MERRILL LYNCH INTERNATIONAL EQUITY FUND, 485BPOS, 1998-08-28

MERRILL LYNCH INTERNATIONAL EQUITY FUND
485BPOS, 1998-08-28

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1998
SECURITIES ACT FILE NO. 33-44917
INVESTMENT COMPANY ACT FILE NO. 811-6521
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 7
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 11
(CHECK APPROPRIATE BOX OR BOXES.)

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

MERRILL LYNCH INTERNATIONAL EQUITY FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

800 SCUDDERS MILL ROAD

PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

ARTHUR ZEIKEL
MERRILL LYNCH INTERNATIONAL EQUITY FUND
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

Copies to:
COUNSEL FOR THE FUND:
MICHAEL J. HENNEWINKEL
MERRILL LYNCH ASSET BROWN & WOOD LLP
MANAGEMENT ONE WORLD TRADE CENTER
P.O. BOX 9011 NEW YORK, NEW YORK 10048-0557
PRINCETON, NEW JERSEY 08543-9011 ATTENTION: THOMAS R. SMITH, JR.,
ESQ.
FRANK P. BRUNO, ESQ.

It is proposed that this filing will become effective (check appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date), pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.

If appropriate, check the following box:

[_] this post-effective amendment designates a new
effective date for a
previously filed post-effective amendment.

Title of Securities Being Registered: Shares of Beneficial Interest, par value
$.10 per share.

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

PROSPECTUS

AUGUST 28, 1998

MERRILL LYNCH INTERNATIONAL EQUITY FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800

Merrill Lynch International Equity Fund (the "Fund") is a diversified, open-
end management investment company seeking capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity
securities of issuers located in countries other than the United States. The
Fund is designed for investors seeking to complement their U.S. holdings
through foreign equity investments. The Fund should be considered as a vehicle
for diversification and not as a balanced investment program. Investments may
be shifted among the various equity markets of the world outside of the United
States depending upon management's outlook with respect to prevailing trends
and developments. It is anticipated that a substantial portion of the Fund's
assets will be invested in the developed countries of Europe and the Far East
and that a significant portion of its assets also may be invested in developing
countries. The Fund may employ a variety of investments and techniques to hedge
against market and currency risk. There can be no assurance that the Fund's
investment objective will be achieved. Investments on an international basis in
foreign securities markets involve certain risk factors. See "Risk Factors and
Special Considerations" below. For more information on the Fund's investment
objective and policies, please see "Investment Objective and Policies" on page
12.

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. As a
result of the implementation of the Merrill Lynch Select Pricing SM System,
Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated Class D shares. The Class A shares offered by this Prospectus
differ from the Class A shares offered prior to October 21, 1994, in many
respects, including sales charges, exchange privilege and the classes of
persons to whom such shares are offered. See "Merrill Lynch Select Pricing SM
System" on page 3.

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 that 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 retirement plans the minimum
initial purchase is $100 and the minimum subsequent purchase is $1, and 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 August 28, 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 the
Fund 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.

----------------
MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER

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) CLASS B(b) CLASS C CLASS D
---------- ---------- ------------ -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANS-
ACTION EXPENSES:
Maximum Sales
Charge Imposed
on Purchases (as
a percentage of
offering price). 5.25%(c) None None 5.25%(c)
Sales Charge Im-
posed on Divi-
dend Reinvest-
ments........... None None None None
Deferred Sales
Charge (as a
percentage of
original pur-
chase price or
redemption pro-
ceeds, whichever
is lower)....... None(d) 4.0% during the first 1.0% for one None(d)
year, year(f)
decreasing 1.0% annually
thereafter to 0.0% after
the
fourth year(e)
Exchange Fee..... None None None None
ANNUAL FUND OPER-
ATING EXPENSES
(AS A PERCENTAGE
OF AVERAGE NET
ASSETS):
Investment Advi-
sory Fees(g).... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees(h):
Account Mainte-
nance Fees...... None 0.25% 0.25% 0.25%
Distribution
Fees............ None 0.75% 0.75% None
(Class B shares convert
to
Class D shares
automatically
after approximately
eight years
and cease being subject
to
distribution fees)
Other Expenses:
Shareholder Ser-
vicing Costs(i). 0.18% 0.21% 0.22% 0.18%
Other............ 0.23% 0.24% 0.24% 0.24%
---- ---- ---- ----
Total Other Ex- 0.41% 0.45% 0.46% 0.42%
penses......... ---- ---- ---- ----
Total Fund Oper- 1.16% 2.20% 2.21% 1.42%
ating Expenses.. ==== ==== ==== ====
</TABLE>
- --------

(a) Class A shares are sold to a limited group of investors including certain
retirement plans and participants in certain fee-based programs. The Class
A shares offered by this Prospectus differ from the Class A shares offered
prior to October 21, 1994. See "Purchase of Shares--Initial Sales Charge
Alternatives--Class A and Class D Shares" --page 21.

(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares--Deferred Sales
Charge Alternatives--Class B and Class C Shares" --page 23.

(c) Reduced for purchases of $25,000 and over, and waived for purchases of
Class A shares by certain retirement plans and participants in connection
with certain fee-based programs. Class A and Class D purchases of
$1,000,000 or more may not be subject to an initial sales charge. See
"Purchase of Shares--Initial Sales Charge Alternatives--Class A and Class
D Shares" --page 21.

(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 which
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. A
0.75% sales charge for 401(k) purchases over $1,000,000 will apply. See
"Shareholder Services--Fee-Based Programs"--page 34.
(e) The CDSC may be modified in connection with certain fee-based programs.
See "Shareholder Services--Fee-Based Programs"--page 34.
(f) The CDSC may be waived in connection with certain fee-based programs. See
"Shareholder Services--Fee-Based Programs"--page 34.
(g) See "Management of the Fund--Advisory and Management Arrangements" --page
17.
(h) See "Purchase of Shares--Distribution Plans" --page 27.
(i) See "Management of the Fund--Transfer Agency Services" --page 19.

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 includ-
ing the maximum $52.50
initial sales charge
(Class A and Class D
shares only) and assuming
(1) the Total Fund Oper-
ating 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 (in-
cluding any applicable
CDSC for Class B and
Class C shares):
Class A................. $ 64 $ 87 $ 113 $ 186
Class B................. $ 62 $ 89 $ 118 $ 234*
Class C................. $ 32 $ 69 $ 118 $ 254
Class D................. $ 66 $ 95 $ 126 $ 214
An investor would pay the
following expenses on the
same $1,000 investment
assuming no redemption at
the end of the period:
Class A................. $ 64 $ 87 $ 113 $ 186
Class B................. $ 22 $ 69 $ 118 $ 234*
Class C................. $ 22 $ 69 $ 118 $ 254
Class D................. $ 66 $ 95 $ 126 $ 214
</TABLE>
- --------
* Assumes conversion to Class D shares approximately eight years after
purchase.

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 charges permitted under the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"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."

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

3
<PAGE>

the "Investment Adviser") or its affiliate, Fund Asset Management, L.P.
("FAM"). Funds advised by MLAM or FAM which utilize 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 or her particular circumstances. More
detailed information as to each class of shares is set forth under "Purchase
of Shares."

(footnotes appear on following page)

4
<PAGE>

- --------
(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 by certain retirement plans and 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 1.0% CDSC if redeemed within one
year. Such CDSC may be waived in connection with certain fee-based
programs. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply. 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
retirement plans was modified. Also, Class B shares of certain other MLAM-
advised mutual funds into which exchanges may be made have a ten 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 of the Fund are offered to a limited group of investors and also
will be issued upon reinvestment of dividends on outstanding Class A
shares. Investors who currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares
in that account. Other eligible investors include certain retirement
plans and 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.") and its subsidiaries (the term "subsidiaries,"
when used herein with respect to ML & Co., includes MLAM, FAM and
certain other entities directly or indirectly wholly-owned and
controlled by ML & Co.) and their directors and employees and to
members of the Boards of MLAM-advised mutual funds. The maximum initial
sales charge of 5.25% is reduced for purchases of $25,000 and over, and
waived for purchases by certain retirement plans and participants in
connection with certain fee-based programs. Certain 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.
A 0.75% sales charge for 401(k) purchases over $1,000,000 will apply.
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."

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 0.75% of the Fund's average net assets
attributable to Class B shares as well as a CDSC if they are redeemed
within four years of purchase. Such CDSC may be modified in connection
with certain fee-based programs. Approximately eight years after
issuance, Class B shares will convert automatically into Class D shares
of the Fund, which are subject to an account maintenance fee but 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 ten years. If Class B shares of the
Fund are exchanged for Class B shares of another MLAM-advised mutual
fund, the conversion period

5
<PAGE>

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. 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 and the conversion
and holding periods for certain retirement plans are 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 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares are also subject to a
1.0% CDSC 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 distribution fees that will be imposed on
Class C shares for an indefinite period subject to annual approval by
the Fund'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 0.25% of the
Fund's 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 5.25% 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 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 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 by retirement plans 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.

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

6
<PAGE>

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. Class A, Class B,
Class C and Class D share holdings will count toward a right of accumulation
which 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 eight 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 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 conjunction
with the annual audits of the financial statements of the Fund by Deloitte &
Touche LLP, independent auditors. Financial statements for the fiscal year
ended May 31, 1998, and the independent auditors' report thereon appear in the
annual report of the Fund for the fiscal year ended May 31, 1998, which has
been incorporated by reference into the Statement of Additional Information.
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 Fund at the telephone number or address on
the front cover of this Prospectus.

The following per share data and ratios have been derived from information
provided in the financial statements.

<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------- -------------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR ENDED OCTOBER 21, FOR THE YEAR ENDED JULY 30,
MAY 31, 1994+ TO MAY 31, 1993+ TO
-------------------------- MAY 31, --------------------------------------- MAY 31,
1998++ 1997++ 1996++ 1995 1998++ 1997++ 1996++ 1995 1994++
------- ------- -------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Asset Value:
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 12.58 $ 11.94 $ 10.25 $ 11.73 $ 12.42 $ 11.76 $ 10.19 $ 11.44 $ 10.00
------- ------- -------- ------- -------- -------- -------- -------- --------
Investment income
(loss)--net........... .12 .12 .16 .26 --+++ .01 .04 .02 (.02)
Realized and unrealized
gain (loss) on
investments and
foreign currency
transactions--net..... (1.08) 1.09 1.53 (1.05) (1.04) 1.08 1.53 (.69) 1.46
------- ------- -------- ------- -------- -------- -------- -------- --------
Total from investment
operations............. (.96) 1.21 1.69 (.79) (1.04) 1.09 1.57 (.67) 1.44
------- ------- -------- ------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Investment income--net. -- (.24) -- (.15) -- (.10) -- (.04) --
In excess of investment
income--net........... -- (.01) -- -- -- (.01) -- -- --
Realized gain on
investments--net...... (1.08) (.32) -- (.54) (.93) (.32) -- (.54) --
In excess of realized
gain on investments--
net................... (.97) -- -- -- (.83) -- -- -- --
------- ------- -------- ------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (2.05) (.57) -- (.69) (1.76) (.43) -- (.58) --
------- ------- -------- ------- -------- -------- -------- -------- --------
Net asset value, end of
period................. $ 9.57 $ 12.58 $ 11.94 $ 10.25 $ 9.62 $ 12.42 $ 11.76 $ 10.19 $ 11.44
======= ======= ======== ======= ======== ======== ======== ======== ========
TOTAL INVESTMENT
RETURN:**
Based on net asset value
per share.............. (6.02%) 10.76% 16.49% (6.78%)# (7.01%) 9.70% 15.41% (5.91%) 14.40%#
======= ======= ======== ======= ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS:
Expenses................ 1.16% 1.11% 1.06% 1.23%* 2.20% 2.14% 2.09% 2.13% 2.07% *
======= ======= ======== ======= ======== ======== ======== ======== ========
Investment income
(loss)--net............ 1.08% 1.04% 1.47% 4.64%* (.01%) .08% .37% .23% (.19%)*
======= ======= ======== ======= ======== ======== ======== ======== ========
SUPPLEMENTAL DATA:
Net assets, end of
period (in thousands).. $33,960 $44,624 $116,628 $74,478 $311,520 $583,213 $945,368 $961,941 $844,295
======= ======= ======== ======= ======== ======== ======== ======== ========
Portfolio turnover...... 107.50% 60.56% 71.86% 63.95% 107.50% 60.56% 71.86% 63.95% 50.63%
======= ======= ======== ======= ======== ======== ======== ======== ========
Average commission rate
paid ##................ $ .0046 $ .0004 $ .0005 -- $ .0046 $ .0004 $ .0005 -- --
======= ======= ======== ======= ======== ======== ======== ======== ========
</TABLE>
+Commencement of Operations. * Annualized.

++Based on average shares outstanding. ** Total investment returns
exclude the effects of
+++Amount is less than $.01 per share. sales loads.
#Aggregate total investment return.
- -------

## For fiscal years beginning on or after
September 1, 1995, the Fund is required to
disclose its average commission rate per
share for purchases and sales of equity
securities. The "Average Commission Rate
Paid" includes commissions paid in foreign
currencies which have been converted into
U.S. dollars using the prevailing exchange
rate on the date of the transaction. Such
conversions may significantly affect the
rate shown.

8
<PAGE>

<TABLE>
<CAPTION>
CLASS C CLASS D
------------------------------------------- --------------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEAR ENDED OCTOBER 21, FOR THE YEAR ENDED JULY 30,
MAY 31, 1994+ TO MAY 31, 1993+ TO
--------------------------------- MAY 31, ------------------------------------ MAY 31,
1998++ 1997++ 1996++ 1995 1998++ 1997++ 1996++ 1995 1994++
------- ------- ------- ----------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.26 $ 11.65 $ 10.10 $ 11.62 $ 12.59 $ 11.94 $ 10.27 $ 11.51 $ 10.00
------- ------- ------- ------- ------- -------- -------- -------- --------
-- +++ -- +++ .05 .24 .09 .10 .13 .10 .04
(1.02) 1.08 1.50 (1.09) (1.07) 1.09 1.54 (.68) 1.47
------- ------- ------- ------- ------- -------- -------- -------- --------
(1.02) 1.08 1.55 (.85) (.98) 1.19 1.67 (.58) 1.51
------- ------- ------- ------- ------- -------- -------- -------- --------
-- (.14) -- (.13) -- (.21) -- (.12) --
-- (.01) -- -- -- (.01) -- -- --
(.92) (.32) -- (.54) (1.04) (.32) -- (.54) --
(.83) -- -- -- (.94) -- -- -- --
------- ------- ------- ------- ------- -------- -------- -------- --------
(1.75) (.47) -- (.67) (1.98) (.54) -- (.66) --
------- ------- ------- ------- ------- -------- -------- -------- --------
$ 9.49 $ 12.26 $ 11.65 $ 10.10 $ 9.63 $ 12.59 $ 11.94 $ 10.27 $ 11.51
======= ======= ======= ======= ======= ======== ======== ======== ========
(6.96%) 9.71% 15.35% (7.36%)# (6.18%) 10.50% 16.26% (5.11%) 15.10%#
======= ======= ======= ======= ======= ======== ======== ======== ========
2.21% 2.15% 2.09% 2.30%* 1.42% 1.36% 1.31% 1.34% 1.31%*
======= ======= ======= ======= ======= ======== ======== ======== ========
(.01%) .04% .45% 4.26%* .77% .86% 1.13% .85% .55%*
======= ======= ======= ======= ======= ======== ======== ======== ========
$14,717 $24,774 $46,985 $25,822 $67,689 $119,024 $175,151 $188,583 $208,007
======= ======= ======= ======= ======= ======== ======== ======== ========
107.50% 60.56% 71.86% 63.95% 107.50% 60.56% 71.86% 63.95% 50.63%
======= ======= ======= ======= ======= ======== ======== ======== ========
$ .0046 $ .0004 $ .0005 -- $ .0046 $ .0004 $ .0005 -- --
======= ======= ======= ======= ======= ======== ======== ======== ========
</TABLE>

9
<PAGE>

RISK FACTORS AND SPECIAL CONSIDERATIONS

International Investing. International investments involve certain risks not
typically involved in domestic investments, including fluctuations in foreign
exchange rates, future political and economic developments, different legal
systems and the existence or possible imposition of exchange controls or other
foreign or U.S. governmental laws or restrictions applicable to such
investments. Securities prices in different countries are subject to different
economic, financial, political and social factors. Because the Fund will invest
in securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may affect the value of securities
in the portfolio and the unrealized appreciation or depreciation of investments
insofar as U.S. investors are concerned. Foreign currency exchange rates are
determined by forces of supply and demand in the foreign exchange markets.
These forces are, in turn, affected by international balance of payments and
other economic and financial conditions, government intervention, speculation
and other factors. With respect to certain countries, there may be the
possibility of expropriation of assets, confiscatory taxation, high rates of
inflation, political or social instability or diplomatic developments which
could affect investment in those countries. In addition, certain foreign
investments may be subject to foreign withholding taxes. As a result,
management of the Fund may determine that, notwithstanding otherwise favorable
investment criteria, it may not be practicable or appropriate to invest in a
particular country.

Most of the securities held by the Fund will not be registered with the
Commission nor will the issuers thereof be subject to the reporting
requirements of such agency. Accordingly, there may be less publicly available
information about a foreign company than about a U.S. company, and foreign
companies may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those to which U.S. companies are
subject.

Foreign financial markets, while generally growing in trading volume,
typically have substantially less volume than U.S. markets, and securities of
many foreign companies are less liquid and their prices more volatile than
securities of comparable domestic companies. The foreign markets also have
different clearance and settlement procedures, and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some countries having smaller capital markets, which may result in
the Fund incurring additional costs and delays in transporting and custodying
such securities outside such countries. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could result in temporary periods when assets of the
Fund are uninvested and no return is earned thereon. The inability of the Fund
to make intended security purchases due to settlement problems could cause the
Fund to miss attractive investment opportunities. Inability to dispose of a
portfolio security due to settlement problems either could result in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Brokerage commissions and other
transaction costs on foreign securities exchanges are generally higher than in
the United States. There is generally less governmental supervision and
regulation of exchanges, brokers and issuers in foreign countries than there is
in the United States.

10
<PAGE>

A significant portion of the Fund's assets may be invested in the developing
countries of the world, including, but not limited to, countries located in
Eastern Europe, Latin America and the Far East. The risks noted above, as well
as in "Restrictions on Foreign Investment" below, are often heightened for
investments in developing countries.

Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustration,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investment by foreign persons in a company to only a
specific class of securities which may have less advantageous terms than
securities of the company available for purchase by nationals.

A number of countries, such as South Korea, Taiwan and Thailand, have
authorized the formation of closed-end investment companies to facilitate
indirect foreign investment in their capital markets. In accordance with the
Investment Company Act of 1940, as amended (the "Investment Company Act"), the
Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. This restriction on investments in securities of closed-
end investment companies may limit opportunities for the Fund to invest
indirectly in certain smaller capital markets. Shares of certain closed-end
investment companies may at times be acquired only at market prices
representing premiums to their net asset values. If the Fund acquires shares in
closed-end investment companies, shareholders would bear both their
proportionate share of expenses in the Fund (including investment advisory
fees) and, indirectly, the expenses of such closed-end investment companies.
The Fund also may seek, at its own cost, to create its own investment entities
under the laws of certain countries.

In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. Also, the Investment Company Act limits the Fund's ability
to invest in any equity security of an issuer which, in its most recent fiscal
year, derived more than 15% of its revenues from "securities related
activities," as defined by the rules thereunder. These provisions also may
restrict the Fund's investments in certain foreign banks and other financial
institutions.

