tmf-ncsrs.htm

N-CSRS 1 tmf-ncsrs.htm THE MERGER FUND SEMIANNUAL REPORT 6-30-12 tmf-ncsrs.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-3445

The Merger Fund

(Exact name of registrant as specified in charter)

100 Summit Lake Drive

Valhalla, New York 10595

(Address of principal executive offices) (Zip code)

Roy Behren and Michael T. Shannon

100 Summit Lake Drive

Valhalla, New York 10595

(Name and address of agent for service)

1-800-343-8959

Registrant's telephone number, including area code

Date of fiscal year end: December 31

Date of reporting period: June 30, 2012

Item 1. Reports to Stockholders.

	THE
	MERGER
	FUND®

SEMI-ANNUAL REPORT

JUNE 30, 2012

Chart 1	Chart 2

PORTFOLIO COMPOSITION	PORTFOLIO COMPOSITION
By Type of Deal*	By Type of Buyer*

Chart 3

PORTFOLIO COMPOSITION

By Deal Terms*

* Data expressed as a percentage of long common stock, corporate bonds and swap contract positions as of June 30, 2012.

Chart 4

PORTFOLIO COMPOSITION

By Sector*

Chart 5

PORTFOLIO COMPOSITION

By Region*

* Data expressed as a percentage of long common stock, corporate bonds and swap contract positions as of June 30, 2012.

The Global Industry Classification Standard (GICS®) was developed by and/or is the exclusive property of MSCI, Inc. and Standard & Poor Financial Services LLC (“S&P”). GICS is a service mark of MSCI and S&P and has been licensed for use by U.S. Bancorp Fund Services, LLC.

Chart 6

GLOBAL MERGER ACTIVITY

Quarterly volume of announced global mergers

and acquisitions January 2002 – June 2012

Source: Bloomberg, Global Financial Advisory Mergers & Acquisitions Rankings first half 2012

The Merger Fund

EXPENSE EXAMPLE

June 30, 2012

(Unaudited)

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs as described below and (2) ongoing costs, including management fees; distribution and/or service fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 for the period 1/1/12 – 6/30/12.

Actual Expenses

The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period. Although the Fund charges no sales load or transaction fees, you will be assessed transaction-related fees for outgoing wire transfers, returned checks and stop-payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Fund’s transfer agent. If you request that a redemption be made by wire transfer, a $15.00 fee will be charged by the Fund’s transfer agent. IRAs will be charged a $15.00 annual maintenance fee. To the extent the Fund invests in shares of other investment companies as part of its investment strategy, you will indirectly bear your proportionate share of any fees and expenses charged by the underlying funds in which the Fund invests in addition to the expenses of the Fund. Actual expenses of the underlying funds are expected to vary among the various underlying funds. These expenses are not included in the example below. The example below includes, but is not limited to, management fees, shareholder servicing fees, fund accounting, custody and transfer agent fees. However, the example below does not include portfolio trading commissions and related expenses, and other extraordinary expenses as determined under generally accepted accounting principles.

Hypothetical Example for Comparison Purposes

The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

	Beginning Account	Ending Account	Expenses Paid During
	Value 1/1/12	Value 6/30/12	Period 1/1/12 – 6/30/12*
Actual + (1)	$1,000.00	$1,011.50	$9.65
Hypothetical ++ (2)	$1,000.00	$1,015.27	$9.67

+	Excluding dividends on securities sold short, borrowing expense on securities sold short and interest expense, your actual cost of investment in the Fund would be $6.45.

++	Excluding dividends on securities sold short, borrowing expense on securities sold short and interest expense, your hypothetical cost of investment in the Fund would be $6.47.

*	Expenses are equal to the Fund’s annualized expense ratio of 1.93%, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period).

(1)	Ending account values and expenses paid during the period based on a 1.15% return. This actual return is net of expenses.

(2)	Ending account values and expenses paid during period based on a 5.00% annual return before expenses.

The Merger Fund

SCHEDULE OF INVESTMENTS

June 30, 2012

(Unaudited)

Shares			Value
COMMON STOCKS — 69.27%
		AEROSPACE & DEFENSE — 7.27%
	2,750,641	Goodrich Corporation (h)	$	349,056,343
		AGRICULTURAL PRODUCTS — 3.83%
	11,596,600	Viterra, Inc. (b)(g)		183,955,496
		ALTERNATIVE CARRIERS — 0.96%
	525,500	AboveNet, Inc. (a)		44,142,000
	169,100	Hughes Telematics, Inc. (a)		2,020,745
				46,162,745
		APPAREL RETAIL — 1.71%
	2,140,350	Collective Brands, Inc. (a)		45,846,297
	1,334,600	The Gap, Inc. (f)		36,514,656
				82,360,953
		AUTOMOTIVE RETAIL — 0.02%
	91,500	Pep Boys — Manny, Moe & Jack (a)(f)		905,850
		BIOTECHNOLOGY — 0.95%
	1,614,300	Amylin Pharmaceuticals, Inc. (a)(f)		45,571,689
		BREWERS — 0.48%
	552,700	Molson Coors Brewing Company (f)		22,997,847
		BROADCASTING & CABLE TV — 1.42%
	515,000	Astral Media, Inc. (b)(f)		24,705,432
	2,434,700	Liberty Interactive Corp. (a)(f)		43,313,313
				68,018,745
		CABLE & SATELLITE TV — 0.88%
	1,137,368	Comcast Corporation Special Class A		35,713,356
	332,708	Knology, Inc. (a)		6,544,368
				42,257,724
		DISTILLERS & VINTNERS — 0.52%
	915,800	Constellation Brands, Inc. (a)(f)		24,781,548
		DIVERSIFIED CHEMICALS — 4.39%
	2,637,804	Huntsman Corporation (f)		34,133,184
	6,303,130	Solutia Inc. (i)		176,802,796
				210,935,980
		DIVERSIFIED METALS & MINING — 0.06%
	108,455	Molycorp, Inc. (a)(f)		2,337,205

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF INVESTMENTS (continued)

June 30, 2012

(Unaudited)

Shares			Value
		DIVERSIFIED METALS & MINING — 0.06% (continued)
	310,134	Pilot Gold, Inc. (a)(b)	$	335,083
				2,672,288
		ELECTRIC UTILITIES — 3.10%
	1,054,353	Exelon Corporation (f)		39,664,760
	1,814,660	Progress Energy, Inc. (f)		109,188,093
				148,852,853
		ELECTRICAL COMPONENTS & EQUIPMENT — 4.39%
	3,093,885	Cooper Industries PLC (b)(g)		210,941,079
		GOLD — 0.06%
	639,900	Extorre Gold Mines Ltd. (a)(b)		2,646,085
		HEALTH CARE EQUIPMENT — 2.29%
	1,338,165	Gen-Probe, Inc. (a)(h)		109,997,163
		HEALTH CARE SERVICES — 2.43%
	1,248,500	Catalyst Health Solutions, Inc. (a)(f)		116,659,840
		INDUSTRIAL CONGLOMERATES — 0.89%
	806,700	Tyco International Ltd. (b)(f)		42,634,095
		INTEGRATED OIL & GAS — 2.08%
	1,855,500	BP PLC — ADR (f)		75,221,970
	437,400	ConocoPhillips (f)		24,441,912
				99,663,882
		INTEGRATED TELECOMMUNICATION SERVICES — 3.83%
	1,772,575	AT&T, Inc. (f)		63,210,024
	1,926,840	CenturyLink, Inc. (f)		76,090,912
	330,050	TELUS Corporation (non-voting) (b)(f)		19,311,540
	570,300	Verizon Communications, Inc. (f)		25,344,132
				183,956,608
		INTERNET SOFTWARE & SERVICES — 2.17%
	482,097	Tudou Holdings Ltd. — ADR (a)		16,159,892
	5,562,000	Yahoo! Inc. (a)		88,046,460
				104,206,352
		LIFE SCIENCES TOOLS & SERVICES — 1.05%
	1,254,211	Illumina, Inc. (a)(f)		50,657,583
		MANAGED HEALTH CARE — 0.45%
	562,600	Aetna, Inc. (f)		21,812,002

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF INVESTMENTS (continued)

June 30, 2012

(Unaudited)

Shares			Value
		MOVIES & ENTERTAINMENT — 0.65%
	1,404,700	News Corporation Class A (f)	$	31,310,763
		MULTI-LINE INSURANCE — 2.09%
	2,115,400	American International Group, Inc. (a)(f)		67,883,186
	1,842,200	Hartford Financial Services Group, Inc. (f)		32,477,986
				100,361,172
		OIL & GAS EXPLORATION & PRODUCTION — 0.51%
	1,522,046	EXCO Resources, Inc. (f)		11,552,329
	649,700	Progress Energy Resources Corp. (b)		12,807,660
				24,359,989
		OIL & GAS REFINING & MARKETING — 2.19%
	2,218,500	Sunoco, Inc. (f)		105,378,750
		OIL & GAS STORAGE & TRANSPORTATION — 0.36%
	594,700	Williams Companies, Inc. (f)		17,139,254
		PACKAGED FOODS & MEATS — 2.37%
	3,912,300	D.E. Master Blenders 1753 NV (a)(b)		44,113,632
	782,460	Hillshire Brands Company (f)		22,683,516
	1,214,900	Kraft Foods, Inc. (f)		46,919,438
				113,716,586
		PERSONAL PRODUCTS — 0.43%
	258,100	Mead Johnson Nutrition Co. (f)		20,779,631
		PHARMACEUTICALS — 2.51%
	351,600	Abbott Laboratories (f)		22,667,652
	264,300	Eli Lilly & Company (g)		11,341,113
	145,300	Johnson & Johnson (f)		9,816,468
	1,613,600	Pfizer, Inc. (f)		37,112,800
	2,209,500	Warner Chilcott PLC — ADR (a)(f)		39,594,240
				120,532,273
		REGIONAL BANKS — 1.08%
	6,715,800	KeyCorp (f)		51,980,292
		SECURITY & ALARM SERVICES — 0.42%
	689,800	Corrections Corporation of America (a)(f)		20,314,610
		SEMICONDUCTOR EQUIPMENT — 1.73%
	2,207,786	Lam Research Corporation (a)(f)		83,321,844

