MERRILL LYNCH N Y MUNI BD FD OF M L MULTI ST MUNI SER TRUST, 485BPOS, 1999-01-25

MERRILL LYNCH N Y MUNI BD FD OF M L MULTI ST MUNI SER TRUST
485BPOS, 1999-01-25

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 1999

SECURITIES ACT FILE NO. 2-99473
INVESTMENT COMPANY ACT FILE NO. 811-4375
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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. 17 [X]

AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]

AMENDMENT NO. 181 [X]

(CHECK APPROPRIATE BOX OR BOXES)

---------------
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

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

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

---------------
ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
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:

<TABLE>
<S> <C>
COUNSEL FOR THE TRUST: MICHAEL J. HENNEWINKEL, ESQ.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT
ONE WORLD TRADE CENTER P.O. BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.

---------------
</TABLE>

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

IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
TITLE OF SECURITIES BEING REGISTERED: Shares of Beneficial Interest, par value
$.10 per share.
- --------------------------------------------------------------------------------
</TABLE>

<PAGE>

[MERRILL LYNCH LOGO HERE]

Merrill Lynch New York Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust

[PROSPECTUS GRAPHIC HERE]

January 25, 1999

This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and
keep it for future reference.

The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<S> <C>
PAGE
[KEY GRAPHIC HERE]
KEY FACTS
-----------------------------------------------------------------------
The Merrill Lynch New York Municipal Bond Fund at a Glance............3
Risk/Return Bar Chart.................................................5
Fees and Expenses.....................................................6

[BINOCULAR GRAPHIC HERE]
DETAILS ABOUT THE FUND
-----------------------------------------------------------------------
How the Fund Invests..................................................8
Investment Risks......................................................9

[PEN & PAPER GRAPHIC HERE]
YOUR ACCOUNT
-----------------------------------------------------------------------
Merrill Lynch Select Pricing(SM) System..............................15
How to Buy, Sell, Transfer and Exchange Shares.......................20
Participation in Merrill Lynch Fee-Based Programs....................24

[COMPASS GRAPIC HERE]
MANAGEMENT OF THE FUND
-----------------------------------------------------------------------
Fund Asset Management................................................27
Financial Highlights.................................................28

[PHONE AND LETTER GRAPHIC HERE]
FOR MORE INFORMATION
-----------------------------------------------------------------------
Shareholder Reports..........................................Back Cover
Statement of Additional Information..........................Back Cover
</TABLE>

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
<PAGE>

[KEY GRAPHIC HERE]
Key Facts

In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.

INVESTMENT GRADE -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch IBCA, Inc.

NEW YORK MUNICIPAL BOND --
a debt obligation issued by or on behalf of a governmental entity in New York
State or New York City or other qualifying issuer that pays interest exempt
from New York State and New York City personal income taxes as well as from
Federal income tax.

THE MERRILL LYNCH NEW YORK MUNICIPAL
BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------

What are the Fund's objective and goals?

What are the Fund's main investment strategies?

The Fund invests primarily in a portfolio of long term INVESTMENT GRADE NEW
YORK MUNICIPAL BONDS. These may be obligations of a variety of issuers
including governmental entities in New York and issuers located in Puerto Rico,
the U.S. Virgin Islands and Guam. The Fund will invest at least 80% of its
total assets in obligations that pay interest exempt from Federal income tax
and at least 65% of its assets in New York municipal bonds. The Fund may invest
up to 20% of its assets in high yield or "junk" bonds. The Fund also may invest
in certain types of "derivative" securities. When choosing investments, Fund
management considers various factors, including the credit quality of issuers,
yield analysis, maturity analysis and call features of the obligations. Under
normal conditions, the Fund's average weighted maturity will be more than ten
years. The Fund cannot guarantee that it will achieve its goal.

What are the main risks of investing in the Fund?

As with any mutual fund, the value of the Fund's investments -- and therefore
the value of Fund shares -- may go up or down. These changes may occur in
response to interest rate changes or other factors that may affect a particular
issuer or obligation. Generally, when interest rates go up, the value of debt
instruments like municipal bonds goes down. If the value of the Fund's
investments goes down, you may lose money. Prices of longer term securities
generally change more in response to interest rate changes than prices of
shorter term securities.

In addition, since the Fund invests at least 65% of its assets in New York
municipal bonds, it is more susceptible to negative political or economic
factors in New York State or New York City than a fund that invests more
widely. Derivatives and high yield or "junk" bonds may be volatile and subject
to liquidity, leverage, credit and other types of risks.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
3
<PAGE>

[KEY GRAPHIC HERE]

Key Facts

Who should invest?

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

o Are looking for income that is exempt from Federal income tax and from
New York State and New York City personal income taxes;

o Want a professionally managed portfolio without the administrative
burdens of direct investments in municipal bonds;

o Are looking for liquidity;

o Can tolerate the risk of loss caused by negative political or economic
developments in New York State and New York City, changes in
interest rates or adverse changes in the price of bonds in general.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
4
<PAGE>

RISK/RETURN BAR CHART

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

The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class B shares for each of the past ten calendar years. Sales charges are
not reflected in the bar chart. If these amounts were reflected, returns would
be less than those shown. The table compares the average annual total returns
for each class of the Fund's shares for the periods shown with those of the
Lehman Brothers Municipal Bond Index. How the Fund performed in the past is not
necessarily an indication of how the Fund will perform in the future.

[BAR CHART GRAPHIC HERE]

8.87% 4.93% 12.86 9.82 11.31% -9.14% 15.67% 2.85% 8.95% 5.35%
- ---------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

During the ten year period shown in the bar chart, the highest return for a
quarter was 6.37% (quarter ended March 31, 1995) and the lowest return for a
quarter was -6.79% (quarter ended March 31, 1994).
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(AS OF THE CALENDAR YEAR ENDED PAST PAST PAST TEN YEARS/
DECEMBER 31, 1998) ONE YEAR FIVE YEARS SINCE INCEPTION
- -------------------------------- ---------- ------------ -------------------
<S> <C> <C> <C>
Merrill Lynch New York
Municipal Bond Fund* A 1.57% 4.09% 6.96%
B 1.44% 4.41% 6.87%
C 4.18% N/A 7.08%+
D 1.47% N/A 6.56%+
Lehman Brothers
Municipal Bond Index** 6.48% 6.22% 8.21%/8.98%#
- -------------------------------- ---- ---- -----------
</TABLE>

* Includes sales charge.
** This unmanaged Index consists of long term revenue bonds, prerefunded bonds,
general obligation bonds and insured bonds. Past performance is not
predictive of future performance.
+ Inception date is October 21, 1994.
# Represents total returns for the ten years ended December 31, 1998 and for
the period since October 31, 1994, respectively.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
5
<PAGE>
[KEY GRAPHIC HERE]

Key Facts

UNDERSTANDING EXPENSES

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

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:

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

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER:

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

MANAGEMENT FEE -- a fee paid to the Manager for managing the Fund.

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

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

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

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.

This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.

<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT): Class A Class B(a) Class C Class D
- ------------------------------------------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) imposed on
purchases (as a percentage of offering
price) 4.00%(b) None None 4.00%(b)
Maximum Deferred Sales Charge (Load) (as
a percentage of original purchase price or
redemption proceeds, whichever is lower) None(c) 4.0%(b) 1.0%(b) None(c)
Maximum Sales Charge (Load) imposed on
Dividend Reinvestments None None None None
Redemption Fee None None None None
Exchange Fee None None None None
Maximum Account Fee None None None None
ANNUAL FUND OPERATING EXPENSES (EXPENSES
THAT ARE DEDUCTED FROM FUND ASSETS):
MANAGEMENT FEE(d) 0.55% 0.55% 0.55% 0.55%
DISTRIBUTION AND/OR SERVICE (12B-1) FEES(e) None 0.50% 0.60% 0.10%
Other Expenses (including transfer agency
fees)(f) 0.12% 0.13% 0.13% 0.12%
Total Annual Fund Operating Expenses(g) 0.67% 1.18% 1.28% 0.77%
- ------------------------------------------------- -------- ------ ------ --------
</TABLE>

(a) Class B shares automatically convert to Class D shares about ten years
after you buy them. Then they will no longer be subject to distribution
fees and will pay lower account maintenance fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund has agreed to pay the Manager a fee at the annual rate of 0.55% of
the average daily net assets of the Fund. The Manager agreed to
voluntarily waive a portion of the fee so that the Fund pays the Manager a
fee at the annual rate of 0.55% of the average daily net assets of the
Fund for the first $500 million; 0.525% of the average daily net assets
from $500 million to $1 billion; and 0.50% of the average daily net assets
above $1 billion. The Manager may discontinue or reduce this waiver of
fees at any time without notice. For the fiscal year ended September 30,
1998, the Manager received a fee equal to 0.55% of the Fund's average
daily net assets.

(e) The Fund calls the "Service Fee" an "Account Maintenance Fee." Account
Maintenance Fee is the term used elsewhere in this Prospectus and in all
other Fund materials. If you hold Class B or Class C shares for a long
time, it may cost you more in distribution (12b-1) fees than the maximum
sales charge that you would have paid if you had bought one of the other
classes.

(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge, which is assessed upon all accounts that close
during the year. This fee begins the month following the month the account
is closed and ends at the end of the calendar year. For the fiscal year
ended September 30, 1998, the Fund paid the Transfer Agent fees totaling
$195,695. The Manager provides accounting services to the Fund at its
cost. For the fiscal year ended September 30, 1998, the Fund reimbursed
the Manager $88,092 for these services.
(g) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
6
<PAGE>

EXAMPLES:

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

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

EXPENSES IF YOU DID REDEEM YOUR SHARES:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A $466 $606 $758 $1,201
Class B $520 $575 $649 $1,432
Class C $230 $406 $702 $1,545
Class D $476 $636 $811 $1,316
- ---------- ---- ---- ---- ------
</TABLE>

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:

<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A $466 $606 $758 $1,201
Class B $120 $375 $649 $1,432
Class C $130 $406 $702 $1,545
Class D $476 $636 $811 $1,316
- ---------- ---- ---- ---- ------
</TABLE>

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
7
<PAGE>

[BINOCULAR GRAPHIC HERE]

Details About the Fund

ABOUT THE
PORTFOLIO MANAGER

Roberto W. Roffo is the portfolio manager of the Fund and has been a Vice
President of Merrill Lynch Asset Management since 1996 and a portfolio manager
since 1992.

ABOUT THE MANAGER

The Fund is managed by Fund Asset Management.

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

The Fund's main goal is to seek a high level of income that is exempt from
Federal income tax and New York State and New York City personal income taxes.
The Fund invests primarily in long term, investment grade New York municipal
bonds. These may be obligations of a variety of issuers including governmental
entities or other qualifying issuers. Issuers may be located in New York or in
other qualifying jurisdictions such as Puerto Rico, the U.S. Virgin Islands and
Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's total assets will be invested in investment grade securities.
The Fund will limit its investment in high yield or junk bonds to no more than
20% of its total assets. These bonds are generally more speculative and involve
greater price fluctuations than investment grade securities.

The Fund will invest at least 80% of its total assets in obligations that pay
interest exempt from Federal income tax and at least 65% of its total assets in
New York municipal bonds. Under normal conditions, the Fund's average weighted
maturity will be more than ten years. For temporary periods, however, the Fund
may invest up to 35% of its total assets in short term tax exempt or taxable
money market obligations. No more than 20% of the Fund's net assets will be
invested in taxable money market obligations. However, as a temporary measure
for defensive purposes, the Fund may invest without limitation in short term
obligations. Short term investments and temporary defensive positions may limit
the potential for the Fund to achieve its goal of a high level of tax exempt
income.

The Fund may use derivatives including futures, options, indexed securities and
inverse securities. Derivatives are financial instruments whose value is
derived from another security or an index such as the Lehman Brothers Municipal
Bond Index.

The Fund's investments may include private activity bonds that may subject
certain shareholders to an alternative minimum tax.

New York's economy is influenced by numerous factors including banking,
finance, insurance, transportation, communications and service employment. New
York's economy relies less on manufacturing than does the nation as a whole.
The Manager believes that current economic conditions in New York will enable
the Fund to continue to invest in high quality New York municipal bonds.
Moody's and Standard & Poor's currently rate the State of New York's general
obligation bonds A2 and A, respectively. Moody's, Standard & Poor's and Fitch
currently rate New York City's general obligation bonds A3, A- and A-,
respectively.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
8
<PAGE>

Fund management considers a variety of factors when choosing investments, such
as:

o CREDIT QUALITY OF ISSUERS -- based on bond ratings and other factors
including economic and financial conditions.

o YIELD ANALYSIS -- takes into account factors such as the different
yields available on different types of obligations and the shape of
the yield curve (longer term obligations typically have higher
yields).

o MATURITY ANALYSIS -- the average maturity of the portfolio will be
maintained within a desirable range as determined from time to time.
Factors considered include portfolio activity, maturity of the
supply of available bonds and the shape of the yield curve.

In addition, Fund management considers the availability of features that
protect against an early call of a bond by the issuer.

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

BOND MARKET AND SELECTION RISK -- Bond market risk is the risk that the bond
market will go down in value, including the possibility that the market will go
down sharply and unpredictably. Selection risk is the risk that the investments
that Fund management selects will underperform the market or other funds with
similar investment objectives and investment strategies.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
9
<PAGE>

[BINOCULAR GRAPHIC HERE]

Details About the Fund

CREDIT RISK -- Credit risk is the risk that the issuer will be unable to pay
the interest or principal when due. The degree of credit risk depends on both
the financial condition of the issuer and the terms of the obligation.

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

STATE SPECIFIC RISK -- The Fund will invest primarily in New York municipal
bonds. Therefore, an investment in the Fund may be riskier than an investment
in a fund that does not concentrate in municipal bonds of one state. New York
State, New York City and other New York public bodies have sometimes
encountered financial difficulties of a type that could have an adverse effect
on the performance of the Fund.

CALL AND REDEMPTION RISK -- A bond's issuer may call a bond for redemption
before it matures. If this happens to a bond the Fund holds, the Fund may lose
income and may have to invest the proceeds in bonds with lower yields.

Risks associated with certain types of obligations in which the Fund may invest
include:

GENERAL OBLIGATION BONDS -- The faith, credit and taxing power of the
municipality that issues a general obligation bond secures payment of interest
and repayment of principal. Timely payments depend on the issuer's credit
quality, ability to raise tax revenues and ability to maintain an adequate tax
base.

REVENUE BONDS -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
10
<PAGE>

INDUSTRIAL DEVELOPMENT BONDS -- Municipalities and other public authorities
issue industrial development bonds to finance development of industrial
facilities for use by a private enterprise. The private enterprise pays the
principal and interest on the bond, and the issuer does not pledge its faith,
credit and taxing power for repayment. If the private enterprise defaults on
its payments, the Fund may not receive any income or get its money back from
the investment.

MORAL OBLIGATION BONDS -- Moral obligation bonds are generally issued by
special purpose public authorities of a state or municipality. If the issuer is
unable to meet its obligations, repayment of these bonds becomes a moral
commitment, but not a legal obligation, of the state or municipality.

MUNICIPAL NOTES -- Municipal notes are shorter term municipal debt obligations.
They may provide interim financing in anticipation of tax collection, bond
sales or revenue receipts. If there is a shortfall in the anticipated proceeds,
the notes may not be fully repaid and the Fund may lose money.

MUNICIPAL LEASE OBLIGATIONS -- In a municipal lease obligation, the issuer
agrees to budget for and appropriate municipal funds to make payments due on
the lease obligation. However, this does not ensure that funds will actually be
appropriated in future years. The issuer does not pledge its unlimited taxing
power for payment of the lease obligation, but the leased property secures the
obligation. In addition, the proceeds of a sale may not cover the Fund's loss.

INSURED MUNICIPAL BONDS -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal
on maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop.

JUNK BONDS -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. The Fund does not intend to
purchase debt securities that are in default or which Fund management believes
will be in default. Although junk bonds generally pay higher rates of interest
than investment grade bonds, they are high risk investments that may cause
income and principal losses for the Fund. Junk bonds generally are less liquid
and experience more price volatility than higher rated debt securities. The
issuers of junk bonds may have a larger amount of outstanding debt

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
11
<PAGE>

[BINOCULAR GRAPHIC HERE]

Details About the Fund

relative to their assets than issuers of investment grade bonds. In the event
of an issuer's bankruptcy, claims of other creditors may have priority over the
claims of junk bond holders, leaving few or no assets available to repay junk
bond holders. Junk bonds may be subject to greater call and redemption risk
than higher rated debt securities.

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

VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations (VRDOs)
are floating rate securities that combine an interest in a long term municipal
bond with a right to demand payment before maturity from a bank or other
financial institution. If the bank or financial institution is unable to pay,
the Fund may lose money.

ILLIQUID INVESTMENTS -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily resell within seven days at current value or
that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.

DERIVATIVES -- Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments.

Derivatives are volatile and involve significant risks, including:

o CREDIT RISK -- the risk that the counterparty (the party on the other
side of the transaction) on a derivative transaction will be unable
to honor its financial obligation to the Fund.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
12
<PAGE>

o LEVERAGE RISK -- the risk associated with certain types of investments
or trading strategies (such as borrowing money to increase the
amount of investments) that relatively small market movements may
result in large changes in the value of an investment. Certain
investments or trading strategies that involve leverage can result
in losses that greatly exceed the amount originally invested.

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

The Fund may use derivatives for hedging purposes including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of the derivative
outweighs the benefit of the hedge. Hedging also involves the risk that changes
in the value of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the holdings being
hedged may not be reduced. There can be no assurance that the Fund's hedging
strategy will reduce risk or that hedging transactions will be either available
or cost effective. The Fund is not required to use hedging and may choose not
to do so.

INDEXED AND INVERSE FLOATING RATE SECURITIES -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
13
<PAGE>

[BINOCULAR GRAPHIC HERE]

Details About the Fund

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

BORROWING AND LEVERAGE -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The costs of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, when issued securities, forward commitments
and options.

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

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

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
14
<PAGE>

[PEN AND PAPER GRAPHIC HERE]
YOUR ACCOUNT

MERRILL LYNCH SELECT PRICING(SM) SYSTEM
- --------------------------------------------------------------------------------

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

For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. You may be eligible for a sales
charge waiver.

If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.25% on Class
B shares or 0.35% on Class C shares and an account maintenance fee of 0.25% on
both classes. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees increase the cost of your investment and
may cost you more than paying an initial sales charge. In addition, you may be
subject to a deferred sales charge when you sell Class B or C shares.

The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
The Fund is a series of the Merrill Lynch Multi-State Municipal Series Trust.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
15
<PAGE>
[PEN AND PAPER GRAPHIC HERE]
YOUR ACCOUNT

The table below summarizes key features of the Merrill Lynch Select Pricing(SM)
System.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------------ ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors including: through Merrill through Merrill through Merrill
o Current Class A Lynch. Limited Lynch. Limited Lynch. Limited
shareholders availability through availability through availability through
o Participants in other securities other securities other securities
certain Merrill dealers. dealers. dealers.
Lynch sponsored
programs
o Certain affiliates of
Merrill Lynch.
---------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at time No. Entire purchase No. Entire purchase Yes. Payable at time
Charge? of purchase. Lower price is invested in price is invested in of purchase. Lower
sales charges shares of the Fund. shares of the Fund. sales charges
available for larger available for larger
investments. investments.
----------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within
one year.) one year.)
----------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.10% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.25% Distribution 0.35% Distribution No Distribution Fee.
Fee. Fee.
----------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
---------------------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
16
<PAGE>

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

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

Class A and Class D Shares -- Initial Sales Charge Options

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

<TABLE>
<CAPTION>
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* OFFERING PRICE
- ------------------------- ---------------- ------------------ ---------------
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.75%
- -----------------------------------------------------------------------------
$25,000 but less than
$ 50,000 3.75% 3.90% 3.50%
- -----------------------------------------------------------------------------
$50,000 but less than
$ 100,000 3.25% 3.36% 3.00%
- -----------------------------------------------------------------------------
$100,000 but less than
$ 250,000 2.50% 2.56% 2.25%
- -----------------------------------------------------------------------------
$250,000 but less than
$1,000,000 1.50% 1.52% 1.25%
- -----------------------------------------------------------------------------
$1,000,000 and
over** 0.00% 0.00% 0.00%
- -----------------------------------------------------------------------------
</TABLE>
* Rounded to the nearest one-hundredth percent.

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

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

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

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

o TMA(SM) Managed Trusts.

o Certain Merrill Lynch investment or central asset accounts.

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

o Certain investors, including directors or trustees of Merrill Lynch
mutual funds and Merrill Lynch employees.

o Certain Merrill Lynch fee-based programs.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
17
<PAGE>

[PEN AND PAPER GRAPHIC HERE]
YOUR ACCOUNT

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

If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while
Class A shares are not.

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

Class B and Class C Shares -- Deferred Sales Charge Options

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase, or your Class C shares within one year after purchase,
you may be required to pay a deferred sales charge. You will also pay
distribution fees of 0.25% for Class B shares and 0.35% for Class C shares and
account maintenance fees of 0.25% for Class B and Class C shares each year
under distribution plans that the Fund has adopted under Rule 12b-1. Because
these fees are paid out of the Fund's assets on an ongoing basis, over time
these fees increase the cost of your investment and may cost you more than
paying an initial sales charge. The Distributor uses the money that it receives
from the deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Consultant
or other securities dealer who assists you in purchasing Fund shares.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
18
<PAGE>

CLASS B SHARES

If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:

<TABLE>
<CAPTION>
YEARS SINCE PURCHASE SALES CHARGE*
- ----------------------------- --------------
<S> <C>
0 - 1 4.00%
1 - 2 3.00%
2 - 3 2.00%
3 - 4 1.00%
4 and thereafter 0.00%
- ----------------------------- ----
</TABLE>

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

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

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

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

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

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

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
19
<PAGE>

[PEN AND PAPER GRAPHIC HERE]
YOUR ACCOUNT

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

CLASS C SHARES

If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares may be reduced or waived in connection
with participation in certain Merrill Lynch fee-based programs, involuntary
termination of an account in which Fund shares are held and withdrawals through
the Merrill Lynch Systematic Withdrawal Plan.

Class C shares do not offer a conversion privilege.

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

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

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
20
<PAGE>

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES
- -------------------- ------------------------------
<S> <C><C> <C>
Buy Shares First, select the share class
appropriate for you
-------------------------------
Next, determine the amount
of your investment

-------------------------------
Have your Merrill Lynch
Financial Consultant or
securities dealer submit your
purchase order

-------------------------------
Or contact the Transfer Agent
-------------------------------
Add to Your Purchase additional shares
Investment

-------------------------------
Acquire additional shares
through the automatic
dividend reinvestment plan

Participate in the automatic
investment plan
-------------------------------
Transfer Shares to Transfer to a participating
Another Securities securities dealer
-------------------------------
Dealer
Transfer to a
non-participating securities
dealer
-------------------------------

<CAPTION>
IF YOU WANT TO INFORMATION IMPORTANT FOR YOU TO KNOW
- -------------------- --------------------------------------------------------------------------
<S> <C>
Buy Shares Refer to the Merrill Lynch Select Pricing table on page 16. Be sure to
read this prospectus carefully.
--------------------------------------------------------------------------
The minimum initial investment for the Fund is $1,000 for all
accounts except that certain Merrill Lynch fee-based programs have a
$250 initial minimum investment.
(The minimums for initial investments may be waived under certain
circumstances.)
---------------------------------------------------------------------------
The price of your shares is based on the next calculation of net asset
value after your order is placed. Any purchase orders placed within
fifteen minutes after the close of business on the New York Stock
Exchange will be priced at the net asset value determined that day.
Purchase orders placed after that time will be priced at the net asset
value determined on the next business day. The Fund may reject any
order to buy shares and may suspend the sale of shares at any time.
Merrill Lynch may charge a processing fee to confirm a purchase. This
fee is currently $5.35.
---------------------------------------------------------------------------
To purchase shares directly, call the Transfer Agent at
1-800-MER-FUND and request a purchase application. Mail the
completed purchase application to the Transfer Agent at the address
on the inside back cover of this Prospectus.
---------------------------------------------------------------------------
Add to Your The minimum investment for additional purchases is $50.
Investment
(The minimum for additional purchases may be waived under certain
circumstances.)
---------------------------------------------------------------------------
All dividends and capital gains distributions are automatically
reinvested without a sales charge.
You may invest a specific amount on a periodic basis through certain
Merrill Lynch investment or central asset accounts.
---------------------------------------------------------------------------
Transfer Shares to You may transfer your Fund shares only to another securities dealer
Another Securities that has entered into an agreement with Merrill Lynch. All
Dealer shareholder services will be available for the transferred shares. You
may only purchase additional shares of funds previously owned
before the transfer. All future trading of these assets must be
coordinated by the receiving firm.
---------------------------------------------------------------------------
You must either:
o Transfer your shares to an account with the Transfer Agent; or
o Sell your shares.
===========================================================================
</TABLE>

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
21
<PAGE>

[PEN AND PAPER GRAPHIC HERE]
YOUR ACCOUNT

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ------------------ ------------------------------- ------------------------------------------------------------------------
<S> <C><C> <C>
Sell Your Shares Have your Merrill Lynch The price of your shares is based on the next calculation of net asset
Financial Consultant or value after your order is placed. For your redemption request to be
securities dealer submit your priced at the net asset value on the day of your request, you must
sales order submit your request to your dealer within fifteen minutes after that
day's close of business on the New York Stock Exchange (generally
4:00 p.m. Eastern time). Any redemption request placed after that
time will be priced at the net asset value at the close of business on
the next business day. Dealers must submit redemption requests to
the Fund not more than thirty minutes after the close of business on
the New York Stock Exchange on the day the request was received.
Securities dealers, including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a fee
of $5.35. No processing fee is charged if you redeem shares directly
through the Transfer Agent.