Hedging Strategies. The Fund may engage in various portfolio strategies to
seek to hedge its portfolio against adverse market movements. Utilization of
hedging strategies involves the risk of an imperfect correlation in movements
in the price of the hedge and in the price of the securities or currencies
which are the subject of the hedge. Hedge transactions in foreign markets also
are subject to the risk factors associated with foreign investments generally,
as discussed above. There can be no assurance that the Fund's hedging
strategies will be effective.

No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest, and such securities
may not be rated at all for creditworthiness. Securities rated in the medium to
lower rating categories of nationally recognized statistical rating
organizations and unrated securities of comparable quality are predominately
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

11
<PAGE>

volatility of price than securities in higher rating categories. The Fund does
not intend to purchase debt securities that are in default or which the
Investment Adviser believes will be in default.

Borrowing. The Fund may borrow up to 20% of its total assets, taken at market
value, but only from banks as a temporary measure for extraordinary or
emergency purposes, including to meet redemptions or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed 5%
of its total assets, except (a) to honor prior commitments or (b) to exercise
subscription rights when outstanding borrowings have been obtained exclusively
for settlements of other securities transactions. The purchase of securities
while borrowings are outstanding will have the effect of leveraging the Fund.
Such leveraging increases the Fund's exposure to capital risk, and borrowed
funds are subject to interest costs which will reduce net income.

Fees and Expenses. The investment advisory fee (at the annual rate of 0.75%
of the Fund's average daily net assets) and other operating expenses of the
Fund may be higher than the investment advisory fees and operating expenses of
other mutual funds managed by the Investment Adviser and other investment
advisers.

Other Special Considerations. Other special considerations are that the Fund
may invest up to 15% of its total assets in illiquid investments, which include
securities for which there is no readily available market, and that the Fund
may invest more than 5% of its assets in securities issued or guaranteed by
certain foreign governments. Because of its emphasis on securities of foreign
issuers, the Fund should be considered as a vehicle for diversification and not
as a balanced investment program. The suitability for any particular investor
of a purchase of shares of the Fund will depend upon, among other things, such
investor's investment objectives and such investor's ability to accept the
risks of investing in such markets including the risk of loss of principal.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to seek capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity
securities of issuers located in countries other than the United States. Under
normal conditions, at least 65% of the Fund's net assets will be invested in
such equity securities. There can be no assurance that the Fund's investment
objective will be achieved. The investment objective of the Fund is a
fundamental policy and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities. The Fund may employ
a variety of investments and techniques to hedge against market and currency
risk. The Fund is designed for investors seeking to complement their U.S.
holdings through foreign equity investments. The Fund should be considered as a
vehicle for diversification and not as a balanced investment program.

The Fund, utilizing the combined purchasing power of its shareholders' funds,
provides the investor with the opportunity to participate with a minimum
investment of $1,000 ($100 for retirement plans and $250 for participants in
certain fee-based programs) in a diversified portfolio of equity securities in
foreign markets which typically would require substantially larger commitments.
Other advantages include worldwide

12
<PAGE>

professional management and administrative convenience. Unlike many
intermediary investment vehicles, such as closed-end investment companies that
invest in a single country, the Fund intends to diversify investment risk among
the capital markets of a number of countries.

The Fund will invest in an international portfolio of securities of foreign
companies located throughout the world. While there are no prescribed limits on
the geographic allocation of the Fund's investments, management of the Fund
anticipates that a substantial portion of its assets will be invested in the
developed countries of Europe and the Far East. However, for the reasons stated
below, management of the Fund will give special attention to investment
opportunities in the developing countries of the world, including, but not
limited to, Eastern Europe, Latin America and the Far East. It is anticipated
that a significant portion of the Fund's assets may be invested in such
developing countries, and the Fund may invest without limit in such securities.

The allocation of the Fund's assets among the various foreign securities
markets will be determined by the Investment Adviser and by the Fund's sub-
adviser, Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), based
primarily on an assessment of the relative condition and growth potential of
the various economies and securities markets, currency and taxation
considerations and other pertinent financial, social, national and political
factors. Within such allocations, the Investment Adviser and MLAM U.K. will
seek to identify equity investments in each market which are expected to
provide a total return which equals or exceeds the return of such market as a
whole.

A significant portion of the Fund's assets may be invested in developing
countries. This allocation of the Fund's assets reflects the belief that
attractive investment opportunities may result from an evolving long-term
international trend favoring more market-oriented economies, a trend that may
especially benefit certain developing countries with smaller capital markets.
This trend may be facilitated by local or international political, economic or
financial developments that could benefit the capital markets of such
countries. Because of the general illiquidity of the capital markets in certain
developing countries, the Fund may invest in a relatively small number of
leading or relatively actively traded companies in such countries' capital
markets in the expectation that the investment experience of the securities of
such companies will substantially represent the investment experience of the
countries' capital markets as a whole.

While the Fund will primarily emphasize investments in common stock, the
Fund's equity investments may also include preferred stocks, convertible debt
securities and other instruments the return on which is linked to the
performance of a common stock or a basket or index of common stocks
(collectively "equity securities"). The Fund may also invest in non-equity
securities including longer-term, non-convertible debt securities, cash or cash
equivalents in U.S. dollars or foreign currencies and short-term securities
including money market securities. Under certain adverse investment conditions,
for defensive purposes, the Fund may restrict the markets in which its assets
will be invested and may increase the proportion of assets invested in short-
term obligations of U.S. issuers. Under normal conditions, at least 65% of the
Fund's total assets will be invested in the securities of issuers from at least
three different foreign countries. Investments made for defensive purposes will
be maintained only during periods in which the Investment Adviser or MLAM U.K.
determines that economic or financial conditions are adverse for holding or
being invested in equity securities of foreign issuers. A portion of the
portfolio normally will be held in U.S. dollars or short-term interest bearing
U.S. dollar-denominated securities to provide for possible redemptions.

13
<PAGE>

The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
Global Depositary Receipts ("GDRs") or other securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by an American bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. GDRs are receipts issued throughout the world which
evidence a similar ownership arrangement. Generally, ADRs, in registered form,
are designed for use in the U.S. securities markets, and EDRs, in bearer form,
are designed for use in European securities markets. GDRs are tradeable both in
the United States and Europe and are designed for use throughout the world. The
Fund may invest in unsponsored ADRs, EDRs and GDRs. The issuers of unsponsored
ADRs, EDRs and GDRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such securities.

The Fund also may invest up to 35% of its net assets in longer-term, non-
convertible debt securities, emphasizing debt securities which offer the
opportunity for capital appreciation. Capital appreciation in debt securities
may arise as a result of a favorable change in relative foreign exchange rates,
relative interest rate levels, or the creditworthiness of issuers. In
accordance with its investment objective, the Fund will not seek to benefit
from anticipated short-term fluctuations in currency exchange rates. The Fund
may, from time to time, invest in debt securities with relatively high yields
(as compared to other debt securities meeting the Fund's investment criteria),
notwithstanding that the Fund may not anticipate that such securities will
experience substantial capital appreciation. Such income can be used, however,
to offset the operating expenses of the Fund.

The Fund may invest in debt securities issued or guaranteed by foreign
governments (including foreign states, provinces and municipalities) or their
agencies and instrumentalities ("government entities"), issued or guaranteed by
international organizations designated or supported by multiple foreign
governmental entities (which are not obligations of foreign governments) to
promote economic reconstruction or development ("supranational entities"), or
issued by foreign corporations or financial institutions.

Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The
governmental members, or "stockholders," usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings.

The Fund has established no rating criteria for the debt securities in which
it may invest, and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to lower rating categories of
nationally recognized statistical rating organizations and unrated securities
of comparable quality are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of
the security and generally involve a greater volatility of price than
securities in higher rating categories. See "Investment Objective and Policies"
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.

14
<PAGE>

OTHER INVESTMENT PRACTICES

Portfolio Strategies Involving Indexed and Inverse Securities, Options,
Futures, Swaps and Foreign Exchange Transactions. The Fund may use certain
derivative instruments, including indexed and inverse securities, options,
futures and swaps, and may engage in foreign exchange transactions.
Transactions involving such instruments expose the Fund to certain risks. The
Fund's use of these instruments and the associated risks are described in
detail in Appendix A attached to this Prospectus.

Portfolio Transactions. In executing portfolio transactions, the Investment
Adviser and MLAM U.K. seek to obtain the best net results for the Fund, taking
into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution and
operational facilities of the firm involved and the firm's risk in positioning
a block of securities. While the Investment Adviser and MLAM U.K. generally
seek reasonably competitive commission rates, the Fund does not necessarily pay
the lowest commission or spread available. The Fund has no obligation to deal
with any broker or group of brokers in the execution of transactions in
portfolio securities. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons, including
Merrill Lynch, are prohibited from dealing with the Fund as a principal in the
purchase and sale of securities unless a permissive order allowing such
transactions is obtained from the Commission. Affiliated persons of the Fund,
and affiliated persons of such affiliated persons, may serve as the Fund's
broker in transactions conducted on an exchange and in over-the-counter
transactions conducted on an agency basis and may receive brokerage commissions
from the Fund. In addition, consistent with the Conduct Rules of the NASD, the
Fund 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. It is
expected that the majority of the shares of the Fund will be sold by Merrill
Lynch. Brokerage commissions and other transaction costs on foreign stock
exchange transactions are generally higher than in the United States, although
the Fund will endeavor to achieve the best net results in effecting its
portfolio transactions.

Portfolio Turnover. The Fund may dispose of securities without regard to the
time they have been held when such actions, for defensive or other reasons,
appear advisable to the Investment Adviser. 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. A
high portfolio turnover rate involves certain tax consequences and greater
transaction costs in the form of dealer spreads and brokerage commissions,
which are borne directly by the Fund.

Lending of Portfolio Securities. The Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. During the period of such a
loan, the Fund receives the income on both the loaned securities and the
collateral and thereby increases its yield. In the event that the borrower
defaults on its obligation to return borrowed securities because of insolvency
or otherwise, the Fund could experience delays and costs in gaining access to
the collateral and could suffer a loss to the extent the value of the
collateral falls below the market value of the borrowed securities.

Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements or purchase and sale contracts.
Under a repurchase agreement, the seller agrees,

15
<PAGE>

upon entering into the contract with the Fund, to repurchase the security at a
mutually agreed upon time and price in a specified currency, thereby
determining the yield during the term of the agreement. This insulates the Fund
from market fluctuations during such period although, to the extent the
repurchase agreement is not denominated in U.S. dollars, the Fund's return may
be affected by currency fluctuations. 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. A purchase and sale
contract is similar to a repurchase agreement, but purchase and sale contracts,
unlike repurchase agreements, allocate interest on the underlying security to
the purchaser during the term of the agreement. The Fund does not have the
right to seek additional collateral in the case of purchase and sale contracts.
If the seller were to default on its obligation to repurchase a security under
a repurchase agreement or purchase and sale contract and the market value of
the underlying security at such time was less than the Fund had paid to the
seller, the Fund would realize a loss. The Fund may not invest more than 15% of
its total assets in repurchase agreements or purchase and sale contracts
maturing in more than seven days, together with all other illiquid securities.

INVESTMENT RESTRICTIONS

The Fund has adopted the following restrictions and policies relating to the
investment of its assets and its activities, which are fundamental policies and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities (which for this purpose and under the
Investment Company Act means the lesser of (a) 67% of the shares represented at
a meeting at which more than 50% of the outstanding shares are represented or
(b) more than 50% of the outstanding shares). Among its fundamental policies,
the Fund may not invest more than 25% of its total assets, taken at market
value at the time of each investment, in the securities of issuers in any
particular industry (excluding the U.S. Government and its agencies or
instrumentalities). 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, and then
only from banks as a temporary measure for extraordinary or emergency purposes,
such as the redemption of Fund shares. The Fund will not purchase securities
while borrowings exceed 5% of its total assets, except (a) to honor prior
commitments or (b) to exercise subscription rights when outstanding borrowings
have been obtained exclusively for settlements of other securities
transactions.

As a non-fundamental policy, the Fund will not invest in securities which
cannot be readily resold because of legal or contractual restrictions or that
cannot otherwise be marketed, redeemed or put to the issuer or a third party,
including repurchase agreements maturing in more than seven days, if, regarding
all such securities, more than 15% of its total assets taken at market value
would be invested in such securities. Notwithstanding the foregoing, the Fund
may purchase without regard to this limitation securities that are not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
but that can be offered and sold to "qualified institutional buyers" under Rule
144A under the Securities Act, provided that the Fund's Board of Trustees
continuously determines, based on the trading markets for the specific Rule
144A security, that it is liquid. The Board of Trustees may adopt guidelines
and delegate to the Investment Adviser and MLAM U.K. the daily function of
determining and monitoring liquidity of restricted securities. The Board has
determined that securities which are freely tradeable in their primary market
offshore should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.

16
<PAGE>

MANAGEMENT OF THE FUND

BOARD OF TRUSTEES

The Board of Trustees of the Fund consists of six individuals, five of whom
are not "interested persons" of the Fund as defined in the Investment Company
Act. The Board of Trustees of the Fund is responsible for the overall
supervision of the operations of the Fund and performs the various duties
imposed on the directors of investment companies by the Investment Company
Act.

The Trustees of the Fund are:

Arthur Zeikel*--Chairman of the Investment Adviser and its affiliate, FAM;
Chairman and Director of Princeton Services, Inc. ("Princeton Services"); and
Executive Vice President of ML & Co.

Donald Cecil--Special Limited Partner of Cumberland Partners (an investment
partnership).

Edward H. Meyer--Chairman of the Board, President and Chief Executive
Officer of Grey Advertising Inc.

Charles C. Reilly--Self-employed financial consultant; former President and
Chief Investment Officer of Verus Capital, Inc.; former Senior Vice President
of Arnhold and S. Bleichroeder, Inc.

Richard R. West--Dean Emeritus of New York University Leonard N. Stern
School of Business Administration.

Edward D. Zinbarg--Former Executive Vice President of The Prudential
Insurance Company of America.
- --------
*Interested person, as defined in the Investment Company Act, of the Fund.

ADVISORY AND MANAGEMENT ARRANGEMENTS

MLAM acts as the Fund's investment adviser. The Investment Adviser is owned
and controlled by ML & Co., a financial services holding company and the
parent of Merrill Lynch. The Asset Management Group of ML & Co. (which
includes the Investment Adviser), acts as the investment adviser to more than
100 registered investment companies and offers portfolio management services
to individuals and institutions. As of July 1998, the Asset Management Group
had a total of approximately $488 billion in investment company and other
portfolio assets under management. This amount includes assets managed for
certain affiliates of the Investment Adviser.

The Fund has entered into an investment advisory agreement with the
Investment Adviser (the "Investment Advisory Agreement"). The Investment
Advisory Agreement provides that, subject to the direction of the Board of
Trustees of the Fund, the Investment Adviser is responsible for the actual
management of the Fund's portfolio and constantly reviews the Fund's holdings
in light of its own research and analysis and that from other relevant
sources. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Investment Adviser and MLAM U.K., subject
to review by the Board

17
<PAGE>

of Trustees. The Investment Adviser is also obligated to perform certain
administrative and management services for the Fund and is obligated to provide
all of the office space, facilities, equipment and personnel necessary to
perform its duties under the Investment Advisory Agreement.

The Fund pays the Investment Adviser a monthly fee at the annual rate of
0.75% of the average daily net assets of the Fund. This fee is higher than that
of many mutual funds, including many other mutual funds managed by the
Investment Adviser and other investment advisers, but management of the Fund
believes this fee is justified by the additional investment research and
analysis required in connection with investing in equities on an international
basis. For the fiscal year ended May 31, 1998, the fee paid by the Fund to the
Investment Adviser was $4,596,696 (based upon average daily net assets of
approximately $614.6 million).

The Investment Adviser has entered into a sub-advisory agreement (the "Sub-
Advisory Agreement") with MLAM U.K., an indirect, wholly-owned subsidiary of ML
& Co. and an affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment advisory
services to the Investment Adviser with respect to the Fund in an amount to be
determined from time to time by the Investment Adviser and MLAM U.K. but in no
event in excess of the amount that the Investment Adviser actually receives for
providing services to the Fund pursuant to the Investment Advisory Agreement.
MLAM U.K. has offices at Milton Gate, 1 Moor Lane, London EC2Y 9HA, England.
For the fiscal year ended May 31, 1998, the fee paid by the Investment Adviser
to MLAM U.K. was $612,740.

The Fund pays certain expenses incurred in its operations, including, among
other things, the investment advisory fees; 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. Also, accounting services are provided to the Fund by the
Investment Adviser, and the Fund reimburses the Investment Adviser for its
costs in connection with such services on a semi-annual basis. For the fiscal
year ended May 31, 1998 the Fund reimbursed the Investment Adviser $149,179 for
accounting services. For the fiscal year ended May 31, 1998, the ratio of total
expenses to average net assets for the Class A, Class B, Class C and Class D
shares was 1.16%, 2.20%, 2.21% and 1.42%, respectively.

Decisions concerning the allocation of the Fund's assets among the three
prime regions outside the United States (i.e., Europe, Latin America and the
Pacific Basin) as well as country and individual security selection, will
generally be made by the Fund's Portfolio Manager, who is based in London.

Clive D. Lang is the Portfolio Manager of the Fund and the person primarily
responsible for the Fund's day-to-day operations. Mr. Lang has been associated
with MLAM U.K. since 1997 and was prior to that the Chief Investment Officer of
Panagora Asset Management Limited.

CODE OF ETHICS

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

18
<PAGE>

The Codes require that all employees of the Investment Adviser 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 Investment Adviser include a ban on acquiring any securities
in a "hot" initial public offering and a prohibition from profiting on short-
term trading in securities. In addition, no employee may purchase or sell any
security which at the time is being purchased or sold (as the case may be), or
to the knowledge of the employee is being considered for purchase or sale, by
any fund advised by the Investment Adviser. Furthermore, the Codes provide for
trading "blackout periods" which prohibit trading by investment personnel of
the Fund within periods of trading by the Fund in the same (or equivalent)
security (15 or 30 days depending upon the transaction).

TRANSFER AGENCY SERVICES

The Transfer Agent, which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the "Transfer Agency Agreement").
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible
for the issuance, transfer and redemption of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency Agreement,
the Transfer Agent receives an annual fee of up to $11.00 per Class A or Class
D account and up to $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 the fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fee 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 a 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 May 31, 1998, the Fund paid the Transfer Agent $1,280,220
pursuant to the Transfer Agency Agreement.

PURCHASE OF SHARES

The Distributor, an affiliate of both the Investment Adviser and of 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 (i) for retirement plans, the minimum
initial purchase is $100 and the minimum subsequent purchase is $1 and (ii) for
participants in certain fee-based programs, the minimum initial purchase is
$250 and the minimum subsequent purchase is $50.

The Fund offers 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

19
<PAGE>

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

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 their 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 contingent deferred sales charge and
ongoing distribution 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 3.

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

20
<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 PricingSM System.

<TABLE>
<CAPTION>
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(/1/) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A Maximum 5.25% initial No No No
sales charge(/2/)(/3/)
- -------------------------------------------------------------------------------------------
B CDSC for a period of four years, 0.25% 0.75% B shares convert to
at a rate of 4.0% during the D shares automatically
first year, decreasing 1.0% after approximately
annually to 0.0%(/4/) eight years(/5/)
- -------------------------------------------------------------------------------------------
C 1.0% CDSC for one year(/6/) 0.25% 0.75% No
- -------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% 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 may be 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 certain retirement plans and 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 1.0% CDSC if redeemed within one
year. Such CDSC may be waived in connection with certain fee-based
programs. A 0.75% sales charge for 401(k) purchases over $1,000,000 will
apply.
(4) The CDSC may be modified in connection with certain fee-based programs.

