MERRILL LYNCH SHORT TERM GLOBAL INCOME FUND INC, 485APOS, 1999-02-26

MERRILL LYNCH SHORT TERM GLOBAL INCOME FUND INC
485APOS, 1999-02-26

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1999
SECURITIES ACT FILE NO. 33-34476
INVESTMENT COMPANY ACT FILE NO. 811-6089
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
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. 7 [X]

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

AMENDMENT NO. 10 [X]

(CHECK APPROPRIATE BOX OR BOXES)

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

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

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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 SHORT-TERM GLOBAL INCOME FUND, INC.

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 FUND: 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.
</TABLE>

---------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 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: Common Stock, par value $.10 per share.

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

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT USE THIS PROSPECTUS TO SELL SECURITIES UNTIL THE REGISTRATION STATEMENT
CONTAINING THIS PROSPECTUS, WHICH HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.

[PROSPECTUS GRAPHIC APPEARS HERE]

[MERRILL LYNCH LOGO APPEARS HERE]

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED FEBRUARY 26, 1999

Merrill Lynch Short-Term Global Income Fund, Inc.

[PROSPECTUS GRAPHIC APPEARS HERE]

April , 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> <C>
PAGE
[KEY FACTS GRAPHIC HERE]

KEY FACTS
------------------------------------------------------------------
The Merrill Lynch Short-Term Global Income Fund at a Glance......3
Risk/Return Bar Chart............................................5
Fees and Expenses................................................7

[DETAILS ABOUT THE FUND GRAPHIC HERE]

DETAILS ABOUT THE FUND
------------------------------------------------------------------
How the Fund Invests.............................................9
Investment Risks................................................10

[YOUR ACCOUNT GRAPHIC HERE]

YOUR ACCOUNT
------------------------------------------------------------------
Merrill Lynch Select PricingSM System...........................18
How to Buy, Sell, Transfer and Exchange Shares..................23
Participation in Merrill Lynch Fee-Based Programs...............27

[MANAGEMENT OF THE FUND GRAPHIC HERE]

MANAGEMENT OF THE FUND
------------------------------------------------------------------
Merrill Lynch Asset Management..................................29
Financial Highlights............................................30

[FOR MORE INFORMATION GRAPHIC HERE]

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

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
<PAGE>

[KEY FACTS GRAPHIC HERE]

THE MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND
AT A GLANCE
- --------------------------------------------------------------------------------

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

MATURITY -- the time at which the principal amount of a bond is scheduled to be
returned to investors.

FIXED INCOME SECURITY --
security that pays a fixed rate of interest or a fixed dividend.

GOVERNMENT OBLIGATIONS --
fixed income securities issued by a government or its agencies or
instrumentalities, as distinct from securities issued by corporations.

CORPORATE BOND OR NOTE --
a fixed income debt security issued by a corporation, as distinct from one
issued by a government agency or instrumentality.

YIELD -- the income generated by an investment in the Fund.

What is the Fund's investment objective?

The investment objective of the Fund is to seek a high level of current income
from a global portfolio of high quality debt securities denominated in various
currencies and multinational currency units and having remaining MATURITIES not
exceeding three years.

What are the Fund's main investment strategies?

The Fund tries to achieve its goals by investing in a non-diversified portfolio
of FIXED INCOME SECURITIES, such as GOVERNMENT OBLIGATIONS, CORPORATE BONDS AND
NOTES, mortgage backed securities and securities whose potential investment
return is based on the change in a particular index or rate. U.S. and foreign
companies and governments and supranational entities may issue these
securities. Other than government obligations, the securities in which the Fund
invests are rated in the top two highest rating categories of recognized rating
agencies or determined to be of comparable quality by the Fund's Board of
Directors and Investment Adviser.

The Fund is designed to seek a higher amount of YIELD than a money market fund
and less fluctuation in the Fund's net asset value than a longer term global
bond fund. The Investment Adviser manages the Fund using a multi-market
strategy. This means that the Investment Adviser allocates the Fund's
investments among securities denominated in the currencies of a number of
foreign countries based on the Investment Adviser's assessment of yields,
market and economic conditions and the expected changes in currencies of
various countries relative to each other. Within each country, the Investment
Adviser may allocate the Fund's investments to different types of securities.
Generally, the Fund will invest at least 25% of its total assets in debt
securities issued by banks.

The Fund may invest in debt securities denominated in any currency. It will not
invest more than 25% of its total assets in a single currency other than the
U.S. dollar. Generally, the Fund will invest in securities denominated in at
least three currencies, including the U.S. dollar. The Fund will not invest in
countries that the Investment Adviser does not consider to have stable
governments or whose currencies are not convertible into U.S. dollars.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
3
<PAGE>

THE MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND
AT A GLANCE
- --------------------------------------------------------------------------------
[KEY FACTS GRAPHIC HERE]

Key Facts

FOREIGN SECURITIES -- securities issued by a foreign corporation or government,
as distinct from securities issued by a U.S. corporation or the U.S.
government.

The Fund may seek to hedge its portfolio securities against currency risks, and
to a lesser extent, interest rate risks through the use of derivatives,
including options, futures, options on futures and currency transactions.

We cannot guarantee that the Fund will achieve its goals.

What are the main risks of investing in the Fund?

As with any fund, the value of the Fund's investments -- and therefore the
value of the Fund's 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 fixed
income securities goes down. If the value of the Fund's investments goes down,
you may lose money.

The Fund will invest in FOREIGN SECURITIES. Foreign investing involves special
risks -- including foreign currency risk and the possibility of substantial
volatility due to adverse political, economic or other developments. Foreign
securities may also be less liquid and harder to value than U.S. securities.

The Fund's policy of concentrating its investments in the banking industry will
cause the Fund to have greater exposure to certain risks associated with that
industry, such as the impact of bank regulation, increases in interest rates
and exposure to credit losses.

The Fund is a non-diversified fund, which means that it may invest more of its
assets in fewer companies than if it were a diversified fund. By concentrating
in a smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.

Who should invest?

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

o Are looking for an investment that provides current income.

o Want a professionally managed portfolio without the administrative
burdens of direct investments in global bonds.

o Are willing to accept the risk of loss of income and principal caused by
negative economic developments, changes in interest rates or adverse
changes in the price of bonds generally.

o Are willing to accept the risks of foreign investing in order to seek
potentially higher long term returns.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
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 complete calendar year since the Fund's inception.
Sales charges are not reflected in the bar chart. If these amounts were
reflected, returns would be less than those shown. The table compares the
average annual total returns for each class of the Fund's shares for the
periods shown with those of the Merrill Lynch Global Government Bond Index and
the Salomon Brothers World Government One-Three Year Bond Index. How the Fund
performed in the past is not necessarily an indication of how the Fund will
perform in the future.

[RISK/RETURN BAR CHART HERE]

6.63% -3.39% 6.15% -3.30% 6.31% 4.52% 30.8% 4.52%
- ---------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998

During the period shown in the bar chart, the highest return for a quarter was
2.88% (quarter ended June 30, 1992) and the lowest return for a quarter was
- -7.13% (quarter ended September 30, 1992). The year-to-date return as of March
31, 1999 was %.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
5
<PAGE>

RISK/RETURN BAR CHART

[KEY FACTS GRAPHIC HERE]

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

Key Facts

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(AS OF THE CALENDAR YEAR ENDED PAST PAST SINCE
DECEMBER 31, 1998) ONE YEAR FIVE YEARS INCEPTION
- ---------------------------------- ---------- ------------ --------------
<S> <C> <C> <C>
Merrill Lynch Short-Term Global
Income Fund* Class A 1.27% N/A 4.04%+
Merrill Lynch Global Government
Bond Index** 9.45% N/A 5.56%
Salomon Brothers World Government
One-three Year Bond Index*** 7.31% N/A 7.77%
- ---------------------------------- ---- ---- ------
Merrill Lynch Short-Term Global
Income Fund* Class B 0.52% 2.97% 3.25%++
Merrill Lynch Global Government
Bond Index** 9.45% 5.83% 7.47%
Salomon Brothers World Government
One-three Year Bond Index*** 7.31% 6.57% 7.05%
- ---------------------------------- ---- ---- ------
Merrill Lynch Short-Term Global
Income Fund* Class C 3.37% N/A 3.42%+
Merrill Lynch Global Government
Bond Index** 9.45% N/A 5.65%
Salomon Brothers World Government
One-three Year Bond Index*** 7.31% N/A 7.77%
- ---------------------------------- ---- ---- ------
Merrill Lynch Short-Term Global
Income Fund* Class D# 0.76% 2.66% 3.31%++
Merrill Lynch Global Government
Bond Index** 9.45% 5.83% 7.47%
Salomon Brothers World Government
One-three Year Bond Index*** 7.31% 6.57% 7.05%
- ---------------------------------- ---- ---- ------
</TABLE>

* Includes sales charge.

** This unmanaged index is comprised of global government bonds maturing in one
to three years. Performance data is as of October 21, 1994 for Class A and
Class C shares and August 3, 1990 for Class B and Class D shares. Past
performance is not predictive of future performance.

*** This unmanaged index is comprised of global government bonds maturing in one
to three years hedged into U.S. dollars. Performance data is as of October
21, 1994 for Class A and Class C shares and July 31, 1990 for Class B and
Class D shares. Past performance is not predictive of future performance.

+ Inception date is October 21, 1994.

++ Inception date is August 3, 1990.

# As a result of the implementation of the Merrill Lynch Select PricingSM
System, Class A shares outstanding prior to October 21, 1994, were
redesignated Class D shares. Historical performance information pertaining
to these shares is included here.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
6
<PAGE>

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

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 Investment Adviser for managing the Fund.

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

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

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 0.75% 0.80% 0.25%
Other Expenses (including transfer agency
fees)(f) 0.29% 0.35% 0.41% 0.30%
Total Annual Fund Operating Expenses(g) 0.84% 1.65% 1.76% 1.10%
- ------------------------------------------------- -------- ------ ------ --------
</TABLE>

(a) Class B shares automatically convert to Class D shares about ten years
after you buy them and will no longer be subject to distribution fees.

(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 pays the Investment Adviser a fee at the annual rate of 0.55% of
the average daily net assets of the Fund for the first $2 billion; 0.525%
of the average daily net assets from $2 billion to $4 billion; 0.50% of
the average daily net assets from $4 billion to $6 billion; 0.475% of the
average daily net assets from $6 billion to $10 billion; 0.45% of the
average daily net assets from $10 billion to $15 billion; and 0.425% of
the average daily net assets above $15 billion. For the fiscal year ended
December 31, 1998, the Investment Adviser 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 December 31, 1998, the Fund paid the Transfer Agent fees totaling
$257,882. The Investment Adviser provides accounting services to the Fund
at its cost. For the fiscal year ended December 31, 1998, the Fund
reimbursed the Investment Adviser $56,427 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 SHORT-TERM GLOBAL INCOME FUND, INC.
7
<PAGE>

[KEY FACTS GRAPHIC HERE]

Key Facts

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 $482 $657 $847 $1,396
Class B $568 $720 $897 $1,955
Class C $279 $554 $954 $2,073
Class D $508 $736 $982 $1,687
- ---------- ---- ---- ---- ------
</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 $482 $657 $847 $1,396
Class B $168 $520 $897 $1,955
Class C $179 $554 $954 $2,073
Class D $508 $736 $982 $1,687
- ---------- ---- ---- ---- ------
</TABLE>

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
8
<PAGE>

[DETAILS ABOUT THE FUND GRAPHIC HERE]

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

ABOUT THE
PORTFOLIO MANAGER

Edward F. Gobora is a Vice President and the portfolio manager of the Fund. Mr.
Gobora has been a Vice President and Portfolio Manager of Merrill Lynch Asset
Management since 1993 and has been associated with Merrill Lynch Asset
Management since 1988.

ABOUT THE
INVESTMENT ADVISER

The Fund is managed by Merrill Lynch Asset Management.

The main goal of the Fund is a high level of current income. The Fund invests
in a non-diversified global portfolio of high quality fixed income securities
denominated in various currencies and multinational currency units having
remaining maturities not exceeding three years. The securities in which the
Fund may invest include government obligations and debt securities issued by
supranational entities, corporations and financial institutions. Under normal
circumstances, the Fund will invest at least 25% of its total assets in debt
instruments issued by U.S. and foreign companies engaged in the banking
industry, including bank holding companies. The Fund may also invest in
participations in, or bonds or notes backed by, pools of mortgages or other
assets or receivables with remaining maturities of three years or less.

The Fund will normally invest a significant portion of its investments in short
term debt securities and cash or cash equivalents (including repurchase
agreements) denominated in U.S. dollars or foreign currencies ("money market
securities"). Money market securities include short term government
obligations; bank instruments, including certificates of deposit, bankers'
acceptances and deposit notes (including Yankeedollar and Eurodollar
obligations); and commercial paper. Yankeedollar obligations are debt
securities issued by U.S. branches or subsidiaries of foreign depository
institutions. Eurodollar obligations are debt securities issued by foreign
branches or subsidiaries of U.S. depository institutions. Yankeedollar and
Eurodollar obligations and obligations of branches or subsidiaries may be
general obligations of the parent bank or may be limited to the issuing branch
or subsidiary.

The Fund may invest in debt securities denominated in any currency or
multinational currency unit, including the Euro. It is anticipated that the
Fund will invest primarily in securities denominated in the currencies of the
United States, Japan, Canada, Western European nations, New Zealand or
Australia. Further, the Fund expects that the securities in which it invests
will be issued primarily by entities located in these countries and by
supranational entities. Normally, the Fund will not invest more than 25% of its
total assets in debt securities denominated in a single currency or currency
unit other than the U.S. dollar. Under adverse circumstances, however, the Fund
may invest solely in one market or in one currency.

To minimize the credit risk of its securities, the Fund will invest only in
high quality securities. High quality securities are government obligations,
securities issued by supranational entities and securities rated AA or better
by Standard & Poor's and Fitch IBCA, Inc. or Aa or better by Moody's Investors

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
9
<PAGE>

[DETAILS ABOUT THE FUND GRAPHIC HERE]

Details About the Fund

Service, Inc. (or A-1 or better by Standard & Poor's or Prime-1 by Moody's in
the case of commercial paper) or determined by the Fund's Board and the
Investment Adviser to be of similar quality.

The Fund may invest in indexed securities. Indexed securities are securities
whose potential investment return is based on the change in some specified
value such as the change in interest rates or in the value of a bond index or
in some other particular measurement. For example, the Fund may invest in
securities that pay a higher rate of interest and principal when the value of
the index increases and lower interest and principal when the index decreases.
Alternatively, the Fund may invest in inverse securities that pay a higher rate
of interest and principal when the index decreases and a lower rate of interest
and principal when it increases. The Fund will purchase indexed securities to
generate current income or for currency hedging purposes, and will not
speculate through such obligations.

The Fund may invest up to 15% of its assets in illiquid securities that it
cannot easily resell. These securities may include securities for which there
is no readily available market and certain asset backed and receivable backed
securities. Other possibly illiquid securities in which the Fund may invest are
securities that have contractual or legal restrictions on resale, known as
restricted securities, including Rule 144A securities that can be resold to
qualified institutional buyers but not to the general public.

The Fund may use derivatives to hedge its portfolio against interest rate and
currency risks. The derivatives which the Fund may use include options on
portfolio positions or currencies, financial and currency futures, options on
such futures and forward foreign currency transactions.

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

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

MARKET AND SELECTION RISK -- Market risk is the risk that the bond market in
one or more countries in which the Fund invests will go down in value,
including the possibility that the market will go down sharply and

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
10
<PAGE>

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.

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 fixed
income securities 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.

CONCENTRATION RISK -- The Fund is a nondiversified fund. By concentrating in a
smaller number of investments, the Fund's risk is increased because each
investment has a greater effect on the Fund's performance.

FOREIGN MARKET RISK -- Since the Fund invests in foreign securities, it offers
the potential for more diversification than an investment only in the United
States. This is because securities traded on foreign markets have often (though
not always) performed differently from securities in the United States.
However, such investments involve special risks not present in U.S. investments
that can increase the chances that the Fund will lose money. In particular, the
Fund is subject to the risk that because there are generally fewer investors on
foreign exchanges and a smaller number of securities traded each day, it may
make it difficult for the Fund to buy and sell securities on those exchanges.
In addition, prices of foreign securities may go up and down more than prices
of securities traded in the United States.

FOREIGN ECONOMY RISK -- The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures.

Investments in foreign markets may also be adversely affected by governmental
actions such as the imposition of capital controls, nationalization of
companies or industries, expropriation of assets or the imposition of punitive
taxes. In addition, the governments of certain countries may prohibit or impose
substantial restrictions on foreign investing in their capital markets or in

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
11
<PAGE>

[DETAILS ABOUT THE FUND GRAPHIC HERE]

Details About the Fund

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

CURRENCY RISK -- Securities in which the Fund invests may be denominated or
quoted in currencies other than the U.S. dollar. Changes in foreign currency
exchange rates affect the value of the Fund's portfolio. Generally, when the
U.S. dollar rises in value against a foreign currency, a security denominated
in that currency loses value because the currency is worth fewer U.S. dollars.
Conversely, when the U.S. dollar decreases in value against a foreign currency,
a security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as "currency risk," means
that a stronger U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.

GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS -- Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Some countries may not have laws
to protect investors the way that the U.S. securities laws do. For example,
some countries may have no laws or rules against insider trading. Insider
trading occurs when a person buys or sells a company's securities based on
non-public information about that company. Accounting standards in other
countries are not necessarily the same as in the United States. If the
accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for the Fund's management to completely
and accurately determine a company's financial condition. Also, brokerage
commissions and other costs of buying or selling securities often are higher in
foreign countries than they are in the United States. This reduces the amount
the Fund can earn on its investments.

CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES -- The Fund
generally holds its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets if
a

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
12
<PAGE>

foreign bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Fund to buy, sell and
hold securities in certain foreign markets than in the U.S. The increased
expense of investing in foreign markets reduces the amount the Fund can earn on
its investments and typically results in a higher operating expense ratio for
the Fund than investment companies invested only in the U.S.

13
<PAGE>

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

EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") -- Certain European countries have
joined EMU in an effort to, among other things, reduce barriers between
countries, increase competition among companies, reduce government subsidies in
certain industries and reduce or eliminate currency fluctuations among these
countries. EMU has established a single common European currency (the "euro")
that was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1, 2002. Certain securities
(beginning with government and corporate bonds) were redenominated in the euro,
and are listed, trade and make dividend and other payments only in euros.
Although EMU is generally expected to have a beneficial effect, it could
negatively affect the Fund in a number of situations, including as follows:

o If the transition to the euro, or EMU as a whole, does not proceed as
planned, the Fund's investments could be adversely affected. For
example, sharp currency fluctuations, exchange rate volatility and
other disruptions of the markets could occur.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
14
<PAGE>

[DETAILS ABOUT THE FUND GRAPHIC HERE]

Details About the Fund

o Withdrawal from EMU by a participating country could also have a negative
effect on the Fund's investments, for example, if securities
redenominated in euros are transferred back into that country's national
currency.

o Computer, accounting and trading systems must be capable of recognizing
the euro as a distinct currency. If not properly addressed, this may
negatively affect the operations of the companies the Fund invests in.

