MERRILL LYNCH FL MUN BOND FD OF MERRILL LYNCH MUL ST MUN SER, 497, 1998-11-12

MERRILL LYNCH FL MUN BOND FD OF MERRILL LYNCH MUL ST MUN SER
497, 1998-11-12

Previous: EXCEL TECHNOLOGY INC, 10-Q, 1998-11-12

Next: DEAN WITTER SPECTRUM SELECT LP, 10-Q, 1998-11-12

PROSPECTUS

NOVEMBER 6, 1998

Merrill Lynch Florida Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800
----------------
Merrill Lynch Florida Municipal Bond Fund (the "Fund") is a mutual fund
that seeks to provide shareholders with as high a level of income exempt from
Federal income taxes as is consistent with prudent investment management. The
Fund also seeks to offer shareholders the opportunity to own securities exempt
from Florida intangible personal property taxes. The Fund invests primarily in a
portfolio of long-term, investment grade obligations issued by or on behalf of
the State of Florida, its political subdivisions, agencies and instrumentalities
and obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the U.S. Virgin Islands and Guam, which pay interest exempt, in the
opinion of bond counsel to the issuer, from Federal income taxes and which
enables shares of the Fund to be exempt from Florida intangible personal
property taxes ("Florida Municipal Bonds"). Dividends paid by the Fund are
exempt from Federal income taxes to the extent they are paid from interest on
Florida Municipal Bonds. The Fund may invest in certain tax-exempt securities
classified as "private activity bonds" that may subject certain investors in the
Fund to an alternative minimum tax. At times, the Fund may seek to hedge its
portfolio through the use of futures transactions and options. There can be no
assurance that the investment objective of the Fund will be realized. FOR MORE
INFORMATION ON THE FUND'S INVESTMENT OBJECTIVE AND POLICIES, PLEASE SEE
"INVESTMENT OBJECTIVE AND POLICIES" ON PAGE 11.
----------------
Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances. See
"Merrill Lynch Select Pricing(SM) System" on page 4.

Shares may be purchased directly from Merrill Lynch Funds Distributor (the
"Distributor"), a division of Princeton Funds Distributor, Inc. ("PFD"), P.O.
Box 9081, Princeton, New Jersey 08543-9081 [(609) 282-2800], or from securities
dealers which have entered into selected dealer agreements with the
Distributor, including Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). The minimum initial purchase is $1,000 and the minimum
subsequent purchase is $50 except that for participants in certain fee-based
programs the minimum initial purchase is $250 and the minimum subsequent
purchase is $50. Merrill Lynch may charge its customers a processing fee
(presently $5.35) for confirming purchases and repurchases. Purchases and
redemptions made directly through Financial Data Services, Inc. (the "Transfer
Agent") are not subject to the processing fee. See "Purchase of Shares" and
"Redemption of Shares."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated November 6, 1998 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing Merrill
Lynch Multi-State Municipal Series Trust (the "Trust") at the above telephone
number or address. The Commission maintains a Web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference and other information regarding the Fund. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus. The Fund
is a separate series of the Trust, an open-end management investment company
organized as a Massachusetts business trust.
----------------
Fund Asset Management -- Manager
Merrill Lynch Funds Distributor -- Distributor
<PAGE>

FEE TABLE

A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to shares of the Fund follows:
<TABLE>
<CAPTION>
CLASS A(A)
---------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ............................. 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments ............. None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ......... None(d)

Exchange Fee ............................................... None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE
NET ASSETS):
Investment Advisory Fees(g) ................................ 0.55%
12b-1 Fees(h):
Account Maintenance Fees .................................. None
Distribution Fees ......................................... None

Other Expenses:
Shareholder Servicing Costs(i) ............................. 0.03%
Other ...................................................... 0.11%
----------
Total Other Expenses ...................................... 0.14%
----------
Total Fund Operating Expenses ............................... 0.69%
==========

<CAPTION>
CLASS B(B) CLASS C CLASS D
-------------------------------- --------------- ---------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) ............................. None None 4.00%(c)
Sales Charge Imposed on Dividend Reinvestments ............. None None None
Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ......... 4.0% during the first year, 1.0% for None(d)
decreasing 1.0% annually one year(f)
thereafter to 0.0% after the
fourth year(e)
Exchange Fee ............................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE
NET ASSETS):
Investment Advisory Fees(g) ................................ 0.55% 0.55% 0.55%
12b-1 Fees(h):
Account Maintenance Fees .................................. 0.25% 0.25% 0.10%
Distribution Fees ......................................... 0.25% 0.35% None
(CLASS B SHARES CONVERT TO
CLASS D SHARES AUTOMATICALLY
AFTER APPROXIMATELY TEN YEARS
AND CEASE BEING SUBJECT TO
DISTRIBUTION FEES AND ARE
SUBJECT TO LOWER ACCOUNT
MAINTENANCE FEES)
Other Expenses:
Shareholder Servicing Costs(i) ............................. 0.04% 0.04% 0.03%
Other ...................................................... 0.11% 0.11% 0.11%
---- ---- -----
Total Other Expenses ...................................... 0.15% 0.15% 0.14%
---- ---- -----
Total Fund Operating Expenses ............................... 1.20% 1.30% 0.79%
==== ==== =====
</TABLE>

- --------
(a) Class A shares are sold to a limited group of investors including existing
Class A shareholders and participants in certain fee-based programs. See
"Purchase of Shares -- Initial Sales Charge Alternatives -- Class A and
Class D Shares" -- page 24 and "Shareholder Services -- Fee-Based
Programs" -- page 36.
(b) Class B shares convert to Class D shares automatically approximately ten
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" -- page 26.
(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares in connection with certain fee-based programs. Class A or Class D
purchases of $1,000,000 or more may not be subject to an initial sales
charge. See "Purchases of Shares -- Initial Sales Charge Alternatives --
Class A and Class D Shares" -- page 24.
(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more that
are not subject to an initial sales charge may instead be subject to a CDSC
of 1.0% of amounts redeemed within the first year after purchase. Such CDSC
may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 36.
(e) The CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 36.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs" -- page 36.
(g) See "Management of the Trust -- Management and Advisory Arrangements" --page
21.
(h) See "Purchase of Shares -- Distribution Plans" -- page 29.
(i) See "Management of the Trust -- Transfer Agency Services" -- page 22.

2
<PAGE>

EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including the maximum $40 initial sales charge (Class A and Class D shares
only) and assuming (1) the Total Fund Operating Expenses for each class set
forth on page 2, (2) a 5% annual return throughout the periods and (3)
redemption at the end of the period (including any applicable CDSC for Class B
and Class C shares):
Class A ........................................................................ $ 47 $ 61 $ 77 $122
Class B ........................................................................ $ 52 $ 58 $ 66 $145
Class C ........................................................................ $ 23 $ 41 $ 71 $157
Class D ........................................................................ $ 48 $ 64 $ 82 $134
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A ........................................................................ $ 47 $ 61 $ 77 $122
Class B ........................................................................ $ 12 $ 38 $ 66 $145
Class C ........................................................................ $ 13 $ 41 $ 71 $157
Class D ........................................................................ $ 48 $ 64 $ 82 $134
</TABLE>

The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charge permitted under the Conduct
Rules of the National Association of Securities Dealers, Inc. ("NASD"). Merrill
Lynch may charge its customers a processing fee (presently $5.35) for confirming
purchases and repurchases. Purchases and redemptions made directly through the
Transfer Agent are not subject to the processing fee. See "Purchase of Shares"
and "Redemption of Shares."

3
<PAGE>

MERRILL LYNCH SELECT PRICING(SM) SYSTEM

The Fund offers four classes of shares under the Merrill Lynch Select
Pricing(SM) System. The shares of each class may be purchased at a price equal
to the next determined net asset value per share subject to the sales charges
and ongoing fee arrangements described below. Shares of Class A and Class D are
sold to investors choosing the initial sales charge alternatives and shares of
Class B and Class C are sold to investors choosing the deferred sales charge
alternatives. The Merrill Lynch Select Pricing(SM) System is used by more than
50 registered investment companies advised by Merrill Lynch Asset Management,
L.P. ("MLAM") or Fund Asset Management, L.P. ("FAM" or the "Manager"), an
affiliate of MLAM. Funds advised by MLAM or FAM that use the Merrill Lynch
Select Pricing(SM) System are referred to herein as "MLAM-advised mutual funds."

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

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

The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System,
followed by a more detailed description of each class and a discussion of the
factors that investors should consider in determining the method of purchasing
shares under the Merrill Lynch Select Pricing(SM) System that the investor
believes is most beneficial under his particular circumstances. More detailed
information as to each class of shares is set forth under "Purchase of Shares."

4
<PAGE>
<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial No No No
sales charge(2)(3)
B CDSC for a period of four 0.25% 0.25% B shares convert to
years, at a rate of 4.0% during D shares automatically
the first year, decreasing 1.0% after approximately
annually to 0.0%(4) ten years(5)
C 1.0% CDSC for one year(6) 0.25% 0.35% No
D Maximum 4.00% initial 0.10% No No
sales charge(3)
</TABLE>
- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial
Sales Charge Alternatives -- Class A and Class D Shares -- Eligible Class
A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares in connection with certain fee-based programs. Class A and Class D
share purchases of $1,000,000 or more may not be subject to an initial sales
charge but instead may be subject to a CDSC if redeemed within one year.
Such CDSC may be waived in connection with certain fee-based programs. See
"Class A" and "Class D" below.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain
fee-based programs may differ. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C shares -- Conversion of Class B
shares to Class D shares." Also, Class B shares of certain other
MLAM-advised mutual funds into which exchanges may be made have an eight
year conversion period. If Class B shares of the Fund are exchanged for
Class B shares of another MLAM-advised mutual fund, the conversion period
applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.

CLASS A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares.
Investors that currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Other eligible investors include
participants in certain fee-based programs. In addition, Class A shares
will be offered at net asset value to Merrill Lynch & Co., Inc. ("ML &
Co."), its subsidiaries (the term "subsidiaries," when used herein with
respect to ML & Co., includes MLAM, the Manager and certain other
entities directly or indirectly wholly owned and controlled by ML &
Co.) and their directors and employees, and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge of 4.00% is
reduced for purchases of $25,000 and over and waived for purchases of
Class A shares by participants in connection with certain fee-based
programs. Purchases of $1,000,000 or more may not be subject to an
initial sales charge but if the initial sales charge is waived, such
purchases may be subject to a 1.0% CDSC if the shares are redeemed
within one year after purchase. Such CDSC may be waived in connection
with certain fee-based programs. Sales charges also are reduced under a
right of accumulation that takes into account the investor's holdings
of all classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives --Class A and Class D
Shares."

5
<PAGE>

CLASS B: Class B shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.25% of the Fund's average net assets
attributable to Class B shares, and a CDSC if they are redeemed within
four years of purchase. Such CDSC may be modified in connection with
certain fee-based programs. Approximately ten years after issuance,
Class B shares will convert automatically into Class D shares of the
Fund, which are subject to a lower account maintenance fee of 0.10% and
no distribution fee; Class B shares of certain other MLAM-advised
mutual funds into which exchanges may be converted into Class D shares
automatically after approximately eight years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, as will the Class D account maintenance fee
of the acquired fund upon the conversion, and the holding period for
the shares exchanged will be tacked onto the holding period for the
shares acquired. Automatic conversion of Class B shares into Class D
shares will occur at least once a month on the basis of the relative
net asset values of the shares of the two classes on the conversion
date, without the imposition of any sales load, fee or other charge.
Conversion of Class B shares to Class D shares will not be deemed a
purchase or sale of the shares for Federal income tax purposes. Shares
purchased through reinvestment of dividends on Class B shares also will
convert automatically to Class D shares. The conversion period for
dividend reinvestment shares is modified as described under "Purchase
of Shares --Deferred Sales Charge Alternatives -- Class B and Class C
Shares --Conversion of Class B Shares to Class D Shares."

CLASS C: Class C shares do not incur a sales charge when they are purchased, but
they are subject to an ongoing account maintenance fee of 0.25% and an
ongoing distribution fee of 0.35% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
CDSC of 1.0% if they are redeemed within one year after purchase. Such
CDSC may be waived in connection with certain fee-based programs.
Although Class C shares are subject to a CDSC for only one year (as
compared to four years for Class B shares), Class C shares have no
conversion feature and, accordingly, an investor who purchases Class C
shares will be subject to account maintenance fees and higher
distribution fees that will be imposed on Class C shares for an
indefinite period subject to annual approval by the Trust's Board of
Trustees and regulatory limitations.

CLASS D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.10% of
average net assets attributable to Class D shares. Class D shares are
not subject to an ongoing distribution fee or any CDSC when they are
redeemed. The maximum initial sales charge of 4.00% is reduced for
purchases of $25,000 and over. Purchases of $1,000,000 or more may not
be subject to an initial sales charge, but if the initial sales charge
is waived, such purchases may be subject to a CDSC of 1.0% if the
shares are redeemed within one year after purchase. Such CDSC may be
waived in connection with certain fee-based programs. The schedule of
initial sales charges and reductions for the Class D shares is the same
as the schedule for Class A shares; except that there is no waiver for
purchases of Class D shares in connection with certain fee-based
programs. Class D shares also will be issued upon conversion of Class B
shares as described above under "Class B." See "Purchase of Shares --
Initial Sales Charge Alternatives -- Class A and Class D Shares."

The following is a discussion of the factors that investors should consider
in determining the method of purchasing shares under the Merrill Lynch Select
Pricing(SM) System that the investor believes is most beneficial under his or
her particular circumstances.

6
<PAGE>

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

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

Certain investors may elect to purchase Class B shares if they determine it
to be most advantageous to have all their funds invested initially and intend to
hold their shares for an extended period of time. Investors in Class B shares
should take into account whether they intend to redeem their shares within the
CDSC period and, if not, whether they intend to remain invested until the end of
the conversion period and thereby take advantage of the reduction in ongoing
fees resulting from the conversion into Class D shares. Other investors,
however, may elect to purchase Class C shares if they determine that it is
advantageous to have all their assets invested initially and they are uncertain
as to the length of time they intend to hold their assets in MLAM-advised mutual
funds. Although Class C shareholders are subject to a shorter CDSC period at a
lower rate, they are subject to higher distribution fees and forgo the Class B
conversion feature, making their investment subject to account maintenance and
distribution fees for an indefinite period of time. In addition, while both
Class B and Class C distribution fees are subject to the limitations on
asset-based sales charges imposed by the NASD, the Class B distribution fees are
further limited under a voluntary waiver of asset-based sales charges. See
"Purchase of Shares --Limitations on the Payment of Deferred Sales Charges."

7
<PAGE>

FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in connection
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year ended
July 31, 1998 and the independent auditors' report thereon are incorporated by
reference into the Statement of Additional Information to the Fund's 1998 annual
report. The following per share data and ratios have been derived from
information provided in the Fund's audited financial statements. Further
information about the performance of the Fund is contained in the Fund's most
recent annual report to shareholders which may be obtained, without charge, by
calling or by writing the Trust at the telephone number or address on the front
cover of this Prospectus.

<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
FOR THE YEAR ENDED JULY 31,
-----------------------------------------------
1998 1997 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............. $ 10.37 $ 9.94 $ 9.86 $ 9.88
------- ------- ------- -------
Investment income -- net ........................ .53 .53 .53 .53
Realized and unrealized gain (loss)
on investments -- net .......................... .04 .43 .08 (.02)
------- ------- ------- --------
Total from investment operations ................. .57 .96 .61 .51
------- ------- ------- --------
Less dividends and distributions:
Investment income -- net ........................ (.53) (.53) (.53) (.53)
Realized gain on investments -- net ............. -- -- -- --
In excess of realized gain on
investments -- net ............................. -- -- -- --
-------- ------- -------- --------
Total dividends and distributions ................ (.53) (.53) (.53) (.53)
-------- ------- -------- --------
Net asset value, end of period ................... $ 10.41 $10.37 $ 9.94 $ 9.86
======== ======= ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ............... 5.61% 9.99% 6.30% 5.47%
======== ======= ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ................... .69% .69% .68% .70%
======== ======= ======== ========
Expenses ......................................... .69% .69% .68% .70%
======== ======= ======== ========
Investment income -- net ......................... 5.06% 5.31% 5.30% 5.54%
======== ======= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ......... $44,173 $47,598 $46,765 $ 51,805
======== ======= ======== ========
Portfolio turnover ............................... 101.75% 84.69% 162.83% 178.62%
======== ======= ======== ========

<CAPTION>
CLASS A
---------------------------------------------------

FOR THE PERIOD
FOR THE YEAR ENDED JULY 31, MAY 31, 1991+
----------------------------------- TO JULY 31,
1994 1993 1992 1991
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............. $ 10.78 $ 10.66 $ 9.99 $ 10.00
------- ------- ------- --------
Investment income -- net ........................ .55 .59 .66 .10
Realized and unrealized gain (loss)
on investments -- net .......................... (.48) .22 .68 (.01)
-------- ------- ------- ---------
Total from investment operations ................. .07 .81 1.34 .09
-------- ------- ------- ---------
Less dividends and distributions:
Investment income -- net ........................ (.55) (.59) (.66) (.10)
Realized gain on investments -- net ............. -- (.10) (.01) --
In excess of realized gain on
investments -- net ............................. (.42) -- -- --
-------- -------- -------- ---------
Total dividends and distributions ................ (.97) (.69) (.67) (.10)
-------- -------- -------- ---------
Net asset value, end of period ................... $ 9.88 $ 10.78 $ 10.66 $ 9.99
======== ======== ======== =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ............... .39% 7.98% 13.91% 1.07%#
======== ======== ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ................... .68% .66% .43% .28%*
======== ======== ======== =========
Expenses ......................................... .68% .69% .76% .83%*
======== ======== ======== =========
Investment income -- net ......................... 5.23% 5.58% 6.39% 6.69%*
======== ======== ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ......... $69,409 $ 70,610 $ 49,806 $ 27,961
======== ======== ======== =========
Portfolio turnover ............................... 205.94% 142.59% 102.36% 16.96%
======== ======== ======== =========
</TABLE>

- --------
+ Commencement of Operations.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.

8
<PAGE>

<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------
FOR THE YEAR ENDED JULY 31,
---------------------------------------------------
1998 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ...... $ 10.37 $ 9.94 $ 9.86 $ 9.88
------- ------- ------- -------
Investment income -- net ................. .47 .48 .48 .49
Realized and unrealized gain (loss)
on investments -- net ................... .04 .43 .08 (.02)
------- ------- ------- --------
Total from investment operations .......... .51 .91 .56 . 47
------- ------- ------- --------
Less dividends and distributions:
Investment income -- net ................. (.47) (.48) (.48) (.49)
Realized gain on investments -- net ...... -- -- -- --
In excess of realized gain on
investments -- net ...................... -- -- -- --
-------- -------- -------- --------
Total dividends and distributions ......... (.47) (.48) (.48) (.49)
-------- -------- -------- --------
Net asset value, end of period ............ $ 10.41 $ 10.37 $ 9.94 $ 9.86
======== ======== ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........ 5.07% 9.43% 5.76% 4.93%
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ............ 1.20% 1.20% 1.18% 1.21%
======== ======== ======== ========
Expenses .................................. 1.20% 1.20% 1.18% 1.21%
======== ======== ======== ========
Investment income -- net .................. 4.55% 4.80% 4.79% 5.03%
======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ........................... $143,496 $160,562 $195,097 $205,362
======== ======== ======== ========
Portfolio turnover ........................ 101.75% 84.69% 162.83% 178.62%
======== ======== ======== ========

<CAPTION>
CLASS B
-------------------------------------------------------

FOR THE PERIOD
FOR THE YEAR ENDED JULY 31, MAY 31, 1991+
--------------------------------------- TO JULY 31,
1994 1993 1992 1991
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ...... $ 10.78 $ 10.66 $ 9.99 $ 10.00
------- ------- ------- --------
Investment income -- net ................. .49 .54 .61 .09
Realized and unrealized gain (loss)
on investments -- net ................... (.48) .22 .68 (.01)
------- ------- ------- ---------
Total from investment operations .......... .01 .76 1.29 . 08
------- ------- ------- ---------
Less dividends and distributions:
Investment income -- net ................. (.49) (.54) (.61) (.09)
Realized gain on investments -- net ...... -- (.10) (.01) --
In excess of realized gain on
investments -- net ...................... (.42) -- -- --
------- -------- -------- ---------
Total dividends and distributions ......... (.91) (.64) (.62) (.09)
------- -------- -------- ---------
Net asset value, end of period ............ $ 9.88 $ 10.78 $ 10.66 $ 9.99
======= ======== ======== =========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ........ (.11%) 7.44% 13.33% .99%#
======= ======== ======== =========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement ............ 1.18% 1.16% .94% .79%*
======= ======== ======== =========
Expenses .................................. 1.18% 1.20% 1.26% 1.34%*
======= ======== ======== =========
Investment income -- net .................. 4.73% 5.07% 5.87% 6.19%*
======= ======== ======== =========
SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) ........................... $224,915 $213,840 $147,743 $ 71,831
======== ======== ======== =========
Portfolio turnover ........................ 205.94% 142.59% 102.36% 16.96%
======== ======== ======== =========
</TABLE>
- --------
+ Commencement of Operations.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.

