FINANCIAL INSTITUTIONS SERIES TRUST, 497, 1998-10-09

FINANCIAL INSTITUTIONS SERIES TRUST
497, 1998-10-09

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<PAGE>

PROSPECTUS
SEPTEMBER 29, 1998
SUMMIT CASH RESERVES FUND
FINANCIAL INSTITUTIONS SERIES TRUST
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543 PHONE NO. (609) 282-2800

The investment objectives of the Summit Cash Reserves Fund (the "Money
Fund") are current income, preservation of capital and liquidity available
from investing in a diversified portfolio of short-term money market
securities. These securities will consist primarily of U.S. Government and
Government agency securities, bank certificates of deposit and bankers'
acceptances, commercial paper and repurchase agreements. For purposes of its
investment policies, the Money Fund defines short-term money market securities
as having a maturity of no more than 762 days (25 months) in the case of U.S.
Government and Government agency securities and no more than 397 days (13
months) in the case of all other securities. There can be no assurance that
the investment objectives of the Money Fund will be realized. See "Investment
Objective and Policies." The Money Fund is a separate series of Financial
Institutions Series Trust (the "Trust"), a no-load, diversified, open-end
investment company organized as a Massachusetts business trust. The net income
of the Money Fund is declared as dividends daily and reinvested monthly in
additional shares at net asset value. THE MONEY FUND SEEKS TO MAINTAIN A
CONSTANT $1.00 NET ASSET VALUE PER SHARE, ALTHOUGH THIS CANNOT BE ASSURED. AN
INVESTMENT IN THE MONEY FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. In order to maintain a constant net asset value of $1.00 per
share, the Money Fund may reduce the number of shares held by its
shareholders.

The Money Fund will offer two classes of shares designated Class A and Class
B (the "Shares"). The Shares will be available only upon exchange of shares
pursuant to the Exchange Program or pursuant to the exchange privilege
available to certain mutual funds advised by Merrill Lynch Asset Management,
L.P. ("MLAM"), its affiliate, Fund Asset Management, L.P. ("FAM" or the
"Investment Manager") or Mercury Asset Management International Limited
("Mercury"), an affiliate of FAM and MLAM. See "Exchange Privilege and
Exchange Program." Class A and Class B shares are offered at net asset value
without any sales charge; however Class B shares will be subject to an ongoing
distribution fee and may be subject to a contingent deferred sales charge
("CDSC"). Shares may be redeemed at any time at net asset value as described
herein. See "Purchase of Shares" and "Redemption of Shares."

Shares may be purchased from securities dealers that have entered into
selected dealer agreements with Princeton Funds Distributor, Inc. (the
"Distributor" or "PFD") P.O. Box 9081, Princeton, New Jersey 08543-9081, Tel.
No. (609) 282-2800, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). See "Purchase of Shares."

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

This Prospectus is a concise statement of information about the Money Fund
that is relevant to making an investment in the Money Fund. This Prospectus
should be read carefully and retained for future reference. A statement
containing additional information about the Money Fund, dated September 29,
1998 (the "Statement of Additional Information"), has been filed with the
Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling or by writing the Money Fund at the above telephone
number or address. The Commission maintains a Web site (http://www.sec.gov)
that contains the Statement of Additional Information, material incorporated
by reference and other information regarding the Money Fund. The Statement of
Additional Information is hereby incorporated by reference into this
Prospectus.

----------------
FUND ASSET MANAGEMENT -- INVESTMENT MANAGER
PRINCETON FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>

FEE TABLE

ANNUAL MONEY FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS):

<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower).......... None None(a)
Management Fees............................................. 0.50% 0.50%
Rule 12b-1 Fees(b).......................................... None 0.75%
Other Expenses(c)
Dividend and Transfer Agency Fees(d)...................... 0.14% 0.14%
Other..................................................... 0.25% 0.25%
---- ----
Total Other Expenses...................................... 0.39% 0.39%
---- ----
TOTAL MONEY FUND OPERATING EXPENSES(E)(F)..................... 0.89% 1.64%
==== ====
</TABLE>
- ------------
(a) If holders of the Money Fund's Class B shares redeem those shares instead
of exchanging back into shares of the original fund from which the
exchange occurred or another fund in the same fund complex, CDSC
payments, if any, will be assessed based upon the combined holding period
for the fund shares and the Money Fund Shares. See "Exchange Privilege
and Exchange Program," page 12.
(b) See "Purchase of Shares--Distribution Plan"--page 10.
(c) Due to the gap in active operations and significant changes to the Money
Fund's expense structure, the financial performance of the Money Fund
will vary significantly from its historical performance. Information
under "Other Expenses" is based on estimated amounts through the end of
the Money Fund's first fiscal year of operations as a money market fund
issuing multiple classes of shares, on an annualized basis.
(d) See "Management of the Trust--Transfer Agency Services"--page 9.
(e) There are likely to be a large number of Money Fund accounts of
relatively small asset size, and as a result, the total operating
expenses of the Money Fund may be higher than the expenses incurred in
other money market funds.
(f) The Investment Manager may waive all or a portion of its management fee
and assume all or a portion of the Money Fund's other expenses and may
discontinue such waiver or assumption at any time.

2
<PAGE>

EXAMPLE:

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES
PAID FOR THE PERIOD OF:
-------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment assuming the Total
Money Fund Operating Expenses set forth on
page 2 and a 5% annual return throughout the
period.
Class A..................................... $ 9 $28 $49 $110
Class B(a).................................. $17 $52 $89 $194
</TABLE>
- ------------
(a) If holders of the Money Fund's Class B shares redeem those shares instead
of exchanging back into shares of the original fund from which the
exchange occurred or another fund in the same fund complex, CDSC payments,
if any, will be assessed based upon the combined holding period for the
fund shares and the Money Fund Shares. See "Exchange Privilege and
Exchange Program," page 12.

The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Money Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" for Class B shares
are based on estimated amounts through the end of the Money Fund's first
fiscal year of operations as a money market fund issuing multiple classes of
shares on an annualized basis. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5% annual rate
of return as mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES AND ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.

3
<PAGE>

FINANCIAL HIGHLIGHTS

The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Money Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the
fiscal year ended May 31, 1998 and the independent auditors' report thereon
are included in the Statement of Additional Information. The following per
share data and ratios have been derived from information provided in the Money
Fund's audited financial statements. The information provided is for periods
during which the Money Fund issued only Class A shares. During the fiscal year
ended May 31, 1998 and a portion of the fiscal year ending May 31, 1999, the
Money Fund was not publicly offering its shares, and as of May 31, 1998, all
of the Money Fund's outstanding shares were owned by the Investment Manager.

<TABLE>
<CAPTION>
FOR YEAR ENDED MAY 31,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------ ------ ------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSET VALUE:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------- ------- -------- -------- -------- -------- -------- --------
Investment Income--
net.................. .0531 .0432 .0476 .0444 .0254 .0262 .0464 .0684 .0811 .7099
Realized and
unrealized gain
(loss) on
investments--net..... -- .0001 (.0011) .0014 .0003 .0007 (.0001) .0024 (.0003) .0002
------ ------ ------- ------- -------- -------- -------- -------- -------- --------
Total from Investment
Operations............ .0531 .0433 .0465 .0458 .0257 .0269 .0463 .0708 .0808 .0801
------ ------ ------- ------- -------- -------- -------- -------- -------- --------
Less dividends and dis-
tributions:
Investment income--
net.................. (.0531) (.0431) (.0476) (.0445) (.0257) (.0269) (.0463) (.0708) (.0808) (.0799)
Realized gain on
investment--net...... -- (.0431) --** (.0001) (.0003) (.0007) -- (.0024)* -- (.0002)*
------ ------ ------- ------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions......... (.0531) (.0431) (.0476) (.0445) (.0257) (.0269) (.0463) (.0708) (.0808) (.0801)
------ ------ ------- ------- -------- -------- -------- -------- -------- --------
Net asset value, end of
year.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ======= ======= ======== ======== ======== ======== ======== ========
Total investment
return................ 5.44% 4.32% 4.87% 4.52% 2.57% 2.74% 4.44% 7.36% 8.42% 8.30%
====== ====== ======= ======= ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS
Expenses, net of
reimbursement......... 0.00% 1.38% 1.13% .98% .90% .86% .79% .85% .74% .82%
====== ====== ======= ======= ======== ======== ======== ======== ======== ========
Expenses............... 72.77% 1.97% 1.13% .98% .90% .86% .79% .85% .74% .82%
====== ====== ======= ======= ======== ======== ======== ======== ======== ========
Investment income and
realized gain on
investments--net...... 5.30% 4.18% 4.83% 4.35% 2.54% 2.72% 4.48% 7.14% 8.03% 7.98%
====== ====== ======= ======= ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)........ $ 253 $ 240 $34,865 $89,119 $135,301 $156,677 $237,868 $374,212 $546,593 $637,424
====== ====== ======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
- ------------
* Includes unrealized gain (loss)
** Amount is less than $.0001 per share.

4
<PAGE>

YIELD INFORMATION

The yield of the Money Fund refers to the income generated by an investment
in the Money Fund over a stated seven-day period. This income is then
annualized; that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The compounded annualized yield is
calculated similarly but, when annualized, the income earned by an investment
in the Money Fund is assumed to be reinvested. The compounded annualized yield
will be somewhat higher than the yield because of the effect of the assumed
reinvestment.

The yield on Money Fund shares normally will fluctuate on a daily basis.
Therefore, the yield for any given past period is not an indication or
representation by the Money Fund of future yields or rates of return on its
shares. The Money Fund's yield is affected by changes in interest rates on
money market securities, average portfolio maturity, the types and quality of
portfolio securities held, and operating expenses. Current yield information
may not provide a basis for comparison with bank deposits or other investments
that pay a fixed yield over a stated period of time.

On occasion, the Money Fund may compare its yield to (i) the average yield
reported by the Bank Rate Monitor National Index(TM) for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas, (ii) yield 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 and Fortune Magazine and (iii) the yield on an
investment in 90-day Treasury bills on a rolling basis, assuming quarterly
compounding. As with other performance data, yield comparisons should not be
considered indicative of the Money Fund's yield or relative performance for
any future period.

INVESTMENT OBJECTIVES AND POLICIES

The investment objectives of the Money Fund are current income, preservation
of capital and liquidity available from investing in a diversified portfolio
of short-term money market securities. The investment objectives are
fundamental policies of the Money Fund that may not be changed without a vote
of the majority of the outstanding shares of the Money Fund.

Investment in the Money Fund offers several potential benefits. The Money
Fund seeks to provide as high a yield potential as is available, consistent
with the preservation of capital, from short-term money market securities
utilizing professional money market management, block purchases of securities
and yield improvement techniques. It provides high liquidity because of its
redemption features and seeks reduced risk that generally results from
diversification of assets. There can be no assurance that the investment
objectives of the Money Fund will be realized. Certain expenses are borne by
investors, including advisory and management fees, administrative costs and
operational costs and in the case of Class B shares, Rule 12b-1 fees.

In managing the Money Fund, the Investment Manager will employ a number of
professional money management techniques, including varying the composition of
the Money Fund's investments and the average maturity of the portfolio based
on its assessment of the relative values of the various money market
securities

5
<PAGE>

and future interest rate patterns. The Investment Manager's assessments will
respond to changing economic and money market conditions and to shifts in
fiscal and monetary policy. The Investment Manager also will seek to improve
yield by taking advantage of yield disparities that regularly occur in the
money market. For example, market conditions frequently result in similar
securities trading at different prices. Also, there are frequently differences
in the yield between the various types of money market securities. The Money
Fund seeks to enhance yield by purchasing and selling securities based on
these yield differences.

The following is a description of the types of money market securities in
which the Money Fund may invest:

(i) U.S. Treasury bills, notes and other obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities;

(ii) U.S. dollar-denominated obligations of U.S. and foreign depository
institutions, including, but not limited to, certificates of deposit,
bankers' acceptances, time deposits, bank notes, thrift notes and deposit
notes;

(iii) commercial paper and other short-term obligations issued by
corporations, partnerships, trusts or other entities, including U.S.
dollar-denominated obligations issued by foreign entities; and

(iv) other short-term obligations which in the opinion of the Trustees of
the Trust are of comparable credit quality.

The Money Fund will only invest in short-term obligations that (1) have been
rated in one of the two highest rating categories for short-term debt
obligations by a nationally recognized statistical rating organization
("NRSRO"); (2) have been issued by an issuer rated in one of the two highest
rating categories by an NRSRO with respect to a class of debt obligations that
is comparable in priority and security with the investment; or (3) if not
rated, will be of comparable quality as determined by the Trustees of the
Trust. Currently, there are five NRSROs: Duff & Phelps Credit Ratings Co.,
Fitch IBCA, Inc., Moody's Investors Service, Inc., Standard & Poor's and
Thomson BankWatch, Inc.

Rule 2a-7 under the Investment Company Act of 1940, as amended (the
"Investment Company Act") presently limits investments by the Money Fund in
securities issued by any one issuer (other than the U.S. Government, its
agencies or instrumentalities) ordinarily to not more than 5% of its total
assets, or, in the event that such securities are not First Tier Securities
(as defined in the Rule), not more than 1%. In addition, Rule 2a-7 requires
that not more than 5% of the Money Fund's total assets be invested in Second
Tier Securities (as defined in the Rule). The Rule requires the Money Fund to
be diversified (as defined in the Rule) other than with respect to government
securities and securities subject to a guarantee issued by a non-controlled
person (as defined in the Rule).

The following is a description of some of the investments or investment
practices in which the Money Fund may invest or engage:

Government Securities. U.S. Treasury bills and notes are supported by the
full faith and credit of the United States. The Money Fund also will invest
in debt securities issued by U.S. Government sponsored enterprises,
agencies and instrumentalities, including, but not limited to, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation,
the Student Loan Marketing Association, the Federal Agricultural Mortgage
Corporation, and the Federal Home Loan Bank. Such securities may also
include debt securities issued by international organizations designated or
supported by multiple

6
<PAGE>

governmental entities, such as the International Bank for Reconstruction
and Development. Government agency securities are not direct obligations of
the U.S. Treasury but involve various forms of U.S. Government sponsorship
or guarantees.