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

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 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 other fixed rate
securities. Both indexed securities and inverse floaters are derivative
securities and can be considered speculative.

MORTGAGE AND ASSET BACKED SECURITIES -- Mortgage and asset backed securities
represent the right to receive a portion of principal and/or interest payments
made on a pool of residential or commercial mortgage loans or other types of
receivables. When interest rates fall, borrowers may refinance or otherwise
repay principal on their loans earlier than scheduled. When this happens,
certain types of mortgage and asset backed securities will be paid off more
quickly than originally anticipated and the Fund will have to invest the
proceeds in securities with lower yields. This risk is known as "prepayment
risk." When interest rates rise, certain types of mortgage and asset backed
securities will be paid off more slowly than originally anticipated and the
value of these securities will fall. This risk is known as "extension risk."
Certain asset backed securities may be illiquid.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
15
<PAGE>

Because of prepayment risk and extension risk, mortgage and asset backed
securities react differently to changes in interest rates than other fixed
income securities. Small movements in interest rates (both increases and
decreases) may quickly and significantly reduce the value of certain mortgage
and asset backed securities.

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

ILLIQUID SECURITIES -- 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.

RESTRICTED SECURITIES -- Restricted securities have contractual or legal
restrictions on their resale. They include private placement securities that
the Fund buys directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.

Restricted securities may be illiquid. The Fund may be unable to sell them on
short notice or may be able to sell them only at a price below current value.
The Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, the Fund will not be able to
sell the security.

RULE 144A SECURITIES -- Rule 144A securities are restricted securities that
can be resold to qualified institutional buyers but not to the general public.
Rule 144A securities may have an active trading market, but carry the risk that
the active trading market may not continue.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
16
<PAGE>

[DETAILS ABOUT THE FUND GRAPHIC HERE]

Details About the Fund

DERIVATIVES -- The Fund may use derivative instruments including futures,
forwards, options, indexed securities and inverse securities. Derivatives are
financial instruments whose value is derived from another security, a commodity
(such as oil or gold) or an index, such as the Standard & Poor's Composite 500
Index. 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.

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

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 not choose
to do so.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
17
<PAGE>

SECURITIES LENDING -- The Fund may lend securities to financial institutions
which provide government securities as collateral. Securities lending involves
the risk that the borrower may fail to return the securities in a timely manner
or at all. As a result, the Fund may lose money and there may be a delay in
recovering the loaned securities. The Fund could also lose money if it does not
recover the securities and the value of the collateral falls. These events
could trigger adverse tax consequences to the Fund.

REPURCHASE AGREEMENTS; PURCHASE AND SALE CONTRACTS -- The Fund may enter into
certain types of repurchase agreements or purchase and sale contracts. Under a
repurchase agreement, the seller agrees to repurchase a security (typically a
security issued or guaranteed by the U.S. Government) at a mutually agreed upon
time and price. This insulates the Fund from changes in the market value of the
security during the period, except for currency fluctuations. A purchase and
sale contract is similar to a repurchase agreement, but purchase and sale
contracts provide that the purchaser receives any interest on the security paid
during the period. If the seller fails to repurchase the security in either
situation and the market value declines, the Fund may lose money.

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 SHORT-TERM GLOBAL INCOME FUND, INC.
18
<PAGE>

[YOUR ACCOUNT GRAPHIC HERE]

Your Account

MERRILL LYNCH SELECT PRICINGSM 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 0.25%. You may be eligible for a sales
charge waiver.

If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.50% with
respect to Class B shares and 0.55% with respect to Class C shares and an
account maintenance fee of 0.25%. 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.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
19
<PAGE>

The table below summarizes key features of the Merrill Lynch Select PricingSM
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 Certain Reitrement other securities other securities other securities
Plans dealers. dealers. dealers.
o Participants in
certain Merrill
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 0.25% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.50% Distribution 0.55% Distribution No Distribution Fee.
Fee. Fee.
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
</TABLE>

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
20
<PAGE>

[YOUR ACCOUNT GRAPHIC HERE]

Your Account

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. A sales charge of 0.75% will be
charged on purchases of $1,000,000 or more of Class A or Class D shares by
certain employer sponsored retirement or savings plans.

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

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

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

o Merrill Lynch BlueprintSM Program participants.

o TMASM Managed Trusts.

o Certain Merrill Lynch investment or central asset accounts.

o Certain employer-sponsored retirement or savings plans.

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

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
21
<PAGE>

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

o Certain Merrill Lynch fee-based programs.

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

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

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

As a result of the implementation of the Merrill Lynch Select PricingSM System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares offered here differ from the
Class A shares offered prior to October 21, 1994, in many respects, including
eligible investors, sales charges and exchange privilege.

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 0.50% with respect to Class B shares and 0.55% with
respect to Class C shares and account maintenance fees of 0.25% 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 SHORT-TERM GLOBAL INCOME FUND, INC.
22
<PAGE>

[YOUR ACCOUNT GRAPHIC HERE]

Your Account

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

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

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

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
23
<PAGE>

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.

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 longer 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 SHORT-TERM GLOBAL INCOME FUND, INC.
24
<PAGE>

[YOUR ACCOUNT GRAPHIC HERE]

Your Account

<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

<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 20. Be sure to
read this prospectus carefully.
--------------------------------------------------------------------------
The minimum initial investment for the Fund is $1,000 for all
accounts except:
o $250 for certain Merrill Lynch fee-based programs
o $100 for retirement plans
(The minimums for initial investments may be waived or reduced
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 for all
Investment accounts except that retirement plans have a minimum additional
purchase of $1.
(The minimums 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.
===========================================================================
</TABLE>

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
25
<PAGE>

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- -------------------- ------------------------------- ------------------------------------------------------------------------
<S> <C><C> <C>
Transfer Shares to Transfer to a You must either:
Another Securities non-participating securities o Transfer your shares to an account with the Transfer Agent; or
Dealer (continued) dealer o Sell your shares.
==================== =============================== ========================================================================
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.
========================================================================
</TABLE>

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
26
<PAGE>

[YOUR ACCOUNT GRAPHIC HERE]

Your Account

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
- ---------------- --------------------------------- ------------------------------------------------------------------------
<S> <C><C> <C>
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.
========================================================================
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 SHORT-TERM GLOBAL INCOME FUND, INC.
27
<PAGE>

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. Foreign securities owned by the Fund may trade
on weekends or other days when the Fund does not price its shares. As a result,
the Fund's net asset value may change on days when you will not be able to
purchase or redeem the Fund's shares.

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

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

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

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

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

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
28
<PAGE>

[YOUR ACCOUNT GRAPHIC HERE]

Your Account

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

"BUYING A DIVIDEND"

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

However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.

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

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

The Fund will distribute any net investment income and any net realized long or
short term capital gains at least annually. The Fund may also pay a special
distribution at or about 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 in cash, contact your Merrill Lynch Financial Consultant. If
your account is with the Transfer Agent and you would like to receive dividends
in cash, contact the Transfer Agent.

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

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

Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. You may be
able to claim a credit or take a deduction for foreign taxes paid by the Fund
if certain requirements are met.

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

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

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
29
<PAGE>

[MANAGEMENT OF THE FUND GRAPHIC HERE]

MERRILL LYNCH ASSET MANAGEMENT
- --------------------------------------------------------------------------------

Merrill Lynch Asset Management, the Fund's Investment Adviser, manages the
Fund's investments and its business operations under the overall supervision of
the Fund's Board of Directors. The Investment Adviser has the responsibility
for making all investment decisions for the Fund. The Investment Adviser has a
sub-advisory agreement with Merrill Lynch Asset Management U.K. Limited, an
affiliate, under which the Investment Adviser may pay a fee for services it
receives. The Fund pays the Investment Adviser a fee at the annual rate of
0.55% of the average daily net assets of the Fund for the first $2 billion;
0.525% of the average daily net assets from $2 billion to $4 billion; 0.50% of
the average daily net assets from $4 billion to $6 billion; 0.475% of the
average daily net assets from $6 billion to $10 billion; 0.45% of the average
daily net assets from $10 billion to $15 billion; and 0.425% of the average
daily net assets above $15 billion. For the fiscal year ended December 31,
1998, the Investment Adviser received a fee equal to 0.55% of the Fund's
average daily net assets.

Merrill Lynch Asset Management is part of Merrill Lynch Asset Management Group,
which 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 companies in which the
Fund invests, and this could hurt the Fund's investment returns.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
30
<PAGE>

[MANAGEMENT OF THE FUND 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 periods shown. 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 FOR THE
PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 1 YEAR OCT. 21,
DECEMBER 31, 1995 TO ENDED 1994+ TO
----------------------------------- DEC. 31, OCT. 31, OCT. 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996++ 1995++ 1995++ 1994++
- ------------------------------------------- ----------- ----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ $ 7.89 $ 7.91 $ 7.93 $ 8.11 $ 8.11
Investment income -- net .42 .54 .09 .49 .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net (.13) (.06) (.02) (.12) --
Total from investment operations .29 .48 .07 .37 .01
Less dividends and distributions:
Investment income -- net (.39) (.44) (.09) (.27) --
Return of capital -- net (.03) (.06) -- (.28) (.01)
Total dividends and distributions (.42) (.50) (.09) (.55) (.01)
Net asset value, end of period $ $ 7.76 $ 7.89 $ 7.91 $ 7.93 $ 8.11
TOTAL INVESTMENT RETURN:**
Based on net asset value per share % 3.77% 6.29% .92%# 4.62% .12%#
RATIOS TO AVERAGE NET ASSETS:
Expenses % .76% .95% 1.02%* .96% .97%*
Investment income -- Net % 5.39% 6.45% 6.91%* 6.75% 6.28%*
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ $ 18 $ 3 $ 75 $ 66 $ 59
Portfolio turnover % 287.81% 349.34% 25.09% 312.13% 259.50%
- ------------------------------------------- -------- --------- --------- ------- --------- --------

<CAPTION>
CLASS B
-------------------------------------------------------------------------
FOR THE
PERIOD FOR THE YEAR
FOR THE YEAR ENDED NOV. 1 ENDED
DECEMBER 31, 1995 TO OCTOBER 31,
-------------------------------- DEC. 31, -------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1998 1997 1996++ 1995++ 1995++ 1994++
- ------------------------------------------- ------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ $ 7.81 $ 7.90 $ 7.93 $ 8.10 8.65
Investment income -- net .35 .44 .08 .47 .50
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net (.12) (.09) (.03) (.15) (.58)
Total from investment operations .23 .35 .05 .32 (.08)
Less dividends and distributions:
Investment income -- net (.32) (.38) (.08) (.24) --
Return of capital -- net (.03) (.06) -- (.25) (.47)
Total dividends and distributions (.35) (.44) (.08) (.49) (.47)
Net asset value, end of period $ $ 7.69 $ 7.81 $ 7.90 $ 7.93 $ 8.10
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 3.08% 4.52% .66%# 3.96% (1.02)%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.62% 1.74% 1.80%* 1.73% 1.52%
Investment income -- Net 4.59% 5.62% 6.13%* 5.95% 5.68%
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ $160,096 $239,419 $376,049 $398,136 $750,750
Portfolio turnover 287.81% 349.34% 25.09% 312.13% 259.50%
- ------------------------------------------- -------- -------- -------- -------- --------
</TABLE>

* Annualized.

** Total investment returns exclude the effects of sales loads.

+ Commencement of operations.

++ Based on average shares outstanding.

# Aggregate total investment return.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
31
<PAGE>

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

<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------
FOR THE FOR THE
PERIOD FOR THE PERIOD
FOR THE YEAR ENDED NOV. 1, YEAR OCT. 21,
DECEMBER 31, 1995 TO ENDED 1994+ TO
INCREASE (DECREASE) IN ----------------------------------- DEC. 31, OCT. 31, OCT. 31,
NET ASSET VALUE: 1998 1997 1996++ 1995++ 1995++ 1994++
- ---------------------------------------- ----------- ----------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $ $ 7.67 $ 7.72 $ 7.74 $ 8.10 $ 8.11
Investment income -- net .35 .38 .08 .35 .01
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net (.09) (.01) (.02) (.28) (.01)
Total from investment operations .26 .37 .06 .07 --
Less dividends and distributions:
Investment income -- net (.32) (.37) (.08) (.21) --
Return of capital -- net (.03) (.05) -- (.22) (.01)
Total dividends and distributions (.35) (.42) (.08) (.43) (.01)
Net asset value, end of period $ $ 7.58 $ 7.67 $ 7.72 $ 7.74 $ 8.10
TOTAL INVESTMENT RETURN:**
Based on net asset value per share % 3.42% 4.93% .78%# .89% .00%#
RATIOS TO AVERAGE NET ASSETS:
Expenses % 1.60% 1.73% 1.83%* 1.83% 2.14%*
Investment income -- net % 4.46% 5.23% 6.09%* 5.99% 5.63%*
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $ $ 344 $ 155 $ 103 $ 109 $ 1
Portfolio turnover % 287.81% 349.34% 25.09 % 312.13% 259.50%
- ---------------------------------------- -------- --------- --------- ------- --------- --------

<CAPTION>
CLASS D
--------------------------------------------------------------------
FOR THE
PERIOD
FOR THE YEAR ENDED NOV. 1, FOR THE YEAR ENDED
DECEMBER 31, 1995 TO OCTOBER 31,
INCREASE (DECREASE) IN ------------------------------ DEC. 31, ------------------------
NET ASSET VALUE: 1998 1997 1996++ 1995++ 1995++ 1994++
- ---------------------------------------- ------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $ $ 7.81 $ 7.90 $ 7.93 $ 8.11 $ 8.66
Investment income -- net .40 .48 .09 .52 .54
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net (.11) (.09) (.03) (.17) (.58)
Total from investment operations .29 .39 .06 .35 (.04)
Less dividends and distributions:
Investment income -- net (.37) (.42) (.09) (.26) --
Return of capital -- net (.03) (.06) -- (.27) (.51)
Total dividends and distributions (.40) (.48) (.09) (.53) (.51)
Net asset value, end of period $ $ 7.70 $ 7.81 $ 7.90 $ 7.93 $ 8.11
TOTAL INVESTMENT RETURN:**
Based on net asset value per share 3.77% 5.09% .75%# 4.40% (.51)%
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.08% 1.20% 1.27%* 1.20% 1.01%
Investment income -- net 5.13% 6.13% 6.67%* 6.49% 6.19%
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands) $ $13,225 $ 17,948 $24,240 $ 26,619 $48,879
Portfolio turnover 287.81% 349.34% 25.09% 312.13% 259.50%
- ---------------------------------------- -------- -------- ------- -------- -------
</TABLE>

* Annualized.

** Total investment returns exclude the effects of sales loads.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
32
<PAGE>

[MANAGEMENT OF THE FUND GRAPHIC HERE]

POTENTIAL
INVESTORS
Open an account (two options).

(1)
MERRILL LYNCH
FINANCIAL CONSULTANT
OR SECURITIES DEALER
Advises shareholders on their Fund investments.

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.

(2)
TRANSFER AGENT
FINANCIAL DATA SERVICES, INC.
P.O. Box 45289
Jacksonville, Florida 32232-5289
Performs recordkeeping and reporting services.

THE FUND
THE BOARD OF DIRECTORS
OVERSEES THE FUND.

COUNSEL
BROWN & WOOD LLP
One World Trade Center
New York, New York 10048-0557
Provides legal advice to the Fund.

INDEPENDENT AUDITORS
DELOITTE & TOUCHE LLP
117 Campus Drive
Princeton, New Jersey 08540-6400
Audits the financial statements
of the Fund on behalf of the shareholders.

CUSTODIAN
THE CHASE MANHATTAN BANK
GLOBAL SECURITIES SERVICES
4 Chase MetroTech Center,
18th Floor
Brooklyn, New York 11245
Holds the Fund's assets for safekeeping.

INVESTMENT ADVISER
MERRILL LYNCH ASSET MANAGEMENT, L.P.
ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Plainsboro, New Jersey 08536
MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day activities.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
33
<PAGE>

[FOR MORE INFORMATION GRAPHIC HERE]

SHAREHOLDER REPORTS

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

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

STATEMENT OF ADDITIONAL INFORMATION

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

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

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

You should rely only on the information contained in this Prospectus. No one is
authorized to provide you with information that is different from information
contained in this Prospectus.

Investment Company Act file #811-6089
Code #11099-04-99

(c)Merrill Lynch Asset Management, L.P.

[PROSPECTUS GRAPHIC HERE]

[MERRILL LYNCH LOGO HERE]

Merrill Lynch
Short-Term
Global Income Fund, Inc.

[PROSPECTUS GRAPHIC HERE]

April , 1999

<PAGE>

THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO
SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED FEBRUARY 26, 1999

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.

P.O. Box 9011, Princeton, New Jersey 08543-9011 o Phone No. (609) 282-2800

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

Merrill Lynch Short-Term Global Income Fund, Inc. (the "Fund") is a
non-diversified mutual fund seeking to provide shareholders with a high level
of current income from a global portfolio of high quality debt securities
denominated in various currencies and multinational currency units and having
remaining maturities not exceeding three years. Under normal circumstances, the
Fund will invest its assets in debt securities denominated in at least three
different currencies, including the U.S. dollar. At times, the Fund may seek to
hedge its portfolio against interest rate and currency risks through the use of
futures, options on futures and currency transactions. There can be no
assurance that the investment objective of the Fund will be realized.

Pursuant to the Merrill Lynch Select PricingSM 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 PricingSM 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 April
, 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 1 (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00
p.m. on any business day.

