CMA MASSACHUSETTS MUN MON FD OF CMA MULTI STATE MUN SERS TRU, 485BPOS, 1999-07-27

CMA MASSACHUSETTS MUN MON FD OF CMA MULTI STATE MUN SERS TRU
485BPOS, 1999-07-27

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1999

SECURITIES ACT FILE NO. 33-34610
INVESTMENT COMPANY ACT FILE NO. 811-5011
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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. 11 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 103 /X/
(Check appropriate box or boxes)

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

CMA MASSACHUSETTS MUNICIPAL MONEY FUND
OF CMA MULTI-STATE MUNICIPAL SERIES TRUST
(Exact Name of Registrant as Specified in Charter)

800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(Address of Principal Executive Offices)

(609) 282-2800
(Registrant's Telephone Number, including Area Code)
------------------------

TERRY K. GLENN
CMA MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS:
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(Name and Address of Agent for Service)
------------------------

COPIES TO:

<TABLE>
<S> <C>
Counsel for the Fund: Michael J. Hennewinkel, Esq.
BROWN & WOOD LLP FUND ASSET MANAGEMENT
One World Trade Center P.O. Box 9011
New York, New York 10048-0557 Princeton, New Jersey
Attention: Thomas R. Smith, Jr., 08543-9011
Esq.
</TABLE>

JEFFREY S. ALEXANDER, ESQ.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10281
------------------------

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE
BOX)

<TABLE>
<C> <S>
/ / immediately upon filing pursuant to paragraph (b)
/X/ on July 27, 1999 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (1)
/ / on (date) pursuant to paragraph (a) (1)
/ / 75 days after filing pursuant to paragraph (a) (2)
/ / on (date) pursuant to paragraph (a) (2) of Rule 485
</TABLE>

IF APPROPRIATE, CHECK THE FOLLOWING BOX:

<TABLE>
<C> <S>
/ / This post-effective amendment designates a new effective date for a previously
filed post-effective amendment.
</TABLE>

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

TITLE OF SECURITIES BEING REGISTERED: SHARES OF BENEFICIAL INTEREST, PAR
VALUE $.10 PER SHARE

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[LOGO]

PROSPECTUS

CMA Multi-State Municipal Series Trust

CMA Arizona Municipal Money Fund

CMA California Municipal Money Fund

CMA Connecticut Municipal Money Fund

CMA Massachusetts Municipal Money Fund

CMA Michigan Municipal Money Fund

CMA New Jersey Municipal Money Fund

CMA New York Municipal Money Fund

CMA North Carolina Municipal Money Fund

CMA Ohio Municipal Money Fund

CMA Pennsylvania Municipal Money Fund

July 27, 1999

THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD
KNOW BEFORE INVESTING, INCLUDING INFORMATION ABOUT
RISKS. PLEASE READ IT BEFORE YOU INVEST AND KEEP IT
FOR FUTURE REFERENCE.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
TABLE OF CONTENTS

<TABLE>
<S> <C>
PAGE
[ICON] KEY FACTS
------------------------------------------------------

CMA Multi-State Municipal Series Trust at a
Glance ............................................. 3

Risk/Return Bar Charts for Each Fund ............... 5

Fees and Expenses for Each Fund ................... 11

[ICON] DETAILS ABOUT THE FUNDS
------------------------------------------------------

How Each Fund Invests ............................. 13

Investment Risks .................................. 16

[ICON] YOUR ACCOUNT
------------------------------------------------------

How to Buy, Sell and Transfer Shares .............. 22

How Shares are Priced ............................. 27

Dividends and Taxes ............................... 27

[ICON] MANAGEMENT OF THE FUNDS
------------------------------------------------------

Fund Asset Management ............................. 29

Financial Highlights .............................. 30

[ICON] FOR MORE INFORMATION
------------------------------------------------------

Shareholder Reports ....................... Back Cover

Statement of Additional Information ....... Back Cover
</TABLE>

CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
KEY FACTS [ICON]
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.

SHORT TERM SECURITIES -- securities that mature or reset to a new interest rate
within not more than 397 days (13 months), or that give a Fund the right to
demand payment from a financial institution within that period.

MUNICIPAL SECURITIES -- securities issued by or on behalf of a particular state
or its agencies, political subdivisions or instrumentalities, or other
qualifying issuer that either (i) pay interest that, in the opinion of counsel
to the issuer, is exempt from Federal income tax and any applicable state or
local income or other taxes or (ii) in states that impose an intangible personal
property tax, are securities the value of which is exempt from such taxes.

THE CMA MULTI-STATE MUNICIPAL SERIES TRUST AT A
GLANCE
--------------------------------------------------

A Cash Management Account-Registered Trademark-
("CMA-Registered Trademark- Account") is a
conventional Merrill Lynch cash securities or
margin account that is linked to the CMA Funds, to
money market deposit accounts maintained with
certain banks and to a Visa-Registered Trademark-
card/check account ("Visa-Registered Trademark-
Account"). Subscribers to the CMA service are
charged an annual program participation fee of
$100, and may automatically invest free cash
balances held in their CMA accounts in shares of
one of the CMA Funds, including the various series
of The CMA Multi-State Municipal Series Trust.

Although the CMA Funds have been designed
primarily to accommodate the investment of free
cash balances of CMA subscribers, the CMA service
is a program offered by Merrill Lynch (not the
Funds). This prospectus is not intended to provide
detailed information concerning the CMA service.
If you want more information about the CMA
service, please review the CMA program description
brochure.

The ten series of the CMA Multi-State Municipal
Series Trust, together with CMA Money Fund, CMA
Government Securities Fund, CMA Tax-Exempt Fund
and CMA Treasury Fund make up the CMA Funds. The
CMA Funds are money market funds whose shares are
offered to subscribers of the CMA service. Each
CMA Fund is a no-load money market fund that seeks
current income, preservation of capital and
liqudity from investing in short term securities.
Each CMA Fund has its own goals, investment
strategies and risks. We cannot guarantee that any
of the CMA Funds will achieve its goals.

This prospectus provides information concerning
only the Funds that make up the CMA Multi-State
Municipal Series Trust.

WHAT ARE EACH FUND'S INVESTMENT OBJECTIVES?

The investment objectives of each Fund are to seek
current income (or value, in the case of states
that impose intangible personal property taxes)
exempt from tax, including Federal and the
designated state's personal income taxes, and in
certain instances, local personal income taxes,
local personal property taxes and/ or state
intangible personal property taxes. Each Fund also
seeks preservation of capital and liquidity
available from investing in a portfolio of short
term, high quality tax-exempt securities.

WHAT ARE EACH FUND'S MAIN INVESTMENT STRATEGIES?

Each Fund tries to achieve its objectives by
investing in a portfolio of SHORT TERM MUNICIPAL
SECURITIES of its designated state. These
securities consist principally of municipal notes
and commercial paper, short term municipal bonds,
variable rate demand obligations, and short term
municipal derivative securities.

Each Fund will generally invest at least 80% of
its net assets in municipal securities including
at least 65% of its total assets in municipal
securities of its designated state. The New Jersey
Fund will generally invest at least 80% of its
total assets in New Jersey municipal securities.
Each Fund may invest up to 20% of its assets in
short term money market securities that are not
exempt from Federal or state taxes.

Each Fund only invests in short term municipal
securities that have one of the two highest short
term ratings from a nationally recognized rating
agency or in unrated securities that Fund
management believes are of comparable quality.
Certain short term municipal securities are
entitled to the benefit of insurance,

CMA MULTI-STATE MUNICIPAL SERIES TRUST 3
<PAGE>
[ICON] KEY FACTS

guarantees, letters of credit or similar
arrangements provided by a financial institution.
Each Fund may invest more than 25% of its assets
in short term municipal securities of this kind.
When this is the case, Fund management may
consider the obligation of the financial
institution and its creditworthiness in
determining whether the security is an appropriate
investment for the Fund. Certain short term
municipal securities have maturities longer than
397 days, but give the Fund the right to demand
payment from a financial institution within that
period. The Funds treat those securities as having
a maturity of 397 days or less. The
dollar-weighted average maturity of each Fund's
portfolio will be 90 days or less.

Fund management decides which securities to buy
and sell based on its assessment of the relative
values of different securities and future interest
rates. Fund management seeks to improve each
Fund's yield by taking advantage of differences in
yield that regularly occur between securities of a
similar kind.

WHAT ARE THE MAIN RISKS OF INVESTING IN A FUND?

An investment in a Fund is not insured or
guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The
Fund could lose money if the issuer of an
instrument held by the Fund defaults or if short
term interest rates rise sharply in a manner not
anticipated by Fund management. Although each Fund
seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by
investing in a Fund.

In addition, since each Fund invests at least 65%
of its assets in the municipal securities of its
designated state, it is more exposed to negative
political or economic factors in that state than a
fund that invests more widely.

We cannot guarantee that each Fund will achieve
its objectives.

WHO SHOULD INVEST?

Shares of each Fund are offered to participants in
the Cash Management Account-Registered Trademark-
financial service program and to investors
maintaining accounts directly with the Transfer
Agent.

A Fund may be an appropriate investment for you if
you:
- Are looking for liquidity and current
income (or value) that is exempt from
Federal income tax and applicable state
taxes.
- Are looking for preservation of capital.
- Are investing with short term goals in
mind, such as for cash reserves.

KEY FACTS [ICON]

4 CMA MULTI-STATE MUNICIPAL SERIES TRUST

<PAGE>
RISK/RETURN BAR CHARTS
--------------------------------------------------
The bar charts and tables shown below provide an
indication of the risks of investing in each Fund.
The bar charts show changes in each Fund's
performance for the past ten calendar years or
since inception. The tables show the average annual
total returns of each Fund for the periods shown.
How each Fund performed in the past is not
necessarily an indication of how that Fund will
perform in the future.

CMA ARIZONA MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC

During the period shown in the bar chart, the
highest return for a quarter was 0.94% (quarter
ended June 30, 1995) and the lowest return for a
quarter was 0.45% (quarter ended March 31, 1994).
The Fund's year-to-date return as of June 30, 1999
was 1.22%.

<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>
- --------------------------------------------------------------------------------
CMA Arizona Municipal Money Fund 2.85% 2.94% 2.78%+
- --------------------------------------------------------------------------------
</TABLE>

+ Inception date is February 8, 1993.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 5
<PAGE>
CMA CALIFORNIA MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the ten year period shown in the bar chart, the highest return for a
quarter was 1.55% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.45% (quarter ended March 31, 1994). The Fund's year-to-date return
as of June 30, 1999 was 1.18%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(AS OF THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
CMA California Municipal Money Fund 2.81% 2.87% 3.35%
- --------------------------------------------------------------------------------
</TABLE>

CMA CONNECTICUT MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the period shown in the bar chart, the highest return for a quarter was
0.81% (quarter ended June 30, 1995) and the lowest return for a quarter was
0.43% (quarter ended March 31, 1994). The Fund's year-to-date return as of June
30, 1999 was 1.16%.

<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>
- --------------------------------------------------------------------------------
CMA Connecticut Municipal Money Fund 2.74% 2.76% 2.69%+
- --------------------------------------------------------------------------------
</TABLE>

+ Inception date is April 29, 1991.

KEY FACTS [Icon]

6 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
CMA MASSACHUSETTS MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the period shown in the bar chart, the highest return for a quarter was
1.07% (quarter ended March 31, 1991) and the lowest return for a quarter was
0.41% (quarter ended March 31, 1994). The Fund's year-to-date return as of June
30, 1999 was 1.24%.

<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>
- --------------------------------------------------------------------------------
CMA Massachusetts Municipal Money Fund 2.88% 2.79% 2.91%+
- --------------------------------------------------------------------------------
</TABLE>

+ Inception date is July 30, 1990.

CMA MICHIGAN MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the period shown in the bar chart, the highest return for a quarter was
0.84% (quarter ended June 30, 1995) and the lowest return for a quarter was
0.43% (quarter ended March 31, 1994). The Fund's year-to-date return as of June
30, 1999 was 1.25%.

<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>
- --------------------------------------------------------------------------------
CMA Michigan Municipal Money Fund 2.89% 2.86% 2.77%+
- --------------------------------------------------------------------------------
</TABLE>

+ Inception date is April 29, 1991.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 7
<PAGE>
CMA NEW JERSEY MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the period shown in the bar chart, the highest return for a quarter was
1.01% (quarter ended March 31, 1991) and the lowest return for a quarter was
0.42% (quarter ended March 31, 1994). The Fund's year-to-date return as of June
30, 1999 was 1.21%.

<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>
- --------------------------------------------------------------------------------
CMA New Jersey Municipal Money Fund 2.82% 2.79% 2.89%+
- --------------------------------------------------------------------------------
</TABLE>

+ Inception date is July 30, 1990.

CMA NEW YORK MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the ten year period shown in the bar chart, the highest return for a
quarter was 1.43% (quarter ended June 30, 1989) and the lowest return for a
quarter was 0.43% (quarter ended June 30, 1993). The Fund's year-to-date return
as of June 30, 1999 was 1.25%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
(AS OF THE CALENDAR YEAR ENDED) PAST PAST PAST
DECEMBER 31, 1998 ONE YEAR FIVE YEARS TEN YEARS
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
CMA New York Municipal Money Fund 2.91% 2.88% 3.29%
- --------------------------------------------------------------------------------
</TABLE>

KEY FACTS [Icon]

8 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
CMA NORTH CAROLINA MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the period shown in the bar chart, the highest return for a quarter was
0.86% (quarter ended June 30, 1995) and the lowest return for a quarter was
0.44% (quarter ended March 31, 1994). The Fund's year-to-date return as of June
30, 1999 was 1.21%.

<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>
- --------------------------------------------------------------------------------
CMA North Carolina Municipal Money Fund 2.85% 2.84% 2.74%+
- --------------------------------------------------------------------------------
</TABLE>

+ Inception date is May 28, 1991.

CMA OHIO MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the period shown in the bar chart, the highest return for a quarter was
0.88% (quarter ended June 30, 1995) and the lowest return for a quarter was
0.45% (quarter ended March 31, 1994). The Fund's year-to-date return as of June
30, 1999 was 1.27%.

<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>
- --------------------------------------------------------------------------------
CMA Ohio Municipal Money Fund 2.97% 2.95% 2.84%+
- --------------------------------------------------------------------------------
</TABLE>

+ Inception date is April 29, 1991.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 9
<PAGE>
CMA PENNSYLVANIA MUNICIPAL MONEY FUND

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

During the period shown in the bar chart, the highest return for a quarter was
1.02% (quarter ended September 30, 1991) and the lowest return for a quarter was
0.43% (quarter ended March 31, 1994). The Fund's year-to-date return as of June
30, 1999 was 1.24%.

<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>
- --------------------------------------------------------------------------------
CMA Pennsylvania Municipal Money Fund 2.89% 2.89% 2.96%+
- --------------------------------------------------------------------------------
</TABLE>

+ Inception date is August 27, 1990.

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

YIELD INFORMATION

The YIELD on Fund shares normally will go up and down on a daily basis.
Therefore, yields for any given past periods are not an indication or
representation of future yields. Each Fund's yield is affected by changes in
interest rates, average portfolio maturity and operating expenses. Current yield
information may not provide the basis for a comparison with bank deposits or
other investments, which pay a fixed yield over a stated period of time. To
obtain each Fund's current 7-day yield, call 1-800-221-7210.

KEY FACTS [Icon]

10 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
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 INDIRECTLY BY THE SHAREHOLDER (THESE COSTS ARE DEDUCTED FROM A
FUND'S TOTAL ASSETS).

ANNUAL FUND OPERATING EXPENSES -- expenses that cover the costs of operating a
Fund.
MANAGEMENT FEE -- a fee paid to the Manager for managing a Fund.

DISTRIBUTION FEES -- fees used to support a Fund's marketing and distribution
efforts, such as compensating Financial Consultants and others for distribution
and for shareholder servicing.

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

The following tables show the different fees
and expenses that you may pay if you buy and
hold shares of a Fund. Future expenses may
be greater or less than those indicated
below.

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID ARIZONA CALIFORNIA CONNECTICUT MASSACHUSETTS MICHIGAN
DIRECTLY BY THE SHAREHOLDER) FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
MAXIMUM ACCOUNT FEE(a) $ 100 $ 100 $ 100 $ 100 $ 100
- --------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS)
MANAGEMENT FEE(b) 0.50% 0.42% 0.50% 0.50% 0.50%
- --------------------------------------------------------------------------------------------------
DISTRIBUTION (12b-1)
FEES(c) 0.13% 0.13% 0.13% 0.13% 0.13%
- --------------------------------------------------------------------------------------------------
Other Expenses (including
transfer agency fees)(d) 0.10% 0.03% 0.07% 0.09% 0.08%
- --------------------------------------------------------------------------------------------------
Total Annual Fund Operating
Expenses 0.73% 0.58% 0.70% 0.72% 0.71%
- --------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
SHAREHOLDER FEES (FEES PAID NEW JERSEY NEW YORK NORTH CAROLINA OHIO PENNSYLVANIA
DIRECTLY BY THE SHAREHOLDER) FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
MAXIMUM ACCOUNT FEE(a) $ 100 $ 100 $ 100 $ 100 $ 100
- ------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES (EXPENSES THAT ARE
DEDUCTED FROM FUND ASSETS)
- ------------------------------------------------------------------------------------------------------
MANAGEMENT FEE(b) 0.47% 0.43% 0.50% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------
DISTRIBUTION (12b-1)
FEES(c) 0.13% 0.13% 0.13% 0.13% 0.13%
- ------------------------------------------------------------------------------------------------------
Other Expenses (including
transfer agency fees)(d) 0.06% 0.05% 0.08% 0.08% 0.07%
- ------------------------------------------------------------------------------------------------------
Total Annual Fund Operating
Expenses 0.66% 0.61% 0.71% 0.71% 0.70%
- ------------------------------------------------------------------------------------------------------
</TABLE>

(a) Merrill Lynch charges this annual program fee to CMA program subscribers.
(b) See "Management of the Funds-- Management and Advisory
Arrangements--Management Fee"--Page 14 of the Statement of Additional
Information.
(c) Each Fund is authorized to pay Merrill Lynch distribution fees of 0.125%
each year under the distribution plan each Fund has adopted under Rule
12b-1. See "Purchase of Shares--Distribution Plan"--Page 19 of the
Statement of Additional Information.
(d) Each Fund pays the Transfer Agent $10.00 for each shareholder account and
reimburses the Transfer Agent's out-of-pocket expenses. See "Management and
Advisory Arrangements--Transfer Agency Services"--Page 15 of the Statement
of Additional Information. The Manager provides accounting services to each
Fund at its cost.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 11
<PAGE>

[ICON] KEY FACTS

EXAMPLES:
The following examples are intended to help
you compare the cost of investing in each
Fund with the cost of investing in other
money market funds.

These examples assume that you invest
$10,000 in a Fund for the time periods
indicated, that your investment has a 5%
return each year and that the Fund's
operating expenses remain the same. This
assumption is not meant to indicate that 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:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------
Arizona Fund $75 $233 $406 $906
- -------------------------------------------------------------------------
California Fund 59 186 324 726
- -------------------------------------------------------------------------
Connecticut Fund 72 224 390 871
- -------------------------------------------------------------------------
Massachusetts Fund 74 230 401 894
- -------------------------------------------------------------------------
Michigan Fund 73 227 395 883
- -------------------------------------------------------------------------
New Jersey Fund 67 211 368 822
- -------------------------------------------------------------------------
New York Fund 62 195 340 762
- -------------------------------------------------------------------------
North Carolina Fund 73 227 395 883
- -------------------------------------------------------------------------
Ohio Fund 73 227 395 883
- -------------------------------------------------------------------------
Pennsylvania Fund 72 224 390 871
- -------------------------------------------------------------------------
</TABLE>

These examples do not take into account the
annual program participation fee charged by
Merrill Lynch to CMA subscribers. See the
CMA program description brochure for
details. Shareholders of a Fund whose
accounts are maintained directly with the
Transfer Agent and who are not subscribers
to the CMA program will not be charged a
program fee but will not receive any of the
additional services available to
subscribers.

12 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
DETAILS ABOUT EACH FUND [ICON]

ILLIQUID -- securities that cannot be resold within seven days under normal
circumstances at prices approximating carrying value or that have legal or
contractual restrictions on resale.

HOW EACH FUND INVESTS
--------------------------------------------------

Each Fund seeks current income exempt from Federal
income taxes and any applicable state taxes,
preservation of capital and liquidity. Each Fund
tries to achieve its goals by investing in a
portfolio of short term municipal securities of
its designated state. We cannot guarantee that
each Fund will achieve its goals.

Short term municipal securities mature or reset to
a new interest rate within 13 months. Certain
short term municipal securities have maturities
longer than 13 months, but give the Fund the right
to demand payment from a financial institution
within that period. The Funds treat these
securities as having a maturity of 13 months or
less. Each Fund's dollar-weighted average maturity
will not exceed 90 days. Each Fund only invests in
short term municipal securities having one of the
two highest ratings from a nationally recognized
rating agency or unrated securities which, in the
opinion of Fund management, are of similar credit
quality. Certain short term municipal securities
are entitled to the benefit of insurance,
guarantees, letters of credit or similar
arrangements provided by a financial institution.
Each Fund may invest more than 25% of its assets
in short term municipal securities of this kind.
When this is the case, Fund management may
consider the obligation of the financial
institution and its creditworthiness in
determining whether the security is an appropriate
investment for the Fund.

Fund management intends to keep each Fund's assets
fully invested to maximize the yield on that
Fund's portfolio. There may be times when a Fund
has uninvested cash, however, which will reduce
its yield. Fund management will vary the kinds of
short term municipal securities in each portfolio
as well as its average maturity. Fund management
decides which securities to buy and sell based on
its assessment of the relative values of different
securities and future interest rates. Fund
management seeks to improve each Fund's yield by
taking advantage of differences in yield that
regularly occur between securities of a similar
kind.

Each Fund will generally invest at least 80% of
its net assets in short-term municipal securities,
including at least 65% of its total assets in
municipal securities of its designated state. The
New Jersey Fund will generally invest at least 80%
of its total assets in New Jersey municipal
securities. Each Fund normally may invest up to
20% of its assets in short term money market
securities that are not exempt from Federal or
state taxes. For temporary defensive purposes,
each Fund may invest more than 35% (or more than
20% for the New Jersey Fund) of its total assets
in short term municipal securities other than
those of designated state and more than 20% of its
total assets in these taxable money market
securities.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 13
<PAGE>
[ICON] DETAILS ABOUT EACH FUND

ABOUT THE
PORTFOLIO MANAGERS

Edward J. Andrews is the portfolio manager of the CMA New York Fund. Mr. Andrews
has been a Vice President of Merrill Lynch Asset Management since 1991.

Steven Lewis is the portfolio manager of the CMA Connecticut and New Jersey
Funds. Mr. Lewis has been a Vice President of Merrill Lynch Asset Management
since 1998 and was an Assistant Vice President of Merrill Lynch Asset Management
from 1995 to 1998.

Darren Sanfillippo is the portfolio manager of the CMA Arizona, Michigan, North
Carolina and Pennsylvania Funds. Mr. Sanfillippo has been a Vice President of
Merrill Lynch Asset Management since 1998, and was an Assistant Vice President
of Merrill Lynch Asset Management from 1994 to 1998.

Kevin A. Schiatta is the portfolio manager of the CMA Massachusetts and Ohio
Funds. Mr. Schiatta has been a Vice President of Merrill Lynch Asset Management
since 1985.

Helen Marie Sheehan is the portfolio manager of the CMA California Fund. Ms.
Sheehan has been a Vice President of Merrill Lynch Asset Management since 1991.

ABOUT THE
MANAGER

Each Fund is managed by Fund Asset Management.

No more than 10% of each Fund's net assets will be invested in ILLIQUID
securities.

The Funds may invest in certain short term municipal securities classified as
"private activity bonds" that may subject certain investors to a Federal
alternative minimum tax.

Among the securities the Funds may buy are:

MUNICIPAL NOTES -- short term municipal debt obligations often used to provide
interim financing in anticipation of tax collection, a bond sale or other
revenue receipts.

MUNICIPAL COMMERCIAL PAPER -- short term unsecured promissory notes used to
finance general short term credit needs.

MUNICIPAL BONDS -- long term debt obligations that pay interest exempt from
Federal income tax. A Fund will only invest in municipal bonds with no more than
397 days (13 months) remaining to maturity at the date of purchase or that the
Fund has a contractual right to sell (put) periodically or on demand within that
time.

VARIABLE RATE DEMAND OBLIGATIONS -- floating rate securities that combine an
interest in a long term municipal bond with a right to receive payment
periodically or on demand. Each Fund may also buy a participation interest in a
variable rate demand obligation owned by a commercial bank or other financial
institution. When a Fund purchases a participation interest, it receives the
right to demand payment on notice to the owner of the obligation. Each Fund will
not invest more than 20% of its total assets in participation interests in
variable rate demand obligations.

SHORT TERM MUNICIPAL DERIVATIVES -- a variety of securities that generally
represent a Fund's ownership interest in one or more municipal bonds held by a
trust or partnership coupled with a conditional right to sell (put) that
interest on demand or periodically to a financial institution for a price equal
to face value. Income on the underlying municipal bonds is "passed through" the
trust or partnership to a Fund and other institutions having an ownership
interest. Depending on the particular security, a Fund may receive pass-through
income at a fixed interest rate or a floating municipal money market interest
rate.

14 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>

MUNICIPAL LEASE OBLIGATIONS -- participation certificates issued by government
authorities to finance the acquisition, development or construction of
equipment, land or facilities. The certificates represent participations in a
lease or similar agreement backed by the municipal issuer's promise to budget
for and appropriate funds to make payments due under the lease.

MONEY MARKET SECURITIES -- A variety of short term securities, including U.S.
Government and agency securities, bank money market investments, commercial
paper and other obligations.

REPURCHASE AGREEMENTS -- In a repurchase agreement a Fund buys a security from
another party which agrees to buy it back at an agreed upon time and price. Each
Fund may invest in repurchase agreements involving the money market securities
described above or U.S. Government and agency securities with longer maturities.

WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- In these transactions, a Fund buys or sells securities at an
established price with payment and delivery taking place in the future. The
value of the security on the delivery date may be more or less than its purchase
or sale price.

Each Fund's portfolio represents a significant percentage of the market in short
term municipal securities in its designated state. A shortage of available high
quality short term municipal securities will affect the yield on a Fund's
portfolio. Each Fund may suspend or limit sales of shares if, due to such a
shortage, the sale of additional shares will not be in the best interest of the
Fund's shareholders.

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

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

CMA MULTI-STATE MUNICIPAL SERIES TRUST 15
<PAGE>
[ICON] DETAILS ABOUT EACH FUND

CREDIT RISK -- Credit risk is the risk that the
issuer of a security owned by a Fund 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.

SELECTION RISK -- Selection risk is the risk that
the securities that Fund management selects will
underperform other funds with similar investment
objectives and investment strategies.

INTEREST RATE RISK -- Interest rate risk is the
risk that prices of money market 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.

SHARE REDUCTION RISK -- In order to maintain a
constant net asset value of $1.00 per share, each
Fund may reduce the number of shares held by its
shareholders.

BORROWING RISK -- Each Fund may borrow only to
meet redemptions. Borrowing may exaggerate changes
in the net asset value of Fund shares and in the
yield on the Fund's portfolio. Borrowing will cost
the Fund interest expense and other fees. The cost
of borrowing money may reduce the Fund's return.

REPURCHASE AGREEMENT RISK -- If the party with
whom a Fund has entered into a repurchase
agreement defaults on its obligation under the
agreement, the Fund may suffer delays and incur
costs or even lose money in exercising its rights
under the agreement.

WHEN ISSUED SECURITIES, DELAYED DELIVERY
SECURITIES AND FORWARD COMMITMENTS -- When issued
and delayed delivery securities and forward
commitments involve the risk that the security a
Fund buys will lose value prior to its delivery.
There also is the risk that the security will not
be issued or that the other party will not meet
its obligation. If this occurs, a Fund both loses
the investment opportunity for the assets it has
set aside to pay for the security and any gain in
the security's price. When issued and delayed
delivery securities also involve the risk that the
yields available in the market when delivery takes
place may be higher than those fixed in the
transaction at the time of the commitment. If this
happens, the value of the when issued or delayed
delivery security will generally decline.

16 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
VRDO AND MUNICIPAL DERIVATIVES CREDIT RISK -- When
a Fund invests in variable rate demand obligations
or short term municipal derivatives, it assumes
credit risk with respect to the financial
institution providing the Fund with the right to
demand payment or put (sell) the security. While
the Funds invest only in short term municipal
securities of high quality issuers, or which are
backed by high quality financial institutions,
those issuers or financial institutions may still
default on their obligations.

SHORT TERM MUNICIPAL DERIVATIVES -- Short term
municipal derivatives present certain unresolved
tax, legal, regulatory and accounting issues not
presented by investments in other short term
municipal securities. These issues might be
resolved in a manner adverse to the Fund. For
example, the Internal Revenue Service has never
ruled on the subject of whether pass-through
income paid to a Fund is tax-exempt. Each Fund
receives an opinion of counsel that pass-through
income is tax-exempt, but that does not mean that
the IRS will never rule that pass-through income
is taxable.

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

ILLIQUID SECURITIES -- If a 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.

CONCENTRATION RISK -- Each Fund may invest more
than 25% of its assets in municipal securities
secured by bank letters of credit. Banks are
subject to extensive government regulation, depend
on the availability and cost of funds to support
their lending operations, and are more exposed
than other businesses to adverse economic
conditions. These factors may affect a bank's
ability to meet its obligations under a letter of
credit.

STATE SPECIFIC RISK -- Each Fund will invest
primarily in municipal securities issued by or on
behalf of its designated state. Therefore, an
investment in a Fund may be more subject to the
risks of negative economic and financial
conditions in that state than a fund that does not
invest in the municipal securities of a single
state. Set forth below are certain risk factors
specific to

CMA MULTI-STATE MUNICIPAL SERIES TRUST 17
<PAGE>
[ICON] DETAILS ABOUT EACH FUND

each state. Management does not believe that the
current economic conditions of any state will
adversely affect that state's ability to invest in
high quality state municipal securities.

ARIZONA -- During the 1990's, Arizona's
efforts to diversify its economy have
enabled it to realize and sustain
increasing growth rates. Arizona has
adopted a new method of financing its
public school system following the
Arizona Supreme Court's 1994 ruling that
the former system was unconstitutional.
The State of Arizona is not authorized to
issue general obligation bonds.

CALIFORNIA -- During the late 1990's,
California's economy has been recovering
from the severe recession it suffered at
the beginning of the decade and has been
growing steadily. The current expansion
has been marked by growth in high
technology manufacturing and services,
electronic manufacturing, motion picture
and television production, business
services, nonresidential and residential
construction and local education.
However, weakness in Asian and Latin
American economies, which are
California's largest trading partners,
may slow growth. Moody's, Standard &
Poor's and Fitch currently rate the State
of California's general obligation bonds
Aa3, A+, and AA-, respectively, which are
in Moody's and S&P's third highest rating
category and the lower end of Fitch's
second highest rating category.

CONNECTICUT -- Connecticut's economy
relies, in part, on activities that may be
adversely affected by cyclical change.
However, in recent years, the
unemployment level has dropped and
personal wealth has remained among the
highest in the nation. Connecticut has
run General Fund surpluses since the
1990-1991 fiscal year. Moody's, Standard
& Poor's and Fitch currently rate the
State of Connecticut's general obligation
bonds Aa3, AA, and AA, respectively,
which are at the lower end of each
agency's second highest rating category.

MASSACHUSETTS -- Massachusetts is
currently enjoying a strong and continuing
economic recovery. The state has run
positive budget operating fund balances
for the last half of the 1990's and is
projected to continue that trend.
Moody's, Standard & Poor's and Fitch
currently rate the State of Massachusetts

18 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
general obligation bonds Aa3, AA-, and
AA-, respectively, which are at the lower
end of each agency's second highest
rating category.

MICHIGAN -- Michigan's economy remains
closely tied to the cycles of the
automobile industry, although it has
worked to diversify its economy in recent
years. This greater diversification
coupled with the current increase in
automobile production have led to an
unemployment rate below the national
average for the last several years.
Moody's, Standard & Poor's and Fitch
currently rate the State of Michigan's
general obligation bonds Aa1, AA+, and
AA+, respectively, which are at the top
of each agency's second highest rating
category.

NEW JERSEY -- The years 1999 and 2000
contain more risk than the recent past,
but the momentum and measures of New
Jersey's economic health are favorable.
The New Jersey outlook is based largely
on expected national economic performance
and on recent New Jersey strategic policy
actions aimed at infrastructure
improvements, effective education and
training of New Jersey's workforce, and
those maintaining a competitive business
climate. Investments in each of these
policy areas are seen as vital to
maintaining the long-term health of New
Jersey's economy. Moody's, Standard &
Poor's and Fitch currently rate the State
of New Jersey's general obligation bonds
Aa1, AA+, and AA+, respectively, which
are at the top of each agency's second
highest rating category.

NEW YORK -- In recent years, New York
State, New York City, and other New York
public entities have had financial
problems that could adversely affect the
performance of the State's municipal
bonds. In the last two years, however,
New York's economy has improved, although
growth has remained below the national
average. Moody's, Standard & Poor's and
Fitch currently rate New York City's
general obligation bonds A3, A-, and A,
respectively, which are in each agency's
third highest rating category. Moody's
and Standard & Poor's currently rate the
State of New York's general obligation
bonds A2 and A, respectively, which are
in the middle of each agency's third
highest rating category.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 19
<PAGE>
[ICON] DETAILS ABOUT EACH FUND

NORTH CAROLINA -- North Carolina derives
most of its revenue from taxes, including
taxes on personal and corporate income,
alcohol, and tobacco. In recent years,
the state has run General Fund surpluses,
a trend that is expected to continue for
the near future. Moody's, Standard &
Poor's and Fitch currently rate the State
of North Carolina's general obligation
bonds Aaa, AAA, and AAA, respectively,
which are in each agency's highest rating
category.

OHIO -- Economic activity in Ohio, as in
many other industrial states, tends to be
more cyclical than in other states and in
the nation as a whole. At the end of its
most recent fiscal year, the state's
General Revenue Fund had a positive cash
balance. Moody's, Standard & Poor's and
Fitch currently rate the State of Ohio's
general obligation bonds Aa1, AA+, and
AA+, respectively, which are at the top
of each agency's second highest rating
category.

PENNSYLVANIA -- From time to time,
Pennsylvania and its political
subdivisions have had financial
difficulties that have adversely affected
their credit standings. In recent years,
however, the state's general fund has run
positive cash balances. Moody's, Standard
& Poor's and Fitch currently rate the
State of Pennsylvania's general
obligation bonds Aa3, AA, and AA,
respectively, which are at the lower end
of each agency's second highest rating
category.
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------

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

20 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
YOUR ACCOUNT [ICON]
HOW TO BUY, SELL AND TRANSFER SHARES
--------------------------------------------------

The chart below summarizes how to buy, sell and
transfer shares through Merrill Lynch. You may
also buy and sell shares through the Transfer
Agent. To learn more about buying and selling
shares through the Transfer Agent, call
1-800-221-7210. Because the selection of a mutual
fund involves many considerations, your Merrill
Lynch Financial Consultant may help you with this
decision.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 21
<PAGE>
[ICON]

<TABLE>
<CAPTION>
IF YOU WANT TO YOUR CHOICES INFORMATION IMPORTANT FOR YOU TO KNOW
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Buy Shares Determine the If you are a CMA program subscriber, there is no minimum initial investment
amount of your for Fund shares, but the minimum for the program is $20,000 in cash and/or
investment securities.
If you are not a CMA program subscriber, the minimum initial investment for a
Fund is $5,000.
--------------------------------------------------------------------------------------------------------
Have cash balances If you are a CMA program subscriber and you choose to have your cash balances
from your account automatically invested in a Fund, they will be invested as follows:
automatically - Except as described below, cash balances of less than $1,000 in a CMA
invested in shares account are automatically invested in shares of a Fund at the next
of the Fund determined net asset value not later than the first business day of
designated as your each week on which both the New York Stock Exchange and New York banks
primary money are open, which will usually be a Monday.
account - Cash balances from (i) a sale of securities that does not settle on the
day the sale is made, (ii) a sale of securities that settles on a same
day basis, (iii) a repayment of principal on debt securities held in
the CMA account, or (iv) a sale of shares of Merrill Lynch Ready Assets
Trust or Merrill Lynch U.S.A. Government Reserves will be invested in
shares of a Fund at the next determined net asset value on the business
day following the day on which proceeds of the transaction are received
by the CMA account, subject to certain timing considerations described
below.
- A cash deposit of $1,000 or more to the CMA account, other than a
manual investment placed through your Merrill Lynch Financial
Consultant, or a cash balance of $1,000 or more from a payment of
dividends or interest on securities held in your CMA account will be
invested in shares of a Fund at the next determined net asset value on
the next business day if the deposit is made or the payment is received
prior to the cashiering deadline in the brokerage office in which the
deposit is made in order to be invested in shares. Check with your
Merrill Lynch Financial Consultant regarding the cashiering deadline in
his or her branch. If the deposit is made or payment received after the
applicable cashiering deadline, the cash balance will be invested in
shares of the Fund at the net asset value next determined on the second
business day following the date of the deposit or payment.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

22 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>

Buy Shares Have your Merrill If you are a CMA subscriber, you may make manual investments of $1,000 or
(continued) Lynch Financial more at any time in shares of a CMA Fund not selected as your primary money
Consultant submit account. However, you may not hold shares of more than one Series of the CMA
your purchase order Multi-State Municipal Series Trust at the same time.
Generally, manual purchases placed through Merrill Lynch will be effective on
the day following the day the order is placed. Manual purchases of $500,000
or more can be made effective on the same day the order is placed provided
certain requirements are met.
Each Fund may reject any order to buy shares and may suspend the sale of
shares at any time.
Merrill Lynch reserves the right to terminate a subscriber's participation in
the CMA program at any time.
When purchasing shares as a CMA program subscriber, you will be subject to
the applicable annual program participation fee. To receive all the services
available as a CMA program subscriber, you must complete the account opening
process, including completing or supplying requested documentation.
--------------------------------------------------------------------------------------------------------
Or contact the If you maintain an account directly with the Transfer Agent and are not a CMA
Transfer Agent program subscriber, you may call the Transfer Agent at 1-800-221-7210 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 Purchase additional The minimum investment for additional purchases (other than automatic
Investment shares purchases) is $1,000 for all accounts.
--------------------------------------------------------------------------------------------------------

Acquire additional All dividends are automatically reinvested daily in the form of additional
shares through the shares at net asset value.
automatic dividend
reinvestment plan
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

CMA MULTI-STATE MUNICIPAL SERIES TRUST 23
<PAGE>

[ICON] YOUR ACCOUNT
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Transfer Shares to Transfer to a You may transfer your Fund shares only to another securities dealer that has
Another Securities participating entered into an agreement with Merrill Lynch. Certain shareholder services
Dealer securities dealer may not 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.
--------------------------------------------------------------------------------------------------------

Transfer to a If you no longer maintain a CMA account, you must transfer your shares to an
non-participating account with the Transfer Agent or they will be automatically redeemed.
securities dealer Shareholders maintaining accounts with the Transfer Agent are not entitled to
the services available to CMA subscribers.
- --------------------------------------------------------------------------------------------------------------------------------

Sell Your Shares Automatic Each Fund has instituted an automatic redemption procedure for CMA program
Redemption subscribers who have elected to have cash balances in their accounts
automatically invested in shares of a designated Fund. For these subscribers,
unless directed otherwise, Merrill Lynch will redeem a sufficient number of
shares of the designated Fund to satisfy debit balances in the account (i)
created by activity therein or (ii) created by Visa-Registered Trademark-
card purchases, cash advances or checks written against the
Visa-Registered Trademark- account. Each CMA account of a subscriber will be
automatically scanned for debits each business day prior to 12 noon, Eastern
time. After application of any cash balances in the account to these debits,
shares of the Fund designated on the primary money account and to the extent
necessary, other CMA Funds or money accounts, will be redeemed at net asset
value at the 12 noon, Eastern time, pricing to satisfy remaining debits.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

24 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>

Sell Your Shares Have your Merrill If you are a CMA program subscriber, you may redeem your shares directly by
(continued) Lynch Financial submitting a written notice of redemption to Merrill Lynch, which will submit
Consultant submit the request to the Transfer Agent. Cash proceeds from the redemption
your sales order generally will be mailed to you at your address of record, or upon request,
mailed or wired (if $10,000 or more) to your bank account. Redemption
requests should not be sent to the Fund or the Transfer Agent. If
inadvertently sent to the Fund or the Transfer Agent, redemption requests
will be forwarded to Merrill Lynch. All shareholders on the account must sign
the letter and signatures must be guaranteed (e.g., by a bank or a broker).
Redemptions of Fund shares will be confirmed to CMA program subscribers
(rounded to the nearest share) in their monthly transaction statements.
- --------------------------------------------------------------------------------------------------------------------------------

Sell through the You may sell shares held at the Transfer Agent by writing to the Transfer
Transfer Agent 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 (e.g., by a bank or a broker). Redemption requests should not be
sent to the Fund or Merrill Lynch. If inadvertently sent to the Fund or
Merrill Lynch, redemption requests will be forwarded to the Transfer Agent.
Following receipt of a properly completed request, the Transfer Agent will
mail redemption proceeds to you at your address of record. If you make a
redemption request before a 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.
Check with the Transfer Agent or your Merrill Lynch Financial Consultant for
details.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>

CMA MULTI-STATE MUNICIPAL SERIES TRUST 25
<PAGE>
[ICON] YOUR ACCOUNT

NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.
DIVIDENDS -- exempt interest, ordinary income and capital gains paid to
shareholders. Dividends may be reinvested in additional Fund shares as they are
paid.
HOW SHARES ARE PRICED
--------------------------------------------

When you buy shares, you pay the NET ASSET
VALUE (normally $1.00 per share) without a
sales charge. The "amortized cost" method is
used in calculating net asset value, meaning
that the calculation is based on a valuation
of the assets held by each Fund at cost,
with an adjustment for any discount or
premium on a security at the time of
purchase. The net asset value is the
offering price. Shares are also redeemed at
their net asset value. Each Fund calculates
its net asset value at 12 noon Eastern time
on each business day the New York Stock
Exchange or New York banks are open,
immediately after the daily declaration of
dividends. The net asset value used in
determining your price is the one calculated
after your purchase or redemption order
becomes effective. Share purchase orders are
effective on the date Federal funds become
available to the Fund.

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

DIVIDENDS are declared and reinvested daily in the
form of additional shares at net asset value. You
will begin accruing dividends on the day following
the date your purchase becomes effective.
Shareholders will receive statements monthly as to
such reinvestments. In most cases shareholders
redeeming their holdings will receive all
dividends declared and reinvested through the date
of redemption.

Each Fund intends to make distributions, most of
which will be exempt from Federal income tax, the
designated state's personal income tax and, in
certain instances, where applicable, local
personal income tax. Where applicable, each Fund
intends that the value of its shares will be
exempt from any state intangible personal property
tax or local personal property tax, although it
cannot guarantee that this will always be the
case. If you are subject to income tax in a state
other than the relevant designated state, the
dividends derived from state municipal securities
of the designated state will not be exempt from
that state's personal income tax although they may
be exempt from Federal income tax.

Distributions derived from capital gains on
portfolio securities will be subject to federal
income taxes and will generally be subject to
state and local income taxes. Capital gains
dividends are generally taxed at different rates
from ordinary income dividends for Federal income
tax purposes. In general, capital gain dividends
are taxed at the same rates as ordinary income for
state personal income tax purposes. Certain
investors may be subject to a

26 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>

Federal alternative minimum tax on dividends
received from a Fund attributable to the Fund's
investments in private activity bonds. Interest
income on some of each Fund's investments may
produce taxable distributions.

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

If the value of assets held by a Fund declines,
the Trustees may authorize a reduction in the
number of outstanding shares in shareholders'
accounts so as to preserve a net asset value of
$1.00 per share. After such a reduction, the basis
of your eliminated shares would be added to the
basis of your remaining Fund shares, and you could
recognize a capital loss if you disposed of your
shares at that time.

By law, each Fund must withhold 31% of your
dividends and proceeds if you have not provided a
taxpayer identification number to the Trust or the
number is incorrect.