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF INVESTMENTS (continued)

June 30, 2012

(Unaudited)

Shares			Value
		SPECIALIZED FINANCE — 2.13%
	1,043,132	NYSE Euronext (f)	$	26,683,316
	4,174	Osaka Securities Exchange Co. (b)		23,497,842
	1,140,475	TMX Group, Inc. (b)		51,977,252
				102,158,410
		SYSTEMS SOFTWARE — 3.79%
	4,067,447	Ariba, Inc. (a)(e)		182,058,928
		TRUCKING — 3.78%
	2,243,425	Dollar Thrifty Automotive Group, Inc. (a)(f)(i)		181,627,688
		TOTAL COMMON STOCKS
		(Cost $3,283,282,629)		3,326,744,940

WARRANTS — 0.00%
	142,642	Kinross Gold Corporation (a)(b)		56,042
		TOTAL WARRANTS
		(Cost $540,029)		56,042

Principal Amount
CONVERTIBLE BONDS — 0.05%
		Patriot Coal Corp.
$	8,292,000	3.250%, 5/31/2013 (j)		2,280,300
		TOTAL CONVERTIBLE BONDS
		(Cost $8,006,683)		2,280,300

CORPORATE BONDS — 1.51%
		Level 3 Financing, Inc.
	40,115,000	8.750%, 2/15/2017 (h)		41,920,175
		PHH Corp.
	4,507,000	7.125%, 3/1/2013		4,619,675
		Rite Aid Corp.
	24,486,000	10.375%, 7/15/2016		26,031,679
		TOTAL CORPORATE BONDS
		(Cost $72,179,685)		72,571,529

Contracts (100 shares per contract)
PURCHASED PUT OPTIONS — 0.45%
		Abbott Laboratories
	3,516	Expiration: August 2012, Exercise Price: $55.00		31,644

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF INVESTMENTS (continued)

June 30, 2012

(Unaudited)

Contracts (100 shares per contract)			Value
		Aetna, Inc.
	5,626	Expiration: July 2012, Exercise Price: $37.00	$	298,178
		American International Group, Inc.
	3,818	Expiration: August 2012, Exercise Price: $24.00		49,634
	10,982	Expiration: August 2012, Exercise Price: $25.00		186,694
	6,354	Expiration: August 2012, Exercise Price: $26.00		158,850
		Amylin Pharmaceuticals, Inc.
	16,143	Expiration: July 2012, Exercise Price: $23.00		920,151
		BP PLC — ADR
	5,127	Expiration: July 2012, Exercise Price: $37.00		82,032
	5,534	Expiration: July 2012, Exercise Price: $39.00		232,428
	5,127	Expiration: July 2012, Exercise Price: $40.00		364,017
		CenturyLink, Inc.
	1,390	Expiration: July 2012, Exercise Price: $32.00		3,475
	8,204	Expiration: July 2012, Exercise Price: $33.00		20,510
	171	Expiration: October 2012, Exercise Price: $31.00		3,420
		ConocoPhillips
	4,374	Expiration: August 2012, Exercise Price: $45.00		74,358
		Constellation Brands, Inc.
	9,158	Expiration: August 2012, Exercise Price: $17.50		18,316
		Corrections Corporation of America
	6,898	Expiration: September 2012, Exercise Price: $22.50		293,165
		Eli Lilly & Company
	2,643	Expiration: August 2012, Exercise Price: $36.00		18,501
		The Gap, Inc.
	13,346	Expiration: September 2012, Exercise Price: $21.00		266,920
		Hartford Financial Services Group, Inc.
	16,307	Expiration: September 2012, Exercise Price: $13.00		285,373
		Hillshire Brands Company
	1,340	Expiration: July 2012, Exercise Price: $18.00 (d)		1,072
	38,023	Expiration: October 2012, Exercise Price: $16.00 (d)		212,929
		Huntsman Corporation
	10,368	Expiration: August 2012, Exercise Price: $11.00		311,040
		Johnson & Johnson
	1,453	Expiration: August 2012, Exercise Price: $60.00		5,812
		KeyCorp
	49,443	Expiration: September 2012, Exercise Price: $5.00		247,215

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF INVESTMENTS (continued)

June 30, 2012

(Unaudited)

Contracts (100 shares per contract)			Value
		Kraft Foods, Inc.
	10,362	Expiration: September 2012, Exercise Price: $32.00	$	124,344
		Lam Research Corporation
	22,073	Expiration: September 2012, Exercise Price: $30.00		938,103
		Liberty Interactive Corp.
	23,812	Expiration: July, 2012, Exercise Price: $14.00		297,650
	535	Expiration: July 2012, Exercise Price: $15.00		4,012
		Materials Select Sector SPDR Trust
	636	Expiration: September 2012, Exercise Price: $37.00		168,858
		Mead Johnson Nutrition Co.
	2,581	Expiration: August 2012, Exercise Price: $65.00		107,111
		Molson Coors Brewing Company
	5,527	Expiration: July 2012, Exercise Price: $35.00		27,635
		Molycorp, Inc.
	1,392	Expiration: September 2012, Exercise Price: $40.00		2,630,880
	142	Expiration: September 2012, Exercise Price: $45.00		345,060
		News Corporation Class A
	4,630	Expiration: October 2012, Exercise Price: $16.00		46,300
	4,986	Expiration: October 2012, Exercise Price: $17.00		74,790
	4,431	Expiration: October 2012, Exercise Price: $18.00		110,775
		NYSE Euronext
	10,431	Expiration: September 2012, Exercise Price: $18.00		130,387
		Pfizer, Inc.
	16,136	Expiration: July 2012, Exercise Price: $17.00		16,136
		SPDR S&P 500 ETF Trust
	7,125	Expiration: August 2012, Exercise Price: $134.00		1,653,000
		Tyco International Ltd.
	8,067	Expiration: July 2012, Exercise Price: $47.00		76,637
		Warner Chilcott PLC — ADR
	7,378	Expiration: July 2012, Exercise Price: $16.00		295,120
	14,757	Expiration: October 2012, Exercise Price: $15.00		1,844,625
		Williams Companies, Inc.
	5,947	Expiration: August 2012, Exercise Price: $25.00		154,622
		Yahoo! Inc.
	14,559	Expiration: July 2012, Exercise Price: $12.00		7,280
	4,635	Expiration: July 2012, Exercise Price: $13.00		2,317
	30,159	Expiration: October 2012, Exercise Price: $12.00		331,749

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF INVESTMENTS (continued)

June 30, 2012

(Unaudited)

Contracts (100 shares per contract)			Value
		Youku, Inc. — ADR
	4,498	Expiration: September 2012, Exercise Price: $40.00	$	8,388,770
		TOTAL PURCHASED PUT OPTIONS
		(Cost $33,738,939)		21,861,895

Principal Amount
ESCROW NOTES — 0.02%
$	601,200	Delphi Financial Class Action Trust Escrow (a)(d)		420,840
		Washington Mutual, Inc.
	16,636,000	4.000%, 1/15/2009 (a)(d)		107,302
	5,747,000	4.200%, 1/15/2010 (a)(d)		39,367
	18,027,000	5.500%, 8/24/2011 (a)(d)		163,144
	20,154,000	5.000%, 3/22/2012 (a)(d)		166,271
	37,798,000	5.250%, 9/15/2017 (a)(d)		326,953
		TOTAL ESCROW NOTES
		(Cost $0)		1,223,877

Shares
SHORT-TERM INVESTMENTS — 25.58%
	264,000,000	BlackRock Liquidity Funds TempFund Portfolio, 0.15% (c)(h)		264,000,000
	264,000,000	Fidelity Institutional Government Portfolio, 0.01% (c)(h)		264,000,000
	264,000,000	Goldman Sachs Financial Square Money Market Fund, 0.19% (c)(g)		264,000,000
	172,967,649	Invesco Prime Portfolio Money Market, 0.08% (c)(e)(i)		172,967,649
	264,000,000	The Liquid Asset Portfolio, 0.16% (c)(g)		264,000,000
		TOTAL SHORT-TERM INVESTMENTS
		(Cost $1,228,967,649)		1,228,967,649
		TOTAL INVESTMENTS
		(Cost $4,626,715,614) — 96.88%	$	4,653,706,232

ADR — American Depository Receipt

ETF — Exchange-Traded Fund

PLC — Public Limited Company

(a)	Non-income producing security.

(b)	Foreign security.

(c)	The rate quoted is the annualized seven-day yield as of June 30, 2012.

(d)	Security fair valued by the Adviser in good faith in accordance with the policies adopted by the Board of Trustees.

(e)	All or a portion of the shares have been committed as collateral for open securities sold short.

(f)	All or a portion of the shares have been committed as collateral for written option contracts.

(g)	All or a portion of the shares have been committed as collateral for swap contracts.

(h)	All or a portion of the shares have been committed as collateral for forward currency exchange contracts.

(i)	Affiliated company.

(j)	Subsequent to June 30, 2012, default or other conditions exist and security is not presently accruing income.

