MERRILL LYNCH NEW MEXICO MUNICIPAL BD FD OF MLMSMST, 485APOS, 1998-11-27

MERRILL LYNCH NEW MEXICO MUNICIPAL BD FD OF MLMSMST
485APOS, 1998-11-27

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1998

SECURITIES ACT FILE NO. 33-52303
INVESTMENT COMPANY ACT FILE NO. 811-4375

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 6 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 179 [X]
(CHECK APPROPRIATE BOX OR BOXES)

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

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

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

ARTHUR ZEIKEL
MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY
MAILING ADDRESS: P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(NAME AND ADDRESS OF AGENT FOR SERVICE)

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

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

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

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

[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.

If appropriate, check the following box:

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

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

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Prospectus
LOGO OF MERRILL LYNCH

Merrill Lynch New Mexico Municipal Bond Fund
of Merrill Lynch Multi-State Municipal Series Trust

November 30, 1998

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

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

Table of Contents

PAGE

[GRAPHIC]
KEY FACTS
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The Merrill Lynch New Mexico Municipal Bond Fund at a Glance................. 3
Risk/Return Bar Chart........................................................ 4
Fees and Expenses............................................................ 5

[GRAPHIC]
DETAILS ABOUT THE FUND
- -------------------------------------------------------------------------------
How the Fund Invests......................................................... 7
Investment Risks............................................................. 8

[GRAPHIC]
YOUR ACCOUNT
- -------------------------------------------------------------------------------
Merrill Lynch Select Pricing SM System...................................... 13
How to Buy, Sell, Transfer and Exchange Shares.............................. 18
Participation in Merrill Lynch Fee-Based Programs........................... 22

[GRAPHIC]
MANAGEMENT OF THE FUND
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Fund Asset Management....................................................... 25
Financial Highlights........................................................ 26

[GRAPHIC]
FOR MORE INFORMATION
- -------------------------------------------------------------------------------
Shareholder Reports................................................. Back Cover
Statement of Additional Information................................. Back Cover

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND
<PAGE>

Key Facts [GRAPHIC]

In an effort to help you better understand the many concepts involved in making
an investment decision, we have defined highlighted terms in this prospectus in
the sidebar.

INVESTMENT GRADE -- any of the four highest debt obligation ratings by
recognized rating agencies, including Moody's Investors Service, Inc., Standard
& Poor's or Fitch IBCA, Inc.

NEW MEXICO MUNICIPAL BOND -- a debt obligation issued by or on behalf of a
governmental entity in New Mexico or other qualifying issuer that pays interest
exempt from New Mexico income tax as well as from Federal income tax.
THE MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND AT A GLANCE
- --------------------------------------------------------------------------------

WHAT ARE THE FUND'S OBJECTIVE AND GOALS?

The investment objective of the Fund is to provide as high a level of income
that is exempt from Federal and New Mexico income taxes as is consistent with
prudent investment management. The Fund tries to accomplish this goal by
investing primarily in long term INVESTMENT GRADE New Mexico municipal bonds.
The Fund cannot guarantee that it will achieve its goal.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests primarily in a portfolio of NEW MEXICO MUNICIPAL BONDS. These
may be obligations of a variety of issuers including governmental entities in
New Mexico and issuers located in Puerto Rico, the U.S. Virgin Islands and
Guam. Generally, the Fund will invest at least 65% of its assets in New Mexico
municipal bonds. The Fund will invest primarily in long term investment grade
municipal bonds. However, the Fund may invest up to 20% of its assets in high
yield or "junk" bonds. The Fund also may invest in certain types of
"derivative" securities. When choosing investments, Fund management considers
various factors, including the credit quality of issuers, yield analysis,
maturity analysis and call features of the obligations.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

As with any mutual fund, the value of the Fund's investments -- and therefore
the value of Fund shares -- may go up or down. These changes may occur in
response to interest rate changes or other factors that may affect a particular
issuer or obligation. Generally, when interest rates go up, the value of debt
instruments like municipal bonds goes down. If the value of the Fund's
investments goes down, you may lose money.

In addition, since the Fund invests at least 65% of its assets in New Mexico
municipal bonds, it is more susceptible to negative political or economic
factors in New Mexico than a fund that invests more widely. Derivatives and
high yield or "junk" bonds may be volatile and subject to liquidity, leverage,
credit and other types of risks.

WHO SHOULD INVEST?

The Fund may be an appropriate investment for you if you:

. Are looking for income that is
exempt from Federal income tax
and New Mexico income tax;

. Want a professionally managed
portfolio without the
administrative burdens of direct
investments in municipal bonds;

. Are looking for liquidity;

. Can tolerate the risk of loss
caused by negative political or
economic developments in New
Mexico, changes in interest
rates or adverse changes in the
price of bonds in general.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

3
<PAGE>

[GRAPHIC] Key Facts
RISK/RETURN BAR CHART
- --------------------------------------------------------------------------------

The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Fund's performance
for Class B shares from year to year since the Fund's inception. Sales charges
are not reflected in the bar chart. If these amounts were reflected, returns
would be less than those shown. The table compares the average annual total
returns for each class of the Fund's shares for the periods shown with those of
the Lehman Brothers Municipal Bond Index. How the Fund performed in the past is
not necessarily an indication of how the Fund will perform in the future.

[BAR CHART APPEARS HERE]

1% 17% 3% 8%
------------------------------
1994+ 1995 1996 1997

During the period shown in the bar chart, the highest return for a quarter was
6.91% (quarter ended March 31, 1995) and the lowest return for a quarter was -
1.94% (quarter ended March 31, 1996). The year-to-date return as of September
30, 1998 was 4.73%.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURNS (AS OF THE
CALENDAR YEAR ENDED PAST
DECEMBER 31, 1997) ONE YEAR SINCE INCEPTION
- ----------------------------------------------------------
<S> <C> <C>
Merrill Lynch New Mexico
Municipal Bond Fund*A 4.16% 6.91%+
- ----------------------------------------------------------
B 3.95% 7.33%+
- ----------------------------------------------------------
C 6.74% 8.10%++
- ----------------------------------------------------------
D 4.05% 7.32%++
- ----------------------------------------------------------
Lehman Brothers Municipal Bond
Index** 9.19% 8.13%#
- ----------------------------------------------------------
</TABLE>
* Includes sales charge.
** This unmanaged index consists of long term revenue bonds, prerefunded bonds,
general obligation bonds and insured bonds. Past performance is not
predictive of future performance.
+ Inception date is May 6, 1994.
++ Inception date is October 21, 1994.
# Since April 30, 1994.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

4
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UNDERSTANDING EXPENSES

Fund investors pay various fees and expenses, either directly or indirectly.
Listed below are some of the main types of expenses, which all mutual funds may
charge:

EXPENSES PAID DIRECTLY BY THE SHAREHOLDER:

Shareholder fees -- fees paid directly from your investment. These include
sales charges which you may pay when you buy or sell shares of the Fund.

EXPENSES PAID INDIRECTLY BY THE SHAREHOLDER (THESE COSTS ARE DEDUCTED FROM THE
FUND'S TOTAL ASSETS):

Annual Fund Operating Expenses -- expenses that cover the costs of operating
the Fund.

Management Fee -- a fee paid to the Manager for managing the Fund.

Distribution Fees -- fees used to support the Fund's marketing and distribution
efforts, such as compensating Financial Consultants, advertising and promotion.

Account Maintenance Fees -- fees used to compensate securities dealers for
account maintenance activities.

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

The Fund offers four different classes of shares. Although your money will be
invested the same way no matter which class of shares you buy, there are
differences among the fees and expenses associated with each class. Not
everyone is eligible to buy every class. After determining which classes you
are eligible to buy, decide which class best suits your needs. Your Merrill
Lynch Financial Consultant can help you with this decision.

This table shows the different fees and expenses that you may pay if you buy
and hold the different classes of shares of the Fund. Future expenses may be
greater or less than those indicated below.

<TABLE>
<CAPTION>
SHAREHOLDER FEES: CLASS A CLASS B(a) CLASS C CLASS D
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum Sales Charge
(Load) imposed on
purchases
(as a percentage of
offering price) 4.00%(b) None None 4.00%(b)
- -----------------------------------------------------------------
Maximum Deferred Sales
Charge (Load) (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower) None(c) 4.0%(b) 1.0%(b) None(c)
- -----------------------------------------------------------------
Maximum Sales Charge
(Load) imposed on
Dividend Reinvestments None None None None
- -----------------------------------------------------------------
Redemption Fee None None None None
- -----------------------------------------------------------------
Exchange Fee None None None None
- -----------------------------------------------------------------
Maximum Account Fee None None None None
- -----------------------------------------------------------------
ANNUAL FUND OPERATING
EXPENSES:
- -----------------------------------------------------------------
MANAGEMENT FEE(d) 0.55% 0.55% 0.55% 0.55%
- -----------------------------------------------------------------
DISTRIBUTION AND/OR
ACCOUNT MAINTENANCE (12B-
1) FEES(e) None 0.50% 0.60% 0.10%
- -----------------------------------------------------------------
Other Expenses (including
transfer agency fees)(f) 1.08% 1.07% 1.07% 1.06%
- -----------------------------------------------------------------
Total Annual Fund
Operating Expenses(g) 1.63% 2.12% 2.22% 1.71%
- -----------------------------------------------------------------
</TABLE>
(a) Class B shares automatically convert to Class D shares about ten years
after you buy them. Then they will no longer be subject to distribution
fees and will pay lower account maintenance fees.
(b) Some investors may qualify for reductions in the sales charge (load).
(c) You may pay a deferred sales charge if you purchase $1 million or more and
you redeem within one year.
(d) The Fund pays the Manager a fee at the annual rate of 0.55% of the average
daily net assets of the Fund for the first $500 million; 0.525% of the
average daily net assets from $500 million to $1 billion; and 0.50% of the
average daily net assets above $1 billion. For the fiscal year ended July
31, 1998, the fee payable to the Manager from the Fund was equal to 0.55%
of the Fund's average daily net assets, but the Manager voluntarily waived
$65,367 of the management fee due. Total Fund Operating Expenses in the fee
table have been restated to assume the absence of the waiver because it may
be discontinued or reduced by the Manager at any time without notice. For
the fiscal year ended July 31, 1998, the Manager waived management fees
totaling 0.40% for Class A shares, 0.41% for Class B shares, 0.40% for
Class C shares and 0.40% for Class D shares, after which the Fund's total
expense ratio was 1.23% for Class A shares, 1.71% for Class B shares, 1.82%
for Class C shares and 1.31% for Class D shares.
(e) If you hold Class B or Class C shares for a long time, it may cost you
more in distribution (12b-1) fees than the maximum sales charge that you
would have paid if you had bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for each Class A and Class D
shareholder account and $14.00 for each Class B and Class C shareholder
account and reimburses the Transfer Agent's out-of-pocket expenses. The
Fund pays a 0.10% fee for certain accounts that participate in the Merrill
Lynch Mutual Fund Advisor program. The Fund also pays a $0.20 monthly
closed account charge,

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

5
<PAGE>

[GRAPHIC] Key Facts
(footnotes continued from previous page)

which is assessed upon all accounts that close during the year. This fee
begins the month following the month the account is closed and ends at the end
of the calendar year. For the fiscal year ended July 31, 1998, the Fund paid
the Transfer Agent fees totaling $9,013. The Manager provides accounting
services to the Fund at its cost. For the fiscal year ended July 31, 1998, the
Fund reimbursed the Manager $45,678 for these services.
(g) In addition, Merrill Lynch may charge clients a processing fee (currently
$5.35) when a client buys or redeems shares.

EXAMPLES:

These examples are intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.

These examples assume that you invest $10,000 in the Fund for the time periods
indicated, that your investment has a 5% return each year, that you pay the
sales charges, if any, that apply to the particular class and that the Fund's
operating expenses remain the same. This assumption is not meant to indicate
you will receive a 5% annual rate of return. Your annual return may be more or
less than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:

EXPENSES IF YOU DID REDEEM YOUR SHARES:
--

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $559 $894 $1,251 $2,256
- -------------------------------------------
Class B $615 $864 $1,139 $2,452
- -------------------------------------------
Class C $325 $694 $1,190 $2,554
- -------------------------------------------
Class D $567 $917 $1,291 $2,339
- -------------------------------------------

EXPENSES IF YOU DID NOT REDEEM YOUR SHARES:
------

<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------
<S> <C> <C> <C> <C>
Class A $559 $894 $1,251 $2,256
- -------------------------------------------
Class B $215 $664 $1,139 $2,452
- -------------------------------------------
Class C $225 $694 $1,190 $2,554
- -------------------------------------------
Class D $567 $917 $1,291 $2,339
- -------------------------------------------
</TABLE>

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

6
<PAGE>

Details About the Fund [GRAPHIC]

ABOUT THE PORTFOLIO MANAGER
Roberto W. Roffo is the portfolio manager of the Fund. Mr. Roffo has been a
Vice President of Merrill Lynch Asset Management since 1996 and a portfolio
manager since 1992.

ABOUT THE MANAGER
The Fund is managed by Fund Asset Management.

HOW THE FUND INVESTS
- --------------------------------------------------------------------------------

The Fund's main goal is to seek a high level of income that is exempt from
Federal income tax and New Mexico income tax. The Fund invests primarily in
long term, investment grade New Mexico municipal bonds. Issuers may be located
in New Mexico or in other qualifying jurisdictions such as Puerto Rico, the
U.S. Virgin Islands and Guam.

The Fund may invest in either fixed rate or variable rate obligations. At least
80% of the Fund's total assets will be invested in investment grade securities.
The Fund will limit its investment in high yield or junk bonds to no more than
20% of its total assets. These bonds are generally more speculative and involve
greater price fluctuations than investment grade securities.

The Fund generally will invest at least 65% of its total assets in New Mexico
municipal bonds. For temporary periods, however, the Fund may invest up to 35%
of its total assets in short term tax exempt or taxable money market
obligations. No more than 20% of the Fund's net assets will be invested in
taxable money market obligations. However, as a temporary measure for defensive
purposes, the Fund may invest without limitation in short term obligations.
Short term investments may limit the potential for tax exempt income on your
shares.

The Fund may use derivatives including futures, options, indexed securities and
inverse securities. Derivatives are financial instruments whose value is
derived from another security or an index, such as the Lehman Brothers
Municipal Bond Index.

The Fund's investments may include private activity bonds that may subject
certain shareholders to an alternative minimum tax.

Employment, per capita personal income and the overall economy in New Mexico
are growing slowly, although mining is below earlier levels and reductions in
federal spending associated with the end of the Cold War have adversely
affected various national laboratories and military installations in the state.
The Manager believes that current economic conditions in New Mexico will enable
the Fund to continue to invest in high quality New Mexico municipal bonds.
Moody's and Standard & Poor's currently rate the State of New Mexico's general
obligation bonds Aa1 and AA+, respectively.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

7
<PAGE>

[GRAPHIC] Details About the Fund

Fund management considers a variety of factors when choosing investments, such
as:

. Credit Quality of Issuers --
based on bond ratings and other
factors including economic and
financial conditions.

. Yield Analysis -- takes into
account factors such as the
different yields available on
different types of obligations
and the shape of the yield curve
(longer term obligations
typically have higher yields).

. Maturity Analysis -- the average
maturity of the portfolio will be
maintained within a desirable
range as determined from time to
time. Factors considered include
portfolio activity, maturity of
the supply of available bonds and
the shape of the yield curve.

In addition, Fund management considers the availability of features that pro-
tect against an early call of a bond by the issuer.

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

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

BOND MARKET AND SELECTION RISK
Bond market risk is the risk that the bond market will go down in value,
including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the investments that Fund
management selects will underperform the market or other funds with similar
investment objectives and investment strategies.

CREDIT RISK
Credit risk is the risk that the issuer will be unable to pay the interest or
principal when due. The degree of credit risk depends on both the financial
condition of the issuer and the terms of the obligation.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

8
<PAGE>

INTEREST RATE RISK
Interest rate risk is the risk that prices of municipal bonds generally
increase when interest rates decline and decrease when interest rates increase.
Prices of longer term securities generally change more in response to interest
rate changes than prices of shorter term securities.

STATE SPECIFIC RISK
The Fund will invest primarily in New Mexico municipal bonds. Therefore, an
investment in the Fund may be riskier than an investment in a fund that does
not concentrate in municipal bonds of one state.

CALL AND REDEMPTION RISK
A bond's issuer may call a bond for redemption before it matures. If this
happens to a bond the Fund holds, the Fund may lose income and may have to
invest the proceeds in bonds with lower yields.

Risks associated with certain types of obligations in which the Fund may invest
include:

GENERAL OBLIGATION BONDS -- The faith, credit and taxing power of the
municipality that issues a general obligation bond secures payment of interest
and repayment of principal. Timely payments depend on the issuer's credit
quality, ability to raise tax revenues and ability to maintain an adequate tax
base.

REVENUE BONDS -- Payments of interest and principal on revenue bonds are made
only from the revenues generated by a particular facility, class of facilities
or the proceeds of a special tax or other revenue source. These payments depend
on the money earned by the particular facility or class of facilities.
Industrial development bonds are one type of revenue bond.

INDUSTRIAL DEVELOPMENT BONDS -- Municipalities and other public authorities
issue industrial development bonds to finance development of industrial
facilities for use by a private enterprise. The private enterprise pays the
principal and interest on the bond, and the issuer does not pledge its faith,
credit and taxing power for repayment. If the private enterprise defaults on
its payments, the Fund may not receive any income or get its money back from
the investment.

MORAL OBLIGATION BONDS -- Moral obligation bonds are generally issued by
special purpose public authorities of a state or municipality. If the issuer is
unable to meet its obligations, the repayment of these bonds becomes a moral
commitment, but not a legal obligation, of the state or municipality.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

9
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[GRAPHIC] Details About the Fund

MUNICIPAL NOTES -- Municipal notes are shorter term municipal debt obligations.
They may provide interim financing in anticipation of tax collection, bond
sales or revenue receipts. If there is a shortfall in the anticipated proceeds,
the notes may not be fully repaid and the Fund may lose money.

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

INSURED MUNICIPAL BONDS -- Bonds purchased by the Fund may be covered by
insurance that guarantees timely interest payments and repayment of principal
on maturity. If a bond's insurer fails to fulfill its obligations or loses its
credit rating, the value of the bond could drop.

JUNK BONDS -- Junk bonds are debt securities that are rated below investment
grade by the major rating agencies or are unrated securities that Fund
management believes are of comparable quality. Although junk bonds generally
pay higher rates of interest than investment grade bonds, they are high risk
investments that may cause income and principal losses for the Fund. Junk bonds
generally are less liquid and experience more price volatility than higher
rated debt securities. The issuers of junk bonds may have a larger amount of
outstanding debt relative to their assets than issuers of investment grade
bonds. In the event of an issuer's bankruptcy, claims of other creditors may
have priority over the claims of junk bond holders, leaving few or no assets
available to repay junk bond holders. Junk bonds may be subject to greater call
and redemption risk than higher rated debt securities.

WHEN ISSUED SECURITIES, DELAYED DELIVERY SECURITIES AND FORWARD
COMMITMENTS -- When issued and delayed delivery securities and forward
commitments involve the risk that the security the Fund buys will lose value
prior to its delivery to the Fund. There also is the risk that the security
will not be issued or that the other party will not meet its obligation, in
which case the Fund loses the investment opportunity of the assets it has set
aside to pay for the security and any gain in the security's price.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

10
<PAGE>

VARIABLE RATE DEMAND OBLIGATIONS -- Variable rate demand obligations (VRDOs)
are floating rate securities that combine an interest in a long term municipal
bond with a right to demand payment before maturity from a bank or other
financial institution. If the bank or financial institution is unable to pay,
the Fund may lose money.

