MERRILL LYNCH MIDDLE EAST AFRICA FUND, 485BPOS, 1996-03-29

MERRILL LYNCH MIDDLE EAST AFRICA FUND
485BPOS, 1996-03-29

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1996

SECURITIES ACT FILE NO. 33-55843
INVESTMENT COMPANY ACT FILE NO. 811-07155
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 3 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 6 /X/

(CHECK APPROPRIATE BOX OR BOXES.)

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

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

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

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

ARTHUR ZEIKEL
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
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:

<TABLE>
<S> <C>
COUNSEL FOR THE FUND: PHILIP L. KIRSTEIN, ESQ.
BROWN & WOOD MICHAEL J. HENNEWINKEL, ESQ.
ONE WORLD TRADE CENTER MERRILL LYNCH ASSET MANAGEMENT
NEW YORK, NEW YORK 10048-0557 P.O. BOX 9011
ATTENTION: THOMAS R. SMITH, JR., ESQ. PRINCETON, NEW JERSEY 08543-9011
FRANK P. BRUNO, ESQ.
</TABLE>

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

IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK
APPROPRIATE BOX):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.

THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES OF COMMON
STOCK UNDER THE SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE
REGISTRANT'S MOST RECENT FISCAL YEAR WAS FILED ON JANUARY 23, 1996.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fee Table; Prospectus Summary
Item 3. Condensed Financial Information....... Financial Highlights
Item 4. General Description of Registrant..... Prospectus Summary; Investment
Objective and Policies; Additional
Information
Item 5. Management of the Fund................ Fee Table; Management of the Fund;
Inside Back Cover Page
Item 5A. Management's Discussion of Fund
Performance......................... Not Applicable
Item 6. Capital Stock and Other Securities.... Cover Page; Purchase of Shares;
Redemption of Shares; Shareholder
Services; Additional Information
Item 7. Purchase of Securities Being
Offered............................. Cover Page; Fee Table; Prospectus
Summary; Merrill Lynch Select
PricingSM System; Purchase of
Shares; Shareholder Services;
Additional Information; Inside Back
Cover Page
Item 8. Redemption or Repurchase.............. Fee Table; Prospectus Summary; Merrill
Lynch Select PricingSM System;
Purchase of Shares; Redemption of
Shares
Item 9. Pending Legal Proceedings............. Not Applicable
PART B
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Back Cover Page
Item 12. General Information and History....... Not Applicable
Item 13. Investment Objective and Policies..... Investment Objective and Policies
Item 14. Management of the Fund................ Management of the Fund
Item 15. Control Persons and Principal Holders
of Securities....................... Management of the Fund; General
Information--Additional Information
Item 16. Investment Advisory and Other
Services............................ Management of the Fund; Purchase of
Shares; General Information
Item 17. Brokerage Allocation and Other
Practices........................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.... Purchase of Shares; Redemption of
Shares; Shareholder Services; General
Information--Description of Shares
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............ Purchase of Shares; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services; General
Information--Computation of Offering
Price Per Share
Item 20. Tax Status............................ Taxes
Item 21. Underwriters.......................... Purchase of Shares
Item 22. Calculation of Performance Data....... Performance Data
Item 23. Financial Statements.................. Independent Auditors' Report;
Statement of Assets and Liabilities;
Financial Statements
</TABLE>

PART C

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

<PAGE> 3

PROSPECTUS

MARCH 29, 1996

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.

P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800

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

Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is a
non-diversified, open-end management
investment company seeking long-term capital appreciation by investing primarily
in equity and debt securities of corporate and governmental issuers in countries
located in the Middle East and Africa ("Middle Eastern/African countries"). For
purposes of its investment objective, the Fund may invest in the securities of
issuers in all countries in the Middle East and Africa. The Fund currently
expects to emphasize investments in the securities of issuers in Botswana,
Ghana, Morocco, South Africa, Turkey, Israel, Jordan and Zimbabwe; although the
Fund is not required to invest in securities of issuers located in the
aforementioned markets. Under normal market conditions, at least 65% of the
Fund's total assets will be invested in equity or debt securities of corporate
and governmental issuers in Middle Eastern/African countries. The Fund may
employ a variety of derivative investments and techniques to hedge against
market and currency risk. Also, the Fund may invest in certain derivative
instruments, such as indexed and inverse securities, to enhance its return.
There can be no assurance that the Fund's investment objective will be achieved.
For more information on the Fund's investment objective and policies, please see
"Investment Objective and Policies" on page 22.

Investments in securities of issuers in Middle Eastern/African countries
involve risks and special considerations not typically associated with
investments in securities of U.S. issuers. The Fund may invest without
limitation in debt securities that are in the lower rating categories or unrated
and may be in default as to repayment of principal and/or payment of interest at
the time of acquisition by the Fund. These securities commonly are referred to
as "junk bonds". Such securities generally involve greater volatility of price
and risks to principal and income than securities in the higher rating
categories. See "Risk Factors and Special Considerations".

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

This Prospectus is a concise statement of information about the Fund that
is relevant to making an investment in the Fund. This Prospectus should be
retained for future reference. A statement containing additional information
about the Fund, dated March 29, 1996 (the "Statement of Additional
Information"), has been filed with the Securities and Exchange Commission (the
"Commission") and is available, without charge, by calling or by writing the
Fund at the above telephone number or address. The Statement of Additional
Information is hereby incorporated by reference into this Prospectus.

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

MERRILL LYNCH ASSET MANAGEMENT -- MANAGER
MERRILL LYNCH FUNDS DISTRIBUTOR, INC. -- DISTRIBUTOR
<PAGE> 4

(Continued from Cover Page)

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

Shares may be purchased directly from Merrill Lynch Funds Distributor, Inc.
(the "Distributor"), P.O. Box 9081, Princeton, New Jersey 08543-9081 ((609)
282-2800), or from other securities dealers which have entered into selected
dealer agreements with the Distributor, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch"). The minimum initial purchase is $1,000
and the minimum subsequent purchase is $50, except for retirement plans, where
the minimum initial purchase is $100 and the minimum subsequent purchase is $1.
Merrill Lynch may charge its customers a processing fee (presently $4.85) for
confirming purchases and repurchases. Purchases and redemptions directly through
Merrill Lynch Financial Data Services, Inc., the Fund's transfer agent (the
"Transfer Agent"), are not subject to the processing fee. See "Purchase of
Shares" and "Redemption of Shares".

2
<PAGE> 5

FEE TABLE

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

<TABLE>
<CAPTION>
CLASS A(a) CLASS B(b) CLASS C CLASS D
---------- ---------- ------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price)................ 5.25%(c) None None 5.25%(c)
Sales Charge Imposed on Dividend
Reinvestments.................. None None None None
Deferred Sales Charge (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)............ None(d) 4.0% during the first year 1% for one year None(d)
decreasing 1.0% annually to
0.0% after the fourth year
Redemption Fee Payable to the
Fund (as a percentage of amount
redeemed)(e)................... 2.00% 2.00% 2.00% 2.00%
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET
ASSETS):
Management Fees(f)............... 1.00% 1.00% 1.00% 1.00%
Rule 12b-1 Fees(g):
Account Maintenance Fees....... None 0.25% 0.25% 0.25%
Distribution Fees.............. None 0.75% 0.75% None
(Class B shares convert to Class D
shares automatically after
approximately
eight years and cease being subject
to distribution fees)
Other Expenses:
Custodial Fees................. 0.22% 0.22% 0.22% 0.22%
Shareholder Servicing
Costs(h)..................... 0.16% 0.19% 0.19% 0.16%
Miscellaneous.................. 3.26% 3.26% 3.26% 3.26%
----- ----- ----- -----
Total Other Expenses......... 3.64% 3.67% 3.67% 3.64%
----- ----- ----- -----
Reimbursement of Expenses(i)..... (4.14)% (4.17)% (4.17)% (4.14)%
----- ----- ----- -----
Total Fund Operating Expenses.... 0.50% 1.50% 1.50% 0.75%
===== ===== ===== =====
</TABLE>

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

(a) Class A shares are sold to a limited group of investors, including existing
Class A shareholders, certain retirement plans and certain investment
programs. See "Purchase of Shares -- Initial Sales Charge
Alternatives -- Class A and Class D Shares" on page 36.

(b) Class B shares convert to Class D shares automatically approximately eight
years after initial purchase. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" on page 38.

(c) Reduced for purchases of $25,000 and over, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A or Class D purchases of $1,000,000 or more may not be
subject to an initial sales charge. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares" on page 36.

(d) Class A and Class D shares are not subject to a contingent deferred sales
charge ("CDSC"), except that certain purchases of $1,000,000 or more which
may not be subject to an initial sales charge instead may be subject to a
CDSC of 1.0% of amounts redeemed within the first year of purchase.

(e) Applies only to redemptions made within one year of purchase. See
"Redemption of Shares" on page 43.

(f) See "Management of the Fund -- Management and Advisory Arrangements" on page
32.

(g) See "Purchase of Shares -- Distribution Plans" on page 41.

(h) See "Management of the Fund -- Transfer Agency Services" on page 34.

(i) The expense information in the table reflects current reimbursement
arrangements. As of November 30, 1995, the Manager was waiving its entire
management fee and voluntarily reimbursing the Fund for a portion of other
expenses (excluding Rule 12b-1 fees). Absent the waiver or reimbursement,
the Fund would have incurred expenses of 4.64% for Class A shares, 5.67% for
Class B shares, 5.67% for Class C shares and 4.89% for Class D shares.

3
<PAGE> 6

EXAMPLE:

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE
PERIOD OF:
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a $1,000
investment including, the maximum $52.50 initial sales charge
(Class A and Class D shares only) and assuming (1) the Total
Fund Operating Expenses for each class set forth above, (2) a
5% annual return throughout the periods and (3) redemption at
the end of the period:
Class A...................................................... $ 76* $ 68 $ 79 $112
Class B...................................................... $ 75* $ 67 $ 82 $159**
Class C...................................................... $ 45* $ 47 $ 82 $179
Class D...................................................... $ 79* $ 75 $ 92 $141
An investor would pay the following expenses on the same
assuming no redemption at the end of the period:
Class A...................................................... $ 76 $ 68 $ 79 $112
Class B...................................................... $ 15 $ 47 $ 82 $159**
Class C...................................................... $ 15 $ 47 $ 82 $179
Class D...................................................... $ 79 $ 75 $ 92 $141
</TABLE>

- ---------------
* Reflects the 2.0% redemption fee payable to the Fund charged on redemptions
made within one year of purchase.
** Assumes conversion to Class D shares approximately eight years after
purchase.

The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The Example set forth above assumes reinvestment of all dividends
and distributions and utilizes a 5% annual rate of return as mandated by
Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. Class B and Class C shareholders who hold their shares for an extended
period of time may pay more in Rule 12b-1 distribution fees than the economic
equivalent of the maximum front-end sales charges permitted under the Rules of
Fair Practice of the National Association of Securities Dealers, Inc. (the
"NASD"). Merrill Lynch may charge its customers a processing fee (presently
$4.85) for confirming purchases and repurchases. Purchases and redemptions
directly through the Transfer Agent are not subject to the processing fee. See
"Purchase of Shares" and "Redemption of Shares".

4
<PAGE> 7

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and in the Statement
of Additional Information.

THE FUND

Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company investing primarily in
equity and debt securities of corporate and governmental issuers in countries
located in the Middle East and Africa ("Middle Eastern/African countries").

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in equity and debt securities of corporate
and governmental issuers in Middle Eastern/African countries. For purposes of
its investment objective, the Fund may invest in the securities of issuers in
all countries in the Middle East and Africa. The Fund currently expects to
emphasize investments in the securities of issuers in Botswana, Ghana, Morocco,
South Africa, Turkey, Israel, Jordan and Zimbabwe; although the Fund is not
required to invest in securities of issuers located in the aforementioned
markets. Under normal market conditions, at least 65% of the Fund's total assets
will be invested in equity or debt securities of corporate and governmental
issuers in Middle Eastern/African countries. For purposes of the Fund's
investment objective and policies, the term "Middle Eastern countries" includes,
but is not limited to: Israel, Jordan, Egypt, Syria, Lebanon, Turkey, Saudi
Arabia, Iraq, Iran, Libya, Kuwait, Qatar, Bahrain, Yemen, Oman and the United
Arab Emirates, and the term "African countries" includes all countries generally
considered as part of the African continent. There can be no assurance that the
investment objective of the Fund will be realized. See "Investment Objective and
Policies".

The Fund is authorized to employ a variety of derivative investments and
techniques to hedge against market and currency risks, although at the present
time suitable hedging instruments may not be available with respect to
securities of companies or governments in Middle Eastern/African countries at
all or on a timely basis and on acceptable terms. Furthermore, even if hedging
techniques are available, the Fund only will engage in hedging activities from
time to time and may not necessarily be engaging in hedging activities when
market or currency movements occur. There are certain risks associated with the
use of futures and options to hedge investment portfolios. See Appendix A to
this Prospectus -- "Futures, Options and Forward Foreign Exchange
Transactions -- Risk Factors in Futures, Options and Currency Transactions".
Also, the Fund may invest in certain derivative instruments, such as indexed and
inverse securities, to enhance its return. See "Investment Objective and
Policies -- Description of Certain Investments -- Indexed and Inverse
Securities".

RISK FACTORS AND SPECIAL CONSIDERATIONS

Investment in securities of Middle Eastern/African issuers involves risks
and special considerations not typically associated with investment in
securities of U.S. issuers, including the risks associated with international
investing generally, such as currency fluctuations; the risks of investing in
countries with smaller capital markets, such as limited liquidity, price
volatility and restrictions on foreign investment; and the risks associated with
emerging economies of developing countries, including significant political and
social uncertainties, government involvement in the economies, the possibility
of asset expropriation or confiscatory

5
<PAGE> 8

levels of taxation, reliance upon exports of primary commodities and different
legal systems from the United States. See "Risk Factors and Special
Considerations".

THE MANAGER

Merrill Lynch Asset Management, L.P. (the "Manager" or "MLAM"), which is
owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co."), acts as the
manager for the Fund and provides the Fund with management services. The Manager
or an affiliate, Fund Asset Management, L.P. ("FAM"), acts as the investment
adviser for over 130 other registered investment companies. The Manager and FAM
also offer portfolio management and portfolio analysis services to individuals
and institutions. As of February 29, 1996, the Manager and FAM had a total of
approximately $208.7 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager. See
"Management of the Fund -- Management and Advisory Arrangements".

PURCHASE AND REDEMPTION OF SHARES

Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
purchaser, may be imposed (i) in the case of Class A or Class D shares, at the
time of the purchase or (ii) in the case of Class B or Class C shares, on a
deferred basis. Class D shares pay an ongoing account maintenance fee, and Class
B and Class C shares pay ongoing account maintenance and distribution fees. See
"Purchase of Shares".

Shareholders may redeem their shares at any time at the next determined net
asset value, except that the redemption price for shares redeemed during the
first year after purchase will be subject to the redemption fee discussed below,
Class B shares may be subject to a CDSC on shares redeemed within four years of
purchase and Class C shares may be subject to a CDSC on shares redeemed within
one year of purchase. See "Redemption of Shares".

The Fund is designed for long-term investors. To discourage short-term
trading in shares of the Fund, shares redeemed within 12 months of purchase are
subject to a redemption fee of 2.0% of the net asset value of the shares being
redeemed. The redemption fee is retained by the Fund and may be used to cover
the costs of liquidating portfolio securities.

DIVIDENDS AND DISTRIBUTIONS

It is the Fund's intention to distribute substantially all of its net
investment income. Dividends from such net investment income are paid at least
annually. All net realized long-term and short-term capital gains, if any, will
be distributed to the Fund's shareholders at least annually. See "Additional
Information -- Dividends and Distributions".

6
<PAGE> 9

DETERMINATION OF NET ASSET VALUE

The net asset value of the Fund is determined by the Manager once daily, 15
minutes after the close of business on the New York Stock Exchange (generally,
4:00 P.M., New York time), on each day during which the New York Stock Exchange
is open for trading. See "Additional Information -- Determination of Net Asset
Value".

MERRILL LYNCH SELECT PRICINGSM SYSTEM

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

Each Class A, Class B, Class C or Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges 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
the Class D shares, are imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares 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.

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 deferred sales charges with respect to the Class B and Class C
shares in that the sales charges applicable to each class provide for the
financing of the distribution of the shares of the Fund. The
distribution-related revenues paid with respect to a class will not be used to
finance the distribution expenditures of another class. Sales personnel may
receive different compensation for selling different classes of shares.

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

7
<PAGE> 10

<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1)(5) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial sales No No No
charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of up to 4 0.25% 0.75% B shares convert to
years, at a rate of 4.0% D shares automatically
during the first year, after approximately
decreasing 1.0% annually to eight years(4)
0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial sales 0.25% No No
charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>

(1) Initial sales charges are imposed at the time of purchase as a percentage of
the offering price. CDSCs are imposed if the redemption occurs within the
applicable CDSC time period. The charge will be assessed on an amount equal
to the lesser of the proceeds of redemption or the cost of the shares being
redeemed.
(2) Offered only to eligible investors. See "Purchase of Shares -- Initial Sales
Charge Alternatives -- Class A and Class D Shares -- Eligible Class A
Investors".
(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead will be subject to a 1.0%
CDSC for one year. See "Class A" and "Class D" below.

(4) The conversion period for dividend reinvestment shares and certain
retirement plans was modified.

(5) Shares of each class redeemed within 12 months of purchase are subject to a
redemption fee of 2.0% of the net asset value of shares being redeemed. See
"Redemption of Shares".

Class A: Class A shares incur an initial sales charge when they are purchased
and bear no ongoing distribution or account maintenance fees. Class A
shares of the Fund are offered to a limited group of investors and
also will be issued upon reinvestment of dividends on outstanding
Class A shares of the Fund. Eligible investors include certain
retirement plans and participants in certain investment programs. In
addition, Class A shares of the Fund will be offered to 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 to
their directors and employees and to members of the Boards of
MLAM-advised mutual funds. The maximum initial sales charge is 5.25%,
which is reduced for purchases of $25,000 and over, and waived for
purchases by certain retirement plans in connection with certain
investment programs. Purchases of $1,000,000 or more may not be
subject to an initial sales charge but if the initial sales charge is
waived, such shares will be subject to a contingent deferred sales
charge ("CDSC") of 1.0% if the shares are redeemed within one year
after purchase. Sales charges also are reduced under a right of
accumulation which takes into account the investor's holdings of all
classes of all MLAM-advised mutual funds. See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares".

Class B: Class B shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% of
the Fund's average net assets attributable to the Class B shares, an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to the Class B shares and a CDSC if they are redeemed
within four years of purchase. Approximately eight years after
issuance, Class B shares will convert automatically into Class D
shares of the Fund, which are subject to an account maintenance fee
but no distribution fee. Automatic conversion of Class B shares into
Class D shares will occur at least once each month on the basis of the
relative net asset values of the shares of the two classes on the
conversion date, without the imposition of any sales load, fee or
other charge. Conversion of Class B shares to Class D shares

8
<PAGE> 11

will not be deemed a purchase or sale of the shares for Federal income tax
purposes. Shares purchased through reinvestment of dividends on Class B shares
also will convert automatically to Class D shares. The conversion period for
dividend reinvestment shares, and the conversion and holding periods for
certain retirement plans, are modified as described under "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Class B and Class C
Shares -- Conversion of Class B Shares to Class D Shares".

Class C: Class C shares do not incur a sales charge when they are purchased,
but they are subject to an ongoing account maintenance fee of 0.25% of
the Fund's average net assets attributable to Class C shares and an
ongoing distribution fee of 0.75% of the Fund's average net assets
attributable to Class C shares. Class C shares also are subject to a
CDSC if they are redeemed within one year of purchase. Although Class
C shares are subject to a 1.0% CDSC for only one year (as compared to
four years for Class B), Class C shares have no conversion feature
and, accordingly, an investor that purchases Class C shares will be
subject to distribution fees that will be imposed on Class C shares
for an indefinite period subject to annual approval by the Fund's
Board of Directors and regulatory limitations.

Class D: Class D shares incur an initial sales charge when they are purchased
and are subject to an ongoing account maintenance fee of 0.25% of the
Fund's average net assets attributable to Class D shares. Class D
shares are not subject to an ongoing distribution fee or any CDSC when
they are redeemed. Purchases of $1,000,000 or more may not be subject
to an initial sales charge but if the initial sales charge is waived,
such purchases will be subject to a CDSC of 1.0% if the shares are
redeemed within one year after purchase. The schedule of initial sales
charges and reductions for the Class D shares is the same as the
schedule for Class A shares, except that there is no waiver for
purchases by retirement plans in connection with certain investment
programs. Class D shares also will be issued upon conversion of Class
B shares as described above under "Class B". See "Purchase of
Shares -- Initial Sales Charge Alternatives -- Class A and Class D
Shares".

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

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

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<PAGE> 12

sales charge shares. The ongoing Class D account maintenance fees will cause
Class D shares to have a higher expense ratio, pay lower dividends and have a
lower total return than Class A shares.

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

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

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<PAGE> 13

RISK FACTORS AND SPECIAL CONSIDERATIONS

GENERAL

Because the Fund invests primarily in securities of issuers in Middle
Eastern/African countries, an investor in the Fund should be aware of certain
risk factors and special considerations relating not only to investing in the
economies of Middle Eastern/African countries, but also, more generally, to
international investing and investing in smaller, emerging capital markets, each
of which may involve risks which are not typically associated with investments
in securities of U.S. issuers. Consequently, the Fund should be considered as a
means of diversifying an investment portfolio and not in itself a balanced
investment program.

INVESTING ON AN INTERNATIONAL BASIS

Investing on an international basis involves certain risks not involved in
domestic investments, including fluctuations in foreign exchange rates, future
political and economic developments, and the possible imposition of exchange
controls or other foreign governmental laws or restrictions. Securities prices
in different countries are subject to different economic, financial, political
and social factors. Since the Fund invests heavily in securities denominated or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in the portfolio and the
unrealized appreciation or depreciation of investments. Currencies of certain
Middle Eastern/African countries may be volatile and therefore may affect the
value of securities denominated in such currencies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation of assets,
confiscatory taxation, difficulty in obtaining or enforcing a court judgment,
economic, political or social instability or diplomatic developments which could
affect investments in those countries. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rates of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position. Certain foreign
investments also may be subject to foreign withholding taxes. These risks often
are heightened for investments in smaller, emerging capital markets, such as
those in Middle Eastern/African countries.

Most of the securities held by the Fund are not registered with the
Commission, nor are the issuers thereof subject to the reporting requirements of
such agency. Accordingly, there may be less publicly available information about
a foreign issuer than about a U.S. issuer and such foreign issuers may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those of U.S. issuers. As a result, traditional
investment measurements, such as price/earnings ratios, as used in the United
States, may not be applicable to certain smaller, emerging foreign capital
markets. Foreign issuers, and issuers in smaller, emerging capital markets in
particular, generally are not subject to uniform accounting, auditing and
financial reporting standards or to practices and requirements comparable to
those applicable to domestic issuers.

Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have failed to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in periods when
assets of the Fund are uninvested and no return is earned thereon. The inability
of the Fund to make intended security purchases due to settlement problems or
the risk of intermediary counter party failures could cause the Fund to miss
investment opportunities. The inability to dispose of a portfolio security due
to settlement problems could

11
<PAGE> 14

result either in losses to the Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.

There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, there may be no comparable provisions under certain foreign
laws to insider trading and similar investor protection securities laws that
apply with respect to securities transactions consummated in the United States.
Further, brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.

The Fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts") or other securities convertible
into securities of foreign issuers. Depositary Receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the securities underlying
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States, and therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the market value of the Depositary Receipts. Depositary Receipts
also involve the risks of other investments in foreign securities, as discussed
above.

RISKS RELATING TO INVESTMENT IN MIDDLE EASTERN/AFRICAN COUNTRIES

Certain of the risks associated with international investments are
heightened for investments in Middle Eastern/African countries. Investment in
the securities of Middle Eastern/African issuers may increase the volatility of
the Fund's net asset value. The securities markets of Middle Eastern/African
countries are significantly smaller than the U.S. securities markets and have
substantially less trading volume, resulting in a lack of liquidity with high
price volatility. Certain markets are in only the earliest stages of
development. There also may be a high concentration of market capitalization and
trading volume in a small number of issuers representing a limited number of
industries, as well as a high concentration of investors and financial
intermediaries. Brokers in Middle Eastern/African countries typically are fewer
in number and less capitalized than brokers in the United States. The Fund may
not invest more than 25% of its total assets in the sovereign debt securities of
any particular Middle Eastern/African country. These factors, combined with
other U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment discussed below, result in potentially fewer
investment opportunities for the Fund, limit the degree to which the Fund may
diversify among securities, industries and countries and may have an adverse
impact on the investment performance of the Fund.

Emerging economies present certain risks that do not exist in more
established economies; especially significant are the political and social
uncertainties that exist for many of the Middle Eastern/African countries. Many
of the Middle Eastern/African countries may be subject to a greater degree of
economic, political and social instability than is the case in the United States
and Western European countries. Such instability may result from, among other
things: (i) authoritarian governments or military involvement in political and
economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies
and terrorist activities; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection. Such economic, political and
social instability could severely disrupt the principal financial markets in
which the Fund invests and could adversely affect the value of the

12
<PAGE> 15

Fund's assets. For example, South Africa currently is undergoing the drastic
political transformation from a system of apartheid to one of racial equality
and democracy. South Africa is now led by a national unity government primarily
comprised of three partners: the African National Congress, the National Party
and the Inkatha Freedom Party. In the spring of 1994, Nelson Mandela, the leader
of the dominant party in the government, the African National Congress, became
South Africa's first black president in the country's first all-race elections.
The abolition of apartheid eliminated controversial racial legislation and led
to the lifting of economic sanctions, both of which had burdened South Africa's
political climate and economic structure. Many problems still persist, however,
among them the lingering economic disparity between the black and white
populations, as white citizens continue to hold a greatly disproportionate
portion of the country's wealth. Other difficulties that continue to beset South
Africa include a high rate of unemployment, labor unrest and ongoing racial
tensions. Although the repeal of economic sanctions and the government's
institution of a reconstruction and development program have fostered current
growth, the persistence of the aforementioned difficulties cast doubt on its
sustainability. As another example, Islamic militants have grown in number in a
few Middle Eastern countries, and Iran has been ruled by Islamic fundamentalists
since 1979. If these militants gain strength, they may present a challenge to
openness to foreign investment. In addition, some of these movements may have
destabilizing effects because they espouse violence and anti-Western sentiments
as a means to achieving their goals, and have denounced efforts to resolve the
Arab-Israeli conflict. If such groups were to gain control of the governments of
any other Middle Eastern countries, the resulting economic, political and social
changes could have an adverse effect on the Fund's investments in such
countries.

In addition, in certain Middle Eastern/African countries there may be the
possibility of asset expropriations or future confiscatory levels of taxation
affecting the Fund. In the event of expropriation, nationalization or other
confiscation, the Fund may not be fairly compensated for any losses and could
lose its entire investment in the country involved. Actions of the governments
of Middle Eastern/African countries in the future could have a significant
effect on local economies, which could adversely affect private sector
companies, market conditions and the prices and yields of securities in the
Fund's portfolio.

Certain economies in Middle Eastern/African countries depend to a
significant degree upon exports of primary commodities such as gold, silver,
copper, diamonds and oil and, therefore, are vulnerable to changes in commodity
prices which, in turn, may be affected by a variety of factors. In addition,
governments of many Middle Eastern/African countries have exercised and continue
to exercise substantial influence over many aspects of the private sector. In
certain cases, the government owns or controls many companies, including the
largest in the country. Accordingly, governmental actions in the future could
have a significant effect on economic conditions in Middle Eastern/African
countries, which could affect private sector companies and the Fund, as well as
the value of securities in the Fund's portfolio.

The legal systems in certain Middle Eastern/African countries also may have
an adverse impact on the Fund. For example, while the potential liability of a
shareholder in a U.S. corporation with respect to acts of the corporation
generally is limited to the amount of the shareholder's investment, the notion
of limited liability is less clear in certain Middle Eastern/African countries.
The Fund, therefore, may be liable in certain Middle Eastern/African countries
for the acts of a corporation in which it invests for an amount greater than the
Fund's actual investment in such corporation. Similarly, the rights of investors
in Middle Eastern/African issuers may be more limited than those of shareholders
of U.S. corporations. It may be difficult or impossible to obtain and/or enforce
a judgment in a Middle Eastern/African country.