(5) The conversion period for dividend reinvestment shares, certain retirement
plans and certain fee-based programs may be modified. Also, Class B shares
of certain other MLAM-advised mutual funds into which exchanges may be
made have a ten 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 shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.

21
<PAGE>

The public offering price of Class A and Class D shares for purchasers
choosing the initial sales charge alternatives 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 THE OFFERING PRICE INVESTED THE OFFERING PRICE
- ------------------ ------------------ --------------- ------------------
<S> <C> <C> <C>
Less than $25,000........ 5.25% 5.54% 5.00%
$25,000 but less than
$50,000................. 4.75 4.99 4.50
$50,000 but less than
$100,000................ 4.00 4.17 3.75
$100,000 but less than
$250,000................ 3.00 3.09 2.75
$250,000 but less than
$1,000,000.............. 2.00 2.04 1.80
$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 certain
retirement plans and 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 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 charge will be assessed
on an amount equal to the lesser of the proceeds of redemption or the cost
of the shares being redeemed. A sales charge of 0.75% will be charged on
purchases of $1,000,000 or more of Class A or Class D shares by certain
employer-sponsored retirement or savings plans.

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. 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.

During the fiscal year ended May 31, 1998, the Fund sold 2,078,080 Class A
shares for aggregate net proceeds of $21,677,428. The gross sales charges for
the sale of Class A shares of the Fund for that year were $1,469, of which $117
and $1,352 were received by the Distributor and Merrill Lynch, respectively.
During such period, 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.

During the fiscal year ended May 31, 1998, the Fund sold 3,449,207 Class D
shares for aggregate net proceeds of $39,786,340. The gross sales charges for
the sale of Class D shares of the Fund for that year were $29,382, of which
$1,851 and $27,531 were received by the Distributor and Merrill Lynch,
respectively. During such period, 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.

Eligible Class A Investors. Class A shares are offered to a limited group of
investors and also will be issued upon reinvestment of dividends on outstanding
Class A shares. Investors who currently own Class A shares of the Fund in a
shareholder account are entitled to purchase additional Class A shares of the
Fund in that account. Certain employer-sponsored retirement or savings plans,
including eligible 401(k) plans, may purchase Class A shares at net asset value
provided such plans meet the required minimum number of eligible employees or
required amount of assets advised by MLAM or any of its affiliates. Class A
shares are available

22
<PAGE>

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 fee-based programs including TMASM Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services, collective
investment trusts for which Merrill Lynch Trust Company serves as trustee and
certain purchases made in connection with certain fee-based programs. In
addition, Class A shares are offered at net asset value to ML & Co. and its
subsidiaries and their directors and employees and to members of the Boards of
MLAM-advised investment companies, including the Fund. 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. 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 certain employer-sponsored
retirement or savings plans and 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 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.

23
<PAGE>

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 eight 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 a distribution fee of 0.75% of net assets as discussed below under
"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) related 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 Class
B and Class C shares, from the dealers' own funds. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of the Fund to sell
the Class B and Class C shares without a sales charge being deducted at the
time of purchase. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but 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 ten 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 Charges--Class B Shares. Class B shares that are
redeemed within four years of purchase may be subject to a CDSC at the rates
set forth below charged as a percentage of the dollar amount subject thereto.
The charge will be assessed on an amount equal to the lesser of the current
market value 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.

24
<PAGE>

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 May 31, 1998 the Distributor received CDSCs of
$868,213 with respect to redemptions of Class B shares, all of which were paid
to Merrill Lynch. Additional CDSCs payable to the Distributor may 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 possible 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 purchases 100 shares at $10 per
share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares through 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 the 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 for shares
purchased after October 21, 1994).

The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans.
The CDSC is also waived for any Class B shares that are purchased by eligible
401(k) or eligible 401(a) plans that are rolled over into a Merrill Lynch or
Merrill Lynch Trust Company custodied IRA and held in such account at the time
of redemption. The Class B CDSC is also waived for any Class B shares
purchased within qualifying Employee Access SM Accounts. The Class B CDSC also
is waived for any Class B shares which are purchased by a Merrill Lynch
rollover IRA that was funded by a rollover from a terminated 401(k) plan
managed by the MLAM Private Portfolio Group and held in such account at the
time of redemption. 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."

25
<PAGE>

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 CDSC may be waived in connection
with certain fee-based programs. See "Shareholder Services--Fee-Based
Programs." For the fiscal year ended May 31, 1998, the Distributor received
CDSCs of $3,787 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 eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of 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 deemed a purchase or sale of the shares for Federal income tax purposes.

In addition, shares purchased through reinvestment of dividends on Class B
shares also will convert automatically to Class D shares. The Conversion Date
for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying such dividend reinvestment shares were
outstanding. If at 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

26
<PAGE>

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 is modified for shareholders who purchased Class B
shares through certain retirement plans which qualified for a waiver of the
CDSC normally imposed on purchases of Class B shares ("Class B Retirement
Plans"). When the first share of any MLAM-advised mutual fund purchased by a
Class B Retirement Plan has been held for ten years (i.e., ten years from the
date the relationship between MLAM-advised mutual funds and the Class B
Retirement Plan was established), all Class B shares of all MLAM-advised mutual
funds held in that Class B Retirement Plan will be converted into Class D
shares of the appropriate funds. Subsequent to such conversion, that Class B
Retirement Plan will be sold Class D shares of the appropriate funds at net
asset value per share.

The Conversion Period also may be modified for retirement plan 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 Investment Company Act (each a
"Distribution Plan") with respect to the account maintenance and/or
distribution fees paid by the Fund to the Distributor with respect to such
classes. The 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 provide
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rate of 0.25% of the average daily net assets of the Fund attributable to
shares of the relevant class, in order to compensate the Distributor and
Merrill Lynch (pursuant to a sub-agreement) in connection with account
maintenance activities.

The Distribution Plans for Class B and Class C shares each provide 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 rate of 0.75% 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.

For the fiscal year ended May 31, 1998, the Fund paid the Distributor
$4,565,655 pursuant to the Class B Distribution Plan (based on average daily
net assets subject to such Class B Distribution Plan of

27
<PAGE>

approximately $457.8 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 May 31, 1998, the
Fund paid the Distributor $205,028 pursuant to the Class C Distribution Plan
(based on average daily net assets subject to such Class C Distribution Plan of
approximately $20.6 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 May 31, 1998, the
Fund paid the Distributor $242,039 pursuant to the Class D Distribution Plan
(based on average daily net assets subject to such Class D Distribution Plan of
approximately $97.1 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.

The 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 Distributor on 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, with respect to Class B shares, fully allocated
accrual expenses incurred by the Distributor and Merrill Lynch for the period
since July 30, 1993 (commencement of operations) exceeded fully allocated
accrual revenues for such period by approximately $3,441,000 (0.88% of Class B
net assets at that date). As of May 31, 1998, with respect to Class B shares,
direct cash revenues for the period since July 30, 1993 (commencement of
operations) exceeded direct cash expenses by $26,134,718 (8.39% of Class B net
assets at that date). As of December 31, 1997, with respect to Class C shares,
fully allocated accrual expenses incurred by the Distributor and Merrill Lynch
for the period since October 21, 1994 (commencement of operations) exceeded
fully allocated accrual revenues for such period by approximately $303,000
(1.69% of Class C net assets at that date). As of May 31, 1998, with respect to
Class C shares, direct cash revenues for the period since October 21, 1994
(commencement of operations) exceeded direct cash expenses by $675,579 (4.59%
of Class C net assets at that date).

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 Fund 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

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<PAGE>

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."

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

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

REDEMPTION OF SHARES

The Fund is required to redeem for cash all full and fractional shares of the
Fund on 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

29
<PAGE>

should not be sent to the Fund. The redemption request in either event requires
the signatures of all persons in whose names the shares are registered, signed
exactly as their names appear on the Transfer Agent's register or on the
certificate, as the case may be. The signature(s) on the redemption request
must be guaranteed by an "eligible guarantor institution" (including, for
example, Merrill Lynch branches and certain other financial institutions) 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 redeeming directly with the Transfer Agent, payment
will be mailed within seven days of receipt of a proper notice of redemption.

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

REPURCHASE

The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase 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, 4:00 p.m., New York time) on the day received and that such
request is received by the Fund from such dealer not later than 30 minutes
after the close of business on the NYSE on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later
than 30 minutes after the close of business on the NYSE in order to obtain that
day's closing price.

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

30
<PAGE>

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 Fund 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 with respect thereto, can be obtained
from the Fund by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Certain of these services are available only
to U.S. investors.

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and long-term capital gain distributions. The quarterly 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 gain
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 also may 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,
without charge, 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. Shareholders considering transferring a tax-deferred
retirement account such as an IRA from Merrill Lynch to another brokerage firm
or financial institution

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<PAGE>

should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the 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 a retirement account at Merrill Lynch for those shares.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to receive systematic withdrawal payments from his or
her Investment Account in the form of payments by check or through automatic
payment by direct deposit to his or her bank account on either a monthly or
quarterly basis. A shareholder whose shares are held within a CMA(R), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the Systematic Redemption
Program, subject to certain conditions. With respect to redemption of Class B
and Class C shares pursuant to a systematic withdrawal plan, the maximum number
of Class B and Class C shares that can be redeemed from an account 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 automatically be
applied thereafter to Class D shares. See "Purchase of Shares--Deferred Sales
Charge 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 or 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. Investors who maintain CMA(R) or CBA (R)
accounts may arrange to have periodic investments made in the Fund in their
CMA(R) or CBA (R) account or in certain related accounts in amounts of $100 or
more through the CMA(R) or CBA (R) Automated Investment Program.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

All dividends and capital gains distributions are automatically reinvested in
full and fractional shares of the Fund, without sales charge, at the net asset
value per share next determined after the close of business on the NYSE on the
ex-dividend date of such dividend or distribution. 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 capital gains
distributions, or both, 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 or less, a shareholder will not receive such payment in cash and
such payment will be automatically reinvested in additional shares). Cash
payments can also be directly deposited to the shareholder's bank account. No
CDSC will be imposed on redemptions of shares issued as a result of the
automatic reinvestment

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<PAGE>

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.

EXCHANGE PRIVILEGE

U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other 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 in accordance
with the rules of the Commission.

Under the Merrill Lynch Select PricingSM 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
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
MLAM-advised mutual fund, and the shareholder 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
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.

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, Class B, Class C and Class D shares also are exchangeable for shares
of certain MLAM-advised money market funds specifically designated as available
for exchange by holders of Class A, Class B, Class C or Class D shares. The
period of time that Class A, Class B, Class C or Class D shares are held in a
money market fund, however, will not count toward satisfaction of the holding
period requirement for reduction of any CDSC imposed on such shares, if any,
and, with respect to Class B shares, toward satisfaction of the Conversion
Period.

Effective on or about October 12, 1998, Class A and Class D shares also will
be exchangeable for Class A shares of, and Class B and Class C shares also will
be exchangeable for Class B shares of, Summit Cash Reserves Fund, a series of
Financial Institutions Series Trust, which is a Merrill Lynch-sponsored money
market fund specifically designated as available for exchange by holders of
Class A, Class B, Class C and

33
<PAGE>

Class D shares of MLAM-advised mutual funds. Class A shares of Summit Cash
Reserves Fund have an exchange privilege back into Class A or Class D shares of
MLAM-advised mutual funds; Class B shares of Summit Cash Reserves Fund have an
exchange privilege back into Class B or Class C shares of MLAM-advised mutual
funds. The period of time that Class B shares of Summit Cash Reserves Fund 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 Cash Reserves
Fund 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.

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 exchange privilege is modified with respect to certain retirement plans
which participate in the MFA program. Such retirement plans may exchange Class
B, Class C or Class D shares that have been held for at least one year for
Class A shares of the same fund on the basis of relative net asset values in
connection with the commencement of participation in the MFA program, i.e., no
CDSC will apply. The one year holding period does not apply to shares acquired
through reinvestment of dividends. Upon termination of participation in the MFA
program, Class A shares will be re-exchanged for the class of shares originally
held. For purposes of computing any CDSC that may be payable upon redemption of
Class B or Class C shares so reacquired, or the Conversion Period for Class B
shares so reacquired, the holding period for the Class A shares will be
"tacked" to the holding period for the Class B or Class C shares originally
held. The Fund's exchange privilege is also modified with respect to purchases
of Class A and Class D shares by non-retirement plan investors under the MFA
program. First, the initial allocation of assets is made under the MFA program.
Then, any subsequent exchange under the MFA program of Class A or Class D
shares of a MLAM-advised mutual fund for Class A or Class D shares of the Fund
will be made solely on the basis of the relative net asset values of the shares
being exchanged. Therefore, there will not be a charge for any difference
between the sales charge previously paid on the shares of the other MLAM-
advised mutual fund and the sales charge payable on the shares of the Fund
being acquired in the exchange under the MFA program.

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

34
<PAGE>

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.

PERFORMANCE DATA

From time to time the Fund may include its average annual total return for
various specified time periods in advertisements or information furnished to
present or prospective shareholders. Average annual total return is computed
separately for Class A, Class B, Class C and Class D shares in accordance with
a formula 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 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
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 exclusively 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 may also 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

35
<PAGE>

return reflect compounding over longer periods of time. In advertisements
distributed to investors whose purchases are subject to waiver of the CDSC in
the case of Class B and Class C shares (such as investors in certain retirement
plans) or to reduced sales charges in the case of Class A and Class D shares,
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 may be 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 the effect of such total return on a hypothetical $1,000
investment in the Fund at the beginning of each specified period.

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

On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, other market
indices or performance data published by Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., Money Magazine, U.S. News & World Report,
Business Week, CDA Investment Technology, Inc., Forbes Magazine, Fortune
Magazine or other industry publications. When comparing its performance to a
market index, the Fund may refer to various statistical measures derived from
the historic performance of the Fund and the index, such as standard deviation
and beta. As with other performance data, performance comparisons should not be
considered indicative of the Fund's relative performance for any future period.

ADDITIONAL INFORMATION

DIVIDENDS AND DISTRIBUTIONS

It is the Fund's intention to distribute all of its net investment income, if
any. Dividends from such net investment income will be paid at least annually.
All net realized capital gains, if any, will be distributed to the Fund's
shareholders at least annually. 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." Dividends and distributions
will be reinvested automatically in shares of the Fund at net asset value
without a sales charge. However, a shareholder whose account is maintained at
the Transfer Agent or whose account is maintained through Merrill Lynch may
elect in writing to receive any such dividends or distributions, or both, in
cash (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). Dividends and distributions are taxable to shareholders
as discussed below whether they are reinvested in shares of the Fund or
received in cash. From time to time, the Fund may declare a special
distribution at or about the end of the calendar year in order to comply with
Federal tax requirements that certain percentages of its ordinary income and
capital gains be distributed during the year.

Gains or losses attributable to foreign currency gains or losses from certain
forward contracts may increase or decrease the amount of the Fund's income
available for distribution to shareholders. If such losses

36
<PAGE>

exceed other income during a taxable year, (a) the Fund would not be able to
make any ordinary income dividend distributions, and (b) all or a portion of
distributions made before the losses were realized would be recharacterized as
a return of capital to shareholders, rather than as an ordinary income
dividend, thereby reducing each shareholder's tax basis in Fund shares for
Federal income tax purposes and resulting in a capital gain for any shareholder
who received a distribution greater than the shareholder's tax basis in Fund
shares (assuming that the shares were held as a capital asset). For a detailed
discussion of the Federal tax considerations relevant to foreign currency
transactions, see "Additional Information--Taxes."

TAXES

The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B, Class C and Class D shareholders (together,
the "shareholders"). The Fund intends to distribute substantially all of such
income.

Dividends paid by the Fund from its ordinary income or from an excess of net
short-term capital gains over net long-term capital losses (together referred
to hereafter as "ordinary income dividends") are taxable to shareholders as
ordinary income. Distributions made from an excess of net long-term capital
gains over net short-term capital losses (including gains or losses from
certain transactions in futures and options) ("capital gain dividends") are
taxable to shareholders as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less will be treated as long-term capital
loss to the extent of any capital gain dividends received by the shareholder.
Distributions in excess of the Fund's earnings and profits will first reduce
the adjusted tax basis of a holder's shares and, after such adjusted tax basis
is reduced to zero, will constitute capital gains to such holder (assuming the
shares are held as a capital asset). Recent legislation created additional
categories of capital gains taxable at different rates. Additional legislation
eliminates the highest 28% category for most sales of capital assets occurring
after December 31, 1997. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends, as well as the amount of capital gain dividends in the different
categories of capital gain referred to above.

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

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

37
<PAGE>

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

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

The Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. If the Fund purchases shares of an investment company (or
similar investment entity) organized under foreign law, the Fund will be
treated as owning shares in a passive foreign investment company ("PFIC") for
U.S. Federal income tax purposes. The Fund may be subject to U.S. Federal
income tax, and an additional tax in the nature of interest (the "interest
charge"), on a portion of the distributions from such a company and on gain
from the disposition of the shares of such a company (collectively referred to
as "excess distributions"), even if such excess distributions are paid by the
Fund as a dividend to its shareholders. The Fund may be eligible to make an
election with respect to certain PFICs in which it owns shares that will allow
it to avoid the taxes on excess distributions. However, such election may cause
the Fund to recognize income in a particular year in excess of the
distributions received from such PFICs. Alternatively, under recent legislation
the Fund could elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares over
their adjusted basis and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases. By making the mark-to-market
election, the Fund could avoid imposition of the interest charge

38
<PAGE>

with respect to its distributions from PFICs, but in any particular year might
be required to recognize income in excess of the distributions it received from
PFICs and its proceeds from dispositions of PFIC stock.

Under Code Section 988, foreign currency gains or losses from certain debt
instruments, from certain forward contracts, from futures contracts that are
not "regulated futures contracts" and from unlisted options will generally be
treated as ordinary income or loss. Such Code Section 988 gains or losses will
generally increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make any
ordinary income dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
recharacterized as a return of capital to shareholders, thereby reducing the
basis of each shareholder's Fund shares and resulting in a capital gain for any
shareholder who received a distribution greater than the shareholder's tax
basis in Fund shares (assuming the shares were held as a capital asset).

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.

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

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

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

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

39
<PAGE>

DETERMINATION OF NET ASSET VALUE

Net asset value of the shares of all classes of the Fund is determined once
daily as of 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time), on each day during which the NYSE is open for trading.
Any assets or liabilities initially expressed in terms of non-U.S. dollar
currencies are translated into U.S. dollars at the prevailing market rates as
quoted by one or more banks or dealers on the day of valuation.

The net asset value is computed by dividing the sum of the market values 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 management fees
payable to the Investment Adviser and any account maintenance and/or
distribution fees payable to 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 asset value of shares of the other classes, reflecting the daily
expense accruals of the account maintenance, distribution and higher transfer
agency fees applicable with respect to Class B and Class C shares and the daily
expense accruals of the account maintenance fees applicable with respect to
Class D shares; in addition, the per share net asset value of Class D shares
generally will be higher than the per share net asset value of Class B and
Class C shares, reflecting the daily expense accruals of the distribution 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.

Portfolio securities that are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price for long positions and
at the last available ask price for short positions. In cases where securities
are traded on more than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Trustees as the primary
market. Long positions in securities traded in the OTC market are valued at the
last available bid price in the OTC market prior to the time of valuation.
Short positions in securities traded in the OTC market are valued at the last
available ask price in the OTC market prior to the time of valuation. Portfolio
securities that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes an option, the amount of the premium received is recorded on the books
of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last asked
price. Options purchased by the Fund are valued at their last sale price in the
case of exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. Other investments, including financial futures
contracts and related options, are stated at market value. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Trustees of the Fund. Such valuations and procedures will be reviewed
periodically by the Board of Trustees.