ILLIQUID INVESTMENTS -- The Fund may invest up to 15% of its assets in illiquid
securities that it cannot easily resell within seven days at current value or
that have contractual or legal restrictions on resale. If the Fund buys
illiquid securities it may be unable to quickly resell them or may be able to
sell them only at a price below current value.

DERIVATIVES -- Derivatives allow the Fund to increase or decrease its risk
exposure more quickly and efficiently than other types of instruments.
Derivatives are volatile and involve significant risks, including:

Credit risk -- the risk that the
counterparty (the party on the
other side of the transaction) on
a derivative transaction will be
unable to honor its financial
obligation to the Fund.

Leverage risk -- the risk
associated with certain types of
investments or trading strategies
(such as borrowing money to
increase the amount of
investments) that relatively small
market movements may result in
large changes in the value of an
investment. Certain investments or
trading strategies that involve
leverage can result in losses that
greatly exceed the amount
originally invested.

Liquidity risk -- the risk that
certain securities may be
difficult or impossible to sell at
the time that the seller would
like or at the price that the
seller believes the security is
currently worth.

The Fund may use derivatives for hedging purposes including anticipatory
hedges. Hedging is a strategy in which the Fund uses a derivative to offset the
risk that other Fund holdings may decrease in value. While hedging can reduce
losses, it can also reduce or eliminate gains if the market moves in a
different manner than anticipated by the Fund or if the cost of the derivative
outweighs the benefit of the hedge. Hedging also involves the risk that changes
in the value of the derivative will not match those of the holdings being
hedged as expected by the Fund, in which case any losses on the holdings being
hedged may not be reduced. There can be no assurance that

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

11
<PAGE>

[GRAPHIC] Details About the Fund

the Fund's hedging strategy will reduce risk or that hedging transactions will
be either available or cost effective. The Fund is not required to use hedging
and may not do so.

INDEXED AND INVERSE FLOATING RATE SECURITIES -- The Fund may invest in
securities whose potential returns are directly related to changes in an
underlying index or interest rate, known as indexed securities. The return on
indexed securities will rise when the underlying index or interest rate rises
and fall when the index or interest rate falls. The Fund may also invest in
securities whose return is inversely related to changes in an interest rate
(inverse floaters). In general, income on inverse floaters will decrease when
short term interest rates increase and increase when short term interest rates
decrease. Investments in inverse floaters may subject the Fund to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate which effectively
leverages the Fund's investment. As a result, the market value of such
securities will generally be more volatile than that of fixed rate, tax exempt
securities. Both indexed securities and inverse floaters are derivative
securities and can be considered speculative.

BORROWING AND LEVERAGE -- The Fund may borrow for temporary emergency purposes
including to meet redemptions. Borrowing may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Borrowing
will cost the Fund interest expense and other fees. The costs of borrowing may
reduce the Fund's return. Certain securities that the Fund buys may create
leverage including, for example, when issued securities, forward commitments
and options.

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

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

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

12
<PAGE>

Your Account [GRAPHIC]

MERRILL LYNCH SELECT PRICING SM SYSTEM
- --------------------------------------------------------------------------------

The Fund offers four share classes, each with its own sales charge and expense
structure, allowing you to invest in the way that best suits your needs. Each
share class represents an ownership interest in the same investment portfolio.
When you choose your class of shares you should consider the size of your
investment and how long you plan to hold your shares. Your Merrill Lynch
Financial Consultant can help you determine which share class is best suited to
your personal financial goals.

For example, if you select Class A or D shares, you generally pay a sales
charge at the time of purchase. If you buy Class D shares, you also pay an
ongoing account maintenance fee of 0.10%. You may be eligible for a sales
charge waiver.

If you select Class B or C shares, you will invest the full amount of your
purchase price, but you will be subject to a distribution fee of 0.25% on Class
B shares or 0.35% on Class C shares and an account maintenance fee of 0.25% on
both classes. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees increase the cost of your investment and
may cost you more than paying an initial sales charge. In addition, you may be
subject to a deferred sales charge when you sell Class B or C shares.

The Fund's shares are distributed by Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc., an affiliate of Merrill Lynch.
The Fund is a series of the Merrill Lynch Multi-State Municipal Series Trust.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

13
<PAGE>

[GRAPHIC] Your Account
The table below summarizes key features of the Merrill Lynch Select Pricing SM
System.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Availability Limited to certain Generally available Generally available Generally available
investors through Merrill through Merrill through Merrill
including: Lynch. Limited Lynch. Limited Lynch. Limited
. Current Class A availability through availability through availability
shareholders other securities other securities through other
. Participants in dealers. dealers. securities dealers.
certain Merrill
Lynch
sponsored programs
. Certain
affiliates of
Merrill Lynch.
- -------------------------------------------------------------------------------------------------------
Initial Sales Yes. Payable at No. Entire purchase No. Entire purchase Yes. Payable at
Charge? time of purchase. price is invested in price is invested in time of purchase.
Lower sales charges shares of the Fund. shares of the Fund. Lower sales charges
available for available for
larger investments. larger investments.
- -------------------------------------------------------------------------------------------------------
Deferred Sales No. (May be charged Yes. Payable if you Yes. Payable if you No. (May be charged
Charge? for purchases over redeem within four redeem within one for purchases over
$1 million that are years of purchase. year of purchase. $1 million that are
redeemed within redeemed within one
one year.) year.)
- -------------------------------------------------------------------------------------------------------
Account No. 0.25% Account 0.25% Account 0.10% Account
Maintenance and Maintenance Fee Maintenance Fee Maintenance Fee
Distribution Fees? 0.25% Distribution 0.35% Distribution No Distribution
Fee. Fee. Fee.
- -------------------------------------------------------------------------------------------------------
Conversion to No. Yes, automatically No. No.
Class D shares? after approximately
ten years.
- -------------------------------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

14
<PAGE>

RIGHT OF ACCUMULATION -- permits you to pay the sales charge that would apply
to the cost or value (whichever is higher) of all shares you own in the Merrill
Lynch mutual funds that offer Select Pricing options.

LETTER OF INTENT -- permits you to pay the sales charge that would be
applicable if you add up all shares of Merrill Lynch Select Pricing System
funds that you agree to buy within a 13 month period. Certain restrictions
apply.

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

If you select Class A or Class D shares, you will pay a sales charge at the
time of purchase.

<TABLE>
<CAPTION>
DEALER
COMPENSATION
AS A % OF AS A % OF AS A % OF
YOUR INVESTMENT OFFERING PRICE YOUR INVESTMENT* OFFERING PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 4.00% 4.17% 3.75%
- -------------------------------------------------------------------------------
$25,000 but less than $50,000 3.75% 3.90% 3.50%
- -------------------------------------------------------------------------------
$50,000 but less than
$100,000 3.25% 3.36% 3.00%
- -------------------------------------------------------------------------------
$100,000 but less than
$250,000 2.50% 2.56% 2.25%
- -------------------------------------------------------------------------------
$250,000 but less than
$1,000,000 1.50% 1.52% 1.25%
- -------------------------------------------------------------------------------
$1,000,000 and over** 0.00% 0.00% 0.00%
- -------------------------------------------------------------------------------
</TABLE>

* Rounded to the nearest one-hundredth percent.

** If you invest $1,000,000 or more in Class A or Class D shares, you may not
pay an initial sales charge. However, if you redeem your shares within one
year after purchase, you may be charged a deferred sales charge. This charge
is 1% of the lesser of the original cost of the shares being redeemed or
your redemption proceeds.

No initial sales charge applies to Class A or Class D shares that you buy
through reinvestment of dividends or distributions.

A reduced or waived sales charge on a purchase of Class A or Class D shares may
apply for:

. Purchases under a RIGHT OF ACCUMULATION or LETTER OF INTENT.
. TMA SM Managed Trusts.
. Certain Merrill Lynch investment
or central asset accounts.
. Purchases using proceeds from the
sale of certain Merrill Lynch
closed-end funds under certain
circumstances.
. Certain investors, including
directors or trustees of Merrill
Lynch mutual funds and Merrill
Lynch employees.
. Certain Merrill Lynch fee-based
programs.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

15
<PAGE>

[GRAPHIC] Your Account

Only certain investors are eligible to buy Class A shares. Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to buy
Class A shares or to participate in any of these programs.

If you decide to buy shares under the initial sales charge alternative and you
are eligible to buy both Class A and Class D shares, you should buy Class A
since Class D shares are subject to a 0.10% account maintenance fee, while
Class A shares are not.

If you redeem Class A or Class D shares and within 30 days buy new shares of
the same class, you will not pay a sales charge on the new purchase amount. The
amount eligible for this "Reinstatement Privilege" may not exceed the amount of
your redemption proceeds. To exercise the privilege, contact your Merrill Lynch
Financial Consultant or the Fund's Transfer Agent at 1-800-MER-FUND.

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

If you select Class B or Class C shares, you do not pay an initial sales charge
at the time of purchase. However, if you redeem your Class B shares within four
years after purchase, or your Class C shares within one year after purchase,
you may be required to pay a deferred sales charge. You will also pay
distribution fees of 0.25% for Class B shares and 0.35% for Class C shares and
account maintenance fees of 0.25% for Class B and Class C shares each year
under distribution plans that the Fund has adopted under Rule 12b-1. Because
these fees are paid out of the Fund's assets on an ongoing basis, over time
these fees increase the cost of your investment and may cost you more than
paying an initial sales charge. The Distributor uses the money that it receives
from the deferred sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the Merrill Lynch Financial Consultant
or other securities dealer who assists you in purchasing Fund shares.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

16
<PAGE>

CLASS B SHARES

If you redeem Class B shares within four years after purchase, you may be
charged a deferred sales charge. The amount of the charge gradually decreases
as you hold your shares over time, according to the following schedule:

<TABLE>
<CAPTION>
YEARS SINCE
PURCHASE SALES CHARGE*
---------------------------------
<S> <C>
0 - 1 4.00%
---------------------------------
1 - 2 3.00%
---------------------------------
2 - 3 2.00%
---------------------------------
3 - 4 1.00%
---------------------------------
4 and thereafter 0.00%
---------------------------------
</TABLE>

* The percentage charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption. Shares acquired
through reinvestment of dividends or distributions are not subject to a
deferred sales charge. Not all Merrill Lynch funds have identical deferred
sales charge schedules. If you exchange your shares for shares of another
fund, the higher charge will apply.

The deferred sales charge relating to Class B shares will be reduced or waived
in certain circumstances, such as:

. Redemption in connection with
participation in certain Merrill
Lynch fee-based programs.

. Withdrawals resulting from
shareholder death or disability
as long as the waiver request is
made within one year of death or
disability or, if later,
reasonably promptly following
completion of probate.

. Withdrawal through the Merrill
Lynch Systematic Withdrawal Plan
of up to 10% per year of your
Class B account value at the time
the plan is established.

. Withdrawals resulting from
closure by Merrill Lynch of the
account in which shares of the
Fund are held.

Your Class B shares convert automatically into Class D shares approximately ten
years after purchase. Any Class B shares received through reinvestment of
dividends or distributions paid on converting shares will also convert at that
time. Class D shares are subject to lower annual expenses than Class B shares.
The conversion of Class B to Class D shares is not a taxable event for federal
income tax purposes.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

17
<PAGE>

[GRAPHIC] Your Account

Different conversion schedules apply to Class B shares of different Merrill
Lynch mutual funds. For example, Class B shares of a fixed-income fund convert
approximately ten years after purchase compared to approximately eight years
for equity funds. If you acquire your Class B shares in an exchange from
another fund with a shorter conversion schedule, the Fund's ten year conversion
schedule will apply. If you exchange your Class B shares in the Fund for Class
B shares of a fund with a shorter conversion schedule, the other fund's
conversion schedule will apply. The length of time that you hold both the
original and exchanged Class B shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in certain other
cases as well.

CLASS C SHARES
If you redeem Class C shares within one year after purchase, you may be charged
a deferred sales charge of 1.00%. The charge will apply to the lesser of the
original cost of the shares being redeemed or the proceeds of your redemption.
You will not be charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or distributions. The deferred
sales charge relating to Class C shares may be reduced or waived in the same
circumstances as Class B shares except that it may not be waived or reduced in
connection with shareholder death or disability.

Class C shares do not offer a conversion privilege.

HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
- --------------------------------------------------------------------------------

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

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

18
<PAGE>

<TABLE>
<CAPTION>
INFORMATION IMPORTANT FOR YOU TO
IF YOU WANT TO YOUR CHOICES KNOW
- -------------------------------------------------------------------------------
<C> <C> <S>
Buy Shares First, select the share Refer to the Merrill Lynch Select
class appropriate for Pricing table on page 14. Be sure to
you read this prospectus carefully.
--------------------------------------------------------------------
Next, determine the The minimum initial investment for
amount of your the Fund is $1,000 for all accounts
investment except that certain Merrill Lynch
fee-based programs have a $250
initial minimum investment.

(The minimums for initial
investments may be waived under
certain circumstances.)
--------------------------------------------------------------------
Have your Merrill Lynch The price of your shares is based on
Financial Consultant or the next calculation of net asset
securities dealer submit value after your order is placed.
your purchase order Any purchase orders placed within
fifteen minutes after the close of
business on the New York Stock
Exchange will be priced at the net
asset value determined that day.

Purchase orders placed after that
time will be priced at the net asset
value determined on the next
business day. The Fund may reject
any order to buy shares and may
suspend the sale of shares at any
time. Merrill Lynch may charge a
processing fee to confirm a
purchase. This fee is currently
$5.35.
--------------------------------------------------------------------
Or contact the Transfer You can purchase shares of the Fund
Agent directly by mailing a purchase order
to the Transfer Agent at the address
on the inside back cover of this
prospectus.
- -------------------------------------------------------------------------------
Add to Your Purchase additional The minimum investment for
Investment shares additional purchases is $50.

(The minimum for additional
purchases may be waived under
certain circumstances.)
--------------------------------------------------------------------
Acquire additional All dividends and capital gains
shares through the distributions are automatically
automatic dividend reinvested without a sales charge.
reinvestment plan
--------------------------------------------------------------------
Participate in the You may invest a specific amount on
automatic investment a periodic basis through certain
plan Merrill Lynch investment or central
asset accounts.
- -------------------------------------------------------------------------------
Transfer Shares Transfer to a You may transfer your Fund shares
to Another participating securities only to another securities dealer
Securities dealer that has entered into an agreement
Dealer with Merrill Lynch. All shareholder
services will be available for the
transferred shares. You may only
purchase additional shares of funds
previously owned before the
transfer. All future trading of
these assets must be coordinated by
the receiving firm.
--------------------------------------------------------------------
Transfer to a non- You must either:
participating securities .Transfer your shares to an account
dealer with the Transfer Agent; or
.Sell your shares.
- -------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

19
<PAGE>

[GRAPHIC] Your Account

<TABLE>
<CAPTION>
INFORMATION IMPORTANT FOR YOU TO
IF YOU WANT TO YOUR CHOICES KNOW
- -------------------------------------------------------------------------------
<C> <C> <S>
Sell Your Have your Merrill Lynch The price of your shares is based on
Shares Financial Consultant or the next calculation of net asset
securities dealer submit value after your order is placed.
your sales order For your redemption request to be
priced at the net asset value on the
day of your request, you must submit
your request to your dealer within
fifteen minutes after that day's
close of business on the New York
Stock Exchange (generally 4:00 p.m.
Eastern time). Any redemption
request placed after that time will
be priced at the net asset value at
the close of business on the next
business day. Dealers must submit
redemption requests to the Fund not
more than thirty minutes after the
close of business on the New York
Stock Exchange on the day the
request was received.

Securities dealers, including
Merrill Lynch, may charge a fee to
process a redemption of shares.
Merrill Lynch currently charges a
fee of $5.35. No processing fee is
charged if you redeem shares
directly through the Transfer Agent.

The Fund may reject an order to sell
shares under certain circumstances.
--------------------------------------------------------------------
Sell through the You may sell shares held at the
Transfer Agent Transfer Agent by writing to the
Transfer Agent at the address on the
inside back cover of this
prospectus. All shareholders on the
account must sign the letter and
signatures must be guaranteed. If
you hold stock certificates, return
the certificates with the letter.
The Transfer Agent will normally
mail redemption proceeds within
seven days following receipt of a
properly completed request. If you
make a redemption request before the
Fund has collected payment for the
purchase of shares, the Fund or the
Transfer Agent may delay mailing
your proceeds. This delay will
usually not exceed ten days.

If you hold share certificates, they
must be delivered to the Transfer
Agent before they can be converted.
Check with the Transfer Agent or
your Merrill Lynch Financial
Consultant for details.
- -------------------------------------------------------------------------------
Sell Shares Participate in the You can choose to receive systematic
Systematically Fund's Systematic payments from your Fund account
Withdrawal Plan either by check or through direct
deposit to your bank account on a
monthly or quarterly basis. If you
have a Merrill Lynch CMA(R), CBA(R)
or Retirement Account you can
arrange for systematic redemptions
of a fixed dollar amount on a
monthly, bi-monthly, quarterly,
semi-annual or annual basis, subject
to certain conditions. Under either
method you must have dividends and
other distributions automatically
reinvested. For Class B and C shares
your total annual withdrawals cannot
be more than 10% per year of the
value of your shares at the time
your plan is established. The
deferred sales charge is waived for
systematic redemptions. Ask your
Merrill Lynch Financial Consultant
for details.
- -------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

20
<PAGE>

<TABLE>
<CAPTION>
INFORMATION IMPORTANT FOR YOU TO
IF YOU WANT TO YOUR CHOICES KNOW
- -------------------------------------------------------------------------------
<C> <C> <S>
Exchange Your Select the fund into You can exchange your shares of the
Shares which you want to Fund for shares of many other
exchange. Be sure to Merrill Lynch mutual funds. You must
read that fund's have held the shares used in the
prospectus exchange for at least 15 calendar
days before you can exchange to
another fund.

Each class of Fund shares is
generally exchangeable for shares of
the same class of another fund. If
you own Class A shares and wish to
exchange into a fund in which you
have no Class A shares, you will
exchange into Class D shares.

Some of the Merrill Lynch mutual
funds impose a different initial or
deferred sales charge schedule. If
you exchange Class A or D shares for
shares of a fund with a higher
initial sales charge than you
originally paid, you will be charged
the difference at the time of
exchange. If you exchange Class B
shares for shares of a fund with a
different deferred sales charge
schedule, the higher schedule will
apply. The time you hold Class B or
C shares in both funds will count
when determining your holding period
for calculating a deferred sales
charge at redemption. If you
exchange Class A or D shares for
money market fund shares, you will
receive Class A shares of Summit
Cash Reserves Fund. Class B or C
shares of the Fund will be exchanged
for Class B shares of Summit.

Although there is currently no limit
on the number of exchanges that you
can make, the exchange privilege may
be modified or terminated at any
time in the future.
- -------------------------------------------------------------------------------
</TABLE>

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

21
<PAGE>

[GRAPHIC] Your Account

NET ASSET VALUE -- the market value of the Fund's total assets after deducting
liabilities, divided by the number of shares outstanding.

HOW SHARES ARE PRICED
- --------------------------------------------------------------------------------

When you buy shares, you pay the NET ASSET VALUE, plus any applicable sales
charge. This is the offering price. Shares are also redeemed at their net asset
value, minus any applicable deferred sales charge. The Fund calculates its net
asset value (generally by using market quotations) each day the New York Stock
Exchange is open, fifteen minutes after the close of business on the Exchange
(the Exchange generally closes at 4:00 p.m. Eastern time). The net asset value
used in determining your price is the next one calculated after your purchase
or redemption order is placed.