This section summarizes some of the consequences
under current Federal and, very generally, state
tax law of an investment in each Fund. It is not a
substitute for personal tax advice. Consult your
personal tax adviser about the potential tax
consequences of an investment in each Fund under
all applicable tax laws.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 27
<PAGE>
[ICON]

MANAGEMENT OF THE FUNDS [ICON]
FUND ASSET MANAGEMENT
--------------------------------------------------

Fund Asset Management, the Funds' Manager, manages
each Fund's investments and its business
operations under the overall supervision of the
Trust's Board of Trustees. The Manager has the
responsibility for making all investment decisions
for each Fund. Each Fund pays the Manager a fee at
the annual rate of 0.500% of each Fund's average
daily net assets not exceeding $500 million;
0.425% of the average daily net assets exceeding
$500 million but not exceeding $1 billion; and
0.375% of the average daily net assets exceeding
$1 billion.

Fund Asset Management is part of Merrill Lynch
Asset Management Group, which had approximately
$516 billion in investment company and other
portfolio assets under management as of June 1999.
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").
Each Fund could be adversely affected if the
computer systems used by Fund management or other
Fund service providers do not properly address
this problem before January 1, 2000. Fund
management expects to have addressed this problem
before then, and does not anticipate that the
services it provides will be adversely affected.
Each Fund's other service providers have told Fund
management that they also expect to resolve the
Year 2000 Problem, and Fund management will
continue to monitor the situation as the Year 2000
approaches. However, if the problem has not been
fully addressed, each Fund could be negatively
affected. The Year 2000 Problem could also have a
negative impact on the issuers in which each Fund
invests, and this could hurt each Fund's
investment returns.

28 CMA MULTI-STATE MUNICIPAL SERIES TRUST
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
ARIZONA FUND
---------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .03
- ---------------------------------------------------------------------------------------------------
Realized gain (loss) on investments --
net --+ --+ --+ --+ --+
- ---------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .03
- ---------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.03)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------
Total Investment Return 2.73% 3.05% 2.86% 3.35% 2.83%
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- ---------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .73% .74% .76% .58% .54%
- ---------------------------------------------------------------------------------------------------
Expenses .73% .74% .76% .77% .85%
- ---------------------------------------------------------------------------------------------------
Investment income -- net 2.69% 2.99% 2.80% 3.27% 2.84%
- ---------------------------------------------------------------------------------------------------
Supplemental Data:
- ---------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $214,018 $213,277 $169,551 $137,520 $103,717
- ---------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 29

<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CALIFORNIA FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.03)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.68% 3.06% 2.90% 3.15% 2.66%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses .58% .59% .60% .64% .63%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.63% 3.00% 2.85% 3.11% 2.62%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $2,270,864 $2,005,663 $1,565,802 $1,421,140 $1,168,234
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

<TABLE>
<CAPTION>
CONNECTICUT FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.03)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.62% 2.93% 2.81% 3.01% 2.54%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses .70% .69% .71% .72% .71%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.58% 2.88% 2.76% 2.97% 2.53%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 481,633 $ 453,295 $ 339,931 $ 313,362 $ 260,398
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

CMA MULTI-STATE MUNICIPAL SERIES TRUST

30
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
MASSACHUSETTS FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .02
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .02
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.02)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.77% 3.03% 2.84% 3.04% 2.46%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses .72% .72% .76% .76% .76%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.72% 2.98% 2.78% 3.00% 2.43%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 331,437 $ 268,929 $ 200,598 $ 189,482 $ 161,076
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

<TABLE>
<CAPTION>
MICHIGAN FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.03)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.78% 3.07% 2.90% 3.12% 2.57%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses .71% .71% .72% .73% .73%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.72% 3.02% 2.84% 3.05% 2.54%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 393,612 $ 306,046 $ 272,969 $ 247,544 $ 220,171
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 31

<PAGE>

FINANCIAL HIGHLIGHTS

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

<TABLE>
<CAPTION>
NEW JERSEY FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .02
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .02
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.02)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.71% 2.97% 2.83% 3.07% 2.52%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses .66% .66% .68% .68% .71%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.65% 2.92% 2.78% 3.02% 2.51%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $1,017,235 $ 799,997 $ 683,361 $ 610,285 $ 525,747
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

<TABLE>
<CAPTION>
NEW YORK FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.03)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.79% 3.09% 2.94% 3.17% 2.59%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses .61% .61% .63% .64% .67%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.74% 3.04% 2.88% 3.12% 2.59%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $1,826,720 $1,556,021 $1,236,322 $1,132,264 $ 919,852
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

CMA MULTI-STATE MUNICIPAL SERIES TRUST

32
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
NORTH CAROLINA FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.03)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.73% 3.02% 2.84% 3.12% 2.61%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses, net of reimbursement .71% .71% .72% .69% .62%
- -------------------------------------------------------------------------------------------------------------
Expenses .71% .71% .72% .74% .72%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.69% 2.97% 2.79% 3.08% 2.58%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 304,066 $ 307,069 $ 274,180 $ 273,910 $ 278,704
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

<TABLE>
<CAPTION>
OHIO FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.03)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.85% 3.15% 3.00% 3.26% 2.65%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses .71% .70% .71% .73% .74%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.80% 3.09% 2.94% 3.21% 2.64%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 402,370 $ 394,715 $ 327,173 $ 282,187 $ 237,655
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

CMA MULTI-STATE MUNICIPAL SERIES TRUST 33

<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PENNSYLVANIA FUND
-------------------------------------------------------------------
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSET VALUE: 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
- -------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Investment income -- net .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Realized gain (loss) on
investments -- net --+ --+ --+ --+ --+
- -------------------------------------------------------------------------------------------------------------
Total from investment operations .03 .03 .03 .03 .03
- -------------------------------------------------------------------------------------------------------------
Less dividends from investment
income -- net (.03) (.03) (.03) (.03) (.03)
- -------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------------------------------------
Total Investment Return 2.77% 3.08% 2.92% 3.19% 2.65%
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
- -------------------------------------------------------------------------------------------------------------
Expenses .70% .70% .71% .72% .71%
- -------------------------------------------------------------------------------------------------------------
Investment income -- net 2.71% 3.03% 2.86% 3.13% 2.64%
- -------------------------------------------------------------------------------------------------------------
Supplemental Data:
- -------------------------------------------------------------------------------------------------------------
Net assets, end of year (in thousands) $ 528,840 $ 443,012 $ 428,896 $ 416,729 $ 353,635
- -------------------------------------------------------------------------------------------------------------
</TABLE>

+ Amount is less than $.01 per share.

CMA MULTI-STATE MUNICIPAL SERIES TRUST

34
<PAGE>

<TABLE>
<S> <C> <C>
POTENTIAL
------------------------- INVESTORS ----------------------------
| OPEN AN ACCOUNT (TWO OPTIONS). |
| |
| |

-1- -2-

CMA PROGRAM SUBSCRIBERS TRANSFER AGENT
MERRILL LYNCH
FINANCIAL CONSULTANT FINANCIAL DATA SERVICES, INC.
P.O. Box 45290
ADVISES SHAREHOLDERS ON THEIR FUND JACKSONVILLE, FLORIDA 32232-5290
INVESTMENTS. 1-800-221-7210
|
| PERFORMS
| RECORDKEEPING AND REPORTING SERVICES.
| DISTRIBUTOR |
| |
| MERRILL LYNCH, PIERCE, FENNER & SMITH |
| INCORPORATED |
| NORTH TOWER |
| WORLD FINANCIAL CENTER |
----------------- 250 VESEY STREET --------------------
NEW YORK, NEW YORK 10281

ARRANGES FOR THE SALE OF FUND SHARES.

|
|
|
|

THE FUNDS
----------------------- THE BOARD OF TRUSTEES ------------------------
| OVERSEES EACH FUND. |
| |
| |

DELOITTE & TOUCHE LLP FUND ASSET MANAGEMENT, L.P.
117 CAMPUS DRIVE
PRINCETON, NEW JERSEY 08540-6400 ADMINISTRATIVE OFFICES
800 SCUDDERS MILL ROAD
AUDITS THE FINANCIAL PLAINSBORO, NEW JERSEY 08536
STATEMENTS OF THE FUND ON BEHALF OF
THE SHAREHOLDERS. 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.

</TABLE>

CMA MULTI-STATE MUNICIPAL SERIES TRUST

<PAGE>
FOR MORE INFORMATION
[ICON]

SHAREHOLDER REPORTS

Additional information about each Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. You may obtain these reports at
no cost by calling 1-800-221-7210.

Each 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 1-800-221-7210.

STATEMENT OF ADDITIONAL INFORMATION

The Funds' Statement of Additional Information contains further information
about each Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Trust at
Financial Data Services, Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290
or by calling 1-800-221-7210.

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

Information about each 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 THE
INFORMATION CONTAINED IN THIS PROSPECTUS.

Investment Company Act file #811-5011
Code #16817-0799
- -C- Fund Asset Management, L.P.

[LOGO]
PROSPECTUS
CMA MULTI-STATE MUNICIPAL SERVIES TRUST

ARIZONA

CALIFORNIA

CONNECTICUT

MASSACHUSETTS

MICHIGAN

NEW JERSEY

NEW YORK

NORTH CAROLINA

OHIO

PENNSYLVANIA

July 27, 1999

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

CMA MULTI-STATE MUNICIPAL SERIES TRUST

CMA ARIZONA MUNICIPAL MONEY FUND CMA NEW JERSEY MUNICIPAL MONEY FUND
CMA CALIFORNIA MUNICIPAL MONEY FUND CMA NEW YORK MUNICIPAL MONEY FUND
CMA CONNECTICUT MUNICIPAL MONEY FUND CMA NORTH CAROLINA MUNICIPAL MONEY
CMA MASSACHUSETTS MUNICIPAL MONEY FUND FUND
CMA MICHIGAN MUNICIPAL MONEY FUND CMA OHIO MUNICIPAL MONEY FUND
CMA PENNSYLVANIA MUNICIPAL MONEY FUND

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

CMA Multi-State Municipal Series Trust (the "Trust") consists of CMA Arizona
Municipal Money Fund (the "Arizona Fund"), CMA California Municipal Money Fund
(the "California Fund"), CMA Connecticut Municipal Money Fund (the "Connecticut
Fund"), CMA Massachusetts Municipal Money Fund (the "Massachusetts Fund"), CMA
Michigan Municipal Money Fund (the "Michigan Fund"), CMA New Jersey Municipal
Money Fund (the "New Jersey Fund"), CMA New York Municipal Money Fund (the "New
York Fund"), CMA North Carolina Municipal Money Fund (the "North Carolina
Fund"), CMA Ohio Municipal Money Fund (the "Ohio Fund") and CMA Pennsylvania
Municipal Money Fund (the "Pennsylvania Fund") (together, the "Funds"). Each
Fund is a non-diversified, no-load money market mutual fund seeking current
income (or value, in the case of property taxes) exempt from Federal income
taxes, the designated state's personal income taxes and, in certain instances,
local personal income taxes, local personal property taxes and/or state
intangible personal property taxes. Each Fund also seeks preservation of capital
and liquidity available from investing in a portfolio of short-term, high
quality obligations, the interest on which (or, in the case of property taxes,
the value of which) is exempt, in the opinion of counsel to the issuer, from
Federal income taxes, personal income taxes of the designated state and, in
certain instances, local personal income taxes, local personal property taxes
and/or state intangible personal property taxes. The Funds may invest in certain
tax-exempt securities classified as "private activity bonds" that may subject
certain investors in the Funds to a Federal alternative minimum tax. The Funds
also may invest in derivative or synthetic municipal instruments. The Funds'
shares are offered to participants in the Cash Management
Account-Registered Trademark- ("CMA" or "CMA account") financial service program
of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") to
provide a medium for the investment of free cash balances held in CMA accounts.
A CMA account is a conventional Merrill Lynch cash securities or margin
securities account ("Securities Account") that is linked to the Funds and
certain other mutual funds (collectively, the "CMA Funds"), money market deposit
accounts maintained with depository institutions and to a
Visa-Registered Trademark- card/check account ("Visa Account"). Merrill Lynch
markets its margin account under the name Investor CreditLine-SM- service. The
CMA Funds and the Insured Savings Account are collectively referred to as "Money
Accounts."

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

A customer of Merrill Lynch may subscribe to the CMA program with a minimum
of $20,000 in securities or cash. Free cash balances in the Securities Account
of CMA participants may be invested, automatically or periodically, in shares of
one of the CMA Funds or deposited with a depository institution through the
Insured Savings-SM- Account (the "Insured Savings Account"). Free cash balances
held in CMA accounts will be invested automatically or deposited through the
Money Account selected by the CMA subscriber as the Primary Money Account. This
permits the subscriber to earn a return on such funds pending further investment
in other aspects of the CMA program or utilization of the Visa Account. The
shares of the Funds also may be purchased by individual investors maintaining
accounts directly with the Transfer Agent who do not subscribe to the CMA
program. The minimum initial purchase for non-CMA subscribers is $5,000 and
subsequent purchases must be $1,000 or more.

Merrill Lynch charges a program participation fee for the CMA service which
presently is $100 per year for individuals (an additional $25 annual program fee
is charged for participation in the CMA Visa-Registered Trademark- Gold Program
described in the CMA Program Description). A different fee may be charged to
certain group plans and special accounts. Merrill Lynch reserves the right to
change the fee for the CMA service or the CMA Visa Gold Program at any time.
------------------------

THE INFORMATION IN THIS DOCUMENT SHOULD BE READ IN CONJUNCTION WITH THE
DESCRIPTION OF THE MERRILL LYNCH CASH MANAGEMENT ACCOUNT PROGRAM WHICH IS
FURNISHED TO ALL CMA SUBSCRIBERS. REFERENCE IS MADE TO SUCH DESCRIPTION FOR
INFORMATION WITH RESPECT TO THE CMA PROGRAM, INCLUDING THE FEES RELATED THERETO.
INFORMATION CONCERNING THE OTHER CMA FUNDS IS CONTAINED IN THE PROSPECTUS
RELATING TO EACH OF SUCH FUNDS AND INFORMATION CONCERNING THE INSURED SAVINGS
ACCOUNT IS CONTAINED IN THE INSURED SAVINGS ACCOUNT FACT SHEET. ALL CMA
SUBSCRIBERS ARE FURNISHED WITH THE PROSPECTUSES OF CMA MONEY FUND, CMA
GOVERNMENT SECURITIES FUND, CMA TAX-EXEMPT FUND AND CMA TREASURY FUND AND THE
INSURED SAVINGS ACCOUNT FACT SHEET. FOR MORE INFORMATION ABOUT THE MERRILL LYNCH
CASH MANAGEMENT ACCOUNT PROGRAM, CALL TOLL-FREE FROM ANYWHERE IN THE U.S.,
1-800-CMA-INFO (1-800-262-4636).

UNLESS OTHERWISE INDICATED, THE INFORMATION SET FORTH IN THIS STATEMENT OF
ADDITIONAL INFORMATION IS APPLICABLE TO EACH FUND. MANAGEMENT OF THE TRUST HAS
CONSIDERED THE POSSIBILITY THAT THE USE OF A COMBINED PROSPECTUS MAY SUBJECT A
FUND OR FUNDS TO LIABILITY FOR AN ALLEGED MISSTATEMENT RELATING TO ANOTHER FUND
OR FUNDS. MANAGEMENT BELIEVES THIS POSSIBILITY IS REMOTE.
------------------------

This Statement of Additional Information of the Funds is not a prospectus
and should be read in conjunction with the Prospectus of the Funds, dated July
27, 1999 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) 221-7210 or by writing the Trust 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. Each Fund's audited financial statements are
incorporated in this Statement of Additional Information by reference to its
1999 annual report to shareholders. You may request a copy of the annual report
at no charge by calling (800) 221-7210 ext. 789 between 8:00 a.m. and 8:00 p.m.
on any business day.

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

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

The date of this Statement of Additional Information is July 27, 1999.

<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Investment Objectives and Policies......................................................................... 2
Management of the Funds.................................................................................... 10
Trustees and Officers...................................................................................... 10
Compensation of Trustees................................................................................... 12
Management and Advisory Arrangements....................................................................... 14
Code of Ethics............................................................................................. 17
Purchase of Shares......................................................................................... 17
Distribution Plans......................................................................................... 20
Redemption of Shares....................................................................................... 21
Determination of Net Asset Value........................................................................... 23
Yield Information.......................................................................................... 24
Portfolio Transactions..................................................................................... 25
Dividends and Taxes........................................................................................ 27
General Information........................................................................................ 34
Description of Shares...................................................................................... 34
Independent Auditors....................................................................................... 34
Custodian.................................................................................................. 34
Transfer Agent............................................................................................. 35
Legal Counsel.............................................................................................. 35
Reports to Shareholders.................................................................................... 35
Shareholder Inquiries...................................................................................... 35
Additional Information..................................................................................... 35
Financial Statements....................................................................................... 35
Appendix................................................................................................... A-1
Economic and Financial Conditions in Arizona............................................................. A-1
Economic and Financial Conditions in California.......................................................... B-1
Economic and Financial Conditions in Connecticut......................................................... C-1
Economic and Financial Conditions in Massachusetts....................................................... D-1
Economic and Financial Conditions in Michigan............................................................ E-1
Economic and Financial Conditions in New Jersey.......................................................... F-1
Economic and Financial Conditions in New York............................................................ G-1
Economic and Financial Conditions in North Carolina...................................................... H-1
Economic and Financial Conditions in Pennsylvania........................................................ J-1
Information Concerning Municipal Securities.............................................................. K-1
Part C...................................................................................................
</TABLE>

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INVESTMENT OBJECTIVES AND POLICIES

The investment objectives of each Fund are to seek current income (or value,
in the case of property taxes) exempt from Federal and the designated state's
personal income taxes and in certain instances, local personal income taxes,
local personal property taxes and/or state intangible personal property taxes.
Each Fund also seeks preservation of capital and liquidity available from
investing in a portfolio of short-term, high quality tax-exempt securities. Each
Fund seeks to achieve its objectives by investing primarily in a portfolio of
obligations with remaining maturities of 397 days (13 months) or less that are
issued by or on behalf of the designated states, their political subdivisions,
agencies and instrumentalities, and obligations of other qualifying issuers,
such as issuers located in Puerto Rico, the Virgin Islands and Guam and issuers
of derivative or synthetic municipal instruments ("Derivative Products"), the
interest from which (or, in the case of property taxes, the value of which) is
exempt, in the opinion of counsel to the issuer, from Federal income taxes, the
designated state's income taxes and in certain instances, local personal income
taxes, local personal property taxes and/or state intangible personal property
taxes. Such obligations are herein referred to as "State Municipal Securities."
The investment objectives of the Funds described in this paragraph are
fundamental policies of each Fund and may not be changed without a vote of the
majority of the outstanding shares of the respective Fund.

The Funds ordinarily do not intend to realize investment income not exempt
from Federal income taxes, the personal income taxes of the designated states
or, if applicable, local personal income or property taxes and/or state
intangible personal property taxes. However, to the extent that suitable State
Municipal Securities are not available for investment by a Fund, that Fund may
purchase high quality obligations with remaining maturities of 397 days (13
months) or less that are issued by other states, their agencies and
instrumentalities and derivative or synthetic municipal instruments, the
interest income on which is exempt, in the opinion of counsel to the issuer,
from Federal taxes but not state or, where relevant, local taxes. Such
obligations, either separately or together with State Municipal Securities, are
herein referred to as "Municipal Securities."

The Funds can be expected to offer lower yields than longer-term municipal
bond funds because the types of securities in which the Funds will invest, as
described in the Prospectus (hereinafter referred to as "State Municipal
Securities" or "Municipal Securities"), have shorter maturities and therefore
tend to produce lower yields than longer-term municipal securities. Interest
rates in the short-term municipal securities market also may fluctuate more
widely from time to time than interest rates in the long-term municipal bond
market. Because the Funds invest solely in short-term securities, however, the
market value of each Fund's portfolio at any given time can be expected to
fluctuate less as a result of changes in interest rates.

Except during temporary defensive periods, each Fund will invest at least
65% of its total assets in State Municipal Securities and at least 80% of its
net assets in Municipal Securities. The New Jersey Fund will invest at least 80%
of its total assets in New Jersey State Municipal Securities. Interest received
on certain State Municipal Securities and Municipal Securities that are
classified as "private activity bonds" (in general, bonds that benefit
non-governmental entities) may be subject to a Federal alternative minimum tax.
See "Taxes." The percentage of each Fund's net assets invested in "private
activity bonds" will vary during the year. Each Fund has the authority to invest
as much as 20% of its net assets in obligations that do not qualify as State
Municipal Securities or Municipal Securities. Such obligations include taxable
money market obligations, including repurchase agreements and purchase and sale
contracts, with maturities of 397 days (13 months) or less, and are referred to
herein as "Taxable Securities." In addition, each Fund except the New Jersey
Fund reserves the right as a defensive measure to invest temporarily more than
35% of its total assets in Municipal Securities other than its respective State
Municipal Securities and more than 20% of its net assets in Taxable Securities
when, in the opinion of Fund Asset Management, L.P. (the "Manager"), prevailing
market or financial conditions warrant. The New Jersey Fund reserves the right
as a defensive measure to invest temporarily more than 20% of its total assets
in Municipal Securities other than New Jersey Municipal Securities and more than
20% of its net

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assets in Taxable Securities when, in the opinion of the Manager, prevailing
market or financial conditions warrant.

As noted above, each Fund may invest a portion of its assets in certain
otherwise tax-exempt securities which are classified, under the Internal Revenue
Code of 1986, as amended (the "Code"), as "private activity bonds." A Fund's
policy with respect to investments in "private activity bonds" is not a
fundamental policy of that Fund and may be amended by the Trustees of the Trust
without the approval of the Fund's shareholders. Each Fund may invest more than
25% of its assets in Municipal Securities secured by bank letters of credit. In
view of this possible "concentration" in Municipal Securities with bank credit
enhancements, an investment in Fund shares should be made with an understanding
of the characteristics of the banking industry and the risks that such an
investment may entail. See "Investment Objectives and Policies -- Other
Factors."

Investment in Fund shares offers several potential benefits. The Funds are
investment vehicles designed to be suitable for investors of designated states
seeking income (or value, in the case of property taxes) exempt from income
taxation by those states as well as Federal income taxation and, in certain
instances, where applicable, local personal income taxation, local personal
property taxation and state intangible personal property taxation. Each Fund
seeks to provide as high a tax-exempt yield potential as is available from
investments in the short-term State Municipal Securities in which it invests
utilizing professional management and block purchases of securities. The Funds
also provide liquidity because of their redemption features. The investor also
is relieved of the burdensome administrative details involved in managing a
portfolio of municipal securities. These benefits are at least partially offset
by the expenses involved in operating an investment company. Such expenses
primarily consist of the management fee, distribution fee and operational costs
of each Fund.

The State Municipal Securities in which the Funds invest include municipal
notes, municipal commercial paper, municipal bonds with a remaining maturity of
397 days (13 months) or less, variable rate demand obligations and
participations therein, and derivative or synthetic municipal instruments. The
Funds may invest in all types of municipal and tax-exempt instruments currently
outstanding or to be issued in the future which satisfy the short-term maturity
and quality standards of the Funds.

Certain of the instruments in which the Funds invest, including Variable
Rate Demand Obligations ("VRDOs") and Derivative Products, effectively provide
the Funds with economic interests in long-term municipal bonds (or a portion of
the income derived therefrom), coupled with rights to demand payment of the
principal amounts of such instruments from designated persons (a "demand
right"). Under Commission rules, the Funds treat these instruments as having
maturities shorter than the stated maturity dates of the VRDOs or of the
long-term bonds underlying the Derivative Products (the "Underlying Bonds").
Such maturities are sufficiently short-term to allow such instruments to qualify
as eligible investments for money market funds such as the Funds. A demand right
is dependent on the financial ability of the issuer of the demand right (or, if
the instrument is subject to credit enhancement, a bank or other financial
institution issuing a letter of credit or other credit enhancement supporting
the demand right), to purchase the instrument at its principal amount. In
addition, the right of a Fund to demand payment from the issuer of a demand
right may be subject to certain conditions, including the creditworthiness of
the Underlying Bond. If the issuer of a demand right is unable to purchase the
instrument, or if, because of conditions on the right of the Fund to demand
payment, the issuer of a demand right is not obligated to purchase the
instrument on demand, the Fund may be required to dispose of the instrument or
the Underlying Bond in the open market, which may be at a price which adversely
affects the Fund.

VARIABLE RATE DEMAND OBLIGATIONS. VRDOs are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest on a short notice period. The interest on a VRDO is
adjustable at periodic intervals to a rate calculated to maintain the market
value of the VRDO at

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<PAGE>
approximately the par value of the VRDO on adjustment date. The adjustment may
be based on an interest rate adjustment index.

VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding
seven days may be deemed to be illiquid securities.

A VRDO with a demand notice period exceeding seven days will therefore be
subject to the Funds' restrictions on illiquid investments unless, in the
judgment of the Trustees, such VRDO is liquid. The Trustees may adopt guidelines
and delegate to the Manager the daily function of determining and monitoring
liquidity of such VRDO. The Trustees, however, will retain sufficient oversight
and be ultimately responsible for such determinations.

The Funds also may invest in VRDOs in the form of participation interests
("Participating VRDOs") in variable rate tax-exempt obligations held by
financial institutions, typically commercial banks ("institutions").
Participating VRDOs provide the Funds with a specified undivided interest (up to
100%) of the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDOs from the
institution on a specified number of days' notice, presently not to exceed 30
days. In addition, each Participating VRDO is backed by an irrevocable letter of
credit or similar commitment of the institution. A Fund that invests in a VRDO
has an undivided interest in an underlying obligation and thus participates on
the same basis as the institution in such obligation, except that the
institution typically retains fees out of the interest paid on the obligation
for servicing the obligation, providing the letter of credit or issuing the
repurchase commitment.

Each Fund has been advised by counsel to the Trust that the interest
received on Participating VRDOs will be treated as interest from tax-exempt
obligations as long as such Fund does not invest more than a limited amount (not
more than 20%) of its total assets in such investments and certain other
conditions are met. It is contemplated that no Fund will invest more than a
limited amount of its total assets in Participating VRDOs.

Because of the interest rate adjustment formula on VRDOs (including
Participating VRDOs), the VRDOs are not comparable to fixed rate securities. A
Fund's yield on VRDOs will decline and its shareholders will forego the
opportunity for capital appreciation during periods when prevailing interest
rates have declined. On the other hand, during periods where prevailing interest
rates have increased, a Fund's yield on VRDOs will increase and its shareholders
will have a reduced risk of capital depreciation.

DERIVATIVE PRODUCTS. The Funds may invest in a variety of Derivative
Products. Derivative Products are typically structured by a bank, broker-dealer
or other financial institution. A Derivative Product generally consists of a
trust or partnership through which a Fund holds an interest in one or more
Underlying Bonds coupled with a conditional right to sell ("put") that Fund's
interest in the Underlying Bonds at par plus accrued interest to a financial
institution (a "Liquidity Provider"). Typically, a Derivative Product is
structured as a trust or partnership which provides for pass-through tax-exempt
income. There are currently three principal types of derivative structures: (1)
"Tender Option Bonds," which are instruments which grant the holder thereof the
right to put an Underlying Bond at par plus accrued interest at specified
intervals to a Liquidity Provider; (2) "Swap Products," in which the trust or
partnership swaps the payments due on an Underlying Bond with a swap
counterparty who agrees to pay a floating municipal money market interest rate;
and (3) "Partnerships," which allocate to the partners portions of income,
expenses, capital gains and losses associated with holding an underlying Bond in
accordance with a governing agreement. The Funds may also invest in other forms
of short-term Derivative Products eligible for investment by money market funds.

Investments in Derivative Products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
which could adversely impact the performance of a Fund. For example, the tax-

4
<PAGE>

exempt treatment of the interest paid to holders of Derivative Products is
premised on the legal conclusion that the holders of such Derivative Products
have an ownership interest in the Underlying Bonds. While a Fund receives
opinions of legal counsel to the effect that the income from a Derivative
Product in which the fund invests is tax-exempt at the Federal and state level
to the same extent as the Underlying Bond, the Internal Revenue Service (the
"IRS"), as well as the taxing authorities of many states have not issued a
ruling on this subject. Were the IRS or any state taxing authority to issue an
adverse ruling or take an adverse position with respect to the taxation of
Derivative Products, there is a risk that the interest paid on such Derivative
Products or, in the case of property taxes, the value of such fund to the extent
represented by such Derivative Products, would be deemed taxable on the Federal
and/or state level.

MUNICIPAL LEASE OBLIGATIONS. Also included within the general category of
the State Municipal Securities are participation certificates in a lease, an
installment purchase contract or a conditional sales contract (hereinafter
collectively called "lease obligations") entered into by the designated state or
a political subdivision thereof to finance the acquisition or construction of
equipment, land or facilities. Although lease obligations do not constitute
general obligations of the issuer for which the lessee's unlimited taxing power
is pledged, a lease obligation is frequently backed by the lessee's covenant to
budget for, appropriate and make the payments due under the lease obligation.
However, certain lease obligations contain "nonappropriation" clauses which
provide that the lessee has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "nonappropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. Certain investments in lease obligations may be illiquid. A
Fund may not invest in illiquid lease obligations if such investments, together
with all other illiquid investments, would exceed 10% of such Fund's net assets.
A Fund may, however, invest without regard to such limitation in lease
obligations which the Manager, pursuant to guidelines which have been adopted by
the Board of Trustees and subject to the supervision of the Board, determines to
be liquid. Pursuant to Guidelines which apply to the Funds and other funds
managed by the Manager (which funds may be able to invest in lower rated
obligations than the Funds), the Manager will deem lease obligations liquid if
they are publicly offered and have received an investment grade rating of Baa or
better by Moody's Investors Service, Inc. ("Moody's"), or BBB or better by
Standard & Poor's or Fitch IBCA, Inc. ("Fitch"). Unrated lease obligations will
be considered liquid if the obligations come to the market through an
underwritten public offering and at least two dealers are willing to give
competitive bids. In reference to the unrated lease obligations, the Manager
must, among other things, also review the creditworthiness of the municipality
obligated to make payment under the lease obligation and make certain specified
determinations based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.

PURCHASE OF SECURITIES WITH FIXED PRICE "PUTS." The Tax-Exempt Fund has
authority to purchase fixed rate Tax-Exempt Securities and, for a price,
simultaneously acquire the right to sell such securities back to the seller at
an agreed upon price at any time during a stated period or on a certain date.
Such a right is generally denoted as a fixed price put. Puts with respect to
fixed rate instruments are to be distinguished from the demand or repurchase
features of VRDNs and Participating VRDNs which enable the Tax-Exempt Fund to
dispose of the security at a time when the market value of the security
approximates its par value.

SHORT-TERM MATURITY STANDARDS

All of the investments of the Funds will be in securities with remaining
maturities of 397 days (13 months) or less. The dollar-weighted average maturity
of each Fund's portfolio will be 90 days or less. For purposes of this
investment policy, an obligation will be treated as having a maturity earlier
than its stated maturity date if such obligation has technical features which,
in the judgment of the Manager, will result in the obligation being valued in
the market as though it has such earlier maturity.

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The maturities of VRDOs (including Participating VRDOs) are deemed to be the
longer of (i) the notice period required before a Fund is entitled to receive
payment of the principal amount of the VRDO on demand or (ii) the period
remaining until the VRDO's next interest rate adjustment. If not redeemed by the
Funds through the demand feature, VRDOs mature on a specified date which may
range up to 30 years from the date of issuance.

QUALITY STANDARDS

Each Fund's portfolio investments in municipal notes and short-term
tax-exempt commercial paper will be limited to those obligations which are
rated, or issued by issuers who have been rated, in one of the two highest
rating categories for short-term municipal debt obligations by a nationally
recognized statistical rating organization (an "NRSRO") or, if not rated, will
be of comparable quality as determined under procedures approved by the Trustees
of the Trust. Each Fund's investments in municipal bonds (which must have
maturities at the date of purchase of 397 days (13 months) or less) will be in
issuers who have received from the requisite NRSROs a rating, with respect to a
class of short-term debt obligations that is comparable in priority and security
with the investment, in one of the two highest rating categories for short-term
obligations or, if not rated, will be of comparable quality as determined by the
Trustees of the Trust. Currently, there are three NRSROs which rate municipal
obligations: Fitch, Moody's and Standard & Poor's. Certain tax-exempt
obligations (primarily VRDOs and Participating VRDOs) may be entitled to the
benefit of letters of credit or similar credit enhancements issued by financial
institutions. In such instances, in assessing the quality of such instruments,
the Trustees and the Manager will take into account not only the
creditworthiness of the issuers, but also the creditworthiness and type of
obligation of the financial institution. The type of obligation of the financial
institution concerns, for example, whether the letter of credit or similar
credit enhancement being issued is conditional or unconditional. The Funds also
may purchase other types of municipal instruments if, in the opinion of the
Trustees or the Manager (as determined in accordance with the procedures
established by the Trustees), such obligations are equivalent to securities
having the ratings described above. For a description of Municipal Securities
and ratings, see Appendix K -- "Information Concerning Municipal Securities."

Taxable Securities in which the Funds invest will be rated, or will be
issued by issuers who have been rated, in one of the two highest rating
categories for short-term debt obligations by an NRSRO or, if not rated, will be
of comparable quality as determined by the Trustees of the Trust. Currently,
there are five NRSROs that rate Taxable Securities: Fitch, Moody's, Standard &
Poor's, Duff & Phelps Credit Ratings Co. and Thomson BankWatch, Inc. The Funds
may not invest in any security issued by a depository institution unless such
institution is organized and operating in the United States, has total assets of
at least $1 billion and is Federally insured.

Preservation of capital is a prime investment objective of the Funds, and
while the types of money market securities in which the Funds invest generally
are considered to have low principal risk, such securities are not completely
risk free. There is a risk of the failure of issuers or credit enhancers to meet
their principal and interest obligations. With respect to repurchase agreement
and purchase and sale contracts, there is also the risk of the failure of the
parties involved to repurchase at the agreed-upon price, in which event each
Fund may suffer time delays and incur costs or possible losses in connection
with such transactions.

SINGLE STATE RISK

Each Fund ordinarily will invest at least 65% (80% in the case of the New
Jersey Fund) of its total assets in its respective State Municipal Securities
and, therefore, it is more susceptible to factors adversely affecting issuers of
Municipal Securities in such state than is a tax-exempt mutual fund that is not
concentrated in issuers of State Municipal Securities to this degree. Because
each Fund's portfolio will be comprised primarily of short-term, high quality
securities, each Fund is expected to be less subject to

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market and credit risks than a fund that invests in longer-term or lower quality
State Municipal Securities. See Appendices A through J hereto for special
considerations and risk factors specific to each Fund.

OTHER FACTORS

Management of the Funds will endeavor to be as fully invested as reasonably
practicable in order to maximize the yield on each Fund's portfolio. Not all
short-term municipal securities trade on the basis of same day settlements and,
accordingly, a portfolio of such securities cannot be managed on a daily basis
with the same flexibility as a portfolio of money market securities which can be
bought and sold on a same day basis. There may be times when a Fund has
uninvested cash resulting from an influx of cash due to large purchases of
shares or the maturing of portfolio securities. A Fund also may be required to
maintain cash reserves or incur temporary bank borrowings to make redemption
payments which are made on the same day the redemption request is received. Such
inability to be invested fully would lower the yield on such Fund's portfolio.

A Fund may invest more than 25% of the value of its total assets in
Municipal Securities that are related in such a way that an economic, business
or political development or change affecting one such security also would affect
the other securities; for example, securities the interest upon which is paid
from revenues of similar types of projects. As a result, the Funds may be
subject to greater risk as compared to mutual funds that do not follow this
practice.

In view of the possible "concentration" of the Funds in Municipal Securities
secured by bank letters of credit or guarantees, an investment in a Fund should
be made with an understanding of the characteristics of the banking industry and
the risks which such an investment may entail. Banks are subject to extensive
governmental regulations that may limit both the amounts and types of loans and
other financial commitments which may be made and interest rates and fees which
may be charged. The profitability of the banking industry is largely dependent
on the availability and cost of capital funds for the purpose of financing
leading operations under prevailing money market conditions. Furthermore,
general economic conditions play an important part in the operations of this
industry and exposure to credit losses arising from possible financial
difficulties of borrowers might affect a bank's ability to meet its obligations
under a letter of credit.

Changes to the Code limit the types and volume of securities qualifying for
the Federal income tax exemption of interest with the result that the volume of
new issues of Municipal Securities has declined substantially. Such changes may
affect the availability of Municipal Securities for investment by the Funds,
which could have a negative impact on the yield of the portfolios. Each Fund
reserves the right to suspend or otherwise limit sales of its shares if, as a
result of difficulties in acquiring portfolio securities or otherwise, it is
determined that it is not in the interests of the Fund's shareholders to issue
additional shares.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

Municipal Securities at times may be purchased or sold on a delayed delivery
basis or on a when-issued basis. These transactions arise when securities are
purchased or sold by a Fund with payment and delivery taking place in the
future, often a month or more after the purchase. The payment obligation and the
interest rate are each fixed at the time the buyer enters into the commitment. A
Fund will make commitments to purchase such securities only with the intention
of actually acquiring the securities, but such Fund may sell these securities
prior to settlement date if it is deemed advisable. No new when-issued
commitments will be made if more than 40% of a Fund's net assets would become so
committed. Purchasing Municipal Securities on a when-issued basis involves the
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself; if yields so
increase, the value of the when-issued obligation generally will decrease. Each
Fund will maintain

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<PAGE>
a separate account at the Trust's custodian consisting of cash or liquid
Municipal Securities (valued on a daily basis) equal at all times to the amount
of the when-issued commitment.

TAXABLE MONEY MARKET SECURITIES

The Funds may invest in a variety of taxable money market securities
("Taxable Securities"). The Taxable Securities in which the Funds may invest
consist of U.S. Government securities, U.S. Government agency securities,
domestic bank certificates of deposit and bankers' acceptances, short-term
corporate debt securities such as commercial paper and repurchase agreements.
These investments must have a stated maturity not in excess of 397 days (13
months) from the date of purchase.

The standards applicable to Taxable Securities in which the Funds invest are
essentially the same as those described above with respect to Municipal
Securities. The Funds may not invest in any security issued by a depository
institution unless such institution is organized and operating in the United
States, has total assets of at least $1 billion and is federally insured.

REPURCHASE AGREEMENTS

The Funds may invest in Taxable Securities pursuant to repurchase
agreements. Repurchase agreements may be entered into only with a member bank of
the Federal Reserve System or primary dealer in U.S. Government securities or an
affiliate thereof which meet the creditworthiness standards adopted by the Board
of Trustees. Under such agreements, the bank or primary dealer or an affiliate
thereof agrees, upon entering into the contract, to repurchase the security at a
mutually agreed upon time and price, thereby determining the yield during the
term of the agreement. This results in a fixed rate of return insulated from
market fluctuations during such period. 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,
a Fund will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, such 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 a repurchase
agreement that is construed to be a collateralized loan, instead of the
contractual fixed rate of return, the rate of return to such Fund shall be
dependent upon intervening fluctuations of the market value of such security and
the accrued interest on the security. In such event, such Fund would have rights
against the seller for breach of contract with respect to any losses arising
from market fluctuations following the failure of the seller to perform.

In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements, even if the underlying securities are
tax-exempt securities, will not be considered tax-exempt interest.

From time to time, the Funds also may invest in money market securities
pursuant to purchase and sale contracts. While purchase and sale contracts are
similar to repurchase agreements, purchase and sale contracts are structured so
as to be in substance more like a purchase and sale of the underlying security
than is the case with repurchase agreements.

INVESTMENT RESTRICTIONS

The Trust has adopted a number of restrictions and policies relating to the
investment of each Fund's assets and activities, which are fundamental policies
and may not be changed without the approval of the holders of a majority of the
respective Fund's outstanding shares (for this purpose a majority of the shares

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<PAGE>
means the lesser of (i) 67% of the shares represented at a meeting at which more
than 50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares). No Fund may:

(1) purchase any securities other than securities referred to under "How
the Funds Invest" in the Prospectus and under "Investment Objectives and
Policies" herein;

(2) invest more than 5% of its total assets (taken at market value at
the time of each investment) in private activity bonds or industrial revenue
bonds where the entity supplying the revenues from which the issue is to be
paid, including predecessors, has a record of less than three years of
continuous operation;

(3) make investments for the purpose of exercising control or
management;

(4) purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization;

(5) purchase or sell real estate (provided that such restriction shall
not apply to Municipal Securities secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein), commodities or commodity contracts, interests in oil, gas or other
mineral exploration or development programs;

(6) purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities;

(7) make short sales of securities or maintain a short position or
invest in put, call, straddle, or spread options or combinations thereof;
provided, however, that each Fund shall have the authority to purchase
Municipal Securities subject to put options as set forth herein under
"Investment Objectives and Policies" and Appendix K -- "Information
Concerning Municipal Securities";

(8) make loans to other persons, provided that each Fund may purchase a
portion of an issue of Municipal Securities (the acquisition of a portion of
an issue of Municipal Securities or bonds, debentures or other debt
securities which are not publicly distributed is considered to be the making
of a loan under the Investment Company Act);

(9) borrow amounts in excess of 20% of its total assets taken at market
value (including the amount borrowed), and then only from banks as a
temporary measure for extraordinary or emergency purposes including to meet
redemptions and to settle securities transactions. (Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets; however,
the Funds will not borrow to increase income but only to meet redemption
requests which might otherwise require untimely dispositions of portfolio
securities. The Funds will not purchase securities while borrowings are
outstanding except to honor prior commitments. Interest paid on such
borrowings will reduce net income.);

(10) mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (9) above, and then
such mortgaging, pledging or hypothecating may not exceed 10% of its total
assets, taken at market value;

(11) invest in securities with legal or contractual restrictions on
resale for which no readily available market exists, including repurchase
agreements maturing in more than seven days, if, regarding all such
securities, more than 10% of its total assets (taken at market value), would
be invested in such securities;

(12) act as an underwriter of securities, except to the extent that the
Fund technically may be deemed an underwriter when engaged in the activities
described in (8) above or insofar as the Fund may be deemed an underwriter
under the Securities Act of 1933 in selling portfolio securities;

9
<PAGE>

(13) purchase or retain the securities of any issuer, if those individual
officers and Trustees of the Trust, the Manager or any subsidiary thereof
each owning beneficially more than 1/2 of 1% of the securities of such
issuer own in the aggregate more than 5% of the securities of such issuer;
and

(14) issue senior securities to the extent such issuance would violate
applicable law.

In addition to the foregoing, the Funds have undertaken with the State of
Texas that they will not invest in oil, gas or mineral leases.

The Funds are classified as non-diversified within the meaning of the
Investment Company Act, which means that a Fund is not limited by such Act in
the proportion of its assets that it may invest in obligations of a single
issuer. However, each Fund's investments will be limited so as to qualify as a
"regulated investment company" ("RIC") for purposes of the Code. See "Taxes." To
qualify, among other requirements, the Trust will limit each Fund's investments
so that, at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of each 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 each Fund's total assets, not more than 5% of the market value of such assets
will be invested in the securities of a single issuer and the respective Fund
will not own more than 10% of the outstanding voting securities of a single
issuer. For purposes of this restriction, the Funds will regard each state and
each political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the Trustees of the Trust to the
extent necessary to comply with changes to the Federal tax requirements. A fund
which 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 a Fund assumes large positions in the
obligations of a small number of issuers, the Fund's yield 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.

MANAGEMENT OF THE FUNDS

TRUSTEES AND OFFICERS

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

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

TERRY K. GLENN (58) -- PRESIDENT AND TRUSTEE(1)(2) -- Executive Vice
President of the Manager and Merrill Lynch Asset Management, L.P. ("MLAM")
(which terms as used herein include their corporate predecessors) since 1983;
Executive Vice President and Director of Princeton Services, Inc. ("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.

RONALD W. FORBES (58) -- TRUSTEE(2) -- 1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989; Consultant, Urban Institute, Washington, D.C. since
1995.

10
<PAGE>
CYNTHIA A. MONTGOMERY (46) -- TRUSTEE(2) -- Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate School of
Management, Northwestern University from 1985 to 1989; Assistant Professor,
Graduate School of Business Administration, The University of Michigan from 1979
to 1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.

CHARLES C. REILLY (68) -- TRUSTEE(2) -- 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 Arnold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990.

KEVIN A. RYAN (66) -- TRUSTEE(2) -- 127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director of The Boston University
Center for the Advancement of Ethics and Character; Professor of Education at
Boston University since 1982; formerly taught on the faculties of The University
of Chicago, Stanford University and Ohio State University.

RICHARD R. WEST (60) -- TRUSTEE(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and 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., Vornado Realty Trust, Inc.,
Vornado Operating Company and Alexander's Inc.

ARTHUR ZEIKEL (66) -- TRUSTEE(1)(2) -- 300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Manager and MLAM from 1997 to 1999 and President
thereof from 1977 to 1997; Chairman of Princeton Services from 1997 to 1999,
Director thereof from 1993 to 1999 and President thereof from 1993 to 1997;
Executive Vice President of Merrill Lynch & Co., Inc. ("ML & Co.") from 1990 to
1999.

