MERCURY ASSET MANAGEMENT V I FUNDS INC, N-1A/A, 1999-04-19

MERCURY ASSET MANAGEMENT V I FUNDS INC
N-1A/A, 1999-04-19

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 1999

SECURITIES ACT FILE NO. 333-68879
INVESTMENT COMPANY ACT FILE NO. 811-09159
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]

PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 2 [X]
(Check appropriate box or boxes)
------------------------
MERCURY V.I. U.S. LARGE CAP FUND
of Mercury Asset Management V.I. Funds, 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: (888) 763-2260

JEFFREY M. PEEK
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)

Copies to:

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<S> <C> <C>
Counsel for the Fund:
JOEL H. GOLDBERG, Esq. and
Swidler Berlin Shereff Friedman, LLP LORRAINE D. MANDEL, Esq.
919 Third Avenue P.O. Box 9011
New York, New York 10022 Princeton, New Jersey 08543-9011
</TABLE>

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of the Registration Statement.
------------------------

It is proposed that this filing will become effective
[ ] 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.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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EXPLANATORY NOTE

Mercury Asset Management V.I. Funds, Inc. (the "Company") is an open-ended
management investment company of which Mercury V.I. U.S. Large Cap Fund is a
series (hereinafter referred to as the "Fund"). Two separate classes of common
stock ("Common Stock"), Class A Common Stock and Class B Common Stock, are
offered for the Fund. This document consists of (A) the prospectus for the Fund,
which is composed of (i) a Fund specific front portion, (ii) a section entitled
"Adviser's Historical Performance Data," and (iii) an Appendix, and (B) the
Statement of Additional Information for the Fund which is composed of (i) a Fund
specific front portion, and (ii) an Appendix. The sections referred to in items
(A)(ii), (A)(iii) and (B)(ii) appear in two different versions, one for Class A
Common Stock and the second for Class B Common Stock, each of which constitutes
a part of the prospectus or Statement of Additional Information, as applicable,
for either the Class A Common Stock of the Fund or the Class B Common Stock of
the Fund, as appropriate. A table of contents may be found in each prospectus
and Statement of Additional Information.

The investment advisor of the Fund is Mercury Asset Management
International Ltd. (the "Investment Adviser"), an indirect subsidiary of Merrill
Lynch & Co., Inc., a publicly held corporation. The distributor of the Fund is
Mercury Funds Distributor ("MFD"), a division of Princeton Funds Distributor,
Inc.

Both the Class A and Class B shares of the Fund are sold to separate
accounts ("Separate Accounts") of certain insurance companies to fund benefits
under variable annuity contracts ("Variable Annuity Contracts") and/or variable
life insurance contracts (together with the Variable Annuity Contracts, the
"Contracts") issued by such companies. It is currently anticipated that the Fund
will be sold to Merrill Lynch Life Insurance Company ("MLLIC"), ML Life
Insurance Company of New York ("ML of New York"), indirect wholly owned
subsidiaries of Merrill Lynch & Co., Inc., Hartford Life Insurance Company
("Hartford"), The AIG Life Companies (U.S.) ("AIG Life"), American International
Life Assurance Company of New York ("Hartford of NY"), Hartford Life and Annuity
Insurance Company ("Hartford Life and Annuity" and, together with ML of New
York, MLLIC, Hartford, AIG Life, Hartford of NY, Hartford Life and Annuity, and
certain other insurance companies, the "Insurance Companies"). The Separate
Accounts invest in shares of the Fund in accordance with instructions received
from Contract owners. It is currently anticipated that the Contracts will be
offered by agents of Merrill Lynch Life Agency, Inc. ("MLLA"), an affiliate of
the Investment Adviser, and Contracts issued by any Insurance Company may be
offered by agents associated with that Insurance Company. MLLIC and ML of New
York are also affiliates of the Investment Adviser.
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Merrill Lynch Logo

Mercury V.I. U.S. Large Cap Fund
OF MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.
Artwork to Come

THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD
KNOW BEFORE INVESTING, INCLUDING INFORMATION
ABOUT RISKS. PLEASE READ IT BEFORE YOU INVEST
AND KEEP IT FOR FUTURE REFERENCE.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS - April 19, 1999
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Table of Contents

[FUND FACTS ICON]
FUND FACTS
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About the Mercury V.I. U.S. Large Cap Fund.................. 2

[ABOUT THE DETAILS ICON]
ABOUT THE DETAILS
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How the Mercury V.I. U.S. Large Cap Fund Invests............ 4
Investment Risks............................................ 5
Appendix and Statement of Additional Information............ 8
Adviser's Historical Performance Data -- Class A............ 8
Adviser's Historical Performance Data -- Class B............ 14

[THE MANAGEMENT TEAM ICON]
THE MANAGEMENT TEAM
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Management of the Mercury V.I. U.S. Large Cap Fund.......... 19

APPENDIX

[ACCOUNT CHOICES ICON]
ACCOUNT CHOICES
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Fund Shares................................................. A-2
How to Buy and Sell Shares.................................. A-2
How Shares are Priced....................................... A-2
Dividends, Capital Gains and Taxes.......................... A-3

[TO LEARN MORE ICON]
TO LEARN MORE
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Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>

MERCURY V.I. U.S. LARGE CAP FUND
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[FUND FACTS ICON] Fund Facts

IN AN EFFORT TO HELP YOU BETTER UNDERSTAND THE MANY CONCEPTS INVOLVED IN MAKING
AN INVESTMENT DECISION, WE HAVE DEFINED THE HIGHLIGHTED TERMS IN THIS PROSPECTUS
IN THE SIDEBAR.

LARGE CAP COMPANIES -- companies whose market capitalization is at least $5
billion under current market conditions. The Fund's definition of large cap
companies may be increased in response to changes in the market.

COMMON STOCK -- units of ownership of a corporation.

PREFERRED STOCK -- class of capital stock that often pays dividends at a
specified rate and has preference over common stock in dividend payments and
liquidation of assets.

CONVERTIBLE SECURITIES -- corporate securities (usually preferred stock or
bonds) that are exchangeable for a fixed number of other securities (usually
common stock) at a set price or formula.

ABOUT THE MERCURY V.I. U.S. LARGE CAP FUND
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WHAT ARE THE FUND'S GOALS?

The Fund's main goal is long-term capital growth. In other words, it tries to
choose investments that will increase in value. Current income from dividends
and interest will not be an important consideration in selecting portfolio
securities. We cannot guarantee that the Fund will achieve its goal.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests primarily in a diversified portfolio of equity securities of
LARGE CAP COMPANIES located in the U.S. that Fund management believes are
undervalued or have good prospects for earnings growth. The Fund may also invest
up to 10% of its assets in stocks of companies located in Canada. A company's
stock is considered undervalued when its price is less than Fund management
believes it is worth. A company whose earnings per share grow faster than
inflation and the economy in general usually has a higher stock price over time
than a company with slower earnings growth. The Fund's evaluation of the
prospects for a company's industry or market sector is an important factor in
evaluating a particular company's earnings prospects. The Fund may purchase
COMMON STOCK, PREFERRED STOCK and CONVERTIBLE SECURITIES and other instruments.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

As with any mutual fund, the value of the Fund's investments, and, therefore,
the value of the Fund's shares, may go up or down. If the value of the Fund's
investments goes down, you may lose money. The value changes in the Fund's
investments may occur because the U.S. stock market is rising or falling. At
other times, there are specific factors that may affect the value of a
particular investment. The Fund is also subject to the risk that the stocks the
Fund's adviser selects will underperform the markets or other funds with similar
investment objectives and investment strategies.

2 MERCURY V.I. U.S. LARGE CAP FUND
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[FUND FACTS ICON] Fund Facts

CONTRACT -- The Fund offers its shares only to participating insurance
companies. These insurance companies write variable annuity and/or variable
life insurance contracts that allow the contract owner to choose the Fund as an
investment option. The contract owner does not become a Fund shareholder.

In addition, because the Fund will invest up to 10% of its assets in securities
of Canadian companies, the Fund will be subject to additional risks. For
example, the Fund's securities may go up or down in value depending on changes
in the Canadian stock market, on the relative exchange rates of the U.S. dollar
and the Canadian dollar, U.S. and Canadian political and economic developments,
and U.S. and Canadian laws relating to investments in Canada. Canadian
securities may also be less liquid, more volatile and harder to value than U.S.
securities.

WHO SHOULD INVEST?

The Fund may be an appropriate investment to fund a portion of a CONTRACT owned
by contract owners who:

- Have long-term goals in mind.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk of short-term fluctuations in
exchange for the potential of higher long-term returns.

MERCURY V.I. U.S. LARGE CAP FUND 3
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[ABOUT THE DETAILS LOGO] About the Details

ABOUT THE PORTFOLIO MANAGEMENT TEAM -- The Fund is managed by members of a team
of 17 investment professionals who participate in the team's research process
and stock selection. The senior investment professionals in this group include
Garrett Fish, Andrew Hudson and Michael Morony. Michael Morony is primarily
responsible for the day-to-day management of the Fund.

ABOUT THE INVESTMENT ADVISER -- Mercury Asset Management International Ltd. is
the investment adviser.

HOW THE MERCURY V.I. U.S. LARGE CAP FUND INVESTS
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The Fund's main goal is long-term capital growth. The Fund tries to achieve its
goal by investing primarily in a diversified portfolio of equity securities of
large cap companies located in the U.S. The Fund may also invest up to 10% of
its assets in equity securities of companies located in Canada. In selecting
securities, the Fund emphasizes those securities that Fund management believes
to be undervalued or have good prospects for earnings growth.

The Fund will, under normal circumstances, invest at least 65% of its total
assets in equity securities of large cap companies located in the U.S.
Investments will also be made in equity securities of companies of any market
capitalization located in Canada and of small or medium capitalization companies
located in the U.S. Normally, Canadian investments will represent 10% or less of
the Fund's assets. A company's market capitalization may go up or down due to
market fluctuations. The Fund will not sell a company's securities just because
that company's market capitalization drops below $5 billion or another amount
set by the Fund. Equity securities consist of:

- Common Stock
- Preferred Stock
- Securities Convertible into Common Stock
- Derivative securities such as options (including warrants)
and futures, the value of which is based on a common stock or
group of common stocks

The Fund considers a company to be "located" in the U.S. or Canada if:

- it is legally organized in the U.S. or Canada, or
- the primary trading market for its securities is located in the
U.S. or Canada, or
- at least 50% of the company's (and its subsidiaries') non-current
assets, capitalization, gross revenues or profits have been
located in the U.S. or Canada during one of the last two fiscal
years

Under this definition a "foreign" company (a company organized or trading
outside the U.S. or Canada, or with substantial operations outside the U.S. or
Canada) may be considered to be "located" in the U.S. or Canada.

A company's stock is considered undervalued when the stock's current price is
less than Fund management believes a share of the company is worth. Fund
management feels a company's worth can be assessed by several factors, such as:

- financial resources
- value of assets
- sales and earnings growth
- product development
- quality of management
- overall business prospects
A company's stock may become undervalued when most investors fail to perceive
the company's strengths in one or more of these areas. A company whose earnings
per share grow faster than inflation and the economy in general usually has a
higher stock price over time than a company with slower earnings growth. The
Fund's evaluation of the prospects for a company's industry or

4 MERCURY V.I. U.S. LARGE CAP FUND
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[ABOUT THE DETAILS ICON] About the Details

market sector is an important factor in evaluating a particular company's
earnings prospects. Current income from dividends and interest will not be an
important consideration in selecting portfolio securities. The Fund may invest
in debt securities that are issued together with a particular equity security.
The Fund may invest in derivatives for a variety of portfolio management
purposes, including to hedge (protect against price movements) or to enable it
to reallocate its investments more quickly than it could by buying and selling
the underlying securities. The Fund is not required to use derivatives and may
choose not to do so.

The Fund has no stated minimum holding period for investments, and will buy or
sell securities whenever Fund management sees an appropriate opportunity.

The Fund will normally invest almost all of its assets as described above. The
Fund may, however, invest in short-term instruments, such as money market
securities and repurchase agreements, to meet redemptions. The Fund may also
reduce its exposure to equity securities by investing without limit in
short-term investments, high quality bonds or derivatives, when the Fund
believes it is advisable to do so (on a temporary defensive basis). Short-term
investments and temporary defensive positions may limit the potential for growth
in the value of Fund shares. Therefore, the Fund may not achieve its investment
objective.

The Fund may use many different strategies in seeking its investment objectives
and it has certain investment restrictions. These strategies and certain of the
restrictions and policies governing the Fund's investments are explained in the
Fund's Statement of Additional Information. If you would like to learn more
about the Fund, request the Statement of Additional Information.

INVESTMENT RISKS
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This section contains a summary discussion of the general risks of investing in
the Fund. As with any mutual fund, there can be no guarantee that the Fund will
meet its goals, or that the Fund's performance will be positive over any period
of time.

STOCK MARKET RISK

Stock market risk is the risk that the U.S. or Canadian stock markets will go
down in value, including the possibility that the U.S. or Canadian stock
markets will go down sharply and unpredictably.

SELECTION RISK

Selection risk is the risk that the investments that Fund management selects
will underperform the stock market or other funds with similar investment
objectives and investment strategies.

CANADIAN INVESTMENT RISK

Canadian investment risk is the risk that the Fund's Canadian securities may go
up or down in value depending on the fluctuations in the relative exchange rates
of the U.S. dollar and the Canadian dollar, U.S. and Canadian political

MERCURY V.I. U.S. LARGE CAP FUND 5
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[ABOUT THE DETAILS ICON] About the Details

and economic developments, and changes in U.S. and Canadian laws relating to
investments in Canada.

LIQUIDITY, INFORMATION AND VALUATION RISKS

Certain securities, including securities of small companies, securities of
Canadian companies and "restricted securities," may be illiquid or volatile,
making it difficult or impossible to sell them at the time and at the price that
the Fund would like. Restricted securities have contractual or legal
restrictions on their resale and include "private placement" securities that the
Fund may buy directly from the issuer. Also, important information about these
companies, securities or the markets in which they trade may be inaccurate or
unavailable. It may be difficult to value accurately these types of securities.
Certain derivatives may be subject to these risks as well.

OTHER CANADIAN SECURITIES RISKS

Canadian securities are sensitive to conditions within Canada, but also tend to
follow the U.S. market. Canada's economy depends heavily on exports to the U.S.,
Canada's largest trading partner. The Canadian economy relies strongly on the
production and processing of natural resources. Historically, natural resource
prices have been volatile. Demand by many citizens of the Province of Quebec for
secession from Canada may significantly impact the Canadian economy.

- The costs of Canadian securities transactions tend to be higher
than those of U.S. transactions.

- The Canadian securities market has different clearance and
settlement procedures, which may cause delays. This means that the
Fund's assets may be uninvested and not earning returns. The Fund
may miss investment opportunities or be unable to dispose of a
security because of these delays.

FOREIGN SECURITIES RISKS

The Fund defines companies located in the U.S. or Canada broadly. As a result,
the Fund's investments may include companies organized, traded or having
substantial operations outside the U.S. or Canada. This may expose the Fund to
risks associated with foreign investments.

- The value of holdings traded outside the U.S. (and hedging
transactions in foreign currencies) will be affected by changes in
currency exchange rates.

- The costs of non-U.S. securities transactions tend to be higher
than those of U.S. transactions.

- The Fund's holdings may be adversely affected by U.S. or foreign
government action.

- International trade barriers or economic sanctions against certain
non-U.S. countries may adversely affect the Fund's holdings.

6 MERCURY V.I. U.S. LARGE CAP FUND
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[ABOUT THE DETAILS ICON] About the Details

BORROWING AND LEVERAGE

The Fund may borrow for temporary emergency purposes, including to meet
redemptions. Borrowing may exaggerate changes in the net asset value of Fund
shares and the return on the Fund's investments. Borrowing will cost the Fund
interest expense and other fees. These costs may reduce the Fund's return.

Certain securities that the Fund buys may create leverage, including, for
example, derivative securities. Like borrowing, these investments may increase
the Fund's exposure to risk.

DERIVATIVES

The Fund may also use instruments referred to as "Derivatives." Derivatives are
financial instruments whose value is derived from another security, a commodity
(such as gold or oil) or an index (a measure of value or rates, such as the S&P
500 or the prime lending rate). Derivatives can allow the Fund to increase or
decrease its level of risk exposure more quickly and efficiently than
transactions in other types of instruments. Derivatives, however, are volatile
and involve significant risks, including many of the risks described above.
Derivatives may not always be available or cost efficient. If the Fund invests
in derivatives, the investments may not be effective as a hedge against price
movements and can limit potential for growth in Fund share value. Other risks
include:

Credit risk -- the risk that the counterparty on a derivative
transaction will be unable to honor its financial obligation to the
Fund.

Currency risk -- the risk that changes in the exchange rate between
two currencies will adversely affect the value (in U.S. dollar
terms) of an investment.

Leverage risk -- the risk associated with certain types of
investments or trading strategies that relatively small market
movements may result in large changes in the value of an investment.
Certain investments or trading strategies that involve leverage can
result in losses that greatly exceed the amount originally invested.

Liquidity risk -- the risk that certain securities may be difficult
or impossible to sell at the time that the seller would like or at
the price that the seller believes the security is currently worth.

Index risk -- If the derivative is linked to the performance of an
index, it will be subject to the risks associated with changes in
that index. If the index changes, the Fund could receive lower
interest payments or experience a reduction in the value of the
derivative to below what the Fund paid. Certain indexed securities,
including inverse securities (which move in an opposite direction to
the index), may create leverage, to the extent that they increase or
decrease in value at a rate that is a multiple of the changes in the
applicable index.

The Fund may use the following types of derivative instruments: futures,
forwards and options.

MERCURY V.I. U.S. LARGE CAP FUND 7
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[ABOUT THE DETAILS ICON] About the Details

CONVERTIBLE SECURITIES

Convertible securities, including bonds and preferred stock, are convertible
into common stock. As a result of the conversion feature, the interest or
dividend rate on a convertible security is generally less than would be the case
if the security were not convertible. The value of a convertible security will
be affected both by its stated interest or dividend rate and the value of the
underlying common stock. Therefore, its value will be affected by the factors
that affect both debt securities (such as interest rates) and equity securities
(such as stock market movements generally). Some convertible securities might
require the Fund to sell the securities back to the issuer or a third party at a
time that is disadvantageous to the Fund.

DEBT SECURITIES

Debt securities, such as bonds, involve credit risk, which is the risk that the
borrower will not make timely payments of principal and interest. These
securities are also subject to interest rate risk, which is the risk that the
value of the security may fall when interest rates rise. In general, the market
price of debt securities with longer maturities will go up or down more in
response to changes in interest rates than shorter term securities.

APPENDIX AND STATEMENT OF ADDITIONAL INFORMATION
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Additional information about the Fund is discussed in the Appendix which is a
part of this Prospectus.

If you would like further information about the Fund, including additional
details about how it invests, please see the Statement of Additional
Information.