9
<PAGE>

<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------
FOR THE YEAR
ENDED JULY 31, FOR THE PERIOD
---------------------------------- OCTOBER 21,
1994+
TO JULY 31,
1998 1997 1996 1995
----------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............. $ 10.35 $ 9.92 $ 9.85 $ 9.48
-------- ------- -------- --------
Investment income -- net ........................ .46 .47 .47 .37
Realized and unrealized gain on
investments -- net ............................. .04 .43 .07 .37
-------- ------- -------- --------
Total from investment operations ................. .50 .90 .54 .74
-------- ------- -------- --------
Less dividends from investment
income -- net ................................... (.46) (.47) (.47) (.37)
--------- ------- --------- --------
Net asset value, end of period ................... $ 10.39 $ 10.35 $ 9.92 $ 9.85
========= ======= ========= ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ............... 4.97% 9.33% 5.54% 7.92%#
========= ======= ========= ========
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... 1.30% 1.30% 1.28% 1.33%*
========= ======= ========= ========
Investment income -- net ......................... 4.44% 4.70% 4.70% 4.84%*
========= ======= ========= ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ......... $ 8,900 $ 5,976 $ 5,738 $ 1,954
========= ======= ========= ========
Portfolio turnover ............................... 101.75% 84.69% 162.83% 178.62%
========= ======= ========= ========

<CAPTION>
CLASS D
---------------------------------------------------
FOR THE PERIOD
FOR THE YEAR OCTOBER 21,
ENDED JULY 31, 1994+
----------------------------------- TO JULY 31,
1998 1997 1996 1995
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............. $ 10.35 $ 9.92 $ 9.85 $ 9.48
------- ------- ------- --------
Investment income -- net ........................ .52 .52 .52 .40
Realized and unrealized gain on
investments -- net ............................. .04 .43 .07 .37
------- ------- ------- --------
Total from investment operations ................. .56 .95 .59 .77
------- ------- ------- --------
Less dividends from investment
income -- net ................................... (.52) (.52) (.52) (.40)
-------- ------- -------- --------
Net asset value, end of period ................... $ 10.39 $10.35 $ 9.92 $ 9.85
======== ======= ======== ========
TOTAL INVESTMENT RETURN:**
Based on net asset value per share ............... 5.51% 9.89% 6.09% 8.34%#
======== ======= ======== ========
RATIOS TO AVERAGE NET ASSETS:
Expenses ......................................... .79% .79% .78% .81%*
======== ======= ======== ========
Investment income -- net ......................... 4.95% 5.21% 5.20% 5.39%*
======== ======= ======== ========
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) ......... $24,268 $19,511 $ 15,231 $ 9,179
======== ======= ======== ========
Portfolio turnover ............................... 101.75% 84.69% 162.83% 178.62%
======== ======= ======== ========
</TABLE>

- --------
+ Commencement of Operations.
* Annualized.
** Total investment returns exclude the effects of sales loads.
# Aggregate total investment return.

10
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes as is consistent with
prudent investment management. The Fund also intends to provide shareholders
with the opportunity to own shares, the value of which is exempt from Florida
intangible personal property taxes. The Fund seeks to achieve its objective
while providing investors with the opportunity to invest in a portfolio of
long-term obligations issued by or on behalf of the State of Florida, its
political subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the U.S. Virgin
Islands and Guam, which pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income taxes and which enables shares of the Fund to be
exempt from Florida intangible personal property taxes. Obligations exempt from
Federal income taxes are referred to herein as "Municipal Bonds" and obligations
exempt from both Federal income taxes and Florida intangible personal property
taxes are referred to as "Florida Municipal Bonds." See "Distributions and Taxes
- -- Taxes." Unless otherwise indicated, references to Municipal Bonds shall be
deemed to include Florida Municipal Bonds. The Fund at all times, except during
temporary defensive periods, will maintain at least 65% of its total assets
invested in Florida Municipal Bonds. The investment objective of the Fund as set
forth in the first sentence of this paragraph is a fundamental policy and may
not be changed without shareholder approval. At times, the Fund may seek to
hedge its portfolio through the use of futures transactions to reduce volatility
in the net asset value of Fund shares.

Municipal Bonds may include several types of bonds. The interest on
Municipal Bonds may bear a fixed rate or be payable at a variable or floating
rate. At least 80% of the Municipal Bonds purchased by the Fund primarily will
be what are commonly referred to as "investment grade" securities, which are
obligations rated at the time of purchase within the four highest quality
ratings as determined by either Moody's Investors Service ("Moody's") (currently
Aaa, Aa, A and Baa), Standard & Poor's ("Standard & Poor's") (currently AAA, AA,
A and BBB) or Fitch IBCA, Inc. ("Fitch") (currently, AAA, AA, A and BBB). If
Municipal Bonds are unrated, such securities will possess creditworthiness
comparable, in the opinion of the Manager to obligations in which the Fund may
invest. Municipal Bonds rated in the fourth highest rating category, while
considered "investment grade," have certain speculative characteristics and are
more likely to be downgraded to non-investment grade than obligations rated in
one of the top three rating categories. See Appendix II -- "Ratings of Municipal
Bonds" in the Statement of Additional Information for more information regarding
ratings of debt securities. An issue of rated Municipal Bonds may cease to be
rated or its rating may be reduced below "investment grade" subsequent to its
purchase by the Fund. If an obligation is downgraded below investment grade, the
Manager will consider factors such as price, credit risk, market conditions,
financial condition of the issuer and interest rates to determine whether to
continue to hold the obligation in the Fund's portfolio.

The Fund may invest up to 20% of its total assets in Municipal Bonds that
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch, or
which in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and repay
principal in accordance with the terms of the security and generally involve a
greater volatility of price than securities in higher rating categories. The
market prices of high yielding, lower-rated securities may fluctuate more than
higher-rated securities and may decline significantly in periods of general
economic difficulty, which may follow periods of rising interest rates. In
purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of the issuer of such
securities. The Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of its management and regulatory matters. See
"Investment Objective and Policies" in the Statement of Additional Information
for a more detailed discussion of the pertinent risk factors involved in
investing in "high yield" or "junk" bonds and

11
<PAGE>

Appendix II -- "Ratings of Municipal Bonds" in the Statement of Additional
Information for additional information regarding ratings of debt securities. The
Fund does not intend to purchase debt securities that are in default or which
the Manager believes will be in default.

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

The Fund's investments may also include variable rate demand obligations
("VRDOs") and VRDOs in the form of participation interests ("Participating
VRDOs") in variable rate tax-exempt obligations held by a financial institution.
The VRDOs in which the Fund will invest are tax-exempt obligations which contain
a floating or variable interest rate adjustment formula and an unconditional
right of demand on the part of the holder thereof to receive payment of the
unpaid principal balance plus accrued interest on a short notice period not to
exceed seven days. Participating VRDOs provide the Fund with a specified
undivided interest (up to 100%) of the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution on a specified number of
days' notice, not to exceed seven days. There is, however, the possibility that
because of default or insolvency, the demand feature of VRDOs or Participating
VRDOs may not be honored. The Fund has been advised by its counsel that the Fund
should be entitled to treat the income received on Participating VRDOs as
interest from tax-exempt obligations.

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

The Fund ordinarily does not intend to realize investment income from
securities other than Florida Municipal Bonds. However, to the extent that
suitable Florida Municipal Bonds are not available for investment by the Fund,
the Fund may purchase Municipal Bonds issued by other states, their agencies and
instrumentalities, the interest income on which is exempt, in the opinion of
bond counsel, from Federal income tax, but which securities are not exempt from
Florida intangible personal property taxation. Included within the term
Municipal Bonds are, among other things, obligations of issuers located in
Puerto Rico, the U.S. Virgin Islands and Guam. The Fund also may invest in
securities not issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if the Fund nevertheless believes such securities to be
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in municipal bonds, to the extent such
investments are permitted by the Investment Company Act of 1940, as amended (the
"1940 Act"). Other Tax-Exempt Non-Municipal Securities could include trust
certificates or other derivative instruments evidencing interests in one or more
Municipal Bonds. The Fund will attempt not to hold Municipal Bonds and
Non-Municipal Tax-Exempt Securities on the last business day of any calendar
year to the extent that such investments may result in shares of the Fund being
subject to Florida intangible personal property tax. See "Investment Objective
and Policies -- Potential Benefits" and "Distributions and Taxes --Taxes."

Under normal circumstances, except when acceptable securities are
unavailable as determined by the Manager, the Fund will invest at least 65% of
its assets in Florida Municipal Bonds. For temporary defensive periods or to
provide liquidity, the Fund has the authority to invest as much as 35% of its
total assets in tax-exempt or

12
<PAGE>

taxable money market obligations with a maturity of one year or less (such
short-term obligations being referred to herein as "Temporary Investments"),
except that taxable Temporary Investments shall not exceed 20% of the Fund's net
assets. The Temporary Investments, VRDOs and Participating VRDOs in which the
Fund may invest also will be in the following rating categories at the time of
purchase: MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1
through Prime-3 for commercial paper (as determined by Moody's), SP-1 through
SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined
by Standard & Poor's), or F-1 through F-3 for notes, VRDOs and commercial paper
(as determined by Fitch) or, if unrated, of comparable quality in the opinion of
the Manager. The Fund will attempt not to hold Temporary Investments, VRDOs or
Participating VRDOs on the last business day of any calendar year to the extent
that such investments may result in shares of the Fund being subject to Florida
intangible personal property tax. The Fund at all times will have at least 80%
of its net assets invested in securities the interest on which is exempt from
Federal taxation. However, interest received on certain otherwise tax-exempt
securities which are classified as "private activity bonds" (in general, bonds
that benefit non-governmental entities) may be subject to Federal alternative
minimum tax. The percentage of the Fund's net assets invested in "private
activity bonds" will vary during the year. See "Distributions and Taxes." In
addition, the Fund reserves the right to invest temporarily a greater portion of
its assets in Temporary Investments for defensive purposes, when, in the
judgment of the Manager, market conditions warrant. The Fund's hedging
strategies, which are described in more detail under "Financial Futures
Transactions and Options," are not fundamental policies and may be modified by
the Trustees of the Trust without the approval of the Fund's shareholders.

POTENTIAL BENEFITS

Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal income taxes and
to own shares not subject to Florida intangible personal property taxes by
investing in a professionally managed portfolio consisting primarily of
long-term Florida Municipal Bonds. The Fund also provides liquidity because of
its redemption features and relieves the investor of the burdensome
administrative details involved in managing a portfolio of tax-exempt
securities. The benefits are at least partially offset by the expenses involved
in operating an investment company. Such expenses primarily consist of the
management fee and operational costs and, in the case of certain classes of
shares, the account maintenance and distribution costs.

One advantage of an investment in the Fund is that the value of Fund shares
held by Florida residents will be exempt from Florida intangible personal
property taxes. However, as discussed more fully below in the section of this
Prospectus entitled "Taxes," that benefit will apply in a given year only with
respect to the portion of Fund assets consisting of direct obligations of the
U.S. government, unless all other investments held by the Fund on the last
business day of any calendar year would qualify for exemption from the
intangible personal property tax. The Manager will attempt to ensure that on
such day 100% of the Fund's assets would so qualify; thus, the Fund will seek to
sell any non-qualifying assets of which it is aware on or prior to that date.
Such a sale, depending on the circumstances, may result in certain additional
costs to the Fund or receipt of a lower price for the securities sold. However,
it is possible that the Fund may not be able to fully dispose of all its assets
subject to Florida intangible personal property tax by the last business day of
the calendar year, thereby subjecting shares of the Fund to Florida intangible
personal property tax.

SPECIAL AND RISK CONSIDERATIONS RELATING TO MUNICIPAL BONDS

The risks and special considerations involved in investments in Municipal
Bonds vary with the types of instruments being acquired. Investments in
Non-Municipal Tax-Exempt Securities may present similar risks, depending

13
<PAGE>

on the particular product. Certain instruments in which the Fund may invest may
be characterized as derivative instruments. See "Description of Municipal
Bonds" and "Financial Futures Transactions and Options."

Moreover, the Fund ordinarily will invest at least 80% of its total assets
in Florida Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of Florida Municipal Bonds than is a tax-exempt
mutual fund that is not concentrated in issuers of Florida Municipal Bonds to
this degree. Many different social, environmental and economic factors may
affect the financial condition of Florida and its political subdivisions. From
time to time Florida and its political subdivisions have encountered financial
difficulties. Florida is highly dependent upon sales and uses taxes which
account for the majority of its General Fund revenues. The Florida Constitution
does not permit a state or local personal income tax. The structure of personal
income in Florida is also different from the rest of the nation in that it has a
proportionally greater retirement age population which is dependent upon
transfer payments (social security, pension benefits, etc.). Such transfer
payments can be affected by Federal legislation. Florida's economic growth is
also highly dependent upon other factors such as changes in population growth,
tourism, interest rates and hurricane activity. Finally, two amendments to the
Florida Constitution may limit the State's ability to raise revenues. In
combination, the two amendments may have an adverse effect on the finances of
Florida and its political subdivisions. See Appendix I -- "Economic Conditions
in Florida" in the Statement of Additional Information for important information
regarding the State of Florida.

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

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

DESCRIPTION OF MUNICIPAL BONDS

Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction and equipping of a wide range of public
facilities (including water, sewer, gas, electricity, solid waste, health care,
transportation, education and housing facilities), refunding of outstanding
obligations and obtaining funds for general operating expenses and loans to
other public institutions and facilities. In addition, certain types of bonds
are issued by or on behalf of public authorities to finance various privately
operated facilities, including certain local facilities for water supply, gas,
electricity, sewage or waste disposal. For purposes of this Prospectus, such
obligations are referred to as Municipal Bonds if the interest paid thereon is
excluded from gross income for purposes of Federal income taxation, and, as
Florida Municipal Bonds if the interest thereon is exempt from Federal income
tax and such obligations are issued by or on behalf of the State of Florida, its
political subdivisions, agencies and instrumentalities or are obligations of
other qualifying Florida issuers, even though such bonds may be "private
activity bonds" as discussed below.

14
<PAGE>

The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds which latter category includes industrial
development bonds ("IDBs") and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest.
The taxing power of any governmental entity may be limited, however, by
provisions of its state constitution or laws, and an entity's creditworthiness
will depend on many factors, including potential erosion of the tax base due to
population declines, natural disasters, declines in the state's industrial base
or inability to attract new industries, economic limits on the ability to tax
without eroding the tax base, state legislative proposals or voter initiatives
to limit ad valorem real property taxes and the extent to which the entity
relies on Federal or state aid, access to capital markets or other factors
beyond the state or entity's control. Accordingly, the capacity of the issuer of
a general obligation bond as to the timely payment of interest and the repayment
of principal when due is affected by the issuer's maintenance of its tax base.

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

The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are, in most cases, tax-exempt securities issued by states,
municipalities or public authorities to provide funds, usually through a loan or
lease arrangement to a private entity for the purpose of financing construction
or improvement of a facility to be used by the private entity. Such bonds are
secured primarily by revenues derived from loan repayments or lease payments due
from the entity which may or may not be guaranteed by a parent company or
otherwise secured. IDBs and private activity bonds are generally not secured by
a pledge of the taxing power of the issuer of such bonds. Therefore, an investor
should be aware that repayment of such bonds generally depends on the revenues
of a private entity and be aware of the risks that such an investment may
entail. Continued ability of an entity to generate sufficient revenues for the
payment of principal and interest on such bonds will be affected by many factors
including the size of the entity, capital structure, demand for its products or
services, competition, general economic conditions, government regulation and
the entity's dependence on revenues for the operation of the particular facility
being financed. The Fund may also invest in "moral obligation" bonds, which are
normally issued by special purpose authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, repayment of such bonds becomes a moral
commitment, but not a legal obligation of the state or municipality in question.

15
<PAGE>

they may increase or decrease in value in response to changes, as an
illustration, in market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax-exempt securities increase or
decrease in response to such changes. As a result, the market values of such
securities will generally be more volatile than the market values of fixed-rate
tax-exempt securities. To seek to limit the volatility of these securities, the
Fund may purchase inverse floating obligations with shorter-term maturities or
which contain limitations on the extent to which the interest rate may vary.
Certain investments in such obligations may be illiquid. The Fund may not invest
in such illiquid obligations if such investments, together with other illiquid
investments, would exceed 15% of the Fund's total assets. The Manager believes,
however, that indexed and inverse floating obligations represent flexible
portfolio management instruments for the Fund which allow the Fund to seek
potential investment rewards, hedge other portfolio positions or vary the degree
of investment leverage relatively efficiently under different market conditions.

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

The value of bonds and other fixed-income obligations may fall when
interest rates rise and rise when interest rates fall. In general, bonds and
other fixed-income obligations with longer maturities will be subject to greater
volatility resulting from interest rate fluctuations than will similar
obligations with shorter maturities. Under normal conditions, it is generally
anticipated that the Fund's average weighted maturity would be in excess of ten
years.

Federal tax legislation has limited the types and volume of bonds the
interest on which qualifies for a Federal income tax exemption. As a result,
this legislation and legislation which may be enacted in the future may affect
the availability of Municipal Bonds for investment by the Fund.

16
<PAGE>

CALL RIGHTS

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

WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS

The Fund may purchase or sell Municipal Bonds on a delayed delivery basis
or a when-issued basis at fixed purchase terms. These transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future. The purchase will be recorded on the date the Fund enters
into the commitment and the value of the obligation will thereafter be reflected
in the calculation of the Fund's net asset value. The value of the obligation on
the delivery date may be more or less than its purchase price. A separate
account of the Fund will be established with its custodian consisting of cash,
cash equivalents or liquid Securities having a market value at all times at
least equal to the amount of the forward commitment.

FINANCIAL FUTURES TRANSACTIONS AND OPTIONS

The Fund is authorized to purchase and sell certain exchange traded
financial futures contracts ("financial futures contracts") solely for the
purpose of hedging its investments in Municipal Bonds against declines in value
and to hedge against increases in the cost of securities it intends to purchase.
However, any transactions involving financial futures or options (including puts
and calls associated therewith) will be in accordance with the Fund's investment
policies and limitations. Similarly, while the effect of futures or options
transactions with respect to the Florida intangible personal property tax is
uncertain, the Fund does not intend to engage in such transactions in a manner
which will result in such tax being imposed on Fund shares.

A financial futures contract obligates the seller of a contract to deliver
and the purchaser of a contract to take delivery of the type of financial
instrument covered by the contract, or in the case of index-based futures
contracts to make and accept a cash settlement, at a specific future time for a
specified price. A sale of financial futures contracts may provide a hedge
against a decline in the value of portfolio securities because such depreciation
may be offset, in whole or in part, by an increase in the value of the position
in the financial futures contracts. A purchase of financial futures contracts
may provide a hedge against an increase in the cost of securities intended to be
purchased, because such appreciation may be offset, in whole or in part, by an
increase in the value of the position in the futures contracts. Distributions,
if any, of net long-term capital gains from certain transactions in futures or
options are taxable at long-term capital gains rates for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. See "Distributions and Taxes -- Taxes."

The Fund deals in financial futures contracts traded on the Chicago Board
of Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure
of the market value of 40 large, recently issued tax-exempt bonds. There can be
no assurance, however, that a liquid secondary market will exist to terminate
any particular financial futures contract at any specific time. If it is not
possible to close a financial futures position entered into by the Fund, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such a situation, if the Fund
has insufficient cash, it may have to sell

17
<PAGE>

portfolio securities to meet daily variation margin requirements at a time when
it may be disadvantageous to do so. The inability to close financial futures
positions also could have an adverse impact on the Fund's ability to hedge
effectively. There is also the risk of loss by the Fund of margin deposits in
the event of bankruptcy of a broker with whom the Fund has an open position in a
financial futures contract.

The Fund may purchase and sell financial futures contracts on U.S.
Government securities and write and purchase put and call options on such
futures contracts as a hedge against adverse changes in interest rates as
described more fully in the Statement of Additional Information. With respect to
U.S. Government securities, currently there are financial futures contracts
based on long-term U.S. Treasury bonds, Treasury notes, Government National
Mortgage Association ("GNMA") Certificates and three-month U.S. Treasury bills.

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

Utilization of futures transactions and options thereon involves the risk
of imperfect correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of the hedge. If the
price of the futures contract moves more or less than the price of the security
that is the subject of the hedge, the Fund will experience a gain or loss which
will not be completely offset by movements in the price of such security. There
is a risk of imperfect correlation where the securities underlying futures
contracts have different maturities, ratings or geographic mixes than the
security being hedged. In addition, the correlation may be affected by additions
to or deletions from the index which serves as a basis for a financial futures
contract. Finally, in the case of futures contracts on U.S. Government
securities and options on such futures contracts, the anticipated correlation of
price movements between the U.S. Government securities underlying the futures or
options and Municipal Bonds may be adversely affected by economic, political,
legislative or other developments which have a disparate impact on the
respective markets for such securities.