The Fund may reject an order to sell shares under certain
circumstances.
------------------------------------------------------------------------
Sell through the Transfer You may sell shares held at the Transfer Agent by writing to the
Agent Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter and
signatures must be guaranteed. If you hold stock certificates, return
the certificates with the letter. The Transfer Agent will normally mail
redemption proceeds within seven days following receipt of a
properly completed request. If you make a redemption request
before the Fund has collected payment for the purchase of shares,
the Fund or the Transfer Agent may delay mailing your proceeds. This
delay will usually not exceed ten days.

If you hold share certificates, they must be delivered to the Transfer
Agent before they can be converted. Check with the Transfer Agent
or your Merrill Lynch Financial Consultant for details.
------------------------------------------------------------------------
Sell Shares Participate in the Fund's You can choose to receive systematic payments from your Fund
Systematically Systematic Withdrawal Plan account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you have a Merrill Lynch
CMA(R), CBA(R) or Retirement Account you can arrange for systematic
redemptions of a fixed dollar amount on a monthly, bi-monthly,
quarterly, semi-annual or annual basis, subject to certain conditions.
Under either method you must have dividends and other
distributions automatically reinvested. For Class B and C shares your
total annual withdrawals cannot be more than 10% per year of the
value of your shares at the time your plan is established. The deferred
sales charge is waived for systematic redemptions. Ask your Merrill
Lynch Financial Consultant for details.
========================================================================
</TABLE>

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
22
<PAGE>

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ---------------- --------------------------------- -----------------------------------------------------------------------
<S> <C><C> <C>
Exchange Your Select the fund into which you You can exchange your shares of the Fund for shares of many other
Shares want to exchange. Be sure to Merrill Lynch mutual funds. You must have held the shares used in
read that fund's prospectus the exchange for at least 15 calendar days before you can exchange
to another fund.
Each class of Fund shares is generally exchangeable for shares of the
same class of another fund. If you own Class A shares and wish to
exchange into a fund in which you have no Class A shares, you will
exchange into Class D shares.
Some of the Merrill Lynch mutual funds impose a different initial or
deferred sales charge schedule. If you exchange Class A or D shares
for shares of a fund with a higher initial sales charge than you
originally paid, you will be charged the difference at the time of
exchange. If you exchange Class B shares for shares of a fund with a
different deferred sales charge schedule, the higher schedule will
apply. The time you hold Class B or C shares in both funds will count
when determining your holding period for calculating a deferred
sales charge at redemption. If you exchange Class A or D shares for
money market fund shares, you will receive Class A shares of Summit
Cash Reserves Fund. Class B or C shares of the Fund will be exchanged
for Class B shares of Summit.

Although there is currently no limit on the number of exchanges that
you can make, the exchange privilege may be modified or terminated
at any time in the future.
=======================================================================
</TABLE>

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
23
<PAGE>

[PEN AND PAPER GRAPHIC HERE]
YOUR ACCOUNT

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

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

When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase
or redemption order is placed.

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

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

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

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

If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
24
<PAGE>

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

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

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

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

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

Taxes

To the extent that the dividends distributed by the Fund are from municipal
bond interest income, they are exempt from Federal income tax. However, certain
investors may be subject to alternative minimum tax on dividends received from
the Fund. To the extent that the dividends distributed by the Fund are derived
from New York municipal bond interest income, they are also exempt from New
York State and New York City personal income taxes. Interest income from other
investments may produce taxable distributions. If you are subject to income tax
in a state other than New York and/or a city other than New York City, the
dividends derived from New York municipal bonds will not be exempt from income
tax in that state and/or city. Capital gain dividends are taxed at the same
rates as ordinary income for New York State and New York City personal income
tax purposes.

Generally, within 60 days after the end of the Fund's taxable year, the Trust
will tell you the amount of exempt-interest dividends, ordinary income
dividends or capital gain dividends you received that year. Capital gain
dividends are taxable as long term capital gains to you, regardless of how long
you have held your shares. The tax treatment of distributions from the Fund is
the same whether you choose to receive distributions in cash or to have them
reinvested in shares of the Fund.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
25
<PAGE>

[PEN AND PAPER GRAPHIC HERE]
YOUR ACCOUNT

"BUYING A DIVIDEND"

You may want to avoid buying shares shortly before the Fund pays a dividend or
distribution, although the impact on you will be significantly less than if you
were invested in a fund paying fully taxable dividends. The reason? If you buy
shares when a fund has realized but not yet distributed taxable income (if any)
or capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a distribution all or, more likely,
part of which could be taxable. Before investing you may want to consult your
tax adviser.

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

If you redeem Fund shares or exchange them for shares of another fund, any gain
on the transaction may be subject to Federal income tax.

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

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
26
<PAGE>
[COMPASS GRAPHIC HERE]
MANAGEMENT OF THE FUND

FUND ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment
decisions for the Fund. The Fund pays the Manager a fee at the annual rate of
0.55% of the average daily net assets of the Fund. The Manager agreed to
voluntarily waive a portion of the fee so that the Fund pays the Manager a fee
at the annual rate of 0.55% of the average daily net assets of the Fund for the
first $500 million; 0.525% of the average daily net assets from $500 million to
$1 billion; and 0.50% of the average daily net assets above $1 billion. The
Manager may discontinue or reduce this waiver of fees at any time without
notice. For the fiscal year ended September 30, 1998, the Manager received a
fee equal to 0.55% of the Fund's average daily net assets.

Fund Asset Management is part of the Merrill Lynch Asset Management Group. The
Asset Management Group had approximately $501 billion in investment company and
other portfolio assets under management as of December 1998. This amount
includes assets managed for Merrill Lynch affiliates.

A Note About Year 2000

Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Fund invests, and this could hurt the Fund's investment returns.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
27
<PAGE>
[COMPASS GRAPHIC HERE]
MANAGEMENT OF THE FUND

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------

The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.

<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSET VALUE: 1998 1997 1996 1995 1994
- ----------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.46 $ 11.12 $ 11.04 $ 10.88 $ 12.46
Investment income -- net .57 .60 .59 .61 .64
Realized and unrealized gain (loss)
on investments -- net .54 .34 .08 .16 (1.25)
Total from investment operations 1.11 .94 .67 .77 (.61)
Less dividends and distributions:
Investment income -- net (.57) (.60) (.59) (.61) (.64)
Realized gain on investments -- net -- --+ -- -- (.11)
In excess of realized gain on
investments -- net -- -- -- -- (.22)
Total dividends and distributions (.57) (.60) (.59) (.61) (.97)
Net asset value, end of year $ 12.00 $ 11.46 $ 11.12 $ 11.04 $ 10.88
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 9.94% 8.69% 6.19% 7.37% (5.17)%
RATIOS TO AVERAGE NET ASSETS:
Expenses .67% .65% .66% .67% .63%
Investment income -- net 4.92% 5.30% 5.31% 5.67% 5.52%
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $ 17,727 $22,301 $ 21,762 $ 23,304 $28,301
Portfolio turnover 163.12% 97.22% 114.78% 181.21% 107.96%
- ----------------------------------------- -------- ------- -------- -------- -------

<CAPTION>
CLASS B
------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSET VALUE: 1998 1997 1996 1995 1994
- ----------------------------------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 11.46 $ 11.12 $ 11.04 $ 10.88 $ 12.46
Investment income -- net .51 .54 .54 .56 .58
Realized and unrealized gain (loss)
on investments -- net .54 .34 .08 .16 (1.25)
Total from investment operations 1.05 .88 .62 .72 (.67)
Less dividends and distributions:
Investment income -- net (.51) (.54) (.54) (.56) (.58)
Realized gain on investments -- net -- -- -- -- (.11)
In excess of realized gain on
investments -- net -- -- -- -- (.22)
Total dividends and distributions (.51) (.54) (.54) (.56) (.91)
Net asset value, end of year $ 12.00 $ 11.46 $ 11.12 $ 11.04 $ 10.88
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 9.38% 8.14% 5.66% 6.82% (5.66)%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.18% 1.16% 1.16% 1.18% 1.14%
Investment income -- net 4.40% 4.79% 4.80% 5.16% 5.02%
SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) $242,811 $279,754 $403,403 $564,963 $645,341
Portfolio turnover 163.12% 97.22% 114.78% 181.21% 107.96%
- --------------------------------------------------------------------------------------------------------
</TABLE>

* Total investment returns exclude the effects of sales loads.
+ Amount is less than $.01 per share.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
28
<PAGE>

FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCT. 21,
SEPTEMBER 30, 1994+
INCREASE (DECREASE) IN ----------------------------------- TO SEPTEMBER 30,
NET ASSET VALUE: 1998 1997 1996 1995
- ----------------------------------------------------- ----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.47 $ 11.12 $ 11.04 $ 10.76
Investment income -- net .50 .53 .52 .51
Realized and unrealized gain on investments -- net .54 .35 .08 .28
Total from investment operations 1.04 .88 .60 .79
Less dividends and distributions:
Investment income -- net (.50) (.53) (.52) (.51)
Realized gain on investments -- net -- --++ -- --
Total dividends and distributions (.50) (.53) (.52) (.51)
Net asset value, end of period $ 12.01 $ 11.47 $ 11.12 $ 11.04
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 9.27% 8.13% 5.55% 7.57%#
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.28% 1.26% 1.27% 1.27%**
Investment income -- net 4.27% 4.69% 4.70% 4.91%**
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 8,229 $ 5,034 $ 4,175 $ 3,556
Portfolio turnover 163.12% 97.22% 114.78% 181.21%
- ----------------------------------------------------- --------- ------- --------- ---------

<CAPTION>
CLASS D
---------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCT. 21,
SEPTEMBER 30, 1994+
INCREASE (DECREASE) IN -------------------------------------- TO SEPTEMBER 30,
NET ASSET VALUE: 1998 1997 1996 1995
- ----------------------------------------------------- ------------ ------------- ----------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.46 $ 11.11 $ 11.03 $ 10.76
Investment income -- net .56 .58 .58 .56
Realized and unrealized gain on investments -- net .54 .35 .08 .27
Total from investment operations 1.10 .93 .66 .83
Less dividends and distributions:
Investment income -- net (.56) (.58) (.58) (.56)
Realized gain on investments -- net -- --++ -- --
Total dividends and distributions (.56) (.58) (.58) (.56)
Net asset value, end of period $ 12.00 $ 11.46 $ 11.11 $ 11.03
TOTAL INVESTMENT RETURN:*
Based on net asset value per share 9.83% 8.68% 6.09% 7.99%#
RATIOS TO AVERAGE NET ASSETS:
Expenses .77% .75% .76% .76%**
Investment income -- net 4.79% 5.20% 5.21% 5.46%**
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $153,032 $139,511 $94,297 $ 2,572
Portfolio turnover 163.12% 97.22% 114.78% 181.21%
- ----------------------------------------------------- -------- -------- -------- ---------
</TABLE>

* Total investment returns exclude the effects of sales loads.
** Annualized.
+ Commencement of operations.
++ Amount is less than $.01 per share.
# Aggregate total investment return.

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
29
<PAGE>

(This page intentionally left blank)

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
POTENTIAL
INVESTORS
Open an account (two options).

1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT FINANCIAL DATA SERVICES, INC.
OR SECURITIES DEALER P.O. Box 45289
ADVISES SHAREHOLDERS ON Jacksonville, Florida 32232-5289
THEIR FUND INVESTMENTS. PERFORMS RECORDKEEPING AND REPORTING
SERVICES.

DISTRIBUTOR
MERRILL LYNCH FUNDS DISTRIBUTOR,
A DIVISION OF PRINCETON FUNDS DISTRIBUTOR, INC.
P.O. Box 9081
Princeton, New Jersey 08543-9081
ARRANGES FOR THE SALE OF FUND SHARES.

COUNSEL CUSTODIAN
BROWN & WOOD LLP THE FUND STATE STREET BANK
One World Trade Center AND TRUST COMPANY
New York, New York 10048-0557 THE BOARD OF TRUSTEES P.O. Box 351
PROVIDES LEGAL ADVICE TO THE FUND. OVERSEES THE FUND. Boston, Massachusetts 02101
HOLDS THE FUND'S ASSETS FOR
SAFEKEEPING.

INDEPENDENT AUDITORS MANAGER
DELOITTE & TOUCHE LLP FUND ASSET MANAGEMENT,L.P.
117 Campus Drive ADMINISTRATIVE OFFICES
Princeton, New Jersey 08540-6400 800 Scudders Mill Road
Plainsboro, New Jersey 08536
AUDITS THE FINANCIAL STATEMENTS
OF THE FUND ON BEHALF OF MAILING ADDRESS
THE SHAREHOLDERS. P.O. Box 9011
Princeton, New Jersey 08543-9011

TELEPHONE NUMBER
1-800-MER-FUND
MANAGES THE FUND'S DAY-TO-DAY ACTIVITIES.

</TABLE>
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
<PAGE>

[PHONE AND LETTER GRAPHIC HERE]
For More Information

SHAREHOLDER REPORTS

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

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

STATEMENT OF ADDITIONAL INFORMATION

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

Contact your Merrill Lynch Financial Consultant or the Fund at the telephone
number or address indicated above if you have any questions.

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

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

Investment Company Act file #811-4375
Code #10342-01-99
(c)Fund Asset Management, L.P.

[MERRILL LYNCH LOGO HERE]

Merrill Lynch New York Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series
Trust

[PROSPECTUS GRAPHIC HERE]

January 25, 1999

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800

----------------
Merrill Lynch New York Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), an open-end
investment company organized as a Massachusetts business trust. The investment
objective of the Fund is to provide shareholders with as high a level of income
exempt from Federal income tax and New York State and New York City personal
income taxes as is consistent with prudent investment management. The Fund
seeks to achieve its objective while providing investors with the opportunity
to invest primarily in a diversified portfolio of long-term obligations issued
by or on behalf of New York State, its political subdivisions, agencies and
instrumentalities and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the U.S. Virgin Islands and Guam, which pay interest
exempt, in the opinion of bond counsel to the issuer, from Federal income tax
and New York State and New York City personal income taxes. The Fund may invest
in certain tax-exempt securities classified as "private activity bonds" that
may subject certain investors in the Fund to an alternative minimum tax. At
times, the Fund may seek to hedge its portfolio through the use of futures
transactions and options. There can be no assurance that the investment
objective of the Fund will be realized. For more information on the Fund's
investment objective and policies, see "Investment Objective and Policies."

Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of
time the investor expects to hold the shares and other relevant circumstances.
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
January 25, 1999 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus. The Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1998 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.

----------------
FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR

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

The date of this Statement of Additional Information is January 25, 1999.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies ......................................... 3
General ................................................................. 3
Risk Factors and Special Considerations Relating to Municipal Bonds ..... 4
Description of Municipal Bonds .......................................... 5
Financial Futures Transactions and Options .............................. 8
Description of Temporary Investments .................................... 12
Investment Restrictions ................................................. 14
Portfolio Turnover ...................................................... 15
Management of the Trust ................................................... 15
Trustees and Officers ................................................... 15
Compensation of Trustees ................................................ 17
Management and Advisory Arrangements .................................... 17
Code of Ethics .......................................................... 19
Purchase of Shares ........................................................ 19
Initial Sales Charge Alternatives -- Class A and Class D Shares ......... 20
Reduced Initial Sales Charges ........................................... 22
Deferred Sales Charge Alternatives -- Class B and Class C Shares ........ 24
Distribution Plans ...................................................... 26
Limitations on the Payment of Deferred Sales Charges .................... 28
Redemption of Shares ...................................................... 29
Redemption .............................................................. 29
Repurchase .............................................................. 30
Reinstatement Privilege -- Class A and Class D Shares ................... 30
Pricing of Shares ......................................................... 30
Determination of Net Asset Value ........................................ 30
Computation of Offering Price Per Share ................................. 31
Portfolio Transactions .................................................... 32
Transactions in Portfolio Securities .................................... 32
Shareholder Services ...................................................... 33
Investment Account ...................................................... 33
Exchange Privilege ...................................................... 34
Fee-Based Programs ...................................................... 35
Automatic Investment Plans .............................................. 36
Automatic Dividend Program .............................................. 36
Systematic Withdrawal Plan .............................................. 36
Distributions and Taxes ................................................... 37
Dividends and Distributions ............................................. 37
Taxes ................................................................... 38
Tax Treatment of Options and Futures Transactions ....................... 40
Performance Data .......................................................... 41
General Information ....................................................... 44
Description of Shares ................................................... 44
Independent Auditors .................................................... 45
Custodian ............................................................... 45
Transfer Agent .......................................................... 45
Legal Counsel ........................................................... 45
Reports to Shareholders ................................................. 45
Shareholder Inquiries ................................................... 45
Additional Information .................................................. 46
Financial Statements ...................................................... 46
Appendix I -- Economic Conditions in New York ............................. I-1
Appendix II -- Ratings of Municipal Bonds ................................. II-1
</TABLE>

2
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income tax and New York State and
New York City personal income taxes as is consistent with prudent investment
management. The Fund seeks to achieve its objective by investing primarily in a
diversified portfolio of long-term obligations issued by or on behalf of New
York State, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the U.S. Virgin Islands and Guam, which pay interest exempt, in the
opinion of bond counsel to the issuer, from Federal income tax and New York
State and New York City personal income taxes. Obligations exempt from Federal
income taxes are referred to herein as "Municipal Bonds," and obligations
exempt from Federal income tax and New York State and New York City personal
income taxes are referred to as "New York Municipal Bonds." Unless otherwise
indicated, references to Municipal Bonds shall be deemed to include New York
Municipal Bonds. The Fund anticipates that at all times, except during
temporary defensive periods, it will maintain at least 65% of the Fund's total
assets invested in New York Municipal Bonds. The investment objective as set
forth in the first sentence of this paragraph is a fundamental policy and may
not be changed without a vote of a majority of the outstanding shares of the
Fund. See "How the Fund Invests" in the Prospectus for a general discussion of
the Fund's goals, main investment strategies and main risks.

GENERAL

Under normal circumstances, except when acceptable securities are
unavailable as determined by Fund Asset Management, L.P. (the "Manager" or
"FAM"), the Fund's manager, the Fund will invest at least 65% of its total
assets in New York Municipal Bonds. The value of bonds and other fixed-income
obligations may fall when interest rates rise and rise when interest rates
fall. In general, bonds and other fixed-income obligations with longer
maturities will be subject to greater volatility resulting from interest rate
fluctuations than will similar obligations with shorter maturities. Under
normal conditions, it is generally anticipated that the Fund's average weighted
maturity will be in excess of ten years. For temporary periods or to provide
liquidity, the Fund has the authority to invest as much as 35% of its total
assets in tax-exempt or taxable money market obligations with a maturity of one
year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary Investments shall not
exceed 20% of the Fund's net assets.

The Fund may also invest in variable rate demand obligations ("VRDOs") and
VRDOs in the form of participation interests ("Participating VRDOs") in
variable rate tax-exempt obligations held by a financial institution. See
"Description of Temporary Investments." The Fund's hedging strategies, which
are described in more detail under "Financial Futures Transactions and
Options," are not fundamental policies and may be modified by the Trustees of
the Trust without the approval of the Fund's shareholders.

At least 80% of the Municipal Bonds purchased by the Fund will be what are
commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's ("S&P") (currently AAA, AA, A and BBB)
or Fitch IBCA, Inc. ("Fitch") (currently AAA, AA, A and BBB). If unrated, such
securities will possess creditworthiness comparable, in the opinion of the
Manager, to other obligations in which the Fund may invest.

The Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by S&P or Fitch or which, in the
Manager's judgment, possess similar credit characteristics. Such securities,
sometimes referred to as "high yield" or "junk" bonds, are predominantly
speculative with respect to the capacity to pay interest and repay principal in
accordance with the terms of the security and generally involve a greater
volatility of price than securities in higher rating categories. See
"Description of Municipal Bonds -- \`High Yield' or \`Junk' Bonds." The Fund
does not intend to purchase debt securities that are in default or which the
Manager believes will be in default.

Certain Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution that provides the
credit enhancement.

3
<PAGE>

The Fund ordinarily does not intend to realize investment income not
exempt from Federal income tax and New York State and New York City personal
income taxes. However, to the extent that suitable New York Municipal Bonds are
not available for investment by the Fund, the Fund may purchase Municipal Bonds
issued by other states, their agencies and instrumentalities, the interest
income on which is exempt, in the opinion of bond counsel to the issuer, from
Federal income tax, but not New York State and New York City personal income
taxation. The Fund also may invest in securities not issued by or on behalf of
a state or territory or by an agency or instrumentality thereof, if the Fund
nevertheless believes such securities to be exempt from Federal income taxation
("Non-Municipal Tax-Exempt Securities"). Non-Municipal Tax-Exempt Securities
could include trust certificates or other instruments evidencing interest in
one or more long-term municipal securities. Non-Municipal Tax-Exempt Securities
also may include securities issued by other investment companies that invest in
municipal bonds, to the extent such investments are permitted by applicable
law. Non-Municipal Tax-Exempt securities will be considered "Municipal Bonds"
for purposes of the Fund's investment objective and policies. The Fund at all
times will have at least 80% of its net assets invested in securities the
interest on which is exempt from Federal taxation. However, interest received
on certain otherwise tax-exempt securities that are classified as "private
activity bonds" (in general, bonds that benefit non-governmental entities) may
be subject to Federal alternative minimum tax. The percentage of the Fund's
total assets invested in "private activity bonds" will vary during the year.
Federal tax legislation has limited the types and volume of bonds the interest
on which qualifies for a Federal income tax exemption. As a result, this
legislation and legislation that may be enacted in the future may affect the
availability of Municipal Bonds for investment by the Fund. See "Distributions
and Taxes -- Taxes."

RISK FACTORS AND SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL BONDS

The risks and special considerations involved in investment in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax-Exempt Securities may present similar risks, depending on the
particular product. Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See "Investment Objective and Policies
- -- Description of Municipal Bonds" and " -- Financial Futures Transactions and
Options."

The Fund ordinarily will invest at least 65% of its assets in New York
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of New York Municipal Bonds than is a municipal bond mutual
fund that is not concentrated in issuers of New York Municipal Bonds to this
degree. New York State, New York City and other New York public bodies have
sometimes encountered financial difficulties of a type that could have an
adverse effect with respect to the performance of the Fund. Currently, Moody's,
S&P and Fitch rate New York City's general obligation bonds A3, A- and A-,
respectively. Moody's and S&P currently rate New York State's general
obligation bonds A2 and A, respectively.

The value of Municipal Bonds generally may be affected by uncertainties in
the municipal markets as a result of legislation or litigation changing the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the
event of a bankruptcy. Municipal bankruptcies are rare and certain provisions
of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further,
the application of state law to Municipal Bond issuers could produce varying
results among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the Municipal
Bonds or the New York Municipal Bonds in which the Fund invests.

The Manager does not believe that the current economic conditions in New
York or other factors described above will have a significant adverse effect on
the Fund's ability to invest in high quality New York Municipal Bonds. Because
the Fund's portfolio will be comprised primarily of investment grade
securities, the Fund is expected to be less subject to market and credit risks
than a fund that invests primarily in lower quality New York Municipal Bonds.
For a discussion of economic and other conditions in the State and City of New
York, see Appendix I "Economic Conditions in New York."