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF SECURITIES SOLD SHORT

June 30, 2012

(Unaudited)

Shares			Value
COMMON STOCKS
	1,137,368	Comcast Corporation Special Class A	$	36,361,655
	4,740,938	Duke Energy Corporation		109,326,030
	608,569	Eastman Chemical Company		30,653,620
	1,782,417	Eaton Corporation		70,637,186
	1,089,162	Hertz Global Holdings, Inc.		13,941,274
	247,414	Patriot Coal Corporation		301,845
	132,004	SXC Health Solutions Corporation (a)		13,096,117
	330,050	TELUS Corporation (a)		19,820,506
	31,917	Yamana Gold Inc. (a)		492,502
	319,001	Youku Inc. — ADR		6,915,941
				301,546,676
EXCHANGE-TRADED FUNDS
	71,500	SPDR S&P 500 ETF Trust		9,743,305
		TOTAL SECURITIES SOLD SHORT
		(Proceeds $302,598,147)	$	311,289,981

ADR — American Depository Receipt

ETF — Exchange-Traded Fund

(a)Foreign security.

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF OPTIONS WRITTEN

June 30, 2012

(Unaudited)

Contracts (100 shares per contract)			Value
CALL OPTIONS WRITTEN
		Abbott Laboratories
	3,516	Expiration: August 2012, Exercise Price: $60.00	$	1,582,200
		Aetna, Inc.
	5,626	Expiration: July 2012, Exercise Price: $40.00		298,178
		American International Group, Inc.
	3,818	Expiration: August 2012, Exercise Price: $27.00		2,071,265
	5,819	Expiration: August 2012, Exercise Price: $28.00		2,647,645
	9,854	Expiration: August 2012, Exercise Price: $29.00		3,714,958
	1,663	Expiration: August 2012, Exercise Price: $30.00		498,900
		Amylin Pharmaceuticals, Inc.
	16,143	Expiration: October 2012, Exercise Price: $26.00		6,336,128
		ASX Ltd.
	2,566	Expiration: August 2012, Exercise Price: AUD 29.50		262,674
		AT&T, Inc.
	7,200	Expiration: August 2012, Exercise Price: $32.00		2,635,200
	2,105	Expiration: September 2012, Exercise Price: $33.00		564,140
	8,421	Expiration: September 2012, Exercise Price: $34.00		1,519,990
		BP PLC — ADR
	2,950	Expiration: July 2012, Exercise Price: $43.00		48,675
	5,934	Expiration: October 2012, Exercise Price: $40.00		1,453,830
	5,934	Expiration: October 2012, Exercise Price: $41.00		1,145,262
		British Sky Broadcasting Group PLC
	2,195	Expiration: August 2012, Exercise Price: GBP 7.00		782,078
		CenturyLink, Inc.
	2,706	Expiration: July 2012, Exercise Price: $38.00		405,900
	16,390	Expiration: July 2012, Exercise Price: $39.00		1,065,350
	171	Expiration: October 2012, Exercise Price: $36.00		63,270
		ConocoPhillips
	4,374	Expiration: August 2012, Exercise Price: $52.50		1,683,990
		Constellation Brands, Inc.
	9,158	Expiration: August 2012, Exercise Price: $20.00		6,465,548
		Corrections Corporation of America
	6,898	Expiration: September 2012, Exercise Price: $25.00		3,586,960
		Dollar Thrifty Automotive Group, Inc.
	237	Expiration: July 2012, Exercise Price: $85.00		35,550
	7,374	Expiration: October 2012, Exercise Price: $75.00		6,636,600

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF OPTIONS WRITTEN (continued)

June 30, 2012

(Unaudited)

Contracts (100 shares per contract)			Value
		Eaton Corporation
	1,291	Expiration: July 2012, Exercise Price: $35.00	$	597,733
	4,341	Expiration: August 2012, Exercise Price: $38.00		1,063,545
		Eli Lilly & Company
	2,643	Expiration: August 2012, Exercise Price: $39.00		1,077,023
		EXCO Resources, Inc.
	983	Expiration: August 2012, Exercise Price: $7.00		90,927
		Exelon Corporation
	2,351	Expiration: August 2012, Exercise Price: $38.00		111,673
	1,864	Expiration: October 2012, Exercise Price: $39.00		74,560
		The Gap, Inc.
	2,110	Expiration: September 2012, Exercise Price: $24.00		822,900
	11,236	Expiration: September 2012, Exercise Price: $25.00		3,483,160
		Hartford Financial Services Group, Inc.
	16,307	Expiration: September 2012, Exercise Price: $17.00		2,494,971
	846	Expiration: September 2012, Exercise Price: $18.00		82,062
		Hillshire Brands Company
	1,340	Expiration: July 2012, Exercise Price: $21.00 (a)		16,750
	964	Expiration: October 2012, Exercise Price: $20.00 (a)		83,868
	37,059	Expiration: October 2012, Exercise Price: $21.00 (a)		1,890,009
		Huntsman Corporation
	20,738	Expiration: August 2012, Exercise Price: $13.00		1,866,420
	1,022	Expiration: August 2012, Exercise Price: $15.00		25,550
		Illumina, Inc.
	1,418	Expiration: July 2012, Exercise Price: $39.00		280,055
	1,418	Expiration: July 2012, Exercise Price: $40.00		194,975
	4,048	Expiration: August 2012, Exercise Price: $39.00		1,214,400
	2,836	Expiration: August 2012, Exercise Price: $40.00		652,280
		Johnson & Johnson
	1,453	Expiration: August 2012, Exercise Price: $67.50		159,830
		KeyCorp
	2,931	Expiration: September 2012, Exercise Price: $6.00		509,994
	55,770	Expiration: September 2012, Exercise Price: $7.00		5,186,610
		Kraft Foods, Inc.
	5,178	Expiration: September 2012, Exercise Price: $37.00		1,100,325
	6,971	Expiration: September 2012, Exercise Price: $38.00		961,998
		Lam Research Corporation
	22,073	Expiration: September 2012, Exercise Price: $35.00		9,049,930

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF OPTIONS WRITTEN (continued)

June 30, 2012

(Unaudited)

Contracts (100 shares per contract)			Value
		Liberty Interactive Corp.
	24,347	Expiration: July 2012, Exercise Price: $17.00	$	2,008,628
		Mead Johnson Nutrition Co.
	2,581	Expiration: August 2012, Exercise Price: $75.00		1,884,130
		Molson Coors Brewing Company
	5,527	Expiration: July 2012, Exercise Price: $40.00		1,000,387
		Molycorp, Inc.
	1,392	Expiration: September 2012, Exercise Price: $40.00		9,744
	142	Expiration: September 2012, Exercise Price: $45.00		1,704
		News Corporation Class A
	4,630	Expiration: October 2012, Exercise Price: $20.00		1,250,100
	9,417	Expiration: October 2012, Exercise Price: $21.00		1,906,943
		NYSE Euronext
	10,431	Expiration: September 2012, Exercise Price: $23.00		3,077,145
		Pep Boys — Manny, Moe & Jack
	915	Expiration: July 2012, Exercise Price: $7.50		228,750
	6,889	Expiration: July 2012, Exercise Price: $15.00		17,222
		Pfizer, Inc.
	16,136	Expiration: July 2012, Exercise Price: $22.00		1,662,008
		SPDR S&P 500 ETF Trust
	949	Expiration: August 2012, Exercise Price: $45.00		100,594
		Sunoco, Inc.
	4,624	Expiration: August 2012, Exercise Price: $45.00		1,262,352
	2,234	Expiration: August 2012, Exercise Price: $46.00		407,705
	8,113	Expiration: August 2012, Exercise Price: $47.00		1,006,012
	6,934	Expiration: August 2012, Exercise Price: $48.00		540,852
		SXC Health Solutions Corporation
	2,472	Expiration: July 2012, Exercise Price: $72.50		6,686,760
	626	Expiration: July 2012, Exercise Price: $80.00		1,214,440
	1,470	Expiration: July 2012, Exercise Price: $85.00		2,116,800
	2,353	Expiration: July 2012, Exercise Price: $87.50		2,894,190
		Tyco International Ltd.
	8,067	Expiration: July 2012, Exercise Price: $52.50		935,772
		Verizon Communications, Inc.
	5,703	Expiration: August 2012, Exercise Price: $40.00		2,532,132
		Warner Chilcott PLC — ADR
	7,378	Expiration: July 2012, Exercise Price: $20.00		276,675
	7,379	Expiration: October 2012, Exercise Price: $18.00		1,844,750
	7,379	Expiration: October 2012, Exercise Price: $19.00		1,604,932

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF OPTIONS WRITTEN (continued)

June 30, 2012

(Unaudited)

Contracts (100 shares per contract)			Value
		Williams Companies, Inc.
	5,947	Expiration: August 2012, Exercise Price: $29.00	$	633,355
		Xstrata PLC
	8,550	Expiration: August 2012, Exercise Price: GBP 7.20		1,419,394
	19,080	Expiration: August 2012, Exercise Price: GBP 10.50		44,819
	6,670	Expiration: September 2012, Exercise Price: GBP 8.40		532,753
		Yahoo! Inc.
	14,559	Expiration: July 2012, Exercise Price: $14.00		2,664,297
	4,635	Expiration: July 2012, Exercise Price: $15.00		426,420
	15,482	Expiration: October 2012, Exercise Price: $14.00		3,429,263
	20,944	Expiration: October 2012, Exercise Price: $15.00		3,120,656
		Youku, Inc. — ADR
	4,498	Expiration: September 2012, Exercise Price: $40.00		11,245
				127,348,768
PUT OPTIONS WRITTEN
		SPDR S&P 500 ETF Trust
	3,326	Expiration: August 2012, Exercise Price: $126.00		271,069
		TOTAL OPTIONS WRITTEN
		(Premiums received $115,640,513)	$	127,619,837

ADR — American Depository Receipt

AUD — Australian Dollar

ETF — Exchange-Traded Fund

GBP — British Pound

PLC — Public Limited Company

(a)Security fair valued by the Adviser in good faith in accordance with the policies adopted by the Board of Trustees.