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

EDWARD J. ANDREWS (39) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) -- Vice
President of MLAM since 1991; investment officer in the Private Banking Division
of Citibank, N.A. from 1982 to 1991.

PETER J. HAYES (40) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) -- First
Vice President of MLAM since 1997; Vice President of MLAM from 1988 to 1997.

KENNETH A. JACOB (48) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) -- First
Vice President of MLAM since 1997; Vice President of MLAM from 1984 to 1997.

KEVIN A. SCHIATTA (44) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) -- Vice
President of MLAM since 1985.

HELEN MARIE SHEEHAN (39) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) --
Vice President of MLAM since 1991; Assistant Vice President of MLAM from 1989 to
1991; employee of MLAM since 1985.

STEVEN LEWIS (36) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) -- Vice
President of MLAM since 1998; Assistant Vice President of MLAM from 1995 to
1998.

DARRIN SANFILLIPPO (34) -- VICE PRESIDENT AND PORTFOLIO MANAGER(1)(2) --
Vice President of MLAM since 1998; Assistant Vice President of MLAM from 1994 to
1998.

DONALD C. BURKE (39) -- VICE PRESIDENT AND TREASURER(1)(2) -- Senior Vice
President and Treasurer of the Manager and MLAM since 1999; First Vice President
of MLAM from 1997 to 1999; Vice President of MLAM from 1990 to 1997; Director of
Taxation of MLAM since 1990; Vice President of PFD since 1999; Senior Vice
President and Treasurer of Princeton Services since 1999.

11
<PAGE>

WILLIAM E. ZITELLI, JR. (31) -- SECRETARY(1)(2) -- Attorney associated with
MLAM since 1998; Attorney associated with Pepper Hamilton LLP from 1997 to 1998;
Attorney associated with Reboul, MacMurray, Hewitt, Maynard and Kristol from
1994 to 1997.

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

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

(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which MLAM or FAM acts as the investment adviser or
manager.

As of July 1, 1999, the Trustees and officers of the Trust as a group (17
persons) owned an aggregate of less than 1% of the outstanding shares of each
Fund. At such date, Mr. Zeikel, a Trustee of the Trust, Mr. Glenn, a Trustee and
officer of the Trust, and the other officers of each Fund owned an aggregate of
less than 1% of the outstanding shares of common stock of ML & Co.

COMPENSATION OF TRUSTEES

Pursuant to the terms of separate management agreements between the Trust on
behalf of each Fund and the Manager (the "Management Agreements"), the Manager
pays all compensation of officers and employees of the Trust as well as the fees
of Trustees who are affiliated persons of ML & Co. or its subsidiaries. The
Trust pays each non-interested Trustee a fee of $5,000 per year plus $500 per
meeting attended. The Trust also compensates members of its Audit and Nominating
Committee (the "Committee"), which consists of all the non-interested Trustees,
a fee of $2,000 per year. The Trust pays all Trustees' out-of-pocket expenses
relating to attendance at meetings. The Chairman of the Audit and Nominating
Committee receives an additional annual fee of $1,000 per year.

The following table sets forth for the fiscal year ended March 31, 1999
compensation paid by the Funds to the non-affiliated Trustees and for the
calendar year ended December 31, 1998 the aggregate compensation paid by all
registered investment companies advised by MLAM and its affiliate, FAM
("MLAM/FAM Advised Funds") to the non-affiliated Trustees.

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION FROM
PENSION OR RETIREMENT FUND AND MLAM/ FAM
COMPENSATION BENEFITS ACCRUED AS PART ADVISED FUNDS PAID
NAME OF TRUSTEE FROM FUND OF FUND EXPENSE TO TRUSTEES(1)
- ----------------------------------------------------- --------------- ------------------------- -------------------
<S> <C> <C> <C>
ARIZONA FUND
Ronald W. Forbes(1)................................ $ 257 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 257 None $ 192,567
Charles C. Reilly(1)............................... $ 287 None $ 362,858
Kevin A. Ryan(1)................................... $ 257 None $ 192,567
Richard R. West(1)................................. $ 257 None $ 346,125
CALIFORNIA FUND
Ronald W. Forbes(1)................................ $ 2,515 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 2,515 None $ 192,567
Charles C. Reilly(1)............................... $ 2,810 None $ 362,858
Kevin A. Ryan(1)................................... $ 2,515 None $ 192,567
Richard R. West(1)................................. $ 2,515 None $ 346,125
CONNECTICUT FUND
Ronald W. Forbes(1)................................ $ 565 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 565 None $ 192,567
Charles C. Reilly(1)............................... $ 632 None $ 362,858
Kevin A. Ryan(1)................................... $ 565 None $ 192,567
Richard R. West(1)................................. $ 565 None $ 346,125
MASSACHUSETTS FUND
Ronald W. Forbes(1)................................ $ 339 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 339 None $ 192,567
Charles C. Reilly(1)............................... $ 379 None $ 362,858
Kevin A. Ryan(1)................................... $ 339 None $ 192,567
Richard R. West(1)................................. $ 339 None $ 346,125
</TABLE>

12
<PAGE>

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION FROM
PENSION OR RETIREMENT FUND AND MLAM/ FAM
COMPENSATION BENEFITS ACCRUED AS PART ADVISED FUNDS PAID
NAME OF TRUSTEE FROM FUND OF FUND EXPENSE TO TRUSTEES(1)
- ----------------------------------------------------- --------------- ------------------------- -------------------
<S> <C> <C> <C>
MICHIGAN FUND
Ronald W. Forbes(1)................................ $ 393 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 393 None $ 192,567
Charles C. Reilly(1)............................... $ 438 None $ 362,858
Kevin A. Ryan(1)................................... $ 393 None $ 192,567
Richard R. West(1)................................. $ 393 None $ 346,125
NEW JERSEY FUND
Ronald W. Forbes(1)................................ $ 1,023 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 1,023 None $ 192,567
Charles C. Reilly(1)............................... $ 1,144 None $ 362,858
Kevin A. Ryan(1)................................... $ 1,023 None $ 192,567
Richard R. West(1)................................. $ 1,023 None $ 346,125
NEW YORK FUND
Ronald W. Forbes(1)................................ $ 1,994 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 1,994 None $ 192,567
Charles C. Reilly(1)............................... $ 2,230 None $ 362,858
Kevin A. Ryan(1)................................... $ 1,994 None $ 192,567
Richard R. West(1)................................. $ 1,994 None $ 346,125
NORTH CAROLINA FUND
Ronald W. Forbes(1)................................ $ 376 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 376 None $ 192,567
Charles C. Reilly(1)............................... $ 421 None $ 362,858
Kevin A. Ryan(1)................................... $ 376 None $ 192,567
Richard R. West(1)................................. $ 376 None $ 346,125
OHIO FUND
Ronald W. Forbes(1)................................ $ 485 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 485 None $ 192,567
Charles C. Reilly(1)............................... $ 542 None $ 362,858
Kevin A. Ryan(1)................................... $ 485 None $ 192,567
Richard R. West(1)................................. $ 485 None $ 346,125
PENNSYLVANIA FUND
Ronald W. Forbes(1)................................ $ 553 None $ 192,567
Cynthia A. Montgomery(1)........................... $ 553 None $ 192,567
Charles C. Reilly(1)............................... $ 618 None $ 362,858
Kevin A. Ryan(1)................................... $ 553 None $ 192,567
Richard R. West(1)................................. $ 553 None $ 346,125
</TABLE>

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

(1) The Trustees serve on the boards of FAM/MLAM-advised funds as follows: Mr.
Forbes (38 registered investment companies consisting of 51 portfolios); Ms.
Montgomery (38 registered investment companies consisting of 51 portfolios);
Mr. Reilly (57 registered investment companies consisting of 70 portfolios);
Mr. Ryan (38 registered investment companies consisting of 51 portfolios);
and Mr. West (59 registered investment companies consisting of 83
portfolios).

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

13
<PAGE>
MANAGEMENT AND ADVISORY ARRANGEMENTS

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

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

MANAGEMENT FEE. Pursuant to the Management Agreements, the Manager receives
for its services to each Fund monthly compensation at the following annual
rates:

PORTION OF AVERAGE DAILY NET ASSETS:

<TABLE>
<CAPTION>
RATE
-----------
<S> <C>
Not exceeding $500 million............................................................ 0.500%
In excess of $500 million but not exceeding $1 billion................................ 0.425%
In excess of $1 billion............................................................... 0.375%
</TABLE>

Set forth below are the total management fees paid by each Fund to the
Manager for the fiscal years ended March 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-------------------------------------
1999 1998 1997
--------- ------------ ------------
<S> <C> <C> <C>
Arizona Fund...................................................... $1,025,182 $ 888,435 $ 752,072
California Fund................................................... $8,687,408 $7,429,249 $6,413,612
Connecticut Fund.................................................. $2,234,172 $1,826,850 $1,150,354
Massachusetts Fund................................................ $1,483,533 $1,148,245 $ 938,904
Michigan Fund..................................................... $1,806,214 $1,420,153 $1,255,849
New Jersey Fund................................................... $3,896,780 $3,390,860 $2,990,679
New York Fund..................................................... $6,833,444 $5,848,065 $5,150,683
North Carolina Fund............................................... $1,425,986 $1,381,698 $1,331,895
Ohio Fund......................................................... $1,960,327 $1,784,810 $1,508,892
Pennsylvania Fund................................................. $2,420,993 $2,072,950 $2,013,273
</TABLE>

PAYMENT OF FUND EXPENSES. Each Management Agreement obligates the Manager
to provide management services and to pay all compensation of and furnish office
space for officers and employees of the Trust connected with investment and
economic research, trading and investment management of the Trust, as well as
the fees of all Trustees of the Trust who are affiliated persons of ML & Co. or
any of its affiliates. Each Fund pays all other expenses incurred in its
operations and a portion of the Trust's general administrative expenses
allocated on the basis of asset size of the respective Fund. Such expenses
include, 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; charges of the custodian and the transfer agent; expenses of redemption
of

14
<PAGE>
shares; Commission fees; expenses of registering the shares under Federal and
state securities laws; fees and expenses of non-interested Trustees; accounting
and pricing costs (including the daily calculations of net asset value);
insurance; interest; brokerage costs; and other expenses properly payable by
each Fund. Accounting services are provided for each Fund by the Manager and
each Fund reimburses the Manager for its costs in connection with such services.
Depending upon the nature of a lawsuit, litigation costs may be assessed to the
specific Fund to which the lawsuit relates or allocated on the basis of the
asset size of the respective Funds. The Trustees have determined that this is an
appropriate method of allocation of expenses.

For information as to the distribution fee paid by the Fund to Merrill Lynch
pursuant to the Distribution Agreement, see "Purchase and Redemption of Shares"
below.

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

DURATION AND TERMINATION. Unless earlier terminated as described herein,
the Management Agreements will continue in effect from year to year if approved
annually (a) by the Board of Trustees of the Trust or by a majority of the
outstanding shares of the respective Fund and (b) by a majority of the Trustees
who are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such agreement terminates upon
assignment and may be terminated without penalty on 60 days' written notice at
the option of either party thereto or by vote of the shareholders of the
respective Fund.

TRANSFER AGENCY SERVICES

Financial Data Services, Inc. (the "Transfer Agent"), a subsidiary of ML &
Co., acts as each Fund's Transfer Agent pursuant to a Transfer Agency,
Shareholder Servicing Agency and Proxy Agency Agreement (the "Transfer Agency
Agreement"). Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and redemption of shares and the opening
and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives a fee of $10.00 per account and is
entitled to reimbursement from the Fund for certain transaction charges and
out-of-pocket expenses incurred by it under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term "account" includes a shareholder account maintained directly
by the Transfer Agent and any other account representing the beneficial interest
of a person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co.

15
<PAGE>
Set forth below are the fees paid by each Fund, including out-of-pocket
expenses, to the Transfer Agent pursuant to the Transfer Agency Agreement for
the year ended March 31, 1999.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31, 1999
------------------
<S> <C>
Arizona Fund.............................................................. $ 24,976
California Fund........................................................... $ 240,243
Connecticut Fund.......................................................... $ 52,342
Massachusetts Fund........................................................ $ 57,616
Michigan Fund............................................................. $ 57,327
New Jersey Fund........................................................... $ 135,291
New York Fund............................................................. $ 245,687
North Carolina Fund....................................................... $ 54,900
Ohio Fund................................................................. $ 63,095
Pennsylvania Fund......................................................... $ 97,473
</TABLE>

16
<PAGE>
CODE OF ETHICS

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

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

PURCHASE OF SHARES BY CASH MANAGEMENT ACCOUNT SUBSCRIBERS

CMA PROGRAM. The shares of the Funds are offered to participants in the CMA
program to provide medium for the investment of free cash balances held in CMA
accounts. Persons subscribing to the CMA program will have these balances
invested in shares of a CMA State Fund or CMA Money Fund, CMA Government
Securities Fund, CMA Tax-Exempt Fund or CMA Treasury Fund (collectively, the
"CMA National Funds" and together with the CMA State Funds, the "CMA Funds")
depending on which CMA Fund has been designated by the participant as the
primary investment account (the "Primary Money Account"). Alternatively,
subscribers may designate the Insured Savings Account as their Primary Money
Account. As described in the CMA Program Description, a subscriber to the CMA
service may elect to have free cash balances in the CMA account deposited in
individual money market deposit accounts established for such subscriber at
designated depository institutions pursuant to the Insured Savings Account. The
CMA Funds and the Insured Savings Account are collectively referred to as the
"Money Accounts." However, this Statement of Additional Information does not
purport to describe the other CMA Funds or the Insured Savings Account and
prospective participants in such CMA Funds or Insured Savings Account are
referred to the Statement of Additional Information with respect to each such
CMA Fund and the Fact Sheet with respect to the Insured Savings Account. All CMA
subscribers are furnished with the prospectuses of the CMA National Funds and
the Insured Savings Account Fact Sheet, as well as the CMA Program Description.
To the extent not inconsistent with information contained herein, information
set forth in the CMA Program Description with respect to the CMA National Funds
also is applicable to each CMA State Fund. Shareholders of a CMA State Fund may
also maintain positions in one or more of the CMA National Funds or the Insured
Savings Account but may not maintain positions in more than one CMA State Fund
at any given time.

Merrill Lynch charges a program participation fee for the CMA service which
presently is $100 per year (an additional $25 annual program fee is charged for
participation in the CMA Visa-Registered Trademark- Gold Program described in
the CMA Program Description). A different fee may be charged to certain group
plans and special Accounts. Merrill Lynch reserves the right to change the fee
for the CMA service or the CMA Visa-Registered Trademark- Gold Program at any
time. Shares of the CMA Funds may also be purchased directly through the CMA
Funds' Transfer Agent by investors who are not subscribers to the CMA program.
Shareholders of

17
<PAGE>
the CMA Funds not subscribing to the CMA program will not be charged the CMA
program fee but will not receive any of the additional services available to CMA
program subscribers.

Purchase of shares of a CMA Fund designated as the Primary Money Account
will be made pursuant to the CMA automatic purchase procedures described below.
Purchases of shares of the CMA Funds also may be made pursuant to the manual
procedures described below. If a Fund exercises its right to suspend or
otherwise limit sales of its shares, as discussed under "Investment Objectives
and Policies--Other Factors," amounts that would have been applied to the
purchase of such Fund's shares will be applied to the purchase of shares of one
of the other CMA Funds or the Insured Savings Account depending on which is
designated by the participant as the secondary investment account (the
"Secondary Money Account"). However, dividends declared on shares of the CMA
Fund designated as the Primary Money Account will continue to be reinvested in
that Fund. If the participant has not designated a Secondary Money Account,
additional purchases through the CMA program will be made in shares of CMA Tax-
Exempt Fund rather than in shares of the CMA Fund designated as the Primary
Money Account.

Subscribers to the CMA service have the option to change the designation of
their Primary Money Account at any time by notifying their Merrill Lynch
Financial Consultants. At that time, a subscriber may instruct his or her
financial consultant to redeem shares of a CMA Fund designated as the Primary
Money Account and to transfer the proceeds to the newly-designated Primary Money
Account.

Merrill Lynch reserves the right to terminate a subscriber's participation
in the CMA program for any reason.

Shares of the Funds are offered continuously for sale by Merrill Lynch
without sales charge at a public offering price equal to the net asset value
(normally $1.00 per share) next determined after receipt by a Fund of an
automatic or manual purchase order. Shares purchased will receive the next
dividend declared after the shares are issued, which will be immediately prior
to the 12 noon, Eastern time, pricing on the following business day. A purchase
order will not become effective until cash in the form of Federal funds becomes
available to the Fund (see below for information as to when the Funds receive
such funds). There are no minimum investment requirements for CMA subscribers
other than for manual purchases.

AUTOMATIC PURCHASES. Free cash balances arising in a CMA account are
automatically invested in shares of a Fund designated as the Primary Money
Account not later than the first business day of each week on which either the
New York Stock Exchange or New York banks are open, which normally will be
Monday. Free cash balances arising from the following transactions will be
invested automatically prior to the automatic weekly sweeps. Free cash balances
arising from the sale of securities which do not settle on the day of the
transaction (such as most common and preferred stock transactions) and from
principal repayments on debt securities become available to the Funds and will
be invested in shares on the business day following receipt of the proceeds with
respect thereto in the CMA account. Proceeds from the sale of securities
settling on a same day basis will also be invested in shares on the next
business day following receipt. Free cash balances of $1,000 or more arising
from cash deposits into a CMA account, dividend and interest payments or any
other source become available to the Funds and are invested in shares on the
next business day following receipt in the CMA account unless such balance
results from a cash deposit made after the cashiering deadline of the Merrill
Lynch office in which the deposit is made, in which case the resulting free cash
balances are invested on the second following business day. A CMA participant
desiring to make a cash deposit should contact his or her Merrill Lynch
Financial Consultant for information concerning the local office's cashiering
deadline, which is dependent on such office's arrangements with its commercial
banks. Free cash balances of less than $1,000 are invested in shares in the
automatic weekly sweep.

MANUAL PURCHASES. Subscribers to the CMA service may make manual
investments of $1,000 or more at any time in shares of a Fund not selected as
their Primary Money Account. Manual purchases shall be effective on the day
following the day the order is placed with Merrill Lynch, except that orders
involving cash deposits made on the date of a manual purchase shall become
effective on the second business day

18
<PAGE>
thereafter if they are placed after the cashiering deadline referred to in the
preceding paragraph. As a result, CMA customers who enter manual purchase orders
which include cash deposits made on that day after such cashiering deadline will
not receive the daily dividend which would have been received had their orders
been entered prior to the deadline. In addition, manual purchases of $500,000 or
more can be made effective on the same day the order is placed with Merrill
Lynch provided that requirements as to timely notification and transfer of a
Federal funds wire in the proper amount are met. CMA customers desiring further
information on this method of purchasing shares should contact their Merrill
Lynch Financial Consultants.

All purchases of CMA Fund shares and dividend reinvestments will be
confirmed to CMA subscribers (rounded to the nearest share) in the CMA Account
Statement which is sent to all CMA participants monthly.

Merrill Lynch, in conjunction with another subsidiary of Merrill Lynch &
Co., Inc. ("ML & Co.)" offers a modified version of the CMA account which has
been designed for corporations and other businesses. This account, the Working
Capital Management-SM- account ("WCMA-Registered Trademark-"), provides
participants with the features of a regular CMA account and also optional lines
of credit. A brochure describing the WCMA program as well as information
concerning charges for participation in the program, is available from Merrill
Lynch.

Participants in the WCMA program are able to invest funds in one or more
designated CMA Funds. Checks and other funds transmitted to a WCMA account
generally will be applied first, to the payment of
pending securities transactions or other charges in the participant's securities
account, second, to reduce outstanding balances in the lines of credit available
through such program and third, to purchase shares of the designated CMA Fund.
To the extent not otherwise applied, funds transmitted by Federal funds wire or
an automated clearinghouse service will be invested in shares of the designated
CMA Fund on the business day following receipt of such funds by Merrill Lynch.
Funds received in a WCMA account from the sale of securities will be invested in
the designated CMA Fund as described above. The amount payable on a check
received in a WCMA account prior to the cashiering deadline referred to above
will be invested on the second business day following receipt of the check by
Merrill Lynch. Redemptions of CMA Fund shares will be effected as described
below under "Redemption of Shares--Redemption of Shares by CMA
Subscribers--Automatic Redemptions" to satisfy debit balances, such as those
created by purchases of securities or by checks written against a bank providing
checking services to WCMA participants. WCMA participants that have a line of
credit will, however, be permitted to maintain a minimum CMA Fund balance; for
participants who elect to maintain such a balance, debits from check usage will
be satisfied through the line of credit so that such balance is maintained.
However, if the full amount of available credit is not sufficient to satisfy the
debit, it will be satisfied from the minimum balance.

From time to time, Merrill Lynch also may offer the Funds to participants in
certain other programs sponsored by Merrill Lynch. Some or all of the features
of the CMA Account any not be available in such programs. For more information
on the services available under such programs, participants should contact their
Merrill Lynch Financial Consultants.

PURCHASE OF SHARES BY NON-CASH MANAGEMENT ACCOUNT SUBSCRIBERS

Shares of the Funds may be purchased by investors maintaining accounts
directly with the Funds' Transfer Agent who are not subscribers to the Cash
Management Account program. Shareholders of the Funds not subscribing to such
program will not be charged the applicable program fee, but will not receive any
of the services available to program subscribers, such as the Visa card/check
account or the automatic investment of free cash balances. The minimum initial
purchase for non-program subscribers is $5,000 and the minimum subsequent
purchase is $1,000. Investors desiring to purchase shares directly through the
Transfer Agent as described below should contact Financial Data Services, Inc.,
P.O. Box 45290, Jacksonville, Florida 32232-5290 or call (800) 221-7210.

19
<PAGE>

PAYMENT TO THE TRANSFER AGENT. Investors who are not subscribers to the CMA
program may submit purchase orders directly by mail or otherwise to the Transfer
Agent. Purchase orders by mail should be sent to Financial Data Services, Inc.,
P.O. Box 45290, Jacksonville, Florida 32232-5290. Purchase orders that are sent
by hand should be delivered to Financial Data Services, Inc., 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484. Investors opening a new account
must enclose a completed Purchase Application which is available from Financial
Data Services, Inc. Existing shareholders should enclose the detachable stub
from a monthly account statement that they have received. Checks should be made
payable to Merrill Lynch, Pierce, Fenner & Smith Incorporated. Certified checks
are not necessary, but checks are accepted subject to collection at full face
value in U.S. funds and must be drawn in U.S. dollars on a U.S. bank. Payments
for the accounts of corporations, foundations and other organizations may not be
made by third party checks. Since there is a three-day settlement period
applicable to the sale of most securities, delays may occur when an investor is
liquidating other investments for investment in one of the Funds.

The CMA Funds have been created for the purpose of being part of the CMA
program or as part of other Merrill Lynch central asset account programs, and
they do not offer certain typical money fund features such as exchange
privileges. There are money market funds which have investment objectives
similar to the CMA Funds and which offer check writing and exchange privileges,
including others sponsored by Merrill Lynch (Merrill Lynch, however, does not
sponsor money funds outside the CMA program which seek to provide income exempt
from state or city income taxes). Prior to making an investment in any such
money fund, an investor should obtain and read the prospectus of such money
market fund.

Shares of each Fund are offered continuously for sale by Merrill Lynch
without a sales load at a public offering price equal to the net asset value
(normally $1.00 per share) next determined after a purchase order becomes
effective. Share purchase orders are effective on the date Federal funds become
available to the selling Fund. If Federal funds are available to such Fund prior
to 12 noon on any business day, the order will be effective on that day. Shares
purchased will begin accruing dividends on the day following the date of
purchase.

The Trust, on behalf of each Fund, has entered into a separate Distribution
Agreement with Merrill Lynch pursuant to which Merrill Lynch acts as the
distributor for each Fund. The Distribution Agreements obligate Merrill Lynch to
pay certain expenses in connection with the offering of the shares of the Funds.
After the prospectuses, statements of additional information and periodic
reports have been prepared, set in type and mailed to shareholders, Merrill
Lynch will pay for the printing and distribution of copies thereof used in
connection with the offering to investors. Merrill Lynch will also pay for other
supplementary sales literature and advertising costs. The Distribution
Agreements are subject to the same renewal requirements and termination
provisions as the Management Agreements described above.

DISTRIBUTION PLANS

The Trust, on behalf of each Fund, has also adopted a separate Distribution
and Shareholder Servicing Plan in compliance with Rule 12b-1 under the
Investment Company Act (the "Distribution Plans") pursuant to which Merrill
Lynch receives a distribution fee from each Fund at the end of each month at the
annual rate of 0.125% of average daily net assets of that Fund attributable to
subscribers to the CMA program, to investors maintaining securities accounts at
Merrill Lynch who are not subscribers to the CMA programs and to investors
maintaining accounts directly with the Transfer Agent, except that the value of
Fund shares in accounts maintained directly with the Transfer Agent that are not
serviced by Merrill Lynch Financial Consultants will be excluded. The
Distribution Plans reimburse Merrill Lynch only for actual expenses incurred in
the fiscal year in which the fee is paid. The distribution fees principally
compensate Merrill Lynch Financial Consultants and other Merrill Lynch personnel
for selling shares of the Fund and for providing direct personal services to
shareholders. The distribution fees are not compensation for the administrative
and operational services rendered to the Funds or their shareholders

20
<PAGE>
by Merrill Lynch that are covered by the Management Agreements (see "Management
of the Funds -- Management and Advisory Arrangements") between the Trust and the
Manager. The Trustees believe that the Funds' expenditures under the
Distribution Plans benefit the Funds and their shareholders by providing better
shareholder services and by facilitating the sale and distribution of Fund
shares.

Set forth below are the distribution fees paid by each Fund to Merrill Lynch
pursuant to their respective Distribution Plans for the fiscal years ended March
31, 1999, 1998 and 1997. All of the amounts expended were allocated to Merrill
Lynch personnel and to related administrative costs.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Arizona Fund............................................................ $ 252,963 $ 218,259 $ 185,231
California Fund......................................................... $ 2,589,655 $ 2,160,142 $ 1,819,326
Connecticut Fund........................................................ $ 556,486 $ 454,599 $ 383,286
Massachusetts Fund...................................................... $ 369,059 $ 283,055 $ 228,987
Michigan Fund........................................................... $ 450,367 $ 351,653 $ 308,843
New Jersey Fund......................................................... $ 1,033,214 $ 879,810 $ 759,664
New York Fund........................................................... $ 1,981,066 $ 1,646,549 $ 1,405,157
North Carolina Fund..................................................... $ 355,105 $ 340,553 $ 326,935
Ohio Fund............................................................... $ 484,767 $ 440,461 $ 372,783
Pennsylvania Fund....................................................... $ 604,797 $ 513,883 $ 496,888
</TABLE>

The payment of the distribution fees under the Distribution Agreements is
subject to the provisions of each Fund's Distribution Plan and Rule 12b-1. Among
other things, each Distribution Plan provides that Merrill Lynch shall provide
and the Trustees of the Trust shall review quarterly reports regarding the
payment of the respective distribution fees during such period. In their
consideration of each Distribution Plan, the Trustees must consider all factors
they deem relevant, including information as to the benefits of the Distribution
Plan to the respective Fund and its shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in effect, the selection
and nomination of non-interested Trustees shall be committed to the discretion
of the non-interested Trustees then in office. A Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the
non-interested Trustees or by the vote of the holders of a majority of the
outstanding voting securities of the respective Fund. Finally, a Distribution
Plan cannot be amended to increase materially the amount to be spent by the
respective Fund thereunder without shareholder approval, and all material
amendments are required to be approved by vote of the Trustees, including a
majority of the non-interested Trustees, cast in person at a meeting called for
that purpose.

REDEMPTION OF SHARES

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

Each Fund is required to redeem for cash all full and fractional shares of
such Fund. The redemption price of a Fund is the net asset value per share next
determined after receipt by the Transfer Agent of proper notice of redemption as
described in accordance with either the automatic or manual procedures set forth
below. If such notice is received by the Transfer Agent prior to the
determination of net asset value at 12 noon, Eastern time, on any day that the
NYSE or New York banks are open for business, the redemption will be effective
on such day. Payment of the redemption proceeds will be made on the same day the
redemption becomes effective. If the notice is received after 12 noon, the
redemption will be effective on the next business day and payment will be made
on such next day.

21
<PAGE>
REDEMPTION OF SHARES BY CMA SUBSCRIBERS

AUTOMATIC REDEMPTIONS. Redemptions will be effected automatically by
Merrill Lynch to satisfy debit balances in the Securities Account created by
activity therein or to satisfy debit balances created by Visa card purchases,
cash advances or checks written against the Visa Account. Each CMA account will
be scanned automatically for debits each business day prior to 12 noon. After
application of any free cash balances in the account to such debits, shares of
the designated Fund will be redeemed at net asset value at the 12 noon pricing,
and funds deposited pursuant to the Insured Savings Account will be withdrawn,
to the extent necessary to satisfy any remaining debits in either the Securities
Account or the Visa Account. Automatic redemptions or withdrawals will be made
first from the participant's Primary Money Account and then, to the extent
necessary, from Money Accounts not designated as the Primary Money Account.
Unless otherwise requested, in those instances where shareholders request
transactions that settle on a "same-day" basis (such as Federal funds wire
redemptions, branch office checks, transfers to other Merrill Lynch accounts and
certain securities transactions) the Fund shares necessary to effect such
transactions will be deemed to have been transferred to Merrill Lynch prior to
the Fund's declaration of dividends on that day. In such instances, shareholders
will receive all dividends declared and reinvested through the date immediately
preceding the date of redemption. Unless otherwise requested by the participant,
redemptions or withdrawals from non-Primary Money Accounts will be made in the
order the Money Accounts were established; thus, redemptions or withdrawals will
first be made from the non-Primary Money Account which the participant first
established. Margin loans through the Investor CreditLine-SM- service will be
utilized to satisfy debits remaining after the liquidation of all funds invested
in or deposited through Money Accounts, and shares of the Funds may not be
purchased, nor may deposits be made pursuant to the Insured Savings Account,
until all debits and margin loans in the account are satisfied.

As set forth in the current description of the CMA Program, it is expected
that participants whose Securities Accounts are margin accounts with or through
the Investor CreditLine-SM- service will be permitted to designate minimum
balances to be maintained in shares of a CMA Fund or in deposits made pursuant
to the Insured Savings Account (the "Minimum Money Accounts Balance"). If a
participant designates a Minimum Money Accounts Balance, the shares or deposits
representing such balance will not be redeemed or withdrawn until loans equal to
the available margin loan value of securities in the Securities Account have
been made. Participants considering the establishment of a Minimum Money
Accounts Balance should review the description of this service contained in the
description of the CMA program which is available from Merrill Lynch.

MANUAL REDEMPTIONS. Shareholders who are subscribers to the CMA program may
redeem shares of a Fund directly by submitting a written notice of redemption
directly to Merrill Lynch, which will submit the requests to the Transfer Agent.
Cash proceeds from the manual redemption of Fund shares ordinarily will be
mailed to the shareholder at his or her address of record or on request, mailed
or wired (if $10,000 or more) to his or her bank account. Redemption requests
should not be sent to a Fund or the Transfer Agent. If inadvertently sent to a
Fund or the Transfer Agent, such redemption requests will be forwarded to
Merrill Lynch. The notice requires the signatures of all persons in whose names
the shares are registered, signed exactly as their names appear on their monthly
statement. The signature(s) on the redemption request must be guaranteed by an
"eligible guarantor institution" as such is defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934 (the "1934 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,
additional documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates of
corporate authority may be required. Shareholders desiring to effect manual
redemptions should contact their Merrill Lynch Financial Consultants.

All redemptions of Fund shares will be confirmed to CMA subscribers in the
CMA Account Statement which is sent to all CMA participants monthly.

22
<PAGE>
REDEMPTION OF SHARES BY NON-CMA SUBSCRIBERS

Shareholders may redeem shares of a Fund held in a Merrill Lynch securities
account directly as described above under "Redemption of Shares--Redemption of
Shares by CMA Subscribers--Manual Redemptions."

Shareholders maintaining an account directly with the Transfer Agent, who
are not CMA program participants, may redeem shares of a Fund by submitting a
written notice by mail directly to the Transfer Agent, Financial Data Services,
Inc., P.O. Box 45290, Jacksonville, Florida 32232-5290. Redemption requests
which are sent by hand should be delivered to Financial Data Services, Inc.,
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Cash proceeds from
the manual redemption of Fund shares will be mailed to the shareholder at his or
her address of record. Redemption requests should not be sent to a Fund or
Merrill Lynch. If inadvertently sent to a Fund or Merrill Lynch such redemption
requests will be forwarded to the Transfer Agent. The notice requires the
signatures of all persons in whose names the shares are registered, signed
exactly as their names appear on their monthly statement. The signature(s) on
the redemption request must be guaranteed by an "eligible guarantor institution"
as such is defined in Rule 17Ad-15 under the 1934 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, additional documents such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator, or certificates
of corporate authority may be required.

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

Shares of the Funds must be held in either a CMA account or through the
Transfer Agent. Shareholders who no longer maintain a CMA account will have
their shares automatically redeemed unless they elect to open an account for
such shares through the Transfer Agent. Such shareholders will no longer receive
any of the services available to CMA program participants.

At various times, a Fund may be requested to redeem shares, in manual or
automatic redemptions, with respect to which good payment has not yet been
received by Merrill Lynch. Such Fund may delay, or cause to be delayed, the
payment of the redemption proceeds until such time as it has assured itself that
good payment has been collected for the purchase of such shares. Normally, this
delay will not exceed 10 days. In addition, such Fund reserves the right not to
effect automatic redemptions where the shares to be redeemed have been purchased
by check within 15 days prior to the date the redemption request is received.

DETERMINATION OF NET ASSET VALUE

The net asset value of each Fund is determined by the Manager at 12 noon,
Eastern time, on each business day the NYSE or New York banks are open for
business. As a result of this procedure, the net asset value is determined each
business day except for days on which both the NYSE and New York banks are
closed. Both the NYSE and New York banks are closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. The net asset value is determined by
adding the value of all securities and other assets in the portfolio, deducting
the portfolio's liabilities, dividing by the number of shares outstanding and
rounding the result to the nearest whole cent. It is anticipated that the net
asset value per share of each Fund will remain constant at $1.00, but no
assistance can be given in this regard.

Each fund values its portfolio securities based upon their amortized cost in
accordance with the terms of a rule adopted by the Commission. This involves
valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
fund would receive if it sold the instrument.

23
<PAGE>

In accordance with the Commission rule applicable to the valuation of its
portfolio securities, each Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less and will purchase instruments having
remaining maturities of not more than 397 days (13 months). Each Fund will
invest only in securities determined by the Trustees to be of high quality with
minimal credit risks. In addition, the Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the Trust's price per
share as computed for the purpose of sales and redemptions at $1.00. Deviations
of more than an insignificant amount between the net asset value calculated
using market quotations and that calculated on an "amortized cost" basis will be
reported to the Trustees by the Manager. In the event the Trustees determine
that a deviation exists which may result in material dilution or other unfair
results to investors or existing shareholders, each Fund will take such
corrective action as it regards as necessary and appropriate, including the
reduction of the number of outstanding shares of each Fund by having each
shareholder proportionately contribute shares to each Fund's capital; the sale
of portfolio instruments prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity; withholding dividends; or establishing a
net asset value per share solely by using available market quotations. If the
number of outstanding shares is reduced in order to maintain a constant net
asset value of $1.00 per share, the shareholders will contribute proportionately
to each Fund's capital. Each shareholder will be deemed to have agreed to such
contribution by his or her investment in each Fund.

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

YIELD INFORMATION

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

The yield on each Fund's shares normally will fluctuate on a daily basis.
Therefore, the yield for any given past period is not an indication or
representation by each Fund of future yields or rates of return on its shares.
The yield is affected by such factors as changes in interest rates on each
Fund's portfolio

24
<PAGE>
securities, average portfolio maturity, the types and quality of portfolio
securities held and operating expenses.

<TABLE>
<CAPTION>
SEVEN-DAY
PERIOD ENDED
MARCH 31, 1999
(EXCLUDING GAINS
FUND AND LOSSES)
-------------------
<S> <C>
Arizona Fund................................................................... 2.31 %
California Fund................................................................ 2.34 %
Connecticut Fund............................................................... 2.24 %
Massachusetts Fund............................................................. 2.42 %
Michigan Fund.................................................................. 2.41 %
New Jersey Fund................................................................ 2.32 %
New York Fund.................................................................. 2.39 %
North Carolina Fund............................................................ 2.29 %
Ohio Fund...................................................................... 2.48 %
Pennsylvania Fund.............................................................. 2.38 %
</TABLE>

On occasion, each Fund may compare its yield to (i) industry averages
compiled by IBC'S MONEY FUND REPORT, a widely recognized independent publication
that monitors the performance of money market mutual funds, (ii) the average
yield reported by the BANK RATE MONITOR NATIONAL INDEX-TM- for money market
deposit accounts offered by the 100 leading banks and thrift institutions in the
ten largest standard metropolitan statistical areas, (iii) yield data published
by Lipper Analytical Services, Inc., (iv) the yield on an investment in 90-day
Treasury bills on a rolling basis, assuming quarterly compounding or (v)
performance data published by Morningstar Publications, Inc., MONEY MAGAZINE,
U.S. NEWS & WORLD REPORT, BUSINESS WEEK, CDA Investment Technology, Inc., FORBES
MAGAZINE and FORTUNE MAGAZINE or historical yield data relating to other central
asset accounts similar to the CMA program. As with yield quotations, yield
comparisons should not be considered indicative of each Fund's yield or relative
performance for any future period. Current yield information may not provide a
basis for comparison with bank deposits or other investments that pay a fixed
yield over a stated period of time. In addition, from time to time a Fund may
include its Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature.

PORTFOLIO TRANSACTIONS

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

The money market securities in which the Funds invest are traded primarily
in the over-the-counter ("OTC") market. Bonds and debentures usually are traded
OTC, but may be traded on an exchange. Where possible, each Fund will deal
directly with the dealers who make a market in the securities involved except in
those circumstances where better prices and execution are available elsewhere.
Such dealers usually are acting as principals for their own accounts. On
occasion, securities may be purchased directly from the issuer. The money market
securities in which each Fund invests are generally traded on a net basis and do
not normally involve either brokerage commissions or transfer taxes. The cost of
executing portfolio securities transaction of each Fund primarily will consist
of dealer spreads. Under the Investment Company Act, persons affiliated with the
Trust are prohibited from dealing with the Trust as principals in

25
<PAGE>
the purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the Commission. Since OTC transactions are usually
principal transactions, affiliated persons of the Trust, may not serve as a
Fund's dealer in connection with such transactions except pursuant to the
exemptive order described below. An affiliated person of the Trust may serve as
its broker in OTC transactions conducted on an agency basis. A Fund may not
purchase securities from any underwriting syndicate of which Merrill Lynch is a
member, except in accordance with applicable rules under the Investment Company
Act.

Prior to the receipt of the exemptive order described below, the Funds could
be purchase securities in principal transactions from Merrill Lynch, although
they could purchase tax-exempt securities from underwriting syndicates of which
Merrill Lynch was a member under certain conditions in accordance with a rule
adopted under the Investment Company Act. The Commission has issued an exemptive
order permitting the Funds to conduct principal transactions with Merrill Lynch
in Municipal Securities with remaining maturities of one year or less. This
order contained a number of conditions, including conditions designed to ensure
that the price to a Fund from Merrill Lynch is equal to or better than that
available from other sources. Merrill Lynch has informed the Trust that it will
in no way, at any time, attempt to influence or control the activities of any
Fund or the Manager in placing such principal transactions. The exemptive order
allows Merrill Lynch to receive a dealer spread on any transaction with a Fund
no greater than its customary dealer spread for transactions of the type
involved.

Set forth below are the number of principal transactions each Fund engaged
in with Merrill Lynch and the aggregate amount of those transactions during the
fiscal years ended March 31, 1999, 1998 and 1997.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE NUMBER OF AGGREGATE
TRANSACTIONS AMOUNT* TRANSACTIONS AMOUNT* TRANSACTIONS AMOUNT*
------------ --------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Arizona Fund............................ 10 $ 23.0 2 $ 2.2 5 $ 5.8
California Fund......................... 43 $754.3 43 $614.7 29 $364.4
Connecticut Fund........................ 17 $ 87.8 78 $230.3 42 $ 99.3
Massachusetts Fund...................... 1 $ 5.6 21 $ 63.1 39 $ 75.1
Michigan Fund........................... 12 $ 61.2 11 $ 52.5 7 $ 20.0
New Jersey Fund......................... 10 $ 38.6 75 $258.7 31 $ 88.4
New York Fund........................... 0 $-- 6 $ 46.4 7 $ 71.4
North Carolina Fund..................... 4 $ 10.3 11 $ 41.8 -- $ --
Ohio Fund............................... 2 $ 3.3 13 $ 76.4 17 $ 52.1
Pennsylvania Fund....................... 7 $ 29.2 6 $ 30.4 3 $ 17.3
</TABLE>

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

* in millions

26
<PAGE>
The Trustees of the Trust have considered the possibilities of recapturing
for the benefit of the Funds expenses of possible portfolio transactions, such
as dealer spreads and underwriting commissions, by conducting such portfolio
transactions through affiliated entities, including Merrill Lynch. For example,
dealer spreads received by Merrill Lynch on transactions conducted pursuant to
the permissive order described above could be offset against the management fee
payable by a Fund to the Manager. After considering all factors deemed relevant,
the Trustees made a determination not to seek such recapture. The Trustees will
reconsider this matter from time to time. The Manager has arranged for the
Custodian to receive any tender offer solicitation fees on behalf of each Fund
payable with respect to portfolio securities of such Fund.

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

DIVIDENDS AND TAXES

DIVIDENDS

Dividends are declared and reinvested daily by each Fund in the form of
additional shares at net asset value. Each Fund's net income for dividend
purposes is determined at 12 noon, Eastern time, on each day the NYSE or New
York banks are open for business, immediately prior to the determination of such
Fund's net asset value on that day (see "Determination of Net Asset Value").
Such reinvestments will be reflected in shareholders' monthly CMA transaction
statements. Shareholders liquidating their holdings will receive on redemption
all dividends declared and reinvested through the date of redemption, except
that in those instances where shareholders request transactions that settle on a
"same day" basis (such as Federal Funds wire redemptions, branch office checks,
transfers to other Merrill Lynch accounts and certain securities transactions)
the Fund shares necessary to effect such transactions will be deemed to have
been transferred to Merrill Lynch prior to the Fund's declaration of dividends
on that day. In such instances, shareholders will receive all dividends declared
and reinvested through the date immediately preceding the date of redemption.
Since the net income (including realized gains and losses on the portfolio
assets) is declared as a dividend in shares each time the net income of the Fund
is determined, the net asset value per share of the Fund normally remains
constant at $1.00 per share.

Net income of each Fund (from the time of the immediately preceding
determination thereof) consists of (i) interest accrued and/or discount earned
(including both original issue and market discount), (ii) less amortization of
premiums and the estimated expenses of the Fund (including the fees payable to
the Investment Adviser) for the period, (iii) plus or minus all realized gains
and losses on portfolio securities. The amount of discount or premium on
portfolio securities is fixed at the time of their purchase and consists of the
difference between the purchase price for such securities and the principal
amount of such securities. Unrealized gains and losses are reflected each Fund's
net assets and are not included in net income.

TAXES

FEDERAL

The Trust intends to continue to qualify each Fund for the special tax
treatment afforded RICs under the Code. As long as a Fund so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax to the
extent that it distributes its net investment income and net realized capital
gains. The Trust intends to cause the Funds to distribute substantially all of
such income.

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<PAGE>
As discussed in the Prospectus for the Funds, the Trust has a number of
series, each referred to herein as a "Fund". Each Fund is treated as a separate
corporation for Federal income tax purposes, and therefore is considered to be a
separate entity in determining its treatment under the rules for RICs described
in the Prospectus. Losses in one Fund do not offset gains in another Fund, and
the requirements (other than certain organizational requirements) for qualifying
for RIC status will be determined at the Fund level rather than at the Trust
level.