Repurchase Agreements. The Money Fund may enter into repurchase
agreements. A repurchase agreement is an instrument under which the
purchaser (i.e., the Money Fund) acquires the obligation (debt security)
and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed- upon time and price, thereby determining
the yield during the purchaser's holding period. As a matter of operating
policy, the Money Fund will not enter into repurchase agreements with more
than seven days to maturity if it would result in the investment of more
than 10% of the value of the Money Fund's net assets in such repurchase
agreements. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred
to the purchaser. If a repurchase agreement is construed to be a
collateralized loan, the underlying securities will not be considered to be
owned by the Money Fund but only to constitute collateral for the seller's
obligation to pay the repurchase price, and, in the event of a default by
the seller, the Money Fund may suffer time delays and incur costs or losses
in connection with the disposition of the collateral.

Reverse Repurchase Agreements. The Money Fund may enter into reverse
repurchase agreements which involve the sale of money market securities
held by the Money Fund, with an agreement to repurchase the securities at
an agreed-upon price, date and interest payment. During the time a reverse
repurchase agreement is outstanding, the Money Fund will maintain a
segregated custodial account containing U.S. Government or other
appropriate liquid securities having a value equal to the repurchase price.
Management of the Money Fund does not consider entering into reverse
repurchase agreements to constitute borrowing money for purposes of the
Money Fund's investment restrictions set forth in the Statement of
Additional Information.

Lending of Portfolio Securities. The Money Fund may lend portfolio
securities to brokers, dealers and financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S.
Government which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. During the
period of the loan, the Money Fund will receive income on the loaned
securities and either will receive a fee or earn interest on any
investments made with cash collateral, thereby increasing its yield.

Commercial Paper and Other Short-Term Obligations. The Money Fund may
purchase commercial paper (including variable amount master notes and
funding agreements), which refers to short-term promissory notes issued by
corporations, partnerships, trusts or other entities to finance short-term
credit needs, and non-convertible debt securities (e.g., bonds and
debentures) with no more than 397 days (13 months) remaining to maturity at
the time of purchase. Short-term obligations issued by trusts may include,
but are not limited to, mortgage-related or asset-backed debt instruments,
including pass-through certificates such as participations in, or Treasury
bonds or notes backed by, pools of mortgages, or credit card, automobile or
other types of receivables. See "Investment Objectives and Policies" in the
Statement of Additional Information for a discussion of these structured
financings.

Bank Money Instruments. Obligations of depository institutions such as
certificates of deposit, including variable rate certificates of deposit,
bankers' acceptances, bank notes and time deposits.

Forward Commitments. The Money Fund may purchase and sell securities on a
when-issued basis or forward commitment basis, and it may purchase or sell
such securities for delayed delivery. The Money

7
<PAGE>

Fund will maintain a segregated account with its custodian of liquid
securities in an aggregate amount equal to the amount of its commitments in
connection with such purchase transactions.

While the types of money market securities in which the Money Fund invests
generally are considered to have low principal risk, such securities are not
completely risk-free. There is a risk of the failure of issuers to meet their
principal and interest obligations. With respect to repurchase agreements,
reverse repurchase agreements and the lending of portfolio securities by the
Money Fund, there is also the risk of the failure of parties involved to
repurchase at the agreed-upon price or to return the securities involved in
such transactions, in which event the Money Fund may suffer time delays and
incur costs or possible losses in connection with the disposition of the
collateral.

Investment Restrictions. The Money Fund has adopted a number of restrictions
and policies relating to the investment of its assets and its activities,
which are fundamental policies and may not be changed without the approval of
the holders of a majority of the Money Fund's outstanding voting securities.
Among the more significant restrictions, the Money Fund may not (1) invest
more than 25% of its total assets, taken at market value at the time of each
investment, in the securities of issuers in any particular industry (other
than U.S. Government securities, U.S. Government agency securities or domestic
bank money instruments). For purposes of this restriction, states,
municipalities and their political subdivisions are not considered part of any
industry, and investments in mortgage-related or asset-backed securities shall
not be considered investments in the securities of issuers in a particular
industry; (2) borrow money, except that the Money Fund may borrow from banks
(as defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), or for temporary purposes (up to
an additional 5% of its total assets), or as necessary for the clearance of
securities transactions, or for the purchase of securities on margin; or (3)
make loans to other persons, except that the purchase of debt instruments,
U.S. Government securities, commercial paper pass-through instruments,
certificates of deposit, bankers' acceptances, repurchase agreements or other
similar instruments are not deemed the making of a loan and that the Money
Fund may lend its portfolio securities in accordance with applicable law and
the guidelines set forth herein and in the Statement of Additional
Information.

MANAGEMENT OF THE TRUST

TRUSTEES

The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the Investment Company Act.
The Trustees of the Trust are responsible for the overall supervision of the
operations of the Trust and perform the various duties imposed on the
directors of investment companies by the Investment Company Act.

The Trustees of the Trust are:

Arthur Zeikel*--Chairman of the Investment Manager and its affiliate,
MLAM; Chairman and Director of Princeton Services, Inc. ("Princeton
Services"); Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.").
- ------------
*Interested person, as defined in the Investment Company Act, of the Trust.

8
<PAGE>

Joe Grills--Member of the Committee of Investment of Employee Benefit
Assets of the Financial Executives Institute ("CIEBA"); Member of CIEBA's
Executive Committee; Assistant Treasurer of International Business Machines
Corporation ("IBM") and Chief Investment Officer of IBM Retirement Funds;
Member of the Investment Advisory Committees of the State of New York
Common Retirement Fund, Howard Hughes Medical Institute and the Virginia
Retirement System; Director, Duke Management Company, Director, LaSalle
Street Fund, Director, Kimco Realty Corporation and Director of the
Hotchkis and Wiley Funds.

Walter Mintz--Special Limited Partner of Cumberland Associates
(investment partnership).

Robert S. Salomon, Jr.--Principal of STI Management (investment adviser).

Melvin R. Seiden--Director of Silbanc Properties, Ltd. (real estate,
investment and consulting).

Stephen B. Swensrud--Chairman of Fernwood Advisors (investment adviser);
Principal of Fernwood Associates (financial consultant).

MANAGEMENT AND ADVISORY ARRANGEMENTS

The Investment Manager acts as the manager of the Money Fund and provides
the Money Fund and the Trust with management and investment advisory services.
The Investment Manager is an affiliate of MLAM and is owned and controlled by
ML & Co., a financial services holding company and the parent of Merrill
Lynch. The Asset Management Group of ML & Co. (which includes the Investment
Manager) acts as the investment adviser for more than 100 registered
investment companies and provides portfolio management services to individual
and institutional accounts. As of August 1998, the Asset Management Group had
a total of approximately $473 billion in investment company and other
portfolio assets under management. This amount includes assets managed for
certain affiliates of the Investment Manager.

The Investment Management Agreement (the "Investment Management Agreement")
provides that, subject to the supervision of the Trustees, the Investment
Manager is responsible for the actual management of the Money Fund and
constantly reviews the Money Fund's holdings in light of its own research
analysis and that from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Investment
Manager, subject to review by the Trustees. The Investment Manager performs
certain of the other administrative services necessary for the operation of
the Trust and the Money Fund, including regulatory compliance, and provides
all the office space, facilities, equipment and necessary personnel for
management of the Money Fund.

Pursuant to the Investment Management Agreement, the Investment Manager is
entitled to receive compensation at the annual rate of 0.50% of average daily
net assets of the Money Fund.

The Investment Management Agreement obligates the Money Fund to pay certain
expenses incurred in its operations, including, among other things, the
investment management fees, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees,
accounting and pricing costs, and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information.
Accounting services are provided to the Trust by the Investment Manager, and
the Trust reimburses the Investment Manager for its costs in connection with
such services.

TRANSFER AGENCY SERVICES

Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly
owned subsidiary of ML & Co., acts as the Money Fund's transfer agent pursuant
to a transfer agency, shareholder servicing agency and proxy agency agreement
(the "Transfer Agency Agreement"). Pursuant to the Transfer Agency Agreement,
the Transfer Agent is responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts. Pursuant to
the Transfer Agency Agreement, the Transfer Agent receives

9
<PAGE>

a fee at the rate of $11.00 per Class A shareholder account and $14.00 per
Class B shareholder account and is entitled to reimbursement from the Money
Fund for certain transaction charges and out-of-pocket expenses incurred by it
under the Transfer Agency Agreement. Additionally, a $0.20 monthly closed
account charge will be assessed on all accounts which close during the
calendar year. Application of this fee will commence the month following the
month the account is closed. At the end of the calendar year, no further fees
will be due. For purposes of the Transfer Agency Agreement, the term "account"
includes a shareholder account maintained directly by the Transfer Agent and
any other account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the recordkeeping
system is maintained by a subsidiary of ML & Co.

PURCHASE OF SHARES

The Money Fund will offer Class A and Class B shares, without a sales
charge, at a public offering price equal to the net asset value (normally
$1.00 per share) next determined after a purchase order becomes effective.

Class A and Class B shares will be offered only (i) pursuant to the exchange
program with certain non-money market open-end management investment companies
for which Merrill Lynch serves as selected dealer and which are not advised by
FAM or MLAM (the "Exchange Program") and (ii) pursuant to the exchange
privilege available to certain mutual funds advised by FAM or MLAM ("MLAM-
advised funds") or by Mercury ("Mercury-advised funds"). See "Exchange
Privilege and Exchange Program." Share purchase orders are effective on the
date Federal Funds become available to the Money Fund. If Federal Funds are
available to the Money Fund prior to the determination of net asset value
(generally 4:00 P.M., New York time) on any business day, the order will be
effective on that day. Shares purchased will begin accruing dividends on the
day of purchase.

Class A shares will be offered without any front-end or deferred sales
charges and will bear no ongoing distribution fees.

DISTRIBUTION PLAN

The Money Fund has adopted a distribution plan pursuant to Rule 12b-1 under
the Investment Company Act with respect to distribution fees paid by the Money
Fund to Merrill Lynch and certain other dealers with respect to the Class B
shares (the "Class B Distribution Plan"). The Class B Distribution Plan
provides that such distribution fee is accrued daily and paid monthly at the
annual rate of 0.75% of the Money Fund's average daily net assets attributable
to Class B shares. This distribution fee will be used to compensate the
Distributor for providing sales and promotional activities and services
relating to the sale, promotion and marketing of Class B shares of the Fund
and payment related to the furnishing of services to Class B shareholders by
sales and marketing personnel. Such expenditures may consist of sales
commissions to financial consultants for selling Class B shares (including
reimbursement to the parties who have paid such commissions), compensation,
sales incentives and payments to sales and marketing personnel, and the
payment of expenses incurred in their sales and promotional activities
including advertising expenditures, the costs of preparing and distributing
promotional materials and the costs of providing services to Class B
shareholders including assistance in connection with inquiries related to
shareholder accounts.

Payments under the Class B Distribution Plan will be based on a percentage
of average daily net assets attributable to the Class B shares regardless of
the amount of expenses incurred, and accordingly, distribution-related
revenues from the Class B Distribution Plan may be more or less than
distribution-related expenses. Information with respect to the Class B
distribution-related revenues and expenses will be presented to the Trustees
for their consideration in connection with their deliberations as to the
continuance of the Class B Distribution Plan.

10
<PAGE>

The Trust has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch or other selected dealers in
connection with Class B shares, and there is no assurance that the Trustees of
the Trust will approve the continuance of the Class B Distribution Plan from
year to year. However, the Distributor intends to seek annual continuation of
the Class B Distribution Plan. In their review of the Class B Distribution
Plan, the Trustees will be asked to take into consideration expenses incurred
in connection with the distribution of shares. The distribution fee received
with respect to Class B shares will not be used to subsidize the sale of Class
A shares. Payments of the distribution fee on Class B shares will terminate on
conversion of those Class B shares to Class A shares. See "Conversion of Class
B Shares to Class A Shares." The Distributor, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, acts as principal underwriter of the shares of
the Money Fund. PFD is an affiliate of both the Investment Manager and of
Merrill Lynch.

CONVERSION OF CLASS B SHARES TO CLASS A SHARES

In the case of Class B Shares of the Money Fund acquired in an exchange from
Class B or Class C shares of a MLAM-advised fund or Mercury-advised fund,
after approximately ten years (the "Conversion Period"), the Class B shares
will be converted automatically into Class A shares of the Money Fund. Class A
shares are not subject to the distribution fee that is borne by Class B
shares. Automatic conversion of Class B shares into Class A 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 A shares will not be deemed a purchase
or sale of the shares for Federal income tax purposes.

Under the Exchange Program (described below, see "Exchange Privilege and
Exchange Program"), if shares of a Participating Fund have a conversion
feature providing that shares of one class of the Participating Fund will be
exchanged automatically for shares of another class of the Participating Fund,
this conversion feature will carry over to Class B shares of the Money Fund
acquired in exchange for those Participating Fund shares. At the end of the
particular conversion period, if the shareholder still holds the Money Fund
Class B shares, such shares will be converted to Class A shares of the Money
Fund that are not subject to any ongoing distribution fee.

REDEMPTION OF SHARES

The Trust is required to redeem for cash all full and fractional shares of
the Money Fund. The redemption price in the case of Class A shares is the net
asset value per share next determined after receipt by the Transfer Agent of
proper notice of redemption as described below. In the case of Class B Shares,
the redemption price is the net asset value less any applicable CDSC. See
"Exchange Privilege and Exchange Program." If such notice is received by the
Transfer Agent prior to the determination of net asset value (generally 4:00
P.M., New York time) on any business day during which the New York Stock
Exchange ("NYSE") is open for business, the redemption will be effective on
such day and payment generally will be made on the next business day. If the
notice is received after the determination of net asset value has been made,
the redemption will be effective on the next business day and payment will be
made on the second business day thereafter. A direct shareholder liquidating
his or her holdings will receive upon redemption all dividends declared and
reinvested until the time of redemption.

METHODS OF REDEMPTION

Set forth below is information as to two methods pursuant to which
shareholders may redeem shares. In certain instances, the Transfer Agent may
require additional documents in connection with redemptions.