The suitability for any particular investor of a purchase of shares of the
Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks of investing in such
markets, including the loss of principal.

4
<PAGE>

DESCRIPTION OF MUNICIPAL BONDS

Set forth below is a detailed description of the Municipal Bonds and
Temporary Investments in which the Fund may invest. Information with respect to
ratings assigned to tax-exempt obligations that the Fund may purchase is set
forth in Appendix II to this Statement of Additional Information. See "How the
Fund Invests" in the Prospectus.

Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance various privately owned or operated facilities,
including certain facilities for the local furnishing of electric energy or
gas, sewage facilities, solid waste disposal facilities and other specialized
facilities. Such obligations are included within the term Municipal Bonds if
the interest paid thereon is excluded from gross income for Federal income tax
purposes and, in the case of New York Municipal Bonds, exempt from New York
State and New York City personal income taxes. Other types of industrial
development bonds or private activity bonds, the proceeds of which are used for
the construction, equipment or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
Federal tax laws place substantial limitations on the size of such issues. The
interest on Municipal Bonds may bear a fixed rate or be payable at a variable
or floating rate. The two principal classifications of Municipal Bonds are
"general obligation" and "revenue" bonds, which latter category includes
industrial development bonds ("IDBs") and, for bonds issued after August 15,
1986, private activity bonds.

GENERAL OBLIGATION BONDS. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of its state constitution or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of its tax base due to population declines, natural disasters, declines
in the state's industrial base or inability to attract new industries, economic
limits on the ability to tax without eroding the tax base, state legislative
proposals or voter initiatives to limit ad valorem real property taxes and the
extent to which the entity relies on Federal or state aid, access to capital
markets or other factors beyond the state's or entity's control. Accordingly,
the capacity of the issuer of a general obligation bond as to the timely
payment of interest and the repayment of principal when due is affected by the
issuer's maintenance of its tax base.

REVENUE BONDS. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as
payments from the user of the facility being financed; accordingly the timely
payment of interest and the repayment of principal in accordance with the terms
of the revenue or special obligation bond is a function of the economic
viability of such facility or such revenue source.

IDBS AND PRIVATE ACTIVITY BONDS. The Fund may purchase IDBs and private
activity bonds. IDBs and private activity bonds are, in most cases, tax-exempt
securities issued by states, municipalities or public authorities to provide
funds, usually through a loan or lease arrangement, to a private entity for the
purpose of financing construction or improvement of a facility to be used by
the entity. Such bonds are secured primarily by revenues derived from loan
repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. IDBs and private activity
bonds generally are not secured by a pledge of the taxing power of the issuer
of such bonds. Therefore, an investor should be aware that repayment of such
bonds generally depends on the revenues of a private entity and be aware of the
risks that such an investment may entail. Continued ability of an entity to
generate sufficient revenues for the payment of principal and interest on such
bonds will be affected by many factors including the size of the entity,
capital structure, demand for its products or services, competition, general
economic conditions, government regulation and the entity's dependence on
revenues for the operation of the particular facility being financed. The Fund
may invest more than 25% of its total assets in IDBs or private activity bonds.

5
<PAGE>

"MORAL OBLIGATION" BONDS. The Fund also may invest in "moral obligation"
bonds, which are normally issued by special purpose public authorities. If an
issuer of moral obligation bonds is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal obligation
of the state or municipality in question.

LEASE OBLIGATIONS. Also included within the general category of Municipal
Bonds are participation certificates issued by government authorities or
entities to finance the acquisition or construction of equipment, land and/or
facilities. The certificates represent participations in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") relating to such equipment, land or
facilities. Although lease obligations do not constitute general obligations of
the issuer for which the issuer's unlimited taxing power is pledged, a lease
obligation is frequently backed by the issuer's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a type of financing that has not
yet developed the depth of marketability associated with more conventional
securities. Certain investments in lease obligations may be illiquid. The Fund
may not invest in illiquid lease obligations if such investments, together with
all other illiquid investments, would exceed 15% of the Fund's total assets.
The Fund may, however, invest without regard to such limitation in lease
obligations which the Manager, pursuant to guidelines which have been adopted
by the Board of Trustees and subject to the supervision of the Board,
determines to be liquid. The Manager will deem lease obligations to be liquid
if they are publicly offered and have received an investment grade rating of
Baa or better by Moody's, or BBB or better by S&P or Fitch. Unrated lease
obligations, or those rated below investment grade, will be considered liquid
if the obligations come to the market through an underwritten public offering
and at least two dealers are willing to give competitive bids. In reference to
the latter, the Manager must, among other things, also review the
creditworthiness of the entity obligated to make payment under the lease
obligation and make certain specified determinations based on such factors as
the existence of a rating or credit enhancement such as insurance, the
frequency of trades or quotes for the obligation and the willingness of dealers
to make a market in the obligation.

INDEXED AND INVERSE FLOATING OBLIGATIONS. The Fund may invest in Municipal
Bonds (and Non-Municipal Tax-Exempt Securities) the return on which is based on
a particular index of value or interest rates. For example, the Fund may invest
in Municipal Bonds that pay interest based on an index of Municipal Bond
interest rates. The principal amount payable upon maturity of certain Municipal
Bonds also may be based on the value of the index. To the extent the Fund
invests in these types of Municipal Bonds, the Fund's return on such Municipal
Bonds will be subject to risk with respect to the value of the particular
index. Interest and principal payable on the Municipal Bonds may also be based
on relative changes among particular indices. Also, the Fund may invest in
so-called "inverse floating obligations" or "residual interest bonds" on which
the variable long-term interest rates typically decline as short-term market
rates increase and increase as short-term market rates decline. The Fund's
return on such Municipal Bonds (and Non-Municipal Tax-Exempt Securities) will
be subject to risk with respect to the value of the particular index, which may
include reduced or limited interest payments and losses of invested principal.
Such securities have the effect of providing a degree of investment leverage,
since they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax-exempt securities increase
or decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
which contain limitations on the extent to which the interest rate may vary.
Certain investments in such obligations may be illiquid. The Fund may not
invest in such illiquid obligations if such investments, together with other
illiquid investments, would exceed 15% of the Fund's total assets. The Manager,
however, believes that indexed and inverse floating obligations represent
flexible portfolio management instruments for the Fund which allow the Fund to
seek potential investment rewards, hedge other portfolio positions or vary the
degree of investment leverage relatively efficiently under different market
conditions.

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<PAGE>

WHEN ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS. Municipal Bonds
may at times be purchased or sold on a delayed delivery basis or a when issued
basis. These transactions arise when securities are purchased or sold by the
Fund with payment and delivery taking place in the future, often a month or
more after the purchase. The purchase will be recorded on the date the Fund
enters into the commitment and the value of the obligation will thereafter be
reflected in the calculation of the Fund's net asset value. The value of the
obligation on the delivery date may be more or less than its purchase price.
The payment obligation and the interest rate are each fixed at the time the
buyer enters into the commitment. The Fund will make only commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to the settlement date
if it is deemed advisable. Purchasing Municipal Bonds on a when issued basis
involves the risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself; if yields so increase, the value of the when issued obligation
generally will decrease. The Fund will maintain a separate account at its
custodian bank consisting of cash, cash equivalents or liquid securities
(valued on a daily basis) equal at all times to the amount of the when issued
commitment.

CALL RIGHTS. The Fund may purchase a Municipal Bond issuer's right to call
all or a portion of such Municipal Bond for mandatory tender for purchase (a
"Call Right"). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to maturity of the
related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's total assets.

"HIGH YIELD" OR "JUNK" BONDS. The Fund may invest up to 20% of its total
assets in Municipal Bonds that are rated below Baa by Moody's or below BBB by
S&P or Fitch or which, in the Manager's judgment, possess similar credit
characteristics. See Appendix II -- "Ratings of Municipal Bonds" for additional
information regarding ratings of debt securities. In purchasing such
securities, the Fund will rely on the Manager's judgment, analysis and
experience in evaluating the creditworthiness of the issuer of such securities.
The Manager will take into consideration, among other things, the ratings
assigned by S&P, Moody's or Fitch, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of its management and regulatory matters.

High yield securities are considered by S&P, Moody's and Fitch to have
varying degrees of speculative characteristics. Consequently, although high
yield securities can be expected to provide higher yields, such securities may
be subject to greater market price fluctuations and risk of loss of principal
than lower yielding, higher rated debt securities. The market prices of
high-yielding, lower-rated securities may fluctuate more than higher-rated
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. Investments in
high yield securities will be made only when, in the judgment of the Manager,
such securities provide attractive total return potential relative to the risk
of such securities, as compared to higher quality debt securities. The Fund
generally will not invest in debt securities in the lowest rating categories
(those rated CC or lower by S&P or Fitch or Ca or lower by Moody's) unless the
Manager believes that the financial condition of the issuer or the protection
afforded the particular securities is stronger than would otherwise be
indicated by such low ratings. The Fund does not intend to purchase debt
securities that are in default or which the Manager believes will be in
default.

Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing.
Therefore, the risks associated with acquiring the securities of such issuers
generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers or obligors of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors are highly
leveraged. During such periods, such issuers may not have sufficient revenues
to meet their interest payment obligations. The issuer's ability to service its
debt obligations also may be adversely affected by specific issuer
developments, or the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer is significantly greater for the holders of high yield
securities because such securities may be unsecured and may be subordinated to
other creditors of the issuer.

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<PAGE>

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

The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it generally is not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.

It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and therefore have the
opportunity to participate in structuring the terms of the offering. Although
this may enable the Fund to seek to protect itself against certain of such
risks, the considerations discussed herein would nevertheless remain
applicable.

Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.

YIELDS. Yields on Municipal Bonds are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the financial condition of the
issuer, the maturity of the obligation and the rating of the issue. The ability
of the Fund to achieve its investment objective is also dependent on the
continuing ability of the issuers of the securities in which the Fund invests
to meet their obligations for the payment of interest and principal when due.
There are variations in the risks involved in holding Municipal Bonds, both
within a particular classification and between classifications, depending on
numerous factors. Furthermore, the rights of owners of Municipal Bonds and the
obligations of the issuer of such Municipal Bonds may be subject to applicable
bankruptcy, insolvency and similar laws and court decisions affecting the
rights of creditors generally and to general equitable principles, which may
limit the enforcement of certain remedies.

FINANCIAL FUTURES TRANSACTIONS AND OPTIONS

Reference is made to "How the Fund Invests" in the Prospectus. Set forth
below is additional information concerning these transactions.

The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts ("financial futures contracts") solely for the
purpose of hedging its investments in Municipal Bonds against declines in value
and to hedge against increases in the cost of securities it intends to
purchase. However, any transactions involving financial futures or options
(including puts and calls associated therewith) will be in accordance with the
Fund's investment policies and limitations. A financial futures contract
obligates the seller of a contract to deliver and the purchaser of a contract
to take delivery of the type of financial instrument covered by the contract,
or in the case of index-based futures contracts to make and accept a cash
settlement, at a specific future time for a specified price. To hedge its
portfolio, the Fund may take an investment position in a futures contract which
will move in the opposite direction from the portfolio position being hedged. A
sale of financial futures contracts may provide a hedge against a decline in
the value of portfolio securities because such depreciation

8
<PAGE>

may be offset, in whole or in part, by an increase in the value of the position
in the financial futures contracts. A purchase of financial futures contracts
may provide a hedge against an increase in the cost of securities intended to
be purchased because such appreciation may be offset, in whole or in part, by
an increase in the value of the position in the futures contracts. While the
Fund's use of hedging strategies is intended to moderate capital changes in
portfolio holdings and thereby reduce the volatility of the net asset value of
Fund shares, the Fund anticipates that its net asset value will fluctuate.
Distributions, if any, of net long-term capital gains from certain transactions
in futures or options are taxable at long-term capital gains rates for Federal
income tax purposes, regardless of the length of time the shareholder has owned
Fund shares. See "Distributions and
Taxes -- Taxes."

DESCRIPTION OF FUTURES CONTRACTS. A futures contract is an agreement
between two parties to buy and sell a security or, in the case of an
index-based futures contract, to make and accept a cash settlement for a set
price on a future date. A majority of transactions in futures contracts,
however, do not result in the actual delivery of the underlying instrument or
cash settlement, but are settled through liquidation, i.e., by entering into an
offsetting transaction. Futures contracts have been designed by boards of trade
which have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC").

The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract
market, which varies, but is generally about 5% of the contract amount, must be
deposited with the broker. This amount is known as "initial margin" and
represents a "good faith" deposit assuring the performance of both the
purchaser and seller under the futures contract. Subsequent payments to and
from the broker, called "variation margin," are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." At any time prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite position
that will operate to terminate the position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid to or released by the broker and the purchaser realizes a loss or gain.
In addition, a nominal commission is paid on each completed sale transaction.

The Fund deals in financial futures contracts based on a long-term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax-exempt municipal revenue and general obligation bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
S&P and must have a remaining maturity of 19 years or more. Twice a month new
issues satisfying the eligibility requirements are added to, and an equal
number of old issues are deleted from, the Municipal Bond Index. The value of
the Municipal Bond Index is computed daily according to a formula based on the
price of each bond in the Municipal Bond Index, as evaluated by six
dealer-to-dealer brokers.

The Municipal Bond Index futures contract is traded only on the CBT. Like
other contract markets, the CBT assures performance under futures contracts
through a clearing corporation, a nonprofit organization managed by the
exchange membership which is also responsible for handling daily accounting of
deposits or withdrawals of margin.

The Fund may purchase and sell financial futures contracts on U.S.
Government securities as a hedge against adverse changes in interest rates as
described below. With respect to U.S. Government securities, currently there
are financial futures contracts based on long-term U.S. Treasury bonds,
Treasury notes, Government National Mortgage Association ("GNMA") Certificates
and three-month U.S. Treasury bills. The Fund may purchase and write call and
put options on futures contracts on U.S. Government securities and purchase and
sell Municipal Bond index futures contracts in connection with its hedging
strategies.

Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices that may become available if the Manager and the
Trustees of the Trust should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.

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<PAGE>

FUTURES STRATEGIES. The Fund may sell a financial futures contract (I.E.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This strategy,
however, entails increased transaction costs in the form of dealer spreads and
typically would reduce the average yield of the Fund's portfolio securities as
a result of the shortening of maturities. The sale of futures contracts
provides an alternative means of hedging against declines in the value of its
investments in Municipal Bonds. As such values decline, the value of the Fund's
positions in the futures contracts will tend to increase, thus offsetting all
or a portion of the depreciation in the market value of the Fund's Municipal
Bond investments that are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, commissions on futures
transactions are lower than transaction costs incurred in the purchase and sale
of Municipal Bonds. In addition, the ability of the Fund to trade in the
standardized contracts available in the futures markets may offer a more
effective defensive position than a program to reduce the average maturity of
the portfolio securities due to the unique and varied credit and technical
characteristics of the municipal debt instruments available to the Fund.
Employing futures as a hedge also may permit the Fund to assume a defensive
posture without reducing the yield on its investments beyond any amounts
required to engage in futures trading.

When the Fund intends to purchase Municipal Bonds, the Fund may purchase
futures contracts as a hedge against any increase in the cost of such Municipal
Bonds resulting from a decrease in interest rates or otherwise, that may occur
before such purchases can be effected. Subject to the degree correlation
between the Municipal Bonds and the futures contracts, subsequent increases in
the cost of Municipal Bonds should be reflected in the value of the futures
held by the Fund. As such purchases are made, an equivalent amount of futures
contracts will be closed out. Due to changing market conditions and interest
rate forecasts, however, a futures position may be terminated without a
corresponding purchase of portfolio securities.

CALL OPTIONS ON FUTURES CONTRACTS. The Fund may also purchase and sell
exchange traded call and put options on financial futures contracts on U.S.
Government securities. The purchase of a call option on a futures contract is
analogous to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the futures contract upon which
it is based or the price of the underlying debt securities, it may or may not
be less risky than ownership of the futures contract or underlying debt
securities. Like the purchase of a futures contract, the Fund will purchase a
call option on a futures contract to hedge against a market advance when the
Fund is not fully invested.

The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is below
the exercise price, the Fund will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Fund's portfolio holdings.

PUT OPTIONS ON FUTURES CONTRACTS. The purchase of a put option on a
futures contract is analogous to the purchase of a protective put option on
portfolio securities. The Fund will purchase a put option on a futures contract
to hedge the Fund's portfolio against the risk of rising interest rates.

The writing of a put option on a futures contract constitutes a partial
hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher
than the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
Municipal Bonds which the Fund intends to purchase.

The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option will be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures contracts

The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities

10
<PAGE>

and other assets of an investment company and may be deemed to prohibit certain
arrangements between the Fund and commodities brokers with respect to initial
and variation margin. Section 18(f) of the Investment Company Act prohibits an
open-end investment company such as the Trust from issuing a "senior security"
other than a borrowing from a bank. The staff of the Commission has in the past
indicated that a futures contract may be a "senior security" under the
Investment Company Act.

RESTRICTIONS ON USE OF FUTURES TRANSACTIONS. Regulations of the CFTC
applicable to the Fund require that all of the Fund's futures transactions
constitute bona fide hedging transactions and that the Fund purchase and sell
futures contracts and options thereon (i) for bona fide hedging purposes, and
(ii) for non-hedging purposes, if the aggregate initial margin and premiums
required to establish positions in such contracts and options does not exceed
5% of the liquidation value of the Fund's portfolio assets after taking into
account unrealized profits and unrealized losses on any such contracts and
options. (However, the Fund intends to engage in options and futures
transactions only for hedging purposes.) Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.

When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (E.G., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation
margin held in the account of its broker equals the market value of the futures
contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.

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

The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the bonds held by
the Fund. As a result, the Fund's ability to hedge effectively all or a portion
of the value of its Municipal Bonds through the use of such financial futures
contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract correlate with the price
movements of the Municipal Bonds held by the Fund. The correlation may be
affected by disparities in the average maturity, ratings, geographical mix or
structure of the Fund's investments as compared to those comprising the
Municipal Bond Index and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of
Municipal Bonds held by the Fund may be greater. Municipal Bond Index futures
contracts were approved for trading in 1986. Trading in such futures contracts
may tend to be less liquid than trading in other futures contracts. The trading
of futures contracts also is subject to certain market risks, such as
inadequate trading activity, which could at times make it difficult or
impossible to liquidate existing positions.

The Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract market.
There can be no assurance, however, that a liquid secondary market will exist
for any particular futures contract at any specific time. Thus, it may not be
possible to close out a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of variation margin. In such situations, if the Fund has insufficient cash, it
may be required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do

11
<PAGE>

so. The inability to close out futures positions also could have an adverse
impact on the Fund's ability to hedge effectively its investments in Municipal
Bonds. The liquidity of a secondary market in a futures contract may be
adversely affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
moved beyond the daily limit on a number of consecutive trading days. The Fund
will enter into a futures position only if, in the judgment of the Manager,
there appears to be an actively traded secondary market for such futures
contracts.

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

Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result,
relatively small movements in the price of the futures contracts can result in
substantial unrealized gains or losses. There is also the risk of loss by the
Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a financial futures contract. Because the Fund
will engage in the purchase and sale of futures contracts solely for hedging
purposes, however, any losses incurred in connection therewith should, if the
hedging strategy is successful, be offset in whole or in part by increases in
the value of securities held by the Fund or decreases in the price of
securities the Fund intends to acquire.

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

DESCRIPTION OF TEMPORARY INVESTMENTS

The Fund may invest in short-term tax-free and taxable securities subject
to the limitations set forth above and in the Prospectus under "How the Fund
Invests." The tax-exempt money market securities may include municipal notes,
municipal commercial paper, municipal bonds with a remaining maturity of less
than one year, variable rate demand notes and participations therein. Municipal
notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and grant anticipation notes. Anticipation notes are sold as
interim financing in anticipation of tax collection, bond sales, government
grants or revenue receipts. Municipal commercial paper refers to short-term
unsecured promissory notes generally issued to finance short-term credit needs.
The taxable money market securities in which the Fund may invest as Temporary
Investments consist of U.S. Government securities, U.S. Government agency
securities, domestic bank or savings institution certificates of deposit and
bankers' acceptances, short-term corporate debt securities such as commercial
paper and repurchase agreements. These Temporary Investments must have a stated
maturity not in excess of one year from the date of purchase. The Fund may not
invest in any security issued by a commercial bank or a savings institution
unless the bank or institution is organized and operating in the United States,
has total assets of at least one billion dollars and is a member of the Federal
Deposit Insurance Corporation ("FDIC"), except that up to 10% of total assets
may be invested in certificates of deposit of smaller institutions if such
certificates are fully insured by the FDIC.

VRDOS AND PARTICIPATING VRDOS. VRDOs are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and a right of
demand on the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period not to
exceed seven days. There is, however, the possibility that because of default
or insolvency the demand feature of VRDOs and Participating VRDOs may not be
honored. The interest rates are adjustable at intervals (ranging from daily to
up to one

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<PAGE>

year) to some prevailing market rate for similar investments, such adjustment
formula being calculated to maintain the market value of the VRDOs, at
approximately the par value of the VRDOs on the adjustment date. The
adjustments typically are based upon the Bond Market Association Index or some
other appropriate interest rate adjustment index. The Fund may invest in all
types of tax-exempt instruments currently outstanding or to be issued in the
future which satisfy the short-term maturity and quality standards of the Fund.

Participating VRDOs provide the Fund with a specified undivided interest
(up to 100%) of the underlying obligation and the right to demand payment of
the unpaid principal balance plus accrued interest on the Participating VRDOs
from the financial institution upon a specified number of days notice, not to
exceed seven days. In addition, the Participating VRDO is backed by an
irrevocable letter of credit or guaranty of the financial institution. The Fund
would have an undivided interest in the underlying obligation and thus
participate on the same basis as the financial institution in such obligation
except that the financial institution typically retains fees out of the
interest paid on the obligation for servicing the obligation, providing the
letter of credit and issuing the repurchase commitment. The Fund has been
advised by its counsel that the Fund should be entitled to treat the income
received on Participating VRDOs as interest from tax-exempt obligations.

VRDOs that contain a right of demand to receive payment of the unpaid
principal balance plus accrued interest on a notice period exceeding seven days
may be deemed to be illiquid securities. A VRDO with a demand notice period
exceeding seven days will therefore be subject to the Fund's restriction on
illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible
for such determinations.

The Temporary Investments, VRDOs and Participating VRDOs in which the Fund
may invest will be in the following rating categories at the time of purchase:
MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through
Prime-3 for commercial paper (as determined by Moody's), SP-1 through SP-2 for
notes and A-1 through A-3 for VRDOs and commercial paper (as determined by
S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined
by Fitch). Temporary Investments, if not rated, must be of comparable quality
in the opinion of the Manager. In addition, the Fund reserves the right to
invest temporarily a greater portion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of the Manager, market conditions
warrant.

REPURCHASE AGREEMENTS. The Fund may invest in securities pursuant to
repurchase agreements. Repurchase agreements may be entered into only with a
member bank of the Federal Reserve System or primary dealer or an affiliate
thereof, in U.S. Government securities. Under such agreements, the bank or
primary dealer or an affiliate thereof agrees, upon entering into the contract,
to repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations. Such agreements usually
cover short periods, such as under one week. Repurchase agreements may be
construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In a repurchase agreement, 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 default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate of return, the rate
of return to the Fund shall be dependent upon intervening fluctuations of the
market value of such security and the accrued interest on the security. In such
event, the 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. The Fund may not invest in repurchase
agreements maturing in more than seven days if such investments, together with
all other illiquid investments, would exceed 15% of the Fund's net assets.

13
<PAGE>

In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold." Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. The treatment of purchase and sales contracts is less certain.

INVESTMENT RESTRICTIONS

The Fund has adopted a number of fundamental and non-fundamental
investment restrictions and policies relating to the investment of its assets
and its activities. The fundamental policies set forth below may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities (which for this purpose and under the Investment Company Act
means the lesser of (i) 67% of the Fund's shares present at a meeting at which
more than 50% of the outstanding shares of the Fund are represented or (ii)
more than 50% of the Fund's outstanding shares). Under the fundamental
investment restrictions, the Fund may not:

(1) Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.

(2) Invest more than 25% of its assets, taken at market value at the
time of each investment, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies and
instrumentalities). For purposes of this restriction, states,
municipalities and their political subdivisions are not considered part of
any industry.

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

(4) Purchase or sell real estate, except that, to the extent permitted
by applicable law, the Fund may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies that
invest in real estate or interests therein.