13
<PAGE> 16

Certain of the risks associated with international investment and
investment in smaller, emerging capital markets are heightened for investment in
Middle Eastern/African countries. For example, some of the currencies of Middle
Eastern/African countries have experienced devaluation relative to the U.S.
dollar and major adjustments have been made periodically in certain of such
currencies. Certain Middle Eastern/African countries face serious exchange
constraints.

In addition to the relative lack of publicly available information about
Middle Eastern/African issuers and the possibility that such issuers may not be
subject to the same accounting, auditing and financial reporting standards as
U.S. issuers, inflation accounting rules in some Middle Eastern/African
countries require, for issuers that keep accounting records in the local
currency, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting
indirectly may generate losses or profits for certain Middle Eastern/African
issuers.

As a result, management of the Fund may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or
appropriate to invest in a particular Middle Eastern/African country. The Fund
may invest in countries in which foreign investors, including management of the
Fund, have had no or limited prior experience.

RESTRICTIONS ON FOREIGN INVESTMENT

Some Middle Eastern/African countries prohibit or impose substantial
restrictions on investments in their capital markets, particularly their equity
markets, by foreign entities such as the Fund. As illustrations, certain
countries may require governmental approval prior to investment by foreign
persons or limit the amount of investment by foreign persons in a particular
issuer or limit the investment by foreign persons to only a specific class of
securities of an issuer which may have less advantageous terms (including price)
than securities of the issuer available for purchase by nationals. There can be
no assurance that the Fund will be able to obtain required governmental
approvals in a timely manner. In addition, changes to restrictions on foreign
ownership of securities subsequent to the Fund's purchase of such securities may
have an adverse effect on the value of such securities. Certain countries may
restrict investment opportunities in issuers or industries deemed important to
national interests.

The manner in which foreign investors may invest in companies in certain
countries, as well as limitations on such investments, may have an adverse
impact on the operations of the Fund. For example, the Fund may be required in
certain of such countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the Fund.
Re-registration in some instances may not be able to occur on a timely basis,
resulting in a delay during which the Fund may be denied certain of its rights
as an investor, including rights as to dividends or to be made aware of certain
corporate actions. There also may be instances where the Fund places a purchase
order but is subsequently informed, at the time of re-registration, that the
permissible allocation of the investment to foreign investors has been filled,
depriving the Fund of the ability to make its desired investment at that time.
There also may be a credit risk involved if the Fund invests in securities of
issuers in certain Middle Eastern/African countries where pursuant to market
practice, local law or exchange requirement or the terms of the specific
securities transaction itself, the Fund is required to make a cash payment to an
issuer, or its agent, prior to the delivery of the securities. In these
circumstances, there can be no guarantee that the Fund actually will receive the
full amount of the securities expected to be

14
<PAGE> 17

allocated to the Fund, or that the Fund will be able to retrieve its cash
payment in the event that the issuer, or its agent, defaults in its obligation
to deliver the securities.

Substantial limitations may exist in certain countries with respect to the
Fund's ability to repatriate investment income, capital or proceeds of sales of
securities by foreign investors. The Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investment. Securities which are subject to material legal restrictions on
repatriation of assets will be considered illiquid securities by the Fund and
subject to the limitations on illiquid investments discussed in this Prospectus.
See "Illiquid Securities" on page 19 and "Investment Objective and
Policies -- Description of Certain Investments -- Illiquid Securities" on page
25.

A number of Middle Eastern/African countries have authorized the formation
of closed-end investment companies to facilitate indirect foreign investment in
their capital markets. There also are investment opportunities in certain of
such countries in pooled vehicles that resemble open-end investment companies.
Under the Investment Company Act, the Fund may invest up to 10% of its total
assets in shares of other investment companies and up to 5% of its total assets
in any one investment company, provided that the investment does not represent
more than 3% of the voting stock of the related acquired investment company.
This restriction on investments in securities of investment companies may limit
opportunities for the Fund to invest indirectly in certain Middle
Eastern/African countries. Shares of certain investment companies at times may
be acquired only at market prices representing premiums to their net asset
values. If the Fund acquires shares of investment companies or of venture
capital funds, shareholders would bear both their proportionate share of
expenses in the Fund (including management and advisory fees) and, indirectly,
the expenses of such investment companies or venture capital funds. The Fund
also may seek, at its own cost, to create its own investment entities under the
laws of certain Middle Eastern/African countries.

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

SOVEREIGN DEBT

Certain developing countries are especially large debtors to commercial
banks and foreign governments. Investment in debt obligations ("sovereign debt")
issued or guaranteed by developing countries or their agencies, political
subdivisions and instrumentalities ("governmental entities") involves a high
degree of risk. The governmental entity that controls the repayment of sovereign
debt may not be able or willing to repay the principal and/or pay the interest
when due in accordance with the terms of such debt. A governmental entity's
willingness or ability to repay principal and pay interest when due in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the governmental entity's policy towards the
International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities also may be dependent
on expected disbursements from foreign governments, multinational agencies and
others abroad to reduce principal and

15
<PAGE> 18

interest arrearage on their debt. The commitment on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or pay interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which further may
impair such debtor's ability or willingness to service timely its debts.
Consequently, governmental entities may default on their sovereign debt. Holders
of sovereign debt securities, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which sovereign debt
on which a governmental entity has defaulted may be collected in whole or in
part.

Certain of the sovereign debt securities in which the Fund may invest
involve great risk and are deemed to be the equivalent in terms of quality to
high yield/high risk securities discussed below and are subject to many of the
same risks as such securities. In addition, the Fund's investments in non-dollar
denominated sovereign debt securities are subject to foreign currency risks.
Also, the Fund's investments in dollar denominated sovereign debt securities are
subject to the risk that the issuer may be unable to obtain, on favorable terms,
dollars to service its interest payments and principal repayments thereon.
Similarly, the Fund may have difficulty disposing of certain sovereign debt
securities because there may be a thin trading market for such securities.

The Fund also may invest in debt securities of supranational entities.
These entities include international organizations designated or supported by
governmental entities to promote economic reconstruction or development and
international banking institutions and related government agencies. Examples
include the International Bank for Reconstruction and Development (the "World
Bank") and the African Development Bank. The obligations of supranational
entities are guaranteed only by the related supranational entity and are not
backed by the credit of any government. The governmental members, or
"stockholders," usually make initial capital contributions to the supranational
entity and in many cases are committed to make additional capital contributions
if the supranational entity is unable to repay its borrowings. It is possible
that any such governmental member or stockholder, for economic or political
reasons, may refuse to satisfy its commitment if additional capital
contributions are required. The Fund may not invest more than 25% of its total
assets in the sovereign debt securities of any particular Middle Eastern/African
country.

NO RATING CRITERIA FOR DEBT SECURITIES

The Fund has not established any rating criteria for the debt securities in
which it may invest and such securities may not be rated at all for
creditworthiness. Securities rated in the medium to low rating categories of
nationally recognized statistical rating organizations, such as Standard &
Poor's Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's"),
and unrated securities of comparable quality (such lower rated and unrated
securities are referred to herein as "high yield/high risk securities" or "junk
bonds") are 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
Appendix B to this Prospectus -- "Ratings of Debt Securities and Preferred
Stock" on page 58. These securities commonly are referred to as "junk bonds." In
purchasing such securities, the Fund will rely on the Manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer of such
securities. The Manager will take into consideration, among other things, the
issuer's financial resources, its sensitivity to

16
<PAGE> 19

economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters. The Fund may invest in debt
securities of corporate or governmental issuers that are in default as discussed
below under "Distressed Securities".

The market values of high yield/high risk securities, or "junk bonds", tend
to reflect individual issuer developments to a greater extent than do higher
rated securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of high yield/high risk securities may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of such
issuers generally is greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers of high yield/high risk securities may be more likely to
experience financial stress, especially if such issuers are highly leveraged.
During such periods, service of 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/high risk securities because such securities may be
unsecured and may be subordinated to other creditors of the issuer.

High yield/high risk securities may have call or redemption features which
would permit an issuer to repurchase the securities 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 securities with lower yielding
securities, thus decreasing the net investment income to the Fund and dividends
to shareholders.

The Fund may have difficulty disposing of certain high yield/high risk
securities, or "junk bonds", because there may be a thin trading market for such
securities. To the extent that a secondary trading market for high yield/high
risk 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
high yield/high risk securities also may make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing the Fund's portfolio.
Market quotations generally are available on many high yield/high risk
securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. The Fund's
Directors, or the Manager will consider carefully the factors affecting the
market for high yield/high risk, lower rated securities in determining whether
any particular security is liquid or illiquid and whether current market
quotations readily are available.

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

DISTRESSED SECURITIES

The Fund may invest in debt securities of corporate or governmental issuers
that are in default as to repayment of principal and/or payment of interest at
the time of acquisition by the Fund ("Distressed Securities"). Investment in
Distressed Securities is speculative and involves significant risk. The Fund
only

17
<PAGE> 20

will make such investments when the Manager believes it is reasonably likely
that the issuer of the securities will make an exchange offer or will be the
subject of a plan of reorganization, such as the rescheduling or other
restructuring of debt by a corporate or governmental issuer. There can be no
assurance that such an exchange offer will be made or that such a plan of
reorganization will be adopted. In addition, a significant period of time may
pass between the time at which the Fund makes its investment in Distressed
Securities and the time that any such exchange offer or plan of reorganization
is completed. During this period, it is unlikely that the Fund will receive any
interest payments on the Distressed Securities, the Fund will be subject to
significant uncertainty as to whether or not the exchange offer or plan of
reorganization will be completed, and the Fund may be required to bear certain
expenses to protect its interest in the course of negotiations surrounding any
potential exchange offer or plan of reorganization. In addition, even if an
exchange offer is made or a plan of reorganization is adopted with respect to
Distressed Securities held by the Fund, there can be no assurance that the
securities or other assets received by the Fund in connection with such exchange
offer or plan of reorganization will not have a lower value or income potential
than anticipated when the investment was made. Moreover, any securities received
by the Fund upon completion of an exchange offer or plan of reorganization may
be restricted as to resale. As a result of the Fund's participation in
negotiations with respect to any exchange offer or plan of reorganization with
respect to an issuer of Distressed Securities, the Fund may be precluded from
disposing of such securities.

DERIVATIVE INVESTMENTS

In order to seek to hedge various portfolio positions or to enhance its
return, the Fund may invest in certain instruments which may be characterized as
derivatives. These investments include various types of options transactions,
futures and options thereon and currency transactions. Such investments also may
consist of indexed securities, including inverse securities. The Fund has
express limitations on the percentage of its assets that may be committed to
certain of such investments. Other of such investments have no express
quantitative limitations, although they may be made solely for hedging purposes,
not for speculation, and may in some cases require limitations as to the type of
permissible counter-party to the transaction. Investments in indexed securities,
including inverse securities, subject the Fund to the risks associated with
changes in the particular indices, which may include reduced or eliminated
interest payments and losses of invested principal. Options transactions involve
the potential loss of the opportunity to profit from any price increase in the
underlying security above the option exercise price or the potential loss of the
premium paid for an option. Similarly, utilization of futures and options
thereon and currency transactions involves the risk of imperfect correlation in
movements in the price of futures, options or currency hedge and movements in
the price of the securities or currency which are the subject of the hedge. For
a further discussion of the risks associated with these investments, see
"Investment Objective and Policies -- Description of Certain
Investments -- Indexed and Inverse Securities" on page 26, "-- Other Investment
Policies and Practices -- Portfolio Strategies Involving Futures, Options and
Forward Foreign Exchange Transactions" on page 27 and Appendix A to this
Prospectus -- "Futures, Options and Forward Foreign Exchange Transactions" on
page 52.

BORROWING

The Fund may borrow up to 33 1/3% of its total assets, taken at market
value, but only from banks as a temporary measure for extraordinary or emergency
purposes, including to meet redemptions (so as not to force the Fund to
liquidate securities at a disadvantageous time) or to settle securities
transactions. The Fund will not purchase securities while borrowings exceed 5%
of its total assets, except (a) to honor prior

18
<PAGE> 21

commitments or (b) to exercise subscription rights when outstanding borrowings
have been obtained exclusively for settlements of other securities transactions.
The purchase of securities while borrowings are outstanding will have the effect
of leveraging the Fund. Such leveraging increases the Fund's exposure to capital
risk, and borrowed funds are subject to interest costs which will reduce net
income.

ILLIQUID SECURITIES

The Fund may invest up to 15% of its total assets in securities that lack
an established secondary trading market or otherwise are considered illiquid.
(However, under the law of certain states, the Fund presently is limited with
respect to such investments to 10% of its total assets.) Liquidity of a security
relates to the ability to dispose easily of the security and the price to be
obtained upon disposition of the security, which may be less than a comparable
more liquid security. Investment of the Fund's assets in illiquid securities may
restrict the ability of the Fund to dispose of its investments in a timely
fashion and for a fair price as well as its ability to take advantage of market
opportunities. The risks associated with illiquidity will be particularly acute
in situations in which the Fund's operations require cash, such as when the Fund
redeems shares or pays dividends, and could result in the Fund borrowing to meet
short-term cash requirements or incurring capital losses on the sale of illiquid
investments. Further, issuers whose securities are not publicly traded are not
subject to the disclosure and other investor protection requirements which would
be applicable if their securities were publicly traded. Illiquid sovereign debt
securities and corporate fixed income and equity securities may trade at a
discount from comparable, more liquid investments. In making investments in such
securities, the Fund may obtain access to material nonpublic information which
may restrict the Fund's ability to conduct portfolio transactions in such
securities. In addition, the Fund may invest in privately placed securities
which may or may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. See "Investment
Objective and Policies -- Description of Certain Investments -- Illiquid
Securities" on page 25.

WITHHOLDING AND OTHER TAXES

Income and capital gains on securities held by the Fund may be subject to
withholding and other taxes imposed by Middle Eastern/African countries, which
would reduce the return to the Fund on those securities. The Fund intends,
unless ineligible, to elect to "pass-through" to the Fund's shareholders, as a
deduction or credit, the amount of foreign taxes paid by the Fund. The taxes
passed through to shareholders will be included in each shareholder's income.
Certain shareholders, including non-U.S. shareholders, will not be entitled to
the benefit of a deduction or credit with respect to foreign taxes paid by the
Fund. Other taxes, such as transfer taxes, may be imposed on the Fund, but would
not give rise to a credit, or be eligible to be passed through to shareholders.

NON-DIVERSIFICATION

The Fund is classified as a non-diversified investment company under the
Investment Company Act, which means that the Fund is not limited by the
Investment Company Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Thus, the Fund may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
as a result, will be subject to greater risk of loss with respect to its
portfolio securities. The Fund, however, intends to comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated

19
<PAGE> 22

investment company. See "Additional Information -- Taxes" on page 47 and
"Investment Restrictions" on page 30.

FEES AND EXPENSES

The management fee (at the annual rate of 1.00% of the Fund's average daily
net assets) and other operating expenses of the Fund may be higher than the
management fees and operating expenses of other mutual funds managed by the
Manager and other investment advisers or of investment companies investing
exclusively in the securities of U.S. issuers. The management fees and operating
expenses, however, are believed by the Manager to be comparable to expenses of
other open-end management investment companies that invest primarily in the
securities of issuers in emerging market countries with investment objectives
similar to the investment objective of the Fund.

FOREIGN SUB-CUSTODIANS AND SECURITIES DEPOSITORIES

Rules adopted under the Investment Company Act permit the Fund to maintain
its foreign securities and cash in the custody of certain eligible non-U.S.
banks and securities depositories. Certain banks in foreign countries may not be
eligible sub-custodians for the Fund, in which event the Fund may be precluded
from purchasing securities in certain foreign countries in which it otherwise
would invest or which may result in the Fund's incurring additional costs and
delays in providing transportation and custody services for such securities
outside of such countries. The Fund may encounter difficulties in effecting on a
timely basis portfolio transactions with respect to any securities of issuers
held outside of their countries. Other banks that are eligible foreign
sub-custodians may be recently organized or otherwise lack extensive operating
experience. In addition, in certain countries there may be legal restrictions or
limitations on the ability of the Fund to recover assets held in custody by
foreign sub-custodians in the event of the bankruptcy of the sub-custodian.

20
<PAGE> 23

FINANCIAL HIGHLIGHTS

The financial information in the table below has been audited in
conjunction with the annual audits of the Financial Statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial Statements and the
independent auditors' report thereon for the fiscal period December 30, 1994
(commencement of operations) to November 30, 1995, are included in the Statement
of Additional Information. Further information about the performance of the Fund
is contained in the Fund's annual report to shareholders which may be obtained,
without charge, by calling or by writing the Fund at the telephone number or
address on the front cover of this Prospectus.

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

<TABLE>
<CAPTION>
FOR THE PERIOD DECEMBER 30, 1994+ TO NOVEMBER 30,
1995
----------------------------------------------------
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Asset Value:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 10.00 $ 10.00 $ 10.00 $10.00
------ ------ ------ ------
Investment income -- net.................. .57 .79 .83 .77
Realized and unrealized gain (loss) on
investments and foreign currency
transactions -- net..................... .09 (.23) (.27) (.14)
------ ------ ------ ------
Total from investment operations.......... .66 .56 .56 .63
------ ------ ------ ------
Net asset value, end of period............ $ 10.66 $ 10.56 $ 10.56 $10.63
====== ====== ====== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share........ 6.60%# 5.60%# 5.60%# 6.30 %#
====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding account maintenance
and distribution fees and net of
reimbursement........................... .00%* .01%* .01%* .00 %*
====== ====== ====== ======
Expenses, net of reimbursement............ .00%* 1.01%* 1.01%* .25 %*
====== ====== ====== ======
Expenses.................................. 4.63%* 5.68%* 5.67%* 4.89 %*
====== ====== ====== ======
Investment income -- net.................. 8.43%* 8.33%* 8.45%* 9.07 %*
====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands).............................. $ 648 $ 7,701 $ 1,012 $1,569
====== ====== ====== ======
Portfolio turnover........................ 40.97% 40.97% 40.97% 40.97 %
====== ====== ====== ======
</TABLE>

- ---------------
* Annualized.

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

+ Commencement of operations.

# Aggregate total investment return.

21
<PAGE> 24

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to seek long-term capital
appreciation by investing primarily in equity and debt securities of corporate
and governmental issuers in countries located in the Middle East and Africa
("Middle Eastern/African countries"). For purposes of its investment objective,
the Fund may invest in the securities of issuers in all countries in the Middle
East and Africa. Under normal market conditions, at least 65% of the Fund's
total assets will be invested in equity or debt securities of corporate and
governmental issuers in Middle Eastern/African countries. This investment
objective is a fundamental policy of the Fund and may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act. The Fund currently expects
to emphasize investments in the securities of issuers in Botswana, Ghana,
Morocco, South Africa, Turkey, Israel, Jordan and Zimbabwe; although the Fund is
not required to invest in securities of issuers located in the aforementioned
markets. The Fund is authorized to employ a variety of investment techniques to
hedge against market and currency risks, although suitable hedging instruments
may not be available on a timely basis and on acceptable terms. There can be no
assurance that the Fund's investment objective will be achieved.

The Fund only will invest in securities of issuers in Middle
Eastern/African countries where foreign investment is permitted and that offer
market accessibility and sub-custodial arrangements either inside or outside of
such countries that satisfy the requirements of rules adopted under the
Investment Company Act. See "Risk Factors and Special Considerations -- Foreign
Sub-custodians and Securities Depositories". For purposes of the Fund's
investment objective and policies, the term "Middle Eastern countries" includes,
but is not limited to: Israel, Jordan, Egypt, Syria, Lebanon, Turkey, Saudi
Arabia, Iraq, Iran, Libya, Kuwait, Qatar, Bahrain, Yemen, Oman and the United
Arab Emirates, and the term "African countries" includes all countries generally
considered as part of the African continent.

The Manager believes that the quickening pace of political, social and
economic change in certain Middle Eastern/African countries creates the
potential for rapid economic growth which may be reflected in the prices of
securities of issuers in such countries. The Manager also believes that regional
growth may result from governmental policies directed toward market oriented
economic reform. In addition, certain Middle Eastern/African countries have been
introducing deregulatory reforms to encourage development of their securities
markets and, in varying degrees, to permit foreign investment. Nevertheless,
investments in Middle Eastern/African countries are subject to considerable
risks. See "Risk Factors and Special Considerations".

In addition to making equity investments, the Fund seeks capital
appreciation through investment in sovereign and corporate debt securities of
issuers in Middle Eastern/African countries. Such debt securities may be lower
rated or unrated obligations of corporate or sovereign issuers. To the extent
such debt securities are traded in over-the-counter markets, they are traded by
a limited number of dealers. Consequently, these securities may be less liquid
than certain other securities which are traded in over-the-counter markets. The
Fund's investments in sovereign debt consists of debt securities or obligations
issued or guaranteed by foreign governments, their agencies, instrumentalities
and political subdivisions and by entities controlled or sponsored by such
governments. Since such debt securities frequently trade in the secondary
markets at substantial discounts, there is opportunity for capital appreciation
to the extent there is a favorable change in the market perception of the
creditworthiness of the issuer. Capital appreciation in debt securities also may
arise as a result of a favorable change in relative foreign exchange rates or in
relative interest rate levels. In accordance with its investment objective, the
Fund will not seek to benefit from anticipated short-term fluctuations in
currency exchange rates. The receipt of income from such debt securities is
incidental to the Fund's objective

22
<PAGE> 25

of long-term capital appreciation. The Fund, from time to time, may invest in
debt securities with relatively high yields (as compared with other debt
securities meeting the Fund's investment criteria), notwithstanding that the
Fund may not anticipate that such securities will experience substantial capital
appreciation. Such income can be used, however, to offset the operating expenses
of the Fund. Debt securities with relatively high yields usually are subject to
a greater risk of default than other comparable debt securities with lower
yields.

The Fund's investments in high yield/high risk securities include debt
securities, preferred stocks and convertible securities which are rated in the
lower rating categories of the established rating services ("Baa" or lower by
Moody's and "BBB" or lower by S&P), or, if unrated, which are considered by the
Manager to be of comparable quality. Securities rated below "Baa" by Moody's or
below "BBB" by S&P, and unrated securities of comparable quality, are commonly
known as "junk bonds". See "Risk Factors and Special Considerations -- No Rating
Criteria for Debt Securities".

Further, the Fund may invest in debt securities that are in default as to
the payment of interest and/or the repayment of principal at the time of
acquisition by the Fund ("Distressed Securities"). The Fund will invest in
Distressed Securities only when the Manager believes it is reasonably likely
that the issuer of the securities will make an exchange offer or will be the
subject of a plan of reorganization, such as the rescheduling or other
restructuring of debt by a corporate or governmental issuer. Capital
appreciation in debt securities may arise as a result of a favorable change in
relative foreign exchange rates, in relative interest rate levels, or in the
creditworthiness of issuers. The receipt of income from such debt securities is
incidental to the Fund's objective of long-term capital appreciation. See "Risk
Factors and Special Considerations -- Distressed Securities".

The Fund may invest in debt securities ("sovereign debt securities") issued
or guaranteed by Middle Eastern/African governments (including Middle
Eastern/African countries, provinces and municipalities) or their agencies and
instrumentalities ("governmental entities"), debt securities issued or
guaranteed by international organizations designated or supported by multiple
foreign governmental entities (which are not obligations of foreign governments)
to promote economic reconstruction or development ("supranational entities"),
debt securities issued by corporations or financial institutions or debt
securities issued by the U.S. Government or an agency or instrumentality
thereof. Sovereign debt securities may take the form of Brady Bonds, which are
debt securities issued under the framework of the Brady Plan, an initiative
established in 1989 as a mechanism for debtor nations to restructure their
outstanding external commercial bank indebtedness. Presently, Nigeria is the
only Middle Eastern/African country which has issued Brady Bonds. Supranational
entities include international organizations designated or supported by
governmental entities to promote economic reconstruction or development and
international banking institutions and related governmental agencies. Examples
include the International Bank for Reconstruction and Development (the "World
Bank") and the African Development Bank. The obligations of supranational
entities are guaranteed only by the related supranational entity and are not
backed by the credit of any government. The governmental members or
"stockholders" of a supranational entity usually make initial capital
contributions to the supranational entity and in many cases are committed to
make additional capital contributions if the supranational entity is unable to
repay its borrowings. It is possible that any such governmental member or
stockholder, for economic or political reasons, may refuse to satisfy its
commitment if additional capital contributions are required. The Fund may not
invest more than 25% of its total assets in the sovereign debt securities of any
particular Middle Eastern/African country.

23
<PAGE> 26

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

Investment in shares of the Fund potentially offers several benefits. Many
investors, particularly individuals, lack the information or capability to
invest in Middle Eastern/African countries. It also may not be permissible for
such investors to invest directly in the capital markets of certain Middle
Eastern/African countries. The Fund offers investors the possibility of
obtaining capital appreciation through a portfolio comprised of securities of
Middle Eastern/African issuers. In managing such portfolio, the Manager will
provide the Fund and its shareholders with professional analysis of investment
opportunities and the use of professional money management techniques. In
addition, unlike many intermediary investment vehicles, such as investment
companies that are limited to investment in a single country, the Fund has the
ability to diversify investment risk among the capital markets of a number of
countries. However, until additional Middle Eastern/African countries become
more readily accessible to investment by foreign entities, the Fund may not be
able to diversify investment risk or realize any potential benefits from
diversification.

The Fund will not necessarily seek to diversify investments among Middle
Eastern/African countries and is not limited as to the percentage of assets it
may invest per country. The allocation of the Fund's assets among the various
securities markets of the Middle Eastern/African countries will be determined by
the Manager. Under certain adverse investment conditions, the Fund may restrict
the Middle Eastern/African countries in which its assets are invested.

An issuer ordinarily will be considered to be in a Middle Eastern/African
country when it is organized in, or the primary trading market of its securities
is located in, a Middle Eastern/African country. The Fund may consider an issuer
to be in a Middle Eastern/African country, without reference to such issuer's
domicile or to the primary trading market of its securities, when at least 50%
of the issuer's non-current assets, capitalization, gross revenues or profits in
any one of the two most recent fiscal years represents (directly or indirectly
through subsidiaries) assets or activities located in such countries. The Fund
may acquire securities of companies or governments in Middle Eastern/African
countries that are denominated in currencies other than a Middle Eastern/African
country's currency. The Fund also may consider a debt security that is
denominated in a Middle Eastern/African country's currency to be a security of
an issuer in a Middle Eastern/African country without reference to the principal
trading market of the security or to the location of its issuer. Additionally,
the Fund may consider a derivative product tied to securities or issuers located
in Middle Eastern/African countries to be the security of a Middle
Eastern/African issuer. The Fund may consider investment companies or other
pooled investment vehicles to be located in the country or countries in which
they primarily make their portfolio investments.

24
<PAGE> 27

The Fund reserves the right, as a temporary defensive measure or in
anticipation of investment in Middle Eastern/African countries, to hold cash or
cash equivalents (in U.S. dollars or foreign currencies) and short-term
securities including money market securities denominated in U.S. dollars or
foreign currencies ("Temporary Investments").

DESCRIPTION OF CERTAIN INVESTMENTS

Warrants. The Fund may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
Warrants do not carry with them the right to dividends or voting rights with
respect to the securities that they entitle their holders to purchase, and they
do not represent any rights in the assets of the issuer. As a result, an
investment in warrants may be considered more speculative than certain other
types of investments. In addition, the value of a warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to its expiration date.

Convertible Securities. A convertible security is a bond, debenture, note,
preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
several unique investment characteristics such as (i) higher yields than common
stocks, but lower yields than comparable nonconvertible securities, (ii) a
lesser degree of fluctuation in value than the underlying stock since they have
fixed income characteristics, and (iii) the potential for capital appreciation
if the market price of the underlying common stock increases. A convertible
security might be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. If a convertible
security held by the Fund is called for redemption, the Fund may be required to
permit the issuer to redeem the security, convert it into the underlying common
stock or sell it to a third party.