ORGANIZATION OF THE FUND

The Fund was organized on January 3, 1992, under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Fund is authorized to

40
<PAGE>

issue an unlimited number of shares of beneficial interest of $.10 par value of
different classes. At the date of this Prospectus, the shares of the Fund are
divided into Class A, Class B, Class C and Class D shares. Shares of Class A,
Class B, Class C and Class D represent interests in the 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 account maintenance and distribution
expenditures, as applicable. See "Purchase of Shares." Shares issued are fully
paid, non-assessable and have no preemptive rights. Shares have the conversion
rights described in this Prospectus.

The Declaration of Trust of the Fund, as amended (the "Declaration"), does
not require that the Fund hold an annual meeting of shareholders. However, the
Fund will be required to call special meetings of shareholders in accordance
with the requirements of the Investment Company Act to seek approval of new
investment advisory and management arrangements, a material increase in
distribution fees or a change in the fundamental policies, objective or
restrictions of the Fund. The Fund also would be required to hold a special
shareholders' meeting to elect new Trustees at such time as less than a
majority of the Trustees holding office have been elected by shareholders. The
Declaration provides that a shareholders' meeting may be called for any reason
at the request of 10% of the outstanding shares of the Fund or by a majority of
the Trustees.

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 and/or mutual fund account numbers. If
you have any questions regarding this, please call your Merrill Lynch Financial
Consultant or Financial Data Services, Inc. at 1-800-637-3863.

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund 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 Investment Adviser or other Fund service
providers do not

41
<PAGE>

properly address this problem prior to January 1, 2000. The Investment Adviser
has established a dedicated group to analyze these issues and to implement any
systems modifications necessary to prepare for the Year 2000. Currently, the
Investment Adviser 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 Investment Adviser has sought assurances from
the Fund's other service providers that they are taking all necessary steps to
ensure that their computer systems will accurately reflect the Year 2000, and
the Investment Adviser 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 Fund, dated January 3, 1992, 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 International Equity Fund" 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 Fund
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 said Fund,
but the "Trust Property" only shall be liable.

42
<PAGE>

MERRILL LYNCH INTERNATIONAL EQUITY FUND -- AUTHORIZATION FORM (PART 1)
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase: (choose one)

[_] Class A shares [_] Class B shares
[_] Class C shares [_] Class D shares

of Merrill Lynch International Equity Fund and establish an Investment Account
as described in the Prospectus. In the event that I am not eligible to
purchase Class A shares, I understand that Class D shares will be purchased.

Basis for establishing an Investment Account:

A. I enclose a check for $............ payable to Financial Data Services,
Inc., as an initial investment (minimum $1,000). I understand that this
purchase will be executed at the applicable offering price next to be
determined after this Application is received by you.

B. I already own shares of the following Merrill Lynch mutual funds that
would qualify for the right of accumulation as outlined in the Statement of
Additional Information: Please list all funds. (Use a separate sheet of
paper if necessary.)

1. .................................. 4. ..................................
2. .................................. 5. ..................................
3. .................................. 6. ..................................

Name...........................................................................
First Name Initial Last Name
Name of Co-Owner (if any)......................................................
First Name Initial Last Name
Address........................................................................
................................................. Date........................
(Zip Code)
Occupation........................... Name and Address of Employer ........
.....................................
.....................................
..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)

(In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.)
- -------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS

Ordinary Income Dividends Long-Term Capital Gains
SELECT [_] Reinvest SELECT [_] Reinvest
ONE: [_] Cash ONE: [_] Cash

If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.

IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU:
[_] Check or [_] Direct Deposit to bank account

IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by
direct deposit to my bank account and, if necessary, debit entries and
adjustments for any credit entries made to my account in accordance with the
terms I have selected on the Merrill Lynch International Equity Fund
Authorization Form.

Specify type of account (check one): [_] checking [_] savings

Name on your account ..........................................................

Bank Name .....................................................................

Bank Number ...................... Account Number ............................

Bank Address ..................................................................

I agree that this authorization will remain in effect until I provide written
notification to Financial Data Services, Inc. amending or terminating this
service.

Signature of Depositor ........................................................

Signature of Depositor ............................... Date...................
(If joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED
CHECK MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD
ACCOMPANY THIS APPLICATION.

43
<PAGE>

MERRILL LYNCH INTERNATIONAL EQUITY FUND -- AUTHORIZATION FORM (PART 1) --
(CONTINUED)
- -------------------------------------------------------------------------------
3. SOCIAL SECURITY OR TAXPAYER IDENTIFICATION NUMBER

[ ]
Social Security Number or Taxpayer Identification Number

Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security Number or Taxpayer Identification Number and (2)
that I am not subject to backup withholding (as discussed in the Prospectus
under "Additional Information--Taxes") either because I have not been notified
that I am subject thereto as a result of a failure to report all interest or
dividends, or the Internal Revenue Service ("IRS") has notified me that I am
no longer subject thereto.

INSTRUCTION: YOU MUST STRIKE OUT THE LANGUAGE IN (2) ABOVE IF YOU HAVE BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING DUE TO UNDERREPORTING AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED. THE UNDERSIGNED AUTHORIZES THE FURNISHING OF THIS
CERTIFICATION TO OTHER MERRILL LYNCH SPONSORED MUTUAL FUNDS.

..................................... .....................................
Signature of Owner Signature of Co-Owner (if any)
- -------------------------------------------------------------------------------
4. LETTER OF INTENTION--CLASS A AND CLASS D SHARES ONLY (SEE TERMS AND
CONDITIONS IN THE STATEMENT OF ADDITIONAL INFORMATION)

..................., 19......
Date of Initial Purchase
Dear Sir/Madam:

Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch International Equity Fund or any other investment company with an
initial sales charge or deferred sales charge for which Merrill Lynch Funds
Distributor acts as distributor over the next 13-month period which will equal
or exceed:

[_] $25,000 [_] $50,000 [_] $100,000 [_] $250,000 [_] $1,000,000
Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Merrill Lynch International
Equity Fund Prospectus.

I agree to the terms and conditions of this Letter of Intention. I hereby
irrevocably constitute and appoint Merrill Lynch Funds Distributor my
attorney, with full power of substitution, to surrender for redemption any or
all shares of Merrill Lynch International Equity Fund held as security.

By: ................................. .....................................
Signature of Owner Signature of Co-Owner
(If registered in joint names,
both must sign)

In making purchases under this letter, the following are the related
accounts on which reduced offering prices are to apply:

(1) Name............................. (2) Name.............................
Account Number.......................
Account Number.......................
- -------------------------------------------------------------------------------

5. FOR DEALER ONLY
Branch Office, Address, Stamp
- - - We hereby authorize Merrill Lynch
Funds Distributor to act as our
agent in connection with
transactions under this
authorization form and agree to
notify the Distributor of any
purchases or sales made under a
Letter of Intention, Automatic
Investment Plan or Systematic
Withdrawal Plan. We guarantee the
shareholder's signature.

.....................................
Dealer Name and Address
- - -
This form when completed should be By ..................................
mailed to: Authorized Signature of Dealer

Merrill Lynch International [_][_][_] [_][_][_][_].............
Equity Fund Branch Code F/C No. F/C Last Name
c/o Merrill Lynch Financial
Data Services, Inc. [_][_][_][_][_][_][_][_]
P.O. Box 45289 Dealer's Customer A/C No.
Jacksonville, FL 32232-5289

44
<PAGE>

MERRILL LYNCH INTERNATIONAL EQUITY FUND--AUTHORIZATION FORM (PART 2)
- -------------------------------------------------------------------------------

NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE SYSTEMATIC WITHDRAWAL OR
AUTOMATIC INVESTMENT PLANS ONLY.
- -------------------------------------------------------------------------------

1. ACCOUNT REGISTRATION

Name of Owner......................... [ ]
First Name Initial Last Name Social Security Number or
Taxpayer Identification
Number
Name of Co-Owner (if any).............
First Name Initial Last Name

Address............................ Account Number ....................
(if existing account)
...................................
- -------------------------------------------------------------------------------

2. SYSTEMATIC WITHDRAWAL PLAN--(SEE TERMS AND CONDITIONS IN THE STATEMENT OF
ADDITIONAL INFORMATION)

MINIMUM REQUIREMENTS: $10,000 for monthly disbursements, $5,000 for quarterly,
of [_] Class A, [_] Class B*, [_] Class C* or [_] Class D shares in Merrill
Lynch International Equity Fund at cost or current offering price. Withdrawals
to be made either (check one) [_] Monthly on the 24th day of each month, or
[_] Quarterly on the 24th day of March, June, September and December. If the
24th falls on a weekend or holiday, the next succeeding business day will be
utilized. Begin systematic withdrawal in . . . . . . . or as soon as possible
(month)
thereafter.

SPECIFY THE AMOUNT OF WITHDRAWAL YOU WOULD LIKE PAID TO YOU:
$. . . . . . . . . . of (check one) [_] Class A, [_] Class B*, [_] Class C* or
[_] Class D shares in the account.

SPECIFY WITHDRAWAL METHOD: [_] check or [_] direct deposit to bank account
(check one and complete part (a) or (b) below):

DRAW CHECKS PAYABLE (CHECK ONE)

(a)I hereby authorize payment by check
[_] as indicated in Item 1.
[_] to the order of..........................................................

Mail to (check one)
[_] the address indicated in Item 1.
[_] Name (Please Print)......................................................

Address .......................................................................

..........................................................................

Signature of Owner................................ Date..................

Signature of Co-Owner (if any)............................................

(B) I HEREBY AUTHORIZE PAYMENT BY DIRECT DEPOSIT TO BANK ACCOUNT AND, IF
NECESSARY, DEBIT ENTRIES AND ADJUSTMENTS FOR ANY CREDIT ENTRIES MADE TO MY
ACCOUNT. I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE
WRITTEN NOTIFICATION TO FINANCIAL DATA SERVICES, INC. AMENDING OR TERMINATING
THIS SERVICE.

Specify type of account (check one): [_] checking [_] savings

Name on your Account...........................................................

Bank Name......................................................................

Bank Number........................ Account Number............................

Bank Address...................................................................

........................................................................

Signature of Depositor................................. Date..................

Signature of Depositor.........................................................
(If joint account, both must sign)

NOTE: IF DIRECT DEPOSIT IS ELECTED, YOUR BLANK, UNSIGNED CHECK MARKED "VOID"
OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS APPLICATION.

* ANNUAL WITHDRAWAL CANNOT EXCEED 10% OF THE VALUE OF SHARES OF SUCH CLASS
HELD IN THE ACCOUNT AT THE TIME THE ELECTION TO JOIN THE SYSTEMATIC
WITHDRAWAL PLAN IS MADE.

45
<PAGE>

MERRILL LYNCH INTERNATIONAL EQUITY FUND--AUTHORIZATION FORM (PART 2)--
(CONTINUED)
- -------------------------------------------------------------------------------

3. APPLICATION FOR AUTOMATIC INVESTMENT PLAN

I hereby request that Financial Data Services, Inc. draw an automated
clearing house ("ACH") debit on my checking account as described below each
month to purchase: (choose one)

[_] Class A shares [_] Class B shares
[_] Class C shares [_] Class D shares

of Merrill Lynch International Equity Fund subject to the terms set forth
below. In the event that I am not eligible to purchase Class A shares, I
understand that Class D shares will be purchased.

AUTHORIZATION TO HONOR ACH DEBITS
FINANCIAL DATA SERVICES, INC. DRAWN BY FINANCIAL DATA SERVICES,
INC.

You are hereby authorized to draw an
ACH debit each month on my bank To...............................Bank
account for investment in Merrill (Investor's Bank)
Lynch International Equity Fund as
indicated below: Bank Address.........................

Amount of each ACH debit $........ City....... State........ Zip.......

Account Number....................

As a convenience to me, I hereby
Please date and invest ACH debits on request and authorize you to pay and
the 20th of each month beginning charge to my account ACH debits
. . . . . . . . . . . . as soon drawn on my account by and payable
(month) to Financial Data Services, Inc. I
thereafter as possible. agree that your rights in respect to
each such debit shall be the same as
if it were a check drawn on you and
I agree that you are drawing these signed personally by me. This
ACH debits voluntarily at my request authority is to remain in effect
and that you shall not be liable for until revoked personally by me in
any loss arising from any delay in writing. Until you receive such
preparing or failure to prepare any notice, you shall be fully protected
such debit. If I change banks or in honoring any such debit. I
desire to terminate or suspend this further agree that if any such debit
program, I agree to notify you be dishonored, whether with or
promptly in writing. I hereby without cause and whether
authorize you to take any action to intentionally or inadvertently, you
correct erroneous ACH debits of my shall be under no liability.
bank account or purchases of Fund
shares including liquidating shares
of the Fund and crediting my bank ............ .....................
account. I further agree that if a Date Signature of
check or debit is not honored upon Depositor
presentation, Financial Data
Services, Inc. is authorized to ............ .....................
discontinue immediately the Automatic Bank Signature of Depositor
Investment Plan and to liquidate Account (If joint account,
sufficient shares held in my account Number both must sign)
to offset the purchase made with the
dishonored debit.

............ .....................
Date Signature of
Depositor

......................
Signature of Depositor
(If joint account,
both must sign)

NOTE: IF AUTOMATIC INVESTMENT PLAN IS ELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" SHOULD ACCOMPANY THIS APPLICATION.

46
<PAGE>

APPENDIX A

INVESTMENT PRACTICES INVOLVING THE USE OFINDEXED SECURITIES, OPTIONS, FUTURES,
SWAPS AND FOREIGN EXCHANGE

The Fund is authorized to use certain derivative instruments, including
indexed and inverse securities, options, futures, and swaps, and to purchase
and sell foreign exchange, as described below. Such instruments are referred to
collectively herein as "Strategic Instruments."

Indexed and Inverse Securities

The Fund may invest in securities the potential return of which is based on
the change in particular measurements of value or rate (an "index"). As an
illustration, the Fund may invest in a debt security that pays interest and
returns principal based on the change in the value of a securities index or a
basket of securities, or based on the relative changes of two indices. In
addition, the Fund may invest in securities the potential return of which is
based inversely on the change in an index. For example, the Fund may invest in
securities that pay a higher rate of interest when a particular index decreases
and pay a lower rate of interest (or do not fully return principal) when the
value of the index increases. If the Fund invests in such securities, it may be
subject to reduced or eliminated interest payments or loss of principal in the
event of an adverse movement in the relevant index or indices.

Certain indexed and inverse securities may have the effect of providing
investment leverage because the rate of interest or amount of principal payable
increases or decreases at a rate that is a multiple of the changes in the
relevant index. As a consequence, the market value of such securities may be
substantially more volatile than the market values of other debt securities.
The Fund believes that indexed and inverse securities may provide portfolio
management flexibility that permits the Fund to seek enhanced returns, hedge
other portfolio positions or vary the degree of portfolio leverage with greater
efficiency than would otherwise be possible under certain market conditions.

Options on Securities and Securities Indices

Purchasing Options. The Fund is authorized to purchase put options on
securities held in its portfolio or securities indices the performance of which
is substantially correlated with securities held in its portfolio. When the
Fund purchases a put option, in consideration for an up-front payment (the
"option premium") the Fund acquires a right to sell to another party specified
securities owned by the Fund at a specified price (the "exercise price") on or
before a specified date (the "expiration date"), in the case of an option on
securities, or to receive from another party a payment based on the amount a
specified securities index declines below a specified level on or before the
expiration date, in the case of an option on a securities index. The purchase
of a put option limits the Fund's risk of loss in the event of a decline in the
market value of the portfolio holdings underlying the put option prior to the
option's expiration date. If the market value of the portfolio holdings
associated with the put option increases rather than decreases, however, the
Fund will lose the option premium and will consequently realize a lower return
on the portfolio holdings than would have been realized without the purchase of
the put.

The Fund is also authorized to purchase call options on securities it intends
to purchase or securities indices the performance of which is substantially
correlated with the performance of the types of securities it

A-1
<PAGE>

intends to purchase. When the Fund purchases a call option, in consideration
for the option premium the Fund acquires a right to purchase from another party
specified securities at the exercise price on or before the expiration date, in
the case of an option on securities, or to receive from another party a payment
based on the amount a specified securities index increases beyond a specified
level on or before the expiration date, in the case of an option on a
securities index. The purchase of a call option may protect the Fund from
having to pay more for a security as a consequence of increases in the market
value for the security during a period when the Fund is contemplating its
purchase, in the case of an option on a security, or attempting to identify
specific securities in which to invest in a market the Fund believes to be
attractive, in the case of an option on an index (an "anticipatory hedge"). In
the event the Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium.

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

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

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

A-2
<PAGE>

the put in connection with trading strategies involving combinations of
options--for example, the sale and purchase of options with identical
expiration dates on the same security or index but different exercise prices (a
technique called a "spread").

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

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

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

Futures

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

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

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

A-3
<PAGE>

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

Swaps

The Fund is authorized to enter into equity swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a fixed or
variable interest rate or the change in market value of a different equity
security, basket of equity securities or equity index. Swap agreements may be
used to obtain exposure to an equity or market without owning or taking
physical custody of securities in circumstances in which direct investment is
restricted by local law or is otherwise impractical.

The Fund will enter into a swap transaction only if, immediately following
the time the Fund enters into the transaction, the aggregate notional principal
amount of swap transactions to which the Fund is a party would not exceed 5% of
the Fund's net assets.

Foreign Exchange Transactions

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

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

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

A-4
<PAGE>

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

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

Risk Factors in Hedging Foreign Currency Risks. While the Fund's use of
Currency Instruments to effect hedging strategies is intended to reduce the
volatility of the net asset value of the Fund's shares, the net asset value of
the Fund's shares will fluctuate. Moreover, although Currency Instruments will
be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency
movements will not be accurately predicted and that the Fund's hedging
strategies will be ineffective. To the extent that the Fund hedges against
anticipated currency movements which do not occur, the Fund may realize losses,
and decrease its total return, as the result of its hedging transactions.
Furthermore, the Fund will only engage in hedging activities from time to time
and may not be engaging in hedging activities when movements in currency
exchange rates occur. It may not be possible for the Fund to hedge against
currency exchange rate movements, even if correctly anticipated, in the event
that (i) the currency exchange rate movement is so generally anticipated that
the Fund is not able to enter into a hedging transaction at an effective price,
or (ii) the currency exchange rate movement relates to a market with respect to
which Currency Instruments are not available (such as certain developing
markets) and it is not possible to engage in effective foreign currency
hedging.

Risk Factors in Options, Futures, Swaps and Currency Instruments

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

The Fund intends to enter into transactions involving Strategic Instruments
only if there appears to be a liquid secondary market for such instruments or,
in the case of illiquid instruments traded in OTC

A-5
<PAGE>

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

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

Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC
Strategic Instruments

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

The staff of the Securities and Exchange Commission has taken the position
that purchased OTC options and the assets underlying written OTC options are
illiquid securities. The Fund has therefore adopted an investment policy
pursuant to which it will not purchase or sell OTC options (including OTC
options on futures contracts) if, as a result of such transactions, the sum of
the market value of OTC options currently outstanding which are held by the
Fund, the market value of the securities underlying OTC call options currently
outstanding which have been sold by the Fund and margin deposits on the Fund's
outstanding OTC options exceeds 15% (10% to the extent required by certain
state laws) of the total assets of the Fund, taken at market value, together
with all other assets of the Fund which are deemed to be illiquid or are
otherwise not readily marketable. However, if an OTC option is sold by the Fund
to a dealer in U.S. government securities recognized as a "primary dealer" by
the Federal Reserve Bank of New York and the Fund has the unconditional
contractual right to repurchase such OTC option at a predetermined price, then
the Fund will treat as illiquid such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is "in-the-
money" (i.e., current market value of the underlying security minus the
option's exercise price).