Under regulations of the Commodity Futures Trading Commission ("CFTC"), the
futures trading activities described herein will not result in the Fund being
deemed to be a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) only for bona fide
hedging purposes, and (ii) for non-hedging purposes, if the aggregate initial
margins and premiums required to establish positions in such contracts and
options does not exceed 5% of the liquidation value of the Fund's portfolio
assets after taking into account unrealized profits and unrealized losses on any
such contracts and options. (However, as stated above, the Fund intends to
engage in options and futures transactions only for hedging purposes.) Margin
deposits may consist of cash or securities acceptable to the broker and the
relevant contract market.

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

Although certain risks are involved in options and futures transactions,
the Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the

18
<PAGE>

Fund will not subject the Fund to certain risks frequently associated with
speculation in futures transactions. The Fund must meet certain Federal income
tax requirements under the Internal Revenue Code of 1986, as amended (the
"Code"), in order to qualify for the special tax treatment afforded regulated
investment companies, including a requirement that less than 30% of its gross
income be derived from the sale or other disposition of securities held for less
than three months. This requirement will no longer apply to the Fund after its
fiscal year ending July 31, 1998. Additionally, the Fund is required to meet
certain diversification requirements under the Code.

The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a
single trading day. Once the daily limit has been reached in the contract, no
trades may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days.

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

Reference is made to the Statement of Additional Information for further
information on financial futures contracts and certain options thereon.

REPURCHASE AGREEMENTS

As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements. As with other Temporary Investments, the Fund does not
intend to hold such agreements or contracts on the last business day of any
calendar year if doing so would result in the Fund shares being subject to
Florida intangible personal property tax. Repurchase agreements may be entered
into only with a member bank of the Federal Reserve System or a primary dealer
in U.S. Government securities or an affiliate thereof. Under such agreements,
the seller agrees, upon entering into the contract, to repurchase the security
from the Fund at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. The Fund may not invest
in repurchase agreements maturing in more than seven days if such investments,
together with the Fund's other illiquid investments, exceed 15% of the Fund's
total assets. In the event of default by the seller under a repurchase
agreement, the Fund may suffer time delays and incur costs or possible losses in
connection with the disposition of the underlying securities.

INVESTMENT RESTRICTIONS

The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act which 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. Among
its fundamental policies, the Fund may not invest more than 25% of its assets,
taken at market value at the time of each investment, in the securities of
issuers in any particular industry (excluding the U.S. Government and its
agencies and instrumentalities.)

19
<PAGE>

(For purposes of this restriction, states, municipalities and their political
subdivisions are not considered to be part of any industry). Investment
restrictions and policies that are non-fundamental policies may be changed by
the Board of Trustees without shareholder approval. As a non-fundamental policy,
the Fund may not borrow amounts in excess of 20% of its total assets taken at
market value (including the amount borrowed), and then only from banks as a
temporary measure for extraordinary or emergency purposes. In addition, the Fund
will not purchase securities while borrowings are outstanding.

As a non-fundamental policy, the Fund will not (i) purchase securities of
other investment companies, except to the extent such purchases are permitted by
applicable law; (ii) invest in securities which cannot be readily resold because
of legal or contractual restrictions or which cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of acquisition
more than 15% of its total assets would be invested in such securities. This
restriction shall not apply to securities which mature within seven days or
securities which the Board of Trustees of the Trust has otherwise determined to
be liquid pursuant to applicable law.

The Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by the 1940 Act in the proportion
of its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code. See "Distributions and Taxes
- -- Taxes." To qualify, among other requirements, the Trust will limit the 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 the Fund's total assets will be invested in
the securities of a single issuer, and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer and the Fund will
not own more than 10% of the outstanding voting securities of a single issuer.
For purposes of this restriction, the Fund will regard each state and each
political subdivision, agency or instrumentality of such state and each
multi-state agency of which such state is a member and each public authority
which issues securities on behalf of a private entity as a separate issuer,
except that if the security is backed only by the assets and revenues of a
non-government entity then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. These
tax-related limitations may be changed by the 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 1940 Act must satisfy
the foregoing 5% and 10% requirements with respect to 75% of its total assets.
To the extent that the Fund assumes large positions in the obligations of a
small number of issuers, the Fund's total return 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.

Investors are referred to the Statement of Additional Information for a
complete description of the Fund's investment restrictions.

MANAGEMENT OF THE TRUST

TRUSTEES

The Trustees of the Trust consist of six individuals, five of whom are not
"interested persons" of the Trust as defined in the 1940 Act. The Trustees are
responsible for the overall supervision of the operations of the Trust and the
Fund and perform the various duties imposed on the directors or trustees of
investment companies by the 1940 Act.

20
<PAGE>

The Trustees of the Trust are:

ARTHUR ZEIKEL* -- Chairman of the Manager and its affiliate, MLAM;
Chairman and Director of Princeton Services, Inc. ("Princeton Services");
Executive Vice President of ML & Co.

JAMES H. BODURTHA -- Director and Executive Vice President, The China
Business Group, Inc.

HERBERT I. LONDON -- John M. Olin Professor of Humanities, New York
University.

ROBERT R. MARTIN -- Former Chairman, Kinnard Investments, Inc.

JOSEPH L. MAY -- Attorney in private practice.

ANDRE F. PEROLD -- Professor, Harvard Business School.
- --------
* Interested person, as defined in the 1940 Act, of the Trust.

MANAGEMENT AND ADVISORY ARRANGEMENTS

The Manager, which is an affiliate of MLAM and is owned and controlled by
ML & Co., a financial services holding company, acts as the manager for the Fund
and provides the Fund with management and investment advisory services. The
Merrill Lynch Asset Management Group (which includes the Manager) acts as the
investment adviser for more than 100 registered investment companies and offers
portfolio management services to individuals and institutions. As of September
1998, the Asset Management Group had a total of approximately $467 billion in
investment company and other portfolio assets under management. This amount
includes assets managed for certain affiliates of the Manager.

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

Robert A. DiMella and Robert D. Sneeden are the Portfolio Managers of the
Fund and are responsible for the day-to-day management of the Fund's investment
portfolio. Mr. DiMella has been a Vice President of MLAM since 1995. From 1993
to 1995 he was an Assistant Portfolio Manager with MLAM. Mr. Sneeden has been
an Assistant Vice President of MLAM since 1994. From 1990 to 1994 he was a Vice
President of Lehman Brothers.

Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the average daily net assets
not exceeding $500 million; 0.525% of the average daily net assets exceeding
$500 million but not exceeding $1.0 billion; and 0.50% of the average daily net
assets exceeding $1.0 billion. For the year ended July 31, 1998, the total fee
paid by the Fund to the Manager was $1,237,408 (based on average daily net
assets of approximately $223.8 million).

The Management Agreement obligates the Trust on behalf of the Fund to pay
certain expenses incurred in the Fund's operations, including, among other
things, the management fee, legal and audit fees, unaffiliated Trustees' fees
and expenses, registration fees, custodian and transfer agency fees, accounting
and pricing costs, and certain of the costs of printing proxies, shareholder
reports, prospectuses and statements of additional information. Accounting
services are provided to the Fund by the Manager, and the Fund reimburses the
Manager for its costs in connection with such services. The Manager may
voluntarily waive all or a portion of its management fee and may voluntarily

21
<PAGE>

assume all or a portion of the Fund's expenses. For the fiscal year ended July
31, 1998, the Fund reimbursed the Manager $86,605 for accounting services. For
the fiscal year ended July 31, 1998, the ratio of total expenses to average net
assets was .69% for Class A shares, 1.20% for Class B shares, 1.30% for Class C
shares and .79% for Class D shares.

CODE OF ETHICS

The Board of Trustees of the Trust has adopted a Code of Ethics under Rule
17j-1 of the 1940 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 preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition, no
employee may purchase or sell any security that at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).

TRANSFER AGENCY SERVICES

The Transfer Agent, which is a subsidiary of ML & Co., acts as the Trust's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and redemption of shares and the opening and maintenance
of shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of $11.00 per Class A or Class D account and $14.00
per Class B or Class C account, and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by the Transfer Agent
under the Transfer Agency Agreement. Additionally, a $.20 monthly closed account
charge will be assessed on all accounts which close during the calendar year.
Application of this fee will commence the month following the month the account
is closed. At the end of the calendar year, no further fees will be due. For
purposes of the Transfer Agency Agreement, the term "account" includes a
shareholder account maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is maintained
by a subsidiary of ML & Co. For the fiscal year ended July 31, 1998, the total
fee paid by the Fund to the Transfer Agent was $80,291 pursuant to the Transfer
Agency Agreement.

PURCHASE OF SHARES

The Distributor, an affiliate of each of the Manager, MLAM and Merrill
Lynch, acts as the Distributor of the shares of the Fund. Shares of the Fund are
offered continuously for sale by the Distributor and other eligible securities
dealers (including Merrill Lynch). Shares of the Fund may be purchased from
securities dealers or by mailing a purchase order directly to the Transfer
Agent. The minimum initial purchase is $1,000 and the minimum subsequent
purchase is $50, except that for shareholders who are participants in certain
fee-based programs, the minimum initial purchase is $250 and the minimum
subsequent purchase is $50.

22
<PAGE>

The Fund is offering its shares in four classes at a public offering price
equal to the next determined net asset value per share plus sales charges
imposed either at the time of purchase or on a deferred basis depending upon the
class of shares selected by the investor under the Merrill Lynch Select
Pricing(SM) System, as described below. The applicable offering price for
purchase orders is based upon the net asset value of the Fund next determined
after receipt of the purchase orders by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the New York
Stock Exchange (the "NYSE") (generally, 4:00 p.m., New York time), which
includes orders received after the close of business on the previous day, the
applicable offering price will be based on the net asset value determined as of
15 minutes after the close of business on the NYSE on that day, provided the
Distributor in turn receives the order from the securities dealer prior to 30
minutes after the close of business on the NYSE on that day. If the purchase
orders are not received by the Distributor prior to 30 minutes after the close
of business on the NYSE on that day, such orders shall be deemed received on the
next business day. The Trust or the Distributor may suspend the continuous
offering of the Fund's shares of any class at any time in response to conditions
in the securities markets or otherwise and may thereafter resume such offering
from time to time. Any order may be rejected by the Distributor or the Trust.
Neither the Distributor nor the dealers are permitted to withhold placing orders
to benefit themselves by a price change. Merrill Lynch may charge its customers
a processing fee (presently $5.35) to confirm a sale of shares to such
customers. Purchases made directly through the Fund's Transfer Agent are not
subject to the processing fee.

The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System, which permits each investor to choose the method of
purchasing shares that the investor believes is most beneficial given the amount
of the purchase, the length of time the investor expects to hold the shares and
other relevant circumstances. Shares of Class A and Class D are sold to
investors choosing the initial sales charge alternatives and shares of Class B
and Class C are sold to investors choosing the deferred sales charge
alternatives. Investors should determine whether under their particular
circumstances it is more advantageous to incur an initial sales charge or to
have the entire initial purchase price invested in the Fund with the investment
thereafter being subject to a CDSC and ongoing distribution fees and higher
account maintenance fees. A discussion of the factors that investors should
consider in determining the method of purchasing shares under the Merrill Lynch
Select Pricing(SM) System is set forth under "Merrill Lynch Select Pricing(SM)
System" on page 4.

Each Class A, Class B, Class C and Class D share of the Fund represents
identical interests in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
CDSCs, distribution and account maintenance fees that are imposed on Class B and
Class C shares, as well as the account maintenance fees that are imposed on
Class D shares, are imposed directly against those classes and not against all
assets of the Fund and, accordingly, such charges do not affect the net asset
value of any other class or have any impact on investors choosing another sales
charge option. Dividends paid by the Fund for each class of shares are
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid (except that Class B shareholders may vote upon any material changes to
expenses charged under the Class D Distribution Plan). See "Distribution Plans"
below. Each class has different exchange privileges. See "Shareholder Services
- -- Exchange Privilege."

Investors should understand that the purpose and function of the initial
sales charges with respect to Class A and Class D shares are the same as those
of the CDSCs and distribution fees with respect to Class B

23
<PAGE>

and Class C shares in that the sales charges and distribution fees applicable to
each class provide for the financing of the distribution of the shares of the
Fund. The distribution-related revenues paid with respect to a class will not be
used to finance the distribution expenditures of another class. Sales personnel
may receive different compensation for selling different classes of shares.
Investors are advised that only Class A and Class D shares may be available for
purchase through securities dealers, other than Merrill Lynch, that are eligible
to sell shares.

The following table sets forth a summary of the distribution arrangements
for each class of shares under the Merrill Lynch Select Pricing(SM) System.

<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1) FEE FEE FEATURE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 4.00% initial sales No No No
charge(2)(3)
B CDSC for a period of four 0.25% 0.25% B shares convert to D shares
years, at a rate of 4.0% during automatically after
the first year, decreasing 1.0% approximately ten years(5)
annually to 0.0%(4)
C 1.0% CDSC for one year(6) 0.25% 0.35% No
D Maximum 4.00% initial sales 0.10% No No
charge(3)
</TABLE>

- --------
(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Initial Sales Charge Alternatives
-- Class A and Class D Shares -- Eligible Class A Investors."
(3) Reduced for purchases of $25,000 or more and waived for purchases of Class A
shares by participants in connection with certain fee-based programs.
Certain Class A and Class D share purchases of $1,000,000 or more may not be
subject to an initial sales charge but instead may be subject to a CDSC if
redeemed within one year. Such CDSC may be waived in connection with certain
fee-based programs.
(4) The CDSC may be modified in connection with certain fee-based programs.
(5) The conversion period for dividend reinvestment shares and certain fee
based programs may differ. See "Deferred Sales Charge Alternatives --Class B
and Class C Shares -- Conversion of Class B Shares to Class D Shares." Also,
Class B shares of certain other MLAM-advised mutual funds into which
exchanges may be made have an eight year conversion period. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares acquired
in the exchange will apply, and the holding period for the shares exchanged
will be tacked onto the holding period for the shares acquired.
(6) The CDSC may be waived in connection with certain fee-based programs.

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

INVESTORS CHOOSING THE INITIAL SALES CHARGE ALTERNATIVES WHO ARE ELIGIBLE
TO PURCHASE CLASS A SHARES SHOULD PURCHASE CLASS A RATHER THAN CLASS D SHARES
BECAUSE THERE IS AN ACCOUNT MAINTENANCE FEE IMPOSED ON CLASS D SHARES.

24
<PAGE>

The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternative is the next determined net asset
value plus varying sales charges (I.E., sales loads), as set forth below.

<TABLE>
<CAPTION>
SALES CHARGE AS DISCOUNT TO
SALES CHARGE AS PERCENTAGE* OF SELECTED DEALERS
PERCENTAGE OF THE NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------------------------------ ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $25,000......................... 4.00% 4.17% 3.75%
$25,000 but less than $50,000............. 3.75 3.90 3.50
$50,000 but less than $100,000............ 3.25 3.36 3.00
$100,000 but less than $250,000........... 2.50 2.56 2.25
$250,000 but less than $1,000,000......... 1.50 1.52 1.25
$1,000,000 and over**..................... 0.00 0.00 0.00
</TABLE>

- --------
* Rounded to the nearest one-hundredth percent.
** The initial sales charge may be waived on certain Class A and Class D
purchases of $1,000,000 or more and on Class A purchases by participants in
connection with certain fee-based programs. If the sales charge is waived in
connection with a purchase of $1,000,000 or more, such purchases may be
subject to a 1.0% CDSC if the shares are redeemed within one year after
purchase. Such CDSC may be waived in connection with certain fee-based
programs. The charge will be assessed on an amount equal to the lesser of the
proceeds of redemption or the cost of the shares being redeemed.

The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and Class
D shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended. The proceeds from account maintenance fees are used to compensate
the Distributor and Merrill Lynch (pursuant to a sub-agreement) for providing
continuing account maintenance activities.

For the fiscal year ended July 31, 1998, the Fund sold 648,986 Class A
shares for aggregate net proceeds of $6,738,638. The gross sales charges for the
sale of Class A shares of the Fund for the year were $13,043, of which $1,243
and $11,800 were received by the Distributor and Merrill Lynch, respectively.
For the fiscal year ended July 31, 1998, the Distributor received no CDSCs with
respect to redemption within one year after purchase of Class A shares purchased
subject to a front-end sales charge waiver. For the fiscal year ended July 31,
1998, the Fund sold 762,178 Class D shares for aggregate net proceeds of
$7,918,934. The gross sales charges for the sale of Class D shares of the Fund
for the year were $26,224, of which $2,713 and $23,511 were received by the
Distributor and Merrill Lynch, respectively. For the fiscal year ended July 31,
1998, the Distributor received CDSCs of $10,000 with respect to redemption
within one year after purchase of Class D shares purchased subject to a
front-end sales charge waiver.

ELIGIBLE CLASS A INVESTORS. Class A shares are offered to a limited group
of investors and also will be issued upon reinvestment of dividends on
outstanding Class A shares. Investors that currently own Class A shares of the
Fund in a shareholder account are entitled to purchase additional Class A shares
of the Fund in that account. Class A shares are available at net asset value to
corporate warranty insurance reserve fund programs and U.S. branches of foreign
banking institutions provided that the program or branch has $3 million or more
initially invested in MLAM-advised mutual funds. Also eligible to purchase Class
A shares at net asset value are participants in certain investment programs
including TMA(SM) Managed Trusts to which Merrill Lynch Trust Company provides
discretionary trustee services, collective investment trusts for which Merrill
Lynch Trust Company serves as trustee and purchases made in connection with
certain fee-based programs. In addition, Class A shares are offered at net asset
value to ML & Co. and its subsidiaries and their directors and employees and to
members of the

25
<PAGE>

Boards of MLAM-advised investment companies, including the Trust. Certain
persons who acquired shares of certain MLAM-advised closed-end funds in their
initial offerings who wish to reinvest the net proceeds from a sale of their
closed-end fund shares of common stock in shares of the Fund also may purchase
Class A shares of the Fund if certain conditions set forth in the Statement of
Additional Information are met (for closed-end funds that commenced operations
prior to October 21, 1994). In addition, Class A shares of the Fund and certain
other MLAM-advised mutual funds are offered at net asset value to shareholders
of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain conditions set
forth in the Statement of Additional Information are met, to shareholders of
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to a tender offer conducted by
such funds in shares of the Fund and certain other MLAM-advised mutual funds.

REDUCED INITIAL SALES CHARGES. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention. Class A
shares are offered at net asset value to certain eligible Class A investors as
set forth above under "Eligible Class A Investors." See "Shareholder Services --
Fee-Based Programs."

Provided applicable threshold requirements are met, either Class A or Class
D shares are offered at net asset value to Employee Access(SM) Accounts
available through authorized employers. Class A shares are offered at net asset
value to shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and
subject to certain conditions, Class A and Class D shares are offered at net
asset value to shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and
Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to reinvest in
shares of the Fund the net proceeds from a sale of certain of their shares of
common stock pursuant to tender offers conducted by those funds.

Class D shares are offered at net asset value, without sales charge, to an
investor who has a business relationship with a Merrill Lynch Financial
Consultant if certain conditions set forth in the Statement of Additional
Information are met. Class D shares may be offered at net asset value in
connection with the acquisition of assets of other investment companies.

Additional information concerning these reduced initial sales charges is
set forth in the Statement of Additional Information.

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

INVESTORS CHOOSING THE DEFERRED SALES CHARGE ALTERNATIVES SHOULD CONSIDER
CLASS B SHARES IF THEY INTEND TO HOLD THEIR SHARES FOR AN EXTENDED PERIOD OF
TIME AND CLASS C SHARES IF THEY ARE UNCERTAIN AS TO THE LENGTH OF TIME THEY
INTEND TO HOLD THEIR ASSETS IN MLAM-ADVISED MUTUAL FUNDS.

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four-year CDSC,
which declines each year, while Class C shares are subject only to a one-year
1.0% CDSC. On the other hand, approximately ten years after Class B shares are
issued, such Class B shares, together with shares issued upon dividend
reinvestment with respect to those shares, are automatically converted into
Class D shares of the Fund and thereafter will be subject to lower continuing
fees. See "Conversion of Class B Shares to Class D Shares" below. Both Class B
and Class C shares are subject to an account maintenance fee of 0.25% of net
assets and Class B and Class C shares are subject to distribution fees of 0.25%
and 0.35%, respectively, of net assets as discussed below under

26
<PAGE>

"Distribution Plans." The proceeds from the account maintenance fees are used to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) for
providing continuing account maintenance activities.

Class B and Class C shares are sold without an initial sales charge so that
the Fund will receive the full amount of the investor's purchase payment.
Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. See "Distribution
Plans" below.

