MERRILL LYNCH USA GOVERNMENT RESERVES, 485BPOS, 1997-11-26

MERRILL LYNCH USA GOVERNMENT RESERVES
485BPOS, 1997-11-26

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 26, 1997

SECURITIES ACT FILE NO. 2-78702
INVESTMENT COMPANY ACT FILE NO. 811-3534

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]

POST-EFFECTIVE AMENDMENT NO. 16 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]

AMENDMENT NO. 19 [X]
(CHECK APPROPRIATE BOX OR BOXES)

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

MERRILL LYNCH U.S.A. GOVERNMENT RESERVES
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 282-2800

ARTHUR ZEIKEL
MERRILL LYNCH U.S.A. GOVERNMENT RESERVES
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

COPIES TO:

PHILIP L. KIRSTEIN, ESQ.
COUNSEL FOR THE FUND: BROWN & WOOD LLP ONE WORLD TRADE CENTER NEW YORK, NEW
YORK 10048-0557 ATTENTION: THOMAS R. SMITH, JR., ESQ.

MERRILL LYNCH ASSET THOMAS D. JONES,
MANAGEMENT III, ESQ.
MERRILL LYNCH ASSET
P.O. BOX 9011 MANAGEMENT
PRINCETON, N.J. 08543-9011 P.O. BOX 9011
PRINCETON, N.J.
08543-9011

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

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.

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

IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_]This post-effective amendment designates a new effective date
for a previously filed
post-effective amendment.

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TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, par
value $.10 per share

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

MERRILL LYNCH U.S.A. GOVERNMENT RESERVES

REGISTRATION STATEMENT ON FORM N-1A

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
N-
1A ITEM NO.
-----------
PART A LOCATION
------ --------
<C> <S> <C>
Item 1. Cover Page................. Cover Page
Item 2. Synopsis................... Fee Table
Item 3. Condensed Financial
Information............... Financial Highlights; Yield Informa-
tion
Item 4. General Description of
Registrant................ Investment Objectives and Policies;
Additional Information
Item 5. Management of the Fund..... Fee Table; Management of the Fund;
Portfolio Transactions; Inside Back
Cover Page
Item 5A. Management's Discussion of
Fund Performance.......... Not Applicable
Item 6. Capital Stock and Other
Securities................ Cover Page; Additional Information
Item 7. Purchase of Securities
Being Offered............. Cover Page; Fee Table; Purchase of
Shares; Redemption of Shares;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase... Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal Proceedings.. Not Applicable
<CAPTION>
PART B
------
<C> <S> <C>
Item 10. Cover Page................. Cover Page
Item 11. Table of Contents.......... Back Cover Page
Item 12. General Information and
History................... Not Applicable
Item 13. Investment Objectives and
Policies.................. Investment Objectives and Policies
Item 14. Management of the Fund..... Management of the Fund
Item 15. Control Persons and
Principal Holders of
Securities................ Management of the Fund
Item 16. Investment Advisory and
Other Services............ Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation....... Portfolio Transactions
Item 18. Capital Stock and Other
Securities................ General Information
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered............. Purchase of Shares; Redemption of
Shares; Purchase and Redemption of
Shares Through Merrill Lynch Retire-
ment Plans; Determination of Net As-
set Value; Shareholder Services
Item 20. Tax Status................. Taxes
Item 21. Underwriters............... Purchase of Shares
Item 22. Calculations of Performance
Data...................... Yield Information
Item 23. Financial Statements....... Financial Statements
<CAPTION>
PART C
------
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>

PROSPECTUS

NOVEMBER 26, 1997

MERRILL LYNCH U.S.A. GOVERNMENT RESERVES
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800

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

The investment objectives of Merrill Lynch U.S.A. Government Reserves (the
"Fund") are to seek preservation of capital, current income and liquidity
available from investing in a diversified portfolio of short-term marketable
securities, including variable rate securities, that are direct obligations of
the U.S. Government, and repurchase agreements pertaining to such securities.
For purposes of its investment policies, the Fund defines short-term securities
as securities having a maturity of no more than 762 days (25 months).
Management of the Fund expects that substantially all of 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 two years.

THE NET INCOME OF THE FUND IS DECLARED AS DIVIDENDS DAILY AND REINVESTED AT
NET ASSET VALUE IN ADDITIONAL SHARES. THE FUND SEEKS TO MAINTAIN A CONSTANT
$1.00 NET ASSET VALUE PER SHARE, ALTHOUGH THIS CANNOT BE ASSURED. IN ORDER TO
MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE, THE FUND MAY REDUCE THE
NUMBER OF SHARES HELD BY ITS SHAREHOLDERS. AN INVESTMENT IN THE FUND IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.

Shares of the Fund may be purchased at their net asset value without any
sales charge. The minimum initial purchase is $5,000 and subsequent purchases
generally must be $1,000 or more. For accounts advised by banks and registered
investment advisers, the minimum initial purchase is $300 and the minimum
subsequent purchase is $100. The minimum initial purchase with respect to
pension, profit sharing, individual retirement and certain other retirement
plans is $100 and the minimum subsequent purchase with respect to these plans
is $1, except that the minimum purchase requirements are waived for purchases
of Fund shares by certain employer sponsored retirement or savings plans. The
minimum initial purchase under the Merrill Lynch BlueprintSM Program is $500
(or $50 if the shareholder elects to participate in the automatic investment of
sale proceeds option on the Merrill Lynch BlueprintSM Program application form)
and the minimum subsequent purchase is $50. 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 directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081, Tel. No.
(609) 282-2800, or from securities dealers that have entered into selected
dealer agreements with the Distributor, 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 SECURITIES AND EXCHANGE 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 Fund that is
relevant to making an investment in the Fund. This Prospectus should be read
carefully and retained for future reference. A statement containing additional
information about the Fund, dated November 26, 1997 (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 Fund at the above telephone number or address. The Commission
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference and other
information regarding the Fund. The Statement of Additional Information is
hereby incorporated by reference into this Prospectus.

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

MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE>

FEE TABLE

<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS
FOR THE YEAR ENDED AUGUST 31, 1997):
--------------------------------------
<S> <C>
Investment Advisory Fees (a)........................................... .45%
Rule 12b-1 Fees (b).................................................... .11
Shareholder Servicing Fees (c)......................................... .18
Other Expenses......................................................... .08
---
Total Fund Operating Expenses.......................................... .82%
===
</TABLE>
- --------
(a) See "Management of the Fund--Management and Advisory Arrangements"--page 7.
(b) See "Purchase of Shares--Distribution Plan"--page 9.
(c) See "Management of the Fund--Transfer Agency Services"--page 8.

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
an operating expense ratio
of 0.82% and a 5% annual re-
turn throughout the periods. $8 $26 $46 $101
</TABLE>

The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. The Example should not be considered a representation
of past or future expenses or annual rate of return and actual expenses or
annual rate of return may be more or less than those assumed for purposes of
the Example.

2
<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 Fund by Deloitte &
Touche LLP, Independent auditors. Financial statements for the year ended
August 31, 1997 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 Fund's audited
financial statements. Further information about the performance of the Fund is
contained in the Fund's most recent annual report to shareholders, which may be
obtained, without charge, by calling or writing the Fund at the telephone
number or address on the front cover of this Prospectus.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSET VALUE:
PER SHARE OPERATING PER-
FORMANCE:
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.. .0471 .0474 .0472 .0280 .0248 .0365 .0602 .0755 .0813 .0607
Realized and unrealized
gain (loss) on
investments--net........ .0005 (.0002) .0017 (.0007) .0007 .0046 .0013 .0004 -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations............... .0476 .0472 .0489 .0273 .0255 .0411 .0615 .0759 .0813 .0607
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less dividends and dis-
tributions:
Investment income--net.. (.0471) (.0474) (.0472) (.0280) (.0248) (.0365) (.0602) (.0755) (.0813) (.0607)
Realized gain on invest-
ments--net.............. (.0001) (.0003) (.0007) (.0002) (.0013) (.0038) (.0013)* (.0004)* -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total dividends and
distributions............ (.0472) (.0477) (.0479) (.0282) (.0261) (.0403) (.0615) (.0759) (.0813) (.0607)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
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:. 4.82% 4.89% 4.89% 2.85% 2.64% 4.15% 6.37% 7.82% 8.45% 6.24%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................. .82% .82% .85% .81% .75% .75% .73% .81% .84% .80%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Investment income and re-
alized gain on invest-
ments--net............... 4.71%* 4.78% 4.79% 2.82% 2.61% 4.10% 6.07%* 7.57%* 8.15%* 6.07%*
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of year
(in thousands)........... $558,125 $554,285 $558,929 $544,174 $575,044 $584,067 $658,207 $438,829 $302,519 $260,959
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ----
* Includes unrealized gain (loss).

3
<PAGE>

YIELD INFORMATION

Set forth below is yield information for the indicated seven-day periods,
computed to include and exclude realized and unrealized gains and losses, and
information as to the compounded annualized yield, excluding gains and losses,
for the same periods.

<TABLE>
<CAPTION>
SEVEN-DAY PERIOD ENDED
---------------------------------
AUGUST 31, 1997 NOVEMBER 14, 1997
--------------- -----------------
<S> <C> <C>
Including gains and losses................ 4.82% 4.85%
Excluding gains and losses................ 4.82% 4.85%
Compounded annualized yield............... 4.94% 4.97%
Average maturity of portfolio at end of
period................................... 85 days 71 days
</TABLE>

The yield of the Fund refers to the income generated by an investment in the
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 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 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 Fund of future yields or rates of return on its shares. The 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 which pay a fixed yield over
a stated period of time.

On occasion, the Fund may compare its yield to (1) the Donoghue's Domestic
Prime Funds Average, an average compiled by Donoghue's Money Fund Report, a
widely recognized independent publication that monitors the performance of
money market mutual funds, (2) 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, (3) 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, or (4) the yield on an investment in 91-day Treasury bills on a
rolling basis, assuming quarterly compounding. As with yield quotations, yield
comparisons should not be considered indicative of the Fund's yield or relative
performance for any future period.

INVESTMENT OBJECTIVES AND POLICIES

The investment objectives of the Fund are to seek preservation of capital,
current income and liquidity available from investing in a diversified
portfolio of short-term marketable securities that are direct obligations of
the U.S. Government, and repurchase agreements pertaining to such securities
with banks and securities dealers. The investment objectives are fundamental
policies of the Fund that may not be changed without a vote of the majority of
the outstanding shares of the Fund.

Investment in the Fund offers several potential benefits. The Fund seeks to
provide as high a yield potential as is available, consistent with the
preservation of capital, from short-term U.S. Government

4
<PAGE>

securities utilizing professional money market management, block purchases of
securities and yield improvement techniques. It is expected to provide high
liquidity because of its redemption features and seeks reduced risk resulting
from diversification of assets. There can be no assurance that the investment
objectives of the Fund will be realized. Certain expenses are borne by
investors, including advisory and management fees, administrative costs and
operational costs.

In managing the Fund, Merrill Lynch Asset Management, L.P. (the "Manager")
will employ a number of professional money management techniques, including
varying the composition of investments and the average maturity of the
portfolio based on its assessment of the relative values of the various
securities and future interest rate patterns. These assessments will respond to
changing economic and money market conditions and to shifts in fiscal and
monetary policy. The Manager also will seek to improve yield by taking
advantage of yield disparities that regularly occur between securities of a
similar kind. For example, market conditions frequently result in similar
securities trading at different prices. The Fund seeks to enhance yield by
purchasing and selling securities based on these yield disparities.

Direct U.S. Government obligations consist of securities issued or guaranteed
as to principal and interest by the United States and that are backed by the
full faith and credit of the United States. Marketable securities issued by the
U.S. Government consist of U.S. Treasury bills, notes and bonds, which differ
mainly in the length of their maturity. Treasury bills, the most frequently
issued marketable U.S. Government security, have a maturity of up to one year
and are issued on a discount basis. U.S. Government agency securities, which
are backed by the full faith and credit of the United States, include
securities guaranteed by the Export-Import Bank of the United States and the
Small Business Administration. The Fund may invest in variable rate direct U.S.
Government obligations. Such obligations are securities on which the interest
rate is adjusted periodically prior to their stated maturity at stated
intervals (usually at 30, 90 or 180 day intervals) based on a predetermined
index or interest rate. The Fund may invest in direct obligations of the U.S.
Government by purchasing component parts of U.S. Treasury bonds or other U.S.
Government or U.S. Government agency securities through the acquisition of
deposit receipts, which evidence ownership of direct interests in such
component parts of U.S. Government securities. The Fund may not invest in
securities issued or guaranteed by U.S. Government agencies, instrumentalities
or U.S. Government-sponsored enterprises that are not backed by the full faith
and credit of the United States.

The Fund may invest in the U.S. Government securities described above
pursuant to repurchase agreements. Repurchase agreements may be entered into
only with a member bank of the Federal Reserve System or a primary dealer in
U.S. Government securities or an affiliate thereof. Under such agreements, the
seller agrees, on entering into the contract, to repurchase the security from
the Fund at a mutually agreed- upon time and price, thereby determining the
yield during the term of agreement. This results in a fixed rate of return
insulated from market fluctuations during such period.

Preservation of capital is a prime investment objective of the Fund, and the
U.S. Government obligations in which it will invest generally are considered to
have the lowest principal risk among money market securities. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities are not owned by the Fund but
only constitute collateral for the seller's obligation to pay the repurchase
price. With respect to repurchase agreements there is also the risk of the
failure of parties involved to return the securities involved in such
transactions, in which event the Fund may suffer time delays and incur costs or
possible losses in connection with such transactions.

5
<PAGE>

The Fund may purchase U.S. Government securities on a forward commitment
basis at fixed purchase terms with periods of up to 90 days between the
commitment and settlement dates. The purchase will be recorded on the date the
Fund enters into the commitment and the value of the security thereafter will
be reflected in the calculation of the Fund's net asset value. The value of
the security on the delivery date may be more or less than its purchase price.
A separate account of the Fund will be established with its Custodian
consisting of cash or U.S. Government securities having a market value at all
times at least equal to the amount of the forward commitment. Although the
Fund generally will enter into forward commitments with the intention of
acquiring securities for its portfolio, the Fund may dispose of a commitment
prior to settlement if the Manager deems it appropriate to do so. There can,
of course, be no assurance that the judgments on which these techniques are
based will be accurate or that such techniques when applied will be effective.