11
<PAGE>

Repurchase Through Securities Dealers. The Trust will repurchase shares of
the Money Fund through securities dealers. The Trust will normally accept
orders to repurchase shares by wire or telephone from dealers for their
customers at the net asset value next computed after receipt of the order from
the dealer, provided that such request for repurchase is received from the
dealer prior to the determination of net asset value of the Money Fund
(generally 4:00 P.M., New York time) on any business day. These repurchase
arrangements are for the convenience of shareholders and do not involve a
charge by the Trust; however, dealers may impose a charge on the shareholder
for transmitting the notice of repurchase to the Trust. The Trust reserves the
right to reject any order for repurchase through a securities dealer, but it
may not reject properly submitted requests for redemption as described below.
The Trust will promptly notify any shareholder of any rejection of a
repurchase with respect to shares of the Money Fund. For shareholders
requesting repurchases through their securities dealer, payment will be made
by the Transfer Agent to the dealer.

Regular Redemption. A shareholder may also redeem shares by submitting a
written notice of redemption directly to the Transfer Agent, Financial Data
Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290. Redemption
requests delivered other than by mail should be delivered to Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
Redemption requests should not be sent to the Trust. The notice requires the
signature of all persons in whose name the shares are registered, signed
exactly as their names appear on the Transfer Agent's register. The signatures
on the notice must be guaranteed by a national bank or other bank which is a
member of the Federal Reserve System (not a savings bank) or by a member firm
of any national or regional stock exchange. Notarized signatures are not
sufficient.

EXCHANGE PRIVILEGE AND EXCHANGE PROGRAM

EXCHANGE PRIVILEGE

Class A shareholders of the Money Fund who acquired their Money Fund Shares
upon an exchange from Class A or Class D shares of certain MLAM-advised funds
will have an exchange privilege with Class A or Class D shares of certain
MLAM-advised funds. Shareholders may exchange Class A shares of the Money Fund
for Class A shares of one of the MLAM-advised funds if the shareholder holds
any Class A shares of that fund in the account in which the exchange is to be
made at the time of the exchange or is otherwise eligible to purchase Class A
shares of that fund. Shareholders who exchange all Class A shares in their
account of certain MLAM-advised funds and are not otherwise eligible to
purchase Class A shares of that fund only may exchange back into Class D
shares of that fund. The holder of Money Fund Class A shares may subsequently
either exchange back into the same class of shares of the original MLAM-
advised fund (if eligible) without paying any sales charge or, alternatively,
exchange into Class A (if eligible) or Class D shares of another MLAM-advised
fund in which case the holder will be required to pay a sales charge equal to
the difference, if any, between the sales charge previously paid on the shares
of the original MLAM-advised fund and the sales charge payable at the time of
the exchange on the shares of the new MLAM-advised fund.

Class B shareholders of the Money Fund who acquired their Money Fund Shares
upon an exchange from Class B or Class C shares of MLAM-advised funds will
have an exchange privilege with Class B or Class C shares of MLAM-advised
funds. Similarly, Class B or Class C shareholders who acquired their Money
Fund shares upon exchange from Class B or Class C Mercury shares have an
exchange privilege with Class B or Class C shares of Mercury-advised funds.
When a shareholder exchanges Class B or Class C shares of a MLAM-advised fund
or a Mercury-advised fund for Class B shares of the Money Fund, the period of
time that the stockholder holds the Money Fund Class B shares will count
towards satisfaction of the holding period

12
<PAGE>

requirement for purposes of reducing the CDSC relating to the Class B or Class
C shares acquired upon exchange of the Money Fund Class B shares. With respect
to exchanges of Class B shares of a MLAM-advised fund or a Mercury-advised
fund into Money Fund Class B shares, the period of time the Money Fund Class B
shares are held will also count towards satisfaction of the conversion period
(the length of time until the Class B shares acquired upon exchange of the
Money Fund Class B shares are automatically converted into Class D shares).

Class A shareholders of the Money Fund who acquired their Money Fund Shares
upon an exchange from Class I or Class A shares of certain Mercury-advised
funds will have an exchange privilege with Class I or Class A shares of
certain Mercury-advised funds. Shareholders may exchange Class A shares of the
Money Fund for Class I shares of one of the Mercury-advised funds if the
shareholder is eligible to purchase Class I shares of that fund. Otherwise
Class A shares will be purchased. Class B shareholders of the Money Fund who
acquired their Money Fund Shares upon an exchange from Class B or C shares of
a Mercury-advised fund will have an exchange privilege with Class B or Class C
shares of the Mercury-advised funds. There is currently no limitation on the
number of times a shareholder may exercise the exchange privilege.

If Class B shares are redeemed from the Money Fund and not exchanged into
shares of a MLAM-advised fund or Mercury-advised fund, a CDSC will be charged
to the extent it would have been charged on a redemption of shares from the
original MLAM-advised fund or Mercury-advised fund.

Shares with a net asset value of at least $100 are required to qualify for
the exchange privilege and any shares utilized in an exchange must have been
held by the shareholder for at least 15 days. It is contemplated that the
exchange privilege may be applicable to other new mutual funds whose shares
are distributed by PFD or any of its subdivisions. The exchange privilege may
be modified or terminated at any time in accordance with the rules of the
Commission. Exercise of the exchange privilege is treated as a sale of the
exchanged shares and a purchase of the acquired shares for Federal income tax
purposes. For further information, see "Exchange Privilege and Exchange
Program" in the Statement of Additional Information.

EXCHANGE PROGRAM

The Money Fund participates in the Exchange Program with certain non-money
market open-end management investment companies for which Merrill Lynch serves
as selected dealer, which are not advised by the Investment Manager, MLAM, or
Mercury and not distributed by PFD or any of its subdivisions (each referred
to as a "Participating Fund"). The Exchange Program is available to investors
who purchase shares of a Participating Fund through Merrill Lynch. Pursuant to
the Exchange Program, exchanges may be made into Class A shares of the Money
Fund at net asset value without the imposition of a front-end sales load
("FESL") or a CDSC. Shares of a Participating Fund that are subject to an FESL
will be exchanged for Class A shares of the Money Fund without the imposition
of a sales charge. The holder of such Class A shares may subsequently either
exchange back into the same shares of the Participating Fund without incurring
any FESL or the holder of Class A shares may exchange into shares of another
Participating Fund that is subject to an FESL. In the latter case the Class A
shareholder must remit an amount equal to the difference, if any, between the
FESL previously paid on the shares of the original Participating Fund and the
FESL payable at the time of the exchange on the shares of the new
Participating Fund.

13
<PAGE>

would have been due on the Participating Fund shares for the time period
during which the Money Fund Class B shares are held. If the Participating Fund
shares were subject to a conversion feature, the period of time that the Money
Fund Class B shares are held will also count towards satisfaction of such
conversion period.

The holder of Class B shares of the Money Fund may subsequently either
exchange back into the same class of shares of the Participating Fund from
which the exchange into the Money Fund occurred, or into the same class of
shares of another Participating Fund in the same mutual fund complex as the
original Participating Fund. If Shares are redeemed from the Money Fund and
not exchanged into shares of a Participating Fund, a CDSC will be charged to
the extent it would have been charged on a redemption of shares from the
original Participating Fund.

The Participating Funds may impose administrative and/or redemption fees on
an exchange transaction with the Money Fund pursuant to the Exchange Program.
There will be no sales charge on exchange transactions into the Money Fund
pursuant to the Exchange Program. The Exchange Program may be modified or
terminated at any time in accordance with the rules of the Commission. An
exchange of shares through the Exchange Program, like an exchange of shares
pursuant to the exchange privilege, is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.

Shares with a net asset value of at least $100 are required to qualify for
the exchange program into the Money Fund and any shares utilized in an
exchange must have been held by the shareholder for at least 15 days.

A Participating Fund may modify or terminate the terms of its involvement in
the Exchange Program at any time in accordance with the rules of the
Commission. To effect an exchange under either the Exchange Program or the
exchange privilege, shareholders should contact their Merrill Lynch Financial
Consultant, who will advise the Money Fund of the exchange. Further
information regarding such exchanges is set forth under "Exchange Privilege
and Exchange Program" in the Statement of Additional Information.

PORTFOLIO TRANSACTIONS

The money market securities in which the Money Fund invests are traded
primarily in the over-the-counter ("OTC") market. Where possible, the Money
Fund will deal with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Money
market securities generally are traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes. The cost of executing
portfolio securities transactions of the Money Fund will primarily consist of
dealer spreads and underwriting commissions. Under the Investment Company Act,
persons affiliated with the Trust are prohibited from dealing with the Trust
as principal in the purchase and sale of securities unless an exemptive order
allowing such transactions is obtained from the Commission. An affiliated
person of the Trust may serve as its broker in OTC transactions conducted on
an agency basis. The Commission has issued an exemptive order permitting the
Trust to conduct certain principal transactions with Merrill Lynch, Merrill
Lynch Government Securities Inc. and Merrill Lynch Money Markets Inc., subject
to certain terms and conditions.

ADDITIONAL INFORMATION

DIVIDENDS

Dividends will be declared daily and reinvested monthly in the form of
additional shares at net asset value. Shareholders liquidating their holdings
will receive upon redemption all dividends declared and reinvested through the
date of redemption. Since the net income (including realized gains and losses
on the portfolio assets) is declared as a dividend in shares each time the net
income of the Money Fund is determined, the net asset

14
<PAGE>

value per share of the Money Fund normally remains constant at $1.00 per
share. Fluctuations in value may be reflected in the number of outstanding
shares in the shareholder's account. See "Taxes."

Net income (from the time of the immediately preceding determination
thereof) consists of (i) interest accrued and/or discount earned (including
both original issue and market discount), (ii) plus or minus all realized
gains and losses on portfolio securities, (iii) less the estimated expenses of
the Money Fund applicable to that dividend period.

DETERMINATION OF NET ASSET VALUE

The net asset value of the Money Fund is determined by the Investment
Manager once daily, immediately after the daily declaration of dividends, on
each day during which the NYSE is open for business. Such determination is
made as of the close of business on the NYSE (generally 4:00 P.M., New York
time). The net asset value per share is determined pursuant to the "penny-
rounding" method by adding the fair value of all securities and other assets
in the portfolio including interest accrued but not yet received, deducting
the portfolio's liabilities and dividing by the number of shares outstanding.
The result of this computation will be rounded to the nearest whole cent. It
is anticipated that net asset value will remain constant at $1.00 per share,
but no assurance can be offered in this regard. Securities with remaining
maturities of greater than 60 days for which market quotations are readily
available will be valued at market value. Securities with remaining maturities
of 60 days or less will be valued on an amortized cost basis. This involves
valuing the instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. Other
securities held by the Money Fund will be valued at the fair value as
determined in good faith by or under the direction of the Board of Trustees.

SHAREHOLDER SERVICES

The Trust offers a number of shareholder services described below designed
to facilitate investment in shares of the Money Fund. Full details as to each
of such services and copies of the various plans described below can be
obtained from the Trust.

Investment Account. Every shareholder with a direct account at the Transfer
Agent has an Investment Account and will receive quarterly reports showing the
activity in his or her account since the preceding statement. A shareholder
may ascertain the number of shares in his Investment Account by telephoning
the Transfer Agent at (800) MER-FUND, or (800-637-3863) toll-free. The
Transfer Agent will furnish this information only after the shareholder has
specified the name, address, account number and social security number of the
registered owner or owners.

Accrued Monthly Payout Plan. Shareholders desiring their dividends in cash
may enroll in this plan and receive monthly cash payments.

TAXES

The Trust intends to continue to qualify the Money Fund for the special tax
treatment afforded RICs under the Internal Revenue Code of 1986, as amended
(the "Code"). As long as it so qualifies, the Money Fund will not be subject
to Federal income tax on the part of its net ordinary income and net realized
capital gains that it distributes to shareholders. The Trust intends to cause
the Money Fund to distribute substantially all of such income.

Dividends paid by the Money 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

15
<PAGE>

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 Money Fund shares. Any loss upon the sale or exchange of
Money Fund shares held for six months or less will be treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Money Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional categories of capital gain taxable at different rates.
Additional legislation eliminates the highest 28% category for most sales of
capital assets occurring after December 31, 1997. Generally not later than 60
days after the close of its taxable year, the Money Fund will provide its
shareholders with a written notice designating the amounts of any ordinary
income dividends or capital gain dividends, as well as the amounts of capital
gain dividends in the different categories of capital gain referred to above.

Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Money Fund. Distributions by the Money Fund, whether
from ordinary income or capital gains, will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Money Fund
pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Money Fund and received by its shareholders on December 31 of the year
in which the dividend was declared.

If the value of assets held by the Money Fund declines, the Trustees may
authorize a reduction in the number of outstanding shares in shareholders'
accounts so as to preserve a net asset value of $1.00 per share. After such a
reduction, the basis of eliminated shares would be added to the basis of
shareholders' remaining Money Fund shares, and any shareholders disposing of
shares at that time may recognize a capital loss. Distributions, including
distributions reinvested in additional shares of the Money Fund, will
nonetheless be fully taxable, even if the number of shares in shareholders'
accounts has been reduced as described above.

Ordinary income 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 advisors concerning the applicability of the United States
withholding tax.

Dividends and interest received by the Money 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.

Under certain provisions of the Code, some taxpayers may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Trust or who, to the Trust's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.

If a shareholder exercises an exchange privilege within 90 days of acquiring
the shares, then the loss the shareholder can recognize on the exchange will
be reduced (or the gain increased) to the extent any sales charge paid to the
Money Fund on the exchanged shares reduces any sales charge the shareholder
would have owed upon purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new shares.

16
<PAGE>

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

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and the Treasury
regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.

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

Certain states exempt from state income taxation dividends paid by RICs
which are derived from interest on United States Government obligations. State
law varies as to whether dividend income attributable to United States
Government obligations is exempt from state income tax.

Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should consider applicable foreign taxes in their evaluation of an investment
in the Money Fund.

YEAR 2000 ISSUES

Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000 from the
Year 1900 (commonly known as the "Year 2000 Problem"). Like other investment
companies and financial and business organizations, the Money Fund could be
adversely affected if the computer systems used by the Investment Manager or
other Money Fund service providers do not properly address this problem prior
to January 1, 2000. The Investment Manager has established a dedicated group
to analyze these issues and to implement any systems modifications necessary
to prepare for the Year 2000. Currently, the Investment Manager does not
anticipate that the transition to the Year 2000 will have any material impact
on its ability to continue to service the Money Fund at current levels. In
addition, the Investment Manager has sought assurances from the Money Fund's
other service providers that they are taking all necessary steps to ensure
that their computer systems will accurately reflect the Year 2000, and the
Investment Manager will continue to monitor the situation. At this time,
however, no assurance can be given that the Money Fund's other service
providers have anticipated every step necessary to avoid any adverse effect on
the Money Fund attributable to the Year 2000 Problem.