Generally, Class A shares will have the highest net asset value because that
class has the lowest expenses, and Class D shares will have a higher net asset
value than Class B or Class C shares. Also dividends paid on Class A and Class
D shares will generally be higher than dividends paid on Class B and Class C
shares because Class A and Class D shares have lower expenses.

PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
- --------------------------------------------------------------------------------

If you participate in certain fee-based programs offered by Merrill Lynch, you
may be able to buy Class A shares at net asset value, including by exchanges
from other share classes. Sales charges on the shares being exchanged may be
reduced or waived under certain circumstances.

You generally cannot transfer shares held through a fee-based program into
another account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and you
will pay any applicable sales charges.

If you leave one of these programs, your shares may be redeemed or
automatically exchanged into another class of Fund shares or into a money
market fund. The class you receive may be the class you originally owned when
you entered the program, or in certain cases, a different class. If the
exchange is into Class B shares, the period before conversion to Class D shares
may be modified. Any redemption or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the program.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

22
<PAGE>

DIVIDENDS -- income paid to shareholders. Dividends may be reinvested in
additional Fund shares as they are paid.

DISTRIBUTIONS -- capital gains paid to shareholders. Distributions may be
reinvested in additional Fund shares as they are paid.

Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your Merrill
Lynch Financial Consultant.

DIVIDENDS, CAPITAL GAINS AND TAXES
- --------------------------------------------------------------------------------

The Fund will distribute any net investment income monthly, and any net
realized long or short-term capital gains at least annually. The Fund may also
pay a special distribution at the end of the calendar year to comply with
federal tax requirements. If your account is with Merrill Lynch and you would
like to receive DIVIDENDS and DISTRIBUTIONS in cash, contact your Merrill Lynch
Financial Consultant. If your account is with the Transfer Agent and you would
like to receive dividends and distributions in cash, contact the Transfer
Agent.

Taxes

To the extent that the dividends distributed by the Fund are from municipal
bond interest income, they are exempt from Federal income tax. However, certain
investors may be subject to alternative minimum tax on dividends received from
the Fund. To the extent that the dividends distributed by the Fund are derived
from New Mexico municipal bond interest income, they are also exempt from New
Mexico personal and corporate income tax. Interest income from other
investments may produce taxable distributions. If you are subject to income tax
in a state other than New Mexico, the dividends derived from New Mexico
municipal bonds will not be exempt from income tax in that state. Capital gain
dividends are taxed at the same rates as ordinary income for New Mexico
personal and corporate income tax purposes.

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

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

23
<PAGE>

[GRAPHIC] Your Account

"BUYING A DIVIDEND"

You may want to avoid buying shares shortly before the Fund pays a dividend or
distribution, although the impact on you will be significantly less than if you
were invested in a fund paying fully taxable dividends. The reason? If you buy
shares when a fund has realized but not yet distributed taxable income (if any)
or capital gains, you will pay the full price for the shares and then receive a
portion of the price back in the form of a distribution, all or, more likely,
part of which could be taxable. Before investing you may want to consult your
tax adviser.

By law, the Fund must withhold 31% of your distributions and proceeds if you
have not provided a taxpayer identification number or social security number.

If you redeem Fund shares or exchange them for shares of another fund, any gain
on the transaction may be subject to Federal income tax.

This section summarizes some of the consequences of an investment in the Fund
under current Federal and New Mexico tax laws. It is not a substitute for
personal tax advice. Consult your personal tax adviser about the potential tax
consequences to you of an investment in the Fund under all applicable tax laws.
The Fund's Statement of Additional Information has more information about
taxes.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

24
<PAGE>

Management of the Fund [GRAPHIC]

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

Fund Asset Management, the Fund's Manager, manages the Fund's investments and
its business operations under the overall supervision of the Trust's Board of
Trustees. The Manager has the responsibility for making all investment
decisions for the Fund. The Fund pays the Manager a fee at the annual rate of
0.55% of the average daily net assets of the Fund for the first $500 million;
0.525% of the average daily net assets from $500 million to $1 billion; and
0.50% of the average daily net assets above $1 billion. For the fiscal year
ended July 31, 1998, the fee payable to the Manager from the Fund was equal to
0.55% of the Fund's average daily net assets, but the Manager voluntarily
waived a portion of the management fee due for the fiscal year. See the Fees
and Expenses table on page 5.

Fund Asset Management is part of the Merrill Lynch Asset Management Group. The
Asset Management Group had approximately $483 billion in investment company and
other portfolio assets under management as of October 1998. This amount
includes assets managed for Merrill Lynch affiliates.

A NOTE ABOUT YEAR 2000

Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund management that they also
expect to resolve the Year 2000 Problem, and the Fund management will continue
to monitor the situation as the Year 2000 approaches. However, if the problem
has not been fully addressed, the Fund could be negatively affected. The Year
2000 Problem could also have a negative impact on the issuers of securities in
which the Fund invests, and this could hurt the Fund's investment returns.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

25
<PAGE>

[GRAPHIC] Management of the Fund

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

The Financial Highlights table is intended to help you understand the Fund's
financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate an investor would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions). This information
has been audited by Deloitte & Touche LLP, whose report, along with the Fund's
financial statements, are included in the Fund's annual report to shareholders,
which is available upon request.

<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------- -------------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED JULY 31, MAY 6, 1994+ FOR THE YEAR ENDED JULY 31, MAY 6, 1994+
INCREASE (DECREASE) IN ------------------------------ TO JULY 31, --------------------------------- TO JULY 31,
NET ASSET VALUE: 1998++ 1997 1996 1995 1994 1998++ 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $10.82 $10.36 $10.29 $10.24 $10.00 $10.82 $ 10.36 $ 10.29 $ 10.24 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Investment income -- net .47 .53 .56 .60 .13 .42 .48 .50 .54 .12
- ----------------------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain on investments --
net .10 .46 .10 .06 .24 .10 .46 .10 .06 .24
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .57 .99 .66 .66 .37 .52 .94 .60 .60 .36
- ----------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income --
net (.47) (.53) (.56) (.60) (.13) (.42) (.48) (.50) (.54) (.12)
Realized gain on
investments -- net (.34) -- -- -- -- (.34) -- -- -- --
In excess of realized
gain on investments --
net -- -- (.03) (.01) -- -- -- (.03) (.01) --
- ----------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (.81) (.53) (.59) (.61) (.13) (.76) (.48) (.53) (.55) (.12)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $10.58 $10.82 $10.36 $10.29 $10.24 $10.58 $ 10.82 $ 10.36 $ 10.29 $10.24
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:*
- ----------------------------------------------------------------------------------------------------------------------------
Based on net asset value
per share 5.52% 9.86% 6.53% 6.65% 3.76%# 4.99% 9.30% 5.98% 6.11% 3.64%#
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
- ----------------------------------------------------------------------------------------------------------------------------
Expenses, net of
reimbursement 1.23% .79% .49% .07% -- % 1.71% 1.30% 1.01% .59% .50%**
- ----------------------------------------------------------------------------------------------------------------------------
Expenses 1.63% 1.33% 1.42% 1.65% 2.47%** 2.12% 1.84% 1.92% 2.16% 2.97%**
- ----------------------------------------------------------------------------------------------------------------------------
Investment income -- net 4.41% 5.08% 5.33% 5.92% 5.49%** 3.93% 4.57% 4.81% 5.40% 4.98%**
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $3,873 $3,862 $5,287 $7,715 $8,166 $7,422 $11,703 $13,964 $12,104 $8,505
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 50.91% 40.53% 63.02% 28.16% 16.06% 50.91% 40.53% 63.02% 28.16% 16.06%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
** Annualized.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

26
<PAGE>

FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS C CLASS D
----------------------------------------------- -----------------------------------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE YEAR ENDED JULY 31, OCT. 21, 1994+ FOR THE YEAR ENDED JULY 31, OCT. 21, 1994+
INCREASE (DECREASE) IN --------------------------- TO JULY 31, --------------------------- TO JULY 31,
NET ASSET VALUE: 1998++ 1997 1996 1995 1998++ 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
- --------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $ 10.83 $ 10.36 $ 10.30 $ 9.89 $ 10.82 $ 10.36 $ 10.29 $ 9.89
- --------------------------------------------------------------------------------------------------------------------------
Investment income --
net .41 .47 .49 .40 .46 .52 .55 .46
- --------------------------------------------------------------------------------------------------------------------------
Realized and unrealized
gain on investments --
net .10 .47 .09 .42 .10 .46 .10 .41
- --------------------------------------------------------------------------------------------------------------------------
Total from investment
operations .51 .94 .58 .82 .56 .98 .65 .87
- --------------------------------------------------------------------------------------------------------------------------
Less dividends and
distributions:
Investment income --
net (.41) (.47) (.49) (.40) (.46) (.52) (.55) (.46)
Realized gain on
investments -- net (.34) -- -- -- (.34) -- -- --
In excess of realized
gain on investments --
net -- -- (.03) (.01) -- -- (.03) (.01)
- --------------------------------------------------------------------------------------------------------------------------
Total dividends and
distributions (.75) (.47) (.52) (.41) (.80) (.52) (.58) (.47)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 10.59 $ 10.83 $ 10.36 $10.30 $ 10.58 $ 10.82 $ 10.36 $10.29
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
RETURN:*
- --------------------------------------------------------------------------------------------------------------------------
Based on net asset
value per share 4.88% 9.29% 5.76% 8.44%# 5.42% 9.75% 6.42% 8.91%#
- --------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
- --------------------------------------------------------------------------------------------------------------------------
Expenses, net of
reimbursement 1.82% 1.42% 1.15% .80%** 1.31% .90% .61% .23%**
- --------------------------------------------------------------------------------------------------------------------------
Expenses 2.22% 1.95% 2.03% 2.27%** 1.71% 1.44% 1.51% 1.74%**
- --------------------------------------------------------------------------------------------------------------------------
Investment income --
net 3.81% 4.45% 4.67% 5.20%** 4.32% 4.97% 5.21% 5.80%**
- --------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of
period (in thousands) $ 800 $1,082 $ 712 $ 164 $1,695 $ 2,699 $ 2,110 $1,569
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 50.91% 40.53% 63.02% 28.16% 50.91% 40.53% 63.02% 28.16%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment returns exclude the effects of sales loads.
** Annualized.
+ Commencement of operations.
++ Based on average shares outstanding.
# Aggregate total investment return.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND

27
<PAGE>

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<PAGE>

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<PAGE>

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<PAGE>

POTENTIAL
INVESTORS

Open an account (two options).

1 2
MERRILL LYNCH TRANSFER AGENT
FINANCIAL CONSULTANT
OR SECURITIES DEALER Financial Data Services, Inc.
P.O. Box 45289
Advises shareholders on their Jacksonville, FL 32232-5289
Fund investments.
Performs recordkeeping and
reporting services.

DISTRIBUTOR

Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081

Arranges for the sale of Fund shares.

COUNSEL CUSTODIAN
THE FUND
Brown & Wood LLP State Street Bank
One World Trade Center The Board of and Trust Company
New York, New York 10048-0557 Directors P.O. Box 351
oversees the Boston, Massachusetts 02101
Provides legal advice Fund.
to the Fund. Holds the Fund's assets for
safekeeping.

INDEPENDENT AUDITORS INVESTMENT ADVISER

Deloitte & Touche LLP Fund Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011

TELEPHONE NUMBER
1-800-MER-FUND

Manages the Fund's day-to-day
activities.

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND
<PAGE>

For More Information [GRAPHIC]
SHAREHOLDER REPORTS
Additional information about the Fund's investments is available in the Fund's
annual and semi-annual reports to shareholders. In the Fund's annual report
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance during its last fiscal
year. You may obtain these reports at no cost by calling 1-800-MER-FUND.

The Fund will send you one copy of each shareholder report and certain other
mailings, regardless of the number of Fund accounts you have. To receive
separate shareholder reports for each account, call your Merrill Lynch
Financial Consultant or write to the Transfer Agent at its mailing address.
Include your name, address, tax identification number and Merrill Lynch
brokerage or mutual fund account number. If you have any questions, please
call your Merrill Lynch Financial Consultant or the Transfer Agent at
1-800-MER-FUND.

STATEMENT OF ADDITIONAL INFORMATION
The Fund's Statement of Additional Information contains further information
about the Fund and is incorporated by reference (legally considered to be part
of this prospectus). You may request a free copy by writing the Fund at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-
5289 or by calling 1-800-MER-FUND.

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

Information about the Fund (including the Statement of Additional Information)
can be reviewed and copied at the SEC's Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SEC's Internet site
at http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C.
20549-6009.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO ONE
IS AUTHORIZED TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM
INFORMATION CONTAINED IN THIS PROSPECTUS.

Investment Company Act file #811-4375
Code #18034-11-98
(C)Fund Asset Management, L.P.
Prospectus

[LOGO] Merrill Lynch

Merrill Lynch New Mexico
Municipal Bond Fund
of Merrill Lynch Multi-State
Municipal Series Trust

November 30, 1998

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH NEW MEXICO MUNICIPAL BOND FUND
OF MERRILL LYNCH MULTI-STATE MUNICIPAL SERIES TRUST
P.O. Box 9011, Princeton, New Jersey 08543-9011 . Phone No. (609) 282-2800

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

Merrill Lynch New Mexico Municipal Bond Fund (the "Fund") is a series of
Merrill Lynch Multi-State Municipal Series Trust (the "Trust"), a non-
diversified, open-end 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 New Mexico income taxes as is
consistent with prudent investment management. The Fund seeks to achieve its
objective while providing investors with the opportunity to invest primarily
in a diversified portfolio of long-term obligations issued by or on behalf of
New Mexico, its political subdivisions, agencies and instrumentalities and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the U.S. Virgin Islands and Guam, which pay interest exempt, in the
opinion of bond counsel to the issuer, from Federal income tax and New Mexico
income taxes. The Fund may invest in certain tax-exempt securities classified
as "private activity bonds" that may subject certain investors in the Fund to
an alternative minimum tax. At times, the Fund may seek to hedge its portfolio
through the use of futures transactions and options. There can be no assurance
that the investment objective of the Fund will be realized. For more
information on the Fund's investment objective and policies, see "Investment
Objective and Policies."

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

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

This Statement of Additional Information of the Fund is not a prospectus and
should be read in conjunction with the Prospectus of the Fund, dated November
30, 1998 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling (800) MER-FUND or by writing the Fund at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information is incorporated by
reference into the Prospectus.

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

FUND ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR -- DISTRIBUTOR

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

The date of this Statement of Additional Information is November 30, 1998.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.......................................... 2
General................................................................... 2
Risk Factors and Special Considerations Relating to Municipal Bonds....... 3
Description of Municipal Bonds............................................ 4
Financial Futures Transactions and Options................................ 7
Description of Temporary Investments...................................... 11
Investment Restrictions................................................... 13
Portfolio Turnover........................................................ 14
Management of the Trust.................................................... 15
Trustees and Officers..................................................... 15
Compensation of Trustees.................................................. 16
Management and Advisory Arrangements...................................... 17
Code of Ethics............................................................ 18
Purchase of Shares......................................................... 19
Initial Sales Charge Alternatives -- Class A and Class D Shares........... 19
Deferred Sales Charge Alternatives -- Class B and Class C Shares.......... 23
Distribution Plans........................................................ 26
Limitations on the Payment of Deferred Sales Charges...................... 27
Redemption of Shares....................................................... 28
Redemption................................................................ 29
Repurchase................................................................ 29
Reinstatement Privilege -- Class A and Class D Shares..................... 29
Pricing of Shares.......................................................... 30
Determination of Net Asset Value.......................................... 30
Computation of Offering Price Per Share................................... 31
Portfolio Transactions..................................................... 31
Transactions in Portfolio Securities...................................... 31
Shareholder Services....................................................... 32
Investment Account........................................................ 33
Exchange Privilege........................................................ 33
Fee-Based Programs........................................................ 35
Automatic Investment Plans................................................ 35
Automatic Dividend Program................................................ 35
Systematic Withdrawal Plans............................................... 36
Distributions and Taxes.................................................... 37
Dividends and Distributions............................................... 37
Taxes..................................................................... 37
Tax Treatment of Options and Futures Transactions......................... 40
Performance Data........................................................... 40
General Information........................................................ 43
Description of Shares..................................................... 43
Independent Auditors...................................................... 44
Custodian................................................................. 44
Transfer Agent............................................................ 44
Legal Counsel............................................................. 44
Reports to Shareholders................................................... 44
Shareholder Inquiries..................................................... 44
Additional Information.................................................... 45
Financial Statements....................................................... 45
Appendix I -- Economic and Financial Conditions in New Mexico.............. I-1
Appendix II -- Ratings of Municipal Bonds.................................. II-1
</TABLE>
<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 New Mexico 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 New Mexico, its political subdivisions,
agencies and instrumentalities and obligations of other qualifying issuers,
such as issuers located in Puerto Rico, the U.S. Virgin Islands and Guam,
which pay interest exempt, in the opinion of bond counsel to the issuer, from
Federal and New Mexico income taxes. Obligations exempt from Federal income
taxes are referred to herein as "Municipal Bonds," and obligations exempt from
both Federal and New Mexico income taxes are referred to as "New Mexico
Municipal Bonds." Unless otherwise indicated, references to Municipal Bonds
shall be deemed to include New Mexico Municipal Bonds. The Fund anticipates
that at all times, except during temporary defensive periods, it will maintain
at least 65% of the Fund's total assets invested in New Mexico Municipal
Bonds. The investment objective as set forth in the first sentence of this
paragraph is a fundamental policy and may not be changed without a vote of a
majority of the outstanding shares of the Fund. See "How the Fund Invests" in
the Prospectus for a general discussion of the Fund's goals, main investment
strategies and main risks.

GENERAL

Under normal circumstances, except when acceptable securities are
unavailable as determined by Fund Asset Management, L.P. (the "Manager" or
"FAM"), the Fund's manager, the Fund will invest at least 65% of its total
assets in New Mexico Municipal Bonds. The value of bonds and other fixed-
income obligations may fall when interest rates rise and rise when interest
rates fall. In general, bonds and other fixed-income obligations with longer
maturities will be subject to greater volatility resulting from interest rate
fluctuations than will similar obligations with shorter maturities. Under
normal conditions, it is generally anticipated that the Fund's average
weighted maturity will be in excess of ten years. 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 may also invest in 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. See
"Description of Temporary Investments." 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.

At least 80% of the Municipal Bonds purchased by the Fund 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 ("S&P") (currently AAA, AA, A and BBB)
or Fitch IBCA, Inc. ("Fitch") (currently AAA, AA, A and BBB). If unrated, such
securities will possess creditworthiness comparable, in the opinion of the
Manager, to other obligations in which the Fund may invest.

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 S&P 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. See
"Description of Municipal Bonds --"High Yield' or "Junk' Bonds." The Fund does
not intend to purchase debt securities that are in default or which the
Manager believes will be in default.

