MERRILL LYNCH INVESTMENT MANAGERS FUNDS INC, N-1A, 2000-08-11

MERRILL LYNCH INVESTMENT MANAGERS FUNDS INC
N-1A, 2000-08-11

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<PAGE> 1
As filed with the Securities and Exchange Commission on August 11, 2000
Securities Act File No. 333-___________
Investment Company Act File No. 811-_______

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

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

Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [ ]

(Check appropriate box or boxes)

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

MERRILL LYNCH INVESTMENT MANAGERS FUNDS, INC.
(Exact name of Registrant as Specified in Charter)

725 South Figueroa Street, Suite 4000, Los Angeles, California 90017
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (213) 430-1000

Turner Swan
725 South Figueroa Street, Suite 4000
Los Angeles, California 90017
(Name and Address of Agent for Service)

Copies to:

Karin Jagel Flynn, Esq.
Gardner, Carton & Douglas
321 N. Clark Street
Chicago, Illinois 60610

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.

Title of Securities Being Registered......................Shares of Common Stock
(par value $.01 per share)

Fund Asset Management Master Trust has also executed this Registration
Statement.

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.

<PAGE> 2

[MERRILL LYNCH LOGO]
Merrill Lynch Low Duration Fund
of Merrill Lynch Investment Managers Funds, Inc.
October [ ], 2000

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
<PAGE> 3

Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
-----------------------------------------------------------------
The Merrill Lynch Low Duration Fund at a Glance............. 3
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 6

[DETAILS ABOUT THE FUND ICON]
DETAILS ABOUT THE FUND
-----------------------------------------------------------------
How the Fund Invests........................................ 8
Investment Risks............................................ 10
Statement of Additional Information......................... 18

[YOUR ACCOUNT ICON]
YOUR ACCOUNT
-----------------------------------------------------------------
Merrill Lynch Select Pricing(SM) System.......... .......... 19
How to Buy, Sell, Transfer and Exchange Shares.............. 24
How Shares are Priced....................................... 28
Participation in Merrill Lynch Fee-Based Programs........... 28
Dividends and Taxes......................................... 29

[MANAGEMENT OF THE FUND ICON]
MANAGEMENT OF THE FUND
-----------------------------------------------------------------
Fund Asset Management....................................... 31
Master/Feeder Structure..................................... 31

[FOR MORE INFORMATION ICON]
FOR MORE INFORMATION
-----------------------------------------------------------------
Shareholder Reports....................................Back Cover
Statement of Additional Information....................Back Cover
</TABLE>

MERRILL LYNCH LOW DURATION FUND
<PAGE> 4

THE MERRILL LYNCH LOW DURATION FUND AT A GLANCE
--------------------------------------------------------------------------------

WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?

The investment objective of the Fund is to maximize total return, consistent
with preservation of capital.

WHAT ARE THE FUND'S GOALS?

The Fund's main goal is total return -- it looks for securities that pay
interest or dividends and that will increase in value. We cannot guarantee that
the Fund will achieve its goals.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?
The Fund invests in a diversified portfolio of bonds of different maturities,
including U.S. GOVERNMENT SECURITIES, CORPORATE BONDS, ASSET-BACKED SECURITIES
and MORTGAGE-BACKED SECURITIES. At least 70% of its investments will be in
securities rated A or better by a major rating agency. Up to 30% of its
investments may be in securities rated BBB/Baa and up to 10% of its investments
may be in securities rated below investment grade (none below B). The Fund's
DURATION will be from one to three years.

The Fund is a "feeder" fund that invests all of its assets in a corresponding
"master" portfolio (the "Low Duration Master Portfolio") of the Fund Asset
Management Master Trust (the "Trust") which has the same objective as the Fund.
All investments will be made at the Trust level. This structure is sometimes
called a "master/feeder" structure. The Fund's investment results will
correspond directly to the investment results of the Low Duration Master
Portfolio in which it invests. For simplicity, this prospectus uses the term
"Fund" to include the Low Duration Master Portfolio of the Trust.

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 Fund shares, may go up or down. These changes may occur in response to
interest rate changes or in response to other factors that may affect a
particular issuer or obligation. Generally, when interest rates go up, the value
of bonds goes down. The value of the Fund's shares also may be affected by
market conditions and economic or political developments. The longer the
duration of the Fund, the more the Fund's price will go down if interest rates
go up. If the value of the Fund's investments goes down, you may lose money.

Key Facts [KEY FACTS ICON]
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.

U.S. GOVERNMENT SECURITIES -- include direct obligations issued by the U.S.
Treasury and securities issued or guaranteed by U.S. government agencies and
instrumentalities.

CORPORATE BONDS -- fixed-income debt securities issued by corporations, as
distinct from securities issued by a government or its agencies or
instrumentalities.

ASSET-BACKED SECURITIES -- bonds or notes backed by loan paper or accounts
receivable originated by banks, credit card companies or other providers of
credit.

MORTGAGE-BACKED SECURITIES -- securities that give the holder the right to
receive a portion of principal and/or interest payments made on a pool of
residential or commercial mortgage loans, which in some cases are guaranteed by
government agencies.

MERRILL LYNCH LOW DURATION FUND 3
<PAGE> 5

[KEY FACTS ICON] Key Facts
DURATION -- a measure of how much the price of a bond would change compared to a
change in market interest rates.

PREPAYMENT RISK -- the risk that certain obligations will be paid off by the
obligor more quickly than anticipated and the value of these securities will
fall.

EXTENSION RISK -- the risk that certain obligations will be paid off more slowly
by the obligor than anticipated and the value of these securities will fall.

VOLATILITY -- the amount and frequency of changes in a security's value.

"JUNK" BONDS -- bonds with a credit rating of BB/Ba or lower by rating agencies.

The Fund invests in mortgage-backed and asset-backed securities. In addition to
the normal bond risks, these securities are subject to PREPAYMENT RISK and
EXTENSION RISK, and may involve more VOLATILITY than other bonds of similar
maturities. The Fund also may invest in "JUNK" BONDS, which have more credit
risk and tend to be less liquid than higher-rated securities.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are looking for an investment that provides income.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline as the result of interest rate movements in order to
seek high current return.

- Are prepared to receive taxable distributions.

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The Fund recently commenced operations and does not have a performance record.
The Fund will be a feeder fund of the Trust. The Fund and the Low Duration
Master Portfolio have identical investment objectives and policies and use the
same portfolio management personnel.

The bar chart and table shown below are based upon performance of the other
feeder fund which is the predecessor of the recently organized Trust. The bar
chart and table provide an indication of the risks of investing in the Low
Duration Master Portfolio, which are identical to the risks of investing in the
Fund. The bar chart shows changes in performance for Class A shares for each
calendar year based on the performance of the Low Duration Master Portfolio and
its predecessor since its inception. Sales charges are not reflected in the bar
chart. If these amounts were reflected, returns would be less than those shown.
The table compares the average annual total returns

4 MERRILL LYNCH LOW DURATION FUND
<PAGE> 6

for each class of the Fund's shares for the periods shown with those of the
Merrill Lynch 1-3 year U.S. Treasury Note Index. The average annual total
returns of the Fund's shares are based on the performance of the Low Duration
Master Portfolio and its predecessor, adjusted for the sales charges shown in
the fee table. How the Low Duration Master Portfolio and its predecessor
performed in the past is not necessarily an indication of how the Low Duration
Master Portfolio or the Fund will perform in the future.

Total return for the six months ended June 30, 2000: 3.01%.

During the period shown in the bar chart, the highest return for a quarter was
4.02% (quarter ended June 30, 1995) and the lowest return for a quarter was
-0.09% (quarter ended December 31, 1998).

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS PAST PAST SINCE
(FOR THE PERIODS ENDED DECEMBER 31, 1999) ONE YEAR FIVE YEARS INCEPTION
----------------------------------------------------------------------------------------
<S> <C> <C> <C>

CLASS I* 3.19% 7.04% 7.19%(1)
Merrill Lynch 1-3 Year U.S. Treasury Note Index 3.06% 6.51% 5.37%(1)
----------------------------------------------------------------------------------------
CLASS A* N/A N/A 0.80%(2)
Merrill Lynch 1-3 Year U.S. Treasury Note Index N/A N/A 0.71%(2)
----------------------------------------------------------------------------------------
CLASS B N/A N/A N/A
Merrill Lynch 1-3 Year U.S. Treasury Note Index N/A N/A N/A
----------------------------------------------------------------------------------------
CLASS C N/A N/A N/A
Merrill Lynch 1-3 Year U.S. Treasury Note Index N/A N/A N/A
----------------------------------------------------------------------------------------
</TABLE>

The Merrill Lynch 1-3 year U.S. Treasury Note Index is an unmanaged Index
comprised of U.S. Treasury securities with maturities ranging from one to three
years, which are guaranteed as to the timely payment of principal and interest
by the U.S. government. The Fund invests in securities that are not reflected in
the Index or guaranteed.

* Includes the effect of sales charges, which were not imposed until October
, 2000.

(1) Inception date is May 18, 1993.

(2) Inception date is September 24, 1999.

MERRILL LYNCH LOW DURATION FUND 5
<PAGE> 7

[KEY FACTS ICON] Key Facts
UNDERSTANDING EXPENSES

Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:

SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:

ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.

INVESTMENT ADVISORY FEE -- a fee paid to the Investment Adviser for managing the
Trust.

DISTRIBUTION FEE -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants.

SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities dealers
for account maintenance activities.

FEES AND EXPENSES
--------------------------------------------------------------------------------

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not everyone
is eligible to buy every class. After determining which classes you are eligible
to buy, decide which class best suits your needs. Your Merrill Lynch Financial
Consultant can help you with this decision.
This table shows the different fees and expenses that you may pay if you buy and
hold the different classes of shares of the Fund. Future expenses may be greater
or less than those indicated below.

<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(a): CLASS A CLASS B(b) CLASS C CLASS D
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) %(c) None None %(c)
----------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) %(c) %(c) None(d)
----------------------------------------------------------------------------------------------
Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
----------------------------------------------------------------------------------------------
Redemption Fee None None None None
----------------------------------------------------------------------------------------------
Exchange Fee None None None None
----------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
----------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS)(e):
----------------------------------------------------------------------------------------------
INVESTMENT ADVISORY FEES(f) 0.21% 0.21% 0.21% 0.21%
----------------------------------------------------------------------------------------------
DISTRIBUTION AND/OR SERVICE (12b-1) FEES(g) None
----------------------------------------------------------------------------------------------
Other Expenses (including transfer agency and
administrative fees)(h)(i) 0.% 0.% 0.% 0.%
----------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(j) 0.% .% .% .%
----------------------------------------------------------------------------------------------
</TABLE>

(a) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
(b) Class B shares automatically convert to Class D shares about ten years after
you buy them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $ million or more and
you redeem within one year.
(e) For the Fund, the fees and expenses include both the Fund and the Trust.
(f) Paid by the Low Duration Master Portfolio.
(g) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in this prospectus and in all other Fund
materials. If you hold Class B or Class C shares for a long time, it may
cost you more in distribution (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes.
(h) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The Fund
pays a 0.10% fee for certain accounts that participate in the Merrill Lynch
Mutual Fund Advisor program. The Fund also pays a $0.20 monthly closed
account charge, which is assessed upon all accounts that close during the
year. This fee begins the month following the month the account is closed
and ends at the end of the calendar year.

6 MERRILL LYNCH LOW DURATION FUND

<PAGE> 8

(footnotes continued from previous page)

(i) Includes administrative fees, which are payable to the Investment Adviser
by the Fund at the annual rate of 0.25%.
(j) The Investment Adviser has voluntarily agreed to waive a portion of the
management fee due and reimburse the Fund for a portion of other expenses.
Total Annual Fund Operating Expenses after giving effect to the waiver of
fees and reimbursement of expenses would be: 0.58% for Class A shares,
1.33% for Class B shares, 1.38% for Class C shares and 0.83% for Class D
shares. The fee waiver and expense reimbursement may be discontinued or
reduced by the Investment Adviser at any time without notice.
EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate you
will receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:

EXPENSES IF YOU DID REDEEM YOUR SHARES:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS
-----------------------------------------------------------------------------------
<S> <C> <C>
Class A $ $
-----------------------------------------------------------------------------------
Class B* $ $
-----------------------------------------------------------------------------------
Class C $ $
-----------------------------------------------------------------------------------
Class D $ $
-----------------------------------------------------------------------------------
</TABLE>

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

* Assuming conversion to Class D shares.

MERRILL LYNCH LOW DURATION FUND 7
<PAGE> 9

HOW THE FUND INVESTS
--------------------------------------------------------------------------------

The Fund's investment objective is to MAXIMIZE TOTAL RETURN, consistent with
CAPITAL PRESERVATION. The Fund invests in bonds with a portfolio duration of one
to three years. The total rate of return for the Fund is expected to rise and
fall less than a longer duration bond fund.

TYPES OF INVESTMENTS

The Fund seeks to achieve its objective by investing mainly in investment grade,
interest-bearing securities of varying maturities. These include:

- U.S. government securities

- preferred stocks

- mortgage-backed and other asset-backed securities

- corporate bonds

- bonds that are convertible into stocks

- bank certificates of deposit, fixed time deposits and bankers'
acceptances

- repurchase agreements, reverse repurchase agreements and dollar
rolls

- obligations of foreign governments or their subdivisions,
agencies and instrumentalities

- obligations of international agencies or supra-national entities

- municipal bonds

RATINGS LIMITATIONS

- at least 70% of total assets rated at least A or, if short-
term, the second highest quality grade, by a major rating agency
such as Moody's or S&P

- up to 30% of total assets rated Baa by Moody's or BBB
by S&P

- up to 10% of total assets rated below investment grade, but none
below B

The Investment Adviser can invest in unrated securities and will assign them the
rating of a rated security of comparable quality. After the Fund buys a
security, it may be given a lower rating or stop being rated. This will not
require the Fund to sell it, but the Investment Adviser will consider the change
in rating in deciding whether to keep the security.

Details About the Fund [DETAILS ABOUT THE FUND ICON]

ABOUT THE PORTFOLIO MANAGERS

Michael Sanchez is the co-portfolio manager of the Fund. Before joining the
Investment Adviser in 1996, Mr. Sanchez was with Provident Investment Counsel as
senior vice president and portfolio manager from 1991 to 1995 and with ARCO
Investment Management Company as Director of Fixed Income Investments from 1988
to 1991.

John Queen is the co-Portfolio Manager of the Fund. Prior to joining the
Investment Adviser in 1997, Mr. Queen was associated with The Capital Group as a
member of an analyst team responsible for $8 billion in fixed-income assets.

ABOUT THE INVESTMENT ADVISER

Fund Asset Management, L.P. is the Investment Adviser to the Fund.

8 MERRILL LYNCH LOW DURATION FUND
<PAGE> 10

MATURITY AND DURATION REQUIREMENTS

MATURITY -- The EFFECTIVE MATURITY of a bond is the weighted average period over
which principal is expected to be repaid. STATED MATURITY is the date when the
issuer is scheduled to make the final payment of principal. Effective maturity
is different than stated maturity because it estimates the effect of expected
principal prepayments and call provisions.

DURATION -- Duration measures the potential volatility of the price of a bond or
a portfolio of bonds prior to maturity. Duration is the magnitude of the change
in price of a bond relative to a given change in the market interest rate.
Duration incorporates a bond's yield, coupon interest payments, final maturity,
call and put features and prepayment exposure into one measure.

For any bond with interest payments occurring before principal is repaid,
duration is ordinarily less than maturity. Generally, the lower the stated or
coupon rate of interest of a bond, the longer the duration. The higher the
stated or coupon rate of interest of a bond, the shorter the duration. The
calculation of duration is based on estimates.

Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the duration shown below, the Fund's price would change as
follows:

<TABLE>
<CAPTION>
DURATION CHANGE IN INTEREST RATES
----------------------------------------------------------------
<S> <C>
2 YRS. 1% DECLINE -> 2% gain in Fund price
----------------------------------------------------------------
1% RISE -> 2% decline in Fund price
----------------------------------------------------------------
</TABLE>

Other factors such as changes in credit quality, prepayments, the shape of the
yield curve and liquidity affect the price of the Fund and may correlate with
changes in interest rates. These factors can increase swings in the Fund's share
price during periods of volatile interest rate changes.

FOREIGN BONDS

The Fund may invest in foreign bonds as follows:

- up to 25% of total assets in foreign bonds that are denominated
in U.S. dollars

- up to 15% of total assets in foreign bonds that are not
denominated in U.S. dollars

- up to 15% of total assets in emerging market foreign bonds

MERRILL LYNCH LOW DURATION FUND 9
<PAGE> 11

[DETAILS ABOUT THE FUND ICON] Details About the Fund

MONEY MARKET INVESTMENTS

To meet redemptions and when waiting to invest cash receipts, the Fund may
invest in short-term, investment grade bonds, money market mutual funds and
other money market instruments. Also, the Fund temporarily can invest up to 100%
of its assets in short-term, investment grade bonds and other money market
instruments in response to adverse market, economic or political conditions. The
Fund may not achieve its objective using this type of investing.

PORTFOLIO TURNOVER

As a result of the strategies described above, the Fund may have an annual
portfolio turnover rate above 100%. Portfolio turnover is generally the
percentage found by dividing the lesser of portfolio purchases or sales by the
monthly average value of the portfolio. High portfolio turnover (100% or more)
results in higher mark ups and other transaction costs and can affect the Fund's
performance. It also can result in a greater amount of distributions as ordinary
income rather than long-term capital gains.

INVESTMENT RISKS
--------------------------------------------------------------------------------

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 for any period of
time.

MARKET AND SELECTION RISK

Market risk is the risk that the market will go down in value, including the
possibility that the market will go down sharply and unpredictably. Selection
risk is the risk that the investments that the Investment Adviser selects will
underperform the market or other funds with similar investment objectives and
investment strategies.

MORTGAGE-BACKED SECURITIES

Mortgage-backed securities are the right to receive a portion of principal
and/or interest payments made on a pool of residential or commercial mortgage
loans. When interest rates fall, borrowers may refinance or

10 MERRILL LYNCH LOW DURATION FUND
<PAGE> 12

otherwise repay principal on their mortgages earlier than scheduled. When this
happens, certain types of mortgage-backed securities will be paid off more
quickly than originally anticipated. Prepayment reduces the yield to maturity
and average life of mortgage-backed securities. In addition, when the Fund
reinvests the proceeds of a prepayment, it may receive a lower interest rate
than the rate on the security that was prepaid. This risk is known as
"prepayment risk." When interest rates rise, certain types of mortgage-backed
securities will be paid off more slowly than originally anticipated and the
value of these securities will fall. This risk is known as extension risk.

Because of prepayment risk and extension risk, mortgage-backed securities react
differently to changes in interest rates than other bonds. Small movements in
interest rates (both up and down) may quickly and significantly reduce the value
of certain mortgage-backed securities.

Mortgage-backed securities are issued by Federal government agencies like the
Government National Mortgage Association ("Ginnie Mae"), the Federal Home Loan
Mortgage Association ("Freddie Mac") or the Federal National Mortgage
Association ("Fannie Mae"). Principal and interest payments on mortgage-backed
securities issued by Federal government agencies are guaranteed by either the
Federal government or the government agency. This means that such securities
have very little credit risk. Other mortgage-backed securities are issued by
private corporations rather than Federal agencies. Private mortgage-backed
securities have credit risk as well as prepayment risk and extension risk.

Mortgage-backed securities may be either pass-through securities or
collateralized mortgage obligations ("CMOs"). Pass-through securities represent
a right to receive principal and interest payments collected on a pool of
mortgages, which are passed through to security holders (less servicing costs).
CMOs are created by dividing the principal and interest payments collected on a
pool of mortgages into several revenue streams ("tranches") with different
priority rights to portions of the underlying mortgage payments. Certain CMO
tranches may represent a right to receive interest only ("IOs"), principal only
("POs") or an amount that remains after other floating-rate tranches are paid
(an "inverse floater"). These securities are frequently referred to as "mortgage
derivatives" and may be extremely sensitive to changes in interest rates. If the
Fund invests in CMO tranches (including CMO tranches issued by government
agencies) and

MERRILL LYNCH LOW DURATION FUND 11
<PAGE> 13

[DETAILS ABOUT THE FUND ICON] Details About the Fund

interest rates move in a manner not anticipated by the Investment Adviser, it is
possible that the Fund could lose all or substantially all of its investment.

ASSET-BACKED SECURITIES

Like traditional bonds, the value of asset-backed securities typically increases
when interest rates fall and decreases when interest rates rise. Certain asset-
backed securities may also be subject to the risk of prepayment. In a period of
declining interest rates, borrowers may pay what they owe on the underlying
assets more quickly than anticipated. Prepayment reduces the yield to maturity
and the average life of the asset-backed securities. In addition, when the Fund
reinvests the proceeds of a prepayment, it may receive a lower interest rate
than the rate on the security that was prepaid. In a period of rising interest
rates, prepayments may occur at a slower rate than expected. As a result, the
average maturity of the Fund's portfolio will increase. The value of long-term
securities changes more widely in response to changes in interest rates than
shorter-term securities.

CREDIT RISK

Credit risk is the risk that the issuer of bonds 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 on the terms of the specific bonds.

INTEREST RATE RISK

Interest rate risk is the risk that prices of bonds generally increase when
interest rates decline and decrease when interest rates increase. Prices of
longer term securities generally change more in response to interest rate
changes than do prices of shorter term securities.

CALL AND REDEMPTION RISK

Investments in bonds carry the risk that a bond's issuer will call the bond for
redemption prior to the bond's maturity. If there is an early call of a bond,
the Fund may lose income and may have to invest the proceeds of the redemption
in bonds with lower yields than the called bond.

JUNK BONDS

Junk bonds are bonds that are rated below investment grade by the major rating
agencies or are unrated securities that the Fund's Investment Adviser believes
are of comparable quality to bonds rated below investment grade. Although junk
bonds generally pay higher rates of interest than investment

12 MERRILL LYNCH LOW DURATION FUND
<PAGE> 14

grade bonds, they are high risk investments that may cause income and principal
losses for the Fund. Junk bonds generally are less liquid and experience more
price volatility than higher rated bonds. The issuers of junk bonds may have a
larger amount of outstanding debt relative to their assets than issuers of
investment grade bonds. In the event of an issuer's bankruptcy, claims of other
creditors may have priority over the claims of junk bond holders, leaving few or
no assets available to repay junk bond holders. Junk bonds may be subject to
greater call and redemption risk than higher rated debt securities.

WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD COMMITMENTS

When-issued, delayed-delivery securities and forward commitments involve the
risk that the security the Fund buys will lose value prior to its delivery to
the Fund. There also is the risk that the security will not be issued or that
the other party will not meet its obligation, in which case the Fund loses the
investment opportunity of the assets it has set aside to pay for the security
and any gain in the security's price.

VARIABLE RATE DEMAND OBLIGATIONS

Variable rate demand obligations are floating rate securities that consist of an
interest in a long-term bond and the conditional right to demand payment prior
to the bond's maturity from a bank or other financial institution. If the bank
or other financial institution is unable to pay on demand, the Fund may be
adversely affected. In addition, these securities are subject to credit risk.

INDEXED AND INVERSE FLOATING RATE SECURITIES

The Fund may invest in securities whose potential returns are directly related
to changes in an underlying index or interest rate, known as indexed securities.
The return on indexed securities will rise when the underlying index or interest
rate rises and fall when the index or interest rate falls. The Fund may also
invest in securities whose return is inversely related to changes in an interest
rate (inverse floaters). In general, inverse floaters change in value in a
manner that is opposite to most bonds -- that is, interest rates on inverse
floaters will decrease when short-term rates increase and increase when
short-term rates decrease. Investments in indexed securities and inverse
floaters may subject the Fund to the risk of reduced or eliminated interest
payments. Investments in indexed securities also may

MERRILL LYNCH LOW DURATION FUND 13
<PAGE> 15

[DETAILS ABOUT THE FUND ICON] Details About the Fund

subject the Fund to loss of principal. In addition, certain indexed securities
and inverse floaters may increase or decrease in value at a greater rate than
the underlying interest rate, which effectively leverages the Fund's investment.
As a result, the market value of such securities will generally be more volatile
than that of fixed rate securities. Both indexed securities and inverse floaters
can be derivative securities and can be considered speculative.

SOVEREIGN DEBT

The Fund may invest in sovereign debt securities. These securities are issued or
guaranteed by foreign government entities. Investments in sovereign debt subject
the Fund to the risk that a government entity may delay or refuse to pay
interest or repay principal on its sovereign debt. Some of these reasons may
include cash flow problems, insufficient foreign currency reserves, political
considerations, the relative size of its debt position to its economy or its
failure to put in place economic reforms required by the International Monetary
Fund or other multilateral agencies. If a government entity defaults, it may ask
for more time in which to pay or for further loans. There is no legal process
for collecting sovereign debts that a government does not pay.

CORPORATE LOANS

Corporate loans are subject to the risk of loss of principal and income.
Borrowers do not always provide collateral for corporate loans and the value of
the collateral may not completely cover the borrower's obligations at the time
of a default. If a borrower files for protection from its creditors under the
U.S. bankruptcy laws, these laws may limit the Fund's rights to its collateral.
In addition, the value of collateral may erode during a bankruptcy case. In the
event of a bankruptcy, the holder of a corporate loan may not recover its
principal, may experience a long delay in recovering its investment and may not
receive interest during the delay.

RISKS OF CONVERTIBLE SECURITIES

Convertibles are generally bonds or preferred stocks that may be converted into
common stock. Convertibles typically pay current income, as either interest
(bond convertibles) or dividends (preferred stocks). A convertible's value
usually reflects both the stream of current income payments and the value of the
underlying common stock. The market value of a convertible performs like regular
bonds; that is, if market interest rates rise, the value of a convertible
usually falls. Since it is convertible into common stock, the

14 MERRILL LYNCH LOW DURATION FUND
<PAGE> 16

convertible also has the same types of market and issuer risk as the underlying
common stock.

FOREIGN MARKET RISK

Since the Fund may invest in foreign securities, it offers the potential for
more diversification than an investment only in the U.S. This is because bonds
traded in foreign markets have often (though not always) performed differently
than bonds in the U.S. However, such investments involve special risks not
present in U.S. investments that can increase the chances that the Fund will
lose money. In particular, investments in foreign securities involve the
following risks, which are generally greater for investments in emerging
markets:

- The economies of some foreign markets often do not compare
favorably with that of the U.S. in areas such as growth of gross
national product, reinvestment of capital, resources, and
balance of payments. Some of these economies may rely heavily on
particular industries or foreign capital. They may be more
vulnerable to adverse diplomatic developments, the imposition of
economic sanctions against a particular country or countries,
changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures.

- Investments in foreign markets may be adversely affected by
governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes.

- The governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital
markets or in certain industries. Any of these actions could
severely affect security prices. They could also impair the
Fund's ability to purchase or sell foreign securities or
transfer its assets or income back into the U.S., or otherwise
adversely affect the Fund's operations.

- Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign
government securities, difficulties in enforcing favorable legal
judgments in foreign courts and political and social
instability. Legal remedies available to investors

MERRILL LYNCH LOW DURATION FUND 15
<PAGE> 17

[DETAILS ABOUT THE FUND ICON] Details About the Fund

in some foreign countries may be less extensive than those
available to investors in the U.S.

- Prices of foreign securities may go up and down more than prices
of securities traded in the U.S.

- Foreign markets may have different clearance and settlement
procedures. In certain markets, settlements may be unable to
keep pace with the volume of securities transactions. If this
occurs, settlement may be delayed and the Fund's assets may be
uninvested and not earning returns. The Fund also may miss
investment opportunities or be unable to sell an investment
because of these delays.

- The value of the Fund's foreign holdings (and hedging
transactions in foreign currencies) will be affected by changes
in currency exchange rates.

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

- If the Fund purchases a bond issued by a foreign government, the
government may be unwilling or unable to make payments when due.
There may be no formal bankruptcy proceeding by which the Fund
would be able to collect amounts owed by a foreign government.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

A number of European countries have entered into EMU in an effort to reduce
trade barriers between themselves and eliminate fluctuations in their
currencies. EMU established a single European currency (the euro), which was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all initial EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro.
These securities trade and make dividend and other payments only in euros. Like
other investment companies and business organizations, including the companies
in which the Fund invests, the Fund could be adversely affected if the
transition to euro, or EMU as a whole, does not take effect as planned or if a
participating country withdraws from EMU.

16 MERRILL LYNCH LOW DURATION FUND
<PAGE> 18

DERIVATIVES

The Fund also may 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 may 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 more
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 the value of an interest
in the Fund. Derivatives involve the following risks:

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

- CURRENCY RISK -- Currency risk is 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 -- Leverage risk is 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 -- Liquidity risk is 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

MERRILL LYNCH LOW DURATION FUND 17
<PAGE> 19

[DETAILS ABOUT THE FUND ICON] Details About the Fund

increase or decrease in value at a rate that is a multiple of
the changes in the applicable index.

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

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

18 MERRILL LYNCH LOW DURATION FUND
<PAGE> 20

Your Account [YOUR ACCOUNT ICON]
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
--------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents the same ownership interest in the same investment
portfolio. When you choose your class of shares you should consider the size of
your investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or D shares, you pay a sales charge at the
time of purchase. If you buy Class D shares, you also pay an ongoing account
maintenance fee of 0.25%. You may be eligible for a sales charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price but you will be subject to an account maintenance fee of 0.25%
and a distribution fee of % for Class B shares and % for Class C
shares.

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 and may cost you more than
paying an initial sales charge. In addition, you may be subject to a deferred
sales charge when you sell Class B or C shares.

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch.

MERRILL LYNCH LOW DURATION FUND 19
<PAGE> 21

[YOUR ACCOUNT ICON] Your Account

The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.
<TABLE>
<CAPTION>
CLASS A CLASS B
<S> <C> <C>
------------------------------------------------------------------------------
Availability Limited to certain Generally available
investors including: through Merrill Lynch.
- Current Class A Limited availability
shareholders through other securities
- Certain Retirement Plans dealers.
- Participants in certain
Merrill Lynch-sponsored
programs
- Certain affiliates of
Merrill Lynch.
------------------------------------------------------------------------------
Initial Sales Yes. Payable at time of No. Entire purchase price
Charge? purchase. Lower sales is invested in shares of
charges available for the Fund.
larger investments.
------------------------------------------------------------------------------
Deferred Sales No. (May be charged for Yes. Payable if you redeem
Charge? purchases over $ million within three years of
that are redeemed within purchase.
one year.)
------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account Maintenance
and Distribution Fee
Fees? % Distribution Fee.
------------------------------------------------------------------------------
Conversion to Class No. Yes, automatically after
D shares? approximately ten years.
------------------------------------------------------------------------------

<CAPTION>
CLASS C CLASS D
<S> <C> <C>
------------------------------------------------------------------------------
Availability Generally available Generally available
through Merrill Lynch. through Merrill Lynch.
Limited availability Limited availability
through other securities through other securities
dealers. dealers.
------------------------------------------------------------------------------
Initial Sales No. Entire purchase price Yes. Payable at time of
Charge? is invested in shares of purchase. Lower sales
the Fund. charges available for
larger investments.
------------------------------------------------------------------------------
Deferred Sales Yes. Payable if you redeem No. (May be charged for
Charge? within one year of purchases over $1 million
purchase. that are redeemed within
one year.)
------------------------------------------------------------------------------
Account Maintenance 0.25% Account Maintenance 0.25% Account Maintenance
and Distribution Fee Fee No Distribution Fee.
Fees? % Distribution Fee.
------------------------------------------------------------------------------
Conversion to Class No. No.
D shares?
------------------------------------------------------------------------------
</TABLE>

20 MERRILL LYNCH LOW DURATION FUND
<PAGE> 22

RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply to
the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing(SM) options.