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

The Trust intends to qualify each Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close of
each quarter of a Fund's taxable year, at least 50% of the value of its total
assets consists of obligations exempt from Federal income tax ("tax-exempt
obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be qualified
to pay exempt-interest dividends to its shareholders. Exempt-interest dividends
are dividends or any part thereof paid by a Fund which are attributable to
interest on tax-exempt obligations and designated by the Trust as
exempt-interest dividends in a written notice mailed to such Fund's shareholders
within 60 days after the close of the Fund's taxable year. To the extent that
the dividends distributed to a Fund's shareholders are derived from interest
income exempt from Federal income tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
shareholder's gross income for Federal income tax purposes. Exempt-interest
dividends are included, however, in determining the portion, if any, of a
person's social security benefits and railroad retirement benefits subject to
Federal income taxes. Interest on indebtedness incurred or continued to purchase
or carry shares of RICs paying exempt-interest dividends, such as the Funds,
will not be deductible by the investor for Federal income tax purposes to the
extent attributable to exempt-interest dividends. Shareholders are advised to
consult their tax advisers with respect to whether exempt-interest dividends
retain the exclusion under Code Section 103(a) if a shareholder would be treated
as a "substantial user" or "related person" under Code Section 147(a) with
respect to property financed with the proceeds of an issue of "industrial
development bonds" or "private activity bonds", if any, held by a Fund.

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

All or a portion of a Fund's gain from the sale or redemption of tax-exempt
obligations purchased at a market discount will be treated as ordinary income
rather than capital gain. This rule may increase the amount of ordinary income
dividends received by shareholders. Distributions in excess of a 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

28
<PAGE>
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt-interest dividends
received by the shareholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder. If a Fund pays
a dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.

The Code subjects interest received on certain otherwise tax-exempt
securities to a Federal alternative minimum tax. The Federal alternative minimum
tax applies to interest received on "private activity bonds" issued after August
7, 1986. Private activity bonds are bonds which, although tax-exempt, are used
for purposes other than those generally performed by governmental units and
which benefit non-governmental entities (e.g., bonds used for industrial
development or housing purposes). Income received on such bonds is classified as
an item of "tax preference", which could subject certain investors in such
bonds, including shareholders of a Fund, to a Federal alternative minimum tax.
The Funds will purchase such "private activity bonds", and the Trust will report
to shareholders within 60 days after each Fund's calendar year-end the portion
of the Fund's dividends declared during the year which constitutes an item of
tax preference for alternative minimum tax purposes. The Code further provides
that corporations are subject to a Federal alternative minimum tax based, in
part, on certain differences between taxable income as adjusted for other tax
preferences and the corporation's "adjusted current earnings", which more
closely reflect a corporation's economic income. Because an exempt-interest
dividend paid by a Fund will be included in adjusted current earnings, a
corporate shareholder may be required to pay alternative minimum tax on
exempt-interest dividends paid by such Fund.

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

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

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

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

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.

Shareholders are urged to consult their tax advisers regarding specific
questions as to Federal or foreign taxes.

29
<PAGE>
STATE

ARIZONA. Exempt-interest dividends from the Arizona Fund will not be
subject to Arizona income tax for shareholders who are Arizona residents to the
extent that the dividends are attributable to interest earned on Arizona State
Municipal Securities. To the extent that the Arizona Fund's distributions are
derived from interest on its taxable investments or from an excess of net
short-term capital gains over net long-term capital losses, such distributions
are considered ordinary income for Arizona income tax purposes. Distributions,
if any, of net long-term capital gains from the sale of securities are taxable
as ordinary income for Arizona purposes.

CALIFORNIA. So long as, at the close of each quarter of the California
Fund's taxable year, at least 50% of the value of the Fund's total assets
consists of California Municipal Securities, exempt-interest dividends will not
be subject to California personal income tax for California resident individuals
to the extent attributable to interest from California State Municipal
Securities, and such exempt-interest dividends will also be excludable from the
income base used in calculating the California corporate income tax to the
extent attributable to interest on California State Municipal Securities.
Exempt-interest dividends paid to a corporate shareholder subject to California
state corporate franchise tax will be taxable as ordinary income. Distributions
of capital gain dividends will be treated as long-term capital gains which are
taxed at ordinary income tax rates for California state income tax purposes.

CONNECTICUT. Dividends paid by the Connecticut Fund are not subject to the
Connecticut personal income tax on individuals, trusts and estates, to the
extent that they qualify as exempt-interest dividends for Federal income tax
purposes that are derived from obligations issued by or on behalf of the State
of Connecticut or its political subdivisions, instrumentalities, authorities,
districts, or similar public entities created under Connecticut law
("Connecticut Obligations") or obligations the interest on which states are
prohibited from taxing by Federal law. Other Connecticut Fund dividends, whether
received in cash or additional shares, are subject to this tax, except that, in
the case of shares of the Fund held by shareholders as a capital asset,
distributions qualifying as capital gain dividends for Federal income tax
purposes are not subject to the tax to the extent they are derived from
Connecticut Obligations. Dividends and distributions paid by the Connecticut
Fund that constitute items of tax preference for purposes of the Federal
alternative minimum tax, other than exempt-interest dividends not subject to the
Connecticut personal income tax, could cause liability for the net Connecticut
minimum tax, applicable to investors subject to the Connecticut personal income
tax who are required to pay the Federal alternative minimum tax. Interest on
indebtedness incurred to purchase or carry Fund shares will not reduce taxable
income under the Connecticut personal income tax except to the extent it may
reduce the taxpayer's Federal adjusted gross income.

Dividends paid by the Fund, including those that qualify as exempt-interest
dividends for Federal income tax purposes, are taxable for purposes of the
Connecticut Corporation Business Tax. However, 70% (100% if the investor owns at
least 20% of the total voting power and value of the Fund's shares) of amounts
that are treated as dividends and not as exempt-interest dividends or capital
gain dividends for Federal income tax purposes are deductible for purposes of
this tax, but no deduction is allowed for expenses related thereto.

No local income taxes or state or local intangible personal property taxes
are imposed in Connecticut.

MASSACHUSETTS. Under existing Massachusetts law, as long as the
Massachusetts Fund qualifies as a separate RIC under the Code, (i) the
Massachusetts Fund may not be liable for any personal income or corporate excise
tax in the Commonwealth of Massachusetts and (ii) shareholders of the
Massachusetts Fund who are subject to Massachusetts personal income taxation
will not be required to include in their Massachusetts taxable income that
portion of dividends paid by the Massachusetts Fund that is identified in a
year-end statement as (a) exempt-interest dividends directly attributable to
interest that is received by the Massachusetts Fund on obligations issued by the
Commonwealth of Massachusetts, a political

30
<PAGE>
subdivision thereof, or any instrumentality of either of the foregoing, and that
is exempt from Massachusetts taxation, or (b) dividends attributable to interest
received by the Massachusetts Fund on obligations of the United States, interest
on which is exempt from state taxation (collectively, "Massachusetts-exempt
dividends").

Any capital gain dividends of the Massachusetts Fund (except to the extent
derived from capital gains on certain Massachusetts State Municipal Securities
which are specifically exempt by statute), and gains realized by a shareholder
on a redemption or sale of shares of the Massachusetts Fund, will be subject to
Massachusetts personal income taxation. The Massachusetts personal income tax
rates for long-term capital gains vary from 0% to 5% based on the holding period
of the asset generating the gain. Under proposed regulations, capital gain
dividends of the Massachusetts Fund will be taxed at the 5% rate unless the Fund
provides certain information to the Massachusetts Commissioner of Revenue and to
Massachusetts Fund Shareholders regarding the various rate categories from which
its net capital gains were derived. The Massachusetts Fund does not at this time
intend to provide the information required by the proposed regulations. The
portion of any deduction (e.g., an interest deduction) otherwise available to a
shareholder, which relates or is allocable to Massachusetts-exempt dividends
received by the shareholder, will not be deductible for Massachusetts personal
income tax purposes.

In the case of any corporate shareholder subject to the Massachusetts
corporate excise tax, all distributions received from the Massachusetts Fund,
and any gain on the sale or other disposition of Massachusetts Fund shares, will
be includable in the corporation's Massachusetts gross income and taxed
accordingly. Interest on indebtedness incurred or continued to purchase or carry
Fund shares will not be deductible in calculating the income component of the
Massachusetts corporate excise tax.

MICHIGAN. Shareholders who are subject to the Michigan income tax or single
business tax will not be subject to the Michigan income tax or single business
tax on exempt-interest dividends to the extent such dividends are attributable
to interest on Michigan State Municipal Securities. To the extent the
distributions from the Michigan Fund are attributable to sources other than
interest on Michigan State Municipal Securities, such distributions, including,
but not limited to, long-term or short-term capital gains, but excluding any
such capital gains from obligations of the United States or of its possessions,
will not be exempt from Michigan income tax or the single business tax.

The intangibles tax was totally repealed effective January 1, 1998. The
income tax rate will begin a gradual reduction beginning in year 2000, from the
present 4.4 percent, down to a 3.9 percent rate for year 2004 and beyond. The
single business tax is being phased-out over a twenty-three year period at a
rate of one-tenth of one percent per year beginning in 1999.

NEW JERSEY. To the extent distributions are derived from interest or gains
on New Jersey State Municipal Securities, such distributions will be exempt from
New Jersey personal income tax. In order to pass through tax-exempt interest for
New Jersey personal income tax purposes, the New Jersey Fund, among other
requirements, must have not less than 80% of the aggregate principal amount of
its investments invested in New Jersey State Municipal Securities at the close
of each quarter of the tax year (the "80% Test"). For purposes of calculating
whether the 80% Test is satisfied, financial options, futures, forward contracts
and similar financial instruments relating to interest-bearing obligations are
excluded from the principal amount of the New Jersey Fund's investments. The New
Jersey Fund intends to comply with this requirement so as to enable it to pass
through tax-exempt interest. In the event the New Jersey Fund does not so
comply, distributions by the New Jersey Fund may be taxable to shareholders for
New Jersey personal income tax purposes. However, regardless of whether the New
Jersey Fund meets the 80% Test, all distributions attributable to interest
earned on Federal obligations will be exempt from New Jersey personal income
tax. Interest on indebtedness incurred or continued to purchase or carry New
Jersey Fund shares is not deductible either for Federal income tax purposes or
New Jersey personal income tax purposes to the extent attributable to
exempt-interest dividends. Exempt-interest dividends and gains paid to a
corporate shareholder will be subject to the New Jersey corporation business
(franchise) tax and, if

31
<PAGE>
applicable, the New Jersey corporation income tax. Accordingly, investors in the
New Jersey Fund, including, in particular, corporate investors which might be
subject to the New Jersey corporation business (franchise) tax and, if
applicable, the New Jersey corporation income tax, should consult their tax
advisors with respect to the application of such taxes to an investment in the
New Jersey Fund, to the receipt of New Jersey Fund dividends and as to their New
Jersey tax situation in general.

Under present New Jersey law, a RIC, such as the New Jersey Fund, pays a
flat tax of $250 per year. The New Jersey Fund might be subject to the New
Jersey corporation business (franchise) tax for any taxable year in which it
does not qualify as a RIC.

On February 21, 1997, the Tax Court of New Jersey ruled against the Director
of the Division of Taxation holding against the New Jersey requirement that fund
investors pay state taxes on interest their funds earned from U.S. government
securities if the 80% Test was not met. As a result of the court decision, the
State of New Jersey could be forced to pay substantial amounts in tax refunds to
state residents who are mutual fund investors. At this time, the effect of this
litigation cannot be evaluated.

NEW YORK. The portion of exempt-interest dividends equal to the proportion
which the New York Fund's interest on New York State Municipal Securities bears
to all of the New York Fund's tax-exempt interest (whether or not distributed)
will be exempt from New York State and New York City personal income taxes. To
the extent the New York Fund's distributions are derived from interest on
taxable investments or from gain from the sale of investments or are
attributable to the portion of the New York Fund's tax-exempt interest that is
not derived from New York State Municipal Securities, they will constitute
taxable income for New York State and New York City personal income tax
purposes. Capital gain dividends paid by the New York Fund are treated as
capital gains which are taxed at ordinary income tax rates. Distributions paid
to a corporate shareholder from investment income and capital gains of the New
York Fund, including exempt-interest dividends, will be subject to New York
State corporate franchise and New York City corporation income tax.

NORTH CAROLINA. Distributions of exempt-interest dividends, to the extent
attributable to interest on North Carolina State Municipal Securities and to
interest on direct obligations of the United States (including territories
thereof), are not subject to North Carolina individual or corporate income tax.
Distributions of gains attributable to the disposition of certain obligations of
the State of North Carolina and its political subdivisions issued prior to July
1, 1995 are not subject to North Carolina individual or corporate income tax;
however, for such obligations issued after June 30, 1995, distributions of gains
attributable to disposition will be subject to North Carolina individual or
corporate income tax. Any loss upon the sale or exchange of shares of the North
Carolina Fund held for six months or less will be disallowed for North Carolina
income tax purposes to the extent of any exempt-interest dividends received by
the shareholder, even though some portion of such dividends actually may have
been subject to North Carolina income tax. Except for income exempted from North
Carolina income tax as described herein, the North Carolina Fund's distributions
will generally constitute taxable income for taxpayers subject to North Carolina
income tax.

An investment in the North Carolina Fund by a corporate shareholder
generally would be included in the capital stock, surplus and undivided profits
base in computing the North Carolina franchise tax.

OHIO. Exempt-interest dividends are exempt from taxes levied by the State
of Ohio and its subdivisions and therefore will not be subject to Ohio personal
income tax and will be excludable from the net income base used in calculating
the Ohio corporate franchise tax to the extent attributable to interest from
Ohio State Municipal Securities. To the extent that the Ohio Fund's
distributions are derived from interest on its taxable investments or, subject
to certain exceptions, from an excess of net short-term capital gains over net
long-term capital losses, such distributions are considered ordinary income
subject to the Ohio personal income tax and the Ohio corporate franchise tax.
Subject to certain exceptions, distributions, if

32
<PAGE>
any, of net long-term capital gains are also subject to the Ohio personal income
tax and the Ohio corporate franchise tax.

Distributions treated as investment income or as capital gains for Federal
income tax purposes, including exempt-interest dividends, may be subject to
local taxes imposed by certain cities within Ohio. Additionally, the value of
shares of the Fund will be included in (i) the net worth measure of the issued
and outstanding shares of corporations and financial institutions for purposes
of computing the Ohio corporate franchise tax, (ii) the value of the property
included in the gross estate for purposes of the Ohio estate tax, (iii) the
value of capital and surplus for purposes of the Ohio domestic insurance company
franchise tax and (iv) the value of shares of and capital employed by dealers in
intangibles for purpose of the Ohio tax on dealers in intangibles.

PENNSYLVANIA. To the extent distributions from the Pennsylvania Fund are
derived from interest on Pennsylvania State Municipal Securities, such
distributions will be exempt from the Pennsylvania personal income tax. However,
distributions attributable to capital gains derived by the Pennsylvania Fund as
well as distributions derived from investments other than Pennsylvania State
Municipal Securities will be taxable for Pennsylvania personal income tax
purposes. In the case of residents of the City of Philadelphia, distributions
which are derived from interest on Pennsylvania State Municipal Securities or
which are designated as capital gain dividends for Federal income tax purposes
will be exempt from the Philadelphia School District investment income tax.

Shares of the Pennsylvania Fund will be exempt from the personal property
taxes imposed by various Pennsylvania municipalities to the extent the
Pennsylvania Fund's portfolio securities consist of Pennsylvania State Municipal
Securities on the annual assessment date. It should be noted, however, that at
present, Pennsylvania counties generally have stopped assessing personal
property taxes. This is due, in part, to ongoing litigation challenging the
validity of the tax.

Other Pennsylvania counties, cities and townships generally do not tax
individuals on unearned income.

As a result of a pronouncement by the Pennsylvania Department of Revenue, an
investment in the Pennsylvania Fund by a corporate shareholder will apparently
qualify as an exempt asset for purposes of the single asset apportionment
fraction available in computing the Pennsylvania capital stock/foreign franchise
tax to the extent that the portfolio securities of the Pennsylvania Fund
comprise investments in Pennsylvania and/or United States Government Securities
that would be exempt assets if owned directly by the corporation. To the extent
exempt-interest dividends are excluded from taxable income for federal corporate
income tax purposes (determined before net operating loss carryovers and special
deductions), they will not be subject to the Pennsylvania corporate net income
tax.

Under prior Pennsylvania law, in order for the Pennsylvania Fund to qualify
to pass through to investors income exempt from Pennsylvania personal income
tax, the Pennsylvania Fund was required to adhere to certain investment
restrictions. In order to comply with this and other Pennsylvania law
requirements previously in effect, the Pennsylvania Fund adopted, as a
fundamental policy, a requirement that it invest in securities for income
earnings rather than trading for profit and that, in accordance with such
policy, it not vary its portfolio investments except to: (i) eliminate unsafe
investments or investments not consistent with the preservation of capital or
the tax status of the investments of the Pennsylvania Fund; (ii) honor
redemption orders, meet anticipated redemption requirements and negate gains
from discount purchases; (iii) reinvest the earnings from portfolio securities
in like securities; (iv) defray normal administrative expenses; or (v) maintain
a constant net asset value pursuant to, and in compliance with, an order or rule
of the United States Securities & Exchange Commission. Pennsylvania has enacted
legislation which eliminates the necessity for the foregoing investment
policies. Since such policies are fundamental policies of the Pennsylvania Fund,
which can only be changed by the affirmative vote of a majority (as

33
<PAGE>
defined under the Investment Company Act) of the outstanding shares, the
Pennsylvania Fund continues to be governed by such investment policies.
------------------------

The foregoing is a general and abbreviated summary of the tax laws for the
designated states as presently in effect. For the complete provisions, reference
should be made to the applicable state tax laws. The state tax laws described
above are subject to change by legislative, judicial, or administrative action
either prospectively or retroactively. Shareholders of each Fund should consult
their tax advisers about other state and local tax consequences of their
investment in such Fund.

GENERAL INFORMATION

DESCRIPTION OF SERIES AND SHARES

The Trust is an unincorporated business trust organized on February 6, 1987
under the laws of Massachusetts. The Declaration of Trust provides that the
Trust shall comprise separate series, each of which will consist of a separate
portfolio that will issue a separate class of shares. Presently, the Arizona,
California, Connecticut, Massachusetts, Michigan, New Jersey, New York, North
Carolina, Ohio and Pennsylvania Funds are the only series of the Trust offering
their shares to the public. The Trustees are authorized to create an unlimited
number of full and fractional shares of beneficial interest, par value $0.10 per
share, of a single class and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the proportionate beneficial
interests in the series. Shareholder approval is not necessary for the
authorization of additional series of the Trust. All shares have equal voting
rights, except that only shares of the respective series are entitled to vote on
the matters concerning only that series. Each issued and outstanding share is
entitled to one vote and to participate equally in dividends and distributions
declared by the respective series and in net assets of such series upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities. There normally will be no meetings of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders' meeting for the
election of Trustees. Shareholders may, in accordance with the terms of the
Declaration of Trust, cause a meeting of shareholders to be held for the purpose
of voting on the removal of Trustees.

The obligations and liabilities of a particular series are restricted to the
assets of that series and do not extend to the assets of the Trust generally.
The shares of each series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights and will
be freely transferable. Holders of shares of any series are entitled to redeem
their shares as set forth elsewhere herein and in the Prospectus. Shares do not
have cumulative voting rights and the holders of more than 50% of the shares of
the Trust voting for the election of Trustees can elect all of the Trustees if
they choose to do so and in such event the holders of the remaining shares would
not be able to elect any Trustees. No amendment may be made to the Declaration
of Trust without the affirmative vote of a majority of the outstanding shares of
the Trust.

The Manager provided the initial capital for each Fund by purchasing 100,000
shares of each Fund. Such shares were acquired for investment and can only be
disposed of by redemption. Excepting the Arizona Fund, the organizational
expenses of each Fund were paid by the respective Fund and were amortized over a
period not exceeding five years from such Fund's commencement of operations. The
organizational expenses of the Arizona Fund ($35,700) were paid by the Arizona
Fund and are being amortized over a period not exceeding five years. The
proceeds realized by the Manager on the redemption of any of the shares
initially purchased by it will be reduced by the proportionate amount of
unamortized organizational expenses which the number of shares redeemed bears to
the number of shares initially purchased.

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<PAGE>
INDEPENDENT AUDITORS

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

CUSTODIAN

State Street Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts
02101 (the "Custodian"), acts as custodian of each Fund's assets. The Custodian
is responsible for safeguarding and controlling each Fund's cash and securities,
handling the receipt and delivery of securities and collecting interest and
dividends on each Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as each 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 and
Transfer Shares -- Through the Transfer Agent" in the Prospectus.

LEGAL COUNSEL

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

REPORTS TO SHAREHOLDERS

The fiscal year of each Fund ends on March 31. Each Fund sends to its
shareholders, at least semi-annually, reports showing each Fund's portfolio and
other information. An annual report, containing financial statements audited by
independent auditors, is sent to shareholders each year.

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to each 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 with respect to
the shares of each Fund do not contain all the information set forth in the
Registration Statement and the exhibits relating thereto, which each 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.

The Cash Management Account-Registered Trademark- financial service program
is also marketed by Merrill Lynch under the registered service mark "CMA."

The Declaration of Trust establishing the Trust, as amended (the
"Declaration"), is on file in the office of the Secretary of the Commonwealth of
Massachusetts. The Declaration provides that the name "CMA Multi-State Municipal
Series Trust" refers to the Trustees under the Declaration collectively as
Trustees, but not as individuals or personally; and except for his or her own
bad faith, willful misfeasance, gross negligence, or reckless disregard for his
or her duties, no Trustee, shareholder, officer, employee or agent of the Trust
shall be held to any personal liability, nor shall resort be had to their
private property for the satisfaction of any obligation or claim or otherwise in
connection with the affairs of the Trust but the Trust Property only shall be
liable.

35
<PAGE>

To the knowledge of the Funds, no person owned beneficially 5% or more of
any Fund's shares as of July 1, 1999.

FINANCIAL STATEMENTS

Each Fund's audited financial statements are incorporated in this Statement
of Additional Information by reference to its 1999 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling (800) 221-7210 between 8:00 a.m. and 8:00 p.m. on any business day.

36
<PAGE>
APPENDIX A

ECONOMIC AND FINANCIAL CONDITIONS IN ARIZONA

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS BASED PRIMARILY UPON
PUBLICLY AVAILABLE OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF STATE AND
LOCAL ISSUERS AND OTHER DEMOGRAPHIC INFORMATION; HOWEVER, IT HAS NOT BEEN
UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE TRUST HAS NOT INDEPENDENTLY
VERIFIED THIS INFORMATION.

Over the past several decades, the State's economy has grown faster than
most other regions of the country as measured by nearly every major indicator of
economic growth, including population, employment and aggregate personal income.
Although the rate of growth slowed considerably during the late 1980's and early
1990's, the State's efforts to diversify its economy have enabled it to achieve,
and then sustain, steady growth rates in recent years. While jobs in industries
such as mining and agriculture have diminished in relative importance to the
State's economy over the past two decades, substantial growth has occurred in
the areas of aerospace, high technology, light manufacturing, government and the
service industry. Other important industries that contributed to the State's
growth in past years, such as construction and real estate, have rebounded from
substantial declines during the late 1980's and early 1990's, and, like the rest
of the State, are experiencing positive growth.

Arizona's strong economy, warm climate and reasonable cost of living,
coupled with the economic problems and adverse climatic conditions experienced
from time to time in other parts of the country, have encouraged many people to
move to the State. Between 1990 and 1998, the State's population increased 21%,
to a total of 4.66 million; during the same period, Maricopa County, the State's
most populous county, had the single largest population inflow (in absolute
terms) of any county in the country. Current State projections include
continuing population gains averaging approximately 2.7%, or 127,000 people, per
year through the year 2002.

Part of the State's popularity in recent years can be attributed to the
favorable job climate. For the period from 1993 to 1998, Arizona had the
nation's second highest job growth rate, up 33% to more than 2 million jobs; in
1998, the State had the highest job growth. Similarly, for the 12 months ending
in May, 1998, the City of Phoenix ranked first in the nation in job growth among
the 22 largest metropolitan areas, with a 5.8% job growth rate. Notwithstanding
recent layoffs at Motorola and Intel, two large Phoenix area employers, a
relatively sound United States economy, a stronger economy in California (which
historically has been a prime market for Arizona goods and services) and
continued growth in retail trade, manufacturing and services should enable the
State to realize positive, though more modest, gains in job growth in 1999.
Unemployment has declined from an average of 5.5% in 1996, to 4.7% in 1997, to
4.3% in September, 1998.

The State's economic growth in recent years has enabled Arizonans to realize
substantial gains in personal income. While the State's per capita personal
income generally varies between 5% and 15% below the national average due to
such factors as the chronic poverty on the State's Indian reservations, the
State's relatively high numbers of retirees and children, and the State's
below-average wage scale, the State's personal income growth of nearly 5.3%
during each of 1996 and 1997 is projected to continue through the year 2002.

The gains in per capita personal income during this period have led to
continued steady growth in retail sales. In recent years, average retail sales
growth has been as high as 12% (in 1994) and as low as 5% (in 1997), but has
subsequently averaged approximately 7%.

The State government's fiscal situation has improved substantially in recent
years. After experiencing several years of budget shortfalls requiring mid-year
adjustments, the State has had significant budget surpluses each year from 1993
through 1998. However, during fiscal year 1999, a significant portion of the
accumulated surpluses were committed to construction and renovation of public
school facilities, reducing

A-1
<PAGE>

the projected surplus at June 30, 1998 to approximately $70 million. On April
16, 1999, the Governor signed the State's $12 billion budget for the 2000 and
2001 fiscal years. Although an amendment to the State's Constitution requiring a
2/3 majority vote in both houses of the Legislature to pass a tax or fee
increase constrains the State's ability to raise additional revenue if needed,
the State has placed in excess of $400 million of its surplus revenues in a
rainy-day fund to protect against such an eventuality.

In 1994, the Arizona Supreme Court declared the then-current system for
funding construction and maintenance of the State's public schools to be
unconstitutional on the ground that it resulted in substantial disparities in
the nature and condition of capital facilities in the State's public schools.
The Supreme Court directed the State Legislature to make appropriate changes in
the system to rectify this disparity. After several efforts, the State
Legislature, in 1998, adopted legislation which establishes a State Facilities
Board to set uniform minimum capital facilities standards for Arizona's public
schools, with funding for any new facilities or renovations to be provided on a
pay-as-you-go basis from a new School Facilities Fund which will be funded by
annual State appropriations. Under limited circumstances, the voters in a local
school district could authorize the issuance and sale of bonds to pay for the
acquisition or construction of new capital facilities in the district which
exceed the State's established minimum standards. This legislation should have
no effect on the obligation or ability of the districts to pay debt service on
currently outstanding bonds.

Maricopa County is the State's most populous and prosperous county,
accounting for nearly 60% of the State's population and a substantial majority
of its wage and salary employment and aggregate personal income. Within its
borders lie the City of Phoenix, the State's largest city and the sixth largest
city in the United States, and the Cities of Scottsdale, Tempe, Mesa, Glendale,
Chandler and Peoria, as well as the Towns of Paradise Valley and Gilbert. Good
transportation facilities, a substantial pool of available labor, a variety of
support industries and a warm climate have helped make Maricopa County a major
business center in the southwestern United States. Once dependent primarily on
agriculture, Maricopa County has substantially diversified its economic base.
Led by the service sector, which includes transportation, communications, public
utilities, hospitality and entertainment, trade, finance, insurance, real estate
and government, the County has achieved an average annual employment growth rate
of at least 4.5% for each year since 1995. In addition, several large,
publicly-traded companies, such as The Dial Corp., Phelps Dodge and MicroAge,
have their headquarters in Maricopa County, while others, such as Motorola,
Intel and Honeywell, conduct major operations there. A variety of professional
sports teams are based in Maricopa County, including the Phoenix Suns (NBA
basketball), the Arizona Cardinals (NFL football), the Phoenix Coyotes (NHL
hockey), and the Arizona Diamondbacks (MLB baseball). The City of Scottsdale is
seeking voter approval in November 1999 to construct new tax-increment financed
facilities for the Arizona Cardinals and the Phoenix Coyotes, respectively.

Pima County is the State's second most populous county, and includes the
City of Tucson. Traditionally, Pima County's economy has been based primarily
upon manufacturing, mining, government, agriculture, tourism, education and
finance. Hughes Aircraft, which transferred its Hughes Missile Systems division
to Tucson from Canoga Park, California, several years ago, and several large
mining companies, including BHP Copper, ASARCO and Phelps Dodge, anchor the
non-public sector of the Tucson economy. During the past decade, Pima County,
and Tucson in particular, has become a base for hundreds of computer software
companies, as well as a number of companies operating in the areas of
environmental technology, bioindustry and telecommunications. Pima County
traditionally experiences more modest annual job growth, averaging 2.0-2.5%;
this rate is expected to continue for the forseeable future.

A-2
<PAGE>
APPENDIX B
ECONOMIC AND FINANCIAL CONDITIONS IN CALIFORNIA

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF CALIFORNIA AND DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS
BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE OFFERING
STATEMENTS RELATING TO DEBT OFFERINGS OF CALIFORNIA ISSUERS, HOWEVER, IT HAS NOT
BEEN UPDATED. THE FUND HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.

GENERAL ECONOMIC CONDITIONS

The economy of the State of California (sometimes referred to herein as the
"State") is the largest among the 50 states and one of the largest in the world.
This diversified economy has major components in agriculture, manufacturing,
high technology, trade, entertainment, tourism, construction and services.

California's July 1, 1998 population of over 33.2 million represented over
13% of the total United States population. As of July 1, 1990, the population of
29,944,000 represented an increase of over 6 million persons, or 26%, during the
decade of the 1980s.

California's population is concentrated in metropolitan areas. As of the
April 1, 1990 census, 96% of the State's population resided in the 23
Metropolitan Statistical Areas in the State. As of July 1, 1997, the five-county
Los Angeles area accounted for 49%, with 16.0 million residents. The 10-county
San Francisco Bay Area represented 21%, with a population of 6.9 million.

In the Governor's Budget release on January 8, 1999, the Department of
Finance projected that the California economy will show moderate growth through
2000, at a slower pace than in 1998. The economic expansion has been marked by
strong growth in high technology business services (including computer
software), construction, and computer and electronic components manufacturing.
The Asian economic crisis, which began in 1997, has had some dampening effects
on the State's economy, particularly in high technology manufacturing. The
widening trade deficit, continuing weakness in Asia, initial signs of economic
weakness in Latin America, and undertainty in stock prices worldwide all support
moderating growth in 1999. Other impacts of the international situation may help
California, such as the reduction in long-term interest rates.

THE STATE

FISCAL YEARS PRIOR TO 1995-1996. The State's budget problems in the early
1990's were caused by a combination of external economic conditions and a
structural imbalance in that the largest general fund programs (K-14 education,
health, welfare and corrections) were increasing faster than the revenue base,
driven by the State's rapid population growth. These pressures are expected to
continue as population trends maintain strong demand for health and welfare
services, as the school age population continues to grow, and as the State's
corrections program responds to a "Three Strikes" law enacted in 1994, which
requires mandatory life prison terms for certain third- time felony offenders.
In addition, the State's health and welfare programs are in a transition period
as a result of recent federal and state welfare reform initiatives.

As a result of these factors and others, and especially because the severe
recession between 1990-1994 reduced revenues and increased expenditures for
social welfare programs, from the late 1980's until 1992-93, the State had a
period of budget imbalance. During this period, expenditures exceeded revenues
in four out of six years, and the State accumulated and sustained a budget
deficit in its budget reserve, the Special Fund for Economic Uncertainties
("SFEU") approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each fiscal year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance. The State Legislature and the

B-1
<PAGE>
Governor of the State (the "Governor") agreed on the following principal steps
to produce Budget Acts in the years 1991-92 to 1994-95, although not all these
actions were taken in each year.

1. significant cuts in health and welfare program expenditures;

2. transfers of program responsibilities and funding from the State to
local governments (referred to as "realignment"), coupled with some
reduction in mandates on local government;

3. transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing State funding for schools under
Proposition 98 (discussed below);

4. reduction in growth of support for higher education programs,
coupled with increases in student fees, through the 1994-95 Fiscal Year;

5. maintenance of the minimum Proposition 98 funding guarantee for K-14
schools, and the disbursement of additional funds to keep a constant level
of about $4,200 per K-12 pupils through the 1993-94 Fiscal Year;

6. revenue increases, most of which were for a short duration;

7. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services
to illegal immigrants, although during this time frame, most of the
additional aid requested by the Administration was not received; and

8. various one-time adjustments and accounting changes.

Despite these budget actions, as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve, the SFEU, as compared to
projected positive balances. By the 1993-94 Fiscal Year, the accumulated deficit
was so large that it was impractical to budget to retire it in one year, so a
two-year program was implemented, using the issuance of revenue anticipation
warrants to carry a portion of the deficit over the end of the fiscal year. When
the economy failed to recover sufficiently in 1993-94, a second two-year plan
was implemented in 1994-95, again using cross-fiscal year revenue anticipation
warrants to partly finance the deficit into the 1995-96 fiscal year.

Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. For several years during the recession, the State was forced to
rely increasingly on external debt markets to meet its cash needs, as a
succession of notes and revenue anticipation warrants were issued in the period
from June 1992 to July 1994, often needed to pay previously maturing notes or
warrants. These borrowings were used also in part to spread out the repayment of
the accumulated budget deficit over the end of a fiscal year, as noted earlier.
The last and largest of these borrowings was $4.0 billion of revenue
anticipation warrants which were issued in July 1994 and matured on April 25,
1996. However, the State's improved cash position in 1995-96 allowed it to repay
the $4.0 billion Revenue Anticipation Warrant issue on April 25, 1996, and to
issue only $2.0 billion of revenue anticipation notes during the fiscal year,
which matured on June 28, 1996.

1995-96 THROUGH 1997-98 FISCAL YEARS

The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.

B-2
<PAGE>
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled $639.8 million as of June 30, 1997 and $1.782 billion at June
30, 1998.

On August 18, 1997, the Governor signed the 1997-98 Budget Act, but vetoed
about $314 million of specific spending items, primarily in health and welfare
and education areas from both the General Fund and Special Funds. The Governor
announced that he was prepared to restore about $200 million of education
spending upon satisfactory completion of legislation on an education testing
program.

The 1997-98 Budget Act anticipated General Fund revenues and transfers of
$52.5 billion (a 6.8% increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0% increase from the 1996-97 levels). On a budgetary
basis, the SFEU was projected to decrease from $408 million at June 30, 1997 to
$112 million at June 30, 1998. As of January 9, 1998, the State Director of
Finance estimated a reserve of $329 million at June 30, 1998. (The expenditure
figure assumes restoration of $200 million in vetoed funding.) The Budget Act
also included Special Fund expenditures of $14.4 billion (as against estimated
Special Fund revenues of $14.0 billion), and $2.1 billion of expenditures from
various Bond Funds. The State implemented its normal annual cash flow borrowing
program, issuing $3 billion of notes which matured on June 30, 1998.

FEDERAL WELFARE REFORM. Congress passed and the President signed (on August
22, 1996) the Personal Responsibility and Work Opportunity Act of 1996 (the
"Law") making a fundamental reform of the current welfare system. Among many
provisions, the Law includes: (i) conversion of Aid to Families with Dependent
Children from an entitlement program to a block grant titled Temporary
Assistance for Needy Families ("TANF"), with lifetime time limits on TANF
recipients, work requirements and other changes; (ii) provisions denying certain
federal welfare and public benefits to legal noncitizens, allowing states to
elect to deny additional benefits (including TANF) to legal noncitizens, and
generally denying almost all benefits to illegal immigrants; and (iii) changes
in the Food Stamp program, including reducing maximum benefits and imposing work
requirements.

As part of the 1997-98 Budget Act legislative package, the State Legislature
and Governor agreed on a comprehensive reform of the State's public assistance
programs to implement the new federal Law. The new basic State welfare program
is called California Work Opportunity and Responsibility to Kids Act
("CalWORKs"), which replaces the former Aid to Families with Dependent Children
(AFDC) and Greater Avenues to Independence (GAIN) programs effective January 1,
1998. Consistent with the federal Law, CalWORKs contains new time limits on
receipt of welfare aid, both lifetime as well as for any current time on aid.
Administration of the new Welfare-to-Work programs will be largely at the county
level, and counties are given financial incentives for success in this program.

Although the longer-term impact of the new federal Law and CalWORKs cannot
be determined until there has been some experience, the State does not presently
anticipate that these new programs will have any adverse financial impact on its
General Fund. Overall TANF grants from the federal government are expected to
equal or exceed the amounts the State would have received under the old AFDC
program.

1998-99 FISCAL YEAR. When the Governor released his proposed 1998-99 Fiscal
Year Budget on January 9, 1998, he projected General Fund revenues for the
1998-99 Fiscal Year of $55.4 billion, and proposed expenditures in the same
amount. By the time the Governor released the May Revision to the 1998-99 Budget
on May 14, 1998, the Administration projected that revenues for the 1997-98 and
1998-99 Fiscal Years combined would be more than $4.2 billion higher than was
projected in January. The Governor proposed that most of this increased revenue
be dedicated to fund a 75% cut in the Vehicle License Fee ("VLF").

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<PAGE>
Pursuant to Article IV, Section 13(c) of the Constitution of the State of
California, the State Legislature is required to adopt its budget for the
upcoming fiscal year (July 1-June 30) by midnight of June 15th, and in the
absence of which, the Legislature may not send to the Governor for consideration
any bill appropriating funds for expenditure during the fiscal year for which
the budget bill is to be enacted, except emergency bills or appropriations for
the salaries and expenses of the Legislature. For the current fiscal year, as
has been true since the late 1980's, the State Legislature did not adhere to
this deadline. Due to the Legislature's failure to comply with this
constitutional requirement, the Howard Jarvis Taxpayers Association sought an
injunction in a Los Angeles Superior Court to prohibit the State from making
certain types of payments in the absence of an adopted budget. On July 21, 1998,
a preliminary injunction was issued. Under the terms of the injunction order,
until such time as the budget was adopted, the State was precluded from making
any payments from the State treasury for Fiscal Year 1998-99 except for certain
enumerated expenditures.

On July 22, 1998, the Legislature unanimously passed an $18.9 billion
emergency-spending bill to cover the costs of, among others, bond payments,
paychecks for state workers, retirement pensions, prisons, school and welfare
payments from July 1st through August 5th. However, before a final resolution of
the legal issues raised by the plaintiff, a budget for Fiscal Year 1998-99 was
passed by the Legislature on August 11, 1998, and the Governor signed it on
August 21, 1998.

In signing the 1998-99 Budget Bill, the Governor used his line-item veto
power to reduce expenditures by $1.360 billion from the General Fund, and $160
million from Special Funds. Of this total, the Governor indicated that about
$250 million of vetoed funds were "set aside" to fund programs for education.
Vetoed items included education funds, salary increases and many individual
resources and capital projects.

The 1998-99 Budget Act was based on projected general fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion.

After giving effect to the Governor's vetoes, the 1998-99 Budget Act
provided authority for expenditures of $57.3 billion from the General Fund (a
7.3% increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion
from bond funds. The 1998-99 Budget Act projected a balance in the SFEU at June
30, 1999 (but without including the "set aside" veto amount) of $1.255 billion,
a little more than 2% of general fund revenues. The Budget Act assumed the State
will carry out its normal intra-year cash flow borrowing in the amount of $1.7
billion of revenue anticipation notes, which were issued on October 1, 1998.

The most significant feature of the 1998-99 Budget was agreement on a total
of $1.4 billion of tax cuts. The central element was a bill which provides for a
phased-in reduction of the VLF. Since the VLF was transferred to cities and
counties, the bill provided for the general fund to replace the lost revenues.
Starting on January 1, 1999, the VLF was reduced by 25%, at a cost to the
general fund of approximately $500 million in the 1998-99 Fiscal Year and about
$1 billion annually thereafter.

In addition to the cut in VLF, the 1998-99 Budget included both temporary
and permanent increases in the personal income tax dependent credit ($612
million General Fund cost in 1998-99, but less in future years), a nonrefundable
renters tax credit ($133 million), and various targeted business tax credits
($106 million).

Other significant elements of the 1998-99 Budget Act were as follows:

1. Proposition 98 funding for K-12 schools was increased by $1.7
billion in General Fund moneys over revised 1997-98 levels, about $300
million higher than the minimum Proposition 98 guaranty. An additional $600
million was appropriated to settle prior years' Proposition 98 entitlements,
and was primarily devoted to one-time uses such as block grants, deferred
maintenance, and computer and laboratory equipment. Of the 1998-99 funds,
major new programs include money for instructional and library materials,
deferred maintenance, support for increasing the school year to

B-4
<PAGE>

180 days and reduction of class sizes in Grade 9. The Governor held $250
million of education funds which were vetoed as set-aside for enactment of
additional reforms. Overall, per-pupil spending for K-12 schools under
Proposition 98 is increased to $5,695, more than one-third higher than the
level in the last recession year of 1993-94. The 1998-99 Budget also
included $250 million as repayment of prior years' loans to schools, as part
of the settlement of the CTA V. GOULD lawsuit.

2. Funding for higher education increased substantially above the level
called for in the Governor's four-year compact. General Fund support was
increased by $340 million (15.6%) for the University of California and $267
million (14.1%) for the California State University system. In addition,
Community Colleges received a $300 million (6.6%) increase under Proposition
98.

3. The 1998-99 Budget included increased funding for health, welfare
and social services programs. A 4.9% grant increase was included in the
basic welfare grants, the first increase in those grants in 9 years. Future
increases will depend on sufficient general fund revenue to trigger the
phased cuts in VLF described above.

4. Funding for the judiciary and criminal justice programs increased by
about 11% over 1997-98, primarily to reflect increased State support for
local trial courts and rising prison population.

5. Various other highlights of the 1998-99 Budget included new funding
for resources projects, dedication of $376 million of general fund moneys
for capital outlay projects, funding of a three percent State employee
salary increase, funding of 2,000 new Department of Transportation positions
to accelerate transportation construction projects, and funding of the
Infrastructure and Economic Development Bank ($50 million).

6. The State of California received approximately $167 million of
federal reimbursements to offset costs related to the incarceration of
undocumented alien felons for federal fiscal year 1997. The State
anticipated receiving approximately $195 million in federal reimbursements
for federal fiscal year 1998.

Based solely on the legislation enacted, on a net basis, the reserve for
June 30, 1999 was reduced by $256 million. On the other hand, 1997-98 revenues
increased by $160 million. The revised June 30, 1999 reserve was projected to be
$1,159 million or $96 million below the level originally projected by the
1998-99 Budget Act. The reserve projected in the 1998-99 Budget Act was $1,255
million.

SUBSEQUENT EVENTS. TOBACCO LITIGATION. In late 1998, the State signed a
settlement agreement with the four major cigarette manufacturers, which was
later ratified by a State court judge having jurisdiction over a pending lawsuit
brought by the State against these companies. Under the settlement, the
companies will pay California governments a total of approximately $25 billion
over a period of 25 years, starting with some payments in the spring of 1999.
Under the State's settlement, half of these moneys will be paid to the State,
and half to local governments (cities and counties).

The specific amount to be received by the State and local governments is,
however, subject to adjustment for a number of reasons. First, the federal
government has indicated that it may seek recovery of part of the state's
settlement as reimbursement for federal Medicaid funding in prior years. Second,
various details in the settlement allow reduction of the companies' payments
because of events such as certain federal government actions, reductions in
cigarette sales, or bankruptcy of any settling companies.

On January 8, 1999, newly-elected Governor Davis released his proposed
budget for the 1999-2000 Fiscal Year (the "Proposed Budget"). The Proposed
Budget estimated general fund revenues and transfers in 1999-2000 of $60.3
billion, a 7.1% increase from revised 1998-99 figures. The Governor proposed
expenditures of $60.5 billion, a 3.8% increase from 1998-99. The Proposed Budget
projected a balance in the SFEU of $414.5 million on June 30, 2000.

On May 17, 1999, the Legislative Analyst released an updated report (the
"LAO Report") on the Governor's proposal for the fiscal year 1999-2000 budget
which concluded that for the fourth year in a row,

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<PAGE>

California's budget outlook showed a major improvement in the May revision. The
LAO's report determined that the revenue outlook was decidedly stronger because
of (1) a brighter near-term economic outlook than previously assumed and (2)
higher-than-expected personal income tax receipts, especially during April,
although a significant portion of the new revenues will be necessary to cover
cost increases in Proposition 98 education and other state programs.

The original budget's economic forecast was prepared in late 1998 when it
appeared that the Asian economic crisis was resulting in a significant slowdown
in economic activity. However, according to the LAO Report, since that time, the
economic picture has brightened considerably, as both the nation and California
appear to have avoided a major slowdown emanating from Asia's problems. Based on
continued growth in real gross domestic product (GDP), strong consumer
confidence, and other factor, the consensus economic outlook for 1999 now calls
for real GDP growth of over 3.5%, or nearly double the projection contained in
earlier budget forecasts. In California, employment data revisions revealed that
instead of slowing in late 1998 and early 1999, as assumed, wage and salary jobs
in the state continued to expand at a healthy pace. This more positive trend is
expected to continue through 1999.