2
<PAGE>

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

The Fund ordinarily does not intend to realize investment income not exempt
from Federal income tax and New Mexico personal and corporate income taxes.
However, to the extent that suitable New Mexico Municipal Bonds are not
available for investment by the Fund, the Fund may purchase Municipal Bonds
issued by other states, their agencies and instrumentalities, the interest
income on which is exempt, in the opinion of bond counsel to the issuer, from
Federal, but not New Mexico, 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 could include trust
certificates or other instruments evidencing interest in one or more long-term
municipal securities. Non-Municipal Tax-Exempt Securities also may include
securities issued by other investment companies that invest in municipal
bonds, to the extent such investments are permitted by applicable law. Non-
Municipal Tax-Exempt securities will be considered "Municipal Bonds" for
purposes of the Fund's investment objective and policies. 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 that are classified as "private
activity bonds" (in general, bonds that benefit non-governmental entities) may
be subject to Federal alternative minimum tax. The percentage of the Fund's
total assets invested in "private activity bonds" will vary during the year.
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 that may be enacted in the future may affect the
availability of Municipal Bonds for investment by the Fund. See "Distributions
and Taxes -- Taxes."

RISK FACTORS AND SPECIAL CONSIDERATIONS RELATING TO MUNICIPAL BONDS

The risks and special considerations involved in investment in Municipal
Bonds vary with the types of instruments being acquired. Investments in Non-
Municipal Tax-Exempt Securities may present similar risks, depending on the
particular product. Certain instruments in which the Fund may invest may be
characterized as derivative instruments. See "Investment Objective and
Policies -- Description of Municipal Bonds" and " -- Financial Futures
Transactions and Options."

The Fund ordinarily will invest at least 65% of its assets in New Mexico
Municipal Bonds, and therefore it is more susceptible to factors adversely
affecting issuers of New Mexico Municipal Bonds than is a municipal bond
mutual fund that is not concentrated in issuers of New Mexico Municipal Bonds
to this degree. For the current fiscal year, the New Mexico General Fund
stands at a substantial surplus in relation to budgeted expenditures.
Employment, per capita personal income and the overall economy are growing
slowly, although mining is below earlier levels and reductions in federal
spending associated with the end of the Cold War have adversely affected
various national laboratories and military installations in the state.

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

The Manager does not believe that the current economic conditions in New
Mexico or other factors described above will have a significant adverse effect
on the Fund's ability to invest in high quality New Mexico 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 New Mexico Municipal
Bonds. For a discussion of economic and other conditions in New Mexico, see
Appendix I -- "Economic and Financial Conditions in New Mexico."

3
<PAGE>

The suitability for any particular investor of a purchase of shares of the
Fund will depend upon, among other things, such investor's investment
objectives and such investor's ability to accept the risks of investing in
such markets, including the loss of principal.

DESCRIPTION OF MUNICIPAL BONDS

Set forth below is a detailed description of the Municipal Bonds and
Temporary Investments in which the Fund may invest. Information with respect
to ratings assigned to tax-exempt obligations that the Fund may purchase is
set forth in Appendix II to this Statement of Additional Information. See "How
the Fund Invests" in the Prospectus.

Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the 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 excluded from gross income for Federal income tax
purposes and, in the case of New Mexico Municipal Bonds, exempt from New
Mexico 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 interest on Municipal
Bonds may bear a fixed rate or be payable at a variable or floating rate. 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. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of its state constitution or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of 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's 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. 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.

IDBs and Private Activity Bonds. The Fund may purchase IDBs and private
activity bonds. IDBs and private activity bonds are, in most cases, tax-exempt
securities issued by states, municipalities or public authorities to provide
funds, usually through a loan or lease arrangement, to a private entity for
the purpose of financing construction or improvement of a facility to be used
by the entity. Such bonds are secured primarily by revenues derived from loan
repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. IDBs and private activity
bonds generally are not secured by a pledge of the taxing power of the issuer
of such bonds. Therefore, an investor should be aware that repayment of such
bonds generally depends on the revenues of a private entity and be aware of
the risks that such an investment may entail. Continued ability of an entity
to generate sufficient revenues for the payment of principal and interest on
such bonds will be affected by many factors including the size of the entity,
capital structure, demand for its products or services, competition, general
economic conditions, government regulation and the entity's dependence on
revenues for the operation of the particular facility being financed. The Fund
may invest more than 25% of its total assets in IDBs or private activity
bonds.

4
<PAGE>

"Moral Obligation" Bonds. The Fund also may invest in "moral obligation"
bonds, which are normally issued by special purpose public authorities. If an
issuer of moral obligation bonds is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal obligation
of the state or municipality in question.

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

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

5
<PAGE>

When Issued Securities and Delayed Delivery Transactions. 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 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.
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 may actually be higher than those obtained in the
transaction itself; if yields so increase, the value of the when issued
obligation generally will decrease. The Fund will maintain a separate account
at its custodian bank consisting of cash, cash equivalents or liquid
securities (valued on a daily basis) equal at all times to the amount of the
when issued commitment.

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

"High Yield" or "Junk" Bonds. 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
S&P or Fitch or which, in the Manager's judgment, possess similar credit
characteristics. See Appendix II -- "Ratings of Municipal Bonds" for
additional information regarding ratings of debt securities. 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
ratings assigned by S&P, Moody's or Fitch, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of its management and regulatory matters.

High yield securities are considered by S&P, 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. 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. 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 S&P 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 or obligors 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
or obligors of high yield securities may be more likely to experience
financial stress, especially if such issuers or obligors are highly leveraged.
During such periods, such issuers may not have sufficient revenues to meet
their interest payment obligations. The issuer's ability to service its debt
obligations also may be adversely affected by specific issuer developments, or
the issuer's inability to meet specific projected business forecasts, or the
unavailability of additional financing. The risk of loss due to default by the
issuer is significantly greater for the holders of high yield securities
because such securities may be unsecured and may be subordinated to other
creditors of the issuer.

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<PAGE>

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

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

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

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

Yields. 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 maturity of the obligation and the rating of the issue. The
ability of the Fund to achieve its investment objective is also dependent on
the continuing ability of the issuers of the securities in which the Fund
invests to meet their obligations for the payment of interest and principal
when due. There are variations in the risks involved in holding Municipal
Bonds, both within a particular classification and between classifications,
depending on numerous factors. Furthermore, the rights of owners of Municipal
Bonds and the obligations of the issuer of such Municipal Bonds may be subject
to applicable bankruptcy, insolvency and similar laws and court decisions
affecting the rights of creditors generally and to general equitable
principles, which may limit the enforcement of certain remedies.

FINANCIAL FUTURES TRANSACTIONS AND OPTIONS

Reference is made to "How the Fund Invests" in the Prospectus. Set forth
below is additional information concerning these transactions.

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 contracts 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. 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. 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

7
<PAGE>

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. 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.
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."

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

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

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

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

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 and purchase
and sell Municipal Bond index futures contracts in connection with its hedging
strategies.

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

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<PAGE>

Futures Strategies. The Fund may sell a financial futures contract (i.e.,
assume a short position) in anticipation of a decline in the value of its
investments in Municipal Bonds resulting from an increase in interest rates or
otherwise. The risk of decline could be reduced without employing futures as a
hedge by selling such Municipal Bonds and either reinvesting the proceeds in
securities with shorter maturities or by holding assets in cash. This
strategy, however, entails increased transaction costs in the form of dealer
spreads and typically would reduce the average yield of the Fund's portfolio
securities as a result of the shortening of maturities. The sale of futures
contracts provides an alternative means of hedging against declines in the
value of its investments in Municipal Bonds. As such values decline, the value
of the Fund's positions in the futures contracts will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's Municipal Bond investments that 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 a decrease in interest rates or otherwise, that
may occur before such purchases can be effected. Subject to the degree
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 may also 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
upon which it is based or 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 a put option on a futures
contract is analogous to the purchase of a protective put option on portfolio
securities. The Fund will purchase a put option on a futures contract to hedge
the Fund's portfolio against the risk of rising interest rates.

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

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

The Trust has received an order from the Commission exempting it from the
provisions of Section 17(f) and Section 18(f) of the Investment Company Act of
1940, as amended (the "Investment Company Act"), in connection with its
strategy of investing in futures contracts. Section 17(f) relates to the
custody of securities and

9
<PAGE>

other assets of an investment company and may be deemed to prohibit certain
arrangements between the Fund and commodities brokers with respect to initial
and variation margin. Section 18(f) of the Investment Company 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
Investment Company 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 a futures contract, or writes a put option or
purchases a call option thereon, it will maintain an amount of cash, cash
equivalents (e.g., high grade commercial paper and daily tender adjustable
notes) or liquid securities in a segregated account with the Fund's custodian,
so that the amount so segregated plus the amount of initial and variation
margin held in the account of its broker equals the market value of the
futures contracts, thereby ensuring that the use of such futures contract is
unleveraged. It is not anticipated that transactions in futures contracts will
have the effect of increasing portfolio turnover.

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

The particular municipal bonds comprising the index underlying the Municipal
Bond Index financial futures contract may vary from the 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 Municipal Bonds held by the Fund may be greater. Municipal Bond
Index futures contracts were approved for trading in 1986. Trading in such
futures contracts may tend to be less liquid than trading 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.

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

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<PAGE>

to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. The inability to close out futures positions also
could have an adverse impact on the Fund's ability to hedge effectively its
investments in Municipal Bonds. The liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. Prices
have in the past moved beyond the daily limit on a number of consecutive
trading days. The 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 upon 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. 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. 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 fully reflected in the value of the
option purchased.

DESCRIPTION OF TEMPORARY INVESTMENTS

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

VRDOs and Participating VRDOs. VRDOs are tax-exempt obligations which
contain a floating or variable interest rate adjustment formula and a right of
demand on the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period not to
exceed seven days. There is, however, the possibility that because of default
or insolvency the demand feature of VRDOs and Participating VRDOs may not be
honored. The interest rates are adjustable at intervals (ranging from daily to
up to one year) to

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<PAGE>

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

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

The Temporary Investments, VRDOs and Participating VRDOs in which the Fund
may invest will be in the following rating categories at the time of purchase:
MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through
Prime-3 for commercial paper (as determined by Moody's), SP-1 through SP-2 for
notes and A-1 through A-3 for VRDOs and commercial paper (as determined by
S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined
by Fitch). Temporary Investments, if not rated, must be of comparable quality
in the opinion of the Manager. 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.

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

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<PAGE>

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 sales contracts is less certain.

INVESTMENT RESTRICTIONS

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

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

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

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

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

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

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

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

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

In addition, the Fund has adopted non-fundamental investment restrictions
that may be changed by the Board of Trustees without a vote of the Fund's
shareholders. Under the non-fundamental investment restrictions, the Fund may
not:

(a) Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, the Fund will not purchase shares of any registered open-
end investment company or registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the

13
<PAGE>

"fund of funds" provisions) of the Investment Company Act at any time the
Fund's shares are owned by another investment company that is part of the
same group of investment companies as the Fund.

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

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

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

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

Because of the affiliation of Merrill Lynch with the Manager, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch or
its affiliates except pursuant to an exemptive order under the Investment
Company Act. See "Portfolio Transactions." Without such an exemptive order the
Fund would be prohibited from engaging in portfolio transactions with Merrill
Lynch or any of its affiliates acting as principal.

PORTFOLIO TURNOVER

Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such action, for defensive or other reasons,
appears advisable to the Manager. As a result of the investment policies
described herein, the Fund's portfolio turnover rate may be higher than that
of other investment companies; however, it is extremely difficult to predict
portfolio turnover rates with any degree of accuracy. Higher portfolio
turnover may contribute to higher transaction costs in the form of dealer
spreads and brokerage commissions which are borne directly by the Fund. High
portfolio turnover may also result in negative tax consequences, such as an
increase in capital gains dividends or in ordinary income dividends of accrued
market discount. See "Distributions and Taxes -- Taxes." The portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the particular fiscal year by the monthly average of
the value of the portfolio securities owned by the Fund during the particular
fiscal year. For purposes of determining this rate, all securities whose
maturities at the time of acquisition are one year or less are excluded.

14
<PAGE>

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

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

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

Arthur Zeikel (66) -- President and Trustee(1)(2) -- Chairman of the Manager
and Merrill Lynch Asset Management, L.P. ("MLAM") (which terms as used herein
include their corporate predecessors) since 1997; President of the Manager and
MLAM from 1977 to 1997; Chairman of Princeton Services, Inc. ("Princeton
Services") since 1997 and Director thereof since 1993; President of Princeton
Services from 1993 to 1997; Executive Vice President of Merrill Lynch & Co.,
Inc. ("ML & Co.") since 1990.

James H. Bodurtha (54) -- Trustee(2)(3) -- 36 Popponesset Road, Cotuit,
Massachusetts 02635. Director and Executive Vice President, The China Business
Group, Inc. since 1996; Chairman and Chief Executive Officer, China Enterprise
Management Corporation from 1993 to 1996; Chairman, Berkshire Corporation
since 1980; Partner, Squire, Sanders & Dempsey from 1980 to 1993.

Herbert I. London (59) -- Trustee(2)(3) -- 113-115 University Place, New
York, New York 10003. John M. Olin Professor of Humanities, New York
University since 1993 and Professor thereof since 1980; President, Hudson
Institute since 1997 and Trustee thereof since 1980; Dean, Gallatin Division
of New York University from 1976 to 1993; Distinguished Fellow, Herman Kahn
Chair, Hudson Institute from 1984 to 1985; Director, Damon Corporation from
1991 to 1995; Overseer, Center for Naval Analyses from 1983 to 1993; Limited
Partner, Hypertech LP since 1996.

Robert R. Martin (71) -- Trustee(2)(3) -- 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; Chairman of the Board,
WTC Industries Inc. in 1994; Trustee, Northland College since 1992.

Joseph L. May (69) -- Trustee(2)(3) -- 424 Church Street, Suite 2000,
Nashville, Tennessee 37219. Attorney in private practice since 1984;
President, May and Athens Hosiery Mills Division, Wayne-Gossard Corporation
from 1954 to 1983; Vice President, Wayne-Gossard Corporation from 1972 to
1983; Chairman, The May Corporation (personal holding company) from 1972 to
1983; Director, Signal Apparel Co. from 1972 to 1989.

Andre F. Perold (46) -- Trustee(2)(3) -- Morgan Hall, Soldiers Field,
Boston, Massachusetts 02163. Professor, Harvard Business School since 1989 and
Associate Professor from 1983 to 1989; Trustee, The Common Fund since 1989;
Director, Quantec Limited since 1991 and TIBCO from 1994 to 1996.

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

Vincent R. Giordano (54) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and MLAM since 1984; Senior Vice President of
Princeton Services since 1993.

Kenneth A. Jacob (47) -- Vice President(1)(2) -- First Vice President of
MLAM since 1997; Vice President of MLAM from 1984 to 1997; Vice President of
the Manager since 1984.

15
<PAGE>

Hugh T. Hurley, III (34) -- Portfolio Manager and Vice President of the
Fund(1)(2) -- Vice President of MLAM since 1996; Assistant Vice President of
MLAM from 1993 to 1996.

Donald C. Burke (38) -- Vice President(1)(2) -- First Vice President of MLAM
since 1997; Vice President of MLAM from 1990 to 1997; Director of Taxation of
MLAM since 1990.

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

Robert E. Putney, III (38) -- Secretary(1)(2) -- Director (Legal Advisory)
of MLAM and Princeton Administrators, L.P. since 1997; Vice President of
Princeton Administrators, L.P. from 1996 to 1997; Vice President of MLAM from
1994 to 1997; Attorney with MLAM from 1991 to 1994.
- ----------
(1) Interested person, as defined in the Investment Company Act, of the Trust.
(2) Such Trustee or officer is a director, trustee or officer of certain other
investment companies for which FAM or MLAM acts as the investment adviser
or manager.
(3) Member of the Trust's Audit and Nominating Committee, which is responsible
for the selection of the independent auditors and the selection and
nomination of non-interested Trustees.

As of November 1, 1998, the Trustees, the officers of the Trust and the
officers of the Fund as a group (13 persons) owned an aggregate of less than
1% of the outstanding shares of the Fund. At such date, Mr. Zeikel, a Trustee
and an officer of the Trust, the other officers of the Trust and the officers
of the Fund owned an aggregate of less than 1% of the outstanding shares of
common stock of ML & Co.

COMPENSATION OF TRUSTEES

The Trust pays each non-interested Trustee a fee of $10,000 per year plus
$1,000 per meeting attended. The Trust also compensates members of its Audit
and Nominating Committee (the "Committee"), which consists of all the non-
interested Trustees, a fee of $2,000 per year plus $500 per Committee meeting
attended. The Trust reimburses each non-interested Trustee for his out-of-
pocket expenses relating to attendance at Board and Committee meetings. The
fees and expenses of the Trustees are allocated to the respective series of
the Trust on the basis of asset size.

The following table shows the compensation earned by the non-interested
Trustees for the fiscal year ended July 31, 1998 and the aggregate
compensation paid to them from all registered investment companies advised by
the Manager and its affiliate, MLAM ("MLAM/FAM-advised funds"), for the
calendar year ended December 31, 1997.

<TABLE>
<CAPTION>
AGGREGATE
PENSION OR ESTIMATED COMPENSATION FROM
RETIREMENT BENEFITS ANNUAL TRUST AND OTHER
POSITION WITH COMPENSATION ACCRUED AS PART OF BENEFITS UPON MLAM/FAM-
NAME TRUST FROM FUND FUND EXPENSE RETIREMENT ADVISED FUNDS(1)
- ---- ------------- ------------ ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
James H. Bodurtha....... Trustee $196 None None $148,500
Herbert I. London....... Trustee $196 None None $148,500
Robert R. Martin........ Trustee $196 None None $148,500
Joseph L. May........... Trustee $196 None None $148,500
Andre F. Perold......... Trustee $196 None None $148,500
</TABLE>
- ----------
(1) The Trustees serve on the boards of MLAM/FAM-advised funds as follows: Mr.
Bodurtha (25 registered investment companies consisting of 43 portfolios);
Mr. London (25 registered investment companies consisting of 43
portfolios); Mr. Martin (25 registered investment companies consisting of
43 portfolios); Mr. May (25 registered investment companies consisting of
43 portfolios); and Mr. Perold (25 registered investment companies
consisting of 43 portfolios).

16
<PAGE>

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

MANAGEMENT AND ADVISORY ARRANGEMENTS

Management Services. The Manager provides the Fund with investment advisory
and management services. Subject to the supervision 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 Trust and the Fund.

Management Fee. The Trust has entered into a management agreement on behalf
of the Fund with the Manager (the "Management Agreement"), pursuant to which
the Manager receives for its services to the Fund monthly compensation 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 table below sets forth information about the total
management fees paid by the Fund to the Manager for the periods indicated.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31, MANAGEMENT FEE
-------------------------- -------------------------------
<S> <C>
1998............................. $88,673 (of which $65,367 was
voluntarily waived)
1997............................. $120,031 (of which $112,203 was
voluntarily waived)
1996............................. $125,811 (all of which was
voluntarily waived)
</TABLE>

Payment of Fund Expenses. 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 ML & Co. or any of its affiliates. 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 redemption expenses, expenses of portfolio transactions, expenses of
registering the shares under federal and state securities laws, pricing costs
(including the daily calculation of net asset value), expenses of printing
shareholder reports, prospectuses and statements of additional information,
except to the extent paid by Merrill Lynch Funds Distributor, a division of
PFD (the "Distributor") as described below, fees for legal and auditing
services, Commission fees, interest, certain taxes and other expenses
attributable to a particular Series. Expenses that will be allocated on the
basis of asset size of the respective Series include fees and expenses of non-
interested Trustees, state franchise taxes, costs of printing proxies and
other expenses relating to shareholder meetings and other expenses properly
payable by the Trust. The organizational expenses of the Trust were paid by
the Trust, and if additional Series are added to the Trust, the organizational
expenses will be allocated among the Series in a manner deemed equitable by
the Trustees. 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 Trust by the Manager and the Trust
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 the account
maintenance and distribution of Class B and Class C shares will be financed by
the Trust pursuant to the Distribution Plans in compliance with Rule 12b-1
under the Investment Company Act. See "Purchase of Shares -- Distribution
Plans." Reference is made to "Management of the Fund" in the Prospectus for
certain information concerning the management and advisory arrangements of the
Trust.