LETTER OF INTENT -- permits you to pay the sales charge that would be applicable
if you add up all shares of Merrill Lynch Select Pricing(SM) System funds that
you agree to buy within a 13 month period. Certain restrictions apply.

CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS

If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.

<TABLE>
<CAPTION>
DEALER
AS A % OF COMPENSATION
OFFERING AS A % OF YOUR AS A % OF
YOUR INVESTMENT PRICE INVESTMENT* OFFERING PRICE
-------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 % % %
-------------------------------------------------------------------------
$25,000 but less
than $50,000 % % %
-------------------------------------------------------------------------
$50,000 but less
than $100,000 % % %
-------------------------------------------------------------------------
$100,000 but less
than $250,000 % % %
-------------------------------------------------------------------------
$250,000 but less
than $1,000,000 % % %
-------------------------------------------------------------------------
$1,000,000 and
over** % % %
-------------------------------------------------------------------------
</TABLE>

* Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. A sales charge of % will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain employer-
sponsored retirement or savings plans.

No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

- Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.

- Merrill Lynch Blueprint(SM) Program participants.

- TMA(SM) Managed Trusts.

- Certain Merrill Lynch investment or central asset accounts.

- Certain employer-sponsored retirement or savings plans.

- Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.

MERRILL LYNCH LOW DURATION FUND 21
<PAGE> 23

[YOUR ACCOUNT ICON] Your Account

- Certain investors, including directors of Merrill Lynch mutual
funds and Merrill Lynch employees.

- Certain Merrill Lynch fee-based programs.

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.

If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
shares since Class D shares are subject to an account maintenance fee, while
Class A shares are not.

If you redeem Class A or Class D shares and within 30 days buy new shares of the
same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.

CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within three
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of % on Class B shares and % on Class C shares and account
maintenance fees of 0.25% on both Class B and Class C shares each year under a
distribution plan that the Fund has adopted under Rule 12b-1 of the Investment
Company Act of 1940. 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 and may
cost you more than paying an initial sales charge. The Distributor uses the
money that it receives from the deferred sales charges and the distribution fees
to cover the costs of marketing, advertising and compensating the Merrill Lynch
Financial Consultant or other securities dealer who assists you in purchasing
Fund shares.

CLASS B SHARES

If you redeem Class B shares within three years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually

22 MERRILL LYNCH LOW DURATION FUND
<PAGE> 24

decreases as you hold your shares over time, according to the following
schedule:

<TABLE>
<CAPTION>
YEARS SINCE PURCHASE SALES CHARGE*
-------------------------------------
<S> <C>
0 - 1 %
-------------------------------------
1 - 2 %
-------------------------------------
2 - 3 %
-------------------------------------
3 AND THEREAFTER %
-------------------------------------
</TABLE>

* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends or distributions are not subject to a
deferred sales charge. Not all Merrill Lynch funds have identical deferred
sales charge schedules. If you exchange your shares for shares of another
fund, the higher charge will apply.

The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:

- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old.

- Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts and group plans participating in the Merrill
Lynch Blueprint(SM) Program and certain retirement plan
rollovers.

- Redemption in connection with participation in certain Merrill
Lynch fee-based programs.

- Withdrawals resulting from shareholder death or disability as
long as the waiver request is made within one year of death or
disability or, if later, reasonably promptly following
completion of probate, or in connection with involuntary
termination of an account in which Fund shares are held.

- Withdrawal through the Merrill Lynch Systematic Withdrawal Plan
of up to 10% per year of your Class B account value at the time
the plan is established.

Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for federal
income tax purposes.

MERRILL LYNCH LOW DURATION FUND 23
<PAGE> 25

[YOUR ACCOUNT ICON] Your Account

Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years for
equity funds. If you exchange Class B shares with an eight-year conversion
schedule for Class B shares with a ten-year conversion schedule, or vice versa,
the conversion schedule applicable to the Class B shares acquired in the
exchange will apply. If you acquire your Class B shares in an exchange from
another fund, the Fund's ten year conversion schedule will apply. If you
exchange your Class B shares in the Fund for Class B shares of another fund, the
other fund's conversion schedule will apply. The length of time that you hold
both the original and exchanged Class B shares in both funds will count toward
the conversion schedule. The conversion schedule may be modified in certain
other cases as well.

CLASS C SHARES

If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of %. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares will be reduced or waived in connection
with involuntary termination of an account in which Fund shares are held and
withdrawals through the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

The chart in the following pages summarizes how to buy, sell, transfer and
exchange shares through Merrill Lynch or other securities dealers. You may also
buy shares through the Transfer Agent. To learn more about buying shares through
the Transfer Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may help
you with this decision.

24 MERRILL LYNCH LOW DURATION FUND
<PAGE> 26

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing(SM) table on page
appropriate for you 19. Be sure to read this prospectus carefully.
------------------------------------------------------------------------------------------------------
Next, determine the amount of your The minimum initial investment for the Fund is $1,000 for
investment all accounts except:
- $500 for Employee Access(SM) Accounts
- $250 for certain Merrill Lynch fee-based programs
- $100 for the Merrill Lynch Blueprint(SM) Program
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------------
Have your Merrill Lynch Financial The price of your shares is based on the next calculation
Consultant or securities dealer of net asset value after your order is placed. Any purchase
submit your purchase order orders placed after the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) will
be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at
the net asset value determined on the next business day.
The Fund may reject any order to buy shares and may suspend
the sale of shares at any time. Merrill Lynch may charge a
processing fee to confirm a purchase. This fee is currently
$5.35.
------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
-------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for
Investment all accounts except that retirement plans have a minimum
additional purchase of $1.
(The minimum for additional purchases may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------------
Acquire additional shares through the All dividends and capital gains distributions are
automatic dividend reinvestment plan automatically reinvested without a sales charge.
------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis
investment plan through certain Merrill Lynch investment or central asset
accounts.
-------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your Fund shares only to another
Another Securities securities dealer securities dealer that has entered into an agreement with
Dealer Merrill Lynch. Certain shareholder services will be
available for the transferred shares.
You may only purchase additional shares of funds previously
owned before the transfer. All future trading of these
assets must be coordinated by the receiving firm.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH LOW DURATION FUND 25
<PAGE> 27

[YOUR ACCOUNT ICON] Your Account

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares to Transfer to a non-participating You must either:
Another Securities securities dealer - Transfer your shares to an account with the Transfer
Dealer (continued) Agent; or
- Sell your shares.
-------------------------------------------------------------------------------------------------------------------------------
Sell Your Shares Have your Merrill Lynch Financial The price of your shares is based on the next calculation
Consultant or securities dealer of net asset value after your order is placed. You must
submit your sales order submit your request to your dealer within fifteen minutes
after that day's close of regular trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time). Any
redemption request placed from a dealer after that time
will be priced at the net asset value at the close of
regular trading on the next business day. Dealers must
submit redemption requests to the Fund not more than thirty
minutes after the close of business on the New York Stock
Exchange.
Securities dealers, including Merrill Lynch, may charge a
fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares held by the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing
to the Transfer Agent at the address on the inside back
cover of this prospectus. All shareholders on the account
must sign the letter and signatures must be guaranteed. If
you hold stock certificates, return the certificates with
the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of
a properly completed request. If you make a redemption
request before the Fund has collected payment for the
purchase of shares, the Fund or the Transfer Agent may
delay mailing your proceeds. This delay will usually not
exceed ten days.
If you hold share certificates, they must be delivered to
the Transfer Agent before they can be converted. Check with
the Transfer Agent or your Merrill Lynch Financial
Consultant for details.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

26 MERRILL LYNCH LOW DURATION FUND
<PAGE> 28

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Shares Participate in the Fund's Systematic You can choose to receive systematic payments from your
Systematically Withdrawal Plan Fund account either by check or through direct deposit to
your bank account on a monthly or quarterly basis. If you
have a Merrill Lynch CMA(R), CBA(R) or Retirement Account
you can arrange for systematic redemptions of a fixed
dollar amount on a monthly, bi-monthly, quarterly,
semi-annual or annual basis, subject to certain conditions.
Under either method you must have dividends and other
distributions automatically reinvested. For Class B and C
shares your total annual withdrawals cannot be more than
10% per year of the value of your shares at the time your
plan is established. The deferred sales charge is waived
for systematic redemptions. Ask your Merrill Lynch
Financial Consultant for details.
-------------------------------------------------------------------------------------------------------------------------------
Exchange Your Select the fund into which you want You can exchange your shares of the Fund for shares of many
Shares to exchange. Be sure to read that other Merrill Lynch mutual funds. You must have held the
fund's prospectus shares used in the exchange for at least 15 calendar days
before you can exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another fund. If you own Class
A shares and wish to exchange into a fund in which you have
no Class A shares (and are not otherwise eligible to
purchase Class A shares, you will exchange into Class D
shares.
Some of the Merrill Lynch mutual funds impose a different
initial or deferred sales charge schedule. If you exchange
Class A or D shares for shares of a fund with a higher
initial sales charge than you originally paid, you will be
charged the difference at the time of exchange. If you
exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. If you exchange Class A or D shares for money
market fund shares, you will receive Class A shares of
Summit Cash Reserves Fund. Class B or C shares of the Fund
will be exchanged for Class B shares of Summit. Although
there is currently no limit on the number of exchanges that
you can make, the exchange privilege may be modified or
terminated at any time in the future.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH LOW DURATION FUND 27
<PAGE> 29

[YOUR ACCOUNT ICON] Your Account
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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

When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The 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 regular trading on the
Exchange (generally at 4:00 p.m. Eastern time). The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.

Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Class B shares will have a higher net
asset value than Class C shares because Class B shares have lower distribution
expenses than Class C shares. Also dividends paid on Class A and Class D shares
will generally be higher than dividends paid on Class B and Class C shares
because Class A and Class D shares have lower expenses.

PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.

You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.

If you leave one of these programs, your shares may be redeemed or automatically
exchanged into another class of Fund shares or into a money market fund. The
class you receive may be the class you originally owned when you entered the
program, or in certain cases, a different class. If the exchange is into Class B
shares, the period before conversion to Class D

28 MERRILL LYNCH LOW DURATION FUND
<PAGE> 30

DIVIDENDS -- income paid to shareholders. Dividends may be reinvested in
additional Fund shares as they are paid.

DISTRIBUTIONS -- capital gains paid to shareholders. Distributions may be
reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"

Unless your investment is in a tax deferred account, you may want to avoid
buying shares shortly before the Fund pays a dividend or distribution. The
reason? If you buy shares when a fund has realized but not yet distributed
income or capital gains, you will pay the full price for the shares and then
receive a portion of the price back in the form of a taxable dividend. Before
investing you may want to consult your tax adviser.

shares may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period, you
may be charged a fee in accordance with the terms of the program.

Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

The Fund will distribute any net investment income monthly, and any net realized
long or short term capital gains annually. The Fund may also pay a special
distribution at the end of the calendar year to comply with Federal tax
requirements. If your account is with Merrill Lynch and you would like to
receive DIVIDENDS and DISTRIBUTIONS in cash, contact your Merrill Lynch
Financial Consultant. If your account is with the Transfer Agent and you would
like to receive dividends and distributions in cash, contact the Transfer Agent.

You will pay tax on dividends and distributions from the Fund whether you
receive them in cash or additional shares. If you redeem Fund shares or exchange
them for shares of another fund, any gain on the transaction may be subject to
tax. The Fund intends to make distributions that will either be taxed as
ordinary income or capital gains. Capital gains are taxed at different rates
than ordinary income.

If you are neither a lawful permanent resident nor a citizen of the U.S. or if
you are a foreign entity, the Fund's ordinary income dividends (which include
distributions of net short-term capital gains) will generally be subject to a
30% U.S. withholding tax, unless a lower treaty rate applies.

Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

MERRILL LYNCH LOW DURATION FUND 29
<PAGE> 31

[YOUR ACCOUNT ICON] Your Account

By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.

This section summarizes some of the consequences under current federal tax law
of an investment in the Fund. It is not a substitute for personal tax advice.
Consult your personal tax adviser about the potential tax consequences of an
investment in the Fund under all applicable tax laws. The Fund's Statement of
Additional Information has more information about taxes.

30 MERRILL LYNCH LOW DURATION FUND
<PAGE> 32

Management of the Fund [MANAGEMENT OF THE FUND ICON]
FUND ASSET MANAGEMENT
--------------------------------------------------------------------------------

Fund Asset Management, L.P., the Fund's Investment Adviser, manages the Fund's
investments and its business operations under the overall supervision of the
Board of Trustees of the Trust. The Investment Adviser has the responsibility
for making all investment decisions for the Fund. The Trust pays the Investment
Adviser a fee at the annual rate of 0.21% of the average daily net assets of the
Low Duration Master Portfolio of the Trust. The Fund pays the Investment Adviser
an administrative fee at the annual rate of 0.25% of the average daily net
assets of the Fund.

Fund Asset Management is part of Merrill Lynch Investment Managers, which had
approximately $555 billion in investment company and other portfolio assets
under management as of June 2000. This amount includes assets managed for
Merrill Lynch affiliates.

MASTER/FEEDER STRUCTURE
--------------------------------------------------------------------------------

Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Fund seeks to achieve its investment objective by
investing all its assets in the corresponding Low Duration Master Portfolio of
the Trust. Investors in the Fund will acquire an indirect interest in the
underlying Portfolio.
Other "feeder" funds may also invest in the "master" Portfolio. This structure
may enable the Fund to reduce costs through economies of scale. A larger
investment portfolio may also reduce certain transaction costs to the extent
that contributions to and redemptions from the master from different feeders may
offset each other and produce a lower net cash flow.

The Fund may withdraw from the Low Duration Master Portfolio at any time and may
invest all of its assets in another pooled investment vehicle or retain an
investment adviser to manage the Fund's assets directly.

Smaller feeder funds may be harmed by the actions of larger feeder funds. For
example, a larger feeder fund could have more voting power than the Fund over
the operations of the Low Duration Master Portfolio.

Whenever the Low Duration Master Portfolio holds a vote of its feeder funds, the
Fund will pass the vote through to its own shareholders.

MERRILL LYNCH LOW DURATION FUND 31
<PAGE> 33

(This page intentionally left blank)

MERRILL LYNCH LOW DURATION FUND
<PAGE> 34

[ML POTENTIAL INVESTORS CHART]

MERRILL LYNCH LOW DURATION FUND
<PAGE> 35

(LOGO)

For More Information [FOR MORE INFORMATION ICON]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the
Fund's annual and semi-annual reports to shareholders. In the Fund's
annual report you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during its last fiscal year. You may obtain these reports at no cost by
calling 1-800-MER-FUND.

The Fund will send you one copy of each shareholder report and certain
other mailings, regardless of the number of Fund accounts you have. To
receive separate shareholder reports for each account, call your Merrill
Lynch Financial Consultant or write to the Transfer Agent
at its mailing address. Include your name, address, tax identification
number and Merrill Lynch brokerage or mutual fund account number. If you
have any questions, please call your Merrill Lynch Financial Consultant
or the Transfer Agent at 1-800-MER-FUND.

STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further
information about the Fund and is incorporated by reference (legally
considered
to be part of this prospectus). You may request a free copy by writing the Fund
at Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
32232-5289 or by calling 1-800-MER-FUND.

Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated on the inside back cover of this prospectus if you
have any questions.

Information about the 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.

File #811-4182
Code #ML-70-1000
(C) Fund Asset Management, L.P.
Merrill Lynch
Low Duration Fund
October [ ], 2000

Prospectus
<PAGE> 36

[MERRILL LYNCH LOGO]
Merrill Lynch Total Return Bond Fund
of Merrill Lynch Investment Managers Funds, Inc.
October [ ], 2000

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
<PAGE> 37

Table of Contents

<TABLE>
<CAPTION>
PAGE
<S> <C>
[KEY FACTS ICON]
KEY FACTS
-----------------------------------------------------------------
The Merrill Lynch Total Return Bond Fund at a Glance........ 3
Risk/Return Bar Chart....................................... 4
Fees and Expenses........................................... 6

MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 38

THE MERRILL LYNCH TOTAL RETURN BOND FUND AT A GLANCE
--------------------------------------------------------------------------------

WHAT IS THE FUND'S STATED INVESTMENT OBJECTIVE?

The investment objective of the Fund is to maximize long-term total return.

WHAT ARE THE FUND'S GOALS?

The Fund's main goal is total long-term return -- it looks for securities that
pay interest or dividends and that will increase in value over time. We cannot
guarantee that the Fund will achieve its goals.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests in a diversified portfolio of bonds of different maturities,
including U.S. GOVERNMENT SECURITIES, CORPORATE BONDS, ASSET-BACKED SECURITIES
and MORTGAGE-BACKED SECURITIES. At least 85% of its investments will be
investment grade. Up to 15% of its investments may be rated below investment
grade (none below B). The Fund's DURATION will be from two to eight years.

The Fund is a "feeder" fund that invests all of its assets in a corresponding
"master" portfolio (the "Total Return Bond Master Portfolio") of the Fund Asset
Management Master Trust (the "Trust") which has the same objective as the Fund.
All investments will be made at the Trust level. This structure is sometimes
called a "master/feeder" structure. The Fund's investment results will
correspond directly to the investment results of the Total Return Bond Master
Portfolio in which it invests. For simplicity, this prospectus uses the term
"Fund" to include the Total Return Bond Master Portfolio of the Trust.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

Key Facts [KEY FACTS ICON]

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.

U.S. GOVERNMENT SECURITIES -- include direct obligations issued by the U.S.
Treasury and securities issued or guaranteed by U.S. government agencies and
instrumentalities.

CORPORATE BONDS -- fixed-income debt securities issued by corporations, as
distinct from securities issued by a government or its agencies or
instrumentalities.

ASSET-BACKED SECURITIES -- bonds or notes backed by loan paper or accounts
receivable originated by banks, credit card companies or other providers of
credit.

MERRILL LYNCH TOTAL RETURN BOND FUND 3
<PAGE> 39

[KEY FACTS ICON] Key Facts
DURATION -- a measure of how much the price of a bond would change compared to a
change in market interest rates.

PREPAYMENT RISK -- the risk that certain obligations will be paid off by the
obligor more quickly than anticipated and the value of these securities will
fall.

EXTENSION RISK -- the risk that certain obligations will be paid off more slowly
by the obligor than anticipated and the value of these securities will fall.

VOLATILITY -- the amount and frequency of changes in a security's value.

"JUNK" BONDS -- bonds with a credit rating of BB/Ba or lower by rating agencies.

An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.

See "Investment Risks" for more information about the risks associated with the
Fund.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

- Are looking for an investment that provides income.

- Want a professionally managed and diversified portfolio.

- Are willing to accept the risk that the value of your investment
may decline as a result of interest rate movements in order to
seek high current return.

- Are prepared to receive taxable distributions.

RISK/RETURN BAR CHART
--------------------------------------------------------------------------------

The Fund recently commenced operations and does not have a performance record.
The Fund will be a feeder fund of the Trust. The Fund and the Total Return Bond
Master Portfolio have identical investment objectives and policies and use the
same portfolio management personnel.

The bar chart and table shown below are based upon performance of the other
feeder fund which is the predecessor of the recently organized Trust. The bar
chart and table provide an indication of the risks of investing in the Total
Return Bond Master Portfolio, which are identical to the risks of investing in
the Fund. The bar chart shows changes in performance for Class A shares for each
calendar year based on the performance of the Total Return Bond Master Portfolio
and its predecessor since its inception. Sales charges are not reflected in the
bar chart. If these amounts were reflected, returns would be less than those
shown. The table compares the average

4 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 40

annual total returns for each class of the Fund's shares for the periods shown
with those of the Lehman Brothers Aggregate Bond Index. The average annual total
returns of the Fund's shares are based on the performance of the Total Return
Bond Master Portfolio and its predecessor, adjusted for the sales charges shown
in the fee table. How the Total Return Bond Master Portfolio and its predecessor
performed in the past is not necessarily an indication of how the Total Return
Bond Master Portfolio or the Fund will perform in the future.

Total return for the six months ended June 30, 2000: 2.42%.

During the period shown in the bar chart, the highest return for a quarter was
6.57% (quarter ended June 30, 1995) and the lowest return for a quarter was
-2.38% (quarter ended March 31, 1996).

CLASS I* -1.66% 8.45% 8.40%(1)
Lehman Brothers Aggregate Bond Index -0.82% 7.73% 7.63%(1)
----------------------------------------------------------------------------------------
CLASS A* N/A N/A 0.29%(2)
Lehman Brothers Aggregate Bond Index N/A N/A 0.83%(2)
----------------------------------------------------------------------------------------
CLASS B N/A N/A N/A
Lehman Brothers Aggregate Bond Index N/A N/A N/A
----------------------------------------------------------------------------------------
CLASS C N/A N/A N/A
Lehman Brothers Aggregate Bond Index N/A N/A N/A
----------------------------------------------------------------------------------------
</TABLE>

The Lehman Brothers Aggregate Bond Index is an unmanaged market-weighted Index
comprised of investment-grade corporate bonds (rated BBB or better), mortgages
and U.S. Treasury and government agency issues with at least one year to
maturity.

* Includes the effect of sales charges, which were not imposed until October
, 2000.

(1) Inception date is December 6, 1994.

(2) Inception date is June 2, 1999.

MERRILL LYNCH TOTAL RETURN BOND FUND 5
<PAGE> 41

[KEY FACTS ICON] Key Facts
UNDERSTANDING EXPENSES

Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:

SHAREHOLDER FEES -- these include sales charges which you may pay when you buy
or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:

ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating the
Fund.

INVESTMENT ADVISORY FEE -- a fee paid to the Investment Adviser for managing the
Trust.

DISTRIBUTION FEE -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants.

SERVICE (ACCOUNT MAINTENANCE) FEES -- fees used to compensate securities dealers
for account maintenance activities.

FEES AND EXPENSES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)(a): CLASS A CLASS B(b) CLASS C CLASS D
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering price) %(c) None None %(c)
-------------------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load) (as a
percentage of original purchase price or
redemption proceeds, whichever is lower) None(d) %(c) %(c) None(d)
-------------------------------------------------------------------------------------------
Sales Charge (Load) imposed on Dividend
Reinvestments None None None None
-------------------------------------------------------------------------------------------
Redemption Fee None None None None
-------------------------------------------------------------------------------------------
Exchange Fee None None None None
-------------------------------------------------------------------------------------------
Maximum Account Fee None None None None
-------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM
FUND ASSETS)(e):
-------------------------------------------------------------------------------------------
INVESTMENT ADVISORY FEES(f) 0.30% 0.30% 0.30% 0.30%
-------------------------------------------------------------------------------------------
DISTRIBUTION AND/OR SERVICE (12b-1) FEES(g) None
-------------------------------------------------------------------------------------------
Other Expenses (including transfer agency and
administrative fees)(h)(i) 0. % 0. % 0. % 0. %
-------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses(j) 0. % . % . % . %
-------------------------------------------------------------------------------------------
</TABLE>

(a) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.
(b) Class B shares automatically convert to Class D shares about ten years after
you buy them and will no longer be subject to distribution fees.
(c) Some investors may qualify for reductions in the sales charge (load).
(d) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(e) For the Fund, the fees and expenses include both the Fund and the Trust.
(f) Paid by the Total Return Bond Master Portfolio.
(g) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used in this prospectus and in all other Fund
materials. If you hold Class B or Class C shares for a long time, it may
cost you more in distribution (12b-1) fees than the maximum sales charge
that you would have paid if you had bought one of the other classes.
(h) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year.

6 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 42

(footnotes continued from previous page)

(i) Includes administrative fees, which are payable to the Investment Adviser
by the Fund at the annual rate of 0.25%.
(j) The Investment Adviser has voluntarily agreed to waive a portion of the
management fee due and reimburse the Fund for a portion of other expenses.
Total Annual Fund Operating Expenses after giving effect to the waiver of
fees and reimbursement of expenses would be: 0.65% for Class A shares,
1.40% for Class B shares, 1.45% for Class C shares and 0.90% for Class D
shares. The fee waiver and expense reimbursement may be discontinued or
reduced by the Investment Adviser at any time without notice.
EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

EXPENSES IF YOU DID REDEEM YOUR SHARES:

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

* Assuming conversion to Class D shares.

MERRILL LYNCH TOTAL RETURN BOND FUND 7
<PAGE> 43

HOW THE FUND INVESTS
--------------------------------------------------------------------------------

The Fund's investment objective is to MAXIMIZE LONG-TERM TOTAL RETURN. The Fund
invests in bonds with a portfolio duration of two to eight years. The total rate
of return for the Fund is expected to rise and fall more than a shorter duration
bond fund.

TYPES OF INVESTMENTS

The Fund seeks to achieve its objective by investing mainly in investment grade,
interest-bearing securities of varying maturities. These include:

- U.S. government securities

- preferred stocks

- mortgage-backed and other asset-backed securities

- corporate bonds

- bonds that are convertible into stocks

- bank certificates of deposit, fixed time deposits and bankers'
acceptances

- repurchase agreements, reverse repurchase agreements and dollar
rolls

- obligations of foreign governments or their subdivisions,
agencies and instrumentalities

- obligations of international agencies or supra-national entities

- municipal bonds

RATINGS LIMITATIONS

- at least 85% of total assets rated at least investment grade or,
if short-term, the second highest quality grade, by a major
rating agency such as Moody's or S&P

- up to 15% of total assets rated below investment grade,
but none below B

Details About the Fund [DETAILS ABOUT THE FUND ICON]
ABOUT THE PORTFOLIO MANAGERS

Michael Sanchez is the co-Portfolio Manager of the Fund. Before joining the
Investment Adviser in 1996, Mr. Sanchez was with Provident Investment Counsel as
senior vice president and portfolio manager from 1991 to 1995 and with ARCO
Investment Management Company as Director of Fixed Income Investments from 1988
to 1991.

ABOUT THE INVESTMENT ADVISER

Fund Asset Management, L.P. is the Investment Adviser to the Fund.

8 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 44

MATURITY AND DURATION REQUIREMENTS

Duration is a tool to measure interest rate risk. Assuming a 1% change in
interest rates and the duration shown below, the Fund's price would change as
follows:

<TABLE>
<CAPTION>
DURATION CHANGE IN INTEREST RATES
----------------------------------------------------------------
<S> <C>
4.5 YRS. 1% DECLINE -> 4.5% gain in Fund price
----------------------------------------------------------------
1% RISE -> 4.5% decline in Fund price
----------------------------------------------------------------
</TABLE>

FOREIGN BONDS

The Fund may invest in foreign bonds as follows:

- up to 25% of total assets in foreign bonds that are denominated
in U.S. dollars

- up to 15% of total assets in foreign bonds that are not
denominated in U.S. dollars

- up to 15% of total assets in emerging market foreign bonds

MERRILL LYNCH TOTAL RETURN BOND FUND 9
<PAGE> 45

[DETAILS ABOUT THE FUND ICON] Details About the Fund

MONEY MARKET INVESTMENTS

PORTFOLIO TURNOVER

INVESTMENT RISKS
--------------------------------------------------------------------------------

MARKET AND SELECTION RISK

MORTGAGE-BACKED SECURITIES

10 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 46

otherwise repay principal on their mortgages earlier than scheduled. When this
happens, certain types of mortgage-backed securities will be paid off more
quickly than originally anticipated. Prepayment reduces the yield to maturity
and average life of the mortgage-backed securities. In addition, when the Fund
reinvests the proceeds of a prepayment, it may receive a lower interest rate
than the rate on the security that was prepaid. This risk is known as
"prepayment risk." When interest rates rise, certain types of mortgage-backed
securities will be paid off more slowly than originally anticipated and the
value of these securities will fall. This risk is known as extension risk.

Mortgage-backed securities are issued by Federal government agencies like the
Government National Mortgage Association ("Ginnie Mae") the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Association ("Freddie Mac"). Principal and interest payments on mortgage-backed
securities issued by Federal government agencies are guaranteed by either the
Federal government or the government agency. This means that such securities
have very little credit risk. Other mortgage-backed securities are issued by
private corporations rather than Federal agencies. Private mortgage-backed
securities have credit risk as well as prepayment risk and extension risk.

MERRILL LYNCH TOTAL RETURN BOND FUND 11
<PAGE> 47

[DETAILS ABOUT THE FUND ICON] Details About the Fund

interest rates move in a manner not anticipated by the Investment Adviser, it is
possible that the Fund could lose all or substantially all of its investment.

ASSET-BACKED SECURITIES

CREDIT RISK

INTEREST RATE RISK

CALL AND REDEMPTION RISK

JUNK BONDS

Junk bonds are bonds that are rated below investment grade by the major rating
agencies or are unrated securities that the Fund's Investment Adviser believes
are of comparable quality. Although junk bonds generally pay higher rates of
interest than investment grade bonds, they are high risk investments

12 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 48

that may cause income and principal losses for the Fund. Junk bonds generally
are less liquid and experience more price volatility than higher rated bonds.
The issuers of junk bonds may have a larger amount of outstanding debt relative
to their assets than issuers of investment grade bonds. In the event of an
issuer's bankruptcy, claims of other creditors may have priority over the claims
of junk bond holders, leaving few or no assets available to repay junk bond
holders. Junk bonds may be subject to greater call and redemption risk than
higher rated debt securities.

WHEN-ISSUED SECURITIES, DELAYED-DELIVERY SECURITIES AND FORWARD COMMITMENTS

These types of investments involve the risk that the security the Fund buys will
lose value prior to its delivery to the Fund. There also is the risk that the
security will not be issued or that the other party will not meet its
obligation, in which case the Fund loses the investment opportunity of the
assets it has set aside to pay for the security and any gain in the security's
price.

VARIABLE RATE DEMAND OBLIGATIONS

These are floating rate securities that consist of an interest in a long-term
bond and the conditional right to demand payment prior to the bond's maturity
from a bank or other financial institution. If the bank or other financial
institution is unable to pay on demand, the Fund may be adversely affected. In
addition, these securities are subject to credit risk.

INDEXED AND INVERSE FLOATING RATE SECURITIES

MERRILL LYNCH TOTAL RETURN BOND FUND 13
<PAGE> 49

[DETAILS ABOUT THE FUND ICON] Details About the Fund

the underlying interest rate, which effectively leverages the Fund's investment.
As a result, the market value of such securities will generally be more volatile
than that of fixed rate securities. Both indexed securities and inverse floaters
can be derivative securities and can be considered speculative.

SOVEREIGN DEBT

CORPORATE LOANS

RISKS OF CONVERTIBLE SECURITIES

14 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 50

FOREIGN MARKET RISK

MERRILL LYNCH TOTAL RETURN BOND FUND 15
<PAGE> 51

[DETAILS ABOUT THE FUND ICON] Details About the Fund

- Prices of foreign securities may go up and down more than prices
of securities traded in the U.S.