ADVISER'S HISTORICAL PERFORMANCE DATA -- CLASS A
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The following tables present historical performance data for all accounts that
have been managed by the investment adviser's Mercury affiliates and that have
substantially similar (although not necessarily identical) objectives and
policies to the Fund's. These accounts have been managed using investment styles
and strategies substantially similar to those to be used in managing the Fund.
THESE FIGURES DO NOT REPRESENT THE PERFORMANCE OF THE FUND OR OF A PARTICIPATING
INSURANCE COMPANY SEPARATE ACCOUNT THAT FUNDS YOUR CONTRACT. The Fund is newly
organized and does not yet have a performance record. The Fund's actual
performance may be higher or lower, and past performance is no guarantee of
future results. IN ADDITION, PARTICIPATING INSURANCE COMPANIES GENERALLY IMPOSE
ADDITIONAL CHARGES AND FEES IN CONNECTION WITH A CONTRACT. THESE ADDITIONAL FEES
AND CHARGES WILL REDUCE THE CONTRACT OWNER'S RETURNS.

The composite figures shown in the tables presented below were calculated in the
following manner:

- All of the accounts in the composite were managed by the
investment adviser's Mercury affiliates. All personnel of the

8 MERCURY V.I. U.S. LARGE CAP FUND
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About the Details
ABOUT THE DETAILS LOGO

investment adviser and its Mercury affiliates are employed
by a single holding company. Portfolio managers perform
management services for accounts of various Mercury
advisers, including the Fund's investment adviser,
depending on the nature of each adviser's clients. The
investment process, including the resources available to
the portfolio managers and the supervisory review, is the
same across advisers. As a practical matter, there is no
significant distinction between the process used in
determining the recommendations of the investment adviser
and those of its Mercury affiliates.

- The accounts included in the composite are not U.S. mutual funds,
and are not subject to the same rules and regulations under the
Investment Company Act of 1940, as amended, and the Internal
Revenue Code of 1986, as amended (for example, diversification and
liquidity requirements and restrictions on transactions with
affiliates) as the Fund, or to the same types of expenses that the
Fund or a contract owner will pay. These differences might have
adversely affected the performance figures shown below.

- The Fund will calculate its performance using a formula specified
by the Securities and Exchange Commission. Unlike the Fund, some
of the accounts in the historical composite did not value their
assets on a daily basis and, therefore, the Securities and
Exchange Commission formula could not be used. As a result, the
performance figures shown below have been calculated using a
somewhat different formula known as the "Modified Dietz Method."
Although both formulas produce a time weighted rate of return, the
use of the Securities and Exchange Commission formula might have
adversely affected the performance figures shown.

- The composite figures have been calculated by weighting the
performance of each included account by the level of the account's
total assets at the beginning of each monthly or quarterly period.
Accounts were added to the composite as of the first full quarter
under management and excluded at the end of the last full quarter
under management. Accordingly, the number of accounts included in
the composite varies by quarter, beginning with one from July 1,
1990 through January 1, 1996, and increasing to three in the most
recent quarter.

- The performance of each of the accounts in the composite may have
been influenced by the level of the account's total assets. Had an
account's assets been different, its performance might have been
higher or lower.

MERCURY V.I. U.S. LARGE CAP FUND 9
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About the Details
ABOUT THE DETAILS LOGO

- The accounts presented were accounted for in various base
currencies other than U.S. dollars. The Fund will calculate its
net asset value daily in U.S. dollars. For purposes of this
presentation, the accounts' performance history was converted into
U.S. dollars on at least a quarterly basis using exchange rate
movements to approximate the equivalent U.S. dollar returns which
might have been achieved.

- The figures shown below represent the performance, converted to
U.S. dollars, of the composite's included accounts. THEY ARE NOT
THE PERFORMANCE OF EITHER THE FUND OR OF A PARTICIPATING INSURANCE
COMPANY SEPARATE ACCOUNT (THAT FUNDS YOUR CONTRACT) THAT INVESTS
IN THE FUND. Figures show total returns. Total return shows you
how much an investment has changed in value over the stated time
period and includes both capital appreciation and income. The
first table reflects average annual total returns. This smooths
out variations in annual performance by averaging returns over the
stated period. The second table shows actual total returns for
each one year period.

- To provide you with additional information, these composite
performance figures are presented two different ways. The "Gross
of Fees and Charges" row reflects the composite's gross
performance -- that is, performance before any deductions for fees
or expenses in connection with either the Fund or a contract.
These figures are hypothetical and presented for information only;
they do not reflect actual performance of the accounts because the
accounts would have paid fees and expenses. The first table
(average annual total returns) also includes a "Net of Fees and
Charges" section, which reflects adjustments of the gross
performance to reflect the deduction of all of the fees and
expenses (except those fees and expenses that are paid by the
investment adviser in connection with that portion of the EXPENSE
CAP that relates to the one-time non-recurring organizational
expenses of the Fund) that the Fund is projected to pay on its
Class A shares. These projected fees and expenses are shown in a
fee table in the separate prospectus describing the contract. THE
"NET OF FEES AND CHARGES" FIGURES DO NOT REFLECT THE ADDITIONAL
FEES AND CHARGES THAT A PARTICIPATING INSURANCE COMPANY MAY IMPOSE
IN CONNECTION WITH A CONTRACT. THESE ADDITIONAL FEES AND CHARGES
WILL REDUCE A CONTRACT OWNER'S RETURN. Like the gross figures, the
net figures are hypothetical, because they do not reflect the
actual fees and charges paid by the included accounts. The net
figures assume a participating insurance company separate account
bought Class A shares at the beginning of the period and sold
(redeemed) the shares at the end of the period. To the extent the
Fund's expenses deviate from the projections, the "Net of Fees and
Charges" figures will be inaccurate. The effect would be greater
over longer periods due to compounding. The

EXPENSE CAP -- The Fund's

10
MERCURY V.I. U.S. LARGE CAP FUND
investment adviser has agreed to cap the annual operating expenses of the Fund
for one year. This expense cap relates to both the one-time non-recurring
organizational expenses of the Fund and to those expenses that will continue
from year to year.
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About the Details
ABOUT THE DETAILS LOGO

effect of charges in connection with a contract will similarly be
magnified over longer periods. The net figures shown -- that is,
the performance results after applicable Fund level
deductions -- are equal to or lower than the actual net results of
the included accounts.

- Both tables include figures for a benchmark index (Standard &
Poor's 500 Composite Stock Price Index) and for the Lipper Growth
Funds universe so that you can compare the composite's performance
to the performance of the market as a whole. The Standard & Poor's
500 Index is an unmanaged index and does not reflect any fees or
charges. The Lipper Growth Funds Average reflects advisory fees
and other fees and charges.

MERCURY V.I. U.S. LARGE CAP FUND 11
<PAGE> 15

[ABOUT THE DETAILS ICON] About the Details

AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------

THIS IS NOT THE PERFORMANCE OF EITHER THE FUND OR OF ANY PARTICIPATING INSURANCE
COMPANY SEPARATE ACCOUNT INVESTING IN THE FUND. (This is the performance of
other accounts managed by the investment adviser's affiliates, see above.)

FOR FOR FOR FOR FOR FOR
ONE-YEAR TWO-YEAR THREE-YEAR FOUR-YEAR FIVE-YEAR SIX-YEAR
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1999 1999 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
COMPOSITE OF SIMILAR ACCOUNTS,
RECALCULATED:
- ----------------------------------------------------------------------------------------------------------------------------
NET OF FEES AND CHARGES (2):
- ----------------------------------------------------------------------------------------------------------------------------
Class A Fees and Charges 31.1% 35.2% 30.2% 32.7% 29.0% 25.7%
- ----------------------------------------------------------------------------------------------------------------------------
GROSS OF FEES AND CHARGES (3): 33.4 37.6 32.4 35.0 31.2 27.9
- ----------------------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX (4): 18.5 32.4 28.1 29.1 26.2 21.7
- ----------------------------------------------------------------------------------------------------------------------------
LIPPER GROWTH FUNDS AVERAGE (DOES
NOT INCLUDE SALES CHARGES) (5): 13.5 27.1 21.7 23.3 20.3 17.5
- ----------------------------------------------------------------------------------------------------------------------------

<CAPTION>
FOR
EIGHT YEARS
AND
FOR FOR NINE MONTH
SEVEN-YEAR EIGHT-YEAR PERIOD
PERIOD PERIOD ENDED
ENDED ENDED MARCH 31,
MARCH 31, MARCH 31, 1999
1999 1999 (1)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
COMPOSITE OF SIMILAR ACCOUNTS,
RECALCULATED:
- ---------------------------------------------------------------------------------
NET OF FEES AND CHARGES (2):
- ---------------------------------------------------------------------------------
Class A Fees and Charges 23.7% 21.6% 20.4%
- ---------------------------------------------------------------------------------
GROSS OF FEES AND CHARGES (3): 25.8 23.6 22.5
- ---------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX (4): 20.8 19.5 18.7
- ---------------------------------------------------------------------------------
LIPPER GROWTH FUNDS AVERAGE (DOES
NOT INCLUDE SALES CHARGES) (5): 16.8 16.4 15.8
- ---------------------------------------------------------------------------------
</TABLE>

(1) The investment adviser's affiliates first began managing accounts with
substantially similar objectives and policies to those of the Fund on July
1, 1990.

(2) Reflects the reinvestment of dividends and distributions, and the deduction
of all fees and expenses (except those fees and expenses that are paid by
the investment adviser in connection with that portion of the expense cap
that relates to the one-time non-recurring organizational expenses of the
Fund) that the Fund is projected to pay. To the extent the Fund's expenses
deviate from the projections, the "Net of Fees and Charges" figures will be
inaccurate. The effect would be greater over longer periods due to
compounding. Does not reflect the additional fees and charges that a
participating insurance company may impose in connection with a contract.
These additional fees and charges reduce investment returns. Compounding
will magnify this effect over longer periods.

(3) Does not reflect the deduction of any fees, charges or expenses other than
certain brokerage commissions. These figures are hypothetical and presented
for information only; they do not reflect actual performance of the accounts
because the accounts would have paid fees and expenses.

(4) An unmanaged index comprised of common stock prices. No advisory fees and no
other expenses (e.g., custody or brokerage fees) are reflected in the total
returns of the index. Index returns reflect reinvestment of net dividends
and distributions.

(5) An average of the performance of other U.S. investment companies that
concentrate their investments in equity securities of U.S. companies whose
long-term earnings are expected to grow significantly faster than the
earnings of the stocks represented in the major unmanaged stock indices. The
average includes 12b-1 fees, advisory fees and other expenses. The average
also reflects reinvestment of dividends and distributions.

12 MERCURY V.I. U.S. LARGE CAP FUND
<PAGE> 16

[ABOUT THE DETAILS ICON] About the Details

TOTAL RETURNS ON AN ANNUAL BASIS
- --------------------------------------------------------------------------------

FOR THE THREE
MONTHS ENDED FOR EACH YEAR ENDED DECEMBER 31,
MARCH 31, 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
COMPOSITE OF SIMILAR ACCOUNTS,
RECALCULATED: GROSS OF FEES AND
CHARGES (2): 12.2% 34.3% 29.8% 26.8% 46.7%
- -----------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX (3): 5.0 28.6 33.4 23.0 37.6
- -----------------------------------------------------------------------------------------------
LIPPER GROWTH FUNDS AVERAGE (DOES
NOT INCLUDE SALES CHARGES) (4): 4.4 23.1 25.4 19.8 31.3
- -----------------------------------------------------------------------------------------------

<CAPTION>
FOR THE PERIOD
JULY 1, 1990
TO
FOR EACH YEAR ENDED DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990(1)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
COMPOSITE OF SIMILAR ACCOUNTS,
RECALCULATED: GROSS OF FEES AND
CHARGES (2): 5.1% 13.9% 13.1% 28.7% (6.9%)
- -----------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX (3): 0.8 10.6 7.7 30.5 (6.0)
- -----------------------------------------------------------------------------------------------
LIPPER GROWTH FUNDS AVERAGE (DOES
NOT INCLUDE SALES CHARGES) (4): (1.7) 11.2 8.6 37.4 (8.5)
- -----------------------------------------------------------------------------------------------
</TABLE>

(1) The investment adviser's affiliates first began managing accounts with
substantially similar objectives and policies to those of the Fund on July
1, 1990.

(2) Does not reflect the deduction of any fees, charges or expenses, other than
certain brokerage commissions. These figures are hypothetical and presented
for information only; they do not reflect actual performance of the accounts
because the accounts would have paid fees and expenses. If these fees and
expenses were included, the performance figures would be lower.

(3) An unmanaged index comprised of common stock prices. No advisory fees and no
other expenses (e.g., custody or brokerage fees) are reflected in the total
returns of the index. Index returns reflect reinvestment of net dividends
and distributions.

(4) An average of the performance of other U.S. investment companies that
concentrate their investments in equity securities of U.S. companies whose
long-term earnings are expected to grow significantly faster than the
earnings of the stocks represented in the major unmanaged stock indices. The
average includes 12b-1 fees, advisory fees and other expenses. The average
also reflects reinvestment of dividends and distributions.

MERCURY V.I. U.S. LARGE CAP FUND 13
<PAGE> 17
[ABOUT THE DETAILS ICON] About the Details

ADVISER'S HISTORICAL PERFORMANCE DATA -- CLASS B
- --------------------------------------------------------------------------------

The composite figures shown in the tables presented below were calculated in the
following manner:

- All of the accounts in the composite were managed by the
investment adviser's Mercury affiliates. All personnel of the
investment adviser and its Mercury affiliates are employed by a
single holding company. Portfolio managers perform management
services for accounts of various Mercury advisers, including the
Fund's investment adviser, depending on the nature of each
adviser's clients. The investment process, including the resources
available to the portfolio managers and the supervisory review, is
the same across advisers. As a practical matter, there is no
significant distinction between the process used in determining
the recommendations of the investment adviser and those of its
Mercury affiliates.

14 MERCURY V.I. U.S. LARGE CAP FUND
<PAGE> 18
[ABOUT THE DETAILS ICON] About the Details

time weighted rate of return, the use of the Securities
and Exchange Commission formula might have adversely
affected the performance figures shown.

MERCURY V.I. U.S. LARGE CAP FUND 15
<PAGE> 19

[ABOUT THE DETAILS ICON] About the Details

EXPENSE CAP -- The Fund's investment adviser has agreed to cap the annual
operating expenses of the Fund for one year. This expense cap relates to both
the expenses associated with the initial offering of Fund shares and to those
Fund expenses that will continue from year to year.

portion of the EXPENSE CAP that relates to the expenses associated with
the initial offering of Fund shares). These projected fees and expenses
are shown in a fee table in the separate prospectus describing the
contract. THE "NET OF FEES AND CHARGES" FIGURES DO NOT REFLECT THE
ADDITIONAL FEES AND CHARGES THAT A PARTICIPATING INSURANCE COMPANY MAY
IMPOSE IN CONNECTION WITH A CONTRACT. THESE ADDITIONAL FEES AND CHARGES
WILL REDUCE A CONTRACT OWNER'S RETURN. Like the gross figures, the net
figures are hypothetical, because they do not reflect the actual fees
and charges paid by the included accounts. The net figures assume a
participating insurance company separate account bought Class B shares
at the beginning of the period and sold (redeemed) the shares at the end
of the period. To the extent the Fund's expenses deviate from the
projections, the "Net of Fees and Charges" figures will be inaccurate.
The effect would be greater over longer periods due to compounding. The
effect of charges in connection with a contract will similarly be
magnified over longer periods. The net figures shown -- that is, the
performance results after applicable Fund level deductions -- are equal
to or lower than the actual net results of the included accounts.

16 MERCURY V.I. U.S. LARGE CAP FUND

<PAGE> 20
[ABOUT THE DETAILS ICON] About the Details

AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------

FOR FOR FOR FOR FOR FOR
ONE-YEAR TWO-YEAR THREE-YEAR FOUR-YEAR FIVE-YEAR SIX-YEAR
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1999 1999 1999 1999 1999
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
COMPOSITE OF SIMILAR ACCOUNTS, RECALCULATED:
- ----------------------------------------------------------------------------------------------------------------------------
NET OF FEES AND CHARGES (2):
- ----------------------------------------------------------------------------------------------------------------------------
Class B Fees and Charges 30.9% 35.0% 30.0% 32.5% 28.8% 25.5%
- ----------------------------------------------------------------------------------------------------------------------------
GROSS OF FEES AND CHARGES (3): 33.4 37.6 32.4 35.0 31.2 27.9
- ----------------------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX (4): 18.5 32.4 28.1 29.1 26.2 21.7
- ----------------------------------------------------------------------------------------------------------------------------
LIPPER GROWTH FUNDS AVERAGE (DOES NOT INCLUDE SALES
CHARGES) (5): 13.5 27.1 21.7 23.3 20.3 17.5
- ----------------------------------------------------------------------------------------------------------------------------

<CAPTION>
FOR
EIGHT YEARS
AND
FOR FOR NINE MONTH
SEVEN-YEAR EIGHT-YEAR PERIOD
PERIOD PERIOD ENDED
ENDED ENDED MARCH 31,
MARCH 31, MARCH 31, 1999
1999 1999 (1)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
COMPOSITE OF SIMILAR ACCOUNTS, RECALCULATED:
- -------------------------------------------------------------------------------------------
NET OF FEES AND CHARGES (2):
- -------------------------------------------------------------------------------------------
Class B Fees and Charges 23.5% 21.4% 20.3%
- -------------------------------------------------------------------------------------------
GROSS OF FEES AND CHARGES (3): 25.8 23.6 22.5
- -------------------------------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX (4): 20.8 19.5 18.7
- -------------------------------------------------------------------------------------------
LIPPER GROWTH FUNDS AVERAGE (DOES NOT INCLUDE SALES
CHARGES) (5): 16.8 16.4 15.8
- -------------------------------------------------------------------------------------------
</TABLE>

(1) The investment adviser's affiliates first began managing accounts with
substantially similar objectives and policies to those of the Fund on July
1, 1990.

(4) An unmanaged index comprised of common stock prices. No 12b-1 fees or
advisory fees, and no other expenses (e.g., custody or brokerage fees) are
reflected in the total returns of the index. Index returns reflect
reinvestment of net dividends and distributions.

MERCURY V.I. U.S. LARGE CAP FUND 17
<PAGE> 21

[ABOUT THE DETAILS ICON] About the Details

TOTAL RETURNS ON AN ANNUAL BASIS
- --------------------------------------------------------------------------------

(1) The investment adviser's affiliates first began managing accounts with
substantially similar objectives and policies to those of the Fund on July
1, 1990.

(3) An unmanaged index comprised of common stock prices. No 12b-1 fees or
advisory fees, and no other expenses (e.g., custody or brokerage fees) are
reflected in the total returns of the index. Index returns reflect
reinvestment of net dividends and distributions.