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF FORWARD CURRENCY EXCHANGE CONTRACTS*

June 30, 2012

(Unaudited)

				U.S. $					U.S. $		Unrealized
Settlement	Currency to			Value at		Currency to			Value at		Appreciation
Date	be Delivered			June 30, 2012		be Received			June 30, 2012		(Depreciation)
7/18/12		5,255,865	Australian Dollars	$	5,369,439		5,386,210	U.S. Dollars	$	5,386,210	$	16,771
10/17/12		16,124,590	Australian Dollars		16,338,460		15,957,700	U.S. Dollars		15,957,700		(380,760	)
7/26/12		52,159,212	British Pounds		81,683,778		81,612,215	U.S. Dollars		81,612,215		(71,563	)
7/26/12		2,173,820	U.S. Dollars		2,173,820		1,387,600	British Pounds		2,173,016		(804	)
8/15/12		3,862,675	British Pounds		6,048,792		6,056,674	U.S. Dollars		6,056,674		7,882
9/12/12		136,903,184	British Pounds		214,368,433		217,183,473	U.S. Dollars		217,183,474		2,815,041
10/10/12		93,220,788	British Pounds		145,956,324		145,050,271	U.S. Dollars		145,050,271		(906,053	)
8/22/12		52,921,665	Canadian Dollars		51,915,644		52,763,174	U.S. Dollars		52,763,174		847,530
8/28/12		2,239,650	Canadian Dollars		2,196,758		2,183,139	U.S. Dollars		2,183,139		(13,619	)
8/29/12		187,699,145	Canadian Dollars		184,100,592		189,845,022	U.S. Dollars		189,845,023		5,744,431
9/20/12		10,603,560	Canadian Dollars		10,395,409		10,602,730	U.S. Dollars		10,602,730		207,321
10/3/12		13,286,365	Canadian Dollars		13,021,955		12,829,135	U.S. Dollars		12,829,135		(192,820	)
12/18/12		931,002	Canadian Dollars		911,004		906,879	U.S. Dollars		906,879		(4,125	)
12/19/12		25,750,000	Canadian Dollars		25,196,352		25,717,981	U.S. Dollars		25,717,981		521,629
9/10/12		107,981,346	Euros		136,749,007		141,999,825	U.S. Dollars		141,999,825		5,250,818
9/12/12		1,840,056	Euros		2,330,320		2,407,960	U.S. Dollars		2,407,960		77,640
9/12/12		2,296,819	U.S. Dollars		2,296,819		1,840,056	Euros		2,330,320		33,501
10/25/12		41,436,201	Euros		52,504,633		52,327,845	U.S. Dollars		52,327,845		(176,788	)
7/3/12		304,091,550	Hong Kong Dollars		39,197,858		39,191,636	U.S. Dollars		39,191,636		(6,222	)
7/11/12		14,690,000	Hong Kong Dollars		1,928,418		1,927,667	U.S. Dollars		1,927,667		(751	)
7/11/12		1,928	U.S. Dollars		1,928		14,960	Hong Kong Dollars		1,928		0
7/25/12		1,878,300,000	Japanese Yen		23,506,844		22,684,783	U.S. Dollars		22,684,783		(822,061	)
12/19/12		104,466,000	Mexican Pesos		7,706,063		7,483,345	U.S. Dollars		7,483,345		(222,718	)
12/19/12		7,696,022	U.S. Dollars		7,696,021		104,466,000	Mexican Pesos		7,709,590		13,569
				$	1,033,594,671				$	1,046,332,520	$	12,737,849

*JPMorgan Chase & Co. Inc. is the counterparty for all open forward currency exchange contracts held by the Fund as of June 30, 2012.

The accompanying notes are an integral part of these financial statements.

The Merger Fund

SCHEDULE OF SWAP CONTRACTS

June 30, 2012

(Unaudited)

								Unrealized
Termination								Appreciation
Date	Security	Shares			Notional			(Depreciation)*			Counterparty
LONG SWAP CONTRACTS
9/30/12	ASX Ltd.		538,058		$	15,844,635		$	(45,346	)	JPMorgan Chase & Co. Inc.
12/31/12	British Sky Broadcasting Group PLC		3,313,600			34,957,917			678,154		Merrill Lynch & Co. Inc.
12/31/12	British Sky Broadcasting Group PLC		3,956,116			41,701,550			(7,172,401	)	JPMorgan Chase & Co. Inc.
12/31/12	Charter Hall Office REIT		2,032,447			2			2		JPMorgan Chase & Co. Inc.
9/30/12	Cove Energy PLC		1,606,448			6,654,486			325,614		JPMorgan Chase & Co. Inc.
1/15/13	Grupo Modelo, S.A. de C.V.		2,174,030			19,040,298			665,523		JPMorgan Chase & Co. Inc.
12/31/12	Hillgrove Resources Limited		13,139,699			1,518,161			(1,542,411	)	JPMorgan Chase & Co. Inc.
7/11/12	International Power PLC		32,751,958			212,143,930			(1,542,393	)	JPMorgan Chase & Co. Inc.
9/30/12	Molycorp, Inc.		36,500			745,330			(31,788	)	Merrill Lynch & Co. Inc.
8/2/12	Rhoen-Klinikum AG (a)		1,841,957			37,829,118			(11,709,944	)	JPMorgan Chase & Co. Inc.
12/31/12	TELUS Corporation (non-voting)		117,600			6,740,169			283,073		The Goldman Sachs Group, Inc.
12/31/12	TELUS Corporation (non-voting)		2,288,850			131,183,973			3,586,836		Merrill Lynch & Co. Inc.
8/30/12	TMX Group, Inc.		98,200			4,411,346			91,524		Deutsche Bank AG
12/31/12	TNT Express NV		1,229,700			14,089,177			(762,908	)	Merrill Lynch & Co. Inc.
12/31/12	TNT Express NV		10,183,726			116,679,124			(3,499,635	)	JPMorgan Chase & Co. Inc.
11/30/12	Viterra, Inc.		83,300			1,301,638			(13,851	)	Merrill Lynch & Co. Inc.
11/30/12	Xstrata PLC		9,484,993			116,767,093			(50,785,439	)	JPMorgan Chase & Co. Inc.
11/30/12	Xstrata PLC		43,473			535,184			(69,100	)	The Goldman Sachs Group, Inc.
SHORT SWAP CONTRACTS
7/15/12	Eastman Chemical Company		(147,807	)		(7,113,951	)		(27,885	)	Merrill Lynch & Co. Inc.
11/30/12	Glencore International PLC		(299,717	)		(1,364,992	)		499,311		JPMorgan Chase & Co. Inc.
11/30/12	Glencore International PLC		(123,598	)		(562,899	)		93,530		The Goldman Sachs Group, Inc.
12/31/12	TELUS Corporation		(117,600	)		(6,908,672	)		(284,040	)	The Goldman Sachs Group, Inc.
12/31/12	TELUS Corporation		(2,288,850	)		(134,463,552	)		(6,240,547	)	Merrill Lynch & Co. Inc.
								$	(77,504,121	)

PLC — Public Limited Company

*	Based on the net value at each broker, unrealized appreciation is a receivable and unrealized depreciation is a payable.

(a)	Security fair valued by the Adviser in good faith in accordance with the policies adopted by the Board of Trustees.

The accompanying notes are an integral part of these financial statements.

The Merger Fund

STATEMENT OF ASSETS AND LIABILITIES

June 30, 2012

(Unaudited)

ASSETS:
Investments, at value
Investments in non affiliates (Cost $4,147,453,067)				$	4,122,308,099
Investments in affiliates (Cost $479,262,547)					531,398,133
Cash					699,475
Cash held in foreign currency (Cost $51,466,428)					51,538,886
Deposits at brokers					345,893,711
Receivable from brokers					302,598,147
Receivable for investments sold					26,429,540
Receivable for forward currency exchange contracts					15,536,133
Receivable for swap contracts					114,987
Receivable for fund shares issued					10,248,525
Dividends and interest receivable					16,906,033
Swap dividends receivable					7,079,712
Prepaid expenses and other receivables					194,431
Total Assets					5,430,945,812
LIABILITIES:
Securities sold short, at value (proceeds of $302,598,147)	$	311,289,981
Written option contracts, at value (premiums received $115,640,513)		127,619,837
Payable for forward currency exchange contracts		2,798,284
Payable for swap contracts		77,619,108
Payable for swap contracts closed		202,191
Payable for investments purchased		80,441,330
Payable for fund shares redeemed		13,933,347
Payable to the investment adviser		3,441,606
Distribution fees payable		5,481,795
Dividends payable		621,430
Swap dividends payable		1,500,496
Accrued expenses and other liabilities		2,616,305
Total Liabilities					627,565,710
NET ASSETS				$	4,803,380,102
NET ASSETS CONSISTS OF:
Accumulated undistributed net investment income				$	56,608,816
Accumulated net realized loss on investments, securities
sold short, written option contracts expired or closed, swap contracts,
foreign currency translation and forward currency exchange contracts					(24,318,709	)
Net unrealized appreciation / (depreciation) on:
Investments		26,990,618
Securities sold short		(8,691,834	)
Written option contracts		(11,979,324	)
Swap contracts		(77,504,121	)
Foreign currency translation		71,894
Forward currency exchange contracts		12,737,849
Net unrealized depreciation					(58,374,918	)
Paid-in capital					4,829,464,913
Total Net Assets				$	4,803,380,102
NET ASSET VALUE and offering price per share
($4,803,380,102 / 304,640,130 shares of beneficial interest outstanding)				$	15.77

The accompanying notes are an integral part of these financial statements.

