MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND OF MLMSMST, 485BPOS, 1994-02-24

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND OF MLMSMST
485BPOS, 1994-02-24

Previous: MERRILL LYNCH AMERICAS INCOME FUND INC, 24F-2NT, 1994-02-24

Next: STRONG HIGH YIELD MUNICIPAL BOND FUND INC, NSAR-B, 1994-02-24

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1994

SECURITIES ACT FILE NO. 33-49873
INVESTMENT COMPANY ACT FILE NO. 811-4375

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/

PRE-EFFECTIVE AMENDMENT NO. / /

POST-EFFECTIVE AMENDMENT NO. 1 /X/

AND/OR

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/

AMENDMENT NO. 24 /X/

(CHECK APPROPRIATE BOX OR BOXES)
------------------------

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

<TABLE>
<S> <C>
800 SCUDDERS MILL ROAD 08536
PLAINSBORO, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

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
(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

Copies to:

<TABLE>
<S> <C>
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.
</TABLE>

It is proposed that this filing will become effective (check appropriate
box)

/X/ Immediately upon filing pursuant to paragraph (b), or

/ / on (date) pursuant to paragraph (b), or

/ / 60 days after filing pursuant to paragraph (a), or

/ / on (date) pursuant to paragraph (a) of Rule 485.

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

THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS CLASS A AND CLASS
B SHARES OF BENEFICIAL INTEREST UNDER THE SECURITIES ACT OF 1933 PURSUANT TO
RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. NO SHARES OF BENEFICIAL
INTEREST WERE SOLD PURSUANT TO SUCH RULE DURING REGISTRANT'S MOST RECENT FISCAL
YEAR ENDED JULY 31, 1993 (PRIOR TO COMMENCEMENT OF OPERATIONS). THEREFORE,
PURSUANT TO PARAGRAPH (B)(2) OF RULE 24F-2, THE NOTICE REQUIRED BY SUCH RULE
NEED NOT BE FILED FOR SUCH FISCAL YEAR.

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

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

<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- ---------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page................................... Cover Page
Item 2. Synopsis..................................... Fee Table
Item 3. Condensed Financial Information.............. Financial Highlights (unaudited)
Item 4. General Description of Registrant............ Cover Page; Investment Objective and
Policies; Additional Information
Item 5. Management of the Fund....................... Fee Table; Investment Objective and Policies;
Portfolio Transactions; Management of the
Trust; Inside Back Cover Page
Item 5A. Management's Discussion of Fund Not Applicable
Performance................................
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; 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;
Description of Municipal Bonds and
Temporary Investments; 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 Portfolio Transactions
Practices..................................
Item 18. Capital Stock and Other Securities........... General Information
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......................... Financial Statements (unaudited); Statement
of Assets and Liabilities (audited)
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.

<PAGE>

PROSPECTUS
FEBRUARY 24, 1994

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

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

Merrill Lynch Maryland Municipal Bond Fund (the 'Fund') is a mutual fund
seeking to provide shareholders with as high a level of income exempt from
Federal and Maryland 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 Maryland income taxes
('Maryland Municipal Bonds'). The Fund may invest in certain tax-exempt
securities classified as 'private activity bonds' that may subject certain
investors in the Fund to an alternative minimum tax. At times, the Fund may seek
to hedge its portfolio through the use of futures transactions and options.
There can be no assurance that the investment objective of the Fund will be
realized.

The Fund offers two classes of shares which may be purchased at a price
equal to the next determined net asset value per share, plus 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 ongoing account maintenance
and distribution fees. 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 3.

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 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 Class A shares, and that Class B shares have exclusive voting
rights with respect to the account maintenance fee and distribution fee. The two
classes also have different exchange privileges.

Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the 'Distributor'), Box 9011, Princeton, New Jersey 08543-9011 [(609)
282-2800], or from securities dealers which have entered into selected dealer
agreements with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ('Merrill Lynch'). The minimum initial purchase is $1,000 and the
minimum subsequent purchase is $50. 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'.

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

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 February 24, 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>
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
INITIAL SALES CLASS B SHARES
CHARGE DEFERRED SALES
ALTERNATIVE CHARGE ALTERNATIVE
----------------- ------------------------
<S> <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 percentage 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
ASSETS):
Management Fees(c)............................................... 0.55% 0.55%
Rule 12b-1 Fees.................................................. None 0.50%(d)
OTHER EXPENSES
Custodian Fees................................................... 0.07% 0.07%
Shareholder Servicing Costs(e)................................... 0.08% 0.09%
Miscellaneous.................................................... 1.29% 1.29%
Total Other Expenses....................................... 1.44% 1.45%
Total Fund Operating Expenses+................................... 1.99%* 2.50%*
</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 18.

(b) See 'Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares'--page 19.

(d) See 'Purchase of Shares--Deferred Sales Charge Alternative--Class B
Shares--Distribution Plan'--page 20.

(e) See 'Management of the Trust--Transfer Agency Services'--page 16.

* Annualized.

+ As of January 31, 1994, the Manager was voluntarily waiving its entire
management fee and voluntarily reimbursing the Fund for other expenses
(excluding 12b-1 fees). The Manager may discontinue or reduce such assumption
of expenses at any time without notice.

<TABLE>
<CAPTION>
EXAMPLE:
CUMULATIVE EXPENSES PAID
FOR THE PERIOD OF:
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000 investment
including, for Class A shares, the maximum $40 front-end sales charge and
assuming (1) an operating expense ratio of 1.99% for Class A shares and
2.50% for Class B shares, (2) a 5% annual return throughout the periods
and (3) redemption at the end of the period:
Class A................................................................ $ 59.39 $ 99.94 $ 142.97 $ 262.40
Class B................................................................ $ 65.31 $ 97.85 $ 133.05 $ 283.59
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of the period:
Class A................................................................ $ 59.39 $ 99.94 $ 142.97 $ 262.40
Class B................................................................ $ 25.31 $ 77.85 $ 133.05 $ 283.59
</TABLE>

The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The 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 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
2

<PAGE>

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 at a price equal to the next determined
net asset value per share, plus 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 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. 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
3
<PAGE>

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.

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, as amended (the '1940 Act'), 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 CHARGES. TO
ASSIST INVESTORS IN MAKING THIS DETERMINATION, THE FEE TABLE ON PAGE 2
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 17.

4
<PAGE>

FINANCIAL HIGHLIGHTS (UNAUDITED)

The financial information in the table below has not been audited.
Unaudited financial statements for the period October 29, 1993 (commencement of
operations) to January 31, 1994, are included in the Statement of Additional
Information. The following per share data and ratios have been derived from
information provided in the financial statements.

<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 29, 1993+ TO
JANUARY 31, 1994
--------------------
CLASS A CLASS B
--------- ---------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................................ $ 10.00 $ 10.00
--------- ---------
Investment income--net..................................................... .12 .10
Realized and unrealized gain on investments--net........................... .18 .18
--------- ---------
Total from investment operations................................................ .30 .28
--------- ---------
Less dividends:.................................................................
Investment income--net.......................................................... (.12) (.10)
--------- ---------
Net asset value, end of period.................................................. $ 10.18 $ 10.18
--------- ---------
--------- ---------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share.............................................. 2.99%*++ 2.86%*++
--------- ---------
--------- ---------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees and net of reimbursement.................. .00%* .00%*
--------- ---------
--------- ---------
Expenses, net of reimbursement.................................................. .00%* .50%*
--------- ---------
--------- ---------
Expenses........................................................................ 1.99%* 2.50%*
--------- ---------
--------- ---------
Investment income--net.......................................................... 4.54%* 4.02%*
--------- ---------
--------- ---------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)........................................ $ 1,249 $ 11,726
--------- ---------
--------- ---------
Portfolio turnover.............................................................. 11.27% 11.27%
--------- ---------
--------- ---------
</TABLE>

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

+ Commencement of Operations.

* Annualized.

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

++ Aggregate total investment return.

<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 Maryland 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
portfolio of securities consisting primarily of long-term obligations issued by
or on behalf of the State of Maryland, 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 Maryland income
taxes. Obligations exempt from Federal income taxes are referred to herein as
'Municipal Bonds' and obligations exempt from both Federal and Maryland income
taxes are referred to as 'Maryland Municipal Bonds'. Unless otherwise indicated,
references to Municipal Bonds shall be deemed to include Maryland Municipal
Bonds. The Fund at all times, except during temporary defensive periods, will
maintain at least 65% of its total assets invested in Maryland 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. 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 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
6
<PAGE>

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.

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 judgement 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 Maryland income taxes. However, to the extent that suitable
Maryland 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 Maryland, 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 instruments evidencing interests in one or more long-term
municipal securities.

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 Maryland 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 to 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
7
<PAGE>
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 Maryland
income taxes by investing in a professionally managed portfolio consisting
primarily of long-term Maryland 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, the account maintenance and distribution costs.

SPECIAL AND RISK CONSIDERATIONS RELATING TO MARYLAND MUNICIPAL BONDS

The Fund ordinarily will invest at least 65% of its total assets in
Maryland Municipal Bonds, and therefore it is more susceptible to factors
adversely affecting issuers of Maryland Municipal Bonds than is a tax-exempt
mutual fund that is not concentrated in issuers of Maryland Municipal Bonds to
this degree. After enjoying rapid economic growth in the 1980's, Maryland has
experienced declining rates of growth in the 1990's. Despite this trend, per
capita income for residents of Maryland exceeds per capita income in the United
States.

The state's general fund, representing approximately 55% of each year's
total budget, had a surplus on a budgetary basis of $57 million in fiscal year
1990 and $55 thousand in 1991 and a deficit of $56 million in fiscal year 1992.
The Governor of Maryland reduced fiscal year 1993 appropriations by
approximately $56 million to offset the fiscal year 1992 deficit. The General
Fund ended fiscal year 1993 with a surplus of $10.5 million (after transfers of
$24.5 million to reserve accounts) and the Revenue Stabilization Account of the
State Reserve Fund ended fiscal year 1993 with $50.9 million. The Manager does
not believe that the current economic conditions in Maryland will have a
significant adverse effect on the Fund's ability to invest in high quality
Maryland 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 Maryland Municipal Bonds. See Appendix I, 'Economic and Financial
Conditions in Maryland' 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
8

<PAGE>
referred to as Municipal Bonds if the interest paid thereon is exempt from
Federal income tax, and, as Maryland Municipal Bonds if the interest thereon is
exempt from Federal and Maryland income taxes, even though such bonds may be
'private activity bonds' as discussed below.

The two principal classifications of Municipal Bonds are 'general
obligation' 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 its tax base due to
population declines, natural disasters, declines in the state's industrial base
or inability to attract new industries, economic limits on the ability to tax
without eroding the tax base, state legislative proposals or voter initiatives
to limit ad valorem real property taxes and the extent to which the entity
relies on Federal or state aid, access to capital markets or other factors
beyond the state or entity's control. Accordingly, the capacity of the issuer of
a general obligation bond as to the timely payment of interest and the repayment
of principal when due is affected by the issuer's maintenance of its tax base.

Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source such as payments from the
user of the facility being financed; accordingly, the timely payment of interest
and the repayment of principal in accordance with the terms of the revenue or
special obligation bond is a function of the economic viability of such facility
or such revenue source. The Fund may also invest in so-called 'moral obligation'
bonds, which are normally issued by special purpose public authorities. 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 state or
municipality in question.

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. In view of this, 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.

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.

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 frequently is
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain
'non-appropriation' clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although 'non-appropriation'
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a type of financing that has not yet developed the depth of
marketability associated with more conventional securities. Certain investments
in lease obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with 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 state or political subdivision
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.

10
<PAGE>
CALL RIGHTS

The Fund may purchase a Municipal Bond issuer's right to call all or a
portion of such Municipal Bond for mandatory tender for purchase (a 'Call
Right'). A holder of a Call Right may exercise such right to require a mandatory
tender for the purchase of related Municipal Bonds, subject to certain
conditions. A Call Right that is not exercised prior to the maturity of the
related Municipal Bond will expire without value. The economic effect 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.

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
11
<PAGE>
which may become available if the Manager of the Fund and the Trustees of the
Trust should determine that there is normally a sufficient correlation between
the prices of such futures contracts and the Municipal Bonds in which the Fund
invests to make such hedging appropriate.