For purposes of its investment policies, the Fund defines short-term
securities as securities having maturities of not more than 762 days (25
months). Management of the Fund expects that most of the assets of the Fund
will be invested in securities maturing in not more than 397 days (13 months),
but at times some portion may have maturities up to 762 days (25 months). The
maturity of variable rate obligations is deemed to be the next date on which
the interest rate is to be adjusted. The dollar-weighted average maturity of
the Fund's portfolio will not exceed 90 days. During the fiscal year ended
August 31, 1997, the average maturity of its portfolio ranged from 51 days to
88 days.

Investment Restrictions. The 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 Fund's outstanding voting securities as defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act"). Among the more significant restrictions, the Fund may not: (1) purchase
any securities other than short-term marketable securities which are direct
obligations of the U.S. Government, and repurchase agreements and purchase and
sale contracts pertaining to such securities as defined under "Investment
Objectives and Policies"; (2) enter into repurchase agreements and purchase
and sale contracts referred to in (1) with any one bank or primary dealer, if,
immediately thereafter, more than 5% of the value of its total assets (taken
at market value) would be invested in repurchase agreements and purchase and
sale contracts with such bank or primary dealer, except that, with respect to
25% of the Fund's total assets, the Fund may invest up to 10% of its total
assets in repurchase agreements and purchase and sale contracts with any one
bank; or (3) enter into repurchase agreements or purchase and sale contracts
if, as a result thereof, more than 10% of its total assets (taken at market
value at the time of each investment) would be subject to repurchase
agreements or purchase and sale contracts maturing in more than seven days.

MANAGEMENT OF THE FUND

TRUSTEES

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

The Trustees of the Fund are:

Arthur Zeikel*--President of the Manager and its affiliate, Fund Asset
Management, L.P. ("FAM"); President and Director of Princeton Services, Inc.
("Princeton Services"); Executive Vice President of Merrill Lynch & Co., Inc.
("ML & Co.").

6
<PAGE>

Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).

M. Colyer Crum--James R. Williston Professor of Investment Management
Emeritus, Harvard Business School.

Edward H. Meyer--Chairman of the Board of Directors, President and Chief
Executive Officer of Grey Advertising Inc.

Jack B. Sunderland--President and Director of American Independent Oil
Company, Inc. (an energy company).

J. Thomas Touchton--Managing Partner of The Witt-Touchton Company (a private
investment partnership).
- --------
*Interested person, as defined in the Investment Company Act, of the Fund.

MANAGEMENT AND ADVISORY ARRANGEMENTS

The Manager, which is owned and controlled by ML & Co., a financial services
holding company, acts as the investment adviser for the Fund and provides the
Fund with investment advisory and management services. The Manager, or an
affiliate, FAM, acts as the investment adviser for more than 140 registered
investment companies. The Manager also provides investment advisory services to
individual and institutional accounts. As of October 31, 1997, the Manager and
FAM had a total of $271.9 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Manager.

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

As compensation for its services, the Manager receives a fee from the Fund at
the end of each month at the annual rate of 0.45% of the average daily net
assets of the Fund. For the fiscal year ended August 31, 1997, the total
management fee paid by the Fund to the Manager aggregated $2,476,982 (based on
average net assets of approximately $552.5 million).

The Management Agreement obligates the Fund to pay certain expenses incurred
in its operations, including, among other things, the management fee, 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 Fund by the
Manager, and the Fund reimburses the Manager for its costs in connection with
such services on a semi-annual basis. For the fiscal year ended August 31,
1997, the ratio of total expenses to average net assets was 0.82%.

Donaldo Benito is primarily responsible for the day-to-day management of the
Fund's portfolio. Mr. Benito is a Vice President of the Fund and has been a
Vice President of the Manager since 1986.

7
<PAGE>

TRANSFER AGENCY SERVICES

Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which is
a wholly owned subsidiary of ML & Co., acts as the Fund's transfer agent
pursuant to a transfer 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 a fee of $15.00 per shareholder account and is
entitled to reimbursement from the Fund for out-of-pocket expenses incurred by
the Transfer Agent under the Transfer Agency Agreement. For the fiscal year
ended August 31, 1997, the total fee paid by the Fund to the Transfer Agent
pursuant to the Transfer Agency Agreement was $1,015,604.

PURCHASE OF SHARES

The Fund is offering its shares without a sales charge at a public price
equal to the net asset value (normally $1.00 per share) next determined after a
purchase order becomes effective. Share purchase orders are effective on the
date Federal Funds become available to the Fund. If Federal Funds are available
to the 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 following the date of
purchase. Any order may be rejected by the Fund or the Distributor.

The minimum initial purchase is $5,000 and the minimum subsequent purchase is
$1,000, except that lower minimums apply in the case of purchases made under
certain retirement plans. The Fund may, at its discretion, establish reduced
minimum initial and subsequent purchase requirements with respect to various
types of accounts. Participants in the self-directed retirement plans for which
Merrill Lynch acts as passive custodian may invest in shares of the Fund with a
minimum initial purchase of $100 and a minimum subsequent purchase of $1.
Information concerning investments in the Fund by participants in retirement
plans for which Merrill Lynch acts as passive custodian is set forth under
"Purchase and Redemption of Shares through Merrill Lynch Retirement Plans" in
the Statement of Additional Information. A variety of retirement plans are also
available from the Distributor. The minimum initial investment under these
plans is $100 and the minimum subsequent investment is $1. In addition, there
is no minimum investment under certain corporate pension and profit-sharing
plans which have established self-directed employee sub-accounts with Merrill
Lynch. The minimum initial purchase with respect to other retirement plans and
pension and profit-sharing plans is $100 and the minimum subsequent investment
is $1. The minimum initial or subsequent purchase requirements may be waived
for certain employer sponsored retirement or savings plans, such as tax
qualified retirement plans within the meaning of Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), deferred compensation plans
within the meaning of Section 403(b) and Section 457 of the Code, other
deferred compensation arrangements, Voluntary Employee Benefits Association
plans, and non-qualified After Tax Savings and Investment programs, maintained
on the Merrill Lynch Group Employee Services system. For accounts advised by
banks and registered investment advisers, the minimum initial purchase is $300
and the minimum subsequent purchase is $100.

METHODS OF PAYMENT

Payment Through Securities Dealers. Investment in the Fund may be made
through securities dealers, including Merrill Lynch, who have entered into
selected dealer agreements with the Distributor. In such a case, the dealer
will transmit payment to the Fund on behalf of the investor and will supply the
Fund with the required account information. Generally, purchase orders placed
through Merrill Lynch will be made

8
<PAGE>

effective on the day following the day the order is placed with Merrill Lynch,
except that orders received through the Merrill Lynch BlueprintSM Program
("Blueprint") in some circumstances may be executed two business days following
the day the order is placed with Merrill Lynch. Investments in the Fund through
Blueprint may be made only through Merrill Lynch. Such orders should be sent to
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Attention: The BlueprintSM
Program, P.O. Box 30441, New Brunswick, New Jersey 08989-0441. Blueprint
maintains a toll-free telephone number for inquiries: (800) 637-3766. Investors
who are not placing orders through Blueprint and who desire same day
effectiveness should utilize the Payment by Wire procedure described below.
Merrill Lynch has an order procedure pursuant to which investors can have the
proceeds from the sale of listed securities invested in shares of the Fund on
the day investors receive such proceeds in their Merrill Lynch securities
accounts. Investors with free cash credit balances (i.e., immediately available
funds) in securities accounts of Merrill Lynch will not have their funds
invested in the Fund until the day after the order is placed with Merrill Lynch
and will not receive the daily dividend which would have been received had
their funds been invested in the Fund on the day the order was placed with
Merrill Lynch.

Payment by Wire. An expeditious method of investing in the Fund is through
the transmittal of Federal Funds by wire to the Transfer Agent. The Fund will
not be responsible for delays in the wiring system. To purchase shares by
wiring Federal Funds, payment should be wired to First Union National Bank of
Florida. Shareholders should give their financial institutions the following
wiring instructions: ABA #063000021, DDA #2112600061186, Merrill Lynch
Financial Data Services, Inc. The wire should be identified as a payment to
Merrill Lynch U.S.A. Government Reserves and should include the shareholder's
name and account number. Failure to submit the required information may delay
investment. Investors are urged to make payment by wire in Federal Funds.

Payment to the Transfer Agent. Purchase orders for which remittance is to be
made by check may be submitted directly by mail or otherwise to the Transfer
Agent. Purchase orders by mail should be sent to Merrill Lynch Financial Data
Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290. Purchase
orders which are sent by hand should be delivered to Merrill Lynch Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-
6484. Investors opening a new account must enclose a completed Purchase
Application. Existing shareholders should enclose the detachable stub from a
monthly account statement that they have received. Checks should be made
payable to Merrill Lynch Funds Distributor, Inc. Certified checks are not
necessary, but checks are accepted subject to collection at full face value in
U.S. funds and must be drawn in U.S. dollars on a U.S. bank. Payments for the
accounts of corporations, foundations and other organizations may not be made
by third party checks.

DISTRIBUTION PLAN

The Fund has adopted a Shareholder Servicing Plan and Agreement (the "Plan")
in compliance with Rule 12b-1 under the Investment Company Act pursuant to
which the Fund is authorized to pay Merrill Lynch a fee at the annual rate of
0.125% of the average daily net asset value of Fund accounts maintained through
Merrill Lynch. The Plan reimburses Merrill Lynch only for actual expenses
incurred in the fiscal year in which the fee is paid. The fee is principally to
provide compensation to Merrill Lynch Financial Consultants and other Merrill
Lynch personnel for providing certain services to shareholders who maintain
their Fund accounts through Merrill Lynch. The fee is for direct personal
services to Fund shareholders. For the fiscal year ended August 31, 1997,
$621,180 was paid to Merrill Lynch pursuant to the Plan based on average net
assets subject to the Plan of approximately $552.5 million.

9
<PAGE>

REDEMPTION OF SHARES

The Fund is required to redeem for cash all full and fractional shares of the
Fund. The redemption price is the net asset value per share next determined
after receipt by the Transfer Agent of proper notice of redemption as described
in accordance with one of the procedures set forth below. If such notice is
received by the Transfer Agent prior to the determination of net asset value on
that day (generally 4:00 p.m., New York time), the redemption will be effective
on such day and payment 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. If notice of a redemption of shares held
in connection with Blueprint is received by Merrill Lynch prior to the Fund's
determination of net asset value, it will be effective on the business day
following receipt of the redemption request. If the notice is received after
the determination of net asset value has been made, the redemption will be
effective on the second business day thereafter.

At various times, the Fund may be requested to redeem shares for which good
payment has not yet been received. The Fund may delay, or cause to be delayed,
the payment of redemption proceeds until such time as good payment has been
collected for the purchase of such shares. Normally, this delay will not exceed
10 days. In addition, the Fund reserves the right not to honor redemption
checks or requests for Federal Funds redemptions where the shares to be
redeemed have been purchased by check within 10 days prior to the date the
redemption request is received by the Transfer Agent.

Information concerning redemptions by participants in the self-directed
retirement plans for which Merrill Lynch acts as passive custodian is set forth
in the Statement of Additional Information.

METHODS OF REDEMPTION

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

Redemption by Check. Shareholders may redeem shares by check in an amount not
less than $500. At the shareholder's request, the Transfer Agent will provide
the shareholder with checks. These checks can be made payable to the order of
any person in any amount not less than $500; however, these checks may not be
used to purchase securities in transactions with Merrill Lynch. The payee of
the check may cash or deposit it like any check drawn on a bank. When such a
check is presented to the Transfer Agent for payment, the Transfer Agent will
present the check to the Fund as authority to redeem a sufficient number of
full and fractional shares in the shareholder's account to cover the amount of
the check. This enables the shareholder to continue earning daily dividends
until the check is cleared. Canceled checks will be returned to the shareholder
by the Transfer Agent.

Shareholders will be subject to the Transfer Agent's rules and regulations
governing such checking accounts, including the right of the Transfer Agent not
to honor checks in amounts exceeding the value of the shareholder's account at
the time the check is presented for payment. The Fund or the Transfer Agent may
modify or terminate the redemption by check privilege at any time on 30 days'
notice to participating shareholders. In order to be eligible for the
redemption by check privilege, purchasers should check the box under the
caption "Check Redemption Privilege" in the Purchase Application. The Transfer
Agent will then send checks to the shareholders.

10
<PAGE>

Federal Funds Redemption. Shareholders also may arrange to have redemption
proceeds of $5,000 or more wired in Federal Funds to a pre-designated bank
account. In order to be eligible for Federal Funds redemption, the shareholder
must designate on his or her Purchase Application the domestic commercial bank
and account number to receive the proceeds of his or her redemption and must
have his or her signature on the Purchase Application signature guaranteed. The
redemption request for Federal Funds redemption may be made by telephone, wire
or letter to the Transfer Agent and, if received before the determination of
net asset value of the Fund on any business day (generally 4:00 p.m., New York
time), the redemption proceeds will be wired to the investor's pre-designated
bank account on the next business day. Shareholders may effect Federal Funds
redemptions by telephoning the Transfer Agent toll-free at (800) 221-7210. The
Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine; if it does not, the Fund may be liable
for any losses due to fraudulent or unauthorized instructions. Among other
things, redemption proceeds may only be wired into the bank account designated
on the Purchase Application. The investor must independently verify this
information at the time the redemption request is made.

Repurchase Through Securities Dealers. The Fund will repurchase shares
through securities dealers. The Fund normally will accept orders to repurchase
shares by wire or telephone from dealers for 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 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 Fund; however, dealers may
impose a charge on the shareholder for transmitting the notice of repurchase to
the Fund. Redemption of Fund shares held in connection with Blueprint may be
made only through Merrill Lynch. Such a redemption may be made by submitting a
written notice by mail directly to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Attention: The BlueprintSM Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441. Investors whose shares are held through
Blueprint also may effect notice of redemption by telephoning Merrill Lynch
toll-free at (800) 637-3766. The Fund 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 Fund will promptly
notify any shareholder of any rejection of a repurchase with respect to his or
her shares. For shareholders repurchasing through their securities dealer,
payment will be made by the Transfer Agent to the dealer.