- The value of the Fund's foreign holdings (and hedging
transactions in foreign currencies) will be affected by changes
in currency exchange rates.

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

EUROPEAN ECONOMIC AND MONETARY UNION (EMU)

16 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 52

DERIVATIVES

Derivatives involve the following risks:

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

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

MERRILL LYNCH TOTAL RETURN BOND FUND 17
<PAGE> 53

[DETAILS ABOUT THE FUND ICON] Details About the Fund

increase or decrease in value at a rate that is a multiple of
the changes in the applicable index.

STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

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

18 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 54

Your Account [YOUR ACCOUNT ICON]
MERRILL LYNCH SELECT PRICING(SM) SYSTEM
--------------------------------------------------------------------------------

For example, if you select Class A or D shares, you pay a sales charge at the
time of purchase. If you buy Class D shares, you also pay an ongoing account
maintenance fee of 0.25%. You may be eligible for a sales charge waiver.
If you select Class B or C shares, you will invest the full amount of your
purchase price but you will be subject to an account maintenance fee of %
and a distribution fee of % for Class B shares and % for Class C
shares.

The Fund's shares are distributed by FAM Distributors, Inc., an affiliate of
Merrill Lynch.

MERRILL LYNCH TOTAL RETURN BOND FUND 19
<PAGE> 55

[YOUR ACCOUNT ICON] Your Account

The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Availability Limited to certain Generally available Generally available
investors including: through Merrill Lynch. through Merrill Lynch.
- Current Class A Limited availability Limited availability
shareholders through other securities through other securities
- Certain Retirement Plans dealers. dealers.
- Participants in certain
Merrill Lynch-sponsored
programs
- Certain affiliates of
Merrill Lynch.
-----------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time of No. Entire purchase price No. Entire purchase price
Charge? purchase. Lower sales is invested in shares of is invested in shares of
charges available for the Fund. the Fund.
larger investments.
-----------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged for Yes. Payable if you redeem Yes. Payable if you redeem
Charge? purchases over $1 million within four years of within one year of
that are redeemed within purchase. purchase.
one year.)
-----------------------------------------------------------------------------------------------------------
Account Maintenance No. 0.25% Account Maintenance 0.25% Account Maintenance
and Fee Fee
Distribution Fees? % Distribution Fee. % Distribution Fee.
-----------------------------------------------------------------------------------------------------------
Conversion to Class No. Yes, automatically after No.
D shares? approximately ten years.
-----------------------------------------------------------------------------------------------------------

<CAPTION>
CLASS D
<S> <C>
Availability Generally available
through Merrill Lynch.
Limited availability
through other securities
dealers.
---------------------------------------------------------------------------
Initial Sales Yes. Payable at time of
Charge? purchase. Lower sales
charges available for
larger investments.
------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged for
Charge? purchases over $1 million
that are redeemed within
one year.)
-----------------------------------------------------------------------------------------------------------
Account Maintenance 0.25% Account Maintenance
and Fee No Distribution Fee.
Distribution Fees?
-----------------------------------------------------------------------------------------------------------
Conversion to Class No.
D shares?
-----------------------------------------------------------------------------------------------------------
</TABLE>

20 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 56

CLASS A AND CLASS D SHARES -- INITIAL SALES CHARGE OPTIONS

If you select Class A or Class D shares, you will pay a sales charge at the time
of purchase.

* Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or your
redemption proceeds. A sales charge of 0.75% will be charged on purchases of
$1,000,000 or more of Class A or Class D shares by certain employer-
sponsored retirement or savings plans.

No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

- Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.

- Merrill Lynch Blueprint(SM) Program participants.

- TMA(SM) Managed Trusts.

- Certain Merrill Lynch investment or central asset accounts.

- Certain employer-sponsored retirement or savings plans.

- Purchases using proceeds from the sale of certain Merrill Lynch
closed-end funds under certain circumstances.

MERRILL LYNCH TOTAL RETURN BOND FUND 21
<PAGE> 57

[YOUR ACCOUNT ICON] Your Account

- Certain investors, including directors of Merrill Lynch mutual
funds and Merrill Lynch employees.

- Certain Merrill Lynch fee-based programs.

CLASS B AND CLASS C SHARES -- DEFERRED SALES CHARGE OPTIONS

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase or your Class C shares within one year after purchase, you
may be required to pay a deferred sales charge. You will also pay distribution
fees of % on Class B shares and % on Class C shares and account
maintenance fees of 0.25% on both Class B and Class C shares each year under a
distribution plan that the Fund has adopted under Rule 12b-1 of the Investment
Company Act of 1940. 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 and may
cost you more than paying an initial sales charge. The Distributor uses the
money that it receives from the deferred sales charges and the distribution fees
to cover the costs of marketing, advertising and compensating the Merrill Lynch
Financial Consultant or other securities dealer who assists you in purchasing
Fund shares.

CLASS B SHARES

If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually

22 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 58

decreases as you hold your shares over time, according to the following
schedule:

<TABLE>
<CAPTION>
YEARS SINCE PURCHASE SALES CHARGE*
-------------------------------------
<S> <C>
0 - 1 %
-------------------------------------
1 - 2 %
-------------------------------------
2 - 3 %
-------------------------------------
3 - 4 %
-------------------------------------
4 AND THEREAFTER %
-------------------------------------
</TABLE>

The deferred sales charge relating to Class B shares may be reduced or waived in
certain circumstances, such as:

- Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old.

- Redemption by certain eligible 401(a) and 401(k) plans, certain
related accounts and group plans participating in the Merrill
Lynch Blueprint(SM) Program and certain retirement plan
rollovers.

- Redemption in connection with participation in certain Merrill
Lynch fee-based programs.

- Withdrawal through the Merrill Lynch Systematic Withdrawal Plan
of up to 10% per year of your Class B account value at the time
the plan is established.

MERRILL LYNCH TOTAL RETURN BOND FUND 23
<PAGE> 59

[YOUR ACCOUNT ICON] Your Account

shares. The conversion of Class B to Class D shares is not a taxable event for
federal income tax purposes.

CLASS C SHARES

Class C shares do not offer a conversion privilege.

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
--------------------------------------------------------------------------------

24 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 60

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Buy Shares First, select the share class Refer to the Merrill Lynch Select Pricing(SM) table on page
appropriate for you 19. Be sure to read this prospectus carefully.
------------------------------------------------------------------------------------------------------
Next, determine the amount of your The minimum initial investment for the Fund is $1,000 for
investment all accounts except:
- $500 for Employee Access(SM) Accounts
- $250 for certain Merrill Lynch fee-based programs
- $100 for the Merrill Lynch Blueprint(SM) Program
- $100 for retirement plans
(The minimums for initial investments may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------------
Have your Merrill Lynch Financial The price of your shares is based on the next calculation
Consultant or securities dealer of net asset value after your order is placed. Any purchase
submit your purchase order orders placed after the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time) will
be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at
the net asset value determined on the next business day.
The Fund may reject any order to buy shares and may suspend
the sale of shares at any time. Merrill Lynch may charge a
processing fee to confirm a purchase. This fee is currently
$5.35.
------------------------------------------------------------------------------------------------------
Or contact the Transfer Agent To purchase shares directly, call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the
address on the inside back cover of this prospectus.
-------------------------------------------------------------------------------------------------------------------------------
Add to Your Purchase additional shares The minimum investment for additional purchases is $50 for
Investment all accounts except that retirement plans have a minimum
additional purchase of $1.
(The minimum for additional purchases may be waived under
certain circumstances.)
------------------------------------------------------------------------------------------------------
Acquire additional shares through the All dividends and capital gains distributions are
automatic dividend reinvestment plan automatically reinvested without a sales charge.
------------------------------------------------------------------------------------------------------
Participate in the automatic You may invest a specific amount on a periodic basis
investment plan through certain Merrill Lynch investment or central asset
accounts.
-------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a participating You may transfer your Fund shares only to another
Another Securities securities dealer securities dealer that has entered into an agreement with
Dealer Merrill Lynch. Certain shareholder services will not be
available for the transferred shares.
You may only purchase additional shares of funds previously
owned before the transfer. All future trading of these
assets must be coordinated by the receiving firm.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH TOTAL RETURN BOND FUND 25
<PAGE> 61

[YOUR ACCOUNT ICON] Your Account

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Transfer Shares to Transfer to a non-participating You must either:
Another Securities securities dealer - Transfer your shares to an account with the Transfer
Dealer (continued) Agent; or
- Sell your shares.
-------------------------------------------------------------------------------------------------------------------------------
Sell Your Shares Have your Merrill Lynch Financial The price of your shares is based on the next calculation
Consultant or securities dealer of net asset value after your order is placed. You must
submit your sales order submit your request to your dealer within fifteen minutes
after that day's close of regular trading on the New York
Stock Exchange (generally 4:00 p.m. Eastern time). Any
redemption request placed from a dealer after that time
will be priced at the net asset value at the close of
business on the next business day. Dealers must submit
redemption requests to the Fund not more than thirty
minutes after the close of business on the New York Stock
Exchange.
Securities dealers, including Merrill Lynch, may charge a
fee to process a redemption of shares. Merrill Lynch
currently charges a fee of $5.35. No processing fee is
charged if you redeem shares held by the Transfer Agent.
The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------------------------------------
Sell through the Transfer Agent You may sell shares held at the Transfer Agent by writing
to the Transfer Agent at the address on the inside back
cover of this prospectus. All shareholders on the account
must sign the letter and signatures must be guaranteed. If
you hold stock certificates, return the certificates with
the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of
a properly completed request. If you make a redemption
request before the Fund has collected payment for the
purchase of shares, the Fund or the Transfer Agent may
delay mailing your proceeds. This delay will usually not
exceed ten days.
If you hold share certificates, they must be delivered to
the Transfer Agent before they can be converted. Check with
the Transfer Agent or your Merrill Lynch Financial
Consultant for details.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

26 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 62

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sell Shares Participate in the Fund's Systematic You can choose to receive systematic payments from your
Systematically Withdrawal Plan Fund account either by check or through direct deposit to
your bank account on a monthly or quarterly basis. If you
have a Merrill Lynch CMA(R), CBA(R) or Retirement Account
you can arrange for systematic redemptions of a fixed
dollar amount on a monthly, bi-monthly, quarterly,
semi-annual or annual basis, subject to certain conditions.
Under either method you must have dividends and other
distributions automatically reinvested. For Class B and C
shares your total annual withdrawals cannot be more than
10% per year of the value of your shares at the time your
plan is established. The deferred sales charge is waived
for systematic redemptions. Ask your Merrill Lynch
Financial Consultant for details.
-------------------------------------------------------------------------------------------------------------------------------
Exchange Your Select the fund into which you want You can exchange your shares of the Fund for shares of many
Shares to exchange. Be sure to read that other Merrill Lynch mutual funds. You must have held the
fund's prospectus shares used in the exchange for at least 15 calendar days
before you can exchange to another fund.
Each class of Fund shares is generally exchangeable for
shares of the same class of another fund. If you own Class
A shares and wish to exchange into a fund in which you have
no Class A shares (and are not otherwise eligible to
purchase Class A shares), you will exchange into Class D
shares.
Some of the Merrill Lynch mutual funds impose a different
initial or deferred sales charge schedule. If you exchange
Class A or D shares for shares of a fund with a higher
initial sales charge than you originally paid, you will be
charged the difference at the time of exchange. If you
exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher
schedule will apply. The time you hold Class B or C shares
in both funds will count when determining your holding
period for calculating a deferred sales charge at
redemption. If you exchange Class A or D shares for money
market fund shares, you will receive Class A shares of
Summit Cash Reserves Fund. Class B or C shares of the Fund
will be exchanged for Class B shares of Summit. Although
there is currently no limit on the number of exchanges that
you can make, the exchange privilege may be modified or
terminated at any time in the future.
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH TOTAL RETURN BOND FUND 27
<PAGE> 63

[YOUR ACCOUNT ICON] Your Account
NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

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

When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The 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 regular trading on the
Exchange generally at 4:00 p.m. Eastern time). The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by the Fund may trade on
weekends or other days when the Fund does not price its shares. As a result, the
Fund's net asset value may change on days when you will not be able to purchase
or redeem the Fund's shares.

PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
--------------------------------------------------------------------------------

28 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 64

DIVIDENDS -- income paid to shareholders. Dividends may be reinvested in
additional Fund shares as they are paid.

DISTRIBUTIONS -- capital gains paid to shareholders. Distributions may be
reinvested in additional Fund shares as they are paid.
"BUYING A DIVIDEND"

Details about these features and the relevant charges are included in the client
agreement for each fee-based program and are available from your Merrill Lynch
Financial Consultant.

DIVIDENDS AND TAXES
--------------------------------------------------------------------------------

MERRILL LYNCH TOTAL RETURN BOND FUND 29
<PAGE> 65

[YOUR ACCOUNT ICON] Your Account

By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.

30 MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 66

Management of the Fund [MANAGEMENT OF THE FUND ICON]
FUND ASSET MANAGEMENT
--------------------------------------------------------------------------------

Fund Asset Management, L.P., the Fund's Investment Adviser, manages the Fund's
investments and its business operations under the overall supervision of the
Board of Trustees of the Trust. The Investment Adviser has the responsibility
for making all investment decisions for the Fund. The Trust pays the Investment
Adviser a fee at the annual rate of 0.30% of the average daily net assets of the
Total Return Bond Master Portfolio of the Trust. The Fund pays the Investment
Adviser an administrative fee at the annual rate of 0.25% of the average daily
net assets of the Fund.

MASTER/FEEDER STRUCTURE
--------------------------------------------------------------------------------

Other "feeder" funds may also invest in the "master" Portfolio. This structure
may enable the Fund to reduce costs through economies of scale. A larger
investment portfolio may also reduce certain transaction costs to the extent
that contributions to and redemptions from the master from different feeders may
offset each other and produce a lower net cash flow.

The Fund may withdraw from the Total Return Bond Master Portfolio at any time
and may invest all of its assets in another pooled investment vehicle or retain
an investment adviser to manage the Fund's assets directly.

Smaller feeder funds may be harmed by the actions of larger feeder funds. For
example, a larger feeder fund could have more voting power than the Fund over
the operations of the Total Return Bond Master Portfolio.

Whenever the Total Return Bond Master Portfolio holds a vote of its feeder
funds, the Fund will pass the vote through to its own shareholders.

MERRILL LYNCH TOTAL RETURN BOND FUND 31
<PAGE> 67

(This page intentionally left blank)

MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 68

[ML POTENTIAL INVESTORS CHART]

MERRILL LYNCH TOTAL RETURN BOND FUND
<PAGE> 69

(LOGO)

Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated on the inside back cover of this prospectus 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.

File #811-4182
Code #ML-3090-1000
(C) Fund Asset Management, L.P.
Merrill Lynch
Total Return Bond Fund
October [ ], 2000

Prospectus
<PAGE> 70

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH LOW DURATION FUND
OF
MERRILL LYNCH INVESTMENT MANAGERS FUNDS, INC.

725 SOUTH FIGUEROA STREET, SUITE 4000, LOS ANGELES, CALIFORNIA
90017-5400 - PHONE NO. (213) 430-1000

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

Merrill Lynch Low Duration Fund (the "Fund") is a fund of Merrill Lynch
Investment Managers Funds, Inc. (the "Company"). The Company is a diversified,
open-end management investment company which is organized as a Maryland
corporation. The Fund seeks to maximize long-term total return, consistent with
preservation of capital. The Fund will seek to achieve its investment objective
by investing primarily in a diversified portfolio of bonds of different
maturities. The Fund should be considered as a means of diversifying an
investment portfolio and not in itself a balanced investment plan.

The Fund is a "feeder" fund that invests all of its assets in the Low
Duration Master Portfolio (the "Portfolio") of the Fund Asset Management Master
Trust (the "Master Trust"). The Portfolio has the same objective as the Fund.
All investments will be made at the Master Trust level. The Fund's investment
results will correspond directly to the investment results of the Portfolio.
There can be no assurance that the Fund will achieve its investment objective.

Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares of common stock, each with a different combination of
sales charges, ongoing fees and other features. The Merrill Lynch Select
Pricing(SM) System permits an investor to choose the method of purchasing shares
that the investor believes is most beneficial given the amount of the purchase,
the length of time the investor expects to hold the shares and other relevant
circumstances. See "Purchase of Shares."

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

This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated October
, 2000 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 637-3863 or by writing the Fund at Financial Data Services, Inc.,
P.O. Box 45289, Jacksonville, Florida 32232-5289. The Prospectus is incorporated
by reference into this Statement of Additional Information, and this Statement
of Additional Information is incorporated by reference into the Prospectus.

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

FUND ASSET MANAGEMENT, L.P. -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

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

The date of this Statement of Additional Information is October , 2000.
<PAGE> 71

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies........................... 2
Investment Restrictions................................... 2
Repurchase Agreements..................................... 3
Bonds..................................................... 3
U.S. Government Securities................................ 3
Municipal Obligations..................................... 4
Corporate Debt Securities................................. 5
Convertible Securities.................................... 5
Mortgage-Related Securities............................... 6
Asset-Backed Securities................................... 9
Risk Factors Relating to Investing in Mortgage-Related and
Asset-Backed Securities................................ 9
Duration.................................................. 10
Derivative Instruments.................................... 10
Foreign Securities........................................ 14
Foreign Currency Options and Related Risks................ 16
Forward Foreign Currency Exchange Contracts............... 16
Foreign Investment Risks.................................. 18
Risk Factors Relating to Investing in High Yield
Securities............................................. 20
Illiquid Securities....................................... 20
Reverse Repurchase Agreements............................. 21
Dollar Rolls.............................................. 21
Borrowing................................................. 22
Loans of Portfolio Securities............................. 22
When-Issued Securities.................................... 22
Real Estate Investment Trusts............................. 22
Shares of Other Investment Companies...................... 23
Short Sales Against-the-Box............................... 23
Corporate Loans........................................... 23
Temporary Defensive Position.............................. 23
Management of the Fund...................................... 23
Directors and Officers.................................... 23
Compensation of Directors................................. 25
Investment Advisory Arrangements.......................... 25
Administration Arrangements............................... 26
Code of Ethics............................................ 27
Purchase of Shares.......................................... 27
Initial Sales Charge Alternatives -- Class A and Class D
Shares................................................. 29
Reduced Initial Sales Charges -- Class A and Class D
Shares................................................. 30
Deferred Sales Charge Alternatives -- Class B and Class C
Shares................................................. 32
Employer-Sponsored Retirement or Savings Plans and Certain
Other Arrangements..................................... 35
Distribution Plans........................................ 35
Limitations on the Payment of Deferred Sales Charges...... 36
Redemption of Shares........................................ 37
Redemption................................................ 37
Repurchase................................................ 38
Reinstatement Privilege -- Class A and Class D Shares..... 38
</TABLE>
<PAGE> 72

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Deferred Sales Charge -- Class B and Class C Shares....... 39
Portfolio Transactions...................................... 40
Determination of Net Asset Value............................ 42
Shareholder Services........................................ 42
Automatic Investment Plans................................ 43
Fee-Based Programs........................................ 44
Automatic Reinvestment of Dividends and Capital Gains
Distributions.......................................... 44
Systematic Withdrawal Plans............................... 44
Exchange Privilege........................................ 46
Retirement Plans.......................................... 47
Dividends and Taxes......................................... 48
Dividends................................................. 48
Federal Income Taxes...................................... 49
Tax Treatment of Transactions in Options on Debt
Securities, Futures Contracts and Options Thereon...... 51
Performance Data............................................ 51
Additional Information...................................... 52
Organization of the Fund.................................. 52
Description of Shares..................................... 52
Computation of Offering Price Per Share................... 54
Independent Auditors...................................... 54
Custodian................................................. 54
Transfer Agency Services Arrangements..................... 54
Distributor............................................... 55
Legal Counsel............................................. 55
Reports to Shareholders................................... 55
Shareholder Inquiries..................................... 55
Additional Information.................................... 55
Principal Holders......................................... 55
Statement of Assets and Liabilities.........................
Appendix -- Description of Ratings.......................... A-1
</TABLE>
<PAGE> 73

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to maximize long-term total return.

The Fund is a "feeder" fund that invests all of its assets in the
Portfolio, which has the same investment objective as the Fund. All investments
will be made at the Master Trust level. This structure is sometimes called a
"master/feeder" structure. The Fund's investment results will correspond
directly to the investment results of the Portfolio. For simplicity, however,
this Statement of Additional Information, like the Prospectus, uses the term
"Fund" to include the Portfolio. There can be no assurance that the investment
objective of the Fund or the investment objective of the Portfolio will be
realized. The investment objective of the Fund is a fundamental policy of the
Fund and may not be changed without the approval of a majority of the Fund's
outstanding voting securities as defined in the Investment Company Act of 1940
(the "Investment Company Act"). The investment objective of the Portfolio is a
fundamental policy of the Portfolio and may not be changed without the approval
of a majority of the Portfolio's outstanding voting securities as defined in the
Investment Company Act. Reference is made to the discussion under "How the Fund
Invests" and "Investment Risks" in the Prospectus for information with respect
to the Fund's and the Portfolio's investment objective and policies.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions (in addition to its
investment objective) as fundamental policies, which may not be changed without
the favorable vote of the holders of a "majority" of the Fund's outstanding
voting securities, as defined in the Investment Company Act. Under the
Investment Company Act, the vote of the holders of a "majority" of the Fund's
outstanding voting securities means the vote of the holders of the lesser of (1)
67% of the shares of the Fund represented at a meeting at which the holders of
more than 50% of its outstanding shares are represented or (2) more than 50% of
the outstanding shares.

Except as noted, the Fund may not:

1. Purchase any security, other than obligations of the U.S.
government, its agencies, or instrumentalities ("U.S. government
securities"), if as a result: (i) with respect to 75% of its total assets,
more than 5% of the Fund's total assets (determined at the time of
investment) would then be invested in securities of a single issuer; or
(ii) more than 25% of the Fund's total assets (determined at the time of
investment) would be invested in one or more issuers having their principal
business activities in a single industry; provided that the Fund may invest
all of its assets in an open-end management investment company, or series
thereof, with substantially the same investment objective and policies as
the Fund, without regard to the limitations set forth in this paragraph.

2. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions),
provided that the deposit or payment by the Fund of initial or maintenance
margin in connection with futures or options is not considered the purchase
of a security on margin.

3. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment
of any further consideration, for securities of the same issue as, and
equal in amount to, the securities sold short (short sale against-the-box),
and unless not more than 25% of the Fund's net assets (taken at current
value) is held as collateral for such sales at any one time.

4. Issue senior securities, borrow money or pledge its assets except
that the Fund may borrow from a bank for temporary or emergency purposes in
amounts not exceeding 10% (taken at the lower of cost or current value) of
its total assets (not including the amount borrowed) and pledge its assets
to secure such borrowings. (The Fund may borrow from banks or enter into
reverse repurchase agreements and pledge assets in connection therewith,
but only if immediately after each borrowing there is asset coverage of
300%.)

2
<PAGE> 74

an issuer; provided that the Fund may invest all of its assets in an
open-end management investment company, or series thereof, with
substantially the same investment objective and policies as the Fund,
without regard to the limitations set forth in this paragraph.

6. Act as underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under certain federal securities laws; provided that the
purchase by the Fund of securities issued by an open-end management
investment company, or a series thereof, with substantially the same
investment objective and policies as the Fund shall not constitute an
underwriting for purposes of this paragraph.

7. Make investments for the purpose of exercising control or
management; provided that the Fund may invest all of its assets in an
open-end management investment company, or series thereof, with
substantially the same investment objective and policies as the Fund,
without regard to the limitations set forth in this paragraph.

8. Participate on a joint or joint and several basis in any trading
account in securities.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

A repurchase agreement is an agreement where the seller agrees to
repurchase a security from the Fund at a mutually agreed-upon time and price.
The period of maturity is usually quite short, possibly overnight or a few days,
although it may extend over a number of months. The resale price is more than
the purchase price, reflecting an agreed-upon rate of return effective for the
period of time the Fund's money is invested in the repurchase agreement. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of instruments declines, the Fund will
require additional collateral. In the event of a default, insolvency or
bankruptcy by a seller, the Fund will promptly seek to liquidate the collateral.
In such circumstances, the Fund could experience a delay or be prevented from
disposing of the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.

BONDS

The term "bond" or "bonds" as used in the Prospectus is intended to include
all manner of fixed-income securities, debt securities, asset-backed and
mortgage-backed securities and other debt obligations unless specifically
defined or the context requires otherwise.

U.S. GOVERNMENT SECURITIES

U.S. government agencies or instrumentalities which issue or guarantee
securities include the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Federal Land Banks,
Tennessee Valley Authority, Inter-American Development Bank, Asian Development
Bank, Student Loan Marketing Association and the International Bank for
Reconstruction and Development.

Except for U.S. Treasury securities, obligations of U.S. government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
government to purchase the agencies' obligations; while still others, such as
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency or
instrumentality issuing or guaranteeing the obligation for ultimate repayment,
and may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitment. The Fund will
invest in securities of such

3
<PAGE> 75

instrumentality only when the Investment Adviser is satisfied that the credit
risk with respect to any instrumentality is acceptable.

The Fund may invest in component parts of U.S. Treasury notes or bonds,
namely, either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) receipts evidencing the component parts (corpus or coupons)
of Treasury obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of Treasury obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATS"), and are not issued by the U.S.
Treasury; therefore they are not U.S. government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.

MUNICIPAL OBLIGATIONS

The Fund may invest in municipal obligations. The two principal
classifications of municipal bonds, notes and commercial paper are "general
obligation" and "revenue" bonds, notes or commercial paper. General obligation
bonds, notes or commercial paper are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds, notes or commercial paper include states,
counties, cities, towns and other governmental units. Revenue bonds, notes and
commercial paper are payable from the revenues derived from a particular
facility or class of facilities or, in some cases, from specific revenue
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multifamily housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals and
dormitories. They rely primarily on user fees to pay debt service, although the
principal revenue source is often supplemented by additional security features
which are intended to enhance the creditworthiness of the issuer's obligations.
In some cases, particularly revenue bonds issued to finance housing and public
buildings, a direct or implied "moral obligation" of a governmental unit may be
pledged to the payment of debt service. In other cases, a special tax or other
charge may augment user fees.

Included within the revenue bonds category are participations in municipal
lease obligations or installment purchase contracts of municipalities
(collectively, "lease obligations"). State and local governments issue lease
obligations to acquire equipment leases and facilities. Lease obligations may
have risks not normally associated with general obligation or other revenue
bonds. Leases and installment purchase or conditional sale contracts (which may
provide for title to the leased asset to pass eventually to the issuer) have
developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional and statutory
requirements generally applicable for the issuance of debt. Certain lease
obligations contain "non-appropriation" clauses that provide that the
governmental issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on an annual or other periodic basis. Consequently, continued
lease payments on those lease obligations containing "non-appropriation" clauses
are dependent on future legislative actions. If such legislative actions do not
occur, the holders of the lease obligations may experience difficulty in
exercising their rights, including disposition of the property.

Private activity obligations are issued to finance, among other things,
privately operated housing facilities, pollution control facilities, convention
or trade show facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or solid waste
disposal. Private activity obligations are also issued to privately held or
publicly owned corporations in the financing of commercial or industrial
facilities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities. Shareholders, depending on
their individual tax status, may be subject to the

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federal alternative minimum tax on the portion of a distribution attributable to
these obligations. Interest on private activity obligations will be considered
exempt from federal income taxes; however, shareholders should consult their own
tax advisors to determine whether they may be subject to the federal alternative
minimum tax.

Resource recovery obligations are a type of municipal revenue obligation
issued to build facilities such as solid waste incinerators or waste-to-energy
plants. Usually, a private corporation will be involved and the revenue cash
flow will be supported by fees or units paid by municipalities for the use of
the facilities. The viability of a resource recovery project, environmental
protections regulations and project operator tax incentives may affect the value
and credit quality of these obligations.

Tax, revenue or bond anticipation notes are issued by municipalities in
expectation of future tax or other revenues which are payable from these
specific taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of which are
used to repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.

A variable rate obligation is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate obligation has terms which provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Variable or floating rate obligations may be secured by bank letters of credit.

Variable rate auction and residual interest obligations are created when an
issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The interest rate
on one portion reflects short-term interest rates, while the interest rate on
the other portion is typically higher than the rate available on the original
fixed-rate bond.

Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the municipal bond and municipal note
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The achievement of the Fund's investment objective is
dependent in part on the continuing ability of the issuers of municipal
securities in which the Fund invests to meet their obligations for the payment
of principal and interest when due. Obligations of issuers of municipal
securities are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Bankruptcy
Reform Act of 1978, as amended. Therefore, the possibility exists that, as a
result of litigation or other conditions, the ability of any issuer to pay, when
due, the principal of and interest on its municipal securities may be materially
affected.

CORPORATE DEBT SECURITIES

The Fund's investments in U.S. dollar or foreign currency-denominated
corporate debt securities of domestic or foreign issuers are limited to
corporate debt securities (corporate bonds, debentures, notes and other similar
corporate debt instruments) which meet the minimum ratings criteria set forth
for the Fund, or, if unrated, are in the Investment Adviser's opinion comparable
in quality to corporate debt securities in which the Fund may invest. The rate
of return or return of principal on some debt obligations may be linked or
indexed to the level of exchange rates between the U.S. dollar and a foreign
currency or currencies.

CONVERTIBLE SECURITIES

The Fund may invest in convertible securities of domestic or foreign
issuers, which meet the ratings criteria set forth in the prospectus. A
convertible security is a fixed-income security (a bond or preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of common stock or other equity securities of the same or a
different issuer. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar non-convertible security), a convertible security also

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affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.

In general, the market value of a convertible security is at least the
higher of its "investment value" (that is, its value as a fixed-income security)
or its "conversion value" (that is, its value upon conversion into its
underlying stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.

MORTGAGE-RELATED SECURITIES

The Fund may invest in residential or commercial mortgage-related
securities, including mortgage pass-through securities, collateralized mortgage
obligations ("CMOs"), adjustable rate mortgage securities, CMO residuals,
stripped mortgage-related securities, floating and inverse floating rate
securities and tiered index bonds.

Mortgage Pass-Through Securities. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers on the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the issuer
or guarantor of the securities). Mortgage pass-through securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to the sale of underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose the Fund to a lower rate of return upon reinvestment of principal. Also,
if a security subject to repayment has been purchased at a premium, in the event
of prepayment, the value of the premium would be lost.

There are currently three types of mortgage pass-through securities: (1)
those issued by the U.S. government or one of its agencies or instrumentalities,
such as the Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"); (2) those issued by private issuers that represent
an interest in or are collateralized by pass-through securities issued or
guaranteed by the U.S. government or one of its agencies or instrumentalities;
and (3) those issued by private issuers that represent an interest in or are
collateralized by whole mortgage loans or pass-through securities without a
government guarantee but usually having some form of private credit enhancement.

Ginnie Mae is a wholly-owned United States government corporation within
the Department of Housing and Urban Development. Ginnie Mae is authorized to
guarantee, with the full faith and credit of the United States government, the
timely payment of principal and interest on securities issued by the
institutions approved by Ginnie Mae (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.