18 MERCURY V.I. U.S. LARGE CAP FUND
<PAGE> 22

[THE MANAGEMENT TEAM ICON] The Management Team

MANAGEMENT OF THE
MERCURY V.I. U.S. LARGE CAP FUND
- --------------------------------------------------------------------------------

Mercury Asset Management International Ltd. manages the Fund's investments under
the overall supervision of the Fund's Board of Directors. The investment adviser
has the responsibility for making all investment decisions for the Fund.

The senior investment professionals in the group that have managed the Fund's
portfolio since the Fund started operations include:

Garrett Fish has been employed as an investment professional by the investment
adviser or its Mercury affiliates since 1997. Mr. Fish was employed at Jardine
Fleming Hong Kong as a U.S. fund manager from 1994 to 1997. From 1991 to 1993
Mr. Fish was an account manager at Aetna Capital Management in the U.S.

Andrew J. Hudson, Director of Mercury Asset Management, has been employed as an
investment professional by the investment adviser or its Mercury affiliates
since 1992.

Michael Morony has been employed as an investment professional by the investment
adviser or its Mercury affiliates since 1997. Mr. Morony worked for Threadneedle
Investment Managers from 1992 to 1997. Mr. Morony is primarily responsible for
the day-to-day management of the Fund.

Mercury and its affiliates manage portfolios with over $515 billion in assets
(as of March 1999) for individuals and institutions seeking investments
worldwide. This amount includes assets managed for its affiliates. The advisory
agreement between the Fund and the investment adviser gives the investment
adviser the responsibility for making all investment decisions.

The investment adviser is paid at the rate of 0.65% of the Fund's average daily
net assets.

Fund Asset Management, L.P., an affiliate of Mercury, will manage all or a
portion of the Fund's daily cash assets. The Fund does not pay any incremental
fee for this service, although Mercury may make payments to Fund Asset
Management, L.P.

MERCURY V.I. U.S. LARGE CAP FUND 19
<PAGE> 23

[THE MANAGEMENT TEAM ICON] The Management Team

The Fund may in the future invest all of its assets in another mutual fund that
has the same investment objective and fundamental policies as the Fund. All
portfolio investments would then be made at the level of the underlying mutual
fund and the Fund's investment results would correspond directly to that fund's
investment results. This type of mutual fund structure is sometimes referred to
as a "master/feeder" structure. If other entities also invest in the underlying
fund, this could enable the Fund to realize economies of scale by investing
through an entity with more assets (the underlying fund). However, there are
additional costs involved in operating a "master/feeder" structure. If these
additional costs are not offset as a result of economies of scale, it is
possible that the Fund's expenses would increase rather than decrease if it
converts to this structure. The directors of the Fund have the authority to make
the change to a "master/feeder" structure without first holding a vote of the
Fund's shareholders if they believe it is in the best interests of the Fund to
do so.

20 MERCURY V.I. U.S. LARGE CAP FUND

<PAGE> 24

<PAGE> 1

MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.
- --------------------------------------------------------------------------------

APPENDIX

This Appendix constitutes a part of the Prospectus for the Class A shares of
Mercury V.I. U.S. Large Cap Fund. For simplicity, this Appendix uses the term
"Fund" to refer to Mercury V.I. U.S. Large Cap Fund and any future series of
Mercury Asset Management V.I. Funds.

TABLE OF CONTENTS

ACCOUNT CHOICES
- ------------------------------------------------------------------
Fund Shares................................................. A-2
How to Buy and Sell Shares.................................. A-2
How Shares are Priced....................................... A-2
Dividends, Capital Gains and Taxes.......................... A-3

TO LEARN MORE
- ------------------------------------------------------------------
Shareholder Reports.....................................Back Cover
Statement of Additional Information.....................Back Cover
</TABLE>

22
MERCURY ASSET MANAGEMENT V.I. FUNDS

ACCOUNT CHOICES ICON
TO LEARN MORE ICON
<PAGE> 2
[ACCOUNT CHOICES ICON] Account Choices

NET ASSET VALUE -- the market value in U.S. dollars of a Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.

FUND SHARES
- --------------------------------------------------------------------------------

Each Fund offers two classes of shares, Class A and Class B. This Prospectus
describes the Class A shares only. The participating insurance company decides
which share class will support a contract. Each share class represents an
ownership interest in the same investment portfolio.

Each Fund's shares are distributed by Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc.

After a Fund commences operations, participating insurance companies can
purchase Fund shares on each business day.

The Fund's investment adviser has agreed to cap the annual operating expenses of
the Mercury V.I. U.S. Large Cap Fund to 1.25% of the average net assets of the
Fund's Class A shares. This expense cap will be in place through April 2000.

HOW TO BUY AND SELL SHARES
- --------------------------------------------------------------------------------

The Funds do not offer their shares to the general public. Only separate
accounts established by participating insurance companies can buy Fund shares.
Each Fund's investment adviser is affiliated with two participating insurance
companies. Participating insurance companies issue variable annuity and/or
variable life insurance contracts and use Fund shares to support these
contracts. When this prospectus refers to Fund shareholders, it is referring to
the participating insurance companies.

Contract owners have certain rights under their contract, but do not have any
direct interest in Fund shares. A separate prospectus describes the contract and
its additional fees and charges. That prospectus also describes how changes in a
Fund's net asset value and distributions on Fund shares affect benefits under a
contract.

HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------

Shares are sold and redeemed at their NET ASSET VALUE. A Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining share price is the next one calculated after a purchase or
redemption order is placed. Net asset value is generally calculated by valuing
each security at its closing price for the day. A Fund's investments may be
traded on non-U.S. securities exchanges that close many hours before the New
York Stock Exchange. Events that could affect securities prices that occur
between these times normally are not reflected in that Fund's net asset value.
Non-U.S. securities sometimes trade on days that the New York Stock Exchange is
closed. As a result, a Fund's net asset value may change on days when a
participating insurance company will not be able to purchase or redeem a Fund's
shares. Securities and assets for which market quotations are not readily
available are generally valued at fair value as determined in good faith by or
under the direction of the Board of Directors.

A-2 MERCURY ASSET MANAGEMENT V.I. FUNDS

<PAGE> 3
[ACCOUNT CHOICES ICON] Account Choices

DIVIDENDS -- ordinary income and capital gains paid with respect to Fund shares.
Dividends from a Fund are automatically reinvested in additional shares of that
Fund as they are paid.

DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------

A Fund will distribute any net investment income and any net realized long or
short-term capital gains at least annually. A Fund may also pay a special
distribution at the end of the calendar year to comply with federal tax
requirements. DIVIDENDS from a Fund are reinvested automatically in shares of
that Fund at net asset value.

Each Fund intends to continue to qualify as a regulated investment company under
the Internal Revenue Code of 1986, as amended, which requires it to satisfy
certain conditions relating to the diversification of its assets and the nature
and distribution of its income. As long as each Fund is qualified as a regulated
investment company, it will not be subject to federal income tax on the earnings
that it distributes to its shareholders. In addition, each Fund intends to limit
the type of its shareholders and to meet the standards for diversification of
assets as necessary to satisfy the tax rules that apply to the separate accounts
that invest in that Fund.

For information regarding the federal income tax treatment of a contract and
distributions to the separate accounts of the participating insurance companies,
see the separate prospectus for the contracts.

MERCURY ASSET MANAGEMENT V.I. FUNDS A-3
<PAGE> 4
[THE MANAGEMENT TEAM ICON] The Management Team

A NOTE ABOUT YEAR 2000

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"). A Fund could be adversely affected
if the computer systems used by Fund management or other Fund service providers
do not properly address this problem before January 1, 2000. Fund management
expects to have addressed this problem before then, and does not anticipate that
the services it provides will be adversely affected. Each Fund's other service
providers have told the administrator that they also expect to resolve the Year
2000 Problem, and the administrator will continue to monitor the situation as
the year 2000 approaches. However, if the problem has not been fully addressed,
each Fund could be negatively affected. The Year 2000 Problem could also have a
negative impact on the companies in which a Fund invests, and this could hurt
that Fund's investment returns.

The Year 2000 Problem may also adversely affect the participating insurance
companies and the contracts that they offer. For more information, see the
separate contract prospectus.

A-4 MERCURY ASSET MANAGEMENT V.I. FUNDS
<PAGE> 5
[THE MANAGEMENT TEAM ICON] The Management Team

INVESTMENT ADVISER
Mercury Asset Management International Ltd.
33 King William Street
London EC4R 9AS
England

ADMINISTRATOR
Fund Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536

TRANSFER AGENT
Financial Data Services, Inc.
P.O. Box 44062
Jacksonville, Florida 32232-4062
(888-763-2260)

INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400

DISTRIBUTOR
Mercury Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109

COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022

MERCURY ASSET MANAGEMENT V.I. FUNDS A-5
<PAGE> 6
[TO LEARN MORE ICON] To Learn More

SHAREHOLDER REPORTS

Additional information about a Fund's investments is available in that Fund's
annual and semi-annual reports to shareholders. In a Fund's annual report you
will find a discussion of the relevant market conditions and investment
strategies that significantly affected that Fund's performance during its last
fiscal year. You may obtain these reports at no cost by calling 1-888-763-2260.

STATEMENT OF ADDITIONAL INFORMATION

Each Fund's Statement of Additional Information contains further information
about that Fund and is incorporated by reference (legally considered to be part
of that Fund's Prospectus). You may request a free copy by writing or calling
the Transfer Agent at the address and telephone number indicated on the inside
back cover of this Prospectus.

Each Fund's shares are sold to insurance company separate accounts to support
variable annuity and/or variable life insurance contracts. For copies of each
Fund's shareholder reports or Statement of Additional Information, contract
owners may also contact the insurance company that issued their contract.

You may contact the Fund at 1-888-763-2260 if you have any questions.

Information about each Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet Site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the SEC, Washington, D.C. 20549-6009.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS.

Investment Company Act File #811-09159.

<PAGE> 25

<PAGE> 1

MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.
- --------------------------------------------------------------------------------

APPENDIX

This Appendix constitutes a part of the Prospectus for the Class B shares of
Mercury V.I. U.S. Large Cap Fund. For simplicity, this Appendix uses the term
"Fund" to refer to Mercury V.I. U.S. Large Cap Fund and any future series of
Mercury Asset Management V.I. Funds.

TABLE OF CONTENTS

MERCURY ASSET MANAGEMENT V.I. FUNDS 7

ACCOUNT CHOICES ICON
TO LEARN MORE ICON
<PAGE> 2

<TABLE>
<S> <C>
[ACCOUNT Account Choices
CHOICES
ICON]
</TABLE>

FUND SHARES
- --------------------------------------------------------------------------------

Each Fund offers two classes of shares, Class A and Class B. This Prospectus
describes the Class B shares only. The participating insurance company decides
which share class will support a contract. Each share class represents an
ownership interest in the same investment portfolio.

Class B shares of a Fund pay distribution fees of 0.15% per year on an ongoing
basis. These fees are paid under a distribution plan that the Fund has adopted
under Rule 12b-1 under the Investment Company Act of 1940, as amended. Because
these fees are paid out of the Fund's assets on an ongoing basis, over time
these fees increase the cost of your investment. Class B shareholders have no
other option. The money from the distribution fees is used to cover the costs of
the sale and distribution of the Fund's Class B shares.

Each Fund's shares are distributed by Mercury Funds Distributor, a division of
Princeton Funds Distributor, Inc.

After a Fund commences operations, participating insurance companies can
purchase Fund shares on each business day.

The Fund's investment adviser has agreed to cap the annual operating expenses of
the Mercury V.I. U.S. Large Cap Fund to 1.40% of the average net assets of the
Fund's Class B shares. This expense cap will be in place through April 2000.
HOW TO BUY AND SELL SHARES
- --------------------------------------------------------------------------------

A- 2
MERCURY ASSET MANAGEMENT V.I. FUNDS

NET ASSET VALUE -- the market value in U.S. dollars of a Fund's total assets
after deducting liabilities, divided by the number of shares outstanding.
<PAGE> 3

Account Choices
ACCOUNT CHOICES ICON
may be traded on non-U.S. securities exchanges that close many hours before the
New York Stock Exchange. Events that could affect securities prices that occur
between these times normally are not reflected in that Fund's net asset value.
Non-U.S. securities sometimes trade on days that the New York Stock Exchange is
closed. As a result, a Fund's net asset value may change on days when a
participating insurance company will not be able to purchase or redeem a Fund's
shares. Securities and assets for which market quotations are not readily
available are generally valued at fair value as determined in good faith by or
under the direction of the Board of Directors.
DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------

MERCURY ASSET MANAGEMENT V.I. FUNDS A- 3

DIVIDENDS -- ordinary income and capital gains paid with respect to Fund shares.
Dividends from a Fund are automatically reinvested in additional shares of that
Fund as they are paid.
<PAGE> 4

<TABLE>
<S> <C>
[THE The Management Team
MANAGEMENT
TEAM
ICON]
</TABLE>

A NOTE ABOUT YEAR 2000

The Year 2000 Problem may also adversely affect the participating insurance
companies and the contracts that they offer. For more information, see the
separate contract prospectus.

A- 4
MERCURY ASSET MANAGEMENT V.I. FUNDS
<PAGE> 5
The Management Team
[THE MANAGEMENT TEAM ICON]

<TABLE>
<S> <C>
INVESTMENT ADVISER
Mercury Asset Management International Ltd.
33 King William Street
London EC4R 9AS
England
ADMINISTRATOR
Fund Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
TRANSFER AGENT
Financial Data Services, Inc.
P.O. Box 44062
Jacksonville, Florida 32232-4062
(888-763-2260)
INDEPENDENT AUDITORS
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
DISTRIBUTOR
Mercury Funds Distributor, a division of Princeton Funds Distributor,
Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
COUNSEL
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, New York 10022
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MERCURY ASSET MANAGEMENT V.I. FUNDS
<PAGE> 6

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SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

You may contact the Fund at 1-888-763-2260 if you have any questions.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE IS
AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THE
INFORMATION CONTAINED IN THIS PROSPECTUS.

Investment Company Act File #811-09159.

<PAGE> 26

STATEMENT OF ADDITIONAL INFORMATION

MERCURY V.I. U.S. LARGE CAP FUND
of Mercury Asset Management V.I. Funds, Inc.

P.O. Box 9011, Princeton, New Jersey 08543-9011
Phone No. (888) 763-2260
------------------------
Mercury V.I. U.S. Large Cap Fund (the "Mercury V.I. U.S. Large Cap Fund" or
a "Fund") is a series of Mercury Asset Management V.I. Funds, Inc. (the
"Corporation" or "Mercury"). The Mercury V.I. U.S. Large Cap Fund is an open-end
diversified management investment company (commonly known as a mutual fund). The
investment objective of the Mercury V.I. U.S. Large Cap Fund is long-term
capital growth. The Mercury V.I. U.S. Large Cap Fund seeks to achieve this
objective through investments primarily in a diversified portfolio of equity
securities of large cap companies located in the U.S. The Mercury V.I. U.S.
Large Cap Fund may also invest up to 10% of its assets in equity securities of
companies located in Canada. There can be no assurance that the investment
objective of the Mercury V.I. U.S. Large Cap Fund will be achieved.

The Mercury V.I. U.S. Large Cap Fund does not offer its shares to the
general public. Shares are sold only to separate accounts established by
participating insurance companies (the "Participating Insurance Companies") to
fund benefits under variable annuity and/or variable life insurance contracts
(the "Contracts"). Certain Participating Insurance Companies may be affiliates
of Mercury Asset Management International Ltd. ("Mercury International" or the
"Investment Adviser"). The rights of Participating Insurance Companies as
shareholders of the Mercury V.I. U.S. Large Cap Fund should be distinguished
from the rights of a Contract owner, which are set forth in the Contract. A
Contract owner has an interest solely in the Contract and not in the shares of
the Mercury V.I. U.S. Large Cap Fund. The relevant Contract is described in the
prospectus of the Participating Insurance Company that issues the Contract. The
prospectus of the Participating Insurance Company that issues the Contract
describes the various fees and charges in connection with the separate account
and the Contract, and the benefits provided by the Contract. That prospectus
also describes the relationship between the Contract and increases or decreases
in the net asset value of shares of the Mercury V.I. U.S. Large Cap Fund and any
distributions on such shares. The Participating Insurance Companies will redeem
shares to the extent necessary to provide benefits under the respective
Contracts or for such other purposes as consistent with the respective
Contracts. The Mercury V.I. U.S. Large Cap Fund's distributor is Mercury Funds
Distributor, a division of Princeton Funds Distributor, Inc.
------------------------
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the Mercury V.I. U.S. Large Cap Fund,
dated April 19, 1999 (the "Prospectus"), which has been filed with the
Securities and Exchange Commission (the "Commission"), and can be obtained,
without charge, by calling the Mercury V.I. U.S. Large Cap Fund at (888)
763-2260 or writing to the Fund at the address listed above. The Prospectus may
also be obtained from the Participating Insurance Company that issued your
Contract. For information on obtaining the Prospectus from the Participating
Insurance Company that issued your Contract, see the separate prospectus
describing the Contract. This Statement of Additional Information incorporates
by reference the Prospectus.

MERCURY ASSET MANAGEMENT INTERNATIONAL LTD. -- INVESTMENT ADVISER
MERCURY FUNDS DISTRIBUTOR -- DISTRIBUTOR
------------------------
The date of this Statement of Additional Information is April 19, 1999.
<PAGE> 27

TABLE OF CONTENTS

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PAGE
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Investment Objectives and Policies.......................... 2
Insurance Law Restrictions................................ 9
Other Considerations...................................... 9
Investment Restrictions................................... 9
General Information Relating to the Mercury V.I. U.S. Large
Cap Fund.................................................. 11
Description of Shares..................................... 11
Independent Auditors' Report................................ 13
Financial Statements........................................ 14
Appendix.................................................... A-1
Management of the Funds..................................... A-2
Directors and Officers.................................... A-2
Composition of Directors.................................. A-3
Management and Advisory Arrangements...................... A-3
Code of Ethics............................................ A-5
Purchase of Shares.......................................... A-5
Distribution Agreements................................... A-5
Distribution Plans........................................ A-6
Redemption of Shares........................................ A-7
Portfolio Transactions and Brokerage........................ A-7
Determination of Net Asset Value............................ A-8
Dividends and Taxes......................................... A-9
Dividends................................................. A-9
Taxes..................................................... A-9
Performance Data............................................ A-10
General Information......................................... A-11
Independent Auditors...................................... A-11
Custodian................................................. A-11
Transfer Agent............................................ A-11
Legal Counsel............................................. A-11
Reports to Shareholders................................... A-11
Additional Information.................................... A-11
Annex A..................................................... Annex A-1
Annex B..................................................... Annex B-1
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INVESTMENT OBJECTIVES AND POLICIES

The goal (that is, investment objective) of the Mercury V.I. U.S. Large Cap
Fund is long-term capital growth. This is a fundamental policy and cannot be
changed without shareholder approval. The Mercury V.I. U.S. Large Cap Fund tries
to achieve its goal by investing primarily in a diversified portfolio of equity
securities of large cap companies located in the U.S. The Mercury V.I. U.S.
Large Cap Fund may also invest up to 10% of its assets in equity securities of
companies of any market capitalization located in Canada. Reference is made to
"How the Mercury V.I. U.S. Large Cap Fund Invests" and "Investment Risks" in the
Prospectus for a discussion of the investment objective and policies of, and the
risks associated with, an investment in the Mercury V.I. U.S. Large Cap Fund.
There can be no guarantee that the Mercury V.I. U.S. Large Cap Fund's investment
objective will be achieved.