Regular Redemption. Shareholders may redeem shares by submitting a written
notice by mail directly to the Transfer Agent, Merrill Lynch Financial Data
Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290. Redemption
requests which are sent by hand should be delivered to Merrill Lynch Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-
6484. Redemption requests should not be sent to the Fund. The notice requires
the signatures of all persons in whose name the shares are registered, signed
exactly as their names appear on the Transfer Agent's register. The
signatures(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as such term is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, and the existence and validity of
it may be verified by the Transfer Agent through the use of industry
publications. Notarized signatures are not sufficient.

Automatic Redemption. Merrill Lynch has instituted an automatic redemption
procedure applicable to shareholders of the Fund who maintain securities
accounts with Merrill Lynch. This procedure, which is not applicable to margin
accounts, may be utilized by Merrill Lynch to satisfy amounts due it by the
shareholder

11
<PAGE>

as a result of account fees and expenses owed to Merrill Lynch or one of its
affiliates or as a result of purchases of securities or other transactions in
the shareholder's securities account. Under this procedure, unless the
shareholder notifies Merrill Lynch to the contrary, the shareholder's Merrill
Lynch securities account will be scanned each business day prior to the
determination of net asset value of the Fund (generally 4:00 p.m., New York
time); after application of any cash balances in the account, a sufficient
number of Fund shares may be redeemed at net asset value, as determined that
day, to satisfy any amounts for which the shareholder is obligated to make
payment to Merrill Lynch. Redemptions will be effected on the business day
preceding the date the shareholder is obligated to make such payment, and
Merrill Lynch will receive the redemption proceeds on the day following the
redemption date. Shareholders will receive all dividends declared and
reinvested through the date of redemption.

Unless otherwise requested, in those instances where shareholders request
transactions that settle on a "same-day" basis (such as Federal Funds wire
redemptions, branch office checks, transfers to other Merrill Lynch accounts
and certain securities transactions) the Fund shares necessary to effect such
transactions will be deemed to have been transferred to Merrill Lynch prior to
the Fund's declaration of dividends on that day. In such instances,
shareholders will receive all dividends declared and reinvested through the
date immediately preceding the date of redemption.

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

Due to the relatively high cost of maintaining accounts of less than $1,000,
the Fund reserves the right to redeem shares in any account for their then
current value (which will be promptly paid to the shareholder), if at any time
the total investment does not have a value of at least $1,000. Shareholders
will be notified that the value of their account is less than $1,000 and
allowed two months to make an additional investment before the redemption is
processed. In such event, the $1,000 minimum on subsequent investment will not
be applicable.

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services described below that are
designed to facilitate investment in its shares. Certain of such services are
not available to investors who place purchase orders for the Fund's shares
through Blueprint. Full details as to each of such services, copies of the
various plans described below and instructions as to how to participate in the
various services or plans, or to change options with respect thereto, can be
obtained from the Fund, the Distributor or Merrill Lynch. Included in such
services are the following:

Investment Account. Each shareholder has an Investment Account and will
receive from the Transfer Agent a monthly report showing the activity in his or
her account for the month. A shareholder may make additions to his or her
Investment Account at any time by purchasing shares at the public offering
price either through his or her securities dealer, by wire or by mail directly
to the Transfer Agent, acting as agent for his or her dealer. A shareholder may
ascertain the number of shares in his or her Investment Account by telephoning
the Transfer Agent toll-free at (800) 221-7210. 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.
Shareholders also may maintain their accounts through Merrill Lynch. Upon the
transfer of shares out of a Merrill Lynch brokerage account, an Investment
Account in the transferring shareholder's name may be opened at the Transfer
Agent. Shareholders considering transferring a tax-deferred retirement account
such as an IRA from Merrill Lynch to another brokerage firm or financial

12
<PAGE>

institution should be aware that, if the firm to which the retirement account
is to be transferred will not take delivery of shares of the Fund, a
shareholder must either redeem the shares so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must continue
to maintain a retirement account at Merrill Lynch for those shares.

Exchange Privilege. U.S. shareholders of the Fund have an exchange privilege
with Class D shares of certain other mutual funds advised by the Manager or FAM
("MLAM-advised mutual funds"). Alternatively, shareholders may exchange shares
of the Fund for Class A shares of one of the MLAM-advised mutual funds if the
shareholder holds any Class A shares of that fund in the account in which the
exchange is made at the time of the exchange or is otherwise an eligible Class
A investor. Shareholders of the Fund also may exchange shares of the Fund into
shares of certain MLAM-advised money market funds specifically designated as
available for exchange by holders of Fund shares. There is currently no
limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission. Exercise of the exchange privilege
is treated as a sale for Federal income tax purposes. For further information,
see "Shareholder Services--Exchange Privilege" in the Statement of Additional
Information.

Accrued Monthly Payout Plan. Shareholders desiring their dividends in cash
may enroll in this plan and receive monthly cash payments resulting from the
redemption of the shares received on dividend reinvestments during the month.

Systematic Withdrawal Plan. A shareholder may elect to receive systematic
withdrawal payments from his or her Investment Account on either a monthly or
quarterly basis.

Automatic Investment Plan. Regular additions may be made to an investor's
Investment Account by prearranged charges to his or her regular bank account at
a minimum of $50 per month.

PORTFOLIO TRANSACTIONS

The U.S. Government securities in which the Fund invests are traded primarily
in the over-the-counter market. Where possible, the 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 are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. U.S. Government
securities generally are traded on a net basis and normally do not involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
transactions will consist primarily of dealer spreads and underwriting
commissions. Under the Investment Company Act, persons affiliated with the Fund
are prohibited from dealing with the Fund as a 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 Fund may serve as its
broker in over-the-counter transactions conducted on an agency basis. The
Commission has issued an exemptive order permitting the Fund to conduct certain
principal transactions with Merrill Lynch Government Securities, Inc. or its
subsidiary, Merrill Lynch Money Markets, Inc. subject to certain terms and
conditions. During the fiscal year ended August 31, 1997, the Fund engaged in
no transactions pursuant to such order.

13
<PAGE>

ADDITIONAL INFORMATION

DIVIDENDS

Dividends are declared and reinvested daily in the form of additional shares
at net asset value. Shareholders will receive statements monthly as to such
reinvestments. Shareholders liquidating their holdings will receive on
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 Fund is determined, the net asset value per share of the Fund normally
remains constant at $1.00 per share.

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 amortization of premiums
and the estimated expenses of the Fund applicable to that dividend period.

DETERMINATION OF NET ASSET VALUE

The net asset value of the Fund is determined by the Manager once daily,
immediately after the daily declaration of dividends, on each day during which
the New York Stock Exchange (the "NYSE") or New York banks are open for
business. Such determination is made as of the close of business on the NYSE
(generally 4:00 p.m., New York time) or, on days when the NYSE is closed but
New York banks are open, at 4:00 p.m., New York time. The net asset value is
determined pursuant to the "penny-rounding" method by adding the fair value of
all securities and other assets in the portfolio, 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. Securities with
remaining maturities of greater than 60 days for which market quotations are
readily available will be valued at market value. Securities with a remaining
maturity of 60 days or less are valued on an amortized cost basis, i.e., by
valuing an 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 Fund will be valued at their fair value as determined
in good faith by or under direction of the Board of Trustees.

TAXES

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

Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length
of time the shareholder has owned Fund shares. Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as long-
term capital loss to the extent of any capital gain dividends received by the
shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Recent legislation
creates additional

14
<PAGE>

categories of capital gains taxable at different rates. Not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any ordinary income dividends
or capital gain dividends, as well as the amount of capital gain dividends in
the different categories of capital gain referred to above.

Dividends are taxable to shareholders even though they are reinvested in
shares of the Fund. Distributions by the 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 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 Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.

If the value of assets held by the 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 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 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.

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

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

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

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

15
<PAGE>

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

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

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

ORGANIZATION OF THE FUND

The Fund was organized on November 17, 1987 under the laws of the
Commonwealth of Massachusetts. The Fund is a successor to a Massachusetts
business trust of the same name organized on July 24, 1982. It is a no-load,
diversified, open-end investment company. The Declaration of Trust permits the
Trustees to issue an unlimited number of full and fractional shares of
beneficial interest of a single class. Upon liquidation of the Fund,
shareholders are entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders. Shares are fully paid and
nonassessable by the Fund. Shareholders are entitled to one vote for each full
share held and fractional votes for fractional shares held and vote in the
election of Trustees and on other matters submitted to the vote of
shareholders.

The Declaration of Trust does not require that the Fund hold an annual
meeting of shareholders. However, the Fund 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 Fund. The Fund 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 of Trust provides that a shareholders' meeting
may be called for any reason at the request of 10% of the outstanding shares of
the Fund or by a majority of the Trustees. Except as set forth above, the
Trustees shall continue to hold office and appoint successor Trustees.

SHAREHOLDER REPORTS

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

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

The written notification should include the shareholder's name, address, tax
identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
please call your Merrill Lynch Financial Consultant or Merrill Lynch Financial
Data Services, Inc. toll-free at 800-221-7210.

16
<PAGE>

SHAREHOLDER INQUIRIES

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

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

The Declaration of Trust establishing the Fund, dated November 17, 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 "Merrill Lynch U.S.A. Government Reserves" 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
Fund 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 the Fund
but the "Trust Property" (as defined in the Declaration) only shall be liable.

17
<PAGE>

[This page is intentionally left blank]

18
<PAGE>

MERRILL LYNCH U.S.A. GOVERNMENT RESERVES PURCHASE APPLICATION
[ ][ ][ ] - [ ][ ][ ][ ]
U.S.A. GOVERNMENT ACCOUNT NUMBER
(IF ACCOUNT IS ALREADY ESTABLISHED)

TYPE OF ACCOUNT
Check appropriate
box:
[_] Single
[_] Joint
[_] UGMA/UTMA
[_] Estate
[_] Trust*
[_] Corporation*
[_] Partnership*
[_] Transfer On
Death*
[_] Other* ____

FOR CERTAIN ACCOUNTS
(*) ADDITIONAL
DOCUMENTATION MAY
BE REQUIRED, PLEASE
SEE ADDITIONAL
INFORMATION ON

PAGE 21

ACCOUNT OWNER(S) AND OTHER INFORMATION

INDIVIDUAL OR JOINT ACCOUNT

________________________________________________________________________________
First Name MI Last Name Tax Id or Social Security No.

________________________________________________________________________________
Joint Tenant's First Name
MI Last Name

Joint tenants with rights of survivorship and not tenants in common will be
presumed unless otherwise specified. No joint tenants with right of
survivorship registrations are permitted for residents of Louisiana.
- --------------------------------------------------------------------------------
GIFT/TRANSFER TO MINOR ACCOUNTS--UGMA/UTMA

________________________________________________________________________________
Custodian's Name (one only)
Under Uniform Gift/Transfer to Minors Act of (State)

________________________________________________________________________________
Minor's Name (one only) Minor's Social Security Number
- --------------------------------------------------------------------------------
CORPORATE, PARTNERSHIP, TRUST OR OTHER ACCOUNTS

________________________________________________________________________________
Exact Name of Corporation, Partnership, or other Organization
Taxpayer Identification Number

________________________________________________________________________________
Trustee Accounts Only: Name(s) of all Trustee(s) required by trust agreement to
sell/purchase shares

________________________________________________________________________________
Date of Trust Agreement Taxpayer Identification Number of Trust

________________________________________________________________________________
Name of Trust (Trust Registrations only)
For the benefit of (Name of Beneficiary)

For multiple trustees, provide additional names required in registration on a
separate sheet and attach.
- --------------------------------------------------------------------------------
MAILING ADDRESS

________________________________________________________________________________
Street Address Apt. Number

________________________________________________________________________________
City State Zip

( ) ( )
________________________________________________________________________________
Daytime Phone Home Phone

Citizenship
[_] US
[_] Resident Alien
[_] Non Resident Alien (indicate country of residence)

__________________

19
<PAGE>

CHECK
REDEMPTION
PRIVILEGE

Check box [_]

I hereby request and authorize Merrill Lynch Financial Data Services, Inc. (the
"Transfer Agent") to honor checks drawn by me on my Merrill Lynch U.S.A.
Government Reserves (the "Fund") account subject to acceptance by the Fund,
with payment therefor to be made by redeeming sufficient shares in my account
without a signature guarantee. The Transfer Agent and the Fund do hereby
reserve all their lawful rights for honoring checks drawn by me and for
effecting redemptions pursuant to the Check Redemption Privilege. I understand
that this election does not create a checking or other bank account
relationship between myself and the Transfer Agent or the Fund and that the
relationship between myself and the Transfer Agent is that of shareholder-
transfer agent.

For Joint Account: Check here whether any owner [_] is authorized, or all
owners [_] are required to sign checks.

If you select the Check Redemption Privilege, a supply of checks imprinted with
your name and shareholder account number will be sent to you in approximately
10 days. YOU SHOULD BE CERTAIN THAT A SUFFICIENT NUMBER OF SHARES ARE HELD BY
THE TRANSFER AGENT IN YOUR ACCOUNT TO COVER THE AMOUNT OF ANY CHECK DRAWN BY
YOU. IF INSUFFICIENT SHARES ARE IN THE ACCOUNT, THE CHECK WILL BE RETURNED
MARKED INSUFFICIENT FUNDS.