On June 29, 1999, the Governor signed into law the State's budget for the
1999-2000 Fiscal Year (the "1999-2000 Budget"). The 1999-2000 general fund
Budget is as follows:

1999-00 GENERAL FUND
BUDGET SUMMARY
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
1999-00
---------
<S> <C>
Prior Year Balance................................................................. $ 2,412
Revenues and Transfers............................................................. $ 62,981
---------
TOTAL RESOURCES AVAILABLE.......................................................... $ 65,393

Expenditures....................................................................... $ 63,732
---------
---------
FUND BALANCE....................................................................... $ 1,661
BUDGET RESERVES:
Reserve for Liquidation of Encumbrances.......................................... $ 480
Set aside for Employee Compensation and Litigation............................... $ 300
Special Fund for Economic Uncertainties.......................................... $ 881
</TABLE>

The 1999-2000 Budget is based on the following revenue assumptions:

1999-00 REVENUE SOURCES
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
GENERAL SPECIAL
FUND FUND
--------- ---------
<S> <C> <C>
Personal Income Tax..................................................... $ 32,914 --
Sales Tax............................................................... 19,960 $ 2,185
Bank and Corporation Tax................................................ 5,751 --
Highway Users Taxes..................................................... -- 3,015
Motor Vehicle Fees...................................................... 28 4,831
Insurance Tax........................................................... 1,246 --
Estate Taxes............................................................ 907 --
Liquor Tax.............................................................. 269 --
Tobacco Taxes........................................................... 130 1,091
Horseracing Fees........................................................ -- 39
Other................................................................... 1,776 3,615
--------- ---------
Total................................................................... $ 62,981 $ 14,776
--------- ---------
--------- ---------
</TABLE>

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<PAGE>

Education continues to be the single biggest expenditure item in the
1999-2000 Budget. All budgeted expenditures are as follows:

1999-00 EXPENDITURES BY FUND
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
GENERAL SPECIAL BOND
FUNCTION FUNDS FUNDS FUNDS TOTAL
- -------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Education (K-12).................................. $ 26,418 $ 49 $ 36 $ 26,503
Health and Human Services......................... 16,921 4,002 5 20,928
Higher Education.................................. 8,012 686 816 9,514
Business, Transportation and Housing.............. 412 5,390 454 6,256
Trade and Commerce................................ 482 1 -- 483
Tax Relief........................................ 1,868 -- -- 1,868
Local Government Subventions...................... 322 3,255 -- 3,577
Youth and Adult Corrections....................... 4,738 17 7 4,762
Resources......................................... 1,270 918 97 2,285
Environmental Protection.......................... 176 547 75 798
State and Consumer Services....................... 482 485 42 1,009
Other............................................. 2,631 732 -- 3,363
--------- --------- --------- ---------
Total............................................. $ 63,732 $ 16,082 $ 1,532 $ 81,346
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

LOCAL GOVERNMENTS

The primary units of local government in California are the counties,
ranging in population from 1,300 (Alpine) to over 9,000,000 (Los Angeles).
Counties are responsible for the provision of many basic services, including
indigent healthcare, welfare, courts, jails and public safety in unincorporated
areas. There are also about 480 incorporated cities and thousands of other
special districts formed for education, utility and other services. The fiscal
condition of local governments has been constrained since the enactment of
"Proposition 13" in 1978, which reduced and limited the future growth of
property taxes and limited the ability of local governments to impose "special
taxes" (those devoted to a specific purpose) without two-thirds voter approval.
Counties, in particular, have had fewer options to raise revenues than many
other local governmental entities, and have been required to maintain many
services.

The entire statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996 (see "Federal Welfare Reform"
above). Under the CalWORKs program, counties are given flexibility to develop
their own plans, consistent with State law, to implement Welfare-to-Work and to
administer many of its elements and their costs for administrative and support
services are capped at 1996-97 levels. Counties are also given financial
incentives if, at the individual county level or statewide, the CalWORKs program
produces savings associated with specified Welfare-to-Work outcomes; counties
may also suffer penalties for failing to meet federal standards. Under CalWORKs,
counties will still be required to provide "general assistance" aid to certain
persons who cannot obtain welfare from other programs.

Historically, funding for the State's trial court system was divided between
the State and the counties. However, Chapter 850, Statutes of 1997, implements a
restructuring of the State's trial court funding system. Funding for the courts,
with the exception of costs for facilities, local judicial benefits, and revenue
collection, was consolidated at the State level. County contribution for both
their general fund and fine and penalty amounts is capped at the 1994-95 level
and becomes part of the Trial Court Trust Fund, which supports all trial court
operations. The State assumed responsibility for future growth in trial court
funding. The consolidation of funding is intended to streamline the operation of
the courts, provide a dedicated revenue source, and relieve fiscal pressure on
the counties. Beginning in 1998-99, county general fund contribution for court
operations is reduced by $300 million, including $10.7 million to buy out the

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<PAGE>
contribution of the 20 smallest counties, and cities will retain $62 million in
fine and penalty revenue previously remitted to the State; the State's general
fund backfilled the $362 million revenue loss to the Trial Court Trust Fund. In
addition to this general fund backfill, a $50 million augmentation is included
in the 1998 Budget Act for the trial courts to fund workload increases and high
priority issues such as court security. In 1999-2000, county general fund
contributions will be further reduced by an additional $92 million to buy out
the next 17 smallest counties and reduce by ten percent the general fund
contribution of the remaining 21 counties.

In the aftermath of Proposition 13, the State provided aid from the general
fund to make up some of the loss of property tax moneys, including taking over
the principal responsibility for funding local K-12 schools and community
colleges. Under the pressure of the recent recession, the Legislature has
eliminated remnants of this post-Proposition 13 aid to entities other than K-14
education districts, although it has also provided additional funding sources
(such as sales taxes) and reduced mandates for local services. Many counties
continue to be under severe fiscal stress. While such stress has in recent years
most often been experienced by smaller, rural counties, larger urban counties,
such as Los Angeles, have also been affected. Orange County implemented
significant reductions in services and personnel, and continues to face fiscal
constraints in the aftermath of its bankruptcy, which has been caused by large
investment losses in its pooled investment funds.

On November 5, 1996, voters approved Proposition 218, entitled the "Right to
Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions enact limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, and assessments to changes through local initiatives. There are a number
of ambiguities concerning the Proposition and its impact on local governments
and their bonded debt which will require interpretation by the courts or the
State Legislature. The State Legislature Analyst estimated that enactment of
Proposition 218 would reduce local government revenues statewide by over $100
million a year, and that over time revenues to local government would be reduced
by several hundred million dollars. Proposition 218 does not affect the State or
its ability to levy or collect taxes.

On December 23, 1997, a consortium of California counties filed a test claim
with the Commission on State Mandates (the "Commission") asking the Commission
to determine whether the property tax shift from counties to the Educational
Revenue Augmentation Fund, which is a funding source for schools, is a
reimbursable state mandated cost. On August 11, 1998, the State Department of
Justice, on behalf of the State Department of Finance, filed a rebuttal in
opposition to the counties' claim. The issue is currently scheduled to be heard
by the Commission on October 22, 1998. The fiscal impact to the State general
fund if the Commission determines that the property tax shifts created a
reimbursable state mandate could total approximately $8 billion for the 1996-97
($2.5 billion), 1997-98 ($2.6 billion) and 1998-99 ($2.7 billion) property tax
shifts. Ongoing costs to the State general fund would be approximately $2.7
billion annually.

CONSTITUTIONAL AND STATUTORY LIMITATIONS; RECENT AND PENDING INITIATIVES;
PENDING LEGISLATION

CONSTITUTIONAL AND STATUTORY LIMITATIONS. Article XIIIA of the California
Constitution (which resulted from the voter-approved Proposition 13 in 1978)
limits the taxing powers of California public agencies, Article XIIIA, provides
that the maximum ad valorem tax on real property cannot exceed 1% of the "full
cash value" of the property and effectively prohibits the levying of any other
ad valorem tax on real property for general purposes. However, on May 3, 1986,
Proposition 46, an amendment to Article XIIIA, was approved by the voters of the
State of California, creating a new exemption under Article XIIIA permitting an
increase in ad valorem taxes on real property in excess of 1% for bonded
indebtedness approved by two-thirds of the voters voting on the proposed
indebtedness, "Full cash value" is defined as "the County Assessor's valuation
of real property as shown on the 1975-76 Fiscal Year tax bill under "full cash
value" or, thereafter, the appraised value of real property when purchased,
newly constructed, or a

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<PAGE>
change in ownership has occurred after the 1975 assessment." The "full cash
value" is subject to annual adjustment to reflect increases (not to exceed 2%)
or decreases in the consumer price index or comparable local data, or to reflect
reductions in property value caused by damage, destruction or other factors.

Article XIIIB of the California Constitution limits the amount of
appropriations of the State and of the local governments to the amount of
appropriations of the entity for the prior year, adjusted for changes in the
cost of living, population and the services that local government has financial
responsibility for providing. To the extent that the revenues of the State
and/or local government exceed its appropriations, the excess revenues must be
rebated to the public either directly or through a tax decrease. Expenditures
for voter-approved debt services are not included in the appropriations limit.

At the November 9, 1988 general election, California voters approved an
initiative known as Proposition 98. This initiative amends Article XIIIB to
require that (i) the California Legislature establish a prudent state reserve
fund in an amount it shall deem reasonable and necessary and (ii) revenues in
excess of amounts permitted to be spent and which would otherwise be returned
pursuant to Article XIIIB by revision of tax rates or fee schedules be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
Proposition 98 also amends Article XVI to require that the State of California
provide a minimum level of funding for public schools and community colleges.
Commencing with the 1988-89 Fiscal Year, money to be applied by the State for
the support of school districts and community college districts shall not be
less than the greater of: (i) the amount which, as a percentage of the State
general fund revenues which may be appropriated pursuant to Article XIIIB,
equals the percentage of such State general fund revenues appropriated for
school districts and community college districts, respectively, in the 1986-87
Fiscal Year or (ii) the amount required to insure that the total allocations to
school districts and community college districts from the State general fund
proceeds of taxes appropriated pursuant to Article XIIIB and allocated local
proceeds of taxes shall not be less than the total amount from these sources in
the prior year, adjusted for increases in enrollment and adjusted for changes in
the cost of living pursuant to the provisions of Article XIIIB. The initiative
permits the enactment of legislation, by a two-thirds vote, to suspend the
minimum funding requirements for one year. As a result of Proposition 98, funds
that the State might otherwise make available to its political subdivisions may
be allocated instead to satisfy such minimum funding level.

During the recent recession, general fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,220 from the 1991-92
Fiscal Year to the 1993-94 Fiscal Year.

In 1992, a lawsuit was filed, called CALIFORNIA TEACHERS' ASSOCIATION V.
GOULD, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, provides, among other things, that both
the State and K-14 schools share in the repayment of prior years' emergency
loans to schools. Of the total $1.76 billion in loans, the State will repay $935
million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count either as appropriations that count toward satisfying the
Proposition 98 guarantee, or as appropriations from "below" the current base.
Repayments are spread over the eight-year period of the 1994-95 Fiscal Year
through the 2001-02 Fiscal Year to mitigate any adverse fiscal impact.

Substantially increased general fund revenues, above initial budget
projections, in the 1994-95, 1995-96 and 1996-97 fiscal years have resulted or
will result in retroactive increases in Proposition 98 appropriations from
subsequent fiscal years' budgets.

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<PAGE>
On November 8, 1994, the voters approved Proposition 187, an initiative
statute ("Proposition 187"). Proposition 187 specifically prohibits funding by
the State of social services, health care services and public school education
for the benefit of any person not verified as either a United States citizen or
a person legally admitted to the United States. Among the provisions in
Proposition 187 pertaining to public school education, the measure requires,
commencing January 1, 1995, that every school district in the State verify the
legal status of every child enrolling in the district for the first time. By
January 1, 1996, each school district must also verify the legal status of
children already enrolled in the district and of all parents or guardians of all
students. If the district "reasonably suspects" that a student, parent or
guardian is not legally in the United States, that district must report the
student to the United States Immigration and Naturalization Service and certain
other parties. The measure also prohibits a school district from providing
education to a student it does not verify as either a United States citizen or a
person legally admitted to the United States. The State Legislative Analyst
estimates that verification costs could be in the tens of millions of dollars on
a statewide level (including verification costs incurred by other local
governments), with first-year costs potentially in excess of $100 million.

The reporting requirements may violate the Family Educational Rights and
Privacy Act ("FERPA"), which generally prohibits schools that receive federal
funds from disclosing information in student records without parental consent.
Compliance with FERPA is a condition of receiving federal education funds, which
total $2.3 billion annually to California school districts. The Secretary of the
United States Department of Education has indicated that the reporting
requirements in Proposition 187 could jeopardize the ability of school districts
to receive these funds.

Opponents of Proposition 187 filed at least eight lawsuits (which were
subsequently consolidated) challenging the constitutionality and validity of the
measure. On March 18, 1998, a United States District Court judge entered as
final judgment in the case, holding key portions of the measure unconstitutional
and permanently enjoining the State from implementing those sections which would
have required law enforcement, teachers and social services and health care
workers to verify a person's immigration status and subsequently report illegal
immigrants to authorities and deny them social services, health care and
education benefits. An appeal by the State Attorney General was filed with the
Ninth Circuit Court of Appeals on March 25, 1998 and is pending.

PENDING LITIGATION. The State is a party to numerous legal proceedings,
many of which normally occur in governmental operations. Some of the more
significant lawsuits pending against the State are described herein.

The State is involved in a lawsuit, THOMAS HAYES V. COMMISSION ON STATE
MANDATES, related to the state-mandated costs. The action involves an appeal by
the Director of Finance from a 1984 decision by the State Board of Control (now
succeeded by the Commission on State Mandates). The Board of Control decided in
favor of local school districts' claims for reimbursement for special education
programs for handicapped students. The case was then brought to the trial court
by the State and later remanded to the Commission on State Mandates for
redetermination. The Commission on State Mandates expanded the claim to include
supplemental claims filed by seven other educational institutions and determined
that a portion, but not all, of the claims constituted State mandated costs. The
Department of Finance has not yet determined whether to seek judicial review.

The State is involved in a lawsuit related to contamination at the
Stringfellow toxic waste site. In UNITED STATES, PEOPLE OF THE STATE OF
CALIFORNIA V. J. B. STRINGFELLOW, JR., ET. AL., the State is seeking recovery
for post costs of cleanup of the site, a declaration that the defendants are
jointly and severally liable for future costs, and an injunction ordering
completion of the cleanup. However, the defendants have filed a counterclaim
against the State for alleged negligent acts. Because the State is the present
owner of the site, the State may be found liable. Present estimates of the
cleanup range from $300 million to $800 million.

The State is a defendant in a coordinated action involving 3,000 plaintiffs
seeking recovery for damages caused by the Yuba River flood of February 1986.
The appellate court affirmed the trial court

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<PAGE>
finding of liability in inverse condemnation and awarded damages of $500,000 to
12 sample plaintiffs. Potential liability to the remaining 300 plaintiffs, from
claims filed, ranges from $800 million to $1.5 billion. An appeal has been
filed.

In JUST SAY NO TO TOBACCO DOUGH CAMPAIGN V. STATE OF CALIFORNIA, the
petitioners challenge the appropriation of approximately $166 million of
Proposition 99 funds in the Cigarette and Tobacco Products Surtax Fund for years
ended June 30, 1990, through June 30, 1995 for programs which were allegedly not
health education or tobacco-related disease research. The Supreme Court has
granted the State's demurrer and the plaintiffs have asked the court the
reconsider its ruling.

On June 24, 1998, plaintiffs in HOWARD JARVIS TAXPAYERS ASSOCIATION ET AL.
V. KATHLEEN CONNELL filed a complaint for certain declaratory and injunctive
relief challenging the authority of the State Controller to make payments from
the State Treasury in the absence of a state budget. On July 21, 1998, the trial
court issued a preliminary injunction prohibiting the State Controller from
paying moneys from the State Treasury for fiscal year 1998-99, with certain
limited exceptions, in the absence of a state budget. The preliminary
injunction, among other things, prohibited the State Controller from making any
payments pursuant to any continuing appropriation.

On July 22 and 27, 1998, various employee unions which had intervened in the
case appealed the trial court's preliminary injunction and asked the Court of
Appeal to stay the preliminary injunction. On July 28, 1998, the Court of Appeal
granted the unions' requests and stayed the preliminary injunction pending the
Court of Appeal's decision on the merits of the appeal. On August 5, 1998, the
Court of Appeal denied the plaintiffs' request to reconsider the stay. Also on
July 22, 1998, the State Controller asked the California Supreme Court to
immediately stay the trial court's preliminary injunction and to overrule the
order granting the preliminary injunction on the merits. On July 29, 1998, the
Supreme Court transferred the State Controller's request to the Court of Appeal.
The matters are now pending before the Court of Appeal.

A judgment was entered for the plaintiff in August 1998 in the case of
CERIDIAN CORPORATION V. FRANCHISE TAX BOARD, a suit which challenged the
validity of two sections of the California Tax laws. The first related to
deduction from corporate taxes for dividends received from insurance companies
to the extent the insurance companies have California activities. The second
related to corporate deduction of dividends to the extent the earnings of the
dividend-paying corporation have already been included in the measure of their
California tax. If both sections of the California Tax law are ultimately
invalidated, and all dividends become deductible, then the General Fund can
become liable for approximately $200 to $250 million annually. The State has
appealed the decision.

In PROFESSIONAL ENGINEERS IN CALIFORNIA GOVERNMENT V. WILSON, the Superior
Court has ruled that $30.7 million of the $258.2 million transferred from the
State Highway Account to the General Fund violated the California Constitution.
The court also invalidated $130.9 million transferred from the Motor Vehicle
Account to the General Fund. The court ordered further briefing on the $130
million transfer from the State Highway Account to the Motor Vehicle Account. A
hearing on this transfer is scheduled for Spring 1999. No decision has been made
as to whether an appeal will be taken from the court's ruling.

In CAPITOLA LAND V. ANDERSON and other related state and federal cases,
plaintiffs sought payments from the State under the AFDC-Foster Care program.
Judgment was rendered against the State in CAPITOLA, which the State appealed
and lost. The State then filed a state plan amendment with the federal
Department of Health and Human Services to enable the State to comply with the
CAPITOLA ruling and receive federal funding. The DHHS denied the state plan
amendment, and the State has filed suit against DHHS. The Legislature also
enacted a statute which required federal funding in order to comply with the
CAPITOLA judgment. The State then refused to implement the CAPITOLA judgment
based on the new statute. Certain plaintiffs moved for an order of contempt
against the State, which was granted by the trial court, but was stayed and
annulled by the Court of Appeal. The plaintiffs are petitioning the California
Supreme

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<PAGE>
Court for review. If, as a result of this litigation, compliance with the
CAPITOLA judgment is required and the judgment is applied retroactively,
liability to the State could exceed $200 million.

In the Northern California 1997 Flood Litigation, a substantial number of
plaintiffs have joined an existing suit against the State, local agencies, and
private companies and contractors seeking compensation for the damages they
suffered as a result of the 1997 flooding. Property damages have been estimated
up to $2 billion.

In JUST SAY NO TO TOBACCO DOUGH CAMPAIGN V. STATE OF CALIFORNIA, the
superior court issued an order in December 1998, granting the State's demurrer
to the entire action and dismissing the case. Plaintiffs have asked the court to
reconsider its ruling.

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<PAGE>
APPENDIX C

ECONOMIC AND FINANCIAL CONDITIONS IN CONNECTICUT

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS BASED PRIMARILY UPON
ONE OR MORE PUBLICLY AVAILABLE OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF
STATE ISSUERS; HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING
THE YEAR. THE TRUST HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.

Manufacturing has historically been of prime economic importance to
Connecticut (sometimes referred to as the "State"). The State's manufacturing
industry is diversified, with transportation equipment (primarily aircraft
engines, helicopters and submarines) the dominant industry, followed by
fabricated metals, non-electrical machinery and electrical equipment. As a
result of a rise in employment in service-related industries and a decline in
manufacturing employment, however, manufacturing accounted for only 17.09% of
total non-agricultural employment in Connecticut in 1997. Defense-related
business represents a relatively high proportion of the manufacturing sector. On
a per capita basis, defense awards to Connecticut have traditionally been among
the highest in the nation, and reductions in defense spending have had a
substantial adverse impact on Connecticut's economy.

The average annual unemployment rate in Connecticut increased from a low of
3.0% in 1988 to a high of 7.6% in 1992 and, after a number of important changes
in the method of calculation, was reported to be 5.8% in 1996. Average per
capita personal income of Connecticut residents increased in every year from
1989 to 1997, rising from $25,443 to $36,434. However, pockets of significant
unemployment and poverty exist in several Connecticut cities and towns.

At the end of the 1990-1991 fiscal year, the General Fund had an accumulated
unappropriated deficit of $965,712,000. For the seven fiscal years ended June
30, 1998, the General Fund ran operating surpluses, based on the State's
budgetary method of accounting, of approximately $110,200,000, $113,500,000,
$19,700,000, $80,500,000, $250,000,000, $262,600,000, and $312,900,000,
respectively. As a result of legislative action in the final month of the
1998-1999 fiscal year substantially increasing expenditures, a General Fund
surplus of $31,000,000 for the year is expected. General Fund budgets adopted
for the biennium ending June 30, 2001, authorize expenditures of $10,581,600,000
for the 1999-2000 fiscal year and $11,085,200,000 for the 2000-2001 fiscal year
and project surpluses of $64,400,000 and $4,800,000, respectively, for those
years.

During 1991 the State issued a total of $965,710,000 Economic Recovery
Notes. The notes were to be payable no later than June 30, 1996, but as part of
the budget adopted for the biennium ended June 30, 1997, payment of the notes
scheduled to be paid during the 1995-1996 fiscal year was rescheduled to be made
over the four fiscal years ended June 30, 1999. The outstanding notes were
$78,055,000 as of December 1, 1998.

The State's primary method for financing capital projects is through the
sale of general obligation bonds. These bonds are backed by the full faith and
credit of the State. As of December 1, 1998, the State had authorized direct
general obligation bond indebtedness totaling $12,398,200,000, of which
$11,057,371,000 had been approved for issuance by the State Bond Commission and
$9,814,857,000 had been issued. As of December 1, 1998, net State direct general
obligation bond indebtedness outstanding was $6,837,131,000.

In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The University was authorized to issue bonds totaling $962,000,000
by June 30, 2005, that are secured by a State debt service commitment to finance
improvements.

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<PAGE>
In addition, the State has limited or contingent liability on a significant
amount of other bonds. Such bonds have been issued by the following quasi-public
agencies: the Connecticut Housing Finance Authority, the Connecticut Development
Authority, the Connecticut Higher Education Supplemental Loan Authority, the
Connecticut Resources Recovery Authority and the Connecticut Health and
Educational Facilities Authority. Such bonds have also been issued by the cities
of Bridgeport and West Haven and the Southeastern Connecticut Water Authority.
As of December 1, 1998, the amount of bonds outstanding on which the State has
limited or contingent liability totaled $4,054,900,000.

In 1984, the State established a program to plan, construct and improve the
State's transportation system (other than Bradley International Airport). The
total cost of the program through June 30, 2002, is currently estimated to be
$12.6 billion, to be met from federal, state, and local funds. The State expects
to finance most of its $5.1 billion share of such cost by issuing $4.6 billion
of special tax obligation ("STO") bonds. The STO bonds are payable solely from
specified motor fuel taxes, motor vehicle receipts, and license, permit and fee
revenues pledged therefor and credited to the Special Transportation Fund, which
was established to budget and account for such revenues.

The State's general obligation bonds are rated Aa3 by Moody's and AA by
Fitch. On October 8, 1998, Standard & Poor's upgraded its ratings of the State's
general obligation bonds from AA- to AA.

The State, its officers and its employees are defendants in numerous
lawsuits. Although it is not possible to determine the outcome of these
lawsuits, the Attorney General has opined that an adverse decision in any of the
following cases might have a significant impact on the State's financial
position: (i) an action on behalf of all persons with traumatic brain injury who
have been placed in certain State hospitals and other persons with acquired
brain injury who are in the custody of the Department of Mental Health and
Addiction Services, claiming that their constitutional rights are violated by
placement in State hospitals alleged not to provide adequate treatment and
training, and seeking placement in community residential settings with
appropriate support services; (ii) litigation involving claims by Indian tribes
to portions of the State's land area; (iii) an action by certain students and
municipalities claiming that the State's formula for financing public education
violates the State's constitution and seeking a declaratory judgment and
injunctive relief; and (iv) an action for money damages for the death of a young
physician killed in an automobile accident allegedly as a result of negligence
of the State.

As a result of litigation on behalf of black and Hispanic school children in
the City of Hartford seeking "integrated education" within the Greater Hartford
metropolitan area, on July 9, 1996, the State Supreme Court directed the
legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The Superior Court recently ordered
the State to show cause as to whether there has been compliance with the Supreme
Court's ruling. The fiscal impact of this decision might be significant but is
not determinable at this time.

The State's Department of Information Technology is reviewing the State's
Year 2000 exposure and developing plans for modification or replacement of
existing software that it believes will prevent significant operations problems.
There is a risk that the plan will not be completed on time, that planned
testing will not reveal all problems, or that systems of others on whom the
State relies will not be timely updated. If the necessary remediations are not
completed in a timely fashion, the Year 2000 problem may have a material impact
on the operations of the State.

General obligation bonds issued by municipalities are payable primarily from
AD VALOREM taxes on property located in the municipality. A municipality's
property tax base is subject to many factors outside the control of the
municipality, including the decline in Connecticut's manufacturing industry.
Certain Connecticut municipalities have experienced severe fiscal difficulties
and have reported operating and accumulated deficits. The most notable of these
is the City of Bridgeport, which filed a bankruptcy petition on June 7, 1991.
The State opposed the petition. The United States Bankruptcy Court for the
District of Connecticut held that Bridgeport had authority to file such a
petition but that its petition should be

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<PAGE>
dismissed on the grounds that Bridgeport was not insolvent when the petition was
filed. State legislation enacted in 1993 prohibits municipal bankruptcy filings
without the prior written consent of the Governor.

In addition to general obligation bonds backed by the full faith and credit
of the municipality, certain municipal authorities finance projects by issuing
bonds that are not considered to be debts of the municipality. Such bonds may be
repaid only from the revenues of the financed project, the revenues from which
may be insufficient to service the related debt obligations.

Regional economic difficulties, reductions in revenues and increases in
expenses could lead to further fiscal problems for the State and its political
subdivisions, authorities and agencies. Difficulties in payment of debt service
on borrowings could result in declines, possibly severe, in the value of their
outstanding obligations, increases in their future borrowing costs, and
impairment of their ability to pay debt service on their obligations.

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<PAGE>
APPENDIX D

ECONOMIC AND FINANCIAL CONDITIONS IN MASSACHUSETTS

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE COMMONWEALTH OF MASSACHUSETTS AND DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE
SUMMARY IS BASED PRIMARILY UPON ONE OR MORE PUBLICLY AVAILABLE OFFERING
STATEMENTS RELATING TO DEBT OFFERINGS OF MASSACHUSETTS ISSUERS; HOWEVER, IT HAS
NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE TRUST HAS NOT
INDEPENDENTLY VERIFIED THE INFORMATION.

While economic growth in the Commonwealth of Massachusetts (sometimes
referred to herein as the "Commonwealth") slowed considerably during the
recession of 1990-1991, indicators such as retail sales, housing permits,
construction, and employment levels suggest a strong and continued economic
recovery. As of May 1999, the Commonwealth's unadjusted unemployment rate was
2.9% as compared to a national average of 4.0%. Per capita personal income in
the Commonwealth is currently higher than the national average.

In fiscal 1997, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 4.9% over the prior fiscal year to
$18.170 billion. Expenditures increased by 6.3% over the prior fiscal year to
$17.949 billion. As a result, the Commonwealth ended fiscal year 1997 with a
positive closing fund balance of $1.394 billion.

In fiscal 1998, the total revenues of the budgeted operating funds of the
Commonwealth increased by approximately 9.0% over the prior fiscal year to
$19.800 billion. Expenditures increased by 5.9% over the prior fiscal year to
$19.002 billion. As a result, the Commonwealth ended fiscal year 1998 with a
positive closing fund balance of $2.192 billion.

Budgeted revenues and other sources in fiscal 1999, which ended on June 30,
1999, were estimated as of May 19, 1999, by the Executive Office for
Administration and Finance to be approximately $19.852 billion, including tax
revenues of $14.16 billion. It is estimated that fiscal 1999 budgeted
expenditures and other uses will be $20.319 billion and that fiscal 1999 will
end with fund balances of $1.724 billion.

In late April, 1999, both houses of the Massachusetts Legislature agreed on
a consensus revenue estimate for fiscal 2000 of $14.850 billion. On May 8, 1999
the House of Representatives approved its version of the fiscal 2000 budget. The
House budget incorporates several tax cuts, one of which has been included in
the budget approved by the House Ways and Means Committee. The Committee's
budget provided for total expenditures of approximately $20.770 billion.

Standard & Poor's and Moody's Investors Service, Inc. have rated the
Commonwealth's general obligation bonds as AA- and Aa3, respectively. Fitch
IBCA, Inc. has rated the Commonwealth's bonds as AA-. From time to time,
agencies may change their ratings.

Limits on Commonwealth tax revenues were established by initiative petition
in November 1986, and added to the Commonwealth's General Laws as Chapter 62F.
Chapter 62F contains no exclusion for debt service on Municipal Obligations of
the Commonwealth. Tax revenues in fiscal 1994 through fiscal 1998 were lower
than the limit set by Chapter 62F, and the Executive Office for Administration
and Finance currently estimates that state tax revenues in fiscal 1999 will not
reach such limit. In addition, legislation enacted in December, 1989 imposes a
limit on the amount of outstanding direct bonds of the Commonwealth. The law
further provides that bonds to be refunded from the proceeds of Commonwealth
refunding bonds are to be excluded from outstanding direct bonds upon the
issuance of the refunding bonds. The limit did not apply to certain fiscal
recovery bonds issued in 1990 to fund the 1990 operating deficit, the final
maturity of which was paid on December 1, 1997. In January, 1990, legislation
was enacted to impose a limit on debt service appropriations in Commonwealth
budgets beginning in fiscal 1991. The law provides that no more than 10% of the
total appropriations in any fiscal year may be expended for payment of interest
and principal on general obligation debt of the Commonwealth. This limit did not
apply to the fiscal recovery bonds.

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Certain of the Commonwealth's cities, counties and towns have at times
experienced serious financial difficulties which have adversely affected their
credit standing. The recurrence of such financial difficulties, or financial
difficulties of the Commonwealth, could adversely affect the market values and
marketability of outstanding obligations issued by the Commonwealth or its
public authorities or municipalities.

On March 3, 1999, the former Deputy State Treasurer for Cash Management was
arrested for embezzlement, between 1992 and 1995, of approximately $2.4 million
from the Unclaimed Check Fund, to which are credited amounts held for the
payment of aged outstanding checks drawn on the state treasury. Earlier, in
February, another former employee of the State Treasurer's office had been
charged with attempting to embezzle $6.5 million from the same Fund. The
Attorney General is conducting a criminal investigation of the matter and
believes, based on the actual knowledge acquired by the Office of the Attorney
General in its review as of May 1999 of matters related to the operation of the
Office of the State Treasurer, that the likelihood of loss by the Commonwealth
in excess of $20 million is remote. The State Treasurer has since implemented
measures designed to minimize or eliminate the potential for errors, loss or
theft with respect to certain checking accounts.

In Massachusetts, the tax on personal property and real estate is virtually
the only source of tax revenues available to cities and towns to meet local
costs. "Proposition 2 1/2," an initiative petition adopted by the voters of the
Commonwealth on November 4, 1980, limits the power of Massachusetts cities and
towns and certain tax-supported districts and public agencies to raise revenue
from property taxes to support their operations, including the payment of
certain debt service. Proposition 2 1/2 required many cities and towns to reduce
their property tax levels to a stated percentage of the full and fair cash value
of their taxable real estate and personal property and limited the amount by
which the total property taxes assessed by a city or town might increase from
year to year. Although Proposition 2 1/2 will continue to constrain local
property tax revenues, significant capacity exists for overrides in nearly all
cities and towns.

To offset shortfalls experienced by local governments as a result of the
implementation of Proposition 2 1/2, the government of the Commonwealth
increased direct local aid from the 1981 level of $1.632 billion to $3.558
billion in fiscal 1997. Fiscal 1998 expenditures for direct local aid were
$3.949 billion, which is an increase of approximately 11.0% above the 1997
level. It is estimated that fiscal 1999 expenditures for direct local aid will
be $4.272 billion, which is an increase of approximately 8.2% above the fiscal
1998 level. In fiscal 1999 approximately 21.5% of the Commonwealth's budget is
estimated to be allocated to direct local aid.

The aggregate unfunded actuarial liabilities of the pension systems of the
Commonwealth and the unfunded liability of the Commonwealth related to local
retirement systems are significant -- estimated to be approximately $6.720
billion as of January 1, 1996 on the basis of certain actuarial assumptions
regarding, among other things, future investment earnings, annual inflation
rates, wage increases and cost of living increases. No assurance can be given
that these assumptions will be realized. The legislature adopted a comprehensive
pension bill addressing the issue in January 1988, which requires the
Commonwealth, beginning in fiscal year 1989, to fund future pension liabilities
currently and amortize the Commonwealth's unfunded liabilities over 40 years in
accordance with funding schedules prepared by the Secretary for Administration
and Finance and approved by the legislature. Based on the actuarial valuation
completed by the Public Employee Retirement Administration Commission, the
amounts required for funding of current pension liabilities in fiscal years
1999, 2000, 2001 and 2002 are estimated to be $898.5 million, $910.0 million,
$922.1 million and $934.6 million, respectively. Pension funding legislation was
revised in July, 1997, as part of the fiscal 1998 budget, to include an
accelerated pension funding schedule that would eliminate the Commonwealth's
unfunded liability by 2018 rather than 2028.

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APPENDIX E

ECONOMIC AND FINANCIAL CONDITIONS IN MICHIGAN

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF MICHIGAN (THE "STATE") AND DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE
SUMMARY IS BASED PRIMARILY UPON ONE OR MORE PUBLICLY AVAILABLE OFFERING
STATEMENTS RELATING TO DEBT OFFERINGS OF STATE ISSUERS. THE FUND HAS NOT
INDEPENDENTLY VERIFIED THE INFORMATION.

Economic activity in the State of Michigan has tended to be more cyclical
than in the nation as a whole. The State's efforts to diversify its economy have
proven successful, as reflected by the fact that the share of employment in the
State in the durable goods sector has fallen from 33.1% in 1960 to 16.0% in
1998. While durable goods manufacturing still represents a sizable portion of
the State's economy, the service sector now represents 27.51% of the State's
economy. Any substantial national economic downturn is likely to have an adverse
effect on the economy of the State and on the revenues of the State and some of
its local governmental units. Although historically, the average monthly
unemployment rate in the State has been higher than the average figures for the
United States, for the last four years, the unemployment rate in the State has
been at or below the national average. During 1998, the average monthly
unemployment rate in the State was 3.9% compared to a national average of 4.5%.

The State's economy could continue to be affected by changes in the auto
industry resulting from competitive pressures, overcapacity and labor disputes.
Such actions could adversely affect State revenues and the financial impact on
the local units of government in the areas in which plants are located could be
more severe.

The Michigan Constitution limits the amount of total revenues of the State
raised from taxes and certain other sources to a level for each fiscal year
equal to a percentage of the State's personal income for the prior calendar
year. In the event the State's total revenues exceed the limit by 1% or more,
the Constitution requires that the excess be refunded to taxpayers. To avoid
exceeding the revenue limit in the State's 1994-95 fiscal year, the State
refunded approximately $113 million through income tax credits for the 1995
calendar year. The State Constitution does not prohibit the increasing of taxes
so long as expected revenues do not exceed the revenue limit and authorizes
exceeding the limit for emergencies. The State Constitution further provides
that the proportion of State spending paid to all local units to total spending
may not be reduced below the proportion in effect for the 1978-79 fiscal year.
The Constitution requires that if spending does not meet the required level in a
given year an additional appropriation for local units is required for the
following fiscal year. The State Constitution also requires the State to finance
any new or expanded activity of local units mandated by State law. Any
expenditures required by this provision would be counted as State spending for
local units for purposes of determining compliance with the provisions stated
above.

The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for State
operating purposes, short- and long-term debt for the purposes of making loans
to school districts and long-term debt for voter approved purposes. In addition
to the foregoing, the State authorizes special purpose agencies and authorities
to issue revenue bonds payable from designated revenues and fees. Revenue bonds
are not obligations of the State and in the event of shortfalls in
self-supporting revenues, the State has no legal obligation to appropriate money
to these debt service payments. The State's Constitution also directs or
restricts the use of certain revenues.

The State finances its operations through the State's General Fund and
Special Revenue Funds. The General Fund receives revenues of the State that are
not specifically required to be included in the Special Revenue Fund. General
Fund revenues are obtained approximately 55% from the payment of State taxes and
45% from federal and non-tax revenue sources. The majority of the revenues from
State taxes are from the State's personal income tax, single business tax, use
tax, sales tax and various other taxes. Approximately two-thirds of total
General Fund expenditures are for State support of public education and for
social services programs.

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Other significant expenditures from the General Fund provide funds for law
enforcement, general State government, debt service and capital outlay. The
State Constitution requires that any prior year's surplus or deficit in any fund
must be included in the net succeeding year's budget for that fund.

The State of Michigan reports its financial results in accordance with
generally accepted accounting principles. The State ended the five fiscal years
1992-96 with its General Fund in balance after substantial transfers from the
General Fund to the Budget Stabilization Fund. For the 1997 fiscal year, the
State closed its books with its general fund in balance. During the 1997-98
fiscal year, an error was identified pertaining to the Medicaid program
administered by the Department of Community Health ("DCH"). Over a ten-year
period, DCH did not properly record all Medicaid expenditures and revenues on a
modified accrual basis as required by GAAP. For the fiscal year ended September
30, 1997, the General Fund did not reflect Medicaid expenditures of $178.7
million, and federal revenue of $24.6 million. As a result, the total ending
fund balance and unreserved fund balance for the fiscal year ended September 30,
1997, were reduced by $154.1 million to account for the correction of the prior
period error. The General Fund was in balance as of September 30, 1998. The
balance in the Budget Stabilization Fund as of September 30, 1998 was $1,000.5
million. In all but one of the last six fiscal years the State has borrowed
between $500 million and $900 million for cash flow purposes. It borrowed $900
million in each of the 1996, 1997 and 1998 fiscal years. No cash flow borrowing
is planned for the 1999 fiscal year.

In November, 1997, the State Legislature adopted legislation to provide for
the funding of claims of local school districts, some of whom had alleged in a
lawsuit, DURANT V. STATE OF MICHIGAN, that the State had, over a period of
years, paid less in school aid than required by the State's Constitution. Under
this legislation, the State paid to school districts which were plaintiffs in
the suit approximately $212 million from the Budget Stabilization Fund on April
15, 1998, and paid or will be required to pay to or on behalf of other school
districts from the Budget Stabilization Fund (i) an additional $32 million per
year in the fiscal years 1998-99 through 2007-08, and (ii) up to an additional
$40 million per year in the fiscal years 1998-99 through 2012-13.

Amendments to the Michigan Constitution which placed limitations on
increases in State taxes and local AD VALOREM taxes (including taxes used to
meet debt service commitments on obligations of taxing units) were approved by
the voters of the State of Michigan in November 1978 and became effective on
December 23, 1978. To the extent that obligations in the Fund are tax supported
and are for local units and have not been voted by the taxing unit's electors,
the ability of the local units to levy debt service taxes might be affected.

State law provides for distributions of certain State collected taxes or
portions thereof to local units based in part on population as shown by census
figures and authorizes levy of certain local taxes by local units having a
certain level of population as determined by census figures. Reductions in
population in local units resulting from periodic census could result in a
reduction in the amount of State collected taxes returned to those local units
and in reductions in levels of local tax collections for such local units unless
the impact of the census is changed by State law. No assurance can be given that
any such State law will be enacted. In the 1991 fiscal year, the State deferred
certain scheduled payments to municipalities, school districts, universities and
community colleges. While such deferrals were made up at later dates, similar
future deferrals could have an adverse impact on the cash position of some local
units. Additionally, while total State revenue sharing payments have increased
in each of the last five years, the State has reduced revenue sharing payments
to municipalities below the level otherwise provided under formulas in each of
those years.

On March 15, 1994, the electors of the State voted to amend the State's
Constitution to increase the State sales tax rate from 4% to 6% and to place an
annual cap on property assessment increases for all property taxes. Companion
legislation also cut the State's income tax rate from 4.6% to 4.4%, reduced some
property taxes and shifted the balance of school funding sources among property
taxes and State revenues, some of which are being provided from new or increased
State taxes. The legislation also contains other provisions that may reduce or
alter the revenues of local units of government and tax

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increment bonds could be particularly affected. While the ultimate impact of the
constitutional amendment and related legislation cannot yet be accurately
predicted, investors should be alert to the potential effect of such measures
upon the operations and revenues of Michigan local units of government.

The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State or local programs or finances. These lawsuits involve
programs generally in the areas of corrections, highway maintenance, social
services, tax collection, commerce and budgetary reductions to school districts
and governmental units and court funding.

Currently, the State's general obligation bonds are rated Aal by Moody's,
AA+ by Standard & Poor's and AA+ by Fitch. The State received upgrades in
January 1998 from Standard & Poor's, in March 1998 from Moody's and in April
1998 from Fitch.

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APPENDIX F

ECONOMIC AND FINANCIAL CONDITIONS IN NEW JERSEY

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF NEW JERSEY AND DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS
BASED PRIMARILY UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE OFFERING
STATEMENTS RELATING TO DEBT OFFERINGS OF NEW JERSEY ISSUERS, HOWEVER, IT HAS NOT
BEEN UPDATED NOR WILL IT BE UPDATED DURING THE YEAR. THE FUND HAS NOT
INDEPENDENTLY VERIFIED THE INFORMATION.

New Jersey (sometimes referred to herein as the "State") personal income tax
rates were reduced so that beginning with the tax year 1996, personal income tax
rates are, depending upon a taxpayer's level of income and filing status, 30%,
15% or 9% lower than 1993 tax rates.

The State operates on a fiscal year beginning July 1 and ending June 30. For
example, "Fiscal Year 2000" refers to the State's fiscal year beginning July 1,
1999 and ending June 30, 2000.

The General Fund is the fund into which all State revenues, not otherwise
restricted by statute, are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenues, and certain miscellaneous revenue items are recorded in the
General Fund.

The State's undesignated General Fund balance was $442 million for Fiscal
Year 1996, $281 million for Fiscal Year 1997 and $228 million for Fiscal Year
1998. For the Fiscal Year 1999 and the Fiscal Year 2000, the balance in the
undesignated General Fund is estimated to be $209 million and $171 million,
respectively.

The State finances certain capital projects primarily through the sale of
the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. Certain state tax revenues and certain other fees
are pledged to meet the principal payments, interest payments and redemption
premium payments, if any, required to fully pay the bonds. No general obligation
debt can be issued by the State without prior voter approval, except that no
voter approval is required for any law authorizing the creation of a debt for
the purpose of refinancing all or a portion of outstanding debt of the State, so
long as such law requires that the refinancing provide a debt service savings.

The State of New Jersey has implemented a plan to address the Year 2000 data
processing problem and ensure the continuation of government operations into the
Year 2000 and beyond. Planning for the Year 2000 commenced in 1997 with the
requirement that the various State departments submit comprehensive three year
action plans identifying all year 2000 impacts, strategies and timeframes for
addressing these impacts and estimates of cost. The State imposed a moratorium
during Fiscal Year 1998 on all non-year 2000 related data processing activities
to ensure availability of resources for Year 2000 compliance. Agencies were
directed to review current and ongoing technology initiatives in light of the
moratorium and suspend all those that are not considered mission critical. This
moratorium will remain in effect until each agency can certify that it is Year
2000 compliant. As of May 31, 1999, the testing, validation and implementation
of 83% of all centrally maintained State systems was complete. Departmental
systems are in varying stages of implementation. The total estimated cost to the
State to achieve Year 2000 compliance is $120 million of which approximately
$81.1 million of expenditures have been incurred as of May 31, 1999. Colleges
and universities, authorities, municipal, county and local sub-divisions will
address Year 2000 issues separately.