The Mercury V.I. U.S. Large Cap Fund may in the future invest all of its
assets in another mutual fund that has the same investment objective and
fundamental policies as the Mercury V.I. U.S. Large Cap Fund. All portfolio
investments would then be made at the level of the underlying mutual fund and
the Mercury V.I. U.S. Large Cap Fund's investment results would correspond
directly to that fund's investment results. This type of mutual fund structure
is sometimes referred to as a "master/feeder" structure. If other entities also
invest in the underlying fund, this could enable the Mercury V.I. U.S. Large Cap
Fund to realize economies of scale by investing through an entity with more
assets (the underlying fund). However, there are additional costs involved in
operating a "master/feeder" structure. If these additional costs are not offset
as a result of economies of scale, it is possible that the Mercury V.I. U.S.
Large Cap Fund's expenses would increase rather than decrease if it converts to
this structure. The Directors of the Mercury V.I. U.S. Large Cap Fund have the
authority to make the change to a "master/feeder" structure without first
holding a vote of the Fund's shareholders if they believe it is in the best
interests of the Mercury V.I. U.S. Large Cap Fund to do so.

For purposes of the Mercury V.I. U.S. Large Cap Fund's policy to invest in
the U.S. and Canada, an issuer ordinarily will be considered to be located in
the country under the laws of which it is organized or where the primary trading
market of its securities is located. The Mercury V.I. U.S. Large Cap Fund,
however, may also consider a company to be located in a country, without
reference to its domicile or to the primary trading market of its securities,
when at least 50% of its non-current assets, capitalization, gross revenues or
profits in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Mercury V.I. U.S. Large Cap Fund also may consider closed-end investment
companies to be located in the country or countries in which they primarily make
their portfolio investments.

While it is the policy of the Mercury V.I. U.S. Large Cap Fund generally
not to engage in trading for short-term gains, the Investment Adviser 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 general market,
economic or financial conditions.

The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on non-U.S. investments by U.S. investors such
as the Mercury V.I. U.S. Large Cap Fund. If such restrictions should be
reinstituted, it might become necessary for the Mercury V.I. U.S. Large Cap Fund
to invest all or substantially all of its assets in U.S. securities. In such
event, the Mercury V.I. U.S. Large Cap Fund would review its investment
objective or fundamental policies to determine whether changes are appropriate.
Any changes in the investment objective or fundamental policies set forth under
"Investment Restrictions" below would require the approval of the holders of a
majority of the Mercury V.I. U.S. Large Cap Fund's outstanding voting
securities.

The Mercury V.I. U.S. Large Cap Fund's ability and decisions to purchase or
sell portfolio securities may be affected by laws or regulations relating to the
convertibility and repatriation of assets. Under present conditions, the
Investment Adviser does not believe that these considerations will have any
significant effect on its portfolio strategy, although there can be no assurance
in this regard.

2
<PAGE> 29

The Mercury V.I. U.S. Large Cap Fund may invest in the securities of
non-U.S. issuers in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs"), Global Depositary Receipts ("GDRs") or other
securities convertible into securities of non-U.S. issuers. These securities may
not necessarily be denominated in the same currency as the securities into which
they may be converted. However, they would generally be subject to the same
risks as the securities into which they may be converted (as more fully
described in the Prospectus and below). ADRs are receipts typically issued by a
U.S. bank or trust company that evidence ownership of underlying securities
issued by a non-U.S. corporation. EDRs are receipts issued in Europe that
evidence a similar ownership arrangement. GDRs are receipts issued throughout
the world that evidence a similar ownership 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 United States and Europe and are designed for use
throughout the world. The Mercury V.I. U.S. Large Cap Fund may invest in
unsponsored ADRs, EDRs and GDRs. The issuers of unsponsored ADRs, EDRs and GDRs
are not obligated to disclose material information in the United States, and
therefore, there may be no correlation between such information and the market
value of such securities.

The Mercury V.I. U.S. Large Cap Fund's investment objective and policies
are described in "How the Mercury V.I. U.S. Large Cap Fund Invests" in the
Prospectus. Certain types of securities in which the Mercury V.I. U.S. Large Cap
Fund may invest and certain investment practices that the Fund may employ are
discussed more fully below.

Investing in Canada. While the Mercury V.I. U.S. Large Cap Fund will
invest at least 65% of its total assets in large cap companies located in the
United States, it may invest up to 10% of its assets in Canada. Canadian
securities are sensitive to conditions within Canada, but also tend to follow
the U.S. market. The country's economy relies strongly on the production and
processing of natural resources, and foreign trade. The Canadian government has
attempted to reduce restrictions against foreign investment, and its recent
trade agreements with the United States and Mexico are expected to increase
trade; however, these reforms could be reversed. Demand by many citizens in the
Province of Quebec for secession from Canada may significantly impact the
Canadian economy.

Foreign Security Risks. The Mercury V.I. U.S. Large Cap Fund defines
companies located in the U.S. or Canada broadly. As a result, the Mercury V.I.
U.S. Large Cap Fund's investments may include companies organized, traded or
having substantial operations outside the U.S. or Canada. This may expose the
Mercury V.I. U.S. Large Cap Fund to risks associated with foreign investments.
Foreign investments involve certain risks not typically involved in domestic
investments, including fluctuations in foreign exchange rates, future political
and economic developments, different legal systems and the existence or possible
imposition of exchange controls or other U.S. or non-U.S. governmental laws or
restrictions applicable to such investments. Securities prices in different
countries are subject to different economic, financial and social factors.
Because the Mercury V.I. U.S. Large Cap Fund may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments insofar
as U.S. investors are concerned. Foreign currency exchange rates are determined
by forces of supply and demand in the foreign exchange markets. These forces
are, in turn, affected by international balance of payments and other economic
and financial conditions, government intervention, speculation and other
factors. With respect to certain countries, there may be the possibility of
expropriation of assets, confiscatory taxation, high rates of inflation,
political or social instability or diplomatic developments that could affect
investment in those countries. In addition, certain investments may be subject
to non-U.S. withholding taxes.

Debt Securities. The Mercury V.I. U.S. Large Cap Fund may hold convertible
and non-convertible debt securities, and preferred securities. The Mercury V.I.
U.S. Large Cap Fund has established no rating criteria for the debt securities
in which it may invest. Therefore, the Mercury V.I. U.S. Large Cap Fund may
invest in debt securities either (a) rated in one of the top four rating
categories by a nationally recognized statistical rating organization or unrated
but in the Investment Adviser's judgment, possess similar credit characteristics
("investment grade securities") or (b) rated below the top four rating
categories or that are unrated but, in

3
<PAGE> 30

the Investment Adviser's judgment, possess similar credit characteristics ("high
yield securities"). The Investment Adviser considers ratings as one of several
factors in its independent credit analysis of issuers.

Debt securities are subject to interest rate and credit risk. Interest rate
risk is the risk that when interest rates go up, the value of debt instruments
generally goes down. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than
shorter term securities. Credit risk is the risk that the issuer will be unable
to pay the interest or principal when due. The degree of credit risk depends on
both the financial condition of the issuer and the terms of the obligation.

Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are 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
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. High yield securities tend to be more volatile
than higher rated fixed income securities and adverse economic events may have a
greater impact on the prices of high yield securities than on higher rated fixed
income securities. The issuer's ability to service its 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 holder of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.

High yield securities frequently have call or redemption features that
would permit the issuer to repurchase such securities from the Mercury V.I. U.S.
Large Cap Fund. If a call were exercised by an issuer during a period of
declining interest rates, the Mercury V.I. U.S. Large Cap Fund likely would have
to replace such called security with a lower yielding security, thus decreasing
the net investment income for the Mercury V.I. U.S. Large Cap Fund and dividends
to shareholders.

The Mercury V.I. U.S. Large Cap Fund may have difficulty disposing of
certain high yield securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all high yield
securities, there is no established retail secondary market for many of these
securities, and the Mercury V.I. U.S. Large Cap Fund anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent that a secondary trading market for high yield
securities does exist, it is generally 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 Mercury V.I. U.S. Large Cap 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
securities also may make it more difficult for the Mercury V.I. U.S. Large Cap
Fund to obtain accurate market quotations for purposes of valuing the Fund's
portfolio. Market quotations are generally available on many high yield
securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.

Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. To the extent the Mercury
V.I. U.S. Large Cap Fund holds high yield securities, factors adversely
affecting the market value of high yield securities are likely to adversely
affect the Mercury V.I. U.S. Large Cap Fund's net asset value. In addition, the
Mercury V.I. U.S. Large Cap 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 obligation.

Convertible Securities. Convertible securities entitle the holder to
receive interest payments paid on corporate debt securities or the dividend
preference on a preferred stock until such time as the convertible security
matures or is redeemed or until the holder elects to exercise the conversion
privilege.

The characteristics of convertible securities include the potential for
capital appreciation as the value of the underlying common stock increases, the
relatively high yield received from dividend or interest payments as compared to
common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed-income nature. As a result of the
conversion feature, however, the interest

4
<PAGE> 31

rate or dividend preference on a convertible security is generally less than
would be the case if the securities were issued in non-convertible form.

In analyzing convertible securities, the Investment Adviser will consider
both the yield on the convertible security and the potential capital
appreciation that is offered by the underlying common stock.

Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible securities
held by the Mercury V.I. U.S. Large Cap Fund are denominated in U.S. dollars,
the underlying equity securities may be quoted in the currency of the country
where the issuer is domiciled. With respect to a convertible security
denominated in a currency different from that of the underlying equity security,
the conversion price may be based on a fixed exchange rate established at the
time the security is issued. As a result, fluctuations in the exchange rate
between the currency in which the debt security is denominated and the currency
in which the share price is quoted will affect the value of the convertible
security.

Apart from currency considerations, the value of a convertible security is
influenced by both the yield of non-convertible securities of comparable issuers
and by the value of the underlying common stock. The value of a convertible
security viewed without regard to its conversion feature (i.e., strictly on the
basis of its yield) is sometimes referred to as its "investment value." To the
extent interest rates change, the investment value of the convertible security
typically will fluctuate. However, at the same time, the value of the
convertible security will be influenced by its "conversion value," which is the
market value of the underlying common stock that would be obtained if the
convertible security were converted. Conversion value fluctuates directly with
the price of the underlying common stock. If, because of a low price of the
common stock the conversion value is substantially below the investment value of
the convertible security, the price of the convertible security is governed
principally by its investment value.

To the extent the conversion value of a convertible security increases to a
point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A
convertible security will sell at a premium over the conversion value to the
extent investors place value on the right to acquire the underlying common stock
while holding a fixed-income security.

Holders of convertible securities generally have a claim on the assets of
the issuer prior to the common stockholders but may be subordinated to other
debt securities of the same issuer. A convertible security may be subject to
redemption at the option of the issuer at a price established in the charter
provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by the Mercury
V.I. U.S. Large Cap Fund is called for redemption, the Fund will be required to
redeem the security, convert it into the underlying common stock or sell it to a
third party. Certain convertible debt securities may provide a put option to the
holder which entitles the holder to cause the security to be redeemed by the
issuer at a premium over the stated principal amount of the debt security under
certain circumstances.

Borrowing and Leverage. The Mercury V.I. U.S. Large Cap 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), and may borrow up to an
additional 5% of its total assets for temporary purposes. The Mercury V.I. U.S.
Large Cap Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and may purchase
securities on margin to the extent permitted by applicable law, and may use
borrowing to enable it to meet redemptions.

The use of leverage by the Mercury V.I. U.S. Large Cap Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Mercury V.I. U.S. Large Cap Fund shares and in the yield on the Fund's
portfolio. Although the principal of such borrowings will be fixed, the Mercury
V.I. U.S. Large Cap Fund's assets may change in value during the time the
borrowings are outstanding. Borrowings will create interest expenses for the
Mercury V.I. U.S. Large Cap Fund which can exceed the income from the assets
purchased with the borrowings. To the extent the income or capital appreciation
derived from securities purchased with borrowed funds exceeds the interest the
Mercury V.I. U.S. Large Cap Fund will have to pay on the borrowings, the Mercury
V.I. U.S.

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<PAGE> 32

Large Cap Fund's return will be greater than if leverage had not been used.
Conversely, if the income or capital appreciation from the securities purchased
with such borrowed funds is not sufficient to cover the cost of borrowing, the
return to the Mercury V.I. U.S. Large Cap Fund will be less than if leverage had
not been used, and therefore the amount available for distribution to
shareholders as dividends and other distributions will be reduced. In the latter
case, the Investment Adviser in its best judgment nevertheless may determine to
maintain the Mercury V.I. U.S. Large Cap Fund's leveraged position if it expects
that the benefits to the Fund's shareholders of maintaining the leveraged
position will outweigh the current reduced return.

Illiquid or Restricted Securities. The Mercury V.I. U.S. Large Cap 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. Illiquid securities may trade at
a discount from comparable, more liquid investments. Investment of the Mercury
V.I. U.S. Large Cap 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 where the Mercury
V.I. U.S. Large Cap 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.

The Mercury V.I. U.S. Large Cap Fund may invest in securities that are
"restricted securities." Restricted securities have contractual or legal
restrictions on their resale and include "private placement" securities that the
Mercury V.I. U.S. Large Cap Fund may buy directly from the issuer. Restricted
securities may be neither listed on an exchange nor traded in other established
markets. Privately placed securities may or may not be freely transferable under
the laws of the applicable jurisdiction or due to contractual restrictions on
resale. As a result of the absence of a public trading market, privately placed
securities may be more difficult to value than publicly traded securities and
may be less liquid, or illiquid, and therefore may be subject to the risks
associated with illiquid securities, as described in the preceding paragraph.
Some restricted securities, however, may be liquid. In addition, issuers whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements that may be applicable if their
securities were publicly traded. If any privately placed securities held by the
Mercury V.I. U.S. Large Cap Fund are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Mercury
V.I. U.S. Large Cap Fund may be required to bear the expenses of registration.
Certain of the Mercury V.I. U.S. Large Cap Fund's investments in private
placements may consist of direct investments and may include investments in
smaller, less-seasoned issuers, which may involve greater risks. These issuers
may have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. In making investments in such
securities, the Mercury V.I. U.S. Large Cap Fund may obtain access to material
nonpublic information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.

144A Securities. The Mercury V.I. U.S. Large Cap Fund may purchase
restricted securities that can be offered and sold to "qualified institutional
buyers" under Rule 144A under the Securities Act of 1933, as amended, (the
"Securities Act"). The Board of Directors has determined to treat as liquid Rule
144A securities that are either (i) freely tradable in their primary markets
offshore or (ii) non-investment grade debt securities which the Mercury V.I.
U.S. Large Cap Fund's management determines are as liquid as publicly registered
non-investment grade debt securities. The Board of Directors has adopted
guidelines and delegated to the Mercury V.I. U.S. Large Cap Fund's management
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. Since it is not possible
to predict with assurance exactly how this market for restricted securities sold
and offered under Rule 144A will develop, the Board of Directors will carefully
monitor investments in these securities. This investment practice could have the
effect of increasing the level of illiquidity in the Mercury V.I. U.S. Large Cap
Fund to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.

6
<PAGE> 33

Other Special Considerations. The Mercury V.I. U.S. Large Cap Fund may
invest without limit in short-term investments, high quality bonds or
derivatives, to reduce exposure to equity securities when the Mercury V.I. U.S.
Large Cap Fund believes it is advisable to do so (on a temporary defensive
basis). Short-term investments and temporary defensive positions may limit the
potential for growth in the value of shares of the Mercury V.I. U.S. Large Cap
Fund and may reduce the level of current income.

Sovereign Debt. The Mercury V.I. U.S. Large Cap Fund may invest more than
5% of its assets in debt obligations ("sovereign debt") issued or guaranteed by
non-U.S. governments or their agencies and instrumentalities ("governmental
entities"). Investment in sovereign debt involves a high degree of risk that the
governmental entity that controls the repayment of sovereign debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. A governmental entity's willingness or ability to
repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole.

Holders of sovereign debt, including the Mercury V.I. U.S. Large Cap Fund,
may be requested to participate in the rescheduling of such debt and to extend
further loans to governmental entities. There may be no bankruptcy proceeding by
which sovereign debt on which a governmental entity has defaulted may be
collected in whole or in part.

The sovereign debt instruments in which the Mercury V.I. U.S. Large Cap
Fund may invest involve great risk and are deemed to be the equivalent in terms
of quality to high yield/high risk securities discussed above and are subject to
many of the same risks as such securities. Similarly, the Mercury V.I. U.S.
Large Cap Fund may have difficulty disposing of certain sovereign debt
obligations because there may be a thin trading market for such securities.

Securities Lending. The Mercury V.I. U.S. Large Cap Fund may lend
securities with a value not exceeding 33 1/3% of its total assets. In return,
the Mercury V.I. U.S. Large Cap Fund receives collateral in an amount equal to
at least 100% of the current market value of the loaned securities in cash or
securities issued or guaranteed by the U.S. Government. If cash collateral is
received by the Mercury V.I. U.S. Large Cap 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 Mercury V.I. U.S. Large Cap Fund. Alternatively,
if securities are delivered to the Mercury V.I. U.S. Large Cap Fund as
collateral, the Fund and the borrower negotiate a rate for the loan premium to
be received by the Mercury V.I. U.S. Large Cap Fund for lending its portfolio
securities. In either event, the total yield on the Mercury V.I. U.S. Large Cap
Fund's portfolio is increased by loans of its portfolio securities. The Mercury
V.I. U.S. Large Cap Fund may receive a flat fee for its loans. The loans are
terminable at any time and the borrower, after notice, is required to return
borrowed securities within five business days. The Mercury V.I. U.S. Large Cap
Fund may pay reasonable finder's, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Mercury V.I. U.S. Large Cap Fund could experience delays and costs
in gaining access to the collateral and could suffer a loss to the extent the
value of the collateral falls below the market value of the borrowed securities.

