MERRILL LYNCH REAL ESTATE FUND INC
485BPOS, 1998-05-27
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<PAGE>
 
      
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1998     
 
                                              SECURITIES ACT FILE NO. 333-36721
                                      INVESTMENT COMPANY ACT FILE NO. 811-08389
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               ----------------
                                   FORM N-1A
 
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                                                                          
                         PRE-EFFECTIVE AMENDMENT NO.                   [X]     
                                                                          
                        POST-EFFECTIVE AMENDMENT NO. 1                 [_]     
                                                                          
                                    AND/OR                             [X]     
        REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940   
                                AMENDMENT NO. 2                        [X]     
                                                                            [X]
                       (Check appropriate box or boxes)
 
                               ----------------
                     MERRILL LYNCH REAL ESTATE FUND, INC.
              (Exact name of registrant as specified in charter)
                            800 SCUDDERS MILL ROAD,
                          
                       PLAINSBORO, NEW JERSEY 08536     
                   (Address of Principal Executive Offices)
       
       
          
    REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (609) 282-2800     
 
                                 ARTHUR ZEIKEL
                     MERRILL LYNCH REAL ESTATE FUND, INC.
                800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
       MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
                               ----------------
                                  Copies to:
    
      COUNSEL FOR THE FUND:                       PHILIP L. KIRSTEIN, ESQ. 
        BROWN & WOOD LLP                      MERRILL LYNCH ASSET MANAGEMENT 
     ONE WORLD TRADE CENTER                          P.O. BOX 9011
  NEW YORK, NEW YORK 10048-0557               PRINCETON, NEW JERSEY 08543-9011 
 ATTENTION: JOHN A. MACKINNON, ESQ.    
                               ----------------
 
            IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
            APPROPRIATE BOX):
 
                  [X] immediately upon filing pursuant to paragraph (b)
 
                  [_] on (date) pursuant to paragraph (b)
 
                  [_] 60 days after filing pursuant to paragraph (a)(1)
 
                  [_] on (date) pursuant to paragraph (a)(1)
 
                  [_] 75 days after filing pursuant to paragraph (a)(2)
 
                  [_] on (date) pursuant to paragraph (a)(2) of rule 485.
 
            IF APPROPRIATE, CHECK THE FOLLOWING BOX:
 
                  [_] this post-effective amendment designates a new effective
                     date for a previously filed post-effective amendment.
 
                               ----------------
 
 
TITLE OF SECURITIES BEING REGISTERED: Common Stock, par value, $.10 per share.
 
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- -------------------------------------------------------------------------------
<PAGE>
 
                      MERRILL LYNCH REAL ESTATE FUND, INC.
                      REGISTRATION STATEMENT ON FORM N-1A
 
                               ----------------
 
                             CROSS REFERENCE SHEET
 
<TABLE>   
<CAPTION>
N-1A ITEM NO.                                             LOCATION
- -----------                                               --------
PART A
 
 <C>         <S>                          <C>
    Item 1.  Cover Page................   Cover Page
    Item 2.  Synopsis..................   Fee Table
             Condensed Financial
    Item 3.   Information..............   Not Applicable
    Item 4.  General Description of       
              Registrant...............   Cover Page; Risk Factors and Special 
                                           Considerations; Investment Objective
                                           and Policies; Additional Information 
    Item 5.  Management of the Fund....   Fee Table; Management of the Fund;
                                           Inside Back Cover Page
    Item 5A. Management's Discussion of
              Fund Performance.........   Not Applicable
             Capital Stock and Other
    Item 6.   Securities...............   Cover Page; Additional Information
    Item 7.  Purchase of Securities       
              Being Offered............   Cover Page; Merrill Lynch Select  
                                           Pricing SM System; Fee Table;    
                                           Purchase of Shares; Shareholder  
                                           Services; Additional Information;
                                           Inside Back Cover Page            
    Item 8.  Redemption or Repurchase..   Merrill Lynch Select Pricing SM
                                           System; Fee Table; Purchase of
                                           Shares; Redemption of Shares
    Item 9.  Pending Legal
              Proceedings..............   Not Applicable
 
PART B
 
    Item 10. Cover Page................   Cover Page
    Item 11. Table of Contents.........   Back Cover Page
             General Information and
    Item 12.  History..................   General Information
             Investment Objective and
    Item 13.  Policies.................   Investment Objective and Policies
    Item 14. Management of the Fund....   Management of the Fund
    Item 15. Control Persons and
              Principal Holders of        
              Securities...............   Management of the Fund; Additional
                                           Information                      
    Item 16. Investment Advisory and      
              Other Services...........   Management of the Fund; Purchase of
                                           Shares; General Information       
    Item 17. Brokerage Allocation and
              Other Practices..........   Portfolio Transactions and Brokerage
    Item 18. Capital Stock and Other
              Securities...............   General Information
    Item 19. Purchase, Redemption and
              Pricing of Securities       
              Being Offered............   Purchase of Shares; Redemption of 
                                           Shares; Determination of Net Asset
                                           Value; Shareholder Services       
    Item 20. Tax Status................   Dividends, Distributions and Taxes
    Item 21. Underwriters..............   Purchase of Shares
    Item 22. Calculation of Performance
              Data.....................   Performance Data
    Item 23. Financial Statements......   Financial Statements
</TABLE>    
 
PART C
 
  Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
       
<PAGE>
 
PROSPECTUS
   
MAY 27, 1998     
 
                     MERRILL LYNCH REAL ESTATE FUND, INC.
  P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
 
                               ----------------
   
  Merrill Lynch Real Estate Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks total return by investing
primarily in equity securities of issuers that are principally engaged in the
real estate industry. Total return is a combination of capital appreciation
and investment income. The Fund may employ a variety of techniques to hedge
against market or currency risk or to enhance total return. The Fund should be
considered as a means of diversifying an investment portfolio and not itself a
balanced investment. There can be no assurance that the Fund's investment
objective will be realized. For more information on the Fund's investment
objective and policies, see "Investment Objective and Policies" on page 14.
       
  Pursuant to the Merrill Lynch Select PricingSM System, the Fund offers four
classes of shares, each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select PricingSM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select PricingSM System" on page 3.     
   
  Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 ((609)
282-2800), or from other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch").The minimum initial purchase is
$1,000 and the minimum subsequent purchase is $50, except that for
participants in certain fee-based programs the minimum initial purchase is
$250 and the minimum subsequent purchase is $50, and for retirement plans, the
minimum initial purchase is $100, and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $5.35) for
confirming purchases and repurchases. Purchases and redemptions made directly
through Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent") are
not subject to the processing fee. See "Purchase of Shares" and "Redemption of
Shares."     
 
                               ----------------
 
  THESE SECURITIES  HAVE NOT BEEN APPROVED OR DISAPPROVED BY  THE SECURITIES
     AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCU-
        RACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
          CONTRARY IS A CRIMINAL OFFENSE.
 
                               ----------------
   
  This Prospectus is a concise statement of information about the Fund that is
relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated May 27, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Commission maintains a Web
site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information
regarding the Fund. The Statement of Additional Information is hereby
incorporated by reference into this Prospectus.     
 
                               ----------------
 
                   MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
             MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>
 
                                   FEE TABLE
 
  A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
 
<TABLE>   
<CAPTION>
                          CLASS A(a)        CLASS B(b)       CLASS C     CLASS D
                          ----------        ----------       --------    -------
<S>                       <C>         <C>                    <C>         <C>
SHAREHOLDER TRANSACTION
 EXPENSES:
 Maximum Sales Charge
  Imposed on Purchases
  (as a percentage of
  offering price).......     5.25%(c)          None            None       5.25%(c)
 Sales Charge Imposed on
  Dividend
  Reinvestments.........     None              None            None       None
 Deferred Sales Charge
  (as a percentage of        
  original purchase          
  price or redemption        
  proceeds, whichever is     
  lower)................     None(d)  4.0% during the first  1.0% for     None(d)
                                      year, decreasing 1.0%  one year(f)         
                                      annually to 0.0% after                     
                                        the fourth year(e)                       
 Exchange Fee...........     None              None            None       None
ANNUAL FUND OPERATING
 EXPENSES (AS A
 PERCENTAGE OF AVERAGE
 NET ASSETS):
 Investment Advisory
  Fees(g)...............     .85%               .85%            .85%       .85%
 12b-1 Fees (includes
  account maintenance
  fees and distribution
  fees)(h)..............     None              1.00%           1.00%       .25%
                                         (Class B shares
                                        convert to Class D
                                       shares automatically
                                       after approximately
                                      eight years and cease
                                         being subject to
                                        distribution fees)
Other Expenses(i):
 Shareholder Servicing
  Costs(j)..............     0.06%             0.08%           0.08%      0.07%
 Other..................     0.49%             0.49%           0.49%      0.49%
                             ----              ----            ----       ----
 Total Other Expenses...     0.55%             0.57%           0.57%      0.56%
                             ----              ----            ----       ----
Total Fund Operating
 Expenses...............     1.40%             2.42%           2.42%      1.66%
                             ====              ====            ====       ====
</TABLE>    
- --------
   
(a) Class A shares are sold to a limited group of investors including existing
    Class A shareholders, certain retirement plans and participants in certain
    fee-based programs. See "Purchase of Shares--Initial Sales Charge
    Alternatives--Class A and Class D Shares" on page 28 and "Shareholder
    Services--Fee-Based Programs" on page 40.     
   
(b) Class B shares convert to Class D shares automatically approximately eight
    years after initial purchase. See "Purchase of Shares--Deferred Sales
    Charge Alternatives--Class B and Class C Shares" on page 30.     
   
(c) Reduced for purchases of $25,000 and over, and waived for purchases of
    Class A shares by certain retirement plans and participants in connection
    with certain fee-based programs. Class A and Class D purchases of
    $1,000,000 or more may not be subject to an initial sales charge. See
    "Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
    D Shares" on page 28.     
   
(d) Class A and Class D shares are not subject to a contingent deferred sales
    charge ("CDSC"), except that certain purchases of $1,000,000 or more that
    are not subject to an initial sales charge may instead be subject to a
    CDSC of 1.0% of amounts redeemed within the first year after purchase.
    Such CDSC may be waived in connection with certain fee-based programs. A
    0.75% sales charge for 401(k) purchases over $1,000,000 will apply. See
    "Shareholder Services--Fee-Based Programs" on page 40.     
   
(e) The CDSC may be modified in connection with certain fee-based programs.
    See "Shareholder Services--Fee-Based Programs" on page 40.     
   
(f) The CDSC may be waived in connection with certain fee-based programs. See
    "Shareholder Services--Fee-Based Programs" on page 40.     
   
(g) See "Management of the Fund--Management and Advisory Arrangements" on page
    23.     
(h) See "Purchase of Shares--Distribution Plans" on page 33.
   
(i) Information under "Other Expenses" is estimated for the Fund's first
    fiscal year ending November 30, 1998.     
   
(j) See "Management of the Fund--Transfer Agency Services" on page 25.     
 
                                       2
<PAGE>
 
EXAMPLE:
 
<TABLE>   
<CAPTION>
                                                                   CUMULATIVE
                                                                    EXPENSES
                                                                    PAID FOR
                                                                 THE PERIOD OF:
                                                                 --------------
                                                                 1 YEAR 3 YEARS
                                                                 ------ -------
<S>                                                              <C>    <C>
An investor would pay the following expenses on a $1,000
 investment including the maximum $52.50 initial sales charge
 (Class A and Class D shares only) and assuming (1) the Total
 Fund Operating Expenses for each class set forth on page 2,
 (2) a 5% annual return throughout the periods and (3)
 redemption at the end of the period (including any applicable
 CDSC for Class B and Class C shares):
 Class A.......................................................   $66    $ 94
 Class B.......................................................   $65    $ 95
 Class C.......................................................   $35    $ 75
 Class D.......................................................   $68    $102
An investor would pay the following expenses on the same $1,000
 investment assuming no redemption at the end of the period:
 Class A.......................................................   $66    $ 94
 Class B.......................................................   $25    $ 75
 Class C.......................................................   $25    $ 75
 Class D.......................................................   $68    $102
</TABLE>    
   
  The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts for the Fund's first fiscal year ending November 30, 1998.
The Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL EXPENSES OR
ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF
THE EXAMPLE. Class B and Class C shareholders who hold their shares for an
extended period of time may pay more in Rule 12b-1 distribution fees than the
economic equivalent of the maximum front-end sales charge permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$5.35) for confirming purchases and repurchases. Purchases and redemptions
made directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares."     
 
                    MERRILL LYNCH SELECT PRICING SM SYSTEM
 
  The Fund offers four classes of shares under the Merrill Lynch Select
Pricing SM System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D
are sold to investors choosing the initial sales charge alternatives, and
shares of Class B and Class C are sold to investors choosing the deferred
sales charge alternatives. The Merrill Lynch Select Pricing SM System is used
by more than 50 registered investment companies advised by Merrill Lynch Asset
Management, L.P. ("MLAM" or the "Manager") or Fund Asset Management, L.P.
("FAM"), an affiliate of MLAM. Funds advised by MLAM or FAM that utilize the
Merrill Lynch Select Pricing SM System are referred to herein as "MLAM-advised
mutual funds."
 
 
                                       3
<PAGE>
 
  Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution fees and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, are imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges will not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. Dividends paid by the Fund for each
class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Each class has different exchange privileges.
See "Shareholder Services--Exchange Privilege."
   
  Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales
personnel may receive different compensation for selling different classes of
shares.     
 
  The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select PricingSM System that the investor
believes is the most beneficial under his or her particular circumstances.
More detailed information as to each class of shares is set forth under
"Purchase of Shares."
 
<TABLE>
<CAPTION>
                                            ACCOUNT
                                          MAINTENANCE DISTRIBUTION       CONVERSION
  CLASS          SALES CHARGE(/1/)            FEE         FEE             FEATURE
- -----------------------------------------------------------------------------------------
  <S>     <C>                             <C>         <C>          <C>
    A          Maximum 5.25% initial          No           No                No
              sales charge(/2/)(/3/)
- -----------------------------------------------------------------------------------------
    B        CDSC for a period of four       0.25%       0.75%      B shares convert to
          years, at a rate of 4.0% during                          D shares automatically
          the first year, decreasing 1.0%                           after approximately
               annually to 0.0%(/4/)                                  eight years(/5/)
- -----------------------------------------------------------------------------------------
    C       1.0% CDSC for one year(/6/)      0.25%       0.75%               No
- -----------------------------------------------------------------------------------------
    D          Maximum 5.25% initial         0.25%         No                No
                 sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
    of the offering price. CDSCs are imposed if the redemption occurs within
    the applicable CDSC time period. The charge will be assessed on an amount
    equal to the lesser of the proceeds of redemption or the cost of the
    shares being redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares--Initial Sales
    Charge Alternatives--Class A and Class D Shares--Eligible Class A
    Investors."
 
(Footnotes continued on next page)
 
                                       4
<PAGE>
 
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
    A shares by certain retirement plans and participants in connection with
    certain fee-based programs. Class A and Class D share purchases of
    $1,000,000 or more may not be subject to an initial sales charge but
    instead may be subject to a 1.0% CDSC if redeemed within one year. Such
    CDSC may be waived in connection with certain fee-based programs. A 0.75%
    sales charge for 401(k) purchases over $1,000,000 will apply. See "Class
    A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and the conversion
    and holding periods for certain retirement plans are modified. Also, Class
    B shares of certain other MLAM-advised mutual funds into which exchanges
    may be made have a ten-year conversion period. If Class B shares of the
    Fund are exchanged for Class B shares of another MLAM-advised mutual fund,
    the conversion period applicable to the Class B shares acquired in the
    exchange will apply, and the holding period for the shares exchanged will
    be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.
   
Class A: Class A shares incur an initial sales charge when they are purchased
         and bear no ongoing distribution or account maintenance fees. Class A
         shares are offered to a limited group of investors and also will be
         issued upon reinvestment of dividends on outstanding Class A shares.
         Investors that currently own Class A shares of the Fund in a
         shareholder account are entitled to purchase additional Class A
         shares of the Fund in that account. Other eligible investors include
         certain retirement plans and participants in certain fee-based
         programs. In addition, Class A shares will be offered at net asset
         value to Merrill Lynch & Co., Inc. ("ML & Co.") and its subsidiaries
         (the term "subsidiaries" when used herein with respect to ML & Co.
         includes the Manager, FAM and certain other entities directly or
         indirectly wholly owned and controlled by ML & Co.), and their
         directors and employees and to members of the Boards of MLAM-advised
         mutual funds. The maximum initial sales charge of 5.25% is reduced
         for purchases of $25,000 and over and waived for purchases by certain
         retirement plans and participants in connection with certain fee-
         based programs. Purchases of $1,000,000 or more may not be subject to
         an initial sales charge, but if the initial sales charge is waived,
         such purchases may be subject to a 1.0% CDSC if the shares are
         redeemed within one year after purchase. Such CDSC may be waived in
         connection with certain fee-based programs. A 0.75% sales charge for
         401(k) purchases over $1,000,000 will apply. Sales charges are also
         reduced under a right of accumulation that takes into account the
         investor's holdings of all classes of all MLAM-advised mutual funds.
         See "Purchase of Shares--Initial Sales Charge Alternatives--Class A
         and Class D Shares."     
   
Class B: Class B shares do not incur a sales charge when they are purchased,
         but they are subject to an ongoing account maintenance fee of 0.25%
         and an ongoing distribution fee of 0.75% of the Fund's average net
         assets attributable to Class B shares, as well as a CDSC if they are
         redeemed within four years of purchase. Such CDSC may be modified in
         connection with certain fee-based programs. Approximately eight years
         after issuance, Class B shares will convert automatically into Class
         D shares of the Fund, which are subject to an account maintenance fee
         but no distribution fee; Class B shares of certain other MLAM-advised
         mutual funds into which exchanges may be made convert into Class D
         shares automatically after approximately ten years. If Class B shares
         of the Fund are exchanged for Class B shares of another MLAM-advised
         mutual fund, the conversion period applicable to the Class B shares
         acquired in the exchange will apply, as will the Class D account
         maintenance fee of the acquired fund upon the conversion, and the
         holding period for the shares exchanged will be tacked onto the
         holding period for the shares acquired. Automatic conversion of Class
         B shares into Class D shares will occur at least once a month on the
         basis of the relative net asset values of the shares of the two
         classes on the conversion date, without the imposition of any sales
         load, fee or other charge. Conversion of Class B shares to Class D
         shares will not be deemed a purchase or sale of the shares for
         Federal income tax     
 
                                       5
<PAGE>
 
         
      purposes. Shares purchased through reinvestment of dividends on Class B
      shares also will convert automatically to Class D shares. The conversion
      period for dividend reinvestment shares and the conversion and holding
      periods for certain retirement plans is modified as described under
      "Purchase of Shares--Deferred Sales Charge Alternatives--Class B and
      Class C Shares--Conversion of Class B Shares to Class D Shares."     
   
Class C: Class C shares do not incur a sales charge when they are purchased,
         but they are subject to an ongoing account maintenance fee of 0.25%
         and an ongoing distribution fee of 0.75% of the Fund's average net
         assets attributable to Class C shares. Class C shares are also
         subject to a 1.0% CDSC if they are redeemed within one year after
         purchase. Such CDSC may be waived in connection with certain fee-
         based programs. Although Class C shares are subject to a CDSC for
         only one year (as compared to four years for Class B shares), Class C
         shares have no conversion feature and, accordingly, an investor that
         purchases Class C shares will be subject to distribution fees that
         will be imposed on Class C shares for an indefinite period subject to
         annual approval by the Fund's Board of Directors and regulatory
         limitations.     
   
Class D: Class D shares incur an initial sales charge when they are purchased
         and are subject to an ongoing account maintenance fee of 0.25% of the
         Fund's average net assets attributable to Class D shares. Class D
         shares are not subject to an ongoing distribution fee or any CDSC
         when they are redeemed. The maximum initial sales charge of 5.25% is
         reduced for purchases of $25,000 and over. Purchases of $1,000,000 or
         more may not be subject to an initial sales charge, but if the
         initial sales charge is waived, such purchases may be subject to a
         1.0% CDSC if the shares are redeemed within one year after purchase.
         Such CDSC may be waived in connection with certain fee-based
         programs. A 0.75% sales charge for 401(k) purchases over $1,000,000
         will apply. The schedule of initial sales charges and reductions for
         Class D shares is the same as the schedule for Class A shares, except
         that there is no waiver for purchases by retirement plans or
         participants in connection with certain fee-based programs. Class D
         shares also will be issued upon conversion of Class B shares as
         described above under "Class B." See "Purchase of Shares--Initial
         Sales Charge Alternatives--Class A and Class D Shares."     
 
  The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
PricingSM System that the investor believes is most beneficial under his or
her particular circumstances.
   
  Initial Sales Charge Alternatives. Investors that prefer an initial sales
charge alternative may elect to purchase Class D shares or, if an eligible
investor, Class A shares. Investors choosing the initial sales charge
alternative that are eligible to purchase Class A shares should purchase Class
A shares rather than Class D shares because there is an account maintenance
fee imposed on Class D shares. Investors qualifying for significantly reduced
initial sales charges may find the initial sales charge alternative
particularly attractive because similar sales charge reductions are not
available with respect to the CDSCs imposed in connection with purchases of
Class B or Class C shares. Investors not qualifying for reduced initial sales
charges who expect to maintain their investment for an extended period of time
also may elect to purchase Class A or Class D shares, because over time the
accumulated ongoing account maintenance and distribution fees on Class B or
Class C shares may exceed the initial sales charge and, in the case of Class D
shares, the account maintenance fee. Although some investors who previously
purchased Class A shares may no longer be eligible to purchase Class A shares
of other     
 
                                       6
<PAGE>
 
   
MLAM-advised mutual funds, those previously purchased Class A shares, together
with Class B, Class C and Class D share holdings, will count toward a right of
accumulation that may qualify the investor for reduced initial sales charges
on new initial sales charge purchases. In addition, the ongoing Class B and
Class C account maintenance and distribution fees will cause Class B and Class
C shares to have higher expense ratios, pay lower dividends and have lower
total returns than the initial sales charge shares. The ongoing Class D
account maintenance fees will cause Class D shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Class A shares.
       
  Deferred Sales Charge Alternatives. Because no initial sales charges are
deducted at the time of purchase, Class B and Class C shares provide the
benefit of putting all of the investor's dollars to work from the time the
investment is made. The deferred sales charge alternatives may be particularly
appealing to investors that do not qualify for a reduction in initial sales
charges. Both Class B and Class C shares are subject to ongoing account
maintenance fees and distribution fees; however, the ongoing account
maintenance and distribution fees potentially may be offset to the extent any
return is realized on the additional funds initially invested in Class B or
Class C shares. In addition, Class B shares will be converted into Class D
shares of the Fund after a conversion period of approximately eight years, and
thereafter investors will be subject to lower ongoing fees.     
 
  Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend
to hold their shares for an extended period of time. Investors in Class B
shares should take into account whether they intend to redeem their shares
within the CDSC period and, if not, whether they intend to remain invested
until the end of the conversion period and thereby take advantage of the
reduction in ongoing fees resulting from the conversion into Class D shares.
Other investors, however, may elect to purchase Class C shares if they
determine that it is advantageous to have all their assets invested initially
and they are uncertain as to the length of time they intend to hold their
assets in MLAM-advised mutual funds. Although Class C shareholders are subject
to a shorter CDSC period at a lower rate, they forego the Class B conversion
feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on asset-
based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares--Limitations on the Payment of Deferred Sales Charges."
 
                                       7
<PAGE>
 
                              
                           FINANCIAL HIGHLIGHTS     
   
  The financial information in the table below is unaudited. Unaudited
financial statements for the fiscal period December 26, 1997 (commencement of
operations) to March 31, 1998, are included in the Statement of Additional
Information.     
   
  The following per share data and ratios have been derived from information
provided in the Fund's unaudited financial statements.     
 
<TABLE>   
<CAPTION>
                                           FOR THE PERIOD
                                DECEMBER 26, 1997+ TO MARCH 31, 1998
                               ---------------------------------------------
                                CLASS A     CLASS B     CLASS C     CLASS D
                               ---------   ---------   ---------   ---------
<S>                            <C>         <C>         <C>         <C>
INCREASE (DECREASE) IN NET
 ASSET VALUE:
PER SHARE OPERATING
 PERFORMANCE:
Net asset value, beginning of
 period....................... $   10.00   $   10.00   $   10.00   $   10.00
                               ---------   ---------   ---------   ---------
Investment income--net........       .10         .09         .08         .10
Realized and unrealized gain
 on investments--net..........       .31         .29         .30         .30
                               ---------   ---------   ---------   ---------
Total from investment
 operations...................       .41         .38         .38         .40
                               ---------   ---------   ---------   ---------
Net asset value, end of
 period....................... $   10.41   $   10.38   $   10.38   $   10.40
                               =========   =========   =========   =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
 share........................      4.10%#      3.80%#      3.80%#      4.00%#
                               =========   =========   =========   =========
RATIOS TO AVERAGE NET ASSETS:
Expenses......................      1.40%*      2.42%*      2.42%*      1.66%*
                               =========   =========   =========   =========
Investment income--net........      5.01%*      3.72%*      3.90%*      4.45%*
                               =========   =========   =========   =========
SUPPLEMENTAL DATA:
Net assets, end of period (in
 thousands)................... $   1,912   $  55,257   $  10,904   $   8,875
                               =========   =========   =========   =========
Portfolio turnover............     23.37%      23.37%      23.37%      23.37%
                               =========   =========   =========   =========
Average commission rate
 paid##....................... $  0.0569   $  0.0569   $  0.0569   $  0.0569
                               =========   =========   =========   =========
</TABLE>    
- --------
   
+ Commencement of operations.     
   
* Annualized.     
   
** Total investment returns exclude the effect of sales loads.     
   
# Aggregate total investment return.     
   
## The "Average Commission Rate Paid" includes commissions paid in foreign
   currencies, which have been converted into U.S. dollars using the
   prevailing exchange rate on the date of the transaction. Such conversions
   may significantly affect the rate shown.     
 
                                       8
<PAGE>
 
                    RISK FACTORS AND SPECIAL CONSIDERATIONS
 
RISKS ASSOCIATED WITH REAL ESTATE INVESTMENTS
 
  General. Although the Fund does not invest directly in real estate, it does
invest primarily in equity securities of issuers that are principally engaged
in the real estate industry and does have a policy of concentration of its
investments in the real estate industry. Therefore, an investment in the Fund
is subject to certain risks associated with the ownership of real estate and
with the real estate industry in general. These risks include, among others:
possible declines in the value of real estate; risks related to general and
local economic conditions; possible lack of availability of mortgage funds or
other limitations on access to capital; overbuilding; risks associated with
leverage; market illiquidity; extended vacancies of properties; increases in
competition, property taxes, capital expenditures, and operating expenses;
changes in zoning laws or other government regulation; costs resulting from the
clean-up of, and liability to third parties for damages resulting from,
environmental problems; tenant bankruptcies or other credit problems; casualty
or condemnation losses; uninsured damages from floods, earthquakes or other
natural disasters; limitations on and variations in rents, including decreases
in market rates for rents; investment in developments that are not completed or
that are subject to delays in completion; and changes in interest rates. To the
extent that assets underlying the Fund's investments are concentrated
geographically, by property type or in certain other respects, the Fund may be
subject to certain of the foregoing risks to a greater extent. Investments by
the Fund in securities of companies providing mortgage servicing will be
subject to the risks associated with refinancings and their impact on servicing
rights.
   
  In addition, if the Fund receives rental income or income from the
disposition of real property acquired as a result of a default on securities
the Fund owns, the receipt of such income may adversely affect the Fund's
ability to retain its tax status as a regulated investment company ("RIC")
because of certain income source requirements applicable to RICs under the
Internal Revenue Code of 1986, as amended (the "Code").     
   
  Real Estate Investment Trusts ("REITs"). Investing in REITs involves certain
unique risks in addition to those risks associated with investing in the real
estate industry in general. Equity REITs may be affected by changes in the
value of the underlying property owned by the REITs, while mortgage REITs may
be affected by the quality of any credit extended. REITs are dependent upon
management skills, may not be diversified geographically or by property type,
and are subject to heavy cash flow dependency, default by borrowers and self-
liquidation. REITs also must meet certain requirements under the Code to avoid
entity level tax and to pass-through the character of their income to
shareholders. REITs are consequently subject to the risk of failing to meet
these requirements for favorable tax treatment and failing to maintain their
exemptions from registration under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). REITs are also subject to changes in
the Code, including changes involving their tax status.     
 
  REITs (especially mortgage REITs) are also subject to interest rate risks.
When interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investments in such loans will gradually
align themselves to reflect changes in market interest rates, causing the value
of such investments to fluctuate less dramatically in response to interest rate
fluctuations than would investments in fixed rate obligations.
 
                                       9
<PAGE>
 
 
  Investing in REITs involves risks similar to those associated with investing
in small capitalization companies. REITs may have limited financial resources,
may trade less frequently and in limited volume and may be subject to more
abrupt or erratic price movements than larger company securities. Historically,
small capitalization stocks, such as REITs, have been more volatile in price
than the larger capitalization stocks included in the S&P Index of 500 Common
Stocks. The management of a REIT may be subject to conflicts of interest with
respect to the operation of the business of the REIT and may be involved in
real estate activities competitive with the REIT. REITs may own properties
through joint ventures or in other circumstances in which the REIT may not have
control over its investments. REITs may incur significant amounts of leverage.
 
  Mortgage-Backed Securities. The Fund may invest up to 35% of its total assets
in mortgage-backed securities. Investing in mortgage-backed securities involves
certain unique risks in addition to those risks associated with investment in
the real estate industry in general. These risks include the failure of a party
to meet its commitments under the related operative documents, adverse interest
rate changes and the effects of prepayments on mortgage cash flows. When
interest rates decline, the value of an investment in fixed rate obligations
can be expected to rise. Conversely, when interest rates rise, the value of an
investment in fixed rate obligations can be expected to decline. In contrast,
since interest rates on adjustable rate mortgage loans are reset periodically,
yields on investments in such loans will gradually align themselves to reflect
changes in market interest rates, causing the value of such investments to
fluctuate less dramatically in response to interest rate fluctuations than
would investments in fixed rate obligations.
 
  Further, the yield characteristics of mortgage-backed securities, such as
those in which the Fund may invest, differ from those of traditional fixed-
income securities. The major differences typically include more frequent
interest and principal payments (usually monthly), the adjustability of
interest rates, and the possibility that prepayments of principal may be made
substantially earlier than their stated final distribution dates.
 
  Prepayment rates on mortgage loans are influenced by changes in current
interest rates and a variety of economic, geographic, social and other factors,
and cannot be predicted with certainty. Both adjustable rate mortgage loans and
fixed rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment and to a lesser rate of
principal prepayments in an increasing interest rate environment. Early payment
associated with mortgage-backed securities causes these securities to
experience significantly greater price and yield volatility than that
experienced by traditional fixed-income securities. Under certain interest rate
and prepayment rate scenarios, the Fund may fail to recoup fully its investment
in mortgage-backed securities notwithstanding any direct or indirect
governmental or agency guarantee. When the Fund reinvests amounts representing
payments and unscheduled prepayments of principal of the mortgage-backed
securities, it may receive a rate of interest that is lower than the rate on
existing mortgage-backed securities. Thus, mortgage-backed securities, and
adjustable rate mortgage pass-through securities in particular, may be less
effective than other types of fixed income securities as a means of "locking
in" interest rates.
 
DERIVATIVE INVESTMENTS
 
  The Fund may engage in transactions in certain instruments that may be
characterized as derivatives. These instruments include various types of
options, futures and options thereon, currency forwards and options, mortgage-
backed securities and indexed securities, including inverse securities. The
Fund may engage in these transactions for hedging purposes or, in certain
cases, to enhance total return.
 
                                       10
<PAGE>
 
 
  The risks associated with investments in mortgage-backed securities are
described above. Investments in indexed securities, including inverse
securities, subject the Fund to the risks associated with changes in the
particular indices, which may include losses of amounts invested. Transactions
involving options, futures, options on futures or currency may involve the loss
of an opportunity to profit from a price movement in the underlying asset
beyond certain levels or a price increase on other portfolio assets (in the
case of transactions for hedging purposes) or expose the Fund to potential
losses which exceed the amount originally invested by the Fund in such
instruments. For a further discussion of the risks associated with these
investments, see "Investment Objective and Policies--Description of Certain
Investments," "--Other Investment Policies and Practices--Portfolio Strategies
Involving Options, Futures and Foreign Exchange Transactions" and Appendix A to
this Prospectus, "Investment Practices Involving the Use of Options, Futures
and Foreign Exchange."
 
ILLIQUID SECURITIES
   
  The Fund may invest up to 15% of its net assets in securities that lack an
established secondary trading market or otherwise are considered illiquid.
Liquidity of a security relates to the ability to dispose easily of the
security and the price to be obtained upon disposition of the security, which
may be less than would be obtained for a comparable more liquid security.
Investment of the Fund's assets in illiquid securities may restrict the ability
of the Fund to dispose of its investments in a timely fashion and for a fair
price as well as its ability to take advantage of market opportunities. The
risks associated with illiquidity will be particularly acute in situations in
which the Fund's operations require cash, such as when the Fund redeems shares
or pays dividends, and could result in the Fund borrowing to meet short-term
cash requirements or incurring capital losses on the sale of illiquid
investments. Further, issuers whose securities are not publicly traded are not
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. In making investments
in such securities, the Fund may obtain access to material, nonpublic
information which may restrict the Fund's ability to conduct portfolio
transactions in such securities. In addition, the Fund may invest in privately
placed securities that may or may not be freely transferable under the laws of
the applicable jurisdiction or due to contractual restrictions on resale. See
"Investment Objective and Policies--Description of Certain Investments--
Illiquid Securities" on page 17.     
 
NO RATING CRITERIA FOR DEBT SECURITIES
 
  The Fund has not established any rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to low rating categories of
nationally recognized statistical rating organizations, such as Standard &
Poor's Ratings Services ("S&P") and Moody's Investors Service, Inc.
("Moody's"), and unrated securities of comparable quality (such lower rated and
unrated securities are referred to herein as "high yield/high risk securities"
or "junk bonds") are speculative with respect to the capacity to pay interest
and repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. In purchasing such securities, the Fund will rely on the Manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer of such securities. The Manager will take into consideration, among
other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's
management and regulatory matters. The Fund does not intend to purchase debt
securities that are in default. See the Appendix to the Statement of Additional
Information.
 
                                       11
<PAGE>
 
 
  The market values of high yield/high risk securities tend to reflect
individual issuer developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, service of debt obligations also may be adversely affected
by specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of high yield/high risk securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.
 
  High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities from the Fund. If a call
were exercised by the issuer during a period of declining interest rates, the
Fund likely would have to replace such called securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.
 
  The Fund may have difficulty disposing of certain high yield/high risk
securities because there may be a thin trading market for such securities. To
the extent that a secondary trading market for high yield/high risk securities
does exist, it generally is not as liquid as the secondary market for higher
rated securities. Reduced secondary market liquidity may have an adverse impact
on market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations
generally are available on many high yield/high risk securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. The Fund's Directors, or the Manager will
consider carefully the factors affecting the market for high yield/high risk,
lower rated securities in determining whether any particular security is liquid
or illiquid and whether current market quotations are readily available.
 
  Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high
yield/high risk securities, particularly in a thinly traded market. Factors
adversely affecting the market value of high yield/high risk securities are
likely to affect adversely the Fund's net asset value. In addition, the Fund
may incur additional expenses to the extent it is required to seek recovery
upon a default on a portfolio holding or participate in the restructuring of
the obligations.
 