ORGANIZATION OF THE TRUST

The Trust was organized on July 10, 1987 under the laws of the Commonwealth
of Massachusetts. The Trust is a successor to a Massachusetts business trust
of the same name organized on May 28, 1981. It is a no-load, diversified open-
end investment company which is comprised of separate series ("Series"), each
of which is a separate portfolio offering a separate class or classes of
shares to selected groups of purchasers. The Declaration of Trust permits the
Trustees to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares, $.10 par
value per share, of different classes. Shareholder approval is not required
for the authorization of additional Series or classes of a Series of the
Trust. At the date of this Prospectus, the shares of the Money Fund are
divided into Class A and Class B shares. Class A and Class B shares represent
interests in the same assets of the Money Fund and are identical in all
respects, except that Class B shares bear certain expenses related to the
distribution of such shares and have exclusive

17
<PAGE>

voting rights with respect to matters relating to Class B distribution
expenditures. See "Purchase of Shares." The Trustees of the Trust may classify
and reclassify the shares of the Trust into additional classes at a future
date. Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the respective
Series and in net assets of such Series upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities except that, as noted
above, Class B shares bear certain additional expenses. In the event a Series
were unable to meet its obligations, the remaining Series would assume the
unsatisfied obligations of that Series. The obligations and liabilities of a
particular Series are restricted to the assets of that Series and do not
extend to the assets of the Trust generally. The shares of each Series, when
issued, will be fully-paid and non-assessable by the Trust. At the date of
this Prospectus, the Money Fund is the only Series of the Trust.

The Declaration does not require that the Trust hold an annual meeting of
shareholders. However, the Trust will be required to call special meetings of
shareholders in accordance with the requirements of the Investment Company Act
to seek approval of new management and advisory arrangements, of a material
increase in distribution fees or of a change in the fundamental policies,
objectives or restrictions of the Money Fund or the Trust. The Trust also
would be required to hold a special shareholders' meeting to elect new
Trustees at such time as less than a majority of the Trustees holding office
have been elected by shareholders. The Declaration provides that a
shareholders' meeting may be called for any reason at the request of 10% of
the outstanding shares of any Series of the Trust or by a majority of the
Trustees. Except as set forth above, the Trustees shall continue to hold
office and appoint successor Trustees.

The Declaration of Trust establishing the Trust, dated July 10, 1987, a copy
of which, together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Financial Institutions Series Trust" refers to the Trustees
under the Declaration collectively as Trustees, but not as individuals or
personally; and no trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to
their private property for the satisfaction of any obligation or claim of said
Trust but the "Trust Estate" (as defined in the Declaration) only shall be
liable.

SHAREHOLDER REPORTS

Only one copy of each shareholder report and certain shareholder
communications will be mailed to each identified shareholder regardless of the
number of accounts such shareholder has. If a shareholder wishes to receive
copies of each report and communication for all of the shareholder's related
accounts the shareholder should notify in writing:

Financial Data Services, Inc.
P.O. Box 45290
Jacksonville, FL 32232-5290

The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
Financial Consultant or Financial Data Services, Inc. at (800) MER-FUND or
(800) 637-3863 toll-free.

SHAREHOLDER INQUIRIES

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

18
<PAGE>

INVESTMENT MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011

DISTRIBUTOR
Princeton Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
The Bank of New York
90 Washington Street
12th Floor
New York, New York 10286

TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45290
Jacksonville, Florida 32232-5290

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

COUNSEL
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>

- --------------------------------------------------------------------------------
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST, THE INVESTMENT MANAGER OR THE DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................................................. 2
Financial Highlights....................................................... 4
Yield Information.......................................................... 5
Investment Objectives and Policies......................................... 5
Management of the Trust.................................................... 8
Trustees.................................................................. 8
Management and Advisory Arrangements...................................... 9
Transfer Agency Services.................................................. 9
Purchase of Shares......................................................... 10
Distribution Plan......................................................... 10
Conversion of Class B Shares to Class A Shares............................ 11
Redemption of Shares....................................................... 11
Methods of Redemption..................................................... 11
Exchange Privilege and Exchange Program.................................... 12
Exchange Privilege........................................................ 12
Exchange Program.......................................................... 13
Portfolio Transactions..................................................... 14
Additional Information..................................................... 14
Dividends................................................................. 14
Determination of Net Asset Value.......................................... 15
Shareholder Services...................................................... 15
Taxes..................................................................... 15
Year 2000 Issues.......................................................... 17
Organization of the Trust................................................. 17
Shareholder Reports....................................................... 18
Shareholder Inquiries..................................................... 18
</TABLE>

Code # SUMMIT-0998

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Prospectus

LOGO

- ------------------------------------
SUMMIT CASH
RESERVES FUND

FINANCIAL INSTITUTIONS SERIES TRUST

Principal Office of the Trust:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543 9011

This Prospectus should be
retained for future reference.

September 29, 1998

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<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
SUMMIT CASH RESERVES FUND

FINANCIAL INSTITUTIONS SERIES TRUST

P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 PHONE NUMBER (609) 282-2800

The investment objectives of the Summit Cash Reserves Fund (the "Money
Fund") are current income, preservation of capital and liquidity available
from investing in a diversified portfolio of short-term money market
securities. These securities will primarily consist of U.S. Government and
Government agency securities, bank certificates of deposit and bankers'
acceptances, commercial paper and repurchase agreements. For purposes of its
investment policies, the Money Fund defines short-term money market securities
as having a maturity of no more than 762 days (25 months) in the case of U.S.
Government and Government agency securities and no more than 397 days (13
months) in the case of other securities. See "Investment Objectives and
Policies." The Fund seeks to maintain a constant $1.00 net asset value per
share, although this cannot be assured. An investment in the Fund is neither
insured nor guaranteed by the U.S. Government. Management of the Fund expects
that substantially all the assets of the Fund will be invested in securities
maturing in less than one year, but at times some portion may have longer
maturities not exceeding 762 days. The dollar weighted-average maturity of the
Fund's portfolio will not exceed 90 days. There can be no assurance that the
investment objectives of the Money Fund will be realized. The Money Fund is a
separate series of Financial Institutions Series Trust (the "Trust"), a no-
load, diversified, open-end investment company organized as a Massachusetts
business trust.

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

The Money Fund will offer two classes of shares designated as Class A and
Class B (the "Shares"). The Shares will be available only upon exchange of
shares pursuant to the Exchange Program or pursuant to the exchange privilege
available to certain mutual funds advised by Merrill Lynch Asset Management,
L.P. ("MLAM"), Fund Asset Management, L.P. ("FAM" or the "Investment Manager")
or Mercury Asset Management International Limited ("Mercury"). See "Exchange
Privilege and Exchange Program." Shares of the Money Fund are offered at their
net asset value without any sales charge; however, Class B shares will be
subject to ongoing distribution fees and may be subject to a contingent
deferred sales charge ("CDSC"). Shares may be purchased from securities
dealers that have entered into selected dealer agreements with Princeton Funds
Distributor, Inc. (the "Distributor" or "PFD").

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

This Statement of Additional Information of the Money Fund is not a
prospectus and should be read in conjunction with the Prospectus of the Money
Fund, dated September 29, 1998 (the "Prospectus"), which has been filed with
the Securities and Exchange Commission (the "Commission") and can be obtained,
without charge, by calling or by writing the Money Fund at the above telephone
number or address. The Commission maintains a Web site (http://www.sec.gov)
that contains the Statement of Additional Information, material incorporated
by reference and other information regarding the Money Fund. This Statement of
Additional Information has been incorporated by reference into the Prospectus.

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

FUND ASSET MANAGEMENT -- INVESTMENT MANAGER
PRINCETON FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR

The date of this Statement of Additional Information is September 29, 1998.
<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The investment objectives of the Money Fund are current income, preservation
of capital and liquidity available from investing in a diversified portfolio
of short-term money market securities. Reference is made to "Investment
Objectives and Policies" in the Prospectus for a discussion of the investment
objectives and policies of the Money Fund.

All investments of the Money Fund will be in securities with remaining
maturities of up to 762 days (25 months) in the case of U.S. Government and
Government agency securities and 397 days (13 months) in the case of all other
securities. The dollar weighed average maturity of the Money Fund portfolio
will be 90 days or less.

The Money Fund may invest in obligations issued by U.S. banks, foreign
branches or subsidiaries of U.S. banks or U.S. or foreign branches or
subsidiaries of foreign banks. Investment in obligations of foreign branches
or subsidiaries of U.S. banks or of foreign banks may involve different risks
from the risks of investing in obligations of U.S. banks. Such risks include
adverse political and economic developments, the possible imposition of
withholding taxes on interest income payable on such obligations, the possible
seizure or nationalization of foreign deposits and the possible establishment
of exchange controls or other foreign governmental laws or restrictions which
might adversely affect the payment of principal and interest. Generally, the
issuers of such obligations are subject to fewer U.S. regulatory requirements
than are applicable to U.S. banks. Foreign branches or subsidiaries of U.S.
banks and foreign banks may be subject to less stringent reserve requirements
than U.S. banks. U.S. branches or subsidiaries of foreign banks are subject to
the reserve requirements of the state in which they are located. There may be
less publicly available information about a U.S. branch or subsidiary of a
foreign bank or a foreign bank than about a U.S. bank, and such branches or
subsidiaries or banks may not be subject to the same accounting, auditing and
financial record keeping standards and requirements as U.S. banks. Evidence of
ownership of obligations of foreign branches or subsidiaries of U.S. banks or
of foreign banks may be held outside of the United States and the Money Fund
may be subject to the risks associated with the holding of such property
overseas. Any such obligations of the Money Fund held overseas will be held by
foreign branches of the custodian for the Money Fund's portfolio securities or
by other U.S. or foreign banks under subcustodian arrangements complying with
the requirements of the Investment Company Act of 1940, as amended (the
"Investment Company Act").

FAM will consider the above factors in making investments in such
obligations and will not knowingly purchase obligations which, at the time of
purchase, are subject to exchange controls or withholding taxes. Generally,
the Money Fund will limit its investments in obligations of U.S. branches or
subsidiaries of foreign banks to obligations of banks organized in Canada,
France, Germany, Japan, the Netherlands, Switzerland, the United Kingdom and
other industrialized nations.

The Money Fund will only invest in short-term obligations (including short-
term, promissory notes issued by corporations, partnerships, trusts and other
entities, whether or not secured) that (1) have been rated in one of the two
highest rating categories for short-term debt obligations by a nationally
recognized statistical rating organization ("NRSRO"); (2) have been issued by
an issuer rated in one of the two highest rating categories by an NRSRO with
respect to a class of debt obligations that is comparable in priority and
security with the investment; or (3) if not rated, will be of comparable
quality as determined by the Trustees of the Trust. Currently there are five
NRSROs: Duff & Phelps Credit Ratings Co., Fitch IBCA Inc., Moody's Investors
Service, Inc., Standard & Poor's and Thomson BankWatch, Inc. See the Appendix
to this Statement of Additional Information.

2
<PAGE>

The Money Fund may also invest in U.S. dollar-denominated commercial paper
and other short-term obligations issued by foreign entities. Such investments
are subject to quality standards similar to those applicable to investments in
comparable obligations of domestic issuers. Investments in foreign entities in
general involve the same or similar risks as those described in connection
with investments in the obligations of foreign banks.

As described in the Prospectus, the Money Fund may invest in participations
in, or bonds and notes backed by, pools of mortgages, or credit card,
automobile or other types of receivables, with remaining maturities of no more
than 397 days (13 months). These structured financings will be supported by
sufficient collateral and other credit enhancements, including letters of
credit, insurance, reserve funds and guarantees by third parties, to enable
such instruments to obtain the requisite quality rating by an NRSRO.

Variable amount master notes and funding agreements described in the
Prospectus, permit a series of short-term borrowings under a single note. The
lender has the right to increase the amount under the note up to the full
amount provided by the note agreement. In addition the lender has the right to
reduce the amount of outstanding indebtedness.

Forward or firm commitments for the purchase or sale of securities may be
entered into by the Money Fund as described in the Prospectus. The purchase of
the underlying securities will be recorded on the date the Money Fund enters
into the commitment and the value of the security will thereafter be reflected
in the calculation of the Fund's net asset value. A separate account of the
Money Fund will be established with The Bank of New York, the Money Fund's
custodian, consisting of cash or other liquid securities having a market value
at all times until the delivery at least equal to the amount of the forward
purchase commitment. As stated in the Prospectus, the Money Fund may dispose
of a commitment prior to settlement. Risks relating to these trading practices
are briefly described in the Prospectus.

INVESTMENT RESTRICTIONS

In addition to the investment restrictions set forth in the Prospectus, the
Fund Money has adopted the following investment restrictions, none of which
may be changed without the approval of a majority of the Money Fund's
outstanding shares, which for this purpose means the vote of (i) 67% or more
of the Money Fund's shares present at a meeting, if the holders of more than
50% of the outstanding shares of the Money Fund are present or represented by
proxy, or (ii) more than 50% of the Money Fund's outstanding shares, whichever
is less. The Money Fund may not:

(1) Invest more than 25% of its total assets, taken at market value at
the time of each investment, in the securities of issuers in any particular
industry (other than U.S. Government securities, U.S. Government agency
securities or domestic bank money investments). For purposes of this
restriction, states, municipalities and their political subdivisions are
not considered part of any industry, and investments in mortgage-related or
asset-backed securities shall not be considered investments in the
securities of issuers in a particular industry.

(2) Make investments for the purpose of exercising control or management.

(3) Underwrite securities of other issuers except insofar as the Money
Fund technically may be deemed an underwriter under the Securities Act of
1933, as amended (the "Securities Act"), in selling portfolio securities.

3
<PAGE>

(4) Borrow money except that (i) the Money Fund may borrow from banks (as
defined in the Investment Company Act) in amounts up to 33 1/3% of its
total assets (including the amount borrowed), (ii) the Money Fund may
borrow up to an additional 5% of its total assets for temporary purposes,
(iii) the Money Fund may obtain such short-term credit as may be necessary
for the clearance of purchases and sales of portfolio securities, and (iv)
the Money Fund may purchase securities on margin to the extent permitted by
applicable law. These borrowing provisions shall not apply to reverse
repurchase agreements as described in the Prospectus and Statement of
Additional Information. The Money Fund may not pledge its assets other than
to secure such borrowings or to the extent permitted by the Money Fund's
investment policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to time, in
connection with when-issued, reverse repurchase and forward commitment
transactions and similar investment strategies.