17
<PAGE>

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

Duration and Termination. Unless earlier terminated as described herein, the
Management 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 Investment Company
Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days' written notice at the option of either
party or by vote of the shareholders of the Fund.

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

Distribution Expenses. The Fund has entered into four separate distribution
agreements with the Distributor in connection with the continuous offering of
each class of shares of the Fund (the "Distribution Agreements"). The
Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Fund. After the
prospectuses, statements of additional information and periodic reports have
been prepared, set in type and mailed to shareholders, the Distributor pays
for the printing and distribution of copies thereof used in connection with
the offering to dealers and 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.

CODE OF ETHICS

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

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

18
<PAGE>

PURCHASE OF SHARES

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

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

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

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

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

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

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

19
<PAGE>

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

Eligible Class A Investors

Class A shares are offered to a limited group of investors and also will be
issued upon reinvestment of dividends on outstanding Class A shares. Investors
who currently own Class A shares are entitled to purchase additional Class A
shares of the Fund in that account. Class A shares are available at net asset
value to corporate warranty insurance reserve fund programs provided that the
program has $3 million or more initially invested in Select Pricing Funds.
Also eligible to purchase Class A shares at net asset value are participants
in certain investment programs including TMA SM Managed Trusts to which
Merrill Lynch Trust Company provides discretionary trustee services,
collective investment trusts for which Merrill Lynch Trust Company serves as
trustee and certain purchases made in connection with certain fee-based
programs. In addition, Class A shares are offered at net asset value to ML &
Co. and its subsidiaries and their directors and employees and to members of
the Boards of MLAM-advised investment companies. Certain persons who acquired
shares of certain MLAM-advised closed-end funds in their initial offerings who
wish to reinvest the net proceeds from a sale of their closed-end fund shares
of common stock in shares of the Fund also may purchase Class A shares of the
Fund if certain conditions are met. In addition, Class A shares of the Fund
and certain other Select Pricing Funds are offered at net asset value to
shareholders of Merrill Lynch Senior Floating Rate Fund, Inc. and, if certain
conditions are met, to shareholders of Merrill Lynch Municipal Strategy Fund,
Inc. and Merrill Lynch High Income Municipal Bond Fund, Inc. who wish to
reinvest the net proceeds from a sale of certain of their shares of common
stock pursuant to a tender offer conducted by such funds in shares of the Fund
and certain other Select Pricing Funds.

Investors are advised that only Class A and Class D shares may be available
for purchase through securities dealers, other than Merrill Lynch, that are
eligible to sell shares.

Class A and Class D Sales Charge Information

<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
July 31, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1998 $3,264 $299 $2,965 $ 0
1997 $2,518 $199 $2,319 $ 0
1996 $2,110 $179 $1,931 $ 0
<CAPTION>
CLASS D SHARES
---------------------------------------------------------------------------------
For the Fiscal Year Gross Sales Sales Charges Sales Charges CDSCs Received on
Ended Charges Retained by Paid to Redemption of
July 31, Collected Distributor Merrill Lynch Load-Waived Shares
------------------- ----------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
1998 $ 305 $ 21 $ 284 $ 0
1997 $8,756 $765 $7,991 $ 0
1996 $8,433 $661 $7,772 $ 0
</TABLE>

20
<PAGE>

The Distributor may reallow discounts to selected dealers and retain the
balance over such discounts. At times the Distributor may reallow the entire
sales charge to such dealers. Since securities dealers selling Class A and
Class D shares of the Fund will receive a concession equal to most of the
sales charge, they may be deemed to be underwriters under the Securities Act.

Reduced Initial Sales Charges

Reinvested Dividends and Capital Gains. No initial sales charges are imposed
upon Class A and Class D shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.

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

Letter of Intent. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of the Class A or Class D shares of the Fund or
any Select Pricing Funds made within a 13-month period starting with the first
purchase pursuant to a Letter of Intent. The Letter of Intent is available
only to investors whose accounts are established and maintained at the Fund's
Transfer Agent. The Letter of Intent is not available to employee benefit
plans for which Merrill Lynch provides plan participant recordkeeping
services. The Letter of Intent is not a binding obligation to purchase any
amount of Class A or Class D shares; however, its execution will result in the
purchaser paying a lower sales charge at the appropriate quantity purchase
level. A purchase not originally made pursuant to a Letter of Intent may be
included under a subsequent Letter of Intent executed within 90 days of such
purchase if the Distributor is informed in writing of this intent within such
90-day period. The value of Class A and Class D shares of the Fund and of
other Select Pricing Funds presently held, at cost or maximum offering price
(whichever is higher), on the date of the first purchase under the Letter of
Intent, 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 Intent (minimum of $25,000), the investor
will be notified and must pay, within 20 days of the expiration of such
Letter, the difference between the sales charge on the Class A or Class D
shares purchased at the reduced rate and the sales charge applicable to the
shares actually purchased through the Letter. Class A or Class D shares equal
to at least 5.0% of the intended amount will be held in escrow during the 13-
month period (while remaining registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intent must be at least
5.0% of the dollar amount of such Letter. If a purchase during the term of
such Letter would otherwise be subject to a further reduced sales charge based
on the right of accumulation, the purchaser will be entitled on that purchase
and subsequent purchases to the further reduced percentage sales charge that
would be applicable to a single purchase equal to the total dollar value of
the Class A or Class D shares then being purchased under such Letter, but
there will be no retroactive reduction of the sales charge 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 Intent will be deducted
from the total purchases made under such Letter. An exchange from the Summit
Cash Reserves Fund into the Fund that creates a sales charge will count toward
completing a new or existing Letter of Intent from the Fund.

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

21
<PAGE>

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

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

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

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

Class D shares of the Fund are offered at net asset value, without a sales
charge, to an investor that has a business relationship with a Merrill Lynch
Financial Consultant and that has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from the redemption of shares of such
other mutual fund and that such shares have been outstanding for a period of
no less than six months; and, second, such purchase of Class D shares must be
made within 60 days after the redemption and the proceeds from the redemption
must be maintained in the interim in cash or a money market fund.

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

Shareholders of certain MLAM-advised continuously offered closed-end funds
may reinvest at net asset value the net proceeds from a sale of certain shares
of common stock of such funds in shares of the Fund. Upon exercise of this
investment option, shareholders of Merrill Lynch Senior Floating Rate Fund,
Inc. will receive Class A

22
<PAGE>

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

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

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

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

Investors choosing the deferred sales charge alternatives should consider
Class B shares if they intend to hold their shares for an extended period of
time and Class C shares if they are uncertain as to the length of time they
intend to hold their assets in Select Pricing Funds.

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

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net
asset value per share without the imposition of a sales charge at the time of
purchase. See "Pricing of Shares -- Determination of Net Asset Value" below.

Contingent Deferred Sales Charges -- Class B Shares

Class B shares that are redeemed within four years of purchase may be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. In determining whether a CDSC is applicable to
a redemption, the calculation will be determined in the manner that results in
the lowest applicable

23
<PAGE>

rate being charged. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being redeemed.
Accordingly, no CDSC will be imposed on increases in net asset value above the
initial purchase price. In addition, no CDSC will be assessed on shares
derived from reinvestment of dividends or capital gains distributions. It will
be assumed that the redemption is first of shares held for over four years or
shares acquired pursuant to reinvestment of dividends or distributions and
then of shares held longest during the four-year period. 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.

The following table sets forth the Class B CDSC:

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

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

The Class B CDSC is waived on redemptions of shares in certain
circumstances, including 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. The Class B CDSC also is waived for any Class B shares that are
purchased within qualifying Employee Access SM Accounts. The terms of the CDSC
may be modified in connection with certain fee-based programs. See
"Shareholder Services -- Fee-Based Programs."

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

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

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

24
<PAGE>

for the shares exchanged will be tacked on to the holding period for the
shares acquired. The conversion period also may be modified for investors that
participate in certain fee-based programs. See "Shareholder Services -- Fee-
Based Programs."

Class B shareholders of the Fund exercising the exchange privilege described
under "Shareholder Services --Exchange Privilege" will continue to be subject
to the Fund's CDSC schedule if such schedule is higher than the CDSC schedule
relating to the Class B shares acquired as a result of the exchange.

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

Contingent Deferred Sales Charges -- Class C Shares

Class C shares that are redeemed within one year of purchase may be subject
to a 1.0% CDSC charged as a percentage of the dollar amount subject thereto.
In determining whether a Class C CDSC is applicable to a redemption, the
calculation will be determined in the manner that results in the lowest
possible rate being charged. The charge will be assessed on an amount equal to
the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no Class C CDSC will be imposed on increases in net
asset value above the initial purchase price. In addition, no Class C CDSC
will be assessed on shares derived from reinvestment of dividends or capital
gains distributions. It will be assumed that the redemption is first of shares
held for over one year or shares acquired pursuant to reinvestment of
dividends or distributions and then of shares held longest during the one-year
period. The charge will not be applied to dollar amounts representing an
increase in the net asset value since the time of purchase. A transfer of
shares from a shareholder's account to another account will be assumed to be
made in the same order as a redemption. The Class C CDSC may be waived in
connection with certain fee-based programs. See "Shareholder Services -- Fee-
Based Programs."

Class B and Class C Sales Charge Information

<TABLE>
<CAPTION>
CLASS B SHARES*
--------------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended July 31, by Distributor Merrill Lynch
------------------- -------------- -------------
<S> <C> <C>
1998 $91,122 $91,122
1997 $58,462 $58,462
1996 $43,949 $43,949

* Additional Class B CDSCs payable to the Distributor
with respect to the fiscal years ended July 31, 1997
and 1998 may have been waived or converted to a
contingent obligation in connection with a
shareholder's participation in certain fee-based
programs.

<CAPTION>
CLASS C SHARES
--------------------------------------------------------------------------------
For the Fiscal Year CDSCs Received CDSCs Paid to
Ended July 31, by Distributor Merrill Lynch
------------------- -------------- -------------
<S> <C> <C>
1998 $ 648 $ 648
1997 $ 64 $ 64
1996 $ 0 $ 0
</TABLE>

Merrill Lynch compensates its Financial Consultants for selling Class B and
Class C shares at the time of purchase from its own funds. Proceeds from the
CDSC and the distribution fee are paid to the Distributor and are used in
whole or in part by the Distributor to defray the expenses of dealers
(including Merrill Lynch) related to providing distribution-related services
to the Fund in connection with the sale of the Class B and Class C shares,
such as the payment of compensation to financial consultants for selling Class
B and Class C shares from the

25
<PAGE>

dealer's own funds. The combination of the CDSC and the ongoing distribution
fee facilitates the ability of the Fund to sell the Class B and Class C shares
without a sales charge being deducted at the time of purchase. See
"Distribution Plans" below. Imposition of the CDSC and the distribution fee on
Class B and Class C shares is limited by the NASD asset-based sales charge
rule. See "Limitations on the Payment of Deferred Sales Charges" below.

DISTRIBUTION PLANS

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

The Distribution Plans for Class B, Class C and Class D shares each provides
that the Fund pays the Distributor an account maintenance fee relating to the
shares of the relevant class, accrued daily and paid monthly, at the annual
rates of 0.25%, 0.25% and 0.10%, respectively, of the average daily net assets
of the Fund attributable to shares of the relevant class in order to
compensate the Distributor and Merrill Lynch (pursuant to a sub-agreement) in
connection with account maintenance activities with respect to Class B, Class
C and Class D shares. Each of those classes has exclusive voting rights with
respect to the Distribution Plan adopted with respect to such class pursuant
to which account maintenance and/or distribution fees are paid (except that
Class B shareholders may vote upon any material changes to expenses charged
under the Class D Distribution Plan).

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

The Fund's Distribution Plans are subject to the provisions of Rule 12b-1
under the Investment Company Act. In their consideration of each Distribution
Plan, the Trustees must consider all factors they deem relevant, including
information as to the benefits of the Distribution Plan to the Fund and each
related class of shareholders. Each Distribution Plan further provides that,
so long as the Distribution Plan remains in effect, the selection and
nomination of non-interested Trustees shall be committed to the discretion of
the non-interested Trustees then in office. In approving each Distribution
Plan in accordance with Rule 12b-1, the non-interested Trustees concluded that
there is reasonable likelihood that each Distribution Plan will benefit the
Fund and its related class of shareholders. Each Distribution Plan can be
terminated at any time, without penalty, by the vote of a majority of the non-
interested Trustees or by the vote of the holders of a majority of the
outstanding related class of voting securities of the Fund. A Distribution
Plan cannot be amended to increase materially the amount to be spent by the
Fund without the approval of the related class of shareholders and all
material amendments are required to be approved by the vote of Trustees,
including a majority of the non-interested 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 Fund
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.

Among other things, each Distribution Plan provides that the Distributor
shall provide and the Trustees shall review quarterly reports of the
disbursement of the account maintenance and/or distribution fees paid to the
Distributor. Payments under the Distribution Plans are based on a percentage
of average daily net assets attributable to the shares regardless of the
amount of expenses incurred and, accordingly, distribution-related revenues
from the Distribution Plans may be more or less than distribution-related
expenses. Information with respect to the distribution-related revenues and
expenses is presented to the Trustees for their consideration in

26
<PAGE>

connection with their deliberations as to the continuance of the Class B and
Class C Distribution Plans annually, as of December 31 of each year, on a
"fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSCs and certain other
related revenues, and expenses consist of financial consultant compensation,
branch office and regional operation center selling and transaction processing
expenses, advertising, sales promotion and marketing expenses, corporate
overhead and interest expense. On the direct expense and revenue/cash basis,
revenues consist of the account maintenance fees, distribution fees and CDSCs
and the expenses consist of financial consultant compensation.

As of December 31, 1997, the last date for which fully allocated accrual
data is available, the fully allocated accrual expenses of the Distributor and
Merrill Lynch for the period since the commencement of operations of Class B
shares exceeded fully allocated accrual revenues by approximately $187,000
(2.36% of Class B net assets at that date). As of July 31, 1998, direct cash
revenues for the period since the commencement of operations of Class B shares
exceeded direct cash expenses by $195,582 (2.64% of Class B net assets at that
date). As of December 31, 1997, the fully allocated accrual expenses incurred
by the Distributor and Merrill Lynch for the period since the commencement of
operations of Class C shares exceeded the fully allocated accrual revenues by
approximately $2,000 (0.19% of Class C net assets at that date). As of July
31, 1998, direct cash revenues for the period since the commencement of
operations of Class C shares exceeded direct cash expenses by $8,381 (1.05% of
Class C net assets at that date).

For the fiscal year ended July 31, 1998, the Fund paid the Distributor
$44,130 pursuant to the Class B Distribution Plan (based on average daily net
assets subject to such Class B Distribution Plan of approximately $8.8
million), all of which was paid to Merrill Lynch for providing account
maintenance and distribution-related activities and services in connection
with Class B shares. For the fiscal year ended July 31, 1998, the Fund paid
the Distributor $5,728 pursuant to the Class C Distribution Plan (based on
average daily net assets subject to such Class C Distribution Plan of
approximately $1.0 million), all of which was paid to Merrill Lynch for
providing account maintenance and distribution-related activities and services
in connection with Class C shares. For the fiscal year ended July 31, 1998,
the Fund paid the Distributor $2,350 pursuant to the Class D Distribution Plan
(based on average daily net assets subject to such Class D Distribution Plan
of approximately $2.3 million), all of which was paid to Merrill Lynch for
providing account maintenance activities in connection with Class D shares.

LIMITATIONS ON THE PAYMENT OF DEFERRED SALES CHARGES

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

27
<PAGE>

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

<TABLE>
<CAPTION>
DATA CALCULATED AS OF JULY 31, 1998
-------------------------------------------------------------------------------
(IN THOUSANDS)
ANNUAL
DISTRIBUTION
ALLOWABLE AMOUNTS FEE AT
ELIGIBLE ALLOWABLE INTEREST ON MAXIMUM PREVIOUSLY AGGREGATE CURRENT NET
GROSS AGGREGATE UNPAID AMOUNT PAID TO UNPAID ASSET
SALES(1) SALES CHARGE BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
-------- ------------ ----------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS B SHARES FOR THE
PERIOD FEBRUARY 28,
1992 (COMMENCEMENT OF
OPERATIONS) TO JULY 31,
1998
Under NASD Rule as
Adopted................ $16,798 $1,050 $324 $1,374 $347 $1,027 $19
Under Distributor's
Voluntary Waiver....... $16,798 $1,050 $ 84 $1,134 $347 $ 787 $19
CLASS C SHARES, FOR THE
PERIOD OCTOBER 21, 1994
(COMMENCEMENT OF
OPERATIONS) TO JULY 31,
1998
Under NASD Rule as
Adopted................ $ 1,238 $ 77 $ 14 $ 91 $ 9 $ 82 $ 3
</TABLE>
- ----------
(1) Purchase price of all eligible Class B or Class C shares sold during the
periods indicated other than shares acquired through dividend reinvestment
and the exchange privilege.
(2) Interest is computed on a monthly basis based upon the prime rate, as
reported in The Wall Street Journal, plus 1.0%, as permitted under the
NASD Rule.
(3) Consists of CDSC payments, distribution fee payments and accruals. See
"What are the Fund's fees and expenses?" in the Prospectus. This figure
may include CDSCs that were deferred when a shareholder redeemed shares
prior to the expiration of the applicable CDSC period and invested the
proceeds, without the imposition of a sales charge, in Class A shares in
conjunction with the shareholder's participation in the Merrill Lynch
Mutual Fund Advisor (Merrill Lynch MFA SM) Program (the "MFA Program").
The CDSC is booked as a contingent obligation that may be payable if the
shareholder terminates participation in the MFA Program.
(4) Provided to illustrate the extent to which the current level of
distribution fee payments (not including any CDSC payments) is amortizing
the unpaid balance. No assurance can be given that payments of the
distribution fee will reach either the voluntary maximum (with respect to
Class B shares) or the NASD maximum (with respect to Class B and Class C
shares).

REDEMPTION OF SHARES

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

The Fund is required to redeem for cash all shares of the Fund upon receipt
of a written request in proper form. The redemption price is the net asset
value per share next determined after the initial receipt of proper notice of
redemption. Except for any CDSC that may be applicable, there will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption.

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

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

28
<PAGE>

REDEMPTION

A shareholder wishing to redeem shares held with the Transfer Agent may do
so without charge by tendering the shares directly to the Transfer Agent at
Financial Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-
5289. Redemption requests delivered other than by mail should be delivered to
Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of redemption in the case of shares
deposited with the Transfer Agent may be accomplished by a written letter
requesting redemption. Proper notice of redemption in the case of shares for
which certificates have been issued may be accomplished by a written letter as
noted above accompanied by certificates for the shares to be redeemed.
Redemption requests should not be sent to the Fund. The redemption request in
either event requires the signature(s) of all persons in whose name(s) the
shares are registered, signed exactly as such name(s) appear(s) on the
Transfer Agent's register. The signature(s) on the redemption requests must be
guaranteed by an "eligible guarantor institution" as such is defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the existence and validity of which may be verified by the Transfer
Agent through the use of industry publications. Notarized signatures are not
sufficient. In certain instances, 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 Fund may be requested to redeem 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 Fund may delay or cause to be delayed the
mailing of a redemption check until such time as it has assured itself that
good payment (e.g., cash, Federal funds or certified check drawn on a United
States bank) has been collected for the purchase of such Fund shares, which
will not exceed 10 days.