Obligations of Fannie Mae and Freddie Mac are not backed by the full faith
and credit of the United States government. In the case of obligations not
backed by the full faith and credit of the United States government, the Fund
must look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment. Fannie Mae and Freddie Mac may borrow from the U.S. Treasury
to meet its obligations, but the U.S. Treasury is under no obligation to lend to
Fannie Mae or Freddie Mac.

Private mortgage pass-through securities are structured similarly to Ginnie
Mae, Fannie Mae, and Freddie Mac mortgage pass-through securities and are issued
by originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.

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Pools created by private mortgage pass-through issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. The insurance and guarantees and the creditworthiness
of the issuers thereof will be considered in determining whether a
mortgage-related security meets the Fund's investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. Private
mortgage pass-through securities may be bought without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Investment Adviser determines that the
securities meet the Fund's quality standards.

Collateralized Mortgage Obligations. CMOs are debt obligations
collateralized by residential or commercial mortgage loans or residential or
commercial mortgage pass-through securities. Interest and prepaid principal are
generally paid monthly. CMOs may be collateralized by whole mortgage loans or
private mortgage pass-through securities but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae,
Freddie Mac, or Fannie Mae. The issuer of a series of CMOs may elect to be
treated as a Real Estate Mortgage Investment Conduit ("REMIC"). All future
references to CMOs also include REMICs.

CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral which is ordinarily unrelated to the stated
maturity date. CMOs often provide for a modified form of call protection through
a de facto breakdown of the underlying pool of mortgages according to how
quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.

Certain issuers of CMOs are not considered investment companies pursuant to
a rule adopted by the Securities and Exchange Commission ("Commission"), and the
Fund may invest in the securities of such issuers without the limitations
imposed by the 1940 Act on investments by the Fund in other investment
companies. In addition, in reliance on an earlier Commission interpretation, the
Fund's investments in certain other qualifying CMOs, which cannot or do not rely
on the rule, are also not subject to the limitation of the 1940 Act on acquiring
interests in other investment companies. In order to be able to rely on the
Commission's interpretation, these CMOs must be unmanaged, fixed asset issuers,
that: (1) invest primarily in mortgage-backed securities; (2) do not issue
redeemable securities; (3) operate under general exemptive orders exempting them
from all provisions of the 1940 Act; and (4) are not registered or regulated
under the 1940 Act as investment companies. To the extent that the Fund selects
CMOs that cannot rely on the rule or do not meet the above requirements, the
Fund may not invest more than 10% of its assets in all such entities and may not
acquire more than 3% of the voting securities of any single such entity.

The Fund may also invest in, among other things, parallel pay CMOs, Planned
Amortization Class CMOs ("PAC bonds"), sequential pay CMOs, and floating rate
CMOs. Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. PAC bonds generally require payments of a
specified amount of principal on each payment date. Sequential pay CMOs
generally pay principal to only one class while paying interest to several
classes. Floating rate CMOs are securities whose coupon rate fluctuates
according to some formula related to an existing market index or rate. Typical
indices would include the eleventh district cost-of-funds index ("COFI"), the
London Interbank Offered Rate ("LIBOR"), one-year Treasury yields, and ten-year
Treasury yields.

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thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes to a
designated benchmark index.

ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. In the event that
market rates of interest rise more rapidly to levels above that of the ARM's
maximum rate, the ARM's coupon may represent a below market rate of interest. In
these circumstances, the market value of the ARM security will likely have
fallen.

Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.

CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.

The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances the Fund may fail to recoup fully its initial investment in a CMO
residual.

CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has recently developed and CMO residuals currently may not have
the liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the Securities Act of 1933, as amended ("Securities Act"). CMO residuals,
whether or not registered under such Act, may be subject to certain restrictions
on transferability, and may be deemed "illiquid" and subject to the Fund's
limitations on investment in illiquid securities.

Stripped Mortgage-Related Securities. Stripped mortgage-related securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks, and special purpose entities
of the foregoing.

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interest (the "IO class"), while the other class will receive all of the
principal (the "PO class"). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.

Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently introduced. As a result, established trading markets have not
yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to the Fund's limitations on investment in illiquid
securities.

Inverse Floaters. An inverse floater is a debt instrument with a floating
or variable interest rate that moves in the opposite direction to the interest
rate on another security or index level. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.

Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed-rate bond.

ASSET-BACKED SECURITIES

The Fund may invest in various types of asset-backed securities. Through
the use of trusts and special purpose corporations, various types of assets,
primarily automobile and credit card receivables and home equity loans, are
being securitized in pass-through structures similar to the mortgage
pass-through or in a pay-through structure similar to the CMO structure.
Investments in these and other types of asset-backed securities must be
consistent with the investment objective and policies of the Fund.

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

The yield characteristics of mortgage-related and asset-backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if the Fund
purchases such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Fund may invest a portion of its assets in
derivative mortgage-related securities which are highly sensitive to changes in
prepayment and interest rates. The Investment Adviser will seek to manage these
risks (and potential benefits) by diversifying its investments in such
securities and through hedging techniques.

During periods of declining interest rates, prepayment of mortgages
underlying mortgage-related securities can be expected to accelerate.
Accordingly, the Fund's ability to maintain positions in high-yielding
mortgage-related securities will be affected by reductions in the principal
amount of such securities resulting from such prepayments, and its ability to
reinvest the returns of principal at comparable yields is subject to generally
prevailing interest rates at that time. Conversely, slower than expected
prepayments may effectively change a security that was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities tend to fluctuate more in response to interest rate changes, leading
to increased
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net asset value volatility. Prepayments may also result in the realization of
capital losses with respect to higher yielding securities that had been bought
at a premium or the loss of opportunity to realize capital gains in the future
from possible future appreciation.

Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.

DURATION

In selecting securities for the Fund, the Investment Adviser makes use of
the concept of duration for fixed-income securities. Duration is a measure of
the expected life of a fixed-income security. Duration incorporates a bond's
yield, coupon interest payments, final maturity and call features into one
measure. Most debt obligations provide interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also have call
provisions. Depending on the relative magnitude of these payments, the market
values of debt obligations may respond differently to changes in the level and
structure of interest rates.

Duration is a measure of the expected life of a fixed-income security on a
present value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are scheduled
or, in the case of a callable bond, expected to be received, and weights them by
the present values of the cash to be received at each future point in time. For
any fixed-income security with interest payments occurring prior to the payment
of principal, duration is always less than maturity. In general, all other
things being the same, the lower the stated or coupon rate of interest of a
fixed-income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security.

Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen the Fund's duration by approximately
the same amount that holding an equivalent amount of the underlying securities
would.

Short futures or put options positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have the
effect of reducing portfolio duration by approximately the same amount that
selling an equivalent amount of the underlying securities would.

There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Investment Adviser will use more
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure.

DERIVATIVE INSTRUMENTS

As indicated in the prospectus, to the extent consistent with its
investment objective and policies and the investment restrictions listed in this
Statement of Additional Information, the Fund may purchase and write call and
put options on securities, securities indexes and foreign currencies and enter
into futures contracts and use options on futures contracts. The Fund also may
enter into swap agreements with respect to foreign currencies, interest rates
and securities indexes. The Fund may use these techniques to hedge against
changes in interest rates, foreign currency exchange rates, or securities prices
or as part of its overall investment

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strategies. The Fund may also purchase and sell options relating to foreign
currencies for the purpose of increasing exposure to a foreign currency or to
shift exposure to foreign currency fluctuations from one country to another. The
Fund will mark as segregated cash, U.S. Government securities, equity securities
or other liquid, unencumbered assets, marked-to-market daily (or, as permitted
by applicable regulation, enter into certain offsetting positions), to cover its
obligations under options and futures contracts to avoid leveraging of the Fund.

Options on Securities and on Securities Indexes. The Fund may purchase put
options on securities to protect holdings in an underlying or related security
against a substantial decline in market value. The Fund may purchase call
options on securities to protect against substantial increases in prices of
securities the Fund intends to purchase pending its ability to invest in such
securities in an orderly manner. The Fund may sell put or call options it has
previously purchased, which could result in a net gain or loss depending on
whether the amount realized on the sale is more or less than the premium and
other transaction costs paid on the put or call option which is sold. The Fund
may write a call or put option only if the option is "covered" by the Fund
holding a position in the underlying securities or by other means which would
permit immediate satisfaction of the Fund's obligation as writer of the option.
Prior to exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option of the same series.

The purchase and writing of options involve certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
the Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, the Fund may be
unable to close out a position.

There are several risks associated with transactions in options on
securities and on indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.

There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.

If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it had purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.

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Futures Contracts and Options on Futures Contracts. The Fund may use
interest rate, foreign currency or index futures contracts, as specified for the
Fund in its prospectus. An interest rate, foreign currency or index futures
contract provides for the future sale by one party and purchase by another party
of a specified quantity of a financial instrument, foreign currency or the cash
value of an index at a specified price and time. A futures contract on an index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made.

The Fund may purchase and write call and put options on futures. Options on
futures possess many of the same characteristics as options on securities and
indexes (discussed above). An option on a futures contract gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.

The Fund will use futures contracts and options on futures contracts in
accordance with the rules of the Commodity Futures Trading Commission ("CFTC").
For example, the Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's securities or the price of the securities which the Fund intends to
purchase. The Fund's hedging activities may include sales of futures contracts
as an offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
the Fund's exposure to interest rate fluctuations, the Fund may be able to hedge
its exposure more effectively and perhaps at a lower cost by using futures
contracts and options on futures contracts.

The Fund will only enter into futures contracts and options on futures
contracts which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.

When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian or futures commission merchant a
specified amount of cash or U.S. Government securities ("initial margin"). The
margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by the Fund is valued daily at the official settlement price of
the exchange on which it is traded. Each day the Fund pays or receives cash,
called "variation margin", equal to the daily change in value of the futures
contract. This process is known as "marking to market". Variation margin does
not represent a borrowing or loan by the Fund but is instead a settlement
between the Fund and the broker of the amount one would owe the other if the
futures contract expired. In computing daily net asset value, the Fund will mark
to market its open futures positions.

The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.

Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund realizes a capital
gain, or if it is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.

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Limitations on Use of Futures and Options Thereon. When purchasing a
futures contract, the Fund will maintain with its custodian (and mark-to-market
on a daily basis) cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets that, when added to the amounts deposited as margin
with a futures commission merchant or the custodian, are equal to the market
value of the futures contract. Alternatively, the Fund may "cover" its position
by purchasing a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by the Fund.

When selling a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited as margin with a futures commission merchant or the custodian,
are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).

When selling a call option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that, when
added to the amounts deposited as margin with a futures commission merchant or
the custodian, equal the total market value of the futures contract underlying
the call option. Alternatively, the Fund may cover its position by entering into
a long position in the same futures contract at a price no higher than the
strike price of the call option, by owning the instruments underlying the
futures contract, or by holding a separate call option permitting the Fund to
purchase the same futures contract at a price not higher than the strike price
of the call option sold by the Fund.

When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets that equal
the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.

In order to comply with current applicable regulations of the CFTC pursuant
to which the Trust avoids being deemed a "commodity pool operator," the Fund is
limited in its futures trading activities to positions which constitute "bona
fide hedging" positions within the meaning and intent of applicable CFTC rules,
or to non-hedging positions for which the aggregate initial margin and premiums
will not exceed 5% of the liquidation value of the Fund's assets.

Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the
price of the futures contract and the price of the security being hedged. The
hedge will not be fully effective when there is imperfect correlation between
the movements in the prices of two financial instruments. For example, if the
price of the futures contract moves more than the price of the hedged security,
the Fund will experience either a loss or gain on the futures contract which is
not completely offset by movements in the price of the hedged securities. To
compensate for imperfect correlations, the Fund may purchase or sell futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the futures contracts. Conversely, the Fund may purchase or sell fewer
futures contracts if the volatility of the price of the hedged securities is
historically less than that of the futures contracts.

The particular securities comprising the index underlying the index
financial futures contract may vary from the securities held by the Fund. As a
result, the Fund's ability to hedge effectively all or a portion of the value of
its securities through the use of such financial futures contracts will depend
in part on the degree to which price movements in the index underlying the
financial futures contract correlate with the price movements of the securities
held by the Fund. The correlation may be affected by disparities in the Fund's
investments as compared to those comprising the index and general economic or
political factors. In addition, the correlation between movements in the value
of the index may be subject to change over time as additions

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<PAGE> 85

to and deletions from the index alter its structure. The correlation between
futures contracts on U.S. Government securities and the securities held by the
Fund may be adversely affected by similar factors and the risk of imperfect
correlation between movements in the prices of such futures contracts and the
prices of securities held by the Fund may be greater. The trading of futures
contracts also is subject to certain market risks, such as inadequate trading
activity, which could at times make it difficult or impossible to liquidate
existing positions.

The Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments. The liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount of
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. Prices have in the past moved beyond the daily limit on a number of
consecutive trading days. The Fund will enter into a futures position only if,
in the judgment of the Investment Adviser, there appears to be an actively
traded secondary market for such futures contracts.

The successful use of transactions in futures and related options also
depends on the ability of the Investment Adviser to forecast correctly the
direction and extent of interest rate movements within a given time frame. To
the extent interest rates remain stable during the period in which a futures
contract or option is held by the Fund or such rates move in a direction
opposite to that anticipated, the Fund may realize a loss on a hedging
transaction which is not fully or partially offset by an increase in the value
of portfolio securities. As a result, the Fund's total return for such period
may be less than if it had not engaged in the hedging transaction.

Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by the
Fund of margin deposits in the event of the bankruptcy of a broker with whom the
Fund has an open position in a financial futures contract.

The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option on a futures contract also entails the risk that changes in the value of
the underlying futures contract will not be fully reflected in the value of the
option purchased.

FOREIGN SECURITIES

The Fund may invest in American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") or other securities convertible into securities of
issuers based in foreign countries. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts, usually issued by a U.S. bank or trust company,
evidencing ownership of the underlying securities; EDRs are European receipts
evidencing a similar arrangement. Generally, ADRs are issued in registered form,
denominated in U.S. dollars, and are designed for use in the U.S. securities
markets; EDRs are issued in bearer form, denominated in other currencies, and
are designed for use in European securities markets.

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<PAGE> 86

among other things, data, analysis and classification of countries published or
disseminated by the International Bank for Reconstruction and Development
(commonly known as the World Bank) and the International Finance Corporation.
Currently, investing in many emerging markets may not be desirable or feasible,
because of the lack of adequate custody arrangements for the Fund's assets,
overly burdensome repatriation and similar restrictions, the lack of organized
and liquid securities markets, unacceptable political risks or other reasons. As
opportunities to invest in securities in emerging markets develop, the Fund
expects to expand and further broaden the group of emerging markets in which it
invests.

From time to time, emerging markets have offered the opportunity for higher
returns in exchange for a higher level of risk. Accordingly, the Investment
Adviser believes that the Fund's ability to invest in emerging markets
throughout the world can assist in the overall diversification of the Fund's
portfolio.

The Fund may invest in the following types of emerging market fixed-income
securities: (1) fixed-income securities issued or guaranteed by governments,
their agencies, instrumentalities or political subdivisions, or by government
owned, controlled or sponsored entities, including central banks (collectively,
"Sovereign Debt"), including Brady Bonds (described below); (2) interests in
issuers organized and operated for the purpose of restructuring the investment
characteristics of Sovereign Debt; (3) fixed-income securities issued by banks
and other business entities; and (4) fixed-income securities denominated in or
indexed to the currencies of emerging markets. Fixed-income securities held by
the Fund may take the form of bonds, notes, bills, debentures, bank debt
obligations, short-term paper, loan participations, assignments and interests
issued by entities organized and operated for the purpose of restructuring the
investment characteristics of any of the foregoing. There is no requirement with
respect to the maturity of fixed-income securities in which the Fund may invest.

The Fund may invest in Brady Bonds and other Sovereign Debt of countries
that have restructured or are in the process of restructuring Sovereign Debt
pursuant to the Brady Plan. "Brady Bonds" are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the World Bank and the International Monetary Fund ("IMF"). The Brady
Plan framework, as it has developed, contemplates the exchange of commercial
bank debt for newly issued Brady Bonds. Brady Bonds may also be issued in
respect of new money being advanced by existing lenders in connection with the
debt restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount.

Emerging market fixed-income securities generally are considered to be of a
credit quality below investment grade, even though they often are not rated by
any nationally recognized statistical rating organizations. Investment in
emerging market fixed-income securities will be allocated among various
countries based upon the Investment Adviser's analysis of credit risk and its
consideration of a number of factors, including: (1) prospects for relative
economic growth among the different countries in which the Fund may invest; (2)
expected levels of inflation; (3) government policies influencing business
conditions; (4) the outlook for currency relationships; and (5) the range of the
individual investment opportunities available to international investors. The
Investment Adviser's emerging market sovereign credit analysis includes an
evaluation of the issuing country's total debt levels, currency reserve levels,
net exports/imports, overall economic growth, level of inflation, currency
fluctuation, political and social climate and payment history. Particular
fixed-income securities will be selected based upon a credit risk analysis of
potential issuers, the characteristics of the security, the interest rate
sensitivity of the various debt issues available with respect to a particular
issuer, an analysis of the anticipated volatility and liquidity of the
particular debt instruments, and the tax implications to the Fund. The emerging
market fixed-income securities in which the Fund may invest are not subject to
any minimum credit quality standards.

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FOREIGN CURRENCY OPTIONS AND RELATED RISKS

The Fund may take positions in options on foreign currencies to hedge
against the risk that foreign exchange rate fluctuations will affect the value
of foreign securities the Fund holds in its portfolio or intends to purchase.
For example, if the Fund were to enter into a contract to purchase securities
denominated in a foreign currency, it could effectively fix the maximum U.S.
dollar cost of the securities by purchasing call options on that foreign
currency. Similarly, if the Fund held securities denominated in a foreign
currency and anticipated a decline in the value of that currency against the
U.S. dollar, it could hedge against such a decline by purchasing a put option on
the currency involved. The markets in foreign currency options are relatively
new, and the Fund's ability to establish and close out positions in such options
is subject to the maintenance of a liquid secondary market. There can be no
assurance that a liquid secondary market will exist for a particular option at
any specific time. In addition, options on foreign currencies are affected by
all of those factors that influence foreign exchange rates and investments
generally.

The quantities of currencies underlying option contracts represent odd lots
in a market dominated by transactions between banks, and as a result extra
transaction costs may be incurred upon exercise of an option.

There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations be firm or revised on a
timely basis. Quotation information is generally representative of very large
transactions in the interbank market and may not reflect smaller transactions
where rates may be less favorable. Option markets may be closed while
round-the-clock interbank currency markets are open, and this can create price
and rate discrepancies.

Risks of Options Trading. The Fund may effectively terminate its rights or
obligations under options by entering into closing transactions. Closing
transactions permit the Fund to realize profits or limit losses on its options
positions prior to the exercise or expiration of the option. The value of a
foreign currency option depends on the value of the underlying currency relative
to the U.S. dollar. Other factors affecting the value of an option are the time
remaining until expiration, the relationship of the exercise price to market
price, the historical price volatility of the underlying currency and general
market conditions. As a result, changes in the value of an option position may
have no relationship to the investment merit of a foreign security. Whether a
profit or loss is realized on a closing transaction depends on the price
movement of the underlying currency and the market value of the option.

Options normally have expiration dates of up to nine months. The exercise
price may be below, equal to or above the current market value of the underlying
currency. Options that expire unexercised have no value, and the Fund will
realize a loss of any premium paid and any transaction costs. Closing
transactions may be effected only by negotiating directly with the other party
to the option contract, unless a secondary market for the options develops.
Although the Fund intends to enter into foreign currency options only with
dealers which agree to enter into, and which are expected to be capable of
entering into, closing transactions with the Fund, there can be no assurance
that the Fund will be able to liquidate an option at a favorable price at any
time prior to expiration. In the event of insolvency of the counter-party, the
Fund may be unable to liquidate a foreign currency option. Accordingly, it may
not be possible to effect closing transactions with respect to certain options,
with the result that the Fund would have to exercise those options that it had
purchased in order to realize any profit.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may use forward contracts to protect against uncertainty in the
level of future exchange rates. The Fund will not speculate with forward
contracts or foreign currency exchange rates.

The Fund may enter into forward contracts with respect to specific
transactions. For example, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on a security that it holds, the Fund may desire to "lock in" the U.S. dollar
price of the security or the U.S. dollar equivalent of the payment, by entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars or foreign currency, of the amount of foreign currency involved in the
underlying transaction. The Fund will

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<PAGE> 88

thereby be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the currency exchange rates during
the period between the date on which the security is purchased or sold, or on
which the payment is declared, and the date on which such payments are made or
received.

The Fund also may use forward contracts in connection with portfolio
positions to lock in the U.S. dollar value of those positions, to increase the
Fund's exposure to foreign currencies that the Investment Adviser believes may
rise in value relative to the U.S. dollar or to shift the Fund's exposure to
foreign currency fluctuations from one country to another. For example, when the
Investment Adviser believes that the currency of a particular foreign country
may suffer a substantial decline relative to the U.S. dollar or another
currency, it may enter into a forward contract to sell the amount of the former
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. This investment practice
generally is referred to as "cross-hedging" when another foreign currency is
used.

The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (that is, cash)
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver. The projection of short-term currency market movements is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. The Fund may enter into forward
contracts or maintain a net exposure to such contracts only if (1) the
consummation of the contracts would not obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency, or (2) the Fund marks as segregated
cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, in an amount not less than the
value of the Fund's total assets committed to the consummation of the contracts.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, the Investment Adviser believes
it is important to have the flexibility to enter into such forward contracts
when it determines that the best interests of the Fund will be served.

At or before the maturity date of a forward contract that requires the Fund
to sell a currency, the Fund may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the currency that it is obligated to deliver. Similarly, the Fund
may close out a forward contract requiring it to purchase a specified currency
by entering into a second contract entitling it to sell the same amount of the
same currency on the maturity date of the first contract. The Fund would realize
a gain or loss as a result of entering into such an offsetting forward contract
under either circumstance to the extent the exchange rate between the currencies
involved moved between the execution dates of the first and second contracts.

The cost to the Fund of engaging in forward contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. The use of
forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, at the same
time they limit any potential gain that might result should the value of the
currencies increase.

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<PAGE> 89

and investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer.

Swap Agreements. The Fund may enter into interest rate, index and currency
exchange rate swap agreements for purposes of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded the desired return. Swap agreements are
two party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. The "notional amount" of the swap agreement is
only a fictive basis on which to calculate the obligations which the parties to
a swap agreement have agreed to exchange. The Fund's obligations (or rights)
under a swap agreement will generally be equal only to the net amount to be paid
or received under the agreement based on the relative values of the positions
held by each party to the agreement (the "net amount"). The Fund's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Fund) and any accrued but unpaid net amounts owed to a swap counter-party
will be covered by marking as segregated cash, U.S. Government securities,
equity securities or other liquid, unencumbered assets, marked-to-market daily,
to avoid any potential leveraging of the Fund's portfolio. The Fund will not
enter into a swap agreement with any single party if the net amount owed or to
be received under existing contracts with that party would exceed 5% of the
Fund's assets.

Whether the Fund's use of swap agreements will be successful in furthering
its investment objective of total return will depend on the Investment Adviser's
ability to correctly predict whether certain types of investments are likely to
produce greater returns than other investments. Because they are two party
contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, the Fund bears the risk
of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counter-party.
Restrictions imposed by the Internal Revenue Code may limit the Fund's ability
to use swap agreements. The swaps market is a relatively new market and is
largely unregulated. It is possible that developments in the swaps market,
including potential government regulation, could adversely affect the Fund's
ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.

FOREIGN INVESTMENT RISKS

Foreign Market Risk. The Fund may invest a portion of its assets in foreign
securities. Foreign security investment involves special risks not present in
U.S. investments that can increase the chances that the Fund will lose money.
Prices of foreign securities may fluctuate more than prices of securities traded
in the United States.

Foreign Economy Risk. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers, and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets, or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair the Fund's ability to
purchase or sell foreign securities or transfer the Fund's assets or income back
into the United States, or otherwise adversely affect the Fund's operations.
Other foreign market risks include foreign exchange controls,

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difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts, and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.

Currency Risk and Exchange Risk. Securities in which the Fund invests may
be denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of the
Fund. Generally, when the U.S. dollar rises in value against a foreign currency,
your investment in a security denominated in that currency loses value because
the currency is worth fewer U.S. dollars. Similarly when the U.S. dollar
decreases in value against a foreign currency, your investment in a security
denominated in that currency gains value because the currency is worth more U.S.
dollars. This risk is generally known as "currency risk" which is the
possibility that a stronger U.S. dollar will reduce returns for U.S. investors
investing overseas and a weak U.S. dollar will increase returns for U.S.
investors investing overseas.

For a number of years, certain European countries have been seeking
economic unification that would, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries, and reduce or eliminate currency fluctuations among these
European countries. The Treaty of European Union (the "Maastricht Treaty") seeks
to set out a framework for the European Economic and Monetary Union ("EMU")
among the countries that comprise the European Union ("EU"). Among other things,
EMU established a single common European currency (the "euro") that was
introduced on January 1, 1999 and is expected to replace the existing national
currencies of all EMU participants by July 1, 2002. Upon implementation of EMU,
certain securities issued in participating EU countries (beginning with
government and corporate bonds) were redenominated in the euro, and are now
listed, traded, declaring dividends and making other payments only in euros.

No assurance can be given that the changes planned for the EU can be
successfully implemented, or that these changes will result in the economic and
monetary unity and stability intended. There is a possibility that EMU will not
be completed, or will be completed but then partially or completely unwound.
Because any participating country may opt out of EMU within the first three
years, it is also possible that a significant participant could choose to
abandon EMU, which could diminish its credibility and influence. Any of these
occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of
participants' national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of confidence
in the European markets, an undermining of European economic stability, the
collapse or slowdown of the drive toward European economic unity, and/or
reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of EMU. Also, withdrawal from EMU at any time by an
initial participant could cause disruption of the financial markets as
securities redenominated in euros are transferred back into that country's
national currency, particularly if the withdrawing country is a major economic
power. Such developments could have an adverse impact on the Fund's investments
in Europe generally or in specific countries participating in EMU.

Governmental Supervision and Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the U.S. Government does. Some countries may not have laws
to protect investors the way that the United States securities laws do.
Accounting standards in other countries are not necessarily the same as in the
United States. If the accounting standards in another country do not require as
much disclosure or detail as U.S. accounting standards, it may be harder for the
Fund's portfolio managers to completely and accurately determine a company's
financial condition.

Certain Risks of Holding Fund Assets Outside the United States. The Fund
generally holds the foreign securities in which it invests outside the United
States in foreign banks and securities depositories. These foreign banks and
securities depositories may be recently organized or new to the foreign custody
business. They may also have operations subject to limited or no regulatory
oversight. Also, the laws of certain countries may put limits on the Fund's
ability to recover its assets if a foreign bank or depository or issuer of a
security or any of their agents goes bankrupt. In addition, it can be expected
that it will be more expensive for the Fund to

19
<PAGE> 91

buy, sell and hold securities in certain foreign markets than it is in the U.S.
market due to higher brokerage, transaction, custody and/or other costs. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments.

Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks (such as delays
in payment for or delivery of securities) not typically involved with the
settlement of U.S. investments. Communications between the United States and
emerging market countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates. Settlements in certain foreign
countries at times have not kept pace with the number of securities
transactions. These problems may make it difficult for a Fund to carry out
transactions. If the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and certain of its
assets may be uninvested with no return earned thereon for some period. If the
Fund cannot settle or is delayed in settling a sale of securities, it may lose
money if the value of the security then declines or, if it has contracted to
sell the security to another party, the Fund could be liable to that party for
any losses incurred.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

A description of security ratings is attached as an Appendix. Lower-rated
or unrated (that is, high yield) securities are more likely to react to
developments affecting market risk (such as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity)
and credit risk (such as the issuer's inability to meet its obligations) than
are more highly rated securities, which react primarily to movements in the
general level of interest rates. The Investment Adviser considers both credit
risk and market risk in making investment decisions for the Fund.

The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged buyout
activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the Investment Adviser could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower-rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's net asset value prior
to the sale.

Lower-rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.

ILLIQUID SECURITIES

The Fund may not hold more than 15% of its net assets in illiquid
securities. Illiquid securities generally include repurchase agreements which
have a maturity of longer than seven days, and securities that are illiquid by
virtue of the absence of a readily available market (either within or outside of
the United States) or because they have legal or contractual restrictions of
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are otherwise not readily
marketable and repurchase agreements that have a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Limitations on resale may
have an adverse effect on the marketability of portfolio securities

20
<PAGE> 92

and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemption within seven days. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Also market quotations are less readily available. The judgment of
the Investment Adviser may at times play a greater role in valuing these
securities than in the case of unrestricted securities. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.

In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.

Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A established a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The Investment Adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers.

Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Investment Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the Investment Adviser will consider,
among others, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (1) it must be rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization ("NRSRO"), or, if unrated, be of comparable quality in the
view of the Investment Adviser; and (2) it must not be in default as to
principal or interest. Investing in Rule 144A securities could have the effect
of increasing the level of Fund illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements, whereby the Fund
sells securities concurrently with entering into an agreement to repurchase
those securities at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on those securities. Reverse repurchase agreements are speculative techniques
involving leverage and are considered borrowings by the Fund for purposes of the
limit applicable to borrowings.

DOLLAR ROLLS

The Fund may use dollar rolls as part of its investment strategy. In a
dollar roll, the Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar securities (same
type and coupon) on a specified future date from the same party. During the roll
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for

21
<PAGE> 93

which there is an offsetting cash position or cash equivalent security position
that matures on or before the forward settlement date of the dollar roll
transaction.

The Fund will mark as segregated cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, equal
in value to their obligations with respect to dollar rolls. Dollar rolls involve
the risk that the market value of the securities retained by the Fund may
decline below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. If the buyer of the securities under a dollar
roll files for bankruptcy or becomes insolvent, the Fund's use of the proceeds
of the agreement may be restricted pending a determination by the other party,
or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. Dollar rolls are speculative techniques involving
leverage and are considered borrowings by the Fund for purposes of the limit
applicable to borrowings.

BORROWING

The Fund may borrow for temporary, emergency or investment purposes. This
borrowing may be unsecured. The 1940 Act requires the Fund to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. Borrowing
subjects the Fund to interest costs which may or may not be recovered by
appreciation of the securities purchased, and can exaggerate the effect on net
asset value of any increase or decrease in the market value of the Fund's
portfolio. This is the speculative factor known as leverage.

LOANS OF PORTFOLIO SECURITIES

For the purpose of achieving income, the Fund may lend its portfolio
securities, provided: (1) the loan is secured continuously by collateral
consisting of short-term, high quality debt securities, including U.S.
Government securities, negotiable certificates of deposit, bankers' acceptances
or letters of credit, maintained on a daily marked-to-market basis in an amount
at least equal to the current market value of the securities loaned; (2) the
Fund may at any time call the loan and obtain the return of the securities
loaned; (3) the Fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third of the total assets of the Fund.