INVESTMENT IN FOREIGN ISSUERS
 
  General. The Fund may invest up to 25% of its total assets in the securities
of foreign issuers. Investment in securities of foreign issuers involves
certain risks not typically involved in domestic investments, including
fluctuations in foreign exchange rates, future political and economic
developments, different legal systems and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. Securities prices
in different countries are subject to different economic, financial, political
and social factors. Changes in foreign
 
                                       12
<PAGE>
 
currency exchange rates will affect the value of securities in the Fund and the
unrealized appreciation or depreciation of investments. In addition, with
respect to certain foreign countries, there is the possibility of expropriation
of assets, confiscatory taxation, difficulty in obtaining or enforcing a court
judgment, economic, political or social instability or diplomatic developments
that could affect investments in those countries. Certain foreign investments
also may be subject to foreign withholding taxes. These risks often are
heightened for investments in smaller, emerging capital markets.
 
  Public Information. Securities of foreign issuers may not be registered with
the Commission, nor may the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign issuer than about a U.S. issuer and such foreign
issuers may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of U.S. issuers.
 
  Trading Volume, Clearance and Settlement. Foreign financial markets, while
generally growing in trading volume, typically have substantially less volume
than U.S. markets, and securities of many foreign companies are less liquid and
their prices more volatile than securities of comparable domestic companies.
The foreign markets also have different clearance and settlement procedures.
Delays in settlement could result in periods when assets of the Fund are
uninvested and no return is earned thereon. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to
the Fund due to subsequent declines in the value of such portfolio security or,
if the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
 
  Government Supervision and Regulation. There generally is less governmental
supervision and regulation of exchanges, brokers and issuers in foreign
countries than there is in the United States. For example, there may be no
comparable provisions under certain foreign laws to insider trading and similar
investor protection securities laws that apply with respect to securities
transactions consummated in the United States. Further, brokerage commissions
and other transaction costs on foreign securities exchanges generally are
higher than in the United States.
 
NON-DIVERSIFICATION
 
  The Fund is classified as a non-diversified investment company under the
Investment Company Act, which means that the Fund is not limited by the
Investment Company Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the Fund may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to greater risk of loss with respect to its
portfolio securities. The Fund, however, intends to comply with requirements
imposed by the Code for qualification as a regulated investment company. See
"Investment Objective and Policies--Investment Restrictions" and "Taxes."
 
BORROWING
 
  The Fund may borrow up to 33 1/3% of its total assets, taken at market value,
but only from banks as a temporary measure for extraordinary or emergency
purposes, including to meet redemptions (so as not to force the Fund to
liquidate securities at a disadvantageous time) or to settle securities
transactions. The Fund will not
 
                                       13
<PAGE>
 
purchase securities at any time when borrowings exceed 5% of its total assets,
except (a) to honor prior commitments or (b) to exercise subscription rights
when outstanding borrowings have been obtained exclusively for settlements of
other securities transactions. The purchase of securities while borrowings are
outstanding will have the effect of leveraging the Fund. Such leveraging
increases the Fund's exposure to capital risk, and borrowed funds are subject
to interest costs that will reduce net income.
 
SUITABILITY
   
  The economic benefit from an investment in the Fund depends upon many factors
beyond the control of the Fund, the Manager and its affiliates. Because of its
emphasis on securities of issuers principally engaged in the real estate
industry, the Fund should be considered as a vehicle for diversification and
not as a balanced investment program. The suitability for any particular
investor of a purchase of shares of the Fund will depend upon, among other
things, such investor's investment objectives and ability to accept the risks
of investing in such industry including the risk of a loss of principal.     
 
                       INVESTMENT OBJECTIVE AND POLICIES
 
  The investment objective of the Fund is to seek total return by investing
primarily in equity securities of issuers that are principally engaged in the
real estate industry. Total return is a combination of capital appreciation and
investment income. This investment objective is a fundamental policy of the
Fund and may not be changed without the approval of the holders of a majority
of the Fund's outstanding voting securities, as defined in the Investment
Company Act. There can be no assurance that the Fund's investment objective
will be achieved.
 
  The Fund should be considered as a means of diversifying an investment
portfolio and not in itself a balanced investment program. Accordingly, the
Fund may be appropriate only for long-term investors who can assume the risk of
loss of principal, do not seek current income and can accommodate taxable
distributions of income and capital gains.
 
  Under normal market conditions, at least 65% of the Fund's total assets will
be invested in equity securities of issuers that are principally engaged in the
real estate industry. An issuer "principally engaged" in that industry is an
issuer that derives at least 50% of its gross revenues or net profits from the
ownership, leasing, development, construction, financing, management or sale of
commercial, industrial or residential real estate or interests therein. Such
issuers may include, for example, real estate investment trusts ("REITs"), real
estate brokers, home builders or real estate developers, companies with
substantial real estate holdings (such as paper and lumber producers,
agricultural businesses and lodging and entertainment companies) and companies
with significant involvement in the real estate industry, such as building
supply companies, financial institutions that originate real estate mortgages
and companies that provide mortgage servicing. The equity securities in which
the Fund will invest consist of common stocks, shares or units of beneficial
interest of REITs, preferred stock and securities with equity characteristics,
such as convertible securities and warrants.
 
  The Manager's investment strategy with respect to equity securities of real
estate issuers is based on the premise that property market fundamentals are
the primary determinant of growth underlying the success of real
 
                                       14
<PAGE>
 
estate equity securities. Value added management will further distinguish the
most attractive real estate equity securities. The Manager's research and
investment process is designed to identify issuers with strong property
fundamentals and strong management teams. This process is comprised of real
estate market research, specific property inspection and securities analysis.
The Manager believes that this process will result in a portfolio of real
estate equity securities of issuers that own assets in desirable markets
across the country, diversified both geographically and by property type.
 
  Under normal market conditions, up to 35% of the Fund's total assets may be
invested in (i) non-convertible debt securities, (ii) mortgage-backed
securities such as mortgage pass-through certificates, real estate mortgage
investment conduit ("REMIC") certificates and collateralized mortgage
obligations ("CMOs"), and (iii) cash or cash equivalents and investment grade,
short-term securities including money market securities ("Temporary
Investments"). The Fund may invest up to 25% of its total assets in foreign
securities.
 
  Because the Fund has not established any rating criteria for the debt
securities in which it may invest, its assets may be invested in non-
convertible debt securities, REMIC certificates and CMOs that are unrated or
rated in the medium to low rating categories of nationally recognized
statistical rating organizations. See "Risk Factors and Special
Considerations" and the Appendix to the Statement of Additional Information.
 
DESCRIPTION OF CERTAIN INVESTMENTS
 
  REITS. REITs are pooled investment vehicles that invest primarily in income
producing real estate or real estate related loans or interests. REITs are
generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly or indirectly in real property and derive income primarily from the
collection of rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority
of their assets in real estate mortgages and derive income from the collection
of interest payments. Similar to investment companies such as the Fund, REITs
are not taxed on income distributed to shareholders provided they comply with
several requirements of the Code. The Fund will indirectly bear its
proportionate share of expenses incurred by REITs in which the Fund invests in
addition to the expenses incurred directly by the Fund.
 
  Mortgage-Backed Securities. Mortgage-backed securities include mortgage
pass-through certificates and multiple-class pass-through securities, such as
REMIC pass-through certificates, CMOs and stripped mortgage-backed securities,
and other types of mortgage-backed securities that may be available in the
future.
 
  The Fund may invest in guaranteed mortgage pass-through securities which
represent participation interests in pools of residential mortgage loans and
which are issued by United States governmental lenders or by private lenders
and guaranteed by the United States Government or one of its agencies or
instrumentalities, including but not limited to the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
In general, Ginnie Mae certificates are guaranteed by the full faith and
credit of the United States Government for timely payment of principal and
interest on the certificates. Fannie Mae certificates are generally guaranteed
by Fannie Mae, a federally chartered and privately-owned corporation for full
and timely payment of scheduled principal and interest on the certificates. In
general, Freddie Mac certificates are guaranteed by Freddie Mac, a corporate
instrumentality of the United States Government, for timely payment of
interest and the ultimate collection of all principal of the related mortgage
loans.
 
                                      15
<PAGE>
 
  Mortgage-backed securities also include CMOs and REMIC pass-through or
participation certificates, which may be issued by, among others, United
States Government agencies and instrumentalities as well as private lenders.
CMOs and REMIC certificates are issued in multiple classes and the principal
of and interest on the mortgage assets may be allocated among the several
classes of CMOs or REMIC certificates in various ways. Each class of CMOs or
REMIC certificates, often referred to as a "tranche," is issued at a specified
adjustable or fixed interest rate and must be fully retired no later than its
final distribution date. Generally, interest is paid or accrues on all classes
of CMOs or REMIC certificates on a monthly basis. The Fund will not invest in
the lowest tranche of CMOs and REMIC certificates.
 
  Typically, CMOs are collateralized by Ginnie Mae or Freddie Mac certificates
but also may be collateralized by other mortgage assets such as whole loans or
private mortgage pass-through securities. Debt service on CMOs is provided
from payments of principal and interest on collateral of mortgage assets and
any reinvestment income thereon.
 
  A REMIC is a pool of assets that qualifies for special tax treatment under
the Code and consists of certain mortgages or deeds of trust primarily secured
by interests in real property and other permitted investments. Investors may
purchase "regular" and "residual" interests in REMIC trusts although the Fund
does not intend to invest in "residual interests."
 
  Investing in mortgage-backed securities involves certain unique risks in
addition to those generally associated with investing in the real estate
industry in general. These unique risks include the failure of a party to meet
its commitments under the related operative documents, adverse interest rate
changes and the effects of prepayments on mortgage cash flows. See "Risk
Factors and Special Considerations--Risk Associated with Real Estate
Investments--Mortgage-Backed Securities" for a more complete description of
the risks associated with mortgage-backed securities.
 
  Temporary Investments. The Fund reserves the right, as a temporary defensive
measure, to hold up to 100% of its total assets in Temporary Investments.
Under certain adverse investment conditions, the Fund may restrict the markets
in which its assets will be invested and may increase the proportion of assets
invested in Temporary Investments. Investments made for defensive purposes
will be maintained only during periods in which the Manager determines that
economic or financial conditions are adverse for holding or being primarily
invested in equity securities. A portion of the Fund normally would be held in
Temporary Investments in anticipation of investment in equity securities or to
provide for possible redemptions.
   
  Convertible Securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for
a prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics such as (i) higher yields than
common stocks, but lower yields than comparable nonconvertible securities,
(ii) a lesser degree of fluctuation in value than the underlying stock since
they have fixed income characteristics and (iii) the potential for capital
appreciation if the market price of the underlying common stock increases. A
convertible security might be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Fund is called for     
 
                                      16
<PAGE>
 
redemption, the Fund may be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party.
 
  Warrants. The Fund may invest in warrants, which are securities permitting,
but not obligating, their holder to subscribe for other securities. Warrants
do not carry with them the right to dividends or voting rights with respect to
the securities that they entitle their holders to purchase, and they do not
represent any rights in the assets of the issuer. As a result, an investment
in warrants may be considered more speculative than certain other types of
investments. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date.
 
  Indexed and Inverse Securities. The Fund may invest in securities the
potential return of which is based on the change in particular measurements of
value or rate (an "index"). As an illustration, the Fund may invest in a debt
security that pays interest and returns principal based on the change in the
value of a securities index or a basket of securities, or based on the
relative changes of two indices. In addition, the Fund may invest in
securities the potential return of which is based inversely on the change in
an index. For example, the Fund may invest in securities that pay a higher
rate of interest when a particular index decreases and pay a lower rate of
interest (or do not fully return principal) when the value of the index
increases. If the Fund invests in such securities, it may be subject to
reduced or eliminated interest payments or loss of principal in the event of
an adverse movement in the relevant index or indices.
 
  Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal
payable increases or decreases at a rate that is a multiple of the changes in
the relevant index. As a consequence, the market value of such securities may
be substantially more volatile than the market values of other debt
securities. The Fund believes that indexed and inverse securities may provide
portfolio management flexibility that permits the Fund to seek enhanced
returns, hedge other portfolio positions or vary the degree of portfolio
leverage with greater efficiency than would otherwise be possible under
certain market conditions.
 
  Depositary Receipts. The Fund may invest in the securities of foreign
issuers in the form of Depositary Receipts or other securities convertible
into securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. ADRs are receipts typically issued by an American bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. GDRs are receipts issued throughout the world
which evidence a similar arrangement. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets. GDRs are tradeable both in
the U.S. and in Europe and are designed for use throughout the world. The Fund
may invest in unsponsored Depositary Receipts. The issuers of unsponsored
Depository Receipts are not obligated to disclose material information in the
United States, and therefore, there may be less information available
regarding such issuers and there may not be a correlation between such
information and the market value of the Depositary Receipts.
 
  Illiquid Securities. The Fund may invest up to 15% of its net assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. The Fund may invest in securities of issuers that are
sold in private placement transactions between the issuers and their
purchasers and that are neither listed on
 
                                      17
<PAGE>
 
an exchange nor traded in other established markets. In many cases, privately
placed securities will be subject to contractual or legal restrictions on
transfer. See "Investment Restrictions" herein.
 
  The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act. The Board of Directors has determined to
treat as liquid Rule 144A securities that are either (i) freely tradeable in
their primary markets offshore or (ii) non-investment grade debt securities
which the Manager determines are as liquid as publicly-registered non-
investment grade debt securities. The Board of Directors has adopted
guidelines and delegates to the Manager the daily function of determining and
monitoring liquidity of restricted securities. The Board of Directors,
however, will retain sufficient oversight and be ultimately responsible for
the determinations.
 
  Investment in Other Investment Companies. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the Investment Company Act, the
Fund may invest up to 10% of its total assets in securities of other
investment companies. In addition, under the Investment Company Act the Fund
may not own more than 3% of the total outstanding voting stock of any
investment company and not more than 5% of the value of the Fund's total
assets may be invested in the securities of any investment company. If the
Fund acquires shares in investment companies, shareholders would bear both
their proportionate share of expenses in the Fund (including management and
advisory fees) and, indirectly, the expenses of such investment companies
(including management and advisory fees).
 
OTHER INVESTMENT POLICIES AND PRACTICES
 
  Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. The Fund is authorized to engage in certain investment practices
involving the use of options, futures and foreign exchange, which may expose
the Fund to certain risks. These investment practices and the associated risks
are described in detail in Appendix A attached to this Prospectus.
 
  Portfolio Transactions. Subject to policies established by the Board of
Directors of the Fund, the Manager is primarily responsible for the execution
of the Fund's portfolio transactions. Since portfolio transactions may be
effected on foreign securities exchanges, the Fund may incur settlement delays
on certain of such exchanges. See "Risk Factors and Special Considerations."
In executing portfolio transactions, the Manager seeks to obtain the best net
results for the Fund, taking into account such factors as price (including the
applicable brokerage commissions or dealer spread), size of order, difficulty
of execution, operational facilities of the firm involved and the firm's risk
in positioning a block of securities. While the Manager generally seeks
reasonably competitive fees, commissions or spreads, the Fund does not
necessarily pay the lowest fee, commission or spread available. The Fund may
invest in certain securities traded in the over-the-counter ("OTC") market
and, where possible, will deal directly with the dealers who make a market in
the securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as
principal for their own account. On occasion, securities may be purchased
directly from the issuer. Such portfolio securities are generally traded on a
net basis and do not normally involve either brokerage commissions or transfer
taxes. Securities firms may receive brokerage commissions on certain portfolio
transactions including futures, options and options on futures transactions
and the purchase and sale of underlying securities upon exercise of options.
The Fund contemplates that, consistent with its policy of obtaining the best
net results, it will place orders for
 
                                      18
<PAGE>
 
transactions with a number of brokers and dealers, including Merrill Lynch, an
affiliate of the Manager. Subject to obtaining the best price and execution,
securities firms that provide supplemental investment research to the Manager,
including Merrill Lynch, may receive orders for transactions by the Fund.
Information so received will be in addition to, and not in lieu of, the
services required to be performed by the Manager and the expenses of the
Manager will not necessarily be reduced as a result of the receipt of such
supplemental information. See "Management of the Fund--Management and Advisory
Arrangements."
   
  Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the
purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the Commission. Affiliated persons of the Fund,
and affiliated persons of such affiliated persons, may serve as the Fund's
broker in transactions conducted on an exchange and in OTC transactions
conducted on an agency basis and may receive brokerage commissions from the
Fund. In addition, the Fund may not purchase securities during the existence
of any underwriting syndicate for such securities of which Merrill Lynch is a
member or in a private placement in which Merrill Lynch serves as placement
agent except pursuant to procedures approved by the Board of Directors of the
Fund that either comply with rules adopted by the Commission or with the
interpretations of the Commission staff. In addition, consistent with the
Conduct Rules of the NASD, the Fund may consider sales of shares of the Fund
as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund. It is expected that the majority of the shares of
the Fund will be sold by Merrill Lynch. Costs associated with transactions in
foreign securities are generally higher than in the United States, although
the Fund will endeavor to achieve the best net results in effecting its
portfolio transactions.     
 
  The Fund anticipates that its brokerage transactions involving securities of
issuers domiciled in countries other than the United States generally will be
conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions generally are higher than in the United States, although the Fund
will endeavor to achieve the best net results in effecting its portfolio
transactions. There generally is less governmental supervision and regulation
of foreign stock exchanges and brokers than in the United States. See "Risk
Factors and Special Considerations."
   
  Portfolio Turnover. Generally, the Fund does not purchase securities for
short-term trading profits. However, the Fund may dispose of securities
without regard to the time they have been held when such actions, for
defensive or other reasons, appear advisable to the Manager in light of a
change in circumstances in general market, economic or financial conditions.
As a result of its investment policies, the Fund may engage in a substantial
number of portfolio transactions. Accordingly, while the Fund anticipates that
its annual portfolio turnover rate should not exceed 100% under normal
conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of all securities whose maturities at the time of acquisition were one
year or less) by the monthly average value of the securities in the portfolio
during the year. A high portfolio turnover rate involves certain tax
consequences and correspondingly greater transaction costs in the form of
dealer spreads and brokerage commissions, which are borne directly by the
Fund.     
 
  Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale
contracts. Repurchase agreements and purchase and sale contracts may be
entered into only with financial institutions which (i) have, in the opinion
of the Manager, substantial capital relative to the Fund's exposure, or (ii)
have provided the Fund with a third-party guaranty or other credit
 
                                      19
<PAGE>
 
enhancement. Under a repurchase agreement or a purchase and sale contract, the
seller agrees, upon entering into the contract with the Fund, to repurchase
the security at a mutually agreed-upon time and price in a specified currency,
thereby determining the yield during the term of the agreement. This results
in a fixed rate of return insulated from market fluctuations during such
period although it may be affected by currency fluctuations. In the case of
repurchase agreements, the price at which the trades are conducted does not
reflect accrued interest on the underlying obligation; whereas, in the case of
purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateral loans by the purchaser
to the seller secured by the securities transferred to the purchaser. In the
case of a purchase agreement, as a purchaser, the Fund will require the seller
to provide additional collateral if the market value of the securities falls
below the repurchase price at any time during the term of the repurchase
agreement; the Fund does not have the right to seek additional collateral in
the case of purchase and sale contracts. In the event of a default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such securities and the
accrued interest on the securities. In such event, the Fund would have rights
against the seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to perform. While
the substance of purchase and sale contracts is similar to repurchase
agreements, because of the different treatment with respect to accrued
interest and additional collateral, management believes that purchase and sale
contracts are not repurchase agreements as such term is understood in the
banking and brokerage community. The Fund may not invest more than 15% of its
net assets in repurchase agreements or purchase and sale contracts maturing in
more than seven days together with all other illiquid investments.
 
  When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase or sell securities that it is entitled to receive on a when-issued
basis, and it may purchase or sell securities for delayed delivery. These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future to secure what is considered
an advantageous yield and price to the Fund at the time of entering into the
transaction. Although the Fund has not established any limit on the percentage
of its assets that may be committed in connection with such transactions, the
Fund will maintain a segregated account with its custodian of cash, cash
equivalents, U.S. Government securities or other liquid securities denominated
in U.S. dollars or non-U.S. currencies in an aggregate amount equal to the
amount of its commitments in connection with such purchase transactions.
 
  There can be no assurance that a security purchased on a when-issued basis
or purchased or sold for delayed delivery will be issued, and the value of the
security, if issued, on the delivery date may be more or less than its
purchase price. The Fund may bear the risk of a decline in the value of such
security and may not benefit from an appreciation in the value of the security
during the commitment period.
 
  Standby Commitment Agreements. The Fund, from time to time, may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of equity
 
                                      20
<PAGE>
 
securities that may be issued and sold to the Fund at the option of the
issuer. The price and coupon of the security is fixed at the time of the
commitment. At the time of entering into the agreement the Fund is paid a
commitment fee, regardless of whether or not the security is ultimately
issued, which is typically approximately 0.50% of the aggregate purchase price
of the security that the Fund has committed to purchase. The Fund will enter
into such agreements only for the purpose of investing in the security
underlying the commitment at a price that is considered advantageous to the
Fund. The Fund will not enter into a standby commitment with a remaining term
in excess of 45 days and presently will limit its investment in such
commitments so that the aggregate purchase price of the securities subject to
such commitments, together with the value of portfolio securities subject to
legal restrictions on resale that affect their marketability, will not exceed
15% of its net assets taken at the time of acquisition of such a commitment.
The Fund at all times will maintain a segregated account with its custodian of
cash, cash equivalents, U.S. Government securities or other liquid securities
denominated in U.S. dollars or non-U.S. currencies in an aggregate amount
equal to the purchase price of the securities underlying a commitment.
 
  There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
 
  The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security thereafter
will be reflected in the calculation of the Fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. In
the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
 
  Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio with a value not exceeding 33 1/3% of its total
assets to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the United States
Government. Such collateral will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities. During
the period of such a loan, the Fund receives the income on the loaned
securities and either receives the income on the collateral or other
compensation, i.e., negotiated loan premium or fee, for entering into the loan
and thereby increases its yield. In the event that the borrower defaults on
its obligation to return borrowed securities, because of insolvency or
otherwise, the Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent that the value of the
collateral falls below the market value of the borrowed securities.
 
INVESTMENT RESTRICTIONS
 
  The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies that are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (a) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are represented or (b) more than 50%
of the outstanding shares). Among its fundamental policies, the Fund may not
invest more than 25% of its total assets,
 
                                      21
<PAGE>
 
taken at market value at the time of each investment, in the securities of
issuers in any particular industry (excluding issuers principally engaged in
the real estate industry and the U.S. Government and its agencies and
instrumentalities). Investment restrictions and policies that are non-
fundamental policies may be changed by the Board of Directors without
shareholder approval. As a non-fundamental policy, the Fund may not borrow
money or pledge its assets, except that the Fund (a) may borrow from a bank as
a temporary measure for extraordinary or emergency purposes or to meet
redemptions in amounts not exceeding 33 1/3% (taken at market value) of its
total assets and pledge its assets to secure such borrowings, (b) may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (c) may purchase securities on margin to the
extent permitted by applicable law. (However, at the present time, applicable
law prohibits the Fund from purchasing securities on margin.) (The deposit or
payment by the Fund of initial or variation margin in connection with futures
contracts or options transactions is not considered to be the purchase of a
security on margin.) The purchase of securities while borrowings are
outstanding will have the effect of leveraging the Fund. Such leveraging or
borrowing increases the Fund's exposure to capital risk, and borrowed funds
are subject to interest costs which will reduce net income.
 
  As a non-fundamental policy, the Fund will not invest in securities that
cannot readily be resold because of legal or contractual restrictions or that
are not otherwise readily marketable, including repurchase agreements maturing
in more than seven days, if, regarding all such securities, more than 15% of
its net assets taken at market value would be invested in such securities.
Notwithstanding the foregoing, the Fund may purchase without regard to this
limitation securities that are not registered under the Securities Act, but
that can be offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act, provided that the Fund's Board of Directors
continuously determines, based on the trading markets for the specific Rule
144A security, that it is liquid. The Board of Directors may adopt guidelines
and delegate to the Manager the daily function of determining and monitoring
liquidity of restricted securities. The Board has determined that securities
which are freely tradeable in their primary market outside of the United
States should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.
   
NON-DIVERSIFIED STATUS     
   
  The Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act
in the proportion of its assets that it may invest in securities of a single
issuer. The Fund's investments will be limited, however, in order to qualify
for the special treatment afforded "regulated investment companies" under the
Code. See "Taxes." To qualify, the Fund will comply with certain requirements,
including limiting its investments so that at the close of each quarter of the
taxable year (i) not more than 25% of the market value of the Fund's total
assets will be invested in the securities of a single issuer and (ii) with
respect to 50% of the market value of its total assets, not more than 5% of
the market value of its total assets will be invested in the securities of a
single issuer, and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A fund that elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent
that the Fund assumes large positions in the securities of a small number of
issuers, the Fund's net asset value may fluctuate to a greater extent than
that of a diversified investment company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified company.     
 
                                      22
<PAGE>
 
                            MANAGEMENT OF THE FUND
 
DIRECTORS
 
  The Directors of the Fund consist of six individuals, five of whom are not
"interested persons" of the Fund as defined in the Investment Company Act. The
Directors are responsible for the overall supervision of the operations of the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the Investment Company Act.
 
  The Directors are:
   
  Arthur Zeikel*--Chairman of the Manager and its affiliate, FAM; Chairman and
Director of Princeton Services, Inc. ("Princeton Services"); Executive Vice
President of ML & Co.     
 
  Joe Grills--Member of the Committee of Investment of Employee Benefit Assets
of the Financial Executives Institute ("CIEBA"); Member of CIEBA's Executive
Committee; Member of the Investment Advisory Committees of the State of New
York Common Retirement Fund and the Howard Hughes Medical Institute; Director,
Duke Management Company LaSalle Street Fund and Kimco Realty Corporation.
 
  Walter Mintz--Special Limited Partner of Cumberland Associates (investment
partnership).
 
  Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).
 
  Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
investments and consulting).
   
  Stephen B. Swensrud--Chairman of Fernwood Advisors (investment adviser);
Principal of Fernwood Associates (financial consultant).     
- --------
* Interested person, as defined by the Investment Company Act, of the Fund.
 
MANAGEMENT AND ADVISORY ARRANGEMENTS
   
  The Manager acts as the manager for the Fund and provides the Fund with
investment management services. The Manager is owned and controlled by ML &
Co., a financial services holding company and the parent of Merrill Lynch. The
Asset Management Group of ML & Co. (which includes the Manager) acts as the
investment advisor to more than 100 registered investment companies and offers
portfolio management services to individuals and institutions. As of March
1998, the Asset Management Group had a total of approximately $488 billion in
investment company and other portfolio assets under management. This amount
includes assets managed for certain affiliates of the Manager.     
 
  The Fund has entered into an investment advisory agreement with the Manager
(the "Management Agreement"). As described in the Management Agreement, the
Manager will receive for its services to the Fund monthly compensation at the
annual rate of 0.85% of the average daily net assets of the Fund. The
Management Agreement provides that, subject to the direction of the Board of
Directors of the Fund, the Manager
 
                                      23
<PAGE>
 
   
is responsible for the actual management of the Fund's portfolio and
constantly reviews the Fund's holdings in light of its own research analysis
and that from other relevant sources. The responsibility for making decisions
to buy, sell or hold a particular security rests with the Manager, subject to
review by the Board of Directors. For the period December 26, 1997
(commencement of operations) to March 31, 1998, the fee paid by the Fund to
the Manager was $142,865 (based on average daily net assets of $63.9 million).
    
  The Manager provides the portfolio manager for the Fund who considers
analyses from various sources (including brokerage firms with which the Fund
does business), makes the necessary decisions, and places orders for
transactions accordingly. The Manager is also obligated to perform certain
administrative and management services for the Fund and is obligated to
provide all of the office space, facilities, equipment and personnel necessary
to perform its duties under the Management Agreement.
 
  Jay L. Willoughby is the Portfolio Manager of the Fund and is responsible
for the day-to-day management of the Fund's investment portfolio. Mr.
Willoughby was a partner and portfolio manager for the Crabbe Huson Group from
1988 to 1995. From January 1995 to November 1997 he was a Managing Director of
AEW Capital Management, L.P. He has been a Senior Portfolio Manager of the
Manager since November 1997.
   
  The Manager has also entered into a sub-advisory agreement (the "Sub-
Advisory Agreement") with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K."), an indirect, wholly owned subsidiary of ML & Co. and an affiliate of
the Manager, pursuant to which the Manager pays MLAM U.K. a fee for providing
investment advisory services to the Manager with respect to the Fund in an
amount to be determined from time to time by the Manager and MLAM U.K. but in
no event in excess of the amount the Manager actually receives for providing
services to the Fund pursuant to the Management Agreement. For the period
December 26, 1997 (commencement of operations) to March 31, 1998, no fees were
paid by the Manager to MLAM U.K. pursuant to such agreement. MLAM U.K. has
offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.     
   
  The Management Agreement obligates the Fund to pay certain expenses incurred
in its operations including, among other things, the investment advisory fees,
legal and audit fees, registration fees, unaffiliated Directors' fees and
expenses, custodian and transfer fees, accounting and pricing costs and
certain of the costs of printing proxies, shareholder reports, prospectuses
and statements of additional information. Accounting services are provided to
the Fund by the Manager and the Fund reimburses the Manager for its costs in
connection with such services. For the period December 26, 1997 (commencement
of operations) to March 31, 1998, the Fund reimbursed the Manager $10,489 for
accounting services. For the period December 26, 1997 (commencement of
operations) to March 31, 1998, the ratio of total expenses to average net
assets for Class A, Class B, Class C and Class D shares was 1.40%, 2.42%,
2.42% and 1.66%, respectively.     
 
CODE OF ETHICS
 
  The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-l of the Investment Company Act that incorporates the Code of Ethics of
the Manager (together, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of the Manager and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel.
 
                                      24
<PAGE>
 
   
  The Codes require that all employees of the Manager preclear any personal
securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Manager include a ban on acquiring any securities in a "hot"
initial public offering and a prohibition from profiting on short-term trading
in securities. In addition, no employee may purchase or sell any security that
at the time is being purchased or sold (as the case may be), or to the
knowledge of the employee is being considered for purchase or sale, by any
fund advised by the Manager. Furthermore, the Codes provide for trading
"blackout periods" which prohibit trading by investment personnel of the Fund
within periods of trading by the Fund in the same (or equivalent) security (15
or 30 days depending upon the transaction).     
 
TRANSFER AGENCY SERVICES
   
  The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $11.00 per Class
A or Class D account and up to $14.00 per Class B or Class C account and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of
the calendar year, no further fees will be due. For purposes of the Transfer
Agency Agreement, the term "account" includes a shareholder account maintained
directly by the Transfer Agent and any other account representing the
beneficial interest of a person in the relevant share class on a recordkeeping
system, provided the recordkeeping system is maintained by a subsidiary of ML
& Co. For the period December 26, 1997 (commencement of operations) to March
31, 1998, the total fees paid by the Fund to the Transfer Agent were $13,688
pursuant to the Transfer Agency Agreement.     
 
                              PURCHASE OF SHARES
          
  The Distributor, a subsidiary of the Manager and an affiliate of each of FAM
and Merrill Lynch, will act as the distributor of the shares of the Fund.
Shares of the Fund will be offered continuously for sale by the Distributor
and other eligible securities dealers (including Merrill Lynch). Shares of the
Fund may be purchased from securities dealers or by mailing a purchase order
directly to the Transfer Agent. The minimum initial purchase is $1,000. The
minimum subsequent purchase is $50, except that for retirement plans, the
minimum initial purchase is $100 and the minimum subsequent purchase is $1,
and for participants in certain fee-based programs the minimum initial
purchase is $250 and the minimum subsequent purchase is $50. Different
minimums may apply to purchases made through the Merrill Lynch BlueprintSM
Program. See "Purchase of Shares--Merrill Lynch BlueprintSM Program" in the
Statement of Additional Information.     
 
                                      25
<PAGE>
 
   
  The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon
the class of shares selected by the investor under the Merrill Lynch Select
PricingSM System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value, as of 15
minutes after the close of business on the NYSE on the day the orders are
placed with the Distributor, provided the Distributor receives the order from
the securities dealer prior to 30 minutes after the close of business on the
NYSE on that day. If the purchase orders are not received by the Distributor
prior to 30 minutes after the close of business on the NYSE on that day such
orders shall be deemed received on the next business day. The Fund or the
Distributor may suspend the continuous offering of the Fund's shares of any
class at any time in response to conditions in the securities markets or
otherwise and may thereafter resume such offering from time to time. Any order
may be rejected by the Distributor or the Fund. Neither the Distributor nor
the dealers are permitted to withhold placing orders to benefit themselves by
a price change. Merrill Lynch may charge its customers a processing fee
(presently $5.35) to confirm a sale of shares to such customers. Purchases
made directly through the Transfer Agent are not subject to the processing
fee.     
   
  The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the
amount of the purchase, the length of time the investor expects to hold the
shares and other relevant circumstances. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the
investment thereafter being subject to a CDSC and ongoing distribution fees. A
discussion of the factors that investors should consider in determining the
method of purchasing shares under the Merrill Lynch Select PricingSM System is
set forth under "Merrill Lynch Select PricingSM System" on page 3.     
   
  Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of
the ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
The CDSCs, distribution fees and account maintenance fees that are imposed on
Class B and Class C shares, as well as the account maintenance fees that are
imposed on Class D shares, are imposed directly against those classes and not
against all assets of the Fund and, accordingly, such charges do not affect
the net asset value of any other class or have any impact on investors
choosing another sales charge option. The proceeds from account maintenance
fees are used to compensate the Distributor and Merrill Lynch (pursuant to a
sub-agreement) for providing continuing account maintenance activities.
Dividends paid by the Fund for each class of shares are calculated in the same
manner at the same time and will differ only to the extent that account
maintenance and distribution fees and any incremental transfer agency costs
relating to a particular class are borne exclusively by that class. Class B,
Class C and Class D shares each have exclusive voting rights with respect to
the Rule 12b-1 distribution plan adopted with respect to such class pursuant
to which account     
 
                                      26
<PAGE>
 
maintenance and/or distribution fees are paid (except that Class B
shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan). See "Distribution Plans" below. Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege."
   
  Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B and Class C shares
in that the sales charges and distribution fees applicable to each class
provide for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.     
 
  The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select PricingSM System.
 
<TABLE>
<CAPTION>
                                             ACCOUNT
                                           MAINTENANCE DISTRIBUTION           CONVERSION
  CLASS          SALES CHARGE(/1/)             FEE         FEE                 FEATURE
- --------------------------------------------------------------------------------------------------
  <S>     <C>                              <C>         <C>          <C>
    A          Maximum 5.25% initial           No           No                    No
               sales charge(/2/)(/3/)
- --------------------------------------------------------------------------------------------------
    B     CDSC for a period of four years,    0.25%       0.75%      B shares convert to D shares
            at a rate of 4.0% during the                                 automatically after
            first year, decreasing 1.0%                             approximately eight years(/5/)
               annually to 0.0%(/4/)
- --------------------------------------------------------------------------------------------------
    C       1.0% CDSC for one year(/6/)       0.25%       0.75%                   No
- --------------------------------------------------------------------------------------------------
    D          Maximum 5.25% initial          0.25%         No                    No
                 sales charge(/3/)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage
    of the offering price. CDSCs may be imposed if the redemption occurs
    within the applicable CDSC time period. The charge will be assessed on an
    amount equal to the lesser of the proceeds of redemption or the cost of
    the shares being redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge
    Alternatives--Class A and Class D Shares--Eligible Class A Investors."
   
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class
    A shares by certain retirement plans and participants in connection with
    certain fee-based programs. Class A and Class D share purchases of
    $1,000,000 or more may not be subject to an initial sales charge but
    instead may be subject to a 1.0% CDSC if redeemed within one year. Such
    CDSC may be waived in connection with certain fee-based programs. A 0.75%
    sales charge for 401(k) purchases over $1,000,000 will apply.     
       
(4) The CDSC may be modified in connection with certain fee-based programs.
   
(5) The conversion period for dividend reinvestment shares, certain retirement
    plans and certain fee-based programs was modified. Also, Class B shares of
    certain other MLAM-advised mutual funds into which exchanges may be made
    have a ten-year conversion period. If Class B shares of the Fund are
    exchanged for Class B shares of another MLAM-advised mutual fund, the
    conversion period applicable to the Class B shares acquired in the
    exchange will apply, and the holding period for the shares exchanged will
    be tacked onto the holding period for the shares acquired.     
(6) The CDSC may be waived in connection with certain fee-based programs.
 