Repurchase Agreements. The Mercury V.I. U.S. Large Cap Fund may invest in
securities pursuant to repurchase agreements. Repurchase agreements may be
entered into only with a member bank of the Federal Reserve System or primary
dealer in U.S. Government securities or an affiliate thereof. Under such
agreements, the bank or primary dealer or an affiliate thereof agrees, upon
entering into the contract, to repurchase the security at a mutually agreed upon
time and price, thereby determining the yield during the term of the agreement.
This insulates the Mercury V.I. U.S. Large Cap Fund from fluctuations in the
market value of the underlying security during such period, although, to the
extent the repurchase agreement is not denominated in U.S. dollars, the Mercury
V.I. U.S. Large Cap Fund's return may be affected by currency fluctuations. The
Mercury V.I. U.S. Large Cap Fund may not invest more than 15% of its total
assets in repurchase agreements maturing in more than seven days (together with
other illiquid securities). Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the securities

7
<PAGE> 34

transferred to the purchaser. The Mercury V.I. U.S. Large Cap 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. 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 Mercury V.I. U.S. Large Cap Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Mercury
V.I. U.S. Large Cap Fund may suffer time delays and incur costs or possible
losses in connection with the disposition of the collateral. In the event of a
default under such a repurchase agreement, instead of the contractual fixed rate
of return, the rate of return to the Mercury V.I. U.S. Large Cap Fund shall be
dependent upon intervening fluctuations of the market value of such security and
the accrued interest on the security. In such event, the Mercury V.I. U.S. Large
Cap 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.

Warrants. The Mercury V.I. U.S. Large Cap Fund may invest in warrants,
which are securities permitting, but not obligating, the warrant holder to
subscribe for other securities. Buying a warrant does not make the Mercury V.I.
U.S. Large Cap Fund a shareholder of the underlying stock. The warrant holder
has no right to dividends or votes on the underlying stock. A warrant does not
carry any right to assets of the issuer, and for this reason investment in
warrants may be more speculative than other equity-based investments.

When-Issued Securities and Forward Commitments. The Mercury V.I. U.S.
Large Cap Fund may purchase or sell securities that it is entitled to receive on
a when-issued basis. The Mercury V.I. U.S. Large Cap Fund may also purchase or
sell securities through a forward commitment. These transactions involve the
purchase or sale of securities by the Mercury V.I. U.S. Large Cap Fund at an
established price with payment and delivery taking place in the future. The
Mercury V.I. U.S. Large Cap Fund enters into these transactions to obtain what
is considered an advantageous price to the Fund at the time of entering into the
transaction. The Mercury V.I. U.S. Large Cap Fund has not established any limit
on the percentage of its assets that may be committed in connection with these
transactions. When the Mercury V.I. U.S. Large Cap Fund is purchasing securities
in these transactions, the Mercury V.I. U.S. Large Cap Fund maintains a
segregated account with its custodian of cash, cash equivalents, U.S. Government
securities or other liquid securities in an amount equal to the amount of its
purchase commitments.

There can be no assurance that a security purchased on a when-issued basis
will be issued, or a security purchased or sold through a forward commitment
will be delivered. The value of securities in these transactions on the delivery
date may be more or less than the Mercury V.I. U.S. Large Cap Fund's purchase
price. The Mercury V.I. U.S. Large Cap Fund may bear the risk of a decline in
the value of the security in these transactions and may not benefit from an
appreciation in the value of the security during the commitment period.

Standby Commitment Agreements. The Mercury V.I. U.S. Large Cap Fund may
enter into standby commitment agreements. These agreements commit the Mercury
V.I. U.S. Large Cap Fund, for a stated period of time, to purchase a stated
amount of securities which may be issued and sold to the Mercury V.I. U.S. Large
Cap 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 Mercury
V.I. U.S. Large Cap Fund is paid a commitment fee, regardless of whether or not
the security is ultimately issued. The Mercury V.I. U.S. Large Cap Fund will
enter into such agreements for the purpose of investing in the security
underlying the commitment at a price that is considered advantageous to the
Mercury V.I. U.S. Large Cap Fund. The Mercury V.I. U.S. Large Cap Fund will not
enter into a standby commitment with a remaining term in excess of 45 days and
will limit its investment in such commitments so that the aggregate purchase
price of 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 the
commitment. The Mercury V.I. U.S. Large Cap Fund will maintain a segregated
account with its custodian of cash, cash equivalents, U.S. Government securities
or other liquid securities in an aggregate amount equal to the purchase price of
the securities underlying the commitment.

8
<PAGE> 35
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
Mercury V.I. U.S. Large Cap 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 Mercury V.I. U.S. Large
Cap 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.

INSURANCE LAW RESTRICTIONS

In order for shares of the Mercury V.I. U.S. Large Cap Fund to remain
eligible investments for the separate accounts of Participating Insurance
Companies, it may be necessary, from time to time, for the Fund to limit its
investments in certain types of securities in accordance with the insurance laws
or regulations of the various states in which the Contracts are sold.

The New York insurance law requires that investments of the Mercury V.I.
U.S. Large Cap Fund be made with the degree of care of an "ordinarily prudent
person." The Investment Adviser believes that compliance with this standard will
not have any negative impact on the performance of the Mercury V.I. U.S. Large
Cap Fund.

OTHER CONSIDERATIONS

The Investment Adviser will use its best efforts to assure that the Mercury
V.I. U.S. Large Cap Fund complies with certain investment limitations of the
Internal Revenue Service to assure favorable income tax treatment for the
Contracts. It is not expected that such investment limitations will materially
affect the ability of the Mercury V.I. U.S. Large Cap Fund to achieve its
investment objective.

INVESTMENT RESTRICTIONS

The Corporation has adopted the following restrictions and policies
relating to the investment of the Mercury V.I. U.S. Large Cap Fund's assets and
its activities. The fundamental restrictions set forth below may not be changed
with respect to the Mercury V.I. U.S. Large Cap Fund 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 of 1940, as amended, (the
"Investment Company Act") means the lesser of (i) 67% of the shares represented
at a meeting at which more than 50% of the outstanding shares are represented or
(ii) more than 50% of the outstanding shares). Provided that none of the
following restrictions shall prevent the Mercury V.I. U.S. Large Cap Fund from
investing all of its assets in shares of another registered investment company
with the same investment objective (in a master/feeder structure), the Mercury
V.I. U.S. Large Cap Fund may not:

1. Make any investment inconsistent with the Mercury V.I. U.S. Large
Cap Fund's classification as a diversified company under the Investment
Company Act.

2. Invest more than 25% of its total assets, taken at market value, in
the securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).

3. Make investments for the purpose of exercising control or
management. Investments by the Mercury V.I. U.S. Large Cap Fund in
wholly-owned investment entities created under the laws of certain
countries will not be deemed the making of investments for the purpose of
exercising control or management.

9
<PAGE> 36

4. Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Mercury V.I. U.S. Large Cap Fund may invest in
securities directly or indirectly secured by real estate or interests
therein or issued by companies that invest in real estate or interests
therein.

5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
governmental obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers' acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the making of a loan, and
except further that the Mercury V.I. U.S. Large Cap 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 Mercury V.I. U.S. Large Cap Fund's Prospectus and Statement of
Additional Information, as they may be amended from time to time.

6. Issue senior securities to the extent such issuance would violate
applicable law.

7. Borrow money, except that (i) the Mercury V.I. U.S. Large Cap 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
Mercury V.I. U.S. Large Cap Fund may borrow up to an additional 5% of its
total assets for temporary purposes, (iii) the Mercury V.I. U.S. Large Cap
Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) the
Mercury V.I. U.S. Large Cap Fund may purchase securities on margin to the
extent permitted by applicable law. The Mercury V.I. U.S. Large Cap Fund
may not pledge its assets other than to secure such borrowings or, to the
extent permitted by the Mercury V.I. U.S. Large Cap 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.

8. Underwrite securities of other issuers except insofar as the
Mercury V.I. U.S. Large Cap Fund technically may be deemed an underwriter
under the Securities Act of 1933 in selling portfolio securities.

9. Purchase or sell commodities or contracts on commodities, except to
the extent that the Mercury V.I. U.S. Large Cap Fund may do so in
accordance with applicable law and the Mercury V.I. U.S. Large Cap 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.

In addition, the Corporation has adopted non-fundamental restrictions that
may be changed by the Board of Directors without shareholder approval. Like the
fundamental restrictions, none of the non-fundamental restrictions, including
but not limited to restriction (a) below, shall prevent the Mercury V.I. U.S.
Large Cap Fund from investing all of its assets in shares of another registered
investment company with the same investment objective (in a master/feeder
structure). Under the non-fundamental investment restrictions, the Mercury V.I.
U.S. Large Cap Fund may not:

(a) Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Mercury V.I. U.S. Large Cap 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 the Mercury
V.I. U.S. Large Cap Fund's shares are owned by another investment company
that is part of the same group of investment companies as the Mercury V.I.
U.S. Large Cap Fund.

(b) Make short sales of securities or maintain a short position,
except to the extent permitted by applicable law. The Mercury V.I. U.S.
Large Cap Fund currently does not intend to engage in short sales, except
short sales "against the box."

(c) Invest in securities that cannot be readily resold because of
legal or contractual restrictions or that 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 that mature
within seven days or securities that the Directors of the Corporation have
otherwise determined to be liquid pursuant to applicable law. Securities
purchased in accordance with

10
<PAGE> 37

Rule 144A under the Securities Act (which are restricted securities that
can be resold to qualified institutional buyers, but not to the general
public) and determined to be liquid by the Directors are not subject to the
limitations set forth in this investment restriction.

If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.

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 Corporation has adopted an
investment policy pursuant to which the Mercury V.I. U.S. Large Cap Fund will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of the market value of OTC options
currently outstanding that are held by the Mercury V.I. U.S. Large Cap Fund, the
market value of the underlying securities covered by OTC call options currently
outstanding that were sold by the Fund and margin deposits on the Mercury V.I.
U.S. Large Cap Fund's existing OTC options on futures contracts exceeds 15% of
the net assets of the Fund taken at market value, together with all other assets
of the Mercury V.I. U.S. Large Cap Fund that are illiquid or are not otherwise
readily marketable. However, if the OTC option is sold by the Mercury V.I. U.S.
Large Cap 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 Mercury V.I. U.S. Large Cap 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 that 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 Mercury V.I. U.S. Large Cap Fund and may be
amended by the Directors without the approval of the shareholders. However, the
Directors will not change or modify this policy prior to the change or
modification by the Commission staff of its position.

Portfolio securities of the Mercury V.I. U.S. Large Cap Fund generally may
not be purchased from, sold or loaned to the Investment Adviser or its
affiliates or any of their directors, general partners, officers or employees,
acting as principal, unless pursuant to a rule or exemptive order under the
Investment Company Act.

Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser and Fund Asset
Management, L.P. ("FAM"), the Mercury V.I. U.S. Large Cap Fund is prohibited
from engaging in certain transactions involving Merrill Lynch, the Investment
Adviser, or any of its affiliates, except for brokerage transactions permitted
under the Investment Company Act involving only usual and customary commissions
or transactions pursuant to an exemptive order under the Investment Company Act.
See "Portfolio Transactions and Brokerage" in the Appendix to this Statement of
Additional Information. Rule 10f-3 under the Investment Company Act sets forth
conditions under which the Mercury V.I. U.S. Large Cap Fund may purchase from an
underwriting syndicate of which Merrill Lynch is a member.

GENERAL INFORMATION RELATING TO THE MERCURY V.I. U.S. LARGE CAP FUND

DESCRIPTION OF SHARES

The Corporation is a Maryland corporation incorporated on December 7, 1998.
It has authorized capital of 800,000,000 shares of Common Stock, par value
$.0001, divided into 200,000,000 shares of each of Class A and Class B shares
for each of its series.

Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors (to the
extent hereinafter provided) and on other matters submitted to vote of
shareholders, except that Class B shareholders, whose shares bear distribution
expenses as provided below, shall have exclusive voting rights with respect to
matters relating to such distribution expenditures. Voting rights are not
cumulative, so that the holders of more than 50% of the shares voting in the
election of Directors can, if they choose to do so, elect all the Directors of
the Corporation, in which event the holders of the

11
<PAGE> 38

remaining shares are unable to elect any person as a Director. No amendment may
be made to the Articles of Incorporation without the affirmative vote of a
majority of the outstanding shares of the Corporation.

There normally will be no meeting of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the Directors
holding office have been elected by the shareholders, at which time the
Directors then in office will call a shareholders' meeting for the election of
Directors. Shareholders may, in accordance with the terms of the Articles of
Incorporation, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors. Also, the Corporation will be required to
call a special meeting of shareholders in accordance with the requirements of
the Investment Company Act to seek approval of new management and advisory
arrangements, of a material increase in distribution fees or of a change in
fundamental policies, objectives or restrictions. Except as set forth above, the
Directors shall continue to hold office and appoint successor Directors. Each
issued and outstanding share is entitled to participate equally in dividends and
distributions declared and in net assets upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities. Shares issued are
fully-paid and non-assessable by the Corporation or the Mercury V.I. U.S. Large
New Cap Fund. Voting rights for Directors are not cumulative.

Merrill Lynch Life Insurance Company ("MLLIC") has provided the initial
capital for the Mercury V.I. U.S. Large Cap Fund by purchasing shares of the
Fund. Such shares were acquired for investment and can be disposed of only by
redemption. To the extent the organizational expenses of the Corporation are
paid by the Corporation they will be expensed and immediately charged to the net
asset value. See "Determination of Net Asset Value" in the Appendix to this
Statement of Additional Information.

MLLIC, an insurance company organized under the laws of Arkansas, is
located at 425 West Capital Avenue, Suite 1800, Little Rock, Arkansas
72201-3525. MLLIC, an affiliate of Mercury International, is a wholly owned
subsidiary of Merrill Lynch Insurance Group Incorporated ("MLIG"), a holding
company. MLIG is a "controlling person," as defined in the Investment Company
Act, of MLLIC because of its power to exercise a controlling influence over its
management policies.

Prior to the offering of the Mercury V.I. U.S. Large Cap Fund's shares,
MLLIC will be the Fund's sole shareholder and deemed a controlling person of the
Mercury V.I. U.S. Large Cap Fund.

12
<PAGE> 39

MERCURY V.I. U.S. LARGE CAP FUND
OF
MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 19, 1999

<TABLE>
<S> <C>
ASSETS:
Cash ............................................................... $ 100
Prepaid offering costs (Note 3) .................................... 82,700
-------
Total Assets ..................................................... 82,800
-------
LIABILITIES:
Liabilities and accrued expenses ................................... 82,700
-------
NET ASSETS: .......................................................... $ 100
=======
NET ASSETS CONSIST OF:
Class A Shares of Common Stock, $.0001 par value,
200,000,000 shares authorized ..................................... $ 1
Class B Shares of Common Stock, $.0001 par value,
200,000,000 shares authorized ..................................... 1
Paid-in Capital in excess of par ................................... 98
-------
NET ASSETS: .......................................................... $ 100
=======
NET ASSET VALUE:
Class A -- Based on net assets of $50 and 5 shares outstanding ....... $ 10.00
=======
Class B -- Based on net assets of $50 and 5 shares outstanding ....... $ 10.00
=======
</TABLE>
- ----------
Notes to Financial Statements

(1) Mercury Asset/Management V.I. Funds, Inc. (the "Corporation") was organized
as a Maryland corporation on December 7, 1998 and is registered under the
Investment Company Act of 1940. Mercury V.I. U.S. Large Cap Fund (the "U.S.
Large Cap Fund"), an open-end diversified management investment company, is
a series of the Corporation. To date, the U.S. Large Cap Fund has not had
any transactions other than those relating to organizational matters and the
sale of 5 Class A shares and 5 Class B shares of Common Stock to Merrill
Lynch Life Insurance Company ("MLLIC"). The U.S. Large Cap Fund does not
offer its shares to the general public. Shares are sold only to separate
accounts established by participating insurance companies ("Participating
Insurance Companies") to fund benefits under variable annuity or variable
life insurance contracts.

(2) The Corporation on behalf of the U.S. Large Cap Fund has entered into an
investment advisory agreement with Mercury Asset Management International
Ltd. (the "Investment Adviser"), and a distribution agreement with Mercury
Funds Distributor, a division of Princeton Funds Distributor, Inc. (the
"Distributor"). (See "Management of the Funds -- Management and Advisory
Arrangements" in the Statement of Additional Information.) Certain
Participating Insurance Companies may be affiliates of the Investment
Adviser.

(3) Prepaid offering costs consist of legal and printing fees related to
preparing the initial registration statement, and will be amortized over a
12 month period beginning with the commencement of operations of the U.S.
Large Cap Fund. The Investment Adviser, on behalf of the U.S. Large Cap
Fund, will incur organization costs estimated at $44,000.

<PAGE> 40

<PAGE> 1

MERCURY ASSET MANAGEMENT V.I. FUNDS, INC.

APPENDIX

This Appendix constitutes a part of the Statement of Additional Information
for the Class A and Class B shares of Mercury V.I. U.S. Large Cap Fund. This
Appendix uses the term "Fund" to refer to Mercury V.I. U.S. Large Cap Fund and
any future series of Mercury Asset Management V.I. Funds.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management of the Funds..................................... A-2
Directors and Officers.................................... A-2
Compensation of Directors................................. A-3
Management and Advisory Arrangements...................... A-3
Code of Ethics............................................ A-5
Purchase of Shares.......................................... A-5
Distribution Agreements................................... A-5
Distribution Plans........................................ A-6
Redemption of Shares........................................ A-7
Portfolio Transactions and Brokerage........................ A-7
Determination of Net Asset Value............................ A-8
Dividends and Taxes......................................... A-9
Dividends................................................. A-9
Taxes..................................................... A-9
Performance Data............................................ A-10
General Information......................................... A-11
Independent Auditors...................................... A-11
Custodian................................................. A-11
Transfer Agent............................................ A-11
Legal Counsel............................................. A-11
Reports to Shareholders................................... A-11
Additional Information.................................... A-11
Annex A..................................................... Annex A-1
Annex B..................................................... Annex B-1
</TABLE>

A-1
<PAGE> 2

MANAGEMENT OF THE FUNDS

DIRECTORS AND OFFICERS

The Directors of the Corporation consist of six individuals, four of whom
are not "interested persons" of the Corporation as defined in the Investment
Company Act. The Directors are responsible for the overall supervision of the
operations of each Fund and perform the various duties imposed on the directors
of investment companies by the Investment Company Act. Information about the
Directors and executive officers of the Corporation, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.

JEFFREY M. PEEK (52) -- Director and President(1)(2) -- President of
Merrill Lynch Asset Management L.P. ("MLAM") and FAM since 1997; President and
Director of Princeton Services, Inc. ("Princeton Services") since 1997;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1997;
Co-Head of Merrill Lynch Investment Banking Division from March 1997 to December
1997; Director of Merrill Lynch Global Securities Research and Economics
Division from 1995 to 1997; Head of Merrill Lynch Global Industries Group from
1993 to 1995.

TERRY K. GLENN (58) -- Director and Executive Vice President(1)(2) --
Executive Vice President of MLAM and FAM since 1983; Executive Vice President
and Director of Princeton Services since 1993; President of Princeton Funds
Distributor, Inc. since 1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.

DAVID O. BEIM (58) -- Director (2) -- 410 Uris Hall, Columbia University,
New York, New York 10027. Professor of Columbia University since 1991; Chairman
of Outward Bound USA since 1997; Chairman of Wave Hill, Inc. since 1980.