Since the aggregate dollar value of your account fluctuates daily, the total
value of your account cannot be determined in advance and the account cannot be
fully redeemed by check. If the Check Redemption Privilege is being requested
for an account in the name of a corporation, trust or other organization,
additional documents will be required. (See ADDITIONAL INFORMATION on pg. 21)

- --------------------------------------------------------------------------------
FEDERAL
FUNDS
REDEMPTION

Check box [_]

Signature Guarantee
required for this
option

The undersigned hereby authorize(s) and direct(s) Merrill Lynch Financial Data
Services, Inc. (the "Transfer Agent") to act on telephonic, telegraphic, or
other instructions (without signature guarantee) from any person representing
himself to be either the investor or any authorized representative of the
investor, directing redemption of shares in an amount of $5,000.00 or more of
(the "Fund") held by the Transfer Agent on behalf of the undersigned, and to
transmit the proceeds by wire only to the bank account designated below. Any
change in the bank account designated to receive redemption proceeds shall
require a signature guarantee. A national bank, trust company or a member of
the Federal Reserve system may guarantee a signature. A commercial bank or
trust company located in or having a correspondent in New York City, a member
firm of a national securities exchange or a member of the National Association
of Securities Dealers may also guarantee a signature. PLEASE NOTE THAT A NOTARY
PUBLIC'S SEAL DOES NOT CONSTITUTE A SIGNATURE GUARANTEE. The investor
understands and agrees that the Fund and the Transfer Agent reserve the right
to refuse any instructions. The Transfer Agent requires additional
documentation from corporations, partnerships, trustees and similar
institutional investors in addition to this authorization (see ADDITIONAL
INFORMATION on pg. 21 to establish this privilege). Absent its own negligence,
and so long as reasonable procedures to confirm the validity of telephoned
instructions are employed, neither the Fund nor the Transfer Agent shall be
liable for any redemption caused by unauthorized instructions. Investors may
effect notice of this type of redemption by telephoning the Transfer Agent at
the toll-free number (800) 221-7210. Shares which are being repurchased through
securities dealers will not qualify for Federal Funds redemption.

PLEASE PROVIDE THE FOLLOWING INFORMATION IF THE ABOVE BOX IS CHECKED. Your bank
must be a member of the Federal Reserve or have a correspondent banking
relation with a bank that does belong to the Federal Reserve.

ENCLOSE A COPY OF YOUR PERSONAL CHECK (MARKED "VOID") FOR THE BANK ACCOUNT
LISTED BELOW:

________________________________________________________________________________
Your Bank Name Bank Routing Code

________________________________________________________________________________
Your Account Name Your Account Number

________________________________________________________________________________
Your Bank Address City State Zip Code

________________________________________________________________________________
Correspondent Bank Name Routing Code
(complete if your bank is not a member of the Federal Reserve)

20
<PAGE>

AUTOMATIC
INVESTMENT PLAN
PRIVILEGE

Check box [_]

Check this box only if you wish to have an Authorization Form sent to you.
- --------------------------------------------------------------------------------

SYSTEMATIC
WITHDRAWAL PLAN

Check box [_]

Signature Guarantee
required for this
option.

To establish this feature minimum balance requirements are: $10,000.00 for
monthly disbursements and $5,000.00 for quarterly disbursements of shares in
Merrill Lynch U.S.A. Government Reserves at cost or current offering price. IN
ADDITION, TO ESTABLISH THIS PLAN YOUR SIGNATURE(S) MUST BE GUARANTEED. A
national bank, trust company or a member of the Federal Reserve system may
guarantee a signature. A commercial bank or trust company located in or having
a correspondent in New York City, a member firm of a national securities
exchange or a member of the National Association of Securities Dealers may also
guarantee a signature. PLEASE NOTE THAT A NOTARY PUBLIC'S SEAL DOES NOT
CONSTITUTE A SIGNATURE GUARANTEE. This option is only available if you do not
select the Accrued Monthly Payout Plan. The undersigned hereby authorizes and
directs Merrill Lynch Financial Data Services, Inc. on (check only one in each
category):

A: [_]the 24th of each month OR
[_]March 24th, June 24th, September 24th, and December 24th

B: [_]to redeem a sufficient number of shares in my account to generate
redemption
proceeds of $ OR
[_]to redeem % of the shares in my account on such date.

C: [_]Pay the redemption proceeds by check payable to the order of
the registered owner(s) OR
[_]other

________________________________________________________________________________
Name

________________________________________________________________________________
Address

________________________________________________________________________________
City Sate Zip Code

- --------------------------------------------------------------------------------
ADDITIONAL
INFORMATION

[]Corporations--"Certification of Corporate Resolution," indicating the names
and titles of officers authorized to write checks, must be signed by an
officer other than one empowered to execute transactions, with his/her
signature guaranteed and the corporate seal affixed.

[]Partnerships--"Certificate of Partnership," naming the partners and the
required number that may act in accordance with the terms of the Partnership
Agreement is to be executed by a general partner with his/her signature
guaranteed.

[]Trusts--"Certification of Trustees," naming the trustees and the required
number that may act in accordance with the terms of the Trust Agreement, must
be executed by a certifying trustee with his/her signature guaranteed.

[]Transfer On Death--"Transfer on Death Beneficiary Form," must be completed by
the account holder(s) with the signature(s) guaranteed.

[]If you are adding or reinstating the Federal Funds Redemption and/or the
Systematic Withdrawal Plan options, the signature(s) must be guaranteed in
the space provided below. A national bank, trust company or a member of the
Federal Reserve system may guarantee a signature. A commercial bank or trust
company located in or having a correspondent in New York City, a member firm
of a national securities exchange or a member of the National Association of
Securities Dealers may also guarantee a signature. PLEASE NOTE THAT A NOTARY
PUBLIC'S SEAL DOES NOT CONSTITUTE A SIGNATURE GUARANTEE.

21
<PAGE>

ACCRUED MONTHLY
PAYOUT PLAN

Check box [_]

The undersigned hereby authorizes and directs Merrill Lynch Financial Data
Services, Inc. to redeem on the last Friday of the month all shares purchased
during such month through the daily reinvestment of dividends and distributions
and send the proceeds to me.

- --------------------------------------------------------------------------------
REQUIRED
SIGNATURES

By the execution of this Purchase Application, the investor represents and
warrants that the investor has full right, power and authority to make the
investment applied for pursuant to this Purchase Application, and the person or
persons signing on behalf of the investor represent and warrant that they are
duly authorized to sign this Purchase Application and to purchase or redeem
shares of the Fund on behalf of the investor. The investor hereby affirms that
he or she has received a current Fund Prospectus and appoints Merrill Lynch
Financial Data Services, Inc. as his or her agent to receive dividends and
distributions for their automatic reinvestment in additional Fund shares.

X ______________________ ________________________ ______
Print Name Signature of Investor Date

X ______________________ ________________________ ______
Print Name Signature of Joint Registrant, if any Date

Signature(s) Guaranteed: (for those electing the Federal Funds Redemption or
Systematic Withdrawal Plan)

AFFIX SIGNATURE GUARANTEE HERE:

By: ________________________________
(Authorized Signatory)

- --------------------------------------------------------------------------------
TAX CERTIFICATION

Under penalties of perjury, I certify that:

1. The number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me), and 2. I am not subject to
backup withholding (as discussed in the Prospectus under "Additional
Information--Taxes") either because: (a) I am exempt from backup withholding,
or (b) I have not been notified by the Internal Revenue Service (the "IRS")
that I am subject to backup withholding as a result of failure to report all
interest or dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding.

[_] Please check box and write in the word exempt if you are exempt from backup
withholding. _________

CERTIFICATION INSTRUCTIONS: You must cross out item 2 above if you have been
notified by the IRS that you are currently subject to backup withholding
because of underreporting interest or dividends on your tax return. By your
signature below, you authorize the furnishing of this certification to other
mutual funds sponsored by Merrill Lynch Asset Management or its affiliates.

X ______________________ ______ ________________________
Signature Date Title (For Special Accounts, e.g. Trustee)
SIGN HERE

22
<PAGE>

MANAGER
Merrill Lynch Asset Management

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

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

DISTRIBUTOR
Merrill Lynch Funds Distributor, Inc.

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081

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

TRANSFER AGENT
Merrill Lynch Financial Data Services, Inc.

Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 45290
Jacksonville, Florida 32232-5290

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

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
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 FUND, THE 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....................................................... 3
Yield Information.......................................................... 4
Investment Objectives and Policies......................................... 4
Management of the Fund..................................................... 6
Trustees.................................................................. 6
Management and Advisory Arrangements...................................... 7
Transfer Agency Services.................................................. 8
Purchase of Shares......................................................... 8
Methods of Payment........................................................ 8
Distribution Plan......................................................... 9
Redemption of Shares....................................................... 10
Methods of Redemption..................................................... 10
Shareholder Services....................................................... 12
Portfolio Transactions..................................................... 13
Additional Information..................................................... 14
Dividends................................................................. 14
Determination of Net Asset Value.......................................... 14
Taxes..................................................................... 14
Organization of the Fund.................................................. 16
Shareholder Reports....................................................... 16
Shareholder Inquiries..................................................... 17
Purchase Application....................................................... 19
</TABLE>

Code #10152-1197

[LOGO] MERRILL LYNCH

MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES

[ART]

Merrill Lynch U.S.A. Government Reserves is organized as a Massachusetts
business trust. It is not a bank nor does it offer fiduciary or trust services.
Shares of the Fund are not equivalent to a bank account. As with any investment
in securities, the value of a shareholder's investment in the Fund will
fluctuate. The shares of the Fund are not insured by any Government agency and
are not subject to the protection of the Securities Investor Protection
Corporation. A shareholder's investment in the Fund is not insured by any
government agency.

PROSPECTUS

November 26, 1997

Distributor:
Merrill Lynch
Funds Distributor, Inc.

This prospectus should be retained for future reference.

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH U.S.A. GOVERNMENT RESERVES
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800

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

The investment objectives of Merrill Lynch U.S.A. Government Reserves (the
"Fund") are to seek preservation of capital, current income and liquidity
available from investing in a diversified portfolio of short-term marketable
securities, including variable rate securities, which are direct obligations of
the U.S. Government, and repurchase agreements pertaining to such securities.
For purposes of its investment policies, the Fund defines short-term securities
as having a maturity of no more than 762 days (25 months). Management of the
Fund expects that substantially all of 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 two years. There can be no assurance that
the investment objectives of the Fund will be realized. The Fund pays Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") a distribution fee
for providing certain services in connection with the distribution of Fund
shares. See "Purchase of Shares."

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

This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated November
26, 1997 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus. Capitalized terms used but not defined herein have the same
meanings as in the Prospectus.

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

MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR

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

The date of this Statement of Additional Information is November 26, 1997.
<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The investment objectives of the Fund are to seek preservation of capital,
current income and liquidity available from investing in a diversified
portfolio of short-term marketable securities that are direct obligations of
the U.S. Government, and repurchase agreements pertaining to such securities
with banks and securities dealers. Reference is made to "Investment Objectives
and Policies" in the Prospectus for a discussion of the investment objectives
and policies of the Fund.

As discussed in the Prospectus, the Fund may invest in the U.S. Government
securities described therein pursuant to repurchase agreements. Repurchase
agreements may be entered into only with a member bank of the Federal Reserve
System or a primary dealer in U.S. Government securities or an affiliate
thereof. Under such agreements, the bank or the primary dealer or an affiliate
thereof agrees, upon entering into the contract, to repurchase the security
from the Fund at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. Such agreements usually
cover short periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. The Fund will require the seller
to provide additional collateral if the market value of the securities falls
below the repurchase price at any time during the term of the repurchase
agreement. In the event of a default by the seller, the Fund ordinarily will
retain ownership of the securities underlying the repurchase agreement, and
instead of a contractually fixed rate of return, the rate of return to the Fund
shall be dependent upon intervening fluctuations of the market value of such
securities and the accrued interest on the securities. In such event, the Fund
would have rights against the seller for breach of contract with respect to any
losses arising from market fluctuations following the failure of the seller to
perform. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur
costs or losses in connection with the disposition of the collateral. From time
to time the Fund also may invest in money market securities pursuant to
purchase and sale contracts. While purchase and sale contracts are similar to
repurchase agreements, purchase and sale contracts are structured so as to be
in substance more like a purchase and sale of the underlying security than is
the case with repurchase agreements.

In addition to the investment restrictions set forth in the Prospectus, the
Fund has adopted the following 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
Fund's outstanding voting securities (which for this purpose means the lesser
of (i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares). The Fund may not: (1) act as an underwriter of securities issued by
other persons; (2) purchase any securities on margin, except for use of short-
term credit necessary for clearance of purchases and sales of portfolio
securities; (3) make short sales of securities or maintain a short position or
write, purchase or sell puts, calls, straddles, spreads or combinations
thereof; (4) make loans to other persons, provided that the Fund may purchase
U.S. Government securities and enter into repurchase agreements and purchase
and sale contracts referred to in investment restriction (1) in the Prospectus;
(5) borrow amounts in excess of 20% of its total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes [Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however, the
Fund will not borrow to increase income

2
<PAGE>

but only to meet redemption requests which might otherwise require untimely
dispositions of portfolio securities. Interest paid on such borrowings will
reduce net income.]; and (6) mortgage, pledge, hypothecate or in any manner
transfer as security for indebtedness any securities owned or held by the Fund
except as may be necessary in connection with borrowings mentioned in (5)
above, and then such mortgaging, pledging or hypothecating may not exceed 10%
of the Fund's net assets, taken at market value.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

Information about the Trustees and executive officers of the Fund, including
their ages and their principal occupations for at least the last five years, is
set forth below. Unless otherwise noted, the address of each executive officer
and Trustee is c/o Merrill Lynch Asset Management, P.O. Box 9011, Princeton,
New Jersey 08543-9011.

Arthur Zeikel (65)--President and Trustee (1)(2)--President of Merrill Lynch
Asset Management, L.P. ("MLAM" or the "Manager", which term as used herein
includes the Manager's corporate predecessors) since 1977; President of Fund
Asset Management, L.P. ("FAM", which term as used herein includes FAM's
corporate predecessors) since 1977; President and Director of Princeton
Services, Inc. ("Princeton Services") since 1993; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.

Donald Cecil (70)--Trustee (2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.

M. Colyer Crum (65)--Trustee (2)--Soldiers Field Road, Boston, Massachusetts
02163. Currently James R. Williston Professor of Investment Management
Emeritus, Harvard Business School; James R. Williston Professor of Investment
Management, Harvard Business School, from 1971 to 1996; Director of Cambridge
Bancorp, Copley Properties, Inc. and Sun Life Assurance Company of Canada.