The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture.

During 1998 a continuation of the national business expansion, a strong
business climate in New Jersey and positive developments in surrounding
metropolitan areas were major sources of State economic growth.

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Average employment in 1998 increased by 76.5 thousand jobs compared to 1997.
Job gains were spread across a number of industries with particularly strong
growth in business services (20,900) and in wholesale and retail trade (18,000).

For the last decade, New Jersey's job growth has been concentrated in five
clusters of economic activity - high technology, health, financial,
entertainment and logistics. One of every three of the State's workers are in
these sectors, and as a whole these sectors accounted for a 19% increase in
employment over the past decade compared to a 4% employment growth for all other
State industries.

Personal income in New Jersey, spurred by strong labor markets, increased by
5.4% in 1998, a rate comparable to the national rate of increase. As a result,
retail sales rose by an estimated 6.2%. Low inflation, now less than 2%,
continues to benefit New Jersey consumers and businesses and low interest rates
boost housing and consumer durable goods expenditures. Home building had its
best year of the decade.

Joblessness fell in terms of both its absolute level and its rate, and by
the end of 1998, New Jersey's unemployment rate was at or below that of the
nation.

The outlook for 1999/2000 is for continued, although more moderate economic
growth. Job gains in the State may be constrained at times by labor shortages in
skilled technical areas, will be in the 50,000 range and personal income growth
will slow to an average of 4.3%.

Major caveats and uncertainties in the economic forecast for 1999/2000 have
increased. The national conditions in energy, agriculture, and manufactured
exports, particularly to Asian markets, are threats to the U.S. economy.
However, these areas of economic activity are under-represented in New Jersey
and hence the State has been able to avoid the immediate and direct effects of
those problems.

Other areas of concern include possible significant shifts in consumer and
investor confidence, unstable and potentially deflationary international
economic conditions, and the prospect of leaner profits for U.S. corporations.
In addition, the restructuring of major industries will continue spurred by the
imperative of cost containment, globalization of competition and deregulation.
Thus, 1999/2000 contains more risk than the recent past, but the momentum and
measures of the State's economic health are favorable.

The New Jersey outlook is based largely on expected national economic
performance and on recent State strategic policy actions aimed at infrastructure
improvements, effective education and training of New Jersey's workforce, and
those maintaining a competitive business climate. Investment in each of these
policy areas is seen as vital to maintaining the long-term health of the State's
economy.

Looking further ahead, prospects for New Jersey are favorable. While growth
is likely to be slower than in the nation, the locational advantages that have
served New Jersey well for many years will still be there. Structural changes
that have been going on for years can be expected to continue, with job creation
concentrated most heavily in the service industries.

TORT, CONTRACT AND OTHER CLAIMS. At any given time, there are various
numbers of claims and cases pending against the State, State agencies and
employees, seeking recovery of monetary damages that are primarily paid out of
the fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A. 59:1-1,
ET. SEQ.). The State does not formally estimate its reserve representing
potential exposure for these claims and cases. The State is unable to estimate
its exposure for these claims and cases.

The State routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.

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In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.

At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act (N.J.S.A.
59:1-1, ET. SEQ.). An independent study estimated an aggregate potential
exposure of $87,880,000 for tort and medical malpractice claims pending as of
July 1, 1998. In addition, at any given time, there are various numbers of
contract and other claims against the University of Medicine and Dentistry,
seeking recovery of monetary damages or other relief which, if granted, would
require the expenditure of funds. The State is unable to estimate its exposure
for these claims.

BUENA REGIONAL COMMERCIAL TOWNSHIP ET AL. V. NEW JERSEY DEPARTMENT OF
EDUCATION ET AL. This lawsuit was filed in Superior Court, Chancery Division,
Cumberland County. This lawsuit was filed December 9, 1997, on behalf of 17
rural school districts seeking the same type of relief as has been mandated to
be provided to the poor urban school districts in ABBOTT V. BURKE. The
plaintiffs requested a declaratory judgement stating that the chancery court
retain jurisdiction, pending the remanding of the matter to the Commissioner of
Education for a hearing. The petition was then amended to include three more
rural districts for a total of 20. The State and plaintiffs entered into a
consent order to transfer the matter to the Commissioner of Education for
resolution. The chancery court did not retain jurisdiction. Once the matter was
transferred to the Commissioner, plaintiffs moved to amend their pleadings and
have done so three times. With each new pleading, the State has answered with a
motion to dismiss. Decisions on the first two motions to dismiss were rendered
moot by plaintiffs' filing of a subsequent amended pleading. There has been no
decision on the last motion to dismiss filed. The State is unable at this time
to estimate its exposure for this claim and intends to defend this suit
vigorously.

Similar complaints have been filed individually by the school districts of
DOVER and PENNSVILLE. The matter concerning DOVER is presently pending before
the Commissioner of Education and the parties are awaiting a decision on the
State's motion to dismiss. PENNSVILLE is also pending before the Commissioner of
Education. The State is unable, at this time, to estimate its exposure for these
claims. The State intends to vigorously defend these matters.

VERNER STUBAUS, ET AL. V. STATE OF NEW JERSEY, ET AL. Plaintiffs, 25 middle
income school districts, have filed a complaint alleging that the State's system
of funding for their schools is violative of the constitutional rights of equal
protection and a thorough and efficient education. The complaint was filed April
20, 1998. On June 23, 1998, plaintiffs filed an amended complaint removing one
and adding eighteen school district plaintiffs. The State defendants filed a
motion to dismiss the amended complaint on September 18, 1998. The motion was
argued on January 29, 1999 and the court reserved its decision. The State will
vigorously defend this matter. The State is unable, at this time, to estimate
its exposure for these claims.

UNITED HOSPITALS ET AL. V. STATE OF NEW JERSEY AND WILLIAM WALDMAN. These
cases represent challenges by 19 State hospitals to Medicaid hospital
reimbursement since 1995. The matters were filed in the Appellate Division of
the Superior Court of New Jersey. The hospitals challenge all of the following:
(i) whether the State complied with certain federal requirements for Medicaid
reimbursement; (ii) whether the State's reimbursement regulations, N.J.A.C.
10:52-1 ET SEQ., including the regulations' interpretation of marginal loss are
arbitrary, capricious and unreasonable, (iii) whether the Department of Human
Services ("DHS") incorrectly calculated the rates; (iv) whether DHS denied
hospitals a meaningful appeal process; (v) whether the 1996-7 State
Appropriations Act (L.1996, c.42) violates the New Jersey Constitution with
respect to the provision for Medicaid reimbursement to hospitals; and (vi)
whether DHS violated the

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Medicaid State Plan, filed with the U.S. Department of Health and Human
Services, in implementing hospital rates since 1995. The State intends to
vigourously defend these actions.

ABBOTT DISTRICTS, EARLY CHILDHOOD PLAN APPEALS. Abbott districts, in
furtherance of the Court's decision in ABBOTT V. BURKE and DOE regulations, have
developed operational plans for the provision of early childhood programs. In
February of 1999, the Department of Education informed each of the districts of
the Department's concerns regarding each district's plan, and asked that amended
plans be submitted to the Department. The Abbott districts have filed individual
petitions of appeal with the Commissioner. Issues on appeal include the quality
of community care providers, the requirement that districts collaborate with
DHS-licensed facilities, the use of certificated teachers, requests for full day
preschool, accreditation of early childhood programs, and as-applied
constitutional challenges to N.J.A.C. 6:19A-1 ET SEQ. In response to the filed
petitions, the State has filed answers or motions in lieu of answers. The
matters are being transmitted to the Office of Administrative Law for further
proceedings. To date, thirteen districts have filed petitions. Additionally, the
Education Law Center has filed petitions on behalf of students in each of the
three State-operated school districts of Newark, Jersey City and Paterson and on
behalf of the students of West New York. The State is unable to estimate its
exposure for these claims and intends to defend the suits vigorously.

UNITED HEALTHCARE SYSTEM, INC. V. FISHMAN AND GUHL. This Chapter 11 case
commenced two years ago when United Hospital closed. Through the adversary
complaint, United seeks to expunge proofs of claim filed in the Chapter 11 case
in 1997 by the Department of Health and Senior Services and the Department of
Human Services. United moreover asserts claims for turnover of the property of
the debtor's estate and declaratory relief. United wants the bankruptcy court to
take jurisdiction of and decide Medicaid reimbursement matters pending in New
Jersey state administrative proceedings or on appeal in the New Jersey appellate
courts. The pending Medicaid matters have an alleged potential exposure of
approximately $90 million. United also seeks turnover of monies collected by the
Department of Health and Senior Services pursuant to a statutory charge of a $10
per adjusted hospital admission in 1995-97 and an assessment of .53% of annual
hospital operating revenue in 1994-97. The State has filed a motion to dismiss.
The State intends to vigorously defend this action and also to oppose federal
bankruptcy court jurisdiction.

Currently, the State's general obligation bonds are rated AA+ by Standard &
Poor's, Aa1 by Moody's and AA+ by Fitch IBCA. From time to time agencies may
change their ratings.

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APPENDIX G

ECONOMIC AND FINANCIAL CONDITIONS IN NEW YORK

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF NEW YORK CITY (THE "CITY") OR NEW YORK STATE (THE "STATE" OR "NEW
YORK"). OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS BASED PRIMARILY UPON
ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE OFFERING STATEMENTS RELATING
TO DEBT OFFERINGS OF STATE ISSUERS, HOWEVER, IT HAS NOT BEEN UPDATED. THE FUND
HAS NOT INDEPENDENTLY VERIFIED THIS INFORMATION.

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

NEW YORK CITY

GENERAL. More than any other municipality, the fiscal health of the City
has a significant effect on the fiscal health of the State. The City's current
financial plan assumes that, after strong growth in 1998-1999, moderate economic
growth will exist through calendar year 2003, with moderate job growth and wage
increases.

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

Pursuant to the laws of the State, the Mayor is responsible for preparing
the City's financial plan, including the City's current financial plan for the
2000 through 2003 fiscal years (the "2000-2003 Financial Plan", "Financial Plan"
or "City Financial Plan"). The City's projections set forth in the City
Financial Plan are based on various assumptions and contingencies that are
uncertain and may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.

CITY'S FINANCING PROGRAM. Implementation of the City Financial Plan is also
dependent upon the City's ability to market its securities successfully. The
City's program for financing capital projects for fiscal years 1999 through 2003
contemplates the issuance of $10.091 billion of general obligation bonds, $5.340
billion of bonds to be issued by the New York City Transitional Finance
Authority (the "Transitional Finance Authority") and $2.8 billion of bonds to be
issued by the Tobacco Settlement Asset Securitization Corporation ("TSASC") and
paid from revenues received pursuant to a settlement of litigation with the four
leading cigarette companies. The Transitional Finance Authority and TSASC were
created to assist the City in financing its capital program while keeping City
indebtedness within the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to incur. In 1997, the State enacted the
New York City Transitional Finance Authority Act (the "Finance Authority Act"),
which created the Transitional Finance Authority. In a challenge to the
constitutionality of the Finance Authority Act, the State trial court, by
summary judgment on November 25, 1997, held the Finance Authority Act to be
constitutional. On July 30, 1998, the State Appellate Division affirmed the
trial court's decision. Plaintiffs filed a notice of appeal with the State's
Court of Appeals for an appeal as of right of the Appellate Division order. The
appeal as of right was dismissed on September 22, 1998. Plaintiffs subsequently
filed a motion for leave to appeal with the Court of Appeals, which motion was
denied on December 22, 1998. In March 1999, plaintiffs filed a petition for a
writ of certiorari to the United States Supreme Court.

Without additional borrowing capacity, under current projections the City
would reach the limit of its capacity to enter into new contractual commitments
in fiscal year 2000. If TSASC is not able to issue

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$2.8 billion of bonds, the City will need to find another source of financing or
substantially curtail or halt its capital program. Even with the ability to
issue $2.8 billion in bonds by TSASC, the City expects that it will be required
to postpone a substantial part of its capital program from the latter part of
fiscal year 2001 to fiscal year 2002. In addition, the City issues revenue notes
and tax anticipation notes to finance its seasonal working capital requirements
(See "SEASONAL FINANCING REQUIREMENTS" within). The success of projected public
sales of City bonds and notes, New York City Municipal Water Finance Authority
(the "Water Authority") bonds and Transitional Finance Authority and other bonds
will be subject to prevailing market conditions. The City's planned capital and
operating expenditures are dependent upon the sale of its general obligation
bonds and notes, as well as Water Authority, Transitional Finance Authority and
TSASC bonds.

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

1999 MODIFICATION AND 2000-2003 FINANCIAL PLAN. The most recent quarterly
modification to the City's financial plan for the 1999 fiscal year (July 1,
1998-June 30, 1999) submitted to the New York State Financial Control Board (the
"Control Board') on June 14, 1999 (the "1999 Modification"), projects a balanced
budget in accordance with GAAP for the 1999 fiscal year.

On June 14, 1999, the City released the Financial Plan for the 2000 through
2003 fiscal years, which relates to the City and certain entities which receive
funds from the City. The Financial Plan projects revenues and expenditures for
the 2000 fiscal year balanced in accordance with GAAP, and project gaps of $1.8
billion, $1.9 billion and $1.8 billion for fiscal years 2001 through 2003,
respectively.

The 1999 Modification and the 2000-2003 Financial Plan includes a proposed
discretionary transfer in the 1999 fiscal year of $2.6 billion to pay debt
service due in fiscal year 2000, for budget stabilization purposes, a proposed
discretionary transfer in fiscal year 2000 to pay debt service due in fiscal
year 2001 totaling $429 million, and a proposed discretionary transfer in fiscal
year 2001 to pay debt service due in fiscal year 2002 totaling $345 million.

In addition, the Financial Plan sets forth gap-closing actions to eliminate
a previously projected gap for the 2000 fiscal year and to reduce projected gaps
for fiscal year 2001 through 2003 which include additional (i) City agency
actions, (ii) Federal revenue sharing and Medicaid and (iii) State actions
including Medicaid cost containment initiatives. The Financial Plan also
reflects a proposed tax reduction program, which includes the elimination of the
City's non-residents earning tax, the proposed extension of current tax
reductions for owners of cooperative and condominium apartments and a proposed
income tax credit for low income wage earners.

ASSUMPTIONS. The 2000-2003 Financial Plan is based on numerous assumptions,
including the condition of the City's and the region's economies and modest
employment growth and the concomitant receipt of economically sensitive tax
revenues in the amounts projected. The 2000-2003 Financial Plan is subject to
various other uncertainties and contingencies relating to, among other factors,
the extent, if any, to which wage increases for City employees exceed the annual
wage costs assumed for the 1999 through 2003 fiscal years; continuation of
projected interest earnings assumptions for pension fund assets and current
assumptions with respect to wages for City employees affecting the City's
required pension fund contributions; the willingness and ability of the State to
provide the aid contemplated by the Financial Plan and to take various other
actions to assist the City; the ability of Health and Hospitals Corporation (the
"HHC"), the Board of Education (the "BOE") and other such agencies to maintain
balanced budgets; the willingness of the Federal government to provide the
amount of Federal aid contemplated in the Financial Plan; the impact on City
revenues and expenditures of Federal and State welfare reform and any future

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legislation affecting Medicare or other entitlement programs; adoption of the
City's budgets by the City Council in substantially the forms submitted by the
Mayor; the ability of the City to implement cost reduction initiatives, and the
success with which the City controls expenditures; the impact of conditions in
the real estate market on real estate tax revenues; and unanticipated
expenditures that may be incurred as a result of the need to maintain the City's
infrastructure. Certain of these assumptions have been questioned by the City
Comptroller and other public officials.

The Financial Plan assumes; (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999, and which is projected to provide
revenue of $572 million, $585 million, $600 million and $638 million in the 2000
through 2003 fiscal years, respectively; (ii) collection of projected rent
payments for the City's airports, totaling $365 million, $185 million and $155
million in the 2001 through 2003 fiscal years, respectively, a substantial
portion of which may depend on the successful completion of negotiations with
The Port Authority of New York and New Jersey (the "Port Authority") or the
enforcement of the City's rights under the existing leases through pending legal
action; (iii) State and Federal approval of the State and Federal gap-closing
actions proposed by the City in the Financial Plan; and (iv) receipt of the
tobacco settlement funds providing revenues or expenditure offsets in annual
amounts ranging between $250 million and $300 million.

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

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

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

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The Mayor's Office of Operations has stated that work has been completed,
and all or part of the necessary testing has been performed, on approximately
69% (current as of June 18, 1999) of the mission-critical and high priority
systems of Mayoral agencies. The City's computer systems may not all be year
2000 compliant in a timely manner and there could be an adverse impact on City
operations or revenues as a result. The City is in the process of developing
contingency plans for all mission-critical and high priority systems of Mayoral
agencies, if such systems are not year 2000 compliant by pre-determined dates.
The City is also in the process of contacting its significant third party
vendors regarding the status of their compliance. Such compliance is not within
the City's control, and therefore the City cannot assure that there will not be
any adverse effects on the City resulting from any failure of these third
parties.

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

On May 24, 1999, the City Comptroller issued a report on the City's
financial plan as previously updated in April 1999 (the "April Financial Plan").
With respect to the 1999 fiscal year, the report identified a possible surplus
of $94 million, after $2.1 billion of discretionary transfers and subsidy
payments assumed in the April Financial Plan, due to the possibility of higher
than forecasted tax revenues. In addition, taking into account the risks and
additional resources identified in the report and the budget gaps projeted in
the April Financial Plan, the report projected budget gaps of between $1.8
billion and $3.0 billion, $1.8 billion and $3.1 billion, and $2.0 billion and
$3.6 billion in fiscal years 2001 through 2003, respectively.

With respect to fiscal years 2000 through 2003, the report identified
baseline risks of between $698 million and $873 million, $1.0 billion and $2.2
billion, $978 million and $2.2 billion, and $1.1 billion and $2.7 billion,
respectively, depending upon whether the State approves the extension of the 14%
personal income tax surcharge and whether the City incurs additional labor costs
as a result of the expiration of labor contracts starting in fiscal year 2001
which, if settled at the current forecast level of inflation, would result in
additional costs totaling $345 million in fiscal year 2001, $713 million in
fiscal year 2002 and $1.1 billion in fiscal year 2003. Additional risks
identified in the report for fiscal years 2000 through 2003 include the revenues
from the nonresident earnings tax, which the State Legislature has voted to
repeal, at a potential cost to the City of between $360 million and $398 million
annually starting in fiscal year 2000; assumed payments from the Port Authority
relating to the City's claim for back rentals, which are the subject of
arbitration, State and Federal gap-closing actions proposed in the April
Financial Plan; possible increased overtime expenditures, the sale of the New
York City Coliseum in fiscal year 2001; and the write-down of outstanding
education aid receivables of approximately $100 million in each of fiscal years
2002 and 2003. The report noted that these risks may be offset by additional
resources of approximately $900 million in each of fiscal years 2000 through
2002 and approximately $800 million in fiscal year 2003. The report further
noted that expenditure growth continued to exceed revenue growth, and that
deficits could increase if the economy deteriorates. In addition, the report
noted that HHC faces a number of uncertainties that may have a negative impact
on its long-term viability, including proposed State and Federal reductions to
both Medicaid and Medicare and a significant decline in patient utilization. The
decline in utilization has been primarily reflected in Medicaid revenue which
accounts for approximately 50% of HHC's total revenues, and which has been
adversely affected by a smaller welfare

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population, local welfare cost containment initiatives and greater competition
for Medicaid funds among area hospitals. The report also indicated that a
possible negotiated settlement of a class action, filed on behalf of
approximately 63,000 persons challenging the Department of Corrections policy of
strip searching detainees arrested for non-felony offenses, may expose the City
to substantial costs from the settlement of litigation.

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

On May 20, 1999, the staff of the OSDC issued a report on the City's
Executive Budget for fiscal year 2000. The report notes that tax revenues are
likely to be higher than forecast by the City for fiscal years 1999 and 2000 by
a total of $275 million, which may be needed to offset potential budget risks,
such as a possible delay in the receipt of the proceeds from the tobacco
settlement and shortfalls in Federal and State gap-closing aid assumed in the
April Financial Plan. With respect to the subsequent fiscal years in the April
Financial Plan, the report noted that, while the budget gaps have been reduced
to about $1.7 billion annually, they make no provision for wage increases after
the expiration of current contracts which, at the projected rate of inflation,
would increase costs by more than $1 billion by fiscal year 2003.

In addition, the report noted that it is anticipated that an independent
actuarial consulting firm reviewing the assumptions and methodologies to compute
City pension contributions will issue its report and will recommend changes,
such as a reduction in the pension fund investment earnings assumption. These
changes, in addition to those that the City Actuary may recommend, could cost in
excess of $500 million annually. In addition, the report noted that legislation
is under consideration that would increase retirement benefits for certain City
employees. Finally, the report noted that the City remains vulnerable to an
economic downturn which could result in a significant shortfall in projected
non-property tax revenues and higher pension fund contributions and public
assistance costs.

On May 27, 1999, the staff of the Control Board issued a report on the April
Financial Plan. The report noted that the City will end the 1999 fiscal year
with a substantial surplus and that the budget proposed by the Mayor for fiscal
year 2000 also appears to be balanced. However, the report noted that the lack
of a State budget leaves uncertainties as to the amount of intergovernmental aid
which will be available to the City in fiscal year 2000, and that the proposed
elimination by the State of the City's nonresident earnings tax will require the
City to make appropriate adjustments to its revenue and expenditure forecasts.
The report further noted that large gaps still exist in subsequent fiscal years
of the April Financial Plan, even before accounting for known risks such as the
impact of future collective bargaining negotiations. Finally, the report noted
that the City's business and personal income taxes are particularly susceptible
to the vagaries of the financial markets and, if the economy falters, the City
will likely experience a decline in revenues and an increase in social service
costs which will increase the out-year gaps in the April Financial Plan.

On May 14, 1999, the IBO released a report providing its analysis of the
April Financial Plan. The report estimated a potential surplus of $356 million
in fiscal year 2000 and potential gaps of $2.3 billion, $3.0 billion and $3.1
billion for fiscal years 2001 through 2003, respectively, which reflect, among
other things, salary increases for City employees totaling $232 million, $607
million and $1.0 billion in fiscal years 2001 through 2003, respectively, which
are not included in the April Financial Plan. Uncertainties identified in the
report include Federal and State gap-closing actions assumed in the April
Financial Plan

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relating to Medicaid assistance or cost containment, State tort reform
legislation and State funding for low income uninsured disabled children. The
report noted that, while the strength of the local economy is helping the City
solve many of its near term budget problems, persistently large projected
out-year gaps remain a major concern for the City, and even a modest slackening
of the growth forecast for the next four years could increase projected budget
gaps.

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

RATINGS. As of June 18, 1999, Moody's rated the City's outstanding general
obligation bonds A3, Standard & Poor's rated such bonds A- and Fitch rated such
bonds A. In July 1995, Standard & Poor's revised downwards its ratings on
outstanding general obligation bonds of the City from A- to BBB+. In July 1998,
Standard & Poor's revised its rating of City bonds upward to A-. Moody's rating
of City bonds was revised in February 1998 to A3 from Baa1. On March 8, 1999,
Fitch revised its rating of City bonds upward to A. Such ratings reflect only
the view of Moody's, Standard & Poor's and Fitch, from which an explanation of
the significance of such ratings may be obtained. There is no assurance that
such ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely. Any such downward revision or withdrawal
could have an adverse effect on the market prices of City bonds.

OUTSTANDING INDEBTEDNESS. As of March 31, 1999, the City and the Municipal
Assistance Corporation for the City of New York had respectively approximately
$26.8 and $3.2 billion of outstanding net long-term debt. As of May 19, 1999,
the Water Authority had approximately $8.7 billion aggregate principal amount of
outstanding bonds, inclusive of subordinate second resolution bonds, and a $600
million commercial paper program.

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

Legislation has been passed by the State which prohibits the disposal of
solid waste in any landfill located within the City after December 31, 2001. The
Financial Plan includes the estimated costs of phasing out the use of landfills
located within the City. A suit has been commenced against the City by private
individuals under the Resource Conservation and Recovery Act seeking to compel
the City to take certain measures or, alternatively, to close the Fresh Kills
landfill. If as a result of such litigation, the City is required to close the
landfill earlier than required by State legislation, the City could incur
additional costs during the Financial Plan period. Pursuant to court order, the
City is currently required to recycle 2,100 tons per day of solid waste and is
required to recycle 3,400 tons per day by July 1999 and 4,250 tons per day by
July 2001. The City as of June 18, 1999 is recycling slightly over 2,100 tons
per day of solid

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waste. The City may seek to obtain amendments to Local Law No. 19 to modify this
requirement. If the City is unable to obtain such amendments and is required to
fully implement Local Law No. 19, the City may incur substantial costs.

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

NEW YORK STATE

CURRENT ECONOMIC OUTLOOK. The State's 1999-2000 Executive Budget (discussed
below) contains forecasts of the national and State economies which are
summarized as follows. Economic growth for the nation during both 1999 and 2000
is expected to be slower than it was during 1998. The State Division of the
Budget projects real Gross Domestic Product ("GDP") growth of 2.4 percent in
1999, below the 1998 growth rate of 3.7 percent. In 2000, real GDP growth is
expected to continue at a similar pace, increasing by 2.3 percent. For the State
economy, continued growth is projected in 1999 and 2000 for employment, wages
and personal income, although the growth is expected to moderate from the 1998
pace. However, a continuation of international financial and economic turmoil
may result in a sharper slowdown than projected.

Overall employment growth in the State is anticipated to continue at a
modest rate, reflecting the slowing growth in the national economy, continued
spending restraint in government, and restructuring in the manufacturing, health
care, social service, and banking sectors.

Overall employment growth is projected to have been 1.9 percent in 1998, but
is expected to drop to 1.2 percent in 1999 and to 1.0 percent in 2000. On the
national level, employment growth is projected to have been 2.6 percent for 1998
and is projected to be 2.0 percent and 1.5 percent for 1999 and 2000,
respectively.

On an average annual basis, the State unemployment rate is projected to drop
from 5.7 percent in 1998 to 5.5 percent for each of 1999 and 2000. For the
nation as a whole, the unemployment rate is projected to have been 4.5 percent
for 1998, and is projected to be 4.7 percent in 1999 and 4.9 percent in 2000.

Personal income in the State is estimated to have grown by 4.9 percent in
1998, fueled in part by a continued large increase in financial sector bonus
payments at the beginning of the year, and is projected to grow by 4.2 percent
in 1999 and 4.0 percent in 2000. For the nation, personal income is estimated to
have grown by 5.0 percent in 1998, and is projected to grow by 4.5 percent and
4.3 percent, respectively, for 1999 and 2000. Increases in bonus payments in
1999 and 2000 are projected to be modest, a distinct shift from the rate of the
last few years.

CONSENSUS ECONOMIC AND REVENUE FORECASTING PROCESS. On March 10, 1999, the
State Legislature and the Governor conducted a consensus economic and revenue
forecasting process as required under State law. The forecast for income growth
in 1999-2000 was increased modestly to 3.3 percent, consistent with an economic
outlook of continued but slower growth in the State's economy and moderate
inflation. The higher growth rates for the nation and State in the revised
outlook are expected to result in short- and long-term interest rates at
somewhat higher levels than had been anticipated previously. The State Division

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of the Budget revised its estimate of receipts for the 1999-2000 fiscal year to
include an additional $150 million in receipts.

THE 1999-2000 FISCAL YEAR (EXECUTIVE BUDGET FORECAST). The State as of its
May 10, 1999 Annual Information Statement Supplement had not adopted a budget
for the 1999-2000 fiscal year. The State, however, has enacted debt service
appropriations for State-supported, contingent contractual, and certain other
obligations for the entire 1999-2000 fiscal year. Legislation extending certain
revenue-raising authority on an interim basis and making interim appropriations
for State personal service costs, various grants to local governments, and
certain other items was submitted by the Governor and enacted by the State
Legislature through May 23, 1999. In prior years, the State has enacted interim
appropriations to continue its operations until a budget was enacted by the
Legislature.

The Governor presented his 1999-2000 Executive Budget to the Legislature on
January 27, 1999, which was subsequently amended by the Governor on February 12,
1999 (the "Executive Budget"). The Executive Budget contains financial
projections for the State's 1998-1999 through 2001-2002 fiscal years, and a
proposed Capital Program and Financing Plan for the 1999-2000 through 2003-2004
fiscal years. There can be no assurance that the Legislature will enact into law
the Executive Budget as proposed by the Governor, or that the State's adopted
budget projections will not differ materially and adversely from the projections
set forth in the Executive Budget.

The proposed 1999-2000 State Financial Plan, which reflects the Executive
Budget, is projected to have receipts in excess of disbursements on a cash basis
in the General Fund, after accounting for the transfer of available receipts
from the 1998-1999 fiscal year to the 1999-2000 fiscal year. General Fund
receipts, including transfers from other funds, are projected to be $38.81
billion, an increase of approximately $2 billion (5.5%) over estimated receipts
in the 1998-1999 fiscal year. General Fund disbursements, including transfers to
other funds, are projected to grow by 1.4 percent to approximately $37.14
billion, an increase of approximately $528 million over the 1998-1999 fiscal
year. The State is projected to close the 1999-2000 fiscal year with a balance
in the General Fund of approximately $2.47 billion.

RECEIPTS. The forecast of General Fund receipts in fiscal year 1999-2000
reflects the next stage of the School Tax Relief (STAR) property tax reduction
program, as well as the continuing impact of earlier tax reductions. In
addition, the Executive Budget reflects several new tax reduction proposals that
are projected to have only a modest impact on receipts in 1999-2000 and
2000-2001, but are expected to reduce receipts by approximately $1 billion
annually when fully phased in at the end of the 2003-2004 fiscal year.

The largest new tax cut proposals call for further reductions in the
personal income tax to benefit middle income taxpayers. These proposals concern
increasing the income threshold where the top tax rate applies and increasing
the value of the dependent exemption. In addition the Executive Budget includes
several other targeted tax cut proposals, including: reducing certain energy
taxes; lowering the alternative minimum tax on corporations; extending the
business tax rate reductions previously enacted for general corporations to
banks and insurance companies as well as other proposals.

Personal income tax collections for the 1999-2000 fiscal year are projected
to reach approximately $22.88 billion, an increase of approximately 13.8 percent
over 1998-1999. This increase is due in part to refund reserve transactions
which serve to increase reported 1999-2000 personal income tax receipts. Growth
in 1999-2000 personal income tax receipts is partially offset by the diversion
of such receipts into the School Tax Relief Fund, which finances the STAR tax
reduction program.

User tax and fees are projected at $7.17 billion in 1999-2000, a decrease of
approximately one percent from the 1998-1999 fiscal year. The decline in this
category reflects the incremental impact of already-enacted tax reductions, and
the diversion of additional motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.

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Business tax receipts are expected to total approximately $4.56 billion in
1999-2000, approximately five percent below 1998-1999 results. The impact of tax
reductions scheduled in law, as well as slower growth in the underlying tax
base, explain this decline.

Receipts from other taxes, which are comprised primarily of receipts from
estate and gift taxes and pari-mutuel taxes on wagering, are expected to decline
to $990 million, approximately 11.9 percent in 1999-2000. The ongoing effect of
tax cuts already in law is the main reason for the decline.

Miscellaneous receipts are expected to total approximately $1.28 billion in
the 1999-2000 fiscal year, a decline of approximately 17.3 percent from the
1998-1999 fiscal year. Miscellaneous receipts include license revenues, income
from fees and fines, abandoned property proceeds, investment income, and a
portion of the assessments levied on medical providers.

NON-RECURRING RESOURCES. The State Division of the Budget projects that the
proposed 1999-2000 Financial Plan contains only $33 million in non-recurring
resources, or less than one-tenth of one percent of General Fund disbursements.

DISBURSEMENTS. Grants to Local Governments constitute approximately 67
percent of all General Fund spending, and include payments to local governments,
non-profit providers and entitlement benefits to individuals. It is projected to
be approximately $24.84 billion for the 1999-2000 fiscal year, a decrease of
approximately 0.2 percent from the level for the 1998-1999 fiscal year. Since
1994-1995, State spending on welfare has fallen approximately 32 percent, driven
by significant welfare changes initiated at the State and federal levels and a
large, steady decline in the number of people receiving benefits. Several trends
have contributed to falling caseloads, including the State's strong economic
performance over the past three years; State, federal and local welfare-to-work
initiatives that have expanded training and support services to assist
recipients in becoming self-sufficient; tightened eligibility review for
applicants; and aggressive fraud prevention measures.

State Operations reflects the costs of running the Executive, Legislative
and Judicial branches of government. It is projected to be approximately $6.89
billion for the 1999-2000 fiscal year. Spending in this category is projected to
increase approximately 3.7 percent above 1998-1999 and reflects the annualized
costs of 1998-1999 collective bargaining agreements, the decline in federal
receipts that offset General Fund spending for mental hygiene programs, the
costs of staffing a new State prison, and growth in the Legislative and
Judiciary budgets. The State's overall workforce is projected to remain stable
at approximately 191,200 persons.

General State Charges accounts primarily for the costs of providing fringe
benefits for State employees, including contributions to pension systems, the
employer's share of social security contributions, employer contributions toward
the cost of health insurance, and the costs of providing worker's compensation
and unemployment insurance benefits. This category also reflects certain fixed
costs such as payments in lieu of taxes and payments of judgments against the
State or its public officials. It is projected to be approximately $2.32 billion
for the 1999-2000 fiscal year, an increase of 1.4 percent over the level for the
1998-1999 fiscal year.

Transfers to Other Funds from the General Fund are made primarily to finance
certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources. This is
projected to be approximately $3.08 billion for the 1999-2000 fiscal year, an
increase of 10.8 percent over the level for the 1998-1999 fiscal year.

THE 1998-1999 FISCAL YEAR (UNAUDITED RESULTS). The State ended its
1998-1999 fiscal year on March 31, 1999 in balance on a cash basis, with a
reported General Fund cash balance of $892 million. Previously the State had
projected a potential budget imbalance of up to $1.68 billion for the 1998-1999
fiscal year. (The General Fund is the principal operating fund of the State. It
is the State's largest fund and receives almost all State taxes. In the State's
1998-1999 fiscal year, the General Fund is expected to have accounted for

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approximately seventy percent of total State Funds disbursements.). The closing
General Fund balance does not include $2.31 billion that the State deposited
into the tax refund reserve at the close of the 1998-1999 fiscal year to pay for
tax refunds in the 1999-2000 fiscal year. The refund reserve transaction has the
effect of decreasing reported personal income tax receipts in the 1998-1999
fiscal year, while increasing reported receipts in the 1999-2000 fiscal year.
The proposed 1999-2000 State Financial Plan assumes that $1.79 billion of the
moneys made available through this transaction will not be used to support
operations in the 1999-2000 fiscal year, but instead be reserved for use in
2000-2001 and 2001-2002 to offset the incremental loss of tax receipts from
already-enacted tax cuts that will take effect in those years.

General Fund receipts and transfers from other funds for the 1998-1999
fiscal year totaled $36.74 billion, an increase of 6.34 percent from 1997-1998
levels. General Fund disbursements and transfers to other funds totaled $36.49
billion for the 1998-1999 fiscal year, an increase of 6.23 percent from the
1997-1998 levels. Disbursements in All Governmental Funds for the 1998-1999
fiscal year totaled $70.62 billion, or 6.94 percent above the 1997-1998 fiscal
year.

FUTURE FISCAL YEARS. The State Division of the Budget projects budget gaps
of approximately $1.14 billion in the 2000-2001 fiscal year and $2.07 billion in
the 2001-2002 fiscal year. These gaps were projected after assuming that the
State Legislature will enact the 1999-2000 Executive Budget and accompanying
legislation in its entirety. Both houses of the State Legislature have adopted
budget resolutions which provide an outline of their intended spending and
revenue changes to the Executive Budget. The State's Division of the Budget's
analysis of these resolutions indicates that, if enacted, they would increase
the size of the State's future budget gaps. Each gap is projected after also
assuming $500 million in unspecified annual spending efficiencies, which is
comparable to the Governor's Executive Budget assumptions in previous fiscal
years. The proposed 1999-2000 Financial Plan also assumes the use of $1.79
billion in reserves to offset the incremental loss in tax receipts resulting
from previously enacted and proposed tax reductions. The proposed 1999-2000
Financial Plan currently assumes that $589 million of the reserve will be
applied in the 2000-2001 fiscal year, with the remaining $1.2 billion used in
the 2001-2002 fiscal year.

The Civil Service Employees Association (CSEA) failed to ratify a tentative
agreement with the State on a new four-year labor contract. While the proposed
1999-2000 Financial Plan has reserved $100 million for possible collective
bargaining costs, no similar reserves are contained in the current out-year
projections of receipts and disbursements to cover the recurring costs of any
possible new agreements. The State is continuing negotiations with CSEA and
other unions representing State employees.

Future Financial Plans are also likely to count on savings from
efficiencies, workforce management efforts, aggressive efforts to maximize
federal and other non-General Fund resources, and other efforts to control State
spending. Nearly all the actions proposed by the Governor to balance the
proposed 1999-2000 Financial Plan recur and grow in value in future years. The
State Division of the Budget projects that, if the projected budget gap for
2000-2001 is closed with recurring actions, the 2001-2002 budget gap would be
reduced to $963 million under projections current as of February 9, 1999. The
Governor is required by law to propose a balanced budget each year and will
propose steps necessary to address any potential remaining budget gaps in
subsequent budgets.

General Fund receipts are projected to fall to approximately $35.99 billion
in 2000-2001 reflecting the incremental impact of already enacted tax
reductions, the impact of prior tax refund reserve transactions and the
earmarking of receipts for dedicated highway purposes. Receipts are projected to
grow modestly to approximately $36.20 billion in the 2001-2002 fiscal year,
again reflecting the impact of enacted tax cuts on normal receipts growth, as
well as the incremental impact of tax reductions recommended with the Executive
Budget.

The State currently projects spending to grow by approximately $1.09 billion
(2.9 percent) in 2000-2001 and an approximately additional $1.8 billion (4.7
percent) in 2001-2002. General Fund spending increases at a higher rate in
2001-2002 than in 2000-2001, driven primarily by higher growth rates for

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Medicaid, welfare, Children and Families Services, and Mental Retardation, as
well as the loss of federal money that offsets General Fund spending. Local
assistance spending accounts for most of the projected growth in General Fund
spending in the outyears, increasing by approximately $1.04 billion in 2000-2001
and approximately $1.46 billion in 2001-2002. School aid, which accounts for the
largest share of General Fund spending, is projected to grow by approximately
$612 million (6.1 percent) in 2000-2001 and $578 million (5.5 percent) in
2001-2002.

GAAP-BASIS RESULTS. On March 31, 1998, the State recorded on a GAAP-basis,
its first-ever accumulated positive balance in its General Fund. This
accumulated surplus was $567 million. This compares to accumulated deficits of
$995 million and $2.928 billion for the fiscal years ended March 31, 1997 and
March 31, 1996, respectively. The State's GAAP projections indicate that the
State will have accumulated positive General Fund balances of $1.019 billion and
$616 million, respectively, for the fiscal year ended March 31, 1999 and the
fiscal year ending March 31, 2000.

The State reported a General Fund operating surplus of $1.56 billion for the
1997-1998 fiscal year, as compared to an operating surplus of $1.93 billion for
the 1996-1997 fiscal year. The General Fund operating surplus is projected to
decline to $452 million for the fiscal year ended March 31, 1999. A General Fund
operating deficit of $507 million is projected for the fiscal year ending March
31, 2000.

SPECIAL CONSIDERATIONS. According to the State Division of the Budget, over
the long-term uncertainties with regard to the economy present the largest
potential risk to budget balance in New York State. For example, a downturn in
the financial markets or the wider economy is possible, a risk that is
heightened by the lengthy expansion underway. The securities industry is more
important to the New York economy than the national economy, potentially
amplifying the impact of an economic downturn. A large change in stock market
performance during the forecast horizon could result in wage and unemployment
levels that are significantly different from those embodied in the State's
forecast. Merging and downsizing by firms, as a consequence of deregulation or
continued foreign competition, may also have more significant adverse effects on
employment than expected. Finally a "forecast error" of one percentage point in
the growth of receipts could cumulatively raise or lower results by over $1
billion by 2002.

The fiscal effects of tax reductions adopted in the last several fiscal
years and those proposed by the Governor in the Executive Budget are projected
to grow more substantially beyond the 1999-2000 fiscal year. The incremental
annual cost of enacted or proposed tax reductions is estimated to peak at $2.1
billion in 2000-2001, then gradually decline to about $1 billion in 2003-2004.

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

YEAR 2000 COMPUTER MATTERS. New York State is currently addressing "Year
2000" ("Y2K") data processing compliance issues. Since its inception, the
computer industry has used a two-digit date convention to represent the year. In
the year 2000, the date field will contain "00" and, as a result, many computer
systems and equipment may not be able to process dates properly or may fail
since they may not be able to distinguish between the years 1900 and 2000. The
Y2K issue not only affects computer programs, but also the hardware, software
and networks on which they operate. In addition, any system or equipment that is
dependent on an embedded chip, such as telecommunication equipment and security
systems, may also be adversely affected.

In April 1999 the State Comptroller released an audit on the State's Y2K
compliance. The audit, which reviewed the State's Y2K compliance activities
through October 1998, found that the State had

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made progress in achieving Y2K compliance, but needed to improve its activities
in several areas, including data interchanges and contingency planning.

The Office for Technology ("OFT") will continue monitoring compliance
progress for the State's mission-critical and high-priority systems and is
reporting compliance progress to the Governor's office on a quarterly basis.
Mission-critical systems are those that may impact the public health, safety and
welfare of the State and its citizens, and for which failure could have a
material and adverse impact on State operations. High-priority systems are
critical for a State agency to fulfill its mission or deliver services. OFT
reported that as of March 31, 1999, the State had completed 97 percent of
overall compliance efforts for its mission-critical systems; 38 systems are now
Y2K compliant. As of March 31, 1999, the State had completed 80 percent of
overall compliance efforts on the high-priority systems; 208 systems are now Y2K
compliant. Compliance testing is expected to be completed by the end of calendar
year 1999. The State is also procuring independent validation and verification
services from a qualified vendor to perform an automated review of corrected
programming code and a testing process review for all mission-critical systems.

The State is also addressing a number of other issues related to bringing
its mission-critical systems into compliance, including: testing throughout 1999
of over 800 data exchange interfaces with federal, State, local and private data
partners; completing an inventory of priority equipment and systems that may
depend on embedded chips and may therefore need remediation in 1999; and
contacting critical vendors and supply partners to obtain Y2K compliance status
information and assurances. Since problems could be identified during the
compliance testing phase that could produce compliance delays, the State
agencies were required to complete contingency plans for priority systems and
business processes by the first quarter of calendar year 1999. OFT, as of the
second quarter of calendar year 1999, has been reviewing the status of agency
contingency planning during the first quarter. The agency plans were scheduled
to be tested throughout the second quarter of calendar year 1999 and integrated
into the State Emergency Response Plan and coordinated by the State Emergency
Management Office. In addition, the State Public Service Commission has ordered
that all State-regulated utilities complete Y2K activities for mission-critical
systems, including contingency plans, by July 1, 1999 and is requiring utilities
to provide monthly progress reports. The State has also been working with local
governments since December 1996 to raise awareness, promote action and provide
assistance with Y2K compliance.

While the State is taking what it believes to be appropriate action to
address Y2K compliance, there can be no guarantee that all of the State's
systems and equipment will be Y2K compliant and that there will not be an
adverse impact upon State operations or finances as a result. Since Y2K
compliance by outside parties is beyond the State's control to remediate, the
failure of outside parties to achieve Y2K compliance could have an adverse
impact on State operations or finances as well.

PRIOR FISCAL YEARS (CASH BASIS). The State ended its 1997-1998 fiscal year
balanced on a cash basis, with a reported General Fund cash surplus of $2.04
billion resulting from revenue growth and lower spending on welfare, Medicaid,
and other entitlement programs. General Fund receipts and transfers from other
funds for the 1997-1998 fiscal year (including net tax refund reserve account
activity) totaled $34.55 billion, an annual increase of $1.51 billion, or 4.57
percent over the 1996-1997 fiscal year. General Fund disbursements and transfers
to other funds were $34.35 billion, an annual increase of $1.45 billion or 4.41
percent. The State closed a budget gap of approximately $2.3 billion for the
1997-1998 fiscal year. Gap-closing actions included cost containment in State
Medicaid, the use of the $1.4 billion 1996-1997 fiscal year budget surplus to
finance 1997-1998 fiscal year spending, control on State agency spending and
other actions.

