Index Equity Portfolio
Investor C Shares for the Year Ended September 30, 2007                                                                                        Shares                                                          Amount      
Shares sold                                                                                                                                            $ 414,223 
Shares issued to shareholders in reinvestment of dividends                                                                    

Total issued                                                                                                                               30,478         834,781 
Shares redeemed                                                                                                               
                                                                                                                                       (1,425,591)      (38,594,619)

Net decrease                                                                                                                           (1,395,113)    $(37,759,838)                                                            

Investor C Shares for the Year Ended September 30, 2006                                                                                        Shares                                                          Amount      
Shares sold                                                                                                                                            $ 714,172 
Shares issued to shareholders in reinvestment of dividends                                                                    

Total issued                                                                                                                               56,435         1,356,829 
Shares redeemed                                                                                                               
                                                                                                                                       (2,813,536)      (66,955,549)

Net decrease                                                                                                                           (2,757,101)    $(65,598,720)                                                            

     The Portfolio charges a 2% redemption fee on the proceeds (calculated at market value) of a redemption (either by sale or
exchange) of Portfolio shares made within 30 days of purchase. The redemption fee is paid to the Portfolio and is intended to
offset the trading costs, market impact and other costs associated with short-term trading into and out of the Portfolio.

4. Distributions to Shareholders:
     The tax character of distributions paid during the fiscal years ended September 30, 2007 and September 30, 2006 was as 
                                                                                                            9/30/2007                                                         9/30/2006                             
Distributions paid from:                                                                                                 
Ordinary income                                                                                  
                                                                                                                         $ 17,551,033                                                                                  

Total taxable distributions                                                                                $9,424,997    $ 17,551,033                                                                                  

       As of September 30, 2007, the components of accumulated earnings on a tax basis were as follows:                                                                                                                        

Undistributed ordinary income — net                                                                                                                           $ 1,712,014  
Undistributed long-term capital gains — net                                                      

Total undistributed earnings — net                                                                                                                               1,712,014  
Cumulative losses — net                                                                                                                                         (193,983,076)*
Unrealized gains — net                                                                           

Total accumulated earnings — net                                                                                                                              $ 426,915,062                                            

*    As of the tax year end of November 30, 2006, the Portfolio had a net capital loss carryforward of $195,749,939, of which 
     $78,150,703 expires in 2010, $117,169,455 expires in 2011 and $429,781 expires in 2013. This amount will be available to offset
     like amounts of any future taxable gains.
**   The difference between book-basis and tax-basis net unrealized gains is attributable primarily to the tax deferral of income
     from the Master partnership and book/tax differences on contributed securities.

5. Short-Term Borrowings:
      The Portfolio, along with certain other funds managed by the Administrator and its affiliates, is a party to a $500,000,000
credit agreement with a group of lenders, which expires November 2007. The Portfolio may borrow under the credit agreement to
fund shareholder redemptions and for other lawful purposes other than for leverage. The Portfolio may borrow up to the
maximum amount allowable under the Portfolio’s current prospectus and statement of additional information, subject to various
other legal, regulatory or contractual limits. The Portfolio pays a commitment fee of .06% per annum based on the Portfolio’s pro
rata share of the unused portion of the credit agreement. Amounts borrowed under the credit agreement bear interest at a rate
equal to, at each fund’s election, the federal funds rate plus .35% or a base rate as defined in the credit agreement. The Portfolio
did not borrow under the credit agreement during the year ended September 30, 2007. 

6. Subsequent Event:
    On November 14, 2007, the Board of Trustees approved a change in the Portfolio’s fiscal year end from September 30 to 
December 31. 
16                                       BLACKROCK INDEX EQUITY PORTFOLIO                   SEPTEMBER 30, 2007     
Report of Independent Registered Public Accounting Firm                                           BlackRock Index Equity Portfolio

To the Board of Trustees and Shareholders of BlackRock Funds SM :
     We have audited the accompanying statement of assets and liabilities of BlackRock Index Equity Portfolio (the
“Portfolio”), one of the portfolios constituting BlackRock Funds SM (the “Fund”), as of September 30, 2007, and the related 
statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial highlights of the Portfolio for the year ended
September 30, 2003 were audited by other auditors whose report, dated November 26, 2003, expressed an unqualified opinion on 
those financial highlights.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the
financial position of BlackRock Index Equity Portfolio of BlackRock Funds SM as of September 30, 2007, the results of its 
operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the
financial highlights for each of the four years in the period then ended, in conformity with accounting principles generally
accepted in the United States of America.

Deloitte & Touche LLP 
Princeton, New Jersey
November 29, 2007 

Important Tax Information (Unaudited)
     All of the ordinary income distributions paid by BlackRock Index Equity Portfolio during the fiscal year ended
September 30, 2007 qualify for the dividends received deduction for corporations and consist entirely of qualified dividend 
income for individuals.

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