Because Strategic Instruments traded in OTC markets are not guaranteed by an
exchange or clearing corporation and generally do not require payment of
margin, to the extent that the Fund has unrealized gains in such instruments or
has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations.
The Fund will attempt to minimize the risk

A-6
<PAGE>

that a counterparty will become bankrupt or otherwise fail to honor its
obligations by engaging in transactions in Strategic Instruments traded in OTC
markets only with financial institutions which (i) have, in the opinion of the
Investment Adviser, substantial capital relative to the Fund's exposure, or
(ii) have provided the Fund with a third-party guaranty or other credit
enhancement.

Additional Limitations on the Use of Strategic Instruments

The Fund may not use any Strategic Instrument to gain exposure to an asset or
class of assets that it would be prohibited by its investment restrictions from
purchasing directly.

A-7
<PAGE>

[This page is intentionally left blank]
<PAGE>

INVESTMENT ADVISER

Merrill Lynch Asset Management
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011

DISTRIBUTOR

Merrill Lynch Funds Distributor
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9081
Princeton, New Jersey 08543-9081

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

CUSTODIAN

Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109

INDEPENDENT AUDITORS

Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540

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 REPRESEN-
TATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE FUND, THE INVESTMENT ADVISER 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 PricingSM System...................................... 3
Financial Highlights....................................................... 8
Risk Factors and Special Considerations.................................... 10
Investment Objective and Policies.......................................... 12
Other Investment Practices................................................ 15
Investment Restrictions................................................... 16
Management of the Fund..................................................... 17
Board of Trustees......................................................... 17
Advisory and Management Arrangements...................................... 17
Code of Ethics............................................................ 18
Transfer Agency Services.................................................. 19
Purchase of Shares......................................................... 19
Initial Sales Charge Alternatives --
Class A and Class D Shares............................................... 21
Deferred Sales Charge Alternatives --
Class B and Class C Shares............................................... 23
Distribution Plans........................................................ 27
Limitations on the Payment of Deferred Sales Charges...................... 29
Redemption of Shares....................................................... 29
Redemption................................................................ 29
Repurchase................................................................ 30
Reinstatement Privilege --
Class A and Class D Shares............................................... 30
Shareholder Services....................................................... 31
Investment Account........................................................ 31
Systematic Withdrawal Plans............................................... 32
Automatic Investment Plans................................................ 32
Automatic Reinvestment of Dividends and
Capital Gains Distributions.............................................. 32
Exchange Privilege........................................................ 33
Fee-Based Programs........................................................ 34
Performance Data........................................................... 35
Additional Information..................................................... 36
Dividends and Distributions............................................... 36
Taxes..................................................................... 37
Determination of Net Asset Value.......................................... 40
Organization of the Fund.................................................. 40
Shareholder Reports....................................................... 41
Shareholder Inquiries..................................................... 41
Year 2000 Issues.......................................................... 41
Authorization Form......................................................... 43
Appendix A................................................................. A-1
</TABLE>

Code #16747 -- 0898

[LOGO] MERRILL LYNCH

Merrill Lynch
International
Equity Fund

[ART]

PROSPECTUS

August 28, 1998

Distributor:
Merrill Lynch
Funds Distributor

This prospectus should be retained for future reference.
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH INTERNATIONAL EQUITY FUND
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800

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

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

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

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 August 28,
1998 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission (the "Commission") and can be obtained, without charge, by calling
or writing the Fund at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.

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

MERRILL LYNCH ASSET MANAGEMENT -- INVESTMENT ADVISER

MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR

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

THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS AUGUST 28, 1998.
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to seek capital appreciation and,
secondarily, income by investing in a diversified portfolio of equity
securities of issuers located in countries other than the United States.
Reference is made to "Investment Objective and Policies" in the Prospectus for
a discussion of the investment objective and policies of the Fund.

For purposes of the Fund's investment objective, an issuer ordinarily will be
considered to be located in the country under the laws of which it is organized
or where the primary trading market of its securities is located. The Fund,
however, may consider a company to be located in a country, without reference
to its domicile or to the primary trading market of its securities, when at
least 50% of its non-current assets, capitalization, gross revenues or profits
in any one of the two most recent fiscal years represents (directly or
indirectly through subsidiaries) assets or activities located in such country.
The Fund also may consider closed-end investment companies to be located in the
country or countries in which they primarily make their portfolio investments.

The securities markets of many countries have at times in the past moved
relatively independently of one another due to different economic, financial,
political and social factors. When such lack of correlation, or negative
correlation, in movements of these securities markets occurs, it may reduce
risk for the Fund's portfolio as a whole. This negative correlation also may
offset unrealized gains the Fund has derived from movements in a particular
market. To the extent the various markets move independently, total portfolio
volatility is reduced when the various markets are combined into a single
portfolio. Of course, movements in the various securities markets may be offset
by changes in foreign currency exchange rates. Exchange rates frequently move
independently of securities markets in a particular country. As a result, gains
in a particular securities market may be affected by changes in exchange rates.

While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P. (the "Investment
Adviser"), and Merrill Lynch Asset Management U.K. Limited, the Fund's sub-
adviser ("MLAM U.K."), will effect portfolio transactions without regard to
holding period if, in their judgment, such transactions are advisable in light
of a change in circumstances of a particular company or within a particular
industry or in general market, economic or financial conditions. As a result of
the investment policies described in the Prospectus, the Fund's portfolio
turnover rate may be higher than that of other investment companies. For the
fiscal years ended May 31, 1997 and 1998, the Fund's portfolio turnover rate
was 60.56% and 107.50%, respectively. The portfolio turnover rate is calculated
by dividing the lesser of the Fund's annual sales or purchases of portfolio
securities (exclusive of purchases or sales of securities whose maturities at
the time of acquisition were one year or less) by the monthly average value of
the securities in the portfolio during the year. See "Investment Objective and
Policies--Other Investment Practices--Portfolio Turnover" in the Prospectus.

2
<PAGE>

by an American bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. EDRs are receipts issued in Europe
which evidence a similar ownership arrangement. GDRs are receipts issued
throughout the world which evidence a similar ownership arrangement. Generally,
ADRs, in registered form, are designed for use in the U.S. securities markets,
and EDRs, in bearer form, are designed for use in European securities markets.
GDRs are tradeable both in the United States and Europe and are designed for
use throughout the world. The Fund may invest in unsponsored ADRs, EDRs and
GDRs. The issuers of unsponsored ADRs, EDRs and GDRs are not obligated to
disclose material information in the United States, and therefore, there may be
no correlation between such information and the market value of such
securities.

The U.S. Government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors such
as the Fund. If such restrictions should be reinstituted, it might become
necessary for the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment objective and
investment policies to determine whether changes are appropriate. Any changes
in the investment objective or fundamental policies set forth under "Investment
Restrictions" below would require the approval of the holders of a majority of
the Fund's outstanding voting securities.

The Fund's ability and decisions to purchase or sell portfolio securities may
be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a
daily basis on each day the Fund determines its net asset value in U.S.
dollars, the Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary
to meet anticipated redemptions. Under present conditions, the Investment
Adviser does not believe that these considerations will have any significant
effect on its portfolio strategy, although there can be no assurance in this
regard.

Risk Factors in Options and Futures Transactions. Utilization of options and
futures transactions involves the risk of imperfect correlation in movements in
the prices of options and futures contracts and movements in the prices of the
securities and currencies which are the subject of the hedge. If the prices of
the options and futures contracts move more or less than the prices of the
hedged securities and currencies, the Fund will experience a gain or loss which
will not be completely offset by movements in the prices of the securities and
currencies which are the subject of the hedge. The successful use of options
and futures also depends on the Investment Adviser's ability to predict
correctly price movements in the market involved in a particular options or
futures transaction.

Prior to exercise or expiration, an exchange-traded option position can only
be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an
exchange only if there appears to be a liquid secondary market for such option
or future. However, there can be no assurance that a liquid secondary market
will exist for any particular call or put option or futures contract at any
specific time. Thus, it may not be possible to close an option or futures
position. The Fund will acquire only over-the-counter ("OTC") options for which
management believes the Fund can receive on each business day at least two
independent bids or offers (one of which will be from an entity other than a
party to the option) unless only one quote is available, in which case that
quote will be used. In the case of a futures position or an option on a futures
position written by the Fund, 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

3
<PAGE>

insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do
so. In addition, the Fund may be required to take or make delivery of the
security or currency underlying the futures contracts it holds. The inability
to close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. 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 futures contract or related option. The
risk of loss from investing in futures transactions is theoretically unlimited.

The exchanges on which the Fund intends to conduct options transactions have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day. An exchange
may order the liquidation of positions found to be in violation of these
limits, and it may impose other sanctions or restrictions. The Investment
Adviser and MLAM U.K. do not believe that these trading and position limits
will have any adverse impact on the portfolio strategies for hedging the Fund's
portfolio effectively.

Forward Foreign Exchange Transactions. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e., cash, basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 1/10 of 1% due to the costs of
converting from one currency to another. However, the Fund has authority to
deal in forward foreign exchange between currencies of the different countries
in whose securities it will invest as a hedge against possible variations in
the foreign exchange rates between these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund or the payment of dividends and distributions by the
Fund. Position hedging is the sale of forward foreign currency with respect to
portfolio security positions denominated or quoted in such foreign currency.
The Fund will not speculate in forward foreign exchange. The Fund may not
position hedge with respect to the currency of a particular country to an
extent greater than the aggregate market value (at the time of making such
sale) of the instruments and receivables held in its portfolio denominated or
quoted in that particular foreign currency.

Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in foreign currency transactions varies with such factors as
the currencies involved, the length of the contract period and the market
conditions then prevailing. Since transactions in foreign currency exchange are
usually conducted on a principal basis, no fees or commissions are involved.

4
<PAGE>

No Rating Criteria for Debt Securities. The Fund has established no rating
criteria for the debt securities in which it may invest. Therefore, the Fund
may invest in debt securities either (a) which are rated in one of the top four
categories by a nationally recognized rating organization or which, in the
Investment Adviser's judgment, possess similar credit characteristics
("investment grade securities") or (b) which are rated below the top four
rating categories or which, in the Investment Adviser's judgment, possess
similar credit characteristics ("high yield securities"). The Investment
Adviser considers ratings as one of several factors in its independent credit
analysis of issuers.

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 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 such periods, such issuers may not
have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely affected
by specific issuer developments or the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing. The
risk of loss due to default by the issuer is significantly greater for the
holders of high yield securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.

High yield securities frequently have call or redemption features which 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. The secondary
trading market for high yield securities is generally 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 deterioration in the
creditworthiness of the issuer.

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 it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.

Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest in
securities pursuant to repurchase agreements and purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer in U.S. Government securities or an
affiliate thereof. Under a repurchase agreement or a purchase and sale
contract, the counterparty agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price in a specified
currency, thereby determining the yield during the term of the agreement. This
results in a fixed rate of return insulated from market fluctuations during
such period although it may be affected by currency fluctuations.

5
<PAGE>

Such agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the case of a
repurchase agreement, as a purchaser, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but constitute only collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such securities
and the accrued interest on the securities. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform.

Lending of Portfolio Securities. Subject to the investment restrictions set
forth in the Prospectus and herein, the Fund may lend securities from its
portfolio to approved borrowers and receive collateral in cash or securities
issued or guaranteed by the U.S. Government which are maintained at all times
in an amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrowers to use such
securities for delivery to purchasers when such borrowers have sold short. If
cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are delivered
to the Fund as collateral, the Fund and the borrower negotiate a rate for the
loan premium to be received by the Fund for lending its portfolio securities.
In either event, the total yield on the Fund's portfolio is increased by loans
of its portfolio securities. The Fund will have the right to regain record
ownership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may pay
reasonable finder's, administrative and custodial fees in connection with such
loans. With respect to the lending of portfolio securities, there is the risk
of failure by the borrower to return the securities involved in such
transactions.

INVESTMENT RESTRICTIONS

In addition to the investment restrictions set forth in the Prospectus, 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 Investment Company Act of 1940, as amended (the
"Investment Company Act"), 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).

Under the fundamental investment restrictions, the Fund may not:

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

6
<PAGE>

2. Invest more than 25% of its assets, taken at market value, in the
securities of issuers in any particular industry (excluding the U.S.
Government and its agencies and instrumentalities).

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

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

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

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

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

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

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

In addition, the Fund has adopted non-fundamental restrictions which may
be changed by the Board of Trustees without approval of the Fund's
shareholders. Under non-fundamental investment restrictions, 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
Investment Company Act, at any time its shares are owned by another
investment company that is part of the same group of investment companies
as the Fund.

7
<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. Securities purchased in accordance
with Rule 144A under the Securities Act (a "Rule 144A security") and
determined to be liquid by the Fund's Board of Trustees are not subject to
the limitations set forth in this investment restriction.

d. Notwithstanding fundamental investment restriction (7) above, borrow
amounts in excess of 20% of its total assets, taken at market value, and
then only from banks as a temporary measure for extraordinary or emergency
purposes such as the redemption of Fund shares. In addition, the Fund will
not purchase securities while borrowings exceed 5% of its total assets,
except (a) to honor prior commitments or (b) to exercise subscription
rights when outstanding borrowings have been obtained exclusively for
settlements of other securities transactions.

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

Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage." Without such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal.

8
<PAGE>

The investment restrictions set forth in the Prospectus contain an exception
that permits the Fund to purchase securities pursuant to the exercise of
subscription rights, subject to the condition that such purchase will not
result in the Fund ceasing to be a diversified investment company. Japanese and
European corporations frequently issue additional capital stock by means of
subscription rights offerings to existing shareholders at a price substantially
below the market price of the shares. The failure to exercise such rights would
result in the Fund's interest in the issuing company being diluted. The market
for such rights is not well developed, and accordingly, the Fund may not always
realize full value on the sale of rights. Therefore, the exception applies in
cases where the limits set forth in the investment restrictions in the
Prospectus would otherwise be exceeded by exercising rights or have already
been exceeded as a result of fluctuations in the market value of the Fund's
portfolio securities with the result that the Fund would otherwise be forced
either to sell securities at a time when it might not otherwise have done so or
to forego exercising the rights.

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

Information about the Trustees, executive officers and 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 the
portfolio manager and of each executive officer and Trustee is P.O. Box 9011,
Princeton, New Jersey 08543-9011.

Arthur Zeikel (66)--President and Trustee(1)(2)--Chairman of the Investment
Adviser (which term as used herein includes its corporate predecessors) since
1997; Chairman of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1997; President of the
Investment Adviser and FAM from 1977 to 1997; Chairman of Princeton Services,
Inc. ("Princeton Services") since 1997 and Director thereof since 1993;
President of Princeton Services from 1993 to 1997; Executive Vice President of
Merrill Lynch & Co., Inc. ("ML & Co.") since 1990.

Donald Cecil (71)--Trustee(2)--1114 Avenue of the Americas, New York, New
York 10036. Special Limited Partner of Cumberland Partners (an investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.

Edward H. Meyer (71)--Trustee(2)--777 Third Avenue, New York, New York 10017.
President of Grey Advertising Inc. since 1968, Chief Executive Officer since
1970 and Chairman of the Board of Directors since 1972; Director of The May
Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan Allen
Interiors Inc. and Harman International Industries, Inc.

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

9
<PAGE>

Richard R. West (60)--Trustee(2)--Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, Dean from 1984 to 1993 and currently Dean Emeritus of New
York University Leonard N. Stern School of Business Administration; Director
of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company) and Alexander's, Inc. (real estate company).

Edward D. Zinbarg (63)--Trustee(2)--5 Hardwell Road, Short Hills, New Jersey
07078-2117. Executive Vice President of the Prudential Insurance Company of
America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.

Terry K. Glenn (57)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and FAM since 1983; Executive Vice
President and Director of Princeton Services since 1993; President of
Princeton Funds Distributor, Inc. ("PFD"), since 1986 and Director thereof
since 1991.

Norman R. Harvey (65)--Senior Vice President(1)(2)--Senior Vice President of
the Investment Adviser and FAM since 1982; Senior Vice President of Princeton
Services since 1993.

Clive D. Lang (48)--Vice President and Portfolio Manager (1)--Associated
with MLAM U.K. since 1997. Prior to that, various positions with Panagora
Asset Management Limited from 1990 to 1997, including Chief Investment Officer
(1994 to 1997).

Donald C. Burke (38)--Vice President(1)(2)--First Vice President of the
Investment Adviser since 1997 and Director of Taxation thereof since 1990;
Vice President of the Investment Adviser from 1990 to 1997.

Gerald M. Richard (49)--Treasurer(1)(2)--Senior Vice President and Treasurer
of the Investment Adviser and FAM since 1984; Senior Vice President and
Treasurer of Princeton Services since 1993; Vice President of PFD since 1981
and Treasurer thereof since 1984.

Ira P. Shapiro (35)--Secretary(1)(2)--Director (Legal Advisory) of the
Investment Adviser since 1997; Attorney with the Investment Adviser since
1993.
- --------
(1) Interested person, as defined in the Investment Company Act, of the Fund.
(2) Such Trustee or officer is a director, trustee or officer of one or more
additional investment companies for which the Investment Adviser or FAM
acts as investment adviser or manager.

At July 31, 1998, the officers and Trustees of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding shares of the
Fund. At such date, Mr. Zeikel, a Trustee and officer of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML & Co.

COMPENSATION OF TRUSTEES

The Fund pays each Trustee not affiliated with the Investment Adviser (each,
a "non-affiliated Trustee") a fee of $3,500 per year plus $500 per Board
meeting attended, together with such Trustee's actual out-of-

10
<PAGE>

pocket expenses relating to attendance at meetings. The Fund also compensates
members of its Audit and Nominating Committee (the "Committee"), which
consists of all of the non-affiliated Trustees, at a rate of $500 per meeting
attended. The Chairman of the Committee receives an additional fee of $250 per
Committee meeting attended. For the fiscal year ended May 31, 1998, fees and
expenses paid to non-affiliated Trustees by the Fund aggregated $36,601.

The following table sets forth the compensation earned by non-affiliated
Trustees from the Fund for the fiscal year ended May 31, 1998 and the
aggregate compensation paid to non-affiliated Trustees from all registered
investment companies advised by the Investment Adviser and its affiliate FAM
("MLAM/FAM Advised Funds") for the calendar year ended December 31, 1997.

<TABLE>
<CAPTION>
AGGREGATE
PENSION OR COMPENSATION
RETIREMENT FROM FUND AND
BENEFITS ACCRUED OTHER MLAM/FAM
COMPENSATION AS PART OF ADVISED FUNDS PAID
NAME OF TRUSTEE FROM FUND FUND'S EXPENSES TO TRUSTEES(1)
--------------- ------------ ---------------- ------------------
<S> <C> <C> <C>
Donald Cecil................. $8,500 None $275,850
Edward H. Meyer.............. $5,000 None $222,100
Charles C. Reilly............ $7,500 None $299,000
Richard R. West.............. $7,500 None $313,000
Edward D. Zinbarg............ $7,500 None $133,500
</TABLE>
- --------

(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Cecil (34 registered investment companies consisting of 34 portfolios);
Mr. Meyer (34 registered investment companies consisting of 34
portfolios); Mr. Reilly (52 registered investment companies consisting of
65 portfolios); Mr. West (54 registered investment companies consisting of
79 portfolios); and Mr. Zinbarg (19 registered investment companies
consisting of 19 portfolios).