Edward H. Meyer (70)--Trustee (2)--777 Third Avenue, New York, New York
10017. President of Grey Advertising Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Harman
International Industries, Inc. and Ethan Allen Interiors, Inc.

Jack B. Sunderland (69)--Trustee (2)--P.O. Box 7, West Cornwall, Connecticut,
06796. President and Director of American Independent Oil Company, Inc. (an
energy company) since 1987; Member of Council on Foreign Relations since 1971.

3
<PAGE>

J. Thomas Touchton (58)--Trustee (2)--Suite 3405, One Tampa City Center, 201
North Franklin Street, Tampa, Florida 33602. Managing Partner of The Witt-
Touchton Company and its predecessor, The Witt Co. (a private investment
partnership) since 1972; Trustee Emeritus of Washington and Lee University;
Director of TECO Energy, Inc. (an electric utility holding company).

Terry K. Glenn (57)--Executive Vice President (1)(2)--Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Merrill Lynch
Funds Distributor, Inc. (the "Distributor") since 1986 and Director thereof
since 1991; President of Princeton Administrators, L.P. since 1988.

Joseph T. Monagle, Jr. (49)--Senior Vice President (1)(2)--Senior Vice
President of the Manager and FAM since 1990; Vice President of the Manager
from 1978 to 1990; Senior Vice President of Princeton Services since 1993.

Donald C. Burke (37)--Vice President (1)(2)--First Vice President of the
Manager since 1997; Director of Taxation of the Manager since 1990; and Vice
President of the Manager from 1990 to 1997.

Donaldo S. Benito (52)--Vice President (1)(2)--Vice President of the Manager
since 1986; Assistant Vice President of the Manager from 1984 to 1986.

Gerald M. Richard (48)--Treasurer (1)(2)--Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of the Distributor
since 1981 and Treasurer of the Distributor since 1984.

Thomas D. Jones, III (32)--Secretary (1)(2)--Attorney with the Manager since
1992.

- --------
(1) Interested person, as defined in the Investment Company Act of 1940, of
the Fund.
(2) Such Trustee or officer is a director, trustee or officer of certain
other investment companies for which the Manager or FAM acts as investment
adviser.

At November 1, 1997, the Trustees and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of
beneficial interest of the Fund. At such date, Mr. Zeikel, a Trustee of the
Fund, and the other officers of the Fund, owned less than 1% of the
outstanding shares of Common Stock of ML & Co.

COMPENSATION OF TRUSTEES

Pursuant to the terms of its management agreement with the Fund (the
"Management Agreement"), the Manager pays all compensation of all officers of
the Fund and all Trustees of the Fund who are affiliated with ML & Co. or its
subsidiaries. The Fund pays each Trustee not affiliated with the Manager (each
a "non-affiliated Trustee") an annual fee of $3,000 plus a fee of $750 per
meeting attended and pays all Trustees' actual out-of-pocket expenses relating
to attendance at meetings. The Fund also pays each member of the Audit
Committee, which consists of all of the non-affiliated Trustees, an annual fee
of $2,500 and the chairman of the Audit Committee an additional annual fee of
$1,000. Fees and expenses paid to the non-affiliated Trustees aggregated
$43,729 for the fiscal year ended August 31, 1997.

4
<PAGE>

The following table sets forth, for the fiscal year ended August 31, 1997,
compensation paid by the Fund to the non-interested Trustees and, for the
calendar year ended December 31, 1996, the aggregate compensation paid by all
registered investment companies (including the Fund) advised by MLAM and its
affiliate, FAM ("MLAM/FAM-Advised Funds") to the non-affiliated Trustees:

<TABLE>
<CAPTION>
PENSION OR AGGREGATE
RETIREMENT COMPENSATION
BENEFITS FROM FUND AND
ACCRUED AS PART MLAM/FAM-
COMPENSATION OF FUND ADVISED FUNDS
DIRECTOR FROM THE FUND EXPENSE PAID TO TRUSTEES(1)
- -------- ------------- --------------- -------------------
<S> <C> <C> <C>
Donald Cecil.................. $9,500 none $268,933
M. Colyer Crum................ $8,500 none $117,600
Edward H. Meyer............... $8,500 none $227,933
Jack B. Sunderland............ $8,500 none $128,100
J. Thomas Touchton............ $8,500 none $128,100
</TABLE>
- --------

(1) The Trustees serve on the boards of MLAM/FAM-Advised Funds as follows: Mr.
Cecil (33 registered investment companies consisting of 33 portfolios); Mr.
Crum (15 registered investment companies consisting of 15 portfolios); Mr.
Meyer (33 registered investment companies consisting of 33 portfolios); Mr.
Sunderland (18 registered investment companies consisting of 30
portfolios); and Mr. Touchton (18 registered investment companies
consisting of 30 portfolios).

MANAGEMENT AND ADVISORY ARRANGEMENTS

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

Subject to the direction of the Board of Trustees, the Manager is responsible
for the actual management of the Fund's portfolio and constantly reviews the
Fund's holdings in light of its own research analysis and that from other
relevant sources. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Manager. The Manager performs certain of
the other administrative services and provides all of the office space,
facilities, equipment and necessary personnel for portfolio management of the
Fund.

The Manager has access to the expertise of its affiliate, Merrill Lynch
Government Securities, Inc. ("GSI"), which is a wholly owned subsidiary of ML &
Co. In terms of dollar volume of trading, GSI is one of the largest dealers in
U.S. Government securities and U.S. Government agency securities, acting both
as a primary dealer and a secondary market trader. GSI is one of the reporting
dealers in U.S. Government securities who report their daily position and
activity to the Federal Reserve Bank of New York. In addition, the total
securities and economic research facilities of Merrill Lynch are available to
the Manager.

Securities held by the Fund also may be held by, or be appropriate
investments for, other funds or clients (collectively referred to as "clients")
for which the Manager or FAM acts as an adviser or by investment advisory
clients of the Manager. Because of different objectives or other factors, a
particular security may be bought for one or more clients when one or more
clients are selling the same security. If purchases or sales of securities for
the Fund or other advisory clients arise for consideration at or about the same
time, transactions in such securities will be made, insofar as feasible, for
the respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Manager or
its subsidiary 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.

5
<PAGE>

As compensation for its services to the Fund, the Manager receives a fee from
the Fund at the end of each month at the annual rate of 0.45% of the average
daily net assets of the Fund. For the fiscal years ended August 31, 1995, 1996
and 1997, the total management fees paid by the Fund to the Manager aggregated
$2,408,559, $2,478,931 and $2,476,982, respectively.

The Management Agreement obligates the Manager to provide advisory,
administrative and management services, to furnish office space and facilities
for management of the affairs of the Fund and to pay all compensation of and
furnish office space and facilities for officers of the Fund, as well as the
fees of all Trustees of the Fund who are affiliated persons of ML & Co. or any
of its subsidiaries. The Fund pays all other expenses incurred in the operation
of the Fund, including, among other things, organizational expenses, taxes,
expenses for legal and auditing services, costs of printing proxy statements,
shareholder reports, prospectuses and statements of additional information
(except to the extent paid by the Distributor), charges of the custodian and
transfer agent, expenses of redemption of shares, expenses of registering and
qualifying shares for sale under Federal and state securities laws, fees and
expenses of unaffiliated Trustees, accounting and pricing costs (including the
daily calculation of net asset value), insurance, interest, expenses of
portfolio transactions, litigation and other extraordinary or nonrecurring
expenses, and other expenses properly payable by the Fund. Accounting services
are provided for the Fund by the Manager, and the Fund reimburses the Manager
for its costs in connection with such services. For the fiscal year ended
August 31, 1997, the amount of such reimbursement was $57,756.

The Manager is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are "controlling persons"
of the Manager (as defined in the Investment Company Act of 1940, as amended
(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
Management Agreement will continue in effect from year to year if approved
annually (a) by the Board of Trustees of the Fund or by a majority of the
outstanding voting shares of the Fund and (b) by a majority of Trustees who are
not parties to such contract or "interested persons" (as defined in the
Investment Company Act) of any such party. Such contract is not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of the shareholders of the Fund.

PURCHASE OF SHARES

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

The Fund is offering its shares without a sales charge at a public offering
price equal to the net asset value next determined after a purchase order
becomes effective. It is anticipated that the net asset value will remain
constant at $1.00 per share, although this cannot be assured.

The minimum initial purchase is $5,000. The minimum subsequent purchase is
$1,000. The minimum initial purchase with respect to pension, profit sharing,
individual retirement and certain other retirement plans is $100 and the
minimum subsequent purchase in connection with such plans is $1. The minimum
initial or subsequent purchase requirements may be waived for certain employer
sponsored retirement or savings

6
<PAGE>

plans, such as tax qualified retirement plans within the meaning of Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), deferred
compensation plans within the meaning of Section 403(b) and Section 457 of the
Code, other deferred compensation arrangements, Voluntary Employee Benefits
Association plans, and non-qualified After Tax Savings and Investment programs,
maintained on the Merrill Lynch Group Employee Services system. For accounts
advised by banks and registered investment advisers, including the Manager, the
minimum initial purchase is $300 and the minimum subsequent purchase is $100.
Any order may be rejected by the Distributor or the Fund.

The Distributor acts as the distributor in the continuous offering of the
Fund's shares. Shares may be purchased directly from the Distributor or from
other securities dealers, including Merrill Lynch, with whom the Distributor
has entered into a selected dealer agreement. Securities dealers may charge
investors a fee in connection with such transactions. Merrill Lynch has
informed the Fund that it does not charge such a fee.

The Fund's distribution agreement with the Distributor is renewable annually,
and may be terminated on 60 days' written notice by either party. Under such
agreement, 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 in connection with the
offering to dealers and investors. The Distributor also will pay for other
supplementary sales literature.

It is the Fund's policy to be as fully invested as reasonably practicable at
all times to maximize the yield on the Fund's portfolio. The money markets in
which the Fund will purchase and sell portfolio securities normally require
immediate settlement of transactions in Federal Funds. Federal Funds are a
commercial bank's deposits in a Federal Reserve Bank and can be transferred
from one member bank's account to that of another member bank on the same day
and thus are considered to be immediately available funds. Orders for the
purchase of Fund shares shall become effective on the day Federal Funds become
available to the Fund and the shares being purchased will be issued at the net
asset value per share next determined. If Federal Funds are available to the
Fund prior to 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 following the date of purchase.

DISTRIBUTION PLAN

The Fund has adopted a Shareholder Servicing Plan and Agreement (the "Plan")
in compliance with Rule 12b-1 under the Investment Company Act pursuant to
which the Fund is authorized to pay Merrill Lynch a fee at the annual rate of
0.125% of the average daily net asset value of Fund accounts maintained through
Merrill Lynch. The Plan reimburses Merrill Lynch only for actual expenses
incurred in the fiscal year in which the fee is paid. The fee is principally to
provide compensation to Merrill Lynch Financial Consultants and other Merrill
Lynch personnel for providing direct personal services to shareholders of the
Fund. The distribution fee is not compensation for the administrative and
operational services rendered to shareholders by Merrill Lynch, which are
covered by the Management Agreement between the Fund and the Manager (see
"Management of the Fund--Management and Advisory Arrangements").

The Trustees believe that the Fund's expenditures under the Plan benefit the
Fund and its shareholders by providing better shareholder services and by
affecting positively the sale and distribution of Fund shares. For the fiscal
years ended August 31, 1995, 1996 and 1997, $617,903, $642,390 and $621,180,
respectively, was paid to Merrill Lynch pursuant to the Plan (based on average
net assets subject to the Plan of

7
<PAGE>

approximately $535.2 million, $551.9 million and $552.5 million, respectively).
All of such amounts were allocated to Merrill Lynch Financial Consultants,
other Merrill Lynch personnel and related administrative costs.

Among other things, the Plan provides that Merrill Lynch shall provide and
the Trustees of the Fund shall review quarterly reports of the distribution
expenditures made by Merrill Lynch pursuant to the Plan. In their consideration
of the Plan, the Trustees must consider all factors they deem relevant,
including information as to the benefits of the Plan to the Fund and its
shareholders. The Plan further provides that, so long as the Plan remains in
effect, the selection and nomination of Trustees of the Fund who are not
"interested persons" of the Fund as defined in the Investment Company Act (the
"Independent Trustees") shall be committed to the discretion of the Independent
Trustees then in office. The 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 voting securities of the Fund.
Finally, the Plan cannot be amended to increase materially the amount to be
spent by the Fund thereunder without shareholder approval, and all material
amendments are required to be approved by vote of the Trustees of the Fund,
including a majority of the Independent Trustees, cast in person at a meeting
called for that purpose.

REDEMPTION OF SHARES

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

The right to redeem shares or to receive payment with respect to any such
redemption may be suspended 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 (the "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 Fund of securities owned by it is not reasonably practicable or
(B) it is not reasonably practicable for the Fund fairly to determine the value
of its net assets; or (3) for such other periods as the Commission may by order
permit for the protection of security holders of the 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.

The total value of the shareholder's investment in the Fund 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 Fund at such time and income earned.

PURCHASE AND REDEMPTION OF SHARES THROUGH MERRILL LYNCH RETIREMENT PLANS

Merrill Lynch offers four types of self-directed retirement plans for which
it acts as passive custodian ("Retirement Plans"). These plans are an
individual retirement account ("IRA"), The Merrill Lynch Tax-Deferred Basic(TM)
Retirement Plan, designed for sole proprietors, partnerships and small
corporations ("Basic Plan"), a simplified employee pension plan ("SEP"), and a
special IRA available through payroll deductions to individuals through their
employers, labor unions and other employee associations that have chosen to

8
<PAGE>

make such IRAs available on a voluntary basis through the Merrill Lynch
Blueprint SM Program. Information concerning the establishment and maintenance
of Retirement Plans and investments by Retirement Plan accounts is contained
in the Retirement Plan documents available from Merrill Lynch.

PURCHASE BY RETIREMENT PLANS

Special purchase procedures apply in the case of the Retirement Plans. The
minimum initial purchase for participants in Retirement Plans is $100, and the
minimum subsequent purchase is $1. In addition, participants in the Retirement
Plans may elect to have cash balances in their Retirement Plan account
automatically invested in the Fund.