Proceeds from the CDSC and the distribution fee are paid to the Distributor
and are used in whole or in part by the Distributor to defray the expenses of
dealers (including Merrill Lynch) that are paid from the dealers' own funds.
These expenses relate to providing distribution-related services to the Fund in
connection with the sale of Class B and Class C shares, such as the payment of
compensation to financial consultants for selling such shares. The combination
of the CDSC and the ongoing distribution fee facilitates the ability of the Fund
to sell the Class B and Class C shares without a sales charge being deducted at
the time of purchase. Approximately ten years after issuance, Class B shares
will convert automatically into Class D shares of the Fund, which are subject to
a lower account maintenance fee and no distribution fee; Class B shares of
certain other MLAM-advised mutual funds into which exchanges may be made convert
into Class D shares automatically after approximately eight years. If Class B
shares of the Fund are exchanged for Class B shares of another MLAM-advised
mutual fund, the conversion period applicable to the Class B shares acquired in
the exchange will apply, and the holding period for the shares exchanged will be
tacked onto the holding period for the shares acquired.

Imposition of the CDSC and the distribution fee on Class B and Class C
shares is limited by the NASD asset-based sales charge rule. See "Limitations on
the Payment of Deferred Sales Charges" below. Class B shareholders of the Fund
exercising the exchange privilege described under "Shareholder Services
- --Exchange Privilege" will continue to be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
acquired as a result of the exchange.

CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates set
forth below charged as a percentage of the dollar amount subject thereto. The
charge will be assessed on an amount equal to the lesser of the proceeds of
redemption or the cost of the shares being redeemed. Accordingly, no CDSC will
be imposed on increases in net asset value above the initial purchase price. In
addition, no CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions.

The following table sets forth the rates of the Class B CDSC:

<TABLE>
<CAPTION>
CLASS B
CDSC AS A
PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------------------------- ------------------
<S> <C>
0-1 ............................... 4.00%
1-2 ............................... 3.00%
2-3 ............................... 2.00%
3-4 ............................... 1.00%
4 and thereafter .................. 0.00%
</TABLE>

For the fiscal year ended July 31, 1998, the Distributor received CDSCs of
$109,591 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may

27
<PAGE>

have been waived or converted to a contingent obligation in connection with a
shareholder's participation in certain fee-based programs.

In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares held for over four years or shares acquired pursuant to
reinvestment of dividends or distributions and then of shares held longest
during the four-year period. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase. A
transfer of shares from a shareholder's account to another account will be
assumed to be made in the same order as a redemption.

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

The Class B CDSC is waived on redemptions of shares following the death or
disability (as defined in the Code) of a shareholder. The Class B CDSC also is
waived for any Class B shares that are purchased within qualifying Employee
Access(SM) Accounts. Additional information concerning the waiver of the Class B
CDSC is set forth in the Statement of Additional Information. The terms of the
CDSC may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."

CONTINGENT DEFERRED SALES CHARGES -- CLASS C SHARES. Class C shares that
are redeemed within one year after purchase may be subject to a 1.0% CDSC
charged as a percentage of the dollar amount subject thereto. The charge will be
assessed on an amount equal to the lesser of the proceeds of redemption or the
cost of the shares being redeemed. Accordingly, no Class C CDSC will be imposed
on increases in net asset value above the initial purchase price. In addition,
no Class C CDSC will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services
- --Fee-Based Programs." For the fiscal year ended July 31, 1998, the Distributor
received CDSCs of $1,169 with respect to redemptions of Class C shares, all of
which were paid to Merrill Lynch.

In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
of shares held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of shares
from a shareholder's account to another account will be assumed to be made in
the same order as a redemption.

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

28
<PAGE>

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

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

In general, Class B shares of equity MLAM-advised mutual funds will convert
approximately eight years after initial purchase, and Class B shares of taxable
and tax-exempt fixed income MLAM-advised mutual funds will convert approximately
ten years after initial purchase. If, during the Conversion Period, a
shareholder exchanges Class B shares with an eight-year Conversion Period for
Class B shares with a ten-year Conversion Period, or vice versa, the Conversion
Period applicable to the Class B shares acquired in the exchange will apply, and
the holding period for the shares exchanged will be tacked onto the holding
period for the shares acquired.

The Conversion Period also may be modified for investors who participate
in certain fee-based programs. See "Shareholder Services -- Fee-Based
Programs."

DISTRIBUTION PLANS

The Fund has adopted separate distribution plans for Class B, Class C and
Class D shares pursuant to Rule 12b-1 under the 1940 Act (each a "Distribution
Plan") with respect to the account maintenance and/or distribution fees paid by
the Fund to the Distributor with respect to such classes. The Class B and Class
C Distribution Plans provide for the payment of account maintenance fees and
distribution fees, and the Class D Distribution Plan provides for the payment of
account maintenance fees.

The Distribution Plans for Class B, Class C and Class D shares each
provides that the Fund pays the Distributor an account maintenance fee relating
to the shares of the relevant class, accrued daily and paid monthly, at the
annual rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net
assets of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities.

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

29
<PAGE>

For the fiscal year ended July 31, 1998, the Fund paid the Distributor
$753,007 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $149.8
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class B shares. For the fiscal year ended July 31, 1998, the Fund paid the
Distributor $43,931 pursuant to the Class C Distribution Plan (based on average
daily net assets subject to such Class C Distribution Plan of approximately $7.3
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection with
Class C shares. For the fiscal year ended July 31, 1998, the Fund paid the
Distributor $21,886 pursuant to the Class D Distribution Plan (based on average
daily net assets subject to such Class D Distribution Plan of approximately
$21.8 million), all of which was paid to Merrill Lynch for providing account
maintenance activities in connection with Class D shares.

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

As of December 31, 1997, the fully allocated accrual expenses incurred by
the Distributor and Merrill Lynch for the period since the commencement of
operations of Class B shares exceeded fully allocated accrual revenues for such
period by approximately $2,920,000 (1.92% of Class B net assets at that date).
As of July 31, 1998, direct cash revenues for the period since the commencement
of operations of Class B shares exceeded direct cash expenses by $3,663,807
(2.55% of Class B net assets at that date). As of December 31, 1997, the fully
allocated accrual expenses incurred by the Distributor and Merrill Lynch for the
period since the commencement of operations of Class C shares exceeded fully
allocated accrual revenues for such period by approximately $28,000 (0.37% of
Class C net assets at that date). As of July 31, 1998, direct cash revenues for
the period since the commencement of operations of Class C shares exceeded
direct cash expenses by $64,268 (0.72% of Class C net assets at that date).

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee and
the CDSC borne by the Class B and Class C shares, but not the account
maintenance fee. The maximum sales charge rule is applied separately to each
class. As applicable to the Fund, the maximum sales charge rule limits the
aggregate of distribution fee payments and CDSCs payable by the Fund to (1)
6.25% of eligible gross sales of Class B shares and Class C shares, computed
separately (defined to exclude shares issued pursuant to dividend reinvestments
and exchanges) plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the

30
<PAGE>

unpaid balance in excess of 0.50% of eligible gross sales. Consequently, the
maximum amount payable to the Distributor (referred to as the "voluntary
maximum") in connection with the Class B shares is 6.75% of eligible gross
sales. The Distributor retains the right to stop waiving the interest charges at
any time. To the extent payments would exceed the voluntary maximum, the Fund
will not make further payments of the distribution fee with respect to Class B
shares, and any CDSCs will be paid to the Fund rather than to the Distributor;
however, the Fund will continue to make payments of the account maintenance fee.
In certain circumstances the amount payable pursuant to the voluntary maximum
may exceed the amount payable under the NASD formula. In such circumstances
payments in excess of the amount payable under the NASD formula will not be
made.

The Fund has no obligation with respect to distribution and/or account
maintenance-related expenses incurred by the Distributor and Merrill Lynch in
connection with Class B, Class C and Class D shares, and there is no assurance
that the Trustees of the Trust will approve the continuance of the Distribution
Plans from year to year. However, the Distributor intends to seek annual
continuation of the Distribution Plans. In their review of the Distribution
Plans, the Trustees will be asked to take into consideration expenses incurred
in connection with the account maintenance and/or distribution of each class of
shares separately. The initial sales charges, the account maintenance fee, the
distribution fee and/or the CDSCs received with respect to one class will not be
used to subsidize the sale of shares of another class. Payments of the
distribution fee on Class B shares will terminate upon conversion of those Class
B shares into Class D shares as set forth under "Deferred Sales Charge
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares."

REDEMPTION OF SHARES

The Trust is required to redeem for cash all shares of the Fund upon
receipt of a written request in proper form. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice
of redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends reinvested through the date of redemption. The value of shares at the
time of redemption may be more or less than the shareholder's cost, depending on
the market value of the securities held by the Fund at such time.

REDEMPTION

A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Financial Data Services,
Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289. Redemption requests
delivered other than by mail should be delivered to Financial Data Services,
Inc., 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Trust.
The redemption request in either event requires the signature(s) of all persons
in whose name(s) the shares are registered, signed exactly as such name(s)
appear(s) on the Transfer Agent's register. The signature(s) on the redemption
request must be guaranteed by an "eligible guarantor institution" as such is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended,
the existence and validity of which may be verified by the Transfer Agent
through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator, or certificates of corporate
authority. For shareholders

31
<PAGE>

redeeming directly with the Transfer Agent, payments will be mailed within seven
days of receipt of a proper notice of redemption.

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

REPURCHASE

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

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

Redemption payments will be made within seven days of the proper tender of
the certificates, if any, and stock power or letter requesting redemption, in
each instance with signatures guaranteed as noted above.

REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES

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

SHAREHOLDER SERVICES

The Trust offers a number of shareholder services and investment plans
described below that are designed to facilitate investment in shares of the
Fund. Full details as to each of such services, copies of the various plans
described below and instructions as to how to participate in the various
services or plans, or to change options

32
<PAGE>

with respect thereto can be obtained from the Trust by calling the telephone
number on the cover page hereof or from the Distributor or Merrill Lynch.
Included in such services are the following:

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income dividends
and long-term capital-gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and long-term capital gains distributions. A shareholder may
make additions to his or her Investment Account at any time by mailing a check
directly to the Transfer Agent. Shareholders may also maintain their accounts
through Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder's name
will be opened automatically at the Transfer Agent. Shareholders considering
transferring their Class A or Class D shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A or Class D shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A or Class D
shares (paying any applicable CDSC) so that the cash proceeds can be transferred
to the account at the new firm or such shareholder must continue to maintain an
Investment Account at the Transfer Agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the Transfer Agent may request their new brokerage firm to
maintain such shares in an account registered in the name of the brokerage firm
for the benefit of the shareholder at the Transfer Agent. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he or she be issued certificates for such shares and then must
turn the certificates over to the new firm for re-registration as described in
the preceding sentence.

EXCHANGE PRIVILEGE

U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds and Summit Cash Reserves
Fund ("Summit"), a Merrill Lynch-sponsored money market fund specifically
designated as available for exchange by holders of Class A, Class B, Class C and
Class D shares of MLAM-advised mutual funds. There is currently no limitation on
the number of times a shareholder may exercise the exchange privilege. The
exchange privilege may be modified or terminated at any time in accordance with
the rules of the Commission.

Under the Merrill Lynch Select Pricing(SM) System, Class A shareholders may
exchange Class A shares of the Fund for Class A shares of a second MLAM-advised
mutual fund if the shareholder holds any Class A shares of the second fund in
the account in which the exchange is made at the time of the exchange or is
otherwise eligible to purchase Class A shares of the second fund. If the Class A
shareholder wants to exchange Class A shares for shares of a second MLAM-advised
mutual fund, and the shareholder does not hold Class A shares of the second fund
in the account at the time of the exchange and is not otherwise eligible to
acquire Class A shares of the second fund, the shareholder will receive Class D
shares of the second fund as a result of the exchange. Class D shares also may
be exchanged for Class A shares of a second MLAM-advised mutual fund at any time
as long as, at the time of the exchange, the shareholder holds Class A shares of
the second fund in the account in which the exchange is made or is otherwise
eligible to purchase Class A shares of the second fund.

33
<PAGE>

Exchanges of Class A and Class D shares are made on the basis of the
relative net asset values per Class A or Class D share, respectively, plus an
amount equal to the difference, if any, between the sales charge previously paid
on the Class A or Class D shares being exchanged and the sales charge payable at
the time of the exchange on the shares being acquired.

Class B, Class C and Class D shares are exchangeable with shares of the
same class of other MLAM-advised mutual funds.

Shares of the Fund that are subject to a CDSC are exchangeable on the basis
of relative net asset value per share without the payment of any CDSC that might
otherwise be due upon redemption of the shares of the Fund. For purposes of
computing the CDSC that may be payable upon a disposition of the shares acquired
in the exchange, the holding period for the previously owned shares of the Fund
is "tacked" to the holding period for the newly acquired shares of the other
fund.

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

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

Class B shareholders of the Fund exercising the exchange privilege will
continue to be subject to the Fund's CDSC schedule if such schedule is higher
than the CDSC schedule relating to the new Class B shares. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the MLAM-advised mutual fund from
which the exchange has been made.

Exercise of the exchange privilege is treated as a sale of the exchanged
shares and a purchase of the acquired shares for Federal income tax purposes.
For further information, see "Shareholder Services -- Exchange Privilege" in the
Statement of Additional Information.

The Fund's exchange privilege is modified with respect to purchases of
Class A and Class D shares by non-retirement plan investors under the Merrill
Lynch Mutual Fund Adviser (Merrill Lynch MFA(SM)) program (the "MFA Program").
First, the initial allocation of assets is made under the MFA program. Then, any
subsequent exchange under the MFA program of Class A or Class D shares of a
MLAM-advised mutual fund for Class A

34
<PAGE>

or Class D shares of the Fund will be made solely on the basis of the relative
net asset values of the shares being exchanged. Therefore, there will not be a
charge for any difference between the sales charge previously paid on the shares
of the other MLAM-advised mutual fund and the sales charge payable on the shares
of the Fund being acquired in the exchange under the MFA program.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund, without a sales charge, at the net
asset value per share at the close of business on the monthly payment date for
such dividends and distributions. A shareholder may at any time, by written
notification to Merrill Lynch, if the shareholder's account is maintained with
Merrill Lynch or by written notification or by telephone (1-800-MER-FUND) to the
Transfer Agent if the shareholder's account is maintained with the Transfer
Agent, elect to have subsequent dividends or both dividends and capital gains
distributions paid in cash, rather than reinvested, in which event payment will
be mailed on or about the payment date (provided that, in the event that a
payment on an account maintained at the Transfer Agent would amount to $10.00 or
less, a shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). Cash payments can also be
directly deposited to the shareholder's bank account. No CDSC will be imposed
upon redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. The Fund is not responsible for any
failure of delivery to the shareholder's address of record and no interest will
accrue on amounts represented by uncashed distribution or redemption checks.

SYSTEMATIC WITHDRAWAL PLANS

Shareholders may elect to receive systematic withdrawal payments from his
or her Investment Account through automatic payment by check or through
automatic payment by direct deposit to his or her bank account on either a
monthly or quarterly basis. Alternatively, a shareholder whose shares are held
within a CMA(R) or CBA(R) account may elect to have shares redeemed on a
monthly, bimonthly, quarterly, semiannual or annual basis through the CMA(R) or
CBA(R) Systematic Redemption Program, subject to certain conditions. With
respect to redemptions of Class B or Class C shares pursuant to a systematic
withdrawal plan, the maximum number of Class B or Class C shares that can be
redeemed from an account annually shall not exceed 10% of the value of shares of
such class in that account at the time the election to join the systematic
withdrawal plan was made. Any CDSC that otherwise might be due on such
redemption of Class B or Class C shares will be waived. Shares redeemed pursuant
to a systematic withdrawal plan will be redeemed in the same order as Class B or
Class C shares are otherwise redeemed. See "Purchase of Shares --Deferred Sales
Charge Alternatives -- Class B and Class C Shares -- Contingent Deferred Sales
Charges -- Class B Shares" and " -- Contingent Deferred Sales Charges -- Class C
Shares." Where the systematic withdrawal plan is applied to Class B shares, upon
conversion of the last Class B shares in an account to Class D shares, the
systematic withdrawal plan will be applied thereafter to Class D shares if the
shareholder so elects. See "Purchase of Shares --Deferred Sales Charges
Alternatives -- Class B and Class C Shares -- Conversion of Class B Shares to
Class D Shares."

AUTOMATIC INVESTMENT PLANS

Regular additions of Class A, Class B, Class C and Class D shares may be
made to an investor's Investment Account by pre-arranged charges of $50 or more
to his or her regular bank account. An investor whose shares of the Fund are
held within a CMA(R) or CBA(R) account may arrange to have periodic investments
made in the Fund in amounts of $100 or more through the CMA(R) or CBA(R)
Automated Investment Program.

35
<PAGE>

FEE-BASED PROGRAMS

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

PORTFOLIO TRANSACTIONS

The Trust has no obligation to deal with any dealer or group of dealers in
the execution of transactions in portfolio securities of the Fund. Municipal
Bonds and other securities in which the Fund invests are traded primarily in the
over-the-counter market. Where possible, the Trust deals directly with the
dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Trust to obtain the best net results in conducting portfolio
transactions for the Fund, taking into account such factors as price (including
the applicable dealer spread), the size, type and difficulty of the transactions
involved, the firm's general execution and operations facilities, and the firm's
risk in positioning the securities involved and the provision of supplemental
investment research by the firm. While reasonably competitive spreads or
commissions are sought, the Fund will not necessarily be paying the lowest
spread or commission available. The sale of shares of the Fund may be taken into
consideration as a factor in the selection of brokers or dealers to execute
portfolio transactions for the Fund. The portfolio securities of the Fund
generally are traded on a net basis and normally do not involve either brokerage
commissions or transfer taxes. The cost of portfolio securities transactions of
the Fund primarily consists of dealer or underwriter spreads. Under the 1940
Act, persons affiliated with the Trust, including Merrill Lynch, are prohibited
from dealing with the Trust as a principal in the purchase and sale of
securities unless such trading is permitted by an exemptive order issued by the
Commission. The Trust has obtained an exemptive order permitting it to engage in
certain principal transactions with Merrill Lynch involving high quality
short-term municipal bonds subject to certain conditions. In addition, the Trust
may not purchase securities, including Municipal Bonds, for the Fund during the
existence of any underwriting syndicate of which Merrill Lynch is a member or in
a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either comply
with rules adopted by the Commission or with interpretations of the Commission
staff. An affiliated person of the Trust may serve as its broker in
over-the-counter transactions conducted for the Fund on an agency basis only.

36
<PAGE>

DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

The net investment income of the Fund is declared as dividends daily prior
to the determination of the net asset value which is calculated 15 minutes after
the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m.,
Eastern time) on that day. The net investment income of the Fund for dividend
purposes consists of interest earned on portfolio securities, less expenses, in
each case computed since the most recent determination of the net asset value.
Expenses of the Fund, including the management fees and the account maintenance
and distribution fees, are accrued daily. Dividends of net investment income are
declared daily and reinvested monthly in the form of additional full and
fractional shares of the Fund at net asset value as of the close of business on
the "payment date" unless the shareholder elects to receive such dividends in
cash. Shares will accrue dividends as long as they are issued and outstanding.
Shares are issued and outstanding from the settlement date of a purchase order
to the day prior to the settlement date of a redemption order.

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

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

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

TAXES

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

To the extent that the dividends distributed to the Fund's Class A, Class
B, Class C and Class D shareholders (together, the "shareholders") are derived
from interest income exempt from Federal tax under Code Section 103(a) and are
properly designated as "exempt-interest dividends" by the Trust, 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. Dividends paid by the Fund to individuals who
are Florida residents are not subject to personal income taxation by Florida,
because Florida does not impose a personal income tax. Distributions of
investment income and capital gains by the Fund will be subject to Florida
corporate income taxes, state taxes in states other than Florida and local taxes
in cities other than those in Florida. The Trust will inform shareholders
annually as to the portion of the Fund's distributions which constitutes
exempt-interest dividends. Interest on indebtedness incurred or continued to
purchase or carry Fund shares is not deductible for Federal income tax purposes
to the extent attributable to exempt-interest dividends. Persons who may be
"substantial users" (or "related persons" of substantial users) of facilities
financed by industrial development bonds or private activity bonds held by the
Fund should consult their tax advisors before purchasing Fund shares.

37
<PAGE>

The Fund has received a ruling from the Florida Department of Revenue that
if on the last business day of any calendar year the Fund's assets consist
solely of assets exempt from Florida intangible personal property tax, shares of
the Fund will be exempt from Florida intangible personal property tax in the
following year. The Florida Department of Revenue has the authority to revoke or
modify a previously issued ruling; however, if a ruling is revoked or modified,
the revocation or modification is prospective only. Thus, if the ruling is not
revoked or modified and if 100% of the Fund's assets on the last business day of
each calendar year consists of assets exempt from Florida intangible personal
property tax, shares of the Fund owned by Florida residents will be exempt from
Florida intangible personal property tax. Assets exempt from Florida intangible
personal property tax include obligations of the State of Florida and its
political subdivisions; obligations of the United States Government or its
agencies; and cash.

