MERRILL LYNCH CONN MUNI BD FD OF M L MULTI ST MUNI SER TR, N-1A EL/A, 1994-05-16

MERRILL LYNCH CONN MUNI BD FD OF M L MULTI ST MUNI SER TR
N-1A EL/A, 1994-05-16

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 16, 1994

SECURITIES ACT FILE NO. 33-48693
INVESTMENT COMPANY ACT FILE NO. 811-4375

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]

PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [_]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]

AMENDMENT NO. 78
(Check appropriate box or boxes) [X]

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MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)

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

ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD, PLAINSBORO, NEW JERSEY
MAILING ADDRESS: BOX 9011, PRINCETON, NEW JERSEY 08543-9011

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COPIES TO:
COUNSEL FOR THE TRUST: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD FUND ASSET MANAGEMENT
ONE WORLD TRADE CENTER BOX 9011
NEW YORK, NEW YORK 10048-0557 PRINCETON, NEW JERSEY 08543-9011
ATTENTION: THOMAS R. SMITH, JR., ESQ.
BRIAN M. KAPLOWITZ, ESQ.

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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:

AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.

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AN INDEFINITE NUMBER OF CLASS A AND CLASS B SHARES OF BENEFICIAL INTEREST OF
THE REGISTRANT IS BEING REGISTERED BY THIS REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940.

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<PAGE>

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND OF
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
N-LA ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis ......................... Fee Table
Item 3. Condensed Financial Information... Not Applicable
Item 4. General Description of Registrant. Investment Objective and
Policies; Additional
Information
Item 5. Management of the Fund............ Fee Table; Management of
the Trust; Inside Back
Cover Page
Item 5A. Management's Discussion of Fund
Performance....................... Not Applicable
Item 6. Capital Stock and Other
Securities........................ Cover Page; Additional
Information
Item 7. Purchase of Securities Being
Offered .......................... Cover Page; Fee Table;
Alternative Sales
Arrangements; Purchase of
Shares; Shareholder
Services; Additional
Information; Inside Back
Cover Page
Item 8. Redemption of Repurchase.......... Fee Table; Alternative Sales
Arrangements; Purchase of
Shares; Redemption of Shares
Item 9. Pending Legal Proceedings......... Not Applicable
PART B
Item 10. Cover Page........................ Cover Page
Item 11. Table of Contents................. Back Cover Page
Item 12. General Information and History... Not Applicable
Item 13. Investment Objective and Policies. Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund............ Management of the Trust
Item 15. Control Persons and Principal
Holders of Securities............. Management of the Trust;
Additional Information
Item 16. Investment Advisory and Other
Services.......................... Management of the Trust;
Purchase of Shares; General
Information
Item 17. Brokerage Allocation and Other
Practices......................... Portfolio Transactions
Item 18. Capital Stock and Other
Securities........................ General Information--
Description of Series and
Shares
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered....... Purchase of Shares;
Redemption of Shares;
Determination of Net Asset
Value; Shareholder Services
Item 20. Tax Status........................ Distributions and Taxes
Item 21. Underwriters...................... Purchase of Shares
Item 22. Calculation of Performance Data... Performance Data
Item 23. Financial Statements.............. Statement of Assets and
Liabilities
PART C
Information required to be included in Part C is set forth under the appro-
priate Item, so numbered, in Part C to this Registration Statement.
</TABLE>

i
<PAGE>

PROSPECTUS
- ----------

MAY 16, 1994

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
BOX 9011, PRINCETON, NEW JERSEY 08543-9011 . PHONE NO. (609) 282-2800
----------------
Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") is a mutual fund
seeking to provide shareholders with as high a level of income exempt from
Federal and Connecticut income taxes as is consistent with prudent investment
management. The Fund invests primarily in a non-diversified portfolio of long-
term, investment grade obligations, the interest on which, in the opinion of
bond counsel to the issuer, is exempt from Federal and Connecticut income
taxes. The Fund may invest in certain tax-exempt securities classified as
"private activity bonds" that may subject certain investors in the Fund to an
alternative minimum tax. At times, the Fund may seek to hedge its portfolio
through the use of futures transactions and options. There can be no assurance
that the investment objective of the Fund will be realized.

The Fund offers two classes of shares which may be purchased during the
subscription offering at $10.00 per share and during the continuous offering at
a price equal to the next determined net asset value per share, plus in both
cases a sales charge which, at the election of the purchaser, may be imposed
(i) at the time of purchase (the "Class A shares"), or (ii) on a deferred basis
(the "Class B shares"). The deferred charges to which the Class B shares are
subject shall consist of a contingent deferred sales charge which may be
imposed on redemptions made within four years of purchase and an ongoing
account maintenance fee and distribution fee. These alternatives permit an
investor to choose the method of purchasing shares that is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. Investors should understand that the
purpose and function of the deferred sales charges with respect to the Class B
shares are the same as those of the initial sales charge with respect to the
Class A shares. Investors also should understand that over time the deferred
charges related to Class B shares may exceed the initial sales charge with
respect to Class A shares. See "Alternative Sales Arrangements" on page 4.

Each Class A share and Class B share represents identical interests in the
investment portfolio of the Fund and has the same rights, except that Class B
shares bear the expenses of the account maintenance fee and distribution fee
and certain other costs resulting from the deferred sales charge arrangement,
which will cause Class B shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares, and that Class B shares have
exclusive voting rights with respect to the account maintenance fee and the
distribution fee. The two classes also have different exchange privileges.

(continued on following page)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES 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 May 16, 1994 (the "Statement of Additional Information"),
has been filed with the Securities and Exchange Commission and is available,
without charge, by calling or by writing Merrill Lynch Multi-State Municipal
Series Trust (the "Trust") at the above telephone number or address. The
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. The Fund is a separate series of the Trust, an open-end
management investment company organized as a Massachusetts business trust.
----------------
FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE>

(continued from prior page)

Merrill Lynch Funds Distributor, Inc. (the "Distributor"), Box 9011,
Princeton, New Jersey 08543-9011 [(609) 282-2800], and other securities dealers
which have entered into selected dealer agreements with the Distributor,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
will solicit subscriptions for shares of the Fund during a period expected to
end on June 24, 1994, unless extended. On the fifth business day after the
conclusion of this subscription period, the subscriptions will be payable, the
shares will be issued and the Fund will commence operations. The public
offering price of the shares during the subscription offering will be $10.00
per share in the case of Class B shares and $10.00 per share plus a sales
charge of 4.00%, subject to reductions on purchases in single transactions of
$25,000 or more, in the case of Class A shares. After the completion of the
initial subscription offering, the Fund will engage in a continuous offering of
its shares at a price equal to the next determined net asset value per share in
the case of Class B shares and the next determined net asset value per share,
plus a sales charge subject to reductions as noted above, in the case of Class
A shares. Shareholders may redeem their shares at any time at the next
determined net asset value. The Class B shares may be subject to a contingent
deferred sales charge if redeemed within four years of purchase and are subject
to ongoing account maintenance and distribution fees. The minimum initial
purchase during the subscription and continuous offerings is $1,000 and the
minimum subsequent purchase in the continuous offering is $50. Merrill Lynch
may charge its customers a processing fee (presently $4.85) for confirming
purchases and repurchases. Purchases and redemptions directly through the
Fund's Transfer Agent are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".

2
<PAGE>

FEE TABLE

A general comparison of the sales arrangements and other nonrecurring and
recurring expenses applicable to Class A shares and Class B shares follows:

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
INITIAL SALES DEFERRED SALES
CHARGE CHARGE
ALTERNATIVE ALTERNATIVE
---------------- --------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)................. 4.00%(a) None
Sales Charge Imposed on Dividend
Reinvestments .................. None None
Deferred Sales Charge (as a per-
centage of original purchase
price or redemption proceeds,
whichever is lower) ............ None 4.0%
during the
first
year,
decreasing
1.0%
annually
to
0.0% after
the fourth
year(b)
Exchange Fee .................... None None
Annual Fund Operating Expenses (as
a percentage of average net as-
sets):
Management Fees(c) .............. 0.55% 0.55%
Rule 12b-1 Fees ................. None 0.50%(d)
Other Expenses
Custodial Fees................. 0.05% 0.05%
Shareholder Servicing Costs(e). 0.05% 0.05%
Miscellaneous.................. 0.61% 0.61%
------- ----
Total Other Expenses......... 0.71% 0.71%
---- ----
Total Fund Operating Expenses..... 1.26% 1.76%
==== ====
</TABLE>
- --------
(a) Reduced for purchases of $25,000 and over, decreasing to 0.50% for
purchases of $1,000,000 and over. Certain purchasers of Class A shares
investing $1,000,000 or more may in lieu of a front-end sales load, be
assessed a deferred sales charge on redemptions within the first year of
such investment. See "Purchase of Shares--Initial Sales Charge
Alternative--Class A Shares"--page 20.
(b) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares"--page 21.
(c) See "Management of the Trust--Management and Advisory Arrangements"--page
16.
(d) See "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan"--page 22.
(e) See "Management of the Trust--Transfer Agency Services"--page 17.

EXAMPLE:
<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
-------------------------
1 YEAR 3 YEARS
------------ ------------
<S> <C> <C>
An investor would pay the following expenses on a
$1,000 investment including, for Class A shares,
the maximum $40 front-end sales charge and assuming
(1) an operating expense ratio of 1.26% for Class A
shares and 1.76% for Class B shares, (2) a 5% an-
nual return throughout the periods and (3) redemp-
tion at the end of the period:
Class A .......................................... $ 52.32 $78.37
Class B .......................................... $ 57.89 $ 75.41
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of the period:
Class A .......................................... $ 52.32 $ 78.37
Class B .......................................... $ 17.89 $ 55.41
</TABLE>

3
<PAGE>

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 expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as mandated
by Securities and Exchange Commission (the "Commission") regulations. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
ANNUAL RATE OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATE OF RETURN MAY BE MORE
OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE. Class B 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 Rules of Fair Practice of the National Association
of Securities Dealers, Inc. Merrill Lynch may charge its customers a processing
fee (presently $4.85) for confirming purchases and repurchases. Purchases and
redemptions directly through the Fund's Transfer Agent are not subject to the
processing fee. See "Purchase of Shares" and "Redemption of Shares".

ALTERNATIVE SALES ARRANGEMENTS

Shares of the Fund may be purchased during the subscription offering at
$10.00 per share and during the continuous offering at a price equal to the
next determined net asset value per share, plus in both cases a sales charge
which, at the election of the purchaser, may be imposed either (i) at the time
of the purchase (the "initial sales charge alternative"), or (ii) on a deferred
basis (the "deferred sales charge alternative").

Class A Shares. An investor who elects the initial sales charge alternative
acquires Class A shares. Although Class A shares incur a sales charge when they
are purchased, they enjoy the benefit of not being subject to the ongoing
account maintenance and distribution fees to which Class B shares are subject
or any sales charge when they are redeemed. Certain purchasers of Class A
shares qualify for reduced initial sales charges. See "Purchase of Shares".

Class B Shares. An investor who elects the deferred sales charge alternative
acquires Class B shares. Class B shares do not incur a sales charge when they
are purchased, but they are subject to ongoing account maintenance and
distribution fees and a sales charge if they are redeemed within four years of
purchase. Class B shares enjoy the benefit of permitting all of the investor's
dollars to work from the time the investment is made. The ongoing account
maintenance and distribution fees paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares. Payment of the distribution fee is subject to certain limits as
set forth under "Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares".

As an illustration, investors who qualify for significantly reduced sales
charges might elect the initial sales charge alternative because similar sales
charge reductions are not available for purchases under the deferred sales
charge alternative. Moreover, shares acquired under the initial sales charge
alternative would not be subject to ongoing account maintenance and
distribution fees. However, because initial sales charges are deducted at the
time of purchase, such investors would not have all their funds invested
initially. Investors not qualifying for reduced initial sales charges who
expect to maintain their investment for an extended period of time also might
elect the initial sales charge alternative because over time the accumulated
continuing account maintenance and distribution fees may exceed the initial
sales charge. Again, however, such investors must weigh this consideration
against the fact that not all of their funds will be invested initially.

4
<PAGE>

Furthermore, the ongoing account maintenance and distribution fees will be
offset to the extent any return is realized on the additional funds initially
invested under the deferred alternative. However, there can be no assurance as
to the return, if any, which will be realized on such additional funds. Certain
other investors might determine it to be more advantageous to have all of their
funds invested initially, although remaining subject to continued account
maintenance and distribution fees and, for a four-year period of time, a
contingent deferred sales charge.

The distribution expenses incurred by the Distributor and dealers (primarily
Merrill Lynch) in connection with the sale of the shares will be paid, in the
case of the Class A shares, from the proceeds of the initial sales charge. In
the case of the Class B shares, such distribution expenses will be paid from
the proceeds of the ongoing distribution fee and, if applicable, the contingent
deferred sales charge incurred upon redemption within four years of purchase.
Sales personnel may receive different compensation for selling Class A or Class
B shares. Investors should understand that the purpose and function of the
deferred sales charges with respect to the Class B shares are the same as those
of the initial sales charge with respect to the Class A shares.

Dividends paid by the Fund with respect to Class A and Class B 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 and distribution fees and any incremental transfer agency costs
relating to Class B shares will be borne exclusively by that class. See
"Additional Information--Determination of Net Asset Value". Class A and Class B
shareholders of the Fund have an exchange privilege for Class A and Class B
shares, respectively, of certain other mutual funds sponsored by Merrill Lynch.
Class A and Class B shareholders of the Fund also may exchange their shares for
shares of certain money market funds sponsored by Merrill Lynch. See
"Shareholder Services--Exchange Privilege".

The Trustees of the Trust have determined that currently no conflict of
interest exists between the Class A and Class B shares. On an ongoing basis,
the Trustees of the Trust, pursuant to their fiduciary duties under the
Investment Company Act of 1940 and state laws, will seek to assure that no such
conflict arises.

The alternative sales arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and
other circumstances. Investors should determine whether under their
particular circumstances it is more advantageous to incur an initial sales
charge and not be subject to ongoing charges, or to have the entire initial
purchase price invested in the Fund with the investment thereafter being
subject to ongoing account maintenance and distribution fees. To assist
investors in making this determination, the Fee Table on page 3 sets forth
the charges applicable to each class of shares and a discussion of relevant
factors in making such determination is set forth under "Purchase of
Shares--Alternative Sales Arrangements" on page 19.

5
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

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

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

The Fund may invest up to 20% of its total assets in Municipal Bonds that are
rated below Baa by Moody's or below BBB by Standard & Poor's or Fitch, or which
in the Manager's judgment, possess similar credit characteristics. Such
securities, sometimes referred to as "high-yield" or "junk" bonds, are
predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security and generally
involve a greater volatility of price than securities in higher rating
categories. The market prices of high-yielding, lower-rated securities may
fluctuate more than higher-rated securities and may decline significantly in
periods of general economic difficulty, which may follow periods of rising
interest rates. In purchasing such securities, the Fund will rely on the
Manager's judgment, analysis and experience in evaluating the creditworthiness
of the issuer of such securities. The Manager will take into

6
<PAGE>

consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of its management and regulatory matters. See "Investment Objective
and Policies" in the Statement of Additional Information for a more detailed
discussion of the pertinent risk factors involved in investing in "high yield"
or "junk" bonds and Appendix II--"Ratings of Municipal Bonds"--in the Statement
of Additional Information for additional information regarding ratings of debt
securities. The Fund does not intend to purchase debt securities that are in
default or which the Manager believes will be in default.

Certain Municipal Bonds may be entitled to the benefits of letters of credit
or similar credit enhancements issued by financial institutions. In such
instances, the Trustees and the Manager will take into account in assessing the
quality of such bonds not only the creditworthiness of the issuer of such bonds
but also the creditworthiness of the financial institution. Certain instruments
in which the Fund may invest may be characterized as derivative instruments.
See "Description of Municipal Bonds" and "Financial Futures Transactions and
Options".

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

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

The Fund ordinarily does not intend to realize investment income not exempt
from Federal and Connecticut income taxes. However, to the extent that suitable
Connecticut Municipal Bonds are not available for investment by the Fund, the
Fund may purchase Municipal Bonds issued by other states, their agencies and
instrumentalities, the interest income on which is exempt, in the opinion of
bond counsel, from Federal, but not Connecticut, taxation. The Fund also may
invest in securities not issued by or on behalf of a state or territory or by
an agency or instrumentality thereof, if the Fund nevertheless believes such
securities to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt
Securities"). Non-Municipal Tax-Exempt Securities may include securities issued
by other investment companies that invest in municipal bonds, to the extent
such investments are permitted by the Investment Company Act of 1940, as
amended (the "1940 Act"). Other Non-Municipal Tax-Exempt Securities could
include trust certificates or other derivative instruments evidencing interests
in one or more Municipal Bonds.

7
<PAGE>

Under normal circumstances, except when acceptable securities are unavailable
as determined by the Manager, the Fund will invest at least 65% of its total
assets in Connecticut Municipal Bonds. For temporary
defensive periods or to provide liquidity, the Fund has the authority to invest
as much as 35% of its total assets in tax-exempt or taxable money market
obligations with a maturity of one year or less (such short-term obligations
being referred to herein as "Temporary Investments"), except that taxable
Temporary Investments shall not exceed 20% of the Fund's net assets. The
Temporary Investments, VRDOs and Participating VRDOs in which the Fund may
invest also will be in the following rating categories at the time of purchase:
MIG-1/VMIG-1 through MIG-4/VMIG-4 for notes and VRDOs and Prime-1 through
Prime-3 for commercial paper (as determined by Moody's), SP-1 and SP-2 for
notes and A-1 through A-3 for VRDOs and commercial paper (as determined by
Standard & Poor's), or F-1 through F-3 for notes, VRDOs and commercial paper
(as determined by Fitch) or, if unrated, of comparable quality in the opinion
of the Manager. The Fund at all times will have at least 80% of its net assets
invested in securities the interest on which is exempt from Federal taxation.
However, interest received on certain otherwise tax-exempt securities which are
classified as "private activity bonds" (in general, bonds that benefit non-
governmental entities), may be subject to a Federal alternative minimum tax.
The percentage of the Fund's net assets invested in "private activity bonds"
will vary during the year. See "Distributions and Taxes". In addition, the Fund
reserves the right to invest temporarily a greater portion of its assets in
Temporary Investments for defensive purposes, when, in the judgment of the
Manager, market conditions warrant. The investment objective of the Fund is a
fundamental policy of the Fund which may be not changed without a vote of a
majority of the outstanding shares of the Fund. The Fund's hedging strategies,
which are described in more detail under "Financial Futures Transactions and
Options", are not fundamental policies and may be modified by the Trustees of
the Trust without the approval of the Fund's shareholders.

POTENTIAL BENEFITS

Investment in shares of the Fund offers several benefits. The Fund offers
investors the opportunity to receive income exempt from Federal and Connecticut
income taxes by investing in a professionally managed portfolio consisting
primarily of long-term Connecticut Municipal Bonds. The Fund also provides
liquidity because of its redemption features and relieves the investor of the
burdensome administrative details involved in managing a portfolio of tax-
exempt securities. The benefits of investing in the Fund are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the management fee and operational costs, and in
the case of Class B shares, account maintenance and distribution fees.

SPECIAL AND RISK CONSIDERATIONS RELATING TO CONNECTICUT MUNICIPAL BONDS

The Fund ordinarily will invest at least 65% of its total assets in
Connecticut Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of Connecticut Municipal Bonds than is a tax-exempt
mutual fund that is not concentrated in issuers of Connecticut Municipal Bonds
to this degree.

The Connecticut State General Fund had an operating deficit of $28 million
for the 1988-89 fiscal year based on the modified cash basis of accounting used
for statutory financial reporting. The Connecticut Comptroller's annual reports
on the state's fiscal position reported an actual General Fund operating
deficit of $259.5 million for the 1989-90 fiscal year and a General Fund
operating deficit of $808.5 million for the 1990-91 fiscal year. The total
accumulated deficit of approximately $966 million was funded through the
issuance of five-year Economic Recovery Notes. The Connecticut Comptroller's
annual report for the fiscal year ended June 30, 1992 reflected a General Fund
operating surplus of $110.2 million. The Comptroller's annual report for the
fiscal year ended June 30, 1993 reflected a General Fund operating surplus of
$113.5 million. The Comptroller's May 2, 1994 interim report projects a surplus
of $96.9 million for the fiscal

8
<PAGE>

year ending June 30, 1994. On a GAAP basis, the interim report estimates the
cumulative deficit of $429 million at June 30, 1994. Currently, Moody's rates
Connecticut's general obligation bonds Aa and Connecticut's outstanding
commercial paper P-1 and Standard & Poor's rates Connecticut's general
obligation bonds AA- and Connecticut's outstanding commercial paper A-1+.

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

DESCRIPTION OF MUNICIPAL BONDS

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

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

Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source. The Fund will not invest more than 10% of
its total assets (taken at market value at the time of each investment) in
industrial revenue bonds where the entity supplying the revenues from which the
issuer is paid, including predecessors, has a record of less than three years
of continuous business operations. Investments involving entities with less
than three years of continuous

9
<PAGE>

business operations may pose somewhat greater risks due to the lack of a
substantial operating history for such entities. The Manager believes, however,
that the potential benefits of such investments outweigh the potential risks,
particularly given the Fund's limitations on such investments.

The Fund may purchase IDBs and private activity bonds. IDBs and private
activity bonds are tax-exempt securities issued by states, municipalities or
public authorities to provide funds, usually through a loan or lease
arrangement, to a private entity for the purpose of financing construction or
improvement of a facility to be used by the entity. Such bonds are secured
primarily by revenues derived from loan repayments or lease payments due from
the entity which may or may not be guaranteed by a parent company or otherwise
secured. Neither IDBs nor private activity bonds are secured by a pledge of the
taxing power of the issuer of such bonds. Therefore, an investor should be
aware that repayment of such bonds depends on the revenues of a private entity
and be aware of the risks that such an investment may entail. Continued ability
of an entity to generate sufficient revenues for the payment of principal and
interest on such bonds will be affected by many factors including the size of
the entity, capital structure, demand for its products or services,
competition, general economic conditions, governmental regulation and the
entity's dependence on revenues for the operation of the particular facility
being financed. The Fund may also invest in so-called "moral obligation" bonds.
If an issuer of such bonds is unable to meet its obligations, repayment of such
bonds becomes a moral commitment, but not a legal obligation, of the issuer.