(5) Purchase or sell real estate, except that, to the extent permitted by
applicable law, the Money Fund may invest in securities secured by real
estate or interests therein or securities issued by companies that invest
in real estate or interests therein and may hold and sell real estate
acquired by the Money Fund as a result of the ownership of such securities.

(6) Make loans to other persons, except that the acquisition of bonds,
debentures or other debt securities and investment in government
obligations, commercial paper, pass-through instruments, certificates of
deposit, bankers' acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and except
further that the Money Fund may lend its portfolio securities, provided
that the lending of portfolio securities may be made only in accordance
with applicable law and the guidelines set forth in the Money Fund's
Prospectus and Statement of Additional Information, as they may be amended
from time to time.

(7) Issue senior securities to the extent such issuance would violate
applicable law.

(8) Purchase or sell commodities or contracts on commodities, except to
the extent that the Money Fund may do so in accordance with applicable law
and the Money Fund's Prospectus and Statement of Additional Information, as
they may be amended from time to time, and without registering as a
commodity pool operator under the Commodity Exchange Act.

In addition, the Money Fund has adopted non-fundamental restrictions
which may be changed by the Board of Trustees without approval of the Money
Fund's shareholders. Under the non-fundamental investment restrictions, the
Money Fund may not:

a. Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Money Fund will not purchase shares of any
registered open-end investment company or registered unit investment
trust in reliance on Section 12(d)(1)(F) or (G) (the "fund of funds"
provisions) of the Investment Company Act, at any time its shares are
owned by another investment company that is part of the same group of
investment companies as the Money Fund.

b. Make short sales of securities or maintain a short position except
to the extent permitted by applicable law. The Money Fund currently
does not intend to engage in short sales.

c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions, or which cannot otherwise be
marketed, redeemed, put to the issuer or to a third party, if at the
time of acquisition more than 10% of its total assets would be invested
in such securities. This restriction shall

4
<PAGE>

not apply to securities that mature within seven days or securities
that the Board of Trustees has otherwise determined to be liquid
pursuant to applicable law. Securities purchased in accordance with
Rule 144A under the Securities Act and certain commercial paper that is
exempt from registration pursuant to Section 4(2) of the Securities Act
and determined to be liquid by the Board of Trustees are not subject to
the limitations set forth in this investment restriction.

d. Notwithstanding fundamental investment restriction (4) above,
borrow amounts in excess of 5% of its total assets, taken at
acquisition cost or market value, whichever is lower, and then only
from banks as a temporary measure for extraordinary or emergency
purposes. These borrowing provisions shall not apply to reverse
repurchase agreements as described in the Prospectus and Statement of
Additional Information.

Lending of Portfolio Securities. Subject to investment restriction (6)
above, the Money Fund may from time to time lend securities from its portfolio
to brokers, dealers and financial institutions and receive collateral in cash
or securities issued or guaranteed by the U.S. Government which will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. Such cash collateral will be invested
in short-term securities, the income from which will increase the return to
the Money Fund. Such loans will be terminable at any time. The Money Fund will
have the right to regain record ownership of loaned securities to exercise
beneficial rights. The Money Fund may pay reasonable fees in connection with
the arranging of such loans.

For purposes of the 25% limitation on investment in securities of issuers in
a particular industry, neither all utility companies (including telephone
companies) as a group nor all finance companies as a group will be considered
a single industry.

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

Information about the Trustees, executive officers and portfolio manager of
the Trust, including their ages and their principal occupations for at least
the last five years is set forth below. Unless otherwise noted, the address of
the portfolio manager and of each Trustee and executive officer is P.O. Box
9011, Princeton, New Jersey 08543-9011.

Arthur Zeikel (66)--President and Trustee (1)(2)--Chairman of the Investment
Manager and MLAM (which terms as used herein include their corporate
predecessors) since 1997; President of the Investment Manager and MLAM from
1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton Services")
since 1997, and Director thereof since 1993; President of Princeton Services
from 1993 to 1997; Executive Vice President of Merrill Lynch & Co., Inc. ("ML
& Co.") since 1990.

Joe Grills (63)--Trustee (2)--P.O. Box 98, Rapidan, Virginia 22733. Member
of the Committee of Investment of Employee Benefit Assets of the Financial
Executives Institute ("CIEBA") since 1986; Member of CIEBA's Executive
Committee since 1988 and its Chairman from 1991 to 1992; Assistant Treasurer
of International Business Machines Corporation ("IBM") and Chief Investment
Officer of IBM Retirement Funds

5
<PAGE>

from 1986 until 1993; Member of the Investment Advisory Committees of the
State of New York Common Retirement Fund, Howard Hughes Medical Institute and
the Virginia Retirement System; Director, Duke Management Company since 1993;
Director, LaSalle Street Fund since 1995; Director, Kimco Realty Corporation
since 1997; Director of the Hotchkis and Wiley Funds since 1996.

Walter Mintz (69)--Trustee (2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Associates (investment
partnership) since 1982.

Robert S. Salomon, Jr. (61)--Trustee (2)--106 Dolphin Cove Quay, Stamford,
Connecticut 06902. Principal of STI Management (investment adviser); Chairman
and CEO of Salomon Brothers Asset Management Inc. from 1992 until 1995;
Chairman of Salomon Brothers equity mutual funds from 1992 until 1995;
Director of Stock Research and U.S. Equity Strategist at Salomon Brothers Inc.
from 1975 until 1991; Director, The Common Fund.

Melvin R. Seiden (67)--Trustee (2)--780 Third Avenue, Suite 2502, New York,
New York 10017. Director of Silbanc Properties, Ltd. (real estate, investment
and consulting) since 1987; Chairman and President of Seiden & de Cuevas, Inc.
(private investment firm) from 1964 to 1987.

Stephen B. Swensrud (65)--Trustee (2)--24 Federal Street, Suite 400, Boston,
Massachusetts 02110. Chairman of Fernwood Advisors (investment adviser) since
1996; Principal of Fernwood Associates (financial consultants) since 1975.

Terry K. Glenn (58)--Executive Vice President (1)(2)--Executive Vice
President of the Investment Manager and MLAM since 1983; President of
Princeton Funds Distributor, Inc. ("PFD") since 1986 and Director thereof
since 1991; Executive Vice President and Director of Princeton Services since
1993; President of Princeton Administrators, L.P. since 1988.

Joseph T. Monagle, Jr. (50)--Senior Vice President (1)(2)--Senior Vice
President of the Investment Manager and MLAM since 1990; Department Head of
the Global Fixed Income Division of the Investment Manager and MLAM since
1997; Senior Vice President of Princeton Services since 1993.

Kevin J. McKenna (41)--Senior Vice President (1)(2)--First Vice President of
MLAM since 1997; Vice President of MLAM from 1985 to 1997.

Carlo J. Giannini (54)--Vice President and Portfolio Manager (1)(2)--Vice
President of MLAM since 1981.

Gerald M. Richard (49)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Investment Manager and MLAM since 1984; Vice President of PFD
since 1981 and Treasurer thereof since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993.

Donald C. Burke (38)--Vice President (1)(2)--First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.

Robert Harris (46)--Secretary (1)(2)--First Vice President of MLAM since
1997; Vice President of MLAM from 1984 to 1997; Secretary of PFD since 1982.
- ------------
(1) Interested person, as defined in the Investment Company Act, of the Trust.

(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Investment Manager or MLAM acts as
investment adviser.

6
<PAGE>

At July 15, 1998, the Trustees and officers of the Trust as a group (13
persons) owned an aggregate of less than 1% of the outstanding shares of
beneficial interest of the Trust. At such date, Mr. Zeikel, an officer and
Trustee of the Trust, and the other officers of the Trust, owned less than 1%
of the outstanding shares of common stock of ML & Co.

COMPENSATION OF TRUSTEES

Pursuant to the terms of its Investment Management Agreement with the Trust,
the Investment Manager pays all compensation of officers and employees of the
Trust as well as the fees of all Trustees of the Trust who are affiliated
persons of ML & Co. or its subsidiaries. The Trust pays each Trustee who is
not affiliated with the Investment Manager (each a "non-affiliated Trustee") a
fee of $1,500 per year plus $250 per meeting attended and actual out-of-pocket
expenses relating to attendance at such meetings. The Trust also compensates
each member of the Audit Committee, which consists of the non-affiliated
Trustees, an annual fee of $1,500 per year plus a fee of $250 for each meeting
of the Audit Committee attended which is held on a day on which the Board of
Trustees does not also meet, together with all out-of-pocket expenses relating
to attendance at such meeting.

The following table sets forth for the fiscal year ended May 31, 1998, the
compensation paid by the Trust to the non-affiliated Trustees and for the
calendar year ended December 31, 1997, the aggregate compensation paid by all
registered investment companies advised by the Investment Manager and its
affiliate, MLAM ("FAM/MLAM Advised Funds"), to the non-affiliated Trustees.

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM TRUST AND
PENSION OR OTHER FAM/MLAM
NAME RETIREMENT BENEFITS ADVISED FUNDS
OF COMPENSATION ACCRUED AS PART OF PAID TO
RUSTEET FROM THE TRUST(1) TRUST EXPENSES TRUSTEES(2)
- ------- ----------------- ------------------- --------------
<S> <C> <C> <C>
Joe Grills................ $5,000 None $171,500
Walter Mintz.............. $5,000 None $159,500
Robert S. Salomon, Jr..... $5,000 None $159,500
Melvin R. Seiden.......... $5,000 None $159,500
Stephen B. Swensrud....... $5,000 None $175,500
</TABLE>
- ------------
(1) The amounts shown represent the fees payable if each Trustee attended the
four meetings of the Board and four meetings of the Audit Committee held
during the year. For the fiscal year ended May 31, 1998, the Trustees
waived both their annual and meeting attendance fees. At the date of this
Prospectus such waiver was still in effect, but may be rescinded by the
affirmative vote of a majority of the Trustees at any time.
(2) The Trustees serve on the boards of FAM/MLAM Advised Funds as follows: Mr.
Grills (21 registered investment companies consisting of 51 portfolios);
Mr. Mintz (20 registered investment companies consisting of 41
portfolios); Mr. Salomon (20 registered investment companies consisting of
41 portfolios); Mr. Seiden (20 registered investment companies consisting
of 41 portfolios); and Mr. Swensrud (23 registered investment companies
consisting of 56 portfolios).

7
<PAGE>

MANAGEMENT AND ADVISORY ARRANGEMENTS

Reference is made to "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus for certain information concerning management
and advisory arrangements of the Trust.

Subject to the direction of the Trustees, the Investment Manager performs,
or arranges for affiliates to perform, pursuant to the Investment Management
Agreement, the management and administrative services necessary for the
operation of the Trust and the Money Fund. The Investment Manager and its
affiliates will provide a variety of administrative and operational services
to shareholders of the Money Fund, including regulatory compliance processing
services related to the purchase and redemption of shares and the general
handling of shareholder relations. The Investment Manager is responsible for
the actual management of the Money Fund and constantly reviews the Money
Fund's holdings in light of its own research analysis and that from other
relevant sources. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Investment Manager, subject to review by
the Trustees. The Manager provides the Trust and the Money Fund with office
space, equipment and facilities and such other services as the Manager,
subject to supervision and review by the Trustees, shall from time to time
determine to be necessary to perform its obligations under the Investment
Management Agreement.

Securities held by the Money Fund may also be held by, or be appropriate
investments for, other funds or clients (collectively referred to as
"clients") for which the Investment Manager or MLAM acts as an adviser or by
investment advisory clients of MLAM. 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 Money Fund or other 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 by the Investment Manager or MLAM. To the extent that
transactions on behalf of more than one client of the Investment Manager or
MLAM 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.

As compensation for its services to the Money Fund under the Investment
Management Agreement with the Trust, the Investment Manager is entitled to
receive a fee from the Money Fund at the end of each month at the annual rate
of 0.50% of average daily net assets of the Money Fund.

The Investment Management Agreement obligates the Investment Manager to
provide advisory, administrative and management services, to furnish office
space and facilities for management of the affairs of the Trust and the Money
Fund and to pay all compensation of and furnish office space for officers and
employees of the Trust, as well as the fees of all Trustees of the Trust who
are affiliated persons of ML & Co. or any of its subsidiaries. The Money Fund
pays all other expenses incurred in its operation and, if other Series should
be added, a portion of the Trust's general administrative expenses allocated
on the basis of the asset size of the respective Series. Expenses borne
directly by the Series include redemption expenses, expenses of portfolio
transactions, expenses of registering the shares under Federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), fees for legal and auditing services, expenses of printing proxies,
shareholder reports, prospectuses and statements of additional information
(except to the extent paid by the Distributor), charges of the custodian and
transfer agent, the commission fees, interest, certain taxes, and other
expenses attributable to a particular Series. Expenses which are allocated on
the basis of asset size of the respective Series include fees and expenses of
non-affiliated Trustees, state franchise taxes and expenses related to
shareholder meetings, and other expenses properly payable by the Trust. See
"General Information--Description of Series and Shares." Depending upon the
nature of a lawsuit, litigation costs may be assessed to

8
<PAGE>

the specific Series to which the lawsuit relates or allocated on the basis of
the asset size of the respective Series. The Trustees have determined that
this is an appropriate method of allocation of expenses. As required by the
Distribution Agreements (defined below), the Distributor will pay certain of
the expenses of each Series incurred in connection with offering of shares of
each Series; after the prospectuses, statements of additional information and
periodic reports have been prepared and set in type, the Distributor will pay
for the printing and distribution of copies thereof used by it in connection
with the offering to investors. The Distributor will also pay for other
supplementary sales literature. The Distributor will only be responsible for
paying such expenses as are directly related to the sale of Money Fund shares
by such Distributor.

The Investment Manager is a limited partnership, the partners of which are
ML & Co. and Princeton Services. ML & Co. and Princeton Services are
"controlling persons" of the Investment Manager (as defined in 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.

Duration and Termination. Unless earlier terminated as described below, the
Investment Management Agreement will continue in effect from year to year if
approved annually (a) by the Trustees of the Trust or by a majority of the
outstanding shares of the Money Fund and (b) by a majority of the Trustees who
are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such agreement terminates upon
assignment 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
Money Fund.