REPURCHASE

The Fund also will repurchase Fund shares through a shareholder's listed
securities dealer. The Fund 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 the order is placed. Shares will be priced at the
net asset value calculated on the day the request is received, provided that
the request for repurchase is submitted to the dealer prior to fifteen minutes
after the regular close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time) and such request is received by the Fund from such
dealer not later than 30 minutes after the close of business on the NYSE on
the same day. Dealers have the responsibility of submitting such repurchase
requests to the Fund not later than 30 minutes after the close of business on
the NYSE, in order to obtain that day's closing price.

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

REINSTATEMENT PRIVILEGE -- CLASS A AND CLASS D SHARES

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

29
<PAGE>

PRICING OF SHARES

DETERMINATION OF NET ASSET VALUE

Reference is made to "How Shares are Priced" in the Prospectus.

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

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

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

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

30
<PAGE>

COMPUTATION OF OFFERING PRICE PER SHARE

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

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Net Assets........................... $3,873,271 $7,422,157 $799,634 $1,695,269
========== ========== ======== ==========
Number of Shares Outstanding......... 365,954 701,214 75,508 160,190
========== ========== ======== ==========
Net Asset Value Per Share (net assets
divided by number of shares
outstanding)........................ $ 10.58 $ 10.58 $ 10.59 $ 10.58
Sales Charge (for Class A and Class D
shares: 4.00% of offering price;
4.17% of net asset value per share)*
.................................... 0.44 ** ** 0.44
---------- ---------- -------- ----------
Offering Price....................... $ 11.02 $ 10.58 $ 10.59 $ 11.02
========== ========== ======== ==========
</TABLE>
- ----------
* Rounded to the nearest one-hundredth percent; assumes maximum sales charge
is applicable.
** Class B and Class C shares are not subject to an initial sales charge but
may be subject to a CDSC on redemption of shares. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Contingent Deferred Sales Charges -- Class B Shares" and "--
Contingent Deferred Sales Charges -- Class C Shares" herein.

PORTFOLIO TRANSACTIONS

TRANSACTIONS IN PORTFOLIO SECURITIES

Subject to policies established by the Trustees, the Manager is primarily
responsible for the execution of the Fund's portfolio transactions. The Trust
has no obligation to deal with any dealer or group of dealers in the execution
of transactions in portfolio securities of the Fund. 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 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 transaction involved, the firm's general
execution and operations facilities and the firm's risk in positioning the
securities involved. 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. While reasonable
competitive spreads or commissions are sought, the Fund will not necessarily
be paying the lowest spread or commission available. Transactions with respect
to the securities of small and emerging growth companies in which the Fund may
invest may involve specialized services on the part of the broker or dealer
and thereby entail higher commissions or spreads than would be the case with
transactions involving more widely traded securities.

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 expense of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information.
Supplemental investment research obtained from such dealers might be used by
the Manager in servicing all of its accounts and all such research might not
be used by the Manager in connection with the Fund. Consistent with the
Conduct Rules of the NASD and policies established by the Trustees of the
Trust, the Manager may consider sales of shares of the Fund as a factor in the
selection of brokers or dealers to execute portfolio transactions for the
Fund.

31
<PAGE>

Because of the affiliation of Merrill Lynch with the Manager, the Fund is
prohibited from engaging in certain transactions involving such firm or its
affiliates except pursuant to an exemptive order under the Investment Company
Act. Included among such restricted transactions are purchases from or sales
to Merrill Lynch of securities in transactions in which it acts as principal.
Under an exemptive order, the Trust may effect principal transactions with
Merrill Lynch in high quality, short-term, tax-exempt securities subject to
conditions set forth in such order. Information regarding transactions
executed pursuant to the exemptive order is set forth in the following table:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR NUMBER OF APPROXIMATE AGGREGATE
ENDED JULY 31, TRANSACTIONS MARKET VALUE OF TRANSACTIONS
------------------- ------------- ----------------------------
<S> <C> <C>
1998............................ 0 --
1997............................ 0 --
1996............................ 1 $2,500,000
</TABLE>

An affiliated person of the Trust may serve as broker for the Fund in OTC
transactions conducted on an agency basis. Certain court decisions have raised
questions as to the extent to which investment companies should seek
exemptions under the Investment Company Act in order to seek to recapture
underwriting and dealer spreads from affiliated entities. The Trustees have
considered all factors deemed relevant and have made a determination not to
seek such recapture at this time. The Trustees will reconsider this matter
from time to time.

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

Section 11(a) of the Exchange Act generally prohibits members of the U.S.
national securities exchanges from executing exchange transactions for their
affiliates and institutional accounts that they manage unless the member (i)
has obtained prior express authorization from the account to effect such
transactions, (ii) at least annually furnishes the account with a statement
setting forth the aggregate compensation received by the member in effecting
such transactions, and (iii) complies with any rules the Commission has
prescribed with respect to the requirements of clauses (i) and (ii). To the
extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Fund in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Fund and annual statements as to aggregate compensation will be provided
to the Fund. 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 of the Manager or an affiliate when one or
more clients of the Manager or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the same
time that would involve the Fund or other clients or funds for which the
Manager or an affiliate acts as manager 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 an affiliate 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.

SHAREHOLDER SERVICES

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

32
<PAGE>

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Transfer Agent has an
Investment Account and will receive statements, at least quarterly, from the
Transfer Agent. These statements will serve as transaction confirmations for
automatic investment purchases and the reinvestment of ordinary income
dividends and capital gain distributions. The statements will also show any
other activity in the account since the preceding statement. Shareholders will
also receive separate confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of ordinary
income dividends and capital gains distributions. A shareholder with an
account held at the Transfer Agent may make additions to his or her Investment
Account at any time by mailing a check directly to the Transfer Agent. A
shareholder may also maintain an account 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 automatically at
the Transfer Agent.

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

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

EXCHANGE PRIVILEGE

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

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

Exchanges of Class A or Class D shares outstanding ("outstanding Class A or
Class D shares") for Class A or Class D shares of other Select Pricing Funds
or Class A shares of Summit, ("new Class A or Class D shares") are transacted
on the basis of relative net asset value per Class A or Class D share,
respectively, plus an amount

33
<PAGE>

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

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

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

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

Exchanges by Participants in the MFA Program. The Fund's exchange privilege
is modified with respect to purchase of Class A and Class D shares by
investors under the MFA Program. First, the initial allocation of

34
<PAGE>

assets is made under the MFA Program. Then any subsequent exchange under the
MFA Program of Class A or Class D shares of a Select Pricing Fund for Class A
or Class D shares of the Fund will be made solely on the basis of the relative
net asset 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 Select Pricing Fund and the sales charge payable on the
shares of the Fund being acquired in the exchange under the MFA Program.

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

FEE-BASED PROGRAMS

Certain Merrill Lynch fee-based programs, including pricing alternatives for
securities transactions (each referred to in this paragraph as a "Program"),
may permit the purchase of Class A shares at net asset value. Under specified
circumstances, participants in certain Programs may deposit other classes of
shares which will be exchanged for Class A shares. Initial or deferred sales
charges otherwise due in connection with such exchanges may be waived or
modified, as may the Conversion Period applicable to the deposited shares.
Termination of participation in a Program may result in the redemption of
shares held therein or the automatic exchange thereof to another class at net
asset value, which may be shares of a money market fund. In addition, upon
termination of participation in a Program, shares that have been held for less
than specified periods within such Program may be subject to a fee based upon
the current value of such shares. These Programs also generally prohibit such
shares from being transferred to another account at Merrill Lynch, to another
broker-dealer or to the Transfer Agent. Except in limited circumstances (which
may also involve an exchange as described above), such shares must be redeemed
and another class of shares purchased (which may involve the imposition of
initial or deferred sales charges and distribution and account maintenance
fees) in order for the investment not to be subject to Program fees.
Additional information regarding a specific Program (including charges and
limitations on transferability applicable to shares that may be held in such
Program) is available in such Program's client agreement and from the Transfer
Agent at 1-800-MER-FUND or 1-800-637-3863.

AUTOMATIC INVESTMENT PLANS

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

AUTOMATIC DIVIDEND PROGRAM

Unless specific instructions are given as to the method of payment,
dividends and capital gains distributions will be automatically reinvested,
without sales charge, in additional full and fractional 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 NYSE on the

35
<PAGE>

monthly payment date for such dividends and distributions. No CDSC will be
imposed upon redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions.

Shareholders may, at any time, by written notification to Merrill Lynch if
their account is maintained with Merrill Lynch, or by written notification or
by telephone (1-800-MER-FUND) to the Transfer Agent, if their account is
maintained with the Transfer Agent elect to have subsequent dividends or both
dividends and capital gains distributions, paid in cash, rather than
reinvested in shares of the Fund or vice versa (provided that, in the event
that a payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and such
payment will automatically be reinvested in additional shares). Commencing ten
days after the receipt by the Transfer Agent of such notice, those
instructions will be effected. The Fund is not responsible for any failure of
delivery to the shareholder's address of record and no interest will accrue on
amounts represented by uncashed distribution checks. Cash payments can also be
directly deposited to the shareholder's bank account.

SYSTEMATIC WITHDRAWAL PLANS

A shareholder may elect to receive systematic withdrawals from his or her
Investment Account by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have acquired
shares of the Fund having a value, based on cost or the current offering
price, of $5,000 or more, and monthly withdrawals are available for
shareholders with shares having a value of $10,000 or more.

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

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

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

36
<PAGE>

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

DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

TAXES

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

As discussed in "General Information -- Description of Shares," 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. Losses
in one Series do not offset gains in another Series, and the requirements
(other than certain organizational requirements) for qualifying for RIC status
will be determined at the Series level rather than at the Trust level.

37
<PAGE>

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

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

Exempt-interest dividends 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 and railroad retirement benefits subject to Federal income taxes.
Interest on indebtedness incurred or continued to purchase or carry shares of
a RIC paying exempt-interest dividends, such as the Fund, will not be
deductible by the investor for Federal income tax purposes or for New Mexico
income tax purposes to the extent attributable to exempt-interest dividends.
Shareholders are advised to consult their tax advisors 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 New Mexico Municipal Bonds also will be exempt from
New Mexico personal and corporate income taxes. Shareholders subject to income
taxation by states other than New Mexico will realize a lower after-tax rate
of return than New Mexico shareholders since the dividends distributed by the
Fund generally will not be exempt, to any significant degree, from income
taxation by such other states. The Trust will inform shareholders annually
regarding the portion of the Fund's distributions that constitutes exempt-
interest dividends and the portion that is exempt from New Mexico income
taxes. The Trust will allocate exempt-interest dividends among Class A, Class
B, Class C and Class D shareholders for New Mexico 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 New Mexico personal property
tax. Holders should consult their own tax advisors regarding collateral New
Mexico income tax consequences relating to the ownership of shares of the
Fund, including, but not limited to, the inclusion of tax-exempt income
attributable to ownership of shares in "modified gross income," as that term
is used in the New Mexico Income Tax Act, as amended, for purposes of
determining eligibility for and the amount of various New Mexico credits and
rebates.

Distributions from investment income and capital gains, including exempt-
interest dividends, may be subject to state taxes in states other than New
Mexico and may be subject to local taxes in other states. Accordingly,
investors in the Fund should consult their tax advisors with respect to the
application of such taxes to an investment in the Fund, to the receipt of Fund
dividends and as to their New Mexico tax situation in general.

To the extent the Fund's distributions are derived from interest on its
taxable investments or from an excess of net short-term capital gains over net
long-term capital losses ("ordinary income dividends"), such distributions are
considered ordinary income for Federal income tax purposes and New Mexico
income tax purposes. Distributions, if any, from an excess of net long-term
capital gains over net short-term capital losses derived from

38
<PAGE>

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 New Mexico income tax purposes, are treated as
capital gains which are taxed at ordinary income tax rates. Certain categories
of capital gains are taxable at different rates. Generally not later than 60
days after the close of the Fund's taxable year, the Trust will provide
shareholders with a written notice designating the amounts of any exempt-
interest dividends, ordinary income dividends or capital gain dividends, as
well as any amount of capital gain dividends in the different categories of
capital gain referred to above. Distributions by the Fund, whether from
exempt-interest income, ordinary income or capital gains, will not be eligible
for the dividends received deduction allowed to corporations under the Code.

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

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

The Fund may invest in high yield securities, as described in "Investment
Objective and Policies --Description of Municipal Bonds." Furthermore, the
Fund may also invest in instruments the return on which includes non-
traditional features such as indexed principal or interest payments ("non-
traditional instruments"). These instruments may be subject to special tax
rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such high yield securities
and/or non-traditional instruments could be recharacterized as taxable
ordinary income.

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

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

39
<PAGE>

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

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

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

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

TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS

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

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

The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury regulations and New Mexico income tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury regulations promulgated thereunder
and New Mexico income tax laws. The Code and the Treasury regulations, as well
as the New Mexico 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 and with specific
questions as to Federal, foreign, state or local taxes.

PERFORMANCE DATA

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

40
<PAGE>

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

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

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

<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
- ------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31,
1998................... 1.30% $1,013.00 1.08% $1,010.80
Inception (May 6, 1994)
to July 31, 1998....... 6.62% $1,311.90 7.11% $1,337.60
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31,
1998................... 5.52% $1,055.20 4.99% $1,049.90
1997................... 9.86% $1,098.60 9.30% $1,093.00
1996................... 6.53% $1,065.30 5.98% $1,059.80
1995................... 6.65% $1,066.50 6.11% $1,061.10
Inception (May 6, 1994)
to July 31, 1994....... 3.76% $1,037.60 3.64% $1,036.40
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (May 6, 1994)
to July 31, 1998....... 31.19% $1,311.90 33.76% $1,337.60
YIELD
30 days ended July 31,
1998................... 3.45% -- 3.08% --
TAX EQUIVALENT YIELD*
30 days ended July 31,
1998................... 4.79% -- 4.28% --
</TABLE>
- ----------
*Based on a Federal income tax rate of 28%.

41
<PAGE>

<TABLE>
<CAPTION>
CLASS C SHARES CLASS D 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
- ------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
One year ended July 31,
1998................... 3.91% $1,039.10 1.20% $1,012.00
Inception (October 21,
1994) to
July 31, 1998.......... 7.51% $1,314.60 6.92% $1,287.30
ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Year ended July 31,
1998................... 4.88% $1,048.80 5.42% $1,054.20
1997................... 9.29% $1,092.90 9.75% $1,097.50
1996................... 5.76% $1,057.60 6.42% $1,064.20
Inception (October 21,
1994) to
July 31, 1995.......... 8.44% $1,084.40 8.91% $1,089.10
AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception (October 21,
1994) to
July 31, 1998.......... 31.46% $1,314.60 28.73% $1,287.30
YIELD
30 days ended July 31,
1998................... 2.98% -- 3.35% --
TAX EQUIVALENT YIELD*
30 days ended July 31,
1998................... 4.14% -- 4.65% --
</TABLE>
- ----------
*Based on a Federal income tax rate of 28%.

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

On occasion, the Fund may compare its performance to the Lehman Brothers
Municipal Bond Index or other market indices or to performance data published
by Lipper Analytical Services, Inc., Morningstar Publications, Inc.
("Morningstar"), CDA Investment Technology, Inc., Money Magazine, U.S. News &
World Report, Business Week, Forbes Magazine, Fortune Magazine or other
industry publications. When comparing its performance to a market index, the
Fund may refer to various statistical measures derived from the historic
performance of the Fund and the index such as standard deviation and beta. In
addition, from time to time the Fund may include the Fund's Morningstar risk-
adjusted performance ratings in advertisements or supplemental sales
literature. As with other performance data, performance comparisons should not
be considered indicative of the Fund's relative performance of any future
period.

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 gains or losses during the period. The value of an investment in the
Fund will fluctuate and an investor's shares, when redeemed, may be worth more
or less than their original cost.

42
<PAGE>

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Trust is a business trust organized on August 2, 1985 under the laws of
Massachusetts. On October 1, 1987, the Trust changed its name from "Merrill
Lynch Multi-State Tax-Exempt Series Trust" to "Merrill Lynch Multi-State
Municipal Bond Series Trust," and on December 22, 1987 the Trust again changed
its name to "Merrill Lynch Multi-State Municipal Series Trust." The Trust is
an open-end management investment company comprised of separate Series, each
of which is a separate portfolio offering shares to selected groups of
purchasers. Each of the Series is managed independently in order to provide to
shareholders who are residents of the state to which such Series relates as
high a level of income exempt from Federal, and in certain cases state and
local, income taxes as is consistent with prudent investment management. The
Trustees are authorized to create an unlimited number of Series and, with
respect to each Series, to issue an unlimited number of full and fractional
shares of beneficial interest, $.10 par value per share, of different classes
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.
The Trust is presently comprised of the Fund, Merrill Lynch Arizona Municipal
Bond Fund, Merrill Lynch Arkansas Municipal Bond Fund, Merrill Lynch Colorado
Municipal Bond Fund, Merrill Lynch Connecticut Municipal Bond Fund, Merrill
Lynch Florida Municipal Bond Fund, Merrill Lynch Maryland Municipal Bond Fund,
Merrill Lynch Massachusetts Municipal Bond Fund, Merrill Lynch Michigan
Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund, Merrill
Lynch New Jersey Municipal Bond Fund, Merrill Lynch New 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.
Shareholder approval is not required for the authorization of additional
Series or classes of a Series of the Trust.

At the date of this Statement of Additional Information, the shares of the
Fund are divided into Class A, Class B, Class C and Class D shares. Class A,
Class B, Class C and Class D shares represent interests in the same assets of
the Fund and are identical in all respects except that Class B, Class C and
Class D shares bear certain expenses relating to the account maintenance
associated with such shares and Class B and Class C shares bear certain
expenses relating to the distribution of such shares. All shares of the Trust
have equal voting rights. Each class has exclusive voting rights with respect
to matters relating to distribution and/or account maintenance expenditures,
as applicable (except that Class B shareholders may vote upon any material
changes to expenses charged under the Class D Distribution Plan). See
"Purchase of Shares." The Trustees of the Trust may classify and reclassify
the shares of any Series into additional or other classes at a future date.

Each issued and outstanding share of a Series is entitled to one vote and to
participate equally in dividends and distributions with respect to that Series
and, upon liquidation or dissolution of the Series, in the net assets of such
Series remaining after satisfaction of outstanding liabilities except that, as
noted above, expenses relating to distribution and/or account maintenance of
the Class B, Class C and Class D shares are borne solely by the respective
class. There normally will be no meetings of shareholders for the 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 in accordance with the requirements of the Investment
Company Act to seek approval of new management and advisory arrangements, of a
material increase in distribution fees or a change in the fundamental
policies, objectives or restrictions of a Series.

The obligations and liabilities of a particular Series are restricted to the
assets of that Series and do not extend to the assets of the Trust generally.
The shares of each Series, when issued, will be fully paid and nonassessable,
have no preference, preemptive, conversion, exchange or similar rights and
will be freely transferable. Holders of shares of any Series are entitled to
redeem their shares as set forth elsewhere herein and in the Prospectus.
Shares do not have cumulative voting rights and the holders of more than 50%
of the shares of the Trust voting for the election of Trustees can elect all
of the Trustees if they choose to do so and in such event the holders of the
remaining shares would not be able to elect any Trustees. No amendments may be
made to the Declaration of

43
<PAGE>

Trust, other than amendments necessary to conform the Declaration to certain
laws or regulations, to change the name of the Trust, or to make certain non-
material changes, without the affirmative vote of a majority of the
outstanding shares of the Trust, or of the affected Series or class, as
applicable.