Illiquid Securities. The Fund may invest up to 15% of its total assets in
securities that lack an established secondary trading market or otherwise are
considered illiquid. (However, under the laws of certain states, the Fund
presently is limited with respect to such investments to 10% of its total
assets.) The Fund may invest in securities of issuers in Middle Eastern/African
countries that are sold in private placement transactions between the issuers
and their purchasers and that are neither listed on an exchange nor traded in
other established markets. In many cases, privately placed securities will be
subject to contractual or legal restrictions on transfer. As a result of the
absence of a public trading market, privately placed securities in turn may be
less liquid or illiquid and more difficult to value than publicly traded
securities. To the extent that privately placed securities may be resold in
privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than
their fair market value. In addition, issuers whose securities are not publicly
traded may not be subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded. If
any privately placed securities held by the Fund are required to be registered
under the securities laws of one or more jurisdictions before being resold, the
Fund may be required to bear the expenses of registration. Certain of the Fund's
investments in private placements may consist of direct investments and may
include investments in smaller, less-seasoned issuers, which may involve greater
risks. These issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group. In making
investments in such securities, the Fund may obtain access to material nonpublic
information which may restrict the Fund's ability to conduct portfolio
transactions in such securities.

25
<PAGE> 28

The Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "Securities
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A under that Act. The Board of Directors has determined to treat as
liquid Rule 144A securities which are freely tradeable in their primary markets
offshore. The Board of Directors may adopt guidelines and delegate to the
Manager the daily function of determining and monitoring liquidity of restricted
securities. The Board of Directors, however, will retain sufficient oversight
and be ultimately responsible for the determinations.

The Board of Directors will carefully monitor the Fund's investments in
securities purchased pursuant to Rule 144A, focusing on such factors, among
others, as valuation, liquidity and availability of information. Investment in
these types of securities could have the effect of increasing the level of
illiquidity in the Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these securities.

Indexed and Inverse Securities. The Fund may invest in securities whose
potential return is based on the change in particular measurements of value or
rate (an "index"). As an illustration, the Fund may invest in a security that
pays interest and returns principal based on the change in an index of interest
rates or in the value on a precious or industrial metal. Interest and principal
payable on a security also may be based on relative changes among particular
indices. In addition, the Fund may invest in securities whose potential
investment return is inversely based on the change in particular indices. For
example, the Fund may invest in securities that pay a higher rate of interest
and principal when a particular index decreases and pay a lower rate of interest
and principal when the value of the index increases. To the extent that the Fund
invests in such types of securities, it will be subject to the risks associated
with changes in the particular indices, which may include reduced or eliminated
interest payments and losses of invested principal. Examples of such types of
securities are indexed or inverse securities issued with respect to a stock
market index in a particular Middle Eastern/African country.

Certain indexed securities, including certain inverse securities, may have
the effect of providing a degree of investment leverage, because they may
increase or decrease in value at a rate that is a multiple of the changes in
applicable indices. As a result, the market value of such securities generally
will be more volatile than the market values of fixed-rate securities.
Management of the Fund believes that indexed securities, including inverse
securities, represent flexible portfolio management instruments that may allow
the Fund to seek potential investment rewards, hedge other portfolio positions,
or vary the degree of portfolio leverage relatively efficiently under different
market conditions.

Investment in Other Investment Companies and Venture Capital Funds. The
Fund may invest in other investment companies and venture capital funds whose
investment objectives and policies are consistent with those of the Fund. In
accordance with the Investment Company Act, the Fund may invest up to 10% of its
total assets in securities of other investment companies. In addition, under the
Investment Company Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment company and not more than 5% of the
value of the Fund's total assets may be invested in the securities of any
investment company. If the Fund acquires shares in investment companies or
venture capital funds, shareholders would bear both their proportionate share of
expenses in the Fund (including management and advisory fees) and, indirectly,
the expenses of such investment companies or venture capital funds (including
management and advisory fees). Investment in such venture capital funds involves
substantial risk of loss to the Fund of its entire investment.

26
<PAGE> 29

OTHER INVESTMENT POLICIES AND PRACTICES

Portfolio Strategies Involving Futures, Options and Forward Foreign
Exchange Transactions. The Fund is authorized to engage in various portfolio
strategies to hedge its portfolio against adverse movements in the equity, debt
and currency markets. These hedging transactions are considered to be
investments in derivatives.

The Fund has authority to write (i.e., sell) covered put and call options
on its portfolio securities, purchase put and call options on securities and
engage in transactions in stock index options, stock index futures and financial
futures, and related options on such futures. The Fund also may engage in
forward foreign exchange transactions and enter into foreign currency futures
and options, and related options on such futures. Each of these portfolio
strategies is described in more detail in Appendix A to this Prospectus.
Although certain risks are involved in futures and options transactions (as
discussed in "Risk Factors in Futures, Options and Currency Transactions" in
Appendix A to this Prospectus), the Manager believes that, because the Fund will
engage in such transactions only for hedging (including anticipatory hedging)
purposes, the futures, options and currency portfolio strategies of the Fund
will not subject the Fund to the risks frequently associated with the
speculative use of futures, options and currency transactions. While the Fund's
use of hedging strategies is intended to reduce the volatility of the net asset
value of its shares, the net asset value of Fund shares will fluctuate.
Reference is made to Appendix A to this Prospectus and to the Statement of
Additional Information for further information concerning these strategies.

There can be no assurance that the Fund's hedging transactions, to the
extent employed, will be effective. Suitable hedging instruments may not be
available with respect to securities of developing countries on a timely basis
and on acceptable terms. Furthermore, the Fund is not required to employ hedging
strategies and may only engage in hedging activities from time to time and may
not necessarily engage in hedging transactions when movements in the equity,
debt or currency markets occur.

Portfolio Transactions. Subject to policies established by the Board of
Directors of the Fund, the Manager is primarily responsible for the execution of
the Fund's portfolio transactions. Since portfolio transactions may be effected
on foreign securities exchanges, the Fund may incur settlement delays on certain
of such exchanges. See "Risk Factors and Special Considerations". In executing
portfolio transactions, the Manager seeks to obtain the best net results for the
Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. While the Manager generally seeks reasonably
competitive fees, commissions or spreads, the Fund does not necessarily pay the
lowest fee, commission or spread available. The Fund may invest in certain
securities traded in the OTC market and, where possible, will deal directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own account. On occasion,
securities may be purchased directly from the issuer. Such portfolio securities
are generally traded on a net basis and do not normally involve either brokerage
commissions or transfer taxes. Securities firms may receive brokerage
commissions on certain portfolio transactions, including futures, options and
options on futures transactions and the purchase and sale of underlying
securities upon exercise of options. The Fund has no obligation to deal with any
broker or group of brokers in the execution of transactions in portfolio
securities. Subject to obtaining the best price and execution, securities firms
which provide supplemental investment research to the Manager, including Merrill
Lynch, 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 the Management Agreement and the

27
<PAGE> 30

expenses of the Manager will not necessarily be reduced as a result of the
receipt of such supplemental information.

Under the Investment Company Act, persons affiliated with the Fund and
persons who are affiliated with such affiliated persons, including Merrill
Lynch, are prohibited from dealing with the Fund as a principal in the purchase
and sale of securities unless a permissive order allowing such transactions is
obtained from the Securities and Exchange Commission. Affiliated persons of the
Fund, and affiliated persons of such affiliated persons, may serve as the Fund's
broker in transactions conducted on an exchange and in OTC transactions
conducted on an agency basis and may receive brokerage commissions from the
Fund. In addition, the Fund may not purchase securities during the existence of
any underwriting syndicate for such securities of which Merrill Lynch is a
member except pursuant to procedures approved by the Board of Directors of the
Fund which comply with rules adopted by the Securities and Exchange Commission.
To the extent Merrill Lynch is active in distributions of securities of issuers
in Middle Eastern/African countries, the Fund may be disadvantaged in that it
may not purchase securities in such distributions. In addition, consistent with
the Rules of Fair Practice of the NASD, the Fund may consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions for the Fund. It is expected that the majority of the shares of the
Fund will be sold by Merrill Lynch. Costs associated with transactions in
foreign securities are generally higher than in the U.S., although the Fund will
endeavor to achieve the best net results in effecting its portfolio
transactions.

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

The Fund's ability and decisions to purchase and sell portfolio securities
may be affected by foreign laws and regulations relating to the convertibility
and repatriation of assets.

Lending of Portfolio Securities. The Fund, from time to time, may lend
securities from its portfolio, with a value not exceeding 33 1/3% of its total
assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. This limitation is a fundamental
policy, and it may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. During the period of such a loan, the Fund typically
receives the income on both the loaned securities and the collateral and thereby
increases its yield. In certain circumstances, the Fund may receive a flat fee.
Such loans are terminable at any time, and the borrower, after notice, will be
required to return borrowed securities within five business days. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or otherwise, the Fund could experience delays and costs
in gaining access to the collateral and could suffer a loss to the extent the
value of the collateral falls below the market value of the borrowed securities.

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

28
<PAGE> 31

actions, for defensive or other reasons, appear advisable to the Manager in
light of a change in circumstances in general market, economic or financial
conditions. As a result of its investment policies, the Fund may engage in a
substantial number of portfolio transactions. Accordingly, while the Fund
anticipates that its annual portfolio turnover rate should not exceed 100% under
normal conditions, it is impossible to predict portfolio turnover rates. The
portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities (exclusive of purchases or
sales of securities whose maturities at the time of acquisition were one year or
less) by the monthly average value of the securities in the portfolio during the
year. A high portfolio turnover rate involves certain tax consequences and
correspondingly greater transaction costs in the form of dealer spreads and
brokerage commissions, which are borne directly by the Fund.

When-Issued Securities and Delayed Delivery Transactions. The Fund may
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. These transactions occur when securities are
purchased or sold by the Fund with payment and delivery taking place in the
future to secure what is considered an advantageous yield and price to the Fund
at the time of entering into the transaction. Although the Fund has not
established any limit on the percentage of its assets that may be committed in
connection with such transactions, the Fund will maintain a segregated account
with its custodian of cash, cash equivalents, U.S. Government securities or
other high grade liquid debt securities denominated in U.S. dollars or non-U.S.
currencies in an aggregate amount equal to the amount of its commitments in
connection with such purchase transactions.

There can be no assurance that a security purchased on a when-issued basis
or purchased or sold for delayed delivery will be issued, and the value of the
security, if issued, on the delivery date may be more or less than its purchase
price. The Fund may bear the risk of a decline in the value of such security and
may not benefit from an appreciation in the value of the security during the
commitment period.

Standby Commitment Agreements. The Fund, from time to time, may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security or a
stated number of shares of equity securities which may be issued and sold to the
Fund at the option of the issuer. The price and coupon of the security is fixed
at the time of the commitment. At the time of entering into the agreement the
Fund is paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.50% of the aggregate
purchase price of the security which the Fund has committed to purchase. The
Fund will enter into such agreements only for the purpose of investing in the
security underlying the commitment at a yield and price which is considered
advantageous to the Fund. The Fund will not enter into a standby commitment with
a remaining term in excess of 45 days and presently will limit its investment in
such commitments so that the aggregate purchase price of the securities subject
to such commitments, together with the value of portfolio securities subject to
legal restrictions on resale that affect their marketability, will not exceed
15% of its total assets taken at the time of acquisition of such a commitment.
The Fund at all times will maintain a segregated account with its custodian of
cash, cash equivalents, U.S. Government securities or other high grade liquid
debt securities denominated in U.S. dollars or non-U.S. currencies in an
aggregate amount equal to the purchase price of the securities underlying a
commitment.

29
<PAGE> 32

of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.

The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
can reasonably be expected to be issued, and the value of the security
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.

Repurchase Agreements and Purchase and Sale Contracts. The Fund may invest
in securities pursuant to repurchase agreements or purchase and sale contracts.
Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer in U.S. Government securities, or an
affiliate thereof. Purchase and sale contracts may be entered into only with
financial institutions which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
Under such agreements, the other party agrees, upon entering into the contract
with the Fund, to repurchase the security at a mutually agreed upon time and
price in a specified currency, thereby determining the yield during the term of
the agreement. This results in a fixed rate of return insulated from market
fluctuations during such period although it may be affected by currency
fluctuations. In the case of repurchase agreements, the price at which the
trades are conducted do not reflect accrued interest on the underlying
obligation; whereas, in the case of purchase and sale contracts, the prices take
into account accrued interest. Such agreements usually cover short periods, such
as under one week. Repurchase agreements may be construed to be collateralized
loans by the purchaser to the seller secured by the securities transferred to
the purchaser. In the case of a repurchase agreement, as a purchaser, the Fund
will require the seller to provide additional collateral if the market value of
the securities falls below the repurchase price at any time during the term of
the repurchase agreement; the Fund does not have the right to seek additional
collateral in the case of purchase and sale contracts. In the event of default
by the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but only constitute
collateral for the seller's obligation to pay the repurchase price. Therefore,
the Fund may suffer time delays and incur costs or possible losses in connection
with the disposition of the collateral. A purchase and sale contract differs
from a repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate, the rate of return to the Fund would be dependent upon
intervening fluctuations of the market values of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. Repurchase
agreements and purchase and sale contracts maturing in more than seven days are
deemed to be illiquid by the Commission and are therefore subject to the Fund's
investment restriction limiting investments in securities that are not readily
marketable to 15% of the Fund's total assets. (However, under the law of certain
states, the Fund presently is limited with respect to such investments to 10% of
its total assets.) See "Investment Restrictions" below.

INVESTMENT RESTRICTIONS

The Fund's investment activities are subject to further restrictions that
are described in the Statement of Additional Information. Investment
restrictions and policies which are fundamental policies may not be

30
<PAGE> 33

changed without the approval of the holders of a majority of the Fund's
outstanding voting securities (which for this purpose and under the Investment
Company Act means the lesser of (a) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (b) more
than 50% of the outstanding shares). Among its fundamental policies, the Fund
may not invest more than 25% of its total assets, taken at market value at the
time of each investment, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and instrumentalities).
Investment restrictions and policies that are non-fundamental policies may be
changed by the Board of Directors without shareholder approval. As a
non-fundamental policy, the Fund may not borrow money or pledge its assets,
except that the Fund (a) may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions in amounts not
exceeding 33 1/3% (taken at market value) of its total assets and pledge its
assets to secure such borrowings, (b) may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities
and (c) may purchase securities on margin to the extent permitted by applicable
law. (However, at the present time, applicable law prohibits the Fund from
purchasing securities on margin.) (The deposit or payment by the Fund of initial
or variation margin in connection with financial futures contracts or options
transactions is not considered to be the purchase of a security on margin.) The
purchase of securities while borrowings are outstanding will have the effect of
leveraging the Fund. Such leveraging or borrowing increases the Fund's exposure
to capital risk, and borrowed funds are subject to interest costs which will
reduce net income.

As a non-fundamental policy, the Fund will not invest in securities which
cannot readily be resold because of legal or contractual restrictions or which
are not otherwise readily marketable, including repurchase agreements and
purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its total assets (or 10% of its total assets
as presently required by certain state law) taken at market value would be
invested in such securities. Notwithstanding the foregoing, the Fund may
purchase without regard to this limitation securities that are not registered
under the Securities Act, but that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the Securities Act, provided that
the Fund's Board of Directors continuously determines, based on the trading
markets for the specific Rule 144A security, that it is liquid. The Board of
Directors may adopt guidelines and delegate to the Manager the daily function of
determining and monitoring liquidity of restricted securities. The Board has
determined that securities which are freely tradeable in their primary market
offshore should be deemed liquid. The Board, however, will retain sufficient
oversight and be ultimately responsible for the determinations.

NON-DIVERSIFIED STATUS

The Fund is classified as non-diversified within the meaning of the
Investment Company Act, which means that the Fund is not limited by such Act in
the proportion of its assets that it may invest in securities of a single
issuer. The Fund's investments will be limited, however, in order to qualify as
a "regulated investment company" for purposes of the Code. See "Additional
Information -- Taxes". To qualify, the Fund will comply with certain
requirements, including limiting its investments so that at the close of each
quarter of the taxable year (i) not more than 25% of the market value of the
Fund's total assets will be invested in the securities of a single issuer and
(ii) with respect to 50% of the market value of its total assets, not more than
5% of the market value of its total assets will be invested in the securities of
a single issuer, and the Fund will not own more than 10% of the outstanding
voting securities of a single issuer. A fund which elects to be classified as
"diversified" under the Investment Company Act must satisfy the foregoing 5% and
10% requirements with respect to 75% of its total assets. To the extent that the
Fund assumes large positions in the securities of a

31
<PAGE> 34

small number of issuers, the Fund's net asset value may fluctuate to a greater
extent than that of a diversified company as a result of changes in the
financial condition or in the market's assessment of the issuers, and the Fund
may be more susceptible to any single economic, political or regulatory
occurrence than a diversified company.

For purposes of the diversification requirements set forth above with
respect to regulated investment companies, and to the extent required by the
Commission, the Fund, as a non-fundamental policy, will consider securities
issued or guaranteed by the government of any one foreign country as the
obligations of a single issuer.

MANAGEMENT OF THE FUND

BOARD OF DIRECTORS

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

The Directors of the Fund are:

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

DONALD CECIL -- Special Limited Partner of Cumberland Partners (an
investment partnership).

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

CHARLES C. REILLY -- Self-employed financial consultant; former President
and Chief Investment Officer of Verus Capital, Inc.; former Senior Vice
President of Arnold and S. Bleichroeder, Inc.

RICHARD R. WEST -- Professor of Finance, and Dean from 1984 to 1993, New
York University Leonard N. Stern School of Business Administration.

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

MANAGEMENT AND ADVISORY ARRANGEMENTS

MLAM acts as the manager of the Fund and provides the Fund with management
and investment advisory services. The Manager is owned and controlled by ML&Co.,
a financial services holding company and the parent of Merrill Lynch. The
Manager, or an affiliate of the Manager, FAM, acts as the investment adviser to
more than 130 other registered investment companies and provides investment
advisory services to individual and institutional accounts. As of February 29,
1996, the Manager and FAM had a total of

32
<PAGE> 35

approximately $208.7 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of the Manager.

The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As described in the Management Agreement, the
Manager receives for its services to the Fund monthly compensation at the annual
rate of 1.00% of the average daily net assets of the Fund. The Management
Agreement provides that, subject to the direction of the Board of Directors of
the Fund, 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, subject to review by the Board of Directors. The Manager provides the
portfolio managers for the Fund, who consider analyses from various sources
(including brokerage firms with which the Fund does business), make the
necessary investment decisions and place orders for transactions accordingly.
The Manager also is obligated to perform certain administrative and management
services for the Fund and is obligated to provide all of the office space,
facilities, equipment and personnel necessary to perform its duties under the
Management Agreement.

The Fund pays certain expenses incurred in its operations, including, among
other things, the management fees; legal and audit fees; unaffiliated Directors'
fees and expenses; registration fees; custodian and transfer agency fees;
accounting and pricing costs; and certain of the costs of printing proxies,
shareholder reports, prospectuses and statements of additional information. For
the period December 30, 1994 (commencement of operations) to November 30, 1995,
the fee paid by the Fund to the Manager was $95,530 (based on average net assets
of approximately $10.4 million). At February 29, 1996, the net assets of the
Fund aggregated approximately $11.2 million. At this asset level, the annual
management fee would aggregate $112,288. Accounting services are provided to the
Fund by the Manager, and the Fund reimburses the Manager for its costs in
connection with such services on a semi-annual basis. For the fiscal period
December 30, 1994 (commencement of operations) to November 30, 1995, the Fund
reimbursed the Manager $42,157 for such accounting services. For the fiscal
period December 30, 1994 (commencement of operations) to November 30, 1995, the
ratio of total expenses to average net assets was 4.63% for Class A shares,
5.68% for Class B shares, 5.67% for Class C shares and 4.89% for Class D shares.

Grace Pineda is a Vice President of and Portfolio Manager for the Fund. Ms.
Pineda has been a Vice President of the Manager since 1989. Prior to joining the
Manager, Ms. Pineda was a portfolio manager with Clemente Capital, Inc.

CODE OF ETHICS

The Board of Directors of the Fund has adopted a Code of Ethics pursuant to
Rule 17j-1 under 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 preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed investment.
The substantive restrictions applicable to all employees of the Manager include
a ban on acquiring any securities in a "hot" initial public offering and a
prohibition from profiting on short-term trading in securities. In addition,

33
<PAGE> 36

no employee may purchase or sell any security which at the time is being
purchased or sold (as the case may be), or to the knowledge of the employee is
being considered for purchase or sale, by any fund advised by the Manager.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security (15 or 30 days depending upon the
transaction).

TRANSFER AGENCY SERVICES

Merrill Lynch Financial Data Services, Inc. (the "Transfer Agent"), which
is a wholly-owned subsidiary of ML&Co., acts as the Fund's transfer agent
pursuant to a transfer agency, dividend disbursing agency and shareholder
servicing agency agreement (the "Transfer Agency Agreement"). Pursuant to the
Transfer Agency Agreement, the Transfer Agent is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts. Pursuant to the Transfer Agency Agreement, the Transfer Agent receives
an annual fee of $11.00 per Class A or Class D shareholder account, $14.00 per
Class B or Class C shareholder account and nominal miscellaneous fees (e.g.,
account closing fees), and the Transfer Agent is entitled to reimbursement for
out-of-pocket expenses incurred by the Transfer Agent under the Transfer Agency
Agreement. For the period December 30, 1994 (commencement of operations) to
November 30, 1995, the fee paid by the Fund to the Transfer Agent was $17,666.
At February 29, 1996 the Fund had 86 Class A shareholder accounts, 940 Class B
shareholder accounts, 108 Class C shareholder accounts and 158 Class D
shareholder accounts. At this level of accounts, the annual fee payable to the
Transfer Agent would aggregate $17,356, plus miscellaneous and out-of-pocket
expenses.

PURCHASE OF SHARES

The Distributor, an affiliate of the Manager, FAM and Merrill Lynch, acts
as the distributor of the shares of the Fund. Shares of the Fund are offered
continuously for sale by the Distributor and other eligible securities dealers
(including Merrill Lynch). Shares of the Fund may be purchased from securities
dealers or by mailing a purchase order directly to the Transfer Agent. The
minimum initial purchase is $1,000 and the minimum subsequent purchase is $50,
except for retirement plans, where the minimum initial purchase is $100 and the
minimum subsequent purchase is $1.

The Fund offers its shares in four classes at a public offering price equal
to the next determined net asset value per share plus sales charges imposed
either at the time of purchase or on a deferred basis depending upon the class
of shares selected by the investor under the Merrill Lynch Select PricingSM
System, as described below. The applicable offering price for purchase orders is
based upon the net asset value of the Fund next determined after receipt of the
purchase orders by the Distributor. As to purchase orders received by securities
dealers prior to 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 P.M., New York time), which includes orders received
after the determination of net asset value on the previous day, the applicable
offering price will be based on the net asset value determined as of 15 minutes
after the close of business on the New York Stock Exchange on the day the order
is placed with the Distributor, provided the orders are received by the
Distributor prior to 30 minutes after the close of business on the New York
Stock Exchange on that day. If the purchase orders are not received prior to 30
minutes after the close of business on the New York Stock Exchange, such orders
shall be deemed received on the next business day. The Fund or the Distributor
may suspend the continuous offering of the Fund's shares of any class at any
time in response to conditions in the securities markets or otherwise and may

34
<PAGE> 37

thereafter resume such offering from time to time. Any order may be rejected by
the Distributor or the Fund. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price change.
Merrill Lynch may charge its customers a processing fee (presently $4.85) to
confirm a sale of shares to such customers. Purchases directly through the
Transfer Agent are not subject to the processing fee.

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

Each Class A, Class B, Class C and Class D share of the Fund represents an
identical interest in the investment portfolio of the Fund and has the same
rights, except that Class B, Class C and Class D shares bear the expenses of the
ongoing account maintenance fees, and Class B and Class C shares bear the
expenses of the ongoing distribution fees and the additional incremental
transfer agency costs resulting from the deferred sales charge arrangements. The
deferred sales charges 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, will be imposed directly against those classes and not against
all assets of the Fund and, accordingly, such charges will not affect the net
asset value of any other class or have any impact on investors choosing another
sales charge option. Dividends paid by the Fund for each class of shares will be
calculated in the same manner at the same time and will differ only to the
extent that account maintenance and distribution fees and any incremental
transfer agency costs relating to a particular class are borne exclusively by
that class. Class B, Class C and Class D shares each have exclusive voting
rights with respect to the Rule 12b-1 distribution plan adopted with respect to
such class pursuant to which account maintenance and/or distribution fees are
paid. See "Distribution Plans".

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

35
<PAGE> 38

<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ACCOUNT
MAINTENANCE DISTRIBUTION CONVERSION
CLASS SALES CHARGE(1)(5) FEE FEE FEATURE
- -------------------------------------------------------------------------------------------------
A Maximum 5.25% initial No No No
sales charge(2)(3)
- -------------------------------------------------------------------------------------------------
B CDSC for a period of 0.25% 0.75% B shares convert to
up to 4 years, at a rate D shares automatically
of 4.0% during the first after approximately
year, decreasing 1.0% eight years(4)
annually to 0.0%
- -------------------------------------------------------------------------------------------------
C 1.0% CDSC for one year 0.25% 0.75% No
- -------------------------------------------------------------------------------------------------
D Maximum 5.25% initial 0.25% No No
sales charge(3)
- -------------------------------------------------------------------------------------------------
</TABLE>

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

(2) Offered only to eligible investors. See "Initial Sales Charge
Alternatives -- Class A and Class D Shares -- Eligible Class A Investors".

(3) Reduced for purchases of $25,000 or more, and waived for purchases of Class
A shares by certain retirement plans in connection with certain investment
programs. Class A and Class D share purchases of $1,000,000 or more may not
be subject to an initial sales charge but instead will be subject to a 1.0%
CDSC for one year.

(4) The conversion period for dividend reinvestment shares and certain
retirement plans was modified.

(5) Shares of each class redeemed within 12 months of purchase are subject to a
redemption fee of 2.0% of the net asset value of shares being redeemed. See
"Redemption of Shares".

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

Investors choosing the initial sales charge alternatives who are eligible
to purchase Class A shares should purchase Class A shares rather than Class D
shares because there is an account maintenance fee imposed on Class D shares.

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

<TABLE>
<CAPTION>
SALES CHARGE AS SALES LOAD AS DISCOUNT TO SELECTED
PERCENTAGE OF PERCENTAGE* OF THE DEALERS AS PERCENTAGE
AMOUNT OF PURCHASE THE OFFERING PRICE NET AMOUNT INVESTED OF THE OFFERING PRICE
- --------------------------------------- ------------------ ------------------- ----------------------
<S> <C> <C> <C>
Less than $25,000...................... 5.25% 5.54% 5.00%
$25,000 but less than $50,000.......... 4.75 4.99 4.50
$50,000 but less than $100,000......... 4.00 4.17 3.75
$100,000 but less than $250,000........ 3.00 3.09 2.75
$250,000 but less than $1,000,000...... 2.00 2.04 1.80
$1,000,000 and over**.................. 0.00 0.00 0.00
</TABLE>

(Footnotes on next page)

36
<PAGE> 39

- ---------------
* Rounded to the nearest one-hundredth percent.

** The initial sales charge may be waived on Class A and Class D purchases of
$1,000,000 or more, and on Class A share purchases by certain retirement plan
investors in connection with certain investment programs. If the sales charge
is waived in connection with a purchase of $1,000,000 or more, such purchases
will be subject to a CDSC of 1.0% if the shares are redeemed within one year
after purchase. The charge will be assessed on an amount equal to the lesser
of the proceeds of redemption or the cost of the shares being redeemed. A
sales charge of 0.75% will be charged on purchases of $1,000,000 or more of
Class A or Class D shares by certain 401(k) plans.

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

During the period from December 30, 1994 (commencement of operations) to
November 30, 1995, the Fund sold 68,348 of its Class A shares for aggregate net
proceeds to the Fund of $729,728. There were no gross sales charges for the sale
of the Fund's Class A shares for the period from December 30, 1994 (commencement
of operations) to November 30, 1995. During such period, the Distributor
received no CDSCs with respect to redemptions within one year after purchase of
the Class A shares.

During the period from December 30, 1994 (commencement of operations) to
November 30, 1995, the Fund sold 153,535 of its Class D shares for aggregate net
proceeds to the Fund of $1,573,684. The gross sales charges for the sale of its
Class D shares for the period from December 30, 1994 (commencement of
operations) to November 30, 1995 were $13,813, of which $1,003 and $12,810 were
received by the Distributor and Merrill Lynch, respectively. During such period,
the Distributor received $597 in CDSCs with respect to redemptions within one
year after purchase of the Class D shares.