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

10
<PAGE>

appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the issuer has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. These securities represent a type of financing that has not
yet developed the depth of marketability associated with more conventional
securities. Certain investments in lease obligations may be illiquid. The Fund
may not invest in illiquid lease obligations if such investments, together with
other illiquid investments, would exceed 15% of the Fund's net assets. The Fund
may, however, invest without regard to such limitation in lease obligations
which the Manager, pursuant to guidelines which have been adopted by the Board
of Trustees and subject to the supervision of the Board, determines to be
liquid. The Manager will deem lease obligations liquid if they are publicly
offered and have received an investment grade rating of Baa or better by
Moody's, or BBB or better by Standard & Poor's or Fitch. Unrated lease
obligations, or those rated below investment grade, will be considered liquid
if the obligations come to the market through an underwritten public offering
and at least two dealers are willing to give competitive bids. In reference to
the latter, the Manager must, among other things, also review the
creditworthiness of the municipality obligated to make payment under the lease
obligation and make certain specified determinations based on such factors as
the existence of a rating or credit enhancement such as insurance, the
frequency of trades or quotes for the obligation and the willingness of dealers
to make a market in the obligation.

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

WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS

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

CALL RIGHTS

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

11
<PAGE>

FINANCIAL FUTURES TRANSACTIONS AND OPTIONS

The Fund is authorized to purchase and sell certain exchange traded financial
futures contracts ("financial futures contracts") solely for the purpose of
hedging its investments in Municipal Bonds against declines in value and to
hedge against increases in the cost of securities it intends to purchase.
However, any transactions involving financial futures or options (including
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. A financial futures contract obligates the
seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract, or in the
case of index-based futures contracts to make and accept a cash settlement, at
a specific future time for a specified price. A sale of financial futures
contracts may provide a hedge against a decline in the value of portfolio
securities because such depreciation may be offset, in whole or in part, by an
increase in the value of the position in the financial futures contracts. A
purchase of financial futures contracts may provide a hedge against an increase
in the cost of securities intended to be purchased, because such appreciation
may be offset, in whole or in part, by an increase in the value of the position
in the futures contracts. Distributions, if any, of net long-term capital gains
from certain transactions in futures or options are taxable at long-term
capital gains rates for Federal income tax purposes, regardless of the length
of time the shareholder has owned Fund shares. See "Distributions and Taxes--
Taxes".

The Fund deals in financial futures contracts traded on the Chicago Board of
Trade based on The Bond Buyer Municipal Bond Index, a price-weighted measure of
the market value of 40 large, recently issued tax-exempt bonds. There can be no
assurance, however, that a liquid secondary market will exist to terminate any
particular financial futures contract at any specific time. If it is not
possible to close a financial futures position entered into by the Fund, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such a situation, if the
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. The inability to close financial futures positions also could have an
adverse impact on the Fund's ability to hedge effectively. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a financial futures contract.

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

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

Utilization of futures transactions and options thereon involves the risk of
imperfect correlation in movements in the price of futures contracts and
movements in the price of the security which is the subject of the hedge. If
the price of the futures contract moves more or less than the price of the
security that is the subject of the hedge, the Fund will experience a gain or
loss which will not be completely offset by movements

12
<PAGE>

in the price of such security. There is a risk of imperfect correlation where
the securities underlying futures contracts have different maturities, ratings
or geographic mixes than the security being hedged. In addition, the
correlation may be affected by additions to or deletions from the index which
serves as a basis for a financial futures contract. Finally, in the case of
futures contracts on U.S. Government securities and options on such futures
contracts, the anticipated correlation of price movements between the U.S.
Government securities underlying the futures or options and Municipal Bonds may
be adversely affected by economic, political, legislative or other developments
which have a disparate impact on the respective markets for such securities.

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

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

Although certain risks are involved in options and futures transactions, the
Manager believes that, because the Fund will engage in futures transactions
only for hedging purposes, the futures portfolio strategies of the Fund will
not subject the Fund to certain risks frequently associated with speculation in
futures transactions. The Fund must meet certain Federal income tax
requirements under the Internal Revenue Code of 1986, as amended (the "Code"),
in order to qualify for the special tax treatment afforded regulated investment
companies, including a requirement that less than 30% of its gross income be
derived from the sale or other disposition of securities held for less than
three months. Additionally, the Fund is required to meet certain
diversification requirements under the Code.

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

The successful use of transactions in futures also depends on the ability of
the Manager to forecast correctly the direction and extent of interest rate
movements within a given time frame. To the extent these rates remain stable
during the period in which a futures contract is held by the Fund or moves in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or

13
<PAGE>

partially offset by an increase in the value of portfolio securities. As a
result, the Fund's total return for such period may be less than if it had not
engaged in the hedging transaction. Furthermore, the Fund will only engage in
hedging transactions from time to time and may not necessarily be engaging in
hedging transactions when movements in interest rates occur.

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

REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS

As Temporary Investments, the Fund may invest in securities pursuant to
repurchase agreements or purchase and sale contracts. Repurchase agreements and
purchase and sale contracts may be entered into only with a member bank of the
Federal Reserve System or primary dealer in U.S. Government securities. Under
such agreements, the bank or primary dealer agrees, upon entering into the
contract, to repurchase the security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period.
In the case of repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligations;
whereas, in the case of purchase and sale contracts, the prices take into
account accrued interest. Such agreements usually cover short periods, such as
under one week. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred to
the purchaser. In the case of a repurchase agreement, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement; 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 the repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. 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 security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform. The Fund may not invest in repurchase agreements or purchase and sale
contracts maturing in more than seven days if such investments, together with
all other illiquid investments, would exceed 15% of the Fund's net assets.

INVESTMENT RESTRICTIONS

The Fund has adopted a number of restrictions and policies relating to the
investment of the Fund's assets and its activities, which are fundamental
policies of the Fund and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. Among the more significant restrictions, the Fund may not: (i)
purchase any securities other than securities referred to under "Investment
Objective and Policies" herein; (ii) purchase securities of other investment
companies, except in connection with certain specified transactions and with
respect to investments of up to 10% of the Fund's total assets in securities of
closed-end investment companies; (iii) borrow amounts in excess of 20% of its
total assets taken at market value (including the amount borrowed), and then
only from

14
<PAGE>

banks as a temporary measure for extraordinary or emergency purposes [The Fund
will not purchase securities while borrowings are outstanding]; (iv) mortgage,
pledge, hypothecate or in any manner transfer as security for indebtedness any
securities owned or held by the Fund except in connection with certain
specified transactions; (v) invest in securities which cannot be readily resold
because of legal or contractual restrictions or which are not readily
marketable, including individually negotiated loans that constitute illiquid
investments and illiquid lease obligations, and in repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities taken together, more than 15% of its net assets (taken at
market value at the time of each investment) would be invested in such
securities; (vi) invest more than 10% of its total assets (taken at market
value at the time of each investment) in industrial revenue bonds where the
entity supplying the revenues from which the issue is to be paid, and the
guarantor of the obligation, including predecessors, each have a record of less
than three years' continuous business operation; and (vii) invest more than 25%
of its total assets (taken at market value at the time of each investment) in
securities of issuers in any particular industry (other than United States
Government securities or Government agency securities, Municipal Bonds and Non-
Municipal Tax-Exempt Securities).

The Fund is classified as non-diversified within the meaning of the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in obligations of a single issuer. However, the
Fund's investments will be limited so as to qualify as a "regulated investment
company" for purposes of the Internal Revenue Code. See "Taxes". To qualify,
among other requirements, the Trust will limit the Fund's investments so that,
at the close of each quarter of the taxable year, (i) not more than 25% of the
market value of the Fund's total assets will be invested in the securities of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities of a single issuer and the Fund will not own more
than 10% of the outstanding voting securities of a single issuer. [For purposes
of this restriction, the Fund will regard each state and each political
subdivision, agency or instrumentality of such state and each multi-state
agency of which such state is a member and each public authority which issues
securities on behalf of a private entity as a separate issuer, except that if
the security is backed only by the assets and revenues of a non-government
entity then the entity with the ultimate responsibility for the payment of
interest and principal may be regarded as the sole issuer.] These tax-related
limitations may be changed by the Trustees of the Trust to the extent necessary
to comply with changes to the Federal tax requirements. A fund which elects to
be classified as "diversified" under the 1940 Act must satisfy the foregoing 5%
and 10% requirements with respect to 75% of its total assets. To the extent
that the Fund assumes large positions in the obligations of a small number of
issuers, the Fund's total return may fluctuate to a greater extent than that of
a diversified company as a result of changes in the financial condition or in
the market's assessment of the issuers.

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

15
<PAGE>

MANAGEMENT OF THE TRUST

TRUSTEES

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

The Trustees are:

Arthur Zeikel*--President and Chief Investment Officer of Fund Asset
Management, L.P. and Merrill Lynch Asset Management, L.P. ("MLAM");
President and Director of Princeton Services, Inc.; Executive Vice
President of Merrill Lynch & Co., Inc. since 1990; Executive Vice
President of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") since 1990 and a Senior Vice President thereof from
1985 to 1990; Director of Merrill Lynch Funds Distributor, Inc.

Kenneth S. Axelson--Former Executive Vice President and Director, J.C.
Penney Company, Inc.

Robert R. Martin--Chairman, WTC Industries, Inc. and former Chairman,
Kinnard Investments, Inc.

Herbert I. London--Former Dean, Gallatin Division of New York
University.

Joseph L. May--Attorney in private practice.

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

MANAGEMENT AND ADVISORY ARRANGEMENTS

Fund Asset Management, L.P. (the "Manager"), which is an affiliate of MLAM
and is owned and controlled by Merrill Lynch & Co., Inc., acts as the manager
for the Fund and provides the Fund with management services. The Manager or
MLAM acts as the investment adviser for over 90 other registered investment
companies. MLAM also offers portfolio management and portfolio analysis
services to individuals and institutions. As of March 31, 1994, the Manager
and MLAM had a total of approximately $163.6 billion in investment company and
other portfolio assets under management, including accounts of certain
affiliates of the Manager.

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

Vincent R. Giordano and Kenneth A. Jacob are the Portfolio Managers for the
Fund. Vincent R. Giordano has been a Portfolio Manager of the Manager and MLAM
since 1977 and a Senior Vice President of the Manager and MLAM since 1984.
Kenneth A. Jacob has been a Vice President of the Manager and MLAM since 1984.

Pursuant to the management agreement between the Manager and the Trust on
behalf of the Fund (the "Management Agreement"), the Manager is entitled to
receive from the Fund a monthly fee based upon the average daily net assets of
the Fund at the following annual rates: 0.55% of the average daily net assets
not

16
<PAGE>

exceeding $500 million; 0.525% of the average daily net assets exceeding $500
million but not exceeding $1.0 billion; and 0.50% of the average daily net
assets exceeding $1.0 billion.

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

TRANSFER AGENCY SERVICES

Financial Data Services, Inc. (the "Transfer Agent"), which is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc., acts as the Trust's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Fund
pays the Transfer Agent an annual fee of $10.00 per Class A shareholder account
and $12.00 per Class B shareholder account, and the Transfer Agent is entitled
to reimbursement from the Fund for out-of-pocket expenses incurred by the
Transfer Agent under the Transfer Agency Agreement.

PURCHASE OF SHARES

SUBSCRIPTION OFFERING

Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a subsidiary of
the Manager and an affiliate of Merrill Lynch, acts as the distributor of Class
A and Class B shares of the Fund.

The Distributor, Merrill Lynch and other securities dealers which have
entered into selected dealer agreements with the Distributor will solicit
subscriptions for shares of the Fund during a period expected to end on June
24, 1994. The subscription period may be extended for up to an additional 30
days upon agreement between the Trust on behalf of the Fund and the
Distributor. On the fifth business day after the conclusion of the subscription
period, the subscriptions will be payable, the Class A and Class B shares will
be issued and the Fund will commence operations. The subscription offering may
be terminated by the Trust or the Distributor at any time, in which event no
Class A and Class B shares will be issued (and, therefore, the Fund will not
commence operations and no amounts will be payable by subscribers, and no sales
charges will be assessed) or a limited number of shares will be issued.

17
<PAGE>

The public offering price of the Class A shares during the subscription
offering is set forth in the table below:

<TABLE>
<CAPTION>
SUBSCRIPTION PERIOD
-------------------------------------------
SECURITIES DEALERS'
SALES CHARGE CONCESSION
------------------ ------------------------
PERCENTAGE* PERCENTAGE*
PUBLIC OF PUBLIC OF PUBLIC
OFFERING DOLLAR OFFERING DOLLAR OFFERING
PRICE AMOUNT PRICE AMOUNT PRICE
-------- ------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Less than $25,000......... $10.417 $.417 4.00% $.417 4.00%
$25,000 but less than
$50,000.................. 10.390 .390 3.75 .390 3.75
$50,000 but less than
$100,000................. 10.336 .336 3.25 .336 3.25
$100,000 but less than
$250,000................. 10.256 .256 2.50 .256 2.50
$250,000 but less than
$1,000,000............... 10.152 .152 1.50 .152 1.50
$1,000,000 and over....... 10.050 .050 0.50 .050 0.50
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent.

The proceeds per share to the Fund from the sale of all Class A shares sold
during the subscription period will be $10.00.

The public offering price of the Class B shares during the subscription
offering will be $10.00 per share. However, the Class B shares may be subject
to a contingent deferred sales charge described below under "Deferred Sales
Charge Alternative--Class B Shares--CDSC" if redeemed within four years of
purchase and are subject to ongoing account maintenance and distribution fees
as described below.

The minimum initial purchase for both Class A and Class B shares during the
subscription period is $1,000.

CONTINUOUS OFFERING

Commencing immediately after completion of the subscription offering, Class A
and Class B shares of the Fund will be offered continuously for sale by the
Distributor and other eligible securities dealers (including Merrill Lynch).
During the continuous offering, 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 during the continuous offering is $1,000.
The minimum subsequent purchase is $50.

The Fund will offer its shares during the continuous offering at a public
offering price equal to the next determined net asset value per share plus
sales charges which, at the option of the purchaser, may be imposed either at
the time of purchase (the "initial sales charge alternative") or on a deferred
basis (the "deferred sales charge alternative"), as described below. The
applicable offering price for purchase orders is based upon the net asset value
of the Fund next determined after receipt of the purchase orders by the
Distributor. As to purchase orders received by securities dealers prior to 4:15
P.M., New York time, which includes orders received after the determination of
net asset value on the previous day, the applicable offering price will be
based on the net asset value determined as of 4:15 P.M. on the day the order is
placed with the Distributor, provided the order is received by the Distributor
prior to 4:30 P.M., New York time, on that day. If the purchase orders are not
received by the Distributor prior to 4:30 P.M., New York time, such orders
shall be

18
<PAGE>

deemed received on the next business day. Any order may be rejected by the
Distributor or the Trust. The Trust or the Distributor may suspend the
continuous offering of the Fund's shares at any time in response to conditions
in the securities markets or otherwise and may thereafter resume such offering
from time to time. Neither the Distributor nor the dealers are permitted to
withhold placing orders to benefit themselves by a price change. Merrill Lynch
may charge its customers a processing fee (presently $4.85) to confirm a sale
of shares to such customers. Purchases directly through the Fund's Transfer
Agent are not subject to the processing fee.

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

The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative, and Class B shares are sold to
investors choosing the deferred sales charge alternative. Each class of shares
represents an interest in the same portfolio of investments of the Fund, has
thesame rights and is identical to the other class in all respects, except that
Class B shares bear the expenses of the deferred sales arrangements, any
expenses (including incremental transfer agency costs) resulting from such
sales arrangements and the expenses paid by the account maintenance fee and
have exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the account maintenance and distribution fees are paid. The
two classes also have different exchange privileges. See "Shareholder
Services-- Exchange Privilege". The net income attributable to Class B shares
and the dividends payable on Class B shares will be reduced by the amount of
the account maintenance and distribution fees and incremental transfer agency
costs relating to Class B shares; accordingly, the net asset value of the Class
B shares will be reduced by such amount to the extent the Fund has
undistributed net income. Sales personnel may receive different compensation
for selling Class A or Class B shares. Investors are advised that only Class A
shares may be available for purchase through securities dealers, other than
Merrill Lynch, that are eligible to sell shares.

ALTERNATIVE SALES ARRANGEMENTS

The alternative sales arrangements of the Fund permit investors to choose the
method of purchasing shares that is most beneficial given the amount of their
purchase, the length of time the investor expects to hold his shares and other
relevant circumstances. INVESTORS SHOULD DETERMINE WHETHER UNDER THEIR
PARTICULAR CIRCUMSTANCES IT IS MORE ADVANTAGEOUS TO INCUR AN INITIAL SALES
CHARGE AND NOT BE SUBJECT TO ONGOING CHARGES, AS DISCUSSED BELOW, OR TO HAVE
THE ENTIRE INITIAL PURCHASE PRICE INVESTED IN THE FUND WITH THE INVESTMENT
THEREAFTER BEING SUBJECT TO ONGOING CHARGES.

As an illustration, investors who qualify for significantly reduced sales
charges, as described below, might elect the initial sales charge alternative
because similar sales charge reductions are not available for purchases under
the deferred sales charge alternative. Moreover, shares acquired under the
initial sales charge alternative would not be subject to ongoing account
maintenance and distribution fees as described below. However, because initial
sales charges are deducted at the time of purchase, such investors would not
have all their funds invested initially.

Investors not qualifying for reduced initial sales charges who expect to
maintain their investment for an extended period of time also might elect the
initial sales charge alternative because over time the accumulated continuing
account maintenance and distribution fees may exceed the initial sales charge.
Again, however, such investors must weigh this consideration against the fact
that not all their funds will be invested initially. Furthermore, the ongoing
account maintenance and distribution fees will be offset to the extent that any

19
<PAGE>

return is realized on the additional funds initially invested under the
deferred alternative. Another factor that may be applicable under certain
circumstances is that the payment of the Class B distribution fee and
contingent deferred sales charge ("CDSC") is subject to certain limits as set
forth below under "Deferred Sales Charge Alternative--Class B Shares".

Certain other investors might determine it to be more advantageous to have
all their funds invested initially, although remaining subject to continued
account maintenance and distribution fees and, for a four-year period of time,
a CDSC as described below. For example, an investor subject to the 4.0% initial
sales charge will have to hold his investment at least 8 years for the 0.25%
account maintenance fee and 0.25% distribution fee to exceed the initial sales
charge of Class A shares. This example does not take into account the time
value of money which further reduces the impact of the ongoing account
maintenance and distribution fees on the investment, fluctuations in the net
asset value, the effect of the return on the investment over this period of
time or the effect of any limits that may be imposed upon the payment of the
distribution fee and the CDSC.

INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES

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

<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DISCOUNT TO
AS PERCENTAGE AS PERCENTAGE* SELECTED DEALERS
OF OFFERING OF THE NET AS PERCENTAGE OF THE
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED OFFERING PRICE
------------------ ------------- --------------- --------------------
<S> <C> <C> <C>
Less than $25,000....... 4.00% 4.17% 3.75%
$25,000 but less than
$50,000................ 3.75 3.90 3.50
$50,000 but less than
$100,000............... 3.25 3.36 3.00
$100,000 but less than
$250,000............... 2.50 2.56 2.25
$250,000 but less than
$1,000,000............. 1.50 1.52 1.25
$1,000,000 and over..... 0.50 0.50 0.40
</TABLE>
--------
* Rounded to the nearest one-hundredth percent.

Initial sales charges may be waived for shareholders purchasing $1 million or
more in a single transaction (other than a tax qualified retirement plan under
Section 401 of the Code, or a deferred compensation plan under Section 403(b)
and Section 457 of the Code), or a purchase by a TMASM Managed Trust, of Class
A shares of the Fund. In addition, purchases of Class A shares of the Fund made
in connection with a single investment of $1 million or more under the Merrill
Lynch Mutual Fund Adviser Program will not be subject to an initial sales
charge. Purchases described in this paragraph will be subject instead to a CDSC
if the shares are redeemed within one year after purchase at the following
rates:

<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
AMOUNT OF PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
------------------ -------------------------------
<S> <C>
$1 million up to $2.5 million............. 0.75%
Over $2.5 million up to $3.5 million...... 0.40%
Over $3.5 million up to $5 million........ 0.25%
Over $5 million........................... 0.20%
</TABLE>

The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling

20
<PAGE>

Class A shares of the Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act of 1933,
as amended.

Reduced Initial Sales Charges. Sales charges are reduced under a Right of
Accumulation and a Letter of Intention. Class A shares of the Fund are offered
at net asset value to Trustees of the Trust, to directors or trustees of
certain other Merrill Lynch-sponsored investment companies, 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 if certain conditions set forth in the Statement of Additional
Information are met, to directors of Merrill Lynch & Co., Inc. and to employees
of Merrill Lynch & Co., Inc. and its subsidiaries. Also, Class A shares may be
offered at net asset value in connection with the acquisition of assets of
other investment companies. No initial sales charges are imposed upon Class A
shares issued as a result of the automatic reinvestment of dividends or capital
gains distributions. Class A shares are offered to TMASM Managed Trusts to
which Merrill Lynch Trust Company provides discretionary trustee services at
net asset value plus a reduced sales charge. Class A shares of the Fund also
are offered at net asset value to shareholders of certain closed-end funds
advised by the Manager or MLAM who wish to reinvest the net proceeds from a
sale of their closed-end fund shares of common stock in shares of the Fund,
provided certain conditions are met. Thus, for example, Class A shares of the
Fund are offered at net asset value to shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. (formerly known as Merrill Lynch Prime Fund, Inc.)
("Senior Floating Rate Fund") who wish to reinvest the net proceeds from a sale
of certain of their shares of common stock of Senior Floating Rate Fund in
shares of the Fund. In order to exercise this investment option, Senior
Floating Rate Fund shareholders must sell their Senior Floating Rate Fund
shares to the Senior Floating Rate Fund in connection with a tender offer
conducted by the Senior Floating Rate Fund and reinvest the proceeds
immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day. Class A shares of the Fund may
be purchased at net asset value, without a sales charge, by programs associated
with professional athletic players' associations which have invested in the
aggregate more than $10 million in Merrill Lynch-sponsored investment
companies. Additional information concerning these reduced initial sales
charges is set forth in the Statement of Additional Information.

DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES

Investors choosing the deferred sales charge alternative purchase Class B
shares at net asset value per share without the imposition of a sales charge at
the time of purchase. The Class B shares are being 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 shares at the time of purchase from its own funds. The proceeds
of the CDSC and the ongoing distribution fee discussed below are used to defray
Merrill Lynch's distribution expenses, including compensating its financial
consultants. The proceeds from the ongoing account maintenance fee are used to
compensate Merrill Lynch for providing continuing account maintenance
activities.

Proceeds from the CDSCs 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

21
<PAGE>

to the Fund in connection with the sale of the Class B shares, such as the
payment of compensation to financial consultants for selling Class B shares,
from the dealer's own funds. Payments by the Fund to the Distributor of the
distribution fee under the distribution plan described below also may be used
in whole or in part by the Distributor for this purpose. The combination of the
CDSC and the ongoing distribution fee facilitates the ability of the Fund to
sell the Class B shares without a sales charge being deducted at the time of
purchase. 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
deferred sales charge schedule relating to the Class B shares acquired as a
result of the exchange.