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

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

When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or 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.

12
<PAGE>

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 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.
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
13
<PAGE>

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 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.

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.

14
<PAGE>
The Trustees are:

ARTHUR ZEIKEL*--President and Chief Investment Officer of the Manager and
Merrill Lynch Asset Management, L.P. (doing business as Merrill Lynch Asset
Management ('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 the Distributor.

KENNETH S. AXELSON--Former Executive Vice President and Director, J.C.
Penney Company, Inc.

HERBERT I. LONDON--Former Dean, Gallatin Division of New York University.

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

JOSEPH L. MAY--Attorney in private practice.

ANDRE F. PEROLD--Professor, Harvard Business School.

- ------------------
* Interested person, as defined in the 1940 Act, of the Trust.

MANAGEMENT AND ADVISORY ARRANGEMENTS

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 more than 90 other registered investment
companies. MLAM also offers portfolio management and portfolio analysis services
to individuals and institutions. As of January 31, 1994, the Manager and MLAM
had a total of approximately $167.1 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 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.

15
<PAGE>
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

Merrill Lynch Funds Distributor, Inc. (the 'Distributor'), an affiliate of
the Manager and an affiliate of Merrill Lynch, acts as the Distributor of shares
of the Fund. Class A and Class B shares of the Fund are offered continuously for
sale by the Distributor and other eligible securities dealers (including Merrill
Lynch). Shares of the Fund may be purchased from securities dealers or by
mailing a purchase order directly to the Transfer Agent. The minimum initial
purchase is $1,000 and the minimum subsequent purchase is $50.

The Fund is offering its shares 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 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.

On October 29, 1993, the Fund completed the subscription offering of its
shares by issuing 77,726 Class A shares for net proceeds to the Fund of $777,260
and 820,080 Class B shares for net proceeds to the Fund of $8,200,800. In
connection with such subscription offering, the Distributor received $29,556,
all of which was paid to Merrill Lynch as selected dealer.

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 the
same 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

<PAGE>
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
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.

17
<PAGE>
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>
DISCOUNT TO
SALES CHARGE SALES CHARGE AS SELECTED DEALERS
AS PERCENTAGE OF PERCENTAGE* OF THE AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE NET AMOUNT INVESTED THE OFFERING PRICE
- --------------------------------------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
Less than $25,000........................................ 4.00% 4.17% 3.75%
$25,000 but less than $50,000............................ 3.75 3.90 3.50
$50,000 but less than $100,000........................... 3.25 3.36 3.00
$100,000 but less than $250,000.......................... 2.50 2.56 2.25
$250,000 but less than $1,000,000........................ 1.50 1.52 1.25
$1,000,000 and over...................................... 0.50 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 OF PURCHASE
- --------------------------------------------------------------------------------------- ---------------------------
<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 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,
(formerly known as Merrill Lynch Prime Fund, Inc.) ('Senior Floating Rate Fund')
who wish to reinvest the net
18

<PAGE>

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 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 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. 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
DOLLAR AMOUNT
YEAR SINCE 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>

19
<PAGE>

In determining whether a CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
applicable rate being charged. Therefore, it will be assumed that the redemption
is first of shares 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 a redemption.

To provide an example, assume an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the third year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional shares upon dividend reinvestment. If at such time the
investor makes his 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 ongoing account maintenance and distribution fees, 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 distribution fee 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
20

<PAGE>
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. 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. 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.

The following table sets forth comparative information as of November 30,
1993, with respect to the Class B shares of the Fund indicating the maximum
allowable payments that can be made under the NASD maximum sales charge rule and
the Distributor's voluntary maximum for the fiscal period ended November 30,
1993.

<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1993
-----------------------------------------------------------------------------------------------------
(IN THOUSANDS) ANNUAL
DISTRIBUTION
ALLOWABLE ALLOWABLE AMOUNTS FEE AT
AGGREGATE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT
ELIGIBLE GROSS SALES UNPAID AMOUNT PAID TO UNPAID NET ASSET
SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------------- --------- ----------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule as
Adopted................ $9,148 $586,601 $ 3,206 $589,807 $2,546 $587,261 $ 23,925
Under Distributor's
Voluntary Waiver....... $9,148 $586,601 $46,928 $633,529 $2,546 $630,983 $ 23,925
</TABLE>

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

(1) Purchase price of all eligible Class B shares sold since October 29, 1993
(commencement of operations) other than shares acquired through dividend
reinvestment and the exchange privilege.

(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the NASD
Rule.

(3) Consists of CDSC payments, distribution fee payments and accruals.

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

21
<PAGE>
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 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
22

<PAGE>

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 monthly statements from the Transfer Agent showing any reinvestments of
dividends and capital gains distributions and any other activity in the account
since the preceding statement. Shareholders also will receive separate
confirmations for each purchase or sale transaction other than reinvestments of
dividends and capital gains distributions. Shareholders may make additions to
their Investment Accounts 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 may be opened at the
Transfer Agent. 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.

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 in
accordance with the
23

<PAGE>

rules of the Securities and Exchange Commission (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.

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. The exchange
privilege is available only in states where the exchange legally may be made.
For further information, see 'Shareholder Services--Exchange Privilege' in the
Statement of Additional Information.

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
through automatic 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(Registered), CBA(Registered) 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(Registered)
accounts may arrange to have periodic
24
<PAGE>

investments made in the Fund in their CMA(Registered) account or
in certain related accounts in amounts of $100 or more through
the CMA(Registered) Automatic Investment Program.

PORTFOLIO TRANSACTIONS

Subject to the policies established by the Trustees or the Trust, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions. 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 or commission), 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 principal 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.

DISTRIBUTIONS AND TAXES

DISTRIBUTIONS

The net investment income of the Fund is declared as dividends 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 unless the shareholder elects to receive such dividends
in cash. Shares will accrue dividends as long as they are issued and
outstanding. Shares are issued and outstanding from the settlement date of a
purchase order to the day prior to the settlement date of a redemption order.

All net realized 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 of the Fund unless the
shareholder elects to receive such distributions in cash.

25
<PAGE>

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
account maintenance, 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 continue to qualify the Fund for the special tax
treatment afforded regulated investment companies ('RICs') under 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. Similar rules apply to the Fund if its income is subject to Maryland tax.
The Trust does not expect the Fund to be subject to Maryland tax and, in any
event, intends to cause the Fund to distribute substantially all of its 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', 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 exempt-interest dividends paid from
interest received by the Fund from Maryland Municipal Bonds and distributions
attributable to gains from Maryland Municipal Bonds also will be exempt from
Maryland personal and corporate income taxes. However, shareholders of the Fund
that are financial institutions otherwise subject to Maryland financial
institution franchise taxes would be subject to such taxes on all distributions
received from the Fund (including exempt-interest dividends). Individual
shareholders subject to income taxation by states other than Maryland will
realize a lower after-tax rate of return than Maryland 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
Maryland income tax. Interest on indebtedness incurred or continued to purchase
or carry Fund shares is not deductible for Federal income or Maryland income tax
purposes to the extent attributable to exempt-interest dividends. Persons who
may be 'substantial users' (or 'related persons' of substantial users) of
facilities financed by industrial development bonds or private activity bonds
held by the Fund should consult their tax advisers before purchasing Fund
shares.

Maryland presently includes in Maryland taxable income a portion of certain
items of tax preference as defined in the Code. Interest paid on certain private
activity bonds constitutes such a tax preference. Accordingly, up to 50% of any
distributions of the Fund's portfolio attributable to such private activity
bonds will not be exempt from Maryland State and local individual income taxes.

Shares of the Fund will not be subject to the Maryland personal property
tax.

<PAGE>

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 and for state tax purposes are treated as
capital gains which are taxable at ordinary income rates. 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). 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. For Federal income tax purposes, any loss upon the
sale or exchange of shares held for six months or less, however, 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 reflect a
corporation's economic income. Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.

The 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 ordinary income dividends, capital gain dividends and
redemption payments ('backup withholding'). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the 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.

27
<PAGE>
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 Maryland 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 Maryland income tax laws. The Code and the Treasury regulations, as
well as the Maryland 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 Maryland) 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 CDSC that would be applicable to a complete redemption of
the investment at the end of the specified period in the case of Class B 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.

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
28

<PAGE>
'Purchase of Shares'. The Fund's total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return on a
hypothetical $1,000 investment in the Fund at the beginning of each specified
period.

Yield quotations will be computed based on a 30-day period by dividing (a)
the net income based on the yield of each security earned during the period by
(b) the average daily number of shares outstanding during the period that were
entitled to receive dividends multiplied by the maximum offering price per share
on the last day of the period. Tax equivalent yield quotations will be computed
by dividing (a) the part of the Fund's yield that is tax-exempt by (b) one minus
a stated tax rate and (c) adding the result to that part, if any, of the Fund's
yield that is not tax-exempt. The yield for the 30-day period ended January 31,
1994 was 4.62% for Class A shares and 4.32% for Class B shares and the
tax-equivalent yield for the same period (based on a Federal income tax rate of
28%) was 6.42% for Class A shares and 6.00% for Class B shares.

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

On occasion, the Fund may compare its performance to 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 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
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.

29
<PAGE>
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 expenditures. See 'Purchase of
Shares'. The Trust has received an order from the Commission permitting the
issuance and sale of two classes of shares.

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
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.

30
<PAGE>
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.

<PAGE>

MERRILL LYNCH MARYLAND 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) 637-3766.
- --------------------------------------------------------------------------------

1. SHARE PURCHASE APPLICATION

I, being of legal age, wish to purchase . . . . . Class A shares
or . . . . . Class B shares (choose one) of Merrill Lynch Maryland 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 investments $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.

<TABLE>
<S> <C>
1.................................... 4....................................
2.................................... 5....................................
3.................................... 6....................................
(Please list all Funds. Use a separate sheet of paper if necessary.)
</TABLE>

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

<TABLE>
<S> <C> <C>
Distribution Elect / / reinvest dividends Elect / / reinvest capital gains
Options One / / pay dividends in cash One / / pay capital gains in cash

</TABLE>

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

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

<TABLE>
<S> <C> <C> <C> <C> <C>
(PLEASE PRINT)
Name ..................................................................
First Name Initial Last
Name Social Security No.
Name of Co-Owner (if any) ............................................. or Taxpayer Identification No.
First Name Initial Last .......................................... , 19 . . .
Name Date
Address ...............................................................
........................................................................
(Zip Code)

<CAPTION>
(PLEASE PRINT)
<S> <C> <C> <C> <C> <C>
Name ..................................................................
First Name Initial Last
Name
Name of Co-Owner (if any) .............................................
First Name Initial Last
Name
Address ...............................................................
........................................................................
(Zip Code)
</TABLE>

<TABLE>
<S> <C>
Occupation .......................................... Name and Address of Employer ........................
......................................................
......................................................
</TABLE>

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 UNDERREPORTING, AND
IF YOU HAVE NOT RECEIVED A NOTICE FROM THE IRS THAT BACKUP WITHHOLDING HAS BEEN
TERMINATED.

<TABLE>
<S> <C>
SIGNATURE OF OWNER .................................. SIGNATURE OF CO-OWNER (IF ANY) ......................
</TABLE>

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 ....
Date of initial purchase

Gentlemen:

Although I am not obligated to do so, I intend to purchase shares of Merrill
Lynch Maryland Municipal Bond Fund or any other investment company with an
initial sales charge or deferred sales charge for which 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 Maryland Municipal Bond Fund held as security.

<TABLE>
<S> <C>
By.................................................... .....................................................
Signature of Owner Signature
(If registered in joint names, both must sign)
</TABLE>

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

32
<PAGE>

MERRILL LYNCH MARYLAND 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 Maryland 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 BY CHECK

Draw checks payable

(check one)

/ / as indicated in item 1.

/ / to the order of ........................................................

Mail to (check one)

/ / the address indicated in item 1.
/ / Name (Please Print) ....................................................

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

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

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

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

Specify type of account (check one): / / checking / / savings

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 ..........................................................
Bank ..........................................................................
Bank # ......................... Account # ..................................
Bank Address ..................................................................
Signature of Depositor ................................... Date ..............
Signature of Depositor (if joint 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.

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

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 Maryland Municipal Bond Fund subject to the terms set forth below.

FINANCIAL DATA SERVICES, INC.