Eligible Class A Investors. Class A shares of the Fund are offered to a
limited group of investors and also will be issued upon reinvestment of
dividends on outstanding Class A shares of the Fund. Certain employer sponsored
retirement or savings plans, including eligible 401(k) plans, may purchase Class
A shares at net asset value provided that such plans meet the required minimum
number of eligible employees or required amount of assets advised by the Manager
or any of its affiliates. 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 MLAM-advised mutual funds. Also
eligible to purchase Class A shares at net asset value are participants in
certain investment programs including TMASM Managed Trusts to which Merrill
Lynch Trust Company provides discretionary trustee services. 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
mutual funds, including the Fund. Certain persons who acquired shares of certain
MLAM-advised closed-end funds in their initial offering who wish to reinvest the
net proceeds from a sale of their closed-end fund shares of common stock in
shares of the Fund also may purchase Class A shares of the Fund if certain
conditions set forth in the Statement of Additional Information are met. In
addition, Class A shares of the Fund and certain other MLAM-advised mutual funds
are offered at net asset value to shareholders of Merrill Lynch Senior Floating
Rate Fund, Inc. 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 Merrill
Lynch Senior Floating Rate Fund, Inc. in shares of such funds.

37
<PAGE> 40

Reduced Initial Sales Charges. No initial sales charges are imposed upon
Class A and Class D shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions. Class A and Class D sales charges also
may be reduced under a Right of Accumulation and a Letter of Intention.

Class A shares are offered at net asset value to certain eligible Class A
investors as set forth under "Eligible Class A Investors".

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

Class D shares of the Fund are offered at net asset value to shareholders
of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch High Income
Municipal Bond Fund, Inc. who wish to reinvest the net proceeds from a sale of
certain of their shares of common stock pursuant to tender offers conducted by
those funds in shares of the Fund.

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

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

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

The public offering price of Class B and Class C shares for investors
choosing the deferred sales charge alternatives is the next determined net asset
value per share without the imposition of a sales charge at the time of
purchase. As discussed below, Class B shares are subject to a four year CDSC,
while Class C shares are subject only to a one year 1.0% CDSC. On the other
hand, approximately eight years after Class B shares are issued, such Class B
shares, together with shares issued upon dividend reinvestment with respect to
those shares, are converted automatically into Class D shares of the Fund and
thereafter will be subject to lower continuing fees. See "Conversion of Class B
Shares to Class D Shares" below. Class B and Class C shares are both subject to
an account maintenance fee of 0.25% of net assets and a distribution fee of
0.75% of net assets as discussed below under "Distribution Plans".

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

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 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. Approximately eight years after issuance, Class B shares will
convert automatically into Class D shares of the Fund, which are subject to an
account maintenance fee but no distribution fee.

38
<PAGE> 41

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. The proceeds from the ongoing
account maintenance fee are used to compensate Merrill Lynch for providing
continuing account maintenance activities.

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

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

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

For the period December 30, 1994 (commencement of operations) to November
30, 1995, the Distributor received CDSCs of $20,279 with respect to redemptions
of Class B shares, all of which was paid to Merrill Lynch.

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

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

The Class B CDSC is waived on redemptions of shares in connection with
certain post-retirement withdrawals from an Individual Retirement Account
("IRA") or other retirement plan or following the death or disability (as
defined in the Code) of a shareholder. The Class B CDSC also is waived on
redemptions of shares by certain eligible 401(a) and eligible 401(k) plans. The
CDSC also is waived for any Class B shares

39
<PAGE> 42

which are purchased by eligible 401(k) or eligible 401(a) plans which are rolled
over into a Merrill Lynch or Merrill Lynch Trust Company custodied IRA and held
in such account at the time of redemption. The Class B CDSC also is waived for
any Class B shares which are purchased by a Merrill Lynch rollover IRA that was
funded by a rollover from a terminated 401(k) plan managed by the MLAM Private
Portfolio Group and held in such account at the time of redemption. Additional
information concerning the waiver of the Class B CDSC is set forth in the
Statement of Additional Information.

Contingent Deferred Sales Charges -- Class C Shares. Class C shares which
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. 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. For the period December 30, 1994
(commencement of operations) to November 30, 1995, the Distributor received
CDSCs of $800 with respect to redemptions of Class C shares, all of which was
paid to Merrill Lynch.

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

Conversion of Class B Shares to Class D Shares. After approximately eight
years (the "Conversion Period"), Class B shares will be converted automatically
into Class D shares of the Fund. Class D shares are subject to an ongoing
account maintenance fee of 0.25% of net assets but are not subject to the
distribution fee that is borne by Class B shares. Automatic conversion of Class
B shares into Class D shares will occur at least once each month (on the
"Conversion Date") on the basis of the relative net asset values of the shares
of the two classes on the Conversion Date, without the imposition of any sales
load, fee or other charge. Conversion of Class B shares to Class D shares will
not result in recognized gain or loss to shareholders for Federal income tax
purposes.

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

Share certificates for Class B shares of the Fund to be converted must be
delivered to the Transfer Agent at least one week prior to the Conversion Date
applicable to those shares. In the event that 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.

40
<PAGE> 43

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

DISTRIBUTION PLANS

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

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

The Distribution Plans for Class B and Class C shares each provide that the
Fund also pays the Distributor a distribution fee relating to the shares of the
relevant class, accrued daily and paid monthly, at the annual rate of 0.75% of
the average daily net assets of the Fund attributable to the shares of the
relevant class in order to compensate the Distributor and Merrill Lynch
(pursuant to a sub-agreement) for providing 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 related to Class B and Class C shares are designed to permit
an investor to purchase Class B and Class C shares through dealers without the
assessment of an initial sales charge and at the same time permit the dealer to
compensate its financial consultants in connection with the sale of the Class B
and Class C shares. In this regard, the purpose and function of the ongoing
distribution fees and the CDSC are the same as those of the initial sales
charges with respect to the Class A and Class D shares of the Fund in that the
deferred sales charges provide for the financing of the distribution of the
Fund's Class B and Class C shares.

For the period December 30, 1994 (commencement of operations) to November
30, 1995, the Fund paid the Distributor $69,416 pursuant to the Class B
Distribution Plan (based on average net assets subject to the Class B
Distribution Plan of approximately $7.5 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 period
December 30, 1994 (commencement of operations) to November 30, 1995, the Fund
paid the Distributor $9,459 pursuant to the Class C Distribution Plan (based on
average net assets subject to the Class C Distribution Plan of approximately
$1.0 million), all of which was paid to Merrill Lynch for providing

41
<PAGE> 44

account maintenance and distribution-related activities and services in
connection with Class C shares. For the period December 30, 1994 (commencement
of operations) to November 30, 1995, the Fund paid the Distributor $3,137
pursuant to the Class D Distribution Plan (based on average net assets subject
to the Class D Distribution Plan of approximately $1.4 million), all of which
was paid to Merrill Lynch for providing account maintenance-related services in
connection with Class D shares. At February 29, 1996 the net assets of the Fund
subject to the Class B Distribution Plan aggregated approximately $8.2 million.
At this net asset level the annual fee payable pursuant to the Class B
Distribution Plan would aggregate $81,525. At February 29, 1996 the net assets
of the Fund subject to the Class C Distribution Plan aggregated $942,738. At
this net asset level, the annual fee payable pursuant to the Class C
Distribution Plan would aggregate $9,427. At February 29, 1996 the net assets of
the Fund subject to the Class D Distribution Plan aggregated approximately $1.5
million. At this net asset level, the annual fee payable pursuant to the Class D
Distribution Plan would aggregate $3,752.

The payments under the Distribution Plans are based on a percentage of
average daily net assets attributable to the shares regardless of the amount of
expenses incurred, and, accordingly, distribution-related revenues from the
Distribution Plans may be more or less than distribution-related expenses.
Information with respect to the distribution-related revenues and expenses is
presented to the Directors for their consideration in connection with their
deliberations as to the continuance of the Class B and Class C Distribution
Plans. This information is presented annually as of December 31 of each year on
a "fully allocated accrual" basis and quarterly on a "direct expense and
revenue/cash" basis. On the fully allocated accrual basis, revenues consist of
the account maintenance fees, distribution fees, the CDSC 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 promotional and market expenses, corporate overhead
and interest expense. On the direct expense and revenue/cash basis, revenues
consist of the account maintenance fees, distribution fees and CDSCs, and the
expenses consist of financial consultant compensation.

As of December 31, 1995, the last date for which fully allocated accrual
data is available, with respect to Class B shares, the fully allocated accrual
expenses for the period since December 30, 1994 (commencement of operations)
incurred by the Distributor and Merrill Lynch exceeded fully allocated accrual
revenues by approximately $202,000 (2.71% of Class B net assets at that date).
For Class B shares, as of November 30, 1995, direct cash expenses for the same
period exceeded direct cash revenues by $35,953 (.47% of Class B net assets at
that date). Similar fully allocated accrual data for Class C shares is not
presented because such revenues and expenses for the period December 30, 1994
(commencement of operations) to December 31, 1995 are de minimis. With respect
to Class C shares, as of November 30, 1995 direct cash revenues for the period
since December 30, 1994 (commencement of operations) exceeded direct cash
expenses by $6,073 (.60% of Class C net assets at that date).

Limitations on the Payment of Deferred Sales Charges. The maximum sales
charge rule in the Rules of Fair Practice 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

42
<PAGE> 45

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 voluntarily has 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,
payments in excess of the amount payable under the NASD formula will not be
made.

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

REDEMPTION OF SHARES

The Fund is required to redeem for cash all full and fractional shares of
the Fund on receipt of a written request in proper form. The redemption price is
the net asset value per share next determined after the initial receipt of
proper notice of redemption, except that the redemption price for any class of
shares redeemed during the first 12 months after purchase will be the net asset
value per share minus a redemption fee of 2.0% of the net asset value of the
shares being redeemed. The redemption fee is designed to discourage short-term
trading in shares of the Fund, is retained by the Fund and may be used to cover
the cost of liquidating portfolio securities. Except for such redemption fee and
any CDSC which may be applicable to Class B and Class C shares, there will be no
charge for redemption if the redemption request is sent directly to the Transfer
Agent. Shareholders liquidating their holdings will receive upon redemption all
dividends and capital gains reinvested through the date of redemption. The value
of shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time.

REDEMPTION

A shareholder wishing to redeem shares may do so without charge by
tendering the shares directly to the Transfer Agent, Merrill Lynch Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289.
Redemption requests delivered other than by mail should be delivered to Merrill
Lynch Financial Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville,
Florida 32246-6484. Proper notice of

43
<PAGE> 46

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. The notice in either event requires the signatures of
all persons in whose names the shares are registered, signed exactly as their
names appear on the Transfer Agent's register or on the certificate, as the case
may be. The signature(s) on the redemption request must be guaranteed by an
"eligible guarantor institution" (including, for example, Merrill Lynch branches
and certain other financial institutions) as such is defined in Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended, the existence and
validity of which may be verified by the Transfer Agent through the use of
industry publications. Notarized signatures are not sufficient. In certain
instances, the Transfer Agent may require additional documents, such as, but not
limited to, trust instruments, death certificates, appointments as executor or
administrator, or certificates of corporate authority. For shareholders
redeeming directly with the Transfer Agent, payment will be mailed within seven
days of receipt of a proper notice of redemption.

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

REPURCHASE

The Fund also will repurchase shares through a shareholder's listed
securities dealer. The Fund normally will accept orders to repurchase shares by
wire or telephone from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the dealer prior to the close of business on the New
York Stock Exchange (generally, 4:00 P.M., New York time) on the day received
and that such request is received by the Fund from such dealer not later than 30
minutes after the close of business on the New York Stock Exchange 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 New York
Stock Exchange 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
redemption fee and CDSC in the case of Class B or Class C shares). Securities
firms which 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 $4.85) to confirm a repurchase of shares to such
customers. Repurchases directly through the Transfer Agent are not subject to
the processing fee. The Fund reserves the right to reject any order for
repurchase, which right of rejection might adversely affect shareholders seeking
redemption through the repurchase procedure. A shareholder whose order for
repurchase is rejected by the Fund may redeem shares as set forth above.

SHAREHOLDER SERVICES

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

44
<PAGE> 47

can be obtained from the Fund by calling the telephone number on the cover page
hereof or from the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors. Included in the Fund's shareholder services
are the following:

Investment Account. Each shareholder whose account is maintained at the
Transfer Agent has an "Investment Account" and will receive, at least quarterly,
statements from the Transfer Agent. The statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of
ordinary income dividends. The statements also will show any other activity in
the account since the preceding statement. Shareholders will receive separate
transaction confirmations for each purchase or sale transaction other than
automatic investment purchases and the reinvestment of income dividends. A
shareholder may make additions to his or her Investment Account at any time by
mailing a check directly to the Transfer Agent. Shareholders also may maintain
their accounts through Merrill Lynch. Upon the transfer of shares out of a
Merrill Lynch brokerage account, an Investment Account in the transferring
shareholder's name will be opened automatically without charge, at the Transfer
Agent. Shareholders considering transferring their Class A or Class D shares
from Merrill Lynch to another brokerage firm or financial institution should be
aware that, if the firm to which the Class A or Class D shares are to be
transferred will not take delivery of shares of the Fund, a shareholder either
must redeem the Class A or Class D shares (paying any applicable redemption fee
and CDSC) so that the cash proceeds can be transferred to the account at the new
firm or such shareholder must continue to maintain an Investment Account at the
Transfer Agent for those Class A or Class D shares. Shareholders interested in
transferring their Class B or Class C shares from Merrill Lynch and who do not
wish to have an Investment Account maintained for such shares at the Transfer
Agent may request their new brokerage firm to maintain such shares in an account
registered in the name of the brokerage firm for the benefit of the shareholder
at the Transfer Agent. Shareholders considering transferring a tax deferred
retirement account such as an IRA from Merrill Lynch to another brokerage firm
or financial institution should be aware that, if the firm to which the
retirement account is to be transferred will not take delivery of shares of the
Fund, a shareholder must either redeem the shares (paying any applicable
redemption fee and CDSC) so that the cash proceeds can be transferred to the
account at the new firm, or such shareholder must continue to maintain a
retirement account at Merrill Lynch for those shares.

Automatic Reinvestment of Dividends and Capital Gains Distributions. All
dividends and capital gains distributions are automatically reinvested in full
and fractional shares of the Fund, without a sales charge, at the net asset
value per share next determined after the close of the New York Stock Exchange
on the ex-dividend date of such dividend. A shareholder, at any time, by written
notification to Merrill Lynch if the shareholder's account is maintained with
Merrill Lynch or by written notification or telephone call (1-800-MER-FUND) to
the Transfer Agent if the shareholder's account is maintained with the Transfer
Agent, may elect to have subsequent dividends paid in cash, rather than
reinvested, in which event payment will be mailed on or about the payment date.
No redemption fee or CDSC will be imposed on redemptions of shares issued as a
result of the automatic reinvestment of dividends or distributions.

Automatic Investment Plans. Regular additions of Class A, Class B, Class C
and Class D shares may be made to an investor's Investment Account by
prearranged charges of $50 or more to his or her regular bank account.
Alternatively, investors who maintain CMA(R) or CBA(R) accounts may arrange to
have periodic investments made in the Fund in their CMA(R) or CBA(R) account or
in certain related accounts in amounts of $100 or more ($1 for retirement
accounts) through the CMA(R)/CBA(R)Automated Investment Program.

45
<PAGE> 48

PERFORMANCE DATA

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

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

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

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

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<PAGE> 49

On occasion, the Fund may compare its performance to the Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, or to
performance data published by Lipper Analytical Services, Inc., Morningstar
Publications, Inc., Money Magazine, U.S. News & World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine or other industry
publications. In addition, from time to time the Fund may include the Fund's
risk adjusted performance ratings assigned by Morningstar Publications, Inc. in
advertising or supplemental sales literature. As with other performance data,
performance comparisons should not be considered indicative of the Fund's
relative performance for any future period.

ADDITIONAL INFORMATION

DIVIDENDS AND DISTRIBUTIONS

It is the Fund's intention to distribute substantially all of its net
investment income, if any. Dividends from such net investment income will be
paid at least annually. All net realized long- or short-term capital gains, if
any, will be distributed as dividends to the Fund's shareholders at least
annually. The per share dividends 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 "Determination of Net Asset Value". Dividends may
be reinvested automatically in shares of the Fund at net asset value without a
sales charge. Shareholders may elect in writing to receive any such dividends in
cash. See "Shareholder Services". Dividends are taxable to shareholders as
discussed below whether they are reinvested in shares of the Fund or received in
cash. From time to time, the Fund may declare a special distribution at or about
the end of the calendar year in order to comply with a Federal income tax
requirement that certain percentages of its ordinary income and capital gains be
distributed during the calendar year.

Certain gains or losses attributable to foreign currency gains or losses
from certain forward contracts may increase or decrease the amount of the Fund's
income available for distribution to shareholders. If such losses exceed other
ordinary income during a taxable year, (a) the Fund would not be able to make
any ordinary income dividend distributions and (b) all or a portion of
distributions made before the losses were realized but in the same taxable year
would be recharacterized as a return of capital to shareholders, rather than as
an ordinary income dividend, reducing each shareholder's tax basis in Fund
shares for Federal income tax purposes, and resulting in a capital gain for any
shareholder who received a distribution greater than such shareholder's tax
basis in Fund shares (assuming that the shares were held as a capital asset).
See "Taxes" below.

TAXES

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

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<PAGE> 50

shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in warrants, futures and options) ("capital
gain dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Any loss
upon the sale or exchange of Fund shares held for six months or less, however,
will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a holder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such holder (assuming the shares are held as a capital asset).

Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.

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

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

Under certain provisions of the Code, some shareholders may be subject to a
31% withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have furnished
an incorrect

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<PAGE> 51

number. When establishing an account, an investor must certify under penalty of
perjury that such number is correct and that such investor is not otherwise
subject to backup withholding.

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

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

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

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

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

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<PAGE> 52

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

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

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

DETERMINATION OF NET ASSET VALUE

The net asset value per share of all classes of the Fund is determined once
daily, as of 15 minutes after the close of business on the New York Stock
Exchange (generally, 4:00 P.M., New York time), on each day during which the New
York Stock Exchange is open for trading. Any assets or liabilities initially
expressed in terms of non-U.S. dollar currencies are translated into U.S.
dollars at the prevailing market rates as quoted by one or more banks or dealers
on the day of valuation. The net asset value per share is computed by dividing
the value of the securities held by the Fund plus any cash or other assets
(including interest and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total number of shares
outstanding at such time. Expenses, including the fees payable to the Manager
and the Distributor, are accrued daily.

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

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

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<PAGE> 53

for which market quotations are readily available, are valued at market value.
Securities and assets for which market quotations are not readily available are
valued at fair market value as determined in good faith by or under the
direction of the Board of Directors of the Fund.

ORGANIZATION OF THE FUND

The Fund was incorporated under Maryland law on March 15, 1994. It has an
authorized capital of 400,000,000 shares of Common Stock, par value $0.10 per
share, divided into four classes, designated Class A, Class B, Class C and Class
D Common Stock, each of which consists of 100,000,000 shares. Shares of Class A,
Class B, Class C and Class D 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 related to the account maintenance associated with
such shares, and Class B and Class C shares bear certain expenses related to the
distribution of such shares. Each class has exclusive voting rights with respect
to matters relating to such account maintenance fees and distribution
expenditures. See "Purchase of Shares". Shares issued by the Fund are fully
paid, non-assessable and have no preemptive or conversion rights.

Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on the election of Directors and
any other matters submitted to a shareholder vote. The Fund does not intend to
hold an annual meeting of shareholders in any year in which the Investment
Company Act does not require shareholders to elect Directors. Also, the by-laws
of the Fund require that a special meeting of shareholders be held upon the
written request of at least 10% of the outstanding shares of the Fund entitled
to vote at such meeting, if they comply with applicable Maryland law. The Fund
will assist in shareholder communications in the manner described in Section
16(c) of the Investment Company Act.

Voting rights for Directors are not cumulative. Each share of Common Stock
is entitled to participate equally in dividends declared by the Fund and in the
net assets of the Fund upon liquidation or dissolution after satisfaction of
outstanding liabilities, except that, as noted above, expenses related to the
distribution of the shares of a class will be borne solely by such class.

SHAREHOLDER REPORTS

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

Merrill Lynch Financial Data Services, Inc.

P.O. Box 45289

Jacksonville, FL 32232-5289

The written notification should include the shareholder's name, address,
tax identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this, please call your Merrill Lynch
financial consultant or Merrill Lynch Financial Data Services, Inc. at
1-800-637-3863.

SHAREHOLDER INQUIRIES

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

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APPENDIX A

FUTURES, OPTIONS AND FORWARD FOREIGN EXCHANGE TRANSACTIONS

The Fund is authorized to engage in various portfolio hedging strategies.
These strategies are described in more detail below:

The Fund may engage in various portfolio strategies to hedge its portfolio
against investment and currency risks. These strategies include the use of
options on portfolio securities, currency and stock index options and futures,
options on such futures and forward foreign exchange transactions. The Fund may
enter into such transactions only in connection with its hedging strategies.
While the Fund's use of hedging strategies is intended to reduce the volatility
of the net asset value of Fund shares, the net asset value of the Fund's shares
will fluctuate. There can be no assurance that the Fund's hedging transactions
will be effective. Furthermore, the Fund may not necessarily be engaging in
hedging activities when movements in the equity markets or currency exchange
rates occur. Reference is made to the Statement of Additional Information for
further information concerning these strategies.

Although certain risks are involved in futures and options transactions (as
discussed below in "Risk Factors in Futures, Options and Currency
Transactions"), the Manager believes that, because the Fund only will engage in
these transactions for hedging purposes, the futures and options portfolio
strategies of the Fund will not subject the Fund to the risks frequently
associated with the speculative use of futures and options transactions. Tax
requirements may limit the Fund's ability to engage in the hedging transactions
and strategies discussed below. See "Additional Information -- Taxes".

Set forth below are descriptions of certain hedging strategies in which the
Fund is authorized to engage.

Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund in return for a premium gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against the price of the
underlying security declining.

The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options, which means that so
long as the Fund is obligated as the writer of the option it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of
exercise for as long

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as the option is outstanding. The Fund may engage in closing transactions in
order to terminate put options that it has written. The Fund will not write put
options if the aggregate value of the obligations underlying the put options
shall exceed 50% of the Fund's net assets.

Purchasing Options. The Fund is authorized to purchase put options to
hedge against a decline in the market value of its securities. By buying a put
option the Fund has a right to sell the underlying security at the exercise
price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any profit on
the sale in the value of the underlying security will be partially offset by the
amount of the premium paid for the put option and any related transaction costs.
Prior to its expiration, a put option may be sold in a closing sale transaction
and profit or loss from the sale will depend on whether the amount received is
more or less than the premium paid for the put option plus the related
transaction costs. A closing sale transaction cancels out the Fund's position as
the purchaser of an option by means of any offsetting sale of an identical
option prior to the expiration of the option it has purchased.

In certain circumstances, the Fund may purchase call options on securities
held in its portfolio on which it has written call options or on securities
which it intends to purchase. The Fund will not purchase options on securities
(including stock index options discussed below) if, as a result of such
purchase, the aggregate cost of all outstanding options on securities held by
the Fund would exceed 5% of the market value of the Fund's total assets.

Stock Index Options and Futures and Financial Futures. The Fund is
authorized to engage in transactions in stock index options and futures and
financial futures, and related options on such futures. The Fund may purchase or
write put and call options on stock indices to hedge against the risks of
marketwide stock price movements in the securities in which the Fund invests.
Options on indices are similar to options on securities except that on exercise
or assignment, the parties to the contract pay or receive an amount of cash
equal to the difference between the closing value of the index and the exercise
price of the option times a specified multiple. The Fund may invest in stock
index options based on a broad market index or based on a narrow index
representing an industry, country or market segment.

The Fund also may purchase and sell stock index financial futures contracts
and financial futures contracts ("financial futures contracts") as a hedge
against adverse changes in the market value of its portfolio securities as
described below. A financial futures contract is an agreement between two
parties which obligates the purchaser of the financial futures contract to buy
and the seller of a financial futures contract to sell a security for a set
price on a future date. Unlike most other financial futures contracts, a stock
index financial futures contract does not require actual delivery of securities
but results in cash settlement based upon the difference in value of the index
between the time the contract was entered into and the time of its settlement.
The Fund may effect transactions in stock index financial futures contracts in
connection with the equity securities in which it invests and in financial
futures contracts in connection with the debt securities in which it invests.
Transactions by the Fund in stock index futures and financial futures are
subject to limitations as described below under "Restrictions on the Use of
Futures Transactions".

The Fund may sell financial futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When the Fund is not fully
invested in the securities markets and anticipates a significant market advance,
it may purchase futures in order to gain rapid market exposure. This technique
generally will allow the Fund to gain exposure to a market in a manner which is
more efficient than purchasing individual securities, and may in

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<PAGE> 56

part or entirely offset increases in the cost of securities in such markets that
the Fund ultimately purchases. As such purchases are made, an equivalent amount
of financial futures contracts will be terminated by offsetting sales. The
Manager does not consider purchases of financial futures contracts to be a
speculative practice under these circumstances. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position is the purchase of a financial futures contract or the purchase of a
call option or the writing of a put option on a future, but under unusual
circumstances (e.g., the Fund experiences a significant amount of redemptions),
a long futures position may be terminated without the corresponding purchase of
securities.

The Fund also has authority to purchase and write call and put options on
financial futures contracts and stock indices in connection with its hedging
(including anticipatory hedging) activities. Generally, these strategies are
utilized under the same market and market sector conditions (i.e., conditions
relating to specific types of investments) in which the Fund enters into futures
transactions. The Fund may purchase put options or write call options on
financial futures contracts and stock indices rather than selling the underlying
financial futures contract in anticipation of a decrease in the market value of
its securities. Similarly, the Fund may purchase call options, or write put
options on financial futures contracts and stock indices, as a substitute for
the purchase of such futures to hedge against the increased cost resulting from
an increase in the market value of securities which the Fund intends to
purchase.

The Fund may engage in futures and options transactions on U.S. and foreign
exchanges and in options in the over-the-counter markets ("OTC options").
Exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligations is guaranteed by an exchange or clearing corporation)
which, in general, have standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with prices and terms negotiated by
the buyer and seller. The Fund may engage in OTC options to effect the same
strategies as it would through exchange-traded options. See "Restrictions on OTC
Options" below for information as to restrictions on the use of OTC options.

Foreign Currency Hedging. The Fund has authority to deal in forward
foreign exchange among currencies of the different countries in which it will
invest and multinational currency units as a hedge against possible variations
in the foreign exchange rates among these currencies. This is accomplished
through contractual agreements to purchase or sell a specified currency at a
specified future date (up to one year) and price set at the time of the
contract. The Fund's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency with
respect to specific receivables or payables of the Fund accruing in connection
with the purchase and sale of its portfolio securities, the sale and redemption
of shares of the Fund or the payment of dividends by the Fund. Position hedging
is the sale of forward foreign currency with respect to portfolio security
positions denominated or quoted in such foreign currency. The Fund has no
limitation on transaction hedging. The Fund will not speculate in forward
foreign exchange. If the Fund enters into a position hedging transaction, the
Fund's custodian will place cash or liquid debt securities in a separate account
of the Fund in an amount equal to the value of the Fund's total assets committed
to the consummation of such forward contract. If the value of the securities
placed in the separate account declines, additional cash or securities will be
placed in the account so that the value of the account will equal the amount of
the Fund's commitment with respect to such contracts. Hedging against a decline
in the value of a currency does not eliminate fluctuations in the prices of
portfolio securities or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the value of the
hedged

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<PAGE> 57

currency should rise. Moreover, it may not be possible for the Fund to hedge
against a devaluation that is so generally anticipated that the Fund is not able
to contract to sell the currency at a price above the devaluation level it
anticipates. Investors should be aware that U.S. dollar-denominated securities
may not be available in some or all developing countries, that the forward
currency market for the purchase for U.S. dollars in most, if not all,
developing countries is not highly developed and that in certain developing
countries no forward market for foreign currencies currently exists or such
market may be closed to investment by the Fund.