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

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

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

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

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

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

14
<PAGE>

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

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

(c) Invest in securities that cannot be readily resold because of legal
or contractual restrictions or that cannot otherwise be marketed, redeemed
or put to the issuer or a third party, if at the time of acquisition more
than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities that mature within seven days or
securities that the Board of Trustees of the Trust has otherwise determined
to be liquid pursuant to applicable law.

(d) Notwithstanding fundamental investment restriction (7) above, 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.

In addition, to comply with tax requirements for qualification as a
"regulated investment company," the Fund's investments will be limited in a
manner such that, at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Board of Trustees of the Trust to
the extent necessary to comply with changes to the Federal tax requirements.

Because of the affiliation of Merrill Lynch with the Manager, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except pursuant to an exemptive order under the Investment Company
Act. See "Portfolio Transactions." Without such an exemptive order the Fund
would be prohibited from engaging in portfolio transactions with Merrill Lynch
or any of its affiliates acting as principal.

PORTFOLIO TURNOVER

Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to the Manager. As a result of the investment policies described
herein, the Fund's portfolio turnover rate may be higher than that of other
investment companies; however, it is extremely difficult to predict portfolio
turnover rates with any degree of accuracy. Higher portfolio turnover may
contribute to higher transaction costs in the form of dealer spreads and
brokerage commissions which are borne directly by the Fund. High portfolio
turnover may also result in negative tax consequences, such as an increase in
capital gains dividends or in ordinary income dividends of accrued market
discount. See "Distributions and Taxes -- Taxes." The portfolio turnover rate
is calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year by the monthly average of the value
of the portfolio securities owned by the Fund during the particular fiscal
year. For purposes of determining this rate, all securities whose maturities at
the time of acquisition are one year or less are excluded.

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the Investment Company Act (the
"non-interested Trustees"). The Trustees are responsible for the

15
<PAGE>

overall supervision of the operations of the Trust and perform the various
duties imposed on the directors or Trustees of investment companies by the
Investment Company Act.

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

ARTHUR ZEIKEL (66) -- PRESIDENT AND TRUSTEE(1)(2) -- Chairman of the
Manager and Merrill Lynch Asset Management, L.P. ("MLAM") (which terms as used
herein include their corporate predecessors) since 1997; President of the
Manager and MLAM from 1977 to 1997; Chairman of Princeton Services, Inc.
("Princeton Services") since 1997 and Director thereof since 1993; President of
Princeton Services from 1993 to 1997; Executive Vice President of Merrill Lynch
& Co., Inc. ("ML & Co.") since 1990.

JAMES H. BODURTHA (54) -- TRUSTEE(2)(3) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.

HERBERT I. LONDON (59) -- TRUSTEE(2)(3) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York University
since 1993 and Professor thereof since 1980; President, Hudson Institute since
1997 and Trustee thereof since 1980; Dean, Gallatin Division of New York
University from 1976 to 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corporation from 1991 to 1995;
Overseer, Center for Naval Analyses from 1983 to 1993; Limited Partner,
Hypertech LP since 1996.

ROBERT R. MARTIN (71) -- TRUSTEE(2)(3) -- 513 Grand Hill, St. Paul,
Minnesota 55102. Chairman and Chief Executive Officer, Kinnard Investments,
Inc. from 1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to
1989; Director, Carnegie Capital Management from 1977 to 1985 and Chairman
thereof in 1979; Director, Securities Industry Association from 1981 to 1982
and Public Securities Association from 1979 to 1980; Chairman of the Board, WTC
Industries Inc. in 1994; Trustee, Northland College since 1992.

JOSEPH L. MAY (69) -- TRUSTEE(2)(3) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984; President,
May and Athens Hosiery Mills Division, Wayne-Gossard Corporation from 1954 to
1983; Vice President, Wayne-Gossard Corporation from 1972 to 1983; Chairman,
The May Corporation (personal holding company) from 1972 to 1983; Director,
Signal Apparel Co. from 1972 to 1989.

ANDRE F. PEROLD (46) -- TRUSTEE(2)(3) -- Morgan Hall, Soldiers Field,
Boston, Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.

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

VINCENT R. GIORDANO (54) -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice
President of the Manager and MLAM since 1984; Senior Vice President of
Princeton Services since 1993.

KENNETH A. JACOB (47) -- VICE PRESIDENT(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of
the Manager since 1984.

ROBERTO W. ROFFO (33) -- PORTFOLIO MANAGER AND VICE PRESIDENT OF THE
FUND(1)(2) -- Vice President of MLAM since 1996 and a Portfolio Manager thereof
since 1992.

DONALD C. BURKE (38) -- VICE PRESIDENT(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation
of MLAM since 1990.

16
<PAGE>

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

ROBERT E. PUTNEY, III (38) -- SECRETARY(1)(2) -- Director (Legal Advisory)
of MLAM and Princeton Administrators, L.P. since 1997; Vice President of
Princeton Administrators, L.P. from 1996 to 1997; Vice President of MLAM from
1994 to 1997; Attorney with MLAM from 1991 to 1994.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which FAM or MLAM acts as the investment adviser
or manager.
(3) Member of the Trust's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Trustees.

As of January 4, 1999, the Trustees, officers of the Trust and officers of
the Fund as a group (13 persons) owned an aggregate of less than 1% of the
outstanding shares of the Fund. At such date, Mr. Zeikel, a Trustee and officer
of the Trust, the other officers of the Trust and the officers of the Fund
owned an aggregate of less than 1% of the outstanding shares of common stock of
ML & Co.

COMPENSATION OF TRUSTEES

The Trust pays each non-interested Trustee a fee of $10,000 per year plus
$1,000 per meeting attended. The Trust also compensates members of its Audit
and Nominating Committee (the "Committee"), which consists of all the
non-interested Trustees, a fee of $2,000 per year plus $500 per Committee
meeting attended. The Trust reimburses each non-interested Trustee for his
out-of-pocket expenses relating to attendance at Board and Committee meetings.
The fees and expenses of the Trustees are allocated to the respective series of
the Trust on the basis of asset size.

The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended September 30, 1998 and the aggregate
compensation paid to them from all registered investment companies advised by
the Manager and its affiliate, MLAM ("MLAM/FAM-advised funds"), for the
calendar year ended December 31, 1997.

<TABLE>
<CAPTION>
AGGREGATE
PENSION OR ESTIMATED COMPENSATION FROM
RETIREMENT BENEFITS ANNUAL TRUST AND OTHER
POSITION WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME TRUST FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
- --------------------------- --------------- -------------- --------------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
James H. Bodurtha ......... Trustee $4,950 None None $148,500
Herbert I. London ......... Trustee $4,950 None None $148,500
Robert R. Martin .......... Trustee $4,950 None None $148,500
Joseph L. May ............. Trustee $4,950 None None $148,500
Andre F. Perold ........... Trustee $4,950 None None $148,500
</TABLE>

- ----------
(1) The Trustees serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Bodurtha (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43
portfolios); Mr. Martin (25 registered investment companies consisting of
43 portfolios); Mr. May (25 registered investment companies consisting of
43 portfolios); and Mr. Perold (25 registered investment companies
consisting of 43 portfolios).

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

MANAGEMENT AND ADVISORY ARRANGEMENTS

MANAGEMENT SERVICES. The Manager provides the Fund with investment
advisory and management services. Subject to the supervision of the 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

17
<PAGE>

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 the office space,
facilities, equipment and necessary personnel for management of the Trust and
the Fund.

MANAGEMENT FEE. The Trust has entered into a management agreement on
behalf of the Fund with the Manager (the "Management Agreement"), pursuant to
which the Manager receives for its services to the Fund monthly compensation at
the annual rate of 0.55% of the average daily net assets of the Fund. Effective
December 23, 1987, the Manager has voluntarily agreed to waive the amount of
compensation set forth in the Management Agreement and instead has agreed to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the average daily net assets
not exceeding $500 million; 0.525% of the average daily net assets exceeding
$500 million but not exceeding $1.0 billion and 0.50% of the average daily net
assets exceeding $1.0 billion. The table below sets forth information about the
total management fees paid by the Fund to the Manager for the periods
indicated.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, MANAGEMENT FEE
- --------------------------------- ---------------
<S> <C>
1998 ..................... $2,355,979
1997 ..................... $2,697,119
1996 ..................... $3,125,896
</TABLE>

PAYMENT OF FUND EXPENSES. The Management Agreement obligates the Manager
to provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Trust connected with
investment and economic research, trading and investment management of the
Trust, as well as the fees of all Trustees of the Trust who are affiliated
persons of ML & Co. or any of its affiliates. The Fund pays all other expenses
incurred in its operation and a portion of the Trust's general administrative
expenses allocated on the basis of the asset size of the respective series of
the Trust ("Series"). Expenses that will be borne directly by the Series
include redemption expenses, expenses of portfolio transactions, expenses of
registering the shares under federal and state securities laws, pricing costs
(including the daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional information,
except to the extent paid by Merrill Lynch Funds Distributor, a division of PFD
(the "Distributor") as described below, fees for legal and auditing services,
Commission fees, interest, certain taxes and other expenses attributable to a
particular Series. Expenses that will be allocated on the basis of asset size
of the respective Series include fees and expenses of non-interested Trustees,
state franchise taxes, costs of printing proxies and other expenses relating to
shareholder meetings and other expenses properly payable by the Trust. The
organizational expenses of the Trust were paid by the Trust, and if additional
Series are added to the Trust, the organizational expenses will be allocated
among the Series in a manner deemed equitable by the Trustees. Depending upon
the nature of a lawsuit, litigation costs may be assessed to the specific
Series to which the lawsuit relates or allocated on the basis of the asset size
of the respective Series. The Trustees have determined that this is an
appropriate method of allocation of expenses. Accounting services are provided
to the Trust by the Manager and the Trust reimburses the Manager for its costs
in connection with such services. As required by the Fund's distribution
agreements, the Distributor will pay the promotional expenses of the Fund
incurred in connection with the offering of shares of the Fund. Certain
expenses in connection with the account maintenance and distribution of Class B
and Class C shares will be financed by the Trust pursuant to the Distribution
Plans in compliance with Rule 12b-1 under the Investment Company Act. See
"Purchase of Shares -- Distribution Plans." Reference is made to "Management of
the Fund" in the Prospectus for certain information concerning the management
and advisory arrangements of the Trust.

ORGANIZATION OF THE MANAGER. The Manager is a limited partnership, the
partners of which are ML & Co., a financial services holding company and the
parent of Merrill Lynch, and Princeton Services. ML & Co. and Princeton
Services are "controlling persons" of the Manager as defined under the
Investment Company Act because of their ownership of its voting securities or
their power to exercise a controlling influence over its management or
policies.

DURATION AND TERMINATION. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties to
such contract or

18
<PAGE>

interested persons (as defined in the Investment Company Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party or by vote of the
shareholders of the Fund.

TRANSFER AGENCY SERVICES. Financial Data Services, Inc. (the "Transfer
Agent"), a subsidiary of ML & Co., acts as the Trust's Transfer Agent pursuant
to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the "Transfer Agency Agreement"). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the issuance, transfer
and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent
receives a fee of $11.00 per Class A or Class D account and $14.00 per Class B
or Class C account and is entitled to reimbursement for certain transaction
charges and out-of-pocket expenses incurred by the Transfer Agent under the
Transfer Agency Agreement. Additionally, a $.20 monthly closed account charge
will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co.

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

CODE OF ETHICS

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

The Codes require that all employees of the Manager pre-clear any personal
securities investment (with limited exceptions, such as government securities).
The pre-clearance requirement and associated procedures are designed to
identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Manager include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Manager. Furthermore, the Codes provide for trading "blackout periods" which
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security (15 or 30 days depending upon
the transaction).

PURCHASE OF SHARES

Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.

The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class
A, Class B, Class C or Class D share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the

19
<PAGE>

same rights, except that Class B, Class C and Class D shares bear the expenses
of the ongoing account maintenance fees (also known as service fees) and Class
B and Class C shares bear the expenses of the ongoing distribution fees and the
additional incremental transfer agency costs resulting from the deferred sales
charge arrangements. The contingent deferred sales charges ("CDSCs"),
distribution fees and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and differ only to the extent
that account maintenance and distribution fees and any incremental transfer
agency costs relating to a particular class are borne exclusively by that
class. Each class has different exchange privileges. See "Shareholder Services
- -- Exchange Privilege."

Investors should understand that the purpose and function of the initial
sales charges with respect to the Class A and Class D shares are the same as
those of the CDSCs and distribution fees with respect to the Class B and Class
C shares in that the sales charges and distribution fees applicable to each
class provide for the financing of the distribution of the shares of the Fund.
The distribution-related revenues paid with respect to a class will not be used
to finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.

The Merrill Lynch Select Pricing(SM) System is used by more than 50
registered investment companies advised by MLAM or FAM. Funds advised by MLAM
or FAM that utilize the Merrill Lynch Select Pricing(SM) System are referred to
herein as "Select Pricing Funds."

The Fund or the Distributor may suspend the continuous offering of the
Fund's shares of any class at any time in response to conditions in the
securities markets or otherwise and may thereafter resume such offering from
time to time. Neither the Distributor nor the dealers are permitted to withhold
placing orders to benefit themselves by a price change. Merrill Lynch may
charge its customers a processing fee (presently $5.35) to confirm a sale of
shares to such customers. Purchases made directly through the Transfer Agent
are not subject to the processing fee.

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

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

The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account

20
<PAGE>

and to single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or which has no purpose other than the purchase of shares of
the Fund or shares of other registered investment companies at a discount;
provided, however, that it shall not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein
are credit cardholders of a company, policyholders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment
adviser.

ELIGIBLE CLASS A INVESTORS

Class A shares are offered to a limited group of investors and also will
be issued upon reinvestment of dividends on outstanding Class A shares.
Investors who currently own Class A shares are entitled to purchase additional
Class A shares of the Fund in that account. Class A shares are available at net
asset value to corporate warranty insurance reserve fund programs provided that
the program has $3 million or more initially invested in Select Pricing Funds.
Also eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMA(SM) Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
certain purchases made in connection with certain fee-based programs. In
addition, Class A shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies. Certain persons who acquired shares of
certain MLAM-advised closed-end funds in their initial offerings who wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in shares of the Fund also may purchase Class A shares of the Fund if
certain conditions are met. In addition, Class A shares of the Fund and certain
other Select Pricing Funds are offered at net asset value to shareholders of
Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions are
met, to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill
Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest the net
proceeds from a sale of certain of their shares of common stock pursuant to a
tender offer conducted by such funds in shares of the Fund and certain other
Select Pricing Funds.

Investors are advised that only Class A and Class D shares may be
available for purchase through securities dealers, other than Merrill Lynch,
that are eligible to sell shares.

CLASS A AND CLASS D SALES CHARGE INFORMATION

<TABLE>
<CAPTION>
CLASS A SHARES
- -----------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
ENDED CHARGES RETAINED BY PAID TO REDEMPTION OF
SEPTEMBER 30, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- --------------------- ------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
1998 $3,012 $334 $2,678 $0
1997 $8,710 $946 $7,764 $0
1996 $7,511 $772 $6,739 $0
</TABLE>

<TABLE>
<CAPTION>
CLASS D SHARES
- -----------------------------------------------------------------------------------------------
FOR THE FISCAL YEAR GROSS SALES SALES CHARGES SALES CHARGES CDSCS RECEIVED ON
ENDED CHARGES RETAINED BY PAID TO REDEMPTION OF
SEPTEMBER 30, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- --------------------- ------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
1998 $15,449 $1,427 $14,022 $0
1997 $22,686 $2,411 $20,275 $0
1996 $24,378 $2,366 $22,012 $0

</TABLE>

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

21
<PAGE>

REDUCED INITIAL SALES CHARGES

REINVESTED DIVIDENDS AND CAPITAL GAINS. No initial sales charges are
imposed upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.

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

LETTER OF INTENT. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available only
to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit plans
for which Merrill Lynch provides plan participant recordkeeping services. The
Letter of Intent is not a binding obligation to purchase any amount of Class A
or Class D shares; however, its execution will result in the purchaser paying a
lower sales charge at the appropriate quantity purchase level. A purchase not
originally made pursuant to a Letter of Intent may be included under a
subsequent Letter of Intent executed within 90 days of such purchase if the
Distributor is informed in writing of this intent within such 90-day period.
The value of Class A and Class D shares of the Fund and of other Select Pricing
Funds presently held, at cost or maximum offering price (whichever is higher),
on the date of the first purchase under the Letter of Intent, may be included
as a credit toward the completion of such Letter, but the reduced sales charge
applicable to the amount covered by such Letter will be applied only to new
purchases. If the total amount of shares does not equal the amount stated in
the Letter of Intent (minimum of $25,000), the investor will be notified and
must pay, within 20 days of the expiration of such Letter, the difference
between the sales charge on the Class A or Class D shares purchased at the
reduced rate and the sales charge applicable to the shares actually purchased
through the Letter. Class A or Class D shares equal to at least 5.0% of the
intended amount will be held in escrow during the 13-month period (while
remaining registered in the name of the purchaser) for this purpose. The first
purchase under the Letter of Intent must be at least 5.0% of the dollar amount
of such Letter. If a purchase during the term of such Letter would otherwise be
subject to a further reduced sales charge based on the right of accumulation,
the purchaser will be entitled on that purchase and subsequent purchases to the
further reduced percentage sales charge that would be applicable to a single
purchase equal to the total dollar value of the Class A or Class D shares then
being purchased under such Letter, but there will be no retroactive reduction
of the sales charge on any previous purchase.

The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intent will be deducted
from the total purchases made under such Letter. An exchange from the Summit
Cash Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.

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

EMPLOYEE ACCESS(SM) ACCOUNTS. Provided applicable threshold requirements
are met, either Class A or Class D shares are offered at net asset value to
Employee Access(SM) Accounts available through authorized employers. The initial
minimum investment for such accounts is $500, except that the initial minimum
investment for shares purchased for such accounts pursuant to the Automatic
Investment Program is $50.

PURCHASE PRIVILEGE OF CERTAIN PERSONS. Trustees of the Trust, members of
the Boards of other MLAM-advised funds, ML & Co. and its subsidiaries (the term
"subsidiaries," when used herein with respect to

22
<PAGE>

ML & Co., includes MLAM, FAM and certain other entities directly or indirectly
wholly owned and controlled by ML & Co.) and their directors and employees, and
any trust, pension, profit-sharing or other benefit plan for such persons, may
purchase Class A shares of the Fund at net asset value.

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

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

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

CLOSED-END FUND INVESTMENT OPTION. Class A shares of the Fund and certain
other Select Pricing Funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by FAM or MLAM who
purchased such closed-end fund shares prior to October 21, 1994 (the date the
Merrill Lynch Select Pricing(SM) System commenced operations) and wish to
reinvest the net proceeds from a sale of their closed-end fund shares of common
stock in Eligible Class A Shares, if the conditions set forth below are
satisfied. Alternatively, closed-end fund shareholders who purchased such
shares on or after October 21, 1994 and wish to reinvest the net proceeds from
a sale of their closed-end fund shares are offered Class A shares (if eligible
to buy Class A shares) or Class D shares of the Fund and other Select Pricing
Funds ("Eligible Class D Shares"), if the following conditions are met. First,
the sale of closed-end fund shares must be made through Merrill Lynch, and the
net proceeds therefrom must be immediately reinvested in Eligible Class A or
Eligible Class D Shares. Second, the closed-end fund shares must either have
been acquired in the initial public offering or be shares representing
dividends from shares of common stock acquired in such offering. Third, the
closed-end fund shares must have been continuously maintained in a Merrill
Lynch securities account. Fourth, there must be a minimum purchase of $250 to
be eligible for the investment option.

Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an "eligible fund")
must sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in

23
<PAGE>

connection with a tender offer conducted by the eligible fund and reinvest the
proceeds immediately in the designated class of shares of the Fund. This
investment option is available only with respect to eligible shares as to which
no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day
that the related tender offer terminates and will be effected at the net asset
value of the designated class of the Fund on such day.

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

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

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

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

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

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.

CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES

Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to a
redemption, the calculation will be determined in the manner that results in
the lowest applicable rate being charged. The charge will be assessed on an
amount equal to the lesser of the proceeds of redemption or the cost of the
shares being redeemed. Accordingly, no CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no CDSC will be
assessed on shares derived from reinvestment of dividends or capital gains
distributions. It will be assumed that the redemption is first of shares held
for over four years or shares acquired pursuant to reinvestment of dividends or
distributions and then of shares held longest during the four-year period. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.

24
<PAGE>

The following table sets forth the Class B CDSC:

<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE PAYMENT MADE SUBJECT TO CHARGE
- ---------------------------------- ---------------------
<S> <C>
0-1 ............................ 4.0%
1-2 ............................ 3.0%
2-3 ............................ 2.0%
3-4 ............................ 1.0%
4 and thereafter ............... None
</TABLE>

To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor
makes his or her first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to a CDSC because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
2.0% (the applicable rate in the third year after purchase).

The Class B CDSC may be waived on redemptions of shares in certain
circumstances, including any partial or complete redemption following the death
or disability (as defined in the Internal Revenue Code of 1986, as amended (the
"Code")) of a Class B shareholder (including one who owns the Class B shares as
joint tenant with his or her spouse), provided the redemption is requested
within one year of the death or initial determination of disability or, if late,
reasonably, promptly, following completion of probate. The Class B CDSC may be
waived or its terms may be modified in connection with certain fee-based
programs. The Class B CDSC may also be waived in connection with involuntary
termination of an account in which Fund shares are held or for withdrawals
through the Merrill Lynch Systematic Withdrawal Plan. See "Shareholder Services
- -- Fee-Based Programs and "--Systematic Withdrawal Plan."

CONVERSION OF CLASS B SHARES TO CLASS D SHARES. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.10% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset value of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not be deemed a purchase or sale of the shares for Federal income tax purposes.

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

In general, Class B shares of equity Select Pricing Funds will convert
approximately eight years after initial purchase and Class B shares of taxable
and tax-exempt fixed income Select Pricing Funds will convert approximately ten
years after initial purchase. If, during the Conversion Period, a shareholder
exchanges Class B shares with an eight-year Conversion Period for Class B
shares with a ten-year Conversion Period, or vice versa, the Conversion Period
applicable to the Class B shares acquired in the exchange will apply and the
holding period for the shares exchanged will be tacked on to the holding period
for the shares acquired. The conversion period also may be modified for
investors that participate in certain fee-based programs. See "Shareholder
Services -- Fee-Based Programs."

Class B shareholders of the Fund exercising the exchange privilege
described under "Shareholder Services -- Exchange Privilege" will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares acquired as a result of the exchange.

25
<PAGE>

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

CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES

Class C shares that are redeemed within one year of purchase may be
subject to a 1.0% CDSC charged as a percentage of the dollar amount subject
thereto. In determining whether a Class C CDSC is applicable to a redemption,
the calculation will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no Class C CDSC will
be assessed on shares derived from reinvestment of dividends or capital gains
distributions. It will be assumed that the redemption is first of shares held
for over one year or shares acquired pursuant to reinvestment of dividends or
distributions and then of shares held longest during the one-year period. The
charge will not be applied to dollar amounts representing an increase in the
net asset value since the time of purchase. A transfer of shares from a
shareholder's account to another account will be assumed to be made in the same
order as a redemption. The Class C CDSC may be waived in connection with
certain fee-based programs, involuntary termination of an account in which Fund
shares are held and withdrawals through the Merrill Lynch Systematic Withdrawal
Plan. See "Shareholder Services -- Fee-Based Programs" and " -- Systematic
Withdrawal Plan."

CLASS B AND CLASS C SALES CHARGE INFORMATION

<TABLE>
<CAPTION>
CLASS B SHARES*
---------------------------------------------------------
FOR THE FISCAL YEAR CDSCS RECEIVED CDSCS PAID TO
ENDED SEPTEMBER 30, BY DISTRIBUTOR MERRILL LYNCH
--------------------- ---------------- --------------
<S> <C> <C>
1998 $252,871 $252,871
1997 $406,117 $406,117
1996 $676,121 $676,121
</TABLE>

* Additional Class B CDSCs payable to the Distributor with
respect to the fiscal years ended September 30, 1997 and 1998
may have been waived or converted to a contingent obligation
in connection with a shareholder's participation in certain
fee-based programs.