You are hereby authorized to draw a check or an ACH debit each month on my bank
account for investment in Merrill Lynch Maryland Municipal Bond Fund as
indicated below:

Amount of each check or ACH debit $ ........................................
Account No. ...................................................................

Please date and invest checks or draw ACH debits on the 20th of

each month beginning .........................................................
(Month)

or as soon thereafter as possible.

I agree that you are preparing these checks or drawing these debits
voluntarily at my request and that you shall not be liable for any loss arising
from any delay in preparing or failure to prepare any such check or debit. If I
change banks or desire to terminate or suspend this program, I agree to notify
you promptly in writing.

I further agree that if a check or debit is not honored upon presentation,
Financial Data Services, Inc. is authorized to discontinue immediately the
Automatic Investment Plan and to liquidate sufficient shares held in my account
to offset the purchase made with the returned check or dishonored debit.

<TABLE>
<S> <C>
.................... ..............................
Date Signature of Depositor
...............................
Signature of Depositor
(If joint account, both must
sign)
</TABLE>

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

To ....................................................................... Bank
(Investor's Bank)

Bank Address ..................................................................
City ............ State ............ Zip Code ...............................

As a convenience to me, I hereby request and authorize you to pay and charge to
my account checks or ACH debits drawn on my account by and payable to Financial
Data Services, Inc. I agree that your rights in respect to each such check or
debit shall be the same as if it were a check drawn on you and signed personally
by me. This authority is to remain in effect until revoked personally by me in
writing. Until you receive such notice, you shall be fully protected in honoring
any such check or debit. I further agree that if any such check or debit be
dishonored, whether with or without cause and whether intentionally or
inadvertently, you shall be under no liability.

<TABLE>
<S> <C>
.................... ..............................
Date Signature of Depositor
.................... ..............................
Bank Account Number Signature of Depositor
(If joint account, both must
sign)
</TABLE>

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

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

5. FOR DEALER ONLY

Branch Office, Address, Stamp

This form when completed should be mailed to:

Merrill Lynch Maryland Municipal Bond Fund
c/o Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
P.O. Box 45289
Jacksonville, FL 32232-5289

We hereby authorize Merrill Lynch Funds Distributor, Inc. to act as our agent in
connection with transactions under this authorization form and agree to notify
the Distributor of any purchases made under a Letter of Intention or Systematic
Withdrawal Plan. We guarantee the Shareholder's signature.

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

Dealer Name and Address

By..............................................................................

Authorized Signature of Dealer

<TABLE>
<S> <C>
/ / / / / / / / / .....................
Branch-Code F/C No. F/C Last Name
/ / / / / / / / / /
Dealer's Customer A/C No.
</TABLE>

<PAGE>
MANAGER

Fund Asset Management
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
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE MANAGER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Fee Table......................................... 2
Alternative Sales Arrangements.................... 3
Financial Highlights.............................. 5
Investment Objective and Policies................. 6
Potential Benefits.............................. 8
Special and Risk Considerations Relating to
Maryland Municipal Bonds...................... 8
Description of Municipal Bonds.................. 8
When-Issued Securities and Delayed Delivery
Transactions.................................. 10
Call Rights..................................... 11
Financial Futures Transactions and Options...... 11
Repurchase Agreements and Purchase and Sale
Contracts..................................... 13
Investment Restrictions......................... 13
Management of the Trust........................... 14
Trustees........................................ 14
Management and Advisory Arrangements............ 15
Transfer Agency Services........................ 16
Purchase of Shares................................ 16
Alternative Sales Arrangements.................. 17
Initial Sales Charge Alternative--Class A
Shares........................................ 18
Deferred Sales Charge Alternative--Class B
Shares........................................ 19
Redemption of Shares.............................. 22
Redemption...................................... 22
Repurchase...................................... 22
Reinstatement Privilege--Class A Shares......... 23
Shareholder Services.............................. 23
Portfolio Transactions............................ 25
Distributions and Taxes........................... 25
Distributions................................... 25
Taxes........................................... 26
Performance Data.................................. 28
Additional Information............................ 29
Determination of Net Asset Value................ 29
Organization of the Trust....................... 30
Shareholder Reports............................. 31
Shareholder Inquiries........................... 31
Authorization Form................................ 32
</TABLE>

Code # 16858

Prospectus

[INSERT ART HERE]

- ------------------------------------------------------
MERRILL LYNCH
MARYLAND
MUNICIPAL BOND
FUND

MERRILL LYNCH
MULTI-STATE
MUNICIPAL SERIES
TRUST

February 24, 1994

Distributor:
Merrill Lynch
Funds Distributor, Inc.

This prospectus should be
retained for future reference.

<PAGE>
STATEMENT OF ADDITIONAL INFORMATION

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

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

Merrill Lynch Maryland 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 Maryland 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 Maryland income taxes in the opinion of bond counsel to
the issuer ('Maryland 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 at a price
equal to the next determined net asset value per share, plus 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 those 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 February
24, 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 February 24, 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 Maryland 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 Maryland, 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 Maryland
income taxes. Obligations exempt from Federal income taxes are referred to
herein as 'Municipal Bonds' and obligations exempt from both Federal and
Maryland income taxes are referred to as 'Maryland Municipal Bonds'. Unless
otherwise indicated, references to Municipal Bonds shall be deemed to include
Maryland 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 Maryland 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 Maryland income taxes. However, to the extent that suitable
Maryland 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 Maryland 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 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 Maryland 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 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'.
2
<PAGE>
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 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.

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

3
<PAGE>
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 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 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
4
<PAGE>
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. 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 the 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 Maryland Municipal Bonds, exempt
from Maryland 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 include 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 or 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 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 may also invest in 'moral obligation' bonds, which are normally
issued by special purpose public authorities. If the issuer of moral obligation
bonds is unable to meet its obligations, the repayment of such bonds becomes a
moral commitment, but not a legal obligation, of the state or municipality in
question.

obligations do not constitute general obligations of the issuer for which the
issuer's unlimited taxing power is pledged, a lease obligation is frequently
backed by the issuer's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain lease obligations contain
'non-appropriation' clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although 'non-appropriation'
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult. These securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional securities. Certain
investments in lease obligations may be illiquid. The Fund may not invest in
illiquid lease obligations if such investments, together with all other illiquid
investments, would exceed 15% of the Fund's 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 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
6
<PAGE>

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 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 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
7
<PAGE>
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.

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 or calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. 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
8
<PAGE>
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. 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
9
<PAGE>
increase, thus offsetting all or a portion of the depreciation in the market
value of the Fund's Municipal Bond investments which are being hedged. While the
Fund will incur commission expenses in selling and closing out futures
positions, commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of Municipal Bonds. In addition, the ability
of the Fund to trade in the standardized contracts available in the futures
markets may offer a more effective defensive position than a program to reduce
the average maturity of the portfolio securities due to the unique and varied
credit and technical characteristics of the municipal debt instruments available
to the Fund. Employing futures as a hedge also may permit the Fund to assume a
defensive posture without reducing the yield on its investments beyond any
amounts required to engage in futures trading.

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

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

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

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

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

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

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

The Trust has received an order from the 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
10
<PAGE>
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.

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
11
<PAGE>
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.

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 issue 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 (provided that such restriction shall not apply to securities secured by
real estate or interests therein or issued by companies which
12

<PAGE>

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; (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, 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 tax requirements for qualifications 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 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
13
<PAGE>
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 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, Grumman Corporation, UNUM Corporation, Protection Mutual
Insurance Company, Zurn Industries, Inc. and, until 1992, of Central Maine Power
Company and Key Trust Company of Maine; Trustee, The Chicago Dock and Canal
Trust.

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; Distinguished Fellow, Herman Kahn Chair, Hudson
Institute from 1984 to 1985; Director, Damon Corporation since 1991; Overseer,
Center for Naval Analyses.

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

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 02136. 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.

14
<PAGE>

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.

At February 1, 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 MLAM.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more clients are selling the same
security. If purchases or sales of securities for the Fund or other funds for
which they act as manager or for their advisory clients arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds and clients in a manner deemed equitable
to all. To the extent that transactions on behalf of more than one client of the
Manager or MLAM during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an adverse
effect on price.

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 fees of
all Trustees of the Trust who are affiliated persons of Merrill Lynch & Co.,
Inc. or any of its subsidiaries. The Fund pays all other expenses incurred in
its operation and a portion of the Trust's general administrative expenses
allocated on the basis of the asset size of the respective series of the Trust
('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,
15

<PAGE>

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 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 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.

16
<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 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
17
<PAGE>
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, directors and
trustees of certain 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 (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.

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
18
<PAGE>
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--Deferred Sales
Charge Alternative--Class B Shares--Distribution Plan' in the Prospectus for
certain information with respect to the Distribution Plan of the Fund.

The payment of the distribution fee with respect to Class B shares 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 a 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 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 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.

19
<PAGE>
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, absent an exemptive order
from 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. 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 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.)

20
<PAGE>
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, President's 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 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 monthly statements from the Transfer Agent
showing any reinvestment of dividends and capital gains distributions activity
in the account since the previous statement. 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
21

<PAGE>
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. Alternatively, investors who maintain CMA(Registered) accounts may
arrange to have periodic investments made in the Fund in their CMA(Registered)
account or in certain related accounts in amounts of $100 or more through the
CMA(Registered)Automatic Investment Program.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions are given as to the method of payment of
dividends and capital gains distributions, dividends and distributions will 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 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

<PAGE>

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(Registered),
CBA(Registered) 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 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 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 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

23
<PAGE>

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 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 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.

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 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
contingent deferred sales load 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 contingent deferred sales
charge 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 contingent deferred sales
charge 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 (formerly known as Merrill Lynch Natural
Resources Trust) after having held the Fund's Class B shares for two and a half
years. The 2% sales charge 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 Global Resources Trust and receive cash. There
will be no contingent deferred sales load 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 Class B shares are held
in a Class B money market fund will not count towards satisfaction of the
holding period

24
<PAGE>

requirement for purposes of reducing the contingent deferred sales load.
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 contingent deferred sales load. 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% contingent deferred sales load 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 contingent deferred sales load.

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

<TABLE>
<S> <C>
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.
</TABLE>

25
<PAGE>

<TABLE>
<S> <C>
MERRILL LYNCH BASIC VALUE FUND, INC..................... Capital appreciation and, secondarily, income through
investments 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.
MERRILL LYNCH DRAGON FUND, INC.......................... Capital appreciation primarily through investment in
equity and debt securities of issuers domiciled in
</TABLE>

26
<PAGE>

<TABLE>
<S> <C>
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 MUINCIPAL 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 serving 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 portfolio 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 of capital through investment in a
diversified portfolio of equity securities placing
particular emphasis on companies that have exhibited
an above-average growth rate in earnings.
MERRILL LYNCH GLOBAL ALLOCATION FUND, INC............... High total return, consistent with prudent risk, through
a fully managed investment policy utilizing 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.
</TABLE>

27
<PAGE>

<TABLE>
<S> <C>
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 multinational currency units.
MERRILL LYNCH GLOBAL CONVERTIBLE FUND, INC.............. High total return from investment primarily in an
internationally diversified portfolio of convertible
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 resource
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 engaged in the
ownership or operation of facilities used to generate,
transmit or distribute electricity,
telecommunications, gas or water.
MERRILL LYNCH GOVERNMENT FUND........................... A portfolio of Merrill Lynch Funds For Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and security
of principal from investment in securities issued or
guaranteed by the U.S. Government, its agencies and
instrumentalities 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.
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
</TABLE>

28
<PAGE>

<TABLE>
<S> <C>
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 Institutions
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 Institutions
Series, a series fund, whose objective is to provide
current income exempt from Federal income taxes,
preservation of capital and liquidity available from
investing in a diversified portfolio of short-term,
high quality municipal 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 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 exempt from
Federal and Massachusetts income taxes as is
consistent with prudent investment management through
investment in a portfolio primarily of
intermediate-term investment grade Massachusetts
Municipal Bonds.
MERRILL LYNCH MASSACHUSETTS 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 Massachusetts income taxes as
is consistent with prudent investment management.
MERRILL LYNCH MIGHIGAN 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 and Michigan income taxes as is consistent
with prudent investment management through investment
in a portfolio primarily of intermediate-term
investment grade Michigan Municipal Bonds.
</TABLE>