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

MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR

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

The date of this Statement of Additional Information is April , 1999.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies ................................................. 3
Asset-Backed Securities ......................................................... 5
Mortgage-Backed Securities ...................................................... 6
European Economic and Monetary Union ("EMU") .................................... 6
Derivatives ..................................................................... 7
Other Investment Policies, Practices and Risk Factors ........................... 12
Investment Restrictions ......................................................... 14
Portfolio Turnover .............................................................. 16
Management of the Fund ............................................................ 17
Directors and Officers .......................................................... 17
Compensation of Directors ....................................................... 18
Management and Advisory Arrangements ............................................ 19
Code of Ethics .................................................................. 20
Purchase of Shares ................................................................ 20
Initial Sales Charge Alternatives -- Class A and Class D Shares ................. 21
Deferred Sales Charge Alternatives -- Class B and Class C Shares ................ 26
Distribution Plans .............................................................. 29
Limitations on the Payment of Deferred Sales Charges ............................ 31
Redemption of Shares .............................................................. 32
Redemption ...................................................................... 32
Repurchase ...................................................................... 32
Reinstatement Privilege -- Class A and Class D Shares ........................... 33
Pricing of Shares ................................................................. 33
Determination of Net Asset Value ................................................ 33
Computation of Offering Price Per Share ......................................... 34
Portfolio Transactions and Brokerage .............................................. 35
Transactions in Portfolio Securities ............................................ 35
Shareholder Services .............................................................. 36
Investment Account .............................................................. 36
Exchange Privilege .............................................................. 37
Fee-Based Programs .............................................................. 39
Retirement Plans ................................................................ 39
Automatic Investment Plans ...................................................... 39
Automatic Dividend Program ...................................................... 40
Systematic Withdrawal Plan ...................................................... 40
Dividends and Taxes ............................................................... 41
Dividends ....................................................................... 41
Taxes ........................................................................... 42
Tax Treatment of Options, Futures and Forward Foreign Exchange Transactions ..... 43
Special Rules for Certain Foreign Currency Transactions ......................... 44
Performance Data .................................................................. 45
General Information ............................................................... 48
Description of Shares ........................................................... 48
Independent Auditors ............................................................ 49
Custodian ....................................................................... 49
Transfer Agent .................................................................. 49
Legal Counsel ................................................................... 49
Reports to Shareholders ......................................................... 49
Shareholder Inquiries ........................................................... 49
Additional Information .......................................................... 49
Settlement of Litigation ........................................................ 50
Financial Statements .............................................................. 51
Appendix A -- Long-Term and Short-Term Obligation Ratings ......................... A-1
</TABLE>

2
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to seek to provide shareholders
with a high level of current income from a global portfolio of high quality
debt securities denominated in various currencies and multinational currency
units and having remaining maturities not exceeding three years. The investment
objective described in this paragraph is a fundamental policy of the Fund and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities. Under normal circumstances, the Fund will
invest its assets in debt securities denominated in at least three different
currencies, including the U.S. dollar. The Fund may seek to hedge its portfolio
securities against currency risks and, to a lesser extent, interest rate risks
through the use of options, futures, options on futures and currency
transactions. There can be no assurance that the investment objective of the
Fund will be realized.

The Fund is designed for the investor who seeks a higher yield than a
money market fund and less fluctuation in net asset value than a longer-term
global bond fund. Under normal conditions, debt securities with longer
maturities tend to produce higher yields, while debt securities with shorter
maturities are subject to less market risk resulting from changes in interest
rates. With a maturity limit of three years, the Fund seeks more attractive
yields than those offered by the shorter-term money market securities in which
money market funds invest (money market funds maintain average maturities of
less than 90 days). At the same time, the three year limitation enables the
Fund to avoid the greater market risk inherent in longer-term securities.

The Investment Adviser will seek to manage the Fund's portfolio in
accordance with a multi-market strategy. Consistent with such a strategy, the
Fund may invest in debt securities denominated in any currency or multinational
currency unit. In addition, the Investment Adviser intends to allocate the
Fund's investments among securities denominated in the currencies of a number
of foreign countries and, within each such country, among different types of
debt securities. The Investment Adviser will adjust the Fund's exposure to
different currencies based on its perception of the most favorable markets and
issuers. In allocating the Fund's assets among multiple markets, the Investment
Adviser will assess the relative yield and anticipated direction of interest
rates in particular markets, general market and economic conditions and the
relationship of currencies of various countries to each other. In its
evaluations, the Investment Adviser will utilize its internal financial,
economic and credit analysis resources as well as information obtained from
other sources. The Fund will not invest more than 25% of its total assets in
debt securities denominated in a single currency or currency unit, except that
it may invest more than 25% of its total assets in U.S. dollar-denominated
securities. In addition, the Fund will not invest in countries that are not
considered by the Investment Adviser to have stable governments or whose
currencies are not convertible into U.S. dollars. As a result of hedging
techniques, the Fund's net exposure to any one currency may be different from
that of its total assets denominated in such currency.

The operating expense ratio of the Fund can be expected to be higher than
that of an investment company investing exclusively in U.S. securities because
the expenses of the Fund, such as custodial costs, may be higher.

The securities in which the Fund may invest include debt obligations
issued or guaranteed by U.S. or foreign governments, political subdivisions
thereof (including states, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), or issued or guaranteed by
international organizations designated or supported by governmental entities to
promote economic reconstruction or development ("supranational entities"), or
issued by corporations or financial institutions. Securities issued by
supranational entities may be denominated in U.S. dollars, a foreign currency
or a multinational currency unit. Securities of corporations and financial
institutions in which the Fund may invest include corporate and commercial
obligations, such as medium-term notes and commercial paper, which may be
indexed to foreign currency exchange rates.

The Fund may invest in securities whose potential investment return is
based on the change in particular measurements of value or rate (an "index").
Interest and principal payable on a security may also be based on relative
changes among particular indices. In addition, the Fund may invest in
securities whose potential investment return is inversely based on the change
in particular indices. To the extent that the Fund invests in such types of
securities, it will be subject to the risks associated with changes in the
particular indices, which may include reduced or eliminated interest payments
and losses of invested principal. The Fund will purchase such indexed
obligations to generate current income or for currency hedging purposes, and
will not speculate through such obligations.

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<PAGE>

Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities will
generally be more volatile than the market values of fixed-rate securities. The
Fund believes that indexed securities, including inverse securities, represent
flexible portfolio management instruments that may allow the Fund to seek
potential investment returns, hedge other portfolio positions, or vary the
degree of portfolio leverage relatively efficiently under different market
conditions.

The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing powers. These obligations may or may not be
supported by the full faith and credit of a foreign government. The Fund will
invest in foreign government securities of issuers considered stable by the
Investment Adviser, based on its analysis of factors such as general political
or economic conditions relating to the government and the likelihood of
expropriation, nationalization, freezes or confiscation of private property.
The Investment Adviser does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities. Examples of supranational entities include the
International Bank for Reconstruction and Development (the "World Bank"), the
European Steel and Coal Community, the Asian Development Bank and the Inter-
American Development Bank. The governmental members, or "stockholders," usually
make initial capital contributions to the supranational entity and in many
cases are committed to make additional capital contributions if the
supranational entity is unable to repay its borrowings.

The Fund may invest in securities denominated in a multinational currency
unit or in the "euro," the single common European currency that was introduced
on January 1, 1999. See "European Economic and Monetary Union ("EMU")" below.
The Fund may invest in securities denominated in the currency of one nation
although issued by a governmental entity, corporation or financial institution
of another nation. For example, the Fund may invest in a British pound
sterling-denominated obligation issued by a U.S. corporation. Such investments
involve credit risks associated with the issuer and currency risks associated
with the currency in which the obligation is denominated.

The Fund also may invest in participations in, or bonds and notes backed
by, pools of mortgage, credit card, automobile or other types of receivables
with remaining maturities of three years or less. These structured financings
will be supported by sufficient collateral and other credit enhancements,
including letters of credit, insurance, reserve funds and guarantees by third
parties, to enable such instruments to obtain a high quality rating by a
nationally recognized statistical rating agency (such as S&P or Moody's) or be
of comparable quality as determined by the Investment Adviser. Generally, the
issuers of mortgage-backed and receivable-backed bonds, notes or pass-through
certificates are special purpose entities and do not have any significant
assets other than the assets securing such obligations. Certain asset-backed
and receivable-backed securities may be illiquid. The Fund's investments in
asset-backed and receivable-backed securities that are illiquid will be
limited, together with all other illiquid investments, to 15% of the Fund's net
assets.

To minimize the credit risk of its investments, the Fund will invest only
in high quality debt securities. A security may be deemed to be high quality if
it is issued or guaranteed by governmental entities or supranational entities
which the Investment Adviser, acting under the general supervision of the Board
of Directors, has determined to be of high creditworthiness. Securities issued
by corporations or financial institutions will be deemed to be high quality if
they are rated AA or better by S&P or Aa or better by Moody's, or A-1 or better
by S&P or Prime-1 or better by Moody's in the case of commercial paper, or
similarly rated by another internationally recognized rating service, such as
IBCA, or obligations of issuers that the Investment Adviser, acting under the
general supervision of the Board of Directors, has determined to be of similar
creditworthiness.

Under normal conditions, a significant percentage of the shorter-term
investments in the Fund's portfolio may be money market securities. Money
market securities include short-term obligations issued or guaranteed by the
U.S. Government or foreign governments or issued by such governments'
respective agencies and instrumentalities, bank money market instruments
including certificates of deposit, bankers' acceptances and deposit notes and
certain other short-term obligations such as short-term commercial paper.

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<PAGE>

It is anticipated that the Fund will invest primarily in securities
denominated in the currencies of the United States, Japan, Canada, Western
European nations, New Zealand or Australia, as well as securities denominated
in the euro described above. Further, it is anticipated that such securities
will be issued primarily by entities located in such countries and by
supranational entities. Under certain adverse conditions and for the duration
of such conditions, the Fund may restrict the financial markets or currencies
in which its assets are invested, and it may invest its assets solely in one
financial market or in obligations denominated in one currency.

Under normal circumstances, the Fund will invest at least 25% of its total
assets in debt instruments issued by U.S. and foreign companies engaged in the
banking industry, including bank holding companies. Such investments may
include certificates of deposit, time deposits, bankers' acceptances, and
obligations issued by bank holding companies, as well as repurchase agreements
entered into with banks. For temporary defensive purposes, however, the Fund
may reduce its investments in the banking industry to less than 25% of its
total assets. The Fund's policy as to concentrating its investments in the
banking industry is fundamental and may not be changed without the approval of
a majority of the Fund's voting securities.

The Fund's policy of concentrating its investments in the banking industry
will cause the Fund to have greater exposure to certain risks associated with
the banking industry. In particular, economic or regulatory developments in or
related to the banking industry will affect the value of and investment return
on the Fund's shares. Sustained increases in interest rates may adversely
affect the availability and cost of funds for a bank's lending activities;
deterioration in general economic conditions may increase a bank's exposure to
credit losses. The banking industry also is subject to the effects of the
concentration of loan portfolios in particular businesses that may be adversely
affected by economic conditions, such as real estate, energy, agriculture or
high technology-related companies. In addition, the banking industry is subject
to national and local regulation and competition among banks as well as with
other types of financial institutions. Also, the Fund's investments in
commercial banks located in several foreign countries are subject to additional
risks due to the combination in such banks of commercial banking and
diversified securities activities. As discussed above, however, the Fund will
seek to minimize its exposure to such risks by investing only in debt
securities which are determined by the Investment Adviser, acting under the
general supervision of the Board of Directors, to be high quality.

The Fund may engage in various portfolio strategies to hedge its portfolio
against interest rate and currency risks. These strategies include use of
options on portfolio positions or currencies, financial and currency futures,
options on such futures and forward foreign currency transactions. The Fund may
enter into such transactions only in connection with its hedging strategies.
While the Fund's use of hedging strategies is intended to reduce the volatility
of the net asset value of its shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund may only engage in hedging activities
from time to time and may not necessarily be engaging in hedging activities
when movements in interest rates or currency exchange rates occur.

Although certain risks are involved in options and futures transactions,
the Investment Adviser believes that, because the Fund will only engage in
these transactions for hedging purposes, the options and futures portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of options and futures transactions. Tax
requirements may limit the Fund's ability to engage in the hedging transactions
and strategies described below. See "Dividends and Taxes -- Taxes."

ASSET BACKED SECURITIES

The Fund may invest in asset backed securities with remaining maturities
of three years or less. Asset backed securities are "pass through" securities,
meaning that principal and interest payments made by the borrower on the
underlying assets (such as pools of mortgages or credit card receivables) are
passed through to the Fund. The value of asset backed securities, like that of
traditional fixed income securities, typically increases when interest rates
fall and decreases when interest rates rise. However, asset backed securities
differ from traditional fixed income securities because of their potential for
prepayment. The price paid by the Fund for its asset-backed securities, the
yield the Fund expects to receive from such securities and the average life of
the securities are based on a number of factors, including the anticipated rate
of prepayment of the underlying assets. In a period of declining interest
rates, borrowers may prepay the underlying assets more quickly than
anticipated,

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<PAGE>

thereby reducing the yield to maturity and the average life of the asset backed
securities. Moreover, when the Fund reinvests the proceeds of a prepayment in
these circumstances, it will likely receive a rate of interest that is lower
than the rate on the security that was prepaid. To the extent that the Fund
purchases asset backed securities at a premium, prepayments may result in a
loss to the extent of the premium paid. If the Fund buys such securities at a
discount, both scheduled payments and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. In a
period of rising interest rates, prepayments of the underlying assets may occur
at a slower than expected rate, creating maturity extension risk. This
particular risk may effectively change a security that was considered short- or
intermediate-term at the time of purchase into a long-term security. Since
long-term securities generally fluctuate more widely in response to changes in
interest rates than shorter-term securities, maturity extension risk could
increase the inherent volatility of the Fund. Certain asset backed securities
may be illiquid.

MORTGAGE BACKED SECURITIES

Mortgage backed securities are "pass through" securities, meaning that
principal and interest payments made by the borrower on the underlying
mortgages are passed through to the Fund. The value of mortgage backed
securities, like that of traditional fixed income securities, typically
increases when interest rates fall and decreases when interest rates rise.
However, mortgage backed securities differ from traditional fixed income
securities because of their potential for prepayment without penalty. The price
paid by the Fund for its mortgage backed securities, the yield the Fund expects
to receive from such securities and the average life of the securities are
based on a number of factors, including the anticipated rate of prepayment of
the underlying mortgages. In a period of declining interest rates, borrowers
may prepay the underlying mortgages more quickly than anticipated, thereby
reducing the yield to maturity and the average life of the mortgage backed
securities. Moreover, when the Fund reinvests the proceeds of a prepayment in
these circumstances, it will likely receive a rate of interest that is lower
than the rate on the security that was prepaid.

To the extent that the Fund purchases mortgage backed securities at a
premium, mortgage foreclosures and principal prepayments may result in a loss
to the extent of the premium paid. If the Fund buys such securities at a
discount, both scheduled payments of principal and unscheduled prepayments will
increase current and total returns and will accelerate the recognition of
income which, when distributed to shareholders, will be taxable as ordinary
income. In a period of rising interest rates, prepayments of the underlying
mortgages may occur at a slower than expected rate, creating maturity extension
risk. This particular risk may effectively change a security that was
considered short- or intermediate-term at the time of purchase into a long-term
security. Since long-term securities generally fluctuate more widely in
response to changes in interest rates than do short-term securities, maturity
extension risk could increase the inherent volatility of the Fund.

EUROPEAN ECONOMIC AND MONETARY UNION ("EMU")

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

No assurance can be given that EMU will take full effect, that all the
changes planned for the EU can be successfully implemented or that these
changes will result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be completed but
then partially or completely unwound. Because any participating country may opt
out of EMU within the first three years, it is also possible that a significant
participant could choose to abandon EMU, which could diminish its credibility
and

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<PAGE>

influence. Any of these occurrences could have adverse effects on the markets
of both participating and non-participating countries, including sharp
appreciation or depreciation of the participants' national currencies and a
significant increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European markets, an
undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of
EMU. Also, withdrawal from EMU by an initial participant could cause disruption
of the financial markets as securities redenominated in euros are transferred
back into that country's national currency, particularly if the withdrawing
country is a major economic power. Such developments could have an adverse
impact on the Fund's investments in Europe generally or in specific countries
participating in EMU. Gains or losses from euro conversion may be taxable to
Fund shareholders under foreign or, in certain limited circumstances, U.S. tax
laws. In addition, computer, accounting, and trading systems must be capable of
recognizing the euro as a distinct currency. If not properly addressed, this
may negatively affect the operations of the companies in which the Fund
invests.

DERIVATIVES

The Fund may use instruments referred to as "Derivatives." Derivatives are
financial instruments the value of which is derived from another security, a
commodity (such as gold or oil) or an index (a measure of value or rates, such
as the Standard & Poor's Composite 500 Index or the prime lending rate).
Derivatives allow the Fund to increase or decrease the level of risk to which
the Fund is exposed more quickly and efficiently than transactions in other
types of instruments.

HEDGING. The Fund may use Derivatives for hedging purposes. Hedging is a
strategy in which a Derivative is used to offset the risk that other Fund
holdings may decrease in value. Losses on the other investment may be
substantially reduced by gains on a Derivative that reacts in an opposite
manner to market movements. 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.

The Fund may use the following types of Derivative instruments and trading
strategies:

INDEXED AND INVERSE SECURITIES

The Fund may invest in securities the potential return of which is based
on an index. As an illustration, the Fund may invest in a debt security that
pays interest based on the current value of an interest rate index, such as the
prime rate. The Fund may also invest in a debt security which returns principal
at maturity based on the level of a securities index or a basket of securities,
or based on the relative changes of two indices. In addition, the Fund may
invest in securities the potential return of which is based inversely on the
change in an index (that is, a security the value of which will move in the
opposite direction of changes to an index). For example, the Fund may invest in
securities that pay a higher rate of interest when a particular index decreases
and pay a lower rate of interest (or do not fully return principal) when the
value of the index increases. If the Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant index or indices. Indexed and
inverse securities involve credit risk, and certain indexed and inverse
securities may involve leverage risk, liquidity risk and currency risk. The
Fund may invest in indexed and inverse securities to generate current income or
for currency hedging purposes, and will not speculate through such obligations.
When used for hedging purposes, indexed and inverse securities involve
correlation risk.

OPTIONS ON SECURITIES AND SECURITIES INDICES

PURCHASING PUT OPTIONS. The Fund may purchase put options on securities
held in its portfolio or securities or interest rate indices which are
correlated with securities held in its portfolio. When the Fund purchases a put
option, in consideration for an up front payment (the "option premium") the
Fund acquires a right to sell to another party specified securities owned by
the Fund at a specified price (the "exercise price") on or before a specified
date (the "expiration date"), in the case of an option on securities, or to
receive from another party a

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<PAGE>

payment based on the amount a specified securities index declines below a
specified level on or before the expiration date, in the case of an option on a
securities index. The purchase of a put option limits the Fund's risk of loss
in the event of a decline in the market value of the portfolio holdings
underlying the put option prior to the option's expiration date. If the market
value of the portfolio holdings associated with the put option increases rather
than decreases, however, the Fund will lose the option premium and will
consequently realize a lower return on the portfolio holdings than would have
been realized without the purchase of the put. Purchasing a put option may
involve correlation risk, and may also involve liquidity and credit risk.