PURCHASE OF SHARES

Reference is made to "Purchase of Shares" in the Prospectus for certain
information as to the purchase of Money Fund shares.

The Money Fund will offer two classes of shares designated Class A shares
and Class B shares (the "Shares"). Each Class A and Class B share of the Money
Fund represents identical interests in the investment portfolio of the Money
Fund and has the same rights, except that Class B shares bear the expenses of
the ongoing Class B distribution fees and may be subject to a contingent
deferred sales charge ("CDSC"). Class B shares have exclusive voting rights
with respect to the Rule 12b-1 distribution plan adopted with respect to such
class pursuant to which distribution fees are paid. Each class has exchange
privileges. See "Exchange Privilege and Exchange Program."

The Money Fund has entered into a separate distribution agreement with the
Distributor in connection with the continuous offering of each class of shares
of the Money 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 Money 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 provisions as the Investment
Management Agreement described above.

Class B Distribution Plan. Reference is made to "Purchase of Shares--
Distribution Plan" in the Prospectus for certain information with respect to
the distribution plan for Class B shares (the "Class B Distribution Plan")
with respect to the distribution fees paid by the Money Fund to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and other selected
dealers with respect to such class.

9
<PAGE>

Payments of the distribution fees are subject to the provisions of Rule 12b-
1 under the Investment Company Act. Among other things, the Class B
Distribution Plan provides that Merrill Lynch, shall provide and the Trustees
shall review quarterly reports of the disbursement of the distribution fees
paid by the Money Fund. In their consideration of the Class B Distribution
Plan, the Trustees must consider all factors they deem relevant, including
information as to the benefits of the Class B Distribution Plan to the Money
Fund and to the Class B shareholders. The Class B Distribution Plan further
provides that, so long as the Plan remains in effect, the selection and
nomination of Trustees who are not "interested persons" of the Trust, as
defined in the Investment Company Act (the "Independent Trustees"), shall be
committed to the discretion of the Independent Trustees then in office. In
approving the Class B Distribution Plan in accordance with Rule 12b-1, the
Independent Trustees concluded that there is a reasonable likelihood that such
Plan will benefit the Money Fund and its Class B shareholders. The Class B
Distribution Plan can be terminated at any time, without penalty, by the vote
of a majority of the Independent Trustees or by the vote of the holders of a
majority of the outstanding Class B voting securities of the Money Fund. The
Class B Distribution Plan cannot be amended to increase materially the amount
to be spent by the Money Fund without the approval of the Class B
shareholders, and all material amendments are required to be approved by the
vote of the Trustees, including a majority of the Independent Trustees 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 Trust preserve copies of the Class B Distribution Plan and any report
made pursuant to such Plan for a period of not less than six years from the
date of such Class B Distribution Plan or such report, the first two years in
an easily accessible place.

Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Conduct of Rules of the National Association of Securities
Dealers, Inc. ("NASD") imposes a limitation on certain asset-based sales
charges such as the distribution fee borne by the Class B shares. As
applicable to the Class B shares, the maximum sales charge rule limits the
aggregate of distribution fee payments payable by the Money Fund to (1) 6.25%
of eligible gross sales of Class B shares (defined to exclude shares issued
pursuant to dividend reinvestments and exchanges), plus (2) interest on the
unpaid balance for Class B, at the prime rate plus 1% (the unpaid balance
being the maximum amount payable minus amounts received from the payment of
the distribution fee, except that the maximum aggregate sales charges may be
increased to include sales charges of shares issued pursuant to the exchange
privilege, provided that such increase is deducted from the maximum aggregate
sales charges of the fund which redeemed the shares for the purpose of the
exchange).

REDEMPTION OF SHARES

Reference is made to "Redemption of Shares" in the Prospectus for certain
information as to the repurchase and redemption of Money Fund shares.

The right to receive payment with respect to any redemption may be suspended
by the Money Fund for a period of up to seven days. Suspensions of more than
seven days may not be made except (1) for any period (A) during which the New
York Stock Exchange ("NYSE") is closed, other than customary weekend and
holiday closings or (B) during which trading on the NYSE is restricted; (2)
for any period during which an emergency exists as a result of which (A)
disposal by the Trust of securities owned by the Money Fund is not reasonably
practicable or (B) it is not reasonably practicable for the Trust fairly to
determine the value of the net assets of the Money Fund; or (3) for such other
periods as the Commission may by order permit for the protection of security
holders of the Money Fund. The Commission shall by rules and regulations
determine the conditions under which (i) trading shall be deemed to be
restricted and (ii) an emergency shall be deemed to exist within the meaning
of clause (2) above.

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The value of the shareholder's investment at the time of redemption may be
more or less than his or her cost, depending on the market value of the
securities held by the Money Fund at such time and income earned. In the case
of Class B shares, the redemption price will be reduced by any applicable
CDSC.

In the interest of economy and convenience and because of the operating
procedures of the Money Fund, certificates representing the Money Fund's
Shares will not be physically issued. Shares will be maintained by the Fund on
the register maintained by the transfer agent, and the holders thereof will
have the same rights of ownership with respect to such shares as if
certificates had been issued.

EXCHANGE PRIVILEGE AND EXCHANGE PROGRAM

EXCHANGE PRIVILEGE

Class A shareholders of the Money Fund who acquired their Money Fund Shares
upon an exchange from Class A or Class D shares of certain mutual funds
advised by the Investment Manager or MLAM (collectively referred to as the
"MLAM-advised funds") will have an exchange privilege with Class A or Class D
shares of certain MLAM-advised funds. Shareholders may exchange Class A shares
of the Money Fund for Class A shares of one of the MLAM-advised funds if the
shareholder holds any Class A shares of that MLAM-advised fund in the account
in which the exchange is to be made at the time of the exchange or is
otherwise eligible to purchase Class A shares of such MLAM-advised funds.
Otherwise Class D shares will automatically be purchased. An eligible Class A
investor includes the following: certain employer sponsored retirement or
savings plans, including eligible 401(k) plans, provided such plans meet the
required minimum number of eligible employees or required amount of assets
advised by MLAM or any of its affiliates, corporate warranty insurance reserve
fund programs provided that the program has $3 million or more initially
invested in MLAM-advised funds, participants in certain investment programs
including TMASM Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services and ML & Co. and its subsidiaries and their
directors and employees and members of the Boards of MLAM-advised investment
companies, including the Trust.

Class A shareholders of the Money Fund who acquired their Money Fund Shares
upon an exchange from Class I or Class A shares of certain funds advised by
Mercury Asset Management International, Limited ("Mercury-advised funds") will
have an exchange privilege with Class I or Class A shares of certain Mercury-
advised funds. Shareholders may exchange Class A shares of the Money Fund for
Class I shares of one of the Mercury-advised funds if the shareholder is
eligible to purchase Class I shares of that fund. Otherwise, Class A shares
will automatically be purchased. An eligible Class I investor includes the
following: certain employer sponsored retirement or savings plans, including
eligible 401(k) plans, provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by Mercury;
participants in certain investment programs to which a bank, thrift or trust
company provides discretionary trustee services; certain purchases made in
connection with certain fee-based programs managed by affiliates of Mercury or
by selected dealers that have an agreement with Mercury; purchases through
certain financial advisers that meet and adhere to standards established by
Mercury and ML & Co. and its subsidiaries and their directors and employees
and employees of certain selected dealers, and members of the Boards of
Mercury or MLAM-advised investment companies, including the Trust.

If a holder of Money Fund Class A shares subsequently exchanges back into
the same class of shares of the original MLAM-advised fund or Mercury-advised
fund he or she will do so without paying any sales charge. If

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<PAGE>

a holder of Money Fund Class A shares exchanges into Class A or Class D shares
of another MLAM-advised fund or Class I or Class A shares of another Mercury-
advised fund the holder will be required to pay a sales charge equal to the
difference, if any, between the sales charge previously paid on the shares of
the original MLAM-advised fund or Mercury-advised fund and the sales charge
payable at the time of the exchange on the shares of the new MLAM-advised fund
or Mercury-advised fund.

Class B shareholders of the Money Fund who acquired their Money Fund Shares
upon an exchange from Class B or Class C shares of certain MLAM-advised funds
or Mercury-advised funds will have an exchange privilege with Class B or Class
C shares of MLAM-advised funds or a Mercury-advised funds. When a shareholder
exchanges Class B or Class C shares of a MLAM-advised fund or a Mercury-
advised fund for Class B shares of the Money Fund, the period of time that the
stockholder holds the Money Fund Class B shares will count towards
satisfaction of the holding period requirement for purposes of reducing the
CDSC relating to the Class B or Class C shares acquired upon exchange of the
Money Fund Class B shares. With respect to exchanges of Class B shares of a
MLAM-advised fund or a Mercury-advised fund into Money Fund Class B shares,
the period of time the Money Fund Class B shares are held will also count
towards satisfaction of the conversion period (the length of time until the
Class B shares acquired upon exchange of the Money Fund Class B shares are
automatically converted into Class D shares).

Under the exchange privilege, exchanges are made on the basis of the
relative net asset values of the shares being exchanged. Shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
MLAM-advised funds or Mercury-advised funds. For purposes of the exchange
privilege, dividend reinvestment shares shall be deemed to have been sold with
a sales charge equal to the shares charge previously paid on the shares on
which the dividend was paid. Based on this formula an exchange of Class A
shares of the Money Fund for Class A or Class D shares of a MLAM-advised fund
or a Mercury-advised fund generally will require the payment of a sales charge
equal to the difference, if any, between the sales charge previously paid on
the Class A or Class D shares originally exchanged for Class A shares of the
Money Fund and the sales charge payable at the time of the exchange on the
Class A or Class D shares of the MLAM-advised fund or Mercury-advised fund to
be acquired.

EXCHANGE PROGRAM

The Money Fund participates in an exchange program with certain non-money
market open-end management investment companies for which Merrill Lynch serves
as selected dealer which are not advised by the Investment Manager or MLAM,
and are not distributed by PFD (each referred to as a "Participating Fund").
The exchange program is available to investors who purchase shares of a
Participating Fund through Merrill Lynch. Exchanges may be made into Class A
shares of the Money Fund at net asset value without the imposition of a front-
end sales load ("FESL") or CDSC. Shares of a Participating Fund that are
subject to an

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<PAGE>

FESL will be exchanged for Class A shares of the Money Fund without the
imposition of a sales charge. The holder of such Money Fund Class A shares may
subsequently either exchange back into the same class of shares of the
Participating Fund without incurring any FESL or exchange into shares of
another Participating Fund subject to an FESL in the same fund complex as the
original Participating Fund by remitting an amount equal to the difference, if
any, between the FESL previously paid on the shares of the original
Participating Fund and the FESL payable at the time of the exchange on the
shares of the new Participating Fund.

Exchanges may be made into Class B shares of the Money Fund at net asset
value without the imposition of an FESL. Shares of Participating Funds subject
to a CDSC will be exchanged for Class B shares of the Money Fund without the
payment of a CDSC that might otherwise be due on redemption of the
Participating Fund shares. The holder of such Money Fund Class B shares may
subsequently either exchange back into the same class of shares of the
Participating Fund or exchange into shares of another Participating Fund in
the same fund complex as the original Participating Fund. Upon such exchange,
the holder of the Money Fund Class B shares will receive credit toward
reduction of the CDSC that would have been due on the Participating Fund
shares for the time period during which the Money Fund Class B shares were
held. This period of time will also count towards satisfaction of any
conversion period applicable to the Participating Fund shares. If holders of
the Money Fund Class B shares redeem those shares instead of exchanging back
into shares of the original Participating Fund or of another Participating
Fund in the same fund complex, CDSC payments, if any, will be assessed based
upon the combined holding period for the Participating Fund shares and the
Money Fund Shares.

The Participating Funds may impose administrative and/or redemption fees on
an exchange transaction with the Money Fund. There will be no sales charge on
exchange transactions into the Money Fund.

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

Before effecting an exchange, shareholders of the Money Fund should obtain a
currently effective prospectus of the Participating Fund or MLAM-advised fund
or Mercury-advised fund into which the exchange is to be made for information
regarding the fund and for further details regarding such exchange.

To effect an exchange, shareholders should contact their Merrill Lynch
Financial Consultant or other financial consultant, who will advise the Money
Fund of the exchange, or write to the Transfer Agent requesting that the
exchange be effected. Shareholders of Participating Funds and certain MLAM-
advised funds or Mercury-advised funds with shares for which certificates have
not been issued may effect an exchange by wire through their securities
dealers. The Exchange Program or the exchange privilege may be modified or
terminated at any time in accordance with the rules of the Commission. There
is currently no limitation on the number of times a shareholder may exercise
the exchange privilege into the Money Fund; however, the Money Fund reserves
the right to limit the number of times an investor may effect an exchange.
Certain Participating Funds and MLAM-advised funds and Mercury-advised funds
may suspend the continuous offering of their shares at any time and thereafter
may resume such offering from time to time. The Exchange Program and the
exchange privilege are available only to U.S. shareholders in states where the
exchange legally may be made.

An exchange pursuant to the exchange privilege or pursuant to the Exchange
Program is treated as a sale of the exchanged shares and a purchase of the new
shares for Federal income tax purposes. In addition, an exchanging shareholder
of any of the funds may be subject to backup withholding unless such
shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct, and that he or
she is not otherwise subject to backup withholding. See "Taxes."

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<PAGE>

PORTFOLIO TRANSACTIONS

The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Money Fund.
Subject to policies established by the Board of Trustees and officers of the
Trust, the Investment Manager is primarily responsible for the Money Fund's
portfolio decisions and the placing of the portfolio transactions. In placing
orders, it is the policy of the Money Fund to obtain the best net results
taking into account such factors as price (including the applicable dealer
spread), the size, type and difficulty of the transaction involved, the firm's
general execution and operational facilities, and the firm's risk in
positioning the securities involved. While the Investment Manager generally
seeks reasonably competitive spreads or commissions, the Money Fund will not
necessarily be paying the lowest spread or commission available. The Money
Fund's policy of investing in securities with short maturities will result in
high portfolio turnover.

