MERRILL LYNCH
MUNICIPAL
INTERMEDIATE
TERM FUND
[GRAPHIC OMITTED]
STRATEGIC
Performance
Quarterly Report
July 31, 1998
<PAGE>
MERRILL LYNCH MUNICIPAL INTERMEDIATE TERM FUND
Officers and Trustees
Arthur Zeikel, President and Trustee
Ronald W. Forbes, Trustee
Cynthia A. Montgomery, Trustee
Charles C. Reilly, Trustee
Kevin A. Ryan, Trustee
Richard R. West, Trustee
Terry K. Glenn, Executive Vice President
Vincent R. Giordano, Senior Vice President
William R. Bock, Vice President
Donald C. Burke, Vice President
Kenneth A. Jacob, Vice President
Gerald M. Richard, Treasurer
Susan B. Baker, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
<PAGE>
Merrill Lynch Municipal Intermediate Term Fund, July 31, 1998
DEAR SHAREHOLDER
The Municipal Market Environment
During the three months ended July 31, 1998, long-term tax-exempt revenue bond
yields moderately declined. Thus far this year, the near absence of inflationary
pressures continued to support low interest rates. However, consistently strong
domestic economic growth has caused some investors to fear that the Federal
Reserve Board will be forced eventually to raise short-term interest rates. Such
action would be taken to ensure that the US economy's present rate of growth
would decelerate before any inflationary pressures could develop.
However, the weakening financial conditions in many Asian countries subsequently
calmed investor fears of Federal Reserve Board intervention, and fixed-income
prices again moved higher. As measured by the Bond Buyer Revenue Bond Index,
long-term uninsured municipal bond yields fell approximately 15 basis points
(0.15%) to end the July quarter at 5.36%. As in late 1997 and early 1998, US
Treasury bond yields benefited from a "flight to quality" as foreign investors
were drawn to the relative safe haven of US Government securities. Long-term US
Treasury bond yields declined approximately 40 basis points to end the July
quarter at 5.71%.
Thus far in 1998, the municipal bond market has experienced unexpectedly strong
supply pressures. These supply pressures have prevented tax-exempt bond yields
from declining as much as US Treasury bond yields. During the first seven months
of 1998, almost $153 billion in new tax-exempt bonds were underwritten, an
increase of almost 50% compared to the same period a year ago. During the
quarter ended July 31, 1998, municipalities issued over $75 billion in new
securities, an increase of nearly 35% compared to the same three-month period in
1997. Additionally, corporate issuers have also viewed current interest rate
levels as an opportunity to issue significant amounts of taxable securities. For
the first half of 1998, over $500 billion in investment-grade corporate bonds
have been underwritten, an increase of more than 70% compared to the same period
a year ago. This sizeable corporate bond issuance has tended to both support
generally higher fixed-income yields and reduce the demand for tax-exempt bonds.
However, the recent pace of new municipal bond issuance is unlikely to be
maintained. Continued increases in bond issuance will require lower and lower
municipal bond yields to generate the economic savings necessary for additional
tax-exempt bond refinancings. Preliminary estimates for 1998 total municipal
bond issuance are in the $200 billion-$225 billion range. These estimates
suggest that recent supply pressures are likely to abate later in the year.
Recently, municipal bond investors received approximately $30 billion in June
and July in coupon payments, bond maturities and proceeds from early
redemptions. The demand generated by these assets has helped to offset the
increase in supply seen thus far this year.
The continued impact of the Asian financial crisis on the US domestic economy's
future growth remains unclear. Current Asian economic conditions continue to
reflect ongoing weakness. Recent trade data indicated that reduced US exports to
these countries might have lowered US economic growth by as much as 2% in the
first half of 1998. Since further trade deterioration is possible in the coming
months, we do not believe the Federal Reserve Board will be willing to raise
interest rates, barring a dramatic and unexpected resurgence of domestic
inflation.
These factors suggest that over the near term, interest rates in general are
unlikely to rise by any appreciable amount. Recent supply pressures have caused
municipal bond yield ratios to rise relative to US Treasury bond yields. At July
31, 1998, long-term tax-exempt bond yields were at attractive yield ratios
relative to US Treasury securities of comparable maturities (over 90%), well in
excess of their expected range of 85%-88%. Tax-exempt bond yield ratios rarely
exceeded 90% in the 1980s and 1990s. Previous instances have usually been
associated with potential changes in Federal tax codes that would have adversely
affected the tax-favored status of municipal bonds. The present situation has
developed largely because of a temporary supply imbalance. These imbalances
should soon be corrected as tax-exempt bond issuance slows from its current
rapid pace later this year. Any further pressure on the municipal market may
well represent a very attractive investment opportunity.
Portfolio Strategy
During the three-month period ended July 31, 1998, we continued to maintain a
constructive outlook toward the municipal market because we believed that the
robust economic growth seen thus far this year would be tempered by the lack of
inflation and the deteriorating situation in Asia. Consequently, we expected
tax-exempt bond yields to trade in a relatively narrow range, with a bias toward
lower bond yields. We maintained a fully invested position in order to seek to
enhance shareholder income and participate in any investment appreciation that
arose.
Looking ahead, we expect to remain fully invested with little change to the
Fund's present structure in an effort to seek to enhance the Fund's dividend and
capital appreciation potential. Current economic fundamentals and a strong
domestic economy with high productivity offset by equally favorable deflationary
pressures from Asia suggest that interest rates could trend lower in the coming
months. We will continue to monitor economic data for any sign of inflationary
pressures so that we can modify our portfolio strategy to a more defensive
posture.