The Fund may from time to time hold assets that are not exempt from Florida
intangible personal property tax ("non-exempt assets") and may not be able to
fully dispose of all of such assets by the last business day of the calendar
year. This would subject shares of the Fund to Florida intangible personal
property tax. If shares of the Fund are subject to Florida intangible personal
property tax because of a failure to dispose of non-exempt assets, only that
portion of the value of Fund shares equal to the portion of the net asset value
of the Fund that is attributable to obligations of the United States Government
will be exempt from taxation. The Fund will attempt to monitor its portfolio so
that on the last business day of each calendar year the Fund's assets consist
solely of assets exempt from Florida intangible personal property tax.

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

All or a portion of the Fund's 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
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). Any loss upon the sale or exchange of Fund shares held for six
months or less will be disallowed to the extent of any exempt- interest
dividends received by the shareholder. In addition, any such loss that is not
disallowed under the rule stated above will be treated as long-term capital loss
to the extent of any capital gain dividends received by the shareholder. If the
Fund pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in which
such dividend was declared.

38
<PAGE>

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

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

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

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

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 the Fund) during the taxable
year.

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

39
<PAGE>

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

PERFORMANCE DATA

From time to time the Fund may include its average annual total return,
yield and tax-equivalent yield for various specified time periods in
advertisements or information furnished to present or prospective shareholders.
Average annual total return, yield and tax-equivalent yield are computed
separately for Class A, Class B, Class C and Class D shares in accordance with
formulas specified by the Commission.

Average annual total return quotations for the specified periods will be
computed by finding the average annual compounded rates of return (based on net
investment income and any realized and unrealized capital gains or losses on
portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period.
Average annual total return will be computed assuming all dividends and
distributions are reinvested and taking into account all applicable recurring
and nonrecurring expenses, including any CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period such as
in the case of Class B shares and Class C shares and the maximum sales charge in
the case of Class A and Class D shares. Dividends paid by the Fund with respect
to all shares, to the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in the same amount,
except that account maintenance fees, distribution charges and any incremental
transfer agency costs relating to each class of shares will be borne by that
class. The Fund will include performance data for all classes of shares of the
Fund in any advertisement or information including performance data of the Fund.

The Fund also may quote total return and aggregate total return performance
data for various specified time periods. Such data will be calculated
substantially as described above, except that (1) the rates of return calculated
will not be average annual rates, but rather, actual annual, annualized or
aggregate rates of return and (2) the maximum applicable sales charges will not
be included with respect to annual or annualized rates of return calculations.
Aside from the impact on the performance data calculations of including or
excluding the maximum applicable sales charges, actual annual or annualized
total return data generally will be lower than average annual total return data
since the average annual rates of return reflect compounding; aggregate total
return data generally will be higher than average annual total return data since
the aggregate rates of return reflect compounding over a longer period of time.
In advertisements distributed to investors whose purchases are subject to waiver
of the CDSC in the case of Class B shares or to reduced sales charges in the
case of Class A or Class D shares, the performance data may take into account
the reduced, and not the maximum, sales charge or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or waiver of the CDSC, a lower amount of expenses is deducted. See
"Purchase of Shares." The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.

Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. Tax equivalent yield quotations will be computed
by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus
a stated tax rate and (c) adding the result to that part, if any, of the Fund's
yield that is not tax-exempt. The yield for the 30-day period ending July 31,
1998 was 4.31% for Class A shares, 3.98% for Class B shares, 3.88% for Class C
shares and 4.21% for Class D shares and the tax-equivalent yield

40
<PAGE>

for the same period (based on a Federal income tax rate of 28%) was 5.99% for
Class A shares, 5.53% for Class B shares, 5.39% for Class C shares and 5.85% for
Class D shares.

Total return, yield and tax-equivalent yield figures are based on the
Fund's historical performance and are not intended to indicate future
performance. The Fund's total return, yield and tax-equivalent yield will vary
depending on market conditions, the securities comprising the Fund's portfolio,
the Fund's operating expenses and the amount of realized and unrealized net
capital gain or losses during the period. The value of an investment in the Fund
will fluctuate and an investor's shares, when redeemed, may be worth more or
less than their original cost.

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

ADDITIONAL INFORMATION

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of all classes of the Fund is determined
once daily 15 minutes after the close of business on the NYSE (generally, the
NYSE closes at 4:00 p.m., Eastern time), on each day during which the NYSE is
open for trading. The net asset value per share is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time, rounded to the nearest cent. Expenses, including the
fees payable to the Manager and the Distributor, are accrued daily.

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

ORGANIZATION OF THE TRUST

The Trust is a business trust organized on August 2, 1985 under the laws of
Massachusetts. On October 1, 1987, the Trust changed its name from "Merrill
Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch Multi-State
Municipal Bond Series Trust," and on December 22, 1987 the Trust again changed
its name to "Merrill Lynch Multi-State Municipal Series Trust." The Trust is an
open-end management investment company comprised

41
<PAGE>

of separate series ("Series"), each of which is a separate portfolio offering
shares to selected groups of purchasers. Each of the Series is managed
independently in order to provide to shareholders who are residents of the state
to which such Series relates as high a level of income exempt from Federal, and,
in certain cases, state and local income taxes as is consistent with prudent
investment management. The Trustees are authorized to create an unlimited number
of Series and, with respect to each Series, to issue an unlimited number of full
and fractional shares of beneficial interest, $.10 par value per share, of
different classes. Shareholder approval is not required for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Prospectus, the shares of the Fund are divided into Class A, Class B, Class C
and Class D shares. Class A, Class B, Class C and Class D shares represent
interests in the same assets of the Fund and are identical in all respects
except that Class B, Class C and Class D shares bear certain expenses relating
to the account maintenance associated with such shares, and Class B and Class C
shares bear certain expenses relating to the distribution of such shares. Each
class has exclusive voting rights with respect to matters relating to
distribution and/or account maintenance expenditures, as applicable. See
"Purchase of Shares." The Trustees of the Trust may classify or reclassify the
shares of any Series into additional or other classes at a future date.

Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. There normally will be no meeting of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Shareholders may, in accordance with the terms of the Declaration of
Trust, cause a meeting of shareholders to be held for the purpose of voting on
the removal of Trustees. Also, the Trust will be required to call a special
meeting of shareholders of a Series in accordance with the requirements of the
1940 Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or of a change in the fundamental
policies, objectives or restrictions of a Series. Except as set forth above, the
Trustees shall continue to hold office and appoint successor Trustees. Upon
liquidation or dissolution of a Series, each issued and outstanding share of
that Series is entitled to participate equally in dividends and distributions
declared by the respective Series and in net assets of such Series remaining
after satisfaction of outstanding liabilities except that, as noted above, the
Class B, Class C and Class D shares bear certain additional expenses. 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 non-assessable by the
Trust.

SHAREHOLDER REPORTS

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

Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, FL 32232-5289

The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch, Pierce, Fenner & Smith Incorporated
and/or mutual fund account numbers. If you have any questions regarding this
matter please call your Merrill Lynch Financial Consultant or Financial Data
Services, Inc. at 800-637-3863.

42
<PAGE>

SHAREHOLDER INQUIRIES

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

YEAR 2000 ISSUES

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"). Like other investment
companies and financial and business organizations, the Fund could be adversely
affected if the computer systems used by the Manager or other Fund service
providers do not properly address this problem prior to January 1, 2000. The
Manager has established a dedicated group to analyze these issues and to
implement any systems modifications necessary to prepare for the Year 2000.
Currently, the Manager does not anticipate that the transition to the Year 2000
will have any material impact on its ability to continue to service the Fund at
current levels. In addition, the Manager has sought assurances from the Fund's
other service providers that they are taking all necessary steps to ensure that
the computer systems will accurately reflect the Year 2000, the Manager will
continue to monitor the situation. At this time, however, no assurance can be
given that the Fund's other service providers have anticipated every step
necessary to avoid any adverse effect on the Fund attributable to the Year 2000
Problem.
----------------
The Declaration of Trust establishing the Trust, dated August 2, 1985, a
copy of which together with all amendments thereto (the "Declaration"), is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Multi-State Municipal Series Trust" refers
to the Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability, nor shall resort be
had to their private property for the satisfaction of any obligation or claim of
the Trust, but the "Trust Property" only shall be liable.

43
<PAGE>

[This page intentionally left blank.]
<PAGE>

MANAGER
Fund Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011

DISTRIBUTOR
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081

CUSTODIAN
State Street Bank and Trust Company
P.O. Box 351
Boston, Massachusetts 02101

TRANSFER AGENT
Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289

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

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
----------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fee Table ............................................. 2
Merrill Lynch Select Pricing(SM) System ............... 4
Financial Highlights .................................. 8
Investment Objective and Policies ..................... 11
Potential Benefits .................................. 13
Special and Risk Considerations Relating to
Municipal Bonds .................................. 13
Description of Municipal Bonds ...................... 14
Call Rights ......................................... 17
When-Issued Securities and Delayed Delivery
Transactions ..................................... 17
Financial Futures Transactions and Options .......... 17
Repurchase Agreements ............................... 19
Investment Restrictions ............................. 19
Management of the Trust ............................... 20
Trustees ............................................ 20
Management and Advisory Arrangements ................ 21
Code of Ethics ...................................... 22
Transfer Agency Services ............................ 22
Purchase of Shares .................................... 22
Initial Sales Charge Alternatives -- Class A and
Class D Shares ................................... 24
Deferred Sales Charge Alternatives -- Class B and
Class C Shares ................................... 26
Distribution Plans .................................. 29
Limitations on the Payment of Deferred Sales
Charges .......................................... 30
Redemption of Shares .................................. 31
Redemption .......................................... 31
Repurchase .......................................... 32
Reinstatement Privilege -- Class A and Class D
Shares ........................................... 32
Shareholder Services .................................. 32
Investment Account .................................. 33
Exchange Privilege .................................. 33
Automatic Reinvestment of Dividends and Capital
Gains Distributions .............................. 35
Systematic Withdrawal Plans ......................... 35
Automatic Investment Plans .......................... 35
Fee-Based Programs .................................. 36
Portfolio Transactions ................................ 36
Distributions and Taxes ............................... 37
Dividends and Distributions ......................... 37
Taxes ............................................... 37
Performance Data ...................................... 40
Additional Information ................................ 41
Determination of Net Asset Value .................... 41
Organization of the Trust ........................... 41
Shareholder Reports ................................. 42
Shareholder Inquiries ............................... 43
Year 2000 Issues .................................... 43
</TABLE>

[Merrill Lynch Logo appears here]

MERRILL LYNCH
FLORIDA MUNICIPAL
BOND FUND

OF MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST

PROSPECTUS

November 6, 1998

Distributor:
Merrill Lynch
Funds Distributor

This Prospectus should be
retained for future reference.

Code #13904-1198
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

Merrill Lynch Florida Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust
P.O. Box 9011, Princeton, New Jersey 08543-9011 - Phone No. (609) 282-2800

---------------
Merrill Lynch Florida Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), an open-end
management investment company organized as a Massachusetts business trust. The
investment objective of the Fund is to provide shareholders with as high a level
of income exempt from Federal income taxes as is consistent with prudent
investment management. The Fund also seeks to provide shareholders with the
opportunity to invest in securities exempt from Florida intangible personal
property taxes. The Fund invests primarily in a portfolio of long-term
investment grade obligations issued by or on behalf of the State of Florida, its
political subdivisions, agencies and instrumentalities and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the U.S. Virgin
Islands and Guam, which pay interest exempt, in the opinion of bond counsel to
the issuer, from Federal income taxes and which enables shares of the Fund to be
exempt from Florida intangible personal property taxes ("Florida Municipal
Bonds"). There can be no assurance that the investment objective of the Fund
will be realized.

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

Pursuant to the Merrill Lynch Select Pricing(SM) System, the Fund offers
four classes of shares, each with a different combination of sales charges,
ongoing fees and other features. The Merrill Lynch Select Pricing(SM) System
permits an investor to choose the method of purchasing shares that the investor
believes is most beneficial given the amount of the purchase, the length of time
the investor expects to hold the shares and other relevant circumstances.

---------------
This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the Prospectus of the Fund, dated
November 6, 1998 (the "Prospectus"), which has been filed with the Securities
and Exchange Commission (the "Commission") and can be obtained, without charge,
by calling or by writing the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus. Capitalized terms used but not defined herein have the same meanings
as in the Prospectus.

---------------
Fund Asset Management -- Manager
Merrill Lynch Funds Distributor -- Distributor
---------------
The date of this Statement of Additional Information is November 6, 1998.
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to provide shareholders with as
high a level of income exempt from Federal income taxes as is consistent with
prudent investment management. The Fund also seeks to provide shareholders with
the opportunity to own shares exempt from Florida intangible personal property
taxes. The Fund seeks to achieve its objective by investing primarily in a
portfolio of long-term obligations issued by or on behalf of the State of
Florida, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers, such as issuers located in Puerto Rico,
the U.S. Virgin Islands and Guam, which pay interest exempt, in the opinion of
bond counsel to the issuer, from Federal income taxes and which enables shares
of the Fund to be exempt from Florida intangible personal property taxes.
Obligations exempt from Federal income taxes are referred to herein as
"Municipal Bonds" and obligations exempt from both Federal income taxes and
Florida intangible personal property taxes are referred to as "Florida Municipal
Bonds." Unless otherwise indicated, references to Municipal Bonds shall be
deemed to include Florida Municipal Bonds. The Fund anticipates that at all
times, except during temporary defensive periods, it will maintain at least 65%
of its total assets invested in Florida Municipal Bonds. At times, the Fund will
seek to hedge its portfolio through the use of futures transactions to reduce
volatility in the net asset value of Fund shares. Reference is made to
"Investment Objective and Policies" in the Prospectus for a discussion of the
investment objective and policies of the Fund.

Municipal Bonds may include general obligation bonds of the State and its
political subdivisions, revenue bonds to finance utility systems, highways,
bridges, port and airport facilities, colleges, hospitals, housing facilities,
etc., and industrial development bonds or private activity bonds. The interest
on such obligations may bear a fixed rate or be payable at a variable or
floating rate. The Municipal Bonds purchased by the Fund will be primarily what
are commonly referred to as "investment grade" securities, which are obligations
rated at the time of purchase within the four highest quality ratings as
determined by either Moody's Investors Service, Inc. ("Moody's") (currently Aaa,
Aa, A and Baa), Standard & Poor's ("Standard & Poor's") (currently AAA, AA, A
and BBB) or Fitch IBCA, Inc. ("Fitch") (currently AAA, AA, A and BBB). If
unrated, such securities will possess creditworthiness comparable, in the
opinion of the manager of the Fund, Fund Asset Management, L.P. (the "Manager"),
to other obligations in which the Fund may invest.

The Fund ordinarily does not intend to realize investment income from
securities other than Florida Municipal Bonds. However, to the extent that
suitable Florida Municipal Bonds are not available for investment by the Fund,
the Fund may purchase Municipal Bonds issued by other states, their agencies and
instrumentalities, the interest income on which is exempt, in the opinion of
bond counsel to the issuer, from Federal taxation. Included within the term
Municipal Bonds are, among other things, obligations of issuers located in
Puerto Rico, the Virgin Islands and Guam. The Fund also may invest in securities
not issued by or on behalf of a state or territory or by an agency or
instrumentality thereof, if the Fund nevertheless believes such securities to be
exempt from Federal income taxation ("Non-Municipal Tax-Exempt Securities").
Non-Municipal Tax-Exempt Securities may include securities issued by other
investment companies that invest in municipal bonds, to the extent permitted by
applicable law. Other Non-Municipal Tax-Exempt Securities also could include
trust certificates or other derivative instruments evidencing interests in one
or more Municipal Bonds. The Fund will attempt not to hold Municipal Bonds and
Non-Municipal Tax-Exempt Securities on the last business day of any calendar
year to the extent that such investments may result in shares of the Fund being
subject to the Florida intangible personal property tax.

Except when acceptable securities are unavailable as determined by the
Manager, the Fund, under normal circumstances, will invest at least 65% of its
total assets in Florida Municipal Bonds. For temporary periods or to provide
liquidity, the Fund has the authority to invest as much as 35% of its total
assets in tax-exempt or taxable money market obligations with a maturity of one
year or less (such short-term obligations being referred to herein as "Temporary
Investments"), except that taxable Temporary Investments shall not exceed 20% of
the Fund's net assets. The Fund will attempt not to hold Temporary Investments
on the last business day of any calendar year to the extent that such
investments may result in shares of the Fund being subject to the Florida
intangible personal property tax. The Fund at all times will have at least 80%
of its net assets invested in securities exempt from Federal income taxation.
However, interest received on certain otherwise tax-exempt securities which are
classified as "private activity bonds" (in general bonds that benefit
non-governmental entities) may be subject to an alternative minimum tax. The
Fund may purchase such private activity bonds. See "Distributions and Taxes." In
addition, the Fund reserves the right to invest temporarily a greater portion of
its assets in Temporary Investments for defensive purposes, when, in the
judgment of the Manager, market conditions warrant. The investment objective of
the Fund is a fundamental policy of the Fund which may not be changed without a
vote of a majority of the outstanding shares of the Fund. The Fund's hedging
strategies are not fundamental policies and may be modified by the Trustees of
the Trust without the approval of the Fund's shareholders.

Municipal Bonds may at times be purchased or sold on a delayed delivery
basis or a when-issued basis. These transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future, often a month

2
<PAGE>

or more after the purchase. The payment obligation and the interest rate are
each fixed at the time the buyer enters into the commitment. The Fund will make
only commitments to purchase such securities with the intention of actually
acquiring the securities, but the Fund may sell these securities prior to the
settlement date if it is deemed advisable. Purchasing Municipal Bonds on a
when-issued basis involves the risk that the yields available in the market when
the delivery takes place actually may be higher than those obtained in the
transaction itself; if yields so increase, the value of the when-issued
obligation generally will decrease. The Fund will maintain a separate account at
its custodian bank consisting of cash, cash equivalents or high-grade, liquid
Municipal Bonds or Temporary Investments (valued on a daily basis) equal at all
times to the amount of the when-issued commitment.

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

The Fund may invest up to 20% of its total assets in Municipal Bonds which
are rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch or
which, in the Manager's judgment, possess similar credit characteristics ("high
yield securities"). See Appendix II -- "Ratings of Municipal Bonds" for
additional information regarding ratings of debt securities. The Manager
considers the ratings assigned by Standard & Poor's, Moody's or Fitch as one of
several factors in its independent credit analysis of issuers.

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

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

3
<PAGE>

The risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.

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

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

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

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

DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS

Set forth below is a description of the Municipal Bonds and Temporary
Investments in which the Fund may invest. A more complete discussion concerning
futures and options transactions is set forth under "Investment Objective and
Policies" in the Prospectus. Information with respect to ratings assigned to
tax-exempt obligations which the Fund may purchase is set forth in Appendix II
to this Statement of Additional Information.

DESCRIPTION OF MUNICIPAL BONDS

Municipal Bonds 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 funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of industrial development bonds or private activity bonds are
issued by or on behalf of public authorities to finance various privately owned
or operated facilities. Such obligations are included within the term Municipal
Bonds if the interest paid thereon is, in the opinion of bond counsel to the
issuer, excluded from gross income for Federal income tax purposes and such
obligations are issued by the State of Florida, its political subdivisions,
agencies and instrumentalities or are obligations of other qualifying issuers.
Other types of industrial development bonds or private activity bonds, the
proceeds of which are used for the construction, equipment or improvement of
privately operated industrial or commercial facilities, may constitute Municipal
Bonds, although the current Federal tax laws place substantial limitations on
the size of such issues.

The two principal classifications of Municipal Bonds are "general
obligation" bonds and "revenue" bonds, which latter category includes industrial
development bonds ("IDBs") and, for bonds issued after August 15, 1986, private
activity bonds. General obligation bonds are secured by the issuer's pledge of
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special or limited tax or other specific revenue source, such as payments from
the user of the facility being financed. IDBs and private activity bonds are in
most cases revenue bonds and generally do not constitute the pledge of the
credit or taxing power of the issuer of such bonds. Generally, the payment of
the principal of

4
<PAGE>

and interest on such bonds depends solely on the ability of the user of the
facility 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,
unless a line of credit, bond insurance or other security is furnished. Florida
municipal obligations are not secured by a pledge of real or personal property.
The Fund also may invest in so-called "moral obligation" bonds, which are
normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, repayment of such bonds
becomes a moral commitment, but not a legal obligation of the state or
municipality in question.

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

Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, 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
bonds in which the Fund invests to meet their obligations for the payment of
interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally and to equitable
principles, which may limit the enforcement of certain remedies.

DESCRIPTION OF TEMPORARY INVESTMENTS

The Fund may invest in short-term tax-free and taxable securities subject
to the limitations set forth under "Investment Objective and Policies." The
tax-exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with a remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to short-term unsecured promissory notes generally
issued to finance short-term credit needs. The taxable money market securities
in which the Fund may invest as Temporary Investments consist of U.S. Government
securities, U.S. Government agency securities, domestic bank or savings
institution certificates of deposit and bankers' acceptances, short-term
corporate debt securities such as commercial paper, and repurchase agreements.
These Temporary Investments must have a stated maturity not in excess of one
year from the date of purchase.