JAMES T. FLYNN (59) -- Director(2) -- 340 East 72nd Street, New York, New
York 10021. Chief Financial Officer of J.P. Morgan & Co. Inc. from 1990 to 1995
and an employee of J.P. Morgan in various capacities from 1967 to 1995.

W. CARL KESTER (47) -- Director(2) -- Harvard Business School, Morgan Hall
393, Soldiers Field, Boston, Massachusetts 02163. James R. Williston Professor
of Business Administration of Harvard University Graduate School of Business
since 1997; MBA Class of 1958 Professor of Business Administration of Harvard
University Graduate School of Business Administration from 1981 to 1997;
Independent Consultant since 1978.

KAREN P. ROBARDS (48) -- Director (2) -- Robards & Company, 173 Riverside
Drive, New York, New York 10024. President of Robards & Company, a financial
advisory firm, for more than five years; Director of Enable Medical Corp. since
1996; Director of Cine Muse Inc. since 1996; Director of the Cooke Center for
Learning and Development, a not for profit organization, since 1993.

PETER JOHN GIBBS (40) -- Senior Vice President(1)(2) -- 33 King William
Street, London, EC4R 9AS, England. Chairman of Mercury Asset Management
International Ltd. since 1998; Director of Mercury Asset Management Ltd. since
1993; Director of Mercury Asset Management International Channel Islands Ltd.
since 1997.

DONALD C. BURKE (38) -- Treasurer and Vice President (1)(2) -- Senior Vice
President and Treasurer of MLAM and FAM since 1999; Senior Vice President and
Treasurer of Princeton Services since 1999; Vice President of Princeton Funds
Distributor, Inc. since 1999; First Vice President of MLAM and FAM from 1997 to
1999; Director of Taxation of MLAM and FAM since 1990; Vice President of MLAM
and FAM from 1990 to 1997.

A-2
<PAGE> 3

LORRAINE D. MANDEL (50) -- Secretary (1)(2) -- Director (Legal Advisory) of
MLAM since 1998; Second Vice President and Assistant General Counsel of General
Reinsurance Corporation from 1992 to 1998.
- ---------------
(1) Interested person, as defined in the Investment Company Act, of each Fund.

(2) Such Director or officer is a trustee, director or officer of other
investment companies for which the Investment Adviser, or the Funds'
sub-adviser, FAM, or their affiliates, acts as investment adviser.

As of the date of this Statement of Additional Information, the officers
and Directors of the Corporation as a group (nine persons) owned an aggregate of
less than 1% of the outstanding shares of common stock of ML & Co. and owned an
aggregate of less than 1% of the outstanding shares of any Fund.

COMPENSATION OF DIRECTORS

The Corporation expects to pay each Director not affiliated with the
Investment Adviser or FAM or with an affiliate of the Investment Adviser or FAM
(each a "non-affiliated Director"), for service to the Funds, a fee of $3,000
per year plus $500 per in-person meeting attended, together with such
individual's actual out-of-pocket expenses relating to attendance at meetings.
The Corporation also expects to compensate members of the Audit and Nominating
Committee, which consists of all of the non-affiliated Directors, at the rate of
$1,000 annually for service to the Funds.

The following table sets forth the aggregate compensation the Corporation
expects to pay to the non-affiliated Directors for their first full fiscal year
and the aggregate compensation paid by all investment companies advised by
Mercury International, FAM, or their affiliates ("Mercury and Affiliates-Advised
Funds") to the non-affiliated Directors for the calendar year ended December 31,
1998.

<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
FUNDS AND
PENSION OR RETIREMENT MERCURY AND
BENEFITS ACCRUED AS AFFILIATES-ADVISED
AGGREGATE COMPENSATION PART OF FUNDS' FUNDS PAID TO
NAME OF DIRECTOR FROM FUNDS EXPENSES DIRECTORS(1)
---------------- ---------------------- --------------------- -----------------------
<S> <C> <C> <C>
David O. Beim.................... $6,000 None $10,000
James T. Flynn................... $6,000 None $49,000
W. Carl Kester................... $6,000 None $49,000
Karen P. Robards................. $6,000 None $10,000
</TABLE>

- ---------------
(1) In addition to the Corporation, the Directors served on other Mercury and
Affiliates-Advised Funds as follows: Mr. Beim (2 registered investment
companies consisting of 10 portfolios); Mr. Flynn (4 registered investment
companies consisting of 16 portfolios); Mr. Kester (4 registered investment
companies consisting of 16 portfolios); and Ms. Robards (2 registered
investment companies consisting of 10 portfolios).

MANAGEMENT AND ADVISORY ARRANGEMENTS

The Corporation on behalf of each Fund has entered into an investment
advisory agreement with Mercury International as Investment Adviser (each, an
"Advisory Agreement"). As discussed in "The Management Team" in the Prospectus,
the Investment Adviser receives for its services to the Mercury V.I. U.S. Large
Cap Fund monthly compensation at the annual rate of 0.65% of the average daily
net assets of the Mercury V.I. U.S. Large Cap Fund. The Investment Adviser has
agreed to limit the annual operating expenses of the Mercury V.I. U.S. Large Cap
Fund to 1.25% and 1.40% of the Mercury V.I. U.S. Large Cap Fund's average net
assets with respect to the Class A shares and Class B shares, respectively.
These expense limits will be in place through April 2000.

Each Advisory Agreement obligates the Investment Adviser to provide
investment advisory services and to pay, or cause its affiliate to pay, for
maintaining its staff and personnel and to provide office space, facilities

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<PAGE> 4

and necessary personnel for the Corporation. The Investment Adviser is also
obligated to pay, or cause its affiliate to pay, the fees of all Officers and
Directors who are affiliated persons of the Investment Adviser or any
sub-adviser or of an affiliate of the Investment Adviser or any sub-adviser. The
Corporation pays, or causes to be paid, all other expenses incurred in the
operation of each Fund and the Corporation (except to the extent paid by
Participating Insurance Companies), including, among other things, taxes,
expenses for legal and auditing services, costs of printing proxies, shareholder
reports, copies of the Registration Statement, charges of the Custodian, any
Sub-custodian and Financial Data Services, Inc. (the "Transfer Agent"), expenses
of portfolio transactions, expenses of redemption of shares, Commission fees,
expenses of registering the shares under federal, state or non-U.S. laws, fees
and actual out-of-pocket expenses of Directors who are not affiliated persons of
the Investment Adviser or any sub-adviser, or of an affiliate of the Investment
Adviser or of any sub-adviser, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Corporation or any Fund. The Participating Insurance
Companies will pay certain of the expenses of a Fund incurred in connection with
the continuous offering of its shares. Accounting services are provided to the
Corporation by the Investment Adviser or an affiliate of the Investment Adviser,
and the Corporation reimburses the Investment Adviser or an affiliate of the
Investment Adviser for its costs in connection with such services.

Securities held by a Fund of the Corporation may also be held by, or be
appropriate investments for, other funds or investment advisory clients for
which the Investment Adviser 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 of the Investment Adviser or an affiliate when one or more
clients of the Investment Adviser or an affiliate are selling the same security.
If purchases or sales of securities arise for consideration at or about the same
time that would involve a Fund or other clients or funds for which the
Investment Adviser or an affiliate acts as manager, 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 Investment Adviser or an affiliate 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.

Mercury International is located at 33 King William Street, London EC4R
9AS, England. Mercury International's intermediate parent company is Mercury
Asset Management Group Ltd., a London-based holding company of a group engaged
in the provision of investment management and advisory services globally. The
ultimate parent of Mercury Asset Management Group Ltd. is ML & Co., a financial
services holding company. ML & Co. is a "controlling person" of Mercury
International as defined under the Investment Company Act because of its power
to exercise a controlling influence over its management or policies.

The Corporation has entered into sub-advisory agreements (each, a
"Sub-Advisory Agreement") with FAM with respect to each Fund, pursuant to which
FAM provides investment advisory services with respect to all or a portion of
each Fund's daily cash assets. The Corporation has agreed to use its reasonable
best efforts to cause the Investment Adviser to pay to FAM a fee in an amount to
be determined from time to time by the Investment Adviser and FAM but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Corporation and the Funds pursuant to the Advisory
Agreements.

The Investment Adviser has entered into administrative services agreements
with certain Participating Insurance Companies, including Participating
Insurance Companies that may be affiliates of the Investment Adviser, pursuant
to which the Investment Adviser compensates such Participating Insurance
Companies for administrative responsibilities relating to the Corporation which
are performed by such Participating Insurance Companies.

FAM is located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
FAM, an affiliate of Mercury International, is a wholly owned subsidiary of ML &
Co., a financial services holding company and the parent of Merrill Lynch. ML &
Co. and Princeton Services, the partners of FAM, are "controlling persons" of
FAM

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<PAGE> 5

as defined under the Investment Company Act because of their power to exercise a
controlling influence over its management or policies.

Duration and Termination. Unless earlier terminated as described below,
each Advisory Agreement and Sub-Advisory Agreement will each remain in effect
for two years from its effective date. Thereafter, they will remain in effect
from year to year if approved annually (a) by the Board of Directors or by a
majority of the outstanding shares of a 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 contract is not
assignable and may be terminated with respect to any Fund without penalty on 60
days' written notice at the option of either party thereto or by the vote of the
shareholders of that Fund.

CODE OF ETHICS

The Board of Directors of the Corporation, the Investment Adviser, and FAM
have each adopted a Code of Ethics under Rule 17j-1 of the Investment Company
Act (together the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and FAM and, as
described below, impose additional, more onerous, restrictions on fund
investment personnel. Among other substantive restrictions, the Codes contain
reporting and preclearance requirements for employees of the Investment Adviser
and FAM and provide for trading "blackout periods" that prohibit trading by
decision making access persons (those who recommend or determine which
securities transactions the Corporation undertakes) of the Corporation within
periods of trading by the Corporation in the same (or equivalent) security.

PURCHASE OF SHARES

Reference is made to "Account Choices -- Fund Shares" in the Appendix to
the Prospectus for certain information as to the purchase of Fund shares.

Each Fund offers two classes of shares, Class A and Class B. The
Participating Insurance Company decides which share class will support a
Contract. Each Class A and Class B share of a Fund represents an identical
interest in the investment portfolio of that Fund, and has the same rights,
except that Class B shares bear the expenses of the ongoing distribution fees
and Class B shares have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which the
distribution fees are paid.

The Funds do not offer their shares to the general public. Only separate
accounts established by Participating Insurance Companies can buy Fund shares.
Each Fund's investment adviser is affiliated with two Participating Insurance
Companies. Participating Insurance Companies issue Contracts and use Fund shares
to support these Contracts. When this Statement of Additional Information refers
to Fund shareholders, it is referring to the Participating Insurance Companies.

Contract owners have certain rights under their Contract, but do not have
any direct interest in Fund shares. A separate prospectus describes the Contract
and its additional fees and charges. It also describes how changes in a Fund's
net asset value and distributions on Fund shares affect benefits under a
Contract.

Mercury Funds Distributor, a division of Princeton Funds Distributor, Inc.
("MFD" or the "Distributor"), an affiliate of the Investment Adviser and of
Merrill Lynch, with offices at 800 Scudders Mill Road, Plainsboro, New Jersey
08536 (mailing address: P. O. Box 9081, Princeton, New Jersey 08543-9081) acts
as Distributor for each Fund.

DISTRIBUTION AGREEMENTS

The Corporation has entered into distribution agreements (each, a
"Distribution Agreement") with the Distributor with respect to the sale of the
Corporation's shares to the Distributor for resale to Participating Insurance
Companies' separate accounts. Such shares will be sold at their respective net
asset values and therefore will involve no sales charge. The Distributor is an
affiliate of the Investment Adviser.

Each Distribution Agreement is subject to the same renewal requirements and
termination provisions as the Advisory Agreements described above.

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<PAGE> 6

DISTRIBUTION PLANS

Reference is made to "Account Choices -- Fund Shares" in the Appendix to
the Prospectus for certain information with respect to the distribution plan for
Class B shares pursuant to Rule 12b-1, under the Investment Company Act, of a
Fund (each a "Distribution Plan") with respect to the distribution fees paid by
each Fund with respect to such class.

Each Distribution Plan permits the Corporation to pay to each Participating
Insurance Company that enters into an agreement with the Corporation to provide
distribution related services to Contract owners, a distribution fee relating to
the Class B shares accrued daily and paid monthly, at the annual rate of 0.15%
of the average daily net assets of the Class B shares of each Fund held by such
Participating Insurance Company. Such services include, but are not limited to,
(a) the printing and mailing of Fund prospectuses, statements of additional
information, any supplements thereto and shareholder reports for prospective
Contract owners, (b) services relating to the development, preparation, printing
and mailing of Corporation advertisements, sales literature and other
promotional materials describing and/or relating to the Corporation and
including materials intended for use within the Participating Insurance Company
or for broker-dealer only use or retail use, (c) holding seminars and sales
meetings designed to promote the distribution of the Class B shares of the
Funds, (d) obtaining information and providing explanations to Contract owners
regarding the investment objectives and policies and other information about the
Corporation and its Funds, including the performance of the Funds, (e) training
sales personnel regarding the Corporation and the Funds, (f) compensating sales
personnel in connection with the allocation of cash values and premiums of the
Contract owners to the Corporation, (g) providing personal services and/or
maintenance of the accounts of the Contract owners with respect to Class B
shares of the Funds attributable to such accounts, and (h) financing any other
activity that the Corporation's Board of Directors determines is primarily
intended to result in the sale of Class B shares.

A Fund has no obligation with respect to distribution related expenses
incurred by the Distributor or Participating Insurance Companies in connection
with the Class B shares, and there is no assurance that the Directors of the
Corporation 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 distribution of each Fund's Class B shares separately.

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 each Fund and its Class B 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 such 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 reasonable
likelihood that such Distribution Plan will benefit the applicable Fund and its
Class B 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 Class B shares of the
applicable Fund. A Distribution Plan cannot be amended to increase materially
the amount to be spent by a Fund without the approval of the related Class B
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.

The Corporation may reject any order to buy shares and may suspend the
offering of its shares at any time.

A-6
<PAGE> 7

REDEMPTION OF SHARES

The Corporation is required to redeem for cash all shares of a Fund upon
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. The value of shares at the time of redemption may be more or less
than their cost, depending on the net asset value of a Fund's shares at such
time.

The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or during which 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 a Fund is not
reasonably practicable, and for such other periods as the Commission may by
order permit for the protection of shareholders of that Fund.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Investment Adviser is responsible for making each Fund's portfolio
decisions, placing that Fund's brokerage business, evaluating the reasonableness
of brokerage commissions and negotiating the amount of any commissions paid
subject to a policy established by the Corporation's Directors and officers. The
Corporation has no obligation to deal with any broker or group of brokers in the
execution of transactions in portfolio securities. Orders for transactions in
portfolio securities are placed for the Corporation with a number of brokers and
dealers, including affiliates of the Investment Adviser. In placing orders, it
is the policy of the Corporation to obtain the most favorable net results,
taking into account various factors, including price, commissions, if any, size
of the transaction and difficulty of execution. Where applicable, the Investment
Adviser surveys a number of brokers and dealers in connection with proposed
portfolio transactions and selects the broker or dealer that offers the
Corporation the best price and execution or other services that are of benefit
to the Corporation.

Brokers who provide supplemental investment research to the Investment
Adviser may receive orders for transactions by the Corporation. 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 Investment Adviser under each Advisory Agreement. If in the
judgment of the Investment Adviser the Corporation will be benefited by
supplemental research services, the Investment Adviser is authorized to pay
brokerage commissions to a broker furnishing such services in excess of
commissions that another broker may have charged for effecting the same
transaction. The expenses of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental information, and the
Investment Adviser may use such information in servicing its other accounts.

The Corporation invests in certain securities traded in the
over-the-counter market and, where possible, deals directly with 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 Corporation are prohibited from dealing
with the Corporation as principal in purchase and sale of securities. Since
transactions in the over-the-counter market usually involve transactions with
dealers acting as principal for their own accounts, affiliated persons of the
Corporation, including Merrill Lynch, will not serve as the Corporation's dealer
in such transactions. However, affiliated persons of the Corporation may serve
as its broker in over-the-counter transactions conducted on an agency basis.

Pursuant to Section 11(a) of the Securities Exchange Act of 1934, as
amended, Merrill Lynch may execute transactions for the Corporation on the floor
of any U.S. national securities exchange provided that prior authorization of
such transactions is obtained and Merrill Lynch furnishes a statement to the
Corporation at least annually setting forth the compensation it has received in
connection with such transactions.

A-7
<PAGE> 8

The Directors of the Corporation have considered the possibility of
recapturing for the benefit of the Corporation brokerage commissions, dealer
spreads and other expenses of possible portfolio transactions, such as
underwriting commissions, by conducting such portfolio transactions through
affiliated entities, including Merrill Lynch. For example, brokerage commissions
received by Merrill Lynch could be offset against the management fee paid by the
Corporation to the Investment Adviser. After considering all factors deemed
relevant, the Directors made a determination not to seek such recapture. The
Directors will reconsider this matter from time to time.

The portfolio turnover rate is calculated by dividing the lesser of a
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 the securities in the portfolio during
the year. The portfolio turnover rate is generally anticipated to be under 100%.
A high rate of portfolio turnover results in correspondingly higher brokerage
commission expenses.

DETERMINATION OF NET ASSET VALUE

Reference is made to "How Shares are Priced" in the Appendix to the
Prospectus concerning the determination of net asset value.

The net asset value of the shares of a Fund is determined once daily Monday
through Friday as of 15 minutes after the close of business on the NYSE on each
day the NYSE is open for trading (a "Pricing Day"). The close of business on the
NYSE is generally 4:00 p.m., Eastern time. 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 NYSE is not open for trading on New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value is computed by dividing the value of the securities held by a 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 fees payable to the
Participating Insurance Companies, and the advisory fees payable by each Fund to
the Investment Adviser, are accrued daily.

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. Securities traded in the OTC
market are valued at the last available bid 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. Short positions in securities traded on the OTC market
are valued at the last available ask price in the OTC market prior to the time
of valuation. When a Fund writes a call option, the amount of the premium
received is recorded on the books of that 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 a 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. Other investments,
including financial futures contracts and related options, are stated at market
value. Securities and assets for which market quotations are not readily
available are generally valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Corporation. Such
valuations and procedures will be reviewed periodically by the Board of
Directors.

Generally, trading in non-U.S. 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 each 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
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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 a
Fund's net asset value.

DIVIDENDS AND TAXES

DIVIDENDS

Reference is made to "Dividends, Capital Gains and Taxes" in the Appendix
to the Prospectus.

Each Fund intends to distribute 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 each Fund's
shareholders annually. From time to time, a Fund may declare a special dividend
at or about the end of the calendar year in order to comply with a Federal
income tax requirement that certain percentages of its ordinary income and
capital gains be distributed during the calendar year. Dividends and
distributions of a Fund will be automatically reinvested in shares of that Fund
at net asset value.