<TABLE>
<CAPTION>
CLASS C SHARES
---------------------------------------------------------
FOR THE FISCAL YEAR CDSCS RECEIVED CDSCS PAID TO
ENDED SEPTEMBER 30, BY DISTRIBUTOR MERRILL LYNCH
--------------------- ---------------- --------------
<S> <C> <C>
1998 $ 902 $ 902
1997 $1,035 $1,035
1996 $2,876 $2,876
</TABLE>

Merrill Lynch compensates its Financial Consultants for selling Class B
and Class C shares at the time of purchase from its own funds. Proceeds from
the CDSC and the distribution fee are paid to the Distributor and are used in
whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to providing distribution-related services to
the Fund in connection with the sale of the Class B and Class C shares, such as
the payment of compensation to financial consultants for selling Class B and
Class C shares from the dealer's own funds. The combination of the CDSC and the
ongoing distribution fee facilitates the ability of the Fund to sell the Class
B and Class C shares without a sales charge being deducted at the time of
purchase. See "Distribution Plans" below. Imposition of the CDSC and the
distribution fee on Class B and Class C shares is limited by the NASD
asset-based sales charge rule. See "Limitations on the Payment of Deferred
Sales Charges" below.

DISTRIBUTION PLANS

Reference is made to "Fees and Expenses" in the Prospectus for certain
information with respect to the separate distribution plans for Class B, Class
C and Class D shares pursuant to Rule 12b-1 under the Investment

26
<PAGE>

Company Act (each a "Distribution Plan") with respect to the account
maintenance and/or distribution fees paid by the Fund to the Distributor with
respect to such classes.

The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net
assets of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities with respect to Class B, Class C
and Class D shares. Each of those classes has exclusive voting rights with
respect to the Distribution Plan adopted with respect to such class pursuant to
which account maintenance and/or distribution fees are paid (except that Class
B shareholders may vote upon any material changes to expenses charged under the
Class D Distribution Plan).

The Distribution Plans for Class B and Class C shares each provides that
the Fund also pays the Distributor a distribution fee relating to the shares of
the relevant class, accrued daily and paid monthly, at the annual rates of
0.25% and 0.35%, respectively, of the average daily net assets of the Fund
attributable to the shares of the relevant class in order to compensate the
Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
shareholder and distribution services and bearing certain distribution-related
expenses of the Fund, including payments to financial consultants for selling
Class B and Class C shares of the Fund. The Distribution Plans relating to
Class B and Class C shares are designed to permit an investor to purchase Class
B and Class C shares through dealers without the assessment of an initial sales
charge and at the same time permit the dealer to compensate its financial
consultants in connection with the sale of the Class B and Class C shares.

The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Trustees must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that, so
long as the Distribution Plan remains in effect, the selection and nomination
of non-interested Trustees shall be committed to the discretion of the
non-interested Trustees then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the non-interested Trustees concluded that there is
reasonable likelihood that each Distribution Plan will benefit the Fund and its
related class of shareholders. Each Distribution Plan can be terminated at any
time, without penalty, by the vote of a majority of the non-interested Trustees
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders and all material amendments are required to
be approved by the vote of Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Distribution
Plan, cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Distribution Plan and any report
made pursuant to such plan for a period of not less than six years from the
date of the Distribution Plan or such report, the first two years in an easily
accessible place.

Among other things, each Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Trustees for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans annually, as of December 31 of each year, on a "fully allocated accrual"
basis and quarterly on a "direct expense and revenue/cash" basis. On the fully
allocated accrual basis, revenues consist of the account maintenance fees,
distribution fees, the CDSCs and certain other related revenues, and expenses
consist of financial consultant compensation, branch office and regional
operation center selling and transaction processing expenses, advertising,
sales promotion and marketing expenses, corporate overhead and interest
expense. On the direct expense and revenue/cash basis, revenues consist of the
account maintenance fees, distribution fees and CDSCs and the expenses consist
of financial consultant compensation.

27
<PAGE>

As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual expenses of the Distributor and
Merrill Lynch for the period since the commencement of operations of Class B
shares exceeded the fully allocated accrual revenues by approximately
$4,656,000 (1.73% of Class B net assets at that date). As of September 30,
1998, direct cash revenues for the period since the commencement of operations
of Class B shares exceeded direct cash expenses by $23,234,636 (9.57% of Class
B net assets at that date). As of December 31, 1997, the fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch for the period
since the commencement of operations of Class C shares exceeded the fully
allocated accrual revenues by approximately $41,000 (0.75% of Class C net
assets at that date). As of September 30, 1998, direct cash revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $51,487 (0.63% of Class C net assets at that date).

For the fiscal year ended September 30, 1998, the Fund paid the
Distributor $1,282,033 pursuant to the Class B Distribution Plan (based on
average daily net assets subject to such Class B Distribution Plan of
approximately $256.4 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class B shares. For the fiscal year ended September 30,
1998, the Fund paid the Distributor $35,133 pursuant to the Class C
Distribution Plan (based on average daily net assets subject to such Class C
Distribution Plan of approximately $5.9 million), all of which was paid to
Merrill Lynch for providing account maintenance and distribution-related
activities and services in connection with Class C shares. For the fiscal year
ended September 30, 1998, the Fund paid the Distributor $146,245 pursuant to
the Class D Distribution Plan (based on average daily net assets subject to
such Class D Distribution Plan of approximately $146.2 million), all of which
was paid to Merrill Lynch for providing account maintenance activities in
connection with Class D shares.

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

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

The following table sets forth comparative information as of September 30,
1998 with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to the Class B shares, the Distributor's voluntary
maximum.

28
<PAGE>

<TABLE>
<CAPTION>
DATA CALCULATED AS OF SEPTEMBER 30, 1998
------------------------------------------
(IN THOUSANDS)
ALLOWABLE
ELIGIBLE ALLOWABLE INTEREST ON
GROSS AGGREGATE UNPAID
SALES(1) SALES CHARGE BALANCE(2)
------------- -------------- -------------
<S> <C> <C> <C>
CLASS B SHARES FOR THE PERIOD
NOVEMBER 1, 1985
(COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 30, 1998
Under NASD Rule as Adopted .......... $1,435,273 $89,705 $101,386
Under Distributor's Voluntary Waiver $1,435,273 $89,705 $ 7,176
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 30, 1998
Under NASD Rule as Adopted .......... $ 11,254 $ 703 $ 147

<CAPTION>
DATA CALCULATED AS OF SEPTEMBER 30, 1998
------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
AMOUNTS FEE AT
MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
AMOUNT PAID TO UNPAID ASSET
PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS B SHARES FOR THE PERIOD
NOVEMBER 1, 1985
(COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 30, 1998
Under NASD Rule as Adopted .......... $191,091 $32,600 $158,491 $607
Under Distributor's Voluntary Waiver $ 96,881 $32,600 $ 64,281 $607
CLASS C SHARES, FOR THE PERIOD
OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS)
TO SEPTEMBER 30, 1998
Under NASD Rule as Adopted .......... $ 850 $ 61 $ 789 $ 29
</TABLE>

- ----------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in THE WALL STREET JOURNAL, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"What are the Fund's fees and expenses?" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFASM) Program (the "MFA Program"). The
CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).

REDEMPTION OF SHARES

Reference is made to "How to Buy, Sell, Transfer and Exchange Shares" in
the Prospectus.

The Fund is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper
notice of redemption. Except for any CDSC that may be applicable, there will be
no charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.

The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for any period during
which trading on the NYSE is restricted as determined by the Commission or the
NYSE is closed (other than customary weekend and holiday closings), for any
period during which an emergency exists as defined by the Commission as a
result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.

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

REDEMPTION

A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida
32232-5289. Redemption requests delivered other than by mail should be
delivered to Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484. Proper notice of redemption in the case of
shares deposited with the Transfer Agent may be accomplished by a written
letter requesting redemption. Proper notice of redemption in the case of shares
for which certificates have been issued may be accomplished by a written letter
as noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons

29
<PAGE>

in whose name(s) the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent's register. The signature(s) on the redemption
requests must be guaranteed by an "eligible guarantor institution" as such is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the existence and validity of which may be verified by
the Transfer Agent through the use of industry publications. Notarized
signatures are not sufficient. In certain instances, the Transfer Agent may
require additional documents such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the Transfer
Agent, payments will be mailed within seven days of receipt of a proper notice
of redemption.

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

REPURCHASE

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

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

REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES

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

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "How Shares are Priced" in the Prospectus.

30
<PAGE>

The net asset value of the shares of all classes of the Fund is determined
by the Manager once daily Monday through Friday as of 15 minutes after the
close of business on the NYSE on each day the NYSE is open for trading. The
NYSE generally closes at 4:00 p.m., Eastern time. The NYSE is not open for
trading on New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.

Net asset value is computed by dividing the value of the securities held
by the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time, rounded to
the nearest cent. Expenses, including the fees payable to the Manager and
Distributor, are accrued daily.

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

The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in over-the-counter ("OTC") municipal bond and
money markets and are valued at the last available bid price for long positions
and at the last available ask price for short positions in the OTC market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating
and ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis which
approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for Class A,
Class B, Class C and Class D shares of the Fund based on the value of the
Fund's net assets and number of shares outstanding on September 30, 1998 is set
forth below.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net Assets ..................................... $ 17,727,192 $ 242,811,026 $ 8,228,392 $ 153,032,130
============ ============= =========== =============
Number of Shares Outstanding ................... 1,476,951 20,226,135 685,234 12,755,652
============ ============= =========== =============
Net Asset Value Per Share (net assets divided by
number of shares outstanding) ................ $ 12.00 $ 12.00 $ 12.01 $ 12.00
Sales Charge (for Class A and Class D shares:
4.00% of offering price; 4.17% of net asset
value per share)* ............................ .50 ** ** .50
------------ -------------- ------------ -------------
Offering Price ................................. $ 12.50 $ 12.00 $ 12.01 $ 12.50
============ ============= =========== =============
</TABLE>

- ----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of Shares
-- Deferred Sales Charge Alternatives -- Class B and Class C Shares --
Contingent Deferred Sales Charges -- Class B Shares" and " -- Contingent
Deferred Sales Charges -- Class C Shares" herein.

31
<PAGE>

PORTFOLIO TRANSACTIONS

TRANSACTIONS IN PORTFOLIO SECURITIES

Subject to policies established by the Trustees, the Manager is primarily
responsible for the execution of the Fund's portfolio transactions. The Trust
has no obligation to deal with any dealer or group of dealers in the execution
of transactions in portfolio securities of the Fund. Where possible, the Trust
deals directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. It is the policy of the Trust to obtain the best results in
conducting portfolio transactions for the Fund, taking into account such
factors as price (including the applicable dealer spread or commission), the
size, type and difficulty of the transaction involved, the firm's general
execution and operations facilities and the firm's risk in positioning the
securities involved. The portfolio securities of the Fund generally are traded
on a principal basis and normally do not involve either brokerage commissions
or transfer taxes. The cost of portfolio securities transactions of the Fund
primarily consists of dealer or underwriter spreads. While reasonable
competitive spreads or commissions are sought, the Fund will not necessarily be
paying the lowest spread or commission available. Transactions with respect to
the securities of small and emerging growth companies in which the Fund may
invest may involve specialized services on the part of the broker or dealer and
thereby entail higher commissions or spreads than would be the case with
transactions involving more widely traded securities.

Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Manager may receive
orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Manager under its Management Agreement and the expense of the Manager will not
necessarily be reduced as a result of the receipt of such supplemental
information. Supplemental investment research obtained from such dealers might
be used by the Manager in servicing all of its accounts and all such research
might not be used by the Manager in connection with the Fund. Consistent with
the Conduct Rules of the NASD and policies established by the Trustees of the
Trust, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the Fund.

Because of the affiliation of Merrill Lynch with the Manager, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except pursuant to an exemptive order under the Investment Company
Act. Included among such restricted transactions are purchases from or sales to
Merrill Lynch of securities in transactions in which it acts as principal.
Under an exemptive order, the Trust may effect principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities subject to
conditions set forth in such order. Information regarding transactions executed
pursuant to the exemptive order is set forth in the following table:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR NUMBER OF APPROXIMATE AGGREGATE
ENDED SEPTEMBER 30, TRANSACTIONS MARKET VALUE OF TRANSACTIONS
- ------------------------ -------------- -----------------------------
<S> <C> <C>
1998 ................. 5 $ 8,100,000
1997 ................. 1 $ 700,000
1996 ................. 6 $12,600,000
</TABLE>

An affiliated person of the Trust may serve as broker for the Fund in OTC
transactions conducted on an agency basis. Certain court decisions have raised
questions as to the extent to which investment companies should seek exemptions
under the Investment Company Act in order to seek to recapture underwriting and
dealer spreads from affiliated entities. The Trustees have considered all
factors deemed relevant and have made a determination not to seek such
recapture at this time. The Trustees will reconsider this matter from time to
time.

The Fund may not purchase securities, including Municipal Bonds, during
the existence of any underwriting syndicate of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Trustees of the Trust which
either comply with rules adopted by the Commission or with interpretations of
the Commission staff. Rule 10f-3 under the Investment Company Act sets forth
conditions under which the Fund may purchase Municipal Bonds from an
underwriting syndicate of which Merrill Lynch is a member. The rule sets forth
requirements relating to, among other

32
<PAGE>

things, the terms of an issue of Municipal Bonds purchased by the Fund, the
amount of Municipal Bonds that may be purchased in any one issue and the assets
of the Fund that may be invested in a particular issue.

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

Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Manager or an affiliate when one
or more clients of the Manager or an affiliate are selling the same security.
If purchases or sales of securities arise for consideration at or about the
same time that would involve the Fund or other clients or funds for which the
Manager or an affiliate acts as manager transactions in such securities will be
made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more than
one client of the Manager or an affiliate during the same period may increase
the demand for securities being purchased or the supply of securities being
sold, there may be an adverse effect on price.

SHAREHOLDER SERVICES

The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans and
instructions as to how to participate in the various services or plans, or how
to change options with respect thereto, can be obtained from the Fund, by
calling the telephone number on the cover page hereof, or from the Distributor
or Merrill Lynch.

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
also receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of ordinary income
dividends and capital gains distributions. A shareholder with an account held
at the Transfer Agent may make additions to his or her Investment Account at
any time by mailing a check directly to the Transfer Agent. A shareholder may
also maintain an account through Merrill Lynch. Upon the transfer of shares out
of a Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name may be opened automatically at the Transfer Agent.

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

Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable CDSC) so that
the cash proceeds can be transferred to the account at the new firm or continue
to maintain an Investment Account at the Transfer Agent for those Class A or
Class D shares. Shareholders interested in transferring their Class B or Class
C shares from Merrill Lynch who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new

33
<PAGE>

brokerage firm to maintain such shares in an account registered in the name of
the brokerage firm for the benefit of the shareholder at the Transfer Agent. If
the new brokerage firm is willing to accommodate the shareholder in this
manner, the shareholder must request that he or she be issued certificates for
his or her shares and then must turn the certificates over to the new firm for
re-registration in the new brokerage firm's name.

EXCHANGE PRIVILEGE

U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other Select Pricing Funds and Summit Cash Reserves Fund
("Summit"), a series of Financial Institutions Series Trust, which is a Merrill
Lynch-sponsored money market mutual fund specifically designated for exchange
by holders of Class A, Class B, Class C and Class D shares of Select Pricing
Funds. Shares with a net asset value of at least $100 are required to qualify
for the exchange privilege and any shares utilized in an exchange must have
been held by the shareholder for at least 15 days. Before effecting an
exchange, shareholders 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 acquired
shares for Federal income tax purposes.

EXCHANGES OF CLASS A AND CLASS D SHARES. Class A shareholders may exchange
Class A shares of the Fund for Class A shares of a second Select Pricing Fund
if the shareholder holds any Class A shares of the second fund in his or her
account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class
A shareholder wants to exchange Class A shares for shares of a second Select
Pricing Fund, but does not hold Class A shares of the second fund in his or her
account at the time of the exchange and is not otherwise eligible to acquire
Class A shares of the second fund, the shareholder will receive Class D shares
of the second fund as a result of the exchange. Class D shares also may be
exchanged for Class A shares of a second Select Pricing Fund at any time as
long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund. Class D shares are
exchangeable with shares of the same class of other Select Pricing Funds.

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

EXCHANGES OF CLASS B AND CLASS C SHARES. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the
Fund exercising the exchange privilege will continue to be subject to the
Fund's CDSC schedule if such schedule is higher than the CDSC schedule relating
to the new Class B shares acquired through use of the exchange privilege. In
addition, Class B shares of the Fund acquired through use of the exchange
privilege will be subject to the Fund's CDSC schedule if such schedule is
higher than the CDSC schedule relating to the Class B shares of the fund from
which the exchange has been made. For purposes of computing the CDSC that may
be payable on a disposition of the new Class B or Class C shares, the holding
period for the outstanding Class B

34
<PAGE>

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

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

Prior to October 12, 1998, exchanges from the Fund and other Select
Pricing Funds into a money market Fund were directed to certain Merrill
Lynch-sponsored money market funds other than Summit. Shareholders who
exchanged Select Pricing Fund shares for shares of such other money market
funds and subsequently wish to exchange those money market fund shares for
shares of the Fund will be subject to the CDSC schedule applicable to such Fund
shares, if any. The holding period for those money market fund shares will not
count toward satisfaction of the holding period requirement for reduction of
the CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the Conversion Period. However, the holding period for
Class B or Class C shares received in exchange for such money market fund
shares will be aggregated with the holding period for the original shares for
purposes of reducing the CDSC or satisfying the Conversion Period.

EXCHANGES BY PARTICIPANTS IN THE MFA PROGRAM. The Fund's exchange
privilege is also modified with respect to purchases of Class A and Class D
shares by investors under the MFA Program. First, the initial allocation of
assets is made under the MFA Program. Then any subsequent exchange under the
MFA Program of Class A or Class D shares of a Select Pricing Fund for Class A
or Class D shares of the Fund will be made solely on the basis of the relative
net asset values of the shares being exchanged. Therefore, there will not be a
charge for any difference between the sales charge previously paid on the
shares of the other Select Pricing Fund and the sales charge payable on the
shares of the Fund being acquired in the exchange under the MFA Program.

EXERCISE OF THE EXCHANGE PRIVILEGE. To exercise the exchange privilege, a
shareholder should contact his or her Merrill Lynch Financial Consultant, who
will advise the Fund of the exchange. Shareholders of the Fund, and
shareholders of the other Select Pricing Funds with shares for which
certificates have not been issued, may exercise the exchange privilege by wire
through their securities dealers. The Fund reserves the right to require a
properly completed Exchange Application. This exchange privilege may be
modified or terminated in accordance with the rules of the Commission. The Fund
reserves the right to limit the number of times an investor may exercise the
exchange privilege. Certain funds may suspend the 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. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor.

FEE-BASED PROGRAMS

Certain Merrill Lynch fee-based programs, including pricing alternatives
for securities transactions (each referred to in this paragraph as a
"Program"), may permit the purchase of Class A shares at net asset value. Under
specified circumstances, participants in certain Programs may deposit other
classes of shares which will

35
<PAGE>

be exchanged for Class A shares. Initial or deferred sales charges otherwise
due in connection with such exchanges may be waived or modified, as may the
Conversion Period applicable to the deposited shares. Termination of
participation in a Program may result in the redemption of shares held therein
or the automatic exchange thereof to another class at net asset value, which
may be shares of a money market fund. In addition, upon termination of
participation in a Program, shares that have been held for less than specified
periods within such Program may be subject to a fee based upon the current
value of such shares. These Programs also generally prohibit such shares from
being transferred to another account at Merrill Lynch, to another broker-dealer
or to the Transfer Agent. Except in limited circumstances (which may also
involve an exchange as described above), such shares must be redeemed and
another class of shares purchased (which may involve the imposition of initial
or deferred sales charges and distribution and account maintenance fees) in
order for the investment not to be subject to Program fees. Additional
information regarding a specific Program (including charges and limitations on
transferability applicable to shares that may be held in such Program) is
available in such Program's client agreement and from the Transfer Agent at
1-800-MER-FUND or 1-800-637-3863.

AUTOMATIC INVESTMENT PLANS

A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he or she is an eligible Class A investor) or
Class B, Class C or Class D shares at the applicable public offering price.
These purchases may be made either through the shareholder's securities dealer,
or by mail directly to the Transfer Agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Fund's Automatic Investment Plan. The Fund would be authorized, on a regular
basis, to provide systematic additions to the Investment Account of such
shareholder through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house debits.
An investor whose shares of the Fund are held within a CMA(R) or CBA(R) account
may arrange to have periodic investments made in the Fund in amounts of $100 or
more through the CMA(R) or CBA(R) Automated Investment Program.

AUTOMATIC DIVIDEND PROGRAM

Unless specific instructions are given as to the method of payment,
dividends and capital gains distributions will be automatically reinvested,
without sales charge, in additional full and fractional shares of the Fund.
Such reinvestment will be at the net asset value of shares of the Fund as of
the close of business on the NYSE on the monthly payment date for such
dividends and distributions. No CDSC will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.

Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or
by telephone (1-800-MER-FUND) to the Transfer Agent, if their account is
maintained with the Transfer Agent elect to have subsequent dividends or both
dividends and capital gains distributions, paid in cash, rather than reinvested
in shares of the Fund or vice versa (provided that, in the event that a payment
on an account maintained at the Transfer Agent would amount to $10.00 or less,
a shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). Commencing ten days after
the receipt by the Transfer Agent of such notice, those instructions will be
effected. The Fund is not responsible for any failure of delivery to the
shareholder's address of record and no interest will accrue on amounts
represented by uncashed distribution checks. Cash payments can also be directly
deposited to the shareholder's bank account.

SYSTEMATIC WITHDRAWAL PLAN

A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals are available for shareholders with
shares having a value of $10,000 or more.

At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify

36
<PAGE>

the dollar amount and the class of shares to be redeemed. Redemptions will be
made at net asset value as determined as of 15 minutes after the close of
business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern time) on
the 24th day of each month or the 24th day of the last month of each quarter,
whichever is applicable. If the NYSE is not open for business on such date, the
shares will be redeemed at the net asset value determined 15 minutes after the
close of business on the NYSE on the following business day. The check for the
withdrawal payment will be mailed, or the direct deposit of the withdrawal
payment will be made, on the next business day following redemption. When a
shareholder is making systematic withdrawals, dividends and distributions on
all shares in the Investment Account are automatically reinvested in shares of
the Fund. A shareholder's Systematic Withdrawal Plan may be terminated at any
time, without charge or penalty, by the shareholder, the Fund, the Transfer
Agent or the Distributor.

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

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

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

DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes
after the close of business on the NYSE (generally, the NYSE closes at 4:00
p.m., Eastern time) on that day. The net investment income of the Fund for
dividend purposes consists of interest earned on portfolio securities, less
expenses, in each case computed since the most recent determination of net
asset value. Expenses of the Fund, including the management fees and the
account maintenance and distribution fees, are accrued daily. Dividends of net
investment income are declared daily and reinvested monthly in the form of
additional full and fractional shares of the Fund at net asset value as of the
close of business on

37
<PAGE>

the "payment date" unless the shareholder elects to receive such dividends in
cash. Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding from the settlement date of a purchase order
to the day prior to settlement date of a redemption order.

All net realized capital gains, if any, are declared and distributed to
the Fund's shareholders at least annually. Capital gains distributions will be
reinvested automatically in shares of the Fund unless the shareholder elects to
receive such distributions in cash.

The per share dividends and distributions on each class of shares will be
reduced as a result of any account maintenance, distribution and transfer
agency fees applicable to that class. See "Pricing of Shares -- Determination
of Net Asset Value."

See "Shareholder Services" for information as to how to elect either
dividend reinvestment or cash payments. Portions of dividends and distributions
which are taxable to shareholders as described below are subject to income tax
whether they are reinvested in shares of the Fund or received in cash.

TAXES

The Trust intends to continue to qualify the Fund 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 to the extent that it distributes its net
investment income and net realized capital gains. The Trust intends to cause
the Fund to distribute substantially all of such income.

As discussed in "General Information -- Description of Shares," the Trust
has established other series in addition to the Fund (together with the Fund,
the "Series"). Each Series of the Trust is treated as a separate corporation
for Federal income tax purposes. Each Series, therefore, is considered to be a
separate entity in determining its treatment under the rules for RICs. Losses
in one Series do not offset gains in another Series, and the requirements
(other than certain organizational requirements) for qualifying for RIC status
will be determined at the Series level rather than at the Trust level.

The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income, determined on a calendar year basis, and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. The required distributions, however, are based
only on the taxable income of a RIC. The excise tax, therefore, generally will
not apply to the tax-exempt income of a RIC, such as the Fund, that pays
exempt-interest dividends.