CDSC. Class B shares which 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.

The following table sets forth the rates of the CDSC:

<TABLE>
<CAPTION>
CDSC AS A
PERCENTAGE OF
YEAR SINCE DOLLAR AMOUNT
PURCHASE SUBJECT TO
PAYMENT MADE CHARGE
------------ -------------
<S> <C>
0-1........................................................ 4.0%
1-2........................................................ 3.0%
2-3........................................................ 2.0%
3-4........................................................ 1.0%
4 and thereafter........................................... None
</TABLE>

In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in the manner that results in the lowest possible applicable
rate being charged. Therefore, it will be assumed that the redemption is first
of shares until such time as the CDSC is no longer applicable 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 redemption.

To provide an example, assume an investor purchased 100 Class B shares at $10
per share (at a cost of $1,000) and in the third year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired
10 additional shares upon dividend reinvestment. If at such time the investor
makes his first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to charge 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 rates in the third year after purchase). The CDSC is waived on
redemptions of shares following the death or disability (as defined in the
Code) of a shareholder.

Distribution Plan. Pursuant to a distribution plan adopted by the Fund under
Rule 12b-1 under the 1940 Act (the "Distribution Plan"), the Fund pays the
Distributor an ongoing account maintenance fee and

22
<PAGE>

distribution fee relating to Class B shares, which are accrued daily and paid
monthly, at the annual rates of 0.25% and 0.25%, respectively, of the average
daily net assets of the Class B shares of the Fund. Pursuant to a sub-agreement
with the Distributor, Merrill Lynch also provides account maintenance and
distribution services to the Fund. The ongoing account maintenance fee
compensates the Distributor and Merrill Lynch for providing account maintenance
services to Class B shareholders.The ongoing distribution fee compensates the
Distributor and Merrill Lynch for providing distribution services and bearing
certain distribution-related expenses of the Fund, including payments to
financial consultants for selling Class B shares of the Fund.

The Distribution Plan is designed to permit an investor to purchase Class B
shares through dealers without the assessment of a front-end sales charge and
at the same time permit the dealer to compensate its financial consultants in
connection with the sale of the Class B shares. In this regard, the purpose and
function of the ongoing distribution fee under the Distribution Plan and the
CDSC are the same as those of the initial sales charge with respect to the
Class A shares of the Fund in that the deferred sales charges provide for the
financing of the distribution of the Fund's Class B shares.

The payments under the Distribution Plan are based on a percentage of average
daily net assets of Class B shares regardless of the amount of expenses
incurred, and, accordingly, distribution-related revenues may be more or less
than distribution-related expenses. Information with respect to the
distribution-related revenues and expenses is presented to the Trustees for
their consideration in connection with their deliberations as to the
continuance of the Distribution Plan. 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 market
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.

The Fund has no obligation with respect to distribution-related expenses
incurred by the Distributor and Merrill Lynch in connection with the Class B
shares, and there is no assurance that the Trustees of the Trust will approve
the continuance of the Distribution Plan from year to year. However, the
Distributor intends to seek annual continuation of the Distribution Plan. In
their review of the Distribution Plan, the Trustees will not be asked to take
into consideration expenses incurred in connection with the distribution of
Class A shares or of shares of other funds for which the Distributor acts as
distributor. The account maintenance fee, the distribution fee and the CDSC in
the case of Class B shares will not be used to subsidize the sale of Class A
shares.

Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. ("NASD") imposes a limitation on certain asset-based
sales charges such as the Fund's distribution fee and the CDSC, but not the
account maintenance fee. 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 (defined to exclude
shares issued pursuant to dividend reinvestments and exchanges) plus (2)
interest on the unpaid balance 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). The Distributor has voluntarily agreed to waive
interest charges on the unpaid balance in excess of 0.50% of eligible gross
sales.

23
<PAGE>

Consequently, the maximum amount payable to the Distributor (referred to as the
"voluntary maximum") 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 and any CDSCs will be paid to the Fund rather
than to the Distributor; however, the Fund will continue to make payments of
the account maintenance fee. In certain circumstances the amount payable
pursuant to the voluntary maximum may exceed the amount payable under the NASD
formula. In such circumstances, payments in excess of the amount payable under
the NASD formula will not be made.

REDEMPTION OF SHARES

The Trust is required to redeem for cash all full and fractional shares of
the Fund upon receipt of a written request in proper form. The redemption price
is the net asset value per share next determined after the initial receipt of
proper notice of redemption. Except for any CDSC which may be applicable to
Class B shares, 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 by tendering the shares
directly to the Transfer Agent, Financial Data Services, Inc., Transfer Agency
Mutual Fund Operations, P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., Transfer Agency Mutual Fund Operations, 4800
Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice of
redemption in the case of shares deposited with the Transfer Agent may be
accomplished by a written letter requesting redemption. Proper notice of
redemption in the case of shares for which certificates have been issued may be
accomplished by a written letter as noted above accompanied by certificates for
the shares to be redeemed. Redemption requests should not be sent to the Trust.
The notice in either event requires the signature(s) of all persons in whose
name(s) the shares are registered, signed exactly as such name(s) appear(s) on
the Transfer Agent's register. The signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution" as such term 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, payments will be
mailed within seven days of receipt of a proper notice of redemption.

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

REPURCHASE

The Trust also will repurchase Fund shares through a shareholder's listed
securities dealer. The Trust normally will accept orders to repurchase Fund
shares by wire or telephone from dealers for their customers

24
<PAGE>

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 New York Stock Exchange on the day received and is
received by the Fund from such dealer not later than 4:30 P.M., New York time,
on the same day.

Dealers have the responsibility of submitting such repurchase requests to the
Trust not later than 4:30 P.M., New York time, in order to obtain that day's
closing price. The repurchase arrangements are for the convenience of
shareholders and do not involve a charge by the Trust (other than the
applicable CDSC in the case of Class B shares); securities firms which do not
have selected dealer agreements with the Distributor, however, may impose a
charge on the shareholder for transmitting the notice of repurchase to the
Trust. Merrill Lynch may charge its customers a processing fee (presently
$4.85) to confirm a repurchase of shares of such customers. Redemptions
directly through the Fund's Transfer Agent are not subject to the processing
fee. The Trust reserves the right to reject any order for repurchase, which
right of rejection might adversely affect shareholders seeking redemption
through the repurchase procedure. However, a shareholder whose order for
repurchase is rejected by the Trust may redeem Fund shares as set forth above.

REINSTATEMENT PRIVILEGE -- CLASS A SHARES

Shareholders who have redeemed their Class A shares have a one-time privilege
to reinstate their accounts by purchasing Class A shares of the Fund at net
asset value without a sales charge up to the dollar amount redeemed. The
reinstatement privilege may be exercised by sending a notice of exercise along
with a check for the amount to be reinstated to the Transfer Agent within 30
days after the date the request for redemption was accepted by the Transfer
Agent or the Distributor. 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. The reinstatement is a
one-time privilege and may be exercised by the Class A shareholder only the
first time such shareholder makes a redemption.

SHAREHOLDER SERVICES

The Trust offers a number of shareholder services and investment plans
designed to facilitate investment in shares of the Fund. Full details as to
each of such services 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 Trust by calling the telephone number on the cover page hereof or from
the Distributor or Merrill Lynch. Included in such services are the following:

Investment Account. Each shareholder whose account (an "Investment Account")
is maintained at the Transfer Agent has an Investment Account and will receive
quarterly statements from the Transfer Agent. These quarterly statements will
serve as transaction confirmations for automatic investment purchases and the
reinvestment of taxable ordinary income dividends, tax-exempt income, 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
taxable ordinary income dividends, tax-exempt income, and long-term capital
gain distributions. A shareholder may make additions to his Investment Account
at any time by mailing a check directly to the Transfer Agent. Shareholders may
also maintain their accounts through Merrill Lynch. Upon the transfer of shares
out of a Merrill Lynch brokerage account, an Investment Account in the
transferring shareholder's name will be opened automatically, without charge,
at the Transfer Agent. Shareholders considering transferring their Class A
shares from Merrill Lynch

25
<PAGE>

to another brokerage firm or financial institution should be aware that, if the
firm to which the Class A shares are to be transferred will not take delivery
of shares of the Fund, a shareholder either must redeem the Class A shares 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 shares. Shareholders interested in
transferring their Class B 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. If the new brokerage firm is willing to accommodate the
shareholder in this manner, the shareholder must request that he be issued
certificates for his shares and then must turn the certificates over to the new
firm for re-registration as described in the preceding sentence.

Exchange Privilege. Shareholders of the Fund each have an exchange privilege
with certain other mutual funds sponsored by Merrill Lynch. There is currently
no limitation on the number of times a shareholder may exercise the exchange
privilege. The exchange privilege may be modified or terminated at any time in
accordance with the rules of the Commission. Class A shareholders of the Fund
may exchange their shares ("outstanding Class A shares") for Class A shares of
another fund ("new Class A shares") on the basis of relative net asset value
per Class A share, plus an amount equal to the difference, if any, between the
sales charge previously paid on the outstanding Class A shares and the sales
charge payable at the time of the exchange on the new Class A shares. However,
the Fund's exchange privilege is modified with respect to purchases of Class A
shares under the Merrill Lynch Mutual Fund Adviser program. First, the initial
allocation of assets is made under the program. Then, any subsequent exchange
under the program of Class A shares of a fund for Class A 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 fund and
the sales charge payable on the shares of the Fund being acquired in the
exchange under this program. The exchange privilege is available only to U.S.
shareholders in states where the exchange legally may be made.

Class B shareholders of the Fund may exchange their shares ("outstanding
Class B shares") for Class B shares of another fund ("new Class B shares") on
the basis of relative net asset value per share, without the payment of any
CDSC that might otherwise be due upon the redemption of the outstanding Class B
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 deferred sales charge 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 deferred sales charge schedule relating to the Class B shares
of the fund from which the exchange has been made. For purposes of computing
the CDSC that may be payable upon a disposition of the new Class B shares, the
holding period for the outstanding Class B shares is "tacked" to the holding
period of the new Class B shares. Class A and Class B shareholders of the Fund
may also exchange their shares for shares of certain money market funds, but in
the case of an exchange from Class B shares the period of time that shares are
held in a money market fund will not count toward satisfaction of the holding
period requirement for purposes of reducing the CDSC. Exercise of the exchange
privilege is treated as a sale for Federal income tax purposes. For further
information, see "Shareholder Services -- Exchange Privilege" in the Statement
of Additional Information.

The Fund's exchange privilege is modified with respect to purchases of Class
A shares under the Merrill Lynch Mutual Fund Adviser program. First, the
initial allocation of assets is made under the program. Then, any subsequent
exchange under the program of Class A shares of a fund for Class A 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

26
<PAGE>

fund and the sales charge payable on the shares of the Fund being acquired in
the exchange under this program.

Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are reinvested automatically in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share at the close of business on the monthly payment date for such
dividends and distributions. A shareholder may at any time, by written
notification or by telephone (1-800-MER-FUND) to the Transfer Agent, elect to
have subsequent dividends or both dividends and capital gains distributions
paid in cash, rather than reinvested, in which event payment will be mailed
monthly. No deferred sales charge will be imposed upon redemption of shares
issued as a result of the automatic reinvestment of dividends or capital gains
distributions.

Systematic Withdrawal and Automatic Investment Plans. A Class A shareholder
may elect to receive systematic withdrawal payments from his Investment Account
in the form of payment by check or through automatic payment by direct deposit
to his bank account on either a monthly or quarterly basis. A Class 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. Regular additions of both Class A and Class B shares may
be made to an investor's Investment Account by prearranged charges of $50 or
more to his regular bank account. The Fund's Automatic Investment Program is
not available to shareholders whose shares are held in a brokerage account with
Merrill Lynch. Alternatively, investors who maintain CMA(R) accounts may
arrange to have periodic investments made in the Fund in their CMA(R) account
or in certain related accounts in amounts of $100 or more through the CMA(R)
Automatic Investment Program.

PORTFOLIO TRANSACTIONS

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

27
<PAGE>

DISTRIBUTIONS AND TAXES

DISTRIBUTIONS

The net investment income of the Fund is declared as dividends daily
following the normal close of trading on the New York Stock Exchange (currently
4:00 P.M.) prior to the determination of the net asset value on that day. The
net investment income of the Fund for dividend purposes consists of interest
earned on portfolio securities, less expenses, in each case computed since the
most recent determination of the net asset value. Expenses of the Fund,
including the management fees and Class B account maintenance and distribution
fees, are accrued daily. Dividends of net investment income are declared daily
and reinvested monthly in the form of additional full and fractional shares of
the Fund at net asset value as of the close of business on the "payment date"
unless the shareholder elects to receive such dividends in cash. Shares will
accrue dividends as long as they are issued and outstanding. Shares are issued
and outstanding from the settlement date of a purchase order to the day prior
to settlement date of a redemption order.

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

The per share dividends and distributions on Class B shares will be lower
than per share dividends and distributions on Class A shares as a result of the
distribution and transfer agency fees applicable with respect to the Class B
shares. See "Additional Information--Determination of Net Asset Value".

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

TAXES

The Trust intends to elect and to qualify the Fund for the special tax
treatment afforded regulated investment companies ("RICs") under the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income and
90% of its tax-exempt net income (see below), the Fund (but not its
shareholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Trust
intends to cause the Fund to distribute substantially all of such income.

To the extent that the dividends distributed to the Fund's Class A and Class
B shareholders (together, the "shareholders") are derived from interest income
exempt from Federal income tax under Code Section 103(a), and are properly
designated as "exempt-interest dividends" by the Trust, they will be excludable
from a shareholder's gross income for Federal income tax purposes. Exempt-
interest dividends are included, however, in determining the portion, if any,
of a person's social security benefits and railroad retirement benefits subject
to Federal income taxes. The portion of such exempt-interest dividends paid
from interest received by the Fund from Connecticut Municipal Bonds will not be
subject to the Connecticut income tax on individuals, estates and trusts (the
"Connecticut income tax"). Distributions from the Fund to shareholders subject
to the Connecticut corporation business tax will be included in taxable income
to the extent such distributions are treated as exempt-interest dividends or
capital gains dividends. Shareholders subject to income taxation by states
other than Connecticut will realize a lower after-tax rate of return than

28
<PAGE>

Connecticut shareholders since the dividends distributed by the Fund generally
will not be exempt, to any significant degree, from income taxation by such
other states. The Trust will inform shareholders annually as to the portion of
the Fund's distributions which constitutes exempt-interest dividends and the
portion which is exempt from Connecticut income tax. Interest on indebtedness
incurred or continued to purchase or carry Fund shares is not deductible for
Federal income tax purposes to the extent attributable to exempt-interest
dividends, and such interest expense will not reduce taxable income under the
Connecticut income tax except to the extent reflected in Federal adjusted gross
income. Persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by industrial development bonds or
private activity bonds held by the Fund should consult their tax advisers
before purchasing Fund shares.

To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Such distributions
are not eligible for the dividends received deduction for corporations.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased at
a market discount will be treated as ordinary income rather than capital gain.
This rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. In addition, such loss will be disallowed to the extent of any
exempt-interest dividends received by the shareholder. If the Fund pays a
dividend in January which was declared in the previous October, November or
December to shareholders of record on a specified date in one of such months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.

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

The Revenue Reconciliation Act of 1993 has added new marginal tax brackets of
36% and 39.6% for individuals and has created a graduated structure of 26% and
28% for the alternative minimum tax

29
<PAGE>

applicable to individual taxpayers. These rate increases may affect an
individual investor's after-tax return from an investment in the Fund as
compared with such investor's return from taxable investments.

If a Class A shareholder exercises the 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 the sales charge
paid to the Fund reduces any sales charge such shareholder would have owed upon
purchase of the new Class A shares in the absence of the exchange privilege.
Instead, such sales charge will be treated as an amount paid for the new Class
A shares.

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

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

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

Shareholders are urged to consult their tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Connecticut) and with specific questions as to Federal, foreign,
state or local taxes.

PERFORMANCE DATA

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

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

30
<PAGE>

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

Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of the Fund's yield that is tax-exempt by (b)
one minus a stated tax rate and (c) adding the result to that part, if any, of
the Fund's yield that is not tax-exempt.

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

On occasion, the Fund may compare its performance to performance data
published by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar") and CDA Investment Technology, Inc., or to data contained in
publications such as Money Magazine, U.S. News & World Report, Business Week,
Forbes Magazine and Fortune Magazine. From time to time, the Fund may include
the Fund's Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered representative of the Fund's relative
performance for any future period.

ADDITIONAL INFORMATION

DETERMINATION OF NET ASSET VALUE

The net asset value of the Fund is determined by the Manager once daily as of
4:15 P.M., New York time, on each day during which the New York Stock Exchange
is open for trading. The net asset value per share is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other

31
<PAGE>

assets minus all liabilities by the total number of shares outstanding at such
time, rounded to the nearest cent. Expenses, including the fees payable to the
Manager and the Distributor, are accrued daily.

The net asset value per share of the Class A shares and the net asset value
per share of the Class B shares are expected to be equivalent. Under certain
circumstances, however, the per share net asset value of the Class B shares may
be lower than the per share net asset value of the Class A shares reflecting
the higher daily expense accruals of the deferred charges (and incremental
transfer agency costs) applicable with respect to the Class B shares. Even
under those circumstances, the per share net asset value of the two classes
eventually will tend to converge immediately after the payment of dividends,
which will differ by approximately the amount of the expense accrual
differential between the classes.

ORGANIZATION OF THE TRUST

The Trust is an unincorporated business trust organized on August 2, 1985
under the laws of Massachusetts. On October 1, 1987, the Trust changed its name
from "Merrill Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch
Multi-State Municipal Bond Series Trust" and on December 22, 1987 the Trust
changed its name to "Merrill Lynch Multi-State Municipal Series Trust". The
Trust is an open-end management investment company comprised of separate series
("Series"), each of which is a separate portfolio offering shares to selected
groups of purchasers. Each of the Series is to be managed independently in
order to provide to shareholders who are residents of the state to which such
Series relates as high a level of income exempt from Federal, state and local
income taxes as is consistent with prudent investment management. The Trustees
are authorized to create an unlimited number of Series and, with respect to
each Series, to issue an unlimited number of full and fractional shares of
beneficial interest of $.10 par value of different classes. Shareholder
approval is not required for the authorization of additional Series or classes
of a Series of the Trust. At the date of this Prospectus, the shares of the
Fund are divided into Class A shares and Class B shares. Both Class A and Class
B shares represent an interest in the same 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 account maintenance and
distribution of the Class B shares are borne solely by such class and Class B
shares have exclusive voting rights with respect to matters relating to such
distribution expenditures. See "Purchase of Shares". The Trust has received an
order (the "Order") from the Commission permitting the issuance and sale of
multiple classes of shares. The Order permits the Trust to issue additional
classes of shares of any Series if the Board of Trustees deems such issuance to
be in the best interest of the Trust.

Shareholders are entitled to one vote for each full share and to fractional
votes for fractional shares held in the election of Trustees (to the extent
hereinafter provided) and on other matters submitted to the vote of
shareholders. All shares of the Trust have equal voting rights, except that
only shares of the respective Series are entitled to vote on matters concerning
only that Series and, as noted above, only Class B shares of a Series will have
exclusive voting rights with respect to matters relating to the account
maintenance and distribution expenses being borne solely by such class. There
normally will be no meeting of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
Shareholders may, in accordance with the terms of the Declaration of Trust,
cause a meeting of shareholders to be held for the purpose of voting on the
removal of Trustees. Also, the Trust will be required to call a special meeting
of shareholders of a Series in accordance with the requirements of the 1940 Act
to seek approval of new management and advisory arrangements, of a material

32
<PAGE>

increase in distribution fees or of a change in the fundamental policies,
objectives or restrictions of a Series. Except as set forth above, the Trustees
shall continue to hold office and appoint successor Trustees. Each issued and
outstanding share is entitled to participate equally in dividends and
distributions declared by the respective Series and in net assets of such
Series upon liquidation or dissolution remaining after satisfaction of
outstanding liabilities except that, as noted above, expenses related to the
distribution of the Class B shares of a Series will be borne solely by such
class. The obligations and liabilities of a particular Series are restricted to
the assets of that Series and do not extend to the assets of the Trust
generally. The shares of each Series, when issued, will be fully-paid and non-
assessable by the Trust.

SHAREHOLDER REPORTS

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

Financial Data Services, Inc.
Attn: Document Evaluation Unit
P.O. Box 45290
Jacksonville, FL 32232-5290

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

SHAREHOLDER INQUIRIES

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

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

33
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK.]

34
<PAGE>

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND--AUTHORIZATION FORM
- -------------------------------------------------------------------------------
NOTE: THIS FORM MAY NOT BE USED FOR PURCHASES THROUGH THE MERRILL LYNCH
BLUEPRINTSM PROGRAM. YOU MAY REQUEST A MERRILL LYNCH BLUEPRINTSM PROGRAM
APPLICATION BY CALLING (800) 637-2434.
- -------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION

I, being of legal age, wish to purchase . . . . . . . Class A shares or
. . . . . . . Class B shares (choose one) of Merrill Lynch Connecticut
Municipal Bond Fund and establish an Investment Account as described in the
Prospectus.

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) (subsequent
investment $50 or more). 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:

1. ....................................... 4. ...............................

2. ....................................... 5. ...............................

3. ....................................... 6. ...............................

(Please list all Funds. Use a separate sheet of paper if necessary.)

Until you are notified by me in writing, the following options with
respect to dividends and distributions are elected:

Distribution Elect [_] reinvest dividends Elect [_] reinvest capital gains
Options One [_] pay dividends in cash One [_] pay capital gains in cash

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

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

(Please Print)
[_][_][_][_][_][_][_][_][_]
Name .............................................
First Name Initial Last Name Social Security
No. or Taxpayer
Identification
Name of Co-Owner (if any) ............................... No.
First Name Initial Last Name

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

.................................................. ................, 19. .
(Zip Code) Date

Occupation .............. Name and Address..................................

of Employer.......................................

..................................................
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I
am not subject to backup withholding (as discussed under "Distribution and
Taxes--Taxes" in the Prospectus) 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 UNDER-REPORTING,
AND IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS
BEEN TERMINATED.

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. LETTER OF INTENTION--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN THE
STATEMENT OF ADDITIONAL INFORMATION)
..............., 19...

Gentlemen: Date of initial
purchase

Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Connecticut Municipal Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which the Merrill Lynch
Funds Distributor, Inc. acts as a 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 Fund prospectus.

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

By .................................. .....................................
Signature of Owner Signature (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 ............................