The Fund also is authorized to purchase or sell listed or OTC foreign
currency options, foreign currency futures and related options on foreign
currency futures, for example, as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. Dollar-denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund. As an illustration, the Fund may use such techniques to
hedge the stated value in U.S. dollars of an investment in a pound sterling
denominated security. In such circumstances, for example, the Fund may purchase
a foreign currency put option enabling it to sell a specified amount of pounds
for dollars at a specified price by a future date. To the extent the hedge is
successful, a loss in the value of the pound relative to the dollar will tend to
be offset by an increase in the value of the put option. To offset, in whole or
in part, the cost of acquiring such a put option, the Fund also may sell a call
option which, if exercised, requires it to sell a specified amount of pounds for
dollars at a specified price by a future date (a technique called a "straddle").
By selling such a call option in this illustration, the Fund gives up the
opportunity to profit without limit from increases in the relative value of the
pound to the dollar. The Manager believes that "straddles" of the type which may
be utilized by the Fund constitute hedging transactions and are consistent with
the policies described above.

Certain differences exist between these foreign currency hedging
instruments. Foreign currency options provide the holder thereof the right to
buy or sell a currency at a fixed price on a future date. Listed options are
third-party contracts (i.e., performance of the parties' obligations is
guaranteed by an exchange or clearing corporation) which are issued by a
clearing corporation, traded on an exchange and have standardized strike prices
and expiration dates. OTC options are two-party contracts and have negotiated
strike prices and expiration dates. A financial futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Financial futures contracts and
options on financial futures contracts are traded on boards of trade or futures
exchanges. The Fund will not speculate in foreign currency futures, options or
related options. Accordingly, the Fund will not hedge a currency substantially
in excess of the market value of securities which it has committed or
anticipates to purchase which are denominated in such currency and, in the case
of securities which have been sold by the Fund but not yet delivered, the
proceeds thereof in its denominated currency. Further, the Fund will segregate
at its custodian cash, liquid equity or debt securities having a market value
substantially representing any subsequent decrease in the market value of such
hedged security, less any initial or variation margin held in the account of its
broker. The Fund may not incur potential net liabilities of more than 33 1/3% of
its total assets from foreign currency futures, options or related options.

Restrictions on the Use of Futures Transactions. Regulations of the
Commodity Futures Trading Commission applicable to the Fund provide that the
futures trading activities described herein will not result in the Fund being
deemed a "commodity pool" under such regulations if the Fund adheres to certain
restrictions. In particular, the Fund may purchase and sell financial futures
contracts and options thereon (i) for bona fide hedging purposes, and (ii) for
non-hedging purposes, if the aggregate initial margin and

55
<PAGE> 58

premiums required to establish positions in such contracts and options does not
exceed 5% of the liquidation value of the Fund's portfolio, after taking into
account unrealized profits and unrealized losses on any such contracts and
options. The Fund has undertaken to the State of California that the aggregate
margin deposits required on all stock index futures or options thereon, or
financial futures or options thereon, held at any time by the Fund will not
exceed 5% of the Fund's total assets.

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

Restrictions on OTC Options. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign currency options and options on
foreign currency futures, only with member banks of the Federal Reserve System
and primary dealers in U.S. Government securities or with affiliates of such
banks or dealers that have capital of at least $50 million or whose obligations
are guaranteed by an entity having capital of at least $50 million or any other
bank or dealer having capital of at least $150 million or whose obligations are
guaranteed by an entity having capital of at least $150 million.

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

Risk Factors in Futures, Options and Currency Transactions. Utilization of
futures and options transactions to hedge the portfolio, including to affect the
Fund's exposure in various markets, involves the risk of imperfect correlation
in movements in the price of futures and options and movements in the price of
the securities or currencies which are the subject of the hedge. If the price of
the options or futures moves more or less than the price of the hedged
securities or currencies, the Fund will experience a gain or loss which will not
be completely offset by movements in the price of the subject of the hedge. The
successful use of futures and options also depends on the Manager's ability to
predict correctly price movements in the market involved in a particular options
or futures transaction. In addition, futures and options transactions in foreign
markets are

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<PAGE> 59

subject to the risk factors associated with foreign investments generally. See
"Risk Factors and Special Considerations".

The Fund intends to enter into futures and options transactions, on an
exchange or in the OTC market, only if there appears to be a liquid secondary
market for such options or futures or, in the case of OTC transactions, the
Manager believes the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case only that dealer's price will be used, or which can be
sold at a formula price provided for in the OTC option agreement. There can be
no assurance, however, that a liquid secondary market will exist at any specific
time. Thus, it may not be possible to close an options or futures position. The
inability to close futures and options positions also could have an adverse
impact on the Fund's ability to hedge effectively its portfolio. There also is
the risk of loss by the Fund of margin deposits or collateral in the event of
the bankruptcy of a broker with whom the Fund has an open position in an option,
a financial futures contract or related option.

The exchanges on which the Fund intends to conduct options transactions
generally have established limitations governing the maximum number of call or
put options on the same underlying security or currency (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts that any person may trade on a particular trading day. The Manager
does not believe that these trading and position limits will have any adverse
impact on the portfolio strategies for hedging the Fund's portfolio.

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<PAGE> 60

APPENDIX B

RATINGS OF DEBT SECURITIES AND PREFERRED STOCK

DESCRIPTION OF CORPORATE DEBT RATINGS OF MOODY'S INVESTORS SERVICE, INC.
("MOODY'S")

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 the 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 some time 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 payments
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
payments and principal repayments 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
investments. Assurance of interest payments and principal repayments 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: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher

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<PAGE> 61

end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS

The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of nine months. Moody's makes no
representations as to whether such commercial paper is by any other definition
"commercial paper" or is exempt from registration under the Securities Act of
1933, as amended.

Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers.

Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of short-term promissory 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.

-- 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 short-term promissory obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, 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 short-term promissory obligations. The effect of
industry characteristics and market compositions 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.

If an issuer represents to Moody's that its Commercial Paper obligations
are supported by the credit of another entity or entities, in assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment. Moody's
makes no representation and gives no opinion on the legal validity or
enforceability of any support arrangement.

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<PAGE> 62

DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS

Because of the fundamental differences between preferred stocks and bonds,
a variation of the bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols presented below are designed to avoid comparison
with bond quality in absolute terms. It should always be borne in mind that
preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.

Preferred stock rating symbols and their definitions are as follows:

"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.

"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.

"a" An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.

"baa" An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.

"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.

"b" An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.

"caa" An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.

"ca" An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.

"c" This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.

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<PAGE> 63

DESCRIPTION OF CORPORATE DEBT RATINGS OF STANDARD & POOR'S RATINGS GROUP
("STANDARD & POOR'S")

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

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

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

The ratings are based, in varying degrees, on the following considerations:
(1) likelihood of default capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.

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

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

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

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

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

BB Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest payments and principal repayments.
The BB rating category also is used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.

B Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category also is used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.

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<PAGE> 64

CCC Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category also
is used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.

CC The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.

C The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

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

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

PLUS (+) OR MINUS (-):

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

c The letter c indicates that the holder's option to tender the security
for purchase may be canceled under certain prestated conditions enumerated in
the tender option documents.

L The letter L indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter L indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.

p The letter p indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.

* Continuance of the rating is contingent upon Standard & Poor's receipt of
an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.

N.R. Not rated.

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<PAGE> 65

Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.

Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "Investment Grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.

DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from "A-l" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:

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

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

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

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

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

D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal repayments 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.

A commercial paper rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to Standard & Poor's by the issuer or obtained by Standard
& Poor's from other sources it considers reliable. Standard & Poor's does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.

DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS

A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the debt rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.

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<PAGE> 66

The preferred stock ratings are based on the following considerations:

I. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.

II. Nature of, and provisions of, the issue.

III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.

AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.

AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".

A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.

BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.

BB, B, CCC Preferred stock rated "BB", "B", and "CCC" are regarded, on
balance, as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of speculation
and "CCC" the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.

C A preferred stock rated "C" is a non-paying issue.

D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.

NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.

PLUS (+) OR MINUS (-):

To provide more detailed indications of preferred stock quality, 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.

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

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

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MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC. -- AUTHORIZATION FORM (PART 1)
- --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION

I, being of legal age, wish to purchase: (choose one)

/ / Class A shares / / Class B shares / / Class C shares / / Class D
shares

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

Basis for establishing an Investment Account:

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

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

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

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

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

Name............................................................................
First Name Initial Last Name

Name of Co-Owner (if any).......................................................
First Name Initial Last Name

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

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

........... Date ...
(Zip Code)

<TABLE>
<S> <C>
Occupation .........................................
...................................................
Signature of Owner

<CAPTION>
Occupation ......................................... Name and Address of Employer.................................................

<S> <C>
.............................................................................

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

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

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

</TABLE>

(In the case of co-owner, a joint tenancy with rights of survivorship will be
presumed unless otherwise specified.)

- --------------------------------------------------------------------------------
2. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTIONS

<TABLE>
<S> <C> <C> <C> <C> <C>
Ordinary Income Dividends Long-term Capital Gains
--------------------------------- ---------------------------------
SELECT / / Reinvest SELECT / / Reinvest
ONE: / / Cash ONE: / / Cash
--------------------------------- ---------------------------------
</TABLE>

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

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

IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:

I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Middle East/Africa Fund, Inc. Authorization Form.

SPECIFY TYPE OF ACCOUNT (check one): / / checking / / savings

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

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

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

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

I AGREE THAT THIS AUTHORIZATION WILL REMAIN IN EFFECT UNTIL I PROVIDE WRITTEN
NOTIFICATION TO MERRILL LYNCH FINANCIAL DATA SERVICES, INC. AMENDING OR
TERMINATING THIS SERVICE.

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

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

(if joint account, both must sign)

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

65
<PAGE> 68

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC. --
AUTHORIZATION FORM (PART 1) -- (CONTINUED)
- --------------------------------------------------------------------------------

3. SOCIAL SECURITY TAXPAYER IDENTIFICATION NUMBER

Social Security Number or Taxpayer Identification Number

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

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

<TABLE>
<S> <C>
............................................................. ............................................................
Signature of Owner Signature of Co-Owner (if any)
</TABLE>

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

4. LETTER OF INTENTION -- CLASS A AND D SHARES ONLY (See terms and conditions in
the Statement of Additional Information)

<TABLE>
<S> <C>
......................,
19 . . . .
Dear Sir/Madam: Date of initial purchase
</TABLE>

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

/ / $25,000 / / $50,000 / / $100,000 / / $250,000 / /
$1,000,000

Each purchase will be made at the then reduced offering price applicable to
the amount checked above, as described in the Fund's Prospectus.

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

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

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

<TABLE>
<S> <C>
(1) Name ................................................... (2) Name....................................................
Account Number ............................................ Account Number..............................................
</TABLE>

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

5. FOR DEALER ONLY

- --- Branch Office, Address, Stamp
- ---

- -
- -

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

This form when completed should be mailed to:

Merrill Lynch Middle East/Africa Fund, Inc.
c/o Merrill Lynch Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289

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

...............................................................
Dealer Name and Address

By .............................................................................
Authorized Signature of Dealer

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

66
<PAGE> 69

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC. -- AUTHORIZATION FORM (PART 2)
- --------------------------------------------------------------------------------
NOTE: THIS FORM IS REQUIRED TO APPLY FOR THE AUTOMATIC INVESTMENT PLAN ONLY.
- --------------------------------------------------------------------------------

1. ACCOUNT REGISTRATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(PLEASE PRINT) ------------------------------------
Name of Owner.......................................................................
------------------------------------
Social Security No.
First Name Initial Last Name or Taxpayer Identification No.
Address.............................................................................
.................................................................................... Account Number...........................
(Zip Code) (if existing account)
Name of Co-Owner (if any)...........................................................
First Name Initial Last Name
Address.............................................................................
....................................................................................
(Zip Code)

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

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

2. APPLICATION FOR AUTOMATIC INVESTMENT PLAN

I hereby request that Merrill Lynch Financial Data Services, Inc. draw an
automated clearing house ("ACH") debit on my checking account as described below
each month to purchase: (choose one)
/ / Class A shares / / Class B shares / / Class C
shares / / Class D shares

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

MERRILL LYNCH FINANCIAL DATA SERVICES, INC.

You are hereby authorized to draw an ACH debit each month on my bank account for
investment in Merrill Lynch Middle East/Africa Fund, Inc. as indicated below:

Amount of each ACH debit $...................................................

Account No...................................................................
Please date and invest ACH debits on the 20th of each month
beginning or as soon as thereafter as possible.
(month)

I agree that you are drawing these ACH debits voluntarily at my request and
that you shall not be liable for any loss arising from any delay in preparing or
failure to prepare any such debit. If I change banks or desire to terminate or
suspend this program, I agree to notify you promptly in writing. I hereby
authorize you to take any action to correct erroneous ACH debits of my bank
account or purchases of Fund shares including liquidating shares of the Fund and
crediting my bank account. I further agree that if a debit is not honored upon
presentation, Merrill Lynch Financial Data Services, Inc. is authorized to
discontinue immediately the Automatic Investment Plan and to liquidate
sufficient shares held in my account to offset the purchase made with the
returned dishonored debit.

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

.......................................
Signature of Depositor
(If joint account, both must sign)
AUTHORIZATION TO HONOR ACH DEBITS DRAWN BY
MERRILL LYNCH FINANCIAL DATA SERVICES, INC.

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

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

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

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

................. .......................................
Bank Account Signature of Depositor

Number (If joint account, both must sign)

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

67
<PAGE> 70

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 71

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 72

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 73

MANAGER

Merrill Lynch Asset Management

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011

DISTRIBUTOR

Merrill Lynch Funds Distributor, Inc.

Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536

Mailing Address:

P.O. Box 9081

Princeton, New Jersey 08543-9081

TRANSFER AGENT

Merrill Lynch Financial Data Services, Inc.

Administrative Offices:

4800 Deer Lake Drive East

Jacksonville, Florida 32246-6484

Mailing Address:
P.O. Box 45289
Jacksonville, Florida 32232-5289

CUSTODIAN

The Chase Manhattan Bank, N.A.
Global Securities Services
4 MetroTech Center, 18th Floor
Brooklyn, New York 11245

INDEPENDENT AUDITORS

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

COUNSEL

Brown & Wood
One World Trade Center
New York, New York 10048-0557
<PAGE> 74

- ------

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fee Table.................................... 3
Prospectus Summary........................... 5
Merrill Lynch Select PricingSM System........ 7
Risk Factors and Special Considerations...... 11
Financial Highlights......................... 21
Investment Objective and Policies............ 22
Description of Certain Investments......... 25
Other Investment Policies and Practices.... 27
Investment Restrictions...................... 30
Non-Diversified Status..................... 31
Management of the Fund....................... 32
Board of Directors......................... 32
Management and Advisory Arrangements....... 32
Code of Ethics............................. 33
Transfer Agency Services................... 34
Purchase of Shares........................... 34
Initial Sales Charge Alternatives -- Class
A and Class D Shares..................... 36
Deferred Sales Charge Alternatives -- Class
B and Class C Shares..................... 38
Distribution Plans......................... 41
Redemption of Shares......................... 43
Redemption................................. 43
Repurchase................................. 44
Shareholder Services......................... 44
Performance Data............................. 46
Additional Information....................... 47
Dividends and Distributions................ 47
Taxes...................................... 47
Determination of Net Asset Value........... 50
Organization of the Fund................... 51
Shareholder Reports........................ 51
Shareholder Inquiries...................... 51
Appendix A................................... 52
Appendix B................................... 58
Authorization Form........................... 65
Code # 18415-0396
</TABLE>

YZa(LOGO)
MERRILL LYNCH
MIDDLE EAST/AFRICA
FUND, INC.

PROSPECTUS

March 29, 1996

Distributor:

Merrill Lynch
Funds Distributor, Inc.

This Prospectus should be
retained for future reference.

<PAGE> 75

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.

SUPPLEMENT DATED MARCH 29, 1996 TO THE

PROSPECTUS DATED MARCH 29, 1996

FOR USE IN THE STATE OF OHIO

The Fund is a non-diversified, open-end, management investment company.
Consequently, investment in the Fund may involve a higher degree of risk than
investment in open-end, diversified investment companies because, although the
Fund may not purchase more than 10% of the voting securities of any one issuer
with regard to 50% of the Fund's assets, the remaining assets may be invested
without this restriction. See "Investment Restrictions -- Non-Diversified
Status".

This Prospectus must be delivered to Ohio investors prior to the
consummation of the sale of Fund shares.

Code # 18415-0396OH

<PAGE> 76

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.

SUPPLEMENT DATED MARCH 29, 1996 TO THE

PROSPECTUS DATED MARCH 29, 1996

FOR USE IN THE STATE OF MINNESOTA

The restricted securities and derivative instruments in which the Fund may
invest may have certain speculative characteristics, and investors should
consider carefully whether the Fund is a suitable investment vehicle for them.

Code # 18415-0396MN

<PAGE> 77

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.

SUPPLEMENT DATED MARCH 29, 1996 TO THE

PROSPECTUS DATED MARCH 29, 1996

FOR USE IN THE STATE OF MARYLAND

The Fund may invest in certain derivative instruments, such as indexed and
inverse securities, to enhance its return; derivative instruments used to
enhance return may have certain speculative characteristics.

Code # 18415-0396MD

<PAGE> 78

STATEMENT OF ADDITIONAL INFORMATION

MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011 - PHONE NO. (609) 282-2800
-------------------------

Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is a
non-diversified, open-end management investment company seeking long-term
capital appreciation by investing primarily in equity and debt securities of
corporate and governmental issuers in countries located in the Middle East and
Africa ("Middle Eastern/African countries"). For purposes of its investment
objective, the Fund may invest in the securities of issuers in all countries in
the Middle East and Africa. The Fund currently expects to emphasize investments
in the securities of issuers in Botswana, Ghana, Morocco, South Africa, Turkey,
Israel, Jordan and Zimbabwe; although the Fund is not required to invest in
securities of issuers located in the aforementioned markets. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in equity
or debt securities of corporate and governmental issuers in Middle
Eastern/African countries. The Fund may employ a variety of derivative
investments and techniques to hedge against market and currency risk. Also, the
Fund may invest in certain derivative instruments, such as indexed and inverse
securities, to enhance its return. There can be no assurance that the Fund's
investment objective will be achieved.

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

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

This Statement of Additional Information of the Fund is not a prospectus
and should be read in conjunction with the prospectus of the Fund, dated March
29, 1996 (the "Prospectus"), which has been filed with the Securities and
Exchange Commission (the "Commission") and can be obtained, without charge, by
calling or by writing to the Fund at the above telephone number or address. This
Statement of Additional Information has been incorporated by reference into the
Prospectus. Capitalized terms used but not defined herein have the same meanings
as in the Prospectus.

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

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

The date of this Statement of Additional Information is March 29, 1996.

<PAGE> 79

INVESTMENT OBJECTIVE AND POLICIES

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

While it is the policy of the Fund generally not to engage in trading for
short-term gains, Merrill Lynch Asset Management, L.P., the manager for the Fund
(the "Manager" or "MLAM"), will effect portfolio transactions without regard to
holding period if, in its judgment, such transactions are advisable in light of
a change in circumstances of a particular company or within a particular
industry or in general market, economic or financial conditions. For the period
December 30, 1994 (commencement of operations) to November 30, 1995, the Fund's
portfolio turnover rate was 40.97%. As a result of the investment policies
described in the Prospectus, the Fund's portfolio turnover rate may be higher
than that of other investment companies. Accordingly, while the Fund anticipates
that its annual portfolio turnover rate should not exceed 100% under normal
conditions, it is impossible to predict portfolio turnover rates. The portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales or
purchases of portfolio securities (exclusive of purchases or sales of securities
whose maturities at the time of acquisition were one year or less) by the
monthly average value of the securities in the portfolio during the year. The
Fund is subject to the Federal income tax requirement that less than 30% of the
Fund's gross income must be derived from gains from the sale or other
disposition of securities held for less than three months.

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

HEDGING TECHNIQUES

Reference is made to the discussion concerning hedging techniques under the
caption "Investment Objective and Policies -- Other Investment Policies and
Practices -- Portfolio Strategies Involving Futures, Options and Forward Foreign
Exchange Transactions" in the Prospectus and in Appendix A to the Prospectus.

2
<PAGE> 80

Although certain risks are involved in futures and options transactions (as
discussed in the Prospectus and below), the Manager believes that, because the
Fund will only engage in these transactions for hedging purposes, the futures
and options portfolio strategies of the Fund will not subject the Fund to the
risks frequently associated with the speculative use of futures and options
transactions.

The following information relates to the hedging instruments the Fund may
utilize with respect to currency risks.

Writing Covered Options. The Fund is authorized to write (i.e., sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to certain of such options. A covered
call option is an option where the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for
writing call options is to attempt to realize, through the receipt of premiums,
a greater return than would be realized on the securities alone. By writing
covered call options, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting purchase of
an identical option prior to the expiration of the option it has written.
Covered call options serve as a partial hedge against a decline in the price of
the underlying security.

The writer of a covered call option has no control over when he or she may
be required to sell his or her securities since he or she may be assigned an
exercise notice at any time prior to the termination of his or her obligation as
a writer. If an option expires unexercised, the writer would realize a gain in
the amount of the premium. Such a gain, of course, may be offset by a decline in
the market value of the underlying security during the option period. If a call
option is exercised, the writer would realize a gain or loss from the sale of
the underlying security.

The Fund also may write put options which give the holder of the option the
right to sell the underlying security to the Fund at the stated exercise price.
The Fund will receive a premium for writing a put option which increases the
Fund's return. The Fund writes only covered put options which means that so long
as the Fund is obligated as the writer of the option, it will, through its
custodian, have deposited and maintained cash, cash equivalents, U.S. Government
securities or other high grade liquid debt securities denominated in U.S.
dollars or non-U.S. currencies with a securities depository with a value equal
to or greater than the exercise price of the underlying securities. By writing a
put, the Fund will be obligated to purchase the underlying security at a price
that may be higher than the market value of that security at the time of
exercise for as long as the option is outstanding. The Fund may engage in
closing transactions in order to terminate put options that it has written. The
Fund will not write a put option if the aggregate value of the obligations
underlying the put shall exceed 50% of the Fund's net assets.

3
<PAGE> 81

Options referred to herein and in the Prospectus may be options traded on
foreign securities exchanges. An option position may be closed only on an
exchange which provides a secondary market for an option of the same series. If
a secondary market does not exist, it might not be possible to effect closing
transactions in particular options, with the result, in the case of a covered
call option, that the Fund will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
the Options Clearing Corporation (the "Clearing Corporation") may not, at all
times, be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been issued by the Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.

The Fund also may enter into over-the-counter options transactions ("OTC
options"), which are two-party contracts with prices and terms negotiated
between the buyer and seller. The Fund will only enter into OTC options
transactions with respect to portfolio securities for which management believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option).
The staff of the Commission has taken the position that OTC options and the
assets used as cover for written OTC options are illiquid securities.

Purchasing Options. The Fund may purchase put options to hedge against a
decline in the market value of its equity holdings. By buying a put, the Fund
has a right to sell the underlying security at the exercise price, thus limiting
the Fund's risk of loss through a decline in the market value of the security
until the put option expires. The amount of any appreciation in the value of the
underlying security will be offset partially by the amount of the premium paid
for the put option and any related transaction costs. Prior to its expiration, a
put option may be sold in a closing sale transaction; profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction cost. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. In certain circumstances, the Fund may purchase
call options on securities held in its portfolio on which it has written call
options or on securities which it intends to purchase. The Fund may purchase
either exchange-traded options or OTC options. The Fund will not purchase
options on securities (including stock index options discussed below) if as a
result of such purchase, the aggregate cost of all outstanding options on
securities held by the Fund would exceed 5% of the market value of the Fund's
total assets.

Stock Index Futures and Options and Financial Futures. As described in the
Prospectus, the Fund is authorized to engage in transactions in stock index
futures and options and financial futures, and related options on such futures.
Set forth below is further information concerning futures transactions.

A financial futures contract is an agreement between two parties to buy and
sell a security, or, in the case of an index-based financial futures contract,
to make and accept a cash settlement for a set price on a future date. A
majority of transactions in financial futures contracts, however, do not result
in the actual delivery of

4
<PAGE> 82

the underlying instrument or cash settlement, but are settled through
liquidation, i.e., by entering into an offsetting transaction.

The purchase or sale of a financial 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 financial 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 financial futures
contract fluctuates, making the long and short positions in the financial
futures contract more or less valuable, a process known as "mark to the market".
At any time prior to the settlement date of the financial futures contract, the
position may be closed out by taking an opposite position which will operate to
terminate the position in the financial 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.

An order has been obtained from the Commission exempting the Fund 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 financial futures contracts. Section 17(f) relates to the
custody of securities and other assets of an investment company and may be
deemed to prohibit certain arrangements between the 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 Fund from
issuing a "senior security" other than a borrowing from a bank. The staff of the
Commission has in the past indicated that a financial futures contract may be a
"senior security" under the Investment Company Act.

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

Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange for call or put options of the same
series. The Fund will enter into an option or futures transaction on an exchange
only if there appears to be a liquid secondary market for such option or future.
However, there can be no assurance that a liquid secondary market will exist for
any particular call or put option or financial futures contract at any specific
time. Thus, it may not be possible to close an option or futures position. The
Fund will acquire only over-the-counter options for which management believes
(i) the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option)
unless there is only one dealer, in which case such dealer's price will be used,
or (ii) can be sold at a formula price provided for in the over-the-counter
option agreement. In the case of a futures position or an option on a futures
position written by the Fund, in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin.
In such situations, if the Fund has insufficient cash,

5
<PAGE> 83

it may have to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Fund may be required to take or make delivery of the security or currency
underlying the financial futures contracts it holds. The inability to close
futures and options positions also could have an adverse impact on the Fund's
ability to hedge effectively its portfolio.

There also is 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 or related option. The risk of loss from investing in futures
transactions is theoretically unlimited.

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

Forward Foreign Exchange Transactions. Generally, the foreign exchange
transactions of the Fund will be conducted on a spot, i.e., cash, basis at the
spot rate for purchasing or selling currency prevailing in the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than 1/10 of 1% due to the costs of
converting from one currency to another. However, the Fund has authority to deal
in forward foreign exchange between currencies of the different countries in
whose securities it will invest as a hedge against possible variations in the
foreign exchange rates between these currencies. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. The Fund's dealings in
forward foreign exchange will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or payables of
the Fund accruing in connection with the purchase and sale of its portfolio
securities, the sale and redemption of shares of the Fund or the payment of
dividends by the Fund. Position hedging is the sale of forward foreign currency
with respect to portfolio security positions denominated or quoted in such
foreign currency. The Fund will not speculate in forward foreign exchange. The
Fund may not position hedge with respect to the currency of a particular country
to an extent greater than the aggregate market value (at the time of making such
sale) of the securities held in its portfolio denominated or quoted in that
particular foreign currency. If the Fund enters into a position hedging
transaction, its custodian will place cash or liquid debt securities in a
separate account of the Fund in an amount equal to the value of the Fund's total
assets committed to the consummation of such forward contract. If the value of
the securities placed in the separate account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's commitment with respect to such contracts. The
Fund will not enter into a position hedging commitment if, as a result thereof,
the Fund would have more than 15% of the value of its total assets committed to
such contracts. The Fund will not enter into a forward contract with a term of
more than one year.

The Fund also is authorized to purchase or sell listed or over-the-counter
foreign currency options, foreign currency futures and related options on
foreign currency futures as a short or long hedge against possible

6
<PAGE> 84

variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-U.S. dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund. As an illustration, the Fund may use such techniques to
hedge the stated value in U.S. dollars of an investment in a pound denominated
security. In such circumstances, for example, the Fund may purchase a foreign
currency put option enabling it to sell a specified amount of pounds for dollars
at a specified price by a future date. To the extent the hedge is successful, a
loss in the value of the pound relative to the dollar will tend to be offset by
an increase in the value of the put option. To offset, in whole or part, the
cost of acquiring such a put option, the Fund also may sell a call option which,
if exercised, requires it to sell a specified amount of pounds for dollars at a
specified price by a future date (a technique called a "straddle"). By selling
such call option in this illustration, the Fund gives up the opportunity to
profit without limit from increases in the relative value of the pound to the
dollar. The Manager believes that "straddles" of the type which may be utilized
by the Fund constitute hedging transactions and are consistent with the policies
described above.