PURCHASING CALL OPTIONS. The Fund may also purchase call options on
securities it intends to purchase or securities or interest rate indices, which
are correlated with the types of securities it intends to purchase. When the
Fund purchases a call option, in consideration for the option premium the Fund
acquires a right to purchase from another party specified securities at the
exercise price on or before the expiration date, in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index increases beyond a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a call option may protect the Fund from having to pay more for a security as
a consequence of increases in the market value for the security during a period
when the Fund is contemplating its purchase, in the case of an option on a
security, or attempting to identify specific securities in which to invest in a
market the Fund believes to be attractive, in the case of an option on an index
(an "anticipatory hedge"). In the event the Fund determines not to purchase a
security underlying a call option, however, the Fund may lose the entire option
premium. Purchasing a call option involves correlation risk, and may also
involve liquidity and credit risk.

The Fund is also authorized to purchase put or call options in connection
with closing out put or call options it has previously sold.

WRITING CALL OPTIONS. The Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of which
correlates with securities held in its portfolio. When the Fund writes a call
option, in return for an option premium, the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or
before the expiration date, in the case of an option on securities, or agrees
to pay to another party an amount based on any gain in a specified securities
index beyond a specified level on or before the expiration date, in the case of
an option on a securities index. The Fund may write call options to earn
income, through the receipt of option premiums. In the event the party to which
the Fund has written an option fails to exercise its rights under the option
because the value of the underlying securities is less than the exercise price,
the Fund will partially offset any decline in the value of the underlying
securities through the receipt of the option premium. By writing a call option,
however, the Fund limits its ability to sell underlying securities, and gives
up the opportunity to profit from any increase in the value of the underlying
securities beyond the exercise price, while the option remains outstanding.
Writing a call option may involve correlation risk.

WRITING PUT OPTIONS. The Fund may also write put options on securities or
securities indices. When the Fund writes a put option, in return for an option
premium the Fund gives another party the right to sell to the Fund a specified
security at the exercise price on or before the expiration date, in the case of
an option on a security, or agrees to pay to another party an amount based on
any decline in a specified securities index below a specified level on or
before the expiration date, in the case of an option on a securities index. The
Fund may write put options to earn income, through the receipt of option
premiums. In the event the party to which the Fund has written an option fails
to exercise its rights under the option because the value of the underlying
securities is greater than the exercise price, the Fund will profit by the
amount of the option premium. By writing a put option, however, the Fund will
be obligated to purchase the underlying security at a price that may be higher
than the market value of the security at the time of exercise as long as the
put option is outstanding, in the case of an option on a security, or make a
cash payment reflecting any decline in the index, in the case of an option on
an index. Accordingly, when the Fund writes a put option it is exposed to a
risk of loss in the event the value of the underlying securities falls below
the exercise price, which loss potentially may substantially exceed the amount
of option premium received by the Fund for writing the put option. The Fund
will write a put option on a security or a securities index only if the Fund
would be willing to purchase the security at the exercise price for investment
purposes (in the case of an option on a security) or is writing the put in
connection with trading

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<PAGE>

strategies involving combinations of options -- for example, the sale and
purchase of options with identical expiration dates on the same security or
index but different exercise prices (a technique called a "spread"). Writing a
put option may involve substantial leverage risk.

The Fund is also authorized to sell call or put options in connection with
closing out call or put options it has previously purchased.

Other than with respect to closing transactions, the Fund will only write
call or put options that are "covered." A call or put option will be considered
covered if the Fund has segregated assets with respect to such option in the
manner described in "Risk Factors in Derivatives" below. A call option will
also be considered covered if the Fund owns the securities it would be required
to deliver upon exercise of the option (or, in the case of option on a
securities index, securities which substantially correlate with the performance
of such index) or owns a call option, warrant or convertible instrument which
is immediately exercisable for, or convertible into, such security.

TYPES OF OPTIONS. The Fund may engage in transactions in options on
securities or securities indices on exchanges and in the over-the-counter
("OTC") markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against
their obligations, and the performance of the parties' obligations in
connection with such options is guaranteed by the exchange or a related
clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post
margin and are subject to greater credit risk. OTC options also involve greater
liquidity risk. See "Additional Risk Factors of OTC Transactions; Limitations
on the Use of OTC Derivatives" below.

FUTURES

The Fund may engage in transactions in futures and options thereon.
Futures are standardized, exchange-traded contracts which obligate a purchaser
to take delivery, and a seller to make delivery, of a specific amount of an
asset at a specified future date at a specified price. No price is paid upon
entering into a futures contract. Rather, upon purchasing or selling a futures
contract the Fund is required to deposit collateral ("margin") equal to a
percentage (generally less than 10%) of the contract value. Each day thereafter
until the futures cap position is closed, the Fund will pay additional margin
representing any loss experienced as a result of the futures position the prior
day or be entitled to a payment representing any profit experienced as a result
of the futures position the prior day. Futures involve substantial leverage
risk.

The sale of a futures contract limits the Fund's risk of loss through a
decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contract's expiration date. In the event the
market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, the Fund will realize a loss on the
futures position and a lower return on the portfolio holdings than would have
been realized without the purchase of the futures contract.

The purchase of a futures contract may protect the Fund from having to pay
more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific
securities in which to invest in a market the Fund believes to be attractive.
In the event that such securities decline in value or the Fund determines not
to complete an anticipatory hedge transaction relating to a futures contract,
however, the Fund may realize a loss relating to the futures position.

The Fund will limit transactions in futures and options on futures to
financial futures contracts (i.e., contracts for which the underlying asset is
a currency or securities or interest rate index) purchased or sold for hedging
purposes (including anticipatory hedges). The Fund will further limit
transactions in futures and options on futures to the extent necessary to
prevent the Fund from being deemed a "commodity pool" under regulations of the
Commodity Futures Trading Commission.

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<PAGE>

FOREIGN EXCHANGE TRANSACTIONS

The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.

FORWARD FOREIGN EXCHANGE TRANSACTIONS. Forward foreign exchange
transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date
set at the time of the contract. Spot foreign exchange transactions are similar
but require current, rather than future, settlement. The Fund will enter into
foreign exchange transactions only for purposes of hedging either a specific
transaction or a portfolio position. The Fund may enter into a forward foreign
exchange transaction for purposes of hedging a specific transaction by, for
example, purchasing a currency needed to settle a security transaction or
selling a currency in which the Fund has received or anticipates receiving a
dividend or distribution. The Fund may enter into a foreign exchange
transaction for purposes of hedging a portfolio position by selling forward a
currency in which a portfolio position of the Fund is denominated or by
purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future. The Fund may also hedge portfolio positions
through currency swaps, which are transactions in which one currency is
simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis. Forward foreign exchange transactions
involve substantial currency risk, and also involve credit and liquidity risk.

CURRENCY FUTURES. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through use of currency futures or
options thereon. Currency futures are similar to forward foreign exchange
transactions except that futures are standardized, exchange-traded contracts.
See "Futures" above. Currency futures involve substantial currency risk, and
also involve leverage risk.

CURRENCY OPTIONS. The Fund may also hedge against the decline in the value
of a currency against the U.S. dollar through the use of currency options.
Currency options are similar to options on securities, but in consideration for
an option premium the writer of a currency option is obligated to sell (in the
case of a call option) or purchase (in the case of a put option) a specified
amount of a specified currency on or before the expiration date for a specified
amount of another currency. The Fund may engage in transactions in options on
currencies either on exchanges or OTC markets. See "Types of Options" above and
"Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives" below. Currency options involve substantial currency risk, and may
also involve credit, leverage or liquidity risk.

LIMITATIONS ON CURRENCY HEDGING. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which are denominated in such currency. The Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). The Fund will
only enter into a cross-hedge if the Investment Adviser believes that (i) there
is a demonstrable high correlation between the currency in which the
cross-hedge is denominated and the currency being hedged, and (ii) executing a
cross-hedge through the currency in which the cross-hedge is denominated will
be significantly more cost-effective or provide substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.

RISK FACTORS IN HEDGING FOREIGN CURRENCY RISKS. Hedging transactions
involving Currency Instruments involve substantial risks, including correlation
risk. While the Fund's use of Currency Instruments to effect hedging strategies
is intended to reduce the volatility of the net asset value of the Fund's
shares, the net asset value of the Fund's shares will fluctuate. Moreover,
although Currency Instruments will be used with the intention of hedging
against adverse currency movements, transactions in Currency Instruments
involve the risk that anticipated currency movements will not be accurately
predicted and that the Fund's hedging strategies will be ineffective. To the
extent that the Fund hedges against anticipated currency movements which do not
occur, the Fund may realize losses, and decrease its total return, as the
result of its hedging transactions. Furthermore, the Fund will only engage in
hedging activities from time to time and may not be engaging in hedging
activities when movements in currency exchange rates occur.

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<PAGE>

It may not be possible for the Fund to hedge against currency rate
movements, even if correctly anticipated, in the event that (i) the currency
exchange rate movement is so generally anticipated that the Fund is not able to
enter into a hedging transaction at an effective price, or (ii) the currency
exchange rate movement relates to a market with respect to which Currency
Instruments are not available and it is not possible to engage in effective
currency hedging.

RISK FACTORS IN DERIVATIVES

Derivatives are volatile and involve significant risks, including:

Credit risk -- the risk that the counterparty on a Derivative
transaction will be unable to honor its financial obligation to the Fund.

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

Leverage risk -- 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.

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.

Use of Derivatives for hedging purposes involves correlation risk. If
the value of the Derivative moves more or less than the value of the hedged
instruments the Fund will experience a gain or loss which will not be
completely offset by movements in the value of the hedged instruments.

The Fund intends to enter into transactions involving Derivatives only if
there appears to be a liquid secondary market for such instruments or, in the
case of illiquid instruments traded in OTC transactions, such instruments
satisfy the criteria set forth below under "Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives." However, there can be
no assurance that, at any specific time, either a liquid secondary market will
exist for a Derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may therefore not be possible to close a
position in a Derivative without incurring substantial losses, if at all.

Certain transactions in Derivatives (such as futures transactions or sales
of put options) involve substantial leverage risk and may expose the Fund to
potential losses, which exceed the amount originally invested by the Fund. When
the Fund engages in such a transaction, the Fund will deposit in a segregated
account at its custodian liquid securities with a value at least equal to the
Fund's exposure, on a mark-to-market basis, to the transaction (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that
the Fund has assets available to satisfy its obligations with respect to the
transaction, but will not limit the Fund's exposure to loss.

ADDITIONAL RISK FACTORS OF OTC TRANSACTIONS; LIMITATIONS ON THE USE OF OTC
DERIVATIVES.

Certain Derivatives traded in OTC markets, including indexed securities
and OTC options, involve substantial liquidity risk. The absence of liquidity
may make it difficult or impossible for the Fund to sell such instruments
promptly at an acceptable price. The absence of liquidity may also make it more
difficult for the Fund to ascertain a market value for such instruments. The
Fund will therefore acquire illiquid OTC instruments (i) if the agreement
pursuant to which the instrument is purchased contains a formula price at which
the instrument may be terminated or sold, or (ii) for which the Investment
Adviser anticipates the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case that dealer's quotation may be used.

Because Derivatives traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt

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<PAGE>

or otherwise fail to honor its obligations. The Fund will attempt to minimize
the risk that a counterparty will become bankrupt or otherwise fail to honor
its obligations by engaging in transactions in Derivatives traded in OTC
markets only with financial institutions which have substantial capital or
which have provided the Fund with a third-party guaranty or other credit
enhancement.

OTHER INVESTMENT POLICIES, PRACTICES AND RISK FACTORS

SECURITIES LENDING. The Fund may lend securities with a value not
exceeding 33 1/3% of its total assets (subject to investment restriction (4)
below). In return, the Fund receives collateral in an amount equal to at least
100% of the current market value of the loaned securities in cash or securities
issued or guaranteed by the United States Government. The Fund receives
securities as collateral for the loaned securities and the Fund and the
borrower negotiate a rate for the loan premium to be received by the Fund for
the loaned securities, which increases the Fund's yield. The Fund may receive a
flat fee for its loans. The loans are terminable at any time and the borrower,
after notice, is required to return borrowed securities within five business
days. The Fund may pay reasonable finder's, administrative and custodial fees
in connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral and could suffer a loss to the extent the value of the collateral
falls below the market value of the borrowed securities.

ILLIQUID OR RESTRICTED SECURITIES. The Fund may invest up to 15% of its
net assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained upon
disposition of the security, which may be less than would be obtained for a
comparable more liquid security. Illiquid securities may trade at a discount
from comparable, more liquid investments. Investment of the Fund's assets in
illiquid securities may restrict the ability of the Fund to dispose of its
investments in a timely fashion and for a fair price as well as its ability to
take advantage of market opportunities. The risks associated with illiquidity
will be particularly acute where the Fund's operations require cash, such as
when the Fund redeems shares or pays dividends, and could result in the Fund
borrowing to meet short-term cash requirements or incurring capital losses on
the sale of illiquid investments.

The Fund may invest in securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"). Restricted securities may be sold in private placement transactions
between issuers and purchasers, and may be neither listed on an exchange nor
traded in other established markets. In many cases, privately placed securities
may not be freely transferable under the laws of the applicable jurisdiction or
due to contractual restrictions on resale. As a result of the absence of a
public trading market, privately placed securities may be less liquid and more
difficult to value than publicly traded securities. To the extent that
privately placed securities may be resold in privately negotiated transactions,
the prices realized from the sales, due to illiquidity, could be less than
those originally paid by the Fund or less than their fair market value. In
addition, issuers whose securities are not publicly traded may not be subject
to the disclosure and other investor protection requirements that may be
applicable if their securities were publicly traded. If any privately placed
securities held by the Fund are required to be registered under the securities
laws of one or more jurisdictions before being resold, the Fund may be required
to bear the expenses of registration. Certain of the Fund's investments in
private placements may consist of direct investments and may include
investments in smaller, less-seasoned issuers, which may involve greater risks.
These issuers may have limited product lines, markets or financial resources,
or they may be dependent on a limited management group. In making investments
in such securities, the Fund may obtain access to material nonpublic
information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.

144A SECURITIES. The Fund may purchase restricted securities that can be
offered and sold to "qualified institutional buyers" under Rule 144A under the
Securities Act. The Board of Directors has determined to treat as liquid Rule
144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies
and procedures adopted by the Fund's Board. The Board has adopted guidelines
and delegated to the Investment Adviser the daily function of determining and
monitoring liquidity of restricted securities. The Board, however, will retain
sufficient oversight and be ultimately responsible for the determinations.
Since it is not possible to predict with assurance exactly how this market for

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<PAGE>

restricted securities sold and offered under Rule 144A will continue to
develop, the Board of Directors will carefully monitor the Fund's investments
in these securities. This investment practice could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
securities.

BORROWING AND LEVERAGE. The use of leverage by the Fund creates an
opportunity for greater total return, but, at the same time, creates special
risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Fund's portfolio. Although the principal of
such borrowings will be fixed, the Fund's assets may change in value during the
time the borrowings are outstanding. Borrowings will create interest expenses
for the Fund which can exceed the income from the assets purchased with the
borrowings. To the extent the income or capital appreciation derived from the
securities purchased with borrowed funds exceeds the interest the Fund will
have to pay on the borrowings, the Fund's return will be greater than if
leverage had not been used. Conversely, if the income or capital appreciation
from the securities purchased with such borrowed funds is not sufficient to
cover the cost of borrowing, the return to the Fund will be less than if
leverage had not been used, and therefore the amount available for distribution
to shareholders as dividends and other distributions will be reduced. In the
latter case, the Investment Adviser in its best judgment nevertheless may
determine to maintain the Fund's leveraged position if it expects that the
benefits to the Fund's shareholders of maintaining the leveraged position will
outweigh the current reduced return.

Certain types of borrowings by the Fund may result in the Fund being
subject to covenants in credit agreements relating to asset coverage, portfolio
composition requirements and other matters. It is not anticipated that
observance of such covenants would impede the Investment Adviser from managing
the Fund's portfolio in accordance with the Fund's investment objectives and
policies. However, a breach of any such covenants not cured within the
specified cure period may result in acceleration of outstanding indebtedness
and require the Fund to dispose of portfolio investments at a time when it may
be disadvantageous to do so.

The Fund at times may borrow from affiliates of the Investment Adviser,
provided that the terms of such borrowings are no less favorable than those
available for comparable sources of funds in the marketplace.

REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS. The Fund may
invest in securities pursuant to repurchase agreements and purchase and sale
contracts. Repurchase agreements may be entered into only with financial
institutions which (i) have, in the opinion of the Investment Adviser,
substantial capital relative to the Fund's exposure, or (ii) have provided the
Fund with a third-party guaranty or other credit enhancement. Under a
repurchase agreement or a purchase and sale contract, the counterparty agrees,
upon entering into the contract, to repurchase the security at a mutually
agreed upon time and price in a specified currency, 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 although it may be
affected by currency fluctuations. 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 the case of a repurchase agreement, as a
purchaser, the Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement; the Fund does not have the right
to seek additional collateral in the case of purchase and sale contracts. 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
constitute only 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 or under a purchase and sale
contract, 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 securities and the accrued interest on the securities. In such
event, the Fund would have rights against the seller for breach of contract
with respect to any losses arising from market fluctuations following the
failure of the seller to perform.

INVESTMENT RESTRICTIONS

The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities.

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<PAGE>

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). The Fund may not:

(1) Invest more than 25% of its total assets (taken at market value at
the time of each investment) in the securities of issuers in any particular
industry; except that, under normal circumstances, the Fund will invest
more than 25% of its total assets in issuers in the banking industry. This
restriction will not apply to securities issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities, but will apply to
obligations of a foreign government unless the Commission permits their
exclusion.

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

(3) 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.

(4) 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 Prospectus and this
Statement of Additional Information, as they may be amended from time to
time.

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

(6) 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 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.

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

(8) 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 the Fund 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 Directors without a vote of the Fund's
shareholders. Under the non-fundamental investment restrictions, the Fund may
not:

(a) Purchase securities of other investment companies, except to the
extent that 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."

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<PAGE>

(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 Directors of the Fund has otherwise determined
to be liquid pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act and determined to be liquid by the
Fund's Board of Directors are not subject to the limitations set forth in
this investment restriction.

(d) Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 10% 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, including to meet
redemptions or to settle securities transactions. Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however,
the Fund will not borrow to increase income but only to meet redemption
requests or to settle securities transactions which might otherwise require
untimely disposition of portfolio securities. The Fund will not purchase
securities while borrowings exceed 5% of total assets except to honor prior
commitments. (For the purpose of this restriction, collateral arrangements
with respect to the writing of options, and, if applicable, futures
contracts, options on futures contracts, and collateral arrangements with
respect to initial and variation margin are not deemed to be a pledge of
assets and neither such arrangements nor the purchase or sale of futures or
related options are deemed to be the issuance of a senior security.)
Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Investment Adviser or its affiliates or any of their
directors, officers or employees, acting as principal, unless pursuant to a
rule or exemptive order under the Investment Company Act.