ADVISORY AND MANAGEMENT ARRANGEMENTS

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

Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or other investment advisory clients for which
the Investment Adviser or its affiliates act as an adviser. Because of
different objectives or other factors, a particular security may be bought for
one or more clients when one or more clients are selling the same security. If
purchases or sales of securities by the Investment Adviser or MLAM U.K. for
the Fund or other funds for which they act as investment adviser or for other
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the Investment
Adviser 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.

The Fund has entered into an investment advisory agreement (the "Investment
Advisory Agreement") with the Investment Adviser. As described in the
Prospectus, the Investment Adviser receives for its services

11
<PAGE>

to the Fund monthly compensation at the rate of 0.75% of the Fund's average
daily net assets. For the fiscal years ended May 31, 1996, 1997 and 1998, the
investment advisory fees paid by the Fund to the Investment Adviser aggregated
$9,452,920, $7,799,527 and $4,596,696, respectively.

As described in the Prospectus, the Investment Adviser has also entered into
a sub-advisory agreement with MLAM U.K. pursuant to which MLAM U.K. provides
investment advisory services to the Investment Adviser with respect to the
Fund. For the fiscal years ended May 31, 1996, 1997 and 1998, the sub-advisory
fees paid by the Investment Adviser to MLAM U.K. aggregated $1,248,157,
$1,042,511 and $612,740, respectively.

The Investment Advisory Agreement obligates the Investment Adviser to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of the Fund connected with investment and
economic research, trading and investment management of the Fund, as well as
the fees of all Trustees of the Fund who are affiliated persons of the
Investment Adviser. The Fund pays all other expenses incurred in its operation,
including, among other things, taxes; expenses for legal and auditing services;
costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent
paid by the Distributor); charges of the custodian, any sub-custodian and
transfer agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Trustees; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other
expenses properly payable by the Fund. Accounting services are provided to the
Fund by the Investment Adviser, and the Fund reimburses the Investment Adviser
for its costs in connection with such services on a semi-annual basis. For the
fiscal years ended May 31, 1996, 1997 and 1998, the amount of such
reimbursement was $82,867, $238,275 and $149,179, respectively. The Distributor
will pay certain promotional expenses of the Fund incurred in connection with
the offering of its shares. Certain expenses will be financed by the Fund
pursuant to distribution plans in compliance with Rule 12b-1 under the
Investment Company Act. See "Purchase of Shares--Distribution Plans."

The Investment Adviser is a limited partnership, the partners of which are ML
& Co. and Princeton Services. ML & Co. and Princeton Services are "controlling
persons" of the Investment Adviser as defined under the Investment Company Act
because of their ownership of its voting securities or their power to exercise
a controlling influence over its management or policies. Similarly, the
following entities may be considered "controlling persons" of MLAM U.K.:
Merrill Lynch Europe PLC (MLAM U.K.'s parent), a subsidiary of Merrill Lynch
International Holdings, Inc., a subsidiary of Merrill Lynch International,
Inc., a subsidiary of ML & Co.

Duration and Termination. Unless earlier terminated as described herein, the
Investment Advisory Agreement and sub-advisory agreement will remain in effect
from year to year if approved annually (a) by the Board of Trustees of the Fund
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 contracts or interested persons (as
defined in the Investment Company Act) of any such party. Such contracts are
not assignable and may be terminated without penalty on 60 days' written notice
at the option of either party thereto or by the vote of a majority of the
shareholders of the Fund.

12
<PAGE>

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 the Investment Adviser or its
affiliate, FAM. Funds advised by the Investment Adviser or FAM which utilize
the Merrill Lynch Select Pricing SM System are referred to herein as "MLAM-
advised mutual funds."

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

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

As a result of the implementation of the Merrill Lynch Select Pricing SM
System, Class A shares of the Fund outstanding prior to October 21, 1994, were
redesignated as Class D shares. The Class A shares currently being offered
differ from the Class A shares offered prior to October 21, 1994 in many
respects, including sales charges, exchange privilege and the classes of
persons to whom such shares are offered. The Fund sells its Class A and Class
D shares through the Distributor and Merrill Lynch, as dealers. The gross
sales charges for the sale of Class A shares of the Fund for the fiscal year
ended May 31, 1996, were $24,654 of which $1,706 and $22,948 were received by
the Distributor and Merrill Lynch, respectively. The gross sales charges for
the sale of Class A shares of the Fund for the fiscal year ended May 31, 1997,
were $6,553, of which $439 and $6,114 were received by the Distributor and
Merrill Lynch, respectively. The gross sales charge for the sale of Class A
shares of the Fund for the fiscal year ended May 31, 1998, were $1,469, of
which $117 and $1,352 were received by the Distributor and Merrill Lynch,
respectively. The gross sales charges for the sale of Class D shares of the
Fund for the fiscal year ended May 31, 1996, were $317,844, of

13
<PAGE>

which $20,061 and $297,783 were received by the Distributor and Merrill Lynch,
respectively. The gross sales charges for the sale of Class D shares of the
Fund for the fiscal year ended May 31, 1997, were $98,162, of which $5,823 and
$92,339 were received by the Distributor and Merrill Lynch, respectively. The
gross sales charges for the sale of Class D shares of the Fund for the fiscal
year ended May 31, 1998, were $29,382, of which $1,851 and $27,531 were
received by the Distributor and Merrill Lynch, respectively.

The term "purchase" as used in the Prospectus and this Statement of
Additional Information refers to a single purchase by an individual, or to
concurrent purchases, which in the aggregate are at least equal to the
prescribed amounts, by an individual, his or her spouse and their children
under the age of 21 years purchasing shares for his, her or their own account
and single purchases by a trustee or other fiduciary purchasing shares for a
single trust estate or single fiduciary account although more than one
beneficiary is involved. The term "purchase" also includes purchases by any
"company," as that term is defined in the Investment Company Act, but does not
include purchases by any such company that has not been in existence for at
least six months or that 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 MLAM-
advised mutual funds ("Eligible Class A Shares") are offered at net asset value
to shareholders of certain closed-end funds advised by the Investment Adviser
or FAM who purchased such closed-end fund shares prior to October 21, 1994 (the
date the Merrill Lynch Select Pricing SM System commenced operation) 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 MLAM-advised
mutual funds ("Eligible Class D Shares"), if the following conditions are met.
First, the sale of the 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 net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A shares of the Fund and shareholders of Merrill Lynch
Municipal Strategy Fund, Inc. and Merrill Lynch High Income Municipal Bond
Fund, Inc. will receive Class D shares of the Fund, except that shareholders
already owning Class A shares of the Fund will be eligible to purchase
additional Class A shares pursuant to this option, if such additional Class A
shares will be held in the same account as the existing Class A shares and the
other requirements pertaining to the reinvestment privilege are met. In order
to exercise this investment option, a shareholder of one of the above-
referenced continuously offered closed-end funds (an "eligible fund") must sell
his or her shares of common stock of the eligible fund (the "eligible

14
<PAGE>

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. The 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 MLAM-advised mutual 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, and
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 Class A or Class D shares of the Fund or any
other MLAM-advised mutual funds made within a thirteen-month period starting
with the first 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 MLAM-advised mutual 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 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 five percent 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 five percent 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

15
<PAGE>

purchase and subsequent purchases to the further reduced percentage sales
charge that would be applicable to a single purchase equal to the total dollar
value of the Class A 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 a MLAM-
advised money market 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 for such accounts is $500, except that the initial minimum for
shares purchased for such accounts pursuant to the Automatic Investment
Program is $50.

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

Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor 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 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 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, if the following conditions are satisfied.
First, the investor must purchase Class D shares of the Fund with proceeds
from a redemption of shares of such other mutual fund and such fund was
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 of termination.

Class D shares of the Fund will be offered at net asset value, without a
sale 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 following conditions
are satisfied. First, the investor must advise Merrill Lynch that it will
purchase Class D shares of the Fund with proceeds from the redemption of such
shares of other mutual funds 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.

16
<PAGE>

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.

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 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 which
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.

EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS

Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based
on the number of employees or number of employees eligible to participate in
the plan, the aggregate amount invested by the plan in specified investments
and/or the services provided by Merrill Lynch to the plan. Certain other plans
may purchase Class B shares with a waiver of the contingent deferred sales
charge ("CDSC") upon redemption, based on similar criteria. Such Class B
shares will convert into Class D shares approximately ten years after the plan
purchases the first share of any MLAM-advised mutual fund. Minimum purchase
requirements may be waived or varied for such plans. Additional information
regarding purchases by employer-sponsored retirement or savings plans and
certain other arrangements is available toll-free from Merrill Lynch Business
Financial Services at (800) 237-7777.

DISTRIBUTION PLANS

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

Payments of the account maintenance fees and/or distribution fees are
subject to the provisions of Rule 12b-1 under the Investment Company 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

17
<PAGE>

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 shareholder. 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 Fund, as defined in the
Investment Company 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 a 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 shareholder, and all material
amendments are required to be approved by the vote of the 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 Fund 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. ("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 reinvestment and
exchanges), plus (2) interest on the unpaid balance for the respective class,
computed separately, at the prime rate plus 1% (the unpaid balance being the
maximum amount payable minus amounts received from the payment of the
distribution fee and the CDSC). In connection with the Class B shares, the
Distributor has voluntarily agreed to waive interest charges on the unpaid
balance in excess of 0.50% of eligible gross sales. Consequently, the maximum
amount payable to the Distributor (referred to as the "voluntary maximum") in
connection with the Class B shares is 6.75% of eligible gross sales. The
Distributor retains the right to stop waiving the interest charges at any time.
To the extent payments would exceed the voluntary maximum, the Fund will not
make further payments of the distribution fee with respect to Class B shares,
and any CDSCs will be paid to the Fund rather than to the Distributor; however,
the Fund will continue to make payments of the account maintenance fee. In
certain circumstances the amount payable pursuant to the voluntary maximum may
exceed the amount payable under the NASD formula. In such circumstances payment
in excess of the amount payable under the NASD formula will not be made.

18
<PAGE>

The following table sets forth comparative information as of May 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.

<TABLE>
<CAPTION>
DATA CALCULATED AS OF MAY 31, 1998
(IN THOUSANDS)
---------------------------------------------------------------------------

ANNUAL
ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
ELIGIBLE AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(/1/) CHARGE BALANCE(/2/) PAYABLE DISTRIBUTOR(/3/) BALANCE LEVEL(/4/)
---------- --------- ------------ ------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES, FOR THE
PERIOD JULY 30, 1993
(COMMENCEMENT OF
OPERATIONS) TO MAY 31,
1998:
Under NASD Rule As
Adopted............... $1,166,884 $72,930 $22,261 $95,191 $36,325 $58,866 $2,336
Under Distributor's
Voluntary Waiver...... $1,166,884 $72,930 $ 5,835 $78,765 $36,325 $42,440 $2,336
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO MAY 31,
1998:
Under NASD Rule As
Adopted............... $ 61,929 $ 3,871 $ 960 $ 4,831 $ 825 $ 4,006 $ 110
</TABLE>
- --------
(1) Purchase price of all eligible Class B and 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%, 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 Funds 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 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 periods during
which trading on the NYSE is restricted as determined by the Commission, or
the NYSE is closed (other than customary weekend and holiday closings), for
any period during which an emergency exists, as defined by the Commission, as
a result of which disposal of portfolio securities or determination of the net
asset value of the Fund is not reasonably practicable, and for such other
periods as the Commission may by order permit for the protection of
shareholders of the Fund.

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

19
<PAGE>

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 circumstances,
including in connection with certain post-retirement withdrawals from an
Individual Retirement Account ("IRA") or other retirement plan, or following
the death or disability of a Class B shareholder. Redemptions for which the
waiver applies in the case of such withdrawals are: (a) any partial or complete
redemption in connection with a tax-free distribution following retirement
under a tax-deferred retirement plan or attaining age 59 1/2 in the case of an
IRA or other retirement plan or part of a series of equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) or
any redemption resulting from the tax-free return of an excess contribution to
an IRA; or (b) any partial or complete redemption following the death or
disability (as defined in the Code) of a Class B shareholder (including one who
owns the Class B shares as joint tenant with his or her spouse), provided the
redemption is requested within one year of the death or initial determination
of disability. For the fiscal years ended May 31, 1996, 1997 and 1998, with
respect to the redemption of Class B shares, the Distributor received CDSCs of
$2,627,300, $2,672,821 and $868,213, all of which were paid to Merrill Lynch.
Additional CDSCs payable to the Distributor for the fiscal year ended May 31,
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 May 31, 1996, 1997 and 1998, with respect to the redemption
of Class C shares, the Distributor received CDSCs of $18,603, $19,009 and
$3,787, respectively, all of which were paid to Merrill Lynch.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Reference is made to "Investment Objective and Policies--Other Investment
Practices" in the Prospectus.

Subject to policies established by the Board of Trustees of the Fund, the
Investment Adviser and MLAM U.K. are primarily responsible for the execution of
the Fund's portfolio transactions and the allocation of brokerage. In executing
such transactions, the Investment Adviser and MLAM U.K. seek to obtain the best
net results for the Fund, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved and the
firm's risk in positioning a block of securities. While the Investment Adviser
and MLAM U.K. generally seek reasonably competitive commission rates, the Fund
does not necessarily pay the lowest commission or spread available. The Fund
has no obligation to deal with any broker or group of brokers in execution of
transactions in portfolio securities. Subject to obtaining the best price and
execution, brokers who provide supplemental investment research to the
Investment Adviser and MLAM U.K. may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser and MLAM U.K. under
the Investment Advisory Agreement and sub-advisory agreement, respectively, and
the expenses of the Investment Adviser and MLAM U.K. will not necessarily be
reduced as a result of the receipt of such supplemental information. It is
possible that certain supplementary investment research so received will
primarily benefit one or more other investment companies or other accounts for
which investment discretion is exercised. Conversely, the

20
<PAGE>

Fund may be the primary beneficiary of the research or services received as a
result of portfolio transactions effected for such other accounts or investment
companies. In addition, consistent with the Conduct Rules of the NASD and
policies established by the Board of Trustees of the Fund, the Investment
Adviser and MLAM U.K. 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.

The Fund anticipates that its brokerage transactions involving securities of
companies domiciled in countries other than the United States will be conducted
primarily on the principal stock exchanges of such countries. Brokerage
commissions and other transaction costs on foreign stock exchange transactions
are generally higher than in the United States, although the Fund will endeavor
to achieve the best net results in effecting its portfolio transactions. There
is generally less government supervision and regulation of foreign stock
exchanges and brokers than in the United States.

Foreign equity securities may be held by the Fund in the form of ADRs, EDRs,
GDRs or other securities convertible into foreign equity securities. ADRs, EDRs
and GDRs may be listed on stock exchanges or traded in OTC markets in the
United States or Europe, as the case may be. ADRs, like other securities traded
in the United States, as well as GDRs traded in the United States, will be
subject to negotiated commission rates.

The Fund may invest in securities traded in the OTC markets and intends to
deal directly with the dealers who make markets in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Under the Investment Company Act, persons affiliated with the Fund
and persons who are affiliated with such affiliated persons are prohibited from
dealing with the Fund as principal in the purchase and sale of securities
unless a permissive order allowing such transactions is obtained from the
Commission. Since transactions in the OTC market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions. However, affiliated persons of the Fund may
serve as its broker in OTC transactions conducted on an agency basis provided
that, among other things, the fee or commission received by such affiliated
broker is reasonable and fair compared to the fee or commission received by
non-affiliated brokers in connection with comparable transactions. See
"Investment Objective and Policies--Investment Restrictions." For the fiscal
year ended May 31, 1996, the Fund paid total brokerage commissions of
$3,460,324, of which $200,005, or 5.8%, was paid to Merrill Lynch for effecting
7.7% of the aggregate dollar amount of transactions on which the Fund paid
brokerage commissions. For the fiscal year ended May 31, 1997, the Fund paid
total brokerage commissions of $2,513,397, of which $81,635, or 3.2% was paid
to Merrill Lynch for effecting 2.7% of the aggregate dollar amount of
transactions on which the Fund paid brokerage commissions. For the fiscal year
ended May 31, 1998, the Fund paid total brokerage commissions of $2,431,457, of
which $56,208, or 2.31%, was paid to Merrill Lynch for effecting 2.19% of the
aggregate dollar amount of transactions on which the Fund paid brokerage
commissions.

The Board of Trustees has considered the possibilities of seeking to
recapture for the benefit of the Fund brokerage commissions and other expenses
of portfolio transactions by conducting portfolio transactions through
affiliated entities. For example, brokerage commissions received by affiliated
brokers could be offset against the advisory fee paid by the Fund. After
considering all factors deemed relevant, the Board of Trustees made a
determination not to seek such recapture. The Board will reconsider this matter
from time to time.

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

21
<PAGE>

accounts which 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 disclosing 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.

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of the Fund is determined once daily Monday
through Friday as of 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., New York 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. The Fund also will determine its net asset
value on any day in which there is sufficient trading in its portfolio
securities that the net asset value might be affected materially, but only if
on any such day the Fund is required to sell or redeem shares. Any assets or
liabilities initially expressed in terms of non-U.S. dollar currencies are
translated into U.S. dollars at the prevailing market rates as quoted by one or
more banks or dealers on the day of valuation.

Net asset value is computed by dividing the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends
accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares outstanding at such time. Expenses,
including the management fees 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 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. It is
expected, however, that the per share net asset value of the four classes will
tend to converge (although not necessarily meet) immediately after the payment
of dividends or distributions, which will differ by approximately the amount of
the expense accrual differentials between the classes.

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

22
<PAGE>

traded options or, in the case of options traded in the OTC market, the last
bid price. Other investments, including financial futures contracts and related
options, are stated at market value. Securities and assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Trustees of the Fund. Such
valuations and procedures will be reviewed periodically by the Board of
Trustees.

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

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. 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 how to change
options with respect thereto, can be obtained from the Fund, the Distributor or
Merrill Lynch. Certain of these services are available only to U.S. investors.

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the transfer agent has an
Investment Account and will receive statements, at least quarterly, from the
transfer agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and 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
reinvestments of ordinary income dividends and long-term capital gain
distributions. A shareholder may make additions to his or her investment
account at any time by mailing a check directly to the Fund's transfer agent.

Share certificates are issued only for full shares and only upon the specific
request of the shareholder. 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 Fund's transfer agent.

23
<PAGE>

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. Shareholders considering
transferring a tax-deferred retirement account such as an individual retirement
account from Merrill Lynch to another brokerage firm or financial institution
should be aware that, if the firm to which the retirement account is to be
transferred will not take delivery of shares of the Fund, a shareholder must
either redeem the shares (paying any applicable CDSC) so that the cash proceeds
can be transferred to the account at the new firm, or continue to maintain a
retirement account at Merrill Lynch for those shares.

AUTOMATIC INVESTMENT PLANS

A U.S. 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 dealer. Voluntary accumulation also can be made through a service
known as the 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
($1 for retirement accounts) or more through the CMA(R) or CBA(R) Automated
Investment Program.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the
Fund. Such reinvestment will be at the net asset value of the shares of the
Fund as of the close of business on the NYSE on the ex-dividend date of the
dividend or distribution. Shareholders may elect to receive either their
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 the
shareholder's 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 distributions reinvested in shares of the Fund or vice versa,
and commencing ten days after receipt by the Transfer Agent of such notice,
those 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 who have acquired Class A or Class D shares of the Fund having a
value, based upon 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.

24
<PAGE>

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 at the close of business of the NYSE (generally 4:00 p.m., New
York 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 of the withdrawal payment will be made on the next business
day following redemption. When a shareholder is making systematic withdrawals,
dividends and distributions on all Class A or Class D shares in the Investment
Account are reinvested automatically in shares of the Fund, respectively. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Fund, the Transfer Agent or the
Distributor.