WHEN-ISSUED SECURITIES

The Fund may purchase securities on a when-issued or delayed-delivery
basis, generally in connection with an underwriting or other offering.
When-issued and delayed-delivery transactions occur when securities are bought
with payment for and delivery of the securities scheduled to take place at a
future time, beyond normal settlement dates, generally from 15 to 45 days after
the transaction. The price that the Fund is obligated to pay on the settlement
date may be different from the market value on that date. While securities may
be sold prior to the settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them, unless a sale would be
desirable for investment reasons. At the time the Fund makes a commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security each day in determining the Fund's net asset
value. The Fund will also mark as segregated with its custodian cash, U.S.
Government securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its obligations for when-issued
securities.

REAL ESTATE INVESTMENT TRUSTS

The Fund may invest in securities of real estate investment trusts or
REITs. Unlike corporations, REITs do not have to pay income taxes if they meet
certain Internal Revenue Code requirements. REITs offer investors greater
liquidity and diversification than direct ownership of properties, as well as
greater income potential than an investment in common stocks. Like any
investment in real estate, though, a REIT's performance depends on several
factors, such as its ability to find tenants for its properties, to renew leases
and to finance property purchases and renovations.

22
<PAGE> 94

SHARES OF OTHER INVESTMENT COMPANIES

The Fund can invest in securities of other investment companies except to
the extent prohibited by law. Like all equity investments, these investments may
go up or down in value. They also may not perform in correlation with the Fund's
principal strategies. The Fund will pay additional fees through its investments
in other investment companies.

SHORT SALES AGAINST-THE-BOX

The Fund can borrow and sell "short" securities when it also owns an equal
amount of those securities (or their equivalent). No more than 25% of the Fund's
total assets can be held as collateral for short sales at any one time.

CORPORATE LOANS

The Fund can invest in corporate loans. Commercial banks and other
financial institutions make corporate loans to companies that need capital to
grow or restructure. Borrowers generally pay interest on corporate loans at
rates that change in response to changes in market interest rates such as the
London Interbank Offered Rate ("LIBOR") or the prime rates of U.S. banks. As a
result, the value of corporate loan investments is generally less responsive to
shifts in market interest rates. Because the trading market for corporate loans
is less developed than the secondary market for bonds and notes, the Fund may
experience difficulties from time to time in selling its corporate loans.
Borrowers frequently provide collateral to secure repayment of these
obligations. Leading financial institutions often act as agent for a broader
group of lenders, generally referred to as a "syndicate". The syndicate's agent
arranges the corporate loans, holds collateral and accepts payments of principal
and interest. If the agent developed financial problems, the Fund may not
recover its investment, or there might be a delay in the Fund's recovery. By
investing in a corporate loan, the Fund becomes a member of the syndicate.

TEMPORARY DEFENSIVE POSITION

When adverse market or economic conditions indicate to the Investment
Adviser that a temporary defensive strategy is appropriate, the Fund may invest
all or part of its assets in short-term investment grade debt obligations of the
U.S. Government, its agencies and instrumentalities, bank certificates of
deposit, bankers' acceptances, high quality commercial paper, demand notes and
repurchase agreements.

Because of the affiliation of Merrill Lynch with the Investment Adviser,
the Fund is prohibited from engaging in certain transactions involving Merrill
Lynch or 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.
Included among such prohibited transactions are (i) purchases from and sales to
Merrill Lynch of securities in transactions where Merrill Lynch acts as
principal and (ii) purchases of securities from underwriting syndicates of which
Merrill Lynch is a member. See "Portfolio Transactions and Brokerage."

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The Directors of the Company consist of seven individuals, five of whom are
"non-affiliated" persons of the Company as defined in the Investment Company
Act. The Directors of the Fund are responsible for the overall supervision of
the operations of the Fund and perform the various duties imposed on the
directors of investment companies by the Investment Company Act. The Board of
Directors elects officers of the Company annually.

The Directors and officers of the Company, their ages, principal
occupations for at least the last five years and the public companies for which
they serve as directors are set forth below.

23
<PAGE> 95

MICHAEL BAXTER* (37) -- Director -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. Co-Head of the Investment Adviser (since 1999);
Managing Director of the Investment Adviser (since 1996); Partner of the
Investment Adviser (1994 - 1996); Portfolio Manager of the Investment Adviser
(since 1990).

ROBERT L. BURCH III (66) -- Director -- One Rockefeller Plaza, New York, NY
10020. Managing Partner, A.W. Jones Co. (investments) (since 1984); Chairman,
Jonathan Mfg. Corp. (slide manufacturing) (since 1977).

JOHN A. G. GAVIN (69) -- Director -- 2100 Century Park West, Los Angeles,
CA 90067. Partner and Managing Director, Hicks, Muse, Tate & Furst (Latin
America) (private equity investment firm) (since 1994); Chairman, Gamma Services
Corp. (venture capital) (since 1968); Principal, Gavin, Dailey & Partners
(consulting) (since 1993); U.S. Ambassador to Mexico (1981 - 1986); Director,
Apex Mortgage Capital, Inc., Atlantic Richfield Co., International Wire Corp.
and Krause's Furniture.

JOE GRILLS (65) -- Director -- P.O. Box 98, Rapidan, VA 22733. Member of
the Committee of Investment of Employee Benefit Assets of the Financial
Executives Institute ("CIEBA") (since 1986); Member of CIEBA's Executive
Committee (since 1988) and its Chairman (1991 - 1992); Assistant Treasurer of
International Business Machines Incorporated ("IBM") and Chief Investment
Officer of IBM Retirement Funds (1986 - 1993); Member of the Investment Advisory
Committees of the State of New York Common Retirement Fund and the Howard Hughes
Medical Institute (since 1997); Director, Duke Management Company (since 1992)
and Vice Chairman (since 1998); Director, Kimco Realty Corporation (since 1997);
Director, LaSalle Street Fund (since 1995); Member of the Investment Advisory
Committee of the Virginia Retirement System (since 1998); Director, Montpelier
Foundation (since 1998).

NIGEL HURST-BROWN* (49) -- Director -- 725 South Figueroa Street, Suite
4000, Los Angeles, CA 90017-5400. Co-Head of the Investment Adviser (since
1999); Managing Director of the Investment Adviser (since 1998); Director of
Mercury Asset Management Group Plc. (since 1990).

MADELEINE A. KLEINER (49) -- Director -- 1900 Avenue of the Stars, Suite
1700, Los Angeles, CA 90067. Former Senior Executive Vice President, Chief
Administrative Officer and General Counsel, H.F. Ahmanson & Company and Home
Savings of America, FSB (banking company) (1995 - 1998); Partner, Gibson, Dunn &
Crutcher (law firm) (1983 - 1995).

RICHARD R. WEST (62) -- Director -- Box 604, Genoa, NV 89411. Professor of
Finance (since 1984), Dean (1984 - 1993), and currently Dean Emeritus, New York
University Leonard N. Stern School of Business Administration; Director, Vornado
Realty Trust, Inc. and Vornado Operating (real estate holding company);
Director, Bowne & Co., Inc. (financial printers); Director, Alexander's, Inc.
(real estate company).

NANCY D. CELICK (49) -- President -- 725 South Figueroa Street, Suite 4000,
Los Angeles, CA 90017-5400. Chief Administrative Officer of the Investment
Adviser (since 1998); Chief Financial Officer of the Investment Adviser
(1993 - 1998); Chief Financial Officer of Kennedy-Wilson, Inc. (auction
marketing services) (1992 - 1993); Chief Financial Officer of First National
Corporation (bank holding company) (1984 - 1992).

DONALD C. BURKE (40) -- Vice President and Treasurer -- P.O. Box 9011,
Princeton, NJ 08543-9011. Senior Vice President and Treasurer of the Investment
Adviser (since 1999); Senior Vice President and Treasurer of Princeton Services,
Inc. (since 1999); Vice President of FAM Distributors, Inc. (since 1999); First
Vice President of the Investment Adviser (1990 - 1997).

ANNA MARIE S. LOPEZ (32) -- Assistant Treasurer and Assistant
Secretary -- 725 South Figueroa Street, Suite 4000, Los Angeles, CA 90017-5400.
Compliance Officer of the Investment Adviser (since 1997); Manager, Price
Waterhouse (1991 - 1997).

TURNER SWAN (38) -- Secretary -- 725 South Figueroa Street, Suite 4000, Los
Angeles, CA 90017-5400. Attorney with the Investment Adviser (since 1997);
Attorney, Sheppard, Mullin, Richter & Hampton LLP (1995 - 1997); Attorney, Trout
Trading Management Company Ltd. (1993 - 1995).
24
<PAGE> 96

As of , 2000, the Directors and officers of the Company
as a group (11 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 the Fund.

COMPENSATION OF DIRECTORS

Pursuant to the terms of the Investment Advisory Agreement, the Investment
Adviser pays all compensation of officers and employees of the Company as well
as the fees of all Directors of the Company who are affiliated persons of the
Investment Adviser. The Fund pays each Director not affiliated with the
Investment Adviser (each a "non-affiliated Director") an annual fee of $
plus a fee of $ per meeting attended, together with such Director's actual
out-of-pocket expenses relating to attendance at meetings. The Fund also
compensates members of its Audit and Nominating Committee (the "Committee"),
which consists of all of the non-affiliated Directors, with a fee of $ per
year. The principal purpose of the Committee is to review the scope of the
annual audit conducted by the Fund's independent auditors and the evaluation by
such auditors of the accounting procedures followed by the Fund. The Committee
will also select and nominate the Directors who are not "interested persons" of
the Company within the meaning of the Investment Company Act. The Chairman of
the Audit Committee is paid an additional annual fee of $ .

The following table sets forth estimated compensation to be paid by the
Fund to the non-interested Directors and for the calendar year ending December
31, 2000, and the aggregate compensation paid by all investment companies
(including the Company) advised by Merrill Lynch Investment Managers L.P.
("MLIM") and its affiliate, the Investment Adviser ("MLIM/FAM Advised Funds") to
the non-affiliated Directors for the year ended December 31, 1999:

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION FROM
FUND AND
PENSION OR MLIM/FAM
AGGREGATE RETIREMENT BENEFIT ADVISED FUNDS
COMPENSATION ACCRUED AS PART PAID TO
DIRECTOR/TRUSTEE FROM THE FUND OF FUND EXPENSE TRUSTEE/DIRECTOR(1)
---------------- ------------- ------------------ -------------------
<S> <C> <C> <C>
Michael Baxter............................... $-0- None $
Robert L. Burch III.......................... $ None $
John A. G. Gavin............................. $ None $
Joe Grills................................... $ None $
Nigel Hurst-Brown............................ $-0- None $
Madeleine A. Kleiner......................... $ None $
Richard R. West.............................. $ None $
</TABLE>

---------------
(1) The Directors serve on the boards of MLIM/FAM Advised Funds as follows: Mr.
Burch (4 registered investment companies consisting of 18 portfolios); Mr.
Gavin (4 registered investment companies consisting of 18 portfolios); Mr.
Grills (24 registered investment companies consisting of 56 portfolios); Ms.
Kleiner (4 registered investment companies consisting of 18 portfolios); and
Mr. West (62 registered investment companies consisting of 86 portfolios).

INVESTMENT ADVISORY ARRANGEMENTS

Investment Advisory Services and Fee. The Fund currently invests all of its
assets in shares of the Portfolio. Accordingly, the Fund does not invest
directly in portfolio securities and does not require investment advisory
services. All portfolio management occurs at the level of the Master Trust. The
Master Trust has entered into an investment advisory agreement for the Portfolio
with FAM as Investment Adviser (the "Advisory Agreement"). Subject to the
supervision of the Trustees of the Master Trust, the Investment Adviser is
responsible for the actual management of the Portfolio and constantly reviews
the Portfolio's holdings in light of its own research analysis and that from
other relevant sources. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Investment Adviser. The Investment
Adviser performs certain of the other administrative services and provides all
office space, facilities, equipment and necessary personnel for management of
the Portfolio. The Investment Adviser receives for its services to
25
<PAGE> 97

the Portfolio a monthly fee at an annual rate of 0.21% of the Portfolio's
average daily net assets. For purposes of this calculation, average daily net
assets is determined at the end of each month on the basis of the average net
assets of the Portfolio for each day during the month.

Payment of Master Trust Expenses. The Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay, or cause
an affiliate to pay, for maintaining its staff and personnel and to provide
office space, facilities and necessary personnel for the Master Trust. The
Investment Adviser is also obligated to pay, or cause an affiliate to pay, the
fees of all officers and Trustees of the Master Trust 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 Portfolio pays, or causes to be paid,
all other expenses incurred in the operation of the Portfolio (except to the
extent paid by FAM Distributors, Inc. (the "Distributor")), 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 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 non-interested Trustees, 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 Portfolio. Accounting services are
provided to the Portfolio by the Investment Adviser or an affiliate of the
Investment Adviser, and the Portfolio reimburses the Investment Adviser or an
affiliate of the Investment Adviser for its costs in connection with such
services.

Organization of the Investment Adviser. The Investment Adviser is a limited
partnership, the partners of which are ML & Co. and Princeton Services. ML & Co.
and Princeton Services are "controlling persons" of the Investment Adviser as
defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.

Securities held by the Portfolio may also be held by other funds for which
the Investment Adviser or MLIM acts as an adviser or by investment advisory
clients of MLIM. Because of different investment objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
the Portfolio or for other funds for which the Investment Adviser or MLIM acts
as investment adviser or for their advisory clients arise for consideration at
or about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Investment Adviser or MLIM 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.

Duration and Termination. Unless earlier terminated as described below, the
Advisory Agreement will continue in effect for two years from its effective
date. Thereafter, it will remain in effect from year to year if approved
annually (a) by the Board of Trustees of the Master Trust or by a majority of
the outstanding shares of the Portfolio and (b) by a majority of the Trustees of
the Master Trust who are not parties to the Advisory Agreement or interested
persons (as defined in the Investment Company Act) of any such party. The
Advisory Agreement is not assignable and will automatically terminate in the
event of its assignment. In addition, such contract may be terminated by the
vote of a majority of the outstanding voting securities of the Portfolio or by
the Investment Adviser without penalty on 60 days' written notice to the other
party.

ADMINISTRATION ARRANGEMENTS

The Fund has entered into an administration agreement with FAM (the
"Administrator") as Administrator (the "Administration Agreement"). The
Administrator receives for its services to the Fund monthly compensation at the
annual rate of 0.25% of the average daily net assets of the Fund.

The Administration Agreement obligates the Administrator to provide certain
administrative services to the Fund and to pay, or cause its affiliates to pay,
for maintaining its staff and personnel and to provide office space, facilities
and necessary personnel for the Fund. The Administrator is also obligated to
pay, or cause its affiliates to pay, the fees of those officers and Directors
who are affiliated persons of the Administrator or any of its affiliates. The
Fund pays, or causes to be paid, all other expenses incurred in the operation of
the Fund

26
<PAGE> 98

(except to the extent paid by the Distributor), including, among other things,
taxes, expenses for legal and auditing services, costs of printing proxies,
shareholder reports and prospectuses and statements of additional information,
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 Administrator, or of an
affiliate of the Administrator, accounting and pricing costs (including the
daily calculation of the net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other expenses
properly payable by the Fund. The Distributor will pay certain of the expenses
of the Fund incurred in connection with the continuous offering of its shares.
Certain expenses will be financed by the Fund pursuant to distribution plans in
compliance with Rule 12b-1 under the Investment Company Act. See "Purchase of
Shares -- Distribution Plan." Accounting services are provided to the Fund by
the Administrator, and the Fund reimburses the Administrator for its costs in
connection with such services.

Duration and Termination. Unless earlier terminated as described below, the
Administration Agreement will remain in effect for two years from its effective
date. Thereafter it will remain in effect from year to year if approved annually
(a) by the Board of Directors 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 without penalty on 60 days' written notice at the option of either
party thereto or by the vote of the shareholders of the Fund.

CODE OF ETHICS

The Board of Directors of the Company has adopted a Code of Ethics under
Rule 17j-1 of the Investment Company Act which incorporates the Code of Ethics
of the Investment Adviser (together, the "Codes"). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous, restrictions
on fund investment personnel.

The Codes require that all employees of the Investment Adviser and the
Distributor preclear any personal securities investment (with limited
exceptions, such as mutual funds, high-quality short-term securities and direct
obligations of the U.S. Government). The preclearance requirement and associated
procedures are designed to identify any substantive prohibition or limitation
applicable to the proposed investment. The substantive restrictions applicable
to all employees of the Investment Adviser and the Distributor include a ban on
acquiring any securities in a "hot" initial public offering. In addition,
investment personnel are prohibited from profiting on short-term trading in
securities. No employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within seven
calendar days, before or after, of trading by the Fund in the same or equivalent
security.

PURCHASE OF SHARES

Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus. The Fund offers four classes of shares under the Merrill Lynch
Select Pricing(SM) System which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of the time the investor expects to hold the shares
and other relevant circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge or to have the entire initial purchase price invested in the Fund with
the investment thereafter being subject to ongoing account maintenance and
distribution fees and a possible CDSC if shares are redeemed during the
applicable CDSC period. The shares of each class may be purchased at a price
equal to the next determined net asset value per share subject to the sales
charges and ongoing fee arrangements described below. Class A and Class D shares
are sold to investors choosing the initial sales charge alternatives and Class B
and Class C shares are sold to investors choosing the deferred sales charge
alternatives.

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<PAGE> 99

The Distributor, an affiliate of both the Investment Adviser and Merrill
Lynch, acts as the distributor of the shares. Shares may be purchased from the
Distributor or from other securities dealers, including Merrill Lynch, with whom
the Distributor has entered into selected dealer agreements. The minimum initial
purchase in the Fund is $1,000 and the minimum subsequent purchase in the Fund
is $50, except that for (i) retirement plans the minimum initial purchase in the
Fund is $100 and the minimum subsequent purchase is $1, and (ii) for
shareholders, who are participants in a Mutual Funds Adviser ("MFA") program
administered by Merrill Lynch, the minimum initial purchase is $250 and the
minimum subsequent purchase is $50. Merrill Lynch may charge its customers a
processing fee (currently $5.35) to confirm a sale of shares to such customers.
Purchases made directly through the Transfer Agent are not subject to the
processing fee.

Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund, and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
contingent deferred sales charges ("CDSCs") and account maintenance fees that
are imposed on Class B and Class C shares, as well as the account maintenance
fees that are imposed on Class D shares, will be imposed directly against those
classes and not against all assets of the Fund, and, accordingly, such charges
will not affect the net asset value of any other class or have any impact on
investors choosing another sales charge option. Dividends paid by the Fund for
each class of shares will be calculated in the same manner at the same time and
will differ only to the extent that account maintenance and distribution fees
and any incremental transfer agency costs relating to a particular class are
borne exclusively by that class. Class B, Class C and Class D shares each have
exclusive voting rights with respect to the Rule 12b-1 distribution plan adopted
with respect to such class pursuant to which the account maintenance and/or
distribution fees are paid (except that Class B shareholders may vote upon any
material changes to expenses charged under the Class D Distribution Plan). Each
class has different exchange privileges. See "Shareholder Services -- Exchange
Privilege."

The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLIM or its affiliate, FAM. Funds
advised by MLIM or FAM that use the Merrill Lynch Select Pricing(SM) System are
referred to herein as "MLIM-advised mutual funds."

Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSC and distribution fees with respect to Class B and Class C shares in
that the sales charges and distribution fees applicable to each class provide
for the financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.

The Fund has entered into separate distribution agreements with the
Distributor in connection with the continuous offering of each class of shares
of the Fund ("the Distribution Agreements"). The Distribution Agreements
obligate the Distributor to pay certain expenses in connection with the offering
of each class of shares of the fund. After the prospectuses, statements of
additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution
of copies thereof used in connection with the offering to dealers and investors.
The Distributor also pays for other supplementary sales literature and
advertising costs. The Distribution Agreements are subject to the same renewal
requirements and termination provision as the Investment Advisory Agreement
described under "Management of the Fund -- Investment Advisory Arrangements."

The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change.

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<PAGE> 100

INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES

Investors who prefer an initial sales charge alternative may elect to
purchase Class D shares or, if an eligible investor, Class A shares. Investors
choosing the initial sales charge alternative who are eligible to purchase Class
A shares should purchase Class A shares rather than Class D shares because there
is an account maintenance fee imposed on Class D shares. Investors qualifying
for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales charges imposed
in connection with purchases of Class B or Class C shares. Investors not
qualifying for reduced initial sales charges who expect to maintain their
investment for an extended period of time also may elect to purchase Class A or
Class D shares, because over time the accumulated ongoing account maintenance
and distribution fees on Class B or Class C shares may exceed the initial sales
charge and, in the case of Class D shares, the account maintenance fee. Although
some investors who previously purchased Class A shares may no longer be eligible
to purchase Class A shares of other MLIM-advised mutual funds, those previously
purchased Class A shares, together with Class B, Class C and Class D share
holdings, will count toward a right of accumulation which may qualify the
investor for reduced initial sales charge on new initial sales charge purchases.
In addition, the ongoing Class B and Class C account maintenance and
distribution fees will cause Class B and Class C shares to have higher expense
ratios, pay lower dividends and have lower total returns than the initial sales
charge shares. The ongoing Class D account maintenance fees will cause Class D
shares to have a higher expense ratio, pay lower dividends and have a lower
total return than Class A shares.

The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account (including a pension, profit-sharing or other
employee benefit trust created pursuant to a plan qualified under Section 401 of
the Code) although more than one beneficiary is involved. The term "purchase"
also includes purchases by any "company," as that term is defined in the
Investment Company Act, but does not include purchases by any such company which
has not been in existence for at least six months or which has no purpose other
than the purchase of shares of the Fund or shares of other registered investment
companies at a discount; provided, however, that it does not include purchases
by any group of individuals whose sole organizational nexus is that the
participants therein are credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser.

The term "purchase" also includes purchases by employee benefit plans not
qualified under Section 401 of the Code, including purchases by employees or by
employers on behalf of employees, by means of a payroll deduction plan or
otherwise, of shares of the Fund. Purchases by such a company or non-qualified
employee benefit plan will qualify for the quantity discounts discussed above
only if the Fund and the Distributor are able to realize economies of scale in
sales effort and sales related expense by means of the company, employer or plan
making the Fund's Prospectus available to individual investors or employees and
forwarding investments by such persons to the Fund and by any such employer or
plan bearing the expense of any payroll deduction plan.

Eligible Class A Investors. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends from
outstanding Class A shares. Investors who currently own Class A shares in a
shareholder account including participants in the Merrill Lynch Blueprint(SM)
Program, are entitled to purchase additional Class A shares in that account.
Certain employer sponsored retirement or savings plans, including eligible
401(k) plans, may purchase Class A shares at net asset value provided such plans
meet the required minimum number of eligible employees or required amount of
assets advised by FAM or any of its affiliates. Class A shares are available at
net asset value to corporate warranty insurance reserve fund programs provided
that the program has $3 million or more initially invested in MLIM-advised
mutual funds. Also eligible to purchase Class A shares at net asset value are
participants in certain investment programs including TMA(SM) Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services,

29
<PAGE> 101

collective investment trusts for which Merrill Lynch Trust Company serves as
trustee, certain Merrill Lynch investment programs that offer pricing
alternatives for securities transactions and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net asset
value to Merrill Lynch & Co., Inc. and its subsidiaries and their directors and
employees and to members of the Boards of MLIM-advised investment companies,
including the Fund. Certain persons who acquired shares of certain MLIM-advised
closed-end funds in their initial offerings who wish to reinvest the net
proceeds from a sale of their closed-end fund shares of common stock in shares
of the Fund also may purchase Class A shares of the Fund if certain conditions
set forth in the Statement of Additional Information are met (for closed-end
funds that commenced operations prior to October 21, 1994). In addition, Class A
shares of the Fund and certain other MLIM-advised mutual funds are offered at
net asset value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
and, if certain conditions are met, to shareholders of Merrill Lynch Municipal
Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who
wish to reinvest the net proceeds from a sale of certain of their shares of
common stock pursuant to a tender offer conducted by such funds in shares of the
Fund and certain other MLIM-advised mutual funds.

The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.

REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES

Reinvested Dividends. No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions.

Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class A
or Class D shares of the Fund subject to an initial sales charge at the offering
price applicable to the total of (a) the public offering price of the shares
then being purchased plus (b) an amount equal to the then current net asset
value or cost, whichever is higher, of the purchaser's combined holdings of all
classes of shares of the Fund and of other MLIM-advised mutual funds. For any
such right of accumulation to be made available, the Distributor must be
provided at the time of purchase, by the purchaser or the purchaser's securities
dealer, with sufficient information to permit confirmation of qualification.
Acceptance of the purchase order is subject to such confirmation. The right of
accumulation may be amended or terminated at any time. Shares held in the name
of a nominee or custodian under pension, profit-sharing or other employee
benefit plans may not be combined with other shares to qualify for the right of
accumulation.

Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $ or more of Class A or Class D shares of the Fund or any
other MLIM-advised mutual funds made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided by the
Distributor. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A and Class
D shares of the Fund and of other MLIM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares purchased does not equal the amount stated in the Letter of
Intention (minimum of $ ), the investor will be notified and must pay,
within 20 days of the expiration of such Letter, the difference between the
sales charge on the Class A or Class D shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased through the Letter.
Class A shares or Class D shares equal to 5% of the intended amount will be
30
<PAGE> 102

held in escrow during the 13-month period (while remaining registered in the
name of the purchaser) for this purpose. The first purchase under the Letter of
Intention must be at least 5% of the dollar amount of such Letter. If a purchase
during the term of such Letter would otherwise be subject to a further reduced
sales charge based on the right of accumulation, the purchaser will be entitled
on that purchase and subsequent purchases to the reduced percentage sales charge
but there will be no retroactive reduction of the sales charges on any previous
purchase. The value of any shares redeemed or otherwise disposed of by the
purchaser prior to termination or completion of the Letter of Intention will be
deducted from the total purchases made under such Letter. An exchange from a
MLIM-advised money market fund into the Fund that creates a sales charge will
count toward completing a new or existing Letter of Intent for the Fund.

Employee Access(SM) Accounts. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers that provide
employer-sponsored retirement or savings plans that are eligible to purchase
such shares at net asset value. The initial minimum for such accounts is $500,
except that the initial minimum for shares purchased for such accounts pursuant
to the Automatic Investment Program is $50.

Purchase Privilege of Certain Persons. Directors of the Company, members of
the Boards of other MLIM-advised investment companies and ML & Co. and its
subsidiaries (the term "subsidiaries", when used herein with respect to ML &
Co., includes MLIM, FAM and certain other entities directly or indirectly wholly
owned and controlled by ML & Co.) and their directors and employees, and any
trust, pension, profit-sharing or other benefit plan for such persons may
purchase Class A shares of the Fund at net asset value.

Class D shares of the Fund will be offered at net asset value, without a
sales charge, to an investor who has a business relationship with a financial
consultant who joined Merrill Lynch from another investment firm within six
months prior to the date of purchase by such investor if the following
conditions are satisfied. First, the investor must advise Merrill Lynch that
they will purchase Class D shares of the Fund with proceeds from a redemption of
shares of a mutual fund that was sponsored by the financial consultant's
previous firm and was subject to a sales charge either at the time of purchase
or on a deferred basis. Second, the investor must also establish that such
redemption had been made within 60 days prior to the investment in the Fund, and
the proceeds from the redemption had been maintained in the interim in cash or a
money market fund.

Class D shares of the Fund will be offered at the net asset value, without
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund for which
Merrill Lynch has not served as a selected dealer if the following conditions
are satisfied: First, the investor must advise Merrill Lynch that the investor
will purchase Class D shares of the Fund with proceeds from a redemption of such
shares of other mutual funds that have been outstanding for a period of no less
than six months. Second, the investor must also establish that such purchase of
Class D shares had been made within 60 days after the redemption and the
proceeds from the redemption must have been maintained in the interim in cash or
a money market fund.

Class D shares of the Fund are also offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch Financial Consultant and who has invested in a mutual fund sponsored by a
non-Merrill Lynch company for which Merrill Lynch has served as a selected
dealer and where Merrill Lynch has either received or given notice that such
arrangement will be terminated, if the following conditions are satisfied:
First, the investor must purchase Class D shares of the Fund with proceeds from
a redemption of shares of such other mutual fund and such fund was subject to a
sales charge either at the time of purchase or on a deferred basis; Second, such
purchase of Class D shares must be made within 90 days after such notice of
termination.

Closed-End Fund Investment Option. Class A shares of the Fund and other
MLIM-advised mutual funds ("Eligible Class A shares") are offered at net asset
value to shareholders of certain closed-end funds advised by the Investment
Adviser or MLIM who purchased such closed-end fund shares prior to October 21,
1994 (the date Merrill Lynch Select Pricing(SM) System commenced operations) and
wish to reinvest the net proceeds of a sale of their closed-end fund shares of
common stock in Eligible Class A shares of the Fund, if the conditions set forth
below are satisfied. Alternatively, closed-end fund shareholders who purchased
such shares on or after October 21, 1994 and wish to reinvest the net proceeds
from a sale of their closed-end fund

31
<PAGE> 103

shares are offered Class A shares (if eligible to buy Class A shares) or Class D
shares of the Fund and other MLIM-advised mutual funds ("Eligible Class D
shares") if the following conditions are met. First, the sale of closed-end fund
shares must be made through Merrill Lynch, and the net proceeds therefrom must
be immediately reinvested in Eligible Class A or Class D shares. Second, the
closed-end fund shares must either have been acquired in the initial public
offering or be shares representing dividends from shares of common stock
acquired in such offering. Third, the closed-end fund shares must have been
continuously maintained in a Merrill Lynch securities account. Fourth, the
shareholder must have purchased a minimum of $250 of closed-end fund shares to
be eligible for the reinvestment option.

Shareholders of certain MLIM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the fund in
connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.

TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.

Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. The issuance of Class D shares for
consideration other than cash is limited to bona fide reorganizations, statutory
mergers or other acquisitions of portfolio securities which (i) meet the
investment objectives and policies of the Fund; (ii) are acquired for investment
and not for resale (subject to the understanding that the disposition of the
Fund's portfolio securities shall at all times remain within its control); and
(iii) are liquid securities, the value of which is readily ascertainable, which
are not restricted as to transfer either by law or liquidity of market (except
that the Fund may acquire through such transactions restricted or illiquid
securities to the extent the Fund does not exceed the applicable limits on
acquisition of such securities set forth under "Investment Objective and
Policies" herein).

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.

DEFERRED SALES CHARGES ALTERNATIVES -- CLASS B AND CLASS C SHARES

Because no initial sales charges are deducted at the time of purchase,
Class B and Class C shares provide the benefit of putting all of the investor's
dollars to work from the time the investment is made. The deferred sales charge
alternatives may be particularly appealing to investors who do not qualify for a
reduction in initial sales charges. Both Class B and Class C shares are subject
to ongoing account maintenance fees and distribution fees; however, the ongoing
account maintenance and distribution fees potentially may be offset to the
extent any return is realized on the additional funds initially invested in
Class B or Class C shares. In

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<PAGE> 104

addition, Class B shares of the Fund will be converted into Class D shares of
the Fund after a conversion period of approximately ten years, and thereafter
investors will be subject to lower ongoing fees.

Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLIM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they forgo the Class B conversion feature, making their investment
subject to account maintenance and distribution fees for an indefinite period of
time. In addition, while both Class B and Class C distribution fees are subject
to the limitations on asset-based sales charges imposed by the NASD, the Class B
distribution fees are further limited under a voluntary waiver of asset-based
sales charges. See "Purchase of Shares -- Limitations on the Payment of Deferred
Sales Charges."

Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in MLIM-advised mutual funds.

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year CDSC. On the other hand,
approximately ten years after Class B shares are issued, such Class B shares,
together with shares issued upon dividend reinvestment with respect to those
shares, are automatically converted into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Both Class B and Class C shares are subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
% and %, respectively, of net assets. See "Distribution Plans." The
proceeds from the account maintenance fees are used to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.

Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its financial consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans."

Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) related to providing distribution-related
services to the Fund in connection with the sale of the Class B and Class C
shares, such as the payment of compensation to financial consultants for selling
Class B and Class C shares. The combination of the CDSC and the ongoing
distribution fee facilitates the ability of the Fund to sell the Class B and
Class C shares without a sales charge being deducted at the time of purchase.
Approximately ten years after issuance, Class B shares will convert
automatically into Class D shares of the Fund, which are subject to an account
maintenance fee but no distribution fee. Class B shares of certain other
MLIM-advised mutual funds into which exchanges may be made convert into Class D
shares automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLIM-advised mutual fund, the
conversion period applicable to the Class B shares acquired in the exchange will
apply, and the holding period for the shares exchanged will be tacked onto the
holding period for the shares acquired.

Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges." Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services --
Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.

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<PAGE> 105

Contingent Deferred Sales Charge -- Class B Shares. Class B shares which
are redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no sales
charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions.

The following table sets forth the rates of the CDSC on Class B shares:

<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- --------------------
<S> <C>
0 - 1............................................. %
1 - 2............................................. %
2 - 3............................................. %
3 - 4............................................. %
4 and thereafter.................................. %
</TABLE>

In determining whether a contingent deferred sales charge is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest possible rate being charged. Therefore, it will be assumed that the
redemption is first of shares held for over four years or shares acquired
pursuant to reinvestment of dividends or distributions and then of shares held
longest during the four-year period. The charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase. A transfer of shares from a shareholder's account to another account
will be assumed to be made in the same order as a redemption.

To provide an example, assume an investor purchased shares at $ per
share (at a cost of $ ) and in the third year after purchase, the net asset
value per share is $ , and during such time, the investor has acquired
additional shares through dividend reinvestment. If at such time the investor
makes his or her first redemption of shares (proceeds of $ ), shares
will not be subject to the charge because of dividend reinvestment. With respect
to the remaining shares, the charge is applied only to the original cost of
$ per share and not to the increase in net asset value of $ per share.
Therefore, $ of the $ redemption proceeds will be charged at a rate of
% (the applicable rate in the third year after purchase).

The Class B CDSC is waived on redemptions of shares made in connection with
post-retirement withdrawals from an Individual Retirement Account ("IRA") or
other retirement plan or following the death or disability (as defined in the
Code) of a shareholder. The Class B CDSC also is waived on redemptions of shares
in connection with certain group plans through the Merrill Lynch Blueprint(SM)
Program. See "Shareholder Services -- Merrill Lynch Blueprint(SM) Program." The
contingent deferred sales charge is waived on redemption of shares by certain
eligible 401(a) and eligible 401(k) plans. The CDSC is also waived for any Class
B shares that are purchased by an eligible 401(k) or eligible 401(a) plans and
are rolled over into a Merrill Lynch or Merrill Lynch Trust Company custodied
Individual Retirement Account and held in such account at the time of redemption
and for any Class B shares that were acquired and held at the time of the
redemption in an Employee Access(SM) Account available through employers
providing eligible 401(k) plans. The Class B CDSC also is waived for any Class B
shares that are purchased within qualifying Employee Access(SM) Accounts.
Additional information concerning the waiver of the Class B CDSC is set forth in
the Statement of Additional Information. The terms of the CDSC may be modified
for redemptions made in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."

Contingent Deferred Sales Charge -- Class C Shares. Class C shares that are
redeemed within one year of purchase may be subject to a 1.0% CDSC charged as a
percentage of the dollar amount subject thereto. The charge will be assessed on
an amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no Class C CDSC will be imposed on increases
in net asset value above the initial purchase price. In addition, no Class C
CDSC will be assessed on shares derived from reinvestment of dividends or
capital gains distributions. The Class C CDSC may be waived in connection with
involuntary

34
<PAGE> 106

termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch systematic withdrawal plan. See "Shareholder
Services -- Fee-Based Programs."

In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.

Conversion of Class B Shares to Class D Shares. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for federal income tax purposes.

EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS

Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or numbers of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or
the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of CDSC upon redemption, based on similar
criteria. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the share of any MLIM-advised mutual fund.
Minimum purchase requirements may be waived or varied for such plans. Additional
information regarding purchases by employer-sponsored retirement or savings and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at (800) 237-7777.

DISTRIBUTION PLANS

The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or distribution
fees paid by the Fund to the Distributor with respect to such classes. The Class
B and Class C Distribution Plans provide for the payment of account maintenance
fees and distribution fees, and the Class D Distribution Plan provides for the
payment of account maintenance fees.

The Distribution Plans for Class B, Class C and Class D shares each provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual rate
of 0.25% of the average daily net assets of the Fund attributable to shares of
the relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) in connection with account maintenance activities.

The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of % for
Class B shares and % for Class C shares of the average daily net assets of
the Fund attributable to the shares of the relevant class in order to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services, and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B and Class C shares of the Fund. The Distribution Plans relating to Class
B and Class C shares are designed to permit an investor to purchase Class B and
Class C shares through dealers without the assessment of an initial sales charge
and at the same time permit the dealer to compensate its financial consultants
in connection with the sale of the Class B and Class C shares. In this regard,
the purpose and function of the ongoing distribution
35
<PAGE> 107

fees and the CDSC are the same as those of the initial sales charge with respect
to the Class A and Class D shares of the Fund in that the deferred sales charges
provide for the financing of the distribution of the Fund's Class B and Class C
shares.

The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expenses and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSC and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expenses. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and
contingent deferred sales charges, and the expenses consist of financial
consultant compensation.

The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Directors of the Fund will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Directors will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charge, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares."

Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company Act. See
"Additional Information -- Description of Shares." Among other things, each
Distribution Plan provides that the Distributor will provide and the Directors
will review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the Directors must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and to its related class of shareholders. Each Distribution Plan
further provides that, so long as such Distribution Plan remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund, as defined in the Investment Company Act (the "Independent Directors"),
will be committed to the discretion of the Independent Directors then in office.
In approving each Distribution Plan in accordance with Rule 12b-1, the
Independent Directors concluded that there is a reasonable likelihood that such
Distribution Plan will benefit the Fund and its related class of shareholders.
Each Distribution Plan can be terminated at any time, without penalty, by the
vote of a majority of the Independent Directors or by the vote of the holders of
a majority of the outstanding related class of voting securities of the Fund. A
Distribution Plan cannot be amended to increase materially the amount to be
spent by the Fund without the approval of the related class of shareholders, and
all material amendments are required to be approved by the vote of Directors,
including a majority of the Independent Directors who have no direct or indirect
financial interest in such Distribution Plan, cast in person at a meeting called
for that purpose. Rule 12b-1 further requires that the Fund preserve copies of
such Distribution Plan and any reports made pursuant to such plan for a period
of not less than six years from the date of the Distribution Plan or such
reports, the first two years in an easily accessible place.

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD") imposes a limitation on certain
asset-based sales charges, such as the distribution fee and the

36
<PAGE> 108

CDSC borne by the Class B and Class C shares, but not the account maintenance
fee. The maximum sales charge rule is applied separately to each class. As
applicable to the Fund, the maximum sales charge rule limits the aggregate of
distribution fee payments and CDSCs payable by the Fund to (1) 6.25% of eligible
gross sales of Class B shares and Class C shares, computed separately (defined
to exclude shares issued pursuant to dividend reinvestments and exchanges), plus
(2) interest on the unpaid balance for the respective class, computed
separately, at the prime rate plus 1% (the unpaid balance being the maximum
amount payable minus amounts received from the payment of the distribution fee
and the CDSC). In connection with the Class B shares, the Distributor has
voluntarily agreed to waive interest charges on the unpaid balance in excess of
0.50% of eligible gross sales. Consequently, the maximum amount payable to the
Distributor (referred to as the "voluntary maximum") in connection with the
Class B shares is 6.75% of eligible gross sales. The Distributor retains the
right to stop waiving the interest charges at any time. To the extent payments
would exceed the voluntary maximum, the Fund will not make further payments of
the distribution fee with respect to Class B shares, and any CDSCs will be paid
to the Fund rather than to the Distributor; however, the Fund will continue to
make payments of the account maintenance fee. In certain circumstances the
amount payable pursuant to the voluntary maximum may exceed the amount payable
under the NASD formula. In such circumstances payment in excess of the amount
payable under the NASD formula will not be made.

REDEMPTION OF SHARES

Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus for certain information as to the redemption and repurchase of
Fund shares. The Fund is required to redeem for cash all shares of the 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 for Class A and D shares, and is the net asset value per share
next determined after the initial receipt of proper notice of redemption, less
the applicable CDSC, if any, for Class B or Class C shares. Except for any CDSC
which may be applicable to Class B or C shares, there will be no charge for
redemption if the redemption request is sent directly to the Transfer Agent.
Shareholders liquidating their holdings will receive upon redemption all
dividends declared on the shares redeemed.

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 any period during
which trading on the New York Stock Exchange (the "NYSE") is restricted as
determined by the Commission or such Exchange is closed (other than customary
weekend and holiday closings), for any period during which an emergency exists
as defined by the Commission as a result of which disposal of portfolio
securities or determination of the net asset value of the Fund is not reasonably
practicable, and for such other periods as the Commission may by order permit
for the protection of shareholders of the Fund.

The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.

REDEMPTION

A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the notice must be guaranteed by an "eligible
guarantor institution" (including, for example, Merrill Lynch branch offices and
certain other financial institutions) as such term is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, the existence and
validity of which may be verified by the

37
<PAGE> 109

Transfer Agent through the use of industry publications. Notarized signatures
are not sufficient. In certain instances, the Transfer Agent may require
additional documents, such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority. For shareholders redeeming directly with the Transfer
Agent, payment will be mailed within seven days of receipt of a proper notice of
redemption.

At various times the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check until such time as good payment (e.g., cash or
certified check drawn on a U.S. bank) has been collected for the purchase of
such shares. Normally, this delay will not exceed 10 days.

REPURCHASE

The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the NYSE
(generally 4:00 p.m., New York time) on the day received and that such request
is received by the Fund from such dealer not later than 30 minutes after the
close of business on the NYSE, on the same day. Dealers have the responsibility
of submitting such repurchase requests to the Fund not later than 30 minutes
after the close of business on the NYSE, in order to obtain that day's closing
price.

The foregoing repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Fund (other than any applicable
CDSC). Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder for
transmitting the notice of repurchase to the Fund. Merrill Lynch may charge its
customers a processing fee (presently $5.35) to confirm a repurchase of shares
to such customers. Repurchases made directly through the Fund's Transfer Agent
are not subject to the processing fee. The Fund reserves the right to reject any
order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. A shareholder
whose order for repurchase is rejected by the Fund, however, may redeem shares
as set forth above.

For shareholders submitting their shares for repurchase through listed
securities dealers, payment for fractional shares will be made by the Transfer
Agent directly to the shareholder and payment for full shares will be made by
the securities dealer within seven days of the proper tender of the
certificates, if any, and stock power or letter requesting redemption, in each
instance with signature guaranteed as noted in the Prospectus.

REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES

Shareholders who have redeemed their Class A or Class D shares, including
through repurchase, have a privilege to reinstate their accounts by purchasing
Class A or Class D shares, as the case may be, of the Fund at net asset value
without a sales charge up to the dollar amount redeemed. The reinstatement
privilege may be exercised by sending a notice of exercise along with a check
for the amount to be reinstated to the Transfer Agent within 30 days after the
date the request for redemption was accepted by the Transfer Agent or the
Distributor. Alternately, the reinstatement privilege may be exercised through
the investor's Merrill Lynch Financial Consultant within 30 days after the date
the request for redemption was accepted by the Transfer Agent or Distributor.
The reinstatement will be made at the net asset value per share next determined
after the notice of reinstatement is received and cannot exceed the amount of
the redemption proceeds.

The reinstatement privilege is a one-time privilege and may be exercised by
the shareholder only the first time such shareholder makes a redemption
resulting in a gain is a taxable event whether or not the reinstatement
privilege is exercised. A redemption resulting in a loss will not be a taxable
event to the extent the reinstatement privilege is exercised, and an adjustment
will be made to the shareholder's tax basis in shares acquired pursuant to the
reinstatement to reflect the disallowed loss.

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<PAGE> 110

If a shareholder disposes of shares within 90 days of their acquisition and
subsequently reacquires shares of the Fund pursuant to the reinstatement
privilege, then the shareholder's tax basis in those shares disposed of will be
reduced to the extent the load charge paid to the Fund upon the shareholder's
initial purchase reduces any load charge such shareholder would have been
required to pay on the subsequent acquisition in absence of the reinstatement
privilege. Instead, such load charge will be treated as an amount paid for the
subsequently acquired shares and will be included in the shareholder's tax basis
for such shares.

DEFERRED SALES CHARGE -- CLASS B AND CLASS C SHARES

As discussed in the Prospectus under "Purchase of Shares -- Alternative
Sale Arrangements -- Deferred Sales Charge Alternative -- Class B and Class C
Shares," while Class B shares of the Fund redeemed within four years of purchase
are subject to a contingent deferred sales charge under most circumstances, the
charge is waived on redemptions of Class B shares in certain instances including
in connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies in
the case of such withdrawals are: (a) any partial or complete redemption in
connection with a distribution following retirement under a tax-deferred
retirement plan or attaining age 59 1/2 in the case of an IRA or other
retirement plan, or part of a series of equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) or any
redemption resulting from the tax-free return of an excess contribution to an
IRA; or (b) any partial or complete redemption following the death or disability
(as defined in the Internal Revenue Code) of a Class B shareholder (including
one who owns the Class B shares as joint tenant with his or her spouse),
provided the redemption is requested within one year of the death or initial
determination of disability.

Merrill Lynch Blueprint(SM) Program. Class B shares of the Fund are offered
to certain participants in the Merrill Lynch Blueprint(SM) Program
("Blueprint"). Blueprint is directed to small investors and participants in
certain affinity groups such as trade associations and credit unions. Class B
shares are offered through Blueprint only to members of certain affinity groups.
The contingent deferred sales charge is waived for shareholders who are members
of certain affinity groups at the time orders to purchase Class B shares are
placed through Blueprint. However, services (including the exchange privilege)
available to Class B shareholders through Blueprint may differ from those
available to other Class B investors. Orders for purchases and redemptions of
Class B shares may be grouped for execution purposes which, in some
circumstances, may involve the execution of such orders two business days
following the day such orders are placed. The minimum initial purchase price is
$100 with a $50 minimum for subsequent purchases through Blueprint. Minimum
investment amounts are waived in connection with automatic investment plans for
Blueprint participants. Additional information concerning these Blueprint
programs, including any annual fees or transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The Blueprint(SM) Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

In addition, shares purchased through reinvestment of dividends on Class B
shares will also convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at a Conversion Date the conversion of Class B shares to Class D
shares of the Fund in a single account will result in less than $50 worth of
Class B shares being left in the account, all of the Class B shares of the Fund
held in the account on the Conversion Date will be converted to Class D shares
of the Fund.

Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event such certificates are not received by
the Transfer Agent at least one week prior to the Conversion Date, the related
Class B shares will convert to Class D shares on the next scheduled Conversion
Date after such certificates are delivered.

In general, Class B shares of equity MLIM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLIM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year

39
<PAGE> 111

Conversion Period, or vice versa, the Conversion Period applicable to the Class
B shares acquired in the exchange will apply, and the holding period for the
shares exchanged will be tacked onto the holding period for the shares acquired.

The Conversion Period is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the CDSC
normally imposed on purchases of Class B shares ("Class B Retirement Plans").
When the first share of any MLIM-advised mutual fund purchased by a Class B
Retirement Plan has been held for ten years (i.e., ten years from the date the
relationship between MLIM-advised mutual funds and the Plan was established),
all Class B shares of all MLIM-advised mutual funds held in that Class B
Retirement Plan will be converted into Class D shares of the appropriate funds.
Subsequent to such conversion, that retirement plan will be sold Class D shares
of the appropriate funds at net asset value per share.

In the event that all Class B shares of the Fund held in a single account
are converted to Class D shares on a Conversion Date, shares representing
reinvestment of declared but unpaid dividends on those Class B shares also will
be converted to Class D shares; otherwise, only Class B shares purchased through
reinvestment of dividends paid will convert to Class D shares on the Conversion
Date.

The Conversion Period also is modified for retirement plan investors which
participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."

PORTFOLIO TRANSACTIONS

Because the Fund will invest exclusively in shares of the Portfolio, it is
expected that all transactions in portfolio securities will be entered into by
the Master Trust. Subject to policies established by the Board of Trustees of
the Master Trust, the Investment Adviser is responsible for the execution of the
Fund's portfolio transactions. In executing such transactions, the Investment
Adviser seeks to obtain the best net results for the Portfolio, taking into
account such factors as price (including the applicable brokerage commission or
dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved and the firm's risk in positioning a block of
securities. While the Investment Adviser generally seeks reasonably competitive
commission rates, the Portfolio will not necessarily be paying the lowest
commission or spread available.

Subject to obtaining the best price and execution, brokers who provide
supplemental investment research to the Investment Adviser may receive orders
for transactions by the Portfolio. Such supplemental research services
ordinarily consist of assessments and analysis of the business or prospects of a
company, industry, or economic sector. If, in the judgment of the Investment
Adviser, the Fund will be benefited by such supplemental research services, the
Investment Adviser is authorized to pay commissions to brokers furnishing such
services that are in excess of commissions that another broker may charge for
the same transaction. Information so received will be in addition to and not in
lieu of the services required to be performed by the Investment Adviser under
its Investment Advisory Agreement. The expenses of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information. In some cases, the Investment Adviser may use such supplemental
research in providing investment advice to its other investment advisory
accounts. In addition, consistent with the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. and policies established by the
Board of Trustees of the Master Trust, the Investment Adviser may consider sales
of shares of the Fund as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Portfolio.

The Fund has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to the policy
established by the Board of Trustees, the Investment Adviser is primarily
responsible for the portfolio decisions of the Portfolio and the placing of its
portfolio transactions. In placing orders, it is the policy of the Portfolio to
obtain the best price and execution for its transactions. Affiliated persons of
the Fund, including Merrill Lynch, may serve as its broker in over-the-counter
transactions conducted on an agency basis.

During periods when interest rates fluctuate significantly, the portfolio
turnover rate may be substantially higher than 100%. In any particular year,
however, market conditions could result in portfolio activity at a
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<PAGE> 112

greater or lesser rate than anticipated. High portfolio turnover involves
correspondingly greater transaction costs in the form of commissions and dealer
spreads, which are borne directly by the Portfolio.

The Portfolio anticipates that its brokerage transactions involving
securities of companies domiciled in countries other than the United States will
be conducted primarily on the principal stock exchanges of such countries.
Brokerage commissions and other transaction costs on foreign stock exchange
transactions are generally higher than in the United States, although the
Portfolio will endeavor to achieve the best net results in effecting its
portfolio transactions. There is generally less governmental supervision and
regulation of foreign stock exchanges and brokers than in the United States.

The securities in which the Portfolio invests are primarily traded in the
over-the-counter market and, where possible, the Fund deals directly with the
dealers who make a market in the securities involved except in those
circumstances in which better prices and execution are available elsewhere. Such
dealers usually act as principals for their own account. On occasion, securities
may be purchased directly from the issuer. Bonds and money market securities are
generally traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. The cost of portfolio securities transactions of
the Portfolio will consist primarily of dealer or underwriter spreads. Under the
Investment Company Act, persons affiliated with the Portfolio and persons who
are affiliated with such affiliated persons are prohibited from dealing with the
Portfolio as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own accounts, affiliated persons of
the Fund, including Merrill Lynch and any of its affiliates, will not serve as
the Portfolio's dealer in such transactions. However, affiliated persons of the
Portfolio may serve as its broker in listed or over-the-counter transactions
conducted on an agency basis provided that, among other things, the fee or
commission received by such affiliated broker is reasonable and fair compared to
the fee or commission received by non-affiliated brokers in connection with
comparable transactions.

The Portfolio may not purchase securities, during the existence of any
underwriting syndicate of which Merrill Lynch is a member or in a private
placement in which Merrill Lynch serves as placement agent except pursuant to
procedures approved by the Board of Trustees of the Master Trust that either
comply with rules adopted by the Commission or with interpretations of the
Commission Staff. Rule 10f-3 under the Investment Company Act sets forth
conditions under which the Fund may purchase corporate bonds from an
underwriting syndicate of which Merrill Lynch is a member. The rule sets forth
requirements relating to, among other things, the terms of an issue of corporate
bonds purchased by the Portfolio, the amount of corporate bonds that may be
purchased in any one issue and the assets of the Portfolio that may be invested
in a particular issue.

The Portfolio'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. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Portfolio will be managed so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategy.

Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with the aggregate compensation received by the member in effecting such
transactions, and (iii) complies with any rules the Commission has prescribed
with respect to the requirements of clauses (i) and (ii). To the extent Section
11(a) would apply to Merrill Lynch acting as a broker for the Fund in any of its
portfolio transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Fund and annual
statements as to aggregate compensation will be provided to the Fund. Securities
may be held by, or be appropriate investments for, the Fund as well as other
funds or Investment Advisory Clients of the Investment Adviser and MLIM.

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The Fund intends to comply with the various requirements of the Internal
Revenue Code so as to qualify as a "regulated investment company" thereunder.
See "Dividends, Distributions and Taxes."

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of the Fund is determined once daily by
the Investment Adviser immediately after the declaration of dividends as of 15
minutes after the closing time (generally 4:00 p.m. New York time) on each day
during which the NYSE is open for trading and on any other day on which there is
sufficient trading in the Fund's portfolio securities that net asset value might
be materially affected but only if on any such day the Fund is required to sell
or redeem shares. The NYSE is not open on New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. Net asset value is computed by dividing the value of
the securities held by the Fund plus any cash or other assets (including
interest and dividends accrued but not yet received) minus all liabilities
(including accrued expenses) by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the fees payable to the
Administrator and the Distributor, are accrued daily.

The per share net asset value of the Class B, Class C and Class D shares
generally will be lower than the per share net asset value of the Class A shares
reflecting the daily expense accruals of the account maintenance, distribution
and higher transfer agency fees applicable with respect to the Class B and Class
C shares and the daily expense accruals of the account maintenance fees
applicable with respect to Class D shares. Moreover, the per share net asset
value of the Class B and Class C shares generally will be lower than the per
share net asset value of its Class D shares reflecting the daily expense
accruals of the distribution fees and higher transfer agency fees applicable
with respect to the Class B and Class C shares of the Fund. It is expected,
however, that the per share net asset value of the four classes will tend to
converge (although not necessarily meet) immediately after the payment of
dividends or distributions, which will differ by approximately the amount of the
expense accrual differential between the classes.

Portfolio securities that are traded on stock exchanges are valued at the
last sale price as of the close of business on the day the securities are being
valued, or, lacking any sales, at the mean between closing bid and asked prices.
Securities traded in the over-the-counter ("OTC") market are valued at the mean
of the most recent bid and ask prices as obtained from one or more dealers that
make markets in the securities. 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, and it is expected that for debt securities this
ordinarily will be the OTC market. Options on debt securities, which are traded
on exchanges, are valued at the last asked price for options written and the
last bid price for options purchased. Interest rate futures contracts and
options thereon, which are traded on exchanges, are valued at their closing
price at the close of such exchanges. The Fund employs Merrill Lynch Securities
Pricing Service, an affiliate of Merrill Lynch, to provide securities prices for
the Fund. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Company, including valuations
furnished by a pricing service retained by the Fund, which may use a matrix
system for valuations. These procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Directors.

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements at least quarterly, from the
Transfer Agent. These statements will serve as transaction

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confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions.

The statements will also show any other activity in the account since the
preceding statement. Shareholders will receive separate transaction
confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of ordinary income dividends and
long-term capital gains distributions. A shareholder may make additions to his
Investment Account at any time by mailing a check directly to the Fund's
Transfer Agent.

Shareholders may also maintain their accounts through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. Shareholders considering transferring a tax-deferred retirement
account such as an individual retirement account from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.

Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.

Shareholders considering transferring their Class A shares from Merrill
Lynch to another brokerage firm or financial institution should be aware that,
if the firm to which the Class A or Class D shares are to be transferred will
not take delivery of shares of the Fund, a shareholder either must redeem the
Class A or Class D shares (paying any applicable CDSC), so that the cash
proceeds can be transferred to the account at the new firm or such shareholder
must continue to maintain an Investment Account at the transfer agent for those
Class A or Class D shares. Shareholders interested in transferring their Class B
or Class C shares from Merrill Lynch and who do not wish to have an Investment
Account maintained for such shares at the Transfer Agent may request their new
brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the transfer agent. If
the new brokerage firm is willing to accommodate the shareholder in this manner,
the shareholder must request that he or she be issued certificates for his
shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another broker firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC), so that the cash proceeds
can be transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account with Merrill Lynch for those shares.

AUTOMATIC INVESTMENT PLANS

A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if an eligible Class A investor as described herein)
or Class B, Class C or Class D shares at the applicable public offering price
either through the shareholder's securities dealer or by mail directly to the
Transfer Agent, acting as agent for such securities dealer. Voluntary
accumulation also can be made through a service

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<PAGE> 115

known as the Automatic Investment Plan whereby the Fund is authorized through
pre-authorized checks or automated clearing house debits of $50 or more to
charge the regular bank account of the shareholder on a regular basis to provide
systematic additions to the Investment Account of such shareholder. An investor
whose shares of the Fund are held within a CMA(R) or CBA(R) account may arrange
to have periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R)/ CBA(R) Automatic Investment Program.

FEE-BASED PROGRAMS

Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares, which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the conversion period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of such
shares or the automatic exchange thereof to another class at net asset value,
which may be shares of a Money Market Fund. In addition, upon termination of
participation in a Program, shares that have been held for less than specified
periods within such Program may be subject to a fee based upon the current value
of such shares. These Programs also generally prohibit such shares from being
transferred to another account at Merrill Lynch, to another broker-dealer or to
the Transfer Agent. Except in limited circumstances (which may also involve an
exchange as described above), such shares must be redeemed and another class of
shares purchased (which may involve the imposition of initial or deferred sales
charges and distribution and account maintenance fees) in order for the
investment not to be subject to Program fees. Additional information regarding a
specific Program (including charges and limitations on transferability
applicable to shares that may be held in such Program) is available in the
Program's client agreement and from Merrill Lynch Investor Services at (800)
MER-FUND (637-3863).

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and capital
gains distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of shares of the Fund,
without sales charge, as of the close of business on the ex-dividend date of the
dividend and capital gains distributions. Shareholders may elect in writing to
receive their dividends and capital gains distributions, or both, in cash, in
which event payment will be mailed or direct deposited on or about the payment
date except that any dividend or capital gain distribution of less than $10
payable to an account maintained directly with the Fund's Transfer Agent will
not be paid in cash, but will be reinvested in shares of the Fund.

Shareholders may, at any time, notify Merrill Lynch in writing if the
shareholder's account is maintained with Merrill Lynch or notify the Transfer
Agent in writing or by telephone (1-800-MER-FUND) if their account is maintained
with the Transfer Agent that they no longer wish to have their dividends
reinvested in shares of the Fund or vice versa and, commencing ten days after
the receipt by the Transfer Agent of such notice, those instructions will be
effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed dividend or redemption checks. Cash payments can also be
directly deposited to the shareholder's bank account. No CDSC will be imposed
upon redemption of shares issued as a result of the automatic reinvestment of
dividends.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares in the form of payments
by check or through automatic payment by direct deposit to such shareholder's
bank account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have acquired Class A or Class D
shares of the Fund having a

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<PAGE> 116

value, based on cost or the current offering price, of $5,000 or more and
monthly withdrawals are available for shareholders with Class A or Class D
shares having a value of $10,000 or more.

At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify the dollar amount and
class of shares to be redeemed. Redemptions will be made at net asset value as
determined at the close of business of the NYSE (generally 4:00 p.m., New York
City time) on the 24th day of each month or the 24th day of the last month of
each quarter, whichever is applicable. If the NYSE is not open for business on
such date, the shares will be redeemed at the close of business on the following
business day. The check for the withdrawal payment will be mailed, or the direct
deposit of the withdrawal payment will be made, on the next business day
following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all shares in the Investment Account are
reinvested automatically in Fund shares. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Fund's Transfer Agent or the Distributor.

Withdrawal payments should not be considered as dividends, yield or income.
Each withdrawal is a taxable event. If periodic withdrawals continuously exceed
reinvested dividends, the shareholder's original investment may be reduced
correspondingly. Purchases of additional shares concurrent with withdrawals are
ordinarily disadvantageous to the shareholder because of sales charges and tax
liabilities. The Fund will not knowingly accept purchase orders for shares of
the Fund from investors who maintain a Systematic Withdrawal Plan unless such
purchase is equal to at least one year's scheduled withdrawals or $1,200,
whichever is greater. Periodic investments may not be made into an Investment
Account in which the shareholder has elected to make systematic withdrawals.

Alternatively a Class A or Class D shareholder whose shares are held within
a CMA(R)/CBA(R) or Retirement Account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the
CMA(R)/CBA(R) Systematic Redemption Program. The minimum fixed dollar amount
redeemable is $50. The proceeds of systematic redemptions will be posted to the
shareholder's account five business days after the date the shares are redeemed.
All redemptions are made at net asset value. A shareholder may elect to have his
or her shares redeemed on the first, second, third or fourth Monday of each
month, in the case of monthly redemptions, or of every other month, in the case
of bimonthly redemptions. For quarterly, semiannual or annual redemptions, the
shareholder may select the month in which the shares are to be redeemed and may
designate whether the redemption is to be made on the first, second, third or
fourth Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R)/CBA(R) Systematic Redemption Program is not available if Fund shares are
being purchased within the account pursuant to the Automatic Investment Program.
For more information on the CMA(R)/CBA(R) Systematic Redemption Program,
eligible shareholders should contact their Merrill Lynch Financial Consultant.

With respect to redemptions of Class B and Class C shares pursuant to a
systematic withdrawal plan, the maximum number of Class B or Class C shares that
can be redeemed from an account annually shall not exceed 10% of the value of
shares of such class in that account at the time the election to join the
Systematic Withdrawal Plan was made. Any CDSC that otherwise might be due on
such redemption of Class B or Class C shares will be waived. Shares redeemed
pursuant to a Systematic Withdrawal Plan will be redeemed in the same order as
Class B or Class C shares are otherwise redeemed. See "Purchase of
Shares -- Deferred Charge Alternatives -- Class B and C Shares." Where the
Systematic Withdrawal Plan is applied to Class B shares, upon conversion of the
last Class B shares in an account to Class D shares, the Systematic Withdrawal
Plan will automatically be applied thereafter to Class D shares. See "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares". If an investor wishes
to change the amount being withdrawn in a Systematic Withdrawal Plan the
investor should contact his or her Financial Consultant.