The Declaration of Trust establishing the Trust dated August 2, 1985, a copy
of which, together with all amendments thereto (the "Declaration") is on file
in the office of the Secretary of the Commonwealth of Massachusetts, provides
that the name "Merrill Lynch Multi-State Municipal Series Trust" refers to the
Trustees under the Declaration collectively as Trustees, but not as
individuals or personally; and no Trustee, shareholder, officer, employee or
agent of the Trust shall be held to any personal liability; nor shall resort
be had to their private property for the satisfaction of any obligation or
claim of the Trust, but the "Trust Property" only shall be liable. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the trust's
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the trust itself was unable to meet its
obligations.

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

INDEPENDENT AUDITORS

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

CUSTODIAN

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

TRANSFER AGENT

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

LEGAL COUNSEL

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

REPORTS TO SHAREHOLDERS

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

SHAREHOLDER INQUIRIES

Shareholder inquiries may be addressed to the Fund at the address or
telephone number set forth on the cover page of this Statement of Additional
Information.

44
<PAGE>

ADDITIONAL INFORMATION

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

To the knowledge of the Trust, the following persons or entities owned
beneficially 5% or more of the Fund's shares as of November 1, 1998:

<TABLE>
<CAPTION>
NAME ADDRESS PERCENT OF CLASS
- ---- ------- ----------------
<S> <C> <C>
1240 Ashfland Place Drive
Margaret S. Spence O'Fallon, MO 63366 6.1% of Class A
William D. Weinert, Trustee 934 Phaeton Way 5.3% of Class A
Auburn, IN 46706
Daniel M. Sobral 2357 N. Suntuoso Court 23.1% of Class C
Farmington, NM 87401
Guy Williams 420 W. Gold Avenue 16.9% of Class C
Hobbs, NM 88240
Jane C. Carhart and Walter L. 1202 Reens Creek Road 6.7% of Class C
Kantowitz, Trustees Weaverville, NC 28787
Donald Carson and Margaret Carson 972 Antelope Avenue, N.E. 6.5% of Class C
Albuquerque, NM 87122
Allan H. Shields and Anita J. 02 Ute Lane 6.2% of Class C
Shields, Trustees Santa Fe, NM 87505
Harry Miller and Rita Miller, 7 Shorthorn Lane 5.6% of Class C
Trustees La Tierra Nueva
Santa Fe, NM 87501
Kenneth P. Thompson and Juanita A. 2828 Girard Blvd., N.E. 40.2% of Class D
Thompson, Trustees Albuquerque, NM 87107
John P. Young, Trustee 1104 Calle Catalina 10.5% of Class D
Santa Fe, NM 87501
Kenneth Thompson Co. Inc. 2828 Girard Blvd., N.E. 7.2% of Class D
Albuquerque, NM 87107
Jose M. Romero and Celia M. 1316 Lafayette Drive, N.E. 7.0% of Class D
Romero, Trustees Albuquerque, NM 87106
</TABLE>

FINANCIAL STATEMENTS

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

45
<PAGE>

[This page intentionally left blank]

46
<PAGE>

APPENDIX I

ECONOMIC AND FINANCIAL CONDITIONS IN NEW MEXICO

The following information is a brief summary of factors affecting the
economy of the State of New Mexico (sometimes referred to herein as the
"State") and does not purport to be a complete description of such factors.
Other factors will affect issuers. The summary is based primarily upon one or
more publicly available offering statements relating to debt offerings of New
Mexico issuers; however, it has not been updated nor will it be updated during
the year. The Trust has not independently verified the information.

New Mexico, admitted as the forty-seventh state on January 6, 1912, is the
fifth largest state, containing approximately 121,365 square miles. The
State's terrain varies widely and incorporates six of the seven life zones
between its northern mountains and its arid southern plains.

The State's climate is characterized by sunshine and warm bright skies in
both winter and summer. Every part of the State receives no less than 70%
sunshine year-round. Humidities range from 60% (mornings) to 30% (afternoons).
Evenings are crisp and cool in all seasons because of low humidity.

The State has a semiarid subtropical climate with light precipitation.
Thunderstorms in July and August bring most of the moisture. December to March
snowfalls vary from 2 inches (lower Rio Grande Valley) to 300 inches (north
central mountains). The State is an experience in comfortable living with its
clean air, blue skies, and fair weather.

PRINCIPAL ECONOMIC ACTIVITIES

According to reports of the Bureau of Business and Economic Research of the
University of New Mexico ("BBER") through July 1998 and covering reports of
economic results for 1997 and the first quarter of 1998, New Mexico continued
to exhibit moderate growth during the period. The rate of job growth continued
to slow and personal income increased 5.9% for the fourth quarter of 1997. For
the year 1996, non-agricultural employment rose 1.8 percent. It increased to
2.0 percent for the first quarter of 1997. However, New Mexico still ranks
very low with respect to per capita income. Nevertheless, gross state product
("GSP") estimates from the U.S. Bureau of Economic Analysis for 1977-1994
indicate that New Mexico ranked first in terms of growth between 1990 and
1994.

Even though government is still the major employer in the State, it has
become less so in recent years. Nevertheless, employment in local government
grew 3.5% in the first quarter of 1998. Other government employment exhibited
less strength, with state government up 1.8% and federal government down 1.3%.
New Mexico's financial strength is now led by manufacturing and services.
These industries replace energy, the sector which powered New Mexico's growth
in the 1970s and early 1980s. Services increased 3.1 percent for the first
quarter of 1998. The other employment sector showing solid growth for the
first quarter of 1998 was transportation/communications/utilities, which
increased 3.2% during that period.

Construction employment dropped 0.5% overall for the first quarter of 1998.
However, housing construction showed an increase, on the strength of a strong
multi-family component.

Historically, the State's economy has been highly dependent upon government
spending in general and defense spending in particular. Further job losses are
expected over the long term as a result of anticipated spending cutbacks by
the Department of Energy which will adversely impact the national laboratories
at Sandia in Albuquerque and at Los Alamos. New Mexico has largely escaped the
negative impacts of recent corporate downsizing which affected other parts of
the United States, reflecting the small number of large businesses
headquartered in the State.

The Albuquerque economy is experiencing moderate growth, with
nonagricultural employment increasing just 1.9% for the first quarter of 1998.
The Albuquerque economy experienced a construction boom during the mid-1980s,
but construction employment decreased in every year from 1985 to 1991. A major
increase in jobs

I-1
<PAGE>

occurred during 1992 and the construction sector led the Albuquerque economy
in 1993 and 1994, spurred by low interest rates, pent-up demand for housing
and retail and public works construction projects. In early 1993, this sector
received an immense boost when Intel Corporation began an expansion of its
microprocessor production facility in Rio Rancho, within the Albuquerque
Metropolitan Statistical Area ("MSA"), creating as many as 3,000 construction
jobs as of Spring 1993. During 1994, construction continued to be the
Albuquerque MSA's fastest growing employment sector with a 23.2% increase.
Construction employment in the Albuquerque MSA declined 2.2% in the first
quarter of 1998. However, manufacturing employment enjoyed a 3.5% gain for the
same period, and the government sector showed a 3.0% employment increase.
Employment in the services sector increased 2.7% for the first quarter of
1998.

Mining sector employment was down 0.4% from a year ago. Employment in oil
and gas extraction rose 1.0%, but coal/nonmetals employment dropped 2.9%,
primarily resulting from the closing of Eddy Potash in December 1997.

GOVERNMENTAL ORGANIZATION

The State's government consists of the three branches characteristic of the
American political system: executive, legislative and judicial. The executive
branch is headed by the Governor who is elected for a four-year term. A
governor may succeed himself in office once. Following a reorganization plan
implemented in 1978 to reduce and consolidate some 390 agencies, boards and
commissions, the primary functions of the executive branch are now carried out
by sixteen cabinet departments, each headed by a cabinet secretary appointed
by the Governor.

The Legislature consists of 112 members and is divided into a Senate and a
House of Representatives. Senators are elected for four-year terms, members of
the House for two-year terms. The Legislature convenes in regular session
annually on the third Tuesday in January. Regular sessions are
constitutionally limited in length to sixty calendar days in odd-numbered
years and thirty calendar days in even-numbered years. In addition, special
sessions of the Legislature may be convened by the Governor under certain
limited circumstances. Legislators receive no salary, but do receive per diem
and mileage allowances while in session or on official State business.

The judicial branch is composed of a statewide system of Magistrate and
District Courts, the Court of Appeals and the Supreme Court. The district
court is the trial court of record with general jurisdiction.

STATE TAXES AND REVENUES

Programs and operations of the State are predominately funded through a
system of 29 major taxes administered by the Taxation and Revenue Department
("TRD"). In addition, interest income and earnings from the Permanent Fund and
the Severance Tax Permanent Fund provide important sources of funds for State
purposes. The most important tax and revenue sources as measured by magnitude
of revenue generation are described below.

GROSS RECEIPTS TAX

The gross receipts tax is levied on the total amount of money or the value
of other consideration received from selling property (including tangible
personal property) in the State, from leasing property employed in the State,
and from performing services in the State. Exempt from the tax are wages,
certain agricultural products, dividends and interest, and gas, oil, or
mineral extractions. This tax is paid by the seller but generally passed on to
the purchaser.

The gross receipts tax is the largest single source of State General Fund
revenues and a primary source of revenues for cities and counties. The tax
includes the statewide gross receipts tax levy of 5% plus several local

I-2
<PAGE>

option city and county levies. A credit of .5% against the statewide rate of
5% is allowed for municipal local option taxes. Receipts from the statewide
levy, less disbursements to each incorporated municipality of 1.225% of the
taxable gross receipts reported in that municipality and less disbursements to
the State Aviation Fund of 2.15% of the value of jet fuel sales, are deposited
in the State General Fund.

Gross receipts collections, including penalty and interest, for fiscal year
1998 were $1,729.7 million.

PERSONAL INCOME TAX

The personal income tax is imposed on the net income of every resident
individual and upon the net income from business, property, or employment of
non-resident individuals. State taxable income is generally equal to federal
adjusted gross income less a personal exemption allowance, standard deductions
or itemized deductions and amounts non-taxable by the laws or Constitution of
the State or the United States. Since State taxable income is substantially
derived from federal adjusted gross income, federal concepts characterizing
income and entities are generally followed in New Mexico. The State also
allows deductions for income earned by Indians on reservations and graduated
deductions for income earned by taxpayers 65 years old or older. Collections
are placed in the State General Fund.

For the 1998 tax year, tax rates range from 1.7% on taxable income of $8,000
or less on joint returns (1.7% on taxable income at $5,500 or less for single
returns) to 8.5% on taxable income over $100,000 on joint returns (8.5% on
taxable income over $65,000 for single returns).

State statutes provide for a number of tax rebates and tax credits which are
paid from or credited against the personal income tax and which have the
effect of reducing available personal income tax collections. Rebate programs
target those with very low incomes and include a general low income rebate and
a rebate for property taxes paid by the elderly. Credits are available for day
care costs.

In fiscal year 1998 personal income tax receipts were $943.7 million.

CORPORATE INCOME TAX

The corporate income tax is imposed on the net income of every domestic
corporation and upon the net income of foreign corporations from business,
property, and employment in the State. State taxable income is generally equal
to federal taxable income with adjustments for net operating loss carryovers
and amounts nontaxable by the laws or Constitution of the State or the United
States. The tax is not imposed on insurance companies which pay a State
premium tax, nonprofit organizations or retirement trust funds. Collections,
net of refunds, are placed in the State General Fund.

Tax rates are established under a graduated table and range from 4.8% on the
first $500,000 of taxable income to 7.6% on income in excess of $1,000,000. In
fiscal year 1998 the corporate income tax resulted in net receipts of $202.1
million to the General Fund.

OIL AND GAS EMERGENCY SCHOOL TAX

The oil and gas emergency school tax is imposed against persons for the
privilege of engaging in the business of severing oil, natural gas, liquid
hydrocarbons and carbon dioxide from the soil of the State.

The oil and gas emergency school tax rate is levied on the taxable value of
such products at the production unit. The rate was increased from 3.15% on
July 1, 1993. The tax is due on the 25th day of the second month following the
month of production, creating a slight lag between oil and gas production and
tax collections. Oil and gas emergency school tax receipts are disbursed to
the General Fund. In fiscal year 1998 net oil and gas emergency school tax
receipts were equal to $152.1 million.

I-3
<PAGE>

GASOLINE TAX

The Gasoline Tax is levied on all gasoline received in the State and is paid
by the distributors. In addition, there is a petroleum products loading fee of
$80/8,000 gallons (about one cent/gallon). These taxes are distributed
principally to the State Road Fund and the counties and municipalities of the
State based on a formula related to the amount of fuel received in each
jurisdiction. Other portions of tax revenues are earmarked for local
government road funds and for gas tank cleanup funds. In fiscal year 1998
gasoline tax receipts were $177.5 million.

ROYALTIES, RENTS, AND BONUSES

Federal Lands

Under the federal 1920 Mineral Leasing Act, the State receives a 50% share
of all income generated from the leasing of federally held lands for mineral
production. Principal sources of income on federal lands are royalty payments
on oil and gas production. Additional income is derived from bonus payments
for oil and gas leases and royalty payments on production of coal, potash, and
other minerals. Federal mineral lease income is collected by the U.S. Minerals
Management Service. The State receives its payments on a monthly basis and
makes the deposits to the General Fund, almost exclusively for funding public
schools.

State Lands

The State Land Office manages lands acquired by the State under the Federal
Ferguson Act, enacted prior to statehood, as well as under the State
Constitution. All income from such lands is dedicated to specific educational
purposes and institutions. As with federal lands, the oil and gas industry is
the principal source of revenue from State lands. Bonus income is also
collected in the form of cash payments as a result of competitive bidding for
State leases. Rentals and bonus income are distributed to the respective
beneficiary institutions, largely the public schools, for operating purposes.

Minerals production from State trust lands also generates royalty income
which is deposited in the State Permanent Fund. Royalties are imposed on most
minerals production values at the rate of 12 1/2%, although there is a
provision for rates of up to 20% for new leases on developed acreage.
Beneficiaries of the State Permanent Fund are the same as those educational
institutions and public schools benefiting from State lands.

SEVERANCE TAXES

Severance taxes are levied on producers and others severing minerals and
mineral resources within the State, and are distinguished from several other
taxes on, or revenue sources related to, valuable mineral extraction in New
Mexico including the oil and gas emergency school tax, state royalties, bonus
revenues, oil and gas ad valorem production taxes, the oil and gas ad valorem
equipment tax, and the natural gas processors tax.

Minerals and material resources subject to severance taxation which are
produced in New Mexico include natural gas, oil, carbon dioxide, uranium,
copper, potash, gold, lead, manganese, sand, gravel, peat moss, timber, and a
variety of metals.

PRODUCTION AND PROPERTY TAXES ON OIL AND GAS

The School Tax, the Oil and Gas Severance Tax and the Conservation Tax
provide for deductions for trucking costs and for federal, State and Indian
royalties. Statutory rates on natural gas for the School Tax on Natural Gas,
the Oil and Gas Severance Tax, and the Conservation Tax provide for deductions
for federal, State and Indian royalties and by deductions for transportation
and processing tariffs upstream of the sales location. The ad valorem taxes
are imposed in lieu of property taxes on reserves and lease equipment, and
local rates vary in accordance with jurisdiction.

I-4
<PAGE>

PRODUCTION TAXES ON COAL

Statutory rates for the Resources Excise and the Conservation Tax are
effectively reduced by a deduction for federal, State and Indian royalties.
The Resource Excise Tax is separate and apart from the severance tax, and is
levied on persons or entities which sever or process natural resources in New
Mexico. Separate Resources Excise Taxes are levied as follows: a "resources
tax" on the severer who owns the resource; a "processors tax" on the
processor; and a "service tax" on one who severs a natural resource owned by
another. The effective Severance Tax rate on coal reflects the mix of old and
new contract sales and of underground and surface mines. Property taxes were
computed on the basis of average tax per ton liability for 1989 although the
property tax pertained to both equipment and production values. Fundamental
differences in tax bases preclude a true comparison between property taxes and
other taxes shown above. However, property taxes are included in this analysis
to prevent understating the tax burden.

PROPERTY TAXATION SYSTEM

With certain limited exceptions, real and tangible personal property owned
by individuals or corporations is subject to ad valorem taxation in the State.
Local country assessors are responsible for the appraisal of most residential
and commercial property. The Central Appraisal Bureau of the State Taxation
and Revenue Department ("TRD") provides technical assistance to the county
assessors and assists in the implementation of the Property Tax Code.

The Central Assessment Bureau of the TRD is responsible for the assessment
of certain types of properties not assessed by the counties. Property assessed
by the Central Assessment Bureau is referred to as central valuations and
includes the following types of properties:

Railroads
Communication systems
Pipelines
Public utilities
Airlines
Electric generating plants
Construction machinery and equipment, and other personal property of
persons engaged in construction which is used in more than one
county
Mineral property, excepting oil and gas property

Property valuations are established as of January 1 of each year (except
certain livestock). Centrally assessed property is verified and certified to
the local assessors who combine the values with all locally assessed property
values. The totals are reported to the Central Assessment Bureau and the
Department of Finance and Administration and certified for budgetary use. The
county treasurers levy the applicable rates against individual properties and
are required to mail tax bills for the current fiscal year no later than
November 1. Property taxes are due to the county treasurers in two equal
installments on November 10 and April 10. Taxes become delinquent on December
10 and May 10 following the two respective due dates. Civil penalties and
interest are imposed on delinquent taxes. County treasurers are responsible
for the collection of property taxes and their distribution to the
governmental entities participating in the tax receipts, including those
amounts due to the State for payment of principal, premium, if any, and
interest on general obligation bonds.

Maximum property tax rates for operations for various types of local
governments are imposed by the Constitution of the State and by governing
statutes. Differing rates of taxation may apply to residential and non-
residential properties. Except for property which by statute is subject to
special methods of valuation, the value of property is its market value as
determined by sales of comparable property. If comparable sales are
unavailable, an income or cost method of valuation is used. Residential
properties are eligible for a head of family exemption which is $2,000 for
property tax year 1993 and subsequent years. There is also a $2,000 veterans
exemption. Assessed value is computed as one-third of the value derived after
exemptions, the maximum assessment ratio allowed under the State Constitution.
All but one county had completed reappraisal for 1992. Values obtained

I-5
<PAGE>

thereby will be maintained or revised every two years. As of January 1995, all
property will be valued, using the sale of comparable property method, at its
1992 value.

Oil and gas properties and related production equipment are subject to
property taxation in the State. The oil and gas ad valorem production tax is
levied on the basis of assessed value deemed the equivalent of 50% of the
actual price of the oil and gas received at the production unit, less certain
trucking expense deductions and royalties paid to the federal government, the
State, or Indian tribes. The oil and gas production equipment ad valorem tax
is levied based on assessed value deemed equivalent to 9% of the previous
calendar year sales value of the product from each production unit.

The tax year for oil and gas production begins on September 1 based on tax
rates which are set on August 31. The oil and gas ad valorem production tax is
due by the 25th day of the second month following the month of production.
Taxes are collected monthly. The oil and gas production equipment ad valorem
tax is due on November 30. Collections are distributed to the county
treasurers who further distribute the tax revenues to the participating
governmental entities.