The State ended its 1996-1997 fiscal year balanced on a cash basis, with a
1996-1997 General Fund cash surplus as reported by the State Division of the
Budget of approximately $1.4 billion that was used to finance the 1997-1998
Financial Plan. The surplus resulted primarily from higher-than-expected
revenues and lower-than-expected spending for social service programs. General
Fund receipts and transfers from

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other funds for the 1996-1997 fiscal year totaled $33.04 billion, an increase of
0.7 percent from the 1995-1996 fiscal year (excluding deposits into the tax
refund reserve account). General Fund disbursements and transfers to other funds
totaled $32.90 billion for the 1996-1997 fiscal year, an increase of 0.7 percent
from the 1995-1996 fiscal year.

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

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

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

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

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

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

The total amount of State-supported debt outstanding grew from 3.4 percent
of personal income in the State in the 1988-1989 fiscal year to 6.1 percent for
the 1997-1998 fiscal year while State-related debt outstanding declined from 6.8
percent to 6.6 percent of personal income for the same period. Thus, State-
supported debt grew at a faster rate than personal income while State-related
obligations grew at a slower

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rate. At the end of the 1997-1998 fiscal year, there was $37 billion of
outstanding State-related debt and $34.25 billion of outstanding State-supported
debt.

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

RATINGS. As of June 15, 1999, Moody's and Standard & Poor's rated the
State's outstanding general obligation bonds A2 and A, respectively. Standard &
Poor's revised its ratings upward from A- to A on August 28, 1997. Ratings
reflect only the respective views of such organizations, and explanation of the
significance of such ratings must be obtained from the rating agency furnishing
the same. There is no assurance that a particular rating will continue for any
given period of time or that any such rating will not be revised downward or
withdrawn entirely if, in the judgment of the agency originally establishing the
rating, circumstances so warrant. A downward revision or withdrawal of such
ratings may have an effect on the market price of the New York Municipal Bonds
in which the Fund invests.

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

OTHER LOCALITIES. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 1999-2000 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the projections of the
State receipts and disbursements in the State's 1999-2000 fiscal year.

Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board for Yonkers (the "Yonkers Board")
by the State in 1984. On June 30, 1998, Yonkers satisfied the statutory
conditions for ending the supervision of its finances by the Yonkers Board.
Pursuant to State law, the control board's powers over Yonkers' finances lapsed
after the satisfaction of these conditions, on December 31, 1998.

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APPENDIX H
ECONOMIC AND FINANCIAL CONDITIONS IN NORTH CAROLINA

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS BASED PRIMARILY UPON
ONE OR MORE PUBLICLY AVAILABLE OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF
STATE ISSUERS; HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING
THE YEAR. THE TRUST HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.

The State of North Carolina (the "State") has three major operating funds:
the General Fund, the Highway Fund and the Highway Trust Fund. North Carolina
derives most of its revenue from taxes, including individual income tax,
corporation income tax, sales and use taxes, corporation franchise tax,
alcoholic beverage tax, and insurance tax, tobacco products tax. State sales
taxes on food, as well as the inheritance and soft drink taxes, are being phased
out. The State receives other non-tax revenues which are also deposited in the
General Fund. The most important are Federal funds collected by State agencies,
university fees and tuitions, interest earned by the State Treasurer on
investments of General Fund moneys and revenues from the judicial branch. The
proceeds from the motor fuel tax, highway use tax and motor vehicle license tax
are deposited in the Highway Fund and the Highway Trust Fund.

Fiscal year 1997 ended with a positive General Fund balance of approximately
$874.8 million. Along with additional reserves, $135 million was reserved in the
Reserve for Repair and Renovation of State Facilities, in addition to a
supplemental reserve of $39.3 million for repairs and renovations (bringing the
total reserve to $221.2 million after prior withdrawals). An additional $49.4
million was transferred to the Clean Water Management Trust Fund (bringing the
total reserve to $49.4 million after prior withdrawals) and $115 million and
$156 million were reserved in newly-created Disaster Relief and Intangible Tax
Refund Reserves, respectively. The Disaster Relief Reserve was used to cover
disaster relief funds spent during fiscal year 1997. An additional $61 million
was reserved for the State to acquire the shares of the North Carolina Railroad
Company not held by the State. No additional amounts were transferred to the
Savings Reserve for the year (the existing balance of $500.9 million having met
the statutory reserve requirements). After additional reserves, the unreserved
General Fund balance at the end of fiscal year 1997 was approximately $318.7
million.

Fiscal year 1998 ended with a positive General Fund balance of approximately
$1,662 million. Along with additional reserves, $21.6 million was reserved in
the Savings Reserve, and $55 million was reserved to fund public school employee
performance bonuses, longevity payments, school bus purchases and purchases of
additional school technology. $145 million was placed in the Reserve for Repairs
and Renovations of State Facilities (bringing the total reserve to $174.2
million), and $47.4 million was placed in the reserve for the Clean Water
Management Trust Fund. After additional reserves, the unreserved General Fund
balance at the end of fiscal year 1998 was approximately $101 million.

The foregoing results are presented on a budgetary basis. Accounting
principles applied to develop data on a budgetary basis differ significantly
from those principles used to present financial statements in conformity with
generally accepted accounting principles. Based on a modified accrual basis, the
General Fund balance at June 30, 1997 and 1998 was $1,703.9 million and $1,669.7
million, respectively.

On October 28, 1998, the North Carolina General Assembly adopted the
biennium budget for 1998 to 2000. The $12.6 billion budget for fiscal year 1999
included over $100 million in new spending for the state's universities and
community colleges, over $90 million in new spending for health and human
services, including $42.5 million for expansion of North Carolina's Smart Start
program for preschool children, and almost $30 million in new spending on law
enforcement. The legislature also approved teacher pay raises averaging 6.5%.

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The General Assembly also took action to reduce some taxes, including
elimination of the sales tax on food (estimated cost $185.5 million in fiscal
years 1999-2000) and the inheritance tax (estimated cost $52.5 million in fiscal
years 1999-2000).

Under the State's constitutional and statutory scheme, the Governor is
required to prepare and propose a biennial budget to the General Assembly. The
General Assembly is responsible for considering the budget proposed by the
Governor and enacting the final budget. In enacting the final budget, the
General Assembly may modify the budget proposed by the Governor as it deems
necessary. The Governor is responsible for administering the budget enacted by
the General Assembly.

The State budget is based upon a number of existing and assumed State and
non-State factors, including State and national economic conditions,
international activity, Federal government policies and legislation and the
activities of the State's General Assembly. Such factors are subject to change
which may be material and affect the budget. The Congress of the United States
is considering a number of matters affecting the Federal government's
relationship with the state governments that, if enacted into law, could affect
fiscal and economic policies of the states, including the State.

During recent years, the State has moved from an agricultural to a service
and goods-producing economy. According to the North Carolina Employment Security
Commission (the "Employment Security Commission"), in July 1997, the State
ranked tenth among the states in non-agricultural employment and eighth in
manufacturing employment. The Federal Bureau of Labor Statistics estimated the
State's seasonally adjusted unemployment rate in March 1999 to be 3.2% of the
labor force, as compared with an unemployment rate of 4.5% nationwide.

The following are certain cases pending in which the State faces the risk of
either a loss of revenue or an unanticipated expenditure which, in the opinion
of the Department of State Treasurer, would not materially adversely affect the
State's ability to meet its financial obligations.

PATTON V. STATE OF NORTH CAROLINA AND BAILEY V. STATE OF NORTH CAROLINA --
STATE TAX REFUNDS -- FEDERAL AND STATE RETIREES. On May 8, 1998, in BAILEY, ET
AL. V. STATE OF NORTH CAROLINA, the North Carolina Supreme Court held that the
act of the General Assembly that repealed a tax exemption on State and local
government retirement benefits was an unconstitutional impairment of contract
and a taking of property without just compensation. Accordingly, retirement
benefits that were vested before August 1989 were held to be exempt from State
income taxation. In addition, the North Carolina Supreme Court ruled that
recovery of taxes previously paid by retirees on those benefits was not limited
to retirees who paid the tax under protest or requested a refund within the time
periods specified by the statute.

Potential refunds and interest are estimated by the State to be $352.68
million through December 31, 1997, with respect to refunds, and through June 30,
1998, with respect to interest. Until this matter is resolved, any additional
potential refunds and interest will continue to accrue. In addition to refunds
and interest, the State will be unable to continue to tax the applicable
retirement benefits, thus reducing future revenue. The case was remanded by the
North Carolina Supreme Court for administration and further orders to carry out
the decision. Under the initial order of the trial judge, the State would offset
its liabilities to improperly taxed retirees by allowing tax credits to eligible
retirees to be applied against future State income taxes, or in the case of
eligible retirees who are deceased, no longer residents of the State, or who
have no tax liability, to be paid in whole to such retirees or their estates.

Federal retirees in PATTON, ET AL. V. STATE OF NORTH CAROLINA, filed a class
action suit in Wake County Superior Court in 1995 seeking monetary relief for
taxes paid since 1989. This case was brought in anticipation of a favorable
outcome for the plaintiffs in the BAILEY case. The federal retirees allege that
a result in the BAILEY case that exempts State and local retirement benefits
from State income taxes would require a similar exemption for federal retirement
benefits under the United States Supreme Court's 1989 decision in DAVIS V.
MICHIGAN. In DAVIS, the United States Supreme Court ruled that a Michigan income
tax statute that taxed federal retirement benefits while exempting those paid by
state and local governments

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violated the constitutional doctrine of intergovernmental tax immunity. At the
time of the DAVIS decision, North Carolina law contained similar exemptions in
favor of state and local retirees. Those exemptions were repealed prospectively,
beginning with the 1989 tax year by the act of the General Assembly held
unconstitutional in BAILEY. The PATTON case was being held in abeyance pending
the outcome in BAILEY. Potential refunds and interest have been estimated by the
State to be $585.09 million through June 30, 1997. Until this matter is
resolved, any additional potential refunds and interest have continued and will
continue to accrue.

In June 1998, the plaintiff classes in the BAILEY and PATTON cases reached a
tentative settlement with the State of North Carolina. Under the terms of the
settlement, the General Assembly will appropriate $400 million in the 1998-1999
fiscal year, and $399 million by July 15, 1999 in the 1999-2000 fiscal year, to
a settlement fund. Amounts in the fund will be paid to the state, local and
federal retirees in the cases. The terms of the settlement provide that such
payments will completely extinguish all of the State's liability to the retirees
arising from the taxation of state, local and federal retirement income and
benefits from 1989 through 1997.

The tentative court settlement was made subject to the appropriation of
funds by the General Assembly and to court approval following notice to the
class members. The $400 million appropriation was made by action of the General
Assembly in September 1998, and on October 7, 1998, the court entered an order
approving the settlement. In order to achieve final consummation of the
settlement, the General Assembly must appropriate the $399 million amount for
the 1999-2000 fiscal year at its 1999 session, which begins in January 1999.

SMITH ET. AL. V. STATE OF NORTH CAROLINA--STATE TAX REFUNDS--INTANGIBLES
TAX. On February 21, 1996, the U.S. Supreme Court declared North Carolina's
intangibles tax unconstitutional. Subsequently, the State refunded intangibles
taxes paid by all persons who had paid such taxes under protest in compliance
with the state's tax refund statute. In the SMITH case, refunds were sought by a
class of taxpayers who had not complied with the tax refund statute. On December
4, 1998, the Supreme Court ruled that North Carolina will have to pay these
refunds. Refunds to non-protesters will total approximately $233 million plus
interest of approximately $100 million.

In its 1996 Short Session, the North Carolina General Assembly approved
State general obligation bonds in the amount of $950 million for highways and
$1.8 billion for schools. These bonds were approved by the voters of the State
in November 1996. In March 1997, the State issued $450 million of the authorized
school bonds (Public School Building Bonds). In November 1997, the State issued
$250 million of the authorized highway bonds (Highway Bonds). In March 1998, the
State issued an additional $450 million of the authorized school bonds (Public
School Building Bonds). The offering of the remaining $1.6 billion of these
authorized bonds is anticipated to occur over the next two to five years.

On November 3, 1998, North Carolina voters approved the issuance of $800
million in clean water bonds and $200 million in natural gas facilities bonds.
The clean water bonds will provide grants and loans for needed water and sewer
improvement projects for the State's municipalities, and fund programs to reduce
pollution in the State's waterways. The natural gas bond issue will provide
grants, loans and other financing for local distribution companies or state or
local government agencies to build natural gas facilities, in part to help
attract industry to the State's rural regions.

Currently, Moody's, Standard & Poor's and Fitch IBCA rate North Carolina
general obligation bonds Aaa, AAA, and AAA, respectively.

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APPENDIX I
ECONOMIC AND FINANCIAL CONDITIONS IN OHIO

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE AND DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF SUCH
FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE SUMMARY IS BASED PRIMARILY UPON
ONE OR MORE PUBLICLY AVAILABLE OFFERING STATEMENTS RELATING TO DEBT OFFERINGS OF
OHIO ISSUERS, HOWEVER, IT HAS NOT BEEN UPDATED NOR WILL IT BE UPDATED DURING THE
YEAR. THE TRUST HAS NOT INDEPENDENTLY VERIFIED THE INFORMATION.

The State of Ohio (sometimes referred to herein as the "State") operates on
a fiscal biennium for its appropriations and expenditures. The State finances
the majority of its operations through the State's General Revenue Fund (the
"GRF"). The GRF is funded mainly by the State's personal income tax, sales and
use tax, various other taxes and grants from the Federal government. The State
is precluded by law from ending a fiscal year or a biennium in a deficit
position. In 1981 the State created the Budget Stabilization Fund ("BSF") for
purposes of cash management.

The GRF ending fund and cash balances for the State's 1984-85 through
1998-99 bienniums were as follows:

<TABLE>
<CAPTION>
ENDING FUND ENDING CASH
BEGINNING ENDING BALANCE BALANCE
BIENNIUM JULY 1 JUNE 30 (IN THOUSANDS) (IN THOUSANDS)
- -------------------------------------------------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
1984-85........................................... 1983 1985 $ 297,600 $ 849,900
1986-87........................................... 1985 1987 226,300 632,700
1988-89........................................... 1987 1989 475,100 784,268
1990-91........................................... 1989 1991 135,365 326,576
1992-93........................................... 1991 1993 111,013 393,634
1994-95........................................... 1993 1995 928,000 1,312,200
1996-97........................................... 1995 1997 834,900 1,400,000
1989-99........................................... 1997 1999 976,778 1,512,528
</TABLE>

State and national fiscal uncertainties during the 1992-93 biennium required
several actions to achieve GRF positive ending balances. To allow time to
complete the resolution of differences, an interim appropriations act was
enacted effective July 1, 1992: the general appropriations act for the entire
biennium was then passed on July 11 and signed by the Governor of the State on
July 25 and included a $200 million transfer from the BSF to the GRF. In Fiscal
Year 1992, when the State's Office of Budget and Management ("OBM") projected an
imbalance in GRF resources and expenditures, the Governor ordered most State
agencies to reduce GRF appropriations spending in the final six months of Fiscal
Year 1992 by a total of approximately $184 million. (Debt service and lease
rental obligations were not affected by the order.) Then, with General Assembly
authorization, in June 1992 the entire $100.4 million BSF balance and additional
amounts from certain other funds were transferred to the GRF. Other
administration revenue and spending actions resolved the remaining GRF imbalance
for Fiscal Year 1992.

As a first step toward addressing a projected Fiscal Year 1993 GRF
shortfall, then estimated by OBM at approximately $520 million, the Governor
ordered, effective July 1, 1992, selected reductions in Fiscal Year 1993 GRF
appropriations spending totaling $300 million. Appropriations for debt service
(including lease rental appropriations) were expressly excluded from the
Governor's cutback orders. Subsequent executive and legislative actions --
including tax revisions that produced an additional $194.5 million and
additional appropriations spending reductions totalling approximately $50
million -- provided for positive biennium-ending GRF balances. As a first step
toward BSF replenishment, $21 million was deposited in the BSF.

The GRF budget for the 1994-95 biennium provided for total GRF expenditures
of approximately $30.7 billion, with Fiscal Year 1994 expenditures 9.2% higher
than in Fiscal Year 1993, and Fiscal Year

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1995 expenditures 6.6% higher than in Fiscal Year 1994. As noted above, the GRF
ended the 1994-95 biennium with a fund balance of $928 million and cash balance
of $1,312.2 million. As an additional step toward BSF replenishment, OBM
transferred $260.3 million to the BSF at the end of Fiscal Year 1994 and $535.2
million in July 1995.

For the 1996-97 biennium, GRF appropriations approximated $33.5 billion. At
the end of Fiscal Year 1996, the following transfers were made from the GRF:
$100 million for elementary and secondary school computer network purposes, $30
million for a new transportation infrastructure fund, and $400.8 million for
temporary personal income tax reductions. At the end of the biennium, the GRF
had fund and cash balances of $834.9 million and $1,400 million, respectively,
which allowed $250 million to be applied to school building construction and
renovation, $94.4 million for a school computer network, $44.2 million for
school textbooks and instructional materials and a distance learning program,
$34.4 million to be transferred to the BSF, and the $262.9 million balance to an
income tax reduction fund.

The General Appropriations Act for the 1998-99 biennium, provided
approximately for total GRF expenditures of $36.1 billion, an increase of 7.8%
over the previous appropriations act. The Act increased spending for primary and
secondary education, higher education, and rehabilitation and corrections, and
provided for a 4.5% personal income tax reduction in 1998. The biennium ending
GRF balances were $1,512,528,000 (cash) and $976,778,000 (fund). Of the fund
balance, legislation directed $325,700,000 to school building assistance,
$46,374,000 to the BSF, $85,400,000 to SchoolNet (a program to supply computers
for classrooms), $4,600,000 to interactive video distance learning and the
remaining amount to the State income tax reduction fund.

The GRF appropriations acts for the current 2000-2001 biennium (one for all
education purposes and one for general GRF purposes) were passed on June 24 and
June 28, 1999, respectively, and promptly signed (after selective vetoes) by the
Governor. Those acts provided for total GRF biennial expenditures of over $39.8
billion with major program expenditure increases in primary and secondary
eduction (16.9%), higher education (12.6%) mental health and mental retardation
(4.3%) and adult and juvenile corrections (18%).

Litigation pending in the Ohio Court of Claims contests the Ohio Department
of Human Services' ("ODHS") former Medicaid financial eligibility rules for
married couples where one spouse is living in a nursing facility and the other
spouse resides in the community. ODHS promulgated new eligibility rules
effective January 1, 1996. ODHS appealed an order of the Federal court directing
it to provide notice to persons potentially affected by the former rules from
1990 through 1995, and the Court of Appeals has ruled in favor of ODHS.
Plaintiffs' petition for certiorari was not granted by the U.S. Supreme Court.
As to the Court of Claims case, it is not possible to state the period, beyond
the current fiscal year, during which necessary additional Medicaid expenditures
would have to be made. Plaintiffs have estimated total additional Medicaid
expenditures at $600 million for the retroactive period and, based on current
law, it is estimated that the State's share of those additional expenditures
would be approximately $240 million. On April 15, 1999, the Court of Claims
decertified the action there as a class action.

Because the schedule of GRF cash receipts and disbursements do not precisely
coincide, temporary GRF cash flow deficiencies may occur in some months of a
Fiscal Year. Statutory provisions provide for effective management of these
temporary GRF cash deficiencies by permitting the adjustment of payment
schedules and the use of a "Total Operating Fund" ("TOF"). The State has not and
does not do external revenue anticipation borrowing.

The TOF includes the total consolidated cash balances, revenues,
disbursements and transfers of the GRF and several other specified funds
(including the BSF). Those cash balances are consolidated only for the purpose
of meeting cash flow requirements, and, except for the GRF, a positive cash
balance must be maintained for each discrete fund included in the TOF. The GRF
is permitted to incur a temporary cash deficiency by drawing upon the available
consolidated cash balance in the TOF. The amount of that

I-2
<PAGE>
permitted GRF cash deficiency at any time is limited to 10% of GRF revenues for
the then preceding Fiscal Year.

The State has encountered (and planned for) some monthly GRF cash flow
deficiencies in all recent Fiscal Years. For example, GRF cash flow deficiencies
have ranged from occurring in 10 months of Fiscal Year 1992 (with $743.14
million being the highest) to four months in Fiscal Year 1995 and 1997 (the
highest being $565.741 million). OBM reports the GRF had cash flow deficiencies
in seven months of Fiscal Year 1996, in four months of Fiscal Year 1997, and in
five months of Fiscal Year 1998/six months of Fiscal Year 1999.

All cash flow deficiencies have been and are projected by OBM to be within
the TOF limitations discussed above. Often, the GRF balancing steps described
above ameliorated deficiencies in later months of a Fiscal Year, significantly
assisting in producing the projected positive year-end GRF balances.

The State's Constitution directs or restricts the use of certain revenues.
Highway fees and excise taxes, including gasoline taxes, are limited in use to
highway-related purposes including the payment of interest on certain securities
issued for purposes related to the State's highways. Not less than 50% of the
receipts from State income and estate and inheritance taxes must be returned to
the political subdivisions and school districts where such receipts originated.
Since 1987 all net State lottery profits are allocated to elementary, secondary,
vocational and special education program purposes.

Under the current financial structure, Ohio's public school districts
receive a major portion (statewide aggregate approximately 46% in recent years)
of their operating moneys from State subsidy programs (the primary portion of
which is known as the "Foundation Program") distributed in accordance with
statutory formulas that take into account both local needs and local taxing
capacity. The Foundation Program amounts have steadily increased in recent
years, including small aggregate increases even in those Fiscal Years in which
appropriations cutbacks were imposed. School districts also rely heavily upon
receipts from locally voted taxes. In part because of provisions of some State
laws, some school districts have experienced varying degrees of difficulty in
meeting mandated and discretionary increased costs.

Litigation, similar to that in other states, has been pending in Ohio courts
since 1991 questioning the constitutionality of Ohio's system of school funding.
The Ohio Supreme Court concluded in 1997 that major aspects of the system
(including the Foundation Program and certain borrowing programs) are
unconstitutional. The Court ordered the State to provide for and fund
sufficiently a system complying with the Ohio Constitution, but staying its
order for one year to allow time for responsive corrective actions by the
General Assembly. Among other things, the Court indicated that property taxes
may still play a role in, but "can no longer be the primary means" of, school
funding. The Court remanded the case to the trial court to hear evidence and
render an opinion on the constitutionality of the enacted legislation which
opinion could then be appealed directly to the Ohio Supreme Court. A hearing in
the trial court was subsequently held on the constitutionality of the
legislation enacted since 1992 to enhance school funding consistent with Supreme
Court decision.

In February 1999, the trial court judge issued his ruling. He concluded that
the State continues to be not in compliance with the constitutional
requirements, and ordered the State "forthwith to provide for and fund a system
of funding public elementary and secondary education in compliance with the Ohio
Constitution and the [1997] directive of the Ohio Supreme Court." He also
ordered the State Board of Education and the State Superintendent of Public
Instruction to prepare and submit to the General Assembly proposals for
compliance with the trial court orders and the Supreme Court directive.

The State has filed with the Ohio Supreme court a notice of appeal of the
trial court's decision. The trial court has granted the State's request for a
stay, pending appeal, implementation of his order (except that portion calling
for State agency proposals). It is not possible at this time to state what the
results of any appeal might be, or, should plaintiffs prevail on appeal, the
effect on the State's present school funding system.

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<PAGE>

As part of its post-1991 response, the General Assembly has increased State
funding for public schools, as discussed below. In addition, the General
Assembly placed two issues on the May 1998 primary ballot. Neither was approved
by the voters. One was a constitutional amendment authorizing additional State
debt issuing capacity and the other an increase in the State sales tax. That
constitutional amendment would have authorized State general obligation debt to
pay costs of school facilities throughout the State and costs of facilities for
state institutions of higher education. A similar amendment has been placed on
the November 1999 ballot.

State appropriations for primary and secondary education for the current
2000-01 biennium are $13.3 billion or 15% over the previous biennium and
represent an increase of 7.6% in Fiscal Year 2000 over 1999 and 7.6% in Fiscal
Year 2001 over 2000. Appropriations for school funding in recent bienniums were
$11.6 billion in the 1998-99 biennium (18.3% increase), and $10.1 billion in the
1996-97 biennium (13.6% increase).

Federal courts have ruled that the State shared joint liability with the
local school districts for segregation in public schools in Cincinnati,
Cleveland, Columbus, Dayton and Lorain. Subsequent trial court orders directed
that remedial costs be shared equally by the State and the respective local
districts. For that purpose the following amounts have been expended:
$75,752,659 in the 1992-93 biennium, $119,382,294 in the 1994-95 biennium,
$144,759,340 in the 1996-97 biennium, $100,800,000 in the 1998-99 biennium and
$23,700,000 in the 2000-01 biennium. A recent settlement of one desegregation
case reduces annual State payments to one district.

The State's Constitution expressly provides that the State General Assembly
has no power to pass laws impairing the obligations of contracts.

At the present time, the State does not levy any AD VALOREM taxes on real or
tangible personal property. Local taxing districts and political subdivisions
currently levy such taxes. The State's Constitution limits the amount of the
aggregate levy of AD VALOREM property taxes, without a vote of the electors or
municipal charter provision, to 1% of true value in money. Statutes also limit
the amount of the aggregate levy, without a vote or charter provision.

Economic activity in the State, as in many other industrially developed
states, tends to be more cyclical than in some other states and in the nation as
a whole. Although manufacturing (including auto-related manufacturing) remains
an important part of the State's economy, the greatest growth in Ohio employment
in recent years, consistent with national trends, has been in the
nonmanufacturing area. Ohio ranked seventh in the nation in 1996 with $304.4
billion in gross state product; was third in manufacturing with a value of $82.7
billion and second in durable goods with a value of $82.7 billion. Manufacturing
was 27.2% of total Ohio gross state product, compared to 17.7% of that total
being from "services." In addition, agriculture and "agribusiness" continue as
important elements of the Ohio economy. Ohio continues as a major "headquarters"
state. Of the top 500 corporations (industrial and service) based on 1998
revenues reported in 1999 by FORTUNE magazine, 27 had headquarters in Ohio,
placing Ohio fifth as "headquarters" state for corporations. Payroll employment
in Ohio, in the diversifying employment base, showed a steady upward trend until
1979, then decreased until 1982. It reached an all-time high in the summer of
1993 after a slight decrease early in 1992 and then decreased slightly, and has
reached a new high in 1998. Growth in recent years has been concentrated among
nonmanufacturing industries, with manufacturing employment tapering off since
its 1969 peak. Nonmanufacturing industries now employ approximately 80% of all
payroll workers (non-agricultural) in Ohio. Historically, the average monthly
unemployment rate in Ohio has been higher than the average figures for the
United States, although in recent years, the average unemployment rate in Ohio
has been lower than the national rate. Ohio has been below the seasonally
adjusted national rate through May 1999, as well.

Ohio's 1990 decennial census population of over 10,840,000 indicated a 0.5%
population growth since 1980 and Ohio as ranking seventh among the states in
population. In 1980 it ranked sixth. The State's 1997 population was estimated
at 11,186,000, still seventh among the United States.

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<PAGE>
Major offices of the State have had under way extensive efforts and programs
to identify and assess, and remediate when necessary, year 2000 problems
involving data processing systems and other systems and equipment critical to
continued and uninterrupted State agency operations. Various remediation efforts
are under way or complete, and the State's Department of Administrative Services
has established a Year 2000 Competency Center which has been reviewing detailed
written plans, and reporting on remediation project completion percentages and
scheduled completion dates.

Overall, those involved State offices and agencies are satisfied that
material areas for which they are responsible and that may require remediation
have been and are being identified and will timely be addressed, and that the
cost of the remediation will be within moneys available and appropriated. The
State's remediation efforts have been aimed primarily at ensuring the unimpeded
and uninterrupted operation of State government, including tax collections,
investments and timely payment of State obligations. There are agencies outside
the purview of these reviews and efforts, including the State universities and
retirement systems, that are pursuing their own assessment and remediation
activities. Efforts are also being made to address "imbedded chip" situations
generally.

June 30, 1999 was identified as a general target for material compliance.
The aim was for the State to enter, prepared, the Fiscal Year and biennium that
crosses January 1, 2000. Overall, as to those reporting to the Competency
Center, the State was in 64% compliance as to critical systems and in 87%
compliance as to all statewide systems at the end of May. Obviously, the success
of remediation efforts, by the State and by pertinent outside parties, will not
be fully determined until the year 2000 and thereafter.

As of the date of this Statement of Additional Information, the State's
general obligation bonds are rated Aa1, AA+ and AA+ by Moody's, Standard &
Poor's and Fitch, respectively.

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<PAGE>
APPENDIX J

ECONOMIC AND FINANCIAL CONDITIONS IN PENNSYLVANIA

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE COMMONWEALTH OF PENNSYLVANIA AND DOES NOT PURPORT TO BE A
COMPLETE DESCRIPTION OF SUCH FACTORS. OTHER FACTORS WILL AFFECT ISSUERS. THE
SUMMARY IS BASED UPON ONE OR MORE OF THE MOST RECENT PUBLICLY AVAILABLE OFFERING
STATEMENTS RELATING TO DEBT OFFERINGS OF PENNSYLVANIA ISSUERS. THE FUND HAS NOT
INDEPENDENTLY VERIFIED THE INFORMATION.

Many factors affect the financial condition of the Commonwealth of
Pennsylvania (also referred to herein as the "Commonwealth") and its political
subdivisions, such as social, environmental and economic conditions, many of
which are not within the control of such entities. Pennsylvania and certain of
its counties, cities and school districts and public bodies (most notably the
City of Philadelphia, sometimes referred to herein as the "City") have from time
to time in the past encountered financial difficulties which have adversely
affected their respective credit standings. Such difficulties could affect
outstanding obligations of such entities, including obligations held by the
Fund.

The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and Federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.

The five-year period ending with fiscal year 1998 was a time of economic
growth with modest growth rates at the beginning of the period and faster
increases during the most recent years. Throughout the period, inflation has
remained relatively low, helping to restrain expenditure growth. Favorable
economic conditions have helped total revenues and other sources rise at an
annual average of 4.2% rate during the five-year period. The growth rate for
taxes of 4.3% almost matched the total revenue rate. Expenditures and other uses
during the fiscal 1994 through fiscal 1998 period rose at a 3.8% average rate,
led by a 10.2% average increase for protection of person and property costs.

On a generally excepted accountable principles ("GAAP") basis, revenues and
other sources from fiscal 1994 through fiscal 1998 increased by a average 5%
annually. Expenditures and other uses during this period rose at a average
annual rate of 5%.

The fund balance at June 30, 1998 (determined on a "Generally Accepted
Accounting Principals" basis) totaled $1,958.9 million, a $594 million increase
over the $1,364.9 million balance at June 30, 1997.

The unappropriated balance of Commonwealth revenues increased during the
1997 fiscal year by $432.9 million to $591.4 million (prior to reserves for
transfer to the Tax Stabilization Reserve Fund) at the close of the fiscal year.
Higher than estimated revenues and slightly lower expenditures than budgeted
caused the increase. Transfers to the Tax Stabilization Reserve Fund for fiscal
1997 operations were $188.7 million representing the normal 15% of the ending
unappropriated balance, plus an additional $100 million authorized by the
General Assembly when it enacted the fiscal 1998 budget.

Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$17,320.6 million, $576.1 million (3.4%) above the estimate made at the time the
budget was enacted. Revenue from taxes was the largest contributor to higher
than estimated receipts. Tax revenue in fiscal 1997 grew 6.1% over tax revenues
in fiscal 1996. This rate of increase is not adjusted for legislated tax
reductions that affected receipts during both of those fiscal years and
therefore understates the actual underlying rate of growth of tax revenue during
fiscal 1997. Non-tax revenues were $19.8 million (5.8%) over estimate mostly due
to higher than anticipated interest earnings.

Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to the
estimate made in February 1997 with the presentation of the Governor's fiscal
1998 budget request. Total expenditures represent an increase over fiscal 1996

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<PAGE>
expenditures of 1.7%. Lapses of appropriation authority during the fiscal year
totaled $200.6 million compared to an estimate of $100 million. The higher
amount of appropriation lapses was used to support $79.8 million in fiscal 1997
supplemental appropriations over the February 1997 estimate. Supplemental
appropriations for fiscal 1997 totaled $169.3 million.

For GAAP purposes, assets increased $563.4 million and liabilities declined
$166.3 million to produce a $729.7 million increase in the fund balance at June
30, 1997. Total revenues and other sources rose 3.5% for fiscal 1997. An
increase of 5.5% in tax revenue aided by an improving state economy was
partially offset by a $175.2 million decline in intergovernmental revenues.
Expenditures and other uses increased by 1% for this fiscal year.

Operations during the 1998 fiscal year increased the unappropriated balance
of Commonwealth revenues during that period by $86.4 million to $488.7 million
at June 30, 1998 (prior to reserves for transfer to the Tax Stabilization
Reserve Fund). Higher than estimated revenues, offset in part by increased
reserves for tax refunds, and by slightly lower expenditures than budgeted were
responsible for the increase. Transfers to the Tax Stabilization Reserve Fund
for fiscal 1998 operations total $223.3 million consisting of $73.3 million
representing the required transfer of fifteen percent of the ending
unappropriated surplus balance, plus an additional $150 million authorized by
the General Assembly when it enacted the fiscal 1999 budget. With these
transfers, the balance in the Tax Stabilization Reserve Fund exceeds $668
million and represent 3.7% of fiscal 1998 revenues.

Commonwealth revenues (prior to tax refunds) during the fiscal year totaled
$18,123.2 million, $676.1 million (3.9%) above the estimate made at the time the
budget was enacted. Tax revenue received in fiscal 1998 grew 4.8% over tax
revenues received during fiscal 1997. This rate of increase includes the effect
of legislated tax reductions that affected receipts during both fiscal years and
therefore understates the actual underlying rate of growth of tax revenue during
fiscal 1998. Receipts from the personal income tax produced the largest single
component of higher revenues during fiscal 1998.

Expenditures from all fiscal 1998 appropriations of Commonwealth revenues
totaled $17,229.8 million (excluding pooled financing expenditures and net of
current year lapses). This amount represents an increase of 4.5% over fiscal
1997 appropriation expenditures. Lapses of appropriation authority during the
fiscal year totaled $161.8 million including $58.8 million from fiscal 1998
appropriations. These appropriation lapses were used to fund $120.5 million of
supplemental fiscal 1998 appropriations.

Reserves established during fiscal 1998 for tax refunds totaled $910
million. This amount is a $370 million increase over tax refund reserves for
fiscal 1997 representing an increase of 68.5%. The fiscal 1998 amount includes a
one-time addition intended to fund all fiscal 1998 tax refund liabilities,
including that portion to be paid during fiscal 1999. In prior fiscal years, tax
refunds generally were budgeted for the year in which the disbursement was
anticipated to occur. This change in the recognition of tax refund liabilities
on a budgetary basis is expected to reduce the difference between the budgetary
basis unappropriated balance and the GAAP basis unreserved-undesignated balance
(when computed) for the 1998 fiscal year.

For GAAP purposes, assets increased $705.1 million and liabilities rose by
$111.1 million during the fiscal year. These changes contributed to a $310.3
million dollar rise in the undesignated-unreserved balance for June 30, 1998 to
$497.6 million, the highest level achieved since audited GAAP reporting was
instituted in 1994. Fiscal 1998 total revenues and other sources rose 4.3%.
Expenditures and other uses during fiscal 1998 rose by 4.5%

The budget for fiscal 1999 was enacted in April 1998 at which time the
official revenue estimate for the 1999 fiscal year was established at $18,456.6
million. The estimate was reduced by a net $2.4 million in November 1998 due to
passage of tax legislation. Only Commonwealth funds are included in the official
revenue estimate. The official revenue estimate is based on an economic forecast
for national gross domestic product, on a year-over-year basis, to slow from an
estimated annualized 3.9% rate in the fourth

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<PAGE>

quarter of 1997 to a projected 1.8% annualized growth rate by the second quarter
of 1999. The forecast of slowing economic activity is based on the expectation
that consumers will reduce their pace of spending, particularly on motor
vehicles, housing and other durable goods. Business is also expected to trim its
spending on fixed investments. Foreign demand for domestic goods is expected to
decline in reaction to economic difficulties in Asia and Latin America, while an
economic recovery in Europe is expected to proceed slowly. The underlying growth
rate, excluding any effect of scheduled or proposed tax changes, for the General
Fund fiscal 1999 official revenue estimate is 3.0% over actual fiscal 1998
revenues. When adjusted to include the estimated effect of enacted tax changes,
fiscal 1999 Commonwealth revenues are projected to increase by 1.6% over actual
Commonwealth revenues for fiscal 1998.

Tax reductions included in the enacted 1999 fiscal year budget totaled an
estimated $241.0 million for fiscal 1999. The major tax changes were enacted
with January 1, 1998 effective dates. Consequently, the first year's cost of
these changes may be above the expected annualized cost.

Reserves for tax refunds for fiscal 1999 total $631 million, a $26.2 million
increase over the budget as enacted. This amount includes $33.1 million of tax
refunds anticipated to be due to the enacted fiscal 1999 tax changes and
included in the estimated cost of those changes. Reserves for tax refunds for
fiscal 1999 are $279.0 million below the reserve established for fiscal 1998.
The fiscal 1998 amount (described above) includes a one-time addition intended
to fund all fiscal 1998 tax refund liabilities, including that portion to be
paid during fiscal 1999. Without the necessity to pay fiscal 1998 tax refund
liabilities from fiscal 1999 reserves, the fiscal 1999 reserve need only be in
an amount equal to the estimated fiscal 1999 estimate for tax refund
liabilities.

Appropriations enacted for fiscal 1999 are 4.1% ($713.2 million) above the
appropriations enacted for fiscal 1998 (including supplemental appropriations).

In May 1999, along with the adoption of the fiscal 2000 budget, supplemental
fiscal 1999 appropriations totaling $357.8 million were enacted. With these
additional amounts, total appropriations for fiscal 1999 represent a 6.2%
increase over fiscal 1998 appropriations. An anticipated $180 million of
appropriation lapses and anticipated additional revenue provide the funding for
the additional appropriations.

Reserves for tax refunds for fiscal 1999 total $631.0 million, a $26.2
million increase over the budget as enacted. Reserves for tax refunds for fiscal
1999 are $279.0 million below the reserve established for fiscal 1998.

Current revenue estimates for fiscal 1999 anticipate $722 million of
receipts above the official estimate used in the enactment of the fiscal 1999
budget. As of the fiscal year through April 1999, revenues are up $547 million
over the official estimate, principally due to receipts from sales tax and the
personal income tax. The higher revenues, if maintained during the remainder of
the fiscal year, will more than offset the planned draw down of the $265.4
million beginning unappropriated balance.

The General Fund budget for the 1999-2000 fiscal year was approved by the
General Assembly in May 1999. The adopted budget includes estimated spending of
$19,103.8 million and estimated revenues (net of estimated tax refunds and
enacted tax changes) of $18,718.5 million. Funds to cover the $342.1 million
difference between estimated revenues and projected spending will be obtained
from a draw down of the projected fiscal 1999 year-end balance. The level of
proposed spending represents an increase of 3.8% over revised spending
authorized for fiscal 1999 of $18,360.3 million. Enacted tax changes effective
for fiscal 2000 total a net reduction of $380.2 million for the General Fund.

The estimate of Commonwealth revenues for fiscal year 1999 is based on an
economic forecast for real gross domestic product to grow at a 1.4% rate from
the second quarter of 1999 to the second quarter of 2000. Growth of real gross
domestic product is expected to be restrained by a slowing of the rate of
consumer spending to a level consistent with personal income gains and by
smaller gains in business investment in response to falling capacity utilization
and profits. Slowing economic growth is expected to cause the unemployment rate
to rise through the fiscal year but inflation is expected to remain moderate.

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Trends for the Pennsylvania economy are expected to maintain their close
association with national economic trends. Personal income growth is anticipated
to remain slightly below that of the U.S. while the Pennsylvania unemployment
rate is anticipated to be very close to the national rate.

Commonwealth revenues (excluding the estimated cost of the enacted tax
reductions) are projected to increase by 3.1% over revised fiscal 1999
estimates. Appropriates from Commonwealth funds are budgeted to increase by 3.8%
over revised fiscal 1999 appropriations.

Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
the major sources of growth in Pennsylvania are in the service sector, including
trade, medical and the health services, education and financial institutions.

Nonagricultural employment in Pennsylvania over the ten year period that
ended in 1998 increased at an annual rate of 0.75%. This compares to a 0.29%
rate for the Middle Atlantic region and a 1.72% rate for the United States as a
whole during the period 1989 through 1998. For the five years ended with 1998,
employment in the Commonwealth has increased 7.0%. The growth in employment
during this period is higher than the 2.7% growth in the Middle Atlantic region.
The unemployment rate in Pennsylvania for April, 1999 stood at a seasonably
adjusted rate of 4.4%. The seasonably adjusted national unemployment rate for
April, 1999 was 4.3%. In addition, the June 25, 1999 edition of "Economic
Observations" which is published by the Pennsylvania Department of Revenue
reported that the seasonally adjusted Commonwealth unemployment rate for May,
1999 dropped to 3.8%, the lowest rate in nearly 30 years.

The current Constitutional provisions pertaining to Commonwealth debt permit
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster, (ii) electorate-approved debt, (iii)
debt for capital projects subject to an aggregate debt limit of 1.75 times the
annual average tax revenues of the preceding five fiscal years and (iv) tax
anticipation notes payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular amounts.

Debt service on all bonded indebtedness of Pennsylvania, except that issued
for highway purposes or the benefit of other special revenue funds, is payable
from Pennsylvania's General Fund, which receives all Commonwealth revenues that
are not specified by law to be deposited elsewhere. As of June 30, 1998, the
Commonwealth had $4,724.5 million of general obligation debt outstanding.

Other state-related obligations include "moral obligations." Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance Agency
(the "PHFA"), a state-created agency which provides financing for housing for
lower and moderate income families, and The Hospitals and Higher Education
Facilities Authority of Philadelphia, a municipal authority organized by the
City of Philadelphia to, among other things, acquire and prepare various sites
for use as intermediate care facilities for the mentally retarded. PHFA's bonds,
but not its notes, are partially secured by a capital reserve fund required to
be maintained by PHFA in an amount equal to the maximum annual debt service on
its outstanding bonds in any succeeding calendar year. PHFA is not permitted to
borrow additional funds as long as any deficiency exists in the capital reserve
fund.

The Commonwealth, through several of its departments and agencies, leases,
real property and equipment. Some of those leases and their respective lease
payments are, with the Commonwealth's approval, pledged as security for debt
obligations issued by certain public authorities or other entities within the
state. All lease payments payable by Commonwealth departments and agencies are
subject to and dependent upon an annual spending authorization approved through
the Commonwealth's annual budget process. The Commonwealth is not required by
law to appropriate or otherwise provide monies

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from which the lease payments are to be made. The obligations to be paid from
such lease payments are not bonded debt of the Commonwealth.

Certain Commonwealth-created organizations have statutory authorization to
issue debt for which Commonwealth appropriations to pay debt service thereon are
not required. The debt of these organizations is funded by assets of, or
revenues derived from, the various projects financed and is not a statutory or
moral obligation of the Commonwealth. Some of these agencies, however, are
indirectly dependent on Commonwealth operating appropriations. In addition, the
Commonwealth may choose to take action to financially assist these
organizations. The Commonwealth also maintains pension plans covering all state
employees, public school employees and employees of certain state-related
organizations.

The City of Philadelphia is the largest city in the Commonwealth with an
estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of Pennsylvania Intergovernmental Cooperation
Authority (the "PICA") to assist Philadelphia in remedying fiscal emergencies
was enacted by the Pennsylvania General Assembly and approved by the Governor in
June 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on June 9, 1998.

According to PICA, it has issued $2,371.7 million of its Special Tax Revenue
Bonds. This financial assistance has included the refunding of certain city
general obligation bonds, funding of capital projects and the liquidation of the
cumulative General Fund balance deficit as of June 30, 1992 of $224.9 million.
The audited General Fund balance of Philadelphia as of June 30, 1998 shows a
surplus of approximately $169.2 million.

No further bonds are to be issued by PICA for the purpose of financing a
capital project or deficit as the authority for such bond sales expired December
31, 1994. PICA's authority to issue debt for the purpose of financing a cash
flow deficit expired on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted. PICA had $1,054.3 million in Special Revenue
bonds outstanding as of April 15, 1999.

There is various litigation pending against the Commonwealth, its officers
and employees. In 1978, the Pennsylvania General Assembly approved a limited
waiver of sovereign immunity. Damages for any loss are limited to $250,000 for
each person and $1 million for each accident. The Supreme Court held that this
limitation is constitutional. Approximately 3,500 suits against the Commonwealth
remain open.