Cash balances of participants who elect to have such funds automatically
invested in the Fund will be invested as follows. Cash balances arising from
the sale of securities held in the Retirement Plan account which do not settle
on the day of the transaction (such as most common and preferred stock
transactions) become available to the Fund and will be invested in shares of
the Fund on the business day following the day that proceeds with respect
thereto are received in the Retirement Plan account. Proceeds giving rise to
cash balances from the sale of securities held in the Retirement Plan account
settling on a same day basis and from principal repayments on debt securities
held in the account become available to the Fund and will be invested in
shares of the Fund on the next business day following receipt. Cash balances
arising from dividends or interest payments on securities held in the
Retirement Plan account or from a contribution to the Retirement Plan are
invested in shares of the Fund on the business day following the date the
payment is received in the Retirement Plan account. Cash balances of less than
$1.00 will not be invested and no return will be earned.

A participant in the IRA, Basic or SEP Retirement Plans who has not elected
to have cash balances automatically invested in shares of the Fund may enter a
purchase order through his or her Merrill Lynch Financial Consultant.

REDEMPTIONS BY RETIREMENT PLANS

Distributions from Retirement Plans to a participant prior to the time the
participant reaches age 59 1/2 may subject the participant to penalty taxes.
There are, however, no adverse tax consequences resulting from redemptions of
shares of the Fund where the redemption proceeds remain in the Retirement Plan
account or are otherwise invested therein.

The Fund has instituted an automatic redemption procedure for participants
in the Retirement Plans who have elected to have cash balances in their
accounts automatically invested in shares of the Fund. In the case of such
participants, unless directed otherwise, Merrill Lynch will redeem a
sufficient number of shares of the Fund to purchase other securities (such as
common stocks) that the participant has selected for investment in his or her
Retirement Plan account.

Any shareholder may redeem shares of the Fund by submitting a written notice
of redemption to Merrill Lynch. Participants in IRA, Basic and SEP Retirement
Plans should contact their Merrill Lynch Financial Consultant to effect such
redemptions. Participants in the IRA program through the Merrill Lynch
Blueprint SM Program should contact Merrill Lynch at the toll-free number
furnished to them to effect such redemptions. Redemption requests should not
be sent to the Fund. If inadvertently sent to the Fund, they will be forwarded
to Merrill Lynch. The notice must bear the signature of the person in whose
name the Retirement Plan is maintained, signed exactly as his or her name
appears on his Retirement Plan adoption agreement.

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<PAGE>

CONFIRMATIONS

All purchases and redemptions of Fund shares and dividend reinvestments will
be confirmed to participants in the IRA, Basic and SEP Retirement Plans
(rounded to the nearest share) in the statement which is sent quarterly to all
participants in IRA Retirement Plans and monthly to all participants in Basic
and SEP Retirement Plans.

Participants in the IRA program through the Merrill Lynch Blueprint SM
Program will receive quarterly statements reflecting all purchases,
redemptions and dividend reinvestments of Fund shares, and, at least monthly,
will receive an individual confirmation with respect to each redemption of
Fund shares and each purchase of such shares other than purchases which are
made automatically through payroll deductions.

PORTFOLIO TRANSACTIONS

The Fund has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities. Subject to policy
established by the Board of Trustees of the Fund, the Manager is primarily
responsible for the Fund's portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the 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 Manager
generally seeks reasonably competitive spreads or commissions, the Fund will
not necessarily be paying the lowest spread or commission available. The
Fund's policy of investing in securities with short maturities will result in
high portfolio turnover.

The U.S. Government securities in which the Fund invests are traded
primarily in the over-the-counter ("OTC") market. Where possible, the 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 are acting as principals for their
own accounts. On occasion, securities may be purchased directly from the
issuer. U.S. Government securities generally are traded on a net basis and
normally do not involve either brokerage commissions or transfer taxes. The
cost of executing portfolio securities transactions of the Fund primarily will
consist of dealer spreads and underwriting commissions. Under the Investment
Company Act, persons affiliated with the Fund are prohibited from dealing with
the Fund as principals 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 Fund, including GSI and Merrill Lynch, may not serve as the Fund's
dealer in connection with such transactions except pursuant to the exemptive
order described below. However, an affiliated person of the Fund may serve as
its broker in OTC transactions conducted on an agency basis. The Fund may not
purchase securities from any underwriting syndicate of which Merrill Lynch is
a member.

The Commission has issued an order permitting the Fund to conduct principal
transactions with GSI in U.S. Government securities and U.S. Government agency
securities. This order contains a number of conditions, including conditions
designed to ensure that the price to the Fund from GSI is equal to or better
than that available from other sources. GSI has informed the Fund that it will
in no way, at any time, attempt to influence or control the activities of the
Fund or the Manager in placing such principal transactions. The exemptive
order allows GSI or its subsidiary, Merrill Lynch Money Markets, Inc., to
receive a dealer spread on any transaction with the Fund no greater than its
customary dealer spread from transactions of the type

10
<PAGE>

involved. Generally, such spreads do not exceed 0.25% of the principal amount
of the securities involved. During the fiscal years ended August 31, 1995 and
1996 the Fund did not engage in any such transactions. For the fiscal year
ended August 31, 1997 the Fund engaged in four such transactions for an
aggregate amount of $76,001,250.

The Trustees of the Fund have considered the possibilities of recapturing for
the benefit of the Fund expenses of possible portfolio transactions, such as
dealer spreads and underwriting commissions, by conducting such portfolio
transactions through affiliated entities, including GSI and Merrill Lynch. For
example, dealer spreads received by GSI or its subsidiary on transactions
conducted pursuant to the permissive order described above could be offset
against the management fee payable by the Fund to the Manager. After
considering all factors deemed relevant, the Board of Trustees made a
determination not to seek such recapture. The Trustees will reconsider this
matter from time to time.

The 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 economic data and market forecasts) to the Manager
may receive orders for transactions of the Fund. Information so received will
be in addition to and not in lieu of the services required to be performed by
the Manager under the Management Agreement and the expenses of the Manager will
not necessarily be reduced as a result of the receipt of such supplemental
information.

DETERMINATION OF NET ASSET VALUE

The net asset value of the Fund is determined by the Manager once daily,
immediately after the daily declaration of dividends, on each business day
during which the NYSE or New York banks are open for business. Such
determination is made as of the close of business on the NYSE (generally 4:00
p.m., New York time) or, on days when the NYSE is closed but New York banks are
open, at 4:00 p.m., New York time. As a result of this procedure, the net asset
value is determined each day except for days on which both the NYSE and New
York banks are closed. Both the NYSE and New York banks are closed on New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value is determined under 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 Fund values its portfolio securities with remaining maturities of 60 days
or less on an amortized cost basis and values its securities with remaining
maturities of greater than 60 days for which market quotations are readily
available at market value. Other securities held by the Fund are valued at
their fair value as determined in good faith by or under the direction of the
Board of Trustees.

In accordance with the Commission rule applicable to the valuation of its
portfolio securities, the Fund will maintain a dollar-weighted average
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 (twenty-five months). The 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 Fund's price per
share as computed for the purpose of sales and redemptions at $1.00. Deviations
of more than an insignificant amount between the net asset value calculated
using market

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<PAGE>

quotations and that calculated on a "penny-rounded" basis will be reported to
the Trustees by the 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 Fund will take such corrective
action as it regards as necessary and appropriate, including the reduction of
the number of outstanding shares of the Fund by having each shareholder
proportionately contribute shares to the 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 Fund's capital the number of shares which represents the
difference between the amortized cost valuation and market valuation of the
portfolio. Each shareholder will be deemed to have agreed to such contribution
by his or her investment in the Fund.

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

YIELD INFORMATION

The 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 and
unrealized gains and losses on portfolio securities. In accordance with
regulations adopted by the Commission, the Fund is required to disclose its
annualized yield for certain seven-day base periods in a standardized manner
that 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 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 Fund of future yields or rates of return on its shares.
The yield is affected by such factors as changes in interest rates on Treasury
securities, average portfolio maturity, the types and quality of portfolio
securities held and operating expenses. The yield on Fund shares for various
reasons may not be comparable to the yield on shares of other money market
funds or other investments.

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<PAGE>

SHAREHOLDER SERVICES

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

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at Merrill Lynch Financial Data
Services, Inc. (the "Transfer Agent") has an Investment Account and will
receive from the Transfer Agent a monthly report showing the activity in his or
her account for the month. A shareholder may make additions to his or her
Investment Account at any time by purchasing shares at the applicable public
offering price either through his or her securities dealer, by wire or by mail
directly to the Transfer Agent, acting as agent for his or her dealer. A
shareholder may ascertain the number of shares in his or her Investment Account
by telephoning the Transfer Agent toll-free at (800) 221-7210. 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 Fund, certificates representing the Fund's shares will not be
issued physically. Shares are maintained by the Fund 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.

AUTOMATIC INVESTMENT PLAN

The Fund offers an Automatic Investment Plan in connection with accounts
maintained at the Transfer Agent whereby the Transfer Agent is authorized
through preauthorized checks of $50 or more to charge the regular bank account
of the shareholder on a regular basis to provide systematic additions to the
Investment Account of such shareholder. See the Purchase Application in the
Prospectus. A shareholder's Automatic Investment Plan may be terminated at any
time without charge or penalty by the shareholder, the Fund, the Transfer Agent
or the Distributor.

ACCRUED MONTHLY PAYOUT PLAN

The dividends of the Fund are reinvested automatically in additional shares.
Shareholders with accounts maintained at the Transfer Agent desiring cash
payments may enroll in the Accrued Monthly Payout Plan, under which shares
equal in number to shares credited through the automatic reinvestment of
dividends and distributions during each month are redeemed at net asset value
on the last Friday of such month in order to meet the monthly distribution.
Investors may open an Accrued Monthly Payout Plan by completing the appropriate
portion of the Purchase Application in the Prospectus. A shareholder's Accrued
Monthly Payout Plan may be terminated at any time without charge or penalty by
the shareholder, the Fund, the Transfer Agent or the Distributor.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to make systematic withdrawals from an Investment
Account on either a monthly or quarterly basis as provided below. Quarterly
withdrawals are available for shareholders who have

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<PAGE>

acquired shares of the Fund having a value, based on cost or the current
offering price of $5,000 or more, and monthly withdrawals for shareholders with
shares with such a value of $10,000 or more. The quarterly periods end on the
24th day of March, June, September and December. See the Purchase Application
in the Prospectus.

At the time of each withdrawal payment, sufficient shares are redeemed from
those on deposit in the shareholder's account to provide the withdrawal payment
specified by the shareholder. The shareholder may specify either a dollar
amount or a percentage of the value of his or her shares. Redemptions will be
made at net asset value as determined at the close of business on the New York
Stock Exchange on the 24th day of each month or the 24th day of the last month
of each quarter, whichever is applicable. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the Transfer Agent or the Distributor. A shareholder may
not elect to make systematic withdrawals while he or she is enrolled in the
Accrued Monthly Payout Plan.

Withdrawal payments should not be considered as dividends, yield or income.
Withdrawals are sales of shares and may result in taxable gain or loss. If
periodic withdrawals continuously exceed reinvested dividends, the
shareholder's original investment will be reduced correspondingly. Shareholders
are cautioned not to designate withdrawal programs that result in an undue
reduction of principal. There are no minimums on amounts that may be
systematically withdrawn. Periodic investments may not be made into an
Investment Account in which the shareholder has elected to make systematic
withdrawals.

EXCHANGE PRIVILEGE

Shareholders of the Fund who have held all or part of their shares for at
least 15 days may exchange their shares of the Fund for Class D shares of
mutual funds advised by the Manager or FAM described below (collectively
referred to as the "MLAM-advised mutual funds") on the basis described below.
Shares with a net asset value of at least $250 are required to qualify for the
exchange privilege.

Alternatively, shareholders may exchange shares of the Fund for Class A
shares of one of the MLAM-advised mutual funds if the shareholder holds any
Class A shares of that fund in the account in which the exchange is made at the
time of the exchange or is otherwise an eligible Class A investor. 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 mutual funds; participants in certain investment
programs including TMAsm Managed Trusts to which Merrill Lynch Trust Company
provides discretionary trustee services and certain purchases made in
connection with the Merrill Lynch Mutual Fund Adviser program; and ML & Co. and
its subsidiaries and their directors and employees and members of the Boards of
MLAM-advised investment companies, including the Fund.

Shareholders of the Fund also may exchange shares of the Fund into shares of
the following money market funds: Merrill Lynch Ready Assets Trust, Merrill
Lynch Retirement Reserves Money Fund (available only if the exchange occurs
within certain retirement plans) and Merrill Lynch U.S. Treasury Money Fund.

Under the exchange privilege, each of the funds offers to exchange its shares
("new shares") for shares ("outstanding shares") of any of the other funds, on
the basis of relative net asset value per share, plus an

14
<PAGE>

amount equal to the difference, if any, between the sales charge previously
paid on the outstanding shares and the sales charge payable at the time of the
exchange on the new shares. At the present time, the shares of each of the
funds are sold with varying sales charges. With respect to outstanding shares
as to which previous exchanges have taken place, the "sales charge previously
paid" shall include the aggregate of the charges paid with respect to such
shares in the initial purchase and any subsequent exchange. Shares issued
pursuant to dividend reinvestment are sold on a no-load basis in each of the
funds. For purposes of the exchange privilege, dividend reinvestment shares
shall be deemed to have been sold with a sales charge equal to the sales charge
previously paid on the shares on which the dividend was paid. Based on this
formula, an exchange of shares of the Fund, which are sold on a no-load basis,
for shares of the other funds, which are sold with a sales charge, generally
will require the payment of a sales charge.

It is contemplated that the exchange privilege may be applicable to other new
mutual funds whose shares may be distributed by the Distributor. The exchange
privilege available to participants in the Merrill Lynch Blueprintsm Program
may be different from that available to other investors.

Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the new shares for Federal income tax purposes and
depending on the circumstances, a short- or long-term capital gain or loss may
be realized with different long-term capital gains rates potentially
applicable, if gain on the sale is long-term. 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."