The Merger Fund

STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2012

(Unaudited)

INVESTMENT INCOME:
Interest
Non Affiliates				$	3,280,618
Affiliates					125,414
Dividend income on long positions
Non Affiliates (net of foreign withholding taxes of $214,460)					30,617,631
Affiliates					190,076
Total investment income					34,213,739
EXPENSES:
Investment advisory fees	$	24,653,352
Distribution fees		5,356,695
Sub Transfer Agent Fees		2,427,778
Administration fees		785,116
Transfer agent and shareholder servicing agent fees		512,309
Professional fees		293,852
Reports to shareholders		268,137
Fund accounting expense		206,809
Custody fees		186,597
Miscellaneous expenses		120,533
Federal and state registration fees		118,219
Trustees’ fees and expenses		91,504
Borrowing expense on securities sold short		8,606,377
Dividends on securities sold short		7,222,450
Total expenses before expense waiver by adviser					50,849,728
Less: Expense reimbursed by Adviser					(3,196,797	)
Net expenses					47,652,931
NET INVESTMENT LOSS					(13,439,192	)
REALIZED AND UNREALIZED GAIN / (LOSS) ON INVESTMENTS:
Realized gain / (loss) on:
Investments
Non Affiliates		(26,113,165	)
Affiliates		19,273,629
Securities sold short		(6,057,301	)
Written option contracts expired or closed		64,191,322
Swap contracts		(12,328,138	)
Foreign currency translation		(5,033	)
Forward currency exchange contracts		4,001,770
Net realized gain					42,963,084
Change in unrealized appreciation / (depreciation) on:
Investments		72,144,739
Securities sold short		4,846,010
Written option contracts		(4,476,406	)
Swap contracts		(56,844,241	)
Foreign currency translation		24,664
Forward currency exchange contracts		12,254,642
Net unrealized appreciation					27,949,408
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS					70,912,492
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS				$	57,473,300

The accompanying notes are an integral part of these financial statements.

The Merger Fund

STATEMENTS OF CHANGES IN NET ASSETS

	Six Months Ended			Three Months Ended			Year Ended
	June 30, 2012			December 31, 2011*			September 30, 2011
	(Unaudited)
Net investment loss	$	(13,439,192	)	$	(7,373,408	)	$	(49,571,393	)
Net realized gain / (loss) on investments, securities
sold short, written option contracts expired or closed,
swap contracts, foreign currency translation and
forward currency exchange contracts		42,963,084			(9,676,087	)		272,630,284
Change in unrealized appreciation / (depreciation) on
investments, securities sold short, written option
contracts, swap contracts, foreign currency translation
and forward currency exchange contracts		27,949,408			156,748,223			(273,632,296	)
Net increase / (decrease) in net assets
resulting from operations		57,473,300			139,698,728			(50,573,405	)
Distributions to shareholders from: (Note 5)
Net investment income		—			(26,112,274	)		—
Net realized gains		—			(116,043,398	)		(70,276,496	)
Total dividends and distributions		—			(142,155,672	)		(70,276,496	)
Net increase / (decrease) in net assets from
capital share transactions (Note 4)		(280,653,458	)		115,163,137			1,461,121,676
Net increase / (decrease) in net assets		(223,180,158	)		112,706,193			1,340,271,775

NET ASSETS:
Beginning of period		5,026,560,260			4,913,854,067			3,573,582,292
End of period (including accumulated undistributed
net investment income of $56,608,816
and $70,048,008 and $78,326,065, respectively)	$	4,803,380,102		$	5,026,560,260		$	4,913,854,067

*For the period October 1, 2011 through December 31, 2011. The Fund changed its fiscal year end from September 30 to December 31.

The accompanying notes are an integral part of these financial statements.

The Merger Fund

FINANCIAL HIGHLIGHTS

Selected per share data is based on a share of beneficial interest outstanding throughout each period.

	Six			Three
	Months			Months
	Ended			Ended
	June 30,			Dec. 31,			Year Ended September 30,
	2012			2011*				2011			2010(1)			2009(1)			2008(1)			2007(1)
	(Unaudited)
Net asset value,
beginning of period	$	15.59		$	15.59		$	15.93		$	15.26		$	14.79		$	16.55		$	15.95
Income from
investment operations:
Net investment
income / (loss)(2)		(0.04	)(3)		(0.02	)(3)		(0.18	)(3)		(0.02	)(4)		0.24	(4)		0.00	(5)(6)		0.13	(5)
Net realized and unrealized
gain / (loss) on investments		0.22			0.47			0.13			0.69			0.58			(0.70	)		1.13
Total from
investment operations		0.18			0.45			(0.05	)		0.67			0.82			(0.70	)		1.26
Redemption fees		0.00	(6)		0.00	(6)		0.00	(6)		0.00	(6)		0.00	(6)		0.00	(6)		0.00	(6)

Less distributions:
Distributions from
net investment income		—			(0.08	)		—			(0.00	)(6)		(0.06	)		(0.37	)		(0.11	)
Distributions from
net realized gains		—			(0.37	)		(0.29	)		—			(0.05	)		(0.69	)		(0.55	)
Distributions from
return of capital		—			—			—			—			(0.24	)		—			—
Total dividends
and distributions		—			(0.45	)		(0.29	)		(0.00	)(6)		(0.35	)		(1.06	)		(0.66	)
Net Asset Value, end of period	$	15.77		$	15.59		$	15.59		$	15.93		$	15.26		$	14.79		$	16.55

Total Return		1.15	%(7)		2.90	%(7)		(0.34	)%		4.39	%		5.78	%		(4.32	)%		8.15	%

Footnotes To Financial Highlights On Following Page

The accompanying notes are an integral part of these financial statements.

The Merger Fund

FINANCIAL HIGHLIGHTS (continued)

	Six			Three
	Months			Months
	Ended			Ended
	June 30,			Dec. 31,			Year Ended September 30,
	2012			2011*			2011			2010(1)			2009(1)			2008(1)			2007(1)
	(Unaudited)
Supplemental data and ratios:
Net assets, end
of period (000’s)	$	4,803,380		$	5,026,560		$	4,913,854		$	3,573,582		$	1,811,380		$	1,414,165		$	1,821,714
Ratio of operating expenses
to average net assets		1.93	%(8)		1.64	%(8)		1.96	%		2.57	%		4.22	%		1.66	%		2.16	%
Ratio of dividends on short
positions and borrowing
expense on securities sold
short to average net assets		0.64	%(8)		0.31	%(8)		0.62	%		1.16	%		2.68	%		0.19	%		0.76	%
Ratio of operating expense to
average net assets excluding
dividends on short positions
and borrowing expense on
securities sold short:
Before expense waiver		1.42	%(8)		1.46	%(8)		1.46	%		1.48	%		1.54	%		1.48	%		1.41	%
After expense waiver		1.29	%(8)		1.33	%(8)		1.34	%		1.41	%		1.54	%		1.47	%		1.40	%(9)
Ratio of net investment
income / (loss) to average
net assets:
Before expense waiver		(0.68	)%(8)		(0.72	)%(8)		(1.25	)%		(1.35	)%		(2.49	)%		(0.10	)%		0.82	%
After expense waiver		(0.55	)%(8)		(0.59	)%(8)		(1.13	)%		(1.28	)%		(2.49	)%		(0.09	)%		0.83	%
Portfolio turnover rate(10)		106.15	%(7)		48.13	%(7)		292.79	%		192.21	%		318.45	%		300.24	%		334.87	%

(1)	Performance data included herein for periods prior to 2011 reflect that of Westchester Capital Management, Inc., the Fund’s prior investment adviser. See Note 1 for additional information.

(2)

Net investment income / (loss) before interest expense, borrowing expense on securities sold short and dividends on securities sold short for the six months ended June 30, 2012, the three months ended December 31, 2011 and the years ended September 30, 2011, 2010, 2009, 2008 and 2007 was $0.01, $(0.01), $(0.08), $0.12, $0.55, $0.02, and $0.26, respectively.

(3)	Net investment income / (loss) per share represents net investment income / (loss) divided by the average shares outstanding throughout the period.

(4)	Net investment income / (loss) per share is calculated using ending balance after consideration of adjustments for permanent book and tax differences.

(5)	Net investment income / (loss) per share is calculated using ending balances prior to consideration of adjustments for permanent book and tax differences.

(6)	Amount less than $0.005 per share.

(7)	Not Annualized.

(8)	Annualized.

(9)	The Fund incurred proxy expenses of approximately $525,000 in 2007 related to shareholder approval of changes in the Fund’s fundamental investment policies and the election of trustees.

(10)	The numerator for the portfolio turnover rate includes the lesser of purchases or sales (excluding short positions). The denominator includes the average long positions throughout the period.

*	Stub period from October 1, 2011 through December 31, 2011.

The accompanying notes are an integral part of these financial statements.