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

35
<PAGE>

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND--AUTHORIZATION FORM
- --------------------------------------------------------------------------------
3.SYSTEMATIC WITHDRAWAL PLAN--CLASS A SHARES ONLY (SEE TERMS AND CONDITIONS IN
THE STATEMENT OF ADDITIONAL INFORMATION)
Minimum Requirements: $10,000 for monthly disbursements, $5,000 for
quarterly, of shares in Merrill Lynch Connecticut Municipal Bond Fund at cost
or current offering price.

Begin systematic withdrawal on . . . . . . . . . , 19. .
[date]

Withdrawals to be made either (check one) [_] Monthly [_] Quarterly. Quarterly
withdrawals are made on the 24th day of March, June, September and December.

Specify withdrawal amount (check one): [_] $ . . . . . . . or [_] . . . . .% of
the current value of Class A shares in the account
Specify withdrawal method: [_] check or [_] direct deposit to bank account
(CHECK ONE AND COMPLETE PART (A) OR (B) BELOW):

(A) I HEREBY AUTHORIZE PAYMENT (B) I HEREBY AUTHORIZE PAYMENT
BY CHECK BY DIRECT DEPOSIT TO BANK
ACCOUNT and (if necessary) debit
entries and adjustments for any
credit entries made in error to
my account

Draw checks payable
(check one) Specify type of account (check
[_] as indicated in item 1. one): [_] checking [_] savings
[_] to the order of ............ I agree that this authorization
will remain in effect until I
provide written notification to
Financial Data Services, Inc.
amending or terminating this
service.

Name on your Account ............
Mail to (check one) Bank .....................................
[_] the address indicated in Bank # ................ Account # ........
item 1.
[_] Name (Please Print) ........ Bank Address ....................

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

Signature of Depositor (if joint
Signature of Owner............... account) ........................
NOTE: IF AUTOMATIC DIRECT
DEPOSIT IS ELECTED, YOUR BLANK,
UNSIGNED CHECK MARKED "VOID" OR
A DEPOSIT SLIP FROM YOUR SAVINGS
ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.

Signature of Co-Owner (if any)...
- --------------------------------------------------------------------------------
4. APPLICATION FOR AUTOMATIC INVESTMENT PLAN
I hereby request that Financial Data Services, Inc. draw a check or an
automated clearing house ("ACH") debit on my checking account as described
below each month to purchase . . . . . Class A shares or . . . . . Class B
shares of Merrill Lynch Connecticut Municipal Bond Fund subject to the terms
set forth below.

FINANCIAL DATA SERVICES, INC. AUTHORIZATION TO HONOR CHECKS OR ACH
DEBITS
You are hereby authorized to DRAWN BY FINANCIAL DATA SERVICES, INC.
draw a check or an ACH debit To ...................................Bank
each month on my bank account (Investor's Bank)
for investment in Merrill Lynch Bank Address .............................
Connecticut Municipal Bond Fund City .......... State ..... Zip Code......
as indicated below:
Amount of each check or ACH
debit $ .....................
As a convenience to me, I hereby request
Account No. ................. and authorize you to pay and charge to my
Please date and invest account checks or ACH debits drawn on my
checks or draw ACH debits on account by and payable to Financial Data
the 20th of each month Services, Inc. I agree that your rights
beginning ................... in respect to each such check or debit
(Month) shall be the same as if it were a check
or as soon thereafter as drawn on you and signed personally by me.
possible. This authority is to remain in effect un-
til revoked personally by me in writing.
Until you receive such notice, you shall
I agree that you are preparing be fully protected in honoring any such
these checks or drawing these check or debit. I further agree that if
debits voluntarily at my request any such check or debit be dishonored,
and that you shall not be liable whether with or without cause and whether
for any loss arising from any intentionally or inadvertently, you shall
delay in preparing or failure to be under no liability.
prepare any such check or debit. ......... ...............................
If I change banks or desire to Date Signature of Depositor
terminate or suspend this pro- ......... ...............................
gram, I agree to notify you Bank Signature of Depositor
promptly in writing. Account (If joint account, both must
I further agree that if a check Number sign)
or debit is not honored upon NOTE: IF AUTOMATIC INVESTMENT PLAN IS
presentation, Financial Data ELECTED, YOUR BLANK, UNSIGNED CHECK
Services, Inc. is authorized to MARKED "VOID" SHOULD ACCOMPANY THIS
discontinue immediately the APPLICATION.
Automatic Investment Plan and to
liquidate sufficient shares held
in my account to offset the
purchase made with the returned
check or dishonored debit.
...... ......................
Date Signature of
Depositor
......................
Signature of
Depositor
(If joint account,
both must sign)
- --------------------------------------------------------------------------------
5. FOR DEALER ONLY
Branch Office, Address, Stamp We hereby authorize Merrill Lynch Funds
Distributor, Inc. to act as our agent in
- - connection with transactions under this au-
thorization form and agree to notify the
Distributor of any purchases made under a
Letter of Intention or Systematic With-
drawal Plan. We guarantee the Shareholder's
Signature.

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

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

36
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK.]

37
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK.]

38
<PAGE>

MANAGER

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

DISTRIBUTOR

Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey
Mailing Address:
Box 9011
Princeton, New Jersey 08543-9011

CUSTODIAN

National Westminster Bank NJ
100 Wall Street
20th Floor
New York, New York 10005

TRANSFER AGENT

Financial Data Services, Inc.
Administrative Offices:
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289

INDEPENDENT AUDITORS

Deloitte & Touche
117 Campus Drive
Princeton, New Jersey 08540

COUNSEL

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table................................................................. 3
Alternative Sales Arrangements............................................ 4
Investment Objective and Policies......................................... 6
Potential Benefits....................................................... 8
Special and Risk Considerations Relating to Connecticut Municipal Bonds.. 8
Description of Municipal Bonds........................................... 9
When-Issued Securities and Delayed Delivery Transactions................. 11
Call Rights.............................................................. 11
Financial Futures Transactions and Options............................... 12
Repurchase Agreements and Purchase and Sale Contracts.................... 14
Investment Restrictions.................................................. 14
Management of the Trust................................................... 16
Trustees................................................................. 16
Management and Advisory Arrangements..................................... 16
Transfer Agency Services................................................. 17
Purchase of Shares........................................................ 17
Subscription Offering.................................................... 17
Continuous Offering...................................................... 18
Alternative Sales Arrangements........................................... 19
Initial Sales Charge Alternative -- Class A Shares....................... 20
Deferred Sales Charge Alternative-- Class B Shares....................... 21
Redemption of Shares...................................................... 24
Redemption............................................................... 24
Repurchase............................................................... 24
Reinstatement Privilege -- Class A Shares................................ 25
Shareholder Services...................................................... 25
Portfolio Transactions.................................................... 27
Distributions and Taxes................................................... 28
Distributions............................................................ 28
Taxes.................................................................... 28
Performance Data.......................................................... 30
Additional Information.................................................... 31
Determination of Net Asset Value......................................... 31
Organization of the Trust................................................ 32
Shareholder Reports...................................................... 33
Shareholder Inquiries.................................................... 33
Authorization Form........................................................ 35
</TABLE>

Code # 18110-0594
Prospectus

[ART]

- -----------------------------------
MERRILL LYNCH
CONNECTICUT
MUNICIPAL BOND
FUND
MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST

May 16, 1994

Distributor:
Merrill Lynch
Funds Distributor, Inc.

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

STATEMENT OF ADDITIONAL INFORMATION
- -----------------------------------

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
BOX 9011, PRINCETON, NEW JERSEY 08543-9011--PHONE NO. (609) 282-2800

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

Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), an open-end
management investment company organized as a Massachusetts business trust. The
investment objective of the Fund is to provide shareholders with as high a
level of income exempt from Federal and Connecticut income taxes as is
consistent with prudent investment management. The Fund invests primarily in a
non-diversified portfolio of long-term investment grade obligations the
interest on which is exempt from Federal and Connecticut income taxes in the
opinion of bond counsel to the issuer ("Connecticut Municipal Bonds"). There
can be no assurance that the investment objective of the Fund will be realized.

The Fund offers two classes of shares which may be purchased during the
subscription offering at $10.00 per share and during the continuous offering at
a price equal to the next determined net asset value per share, plus in both
cases a sales charge which, at the election of the purchaser, may be imposed
(i) at the time of purchase (the "Class A shares"), or (ii) on a deferred basis
(the "Class B shares"). These alternatives permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
circumstances. Investors should understand that the purpose and function of the
deferred sales charge with respect to the Class B shares are the same as the
purpose and function of the initial sales charge with respect to the Class A
shares. Each Class A share and Class B share represents an identical interest
in the investment portfolio of the Fund and has the same rights, except that
Class B shares bear the expenses of the account maintenance and distribution
fees and certain other costs resulting from the deferred sales charge
arrangement and have exclusive voting rights with respect to the account
maintenance and distribution fees. The two classes also have different exchange
privileges.

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

The Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the prospectus of the Fund, dated May 16,
1994 (the "Prospectus"), which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by calling or by writing the
Fund at the above telephone number or address. This Statement of Additional
Information has been incorporated by reference into the Prospectus. Capitalized
terms used but not defined herein have the same meanings as in the Prospectus.

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

FUND ASSET MANAGEMENT--MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR

The date of this Statement of Additional Information is May 16, 1994
<PAGE>

INVESTMENT OBJECTIVE AND POLICIES

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

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

The Fund ordinarily does not intend to realize investment income not exempt
from Federal and Connecticut income taxes. However, to the extent that suitable
Connecticut Municipal Bonds are not available for investment by the Fund, the
Fund may purchase Municipal Bonds issued by other states, their agencies and
instrumentalities, the interest income on which is exempt, in the opinion of
bond counsel, from Federal but not Connecticut taxation. The Fund also may
invest in securities not issued by or on behalf of a state or territory or by
an agency or instrumentality thereof, if the Fund nevertheless believes such
securities to be exempt from Federal income taxation ("Non-Municipal Tax-Exempt
Securities"). Non-Municipal Tax-Exempt Securities may include securities issued
by other investment companies that invest in municipal bonds, to the extent
permitted by applicable law. Other Non-Municipal Tax-Exempt Securities also
could include trust certificates or other instruments evidencing interests in
one or more long-term municipal securities.

Except when acceptable securities are unavailable as determined by the
Manager, the Fund, under normal circumstances, will invest at least 65% of its
total assets in Connecticut Municipal Bonds. For temporary periods or to
provide liquidity, the Fund has the authority to invest as much as 35% of its
total assets in tax-exempt or taxable money market obligations with a maturity
of one year or less (such short-term obligations being referred to herein as
"Temporary Investments"), except that taxable Temporary Investments shall not
exceed 20% of the Fund's net assets. The Fund at all times will have at least
80% of its net assets invested in securities exempt from Federal income
taxation. However, interest received on

2
<PAGE>

certain otherwise tax-exempt securities which are classified as "private
activity bonds" (in general bonds that benefit non-governmental entities) may
be subject to an alternative minimum tax. The Fund may purchase such private
activity bonds. See "Distributions and Taxes". In addition, the Fund reserves
the right to invest temporarily a greater portion of its assets in Temporary
Investments for defensive purposes, when, in the judgment of the Manager,
market conditions warrant. The investment objective of the Fund set forth in
this paragraph is a fundamental policy of the Fund which may not be changed
without a vote of a majority of the outstanding shares of the Fund. The Fund's
hedging strategies are not fundamental policies and may be modified by the
Trustees of the Trust without the approval of the Fund's shareholders.

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

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

3
<PAGE>

Municipal Bond as a non-callable security. Certain investments in such
obligations may be illiquid. The Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments,
would exceed 15% of the Fund's net assets.

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

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

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

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

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

4
<PAGE>

accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations generally are available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.

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

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

DESCRIPTION OF MUNICIPAL BONDS AND TEMPORARY INVESTMENTS

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

DESCRIPTION OF MUNICIPAL BONDS

Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including construction of a wide range of public facilities,
refunding of outstanding obligations and obtaining funds for general operating
expenses and loans to other public institutions and facilities. In addition,
certain types of bonds are issued by or on behalf of public authorities to
finance various privately owned or operated facilities, including certain
facilities for local furnishing of electric energy or gas, sewage facilities,
solid waste disposal facilities and other specialized facilities. Such
obligations are included within the term Municipal Bonds if the interest paid
thereon is, in the opinion of bond counsel, excluded from gross income for
Federal income tax purposes and, in the case of Connecticut Municipal Bonds,
exempt from Connecticut income taxes. Other types of industrial development
bonds or private activity bonds, the proceeds of which are used for the
construction, equipment or improvement of privately operated industrial or
commercial facilities, may constitute Municipal Bonds, although the current
Federal tax laws place substantial limitations on the size of such issues.

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

5
<PAGE>

bonds depends solely on the ability of the user of the facility financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment, unless a line of
credit, bond insurance or other security is furnished. The Fund also may invest
in "moral obligation" bonds, which are normally issued by special purpose
public authorities. Under a moral obligation bond, if the issuer thereof is
unable to meet its obligations, the repayment of the bond becomes a moral
commitment, but not a legal obligation, of the state or municipality in
question.

Also included within the general category of Municipal Bonds are
participation certificates issued by government authorities or entities to
finance the acquisition or construction of equipment, land and/or facilities.
The certificates represent participations in a lease, an installment purchase
contract or a conditional sales contract (hereinafter collectively called
"lease obligations") relating to such equipment, land or facilities. Although
lease obligations do not constitute general obligations of the issuer for which
the issuer's unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuer's covenant to budget for, appropriate and make
the payments due under the lease obligation. Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 15% of the Fund's net assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the Manager,
pursuant to the guidelines which have been adopted by the Board of Trustees and
subject to the supervision of the Board of Trustees, determines to be liquid.
The Manager will deem lease obligations liquid if they are publicly offered and
have received an investment grade rating of Baa or better by Moody's, or BBB or
better by Standard & Poor's or Fitch. Unrated lease obligations, or those rated
below investment grade, will be considered liquid if the obligations come to
the market through an underwritten public offering and at least two dealers are
willing to give competitive bids. In reference to the latter, the Manager must,
among other things, also review the creditworthiness of the municipality
obligated to make payment under the lease obligation and make certain specified
determinations based on such factors as the existence of a rating or credit
enhancement such as insurance, the frequency of trades or quotes for the
obligation and the willingness of dealers to make a market in the obligation.

Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the financial condition of the issuer, the
general conditions of the Municipal Bond market, the maturity of the
obligation, and the rating of the issue. The ability of the Fund to achieve its
investment objective also is dependent on the continuing ability of the issuers
of the bonds in which the Fund invests to meet their obligations for the
payment of interest and principal when due. There are variations in the risks
involved in holding Municipal Bonds, both within a particular classification
and between classifications, depending on numerous factors. Furthermore, the
rights of owners of Municipal Bonds and the obligations of the issuer of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar
laws and court decisions affecting the rights of creditors generally.

DESCRIPTION OF TEMPORARY INVESTMENTS

The Fund may invest in short-term tax-free and taxable securities subject to
the limitations set forth under "Investment Objective and Policies". The tax-
exempt money market securities may include municipal notes, municipal
commercial paper, municipal bonds with remaining maturity of less than one
year, variable rate demand notes and participations therein. Municipal notes
include tax anticipation notes, bond anticipation notes and grant anticipation
notes. Anticipation notes are sold as interim financing in anticipation of tax
collection, bond sales, government grants or revenue receipts. Municipal
commercial paper refers to

6
<PAGE>

short-term unsecured promissory notes generally issued to finance short-term
credit needs. The taxable money market securities in which the Fund may invest
as Temporary Investments consist of U.S. Government securities, U.S. Government
agency securities, domestic bank or savings institution certificates of deposit
and bankers' acceptances, short-term corporate debt securities such as
commercial paper, and repurchase agreements. These Temporary Investments must
have a stated maturity not in excess of one year from the date of purchase.

Variable rate demand obligations ("VRDOs") are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and an
unconditional right of demand on the part of the holder thereof to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating
VRDOs, described below, may not be honored. The interest rates are adjustable
at intervals (ranging from daily to up to one year) to some prevailing market
rate for similar investments, such adjustment formula being calculated to
maintain the market value of the VRDO at approximately the par value of the
VRDOs on the adjustment date. The adjustments typically are set at a rate
determined by the remarketing agent or based upon the prime rate of a bank or
some other appropriate interest rate adjustment index. The Fund may invest in
all types of tax-exempt instruments currently outstanding or to be issued in
the future which satisfy the short-term maturity and quality standards of the
Fund.

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

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

The Trust has established the following standards with respect to money
market securities and VRDOs in which the Fund invests. Commercial paper
investments at the time of purchase must be rated "A-1" through "A-3" by
Standard & Poor's, "Prime-1" through "Prime-3" by Moody's or "F-1" through "F-
3" by Fitch or, if not rated, issued by companies having an outstanding debt
issue rated at least "A" by Standard & Poor's, Fitch or Moody's. Investments in
corporate bonds and debentures (which must have maturities at the date of
purchase of one year or less) must be rated at the time of purchase at least
"A" by Standard & Poor's, Moody's or Fitch. Notes and VRDOs at the time of
purchase must be rated SP-1/A-1 through SP-2/A-3 by Standard & Poor's, MIG-
l/VMIG-1 through MIG-4/VMIG-4 by Moody's or F-1 through F-3

7
<PAGE>

by Fitch. Temporary Investments, if not rated, must be of comparable quality to
securities rated in the above rating categories in the opinion of the Manager.
The Fund may not invest in any security issued by a commercial bank or a
savings institution unless the bank or institution is organized and operating
in the United States, has total assets of at least one billion dollars and is a
member of the Federal Deposit Insurance Corporation ("FDIC"), except that up to
10% of total assets may be invested in certificates of deposit of small
institutions if such certificates are insured fully by the FDIC.

REPURCHASE AGREEMENTS AND PURCHASE AND SALE CONTRACTS

The Fund may invest in securities pursuant to repurchase agreements or
purchase and sale contracts. Repurchase agreements and purchase and sale
contracts may be entered into only with a member bank of the Federal Reserve
System or primary dealer in U.S. Government securities. Under such agreements,
the bank or primary dealer agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This results in a fixed
rate of return insulated from market fluctuations during such period. In the
case of repurchase agreements, the prices at which the trades are conducted do
not reflect accrued interest on the underlying obligations; whereas, in the
case of purchase and sale contracts, the prices take into account accrued
interest. Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the purchaser.
In the case of a repurchase agreement, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement;
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 only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. 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 will depend on
intervening fluctuations of the market value of such security and the accrued
interest on the security. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. The Fund may not
invest in repurchase agreements or purchase and sale contracts maturing in more
than seven days if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's net assets. While the substance of
purchase and sale contracts is similar to repurchase agreements, because of the
different treatment with respect to accrued interest and additional collateral,
management believes that purchase and sale contracts are not repurchase
agreements as such term is understood in the banking and brokerage community.

In general, for Federal income tax purposes, repurchase agreements are
treated as collateralized loans secured by the securities "sold". Therefore,
amounts earned under such agreements will not be considered tax-exempt
interest. The treatment of purchase and sale contracts is less certain.
However, it is likely that income from such arrangements also will not be
considered tax-exempt interest.

FINANCIAL FUTURES TRANSACTIONS AND OPTIONS

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

8
<PAGE>

As described in the Prospectus, the Fund may purchase and sell exchange
traded financial futures contracts ("financial futures contracts") to hedge its
portfolio of Municipal Bonds against declines in the value of such securities
and to hedge against increases in the cost of securities the Fund intends to
purchase. However, any transactions involving financial futures or options (or
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. See "Investment Objective and Policies--
Investment Restrictions" in the Prospectus. To hedge its portfolio, the Fund
may take an investment position in a futures contract which will move in the
opposite direction from the portfolio position being hedged. While the Fund's
use of hedging strategies is intended to moderate capital changes in portfolio
holdings and thereby reduce the volatility of the net asset value of Fund
shares, the Fund anticipates that its net asset value will fluctuate. Set forth
below is information concerning futures transactions.

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

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

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

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

As described in the Prospectus, the Fund may purchase and sell financial
futures contracts on U.S. Government securities as a hedge against adverse
changes in interest rates as described below. With respect to U.S. Government
securities, currently there are financial futures contracts based on long-term
U.S.

9
<PAGE>

Treasury bonds, Treasury notes, Government National Mortgage Association
("GNMA") Certificates and three-month U.S. Treasury bills. The Fund may
purchase and write call and put options on futures contracts on U.S. Government
securities in connection with its hedging strategies.

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

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

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

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

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

10
<PAGE>

Put Options on Futures Contracts. The purchase of options on a futures
contract is analogous to the purchase of protective put options on portfolio
securities. The Fund will purchase put options on futures contracts to hedge
the Fund's portfolio against the risk of rising interest rates.

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

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

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

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

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

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

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

11
<PAGE>

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

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

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

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

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

Municipal Bond Index futures contracts have only recently been approved for
trading and therefore have little trading history. It is possible that trading
in such futures contracts will be less liquid than that in other futures
contracts. The trading of futures contracts also is subject to certain market
risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.