PROPERTY TAX RATE LIMITATIONS

The New Mexico Constitution imposes a four mill limit on taxes levied upon
real or personal property for State revenue except for the support of the
educational, penal and charitable institutions of the State, payment of the
State debt and interest thereon, and total annual tax levy upon such a
property for all State purposes exclusive of necessary levies for the State
debt shall not exceed ten mills, and taxes levied upon real or personal
tangible property for all purposes, except special levies on specific classes
of property and except necessary levies for public debt shall not exceed
twenty mills annually on each dollar of the assessed valuation thereof, but
laws may be passed authorizing additional taxes to be levied outside of such
limitation when approved by at least a majority of the qualified electors of
the taxing district who paid a property tax therein during the preceding year
voting on such proposition. Currently the State imposes no levy of property
taxes except for the payment of State debt.

Statutes establish maximum property tax rates for operating purposes for
cities, counties and school districts. The Department of Finance and
Administration is permitted by statute to set a rate at less than the maximum
rate in any tax year.

<TABLE>
<CAPTION>
DOLLARS
PER THOUSAND
------------
<S> <C>
Counties...................................................... $11.85
Cities........................................................ 7.65
Schools....................................................... 0.50
------
Maximum statutory tax rate for counties, cities, and schools
combined.................................................... $20.00
======
</TABLE>

Apart from the allowable operating rates above, New Mexico governments may
levy additional property taxes as authorized by statute and voter approval
for:

Debt service
County hospitals
School district capital improvements
Branch and community colleges
Vocational schools
Flood control districts and authorities
Judgments
Water and sanitation districts
Conservancy districts
Other special districts

I-6
<PAGE>

In addition, the Legislature has established certain limits on the amount of
increase in property tax revenue which may be produced for county and city
operating purposes. The "yield control" formula is activated by property
valuation increases due to county assessor reappraisal programs. The yield
control law limits the increase in revenue in any one year over the prior year
to the lesser of 5% or the percentage increase in the annual price index
published by the United States Department of Commerce for State and Local
Government Purchases of Goods and Services, plus increases in tax revenues
resulting from new construction and improvements to properties.

NET TAX REVENUES FOR FISCAL YEAR 1998

Net tax revenues received by the State of New Mexico for the 1998 fiscal
year were as follows:

<TABLE>
<S> <C>
Gross Receipts tax (including penalty and interest)............. $1,729,667,849
Compensating tax................................................ 44,237,382
Governmental Gross Receipts tax................................. 28,499,401
Personal Income tax............................................. 943,701,701
Corporate Income tax............................................ 202,127,651
Estate tax...................................................... 12,067,005
Gasoline tax.................................................... 177,537,658
Resources Excise tax............................................ 8,752,376
Oil and Gas Severance tax....................................... 152,151,944
Severance tax................................................... 9,066,535
Natural Gas Processors tax...................................... 12,842,693
Oil and Gas Ad Valorem Production tax........................... 41,385,102
Oil and Gas Production Equipment Ad Valorem tax................. 7,702,202
</TABLE>

STATE AND LOCAL GOVERNMENT LEASES

In 1989, the New Mexico Supreme Court held in the case of Montano v.
Gabaldon that certain lease purchase agreements which, without voter approval,
commit the State or a political subdivision of the State to make payments out
of general revenues in future years, violate the State Constitution. The Court
stated that its ruling will have modified prospective effect only. The ruling
has impeded lease financings and may reduce the number of New Mexico Municipal
Bonds and certificates of participation based on lease obligations.

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

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APPENDIX II

RATINGS OF MUNICIPAL BONDS

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

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

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

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

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

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

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

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

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

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

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

Short-term Notes: The three ratings of Moody's for short-term notes are
MIG1/VMIG1, MIG2/VMIG2 and MIG3/VMIG3; MIG1/VMIG1 denotes "best quality . . .
strong protection by established cash flows"; MIG2/VMIG2 denotes "high
quality" with ample margins of protection; MIG3/VMIG3 notes are of "favorable
quality . . . but . . . lacking the undeniable strength of the preceding
grades".

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<PAGE>

DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS

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

Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics: leading
market positions in well established industries; high rates of return on funds
employed; conservative capitalization structure with moderate reliance on debt
and ample asset protection; broad margins in earnings 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 supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

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

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

DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") ISSUE CREDIT RATING
DEFINITIONS

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

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

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

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

I. Likelihood of payment capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of obligation;

II. Nature of and provisions of the obligation; and

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.

LONG-TERM ISSUE CREDIT RATINGS

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

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

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<PAGE>

<TABLE>
<C> <S>
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to
meet its financial commitment on the obligation is still strong.

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

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

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

SHORT-TERM ISSUE CREDIT RATINGS

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

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

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

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

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

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

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

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

Credit ratings are used by investors as indications of the likelihood of
getting their money back in accordance with the terms on which they invested.
Thus, the use of credit ratings defines their function: "investment-grade"

II-3
<PAGE>

ratings (international long-term "AAA"--"BBB" categories; short-term "F1"--
"F3") indicate a relatively low probability of default, while those in the
"speculative" or "non-investment grade" categories (international long-term
"BB"--"D") either signal a higher probability of default or that a default has
already occurred. Ratings imply no specific prediction of default probability.

Entities or issues carrying the same rating are of similar but not
necessarily identical credit quality since the rating categories do not fully
reflect small differences in the degrees of credit risk.

Fitch credit and other ratings are not recommendations to buy, sell, or hold
any security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature or taxability of any payments of any security. The ratings are based on
information obtained from issuers, other obligors, underwriters, their
experts, and other sources Fitch believes to be reliable. Fitch does not audit
or verify the truth or accuracy of such information. Ratings may be changed or
withdrawn as a result of changes in, or the unavailability of, information or
for other reasons.

INTERNATIONAL CREDIT RATINGS

Fitch's international credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other
corporate entities and the securities they issue, as well as municipal and
other public finance entities, and securities backed by receivables or other
financial assets, and counterparties. When applied to an entity, these long-
and short-term ratings assess its general creditworthiness on a senior basis.
When applied to specific issues and programs, these ratings take into account
the relative preferential position of the holder of the security and reflect
the terms, conditions, and covenants attaching to that security.

ANALYTICAL CONSIDERATIONS

When assigning ratings, Fitch considers the historical and prospective
financial condition, quality of management, and operating performance of the
issuer and of any guarantor, any special features of a specific issue or
guarantee, the issue's relationship to other obligations of the issuer, as
well as developments in the economic and political environment that might
affect the issuer's financial strength and credit quality.

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

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

INTERNATIONAL LONG-TERM CREDIT RATINGS

Investment Grade

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

AA Very high credit quality. "AA" ratings denote a very low expectation
of credit risk. They indicate strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable
to foreseeable events.

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<PAGE>

A High credit quality. "A" ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable
to changes in circumstances or in economic conditions than is the case
for higher ratings.

BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.

Speculative Grade

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

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

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

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

INTERNATIONAL SHORT-TERM CREDIT RATINGS

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

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

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

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

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

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

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

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

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

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

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

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CODE #18036-11-98
<PAGE>

PART C. OTHER INFORMATION

ITEM 23. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
1(a) --Declaration of Trust of the Registrant, dated August 2, 1985.(a)
(b) --Amendment to Declaration of Trust, dated September 18, 1987.(a)
(c) --Amendment to Declaration of Trust, dated December 21, 1987.(a)
(d) --Amendment to Declaration of Trust, dated October 3, 1988.(a)
(e) --Amendment to Declaration of Trust, dated October 17, 1994 and
instrument establishing Class C and Class D shares of beneficial
interest.(a)
(f) --Instrument establishing Merrill Lynch New Mexico Municipal Bond Fund
(the "Fund") as a series of the Registrant.(a)
(g) --Instrument establishing Class A and Class B shares of beneficial
interest of the Fund.(a)
2 --By-Laws of the Registrant.(a)
3 --Portions of the Declaration of Trust, Certificate of Establishment
and Designation and By-Laws of the Registrant defining the rights of
holders of the Fund as a series of the Registrant.(b)
4 --Management Agreement between the Registrant and Fund Asset
Management, L.P.(c)
5(a) --Form of Revised Class A Distribution Agreement between the
Registrant and Merrill Lynch Funds Distributor, Inc. (now known as
Princeton Funds Distributor, Inc.) (the "Distributor") (including
Form of Selected Dealers Agreement).(e)
(b) --Form of Class B Distribution Agreement between the Registrant and
the Distributor.(a)
(c) --Form of Class C Distribution Agreement between the Registrant and
the Distributor (including Form of Selected Dealers Agreement).(e)
(d) --Form of Class D Distribution Agreement between the Registrant and
the Distributor (including Form of Selected Dealers Agreement).(e)
(e) --Letter Agreement between the Fund and the Distributor, dated March
31, 1994, in connection with the Merrill Lynch Mutual Funds Advisor
Program.(c)
6 --None.
7 --Form of Custody Agreement between the Registrant and State Street
Bank and Trust Company.(d)
8 --Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Merrill Lynch
Financial Data Services, Inc. (now known as Financial Data Services,
Inc.)(c)
9 --Opinion of Brown & Wood LLP, counsel to the Registrant.(g)
10 --Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
11 --None.
12 --Certificate of Fund Asset Management, L.P.(c)
13(a) --Class B Distribution Plan of the Registrant and Class B Distribution
Plan Sub-Agreement.(c)
(b) --Form of Class C Distribution Plan of the Registrant and Class C
Distribution Plan Sub-Agreement.(e)
(c) --Form of Class D Distribution Plan of the Registrant and Class D
Distribution Plan Sub-Agreement.(e)
14(a) --Financial Data Schedule for Class A Shares.(h)
(b) --Financial Data Schedule for Class B Shares.(h)
(c) --Financial Data Schedule for Class C Shares.(h)
(d) --Financial Data Schedule for Class D Shares.(h)
15 --Merrill Lynch Select Pricing SM System Plan pursuant to Rule 18f-
3.(f)
</TABLE>
- ----------
(a) Filed on November 17, 1995 as an Exhibit to Post-Effective Amendment No. 2
to the Registrant's Registration Statement on Form N-1A (File No. 33-
52303) under the Securities Act of 1933, as amended, relating to shares of
the Fund (the "Registration Statement").
(b) 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, as amended, filed as
Exhibits 1(a), 1(b), 1(c), 1(d) and 1(e) with Post-Effective Amendment No.
2 to the Registration Statement; 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

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<PAGE>

interest of the Fund, filed as Exhibits 1(f) and 1(g), respectively, with
Post-Effective Amendment No. 5 to the Registration Statement; and to
Articles I, V and VI of the Registrant's By-Laws, filed as Exhibit 2 with
Post-Effective Amendment No. 5 to the Registration Statement.
(c) Filed on April 22, 1994 as an Exhibit to Pre-Effective Amendment No. 1 to
the Registration Statement.
(d) Incorporated by reference to Exhibit 8 to Post-Effective Amendment No. 3
to Registrant's Registration Statement on Form N-1A under the Securities
Act of 1933, as amended, filed on October 14, 1994, relating to shares of
the Merrill Lynch Minnesota Municipal Bond Fund series of the Registrant
(File No. 33-44734).
(e) Filed on October 18, 1994 as an Exhibit to Post-Effective Amendment No. 1
to the Registration Statement.
(f) Incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 13
to the Registrant's Registration Statement filed on January 25, 1996,
relating to shares of the Merrill Lynch New York Municipal Bond Fund
series of the Registrant (File No. 2-99473).
(g) Previously filed as an exhibit to the Registration Statement.
(h) Filed on September 29, 1998 as an Exhibit to Post-Effective No. 5 to the
Registration Statement.

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

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

ITEM 25. INDEMNIFICATION.

Section 5.3 of the Registrant's Declaration of Trust provides as follows:

"The Trust shall indemnify each of its Trustees, officers, employees and
agents (including persons who serve at its request as directors, officers or
trustees of another organization in which it has any interest as a
shareholder, creditor or otherwise) against all liabilities and expenses
(including amounts paid in satisfaction of judgments, in compromise, as fines
and penalties and as counsel fees) reasonably incurred by him in connection
with the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, in which he may be involved or with which he may be
threatened, while in office or thereafter, by reason of his being or having
been such a trustee, officer, employee or agent, except with respect to any
matter as to which he shall have been adjudicated to have acted in bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties;
provided, however, that as to any matter disposed of by a compromise payment
by such person, pursuant to a consent decree or otherwise, no indemnification
either for said payment or for any other expenses shall be provided unless the
Trust shall have received a written opinion from independent legal counsel
approved by the Trustees to the effect that if either the matter of willful
misfeasance, gross negligence or reckless disregard of duty, or the matter of
good faith and reasonable belief as to the best interests of the Trust, had
been adjudicated, it would have been adjudicated in favor of such person. The
rights accruing to any Person under these provisions shall not exclude any
other right to which he may be lawfully entitled; provided that no person may
satisfy any right 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 moneys 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 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

C-2
<PAGE>

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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

Fund Asset Management, L.P. (the "Manager" or "FAM") acts as the investment
adviser for the following open-end registered investment companies: CBA Money
Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-State
Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate
Fund Accumulation Program, Inc., Financial Institutions Series Trust, Merrill
Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series Trust,
Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield
Fund, Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Multi-State Limited Maturity Municipal Series Trust, Merrill Lynch Multi-State
Municipal Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch
Phoenix Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
World Income Fund, Inc., and The Municipal Fund Accumulation Program, Inc.;
and for the following closed-end registered investment companies: Apex
Municipal Fund, Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 1999, Inc., Income Opportunities Fund 2000, Inc., Merrill
Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc., MuniEnhanced Fund,
Inc., MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings
California Insured Fund, Inc., MuniHoldings California Insured Fund II, Inc.,
MuniHoldings California Insured Fund III, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured Fund
III, MuniHoldings Insured Fund, Inc., MuniHoldings New Jersey Insured Fund,
Inc., MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New York
Fund, Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New York
Insured Fund II, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Michigan Fund, Inc., MuniYield Michigan Insured
Fund, Inc., MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured
Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield New York Insured
Fund II, Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc.,
MuniYield Quality Fund II, Inc., Senior High Income Portfolio, Inc. and
Worldwide DollarVest Fund, Inc.

Merrill Lynch Asset Management, L.P. ("MLAM"), an affiliate of the Manager,
acts as the investment adviser for the following open-end registered
investment companies: Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund,
Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch Convertible Fund, Inc.,
Merrill Lynch Developing Capital Markets Fund, Inc., Merrill Lynch Dragon
Fund, Inc.,

C-3
<PAGE>

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

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

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

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH THE PROFESSION, VOCATION OR
NAME MANAGER EMPLOYMENT
---- ------------------------ --------------------------------
<C> <C> <S>
ML & Co............. Limited Partner Financial Services Holding
Company;
Limited Partner of MLAM
Princeton Services.. General Partner General Partner of MLAM
Arthur Zeikel....... Chairman Chairman of MLAM; President of
FAM and MLAM from 1977 to 1997;
Chairman and Director of
Princeton Services; President of
Princeton Services from 1993 to
1997; Executive Vice President
of ML & Co.
Jeffrey M. Peek..... President President of MLAM; President and
Director of Princeton Services;
Executive Vice President of ML &
Co.; Managing Director and Co-
Head of the Investment Banking
Division of Merrill Lynch in
1997; Senior Vice President and
Director of the Global
Securities and Economics
Division of Merrill Lynch from
1995 to 1997
Terry K. Glenn...... Executive Vice President Executive Vice President of
MLAM; Executive Vice President
and Director of Princeton
Services; President and Director
of PFD; Director of FDS;
President of Princeton
Administrators
</TABLE>

C-4
<PAGE>

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) WITH THE PROFESSION, VOCATION OR
NAME MANAGER EMPLOYMENT
---- ---------------------- -----------------------------
<C> <C> <S>
Mark Desario............. Senior Vice President Senior Vice President of MLAM
Linda L. Federici........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Vincent R. Giordano...... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Elizabeth A. Griffin..... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Norman R. Harvey......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Michael J. Hennewinkel... Senior Vice President, Senior Vice President,
Secretary and General Secretary and General Counsel
Counsel of MLAM; Senior Vice
President of Princeton
Services
Philip L. Kirstein....... Senior Vice President Senior Vice President of
MLAM; Senior Vice President,
Secretary and Director of
Princeton Services
Ronald M. Kloss.......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Debra W. Landsman-Yaros.. Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services; Vice
President of PFD
Stephen M. M. Miller..... Senior Vice President Executive Vice President of
Princeton Administrators;
Senior Vice President of
Princeton Services
Joseph T. Monagle, Jr. .. Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Brian A. Murdock......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services;
Director of PFD
Michael L. Quinn......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Gerald M. Richard........ Senior Vice President Senior Vice President and
and Treasurer Treasurer of MLAM; Senior
Vice President and Treasurer
of Princeton Services; Vice
President and Treasurer of
PFD
Gregory D. Upah.......... Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
Ronald L. Welburn........ Senior Vice President Senior Vice President of
MLAM; Senior Vice President
of Princeton Services
</TABLE>

ITEM 27. PRINCIPAL UNDERWRITERS.

(a) MLFD, a division of PFD, acts as the principal underwriter for the
Registrant and for each of the open-end registered investment companies
referred to in the first two paragraphs of Item 26 except CBA Money Fund, CMA
Government Securities Fund, CMA Money Fund, CMA Multi-State Municipal Series
Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund Accumulation
Program, Inc. and The Municipal Fund Accumulation Program, Inc. MLFD also acts
as the principal underwriter for the following closed-end registered
investment companies: Merrill Lynch High Income Municipal Bond Fund, Inc.,
Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc. A separate division of PFD acts as the principal underwriter
of a number of other investment companies.

C-5
<PAGE>

(b) Set forth below is information concerning each director and officer of
PFD. The principal business address of each such person is P.O. Box 9081,
Princeton, New Jersey 08543-9081, except that the address of Messrs. Breen,
Crook, Fatseas and Wasel is One Financial Center, 23rd Floor, Boston,
Massachusetts 02111-2665.

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

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.

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

ITEM 29. MANAGEMENT SERVICES.

Other than as set forth under the caption "Management of the Fund -- Fund
Asset Management" 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, the Registrant is not a party to any
management-related service contract.

ITEM 30. UNDERTAKINGS.

Not applicable.

C-6
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS POST-
EFFECTIVE AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDESIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF PLAINSBORO,
AND THE STATE OF NEW JERSEY, ON THE 27TH DAY OF NOVEMBER, 1998.

Merrill Lynch Multi-state Municipal
Series Trust (Registrant)

/s/ Gerald M. Richard
By: ____________________________________
GERALD M. RICHARD
TREASURER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS POST-
EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE(S) INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
Arthur Zeikel* President and Trustee
______________________________________ (Principal Executive
(ARTHUR ZEIKEL) Officer)

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

James H. Bodurtha* Trustee
______________________________________
(JAMES H. BODURTHA)

Herbert I. London* Trustee
______________________________________
(HERBERT I. LONDON)

Robert R. Martin* Trustee
______________________________________
(ROBERT R. MARTIN)

Joseph L. May* Trustee
______________________________________
(JOSEPH L. MAY)

Andre F. Perold* Trustee
______________________________________
(ANDRE F. PEROLD)

/s/ Gerald M. Richard November 27, 1998
*By: _________________________________
(GERALD M. RICHARD, ATTORNEY-IN-FACT)

</TABLE>

C-7
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10 Consent of Deloitte & Touche LLP, independent auditors for the
Registrant
</TABLE>

<PAGE>

EXHIBIT 99.10

INDEPENDENT AUDITORS' CONSENT

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

We consent to the incorporation by reference in this Post-Effective Amendment
No. 6 to Registration Statement No. 33-52303 of our report dated September 9,
1998 appearing in the annual report to shareholders of Merrill Lynch New Mexico
Municipal Bond Fund for the year ended July 31, 1998, and to the reference to us
under the caption "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Princeton, New Jersey
November 25, 1998