The Trust intends to qualify the Fund to pay "exempt-interest dividends"
as defined in Section 852(b)(5) of the Code. Under such section if, at the
close of each quarter of the Fund's taxable year, at least 50% of the value of
the Fund's total assets consists of obligations exempt from Federal income tax
("tax-exempt obligations") under Section 103(a) of the Code (relating generally
to obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its Class A, Class B, Class C and
Class D shareholders (together the "shareholders"). Exempt-interest dividends
are dividends or any part thereof paid by the Fund that are attributable to
interest on tax-exempt obligations and designated by the Trust as
exempt-interest dividends in a written notice mailed to the Fund's shareholders
within 60 days after the close of the Fund's taxable year. The Fund will
allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items discussed below) among the Class A,
Class B, Class C and Class D shareholders according to a method (which it
believes is consistent with the Commission rule permitting the issuance and
sale of multiple classes of shares) that is based upon the gross income that is
allocable to the Class A, Class B, Class C and Class D shareholders during the
taxable year, or such other method as the Internal Revenue Service may
prescribe.

Exempt-interest dividends will be excludable from a shareholder's gross
income for Federal income tax purposes. Exempt-interest dividends are included,
however, in determining the portion, if any, of a person's social security and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not

38
<PAGE>

be deductible by the investor for Federal income tax purposes or for New York
State and New York City personal income tax purposes to the extent attributable
to exempt-interest dividends. Shareholders are advised to consult their tax
advisors with respect to whether exempt-interest dividends retain the exclusion
under Code Section 103(a) if a shareholder would be treated as a "substantial
user" or "related person" under Code Section 147(a) with respect to property
financed with the proceeds of an issue of "industrial development bonds" or
"private activity bonds," if any, held by the Fund.

The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from New York Municipal Bonds also will be exempt from New
York State and New York City personal income taxes. Shareholders subject to
income taxation by states other than New York and cities other than New York
City will realize a lower after-tax rate of return than New York State and/or
City shareholders since the dividends distributed by the Fund generally will
not be exempt, to any significant degree, from income taxation by such other
states and/or cities. The Trust will inform shareholders annually regarding the
portion of the Fund's distributions that constitutes exempt-interest dividends
and the portion that is exempt from New York State and New York City personal
income taxes. The Trust will allocate exempt-interest dividends among Class A,
Class B, Class C and Class D shareholders for New York State and New York City
personal income tax purposes based on a method similar to that described above
for Federal income tax purposes.

Distributions from investment income and capital gains, including
exempt-interest dividends, will be subject to New York State corporate
franchise tax, New York City general corporation tax and may also be subject to
state and local taxes in other states. Accordingly, investors in the Fund, in
particular corporate investors, should consult their tax advisors with respect
to the application of such taxes to an investment in the Fund, to the receipt
of Fund dividends and as to their New York tax situation in general.

To the extent the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes and New York State
and New York City personal income tax purposes. Distributions, if any, from an
excess of net long-term capital gains over net short-term capital losses
derived from the sale of securities or from certain transactions in futures or
options ("capital gain dividends") are taxable as long-term capital gains for
Federal income tax purposes, regardless of the length of time the shareholder
has owned Fund shares, and for New York State and New York City personal income
tax purposes, are treated as capital gains which are taxed at ordinary income
tax rates. Certain categories of capital gains are taxable at different rates.
Generally not later than 60 days after the close of the Fund's taxable year,
the Trust will provide shareholders with a written notice designating the
amounts of any exempt-interest dividends, ordinary income dividends or capital
gain dividends, as well as any amount of capital gain dividends in the
different categories of capital gain referred to above. Distributions by the
Fund, whether from exempt-interest income, ordinary income or capital gains,
will not be eligible for the dividends received deduction allowed to
corporations under the Code.

All or a portion of the Fund's gains from the sale or redemption of
tax-exempt obligations purchased at a market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders. 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). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
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.

The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on certain "private activity bonds" issued after August 7,
1986. Private activity bonds are bonds which, although tax-exempt, are used for
purposes other than

39
<PAGE>

those generally performed by governmental units and which benefit
non-governmental entities (e.g., bonds used for industrial development or
housing purposes). Income received on such bonds is classified as an item of
"tax preference," which could subject certain investors in such bonds,
including shareholders of the Fund, to an alternative minimum tax. The Fund
will purchase such "private activity bonds," and the Trust will report to
shareholders within 60 days after calendar year-end the portion of the Fund's
dividends declared during the year which constitute an item of tax preference
for alternative minimum tax purposes. The Code further provides that
corporations are subject to an alternative minimum tax based, in part, on
certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings," which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by the Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by the Fund.

The Fund may invest in high yield securities, as described in "Investment
Objective and Policies -- Description of Municipal Bonds." Furthermore, the
Fund may also invest in instruments the return on which includes
non-traditional features such as indexed principal or interest payments
("non-traditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such high yield securities
and/or non-traditional instruments could be recharacterized as taxable ordinary
income.

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

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

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.

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

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

The Code provides that every person required to file a tax return must
include for information purposes on such return the amount of exempt-interest
dividends received from all sources (including the Fund) during the taxable
year.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Fund may purchase and sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and

40
<PAGE>

put options on such financial futures contracts. In general, unless an election
is available to the Fund or an exception applies, such options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year, i.e., each such
option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders. The mark-to market rules outlined above, however, will not apply
to certain transactions entered into by the Fund solely to reduce the risk of
changes in price or interest rates with respect to its investments.

Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in financial
futures contracts and related options. Under Section 1092, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
sales of securities and certain closing transactions in financial futures
contracts or the related options.

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

Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes and with specific
questions as to Federal, foreign, state or local taxes.

PERFORMANCE DATA

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

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

Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt.

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

41
<PAGE>

will be lower than average annual total return data since the average rates of
return reflect compounding of return; aggregate total return data generally
will be higher than average annual total return data since the aggregate rates
of return reflect compounding over a longer period of time.

Set forth below is total return, yield and tax-equivalent yield
information for the Class A, Class B, Class C and Class D shares of the Fund
for the periods indicated.

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------------- ----------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- -------------------------------------- ------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended September 30, 1998..... 5.54% $ 1,055.40 5.38% $ 1,053.86
Five Years Ended
September 30, 1998 ................. 4.40% $ 1,240.40 4.72% $ 1,259.60
Ten Years Ended
September 30, 1998 ................. -- -- 7.20% $ 2,005.10
Inception (October 25, 1988) to
September 30, 1998 ................. 7.12% $ 1,979.40 -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended September 30,
1998 ................................. 9.94% $ 1,099.40 9.38% $ 1,093.80
1997 ................................. 8.69% $ 1,086.90 8.14% $ 1,081.40
1996 ................................. 6.19% $ 1,061.90 5.66% $ 1,056.60
1995 ................................. 7.37% $ 1,073.70 6.82% $ 1,068.20
1994 ................................. (5.17)% $ 948.30 ( 5.66)% $ 943.40
1993 ................................. 13.24% $ 1,132.40 12.67% $ 1,126.70
1992 ................................. 11.77% $ 1,117.70 11.12% $ 1,111.20
1991 ................................. 13.61% $ 1,136.10 13.03% $ 1,130.30
1990 ................................. 4.42% $ 1,044.20 4.00% $ 1,040.00
1989 ................................. -- -- 8.16% $ 1,081.60
1988 ................................. -- -- 13.35% $ 1,133.50
1987 ................................. -- -- ( 2.50)% $ 975.00
Inception (November 1, 1985) to
September 30, 1986 ................. -- -- 17.65% $ 1,176.50
Inception (October 25, 1988) to
September 30, 1989 ................. 6.28% $ 1,062.80 -- --

AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (November 1, 1985) to
September 30, 1998 ................. -- -- 160.71% $ 2,607.10
Inception (October 25, 1988) to
September 30, 1998 ................. 97.94% $ 1,979.40 -- --
YIELD
30 days ended September 30, 1998 ..... 4.00% -- 3.66% --

TAX EQUIVALENT YIELD*
30 days ended September 30, 1998 ..... 5.56% -- 5.08% --
</TABLE>
- ----------
* Based on a Federal income tax rate of 28%.

42
<PAGE>

<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------------- ----------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- -------------------------------------- ------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended September 30, 1998..... 8.27% $ 1,082.70 5.44% $ 1,054.40
Inception (October 21, 1994) to
September 30, 1998 ................. 7.74% $ 1,341.60 7.15% $ 1,312.90
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year Ended September 30,
1998 ................................. 9.27% $ 1,092.70 9.83% $ 1,098.30
1997 ................................. 8.13% $ 1,081.30 8.68% $ 1,086.80
1996 ................................. 5.55% $ 1,055.50 6.09% $ 1,060.90
Inception (October 21, 1994)
to September 30, 1995 .............. 7.57% $ 1,075.70 7.99% $ 1,079.90
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (October 21, 1994) to
September 30, 1998 ................. 34.16% $ 1,341.60 31.29% $ 1,312.90
YIELD
30 days ended September 30, 1998 ..... 3.56% -- 3.90% --
TAX EQUIVALENT YIELD*
30 days ended September 30, 1998 ..... 4.94% -- 5.42% --
</TABLE>

- ----------
* Based on a Federal income tax rate of 28%.

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

On occasion, the Fund may compare its performance to the Lehman Brothers
Municipal Bond Index or other market indices or to performance data published
by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), CDA Investment Technology, Inc., MONEY MAGAZINE, U.S. NEWS &
WORLD REPORT, BUSINESS WEEK, FORBES MAGAZINE, FORTUNE MAGAZINE or other
industry publications. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the historic
performance of the Fund and the index such as standard deviation and beta. In
addition, from time to time the Fund may include its Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. As with
other performance data, performance comparisons should not be considered
indicative of the Fund's relative performance for any future period.

The Fund's total return, yield and tax-equivalent yield will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.

43
<PAGE>

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Trust is a business trust organized on August 2, 1985 under the laws
of Massachusetts. On October 1, 1987, the Trust changed its name from "Merrill
Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch Multi-State
Municipal Bond Series Trust," and on December 22, 1987 the Trust again changed
its name to "Merrill Lynch Multi-State Municipal Series Trust." The Trust is an
open-end management investment company comprised of separate Series, each of
which is a separate portfolio offering shares to selected groups of purchasers.
Each of the Series is managed independently in order to provide to shareholders
who are residents of the state to which such Series relates as high a level of
income exempt from Federal, and in certain cases state and local, income taxes
as is consistent with prudent investment management. The Trustees are
authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of
beneficial interest, $.10 par value per share, of different classes and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in the Series. The
Trust is presently comprised of the Fund, Merrill Lynch Arizona Municipal Bond
Fund, Merrill Lynch Arkansas Municipal Bond Fund, Merrill Lynch Colorado
Municipal Bond Fund, Merrill Lynch Connecticut Municipal Bond Fund, Merrill
Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland Municipal Bond Fund,
Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch Michigan
Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch
New Jersey Municipal Bond Fund, Merrill Lynch New Mexico Municipal Bond Fund,
Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal
Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pennsylvania
Municipal Bond Fund and Merrill Lynch Texas Municipal Bond Fund. Shareholder
approval is not required for the authorization of additional Series or classes
of a Series of the Trust.

At the date of this Statement of Additional Information, the shares of the
Fund are divided into Class A, Class B, Class C and Class D shares. Class A,
Class B, Class C and Class D shares represent interests in the same assets of
the Fund and are identical in all respects except that Class B, Class C and
Class D shares bear certain expenses relating to the account maintenance
associated with such shares and Class B and Class C shares bear certain
expenses relating to the distribution of such shares. All shares of the Trust
have equal voting rights. Each class has exclusive voting rights with respect
to matters relating to distribution and/or account maintenance expenditures, as
applicable (except that Class B shareholders may vote upon any material changes
to expenses charged under the Class D Distribution Plan). See "Purchase of
Shares." The Trustees of the Trust may classify and reclassify the shares of
any Series into additional or other classes at a future date.

Each issued and outstanding share of a Series is entitled to one vote and
to participate equally in dividends and distributions with respect to that
Series and, upon liquidation or dissolution of the Series, in the net assets of
such Series remaining after satisfaction of outstanding liabilities except
that, as noted above, expenses relating to distribution and/or account
maintenance of the Class B, Class C and Class D shares are borne solely by the
respective class. There normally will be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders may, in accordance with the terms of the Declaration
of Trust, cause a meeting of shareholders to be held for the purpose of voting
on the removal of Trustees. Also, the Trust will be required to call a special
meeting of shareholders in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or a change in the fundamental policies,
objectives or restrictions of a Series.

The obligations and liabilities of a particular Series are restricted to
the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or similar
rights and will be freely transferable. Holders of shares of any Series are
entitled to redeem their shares as set forth elsewhere herein and in the
Prospectus. Shares do not have cumulative voting rights and the holders of more
than 50% of the shares of the Trust voting for the election of Trustees can
elect all of the Trustees if they choose to do so and in such event the holders
of the remaining shares would not be able to elect any Trustees. No amendments
may be made to

44
<PAGE>

the Declaration of Trust, other than amendments necessary to conform the
Declaration to certain laws or regulations, to change the name of the Trust, or
to make certain non-material changes, without the affirmative vote of a
majority of the outstanding shares of the Trust, or of the affected Series or
class, as applicable.

The Declaration of Trust establishing the Trust dated August 2, 1985, 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 Multi-State Municipal Series Trust"
refers to the Trustees under the Declaration collectively as Trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability; nor shall resort be
had to their private property for the satisfaction of any obligation or claim
of the Trust, but the "Trust Property" only shall be liable. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.

The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. If additional Series are added to the
Trust, the organizational expenses will be allocated among the Series in a
manner deemed equitable by the Trustees.

INDEPENDENT AUDITORS

Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540-6400,
has been selected as the independent auditors of the Trust. The selection of
independent auditors is subject to approval by the non-interested Trustees of
the Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.

CUSTODIAN

State Street Bank and Trust Company, P. O. Box 351, Boston, Massachusetts
02101, acts as the Custodian of the Fund's assets. The Custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest on the Fund's
investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Trust's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. See "How to Buy,
Sell, Transfer and Exchange Shares -- Through the Transfer Agent" in the
Prospectus.

LEGAL COUNSEL

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

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on September 30 of each year. The Trust
sends to the Fund's shareholders, at least semi-annually, reports showing the
Fund's portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year, shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.

SHAREHOLDER INQUIRIES

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

45
<PAGE>

ADDITIONAL INFORMATION

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

To the knowledge of the Trust, the following persons or entities owned
beneficially 5% or more of any class of the Fund's shares as of January 4,
1999:

<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
- ------------------------- ---------------------- -----------------
<S> <C> <C>
Rosalie K. Stahl, 101 East 52nd Street 9.7% Class C
Trustee 27th Floor
New York, NY 10022
Theresa M. Santmann, 66 Cedar Lane 5.9% Class C
Theresa A. Santmann and Babylon, NY 11702
John B. Santmann
</TABLE>

FINANCIAL STATEMENTS

The Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.

46
<PAGE>

APPENDIX I

ECONOMIC CONDITIONS IN NEW YORK

THE INFORMATION SET FORTH BELOW IS DERIVED FROM THE OFFICIAL STATEMENTS
PREPARED IN CONNECTION WITH THE ISSUANCE OF NEW YORK MUNICIPAL BONDS AND OTHER
SOURCES THAT ARE GENERALLY AVAILABLE TO INVESTORS. THE FOLLOWING INFORMATION IS
PROVIDED AS GENERAL INFORMATION INTENDED TO GIVE A RECENT HISTORICAL
DESCRIPTION AND IS NOT INTENDED TO INDICATE FUTURE OR CONTINUING TRENDS IN THE
FINANCIAL OR OTHER CONDITIONS OF NEW YORK CITY (THE "CITY") OR NEW YORK STATE
(SOMETIMES REFERRED TO HEREIN AS THE "STATE" OR "NEW YORK"). THE TRUST HAS NOT
INDEPENDENTLY VERIFIED THIS INFORMATION.

The State, some of its agencies, instrumentalities and public authorities
and certain of its municipalities have sometimes faced serious financial
difficulties that could have an adverse effect on the sources of payment for or
the market value of the New York Municipal Bonds in which the Fund invests.

NEW YORK CITY

GENERAL. More than any other municipality, the fiscal health of the City
has a significant effect on the fiscal health of the State. The City's current
financial plan assumes that after noticeable improvements in the City's economy
during calendar years 1997 and 1998, economic growth will slow, with local
employment increasing modestly through fiscal year 2002.

For each of the 1981 through 1998 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating
results as reported in accordance with generally accepted accounting principles
("GAAP"), after discretionary transfers. The City has been required to close
substantial gaps between forecast revenues and forecast expenditures in order
to maintain balanced operating results. There can be no assurance that the City
will continue to maintain balanced operating results as required by State law
without reductions in City services or entitlement programs or tax or other
revenue increases that could adversely affect the City's economic base.

Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's financial plan, including the City's current financial plan for the
1999 through 2002 fiscal years (the "1999-2002 Financial Plan", "Financial
Plan" or "City Financial Plan"). The City's projections set forth in the City
Financial Plan are based on various assumptions and contingencies that are
uncertain and may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.

CITY'S FINANCING PROGRAM. Implementation of the City Financial Plan is
also dependent upon the City's ability to market its securities successfully in
the public credit markets. The City's financing program for fiscal years 1999
through 2002 contemplates the issuance of $5.2 billion of general obligation
bonds and $5.4 billion of bonds to be issued by the New York City Transitional
Finance Authority (the "Transitional Finance Authority") to finance City
capital projects. In 1997, the State enacted the New York City Transitional
Finance Authority Act (the "Finance Authority Act"), which created the
Transitional Finance Authority, to assist the City in keeping the City's
indebtedness within the forecast level of the constitutional restrictions on
the amount of debt the City is authorized to incur. In a challenge to the
constitutionality of the Finance Authority Act, the State trial court, by
summary judgment on November 25, 1997, held the Finance Authority Act to be
constitutional. On July 30, 1998, the State Appellate Division affirmed the
trial court's decision. Plaintiffs filed a notice of appeal with the State's
Court of Appeals for an appeal as of right of the Appellate Division order. The
appeal as of right was dismissed on September 22, 1998. Plaintiffs subsequently
filed a motion for leave to appeal with the Court of Appeals, which motion was
denied on December 22, 1998. Even with the capacity of the Transitional Finance
Authority, the City may be required temporarily to delay entering into new
contractual commitments at the end of fiscal year 1999 and, without additional
legally authorized borrowing capacity, under projections (current as of
December 18, 1998), would reach the limit of its capacity to enter into new
contractual commitments in fiscal year 2000. In addition, the City issues
revenue notes and tax anticipation notes to finance its seasonal working
capital requirements (See "SEASONAL FINANCING REQUIREMENTS" within). The
success of projected public sales of City bonds and notes, New York City
Municipal Water Finance Authority (the "Water Authority") bonds and

I-1
<PAGE>

Transitional Finance Authority bonds will be subject to prevailing market
conditions. The City's planned capital and operating expenditures are dependent
upon the sale of its general obligation bonds and notes, and the Water
Authority and Transitional Finance Authority bonds.

1998 FISCAL YEAR. For the 1998 fiscal year (July 1, 1997-June 30, 1998)
the City had an operating surplus, before discretionary and other transfers,
and achieved balanced operating results, after discretionary and other
transfers, in accordance with GAAP. The 1998 fiscal year is the eighteenth year
that the City has achieved an operating surplus, before discretionary and other
transfers, and balanced operating results, after discretionary and other
transfers.

1999-2002 FINANCIAL PLAN. On November 18, 1998, the City released the
Financial Plan for the 1999 through 2002 fiscal years, which relates to the
City and certain entities which receive funds from the City. The City Financial
Plan is a modification to the financial plan submitted to the New York State
Financial Control Board (the "Control Board") on June 26, 1998 (the "June
Financial Plan"). The City Financial Plan projects revenues and expenditures
for the 1999 fiscal year balanced in accordance with GAAP, and projects gaps of
$2.2 billion, $2.9 billion and $2.4 billion for the 2000 through 2002 fiscal
years, respectively, after implementation of a gap closing program to reduce
agency expenditures by $200 million in the 1999 fiscal year and approximately
$80 million in each of fiscal years 2000 through 2002.

The City's projected budget gaps for the 2001 and 2002 fiscal years do not
reflect the savings expected to result from the prior years' programs to close
the gaps set forth in the City Financial Plan. Thus, for example, recurring
savings anticipated from the actions which the City proposes to take to balance
the fiscal year 2000 budget are not taken into account in projecting the budget
gaps for the 2001 and 2002 fiscal years.

The 1999-2002 Financial Plan includes a proposed discretionary transfer in
the 1999 fiscal year of $465 million to pay debt service due in the fiscal year
2000. In addition, the Financial Plan reflects enacted and proposed tax
reduction programs totaling $429 million, $604 million and $606 million in
fiscal years 2000 through 2002, respectively, including the elimination of the
City sales tax on all clothing as of December 1, 1999, the extension of current
tax reductions for owners of cooperative and condominium apartments starting in
fiscal year 2000 and a personal income tax credit for child care and for
resident holders of Subchapter S corporations starting in fiscal year 2000,
which are subject to State legislative approval, and reduction of the
commercial rent tax commencing in fiscal year 2000.

ASSUMPTIONS. The 1999-2002 Financial Plan is based on numerous
assumptions, including the condition of the City's and the region's economy and
a modest employment recovery and the concomitant receipt of economically
sensitive tax revenues in the amounts projected. The 1999-2002 Financial Plan
is subject to various other uncertainties and contingencies relating to, among
other factors, the extent, if any, to which wage increases for City employees
exceed the annual wage costs assumed for the 1999 through 2002 fiscal years;
continuation of projected interest earnings assumptions for pension fund assets
and current assumptions with respect to wages for City employees affecting the
City's required pension fund contributions; the willingness and ability of the
State to provide the aid contemplated by the Financial Plan and to take various
other actions to assist the City; the ability of Health and Hospitals
Corporation (the "HHC"), the Board of Education (the "BOE") and other such
agencies to maintain balance budgets; the willingness of the Federal government
to provide the amount of Federal aid contemplated in the Financial Plan; the
impact on City revenues and expenditures of Federal and State welfare reform
and any future legislation affecting Medicare or other entitlement programs;
the ability of the City to implement cost reduction initiatives; the success
with which the City controls expenditures; the impact of conditions in the real
estate market on real estate tax revenues and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.

The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999 and which is projected to provide
revenue of $183 million, $524 million, and $544 million in the 2000, 2001 and
2002 fiscal years, respectively; and (ii) collection of the projected rent
payments for the City's airports, totaling $6 million, $365 million, $155
million and $185 million in the 1999 through 2002 fiscal years, respectively, a
substantial portion

I-2
<PAGE>

of which may depend on the successful completion of negotiations with The Port
Authority of New York and New Jersey (the "Port Authority") or the enforcement
of the City's rights under the existing leases through pending legal actions.
In addition, the economic and financial condition of the City may be affected
by various financial, social, economic and political factors which could have a
material effect on the City.

MUNICIPAL UNIONS. The Financial Plan reflects the costs of the settlements
and arbitration awards with certain municipal unions and other bargaining
units, which together represent approximately 98% of the City's workforce, and
assumes that the City will reach agreement with its remaining municipal unions
under terms which are generally consistent with such settlements and
arbitration awards. These contracts are approximately five years in length and
have a total cumulative net increase of 13%. Assuming the City reaches similar
settlements with its remaining municipal unions, the cost of all settlements
for all City-funded employees, as reflected in the Financial Plan, would total
$1.2 billion in the 1999 fiscal year and exceed $2 billion thereafter. The
Financial Plan provides no additional wage increases for City employees after
their contracts expire in fiscal years 2000 and 2001.

INTERGOVERNMENTAL AID. The City depends on the State for aid both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that there will not be reductions in State aid to the City
from amounts currently projected; that State budgets will be adopted by the
April 1 statutory deadline, or interim appropriations enacted; or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the Federal budget negotiation process could result
in reductions or delays in the receipt of Federal grants which could have
additional adverse effects on the City's cash flow or revenues.

YEAR 2000 COMPUTER MATTERS. The year 2000 presents potential operational
problems for computerized data files and computer programs which may recognize
the year 2000 as the year 1900, resulting in possible system failures or
miscalculations. In November 1996, the City's Year 2000 Project Office was
established to develop a project methodology, coordinate the efforts of City
agencies, review plans and oversee implementation of year 2000 projects. At
that time, the City also evaluated the capabilities of the City's Integrated
Financial Management System and Capital Projects Information System, which are
the City's central accounting, budgeting and payroll systems, identified the
potential impact of the year 2000 on these systems, and developed a plan to
replace these systems with a new system which is expected to be year 2000
compliant prior to December 31, 1999. The City has also performed an assessment
of its other mission-critical and high priority computer systems in connection
with making them year 2000 compliant, and the City's agencies have developed
and begun to implement both strategic and operational plans for non-complaint
application systems. In addition, the City Comptroller is conducting audits of
the progress of City agencies in achieving year 2000 compliance. While these
efforts may involve additional costs beyond those assumed in the Financial
Plan, the City believes, based on currently available information, that such
additional costs will not be material.