29
<PAGE>

<TABLE>
<S> <C>
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 Municipal
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 Municipal
Series Trust, a series fund, whose objective is to
provide as high a level of income as possible 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 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 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 Municipal
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 YORK 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, 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 investment grade New York Municipal
Bonds.
MERRILL LYNCH NEW YORK MUNICIPAL BOND FUND.............. A portfolio of Merrill Lynch Multi-State Municipal
Series Trust, a series fund, whose objective is as
</TABLE>

30
<PAGE>

<TABLE>
<S> <C>
high a level of income exempt from Federal, New York
State and New York City income taxes as is consistent
with prudent investment management.
MERRILL LYNCH NORTH CAROLINA 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 North
Carolina income taxes as is consistent with prudent
investment management.
MERRILL LYNCH OHIO 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 Ohio
income taxes as is consistent with prudent investment
management.
MERRILL LYNCH OREGON 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 Oregon
income taxes as is consistent with prudent investment
management.
MERRILL LYNCH PACIFIC FUND, INC......................... Capital appreciation by investing in equity securities
of corporations domiciled in Far Eastern and Western
Pacific countries, including Japan, Australia, Hong
Kong and Singapore.
MERRILL LYNCH PENNSYLVANIA 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 Pennsylvania income taxes as
is consistent with prudent investment management
through investment in a portfolio of intermediate-term
investment grade Pennsylvania Municipal Bonds.
MERRILL LYNCH PENNSYLVANIA 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
Pennsylvania income taxes as is consistent with
prudent investment management.
MERRILL LYNCH PHOENIX FUND, INC......................... Long-term growth of capital by investing in equity 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 current or prospective
condition of such issuer.
</TABLE>

31
<PAGE>

<TABLE>
<S> <C>
MERRILL LYNCH READY ASSETS TRUST........................ Preservation of capital, liquidity and the highest
possible current income consistent with the foregoing
objectives from the short-term money market securities
in which the Fund invests.
MERRILL LYNCH RETIREMENT RESERVES MONEY FUND
(available only if the exchange occurs within certain
retirement plans)..................................... Currently the only portfolio of Merrill Lynch Retirement
Series Trust, a series fund, whose objectives 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 consistent with
prudent investment management from a global portfolio
of high quality debt securities denominated in various
currencies and multinational currency units and having
remaining maturities not exceeding three years.
MERRILL LYNCH SPECIAL VALUE FUND, INC................... Long-term growth of capital from investments in
securities, primarily common stocks, of relatively
small companies believed to have special investment
value and emerging growth companies regardless of
size.
MERRILL LYNCH STRATEGIC DIVIDEND FUND................... Long-term total return from investment in dividend
paying common stocks which yield more than Standard &
Poor's 500 Composite Stock Price Index.
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 technology.
MERRILL LYNCH TEXAS 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 by investing primarily in a portfolio of
long-term, investment grade municipal obligations
issued by the State of Texas, its political
subdivisions, agencies and instrumentalities.
MERRILL LYNCH TREASURY FUND............................. A portfolio of Merrill Lynch Funds For Institutions
Series, a series fund, whose objective is to provide
current income consistent with liquidity and security
of principal from investment in direct obligations of
</TABLE>

32
<PAGE>

<TABLE>
<S> <C>
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 liquidity
available from investing in direct obligations 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 diversified
portfolio of short-term marketable securities which
are direct obligations of the U.S. Treasury.
MERRILL LYNCH UTILITY INCOME FUND, INC.................. High current income through investment in equity and
debt securities issued by companies which are
primarily engaged in the ownership or operation 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 currency units.
</TABLE>

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 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. 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

<PAGE>

capital gains. Similar rules apply to the Fund if its income is subject to
Maryland tax. The Trust does not expect the Fund to be subject to Maryland tax
and in any event, intends to cause the Fund to distribute substantially all of
its income.

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 for each Series individually 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 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 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 or Maryland income tax purposes to the extent
attributable to exempt-interest dividends. Shareholders are advised to consult
their tax advisers with respect to whether exempt-interest dividends retain the
exclusion under Code Section 103(a) if a shareholder would be treated as a
'substantial user' or 'related person' under Code Section 147(a) with respect to
property financed with the proceeds of an issue of 'industrial development
bonds' or 'private activity bonds,' if any, held by the Fund.

The portion of the Fund's exempt-interest dividends paid from interest
received by the Fund from Maryland Municipal Bonds and distributions
attributable to gains from Maryland Municipal Bonds also will be exempt from
Maryland personal and corporate income taxes. However, shareholders of the Fund
that are financial institutions otherwise subject to Maryland financial
institution franchise taxes would be subject to such taxes on all distributions
received from the Fund (including exempt-interest dividends). Individual
shareholders subject to income taxation in states other than Maryland will
realize a lower after-tax rate of return than Maryland shareholders since the
dividends distributed by the Fund generally will not be exempt, to any
significant degree,
34
<PAGE>

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 Maryland income
taxes. The Fund will allocate exempt-interest dividends between Class A and
Class B shareholders for Maryland income tax purposes based on a method similar
to that described above for Federal income tax purposes.

Shares of the Fund will not be subject to the Maryland personal property
tax.

To the extent that the Fund's distributions are derived from interest on
its taxable investments or from an excess of net short-term capital gains over
net long-term capital losses ('ordinary income dividends'), such distributions
are considered taxable ordinary income for Federal and Maryland 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 and for state tax purposes are treated as capital gains
which are taxable at ordinary income rates. 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). 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. For Federal income tax purposes, 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 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 increased 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 Fund will allocate
dividends which are a tax preference item between the Class A and Class B
shareholders based on a method similar to that described above for the
allocation of tax-exempt interest. The Code further provides that corporations
are subject to an alternative minimum tax based, in part, on certain differences
between taxable income as adjusted for other tax preferences and the
corporation's 'adjusted current earnings', which more closely reflect a
corporation's economic income. Because an exempt-interest dividend paid by the
Fund will be included in adjusted current earnings, a corporate shareholder may
be required to pay alternative minimum tax on exempt-interest dividends paid by
the Fund.

35
<PAGE>
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.

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.

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.

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 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 OPTION 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 from
transactions in options and financial futures 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.

36
<PAGE>

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

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 option or financial futures contract.

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

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and Maryland 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 Maryland tax laws. The Code and the Treasury regulations, as well as
the Maryland 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 Maryland) 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.
From time to time, the Fund may include the Fund's Morningstar risk-adjusted
performance ratings in advertisements or supplemental sales literature. 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, yield and tax equivalent yield are determined
separately for Class A and Class B shares in accordance with formulas specified
by the Commission.

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

37
<PAGE>

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

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
-------------------------------------- --------------------------------------
EXPRESSED AS REDEEMABLE VALUE EXPRESSED AS REDEEMABLE VALUE
A PERCENTAGE OF A HYPOTHETICAL A PERCENTAGE OF A HYPOTHETICAL
BASED ON A $1,000 INVESTMENT BASED ON A $1,000 INVESTMENT
HYPOTHETICAL AT THE END OF HYPOTHETICAL AT THE END OF
PERIOD $1,000 INVESTMENT THE PERIOD $1,000 INVESTMENT THE PERIOD
- ---------------------------------------- ----------------- ----------------- ----------------- -----------------
AVERAGE ANNUAL TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
October 29, 1993 (commencement of
operations) to January 31, 1994....... -4.32% $ 988.70 -4.34% $ 988.60

<CAPTION>
ANNUAL TOTAL RETURN (EXCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
October 29, 1993 (commencement of
operations) to January 31, 1994....... 2.99% $1,029.90 2.86% $1,028.60
<CAPTION>
AGGREGATE TOTAL RETURN (INCLUDING MAXIMUM APPLICABLE SALES CHARGES)
<S> <C> <C> <C> <C>
October 29, 1993 (commencement of
operations) to January 31, 1994....... -1.13% $ 988.70 -1.14% $ 988.60
30 days ended on January 31, 1994....... 4.62% YIELD 4.32%
30 days ended on January 31, 1994....... 6.42% TAX EQUIVALENT YIELD 6.00%
</TABLE>

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 ('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 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 York Municipal Bond Fund, Merrill Lynch North Carolina
Municipal Bond Fund, Merrill Lynch Ohio Municipal Bond Fund, Merrill Lynch
Oregon Municipal Bond Fund, Merrill Lynch Pennsylvania Municipal Bond Fund and
Merrill Lynch Texas Municipal Bond Fund. The Trustees are authorized to create
an unlimited number of Series and, with respect to each Series, to issue an
unlimited number of full and fractional shares of beneficial interest, par value
$.10 per share, of different classes and to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in the Series. Shareholder approval is not necessary for
the authorization of additional Series or classes of a Series of the Trust. At
the date of this Statement of Additional Information, the shares of the Fund are
divided into Class A 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 B shares and the Class B shares have
exclusive voting rights with respect to matters relating to such expenditures.
See 'Purchase of Shares'. The Trust has received an order from the Commission
38

<PAGE>
permitting the issuance and sale of two classes of shares of beneficial interest
and the issuance and sale of any additional classes will require an additional
order from the Commission. There is no assurance that such an additional order
will be granted.

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 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. Each issued and
outstanding share is entitled to one vote and to participate equally in
dividends and distributions declared by the respective Series and in 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 account maintenance and distribution of the Class B Shares of a
Series 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.

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 Fund's net assets on January 31, 1994
and its shares outstanding on that date is as follows:

TABLE

<TABLE>
<CAPTION>
CLASS A CLASS B
------------ -------------
<S> <C> <C>
Net Assets............................................................... $ 1,249,147 $ 11,725,780
------------ -------------
------------ -------------
Number of Shares Outstanding............................................. 122,724 1,152,049
------------ -------------
------------ -------------
Net Asset Value Per Share (net assets divided by number of shares
outstanding)........................................................... $ 10.18 $ 10.18
Sales Charge (for Class A shares: 4.00% of offering price (4.17% of net
asset value per share))*............................................... $ 0.42 $ **
------------ -------------
Offering Price........................................................... $ 10.60 $ 10.18
------------ -------------
------------ -------------
</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.

39
<PAGE>
INDEPENDENT AUDITORS

Deloitte & Touche, 117 Campus Drive, Princeton, New Jersey 08540-6400, has
been selected as the independent auditors of the Fund. 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 receipt and delivery of securities and collecting interest on the
Fund's investments.

TRANSFER AGENT

Financial Data Services, Inc., 4800 Deer Lake Drive, Jacksonville, Florida
32246-6434, 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 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.

To the knowledge of the Trust, no person or entity owned beneficially 5% or
more of the Fund's shares on February 1, 1994.

<PAGE>
APPENDIX I

ECONOMIC CONDITIONS IN MARYLAND

The following information provides only a brief summary of some of the
complex factors affecting the financial situation of Maryland issuers. It is
derived from information obtained from various State and local agencies in
Maryland and other sources that are generally available to investors and is
believed to be accurate. No independent verification has been made of the
accuracy or completeness of any of the following information.

There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on the financial condition of Maryland
issuers generally, will not adversely affect the market value of Maryland
Municipal Obligations held in the portfolio of the Fund or the ability of
particular obligors to make timely payments of debt service on (or relating to)
those obligations.

The State and Its Economy. Maryland encompasses a geographic area of 12,186
square miles and ranks 42nd among the 50 states in size. Maryland's land area
(exclusive of inland waterways and the 1,726 square miles of the Chesapeake Bay)
is 9,837 square miles. According to 1990 Census reports, Maryland's population
in that year was 4,781,468, reflecting an increase of 13.4% from the 1980
Census. Maryland's population is concentrated in urban areas; the eight counties
and Baltimore City located in the Baltimore and Washington corridor contain
37.4% of the State's land area and 82.3% of its population. Overall Maryland's
population per square mile in 1990 was 486.1. In each Census report since 1940
(except in 1980), the percentage population increase in Maryland has exceeded
the nation as a whole.