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
correspondingly reduced. Purchases of additional shares concurrent with
withdrawals are ordinarily disadvantageous to the shareholder because of sales
charges and tax liabilities. The Fund will not knowingly accept purchase orders
for shares of the Fund from investors 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), CBA(R) or
Retirement Account may elect to have shares redeemed on a monthly, bimonthly,
quarterly, semiannual or annual basis through the CMA(R) or CBA(R) Systematic
Redemption Program. The minimum fixed dollar amount redeemable is $50. The
proceeds of systematic redemptions will be posted to the shareholder's account
three business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in the
case of monthly redemptions, or of every other month, in the case of bimonthly
redemptions. For quarterly, semiannual or annual redemptions, the shareholder
may select the month in which the shares are to be redeemed and may designate
whether the redemption is to be made on the first, second, third or fourth
Monday of the month. If the Monday selected is not a business day, the
redemption will be processed at net asset value on the next business day. The
CMA(R) or CBA(R) Systematic Redemption Program is not available if Fund shares
are being purchased within the account pursuant to the 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. With respect to redemption 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

25
<PAGE>

automatically be applied thereafter to Class D shares. 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 Financial Consultant.

EXCHANGE PRIVILEGE

U.S. shareholders of each class of shares of the Fund have an exchange
privilege with certain other MLAM-advised mutual funds. 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 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 MLAM-
advised mutual 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 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. Class B,
Class C and Class D shares will be exchangeable with shares of the same class
of other MLAM-advised mutual funds. 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 as more fully
described below. Class A, Class B, Class C and Class D shares also will be
exchangeable for shares of certain MLAM-advised money market funds as follows:
Class A shares may be exchanged for shares of Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Reserves Money Fund (available only for
exchanges within certain retirement plans), Merrill Lynch U.S.A. Government
Reserves and Merrill Lynch U.S. Treasury Money Fund; Class B, Class C and
Class D shares may be exchanged for shares of Merrill Lynch Government Fund,
Merrill Lynch Institutional Fund, Merrill Lynch Institutional Tax-Exempt Fund
and Merrill Lynch Treasury Fund. Effective on or about October 12, 1998, Class
A and Class D shares also will be exchangeable for Class A shares, and Class B
and Class C shares also will be exchangeable for Class B shares, of Summit
Cash Reserves Fund, a series of Financial Institutions Series Trust, which is
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 as more fully described below. 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 15 days. It is contemplated that the exchange privilege may be
applicable to other new mutual funds whose shares may be distributed by the
Distributor.

Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of another MLAM-advised mutual
fund ("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

26
<PAGE>

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 and 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
of the Fund generally may be exchanged into the Class A or Class D shares of
the other funds or into shares of certain money market funds with a reduced or
without a sales charge.

In addition, each of the funds with Class B and 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 ("new Class B or
Class C shares"), of another MLAM-advised mutual fund on the basis of relative
net asset value per Class B or Class C shares, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the CDSC
schedule relating to the new Class B shares acquired through use of the
exchange privilege. In addition, Class B shares of the Fund acquired through
use of the exchange privilege will be subject to the Fund's CDSC schedule if
such schedule is higher than the CDSC schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the sales charge 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 shares of the Fund for those of
Merrill Lynch Special Value Fund, Inc. ("Special Value Fund") after having held
the Fund Class B shares for two and a half years. The 2.0% 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.

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

Shareholders also may exchange shares of the Fund into shares of certain
money market funds advised by the Investment Adviser or its affiliates, but the
period of time that the Class B or Class C shares are held in a money market
fund will not count towards satisfaction of the holding period requirement for
purposes of reducing the CDSC or with respect to Class B shares, towards
satisfaction of the conversion period. However, shares of a money market fund
that were acquired as a result of an exchange for Class B or Class C shares of
the Fund may, in turn, be exchanged back into Class B or Class C shares,
respectively, of any

27
<PAGE>

fund offering such shares, in which event the holding period for Class B or
Class C shares of the newly-acquired fund will be aggregated with previous
holding periods for purposes of reducing the CDSC. Thus, for example, an
investor may exchange Class B shares of the Fund for shares of Merrill Lynch
Institutional Fund ("Institutional Fund") after having held the Fund Class B
shares for two and a half years and three years later decide to redeem the
shares of Institutional Fund for cash. At the time of this redemption, the 2.0%
CDSC that would have been due had the Class B shares of the Fund been redeemed
for cash rather than exchanged for shares of Institutional Fund will be
payable. If instead of such redemption the shareholder exchanged such shares
for Class B shares of a fund that the shareholder continued to hold for an
additional two and a half years, any subsequent redemption would not incur a
CDSC.

Effective on or about October 12, 1998, shareholders also may exchange their
shares into shares of Summit Cash Reserves Fund, which is 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. Class A and Class D shares will be exchangeable for Class A
shares of, and Class B and Class C shares will be exchangeable for Class B
shares of, Summit Cash Reserves Fund. Class A shares of Summit Cash Reserves
Fund have an exchange privilege back into Class A or Class D shares of MLAM-
advised mutual funds; Class B shares of Summit Cash Reserves Fund have an
exchange privilege back into Class B or Class C shares of MLAM-advised mutual
funds. The period of time that Class B shares of Summit Cash Reserves Fund 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 Cash Reserves
Fund 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.

Before effecting an exchange, shareholders should obtain a currently
effective prospectus of the fund into which the exchange is to be made.

To exercise the exchange privilege, a shareholder should contact his or her
Merrill Lynch Financial Consultant who will advise the Fund of the exchange.
Shareholders of the Fund, and shareholders of the other MLAM-advised 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 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.

DIVIDENDS, DISTRIBUTIONS AND TAXES

The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, the Fund
(but not its shareholders) will not be subject to Federal income tax on the
part of its net ordinary income and net realized capital gains which it
distributes to Class A, Class B, Class C or Class D shareholders (together, the
"shareholders"). The Fund intends to distribute substantially all of such
income.

28
<PAGE>

Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally will not be eligible for the dividends
received deduction allowed to corporations under the Code. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.

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

29
<PAGE>

requirements and more than 50% in value of the Fund's total assets at the close
of its taxable year consists of securities of foreign corporations, the Fund
will be eligible, and intends, to file an election with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to include
their proportionate shares of such withholding taxes in their U.S. income tax
returns as gross income, treat such proportionate shares as taxes paid by them
and deduct such proportionate shares in computing their taxable incomes or,
alternatively, use them as foreign tax credits against their U.S. income taxes.
No deductions for foreign taxes, moreover, may be claimed by noncorporate
shareholders who do not itemize deductions. A shareholder that is a nonresident
alien individual or a foreign corporation may be subject to U.S. withholding
tax on the income resulting from the Fund's election described in this
paragraph but may not be able to claim a credit or deduction against such U.S.
tax for the foreign taxes treated as having been paid by such shareholder. The
Fund will report annually to its shareholders the amount per share of such
withholding taxes and other information needed to claim the foreign tax credit.
For this purpose, the Fund will allocate foreign taxes and foreign source
income among the Class A, Class B, Class C and Class D shareholders according
to a method (which it believes is consistent with the Commission rule
permitting the issuance and sale of multiple classes of stock) that is based on
the gross income allowable to 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.

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

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/high risk securities"), as previously described. Some
of these high yield securities may be purchased at a discount and may therefore
cause the Fund to

30
<PAGE>

accrue and distribute income before amounts due under the obligations are paid.
In addition, a portion of the interest payments on such high yield securities
may be treated as dividends for Federal income tax purposes; in such case, if
the issuer of such high yield/high risk securities is a domestic corporation,
dividend payments by the Fund will be eligible for the dividends received
deduction to the extent of the deemed dividend portion of such interest
payments.

TAX TREATMENT OF OPTIONS, FUTURES AND FORWARD FOREIGN EXCHANGE TRANSACTIONS

The Fund may write, purchase or sell options, futures and forward foreign
exchange contracts. Options and futures contracts that are "Section 1256
contracts" will be "marked to market" for Federal income tax purposes at the
end of each taxable year, i.e., each such option or futures contract will be
treated as sold for its fair market value on the last day of the taxable year.
Unless such contract is a forward foreign exchange contract, or is a non-equity
option or a regulated futures contract for a non-U.S. currency for which the
Fund elects to have gain or loss in connection with the contract treated as
ordinary gain or loss under Code Section 988 (as described below), gain or loss
from Section 1256 contracts will be 60% long-term and 40% short-term capital
gain or loss. Application of these rules to Section 1256 contracts held by the
Fund may alter the timing and character of distributions to shareholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by the Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its investments.

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

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

31
<PAGE>

the Fund may be required to postpone recognition for tax purposes of losses
incurred in certain sales of securities and certain closing transactions in
options, futures and forward foreign exchange contracts.

SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS

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

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

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

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

32
<PAGE>

PERFORMANCE DATA

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

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

The Fund also may quote annual, average annual and annualized total return
and aggregate total return performance data, 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.

33
<PAGE>

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

<TABLE>
<CAPTION>
CLASS A SHARES CLASS C SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended May 31,
1998................... (10.96)% $ 890.40 (7.75)% $ 922.50
Inception (October 21,
1994) to May 31, 1998.. 1.92 % $1,071.00 2.44 % $1,090.70
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended May 31,
1998................... (6.02)% $ 939.80 (6.96)% $ 930.40
One Year Ended May 31,
1997................... 10.76 % $1,107.60 9.71 % $1,097.10
One Year Ended May 31,
1996................... 16.49 % $1,164.90 15.35 % $1,153.50
Inception (October 21,
1994) to May 31, 1995.. (6.78)% $ 932.20 (7.36)% $ 926.40
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (October 21,
1994) to May 31, 1998.. 7.10 % $1,071.00 9.07 % $1,090.70
</TABLE>

<TABLE>
<CAPTION>
CLASS B SHARES CLASS D SHARES
----------------------------------- -----------------------------------
REDEEMABLE VALUE REDEEMABLE VALUE
EXPRESSED AS A OF A HYPOTHETICAL EXPRESSED AS A OF A HYPOTHETICAL
PERCENTAGE BASED $1,000 INVESTMENT PERCENTAGE BASED $1,000 INVESTMENT
ON A HYPOTHETICAL AT THE END ON A HYPOTHETICAL AT THE END
PERIOD $1,000 INVESTMENT OF THE PERIOD $1,000 INVESTMENT OF THE PERIOD
------ ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended May 31,
1998................... (10.17)% $ 898.30 (11.10)% $ 889.00
Inception (July 30,
1993) to May 31, 1998.. 5.02 % $1,267.10 4.68 % $1,247.30
<CAPTION>
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
One Year Ended May 31,
1998................... (7.01)% $ 929.90 (6.18)% $ 938.20
One Year Ended May 31,
1997................... 9.70 % $1,097.00 10.50 % $1,105.00
One Year Ended May 31,
1996................... 15.41 % $1,154.10 16.26 % $1,162.60
One Year Ended May 31,
1995................... (5.91)% $ 940.90 (5.11)% $ 948.90
Inception (July 30,
1993) to May 31, 1994.. 14.40 % $1,144.00 15.10 % $1,151.00
<CAPTION>
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
Inception (July 30,
1993) to May 31, 1998.. 26.71 % $1,267.10 24.73 % $1,247.30
</TABLE>

34
<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
reduced, and not the maximum, sales charge or may not take into account the
CDSC and therefore may reflect greater total return since, due to the reduced
sales charges or the waiver of sales charges, a lower amount of expenses may be
deducted.

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Declaration of Trust of the Fund permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par
value $0.10 per share, of different classes and to divide or combine the shares
of each class into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in the Fund. At the date of this
Statement of Additional Information, the shares of the Fund are divided into
shares of Class A, Class B, Class C and Class D shares. Under the Declaration
of Trust, the Trustees have the authority to issue separate classes of shares
which would represent interests in the assets of the Fund and have identical
voting, dividend, liquidation and other rights and the same terms and
conditions except that expenses related to the distribution and/or account
maintenance of the shares of a class may be borne solely by such class, and a
class may have exclusive voting rights with respect to matters relating to the
expenses being borne only by such class. Upon liquidation of the Fund,
shareholders of each class are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders, except for any expenses
which may be attributable only to one class. Shares have no preemptive rights.
The rights of redemption, exchange and conversion are described elsewhere
herein and in the Prospectus. Shares are fully paid and nonassessable by the
Fund.

Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held in the election of Trustees (to the extent
hereafter provided) and on other matters submitted to a vote of shareholders,
except that shareholders of a class bearing distribution and/or account
maintenance expenses as provided above shall have exclusive voting rights with
respect to matters relating to such distribution and/or account maintenance
expenditures. Voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in the election of Trustees can, if they choose
to do so, elect all the Trustees of the Fund, in which event the holders of the
remaining shares are unable to elect any person as a Trustee. No material
amendment may be made to the Declaration of Trust without the affirmative vote
of a majority of the outstanding shares of the Fund.

The Investment Adviser provided the initial capital for the Fund by
purchasing 10,000 shares of the Fund for $100,000. Such shares were acquired
for investment and can only be disposed of by redemption. The proceeds realized
by the Investment Adviser upon the redemption of any of the shares initially
purchased by it will be reduced by the proportional amount of the unamortized
organizational expenses which the number of such initial shares being redeemed
bears to the number of shares initially purchased.

35
<PAGE>

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 on May 31, 1998, and its shares outstanding on that date is set forth
below:

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net Assets.................... $33,959,608 $311,519,929 $14,716,930 $67,689,449
=========== ============ =========== ===========
Number of Shares Outstanding.. 3,546,893 32,372,040 1,551,047 7,032,315
=========== ============ =========== ===========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding).......... $ 9.57 $ 9.62 $ 9.49 $ 9.63
Sales Charge (for Class A and
Class D shares: 5.25% of
offering price; 5.54% of net
asset value*)................ .53 ** ** .53
----------- ------------ ----------- -----------
Offering Price................ $ 10.10 $ 9.62 $ 9.49 $ 10.16
=========== ============ =========== ===========
</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, has
been selected as the independent auditor of the Fund. The selection of
independent auditors is subject to ratification by the independent Trustees of
the Fund. The independent auditors are responsible for auditing the annual
financial statements of the Fund.

CUSTODIAN

Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109
(the "Custodian"), acts as the custodian of the Fund's assets. Under its
contract with the Fund, the Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the
Fund to be held in its offices outside the U.S. and with certain foreign banks
and securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on the Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484, acts as the Fund's transfer agent (the "Transfer Agent").
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 Fund--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 Fund.

36
<PAGE>

REPORTS TO SHAREHOLDERS

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

ADDITIONAL INFORMATION

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

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

To the knowledge of the Fund, no person or entity owned beneficially 5% or
more of the Fund's shares of beneficial interest on July 31, 1998.

The Fund was organized as an unincorporated business trust under the laws of
Massachusetts on January 3, 1992. Its executive offices are located at 800
Scudders Mill Road, Plainsboro, New Jersey 08536.

FINANCIAL STATEMENTS

The Fund's audited financial statements for the fiscal year ended May 31,
1998 are incorporated by reference to its 1998 annual report to shareholders.
You may request a copy of the annual report at no charge by calling 1-800-456-
4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any business day.

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

The Declaration of Trust establishing the Fund, dated January 3, 1992, 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 International Equity Fund" 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 said Fund
but the "Trust Property" only shall be liable.

37
<PAGE>

[This page intentionally left blank]

<PAGE>

[This page intentionally left blank]

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Investment Restrictions.................................................. 6
Management of the Fund.................................................... 9
Trustees and Officers.................................................... 9
Compensation of Trustees................................................. 10
Advisory and Management Arrangements..................................... 11
Purchase of Shares........................................................ 13
Initial Sales Charge Alternatives--Class A and Class D Shares............ 13
Reduced Initial Sales Charges............................................ 15
Employer-Sponsored Retirement or Savings Plans and Certain Other
Arrangements........................................................... 17
Distribution Plans....................................................... 17
Limitations on the Payment of Deferred Sales Charges..................... 18
Redemption of Shares...................................................... 19
Deferred Sales Charges--Class B and Class C Shares....................... 20
Portfolio Transactions and Brokerage...................................... 20
Determination of Net Asset Value.......................................... 22
Shareholder Services...................................................... 23
Investment Account....................................................... 23
Automatic Investment Plans............................................... 24
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans.............................................. 24
Exchange Privilege....................................................... 26
Dividends, Distributions and Taxes........................................ 28
Tax Treatment of Options, Futures and Forward Foreign Exchange
Transactions........................................................... 31
Special Rules for Certain Foreign Currency Transactions.................. 32
Performance Data.......................................................... 33
General Information....................................................... 35
Description of Shares.................................................... 35
Computation of Offering Price Per Share.................................. 36
Independent Auditors..................................................... 36
Custodian................................................................ 36
Transfer Agent........................................................... 36
Legal Counsel............................................................ 36
Reports to Shareholders.................................................. 37
Additional Information................................................... 37
Financial Statements...................................................... 37
</TABLE>

Code #16748 -- 0898

[LOGO] MERRILL LYNCH

Merrill Lynch
International
Equity Fund

[ART]

STATEMENT OF
ADDITIONAL
INFORMATION

August 28, 1998

Distributor:
Merrill Lynch
Funds Distributor
<PAGE>

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A)FINANCIAL STATEMENTS

Contained in Part A:

Financial Highlights for each of the years in the four year period
ended May 31, 1998, and the period July 30, 1993 (commencement of
operations) to May 31, 1994.

Incorporated by reference in Part B:
Financial Statements:

Schedule of Investments as of May 31, 1998.*

Statement of Assets and Liabilities as of May 31, 1998.*

Statement of Operations for the year ended May 31, 1998.*

Statements of Changes in Net Assets for each of the years in the two
year period ended May 31, 1998.*

Financial Highlights for each of the years in the four year period
ended May 31, 1998, and the period July 30, 1993 (commencement of
operations) to May 31, 1994.*
- --------

* Incorporated by reference to the Registrant's 1998 Annual Report to
shareholders filed with the Securities and Exchange Commission for the year
ended May 31, 1998 pursuant to Rule 30b2-1 under the Investment Company Act of
1940, as amended ("1940 Act").