To exercise the exchange privilege, shareholders may either contact their
listed securities dealer, who will advise the Fund of the exchange, or write to
the Transfer Agent requesting that the exchange be effected. Such letter must
be signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" as such is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. Shareholders of the Fund, and shareholders of the other funds
described above with shares for which certificates have not been issued, may
exercise the exchange privilege by wire through their securities dealer. The
Fund reserves the right to require a properly completed Exchange Application.
This exchange privilege may be modified or terminated at any time in accordance
with the rules of the Commission. The Fund reserves the right to limit the
number of times an investor may exercise the exchange privilege. Certain funds
may suspend the continuous offering of their shares to the general public at
any time and may thereafter resume such offering from time to time. The
exchange privilege is available only to U.S. shareholders in states where the
exchange legally may be made.

TAXES

FEDERAL

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

15
<PAGE>

Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses ("capital gain dividends") are taxable
to shareholders as long-term capital gains, regardless of the length of time
the shareholder has owned Fund shares. Any loss upon the sale or exchange of
Fund shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Recent legislation creates additional
categories of capital gains taxable at different rates. Not later than 60 days
after the close of its taxable year, the Fund will provide its shareholders
with a written notice designating the amounts of any ordinary income dividends
or capital gain dividends, as well as the amount of capital gain dividends in
the different categories of capital gain referred to above.

Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the 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 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 Fund and
received by its shareholders on December 31 of the year in which such dividend
was declared.

If the value of assets held by the 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 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 Fund, will nonetheless be fully taxable, even if
the number of shares in shareholders' accounts has been reduced as described
above.

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

16
<PAGE>

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

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 in whole or in part from interest on U.S. Government obligations.
State law varies as to whether dividend income attributable to U.S. Government
obligations is exempt from state income tax.

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

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par
value $0.10 per share, of a single class and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interests in the Fund. Each share represents an equal
proportionate interest in the Fund with each other share. Upon liquidation of
the Fund, shareholders are entitled to share pro rata in the net assets of the
Fund available for distribution to shareholders. Shares have no preemptive or
conversion rights. The rights of redemption and exchange are described
elsewhere herein and in the Prospectus. Shares are fully paid and non-
assessable by the Fund.

Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held and vote in the election of Trustees and on
other matters submitted to the vote of shareholders. Voting rights are not
cumulative, so that the holders of more than 50% of the shares voting in the
election of Trustees can, if they choose to do so, elect all Trustees of the
Fund. No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Fund.

17
<PAGE>

The Manager provided the initial capital for the Fund by purchasing 100,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can be disposed of only by redemption. The organizational expenses of the Fund
were paid by the Fund and were amortized over a period not exceeding five
years. The proceeds received by the Manager on the redemption of any of the
shares initially purchased by it will be reduced by the proportionate amount of
unamortized organizational expenses which the number of shares redeemed bears
to the number of shares it initially purchased.

CUSTODIAN

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

TRANSFER AGENT

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

INDEPENDENT AUDITORS

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

LEGAL COUNSEL

Brown & Wood LLP, One World Trade Center, New York, New York 10048-0557, is
counsel for the Fund.

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on August 31 of each year. The Fund will
send to its shareholders 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 Fund do not contain all of the information set forth in the
Registration Statement and the exhibits relating thereto which the Fund has
filed with the Commission, Washington, D.C., under the Securities Act of 1933,
as amended, and the Investment Company Act, to which reference is hereby made.

18
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares on November 1, 1997.

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

The Declaration of Trust establishing the Fund, dated November 17, 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 "Merrill Lynch U.S.A. Government Reserves" 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
Fund shall be held to any personal liability, nor shall resort be had to their
property for the satisfaction of any obligation or claim of the Fund but the
"Trust Property" (as defined in the Declaration) only shall be liable.

19
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Trustees and Shareholders,
Merrill Lynch U.S.A. Government Reserves:

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch U.S.A. Government Reserves as of
August 31, 1997, 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 August
31, 1997 by correspondence with the custodian and brokers. 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 Merrill Lynch
U.S.A. Government Reserves as of August 31, 1997, 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

October 1, 1997

20
<PAGE>

<TABLE>
<CAPTION>
Merrill Lynch U.S.A. Government Reserves August 31, 1997

SCHEDULE OF INVESTMENTS (in Thousands)

Face Interest Maturity Value
Issue Amount Rate Date (Note 1a)
US Government Obligations -- 44.4%

<S> <C> <C> <C> <C>
US Treasury Bills* $30,000 5.46 % 9/15/97 $29,941
2,100 5.09 1/22/98 2,056
1,900 5.52 5/28/98 1,825
2,250 5.525 5/28/98 2,161
3,080 5.275 7/23/98 2,932

US Treasury Notes 15,500 6.00 9/02/97 15,500
1,000 5.75 9/30/97 1,000
13,050 5.625 10/31/97 13,054
3,200 5.75 10/31/97 3,200
22,600 7.375 11/15/97 22,678
13,250 7.875 1/15/98 13,360
9,430 5.00 1/31/98 9,405
17,750 5.625 1/31/98 17,749
20,220 7.25 2/15/98 20,359
3,600 5.125 2/28/98 3,592
2,500 5.125 3/31/98 2,493
8,540 6.125 3/31/98 8,567
9,200 7.875 4/15/98 9,326
3,765 5.125 4/30/98 3,753
5,500 5.875 4/30/98 5,509
14,010 6.125 5/15/98 14,058
8,480 8.25 7/15/98 8,658
1,500 5.25 7/31/98 1,493
2,800 6.25 7/31/98 2,812
5,100 9.25 8/15/98 5,262
7,100 6.00 9/30/98 7,116
2,400 7.125 10/15/98 2,434
4,200 5.875 10/31/98 4,200
1,400 5.50 11/15/98 1,394
5,100 5.00 1/31/99 5,037
3,200 5.875 1/31/99 3,199
2,900 6.375 4/30/99 2,919
750 5.875 7/31/99 748

Total US Government Obligations
(Cost -- $247,744) 247,790
=========
</TABLE>

10/10/97 Merrill Lynch U.S.A. Government Reserves

Face Value
Amount Issue (Note 1a)
Repurchase Agreements** -- 62.1%

<S> <C> <C>
$21,000 BZW Securities, Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 $21,000
23,000 Bear Stearns & Co., Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 23,000
25,000 Daiwa Securities America, Inc., purchased on 8/29/97 to yield 5.57% to 9/02/1997 25,000
54,000 Fuji Securities, Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 54,000
26,000 HSBC Securities, Inc., purchased on 8/29/97 to yield 5.58% to 9/02/97 26,000
26,000 J. P. Morgan Securities Inc., purchased on 8/29/97 to yield 5.56% to 9/02/97 26,000
54,000 Nesbitt Burns Securities, Inc., purchased on 8/29/97 to yield 5.58% to 9/02/97 54,000
26,000 Nikko Securities Co. International, Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 26,000
24,000 Nomura Securities International, Inc., purchased on 8/29//97 to yield 5.56% to 9/02/97 24,000
24,875 PaineWebber Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 24,875
22,000 SBC Warburg Inc., purchased on 8/29/97 to yield 5.57% to 9/02/97 22,000
21,000 Sanwa Securities USA Co., L.P., purchased on 8/29/97 to yield 5.57% to 9/02/97 21,000

Total Repurchase Agreements
(Cost -- $346,875) 346,875

Total Investments (Cost -- $594,619) -- 106.5% 594,665
Liabilities in Excess of Other Assets -- (6.5%) (36,540)
---------
Net Assets -- 100.0% $558,125
=========
</TABLE>

* US Treasury Bills are traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
** Repurchase Agreements are fully collateralized by US Government & Agency
Obligations.

See Notes to Financial Statements.

21
<PAGE>

FINANCIAL INFORMATION

Statement of Assets and Liabilities as of August 31, 1997

<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $594,619,080*) (Note 1a) $594,664,811
Cash 652
Receivables:
Securities sold $10,857,459
Interest 3,172,456
Beneficial interest sold 7,110 14,037,025
-------------
Prepaid registration fees and other assets (Note 1d) 85,285
-------------
Total assets 608,787,773
-------------

Liabilities: Payables:
Securities purchased 42,116,473
Beneficial interest redeemed 8,005,923
Investment adviser (Note 2) 199,430
Distributor (Note 2) 133,879
Dividends to shareholders (Note 1f) 125 50,455,830
-------------
Accrued expenses and other liabilities 207,146
-------------
Total liabilities 50,662,976
-------------

Net Assets: Net assets $558,124,797
=============

Net Assets Shares of beneficial interest, $0.10 par value, unlimited number of "
Consist of: shares authorized $55,807,907
Paid-in capital in excess of par 502,271,159
Unrealized appreciation on investments -- net 45,731
-------------
Net Assets -- Equivalent to $1.00 per share based on 558,079,066 "
shares of beneficial interest outstanding $558,124,797
=============
</TABLE>
* Cost for Federal income tax purposes. As of August 31, 1997, net
unrealized appreciation for Federal income tax purposes amounted
to $45,731, of which $96,475 related to appreciated securities
and $50,744 related to depreciated securities.

See Notes to Financial Statements.

Statement of Operations

For the Year Ended August 31, 1997

<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $30,430,249
(Note 1c):

Expenses: Investment advisory fees (Note 2) $2,476,982
Transfer agent fees (Note 2) 1,015,604
Distribution fees (Note 2) 621,180
Registration fees (Note 1d) 107,436
Printing and shareholder reports 89,985
Accounting services (Note 2) 57,756
Professional fees 57,524
Trustees' fees and expenses 43,729
Custodian fees 39,243
Other 12,716
-------------
Total expenses 4,522,155
-------------
Investment income -- net 25,908,094
-------------

Realized & Realized gain on investments -- net 42,945
Unrealized Gain on Change in unrealized appreciation/depreciation on investments -- net 249,934
Investments -- Net -------------
(Note 1c): Net Increase in Net Assets Resulting from Operations $26,200,973
=============
</TABLE>
See Notes to Financial Statements.

22
<PAGE>

Statements of Changes in Net Assets

For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $25,908,094 $26,170,999
Realized gain on investments -- net 42,945 192,438
Change in unrealized appreciation/depreciation on investments -- net 249,934 (250,285)
------------- -------------
Net increase in net assets resulting from operations 26,200,973 26,113,152
------------- -------------

Dividends & Investment income -- net (25,908,094) (26,170,999)
Distributions to Realized gain on investments -- net (42,945) (192,438)
Shareholders ------------- -------------
(Note 1f): Net decrease in net assets resulting from dividends and distributions
to shareholders (25,951,039) (26,363,437)
------------- -------------

Beneficial Interest Net proceeds from sale of shares 1,575,865,679 1,473,714,747
Transactions Net asset value of shares issued to shareholders in reinvestment of
(Note 3): dividends and distributions (Note 1f) 25,939,110 26,345,553
------------- -------------
1,601,804,789 1,500,060,300
Cost of shares redeemed (1,598,214,554) (1,504,454,157)
------------- -------------
Net increase (decrease) in net assets derived from beneficial
interest transactions 3,590,235 (4,393,857)
------------- -------------

Net Assets: Total increase (decrease) in net assets 3,840,169 (4,644,142)
Beginning of year 554,284,628 558,928,770
------------- -------------
End of year $558,124,797 $554,284,628
============= =============

</TABLE>
See Notes to Financial Statements.

Financial Highlights

The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1997 1996 1995 1994 1993

<S> <C> <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 .0471 .0474 .0472 .0280 .0248
Realized and unrealized gain (loss) on
investments -- net .0005 (.0002) .0017 (.0007) .0007
--------- --------- --------- --------- ---------
Total from investment operations .0476 .0472 .0489 .0273 .0255
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.0471) (.0474) (.0472) (.0280) (.0248)
Realized gain on investments -- net (.0001) (.0003) (.0007) (.0002) (.0013)
--------- --------- --------- --------- ---------
Total dividends and distributions (.0472) (.0477) (.0479) (.0282) (.0261)
--------- --------- --------- --------- ---------
Net asset value, end of year $1.00 $1.00 $1.00 $1.00 $1.00
========= ========= ========= ========= =========
Total investment return 4.82% 4.89% 4.89% 2.85% 2.64%
========= ========= ========= ========= =========

Ratios to Average Expenses .82% .82% .85% .81% .75%
Net Assets: ========= ========= ========= ========= =========
Investment income and realized gain
on investments -- net 4.71% 4.78% 4.79% 2.82% 2.61%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $558,125 $554,285 $558,929 $544,174 $575,044
Data: ========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.

23
<PAGE>

Merrill Lynch U.S.A. Government Reserves August 31, 1997

NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:
Merrill Lynch U.S.A. Government Reserves (the ""Fund"") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The following is a summary of significant accounting policies followed
by the Fund.

(a) Valuation of investments -- Investments maturing more than sixty days after
the valuation date are valued at market value. When 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. 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. 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 Fund.

(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 or 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 US Government securities
pursuant to repurchase agreements with a member bank of the Federal Reserve
System or a primary dealer in US Government securities. Under such agreements,
the bank or primary dealer 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 daily such dividends (net of non-resident alien tax and
backup withholding tax withheld) 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 Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Asset Management, L.P. (""MLAM""). The general partner of MLAM is Princeton
Services, Inc. (""PSI""), an indirect wholly-owned subsidiary of Merrill Lynch &
Co., Inc. (""ML & Co.""), which is the limited partner. For such services, the
Fund pays a monthly fee equal to an annual rate of 0.45% of the average daily
net assets of the Fund.

The Fund has a Distribution and Shareholder Servicing Plan in accordance with
Rule 12b-1 under the Investment Company Act of 1940, pursuant to which Merrill
Lynch, Pierce, Fenner & Smith Inc. (""MLPF&S"") receives a distribution fee
under the Distribution Agreement from the Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of the accounts of Fund
shareholders who maintain their accounts through MLPF&S. The distribution fee is
to compensate MLPF&S financial consultants and other directly involved branch
office

24
<PAGE>

personnel for selling shares of the Fund and providing direct personal
services to shareholders. The distribution fee is not compensation for the
administrative and operational services rendered to the Fund by MLPF&S in
processing share orders and administering sharebuilder accounts.