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 on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable at
intervals (ranging from daily to up to one year) to some prevailing

5
<PAGE>

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

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

VRDOs that contain 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 Fund's restriction
on illiquid investments unless, in the judgment of the Trustees, such VRDO is
liquid. The Trustees may adopt guidelines and delegate to the Manager the daily
function of determining and monitoring liquidity of such VRDOs. The Trustees,
however, will retain sufficient oversight and will be ultimately responsible for
such determination.

The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated "A-1+" through A-3 by Standard
& Poor's, Prime-1 through Prime-3 by Moody's or F-1 through F-3 by Fitch or, if
not rated, issued by companies having an outstanding debt issue rated at least A
by Standard & Poor's, Fitch or Moody's. Investments in corporate bonds and
debentures (which must have maturities at the date of purchase of one year or
less) must be rated at the time of purchase at least A by Standard & Poor's,
Moody's or Fitch. Notes and VRDOs at the time of purchase must be rated SP-1/A-1
through SP-2/A-3 by Standard & Poor's, MIG-1/VMIG-1 through MIG-3/VMIG-3 by
Moody's or F-1 through F-3 by Fitch. Temporary Investments, if not rated, must
be of comparable quality to securities rated in the above rating categories in
the opinion of the Manager. The Fund may not invest in any security issued by a
commercial bank or a savings institution unless the bank or institution is
organized and operating in the United States, has total assets of at least one
billion dollars and is a member of the Federal Deposit Insurance Corporation
("FDIC"), except that up to 10% of total assets may be invested in certificates
of deposit of small institutions if such certificates are fully insured by the
FDIC.

REPURCHASE AGREEMENTS

The Fund may invest in securities pursuant to repurchase agreements. As
with other Temporary Investments, the Fund does not intend to hold such
agreements or contracts on the last business day of any calendar year if doing
so would result in the Florida intangible personal property tax being imposed on
Fund shares. Repurchase agreements may be entered into only with a member bank
of the Federal Reserve System or a primary dealer in U.S. Government securities
or an affiliate thereof. Under such agreements, the bank or primary dealer or an
affiliate thereof agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the yield
during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. In repurchase agreements,
the prices at which the trades are conducted do not reflect accrued interest on
the underlying obligations. Such agreements usually cover short periods, such as
under one week. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred to
the purchaser. In the case of a repurchase agreement, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement
construed to be a collateralized loan, the underlying securities are not owned
by the Fund but only constitute collateral for the seller's obligation to pay
the repurchase price. Therefore, the Fund may suffer time delays and incur costs
or possible losses in connection with the disposition of the collateral. In the
event of a default under such a repurchase agreement, instead of the contractual
fixed rate of return, the rate of return to the Fund will depend on intervening
fluctuations of the market value of such security and the accrued interest on
the security. In such event, the Fund would have rights against the seller for
breach of contract with respect to any losses arising from market fluctuations
following the failure of

6
<PAGE>

the seller to perform. The Fund may not invest in repurchase agreements maturing
in more than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's total assets.

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

FINANCIAL FUTURES TRANSACTIONS AND OPTIONS

Reference is made to the discussion concerning futures transactions under
"Investment Objective and Policies" in the Prospectus. Set forth below is
additional information concerning these transactions.

As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. The Fund does not intend to engage in any such transactions in a
manner which will result in the Florida intangible personal property tax being
imposed in Fund shares. In addition, any transactions involving financial
futures or options (and puts and calls associated therewith) will be in
accordance with the Fund's investment policies and limitations. See "Investment
Objective and Policies -- Investment Restrictions" in the Prospectus. To hedge
its portfolio, the Fund may take an investment position in a futures contract
which will move in the opposite direction from the portfolio position being
hedged. While the Fund's use of hedging strategies is intended to moderate
capital changes in portfolio holdings and thereby reduce the volatility of the
net asset value of Fund shares, the Fund anticipates that its net asset value
will fluctuate. Set forth below is information concerning futures transactions.

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

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

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

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

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

Subject to policies adopted by the Trustees, the Fund also may engage in
other futures contracts transactions such as futures contracts on other
municipal bond indices that may become available if the Manager and the Trustees
should determine

7
<PAGE>

that there is normally a sufficient correlation between the prices of such
futures contracts and the Municipal Bonds in which the Fund invests to make such
hedging appropriate.

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

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

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

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

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

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

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

The Trust has received an order from the Commission (the "Commission")
exempting it from the provisions of Section 17(f) and Section 18(f) of the
Investment Company Act of 1940, as amended (the "1940 Act"), in connection with
its strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the Trust and commodities
brokers with respect to initial and variation margin. Section 18(f) of the 1940
Act prohibits an open-end investment company such as the Trust from issuing a
"senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a futures contract may be a "senior
security" under the 1940 Act.

8
<PAGE>

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

When the Fund purchases futures contracts or a call option with respect
thereto or writes a put option on a futures contract, an amount of cash, cash
equivalents or liquid securities will be deposited in a segregated account with
the Fund's custodian so that the amount so segregated, plus the amount of
initial and variation margin held in the account of its broker, equals the
market value of the futures contract, thereby ensuring that the use of such
futures is unleveraged.

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

The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the Municipal
Bonds held by the Fund. As a result, the Fund's ability to hedge effectively all
or a portion of the value of its Municipal Bonds through the use of such
financial futures contracts will depend in part on the degree to which price
movements in the index underlying the financial futures contract correlate with
the price movements of the Municipal Bonds held by the Fund. The correlation may
be affected by disparities in the average maturity, ratings, geographical mix or
structure of the Fund's investments as compared to those comprising the
Municipal Bond Index, and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the Municipal
Bond Index alter its structure. The correlation between futures contracts on
U.S. Government securities and the Municipal Bonds held by the Fund may be
adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of the
Municipal Bonds held by the Fund may be greater.

The Fund expects to liquidate a majority of the futures contracts it enters
into through offsetting transactions on the applicable contract market. There
can be no assurance, however, that a liquid secondary market will exist for any
particular futures contract at any specific time. Thus, it may not be possible
to close out a futures position. In the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. In such situations, if the Fund has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. The inability to
close out futures positions also could have an adverse impact on the Fund's
ability to hedge effectively its investments in Municipal Bonds. The Fund will
enter into a futures position only if, in the judgment of the Manager, there
appears to be an actively traded secondary market for such futures contracts.

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

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

9
<PAGE>

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

Municipal Bond Index futures contracts were approved for trading in 1986.
Trading in such futures contracts may tend to be less liquid than that in other
futures contracts. The trading of futures contracts also is subject to certain
market risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.

INVESTMENT RESTRICTIONS

The Fund has adopted a number of fundamental and non-fundamental
restrictions and policies relating to the investment of its assets and its
activities. The fundamental policies set forth below may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities (which for this purpose and under the 1940 Act means the lesser of
(i) 67% of the Fund's shares present at a meeting, at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more than 50% of the
Fund's outstanding shares). The Fund may not:

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

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

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

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

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

6. Borrow money, except that (i) the Fund may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) the Fund may, to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes, (iii) the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities
and (iv) the Fund may purchase securities on margin to the extent permitted
by applicable law. The Fund may not pledge its assets other than to secure
such borrowings or, to the extent permitted by the Fund's investment policies
as set forth in its Prospectus and Statement of Additional Information, as
they may be amended from time to time, in connection with hedging
transactions, short sales, when-issued and forward commitment transactions
and similar investment strategies.

7. Underwrite securities of other issuers, except insofar as the Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended (the "Securities Act"), in selling portfolio securities.

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

Under the non-fundamental investment restrictions, which may be changed by
the Board of Trustees without shareholder approval, the Fund may not:

a. Purchase securities of other investment companies, except to the extent
such purchases are permitted by applicable law. As a matter of policy,
however, the Fund will not purchase shares of any registered open-end
investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the "fund of funds" provisions) of the 1940 Act,
at any time the Fund's shares are owned by another investment company that is
part of the same group of investment companies as the Fund.

10
<PAGE>

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

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

d. Notwithstanding fundamental investment restriction (6) above, borrow
amounts in excess of 20% of the Fund's total assets, taken at market value
(including the amount borrowed), and then only from banks as a temporary
measure for extraordinary or emergency purposes. In addition, the Fund will
not purchase securities while borrowings are outstanding.

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

Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Manager, the Fund is prohibited from
engaging in certain transactions involving Merrill Lynch or its affiliates
except for brokerage transactions permitted under the 1940 Act involving only
usual and customary commissions or transactions pursuant to an exemptive order
under the 1940 Act. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in which
it acts as principal. See "Portfolio Transactions." An exemptive order has been
obtained which permits the Trust to effect principal transactions with Merrill
Lynch in high quality, short-term, tax-exempt securities subject to conditions
set forth in such order.

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

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

ARTHUR ZEIKEL (66) -- PRESIDENT AND TRUSTEE(1)(2) -- Chairman of the
Manager and of Merrill Lynch Asset Management, L.P. ("MLAM") (which terms as
used herein include their corporate predecessors) since 1997; President of the
Manager and MLAM from 1977 to 1997; Chairman of Princeton Services, Inc.
("Princeton Services") since 1997 and Director thereof since 1993; President of
Princeton Services from 1993 to 1997; Executive Vice President of Merrill Lynch
& Co., Inc. ("ML & Co.") since 1990.
JAMES H. BODURTHA (54) -- TRUSTEE(2) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation since
1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.

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

ROBERT R. MARTIN (71) -- TRUSTEE(2) -- 513 Grand Hill, St. Paul, Minnesota
55102. Chairman and Chief Executive Officer, Kinnard Investments, Inc. from
1990 to 1993; Executive Vice President, Dain Bosworth from 1974 to 1989;
Director, Carnegie Capital Management from 1977 to 1985 and Chairman thereof in
1979; Director, Securities Industry Association

11
<PAGE>

from 1981 to 1982 and Public Securities Association from 1979 to 1980; Chairman
of the Board, WTC Industries, Inc. in 1994; Trustee, Northland College since
1992.

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

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

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

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

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

ROBERT A. DIMELLA, CFA (32) -- PORTFOLIO MANAGER AND VICE PRESIDENT OF THE
FUND (1)(2) -- Vice President of MLAM since 1997; Assistant Portfolio Manager of
MLAM from 1993 to 1995; Assistant Portfolio Manager with Prudential Investment
Advisers from 1991 to 1993.

ROBERT D. SNEEDEN (45) -- PORTFOLIO MANAGER AND VICE PRESIDENT OF THE FUND
(1)(2) -- Assistant Vice President and Portfolio Manager of MLAM since 1994;
Vice President of Lehman Brothers from 1990 to 1994.

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

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

ROBERT E. PUTNEY, III (38) -- SECRETARY(1)(2) -- Director (Legal Advisory)
of MLAM and Princeton Administrators since 1997; Vice President of MLAM from
1994 to 1997; Vice President of Princeton Administrators from 1996 to 1997;
Attorney with MLAM from 1991 to 1994.
- -------
(1) Interested person, as defined in the 1940 Act, of the Trust. (2) Such
Trustee or officer is a director, trustee or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.

At September 30, 1998, the Trustees, the officers of the Trust and the
officers of the Fund as a group (14 persons) owned an aggregate of less than 1%
of the outstanding shares of the Fund. At such date, Mr. Zeikel, a Trustee and
officer of the Trust, other officers of the Trust and the officers of the Fund
owned an aggregate of less than 1% of the common stock of ML & Co.

COMPENSATION OF TRUSTEES

The Trust pays each Trustee not affiliated with the Manager (each a
"non-affiliated Trustee") a fee of $10,000 per year plus $1,000 per meeting
attended, together with such Trustee's actual out-of-pocket expenses relating to
attendance at meetings. The Trust also compensates members of its Audit and
Nominating Committee ("the Committee"), which consists of all the non-affiliated
Trustees, a fee of $2,000 per year plus $500 per meeting attended. The Trust
reimburses each non-affiliated Trustee for his out-of-pocket expenses relating
to attendance at Board and Committee meetings. The fees and expenses of the
Trustees are allocated to the respective series of the Trust on the basis of
asset size. For the fiscal year ended July 31, 1998, fees and expenses paid to
non-affiliated Trustees that were allocated to the Fund aggregated $12,533.

The following table sets forth the compensation paid by the Fund to the
non-affiliated Trustees for the fiscal year ended July 31, 1998 and the
aggregate compensation paid by all registered investment companies (including
the Trust) advised by

12
<PAGE>

the Manager and its affiliate, MLAM ("FAM/MLAM Advised Funds") to the
non-affiliated Trustees for the calendar year ended December 31, 1997:

<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM TRUST AND OTHER
PENSION OR RETIREMENT FAM/MLAM-ADVISED
COMPENSATION BENEFITS ACCRUED AS FUNDS PAID TO
NAME OF TRUSTEE FROM FUND PART OF TRUST'S EXPENSES TRUSTEE(1)
- --------------------------- -------------- -------------------------- ---------------------
<S> <C> <C> <C>
James H. Bodurtha ......... $2,512 None $148,500
Herbert I. London ......... $2,512 None $148,500
Robert R. Martin .......... $2,512 None $148,500
Joseph L. May ............. $2,512 None $148,500
Andre F. Perold ........... $2,512 None $148,500
</TABLE>

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

MANAGEMENT AND ADVISORY ARRANGEMENTS

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

Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or its
affiliates. 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 the Manager or its affiliates purchase or sell
securities for the Fund or other funds for which they act as manager or for
their advisory clients and such sales or purchases arise for consideration at or
about the same time, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of the
Manager or its affiliates 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.

Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 0.55% of the average daily net
assets not exceeding $500 million; 0.525% of the average daily net assets
exceeding $500 million but not exceeding $1.0 billion and 0.50% of the average
daily net assets exceeding $1.0 billion. For the fiscal years ended July 31,
1996, 1997 and 1998, the total advisory fees paid by the Fund to the Manager
aggregated $1,502,648, $1,371,623 and $1,237,408, respectively.

The Management Agreement obligates the Manager to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Trust connected with investment and economic
research, trading and investment management of the Trust, as well as the
compensation of all Trustees of the Trust who are affiliated persons of ML & Co.
or any of its affiliates. The Fund pays all other expenses incurred in its
operation and, if other Series shall be added ("Series"), a portion of the
Trust's general administrative expenses will be allocated on the basis of the
asset size of the respective Series. Expenses that will be borne directly by the
Series include, among other things, redemption expenses, expenses of portfolio
transactions, expenses of registering the shares under Federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), expenses of printing shareholder reports, prospectuses and statements of
additional information except to the extent paid by Merrill Lynch Funds
Distributor, a division of PFD (the "Distributor") as described below, fees for
legal and auditing services, Commission fees, interest, certain taxes, and other
expenses attributable to a particular Series. Expenses that will be allocated on
the basis of asset size of the respective Series include fees and expenses of
unaffiliated Trustees, state franchise taxes, costs of printing proxies and
other expenses related to shareholder meetings, and other expenses properly
payable by the Trust. The organizational expenses of the Trust were paid by the
Trust, and as additional Series are added to the Trust, the organizational
expenses are allocated among the Series (including the Fund) in a manner deemed
equitable by the Trustees. Depending upon the nature of a lawsuit, litigation
costs may be assessed to the specific Series to which the lawsuit relates or
allocated on the basis of the asset size of the respective Series. The Trustees
have determined that this is an appropriate method of allocation of expenses.
Accounting services are provided to the Fund by the Manager and the Fund
reimburses the Manager for its costs in connection with such services. For the
fiscal years ended July 31, 1996, 1997 and 1998, the Fund reimbursed the Manager
$67,090, $102,692 and $86,605, respectively,

13
<PAGE>

for accounting services. As required by the Fund's distribution agreements, the
Distributor will pay the promotional expenses of the Fund incurred in connection
with the offering of shares of the Fund. Certain expenses in connection with the
account maintenance and distribution of shares will be financed by the Fund
pursuant to the Distribution Plans in compliance with Rule 12b-1 under the 1940
Act. See "Purchase of Shares -- Distribution Plans."

The Manager is a limited partnership, the partners of which are ML & Co.
and Princeton Services, Inc. ML & Co. and Princeton Services are "controlling
persons" of the Manager as defined under the 1940 Act because of their ownership
of its voting securities or their power to exercise a controlling influence over
its management or policies.

DURATION AND TERMINATION. Unless earlier terminated as described herein,
the Management Agreement will remain in effect from year to year if approved
annually (a) by the Trustees of the Trust or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Trustees who are not parties to
such contract or interested persons (as defined in the 1940 Act) of any such
party. Such contracts are not assignable and may be terminated without penalty
on 60 days' written notice at the option of either party thereto or by vote of
the shareholders of the Fund.

PURCHASE OF SHARES

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

The Fund issues four classes of shares under the Merrill Lynch Select
Pricing(SM) System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share of the Fund represents identical interests in
the investment portfolio of the Fund and has the same rights, except that Class
B, Class C and Class D shares bear the expenses of the ongoing account
maintenance fees, and Class B and Class C shares bear the expenses of the
ongoing distribution fees and the additional incremental transfer agency costs
resulting from the deferred sales charge arrangements. Class B, Class C and
Class D shares each have exclusive voting rights with respect to the Rule 12b-1
distribution plan adopted with respect to such class pursuant to which account
maintenance and/or distribution fees are paid (except that Class B shareholders
may vote upon any material changes to expenses charged under the Class D
Distribution Plan). Each class has different exchange privileges. See
"Shareholder Services -- Exchange Privilege."

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

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

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

The gross sales charges for the sale of Class A shares for the fiscal year
ended July 31, 1996 were $18,558, of which the Distributor received $1,672 and
Merrill Lynch received $16,886. The gross sales charges for the sale of Class A
shares for fiscal year ended July 31, 1997 were $7,501, of which the Distributor
received $729 and Merrill Lynch received $6,772. The gross sales charges for the
sale of Class A shares for the fiscal year ended July 31, 1998 were $13,043, of
which the Distributor received $1,243 and Merrill Lynch received $11,800. The
gross sales charges for the sale of Class D shares for the fiscal year ended
July 31, 1996 were $30,523, of which the Distributor received $3,402 and Merrill
Lynch received $27,121. The gross sales charges for the sale of Class D shares
for the fiscal year ended July 31, 1997 were $27,060, of which the Distributor
received $2,785 and Merrill Lynch received $24,275. The gross sales charges for
the sale of Class D shares for the fiscal year ended July 31, 1998 were $26,224,
of which the Distributor received $2,713 and Merrill Lynch received $23,511. For
the fiscal years ended July 31, 1996, 1997 and 1998, the Distributor received no
CDSCs with respect to redemptions within one year after purchase of Class A
shares purchased subject to a front-end sales charge waiver. For the fiscal
years ended July 31, 1996 and 1997, the Distributor received no CDSCs with
respect to redemptions within one year after purchase of Class D shares
purchased subject to a front-end sales charge waiver. For the fiscal year ended

14
<PAGE>

July 31, 1998, the Distributor received CDSCs of $10,000, with respect to
redemptions within one year after purchase of Class D shares purchased subject
to a front-end sales charge waiver, all of which were paid to Merrill Lynch.

The term "purchase," as used in the Prospectus and this Statement of
Additional Information in connection with an investment in Class A and Class D
shares of the Fund, refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his spouse and their children under the
age of 21 years purchasing shares for his or their own account and to single
purchases by a trustee or other fiduciary purchasing shares for a single trust
estate or single fiduciary account although more than one beneficiary is
involved. The term "purchase" also includes purchases by any "company," as that
term is defined in the 1940 Act, but does not include purchases by any such
company that has not been in existence for at least six months or which has no
purpose other than the purchase of shares of the Fund or shares of other
registered investment companies at a discount; provided, however, that it shall
not include purchases by any group of individuals whose sole organizational
nexus is that the participants therein are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser.

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

Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the proceeds from a sale of certain shares of
common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund, Inc.
will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond Fund,
Inc. will receive Class D shares of the Fund, except that shareholders already
owning Class A shares of the Fund will be eligible to purchase additional Class
A shares pursuant to this option, if such additional Class A shares will be held
in the same account as the existing Class A shares and the other requirements
pertaining to the reinvestment privilege are met. In order to exercise this
investment option, a shareholder of one of the above-referenced continuously
offered closed-end funds (an "eligible fund") must sell his or her shares of
common stock of the eligible fund (the "eligible shares") back to the eligible
fund in connection with a tender offer conducted by the eligible fund and
reinvest the proceeds immediately in the designated class of shares of the fund.
This investment option is available only with respect to eligible shares as to
which no Early Withdrawal Charge or CDSC (each as defined in the eligible fund's
prospectus) is applicable. Purchase orders from eligible fund shareholders
wishing to exercise this investment option will be accepted only on the day that
the related tender offer terminates and will be effected at the net asset value
of the designated class of the Fund on such day.