TAXES

Each Fund is treated as a separate entity for federal income tax purposes
and intends to qualify for and elect the special tax treatment afforded
regulated investment companies ("RICs") under the Internal Revenue Code of 1986,
as amended (the "Code"). As long as a Fund so qualifies, that 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
shareholders. Each Fund intends to distribute substantially all of such income.
To qualify for this treatment, each Fund must, among other things, (a) derive at
least 90% of its gross income (without offset for losses from the sale or other
disposition of securities or foreign currencies) from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of securities or foreign currencies and certain financial futures,
options and forward contracts; and (b) diversify its holdings so that, at the
end of each quarter of the taxable year, (i) at least 50% of the value of its
assets is represented by cash, U.S. Government securities and other securities
limited in respect of any one issuer to an amount no greater than 5% of its
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its assets is invested in the securities of any
one issuer (other than U.S. Government securities). If any Fund should fail to
qualify as a RIC in any year, then that Fund would incur corporate federal
income tax upon its taxable income for that year (with no deduction for
distributions to shareholders), and its distributions will generally be taxable
as ordinary dividend income to its shareholders, and each Participating
Insurance Company separate account invested therein would fail to satisfy the
diversification requirements of section 817(h) of the Code (see below), with the
result that the variable life insurance and/or variable annuity contracts
supported by that account would no longer be eligible for tax deferral.

In addition to satisfying the diversification requirements applicable to
RICs, each Fund intends to diversify its assets as required by section 817(h) of
the Code and the regulations thereunder. These regulations place certain
limitations both on the investments of the Fund and on the type of Fund
shareholders. If a Fund fails to comply with these requirements, Contracts that
invest in the Fund will not be entitled to the favorable treatment granted to
annuity, endowment or life insurance contracts under the Code.

Dividends paid by a Fund from its ordinary income and distributions of a
Fund's net realized capital gains are includable in the respective Participating
Insurance Company's gross income. Distributions of a Fund's net realized
long-term capital gains retain their character as long-term capital gains in the
hands of the Participating Insurance Companies if certain requirements are met.
The tax treatment of such dividends and distributions depends on the respective
Participating Insurance Company's tax status. To the extent that income of the
Corporation represents dividends on common or preferred stock, rather than
interest income, its distributions to the Participating Insurance Companies will
be eligible for the present 70% dividends received deduction applicable in the
case of a life insurance company as provided in the Code. See the separate
prospectus for the Contracts for a description of the respective Participating
Insurance Company's tax status and the charges which may be made to cover any
taxes attributable to the separate account. Not later than 60
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<PAGE> 10

days after the end of each calendar year, the Corporation will send to the
Participating Insurance Companies a written notice required by the Code
designating the amount and character of any distributions made during such year.
------------------------

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and the 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 or administrative action either
prospectively or retroactively.

For information regarding the federal income tax treatment of a Contract
and distributions to the separate accounts of the Participating Insurance
Companies, see the separate prospectus for the Contracts.

PERFORMANCE DATA

From time to time a Fund may include its average annual total return and
other total return data in advertisements or information furnished to present or
prospective Contract owners. Total return is based on a Fund's historical
performance and is not intended to indicate future performance. Average annual
total return is determined separately for Class A and Class B shares in
accordance with a formula 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 and distributions
are reinvested and taking into account all applicable recurring and nonrecurring
expenses. The total return quotations may be of limited use for comparative
purposes because they will not reflect charges imposed on the Contracts by the
Participating Insurance Companies, which, if included, would decrease total
return.

A 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 (1) as required by the periods of the quotations, actual annual,
annualized or aggregate data, rather than average annual data, may be quoted and
(2) the maximum applicable sales charges will not be included. Actual annual or
annualized total return data generally will be lower than average annual total
return data since the average rates of return reflect compounding of return;
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.

On occasion, a Fund may compare its performance to, among other things, the
Standard & Poor's 500 Index, the Value Line Composite Index, the Dow Jones
Industrial Average, the MSCI Europe (if applicable) or other published indices,
or to data contained in publications such as Lipper Analytical Services, Inc.,
Morningstar Publications, Inc. ("Morningstar"), other competing universes, Money
Magazine, U.S. News & World Report, Business Week, Forbes Magazine, Fortune
Magazine and CDA Investment Technology, Inc. When comparing its performance to a
market index, a Fund may refer to various statistical measures derived from the
historic performance of that Fund and the index, such as standard deviation and
beta. As with other performance data, performance comparisons should not be
considered reflective of a Fund's relative performance for any future period.
From time to time, a Fund may include its Morningstar risk-adjusted performance
rating in advertisements or supplemental sales literature. A Fund may from time
to time quote in advertisement or other materials other applicable measures of
performance and may also make references to awards that may be given to the
Investment Adviser.

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GENERAL INFORMATION

INDEPENDENT AUDITORS

Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of each Fund. The independent auditors
are responsible for auditing the annual financial statements of the Fund.

CUSTODIAN

Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts
02109, acts as the Custodian of each Fund's assets. Under its contract with the
Funds, the Custodian is authorized to establish separate accounts in foreign
currencies and to cause foreign securities owned by each Fund to be held in its
offices outside the United States and with certain foreign banks and securities
depositories. The custodian is responsible for safeguarding and controlling each
Fund's cash and securities, handling the receipt and delivery of securities and
collecting interest and dividends on each Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, which is a wholly owned subsidiary of ML & Co., acts as each
Fund's Transfer Agent pursuant to a transfer agency, dividend disbursing agency
and shareholder servicing agency agreement (the "Transfer Agency Agreement").
The Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening, maintenance and servicing of shareholder accounts.

LEGAL COUNSEL

Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, New York
10022, is counsel for the Funds.

REPORTS TO SHAREHOLDERS

Each Fund sends to its shareholders at least semi-annually reports showing
that 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 Corporation has filed with the Commission,
Washington, D.C., under the Securities Act and the Investment Company Act, to
which reference is hereby made.
------------------------

A-11
<PAGE> 12

ANNEX A

INVESTMENT POLICIES INVOLVING THE USE OF INDEXED
SECURITIES, OPTIONS, FUTURES, SWAPS AND FOREIGN EXCHANGE

Each Fund is authorized to use certain derivative instruments, including
indexed and inverse securities, options, futures, and swaps, and to purchase and
sell foreign exchange, as described below. Such instruments are referred to
collectively herein as "Strategic Instruments."

Although certain risks are involved in options and futures transactions (as
defined below in "Risk Factors in Options, Futures and Currency Instruments"),
the Investment Adviser believes that, because each Fund will generally engage in
these transactions, if at all, for hedging purposes, including anticipatory
hedges (other than options on securities that may be used to seek increased
return), the options and futures portfolio strategies of a Fund will not subject
that Fund to the risks frequently associated with the speculative use of options
and futures transactions. While a Fund's use of hedging strategies is intended
to reduce the volatility of the net asset value of Fund shares, that Fund's net
asset value will fluctuate. There can be no assurance that a Fund's hedging
transactions will be effective. Furthermore, each Fund will engage in hedging
activities, if at all, only from time to time and may not necessarily be
engaging in hedging activities when movements in the equity markets, interest
rates or currency exchange rates occur. A Fund is not required to engage in
hedging transactions and may choose not to do so.

INDEXED AND INVERSE SECURITIES

A Fund may invest in securities the potential return of which is based on
the change in particular measurements of value or rate, including interest rates
(an "index"). As an illustration, a 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 interest rate or based on the relative
changes of two indices. In addition, a Fund may invest in securities the
potential return of which is based inversely on the change in an index. For
example, a 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 a 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. Furthermore, where such a security includes a contingent liability, in
the event of such an adverse movement, a Fund may be required to pay substantial
additional margin to maintain the position.

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.
Each Fund believes that indexed and inverse securities may provide portfolio
management flexibility that permits a 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.

OPTIONS ON SECURITIES AND SECURITIES INDICES

Purchasing Options. Each Fund is authorized to purchase put options on
equity securities held in its portfolio or securities indices the performance of
which is substantially replicated by securities held in its portfolio. When a
Fund purchases a put option, in consideration for an upfront payment (the
"option premium") that 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 a 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. If the market value of the portfolio holdings
associated with the put option increases rather than decreases, however, a 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.

Annex A-1
<PAGE> 13

Each Fund is also authorized to purchase call options on securities it
intends to purchase or securities indices the performance of which substantially
replicates the performance of the types of securities it intends to purchase.
When a Fund purchases a call option, in consideration for the option premium
that 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 a 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 a Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event a Fund determines not to purchase a
security underlying a call option, however, that Fund may lose the entire option
premium.

Each Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.

Writing Options. Each 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 replicated by securities held in its
portfolio. When a Fund writes a call option, in return for an option premium
that Fund is legally obligated to sell specified securities owned by the Fund at
the exercise price on or before the expiration date, in the case of an option on
securities, or 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, however much the exercise
price exceeds the market price. Each Fund may write call options to earn income,
through the receipt of option premiums. In the event the party to which a 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, that Fund
will partially offset any decline in the value of the underlying securities
through the receipt of the option premium. By writing a call option, however, a
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.

Each Fund may also write put options on securities or securities indices.
When a Fund writes a put option, in return for an option premium that 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 based 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. Each Fund may write put options to
earn income, through the receipt of option premiums. In the event the party to
which a 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, that Fund will profit by the amount of the option premium. By writing a
put option, however, a 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, in the case of an
option on a security, or make a cash payment reflecting any decline in the
index, in the case of an option on an index. Accordingly, when a 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. A Fund will write a put option on a security or a
securities index only if the Fund would be willing to purchase the security at
the exercise price for investment purposes (in the case of an option on a
security) 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").

Each Fund is also authorized to sell put or call options in connection with
closing out call or put options it has previously purchased.

Other than with respect to closing transactions, each Fund will write only
call or put options that are "covered." A put option will be considered covered
if a Fund has segregated assets with respect to such option

Annex A-2
<PAGE> 14

in the manner described in "Risk Factors in Options, Futures and Currency
Instruments" below. A call option will be considered covered if a 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 that substantially
correlate with the performance of such index) or owns a call option, warrant or
convertible instrument that is immediately exercisable for, or convertible into,
such security.

Types of Options. Each 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 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 Instruments" below.

FUTURES

Each Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts that 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. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract a Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value with the Futures
Commission Merchants (the "FCM") effecting the Fund's exchanges or in a
third-party account with that Fund's Custodian. Each day thereafter until the
futures position is closed, a 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. Whether the margin is deposited with the FCM or
with the Custodian, the margin may be deemed to be in the FCM's custody, and,
consequently, in the event of default due to the FCM's bankruptcy, the margin
may be subject to pro rata treatment as the FCM's assets, which could result in
potential losses to a Fund and its shareholders. Even if a transaction is
profitable, a Fund may not get back the same assets which were deposited as
margin or may receive payment in cash.

The sale of a futures contract limits a Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the future's contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, a 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 may protect a Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when that Fund was attempting to identify specific
securities in which to invest in a market that Fund believes to be attractive.
In the event that such securities decline in value or that Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, that Fund may realize a loss relating to the futures position.

Each Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying commodity
is a currency or securities or interest rate index) purchased or sold for
hedging purposes (including anticipatory hedges). Each Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent that Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission. A Fund will only engage in futures and
options transactions from time to time. A Fund is under no obligation to use
such transactions and may choose not to do so.

SWAPS

Each Fund is authorized to enter into equity swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a fixed or
variable interest rate or the change in market value of a different equity
security, basket of equity securities or equity index.

Annex A-3
<PAGE> 15

Swap agreements may be used to obtain exposure to an equity or market without
owning or taking physical custody of securities.

Each Fund will enter into a swap transaction only if, immediately following
the time that Fund enters into the transaction, the aggregate notional principal
amount of swap transactions to which that Fund is a party would not exceed 5% of
the Fund's net assets.

FOREIGN EXCHANGE TRANSACTIONS

Each 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 purposes 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.
Each Fund will enter into foreign exchange transactions only for purposes of
hedging either a specific transaction or a portfolio position. A 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 at a future date or selling a currency in which that Fund has
received or anticipates receiving a dividend or distribution. A 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 that Fund is
denominated or by purchasing a currency in which the Fund anticipates acquiring
a portfolio position in the near future. A 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.

Each 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.

Each 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. A 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"). A Fund will only enter into a
cross-hedge if the Investment Adviser 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.

A Fund will not speculate in Currency Instruments. Accordingly, no Fund
will hedge a currency in excess of the aggregate market value of the securities
that it owns (including receivables for unsettled securities sales), or has
committed to or anticipates purchasing, which are denominated in such currency.

Risk Factors in Hedging Foreign Currency Risks. While each Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of a Fund's shares, the net asset value of
each 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 may not be accurately predicted and a Fund's hedging strategies may be
ineffective. To the extent that a Fund hedges against anticipated currency
movements that do not occur, that Fund may realize losses, and decrease its
total return, as the result of its hedging transactions. Furthermore, a 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 a Fund to

Annex A-4
<PAGE> 16

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 a 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 or in which their
availability is limited (such as certain emerging markets) and it is not
possible to engage in effective foreign currency hedging.

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, a Fund
will experience a gain or loss that will not be completely offset by movements
in the value of the hedged instruments.

Each Fund intends to enter into 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 a Fund
will otherwise be able to sell such instrument at an acceptable price.
Therefore, it may 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 a
Fund to potential losses that exceed the amount originally invested by that Fund
in such instruments. When a Fund engages in such a transaction, that 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 Commission). Such
segregation will ensure that a Fund has assets available to satisfy its
obligations with respect to the transactions, 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 indexed
securities, swaps and 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 a 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. Each 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 Investment Adviser
anticipates a 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 Commission has taken the position that purchased OTC
options and the assets underlying written OTC options are illiquid securities.
Each Fund has therefore adopted an investment policy pursuant to which no Fund
will 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 that are held by a Fund, the market value of the
securities underlying OTC call options currently outstanding that have been sold
by that 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 that are deemed to be illiquid or are otherwise not
readily marketable. However, if an OTC option is sold by a 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 that Fund will treat
as illiquid such amount of the underlying securities as 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).

Annex A-5
<PAGE> 17

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 a Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty, that Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
Each Fund will attempt to minimize the risk that a counterparty will default by
engaging in transactions in Strategic Instruments traded in OTC markets only
with financial institutions that have a credit rating of AA- or better from
Standard & Poor's, Aa3 or better from Moody's, or AA or better from Fitch.

ADDITIONAL LIMITATIONS ON THE USE OF STRATEGIC INSTRUMENTS

No Fund may use any Strategic Instrument to gain exposure to an asset or
class of assets that it would be prohibited by its investment restrictions from
purchasing directly.

Annex A-6
<PAGE> 18

ANNEX B

RATINGS OF FIXED INCOME SECURITIES

DESCRIPTION OF MOODY'S INVESTORS SERVICES, INC.'S CORPORATE DEBT RATINGS

<TABLE>
<S> <C>
Aaa Bonds that 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 edge." 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 that 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 that make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds that 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 that suggest a susceptibility to impairment sometime
in the future.
Baa Bonds that 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 that 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 therefore not well safeguarded during
both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of
desirable investments. 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 that 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 that are rated Ca represent obligations that are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds that are rated C are the lowest rated bonds, and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
</TABLE>

Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
classification from Aa through B in its corporate bond rating system. 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 category.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act, as
amended.

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act, nor does it represent that
any specific

Annex B-1
<PAGE> 19

note is a valid obligation of a rated issuer or issued in conformity with any
applicable law. Moody's employs the following three designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:

Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:

- Leading market positions in well-established industries

- High rates of return on funds employed

- Conservative capitalization structures with moderate reliance on
debt and ample asset protection

- Broad margins in earnings coverage of fixed financial charges and
higher internal cash generation

- Well established access to a range of financial markets and assured
sources of alternate liquidity

Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory 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, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.

Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternative liquidity is maintained.

Issuers rated Not Prime do not fall within any of the Prime rating
categories.

If an issuer represents to Moody's that its commercial paper 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 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 indicated 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. You are cautioned
to review with your counsel any questions regarding particular support
arrangements.

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 being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stocks occupy a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.

Annex B-2
<PAGE> 20

Preferred stock rating symbols and their definitions are as follows:

<TABLE>
<S> <C>
aaa An issue that 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 that is rated "aa" is considered a high-grade
preferred stock. This rating indicates that there is
reasonable assurance that earnings and asset protection will
remain relatively well maintained in the foreseeable future.
a An issue that 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 protection are,
nevertheless, expected to be maintained at adequate levels.
baa An issue that is rated "baa" is considered to be medium
grade, 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 that 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 that 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 that 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 that is rated "ca" is speculative in a high degree
and is likely to be in arrears on dividends with little
likelihood of eventual payment.
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.
</TABLE>

Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. 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 CORPORATE DEBT RATINGS

A Standard & Poor's corporate or municipal rating is a current assessment
of the creditworthiness of an obligor with respect to a specific obligation.
This assessment may take into consideration obligers such as guarantors,
insurers, or lessees.

The debt 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 information furnished 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 for other reasons.

The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection

Annex B-3
<PAGE> 21

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.

<TABLE>
<S> <C>
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest-rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated
categories.
</TABLE>

Debt rated BB, B, CCC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

<TABLE>
<S> <C>
BB Debt rated BB has less near-term vulnerability to default
than other speculative grade debt. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial or economic conditions that could lead to
inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B Debt rated B has a greater vulnerability to default but
presently has the capacity to meet interest payments and
principal repayments. Adverse business, financial or
economic conditions would likely impair capacity or
willingness to pay interest or repay principal. The B rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to
default, and is dependent upon favorable business, financial
and economic conditions to meet timely payments of interest
and repayments of principal. In the event of adverse
business, financial or economic conditions, it is not likely
to have the capacity to pay interest and repay principal.
The CCC rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied B or B-
rating.
CC The rating CC is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC
rating.
C The rating C is typically applied to debt subordinated to
senior debt that is assigned an actual or implied CCC- debt
rating. The C rating may be used to cover a situation where
a bankruptcy petition has been filed but debt service
payments are continued.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in default. The D rating is assigned on the
day an interest or principal payment is missed. The D rating
also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
</TABLE>

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
ratings categories.

Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no

Annex B-4
<PAGE> 22

comment on the likelihood or risk of default upon failure of such completion.
The investor should exercise judgment with respect to such likelihood and risk.

<TABLE>
<S> <C>
L The letter "L" indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is insured by the Federal
Savings & Loan Insurance Corp. or the Federal Deposit
Insurance Corp. and interest is adequately collateralized.
* Continuance of the rating is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement
or closing documentation confirming investments and cash
flows.
NR 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.
</TABLE>

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) are generally regarded as eligible for bank investment. In addition,
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 generally.

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 four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:

<TABLE>
<S> <C>
A Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are delineated with the numbers 1, 2 and 3 to
indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat
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 adequate
capacity for timely payment. However, such capacity may be
damaged by changing conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
D This rating indicates that the issue is either in default or
is expected to be in default upon maturity.
</TABLE>

The commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.