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

OTHER INVESTMENT POLICIES AND PRACTICES

Non-Diversified Status. The Fund is classified as non-diversified within
the meaning of the Investment Company Act, which means that the Fund is not
limited by such Act in the proportion of its assets that it may invest in
securities of a single issuer. The Fund's investments are limited, however, in
order to qualify as a "regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended (the "Code"). See "Taxes". To qualify,
the Fund complies with certain requirements, including limiting its investments
so that at the close of each quarter of the taxable year (i) not more than 25%
of the market value of the Fund's total assets will be invested in the
securities of a single issuer and (ii) with respect to 50% of the market value
of its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer, and the Fund will not own
more than 10% of the outstanding voting securities of a single issuer. A fund
which elects to be classified as "diversified" under the Investment Company Act
must satisfy the foregoing 5% and 10% requirements with respect to 75% of its
total assets. To the extent that the Fund assumes large positions in the
securities of a small number of issuers, the Fund's net asset value may
fluctuate to a greater extent than that of a diversified company as a result of
changes in the financial condition or in the market's assessment of the issuers,
and the Fund may be more susceptible to any single economic, political or
regulatory occurrence than a diversified company.

7
<PAGE> 85

Although the Fund has not established any limit on the percentage of its assets
that may be committed in connection with such transactions, the Fund will
maintain a segregated account with its custodian of cash, cash equivalents, U.S.
Government securities or other high grade liquid debt securities denominated in
U.S. dollars or non-U.S. currencies in an aggregate amount equal to the amount
of its commitment in connection with such purchase transactions.

There can be no assurance that the securities subject to a standby
commitment will be issued, and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance of
the security underlying the commitment is at the option of the issuer, the Fund
may bear the risk of a decline in the value of such security and may not benefit
from an appreciation in the value of the security during the commitment period.

8
<PAGE> 86

Such agreements usually cover short periods, such as under one week. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred to the purchaser. In the case of a
repurchase agreement, as a purchaser, the Fund will require the seller to
provide additional collateral if the market value of the securities falls below
the repurchase price at any time during the term of the repurchase agreement;
the Fund does not have the right to seek additional collateral in the case of
purchase and sale contracts. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs or possible losses in connection with the
disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or under a purchase and sale contract, instead of the
contractual fixed rate, the rate of return to the Fund would be dependent upon
intervening fluctuations of the market values of such securities and the accrued
interest on the securities. In such event, the Fund would have rights against
the seller for breach of contract with respect to any losses arising from market
fluctuations following the failure of the seller to perform. Repurchase
agreements and purchase and sale contracts maturing in more than seven days are
deemed to be illiquid by the Securities and Exchange Commission and are
therefore subject to the Fund's investment restriction limiting investments in
securities that are not readily marketable to 15% of the Fund's total assets.
(However, under the law of certain states, the Fund presently is limited with
respect to such investments to 10% of its total assets.) See "Investment
Restrictions" below.

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

INVESTMENT RESTRICTIONS

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

9
<PAGE> 87

meeting at which more than 50% of the outstanding shares are represented or (ii)
more than 50% of the outstanding shares). The Fund may not:

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

2. Make investments for the purpose of exercising control or
management. Investments by the Fund in wholly-owned investment entities
created under the laws of certain countries will not be deemed to be the
making of 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 and repurchase agreements and purchase and
sale contracts and 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 this
Prospectus and the 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 the Fund (i) 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) may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities and (iv) 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 the Prospectus and this
Statement of Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales, when-issued and
forward commitment transactions and similar investment strategies.

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

8. Purchase or sell commodities or contracts on commodities, except to
the extent 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 the Fund registering as a commodity
pool operator under the Commodity Exchange Act.

Under the non-fundamental investment restrictions, the Fund may not:

a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently allows the Fund to purchase the securities of other investment
companies if immediately thereafter not more than (i) 3% of the total
outstanding voting

10
<PAGE> 88

stock of such company is owned by the Fund, (ii) 5% of the Fund's total
assets, taken at market value, would be invested in any one such company,
(iii) 10% of the Fund's total assets, taken at market value, would be
invested in such securities, and (iv) the Fund, together with other
investment companies having the same investment adviser and companies
controlled by such companies, owns not more than 10% of the total
outstanding stock of any one closed-end investment company. Investments by
the Fund in wholly-owned investment entities created under the laws of
certain countries will not be deemed an investment in other investment
companies.

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

c. Invest in securities which cannot be readily resold because of
legal or contractual restrictions, or which cannot otherwise be marketed,
redeemed, put to the issuer or to a third party, if at the time of
acquisition more than 15% of its total assets would be invested in such
securities. This restriction shall not apply to securities which mature
within seven days or securities which the Board of Directors of the Fund
has otherwise determined to be liquid pursuant to applicable law.
Notwithstanding the 15% limitation herein, to the extent that the laws of
any state in which the Fund's shares are registered or qualified for sale
require a lower limitation, the Fund will observe such limitation. As of
the date hereof, therefore, the Fund will not invest more than 10% of its
total assets in securities which are subject to this investment restriction
(c). Securities purchased in accordance with Rule 144A under the Securities
Act (each, a "Rule 144A security") and determined to be liquid by the Board
of Directors are not subject to the limitations set forth in this
investment restriction (c).

d. Invest in warrants if, at the time of acquisition, its investments
in warrants, valued at the lower of cost or market value, would exceed 5%
of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange or a major
foreign exchange. For purposes of this restriction, warrants acquired by
the Fund in units or attached to securities may be deemed to be without
value.

e. Invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, if more
than 5% of the Fund's total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities,
asset-backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.

f. Purchase or retain the securities of any issuer, if those
individual officers and directors of the Fund, the officers and general
partner of the Manager, the directors of such general partner or the
officers and directors of any subsidiary thereof each owning beneficially
more than one-half of one percent of the securities of such issuer own in
the aggregate more than 5% of the securities of such issuer.

g. Invest in real estate limited partnership interests or interests in
oil, gas or other mineral leases or exploration or development programs,
except that the Fund may invest in securities issued by companies that
engage in oil, gas or other mineral exploration or development activities.

h. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof, except to the extent permitted in the Prospectus and
this Statement of Additional Information, as amended from time to time.

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<PAGE> 89

i. Notwithstanding fundamental investment restriction (6) above,
borrow money or pledge its assets, except that the Fund (a) may borrow from
a bank as a temporary measure for extraordinary or emergency purposes or to
meet redemptions in amounts not exceeding 33 1/3% (taken at market value)
of its total assets and pledge its assets to secure such borrowings, (b)
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (c) may purchase securities
on margin to the extent permitted by applicable law. However, at the
present time, applicable law prohibits the Fund from purchasing securities
on margin. The deposit or payment by the Fund of initial or variation
margin in connection with financial futures contracts or options
transactions is not considered to be the purchase of a security on margin.
The purchase of securities while borrowings are outstanding will have the
effect of leveraging the Fund. Such leveraging or borrowing increases the
Fund's exposure to capital risk, and borrowed funds are subject to interest
costs which will reduce net income. The Fund will not purchase securities
while borrowings exceed 5% of its total assets.

Portfolio securities of the Fund generally may not be purchased from, sold
or loaned to the Manager or its affiliates or any of their directors, officers
or employees, acting as principal, unless pursuant to a rule or exemptive order
under the Investment Company Act.

The staff of the Commission has taken the position that purchased OTC
options and the assets used as cover for written OTC options are illiquid
securities. Therefore, the Fund has adopted an investment policy pursuant to
which it will not purchase or sell OTC options if, as a result of any such
transaction, the sum of the market value of OTC options currently outstanding
which are held by the Fund, the market value of the underlying securities
covered by OTC call options currently outstanding which were sold by the Fund
and margin deposits on the Fund's existing OTC options on financial futures
contracts exceeds 15% of the total assets of the Fund, taken at market value,
together with all other assets of the Fund which are illiquid or are not
otherwise readily marketable. (Under the law of certain states, the Fund
presently is limited with respect to such investments to 10% of its net assets.)
However, if the OTC option is sold by the Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Fund has the unconditional contractual right to repurchase such OTC option from
the dealer at a predetermined price, then the Fund will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money" (i.e., current market value of the
underlying securities minus the option's strike price). The repurchase price
with the primary dealers is typically a formula price which is generally based
on a multiple of the premium received for the option, plus the amount by which
the option is "in-the-money". This policy as to OTC options is not a fundamental
policy of the Fund and may be amended by the Board of Directors of the Fund
without the approval of the Fund's shareholders. However, the Fund will not
change or modify this policy prior to the change or modification by the
Commission staff of its position.

In addition, as a non-fundamental policy which may be changed by the Board
of Directors and to the extent required by the Commission or its staff, the Fund
will, for purposes of investment restriction (1), treat securities issued or
guaranteed by the government of any one foreign country as the obligations of a
single issuer.

As another non-fundamental policy, the Fund will not invest in securities
which are (a) subject to material legal restrictions on repatriation of assets
or (b) cannot be readily resold because of legal or contractual restrictions or
which are not otherwise readily marketable, including repurchase agreements and

12
<PAGE> 90

purchase and sale contracts maturing in more than seven days, if, regarding all
such securities, more than 15% of its total assets, taken at market value would
be invested in such securities.

Because of the affiliation of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") with the Fund, the Fund is prohibited from
engaging in certain transactions involving such firm or its affiliates except
for brokerage transactions permitted under the Investment Company Act involving
only usual and customary commissions or transactions pursuant to an exemptive
order under the Investment Company Act. See "Portfolio Transactions and
Brokerage". Without such an exemptive order, the Fund would be prohibited from
engaging in portfolio transactions with Merrill Lynch or its affiliates acting
as principal and from purchasing securities in public offerings which are not
registered under the Securities Act in which such firms or any of their
affiliates participate as an underwriter or dealer.

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The Directors and executive officers of the Fund, their ages and their
principal occupations for at least the last five years are set forth below.
Unless otherwise noted, the address of each executive officer and Director is
P.O. Box 9011, Princeton, New Jersey 08543-9011.

ARTHUR ZEIKEL (63) -- President and Director(1)(2) -- President of the
Manager (which term as used herein includes its corporate predecessors) since
1977; President of Fund Asset Management, L.P. ("FAM") (which term as used
herein includes its corporate predecessors) since 1977; President and Director
of Princeton Services, Inc. ("Princeton Services") since 1993; Executive Vice
President of Merrill Lynch & Co., Inc. ("ML & Co.") since 1990; Director of
Merrill Lynch Funds Distributor, Inc. (the "Distributor").

DONALD CECIL (69) -- Director(2) -- 1114 Avenue of the Americas, New York,
New York 10036. Special Limited Partner of Cumberland Partners (investment
partnership) since 1982; Member of Institute of Chartered Financial Analysts;
Member and Chairman of Westchester County (N.Y.) Board of Transportation.

EDWARD H. MEYER (69) -- Director(2) -- 777 Third Avenue, New York, New York
10017. President of Grey Advertising, Inc. since 1968, Chief Executive Officer
since 1970 and Chairman of the Board of Directors since 1972; Director of The
May Department Stores Company, Bowne & Co., Inc. (financial printers), Ethan
Allen Interiors, Inc. and Harman International Industries, Inc.

CHARLES C. REILLY (64) -- Director(2) -- 9 Hampton Harbor Road, Hampton
Bays, N.Y. 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Partner, Small
Cities Cablevision, Inc.

RICHARD R. WEST (58) -- Director(2) -- Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, New York University
Leonard N. Stern School of Business Administration; Director of Bowne & Co.,
Inc. (financial printers), Vornado, Inc. (real estate holding company), Smith-
Corona Corporation (manufacturer of typewriters and word processors) and
Alexander's Inc. (real estate company).

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<PAGE> 91

EDWARD D. ZINBARG (61) -- Director(2) -- 5 Hardwell Road, Short Hills, New
Jersey 07078-2117. Executive Vice President of The Prudential Insurance Company
of America from 1988 to 1994; former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.

TERRY K. GLENN (55) -- Executive Vice President(1)(2) -- Executive Vice
President of the Manager and FAM since 1983; Executive Vice President and
Director of Princeton Services since 1993; President of the Distributor since
1986 and Director thereof since 1991; President of Princeton Administrators,
L.P. since 1988.

NORMAN R. HARVEY (62) -- Senior Vice President(1)(2) -- Senior Vice
President of the Manager and FAM since 1982; Senior Vice President of Princeton
Services since 1993.

DONALD C. BURKE (35) -- Vice President(1)(2) -- Vice President and Director
of Taxation of the Manager and FAM since 1990; employee of Deloitte & Touche LLP
from 1982 to 1990.

GRACE PINEDA (39) -- Vice President(1) -- Vice President of the Manager and
Senior Portfolio Manager since 1989; analyst and portfolio manager with Clemente
Capital, Inc. from 1982 to 1989.

GERALD M. RICHARD (46) -- Treasurer(1)(2) -- Senior Vice President and
Treasurer of the Manager and FAM since 1984; Senior Vice President and Treasurer
of Princeton Services since 1993; Vice President of the Distributor since 1981
and Treasurer since 1984.

MICHAEL J. HENNEWINKEL (43) -- Secretary(1)(2) -- Vice President of the
Manager and FAM since 1985; attorney associated with the Manager and FAM since
1982.

JAMES W. HARSHAW (37) -- Assistant Secretary(1)(2) -- Attorney associated
with the Manager and FAM since 1994; associate at a law firm from 1990 to 1994;
judicial law clerk for the United States Court of Appeals for the Third Circuit
from 1989 to 1990.

- ---------------
(1) Interested person, as defined in the Investment Company Act, of the Fund.

(2) Such Director or officer is a director, trustee or officer of certain other
investment companies for which the Manager, or an affiliate, FAM, acts as
investment adviser or manager.

At March 1, 1996, the Directors and 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 Director and officer of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML & Co.

COMPENSATION OF DIRECTORS

The Fund pays each Director who is not affiliated with the Manager (each, a
"non-affiliated Director") a fee of $3,500 per year plus $500 per Board meeting
attended, together with such Director's actual out-of-pocket expenses relating
to attendance at meetings. The Fund also compensates members of its Audit and
Nominating Committee, which consists of all of the non-affiliated Directors, at
a rate of $500 per meeting attended. The Chairman of the Audit and Nominating
Committee receives an additional fee of $250 per meeting attended. For the
period December 30, 1994 (commencement of operations) to November 30, 1995, fees
and expenses paid to such non-affiliated Directors aggregated $38,234.

14
<PAGE> 92

The following table sets forth for the period from December 30, 1994
(commencement of operations) to November 30, 1995 compensation paid by the Fund
to the non-affiliated Directors, and for the calendar year ended December 31,
1995, the aggregate compensation paid by all registered investment companies
advised by the Manager and an affiliate, FAM ("MLAM/FAM-Advised Funds"), to the
non-affiliated Directors.

<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
PENSION OR RETIREMENT FROM FUND AND
BENEFITS ACCRUED AS OTHER MLAM/FAM
COMPENSATION PART OF FUND ADVISED FUNDS
NAME OF DIRECTOR FROM FUND EXPENSES PAID TO DIRECTORS(1)
- ------------------------------------ ------------ --------------------- -----------------------
<S> <C> <C> <C>
Donald Cecil........................ $ 8,500 None $ 271,850
Edward H. Meyer..................... $ 7,500 None $ 239,225
Charles C. Reilly................... $ 7,500 None $ 269,600
Richard R. West..................... $ 7,500 None $ 294,600
Edward D. Zinbarg................... $ 7,000 None $ 155,063
</TABLE>

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

(1) In addition to the Fund, the Directors serve on the boards of other
MLAM/FAM-Advised Funds as follows: Mr. Cecil (35 funds and portfolios); Mr.
Meyer (35 funds and portfolios); Mr. Reilly (54 funds and portfolios); Mr.
West (54 funds and portfolios); and Mr. Zinbarg (17 funds and portfolios).

MANAGEMENT AND ADVISORY ARRANGEMENTS

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

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

The Fund has entered into a management agreement (the "Management
Agreement") with the Manager. As described in the Prospectus, the Manager
receives for its services to the Fund monthly compensation at the annual rate of
1.00% of the average daily net assets of the Fund. For the period December 30,
1994 (commencement of operations) to November 30, 1995 the total investment
advisory fees paid by the Fund to the Manager aggregated $95,530.

The State of California imposes limitations on the expenses of the Fund.
These expense limitations require that the Manager reimburse the Fund in an
amount necessary to prevent the ordinary operating expenses of the Fund
(excluding interest, taxes, distribution fees, brokerage fees and commissions
and extraordinary charges such as litigation costs) from exceeding in any fiscal
year 2.5% of the Fund's first $30 million of average daily net assets, 2.0% of
the next $70 million of average daily net assets and 1.5% of the remaining
average daily net assets. The Manager's obligation to reimburse the Fund is
limited to the amount

15
<PAGE> 93

of the management fee. No fee payment will be made to the Manager during any
fiscal year which will cause such expenses to exceed the most restrictive
expense limitation applicable at the time of such payment.

The Fund has received an order from the State of California partially
waiving the expense limitations described above. Pursuant to the terms of such
waiver, the expense limitations that otherwise would apply are waived to the
extent that the Fund's expenses for management and auditing fees exceed the
average of such fees of a group of mutual funds managed by the Manager or an
affiliate, FAM, which primarily invest domestically.

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 Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the fees of
all Directors of the Fund who are affiliated persons of ML & Co. or any of its
affiliates. The Fund pays all other expenses incurred in the operation of the
Fund, including, among other things, taxes; expenses for legal and auditing
services; costs of printing proxies, stock certificates, shareholder reports and
prospectuses and statements of additional information (except to the extent paid
by the Distributor); charges of the custodian, any sub-custodian and transfer
agent; expenses of redemption of shares; Commission fees; expenses of
registering the shares under Federal, state or foreign laws; fees and expenses
of unaffiliated Directors; accounting and pricing costs (including the daily
calculation of net asset value); insurance; interest; brokerage costs;
litigation and other extraordinary or non-recurring expenses; and other expenses
properly payable by the Fund. Accounting services are provided to the Fund by
the Manager, and the Fund reimburses the Manager for its costs in connection
with such services on a semi-annual basis. For the period December 30, 1994
(commencement of operations) to November 30, 1995 the Fund reimbursed the
Manager $42,157 for accounting services. The Distributor will pay certain
promotional expenses of the Fund incurred in connection with the offering of its
shares. Certain expenses will be financed by the Fund pursuant to distribution
plans in compliance with Rule 12b-1 under the Investment Company Act. See
"Purchase of Shares -- Distribution Plans".

The Manager is a limited partnership, the partners of which are ML & Co.
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 below, the
Management Agreement will continue in effect for a period of two years from the
date of execution and will remain in effect from year to year thereafter if
approved annually (a) by the Board of Directors of the Fund or by a majority of
the outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contracts or "interested persons" (as defined in the
Investment Company Act) of any such party. Such contracts are not assignable and
may be terminated without penalty on 60 days' written notice at the option of
either party thereto or by the vote of a majority of the shareholders of the
Fund.

PURCHASE OF SHARES

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

16
<PAGE> 94

The Fund issues four classes of shares under the Merrill Lynch Select
PricingSM System: shares of Class A and Class D are sold to investors choosing
the initial sales charge alternatives, and shares of Class B and Class C are
sold to investors choosing the deferred sales charge alternatives. Each Class A,
Class B, Class C and Class D share represents an identical interest in the
investment portfolio of the Fund, and has the same rights, except that Class B,
Class C and Class D shares bear the expenses of the ongoing account maintenance
fees, and Class B and Class C shares bear the expenses of the ongoing
distribution fees and the additional incremental transfer agency costs resulting
from the deferred sales charge arrangements. Class B, Class C and Class D shares
each have exclusive voting rights with respect to the Rule 12b-1 distribution
plan adopted with respect to such class pursuant to which account maintenance
and/or distribution fees are paid.

The Merrill Lynch Select PricingSM System is used by more than 50 mutual
funds advised by the Manager or an affiliate, FAM. Funds advised by the Manager
or FAM which utilize the Merrill Lynch Select PricingSM System are referred to
herein as "MLAM-advised mutual funds".

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

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

There were no gross sales charges for the sale of Class A shares for the
period December 30, 1994 (commencement of operations) to November 30, 1995. The
gross sales charges for the sale of Class D shares for such period were $13,813,
of which the Distributor received $1,003 and Merrill Lynch received $12,810.

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

Closed-End Fund Investment Option. Class A shares of the Fund and of other
MLAM-advised mutual funds ("Eligible Class A Shares") are offered at net asset
value to shareholders of certain closed-end funds advised by MLAM or FAM who
purchased such closed-end funds prior to October 21, 1994, the date the

17
<PAGE> 95

Merrill Lynch Select PricingSM 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 the sale of
their closed-end fund shares are offered Class A shares (if eligible to buy
Class A shares) or Class D shares of the Fund and other MLAM-advised mutual
funds ("Eligible Class D Shares") if the following conditions are met. First,
the sale of the closed-end fund shares must be made through Merrill Lynch, and
the net proceeds therefrom must be reinvested immediately in Eligible Class A
Shares 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 maintained continuously in a
Merrill Lynch securities account. Fourth, there must be a minimum purchase of
$250 to be eligible for the investment option. Class A shares of the Fund are
offered at net asset value to shareholders of Merrill Lynch Senior Floating Rate
Fund, Inc. ("Senior Floating Rate Fund") who wish to reinvest the net proceeds
from a sale of certain of their shares of common stock of Senior Floating Rate
Fund in shares of the Fund. In order to exercise this investment option, Senior
Floating Rate Fund shareholders must sell their Senior Floating Rate Fund shares
to the Senior Floating Rate Fund in connection with a tender offer conducted by
Senior Floating Rate Fund and reinvest the proceeds immediately in the Fund.
This investment option is available only with respect to the proceeds of Senior
Floating Rate Fund shares as to which no Early Withdrawal Charge (as defined in
the Senior Floating Rate Fund's prospectus) is applicable. Purchase orders from
Senior Floating Rate Fund shareholders wishing to exercise this investment
option will be accepted only on the day that the related Senior Floating Rate
Fund tender offer terminates and will be effected at the net asset value of the
Fund at such day. Shareholders of certain MLAM-advised continuously offered
closed-end funds may reinvest at net asset value the net proceeds from a sale of
certain shares of common stock of such funds in shares of the Fund. Upon
exercise of this investment option, shareholders of Merrill Lynch Senior
Floating Rate Fund, Inc. will receive Class A shares of the Fund and
shareholders of Merrill Lynch Municipal Strategy Fund, Inc. and Merrill Lynch
High Income Municipal Bond Fund, Inc. will receive Class D shares of the Fund.
In order to exercise this investment option, a shareholder of one of the
above-referenced continuously offered closed-end funds (an "eligible fund") must
sell his or her shares of common stock of the eligible fund (the "eligible
shares") back to the eligible fund in connection with a tender offer conducted
by the eligible fund and reinvest the proceeds immediately in the designated
class of shares of the Fund. This investment option is available only with
respect to eligible shares as to which no Early Withdrawal Charge or CDSC (each
as defined in the eligible fund's prospectus) is applicable. Purchase orders
from eligible fund shareholders wishing to exercise this investment option will
be accepted only on the day that the related tender offer terminates and will be
effected at the net asset value of the designated class of the Fund on such day.

REDUCED INITIAL SALES CHARGES

Right of Accumulation. Reduced sales charges are applicable through a
right of accumulation under which eligible investors are permitted to purchase
shares of the Fund subject to an initial sales charge at the offering price
applicable to the total of (a) the dollar amount then being purchased plus (b)
an amount equal to the then current net asset value or cost, whichever is
higher, of the purchaser's combined holdings of all classes of shares of the
Fund and of any other MLAM-advised mutual funds. For any such right of
accumulation to be made available, the Distributor must be provided at the time
of purchase, by the purchaser

18
<PAGE> 96

or the purchaser's securities dealer, with sufficient information to permit
confirmation of qualification, and acceptance of the purchase order is subject
to such confirmation. The right of accumulation may be amended or terminated at
any time.

Letter of Intention. Reduced sales charges are applicable to purchases
aggregating $25,000 or more of Class A or Class D shares of the Fund or any
other MLAM-advised mutual fund made within a 13-month period starting with the
first purchase pursuant to a Letter of Intention in the form provided in the
Prospectus. The Letter of Intention is available only to investors whose
accounts are maintained at the Fund's transfer agent. The Letter of Intention is
not available to employee benefit plans for which Merrill Lynch provides
plan-participant recordkeeping services. The Letter of Intention is not a
binding obligation to purchase any amount of Class A or Class D shares; however,
its execution will result in the purchaser paying a lower sales charge at the
appropriate quantity purchase level. A purchase not originally made pursuant to
a Letter of Intention may be included under a subsequent Letter of Intention
executed within 90 days of such purchase if the Distributor is informed in
writing of this intent within such 90-day period. The value of Class A or Class
D shares of the Fund and of other MLAM-advised mutual funds presently held, at
cost or maximum offering price (whichever is higher), on the date of the first
purchase under the Letter of Intention, may be included as a credit toward
completion of such Letter, but the reduced sales charge applicable to the amount
covered by such Letter will be applied only to new purchases. If the total
amount of shares does not equal the amount stated in the Letter of Intention
(minimum of $25,000), the investor will be notified and must pay, within 20 days
of the expiration of such Letter, the difference between the sales charge on the
Class A or Class D shares purchased at the reduced rate and the sales charge
applicable to the shares actually purchased through the Letter. Class A or Class
D shares equal to five percent of the intended amount will be held in escrow
during the 13-month period (while registered in the name of the purchaser) for
this purpose. The first purchase under the Letter of Intention must be at least
five percent of the dollar amount of such Letter. If a purchase during the term
of such Letter otherwise would 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 reduced percentage sales charge which
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 charges on any previous purchase.

The value of any shares redeemed or otherwise disposed of by the purchaser
prior to termination or completion of the Letter of Intention will be deducted
from the total purchases made under such Letter.

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

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

19
<PAGE> 97

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 also are offered at net asset value, without a
sales charge, to an investor who has a business relationship with a Merrill
Lynch financial consultant and who has invested in a mutual fund 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 who has a business relationship with a Merrill Lynch
financial consultant and who has invested in a mutual fund for which Merrill
Lynch has not served as a selected dealer, if the following conditions are
satisfied: first, the investor must advise Merrill Lynch that it will purchase
Class D shares of the Fund with proceeds from a 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.

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

Acquisition of Certain Investment Companies. The public offering price of
Class D shares may be reduced to the net asset value per Class D share in
connection with the acquisition of the assets of or merger or consolidation with
a public or private investment company. The value of the assets or company
acquired in a tax-free transaction may be adjusted in appropriate cases to
reduce possible adverse tax consequences to the Fund which might result from an
acquisition of assets having net unrealized appreciation which is
disproportionately higher at the time of acquisition than the realized or
unrealized appreciation of the Fund. 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 which (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 at all times shall 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.

EMPLOYER-SPONSORED RETIREMENT OR SAVINGS PLANS AND CERTAIN OTHER ARRANGEMENTS

Certain employer-sponsored retirement or savings plans and certain other
arrangements may purchase Class A or Class D shares at net asset value, based on
the number of employees or number of employees eligible to participate in the
plan, the aggregate amount invested by the plan in specified investments and/or

20
<PAGE> 98

the services provided by Merrill Lynch to the plan. Certain other plans may
purchase Class B shares with a waiver of the CDSC upon redemption, based on
similar criteria. Such Class B shares will convert into Class D shares
approximately ten years after the plan purchases the first share of any
MLAM-advised mutual fund. Minimum purchase requirements may be waived or varied
for such plans. Additional information regarding purchases by employer-sponsored
retirement or savings plans and certain other arrangements is available toll-
free from Merrill Lynch Business Financial Services at (800) 237-7777.

DISTRIBUTION PLANS

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

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

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

21
<PAGE> 99

voluntarily has 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, payments in excess of the amount
payable under the NASD formula will not be made.

The following table sets forth comparative information as of November 30,
1995, indicating the maximum allowable payments that can be made under the NASD
maximum sales charge rule with respect to Class B and Class C shares and the
Distributor's voluntary maximum with respect to Class B shares for the period
indicated.