In Conclusion
We thank you for your support of Merrill Lynch Municipal Intermediate Term Fund,
and we look forward to serving your investment needs in the months and years
ahead.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Vincent R. Giordano
Vincent R. Giordano
Senior Vice President
/s/ William R. Bock
William R. Bock
Vice President and
Portfolio Manager
August 28, 1998
2 & 3
<PAGE>
Merrill Lynch Municipal Intermediate Term Fund, July 31, 1998
PERFORMANCE DATA
About Fund Performance
Investors are able to purchase shares of the Fund through the Merrill
Lynch Select Pricing(SM) System, which offers four pricing alternatives:
o Class A Shares incur a maximum initial sales charge (front-end load) of 1%
and bear no ongoing distribution or account maintenance fees. Class A
Shares are available only to eligible investors.
o Class B Shares are subject to a maximum contingent deferred sales charge
of 1% if redeemed during the first year, decreasing 1% thereafter to 0%
after the first year. In addition, Class B Shares are subject to a
distribution fee of 0.10% and an account maintenance fee of 0.20%. These
shares automatically convert to Class D Shares after approximately 10
years. (There is no initial sales charge for automatic share conversions.)
o Class C Shares are subject to a distribution fee of 0.10% and an account
maintenance fee of 0.20%. In addition, Class C Shares are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase.
o Class D Shares incur a maximum initial sales charge of 1% and an account
maintenance fee of 0.10% (but no distribution fee).
None of the past results shown should be considered a representation of
future performance. Figures shown in the "Recent Performance Results" and
"Average Annual Total Return" tables assume reinvestment of all dividends
and capital gains distributions at net asset value on the payable date.
Investment return and principal value of shares will fluctuate so that
shares, when redeemed, may be worth more or less than their original cost.
Dividends paid to each class of shares will vary because of the different
levels of account maintenance, distribution and transfer agency fees
applicable to each class, which are deducted from the income available to
be paid to shareholders.
Average Annual Total Return
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class A Shares*
================================================================================
Year Ended 6/30/98 +7.94% +6.86%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +5.33 +5.12
- --------------------------------------------------------------------------------
Inception (10/31/88) through 6/30/98 +6.72 +6.61
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class B Shares*
================================================================================
Year Ended 6/30/98 +7.60% +6.60%
- --------------------------------------------------------------------------------
Five Years Ended 6/30/98 +5.00 +5.00
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/98 +6.53 +6.53
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
================================================================================
Class C Shares*
================================================================================
Year Ended 6/30/98 +7.48% +6.48%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/98 +6.48 +6.48
- --------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
1 year.
** Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
================================================================================
Class D Shares*
================================================================================
Year Ended 6/30/98 +7.73% +6.65%
- --------------------------------------------------------------------------------
Inception (10/21/94) through 6/30/98 +6.71 +6.42
- --------------------------------------------------------------------------------
* Maximum sales charge is 1%.
** Assuming maximum sales charge.
Recent Performance Results*
<TABLE>
<CAPTION>
Ten Years/ Standardized
12 Month 3 Month Since Inception 30-day Yield
Total Return Total Return Total Return As of 7/31/98
======================================================================================================================
<S> <C> <C> <C> <C>
ML Municipal Intermediate Term Fund Class A Shares +4.93% +2.35% +87.80% 3.96%
- ----------------------------------------------------------------------------------------------------------------------
ML Municipal Intermediate Term Fund Class B Shares +4.60 +2.27 +87.55 3.68
- ----------------------------------------------------------------------------------------------------------------------
ML Municipal Intermediate Term Fund Class C Shares +4.58 +2.26 +26.25 3.67
- ----------------------------------------------------------------------------------------------------------------------
ML Municipal Intermediate Term Fund Class D Shares +4.82 +2.22 +27.32 3.86
======================================================================================================================
</TABLE>
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Total investment returns are
based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset
value on the payable date. The Fund's ten-year/inception dates are: Class
A Shares, 10/31/88; Class B Shares, ten years ended 7/31/98; and Class C
and Class D Shares, 10/21/94.
4 & 5
<PAGE>
Merrill Lynch Municipal Intermediate Term Fund, July 31, 1998
PORTFOLIO COMPOSITION
For the Quarter Ended July 31, 1998
Top Ten States*
California ..................... 16.02%
New York ....................... 14.43
Washington ..................... 10.14
District of Columbia ........... 7.68
Oregon ......................... 5.80
Wyoming ........................ 5.44
Nebraska ....................... 5.02
Minnesota ...................... 4.25
Virginia ....................... 3.86
Colorado ....................... 3.29
------
Total Top Ten .................. 75.93
Total Others ................... 24.07
------
Total Portfolio ................ 100.00%
======
Net assets as of July 31, 1998 were $203,593,955.
Quality Ratings*
(Based on Nationally Recognized Rating Services)
[The following table was depicted as a pie chart in the printed material]
AAA/Aaa 47%
AA/Aa 23%
A/A 18%
BBB/Baa 3%
NR+ 1%
Other++ 8%
* Based on total market value of the portfolio as of July 31, 1998.
+ Not Rated.
++ Temporary investments in short-term municipal securities.
6
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Municipal
Intermediate Term Fund
Merrill Lynch Municipal
Series Trust
Box 9011
Princeton, NJ
08543-9011 10437--7/98
[RECYCLE LOGO] Printed on post-consumer recycled paper