After enjoying rapid economic growth in the 1980's, Maryland has
experienced declining rates of growth in the 1990's. Personal income in Maryland
grew at annual rates between 8.4% and 10.9% in each of the years 1984 through
1989, but grew at a rate of 6.4% in 1990, 3.0% in 1991 and 4.1% in 1992.
Similarly, per capita income, which had grown at rates no lower than 6.5% for
the period from 1972 to 1989, grew at a rate of 4.7% in 1990, 1.8% in 1991 and
3.0% in 1992. Unemployment in Maryland peaked in 1982 at 8.4%, then decreased
steadily to a low of 3.7% in 1989. Unemployment increased to 4.6% in 1990, to
5.9% in 1991 and to 6.8% in 1992.

Retail sales in Maryland grew by 3.9% in 1988, 3.6% in 1989 and 5.0% in
1990, versus nationwide growth of 7.1%, 6.4% and 4.2% in such years,
respectively.

Services (including mining), wholesale and retail trade, government, and
manufacturing (primarily printing and publishing, food and kindred products,
instruments and related products, industrial machinery, electronic equipment,
and chemical and allied products) are the leading areas of employment in
Maryland. In contrast to the nation as a whole, more people in Maryland are
employed in government than in manufacturing. Between 1972 and 1992,
manufacturing wages decreased 26.4%, while non-manufacturing wages increased
62.5%.

State Fiscal Information. The State's total expenditures for the fiscal
years ending June 30, 1991, June 30, 1992 and June 30, 1993 were $11.304
billion, $11.657 billion and $12.353 billion, respectively. As of December 17,
1993, it was estimated that total expenditures for fiscal year 1994 would be
$12.501 billion. The State's General Fund, representing approximately 55% of
each year's total budget, had a surplus on a budgetary basis of $57 million in
fiscal year 1990 and $55 thousand in fiscal year 1991 and a deficit of $56
million in fiscal year 1992. These results were due primarily to revenue
collections which fell short of anticipations, and increases in expenditures for
public assistance. The Governor of Maryland reduced fiscal year 1993
appropriations by approximately $56 million to offset the fiscal year 1992
deficit. During the final months of fiscal year 1992 and the initial months of
fiscal year 1993, collections of State revenues were below the levels estimated
at the time of the adoption of the 1993 Budget. Measures taken to address this
revenue shortfall included: $168 million in reductions to the State's General
Fund appropriations, approved by the Board of Public Works on September 30,
41

<PAGE>

1992; the enactment of legislation by the General Assembly at a November, 1992,
special session reducing State aid to local governments by $147 million; and the
introduction of a new Keno game by the State Lottery Agency in January, 1993.
The General Fund ended fiscal year 1993 with a surplus of $10.5 million (after
transfers of $24.5 million to reserve accounts) and the Revenue Stabilization
Account of the State Reserve Fund ended fiscal year 1993 with $50.9 million. The
State Constitution mandates a balanced budget.

State-level Municipal Obligations. The State of Maryland and its various
political subdivisions issue a number of different kinds of Municipal
Obligations, including general obligation bonds supported by tax collections,
revenue bonds payable from certain identified tax levies or revenue streams,
conduit revenue bonds payable from the repayment of certain loans to authorized
entities such as hospitals, universities and other private entities, and
certificates of participation in tax-exempt municipal leases.

The State of Maryland issues general obligation bonds, debt service on
which is payable (to the extent not paid from other sources) from ad valorem
property taxes. The State Constitution prohibits the contracting of State debt
unless the debt is authorized by a law levying an annual tax or taxes sufficient
to pay the debt service within 15 years and prohibiting the repeal of the tax or
taxes or their use for another purpose until the debt has been paid. The State
also enters into lease-purchase agreements, participation interests in which are
often sold publicly as individual securities. These obligations are subject to
annual appropriation by the General Assembly.

As of February 1994, the State's general obligation bonds were rated 'Aaa'
by Moody's, 'AAA' by S&P, and 'AAA' by Fitch Investors Service, Inc. ('Fitch').
There can be no assurance that these ratings will continue.

The Maryland Department of Transportation issues Consolidated
Transportation Bonds, which are payable out of specific excise taxes, motor
vehicle taxes and corporate income taxes, and from the general revenues of the
Department or from amounts payable under agreements between the Department and
participating counties. Issued to finance highway, port, transit, rail and
aviation facilities, as of December, 1993, these bonds were rated 'Aa' by
Moody's, 'AA' by S&P and 'AA' by Fitch. The Maryland Transportation Authority, a
unit of the Department, issues its own revenue bonds for transportation
facilities, which are payable from certain highway, bridge and tunnel tolls.
These bonds were rated 'A1' by Moody's and 'A+' by S&P as of January, 1993.
There can be no assurance that these ratings will continue.

Other State agencies which issue Municipal Obligations include the Maryland
Stadium Authority, which has issued bonds payable from sports facility lease
revenues and certain lottery revenues, the Maryland Water Quality Financing
Administration, which issues bonds to provide loans to local governments for
wastewater control projects, the Community Development Administration of the
Department of Housing and Community Development, which issues mortgage revenue
bonds for housing, the Maryland Environmental Service, which issues bonds
secured by the revenues from its various water supply, wastewater treatment and
waste management projects, and the various public institutions of higher
education in the State (which include the University of Maryland System, Morgan
State University, Baltimore City Community College and St. Mary's College of
Maryland), which issue their own revenue bonds. None of these bonds constitutes
debt of the State or is secured by a pledge of the full faith and credit of the
State of Maryland. The issuers of these obligations are subject to various
economic risks and uncertainties, and the credit quality of the securities
issued by them may vary considerably from the credit quality of obligations
backed by the full faith and credit of the State.

In addition, a number of State authorities issue conduit revenue bonds,
including the Maryland Health and Higher Educational Facilities Authority, which
issues revenue bonds for nonprofit hospitals and institutions of higher
education, the Northeast Maryland Waste Disposal Authority, which issues revenue
bonds to finance solid waste disposal facilities, and the Maryland Industrial
Development Financing Authority, the Maryland Economic Development Corporation
and the Maryland Energy Financing Administration, which issue revenue bonds to
42
<PAGE>
finance eligible projects for private borrowers under relevant State and federal
laws. These bonds are payable solely from the loan payments made by borrowers
and other financing participants, and their credit quality varies with the
financial strengths of these entities.

Municipal Obligations of Maryland Local Governments. Maryland has 24
geographical subdivisions, comprised of 23 counties plus the independent City of
Baltimore, which functions much like a county. Some of the counties and the City
of Baltimore operate pursuant to the provisions of charters or codes of their
own adoption, while others operate pursuant to State statutes.

Maryland counties and the City of Baltimore receive most of their revenues
from ad valorem taxes on real and personal property, individual income taxes,
transfer taxes, miscellaneous taxes and aid from the State. Their expenditures
include public education, public safety, public works, health, public welfare,
court and correctional services, and general governmental costs.

The economic factors affecting the State, as discussed above, also have
affected the counties and the City of Baltimore. In addition, reductions in
State aid caused by State budget deficits have caused the local governments to
trim expenditures and, in some cases, raise taxes.

Recent available ratings of the counties and the City of Baltimore are as
follows: general obligation bonds of Montgomery County (abutting Washington,
D.C.) are rated 'Aaa' by Moody's and 'AAA' by S&P; Anne Arundel County issues
general obligation bonds which are rated 'AA+' by both Fitch and S&P and 'Aa' by
Moody's; Prince George's County, also in the Washington, D.C. suburbs, issues
general obligation bonds rated 'A' by Moody's and 'AA-' by S&P; Baltimore
County, a separate political subdivision surrounding the City of Baltimore,
issues general obligation bonds rated 'Aaa' by Moody's and 'AA+' by S&P. The
City of Baltimore's general obligation bonds are rated 'A1' by Moody's and 'A'
by S&P and the other counties in Maryland which are rated by Moody's all have
general obligation bond ratings of 'A' or better from Moody's, except for
Allegany County, the bonds of which are rated 'Baa' by Moody's. There can be no
assurance that these ratings will continue.

Two bi-county agencies issue bonds to finance facilities for Montgomery and
Prince George's Counties. The Washington Suburban Sanitary Commission, which
provides water and sewerage services, issues general obligation bonds rated
'Aa1' by Moody's and 'AA' by S&P as of January, 1993. There can be no assurance
that these ratings will continue. The Maryland-National Capital Park and
Planning Commission, which administers a park system for these counties, issues
general obligation bonds that are guaranteed by the county in which the financed
facilities are located.

Additionally, many of the municipal corporations in Maryland (such as the
cities of Annapolis, Frederick and Rockville) have issued general obligation
bonds. These municipalities are subject to various economic risks and
uncertainties, and the credit quality of the securities issued by them may vary
considerably from the credit quality of obligations issued by rated Maryland
counties.

Other Issuers of Maryland Municipal Obligations. Many of Maryland's
counties have established subsidiary agencies with bond issuing powers, such as
sanitary districts, housing authorities, parking revenue authorities and
industrial development authorities. In addition, all Maryland municipalities
have the authority under State law to issue conduit revenue bonds payable from
payments from private borrowers. These entities are subject to various economic
risks and uncertainties, and the credit quality of the securities issued by them
varies with the financial strengths of the respective borrowers.

<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.

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
44
<PAGE>
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; Baa--considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured.

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.

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.

45
<PAGE>
The ratings are based, in varying degrees, on the following considerations:

<TABLE>
<S> <C>
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.
</TABLE>

<TABLE>
<S> <C>
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 Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as predominately speculative
B with respect to capacity to pay interest and repay principal in accordance with the terms of the
CCC obligations. 'BB' indicates the lowest degree of speculation and 'C' the highest degree of
CC speculation. While such debt will likely have some quality and protective characteristics, these
C 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.
</TABLE>

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

DESCRIPTION OF STANDARD & POOR'S 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
46
<PAGE>
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. These categories are as
follows:

<TABLE>
<S> <C>
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.
</TABLE>

A Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer 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.

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

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

Note rating symbols are as follows:

<TABLE>
<S> <C>
SP-1 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.
</TABLE>

47
<PAGE>
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.

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.

<TABLE>
<S> <C>
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+'.
</TABLE>

48
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>

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 (right and left arrows)
Declining (down arrow)
Uncertain (up and 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.

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.

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.

49
<PAGE>
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.

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

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.

50
<PAGE>
Fitch short-term ratings are as follows:

<TABLE>
<S> <C>
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.
</TABLE>

<PAGE>
INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Maryland Municipal Bond Fund of Merrill Lynch Multi-State Municipal Series
Trust as of August 27, 1993. 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 Maryland Municipal
Bond Fund of Merrill Lynch Multi-State Municipal Series Trust as of August 27,
1993 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE
Princeton, New Jersey
August 31, 1993

52
<PAGE>
MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 27, 1993

<TABLE>
<S> <C>
Assets:
Cash in bank.......................................................................................... $ 100,000
Prepaid registration fees (Note 3).................................................................... 16,950
Deferred organization expenses (Note 4)............................................................... 47,600
----------
Total Assets.......................................................................................... 164,550
Liabilities--Accrued expenses......................................................................... 64,550
----------
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>

- ------------------
(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
Maryland 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.