<TABLE>
<CAPTION>
DATA CALCULATED AS OF NOVEMBER 30, 1995
CLASS B SHARES, FOR THE ------------------------------------------------------------------------------------------
PERIOD ANNUAL
DECEMBER 30, 1994 ALLOWABLE ALLOWABLE AMOUNTS DISTRIBUTION
(COMMENCEMENT OF ELIGIBLE AGGREGATE INTEREST MAXIMUM PREVIOUSLY AGGREGATE FEE AT CURRENT
OPERATIONS) GROSS SALES ON UNPAID AMOUNT PAID TO UNPAID NET ASSET
TO NOVEMBER 30, 1995: SALES(1) CHARGES BALANCE(2) PAYABLE DISTRIBUTOR(3) BALANCE LEVEL(4)
- -------------------------- -------- --------- ------------- ------- -------------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule
as Adopted.............. $8,375 $ 523 $42 $ 565 $ 72 $ 493 $ 58
Under Distributor's
Voluntary Waiver........ $8,375 $ 523 $42 $ 565 $ 72 $ 493 $ 58
</TABLE>

<TABLE>
<CAPTION>
CLASS C SHARES, FOR THE
PERIOD
DECEMBER 30, 1994
(COMMENCEMENT OF
OPERATIONS)
TO NOVEMBER 30, 1995: (IN THOUSANDS)
- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Under NASD Rule
as Adopted.............. $1,004 $ 63 $ 5 $ 68 $ 8 $ 60 $ 8
</TABLE>

- ---------------
(1) Purchase price of all eligible Class B and Class C shares sold since
December 30, 1994 (commencement of the Fund's operations) other than shares
acquired through dividend reinvestment.

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

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

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

REDEMPTION OF SHARES

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

The right to redeem shares or to receive payment with respect to any such
redemption may be suspended for more than seven days only for periods during
which trading on the New York Stock Exchange is restricted as determined by the
Securities and Exchange Commission or such Exchange is closed (other than
customary

22
<PAGE> 100

weekend and holiday closings), for any period during which an emergency exists,
as defined by the Securities and Exchange 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 Securities
and Exchange Commission by order may permit for the protection of shareholders
of the Fund.

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

DEFERRED SALES CHARGES -- CLASS B AND CLASS C SHARES

As discussed in the Prospectus under "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares", while Class B shares
redeemed within four years of purchase are subject to a CDSC under most
circumstances, the charge is waived on redemptions of Class B shares in
connection with certain post-retirement withdrawals from an Individual
Retirement Account ("IRA") or other retirement plan or following the death or
disability of a Class B shareholder. Redemptions for which the waiver applies
are: (a) any partial or complete redemption in connection with a tax-free
distribution following retirement under a tax-deferred retirement plan or
attaining age 59 1/2 in the case of an IRA or other retirement plan, or part of
a series of equal periodic payments (not less frequently than annually) made for
the life (or life expectancy) or any redemption resulting from the tax-free
return of an excess contribution to an IRA; or (b) any partial or complete
redemption following the death or disability (as defined in the Code) of a Class
B shareholder (including one who owns the Class B shares as joint tenant with
his or her spouse), provided that the redemption is requested within one year of
the death or initial determination of disability. For the period December 30,
1994 (commencement of operations) to November 30, 1995, the Distributor received
CDSCs of $20,279 with respect to redemptions of Class B shares, all of which was
paid to Merrill Lynch. For the period December 30, 1994 (commencement of
operations) to November 30, 1995, the Distributor received CDSCs of $800 with
respect to redemptions of Class C shares, all of which was paid to Merrill
Lynch.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to policies established by the Board of Directors of the Fund, the
Manager is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. In executing such transactions,
the Manager seeks to obtain the best net results for the Fund, taking into
account such factors as price (including the applicable brokerage commission or
dealer spread), size of order, difficulty of execution and operational
facilities of the firm involved and the firm's risk in positioning a block of
securities. While the Manager generally seeks reasonably competitive commission
rates, the Fund does not necessarily pay the lowest commission or spread
available. The Fund has no obligation to deal with any broker or group of
brokers in execution of transactions in portfolio securities. Subject to
obtaining the best price and execution, brokers who provide supplemental
investment research to the Manager, including Merrill Lynch, 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 the
Management Agreement and the expenses of the Manager will not necessarily be
reduced as a result of the receipt of such supplemental information. It is
possible that certain supplementary investment research so received will
primarily benefit one or more other investment companies or other accounts for
which investment discretion is exercised. Conversely, the Fund may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other accounts or investment companies.
In addition, consistent with the Rules of Fair Practice of the

23
<PAGE> 101

NASD and policies established by the Board of Directors of the Fund, 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.

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

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

The Fund may invest in securities traded in the over-the-counter markets
and intends to deal directly with the dealers who make markets in the securities
involved except in those circumstances where better prices and execution are
available elsewhere. Under the Investment Company Act, persons affiliated with
the Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of
securities unless a permissive order allowing such transactions is obtained from
the Securities and Exchange Commission. Since transactions in the
over-the-counter market usually involve transactions with dealers acting as
principal for their own account, the Fund will not deal with affiliated persons,
including Merrill Lynch and its affiliates, in connection with such
transactions. However, affiliated persons of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis provided that, among
other things, the fee or commission received by such affiliated broker is
reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. See "Investment Objective
and Policies -- Investment Restrictions".

The Fund's ability and decisions to purchase or sell portfolio securities
may be affected by laws or regulations relating to the convertibility and
repatriation of assets. Because the shares of the Fund are redeemable on a daily
basis in U.S. dollars, the Fund intends to manage its portfolio so as to give
reasonable assurance that it will be able to obtain U.S. dollars to the extent
necessary to meet anticipated redemptions. Under present conditions, it is not
believed that these considerations will have any significant effect on its
portfolio strategies.

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

Section 11(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), generally prohibits members of the U.S. national
securities exchanges from executing exchange transactions for their affiliates
and institutional accounts which they manage unless the member (i) has obtained
prior

24
<PAGE> 102

express authorization from the account to effect such transactions, (ii) at
least annually furnishes the account with the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules the
Securities and Exchange Commission has prescribed with respect to the
requirements of clauses (i) and (ii). To the extent Section 11(a) would apply to
Merrill Lynch acting as a broker for the Fund in any of its portfolio
transactions executed on any such securities exchange of which it is a member,
appropriate consents have been obtained from the Fund and annual statements as
to aggregate compensation will be provided to the Fund.

DETERMINATION OF NET ASSET VALUE

The net asset value of the shares of 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 New York Stock Exchange (generally, 4:00 P.M., New York
time), on each day during which the New York Stock Exchange is open for trading.
The New York Stock Exchange is not open on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the prevailing
market rates as quoted by one or more banks or dealers on the day of valuation.
The Fund also will determine its net asset value on any day in which there is
sufficient trading in its portfolio securities that the net asset value might be
affected materially, but only if on any such day the Fund is required to sell or
redeem shares. Net asset value is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares outstanding at such time.
Expenses, including the management fees and any account maintenance and/or
distribution fees, are accrued daily. The per share net asset value of the Class
B, Class C and Class D shares generally will be lower than the per share net
asset value of the Class A shares, reflecting the daily expense accruals of the
account maintenance, distribution and higher transfer agency fees applicable
with respect to the Class B and Class C shares and the daily expense accruals of
the account maintenance fees applicable with respect to 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 the Class D
shares, reflecting the daily expense accruals of the distribution fees and
higher transfer agency fees applicable with respect to the 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.

Portfolio securities which are traded on stock exchanges are valued at the
last sale price (regular way) on the exchange on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Directors as
the primary market. Securities traded in the over-the-counter market are valued
at the last available bid price prior to the time of valuation. Securities that
are traded both in the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative market. When the Fund
writes a call option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based upon the last sale price in the case of exchange-traded
options or, in

25
<PAGE> 103

the case of options traded in the over-the-counter market, the last asked price.
Options purchased by the Fund are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Other investments, including
futures contracts and related options, for which market quotations are readily
available, are valued at market value.

Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund. Such valuations and procedures will be
reviewed periodically by the Board of Directors.

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

SHAREHOLDER SERVICES

The Fund offers a number of shareholder services described below which are
designed to facilitate investment in its shares. Full details as to each of such
services and copies of the various plans described below can be obtained from
the Fund, the Distributor or Merrill Lynch. Certain of these services are
available only to U.S. investors.

INVESTMENT ACCOUNT

Each shareholder whose account is maintained at the Fund's transfer agent
has an Investment Account and will receive, at least quarterly, statements from
the Fund's transfer agent. The statements will serve as transaction
confirmations for automatic investment purchases and the reinvestment of income
dividends and capital gains distributions. The statements also will show any
other activity in the account since the preceding statement. Shareholders will
receive separate transaction confirmations for each purchase or sale transaction
other than automatic investment purchases and the reinvestment of income
dividends.

Share certificates are issued only for full shares and only upon the
specific request of the shareholder. Issuance of certificates representing all
or only part of the full shares in an Investment Account may be requested by a
shareholder directly from the Fund's transfer agent.

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 so that the cash proceeds can be transferred to
the account at the new firm or such shareholder must continue to maintain an
Investment Account at the transfer agent for those Class A or Class D shares.
Shareholders interested in transferring their Class B or Class C shares from
Merrill Lynch and who do not wish to have an Investment Account maintained for
such shares at the transfer agent may request their

26
<PAGE> 104

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 Fund's transfer
agent. If the new brokerage firm is willing to accommodate the shareholder in
this manner, the shareholder must request that he or she be issued certificates
for his or her shares and then must turn the certificates over to the new firm
for re-registration as described in the preceding sentence.

AUTOMATIC INVESTMENT PLANS

A shareholder may make additions to an Investment Account at any time by
purchasing Class A shares (if he is an eligible Class A investor as described in
the Prospectus) or Class B, Class C or Class D shares at the applicable public
offering price either through the shareholder's securities dealer or by mail
directly to the Fund's transfer agent, acting as agent for such securities
dealer. Voluntary accumulation also can be made through a service known as the
Automatic Investment Plan whereby the Fund is authorized through pre-authorized
checks or automated clearing house debits of $50 or more to charge the regular
bank account of the shareholder on a regular basis to provide systematic
additions to the Investment Account of such shareholder. An investor whose
shares of the Fund are held within a CMA(R)/CBA(R) account may arrange to have
periodic investments made in the Fund in amounts of $100 or more ($1 for
retirement accounts) through the CMA(R)/ CBA(R) Automated Investment Program.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Unless specific instructions to the contrary are given as to the method of
payment of dividends and capital gains distributions, dividends and
distributions will be reinvested automatically in additional shares of the Fund.
Such reinvestment will be at the net asset value of the shares of the Fund,
without a sales charge, as of the close of business on the ex-dividend date of
the dividend or distribution. Shareholders may elect in writing to receive their
dividends or capital gains distributions, or both, in cash, in which event
payment will be mailed or direct deposited on or about the payment date.

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

TAXES

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

Dividends paid by the Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in warrants, futures and options) ("capital
gain dividends") are taxable to shareholders as long-term capital gains,
regardless of the length of

27
<PAGE> 105

time the shareholder has owned Fund shares. Any loss upon the sale or exchange
of Fund shares held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset).

Dividends are taxable to shareholders even though they are reinvested in
additional shares of the Fund. Not later than 60 days after the close of its
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
that was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
shareholders on December 31 of the year in which such dividend was declared.

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

Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Shareholders
may be able to claim U.S. foreign tax credits with respect to such taxes,
subject to certain conditions and limitations contained in the Code. For
example, certain retirement accounts cannot claim foreign tax credits on
investments in foreign securities held in the Fund. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, the Fund will be eligible, and intends, to file an
election with the Internal Revenue Service pursuant to which shareholders of the
Fund will be required to include their proportionate shares of such withholding
taxes in their U.S. income tax returns as gross income, treat such proportionate
shares as taxes paid by them and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against
their U.S. income taxes. No deductions for foreign taxes, however, may be
claimed by noncorporate shareholders who do not itemize deductions. A
shareholder that is a nonresident alien individual or a foreign corporation may
be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such shareholder. The Fund will report annually to its shareholders the
amount per share of such withholding taxes. For this purpose, the Fund will
allocate foreign taxes and foreign source income among the Class A, Class B,
Class C and Class D shareholders according to a method (which it believes is
consistent with the Commission rule permitting the issuance and sale of multiple

28
<PAGE> 106

classes of stock) that is based on the gross income allocable to Class A, Class
B, Class C and Class D shareholders during the taxable year, or such other
method as the Internal Revenue Service may prescribe. It should be noted that
the foreign tax credit currently is unavailable for withholding taxes paid to
certain countries in which the Fund is allowed to invest. Shareholders, however,
may be able to deduct their proportionate shares of the taxes for which the
credit has been disallowed.

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

The Code requires a RIC to pay a nondeductible 4% excise tax to the extent
the RIC does not distribute, during each calendar year, 98% of its ordinary
income determined on a calendar year basis and 98% of its capital gains,
determined, in general, on an October 31 year end, plus certain undistributed
amounts from previous years. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.

The Fund may invest in securities rated in the medium to lower rating
categories of nationally recognized rating organizations, and in unrated
securities ("high yield/high risk securities" or "junk bonds"), as described in
the Prospectus. Some of these high yield/high risk securities may be purchased
at a discount and may therefore cause the Fund to accrue income before amounts
due under the obligations are paid. In addition, a portion of the interest
payments on such high yield/high risk securities may be treated as dividends for
Federal income tax purposes; in such case, if the issuer of such high yield/high
risk securities is a domestic corporation, dividend payments by the Fund will be
eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.

29
<PAGE> 107

losses, however, would not be recognized. By making the mark-to-market election,
the Fund could avoid imposition of the interest charge with respect to its
distributions from PFICs, but in any particular year might be required to
recognize income in excess of the distributions it received from PFICs and its
proceeds from dispositions of PFIC stock.

TAX TREATMENT OF FUTURES, OPTIONS AND FORWARD FOREIGN EXCHANGE TRANSACTIONS

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

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

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

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

SPECIAL RULES FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS

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

Under Code Section 988, special rules are provided for certain transactions
in a currency other than the taxpayer's functional currency (i.e., unless
certain special rules apply, currencies other than the U.S. Dollar).

30
<PAGE> 108

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

The Treasury Department has authority to issue regulations concerning the
recharacterization of principal repayments and interest payments with respect to
debt obligations issued in hyperinflationary currencies, which may include the
currencies of certain countries in which the Fund intends to invest. To date, no
such regulations have been issued.

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

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

PERFORMANCE DATA

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

31
<PAGE> 109

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 any redemption fee that would be applicable to a complete
redemption of the investment at the end of the specified period, the maximum
sales charge in the case of Class A and Class D shares and the CDSC that would
be applicable to a complete redemption of the investment at the end of the
specified period in the case of Class B and Class C shares.

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

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

32
<PAGE> 110

Set forth below is total return information for the Class A, Class B, Class
C and Class D shares of the Fund for the period indicated.

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS D SHARES
--------------------------- --------------------------- --------------------------- ---------------------------
EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE EXPRESSED REDEEMABLE
AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A AS A VALUE OF A
PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL PERCENTAGE HYPOTHETICAL
BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000 BASED ON A $1,000
HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT HYPOTHETICAL INVESTMENT AT
$1,000 THE END OF $1,000 THE END OF $1,000 THE END OF $1,000 THE END OF
INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD INVESTMENT THE PERIOD
------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception
(December
30, 1994) to
November 30,
1995........ (1.11)% $ 989.80 (0.56)% $ 994.90 2.71% $1,024.90 (1.41)% $ 987.00

ANNUAL TOTAL RETURN
(EXCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception
(December
30, 1994) to
November 30,
1995........ 6.60% $1,066.00 5.60% $1,056.00 5.60% $1,056.00 6.30% $1,063.00

AGGREGATE TOTAL RETURN
(INCLUDING MAXIMUM APPLICABLE SALES CHARGE)
Inception
(December
30, 1994) to
November 30,
1995........ (1.02)% $ 989.80 (0.51)% $ 994.90 2.49% $1,024.90 (1.30)% $ 987.00
</TABLE>

GENERAL INFORMATION

DESCRIPTION OF SHARES

The Fund was incorporated under Maryland law on March 15, 1994. It has an
authorized capital of 400,000,000 shares of common stock, par value $0.10 per
share. 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, each of
which consists of 100,000,000 shares. Under the Articles of Incorporation of the
Fund, the Directors have the authority to issue separate classes of shares which
would represent interests in the assets of the Fund and have identical voting,
dividend, liquidation and other rights and the same terms and conditions except
that expenses related to the distribution and/or account maintenance of the
shares of a class may be borne solely by such class, and a class may have
exclusive voting rights with respect to matters relating to the expenses being
borne only by such class. Upon liquidation of the Fund, shareholders of each
class are entitled to share pro rata in the net assets of the Fund available for
distribution to shareholders, except for any expenses which may be attributable
only to one class. Shares have no preemptive rights. The redemption, conversion
and exchange rights are described elsewhere herein and in the Prospectus.

Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors (to the
extent hereafter provided) and on other matters submitted to a vote of
shareholders, except that shareholders of a class bearing account maintenance
and/or distribution expenses as provided above shall have exclusive voting
rights with respect to matters relating to such account maintenance and/or
distribution expenditures. The Fund does not intend to hold annual meetings of
shareholders in any

33
<PAGE> 111

year in which the Investment Company Act does not require shareholders to elect
Directors. Also, the by-laws of the Fund require that a special meeting of
shareholders be held upon the written request of at least 10% of the outstanding
shares of the Fund entitled to vote at such meeting, if they comply with
applicable Maryland law. Voting rights for Directors are not cumulative. Shares
issued are fully paid and non-assessable and have no preemptive or conversion
rights. Redemption rights are discussed elsewhere herein and in the Prospectus.
Each share of Class A, Class B, Class C and Class D Common Stock is entitled to
participate equally in dividends declared by the Fund and in the net assets of
the Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities, except that, as noted above, expenses related to the account
maintenance and/or distribution of the Class B, Class C and Class D shares are
borne solely by such class. Stock certificates are issued by the transfer agent
only on specific request. Certificates for fractional shares are not issued in
any case.

The Manager provided the initial capital for the Fund by purchasing 10,000
shares of common stock of the Fund for $100,000. Such shares were acquired for
investment and can only be disposed of by redemption. The organizational
expenses of the Fund (approximately $219,210) are being paid by the Fund and are
being amortized over a period not exceeding five years. The proceeds realized by
the Manager upon the redemption of any of the shares initially purchased by it
will be reduced by the proportional amount of the unamortized organizational
expenses which the number of such initial shares being redeemed bears to the
number of shares initially purchased.

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 November 30, 1995, is set forth
below:

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Assets......................... $648,590 $7,701,149 $1,011,730 $1,568,903
======== ========== ========== ==========
Number of Shares Outstanding....... 60,855 729,414 95,822 147,544
======== ========== ========== ==========
Net Asset Value Per Share (net
assets divided by number of
shares outstanding).............. $ 10.66 $ 10.56 $ 10.56 $ 10.63
Sales Charge for Class A and Class
D Shares: 5.25% of offering price
(5.54% of net asset value per
share*).......................... .59 ** ** .59
-------- ---------- ---------- ----------
Offering Price..................... $ 11.25 $ 10.56 $ 10.56 $ 11.22
======== ========== ========== ==========
</TABLE>

- ---------------
* Rounded to the nearest one-hundredth percent; assumes the 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. See "Purchase of Shares -- Deferred Sales
Charge Alternatives -- Class B and Class C Shares" in the Prospectus and
"Redemption of Shares -- Deferred Sales Charges -- Class B and Class C
Shares" herein.

34
<PAGE> 112

INDEPENDENT AUDITORS

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

CUSTODIAN

The Chase Manhattan Bank, N.A., Global Securities Services, 4 MetroTech
Center, 18th Floor, Brooklyn, New York 11245 acts as the custodian of the Fund's
assets (the "Custodian"). Under its contract with the Fund, the Custodian is
authorized, among other things, to establish separate accounts in foreign
currencies and to cause foreign securities owned by the Fund to be held in its
offices outside of the United States and with certain foreign banks and
securities depositories. The Custodian is responsible for safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.

TRANSFER AGENT

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

LEGAL COUNSEL

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

REPORTS TO SHAREHOLDERS

The fiscal year of the Fund ends on November 30 of each year. The Fund
sends to its shareholders, at least semi-annually, reports showing the Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent auditors, is sent to shareholders each year.
After the end of each year shareholders will receive Federal income tax
information regarding dividends and capital gains distributions.

ADDITIONAL INFORMATION

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

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

To the knowledge of the Fund, no person owned beneficially 5% or more of
the Fund's shares on February 29, 1996.

35
<PAGE> 113

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholder,
MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.:

We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Middle East/Africa Fund, Inc. as
of November 30, 1995, the related statements of operations, changes in net
assets and the financial highlights for the period December 30, 1994
(commencement of operations) to November 30, 1995. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at November 30, 1995, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Middle East/Africa Fund, Inc. as of November 30, 1995, the results
of its operations, the changes in its net assets, and the financial highlights
for the period December 30, 1994 to November 30, 1995 in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Princeton, New Jersey

January 10, 1996

36
<PAGE> 114
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (in US dollars)

Shares Held/ Value Percent of
AFRICA Industries Face Amount Investments Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C>
Botswana Multi-Industry 232,000 Sechaba Investment Trust $ 190,492 $ 155,602 1.4%

Total Investments in Botswana 190,492 155,602 1.4

Ghana Health & Personal 85,000 ++Unilever Ghana 62,559 52,447 0.5
Care

Multi-Industry 723,795 Guiness Ghana Ltd. 132,915 114,472 1.0

Tobacco 70,000 ++Pioneer Tobacco Co. Ltd. 5,081 6,305 0.1

Total Investments in Ghana 200,555 173,224 1.6

Morocco Banking 5,000 Banque Marocaine du Commerce
Exterieure 221,372 220,591 2.0

Building & 2,000 Groupe Omnium Nord Africain 89,279 76,471 0.7
Construction

Building Materials 2,000 ++Les Ciments de l'Oriental 87,576 74,354 0.7

Total Investments in Morocco 398,227 371,416 3.4

South Beverages 14,700 South African Breweries Limited 394,547 497,218 4.6
Africa
Foreign ZAL 4,700,000 South African Bond, 12% due 2/28/2005 997,096 1,126,603 10.3
Government
Obligations

Mining 37,000 Beatrix Mines Ltd. 298,396 328,014 3.0
38,800 ++Driefontein Consolidated
Ltd. (ADR)(a) 570,167 407,400 3.7
38,600 ++Kinross Mines Ltd. 412,446 339,566 3.1
34,700 ++Randfontein Estates Gold Mining Co.
Witwatersrand Ltd. 250,019 217,703 2.0
11,500 Western Areas Gold Mining Company
Ltd. (ADR)(a) 164,189 183,425 1.7
17,126 Western Areas Gold Mining Company
Ltd. (Ordinary) 228,544 276,791 2.5
------------ ------------ ------
1,923,761 1,752,899 16.0

Multi-Industry 52,852 Malbak Ltd. (GDR)(b) 304,425 338,253 3.1

Retail 110,000 ++Teljoy Holdings Ltd. 192,631 174,032 1.6

Steel 330,752 ++South Africa Iron & Steel
Industrial Corp., Ltd. 381,184 296,829 2.7

Total Investments in South Africa 4,193,644 4,185,834 38.3
</TABLE>

37
<PAGE> 115
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Zimbabwe Beverage & Tobacco 217,000 Delta Corporation 290,655 351,702 3.2

Real Estate 215,000 Hippo Valley Estates 76,846 130,092 1.2

Total Investments in Zimbabwe 367,501 481,794 4.4

Total Investments in Africa 5,350,419 5,367,870 49.1

MIDDLE
EAST

Israel Banking 194,852 ++Bank Hapoalim Ltd. 309,137 319,866 2.9
245,000 ++Bank Leumi Israel 303,793 321,750 2.9
------------ ------------ ------
612,930 641,616 5.8

Engineering & 3,603 Koor Industries Ltd. 301,578 325,222 3.0
Construction

Health & Personal 5,600 Teva Pharmaceutical Industries
Care Ltd. (ADR)(a) 199,850 232,400 2.1

Merchandising 37,100 ++Blue Square Stores 201,555 255,430 2.3

Multi-Industry 32,300 ++Ampal-American Israel Corp. (ADR)(a) 196,639 181,687 1.7

Paper & Forest 1,845 American Israeli Paper Mills Ltd. 98,685 86,807 0.8
Products 1,800 American Israeli Paper Mills
Ltd. (ADR)(a) 97,251 83,700 0.8
------------ ------------ ------
195,936 170,507 1.6

Real Estate 41 ++Africa-Israel Investments Ltd. 49,411 50,200 0.5

Total Investments in Israel 1,757,899 1,857,062 17.0

Turkey Automobiles 560,000 Tofas Turk Otomobil Fabrikasi A.S. 126,768 63,231 0.6

Banking 1,724,000 Turkiye Garanti Bankasi A.S. 272,906 125,587 1.1
24,800 Turkiye Garanti Bankasi A.S.
(ADR)(a)++++ 249,925 182,900 1.7
------------ ------------ ------
522,831 308,487 2.8

Brewery 22,300 ++Erciyas Biracilik Ve Malt
Sanayii A.S. (ADR)(a) 299,935 211,850 1.9
14,800 ++Erciyas Biracilik Ve Malt
Sanayii A.S. (ADR)(a)++++ 199,800 140,600 1.3
------------ ------------ ------
499,735 352,450 3.2

Foods 3,100,000 ++Kerevitas Gida Sanayii Ve Ticaret
A.S. 368,113 254,052 2.3

Industrial 1,093,334 ++Turk Siemens Kablo Ve Elektrik
Components Sanayii A.S. 206,649 228,981 2.1

Merchandising 267,000 Migros Turk A.S. 197,259 272,300 2.5

Total Investments in Turkey 1,921,355 1,479,501 13.5

Total Investments in the
Middle East 3,679,254 3,336,563 30.5
</TABLE>

38
<PAGE> 116

<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (concluded) (in US dollars)

SHORT-TERM Face Value Percent of
SECURITIES Amount Investments Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Commercial US$ 359,000 General Electric Capital Corp.,
Paper* 5.90% due 12/01/1995 $ 359,000 $ 359,000 3.3%

US Government & 500,000 Federal Farm Credit Bank,
Agency 5.67% due 12/01/1995 500,000 500,000 4.6
Obligations* 600,000 Federal Home Loan Mortgage Corp.,
5.59% due 12/05/1995 599,627 599,627 5.5
400,000 Federal National Mortgage
Association, 5.67% due 12/05/1995 399,748 399,748 3.6
------------ ------------ ------
1,499,375 1,499,375 13.7

Total Investments in
Short-Term Securities 1,858,375 1,858,375 17.0

Total Investments $ 10,888,048 10,562,808 96.6
============
Other Assets Less Liabilities 367,564 3.4
------------ ------
Net Assets $ 10,930,372 100.0%
============ ======

<FN>
*Commercial Paper and certain US Government & Agency Obligations are
traded on a discount basis; the interest rates shown
are the discount rates paid at the time of purchase by the Fund.
(a)American Depositary Receipts (ADR).
(b)Global Depositary Receipts (GDR).
++Non-income producing security.
++++Restricted securities as to resale. The value of the Fund's
investment was approximately $324,000, representing 3.0% of net
assets.

<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <C> <C> <C>
Erciyas Biracilik Ve 10/05/1995--
Malt Sanayii A.S. (ADR) 10/30/1995 $199,800 $140,600

Turkiye Garanti Bankasi 3/24/1995--
A.S.(ADR) 6/07/1995 249,925 182,900
-------- --------
Total $449,725 $323,500
======== ========

</TABLE>
See Notes to Financial Statements.

EQUITY PORTFOLIO CHANGES

For the Quarter Ended November 30, 1995

Additions Erciyas Biracilik Ve Malt Sanayii A.S. (ADR)
Kerevitas Gida Sanayii Ve Ticaret A.S.
Turkiye Garanti Bankasi A.S. (ADR)

39
<PAGE> 117
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES

As of November 30, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$10,888,048) (Note 1a) $ 10,562,808
Cash 30,068
Receivables:
Interest $ 38,778
Dividends 18,980
Capital shares sold 10,438
Investment adviser (Note 2) 7,803 75,999
-------------
Deferred organization expenses (Note 1f) 244,557
Prepaid registration fees and other assets (Note 1f) 85,544
-------------
Total assets 10,998,976
-------------

Liabilities: Payables:
Capital shares redeemed 9,242
Distributor (Note 2) 7,654 16,896
-------------
Accrued expenses and other liabilities 51,708
-------------
Total liabilities 68,604
-------------

Net Assets: Net assets $ 10,930,372
=============

Net Assets Class A Shares of Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 6,086
Class B Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 72,941
Class C Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 9,582
Class D Shares of Common Stock, $0.10 par value, 100,000,000
shares authorized 14,754
Paid-in capital in excess of par 10,373,961
Undistributed investment income--net 752,093
Undistributed realized capital gains on investments and
foreign currency transactions--net 26,364
Unrealized depreciation on investments and foreign currency
transactions--net (325,409)
-------------
Net assets $ 10,930,372
=============

Net Asset Class A--Based on net assets of $648,590 and 60,855 shares
Value: outstanding $ 10.66
=============
Class B--Based on net assets of $7,701,149 and 729,414 shares
outstanding $ 10.56
=============
Class C--Based on net assets of $1,011,730 and 95,822 shares
outstanding $ 10.56
=============
Class D--Based on net assets of $1,568,903 and 147,544 shares
outstanding $ 10.63
=============

</TABLE>
See Notes to Financial Statements.