The following are among the cases with respect to which the Office of
Attorney General and the Office of General Counsel have determined that an
adverse decision may have a material effect on government operations of the
Commonwealth:

DOM GIORDANO V. TOM RIDGE, GOVERNOR, ET AL.

On February 12, 1999, Dom Giordano, filed in the Commonwealth Court a
petition for review requesting the Commonwealth Court declare that Chapter 5
(relating to sports facilities financing) of the Capital Facilities Debt
Enabling Act ("the Act") violates the Pennsylvania Constitution, and seeking an
order enjoining any action under Chapter 5 of the Act. Named as respondents are
the Commonwealth, the Governor, the Attorney General and the Cities of
Philadelphia and Pittsburgh. Mr. Giordano also filed an application for special
relief in the form of a preliminary injunction which was denied by the
Commonwealth Court. The denial of the preliminary injunction was appealed to the
Supreme Court of Pennsylvania which denied the request for an injunction pending
appeal, and directed the filing of briefs for consideration of the merits of the
appeal. The appeal remains pending before the Supreme Court. The respondents
have filed in Commonwealth Court preliminary objections in the nature of
demurrer, and have asked the Commonwealth Court to dismiss the action with
prejudice. Oral arguments on the respondents' preliminary objections were held
on May 19, 1999.

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BABY NEAL V. COMMONWEALTH, ET AL.

In 1990, the American Civil Liberties Union and other various named
plaintiffs filed an action against the Commonwealth, the City of Philadelphia
and others in federal court seeking an order that, among other things, would
require the Commonwealth to provide additional funding for child welfare
services. No figures for the amount of funding sought are available. A similar
lawsuit filed in the Commonwealth Court
of Pennsylvania was resolved through a court approved settlement which provides,
among other things, for more Commonwealth funding for such services in fiscal
year 1991 and a commitment to pay Pennsylvania counties $30 million over five
years. The Commonwealth sought dismissal of the federal action based, among
other things, on the settlement of the Commonwealth Court case. In December
1994, the Third Circuit Court of Appeals reversed the District Court's denial of
the plaintiff's motion for class certification. As a result, the District Court
has certified the class and the parties have resumed discovery. In July 1998,
the plaintiffs entered into a settlement agreement with the City of Philadelphia
and related parties and submitted the agreement to the district court for
approval. The district court has preliminarily approved the settlement.
Recently, the remaining parties, including the Commonwealth, have agreed to
settle the claims made against them. The Commonwealth has agreed to pay $100,000
to settle plaintiffs' $1.4 million claim for attorneys' fees and to take other
actions in exchange for a full and final release and dismissal of the case
against the Commonwealth parties. The settlement was approved by the District
Court on February 1, 1999.

COUNTY OF ALLEGHENY V. COMMONWEALTH OF PENNSYLVANIA

On December 7, 1987, the Supreme Court of Pennsylvania held that the
statutory scheme for county funding of the judicial system is in conflict with
the Pennsylvania Constitution. However, judgment was stayed in order to afford
the General Assembly an opportunity to enact appropriate funding legislation
consistent with its opinion. On December 7, 1992, the State Association of
County Commissioners filed an action in mandamus seeking to compel the
Commonwealth to comply with the Supreme Court's decision in COUNTY OF ALLEGHENY.
The Court in PENNSYLVANIA STATE ASSOCIATION OF COUNTY COMMISSIONERS V.
COMMONWEALTH OF PENNSYLVANIA issued the writ on July 26, 1996, and appointed a
special master to devise and submit a plan for implementation. Following the
issuance of the writ, the President Pro Tempore of the Senate and the Speaker of
the House filed a petition seeking reconsideration from the Court. The Court has
not acted on the petition. On January 28, 1997, the Supreme Court granted an
extension of time within which the special master must file his report and
announced the establishment of a committee comprised of members of the Executive
Department, the Legislative Department and the special master, to develop an
implementation plan. On July 26, 1997, the "Interim Report of the Master" was
filed setting forth a state funding proposal. Numerous objections to the report
were filed, but the Court has taken no action on them.

On April 22, 1998, the Pennsylvania General Assembly enacted legislation
appropriating approximately $12 million to the Supreme Court for the purpose of
funding county court administrators. The appropriation was designed to enable
the Commonwealth to implement Phase I of the special master's plan. However, the
legislation also provides that no funds from the appropriation may be expended
until legislation has been approved by the General Assembly providing for the
payment of Commonwealth compensation of county court administrators. Because no
such legislation has yet been enacted, the $12 million appropriated to the
Judicial Department cannot be used.

On May 11, 1998, the Administrative Governing Board of the First Judicial
District (comprising the Court of Common Pleas of Philadelphia, the Philadelphia
Municipal Court, and the Traffic Court of Philadelphia) filed an action in
mandamus in the Commonwealth Court of Pennsylvania against the City of
Philadelphia and several City officials, claiming that the City government had
failed to provide adequate funds for the operation of the courts of the First
Judicial District. The petitioners have demanded that the court order the City
of Philadelphia to disburse all funds reasonably necessary for the continued
operation

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of the courts during fiscal year 1998-99 in an amount totaling at least $110
million. The case is captioned ALEX BONAVITACOLA, ET AL. V. EDWARD G. RENDELL,
ET AL.

Also on May 11, 1998, the City of Philadelphia and related respondents in
BONAVITACOLA filed a complaint joining the Commonwealth of Pennsylvania, the
General Assembly and its elected leadership as additional respondents. In their
complaint, the City respondents assert that under the Supreme Court's order
issued July 26, 1996 in PA. STATE ASS'N OF COUNTY COMMISSIONERS V. COMMONWEALTH
OF PENNSYLVANIA, the General Assembly was obligated to enact a funding scheme
for a unified court system no later than January 1, 1998. Because the General
Assembly has not done so, the City respondents allege, the Commonwealth has
failed to comply with the Supreme Court's order. Thus, the City respondents have
requested Commonwealth Court to require the General Assembly to comply with the
Supreme Court's mandamus order and to order the Commonwealth to pay whatever
sums are necessary to fund the cost of operating the courts in fiscal 1998-99.
The First Judicial District Governing Board joined in the City respondents'
request as an alternative to its demanded relief against the City defendants.

On July 15, 1998, the Supreme Court of Pennsylvania assumed extraordinary
jurisdiction over the case and directed Commonwealth Court, on an expedited
basis, to prepare proposed findings of fact and conclusions of law. Acting
pursuant to the Supreme Court's June 15, 1998 order, President Judge James
Gardner Colins of Commonwealth Court on June 17, 1998 issued findings of fact,
conclusions of law and a proposed order. In his proposed order, President Judge
Colins recommended that the Supreme Court order the President of the
Philadelphia Council immediately to introduce legislation to fund the courts of
the First Judicial District for fiscal year 1998-99 and to take all necessary
steps to ensure its passage. President Judge Colins also recommended that the
Supreme Court order the General Assembly to pass legislation, prior to June 30,
1999, to fund the entire state judicial system. By order entered June 23, 1998,
Commonwealth Court forwarded its findings of fact and conclusions of law and
proposed order to the Supreme Court for final disposition. The Commonwealth and
the General Assembly have objected to President Judge Colins' proposed order.

Subsequent to Commonwealth Court's issuance of its findings of fact,
conclusions of law and proposed order, the City Council and Mayor of
Philadelphia acceded (at least temporarily) to President Judge Colins' proposed
mandate that the City fund the First Judicial District's courts for fiscal year
1998-99, thus obviating the First Judicial District's request for emergency
relief. However, the First Judicial District petitioners and the City of
Philadelphia respondents continue to press their demands that the General
Assembly be required to enact legislation providing for state funding of the
courts. In addition, the County of Allegheny has petitioned the Supreme Court
for leave to intervene in the BONAVITACOLA case to secure the same relief
against the Commonwealth -- an order requiring Commonwealth to fund its courts.
The BONAVITACOLA case remains pending before the Supreme Court for disposition.

On November 25, 1998, the First Judicial District Governing Board filed with
the Supreme Court a renewed motion for entry of an order providing emergency
relief. In their renewed motion, the BONAVITACOLA plaintiffs asked the court to
order the City of Philadelphia to provide funds to the First Judicial District's
courts sufficient to maintain necessary judicial operations through the end of
the fiscal year.

BANK SHARES TAX LITIGATION

On November 30, 1989, the Fidelity Bank, N.A. ("Fidelity") filed an action
in challenging the constitutional validity of a 1989 amendment increasing the
bank shares tax and related legislation. The Commonwealth Court ruled in favor
of the Commonwealth finding no constitutional deficiencies in the tax increase,
but invalidating one element of the legislation which provided a credit to new
banks (the "new bank tax credit"). Fidelity, the Commonwealth and certain
investment intervener banks appealed to the Pennsylvania Supreme Court. However,
pursuant to a Settlement Agreement dated as of April 21, 1995, the Commonwealth
agreed to enter a credit in favor of Fidelity in the amount of $4,100,000 in
settlement

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of the constitutional and non-constitutional issues. The credit represents
approximately 5% of the potential claim of Fidelity, had the constitutional
issues been resolved in its favor.

Pursuant to a separate Settlement Agreement dated as of April 21, 1995, the
Commonwealth also settled with the intervening banks with respect to issues
concerning the new bank tax credit.

Notwithstanding the foregoing settlements, other banks have filed petitions
challenging the validity of the 1989 tax increase. One of these banks, Royal
Bank of Pennsylvania, has filed a Stipulation of Facts and in effect proceeded
forward on behalf of the other banks. Their appeals raise the issues that were
advanced by Fidelity, although not brought to resolution by the Pennsylvania
Supreme Court. By decision dated January 8, 1998, a panel of the Commonwealth
Court issued an order ruling in favor of the Commonwealth, finding no
constitutional violation. Royal Bank filed exceptions which were denied by the
Commonwealth Court on July 30, 1998. Royal Bank appealed to the Pennsylvania
Supreme Court, and on May 25, 1999, the Supreme Court affirmed the order of the
Commonwealth Court.

PENNSYLVANIA ASSOCIATION OF RURAL AND SMALL SCHOOLS (PARSS) V. RIDGE

In January 1991, an association of rural and small schools and several
parties filed a lawsuit against then Governor Robert P. Casey and former
Secretary of Education, Donald M. Carroll challenging the constitutionality of
the Commonwealth system for funding local school districts. The litigation
consists of two parallel cases, one in the Commonwealth Court of Pennsylvania
and one in the United States District Court for the Middle District of
Pennsylvania. The federal court case has been indefinitely stayed pending
resolution of the state court case. On July 9, 1998, Commonwealth Court Judge
Dan Pellegrini issued an opinion and decree nisi dismissing the petitioners'
claims in its entirety, holding that Pennsylvania's system for funding public
schools is constitutional under both the education clause and the equal
protection clause of the Pennsylvania Constitution.

On July 20, 1998, the petitioners filed a motion for post-trial relief,
taking exception to many of Judge Pellegrini's findings of fact and conclusions
of law, and again asking the Commonwealth Court to declare Pennsylvania's public
school funding system to be unconstitutional. Also, the petitioners on July 21,
1998 filed an application asking the Supreme Court of Pennsylvania to assume
extraordinary, plenary jurisdiction over the case to decide one legal issue --
whether the petitioners' constitutional claims are justiciable in the courts of
the Commonwealth. The petitioners have asked the court to consider the issue in
conjunction with a separate appeal pending in another case, MARRERRO V.
COMMONWEALTH OF PENNSYLVANIA, involving the same provisions of the Constitution
and a similar issue of justiciability. On September 2, 1998, the Supreme Court
granted petitioners' application and directed the filing of briefs. The
respondents asked the Supreme Court to clarify its assumption of jurisdiction.
Specifically, the respondents have asked the Court to state expressly that it
will consider only the issue of justiciability, as requested in the petitioners'
application and not other issues presented in petitioners' motion for post-trial
relief pending in the Commonwealth Court. The Supreme Court denied the
respondents' motion and, therefore, the parties have addressed in their brief
all the issues presented in the petitioners' motion for post-trial relief. The
Supreme Court has indicated that it will not hear oral arguments in the case but
will decide the petitioners' motion based on the briefs alone.

PENNSYLVANIA HUMAN RELATIONS COMMISSION V. SCHOOL DISTRICT OF PHILADELPHIA,
ET AL. V. COMMONWEALTH OF PENNSYLVANIA, ET AL.

On November 3, 1995, the Commonwealth of Pennsylvania and the Governor of
Pennsylvania, along with the City of Philadelphia and the Mayor of Philadelphia,
were joined as addition respondents in an enforcement action commenced in
Commonwealth Court in 1973 by the Pennsylvania Human Relations Commission
against the School District of Philadelphia pursuant to the Pennsylvania Human
Relations Act. The enforcement action was pursued to remedy unintentional
conditions of segregation in the public schools of Philadelphia. The
Commonwealth and the City were joined in the "remedial phase" of the

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proceeding "to determine their liability, if any, to pay additional costs
necessary to remedy the unlawful conditions found to exist in the Philadelphia
public schools."

On February 28, 1996, the School District of Philadelphia filed a
third-party complaint against the Commonwealth of Pennsylvania asking
Commonwealth Court to require the Commonwealth to "supply such funding as is
necessary for full compliance with the November 28, 1994 and other remedial
orders of the Commonwealth Court." In addition, a group of interveners on March
4, 1996 filed a third-party complaint against the Commonwealth of Pennsylvania
and the City of Philadelphia requesting Commonwealth Court to declare that "it
is the obligation of the Commonwealth and the City to supply the additional
funds identified as necessary for the District to comply with the orders of the
Commonwealth Court," and to require the Commonwealth and the City to supply such
additional funding as is necessary for the District to comply with the orders.

On April 30, 1996, Commonwealth Court Judge Doris A. Smith overruled the
Commonwealth's and City's preliminary objections seeking dismissal of the claims
against them. The Commonwealth and the City thereafter filed answers to the
complaints, asserting numerous defenses. The Commonwealth also asserted a
cross-claim against the City of Philadelphia claiming that if any party is
liable, sole liability rests with the City; in the alternative, the Commonwealth
argued that if it is held to be liable, it has a right of indemnity of
contribution against the City.

Trial commenced on May 30, 1996. During the course of the trial, upon motion
of the Commonwealth, the Pennsylvania Supreme Court on July 3, 1996 assumed
extraordinary plenary jurisdiction and directed Judge Smith to concluded the
proceedings within 60 days and to file with the Supreme Court findings of fact,
conclusions of law and a final opinion.

On August 20, 1996, Judge Smith issued an Opinion and Order pursuant to
which judgment was entered in favor of the School District of Philadelphia and
the interveners and against the Commonwealth of Pennsylvania and the Governor of
Pennsylvania. Judgment was also entered in favor of the City of Philadelphia and
the Mayor of Philadelphia with respect to the intervener's claim and on the
cross-claim filed by the Commonwealth and Governor. The Judge ordered the
Commonwealth and Governor to submit a plan to the Court within thirty days
detailing the means by which the Commonwealth will effectuate the transfer of
additional funds payable to the School District of Philadelphia to enable it to
comply with the remedial order during fiscal year 1996-1997 and any future years
during which the School District establishes its fiscal incapacity to fund the
remedial programs. Judge Smith specifically found that "[b]ecause of the lack of
adequate funds to comply with the remedial order, the School District is
entitled to additional resources for 1996-1997 of $45.1 million."

On August 30, 1996, the Commonwealth filed exceptions to the Findings of
Fact, Conclusions of Law and Opinion and Order of Judge Smith along with a
Motion to Vacate the purported Order and a Notice of Appeal and Jurisdictional
Statement.

On September 10, 1996, the Pennsylvania Supreme Court issued an order
granting the Commonwealth's Motion to Vacate and directed its Prothonotary to
establish a briefing schedule and date for oral argument. It also issued a
further order limiting the issues to be addressed and stated that the
Commonwealth Court is divested of jurisdiction of the matter and all further
proceedings in the Commonwealth Court are stayed pending further order of the
Supreme Court. The Supreme Court retained jurisdiction in the matter. On January
28, 1997, the Supreme Court issued an Order directing the parties to brief
certain specific issues relative to the lower court proceedings. The Supreme
Court heard oral argument on February 3, 1998 and took the matter under
advisement.

RIDGE V. STATE EMPLOYEES' RETIREMENT BOARD

On December 29, 1993, Joseph H. Ridge, a former judge of the Allegheny Court
of Common Pleas, filed in the Commonwealth Court a Petition for Review in the
Nature of Complaint in Mandamus and for

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a Declaratory Judgment against the State Employees' Retirement Board alleging
that the use of gender distinct actuarial factors for benefits based upon his
pre-August 1, 1983 service violates the equal protection and equal rights
clauses of the Pennsylvania Constitution. The lawsuit requests that the
petitioner's benefits be "topped up" to equal those that a similarly situated
female would be receiving. A decision adverse to the Retirement Board could be
applicable to other members of the State Employees' Retirement System and Public
School Employees' Retirement System. The Commonwealth Court granted the
Retirement Board's preliminary objection to Judge Ridge's claims for punitive
damages, attorney's fees and compensatory damages (other than a recalculation of
his pension benefits should he prevail). On November 20, 1996, the Commonwealth
Court heard oral arguments EN BANC on Judge Ridge's motion for judgment on the
pleadings. On February 13, 1997, the Commonwealth Court denied Judge Ridge's
motion for judgment on the pleadings. The case is currently in discovery.

YESENIA MARRERRO, ET AL. V. COMMONWEALTH, ET AL.

On February 24, 1997, five residents of the City of Philadelphia, on their
own behalf, and on behalf of their school-age children, joined by the City of
Philadelphia, the School District of Philadelphia, and two non-profit
organizations, filed in the Commonwealth Court a civil action for declaratory
judgment against the Commonwealth of Pennsylvania, the General Assembly of
Pennsylvania, the presiding officers of the General Assembly, the Governor of
Pennsylvania, the State Board of Education, the Department of Education, and the
Secretary of Education, claiming that the statutory education financing system
is unconstitutional as applied to the School District of Philadelphia and the
system of funding public education violates the constitutional mandate to
provide a thorough and efficient system of education in the City of
Philadelphia. The lawsuit also alleges that the scheme for financing public
education precludes the Commonwealth from providing the constitutionally
required "thorough and efficient system of public education" in the
circumstances faced by the School District of Philadelphia, and that the
defendants have failed to provide the School District of Philadelphia with
resources and other assistance necessary to provide all of its students with the
quality of education to which they are constitutionally entitled. Among other
things, the petitioners seek a declaration that the legislature must amend the
present or enact new education legislation so as to assure that education
funding for the School District of Philadelphia accounts and makes adequate
provision for the greater and special educational challenges and needs of
students in the School District in order to address their disadvantage. The
respondents filed preliminary objections seeking dismissal of the action. On
March 2, 1998, Commonwealth Court sustained the respondents' preliminary
objections and dismissed the case on the grounds that the issues presented are
not justiciable. An appeal to the Supreme Court of Pennsylvania is pending and
briefing is complete. The Court has indicated that it will decide the case based
on the briefs and that there will be no oral argument.

POWELL V. RIDGE

On March 9, 1998, several residents of the City of Philadelphia on behalf of
themselves and their school-aged children, along with the School District of
Philadelphia, the Philadelphia Superintendent of Schools, the chairman of the
Philadelphia Board of Education, the City of Philadelphia, the Mayor of
Philadelphia, and several membership organizations interested in the
Philadelphia public schools, brought suit in the United States District Court
for the Eastern District of Pennsylvania against the Governor, the Secretary of
Education, the chairman of the State Board of Education, and the State
Treasurer. The plaintiffs claimed that the defendants are violating a regulation
of the U.S. Department of Education promulgated under Title VI of the Civil
Rights Act of 1964 in that the Commonwealth's system for funding public schools
has the effect of discriminating on the basis of race. The plaintiffs asked the
court to declare the funding system to be illegal, to enjoin the defendants from
violating the regulation in the future, to award counsel fees and costs, and to
grant such other relief as the court might find just and proper.

The Philadelphia Federation of Teachers intervened on the side of the
plaintiffs, while several leaders of the Pennsylvania General Assembly
intervened on the side of the defendants. In addition, the U.S.

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Department of Justice intervened to defend against a claim made by the
legislator intervenors that a statute waiving states' immunity under the
Eleventh Amendment to the U.S. Constitution for Title VI claims is
unconstitutional.

On November 18, 1998, the district court granted in part and denied in part
various motions by the parties. However, because the court found ultimately that
the plaintiffs had failed to state a claim under the Title VI regulation at
issue or under 42 U.S.C. Section1983, the court dismissed the action in its
entirety with prejudice. An appeal has been filed and fully briefed and the
parties are awaiting scheduling of oral arguments.

RITE AID OF PENNSYLVANIA, INC. V. HOUSTOUN

On March 24, 1997, Rite Aid of Pennsylvania, Inc. (Rite Aid) filed in the
U.S. District Court for the Eastern District of Pennsylvania a civil action
against the Secretary of Public Welfare (Secretary). In its complaint, Rite Aid
alleged that in promulgating regulations on October 1, 1995 governing payment
rates for prescription drugs and related services provided to recipients of
benefits under the Pennsylvania Medical Assistance Program (Medicaid), the
Secretary violated various provisions of Title XIX of the Social Security Act
(commonly known as the Medicaid Act) and regulations of the U.S. Department of
Health and Human Services, as well as provisions of state law and federal
constitutional due process.

On November 3, 1997, the district court granted in part and denied in part
the parties' cross-motions for judgment on the pleadings. The court granted
judgement in favor of the Secretary on Rite Aid's federal due process claim and
Rite Aid's claim that the Secretary had violated a federal regulation (42 CFR
Section447.205) requiring public notice 60 days prior to revising the
reimbursement rates. However, the court denied the Secretary's motion for
judgment on the pleadings regarding Rite Aid's procedural claim under 42 U.S.C.
Section1396(a)(30)(A). The court also granted judgment on the pleadings in favor
of Rite Aid on its claim that the Secretary violated a federal regulation (42
CFR Section447.205(c)(4)) requiring the Secretary to identify a local agency
where the proposed reimbursement changes were available for public view.

After allowing the Pennsylvania Pharmacists Association (PPA) to intervene
as a plaintiff, the district court on May 8, 1998 granted a motion filed by Rite
Aid and PPA to limit its review of the Secretary's compliance with 42 U.S.C.
Section1396(a)(30)(A) "to the information before [the Secretary] at the time
[she] made [her] decision to lower" the reimbursement rates.

On August 31, 1998, the district court granted the motions of Rite Aid and
PPA for summary judgment and denied the cross-motion of the Secretary. The court
declared that the pharmacy reimbursement rates made effective after October 1,
1995, were adopted by the Secretary in violation of section 1396(a)(30)(A) of
the Medicaid Act and enjoined the Secretary from using those rates to reimburse
for any prescription drugs and related services provided to Medicaid recipients
on and after October 1, 1998. The court held that the Secretary acted
arbitrarily and capriciously by failing to consider whether the revised rates
were consistent with the statutory standards of efficiency, economy, and quality
of care.

The Secretary timely appealed the district court's orders, and Rite Aid and
PPA filed cross-appeals. The Secretary filed motions to stay the district
court's injunction order pending appeal. However, the district court denied the
motion on September 18, 1998, and the court of appeals denied the application
for stay on October 26, 1998. However, the court of appeals did grant the
Secretary's motion for expedited appeal.

On March 22, 1999, the U.S. Court Appeals for the Third Circuit reversed the
district courts' order and remanded the case for further proceedings. The Court
of Appeals held that the Secretary had not violated the Medicaid Act in adopting
rates in 1995, but the court remanded the case to allow the plaintiffs to pursue
any claim which they might have that the rates substantially do not satisfy the
statutory standard prescribed by 42 U.S.C. Section1396(a)(30)(A). On April 5,
1999 the plaintiffs filed an application for rehearing.

J-11
<PAGE>

As of June 1, 1999, Pennsylvania general obligation bonds were rate AA by
Standard & Poor's, AA by Fitch and Aa3 by Moody's. There can be no assurance
that the economic conditions on which these ratings are based will continue or
that particular bond issues will not be adversely affected by changes in
economic or political conditions.

J-12
<PAGE>
APPENDIX K
INFORMATION CONCERNING MUNICIPAL SECURITIES
A. DESCRIPTION OF MUNICIPAL SECURITIES

Municipal Securities include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining of funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to finance various facilities
operated for private profit. Such obligations are included within the term
Municipal Securities if the interest paid thereon is exempt from Federal income
tax.

The two principal classifications of Municipal Securities are "general
obligation" bonds and "revenue" or "special obligation" bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the repayment of principal and the payment of interest. Revenue
or special obligation bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as from the user
of the facility being financed. Industrial development bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit or taxing
power of the issuer of such bonds. The repayment of the principal of and the
payment of interest on such industrial revenue bonds depends solely on the
ability of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment. The Fund's portfolio may include "moral
obligation" bonds which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its debt
service obligations from current revenues, it may draw on a reserve fund, the
restoration of which is a moral commitment but not a legal obligation of a state
or municipality.

Yields on Municipal Securities are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities in which the Fund invests to meet their obligations for the
payment of interest and the repayment of principal when due. There are
variations in the risks involved in holding Municipal Securities, both within a
particular classification and between classifications, depending on numerous
factors. Furthermore, the rights of holders of Municipal Securities and the
obligations of the issuers of such Municipal Securities may be subject to
applicable bankruptcy, insolvency and similar laws and court decisions affecting
the rights of creditors generally, and such laws, if any, which may be enacted
by Congress or state legislatures affecting specifically the rights of holders
of Municipal Securities.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on Municipal Securities. Similar proposals may be introduced in the
future. If such a proposal were enacted, the ability of the Fund to pay "exempt-
interest dividends" would be affected adversely and the Fund would re-evaluate
its investment objective and policies and consider changes in its structure. See
"Taxes".

K-1
<PAGE>
B. RATINGS OF MUNICIPAL SECURITIES

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") MUNICIPAL BOND
RATINGS

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

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

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

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

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

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

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

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

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

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

SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2 and MIG 3/VMIG3; MIG 1/VMIG1 denotes "best quality . . .
strong protection by established cash flows"; MIG 2/VMIG2 denotes "high quality"
with ample margins of protection; MIG 3/VMIG3 notes are of "favorable quality .
. . but . . . lacking the undeniable strength of the preceding grades".

K-2
<PAGE>
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. 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 related supporting institutions) have a superior
ability for repayment of short-term promissory obligations. Prime-1 repayment
ability will often be evidenced by 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 earning coverage of fixed financial
charges and high internal cash generation; and well established access to a
range of financial markets and assured sources of alternate liquidity.

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

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

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

DESCRIPTION OF STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL COMPANIES, INC.
("STANDARD & POOR'S") MUNICIPAL DEBT RATINGS

A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers or other
forms of credit enhancement on the obligation.

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

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

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

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

II. Nature of and provisions of the obligation; and

K-3
<PAGE>
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.

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

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

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

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

BB Debt rated "BB," "B," "CCC," "CC" and "C" is regarded as having significant
B speculative characteristics. "BB" indicates the least degree of speculation
CCC and "C" the highest degree of speculation. While such bonds will likely have
CC some quality and protective characteristics, these may be outweighed by
C large uncertainties or major exposures to adverse conditions.

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

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

DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard & Poor's Commercial Paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest-quality obligations to "D" for the lowest. These categories are as
follows:

<TABLE>
<C> <S>
A-1 This highest category indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1".

A-3 Issues carrying this designation have an adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.

B Issues rated "B" are regarded as having only speculative capacity for timely
payment.

C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
</TABLE>

K-4
<PAGE>
<TABLE>
<C> <S>
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period.
</TABLE>

A Commercial Paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.

DESCRIPTION OF STANDARD & POOR'S SHORT-TERM ISSUED CREDIT RATINGS

A Standard & Poor's note rating reflects the liquidity factors and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.

- -- Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.

- -- Source of payment -- the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.

Note rating symbols are as follows:

<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. An issue determined to possess a
very strong capacity to pay debt service is given a plus "+" designation.

SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.

SP-3 Speculative capacity to pay principal and interest.

c The "c" subscript is used to provide additional information to investors that the
bank may terminate its obligation to purchase tendered bonds if the long-term
credit rating of the issuer is below an investment-grade level and/or the
issuer's bonds are deemed taxable.

p The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project financed by the debt being rated
and indicates that payment of debt service requirements is largely or entirely
dependent upon the successful, timely completion of the project. This rating,
however, while addressing credit quality subsequent to the completion of the
project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.

* Continuance of the ratings is contingent upon Standard & Poor's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.

r The "r" highlights derivative, hybrid, and certain other obligations that
Standard & Poor's believes may experience high volatility or high variability in
expected returns as a result of noncredit risks. Examples of such obligations are
securities with principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
</TABLE>

K-5
<PAGE>
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") RATINGS

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

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

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

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

INTERNATIONAL CREDIT RATINGS

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

ANALYTICAL CONSIDERATIONS

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

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

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

K-6
<PAGE>
INTERNATIONAL LONG-TERM CREDIT RATINGS

INVESTMENT GRADE

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

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

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

BBB GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial commitments
is considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest investment
grade category.
</TABLE>

SPECULATIVE GRADE

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

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

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

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

INTERNATIONAL SHORT-TERM CREDIT RATINGS

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

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

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

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

K-7
<PAGE>
<TABLE>
<S> <C>
B SPECULATIVE. Minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.

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

D DEFAULT. Denotes actual or imminent payment default.
</TABLE>

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

Notes:

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

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

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

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

K-8
<PAGE>
PART C. OTHER INFORMATION

ITEM 23. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----- --------------------------------------------------------------------------
<C> <S>
1.(a) -- Declaration of Trust of the Registrant dated February 6, 1987.(a)
(b) -- Amendment to the Declaration of Trust.(a)
(c) -- Instrument establishing CMA Massachusetts Tax-Exempt Fund as a series
of the Registrant.(a)
(d) -- Change of series designation to CMA Massachusetts Municipal Money Fund
(the "Fund"), filed May 9, 1993.(a)
2. -- By-Laws of the Registrant.(a)
3. -- Portion of the Declaration of Trust, Establishment and Designation and
By-Laws of the Registrant defining the rights of holders of shares of the
Fund as a series of the Registrant.(b)
4.(a) -- Form of Management Agreement between the Registrant and Fund Asset
Management, L.P.(a)
(b) -- Supplement to the Management Agreement with Fund Asset Management,
L.P.(c)
5. -- Form of Distribution Agreement between the Registrant and Merrill
Lynch, Pierce, Fenner & Smith Incorporated.(a)
6. -- None.
7. -- Form of Custody Agreement between the Registrant and State Street Bank
and Trust Company.(a)
8.(a) -- Amended Transfer Agency, Shareholder Servicing Agency and Proxy Agency
Agreement between the Registrant and Financial Data Services, Inc.
(formerly known as Merrill Lynch Financial Data Services, Inc.)(a)
(b) -- Form of Cash Management Account Agreement.(a)
9. -- Opinion and Consent of Brown & Wood LLP, counsel to the Registrant.
10. -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11. -- None.
12. -- Certificate of Fund Asset Management, L.P.(a)
13. -- Form of Distribution and Shareholder Servicing Plan between the
Registrant and Merrill Lynch, Pierce, Fenner & Smith Incorporated.(a)
14. -- Financial Data Schedule for the fiscal year ended March 31, 1999.
15. -- None.
</TABLE>

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

(a) Filed on July 31, 1995 phase-in requirements as an exhibit to
Post-Effective Amendment No. 6 to Registrant's Registration Statement (the
"Registration Statement") on Form N-1A.

(b) Reference is made to Article II, Section 2.3 and Articles III, V, VI, VIII,
IX, X and XI of the Registrant's Declaration of Trust, filed as Exhibit
1(a) to Post-Effective Amendment No. 6 to the Registration Statement; to
the Certificate of Establishment and Designation establishing the Fund as a
series of the Registrant, filed as Exhibit 1(c) to Post-Effective Amendment
No. 6 to the Registration Statement; and to Articles I, V and VI of the
Registrant's By-Laws, filed as Exhibit 2 to Post-Effective Amendment No. 6
to the Registration Statement.

Reference is made to the Registration Statements under the Securities Act of
1933 on Form N-1A in connection with exhibits relating to the CMA Arizona
Municipal Money Fund (File No. 33-54492), CMA California Municipal Money Fund
(File No. 33-20580), CMA Connecticut Municipal Money Fund (File No. 33-38833),
CMA Michigan Municipal Money Fund (File No. 33-38834), CMA New Jersey Municipal

C-1
<PAGE>
Money Fund (File No. 33-34609), CMA New York Municipal Money Fund (File No.
33-20463), CMA North Carolina Municipal Money Fund (File No. 33-38780), CMA Ohio
Municipal Money Fund (File No. 33-38835) and CMA Pennsylvania Municipal Money
Fund (File No. 33-34608).

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

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

ITEM 25. INDEMNIFICATION.

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

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

Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act may be concerned, such payments will be
made only on the following conditions: (i) the advances must be limited to
amounts used, or to be used, for the preparation or presentation of a defense to
the action, including costs connected with the preparation of a settlement; (ii)
advances may be made only upon receipt of a written promise by, or on behalf of,
the recipient to repay that amount of the advance which exceeds the amount to
which it is ultimately determined he is entitled to receive from the Registrant
by reason of indemnification; and (iii) (a) such promise must be secured by a
surety bond, other suitable insurance or an equivalent form of security which
assures that any repayments may be obtained by the Registrant without delay or
litigation, which bond, insurance or other form of security must be provided by
the recipient of the advance, or (b) a majority of a quorum of the Registrant's
disinterested, non-party Trustees, or an independent legal counsel in a written
opinion, shall determine, based upon a review of readily available facts, that
the recipient of the advance ultimately will be found entitled to
indemnification.

In Section 8 of the Distribution Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify the distributors and each
person, if any, who controls the Distributors within the meaning of the
Securities Act of 1933 (the "1933 Act"), against certain types of civil
liabilities arising in connection with the Registration Statement or Prospectus.

C-2
<PAGE>
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to Trustees, officers and controlling persons of the Registrant and
the principal underwriter pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Trustee, officer or controlling person of the Registrant
and principal underwriter in connection with the successful defense of any
action or proceeding) is asserted by such Trustee, officer or controlling person
or the principal underwriter in connection with 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 Act and will be governed by the final adjudication of such
issue.

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE MANAGER.

Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the Manager for
the following open-end registered investment companies: 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 Puerto Rico Tax Exempt Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and 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 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 Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings
Insured Fund II, Inc., MuniHoldings Insured Fund III, 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., MuniHoldings Pennsylvania Insured Fund, MuniInsured
Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
Pennsylvania Insured Fund, MuniYield Arizona Fund, Inc., MuniYield California
Fund, Inc., MuniYield California Insured Fund, Inc., MuniYield California
Insured Fund II, Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield
Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income
Portfolio, Inc. and Worldwide DollarVest Fund, Inc.

Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of FAM, acts as
Manager 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

C-3
<PAGE>

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 Convertible
Fund, Inc., Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global 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 Lyunch
Real Estate Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income Fund, Inc.,
Merrill Lynch Variable Series Fund, 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 Muncipal Bond Fund,
Inc., Merrill Lynch Senior Floating Rate Fund, Inc., and Merrill Lynch Senior
Floating Rate Fund II, Inc. MLAM also acts as sub-adviser to Merrill Lynch World
Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio, two
investment portfolios of EQ Advisors Trust.

The address of each of these investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch Funds for
Institutions Series and Merrill Lynch Intermediate Bond Fund is One Financial
Center, 23rd Floor, Boston, Massachusetts 02111-2665. The address of the
Manager, MLAM, Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081,
Princeton, New Jersey 08543-9081. The address of Merrill Lynch, and Merrill
Lynch & Co., Inc. ("ML & Co.") is North Tower, World Financial Center, 250 Vesey
Street, New York, New York 10281-1201. The address of Financial Data Services,
Inc. ("FDS") is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.

Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
March 1, 1997 for his, her or its own account or in the capacity of director,
officer, employee, partner or trustee. In addition, Mr. Glenn is President and
Mr. Burke is Vice President and Treasurer of all or substantially all of the
investment companies listed in the first two paragraphs of this Item 26. Messrs.
Glenn and Burke also hold the same position with substantially all of the
investment companies advised by MLAM as they do with those advised by the
Manager and Messrs. Giordano, Harvey and Monagle are officers or
directors/trustees of one or more of such companies.

C-4
<PAGE>

<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------------------------- ------------------------ --------------------------------------------------
<S> <C> <C>
Terry K. Glenn.......................... Executive Vice President Executive Vice President of MLAM; Executive Vice
President and Director of Princeton Services;
President of Princeton Funds Distributor, Inc.
since 1986 and Director thereof since 1991;
Director of FDS; President of Princeton
Administrators, L.P.
Donald C. Burke......................... Senior Vice President Senior Vice President, Treasurer and Director of
and Treasurer Taxation of MLAM; Senior Vice President and
Treasurer of 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 MLAM; Senior Vice
President of Princeton Services; Treasurer and
Director of PFD; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM from 1996 to
1997
Mark A. Desario......................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Linda L. Federici....................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Vincent R. Giordano..................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel.................. Senior Vice President, Senior Vice President, General Counsel and
General Counsel and Secretary of MLAM; Senior Vice President of
Secretary Princeton Services
Philip L. Kirstein...................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President, Director and Secretary of Princeton
Services
Ronald M. Kloss......................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Debra W. Landsman-Yaros................. Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Senior Vice
President of PFD
Joseph T. Monagle, Jr................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
Brian A. Murdock........................ Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services; Director of PFD
Gregory D. Upah......................... Senior Vice President Senior Vice President of MLAM; Senior Vice
President of Princeton Services
</TABLE>

ITEM 27. PRINCIPAL UNDERWRITERS.

(a) Merrill Lynch acts as the principal underwriter for the Registrant.
Merrill Lynch also acts as the principal underwriter for each of the following
open-end investment companies referred to in the first paragraph of Item 26: CBA
Money Fund; CMA Money Fund; CMA Treasury Fund; CMA Tax-Exempt Fund; nine other
series of CMA Multi-State Municipal Series Trust; CMA Government Securities
Fund; The Corporate Fund Accumulation Program, Inc. and The Municipal Fund
Accumulation Program, Inc. and also acts as the principal underwriter for each
of the closed-end investment companies referred to in

C-5
<PAGE>
the first paragraph of Item 26, and as the depositor of the following unit
investment trusts: The Corporate Income Fund, Municipal Investment Trust Fund,
The ML Trust for Government Guaranteed Securities and The Government Securities
Income Fund.

(b)(1) Set forth below is information concerning each director and executive
officer of Merrill Lynch. The principal business address of each such person is
North Tower, World Financial Center, 250 Vesey Street, New York, New York 10281.

<TABLE>
<CAPTION>
POSITION(S) AND
POSITION(S) AND OFFICE(S) OFFICE(S)
NAME WITH MERRILL LYNCH WITH REGISTRANT
- ---------------------------- ----------------------------------------------------------- ----------------------
<S> <C> <C>
Herbert M. Allison, Jr...... Director, President and Chief Executive Officer None
John L. Steffens............ Vice Chairman and Director None
Thomas W. Davis............. Executive Vice President None
Barry S. Friedberg.......... Executive Vice President None
Edward L. Goldberg.......... Executive Vice President None
Jerome P. Kenney............ Executive Vice President None
E. Stanley O'Neal........... Executive Vice President None
Thomas H. Patrick........... Executive Vice President None
Winthrop H. Smith, Jr....... Executive Vice President None
Roger M. Vasey.............. Executive Vice President None
George A. Schieren.......... General Counsel, Senior Vice President and Director None
John C. Stomber............. Treasurer None
Andrea L. Dulberg........... 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 will be maintained at the offices
of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey 08536, and its
transfer agent, FDS, 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.

ITEM 29. MANAGEMENT SERVICES.

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

(a) Not applicable.

C-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Township of Plainsboro and
State of New Jersey, on the 27th day of July, 1999.

CMA MULTI-STATE MUNICIPAL SERIES TRUST
(Registrant)

By: /s/ TERRY K. GLENN
-----------------------------------------
(Terry K. Glenn, President)

Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed below by the following persons in the capacity and on the date
indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ TERRY K. GLENN President (Principal
- ------------------------------ Executive Officer) and July 27, 1999
(Terry K. Glenn) Trustee

DONALD C. BURKE* Treasurer (Principal
- ------------------------------ Financial and Accounting
(Donald C. Burke) Officer)

RONALD W. FORBES*
- ------------------------------ Trustee
(Ronald W. Forbes)

CYNTHIA A. MONTGOMERY*
- ------------------------------ Trustee
(Cynthia A. Montgomery)

CHARLES C. REILLY*
- ------------------------------ Trustee
(Charles C. Reilly)

KEVIN A. RYAN*
- ------------------------------ Trustee
(Kevin A. Ryan)

RICHARD R. WEST*
- ------------------------------ Trustee
(Richard R. West)

ARTHUR ZEIKEL*
- ------------------------------ Trustee
(Arthur Zeikel)
</TABLE>

<TABLE>
<S> <C> <C> <C>
*By: /s/ TERRY K. GLENN
-------------------------
(Terry K. Glenn, July 27, 1999
Attorney-in-Fact)
</TABLE>

C-7
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
9 Opinion and Consent of Brown & Wood LLP, counsel to the Registrant.
10 Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
</TABLE>

<PAGE>
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TELEPHONE: (212) 839-5300 FACSIMILE: (212) 839-5599

July 27, 1999

CMA Multi-State Municipal Series Trust
800 Scudders Mill Road
Plainsboro, NJ 08536

Ladies and Gentlemen:

We have acted as counsel for CMA Multi-State Municipal Series Trust, a
business Trust organized under the laws of the Commonwealth of Massachusetts
(the "Trust"), in connection with the registration of an indefinite number of
shares of beneficial interest, par value $0.10 per share, of the Trust (the
"Shares") under the Securities Act of 1933, as amended, pursuant to the
following registration statements on Form N-1A of the Trust: CMA Arizona
Municipal Money Fund (File No. 33-54492), CMA California Municipal Money Fund
(File No. 33-20580), CMA Connecticut Municipal Money Fund (File No. 33-38833),
CMA Massachusetts Municipal Money Fund (File No. 33-34610), CMA Michigan
Municipal Money Fund (File No. 33-38834), CMA New Jersey Municipal Money Fund
(File No. 33-34609), CMA New York Municipal Money Fund (File No. 33-20463), CMA
North Carolina Municipal Money Fund (File No. 33-38780), CMA Ohio Municipal
Money Fund (File No. 33-38835) and CMA Pennsylvania Municipal Money Fund (File
No. 33-34608). Such registration statements are collectively referred to as (the
"Registration Statement").

As counsel for the Trust, we are familiar with the proceedings taken by it
in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Declaration of Trust of the
Trust, the By-Laws of the Trust and such other documents as we have deemed
relevant to the matters referred to in this opinion.

In rendering this opinion, we have relied as to matters of Massachusetts law
upon an opinion of Bingham Dana LLP rendered to the Trust.

Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued, fully
paid and non-assessable shares of beneficial interest, except that Shareholders
of the Trust may under certain circumstances be held personally liable for the
Trust's obligations.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the prospectus and
statement of additional information constituting parts thereof.

Very truly yours,

/s/ Brown & Wood LLP

<PAGE>
EXHIBIT 10

INDEPENDENT AUDITORS' CONSENT

CMA Massachusetts Municipal Money Fund of
CMA Multi-State Municipal Series Trust:

We consent to the incorporation by reference in this Post-Effective Amendment
No. 11 to Registration Statement No. 33-34610 of our report dated May 5, 1999
appearing in the annual report to shareholders of CMA Massachusetts Municipal
Money Fund of CMA Multi-State Municipal Series Trust for the year ended March
31, 1999, 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
July 23, 1999

<PAGE>
BROWN & WOOD LLP

ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048

TELEPHONE: (212) 839-5300
FACSIMILE: (212) 839-5599

July 27, 1999

VIA ELECTRONIC FILING
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549

Attention: Division of Investment Management

Re: CMA Massachusetts Municipal Money Fund
of CMA Multi-State Municipal Series Trust
Post-Effective Amendment No. 11 to
Registration Statement on Form N-1A
(File Nos. 33-34610 and 811-5011)
----------------------------------------

Ladies and Gentlemen:

We have assisted CMA Massachusetts Municipal Money Fund of CMA
Multi-State Municipal Series Trust in the preparation of the above-captioned
Post-Effective Amendment. Pursuant to Rule 485(b)(4) under the Securities Act
of 1933, we hereby represent to the Securities and Exchange Commission that,
to our knowledge, such Post-Effective Amendment does not contain disclosure
which would render it ineligible to become effective pursuant to paragraph (b)
of Rule 485.

Very truly yours,

/s/ Brown & Wood LLP