53
<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
SCHEDULE OF INVESTMENTS (UNAUDITED)

JANUARY 31, 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
VALUE
S & P MOODY'S FACE (NOTE
RATINGS RATINGS AMOUNT ISSUE 1A)
- -------- -------- ----------- ------------------------------------------------------------------------ -----------
<S> <C> <C> <C> <C>
MARYLAND--97.9%
A-1 VMG1 $ 400 Anne Arundel County, Maryland, Economic Development Revenue Bonds
(Baltimore Gas and Electric Company Project), AMT, TECP, 2.20% due
2/08/1994 $ 400
AA+ Aa 400 Anne Arundel County, Maryland, Refunding Bonds, Consolidated Water and
Sewer, 5.30% due 4/15/2017 405
AA+ Aaa 500 Baltimore County, Maryland, Refunding Bonds (County Pension Funding),
UT, 6.70% due 7/01/2016 556
NR Aa1 400 Baltimore County, Maryland, Revenue Authority, Lease Revenue Refunding
Bonds, 5% due 10/01/2012 391
BBB+ Baa1 500 Baltimore, Maryland, PCR (General Motors Corporation), 5.35% due
4/01/2008 509
AAA Aaa 2,130 Baltimore, Maryland, Revenue Refunding Bonds (Baltimore City Parking
System Facilities), 5% due 7/01/2018(a) 2,077
A A2 500 Calvert County, Maryland, PCR Refunding (Baltimore Gas and Electric
Company Project), 5.55% due 7/15/2014 508
AA- Aa 400 Carroll County, Maryland, Refunding Bonds, UT, 5.25% due 11/01/2012 407
AAA Aaa 500 Cecil County, Maryland, Refunding Bonds, UT, 5.30% due 12/01/2010 (a) 516
AAA Aaa 500 Cumberland County, Maryland, Refunding Bonds, Series A, UT, 5.25% due
5/01/2021(a) 504
AA- Aa 500 Frederick County, Maryland, Refunding Bonds, Series C, UT, 5.10% due
8/01/2011 504
A1+ VMG1 500 Howard County, Maryland, ALEXS, BANS, 2.20% due 7/01/1995(b) 500
NR Aa 400 Maryland Community Development Administration, M/F Housing, Revenue
Refunding Bonds, Insured Mortgage (Department of Housing and Community
Development), Series H, 5.60% due 5/15/2026 403
Maryland Health and Higher Educational Facilities Authority Revenue
Bonds:
NR VMG1 100 Pooled Loan Program, Series A, VRDN, 2.10% due 4/01/2035(b) 100
BBB Baa1 400 Refunding (Howard County General Hospital), 5.50% due 7/01/2013 394
A A 1,400 Refunding (Peninsula Regional Medical Center), 5% due 7/01/2023 1,330
NR A 315 Northeast Maryland, Waste Disposal Authority, Solid Waste Revenue Bonds
(Montgomery County Resource Recovery Project), Series A, AMT, 6.30% due
7/01/2016 334
NR NR 300 Prince Georges County, Maryland, Housing Authority Mortgage Revenue
Bonds (Laurel-Oxford), VRDN, 2.325% due 10/01/2007(b) 300
AA- A 500 Prince Georges County, Maryland, Refunding Bonds, Consolidated Public
Improvement, 5.25% due 10/01/2011 510
AA+ Aa1 400 Rockville, Maryland, Refunding Bonds, UT, 5% due 4/15/2008 404
AA+ Aa 400 University of Maryland, System Auxiliary Facilities and Tuition Revenue
Refunding Bonds, Series C, 5% due 10/01/2011 397
AAA Aaa 500 Washington, District of Columbia, Metropolitan Area Transportation
Authority, Gross Revenue Refunding Bonds, 5.25% due 10/01/2011(a) 502
Washington Suburban Sanitation District, Maryland (General Construction
Bonds), UT:
AA Aa1 250 7% due 12/01/1994 259
AA Aa1 500 Refunding, 5% due 6/01/2014 494
PUERTO RICO--10.1%
A Baa1 400 Puerto Rico Commonwealth, Refunding Bonds, Series A, 6% due 7/01/2014 423
NR Aaa 500 Puerto Rico Industrial, Medical and Environmental Pollution Control
Facilities, Financing Authority Revenue Bonds, 5.10% due 12/01/2018 498
BBB NR 400 Puerto Rico Industrial, Tourist, Educational, Medical and Environmental
Control Facilities, Financing Authority, Higher Education Revenue Bonds
(Polytechnic University of Puerto Rico Project), Series A, 5.50% due
8/01/2024 392

Total Investments (Cost--$13,790)--108.0% 14,017
Other Assets Less Liabilities--(8.0%) (1,043)
Net Assets--100.0% $12,975

</TABLE>

(a) FCIC Insured.
(b) The interest rate is subject to change periodically based on prevailing
material rates. The rates above shown are those in effect at January 31, 1994.
See Notes to Financial Statements.

PORTFOLIO ABBREVIATIONS

<TABLE>
<S> <C> <C>
To simplify the listing of Merrill Lynch Maryland ALEXS Ajustable Line Exempt Securities
Municipal Bond Fund's portfolio holdings in the AMT Alternative Minimum Tax (subject to)
Schedule of Investments, we have abbreviated the BANS Bond Anticipation Notes
names of many of the securities according to the M/F Multi-Family
list at right. PCR Pollution Control Revenue Bonds
TECP Tax-Exempt Commercial Paper
UT Unlimited Tax
VRDN Variable Rate Demand Notes
</TABLE>

<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JANUARY 31, 1994

<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (identified cost--$13,789,798) (Note 1a)....................... $14,016,981
Cash................................................................................. 78,767
Receivables:
Beneficial interest sold........................................................... $ 279,392
Interest........................................................................... 149,208
Investment adviser (Note 2)........................................................ 41,276 469,876
----------
Deferred organization expenses (Note 1e)............................................. 47,600
-----------
Total assets......................................................................... 14,613,224
-----------
LIABILITIES:
Payables:
Securities purchased............................................................... 1,551,720
Dividends to shareholders (Note 1f)................................................ 10,534
Distributor (Note 2)............................................................... 4,353
1,566,607
Accrued expenses and other liabilities............................................... 71,691
-----------
Total liabilities.................................................................... 1,638,298
-----------
NET ASSETS:
Net assets......................................................................... $12,974,926
-----------
-----------
NET ASSETS CONSIST OF:
Class A Shares of beneficial interest, $.10 par value, unlimited number of shares
authorized...................................................................... $ 12,272
Class B Shares of beneficial interest, $.10 par value, unlimited number of shares
authorized...................................................................... 115,205
Paid-in capital in excess of par................................................... 12,607,654
Undistributed realized capital gains--net.......................................... 12,612
Unrealized appreciation on investments--net........................................ 227,183
-----------
Net assets........................................................................... $12,974,926
-----------
-----------
NET ASSET VALUE:
Class A--Based on net assets of $1,249,147 and 122,724 shares of beneficial interest
outstanding........................................................................ $ 10.18
-----------
-----------
Class B--Based on net assets of $11,725,780 and 1,152,049 shares of beneficial
interest outstanding............................................................... $ 10.18
-----------
-----------
</TABLE>

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

See Notes to Financial Statements.

<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
STATEMENT OF OPERATIONS (UNAUDITED)
JANUARY 31, 1994

<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 29, 1993+ TO
JANUARY 31, 1994
--------------------------
<S> <C>
INVESTMENT INCOME
(NOTE 1D):
Interest and amortization of premium and discount earned................................ $128,492
EXPENSES:
Investment advisory fees (Note 2)....................................................... 15,637
Printing and shareholder reports........................................................ 13,975
Distribution fees--Class B (Note 2)..................................................... 12,837
Accounting Services (Note 2)............................................................ 8,528
Professional fees....................................................................... 5,584
Registration fees (Note 1e)............................................................. 4,728
Transfer agent fees--Class B (Note 2)................................................... 2,450
Amortization of organization expenses (Note 1e)......................................... 2,436
Custodian fees.......................................................................... 1,880
Pricing fees............................................................................ 487
Transfer agent fees--Class A (Note 2)................................................... 230
Trustees' fees and expenses............................................................. 31
Other................................................................................... 948
-----------
Total expenses before reimbursement..................................................... 69,751
Reimbursement of expenses (Note 2)...................................................... (56,913)
-----------
Total expenses after reimbursement...................................................... 12,838
-----------
Investment income--net.................................................................. 115,654
REALIZED & UNREALIZED GAIN ON INVESTMENTS--NET (NOTES 1D & 3):
Realized gain on investments--net....................................................... 12,612
Unrealized appreciation on investments--net............................................. 227,183
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... $355,449
-----------
-----------
</TABLE>

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

+ Commencement of Operations.
See Notes to Financial Statements.

<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
JANUARY 31, 1994

<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 29, 1993+
TO
JANUARY 31, 1994
-------------------
<S> <C>
Increase (Decrease) in Net Assets:
OPERATIONS:
Investment income--net....................................................................... $ 115,654
Realized gain on investments--net............................................................ 12,612
Unrealized appreciation/depreciation on investments--net..................................... 227,183
-------------------
Net increase in net assets resulting from operations......................................... 355,449
-------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F):
Investment income--net:
Class A.................................................................................... (12,529)
Class B.................................................................................... (103,125)
-------------------
Net decrease in net assets resulting from dividends and dividends to shareholders............ (115,654)
-------------------
BENEFICIAL INTEREST TRANSACTIONS (NOTE 4):
Net increase in net assets derived from beneficial interest transactions..................... 12,635,131
-------------------
NET ASSETS:
Total increase in net assets................................................................. 12,874,926
Beginning of period.......................................................................... 100,000
-------------------
End of period................................................................................ $ 12,974,926
-------------------
-------------------
</TABLE>

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

+ Commencement of Operations.

See Notes to Financial Statements.

<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
FINANCIAL HIGHLIGHTS (UNAUDITED)
JANUARY 31, 1994

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

<TABLE>
<CAPTION>
CLASS A
--------------------------
FOR THE PERIOD
OCTOBER 29, 1993+ TO
JANUARY 31, 1994
--------------------------
<S> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE
OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................... $10.00
Investment income--net................................................................ .12
Realized and unrealized gain on investments--net...................................... .18
-------
Total from investment operations........................................................ .30
-------
Less dividends:
Investment income-net................................................................. (.12)
-------
Total dividends......................................................................... (.12)
-------
Net asset value, end of period.......................................................... $10.18
-------
-------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................................................... 2.99%#
-------
-------
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement.......................................................... .00%*
-------
-------
Expenses................................................................................ 1.99%*
-------
-------
Investment income-net................................................................... 4.54%*
-------
-------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................................ $1,249
-------
-------
Portfolio turnover...................................................................... 11.27%
-------
-------
</TABLE>

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

* Annualized.

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

# Aggregate total investment return.

+ Commencement of Operations.

See Notes to Financial Statements.

58
<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
FINANCIAL HIGHLIGHTS (UNAUDITED)
JANUARY 31, 1994

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

<TABLE>
<CAPTION>
CLASS B
--------------------------
FOR THE PERIOD
OCTOBER 29, 1993+ TO
JANUARY 31, 1994
--------------------------
<S> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE
OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................... $ 10.00
Investment income--net................................................................ .10
Realized and unrealized gain on investments--net...................................... .18
----------
Total from investment operations........................................................ .28
----------
Less dividends and distributions:
Investment income-net................................................................. (.10)
----------
Total dividends and distributions....................................................... (.10)
----------
Net asset value, end of period.......................................................... $ 10.18
----------
----------
TOTAL INVESTMENT RETURN:**
Based on net asset value per share...................................................... 2.86%#
----------
----------
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees and net of reimbursement.......................... .00%
----------
----------
Expenses, net of reimbursement.......................................................... .50%*
----------
----------
Expenses................................................................................ 2.50%*
----------
----------
Investment income-net................................................................... 4.02%*
----------
----------
SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)................................................ $ 11,726
----------
----------
Portfolio turnover...................................................................... 11.27%
----------
----------
</TABLE>

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

* Annualized.

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

# Aggregate total investment return.

+ Commencement of Operations.

See Notes to Financial Statements.

<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:

Merrill Lynch Maryland Municipal Bond Fund (the 'Fund') is part of Merrill
Lynch Multi-State Municipal Series Trust (the 'Trust'). The Trust is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. Prior to commencement of operations on October
29, 1993, the Fund had no operations other than those relating to organizational
matters and the issuance of 5,000 Class A Shares of beneficial interest and
5,000 Class B Shares of beneficial interest of the Fund to Fund Asset
Management, Inc. ('FAMI') for $100,000. The Fund offers both Class A and Class B
Shares. Class A Shares are sold with a front-end sales charge. Class B Shares
may be subject to a contingent deferred sales charge. Both classes of shares
have identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that Class B Shares bear certain expenses related to the
distribution of such shares and have exclusive voting rights with respect to
matters relating to such distribution expenditures. The following is a summary
of significant accounting policies followed by the Fund.

(a) Valuation of investments--Municipal bonds and other portfolio
securities in which the Fund invests are traded primarily in the
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. Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their settlement prices as of the close of such
exchanges. Options, which are traded on exchanges, are valued at their last sale
price as of the close of such exchanges or, lacking any sales, at the last
available bid price. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Trustees of the 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.

(b) Financial futures contracts--The Fund may purchase or sell interest
rate futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.

(c) Income taxes--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.

(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Interest income is recognized on the accrual basis. Original issue discounts and
market premiums are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost basis.