                                      27
<PAGE>
 
INITIAL SALES CHARGE ALTERNATIVES--CLASS A AND CLASS D SHARES
 
  Investors choosing the initial sales charge alternatives who are eligible to
purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.
 
  The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (i.e., sales loads), as set forth below:
 
<TABLE>
<CAPTION>
                                                                DISCOUNT TO
                         SALES CHARGE AS   SALES CHARGE AS    SELECTED DEALERS
                          PERCENTAGE OF  PERCENTAGE* OF THE   AS PERCENTAGE OF
AMOUNT OF PURCHASE       OFFERING PRICE  NET AMOUNT INVESTED THE OFFERING PRICE
- ------------------       --------------- ------------------- ------------------
<S>                      <C>             <C>                 <C>
Less than $25,000.......      5.25%             5.54%               5.00%
$25,000 but less than
 $50,000................      4.75              4.99                4.50
$50,000 but less than
 $100,000...............      4.00              4.16                3.75
$100,000 but less than
 $250,000...............      3.00              3.09                2.75
$250,000 but less than
 $1,000,000.............      2.00              2.04                1.80
$1,000,000 and over**...      0.00              0.00                0.00
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.
   
** The initial sales charge may be waived on Class A and Class D purchases of
   $1,000,000 or more and on Class A share purchases by certain retirement
   plan investors and participants in connection with certain fee-based
   programs. If the sales charge is waived in connection with a purchase of
   $1,000,000 or more, such purchase may be subject to a CDSC of 1.0% if the
   shares are redeemed within one year after purchase. Such CDSC may be waived
   in connection with certain fee-based programs. The charge will be assessed
   on an amount equal to the lesser of the proceeds of redemption or the cost
   of the shares being redeemed. A sales charge of 0.75% will be charged on
   purchases of $1,000,000 or more of Class A or Class D shares by certain
   employer-sponsored retirement or savings plans.     
   
  The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.
The proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.     
   
  On November 14, 1997, the Fund commenced the public offering of its Class A
and Class D shares. On December 22, 1997, the Fund completed the subscription
offering of its shares of Common Stock by issuing 66,117 Class A shares for
net proceeds to the Fund of $661,170 and 530,697 Class D shares for net
proceeds to the Fund of $5,306,970. There were no gross sales charges for the
sale of Class A shares of the Fund in the subscription offering. The gross
sales charges for the sale of Class D shares in the subscription offering were
$165,034, all of which were received by Merrill Lynch. For the period December
26, 1997 (commencement of operations) to March 31, 1998, the Fund sold 191,602
Class A shares for aggregate net proceeds of $1,925,720. There were no gross
sales charges for the sale of Class A shares of the Fund for that period. For
that period, the Distributor received no CDSCs with respect to redemptions
within one year after purchase of Class A shares purchased subject to a front-
end sales charge waiver. For the period December 26, 1997 (commencement of
operations) to March 31, 1998, the Fund sold 880,606 Class D shares for
aggregate net proceeds of $8,835,943. The gross sales charges for the sale of
Class D shares of the Fund for the period were $49,208, of which $3,051 and
$46,157 were received by the Distributor and Merrill Lynch, respectively. For
that period, the Distributor received no CDSCs with respect to redemptions
within one year after purchase of Class D shares purchased subject to a front-
end sales charge waiver.     
 
                                      28
<PAGE>
 
   
  Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that own Class A shares of the Fund in a
shareholder account, including participants in the Merrill Lynch BlueprintSM
Program, are entitled to purchase additional Class A shares of the Fund in
that account. Certain employer-sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset
value provided such plans meet the required minimum number of eligible
employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs and U.S. branches of foreign owned
banking institutions provided that the program or branch has $3 million or
more initially invested in MLAM-advised mutual funds. Also eligible to
purchase Class A shares at net asset value are participants in certain fee-
based programs including TMASM Managed Trusts to which Merrill Lynch Trust
Company provides discretionary trustee services, collective investment trusts
for which Merrill Lynch Trust Company serves as trustee and certain purchases
made in connection with certain fee-based programs. In addition, Class A
shares are offered at net asset value to ML & Co. and its subsidiaries and
their directors and employees and to members of the Boards of MLAM-advised
investment companies, including the Fund. Certain persons who acquired shares
of certain MLAM-advised closed-end funds in their initial offerings who wish
to reinvest the net proceeds from a sale of their closed-end fund shares of
common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions set forth in the Statement of Additional
Information are met. In addition, Class A shares of the Fund and certain other
MLAM-advised mutual funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted
by such funds in shares of the Fund and certain other MLAM-advised mutual
funds.     
 
  Reduced Initial Sales Charges. No sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends
or capital gains distributions. Class A and Class D sales charges also may be
reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder
Services--Fee-Based Programs."
 
  Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee AccessSM Accounts
available through authorized employers. Class A shares are offered at net
asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.,
and subject to certain conditions, Class A and Class D shares are offered at
net asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc.
and Merrill Lynch High Income Municipal Bond Fund, Inc., who wish to reinvest
in shares of the Fund the net proceeds from a sale of certain of their shares
of common stock pursuant to tender offers conducted by those funds.
   
  Class D shares are offered at net asset value without a sales charge to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant, if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.     
 
  Class D shares are offered with reduced sales charges and, in certain
circumstances, at net asset value, to participants in the Merrill Lynch
BlueprintSM Program.
 
                                      29
<PAGE>
 
  Additional information concerning these reduced initial sales charges is set
forth in the Statement of Additional Information.
 
DEFERRED SALES CHARGE ALTERNATIVES--CLASS B AND CLASS C SHARES
 
  Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLAM-advised mutual funds.
   
  The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. On November 14, 1997, the Fund commenced the public offering of
Class B and Class C shares. On December 22, 1997, the Fund completed the
subscription offering of its shares of Common Stock by issuing 3,412,616 Class
B shares for net proceeds to the Fund of $34,126,160 and $499,893 Class C
shares for net proceeds to the Fund of $4,998,930. As discussed below, Class B
shares are subject to a four-year CDSC, which declines each year, while Class
C shares are subject only to a one-year 1.0% CDSC. On the other hand,
approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class
B Shares to Class D Shares" below. Both Class B and Class C shares are subject
to an account maintenance fee of 0.25% of net assets and distribution fees of
0.75% of net assets as discussed below under "Distribution Plans." The
proceeds from the ongoing account maintenance fee are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.     
   
  Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.     
   
  Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution related
services to the Fund in connection with the sale of Class B and Class C
shares, such as the payment of compensation to financial consultants for
selling Class B and Class C shares from the dealers' own funds. The
combination of the CDSC and the ongoing distribution fee facilitates the
ability of the Fund to sell the Class B and Class C shares without a sales
charge being deducted at the time of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares of the
Fund, which are subject to an account maintenance fee but no distribution fee;
Class B shares of certain other MLAM-advised mutual funds into which exchanges
may be made convert into Class D shares automatically after approximately ten
years. If Class B shares of the Fund are exchanged for Class B shares of
another MLAM-advised mutual fund, the conversion period applicable to the
Class B shares acquired in the exchange will apply, and the holding period for
the shares exchanged will be tacked onto the holding period for the shares
acquired.     
   
  Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations
on the Payment of Deferred Sales Charges" below. Class B shareholders of the
Fund exercising the exchange privilege described under "Shareholder Services--
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.     
 
                                      30
<PAGE>
 
  Contingent Deferred Sales Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds
of redemption or the cost of the shares being redeemed. Accordingly, no CDSC
will be imposed on increases in net asset value above the initial purchase
price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.
 
  The following table sets forth the rates of the Class B CDSC:
 
<TABLE>
<CAPTION>
                                                                    CLASS B
                                                                   CDSC AS A
                                                                 PERCENTAGE OF
                        YEAR SINCE PURCHASE                      DOLLAR AMOUNT
                           PAYMENT MADE                        SUBJECT TO CHARGE
                        -------------------                    -----------------
     <S>                                                       <C>
      0-1.....................................................       4.0%
      1-2.....................................................       3.0%
      2-3.....................................................       2.0%
      3-4.....................................................       1.0%
      4 and thereafter........................................       None
</TABLE>
   
  For the period December 26, 1997 (commencement of operations) to March 31,
1998, the Distributor received CDSCs of $4,861 with respect to redemptions of
Class B shares, all of which were paid to Merrill Lynch. Additional CDSCs
payable to the Distributor may have been waived or converted to a contingent
obligation in connection with a shareholder's participation in certain fee-
based programs.     
 
  In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest applicable rate
being charged. Therefore, it will be assumed that the redemption is first of
shares held for over four years or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the four-
year period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption.
 
  To provide an example, assume an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the third year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional shares through dividend reinvestment. If at such time
the investor makes his or her first redemption of 50 shares (proceeds of
$600), 10 shares will not be subject to the CDSC because of dividend
reinvestment. With respect to the remaining 40 shares, the CDSC is applied
only to the original cost of $10 per share and not to the increase in net
asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 2.0% (the applicable rate in the third year after
purchase).
   
  The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended (the "Code")) of a
shareholder. The Class B CDSC also is waived on redemptions of shares by
certain eligible 401(a) and eligible 401(k) plans and in connection with
certain group plans placing orders through the Merrill Lynch BlueprintSM
Program. The CDSC is also waived for any Class B shares that are purchased by
eligible 401(a) or eligible 401(k) plans that are rolled over into a Merrill
Lynch or Merrill Lynch Trust Company custodied IRA and held in such account at
    
                                      31
<PAGE>
 
   
the time of redemption. The Class B CDSC also is waived for any Class B shares
that are purchased by a Merrill Lynch rollover IRA that was funded by a
rollover from a terminated 401(k) plan managed by the MLAM Private Portfolio
Group and held in such account at the time of redemption. The Class B CDSC is
also waived for any Class B shares purchased within qualifying Employee
AccessSM Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs."     
   
  Contingent Deferred Sales Charges--Class C Shares. Class C shares that are
redeemed within one year after purchase may be subject to a 1.0% CDSC charged
as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be
imposed on increases in net asset value above the initial purchase price. In
addition, no Class C CDSC will be assessed on shares derived from reinvestment
of dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services--Fee-
Based Programs." For the period December 26, 1997 (commencement of operations)
to March 31, 1998, the Distributor received CDSCs of $2,755 with respect to
redemptions of Class C shares, all of which were paid to Merrill Lynch.     
 
  In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over one year or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the one-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.
 
  Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted
automatically into Class D shares of the Fund. Class D shares are subject to
an ongoing account maintenance fee of 0.25% of net assets but are not subject
to the distribution fee that is borne by Class B shares. Automatic conversion
of Class B shares into Class D shares will occur at least once each month (on
the "Conversion Date") on the basis of the relative net asset values of the
shares of the two classes on the Conversion Date, without the imposition of
any sales load, fee or other charge. Conversion of Class B shares to Class D
shares will not be deemed a purchase or sale of the shares for Federal income
tax purposes.
 
  In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class
D shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the
Fund held in the account on the Conversion Date will be converted to Class D
shares of the Fund.
 
  Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.
 
 
                                      32
<PAGE>
 
  In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of
taxable and tax-exempt fixed income MLAM-advised mutual funds will convert
approximately ten years after initial purchase. If, during the Conversion
Period, a shareholder exchanges Class B shares with an eight-year Conversion
Period for Class B shares with a ten-year Conversion Period, or vice versa,
the Conversion Period applicable to the Class B shares acquired in the
exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.
 
  The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans that qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised
mutual funds held in that Class B Retirement Plan will be converted into Class
D shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value per share.
 
  The Conversion Period also may be modified for retirement plan investors who
participate in certain fee-based programs. See "Shareholder Services--Fee-
Based Programs."
 
DISTRIBUTION PLANS
 
  The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The Class B and Class C Distribution Plans provide for the payment of
account maintenance fees and distribution fees, and the Class D Distribution
Plan provides for the payment of account maintenance fees.
 
  The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities.
 
  The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rate of
0.75% of the average daily net assets of the Fund attributable to the shares
of the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services, and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares. In this regard,
the purpose and function of the ongoing distribution fees and the CDSC are the
same as those of the initial sales charge with respect to the Class A and
Class D shares of the Fund in that the deferred sales charges provide for the
financing of the distribution of the Fund's Class B and Class C shares.
 
                                      33
<PAGE>
 
   
  For the period ended December 26, 1997 (commencement of operations) to March
31, 1998, the Fund paid the Distributor $122,670 pursuant to the Class B
Distribution Plan (based on average daily net assets subject to such Class B
Distribution Plan of approximately $46.6 million), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class B shares. For the period
December 26, 1997 (commencement of operations) to March 31, 1998, the Fund
paid the Distributor $21,660 pursuant to the Class C Distribution Plan (based
on average daily net assets subject to such Class C Distribution Plan of
approximately $8.2 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the period December 26, 1997
(commencement of operations) to March 31, 1998, the Fund paid the Distributor
$5,000 pursuant to the Class D Distribution Plan (based on average daily net
assets subject to such Class D Distribution Plan of approximately $7.6
million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.     
   
  The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount
of expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year
on a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.     
   
  As of December 31, 1997, the fully allocated accrual expenses earned by the
Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated revenues for such period
by $1,174,000 (3.33% of Class B net assets at that date). As of February 28,
1998, direct cash expenses for the period since the commencement of operations
of Class B shares exceeded direct cash revenues by $599,054 (1.17% of Class B
net assets at that date). As of December 31, 1997, the fully allocated accrual
expenses earned by the Distributor and Merrill Lynch for the period since the
commencement of operations of Class C shares exceeded fully allocated revenues
for such period by $53,000 (1.01% of Class C net assets at that date). As of
February 28, 1998, direct cash expenses for the period since the commencement
of operations of Class C shares exceeded direct cash revenues by $12,396
(0.13% of Class C net assets at that date).     
 
  The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with the Class B, Class C and Class D shares, and there is no
assurance that the Directors of the Fund will approve the continuance of the
Distribution Plans from year to year. However, the Distributor intends to seek
annual continuation of the Distribution Plans. In their review of the
Distribution Plans, the Directors will be asked to take into consideration
expenses incurred in connection with the account maintenance and/or
distribution of each class of shares separately. The initial sales charges,
the account maintenance fee, the distribution fee and/or the CDSCs received
with respect to one class will not be used to subsidize the sale of shares of
another class. Payments of the distribution fee on Class B shares will
terminate upon conversion of those Class B shares into Class D shares as set
forth under "Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares."
 
                                      34
<PAGE>
 
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
   
  The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee
and the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend
reinvestments and exchanges), plus (2) interest on the unpaid balance for the
respective class, computed separately, at the prime rate plus 1% (the unpaid
balance being the maximum amount payable minus amounts received from the
payment of the distribution fees and the CDSCs). In connection with the Class
B shares, the Distributor has voluntarily agreed to waive interest charges on
the unpaid balance in excess of 0.50% of eligible gross sales. Consequently,
the maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges
at any time. To the extent payments would exceed the voluntary maximum, the
Fund will not make further payments of the distribution fee with respect to
Class B shares, and any CDSCs will be paid to the Fund rather than to the
Distributor; however, the Fund will continue to make payments of the account
maintenance fee. In certain circumstances the amount payable pursuant to the
voluntary maximum may exceed the amount payable under the NASD formula. In
such circumstances payments in excess of the amount payable under the NASD
formula will not be made.     
 
                             REDEMPTION OF SHARES
 
  The Fund is required to redeem for cash all shares of the Fund on receipt of
a written request in proper form. The redemption price is the net asset value
per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive on
redemption all dividends declared through the date of redemption. The value of
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.
 
REDEMPTION
   
  A shareholder wishing to redeem shares may do so, without charge, by
tendering the shares directly to the Fund's Transfer Agent, Merrill Lynch
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of
shares for which certificates have been issued may be accomplished by a
written letter as noted above accompanied by certificates for the shares to be
redeemed. Redemption requests should not be sent to the Fund. The redemption
request in either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such name(s) appear(s) on
the Transfer Agent's register or on the certificate, as the case may be. The
signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" (including, for example, Merrill Lynch branch     
 
                                      35
<PAGE>
 
   
offices and certain other financial institutions) as such term is defined in
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payments will be
mailed within seven days of receipt of a proper notice of redemption.     
 
  At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed
the mailing of a redemption check until such time as it has assured itself
that good payment (e.g., cash, or certified check drawn on a United States
bank) has been collected for the purchase of such shares. Normally, this delay
will not exceed ten days.
 
REPURCHASE
 
  The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund will normally accept orders to repurchase shares
by wire or telephone from dealers for their customers at the net asset value
next computed after receipt of the order by the dealer, provided that the
request for repurchase is received by the dealer prior to the regular close of
business on the NYSE (generally, 4:00 p.m., New York time) on the day received
and is received by the Fund from such dealer not later than 30 minutes after
the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain
that day's closing price.
   
  These foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any
applicable CDSC). Securities firms that do not have selected dealer agreements
with the Distributor may impose a charge on the shareholder for transmitting
the notice of repurchase to the Fund. Merrill Lynch may charge its customers a
processing fee (presently $5.35) to confirm a repurchase of shares.
Repurchases made directly through the Fund's Transfer Agent are not subject to
the processing fee. The Fund reserves the right to reject any order for
repurchase, which right of rejection might affect adversely shareholders
seeking redemption through the repurchase procedure. However, a shareholder
whose order for repurchase is rejected by the Fund may redeem shares as set
forth above.     
 
  Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.
 
REINSTATEMENT PRIVILEGE--CLASS A AND CLASS D SHARES
 
  Shareholders who have redeemed their Class A or Class D shares have a
privilege to reinstate their accounts by purchasing Class A or Class D shares,
as the case may be, of the Fund at net asset value without a sales charge up
to the dollar amount redeemed. The reinstatement privilege may be exercised by
sending a notice of exercise along with a check for the amount to be
reinstated to the Transfer Agent within 30 days after the date the request for
redemption was accepted by the Transfer Agent or the Distributor.
Alternatively, the reinstatement privilege may be exercised through the
investor's Merrill Lynch Financial Consultant within 30 days after the date
the request was accepted by the Transfer Agent or the Distributor. The
reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.
 
                                      36
<PAGE>
 
                             SHAREHOLDER SERVICES
   
  The Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place orders
for the Fund through the Merrill Lynch Blueprint SM Program. Full details as
to each of such services, copies of the various plans described below and
instructions as to how to participate in the various plans and services, or to
change options with respect thereto, can be obtained from the Fund by calling
the telephone number on the cover page hereof or from the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.
    
INVESTMENT ACCOUNT
   
  Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These quarterly statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gain distributions. These
statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gains distributions. Shareholders may make additions to
their Investment Accounts at any time by mailing a check directly to the
Transfer Agent. Shareholders may also maintain their accounts through Merrill
Lynch. Upon the transfer of shares out of a Merrill Lynch brokerage account,
an Investment Account in the transferring shareholder's name may be opened
automatically, without charge, at the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the Class A
or Class D shares (paying any applicable CDSC) so that the cash proceeds can
be transferred to the account at the new firm or such shareholder must
continue to maintain an Investment Account at the Transfer Agent for those
Class A or Class D shares. Shareholders interested in transferring their Class
B or Class C shares from Merrill Lynch and who do not wish to have an
Investment Account maintained for such shares at the Transfer Agent may
request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the
shareholder at the Transfer Agent. If the new brokerage firm is willing to
accommodate the shareholder in this manner, the shareholder must request that
he or she be issued certificates for such shares and then must turn the
certificates over to the new firm for re-registration as described in the
preceding sentence. Shareholders considering transferring a tax-deferred
retirement account such as an individual retirement account from Merrill Lynch
to another brokerage firm or financial institution should be aware that, if
the firm to which the retirement account is to be transferred will not take
delivery of shares of the Fund, a shareholder either must redeem the shares
(paying any applicable CDSC) so that the cash proceeds can be transferred to
the account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.     
 
                                      37
<PAGE>
 
EXCHANGE PRIVILEGE
 
  U.S. shareholders of each class of shares of the Fund each have an exchange
privilege with certain other MLAM-advised mutual funds. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated in accordance
with the rules of the Commission.
 
  Under the Merrill Lynch Select Pricing SM System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-
advised mutual fund if the shareholder holds any Class A shares of the second
fund in the account in which the exchange is made at the time of the exchange
or is otherwise eligible to purchase Class A shares of the second fund. If the
Class A shareholder wants to exchange Class A shares for shares of a second
MLAM-advised mutual fund, and the shareholder does not hold Class A shares of
the second fund in his or her account at the time of the exchange and is not
otherwise eligible to acquire Class A shares of the second fund, the
shareholder will receive Class D shares of the second fund as a result of the
exchange. Class D shares also may be exchanged for Class A shares of a second
MLAM-advised mutual fund at any time as long as, at the time of the exchange,
the shareholder holds Class A shares of the second fund in the account in
which the exchange is made or is otherwise eligible to purchase Class A shares
of the second fund.
 
  Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously
paid on the Class A or Class D shares being exchanged and the sales charge
payable at the time of the exchange on the shares being acquired.
 
  Class B, Class C and Class D shares are exchangeable with shares of the same
class of other MLAM-advised mutual funds.
 
  Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that
might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares
acquired in the exchange, the holding period for the previously owned shares
of the Fund is "tacked" to the holding period for the newly acquired shares of
the other fund.
 
  Class A, Class B, Class C and Class D shares also are exchangeable for
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Class A, Class B, Class C or Class D
shares. The period of time that Class A, Class B, Class C or Class D shares
are held in a money market fund, however, will not count toward satisfaction
of the holding period requirement for reduction of any CDSC imposed on such
shares, if any, and, with respect to Class B shares, toward satisfaction of
the Conversion Period.
 
  Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class
B shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.
 
  Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services--Exchange Privilege" in the
Statement of Additional Information.
 
                                      38
<PAGE>
 
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
   
  All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without sales charge, at the net
asset value per share next determined after the close of business on the NYSE
on the ex-dividend date of such dividend or distribution. A shareholder may at
any time, by written notification to Merrill Lynch if the shareholder's
account is maintained with Merrill Lynch or by written notification or by
telephone (1-800-MER-FUND) to the Transfer Agent if the shareholder's account
is maintained with the Transfer Agent, elect to have subsequent dividends or
both dividends and capital gains distributions, paid in cash, rather than
reinvested, in which event payment will be mailed on or about the payment date
(provided that, in the event that a payment on an account maintained at the
Transfer Agent would amount to $10.00 or less, a shareholder will not receive
such payment in cash and such payment will automatically be reinvested in
additional shares). The Fund is not responsible for any failure of delivery to
the shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks. Cash payments also
can be directly deposited to the shareholder's bank account. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.     
 
SYSTEMATIC WITHDRAWAL PLANS
   
  A shareholder may elect to receive systematic withdrawal payments from his
or her Investment Account in the form of payments by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or quarterly basis. A shareholder whose shares are held within a
CMA (R), CBA (R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA (R)
or CBA (R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B and Class C shares pursuant to a systematic
withdrawal plan, the maximum value of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares
of such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a systematic withdrawal plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of Shares--
Deferred Sales Charge Alternatives--Class B and Class C Shares--Contingent
Deferred Sales Charges--Class B Shares" and "--Contingent Deferred Sales
Charges--Class C Shares." Where the systematic withdrawal plan is applied to
Class B shares, upon conversion of the last Class B shares in an account to
Class D shares, the systematic withdrawal plan will automatically be applied
thereafter to Class D shares. See "Purchase of Shares--Deferred Sales Charge
Alternatives--Class B and Class C Shares--Conversion of Class B Shares to
Class D Shares."     
 
AUTOMATIC INVESTMENT PLANS
   
  Regular additions of Class A, Class B, Class C or Class D shares may be made
to an investor's Investment Account by pre-arranged charges of $50 or more to
his or her regular bank account. Investors who maintain CMA (R) or CBA (R)
accounts may arrange to have periodic investments made in the Fund in their
CMA (R) or CBA (R) accounts or in certain related accounts in amounts of $100
or more through the CMA (R) or CBA (R) Automated Investment Program.     
 
                                      39
<PAGE>
 
FEE-BASED PROGRAMS
 
  Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares that will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at (800) MER-FUND or (800) 637-3863.
 
                                     TAXES
 
  The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains which it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.
   
  Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.     
   
  Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code if certain requirements are met. If the Fund pays
a dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of     
 
                                      40
<PAGE>
 
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.
 
  Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
   
  Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes.     
 
  Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
   
  The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company
(or similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may
cause the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under recent
legislation, the Fund could elect to "mark to market" at the end of each
taxable year all shares that it holds in PFICs. If it made this election, the
Fund would recognize as ordinary income any increase in the value of such
shares over their adjusted basis and as ordinary loss any decrease in such
value to the extent it did not exceed prior increases. By making the mark-to-
market election, the Fund could avoid imposition of the interest charge with
respect to its distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.     
 
  Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for
any shareholder who received a distribution greater than such shareholder's
tax basis in Fund shares (assuming the shares were held as a capital asset).
 
 
                                      41
<PAGE>
 
  No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the
Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D
shares will include the holding period for the converted Class B shares.
 
  If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Fund on the exchanged shares reduces any sales charge the shareholder would
have owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.
 
  A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
 
  The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
 
  Ordinary income and capital gain dividends may also be subject to state and
local taxes.
 
  Certain states exempt from state income taxation dividends paid by RICs that
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
 
  Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
 
                               PERFORMANCE DATA
 
  From time to time the Fund may include its average annual total return and
yield for various specified time periods in advertisements or information
furnished to present or prospective shareholders. Average annual total return
is computed separately for Class A, Class B, Class C and Class D shares in
accordance with formulas specified by the Commission.
 
  Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on
net investment income and any realized and unrealized capital gains or losses
on portfolio investments over such periods) that would equate the initial
amount invested to the redeemable value of such investment at the end of each
period. Average annual total return will be computed assuming all dividends
and distributions are reinvested and taking into account all applicable
recurring and
 
                                      42
<PAGE>
 
nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such
as in the case of Class B and Class C shares and the maximum sales charge in
the case of Class A and Class D shares. Dividends paid by the Fund with
respect to all shares, to the extent any dividends are paid, will be
calculated in the same manner at the same time on the same day and will be in
the same amount, except that account maintenance fees, distribution charges
and any incremental transfer agency costs relating to each class of shares
will be borne exclusively by that class. The Fund will include performance
data for all classes of shares of the Fund in any advertisement or information
including performance data of the Fund.
 
  The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return
calculated will not be average annual rates, but rather, actual annual,
annualized or aggregate rates of return and (2) the maximum applicable sales
charges will not be included with respect to annual or annualized rates of
return calculations. Aside from the impact on the performance data
calculations of including or excluding the maximum applicable sales charges,
actual annual or annualized total return data generally will be lower than
average annual total return data since the average annual rates of return
reflect compounding; aggregate total return data generally will be higher than
average annual total return data since the aggregate rates of return reflect
compounding over a longer period of time. In advertisements distributed to
investors whose purchases are subject to waiver of the CDSC in the case of
Class B and Class C shares (such as investors in certain retirement plans) or
to reduced sales loads in the case of Class A and Class D shares, the
performance data may take into account the reduced, and not the maximum, sales
charge or may not take into account the CDSC and therefore may reflect greater
total return since, due to the reduced sales charges or waiver of the CDSC, a
lower amount of expenses is deducted. See "Purchase of Shares." The Fund's
total return may be expressed either as a percentage or as a dollar amount in
order to illustrate such total return on a hypothetical $1,000 investment in
the Fund at the beginning of each specified period.
 
  Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's
portfolio, the Fund's operating expenses and the amount of realized and
unrealized net capital gains or losses during the period. The value of an
investment in the Fund will fluctuate and an investor's shares, when redeemed,
may be worth more or less than their original cost.
 
  On occasion, the Fund may compare its performance to that of the Standard &
Poor's 500 Index, The Financial Times/Standard & Poor's Actuarial World
Indices, the Morgan Stanley Capital International Indices, the Morgan Stanley
REIT Index, the NAREIT Equity Total Return Index, the Wilshire REIT Index, the
Dow Jones Industrial Average or performance data published by Lipper
Analytical Services, Inc., Morningstar Publications, Inc., Value Line Mutual
Fund Advisor, Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine, or other
industry publications. From time to time, the Fund may include the Fund's
risk-adjusted performance ratings assigned by Morningstar Publications, Inc.
in advertisements or supplemental sales literature. As with other performance
data, performance comparisons should not be considered representative of the
Fund's relative performance for any future period.
 
                                      43
<PAGE>
 
                            ADDITIONAL INFORMATION
 
DIVIDENDS AND DISTRIBUTIONS
   
  It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid
at least annually. All net realized capital gains, if any, are distributed as
dividends to the Fund's shareholders at least annually. In connection with its
investments in REITs, the Fund may receive distributions that do not consist
of ordinary income or capital gain, but represent a return of capital. The
Fund does not intend to distribute to its shareholders the portion of the
distribution it receives that consists of a return of capital. Instead, the
Fund will reinvest such amounts. The per share dividends and distributions on
each class of shares will be reduced as a result of any account maintenance,
distribution and transfer agency fees applicable to that class. See
"Additional Information--Determination of Net Asset Value." Dividends and
distributions will be reinvested automatically in shares of the Fund at net
asset value without a sales charge. However, a shareholder whose account is
maintained at the Transfer Agent or whose account is maintained through
Merrill Lynch may elect in writing to receive any such dividends or
distributions or both in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its ordinary income and
capital gains be distributed during the year. Capital gains distributions will
be automatically reinvested in shares unless the shareholder elects to receive
such distribution in cash.     
   
  Gains or losses attributable to certain foreign currency transactions may
increase or decrease the amount of the Fund's income available for
distribution to shareholders. If such losses exceed other ordinary income
during a taxable year, (a) the Fund would not be able to make any ordinary
income dividend distributions and (b) all or a portion of distributions made
before the losses were realized but in the same taxable year would be
recharacterized as returns of capital to shareholders, rather than as ordinary
income dividends, thereby reducing each shareholder's tax basis in the Fund
shares for Federal income tax purposes and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset). For a
detailed discussion of the Federal tax considerations relevant to foreign
currency transactions, see "Additional Information--Taxes."     
 
DETERMINATION OF NET ASSET VALUE
   
  The net asset value of shares of all classes of the Fund is determined once
daily, as of 15 minutes after the close of business on the NYSE (generally,
4:00 p.m. New York time), on each day during which the NYSE is open for
trading. Any assets or liabilities initially expressed in terms of non-U.S.
dollar currencies are translated into U.S. dollars at the prevailing market
rates as quoted by one or more banks or dealers on the day of valuation. The
net asset value per share is computed by dividing the sum of the market values
of the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the investment advisory
fees payable to the Manager and any account maintenance and/or distribution
fees payable to the Distributor, are accrued daily. The Fund employs Merrill
Lynch Securities Pricing Service ("MLSPS"), an affiliate of the Manager, to
provide certain securities prices for the Fund. During the period December 26,
1997 (commencement of operations) to March 31, 1998, the Fund     
 
                                      44
<PAGE>
 
   
paid MLSPS $608 for such service. The per share net asset value of Class A
shares generally will be higher than the per share net asset value of shares
of other classes, reflecting the daily expense accruals of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares and the daily expense accruals of
the account maintenance fees applicable with respect to Class D shares;
moreover, the per share net asset value of Class D shares generally will be
higher than the per share net asset value of Class B and Class C shares,
reflecting the daily expense accruals of the distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount
of the expense accrual differentials between the classes.     
   
  Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the
exchange designated by or under the authority of the Board of Directors as the
primary market. Long positions in securities traded in the OTC market are
valued at the last available bid price in the OTC market prior to the time of
valuation. Short positions in securities traded in the OTC market are valued
at the last available ask price in the OTC market prior to the time of
valuation. Securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
When the Fund writes an option, the amount of the premium received is recorded
on the books of the Fund as an asset and an equivalent liability. The amount
of the liability is subsequently valued to reflect the current market value of
the option written, based upon the last sale price in the case of exchange-
traded options or, in the case of options traded in the OTC market, the last
asked price. Options purchased by the Fund are valued at their last sale price
in the case of exchange-traded options or, in the case of options traded in
the OTC market, the last bid price. Any assets or liabilities expressed in
terms of foreign currencies are translated into U.S. dollars at the prevailing
market rates as obtained from one or more dealers. Other investments,
including futures contracts and related options, are valued at market value.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Directors.     
   
YEAR 2000 ISSUES     
   
  Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Fund could be
adversely affected if the computer systems used by the Manager or other Fund
service providers do not properly address this problem prior to January 1,
2000. The Manager has established a dedicated group to analyze these issues
and to implement any systems modifications necessary to prepare for the Year
2000. Currently, the Manager does not anticipate that the transition to the
21st century will have any material impact on its ability to continue to
service the Fund at current levels. In addition, the Manager has sought
assurances from the Fund's other service providers that they are taking all
necessary steps to ensure that their computer systems will accurately reflect
the Year 2000, and the Manager will continue to monitor the situation. At this
time, however, no assurance can be given that the Fund's other service
providers have anticipated every step necessary to avoid any adverse effect on
the Fund attributable to the Year 2000 Problem.     
 
                                      45
<PAGE>
 
ORGANIZATION OF THE FUND
   
  The Fund was incorporated under Maryland law on September 24, 1997. It has
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and
Class D Common Stock, each consisting of 100,000,000 shares. Shares of Class
A, Class B, Class C and Class D Common Stock represent an interest in the same
assets of the Fund and are identical in all respects except that Class B,
Class C and Class D shares bear certain expenses relating to the account
maintenance associated with such shares, and Class B and Class C shares bear
certain expenses relating to distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to distribution
and/or account maintenance expenditures, as applicable. See "Purchase of
Shares." The Directors of the Fund may classify and reclassify the shares of
the Fund into additional or other classes of common stock at a future date.
       
  Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors
and any other matter submitted to a shareholder vote. The Fund does not intend
to hold meetings of shareholders in any year in which the Investment Company
Act does not require shareholders to act upon any of the following matters:
(i) election of Directors; (ii) approval of an investment advisory agreement;
(iii) approval of a distribution agreement; and (iv) ratification of selection
of independent auditors. Also, the by-laws of the Fund require that a special
meeting of shareholders be held upon the written request of a majority of the
outstanding shares of the Fund entitled to vote at such meeting, if such
request is in compliance with applicable Maryland law. Voting rights for
Directors are not cumulative. Shares issued are fully paid and non-assessable
and have no preemptive rights. Shares have the conversion rights described in
this Prospectus. Each share of Common Stock is entitled to participate equally
in dividends and distributions declared by the Fund and in the net assets of
the Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities except, as noted above, the Class B, Class C and Class D shares
bear certain additional expenses.     
 
SHAREHOLDER REPORTS
 
  Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the shareholder's
related accounts the shareholder should notify in writing:
 
               Merrill Lynch Financial Data Services, Inc.
               P.O. Box 45289
               Jacksonville, Florida 32232-5289
   
  The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers. If
you have any questions regarding this matter please call your Merrill Lynch
Financial Consultant or Merrill Lynch Financial Data Services, Inc. at (800)
637-3863.     
 
SHAREHOLDER INQUIRIES
 
  Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Prospectus.
 
                                      46
<PAGE>
 
                                  APPENDIX A
 
              INVESTMENT PRACTICES INVOLVING THE USE OF OPTIONS,
                         FUTURES AND FOREIGN EXCHANGE
 
  The Fund is authorized to engage in certain investment practices involving
the use of options, futures and foreign exchange, as described below. Such
instruments, which may be regarded as derivatives, are referred to
collectively herein as "Strategic Instruments."
 