REDUCED INITIAL SALES CHARGES

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

LETTER OF INTENTION. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or any
other Select Pricing Funds, made within a thirteen-month period starting with
the first

15
<PAGE>

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

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

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

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

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

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

Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor who has a business relationship with a Merrill Lynch
Financial Consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the investor establishes that the
following conditions are satisfied: first, the investor must

16
<PAGE>

advise Merrill Lynch that it will purchase Class D shares of the Fund with
proceeds from the redemption of shares of such other mutual fund and that such
shares have been outstanding for a period of no less than six months; and
second, such purchase of Class D shares must be made within 60 days after the
redemption and the proceeds from the redemption must be maintained in the
interim in cash or a money market fund.

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

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

DISTRIBUTION PLANS

Reference is made to "Purchase of Shares -- Distribution Plans" in the
Prospectus for certain information with respect to the distribution plans for
Class B, Class C and Class D shares pursuant to Rule 12b-1 under the 1940 Act
(each a "Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes.

Payment of the account maintenance fees and/or distribution fees is subject
to the provisions of Rule 12b-1 under the 1940 Act. Among other things, each
Distribution Plan provides that the Distributor shall provide and the Trustees
shall review quarterly reports of the disbursement of the account maintenance
fees and/or distribution fees paid to the Distributor. In their consideration of
each Distribution Plan, the Trustees must consider all factors they deem
relevant, including information as to the benefits of the Distribution Plan to
the Fund and its related class of shareholders. Each Distribution Plan further
provides that, so long as the Distribution Plan remains in effect, the selection
and nomination of Trustees who are not "interested persons" of the Trust, as
defined in the 1940 Act (the "Independent Trustees"), shall be committed to the
discretion of the Independent Trustees then in office. In approving each
Distribution Plan in accordance with Rule 12b-1, the Independent Trustees
concluded that there is reasonable likelihood that such Distribution Plan will
benefit the Fund and its related class of shareholders. Each Distribution Plan
can be terminated at any time, without penalty, by the vote of a majority of the
Independent Trustees or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution Plan
cannot be amended to increase materially the amount to be spent by the Fund
without the approval of the related class of shareholders, and all material
amendments are required to be approved by the vote of Trustees, including a
majority of the Independent Trustees who have no direct or indirect financial
interest in such Distribution Plan, cast in person at a meeting called for that
purpose. Rule 12b-1 further requires that the Trust preserve copies of each
Distribution Plan and any report made pursuant to such plan for a period of not
less than six years from the date of such Distribution Plan or such report, the
first two years in an easily accessible place.

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

The maximum sales charge rule in the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") imposes a limitation on
certain asset-based sales charges such as the distribution fee and the CDSC
borne by the Class B and Class C shares but not the account maintenance fee. The
maximum sales charge rule is applied separately to each class. As applicable to
the Fund, the maximum sales charge rule limits the aggregate of distribution fee
payments and CDSCs payable by the Fund to (1) 6.25% of eligible gross sales of
Class B shares and Class C shares, computed separately (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges), plus (2)
interest on the unpaid balance for the respective class, computed separately, at
the prime rate plus 1% (the unpaid balance being the maximum amount payable
minus amounts received from the payment of the distribution fee and the CDSC).
In connection with the Class B shares, the Distributor has voluntarily agreed to
waive interest charges on the unpaid balance in excess of 0.50% of eligible
gross sales. Consequently, the maximum amount payable to the Distributor
(referred to as the "voluntary maximum") in connection

17
<PAGE>

with the Class B shares is 6.75% of eligible gross sales. The Distributor
retains the right to stop waiving the interest charges at any time. To the
extent payments would exceed the voluntary maximum, the Fund will not make
further payments of the distribution fee with respect to Class B shares, and any
CDSCs will be paid to the Fund rather than to the Distributor; however, the Fund
will continue to make payments of the account maintenance fee. In certain
circumstances the amount payable pursuant to the voluntary maximum may exceed
the amount payable under the NASD formula. In such circumstances payment in
excess of the amount payable under the NASD formula will not be made.

The following table sets forth comparative information as of July 31, 1998,
with respect to the Class B and Class C shares of the Fund indicating the
maximum allowable payments that can be made under the NASD maximum sales charge
rule and, with respect to Class B shares, the Distributor's voluntary maximum.

DATA CALCULATED AS OF JULY 31, 1998

<TABLE>
<CAPTION>
ALLOWABLE ALLOWABLE AMOUNTS
ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY
GROSS SALES ON UNPAID AMOUNT PAID TO
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3)
---------- ----------- ------------ --------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE PERIOD
MAY 31, 1991 (COMMENCEMENT OF OPERATIONS) TO JULY 31, 1998:
Under NASD Rule as Adopted ......................................... $316,997 $ 19,812 $ 9,798 $ 29,610 $ 5,796
Under Distributor's Voluntary Waiver ............................... $316,997 $ 19,812 $ 1,585 $ 21,397 $ 5,796
CLASS C SHARES, FOR THE PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF OPERATIONS) TO
JULY 31, 1998:
Under NASD Rule as Adopted ......................................... $ 11,066 $ 692 $ 125 $ 817 $ 71

<CAPTION>
ANNUAL
AGGREGATE DISTRIBUTION
UNPAID FEE AT CURRENT
BALANCE NET ASSET LEVEL(4)
----------- -------------------
<S> <C> <C>
CLASS B SHARES, FOR THE PERIOD
MAY 31, 1991 (COMMENCEMENT OF OPERATIONS) TO JULY 31, 1998:
Under NASD Rule as Adopted ............................................................. $23,815 $ 359
Under Distributor's Voluntary Waiver ................................................... $15,601 $ 359
CLASS C SHARES, FOR THE PERIOD OCTOBER 21, 1994 (COMMENCEMENT OF OPERATIONS) TO
JULY 31, 1998:
Under NASD Rule as Adopted ............................................................. $ 745 $ 31
</TABLE>

- -------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"Purchase of Shares -- Distribution Plans" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch Mutual
Fund Advisor (Merrill Lynch MFA(SM)) Program (the "MFA Program"). The CDSC
is booked as a contingent obligation that may be payable if the shareholder
terminates participation in the MFA Program.

(4) Provided to illustrate the extent to which the current level of distribution
fee payments (not including any CDSC payments) is amortizing the unpaid
balance. No assurance can be given that payments of the distribution fee
will reach either the voluntary maximum or the NASD maximum (with respect to
Class B and Class C shares) or the voluntary maximum (with respect to Class
B shares).

REDEMPTION OF SHARES

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

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

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

DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES

As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares," while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in certain
instances including following the death or disability of a Class B shareholder.
Redemptions for which the waiver applies in the case of such withdrawals are any
partial or complete redemption following the death or disability (as defined in
the Internal Revenue Code of 1986, as amended (the "Code") of a Class B
shareholder (including one who owns the Class B shares as joint tenant with his
or her spouse), provided the

18
<PAGE>

redemption is requested within one year of the death or initial determination of
disability. For the fiscal years ended July 31, 1996, 1997 and 1998, the
Distributor received CDSCs of $286,394, $265,358 and $109,591, respectively,
with respect to redemptions of Class B shares, all of which were paid to Merrill
Lynch. Additional CDSCs payable to the Distributor, during the fiscal years
ended July 31, 1997 and 1998, may have been waived or converted to a contingent
obligation in connection with a shareholder's participation in certain fee-based
programs. For the fiscal years ended July 31, 1996, 1997 and 1998, the
Distributor received CDSCs of $2,519, $4,549 and $1,169, respectively, with
respect to redemptions of Class C shares, all of which were paid to Merrill
Lynch.

PORTFOLIO TRANSACTIONS

Reference is made to "Investment Objective and Policies" and "Portfolio
Transactions" in the Prospectus.

Under the 1940 Act, persons affiliated with the Trust are prohibited from
dealing with the Fund as a principal in the purchase and sale of securities
unless such trading is permitted by an exemptive order issued by the Commission.
Since over-the-counter ("OTC") transactions are usually principal transactions,
affiliated persons of the Trust, including Merrill Lynch, may not serve as
dealer in connection with transactions with the Fund. The Trust has obtained an
exemptive order permitting it to engage in certain principal transactions with
Merrill Lynch involving high quality short-term municipal bonds subject to
certain conditions. The Trust has applied for an exemptive order permitting it
to, among other things, (i) purchase high quality tax-exempt securities from
Merrill Lynch when Merrill Lynch is a member of an underwriting syndicate and
(ii) purchase tax-exempt securities from and sell tax-exempt securities to
Merrill Lynch in secondary market transactions. Affiliated persons of the Trust
may serve as broker for the Fund in OTC transactions conducted on an agency
basis. Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to seek
to recapture underwriting and dealer spreads from affiliated entities. The
Trustees have considered all factors deemed relevant, and have made a
determination not to seek such recapture at this time. The Trustees will
reconsider this matter from time to time.

The Fund may not purchase securities, including Municipal Bonds, during the
existence of any underwriting syndicate of which Merrill Lynch is a member or in
a private placement in which Merrill Lynch serves as placement agent except
pursuant to procedures approved by the Trustees of the Trust which either comply
with rules adopted by the Commission or with interpretations of the Commission
staff. Rule 10f-3 under the 1940 Act sets forth conditions under which the Fund
may purchase municipal bonds from an underwriting syndicate of which Merrill
Lynch is a member. The rule sets forth requirements relating to, among other
things, the terms of an issue of municipal bonds purchased by the Fund, the
amount of municipal bonds which may be purchased in any one issue and the assets
of the Fund which may be invested in a particular issue.

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

The Trust has no obligation to deal with any broker or dealer in the
execution of transactions for the Fund's portfolio securities. In addition,
consistent with the Rules of Fair Practice of the NASD and policies established
by the Trustees of the Trust, the Manager may consider sales of shares of the
Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund.

Section 11(a) of the Securities Exchange Act of 1934, as amended, generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts that they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules the
Commission has prescribed with respect to the requirements of clauses (i) and
(ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.

Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to the Manager. As a result of the investment policies described in
the Prospectus, under certain market conditions the Fund's

19
<PAGE>

portfolio turnover may be higher than that of other investment companies. Higher
portfolio turnover may contribute to higher transactional costs and negative tax
consequences, such as an increase in capital gain dividends or in ordinary
income dividends of accrued market discount, as well as greater difficulty
meeting the requirement for qualification as a regulated investment company that
less than 30% of its gross income be derived from the sale or other disposition
of securities held for less than three months, which requirement will no longer
apply to the Fund after its fiscal year ending July 31, 1998. See "Distributions
and Taxes." (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.) The portfolio turnover rates for the fiscal years ended July 31, 1997
and 1998, were 84.69% and 101.75%, respectively. The yield volatility exhibited
by the municipal bond market contributed to the higher portfolio turnover during
the fiscal year ended July 31, 1998. The Fund's shift to a more defensive
posture necessitated a significant portfolio restructuring which led to
increased trading activity in the fiscal year ended July 31, 1998.

DETERMINATION OF NET ASSET VALUE

Reference is made to "Additional Information -- Determination of Net Asset
Value" in the Prospectus for information concerning the determination of net
asset value.

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

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

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

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

SHAREHOLDER SERVICES

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

20
<PAGE>

INVESTMENT ACCOUNT

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

Shareholders considering transferring their Class A or Class D shares from
Merrill Lynch to another brokerage firm or financial institution should be aware
that, if the firm to which the Class A or Class D shares are to be transferred
will not take delivery of shares of the Fund, a shareholder either must redeem
the Class A or Class D shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm or continue to
maintain an Investment Account at the Transfer Agent for those Class A or Class
D shares. Shareholders interested in transferring their Class B or Class C
shares from Merrill Lynch and who do not wish to have an Investment Account
maintained for such shares at the Transfer Agent may request their new brokerage
firm to maintain such shares in an account registered in the name of the
brokerage firm for the benefit of the shareholder at the Transfer Agent. If the
new brokerage firm is willing to accommodate the shareholder in this manner, the
shareholder must request that he or she be issued certificates for his or her
shares, and then must turn the certificates over to the new firm for
re-registration as described in the preceding sentence.

AUTOMATIC INVESTMENT PLANS

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

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will
automatically be reinvested in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of business
on the monthly payment date for such dividends and distributions. Shareholders
may elect in writing to receive either their income dividends or capital gains
distributions, or both, in cash, in which event payment will be mailed or direct
deposited on or about the payment date (provided that, in the event that a
payment on an account maintained at the Transfer Agent would amount to $10.00 or
less, a shareholder will not receive such payment in cash and such payment will
automatically be reinvested in additional shares). The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks.

Shareholders may, at any time, notify Merrill Lynch in writing if their
account is maintained with Merrill Lynch or notify the Transfer Agent in writing
or by telephone (1-800-MER-FUND) if the shareholder's account is maintained with
the Transfer Agent, that they no longer wish to have their dividends and/or
capital gains distributions reinvested in shares of the Fund or vice versa and,
commencing ten days after the receipt by the Transfer Agent of such notice, such
instructions will be effected.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to make systematic withdrawals from an Investment
Account of Class A, Class B, Class C or Class D shares on either a monthly or
quarterly basis as provided below. Quarterly withdrawals are available for
shareholders

21
<PAGE>

who have acquired shares of the Fund having a value, based on cost or the
current offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with shares having a value of $10,000 or more.

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

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

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

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

EXCHANGE PRIVILEGE

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

22
<PAGE>

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

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

EXCHANGES OF CLASS B AND CLASS C SHARES. Each Select Pricing Fund with
Class B or Class C shares outstanding ("outstanding Class B or Class C shares")
offers to exchange its Class B or Class C shares for Class B or Class C shares,
respectively, of another Select Pricing Fund or for Class B shares of Summit
("new Class B or Class C shares") on the basis of relative net asset value per
Class B or Class C share, without the payment of any CDSC that might otherwise
be due on redemption of the outstanding shares. Class B shareholders of the Fund
exercising the exchange will continue to be subject to the Fund's CDSC schedule
if such schedule is higher than the CDSC schedule relating to the new Class B
shares acquired through use of the exchange privilege. In addition, Class B
shares of the Fund acquired through use of the exchange privilege will be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the CDSC that may be payable on a
disposition of the new Class B or Class C shares, the holding period for the
outstanding Class B or Class C shares is "tacked" to the holding period of the
new Class B or Class C shares. For example, an investor may exchange Class B or
Class C shares of the Fund for those of Merrill Lynch Special Value Fund, Inc.
("Special Value Fund") after having held the Fund's Class B shares for two and a
half years. The 2% CDSC that generally would apply to a redemption would not
apply to the exchange. Three years later the investor may decide to redeem the
Class B shares of Special Value Fund and receive cash. There will be no CDSC due
on this redemption, since by "tacking" the two and a half year holding period of
Fund Class B shares to the three-year holding period for the Special Value Fund
Class B shares, the investor will be deemed to have held the Special Value Fund
Class B shares for more than five years.

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

Prior to October 12, 1998, exchanges from the Fund and other Select Pricing
Funds into a money market fund were directed to certain Merrill Lynch-sponsored
money market funds other than Summit. Shareholders who have exchanged Select
Pricing Fund shares for shares of such other money market funds and subsequently
wish to exchange those money market fund shares for shares of the Fund will be
subject to the CDSC schedule applicable to such Fund shares, if any. The holding
period for those money market fund shares will not count toward satisfaction of
the holding period requirement for reduction

23
<PAGE>

of the CDSC imposed on such shares, if any, and, with respect to Class B shares,
toward satisfaction of the conversion period. However, the holding period for
Class B or Class C shares received in exchange for such money market fund shares
will be aggregated with the holding period for the original Select Pricing Fund
shares for purposes of reducing the CDSC or satisfying the conversion period.

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

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

DISTRIBUTIONS AND TAXES

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

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

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

24
<PAGE>

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 a RIC paying exempt-interest dividends, such as the Fund,
will not be deductible by the investor for Federal income tax or Florida
corporate excise 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 the Fund.

Dividends paid by the Fund to individuals who are residents of Florida are
not taxable by Florida, because Florida does not impose a personal income tax.
Shareholders subject to taxation by states other than Florida will realize a
lower after tax rate of return than Florida shareholders since the dividends
distributed by the Fund generally will not be exempt, to any significant degree,
from taxation by such other states. The Trust will inform shareholders annually
regarding the portion of the Fund's distributions which constitutes
exempt-interest dividends for Federal income tax purposes.

Distributions of investment income and capital gains by the Fund will be
subject to Florida corporate income taxes and may also be subject to taxes in
states other than Florida and local taxes. Accordingly, investors in the Fund,
including, in particular, corporate investors which may be subject to the
Florida corporate income tax, should consult their tax advisers with respect to
the application of such taxes to the receipt of Fund dividends and to their
Florida tax situation in general.

The Fund may from time to time hold assets that are not exempt from Florida
intangible personal property tax ("non-exempt assets") and may not be able to
fully dispose of all such assets by the last business day of the calendar year.
This would subject shares of the Fund to Florida intangible personal property
tax. If shares of the Fund are subject to Florida intangible personal property
tax because of a failure to dispose of non-exempt assets, only that portion of
the value of Fund shares equal to the portion of the net asset value of the Fund
that is attributable to obligations of the United States Government will be
exempt from taxation. The Fund will attempt to monitor its portfolio so that on
the last business day of each calendar year the Fund's assets consist solely of
assets exempt from Florida intangible personal property tax.

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

25
<PAGE>

received by the shareholder. If the Fund pays a dividend in January which was
declared in the previous October, November or December to shareholders of record
on a specified date in one of such months, then such dividend will be treated
for tax purposes as being paid by the Fund and received by its shareholders on
December 31 of the year in which such dividend was declared.

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

The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations and in unrated
securities ("high yield securities"), as described in the Prospectus.
Furthermore, the Fund may also invest in instruments the return on which
includes nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such high yield securities
and/or nontraditional instruments could be recharacterized as taxable ordinary
income.

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 advisors concerning the applicability of the United States withholding
tax.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

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

26
<PAGE>

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

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

FLORIDA TAX

Provided the Fund does not have a taxable nexus to Florida, such as
through the location of the Fund's activities or those of its advisors within
the state, under present Florida law, the Fund is not subject to Florida
corporate income taxation. Additionally, provided the Fund's assets do not have
a taxable situs in Florida as of January 1 of each calendar year, the Fund will
not be subject to Florida intangible personal property tax. If the Fund has a
taxable nexus to Florida or the Fund's assets have a taxable situs in Florida,
the Fund will be subject to Florida taxation. The Fund intends to operate so as
not to be subject to Florida taxation.
---------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Florida tax laws presently in
effect. For the complete provisions, reference should be made to the pertinent
Code sections, the Treasury regulations promulgated thereunder and the Florida
tax laws. The Code and the Treasury regulations, as well as the Florida tax
laws, are subject to change by legislative, judicial or administrative action
either prospectively or retroactively.