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EXCHANGE PRIVILEGE

U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLIM-advised mutual funds and Summit Cash Reserves
Fund ("Summit"), a series of Financial Institutions Series Trust, which is a
Merrill Lynch-sponsored money market fund specifically designated for exchange
by holders of Class A, Class B, Class C and Class D shares of MLIM-advised
mutual funds. Under the Merrill Lynch Select Pricing(SM) System, Class A
shareholders may exchange Class A shares of the Fund for Class A shares of a
second MLIM-advised mutual fund if the shareholder holds any Class A shares of
the second fund in his or her account in which the exchange is made at the time
of the exchange or is otherwise eligible to purchase Class A shares of the
second fund. If the Class A shareholder wants to exchange Class A shares for
shares of a second MLIM-advised mutual fund, and the shareholder does not hold
Class A shares of the second fund in his or her account at the time of the
exchange and is not otherwise eligible to acquire Class A shares of the second
fund, the shareholder will receive Class D shares of the second fund as a result
of the exchange. Class D shares also may be exchanged for Class A shares of a
second MLIM-advised mutual fund at any time as long as, at the time of the
exchange, the shareholder holds Class A shares of the second fund in the account
in which the exchange is made or is otherwise eligible to purchase Class A
shares of the second fund. Class B, Class C and Class D shares will be
exchangeable with shares of the same class of other MLIM-advised mutual funds.
For purposes of computing the CDSC that may be payable upon a disposition of the
shares acquired in the exchange, the holding period for the previously owned
shares of the Fund is "tacked" to the holding period of the newly acquired
shares of the other fund as more fully described below. Class A, Class B, Class
C and Class D shares also will be exchangeable for shares of certain MLIM-
advised mutual funds specifically designated below as available for exchange by
holders of Class A, Class B, Class C or Class D shares. Shares with a net asset
value of at least $100 are required to qualify for the exchange privilege, and
any shares utilized in an exchange must have been held by the shareholder for at
least 15 days. It is contemplated that the exchange privilege may be applicable
to other new mutual funds whose shares may be distributed by the Distributor.

Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other MLIM-advised mutual
funds or for Class A shares of Summit ("new Class A or Class D shares") are
transacted on the basis of relative net asset value per Class A or Class D
share, respectively, plus an amount equal to the difference, if any, between the
sales charge previously paid on the outstanding Class A or Class D shares and
the sales charge payable at the time of the exchange on the new Class A or Class
D shares. With respect to outstanding Class A or Class D shares as to which
previous exchanges have taken place, the "sales charge previously paid" shall
include the aggregate of the sales charges paid with respect to such Class A or
Class D shares in the initial purchase and any subsequent exchange. Class A or
Class D shares issued pursuant to dividend reinvestment are sold on a no-load
basis in each of the funds offering Class A or Class D shares. For purposes of
the exchange privilege, Class A or Class D shares acquired through dividend
reinvestment shall be deemed to have been sold with a sales charge equal to the
sales charge previously paid on the Class A or Class D shares on which the
dividend was paid. Based on this formula, Class A and Class D shares of the Fund
generally may be exchanged into the Class A or Class D shares of the other
MLIM-advised mutual funds or into shares of Summit with a reduced or without a
sales charge.

In addition, each MLIM-advised mutual fund with Class B or Class C shares
outstanding ("outstanding Class B or Class C shares") offers to exchange its
Class B or Class C shares for Class B or Class C shares, respectively, of
another MLIM-advised mutual fund or for Class B shares of Summit ("new Class B
or Class C shares") on the basis of relative net asset value per Class B or
Class C share, without the payment of any CDSC that might otherwise be due on
redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange privilege will continue to be subject to the Fund's
contingent deferred sales charge schedule if such schedule is higher than the
contingent deferred sales charge schedule relating to the new Class B shares
acquired through use of the exchange privilege. In addition, Class B shares of
the Fund acquired through use of the exchange privilege will be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the Class B shares of the fund from which the exchange has been made. For
purposes of computing the sales charge that may be payable on a disposition of
the new

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<PAGE> 118

Class B or Class C shares, the holding period for the outstanding Class B or
Class C shares is "tacked" to the holding period of the new Class B or Class C
shares. For example, an investor may exchange Class B shares of the Fund for
those of Merrill Lynch Special Value Fund, Inc. after having held the Fund's
Class B shares for two and a half years. The 2% sales charge that generally
would apply to a redemption would not apply to the exchange. Two years later the
investor may decide to redeem the Class B shares of Merrill Lynch Special Value
Fund, Inc. and receive cash. There will be no contingent deferred sales charge
due on this redemption, since by "tacking" the two and a half year holding
period of the Fund's Class B shares to the two year holding period for the
Merrill Lynch Special Value Fund, Inc. Class B shares, the investor will be
deemed to have held the new Class B shares for more than four years.

Exchanges for Shares of a Money Market Fund. Class A and Class D shares are
exchangeable for Class A shares of Summit and Class B and Class C shares are
exchangeable for Class B shares of Summit. Class A shares of Summit have an
exchange privilege back into Class A or Class D shares of MLIM-advised mutual
funds; Class B shares of Summit have an exchange privilege back into Class B or
Class C shares of Select pricing Funds and, in the event of such an exchange,
the period of time that Class B shares of Summit are held will count toward
satisfaction of the holding period requirement for purposes of reducing any CDSC
and toward satisfaction of any Conversion Period with respect to Class B shares.
Class B shares of Summit will be subject to a distribution fee at an annual rate
of 0.75% of average daily net assets of such Class B shares. This exchange
privilege does not apply with respect to certain Merrill Lynch fee-based
programs, for which alternative exchange arrangements may exist. Please see your
Merrill Lynch Financial Consultant for further information.

Exchanges by Participants in the MFA Program. The exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund on
the basis of relative net asset values in connection with the commencement of
participation in the MFA Program, i.e., no CDSC will apply. The one year holding
period does not apply to shares acquired through reinvestment of dividends. Upon
termination of participation in the MFA Program, Class A shares will be
re-exchanged for the class of shares originally held. For purposes of computing
any CDSC that may be payable upon redemption of Class B or Class C shares so
reacquired, or the Conversion Period for Class B shares so reacquired, the
holding period for the Class A shares will be "tacked" to the holding period for
the Class B or Class C shares originally held. The Fund's exchange privilege is
also modified with respect to purchases of Class A and Class D shares by
non-retirement plan investors under the MFA Program. First, the initial
allocation of assets is made under the MFA Program. Then, any subsequent
exchange under the MFA Program of Class A or Class D shares of a Select Pricing
Fund for Class A or Class D shares of the Fund will be made solely on the basis
of the relative net asset values of the shares being exchanged. Therefore, there
will not be a charge for any difference between the sales charge previously paid
on the shares of the other Select Pricing Fund and the sales charge payable on
the shares of the Fund being acquired in the exchange under the MFA Program.

To exercise the exchange privilege, shareholders should contact their
Merrill Lynch Financial Consultant, who will advise the Fund of the exchange.
Before effecting an exchange, Shareholders should obtain a currently effective
prospectus of the fund into which the exchange is to be made. Shareholders of
the Fund, and shareholders of the other funds described above with shares for
which certificates have not been issued, may exercise the exchange privilege by
wire through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be modified
or terminated in accordance with the rules of the Commission. The Fund reserves
the right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares at
any time and may thereafter resume such offering from time to time. The exchange
privilege is available only to U.S. shareholders in states where the exchange
legally may be made.

RETIREMENT PLANS

Self-directed individual retirement accounts and other retirement plans are
available from Merrill Lynch. Under these plans, investments may be made in the
Fund and certain of the other mutual funds sponsored by

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Merrill Lynch as well as in other securities. Merrill Lynch charges an initial
establishment fee and an annual custodial fee for each account. Information with
respect to these plans is available upon request from Merrill Lynch. The minimum
initial purchase to establish any such plan is $100 and the minimum subsequent
purchase is $1.

Any Retirement Plan which does not meet the qualifications to purchase
Class A or Class D shares at net asset value may purchase Class B shares with a
waiver of the CDSC upon redemption if the following qualifications are met. The
CDSC is waived for any Eligible 401(k) Plan redeeming Class B shares. "Eligible
401(k) Plan" is defined as a retirement plan qualified under section 401(k) of
the Code with a salary reduction feature offering a menu of investments to plan
participants. CDSC is also waived for Class B redemptions from a 401(a) plan
qualified under the Code, provided that each such plan has the same or an
affiliated sponsoring employer as an Eligible 401(k) Plan purchasing Class B
shares ("Eligible 401(a) Plan"). Other tax qualified retirement plans within the
meaning of Section 401(a) and 403(b) of the Code which are provided specialized
services (e.g., plans whose participants may direct on a daily basis their plan
allocations among a menu of investments) by independent administration firms
contracted through Merrill Lynch may also purchase Class B shares with a waiver
of the CDSC. The CDSC is also waived for any Class B shares which are purchased
by an Eligible 401(k) Plan or Eligible 401(a) Plan and are rolled over into a
Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. The Class B CDSC is also waived for shares
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The minimum initial and subsequent
purchase requirements are waived in connection with all the above-referenced
Retirement Plans.

DIVIDENDS AND TAXES

DIVIDENDS

It is the Fund's intention to distribute substantially all of its net
investment income monthly, if any. The net investment income of the Fund is
declared as dividends daily immediately prior to the determination of the net
asset value of the Fund on that day and is reinvested monthly in additional full
and fractional shares of the Fund at net asset value unless the shareholder
elects to receive such dividends in cash. The net investment income of each
Portfolio for dividend purposes consists of interest and dividends earned on
portfolio securities, less expenses, in each case computed since the most recent
determination of net asset value. Expenses of the Fund, including the
administration fee and any account maintenance and/or distribution fees (if
applicable), are accrued daily. Shares will accrue dividends as long as they are
issued and outstanding. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends and distributions on
Class A and Class D shares as a result of the account maintenance, distribution
and higher transfer agency fees applicable to the Class B and Class C shares.
Similarly, the per share dividends and distributions on Class D shares will be
lower than the per share dividends and distributions on Class A shares as a
result of the account maintenance fees applicable with respect to the Class D
shares. See "Determination of Net Asset Value" on page 42. Shares are issued and
outstanding as of the settlement date of a purchase order to the settlement date
of a redemption order.

In order to avoid a four percent nondeductible excise tax, a regulated
investment company must distribute to its shareholders during the calendar year
an amount equal to 98 percent of the Fund's investment company income, with
certain adjustments, for such calendar year, plus 98 percent of the Fund's
capital gain net income for the one-year period ending on October 31 of such
calendar year. All net realized long- or short-term capital gains of the Fund,
if any, including gains from option and futures contract transactions, are
declared and distributed to the shareholders of the Fund annually after the
close of the Fund's fiscal year.

See "Shareholder Services -- Automatic Reinvestment of Dividends and
Capital Gains Distributions" on page 44 for information concerning the manner in
which dividends and distributions may be automatically reinvested in shares of
the Fund. Shareholders may elect in writing to receive any such dividends or

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distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash.

FEDERAL INCOME TAXES

The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue Code
of 1986 (the "Code"). As long as it so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its net
ordinary income and net realized capital gains which it distributes to Class A,
Class B, Class C and Class D shareholders (together, the "shareholders"). The
Fund intends to distribute substantially all of such income. If in any taxable
year the Fund does not qualify as a regulated investment company, all of its
taxable income will be taxed to the Portfolio at corporate rates.

The Fund contemplates declaring as dividends substantially all of its net
investment income. Dividends paid by the Fund from its ordinary income or from
an excess of net short-term capital gains over net long-term capital losses
(together referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Recent legislation
creates additional categories of capital gains taxable at different rates.
Although the legislation does not explain how gain in these categories will be
taxed to shareholders of RICs, it authorizes regulations applying the new
categories of gain and the new rates to sales of securities by RICs. In the
absence of guidance, there is some uncertainty as to the manner in which the
categories of gain and related rates will be passed through to the shareholders
in capital gain dividends. Any loss upon the sale or exchange of Fund shares
held for six months or less, however, will be treated as long-term capital loss
to the extent of any capital gain dividends received by the shareholder.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Although the Fund may invest in certain
municipal securities, it is not anticipated that any portion of the dividends
paid by the Fund will qualify for tax-exempt treatment to shareholders.
Dividends and distributions will be taxable to shareholders as ordinary income
or capital gains, whether received in cash or reinvested in additional shares of
the Fund. The Transfer Agent will send each shareholder a monthly dividend
statement which will include the amount of dividends paid and identify whether
such dividends represent ordinary income or capital gains.

Upon sale or exchange of shares of the Fund, a shareholder will realize
short- or long-term capital gain or loss, depending upon the shareholder's
holding period in the Fund's shares. However, if a shareholder's holding period
in his shares is six months or less, any capital loss realized from a sale or
exchange of such shares must be treated as long-term capital loss to the extent
of capital gains dividends received with respect to such shares. Currently, the
maximum tax rates applicable to net capital gains recognized by individuals and
other non-corporate taxpayers are (i) the same as ordinary income rates for
capital assets held for one year or less and (ii) 20% for capital assets held
for more than one year. Shareholders should consult their tax advisers regarding
the availability and effect of a certain tax election to mark-to-market shares
of the Fund held on January 1, 2001. Capital gains or losses recognized by
corporate shareholders are subject to tax at the ordinary income tax rates
applicable to corporations. The new tax rates for capital gains described above
apply to distributions of capital gain dividends by regulated investment
companies ("RICs") such as the Fund as well as to sales and exchanges of shares
in RICs such as the Fund.

Dividends paid to shareholders who are nonresident aliens or foreign
entities will be subject to a 30% United States withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the United States withholding tax.

Some shareholders may be subject to a 31% withholding tax on reportable
dividends, capital gains distributions and redemption payments ("backup
withholding"). Generally, shareholders subject to backup

49
<PAGE> 121

withholding will be those for whom a certified taxpayer identification number is
not on file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. When establishing an account, an investor must certify under
penalties of perjury that such number is correct and that he is not otherwise
subject to backup withholding.

Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

No gain or loss will be recognized by Class B shareholders on the
conversion of their Class B shares into Class D shares. A shareholder's basis in
the Class D shares acquired will be the same as such shareholder's basis in the
Class B shares converted, and the holding period of the acquired Class D shares
will include the holding period of the converted Class B shares.

If a shareholder exercises his exchange privilege within 90 days after the
date such shares were acquired to acquire shares in a second Fund ("New Fund"),
then the loss, if any, recognized on the exchange will be reduced (or the gain,
if any, increased) to the extent the load charge paid to the Fund reduces any
load charge such shareholder would have been required to pay on the acquisition
of the New Fund shares in the absence of the exchange privilege. Instead, such
load charge will be treated as an amount paid for the New Fund shares and will
be included in the shareholder's basis for such shares.

Under another provision of the Code, any dividend declared by the Fund to
shareholders of record in October, November, or December of any year and made
payable to shareholders of record in such a month will be deemed to have been
received on December 31 of such year if actually paid during the following
January.

A loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.

The Code imposes a 4% nondeductible excise tax on a regulated investment
company, such as the Fund, if it does not distribute to its shareholders during
the calendar year an amount equal to 98 percent of the Fund's investment company
income, with certain adjustments, for such calendar year, plus 98 percent of the
Fund's capital gain net income for the one-year period ending on October 31, of
such calendar year. In addition, an amount equal to any undistributed investment
company taxable income or capital gain net income from the previous calendar
year must also be distributed to avoid the excise tax. While the Fund intends to
distribute its income and capital gains in the manner necessary to avoid
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. The excise tax is imposed on the
amount by which the regulated investment company does not meet the foregoing
distribution requirements.

Only dividends paid by the Fund which are attributable to dividends
received by the Fund will qualify for the 70% dividends-received deduction for
corporations. In addition, corporate shareholders must have held their shares in
the Fund for more than 45 days to qualify for the deduction on dividends paid by
the Fund. Because most of the income of the Fund will be interest income, rather
than dividends on common or preferred stock, it is unlikely that any substantial
proportion of its distributions will be eligible for the dividends-received
deduction available for corporations under the Code.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent sections of the
Code and the Treasury Regulations promulgated thereunder. The Code and
Regulations are subject to change by legislative or administrative action.
Investors are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, foreign, state or local taxes.

Ordinary income and capital gains dividends may also be subject to state
and local taxes.

50
<PAGE> 122

TAX TREATMENT OF TRANSACTIONS IN OPTIONS ON DEBT SECURITIES, FUTURES CONTRACTS
AND OPTIONS THEREON

The Fund may purchase and sell interest rate futures contracts and may
write and purchase call and put options on such futures contracts and on certain
debt securities. The Fund may write or purchase options which will be classified
as "nonequity options" under the Code. Generally, gain and loss resulting from
transactions in options on debt securities, as well as gain and loss from
transactions in futures contracts and options thereon, will be treated as
long-term capital gain or loss to the extent of 60 percent thereof and short-
term capital gain or loss to the extent of 40 percent thereof (hereinafter
"blended gain or loss"). In the case of the exercise or assignment of an option
on a debt security, the premium paid or received by the Fund generally will
adjust the gain or loss on disposition of the underlying security.

Any option or futures contract held by the Fund on the last day of a fiscal
year will be treated as sold for market value on that date, and gain or loss
recognized as a result of such deemed sale will be blended gain or loss. The
capital gains and losses of the Fund will be combined in each fiscal year to
determine the capital gains and losses of the Fund, as described above.

In addition, the Fund trading strategies may constitute "straddle"
transactions with futures contracts, options thereon and options on debt
securities. "Straddles" may affect the taxation of futures contracts and
options, and may cause the postponement of recognition of losses incurred in
certain closing transactions.

The requirements for classification as a regulated investment company may
restrict the Fund's ability to engage in certain options and futures contract
transactions. The Fund has obtained a private letter ruling from the Internal
Revenue Service providing the Fund with relief from certain provisions of the
Code which might otherwise affect its ability to engage in such transactions.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return and
other total return data, as well as yield in advertisements or information
furnished to present or prospective shareholders. Total return figures are based
on the Fund's historical performance and are not intended to indicate future
performance. Average annual total return is determined separately for Class A,
Class B, Class C and Class D shares in accordance with a formula specified by
the Commission and take into account the maximum applicable sales charge.

Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized or unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period (in the
case of Class B and Class C shares) and the maximum sales charge (in the case of
Class A and Class D shares.)

Dividends paid by the Fund with respect to all shares, to the extent any
dividends are paid, will be calculated in the same manner at the same time on
the same day and will be in the same amount, except that account maintenance and
distribution fees and any incremental transfer agency costs relating to each
class of shares will be borne exclusively by that class. The Fund will include
performance data for all classes of shares of the Fund in any advertisement or
information including performance data of the Fund.

The Fund also may quote total return and aggregate total return performance
data, both as a percentage and a dollar amount based on a hypothesized $1,000
investment, for various specified time periods other than those noted below.
Such data will be calculated substantially as described above, except that (1)
the rates of return calculated will not be average annual rates, but rather,
actual annual, annualized or aggregate rates of return, and (2) the maximum
applicable sales charges will not be included with respect to actual annual or
annualized rates of return calculations. Aside from the impact on the
performance data calculations of including or excluding the maximum applicable
sales charges, actual annual or annualized total return data

51
<PAGE> 123

generally will be lower than average annual total return data since the average
annual rates of return reflect compounding; aggregate total return data
generally will be higher than average annual total return data since the
aggregate rates of return reflect compounding over longer periods of time. In
advertisements directed to investors whose purchases are subject to waiver of
the CDSC in the case of Class B and Class C shares (such as investors in certain
retirement plans) or reduced sales charges in the case of Class A and Class D
shares, performance data may take into account the reduced, and not the maximum,
sales charge or may not take into account the contingent deferred sales charge
and therefore may reflect greater total return since, due to the reduced sales
charges or waiver of the contingent deferred sales charge, a lower amount of
expenses may be deducted.

Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield to maturity of each security held during the
period by (b) the average daily number of shares outstanding during the period
that were entitled to receive dividends multiplied by the maximum offering price
per share on the last day of the period.

Total return figures are based on the Fund's historical performance and are
not intended to indicate future performance. The Fund's total return will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate, and an investor's shares, when redeemed, may be worth more
or less than their original cost.

On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, The Value Line Composite Index, the Dow Jones
Industrial Average, or performance data published by Lipper Analytical Services,
Inc., Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine, Fortune
Magazine or other industry publications. In addition, from time to time the Fund
may include the Fund's risk-adjusted performance ratings assigned by Morningstar
Publications, Inc. in advertising or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.

In order to reflect the reduced sales charges, in the case of Class A or
Class D shares, or the waiver of the contingent deferred sales charge, in the
case of Class B or Class C shares, applicable to certain investors, as described
under "Purchase of Shares" and "Redemption of Shares," respectively, the total
return data quoted by the Fund in advertisements directed to such investors may
take into account the reduced, and not the maximum, sales charge or may not take
into account the contingent deferred sales charge and therefore may reflect
greater total return since, due to the reduced sales charges or the waiver of
sales charges, a lower amount of expenses may be deducted.

ADDITIONAL INFORMATION

ORGANIZATION OF THE FUND

The Company was organized as a Maryland corporation on July 6, 2000.

DESCRIPTION OF SHARES

The authorized capital stock of the Fund consists of five hundred million
shares of Common Stock, having a par value $0.01 per share, divided into four
classes, each consisting of one hundred million (100,000,000) shares, except
that Class B Common Stock consists of two hundred million (200,000,000)
authorized shares. Each of the Fund's shares has equal dividend, distribution,
liquidation and voting rights, except that Class B, Class C and Class D Shares
bear certain account maintenance expenses and/or expenses related to the
distribution of such shares and have exclusive voting rights with respect to
matters relating to such expenditures (except that Class B Shares have certain
voting rights with respect to the Class D Distribution Plan). Each issued and
outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by the fund and in the net assets of the
Fund upon liquidation or

52
<PAGE> 124

dissolution remaining after satisfaction of outstanding liabilities. The shares
of the Fund, when issued, will be fully paid and nonassessable, have no
preference, preemptive or similar rights, and will be freely transferable.
Exchange and conversion rights are discussed elsewhere herein and in the
Prospectus. Stock certificates will be issued by the Transfer Agent only on
specific request. Certificates for fractional shares are not issued in any case.
Holders of shares of the fund are entitled to redeem their shares as set forth
under "Redemption of Shares." The Board of Directors of the Company may classify
and reclassify the unissued shares of the Fund into additional classes of Common
Stock at a future date.

Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matter submitted to a shareholder vote. The Fund does not intend to
hold meetings of shareholders unless under the Investment Company Act
shareholders are required to act on any of the following matters: (i) election
of Directors; (ii) approval of an investment advisory agreement; (iii) approval
of a distribution agreement; and (iv) ratification of selection of independent
accountants. Voting rights for Directors are not cumulative. Shares issued are
fully paid and nonassessable and have no preemptive rights. Each share is
entitled to participate equally in dividends and distributions declared by the
Fund and in the net assets of the Fund upon liquidation or dissolution after
satisfaction of outstanding liabilities except that, as noted above, Class B,
Class C and Class D shares bear certain additional expenses.

Whenever the Master Trust holds a vote of its feeder funds, the Fund will
pass the vote through to its own shareholders. Smaller feeder funds may be
harmed by the actions of larger feeder funds. For example, a larger feeder fund
could have more voting power than the Fund over the operations of the Portfolio.
The Fund may withdraw from the Portfolio at any time and may invest all of its
assets in another pooled investment vehicle or retain an investment adviser to
manage the Fund's assets directly.

The Master Trust is organized as a Delaware Business Trust. Whenever the
Fund is requested to vote on any matter relating to the Master Trust, the Fund
will hold a meeting of the Fund's shareholders and will cast its vote as
instructed by the Fund's shareholders.

The Investment Adviser provided the initial capital for the Fund by
purchasing 50,000 shares for $100,000. Such shares were acquired for investment
and can only be disposed of by redemption. The proceeds realized by the
Investment Adviser upon the redemption of any of the shares initially purchased
by it will be reduced by the proportional amount of the unamortized
organizational expenses that the number of such initial shares being redeemed
bears to the number of shares initially purchased.

Under a separate agreement Merrill Lynch has granted the Fund the right to
use the "Merrill Lynch" name and has reserved the right to withdraw its consent
to the use of such name by the Fund at any time, or to grant the use of such
name to any other company, and the Fund has granted Merrill Lynch, under certain
conditions, the use of any other name it might assume in the future, with
respect to any corporation organized by Merrill Lynch.

53
<PAGE> 125

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund, based on the value of the Fund's net
assets and number of shares outstanding on , 2000 is calculated as set
forth below

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Assets............................................. $ $ $ $
Number of Shares Outstanding...........................
Net Asset Value Per Share (net assets divided by number
of shares outstanding)............................... $ $ $ $
Sales Charge (for Class A and Class D shares:
% of offering price ( % of net asset value per
share))*............................................. ** **
Offering Price......................................... $ $ $ $
</TABLE>

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

** Class B and Class C shares are not subject to an initial sales charge but may
be subject to a CDSC on redemption. See "Purchase of Shares -- Deferred Sales
Charges Alternatives -- Class B and Class C Shares" herein.

INDEPENDENT AUDITORS

100 E. Wisconsin Avenue, Suite 1500, Milwaukee,
Wisconsin 53202, has been selected as the independent auditors of the 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, acts
as the Custodian of the Fund's assets. Under its contract with the Company, the
Custodian is authorized to establish separate accounts in foreign currencies and
to cause foreign securities owned by the 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 the Fund's cash
and securities, handling the receipt and delivery of securities and collecting
interest and dividends on the Fund's investments.

TRANSFER AGENCY SERVICES ARRANGEMENTS

Financial Data Services, Inc. 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the 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 a subsidiary of ML &
Co. Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Transfer Agent receives an annual fee of $11.00 per Class A or Class D
account and $14.00 per Class B or Class C account and is entitled to
reimbursement for certain transaction charges and out-of-pocket expenses
incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts that close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained directly
by the Transfer Agent and any other account representing the beneficial interest
of a person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co.

54
<PAGE> 126

DISTRIBUTOR

FAM Distributors, Inc., 800 Scudders Mill Road, Plainsboro, New Jersey
08536 acts as the Fund's Distributor. The Distributor is responsible for
soliciting subscriptions and purchases of shares of the Fund.

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610
is counsel for the Company.

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on June 30 of each year. The Fund sends to
its shareholders semi-annual reports showing the investments of the Fund 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.

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

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 Company has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.

PRINCIPAL HOLDERS

To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares as of , 2000, with the exception of the
Investment Adviser, which owned all of the Fund's shares.

[INSERT STATEMENT OF ASSETS AND LIABILITIES]

55
<PAGE> 127

APPENDIX

DESCRIPTION OF RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS:

"Aaa" -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

"Aa" -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.

Moody's applies numerical modifiers "1," "2" and "3" in each generic rating
classification from Aa through B. The modifier "1" indicates that the obligation
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the company
ranks in the lower end of that generic rating category.

"A" -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.

"Baa" -- Bonds which are rated Baa are considered as medium-grade obligations
(that is, they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.

"Ba" -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

"B" -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

SHORT-TERM DEBT RATINGS:

Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.

"PRIME-1" -- Issuers rated "Prime-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of these characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.

A-1
<PAGE> 128

"PRIME-2" -- Issuers rated "Prime-2" (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Adequate alternate liquidity is maintained.

MUNICIPAL BOND RATINGS:

Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or "MIG" with variable rate demand obligations being
designated as "VMIG." A VMIG rating may also be assigned to commercial paper
programs which are characterized as having variable short-term maturities, but
having neither a variable rate nor demand feature. Factors used in determining
ratings include liquidity of the borrower and short-term cyclical elements.

STANDARD & POOR'S RATING GROUP

BOND RATINGS:

"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA" -- An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

"A" -- An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

"BBB" -- An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its commitment on the
obligation.

Obligations rated BB and B are regarded as having significant speculative
characteristics. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.

COMMERCIAL PAPER RATINGS:

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

"A-1" -- This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MUNICIPAL BOND RATINGS:

S&P uses SP-1, SP-2 and SP-3 to rate short-term municipal obligations. A rating
of SP-1 denotes a strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a (+)
designation.

A-2
<PAGE> 129

FITCH INVESTORS SERVICE, INC.

BOND RATINGS:

The following summarizes the ratings used by Fitch for corporate bonds:

"AAA" -- Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.

"AA" -- Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

"A" -- High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to changes in circumstances
or in economic conditions than is the case for higher ratings.

"BBB" -- Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.

"BB" -- Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.

"B" -- Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

PLUS (+) MINUS (-) -- Plus and minus signs may be appended to a rating to denote
relative status within major rating categories. Such suffixes are not added to
the "AAA" long-term rating category or to short-term ratings other than "F1."

SHORT-TERM DEBT RATINGS:

"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.

"F2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.

"F3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

DUFF & PHELPS CREDIT RATING CO.

BOND RATINGS:

The following summarizes the ratings used by Duff & Phelps for long-term debt:

"AAA" -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

"AA+," "AA," "AA-" -- High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.

"A+," "A," "A-" -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.

A-3
<PAGE> 130

"BBB+," "BBB," "BBB-" -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.

"BB+," "BB," "BB-" -- Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.

"B+," "B," "B-" -- Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.

SHORT-TERM DEBT RATINGS:

"D-1+" -- Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations.

"D-1" -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.

"D-1-" -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.

"D-2" -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.

A-4
<PAGE> 131

CODE #10210-04-99
<PAGE> 132

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH TOTAL RETURN BOND FUND
OF
MERRILL LYNCH INVESTMENT MANAGERS FUNDS, INC.
725 SOUTH FIGUEROA STREET, SUITE 4000, LOS ANGELES, CALIFORNIA
90017-5400 - PHONE NO. (213) 430-1000

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

Merrill Lynch Total Return Bond Fund (the "Fund") is a fund of Merrill
Lynch Investment Managers Funds, Inc. (the "Company"). The Company is a
diversified, open-end management investment company which is organized as a
Maryland corporation. The Fund seeks to maximize long-term total return. The
Fund will seek to achieve its investment objective by investing primarily in a
diversified portfolio of bonds of different maturities. The Fund should be
considered as a means of diversifying an investment portfolio and not in itself
a balanced investment plan.

The Fund is a "feeder" fund that invests all of its assets in the Total
Return Bond Master Portfolio (the "Portfolio") of the Fund Asset Management
Master Trust (the "Master Trust"). The Portfolio has the same objective as the
Fund. All investments will be made at the Master Trust level. The Fund's
investment results will correspond directly to the investment results of the
Portfolio. There can be no assurance that the Fund will achieve its investment
objective.

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

FUND ASSET MANAGEMENT, L.P. -- INVESTMENT ADVISER
FAM DISTRIBUTORS, INC. -- DISTRIBUTOR

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

The date of this Statement of Additional Information is October , 2000.
<PAGE> 133

TABLE OF CONTENTS

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to maximize long-term total return.