OPTIONS ON SECURITIES AND SECURITIES INDICES
 
  Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of
which is substantially correlated with securities held in its portfolio. When
the Fund purchases a put option, in consideration for an up-front payment (the
"option premium"), the Fund acquires a right to sell to another party
specified securities owned by the Fund at a specified price (the "exercise
price") on or before a specified date (the "expiration date"), in the case of
an option on securities, or to receive from another party a payment based on
the amount a specified securities index declines below a specified level on or
before the expiration date, in the case of an option on a securities index.
The purchase of a put option limits the Fund's risk of loss in the event of a
decline in the market value of the portfolio holdings underlying the put
option prior to the option's expiration date. In the event the market value of
the portfolio holdings underlying the put option increases rather than
decreases, however, the Fund will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized without the purchase of the put.
 
  The Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices the performance of which
substantially correlates with the performance of the types of securities it
intends to purchase. When the Fund purchases a call option, in consideration
for the option premium, the Fund acquires a right to purchase from another
party specified securities at the exercise price on or before the expiration
date, in the case of an option on securities, or to receive from another party
a payment based on the amount a specified securities index increases beyond a
specified level on or before the expiration date, in the case of an option on
a securities index. The purchase of a call option may protect the Fund from
having to pay more for a security as a consequence of increases in the market
value for the security during a period when the Fund is contemplating its
purchase, in the case of an option on a security, or attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive, in the case of an option on an index (an "anticipatory hedge"). In
the event the Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium.
 
  The Fund may also purchase put or call options in connection with closing
out put or call options it has previously sold.
 
  Writing Options. The Fund is authorized to write (i.e., sell) call options
on securities held in its portfolio or securities indices the performance of
which is substantially correlated with securities held in its portfolio. When
the Fund writes a call option, in return for an option premium, the Fund gives
another party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of
 
                                      47
<PAGE>
 
an option on securities, or agrees to pay to another party an amount based on
any gain in a specified securities index beyond a specified level on or before
the expiration date, in the case of an option on a securities index. The Fund
may write call options to earn income, through the receipt of option premiums.
In the event the party to which the Fund has written an option fails to
exercise its rights under the option because the value of the underlying
securities is less than the exercise price, the Fund will partially offset any
decline in the value of the underlying securities through the receipt of the
option premium and will realize a greater return than would have been realized
on the underlying securities alone. By writing a call option, however, the
Fund limits its ability to sell the underlying securities, and gives up the
opportunity to profit from any increase in the value of the underlying
securities beyond the exercise price, while the option remains outstanding.
 
  The Fund may also write put options on securities or securities indices.
When the Fund writes a put option, in return for an option premium, the Fund
gives another party the right to sell to the Fund a specified security at the
exercise price on or before the expiration date, in the case of an option on a
security, or agrees to pay to another party an amount on any decline in a
specified securities index below a specified level on or before the expiration
date, in the case of an option on a securities index. The Fund may write put
options to earn income through the receipt of option premiums. In the event
the party to which the Fund has written an option fails to exercise its right
under the option because the value of the underlying securities is greater
than the exercise price, the Fund will profit by the amount of the option
premium. By writing a put option, however, the Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of the security at the time of exercise as long as the put option is
outstanding. Accordingly, when the Fund writes a put option it is exposed to a
risk of loss in the event the value of the underlying securities falls below
the exercise price, which loss potentially may substantially exceed the amount
of option premium received by the Fund for writing the put option. The Fund
will write a put option on a security or a securities index only if the Fund
is using the put as an anticipatory hedge or is writing the put in connection
with trading strategies involving combinations of options, for example, the
sale and purchase of options with identical expiration dates on the same
security or index but different exercise prices (a technique called a
"spread").
 
  The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.
 
  Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Options, Futures and Currency
Instruments" below. A call option will be considered covered if the Fund owns
the securities it would be required to deliver upon exercise of the option
(or, in the case of an option on a securities index, securities which
substantially replicate the performance of such index) or owns a call option,
warrant or convertible instrument which is immediately exercisable for, or
convertible into, such security.
 
  Types of Options. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized
exercise prices and expiration dates and require the parties to post margin
against their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
 
                                      48
<PAGE>
 
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post
margin and are subject to greater risk of counterparty default. See
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Investments" below.
 
FUTURES
 
  The Fund may engage in transactions in futures and, including stock index
futures and financial futures contracts, options thereon. Financial futures
contracts are standardized, exchange-traded contracts which obligate a
purchaser to take delivery, and a seller to make delivery, of a specific
amount of a commodity at a specified future date at a specified price. Stock
index futures contracts are similar to other futures contracts except that
they do not require actual delivery of securities but instead result in cash
settlement based on the difference in value of the index between the time the
contract was entered into and the time of its settlement.
 
  No price is paid upon entering into a futures contract. Rather, upon
purchasing or selling a futures contract the Fund is required to deposit
collateral ("margin") equal to a percentage (generally less than 10%) of the
contract value. Each day thereafter until the futures position is closed, the
Fund will pay additional margin representing any loss experienced as a result
of the futures position the prior day or be entitled to a payment representing
any profit experienced as a result of the futures position the prior day.
 
  The sale of a futures contract for hedging purposes limits the Fund's risk
of loss through a decline in the market value of portfolio holdings correlated
with the futures contract prior to the futures contract's expiration date. In
the event the market value of the portfolio holdings correlated with the
futures contract increases rather than decreases, however, the Fund will
realize a loss on the futures position and a lower return on the portfolio
holdings than would have been realized without the purchase of the futures
contract.
 
  The purchase of a futures contract as an anticipatory hedge may protect the
Fund from having to pay more for securities as a consequence of increases in
the market value for such securities during a period when the Fund was
attempting to identify specific securities in which to invest in a market the
Fund believes to be attractive. In the event that such securities decline in
value or the Fund determines not to complete an anticipatory hedge transaction
in a futures contract, however, the Fund may realize a loss relating to the
futures position.
 
  The Fund will limit transactions in futures and options on futures to the
extent necessary to prevent the Fund from being deemed a "commodity pool"
under regulations of the Commodity Futures Trading Commission.
 
FOREIGN EXCHANGE TRANSACTIONS
 
  The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for the purpose of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.
 
  Forward foreign exchange transactions are OTC contracts to purchase or sell
a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange
transactions are similar but require current, rather than future, settlement.
The Fund will enter into foreign exchange transactions for the purpose of
hedging either a specific transaction or a portfolio position.
 
                                      49
<PAGE>
 
The Fund may enter into a foreign exchange transaction for purposes of hedging
a specific transaction by, for example, purchasing a currency needed to settle
a security transaction or selling a currency in which the Fund has received or
anticipates receiving a dividend or distribution. The Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by
selling forward a currency in which a portfolio position of the Fund is
denominated or by purchasing a currency in which the Fund anticipates
acquiring a portfolio position in the near future. The Fund may also hedge
portfolio positions through currency swaps, which are transactions in which
one currency is simultaneously bought for a second currency on a spot basis
and sold for the second currency on a forward basis.
 
  The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through use of currency futures or options thereon.
Currency futures are similar to forward foreign exchange transactions except
that futures are standardized, exchange-traded contracts. See "Futures" above.
 
  The Fund may also hedge against the decline in the value of a currency
against the U.S. dollar through the use of currency options. Currency options
are similar to options on securities, but in consideration for an option
premium the writer of a currency option is obligated to sell (in the case of a
call option) or purchase (in the case of a put option) a specified amount of a
specified currency on or before the expiration date for a specified amount of
another currency. The Fund may engage in transactions in options on currencies
either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments" below.
 
  When entering into a transaction in a Currency Instrument, the Fund will not
hedge a currency in excess of the aggregate market value of the securities
which it owns (including receivables for unsettled securities sales), or has
committed to or anticipates purchasing, which are denominated in such
currency. The Fund may, however, hedge a currency by entering into a
transaction in a Currency Instrument denominated in a currency other than the
currency being hedged (a "cross-hedge"). The Fund will only enter into a
cross-hedge if the Manager believes that (i) there is a demonstrably high
correlation between the currency in which the cross-hedge is denominated and
the currency being hedged and (ii) executing a cross-hedge through the
currency in which the cross-hedge is denominated will be significantly more
cost effective or provide substantially greater liquidity than executing a
similar hedging transaction by means of the currency being hedged.
 
  Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated
currency movements will not be accurately predicted and that the Fund's
hedging strategies will be ineffective. To the extent that the Fund hedges
against anticipated currency movements which do not occur, the Fund may
realize losses, and lower its total return, as the result of its hedging
transactions. Furthermore, the Fund will only engage in hedging activities
from time to time and may not be engaging in hedging activities when movements
in currency exchange rates occur. It may not be possible for the Fund to hedge
against currency exchange rate movements, even if correctly anticipated, in
the event that (i) the currency exchange rate movement is so generally
anticipated that the Fund is not able to enter into a hedging transaction at
an effective price or (ii) the currency exchange rate movement relates to a
market with respect to which Currency Instruments are not available (such as
certain developing markets) and it is not possible to engage in effective
foreign currency hedging.
 
                                      50
<PAGE>
 
RISK FACTORS IN OPTIONS, FUTURES AND CURRENCY INSTRUMENTS
 
  Use of Strategic Instruments for hedging purposes involves the risk of
imperfect correlation in movements in the value of the Strategic Instruments
and the value of the instruments being hedged. If the value of the Strategic
Instruments moves more or less than the value of the hedged instruments, the
Fund will experience a gain or loss which will not be completely offset by
movements in the value of the hedged instruments.
 
  The Fund intends to enter transactions involving Strategic Instruments only
if there appears to be a liquid secondary market for such instruments or, in
the case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Strategic Instruments." However,
there can be no assurance that, at any specific time, either a liquid
secondary market will exist for a Strategic Instrument or the Fund will
otherwise be able to sell such instrument at an acceptable price. It may
therefore not be possible to close a position in a Strategic Instrument
without incurring substantial losses, if at all.
 
  Certain transactions in Strategic Instruments (e.g., forward foreign
exchange transactions, futures transactions, sales of put options) may expose
the Fund to potential losses which exceed the amount originally invested by
the Fund in such instruments. When the Fund engages in such a transaction, the
Fund will deposit in a segregated account at its custodian liquid securities
with a value at least equal to the Fund's exposure, on a mark-to-market basis,
to the transaction (as calculated pursuant to requirements of the Securities
and Exchange Commission). Such segregation will ensure that the Fund has
assets available to satisfy its obligations with respect to the transaction,
but will not limit the Fund's exposure to loss.
 
ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
STRATEGIC INSTRUMENTS
 
  Certain Strategic Instruments traded in OTC markets, including OTC options,
may be substantially less liquid than other instruments in which the Fund may
invest. The absence of liquidity may make it difficult or impossible for the
Fund to sell such instruments promptly at an acceptable price. The absence of
liquidity may also make it more difficult for the Fund to ascertain a market
value for such instruments. The Fund will therefore acquire illiquid OTC
instruments (i) if the agreement pursuant to which the instrument is purchased
contains a formula price at which the instrument may be terminated or sold or
(ii) for which the Manager anticipates the Fund can receive on each business
day at least two independent bids or offers, unless a quotation from only one
dealer is available, in which case that dealer's quotation may be used.
 
  The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% of the total assets of the Fund, taken at
market value, together with all other assets of the Fund which are deemed to
be illiquid or are otherwise not readily marketable. However, if an OTC option
is sold by the Fund to a dealer in U.S. government securities recognized as a
"primary dealer" by the Federal Reserve Bank of New York and the Fund has the
unconditional contractual right to repurchase such OTC option at a
predetermined price, then
 
                                      51
<PAGE>
 
the Fund will treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is "in-the-
money" (i.e., current market value of the underlying security minus the
option's exercise price).
 
  Because Strategic Instruments traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments
or has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk that a counterparty will become
bankrupt or otherwise fail to honor its obligations by engaging in
transactions in Strategic Instruments traded in OTC markets only with
financial institutions which have substantial capital or which have provided
the Fund with a third-party guaranty or other credit enhancement.
 
ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS
 
  The Fund may not use any Strategic Instrument to gain exposure to an asset
or class of assets that it would be prohibited from purchasing directly by its
investment restrictions.
 
                                      52
<PAGE>
 
       MERRILL LYNCH REAL ESTATE FUND, INC.--AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
   BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
   APPLICATION BY CALLING TOLL FREE (800) 637-3766.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
  I, being of legal age, wish to purchase: (choose one)
 [_] Class A shares  [_] Class B shares  [_] Class C shares  [_] Class D shares
 
of Merrill Lynch Real Estate Fund, Inc. and establish an Investment Account as
described in the Prospectus. In the event that I am not eligible to purchase
Class A shares, I understand that Class D shares will be purchased.
 
  Basis for establishing an Investment Account:
    A. I enclose a check for $............ payable to Merrill Lynch Financial
  Data Services, Inc., as an initial investment (minimum $1,000). I understand
  that this purchase will be executed at the applicable offering price next to
  be determined after this Application is received by you.
    B. I already own shares of the following Merrill Lynch mutual funds that
  would qualify for the Right of Accumulation as outlined in the Statement of
  Additional Information: (Please list all funds. Use a separate sheet of
  paper if necessary.)
1. ..................................    4. ..................................
2. ..................................    5. ..................................
3. ..................................    6. ..................................
Name...........................................................................
                First Name                 Initial                 Last Name
Name of Co-Owner (if any)......................................................
                First Name                 Initial                 Last Name
Address..............................    Date ................................
 .....................................    Name and Address of Employer ........
                           (Zip Code)    .....................................
Occupation...........................    .....................................
 .....................................    .....................................
         Signature of Owner                 Signature of Co-Owner (if any)
(In the case of co-owner, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS
 
     Ordinary Income Dividends            Long-Term Capital Gains

     Select  [_] Reinvest                 Select  [_] Reinvest
     One:    [_] Cash                     One:    [_] Cash     
             
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
                                       [_] Check or  [_] Direct Deposit to
                                                         bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch Real Estate Fund, Inc.
Authorization Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE):  [_] checking  [_] savings
 
Name on your account ..........................................................
 
 
Bank Name .....................................................................
 
Bank Number ............................... Account Number ...................
 
Bank Address ..................................................................
 
I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.
 
Signature of Depositor ........................................................
 
Signature of Depositor ............................... Date...................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.
- -------------------------------------------------------------------------------
 
                                      53
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.--AUTHORIZATION FORM (PART 1) --
                                  (CONTINUED)
- -------------------------------------------------------------------------------
 
3. SOCIAL SECURITY NUMBER OR TAXPAYER IDENTIFICATION NUMBER
           [                                                      ]
           Social Security Number or Taxpayer Identification Number
 
  Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Taxes") either because I have not been notified that I am subject
thereto as a result of a failure to report all interest or dividends, or the
Internal Revenue Service ("IRS") has notified me that I am no longer subject
thereto.
 
  INSTRUCTION: YOU MUST STRIKE OUT LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.
 
Signature of Owner...................    Signature of Co-Owner (if any).......
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND D SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
 
                                                 ..................., 19......
                                                   Date of Initial Purchase
 
Dear Sir/Madam:
 
  Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Real Estate Fund, Inc. or any other investment company with an initial
sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor, Inc. acts as distributor over the next 13 month period which will
equal or exceed:
 
 [_] $25,000    [_] $50,000    [_] $100,000    [_] $250,000    [_] $1,000,000
  Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch Real Estate Fund,
Inc. Prospectus.
 
  I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor, Inc., my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch Real Estate Fund, Inc. held as security.
 
By ..................................    .....................................
        Signature of Owner                       Signature of Co-Owner
                               (If registered in joint parties, both must sign)
  In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:
 
(1) Name.............................    (2) Name.............................
                                         
Account Number.......................    Account Number.......................
- -------------------------------------------------------------------------------
5. FOR DEALER ONLY
    Branch Office, Address, Stamp        We hereby authorize Merrill Lynch
                                         Funds Distributor, Inc. to act as
- -                                  -     our agent in connection with
                                         transactions under this
                                         authorization form and agree to
                                         notify the Distributor of any
                                         purchases or sales made under a
                                         Letter of Intention, Automatic
                                         Investment Plan or Systematic
                                         Withdrawal Plan. We guarantee the
                                         Shareholder's signature.
- -                                  -
This form when completed should be       .....................................
mailed to:                                      Dealer Name and Address      
                                                                             
  Merrill Lynch Real Estate Fund, Inc.   By ..................................
  c/o Merrill Lynch Financial               Authorized Signature of Dealer    
   Data Services, Inc.                                                        
  P.O. Box 45289                         [ ][ ][ ] [ ][ ][ ][ ] ..............
  Jacksonville, FL 32232-5289            Branch-Code F/C No.    F/C Last Name 
                                                                
                                         [ ][ ][ ]  [ ][ ][ ][ ][ ]
                                         Dealer's Customer Account No.
 
                                      54
<PAGE>
 
       MERRILL LYNCH REAL ESTATE FUND, INC.--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------
 
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------
 
1. ACCOUNT REGISTRATION
 
(PLEASE PRINT)
 
Name of Owner..............................     [                       ]
              First Name Initial  Last          Social Security Number or
              Name                               Taxpayer Identification
                                                         Number
 
Name of Co-Owner (if any)..................
              First Name Initial  Last
              Name
 
Address....................................    Account Number ................
                                               (if existing account)
   .......................................
                                   (Zip Code)
- -------------------------------------------------------------------------------
 
2. SYSTEMATIC WITHDRAWAL PLAN (SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)
 
  MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for
quarterly, of [_] Class A, [_] Class B*, [_] Class C*, or [_] Class D shares
in Merrill Lynch Real Estate Fund, Inc. at cost or current offering price.
Withdrawals to be made either (check one) [_] Monthly on the 24th day of each
month, or [_] Quarterly on the 24th day of March, June, September and
December. If the 24th falls on a weekend or holiday, the next succeeding
business day will be utilized. Begin systematic withdrawal on
(month), or as soon as possible thereafter.
   
SPECIFY THE AMOUNT OF THE WITHDRAWAL YOU WOULD LIKE PAID TO YOU: [_] $      of
(check one) [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in
the account.     
 
SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):
 
DRAW CHECKS PAYABLE (CHECK ONE)
 
(a)I hereby authorize payment by check
  [_] as indicated in Item 1.
  [_] to the order of..........................................................
 
Mail to (check one)
  [_] the address indicated in Item 1.
  [_] Name (please print)......................................................
 
Address .......................................................................
 
   ..........................................................................
 
Signature of Owner..................................... Date..................
 
Signature of Co-Owner (if any).................................................
 
(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO MY BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING
OR TERMINATING THIS SERVICE.
 
Specify type of account (check one): [_] checking [_] savings
 
Name on your account...........................................................
 
Bank Name......................................................................
 
Bank Number........................ Account Number............................
 
Bank Address...................................................................
 
     ........................................................................
 
Signature of Owner.............................................................
 
Signature of Depositor................................. Date..................
 
Signature of Depositor.........................................................
(If joint account, both must sign)
 
NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.
- -------
   
* Annual withdrawal cannot exceed 10% of the value of shares of such class
  held in the account at the time the election to join the Systematic
  Withdrawal Plan is made.     
 
                                      55
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.--AUTHORIZATION FORM (PART 2) --
                                  (CONTINUED)
- -------------------------------------------------------------------------------
3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
 
  I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase: (choose one)
 
 [_] Class A shares  [_] Class B shares  [_] Class C shares  [_] Class D shares
 
of Merrill Lynch Real Estate Fund, Inc., subject to the terms set forth below.
In the event that I am not eligible to purchase Class A shares, I understand
that Class D shares will be purchased.
 
                                                                            
    MERRILL LYNCH FINANCIAL DATA           AUTHORIZATION TO HONOR ACH DEBITS
           SERVICES, INC.                  DRAWN BY MERRILL LYNCH FINANCIAL 
                                                  DATA SERVICES, INC.       
You are hereby authorized to draw an
ACH debit each month on my bank          To...............................Bank 
account for investment in Merrill                  (Investor's Bank)           
Lynch Real Estate Fund, Inc. as                                                
indicated below:                         Bank Address.........................  
                                                                                
  Amount of each check or ACH debit      City....... State........ Zip.......   
  $.................................                                            
                                         As a convenience to me, I hereby       
  Account Number ...................     request and authorize you to pay and   
                                         charge to my account ACH debits        
Please date and invest ACH debits on     drawn on my account by and payable     
the 20th of each month beginning         to Merrill Lynch Financial Data        
 ......(month) or as soon thereafter as   Services, Inc. I agree that your       
possible.                                rights in respect to each such debit   
                                         shall be the same as if it were a      
I agree that you are preparing these     check drawn on you and signed          
ACH debits voluntarily at my request     personally by me. This authority is    
and that you shall not be liable for     to remain in effect until revoked by   
any loss arising from any delay in       me in writing. Until you receive       
preparing or failure to prepare any      such notice, you shall be fully        
such debit. If I change banks or         protected in honoring any such         
desire to terminate or suspend this      debit. I further agree that if any     
program, I agree to notify you           such debit be dishonored, whether      
promptly in writing. I hereby            with or without cause and whether      
authorize you to take any action to      intentionally or inadvertently, you    
correct erroneous ACH debits of my       shall be under no liability.           
bank account or purchases of fund                                               
shares including liquidating shares      ............   .....................   
of the Fund and crediting my bank            Date           Signature of        
account. I further agree that if a                            Depositor     
debit is not honored upon                                                   
presentation, Merrill Lynch Financial    ............   .....................
Data Services, Inc. is authorized to         Bank      Signature of Depositor
discontinue immediately the Automatic      Account       (If joint account, 
Investment Plan and to liquidate            Number         both must sign)   
sufficient shares held in my account   
to offset the purchase made with the   
dishonored debit.                      
                                       
 ............    .....................
    Date            Signature of
                      Depositor
 
                ......................
               Signature of Depositor
                 (If joint account,
                   both must sign)
 
NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.
 
                                      56
<PAGE>
 
                     
                  [(This page intentionally left blank)]     
<PAGE>
 
                     
                  [(This page intentionally left blank)]     
<PAGE>
 
                                     
                                  MANAGER     
                         
                      Merrill Lynch Asset Management     
                             
                          Administrative Offices:     
                             
                          800 Scudders Mill Road     
                          
                       Plainsboro, New Jersey 08536     
                                
                             Mailing Address:     
                                  
                               P.O. Box 9011     
                        
                     Princeton, New Jersey 08543-9011     
                                   
                                DISTRIBUTOR     
                      
                   Merrill Lynch Funds Distributor, Inc.     
                             
                          Administrative Offices:     
                             
                          800 Scudders Mill Road     
                          
                       Plainsboro, New Jersey 08536     
                                
                             Mailing Address:     
                                  
                               P.O. Box 9081     
                        
                     Princeton, New Jersey 08536-9081     
                                    
                                 CUSTODIAN     
                              
                           The Bank of New York     
                              
                           90 Washington Street     
                                   
                                12th Floor     
                            
                         New York, New York 10286     
                                 
                              TRANSFER AGENT     
                   
                Merrill Lynch Financial Data Services, Inc.     
                             
                          Administrative Offices:     
                            
                         4800 Deer Lake Drive East     
                        
                     Jacksonville, Florida 32246-6484     
                                
                             Mailing Address:     
                                 
                              P.O. Box 45289     
                        
                     Jacksonville, Florida 32232-5289     
                              
                           INDEPENDENT AUDITORS     
                              
                           Deloitte & Touche LLP     
                                
                             117 Campus Drive     
                        
                     Princeton, New Jersey 08540-6400     
                                     
                                  COUNSEL     
                                
                             Brown & Wood LLP     
                             
                          One World Trade Center     
                          
                       New York, New York 10048-0557     
<PAGE>
 
  NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUND, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
 
                              -------------------
 
                               TABLE OF CONTENTS
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Fee Table..................................................................   2
Merrill Lynch Select PricingSM System......................................   3
Financial Highlights.......................................................   8
Risk Factors and Special Considerations....................................   9
Investment Objective and Policies..........................................  14
 Description of Certain Investments........................................  15
 Other Investment Policies and Practices...................................  18
 Investment Restrictions...................................................  21
 Non-Diversified Status....................................................  22
Management of the Fund.....................................................  23
 Directors.................................................................  23
 Management and Advisory Arrangements......................................  23
 Code of Ethics............................................................  24
 Transfer Agency Services..................................................  25
Purchase of Shares.........................................................  25
 Initial Sales Charge Alternatives--
  Class A and Class D Shares...............................................  28
 Deferred Sales Charge Alternatives--
  Class B and Class C Shares...............................................  30
 Distribution Plans........................................................  33
 Limitations on the Payment of Deferred Sales Charges......................  35
Redemption of Shares.......................................................  35
 Redemption................................................................  35
 Repurchase................................................................  36
 Reinstatement Privilege--Class A and Class D Shares.......................  36
Shareholder Services.......................................................  37
 Investment Account........................................................  37
 Exchange Privilege........................................................  38
 Automatic Reinvestment of Dividends and Capital Gains Distributions.......  39
 Systematic Withdrawal Plans...............................................  39
 Automatic Investment Plans................................................  39
 Fee-Based Programs........................................................  40
Taxes......................................................................  40
Performance Data...........................................................  42
Additional Information.....................................................  44
 Dividends and Distributions...............................................  44
 Determination of Net Asset Value..........................................  44
 Year 2000 Issues..........................................................  45
 Organization of the Fund..................................................  46
 Shareholder Reports.......................................................  46
 Shareholder Inquiries.....................................................  46
Appendix A.................................................................  47
Authorization Form.........................................................  53
</TABLE>    
                                                             
                                                          Code #19017-0598     
 
 
[LOGO] MERRILL LYNCH

Merrill Lynch
Real Estate Fund, Inc.

[ART]

PROSPECTUS

    May 27, 1998      

Distributor:
Merrill Lynch
Funds Distributor, Inc.

This prospectus should be retained for future reference.
<PAGE>
 
STATEMENT OF ADDITIONAL INFORMATION
 
                     MERRILL LYNCH REAL ESTATE FUND, INC.
  P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
 
 
                               ----------------
 
 
  Merrill Lynch Real Estate Fund, Inc. (the "Fund") is a non-diversified,
open-end management investment company that seeks to provide shareholders with
total return by investing primarily in equity securities of issuers that are
principally engaged in the real estate industry. Total return is the
combination of capital appreciation and investment income. The Fund may employ
a variety of techniques to hedge against market or currency risk or to enhance
total return. There can be no assurance that the investment objective of the
Fund will be realized.
 
  Pursuant to the Merrill Lynch Select Pricing SM System, the Fund offers four
classes of shares each with a different combination of sales charges, ongoing
fees and other features. The Merrill Lynch Select Pricing SM System permits an
investor to choose the method of purchasing shares that the investor believes
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other relevant circumstances.
 
 
                               ----------------
   
  This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated May 27,
1998 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into
the Prospectus. Capitalized terms used but not defined herein have the same
meanings as in the Prospectus.     
 
 
                               ----------------
 
 
                   MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
             MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
 
 
                               ----------------
     
  The date of this Statement of Additional Information is May 27, 1998.     
<PAGE>
 
                       INVESTMENT OBJECTIVE AND POLICIES
 
  The investment objective of the Fund is to seek total return by investing
primarily in equity securities of issuers that are principally engaged in the
real estate industry. Total return is a combination of capital appreciation
and investment income. There can be no assurance that the Fund's investment
objective will be achieved. Reference is made to "Investment Objective and
Policies" in the Prospectus for a discussion of the investment objective and
policies of the Fund.
 
  The Fund may invest up to 25% of its total assets in foreign securities.
   
  While it is the policy of the Fund generally not to engage in trading for
short-term gains, the Manager will effect portfolio transactions without
regard to holding period, if, in its judgment, such transactions are advisable
in light of a change in circumstances of a particular company or within a
particular industry or in the general market, economic or financial
conditions. The portfolio turnover rate is calculated by dividing the lesser
of the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of all securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities in the portfolio during the year. While the Fund anticipates that
its annual portfolio turnover rate should not exceed 100% under normal
conditions, it is impossible to predict portfolio turnover rates. Higher
portfolio turnover may contribute to higher transactional costs and negative
tax consequences, such as an increase in capital gain dividends or in ordinary
income dividends of accrued market discount. See "Dividends, Distributions and
Taxes." The portfolio turnover rate is calculated by dividing the lesser of
the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of securities whose maturities at the time of acquisition
were one year or less) by the monthly average value of securities in the
portfolio during the year. For the period December 26, 1997 (commencement of
operations) to March 31, 1998, the Fund's portfolio turnover rate was 23.37%.
    
       
       
       
OTHER INVESTMENT POLICIES AND PRACTICES
   
  Portfolio Strategies Involving Options, Futures and Foreign Exchange
Transactions. The Fund is authorized to engage in certain investment practices
involving the use of options, futures and foreign exchange, which may expose
the Fund to certain risks. These investment practices and the associated risks
are described in detail in Appendix A in the Prospectus.     
 
  Non-Diversified Status. The Fund is classified as non-diversified within the
meaning of the Investment Company Act of 1940, as amended (the "Investment
Company Act"), which means that the Fund is not limited by such Act in the
proportion of its assets that it may invest in securities of a single issuer.
The Fund's investments are limited, however, in order for the Fund to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986,
as amended (the "Code"). See "Taxes." To qualify, the Fund complies with
certain requirements, including limiting its investments so that at the close
of each quarter of the taxable year (i) not more than 25% of the market value
of the Fund's total assets will be invested in the securities of a single
issuer and (ii) with respect to 50% of the market value of its total assets,
not more than 5% of the market value of its total assets will be invested in
the securities of a single issuer. A fund that elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5%
and 10% requirements with
 
                                       2
<PAGE>
 
respect to 75% of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the Fund's net asset
value may fluctuate to a greater extent than that of a diversified company as
a result of changes in the financial condition or in the market's assessment
of the issuers, and the Fund may be more susceptible to any single economic,
political or regulatory occurrence than a diversified company.
 
  When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the
Fund at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other liquid securities denominated in U.S. dollars or non-U.S. currencies in
an aggregate amount equal to the amount of its commitment in connection with
such purchase transactions.
 
  There can be no assurance that a security purchased on a when-issued basis
or purchased or sold through a forward commitment will be issued, and the
value of the security, if issued, on the delivery date may be more or less
than its purchase price. The Fund may bear the risk of a decline in the value
of such security and may not benefit from an appreciation in the value of the
security during the commitment period.
 
  Standby Commitment Agreements. The Fund, from time to time, may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of equity securities which may be
issued and sold to the Fund at the option of the issuer. The price of the
security is fixed at the time of the commitment. At the time of entering into
the agreement the Fund is paid a commitment fee, regardless of whether or not
the security is ultimately issued, which is typically approximately 0.50% of
the aggregate purchase price of the security that the Fund has committed to
purchase. The Fund will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a price that is
considered advantageous to the Fund. The Fund will not enter into a standby
commitment with a remaining term in excess of 45 days and presently will limit
its investment in such commitments so that the aggregate purchase price of the
securities subject to such commitments, together with the value of portfolio
securities subject to legal restrictions on resale that affect their
marketability, will not exceed 15% of its net assets taken at the time of
acquisition of such a commitment. The Fund at all times will maintain a
segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other liquid securities denominated in U.S. dollars
or non-U.S. currencies in an aggregate amount equal to the purchase price of
the securities underlying a commitment.
 
  There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
 
  The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security thereafter
will be reflected in the calculation of the Fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. In
the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
 
                                       3
<PAGE>
 
   
  Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements and purchase and sale
contracts. Repurchase agreements and purchase and sale contracts may be
entered into only with financial institutions which (i) have, in the opinion
of Merrill Lynch Asset Management L.P. (the "Manager" or "MLAM"), substantial
capital relative to the Fund's exposure, or (ii) have provided the Fund with a
third-party guaranty or other credit enhancement. Under a repurchase agreement
or a purchase and sale contract, the seller agrees, upon entering into the
contract with the Fund, to repurchase the security at a mutually agreed-upon
time and price in a specified currency, thereby determining the yield during
the term of the agreement. This results in a fixed rate of return insulated
from market fluctuations during such period although it may be affected by
currency fluctuations. In the case of repurchase agreements, the price at
which the trades are conducted do not reflect accrued interest on the
underlying obligation; whereas, in the case of purchase and sale contracts,
the prices take into account accrued interest. Such agreements usually cover
short periods, such as under one week. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. In the case of a repurchase
agreement, as a purchaser, the Fund will require the seller to provide
additional collateral if the market value of the securities falls below the
repurchase price at any time during the term of the repurchase agreement; the
Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate, the rate of return to the Fund shall be dependent upon
intervening fluctuations of the market value of such securities and the
accrued interest on the securities. In such event, the Fund would have rights
against the seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to perform. While
the substance of purchase and sale contracts is similar to repurchase
agreements, because of the different treatment with respect to accrued
interest and additional collateral, management believes that purchase and sale
contracts are not repurchase agreements as such term is understood in the
banking and brokerage community. The Fund may not invest more than 15% of its
net assets in repurchase agreements or purchase and sale contracts maturing in
more than seven days together with all other illiquid investments.     
 
  Lending of Portfolio Securities. Subject to the investment restrictions set
forth in the Prospectus and herein, the Fund may lend securities from its
portfolio to approved borrowers and receive therefor collateral in cash or
securities issued or guaranteed by the United States Government. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. The purpose of such
loans is to permit the borrower to use such securities for delivery to
purchasers when such borrower has sold short. If cash collateral is received
by the Fund, it is invested in short-term money market securities, and a
portion of the yield received in respect of such investment is retained by the
Fund. Alternatively, if securities are delivered to the Fund as collateral,
the Fund and the borrower negotiate a rate for the loaned premium to be
received by the Fund for lending its portfolio securities. In either event,
the total yield on the Fund's portfolio is increased by loans of its portfolio
securities. The Fund will have the right to regain record ownership of loaned
securities to exercise beneficial rights such as voting rights, subscription
rights and rights to dividends, interest or other distributions. Such loans
are terminable at any time, and the borrower, after notice, will be required
to return borrowed securities within five business days. The Fund may pay
reasonable finder's, administrative and
 
                                       4
<PAGE>
 
custodial fees in connection with such loans. With respect to the lending of
portfolio securities, there is the risk of failure by the borrower to return
the securities involved in such transactions.
 
INVESTMENT RESTRICTIONS
 
  The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the Fund's shares represented at a meeting at
which more than 50% of the outstanding shares of the Fund are represented or
(ii) more than 50% of the Fund's outstanding shares). The Fund may not:
 
    1. Invest more than 25% of its assets, taken at market value at the time
  of each investment, in the securities of issuers in any particular industry
  (excluding issuers principally engaged in the real estate industry and the
  U.S. Government and its agencies and instrumentalities). For purposes of
  this restriction, states, municipalities and their political subdivisions
  are not considered part of any industry.
 
    2. Make investments for the purpose of exercising control or management.
  Investments by the Fund in wholly-owned investment entities created under
  the laws of certain countries will not be deemed to be the making of
  investments for the purpose of exercising control or management.
 
    3. Purchase or sell real estate, except that, to the extent permitted by
  applicable law, the Fund may invest in securities directly or indirectly
  secured by real estate or interests therein or issued by companies which
  invest in real estate or interests therein and may hold and sell real
  estate acquired by the Fund as a result of the ownership of securities.
     
    4. Make loans to other persons, except that the acquisition of bonds,
  debentures or other corporate debt securities and investment in government
  obligations, commercial paper, pass-through instruments, certificates of
  deposit, bankers' acceptances, repurchase agreements and purchase and sale
  contracts or any similar instruments shall not be deemed to be the making
  of a loan, and except further that the Fund may lend its portfolio
  securities, provided that the lending of portfolio securities may be made
  only in accordance with applicable law and the guidelines set forth in the
  Fund's Prospectus and this Statement of Additional Information, as they may
  be amended from time to time.     
 
    5. Issue senior securities to the extent such issuance would violate
  applicable law.
 
    6. Borrow money, except that (i) the Fund may borrow from banks (as
  defined in the Investment Company Act) in amounts up to 33 1/3% of its
  total assets (including the amount borrowed), (ii) the Fund may borrow up
  to an additional 5% of its total assets for temporary purposes, (iii) the
  Fund may obtain such short-term credit as may be necessary for the
  clearance of purchases and sales of portfolio securities and (iv) the Fund
  may purchase securities on margin to the extent permitted by applicable
  law. The Fund may not pledge its assets other than to secure such
  borrowings or, to the extent permitted by the Fund's investment policies as
  set forth in its Prospectus and Statement of Additional Information, as
  they may be amended from time to time, in connection with hedging
  transactions, short sales, when-issued and forward commitment transactions
  and similar investment strategies.
 