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

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

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

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

25
<PAGE>

[This page is intentionally left blank]
<PAGE>

[ART]

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies......................................... 2
Management of the Fund..................................................... 3
Trustees and Officers..................................................... 3
Compensation of Trustees.................................................. 4
Management and Advisory Arrangements...................................... 5
Purchase of Shares......................................................... 6
Distribution Plan......................................................... 7
Redemption of Shares....................................................... 8
Purchase and Redemption of Shares through Merrill Lynch Retirement Plans... 8
Purchase by Retirement Plans............................................. 9
Redemptions by Retirement Plans.......................................... 9
Confirmations............................................................ 10
Portfolio Transactions..................................................... 10
Determination of Net Asset Value........................................... 11
Yield Information.......................................................... 12
Shareholder Services....................................................... 13
Investment Account........................................................ 13
Automatic Investment Plan................................................. 13
Accrued Monthly Payout Plan............................................... 13
Systematic Withdrawal Plans............................................... 13
Exchange Privilege........................................................ 14
Taxes...................................................................... 15
Federal................................................................... 15
General Information........................................................ 17
Description of Shares..................................................... 17
Custodian................................................................. 18
Transfer Agent............................................................ 18
Independent Auditors...................................................... 18
Legal Counsel............................................................. 18
Reports to Shareholders................................................... 18
Additional Information.................................................... 18
Security Ownership of Certain
Beneficial Owners........................................................ 19
Independent Auditors' Report............................................... 20
Financial Statements....................................................... 21
</TABLE>

Code #10281-1197
[LOGO] MERRILL LYNCH

MERRILL LYNCH
U.S.A. GOVERNMENT
RESERVES

[ART]

STATEMENT OF ADDITIONAL INFORMATION

November 26, 1997

Distributor:
Merrill Lynch
Funds Distributor, Inc.

<PAGE>

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS:

Contained in Part A:

Financial Highlights for each of the years in the ten-year period
ended August 31, 1997.

Contained in Part B:

Schedule of Investments as of August 31, 1997.

Statement of Assets and Liabilities as of August 31, 1997.

Statement of Operations for the fiscal year ended August 31, 1997.

Statements of Changes in Net Assets for each of the years in the
two-year period ended August 31, 1997.

Financial Highlights for each of the years in the five-year period
ended August 31, 1997.

(B) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Declaration of Trust of Registrant, dated November 17, 1987. (a)
--Amendment to Declaration of Trust of Registrant, dated December 30,
(b) 1988. (a)
2 --By-Laws of Registrant. (a)
3 --None.
4 --None.
5(a) --Form of Management Agreement between Registrant and Merrill Lynch
Asset Management, L.P. (a)
(b) --Supplement to Investment Advisory Agreement with Merrill Lynch Asset
Management,
L.P. (b)
6 --Form of Distribution Agreement between Registrant and Merrill Lynch
Funds Distributor, Inc. (a)
7 --None.
--Form of Custody Agreement between Registrant and The Bank of New
8 York. (a)
9 --Form of Transfer Agency Agreement between Registrant and Merrill
Lynch Financial Data Services, Inc. (a)
10 --None.
--Consent of Deloitte & Touche LLP, independent auditors for
11 Registrant.
12 --None.
13 --Certificate of Merrill Lynch Asset Management, L.P. (a)
14 --None.
15 --Form of Merrill Lynch Shareholder Servicing Plan and Agreement
pursuant to Rule 12b-1 between Registrant and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. (a)
16 --Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22. (a)
17 --Financial Data Schedule.
18 --None.
</TABLE>
- --------
(a) Refiled pursuant to the Electronic Data Gathering, Analysis and Retrieval
(EDGAR) phase-in requirements.

(b) Filed on December 27, 1994 as an exhibit to Post-Effective Amendment No. 13
to Registrant's Registration Statement under the Securities Act of 1933 on
Form N-1A.

C-1
<PAGE>

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

Registrant is not controlled by, or under common control with, any person.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
SEPTEMBER 30,
TITLE OF CLASS 1997
-------------- -------------
<S> <C>
Shares of beneficial interest, par value $0.10 per share....... 54,041
</TABLE>

Note: The number of holders shown above includes holders of record
plus beneficial owners whose shares are held of record by
Merrill Lynch, Pierce, Fenner & Smith Incorporated.

ITEM 27. INDEMNIFICATION.

Reference is made to Section 5.3 of the Registrant's Declaration of Trust and
Section 9 of the Distribution Agreement.

Section 5.3 of the Registrant's Declaration of Trust provides as follows:

"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers
or trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he may be threatened, while in office or thereafter, by reason of his
being or having been such a trustee, officer, employee or agent, except
with respect to any matters as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties; provided, however, that as to any matter disposed
of by a compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustee to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of good faith and reasonable
belief as to the best interests of the Trust, had been adjudicated, it
would have been adjudicated in favor of such person. The rights accruing to
any person under these provisions shall not exclude any other right to
which he may be lawfully entitled; provided that no person may satisfy any
right of indemnity or reimbursement granted herein or in Section 5.1 or to
which he may be otherwise entitled except out of the property of the Trust,
and no Shareholder shall be personally liable to any person with respect to
any claim for indemnity or reimbursement or otherwise. The Trustees may
make advance payments in connection with indemnification under this Section
5.3, provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification."

Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended (the "Investment
Company Act") may be concerned, such payments will be made only on the
following conditions: (i) the advances must be limited to amounts used, or to
be used, for the preparation or presentation of a defense to the action,
including costs connected with the preparation of a settlement; (ii) advances
may be made only upon receipt of a written promise by, or on behalf of, the
recipient to repay that amount of the advance which exceeds the amount which it
is ultimately determined

C-2
<PAGE>

that he is entitled to receive from the Registrant by reason of
indemnification; and (iii) (a) such promise must be secured by a surety bond,
other suitable insurance or an equivalent form of security which assures that
any repayments may be obtained by the Registrant without delay or litigation,
which bond, insurance or other form of security must be provided by the
recipient of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Trustees, or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled to
indemnification.

In Section 9 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), against certain
types of civil liabilities arising in connection with the Registration
Statement or Prospectus and Statement of Additional Information.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to Trustees, officers and controlling persons of the
Registrant and the principal underwriter pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Trustee,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM") acts as the
investment adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
for Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch
Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill
Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend
Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and Hotchkis and Wiley
Funds (advised by Hotchkis and Wiley, a division of MLAM); and the following
closed-end registered investment companies: Merrill Lynch High Income Municipal
Bond Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc. MLAM also
acts as sub-adviser to Merrill Lynch World Strategy Portfolio and Merrill Lynch
Basic Value Equity Portfolio, two investment portfolios of EQ Advisory Trust.

Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond

C-3
<PAGE>

Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Puerto Rico Tax-Exempt Fund, Inc., Merrill
Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and The
Municipal Fund Accumulation Program, Inc.; and the following closed-end
registered investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Debt Strategies Fund,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings Fund, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings Florida Insured Fund, MuniHoldings New York
Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund
II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest
New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona
Fund, Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund,
Inc., MuniYield California Insured Fund II, Inc., MuniYield Florida Fund,
MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund,
Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc.,
MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund II,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Taurus
MuniCalifornia Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide
DollarVest Fund, Inc.

The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Merrill Lynch
Intermediate Government Bond Fund is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2646. The address of the Manager, FAM, Princeton Services,
Inc. ("Princeton Services"), and Princeton Administrators, L.P. is also P.O.
Box 9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor, Inc. ("MLFD") is P.O. Box 9081, Princeton, New Jersey 08543-9081.
The address of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Merrill Lynch & Co., Inc. ("ML & Co.") is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill
Lynch Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.

Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 1, 1995 for his or her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Glenn is Executive Vice President and Mr. Richard is Treasurer of
substantially all of the investment companies described in the first two
paragraphs or this Item 28 and Messrs. Giordano, Harvey, Kirstein and Monagle
are officers or directors/trustees of one or more of such companies.

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- --------------------- ----------------------------------
<S> <C> <C>
ML & Co................. Limited Partner Financial Services Holding Company
Princeton Services, Inc.
....................... General Partner General Partner of FAM
Arthur Zeikel........... President President of FAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co.
Terry K. Glenn.......... Executive Vice Executive Vice President of FAM; Executive
President Vice President and Director of Princeton
Services; President and Director of MLFD;
Director of MLFDS; President of Princeton
Administrators, L.P.
Linda Federici.......... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
</TABLE>

C-4
<PAGE>

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITION WITH MANAGER PROFESSION, VOCATION OR EMPLOYMENT
---- --------------------- ----------------------------------
<S> <C> <C>
Vincent R. Giordano..... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Elizabeth Griffin....... Senior Vice Senior Vice President of FAM
President
Norman R. Harvey........ Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Michael J. Hennewinkel.. Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Philip L. Kirstein...... Senior Vice Senior Vice President, General Counsel and
President, General Secretary of FAM; Senior Vice President,
Counsel and General Counsel, Director and Secretary of
Secretary Princeton Services; Director of MLFD
Ronald M. Kloss......... Senior Vice Senior Vice President and Controller of
President and FAM; Senior Vice President and Controller
Controller of Princeton Services
Debra W. Landsman-Yaros. Senior Vice Senior Vice President of FAM; Vice
President President of MLFD; Senior Vice President
of Princeton Services
Stephen M.M. Miller..... Senior Vice Executive Vice President of Princeton
President Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Michael L. Quinn........ Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services; Managing
Director and First Vice President of
Merrill Lynch from 1985 to 1989
Richard L. Reller....... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services; Director
of MLFD
Gerald M. Richard....... Senior Vice Senior Vice President and Treasurer of FAM;
President and Vice President and Treasurer of MLFD;
Treasurer Senior Vice President and Treasurer of
Princeton Services
Gregory Upah............ Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Ronald L. Welburn....... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
Anthony Wiseman......... Senior Vice Senior Vice President of FAM; Senior Vice
President President of Princeton Services
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) MLFD acts as the principal underwriter for the Registrant and acts as the
principal underwriter each of the open-end investment companies referred to in
the first two paragraphs of Item 28 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA
Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation Program,
Inc. and The Municipal Fund Accumulation Program, Inc., and MLFD also acts as
principal underwriter for the following closed-end investment companies:
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch Municipal
Strategy Fund, and Merrill Lynch Senior Floating Rate Fund, Inc.

C-5
<PAGE>

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

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

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act and the rules thereunder are maintained at
the offices of the Registrant, (800 Scudders Mill Road, Plainsboro, New Jersey
08536) and Transfer Agent, (4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484).

ITEM 31. MANAGEMENT SERVICES.

Other than as set forth under the caption "Management of the Fund--Management
and Advisory Arrangements" in the Prospectus constituting Part A of the
Registration Statement and under the caption "Management of the Fund--
Management and Advisory Arrangements" in the Statement of Additional
Information constituting Part B of the Registration Statement, Registrant is
not a party to any management-related service contract.

ITEM 32. UNDERTAKINGS.

(a)Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of Registrant's latest annual report to shareholders, upon
request and without charge.

C-6
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF THE
REQUIREMENTS FOR EFFECTIVENESS OF THIS AMENDMENT TO ITS REGISTRATION STATEMENT
PURSUANT TO RULE 485(B) OF THE SECURITIES ACT OF 1933 AND HAS DULY CAUSED THIS
AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO, AND
STATE OF NEW JERSEY, ON THE 25TH DAY OF NOVEMBER, 1997.

Merrill Lynch U.S.A. Government
Reserves (Registrant)

/s/ Gerald M. Richard
By ___________________________________
(GERALD M. RICHARD, TREASURER)

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
ITS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE

Arthur Zeikel* President and
- ------------------------------------- Trustee (Principal
(ARTHUR ZEIKEL) Executive Officer)

Treasurer
/s/ Gerald M. Richard (Principal November 25,
- ------------------------------------- Financial and 1997
(GERALD M. RICHARD) Accounting
Officer)

Donald Cecil* Trustee
- -------------------------------------
(DONALD CECIL)

M. Colyer Crum* Trustee
- -------------------------------------
(M. COLYER CRUM)

Edward H. Meyer* Trustee
- -------------------------------------
(EDWARD H. MEYER)

Jack B. Sunderland* Trustee
- -------------------------------------
(JACK B. SUNDERLAND)

J. Thomas Touchton* Trustee
- -------------------------------------
(J. THOMAS TOUCHTON)

/s/ Gerald M. Richard November 25,
*By _________________________________ 1997
(GERALD M. RICHARD, ATTORNEY-IN-
FACT)

C-7
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
11 --Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
17 --Financial Data Schedule.
</TABLE>
<PAGE>

APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

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

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

<PAGE>

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 594619080
<INVESTMENTS-AT-VALUE> 594664811
<RECEIVABLES> 14037025
<ASSETS-OTHER> 85937
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 608787773
<PAYABLE-FOR-SECURITIES> 42116473
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8546503
<TOTAL-LIABILITIES> 50662976
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 558079066
<SHARES-COMMON-STOCK> 558079066
<SHARES-COMMON-PRIOR> 554488831
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45731
<NET-ASSETS> 558124797
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 30430249
<OTHER-INCOME> 0
<EXPENSES-NET> (4522155)
<NET-INVESTMENT-INCOME> 25908094
<REALIZED-GAINS-CURRENT> 42945
<APPREC-INCREASE-CURRENT> 249934
<NET-CHANGE-FROM-OPS> 26200973
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (25908094)
<DISTRIBUTIONS-OF-GAINS> (42945)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1575865679
<NUMBER-OF-SHARES-REDEEMED> (1598214554)
<SHARES-REINVESTED> 25939110
<NET-CHANGE-IN-ASSETS> 3840169
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2476982
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4522155
<AVERAGE-NET-ASSETS> 552457951
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

INDEPENDENT AUDITORS' CONSENT

Merrill Lynch U.S.A. Government Reserves:

We consent to the use in Post-Effective Amendment No. 16 to Registration
Statement No. 2-78702 of our report dated October 1, 1997 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Princeton, New Jersey
November 25, 1997