<PAGE> 118

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS

For the Period December 30, 1994++ to November 30, 1995
<S> <S> <C> <C>
Investment Interest and discount earned $ 803,193
Income Dividends (net of $8,237 foreign withholding tax) 86,660
(Notes 1d & 1e): -------------
Total income 889,853
-------------

Expenses: Investment advisory fees (Note 2) $ 95,530
Printing and shareholder reports 95,500
Account maintenance and distribution fees--Class B (Note 2) 69,416
Amortization of organization expenses (Note 1f) 54,901
Professional fees 43,730
Accounting services (Note 2) 42,157
Directors' fees and expenses 38,234
Registration fees (Note 1f) 32,576
Custodian fees 20,776
Transfer agent fees--Class B (Note 2) 13,302
Account maintenance and distribution fees--Class C (Note 2) 9,459
Account maintenance fees--Class D (Note 2) 3,137
Transfer agent fees--Class D (Note 2) 1,969
Transfer agent fees--Class C (Note 2) 1,751
Transfer agent fees--Class A (Note 2) 644
Pricing fees 589
Other 4,514
-------------
Total expenses before reimbursement 528,185
Reimbursement of expenses (Note 2) (445,268)
-------------
Total expenses after reimbursement 82,917
-------------
Investment income--net 806,936
-------------

Realized & Realized gain (loss) from:
Unrealized Gain Investments--net 26,364
(Loss) on Foreign currency transactions--net (54,881) (28,517)
Investments & -------------
Foreign Currency Unrealized depreciation on:
Transactions--Net Investments--net (325,240)
(Notes 1b, 1c, Foreign currency transactions--net (169) (325,409)
1e & 3): ------------- -------------
Net realized and unrealized loss on investments and
foreign currency transactions (353,926)
-------------
Net Increase in Net Assets Resulting from Operations $ 453,010
=============
</TABLE>

41
<PAGE> 119

<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS

For the Period
December 30, 1994++
Increase (Decrease) in Net Assets: to November 30, 1995
<S> <S> <C>
Operations: Investment income--net $ 806,936
Realized loss on investments and foreign currency
transactions--net (28,517)
Unrealized depreciation on investments and foreign
currency transactions--net (325,409)
-------------
Net increase in net assets resulting from operations 453,010
-------------

Capital Share Net increase in net assets derived from capital share
Transactions transactions 10,377,362
(Note 4): -------------

Net Assets: Total increase in net assets 10,830,372
Beginning of period 100,000
-------------
End of period* $ 10,930,372
=============
<FN>
*Undistributed investment income--net (Note 1h) $ 752,093
=============
</TABLE>

<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS

The following per share data and ratios have been derived For the Period December 30, 1994++
from information provided in the financial statements. to November 30, 1995

Increase (Decrease) in Net Asset Value: Class A Class B Class C Class D
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
Operating ------- ------- ------- -------
Performance: Investment income--net .57 .79 .83 .77
Realized and unrealized gain (loss) on
investments--net .09 (.23) (.27) (.14)
------- ------- ------- -------
Total from investment operations .66 .56 .56 .63
------- ------- ------- -------
Net asset value, end of period $ 10.66 $ 10.56 $ 10.56 $ 10.63
======= ======= ======= =======

Total Investment Based on net asset value per share 6.60%+++ 5.60%+++ 5.60%+++ 6.30%+++
Return:** ======= ======= ======= =======

Ratios to Average Expenses, excluding account maintenance and
Net Assets: distribution fees and net of reimbursement .00%* .01%* .01%* .00%*
======= ======= ======= =======
Expenses, net of reimbursement .00%* 1.01%* 1.01%* .25%*
======= ======= ======= =======
Expenses 4.63%* 5.68%* 5.67%* 4.89%*
======= ======= ======= =======
Investment income--net 8.43%* 8.33%* 8.45%* 9.07%*
======= ======= ======= =======

Supplemental Net assets, end of period (in thousands) $ 648 $ 7,701 $ 1,012 $ 1,569
Data: ======= ======= ======= =======
Portfolio turnover 40.97% 40.97% 40.97% 40.97%
======= ======= ======= =======

<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.

</TABLE>
See Notes to Financial Statements.

42
<PAGE> 120
NOTES TO FINANCIAL STATEMENTS

1. Significant Accounting Policies:
Merrill Lynch Middle East/Africa Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a non-
diversified, open-end management investment company. Prior to
commencement of operations on December 30, 1994, the Fund had no
operations other than those relating to organizational matters and
the issuance of 10,000 shares of capital stock of the Fund to
Merrill Lynch Asset Management, L.P. ("MLAM") for $100,000. The Fund
offers four classes of shares under the Merrill Lynch Select
Pricing SM System. Shares of Class A and Class D are sold with a
front-end sales charge. Shares of Class B and Class C may be subject
to a contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and distribution expenditures. The following is
a summary of significant accounting policies followed by the Fund.

(a) Valuation of securities--Portfolio securities which are traded
on stock exchanges are valued at the last sale price on the exchange
on which such securities are traded, as of the close of business on
the day the securities are being valued or, lacking any sales, at
the last available bid price. Securities traded in the over-the-
counter market are valued at the last available bid price prior to
the time of valuation. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange
designated by or under the authority of the Board of Directors as
the primary market. Securities which are traded both in the over-the-
counter market and on a stock exchange are valued according to the
broadest and most representative market. Options written are valued
at the last sale price in the case of exchange-traded options or, in
the case of options traded in the over-the-counter market, the last
asked price. Options purchased are valued at the last sale price in
the case of exchange-traded options or, in the case of options
traded in the over-the-counter market, the last bid price. Short-
term securities are valued at amortized cost, which approximates
market value. Other investments, including futures contracts and
related options, are stated at market value. Securities and assets
for which market value quotations are not available are valued at
their fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.

(b) Foreign currency transactions--Transactions denominated in
foreign currencies are recorded at the exchange rate prevailing when
recognized. Assets and liabilities denominated in foreign currencies
are valued at the exchange rate at the end of the period. Foreign
currency transactions are the result of settling (realized) or
valuing (unrealized) assets or liabilities expressed in foreign
currencies into US dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on
investments.

(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in equity, debt and currency
markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.

* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.

When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).

Written and purchased options are non-income producing investments.

* Forward foreign exchange contracts--The Fund is authorized to enter
into forward foreign exchange contracts as a hedge against either
specific transactions or portfolio positions. Such contracts are not
entered on the Fund's records. However, the effect on operations is
recorded from the date the Fund enters into such contracts. Premium
or discount is amortized over the life of the contracts.

* Foreign currency options and futures--The Fund may also purchase or
sell listed or over-the-counter foreign currency options, foreign
currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign
exchange rates. Such transactions may be effected with respect to
hedges on non-US dollar denominated securities owned

43
<PAGE> 121

by the Fund, sold by the Fund but not yet delivered, or committed or
anticipated to be purchased by the Fund.

* Financial futures contracts--The Fund may purchase or sell stock
index futures contracts and options on such futures contracts. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time it was closed.

(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. Under the applicable foreign tax law, a
withholding tax may be imposed on interest, dividends, and capital
gains at various rates.

(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend date, except that if the ex-dividend date has passed,
certain dividends from foreign securities are recorded as soon as
the Fund is informed of the ex-dividend date. Interest income
(including amortization of discount) is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis.

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

(g) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.

(h) Reclassification--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $54,881 has been reclassified from undistributed net investment
income to undistributed net realized capital gains and $38 has been
reclassified from paid-in capital in excess of par to undistributed
net investment income. These reclassifications have no effect on net
assets or net asset values per share.

2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. The general partner of MLAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund has also
entered into a Distribution Agreement and Distribution Plans with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc.

MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. As
compensation for its services to the Fund, MLAM receives monthly
compensation at the annual rate of 1.00% of the average daily net
assets of the Fund.

Certain states in which shares of the Fund are qualified for sale
impose limitations on the expenses of the Fund. The most restrictive
annual expense limitation requires that MLAM reimburse the Fund to
the extent that expenses (excluding interest, taxes, distribution
fees, brokerage fees and commissions, and extraordinary items)
exceed 2.5% of the Fund's first $30 million of average daily net
assets, 2.0% of the Fund's next $70 million of average daily net
assets, and 1.5% of the average daily net assets in excess thereof.
MLAM's obligation to reimburse the Fund is limited to the amount of
the investment advisory fee. No fee payment will be made to MLAM
during any fiscal year which will cause such expenses to exceed the
most restrictive expense limitation at the time of such payment. For
the period December 30, 1994 to November 30, 1995, MLAM earned fees
of $95,530, all of which was voluntarily waived. MLAM also
reimbursed the Fund $349,738 in additional expenses.

Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:

Account Distribution
Maintenance Fee Fee

Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class D 0.25% --

Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing

44
<PAGE> 122
NOTES TO FINANCIAL STATEMENTS (concluded)

distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.

For the period December 30, 1994 to November 30, 1995, MLFD earned
underwriting discounts and MLPF&S earned dealer concessions on sales
of the Fund's Class D Shares as follows:

MLFD MLPF&S

Class D $1,003 $12,810

For the period ended November 30, 1995, MLPF&S received contingent
deferred sales charges of $20,279 and $800 relating to transactions
in Class B and Class C Shares, respectively.

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

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

Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, MLPF&S, PSI, MLFDS, MLFD, and/or ML & Co.

3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period ended November 30, 1995 were $10,943,368 and
$2,070,144.

Net realized and unrealized gains (losses) as of November 30, 1995
were as follows:

Realized Unrealized
Gains (Losses) Losses

Long-term investments $ 173,143 $ (325,240)
Short-term investments (146,779) --
Foreign currency transactions (54,881) (169)
----------- -----------
Total $ (28,517) $ (325,409)
=========== ===========

As of November 30, 1995, net unrealized depreciation for Federal
income tax purposes aggregated $325,757, of which $715,539 related
to appreciated securities and $1,041,296 related to depreciated
securities. The aggregate cost of investments at November 30, 1995
for Federal income tax purposes was $10,888,565.

4. Capital Share Transactions:
Net increase in net assets derived from capital share transactions
was $10,377,362 for the period ended November 30, 1995.

Transactions in capital shares for each class were as follows:

Class A Shares for the Period Dollar
Dec. 30, 1994++ to Nov. 30, 1995 Shares Amount

Shares sold 68,348 $ 729,728
Shares redeemed (9,993) (106,209)
----------- -----------
Net increase 58,355 $ 623,519
=========== ===========
[FN]
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.

Class B Shares for the Period Dollar
Dec. 30, 1994++ to Nov. 30, 1995 Shares Amount

Shares sold 832,728 $ 8,419,730
Shares redeemed (105,813) (1,085,440)
----------- -----------
Net increase 726,915 $ 7,334,290
=========== ===========

[FN]
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.

Class C Shares for the Period Dollar
Dec. 30, 1994++ to Nov. 30, 1995 Shares Amount

Shares sold 101,871 $ 1,027,680
Shares redeemed (8,549) (91,175)
----------- -----------
Net increase 93,322 $ 936,505
=========== ===========

[FN]
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.

Class D Shares for the Period Dollar
Dec. 30, 1994++ to Nov. 30, 1995 Shares Amount

Shares sold 153,535 $ 1,573,684
Shares redeemed (8,491) (90,636)
----------- -----------
Net increase 145,044 $ 1,483,048
=========== ===========

[FN]
++Prior to December 30, 1994 (commencement of operations), the Fund
issued 2,500 shares to MLAM for $25,000.

5. Subsequent Event:
On December 15, 1995, the Board of Directors of the Fund declared an
ordinary income dividend in the amount of $0.873127 per Class A Share,
$0.765492 per Class B Share, $0.763079 per Class C Share, and
$0.849586 per Class D Share, payable on December 22, 1995 to
shareholders of record as of December 14, 1995.

45
<PAGE> 123

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 124

- ------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies....... 2
Hedging Techniques.................... 2
Other Investment Policies and
Practices........................... 7
Investment Restrictions............... 9
Management of the Fund.................. 13
Directors and Officers................ 13
Compensation of Directors............. 14
Management and Advisory
Arrangements........................ 15
Purchase of Shares...................... 16
Initial Sales Charge Alternatives --
Class A and Class D Shares.......... 17
Reduced Initial Sales Charges......... 18
Employer-Sponsored Retirement or
Savings Plans and Certain Other
Arrangements........................ 20
Distribution Plans.................... 21
Redemption of Shares.................... 22
Deferred Sales Charges --
Class B and Class C Shares.......... 23
Portfolio Transactions and Brokerage.... 23
Determination of Net Asset Value........ 25
Shareholder Services.................... 26
Investment Account.................... 26
Automatic Investment Plans............ 27
Automatic Reinvestment of Dividends
and Capital Gains Distributions..... 27
Taxes................................... 27
Tax Treatment of Futures, Options
and Forward Foreign Exchange
Transactions........................ 30
Special Rules for Certain Foreign
Currency Transactions............... 30
Performance Data........................ 31
General Information..................... 33
Description of Shares................. 33
Computation of Offering Price Per
Share............................... 34
Independent Auditors.................. 35
Custodian............................. 35
Transfer Agent........................ 35
Legal Counsel......................... 35
Reports to Shareholders............... 35
Additional Information................ 35
Independent Auditors' Report............ 36
Financial Statements.................... 37
Code # 18412-0396
</TABLE>

YZa(LOGO)
MERRILL LYNCH
MIDDLE EAST/AFRICA
FUND, INC.

STATEMENT OF

ADDITIONAL
INFORMATION

March 29, 1996

Distributor:
Merrill Lynch
Funds Distributor, Inc.
<PAGE> 125
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL

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

<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus and
graph paper and Merrill Lynch back cover of Statement of
logo including stylized market Additional Information
bull.
</TABLE>

<PAGE> 126

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements

Contained in Part A:

Financial Highlights for the period ended November 30, 1995

Contained in Part B:

Statement of Assets and Liabilities as of November 30, 1995

Schedule of Investments as of November 30, 1995

Statement of Operations for the period ended November 30, 1995

Statement of Changes in Net Assets for the period ended November 30,
1995

Financial Highlights for the period ended November 30, 1995

(b) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
1 -- Amended and Restated Articles of Incorporation of the Registrant.(a)
2 -- By-Laws of the Registrant.(a)
3 -- None.
4(a) -- Portions of the Amended and Restated Articles of Incorporation and the
By-Laws of the Registrant defining the rights of shareholders.(b)
(b) -- Specimen Share Certificates for Class A, Class B, Class C and Class D
Shares.(c)
5 -- Form of Management Agreement between the Registrant and Merrill Lynch
Asset Management, L.P. (the "Manager").(a)
6(a) -- Form of Class A Shares Distribution Agreement between the Registrant and
Merrill Lynch Funds Distributor, Inc. (the "Distributor").(a)
(b) -- Form of Class B Shares Distribution Agreement between the Registrant and
the Distributor.(a)
(c) -- Form of Class C Shares Distribution Agreement between the Registrant and
the Distributor.(a)
(d) -- Form of Class D Shares Distribution Agreement between the Registrant and
the Distributor.(a)
7 -- None.
8 -- Form of Custody Agreement between the Registrant and The Chase Manhattan
Bank, N.A.(a)
9(a) -- Form of Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between the Registrant and Financial Data
Services, Inc. (now known as Merrill Lynch Financial Data Services, Inc.)
(the "Transfer Agent" ).(a)
(b) -- Form of License Agreement relating to the use of the "Merrill Lynch"
name.(a)
10 -- None.
11 -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant.
12 -- None.
13 -- Certificate of the Manager.(c)
14 -- None.
15(a) -- Form of Class B Shares Distribution Plan and Class B Shares Distribution
Plan Sub-Agreement of the Registrant.(a)
(b) -- Form of Class C Shares Distribution Plan and Class C Shares Distribution
Plan Sub-Agreement of the Registrant.(a)
(c) -- Form of Class D Shares Distribution Plan and Class D Shares Distribution
Plan Sub-Agreement of the Registrant.(a)
</TABLE>

C-1
<PAGE> 127

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
16(a) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class A shares.(d)
(b) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class B shares.(d)
(c) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class C shares.(d)
(d) -- Schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 relating to Class D shares.(d)
17(a) -- Financial Data Schedule for Class A Shares.
(b) -- Financial Data Schedule for Class B Shares.
(c) -- Financial Data Schedule for Class C Shares.
(d) -- Financial Data Schedule for Class D Shares.
18 -- Merrill Lynch Select PricingSM System Plan Pursuant to Rule 18f-3.(e)
</TABLE>
[/R]

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

(a) Previously filed as an Exhibit to Pre-Effective Amendment No. 1 to this
Registration Statement on Form N-1A on November 18, 1994.

(b) Reference is made to Article IV, Article V (Sections 3, 5, 6 and 7) and
Articles VI, VII and IX of the Registrant's Amended and Restated Articles of
Incorporation, filed as Exhibit 1 to the Registration Statement on Form N-1A
referred to in paragraph (a) above and to Article II, Article III (Sections
1, 3, 5 and 6) and Articles VI, VII, XIII and XIV of the Registrant's
By-Laws, filed as Exhibit 2 to the Registration Statement on Form N-1A
referred to in paragraph (a) above.

(c) Previously filed as an Exhibit to Pre-Effective Amendment No. 2 to this
Registration Statement on Form N-1A on December 22, 1994.

(d) Previously filed as an Exhibit to Post-Effective Amendment No. 2 to this
Registration Statement on Form N-1A on June 22, 1995.

(e) Incorporated by reference to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A of Merrill Lynch New York Municipal Bond
Fund of Merrill Lynch Multi-State Municipal Series Trust, filed on January
25, 1996.

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

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

ITEM 26. NUMBER OF HOLDERS OF SECURITIES

<TABLE>
<CAPTION>
NUMBER OF
HOLDERS AT
TITLE OF CLASS FEBRUARY 29, 1996*
- ---------------------------------------------------------------------------- ------------------
<S> <C>
Class A Shares of Common Stock, par value $0.10 per share................... 86
Class B Shares of Common Stock, par value $0.10 per share................... 940
Class C Shares of Common Stock, par value $0.10 per share................... 108
Class D Shares of Common Stock, par value $0.10 per share................... 158
</TABLE>

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

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

ITEM 27. INDEMNIFICATION

Reference is made to Article VI of the Registrant's Amended and Restated
Articles of Incorporation, Article VI of the Registrant's By-Laws, Section 2-418
of the Maryland General Corporation Law and Section 9 of each of the Class A,
Class B, Class C and Class D Shares Distribution Agreements.

C-2
<PAGE> 128

Insofar as the conditional advancing of indemnification moneys for actions
based on the Investment Company Act of 1940, as amended (the "1940 Act") may be
concerned, Article VI of the Registrant's By-Laws provides that 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 on 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 or she is entitled to receive from the
Registrant by reason of indemnification; and (iii) (a) such promise must be
secured by a surety bond, other suitable insurance or an equivalent form of
security which assumes 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 and (b) a majority of a quorum
of the Registrant's disinterested non-party Directors, or an independent legal
counsel in a written opinion, shall determine, based upon a review of readily
available facts, that the recipient of the advance ultimately will be found
entitled to indemnification.

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

Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, 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 Director, 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
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF THE MANAGER

The Manager acts as the investment adviser for the following open-end
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 Developing Capital Markets
Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill
Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund for Tomorrow, Inc.,
Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for
Investment and Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill
Lynch Global Holdings, Inc., Merrill Lynch Global Resources Trust, Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch Institutional Intermediate Fund, Merrill Lynch International
Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch Municipal
Series Trust, Merrill Lynch Pacific Fund, Inc., Merrill Lynch Ready Assets
Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch Series Fund, Inc.,
Merrill Lynch Short-Term Global Income Fund, Inc., Merrill Lynch Strategic
Dividend Fund, Merrill Lynch Technology Fund, Inc., Merrill Lynch U.S. Treasury
Money Fund, Merrill Lynch U.S.A. Government Reserves, Merrill Lynch Utility
Income Fund, Inc. and Merrill Lynch Variable Series Funds, Inc.; and for the
following closed-end investment companies: Convertible Holdings, Inc., Merrill
Lynch High Income Municipal Bond Fund, Inc. and Merrill Lynch Senior Floating
Rate Fund, Inc.

Fund Asset Management, L.P., an affiliate of the Manager ("FAM"), acts as
the investment adviser for the following open-end 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

C-3
<PAGE> 129

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 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 investment companies: Apex Municipal Fund, Inc., Corporate
High Yield Fund, Inc., Corporate High Yield Fund II, Inc., Emerging Tigers Fund,
Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets Fund, Inc.,
MuniEnhanced Fund, Inc., MuniInsured Fund, Inc., MuniVest Fund, Inc., MuniVest
Fund II, Inc., MuniVest California Insured Fund, Inc., MuniVest Florida Fund,
MuniVest Michigan Insured Fund, Inc., MuniVest New Jersey Fund, Inc., MuniVest
New York Insured Fund, Inc., MuniVest Pennsylvania Insured Fund, MuniYield
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc., MuniYield
Florida Fund, MuniYield Florida Insured Fund, MuniYield Fund, Inc., MuniYield
Insured Fund, Inc., MuniYield Insured Fund II, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, Inc.,
MuniYield New Jersey Insured Fund, Inc., MuniYield New York Insured Fund, Inc.,
MuniYield New York Insured Fund II, Inc., MuniYield New York Insured Fund III,
Inc., MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc., Senior High Income
Portfolio II, Inc., Senior Strategic Income Fund, Inc., Taurus MuniCalifornia
Holdings, Inc., Taurus MuniNewYork Holdings, Inc. and Worldwide DollarVest Fund,
Inc.

The address of each of these 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 Institutional Intermediate Fund is One
Financial Center, 15th Floor, Boston, Massachusetts 02111-2646. The address of
the Manager, FAM, Princeton Services, Inc. ("Princeton Services") and Princeton
Administrators, L.P. is also P.O. Box 9011, Princeton, New Jersey 08543-9011.
The address of Merrill Lynch Funds Distributor, Inc. ("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. The address of Merrill Lynch Financial Data Services, Inc. ("MLFDS") 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
December 1, 1993, for his or 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 28

C-4
<PAGE> 130

and Messrs. Giordano, Harvey, Hewitt, Kirstein and Monagle are directors,
trustees or officers of one or more of such companies.

<TABLE>
<CAPTION>
OTHER SUBSTANTIAL BUSINESS,
POSITION(S) PROFESSION,
NAME WITH THE MANAGER VOCATION OR EMPLOYMENT
- ---- ---------------- ---------------------------
<S> <C> <C>
ML & Co. ................... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services.......... General Partner General Partner of FAM
Arthur Zeikel............... President President of FAM; President and
Director of Princeton Services;
Director of MLFD; Executive Vice
President of ML & Co.
Terry K. Glenn.............. Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director
of Princeton Services; President and
Director of MLFD; Director of MLFDS;
President of Princeton Administrators,
L.P.
Vincent R. Giordano......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Elizabeth Griffin........... Senior Vice President Senior Vice President of FAM
Norman R. Harvey............ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
N. John Hewitt.............. Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein.......... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of FAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss............. Senior Vice President and Senior Vice President and Controller
Controller of FAM; Senior Vice President of
Princeton Services
Stephen M.M. Miller......... Senior Vice President Executive Vice President of Princeton
Administrators, L.P.
Joseph T. Monagle, Jr....... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Richard L. Reller........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gerald M. Richard........... Senior Vice President and Senior Vice President and Treasurer of
Treasurer FAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President and Treasurer of MLFD
Ronald L. Welburn........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Anthony Wiseman............. Senior Vice President Senior Vice President of FAM; Senior
VicePresident of Princeton Services
</TABLE>

ITEM 29. PRINCIPAL UNDERWRITERS

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

(b) Set forth below is information concerning each director and officer of
MLFD. The principal business address of each such person is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of

C-5
<PAGE> 131

Messrs. Crook, Aldrich, Brady, Breen, Fatseas and Wasel is One Financial Center,
Boston, Massachusetts 02111-2665.

<TABLE>
<CAPTION>
(2) (3)
(1) POSITION(S) AND OFFICE(S) POSITION(S) AND OFFICE(S)
NAME WITH MLFD WITH THE REGISTRANT
- --------------------------------- --------------------------------------- -------------------------
<S> <C> <C>
Terry K. Glenn................... President and Director Executive Vice President
Arthur Zeikel.................... Director President and Director
Philip L. Kirstein............... Director None
William E. Aldrich............... Senior Vice President None
Robert W. Crook.................. Senior Vice President None
Kevin P. Boman................... Vice President None
Michael J. Brady................. Vice President None
William M. Breen................. Vice President None
Sharon Creveling................. Vice President and Assistant Treasurer None
Mark A. De Sario................. Vice President None
James T. Fatseas................. Vice President None
Debra W. Landsman-Yaros.......... Vice President None
Michelle T. Lau.................. Vice President None
Gerald M. Richard................ Vice President and Treasurer Treasurer
Salvatore Venezia................ Vice President None
William Wasel.................... Vice President None
Robert Harris.................... Secretary None
</TABLE>

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

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

ITEM 31. MANAGEMENT SERVICES

Other than as set forth under the caption "Management of the
Fund--Management and Advisory Arrangements" in the Prospectus constituting Part
A of the Registration Statement and under "Management of the Fund--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 32. UNDERTAKINGS

(a) Not applicable.

(b) Not applicable.

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

C-6
<PAGE> 132

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Plainsboro and the State of New Jersey, on the 28th day of March, 1996.

MERRILL LYNCH MIDDLE EAST/AFRICA
FUND, INC.

(REGISTRANT)

By: /S/ TERRY K. GLENN

-------------------------------------
(Terry K. Glenn, Executive Vice
President)

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ---------------
<C> <S> <C>
ARTHUR ZEIKEL*
- --------------------------------------------- President (Principal Executive
(Arthur Zeikel) Officer) and Director
GERALD M. RICHARD*
- --------------------------------------------- Treasurer (Principal Financial
(Gerald M. Richard) and Accounting Officer)
DONALD CECIL*
- --------------------------------------------- Director
(Donald Cecil)
EDWARD H. MEYER*
- --------------------------------------------- Director
(Edward H. Meyer)
CHARLES C. REILLY*
- --------------------------------------------- Director
(Charles C. Reilly)
RICHARD R. WEST*
- --------------------------------------------- Director
(Richard R. West)
EDWARD D. ZINBARG*
- --------------------------------------------- Director
(Edward D. Zinbarg)
*By: /S/ TERRY K. GLENN
- ---------------------------------------------
(Terry K. Glenn, Attorney-in-Fact) March 28, 1996
</TABLE>

C-7
<PAGE> 133

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------
<C> <S>
11 Consent of Deloitte & Touche LLP, independent auditors for the Registrant.
17(a) Financial Data Schedule for Class A Shares.
(b) Financial Data Schedule for Class B Shares.
(c) Financial Data Schedule for Class C Shares.
(d) Financial Data Schedule for Class D Shares.
</TABLE>

<PAGE> 1

EXHIBIT 11

INDEPENDENT AUDITORS' CONSENT

Merrill Lynch Middle East/Africa Fund, Inc.

We consent to the use in Post-Effective Amendment No. 3 to Registration
Statement No. 33-55843 of our report dated January 10, 1996 appearing in the
Statement of Additional Information, which is a part of such Registration
Statement and to the reference to us under the caption "Financial Highlights"
appearing in the Prospectus, which also is a part of such Registration
Statement.

DELOITTE & TOUCHE LLP
Princeton, New Jersey
March 27, 1996

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6
<CIK> 0000920599
<NAME> MERRILL LYNCH MIDDLE EAST/AFRICA FUND, INC.

<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-30-1994
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 10888048
<INVESTMENTS-AT-VALUE> 10562808
<RECEIVABLES> 75999
<ASSETS-OTHER> 360169
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10998976
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 68604
<TOTAL-LIABILITIES> 68604
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10477324
<SHARES-COMMON-STOCK> 60855
<SHARES-COMMON-PRIOR> 2500
<ACCUMULATED-NII-CURRENT> 752093
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 26364
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (325409)
<NET-ASSETS> 648590
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