    7. Underwrite securities of other issuers, except insofar as the Fund
  technically may be deemed an underwriter under the Securities Act of 1933,
  as amended (the "Securities Act"), in selling portfolio securities.
 
                                       5
<PAGE>
 
    8. Purchase or sell commodities or contracts on commodities, except to
  the extent that the Fund may do so in accordance with applicable law and
  the Fund's Prospectus and Statement of Additional Information, as they may
  be amended from time to time, and without registering as a commodity pool
  operator under the Commodity Exchange Act.
 
  Under the non-fundamental investment restrictions, the Fund may not:
 
    a. Purchase securities of other investment companies except to the extent
  permitted by applicable law. As a matter of policy, however, the Fund will
  not purchase shares of any registered open-end investment company or
  registered unit investment trust in reliance on Section 12(d)(1)(F) or (G)
  (the "fund of funds" provisions) of the Investment Company Act, at any time
  its shares are owned by another investment company that is part of the same
  group of investment companies as the Fund.
 
    b. Make short sales of securities or maintain a short position, except to
  the extent permitted by applicable law. The Fund currently does not intend
  to engage in short sales, except short sales "against the box."
 
    c. Invest in securities which cannot be readily resold because of legal
  or contractual restrictions or which cannot otherwise be marketed, redeemed
  or put to the issuer or a third party, if at the time of acquisition more
  than 15% of its net assets would be invested in such securities. This
  restriction shall not apply to securities which mature within seven days or
  securities which the Board of Directors of the Fund has otherwise
  determined to be liquid pursuant to applicable law. Securities purchased in
  accordance with Rule 144A under the Securities Act and determined to be
  liquid by the Board of Directors are not subject to the limitations set
  forth in this investment restriction.
 
    d. Notwithstanding fundamental investment restriction (6) above, borrow
  money or pledge its assets, except that the Fund (a) may borrow from a bank
  as a temporary measure for extraordinary or emergency purposes or to meet
  redemptions in amounts not exceeding 33 1/3% (taken at market value) of its
  total assets and pledge its assets to secure such borrowings, (b) may
  obtain such short-term credit as may be necessary for the clearance of
  purchases and sales of portfolio securities and (c) may purchase securities
  on margin to the extent permitted by applicable law. However, at the
  present time, applicable law prohibits the Fund from purchasing securities
  on margin. The deposit or payment by the Fund of initial or variation
  margin in connection with financial futures contracts or options
  transactions is not considered to be the purchase of a security on margin.
  The purchase of securities while borrowings are outstanding will have the
  effect of leveraging the Fund. Such leveraging or borrowing increases the
  Fund's exposure to capital risk, and borrowed funds are subject to interest
  costs which will reduce net income. The Fund will not purchase securities
  while borrowings exceed 5% of its total assets.
 
  Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, officers
or employees, acting as principal, unless pursuant to a rule or exemptive
order under the Investment Company Act.
 
  The staff of the Commission has taken the position that purchased over-the-
counter ("OTC") options and the assets used as cover for written OTC options
are illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options if, as a result of
any such transaction, the sum of the market value of OTC options currently
outstanding that are held by the Fund, the market value of the underlying
securities covered by OTC call options currently outstanding that were sold by
 
                                       6
<PAGE>
 
the Fund and margin deposits on the Fund's existing OTC options on financial
futures contracts, exceeds 15% of the net assets of the Fund, taken at market
value, together with all other assets of the Fund that are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund
to a primary U.S. Government securities dealer recognized by the Federal
Reserve Bank of New York and if the Fund has the unconditional contractual
right to repurchase such OTC option from the dealer at a predetermined price,
then the Fund will treat as illiquid such amount of the underlying securities
as is equal to the repurchase price less the amount by which the option is
"in-the-money" (i.e., current market value of the underlying securities minus
the option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the
premium received for the option, plus the amount by which the option is "in-
the-money." This policy as to OTC options is not a fundamental policy of the
Fund and may be amended by the Board of Directors of the Fund without the
approval of the Fund's shareholders. However, the Fund will not change or
modify this policy prior to the change or modification by the Commission staff
of its position.
 
  In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the
Fund will, for purposes of investment restriction (1), treat securities issued
or guaranteed by the government of any one foreign country as the obligations
of a single issuer.
 
  As another non-fundamental policy, the Fund will not invest in securities
that are (a) subject to material legal restrictions on repatriation of assets
or (b) cannot be readily resold because of legal or contractual restrictions
or which are not otherwise readily marketable, including repurchase agreements
and purchase and sale contracts maturing in more than seven days, if,
regarding all such securities, more than 15% of its net assets, taken at
market value would be invested in cash securities.
   
  Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act
involving only usual and customary commissions or transactions permitted
pursuant to an exemptive order under the Investment Company Act. See
"Portfolio Transactions and Brokerage." Without such an exemptive order, the
Fund is prohibited from engaging in portfolio transactions with Merrill Lynch
or its affiliates acting as principal.     
 
                            MANAGEMENT OF THE FUND
 
DIRECTORS AND OFFICERS
   
  Information about the Directors, principal executive officers and portfolio
manager of the Fund, including their ages and their principal occupations for
at least the last five years, is set forth below. Unless otherwise noted, the
address of the portfolio manager and of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.     
   
  Arthur Zeikel (65)--President and Director(1)(2)--Chairman of the Manager
and of Fund Asset Management, L.P. ("FAM," which term as used herein includes
its corporate predecessors) since 1997; President of the Manager and FAM from
1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton Services")
since 1997 and Director thereof since 1993; President of Princeton Services
from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc.
("ML & Co.") since 1990.     
 
                                       7
<PAGE>
 
   
  Joe Grills (63)--Director(2)--P.O. Box 98, Rapidan, VA 22733. Member of the
Committee of Investment of Employee Benefit Assets of the Financial Executives
Institute ("CIEBA") since 1986; Member of CIEBA's Executive Committee since
1988 and its Chairman from 1991 to 1992; Assistant Treasurer of International
Business Machines Incorporated ("IBM") and Chief Investment Officer of IBM
Retirement Funds from 1986 until 1993; Member of the Investment Advisory
Committees of the State of New York Common Retirement Fund and the Howard
Hughes Medical Institute; Director, Duke Management Company since 1993;
Director, LaSalle Street Fund since 1995; Director, Kimco Realty Corporation
since January 1997.     
   
  Walter Mintz (69)--Director(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.     
   
  Robert S. Salomon, Jr. (61)--Director(2)--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Director,
The Common Fund; Chairman and CEO of Salomon Brothers Asset Management from
1992 until 1995; Chairman of Salomon Brothers equity mutual funds from 1992
until 1995; Director of Stock Research and U.S. Equity Strategist at Salomon
Brothers from 1975 until 1991.     
 
  Melvin R. Seiden (67)--Director(2)--780 Third Avenue, Suite 2502, New York,
New York 10017. Director of Silbanc Properties, Ltd. (real estate, investments
and consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964 to 1987.
   
  Stephen B. Swensrud (64)--Director(2)--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser) since
1996; Principal, Fernwood Associates (financial consultant) since 1975.     
 
  Terry K. Glenn (57)--Executive Vice President(1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of Merrill Lynch Funds
Distributor, Inc. (the "Distributor" or "MLFD") since 1986 and Director
thereof since 1991; President of Princeton Administrators, L.P. since 1988.
 
  Norman R. Harvey (64)--Senior Vice President(1)(2)--Senior Vice President of
the Manager and FAM since 1982; Senior Vice President of Princeton Services
since 1993.
   
  Jay L. Willoughby (39)--Senior Portfolio Manager--Senior Portfolio Manager
of the Manager since 1997; Managing Director of AEW Capital Management, L.P.
from 1995 to 1997; Partner and Portfolio Manager of the Crabbe Huson Group
from 1988 to 1995.     
 
  Donald C. Burke (37)--Vice President(1)(2)--First Vice President of the
Manager since 1997; Vice President of the Manager from 1990 to 1997; Director
of Taxation of the Manager since 1990.
 
                                       8
<PAGE>
 
   
  Gerald M. Richard (49)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Manager and FAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of the Distributor since 1984 and
Vice President thereof since 1981.     
 
  Philip M. Mandel (50)--Secretary(1)(2)--First Vice President of the Manager
since 1997; Vice President and Assistant General Counsel of Merrill Lynch from
1989 to 1997.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
   
(2) Such Director or officer is a trustee, director or officer of one or more
    additional investment companies for which the Manager or FAM acts as
    investment adviser or manager.     
   
  At April 30, 1998, the officers and Directors of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund, owned an aggregate of less than 1% of the
outstanding shares of Common Stock of ML & Co.     
 
COMPENSATION OF DIRECTORS
   
  The Fund pays each Director who is not affiliated with the Manager (each, a
"non-affiliated Director") a fee of $1,500 per year plus $250 per Board
meeting attended, together with such Director's actual out-of-pocket expenses
relating to attendance at meetings. The Fund also compensates each member of
the Audit and Nominating Committee (the "Committee"), which consists of the
non-affiliated Directors, a fee of $1,500 per year plus $250 per Committee
meeting attended. Fees and expenses paid to non-affiliated Directors
aggregated $7,076 for the period December 26, 1997 (commencement of
operations) to March 31, 1998.     
   
  The following table sets forth, for the period December 26, 1997
(commencement of operations) to March 31, 1998, compensation paid by the Fund
to the non-affiliated Directors, and for the calendar year ended December 31,
1997 the aggregate compensation paid by all registered investment companies
advised by MLAM or its affiliate, FAM ("MLAM/FAM-Advised Funds"), to the non-
affiliated Directors.     
 
<TABLE>   
<CAPTION>
                                                                    AGGREGATE
                                                                  COMPENSATION
                                                                  FROM FUND AND
                                                                    MLAM/FAM-
                                            PENSION OR RETIREMENT    ADVISED
                               COMPENSATION  BENEFITS ACCRUED AS  FUNDS PAID TO
 NAME OF DIRECTOR               FROM FUND   PART OF FUND EXPENSES DIRECTORS(1)
 ----------------              ------------ --------------------- -------------
<S>                            <C>          <C>                   <C>
Joe Grills....................    $3,500            None            $171,500
Walter Mintz..................    $3,750            None            $159,500
Robert S. Salomon, Jr. .......    $3,750            None            $159,500
Melvin R. Seiden..............    $3,750            None            $159,500
Stephen B. Swensrud...........    $3,750            None            $175,500
</TABLE>    
- --------
   
(1) The Directors serve on the boards of MLAM/FAM-Advised Funds as follows:
    Joe Grills (21 registered investment companies consisting of 49
    portfolios); Walter Mintz (20 registered investment companies consisting
    of 39 portfolios); Robert S. Salomon, Jr. (20 registered investment
    companies consisting of 39 portfolios); Melvin R. Seiden (20 registered
    investment companies consisting of 39 portfolios); and Stephen B. Swensrud
    (23 registered investment companies consisting of 54 portfolios).     
 
                                       9
<PAGE>
 
MANAGEMENT AND ADVISORY ARRANGEMENTS
 
  Reference is made to "Management of the Fund--Management and Advisory
Arrangements" in the Prospectus for certain information concerning the
management and advisory arrangements of the Fund.
 
  Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients for which the Manager or
its affiliates act as an adviser. Because of different objectives or other
factors, a particular security may be bought for one or more clients when one
or more clients are selling the same security. If purchases or sales of
securities by the Manager for the Fund or other funds for which it acts as
investment adviser or for its advisory clients arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates during the same period may increase the demand for
securities being purchased or the supply of securities being sold, there may
be an adverse effect on price.
   
  The Fund has entered into an investment advisory agreement with the Manager
(the "Management Agreement"). As discussed in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the annual rate
of 0.85% of the average daily net assets of the Fund. For the period December
26, 1997 (commencement of operations) to March 31, 1998, the total advisory
fees paid by the Fund to the Manager aggregated $142,865.     
   
  As described in the Prospectus, the Manager has also entered into a sub-
advisory agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") pursuant to which MLAM U.K. provides investment advisory services to
the Manager with respect to the Fund. For the period December 26, 1997
(commencement of operations) to March 31, 1998, no fees were paid by the
Manager to MLAM U.K., pursuant to such agreement.     
   
  The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees
of all Directors of the Fund who are affiliated persons of the Manager. The
Fund pays all other expenses incurred in its operation, including, among other
things, taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports and prospectuses and
statements of additional information (except to the extent paid by the
Distributor), charges of the custodian, any sub-custodian and transfer agent,
expenses of redemption of shares, Commission fees, expenses of registering the
shares under Federal, state or foreign laws, fees and expenses of non-
affiliated Directors, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or nonrecurring expenses, and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the period December
26, 1997 (commencement of operations) to March 31, 1998, the amount of such
reimbursement was $10,489. The Distributor will pay certain promotional
expenses of the Fund incurred in connection with the offering of shares of the
Fund. Certain expenses in connection with the distribution of Class B, Class C
and Class D shares will be financed by the Fund pursuant to distribution plans
in compliance with Rule 12b-1 under the Investment Company Act. See "Purchase
of Shares--Distribution Plans."     
 
                                      10
<PAGE>
 
   
  The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager as defined under the Investment Company Act because of their
ownership of its voting securities or their power to exercise a controlling
influence over its management or policies. Similarly, the following entities
may be considered "controlling persons" of MLAM U.K.: Merrill Lynch Europe PLC
(MLAM U.K.'s parent), a subsidiary of Merrill Lynch International Holdings,
Inc., a subsidiary of Merrill Lynch International, Inc., a subsidiary of ML &
Co.     
   
  Duration and Termination. Unless earlier terminated as described herein, the
Management Agreement and the sub-advisory agreement will continue in effect
for a period of two years from the date of execution and will remain in effect
from year to year thereafter if approved annually (a) by the Board of
Directors or by a majority of the outstanding shares of the Fund and (b) by a
majority of the Directors who are not parties to such contract or "interested
persons" (as defined in the Investment Company Act) of any such party. Such
contracts are not assignable and may be terminated without penalty on 60 days'
written notice at the option of either party thereto or by the vote of the
shareholders of the Fund.     
 
                              PURCHASE OF SHARES
 
  Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Fund shares.
 
  The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System; shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C and Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights
except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements.
Class B, Class C and Class D shares each have exclusive voting rights with
respect to the Rule 12b-1 distribution plan adopted with respect to such class
pursuant to which account maintenance and/or distribution fees are paid
(except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). Each class has
different exchange privileges. See "Shareholder Services--Exchange Privilege."
 
  The Merrill Lynch Select PricingSM System is used by more than 50 registered
investment companies advised by the Manager or its affiliate, FAM. Funds
advised by the Manager or FAM that utilize the Merrill Lynch Select PricingSM
System are referred to herein as "MLAM-advised mutual funds."
 
  The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund (the "Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the
offering of each class of shares of the Fund. After the prospectuses,
statements of additional information and periodic reports have been prepared,
set in type and mailed to shareholders, the Distributor pays for the printing
and distribution of copies thereof used in connection with the offering to
dealers and prospective investors. The Distributor also pays for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreement described under "Management of the
Fund--Management and Advisory Arrangements."
 
                                      11
<PAGE>
 
INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES
   
  For the period December 26, 1997 (commencement of operations) to March 31,
1998, the Fund sold its Class A shares and Class D shares through the
Distributor and Merrill Lynch, as a selected dealer. No gross sales charges
for the sale of Class A shares of the Fund were paid to the Distributor and
Merrill Lynch for that period. The gross sales charges for the sale of Class D
shares of the Fund for the same period were $49,208, of which $3,051 and
$46,157 were received by the Distributor and Merrill Lynch, respectively. For
that period, the Distributor received no CDSCs with respect to redemptions
within one year after purchase of Class A or Class D shares purchased subject
to a front-end sales charge waiver.     
   
  The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and to single purchases by a trustee or other fiduciary purchasing shares for
a single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients or an investment
advisor.     
   
  Closed-End Fund Investment Option. Class A shares of the Fund and other
MLAM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Manager or
FAM who purchased such closed-end fund shares prior to October 21, 1994 (the
date the Merrill Lynch Select PricingSM System commenced operations) and wish
to reinvest the net proceeds of a sale of their closed-end fund shares of
common stock in Eligible Class A shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other MLAM-advised
mutual funds ("Eligible Class D shares"), if the following conditions are met:
first, the sale of closed-end fund shares must be made through Merrill Lynch
and the net proceeds therefrom must be reinvested immediately in Eligible
Class A or Class D shares; second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering; third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account; and fourth, there must be a minimum purchase of $250
to be eligible for the investment option.     
 
  Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a
 
                                      12
<PAGE>
 
shareholder of one of the above-referenced continuously offered closed-end
funds (an "eligible fund") must sell his or her shares of common stock of the
eligible fund (the "eligible shares") back to the eligible fund in connection
with a tender offer conducted by the eligible fund and reinvest the proceeds
immediately in the designated class of shares of the Fund. This investment
option is available only with respect to eligible shares as to which no Early
Withdrawal Charge or CDSC (each as defined in the eligible fund's prospectus)
is applicable. Purchase orders from eligible fund shareholders wishing to
exercise this investment option will be accepted only on the day that the
related tender offer terminates and will be effected at the net asset value of
the designated class of the Fund on such day.
 
REDUCED INITIAL SALES CHARGES
   
  Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the public offering price of the shares then
being purchased plus (b) an amount equal to the then current net asset value
or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of other MLAM-advised mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's
securities dealer, with sufficient information to permit confirmation of
qualification. Acceptance of the purchase order is subject to such
confirmation. The right of accumulation may be amended or terminated at any
time. Shares held in the name of a nominee or custodian under pension, profit-
sharing or other employee benefit plans may not be combined with other shares
to qualify for the right of accumulation.     
   
  Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or of
any other MLAM-advised mutual funds made within a 13-month period starting
with the first purchase pursuant to a Letter of Intention in the form provided
in the Prospectus. The Letter of Intention is available only to investors
whose accounts are maintained at Merrill Lynch Financial Data Services, Inc.,
the Fund's transfer agent (the "Transfer Agent"). The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides plan
participant recordkeeping services. The Letter of Intention is not a binding
obligation to purchase any amount of Class A or Class D shares but its
execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant
to a Letter of Intention may be included under a subsequent Letter of
Intention executed within 90 days of such purchase if the Distributor is
informed in writing of this intent within such 90-day period. The value of
Class A and Class D shares of the Fund and of other MLAM-advised mutual funds
presently held, at cost or maximum offering price (whichever is higher), on
the date of the first purchase under the Letter of Intention, may be included
as a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares purchased does not equal the amount
stated in the Letter of Intention (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A or Class D shares purchased
at the reduced rate and the sales charge applicable to the shares actually
purchased through the Letter. Class A or Class D shares equal to at least five
percent of the intended amount will be held in escrow during the 13-month
period (while remaining registered in the name of the purchaser) for this
purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If a purchase during the
term of such Letter otherwise would be subject to a further reduced sales
charge based on the right of accumulation, the purchaser will be entitled on
that purchase     
 
                                      13
<PAGE>
 
   
and subsequent purchases to that further reduced percentage sales charge that
would be applicable to a single purchase equal to the total dollar value of
the Class A or Class D shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will
be deducted from the total purchases made under such Letter. An exchange from
a MLAM-advised money market fund into the Fund that creates a sales charge
will count toward completing a new or existing Letter of Intention from the
Fund.     
 
  Merrill Lynch BlueprintSM Program. Class D shares of the Fund are offered to
participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. Blueprint is
directed to small investors, group Individual Retirement Accounts ("IRAs") and
participants in certain affinity groups such as credit unions, trade
associations and benefit plans. Investors placing orders to purchase Class A
or Class D shares of the Fund through Blueprint will acquire the Class A or
Class D shares at net asset value plus a sales charge calculated in accordance
with the Blueprint sales charge schedule (i.e., up to $5,000 at 3.50% and
$5,000.01 or more at the standard sales charge rates disclosed in the
Prospectus). In addition, Class A and Class D shares of the Fund are being
offered at net asset value plus a sales charge of .50% for corporate or group
IRA programs placing orders to purchase their Class A or Class D shares
through Blueprint. Services available to Class A and Class D investors through
Blueprint, including exchange privileges, may differ from those available to
other investors in Class A or Class D shares.
 
  Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program ("IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from Employee Sponsored Retirement and Savings Plans
(as defined below) whose trustee and/or plan sponsor has entered into the
Merrill Lynch Directed IRA Rollover Program Service Agreement.
 
  Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of
an automatic investment plan. Additional information concerning purchases
through Blueprint, including any annual fees and transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
BlueprintSM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
 
  Employee AccessSM Accounts. Provided applicable threshold requirements are
met, either Class A or Class D shares are offered at net asset value to
Employee AccessSM Accounts available through authorized employers. The initial
minimum for such accounts is $500, except that the initial minimum for shares
purchased for such accounts pursuant to the Automatic Investment Program is
$50.
   
  Purchase Privilege of Certain Persons. Directors of the Fund, directors and
trustees of other MLAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to ML &
Co., includes the Manager, FAM and certain other entities directly or
indirectly wholly-owned and controlled by ML & Co.) and their directors and
employees, and any trust, pension, profit-sharing or other benefit plan for
such persons, may purchase Class A shares of the Fund at net asset value.     
 
                                      14
<PAGE>
 
  Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Financial
Consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor, if the following
conditions are satisfied: first, the investor must advise Merrill Lynch that
it will purchase Class D shares of the Fund with proceeds from a redemption of
a mutual fund that was sponsored by the Financial Consultant's previous firm
and was subject to a sales charge either at the time of purchase or on a
deferred basis; and second, the investor also must establish that such
redemption had been made within 60 days prior to the investment in the Fund,
and the proceeds from the redemption had been maintained in the interim in
cash or a money market fund.
 
  Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by
a non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated ("notice"), if the following conditions are
satisfied: first, the investor must purchase Class D shares of the Fund with
proceeds from a redemption of shares of such other mutual fund and the shares
of such other fund were subject to a sales charge either at the time of
purchase or on a deferred basis; and second, such purchase of Class D shares
must be made within 90 days after such notice.
 
  Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: first, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of
shares of such other mutual fund and that such shares have been outstanding
for a period of no less than six months; and second, such purchase of Class D
shares must be made within 60 days after the redemption and the proceeds from
the redemption must be maintained in the interim in cash or a money market
fund.
 
  TMASM Managed Trusts. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value.
 
  Acquisition of Certain Investment Companies. The public offering price of
Class D shares of the Fund may be reduced to the net asset value per Class D
share in connection with the acquisition of the assets of or merger or
consolidation with a public or private investment company. The value of the
assets or company acquired in a tax-free transaction may be adjusted in
appropriate cases to reduce possible adverse tax consequences to the Fund that
might result from an acquisition of assets having net unrealized appreciation
that is disproportionately higher at the time of acquisition than the realized
or unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations,
statutory mergers or other acquisitions of portfolio securities that (i) meet
the investment objective and policies of the Fund; (ii) are acquired for
investment and not for resale (subject to the understanding that the
disposition of the Fund's portfolio securities shall at all times remain
within its control); and (iii) are liquid securities, the value of which is
readily ascertainable, that are not restricted as to transfer either by law or
liquidity of market (except that the Fund may acquire through such
transactions restricted or illiquid securities to the extent the Fund does not
exceed the applicable limits on acquisition of such securities set forth under
"Investment Objective and Policies" herein).
 
  Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be
needed in obtaining such investments.
 
                                      15
<PAGE>
 
EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS
 
  Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the contingent deferred sales
charge ("CDSC") upon redemption, based on similar criteria. Such Class B shares
will convert into Class D shares approximately ten years after the plan
purchases the first share of any MLAM-advised mutual fund. Minimum purchase
requirements may be waived or varied for such plans. Additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at (800) 237-7777.
 
DISTRIBUTION PLANS
 
  Reference is made to "Purchase of Shares--Distribution Plans" in the
Prospectus for certain information with respect to the separate distribution
plans for Class B, Class C and Class D shares pursuant to Rule 12b-1 under the
Investment Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.
 
  Payments of the account maintenance fees and/or distribution fees are subject
to the provisions of Rule 12b-1 under the Investment Company Act. Among other
things, each Distribution Plan provides that the Distributor shall provide and
the Directors shall review quarterly reports of the disbursement of the account
maintenance fees and/or distribution fees paid to the Distributor. In their
consideration of each Distribution Plan, the Directors must consider all
factors they deem relevant, including information as to the benefits of the
Distribution Plan to the Fund and its related class of shareholders. Each
Distribution Plan further provides that so long as the Distribution Plan
remains in effect, the selection and nomination of Directors who are not
"interested persons" of the Fund, as defined in the Investment Company Act (the
"Independent Directors"), shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is a
reasonable likelihood that such Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the Independent Directors
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders, and all material amendments are required to
be approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in such
Distribution Plan, cast in person at a meeting called for that purpose. Rule
12b-1 further requires that the Fund preserve copies of each Distribution Plan
and any report made pursuant to such plan for a period of not less than six
years from the date of such Distribution Plan or such report, the first two
years in an easily accessible place.
 
LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES
 
  The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee.
The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of
eligible gross sales of
 
                                       16
<PAGE>
 
   
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately,
at the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed
to waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection with the Class B shares
is 6.75% of eligible gross sales. The Distributor retains the right to stop
waiving the interest charges at any time. To the extent payments would exceed
the voluntary maximum, the Fund will not make further payments of the
distribution fee with respect to Class B shares, and any CDSCs will be paid to
the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.     
   
  The following table sets forth comparative information for the period
December 26, 1997 (commencement of operations) to March 31, 1998, with respect
to the Class B and Class C shares of the Fund, indicating the maximum allowable
payments that can be made under the NASD maximum sales charge rule, and, with
respect to Class B shares, the Distributor's voluntary maximum.     
 
<TABLE>   
<CAPTION>
                                              DATA CALCULATED AS OF MARCH 31, 1998
                          -----------------------------------------------------------------------------
                                                                                             ANNUAL
                                             ALLOWABLE             AMOUNTS                DISTRIBUTION
                          ELIGIBLE AGGREGATE  INTEREST  MAXIMUM   PREVIOUSLY   AGGREGATE FEE AT CURRENT
                           GROSS     SALES   ON UNPAID  AMOUNT     PAID TO      UNPAID     NET ASSET
                          SALES(1)  CHARGES  BALANCE(2) PAYABLE DISTRIBUTOR(3)  BALANCE     LEVEL(4)
                          -------- --------- ---------- ------- -------------- --------- --------------
                                                         (IN THOUSANDS)
<S>                       <C>      <C>       <C>        <C>     <C>            <C>       <C>
CLASS B SHARES, FOR THE
 PERIOD DECEMBER 26,
 1997 (COMMENCEMENT OF
 OPERATIONS) TO MARCH
 31, 1998:
Under NASD Rule as
 Adopted................  $50,178   $3,136       $66    $3,202       $96        $3,106        $414
Under Distributor's Vol-
 untary Waiver..........  $50,178   $3,136      $250    $3,386       $96        $3,290        $414
CLASS C SHARES, FOR THE
 PERIOD DECEMBER 26,
 1997 (COMMENCEMENT OF
 OPERATIONS) TO MARCH
 31, 1998:
Under NASD Rule as
 Adopted................  $10,028     $627       $12      $639       $19          $620         $82
</TABLE>    
- --------
   
(1) Purchase price of all eligible Class B or Class C shares sold during
    periods indicated other than shares acquired through dividend reinvestment
    and the exchange privilege.     
   
(2) Interest is computed on a monthly basis based upon the prime rate, as
    reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
    Rule.     
   
(3) Consists of CDSC payments, distribution fee payment and accruals. This
    figure may include CDCSs that were deferred when a shareholder redeemed
    shares prior to the expiration of the applicable CDSC period and invested
    the proceeds, without the imposition of a sales charge, in Class A shares
    in conjunction with the shareholder's participation in the Merrill Lynch
    Mutual Fund Advisor (Merrill Lynch MFASM) Program (the "MFA Program"). The
    CDSC is booked as a contingent obligation that may be payable if the
    shareholder terminates participation in the MFA Program. See "Purchase of
    Shares--Distribution Plans" in the Prospectus.     
   
(4) Provided to illustrate the extent to which the current level of
    distribution fee payments (not including any CDSC payments) is amortizing
    the unpaid balance. No assurance can be given that payments of the
    distribution fee will reach either the NASD maximum or, with respect to
    Class B shares, the voluntary maximum.     
 
                                       17
<PAGE>
 
                              REDEMPTION OF SHARES
 
  Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the redemption and repurchase of Fund shares.
   
  The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days after the tender of such
shares only for periods during which trading on the New York Stock Exchange
(the "NYSE") is restricted as determined by the Commission, or the NYSE is
closed (other than customary weekend and holiday closings), for any period
during which an emergency exists, as defined by the Commission, as a result of
which disposal of portfolio securities or determination of the net asset value
of the Fund is not reasonably practicable, and for such other periods as the
Commission may by order permit for the protection of shareholders of the Fund.
       
  The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending in part on the market value of the securities
held by the Fund at such time.     
 
DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES
   
  As discussed in the Prospectus under "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares," while Class B shares redeemed
within four years of purchase are subject to a CDSC under most circumstances,
the charge is waived on redemptions of Class B shares in certain instances
including in connection with certain post-retirement withdrawals from an IRA or
other retirement plan or on redemptions of Class B shares following the death
or disability of a Class B shareholder. Redemptions for which the waiver
applies in the case of such withdrawals are: (a) any partial or complete
redemption in connection with a tax-free distribution following retirement
under a tax-deferred retirement plan or attaining age 59 1/2 in the case of an
IRA or other retirement plan, or part of a series of equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) or
any redemption resulting from the tax-free return of an excess contribution to
an IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one who
owns the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination
of disability. For the period December 26, 1997 (commencement of operations) to
March 31, 1998, the Distributor received CDSCs of $4,861 with respect to
redemptions of Class B shares, all of which were paid to Merrill Lynch.
Additional CDSCs payable to the Distributor with respect to Class B shares may
have been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs. For the period
December 26, 1997 (commencement of operations) to March 31, 1998, the
Distributor received CDSCs of $2,755, with respect to redemptions of Class C
shares, all of which were paid to Merrill Lynch.     
 
  Merrill Lynch Blueprint SM Program. Class B shares are offered to certain
participants in the Blueprint(SM) Program. Blueprint is directed to small
investors, group IRAs and participants in certain affinity groups such as trade
associations and credit unions. Class B shares of the Fund are offered through
Blueprint only to members of certain affinity groups. The CDSC is waived in
connection with purchase orders placed through Blueprint. Services, including
the exchange privilege, available to Class B investors through Blueprint,
however, may differ from those available to other Class B investors. Orders for
purchases and redemptions of Class B shares of the Fund will be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100,
 
                                       18
<PAGE>
 
   
with a $50 minimum for subsequent purchases through Blueprint. There is no
minimum initial or subsequent purchase requirement for investors who are part
of a Blueprint automatic investment plan. Additional information concerning
these Blueprint programs, including any annual fees or transaction charges, is
available from Merrill Lynch, Pierce, Fenner & Smith Incorporated, The
Blueprint SM Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441.
    
                      PORTFOLIO TRANSACTIONS AND BROKERAGE
 
  Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to
deal with any broker or group of brokers in execution of transactions in
portfolio securities and does not use any particular broker or dealer. In
executing transactions with brokers and dealers, the Manager seeks to obtain
the best net results for the Fund, taking into account such factors as price
(including the applicable brokerage commission or dealer spread), size of
order, difficulty of execution and operational facilities of the firm involved
and the firm's risk in positioning a block of securities. While the Manager
generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commission or spread available. In addition,
consistent with the Conduct Rules of the NASD and policies established by the
Board of Directors of the Fund, the Manager may consider sales of shares of the
Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund; however, whether or not a particular broker or
dealer sells shares of the Fund neither qualifies nor disqualifies such broker
or dealer to execute transactions for the Fund.
   
  Subject to obtaining the best price and execution, brokers who provide
supplemental investment research services to the Manager may receive orders for
transactions by the Fund. Such supplemental research services ordinarily
consist of assessments and analyses of the business or prospects of a company,
industry or economic sector. Information so received will be in addition to and
not in lieu of the services required to be performed by the Manager under the
Management Agreement, and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information. If in the
judgment of the Manager the Fund will benefit from supplemental research
services, the Manager is authorized to pay brokerage commissions to a broker
furnishing such services that are in excess of commissions that another broker
may have charged for effecting the same transaction. Certain supplemental
research services may primarily benefit one or more other investment companies
or other accounts for which the Manager exercises investment discretion.
Conversely, the Fund may be the primary beneficiary of the supplemental
research services received as a result of portfolio transactions effected for
such other accounts or investment companies. For the period December 26, 1997
(commencement of operations) to March 31, 1998, the Fund paid total brokerage
commissions of $177,346, of which $21,296 or 12.01% was paid to Merrill Lynch
for effecting 10.97% of the aggregate dollar amount of transactions in which
the Fund paid brokerage commissions.     
 
  The Fund may invest in certain securities traded in the OTC market and
intends to deal directly with the dealers who make a market in the securities
involved, except in those circumstances in which better prices and execution
are available elsewhere. Under the Investment Company Act, persons affiliated
with the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained
from the Commission. Since transactions in the OTC market usually involve
transactions with dealers acting as principal
 
                                       19
<PAGE>
 
   
for their own accounts, the Fund will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with such
transactions. However, an affiliated person of the Fund may serve as its broker
in OTC transactions conducted on an agency basis provided that, among other
things, the fee or commission received by such affiliated broker is reasonable
and fair compared to the fee or commission received by non-affiliated brokers
in connection with comparable transactions. In addition, the Fund may not
purchase securities during the existence of any underwriting syndicate for such
securities of which Merrill Lynch is a member or in a private placement in
which Merrill Lynch serves as placement agent except pursuant to the procedures
approved by the Board of Directors of the Fund that either comply with rules
adopted by the Commission or with interpretations of the Commission staff. See
"Investment Objective and Policies--Investment Restrictions."     
 
  Foreign equity securities may be held by the Fund in the form of American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other securities convertible into foreign
equity securities. ADRs, EDRs and GDRs may be listed on stock exchanges, or
traded in over-the-counter markets in the United States or Europe, as the case
may be. ADRs, like other securities traded in the United States, will be
subject to negotiated commission rates. The Fund's ability and decisions to
purchase or sell portfolio securities of foreign issuers may be affected by
laws or regulations relating to the convertibility and repatriation of assets.
Because the shares of the Fund are redeemable on a daily basis in United States
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain United States dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.
 
  The Board of Directors of the Fund has considered the possibility of seeking
to recapture for the benefit of the Fund brokerage commissions and other
expenses of portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund to the
Manager. After considering all factors deemed relevant, the Board of Directors
made a determination not to seek such recapture. The Board will reconsider this
matter from time to time.
   
  Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the United States national securities exchanges from
executing exchange transactions for their affiliates and institutional accounts
which they manage unless the member (i) has obtained prior express
authorization from the account to effect such transactions, (ii) at least
annually furnishes the account with the aggregate compensation received by the
member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.     
 
                        DETERMINATION OF NET ASSET VALUE
 
  The net asset value of the shares of the Fund will be determined by the
Manager once daily Monday through Friday, as of 15 minutes after the close of
business on the NYSE (generally, 4:00 p.m., New York time), on each day during
which the NYSE is open for trading. The NYSE is not open on New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day
 
                                       20
<PAGE>
 
and Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The Fund also will determine its net asset value on any day in which there is
sufficient trading in its portfolio securities that the net asset value might
be affected materially, but only if on any such day the Fund is required to
sell or redeem shares. Net asset value is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time.
Expenses, including the investment advisory fees and any account maintenance
and/or distribution fees, are accrued daily. The per share net asset value of
Class B, Class C and Class D shares generally will be lower than the per share
net asset value of Class A shares, reflecting the daily expense accruals of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to Class B and Class C shares and the daily expense accruals of
the account maintenance fees applicable with respect to Class D shares;
moreover, the per share net asset value of Class B and Class C shares generally
will be lower than the per share net asset value of Class D shares, reflecting
the daily expense accruals of the distribution fees and higher transfer agency
fees applicable with respect to Class B and Class C shares of the Fund. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.
   