The Mayor's Office of Operations has stated that work has been completed,
and all or part of the necessary testing has been performed, on approximately
49% (current as of December 18, 1998) of the mission-critical and high priority
systems of Mayoral agencies. The City's computer systems may not all be year
2000 compliant in a timely manner and there could be an adverse impact on City
operations or revenues as a result. The City is in the process of developing
contingency plans for all mission-critical and high priority systems, if such
systems are not year 2000 compliant by pre-determined dates. The City is also
in the process of contacting its significant third party vendors regarding the
status of their compliance. Such compliance is not within the City's control,
and therefore the City cannot assure that there will not be any adverse effects
on the City resulting from any failure of these third parties.

CERTAIN REPORTS. The City's financial plans have been the subject of
extensive public comment and criticism. From time to time, the Control Board
staff, the Office of the State Deputy Comptroller (the "OSDC"), the City
Comptroller, the City's Independent Budget Office (the "IBO") and others issue
reports and make public statements regarding the City's financial condition,
commenting on, among other matters, the City's financial plans, projected
revenues and expenditures and actions by the City to eliminate projected
operating deficits. Some of these reports and statements have warned that the
City may have underestimated certain expenditures and overestimated certain
revenues and have suggested that the City may not have adequately provided for
future contingencies. Certain of these reports have analyzed the City's future
economic and social conditions and have

I-3
<PAGE>

questioned whether the City has the capacity to generate sufficient revenues in
the future to meet the costs of its expenditure increases and to provide
necessary services.

On December 30, 1998, the City Comptroller issued a report on the City
Financial Plan. With respect to the 1999 fiscal year, the report identified a
possible surplus of between $593 million and $897 million, including $465
million in the budget stabilization account. Potential risks identified in the
report for the 1999 fiscal year include $135 million of greater overtime
spending and a write-down of outstanding education aid receivables that are ten
years past due, which are estimated to be approximately $39 million in the 1999
fiscal year. With respect to fiscal years 2000 through 2002, the report
identified baseline risks of between $454 million and $636 million, $223
million and $1.2 billion, and $399 million and $1.9 billion, respectively,
depending upon whether the State approves the extension of the 14% personal
income tax surcharge and whether the City incurs additional labor costs as a
result of the expiration of labor contracts starting in fiscal year 2001 which,
if settled at the current forecast level of inflation, would result in
additional costs totaling $487 million in fiscal year 2001 and $987 million in
fiscal year 2002. Additional risks identified in the report for fiscal years
2000 through 2002 include assumed payments from the Port Authority relating to
the City's claim for back rentals, which are the subject of arbitration,
possible increased overtime expenditures and the write-down of outstanding
education aid receivables increasing to $109 million in fiscal year 2002. The
report noted that these risks may be partially offset in each of fiscal years
2000 through 2002 by additional resources of between approximately $500 million
and $700 million to $950 million, depending on the level of assumed tax
revenues, which would result in projected budget gaps, including the gaps
projected in the Financial Plan, of between $1.9 billion and $2.3 billion, $2.3
billion and $3.7 billion, and $1.9 billion and $3.8 billion in fiscal years
2000 through 2002, respectively. The report noted that, in the past, the City
has relied on initiatives such as agency expenditure reductions, asset sales
and increased State and Federal aid to close projected budget gaps. The report
further noted than an area of concern is the projected 8.4% growth in the 1999
fiscal year of operating expenditures (which exclude State and Federal
categorical aid and debt service).

On August 25, 1998, the City Comptroller issued a report reviewing the
current condition of the City's major physical assets and the capital
expenditures required to bring them to a state of good repair. The report's
findings relate only to current infrastructure and do not address future
capacity or technology needs. The report estimated that the expenditure of
approximately $91.83 billion would be required over the next decade to bring
the City's infrastructure to a systematic state of good repair and address new
capital needs already identified. The report stated that the City's current
Ten-Year Capital Strategy, together with funding received from other sources,
is projected to provide approximately $52.08 billion. The report noted that the
City's ability to meet all capital obligations is limited by law, as well as
funding capacity, and that the issue for the City is how best to set priorities
and manage limited resources.

On December 16, 1998, the staff of the OSDC issued a report on the City
Financial Plan. The report concluded that the City is likely to end fiscal year
1999 with a $1 billion surplus. With respect to fiscal years 2000 through 2002,
the report concluded that the budget gaps for such years could be larger than
those projected by the City, totaling $3.1 billion, $3.6 billion and $3.2
billion in fiscal years 2000 through 2002, respectively. The risks identified
in the report include (i) assumed payments from the Port Authority relating to
the City's claim for back rentals, which are the subject of arbitration, (ii)
greater than expected increases in health insurance costs and (iii) the
potential need for the City to provide funding to HHC for wage increases, and
to BOE for Project Read and teachers' supplemental salaries which were
previously funded by the State. The report also noted that potential future
liabilities could result from possible changes in the investment earnings
assumption or other assumptions affecting pension costs. In addition, the
report noted that the City is vulnerable to an economic downturn, which could
reduce revenues and increase City pension contributions and public assistance
caseloads and that the City Financial Plan does not make any provision for (i)
wage increases after the expiration of current contracts which, at projected
local inflation rates, would increase the gaps by $430 million and $940 million
in fiscal years 2001 and 2002, respectively, or (ii) the possibility that the
14% personal income tax surcharge will not be extended.

In the report the OSDC identified several other concerns. With respect to
property taxes, the report noted that the City is supporting legislation that
would prevent certain property owners from using actual sales of real

I-4
<PAGE>

property as evidence of whether an assessment is unequal, and that, if such
legislation is not enacted, City officials feel that the City's liability in
tax certiorari cases could increase substantially over current estimates.

With respect to welfare reform, the report expressed concern that the City
Financial Plan does not reflect the full impact of implementing Federal welfare
reform and other changes in State public assistance programs, including
compliance with the Federal work requirements.

The report also expressed concern about the City's growing debt burden,
which will reach 19% of tax revenues by fiscal year 2002, and noted that HHC is
facing significant budget gaps starting in fiscal year 2000 and will face
increasing competitive pressures in the near future when the State begins
requiring most Medicaid recipients to enroll in managed care plans. With
respect to the City's program to repair or replace computer systems to solve
the Year 2000 problem, the report noted that an additional $100 million may be
required from the City's operating budget for consulting contracts.

On December 21, 1998, the staff of the Control Board issued a report
reviewing the City Financial Plan. The report noted that the City is likely to
end the 1999 fiscal year in balance. However, the report identified risks of
$504 million, $284 million and $619 million for fiscal years 2000 through 2002,
respectively, which when combined with the City's projected gaps, results in
estimated gaps of $2.7 billion, $3.2 billion and $3.0 billion for fiscal years
2000 through 2002, respectively, before making provision for any increased
labor costs which may occur when the current contracts with City employees
expire in calendar year 2000. With respect to subsequent fiscal years, the
principal risks identified in the report include (i) the possibility that the
City may decide to fund the $63 million annual cost of teachers' salary
supplementation for fiscal years 2000 through 2002, which the State failed to
fund in the 1999 fiscal year, and an additional risk of $109 million in fiscal
year 2002 for BOE resulting from the write-down of funds owed to BOE by the
State which have been outstanding for ten years or more; (ii) the receipt of
assumed rental payments from the Port Authority relating to the City's claim
for back rents, which are the subject of arbitration; and (iii) overtime and
health insurance expenditures which could be greater than assumed in the City
Financial Plan. With respect to fiscal year 2000, it is unlikely, given the
economic outlook, that the City will approach the $2.1 billion surplus rolled
from fiscal year 1998 into fiscal year 1999. The report further noted that the
gaps facing the City are being caused by slowly growing revenues, reflecting
the City's tax reduction programs, as well as expenditure growth from increased
salaries and wages in the City's current collective bargaining agreements,
increased health insurance costs and an expanding debt service burden.

SEASONAL FINANCING REQUIREMENTS. The City since 1981 has fully satisfied
its seasonal financing needs in the public credit markets, repaying all
short-term obligations within their fiscal year of issuance. The City has
issued $500 million of short-term obligations in the 1999 fiscal year to
finance the City's projected cash flow needs for the 1999 fiscal year. The City
issued $1.075 billion in short-term obligations in fiscal year 1998 to finance
the City's projected cash flow needs for the 1998 fiscal year. The City issued
$2.4 billion of short-term obligations in fiscal year 1997. Seasonal financing
requirements for the 1996 fiscal year increased to $2.4 billion from $2.2
billion and $1.75 billion in the 1995 and 1994 fiscal years, respectively. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.

RATINGS. As of January 15, 1999, Moody's rated the City's outstanding
general obligation bonds A3, Standard & Poor's rated such bonds A- and Fitch
rated such bonds A-. In July 1995, Standard & Poor's revised downwards its
ratings on outstanding general obligation bonds of the City from A- to BBB+. In
July 1998, Standard & Poor's revised its rating of City bonds upward to A-.
Moody's rating of City bonds was revised in February 1998 to A3 from Baa1. Such
ratings reflect only the view of Moody's, Standard & Poor's and Fitch, from
which an explanation of the significance of such ratings may be obtained. There
is no assurance that such ratings will continue for any given period of time or
that they will not be revised downward or withdrawn entirely. Any such downward
revision or withdrawal could have an adverse effect on the market prices of City
bonds.

OUTSTANDING INDEBTEDNESS. As of September 30, 1998, the City and the
Municipal Assistance Corporation for the City of New York had respectively
approximately $26.4 billion and $3.1 billion of outstanding net long-term debt.
As of October 22, 1998, the Water Authority had approximately $8.4 billion of
aggregate principal

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amount of outstanding bonds, inclusive of subordinated second resolution bonds,
and $600 million aggregate principal amount of outstanding commercial paper
notes.

WATER, SEWER AND WASTE. Debt service on Water Authority obligations is
secured by fees and charges collected from the users of the City's water and
sewer system. State and Federal regulations require the City's water supply to
meet certain standards to avoid filtration. The City's water supply now meets
all technical standards and the City has taken the position that increased
regulatory, enforcement and other efforts to protect its water supply, will
prevent the need for filtration. On May 6, 1997, the U.S. Environmental
Protection Agency granted the City a filtration avoidance waiver through April
15, 2002 in response to the City's adoption of certain watershed regulations.
The estimated incremental cost to the City of implementing this Watershed
Memorandum of Agreement, beyond investments in the watershed which are planned
independently, is approximately $400 million. The City has estimated that if
filtration of the upstate water supply system is ultimately required, the
construction expenditures required could be between $4 billion and $5 billion.

Legislation has been passed by the State which prohibits the disposal of
solid waste in any landfill located within the City after December 31, 2001.
The Financial Plan includes the estimated costs of phasing out the use of
landfills located within the City. A suit has been commenced against the City
by private individuals under the Resource Conservation and Recovery Act seeking
to compel the City to take certain measures or, alternatively, to close the
Fresh Kills landfill. If as a result of such litigation, the City is required
to close the landfill earlier than required by State legislation, the City
could incur additional costs during the Financial Plan period. Pursuant to
court order, the City is currently required to recycle 2,100 tons per day of
solid waste and is required to recycle 3,400 tons per day by July 1999 and
4,250 tons per day by July 2001. The City is currently recycling slightly over
2,100 tons per day of solid waste. The City may seek to obtain amendments to
Local Law No. 19 to modify this requirement. If the City is unable to obtain
such amendments and is required to fully implement Local Law No. 19, the City
may incur substantial costs.

LITIGATION. The City is a defendant in a significant number of lawsuits.
Such litigation includes, but is not limited to, routine litigation incidental
to the performance of its governmental and other functions, actions commenced
and claims asserted against the City arising out of alleged constitutional
violations, alleged torts, alleged breaches of contracts and other alleged
violations of law and condemnation proceedings and other tax and miscellaneous
actions. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability to
carry out the City Financial Plan. As of June 30, 1998, the City estimated its
potential future liability on account of outstanding claims amounted to
approximately $3.5 billion.

NEW YORK STATE

CURRENT ECONOMIC OUTLOOK. The national economy strengthened during 1997
and accelerated its rate of expansion as 1998 began. National economic growth
in both 1998 and 1999 is expected to be slower than it was during 1997. The
State Division of the Budget projects real GDP growth of 3.4 percent in 1998,
below the 1997 growth rate of 3.9 percent. In 1999, real GDP growth is expected
to fall further, to 1.6 percent. The State economy has also continued to
expand, but growth remains somewhat slower than in the nation. The State's
forecast of the State's economy projects continued growth in 1998 and 1999 for
employment, wages, and personal income, although for 1999, a significant
slowdown in the growth rates of personal income and wages is expected.

Employment growth in the State has been hindered during recent years by
significant cutbacks in the computer and instrument manufacturing, utility,
defense and banking industries. Government downsizing has also moderated jobs
gains. With the exception of government and manufacturing, every sector
recorded employment gains for the first six months of 1998, with the service
and trade sectors accounting for most of the increase. Much of the service
sector increase occurred in business services. According to data through June
1998, since December 1994, total employment has risen 286,000, with private
employment up by 330,000 and government employment down by 44,000.

Overall, employment growth is expected to be 2.0 percent in 1998, the
strongest in a decade, but is expected to drop to 1.0 percent in 1999,
reflecting the slowing growth in the national economy, continued spending

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restraint in government, less robust profitability in the financial sector and
continued restructuring in the manufacturing, health care and banking sectors.
Employment growth in the State was 1.5 percent for 1997. On the national level,
employment growth was 2.6 percent for 1997 and is projected to be 2.5 percent
and 1.9 percent for 1998 and 1999, respectively.

On an average annual basis, the State unemployment rate is projected to
drop through 1998 and 1999 reaching 5.3 percent for 1999 as compared to the 6.4
percent level of 1997. The State unemployment rate for 1998 is projected to be
5.6 percent. For the nation as a whole, the unemployment rate was 5.0 percent
for 1997 and is projected to be 4.5 percent in 1998 and 4.6 percent in 1999.

Personal income growth in both the State and nation is projected to be 5.0
percent for 1998. Personal income growth in 1997 was 4.7 percent and 5.6
percent, respectively, for the State and the nation. Personal income growth in
the State is projected to decline to 3.4 percent for 1999, below the 4.2
percent level as projected for the nation. Growth in bonus payments is expected
to moderate significantly, a distinct shift from the unusally high increases of
the last few years.

THE 1998-1999 FISCAL YEAR. The State's current fiscal year commenced on
April 1, 1998 and ends on March 31, 1999. On January 20, 1998 the Governor
presented his 1998-1999 Executive Budget (the "Executive Budget") to the
Legislature. The State's budget for the 1998-1999 fiscal year was not adopted
by the April 1 statutory deadline. Prior to adoption of the budget, the
Legislature enacted necessary appropriations for state-supported debt service.
On April 18, 1998, the State Legislature passed a State budget for the State's
1998-1999 fiscal year, and on April 25, 1998 the Governor vetoed certain of the
increased spending initiatives in the budget passed by the State Legislature.

The State's financial plan for the 1998-1999 fiscal year (the "1998-1999
Financial Plan") is projected to be balanced on a cash basis in the General
Fund. (The General Fund is the principal operating fund of the State. It is the
State's largest fund and receives almost all State taxes. In the State's
1998-1999 fiscal year, the General Fund is expected to account for
approximately 70.1 percent of total State Funds disbursements.). Previously,
the State had projected a potential budget imbalance of up to $1.68 billion for
the 1998-1999 fiscal year. Total General Fund receipts, including transfers
from other funds, are projected to be $37.84 billion, an increase of over $3
billion from the $34.55 billion recorded in the 1997-1998 fiscal year. Total
General Fund disbursements, including transfers to support capital projects,
debt service and other funds, are estimated at $36.78 billion. This represents
an increase of $2.43 billion or 7.1 percent from 1997-1998, or an average
annual increase of only 2.3 percent since 1994-1995.

The State Division of the Budget estimates that the 1998-1999 Financial
Plan includes approximately
$64 million in non-recurring resources or savings.

In terms of receipts, the transfer of a portion of the budget surplus
recorded in 1997-1998 to 1998-1999 exaggerates the "real" growth in State
receipts from year to year by depressing reported 1997-1998 figures and
inflating 1998-1999 projections. Conversely, the incremental cost of tax
reductions newly effective in 1998-1999 and the impact of statutes earmarking
certain tax receipts to other funds work to depress apparent growth below the
underlying growth in receipts attributable to expansion of the State economy.

Net personal income tax collections are projected to reach $21.44 billion,
nearly $3.7 billion above the reported 1997-1998 collection total with $2.4
billion of the increase reflecting the net impact of the transfer of the
surplus from State fiscal year 1997-1998 to the 1998-1999 fiscal year. This tax
continues to account for over half of the State's General Fund receipts base.
User tax collections are projected to reach $7.21 billion in fiscal year
1998-1999, an increase of $170 million over the 1997-1998 fiscal year.

Business tax receipts are projected to be $4.79 billion for State fiscal
year 1998-1999. This represents an approximate 2.0 percent decline from the
1997-1998 results. The year-over-year decline in projected receipts in this
category is largely due to statutory changes resulting in diversion of General
Fund petroleum business and utility tax receipts. Additionally, the State's
economic forecast has profit growth slowing significantly in 1998.

The 1998-1999 Financial Plan, as of June 1998, projected General Fund
receipts to be received from the following sources in the approximate following
proportions: i) personal income tax: 56.6 percent, ii) user taxes

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and fees: 19.0 percent, iii) business taxes 13.2 percent, iv) other taxes: 2.7
percent (includes estate and gift taxes), and v) miscellaneous receipts: 8.5
percent (includes investment income, medical provider assessments and minor
Federal grants).

In terms of disbursements, the 1998-1999 Financial Plan, as of June 1998,
projected General Fund disbursements to be allocated to the following
categories in the approximate following proportions: i) grants to local
government: 68.4 percent, ii) State operations: 18.2 percent, iii) debt
service: 6.0 percent, iv) general State charges: 6.0 percent (includes
contributions to pension systems and health insurance for State employees) and
v) capital/other: 1.4 percent.

The 1998-1999 Financial Plan projects spending of $25.14 billion for
grants to local government, an increase of $1.88 billion or 8.1 percent over
the prior year. The largest annual increases are for educational programs,
Medicaid, other health and social welfare programs, and community project
grants. State operations spending, which accounts for the costs of running
State agencies, is projected at $6.70 billion, an increase of $511 million or
8.3 percent from the prior year. General State charges, which account primarily
for fringe benefits for State employees, are projected to total $2.22 billion
in 1998-1999, a modest decrease from the 1997-1998 fiscal year.

FUTURE FISCAL YEARS. The Executive Budget projected budget gaps of
approximately $1.75 billion in 1999-2000 growing to approximately $3.75 billion
in the 2000-2001 fiscal year. These gaps were projected after assuming
unspecified savings actions totaling $600 million in 1999-2000 and $800 million
in 2000-2001. Moreover, the State's projections for 1999-2000 also assume $250
million in additional receipts from the settlement of State claims against the
tobacco industry. As a result of the budget passed by the State Legislature and
the vetoes of the Governor of certain increased spending in the State budget
passed by the Legislature, the potential imbalance in the 1999-2000 fiscal year
is expected to be roughly $1.3 billion, or about $400 million less than
previously projected. Consistent with past practice, the projections do not
include any costs associated with new collective bargaining agreements after
the expiration of the current round of contracts at the end of the 1998-1999
fiscal year.

The STAR program, which dedicates a portion of personal income tax
receipts to fund school tax reductions, has a significant impact on General
Fund receipts. STAR is projected to reduce personal income tax revenues
available to the General Fund by an estimated $1.3 billion in the 2000-2001
fiscal year. Measured from the 1998-1999 base, scheduled reductions to estate
and gift, sales and other taxes, reflecting tax cuts enacted in the 1997-1998
and 1998-1999 fiscal years, will lower General Fund taxes and fees by an
estimated $1.8 billion in the 2000-2001 fiscal year. The fiscal effects of tax
reductions adopted in the last several fiscal years (including 1998-1999) are
projected to grow more substantially beyond the 1998-1999 fiscal year, with the
incremental annual cost of all currently enacted tax reductions estimated at
over $4 billion by the time they are fully effective in State fiscal year
2002-2003. Disbursement projections for the out years currently assume
additional outlays for i) school aid, ii) Medicaid, iii) welfare reform, iv)
mental health community reinvestment, and v) other multi-year spending
commitments in law.

GAAP-BASIS RESULTS. On March 31, 1998, the State recorded on a GAAP-basis,
its first-ever accumulated positive balance in its General Fund. This
accumulated surplus was $567 million. This compares to accumulated deficits of
$995 million and $2.928 billion for the fiscal years ended March 31, 1997 and
March 31, 1996, respectively. The improvement in the State's GAAP position, is
attributable, in part, to the cash surplus recorded at the end of the State's
1997-1998 fiscal year. Much of that surplus is reserved for future
requirements, but a portion is being used to meet spending needs in 1998-1999.
Thus, the State expects some deterioration in its GAAP position, but expects to
maintain a positive GAAP balance through the end of the 1998-1999 fiscal year.
The General Fund accumulated surplus is projected to be $27 million at the end
of the 1998-1999 fiscal year.

The State reported a General Fund operating surplus of $1.56 billion for
the 1997-1998 fiscal year, as compared to an operating surplus of $1.93 billion
for the 1996-1997 fiscal year. Revenues increased 1.8 percent, and expenditures
increased 0.4 percent from the 1996-1997 fiscal year.

SPECIAL CONSIDERATIONS. On July 23, 1998, the New York State Comptroller
issued a report which noted that a significant cause for concern is the budget
gaps in the 1999-2000 and 2000-2001 fiscal years, which the State Comptroller
projected at $1.8 billion and $5.5 billion, respectively, after excluding the
uncertain receipt of $250

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million of funds from the tobacco settlement assumed for each of such fiscal
years, as well as the unspecified actions assumed in the State's projections.
The State's Comptroller also stated that if the security industry or the
economy slows, the size of the gaps would increase.

According to the State Division of the Budget, uncertainties with regard
to the economy present the largest potential risk to budget balance in New York
State. The Executive Budget indentified various risks, including either a
financial market or broader economic correction during the State's financial
plan period, which risks are heightened by the relatively lengthly expansion
currently underway, and the financial turmoil in Asia. In addition, the
Executive Budget noted that a normal forecast error of one percentage point in
the expected growth rate could raise or lower receipts by over $1 billion by
the last year of the projection period, and that funding is not included for
any costs associated with new collective bargaining agreements after the
expiration of the current contracts at the end of the 1998-1999 fiscal year.
Furthermore, the securities industry is more important to the New York economy
than the national economy, and a significant deterioration in stock market
performance could ultimately produce adverse changes in wage and employment
levels.

The State's financial plans and executive budgets are based upon forecasts
of national and State economic activity. Economic forecasts have frequently
failed to predict accurately the timing and magnitude of changes in the
national and State economies. Many uncertainties exist in forecasts of both
national and State economies, particularly in light of the recent volatility in
the international economy and the domestic financial markets, including
consumer attitudes toward spending, Federal financial and monetary policies,
the availability of credit and the condition of the world economy, any of which
could have an adverse effect on the State. There can be no assurance that the
State economy will not experience worse-than-predicted results in the remainder
of the 1998-1999 fiscal year and subsequent fiscal years, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.

Despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, and actions by the Federal government have helped
to create projected structural budget gaps for the State. To address a
potential imbalance in a given fiscal year, the State would be required to take
actions to increase receipts and/or reduce disbursements as it enacts the
budget for that year, and, under the State Constitution, the Governor is
required to propose a balanced budget each year.

Owing to these and other factors, the State may face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from a lower recurring receipts base and the spending required to
maintain State programs at mandated levels. Any such recurring imbalance would
be exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years.