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS

June 30, 2012 (Unaudited)

Note 1 — ORGANIZATION

The Merger Fund (the “Fund”) is a no-load, open-end, non-diversified investment company organized as a trust under the laws of the Commonwealth of Massachusetts on April 12, 1982, and registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund was formerly known as the Risk Portfolio of The Ayco Fund. In January of 1989, the Fund’s fundamental investment policies were amended to permit the Fund to engage in merger arbitrage. At the same time, Westchester Capital Management, Inc. became the Fund’s investment adviser, and the Fund began to do business as The Merger Fund. In a transaction that closed on December 31, 2010, Westchester Capital Management, Inc. transferred substantially all of its business and assets to Westchester Capital Management, LLC (the “Adviser”), which became the Fund’s investment adviser. Therefore, the performance information included herein for periods prior to 2011 reflect the performance of Westchester Capital Management, Inc. Mr. Roy Behren and Mr. Michael Shannon, the Fund’s current portfolio managers, assumed portfolio management duties of the Fund in 2006. Merger arbitrage is a highly specialized investment approach generally designed to profit from the successful completion of proposed mergers, takeovers, tender offers, leveraged buyouts, liquidations and other types of corporate reorganizations. During the prior fiscal period, the Fund’s Board of Trustees approved a change in the Fund’s fiscal year end from September 30 to December 31.

Note 2 — SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with U.S. generally accepted accounting principles (“GAAP”). In preparing these financial statements, the Fund has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were available to be issued. The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

A. Investment Valuation

Securities listed on the NASDAQ Global Market and the NASDAQ Global Select Market are valued at the NASDAQ Official Closing Price (“NOCP”). Investments in registered investment companies that are money market funds are valued at the net asset value. Other listed securities are valued at the last sale price on the exchange on which such securities are primarily traded or, in the case of options, at the last sale price. The securities valued using quoted prices in active markets are classified as Level 1 investments. Securities not listed on an exchange are valued at the last sale price as of the close of the New York Stock Exchange. Non-exchange listed securities that do not trade on a particular day are valued at the average of the closing bid and asked prices. These securities, which include corporate bonds, are classified as Level 2 investments. When pricing options, if no sales are reported or if the last sale is outside the bid and asked parameters, the higher of the intrinsic value of the option or the mean between the last reported bid and asked prices will be used. Options purchased in an active market are classified as Level 1 investments, but options not listed on exchange are classified as Level 2

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

investments. Securities for which there are no such valuations are valued at fair value as determined in good faith by the Adviser under the supervision of the Board of Trustees. The Adviser may, in accordance with policies adopted by the Board of Trustees, value securities, including options, at prices other than last-sale prices, intrinsic value prices, or the average of closing bid and asked prices, when such prices are believed unrepresentative of market value as determined in good faith by the Adviser. When fair-value pricing is employed, the prices of securities used by the Fund to calculate its net asset value (NAV) may differ from quoted or published prices for the same securities. In addition, due to the subjective and variable nature of fair-value pricing, it is possible that the value determined for a particular asset may be materially different from the value realized if the securities were sold. At June 30, 2012, securities fair valued in good faith represented 0.32% of net assets using the absolute value of long investments and written option contracts and the absolute value of unrealized gains or losses on swap contracts. Investments in United States government securities (other than short-term securities) are valued at the average of the quoted bid and asked prices in the over-the-counter market. Short-term investments are carried at amortized cost, which approximates fair value.

The Fund has performed an analysis of all existing investments to determine the significance and character of all inputs to their fair value determination. Various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the three broad levels listed below:

Level 1 —	Quoted prices in active markets for identical securities.
Level 2 —	Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
Level 3 —	Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.

The following tables provide the fair value measurements of applicable Fund assets and liabilities by level within the fair value hierarchy for the Fund as of June 30, 2012. These assets and liabilities are measured on a recurring basis.

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

	Level 1		Level 2		Level 3		Total
Assets
Common Stocks*	$	3,326,774,940	$	—	$	—	$	3,326,744,940
Warrants		56,042		—		—		56,042
Convertible Bonds		—		2,280,300		—		2,280,300
Corporate Bonds		—		72,571,529		—		72,571,529
Purchased Put Options		21,647,894		214,001		—		21,861,895
Escrow Notes		—		—		1,223,877		1,223,877
Short-Term Investments		1,228,967,649		—		—		1,228,967,649
Swap Contracts**		—		114,987		—		114,987
Forward Currency
Exchange Contracts**		—		15,536,133		—		15,536,133
Liabilities
Common Stocks Sold Short	$	301,546,676	$	—	$	—	$	301,546,676
Exchange-Traded
Funds Sold Short		9,743,305		—		—		9,743,305
Options Written		122,587,492		5,032,345		—		127,619,837
Swap Contracts**		—		77,619,108		—		77,619,108
Forward Currency
Exchange Contracts**		—		2,798,284		—		2,798,284

*	Please refer to the Schedule of Investments to view common stocks segregated by industry type.

**	Swap contracts and forward currency exchange contracts are valued at the unrealized appreciation / (depreciation) on the instruments.

The Level 2 securities may be priced using inputs such as current yields, discount rates, credit quality, yields on computable securities, trading volume and maturity date. The Fund did not have transfers into or out of Level 1 or Level 2 during the period. Transfers between levels are recognized at the end of the reporting period.

The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value.

Description	Investments
Balance as of December 31, 2011	$	—
Accrued discounts/premiums		—
Realized gain / (loss)		—
Change in unrealized appreciation / (depreciation)		—
Net purchases (sales)		1,223,877
Transfers in and/or out of Level 3		—
Balance as of June 30, 2012	$	1,223,877

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

Significant unobservable valuation inputs developed by the Board of Directors for material Level 3 investments as of June 30, 2012, are as follows:

Description	Fair Value at 6/30/2012			Valuation Technique	Unobservable Input	Range
Escrow Note		$	420,840	Projected Final	Discount of Projected
				Distribution(1)	Distribution	$	0.70 – 0.73
Escrow Note			107,302	Consensus Pricing(2)	Broker Quoted Inputs		0.62 – 0.68
Escrow Note			39,367	Consensus Pricing(2)	Broker Quoted Inputs		0.66 – 0.71
Escrow Note			163,144	Consensus Pricing(2)	Broker Quoted Inputs		0.88 – 0.95
Escrow Note			166,271	Consensus Pricing(2)	Broker Quoted Inputs		0.80 – 0.86
Escrow Note			326,953	Consensus Pricing(2)	Broker Quoted Inputs		0.84 – 0.91

(1)	This Level 3 security was received through a corporate action and is being priced at an estimate of the expected final distribution.

(2)	These Level 3 securities were received through a bond settlement and are currently being priced at the mean of a bid/ask spread provided by broker’s analysis of the market.

B.Securities Sold Short

The Fund may sell securities or currencies short for economic hedging purposes. For financial statement purposes, an amount equal to the settlement amount is initially included in the Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the short position. Subsequent fluctuations in the market prices of securities or currencies sold, but not yet purchased, may require purchasing the securities or currencies at prices which may differ from the market value reflected on the Statement of Assets and Liabilities. Short sale transactions result in off balance sheet risk because the ultimate obligation may exceed the related amounts shown in the Statement of Assets and Liabilities. The Fund will incur a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund’s loss on a short sale is potentially unlimited because there is no upward limit on the price a borrowed security could attain.

The Fund is liable for any dividends payable on securities while those securities are sold short. Until the security is replaced, the Fund is required to pay to the lender any income earned which is recorded as an expense by the Fund. The Fund generally segregates liquid assets in an amount equal to the market value of the securities sold short. These assets are required to be adjusted daily to reflect changes in the value of the securities or currencies sold short.

C.Transactions with Brokers for Securities Sold Short

The Fund’s receivables from brokers for proceeds on securities sold short and deposits at brokers for securities sold short are with two securities dealers. The Fund does not require the brokers to maintain collateral in support of the receivable from brokers for proceeds on securities sold short. The Fund maintains cash deposits at brokers beyond the receivable for short sales. These cash deposits are presented as deposits at brokers on the Statement of Assets and Liabilities.

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

D.Federal Income Taxes

No provision for federal income taxes has been made since the Fund has complied to date with the provisions of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and intends to continue to so comply in future years and to distribute investment company net taxable income and net capital gains to shareholders. Additionally, the Fund intends to make all required distributions to avoid federal excise tax.

The Fund has reviewed all open tax years and major jurisdictions and concluded that there is no impact on the Fund’s net assets and no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on a tax return. The Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next six months. As of June 30, 2012, open Federal and New York tax years include the tax years ended September 30, 2008 through 2011. The Fund has no tax examination in progress.

E.Written Option Contracts

The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. The Fund may write (sell) call options, including to hedge portfolio investments. Uncovered put options can also be written by the Fund as part of a merger arbitrage strategy involving a pending corporate reorganization. When the Fund writes (sells) an option, an amount equal to the premium received by the Fund is included in the Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market daily to reflect the current value of the option written. By writing an option, the Fund may become obligated during the term of the option to deliver or purchase the securities underlying the option at the exercise price if the option is exercised. Written option contracts are valued at the higher of the intrinsic value of the option or the last sales price reported on the date of valuation. If no sale is reported or if the last sale is outside the parameters of the closing bid and asked prices, the written option contract is valued at the higher of the intrinsic value of the option or the mean between the last reported bid and asked prices on the day of valuation. When an option expires on its stipulated expiration date or the Fund enters into a closing purchase transaction, the Fund realizes a gain or loss if the cost of the closing purchase transaction differs from the premium received when the option was sold without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is eliminated. When an option is exercised, the premium originally received decreases the cost basis of the security (or increases the proceeds on a sale of the security), and the Fund realizes a gain or loss from the sale of the underlying security. Written option contracts sold on an exchange typically include less credit risk than over-the-counter options. Refer to Note 2 R. for further derivative disclosures.

F.Purchased Options

The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. The Fund purchases put or call options to hedge portfolio investments. Premiums paid for option contracts purchased are included in the Statement of Assets and Liabilities as an asset. Option

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

contracts are valued daily at the higher of the intrinsic value of the option or the last reported composite sale price on the date of valuation. If no sale is reported or if the last sale is outside the parameters of the closing bid and asked prices, the option contract purchased is valued at the higher of the intrinsic value of the option or the mean between the last reported bid and asked prices on the day of valuation. When option contracts expire or are closed, realized gains or losses are recognized without regard to any unrealized gains or losses on the underlying securities. Purchased options sold on an exchange include less credit risk than over-the-counter options. Refer to Note 2 R. for further derivative disclosures.