The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of any such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on financial futures
contracts exceeds 15% of the net assets of the Fund, taken at market value,
together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. However, if the OTC option is sold by the Fund to
a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is
"in-the-money" (I.E., current market value of the underlying securities minus
the option's strike price). The repurchase price with the primary dealers is
typically a formula price which is generally based on a multiple of the premium
received for the option, plus the amount by which the option is "in-the-money."
This policy as to OTC options is not a fundamental policy of the Fund and may
be amended by the Board of Directors of the Fund without the approval of the
Fund's shareholders. However, the Fund will not change or modify this policy
prior to the change or modification by the Commission staff of its position.

In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the
Fund will, for purposes of investment restriction (1), treat securities issued
or guaranteed by the government of any one foreign country as the obligations
of a single issuer.

As another non-fundamental policy, the Fund will not invest in securities
which are (a) subject to material legal restrictions on repatriation of assets
or (b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its net assets, taken at market value, would
be invested in such securities.

The U.S. Government has from time to time in the past imposed
restrictions, through taxation and otherwise, on foreign investments by U.S.
investors such as the Fund. If such restrictions should be reinstituted, it
might become necessary for the Fund to invest all or substantially all of its
assets in U.S. securities. In such an event, the Fund would review its
investment objective and investment policies to determine whether changes are

15
<PAGE>

appropriate. As noted above, any changes in the investment objective or
fundamental policies of the Fund would require the approval of the holders of a
majority of the Fund's outstanding voting securities.

Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates except for brokerage transactions permitted under the Investment
Company Act involving only usual and customary commissions or transactions
pursuant to an exemptive order under the Investment Company Act. See "Portfolio
Transactions and Brokerage." 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.

NON-DIVERSIFIED STATUS.

The Fund is classified as non-diversified within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
which means that the Fund is not limited by such Act in the proportion of its
assets that it may invest in securities of a single issuer. The Fund's
investments will be limited, however, in order to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year, (i) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single issuer and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities
of a single issuer, and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A fund that elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent
that the Fund assumes large positions in the securities of a small number of
issuers, the Fund's net asset value may fluctuate to a greater extent than that
of a diversified company as a result of changes in the financial condition or
in the market's assessment of the issuers, and the Fund may be more susceptible
to any single economic, political or regulatory occurrence than a diversified
company.

PORTFOLIO TURNOVER
For purposes of the diversification requirements set forth above with
respect to regulated investment companies, and to the extent required by the
Commission, the Fund, as a non-fundamental policy, will consider securities
issued or guaranteed by the government of any one foreign country as the
obligations of a single issuer.

The Investment Adviser will effect portfolio transactions without regard
to the time they have been held if, in its judgment, such transactions are
advisable in light of a change in circumstances of a particular company or
within a particular industry or in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover should not exceed 400% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year
or less) by the monthly average value of the securities in the portfolio during
the year. A high portfolio turnover involves certain tax consequences and
correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions, which are borne directly by the Fund.

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS
The Board of Directors of the Fund consists of seven individuals, six of
whom are not "interested persons" of the Fund as defined in the Investment
Company Act (the "non-interested Directors"). The Directors are responsible for
the overall supervision of the operations of the Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act.

Information about the Directors, executive officers 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 Director, executive officer and the portfolio manager is P.O.
Box 9011, Princeton, New Jersey 08543-9011.

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<PAGE>

ARTHUR ZEIKEL (66) -- PRESIDENT AND DIRECTOR(1)(2) -- Chairman of the
Investment Adviser and Fund Asset Management, L.P. ("FAM") (which terms as used
herein include their corporate predecessors) since 1997; President of the
Investment Adviser and FAM 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.

DONALD CECIL (72) -- DIRECTOR(2)(3) -- 1114 Avenue of the Americas, New
York, New York 10036. Special Limited Partner of Cumberland Associates (an
investment partnership) since 1982; Member of Institute of Chartered Financial
Analysts; Member and Chairman of Westchester County (N.Y.) Board of
Transportation.

ROLAND M. MACHOLD (62) -- DIRECTOR(2)(3) -- 1091 Princeton-Kingston Road,
Princeton, New Jersey 08540. Director of the State of New Jersey Division of
Investment from 1977 to 1998; Trustee of Bryn Mawr College since 1990 and of
Teacher's College, Columbia University since 1985; Co-Chair Emeritus and
Founding Director of the Council of Institutional Investors; Member of the
Capital Formation and Regulatory Processes Advisory Committee of the Securities
and Exchange Commission from 1995 to 1996; Member of the Institutional Investor
Advisory Committee of the New York Stock Exchange from 1992 to 1995.

EDWARD H. MEYER (72) -- DIRECTOR(2)(3) -- 777 Third Avenue, New York, New
York 10017. President of Grey Advertising Inc. since 1968, Chief Executive
Officer since 1970 and Chairman of the Board of Directors since 1972; Director
of The May Department Stores Company, Bowne & Co., Inc. (financial printers),
Ethan Allen Interiors Inc. and Harman International Industries, Inc.

CHARLES C. REILLY (67) -- DIRECTOR(2)(3) -- 9 Hampton Harbor Road, Hampton
Bays, New York 11946. Self-employed financial consultant since 1990; President
and Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television from 1986 to 1997.

RICHARD R. WEST (61) -- DIRECTOR(2)(3) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, Dean from 1984 to 1993, and currently Dean
Emeritus of New York University Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc. (financial printers), Vornado
Realty Trust, Inc. (real estate holding company) and Alexander's, Inc. (real
estate company).

EDWARD D. ZINBARG (64) -- DIRECTOR(2)(3) -- 5 Hardwell Road, Short Hills,
New Jersey 07078-2117. Executive Vice President of The Prudential Insurance
Company of America from 1988 to 1994; Former Director of Prudential Reinsurance
Company and former Trustee of The Prudential Foundation.

TERRY K. GLENN (58) -- EXECUTIVE VICE PRESIDENT(1)(2) -- Executive Vice
President of the Investment Adviser and FAM 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.

JOSEPH T. MONAGLE, JR. (50) -- SENIOR VICE PRESIDENT(1)(2) -- Senior Vice
President and Department Head of the Global Fixed Income Division of the
Investment Adviser and associated therewith since 1977; Senior Vice President
of Princeton Services since 1993.

EDWARD F. GOBORA (32) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) --
Vice President and Portfolio Manager of the Investment Adviser since 1993.

DONALD C. BURKE (38) -- VICE PRESIDENT AND TREASURER(1)(2) -- Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999; Senior
Vice President and Treasurer of Princeton Services since 1999; First Vice
President of the Investment Adviser from 1997 to 1999; Vice President of the
Investment Adviser from 1990 to 1997; Director of Taxation of the Investment
Adviser since 1990; Vice President of PFD since 1999.

BARBARA G. FRASER (55) -- SECRETARY(1)(2) -- First Vice President of the
Investment Adviser and FAM since 1996; Vice President of the Investment Adviser
from 1994 to 1996; attorney in private practice from 1991 to 1994.

- ----------
(1) Interested person, as defined in the Investment Company Act, of the Fund.

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<PAGE>

(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Investment Adviser or FAM acts as the
investment adviser.
(3) Member of the Fund's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested directors.

As of April , 1999, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Director and officer of the Fund, and the
other officers of the Fund owned an aggregate of less than 1% of the
outstanding shares of common stock of ML & Co.

COMPENSATION OF DIRECTORS

The Fund pays each non-interested Director a fee of $3,500 per year plus
$500 per Board meeting attended. The Fund also compensates members of its Audit
and Nominating Committee (the "Committee"), which consists of all the
non-interested Directors, a fee of $500 per meeting attended. The Fund pays the
Chairman of the Committee an additional fee of $250 per meeting attended. The
Fund reimburses each non-interested Director for his out-of-pocket expenses
relating to attendance at Board and Committee meetings.

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

<TABLE>
<CAPTION>
AGGREGATE
PENSION OR ESTIMATED COMPENSATION FROM
RETIREMENT BENEFITS ANNUAL FUND AND OTHER
POSITION WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME FUND FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
- --------------------------- --------------- -------------- --------------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Donald Cecil .............. Director $8,500 None None $ 277,808
Roland M. Machold ......... Director $1,083 None None $ 39,208(2)
Edward H. Meyer ........... Director $5,500 None None $ 214,558
Charles C. Reilly ......... Director $7,500 None None $ 362,858
Richard R. West ........... Director $7,500 None None $ 334,125
Edward D. Zinbarg ......... Director $7,500 None None $ 133,959
</TABLE>

- ----------

(1) The Directors serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Cecil (34 registered investment companies consisting of 34 portfolios);
Mr. Machold (19 registered investment companies consisting of 19
portfolios); Mr. Meyer (34 registered investment companies consisting of
34 portfolios); Mr. Reilly (58 registered investment companies consisting
of 69 portfolios); Mr. West (58 registered investment companies consisting
of 83 portfolios); and Mr. Zinbarg (19 registered investment companies
consisting of 19 portfolios).
(2) Mr. Machold was elected a Director of the Fund and director or trustee of
certain other MLAM/FAM-advised funds on October 20, 1998.

Directors of the Fund may purchase Class A shares of the Fund at net asset
value. See "Purchase of Shares -- Initial Sales Charge Alternatives -- Class A
and Class D Shares -- Reduced Initial Sales Charges -- Purchase Privilege of
Certain Persons."

MANAGEMENT AND ADVISORY ARRANGEMENTS

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

INVESTMENT ADVISORY FEE. The Fund has entered into an investment advisory
agreement with the Investment Adviser (the "Investment Advisory Agreement"),
pursuant to which the Investment Adviser receives for its services to the Fund
monthly compensation at the annual rate of 0.55% of the average daily net
assets of the

18
<PAGE>

Fund for the first $2 billion; 0.525% of the average daily net assets from $2
billion to $4 billion; 0.50% of the average daily net assets from $4 billion to
$6 billion; 0.475% of the average daily net assets from $6 billion to $10
billion; 0.45% of the average daily net assets from $10 billion to $15 billion;
0.425% of the average daily net assets above $15 billion. The table below sets
forth information about the total investment advisory fees payable by the Fund
to the Investment Adviser for the periods indicated.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, INVESTMENT ADVISORY FEE
- -------------------------------- ------------------------
<S> <C>
1998 .........................
1997 .........................
1996 .........................
</TABLE>

The Investment Adviser has entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") pursuant to which
MLAM U.K. provides investment advisory services to the Investment Adviser with
respect to the Fund. For the fiscal years ended December 31, 1996, 1997 and
1998, the Investment Adviser paid MLAM U.K. fees of $31,481, $161,870 and $ ,
respectively.

PAYMENT OF FUND EXPENSES. The Investment Advisory Agreement obligates the
Investment Adviser to provide investment advisory services and to pay all
compensation of and furnish office space for officers and employees of the Fund
connected with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Directors of the Fund who
are affiliated persons of ML & Co. or any of its affiliates. The Fund pays all
other expenses incurred in the operation of the Fund, including among other
things: taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports, prospectuses and statements
of additional information, except to the extent paid by Merrill Lynch Funds
Distributor, a division of PFD (the "Distributor"); charges of the custodian
and the transfer agent; expenses of redemption of shares; Commission fees;
expenses of registering the shares under Federal, state or foreign laws; fees
and expenses of non-interested Directors; accounting and pricing costs
(including the daily calculations of net asset value); insurance; interest;
brokerage costs; litigation and other extraordinary or non-recurring expenses;
and other expenses properly payable by the Fund. Accounting services are
provided for the Fund by the Investment Adviser and the Fund reimburses the
Investment Adviser for its costs in connection with such services. See
"Purchase of Shares -- Distribution Plans."

ORGANIZATION OF THE INVESTMENT ADVISER. The Investment Adviser 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 Investment Adviser
as defined under the Investment Company Act because of their ownership of its
voting securities or their power to exercise a controlling influence over its
management or policies.

The following entities may be considered "controlling persons" of MLAM
U.K.: Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill
Lynch International Holdings, Inc., a subsidiary of Merrill Lynch
International, Inc., a subsidiary of ML & Co.

DURATION AND TERMINATION. Unless earlier terminated as described herein,
the Investment Advisory Agreement will remain in effect from year to year if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such 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 Fund'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

19
<PAGE>

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 Investment Advisory Agreement described above.

CODE OF ETHICS

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

The Codes require that all employees of the Investment Adviser 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 Investment Adviser 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 Investment Adviser. 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
PricingSM 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 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."

20
<PAGE>

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 PricingSM 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 PricingSM System are referred to
herein as "Select Pricing Funds."

As a result of the implementation of the Merrill Lynch Select PricingSM
System, Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares currently being offered differ
from the Class A shares offered prior to October 21, 1994, in many respects,
including sales charges, exchange privilege and the classes of persons to whom
such shares are offered.

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 charge and, in the case of Class D shares, the account
maintenance fee. Although some investors who previously purchased Class A
shares may no longer be eligible to purchase Class A shares of other 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
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.

21
<PAGE>

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, including participants in the
Merrill Lynch BlueprintSM Program, are entitled to purchase additional Class A
shares of the Fund in that account. Certain Employer Sponsored Retirement or
Savings Plans, including eligible 401(k) plans, may purchase Class A shares at
net asset value provided such plans meet the required minimum number of
eligible employees or required amount of assets advised by MLAM or any of its
affiliates. Class A shares are available at net asset value to corporate
warranty insurance reserve fund programs provided that the program has $3
million or more initially invested in Select Pricing Funds. Also eligible to
purchase Class A shares at net asset value are participants in certain
investment programs including TMASM 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/FAM-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.

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
DECEMBER 31, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- --------------------- ------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
1998 $0 $0 $0 $0
1997 $0 $0 $0 $0
1996 $0 $0 $0 $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
DECEMBER 31, COLLECTED DISTRIBUTOR MERRILL LYNCH LOAD-WAIVED SHARES
- --------------------- ------------- --------------- --------------- -------------------
<S> <C> <C> <C> <C>
1998 $1,941 $ 72 $1,869 $0
1997 $ 540 $ 51 $ 489 $0
1996 $3,557 $312 $3,245 $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.

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

22
<PAGE>

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.

MERRILL LYNCH BLUEPRINTSM PROGRAM. Class D shares of the Fund are offered
to participants in the Merrill Lynch BlueprintSM Program ("Blueprint"). In
addition, participants in Blueprint who own Class A shares of the Fund may
purchase additional Class A shares of the Fund through Blueprint. The Blueprint
program is directed to small investors, group IRAs and participants in certain
affinity groups such as credit unions, trade associations and benefit plans.
Investors placing orders to purchase Class A or Class D shares of the Fund
through Blueprint will acquire the Class A or Class D shares at net asset value
plus a sales charge calculated in accordance with the Blueprint sales charge
schedule (I.E., up to $300 at 4.25%, from $300.01 to $5,000 at 3.25% plus
$3.00, and $5,000.01 or more at the standard sales charge rates disclosed in
the Prospectus). In addition, Class A or Class D shares of the Fund are being
offered at net asset value plus a sales charge of 0.50% for corporate or group
IRA programs placing orders to purchase their Class A or Class D shares through
Blueprint. Services, including the exchange privilege, available to Class A and
Class D investors through Blueprint, however, may differ from those available
to other investors in Class A or Class D shares.

Class A and Class D shares are offered at net asset value to Blueprint
participants through the Merrill Lynch Directed IRA Rollover Program (the "IRA
Rollover Program") available from Merrill Lynch Business Financial Services, a
business unit of Merrill Lynch. The IRA Rollover Program is available to
custodian rollover assets from employer-sponsored retirement and savings plans
(as defined below) whose trustee and/or plan sponsor has entered into the IRA
Rollover Program.

23
<PAGE>

Orders for purchases and redemptions of Class A or Class D shares of the
Fund may be grouped for execution purposes which, in some circumstances, may
involve the execution of such orders two business days following the day such
orders are placed. The minimum initial purchase price is $100, with a $50
minimum for subsequent purchases through Blueprint. There are no minimum
initial or subsequent purchase requirements for participants who are part of an
automatic investment plan. Additional information concerning purchases through
Blueprint, including any annual fees and transaction charges, is available from
Merrill Lynch, Pierce, Fenner & Smith Incorporated, The BlueprintSM Program,
P.O. Box 30441, New Brunswick, New Jersey 08989-0441.

TMA(SM) MANAGED TRUSTS. Class A shares are offered at net asset value to
TMASM 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 AccessSM 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.

EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER
ARRANGEMENTS. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class A or Class D shares at net asset
value, based on the number of employees or number of employees eligible to
participate in the plan, the aggregate amount invested by the plan in specified
investments and/or the services provided by Merrill Lynch to the plan.
Additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements is available toll-free from
Merrill Lynch Business Financial Services at (800) 237-7777.

PURCHASE PRIVILEGE OF CERTAIN PERSONS. Directors of the Fund, members of
the Boards of other MLAM/ FAM-advised investment companies, ML & Co. and its
subsidiaries (the term "subsidiaries," when used herein with respect to 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. The Fund realizes
economies of scale and reduction of sales-related expenses by virtue of the
familiarity of these persons with the Fund. Employees and directors or trustees
wishing to purchase shares of the Fund must satisfy the Fund's suitability
standards.

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

24
<PAGE>

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 PricingSM 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 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.

25
<PAGE>

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.

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.

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.

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.

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 connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Internal Revenue Code of 1986, as amended) of a 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 later, reasonably promptly
following completion of probate. The Class B CDSC also may be waived on
redemptions of shares by certain eligible 401(a) and eligible

26
<PAGE>

401(k) plans. The CDSC may also be waived for any Class B shares that are
purchased by eligible 401(k) or eligible 401(a) plans that are rolled over into
a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held in such
account at the time of redemption. The Class B CDSC may also be waived for any
Class B shares that were acquired and held at the time of the redemption in an
Employee AccessSM Account available through employers providing eligible 401(k)
plans. The Class B CDSC may also be waived for any Class B shares that are
purchased by a Merrill Lynch rollover IRA that was funded by a rollover from a
terminated 401(k) plan managed by the MLAM Private Portfolio Group and held in
such account at the time of redemption. The 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."

EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER
ARRANGEMENTS. Certain employer-sponsored retirement or savings plans and
certain other arrangements may purchase Class B shares with a waiver of the
CDSC upon redemption, based on the number of employees or number of employees
eligible to participate in the plan, the aggregate amount invested by the plan
in specified investments and/or the services provided by Merrill Lynch to the
plan. Such Class B shares will convert into Class D shares approximately ten
years after the plan purchases the first share of any Select Pricing Fund.
Minimum purchase requirements may be waived or varied for such plans.
Additional information regarding purchases by employer-sponsored retirement or
savings plans and certain other arrangements is available toll-free from
Merrill Lynch Business Financial Services at (800) 237-7777.