The money market securities in which the Money Fund invests are traded
primarily in the over-the-counter ("OTC") market. Bonds and debentures are
usually traded OTC but may be traded on an exchange. Where possible, the Money
Fund will deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Such dealers usually act as principal for their own
accounts. On occasion, securities may be purchased directly from the issuer.
Money market securities in which the Money Fund invests are generally traded
on a net basis and do not normally involve either brokerage commissions or
transfer taxes. The cost of executing portfolio securities transactions of the
Money Fund will primarily consist of dealer spreads and underwriting
commissions. Under the Investment Company Act, persons affiliated with the
Trust are prohibited from dealing with the Trust as a principal in the
purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the Commission. Since OTC transactions are
usually principal transactions, affiliated persons of the Trust, including
Merrill Lynch, Merrill Lynch Government Securities Inc. ("GSI") and Merrill
Lynch Money Markets Inc., may not serve the Money Fund as dealer in connection
with such transactions, except pursuant to the exemptive order described
below. However, affiliated persons of the Trust may serve as its broker in OTC
transactions conducted on an agency basis. The Trust may not purchase
securities during the existence of any underwriting syndicate for such
securities of which Merrill Lynch is a member or in a private placement in
which Merrill Lynch serves as placement agent except pursuant to procedures
adopted by the Board of Trustees of the Trust that either comply with rules
adopted by the Commission or with interpretations of the Commission staff.

The Commission has issued an order permitting all Merrill Lynch-sponsored
money market funds, including Series of the Trust, to conduct principal
transactions with GSI in U.S. Government securities and U.S. Government agency
securities and with Merrill Lynch Money Markets, Inc., a subsidiary of GSI
("MMI"), in certificates of deposit and other short-term bank money
instruments and commercial paper. This order contains a number of conditions,
including conditions designed to insure that the price to the Money Fund from
Merrill Lynch, GSI or MMI is equal to or better than that available from other
sources. GSI and MMI have informed the Trust that they will in no way, at any
time, attempt to influence or control the activities of the Money Fund or the
Investment Manager in placing such principal transactions. The exemptive order
allows GSI or MMI to receive a dealer spread on any transaction with the Money
Fund no greater than its customary dealer spread for transactions of the type
involved. Generally such spreads do not exceed 0.25% of the principal amount
of the securities involved.

The Trustees of the Trust have considered the possibilities of recapturing
for the benefit of the Money Fund expenses of possible portfolio transactions,
such as dealer spreads and underwriting commissions, by conducting such
portfolio transactions through affiliated entities. For example, dealer
spreads received by GSI or MMI on

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<PAGE>

transactions conducted pursuant to the exemptive order described above could
be offset against the management and administrative fees payable by the Money
Fund to the Investment Manager. After considering all factors deemed relevant,
the Trustees made a determination not to seek such recapture. The Trustees
will reconsider this matter from time to time. The Investment Manager has
arranged for the Money Fund's custodian to receive any tender offer
solicitation fees on behalf of the Money Fund payable with respect to
portfolio securities of the Money Fund.

The Money Fund does not expect to use one particular dealer, but, subject to
obtaining the best price and execution, dealers who provide supplemental
investment research (such as information concerning money market securities,
economic data and market forecasts) to the Investment Manager may receive
orders for transactions by the Money Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Investment Manager under the Investment Management Agreement and the expenses
of the Investment Manager will not necessarily be reduced as a result of the
receipt of such supplemental information.

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of the Money Fund is determined by the
Investment Manager once daily, immediately after the daily declaration of
dividends, on each business day during which the New York Stock Exchange
("NYSE") is open for business. Such determination is made as of the close of
business on the NYSE (generally 4:00 P.M., New York time). As a result of this
procedure, the net asset value is determined each business day except for days
on which the NYSE is closed. The NYSE is closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset value is
determined pursuant to the "penny-rounding" method by adding the value of all
securities and other assets in the portfolio, deducting the portfolio's
liabilities, dividing by the number of shares outstanding and rounding the
result to the nearest whole cent.

The money market securities in which the Money Fund invests are traded
primarily in the OTC markets. Except as set forth below, these securities are
valued at the most recent bid price or yield equivalent as obtained from
dealers that make markets in such securities. 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 Trustees of the Trust.
Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis. Under this method of valuation, the security is
initially valued at cost on the date of purchase (or in the case of securities
purchased with more than 60 days remaining to maturity, the market value on
the 61st day prior to maturity); and thereafter the Money Fund assumes a
constant proportionate amortization in value until maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the security. For purposes of valuation, the maturity of a variable
rate security is deemed to be the next date on which the interest rate is to
be adjusted.

In accordance with the Commission rule applicable to the valuation of its
portfolio securities, the Money Fund will maintain a dollar-weighted portfolio
maturity of 90 days or less and will purchase instruments having remaining
maturities of not more than 397 days (13 months), with the exception of U.S.
Government Securities and U.S. Government agency securities, which may have
remaining maturities of up to 762 days (25 months). The Money Fund will invest
only in securities determined by the Trustees to be of high quality with
minimal credit risks. In addition, the Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the Money Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.

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<PAGE>

Deviations of more than an insignificant amount between the net asset value
calculated using market quotations and that calculated on a "penny-rounded"
basis will be reported to the Trustees by the Investment Manager. In the event
the Trustees determine that a deviation exists which may result in material
dilution or other unfair results to investors or existing shareholders, the
Money Fund will take such corrective action as it regards as necessary and
appropriate, including the reduction of the number of outstanding shares of
the Money Fund by having each shareholder proportionately contribute shares to
the Money Fund's capital; the sale of portfolio instruments prior to maturity
to realize capital gains or losses or to shorten average portfolio maturity;
withholding dividends; or establishing a net asset value per share solely by
using available market quotations. If the number of outstanding shares is
reduced in order to maintain a constant "penny-rounded" net asset value of
$1.00 per share, the shareholders will contribute proportionately to the Money
Fund's capital. Each shareholder will be deemed to have agreed to such
contribution by such shareholder's investment in the Money Fund.

Since the net income of the Money Fund (including realized gains and losses
on the portfolio securities) is declared as a dividend each time the net
income of the Money Fund is determined, the net asset value per share of the
Money Fund normally remains at $1.00 per share immediately after each
determination and dividend declaration. Any increase in the value of a
shareholder's investment in the Money Fund, representing the reinvestment of
dividend income, is reflected by an increase in the number of shares of the
Money Fund in the account and any decrease in the value of a shareholder's
investment may be reflected by a decrease in the number of shares in the
account. See "Taxes."

YIELD INFORMATION

The Money Fund normally computes its annualized yield by determining the net
income for a seven-day base period for a hypothetical pre-existing account
having a balance of one share at the beginning of the base period, dividing
the net income by the net asset value of the account at the beginning of the
base period to obtain the base period return, multiplying the result by 365
and then dividing by seven. Under this calculation, the yield reflects
realized gains and losses on portfolio securities. In accordance with
regulations adopted by the Commission, the Money Fund is required to disclose
its annualized yield for certain seven-day base periods in a standardized
manner which does not take into consideration any realized or unrealized gains
or losses on portfolio securities. The Commission also permits the calculation
of a standardized effective or compounded yield. This is computed by
compounding the unannualized base period return which is done by adding one to
the base period return, raising the sum to a power equal to 365 divided by
seven, and subtracting one from the result. This compounded yield calculation
also excludes realized and unrealized gains or losses on portfolio securities.

The yield on the Money Fund's shares normally will fluctuate on a daily
basis. Therefore, the yield for any given past period is not an indication or
representation by the Money Fund of future yields or rates of return on its
shares. The yield is affected by such factors as changes in interest rates on
securities, average portfolio maturity, the types and quality of portfolio
securities held and operating expenses. The yield on Money Fund shares for
various reasons may not be comparable to the yield on shares of other money
market funds or other investments.

TAXES

The Trust intends to continue to qualify the Money Fund for the special tax
treatment afforded RICs under the Internal Revenue Code (the "Code"). As long
as it so qualifies, the Money Fund (but not its shareholders) will not be
subject to Federal income tax on the part of its net ordinary income and net
realized capital gains that it distributes to shareholders. The Money Fund
intends to distribute substantially all of such income.

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<PAGE>

As discussed in the Money Fund's Prospectus, the Trust may establish other
series in addition to the Money Fund (together with the Money Fund, the
"Series"). Each Series of the Trust is treated as a separate corporation for
Federal income tax purposes. Each Series therefore is considered to be a
separate entity in determining its treatment under the rules for RICs
described in the Prospectus. Losses in one Series do not offset gains in
another Series, and the requirements (other than certain organizational
requirements) for qualifying for RIC status are determined at the Series level
rather than the Trust level.

Dividends paid by the Money 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 Money Fund shares. Any loss
upon the sale or exchange of Money Fund shares held for six months or less
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Money
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Recent legislation creates additional categories of capital
gain taxable at different rates. Additional legislation eliminates the highest
28% category for most sales of capital assets occurring after December 31,
1997. Generally not later than 60 days after the close of its taxable year,
the Money Fund will provide its shareholders with a written notice designating
the amounts of any ordinary income dividends or capital gain dividends, as
well as the amounts of capital gain dividends in the different categories of
capital gain referred to above.

If the value of assets held by the Money Fund declines, the Trustees may
authorize a reduction in the number of outstanding shares in shareholder's
accounts so as to preserve a net asset value of $1.00 per share. After such a
reduction, the basis of eliminated shares would be added to the basis of
shareholders' remaining Money Fund shares, and any shareholders disposing of
shares at that time may recognize a capital loss. Distributions, including
distributions reinvested in additional shares of the Money Fund, will
nonetheless be fully taxable, even if the number of shares in shareholders'
accounts has been reduced as described above.

Ordinary income 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.

Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally,

17
<PAGE>

shareholders subject to backup withholding will be those for whom no certified
taxpayer identification number is on file with the Trust or who, to the
Trust's knowledge, have furnished an incorrect number. When establishing an
account, an investor must certify under penalty of perjury that such number is
correct and that such investor is not otherwise subject to backup withholding.

The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year-end, plus certain undistributed
amounts from previous years. While the Money Fund intends to distribute its
income and capital gains in the manner necessary to minimize imposition of the
4% excise tax, there can be no assurance that sufficient amounts of the Money
Fund's taxable income and capital gains will be distributed to avoid entirely
the imposition of the tax. In such event, the Money Fund will be liable for
the tax only on the amount by which it does not meet the foregoing
distribution requirements.

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury regulations promulgated thereunder. The Code and these
Treasury regulations are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.

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

Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors
should also consider applicable foreign taxes in their evaluation of an
investment in the Money Fund.

GENERAL INFORMATION

DESCRIPTION OF SERIES AND SHARES

The Declaration of Trust provides that the Trust shall be comprised of
separate Series ("Series") each of which will consist of a separate portfolio
that will issue a separate class of shares. The Trustees are authorized to
create an unlimited number of Series and, with respect to each Series, to
issue an unlimited number of full and fractional shares of beneficial
interest, par value $.10 per share, of different classes and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests in

18
<PAGE>

the Series. Shareholder approval is not necessary for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Statement of Additional Information, the Money Fund is the only existing
Series of the Trust, and shares of the Money Fund are divided into Class A and
Class B shares (although no Class B shares have been issued as of the date of
this Statement of Additional Information). Class A and Class B shares
represent an interest in the same assets of the Money Fund and are identical
in all respects, except that Class B shares bear certain expenses related to
the distribution of such shares and have exclusive voting rights with respect
to matters relating to such distribution expenditures. The Board of Trustees
of the Trust may classify and reclassify shares of any Series into additional
classes at a future date. All shares have equal voting rights, except that
only shares of the respective Series are entitled to vote on matters
concerning only that Series. Shareholders are entitled to one vote for each
full share held and fractional votes for fractional shares held in the
election of Trustees and on other matters submitted to the vote of
shareholders. Each issued and outstanding share is entitled to participate
equally in dividends and distributions declared by the respective Series and
in net assets of such Series upon liquidation or dissolution remaining after
satisfaction of outstanding liabilities.

In the event a Series were unable to meet its obligations, the remaining
Series would assume the unsatisfied obligations of that Series. The shares of
each Series, when issued, will be fully paid and nonassessable, have no
preference, preemptive, conversion, exchange or similar rights, and are freely
transferable. Shares do not have cumulative voting rights and the holders of
more than 50% of the shares of the Trust voting for the election of Trustees
can elect all of the Trustees if they choose to do so and in such event the
holders of the remaining shares would not be able to elect any Trustees. No
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the outstanding shares of the Trust except under certain
limited circumstances set forth in the Declaration of Trust.

INVESTMENT ACCOUNT

Every direct shareholder has an Investment Account and will receive
quarterly reports showing the activity in his or her account since the
preceding statement. A shareholder may ascertain the number of shares in his
Investment Account by telephoning the Transfer Agent at 800-MER-FUND or (800-
637-3863). The Transfer Agent will furnish this information only after the
shareholder has specified the name, address, account number and social
security number of the registered owner or owners.

In the interest of economy and convenience and because of the operating
procedures of the Trust, certificates representing the Money Fund shares will
not be physically issued. Shares of the Money Fund are maintained by the Trust
on its register maintained by the Transfer Agent and the holders thereof will
have the same rights and ownership with respect to such shares as if
certificates had been issued.

CUSTODIAN

The Bank of New York (the "Custodian"), 90 Washington Street, 12th Floor,
New York, New York 10286, acts as custodian of the Money Fund's assets. The
Custodian is responsible for safeguarding and controlling the Money Fund's
cash and securities, handling the delivery of securities and collecting
interest on the Money Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc. (the "Transfer Agent"), 4800 Deer Lake Drive
East, Jacksonville, Florida 32246-6484, a subsidiary of ML & Co., acts as the
Money Fund's transfer agent. The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening and maintenance of
shareholder accounts.

19
<PAGE>

INDEPENDENT AUDITORS

Deloitte & Touche LLP 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Money Fund. The selection of
independent auditors is subject to ratification by the independent Trustees of
the Trust. The independent auditors are responsible for auditing the financial
statements of the Money Fund.

LEGAL COUNSEL

Brown & Wood LLP, One World Trade Center, New York, New York 10048, is
counsel for the Trust.

REPORTS TO SHAREHOLDERS

The fiscal year of the Trust ends on May 31 of each year. The Trust will
send to shareholders of the Money Fund at least semi-annually reports showing
its portfolio securities and other information. An annual report containing
financial statements audited by independent auditors will be sent to
shareholders each year.