  Portfolio securities including ADRs, EDRs or GDRs, that are traded on stock
exchanges are valued at the last sale price (regular way) on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by or under the authority of
the Board of Directors as the primary market. Long positions in securities
traded in the OTC market are valued at the last available bid price in the OTC
market prior to the time of valuation. Short positions in securities traded in
the OTC market are valued at the last available ask price in the OTC market
prior to the time of valuation. Portfolio securities that are traded both in
the OTC market and on a stock exchange are valued according to the broadest and
most representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at the last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last bid price. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund. Such valuations and procedures will be reviewed
periodically by the Board of Directors.     
 
  Generally, trading in foreign securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Directors.
 
                                       21
<PAGE>
 
                             SHAREHOLDER SERVICES
   
  The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of
such services and copies of the various plans described below and instructions
as to how to participate in the various services or plans, or how to change
options with respect thereto, can be obtained from the Fund, the Distributor
or Merrill Lynch. Certain of these services are available only to U.S.
investors.     
 
INVESTMENT ACCOUNT
 
  Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. The statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gain distributions. The statements also will show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale
transaction other than automatic investment purchases, the reinvestment of
ordinary income dividends and long-term capital gain distributions. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Fund's Transfer Agent.
 
  Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by
shareholders directly from the Transfer Agent.
 
  Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or such
shareholder must continue to maintain an Investment Account at the Transfer
Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an
account registered in the name of the brokerage firm for the benefit of the
shareholder. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he or she be
issued certificates for the shares and then must turn the certificates over to
the new firm for re-registration as described in the preceding sentence.
Shareholders considering transferring a tax-deferred retirement account such
as an IRA from Merrill Lynch to another brokerage firm or financial
institution should be aware that, if the firm to which the retirement account
is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm, or
continue to maintain a retirement account at Merrill Lynch for those shares. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent.
 
AUTOMATIC INVESTMENT PLANS
 
  A U.S. shareholder may make additions to an Investment Account at any time
by purchasing Class A shares (if an eligible Class A investor as described in
the Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer, or by mail
directly to the Transfer Agent, acting as agent for such securities dealer.
Voluntary accumulation also can be made through a
 
                                      22
<PAGE>
 
service known as the Fund's Automatic Investment Plan whereby the Fund is
authorized through pre-authorized checks or automated clearing house debits of
$50 or more to charge the regular bank account of the shareholder on a regular
basis to provide systematic additions to the Investment Account of such
shareholder. An investor whose shares of the Fund are held within a CMA(R) or
CBA(R) account may arrange to have periodic investments made in the Fund in
amounts of $100 or more ($1 for retirement accounts) through the CMA(R) or
CBA(R) Automated Investment Program.
 
AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
   
  Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be automatically reinvested in additional shares of the
Fund. Such reinvestment will be at the net asset value of shares of the Fund,
without a sales charge, as of the close of business on the NYSE on the ex-
dividend date of the dividend or distribution. Shareholders may elect in
writing to receive either their dividends or capital gains distributions, or
both, in cash, in which event payment will be mailed on or about the payment
date (provided that, in the event that a payment on an account maintained at
the Transfer Agent would amount to $10.00 or less, a shareholder will not
receive such payment in cash and such payment will automatically be reinvested
in additional shares). Cash payments also can be directly deposited to the
shareholder's bank account.     
   
  Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if the shareholder's account
is maintained with the Transfer Agent, that they no longer wish to have their
dividends and/or capital gains distributions reinvested in shares of the Fund
or vice versa and, commencing ten days after the receipt by the Transfer Agent
of such notice, those instructions will be effected. The Fund is not
responsible for any failure of delivery to the shareholder's address of record
and no interest will accrue on amounts represented by uncashed distribution
and redemption checks.     
 
SYSTEMATIC WITHDRAWAL PLANS
   
  A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders who have acquired shares of the Fund having a value, based on
cost or the current offering price, of $5,000 or more, and monthly withdrawals
are available for shareholders with shares having a value of $10,000 or more.
       
  At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify the dollar
amount and the class of shares to be redeemed. Redemptions will be made at net
asset value as determined at the close of business on the NYSE (generally,
4:00 p.m., New York time) on the 24th day of each month or the 24th day of the
last month of each quarter, whichever is applicable. If the NYSE is not open
for business on such date, the shares will be redeemed at the close of
business on the following business day. The check for the withdrawal payment
will be mailed, or the direct deposit for the withdrawal payment will be made,
on the next business day following redemption. When a shareholder is making
systematic withdrawals, dividends on all shares in the Investment Account are
reinvested automatically in shares of the Fund. A shareholder's Systematic
Withdrawal Plan may be terminated at any time, without charge or penalty, by
the shareholder, the Fund, the Transfer Agent or the Distributor.     
 
                                      23
<PAGE>
 
  Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously
exceed reinvested dividends, the shareholder's original investment may be
reduced correspondingly. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase
orders for shares of the Fund from investors who maintain a Systematic
Withdrawal Plan unless such purchase is equal to at least one year's scheduled
withdrawals or $1,200, whichever is greater. Periodic investments may not be
made into an Investment Account in which the shareholder has elected to make
systematic withdrawals.
 
  With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares
that can be redeemed from an account annually shall not exceed 10% of the
value of shares of such class in that account at the time the election to join
the systematic withdrawal plan was made. Any CDSC that otherwise might be due
on such redemption of Class B or Class C shares will be waived. Shares
redeemed pursuant to a systematic withdrawal plan will be redeemed in the same
order as Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Contingent Deferred Sales Charges--Class B Shares" and "--Contingent Deferred
Sales Charges--Class C Shares" in the Prospectus. Where the systematic
withdrawal plan is applied to Class B shares, upon conversion of the last
Class B shares in an account to Class D shares, the systematic withdrawal plan
will automatically be applied thereafter to Class D shares. See "Purchase of
Shares--Deferred Sales Charge Alternatives--Class B and Class C Shares--
Conversion of Class B Shares to Class D Shares" in the Prospectus; if an
investor wishes to change the amount being withdrawn in a systematic
withdrawal plan the investor should contact his or her Financial Consultant.
   
  A shareholder whose shares are held within a CMA(R), CBA(R) or Retirement
Account may elect to have shares redeemed on a monthly, bimonthly, quarterly,
semiannual or annual basis through the CMA(R) or CBA(R) Systematic Redemption
Program. The minimum fixed dollar amount redeemable is $50. The proceeds of
systematic redemptions will be posted to the shareholder's account three
business days after the date the shares are redeemed. All redemptions are made
at net asset value. A shareholder may elect to have his or her shares redeemed
on the first, second, third or fourth Monday of each month, in the case of
monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the Automatic Investment
Program. For more information on the CMA(R) or CBA(R) Systematic Redemption
Program, eligible shareholders should contact their Merrill Lynch Financial
Consultant.     
 
EXCHANGE PRIVILEGE
 
  U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. Under the Merrill
Lynch Select PricingSM System, Class A shareholders may exchange Class A
shares of the Fund for Class A shares of a second MLAM-advised mutual fund if
the shareholder holds any Class A shares of the second fund in the account in
which the exchange is made at the time of the exchange or is otherwise
eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to
 
                                      24
<PAGE>
 
   
exchange Class A shares for shares of a second MLAM-advised mutual fund, but
does not hold Class A shares of the second fund in his or her account at the
time of the exchange and is not otherwise eligible to acquire Class A shares
of the second fund, the shareholder will receive Class D shares of the second
fund as a result of the exchange. Class D shares also may be exchanged for
Class A shares of a second MLAM-advised mutual fund at any time as long as, at
the time of the exchange, the shareholder holds Class A shares of the second
fund in the account in which the exchange is made or is otherwise eligible to
purchase Class A shares of the second fund. Class B, Class C and Class D
shares are exchangeable with shares of the same class of other MLAM-advised
mutual funds. For purposes of computing the CDSC that may be payable upon a
disposition of the shares acquired in the exchange, the holding period for the
previously owned shares of the Fund is "tacked" to the holding period of the
newly acquired shares of the other fund as more fully described below. Class
A, Class B, Class C and Class D shares also are exchangeable for shares of
certain MLAM-advised money market funds as follows: Class A shares may be
exchanged for shares of Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Reserves Money Fund (available only for exchanges within certain
retirement plans), Merrill Lynch U.S.A. Government Reserves and Merrill Lynch
U.S. Treasury Money Fund; Class B, Class C and Class D shares may be exchanged
for shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Treasury Fund.
Shares with a net asset value of at least $100 are required to qualify for the
exchange privilege, and any shares utilized in an exchange must have been held
by the shareholder for at least 15 days. It is contemplated that the exchange
privilege may be applicable to other new mutual funds whose shares may be
distributed by the Distributor.     
 
  Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("new Class A or Class D shares") are transacted on the basis of relative
net asset value per Class A or Class D share, respectively, plus an amount
equal to the difference, if any, between the sales charge previously paid on
the outstanding Class A or Class D shares and the sales charge payable at the
time of the exchange on the new Class A or Class D shares. With respect to
outstanding Class A or Class D shares as to which previous exchanges have
taken place, the "sales charge previously paid" shall include the aggregate of
the sales charges paid with respect to such Class A or Class D shares in the
initial purchase and any subsequent exchange. Class A or Class D shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds offering Class A or Class D shares. For purposes of the exchange
privilege, Class A and Class D shares acquired through dividend reinvestment
shall be deemed to have been sold with a sales charge equal to the sales
charge previously paid on the Class A or Class D shares on which the dividend
was paid. Based on this formula, Class A and Class D shares of the Fund
generally will be exchanged into the Class A or Class D shares of the other
funds or into shares of certain money market funds without a sales charge.
 
  In addition, each of the funds with Class B and Class C shares outstanding
("outstanding Class B or Class C shares") offers to exchange its Class B or
Class C shares for Class B or Class C shares, respectively, of another MLAM-
advised mutual fund ("new Class B or Class C shares") on the basis of relative
net asset value per Class B or Class C share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding Class B or Class
C shares. Class B shareholders of the Fund exercising the exchange privilege
will continue to be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the new Class B shares acquired
through use of the exchange privilege. In addition, Class B or Class C shares
of the Fund acquired through use of the exchange privilege will be subject to
the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B or Class C shares of the fund from which the
 
                                      25
<PAGE>
 
exchange has been made. For purposes of computing the sales load that may be
payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B or Class C shares is "tacked" to the
holding period of the new Class B or Class C shares. For example, an investor
may exchange Class B or Class C shares of the Fund for those of Merrill Lynch
Special Value Fund, Inc. ("Special Value Fund") after having held the Fund's
Class B shares for two and a half years. The 2% CDSC that generally would
apply to a redemption would not apply to the exchange. Three years later the
investor may decide to redeem the Class B shares of Special Value Fund and
receive cash. There will be no CDSC due on this redemption, since by "tacking"
the two and a half year holding period of the Fund Class B shares to the three
year holding period for the Special Value Fund Class B shares, the investor
will be deemed to have held the Special Value Fund Class B shares for more
than five years.
 
  Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Manager or its affiliates, but the period of
time that Class B or Class C shares are held in a money market fund will not
count towards satisfaction of the holding period requirement for purposes of
reducing the CDSC or, with respect to Class B shares, towards satisfaction of
the conversion period. However, shares of a money market fund that were
acquired as a result of an exchange for Class B or Class C shares of the Fund
may, in turn, be exchanged back into Class B or Class C shares, respectively,
of any fund offering such shares, in which event the holding period for Class
B or Class C shares of the newly acquired fund will be aggregated with
previous holding periods for purposes of reducing the CDSC. Thus, for example,
an investor may exchange Class B shares of the Fund for shares of Merrill
Lynch Institutional Fund ("Institutional Fund") after having held the Fund
Class B shares for two and a half years and three years later decide to redeem
the shares of Institutional Fund for cash. At the time of this redemption, the
2% CDSC that would have been due had the Class B shares of the Fund been
redeemed for cash rather than exchanged for shares of Institutional Fund will
be payable. If, instead of such redemption the shareholder exchanged such
shares for Class B shares of a fund that the shareholder continued to hold for
an additional two and a half years, any subsequent redemption would not incur
a CDSC.
 
  Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.
   
  To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of other MLAM-advised mutual funds
with shares for which certificates have not been issued, may exercise the
exchange privilege by wire through their securities dealers. The Fund reserves
the right to require a properly completed Exchange Application. This exchange
privilege may be modified or terminated in accordance with the rules of the
Commission. The Fund reserves the right to limit the number of times an
investor may exercise the exchange privilege. Certain funds may suspend the
offering of their shares to the general public at any time and thereafter may
resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made.
    
                                      26
<PAGE>
 
                       DIVIDENDS, DISTRIBUTIONS AND TAXES
 
DIVIDENDS AND DISTRIBUTIONS
   
  The Fund intends to distribute substantially all its net investment income,
if any. Dividends from such net investment income will be paid at least
annually. All net realized capital gains, if any, will be distributed to the
Fund's shareholders at least annually. In connection with its investments in
REITs, the Fund may receive distributions that do not consist of ordinary
income or capital gain, but represent a return of capital. The Fund does not
intend to distribute to its shareholders the portion of the distribution it
receives that consists of a return of capital. Instead, the Fund will reinvest
such amounts. From time to time, the Fund may declare a special distribution at
or about the end of the calendar year in order to comply with Federal tax
requirements that certain percentages of its ordinary income and capital gains
be distributed during the year. If in any fiscal year, the Fund has net income
from certain foreign currency transactions, such income will be distributed at
least annually.     
 
  See "Shareholder Services--Automatic Reinvestment of Dividends and Capital
Gains Distributions" for information concerning the manner in which dividends
and distributions may be reinvested automatically in shares of the Fund. A
shareholder whose account is maintained at the Transfer Agent or whose account
is maintained through Merrill Lynch may elect in writing to receive any such
dividends or distributions, or both, in cash. Dividends and distributions are
taxable to shareholders, as discussed below, whether they are reinvested in
shares of the Fund or received in cash. The per share dividends on each class
of shares will be reduced as a result of any account maintenance, distribution
and transfer agency fees applicable with respect to such class of shares. See
"Determination of Net Asset Value."
 
TAXES
   
  The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Code. As long as it
so qualifies, the Fund (but not its shareholders) will not be subject to
Federal income tax on the part of its net ordinary income and net realized
capital gains that it distributes to Class A, Class B, Class C and Class D
shareholders (together, the "shareholders"). The Fund intends to distribute
substantially all of such income.     
   
  Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in warrants, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gains taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the Fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends, as well as the amount
of capital gain dividends in the different categories of capital gain referred
to above.     
 
                                       27
<PAGE>
 
   
  Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. A portion of the Fund's ordinary income
dividends may be eligible for the dividends received deduction allowed to
corporations under the Code, if certain requirements are met. For this purpose,
the Fund will allocate dividends eligible for the dividends received deduction
among the Class A, Class B, Class C and Class D shareholders according to a
method (which it believes is consistent with the Commission rule permitting the
issuance and sale of multiple classes of stock) that is based on the gross
income allocable to Class A, Class B, Class C and Class D shareholders during
the taxable year, or such other method as the Internal Revenue Service may
prescribe. If the Fund pays a dividend in January that was declared in the
previous October, November or December to shareholders of record on a specified
date in one of such months, then such dividend will be treated for tax purposes
as being paid by the Fund and received by its shareholders on December 31 of
the year in which such dividend was declared.     
 
  Ordinary income dividends paid to shareholders who are nonresident aliens or
foreign entities will be subject to a 30% U.S. withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the U.S. withholding tax.
 
  Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify
under penalty of perjury that such number is correct and that such investor is
not otherwise subject to backup withholding.
   
  Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.     
 
  No gain or loss will be recognized by Class B shareholders on the conversion
of their Class B shares into Class D shares. A shareholder's basis in the Class
D shares acquired will be the same as such shareholder's basis in the Class B
shares converted, and the holding period of the acquired Class D shares will
include the holding period for the converted Class B shares.
 
  If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will be
reduced (or the gain increased) to the extent any sales charge paid to the Fund
on the exchanged shares reduces any sales charge the shareholder would have
owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the
new shares.
 
  A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
In such a case, the basis of the shares acquired will be adjusted to reflect
the disallowed loss.
 
                                       28
<PAGE>
 
  The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income
and capital gains in the manner necessary to minimize imposition of the 4%
excise tax, there can be no assurance that sufficient amounts of the Fund's
taxable income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax only
on the amount by which it does not meet the foregoing distribution
requirements.
 
  The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities"), as described in the Prospectus.
Some of these high yield/high risk securities may be purchased at a discount
and may therefore cause the Fund to accrue and distribute income before amounts
due under the obligations are paid. In addition, a portion of the interest
payments on such high yield/high risk securities may be treated as dividends
for Federal income tax purposes; in such case, if the issuer of such high
yield/high risk securities is a domestic corporation, dividend payments by the
Fund will be eligible for the dividends received deduction to the extent of the
deemed dividend portion of such interest payments.
   
  The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under recent
legislation, the Fund could elect to "mark to market" at the end of each
taxable year all shares that it holds in PFICs. If it made this election, the
Fund would recognize as ordinary income any increase in the value of such
shares over their adjusted basis and as ordinary loss any decrease in such
value to the extent it did not exceed prior increases. By making the mark-to-
market election, the Fund could avoid imposition of the interest charge with
respect to its distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.     
 
  The Fund may make investments that produce taxable income which is not
matched by a corresponding receipt of cash or an offsetting loss deduction.
Such investments would include obligations that have original issue discount,
accrue negative amortization or are subordinated in the mortgage-backed
securities structure. Such taxable income would be treated as income earned by
the Fund and would be subject to the distribution requirements of the Code.
Because such income may not be matched by a corresponding receipt of cash by
the Fund or an offsetting loss deduction, the Fund may be required to borrow
money or dispose of other securities to be able to make distributions to
shareholders. The Fund intends to make sufficient and timely distributions to
shareholders to qualify for the special tax treatment afforded RICs at all
times and to avoid imposition of the excise tax.
 
                                       29
<PAGE>
 
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
 
  The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256 contracts will
be 60% long-term and 40% short-term capital gain or loss. Application of these
rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to shareholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rates with respect to its investments.
 
  A forward foreign exchange contract that is a Section 1256 contract will be
marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.
   
  Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in options, futures and
forward foreign exchange contracts.     
       
SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS
 
  In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stocks, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, futures, or
forward foreign exchange contracts will be valued for purposes of the RIC
diversification requirements applicable to the Fund.
 
  Under Code Section 988, special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from futures contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis
 
                                       30
<PAGE>
 
of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than such shareholder's basis
in Fund shares (assuming the shares were held as a capital asset). These rules
and the mark-to-market rules described above, however, will not apply to
certain transactions entered into by the Fund solely to reduce the risk of
currency fluctuations with respect to its investments.
 
  The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
 
  Ordinary income and capital gain dividends may also be subject to state and
local taxes.
 
  Certain states exempt from state income taxation dividends paid by RICs which
are derived from interest on U.S. Government obligations. State law varies as
to whether dividend income attributable to U.S. Government obligations is
exempt from state income tax.
 
  Shareholders are urged to consult their own tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Fund.
 
                                PERFORMANCE DATA
 
  From time to time the Fund may include its average annual total return and
other total return data in advertisements or information furnished to present
or prospective shareholders. Total return figures are based on the Fund's
historical performance and are not intended to indicate future performance.
Average annual total return is determined separately for Class A, Class B,
Class C and Class D shares in accordance with formulas specified by the
Commission.
 
  Average annual total return quotations for the specified periods are computed
by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return is computed assuming all dividends are reinvested
and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge in the case of Class A and Class D shares
and the CDSC that would be applicable to a complete redemption of the
investment at the end of the specified period in the case of Class B and Class
C shares.
   
  The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, both as a percentage and as a
dollar amount based on a hypothetical $1,000 investment, for various periods
other than those noted below. Such data will be computed as described above,
except that (i) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted
and (ii) the maximum applicable sales charges will not be included with respect
to annual or annualized rates of return calculations.     
 
                                       31
<PAGE>
 
   
  Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated.     
<TABLE>   
<CAPTION>
                                   CLASS A SHARES                      CLASS B SHARES
                         ----------------------------------- ----------------------------------
                                                                               REDEEMABLE VALUE
                                                                                     OF A
                                           REDEEMABLE VALUE                      HYPOTHETICAL
                          EXPRESSED AS A   OF A HYPOTHETICAL  EXPRESSED AS A        $1,000
                         PERCENTAGE BASED  $1,000 INVESTMENT PERCENTAGE BASED     INVESTMENT
                         ON A HYPOTHETICAL   AT THE END OF   ON A HYPOTHETICAL  AT THE END OF
        PERIOD           $1,000 INVESTMENT    THE PERIOD     $1,000 INVESTMENT    THE PERIOD
        ------           ----------------- ----------------- ----------------- ----------------
<S>                      <C>               <C>               <C>               <C>
                                              Average Annual Total Return
                                      (including maximum applicable sales charges)
Inception (December 26,
 1997) to March 31,
 1998..................       (5.14)%          $  986.30          (0.77)%         $  998.00
                                                  Annual Total Return
                                      (excluding maximum applicable sales charges)
Inception (December 26,
 1997) to March 31,
 1998..................        4.10 %          $1,041.00           3.80 %         $1,038.00
                                                 Aggregate Total Return
                                      (including maximum applicable sales charges)
Inception (December 26,
 1997) to March 31,
 1998..................       (1.37)%          $  986.30          (0.20)%         $  998.00
</TABLE>    
 
<TABLE>   
<CAPTION>
                                   CLASS C SHARES                      CLASS D SHARES
                         ----------------------------------- ----------------------------------
                                                                               REDEEMABLE VALUE
                                                                                     OF A
                                           REDEEMABLE VALUE                      HYPOTHETICAL
                          EXPRESSED AS A   OF A HYPOTHETICAL  EXPRESSED AS A        $1,000
                         PERCENTAGE BASED  $1,000 INVESTMENT PERCENTAGE BASED     INVESTMENT
                         ON A HYPOTHETICAL   AT THE END OF   ON A HYPOTHETICAL  AT THE END OF
        PERIOD           $1,000 INVESTMENT    THE PERIOD     $1,000 INVESTMENT    THE PERIOD
        ------           ----------------- ----------------- ----------------- ----------------
<S>                      <C>               <C>               <C>               <C>
                                              Average Annual Total Return
                                      (including maximum applicable sales charges)
Inception (December 26,
 1997) to March 31,
 1998..................        11.19%          $1,028.00           (5.49)%        $  985.00
                                                  Annual Total Return
                                      (excluding maximum applicable sales charges)
Inception (December 26,
 1997) to March 31,
 1998..................         3.80%          $1,038.00            4.00 %        $1,040.00
                                                 Aggregate Total Return
                                      (including maximum applicable sales charges)
Inception (December 26,
 1997) to March 31,
 1998..................         2.80%          $1,028.00           (1.46)%        $  985.40
</TABLE>    
 
  In order to reflect the reduced sales charges in the case of Class A or Class
D shares or the waiver of the CDSC in the case of Class B or Class C shares
applicable to certain investors, as described under "Purchase of Shares" and
"Redemption of Shares," respectively, the total return data quoted by the Fund
in advertisements directed to such investors may take into account the reduced,
and not the maximum, sales charge or may not take into account the CDSC and
therefore may reflect greater total return since, due to the reduced sales
charges or the waiver of sales charges, a lower amount of expenses is deducted.
 
                              GENERAL INFORMATION
 
DESCRIPTION OF SHARES
 
  The Fund was incorporated under Maryland law on September 24, 1997. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $.10 per
share, divided into four classes designated Class A, Class B, Class C and Class
D Common Stock, each consisting of 100,000,000 shares. Shares of Class A, Class
B, Class C and Class D Common Stock represent an interest in the same assets of
the Fund and are identical in all respects except that the Class B, Class C and
Class D shares bear certain expenses related to the account maintenance and/or
distribution of such shares and have exclusive voting rights with respect to
matters relating to such expenditures. The Fund may issue additional classes or
shares if the Board of Directors deems such issuance to be in the best
interests of the Fund. Upon liquidation of the Fund, shareholders of each class
are entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders, except for any
 
                                       32
<PAGE>
 
expenses which may be attributable only to one class. Shares have no preemptive
or conversion rights. The rights of redemption and exchange are described
elsewhere herein and in the Prospectus. Shares are fully paid and nonassessable
by the Fund.
 
  Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held in the election of Directors and any other
matter submitted to a shareholder vote. The Fund does not intend to hold annual
meetings of shareholders in any year in which the Investment Company Act does
not require shareholders to act upon any of the following matters: (i) election
of Directors; (ii) approval of an investment advisory agreement; (iii) approval
of a distribution agreement; and (iv) ratification of selection of independent
accountants. Also, the by-laws of the Fund require that a special meeting of
shareholders be held upon the written request of at least 25% of the
outstanding shares of the Fund entitled to vote at such meeting, if they comply
with applicable Maryland law. Voting rights for Directors are not cumulative.
Shares issued are fully paid and non-assessable and have no preemptive rights.
Redemption and conversion rights are discussed elsewhere herein and in the
Prospectus. Each share of Class B, Class C and Class D Common Stock is entitled
to participate equally in dividends and distributions declared by the Fund and
in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities. Stock certificates will be issued by
the Transfer Agent only on specific request. Certificates for fractional shares
are not issued in any case.
   
  The Manager provided the initial capital for the Fund by purchasing 10,000
shares of common stock of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (estimated at approximately $141,000) were paid by the
Fund and are being amortized over a period not exceeding five years. The
proceeds realized by the Manager upon the redemption of any of the shares
initially purchased by it will be reduced by the proportional amount of the
unamortized organizational expenses which the number of such initial shares
being redeemed bears to the number of shares initially purchased.     
 
COMPUTATION OF OFFERING PRICE PER SHARE
   
  An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets on March 31, 1998 and its shares outstanding on that date is as follows:
    
<TABLE>   
<CAPTION>
                                   CLASS A     CLASS B     CLASS C    CLASS D
                                  ---------- ----------- ----------- ----------
<S>                               <C>        <C>         <C>         <C>
Net Assets....................... $1,911,584 $55,257,091 $10,904,221 $8,875,056
                                  ========== =========== =========== ==========
Number of Shares Outstanding.....    183,656   5,322,831   1,050,396    853,219
                                  ========== =========== =========== ==========
Net Asset Value Per Share (net
 assets divided by number of
 shares outstanding)............. $    10.41 $     10.38 $     10.38 $    10.40
Sales Charge (for Class A and
 Class D Shares: 5.25% of
 offering price (5.54% of net
 amount invested*))..............        .58          **          **        .58
                                  ---------- ----------- ----------- ----------
Offering Price................... $    10.99 $     10.38 $     10.38 $    10.98
                                  ========== =========== =========== ==========
</TABLE>    
- --------
 * Rounded to the nearest one-hundredth percent; assumes maximum sales charge
   is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
   may be subject to a CDSC on redemption. See "Purchase of Shares--Deferred
   Sales Charge Alternatives--Class B and Class C Shares" in the Prospectus and
   "Redemption of Shares--Deferred Sales Charges--Class B and Class C Shares"
   herein.
 
                                       33
<PAGE>
 
INDEPENDENT AUDITORS
 
  Deloitte & Touche LLP, has been selected as the independent auditors of the
Fund. The selection of independent auditors is subject to approval by the
Independent Directors of the Fund. The independent auditors are responsible for
auditing the annual financial statements of the Fund.
 
CUSTODIAN
 
  The Bank of New York acts as the Custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized, among other things, to
establish separate accounts in foreign currencies and to cause foreign
securities owned by the Fund to be held in its offices outside of the United
States and with certain foreign banks and securities depositories. The
Custodian is responsible for safeguarding and controlling the Fund's cash and
securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.
 
TRANSFER AGENT
 
  Merrill Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246 6484, acts as the Fund's Transfer Agent. The
Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts. See
"Management of the Fund--Transfer Agency Services" in the Prospectus.
 
LEGAL COUNSEL
 
  Brown & Wood LLP, One World Trade Center, New York New York 10048-0557, is
counsel for the Fund.
 
REPORTS TO SHAREHOLDERS
   
  The fiscal year of the Fund ends on November 30 of each year. The Fund sends
to its shareholders at least semi-annually reports showing the Fund's portfolio
and other information. An annual report, containing financial statements
audited by independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.     
 
ADDITIONAL INFORMATION
 
  The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.
 
  Under a separate agreement, ML & Co. has granted the Fund the right to use
the "Merrill Lynch" name and has reserved the right to withdraw its consent to
the use of such name by the Fund at any time or to grant the use of such name
to any other company, and the Fund has granted ML & Co., under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by ML & Co.
   
  To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's common stock on April 30, 1998.     
 
                                       34
<PAGE>
 
                                   APPENDIX
 
                      RATINGS OF FIXED INCOME SECURITIES
 
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
 
Aaa Bonds which are rated "Aaa" are judged to be of the best quality. They
    carry the smallest degree of investment risk and are generally referred
    to as "gilt edged". Interest payments are protected by a large or by an
    exceptionally stable margin and principal is secure. While the various
    protective elements are likely to change, such changes as can be
    visualized are most unlikely to impair the fundamentally strong position
    of such issues.
 
Aa  Bonds which are rated "Aa" are judged to be of high quality by all
    standards. Together with the "Aaa" group they comprise what are generally
    known as high grade bonds. They are rated lower than the best bonds
    because margins of protection may not be as large as in "Aaa" securities
    or fluctuation of protective elements may be of greater amplitude or
    there may be other elements present which make the long-term risks appear
    somewhat larger than in "Aaa" securities.
 
A   Bonds which are rated "A" possess many favorable investment attributes
    and are to be considered as upper-medium grade obligations. Factors
    giving security to principal and interest are considered adequate, but
    elements may be present which suggest a susceptibility to impairment
    sometime in the future.
  
Baa Bonds which are rated "Baa" are considered as medium-grade obligations
    (i.e., they are neither highly protected nor poorly secured). Interest
    payments and principal security appear adequate for the present but
    certain protective elements may be lacking or may be characteristically
    unreliable over any great length of time. Such bonds lack outstanding
    investment characteristics and in fact have speculative characteristics
    as well.
 
Ba  Bonds which are rated "Ba" are judged to have speculative elements; their
    future cannot be considered as well-assured. Often the protection of
    interest and principal payments may be very moderate, and thereby not
    well safeguarded during both good and bad times over the future.
    Uncertainty of position characterizes bonds in this class.
 
B   Bonds which are rated "B" generally lack characteristics of the desirable
    investment. Assurance of interest and principal payments or of
    maintenance of other terms of the contract over any long period of time
    may be small.
 
Caa Bonds which are rated "Caa" are of poor standing. Such issues may be in
    default or there may be present elements of danger with respect to
    principal or interest.
  
Ca  Bonds which are rated "Ca" represent obligations which are speculative in
    a high degree. Such issues are often in default or have other marked
    shortcomings.
  
C   Bonds which are rated "C" are the lowest rated class of bonds, and issues
    so rated can be regarded as having extremely poor prospects of ever
    attaining any real investment standing.
 
  NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "B". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
 
                                      35
<PAGE>
 
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
 
  Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's makes no
representation that rated bank or insurance company obligations are exempt
from registration under the Securities Act of 1933 or issued in conformity
with any other applicable law or regulation. Nor does Moody's represent that
any specific bank or insurance company obligation is legally enforceable or a
valid senior obligation of a rated issuer. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment ability of rated issuers:
 
  PRIME-1. Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
 
  --Leading market positions in well-established industries.
 
  --High rates of return on funds employed.
 
  --Conservative capitalization structure with moderate reliance on debt and
   ample asset protection.
 
  --Broad margins in earnings coverage of fixed financial charges and high
   internal cash generation.
 
  --Well-established access to a range of financial markets and assured
   sources of alternate liquidity.
 
  PRIME-2. Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
 
  PRIME-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
 
  NOT PRIME. Issuers rated Not Prime do not fall within any of the Prime
rating categories.
 
  If an issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names
of such supporting entity or entities are listed within the parentheses
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the legal
validity or enforceability of any support arrangement.
 
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
 
  Because of the fundamental differences between preferred stocks and bonds, a
variation of the bond rating symbols is used in the quality ranking of
preferred stock. The symbols, presented below, are designed to avoid
 
                                      36
<PAGE>
 
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stock occupies a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
 
  Preferred stock rating symbols and their definitions are as follows:
 
aaa An issue which is rated "aaa" is considered to be a top-quality preferred
    stock. This rating indicates good asset protection and the least risk of
    dividend impairment within the universe of preferred stocks.
 
aa  An issue which is rated "aa" is considered a high-grade preferred stock.
    This rating indicates that there is a reasonable assurance the earnings
    and asset protection will remain relatively well maintained in the
    foreseeable future.
 
a   An issue which is rated "a" is considered to be an upper-medium grade
    preferred stock. While risks are judged to be somewhat greater than in
    the "aaa" and "aa" classifications, earnings and asset protections are,
    nevertheless, expected to be maintained at adequate levels.
 
baa An issue which is rated "baa" is considered to be a medium-grade
    preferred stock, neither highly protected nor poorly secured. Earnings
    and asset protection appear adequate at present but may be questionable
    over any great length of time.
 
ba  An issue which is rated "ba" is considered to have speculative elements
    and its future cannot be considered well assured. Earnings and asset
    protection may be very moderate and not well safeguarded during adverse
    periods. Uncertainty of position characterizes preferred stocks in this
   class.
   
b     
    An issue which is rated "b" generally lacks the characteristics of a
    desirable investment. Assurance of dividend payments and maintenance of
    other terms of the issue over any long period of time may be small.
  
caa An issue which is rated "caa" is likely to be in arrears on dividend
    payments. This rating designation does not purport to indicate the future
    status of payments.
  
ca  An issue which is rated "ca" is speculative in a high degree and is
    likely to be in arrears on dividends with little likelihood of eventual
    payments.
 
c   This is the lowest rated class of preferred or preference stock. Issues
    so rated can be regarded as having extremely poor prospects of ever
    attaining any real investment standing.
 
  NOTE: Moody's applies numerical modifiers l, 2 and 3 in each rating
classification "a" to "b": the modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
 
DESCRIPTION OF STANDARD & POOR'S RATINGS SERVICES ("STANDARD & POOR'S")
CORPORATE DEBT RATINGS
 
  A Standard & Poor's corporate or municipal debt rating is a current opinion
of the creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation.
 
                                      37
<PAGE>
 
  The debt rating is not a recommendation to purchase, sell or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
 
  The ratings are based on current information furnished by the obligors or
obtained by Standard & Poor's from other sources it considers reliable.
Standard & Poor's does not perform any audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
 
  The ratings are based, in varying degrees, on the following considerations:
 
  I.   Likelihood of payment--capacity and willingness of the obligor to meet
       its financial commitment on an obligation in accordance with the terms
       of the obligation;
 
  II.  Nature of and provisions of the obligation; and
 
  III. Protection afforded by, and relative position of, the obligation in
       the event of bankruptcy, reorganization or other arrangement under the
       laws of bankruptcy and other laws affecting creditors' rights.
 
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
    Capacity to meet its financial commitment on the obligation is extremely
    strong.
 
AA  Debt rated "AA" differs from the highest rated obligations only in small
    degree. The obligor's capacity to meet its financial commitment on the
    obligation is very strong.
  
A   Debt rated "A" is somewhat more susceptible to the adverse effects of
    changes in circumstances and economic conditions than debt in higher
    rated categories. However, the obligor's capacity to meet its financial
    commitment on the obligation is still strong.
 