YEAR 2000 COMPUTER MATTERS. New York State is currently addressing "Year
2000" data processing compliance issues. In 1996, the State created the Office
of Technology (the "OFT") to help address statewide technology issues,
including the Year 2000 issue. OFT has estimated that investments of at least
$140 million will be required to bring approximately 350 State mission-critical
and high-priority computer systems not otherwise scheduled for replacement into
Year 2000 compliance, and the State is planning to spend $100 million in the
1998-1999 fiscal year for this purpose. As of June 26, 1998, work had been
completed on roughly 20 percent of these mission-critical and high-priority
systems. All remaining unfinished mission-critical and high-priority systems
had at least 40 percent or more of the work completed. Contingency planning is
underway for those systems which may be non-compliant prior to failure dates.

PRIOR FISCAL YEARS (CASH BASIS). The State ended its 1997-1998 fiscal year
balanced on a cash basis, with a reported General Fund cash surplus of $2.04
billion resulting from revenue growth and lower spending on welfare, Medicaid,
and other entitlement programs. General Fund receipts and transfers from other
funds for the 1997-1998 fiscal year (including net tax refund reserve account
activity) totaled $34.55 billion, an annual increase of $1.51 billion, or 4.57
percent over the 1996-1997 fiscal year. General Fund disbursements and
transfers to other funds were $34.35 billion, an annual increase of $1.45
billion or 4.41 percent. The State closed a budget gap of approximately $2.3
billion for the 1997-1998 fiscal year. Gap-closing actions included cost
containment

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in State Medicaid, the use of the $1.4 billion 1996-1997 fiscal year budget
surplus to finance 1997-1998 fiscal year spending, control on State agency
spending and other actions.

The State ended its 1996-1997 fiscal year balanced on a cash basis, with a
1996-1997 General Fund cash surplus as reported by the State Division of the
Budget of approximately $1.4 billion that was used to finance the 1997-1998
Financial Plan. The surplus resulted primarily from higher-than-expected
revenues and lower-than-expected spending for social service programs. General
Fund receipts and transfers from other funds for the 1996-1997 fiscal year
totaled $33.04 billion, an increase of 0.7 percent from the 1995-1996 fiscal
year (excluding deposits into the tax refund reserve account). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-1997 fiscal year, an increase of 0.7 percent from the 1995-1996 fiscal
year.

The State ended its 1995-1996 fiscal year in balance, with a reported
1995-1996 General Fund cash surplus of $445 million. General Fund receipts and
transfers from other funds totaled $32.81 billion, a decrease of 1.1 percent
from the 1994-1995 levels. General Fund disbursements and transfers to other
funds totaled $32.68 billion for the 1995-1996 fiscal year, a decrease of 2.2
percent from the 1994-1995 levels. Prior to adoption of the State's 1995-1996
fiscal year budget, the State had projected a potential budget gap of
approximately $5 billion, which was closed primarily through spending
reductions, cost containment measures, State agency actions and local
assistance reforms.

The State ended its 1994-1995 fiscal year with the General Fund in
balance. General Fund receipts and transfers from other funds totaled $33.16
billion, an increase of 2.9 percent from the 1993-1994 levels. General Fund
disbursements and transfers to other funds totaled $33.40 billion, an increase
of 4.7 percent from the 1993-1994 levels.

LOCAL GOVERNMENT ASSISTANCE CORPORATION. In 1990, as part of a State
fiscal reform program, legislation was enacted creating the Local Government
Assistance Corporation (the "LGAC"), a public benefit corporation empowered to
issue long-term obligations to fund certain payments to local governments
traditionally funded through the State's annual seasonal borrowing. As of June
1995, LGAC had issued bonds to provide net proceeds of $4.7 billion completing
the program. The impact of LGAC's borrowing is that the State is able to meet
its cash flow needs without relying on short-term seasonal borrowing.
Provisions prohibiting the State from returning to a reliance upon cash flow
manipulation to balance its budget will remain in bond covenants until the LGAC
bonds are retired.

FINANCING ACTIVITIES. State financing activities include general
obligation debt of the State and State-guaranteed debt, to which the full faith
and credit of the State has been pledged, as well as lease-purchase and
contractual-obligation financings, moral obligation financings and other
financings through public authorities and municipalities, where the State's
obligation to make payments for debt service is generally subject to annual
appropriation by the State Legislature.

As of March 31, 1998, the total amount of outstanding general obligation
debt was approximately $5.033 billion, including $293.6 million in bond
anticipation notes. The total amount of moral obligation debt was approximately
$1.390 billion (down from $3.272 billion as of March 31, 1997), and $24.015
billion of bonds issued primarily in connection with lease-purchase and
contractual-obligation financing of State capital programs were outstanding.

For purposes of analyzing the financial condition of the State, debt of
the State and of certain public authorities may be classified as
State-supported debt, which includes general obligation debt of the State and
lease purchase and contractual obligations of public authorities (and
municipalities) where debt service is paid from State appropriations (including
dedicated tax sources, and other revenues such as patient charges and dormitory
facilities rentals). In addition, a broader classification, referred to as
State-related debt, includes State-supported debt, as well as certain types of
contingent obligations, including moral obligation financing, certain
contingent contractual-obligation financing arrangements, and State-guaranteed
debt, where debt service is expected to be paid from other sources and State
appropriations are contingent in that they may be made and used only under
certain circumstances.

The total amount of State-supported debt outstanding grew from 3.4 percent
of personal income in the State in the 1988-1989 fiscal year to 6.1 percent for
the 1997-1998 fiscal year while State-related debt outstanding

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declined from 6.8 percent to 6.6 percent of personal income for the same
period. Thus, State-supported debt grew at a faster rate than personal income
while State-related obligations grew at a slower rate. At the end of the
1997-1998 fiscal year, there was $37 billion of outstanding State-related debt
and $34.25 billion of outstanding State-supported debt.

PUBLIC AUTHORITIES. The fiscal stability of the State is related, in part,
to the fiscal stability of its public authorities. Public authorities are not
subject to the constitutional restrictions on the incurring of debt which apply
to the State itself, and may issue bonds and notes within the amounts of, and
as otherwise restricted by, their legislative authorization. As of December 31,
1997, there were 17 public authorities that had outstanding debt of $100
million or more, and the aggregate outstanding debt, including refunding bonds,
of all State public authorities was $84 billion, up from $75.4 billion as of
September 30, 1996. The State's access to the public credit markets could be
impaired and the market price of its outstanding debt may be adversely affected
if any of its public authorities were to default on their respective
obligations.

RATINGS. As of July 10, 1998, Moody's and Standard & Poor's rated the
State's outstanding general obligation bonds A2 and A, respectively. Standard &
Poor's revised its ratings upward from A- to A on August 28, 1997. Ratings
reflect only the respective views of such organizations, and explanation of the
significance of such ratings must be obtained from the rating agency furnishing
the same. There is no assurance that a particular rating will continue for any
given period of time or that any such rating will not be revised downward or
withdrawn entirely if, in the judgment of the agency originally establishing
the rating, circumstances so warrant. A downward revision or withdrawal of such
ratings may have an effect on the market price of the New York Municipal Bonds
in which the Fund invests.

LITIGATION. The State is a defendant in numerous legal proceedings
including, but not limited to, claims asserted against the State arising from
alleged torts, alleged breaches of contracts, condemnation proceedings and
other alleged violations of State and Federal laws. State programs are
frequently challenged on State and Federal constitutional grounds. Adverse
developments in legal proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced State Financial Plan in
any given fiscal year. There can be no assurance that an adverse decision in
one or more legal proceedings would not exceed the amount the State reserves
for the payment of judgments or materially impair the State's financial
operations. In its audited financial statements for the fiscal year ended March
31, 1998, the State reported its estimated liability for awarded and
anticipated unfavorable judgments at $872 million.

OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1998-1999 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1998-1999 fiscal year.

Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor of the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.

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APPENDIX II

RATINGS OF MUNICIPAL BONDS

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") LONG-TERM DEBT
RATINGS

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

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

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

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

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

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

Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.

SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2 and MIG3/VMIG3; MIG1/VMIG1 denotes "best quality . . .
strong protection by established cash flows"; MIG2/ VMIG2 denotes "high
quality" with ample margins of protection; MIG3/VMIG3 notes are of "favorable
quality . . . but . . . lacking the undeniable strength of the preceding
grades".

DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS

Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:

Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:

II-1
<PAGE>

leading market positions in well established industries; high rates of return
on funds employed; conservative capitalization structure with moderate reliance
on debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.

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

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

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

DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") ISSUE CREDIT RATING
DEFINITIONS

A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated.

The issue credit rating is not a recommendation to purchase, sell, or hold
a financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.

Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.

The ratings are based, in varying degrees, on the following
considerations:

I. Likelihood of payment capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of obligation;

II. Nature of and provisions of the obligation; and

III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.

LONG-TERM ISSUE CREDIT RATINGS

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

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

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

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

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<PAGE>

BB An obligation rated "BB," "B," "CCC," "CC" and "C" is regarded as having
significant speculative B characteristics. "BB" indicates the least
degree of speculation and "C" the highest degree of speculation. CCC
While such bonds will likely have some quality and protective
characteristics, these may be outweighed
CC by large uncertainties or major exposures to adverse conditions.
C
D An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The
"D" rating also will be used upon the filing of a bankruptcy petition or
the taking of a similar action if payments on an obligation are
jeopardized.

Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.

SHORT-TERM ISSUE CREDIT RATINGS

A-1 A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations
is extremely strong.

A-2 A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity
to meet its financial commitment on the obligation is satisfactory.

A-3 A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.

B A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.

C A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.

D A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard
& Poor's believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a bankruptcy
petition or the taking of a similar action if payments on an obligation
are jeopardized.

DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS

Fitch credit ratings are an opinion on the ability of an entity or of a
securities issue to meet financial commitments, such as interest, preferred
dividends, or repayment of principal, on a timely basis.

Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term "AAA" -- "BBB" categories; short-term "F1" --
"F3") indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB" -- "D") either signal a higher probability of default or that a default
has already occurred. Ratings imply no specific prediction of default
probability.

II-3
<PAGE>

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

Fitch credit and other ratings are not recommendations to buy, sell, or
hold any security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of any payments of any security. The ratings are based on
information obtained from issuers, other obligors, underwriters, their experts,
and other sources Fitch believes to be reliable. Fitch does not audit or verify
the truth or accuracy of such information. Ratings may be changed or withdrawn
as a result of changes in, or the unavailability of, information or for other
reasons.

INTERNATIONAL CREDIT RATINGS

Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long- and
short-term ratings assess its general creditworthiness on a senior basis. When
applied to specific issues and programs, these ratings take into account the
relative preferential position of the holder of the security and reflect the
terms, conditions, and covenants attaching to that security.

ANALYTICAL CONSIDERATIONS

When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as well
as developments in the economic and political environment that might affect the
issuer's financial strength and credit quality.

Investment-grade ratings reflect expectations of timeliness of payment.
However, ratings of different classes of obligations of the same issuer may
vary based on expectations of recoveries in the event of a default or
liquidation. Recovery expectations, which are the amounts expected to be
received by investors after a security defaults, are a relatively minor
consideration in investment-grade ratings, but Fitch does use "notching" of
particular issues to reflect their degree of preference in a winding up,
liquidation, or reorganization as well as other factors. Recoveries do,
however, gain in importance at lower rating levels, because of the greater
likelihood of default, and become the major consideration at the "DDD"
category. Factors that affect recovery expectations include collateral and
seniority relative to other obligations in the capital structure.

Variable rate demand obligations and other securities which contain a
demand feature will have a dual rating, such as "AAA/F1+." The first rating
denotes long-term ability to make principal and interest payments. The second
rating denotes ability to meet a demand feature in full and on time.

INTERNATIONAL LONG-TERM CREDIT RATINGS

INVESTMENT GRADE

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

AA VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation of
credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.

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

BBB GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes

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<PAGE>

in circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.

SPECULATIVE GRADE

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

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

CCC HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely CC reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that C default
of some kind appears probable. "C" ratings signal imminent default.

DDD DEFAULT. Securities are not meeting current obligations and are extremely
speculative. "DDD" designates DD the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, D
for example, "DD" indicates expected recovery of 50%-90% of such
outstandings, and "D," the lowest recovery potential, i.e., below 50%.

INTERNATIONAL SHORT-TERM CREDIT RATINGS

A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.

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

F2 GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.

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

B SPECULATIVE. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.

C HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.

D DEFAULT. Denotes actual or imminent payment default.
- ----------
Notes:

"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC," or to short-term ratings other than
"F1."

"NR" indicates that Fitch does not rate the issuer or issue in question.

"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.

RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for a potential downgrade, or "Evolving," if ratings may
be raised, lowered or maintained. RatingAlert is typically resolved over a
relatively short period.

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<PAGE>

Code # 10343-01-99

<PAGE>

PART C. OTHER INFORMATION

ITEM 23. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<S> <C>
1(a) -- Declaration of Trust of the Registrant, dated August 2, 1985.(f)
(b) -- Amendment to Declaration of Trust, dated September 18, 1987.(a)
(c) -- Amendment to Declaration of Trust, dated December 21, 1987.(a)
(d) -- Amendment to Declaration of Trust, dated October 3, 1988.(f)
(e) -- Amendment to Declaration of Trust, dated October 17, 1994 and instrument establishing Class C
and Class D shares of beneficial interest.(f)
(f) -- Instrument establishing Merrill Lynch New York Municipal Bond Fund (the "Fund") as a series of
the Registrant.(f)
(g) -- Instrument establishing Class A and Class B shares of beneficial interest of the Fund.(f)
2 -- By-Laws of the Registrant.(a)
3 -- Portions of the Declaration of Trust, Certificate of Establishment and Designation and By-Laws of
the Registrant defining the rights of holders of the Fund as a series of the Registrant.(b)
4(a) -- Form of Management Agreement between the Registrant and Fund Asset Management, L.P.(a)
(b) -- Supplement to Management Agreement between Registrant and Fund Asset Management, L.P.(e)
5(a) -- Form of Revised Class A Distribution Agreement between the Registrant and Merrill Lynch Funds
Distributor, Inc. (now known as Princeton Funds Distributor, Inc.) (the "Distributor") (including
5(a) Form of Selected Dealers Agreement).(e)
(b) -- Form of Class B Distribution Agreement between the Registrant and the Distributor.(a)
(c) -- Form of Class C Distribution Agreement between the Registrant and the Distributor (including
Form of Selected Dealers Agreement).(e)
(d) -- Form of Class D Distribution Agreement between the Registrant and the Distributor (including
Form of Selected Dealers Agreement).(e)
(e) -- Letter Agreement between the Fund and the Distributor, dated September 15, 1993, in connection
with the Merrill Lynch Mutual Fund Advisor Program.(c)
6 -- None.
7 -- Form of Custody Agreement between the Registrant and State Street Bank and Trust Company.(d)
8 -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between the Registrant and Merrill Lynch Financial Data Services, Inc. (now known as
Financial Data Services, Inc.)(g)
9 -- Opinion of Brown & Wood LLP, counsel to the Registrant.(h)
10 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
11 -- None.
12 -- Certificate of Fund Asset Management, L.P.(a)
13(a) -- Amended and Restated Class B Distribution Plan of the Registrant and Amended and Restated
Class B Distribution Plan Sub-Agreement.(c)
(b) -- Form of Class C Distribution Plan of the Registrant and Class C Distribution Plan
Sub-Agreement.(e)
(c) -- Form of Class D Distribution Plan of the Registrant and Class D Distribution Plan
Sub-Agreement.(e)
14(a) -- Financial Data Schedule for Class A Shares.(i)
(b) -- Financial Data Schedule for Class B Shares.(i)
(c) -- Financial Data Schedule for Class C Shares.(i)
(d) -- Financial Data Schedule for Class D Shares.(i)
15 -- Merrill Lynch Select Pricing(SM) System Plan pursuant to Rule 18f-3.(a)
</TABLE>

- ---------
(a) Filed on January 25, 1996 as an Exhibit to Post-Effective Amendment No. 13
to the Registrant's Registration Statement on Form N-1A (File No. 2-99473)
under the Securities Act of 1933, as amended, relating to shares of the
Fund (the "Registration Statement").

(b) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, as amended, filed as
Exhibits 1(b) and 1(c) with Post-Effective Amendment No. 13 to the
Registration Statement

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<PAGE>

and as Exhibits 1(a), 1(d) and 1(e) with Post-Effective Amendment No. 12 to
the Registration Statement; to the Certificates of Establishment and
Designation establishing the Fund as a series of the Registrant and
establishing Class A and Class B shares of beneficial interest of the Fund,
filed as Exhibits 1(f) and 1(g), respectively, with Post-Effective
Amendments No. 13 and No. 12, respectively, to the Registration Statement;
and to Articles I, V and VI of the Registrant's By-Laws, filed as Exhibit 2
with Post-Effective Amendment No. 13 to the Registration Statement.

(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, filed on October 14, 1994, relating to shares of Merrill Lynch
Minnesota Municipal Bond Fund series of the Registrant (File No.
33-44734).

(e) Filed on October 18, 1994 as an Exhibit to Post-Effective Amendment No. 11
to the Registration Statement.

(f) Filed on January 31, 1995 as an Exhibit to Post-Effective Amendment No. 12
to the Registration Statement.

(g) Incorporated by reference to Exhibit 9 to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, filed on October 20, 1995, relating to shares of Merrill Lynch
Arizona Municipal Bond Fund series of the Registrant (File No. 33-41311).

(h) Previously filed as an exhibit to the Registration Statement.

(i) Filed on November 25, 1998 as an Exhibit to Post-Effective Amendment No. 16
to the Registration Statement.

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

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

ITEM 25. INDEMNIFICATION.

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 matter 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 Trustees 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 in 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 moneys for actions
based upon the Investment Company Act of 1940, as amended 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 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

C-2
<PAGE>

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 Agreements relating to the securities
being offered hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933, as amended ("1933 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 1933 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 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a 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 1933 Act and will be governed by the final adjudication of
such issue.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World
Income Fund, Inc., and The Municipal Fund Accumulation Program, Inc.; and for
the following closed-end registered investment companies: Apex Municipal Fund,
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Corporate High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income Opportunities
Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill Lynch Municipal
Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings California
Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund III, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New York Fund,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York Insured
Fund II, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund,
Inc., MuniYield California Fund, Inc., MuniYield California Insured Fund, Inc.,
MuniYield California Insured Fund II, Inc., MuniYield Florida Fund, MuniYield
Florida Insured Fund, MuniYield Fund, Inc., MuniYield Insured Fund, Inc.,
MuniYield Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc., MuniYield
New Jersey Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Inc., Senior High Income Portfolio, Inc. and Worldwide DollarVest Fund, Inc.

Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the
Manager, 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 Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology Fund, Inc.,
Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Global Value Fund, Inc.,
Merrill Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc.,

C-3
<PAGE>

Merrill Lynch Intermediate Government Bond Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate
Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund,
Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill
Lynch Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc. and
Hotchkis and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM);
and for the following closed-end registered investment companies: Merrill Lynch
High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating Rate
Fund, Inc. MLAM also acts as sub-adviser to Merrill Lynch World Strategy
Portfolio and Merrill Lynch Basic Value Equity Portfolio, two investment
portfolios of EQ Advisors Trust.

The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts
02111-2665. The address of the Manager, MLAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Princeton Funds Distributor, Inc., ("PFD") and of Merrill Lynch
Funds Distributor ("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 10281-1201. The address of
the Fund's transfer agent, Financial Data Services, Inc. ("FDS"), is 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484.

Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
October 1, 1996 for his, her or its own account or in the capacity of director,
officer, partner or trustee. In addition, Mr. Zeikel is President, Mr. Richard
is Treasurer and Mr. Glenn is Executive Vice President of substantially all of
the investment companies described in the first two paragraphs of this Item 26,
and Messrs. Giordano, Harvey, Kirstein and Monagle are officers of one or more
of such companies.

<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
ML & Co .................... Limited Partner Financial Services Holding Company;
Limited Partner of MLAM

Princeton Services ......... General Partner General Partner of MLAM

Arthur Zeikel .............. Chairman Chairman of MLAM; President of FAM and
MLAM from 1977 to 1997; Chairman and
Director of Princeton Services; President of
Princeton Services from 1993 to 1997;
Executive Vice President of ML & Co.

Jeffrey M. Peek ............ President President of MLAM; President and Director
of Princeton Services; Executive Vice
President of ML & Co.; Managing Director
and Co-Head of the Investment Banking
Division of Merrill Lynch in 1997; Senior
Vice President and Director of the Global
Securities and Economics Division of
Merrill Lynch from 1995 to 1997.

Terry K. Glenn ............. Executive Vice President Executive Vice President of MLAM;
Executive Vice President and Director of
Princeton Services; President and Director
of PFD; Director of FDS; President of
Princeton Administrators

Mark A. Desario ............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Linda L. Federici .......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>

C-4
<PAGE>

<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- ------------------------ ---------------------------------------------
<S> <C> <C>
Vincent R. Giordano ......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Elizabeth A. Griffin ........ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Norman R. Harvey ............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Michael J. Hennewinkel ...... Senior Vice President, Senior Vice President, Secretary and General
Secretary and General Counsel of MLAM; Senior Vice President
Counsel of Princeton Services

Philip L. Kirstein .......... Senior Vice President Senior Vice President of MLAM; Senior Vice
President, Secretary and Director of
Princeton Services

Ronald M. Kloss ............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Debra W. Landsman-Yaros ..... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Vice
President of PFD

Stephen M. M. Miller ........ Senior Vice President Executive Vice President of Princeton
Administrators; Senior Vice President of
Princeton Services

Joseph T. Monagle, Jr. ...... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Brian A. Murdock ............ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Gerald M. Richard ........... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of PFD

Gregory D. Upah ............. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services

Ronald L. Welburn ........... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>

ITEM 27. PRINCIPAL UNDERWRITERS.

(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 26 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. The Municipal Fund Accumulation Program, Inc. MLFD also acts as
the principal underwriter for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating Rate Fund, Inc.
A separate division of PFD acts as the principal underwriter of a number of
other investment companies.

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

C-5
<PAGE>

<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH PFD WITH REGISTRANT
- --------------------------------- ------------------------------ ---------------------------
<S> <C> <C>
Terry K. Glenn .................. President and Director Executive Vice President
Michael G. Clark ................ Director None
Thomas J. Verage ................ Director None
Robert W. Cook .................. Senior Vice President None
Michael J. Brady ................ Vice President None
William M. Breen ................ Vice President None
James T. Fatseas ................ Vice President None
Debra W. Landsman-Yaros ......... Vice President None
Michelle T. Lau ................. Vice President None
Gerald M. Richard ............... Vice President and Treasurer Treasurer
Salvatore Venezia ............... Vice President None
William Wasel ................... Vice President None
Robert Harris ................... Secretary None
</TABLE>

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder are maintained at the
offices of the Registrant (800 Scudders Mill Road, Plainsboro, New Jersey
08536), and its transfer agent, Financial Data Services, Inc. (4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484).

ITEM 29. MANAGEMENT SERVICES.

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

ITEM 30. UNDERTAKINGS.

Not applicable.

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<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 Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and the State of New Jersey, on the day of
January, 1999.

MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(Registrant)

By: /s/ GERALD M. RICHARD
-------------------------------------
GERALD M. RICHARD
TREASURER

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date(s) indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------- ------------------------------- -----------------
<S> <C> <C>
ARTHUR ZEIKEL* President and Trustee
---------------------------------- (Principal Executive Officer)
(ARTHUR ZEIKEL)

GERALD M. RICHARD* Treasurer (Principal Financial
---------------------------------- and Accounting Officer)
(GERALD M. RICHARD)

JAMES H. BODURTHA* Trustee
----------------------------------
(JAMES H. BODURTHA)

HERBERT I. LONDON* Trustee
----------------------------------
(HERBERT I. LONDON)

ROBERT R. MARTIN* Trustee
----------------------------------
(ROBERT R. MARTIN)

JOSEPH L. MAY* Trustee
----------------------------------
(JOSEPH L. MAY)

ANDRE F. PEROLD* Trustee
----------------------------------
(ANDRE F. PEROLD)

*By: /s/ GERALD M. RICHARD January , 1999
------------------------------
(GERALD M. RICHARD, ATTORNEY-IN-FACT)
</TABLE>

C-7
<PAGE>

EXHIBIT INDEX

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

INDEPENDENT AUDITORS' CONSENT

Merrill Lynch New York Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:

We consent to the incorporation by reference in this Post-Effective Amendment
No. 17 to Registration Statement No. 2-99473 of our report dated November 9,
1998, appearing in the annual report to shareholders of Merrill Lynch New
York Muncipal Bond Fund for the year ended September 30, 1998, and to the
reference to us under the caption "Financial Highlights" in the Prospectus,
which is a part of such Registration Statement.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Princeton, New Jersey
January 22, 1999