INVESTMENT RESTRICTIONS

Except as noted, the Fund may not:

2
<PAGE> 136

5. Purchase any security (other than U.S. government securities) if as
a result, with respect to 75% of the Fund's total assets, the Fund would
then hold more than 10% of the outstanding voting securities of an issuer;
provided that the Fund may invest all of its assets in an open-end
management investment company, or series thereof, with substantially the
same investment objective and policies as the Fund, without regard to the
limitations set forth in this paragraph.

8. Participate on a joint or joint and several basis in any trading
account in securities.

Any percentage limitation on the Fund's investments is determined when the
investment is made, unless otherwise noted.

REPURCHASE AGREEMENTS

BONDS

U.S. GOVERNMENT SECURITIES

3
<PAGE> 137

event the agency or instrumentality does not meet its commitment. The Fund will
invest in securities of such instrumentality only when the Investment Adviser is
satisfied that the credit risk with respect to any instrumentality is
acceptable.

MUNICIPAL OBLIGATIONS

4
<PAGE> 138

of the users of such facilities. Shareholders, depending on their individual tax
status, may be subject to the federal alternative minimum tax on the portion of
a distribution attributable to these obligations. Interest on private activity
obligations will be considered exempt from federal income taxes; however,
shareholders should consult their own tax advisors to determine whether they may
be subject to the federal alternative minimum tax.

CORPORATE DEBT SECURITIES

CONVERTIBLE SECURITIES

5
<PAGE> 139

common stock but lower than that afforded by a similar non-convertible
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation
attendant upon a market price advance in the convertible security's underlying
common stock.

MORTGAGE-RELATED SECURITIES

6
<PAGE> 140

loans, including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing.

The Fund may also invest in, among other things, parallel pay CMOs, Planned
Amortization Class CMOs ("PAC bonds"), sequential pay CMOs, and floating rate
CMOs. Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. PAC bonds generally require payments of a
specified amount of principal on each payment date. Sequential pay CMOs
generally pay principal to only one class while paying interest to several
classes. Floating rate CMOs are securities whose coupon rate fluctuates
according to some formula related to an existing market index or rate. Typical
indexes would include the eleventh district cost-of-funds index ("COFI"), the
London Interbank Offered Rate ("LIBOR"), one-year Treasury yields, and ten-year
Treasury yields.

7
<PAGE> 141

Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.

8
<PAGE> 142

SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the "IO class"), while
the other class will receive all of the principal (the "PO class"). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the Fund's
yield to maturity from these securities. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities even if the security
is in one of the highest rating categories.

ASSET-BACKED SECURITIES

RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES

from such prepayments, and its ability to reinvest the returns of principal at
comparable yields is subject to generally prevailing interest rates at that
time. Conversely, slower than expected prepayments may effectively change a
security that was considered short or intermediate-term at the time of purchase
into a long-term security. Long-term securities tend to fluctuate more in
response to interest rate changes, leading to increased net asset value
volatility. Prepayments may also result in the realization of capital losses
with respect to higher yielding securities that had been bought at a premium or
the loss of opportunity to realize capital gains in the future from possible
future appreciation.

DURATION

DERIVATIVE INSTRUMENTS

10
<PAGE> 144

call and put options on securities, securities indexes and foreign currencies
and enter into futures contracts and use options on futures contracts. The Fund
also may enter into swap agreements with respect to foreign currencies, interest
rates and securities indexes. The Fund may use these techniques to hedge against
changes in interest rates, foreign currency exchange rates, or securities prices
or as part of its overall investment strategies. The Fund may also purchase and
sell options relating to foreign currencies for the purpose of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another. The Fund will mark as segregated cash,
U.S. Government securities, equity securities or other liquid, unencumbered
assets, marked-to-market daily (or, as permitted by applicable regulation, enter
into certain offsetting positions), to cover its obligations under options and
futures contracts to avoid leveraging of the Fund.

11
<PAGE> 145

the same index purchased by the Fund, movements in the index may result in a
loss to the Fund; however, such losses may be mitigated by changes in the value
of the Fund's securities during the period the option was outstanding.

12
<PAGE> 146

Conversely, if an offsetting sale price is more than the original purchase
price, the Fund realizes a capital gain, or if it is less, the Fund realizes a
capital loss. The transaction costs must also be included in these calculations.

13
<PAGE> 147

movements of the securities held by the Fund. The correlation may be affected by
disparities in the Fund's investments as compared to those comprising the index
and general economic or political factors. In addition, the correlation between
movements in the value of the index may be subject to change over time as
additions to and deletions from the index alter its structure. The correlation
between futures contracts on U.S. Government securities and the securities held
by the Fund may be adversely affected by similar factors and the risk of
imperfect correlation between movements in the prices of such futures contracts
and the prices of securities held by the Fund may be greater. The trading of
futures contracts also is subject to certain market risks, such as inadequate
trading activity, which could at times make it difficult or impossible to
liquidate existing positions.

FOREIGN SECURITIES

14
<PAGE> 148

The Fund may also invest in fixed-income securities of issuers located in
emerging foreign markets. Emerging markets generally include every country in
the world other than the United States, Canada, Japan, Australia, Malaysia, New
Zealand, Hong Kong, South Korea, Singapore and most Western European countries.
In determining what countries constitute emerging markets, the Investment
Adviser will consider, among other things, data, analysis and classification of
countries published or disseminated by the International Bank for Reconstruction
and Development (commonly known as the World Bank) and the International Finance
Corporation. Currently, investing in many emerging markets may not be desirable
or feasible, because of the lack of adequate custody arrangements for the Fund's
assets, overly burdensome repatriation and similar restrictions, the lack of
organized and liquid securities markets, unacceptable political risks or other
reasons. As opportunities to invest in securities in emerging markets develop,
the Fund expects to expand and further broaden the group of emerging markets in
which it invests.

15
<PAGE> 149

the tax implications to the Fund. The emerging market fixed-income securities in
which the Fund may invest are not subject to any minimum credit quality
standards.

FOREIGN CURRENCY OPTIONS AND RELATED RISKS

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may use forward contracts to protect against uncertainty in the
level of future exchange rates. The Fund will not speculate with forward
contracts or foreign currency exchange rates.

16
<PAGE> 150

holds, the Fund may desire to "lock in" the U.S. dollar price of the security or
the U.S. dollar equivalent of the payment, by entering into a forward contract
for the purchase or sale, for a fixed amount of U.S. dollars or foreign
currency, of the amount of foreign currency involved in the underlying
transaction. The Fund will thereby be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the currency
exchange rates during the period between the date on which the security is
purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.

17
<PAGE> 151

Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.

FOREIGN INVESTMENT RISKS

18
<PAGE> 152

sell foreign securities or transfer the Fund's assets or income back into the
United States, or otherwise adversely affect the Fund's operations. Other
foreign market risks include foreign exchange controls, difficulties in pricing
securities, defaults on foreign government securities, difficulties in enforcing
favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.

19
<PAGE> 153

may put limits on the Fund's ability to recover its assets if a foreign bank or
depository or issuer of a security or any of their agents goes bankrupt. In
addition, it can be expected that it will be more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than it is in the U.S.
market due to higher brokerage, transaction, custody and/or other costs. The
increased expense of investing in foreign markets reduces the amount the Fund
can earn on its investments.

Dividends or interest on, or proceeds from the sale of, foreign securities
may be subject to foreign withholding taxes, and special U.S. tax considerations
may apply.

RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES

ILLIQUID SECURITIES

20
<PAGE> 154

referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemption within seven days. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments. Also
market quotations are less readily available. The judgment of the Investment
Adviser may at times play a greater role in valuing these securities than in the
case of unrestricted securities. A mutual fund might also have to register such
restricted securities in order to dispose of them resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.

REVERSE REPURCHASE AGREEMENTS

DOLLAR ROLLS

21
<PAGE> 155

current sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of dollar roll
for which there is an offsetting cash position or cash equivalent security
position that matures on or before the forward settlement date of the dollar
roll transaction.

BORROWING

LOANS OF PORTFOLIO SECURITIES

WHEN-ISSUED SECURITIES

REAL ESTATE INVESTMENT TRUSTS

22
<PAGE> 156

SHARES OF OTHER INVESTMENT COMPANIES

SHORT SALES AGAINST-THE-BOX

CORPORATE LOANS

TEMPORARY DEFENSIVE POSITION

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The Directors of the Company consist of seven individuals, five of whom are
"non-affiliated" persons of the Company as defined in the Investment Company
Act. The Directors of the Company are responsible for the overall supervision of
the operations of the Fund and perform the various duties imposed on the
directors of investment companies by the Investment Company Act. The Board of
Directors elects officers of the Fund annually.

The Directors and officers of the Company, their ages, principal
occupations for at least the last five years and the public companies for which
they serve as directors are set forth below.

23
<PAGE> 157

COMPENSATION OF DIRECTORS

INVESTMENT ADVISORY ARRANGEMENTS

the Portfolio a monthly fee at an annual rate of 0.30% of the Portfolio's
average daily net assets. For purposes of this calculation, average daily net
assets is determined at the end of each month on the basis of the average net
assets of the Portfolio for each day during the month.

ADMINISTRATION ARRANGEMENTS

26
<PAGE> 160

CODE OF ETHICS

The Codes require that all employees of the Investment Adviser and the
Distributor preclear any personal securities investment (with limited
exceptions, such as mutual funds, high-quality short-term securities and direct
obligations of the U.S. Government). The preclearance requirement and associated
procedures are designed to identify any substantive prohibition or limitation
applicable to the proposed investment. The substantive restrictions applicable
to all employees of the Investment Adviser and the Distributor include a ban on
acquiring any securities in a "hot" initial public offering. In addition,
investment personnel are prohibited from profiting on short-term trading in
securities. No employee may purchase or sell any security which at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Investment Adviser. Furthermore, the Codes provide for trading "blackout
periods" which prohibit trading by investment personnel of the Fund within seven
calendar days before or after, of trading by the Fund in the same or equivalent
security.

PURCHASE OF SHARES

27
<PAGE> 161

28
<PAGE> 162

INITIAL SALES CHARGE ALTERNATIVES -- CLASS A AND CLASS D SHARES

29
<PAGE> 163

REDUCED INITIAL SALES CHARGES -- CLASS A AND CLASS D SHARES

Reinvested Dividends. No initial sales charges are imposed upon Class A and
Class D shares issued as a result of the automatic reinvestment of dividends or
capital gains distributions.

31
<PAGE> 165

TMA(SM) Managed Trusts. Class A shares are offered to TMA(SM) Managed
Trusts to which Merrill Lynch Trust Company provides discretionary trustee
services at net asset value.

Reductions in or exemptions from the imposition of a sales load are due to
the nature of the investors and/or the reduced sales efforts that will be needed
in obtaining such investments.

DEFERRED SALES CHARGE ALTERNATIVES -- CLASS B AND CLASS C SHARES

32
<PAGE> 166

33
<PAGE> 167

The following table sets forth the rates of the CDSC on Class B shares:

<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
-------------------------------- --------------------
<S> <C>
0 - 1................................... %
1 - 2................................... %
2 - 3................................... %
3 - 4................................... %
4 and thereafter........................ %
</TABLE>

34
<PAGE> 168

termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch systematic withdrawal plan. See "Shareholder
Services -- Fee-Based Programs."

EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS

DISTRIBUTION PLANS

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

36
<PAGE> 170

REDEMPTION OF SHARES

The value of shares at the time of redemption may be more or less than the
shareholder's cost, depending on the market value of the securities held by the
Fund at such time.

REDEMPTION

37
<PAGE> 171

branch offices and certain other financial institutions) as such term is defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, the
existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Notarized signatures are not sufficient. In
certain instances, the Transfer Agent may require additional documents, such as,
but not limited to, trust instruments, death certificates, appointments as
executor or administrator, or certificates of corporate authority. For
shareholders redeeming directly with the Transfer Agent, payment will be mailed
within seven days of receipt of a proper notice of redemption.

REPURCHASE

REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES

DEFERRED SALES CHARGE -- CLASS B AND CLASS C SHARES

39
<PAGE> 173

The Conversion Period also is modified for retirement plan investors which
participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."

PORTFOLIO TRANSACTIONS

41
<PAGE> 175

The Fund intends to comply with the various requirements of the Internal
Revenue Code so as to qualify as a "regulated investment company" thereunder.
See "Dividends, Distributions and Taxes."

DETERMINATION OF NET ASSET VALUE

SHAREHOLDER SERVICES

42
<PAGE> 176

confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends and long-term capital gains distributions.

Shareholders may also maintain their accounts through Merrill Lynch. Upon
the transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name will be opened automatically,
without charge, at the Transfer Agent. Shareholders considering transferring
their Class A or Class D shares from Merrill Lynch to another brokerage firm or
financial institution should be aware that, if the firm to which the Class A or
Class D shares are to be transferred will not take delivery of shares of the
Fund, a shareholder either must redeem the Class A or Class D shares (paying any
applicable CDSC), so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain an Investment Account
at the Transfer Agent for those Class A or Class D shares. Shareholders
interested in transferring their Class B or Class C shares from Merrill Lynch
and who do not wish to have an Investment Account maintained for such shares at
the Transfer Agent may request their new brokerage firm to maintain such shares
in an account registered in the name of the brokerage firm for the benefit of
the shareholder. Shareholders considering transferring a tax-deferred retirement
account such as an individual retirement account from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the retirement account is to be transferred will not take delivery of
shares of the Fund, a shareholder must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at
the new firm or such shareholder must continue to maintain a retirement account
at Merrill Lynch for those shares.

AUTOMATIC INVESTMENT PLANS

43
<PAGE> 177

FEE-BASED PROGRAMS

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

SYSTEMATIC WITHDRAWAL PLANS

44
<PAGE> 178

value, based on cost or the current offering price, of $5,000 or more and
monthly withdrawals are available for shareholders with Class A or Class D
shares having a value of $10,000 or more.

45
<PAGE> 179

EXCHANGE PRIVILEGE

46
<PAGE> 180

RETIREMENT PLANS

47
<PAGE> 181

DIVIDENDS AND TAXES

DIVIDENDS

48
<PAGE> 182

distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash.

FEDERAL INCOME TAXES

49
<PAGE> 183

Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.

Ordinary income and capital gains dividends may also be subject to state
and local taxes.

50
<PAGE> 184

TAX TREATMENT OF TRANSACTIONS IN OPTIONS ON DEBT SECURITIES, FUTURES CONTRACTS
AND OPTIONS THEREON

PERFORMANCE DATA

51
<PAGE> 185

ADDITIONAL INFORMATION

ORGANIZATION OF THE FUND

The Company was organized as a Maryland corporation on July 6, 2000.

DESCRIPTION OF SHARES

The authorized capital stock of the Fund consists of five hundred million
shares of Common Stock, having a par value $0.01 per share, divided into four
classes, each consisting of one hundred million (100,000,000) shares, except
that Class B Common Stock consists of two hundred million (200,000,000)
authorized shares. Each of the Fund's shares has equal dividend, distribution,
liquidation and voting rights, except that Class B, Class C and Class D shares
bear certain account maintenance expenses and/or expenses related to the
distribution of such shares and have exclusive voting rights with respect to
matters relating to such expenditures (except that Class B shares have certain
voting rights with respect to the Class D Distribution Plan). Each issued and
outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by the fund and in the net assets of the
Fund upon liquidation or

52
<PAGE> 186

53
<PAGE> 187

COMPUTATION OF OFFERING PRICE PER SHARE

---------------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.

INDEPENDENT AUDITORS

100 E. Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin 53202, has been
selected as the independent auditors of the Fund. The independent auditors are
responsible for auditing the annual financial statements of the Fund.

CUSTODIAN

TRANSFER AGENCY SERVICES ARRANGEMENTS

54
<PAGE> 188

DISTRIBUTOR

LEGAL COUNSEL

Gardner, Carton & Douglas, 321 North Clark Street, Chicago, Illinois 60610
is counsel for the Fund.

REPORTS TO SHAREHOLDERS

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Fund has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the Investment
Company Act, to which reference is hereby made.

PRINCIPAL HOLDERS

To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares as of , 2000, with the exception of the
Investment Adviser, which owned all of the Fund's shares.

[INSERT STATEMENT OF ASSETS AND LIABILITIES]

55
<PAGE> 189

APPENDIX

DESCRIPTION OF RATINGS

MOODY'S INVESTORS SERVICE

BOND RATINGS:

SHORT-TERM DEBT RATINGS:

A-1
<PAGE> 190

MUNICIPAL BOND RATINGS:

STANDARD & POOR'S RATING GROUP

BOND RATINGS:

"AAA" -- An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

"AA" -- An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.

COMMERCIAL PAPER RATINGS:

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

"A-2" -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

MUNICIPAL BOND RATINGS:

A-2
<PAGE> 191

FITCH INVESTORS SERVICE, INC.

BOND RATINGS:

The following summarizes the ratings used by Fitch for corporate bonds:

SHORT-TERM DEBT RATINGS:

"F1" -- Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.

"F2" -- Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.

"F3" -- Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.

DUFF & PHELPS CREDIT RATING CO.

BOND RATINGS:

The following summarizes the ratings used by Duff & Phelps for long-term debt:

"AAA" -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

"AA+," "AA," "AA-" -- High credit quality. Protection factors are strong. Risk
is modest but may vary slightly from time to time because of economic
conditions.

"A+," "A," "A-" -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.

A-3
<PAGE> 192

"BBB+," "BBB," "BBB-" -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.

SHORT-TERM DEBT RATINGS:

"D-1" -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.

"D-1-" -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.

A-4
<PAGE> 193

CODE #10210-04-99
<PAGE> 194
PART C. OTHER INFORMATION

Item 23. Exhibits.

(i) -- Opinion of Counsel.**
(j) -- Consent of independent accountants.**
(k) -- None.
(l) -- Certificate of Fund Asset Management, L.P.**
(m)(1) -- Form of Class B Shares Distribution Plan of the Registrant.*
(2) -- Form of Class C Shares Distribution Plan of the Registrant.*
(3) -- Form of Class D Shares Distribution Plan of the Registrant.*
(n) -- Merrill Lynch Select Pricing System Plan pursuant to Rule 18f-3.*
(p) -- Code of Ethics (for Master Trust, too).*
</TABLE>

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

* Filed herewith.
** To be filed by amendment.

Item 24. Persons Controlled by or under Common Control with the Fund.

Each Series of the Fund will sell ____ Class A shares of its
Common Stock, ____ Class B shares of its Common Stock, ____ shares of its Class
C Common Stock and ____ Class D shares of its Common Stock to Fund Asset
Management, L.P. ("the Investment Adviser" or "FAM") for an aggregate of
$100,000. The Investment Adviser then will be the sole shareholder of the Fund.
The Investment Adviser is organized as a Delaware limited partnership.

Item 25. Indemnification.

Reference is made to Article V Sections (4) and (5) of the
Registrant's Articles of Incorporation, Article VI of the Registrant's By-Laws,
Section 2-418 of the Maryland General Corporation Law and Section 9 of the
Distribution Agreement. Insofar as the conditional advancing of indemnification
monies for actions based on the Investment Company Act of 1940, as amended (the
"Investment Company Act") may be concerned, Article VI of the Registrant's
By-Laws provides that such payments will be made only on the following
conditions: (i) advances may be

<PAGE> 195
made only on receipt of a written affirmation of such person's 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 is ultimately determined that the standard of conduct has not been met and at
least one of the following is met: (a) such promise must be secured by a
security for the undertaking in form and amount acceptable to the Registrant,
(b) the Registrant is insured against losses arising by reason of the advance,
or (c) a majority of a quorum of the Registrant's non-party independent
Directors, or an independent legal counsel in a written opinion, shall
determine, based upon a review of facts readily available to the Registrant,
that at the time the advance is proposed to be made, there is reason to believe
that the person seeking indemnification will ultimately be found to be entitled
to indemnification. In Section 9 of the Distribution Agreement relating to the
securities being offered hereby, the Registrant agrees to indemnify and hold
harmless the Distributor and each person, if any, who controls the Distributor
within the meaning of the Securities Act against certain types of civil
liabilities arising in connection with the Registration Statement or the
Prospectus and Statement of Additional Information. Insofar as indemnification
for liabilities arising under the Securities 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 Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer or controlling person of the Registrant
and the principal underwriter in connection with the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or controlling
person or the principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

Item 26. Business and other Connections of the Investment Adviser.

Fund Asset Management, L.P. ("FAM" or 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 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 registered investment companies:
Apex Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.,
MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,

<PAGE> 196

MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings Insured Fund,
MuniHoldings Insured Fund II, MuniHoldings Insured Fund III, MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings California Insured
Fund IV, 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 II, Inc., MuniHoldings New Jersey
Fund III, Inc., MuniHoldings New Jersey 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 Michigan Insured Fund, 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, Inc., 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.

Merrill Lynch Investment Management, L.P. ("MLIM"), acts as the
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 Developing Capital Markets Fund, Inc., Merrill
Lynch Convertible 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 Convertible Fund, Inc., Merrill Lynch Global
Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth
Fund, Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real
Estate Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.
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

<PAGE> 197

portfolios of EQ Advisors Trust.

The address of each of these investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate Government Bond
Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-2646. The
address of the Manager, FAM and Princeton Services, Inc. ("Princeton Services"),
and Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey
08543-9011. The address of Princeton Funds Distributor, Inc. ("PFD") is P.O. Box
9081, Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML
& Co.") is North Tower, World Financial Center, 250 Vesey Street, New York, New
York 10281-1201. The address of the Fund's transfer agent, Financial Data
Services, Inc. ("FDS"), is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.

Set forth below is a list of each executive officer and partner
of the Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has been
engaged since September 30, 1995, for his or her own account or in the capacity
of director, officer, partner or trustee. In addition, Mr. Glenn is President
and Mr. Burke is Vice President and Treasurer of substantially all of the
investment companies described in the first two paragraphs of this Item 28 and
Messrs. Giordano and Monagle are directors or officers of one or more of such
companies.

<TABLE>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ----------------------------------------------
<S> <C> <C>
ML & Co ................ Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services ..... General Partner General Partner of MLIM
Jeffrey M. Peek ........ President President of MLIM; President and director of
Princeton Services; Executive Vice President
of ML & Co.; Managing Director and Co-Head
of the Investment Banking division of
Merrill Lynch until 1999; 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 MLIM; Executive
President Vice President and Director of Princeton
Services; President and Director of PFD;
Director of Financial Data Services, Inc.;
President of Princeton Administrators, L.P.
Donald C. Burke ........ Senior Vice Senior Vice President and Treasurer of MLIM;
President and Senior Vice President and Treasurer of
Treasurer Princeton Services; Vice President and
Treasurer of PFD; First Vice President of
MLIM from 1997 to 1999; Vice President of
MLIM from 1990 to 1997; Director of
Taxation of MLIM
Michael G. Clark ....... Senior Vice Senior Vice President of MLIM; Senior Vice
President President of Princeton Services
Mark DeSario ........... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Linda L. Federieci ..... Senior Vice Senior Vice President of MLIM; Senior Vice
President President of Princeton Services
Vincent R. Giordano .... Senior Vice Senior Vice President of MLIM; Senior Vice
President President of Princeton Services
Elizabeth A. Griffin ... Senior Vice Senior Vice President of MLIM; Senior Vice
President President of
</TABLE>

<PAGE> 198

<TABLE>
<S> <C> <C>
Princeton Services
Michael J. Hennewinkel . Senior Vice Senior Vice President, General Counsel and
President Counsel and Secretary of MLIM; Secretary
Senior Vice President of Princeton Services
Philip L. Kirstein ..... Senior Vice Senior Vice President of MLIM; Senior Vice
President President, General Counsel, Director and
Secretary of Princeton Services
Ronald M. Kloss ........ Senior Vice Senior Vice President of MLIM; Senior Vice
President President of Princeton Services
Debra W. Landsman-Yaros Senior Vice Senior Vice President of MLIM; Senior Vice
President President of Princeton Services; Vice
President of PFD
Stephen M. Miller ...... Senior Vice Executive Vice President of Princeton
President Administrators, L.P.; Senior Vice President
of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice Senior Vice President of MLIM; Senior Vice
President President of Princeton Services
Brian A. Murdock ....... Senior Vice Senior Vice President of MLIM; Senior Vice
President President of Princeton Services;
Gregory D. Upah ........ Senior Vice Senior Vice President of MLIM; Senior Vice
President President of Princeton Services
</TABLE>

Item 27. Principal Underwriters.

(a) The Registrant's principal underwriter, FAM Distributors,
Inc. ("FAM"), also acts as principal underwriter for the following open-end
registered investment companies:

The Asset Program, Inc., Financial Institutions Series Trust,
Hotchkis and Wiley Variable Trust, Master Focus Twenty Trust, Master Global
Financial Services Trust, Master Internet Strategies Trust, Master Large Cap
Series Trust, Master Premier Growth Trust, Mercury Global Holdings, Inc.,
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 Basic Value Fund, Inc., Merrill Lynch
California Municipal Series Trust, Merrill Lynch Balanced Capital Fund, Inc.,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch Developing Capital
Markets Fund, Inc., Merrill Lynch Disciplined Equity Fund, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth
Fund, Inc., Merrill Lynch Funds for Institutions Series, Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Growth Fund, 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 Index Funds, Inc., Merrill Lynch Intermediate
Government Bond Fund, Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Multi-State Limited Maturity Municipal
Series Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch
Municipal Bond Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series
Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income
Fund, Inc., Merrill Lynch Small Cap Value Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch U.S. Government Mortgage Fund, 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
Merrill Lynch World Income Fund, Inc. FAM also acts as the principal underwriter
for the following closed-end registered investment companies: Merrill Lynch High
Income Municipal Bond Program, Inc., Merrill Lynch Municipal Strategy Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc., and Merrill Lynch Senior
Floating Rate Fund II, Inc. A separate division of FAM acts as the principal
underwriter of a number of other investment companies.

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

<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with the Distributor with Registrant
---- --------------------- ---------------------
<S> <C> <C>
Terry K. Glenn President and Director 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
Michael G. Clark Vice President None
James T. Fatseas Vice President None
Debra W. Landsman-Yaros Vice President None
Michelle T. Lau Vice President None
Donald C. Burke Vice President Vice President and Treasurer
Salvatore Venezia Vice President None
William Wasel Vice President None
Robert Harris Secretary None
</TABLE>

<PAGE> 199

Item 28. Location of Accounts and Records.

The accounts, books and other documents required to be maintained by Registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are in the possession of Registrant or Registrant's
investment adviser, 725 S. Figueroa Street, Suite 4000, Los Angeles, California
90017 or 800 Scudders Mill Road, Plainsboro, New Jersey 08536, Registrant's
transfer agent, Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, or Registrant's custodian, Brown Brothers
Harriman & Co., 40 Water Street, Boston, Massachusetts 02109.

Item 29. Management Services.

Other than as set forth under the caption "Investment Adviser" in
the Prospectuses constituting Part A of the Registration Statement and under the
caption "Management of the Fund--Investment Advisory Arrangements" and
"-Administration Arrangements" in the Statements of Additional Information
constituting Part B of the Registration Statement, the Registrant is not a party
to any management-related service contract.

Item 30. Undertakings.

Not Applicable.

<PAGE> 200

SIGNATURES

Pursuant to the requirements of the Securities Act and the
Investment Company Act, the Fund has duly caused this Registration Statement to
be signed on its behalf by the undersigned, duly authorized, in the City of Los
Angeles, and State of California, on the 11th day of August, 2000.

MERRILL LYNCH INVESTMENT MANAGERS
FUNDS, INC.

By: /s/ Nancy D. Celick
---------------------------------
Nancy D. Celick
President

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nancy D. Celick Principal Executive Officer August 11, 2000
-----------------------------
Nancy D. Celick

/s/ Donald C. Burke Principal Financial and August 11, 2000
----------------------------- Accounting Officer
Donald C. Burke

/s/ Michael S. Baxter Director August 11, 2000
-----------------------------
Michael S. Baxter

/s/ Robert L. Burch III Director August 11, 2000
-----------------------------
Robert L. Burch III

/s/ John Gavin Director August 11, 2000
-----------------------------
John Gavin

/s/ Joe Grills Director August 11, 2000
-----------------------------
Joe Grills

/s/ Nigel Hurst-Brown Director August 11, 2000
-----------------------------
Nigel Hurst-Brown

/s/ Madeleine A. Kleiner Director August 11, 2000
-----------------------------
Madeleine A. Kleiner

/s/ Richard R. West Director August 11, 2000
-----------------------------
Richard R. West
</TABLE>

<PAGE> 201
SIGNATURES

Fund Asset Management Master Trust has duly caused this
Registration Statement of Merrill Lynch Investment Managers Funds, Inc. to be
signed on its behalf by the undersigned, duly authorized, in the City of Los
Angeles, and State of California, on the 11th day of August, 2000.

FUND ASSET MANAGEMENT MASTER TRUST

By: /s/ Nancy D. Celick
-------------------------------
Nancy D. Celick
President

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

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nancy D. Celick Principal Executive Officer August 11, 2000
-------------------------------
Nancy D. Celick

/s/ Donald C. Burke Principal Financial and August 11, 2000
------------------------------- Accounting Officer
Donald C. Burke

/s/ Michael S. Baxter Trustee August 11, 2000
-------------------------------
Michael S. Baxter

/s/ Robert L. Burch III Trustee August 11, 2000
-------------------------------
Robert L. Burch III

/s/ John Gavin Trustee August 11, 2000
-------------------------------
John Gavin

/s/ Joe Grills Trustee August 11, 2000
-------------------------------
Joe Grills

/s/ Nigel Hurst-Brown Trustee August 11, 2000
-------------------------------
Nigel Hurst-Brown

/s/ Madeleine A. Kleiner Trustee August 11, 2000
-------------------------------
Madeleine A. Kleiner

/s/ Richard R. West Trustee August 11, 2000
-------------------------------
Richard R. West
</TABLE>

<PAGE> 202

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
(a)(1) -- Articles of Incorporation of the Registrant.*
(2) -- Certificate of Correction.*
(b) -- By-Laws of the Registrant.*
(c) -- Portions of Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of common stock
of the Registrant.*
(d) -- Not Applicable.
(e) -- Form of Distribution Agreement between the Registrant and FAM
Distributors, Inc. (including form of Selected Dealer Agreement).*
(f) -- None.
(g) -- Not Applicable.
(h)(1) -- Form of Transfer Agency, Divided Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Financial
Data Services, Inc. *
(2) -- Agreement relating to use of name between the Registrant and
Merrill Lynch & Co., Inc.*
(i) -- Opinion of Counsel.**
(j) -- Consent of independent accountants.**
(k) -- None.
(l) -- Certificate of Fund Asset Management, L.P.**
(m)(1) -- Form of Class B Shares Distribution Plan of the Registrant.*
(2) -- Form of Class C Shares Distribution Plan of the Registrant.*
(3) -- Form of Class D Shares Distribution Plan of the Registrant.*

(n) -- Merrill Lynch Select Pricing System Plan pursuant to Rule 18f-3.*
(p) -- Code of Ethics (for Master Trust, too).*
</TABLE>

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

* Filed herewith.
** To be filed by amendment.