G.Forward Currency Exchange Contracts

The Fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use forward currency exchange contracts to hedge against changes in the value of foreign currencies. The Fund may enter into forward currency exchange contracts obligating the Fund to deliver and receive a currency at a specified future date. Forward contracts are valued daily, and unrealized appreciation or depreciation is recorded daily as the difference between the contract exchange rate and the closing forward rate applied to the face amount of the contract. A realized gain or loss is recorded at the time the forward contract expires. Credit risk may arise as a result of the failure of the counterparty to comply with the terms of the contract. The Fund considers the creditworthiness of each counterparty to a contract in evaluating potential credit risk quarterly. The counterparty risk to the Fund is limited to the net unrealized gain, if any, on the contract.

The use of forward currency exchange contracts does not eliminate fluctuations in the underlying prices of the Fund’s investment securities; however, it does establish a rate of exchange that can be achieved in the future. The use of forward currency exchange contracts involves the risk that anticipated currency movements will not be accurately predicted. A forward currency exchange contract would limit the risk of loss due to a decline in the value of a particular currency; however it would also limit any potential gain that might result should the value of the currency increase instead of decrease. These contracts may involve market risk in excess of the amount of receivable or payable reflected on the Statement of Assets and Liabilities. Refer to Note 2 R. for further derivative disclosures.

H.Equity Swap Contracts

The Fund is subject to equity price risk and interest rate risk in the normal course of pursuing its investment objectives. The Fund has entered into both long and short equity swap contracts with multiple broker-dealers. A long equity swap contract entitles the Fund to receive from the counterparty any appreciation and dividends paid on an individual security, while obligating the Fund to pay the counterparty any depreciation on the security as well as interest on the notional amount of the contract at a rate equal to LIBOR plus 25 to 100 basis points. A short equity swap contract obligates the Fund to pay the counterparty any appreciation and dividends paid on an individual security, while entitling the Fund to receive from the counterparty any depreciation on the security as well as interest on the notional value of the contract at a rate equal to LIBOR less 25 to 100 basis points.

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

The Fund may also enter into equity swap contracts whose value may be determined by the spread between a long equity position and a short equity position. This type of swap contract obligates the Fund to pay the counterparty an amount tied to any increase in the spread between the two securities over the term of the contract. The Fund is also obligated to pay the counterparty any dividends paid on the short equity holding as well as any net financing costs. This type of swap contract entitles the Fund to receive from the counterparty any gains based on a decrease in the spread as well as any dividends paid on the long equity holding and any net interest income.

Fluctuations in the value of an open contract are recorded daily as a net unrealized gain or loss. The Fund will realize a gain or loss upon termination or reset of the contract. Either party, under certain conditions, may terminate the contract prior to the contract’s expiration date.

Credit risk may arise as a result of the failure of the counterparty to comply with the terms of the contract. The Fund considers the creditworthiness of each counterparty to a contract in evaluating potential credit risk quarterly. The counterparty risk to the Fund is limited to the net unrealized gain, if any, on the contract, along with dividends receivable on long equity contracts and interest receivable on short equity contracts. Additionally, risk may arise from unanticipated movements in interest rates or in the value of the underlying securities. Refer to Note 2 R. for further derivative disclosures.

I. Distributions to Shareholders

Dividends from net investment income and net realized capital gains, if any, are declared and paid at least annually. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from GAAP. These differences are due primarily to wash sale-loss deferrals, constructive sales, straddle-loss deferrals, adjustments on swap contracts, and unrealized gains or losses on Section 1256 contracts, which were realized, for tax purposes, at December 31, 2011.

J. Foreign Securities

Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in U.S. companies and the U.S. government. These risks include revaluation of currencies and adverse political and economic developments. Moreover, securities of many foreign companies and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government.

K.Foreign Currency Translation

The books and records of the Fund are maintained in U.S. dollars. Foreign currency transactions are translated into U.S. dollars on the following basis: (i) market value of investment securities, assets and liabilities at the daily rates of exchange, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. For financial reporting purposes, the Fund does not isolate changes in the exchange rate of investment securities from the fluctuations arising from changes in the market prices of securities. However, for federal income tax purposes, the Fund does isolate and treat as ordinary income the effect of changes in foreign exchange rates on realized gain or loss from the sale of investment securities and payables and receivables arising from trade-date and settlement-date differences.

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

L.Cash Equivalents

The Fund considers highly liquid temporary cash investments purchased with an original maturity of less than three months to be cash equivalents. Cash equivalents are included in short-term investments on the Schedule of Investments as well as in investments on the Statement of Assets and Liabilities.

M. Guarantees and Indemnifications

In the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. The Fund has not incurred material expenses in respect of those provisions.

N. Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Adviser to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

O. Other

Investment and shareholder transactions are recorded on the trade date. Realized gains and losses from security transactions are recorded on the identified cost basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Interest is accounted for on the accrual basis and includes amortization of premiums and discounts on the interest method. Expenses include $8,606,377 of borrowing expense on securities sold short. The Fund may utilize derivative instruments such as options, forward currency exchange contracts and other instruments with similar characteristics to the extent that they are consistent with the Fund’s investment objectives and limitations. The use of these instruments may involve additional investment risks, including the possibility of illiquid markets or imperfect correlation between the value of the instruments and the underlying securities.

P.Counterparty Risk

The Fund helps manage counterparty credit risk by entering into agreements only with counterparties the Adviser believes have the financial resources to honor their obligations and by having the Adviser monitor the financial stability of the counterparties. Collateral pledges are monitored and subsequently adjusted if and when the valuations fluctuate, either up or down, by at least the predetermined threshold amount.

Q. The Right to Offset

Financial assets and liabilities as well as cash collateral received and posted are offset by counterparty, and the net amount is reported in the Statement of Assets and Liabilities when the Fund believes there exists a legally enforceable right to set off the recognized amounts.

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

R.Derivatives

The Fund has adopted authoritative standards regarding disclosure about derivatives and hedging activities and how they affect the Fund’s Statement of Assets and Liabilities and Statement of Operations. For the six months ended June 30, 2012: long option contracts (982,781 contracts) were purchased and $95,267,173 premiums were paid, written option contracts (1,830,585 contracts) were opened and $338,446,465 premiums were received, equity swap contracts were opened for a notional value of $1,076,612,043 and closed for a notional value of $887,293,495 and an average of 18 forward currency exchange contract positions were open during the period.

Statement of Assets and Liabilities

Fair values of derivative instruments as of June 30, 2012:

Asset Derivatives

Liability Derivatives

Statement of Assets

Derivatives

and Liabilities Location

Fair Value

and Liabilities Location

Fair Value

Equity Contracts:

Purchased Options

Investments

21,861,895

N/A

—

Written Option Contracts

N/A

—

Written Options

127,619,837

Swap Contracts

Receivables

114,987

Payables

77,619,108

Foreign exchange contracts:

Forward Foreign Currency

Exchange Contracts

Receivables

15,536,133

Payables

2,798,284

Total

37,513,015

208,037,229

Statement of Operations

The effect of derivative instruments on the Statement of Operations for the six months ended June 30, 2012:

Amount of Realized Gain / (Loss) on Derivatives

						Forward
				Written		Currency
	Purchased			Options		Exchange		Swap
Derivatives	Options			Contracts		Contracts		Contracts			Total
Equity contracts	$	(61,812,477	)	$	64,191,322	$	—	$	(12,328,138	)	$	(9,949,293	)
Foreign exchange
contracts		—			—		4,001,770		—			4,001,770
Total	$	(61,821,477	)	$	64,191,322	$	4,001,770	$	(12,328,138	)	$	(5,947,523	)

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)

Change in Unrealized Appreciation / (Depreciation) on Derivatives

						Forward
			Written			Currency
	Purchased		Options			Exchange		Swap
Derivatives	Options		Contracts			Contracts		Contracts			Total
Equity contracts	$	4,338,287	$	(4,476,406	)	$	—	$	(56,844,241	)	$	(56,982,360	)
Foreign exchange
contracts		—		—			12,254,642		—			12,254,642
Total	$	4,338,287	$	(4,476,406	)	$	12,254,642	$	(56,844,241	)	$	(44,727,718	)

Note 3 — AGREEMENTS

The Fund’s investment adviser is Westchester Capital Management, LLC pursuant to an investment advisory agreement with the Adviser dated as of January 1, 2011 (the “Advisory Agreement”). Under the terms of this Advisory Agreement, the Adviser is entitled to receive a fee, calculated daily and payable monthly, at the annual rate of 1.00% of the Fund’s average daily net assets. The Adviser has agreed to voluntarily waive 0.10% of its fee at net asset levels between $1.5 billion through $2 billion, 0.20% of its fee at net asset levels between $2 billion through $5 billion, and 0.25% of its fee at net asset levels exceeding $5 billion. Investment advisory fees voluntarily waived by the Adviser for the six month period ended June 30, 2012 were $3,196,797. Certain officers of the Fund are also officers of the Adviser. The Advisory Agreement was approved for an initial term of two years and thereafter will remain in effect from year to year provided that such continuance is specifically approved at least annually by the vote of a majority of the Fund’s Trustees who are not interested persons of the Adviser or the Fund or by a vote of a majority of the outstanding voting securities of the Fund.

U.S. Bancorp Fund Services, LLC, a subsidiary of U.S. Bancorp, a publicly held bank holding company, serves as transfer agent, administrator, fund accountant, dividend paying agent and shareholder servicing agent for the Fund. U.S. Bank, N.A. serves as custodian for the Fund.