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

PERFORMANCE DATA

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

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

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

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

27
<PAGE>

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------- -------------------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL BASED ON A HYPOTHETICAL
HYPOTHETICAL $1,000 INVESTMENT HYPOTHETICAL $1,000 INVESTMENT
$1,000 AT THE END $1,000 AT THE END
INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
----------------- ------------------- ----------------- -------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One year ended July 31, 1998 ......... 1.38% $ 1,013.80 1.07% $ 1,010.70
Five years ended July 31, 1998 ....... 4.65% $ 1,255.10 4.97% $ 1,274.70
Inception (May 31, 1991) to
July 31, 1998 ....................... 6.40% $ 1,560.20 6.47% $ 1,567.40
Inception (October 21, 1994) to
July 31, 1998 ....................... -- -- -- --
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31,
1998 ................................ 5.61% $ 1,056.10 5.07% $ 1,050.70
1997 ................................ 9.99% $ 1,099.90 9.43% $ 1,094.30
1996 ................................ 6.30% $ 1,063.00 5.76% $ 1,057.60
1995 ................................ 5.47% $ 1,054.70 4.93% $ 1,049.30
1994 ................................ 0.39% $ 1,003.90 (0.11%) $ 998.90
1993 ................................ 7.98% $ 1,079.80 7.44% $ 1,074.40
1992 ................................ 13.91% $ 1,139.10 13.33% $ 1,333.30
Inception (May 31, 1991) to
July 31, 1991 ....................... 1.07% $ 1,010.70 0.99% $ 1,009.90
Inception (October 21, 1994) to
July 31, 1995 ....................... -- -- -- --
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (May 31, 1991) to
July 31, 1998 ....................... 56.02% $ 1,560.20 56.74% $ 1,567.40
Inception (October 21, 1994) to
July 31, 1998 ....................... -- -- -- --
YIELD
30 days ended July 31, 1998 .......... 4.31% -- 3.98% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1998 .......... 5.99% -- 5.53% --

<CAPTION>
CLASS C SHARES CLASS D SHARES
------------------------------------- ------------------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A PERCENTAGE VALUE OF A AS A PERCENTAGE VALUE OF A
BASED ON A HYPOTHETICAL BASED ON A HYPOTHETICAL
HYPOTHETICAL $1,000 INVESTMENT HYPOTHETICAL $1,000 INVESTMENT
$1,000 AT THE END $1,000 AT THE END
INVESTMENT OF THE PERIOD INVESTMENT OF THE PERIOD
----------------- ------------------- ----------------- ------------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
<S> <C> <C> <C> <C>
One year ended July 31, 1998 ......... 3.97% $ 1,039.70 1.29% $ 1,012.90
Five years ended July 31, 1998 ....... -- -- -- --
Inception (May 31, 1991) to
July 31, 1998 ....................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1998 ....................... 7.35% $ 1,307.20 6.74% $ 1,279.30

ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)

Year ended July 31,
1998 ................................ 4.97% $ 1,049.70 5.51% $ 1,055.10
1997 ................................ 9.33% $ 1,093.30 9.89% $ 1,098.90
1996 ................................ 5.54% $ 1,055.40 6.09% $ 1,060.90
1995 ................................ -- -- -- --
1994 ................................ -- -- -- --
1993 ................................ -- -- -- --
1992 ................................ -- -- -- --
Inception (May 31, 1991) to
July 31, 1991 ....................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1995 ....................... 7.92% $ 1,079.20 8.34% $ 1,083.40
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)

Inception (May 31, 1991) to
July 31, 1998 ....................... -- -- -- --
Inception (October 21, 1994) to
July 31, 1998 ....................... 30.72% $ 1,307.20 27.93% $ 1,279.30
YIELD
30 days ended July 31, 1998 .......... 3.88% -- 4.21% --
TAX EQUIVALENT YIELD*
30 days ended July 31, 1998 .......... 5.39% -- 5.85% --
</TABLE>

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

28
<PAGE>

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

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Arkansas Municipal Bond Fund,
Merrill Lynch Colorado Municipal Bond Fund, Merrill Lynch Connecticut Municipal
Bond Fund, Merrill Lynch Maryland Municipal Bond Fund, Merrill Lynch
Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund,
Merrill Lynch Minnesota Municipal Bond Fund, Merrill Lynch New Jersey Municipal
Bond Fund, Merrill Lynch New Mexico Municipal Bond Fund, Merrill Lynch New York
Municipal Bond Fund, Merrill Lynch North Carolina Municipal Bond Fund, Merrill
Lynch Ohio Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund,
Merrill Lynch Pennsylvania Municipal Bond Fund and Merrill Lynch Texas Municipal
Bond Fund. The Trustees are authorized to create an unlimited number of Series
and, with respect to each Series, to issue an unlimited number of full and
fractional shares of beneficial interest, par value $.10 per share, of different
classes and to divide or combine the shares into a greater or lesser number of
shares without thereby changing the proportionate beneficial interests in the
Series. Shareholder approval is not necessary for the authorization of
additional Series or classes of a Series of the Trust. At the date of this
Statement of Additional Information, the shares of the Fund are divided into
Class A, Class B, Class C and Class D shares. Class A, Class B, Class C and
Class D shares represent interests in the same assets of the Fund and are
identical in all respects except that the Class B, Class C and Class D shares
bear certain expenses related to the account maintenance and/or distribution of
such shares and have exclusive voting rights with respect to matters relating to
such account maintenance and/or distribution expenditures. The Board of Trustees
may classify and reclassify the shares of any Series into additional or other
classes at a future date.

All shares of the Trust have equal voting rights, except that only shares
of the respective Series are entitled to vote on matters concerning only that
Series and, as noted above, Class B, Class C and Class D shares have exclusive
voting rights with respect to matters relating to the account maintenance and/or
distribution expenses, as appropriate, being borne solely by such class. Each
issued and outstanding share of a Series is entitled to one vote and to
participate equally in dividends and distributions declared with respect to that
Series and, upon liquidation or dissolution of the Series, in the net assets of
such Series remaining after satisfaction of outstanding liabilities, except
that, as noted above, expenses relating to the distribution and/or account
maintenance of the Class B, Class C and Class D shares are borne solely by the
respective class. There normally will be no meetings of shareholders for the
purposes of electing Trustees unless and until such time as less than a majority
of the Trustees holding office have been elected by shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. Shareholders may, in accordance with the terms of the Declaration
of Trust, cause a meeting of shareholders to be held for the purpose of voting
on the removal of Trustees. Also, the Trust will be required to call a special
meeting of shareholders in accordance with the requirements of the 1940 Act to
seek approval of new management and advisory arrangements, of a material
increase in distribution fees or of a change in the fundamental policies,
objectives or restrictions of a Series.

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

29
<PAGE>

Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.

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

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for Class A, Class
B, Class C and Class D shares of the Fund based on the value of the Fund's net
assets and number of shares outstanding on July 31, 1998 is calculated as set
forth below.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net Assets ..................................... $ 44,172,932 $ 143,496,603 $ 8,899,850 $ 24,267,649
============ ============= =========== ============
Number of Shares Outstanding ................... 4,243,940 13,786,877 856,535 2,335,428
============ ============= =========== ============
Net Asset Value Per Share (net assets divided by
number of shares outstanding) ................. $ 10.41 $ 10.41 $ 10.39 $ 10.39
Sales Charge (for Class A and Class D shares:
4.00% of offering price; 4.17% of net asset
value per share)* ............................. .43 ** ** .43
------------ -------------- ------------ ------------
Offering Price ................................. $ 10.84 $ 10.41 $ 10.39 $ 10.82
============ ============= =========== ============
</TABLE>

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

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 independent Trustees of the
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Fund.

CUSTODIAN

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

TRANSFER AGENT

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

LEGAL COUNSEL

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

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on July 31 of each year. The Trust sends
to shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.

30
<PAGE>

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act and the 1940 Act, to
which reference is hereby made.

The Declaration of Trust establishing the Trust dated August 2, 1985, a
copy of which, together with all amendments thereto (the "Declaration") is on
file in the office of the Secretary of the Commonwealth of Massachusetts,
provides that the name "Merrill Lynch Multi-State Municipal Series Trust" refers
to the Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability; nor shall resort be
had to their private property for the satisfaction of any obligation or claim of
the Trust but the "Trust Property" only shall be liable.

To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on October 1, 1998.

FINANCIAL STATEMENTS

The Fund's audited financial statements are incorporated by reference in
this Statement of Additional Information to its 1998 annual report to
shareholders. You may request a copy of the annual report at no charge by
calling 1-800-456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.

31
<PAGE>

[This page intentionally left blank.]

32
<PAGE>

APPENDIX I

ECONOMIC CONDITIONS IN FLORIDA

THE FOLLOWING INFORMATION IS A BRIEF SUMMARY OF FACTORS AFFECTING THE
ECONOMY OF THE STATE OF FLORIDA (THE "STATE") 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 PUBLICLY AVAILABLE OFFERING STATEMENTS
RELATING TO DEBT OFFERINGS OF THE STATE; HOWEVER, IT HAS NOT BEEN UPDATED NOR
WILL IT BE UPDATED DURING THE YEAR. THE TRUST HAS NOT INDEPENDENTLY VERIFIED THE
INFORMATION.

Throughout the 1980s, the State's unemployment rate has, generally, tracked
below that of the nation. In the nineties, the trend was reversed, until 1995
and 1996, when the State's unemployment rate again tracked below the national
average. The State's unemployment rate is projected to be 4.7% in 1997-98 and
5.0% in 1998-99. The average rate of unemployment for the State was 4.8% while
the nation's was 4.9%. (The projections set forth in this Appendix were obtained
from a report, prepared by the Revenue and Economic Analysis Unit of the
Executive Office of the Governor for the State of Florida, contained within a
recent official statement, dated August 18, 1998, for a State of Florida debt
offering.)

Over the years, Florida's total personal income has grown at a strong pace
and outperformed both the U.S. and other southeastern states. The increase in
Florida's total personal income directly reflects the State's population
increase. Florida's per capita personal income has been closely tracking the
national average for many years. From 1992 to 1997, Florida's total nominal
personal income grew by 36.6% and per capita income expanded approximately
25.9%. For the nation, total and per capita personal income increased by 30.2%
and 24.1%, respectively. Real personal income in Florida is estimated to
increase 5.2% in 1997-98 and 3.7% in 1998-99 while real personal income per
capita is projected to grow at 3.2% in 1996-97 and 1.8% in 1998-99.

The structure of Florida's income differs from that of the nation and the
southeast. Since Florida has a proportionally greater retirement age population,
property income (dividends, interest, and rent) and transfer payments (social
security and pension benefits, among other sources of income) are a relatively
more important source of income. For example, Florida's employment income in
1997 represented 59.8% of total personal income, while the nation's share of
total personal income in the form of wages and salaries and other labor benefits
was 70.8%. Florida's income is dependent upon transfer payments controlled by
the federal government.

The State's strong population growth is one fundamental reason why its
economy has typically performed better than the nation as a whole. In 1980, the
State was ranked seventh among the 50 states with a population of 9.7 million
people. The State has grown dramatically since then and as of April 1, 1997
ranked fourth with an estimated population of 14.7 million. Since 1990, the
State's average annual rate of population increase has been approximately 1.8%
as compared to approximately 1.0% for the nation as a whole. While annual growth
in the State's population is expected to decline somewhat, it is still expected
to grow close to 230,000 new residents per year throughout the 1990s.

Tourism is one of the State's most important industries. 47 million people
visited the State in 1997, according to the Florida Department of Commerce.
Tourist arrivals are expected to increase by 2.1% this fiscal year and 4.0% next
year. By the end of the fiscal year, 43.8 million domestic and international
tourists are expected to have visited the State. In 1998-99, tourist arrivals
should approximate 44.7 million. Florida tourism appears to be recovering from
the effects of negative publicity regarding crime against tourists in the state.
Factors such as "product maturity" of a Florida vacation package, higher prices,
and more aggressive marketing by competing vacation destinations, could
contribute to tourism slowdown.

Florida's dependency on the highly cyclical construction and
construction-related manufacturing sectors has declined. For example, total
contract construction employment as a share of total non-farm employment was a
little over 5.7% in 1997. Florida, nevertheless, has had a dynamic construction
industry, with single and multi-family housing starts during 1997 accounting for
approximately 9.2% of total U.S. housing starts, while the State's population
was 5.5% of the nation's population. Total housing starts were 132,813 in 1997.
A driving force behind Florida's construction industry is its rapid growth in
population. In Florida, single and multi-family housing starts in 1997-98 are
projected to reach a combined level of 129,500, while increasing to 131,300 next
year. Multi-family starts have been slow to recover, but are showing stronger
growth now and should maintain a level of nearly 38,200 in 1997-98 and 37,200 in
1998-99. Total construction expenditures are forecasted to increase 13.2% in
this year and increase 6.5% next year.

Financial operations of the State covering all receipts and expenditures
are maintained through the use of four funds -- the General Revenue Fund, Trust
Funds, the Working Capital Fund, and beginning in fiscal year 1994-95, the
Budget Stabilization Fund. In fiscal year 1997, the State derived approximately
67% of the total direct revenues to these funds from State taxes and fees.
Federal funds and other special revenues accounted for the remaining revenues.
Major sources of tax revenues to the General Revenue Fund are the sales and use
tax, corporate income tax, intangible personal property tax, beverage tax

33
<PAGE>

and estate tax, which amounted to 68%, 8%, 4%, 3% and 3%, respectively, of total
General Revenue Funds available. State expenditures are categorized for budget
and appropriation purposes by type of fund and spending unit, which are further
subdivided by line item. In fiscal year 1995-96, expenditures from the General
Revenue Fund for education, health and welfare, and public safety amounted to
approximately 53%, 26% and 14%, respectively, of total General Revenues.

The Sales and Use Tax is the greatest single source of tax receipts in the
State. For the State fiscal year ended June 30, 1997, receipts from this source
were $12,089 million, an increase of 5.5% from fiscal year 1995-96. The second
largest source of State tax receipts is the Motor Fuel Tax. The estimated
collections from this source during the fiscal year ended June 30, 1997, were
$2,012 million. Alcoholic beverage tax revenues totalled $447.2 million for the
State fiscal year ended June 30, 1997, an increase of $5.7 million from the
previous year. The receipts of corporate income tax for the fiscal year ended
June 30, 1997 were $1,362.3 million, an increase of 9.3% from fiscal year
1995-96. Gross Receipt tax collections for fiscal year 1996-97 totalled $575.7
million, an increase of 6.0% over the previous fiscal year. Documentary stamp
tax collections totalled $844.2 million during fiscal year 1996-97, posting an
8.9% increase from the previous fiscal year. The intangible personal property
tax is a tax on stocks, bonds, notes, governmental leaseholds, certain limited
partnership interests, mortgages and other obligations secured by liens on
Florida realty, and other intangible personal property. Total collections from
intangible personal property taxes were $952.4 million during the fiscal year
ended June 30, 1997, a 6.3% increase from the previous fiscal year. Severance
taxes totalled $39.2 million during fiscal year 1996-97, up 26.1% from the
previous fiscal year. In November 1986, the voters of the State approved a
constitutional amendment to allow the State to operate a lottery. Fiscal year
1996-97 produced ticket sales of $2.07 billion of which education received
approximately $792.3 million.

For fiscal year 1997-98 the estimated General Revenue plus Working Capital
and Budget Stabilization funds available total $18,621.8 million, a 11.2%
increase over 1996-97. The $16,877.6 million in estimated revenues represent a
7.2% increase over the analogous figure in 1996-97. With combined General
Revenue, Working Capital Fund and Budget Stabilization Fund appropriations at
$17,207.0 million, unencumbered reserves at the end of 1997-98 are estimated at
$1,414.8 million.

Estimated fiscal year 1998-99 General Revenue plus Working Capital and
Budget Stabilization funds available are expected to total $19,113.2 million, a
2.6% increase over fiscal year 1997-98.

The State Constitution does not permit a state or local personal income
tax. An amendment to the State Constitution by the electors of the State would
be required in order to impose a personal income tax in the State.

Property valuations for homestead property are subject to a growth cap.
Growth in the just (market) value of property qualifying for the homestead
exemption is limited to 3% or the change in the Consumer Price Index, whichever
is less. If the property changes ownership or homestead status, it is to be
re-valued at full just value on the next tax roll. Although the impact of the
growth cap cannot be determined, it may have the effect of causing local
government units in the State to rely more on non-ad valorem tax revenues to
meet operating expenses and other requirements normally funded with ad valorem
tax revenues.

An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994 general election which is commonly referred to as the
"Limitation on State Revenues Amendment". This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are required
to be transferred to the Budget Stabilization Fund until the fund reaches the
maximum balance specified in Section 19(g) of Article III of the State
Constitution, and thereafter is required to be refunded to taxpayers as provided
by general law. The limitation on State revenues imposed by the amendment may be
increased by the Legislature, by a two-thirds vote of each house.

The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (i) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by the
State; (ii) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception of
State matching funds used to fund elective expansions made after July 1, 1994;
(iii) proceeds from the State lottery returned as prizes; (iv) receipts of the
Florida Hurricane Catastrophe Fund; (v) balances carried forward from prior
fiscal years; (vi) taxes, licenses, fees and charges for services imposed by
local, regional, or school district governing bodies; or (vii) revenue from
taxes, licenses, fees and charges for services required to be imposed by any
amendment or revision to the State Constitution after July 1, 1994. The
amendment took effect on January 1, 1995 and is applicable to State fiscal year
1995-96.

34
<PAGE>

It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation will itself
be the subject of further court interpretation.

The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.

Hurricanes continue to endanger the coastal and interior portions of
Florida. Substantial damage resulted from Hurricane Andrew in 1992. During the
1995 hurricane season, a record number of tropical storms and hurricanes also
caused substantial damages. The 1996 and 1997 hurricane seasons were uneventful
with considerably less damage than in 1992 and 1995. During the 1998 hurricane
season, which ends November 30, at least two hurricanes have caused significant
damage to several coastal communities in Florida. The Fund cannot predict the
economic impact, if any, of future hurricanes and storms.

According to the Florida General Purposes Financial Statements for fiscal
year ended June 30, 1997, the State had a high bond rating from Moody's
Investors Service, Inc. (Aa2), Standard & Poor's (AA+) and Fitch IBCA, Inc. (AA)
on all of its general obligation bonds. Outstanding general obligation bonds at
June 30, 1997 totalled almost $7.9 billion and were issued to finance capital
outlay for educational projects of both local school districts, community
colleges and state universities, environmental protection and highway
construction. The State has issued over $1,340 billion of general obligation
bonds since July 1, 1997.

Due to investments in certain derivatives, Escambia County, Florida in 1994
sustained notable losses which may in the future affect their operations. As
reported in the local press, several lawsuits have resulted regarding such
investments.

In late October, 1996, the Florida Auditor General notified the Governor's
office that seventeen municipalities or special districts are in a state of
financial emergency (including the Orlando-Orange County Expressway Authority
and the Pinellas Suncoast Transit Authority) and that another twenty-five
municipalities or special districts might be in a state of financial emergency
(including the City of Miami). For these purposes, a state of emergency is
considered two consecutive years of budget deficits. Municipalities or special
districts that may be in a state of financial emergency are those that the
Auditor General was unable to conclude had sufficient revenues to cover their
deficits. The operations of all these entities mentioned in the Auditor
General's communication may be adversely affected by their financial condition.

35
<PAGE>

[This page intentionally left blank.]

36
<PAGE>

APPENDIX II

RATINGS OF MUNICIPAL BONDS

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

Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt 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 risk appear
somewhat larger than in Aaa securities.

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

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

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

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

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

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

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

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

SHORT-TERM NOTES: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2 and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes "best quality . .
. enjoying strong protection by established cash flows"; MIG 2/ VMIG 2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG 3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades".

DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS

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

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

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

37
<PAGE>

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

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

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

DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") ISSUE CREDIT RATINGS
DEFINITION

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

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

Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
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 the obligation;

II. Nature of and provisions of the obligation; and

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

LONG-TERM ISSUE CREDIT RATINGS

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

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

A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligation is still strong.

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

BB, An obligation rated "BB," "B," "CCC," "CC" and "C" is regarded as
B having significant speculative characteristics.
CCC, "BB" indicates the least degree of speculation and "C" the highest
CC, degree of speculation. While such bonds
C will likely have some quality and protectivecharacteristics, these may
be outweighed by large uncertainties or major exposures to adverse
conditions.

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

38
<PAGE>

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

SHORT-TERM ISSUE CREDIT RATINGS

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

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

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

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

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

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

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

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

Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"
ratings (international long-term, "AAA" -- "BBB," categories: short-term, "F1,"
- -- "F3,") indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term,
"BB," -- "D") either signal a higher probability of default or that a default
has already occured. 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.

39
<PAGE>

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 effect the
issuer's financial strength and credit quality.

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

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

INTERNATIONAL LONG-TERM CREDIT RATINGS

INVESTMENT GRADE

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

SPECULATIVE GRADE

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

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

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

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

40
<PAGE>

INTERNATIONAL SHORT-TERM CREDIT RATINGS

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

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

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

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

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

C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.

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

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

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

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

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

41
<PAGE>

[This page intentionally left blank.]
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Investment Objective and Policies ...................... 2
Description of Municipal Bonds and Temporary
Investments ......................................... 4
Description of Municipal Bonds ...................... 4
Description of Temporary Investments ................ 5
Repurchase Agreements ............................... 6
Financial Futures Transactions and Options .......... 7
Investment Restrictions ............................. 10
Management of the Trust ................................ 11
Trustees and Officers ............................... 11
Compensation of Trustees ............................ 12
Management and Advisory Arrangements ................ 13
Purchase of Shares ..................................... 14
Initial Sales Charge Alternatives -- Class A and
Class D Shares ................................... 14
Reduced Initial Sales Charges ....................... 15
Distribution Plans .................................. 17
Limitations on the Payment of Deferred Sales
Charges .......................................... 17
Redemption of Shares ................................... 18
Deferred Sales Charges -- Class B and Class C
Shares ........................................... 18
Portfolio Transactions ................................. 19
Determination of Net Asset Value ....................... 20
Shareholder Services ................................... 20
Investment Account .................................. 21
Automatic Investment Plans .......................... 21
Automatic Reinvestment of Dividends and
Capital Gains Distributions ...................... 21
Systematic Withdrawal Plans ......................... 21
Exchange Privilege .................................. 22
Distributions and Taxes ................................ 24
Tax Treatment of Options and Futures
Transactions ..................................... 26
Florida Tax ......................................... 27
Performance Data ....................................... 27
General Information .................................... 29
Description of Shares ............................... 29
Computation of Offering Price Per Share ............. 30
Independent Auditors ................................ 30
Custodian ........................................... 30
Transfer Agent ...................................... 30
Legal Counsel ....................................... 30
Reports to Shareholders ............................. 30
Additional Information .............................. 31
Financial Statements ................................... 31
Appendix I -- Economic Conditions in Florida ........... 33
Appendix II -- Ratings of Municipal Bonds .............. 37
</TABLE>

Code #13905-1198

[Merrill Lynch Logo appears here]

MERRILL LYNCH
FLORIDA MUNICIPAL
BOND FUND

OF MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST

STATEMENT OF
ADDITIONAL
INFORMATION

November 6, 1998

Distributor:
Merrill Lynch
Funds Distributor