12
<PAGE>

INVESTMENT RESTRICTIONS

The Trust has adopted a number of 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 1940
Act means the lesser of (i) 67% of the Fund's shares present at a meeting at
which more than 50% of the outstanding shares of the Fund are represented or
(ii) more than 50% of the Fund's outstanding shares). The Fund may not (1)
purchase any securities other than securities referred to under "Investment
Objective and Policies" herein and in the Prospectus; (2) invest more than 25%
of its total assets (taken at market value at the time of each investment) in
securities of issuers in any particular industry (other than U.S. Government
securities or Government agency securities, Municipal Bonds and Non-Municipal
Tax-Exempt Securities); (3) invest more than 10% of its total assets (taken at
market value at the time of each investment) in industrial revenue bonds where
the entity supplying the revenues from which the issuer is to be paid, and the
guarantor of the obligation, including predecessors, each have a record of less
than three years of continuous business operation; (4) make investments for the
purpose of exercising control or management; (5) purchase securities of other
investment companies, except in connection with a merger, consolidation,
acquisition or reorganization, and provided further that the Fund may purchase
securities of closed-end investment companies if immediately thereafter not
more than (i) 3% of the total outstanding voting stock of such company is owned
by the Fund, (ii) 5% of the Fund's total assets, taken at market value, would
be invested in any one such company, or (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities; (6) purchase or
sell real estate (including limited partnership interests, but provided that
such restriction shall not apply to readily marketable securities secured by
real estate or interests therein or issued by companies which invest in real
estate or interests therein), commodities or commodity contracts (except that
the Fund may purchase and sell financial futures contracts), interests in oil,
gas or other mineral exploration or development programs or leases; (7)
purchase any securities on margin, except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities (the
deposit or payment by the Fund of initial or variation margin in connection
with financial futures contracts is not considered the purchase of a security
on margin); (8) make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options (this restriction does not
apply to options on financial futures contracts); (9) make loans to other
persons, provided that the Fund may purchase a portion of an issue of tax-
exempt securities (the acquisition of a portion of an issue of tax-exempt
securities or bonds, debentures or other debt securities which are not publicly
distributed is considered to be the making of a loan under the 1940 Act) and
provided further that investments in repurchase agreements and purchase and
sale contracts shall not be deemed to be the making of a loan; (10) borrow
amounts in excess of 20% of its total assets, taken at market value (including
the amount borrowed), and then only from banks as a temporary measure for
extraordinary or emergency purposes [Usually only "leveraged" investment
companies may borrow in excess of 5% of their assets; however, the Fund will
not borrow to increase income but only to meet redemption requests which might
otherwise require untimely disposition of portfolio securities. The Fund will
not purchase securities while borrowings are outstanding. Interest paid on such
borrowings will reduce net income]; (11) mortgage, pledge, hypothecate or in
any manner transfer as security for indebtedness any securities owned or held
by the Fund except as may be necessary in connection with borrowings mentioned
in (10) above, and then such mortgaging, pledging or hypothecating may not
exceed 10% of its total assets, taken at market value, or except as may be
necessary in connection with transactions in financial futures contracts; (12)
invest in securities which cannot be readily resold because of legal or
contractual restrictions or which are not readily marketable, including
individually negotiated loans that constitute illiquid investments and illiquid
lease obligations, or in repurchase agreements or purchase and sale contracts
maturing in more than seven days,

13
<PAGE>

if, regarding all such securities, more than 15% of its net assets (taken at
market value), would be invested in such securities; and (13) act as an
underwriter of securities, except to the extent that the Fund may technically
be deemed an underwriter when engaged in the activities described in (12) above
or insofar as the Fund may be deemed an underwriter under the Securities Act of
1933, as amended, in selling portfolio securities.

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

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

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

The Trustees and executive officers of the Trust and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each Trustee and executive officer is Box 9011,
Princeton, New Jersey 08543-9011.

Arthur Zeikel--President and Trustee(1)(2)--President and Chief Investment
Officer of Fund Asset Management, L.P. (the "Manager") since 1977; President of
Merrill Lynch Asset Management, L.P. ("MLAM") since 1977 and Chief Investment
Officer thereof since 1976; President and Director of Princeton Services, Inc.
("Princeton Services") since 1993; Executive Vice President of Merrill Lynch &
Co., Inc. since 1990; Executive Vice President of Merrill Lynch since 1990 and
a Senior Vice President thereof from 1985 to 1990; Director of Merrill Lynch
Funds Distributor, Inc. ("MLFD" or the "Distributor").

Kenneth S. Axelson--Trustee(2)--75 Jameson Point Road, Rockland, Maine 04841.
Executive Vice President and Director, J.C. Penney Company, Inc. until 1982;
Director, UNUM Corporation, Protection Mutual Insurance Company, Zurn
Industries, Inc. and, until 1994, Grumman Corporation, and, until 1992, of
Central Maine Power Company and Key Trust Company of Maine; Trustee, The
Chicago Dock and Canal Trust.

14
<PAGE>

Robert R. Martin--Trustee(2)--513 Grand Hill, St. Paul, Minnesota 55102.
Chairman, WTC Industries, Inc. since 1994; Chairman and Chief Executive
Officer, Kinnard Investments, Inc. from 1990 to 1993; Executive Vice President,
Dain Bosworth from 1974 to 1989; Director, Carnegie Capital Management from
1977 to 1985 and Chairman thereof in 1979; Director, Securities Industry
Association from 1981 to 1982 and Public Securities Association from 1979 to
1980; Trustee, Northland College since 1992.

Herbert I. London--Trustee(2)--New York University--Gallatin Division, 113-
115 University Place, New York, New York 10003. Dean, Gallatin Division of New
York University from 1978 to 1993 and Director from 1975 to 1976; Professor,
New York University since 1973; John M. Olin, Professor of Humanities, New York
University since 1993; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Trustee, Hudson Institute since 1980; Director,
Damon Corporation since 1991; Overseer, Center for Naval Analyses.

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

Andre F. Perold--Trustee(2)--Morgan Hall, Soldiers Field, Boston,
Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund, since 1989;
Director, Quantec Investment Technology (a private United Kingdom company).

Terry K. Glenn--Executive Vice President(1)(2)--Executive Vice President of
the Manager and MLAM since 1983; Executive Vice President and Director of
Princeton Services since 1993; President of MLFD since 1986 and Director
thereof since 1991.

Vincent R. Giordano--Vice President and Portfolio Manager(1)(2)--Portfolio
Manager of the Manager and MLAM since 1977 and Senior Vice President of the
Manager and MLAM since 1984; Vice President of MLAM from 1980 to 1984; Senior
Vice President of Princeton Services since 1993.

Kenneth A. Jacob--Vice President and Portfolio Manager(1)(2)--Vice President
of the Manager and MLAM since 1984.

Donald C. Burke--Vice President(1)(2)--Vice President and Director of
Taxation of MLAM since 1990; Employee of Deloitte & Touche from 1982 to 1990.

Gerald M. Richard--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Manager and MLAM since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Treasurer of MLFD since 1984 and Vice President
since 1981.

Jerry Weiss--Secretary(1)(2)--Vice President of MLAM since 1990; Attorney in
private practice from 1982 to 1990.
- --------
(1) Interested person, as defined in the 1940 Act, of the Trust.
(2) Such Trustee or officer is a director or officer of certain other
investment companies for which the Manager or MLAM acts as investment
adviser or manager.

15
<PAGE>

At March 31, 1994, the Trustees and officers of the Trust as a group (12
persons) owned an aggregate of less than 1/4 of 1% of the outstanding shares of
Common Stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of the Fund.

The Trust pays each Trustee not affiliated with the Manager a fee of $10,000
per year plus $1,000 per meeting attended, together with such Trustee's actual
out-of-pocket expenses relating to attendance at meetings. The Trust also
compensates members of its Audit Committee, which consists of all the non-
affiliated Trustees.

MANAGEMENT AND ADVISORY ARRANGEMENTS

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

Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Manager or its
affiliates. Because of different objectives or other factors, a particular
security may be bought for one or more clients when one or more clients are
selling the same security. If the Manager or its affiliates purchase or sell
securities for the Fund or other funds for which they act as manager or for
their advisory clients and such sales or purchases arise for consideration at
or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of
the Manager or its affiliates during the same period may increase the demand
for securities being purchased or the supply of securities being sold, there
may be an adverse effect on price.

Pursuant to a management agreement between the Trust on behalf of the Fund
and the Manager (the "Management Agreement"), the Manager receives for its
services to the Fund monthly compensation based upon the average daily net
assets of the Fund at the following annual rates: 0.55% of the average daily
net assets not exceeding $500 million; 0.525% of the average daily net assets
exceeding $500 million but not exceeding $1.0 billion; and 0.50% of the average
daily net assets exceeding $1.0 billion.

The Management Agreement obligates the Manager to provide investment advisory
services and to pay all compensation of and furnish office space for officers
and employees of the Trust connected with investment and economic research,
trading and investment management of the Trust, as well as the compensation of
all Trustees of the Trust who are affiliated persons of the Manager or any of
its subsidiaries. The Fund pays all other expenses incurred in its operation
and, if other Series shall be added ("Series"), a portion of the Trust's
general administrative expenses will be allocated on the basis of the asset
size of the respective Series. Expenses that will be borne directly by the
Series include, among other things, redemption expenses, expenses of portfolio
transactions, expenses of registering the shares under Federal and state
securities laws, pricing costs (including the daily calculation of net asset
value), expenses of printing shareholder reports, prospectuses and statements
of additional information (except to the extent paid by the Distributor as
described below), fees for legal and auditing services, Commission fees,
interest, certain taxes, and other expenses attributable to a particular Series.
Expenses which will be allocated on the basis of asset size of the respective
Series include fees and expenses of unaffiliated Trustees, state franchise
taxes, costs of printing proxies and other expenses related to shareholder
meetings, and other expenses properly payable by the Trust. The organizational
expenses of the Trust were paid by the Trust, and as additional Series are added
to the

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<PAGE>

Trust, the organizational expenses are allocated among the Series (including
the Fund) in a manner deemed equitable by the Trustees. Depending upon the
nature of a lawsuit, litigation costs may be assessed to the specific Series to
which the lawsuit relates or allocated on the basis of the asset size of the
respective Series. The Trustees have determined that this is an appropriate
method of allocation of expenses. Accounting services are provided to the Fund
by the Manager and the Fund reimburses the Manager for its costs in connection
with such services. As required by the Fund's distribution agreements, the
Distributor will pay the promotional expenses of the Fund incurred in
connection with the offering of shares of the Fund. Certain expenses in
connection with account maintenance and the distribution of Class B shares will
be financed by the Fund pursuant to the Distribution Plan in compliance with
Rule 12b-1 under the 1940 Act. See "Purchase of Shares--Deferred Sales Charge
Alternative--Class B Shares--Distribution Plan".

The Manager is a limited partnership, the partners of which are Merrill Lynch
& Co., Inc., Fund Asset Management, Inc. and Princeton Services, Inc.

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

PURCHASE OF SHARES

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

ALTERNATIVE SALES ARRANGEMENTS

The Fund issues two classes of shares: Class A shares are sold to investors
choosing the initial sales charge alternative and Class B shares are sold to
investors choosing the deferred sales charge alternative. The two classes of
shares each represents an interest in the same portfolio of investments of the
Fund, has the same rights and is identical in all respects, except that Class B
shares bear the expenses of the deferred sales arrangements and any expenses
(including incremental transfer agency costs) resulting from such sales
arrangements and the expenses paid by the account maintenance fee. The two
classes also have different exchange privileges. See "Shareholder Services--
Exchange Privilege".

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

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<PAGE>

INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES

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

REDUCED INITIAL SALES CHARGES--CLASS A SHARES

Right of Accumulation. Reduced sales charges are applicable through a right
of accumulation under which eligible investors are permitted to purchase Class
A shares of the Fund at the offering price applicable to the total of (a) the
dollar amount 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 the Class A shares and Class B shares of the Fund and of any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser or the purchaser's securities dealer, with
sufficient information to permit confirmation of qualification. Acceptance of
the purchase order is subject to such confirmation. The right of accumulation
may be amended or terminated at any time.

Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A shares of the Fund or any other
investment company with an initial sales charge or a deferred sales charge for
which the Distributor acts as the distributor 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 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 shares of the Fund and of other investment companies with an initial
sales charge or a deferred sales charge for which the Distributor acts as the
distributor presently held, at cost or maximum offering price (whichever is
higher), on the date of the first purchase under the Letter of Intention, may
be included as a credit toward the completion of such Letter, but the reduced
sales charge applicable to the amount covered by such Letter will be applied
only to new purchases. If the total amount of shares does not equal the amount
stated in the Letter of Intention (minimum of $25,000), the investor will be
notified and must pay, within 20 days of the expiration of such Letter, the
difference between the sales charge on the Class A shares purchased at the
reduced rate

18
<PAGE>

and the sales charge applicable to the shares actually purchased through the
Letter. Class A 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 during the term of such Letter, a purchase brings the
total amount invested to an amount equal to or in excess of the amount
indicated in the Letter, the purchaser will be entitled on that purchase and
subsequent purchases to the reduced percentage sales charge which 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 Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Reserves Money Fund, Merrill Lynch U.S.
Treasury Money Fund or Merrill Lynch U.S.A. Government Reserves into the Fund
that creates a sales charge will count toward completing a new or existing
Letter of Intention from the Fund.

Purchase Privilege of Certain Persons. Trustees of the Trust and directors or
trustees of other Merrill Lynch-sponsored investment companies, directors of
Merrill Lynch & Co., Inc., employees of Merrill Lynch & Co., Inc. and its
subsidiaries 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. Under
such programs, the Fund realizes economies of scale and reduction of sales
related expenses by virtue of familiarity with the Fund.

Class A shares of the Fund will be offered at net asset value, without 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 purchase Class A shares of
the Fund with proceeds from a redemption of shares of a mutual fund that was
sponsored by the financial consultant's previous firm and imposed a sales
charge either at the time of purchase or on a deferred basis. Second, such
redemption must have been made within 60 days prior to the investment in the
Fund, and the proceeds from the redemption must have been maintained in the
interim in cash or a money market fund.

Closed-End Fund Option. Class A shares of the Fund and certain other mutual
funds advised by the Manager or MLAM (the "Eligible Class A shares") are
offered at net asset value to shareholders of certain closed-end funds advised
by the Manager or MLAM who wish to reinvest the net proceeds of a sale of their
closed-end fund shares of common stock in Eligible Class A shares, if the
conditions set forth below are satisfied. First, the sale of closed-end fund
shares must be made through Merrill Lynch, and the net proceeds therefrom must
be immediately reinvested in Eligible Class A shares. Second, the closed-end
fund shares must have either 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. Class A
shares of the Fund are offered at net asset value to shareholders of Merrill
Lynch Senior Floating Rate Fund, Inc. (formerly Merrill Lynch Prime Fund, Inc.)
("Senior Floating Rate Fund") who wish to reinvest the net proceeds from a sale
of certain of their shares of common stock of Senior Floating Rate Fund in
shares of the Fund. In order to exercise this investment option, Senior
Floating Rate Fund shareholders must sell their Senior Floating Rate shares to
the Senior Floating Rate Fund in connection with a tender offer conducted by
the Senior Floating Rate Fund and reinvest the proceeds

19
<PAGE>

immediately in the Fund. This investment option is available only with respect
to the proceeds of Senior Floating Rate Fund shares as to which no Early
Withdrawal Charge (as defined in the Senior Floating Rate Fund prospectus) is
applicable. Purchase orders from Senior Floating Rate Fund shareholders wishing
to exercise this investment option will be accepted only on the day that the
related Senior Floating Rate Fund tender offer terminates and will be effected
at the net asset value of the Fund at such day.

Acquisition of Certain Investment Companies. The public offering price of
Class A shares may be reduced to the net asset value per Class A share in
connection with the acquisition of the assets of or merger or consolidation
with a personal holding company or a public or private investment company. The
value of the assets or company acquired in a tax-free transaction may be
adjusted in appropriate cases to reduce possible adverse tax consequences to
the Fund which 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.

DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES

Distribution Plan. Reference is made to "Purchase of Shares--Distribution
Plan" in the Prospectus for certain information with respect to the
Distribution Plan of the Fund.

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

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 only for any period during which trading on the New
York Stock Exchange is restricted as determined by

20
<PAGE>

the Commission or such Exchange 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.

CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES

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

PORTFOLIO TRANSACTIONS

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

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

As a non-fundamental restriction, the Trust will prohibit the purchase or
retention by the Fund of the securities of any issuer if the officers,
directors or trustees of the Trust or the Manager owning beneficially more than
one-half of one per cent of the securities of an issuer together own
beneficially more than five per cent of the securities of that issuer. In
addition, under the 1940 Act, the Fund may not purchase securities during the
existence of any underwriting syndicate of which Merrill Lynch is a member
except pursuant to an exemptive order or rules adopted by the Commission. Rule
10f-3 under the 1940 Act sets forth conditions under which the Fund may
purchase municipal bonds in such transactions. The rule sets forth requirements
relating to, among other things, the terms of an issue of municipal bonds
purchased by the Fund, the amount of municipal bonds which may be purchased in
any one issue and the assets of the Fund which may be invested in a particular
issue.

The Fund does not expect to use any particular dealer in the execution of
transactions but, subject to obtaining the best net results, dealers who
provide supplemental investment research (such as information

21
<PAGE>

concerning tax-exempt securities, economic data and market forecasts) to the
Manager may receive orders for transactions by the Fund. Information so
received will be in addition to and not in lieu of the services required to be
performed by the Manager under its Management Agreement and the expenses of the
Manager will not necessarily be reduced as a result of the receipt of such
supplemental information.

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

Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such action, for defensive or other reasons, appears
advisable to its Manager. While it is not possible to predict turnover rates
with any certainty, at present it is anticipated that the Fund's annual
portfolio turnover rate, under normal circumstances after the Fund's portfolio
is invested in accordance with its investment objective, will be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average of the value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate, all
securities whose maturities at the time of acquisition are one year or less are
excluded.)

DETERMINATION OF NET ASSET VALUE

The net asset value of the Fund is determined by the Manager once daily,
Monday through Friday, as of 4:15 P.M., New York City time, on each day during
which the New York Stock Exchange is open for trading. The New York Stock
Exchange is not open on New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset
value per share is computed by dividing the sum of the value of the securities
held by the Fund plus any cash or other assets minus all liabilities by the
total number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Manager and Distributor, are
accrued daily. The net asset value per share of the Class A shares and the net
asset value per share of the Class B shares are expected to be equivalent.
Under certain circumstances, however, the per share net asset value of the
Class B shares may be lower than the per share net asset value of the Class A
shares reflecting the higher daily expense accruals of the account maintenance
and distribution fees (and incremental transfer agency costs) applicable with
respect to the Class B shares. Even under those circumstances, the per share
net asset value of the two classes will tend to converge immediately after the
payment of dividends, which will differ by approximately the amount of the
expense accrual differential between the classes.

The Municipal Bonds, and other portfolio securities in which the Fund invests
are traded primarily in over-the-counter municipal bond and money markets and
are valued at the last available bid price in the over-the-counter market or on
the basis of yield equivalents as obtained from one or more dealers that make
markets in the securities. One bond is the "yield equivalent" of another bond
when, taking into account market price, maturity, coupon rate, credit rating
and ultimate return of principal, both bonds will theoretically produce an
equivalent return to the bondholder. Financial futures contracts and options
thereon, which are traded on exchanges, are valued at their settlement prices
as of the close of such exchanges. Short-term investments with a remaining
maturity of 60 days or less are valued on an amortized cost basis, which

22
<PAGE>

approximates market value. Securities and assets for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Trustees of the Trust, including valuations
furnished by a pricing service retained by the Trust, which may utilize a
matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general
supervision of the Trustees.

SHAREHOLDER SERVICES

The Trust offers a number of shareholder services described below which are
designed to facilitate investment in shares of the Fund. Full details as to
each of such services can be obtained from the Trust, the Distributor or
Merrill Lynch.

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive quarterly statements from the Transfer
Agent. These quarterly statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of taxable ordinary income
dividends, tax-exempt income, 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 taxable ordinary income dividends,
tax-exempt income, and long-term capital gain distributions. Shareholders
considering transferring their Class A shares from Merrill Lynch to another
brokerage firm or financial institution should be aware that, if the firm to
which the Class A shares are to be transferred will not take delivery of shares
of the Fund, a shareholder either must redeem the Class A shares 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 shares. Shareholders interested in transferring their
Class B 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. If the new brokerage
firm is willing to accommodate the shareholder in this manner, the shareholder
must request that he be issued certificates for his shares, and then must turn
the certificates over to the new firm for re-registration as described in the
preceding sentence. A shareholder may make additions to his Investment Account
at any time by mailing a check directly to the Transfer Agent.

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

AUTOMATIC INVESTMENT PLAN

A shareholder may make additions to an Investment Account at any time by
purchasing Class A or Class B shares at the applicable public offering price
either through the shareholder's securities dealer, or by mail directly to the
Transfer Agent, acting as agent for such securities dealers. Voluntary
accumulation also can be made through a service known as the Automatic
Investment Plan whereby the Fund is authorized through pre-authorized checks 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. The Fund's Automatic Investment Program is not available to
shareholders whose shares are held in brokerage account with Merrill Lynch.
Alternatively, investors who maintain CMA(R) accounts may arrange to have
periodic investments made in the Fund in their CMA(R) account or in certain
related accounts in amounts of $100 or more through the CMA(R) Automatic
Investment Program.

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<PAGE>

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will be
reinvested automatically in additional shares of the Fund. Such reinvestment
will be at the net asset value of shares of the Fund as of the close of
business on the monthly payment date for such dividends and distributions.
Shareholders may elect in writing to receive either their income dividends or
capital gains distributions, or both, in cash, in which event payment will be
mailed on or about the payment date.

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

SYSTEMATIC WITHDRAWAL PLANS--CLASS A SHARES

A Class A shareholder may elect to make systematic withdrawals from an
Investment Account on either a monthly or quarterly basis as provided below.
Quarterly withdrawals are available for shareholders who have acquired Class A
shares of the Fund having a value, based on cost or the current offering price,
of $5,000 or more, and monthly withdrawals for shareholders with Class A shares
with such a value of $10,000 or more.

At the time of each withdrawal payment, sufficient Class A 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
either a dollar amount or a percentage of the value of his Class A shares.
Redemptions will be made at net asset value as determined at the normal close
of business on the New York Stock Exchange (currently 4:00 P.M., New York City
time) on the 24th day of each month or the 24th day of the last month of each
quarter, whichever is applicable. If the Exchange is not open for business on
such date, the Class A shares will be redeemed at the close of business on the
following business day. The check for the withdrawal payment will be mailed, or
the direct deposit for the withdrawal payment will be made, on the next
business day following redemption. When a shareholder is making systematic
withdrawals, dividends and distributions on all Class A shares in the
Investment Account are reinvested automatically in the Fund's Class A shares. A
shareholder's Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, the Trust, the Transfer Agent or the
Distributor. Withdrawal payments should not be considered as dividends, yield
or income. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be reduced correspondingly. Purchases of additional Class A shares
concurrent with withdrawals are ordinarily disadvantageous to the shareholder
because of sales charges and tax liabilities. The Trust will not knowingly
accept purchase orders for Class A 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.

A Class 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. The minimum fixed dollar amount redeemable is $25. The proceeds of
systematic redemptions will be posted to the shareholder's account five
business days after the date the shares

24
<PAGE>

are redeemed. Monthly systematic redemptions will be made at net asset value on
the first Monday of each month, bimonthly systematic redemption will be made at
net asset value on the first Monday of every other month, and quarterly,
semiannual or annual redemptions are made at net asset value on the first
Monday of months selected at the shareholder's option. If the first Monday of
the month is a holiday, the redemption will be processed at net asset value on
the next business day. The Systematic Redemption Program is not available if
Company shares are being purchased within the account pursuant to the Automatic
Investment Program. For more information on the Systematic Redemption Program,
eligible shareholders should contact their Financial Consultant.