(B)EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1(a) --Amended and Restated Declaration of Trust.(a)
(b) --Certificate of Establishment and Designation of Class A Shares and
Class B Shares, dated June 11, 1993.(a)
(c) --Certificate of Amendment to Declaration of Trust and Establishment
and Designation of Classes, dated October 17, 1994.(a)
2 --Amended and Restated By-Laws of Registrant.(a)
3 --None.
4 --Copies of instruments defining the rights of shareholders, including
the relevant portions of the Amended and Restated Declaration of
Trust, as amended, Certificates of Establishment and Designation, and
Amended and Restated By-Laws of Registrant.(b)
5(a) --Investment Advisory Agreement between the Registrant and Merrill
Lynch Investment Management, Inc.(c)
(b) --Sub-Advisory Agreement between Merrill Lynch Investment Management,
Inc. and Merrill Lynch Asset Management U.K. Limited.(h)
(c) --Supplement to Investment Advisory Agreement between Registrant and
Merrill Lynch Asset Management, L.P.(d)
6(a) --Form of new Class A Shares Distribution Agreement between Registrant
and Merrill Lynch Funds Distributor, Inc. (now known as Princeton
Funds Distributor, Inc.) (the "Distributor").(e)
(b) --Class B Shares Distribution Agreement between the Registrant and the
Distributor.(c)
(c) --Letter Agreement between the Registrant and the Distributor with
respect to the Merrill Lynch Mutual Funds Advisor Program.(c)
(d) --Form of Class C Shares Distribution Agreement between the Registrant
and the Distributor.(e)
(e) --Form of Class D Shares Distribution Agreement between the Registrant
and the Distributor.(e)
7 --None.
8(a) --Custodian Agreement between the Registrant and Brown Brothers
Harriman & Co.(d)
(b) --Amendment to Custodian Agreement between the Registrant and Brown
Brothers Harriman & Co.(f)
</TABLE>

C-1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
9(a) --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Merrill Lynch
Financial Data Services, Inc. (now known as Financial Data Services,
Inc.)(c)
(b) --License Agreement relating to the use of the name between the
Registrant and Merrill Lynch & Co., Inc.(c)
10 --Opinion of Brown & Wood LLP, counsel for the Registrant.(i)
--Consent of Deloitte & Touche LLP, independent auditors for the
11 Registrant.
12 --None.
13 --Certificate of Merrill Lynch Investment Management, Inc.(a)
14 --None.
15(b) --Class B Shares Distribution Plan and Class B Shares Distribution
Plan Sub-Agreement of Registrant.(c)
(c) --Form of Class C Shares Distribution Plan and Class C Shares
Distribution Plan Sub-Agreement of Registrant.(e)
(d) --Form of Class D Shares Distribution Plan and Class D Shares
Distribution Plan Sub-Agreement of Registrant.(e)
16(a) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class A
Shares.(a)
(b) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class B
Shares.(c)
(c) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class C
Shares.(a)
(d) --Schedule of computation of each performance quotation provided in
the Registration Statement in response to Item 22 relating to Class D
Shares (formerly designated Class A Shares).(c)
17(a) --Financial Data Schedule for Class A Shares.
(b) --Financial Data Schedule for Class B Shares.
(c) --Financial Data Schedule for Class C Shares.
(d) --Financial Data Schedule for Class D Shares.
--Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
18 3.(g)
</TABLE>
- --------
(a) Filed on September 27, 1995, as an Exhibit to Post-Effective Amendment No.
4 to the Registrant's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (File No. 33-44917) (the "Registration
Statement").
(b) Reference is made to Article I, Article II (Sections 2.2, 2.3, 2.4 and
2.7), Article III (Sections 3.1 and 3.4), Article IV (Sections 4.1, 4.3 and
4.4), Article V (Sections 5.1, 5.2, 5.3 and 5.5), Article VI (Sections 6.2,
6.3, 6.4, 6.5, 6.7 and 6.8), Article VII (Section 7.1), Article VIII
(Sections 8.2 and 8.3), Article X (Sections 10.3, 10.4, 10.5, 10.6, 10.7
and 10.8), Article XI (Sections 11.3, 11.4 and 11.5) and Article XII
(Section 12.6) of the Registrant's Amended and Restated Declaration of
Trust filed as Exhibit 1(a) to the Registration Statement; the Instrument
of Establishment filed as Exhibit 1(b) to the Registration Statement; the
Certificate of Amendment to the Declaration of Trust and Establishment and
Designation of Classes filed as Exhibit 1(c) to the Registration Statement;
and Article I, Article V, Article VI and Article VII of the Registrant's
Amended and Restated By-Laws filed as Exhibit 2 to the Registration
Statement.
(c) Filed on January 14, 1994, as an Exhibit to Post-Effective Amendment No. 1
to the Registration Statement.
(d) Filed on September 29, 1994, as an Exhibit to Post-Effective Amendment No.
2 to the Registration Statement.
(e) Filed on October 18, 1994, as an Exhibit to Post-Effective Amendment No. 3
to the Registration Statement.
(f) Filed on September 27, 1996, as an Exhibit to Post-Effective Amendment No.
5 to the Registration Statement.
(g) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A under the Securities Act of
1933, as amended, filed on January 25, 1996 relating to shares of Merrill
Lynch New York Municipal Bond Fund series of Merrill Lynch Multi-State
Municipal Series Trust (File No. 2-99473).

(h) Filed on August 29, 1997, as an Exhibit to Post-Effective Amendment No. 6
to the Registration Statement.

(i) Previously filed as Exhibit 10 to the Registration Statement.

C-2
<PAGE>

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

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

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS AT
TITLE OF CLASS JULY 31, 1998*
- -------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per
share........................................................ 3,252
Class B shares of beneficial interest, par value $0.10 per
share....................................................... 35,750
Class C shares of beneficial interest, par value $0.10 per
share....................................................... 2,116
Class D shares of beneficial interest, par value $0.10 per
share....................................................... 8,370
</TABLE>

* The number of holders shown above includes holders of record plus beneficial
owners, whose shares are held of record by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch").

ITEM 27. INDEMNIFICATION.

Section 5.3 of the Registrant's Declaration of Trust provides as follows:
"The Trust shall indemnify each of its Trustees, officers, employees, and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest, as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as fines
and penalties, and as counsel fees) reasonably incurred by him or her in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he may be involved or with
which he or she may be threatened, while in office or thereafter, by reason of
his being or having been such a Trustee, officer, employee or agent, except
with respect to any matter as to which he shall have been adjudicated to have
acted in bad faith, willful misfeasance, gross negligence or reckless disregard
of his or her duties; provided, however, that as to any matter disposed of by a
compromise payment by such person, pursuant to a consent decree or otherwise,
no indemnification either for said payment or for any other expenses shall be
provided unless the Trust shall have received a written opinion from
independent legal counsel approved by the Trustees to the effect that if either
the matter of willful misfeasance, gross negligence or reckless disregard of
duty, or the matter of good faith and reasonable belief as to the best
interests of the Trust, had been adjudicated, it would have been adjudicated in
favor of such person. The rights accruing to any Person under these provisions
shall not exclude any other right to which he or she may be lawfully entitled;
provided that no Person may satisfy any right of indemnity or reimbursement
granted herein or in Section 5.1 or to which he or she may be otherwise
entitled except out of the property of the Trust, and no Shareholder shall be
personally liable to any Person with respect to any claim for indemnity or
reimbursement or otherwise. The Trustees may make advance payments in
connection with indemnification under this Section 5.3, provided that the
indemnified person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he or she is not entitled
to such indemnification."

Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940 may be concerned, such payments
will be made only on the following conditions: (i) the advances must be limited
to amounts used, or to be used, for the preparation or presentation of a
defense to the action, including costs connected with the preparation of a
settlement; (ii) advances may be made only upon receipt of a written promise
by, or on behalf of, the recipient to repay that amount of the advance which
exceeds the amount to which it is ultimately determined that he or she is
entitled to receive from the Registrant by reason of indemnification; and
(iii)(a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.

C-3
<PAGE>

In Section 9 of the Class A, Class B, Class C and Class D shares Distribution
Agreements relating to the securities being offered hereby, the Registrant
agrees to indemnify the Distributor and each person, if any, who controls the
Distributor within the meaning of the Securities Act of 1933, as amended (the
"1933 Act") against certain types of civil liabilities arising in connection
with the Registration Statement or Prospectus and Statement of Additional
Information.

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

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

(a) Merrill Lynch Asset Management, L.P. ("MLAM" or the "Investment
Adviser"), acts as investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund,
Inc., Merrill Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc.,
Merrill Lynch Fund For Tomorrow, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement, Merrill
Lynch Global Growth Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill
Lynch Global Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc.,
Merrill Lynch Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond Fund, Merrill
Lynch International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series
Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets Trust,
Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Retirement Series Trust,
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund,
Inc., Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc. and Hotchkis and Wiley Funds (advised by Hotchkis and Wiley,
a division of MLAM); and for the following closed-end registered investment
companies: Merrill Lynch High Income Municipal Bond Fund, Inc. and Merrill
Lynch Senior Floating Rate Fund, Inc. MLAM also acts as sub-adviser to Merrill
Lynch World Strategy Portfolio and Merrill Lynch Basic Value Equity Portfolio,
two investment portfolios of EQ Advisory Trust.

(b) Fund Asset Management, L.P. ("FAM"), an affiliate of MLAM, acts as the
investment adviser for the following open-end registered investment companies:
CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special

C-4
<PAGE>

Value Fund, Inc., Merrill Lynch World Income Fund, Inc., and The Municipal Fund
Accumulation Program, Inc.; and for the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High Yield Fund,
Inc., Corporate High Yield Fund II, Inc., Corporate High Yield Fund III, Inc.,
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund
III, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc.; MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniHoldings California Insured Fund, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Fund, Inc.,
MuniHoldings Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings New
Jersey Insured Fund, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New
York Insured Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured Fund,
Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured Fund
II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., and Worldwide
DollarVest Fund, Inc.

The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series and Merrill Lynch Intermediate Government
Bond Fund is One Financial Center, 23rd Floor, Boston, Massachusetts 02111-
2665. The address of the Investment Adviser, FAM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators L.P. is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Princeton Funds Distributor,
Inc. ("PFD") and of Merrill Lynch Funds Distributor ("MLFD") is P.O. Box 9081,
Princeton, New Jersey 08543-9081. The address of Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML &
Co.") is World Financial Center, North Tower, 250 Vesey Street, New York, New
York 10281-1201. The address of the Fund's transfer agent, Financial Data
Services, Inc. ("FDS") is 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484.

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

<TABLE>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <S> <C>
ML & Co. .......... Limited Partner Financial Services Holding Company; Limited
Partner of FAM
Princeton Services. General Partner General Partner of FAM
Arthur Zeikel...... Chairman Chairman of FAM; President of MLAM and FAM
from 1977 to 1997; Chairman and Director
of Princeton Services; President of
Princeton Services from 1993 to 1997;
Executive Vice President of ML & Co.
Jeffrey M. Peek.... President President of FAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co.
</TABLE>

C-5
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH THE OTHER SUBSTANTIAL BUSINESS, PROFESSION,
NAME INVESTMENT ADVISER VOCATION OR EMPLOYMENT
---- ------------------ ---------------------------------------
<C> <S> <C>
Terry K. Glenn......... Executive Vice Executive Vice President of FAM; Executive
President Vice President and Director of Princeton
Services; President and Director of PFD;
Director of FDS; President of Princeton
Administrators, L.P.
Linda L. Federici...... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Vincent R. Giordano.... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Elizabeth A. Griffin... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Norman R. Harvey....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael J. Hennewinkel. Senior Vice President Senior Vice President and General Counsel
and General Counsel of FAM; Senior Vice President of Princeton
Services
Philip L. Kirstein..... Senior Vice President Senior Vice President and Secretary of FAM;
and Secretary Senior Vice President, Director and
Secretary
of Princeton Services
Ronald M. Kloss........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Debra W. Landsman-Yaros Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Vice
President of PFD
Stephen M.M. Miller.... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr.. Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Michael L. Quinn....... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Managing
Director and First Vice President of
Merrill Lynch from 1989 to 1995
Richard L. Reller...... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services; Director
of PFD
Gerald M. Richard...... Senior Vice President Senior Vice President and Treasurer of FAM;
and Treasurer Senior Vice President and Treasurer of
Princeton Services; Vice President and
Treasurer of PFD
Gregory D. Upah........ Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
Ronald L. Welburn...... Senior Vice President Senior Vice President of FAM; Senior Vice
President of Princeton Services
</TABLE>

C-6
<PAGE>

(b) Merrill Lynch Asset Management U.K. Limited ("MLAM U.K.") acts as sub-
adviser for the following registered investment companies: The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc.,
Debt Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Americas Income Fund, Inc.,
Merrill Lynch Asset Builder Program, Inc., Merrill Lynch Asset Growth Fund,
Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Consults International
Portfolio, Merrill Lynch Convertible Fund, Inc., Merrill Lynch Corporate Bond
Fund, Inc., Merrill Lynch Developing Capital Markets, Inc., Merrill Lynch
Dragon Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund For
Tomorrow, Inc., Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch
Global Bond Fund for Investment and Retirement, Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global Resources
Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill Lynch Global
Technology Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Pacific Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Real Estate
Fund Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch Senior Floating Rate
Fund, Inc., Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc., Merrill Lynch World Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc. and Worldwide DollarVest Fund, Inc.
The address of each of these registered investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of MLAM U.K. is Milton Gate, 1
Moor Lane, London EC2Y 9HA, England.

Set forth below is a list of each executive officer and director of MLAM U.K.
indicating each business, profession, vocation or employment of a substantial
nature in which each such person has been engaged since June 1, 1996, for his
or her own account or in the capacity of director, officer, partner or trustee.
In addition, Messrs. Zeikel, Albert and Richard are officers of one or more of
the registered investment companies listed in the preceding paragraphs:

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

C-7
<PAGE>

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 28 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc., and The Municipal Fund Accumulation Program, Inc. and MLFD also
acts as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Program, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. A separate division of PFD acts as the principal underwriter of
a number of other investment companies.

(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.

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

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

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

ITEM 31. MANAGEMENT SERVICES.

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

ITEM 32. UNDERTAKINGS.

(a) Not applicable.

(b) Not applicable.

(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.

C-8
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the Township of Plainsboro, and State of New Jersey, on the 28th day of August
1998.

Merrill Lynch International Equity
Fund
(Registrant)

/s/ Arthur Zeikel
By: _________________________________

(ARTHUR ZEIKEL, PRESIDENT)

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

SIGNATURE TITLE DATE

Arthur Zeikel* President and
- ------------------------------------- Trustee
(ARTHUR ZEIKEL) (Principal Executive Officer)

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

Donald Cecil* Trustee
- -------------------------------------
(DONALD CECIL)

Edward H. Meyer* Trustee
- -------------------------------------
(EDWARD H. MEYER)

Charles C. Reilly* Trustee
- -------------------------------------
(CHARLES C. REILLY)

Richard R. West* Trustee
- -------------------------------------
(RICHARD R. WEST)

Edward D. Zinbarg* Trustee
- -------------------------------------
(EDWARD D. ZINBARG)

/s/ Arthur Zeikel August 28, 1998
*By: ________________________________

(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)

C-9
<PAGE>

EXHIBIT INDEX

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

APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

Pursuant to Rule 304 of Regulation S-T, the following table presents
fair and accurate narrative descriptions of graphic and image material omitted
from this EDGAR Submission file due to ASCII-incompatibility and cross-
references this material to the location of each occurrence in the text.

DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC O IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill lynch back cover of Statement of
logo including stylized market Additional Information
bull

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> MERRILL LYNCH INTERNATIONAL EQUITY FUND - CLASS A SHARES

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 427643245
<INVESTMENTS-AT-VALUE> 444155744
<RECEIVABLES> 17035274
<ASSETS-OTHER> 4490751
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 465681769
<PAYABLE-FOR-SECURITIES> 33491861
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4303992
<TOTAL-LIABILITIES> 37795853
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 452956956
<SHARES-COMMON-STOCK> 3546893
<SHARES-COMMON-PRIOR> 3546090
<ACCUMULATED-NII-CURRENT> 1123347
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (44405855)
<ACCUM-APPREC-OR-DEPREC> 18211468
<NET-ASSETS> 33959608
<DIVIDEND-INCOME> 11479166
<INTEREST-INCOME> 1975913
<OTHER-INCOME> 0
<EXPENSES-NET> (12331732)
<NET-INVESTMENT-INCOME> 1123347
<REALIZED-GAINS-CURRENT> 19117687
<APPREC-INCREASE-CURRENT> (74763524)
<NET-CHANGE-FROM-OPS> (54522490)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (6099856)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2078080
<NUMBER-OF-SHARES-REDEEMED> (2710923)
<SHARES-REINVESTED> 633646
<NET-CHANGE-IN-ASSETS> (343749337)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 30286510
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4596696
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12331732
<AVERAGE-NET-ASSETS> 39122133
<PER-SHARE-NAV-BEGIN> 12.58
<PER-SHARE-NII> .12
<PER-SHARE-GAIN-APPREC> (1.08)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2.05)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.57
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> MERRILL LYNCH INTERNATIONAL EQUITY FUND - CLASS B SHARES

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 427643245
<INVESTMENTS-AT-VALUE> 444155744
<RECEIVABLES> 17035274
<ASSETS-OTHER> 4490751
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 465681769
<PAYABLE-FOR-SECURITIES> 33491861
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4303992
<TOTAL-LIABILITIES> 37795853
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 452956956
<SHARES-COMMON-STOCK> 32372040
<SHARES-COMMON-PRIOR> 46962821
<ACCUMULATED-NII-CURRENT> 1123347
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (44405855)
<ACCUM-APPREC-OR-DEPREC> 18211468
<NET-ASSETS> 311519929
<DIVIDEND-INCOME> 11479166
<INTEREST-INCOME> 1975913
<OTHER-INCOME> 0
<EXPENSES-NET> (12331732)
<NET-INVESTMENT-INCOME> 1123347
<REALIZED-GAINS-CURRENT> 19117687
<APPREC-INCREASE-CURRENT> (74763524)
<NET-CHANGE-FROM-OPS> (54522490)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (68222064)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5510516
<NUMBER-OF-SHARES-REDEEMED> (26780688)
<SHARES-REINVESTED> 6679391
<NET-CHANGE-IN-ASSETS> (343749337)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 30286510
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4596696
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 12331732
<AVERAGE-NET-ASSETS> 457813780
<PER-SHARE-NAV-BEGIN> 12.42
<PER-SHARE-NII> 0
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<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.76)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.62
<EXPENSE-RATIO> 2.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
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<NUMBER> 003
<NAME> MERRILL LYNCH INTERNATIONAL EQUITY FUND - CLASS C SHARES

<S> <C>
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<INVESTMENTS-AT-VALUE> 444155744
<RECEIVABLES> 17035274
<ASSETS-OTHER> 4490751
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 465681769
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<TOTAL-LIABILITIES> 37795853
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<SHARES-COMMON-STOCK> 1551047
<SHARES-COMMON-PRIOR> 2020514
<ACCUMULATED-NII-CURRENT> 1123347
<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> (44405855)
<ACCUM-APPREC-OR-DEPREC> 18211468
<NET-ASSETS> 14716930
<DIVIDEND-INCOME> 11479166
<INTEREST-INCOME> 1975913
<OTHER-INCOME> 0
<EXPENSES-NET> (12331732)
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<REALIZED-GAINS-CURRENT> 19117687
<APPREC-INCREASE-CURRENT> (74763524)
<NET-CHANGE-FROM-OPS> (54522490)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (3133753)
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<NUMBER-OF-SHARES-SOLD> 1734570
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<SHARES-REINVESTED> 320806
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<OVERDISTRIB-NII-PRIOR> 0
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<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> MERRILL LYNCH INTERNATIONAL EQUITY FUND - CLASS D SHARES

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<PERIOD-START> JUN-01-1997
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<INVESTMENTS-AT-VALUE> 444155744
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4303992
<TOTAL-LIABILITIES> 37795853
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 452956956
<SHARES-COMMON-STOCK> 7032315
<SHARES-COMMON-PRIOR> 9451252
<ACCUMULATED-NII-CURRENT> 1123347
<OVERDISTRIBUTION-NII> 0
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<REALIZED-GAINS-CURRENT> 19117687
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<NET-CHANGE-FROM-OPS> (54522490)
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (16354380)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3919900
<NUMBER-OF-SHARES-REDEEMED> (7952491)
<SHARES-REINVESTED> 1613654
<NET-CHANGE-IN-ASSETS> (343749337)
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 12331732
<AVERAGE-NET-ASSETS> 97081505
<PER-SHARE-NAV-BEGIN> 12.59
<PER-SHARE-NII> .09
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<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.98)
<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> 1.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

Exhibit 99.11

INDEPENDENT AUDITORS' CONSENT

Merrill Lynch International Equity Fund:

We consent to the incorporation by reference in this Post-Effective Amendment
No. 7 to Registration Statement No. 33-44917 of our report dated July 16, 1998
appearing in the annual report to shareholders of the Merrill Lynch
International Equity Fund for the year ended May 31, 1998, and to the
reference to us under the caption "Financial Highlights" in the Prospectus.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Princeton, New Jersey
August 28, 1998