BBB Debt rated "BBB" exhibits adequate protection parameters. However,
    adverse economic conditions or changing circumstances are more likely to
    lead to a weakened capacity of the obligor to meet its financial
    commitment on the obligation.
 
    Debt rated "BB", "B", "CCC", "CC" and "C" are regarded as having
    significant speculative characteristics. "BB" indicates the least degree
    of speculation and "C" the highest. While such debt will likely have some
    quality and protective characteristics, these may be outweighed by large
    uncertainties or major exposures to adverse conditions.
 
BB  Debt rated "BB" is less vulnerable to non-payment than other speculative
    issues. However, it faces major ongoing uncertainties or exposure to
    adverse business, financial, or economic conditions which could lead to
    the obligor's inadequate capacity to meet its financial commitment on the
    obligation.
 
B   Debt rated "B" is more vulnerable to non-payment than obligations rated
    "BB", but the obligor currently has the capacity to meet its financial
    commitment on the obligation. Adverse business, financial, or economic
    conditions will likely impair the obligor's capacity or willingness to
    meet its financial commitment on the obligation.
 
CCC Debt rated "CCC" is currently vulnerable to non-payment, and is dependent
    upon favorable business, financial, and economic conditions for the
    obligor to meet its financial commitment on the obligation. In the event
    of adverse business, financial, or economic conditions, it is not likely
    to have the capacity to meet its financial commitment on the obligation.
 
CC  The rating "CC" is currently highly vulnerable to non-payment.
 
                                      38
<PAGE>
 
C  The "C" rating may be used to cover a situation where a bankruptcy
   petition has been filed or similar action has been taken, but payments on
   this obligation are being continued.
 
D  Debt rated "D" is in payment default. The "D" rating category is used
   when payments on an obligation are not made on the date due even if the
   applicable grace period has not expired on an obligation, unless Standard
   & Poor's believes that such payments will be made during such grace
   period. The "D" rating also will be used upon the filing of a bankruptcy
   petition or the taking of similar action if payments on an obligation are
   jeopardized.
 
  PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
 
  N.R. indicates not rated.
 
  Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
 
  BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) generally are regarded as eligible for bank investment. Also, the
laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks,
trust companies, insurance companies and fiduciaries in general.
 
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
 
  A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from "A"
for the highest-quality obligations to "D" for the lowest. These categories
are as follows:
 
A-1 This designation indicates that the degree of safety regarding timely
    payment is strong. Those issues determined to possess extremely strong
    safety characteristics are denoted with a plus (+) sign designation.
 
A-2 Capacity for timely payment on issues with this designation is
    satisfactory. However, the relative degree of safety is not as high as
    for issues designated "A-1".
 
A-3 Issues carrying this designation have an adequate capacity for timely
    payment. They are, however, more vulnerable to the adverse effects of
    changes in circumstances than obligations carrying the higher
    designations.
 
B   Issues rated "B" are regarded as having only speculative capacity for
    timely payment.
 
C   This rating is assigned to short-term debt obligations with a doubtful
    capacity for payment.
 
D   Debt rated "D" is in payment default. The "D" rating category is used
    when interest payments or principal payments are not made on the date
    due, even if the applicable grace period has not expired, unless Standard
    & Poor's believes that such payments will be made during such grace
    period.
 
  A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current
 
                                      39
<PAGE>
 
information furnished to Standard & Poor's by the issuer or obtained by
Standard & Poor's from other sources it considers reliable. Standard & Poor's
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
 
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
 
  A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not
be higher than the debt rating symbol assigned to, or that would be assigned
to, the senior debt of the same issuer.
 
  Preferred stock ratings are based on the following considerations:
 
1.  Likelihood of payment--capacity and willingness of the issuer to meet
    the timely payment of preferred stock dividends and any applicable
    sinking fund requirements in accordance with the terms of the
    obligation.
 
2.  Nature of, and provisions of, the issue.
 
3.  Relative position of the issue in the event of bankruptcy,
    reorganization, or other arrangement under the laws of bankruptcy and
    other laws affecting creditors' rights.
 
AAA This is the highest rating that may be assigned by Standard & Poor's to
    a preferred stock issue and indicates an extremely strong capacity to
    pay the preferred stock obligations.
 
AA  A preferred stock issue rated "AA" also qualifies as a high-quality,
    fixed income security. The capacity to pay preferred stock obligations
    is very strong, although not as overwhelming as for issues rated "AAA".
 
A   An issue rated "A" is backed by a sound capacity to pay the preferred
    stock obligations, although it is somewhat more susceptible to the
    adverse effects of changes in circumstances and economic conditions.
 
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
    pay the preferred stock obligations. Whereas it normally exhibits
    adequate protection parameters, adverse economic conditions or changing
    circumstances are more likely to lead to a weakened capacity to make
    payments for a preferred stock in this category than for issues in the
    "A" category.
 
BB, B, CCC
    Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
    predominately speculative with respect to the issuer's capacity to pay
    preferred stock obligations. "BB" indicates the lowest degree of
    speculation and "CCC" the highest. While such issues will likely have
    some quality and protective characteristics, these are outweighed by
    large uncertainties or major risk exposures to adverse conditions.
 
CC  The rating "CC" is reserved for a preferred stock issue in arrears on
    dividends or sinking fund payments but that is currently paying.
 
C   A preferred stock rated "C" is a non-paying issue.
 
D   A preferred stock rated "D" is a non-paying issue with the issuer in
    default on debt instruments.
 
                                      40
<PAGE>
 
  N.R. indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate
a particular type of obligation as a matter of policy.
 
  PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the rating from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
 
  The preferred stock rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or suitability
for a particular investor. [Preferred stock ratings are wholly unrelated to
Standard & Poor's earnings and dividend rankings for common stocks.]
 
  The ratings are based on current information furnished to Standard & Poor's
by the issuer, or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes in,
or unavailability of, such information, or based on other circumstances.
 
                                      41
<PAGE>
 
INDEPENDENT AUDITORS' REPORT
 
THE BOARD OF DIRECTORS AND SHAREHOLDER,
MERRILL LYNCH REAL ESTATE FUND, INC.:
 
We have audited the accompanying statement of assets and liabilities of
Merrill Lynch Real Estate Fund, Inc. as of November 12, 1997. This financial
statement is the responsibility of the Fund's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
 
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
In our opinion, such statement of assets and liabilities presents fairly, in
all material respects, the financial position of Merrill Lynch Real Estate
Fund, Inc. as of November 12, 1997 in conformity with generally accepted
accounting principles.
   
Deloitte & Touche LLP     
Princeton, New Jersey
November 12, 1997
 
                                      42
<PAGE>
 
                     MERRILL LYNCH REAL ESTATE FUND, INC.
 
                      STATEMENT OF ASSETS AND LIABILITIES
 
                               NOVEMBER 12, 1997
 
<TABLE>   
<S>                                                                    <C>
Assets:
  Cash in Bank........................................................ $100,000
  Prepaid registration fees (Note 3)..................................   68,030
  Deferred organization expenses (Note 4).............................  141,000
                                                                       --------
    Total Assets......................................................  309,030
                                                                       --------
Liabilities--accrued expenses.........................................  209,030
                                                                       --------
Net Assets (equivalent to $10.00 per share on 2,500 Class A shares of
 Common Stock (par value $0.10), 2,500 Class B shares of Common Stock
 (par value $0.10), 2,500 Class C shares of Common Stock (par value
 $0.10) and 2,500 Class D shares of Common Stock (par value $0.10)
 outstanding with 400,000,000 shares authorized) (Note 1)............. $100,000
                                                                       ========
</TABLE>    
- --------
Notes to Statement of Assets and Liabilities.
(1) Merrill Lynch Real Estate Fund, Inc. (the "Fund") was organized as a
    Maryland corporation on September 24, 1997. The Fund is registered under
    the Investment Company Act of 1940 as an open-end management investment
    company. To date, the Fund has not had any transactions other than those
    relating to organizational matters and the sale of 2,500 Class A shares,
    2,500 Class B shares, 2,500 Class C shares and 2,500 Class D shares of
    Common Stock to Merrill Lynch Asset Management, L.P. (the "Manager").
(2) The Fund has entered into a management agreement (the "Management
    Agreement") with the Manager, and distribution agreements (the
    "Distribution Agreements") with Merrill Lynch Funds Distributor, Inc. (the
    "Distributor"). (See "Management of the Fund--Management and Advisory
    Arrangements" in the Statement of Additional Information.) Certain
    officers and/or directors of the Fund are officers and/or directors of the
    Manager and the Distributor.
(3) Prepaid registration fees are charged to income as the related shares are
    issued.
(4) Deferred organization expenses will be amortized over a period from the
    date the Fund commences operations not exceeding five years. In the event
    that the Manager (or any subsequent holder) redeems any of its original
    shares prior to the end of the five-year period, the proceeds of the
    redemption payable in respect of such shares shall be reduced by the pro
    rata share (based on the proportionate share of the original shares
    redeemed to the total number of original shares outstanding at the time of
    redemption) of the unamortized deferred organization expenses as of the
    date of such redemption. In the event that the Fund is liquidated prior to
    the end of the five-year period, the Manager (or any subsequent holder)
    shall bear the unamortized deferred organization expenses.
 
                                      43
<PAGE>
 
 
 
                       UNAUDITED FINANCIAL STATEMENTS FOR
                      MERRILL LYNCH REAL ESTATE FUND, INC.
         FOR THE PERIOD DECEMBER 26, 1997 (COMMENCEMENT OF OPERATIONS)
                               TO MARCH 31, 1998
 
 
 
 
                                       44
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC. (UNAUDITED)           MARCH 31, 1998
 
     SCHEDULE OF INVESTMENTS                             (IN U.S. DOLLARS)
 
<TABLE>   
<CAPTION>
                            SHARES   REAL ESTATE INVESTMENT                  VALUE    PERCENT OF
      INDUSTRIES             HELD        TRUSTS (REITS)           COST     (NOTE 1A)  NET ASSETS
 
 
      <C>                   <C>     <S>                        <C>        <C>         <C>
      APARTMENTS             30,000 Avalon Properties, Inc.    $  887,331 $   870,000       1.1%
                             90,000 Oasis Residential, Inc.     1,992,276   1,996,875       2.6
                             71,000 Post Properties, Inc.       2,765,010   2,835,562       3.7
                            120,000 Security Capital            2,643,415   2,520,000       3.3
                                    Atlantic Incorporated
                             40,000 Summit Properties Inc.        812,349     805,000       1.0
                                                               ---------- -----------     ------
                                                                9,100,381   9,027,437      11.7
 
 
      DIVERSIFIED/MIXED USE 200,000 Capital Automotive (a)      3,000,000   3,787,500       4.9
                             96,700 Cousins Properties,         2,802,590   2,985,612       3.9
                                    Inc.
                             89,900 Entertainment Properties    1,755,808   1,764,287       2.3
                                    Trust
                                                               ---------- -----------     ------
                                                                7,558,398   8,537,399      11.1
 
 
      HEALTH CARE            60,000 Meditrust Companies         1,965,138   1,852,500       2.4
 
 
      HOTEL/RESTAURANT       40,000 Boykin Loding Company         995,275     985,000       1.3
                             25,000 FelCor Suite Hotels,          906,337     926,562       1.2
                                    Inc.
                             57,715 Starwood Hotels &           3,085,485   3,084,145       4.0
                                    Resorts
                                                               ---------- -----------     ------
                                                                4,987,097   4,995,707       6.5
 
 
      MANUFACTURED HOMES     50,000 Sun Communities, Inc.       1,696,750   1,737,500       2.3
 
 
      OFFICE PROPERTY        75,000 Arden Realty, Inc.          2,123,437   2,137,500       2.8
                             90,000 CarrAmerica Realty          2,732,422   2,700,000       3.5
                                    Corporation
                            105,000 Crescent Real Estate        3,741,739   3,780,000       4.9
                                    Equities Company
                            105,000 Equity Office Properties    3,220,337   3,215,625       4.2
                                    Trust
                             60,000 Highwoods Properties,       2,095,131   2,118,750       2.7
                                    Inc.
                             10,000 Kilroy Realty                 266,225     285,625       0.4
                                    Corporation
                             40,000 Liberty Property Trust      1,003,025   1,075,000       1.4
                             93,100 Tower Realty Trust,         2,187,806   2,292,588       3.0
                                    Inc.
                                                               ---------- -----------     ------
                                                               17,370,122  17,605,088      22.9
      OUTLET CENTERS         46,000 Chelsea GCA Realty, Inc.    1,703,897   1,702,000       2.2
                             20,000 Tanger Factory Outlet         588,625     582,500       0.8
                                    Centers, Inc.
                                                               ---------- -----------     ------
                                                                2,292,522   2,284,500       3.0
 
 
      REGIONAL MALLS         80,100 CBL & Associates            1,995,741   1,962,450       2.6
                                    Properties, Inc.
                             91,800 Glimcher Realty Trust       2,042,827   2,008,125       2.6
                             64,200 JP Realty, Inc.             1,632,152   1,629,075       2.1
                            115,000 Taubman Centers, Inc.       1,435,039   1,502,188       1.9
                             35,000 Urban Shopping Centers,     1,164,363   1,155,000       1.5
                                    Inc.
                                                               ---------- -----------     ------
                                                                8,270,122   8,256,838      10.7
 
 
</TABLE>    
 
 
 
                                       45
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC. (UNAUDITED)           MARCH 31, 1998
 
                                                         (IN U.S. DOLLARS)
     SCHEDULE OF INVESTMENTS (CONCLUDED)     
 
<TABLE>   
<CAPTION>
                           SHARES   REAL ESTATE INVESTMENT                   VALUE    PERCENT OF
      INDUSTRIES            HELD        TRUSTS (REITS)           COST      (NOTE 1A)  NET ASSETS
 
 
      <C>                  <C>     <S>                        <C>         <C>         <C> 
      SHOPPING CENTERS      77,600 Federal Realty             $ 1,963,768 $ 1,906,050       2.5%
                                   Investment Trust
                            40,000 Kimco Realty Corporation     1,362,400   1,415,000       1.8
                            55,000 Regency Realty               1,486,363   1,454,063       1.9
                                   Corporation
                                                              ----------- -----------      -----
                                                                4,812,531   4,775,113       6.2
 
 
      STORAGE               50,000 Shurgard Storage             1,443,269   1,406,250       1.8
                                   Centers, Inc.
                            48,000 Storage USA, Inc.            1,870,005   1,842,000       2.4
                                                              ----------- -----------      -----
                                                                3,313,274   3,248,250       4.2
 
 
      WAREHOUSE/INDUSTRIAL 220,000 Cabot Industrial Trust       4,589,200   5,238,750       6.8
                            10,000 CenterPoint Properties         330,600     346,875       0.4
                                   Corporation
                            70,000 Weeks Corporation            2,238,262   2,288,125       3.0
                                                              ----------- -----------      -----
                                                                7,158,062   7,873,750      10.2
 
 
                                   TOTAL REAL ESTATE           68,524,397  70,194,082      91.2
                                   INVESTMENT & TRUSTS
                                   (REITS)
<CAPTION>
                                         COMMON STOCK
 
 
      <C>                  <C>     <S>                        <C>         <C>         <C>
      DIVERSIFIED          130,000 TrizecHahn Corporation       2,999,033   3,063,125       4.0
 
 
                                   Interstate Hotels                                        3.7
      HOTELS & MOTELS       79,500 Company (a)                  2,723,027   2,852,063
 
 
                                   TOTAL COMMON STOCKS          5,722,060   5,915,188       7.7
 
<CAPTION>
                          FACE
                         AMOUNT   SHORT-TERM SECURITIES
 
      <C>                  <C>     <S>                        <C>         <C>         <C>  
      COMMERCIAL PAPER* $587,000 General Motors
                                 Acceptance Corp., 6.13%
                                  due 4/01/1998                   587,000     587,000       0.8   
                                                                                                  
                                                                                                  
                                 TOTAL SHORT-TERM                                           0.8    
                                 SECURITIES                       587,000     587,000         
 
 
                                 TOTAL SHORT-TERM                                           0.8
                                 SECURITIES                       587,000     587,000
 
 
      TOTAL INVESTMENTS                                       $74,833,457  76,696,270      99.7
                                                              -----------            
      OTHER ASSETS LESS                                                                     0.3
       LIABILITIES                                                            251,682
                                                                          -----------     ------
      NET ASSETS                                                          $76,947,952     100.0%
                                                                          -----------     ------
</TABLE>     
        
     * Commercial Paper is traded on a discount basis; the interest rate
     shown is the discount rate paid at the time of purchase by the Fund.
            
     (a) Non-income producing security.     
     See Notes to Financial Statements.
 
                                       46
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.                       MARCH 31, 1998
 
     FINANCIAL INFORMATION (UNAUDITED)
 
<TABLE>   
<CAPTION>
 
     STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 31, 1998
 
      <C>              <S>                                     <C>        <C>
      ASSETS:          Investments, at value (identified                  $76,696,270
                       cost -- $74,833,457) (Note 1a)........
                       Cash..................................                      39
                       Receivables:
                       Securities sold.......................  $1,265,000
                       Capital shares sold...................     729,814
                       Dividends.............................     509,832   2,504,646
                                                               ----------
                       Prepaid registration fees and other                     56,205
                       assets (Note 1e)......................
                                                                          -----------
                       Total assets..........................              79,257,160
                                                                          -----------
 
 
      LIABILITIES:     Payables:
                       Securities purchased..................   1,981,769
                       Capital shares redeemed...............     216,687
                       Distributor (Note 2)..................      56,594
                       Investment adviser (Note 2)...........      54,158   2,309,208
                                                               ---------- -----------
                       Total liabilities.....................               2,309,208
                                                                          -----------
 
 
      NET ASSETS:      Net assets............................             $76,947,952
                                                                          -----------
 
 
      NET ASSETS       Class A Shares of Common Stock, $.10
      CONSIST OF:      par value, 100,000,000 shares
                       authorized............................             $    18,365
                       Class B Shares of Common Stock, $.10
                       par value, 100,000,000 shares
                       authorized............................                 532,283
                       Class C Shares of Common Stock, $.10
                       par value, 100,000,000 shares
                       authorized............................                 105,040
                       Class D Shares of Common Stock, $.10
                       par value, 100,000,000 shares
                       authorized............................                  85,322
                       Paid-in capital in excess of par......              73,610,673
                       Undistributed investment income --                     648,047
                        net..................................
                       Undistributed realized capital gains                    85,409
                       on investments -- net.................
                       Unrealized appreciation on                           1,862,813
                       investments -- net....................
                                                                          -----------
                       Net assets............................             $76,947,952
                                                                          -----------
      NET ASSET VALUE: Class A -- Based on net assets of
                            $1,911,584 and 183,656 shares
                            outstanding......................                  $10.41
                                                                          -----------
                       Class B -- Based on net assets of
                            $55,257,091 and 5,322,831 shares
                            outstanding......................                  $10.38
                                                                          -----------
                       Class C -- Based on net assets of
                            $10,904,221 and 1,050,396 shares
                            outstanding......................                  $10.38
                                                                          -----------
                       Class D -- Based on net assets of
                            $8,875,056 and 853,219 shares
                            outstanding......................                  $10.40
                                                                          -----------
 
 
 
 
                       See Notes to Financial Statements.
</TABLE>    
 
                                       47
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.                       MARCH 31, 1998
 
     FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
 
<TABLE>   
<CAPTION>
 
     STATEMENT OF OPERATIONS FOR THE PERIOD DEC. 26, 1997+ TO MARCH 31, 1998
 
      <C>              <S>                                  <C>      <C>
      INVESTMENT       Dividends (net of $2,588 foreign              $  843,531
                       withholding tax)..................
      INCOME           Interest and amortizations of                    192,450
                       premium and discount earned.......
                                                                     ----------
      (NOTES 1c &      Total income......................             1,035,981
      1d):
                                                                     ----------
 
 
      EXPENSES:        Investment advisory fees (Note       $142,865
                       2)................................
                       Account maintenance and               122,670
                       distribution fees -- Class B (Note
                       2)................................
                       Amortization of organization           24,566
                       expenses (Note 1f)................
                       Account maintenance and                21,660
                       distribution fees -- Class C (Note
                       2)................................
                       Registration fees (Note 1f).......     16,342
                       Accounting services (Note 2)......     10,489
                       Printing and shareholder reports..     10,267
                       Transfer agent fees -- Class B         10,214
                       (Note 2)..........................
                       Professional fees.................      7,770
                       Directors' fees and expenses......      7,076
                       Account maintenance fees -- Class       5,000
                       D (Note 2)........................
                       Custodian fees....................      3,268
                       Transfer agent fees -- Class C          1,859
                       (Note 2)..........................
                       Transfer agent fees -- Class D          1,364
                       (Note 2)..........................
                       Pricing fees......................        608
                       Transfer agent fees -- Class A            251
                       (Note 2)..........................
                       Other.............................      1,665
                                                            --------
                       Total expenses....................               387,934
                                                                     ----------
                       Investment income -- net..........               648,047
                                                                     ----------
      REALIZED &       Realized gain on investments --                   85,409
                        net..............................
      UNREALIZED GAIN  Unrealized appreciation on                     1,862,813
      ON               investments -- net................
                                                                     ----------
      INVESTMENTS --   NET INCREASE IN NET ASSETS
       NET             RESULTING FROM OPERATIONS.........            $2,596,269
                                                                     ----------
      (NOTES 1B, 1C,
      1E & 3)
 
 
 
 
                       +Commencement of operations.
                       See Notes to Financial Statements.
</TABLE>    
 
                                       48
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.                       MARCH 31, 1998
 
     FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
 
 
     STATEMENT OF CHANGES IN NET ASSETS
 
<TABLE>
<CAPTION>
                                                                FOR THE PERIOD
                                                               DEC. 26 1997+ TO
                       INCREASE (DECREASE) IN NET ASSETS        MARCH 31, 1998
 
 
      <C>              <S>                                     <C>
      OPERATIONS:      Investment income -- net.............     $   648,047
                       Realized gain on investments -- net..          85,409
                       Unrealized appreciation on
                       investments -- net...................       1,862,813
                                                                 -----------
                       Net increase in net assets resulting
                       from operations .....................       2,596,269
                                                                 -----------
 
 
      CAPITAL SHARE    Net increase in net assets derived         74,251,683
                       from capital share transactions......
                                                                 -----------
      TRANSACTIONS
      (NOTE 4):
 
 
      NET ASSETS       Total increase in net assets.........      76,847,952
                       Beginning of period..................         100,000
                                                                 -----------
                       End of period*.......................     $76,947,952
                                                                 -----------
 
                       *Undistributed investment income --       $   648,047
                        net.................................
                                                                 -----------
 
                       +Commencement of operations.
                       See Notes to Financial Statements.
</TABLE>
 
                                       49
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.                       MARCH 31, 1998
 
     FINANCIAL HIGHLIGHTS (UNAUDITED)
 
<TABLE>   
<CAPTION>
                       THE FOLLOWING PER SHARE DATA AND
                       RATIOS HAVE BEEN DERIVED FROM
                       INFORMATION PROVIDED IN THE                 CLASS A
                       FINANCIAL STATEMENTS.                  -----------------
                                                               FOR THE PERIOD
                       INCREASE (DECREASE) IN NET ASSET       DEC. 26, 1997+ TO
                       VALUE:                                  MARCH 31, 1998
 
      <C>              <S>                                    <C>
      PER SHARE        Net asset value, beginning of
                       period..............................        $ 10.00
                                                                   -------
      OPERATING        Investment income -- net............           0.10
      PERFORMANCE:     Realized and unrealized gain on
                       investments -- net..................           0.31
                                                                   -------
                       Total from investment operations....           0.41
                                                                   -------
                       Net asset value, end of period......        $ 10.41
                                                                   -------
 
      TOTAL
      INVESTMENT       Based on net asset value per share..           4.10%#
                                                                   -------
      RETURN:**
 
      RATIOS TO        Expenses............................           1.40%*
      AVERAGE
                                                                   -------
      NET ASSETS:      Investment income -- net............           5.01%*
                                                                   -------
 
      SUPPLEMENTAL     Net assets, end of period (in               $ 1,912
                       thousands)..........................
                                                                   -------
      DATA:            Portfolio turnover..................          23.37%
                                                                   -------
                       Average commission rate paid##......        $0.0569
                                                                   -------
 
                       *Annualized
                       **Total investment returns exclude
                       the effects of sales loads.
                       +Commencement of operations.
                       #Aggregate total investment return.
                       ##The "Average Commission Rate Paid" includes
                       commissions paid in foreign currencies, which have
                       been converted into U.S. dollars using the prevailing
                       exchange rate on the date of the transaction. Such
                       conversions may significantly affect the rate shown.
                       See Notes to Financial Statements.
</TABLE>    
 
                                       50
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.                       MARCH 31, 1998
 
     FINANCIAL HIGHLIGHTS (UNAUDITED) (CONTINUED)
 
<TABLE>   
<CAPTION>
                       THE FOLLOWING PER SHARE DATA AND
                       RATIOS HAVE BEEN DERIVED FROM
                       INFORMATION PROVIDED IN THE                 CLASS B
                       FINANCIAL STATEMENTS.                  -----------------
                                                               FOR THE PERIOD
                       INCREASE (DECREASE) IN NET ASSET       DEC. 26, 1997+ TO
                       VALUE:                                  MARCH 31, 1998
 
      <C>              <S>                                    <C>
                       Net asset value, beginning of
      PER SHARE        period..............................        $ 10.00
                                                                   -------
      OPERATING        Investment income -- net............           0.09
      PERFORMANCE:     Realized and unrealized gain on
                       investments -- net..................           0.29
                                                                   -------
                       Total from investment operations....           0.38
                                                                   -------
                       Net asset value, end of period......        $ 10.38
                                                                   -------
 
      TOTAL            Based on net asset value per share..           3.80%#
      INVESTMENT
                                                                   -------
      RETURN:**
 
      RATIOS TO        Expenses............................           2.42%*
                                                                   -------
      AVERAGE NET      Investment income -- net............           3.72%*
                                                                   -------
      ASSETS:
 
      SUPPLEMENTAL     Net assets, end of period (in               $55,257
                       thousands)..........................
                                                                   -------
      DATA:            Portfolio turnover..................          23.37%
                                                                   -------
                       Average commission rate paid##......        $0.0569
                                                                   -------
 
                       *Annualized
                       **Total investment returns exclude
                       the effects of sales loads.
                       +Commencement of operations.
                       #Aggregate total investment return.
                       ##The "Average Commission Rate Paid" includes
                       commissions paid in foreign currencies, which have
                       been converted into U.S. dollars using the prevailing
                       exchange rate on the date of the transaction. Such
                       conversions may significantly affect the rate shown.
                       See Notes to Financial Statements.
</TABLE>    
 
                                       51
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.                       MARCH 31, 1998
 
     FINANCIAL HIGHLIGHTS (UNAUDITED) (CONTINUED)
 
<TABLE>   
<CAPTION>
                       THE FOLLOWING PER SHARE DATA AND
                       RATIOS HAVE BEEN DERIVED FROM
                       INFORMATION PROVIDED IN THE                 CLASS C
                       FINANCIAL STATEMENTS.                  -----------------
                                                               FOR THE PERIOD
                       INCREASE (DECREASE) IN NET ASSET       DEC. 26, 1997+ TO
                       VALUE:                                  MARCH 31, 1998
 
      <C>              <S>                                    <C>
      PER SHARE        Net asset value, beginning of               $ 10.00
                       period..............................
                                                                   -------
      OPERATING        Investment income -- net............           0.08
      PERFORMANCE:     Realized and unrealized gain on
                       investments -- net..................           0.30
                                                                   -------
                       Total from investment operations....           0.38
                                                                   -------
                       Net asset value, end of period......        $ 10.38
                                                                   -------
 
      TOTAL            Based on net asset value per share..           3.80%#
      INVESTMENT
                                                                   -------
      RETURN:**
 
      RATIOS TO        Expenses............................           2.42%*
      AVERAGE
                                                                   -------
      NET ASSETS:      Investment income -- net............           3.90%*
                                                                   -------
 
      SUPPLEMENTAL     Net assets, end of period (in               $10,904
                       thousands)..........................
                                                                   -------
      DATA:            Portfolio turnover..................          23.37%
                                                                   -------
                       Average commission rate paid##......        $0.0569
                                                                   -------
 
                       *Annualized.
                       **Total investment returns exclude
                       the effects of sales loads.
                       +Commencement of operations.
                       #Aggregate total investment return.
                       ##The "Average Commission Rate Paid" includes
                       commissions paid in foreign currencies, which have
                       been converted into U.S. dollars using the prevailing
                       exchange rate on the date of the transaction. Such
                       conversions may significantly affect the rate shown.
                       See Notes to Financial Statements.
</TABLE>    
 
                                       52
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.                       MARCH 31, 1998
 
     FINANCIAL HIGHLIGHTS (UNAUDITED) (CONCLUDED)
 
<TABLE>   
<CAPTION>
                       THE FOLLOWING PER SHARE DATA AND            CLASS D
                       RATIOS HAVE BEEN DERIVED FROM          -----------------
                       INFORMATION PROVIDED IN THE
                       FINANCIAL STATEMENTS.
                                                               FOR THE PERIOD
                       INCREASE (DECREASE) IN NET ASSET       DEC. 26, 1997+ TO
                       VALUE:                                  MARCH 31, 1998
 
      <C>              <S>                                    <C>
      PER SHARE        Net asset value, beginning of               $ 10.00
                       period..............................        -------
      OPERATING        Investment income -- net............           0.10
      PERFORMANCE:     Realized and unrealized gain on                0.30
                       investments -- net..................        -------
                       Total from investment operations....           0.40
                                                                   -------
                       Net asset value, end of period......         $10.40
                                                                   -------
 
      TOTAL            Based on net asset value per share..           4.00%#
      INVESTMENT                                                   -------
      RETURN:**
 
      RATIOS TO        Expenses............................           1.66%*
      AVERAGE                                                      -------
      NET ASSETS:      Investment income -- net............           4.45%*
                                                                   -------
 
      SUPPLEMENTAL     Net assets, end of period (in               $ 8,875
      DATA:            thousands)..........................        -------
                       Portfolio turnover..................          23.37%
                                                                   -------
                       Average commission rate paid##......        $0.0569
                                                                   -------
 
                       *Annualized.
                       **Total investment returns exclude
                       the effects of sales loads.
                       +Commencement of operations.
                       #Aggregate total investment return.
                       ##The "Average Commission Rate Paid" includes
                       commissions paid in foreign currencies, which have
                       been converted into U.S. dollars using the prevailing
                       exchange rate on the date of the transaction. Such
                       conversions may significantly affect the rate shown.
                       See Notes to Financial Statements.
</TABLE>    
 
                                       53
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.
 
     NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
1. SIGNIFICANT ACCOUNTING POLICIES:
Merrill Lynch Real Estate Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company that seeks total return by investing primarily in equity
securities of issuers that are principally engaged in the real estate industry.
Prior to commencement of operations on December 26, 1997, the Fund had no
operations other than those relating to organizational matters and the issue of
10,000 capital shares of the Fund to Merrill Lynch Asset Management, L.P.
("MLAM") for 100,000 on September 24, 1997. The Fund offers four classes of
shares under the Merrill Lynch Select Pricing (sm) System. Shares of Class A
and Class D are sold with a front-end sales charge. Shares of Class B and Class
C 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 Class B, Class C and Class D Shares bear
certain expenses related to the account maintenance of such shares, and Class B
and Class 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 account maintenance and distribution expenditures. The
following is a summary of significant accounting policies followed by the Fund.
 
(a) Valuation of investments -- Portfolio securities which are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid price.
Securities traded in the over-the-counter market are valued at the last
available bid price prior to the time of valuation. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as the primary
market. Securities which are traded both in the over-the-counter market and on
a stock exchange are valued according to the broadest and most representative
market. Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the over-the-
counter market, the last asked price. Options purchased are valued at the last
sale price in the case of exchange-traded options, or, in the case of options
traded in the over-the-counter market, the last bid price. Short-term
securities are valued at amortized cost, which approximates market value. Other
investments, including futures contracts and related options, are stated at
market value. Securities and assets for which market value quotations are not
available are valued at their fair value as determined in good faith by or
under the direction of the Fund's Board of Directors.
 
(b) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
 
(c) Derivative financial instruments -- The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its portfolio
against adverse movements in the equity, debt and currency markets. Losses may
arise due to changes in the value of the contract or if the counterparty does
not perform under the contract.
 
 . Options -- The Fund is authorized to write and purchase call and put options.
When the Fund writes an option, an amount equal to the premium received by the
Fund is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written.
 
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund entered into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid
 
                                       54
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.
 
     NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
(or gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
 
Written and purchased options are non-income producing investments.
 
 . Forward foreign exchange contracts -- The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contracts.
 
 . Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such futures contracts as a hedge against
adverse changes in the interest rate. A futures contract is an agreement
between two parties to buy and sell a security, respectively, for a set price
on a future date. Upon entering into a contract, the Fund deposits and
maintains as collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value of at the time it was closed.
 
(d) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no Federal
income tax provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest and capital gains at various rates.
 
(e) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains
and losses on security transactions are determined on the identified cost
basis.
 
(f) Deferred organization expenses and prepaid registration fees -- Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.
 
(g) Dividends and distributions -- Dividends from net investment and
distribution of capital gains are recorded on the ex-dividend date.
 
2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:
   
The Fund has entered into an investment Advisory Agreement with MLAM. The
general partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of Merrill Lynch & co., Inc. ("ML&Co."), which is the
limited partner. The Fund has also entered into a Distribution Agreement and
Distribution Plans with Merrill Lynch Funds Distributor, Inc. ("MLFD" or
"Distributor"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.     
 
MLAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operation of the Fund. For such services, the Fund pays a monthly fee of
0.85%, on an annual basis, of the average daily value of the Fund's net assets.
 
Pursuant to the Distribution Plans adopted by the Fund in accordance with Rule
12b-1 under the Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance 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:
 
 
                                       55
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.
 
     NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
                                                          ACCOUNT
                                                        MAINTENANCE DISTRIBUTION
                                                            FEE         FEE
- --------------------------------------------------------------------------------
<S>                                                     <C>         <C>
Class B................................................    0.25%       0.75%
- --------------------------------------------------------------------------------
Class C................................................    0.25%       0.75%
- --------------------------------------------------------------------------------
Class D................................................    0.25%         --
- --------------------------------------------------------------------------------
</TABLE>
 
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner
& Smith Inc. ("MLPF&S"), a subsidiary of ML&Co., also provides account
maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class B, Class C and Class D shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
 
For the period December 26, 1997 to March 31, 1998, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
 
<TABLE>   
- --------------------------------------------------------------------------------
<CAPTION>
                                                                   MLFD  MLPF&S
- --------------------------------------------------------------------------------
<S>                                                               <C>    <C>
Class D.......................................................... $3,051 $46,157
- --------------------------------------------------------------------------------
</TABLE>    
 
For the period December 26, 1997 to March 31, 1998, MLPF&S received contingent
deferred sales charges of $4,861 and $2,755 relating to transactions in Class B
and Class C Shares, respectively.
 
In addition, MLPF&S received $21,296 in commissions on the execution of
portfolio security transactions for the Fund for the period December 26, 1997
to March 31, 1998.
 
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-owned
subsidiary of ML & Co., is the Fund's transfer agent.
 
Accounting services are provided to the Fund by MLAM at cost.
 
Certain officers and/or directors of the Fund are officers and/or directors of
MLAM, MLFD, MLFDS, PSI and/or ML & Co.
 
3. INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
period December 26, 1997 to March 31, 1998, were $83,861,531 and $9,700,440,
respectively.
 
Net realized gains for the period December 26, 1997 to March 31, 1998 and net
unrealized gains as of March 31, 1998 were as follows:
 
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
                                                            REALIZED UNREALIZED
                                                             GAINS     GAINS
- -------------------------------------------------------------------------------
<S>                                                         <C>      <C>
Long-term investments...................................... $85,366  $1,862,813
Short-term investments.....................................      43          --
                                                            -------  ----------
Total...................................................... $85,409  $1,862,813
                                                            =======  ==========
- -------------------------------------------------------------------------------
</TABLE>
 
As of March 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $1,862,813, of which $2,415,793 related to appreciated
securities and $552,980 related to depreciated securities. At February 28,
1998, the aggregate cost of investments for Federal income tax purposes was
$74,833,457.
 