EXCHANGE PRIVILEGE

Class A and Class B shareholders of the Fund may exchange their Class A or
Class B shares of the Fund for shares of the same class of Merrill Lynch
Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas Income Fund,
Inc., Merrill Lynch Arizona Limited Maturity Municipal Bond Fund, Merrill Lynch
Arizona Municipal Bond Fund, Merrill Lynch Balanced Fund for Investment and
Retirement, Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Insured Municipal Bond Fund, Merrill Lynch California Limited Maturity
Municipal Bond Fund, Merrill Lynch California Municipal Bond Fund, Merrill
Lynch Capital Fund, Inc., Merrill Lynch Colorado Municipal Bond Fund, Merrill
Lynch Corporate Bond Fund, Inc., Merrill Lynch Developing Capital Markets Fund,
Inc. (shares of which are deemed Class A shares for purposes of the exchange
privilege), Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Federal Securities Trust, Merrill Lynch Florida Limited Maturity
Municipal Bond Fund, Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch
Fund For Tomorrow, Inc., Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings (residents of Arizona must meet investor suitability
standards), Merrill Lynch Global Resources Trust, Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Growth Fund for Investment and Retirement, Merrill
Lynch Healthcare Fund, Inc. (residents of Wisconsin must meet investor
suitability standards), Merrill Lynch International Equity Fund, Merrill Lynch
Latin America Fund, Inc., Merrill Lynch Maryland Municipal Bond Fund, Merrill
Lynch Massachusetts Limited Maturity Municipal Bond Fund, Merrill Lynch
Massachusetts Municipal Bond Fund, Merrill Lynch Michigan Limited Maturity
Municipal Bond Fund, Merrill Lynch Michigan Municipal Bond Fund, Merrill Lynch
Minnesota Municipal Bond Fund, Merrill Lynch Municipal Bond Fund, Inc., Merrill
Lynch Municipal Intermediate Term Fund, Merrill Lynch New Jersey Limited
Maturity Municipal Bond Fund, Merrill Lynch New Jersey Municipal Bond Fund,
Merrill Lynch New Mexico Municipal Bond Fund, Merrill Lynch New York Limited
Maturity Municipal Bond Fund, Merrill Lynch New York Municipal Bond Fund,
Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal
Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Pennsylvania Limited Maturity Municipal Bond Fund,
Merrill Lynch Pennsylvania Municipal Bond Fund, Merrill Lynch Phoenix 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 Texas Municipal Bond Fund, Merrill Lynch
Utility Income Fund, Inc. and Merrill Lynch World Income Fund, Inc., on the
basis described below. In addition, Class A shareholders of the Fund may
exchange their Class A shares for shares of Merrill Lynch U.S.A. Government
Reserves, Merrill Lynch U.S. Treasury Money Fund and Merrill Lynch Ready Assets
Trust (or Merrill Lynch Retirement Reserves Money Fund if the exchange occurs
within certain retirement plans) (together, the "Class A money market funds")
and Class B shareholders of the Fund may exchange their Class B shares for
shares of Merrill Lynch Government Fund, Merrill Lynch Institutional Fund,
Merrill

25
<PAGE>

Lynch Treasury Fund and Merrill Lynch Institutional Tax-Exempt Fund (together,
the "Class B money market funds") on the basis described below. Shares with a
net asset value of at least $250 are required to qualify for the exchange
privilege and any shares utilized in an exchange must have been held by the
shareholder for at least 15 days. Certain funds into which exchanges may be
made may impose a redemption fee (not in excess of 2.00% of the amount
redeemed) on shares purchased through the exchange privilege when such shares
are subsequently redeemed, including redemption through subsequent exchanges.
Such redemption fee would be in addition to any contingent deferred sales
charge otherwise applicable to a redemption of Class B shares. It is
contemplated that the exchange privilege may be applicable to other new mutual
funds whose shares may be distributed by the Distributor. The exchange
privilege available to Participants in the Merrill Lynch Blueprint SM Program
may be different from that available to other investors.

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

In addition, each of the funds with Class B shares outstanding offers to
exchange its Class B shares ("new Class B shares") for Class B shares
("outstanding Class B shares") of any of the other funds on the basis of
relative net asset value per Class B share, without the payment of any CDSC
that might otherwise be due on redemption of the outstanding shares. Class B
shareholders of the Fund exercising the exchange privilege will continue to be
subject to the Fund's CDSC schedule if such schedule is higher than the
deferred sales charge 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 deferred sales charge
schedule relating to the Class B shares of the fund from which the exchange has
been made. For purposes of computing the sales load that may be payable on a
disposition of the new Class B shares, the holding period for the outstanding
Class B shares is "tacked" to the holding period of the new Class B shares. For
example, an investor may exchange Class B shares of the Fund for those of
Merrill Lynch Global Resources Trust after having held the Fund's Class B
shares for two and a half years. The 2% sales load 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 Merrill Lynch Natural Resources
Trust and receive cash. There will be no CDSC due on this redemption, since by
"tacking" the two and a half year holding period of the Fund's Class B shares
to the three-year holding period for the Merrill Lynch Global Resources Trust
Class B shares, the investor will be deemed to have held the new Class B shares
for more than five years.

Shareholders also may exchange Class A shares and Class B shares from any of
the funds into shares of the Class A money market funds and Class B money
market funds, respectively, but the period of time that

26
<PAGE>

Class B shares are held in a Class B money market fund will not count towards
satisfaction of the holding period requirement for purposes of reducing the
CDSC. However, shares of a Class B money market fund which were acquired as a
result of an exchange for Class B shares of a fund may, in turn, be exchanged
back into Class B shares of any fund offering such shares, in which event the
holding period for Class B shares of the 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 after having held the Fund Class B shares for two and a half
years and three years later decide to redeem the shares of Merrill Lynch
Institutional Fund for cash. At the time of this redemption, the 2% CDSC that
would have been due had the Class B shares of the Fund been redeemed for cash
rather than exchanged for shares of Merrill Lynch Institutional Fund will be
payable. If, instead of such redemption the shareholder exchanged such shares
for Class B shares of a fund which the shareholder continues to hold for an
additional two and a half years, any subsequent redemption will not incur a
CDSC.

The investment objectives of the other funds into which exchanges can be made
are as follows:

Merrill Lynch Adjustable
Rate Securities Fund,
Inc. ..................... High current income consistent with a policy of
limiting the degree of fluctuation in net asset
value by investing primarily in a portfolio of
adjustable rate securities, consisting
principally of mortgage-backed and asset-backed
securities.

Merrill Lynch Americas
Income Fund, Inc. ........
A high level of current income, consistent with
prudent investment risk, by investing primarily
in debt securities denominated in a currency of
a country located in the Western Hemisphere
(i.e., North and South America and the
surrounding waters).

Merrill Lynch Arizona
Limited Maturity
Municipal Bond Fund ......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Arizona income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of intermediate-term investment grade
Arizona Municipal Bonds.
Merrill Lynch Arizona
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is to provide investors with as high a
level of income exempt from Federal and Arizona
income taxes as is consistent with prudent
investment management.

Merrill Lynch Balanced
Fund for Investment and
Retirement ...............
As high a level of total investment return as is
consistent with reasonable risk by investing in
common stock and other types of securities,
including fixed income securities and
convertible securities.

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<PAGE>

Merrill Lynch Basic Value
Fund, Inc. ...............
Capital appreciation and, secondarily, income
through investment in securities, primarily
equities, that are undervalued and therefore
represent basic investment value.

Merrill Lynch California
Insured Municipal Bond
Fund......................
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is
to provide shareholders with as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management through investment in a portfolio
primarily of insured California Municipal Bonds.

Merrill Lynch California
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide shareholders with
as high a level of income exempt from Federal
and California income taxes as is consistent
with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade California
Municipal Bonds.

Merrill Lynch California
Municipal Bond Fund ......
A portfolio of Merrill Lynch California Municipal
Series Trust, a series fund, whose objective is
to provide investors with as high a level of
income exempt from Federal and California income
taxes as is consistent with prudent investment
management.

Merrill Lynch Capital
Fund, Inc. ...............
The highest total investment return consistent
with prudent risk through a fully managed
investment policy utilizing equity, debt and
convertible securities.

Merrill Lynch Colorado
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal and Colorado income taxes as is
consistent with prudent investment management.

Merrill Lynch Corporate
Bond Fund, Inc. ..........
Current income from three separate diversified
portfolios of fixed income securities.

Merrill Lynch Developing
Capital Markets Fund,
Inc. .....................
Long-term appreciation through investment in
securities, principally equities, of issuers in
countries having smaller capital markets.

28
<PAGE>

Merrill Lynch Dragon Fund,
Inc. .....................
Capital appreciation primarily through investment
in equity and debt securities of issuers
domiciled in developing countries located in
Asia and the Pacific Basin, other than Japan,
Australia and New Zealand.

Merrill Lynch EuroFund..... Capital appreciation primarily through investment
in equity securities of corporations domiciled
in Europe.

Merrill Lynch Federal
Securities Trust .........
High current return through investments in U.S.
Government and Government agency securities,
including GNMA mortgage-backed certificates and
other mortgage-backed Government securities.

Merrill Lynch Florida
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income
exempt from Federal income taxes as is
consistent with prudent investment management
while seeking to offer shareholders the
opportunity to own securities exempt from
Florida intangible personal property taxes
through investment in a portfolio primarily of
intermediate-term investment grade Florida
Municipal Bonds.

Merrill Lynch Florida
Municipal Bond Fund ......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal income taxes as is consistent with
prudent investment management while seeking to
offer shareholders the opportunity to own
securities exempt from Florida intangible
personal property taxes.

Merrill Lynch Fund For
Tomorrow, Inc.............
Long-term growth through investment in a portfo-
lio of good quality securities, primarily common
stock, potentially positioned to benefit from
demographic and cultural changes as they affect
consumer markets.

Merrill Lynch Fundamental
Growth Fund, Inc. ........
Long-term growth through investment in a
diversified portfolio of equity securities
placing particular emphasis on companies that
have exhibited above-average growth rates in
earnings.

Merrill Lynch Global
Allocation Fund, Inc......
High total return, consistent with prudent risk,
through a fully managed investment policy util-
izing United States and foreign equity, debt and
money market securities, the combination of
which will be varied from time to time both with
respect to the types of securities and markets
in response to changing market and economic
trends.

29
<PAGE>

Merrill Lynch Global Bond
Fund for Investment and
Retirement................
High total investment return from investment in a
global portfolio of debt instruments denominated
in various currencies and multi-national cur-
rency units.

Merrill Lynch Global
Convertible Fund, Inc.....
High total return from investment primarily in an
internationally diversified portfolio of con-
vertible debt securities, convertible preferred
stock and "synthetic" convertible securities
consisting of a combination of debt securities
or preferred stock and warrants or options.

Merrill Lynch Global
Holdings (residents of
Arizona must meet
investor suitability
standards) ...............
The highest total investment return consistent
with prudent risk through worldwide investment
in an internationally diversified portfolio of
securities.

Merrill Lynch Global
Resources Trust...........
Long-term growth and protection of capital from
investment in securities of domestic and foreign
companies that possess substantial natural re-
source assets.

Merrill Lynch Global
Utility Fund, Inc.........
Capital appreciation and current income through
investment of at least 65% of its total assets
in equity and debt securities issued by domestic
and foreign companies which are primarily en-
gaged in the ownership or operation of facili-
ties used to generate, transmit or distribute
electricity, telecommunications, gas or water.

Merrill Lynch Government
Fund......................
A portfolio of Merrill Lynch Funds For Institu-
tions Series, a series fund, whose objective is
to provide current income consistent with li-
quidity and security of principal from invest-
ment in securities issued or guaranteed by the
U.S. Government, its agencies and instrumentali-
ties and in repurchase agreements secured by
such obligations.

Merrill Lynch Growth Fund
for Investment and
Retirement................
Growth of capital and, secondarily, income from
investment in a diversified portfolio of equity
securities placing principal emphasis on those
securities which management of the fund believes
to be undervalued.

30
<PAGE>

Merrill Lynch Healthcare
Fund, Inc. (residents of
Wisconsin must meet
investor suitability
standards)................
Capital appreciation through worldwide investment
in equity securities of companies that derive or
are expected to derive a substantial portion of
their sales from products and services in
healthcare.

Merrill Lynch
Institutional Fund........
A portfolio of Merrill Lynch Funds For Institu-
tions Series, a series fund, whose objective is
to provide maximum current income consistent
with liquidity and the maintenance of a high
quality portfolio of money market securities.

Merrill Lynch
Institutional Tax-Exempt
Fund......................
A portfolio of Merrill Lynch Funds for Institu-
tions Series, a series fund, whose objective is
to provide current income exempt from Federal
income taxes, preservation of capital and li-
quidity available from investing in a diversi-
fied portfolio of short-term, high quality mu-
nicipal bonds.

Merrill Lynch
International Equity
Fund...................... Capital appreciation and, secondarily, income by
investing in a diversified portfolio of equity
securities of issuers located in countries other
than the United States.

Merrill Lynch Latin
America Fund, Inc. .......
Capital appreciation by investing primarily in
Latin American equity and debt securities.

Merrill Lynch Maryland
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Maryland income taxes as is consistent with
prudent investment management.

Merrill Lynch
Massachusetts Limited
Maturity Municipal Bond
Fund......................
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and Massachusetts income taxes
as is consistent with prudent investment manage-
ment through investment in a portfolio primarily
of intermediate-term investment grade Massachu-
setts Municipal Bonds.

Merrill Lynch
Massachusetts Municipal
Bond Fund................. A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Massachusetts income taxes as is consistent
with prudent investment management.

31
<PAGE>

Merrill Lynch Michigan
Limited Maturity
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and Michigan income taxes as
is consistent with prudent investment management
through investment in a portfolio primarily of
intermediate-term investment grade Michigan Mu-
nicipal Bonds.

Merrill Lynch Michigan
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State
Municipal Series Trust, a series fund, whose
objective is as high a level of income exempt
from Federal and Michigan income taxes as is
consistent with prudent investment management.

Merrill Lynch Minnesota
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Minnesota income taxes as is consistent with
prudent investment management.

Merrill Lynch Municipal
Bond Fund, Inc............
Tax-exempt income from three separate diversified
portfolios of municipal bonds.

Merrill Lynch Municipal
Intermediate Term Fund....
Currently the only portfolio of Merrill Lynch Mu-
nicipal Series Trust, a series fund, whose ob-
jective is to provide as high a level as possi-
ble of income exempt from Federal income taxes
by investing in investment grade obligations
with a dollar weighted average maturity of five
to twelve years.

Merrill Lynch New Jersey
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal and New Jersey income taxes as
is consistent with prudent investment management
through a portfolio primarily of intermediate-
term investment grade New Jersey Municipal
Bonds.

Merrill Lynch New Jersey
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and New Jersey income taxes as is consistent
with prudent investment management.

Merrill Lynch New Mexico
Municipal Bond Fund..

A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and New Mexico income taxes as is consistent
with prudent investment management.

32
<PAGE>

Merrill Lynch New York
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is as high a level of income ex-
empt from Federal, New York State and New York
City income taxes as is consistent with prudent
investment management through investment in a
portfolio primarily of intermediate-term invest-
ment grade New York Municipal Bonds.

Merrill Lynch New York Mu-
nicipal Bond Fund.........
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Feder-
al, New York State and New York City income
taxes as is consistent with prudent investment
management.

Merrill Lynch North Caro-
lina Municipal Bond Fund..
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and North Carolina income taxes as is consistent
with prudent investment management.

Merrill Lynch Ohio Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Ohio income taxes as is consistent with pru-
dent investment management.

Merrill Lynch Oregon Mu-
nicipal Bond Fund.........
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Oregon income taxes as is consistent with
prudent investment management.

Merrill Lynch Pacific
Fund, Inc.................
Capital appreciation by investing in equity secu-
rities of corporations domiciled in Far Eastern
and Western Pacific countries, including Japan,
Australia, Hong Kong and Singapore.
Merrill Lynch Pennsylvania
Limited Maturity Munici-
pal Bond Fund.............
A portfolio of Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, a series fund,
whose objective is to provide as high a level of
income exempt from Federal and Pennsylvania in-
come taxes as is consistent with prudent invest-
ment management through investment in a portfo-
lio of intermediate-term investment grade Penn-
sylvania Municipal Bonds.

33
<PAGE>

Merrill Lynch Pennsylvania
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
and Pennsylvania income taxes as is consistent
with prudent investment management.

Merrill Lynch Phoenix
Fund, Inc.................
Long-term growth of capital by investing in eq-
uity and fixed income securities, including tax-
exempt securities, of issuers in weak financial
condition or experiencing poor operating results
believed to be undervalued relative to the cur-
rent or prospective condition of such issuer.

Merrill Lynch Ready Assets
Trust.....................
Preservation of capital, liquidity and the high-
est possible current income consistent with the
foregoing objectives from the short-term money
market securities in which the Trust invests.

Merrill Lynch Retirement
Reserves Money Fund
(available only if the
exchange occurs within
certain retirement
plans)....................
Currently the only portfolio of Merrill Lynch Re-
tirement Series Trust, a series fund, whose ob-
jectives are current income, preservation of
capital and liquidity available from investing
in a diversified portfolio of short-term money
market securities.

Merrill Lynch Short-Term
Global Income Fund, Inc...
As high a level of current income as is consis-
tent with prudent investment management from a
global portfolio of high quality debt securities
denominated in various currencies and multina-
tional currency units and having remaining matu-
rities not exceeding three years.

Merrill Lynch Special
Value Fund, Inc...........
Long-term growth of capital from investments in
securities, primarily equities, of relatively
small companies believed to have special invest-
ment value and emerging growth companies regard-
less of size.

Merrill Lynch Strategic
Dividend Fund.............
Long-term total return from investment in divi-
dend paying common stocks which yield more than
Standard & Poor's 500 Composite Stock Price In-
dex.

Merrill Lynch Technology
Fund, Inc.................
Capital appreciation through worldwide investment
in equity securities of companies that derive or
are expected to derive a substantial portion of
their sales from products and services in tech-
nology.

34
<PAGE>

Merrill Lynch Texas
Municipal Bond Fund.......
A portfolio of Merrill Lynch Multi-State Munici-
pal Series Trust, a series fund, whose objective
is as high a level of income exempt from Federal
income taxes as is consistent with prudent in-
vestment management by investing primarily in a
portfolio of long-term, investment grade obliga-
tions issued by the State of Texas, its politi-
cal subdivisions, agencies and instrumentali-
ties.

Merrill Lynch Treasury A portfolio of Merrill Lynch Funds For Institu-
Fund...................... tions Series, a series fund, whose objective is
to provide current income consistent with li-
quidity and security of principal from invest-
ment in direct obligations of the U.S. Treasury
and up to 10% of its total assets in repurchase
agreements secured by such obligations.

Merrill Lynch U.S.A.
Government Reserves.......
Preservation of capital, current income and li-
quidity available from investing in direct obli-
gations of the U.S. Government and repurchase
agreements relating to such securities.

Merrill Lynch U.S.
Treasury Money Fund.......
Preservation of capital, liquidity and current
income through investment exclusively in a di-
versified portfolio of short-term marketable se-
curities which are direct obligations of the
U.S. Treasury.

Merrill Lynch Utility In-
come Fund, Inc............
High current income through investment in equity
and debt securities issued by companies which
are primarily engaged in the ownership or opera-
tion of facilities used to generate, transmit or
distribute electricity, telecommunications, gas
or water.

Merrill Lynch World Income
Fund, Inc. ...............
High current income by investing in a global
portfolio of fixed income securities denominated
in various currencies, including multinational
currencies.

Before effecting an exchange, shareholders of the Fund should obtain a
currently effective prospectus of the fund into which the exchange is to be
made. Exercise of the exchange privilege is treated as a sale for Federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. In addition, a shareholder exchanging
shares of any of the funds may be subject to a backup withholding tax unless
such shareholder certifies under penalty of perjury that the taxpayer
identification number on file with any such fund is correct and that such
investor is not otherwise subject to backup withholding. See "Distributions and
Taxes" below.

To exercise the exchange privilege, shareholders should contact their Merrill
Lynch financial consultant, who will advise the Fund of the exchange, or, if the
exchange does not involve a money market fund, the shareholder may write to the
Transfer Agent requesting that the exchange be effected. Such letter must be
signed exactly as the account is registered with signatures guaranteed by an
"eligible guarantor institution" as such term is defined in Rule 17Ad-15 under
the Securities and Exchange Act of 1934, as amended, the

35
<PAGE>

existence and validity of which may be verified by the Transfer Agent through
the use of industry publications. Shareholders of the Fund, and shareholders of
the other funds described above 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 at
any time in accordance with the rules of the Commission. The Fund reserves the
right to limit the number of times an investor may exercise the exchange
privilege. Certain funds may suspend the continuous offering of their shares to
the general public at any time and may thereafter resume such offering from
time to time. The exchange privilege is available only to U.S. shareholders in
states where the exchange legally may be made.

DISTRIBUTIONS AND TAXES

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

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

The Trust intends to qualify the Fund to pay "exempt-interest dividends" as
defined in Section 852(b)(5) of the Code. Under such section if, at the close
of each quarter of the Fund's taxable year, at least 50% of the value of the
Fund's total assets consists of obligations exempt from Federal income tax
("tax-exempt obligations") under Section 103(a) of the Code (relating generally
to obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its Class A and Class B
shareholders (together, the "shareholders"). Exempt-interest dividends are
dividends or any part thereof paid by the Fund which are attributable to
interest on tax-exempt obligations and designated by the Trust as exempt-
interest dividends in a written notice mailed to the Fund's shareholders within
60 days after the close of the Fund's taxable year. For this purpose, the Fund
will allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items, discussed below) between the Class A
and Class B shareholders according to a method (which it believes is consistent
with the Commission's exemptive order permitting the issuance and sale of two
classes of shares) that is based on the gross income allocable to Class A and
Class B shareholders during the taxable year, or such other method as the
Internal Revenue

36
<PAGE>

Service may prescribe. To the extent that the dividends distributed to the
Fund's shareholders are derived from interest income exempt from Federal income
tax under Code Section 103(a) and are properly designated as exempt-interest
dividends, they will be excludable from a shareholder's gross income for
Federal income tax purposes. Exempt-interest dividends are included, however,
in determining the portion, if any, of a person's social security benefits and
railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for Federal income tax purposes to the extent attributable to exempt-
interest dividends, and such interest expense will not reduce taxable income
under the Connecticut income tax except to the extent reflected in Federal
adjusted gross income. Shareholders are advised to consult their tax advisers
with respect to whether exempt-interest dividends retain the exclusion under
Code Section 103(a) if a shareholder would be treated as a "substantial user"
or "related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of "industrial development bonds" or "private
activity bonds," if any, held by the Fund.