60
<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED)--(CONTINUED)

(e) Deferred organization expenses and prepaid registration fees--Deferred
organization expenses are charged to expense on a straight-line basis over a
five-year period. Prepaid registration fees are charged to expense as the
related shares are issued.

(f) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.

2. INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH AFFILIATES:

The Fund has entered into an Investment Advisory Agreement with FAM.
Effective January 1, 1994, the investment advisory business of FAM was
reorganized from a corporation to a limited partnership. Both prior to and after
the reorganization, ultimate control of FAM has vested with Merrill Lynch & Co.,
Inc. ('ML & Co.'). The general partner of FAM is Princeton Services, Inc., an
indirect wholly-owned subsidiary of ML & Co. The limited partners are ML & Co.,
and Merrill Lynch Investment Management, Inc. ('MLIM'), which is also an
indirect wholly-owned subsidiary of ML & Co. The Fund has also entered into
Distribution Agreements and a Distribution Plan with Merrill Lynch Funds
Distributor, Inc. ('MLFD' or 'Distributor'), a wholly-owned subsidiary of MLIM.

FAM is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee based upon the average daily value of the Fund's net assets at the
following annual rates: 0.55% of the Fund's average daily net assets not
exceeding $500 million; 0.525% of average daily net assets in excess of $500
million but not exceeding $1 billion; and 0.50% of average daily net assets in
excess of $1 billion. For the period October 29, 1993 to January 31, 1994, FAM
earned fees of $15,637 , all of which was voluntarily waived. FAM also
reimbursed the Fund additional expenses of $41,276.

The Fund has adopted a Plan of Distribution (the 'Plan') pursuant to Rule
12b-1 under the Investment Company Act of 1940 pursuant to which MLFD receives
an ongoing account maintenance fee and distribution fee from the Fund for the
sale of Class B Shares at the end of each month 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 distribution
fee is to compensate the Distributor for services provided and the expenses
borne by the Distributor under the Distribution Agreement. As authorized by the
Plan, the Distributor has entered into an agreement with Merrill Lynch, Pierce,
Fenner & Smith Inc. ('MLPF&S'), an affiliate of MLIM, which provides for the
compensation of MLPF&S for providing distribution-related services to the Fund.
For the period October 29, 1993 to January 31, 1994, MLFD earned underwriting
discounts of $707 and MLPF&S earned dealer concessions of $38,604 on sales of
the Fund's Class A Shares. MLPF&S also received contingent deferred sales
charges of $1,046 relating to Class B Share transactions during the period.

Financial Data Services, Inc. ('FDS'), a wholly-owned subsidiary of Merrill
Lynch & Co., Inc., is the Fund's transfer agent.

Accounting services are provided to the Fund by FAM at cost.

Certain officers and/or trustees of the Fund are officers and/or directors
of FAM, MLIM, MLFD, FDS, MLPF&S, and/or Merrill Lynch & Co., Inc.

61
<PAGE>

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED)--(CONTINUED)

3. INVESTMENTS:

Purchases and sales of investments, excluding short-term securities, for
the period ended January 31, 1994 were $13,131,213 and $910,811, respectively.

Net realized and unrealized gains as of January 31, 1994 were as follows:

<TABLE>
<CAPTION>
REALIZED UNREALIZED
GAINS (LOSSES) GAINS (LOSSES)
-------------- --------------
<S> <C> <C>
Long-term investments.............................................................. $ 10,614 $226,509
Short-term investments............................................................. 213 674
Financial future contracts......................................................... 1,785 --
-------------- --------------
Total.............................................................................. $ 12,612 $227,183
-------------- --------------
-------------- --------------
</TABLE>

As of January 31, 1994, net unrealized appreciation for Federal income tax
purposes aggregated $227,183 of which $229,552 related to appreciated securities
and $2,369 related to depreciated securities. The aggregate cost of investments
at January 31, 1994 for Federal income tax purposes was $13,789,798.

4. BENEFICIAL INTEREST TRANSACTIONS:

Net increase in net assets derived from beneficial interest transactions
was $12,635,131 for the period ended January 31, 1994.

Transactions in shares of beneficial interest for Class A and Class B
Shares were as follows:

<TABLE>
<CAPTION>
CLASS A SHARES FOR THE PERIOD
OCTOBER 29, 1993+ DOLLAR
TO JANUARY 31, 1994 SHARES AMOUNT
- ----------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Shares sold........................................................................ 125,103 $1,247,657
Shares issued to shareholders in reinvestment of dividends and distributions....... 419 4,201
-------------- --------------
Total issued....................................................................... 125,522 1,251,858
Shares redeemed.................................................................... (7,798) (77,560)
-------------- --------------
Net increase....................................................................... 117,724 $1,174,298
-------------- --------------
-------------- --------------
</TABLE>

- ------------------
+ prior to October 29, 1993 (commencement of operations), the Fund issued 5,000
shares to FAM for $50,000.

<TABLE>
<CAPTION>
CLASS B SHARES FOR THE PERIOD
OCTOBER 29, 1993+ DOLLAR
TO JANUARY 31, 1994 SHARES AMOUNT
- ----------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Shares sold........................................................................ 1,204,281 $ 12,027,962
Shares issued to shareholders in reinvestment of dividends and distributions....... 4,008 40,234
-------------- --------------
Total issued....................................................................... 1,208,289 12,068,196
Shares redeemed.................................................................... (61,240) (607,363)
-------------- --------------
Net increase....................................................................... 1,147,049 $ 11,460,833
-------------- --------------
-------------- --------------
</TABLE>

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

+ Prior to October 29, 1993 (commencement of operations), the Fund issued 5,000
shares to FAM for $50,000.

62
<PAGE>
[This page intentionally left blank.]

<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Investment Objective and Policies................. 2
Description of Municipal Bonds and Temporary
Investments..................................... 5
Description of Municipal Bonds.................. 5
Description of Temporary Investments............ 6
Repurchase Agreements and Purchase and Sale
Contracts..................................... 7
Financial Futures Transactions and Options...... 8
Investment Restrictions........................... 12
Management of the Trust........................... 14
Trustees and Officers........................... 14
Management and Advisory Arrangements............ 15
Purchase of Shares................................ 16
Alternative Sales Arrangements.................. 16
Initial Sales Charge Alternative--Class A
Shares........................................ 17
Reduced Initial Sales Charges--Class A Shares... 17
Deferred Sales Charge Alternative--Class B
Shares........................................ 19
Redemption of Shares.............................. 19
Contingent Deferred Sales Charge--Class B
Shares........................................ 19
Portfolio Transactions............................ 20
Determination of Net Asset Value.................. 21
Shareholder Services.............................. 21
Investment Account.............................. 21
Automatic Investment Plan....................... 22
Automatic Reinvestment of Dividends and Capital
Gains Distributions........................... 22
Systematic Withdrawal Plans--Class A Shares..... 22
Exchange Privilege.............................. 23
Distributions and Taxes........................... 33
Environmental Tax............................... 36
Tax Treatment of Option and Futures
Transactions.................................. 36
Performance Data.................................. 37
General Information............................... 38
Description of Shares........................... 38
Computation of Offering Price Per Share......... 39
Independent Auditors............................ 40
Custodian....................................... 40
Transfer Agent.................................. 40
Legal Counsel................................... 40
Reports to Shareholders......................... 40
Additional Information.......................... 40
Appendix I--Economic Conditions in Maryland....... 41
Appendix II--Ratings of Municipal Bonds........... 44
Independent Auditors' Report...................... 52
Statement of Assets and Liabilities............... 53
Schedule of Investments (unaudited)............... 54
Financial Statements (unaudited).................. 55
</TABLE>

Code # 16860

Statement of
Additional Information

[INSERT ART HERE]

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

February 24, 1994

Distributor:
Merrill Lynch
Funds Distributor, Inc.

<PAGE>
PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

(A) FINANCIAL STATEMENTS

Contained in Part A:

Financial Highlights for the period October 29, 1993 (commencement
of operations) to January 31, 1994 (unaudited).

Contained in Part B:

Financial Statement (audited):

Statement of Assets and Liabilities as of August 27, 1993.

Financial Statements (unaudited):

Schedule of Investments as of January 31, 1994.

Statement of Assets and Liabilities as of January 31, 1994.

Statement of Operations for the period October 29, 1993
(commencement of operations) to January 31, 1994.

Statement of Changes in Net Assets for the period October 29, 1993
(commencement of operations) to January 31, 1994.

Financial Highlights for the period October 29, 1993 (commencement
of operations) to January 31, 1994.

(B) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------------------------
<S> <C> <C>
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 Maryland Municipal Bond Fund (the 'Fund') as a series of
Registrant. (f)
(d) -- Instrument establishing Class A and Class B shares of beneficial interest of the Fund.
2 -- By-Laws of Registrant. (a)
3 -- None.
4 -- 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)
5 -- Management Agreement between Registrant and Fund Asset Management, Inc. (e)
6 (a) -- Class A Shares Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.
(e)
(b) -- Class B Shares Distribution Agreement between Registrant and Merrill Lynch Funds Distributor, Inc.
(e)
(c) -- Letter Agreement between the Fund and Merrill Lynch Funds Distributor, Inc., dated September 15,
1993, in connection with the Merrill Lynch Mutual Fund Adviser program.
7 -- None.
8 -- 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. (e)
10 -- None.
11 -- Consent of Deloitte & Touche, independent auditors for the Registrant.
12 -- None.
</TABLE>

C-1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------------------------
13 -- Certificate of Fund Asset Management, Inc. (f)
<S> <C> <C>
14 -- None.
15 -- Class B Shares Distribution Plan and Class B Shares Distribution Plan Sub-Agreement of the
Registrant. (e)
16(a) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class A shares.
(b) -- Schedule for computation of each performance quotation provided in the Registration Statement in
response to Item 22 relating to Class B shares.
</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.

(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 are filed herein 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.

(e) Filed on July 30, 1993 as an Exhibit to the Registration Statement on Form
N-1A (File No. 33-49873) under the Securities Act of 1993 of Merrill Lynch
Maryland Municipal Bond Fund, a series of the Registrant.

(f) Filed on September 3, 1993 as an Exhibit to the Registration Statement on
Form N-1A (File No. 33-49873) under the Securities Act of 1933 of Merrill
Lynch Maryland Municipal Bond Fund, a series of the Registrant.

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

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

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

<TABLE>
<CAPTION>
NUMBER OF RECORD
HOLDERS AT
TITLE OF CLASS DECEMBER 31, 1993
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Class A shares of beneficial interest, par value $0.10 per share............................... 4
Class B shares of beneficial interest, par value $0.10 per share............................... 23
</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
C-2
<PAGE>
be involved or with which he may be threatened, while in office or thereafter,
by reason of his being or having been such a trustee, officer, employee or
agent, except with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties; provided, however, that as to any matter
disposed of by a compromise payment by such person, pursuant to a consent decree
or otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the effect
that if either the matter of willful misfeasance, gross negligence or reckless
disregard of duty, or the matter of good faith and reasonable belief as to the
best interests of the Trust, had been adjudicated, it would have been
adjudicated in favor of such person. The rights accruing to any Person under
these provisions shall not exclude any other right to which he may be lawfully
entitled; provided that no person may satisfy any right 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, as amended ('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., Financial
Institutions Series Trust, Income Opportunities Fund 1999, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Basic Value Fund, Inc., Merrill
Lynch California Municipal Series Trust, Merrill Lynch Corporate Bond Fund,
Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited
C-3
<PAGE>

Maturity Municipal Series Trust, Merrill Lynch Multi-State Municipal Series
Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch World Income Fund,
Inc., 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 MuniNewYork Holdings, Inc. and
Worldwide DollarVest Fund, Inc. Merrill Lynch Asset Management, L.P., doing
business as Merrill Lynch Asset Management ('MLAM'), an affiliate of the
Investment Adviser, 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 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, 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 Prime Fund, Inc., Merrill Lynch Ready Assets Trust, Merrill Lynch
Retirement Series Trust, Merrill Lynch Series Fund, Inc., Merrill Lynch
Short-Term Global Income Fund, Inc., Merrill Lynch Strategic Dividend Fund,
Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury Money Fund,
Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility Income Fund,
Inc., and Merrill Lynch Variable Series Funds, Inc. The address of each of these
investment companies in Box 9011, Princeton, New Jersey 08543-9011, except that
the address of Merrill Lynch Funds for Institutions Series 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 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:

C-4
<PAGE>

<TABLE>
<CAPTION>
POSITION(S) WITH OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- --------------------------- --------------------------- ------------------------------------------------------
Arthur Zeikel.............. President President of MLAM; President and Director of Princeton
Services; Director of Merrill Lynch Funds
Distributor, Inc.; Executive Vice President of ML &
Co.; Executive Vice President of Merrill Lynch
<S> <C> <C>
Terry K. Glenn............. Executive Vice President Executive Vice President of MLAM; Executive Vice
President and Director of Princeton Services;
President and Director of MLFD; President of
Princeton Administrators, Inc.
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 and Secretary
General Counsel and of MLAM; Senior Vice President, General Counsel,
Secretary Director and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss............ Senior Vice President and Senior Vice President and Controller of MLAM; Senior
Controller Vice President and Controller of Princeton Services
Stephen M.M. Miller........ Senior Vice President Executive Vice President of Princeton Administrators,
Inc. since 1989; Vice President and Secretary of
Merrill Lynch from 1982 to 1989; Secretary of
Merrill Lynch & Co. from 1982 to 1989.
Joseph T. Monagle, Jr...... Senior Vice President Senior Vice President of MLAM; Senior Vice President
of Princeton Services
Gerald M. Richard.......... Senior Vice President and Senior Vice President and Treasurer of MLAM; Senior
Treasurer Vice President and Treasurer of Princeton Services;
Vice President and Treasurer of MLFD
Richard L. Rufener......... Senior Vice President Senior Vice President of MLAM; Vice President of MLFD;
Senior Vice President of Princeton Services
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>

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,
C-5
<PAGE>

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
Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc., MuniYield
California Fund, Inc., MuniYield California Insured Fund, 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.