MERRILL LYNCH BLUEPRINTSM PROGRAM. Class B shares are offered to certain
participants in Blueprint. Blueprint is directed to small investors, group IRAs
and participants in certain affinity groups such as trade associations, credit
unions and benefit plans. Class B shares of the Fund are offered through
Blueprint only to members of certain affinity groups. The CDSC is waived in
connection with purchase orders placed through Blueprint. Services, including
the exchange privilege, available to Class B investors through Blueprint,
however, may differ from those available to other Class B investors. Orders for
purchases and redemptions of Class B shares of the Fund may be grouped for
execution purposes which, in some circumstances, may involve the execution of
such orders two business days following the day such orders are placed. The
minimum initial purchase price is $100, with a $50 minimum for subsequent
purchases through Blueprint. There is no minimum initial or subsequent purchase
requirement for investors who are part of a Blueprint automatic investment
plan. Additional information concerning these Blueprint programs, including any
annual fees or transaction charges, is available from Merrill Lynch, Pierce,
Fenner & Smith Incorporated, The BlueprintSM Program, P.O. Box 30441, New
Brunswick, New Jersey 08989-0441.

CONVERSION OF CLASS B SHARES TO CLASS D SHARES. After approximately ten
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of average daily 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

27
<PAGE>

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.

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 DECEMBER 31, BY DISTRIBUTOR MERRILL LYNCH
- --------------------- ---------------- --------------
<S> <C> <C>
1998 $ 45,018 $ 45,018
1997 $ 73,650 $ 73,650
1996 $113,472 $113,472
</TABLE>

* Additional Class B CDSCs payable to the Distributor with respect to
the fiscal years ended December 31, 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 DECEMBER 31, BY DISTRIBUTOR MERRILL LYNCH
- --------------------- ---------------- --------------
<S> <C> <C>
1998 $76 $76
1997 $ 0 $ 0
1996 $ 0 $ 0
</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

28
<PAGE>

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 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 rate of 0.25% of the average daily net assets of the Fund attributable
to shares of the relevant class in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities 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
0.50%, with respect to Class B shares, 0.55%, with respect to Class C shares,
of the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing shareholder and distribution
services and bearing certain distribution-related expenses of the Fund,
including payments to financial consultants for selling Class B and Class C
shares of the Fund. The Distribution Plans relating to Class B and Class C
shares are designed to permit an investor to purchase Class B and Class C
shares through dealers without the assessment of an initial sales charge and at
the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B and Class C shares.

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 Directors 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 Independent Directors shall be committed to the discretion of the
Independent Directors then in office. In approving each Distribution Plan in
accordance with Rule 12b-1, the Independent Directors concluded that there is
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 Independent Directors
or by the vote of the holders of a majority of the outstanding related class of
voting securities of the Fund. A Distribution Plan cannot be amended to
increase materially the amount to be spent by the Fund without the approval of
the related class of shareholders and all material amendments are required to
be approved by the vote of Directors, including a majority of the Independent
Directors who have no direct or indirect financial interest in 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 Directors 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

29
<PAGE>

revenues from the Distribution Plans may be more or less than
distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Directors for
their consideration in connection with their deliberations as to the
continuance of the Class B and Class C Distribution Plans 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.

As of December 31, 1998, 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 $ ( % of Class B net assets at that date). As of
December 31, 1998, direct cash revenues for the period since the commencement
of operations of Class B shares exceeded direct cash expenses by $
( % of Class B net assets at that date). As of December 31, 1998, 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 $3,000 (0.87% of Class C net
assets at that date). As of December 31, 1998, direct cash revenues for the
period since the commencement of operations of Class C shares exceeded direct
cash expenses by $2,303 (13.40% of Class C net assets at that date).

For the fiscal year ended December 31, 1998, the Fund paid the Distributor
$ pursuant to the Class B Distribution Plan (based on average daily net assets
subject to such Class B Distribution Plan of approximately $ 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 December 31, 1998, the Fund paid the Distributor
$_______ pursuant to the Class C Distribution Plan (based on average daily net
assets subject to such Class C Distribution Plan of approximately $ 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 December 31, 1998, the Fund paid the Distributor
$_______ pursuant to the Class D Distribution Plan (based on average daily net
assets subject to such Class D Distribution Plan of approximately $ 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.

30
<PAGE>

The following table sets forth comparative information as of December 31,
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.

<TABLE>
<CAPTION>
DATA CALCULATED AS OF DECEMBER 31,
1998(1)
----------------------------------------
(IN THOUSANDS)
ALLOWABLE
ELIGIBLE ALLOWABLE INTEREST ON
GROSS AGGREGATE UNPAID
SALES(1) SALES CHARGES(2) BALANCE(3)
---------- --------------- -------------
<S> <C> <C> <C>
CLASS B SHARES FOR THE PERIOD AUGUST 3, 1990
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
Under NASD Rule as Adopted ................... $6,442 $403 $302
Under Distributor's Voluntary Waiver ......... $6,442 $403 $ 32
CLASS C SHARES, FOR THE PERIOD OCTOBER 21,
1994 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
Under NASD Rule as Adopted ................... $ 684 $ 43 $ 15

<CAPTION>
DATA CALCULATED AS OF DECEMBER 31, 1998(1)
-----------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION FEE
MAXIMUM AMOUNTS AGGREGATE AT CURRENT
AMOUNT PREVIOUSLY PAID UNPAID NET ASSET
PAYABLE TO DISTRIBUTOR(4) BALANCE LEVEL(5)
--------- ------------------- ----------- -----------------
<S> <C> <C> <C> <C>
CLASS B SHARES FOR THE PERIOD AUGUST 3, 1990
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
Under NASD Rule as Adopted ................... $705 $120 $585 $555
Under Distributor's Voluntary Waiver ......... $435 $120 $315 $555
CLASS C SHARES, FOR THE PERIOD OCTOBER 21,
1994 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
Under NASD Rule as Adopted ................... $ 58 $ 3 $ 55 $ 0
</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) Includes amounts attributable to exchanges from Summit Cash Reserves Fund
("Summit") which are not reflected in Eligible Gross Sales. Shares of Summit
can only be purchased by exchange from another fund (the "redeemed fund").
Upon such an exchange, the maximum allowable sales charge payment to the
redeemed fund is reduced in accordance with the amount of the redemption.
This amount is then added to the maximum allowable sales charge payment with
respect to Summit. Upon an exchange out of Summit, the remaining balance of
this amount is deducted from the maximum allowable sales charge payment to
Summit and added to the maximum allowable sales charge payment to the fund
into which the exchange is made.
(3) 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.
(4) Consists of CDSC payments, distribution fee payments and accruals. Of the
distribution fee payments made with respect to Class B shares prior to
July 7, 1993, under the distribution plan in effect at that time, at a
0.75% rate, 0.50% of average daily net assets has been treated as a
distribution fee and 0.25% of average daily net assets has been deemed to
have been a service fee and not subject to the NASD maximum sales charge
rule. 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.
(5) 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).

31
<PAGE>

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 New York Stock Exchange (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 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

32
<PAGE>

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.

The net asset value of the shares of all classes of the Fund is determined
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. Any assets or liabilities initially expressed in
terms of non-U.S. dollar currencies are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or dealers on the day of
valuation. 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 Investment Adviser 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. Since the distribution
fees borne by Class C shares are higher than the distribution fees borne by
Class B shares, the per share net asset value of Class B shares generally will
be higher than the per share net asset value of Class C shares. It is expected,
however, that

33
<PAGE>

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.

Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions, and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Directors as the primary market.
Long positions in securities traded in the OTC market are valued at the last
available bid price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. Short
positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. When the
Fund writes an option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at 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 Directors of
the Fund. Such valuations and procedures will be reviewed periodically by the
Directors.

Generally, trading in non-U.S. securities, as well as U.S. Government
securities and money market instruments, is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates are also generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Directors.

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 December 31, 1998 is set
forth below.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net Assets ...................................................... $ $ $ $
========= ========== ========== ========
Number of Shares Outstanding ....................................
========= ========== ========== ========
Net Asset Value Per Share (net assets divided by number of shares
outstanding) ................................................... $ $ $ $
Sales Charge (for Class A and Class D shares: 4.00% of offering
price; 4.17% of net asset value per share)* .................... -- ** -- **
--------- ---------- ---------- --------
Offering Price .................................................. $ $ $ $
========= ========== ========== ========
</TABLE>

- ----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge is
applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption 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.

34
<PAGE>

PORTFOLIO TRANSACTIONS AND BROKERAGE

TRANSACTIONS IN PORTFOLIO SECURITIES

Subject to policies established by the Board of Directors, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions. The securities in which the Fund invests are traded primarily in
the OTC market. Since portfolio transactions generally will not be effected on
foreign securities exchanges, the Fund generally does not expect to incur
potential settlement delays which may occur on certain of such exchanges. Where
possible, the Fund will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better prices and
execution are available elsewhere. Such dealers usually are acting as principal
for their own account. On occasion, securities may be purchased directly from
the issuer. Such portfolio securities generally are traded on a net basis and
normally do not involve either brokerage commissions or transfer taxes.
Securities firms may receive brokerage commissions on certain portfolio
transactions, including options, futures and options on futures transactions
and the purchase and sale of underlying securities upon exercise of options.
The Fund has no obligation to deal with any broker or group of brokers in the
execution of transactions in portfolio securities of the Fund. It is the policy
of the Fund 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 brokerage 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. While reasonable
competitive commission rates are sought, the Fund will not necessarily be
paying the lowest spread or commission available.

Subject to obtaining the best net results, brokers who provide
supplemental investment research (such as information concerning tax-exempt
securities, economic data and market forecasts) to the Investment Adviser 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
Investment Adviser under its Investment Advisory Agreement, and the expenses of
the Investment Adviser will not necessarily be reduced as a result of the
receipt of such supplemental information. It is possible that certain of the
supplementary investment research so received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, the Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions
effected for such other accounts or investment companies. Consistent with the
Conduct Rules of the NASD and policies established by the Directors of the
Fund, the Investment Adviser may consider sales of shares of the Fund as a
factor in the selection of brokers or dealers to execute portfolio transactions
for the Fund.

Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sales of securities
unless a permissive order allowing such transactions is obtained from the
Commission. Since transactions in the OTC market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions. However, affiliated persons of the Fund may
serve as its broker in listed or OTC transactions conducted on an agency basis
provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission
received by non-affiliated brokers in connection with comparable transactions.
In addition, the Fund may not purchase securities during the existence of any
underwriting syndicate for such securities of which Merrill Lynch is a member
or in a private placement in which Merrill Lynch serves as placement agent
except pursuant to procedures approved by the Board of Directors of the Fund
that either comply with rules adopted by the Commission or with interpretations
of the Commission staff. See "Investment Objective and Policies -- Investment
Restrictions."

The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis in U.S. dollars, the Fund intends to manage its portfolio so as to
give reasonable assurance that it will be able to obtain U.S. dollars to the
extent necessary to meet anticipated redemptions. Under present conditions, it
is not believed that these considerations will have any significant effect on
its portfolio strategy.

35
<PAGE>

Information about the brokerage commissions paid by the Fund including
commissions paid to Merrill Lynch, is set forth in the following table:

<TABLE>
<CAPTION>
AGGREGATE PAID TO
FISCAL YEAR ENDED DECEMBER 31, COMMISSIONS PAID MERRILL LYNCH
- -------------------------------- ------------------ --------------
<S> <C> <C>
1998 ................ $ $
1997 ................ $8,287,221 $238,952
1996 ................ $4,122,526 $197,361
</TABLE>

For the fiscal year ended December 31, 1998, the brokerage commissions
paid to Merrill Lynch represented % of the aggregate brokerage commissions
paid and involved % of the Fund's dollar amount of transactions involving
payment of commissions during the year.

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 Directors have considered all factors deemed relevant and have
made a determination not to seek such recapture at this time. The Directors
will reconsider this matter from time to time.

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 Investment
Adviser or FAM.

Because of different objectives or other factors, a particular security
may be bought for one or more clients of the Investment Adviser or an affiliate
when one or more clients of the Investment Adviser 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 Investment Adviser or an affiliate act 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 Investment Adviser 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 Fund offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Certain of such services are not available to investors who place
purchase orders for the Fund's shares through the Merrill Lynch BlueprintSM
Program. 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. Certain of these services are available only to U.S.
investors.

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

36
<PAGE>

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
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 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 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

37
<PAGE>

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 or Class C 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 or Class C shares is "tacked" to the
holding period of the new Class B 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 have
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 the 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 exchange privilege is
modified with respect to certain retirement plans which participate in the MFA
Program. Such retirement plans may exchange Class B, Class C or Class D shares
that have been held for at least one year for Class A shares of the same fund
on the basis of relative net asset values in connection with the commencement
of participation in the MFA Program, i.e., no CDSC will apply. The one year
holding period does not apply to shares acquired through reinvestment of
dividends. Upon termination of participation in the MFA Program, Class A shares
will be re-exchanged for the class of shares originally held. For purposes of
computing any CDSC that may be payable upon redemption of Class B or Class C
shares so reacquired, or the Conversion Period for Class B shares so
reacquired, the holding period

38
<PAGE>

for the Class A shares will be "tacked" to the holding period for the Class B
or Class C shares originally held. The Fund's exchange privilege is also
modified with respect to purchases of Class A and Class D shares by non-
retirement plan investors under the MFA Program. First, the initial allocation
of assets is made under the MFA Program. Then, any subsequent exchange under
the MFA Program of Class A or Class D shares of a Select Pricing Fund for Class
A or Class D shares of the Fund will be made solely on the basis of the
relative net asset values of the shares being exchanged. Therefore, there will
not be a charge for any difference between the sales charge previously paid on
the shares of the other Select Pricing Fund and the sales charge payable on the
shares of the Fund being acquired in the exchange under the MFA Program.

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 MLAM-advised mutual 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 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 (1-800-637-3863).

RETIREMENT PLANS

Individual retirement accounts and other retirement plans are available
from Merrill Lynch. Under these plans, investments may be made in the Fund and
certain of the other mutual funds sponsored by Merrill Lynch as well as in
other securities. Merrill Lynch charges an initial establishment fee and an
annual custodial fee for each account. Information with respect to these plans
is available on request from Merrill Lynch. The minimum initial purchase to
establish any such plan is $100, and the minimum subsequent purchase is $1.

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,

39
<PAGE>

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. For
investors that buy shares of the Fund through Blueprint, no minimum charge to
the investor's bank account is required. Alternatively, an investor that
maintains a CMA(R) or CBA(R) account may arrange to have periodic investments
made in the Fund of amounts of $100 or more ($1 or more for retirement
accounts) through the CMA(R) or CBA(R) Automated Investment Program.

AUTOMATIC DIVIDEND REINVESTMENT PLAN

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 dividend 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 Class A, Class B, Class
C or Class D shares are redeemed from those on deposit in the shareholder's
account to provide the withdrawal payment specified by the shareholder. The
shareholder may specify the dollar amount and the class of shares to be
redeemed. Redemptions will be made at net asset value as determined 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
reinvested automatically in Fund shares. A shareholder's Systematic Withdrawal
Plan may be terminated at any time, without charge or penalty, by the
shareholder, the Fund, the 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

40
<PAGE>

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), CBA(R)
Account or Retirement 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.

DIVIDENDS AND TAXES

DIVIDENDS

The net investment income of the Fund is declared as ordinary income
dividends daily prior to the determination of the net asset value. 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 the net asset value. Expenses of the Fund, including
the investment advisory fees, distribution and/or account maintenance 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 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 annually. Capital gain dividends will be reinvested
automatically in shares unless the shareholder elects to receive such
distributions in cash.

Shareholders may elect in writing to receive any such dividends in cash.
See "Shareholder Services -- Automatic Dividend Reinvestment Plan" for
information concerning the manner in which dividends may be reinvested
automatically in shares of the Fund. Dividends are taxable to shareholders, as
described below, whether they are invested in shares of the Fund or received in
cash. The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A and Class D shares as a result of the account
maintenance, distribution and higher transfer agency fees applicable with
respect to the Class B and Class C shares. Similarly, the per share dividends on
Class D shares will be lower than the per share dividends on Class A shares as a
result of the account maintenance fees applicable with respect to the Class D
shares, and the per share dividends on Class C shares will be lower than the per
share dividends on Class B shares as a result of the higher distribution
expenses with respect to Class C shares. See "Pricing of Shares -- Determination
of Net Asset Value."

41
<PAGE>

TAXES

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

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

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

Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January that 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.

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

If a shareholder exercises 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
the 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.

42
<PAGE>

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

Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders may be able to claim U.S. foreign tax credits with respect to such
taxes, subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. In addition, recent
legislation permits a foreign tax credit to be claimed with respect to
withholding tax on a dividend paid by the Fund only if the shareholder meets
certain holding period requirements. The Fund also must meet these holding
requirements, and if the Fund fails to do so, it will not be able to "pass
through" to shareholders the ability to claim a credit or a deduction for the
related foreign taxes paid by the Fund. If the Fund satisfies the holding
period requirements and if more than 50% in value of its total assets at the
close of its taxable year consists of securities of foreign corporations, the
Fund will be eligible, and intends, to file an election with the Internal
Revenue Service pursuant to which shareholders of the Fund will be required to
include their proportionate shares of such withholding taxes in their U.S.
income tax returns as gross income, treat such proportionate shares as taxes
paid by them, and deduct such proportionate shares in computing their taxable
incomes or, alternatively, use them as foreign tax credits against their U.S.
income taxes. No deductions for foreign taxes, moreover, may be claimed by
noncorporate shareholders who do not itemize deductions. A shareholder that is
a nonresident alien individual or a foreign corporation may be subject to U.S.
withholding tax on the income resulting from the Fund's election described in
this paragraph but may not be able to claim a credit or deduction against such
U.S. tax for the foreign taxes treated as having been paid by such shareholder.
The Fund will report annually to its shareholders the amount per share of such
withholding taxes and other information needed to claim the foreign tax credit.
For this purpose, the Fund will allocate foreign taxes and foreign source
income 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 stock) that is based on
the gross income allocated 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.

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

The Fund may make investments that produce taxable income that is not
matched by a corresponding receipt of cash or an offsetting loss deduction.
Such investments would include obligations that have original issue discount or
that accrue discount and obligations which are subordinated in the mortgage
backed or asset backed securities structure. Such taxable income would be
treated as income earned by the Fund and would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding receipt of cash by the Fund or an offsetting loss deduction, the
Fund may be required to borrow money or dispose of other securities to be able
to make distributions to shareholders. The Fund intends to make sufficient and
timely distributions to shareholders so as to qualify for treatment as a RIC at
all times.

TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS

The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. 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 futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have

43
<PAGE>

gain or loss treated as ordinary gain or loss under Code Section 988 (as
described below), gain or loss from 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.

A forward foreign exchange contract that is a Section 1256 contract will
be marked to market, as described above. However, the character of gain or loss
from such a contract will generally be ordinary under Code Section 988. The
Fund may, nonetheless, elect to treat the gain or loss from certain forward
foreign exchange contracts as capital. In this case, gain or loss realized in
connection with a forward foreign exchange contract that is a Section 1256
contract will be characterized as 60% long-term and 40% short-term capital gain
or loss.

Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in options, futures
and forward foreign exchange contracts. 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 options, futures and
forward foreign exchange contracts.

SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS

In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether the Fund qualifies as a
RIC. It is currently unclear, however, who will be treated as the issuer of a
foreign currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes of
the RIC diversification requirements applicable to the Fund.

Under Code Section 988, special rules are provided for certain
transactions in a currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain debt instruments, from
certain forward contracts, from future contracts that are not "regulated
futures contracts" and from unlisted options will be treated as ordinary income
or loss under Code Section 988. In certain circumstances, the Fund may elect
capital gain or loss treatment for such transactions. Regulated futures
contracts, as described above, will be taxed under Code Section 1256 unless
application of Section 988 is elected by the Fund. In general, however, Code
Section 988 gains or losses will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders
as ordinary income. Additionally, if Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Fund would not be
able to make any ordinary income dividend distributions, and all or a portion
of distributions made before the losses were realized but in the same taxable
year would be recharacterized as a return of capital to shareholders, thereby
reducing the basis of each shareholder's Fund shares and resulting in a capital
gain for any shareholder who received a distribution greater than such
shareholder's basis in Fund shares (assuming the shares were held as a capital
asset). These rules and the mark-to-market rules described above, however, will
not apply to certain transactions entered into by the Fund solely to reduce the
risk of currency fluctuations with respect to its investments.

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

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

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

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

44
<PAGE>

PERFORMANCE DATA

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

The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data 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 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. 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 take into
account the waiver of the CDSC and therefore may reflect greater total return
since, due to the reduced sales charges or the waiver of sales charges, a lower
amount of expenses is deducted. The Fund's total return may be expressed either
as a percentage or as a dollar amount in order to illustrate such total return
on a hypothetical $1,000 investment in the Fund at the beginning of each
specified period.

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 (c) the maximum offering price per
share on the last day of the period.

Set forth in the tables below is total return information for the Class A,
Class B, Class C and Class D shares of the Fund for the periods indicated. As a
result of the implementation of the Merrill Lynch Select PricingSM System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares, and historical performance data pertaining to such
shares is provided below under the caption "Class D."

45
<PAGE>

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------------- ----------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A 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 CHARGES)
One Year Ended
December 31, 1998 ..................... % $ % $
Five Years Ended
December 31, 1998 ..................... -- -- % $
Inception (August 3, 1990) to
December 31, 1998 ..................... -- -- % $
Inception (October 21, 1994) to
December 31, 1998 ..................... % $ -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended December 31,
1998 .................................... % $ % $
1997 .................................... 3.77% $ 1,037.70 3.08% $ 1,030.80
1996 .................................... 6.29% $ 1,062.90 4.52% $ 1,045.20
1995 .................................... 7.14% $ 1,071.40 6.31% $ 1,063.10
1994 .................................... -- -- (3.30)% $ 967.00
Inception (October 21, 1994) to
December 31, 1994 ..................... (1.33)% $ 986.70 -- --
1993 .................................... -- -- 6.15% $ 1,061.50
1992 .................................... -- -- (3.39)% $ 966.10
1991 .................................... -- -- 6.63% $ 1,066.30
Inception (August 3, 1990) to
December 31, 1990 ..................... -- -- 3.40% $ 1,034.00
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (August 3, 1990) to
December 31, 1998 ..................... -- -- % $
Inception (October 21, 1994) to
December 31, 1998 ..................... % $ -- --
YIELD
30 days ended December 31, 1998 ......... % -- % --
</TABLE>

46
<PAGE>
<TABLE>
<CAPTION>
CLASS C SHARES CLASS D SHARES
----------------------------------------- ----------------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END OF ON A 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 CHARGES)
One Year Ended
December 31, 1998 ..................... % $ % $
Five Years Ended
December 31, 1998 ..................... -- -- % $
Inception (August 3, 1990)
to December 31, 1998 .................. -- -- % $
Inception (October 21, 1994)
to December 31, 1998 .................. % $ -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Year Ended December 31,
1998 .................................... % $ % $
1997 .................................... 3.42% $ 1,034.20 3.77% $ 1,037.70
1996 .................................... 4.93% $ 1,049.30 5.09% $ 1,050.90
1995 .................................... 3.48% $ 1,034.80 6.87% $ 1,068.70
1994 .................................... -- -- (2.91)% $ 970.90
Inception (October 21, 1994)
to December 31, 1994 .................. (1.74)% $ 982.60 -- --
1993 .................................... -- -- 6.69% $ 1,066.90
1992 .................................... -- -- (2.79)% $ 972.10
1991 .................................... -- -- 7.23% $ 1,072.30
Inception (August 3, 1990)
to December 31, 1990 .................. -- -- 3.72% $ 1,037.20
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
Inception (August 30, 1990) to
December 31, 1998 ..................... -- -- % $
Inception (October 21, 1994)
to December 31, 1998 .................. % $ -- --
YIELD
30 days ended December 31, 1998 ......... % -- % --
</TABLE>

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.

Total return and yield figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
total return and 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.

47
<PAGE>

On occasion, the Fund may compare its performance to various indices,
including the Merrill Lynch Global Government Bond Index, the Salomon Brothers
World Government One-three Year Bond Index, the Standard & Poor's Composite 500
Index, the Dow Jones Industrial Average, 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 the Fund's 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.

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Fund was incorporated under Maryland law on April 18, 1990. At the
date of this Statement of Additional Information, the Fund has an authorized
capital of 2,600,000,000 shares of Common Stock, par value $0.10 per share,
divided into four classes, designated Class A, Class B, Class C and Class D
Common Stock. Class A consists of 1,000,000,000 shares, Class B consists of
1,000,000,000 shares, Class C consists of 300,000,000 shares and Class D
consists of 300,000,000 shares. Shares of Class A, Class B, Class C and Class D
Common Stock represent an interest in the same assets of the Fund and are
identical in all respects except that the Class B, Class C and Class D shares
bear certain expenses relating to the account maintenance fee relating to such
shares, and Class B and Class C shares bear certain expenses relating to the
distribution of such shares. Each class has exclusive voting rights with
respect to matters relating to account maintenance and distribution
expenditures (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 Directors of the Fund may classify and reclassify the shares of
the Fund into additional classes of Common Stock at a future date.

Shareholders are entitled to one vote for each full share held and to
fractional votes for fractional shares held in the election of Directors (to
the extent hereafter provided) and on other matters submitted to the vote of
shareholders. Except as noted above, all shares of the Fund have equal voting
rights. There normally will be no meeting of shareholders for the purpose of
electing Directors unless and until such time as less than a majority of the
Directors holding office have been elected by the shareholders, at which time
the Directors then in office will call a shareholders' meeting for the election
of Directors. Shareholders may, in accordance with the terms of the Articles of
Incorporation, cause a meeting of shareholders to be held for the purpose of
voting on the removal of Directors. Also, the Fund 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 and/or account maintenance
fees or of a change in fundamental policies, objectives or restrictions of the
Fund. Except as set forth above, the Directors shall continue to hold office
and appoint successor Directors. Each issued and outstanding share is entitled
to participate equally in dividends and distributions declared and in net
assets upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, the Class B, Class C and
Class D shares bear certain additional expenses.

Shares issued are fully paid and nonassessable and have no preemptive
rights. Redemption and conversion rights are discussed 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 Fund voting for the election of Directors
can elect all of the Directors if they choose to do so, and in such event the
holders of the remaining shares would not be able to elect any Directors. No
amendments may be made to the Articles of Incorporation without the affirmative
vote of a majority of the outstanding shares of the Fund.

The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of common stock of the Fund for $100,000. Such shares
were acquired for investment and can only be disposed of by redemption.

48
<PAGE>

INDEPENDENT AUDITORS

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

CUSTODIAN

The Chase Manhattan Bank, Global Securities Services, 4 Chase MetroTech
Center, 18th Floor, Brooklyn, New York 11245 (the "Custodian"), acts as
custodian of the Fund's assets. Under its contract with the Fund, the Custodian
is authorized to establish separate accounts in foreign currencies and to cause
foreign securities owned by the Fund to be held in its offices outside the U.S.
and with certain foreign banks and securities depositories. The Custodian is
responsible for safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on the Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's Transfer Agent. The Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the
opening, maintenance and servicing of shareholder accounts. 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 Fund.

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on December 31 of each year. The Fund
sends to its 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.

ADDITIONAL INFORMATION

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

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

49
<PAGE>

To the knowledge of the Fund, the following persons or entities owned
beneficially 5% or more of the Fund's shares as of February 1, 1999:

<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
- ---------------------------------------------- ------------------------ -----------------
<S> <C> <C>
Blueprint Omnibus Account 400 Atrium Drive 62.4% of Class A
Somerset, NJ 08873
Mr. Edward F. Gobora and Mr. Harry J. Gobora 221 Coolidge Place 17.8% of Class A
Bristol, PA 19007
Merrill Lynch Asset Management P.O. Box 9011 15.0% of Class A
Princeton, NJ 08543 5.4% of Class C
Shirley J. Beard 24 Northwest E Street 45.6% of Class C
Richmond, IN 47374
Muriel Goodman and Herbert Goodman, Trustees 2175 Torrey Glenn 32% of Class C
Goodman Family Trust Escondido, CA 92026
Reynolds E. Labay Russellville Road 9.5% of Class C
Westfield, MA 01085
Paul Mailloux, Executor 2516 Oswego Lane 5.0% of Class C
Estate of Orville C. Mailloux Lafayette, IN 47905
Mabel P. Caruth and Vester T. Hughes, Jr., 5803 Greenville Avenue 6.8% of Class D
Independent Co-Executors Dallas, TX 75206
Estate of W. W. Caruth, Jr.
</TABLE>

SETTLEMENT OF LITIGATION

In June 1993, a putative class action complaint was filed in the United
States District Court for the Southern District of California by several
shareholders of the Merrill Lynch Short-Term World Income Portfolio (the "World
Fund," and together with the Fund referred to in this section as the "Funds"),
a fund organized under the laws of the Cayman Islands for investment solely by
non-United States persons, that has similar investment objectives to the Fund.
The complaint named the World Fund, the Investment Adviser and certain of their
affiliates as defendants. The complaint alleged, among other things, that the
World Fund prospectus did not contain risk disclosures included in the Fund's
prospectus.

Thereafter, in September 1993, a First Amended Class Action Complaint was
filed adding, among other things, two plaintiffs who purchased shares in the
Fund, and adding the Fund and the Distributor as defendants. The Amended
Complaint alleged violations of Section 10(b) and Section 20 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), Section 12(2) and
Section 15 of the Securities Act, and various common law claims. In essence,
plaintiffs alleged that these Funds' sales materials did not contain adequate
risk disclosures and further alleged oral point of sale misrepresentations
regarding the safety of investing in these Funds. In April 1994, the Court
granted defendants' motion to transfer the action to the District of New
Jersey.

On March 10, 1995, plaintiffs filed a Second Amended Complaint which
alleged, among other things, that the Fund and the Word Fund improperly
"speculated" in "high risk `derivatives'" and that this was not disclosed to
the shareholders of either fund in its offering materials. Plaintiffs
reasserted causes of action under Section 12(2) of the Securities Act and
Section 10(b) of the Exchange Act, as well as various common law claims. The
Second Amended Complaint also alleged that defendants violated Section 12(1) of
the Securities Act and Section 7(d) of the Investment Company Act by selling
shares of the World Fund within the United States without registering with the
Commission. It also asserted a new cause of action under Section 13(a) (3) of
the Investment Company Act, alleging that the Fund and the World Fund
improperly deviated from their stated investment policies. The pleading also
added David Walter, one of the Funds' portfolio managers as a defendant.

50
<PAGE>

The Second Amended Complaint purported to be brought on behalf of all
persons and entities who purchased World Fund shares between June 9, 1990 and
October 31, 1992 and who purchased Fund shares between September 15, 1990 and
October 31, 1992. Plaintiffs claimed losses of approximately $700 million and
sought punitive damages in connection with their common law fraud claim.

On September 11, 1995, defendants filed a motion to dismiss the Second
Amended Complaint. On February 23, 1996, the Court granted in part and denied
in part defendants' motion. The Court dismissed plaintiffs' claims that the
defendants failed properly to register the World Fund and its shares with the
Commission. The other counts of the complaint remained. In its opinion, the
Court stated that the prospectuses contained warnings concerning risks
associated with investing in the Funds, including that "investments on a global
basis involved special risks" and warned of the risks of net asset fluctuation,
investments in indexed notes, the use of derivative securities to execute a
hedge and higher fees. The Court found, however, that taking plaintiffs'
allegations as true for purposes of the motion, as it must, the prospectuses
"failed to disclose that it would be necessary for the Funds to take
speculative positions in derivative securities," as plaintiffs alleged. The
Funds maintain that such disclosure was omitted because such speculation was
not the Funds' intention, nor did it in fact occur.

On May 14, 1996, defendants filed an Answer to the Second Amended
Complaint. Plaintiffs then amended their complaint to add a claim under Section
11 of the Securities Act for false and misleading disclosures in the Fund's
Registration Statement. On January 6, 1997, defendants moved to dismiss
plaintiffs' claims under Sections 11 and 12(2) of the Securities Act and
Section 13(a) (3) of the Investment Company Act for failure to state a claim
and on the ground that the applicable statutes of limitation had expired.

In October 1997, while that motion was pending, a settlement agreement was
signed by the parties. On March 4, 1998, the Court entered a final order and
judgment approving the settlement. The Fund will not be paying any money toward
the settlement.

Pursuant to the terms of the settlement agreement, ML & Co. will pay into
a settlement fund (i) $50 million in cash and (ii) coupons with a face value of
$40 million to be used to pay front-end sales charges on purchases of shares of
other mutual funds advised by MLAM, or its affiliate, FAM. The coupons are also
exchangeable for cash equal to 50% of the coupon's face value. Each qualified
claimant will receive, at a minimum, a $70.00 coupon. Cash from the settlement
fund will first be distributed to those qualified claimants who invested in the
Fund and who experienced losses on a total return basis as of September 15,
1993 (the date the Fund was added as a defendant) and to those qualified
claimants who invested in the World Fund and who experienced such losses as of
June 8, 1993. The net settlement amount remaining in the settlement fund after
payment of certain costs and attorney's fees and expenses will be distributed
to qualified claimants.

The settlement does not represent any finding or admission of wrongdoing
by the defendants, in the management or marketing of the Fund or the World Fund
or otherwise.

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.

51
<PAGE>

APPENDIX A
[TO BE UPDATED]

LONG-TERM AND SHORT-TERM OBLIGATION RATINGS

STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS

A Standard & Poor's long-term issue credit rating is a current opinion of
the creditworthiness of an obligor with respect to a financial specific
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 credit worthiness of guarantors,
insurers or other forms of credit enhancement on the obligation and takes into
account the currency in which the obligation is denominated. An obligation
rated "AAA" has the highest rating assigned by Standard & Poor's. The obligor's
capacity to meet its financial commitment is extremely strong. An obligation
rated "AA" differs from the highest rated obligation only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very
strong.

The "AA" rating may be modified by the addition of a plus or minus sign to
show relative standing within that major rating category.

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

Excerpts from Moody's description of its corporate bond ratings: Bonds
which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk; and Bonds which are rated Aa are judged to
be of high quality by all standards.

FITCH IBCA, INC.'S INTERNATIONAL LONG-TERM CREDIT RATINGS

AAA ratings denote the lowest expectation of investment 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 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.

"+" or "-" may be appended to a rating to denote relative status within
major rating categories.

STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS

A Standard & Poor's short-term issue credit rating is a current opinion of
the creditworthiness of an obligor with respect to a specific financial
obligation. The highest category is as follows:

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.

An 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 to 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.

A-1
<PAGE>

MOODY'S SHORT-TERM DEBT RATINGS

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year unless explicitly noted. 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: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.

FITCH IBCA, INC.'S INTERNATIONAL SHORT-TERM CREDIT RATINGS

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

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

"+" or "-" may be appended to a rating to denote relative status within
major rating categories.

A-2
<PAGE>

Code #: 11100-04-99
<PAGE>

PART C. OTHER INFORMATION

ITEM 23. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<S> <C>
1(a) -- Articles of Incorporation of the Registrant, dated April 17, 1990.(a)
(b) -- Articles of Amendment to the Articles of Incorporation of the Registrant, dated October 19,
1994.(a)
(c) -- Articles Supplementary to the Articles of Incorporation of the Registrant, dated October 21,
1994.(a)
2 -- Amended and Restated By-Laws of the Registrant.(b)
3 -- Portions of the Articles of Incorporation, as amended, and the Amended and Restated By-Laws of
the Registrant.(c)
4(a) -- Investment Advisory Agreement between the Registrant and Merrill Lynch Asset Management,
L.P.(b)
(b) -- Sub-Advisory Agreement between Merrill Lynch Investment Management, Inc. (now Merrill Lynch
Asset Management, L.P.) and Merrill Lynch Asset Management U.K. Limited.(b)
(c) -- Supplement to Investment Advisory Agreement between the Registrant and Merrill Lynch Asset
Management, L.P., dated January 3, 1994.(d)
5(a) -- Class A Shares Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc.(d)
(b) -- Class B Shares Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc.(b)
(c) -- Letter Agreement between the Registrant and Merrill Lynch Funds Distributor, Inc. with respect to
the Merrill Lynch Mutual Fund Adviser Program.(e)
(d) -- Class C Shares Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc.(d)
(e) -- Class D Shares Distribution Agreement between the Registrant and Merrill Lynch Funds Distributor,
Inc.(d)
6 -- None.
7 -- Custodian Agreement between the Registrant and The Chase Manhattan Bank, N.A.(b)
8(a) -- 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.)(b)
(b) -- Form of License Agreement relating to the use of name between the Registrant and Merrill Lynch
& Co., Inc.(b)
9 -- Opinion of Brown & Wood LLP, counsel to the Registrant.(g)
10 -- Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
11 -- None.
12 -- Certificate of Merrill Lynch Asset Management, Inc.(b)
13(a) -- Class B Shares Distribution Plan and Class B Shares Distribution Plan Sub-Agreement of the
Registrant.(e)
(b) -- Class C Shares Distribution Plan and Class C Shares Distribution Plan Sub-Agreement of the
Registrant.(d)
(c) -- Class D Shares Distribution Plan and Class D Shares Distribution Plan Sub-Agreement of the
Registrant.(d)
14(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
15 -- Merrill Lynch Select PricingSM System Plan pursuant to Rule 18f-3.(f)
</TABLE>

- ---------
(a) Filed on March 1, 1995 as an Exhibit to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A under the Securities Act
of 1933, as amended (File No. 33-34476) (the "Registration Statement").

(b) Filed on February 26, 1996 as an Exhibit to Post-Effective Amendment No. 7
to the Registration Statement.