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information with respect to
the shares of the Money Fund do not contain all of the information set forth
in the Registration Statement and the exhibits relating thereto, which the
Trust has filed with the Commission, Washington, D.C., under the Securities
Act of 1933 and the Investment Company Act, to which reference is hereby made.
Offerings of shares of separate Series of the Trust will be made by separate
prospectuses.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

At July 15, 1998 all 251,623 outstanding shares of the Money Fund were owned
by the Investment Manager.

The Declaration of Trust establishing the Trust, dated July 10, 1987, a copy
of which, together with all amendments thereto (the "Declaration"), is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Financial Institutions Series Trust" refers to the Trustees
under the Declaration collectively as Trustees, but not as individuals or
personally; and no Trustee, shareholder, officer, employee or agent of the
Trust shall be held to any personal liability, nor shall resort be had to
their private property for the satisfaction of any obligation or claim of said
Trust but the "Trust Estate" only shall be liable.

20
<PAGE>

APPENDIX

DESCRIPTION OF COMMERCIAL PAPER, BANK MONEY INSTRUMENTS
AND CORPORATE BOND RATINGS

COMMERCIAL PAPER AND BANK MONEY INSTRUMENTS

Commercial paper with the greatest capacity for timely payment is rated A by
Standard & Poor's ("S&P"). Issues within this category are further redefined
with designations 1, 2 and 3 to indicate the relative degree of safety; A-1,
the highest of the three, indicates the degree of safety is either
overwhelming or very strong; A-2 indicates that capacity for timely repayment
is strong.

Moody's Investors Service, Inc. ("Moody's") employs the designations of
Prime-1, Prime-2 and Prime-3 to indicate the relative capacity of the rated
issuers to repay punctually. Prime-1 issues have a superior capacity for
repayment. Prime-2 issues have a strong capacity for repayment, but to a
lesser degree than Prime-1.

Fitch IBCA, Inc. ("Fitch") employs the rating F1+ to indicate issues
regarded as having the strongest degree of assurance for timely payment. The
rating F1 reflects an assurance of timely payment only slightly less in degree
than issues rated F1+, while the rating F2 indicates a satisfactory degree of
assurance for timely payment, although the margin of safety is not as great as
indicated by the F1+ and F1 categories.

Duff & Phelps Credit Ratings Co. ("Duff & Phelps") employs the designation
of Duff 1 with respect to top grade commercial paper and bank money
instruments. Duff 1+ indicates the highest certainty of timely payment: short-
term liquidity is clearly outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations. Duff 1- indicates high certainty of timely
payment. Duff 2 indicates good certainty of timely payment: liquidity factors
and company fundamentals are sound.

Thomson BankWatch, Inc. ("TBW") employs the designations TBW-1, TBW-2, TBW-3
and TBW-4 as ratings for commercial paper, other senior short-term obligations
and deposit obligations of the entities to which the rating has been assigned.
TBW-1 is the highest category and indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis. TBW-2 is the
second highest category and indicates that while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.

CORPORATE BONDS

Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay interest and repay principal
and differ from the highest rated issues only in a small degree.

Bonds rated Aaa by Moody's are judged to be of the best quality. Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. Bonds rated Aa are judged to be of high quality by all
standards. They are rated lower than the best bonds because margins of
protection may not be as large 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 in its corporate bond rating system. The

21
<PAGE>

modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA are considered to be investment grade and
of very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.

Bonds rated AAA by Duff & Phelps are deemed to be of the highest credit
quality: the risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt. AA indicates high credit quality: protection
factors are strong, and risk is modest but may vary slightly from time to time
because of economic conditions.

Bonds rated AAA by TBW are accorded the highest rating category which
indicates that the ability to repay principal and interest on a timely basis
is very high. AA is the second highest rating category and indicates a
superior ability to repay principal and interest on a timely basis with
limited incremental risk versus issues rated in the highest rating category.

22
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Trustees and Shareholders,
Summit Cash Reserves Fund of
Financial Institutions Series Trust:

We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Summit Cash Reserves Fund of
Financial Institutions Series Trust as of May 31, 1998, the related statements
of operations for the year then ended and changes in net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at May 31, 1998 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Summit Cash
Reserves Fund of Financial Institutions Series Trust as of May 31, 1998, the
results of its operations, the changes in its net assets, and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.

Deloitte & Touche LLP
Princeton, New Jersey
June 16, 1998

23
<PAGE>

<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>

Face Interest Maturity Value
Issue Amount Rate* Date (Note 1a)
<S> <C> <C> <C> <C>
US Treasury Bill $230,000 4.85% 8/06/98 $227,955

Total US Government Obligations--Discount (Cost--$227,955) 227,955

Total Investments (Cost--$227,955)--90.2% 227,955

Other Assets Less Liabilities--9.8% 24,797
--------
Net Assets--100.0% $252,752
========

<FN>
*Certain US Government Obligations are traded on a discount basis;
the interest rate shown is the discount rate paid at the time of
purchase by the Fund.

See Notes to Financial Statements.
</TABLE>

24
<PAGE>

Summit Cash Reserves Fund
May 31, 1998

FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of May 31, 1998
<S> <S> <C>
Assets: Investments, at value (identified cost--$227,955*) (Notes 1a & 1e) $ 227,955
Cash 739
Investment adviser receivable (Note 2) 10,237
Prepaid registration fees and other assets (Note 1d) 96,211
------------
Total assets 335,142
------------

Liabilities: Payable to administrator (Note 2) 59
Accrued expenses and other liabilities 82,331
------------
Total liabilities 82,390
------------

Net Assets: Net assets $ 252,752
============
Net Assets Shares of beneficial interest, $.10 par value, unlimited
Consist of: number of shares authorized $ 25,275
Paid-in capital in excess of par 227,477
------------
Net assets--Equivalent to $1.00 per share based on 252,752 shares of
beneficial interest outstanding $ 252,752
============

<FN>
*Cost for Federal income tax purposes.

See Notes to Financial Statements.
</TABLE>

25
<PAGE>

Summit Cash Reserves Fund
May 31, 1998

FINANCIAL INFORMATION (continued)

<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended
May 31, 1998
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 13,040
(Note 1c):

Expenses: Professional fees $ 106,500
Registration fees (Note 1d) 43,689
Accounting services (Note 2) 15,492
Printing and shareholder reports 6,688
Trustees' fees and expenses 5,332
Investment advisory fees (Note 2) 677
Administrative fees (Note 2) 677
------------
Total expenses before reimbursement 179,055
Reimbursement of expenses (Note 2) (179,055)
------------
Total expenses after reimbursement 0
------------
Investment income--net 13,040
------------
Net Increase in Net Assets Resulting from Operations $ 13,040
============

See Notes to Financial Statements.
</TABLE>

26
<PAGE>

Summit Cash Reserves Fund
May 31, 1998

FINANCIAL INFORMATION (continued)

<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 13,040 $ 457,144
Realized loss on investments--net -- (853)
Change in unrealized appreciation on investments--net -- 2,439
------------ ------------
Net increase in net assets resulting from operations 13,040 458,730
------------ ------------

Dividends to Investment income--net (13,040) (456,291)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends
to shareholders (13,040) (456,291)
------------ ------------

Beneficial Net proceeds from sale of shares -- 68,683,693
Interest Net asset value of shares issued to shareholders in
Transactions reinvestment of dividends (Note 1f) 13,013 451,377
(Note 3): ------------ ------------
13,013 69,135,070
Cost of shares redeemed -- (103,762,576)
------------ ------------
Net increase (decrease) in net assets derived from beneficial
interest transactions 13,013 (34,627,506)

Net Assets: Total increase (decrease) in net assets 13,013 (34,625,067)
Beginning of year 239,739 34,864,806
------------ ------------
End of year $ 252,752 $ 239,739
============ ============

See Notes to Financial Statements.
</TABLE>

27
<PAGE>

Summit Cash Reserves Fund
May 31, 1998

FINANCIAL INFORMATION (concluded)

<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1998 1997 1996 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .0531 .0432 .0476 .0444 .0254
Realized and unrealized gain (loss) on
investments--net -- .0001 (.0011) .0014 .0003
-------- -------- -------- -------- --------
Total from investment operations .0531 .0433 .0465 .0458 .0257
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.0531) (.0431) (.0476) (.0444) (.0254)
Realized gain on investments--net -- -- --++ (.0001) (.0003)
-------- -------- -------- -------- --------
Total dividends and distributions (.0531) (.0431) (.0476) (.0445) (.0257)
-------- -------- -------- -------- --------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total investment return 5.44% 4.40% 4.95% 4.51% 2.56%
======== ======== ======== ======== ========

Ratios to Average Expenses, net of reimbursement .00% 1.38% 1.13% .98% .90%
Net Assets: ======== ======== ======== ======== ========
Expenses 72.77% 1.97% 1.13% .98% .90%
======== ======== ======== ======== ========
Investment income and realized gain on
investments--net 5.30% 4.18% 4.83% 4.35% 2.54%
======== ======== ======== ======== ========

Supplemental Net assets, end of year (in thousands) $ 253 $ 240 $34,865 $89,119 $135,301
Data: ======== ======== ======== ======== ========

<FN>
++Amount is less than $.0001 per share.

See Notes to Financial Statements.
</TABLE>

28
<PAGE>

Summit Cash Reserves Fund
May 31, 1998

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:
Summit Cash Reserves Fund (the "Fund") is a separate fund offering a
separate class of shares of Financial Institutions Series Trust (the
"Trust"). The Trust is registered under the Investment Company Act
of 1940 as a diversified, open-end management investment company
which comprises a series of separate portfolios offering a separate
class of shares to selected groups of purchasers. The Fund is
currently the only operating series of the Trust. As of May 31,
1998, all of the Fund's shares outstanding are owned by Fund Asset
Management, L.P. ("FAM"). Furthermore, the Fund is not offering
additional shares for purchase at the present time. The following is
a summary of significant accounting policies followed by the Fund.

(a) Valuation of investments--The money market securities in which
the Fund invests are traded primarily in the over-the-counter
markets. Investments maturing more than sixty days after the
valuation date are valued at the most recent bid price or yield
equivalent as obtained from dealers that make markets in such
securities. When such securities are valued with sixty days or less
to maturity, the difference between the valuation existing on the
sixty-first day before maturity and maturity value is amortized on a
straight-line basis to maturity. Investments maturing within sixty
days from their date of acquisition are valued at amortized cost,
which approximates market value. 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 Trustees of the Trust.
For purposes of valuation, the maturity of a variable rate security
is deemed to be the next coupon date on which the interest rate is
to be adjusted.

(b) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income to
its shareholders. Therefore, no Federal income tax provision is
required.

(c) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
premium and discount) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.

(d) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.

(e) Repurchase agreements--The Fund invests in money market
securities pursuant to repurchase agreements. Under such agreements,
the counterparty agrees to repurchase the security at a mutually
agreed upon time and price. The Fund takes possession of the
underlying securities, marks to market such securities and, if
necessary, receives additional securities daily to ensure that the
contract is fully collateralized.

(f) Dividends and distributions to shareholders--The Fund declares
dividends daily and reinvests monthly such dividends (net of non-
resident alien tax and back-up withholding tax) in additional fund
shares at net asset value. Dividends and distributions are declared
from the total of net investment income and net realized gain or
loss on investments.

2. Investment Advisory and Administrative
Agreements:
The Fund has entered into an Investment Advisory Agreement and an
Administrative Agreement with FAM. The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.

FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities and equipment to
provide such services to the Fund. For such services, the Investment
Adviser receives a fee from the Fund at the end of each month at the
annual rate of 0.275% of the average daily net assets of the Fund
not exceeding $500 million, and at the annual rate of 0.25% of
average daily net assets in excess of $500 million. For the year
ended May 31, 1998, FAM earned fees of $677, all of which were
waived. FAM also reimbursed the Fund for additional expenses of
$178,378. Pursuant to the Administrative Agreement, the Fund pays
FAM a monthly fee identical to the investment advisory fee, in
return for the performance of administrative services (other

29
<PAGE>

than investment advice and related portfolio activities) necessary for the
operation of the Fund.

Summit Cash Reserves Fund
May 31, 1998

Merrill Lynch Funds Distributor, Inc. ("MLFD"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc., is the Distributor of the
shares of the Fund.

Merrill Lynch Financial Data Services, Inc. ("MLFDS"), a wholly-
owned subsidiary of ML & Co., is the Fund's transfer agent.

Accounting services are provided to the Fund by FAM at cost.

Certain officers and/or trustees of the Fund are officers and/or
directors of FAM, PSI, MLFD, MLFDS, and/or ML & Co.

3. Shares of Beneficial Interest:
The number of shares purchased and redeemed during the periods
corresponds to the amounts included in the Statements of Changes in
Net Assets for net proceeds from sale of shares and cost of shares
redeemed, respectively, since shares are recorded at $1.00 per
share.

4. Capital Loss Carryforward:
At May 31, 1998, the Fund had a net capital loss carryforward of
approximately $6,000, of which $5,000 expires in 2004 and $1,000
expires in 2005. This amount will be available to offset like
amounts of any future taxable gains.

30
<PAGE>

[This page intentionally left blank]

<PAGE>

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................... 2
Investment Restrictions................................................... 3
Management of the Trust.................................................... 5
Trustees and Officers..................................................... 5
Compensation of Trustees.................................................. 7
Management and Advisory Arrangements...................................... 8
Purchase of Shares......................................................... 9
Redemption of Shares....................................................... 10
Exchange Privilege and Exchange Program.................................... 11
Exchange Privilege........................................................ 11
Exchange Program.......................................................... 12
Portfolio Transactions..................................................... 14
Determination of Net Asset Value........................................... 15
Yield Information.......................................................... 16
Taxes...................................................................... 16
General Information........................................................ 18
Description of Series and Shares.......................................... 18
Investment Account........................................................ 19
Custodian................................................................. 19
Transfer Agent............................................................ 19
Independent Auditors...................................................... 20
Legal Counsel............................................................. 20
Reports to Shareholders................................................... 20
Additional Information.................................................... 20
Security Ownership of Certain Beneficial Owners........................... 20
Appendix................................................................... 21
Independent Auditors' Report............................................... 23
Financial Statements....................................................... 24
</TABLE>

Code #SUMMITSAI-0998

- ------------------------------------
SUMMIT CASH
RESERVES FUND

FINANCIAL INSTITUTIONS SERIES TRUST

Principal Office of the Trust:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011

September 29, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

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

DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
BOX GRAPHIC Back cover of Prospectus and
ON BACK COVER back cover of Statement of
Additional Information