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 issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will

Annex B-5
<PAGE> 23

normally not be higher than the bond rating symbol assigned to, or that would be
assigned to, the senior debt of the same issuer.

The preferred stock ratings are based on the following considerations:

<TABLE>
<S> <C>
I. 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.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements 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, Preferred stock rated "BB," "B," and "CCC" are regarded, on
B, balance, as predominantly speculative with respect to the
CCC issuer's capacity to pay preferred stock obligations. "BB"
indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely
have some quality and protection 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 in default
on debt instruments.
</TABLE>

NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P 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 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.

The preferred stock ratings are not a recommendation to purchase or sell a
security, inasmuch as market price is not considered in arriving at the rating.
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, and obtained by Standard & Poor's from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information.

DESCRIPTION OF FITCH IBCA, INC.'S ("FITCH") INVESTMENT GRADE BOND RATINGS

Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.

Annex B-6
<PAGE> 24

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.

Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.

Bonds carrying the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.

Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.

Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.

<TABLE>
<S> <C>
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+."
A Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
</TABLE>

Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.

<TABLE>
<S> <C>
NR Indicates that Fitch does not rate the specific issue.
CONDITIONAL A conditional rating is premised on the successful
completion of a project or the occurrence of a specific
event.
SUSPENDED A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for
rating purposes.
WITHDRAWN A rating will be withdrawn when an issue matures or is
called or refinanced and, at Fitch's discretion, when an
issuer fails to furnish proper and timely information.
FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated as
"Positive" indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be
raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
</TABLE>

Annex B-7
<PAGE> 25

Ratings Outlook: An outlook is used to describe the most likely direction
of any rating change over the intermediate term. It is described as "Positive"
or "Negative." The absence of a designation indicates a stable outlook.

DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS

Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.

Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.

<TABLE>
<S> <C>
BB Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time
by adverse economic changes. However, business and financial
alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds have certain identifiable characteristics which, if
not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or
principal.
DDD Bonds are in default on interest and/or principal payments.
DD Such bonds are extremely speculative and should be valued on
D the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
</TABLE>

PLUS (+) or MINUS (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD," "DD," or "D" categories.

DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS

Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.

The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.

Fitch short-term ratings are as follows:

<TABLE>
<S> <C>
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+."
</TABLE>

Annex B-8
<PAGE> 26
<TABLE>
<S> <C>
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned
"F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below
investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D Default. Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.
</TABLE>

Annex B-9

<PAGE> 41

PART C. OTHER INFORMATION

ITEM 23. EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
1(a) -- Articles of Incorporation of Registrant.(1)
1(b) -- Amended Articles of Incorporation of Registrant.(3)
2 -- By-Laws of Registrant.(1)
3 -- Instrument Defining Rights of Shareholders. Incorporated by
reference to Exhibits 1 and 2 above.
4(a) -- Form of Investment Advisory Agreement between Registrant and
Mercury Asset Management International Ltd.(3)
4(b) -- Form of Sub-Advisory Agreement between Registrant and Fund
Asset Management, L.P.(3)
5(a) -- Form of Class A Distribution Agreement between Registrant
and Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc.(3)
5(b) -- Form of Class B Distribution Agreement between Registrant
and Mercury Funds Distributor, a division of Princeton Funds
Distributor, Inc.(3)
6 -- Not Applicable.
7 -- Form of Custody Agreement between Registrant and Brown
Brothers Harriman & Co.(3)
8(a) -- Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between Registrant
and Financial Data Services, Inc.(3)
8(b) -- Form of License Agreement relating to Use of Name among
Mercury Asset Management International Ltd., Mercury Asset
Management Group Ltd. and Mercury Funds Distributor, a
division of Princeton Funds Distributor, Inc.(2)
8(c) -- Form of License Agreement relating to Use of Name among
Mercury Asset Management International Ltd., Mercury Asset
Management Group Ltd. and Registrant.(3)
8(d) -- Form of Participation Agreement between Registrant and a
participating insurance company.(3)
8(e) -- Form of Expense Cap Agreement between Mercury Asset
Management International, Ltd. and Registrant. (3)
9 -- Opinion and consent of Swidler Berlin Shereff Friedman, LLP,
counsel for Registrant.(3)
10 -- Consent of Deloitte & Touche, LLP, independent auditors for
the Registrant.
11 -- Not Applicable.
12 -- Not Applicable.
13 -- Form of Class B Distribution Plan and Class B Plan
Sub-Agreement.(3)
14 -- Not Applicable.
15(a) -- Rule 18f-3 Plan.(3)
15(b) -- Power of Attorney.(3)
</TABLE>

- ---------------

(1) Incorporated by reference to identically numbered exhibit to Registrant's
initial Registration Statement on Form N-1A (File No. 333-68879).

(2) Incorporated by reference to Exhibit No. 8(c) to Pre-Effective Amendment No.
1 of Mercury Pan-European Growth Fund of Mercury Asset Management Funds,
Inc.'s Registration Statement on Form N-1A (File No. 333-56205).

(3) Incorporated by reference to identically numbered exhibit to Pre-Effective
Amendment No. 1 of Registrant's Registration Statement on Form N-1A (File
No. 333-68879).

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

The Registrant has sold shares of its series, Mercury V.I. U.S. Large Cap
Fund to Merrill Lynch Life Insurance Company ("MLLIC"). Except that all of the
Registrant's shares will be held by separate accounts of participating insurance
companies, the Registrant is not controlled by or under common control with any
other person.

ITEM 25. INDEMNIFICATION.

Reference is made to Article V of Registrant's Articles of Incorporation,
Article VI of Registrant's By-Laws and Section 2-418 of the Maryland General
Corporation Law.

C-1
<PAGE> 42

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 Maryland General Corporation Law, 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 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 by special legal counsel in a written opinion or the vote of a
quorum of the Directors who are neither "interested persons," as defined in
Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties
to the proceeding ("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 Maryland General Corporation Law without a preliminary
determination as to his or her ultimate entitlement to indemnification (except
as set forth below); 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 8 of the Distribution Agreement 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, as amended (the "Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus
and Statement of Additional Information.

Insofar as indemnification for liabilities arising under the 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 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

C-2
<PAGE> 43

precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

Set forth below is a list of each executive officer and partner of the
adviser indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
January 1997 for his own account or in the capacity of director, officer,
partner or trustee.

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH ADVISER PROFESSION, VOCATION OR EMPLOYMENT
---- ---------------------- ----------------------------------
<S> <C> <C>
Peter John Gibbs.......................... Chairman Director of Mercury Asset
Management Ltd.; and Director of
Mercury Asset Management
International Channel Islands Ltd.
Carol Consuelo Brooke..................... Deputy Chairman Director of Mercury Asset
Management Ltd.
David Morris Fitzgerald Scott............. Director Director of Corporation of St.
Lawrence College
Debra Ann Searle.......................... Secretary None
John Eric Nelson.......................... Director None
Steve Warner Golann....................... Director None
</TABLE>

Set forth below is a list of the name and principal business address of any
company for which a person listed above serves in the capacity of director,
officer, employee, partner or trustee. The address of each, unless otherwise
stated is 33 King William Street, London, England EC4R 9AS.

Mrs. Brooke also serves as director of the following companies:

Munich London Investment Management Ltd.; Benenden School (Kent) Ltd.,
Cranbrook Kent, TN17 4AA; and Mercury Asset Management Pension Trustee Co. Ltd.

Mrs. Searle also serves as officer of the following companies:

Forum House Limited; Grosvenor Alternate Partner Limited; Grosvenor General
Partner Limited; Grosvenor Ventures Limited; Grosvenor Venture Managers Limited;
33 King William Street, Ltd.; Mercury Asset Management Employee Trust Co. Ltd.;
Mercury Asset Management Finance Ltd.; Mercury Asset Management Group Ltd;
Mercury Asset Management Group Services Ltd; Mercury Asset Management Holdings
Ltd.; Mercury Asset Management International Ltd.; Mercury Asset Management No.
1 Limited; Mercury Asset Management Ltd.; Mercury Asset Management Pension
Trustee Co. Ltd.; Mercury Fund Managers Limited; Mercury Financial Services
Ltd.; Mercury Investment Management Limited; Mercury Investment Services Ltd.;
Mercury Investment Trust Managers Ltd.; Mercury Life Assurance Company Ltd.;
Mercury Life Limited; Mercury Life Nominees Ltd.; Mercury Private Equity
Holdings Ltd.; Mercury Rowan Mullens Ltd.; Munich London Investment Management
Ltd.; Mercury Private Equity MUST 3 Limited; Third Grosvenor Limited; Wimco
Nominees Ltd.; Toll Company; SNC International (Holdings) Limited; SNC
Securities Limited; SNCS Limited; Storey Saver Limited; Merrill Lynch Private
Capital Limited; Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers)
Limited; Merrill Lynch, Pierce, Fenner & Smith Limited; Mership Nominees
Limited; ML Europe Property Ltd.; ML Invest Holdings Limited; ML Invest Limited;
N.Y. Nominees Limited; Paramount Nominees Limited; Prismbond Limited; RNML
Limited; S.N.C. Nominees Limited; Sealion Nominees Limited; Smith Bros (Services
& Leasing) Limited; Smith Bros Nominees Limited; Smith Bros Participations
Limited; Smith Bros PLC; SNC Corporate Finance Limited; SNC Financial Services;
McIntosh Services (UK) Limited; Merrill Lynch (UK) Pension Plan Trustees
Limited; Merrill Lynch Capital Markets Bank Limited; Merrill Lynch Equities
Limited; Merrill Lynch Europe Funding; Merrill Lynch Europe Holdings Limited;
Merrill Lynch Europe PLC; Merrill Lynch Financial Services Limited; Merrill
Lynch Gilts (Nominees) Limited; Merrill Lynch Gilts Holdings Limited; Merrill
Lynch Gilts Investments Limited; Merrill Lynch Gilts Limited; Merrill Lynch
Group Holdings

C-3
<PAGE> 44

Limited; Merrill Lynch International; Merrill Lynch International Bank Limited;
Merrill Lynch Investment Services Limited; Merrill Lynch Investments Limited;
Merrill Lynch Limited; Merrill Lynch Nominees Limited; Merrill Lynch Private
Capital Limited; Benson Nominees Limited; C.P.W. Limited; Capital Markets;
Chetwynd Nominees Limited; Citygale Nominees Limited; CLO Funding Limited; and
McIntosh Services (UK) Limited.

Set forth below is a list of each executive officer and director of Fund
Asset Management, L.P. ("FAM") indicating each business, profession, vocation or
employment of a substantial nature in which each such person has been engaged
since January 1997 for his own account or in the capacity of director, officer,
partner or trustee.

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH FAM PROFESSION, VOCATION OR EMPLOYMENT
---- --------------------- ---------------------------------------
<S> <C> <C>
ML & Co............................. Limited Partner Financial Services Holding Company;
Limited Partner of Merrill Lynch Asset
Management, L.P. ("MLAM")
Fund Asset Management, Inc.......... Limited Partner Investment Advisory Service
Princeton Services.................. General Partner General Partner of MLAM
Jeffrey M. Peek..................... President President of MLAM; President and
Director of Princeton Services, Inc.
("Princeton Services"); Executive Vice
President of Merrill Lynch & Co., Inc.
(" ML & Co."); Managing Director and
Co-Head of the Investment Banking
Division of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("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 Executive Vice President of MLAM;
President Executive Vice President and Director
of Princeton Services; President and
Director of Princeton Funds
Distributor, Inc.; Director of
Financial Data Services, Inc.;
President of Princeton Administrators,
L.P.
Donald C. Burke..................... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM since 1999; Senior Vice President
and Treasurer of Princeton Services;
Vice President and Treasurer of
Princeton Funds Distributor, Inc.;
First Vice President of MLAM from 1997
to 1999; Vice President of MLAM from
1990 to 1997; Director of Taxation of
MLAM since 1990.
</TABLE>

C-4
<PAGE> 45

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH FAM PROFESSION, VOCATION OR EMPLOYMENT
---- --------------------- ---------------------------------------
<S> <C> <C>
Michael G. Clark.................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Mark A. Desario..................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Linda L. Federici................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Michael J. Hennewinkel.............. Senior Vice Senior Vice President, Secretary and
President, Secretary General Counsel of MLAM; Senior Vice
and General Counsel President of Princeton Services
Philip L. Kirstein.................. Senior Vice President Senior Vice President of MLAM; Senior
Vice President, General Counsel,
Director and Secretary of Princeton
Services
Ronald M. Kloss..................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Debra W. Landsman-Yaros............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of Princeton Funds
Distributor, Inc.
Stephen M.M. Miller................. Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. ............. Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Brian A. Murdock.................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Director of Princeton Funds
Distributor, Inc.
Gregory D. Upah..................... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>

Mr. Glenn is President and Mr. Burke is Treasurer of all or substantially
all of the investment companies described in the following two paragraphs. Mr.
Glenn is a director of such companies. Messrs. Giordano, Kirstein, and Monagle
are officers of one or more of such companies.

FAM, located at P.O. Box 9011, Princeton, New Jersey 08543-9011, an
affiliate of the Investment Adviser, 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., Financial Institutions Series Trust, Merrill Lynch Basic Value
Fund, Inc., Merrill Lynch California Municipal

C-5
<PAGE> 46

Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate
High Yield 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 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., Debt Strategies Fund III, Inc., Income Opportunities Fund 1999,
Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy
Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc., MuniHoldings Fund,
Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings
Insured Fund II, Inc., MuniHoldings California Insured Fund, Inc., MuniHoldings
California Insured Fund II, Inc., MuniHoldings California Insured Fund III,
Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings Michigan
Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniHoldings
New York Insured Fund III, Inc., MuniHoldings Florida Insured Fund, MuniHoldings
Florida Insured Fund II, MuniHoldings Florida Insured Fund III, MuniHoldings
Florida Insured Fund IV, MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New Jersey Insured
Fund III, Inc., MuniHoldings Pennsylvania Insured Fund, 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.

MLAM, located at P.O. Box 9011, Princeton, New Jersey 08543-9011, acts as
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, 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
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 Technology 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 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.
Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, 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.

C-6
<PAGE> 47

ITEM 27. PRINCIPAL UNDERWRITERS.

(a) Mercury Funds Distributor, a division of Princeton Funds Distributor,
Inc. ("MFD") acts as the principal underwriter for the Registrant and for each
of the following open-end investment companies:

Mercury Gold and Mining Fund of Mercury Asset Management Funds, Inc.;
Mercury International Fund of Mercury Asset Management Funds, Inc.; Mercury
Japan Capital Fund of Mercury Asset Management Funds, Inc.; Mercury
Pan-European Growth Fund of Mercury Asset Management Funds, Inc.; Mercury
V.I. U.S. Large Cap Fund of Mercury Asset Management Funds, Inc.; Mercury
Global Balanced Fund of Mercury Asset Management Funds, Inc.; Summit Cash
Reserves Fund of Financial Institutions Series Trust; and Mercury V.I.
Pan-European Growth Fund of Mercury Asset Management V.I. Funds, Inc.

A separate division of Princeton Funds Distributor, Inc. acts as the
principal underwriter of other investment companies.

(b) Set forth below is information concerning each director and officer of
MFD. The principal business address of each such person is Box 9081, Princeton,
New Jersey 08543-9081, except that the address of Messrs. Crook, Aldrich, Breen,
Fatseas and Wasel is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2665.

<TABLE>
<CAPTION>
(2) (3)
(1) POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH THE DISTRIBUTOR WITH REGISTRANT
---- --------------------- ----------------------------
<S> <C> <C>
Terry K. Glenn....................... President and Director Executive Vice President
Michael G. Clark..................... Director and Treasurer None
Thomas J. Verage..................... Director None
Robert W. Crook...................... Senior Vice President None
Michael J. Brady..................... Vice President None
William M. Breen..................... Vice President None
James T. Fatseas..................... Vice President None
Debra W. Landsman-Yaros.............. Vice President None
Michelle T. Lau...................... Vice President None
Donald C. Burke...................... Vice President Vice President and Treasurer
Salvatore Venezia.................... Vice President None
William Wasel........................ Vice President None
Robert Harris........................ Secretary None
</TABLE>

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the rules
thereunder are maintained at the offices of:

(1) the registrant, Mercury Asset Management V.I. Funds, Inc., 800 Scudders
Mill Road, Plainsboro, New Jersey 08536;

(2) the transfer agent, Financial Data Services, Inc., 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484;

(3) the custodian, Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109;

(4) the investment adviser, Mercury Asset Management International Ltd., 33
King William Street, London EC4R 9AS, England; and

(5) the sub-adviser and administrator, Fund Asset Management, L.P., 800
Scudders Mill Road, Plainsboro, New Jersey 08536.

C-7
<PAGE> 48

ITEM 29. MANAGEMENT SERVICES.

Other than as set forth under the caption "Management of the Mercury V.I.
U.S. Large Cap Fund" in the Prospectus constituting Part A of the Registration
Statement and under "Management of the Funds -- Management and Advisory
Arrangements" in the Appendix to the Statement of Additional Information
constituting Part B of the Registration Statement, the Registrant is not party
to any management related service contract.

ITEM 30. UNDERTAKINGS.

None.

C-8
<PAGE> 49

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Pre-Effective Amendment to the 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 19th day of April, 1999.

MERCURY V.I. U.S. LARGE CAP FUND OF
MERCURY ASSET MANAGEMENT V.I.
FUNDS, INC.

Registrant

By: /s/ TERRY K. GLENN
------------------------------------
Terry K. Glenn, Executive Vice
President

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>

* President and Director April 19, 1999
- -------------------------------------------- (Principal Executive Officer)
Jeffrey M. Peek

/s/ TERRY K. GLENN Director and Executive Vice
- -------------------------------------------- President
Terry K. Glenn

* Director
- --------------------------------------------
David O. Beim

* Director
- --------------------------------------------
James T. Flynn

* Director
- --------------------------------------------
W. Carl Kester
* Director
- --------------------------------------------
Karen P. Robards
* Treasurer (Principal Financial
- -------------------------------------------- Accounting Officer) and Vice
Donald C. Burke President

*By /s/ TERRY K. GLENN
----------------------------------------

(Terry K. Glenn, Attorney-in-Fact) April 19, 1999
</TABLE>

* This amendment has been signed by each of the persons
so indicated by the undersigned as Attorney-in-Fact.

C-9
<PAGE> 50

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10 Consent of Deloitte & Touche, LLP, independent auditors for
the Registrant.
</TABLE>

C-10

<PAGE> 1
EXHIBIT 10

INDEPENDENT AUDITORS' CONSENT

Mercury V.I. U.S. Large Cap Fund of
Mercury Asset Management V.I. Funds, Inc.:

We consent to the reference to us in Pre-Effective Amendment No. 2 to
Registration Statement No. 333-68879 of our report dated April 19, 1999
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
April 19, 1999