Distribution services are performed pursuant to distribution contracts with broker-dealers and other qualified institutions.

Note 4 — SHARES OF BENEFICIAL INTEREST

The Board of Trustees has the authority to issue an unlimited amount of shares of beneficial interest without par value.

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 4 — SHARES OF BENEFICIAL INTEREST (continued)

Changes in shares of beneficial interest were as follows:

	Six Months Ended						Three Months Ended						Year Ended
	June 30, 2012						December 31, 2011						September 30, 2011
	Shares			Amount			Shares			Amount			Shares			Amount
Issued		50,703,065		$	796,279,631			29,716,276		$	471,436,947			176,395,668		$	2,824,267,550
Issued as
reinvestment
of dividends		—			—			7,466,034			116,320,806			3,547,347			55,977,137
Redemption fee		—			14,657			—			40,203			—			357,767
Redeemed		(68,522,451	)		(1,076,947,746	)		(29,854,090	)		(472,634,819	)		(89,150,638	)		(1,419,480,778	)
Net increase
(decrease)		(17,819,386	)	$	(280,653,458	)		7,328,220		$	115,163,137			90,792,376		$	1,461,121,676

Note 5 — INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION

Purchases and sales of securities for the six month period ended June 30, 2012 (excluding short-term investments, options, forward currency contracts, swap contracts and short positions) aggregated $3,756,360,454 and $3,599,982,343, respectively. There were no purchases or sales of U.S. Government securities.

At December 31, 2011, the components of accumulated earnings (losses) on a tax basis were as follows:

Cost of investments	$	5,040,415,753
Gross unrealized appreciation		110,956,863
Gross unrealized depreciation		(167,265,549	)
Net unrealized depreciation	$	(56,308,686	)
Undistributed ordinary income	$	49,871,335
Undistributed long-term capital gain		—
Total distributable earnings	$	49,871,335
Other accumulated losses		(77,120,760	)
Total accumulated losses	$	(83,558,111	)

The tax components of dividends paid during the six months ended June 30, 2012, three months ended December 31, 2011 and the fiscal year ended September 30, 2011 were as follows:

	June 30, 2012		December 31, 2011		September 30, 2011
Ordinary Income	$	—	$	142,155,672	$	70,276,496
Return of Capital		—		—		—
Total Distributions	$	—	$	142,155,672	$	70,276,496

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 5 — INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION (continued)

The Fund incurred a post-October capital loss of $5,371,346 for securities which is deferred for tax purposes until the next fiscal year. As of December 31, 2011, the Fund had short-term capital loss carryforwards of $24,849,619 and long-term capital loss carryforwards of $10,876,091.

For the three month period ended December 31, 2011, certain dividends paid by the Fund may be subject to a maximum tax rate of 15% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from net investment income designated as qualified dividend income for the three month period ended December 31, 2011 was 21.80% (unaudited) for the Fund.

For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends-received deduction for the three month period ended December 31, 2011 was 20.07% (unaudited) for the Fund. The percentage of taxable ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Code Section 871(k)(2)(c) for the three month period ended December 31, 2011 was 97.71% (unaudited) for the Fund.

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Act”) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes are generally effective for taxable years beginning after the date of enactment. One of the more prominent changes addresses capital loss carryforwards. Under the Act, the Fund is permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those taxable years are required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulations.

Note 6 — WRITTEN OPTION CONTRACTS

The premium amount and the number of option contracts written during the six month period ended June 30, 2012 were as follows:

	Premium Amount			Number of Contracts
Options outstanding at December 31, 2011	$	83,679,758			381,750
Options written		338,446,465			1,830,585
Options closed		(207,609,285	)		(961,406	)
Options exercised		(73,879,020	)		(397,368	)
Options expired		(24,997,405	)		(261,539	)
Options outstanding at June 30, 2012	$	115,640,513			592,022

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 7 — DISTRIBUTION PLAN

The Fund has adopted an Amended and Restated Plan of Distribution (the “Plan”) dated July 19, 2005, pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund will compensate broker dealers or other qualified institutions with whom the Fund has entered into a contract to distribute Fund shares. Under the Plan, the amount of such compensation paid in any one year shall not exceed 0.25% annually of the average daily net assets of the Fund, which may be payable as a service fee for providing permitted recordkeeping, subaccounting, subtransfer agency and/or shareholder liaison services. For the six months ended June 30, 2012, the Fund incurred $5,356,695 pursuant to the Plan. The Plan will remain in effect from year to year provided such continuance is approved at least annually by a vote either of a majority of the Trustees, including a majority of the non-interested Trustees, or a majority of the Fund’s outstanding shares.

Note 8 — TRANSACTIONS WITH AFFILIATES

Pursuant to Section (2)(a)(3) of the 1940 Act, if the Fund owns 5% or more of the outstanding voting securities of an issuer, the issuer is deemed to be an affiliate of the Fund. During the six months ended June 30, 2012, the Fund owned the following positions in such companies for investment purposes only:

	Share						Share		Market
	Balance at						Balance at		Value at						Realized
	January 1,						June 30,		June 30,		Dividend		Interest		Gain/
Issuer Name	2012		Purchases		Sales		2012		2012		Income		Income		(Loss)
Blue Coat
Systems, Inc.		2,480,900		—		2,480,900		—	$	—	$	—	$	—	$	1,455,242
Dollar Thrifty
Automotive
Group, Inc.		2,338,825		—		95,400		2,243,425		181,627,688		—		—		3,201,428
Invesco
Prime Portfolio
Money Market		266,389,252		1,757,629,248		1,851,050,851		172,967,649		172,967,649		—		125,414		—
NetLogic
Microsystems Inc.		3,670,572		—		3,670,572		—		—		—		—		6,893,766
Solutia, Inc.		—		6,303,130		—		6,303,130		176,802,796		190,076		—		—
SuccessFactors,
Inc.		4,344,497		285,000		4,629,497		—		—		—		—		1,201,983
Temple-Inland Inc.		5,648,872		453,874		6,102,746		—		—		—		—		6,521,210
									$	531,398,133	$	190,076	$	125,414	$	19,273,629

The Merger Fund

NOTES TO THE FINANCIAL STATEMENTS (continued)

June 30, 2012 (Unaudited)

Note 9 — RECENT ACCOUNTING PRONOUNCEMENT

In December 2011, the FASB issued ASU No. 2011-11 “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires disclosures to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the Statements of Assets & Liabilities as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, ASU 2011-11 requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. New disclosures are required for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods.

Management is currently evaluating the impact that ASU No. 2011-11 will have on the Funds’ financial statements and disclosures.

The Merger Fund

AVAILABILITY OF PROXY VOTING INFORMATION

Information regarding how the Fund generally votes proxies relating to portfolio securities may be obtained without charge by calling the Fund’s Transfer Agent at 1-800-343-8959 or by visiting the SEC’s website at www.sec.gov. Information regarding how the Fund voted proxies during the most recent 12-month period ended June 30 is available on the SEC’s website or by calling the toll-free number listed above.

AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULE

The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

(This Page Intentionally Left Blank.)

Investment Adviser

Westchester Capital Management, LLC

100 Summit Lake Drive

Valhalla, NY 10595

(914) 741-5600

www.mergerfund.com

Administrator, Transfer Agent, Fund Accountant,

Dividend Paying Agent and Shareholder

Servicing Agent

U.S. Bancorp Fund Services, LLC

615 East Michigan Street

P.O. Box 701

Milwaukee, WI 53201-0701

(800) 343-8959

Custodian

U.S. Bank, N.A.

1555 North RiverCenter Drive, Suite 302

Milwaukee, WI 53212

(800) 343-8959

Trustees

Roy Behren

Michael J. Downey

James P. Logan, III

Barry Hamerling

Executive Officers

Roy Behren, Co-President and Treasurer

Michael T. Shannon, Co-President

Bruce Rubin, Vice President and

Chief Compliance Officer

Jane Perl, Secretary

Counsel

Ropes & Gray LLP

1211 Avenue of the Americas

New York, NY 10036

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

100 East Wisconsin Avenue

Milwaukee, WI 53202

Item 2. Code of Ethics.

Not applicable for semi-annual reports.

Item 3. Audit Committee Financial Expert.

Not applicable for semi-annual reports.

Item 4. Principal Accountant Fees and Services.

Not applicable for semi-annual reports.

Item 5. Audit Committee of Listed Registrants.

Not applicable to registrants who are not listed issuers (as defined in Rule 10A-3 under the Securities Exchange Act of 1934).

Item 6. Investments.

(a)	Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable to open-end investment companies.

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

Not applicable to open-end investment companies.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable to open-end investment companies.

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant’s board of trustees.

Item 11. Controls and Procedures.

(a)

The Registrant’s Co-Presidents/Principal Executive Officers and Treasurer/Principal Financial Officer have reviewed the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider.

(b)

There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting.

Item 12. Exhibits.

(1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Filed herewith.

(2) A separate certification for each principal executive and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies.

(a)	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant) The Merger Fund

By (Signature and Title)* /s/ Michael T. Shannon

Michael T. Shannon, Co-President

Date 8/29/2012

By (Signature and Title)* /s/ Roy Behren

Roy Behren, Co-President and Treasurer

Date 8/29/2012

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By (Signature and Title)* /s/ Michael T. Shannon

Michael T. Shannon, Co-President

Date 8/29/2012

By (Signature and Title)* /s/ Roy Behren

Roy Behren, Co-President and Treasurer

Date 8/29/2012

* Print the name and title of each signing officer under his or her signature.