(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 None
Assistant Treasurer
Mark A. DeSario....................................... Vice President None
James T. Fatseas...................................... Vice President None
Stanley Graczyk....................................... Vice President None
Debra W. Landsman-Yaros............................... 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>

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.

C-6
<PAGE>
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.

Not applicable.

C-7

<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT CERTIFIES THAT IT MEETS ALL OF
THE REQUIREMENTS FOR EFFECTIVENESS OF THIS REGISTRATION STATEMENT PURSUANT TO
RULE 485(B) UNDER THE SECURITIES ACT OF 1933 AND 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
23RD DAY OF FEBRUARY, 1994.

MERRILL LYNCH MULTI-STATE MUNICIPAL
SERIES TRUST

(Registrant)

By /s/ ARTHUR ZEIKEL
(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 (Principal February 23, 1994
- ------------------------------------------------ Executive Officer)
(ARTHUR ZEIKEL)
/s/ GERALD M. RICHARD Treasurer (Principal Financial February 23, 1994
- ------------------------------------------------ and Accounting Officer)
(GERALD M. RICHARD)
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)
*By /s/ ARTHUR ZEIKEL February 23, 1994
(ARTHUR ZEIKEL, ATTORNEY-IN-FACT)
</TABLE>

<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------------- -------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
(6c) -- Letter Agreement between the Trust on behalf of the Fund and Merrill Lynch Funds
Distributor, Inc., dated September 15, 1993, in connection with the Merrill Lynch Mutual
Fund Adviser Program.....................................................................
11 -- Consent of Deloitte & Touche, independent auditors for the Registrant....................
(16a) -- Schedule for Computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class A Shares..............................
(b) -- Schedule for Computation of each performance quotation provided in the Registration
Statement in response to Item 22 relating to Class B Shares..............................
</TABLE>

GRAPHICS APPENDIX

On the back cover of the prospectus and the statement of additional
information, there will be artwork to follow.

Exhibit 99.6(c)

September 15, 1993

Merrill Lynch Funds Distributor, Inc.
Post Office Box 9011
Princeton, New Jersey 08543-9011

The Merrill Lynch Multi-State Municipal Series Trust
(the "Trust") has entered into Distribution Agreements with
Merrill Lynch Funds Distributor, Inc. (the "Distributor") with
respect to each of Merrill Lynch Colorado Municipal Bond Fund,
Merrill Lynch Maryland Municipal Bond Fund and Merrill Lynch
Oregon Municipal Bond Fund (the "Funds"), each a separate
series of the Trust. Under the terms of such Agreements, the
Distributor is authorized to offer shares of each Fund and to
purchase, as principal, such number of shares from each of the
Funds as are needed to fill unconditional orders for shares
of such Fund placed with the Distributor by investors or by
securities dealers.

This letter confirms each agreement by the Trust with
the Distributor that, in connection with the Merrill Lynch
Mutual Fund Adviser program, the Distributor and its affiliate,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, are also
authorized to offer and sell shares of each Fund, as agent
for each Fund, to participants in such program. This letter
further confirms that the terms of each Distribution Agreement
between the Trust and the Distributor shall apply to such
sales, including terms as to the offering price of shares,
the proceeds to be paid to each Fund, the duties of the
Distributor, the payment of expenses and indemnification
obligations of the Trust and the Distributor.

If the foregoing is consistent with your understanding
of our agreement, please sign and return one copy of the
enclosed agreement.

Very truly yours,

Merrill Lynch Multi-State
Municipal Series Trust

By: /s/ Terry K. Glenn
_________________________
Authorized Signatory

Accepted as of the date
set forth above

Merrill Lynch Funds Distributor Inc.

By: /s/ Gerald M. Richard
_________________________
Authorized Signatory

<PAGE>

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 "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 Merrill Lynch Multi-State Municipal
Series Trust, but the "Trust Property" only shall be liable.

Exhibit 99.11

INDEPENDENT AUDITORS' CONSENT

Merrill Lynch Maryland Municipal Bond Fund of
Merrill Lynch Multi-State Municipal Series Trust:

We consent to the use in Pre-Effective Amendment No. 1 to
Registration Statement No. 33-49873 of our report dated
August 31, 1993 appearing in the Statement of Additional
Information, which is a part of such Registration Statement,
and to the reference to us under the caption "Financial
Highlights" appearing in the Prospectus, which also is a
part of such Registration Statement.

Deloitte & Touche
Princeton, New Jersey
February 24, 1994

<PAGE>

EXHIBIT 16(A)

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND CLASS A (10/29/93-1/31/94)
AVERAGE ANNUAL AND TOTAL RETURNS

<TABLE>
<CAPTION>
SINCE
INCEPTION SINCE
AVERAGE INCEPTION
ANNUAL TOTAL
RETURN RETURN*
---------- ----------
<S> <C> <C>
Initial Investment...................................................................... $ 1,000.00 $ 1,000.00
Divided by Initial Maximun Offering Price............................................... 10.42
----------
Divided by Net Asset Value.............................................................. 10.00
----------
Equals Shares Purchased................................................................. 96.00 100.00
Plus Shares Acquired through Dividend Reinvestment...................................... 1.03 1.07
---------- ----------
Equals Shares Held at 1/31/94........................................................... 97.03 101.07
Multiplied by Net Asset Value at 1/31/94................................................ 10.19 10.19
---------- ----------
Equals Ending Redeemable Value at $1,000 Investment (ERV) at 1/31/94.................... $ 988.70 $ 1,029.90
Divided by $1,000 (P)................................................................... 0.9887 1.0299
Subtract 1.............................................................................. (0.0113) 0.0299
Expressed as a percentage equals the Aggregate Total Return for the Period (T).......... (1.13)%
----------
----------
Expressed as a percentage equals the Aggregate Total Return for the Period.............. 2.99%
----------
----------
ERV divided by P........................................................................ 0.9887
Raise to the power of................................................................... 3.8830
Equals.................................................................................. 0.9568
Subtract 1.............................................................................. (0.0432)
Expressed as a percentage equals the Average Annualized Total Return.................... (4.32)%
----------
----------
</TABLE>

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

* Does not incude sales charge for the period.

<PAGE>

EXHIBIT 16(A) (CONTINUED)

30 DAYS STANDARDIZED YIELD FOR THE
PERIOD ENDED JANUARY 31, 1994

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND--CLASS A

<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market value of each
security............................................................................ $ 4,508
Plus short term income accured for the past thirty days............................... 220
-----------
Equals Total Income................................................................... 4,728
Less expenses for the past thirty days................................................ 0
-----------
Equals net monthly income for yield calculation....................................... 4,728
-----------
Average shares outstanding for 30 days................................................ 116,930
Times the Maximum Offering Price...................................................... 10.60
-----------
Equals total dollars.................................................................. $ 1,239,462
-----------
-----------
Net monthly income divided by total dollars equals.................................... 0.003814404
Add 1................................................................................. 1.003814404
Raise to the power of 6............................................................... 1.023105782
Subtract 1............................................................................ 0.023105782
Times 2............................................................................... 0.046211563
Expressed as a percentage equals the Standardized Yield for 30 day period............. 4.62%
-----------
-----------
Tax Rate.............................................................................. 28.00%
X = 1 minus Tax Rate.................................................................. 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30 day period......... 6.42%
-----------
-----------
</TABLE>

<PAGE>

EXHIBIT 16(B)

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND CLASS B (10/29/93--1/31/94)
AVERAGE ANNUAL AND TOTAL RETURNS

<TABLE>
<CAPTION>
SINCE SINCE
INCEPTION INCEPTION
AVERAGE ANNUAL TOTAL
RETURN RETURN*
-------------- ---------
<S> <C> <C>
Initial Investment.................................................................. $ 1,000.00 $1,000.00
Divided by Net Asset Value.......................................................... 10.00 10.00
-------------- ---------
Equals Shares Purchased............................................................. 100.00 100.00
Plus Shares Acquired through Dividend Reinvestment.................................. 0.95 0.95
-------------- ---------
Equals Shares Held at 1/31/94....................................................... 100.95 100.95
Multiplied by Net Asset Value at 1/31/94............................................ 10.19 10.19
-------------- ---------
Equals Ending Value before deduction for contingent deferred sales charge........... 1,028.63 1,028.63
Less deferred sales charge.......................................................... (40.00) 0.00
-------------- ---------
Equals Ending Redeemable Value at $1,000 Investment (ERV) at 1/31/94................ $ 988.63 $1,028.63
Divided by $1,000 (P)............................................................... 0.9886 1.0286
Subtract 1.......................................................................... (0.0114) 0.0286
Expressed as a percentage equals the Aggregate Total Return for the Period (T)...... (1.14)%
--------------
--------------
Expressed as a percentage equals the Aggregate Total Return for the Period.......... 2.86%
---------
---------
ERV divided by P.................................................................... 0.9886
Raise to the power of............................................................... 3.8830
Equals.............................................................................. 0.9566
Subtract 1.......................................................................... (0.0434)
Expressed as a percentage equals the Average Annualized Total Return................ (4.34)%
--------------
--------------
</TABLE>

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

* Does not include sales charge for the period.
<PAGE>

EXHIBIT 16(B) (CONTINUED)

30 DAYS STANDARDIZED YIELD
FOR THE PERIOD ENDED JANUARY 31, 1994

MERRILL LYNCH MARYLAND MUNICIPAL BOND FUND--CLASS B

<TABLE>
<S> <C>
Long term income generally based on yield to maturity times market value of each
security............................................................................. $ 41,826
Plus short term income accrued for the past thirty days................................ 2,043
-----------
Equals Total Income.................................................................... 43,870
Less expenses for the past thirty days................................................. (4,497)
-----------
Equals net monthly income for yield calculation........................................ 39,373
-----------
Average shares outstanding for 30 days................................................. 1,085,081
Times the Net Asset Value.............................................................. 10.18
-----------
Equals total dollars................................................................... $11,046,129
-----------
-----------
Net monthly income divided by total dollars equals..................................... 0.003564407
Add 1 1.003564407
Raise to the power of 6................................................................ 1.021577925
Subtract 1............................................................................. 0.021577925
Times 2................................................................................ 0.043155850
Expressed as a percentage equals the Standardized Yield for the 30 day period.......... 4.32%
-----------
-----------
Tax Rate............................................................................... 28.00%
X = 1 minus Tax Rate................................................................... 72.00%
Standardized Yield divided by X equals Tax Equivalent Yield for 30 day period.......... 6.00%
-----------
-----------
</TABLE>

<PAGE>

[INSERT EXHIBIT??)