The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from Connecticut Municipal Bonds will not be subject to
the Connecticut income tax. Distributions from the Fund to shareholders subject
to the Connecticut corporation business tax will be included in taxable income
to the extent such distributions are treated as exempt-interest or capital
gains dividends. Shareholders subject to income taxation in states other than
Connecticut will realize a lower after-tax rate of return than Connecticut
shareholders since the dividends distributed by the Fund generally will not be
exempt, to any significant degree, from income taxation by such other states.
The Trust will inform shareholders annually regarding the portion of the Fund's
distributions which constitutes exempt-interest dividends and the portion which
is exempt from Connecticut income taxes. The Trust will allocate exempt-
interest dividends between Class A and Class B shareholders for Connecticut
income tax purposes based on a method similar to that described above for
Federal income tax purposes.

To the extent that the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes. Such distributions
are not eligible for the dividends received deduction for corporations.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in futures or options ("capital gain
dividends") are taxable as long-term capital gains for Federal income tax
purposes, regardless of the length of time the shareholder has owned Fund
shares. Under the Revenue Reconciliation Act of 1993, all or a portion of the
Fund's gain from the sale or redemption of tax-exempt obligations purchased at
a market discount will be treated as ordinary income rather than capital gain.
This rule may increase the amount of ordinary income dividends received by
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Any loss upon the
sale or exchange of Fund shares held for six months or less, however, will be
treated as long-term capital loss to the extent of capital gain dividends
received by the shareholder. In addition, such loss will be disallowed to the
extent of any exempt-interest dividends received by the shareholder. If the
Fund pays a dividend in January which was declared in the previous October,
November or December to shareholders of record on a specific date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by its shareholders on December 31 of the year in
which such dividend was declared.

The Code subjects interest received on certain otherwise tax-exempt
securities to an alternative minimum tax. The alternative minimum tax applies
to interest received on "private activity bonds" issued after

37
<PAGE>

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

The Revenue Reconciliation Act of 1993 has added new marginal tax brackets
of 36% and 39.6% for individuals and has created a graduated structure of 26%
and 28% for the alternative minimum tax applicable to individual taxpayers.
These rate increases may affect an individual investor's after-tax return from
an investment in the Fund as compared with such investor's return from taxable
investments.

If a Class A shareholder exercises the 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 the sales
charge paid to the Fund reduces any sales charge such shareholder would have
owed upon purchase of the new Class A shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for
the new Class A shares.

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

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

ENVIRONMENTAL TAX

The Code imposes a deductible tax (the "Environmental Tax") on a
corporation's modified alternative minimum taxable income (computed without
regard to the alternative tax net operating loss deduction and

38
<PAGE>

the deduction for the Environmental Tax) at a rate of $12 per $10,000 (0.12%)
of alternative minimum taxable income in excess of $2,000,000. The
Environmental Tax is imposed for taxable years beginning after December 31,
1986, and before January 1, 1996. The Environmental Tax is imposed even if the
corporation is not required to pay an alternative minimum tax because the
corporation's regular income tax liability exceeds its minimum tax liability.
The Code provides, however, that a RIC, such as the Fund, is not subject to the
Environmental Tax. However, exempt-interest dividends paid by the Fund that
create alternative minimum tax preferences for corporate shareholders under the
Code (as described above) may subject corporate shareholders of the Fund to the
Environmental Tax.

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

The Fund may purchase or sell municipal bond index futures contracts and
interest rate futures contracts on U.S. Government securities ("financial
futures contracts"). The Fund may also purchase and write call and put options
on such financial futures contracts. In general, unless an election is
available to the Fund or an exception applies, such options and financial
futures contracts that are "Section 1256 contracts" will be "marked to market"
for Federal income tax purposes at the end of each taxable year, i.e., each
such option or financial futures contract will be treated as sold for its fair
market value on the last day of the taxable year, and any gain or loss
attributable to Section 1256 contracts will be 60% long-term and 40% short-term
capital gain or loss. Application of these rules to Section 1256 contracts held
by the Fund may alter the timing and character of distributions to
shareholders.

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

One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months. Accordingly, the
Fund may be restricted in effecting closing transactions within three months
after entering into an options or financial futures contract.

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

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

Shareholders are urged to consult their own tax advisers regarding the
availability of any exemptions from state or local taxes (other than those
imposed by Connecticut) and with specific questions as to Federal, state, local
or foreign taxes.

PERFORMANCE DATA

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

39
<PAGE>

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 shares and the contingent deferred sales charge that would be
applicable to a complete redemption of the investment at the end of the
specified period in the case of the Class B 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.

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

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Declaration of Trust provides that the Trust shall be comprised of
separate Series each of which will consist of a separate portfolio which will
issue separate shares. The Trust is presently comprised of the Fund, Merrill
Lynch Arizona Municipal Bond Fund, Merrill Lynch Colorado Municipal Bond Fund,
Merrill Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland Municipal
Bond Fund, Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch
Michigan Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund,
Merrill Lynch New Jersey Municipal Bond Fund, Merrill Lynch New Mexico
Municipal Bond Fund, Merrill Lynch New York Municipal Bond Fund, Merrill Lynch
North Carolina Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond Fund,
Merrill Lynch Oregon Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal
Bond Fund and Merrill Lynch Texas Municipal Bond Fund. The Trustees are
authorized to create an unlimited number of Series and, with respect to each
Series, to issue an unlimited number of full and fractional shares of
beneficial interest, par value $.10 per share, of different classes and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in the Series.
Shareholder approval is not necessary for the authorization of additional
Series or classes of a Series of the Trust. At the date of this

40
<PAGE>

Statement of Additional Information, the shares of the Fund are divided into
Class A shares and Class B shares. Both Class A and Class B shares represent an
interest in the same 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 fee of the Class B shares are borne solely
by such Class B shares and the Class B shares have exclusive voting rights with
respect to matters relating to such distribution expenditures. See "Purchase of
Shares". The Trust has received an order ("the Order") from the Commission
permitting the issuance and sale of multiple classes of shares. The Order
permits the Trust to issue additional classes of shares of any Series if the
Board of Trustees deems such issuance to be in the best interest of the Trust.

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

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

The Manager provided the initial capital for the Fund by purchasing 10,000
shares of the Fund for $100,000. Such shares were acquired for investment and
can only be disposed of by redemption. The organizational expenses of the Fund
(estimated at approximately $47,600) will be paid by the Fund and amortized
over a period not exceeding five years. The proceeds realized by the Manager
(or any subsequent holder) upon the redemption of any of the shares initially
purchased by it will be reduced by the proportionate amount of unamortized
organizational expenses which the number of shares redeemed bears to the number
of shares initially purchased. Such organizational expenses include certain of
the initial organizational expenses of the Trust which have been allocated to
the Fund by the Trustees. If additional Series are added to the Trust, the
organizational expenses will be allocated among the Series in a manner deemed
equitable by the Trustees.

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<PAGE>

COMPUTATION OF OFFERING PRICE PER SHARE

An illustration of the computation of the offering price for Class A and
Class B shares of the Fund based on the projected value of the Fund's estimated
net assets and projected number of shares outstanding on the date its shares
are first offered for sale to public investors is as follows:

TABLE*
<TABLE>
<CAPTION>
CLASS A CLASS B
---------- ----------
<S> <C> <C>
Net Assets............................................ $50,000.00 $50,000.00
Number of Shares Outstanding.......................... 5,000 5,000
========== ==========
Net Asset Value Per Share (net assets divided by num-
ber of shares outstanding)........................... $ 10.00 $ 10.00
Sales Charge (for Class A shares: 4.00% of offering
price (4.17% of net asset value per share))*......... $ .42 $ **
---------- ----------
Offering Price........................................ $ 10.42 $ 10.00
========== ==========
</TABLE>
- --------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B shares are not subject to an initial sales charge but may be
subject to a contingent deferred sales charge on redemption of shares
within four years of purchase. See "Purchase of Shares--Deferred Sales
Charge Alternative--Class B Shares" herein and in the Prospectus.

INDEPENDENT AUDITORS

Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540, has been
selected as the independent auditors of the Fund. The selection of independent
auditors is subject to ratification by the shareholders of the Fund. In
addition, the employment of such auditors may be terminated without any penalty
by vote of a majority of the outstanding shares of the Trust at a meeting
called for the purpose of terminating such employment. The independent auditors
are responsible for auditing the annual financial statements of the Fund.

CUSTODIAN

National Westminster Bank NJ, 100 Wall Street, 20th Floor, New York, New York
10005, acts as the custodian of the Fund's assets. The custodian is responsible
for safeguarding and controlling the Fund's cash and securities, handling the
delivery of securities and collecting interest on the Fund's investments.

TRANSFER AGENT

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

LEGAL COUNSEL

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

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on July 31 of each year. The Trust sends to
shareholders of the Fund at least semi-annually reports showing the Fund's
portfolio and other information. An annual report, containing

42
<PAGE>

financial statements audited by independent auditors, is sent to shareholders
each year. After the end of each year shareholders will receive Federal income
tax information regarding dividends and capital gains distributions.

ADDITIONAL INFORMATION

The Prospectus and this Statement of Additional Information do not contain
all the information set forth in the Registration Statement and the exhibits
relating thereto, which the Trust has filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Act of 1933 and the
Investment Company Act of 1940, to which reference is hereby made.

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

43
<PAGE>

APPENDIX I

ECONOMIC AND FINANCIAL INFORMATION CONCERNING CONNECTICUT

The information set forth below is derived from official statements prepared
in connection with the issuance of municipal bonds in Connecticut and other
sources that are generally available to investors. The information is provided
as general information intended to give a recent historical description and is
not intended to indicate future or continuing trends affecting the financial or
other positions of the State of Connecticut (the "State"). The Trust has not
independently verified this information.

The State of Connecticut (the "State") finances its operations primarily
through the State's general fund (the "General Fund"). The State derives over
70% of its revenues from taxes, including sales and use taxes, corporation
business taxes, and dividends, interest and capital gains taxes imposed by the
State. The remainder of the State's revenues are derived from federal grants,
miscellaneous fees, receipts and transfers.

For fiscal years ended June 30, 1984 to 1987, the Comptroller's annual report
to the Governor of the State stated a surplus in the General Fund. The State
had operating deficits in 1988 and 1989 of $115.6 million and $28.0 million,
respectively, stated on the modified cash basis of accounting used for
statutory financial reporting. As required by the General Statutes of the
State, these amounts were deemed to be appropriated from the Budget Reserve
Fund to fund the deficit.

The Comptroller's annual report to the Governor for the fiscal year ended
June 30, 1990 stated that the operating deficit was $259.5 million. This was
the net deficit after actions taken by the Governor and the General Assembly
which affected both revenues and expenditures. As required by statute, the
State Comptroller transferred the balance of the Budget Reserve Fund, $102.3
million, to the General Fund to partially fund the operating deficit. This
action brought the total deficit carried forward to fiscal 1990-91 to $157.2
million.

The Comptroller's annual report to the Governor for the fiscal year ended
June 30, 1991 stated that the operating deficit, after miscellaneous surplus
adjustments, was $808.5 million. Together with a deficit carried forward from
fiscal 1989-90, the total deficit for the fiscal year 1990-91 was $965.7
million.

The legislation enacting the fiscal 1991-92 budget contained two key
provisions designed to balance the budget in fiscal year 1991-92 and to address
and eliminate the cumulative deficit. They were the imposition of a broad based
personal income tax and a five-year note financing. In September and October,
the State issued $965.7 million of general obligation economic recovery notes
with a final maturity of June 15, 1996 to finance the cumulative general fund
deficit. The Comptroller's annual report to the Governor for the fiscal year
ended June 30, 1992 found the General Fund to have a surplus of $110.2 million,
which was used to retire $110.1 million of the economic recovery notes.

The Comptroller's annual report for the fiscal year ended June 30, 1993
reported a General Fund operating surplus of $113.5 million.

The Comptroller is required to issue cumulative monthly financial statements
relating to the financial condition of the State. This report compares revenues
already received and expenditures already made to estimated revenues to be
collected and estimated expenditures to be made during the balance of the year.

44
<PAGE>

The Comptroller's May 2, 1994 report on the State's fiscal position as of
June 30, 1994 estimates a General Fund operating surplus of $96.9 million due
to revisions in revenue estimates and expenditures. On a GAAP basis, however,
the Comptroller estimated a cumulative projected deficit in the General Fund as
of June 30, 1994 of $429 million.

Despite the recent slowdown in the State's economy, the State maintains a
high level of personal income compared to the nation and the New England
region. The State's unemployment rate historically has been lower than the
unemployment rate for the country as a whole, and while it had increased to
7.0% as of January 1993, on a seasonally adjusted basis, it has fallen to 5.9%
at December 31, 1993, again on a seasonally adjusted basis.

Currently, Moody's Investors Service, Inc. rates Connecticut's general
obligation bonds Aa and Connecticut's outstanding commercial paper P-1 and
Standard and Poor's Corporation rates Connecticut's general obligation bonds
AA- and Connecticut's outstanding commercial paper A-1+.

45
<PAGE>

APPENDIX II

RATINGS OF MUNICIPAL BONDS

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") MUNICIPAL BOND
RATINGS

Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.

Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.

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

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

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

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

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

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

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

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

46
<PAGE>

Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG1, MIG 2/VMIG2, MIG 3/VMIG3 and MIG 4/VMIG4; MIG 1/VMIG1 denotes "best
quality . . . strong protection by established cash flows"; MIG 2/VMIG2 denotes
"high quality" with ample margins of protection; MIG 3/VMIG3 notes are of
"favorable quality . . . but . . . lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG4 notes are of "adequate quality . . .
[p]rotection commonly regarded as required of an investment security is
present . . . there is specific risk."

DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS

Excerpts from Moody's description of its corporate bond ratings: Aaa--judged
to be the best quality, carry the smallest degree of investment risk; Aa--
judged to be of high quality by all standards; A--possess many favorable
investment attributes and are to be considered as upper medium grade
obligations.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earning coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.

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

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

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

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("STANDARD & POOR'S") MUNICIPAL
DEBT RATINGS

A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.

47
<PAGE>

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

The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.

The ratings are based, in varying degrees, on the following considerations:

I. Likelihood of default--capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;

II. Nature of and provisions of the obligations;

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

AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.

AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher-rated issues only
in small degree.

A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.

BBB Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.

BB, B, CCC, CC, C
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded, on
balance, as predominately speculative with respect to capacity
to pay interest and repay principal in accordance with the
terms of the obligations. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major exposures to adverse conditions.

CI The rating "CI" is reserved for income bonds on which no
interest is being paid.

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

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

48
<PAGE>

DESCRIPTION OF STANDARD & POOR'S CORPORATE BOND RATINGS

A Standard & Poor's corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to specific obligation. Debt rated
"AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay
interest and repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and differs from the
highest rated issues only in small degree. Debt rated "A" has a strong capacity
to pay interest and repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
debt of a higher rated category. Debt rated "BBB" is regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.

The ratings from "AA" to "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.

DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. Ratings are applicable
to both taxable and tax-exempt commercial paper. Issues assigned the highest
rating are regarded as having the greatest capacity for timely payment. Issues
in this category are further refined with the designation 1, 2 and 3 to
indicate the relative degree of safety. The three designations in the "A"
category are as follows:

A-1
This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.

A-2
Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated "A-1".

A-3
Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.

B
Issues rated "B" are regarded as having only speculative capacity for
timely payment.

C
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.

D
Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.

A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.

A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a long-
term debt rating. The following criteria will be used in making that
assessment.

49
<PAGE>

--Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).

--Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).

Note rating sysmbols are as follows:

SP-1 A very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a "+" designation.

SP-2 A satisfactory capacity to pay principal and interest.

SP-3 A speculative capacity to pay principal and interest.

Standard & Poor's may continue to rate note issues with a maturity greater
than three years in accordance with the same rating scale currently employed
for municipal bond ratings.

Unrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuers belongs to a group of securities that are not
rated as a matter of policy.

3. There is a lack of essential data pertaining to the issue or issuer.

4. The issue was privately placed, in which case the rating is not
published in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date information to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.

DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S ("FITCH") INVESTMENT GRADE BOND
RATINGS

Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of any
guarantor, as well as the economic and political environment that might affect
the issuer's future financial strength and credit quality.

Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.

Bonds that have the same rating are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.

Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.

50
<PAGE>

Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information.
Ratings may be changed, suspended, or withdrawn as a result of changes in, or
the unavailability of, information or for any other reasons.

AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.

AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated "F-1+".

A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.

Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.

Credit Trend Indicator: Credit trend indicators show whether credit
fundamentals are improving, stable, declining, or uncertain, as follows:

Improving (UP ARROW)

Stable (LEFT/RIGHT ARROW)

Declining (DOWN ARROW)

Uncertain (UP/DOWN ARROW)

Credit trend indicators are not predictions that any rating change will occur,
and have a longer-term time frame than issues placed on FitchAlert.

indicates that Fitch does not rate the specific issue.
NR

CONDITIONAL A conditional rating is premised on the successful completion
of a project or the occurrence of a specific event.

SUSPENDED
A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for
rating purposes.

51
<PAGE>

WITHDRAWN A rating will be withdrawn when an issue matures or is called
or refinanced and, at Fitch's discretion, when an issuer
fails to furnish proper and timely information.

FITCHALERT Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be
raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.

DESCRIPTION OF FITCH SPECULATIVE GRADE BOND RATINGS

Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation.

The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.

Bonds that have the same rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.

BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor
in satisfying its debt service requirements.

B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.

CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.

CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.

C Bonds are in imminent default in payment of interest or
principal.

DDD, DD and D Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on
the basis of their ultimate recovery value in liquidation or
reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the
lowest potential for recovery.

52
<PAGE>

DESCRIPTION OF FITCH INVESTMENT GRADE SHORT-TERM RATINGS

Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.

The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.

Fitch short-term ratings are as follows:

F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.

F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+".

F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned "F-1+"
and "F-1" ratings.

F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate, however, near-term adverse changes
could cause these securities to be rated below investment
grade.

F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.

D Default. Issues assigned this rating are in actual or imminent
payment default.

LOC The symbol "LOC" indicates that the rating is based on a
letter of credit issued by a commercial bank.

INS The symbol "INS" indicates that the rating is based on an
insurance policy or financial guaranty issued by an insurance
company.

53
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Trustees and Shareholder,
Merrill Lynch Connecticut Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:

We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Connecticut Municipal Bond Fund of Merrill Lynch Multi-State Municipal
Series Trust as of May 4, 1994. This financial statement is the responsibility
of the Fund's management. Our responsibility is to express an opinion on this
financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such statement of assets and liabilities presents fairly, in
all material respects, the financial position of Merrill Lynch Connecticut
Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as of
May 4, 1994, in conformity with generally accepted accounting principles.

Deloitte & Touche

Princeton, New Jersey

May 4, 1994

54
<PAGE>

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

STATEMENT OF ASSETS AND LIABILITIES

MAY 4, 1994

<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash in bank..................................................... $100,000
Prepaid registration fees (Note 3)............................... 10,850
Deferred organization expenses (Note 4).......................... 47,600
--------
Total Assets....................................................... 158,450
Liabilities-Accrued expenses....................................... 58,450
--------
Net Assets (equivalent to $10.00 per share on 5,000 Class A Shares
of beneficial interest (par value $0.10) and 5,000 of Class B
Shares of beneficial interest (par value $0.10) outstanding with an
unlimited number of shares authorized) (Note 1).................... $100,000
========
</TABLE>
- --------
Notes to Statement of Assets and Liabilities:

(1) Merrill Lynch Multi-State Municipal Series Trust (the "Trust") was
organized as a Massachusetts business trust on August 2, 1985. To date,
Merrill Lynch Connecticut Municipal Bond Fund (the "Fund") has not had any
transactions other than those relating to organizational matters and the
sale of 5,000 Class A shares and 5,000 Class B shares of beneficial
interest of the Fund to Fund Asset Management, Inc. (the "Manager"). The
Trust is registered under the Investment Company Act of 1940 as an open-end
management investment company.

(2) The Trust has entered into a Management Agreement with the Manager and
separate Class A and Class B Distribution Agreements and a Distribution
Plan with Merrill Lynch Funds Distributor, Inc. (the "Distributor") on
behalf of the Fund. (See "Management of the Trust--Management and Advisory
Arrangements" in the Prospectus and Statement of Additional Information.)
Certain officers and/or Trustees of the Trust are officers and/or directors
of the Manager and the Distributor.

(3)Prepaid registration fees are charged to income as the related shares are
issued.

(4) Deferred organization expenses will be amortized over a period from the
date the Fund commences operations not exceeding five years. In the event
that the Manager (or any subsequent holder) redeems any of its original
shares prior to the end of the five-year period, the proceeds of the
redemption payable in respect of such shares shall be reduced by the pro
rata share (based on the proportionate share of the original shares
redeemed to the total number of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Fund is liquidated prior to
the end of the five-year period, the Manager (or any subsequent holder)
shall bear the unamortized deferred organization expenses.

55
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................... 2
Description of Municipal Bonds and Temporary
Investments.............................................................. 5
Description of Municipal Bonds........................................... 5
Description of Temporary Investments..................................... 6
Repurchase Agreements and Purchase and Sale Contracts.................... 8
Financial Futures Transactions and Options............................... 8
Investment Restrictions................................................... 13
Management of the Trust................................................... 14
Trustees and Officers.................................................... 14
Management and Advisory Arrangements..................................... 16
Purchase of Shares........................................................ 17
Alternative Sales Arrangements........................................... 17
Initial Sales Charge Alternative--Class A Shares......................... 18
Reduced Initial Sales Charges--Class A Shares............................ 18
Deferred Sales Charge Alternative--Class B Shares........................ 20
Redemption of Shares...................................................... 20
Contingent Deferred Sales Charge--Class B Shares......................... 21
Portfolio Transactions.................................................... 21
Determination of Net Asset Value.......................................... 22
Shareholder Services...................................................... 23
Investment Account....................................................... 23
Automatic Investment Plan................................................ 23
Automatic Reinvestment of Dividends and Capital Gains Distributions...... 24
Systematic Withdrawal Plans--Class A Shares.............................. 24
Exchange Privilege....................................................... 25
Distributions and Taxes................................................... 36
Environmental Tax........................................................ 38
Tax Treatment of Options and Futures Transactions........................ 39
Performance Data.......................................................... 39
General Information....................................................... 40
Description of Shares.................................................... 40
Computation of Offering Price Per Share.................................. 42
Independent Auditors..................................................... 42
Custodian................................................................ 42
Transfer Agent........................................................... 42
Legal Counsel............................................................ 42
Reports to Shareholders.................................................. 42
Additional Information................................................... 43
Appendix I--Economic and Financial Information Concerning Connecticut..... 44
Appendix II--Ratings of Municipal Bonds................................... 46
Independent Auditors' Report.............................................. 54
Statement of Assets and Liabilities....................................... 55
</TABLE>

Code # 18111-0594
Statement of
Additional Information

(ART)
- ------------------------------------
MERRILL LYNCH
CONNECTICUT
MUNICIPAL BOND
FUND
MERRILL LYNCH MULTI-STATE
MUNICIPAL SERIES TRUST

May 16, 1994

Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE>

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) FINANCIAL STATEMENTS

Contained in Part B:

Statement of Assets and Liabilities as of May 4, 1994.