C-1
<PAGE>

(c) Reference is made to Article III (Sections 3 and 4), Article V, Article VI
(Section 2, 3, 4, 5 and 6), Article VII, Article VIII and Article X of the
Registrant's Articles of Incorporation, as amended and supplemented, filed
as Exhibits 1(a), 1(b) and 1(c) to the Registration Statement, and Article
II, Article III (Sections 1, 3, 5, 6 and 17), Article VI, Article VII,
Article XIII, and Article XIV of the Registrant's Amended and Restated
By-Laws filed as Exhibit 2 to the Registration Statement.

(d) Filed on October 17, 1994 as an Exhibit to Post-Effective Amendment No. 5
to the Registration Statement.

(e) Filed on February 28, 1994 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement.

(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of 1933,
as amended, filed on January 25, 1996, relating to the shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).

(g) Previously filed as an exhibit 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.

Reference is made to Article VI of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-Laws, Section 2-418 of the
Maryland General Corporation Law and Section 9 of the Distribution Agreements.

Article VI of the By-Laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the General Laws of the State of Maryland, except that such indemnity
shall not protect any such person against any liability to the Registrant or
any stockholder thereof to which such person would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification was not
liable on the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent counsel or non-party
independent directors, after review of the facts, that such officer or director
is not guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.

Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-Laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the
full extent permitted under the General Laws of the State of Maryland;
provided, however, that the person seeking indemnification shall provide to the
Registrant a written affirmation of his good faith belief that the standard of
conduct necessary for indemnification by the Registrant has been met and a
written undertaking to repay any such advance, if it should ultimately be
determined that the standard of conduct has not been met, and provided further
that at least one of the following additional conditions is met: (a) the person
seeking indemnification shall provide a security in form and amount acceptable
to the Registrant for his undertaking; (b) the Registrant is insured against
losses arising by reason of the advance; (c) a majority of a quorum of
non-party independent directors, or independent legal counsel in a written
opinion, shall determine, based on a review of facts readily available to the
Registrant at the time the advance is proposed to be made, that there is reason
to believe that the person seeking indemnification will ultimately be found to
be entitled to indemnification.

The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the General Laws of
the State of Maryland from liability arising from his activities as officer or
director of the Registrant. The Registrant, however, may not purchase insurance
on behalf of any officer or director of the Registrant that protects or
purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.

The Registrant may indemnify, make advances or purchase insurance to the
extent provided in Article VI of the By-Laws on behalf of an employee or agent
who is not an officer or director of the Registrant.

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

C-2
<PAGE>

1933, as amended (the "1933 Act"), against certain types of civil liabilities
arising in connection with the Registration Statement, the Prospectus or the
Statement of Additional Information.

Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 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 Director, officer,
or controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the principal
underwriter in connection with the shares being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or "MLAM"),
acts as the investment adviser for the following open-end registered investment
companies: Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill
Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill
Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch
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., 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.

Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities Fund, CMA Money
Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury
Fund, The Corporate Fund Accumulation Program, Inc., Financial Institutions
Series Trust, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch
Corporate High Yield Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc.,
Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series Trust,
Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal Bond
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund,
Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and 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
California Insured Fund IV, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund III,
MuniHoldings Florida Insured Fund IV, MuniHoldings Insured Fund, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New Jersey
Insured Fund III, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc., MuniHoldings
New York Insured Fund III, Inc., 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.,

C-3
<PAGE>

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.

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 Investment Adviser, FAM, 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
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person or entity has been engaged
since January 1, 1997 for his, her or its own account or in the capacity of
director, officer, partner or trustee. In addition, Mr. Zeikel is President,
Mr. Burke is Vice President and Treasurer and Mr. Glenn is Executive Vice
President of all or substantially all of the investment companies described in
the first two paragraphs of this Item 26, and Messrs. Giordano 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 FAM
Princeton Services ......... General Partner General Partner of FAM
Arthur Zeikel .............. Chairman Chairman of FAM; President of MLAM and
FAM 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 FAM; 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 FAM; Executive
Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators
Donald C. Burke ............ Senior Vice President, Senior Vice President and Treasurer of FAM;
Treasurer and Director Senior Vice President and Treasurer of
of Taxation Princeton Services; Vice President of PFD;
First Vice President of MLAM from 1997
to 1999; Vice President of MLAM from
1990 to 1997
Michael G. Clark ........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Director
and Treasurer of PFD; First Vice President
of MLAM from 1997 to 1999; Vice
President of MLAM from 1996 to 1997
</TABLE>

C-4
<PAGE>

<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ----------------------------- ------------------------ ---------------------------------------------
<S> <C> <C>
Mark A. Desario ............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Linda L. Federici ........... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Vincent R. Giordano ......... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin ........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Norman R. Harvey ............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel ...... Senior Vice President, Senior Vice President, Secretary and General
Secretary and General Counsel of FAM; Senior Vice President of
Counsel Princeton Services
Philip L. Kirstein .......... Senior Vice President Senior Vice President of FAM; Senior Vice
President, Director and Secretary of
Princeton Services
Ronald M. Kloss ............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Debra W. Landsman-Yaros ..... Senior Vice President Senior Vice President of FAM; 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 FAM; Senior Vice
President of Princeton Services
Brian A. Murdock ............ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Gregory D. Upah ............. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>

Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as
sub-adviser for the following registered investment companies: The Corporate
Fund Accumulation Program, 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 Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Consults International Portfolio, Merrill Lynch Convertible Fund,
Inc., Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High
Yield Fund, Inc., Merrill Lynch Developing Capital Markets Fund, Inc., Merrill
Lynch Dragon Fund, Inc., Merrill Lynch Emerging Tigers 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., Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Middle
East/Africa Fund, Inc., Merrill Lynch Pacific Fund, Inc., Merrill Lynch Phoenix
Fund, Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Series Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc., Merrill Lynch Short-Term
Global Income Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch
Utility Income Fund, Inc., Merrill Lynch Variable Series Funds, Inc., Merrill
Lynch World Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.
and Worldwide DollarVest Fund, Inc. The address of each of these registered
investment companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of MLAM U.K. is Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.

C-5
<PAGE>

Set forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of a
substantial nature in which each such person has been engaged since January 1,
1997, for his or her own account or in the capacity of director, officer,
partner or trustee. In addition, Messrs. Zeikel, Albert and Burke are officers
of one or more of the registered investment companies listed in the first two
paragraphs of this Item 26:

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
NAME POSITIONS WITH PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- MLAM U.K. ------------------------------------------
<S> <C> <C>
Arthur Zeikel ............. Director and Chairman Chairman of MLAM and FAM; President of
MLAM and FAM from 1977 to 1997;
Chairman and Director of Princeton
Services; President of Princeton Services
from 1993 to 1997; Executive Vice
President of ML & Co.
Alan J. Albert ............ Senior Managing Director Vice President of MLAM
Nicholas C.D. Hall ........ Director Director of Merrill Lynch Europe PLC;
General Counsel of Merrill Lynch
International Private Banking Group
Carol Ann Langham ......... Company Secretary None
Debra Anne Searle ......... Assistant Company Secretary None
</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. and 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.

<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 ................ Treasurer and Director None
Thomas J. Verage ................ Director None
Robert W. Crook ................. Senior Vice President None
Michael J. Brady ................ Vice President None
William M. Breen ................ Vice President None
Donald C. Burke ................. Vice President Vice President and Treasurer
James T. Fatseas ................ Vice President None
Debra W. Landsman-Yaros ......... Vice President None
Michelle T. Lau ................. Vice President None
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).

C-6
<PAGE>

ITEM 29. MANAGEMENT SERVICES.

Other than as set forth under the caption "Management of the Fund --
Merrill Lynch Asset Management" in the Prospectus constituting Part A of the
Registration Statement and under "Management of the Fund -- 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.

C-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act and the Investment
Company Act, the registrant has duly caused this 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 26th day of
February, 1999.

MERRILL LYNCH SHORT-TERM GLOBAL INCOME FUND, INC.
(Registrant)

By: /s/ TERRY K. GLENN

-------------------------------------
(TERRY K. GLENN, EXECUTIVE VICE PRESIDENT)

Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following person in the capacities and
on the date indicated.

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

DONALD C. BURKE* Vice President and Treasurer (Principal
---------------------------------- Financial and Accounting Officer)
(DONALD C. BURKE)

DONALD CECIL* Director
----------------------------------
(DONALD CECIL)

ROLAND M. MACHOLD* Director
----------------------------------
(ROLAND M. MACHOLD)

EDWARD H. MEYER* Director
----------------------------------
(EDWARD H. MEYER)

CHARLES C. REILLY* Director
----------------------------------
(CHARLES C. REILLY)

RICHARD R. WEST* Director
----------------------------------
(RICHARD R. WEST)

EDWARD D. ZINBARG* Director
----------------------------------
(EDWARD D. ZINBARG)

*By: /s/ TERRY K. GLENN February 26, 1999
------------------------------
(TERRY K. GLENN, ATTORNEY-IN-FACT)
</TABLE>

C-8

<PAGE>

POWER OF ATTORNEY

The undersigned, a director of each of the Maryland corporations listed
below and a trustee of each of the Massachusetts business trusts listed below,
hereby authorizes Arthur Zeikel, Terry K. Glenn, Donald C. Burke, Barbara G.
Fraser, Phillip S. Gillespie, Robert Harris, Philip M. Mandel, Ira P. Shapiro
or Michael J. Hennewinkel, or any of them, as attorney-in-fact, to sign on his
behalf any amendments to the Registration Statement for each of the following
registered investment companies and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission: Merrill Lynch Americas
Income Fund, Inc.; Merrill Lynch Developing Capital Markets Fund, Inc.; Merrill
Lynch Dragon Fund, Inc.; Merrill Lynch Emerging Tigers Fund, Inc.; Merrill
Lynch EuroFund; Merrill Lynch Global Allocation Fund, Inc.; Merrill Lynch
Global Bond Fund for Investment and Retirement; Merrill Lynch Global Holdings,
Inc.; Merrill Lynch Global SmallCap Fund, Inc.; Merrill Lynch Global Technology
Fund, Inc.; Merrill Lynch Global Value Fund, Inc.; Merrill Lynch Healthcare
Fund, Inc.; Merrill Lynch International Equity Fund; Merrill Lynch Latin
America Fund, Inc.; Merrill Lynch Middle East/ Africa Fund, Inc.; Merrill
Lynch Pacific Fund, Inc.; Merrill Lynch Short-Term Global Income Fund, Inc.;
Merrill Lynch Technology Fund, Inc.; and Worldwide DollarVest Fund, Inc.

Dated: January 21, 1999

/s/ DONALD CECIL
----------------------------------------
(DONALD CECIL)

/s/ ROLAND M. MACHOLD
----------------------------------------
(ROLAND M. MACHOLD)

/s/ EDWARD H. MEYER
----------------------------------------
(EDWARD H. MEYER)

/s/ CHARLES C. REILLY
----------------------------------------
(CHARLES C. REILLY)

/s/ RICHARD B. WEST
----------------------------------------
(RICHARD B. WEST)

/s/ ARTHUR ZEIKEL
----------------------------------------
(ARTHUR ZEIKEL)

/s/ EDWARD D. ZINBARG
----------------------------------------
(EDWARD D. ZINBARG)

C-9

<PAGE>

POWER OF ATTORNEY

The undersigned, the Vice President and Treasurer of each of the
registered investment companies listed below, hereby authorizes Arthur Zeikel,
Terry K. Glenn, Barbara G. Fraser, Phillip S. Gillespie, Robert Harris, Philip
M. Mandel, Ira P. Shapiro or Michael J. Hennewinkel, or any of them, as
attorney-in-fact, to sign on his behalf any amendments to the Registration
Statement for each of the following registered investment companies and to file
the same, with all exhibits thereto, with the Securities and Exchange
Commission: Merrill Lynch Americas Income Fund, Inc.; Merrill Lynch Developing
Capital Markets Fund, Inc.; Merrill Lynch Dragon Fund, Inc.; Merrill Lynch
Emerging Tigers Fund, Inc.; Merrill Lynch EuroFund; Merrill Lynch Global
Allocation Fund, Inc.; Merrill Lynch Global Bond Fund for Investment and
Retirement; Merrill Lynch Global Holdings, Inc.; Merrill Lynch Global SmallCap
Fund, Inc.; Merrill Lynch Global Technology Fund, Inc.; Merrill Lynch Global
Value Fund, Inc.; Merrill Lynch Healthcare Fund, Inc.; Merrill Lynch
International Equity Fund; Merrill Lynch Latin America Fund, Inc.; Merrill
Lynch Middle East/Africa Fund, Inc.; Merrill Lynch Pacific Fund, Inc.; Merrill
Lynch Short-Term Global Income Fund, Inc.; Merrill Lynch Technology Fund, Inc.;
and Worldwide DollarVest Fund, Inc.

Dated: January 22, 1999

/s/ DONALD C. BURKE
----------------------------------------
(DONALD C. BURKE)

C-10
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------- ---------------------------------------------------------------------------
<S> <C> <C>
10 -- Consent of Deloitte & Touche LLP, independent auditors for
the Registrant.
14(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
</TABLE>

Exhibit 10

INDEPENDENT AUDITORS' CONSENT

Merrill Lynch Short-Term Global Income Fund, Inc.:

We consent to the incorporation by reference in this Post-Effective Amendment
No. 7 to Registration Statement No. 33-34476 of our report dated February 19,
1999 appearing in the annual report to shareholders of Merrill Lynch Short-Term
Global Income Fund, Inc. for the year ended December 31, 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
February 25, 1999

<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[INVESTMENTS-AT-COST] 120669386
[INVESTMENTS-AT-VALUE] 120414061
[RECEIVABLES] 1141026
[ASSETS-OTHER] 412678
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 121967765
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 989478
[TOTAL-LIABILITIES] 989478
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 168463494
[SHARES-COMMON-STOCK] 841
[SHARES-COMMON-PRIOR] 2261
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (47511075)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 25868
[NET-ASSETS] 6564
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 8417558
[OTHER-INCOME] 0
[EXPENSES-NET] (2392445)
[NET-INVESTMENT-INCOME] 6025113
[REALIZED-GAINS-CURRENT] (193436)
[APPREC-INCREASE-CURRENT] 540945
[NET-CHANGE-FROM-OPS] 6372622
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (446)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2330
[NUMBER-OF-SHARES-REDEEMED] (3799)
[SHARES-REINVESTED] 49
[NET-CHANGE-IN-ASSETS] (52704449)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (47522387)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 816524
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2392445
[AVERAGE-NET-ASSETS] 9263
[PER-SHARE-NAV-BEGIN] 7.76
[PER-SHARE-NII] .38
[PER-SHARE-GAIN-APPREC] .04
[PER-SHARE-DIVIDEND] (.37)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (.01)
[PER-SHARE-NAV-END] 7.80
[EXPENSE-RATIO] .84
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[INVESTMENTS-AT-COST] 120669386
[INVESTMENTS-AT-VALUE] 120414061
[RECEIVABLES] 1141026
[ASSETS-OTHER] 412678
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 121967765
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 989478
[TOTAL-LIABILITIES] 989478
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 168463494
[SHARES-COMMON-STOCK] 14378489
[SHARES-COMMON-PRIOR] 20806225
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (47511075)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 25868
[NET-ASSETS] 110989173
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 8417558
[OTHER-INCOME] 0
[EXPENSES-NET] (2392445)
[NET-INVESTMENT-INCOME] 6025113
[REALIZED-GAINS-CURRENT] (193436)
[APPREC-INCREASE-CURRENT] 540945
[NET-CHANGE-FROM-OPS] 6372622
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (5498344)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2168042
[NUMBER-OF-SHARES-REDEEMED] (8956990)
[SHARES-REINVESTED] 361212
[NET-CHANGE-IN-ASSETS] (52704449)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (47522387)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 816524
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2392445
[AVERAGE-NET-ASSETS] 136010197
[PER-SHARE-NAV-BEGIN] 7.69
[PER-SHARE-NII] .31
[PER-SHARE-GAIN-APPREC] .03
[PER-SHARE-DIVIDEND] (.30)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (.01)
[PER-SHARE-NAV-END] 7.72
[EXPENSE-RATIO] 1.65
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[INVESTMENTS-AT-COST] 120669386
[INVESTMENTS-AT-VALUE] 120414061
[RECEIVABLES] 1141026
[ASSETS-OTHER] 412678
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 121967765
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 989478
[TOTAL-LIABILITIES] 989478
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 168463494
[SHARES-COMMON-STOCK] 2260
[SHARES-COMMON-PRIOR] 45390
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (47511075)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 25868
[NET-ASSETS] 17191
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 8417558
[OTHER-INCOME] 0
[EXPENSES-NET] (2392445)
[NET-INVESTMENT-INCOME] 6025113
[REALIZED-GAINS-CURRENT] (193436)
[APPREC-INCREASE-CURRENT] 540945
[NET-CHANGE-FROM-OPS] 6372622
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (1670)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 186138
[NUMBER-OF-SHARES-REDEEMED] (229410)
[SHARES-REINVESTED] 142
[NET-CHANGE-IN-ASSETS] (52704449)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (47522387)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 816524
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2392445
[AVERAGE-NET-ASSETS] 41781
[PER-SHARE-NAV-BEGIN] 7.58
[PER-SHARE-NII] .29
[PER-SHARE-GAIN-APPREC] .03
[PER-SHARE-DIVIDEND] (.28)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (.01)
[PER-SHARE-NAV-END] 7.61
[EXPENSE-RATIO] 1.76
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[INVESTMENTS-AT-COST] 120669386
[INVESTMENTS-AT-VALUE] 120414061
[RECEIVABLES] 1141026
[ASSETS-OTHER] 412678
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 121967765
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 989478
[TOTAL-LIABILITIES] 989478
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 168463494
[SHARES-COMMON-STOCK] 1290599
[SHARES-COMMON-PRIOR] 1718210
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (47511075)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 25868
[NET-ASSETS] 9965359
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 8417558
[OTHER-INCOME] 0
[EXPENSES-NET] (2392445)
[NET-INVESTMENT-INCOME] 6025113
[REALIZED-GAINS-CURRENT] (193436)
[APPREC-INCREASE-CURRENT] 540945
[NET-CHANGE-FROM-OPS] 6372622
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (524653)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 104159
[NUMBER-OF-SHARES-REDEEMED] (572114)
[SHARES-REINVESTED] 40344
[NET-CHANGE-IN-ASSETS] (52704449)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (47522387)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 816524
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2392445
[AVERAGE-NET-ASSETS] 11432819
[PER-SHARE-NAV-BEGIN] 7.70
[PER-SHARE-NII] .35
[PER-SHARE-GAIN-APPREC] .02
[PER-SHARE-DIVIDEND] (.34)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (.01)
[PER-SHARE-NAV-END] 7.72
[EXPENSE-RATIO] 1.10
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>