4. CAPITAL SHARE TRANSACTION
The net increase in net assets derived from capital share transactions was
$74,251,683 for the period ended March 31, 1998.
 
Transactions in shares for each class were as follows:
 
<TABLE>   
- --------------------------------------------------------------------------------
<CAPTION>
                                                                      DOLLAR
CLASS A SHARES FOR THE PERIOD ENDED MARCH 31, 1998+        SHARES     AMOUNT
- --------------------------------------------------------------------------------
<S>                                                        <C>      <C>
Shares sold............................................... 189,102  $ 1,900,720
Shares redeemed...........................................  (7,946)     (80,246)
                                                           -------  -----------
Net increase.............................................. 181,156  $ 1,820,474
                                                           =======  ===========
- --------------------------------------------------------------------------------
</TABLE>    
+Prior to December 26, 1997 (commencement of operations), the Fund issued 2,500
shares to MLAM for $25,000.
 
 
                                       56
<PAGE>
 
     MERRILL LYNCH REAL ESTATE FUND, INC.
 
     NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONCLUDED)
 
<TABLE>   
- --------------------------------------------------------------------------------
<CAPTION>
                                                                      DOLLAR
CLASS B SHARES FOR THE PERIOD ENDED MARCH 31, 1998+       SHARES      AMOUNT
- --------------------------------------------------------------------------------
<S>                                                      <C>        <C>
Shares sold............................................. 5,443,379  $54,612,988
Shares redeemed.........................................  (123,048)  (1,243,992)
                                                         ---------  -----------
Net increase............................................ 5,320,331  $53,368,996
                                                         =========  ===========
- --------------------------------------------------------------------------------
</TABLE>    
+Prior to December 26, 1997 (commencement of operations), the Fund issued 2,500
shares to MLAM for $25,000.
 
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
                                                                      DOLLAR
CLASS C SHARES FOR THE PERIOD ENDED MARCH 31, 1998+       SHARES      AMOUNT
- --------------------------------------------------------------------------------
<S>                                                      <C>        <C>
Shares sold............................................. 1,096,911  $11,025,762
Shares redeemed.........................................   (49,015)    (496,093)
                                                         ---------  -----------
Net increase............................................ 1,047,896  $10,529,669
                                                         =========  ===========
- --------------------------------------------------------------------------------
</TABLE>
+Prior to December 26, 1997 (commencement of operations), the Fund issued 2,500
shares to MLAM for $25,000.
 
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
                                                                       DOLLAR
CLASS D SHARES FOR THE PERIOD ENDED MARCH 31, 1998+         SHARES     AMOUNT
- --------------------------------------------------------------------------------
<S>                                                         <C>      <C>
Shares sold................................................ 878,106  $8,810,943
Shares redeemed............................................ (27,387)   (278,399)
                                                            -------  ----------
Net increase............................................... 850,719  $8,532,544
                                                            =======  ==========
- --------------------------------------------------------------------------------
</TABLE>
+Prior to December 26, 1997 (commencement of operations), the Fund issued 2,500
shares to MLAM for $25,000.
 
                                       57
<PAGE>
 
                     
                  [(This page intentionally left blank)]     
<PAGE>
 
                     
                  [(This page intentionally left blank)]     
<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>   
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Investment Objective and Policies.........................................   2
 Other Investment Policies and Practices..................................   2
 Investment Restrictions..................................................   5
Management of the Fund....................................................   7
 Directors and Officers...................................................   7
 Compensation of Directors................................................   9
 Management and Advisory Arrangements.....................................  10
Purchase of Shares........................................................  11
 Initial Sales Charge Alternatives--
  Class A and Class D Shares..............................................  12
 Reduced Initial Sales Charges............................................  13
 Employer-Sponsored Retirement or Savings Plans and Certain Other
  Arrangements............................................................  16
 Distribution Plans.......................................................  16
 Limitations on the Payment of Deferred Sales Charges.....................  16
Redemption of Shares......................................................  18
 Deferred Sales Charges--Class B and Class C Shares.......................  18
Portfolio Transactions and Brokerage......................................  19
Determination of Net Asset Value..........................................  20
Shareholder Services......................................................  22
 Investment Account.......................................................  22
 Automatic Investment Plans...............................................  22
 Automatic Reinvestment of Dividends and Capital Gains Distributions......  23
 Systematic Withdrawal Plans..............................................  23
 Exchange Privilege.......................................................  24
Dividends, Distributions and Taxes........................................  27
 Dividends and Distributions..............................................  27
 Taxes....................................................................  27
 Tax Treatment of Options and Futures Transactions........................  30
 Special Rules for Certain Foreign Currency Transactions..................  30
Performance Data..........................................................  31
General Information.......................................................  32
 Description of Shares....................................................  32
 Computation of Offering Price Per Share..................................  33
 Independent Auditors.....................................................  34
 Custodian................................................................  34
 Transfer Agent...........................................................  34
 Legal Counsel............................................................  34
 Reports to Shareholders..................................................  34
 Additional Information...................................................  34
Appendix..................................................................  35
Independent Auditors' Report..............................................  42
Statement of Assets and Liabilities.......................................  43
Financial Statements (unaudited)..........................................  44
</TABLE>    
                                                             
                                                          Code #19018-0598     
 
[LOGO] MERRILL LYNCH

Merrill Lynch
Real Estate Fund, Inc.

[ART]

STATEMENT OF
ADDITIONAL
INFORMATION

    May 27, 1998      

Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>
 
                           PART C. OTHER INFORMATION
 
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
 
(a)FINANCIAL STATEMENTS:
     
  Contained in Part A:     
       
    Financial Highlights for the period December 26, 1997 (commencement of
       operations) to March 31, 1998 (unaudited).     
  Contained in Part B:
    Independent Auditors' Report
    Statement of Assets and Liabilities as of November 12, 1997.
       
    Schedule of Investments as of March 31, 1998 (unaudited)     
       
    Statement of Assets and Liabilities as of March 31, 1998 (unaudited)
              
    Statement of Operations for the period December 26, 1997 (commencement
       of operations) to March 31, 1998 (unaudited)     
       
    Statement of Changes in Net Assets for the period December 26, 1997
       (commencement of operations) to March 31, 1998 (unaudited)     
       
    Financial Highlights for the period December 26, 1997 (commencement of
       operations) to March 31, 1998 (unaudited)     
 
(b)EXHIBITS:
 
<TABLE>   
<CAPTION>
 EXHIBIT
 NUMBER                                DESCRIPTION
 -------                               -----------
 <C>     <S>
         --Articles of Incorporation of the Registrant, dated September 23,
  1       1997.(a)
  2      --By-Laws of the Registrant.(b)
  3      --None.
  4(a)   --Portions of the Articles of Incorporation and the By-Laws of the
          Registrant defining the rights of holders of shares of the
          Registrant.(c)
   (b)   --Form of Specimen Certificate for shares of Common Stock of the
          Registrant.(b)
  5(a)   --Form of Management Agreement between the Registrant and Merrill
          Lynch Asset Management, L.P. (the "Manager").(b)
   (b)   --Form of Sub-Advisory Agreement between the Manager and Merrill Lynch
          Asset Management U.K. Limited.(b)
  6(a)   --Form of Class A Shares Distribution Agreement between the Registrant
          and Merrill Lynch Funds Distributor, Inc. (the "Distributor").(b)
   (b)   --Form of Class B Shares Distribution Agreement between the Registrant
          and the Distributor.(b)
   (c)   --Form of Class C Shares Distribution Agreement between the Registrant
          and the Distributor.(b)
   (d)   --Form of Class D Shares Distribution Agreement between the Registrant
          and the Distributor.(b)
  7      --None.
  8      --Form of Custody Agreement between Registrant and The Bank of New
          York.(b)
  9(a)   --Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
          Servicing Agency Agreement between the Registrant and Merrill Lynch
          Financial Data Services, Inc. (the "Transfer Agent").(b)
   (b)   --Form of Agreement relating to use of name between the Registrant and
          Merrill Lynch & Co., Inc.(b)
 10      --None.
 11      --Consent of Deloitte & Touche LLP, independent auditors for the
          Registrant.
 12      --None.
 13      --Certificate of the Manager.(b)
 14      --None.
</TABLE>    
 
                                      C-1
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBIT
 NUMBER                                DESCRIPTION
 -------                               -----------
 <C>     <S>
 15(a)   --Form of Class B Shares Distribution Plan and Class B Shares
          Distribution Plan Sub-Agreement of the Registrant.(b)
   (b)   --Form of Class C Shares Distribution Plan and Class C Shares
          Distribution Plan Sub-Agreement of the Registrant.(b)
   (c)   --Form of Class D Shares Distribution Plan and Class D Shares
          Distribution Plan Sub-Agreement of the Registrant.(b)
 16      --None.
 17(a)   --Financial Data Schedule for Class A Shares.
   (b)   --Financial Data Schedule for Class B Shares.
   (c)   --Financial Data Schedule for Class C Shares.
   (d)   --Financial Data Schedule for Class D Shares.
 18      --Merrill Lynch Select PricingSM System Plan Pursuant to Rule 18f-3.(d)
</TABLE>    
- --------
     
  (a) Filed on September 30, 1997 as an Exhibit to the Registrant's
      Registration Statement on Form N-1A (File No. 333-36721) under the
      Securities Act of 1933, as amended (the "Registration Statement").     
     
  (b) Filed on November 12, 1997, as an Exhibit to Pre-Effective Amendment
      No. 1 to the Registration Statement.     
     
  (c) Reference is made to Articles IV, V (Sections 3, 5, 6 and 7), VI, VII
      and IX of the Registrant's Articles of Incorporation filed as Exhibit 1
      to the Registration Statement; and to Articles II, III (Sections 1, 3,
      5 and 6), VI, VII, XIII and XIV of the Registrant's By-Laws, filed as
      Exhibit 2 to the Registration Statement.     
     
  (d) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No.
      13 to the Registration Statement on Form N-1A under the Securities Act
      of 1933, as amended, filed on January 25, 1996 relating to shares of
      Merrill Lynch New York Municipal Bond Fund series of Merrill Lynch
      Multi-State Municipal Series Trust (File No. 2-99473).     
 
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT
   
  Registrant is not controlled by or under common control with any other
person.     
 
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
 
<TABLE>   
<CAPTION>
                                                                 NUMBER OF
                                                              RECORD HOLDERS
      TITLE OF CLASS                                         AT MARCH 31, 1998
      --------------                                         -----------------
      <S>                                                    <C>
      Class A shares of Common Stock, par value $0.10 per
       share................................................         117
      Class B shares of Common Stock, par value $0.10 per
       share................................................       3,312
      Class C shares of Common Stock, par value $0.10 per
       share................................................         842
      Class D shares of Common Stock, par value $0.10 per
       share................................................         457
</TABLE>    
- --------
   
Note: The number of holders includes holders of record plus beneficial owners,
      whose shares are held of record by Merrill Lynch, Pierce, Fenner & Smith
      Incorporated ("Merrill Lynch").     
 
ITEM 27. INDEMNIFICATION
 
  Reference is made to Article V of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws, Section 2-418 of the Maryland General
Corporation Law and Section 9 of the Class A, Class B, Class C and Class D
Distribution Agreements.
 
  Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or
 
                                      C-2
<PAGE>
 
reckless disregard of the duties involved in the conduct of his office. Absent
a court determination that an officer or director seeking indemnification was
not liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or
director is not guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
 
  Each officer and director of the Registrant claiming indemnification within
the scope of Article VI of the By-Laws shall be entitled to advances from the
Registrant for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to
the Registrant a written affirmation of his good faith belief that the
standard of conduct necessary for indemnification by the Registrant has been
met and a written undertaking to repay any such advance, if it should
ultimately be determined that the standard of conduct has not been met, and
provided further that at least one of the following additional conditions is
met: (a) the person seeking indemnification shall provide a security in form
and amount acceptable to the Registrant for his undertaking; (b) the
Registrant is insured against losses arising by reason of the advance; (c) a
majority of a quorum of non-party independent directors, or independent legal
counsel in a written opinion, shall determine, based on a review of facts
readily available to the Registrant at the time the advance is proposed to be
made, that there is reason to believe that the person seeking indemnification
will ultimately be found to be entitled to indemnification.
 
  The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase
insurance on behalf of any officer or director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
 
  The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.
   
  In Section 9 of the Class A, Class B, Class C and Class D Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933 (the "1933 Act"),
against certain types of civil liabilities arising in connection with the
Registration Statement, Prospectus or the Statement of Additional Information.
    
  Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
 
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF MANAGER
 
  (a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Manager") acts as
the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund,
 
                                      C-3
<PAGE>
 
   
Inc., Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder
Program, Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible
Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill
Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust,
Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill
Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc.,
Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series
Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a
division of MLAM); and for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill
Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio,
two investment portfolios of EQ Advisors Trust.     
   
  (b) Fund Asset Management, L.P. ("FAM"), an affiliate of the Manager, acts
as the investment adviser for the following open-end registered investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund,
The Corporate Fund Accumulation Program, Inc., Debt Strategies Fund, Inc.,
Financial Institutions Series Trust, Merrill Lynch Basic Value Fund, Inc.,
Merrill Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
World Income Fund, Inc. and The Municipal Fund Accumulation Program, Inc.; and
the following closed-end registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Corporate High Yield Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund, Inc., MuniHoldings New York Fund, MuniHoldings New York
Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund
II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured
Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured
Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc. and
Worldwide DollarVest Fund, Inc.     
   
  The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665. The address of the Manager, FAM, Princeton Services,
Inc. ("Princeton Services") and Princeton Administrators L.P. is also P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of     
 
                                      C-4
<PAGE>
 
Merrill Lynch & Co., Inc. ("ML&Co.") is World Financial Center, North Tower,
250 Vesey Street, New York, New York 10281. The address of Merrill Lynch
Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
   
  Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 1, 1995 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Richard is Treasurer and Mr. Glenn is Executive Vice President of
substantially all of the investment companies described in the first two
paragraphs of this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are directors, trustees or officers of one or more of such companies.     
 
  Officers and partners of MLAM are as follows:
 
<TABLE>   
<CAPTION>
                                POSITION WITH           OTHER SUBSTANTIAL BUSINESS,
          NAME                   THE MANAGER         PROFESSION, VOCATION OR EMPLOYMENT
          ----                  -------------        ----------------------------------
<S>                       <C>                        <C>
ML & Co. ...............  Limited Partner            Financial Services Holding
                                                      Company; Limited Partner of FAM
Princeton Services......  General Partner            General Partner of FAM
Arthur Zeikel...........  Chairman                   Chairman of FAM since 1997;
                                                      President of FAM and MLAM from
                                                      1977 to 1997; Chairman of
                                                      Princeton Services since 1997,
                                                      Director thereof since 1993 and
                                                      President thereof from 1993 to
                                                      1997; Executive Vice President
                                                      of
                                                      ML & Co.
Jeffrey M. Peek.........  President                  President of FAM; President and
                                                      Director of Princeton Services;
                                                      Executive Vice President of
                                                      ML & Co.; Managing Director and
                                                      Co-Head of the Investment
                                                      Banking Division of Merrill
                                                      Lynch in 1997; Senior Vice
                                                      President and Director of the
                                                      Global Securities and Economics
                                                      Division of Merrill Lynch from
                                                      1995 to 1997
Terry K. Glenn..........  Executive Vice President   Executive Vice President of FAM;
                                                      Executive Vice President and
                                                      Director of Princeton Services;
                                                      President and Director of MLFD;
                                                      Director of MLFDS; President of
                                                      Princeton Administrators, L.P.
Linda L. Federici.......  Senior Vice President      Senior Vice President of FAM;
                                                      Senior Vice President of
                                                      Princeton Services
Vincent R. Giordano.....  Senior Vice President      Senior Vice President of FAM;
                                                      Senior Vice President of
                                                      Princeton Services
Elizabeth A. Griffin....  Senior Vice President      Senior Vice President of FAM;
                                                      Senior Vice President of
                                                      Princeton Services
Norman R. Harvey........  Senior Vice President      Senior Vice President of FAM;
                                                      Senior Vice President of
                                                      Princeton Services
Michael J. Hennewinkel..  Senior Vice President      Senior Vice President of FAM;
                                                      Senior Vice President of
                                                      Princeton Services
Philip L. Kirstein......  Senior Vice President,     Senior Vice President, General
                          General Counsel and         Counsel and Secretary of FAM;
                          Secretary                   Senior Vice President, General
                                                      Counsel, Director and Secretary
                                                      of Princeton Services
</TABLE>    
 
 
                                      C-5
<PAGE>
 
<TABLE>   
<CAPTION>
                               POSITION WITH           OTHER SUBSTANTIAL BUSINESS,
          NAME                  THE MANAGER         PROFESSION, VOCATION OR EMPLOYMENT
          ----                 -------------        ----------------------------------
<S>                      <C>                        <C>
Ronald M. Kloss......... Senior Vice President      Senior Vice President of FAM;
                                                     Senior Vice President of
                                                     Princeton Services
 
 
Debra Landsman-Yaros.... Senior Vice President      Senior Vice President of FAM;
                                                     Senior Vice President of
                                                     Princeton Services; Vice
                                                     President of MLFD
Stephen M.M. Miller..... Senior Vice President      Executive Vice President of
                                                     Princeton Administrators, L.P.;
                                                     Senior Vice President of
                                                     Princeton Services
Joseph T. Monagle,       Senior Vice President      Senior Vice President of FAM;
 Jr. ...................                             Senior Vice President of
                                                     Princeton Services
Michael L. Quinn........ Senior Vice President      Senior Vice President of FAM;
                                                     Senior Vice President of
                                                     Princeton Services; Managing
                                                     Director and First Vice
                                                     President of Merrill Lynch,
                                                     Pierce Fenner & Smith from 1989
                                                     to 1995
Richard L. Reller....... Senior Vice President      Senior Vice President of FAM;
                                                     Senior Vice President of
                                                     Princeton Services; Director of
                                                     MLFD
Gerald M. Richard....... Senior Vice President and  Senior Vice President and
                         Treasurer                   Treasurer of FAM; Senior Vice
                                                     President and Treasurer of
                                                     Princeton Services; Vice
                                                     President and Treasurer of MLFD
Gregory D. Upah......... Senior Vice President      Senior Vice President of FAM;
                                                     Senior Vice President of
                                                     Princeton Services
Ronald L. Welburn....... Senior Vice President      Senior Vice President of FAM;
                                                     Senior Vice President of
                                                     Princeton Services
</TABLE>    
   
  (b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Corporate High Yield Fund III, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Americas
Income Fund Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Consults International Portfolio, Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital
Markets, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund
Inc., Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation
Fund, Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc.,
Merrill Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund,
Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value
Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc.,
Merrill Lynch International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology
Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch World Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc. and Worldwide DollarVest Fund, Inc. The address of
each of these investment companies is P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y
9HA, England.     
 
                                      C-6
<PAGE>
 
   
  Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since December
1, 1995, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Richard are
officers of one or more of the registered investment companies listed in the
first two paragraphs of this Item 28.     
 
<TABLE>   
<CAPTION>
                               POSITION WITH            OTHER SUBSTANTIAL BUSINESS,
          NAME                   MLAM U.K.           PROFESSION, VOCATION OR EMPLOYMENT
          ----                 -------------         ----------------------------------
<S>                      <C>                        <C>
Arthur Zeikel........... Director and Chairman      Chairman of MLAM and FAM since 1997;
                                                     Chairman and Director of Princeton
                                                     Services since 1997, Director
                                                     thereof since 1993 and President
                                                     thereof from 1993 to 1997;
                                                     President of MLAM and FAM from 1977
                                                     to 1997; Executive Vice President
                                                     of ML&Co.
Alan J. Albert.......... Senior Managing Director   Vice President of the MLAM
Nicholas C.D. Hall...... Director                   Director of Merrill Lynch Europe
                                                     PLC.; General Counsel of Merrill
                                                     Lynch International Private Banking
                                                     Group
Gerald M. Richard....... Senior Vice President      Senior Vice President and Treasurer
                                                     of MLAM and FAM; Senior Vice
                                                     President and Treasurer of
                                                     Princeton Services; Vice President
                                                     and Treasurer of MLFD
Carol Ann Langham....... Company Secretary          None
Debra Anne Searle....... Assistant Company
                         Secretary                  None
</TABLE>    
 
ITEM 29. PRINCIPAL UNDERWRITERS
 
  (a) MLFD acts as the principal underwriter for the Registrant. MLFD acts as
the principal underwriter for each of the open-end investment companies
referred to in the first two paragraphs of Item 28 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., MuniAssets Fund, Inc. and The Municipal Fund Accumulation
Program, Inc., and MLFD also acts as the principal underwriter for the
following closed-end investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc., Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
Senior Floating Rate Fund, Inc.
 
                                      C-7
<PAGE>
 
   
  (b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Fatseas, and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.     
 
<TABLE>
<CAPTION>
                              POSITIONS AND OFFICES   POSITION(S) AND OFFICE(S)
            NAME                    WITH MLFD              WITH REGISTRANT
            ----              ---------------------   -------------------------
<S>                          <C>                      <C>
Terry K. Glenn.............. President and Director   Executive Vice President
Richard L. Reller........... Director                 None
Thomas J. Verage............ Director                 None
William E. Aldrich.......... Senior Vice President    None
Robert W. Crook............. Senior Vice President    None
Michael J. Brady............ Vice President           None
William M. Breen............ Vice President           None
Michael G. Clark............ Vice President           None
James T. Fatseas............ Vice President           None
Debra W. Landsman-Yaros..... Vice President           None
Michelle T. Lau............. Vice President           None
                             Vice President and       Treasurer
Gerald M. Richard........... Treasurer
Salvatore Venezia........... Vice President           None
William Wasel............... Vice President           None
Robert Harris............... Secretary                None
</TABLE>
 
  (c) Not Applicable.
 
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
   
  All accounts, books and other documents required to be maintained by Section
31 (a) of the 1940 Act and the rules thereunder will be maintained at the
offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and its Transfer Agent, MLFDS, 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484.     
 
ITEM 31. MANAGEMENT SERVICES
 
  Other than as set forth under the caption "Management of the Fund--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Fund--Management and
Advisory Arrangements" in the Statement of Additional Information constituting
Part B of the Registration Statement, the Registrant is not a party to any
management-related service contract.
 
ITEM 32. UNDERTAKINGS
 
  (a) The Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months
from the effective date of the Registrant's registration statement under the
1933 Act.
 
  (b) The Fund, if requested to do so by the holders of at least 10% of the
Fund's outstanding shares, will call a meeting of shareholders for the purpose
of voting upon the question of removal of a director or directors and will
assist communications with other shareholders as required by Section 16(c) of
the 1940 Act.
 
                                      C-8
<PAGE>
 
                                  SIGNATURES
   
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT
TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW
JERSEY, ON THE 27TH DAY OF MAY, 1998.     
 
                                          Merrill Lynch Real Estate Fund, Inc.
                                           (Registrant)
                                                     
                                                  /s/ Arthur Zeikel     
                                          By: _________________________________
                                                (ARTHUR ZEIKEL, PRESIDENT)
                                                      
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.     
 
              SIGNATURE                        TITLE                 DATE
 
                                       President and                       
       /s/ Arthur Zeikel*               Director (Principal                
- -------------------------------------   Executive Officer)                 
           (ARTHUR ZEIKEL)                                                 
                                                                           
                                       Treasurer (Principal                
       Gerald M. Richard*               Financial and                      
- -------------------------------------   Accounting Officer)                
         (GERALD M. RICHARD)            and Director                       
                                                                           
                                       Director                            
          Joe Grills*                                                      
- -------------------------------------                                      
            (JOE GRILLS)                                                   
                                                                           
                                       Director                            
         Walter Mintz*                                                     
- -------------------------------------                                      
           (WALTER MINTZ)                                                  
                                                                           
                                       Director                            
       Melvin R. Seider*                                                   
- -------------------------------------                                      
         (MELVIN R. SEIDER)                                                
                                                                           
                                       Director                            
    Robert S. Salomon, Jr.*                                                
- -------------------------------------                                      
      (ROBERT S. SALOMON, JR.)                                             
                                                                           
                                       Director                            
      Stephen B. Swensrud*                                                 
- -------------------------------------
        (STEPHEN B. SWENSRUD)
                                                                 
        /s/ Arthur Zeikel                                        May 27, 1998
*By: ___________________________     
      
   (ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
                     
                                      C-9
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>   
<CAPTION>
 EXHIBIT
 NUMBER
 -------
 <C>     <S>                                                                <C>
  11     --Consent of Deloitte & Touche LLP, independent auditors for the
          Registrant
  17(a)  --Financial Data Schedule for Class A Shares
    (b)  --Financial Data Schedule for Class B Shares
    (c)  --Financial Data Schedule for Class C Shares
    (d)  --Financial Data Schedule for Class D Shares
</TABLE>    
<PAGE>
 
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

        Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.

DESCRIPTION OF OMITTED                      LOCATION OF GRAPHIC
  GRAPHIC OR IMAGE                           OR IMAGE IN TEXT
- ----------------------                      -------------------
Compass plate, circular                 Back cover of Prospectus and 
graph paper and Merrill Lynch            back cover of Statement of
logo including stylized market              Additional Information
bull


<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 6
<SERIES>
   <NUMBER> 001
<NAME> MERRILL LYNCH REAL ESTATE FUND, INC. - CLASS A SHARES
       
<S>                             <C>
<PERIOD-TYPE>                   OTHER
<FISCAL-YEAR-END>                          NOV-30-1998
<PERIOD-START>                             DEC-26-1997
<PERIOD-END>                               MAR-31-1998
<INVESTMENTS-AT-COST>                         74833457
<INVESTMENTS-AT-VALUE>                        76696270
<RECEIVABLES>                                  2504646
<ASSETS-OTHER>                                   56244
<OTHER-ITEMS-ASSETS>                                 0
<TOTAL-ASSETS>                                79257160
<PAYABLE-FOR-SECURITIES>                       1981769
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                       327439
<TOTAL-LIABILITIES>                            2309208
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                      74351683
<SHARES-COMMON-STOCK>                           183656
<SHARES-COMMON-PRIOR>                             2500
<ACCUMULATED-NII-CURRENT>                       648047
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                          85409
<OVERDISTRIBUTION-GAINS>                             0
<ACCUM-APPREC-OR-DEPREC>                       1862813
<NET-ASSETS>                                   1911584
<DIVIDEND-INCOME>                               843531
<INTEREST-INCOME>                               192450
<OTHER-INCOME>                                       0
<EXPENSES-NET>                                (387934)
<NET-INVESTMENT-INCOME>                         648047
<REALIZED-GAINS-CURRENT>                         85409
<APPREC-INCREASE-CURRENT>                      1862813
<NET-CHANGE-FROM-OPS>                          2596269
<EQUALIZATION>                                       0
<DISTRIBUTIONS-OF-INCOME>                            0
<DISTRIBUTIONS-OF-GAINS>                             0
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                         189102
<NUMBER-OF-SHARES-REDEEMED>                     (7946)
<SHARES-REINVESTED>                                  0
<NET-CHANGE-IN-ASSETS>                        76847952
<ACCUMULATED-NII-PRIOR>                              0
<ACCUMULATED-GAINS-PRIOR>                            0
<OVERDISTRIB-NII-PRIOR>                              0
<OVERDIST-NET-GAINS-PRIOR>                           0
<GROSS-ADVISORY-FEES>                           142865
<INTEREST-EXPENSE>                                   0
<GROSS-EXPENSE>                                 387934
<AVERAGE-NET-ASSETS>                           1424421
<PER-SHARE-NAV-BEGIN>                            10.00
<PER-SHARE-NII>                                    .10
<PER-SHARE-GAIN-APPREC>                            .31
<PER-SHARE-DIVIDEND>                                 0
<PER-SHARE-DISTRIBUTIONS>                            0
<RETURNS-OF-CAPITAL>                                 0
<PER-SHARE-NAV-END>                              10.41
<EXPENSE-RATIO>                                   1.40
<AVG-DEBT-OUTSTANDING>                               0
<AVG-DEBT-PER-SHARE>                                 0
        

</TABLE>

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 6
<SERIES>
   <NUMBER> 002
<NAME> MERRILL LYNCH REAL ESTATE FUND, INC. - CLASS B SHARES
       
<S>                             <C>
<PERIOD-TYPE>                   OTHER
<FISCAL-YEAR-END>                          NOV-30-1998
<PERIOD-START>                             DEC-26-1997
<PERIOD-END>                               MAR-31-1998
<INVESTMENTS-AT-COST>                         74833457
<INVESTMENTS-AT-VALUE>                        76696270
<RECEIVABLES>                                  2504646
<ASSETS-OTHER>                                   56244
<OTHER-ITEMS-ASSETS>                                 0
<TOTAL-ASSETS>                                79257160
<PAYABLE-FOR-SECURITIES>                       1981769
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                       327439
<TOTAL-LIABILITIES>                            2309208
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                      74351683
<SHARES-COMMON-STOCK>                          5322831
<SHARES-COMMON-PRIOR>                             2500
<ACCUMULATED-NII-CURRENT>                       648047
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                          85409
<OVERDISTRIBUTION-GAINS>                             0
<ACCUM-APPREC-OR-DEPREC>                       1862813
<NET-ASSETS>                                  55257091
<DIVIDEND-INCOME>                               843531
<INTEREST-INCOME>                               192450
<OTHER-INCOME>                                       0
<EXPENSES-NET>                                (387934)
<NET-INVESTMENT-INCOME>                         648047
<REALIZED-GAINS-CURRENT>                         85409
<APPREC-INCREASE-CURRENT>                      1862813
<NET-CHANGE-FROM-OPS>                          2596269
<EQUALIZATION>                                       0
<DISTRIBUTIONS-OF-INCOME>                            0
<DISTRIBUTIONS-OF-GAINS>                             0
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                        5443379
<NUMBER-OF-SHARES-REDEEMED>                   (123048)
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<NET-CHANGE-IN-ASSETS>                        76847952
<ACCUMULATED-NII-PRIOR>                              0
<ACCUMULATED-GAINS-PRIOR>                            0
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<GROSS-EXPENSE>                                 387934
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<PER-SHARE-NAV-BEGIN>                            10.00
<PER-SHARE-NII>                                    .09
<PER-SHARE-GAIN-APPREC>                            .29
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<EXPENSE-RATIO>                                   2.42
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<AVG-DEBT-PER-SHARE>                                 0
        

</TABLE>

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 6
<SERIES>
   <NUMBER> 003
<NAME> MERRILL LYNCH REAL ESTATE FUND, INC. - CLASS C SHARES
       
<S>                             <C>
<PERIOD-TYPE>                   OTHER
<FISCAL-YEAR-END>                          NOV-30-1998
<PERIOD-START>                             DEC-26-1997
<PERIOD-END>                               MAR-31-1998
<INVESTMENTS-AT-COST>                         74833457
<INVESTMENTS-AT-VALUE>                        76696270
<RECEIVABLES>                                  2504646
<ASSETS-OTHER>                                   56244
<OTHER-ITEMS-ASSETS>                                 0
<TOTAL-ASSETS>                                79257160
<PAYABLE-FOR-SECURITIES>                       1981769
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                       327439
<TOTAL-LIABILITIES>                            2309208
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                      74351683
<SHARES-COMMON-STOCK>                          1050396
<SHARES-COMMON-PRIOR>                             2500
<ACCUMULATED-NII-CURRENT>                       648047
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                          85409
<OVERDISTRIBUTION-GAINS>                             0
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<NET-ASSETS>                                  10904221
<DIVIDEND-INCOME>                               843531
<INTEREST-INCOME>                               192450
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<EXPENSES-NET>                                (387934)
<NET-INVESTMENT-INCOME>                         648047
<REALIZED-GAINS-CURRENT>                         85409
<APPREC-INCREASE-CURRENT>                      1862813
<NET-CHANGE-FROM-OPS>                          2596269
<EQUALIZATION>                                       0
<DISTRIBUTIONS-OF-INCOME>                            0
<DISTRIBUTIONS-OF-GAINS>                             0
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<NUMBER-OF-SHARES-SOLD>                        1096911
<NUMBER-OF-SHARES-REDEEMED>                    (49015)
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</TABLE>

<TABLE> <S> <C>

<PAGE>
 
<ARTICLE> 6
<SERIES>
   <NUMBER> 004
<NAME> MERRILL LYNCH REAL ESTATE FUND, INC. - CLASS D SHARES
       
<S>                             <C>
<PERIOD-TYPE>                   OTHER
<FISCAL-YEAR-END>                          NOV-30-1998
<PERIOD-START>                             DEC-26-1997
<PERIOD-END>                               MAR-31-1998
<INVESTMENTS-AT-COST>                         74833457
<INVESTMENTS-AT-VALUE>                        76696270
<RECEIVABLES>                                  2504646
<ASSETS-OTHER>                                   56244
<OTHER-ITEMS-ASSETS>                                 0
<TOTAL-ASSETS>                                79257160
<PAYABLE-FOR-SECURITIES>                       1981769
<SENIOR-LONG-TERM-DEBT>                              0
<OTHER-ITEMS-LIABILITIES>                       327439
<TOTAL-LIABILITIES>                            2309208
<SENIOR-EQUITY>                                      0
<PAID-IN-CAPITAL-COMMON>                      74351683
<SHARES-COMMON-STOCK>                           853219
<SHARES-COMMON-PRIOR>                             2500
<ACCUMULATED-NII-CURRENT>                       648047
<OVERDISTRIBUTION-NII>                               0
<ACCUMULATED-NET-GAINS>                          85409
<OVERDISTRIBUTION-GAINS>                             0
<ACCUM-APPREC-OR-DEPREC>                       1862813
<NET-ASSETS>                                   8875056
<DIVIDEND-INCOME>                               843531
<INTEREST-INCOME>                               192450
<OTHER-INCOME>                                       0
<EXPENSES-NET>                                (387934)
<NET-INVESTMENT-INCOME>                         648047
<REALIZED-GAINS-CURRENT>                         85409
<APPREC-INCREASE-CURRENT>                      1862813
<NET-CHANGE-FROM-OPS>                          2596269
<EQUALIZATION>                                       0
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<DISTRIBUTIONS-OF-GAINS>                             0
<DISTRIBUTIONS-OTHER>                                0
<NUMBER-OF-SHARES-SOLD>                         878106
<NUMBER-OF-SHARES-REDEEMED>                    (27387)
<SHARES-REINVESTED>                                  0
<NET-CHANGE-IN-ASSETS>                        76847952
<ACCUMULATED-NII-PRIOR>                              0
<ACCUMULATED-GAINS-PRIOR>                            0
<OVERDISTRIB-NII-PRIOR>                              0
<OVERDIST-NET-GAINS-PRIOR>                           0
<GROSS-ADVISORY-FEES>                           142865
<INTEREST-EXPENSE>                                   0
<GROSS-EXPENSE>                                 387934
<AVERAGE-NET-ASSETS>                           7604147
<PER-SHARE-NAV-BEGIN>                            10.00
<PER-SHARE-NII>                                    .10
<PER-SHARE-GAIN-APPREC>                            .30
<PER-SHARE-DIVIDEND>                                 0
<PER-SHARE-DISTRIBUTIONS>                            0
<RETURNS-OF-CAPITAL>                                 0
<PER-SHARE-NAV-END>                              10.40
<EXPENSE-RATIO>                                   1.66
<AVG-DEBT-OUTSTANDING>                               0
<AVG-DEBT-PER-SHARE>                                 0
        

</TABLE>

<PAGE>
 
                                                                   EXHIBIT 99.11


INDEPENDENT AUDITORS' CONSENT

Merrill Lynch Real Estate Fund, Inc.:

We consent to the use in Post-Effective Amendment No. 1 to Registration
Statement No. 333-36721 of our report dated November 12, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement.


/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Princeton, New Jersey
May 26, 1998



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