(b) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 2, 1985.
(a)
(b) --Amendment to Declaration of Trust, dated October 3, 1988. (b)
(c) --Instrument establishing Merrill Lynch Connecticut Municipal Bond
Fund (the "Fund") as a series of Registrant.
(d) --Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.
2 --By-Laws of Registrant.
3 --None.
4(a) --Portions of the Declaration of Trust, Establishment and
Designation and By-Laws of the Registrant defining the rights of
holders of the Fund as a series of the Registrant. (c)
(b) --Specimen share certificates for Class A and Class B shares.
5 --Management Agreement between Registrant and Fund Asset
Management, L.P.
6(a) --Class A Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.
(b) --Class B Shares Distribution Agreement between Registrant and
Merrill Lynch Funds Distributor, Inc.
(c) --Letter Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc., dated March 31, 1993, in connection with the
Merrill Lynch Mutual Fund Adviser Program.
7 --None.
8 --Form of Letter Amendment to the Custody Agreement between
Registrant and National Westminster Bank NJ. (d)
9 --Amended Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement between Registrant and
Financial Data Services, Inc.
10 --Opinion of Brown & Wood, counsel for the Registrant.
11 --Consent of Deloitte & Touche, independent auditors for the
Registrant.
12 --None.
13 --Certificate of Fund Asset Management, L.P.
14 --None.
15 --Class B Shares Distribution Plan and Class B Shares Distribution
Plan
Sub-Agreement of the Registrant.
16 --None.
</TABLE>
- --------
(a) Filed on August 6, 1985 as an Exhibit to the Registration Statement on Form
N-1A (File No. 2-99473) under the Securities Act of 1933 of Merrill Lynch
New York Municipal Bond Fund, a series of the Registrant.

C-1
<PAGE>

(b) Filed on October 11, 1988 as an Exhibit to Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A (File No. 2-99473) under the
Securities Act of 1933 of Merrill Lynch New York Municipal Bond Fund, a
series of the Registrant.
(c) Reference is made to Article II, Section 2.3 and Articles V, VI, VIII, IX,
X and XI of the Registrant's Declaration of Trust, previously filed as
Exhibit 1(a) to the Registration Statement referred to in paragraph (a)
above; to the Certificates of Establishment and Designation establishing
the Fund as a series of the Registrant and establishing Class A and Class B
shares of beneficial interest of the Fund, which will be filed as Exhibits
1(c) and 1(d), respectively, to the Registration Statement; and to Articles
I, V and VI of the Registrant's By-Laws, previously filed as Exhibit 2 to
the Registration Statement referred to in paragraph (a) above.
(d) The Custody Agreement between Registrant and National Westminster Bank,
dated November 1, 1985, was filed on March 18, 1986 as an Exhibit to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A (File
No. 2-99473) under the Securities Act of 1933 of Merrill Lynch New York
Municipal Bond Fund, a series of the Registrant, and is incorporated by
reference herein.

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

The Registrant has sold 5,000 Class A shares of beneficial interest and 5,000
Class B shares of beneficial interest of the Fund to Fund Asset Management,
L.P. for an aggregate of $100,000.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS MAY 4, 1994
-------------- ----------------
<S> <C>
Class A shares of beneficial interest par value $0.10
per share............................................. 1
Class B shares of beneficial interest par value $0.10
per share............................................. 1
</TABLE>

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 in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which he may be involved or with which he may be threatened, while in office
or thereafter, by reason of his being or having been such a trustee, officer,
employee or agent, except with respect to any matter as to which he shall have
been adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties; provided, however, that as to
any matter disposed of by a compromise payment by such person, pursuant to a
consent decree or otherwise, no indemnification either for said payment or for
any other expenses shall be provided unless the Trust shall have received a
written opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence or
reckless disregard of duty, or the matter of good faith and reasonable belief
as to the best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which

C-2
<PAGE>

he may be lawfully entitled; provided that no person may satisfy any right in
indemnity or reimbursement granted herein or in Section 5.1 or to which he may
be otherwise entitled except out of the property of the Trust, and no
Shareholder shall be personally liable to any Person with respect to any claim
for indemnity or reimbursement or otherwise. The Trustees may make advance
payments in connection with indemnification under this Section 5.3, provided
that the indemnified person shall have given a written undertaking to reimburse
the Trust in the event it is subsequently determined that he is not entitled to
such indemnification."

Insofar as the conditional advancing of indemnification monies for actions
based upon the Investment Company Act of 1940, as amended 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
is entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested, non-
party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts that the recipient of
the advance ultimately will be found entitled to indemnification.

In Section 9 of the Distribution Agreements relating to the securities being
offered hereby, the Registrant agrees to indemnify the Distributor and each
person, if any, who controls the Distributor within the meaning of the
Securities Act of 1933 ("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.

Fund Asset Management, L.P. (the "Manager") acts as the investment adviser
for the following registered investment companies: Apex Municipal Fund, Inc.,
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., Corporate High Yield Fund, Inc., Corporate
High Yield Fund II, Inc., Financial Institutions Series Trust, Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California

C-3
<PAGE>

Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Emerging
Tigers Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds
for Institutions Series, Merrill Lynch Institutional Tax-Exempt Fund, Merrill
Lynch Multi-State Municipal Series Trust, Merrill Lynch Multi-State Limited
Maturity Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc.,
Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc.,
Merrill Lynch World Income Fund, Inc., MuniAssets Fund, Inc., MuniBond Income
Fund, Inc., The Municipal Fund Accumulation Program, Inc., MuniEnhanced Fund,
Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc.,
MuniVest California Insured Fund, Inc., MuniVest Florida Fund, MuniVest
Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest New York
Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield Arizona Fund,
Inc., MuniYield Arizona Fund II, 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 Insured Fund II, 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 New
York Insured Fund III, Inc., MuniYield Pennsylvania Fund, MuniYield Quality
Fund, Inc., MuniYield Quality Fund II, Inc., Senior High Income Portfolio,
Inc., Senior High Income Portfolio II, Inc., Taurus MuniCalifornia Holdings,
Inc., Taurus MuniNew York Holdings, Inc. and Worldwide DollarVest Fund, Inc.
Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager,
acts as the investment adviser for the following companies: Convertible
Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill
Lynch Americas Income Fund, Inc., Merrill Lynch Balanced Fund for Investment
and Retirement, Merrill Lynch Capital 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 Bond Fund for Investment and Retirement,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Convertible
Fund, Inc., Merrill Lynch Global Holdings, Merrill Lynch Global Resources
Trust, Merrill Lynch Global Utility Fund, Inc., Merrill Lynch Growth Fund for
Investment and Retirement, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
High Income Municipal Bond Fund, Inc., Merrill Lynch Institutional Intermediate
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin America
Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust,
Merrill Lynch Senior Floating Rate Fund, Inc., Senior Strategic Income Fund,
Inc., 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 Worldwide DollarVest Fund, Inc. The address of
each of these investment companies is Box 9011, Princeton, New Jersey 08543-
9011, except that the address of Merrill Lynch Funds for Institutions Series,
Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch Institutional
Intermediate Fund is One Financial Center, 15th Floor, Boston, Massachusetts
02111-2646. The address of the Manager and MLAM is also Box 9011, Princeton,
New Jersey 08543-9011. 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.

Set forth below is a list of each executive officer and partner of the
Manager indicating each business, profession, vocation or employment of a
substantial nature in which each such person or entity has been engaged since
December 31, 1991 for his 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 paragraph and also hold the
same positions with all or substantially all of the investment companies
advised by MLAM as they do

C-4
<PAGE>

with those advised by the Manager, and Messrs. Durnin, Giordano, Harvey,
Hewitt, and Monagle are directors or officers of one or more of such companies.

OFFICERS AND PARTNERS OF FAM ARE SET FORTH AS FOLLOWS:

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL
POSITION(S) WITH BUSINESS, PROFESSION,
NAME THE MANAGER VOCATION OR EMPLOYMENT
---- ---------------- ----------------------
<S> <C> <C>
ML & Co. ............... Limited Partner Financial Services Holding Company
Fund Asset Management,
Inc. .................. Limited Partner Investment Advisory Services
Princeton Services, General Partner General Partner of MLAM
Inc. ..................
("Princeton Services")
Arthur Zeikel........... President President of MLAM; President and Di-
rector of Princeton Services; Direc-
tor of MLFD; Executive Vice President
of ML & Co.; Executive Vice President
of Merrill Lynch
Terry K. Glenn.......... Executive Vice President Executive Vice President of MLAM; Ex-
ecutive Vice President and Director
of Princeton Services; President and
Director of MLFD; President of
Princeton Administrators
Bernard J. Durnin....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Vincent R. Giordano..... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Elizabeth Griffin....... Senior Vice President Senior Vice President of MLAM
Norman R. Harvey........ Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
N. John Hewitt.......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Philip L. Kirstein...... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of MLAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss......... Senior Vice President Senior Vice President and Controller
and Controller of MLAM; Senior Vice President and
Controller of Princeton Services
Joseph T. Monagle, Jr. . Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Gerald M. Richard....... Senior Vice President Senior Vice President and Treasurer of
and Treasurer MLAM; Senior Vice President and Trea-
surer of Princeton Services; Vice
President and Treasurer of MLFD
Richard L. Rufener...... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services;
Vice President of MLFD
Ronald L. Welburn....... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
Anthony Wiseman......... Senior Vice President Senior Vice President of MLAM; Senior
Vice President of Princeton Services
</TABLE>

C-5
<PAGE>

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) MLFD acts as the principal underwriter for the Registrant and, for each
of the open-end investment companies referred to in the first paragraph of Item
28 except Apex Municipal Fund, Inc., CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust, CMA Tax-Exempt
Fund, CMA Treasury Fund, Convertible Holdings, Inc., The Corporate Fund
Accumulation Program, Inc., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, Inc., Income Opportunities Fund
1999, Inc., Income Opportunities Fund 2000, Inc., MuniAssets Fund, Inc.,
MuniBond Income Fund, Inc., The Municipal Fund Accumulation Program, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield Arizona Fund II, 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 Insured Fund II,
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 New York Insured Fund III, Inc., MuniYield Pennsylvania Fund,
MuniYield Quality Fund, Inc., MuniYield Quality Fund II, Inc., Senior High
Income Portfolio, Inc., Senior High Income Portfolio II, Inc., Senior Strategic
Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus MuniNewYork
Holdings, Inc. and Worldwide DollarVest Fund, Inc.

(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is Box 9011,
Princeton, New Jersey 08543-9011, except that the address of Messrs. Aldrich,
Breen, Crook, Graczyk, Fatseas and Wasel is One Financial Center, 15th Floor,
Boston, Massachusetts 02111-2646.

<TABLE>
<CAPTION>
POSITION(S) AND OFFICES POSITION(S) AND OFFICES
NAME WITH MLFD WITH REGISTRANT
---- ----------------------- -----------------------
<S> <C> <C>
Terry K. Glenn........ President and Director Executive Vice President
Arthur Zeikel......... Director President and Trustee
Philip L. Kirstein.... Director None
William E. Aldrich.... Senior Vice President None
Robert W. Crook....... Senior Vice President None
Michael J. Brady...... Vice President None
William M. Breen...... Vice President None
Sharon Creveling...... Vice President and Assistant
Treasurer None
Mark A. DeSario....... Vice President None
James T. Fatseas...... Vice President None
Stanley Graczyk....... Vice President None
Michelle T. Lau....... Vice President None
Gerald M. Richard..... Vice President and Treasurer Treasurer
Richard L. Rufener.... Vice President None
Salvatore Venezia..... Vice President None
William Wasel......... Vice President None
Robert Harris......... Secretary None
</TABLE>

C-6
<PAGE>

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 and Financial Data
Services, Inc.

ITEM 31. MANAGEMENT SERVICES.

Other than as set forth under the caption "Management of the Trust--
Management and Advisory Arrangements" in the Prospectus constituting Part A of
the Registration Statement and under "Management of the Trust--Management and
Advisory 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.

The Registrant undertakes to file a post-effective amendment, using financial
statements which need not be certified, within four to six months from the
effective date of Registrant's registration statement under the Securities Act
of 1933, as amended.

C-7
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE TOWNSHIP OF PLAINSBORO, AND STATE OF NEW JERSEY, ON THE 13TH DAY OF MAY,
1994.

Merrill Lynch Multi-State Municipal
Series Trust
(Registrant)

/s/ Arthur Zeikel
By___________________________________
(Arthur Zeikel, President)

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Arthur Zeikel President and Trustee May 13, 1994
- ------------------------------------ (Principal Executive
(Arthur Zeikel) Officer)

/s/ Gerald M. Richard Treasurer (Principal May 13, 1994
- ------------------------------------ Financial and
(Gerald M. Richard) Accounting Officer)

Kenneth S. Axelson* Trustee
- ------------------------------------
(Kenneth S. Axelson)

Herbert I. London* Trustee
- ------------------------------------
(Herbert I. London)

Robert R. Martin* Trustee
- ------------------------------------
(Robert R. Martin)

Joseph L. May* Trustee
- ------------------------------------
(Joseph L. May)

Andre F. Perold* Trustee
- ------------------------------------
(Andre F. Perold)

/s/ Arthur Zeikel
*By________________________________
Arthur Zeikel (Attorney-in-Fact ) May 13, 1994
</TABLE>

C-8
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
1(c) --Instrument establishing Merrill Lynch Connecticut Municipal Bond Fund
(the "Fund") as a series of Registrant.
(d) --Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.
4(b) --Specimen share certificates for Class A and Class B shares.
5 --Management Agreement between Registrant and Fund Asset Management,
L.P.
6(a) --Class A Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.
(b) --Class B Shares Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.
(c) --Letter Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc., dated March 31, 1994, in connection with the Merrill
Lynch Mutual Fund Adviser Program.
8 --Form of Letter Amendment to the Custody Agreement between Registrant
and National Westminster Bank NJ.
9 --Amended Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc.
10 --Opinion of Brown & Wood, counsel for the Registrant.
11 --Consent of Deloitte & Touche, independent auditors for the Registrant.
13 --Certificate of Fund Asset Management, L.P.
15 --Class B Shares Distribution Plan and Class B Shares Distribution Plan
Sub-Agreement of the Registrant.
</TABLE>
<PAGE>
GRAPHICS APPENDIX LIST
----------------------

PAGE WHERE
GRAPHIC DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
APPEARS
- --------------------------------------------------------------------------------
BACK COVER OF
PROSPECTUS PICTURE OF SAILBOAT AND HOUSES

BACK COVER OF
STATEMENT OF
ADDITIONAL
INFORMATION PICTURE OF SAILBOAT AND HOUSES

<PAGE>

EXHIBIT 99.1(c)

MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

Establishment and Designation

Merrill Lynch Connecticut Municipal Bond Fund

The undersigned, being all of the Trustees of Merrill Lynch Multi-State
Municipal Series Trust, a Massachusetts business trust (the "Trust"), acting
pursuant to Section 6.2 of the Declaration of Trust, dated August 2, 1985 (the
"Declaration"), of the Trust, do hereby divide the shares of beneficial interest
of the Trust, par value $.10 per share ("Shares"), to create a separate Series,
within the meaning of said Section 6.2, as follows:

1. The Series is designated the "Merrill Lynch Connecticut Municipal Bond
Fund" (referred to herein as the "Fund").

2. Shares of the Fund shall be entitled to all of the rights and
preferences accorded to Shares under the Declaration.

3. The purchase price of Shares of the Fund, the method of determination
of net asset value of the Fund, the price, terms and manner of
redemption of Shares of the Fund, and the relative dividend rights of
holders of Shares of the Fund shall be established by the Trustees of
the Trust in accordance with the provisions of the Declaration and
shall be set forth in the currently effective prospectus and statement
of additional information relating to shares of the Fund, as amended
from time to time, under the Securities Act of 1933, as amended.
<PAGE>

IN WITNESS WHEREOF, the undersigned have signed this instrument in
duplicate original counterparts and have caused a duplicate original to be
lodged among the records of the Trust on this day of March, 1994.

/s/ Kenneth Axelson /s/ Joseph L. May
- ------------------------ ------------------------
Kenneth Axelson Joseph L. May
75 Jameson Point Road 424 Church Street
Rockland, ME 04841 Suite 2000
Nashville, TN 37219

/s/ Herbert I. London /s/ Andre F. Perold
- ------------------------ ------------------------
Herbert I. London Andre F. Perold
Apartment 12-B Morgan Hall
2 Washington Square Village Soldiers Field
New York, NY 10012 Boston, MA 02163

/s/ Robert R. Martin /s/ Arthur Zeikel
- ------------------------ ------------------------
Robert R. Martin Arthur Zeikel
513 Grand Hill Box 9011
St. Paul, MN 55102 Princeton, NJ 08543-9011

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

<PAGE>

EXHIBIT 99.1(d)

MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST

Establishment and Designation
of
Class A Shares and Class B Shares of
Beneficial Interest of the Series Designated

Merrill Lynch Connecticut Municipal Bond Fund

The undersigned, being a majority of the Trustees of Merrill Lynch
Multi-State Municipal Series Trust, a Massachusetts business trust (the
"Trust"), acting pursuant to Section 6.2 of the Declaration of Trust, dated
August 2, 1985 (the "Declaration"), of the Trust, do hereby divide the shares of
beneficial interest of the Series designated "Merrill Lynch Connecticut
Municipal Bond Fund" (the "Fund") of the Trust, par value $.10 per share
("Shares"), to create two classes of shares, within the meaning of said Section
6.2, as follows:

1. The two classes of Shares are designated "Class A Shares" and "Class B
Shares".

2. Class A Shares and Class B Shares shall be entitled to all of the
rights and preferences accorded to Shares under the Declaration.

3. The purchase price of Class A Shares and Class B Shares, the method of
determination of net asset value of Class A Shares and Class B Shares,
the price, terms and manner of redemption of Class A Shares and Class
B Shares, and the relative dividend rights of holders of Class A
Shares and Class B Shares shall be established by the Trustees of the
Trust in accordance with the provisions of the Declaration and shall
be set forth in the currently effective prospectus and statement of
additional information of the Trust relating to the Fund, as amended
from time to time, under the Securities Act of 1933, as amended.

4. The 10,000 shares of the Fund issued and outstanding on the date
hereof, subject to approval of the Fund's sole shareholder, shall be
divided into 5,000 Class A Shares and 5,000 Class B Shares.
<PAGE>

/s/ Kenneth Axelson /s/ Joseph L. May
- --------------------------- --------------------------
Kenneth Axelson Joseph L. May
75 Jameson Point Road 424 Church Street
Rockland, ME 04841 Suite 2000
Nashville, TN 37219

/s/ Herbert I. London /s/ Andre F. Perold
- --------------------------- --------------------------
Herbert I. London Andre F. Perold
Apartment 12-B Morgan Hall
2 Washington Square Village Soldiers Field
New York, NY 10012 Boston, MA 02163

/s/ Robert R. Martin /s/ Arthur Zeikel
- --------------------------- --------------------------
Robert R. Martin Arthur Zeikel
513 Grand Hill Box 9011
St. Paul, MN 55102 Princeton, NJ 08543-9011

<PAGE>

EXHIBIT 99.4(b)

NUMBER SHARES
MERRILL LYNCH CONNECTICUT
MUNICIPAL BOND FUND
Merrill Lynch Multi-State Municipal Series Trust
ORGANIZED AS A BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS
CLASS A SHARES OF BENEFICIAL INTEREST

THIS CERTIFIES THAT CUSIP
SEE REVERSE FOR CERTAIN DEFINITIONS

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE TEN CENTS ($0.10) PER SHARE, OF
BENEFICIAL INTEREST, CLASS A, OF
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND

in accordance with, and subject to all the provisions of, a Declaration of Trust
dated August 2, 1985, as amended, a copy of which has been filed with the
Secretary of The Commonwealth of Massachusetts.
The Declaration of Trust provides that the name "Merrill Lynch Multi-State
Municipal Series Trust" refers to the Trustees under the Declaration
collectively as Trustees, but not as individuals or personally; and no Trustee,
shareholder, officer, employee or agent of the Trust may be held to any personal
liability, nor may resort be had to their private property for the satisfaction
of any obligation or claim or otherwise in connection with the affairs of the
Trust but the Trust Property only shall be liable.
This Certificate is not valid until countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trustees under said Declaration of Trust, acting not
individually, but as such Trustees, have caused to be affixed to this
certificate the facsimile Seal of the Trust and the facsimile signatures of duly
authorized officers of the Trust, acting not individually but as such officers.

DATED:

SEAL OF MERRILL LYNCH
MULTI-STATE MUNICIPAL Countersigned:
SERIES TRUST FINANCIAL DATA SERVICES, INC.

By Transfer Agent
/s/ Arthur Zeikel /s/ Jerry Weiss
President Secretary Authorized Signature
<PAGE>

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.

MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND
Merrill Lynch Multi-State Municipal Series Trust

A full statement of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the shares of each
series and class thereof which the Trust is authorized to issue and the
differences in the relative rights and preferences between the shares of each
series and class thereof to the extent that they have been set, and the
authority of the Board of Trustees to set the relative rights and preferences of
subsequent series and classes thereof, will be furnished by the Trust to any
shareholder, without charge, upon request to the Secretary of the Trust at its
principal office.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM - as tenants in common UNIF GIFT MIN ACT -.........Custodian........
(Cust) (Minor)

TEN ENT - as tenants by the entireties under Uniform Gifts to
Minors

JT TEN - as joint tenants with right Act.....................
of survivorship and not as (State)
tenants in common

Additional abbreviations may also be used though not in the above list.

For value received,.......... hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ] .......................................

...............................................................................
Please Print or Typewrite Name and Address including Postal Zip Code of Assignee

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

......................................................................... Shares
represented by the within Certificate, and do hereby irrevocably constitute
and appoint

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

...............................................................................
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.

Dated:....................

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

[ Signatures must be guaranteed by a national bank or other bank which is
a member of the Federal Reserve System (not a savings bank) or by a
member firm or any national or regional stock exchange. Notarized
signatures are not sufficient.]
<PAGE>

THIS CERTIFIES THAT CUSIP
SEE REVERSE FOR CERTAIN DEFINITIONS

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE TEN CENTS ($0.10) PER SHARE, OF
BENEFICIAL INTEREST, CLASS B, OF
MERRILL LYNCH CONNECTICUT MUNICIPAL BOND FUND

DATED:

SEAL OF MERRILL LYNCH
MULTI-STATE MUNICIPAL Countersigned:
SERIES TRUST FINANCIAL DATA SERVICES, INC.

By Transfer Agent
/s/ Arthur Zeikel /s/ Jerry Weiss
President Secretary Authorized Signature